Republic of the Philippines On 24 August 2004, Smart received from the Permit and Licensing Division of

SUPREME COURT the Office of the Mayor of the Municipality an assessment letter with a schedule
Manila of payment for the total amount of ₱389,950.00 for Smart’s telecommunications
tower. The letter reads as follows:
EN BANC
This is to formally submit to your good office your schedule of payments in the
G.R. No. 204429 February 18, 2014 Municipal Treasury of the Local Government Unit of Malvar, province of
Batangas which corresponds to the tower of your company built in the premises
SMART COMMUNICATIONS, INC., Petitioner, of the municipality, to wit:
vs.
MUNICIPALITY OF MALVAR, BATANGAS, Respondent. TOTAL PROJECT COST: PHP
11,000,000.00
DECISION
For the Year 2001-2003
CARPIO, J.: 50% of 1% of the total project cost Php55,000.00

The Case Add: 45% surcharge 24,750.00

This petition for review1 challenges the 26 June 2012 Decision2 and 13 Php79,750.00
November 2012 Resolution3 of the Court of Tax. Appeals (CTA) En Banc.
Multiply by 3 yrs. (2001, 2002, 2003) Php239,250.00
Th e CTA En Banc affirmed the 17 December 2010 Decision4 and 7 April 2011 For the year 2004
Resolution5 of the CTA First Division, which in turn affirmed the 2 December
2008 Decision6 and 21 May 2009 Order7 of the Regional Trial Court of Tanauan 1% of the total project cost Php110,000.00
City, Batangas, Branch 6. The trial court declared void the assessment imposed
by respondent Municipality of Malvar, Batangas against petitioner Smart 37% surcharge 40,700.00
Communications, Inc. for its telecommunications tower for 2001 to July 2003 ==========
and directed respondent to assess petitioner only for the period starting 1 Php150,700.00
October 2003.
TOTAL Php389,950.00
The Facts
Hoping that you will give this matter your preferential attention. 8
Petitioner Smart Communications, Inc. (Smart) is a domestic corporation
engaged in the business of providing telecommunications services to the
general public while respondent Municipality of Malvar, Batangas (Municipality) Due to the alleged arrears in the payment of the assessment, the Municipality
is a local government unit created by law. also caused the posting of a closure notice on the telecommunications tower.

In the course of its business, Smart constructed a telecommunications tower On 9 September 2004, Smart filed a protest, claiming lack of due process in the
within the territorial jurisdiction of the Municipality. The construction of the tower issuance of the assessment and closure notice. In the same protest, Smart
was for the purpose of receiving and transmitting cellular communications within challenged the validity of Ordinance No. 18 on which the assessment was
the covered area. based.

On 30 July 2003, the Municipality passed Ordinance No. 18, series of 2003, In a letter dated 28 September 2004, the Municipality denied Smart’s protest.
entitled "An Ordinance Regulating the Establishment of Special Projects."

1
On 17 November 2004, Smart filed with Regional Trial Court of Tanauan City, Smart filed a petition for review with the CTA En Banc, which affirmed the CTA
Batangas, Branch 6, an "Appeal/Petition" assailing the validity of Ordinance No. First Division’s decision and resolution. The dispositive portion of the CTA En
18. The case was docketed as SP Civil Case No. 04-11-1920. Banc’s 26 June 2012 decision reads:

On 2 December 2008, the trial court rendered a Decision partly granting Smart’s WHEREFORE, premises considered, the present Petition for Review is hereby
Appeal/Petition. The trial court confined its resolution of the case to the validity DISMISSED for lack of merit.1âwphi1
of the assessment, and did not rule on the legality of Ordinance No. 18. The trial
court held that the assessment covering the period from 2001 to July 2003 was Accordingly, the assailed Decision dated December 17, 2010 and Resolution
void since Ordinance No. 18 was approved only on 30 July 2003. However, the dated April 7, 2011 are hereby AFFIRMED.
trial court declared valid the assessment starting 1 October 2003, citing Article 4
of the Civil Code of the Philippines,9 in relation to the provisions of Ordinance
SO ORDERED.13
No. 18 and Section 166 of Republic Act No. 7160 or the Local Government
Code of 1991 (LGC).10 The dispositive portion of the trial court’s Decision reads:
The CTA En Banc denied the motion for reconsideration.
WHEREFORE, in light of the foregoing, the Petition is partly GRANTED. The
assessment dated August 24, 2004 against petitioner is hereby declared null Hence, this petition.
and void insofar as the assessment made from year 2001 to July 2003 and
respondent is hereby prohibited from assessing and collecting, from petitioner, The Ruling of the CTA En Banc
fees during the said period and the Municipal Government of Malvar, Batangas
is directed to assess Smart Communications, Inc. only for the period starting The CTA En Banc dismissed the petition on the ground of lack of jurisdiction.
October 1, 2003. The CTA En Banc declared that it is a court of special jurisdiction and as such, it
can take cognizance only of such matters as are clearly within its jurisdiction.
No costs. Citing Section 7(a), paragraph 3, of Republic Act No. 9282, the CTA En Banc
held that the CTA has exclusive appellate jurisdiction to review on appeal,
SO ORDERED.11 decisions, orders or resolutions of the Regional Trial Courts in local tax cases
originally resolved by them in the exercise of their original or appellate
jurisdiction. However, the same provision does not confer on the CTA
The trial court denied the motion for reconsideration in its Order of 21 May 2009. jurisdiction to resolve cases where the constitutionality of a law or rule is
challenged.
On 8 July 2009, Smart filed a petition for review with the CTA First Division,
docketed as CTA AC No. 58.
The Issues

On 17 December 2010, the CTA First Division denied the petition for review.
The petition raises the following arguments:
The dispositive portion of the decision reads:
1. The [CTA En Banc Decision and Resolution] should be reversed and
WHEREFORE, the Petition for Review is hereby DENIED, for lack of merit. set aside for being contrary to law and jurisprudence considering that
Accordingly, the assailed Decision dated December 2, 2008 and the Order the CTA En Banc should have exercised its jurisdiction and declared
dated May 21, 2009 of Branch 6 of the Regional Trial Court of Tanauan City,
the Ordinance as illegal.
Batangas in SP. Civil Case No. 04-11-1920 entitled "Smart Communications,
Inc. vs. Municipality of Malvar, Batangas" are AFFIRMED.
2. The [CTA En Banc Decision and Resolution] should be reversed and
set aside for being contrary to law and jurisprudence considering that
SO ORDERED.12 the doctrine of exhaustion of administrative remedies does not apply in
[this case].
On 7 April 2011, the CTA First Division issued a Resolution denying the motion
for reconsideration.

2
 3. The [CTA En Banc Decision and Resolution] should be reversed and
set aside for being contrary to law and jurisprudence considering that
the respondent has no authority to impose the so-called "fees" on the
basis of the void ordinance.14
The Ruling of the Court
The Court denies the petition.
On whether the CTA has jurisdiction over the present case
Smart contends that the CTA erred in dismissing the case for lack of jurisdiction.
Smart maintains that the CTA has jurisdiction over the present case considering
the "unique" factual circumstances involved.
The CTA refuses to take cognizance of this case since it challenges the
constitutionality of Ordinance No. 18, which is outside the province of the CTA.
Jurisdiction is conferred by law. Republic Act No. 1125, as amended by
Republic Act No. 9282, created the Court of Tax Appeals. Section 7, paragraph
(a), sub-paragraph (3)15 of the law vests the CTA with the exclusive appellate
jurisdiction over "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."
The question now is whether the trial court resolved a local tax case in order to
fall within the ambit of the CTA’s appellate jurisdiction This question, in turn,
depends ultimately on whether the fees imposed under Ordinance No. 18 are in
fact taxes.
Smart argues that the "fees" in Ordinance No. 18 are actually taxes since they
are not regulatory, but revenue-raising. Citing Philippine Airlines, Inc. v.
Edu,16 Smart contends that the designation of "fees" in Ordinance No. 18 is not
controlling.
The Court finds that the fees imposed under Ordinance No. 18 are not taxes.
Section 5, Article X of the 1987 Constitution provides that "each local
government unit shall have the power to create its own sources of revenues and
to levy taxes, fees, and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local government."
3
Consistent with this constitutional mandate, the LGC grants the taxing powers to
each local government unit. Specifically, Section 142 of the LGC grants
municipalities the power to levy taxes, fees, and charges not otherwise levied by
provinces. Section 143 of the LGC provides for the scale of taxes on business
that may be imposed by municipalities17 while Section 14718 of the same law
provides for the fees and charges that may be imposed by municipalities on
business and occupation.
The LGC defines the term "charges" as referring to pecuniary liability, as rents
or fees against persons or property, while the term "fee" means "a charge fixed
by law or ordinance for the regulation or inspection of a business or activity."19
In this case, the Municipality issued Ordinance No. 18, which is entitled "An
Ordinance Regulating the Establishment of Special Projects," to regulate the
"placing, stringing, attaching, installing, repair and construction of all gas mains,
electric, telegraph and telephone wires, conduits, meters and other apparatus,
and provide for the correction, condemnation or removal of the same when
found to be dangerous, defective or otherwise hazardous to the welfare of the
inhabitant[s]."20 It was also envisioned to address the foreseen "environmental
depredation" to be brought about by these "special projects" to the
Municipality.21 Pursuant to these objectives, the Municipality imposed fees on
various structures, which included telecommunications towers.
As clearly stated in its whereas clauses, the primary purpose of Ordinance No.
18 is to regulate the "placing, stringing, attaching, installing, repair and
construction of all gas mains, electric, telegraph and telephone wires, conduits,
meters and other apparatus" listed therein, which included Smart’s
telecommunications tower. Clearly, the purpose of the assailed Ordinance is to
regulate the enumerated activities particularly related to the construction and
maintenance of various structures. The fees in Ordinance No. 18 are not
impositions on the building or structure itself; rather, they are impositions on the
activity subject of government regulation, such as the installation and
construction of the structures.22
Since the main purpose of Ordinance No. 18 is to regulate certain construction
activities of the identified special projects, which included "cell sites" or
telecommunications towers, the fees imposed in Ordinance No. 18 are primarily
regulatory in nature, and not primarily revenue-raising. While the fees may
contribute to the revenues of the Municipality, this effect is merely incidental.
Thus, the fees imposed in Ordinance No. 18 are not taxes.
In Progressive Development Corporation v. Quezon City, 23 the Court declared
that "if the generating of revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is the primary purpose, the
fact that incidentally revenue is also obtained does not make the imposition a
tax."
In Victorias Milling Co., Inc. v. Municipality of Victorias, 24 the Court reiterated
that the purpose and effect of the imposition determine whether it is a tax or a
fee, and that the lack of any standards for such imposition gives the
presumption that the same is a tax.
We accordingly say that the designation given by the municipal authorities does
not decide whether the imposition is properly a license tax or a license fee. The
determining factors are the purpose and effect of the imposition as may be
apparent from the provisions of the ordinance. Thus, "[w]hen no police
inspection, supervision, or regulation is provided, nor any standard set for the
applicant to establish, or that he agrees to attain or maintain, but any and all
persons engaged in the business designated, without qualification or hindrance,
may come, and a license on payment of the stipulated sum will issue, to do
business, subject to no prescribed rule of conduct and under no guardian eye,
but according to the unrestrained judgment or fancy of the applicant and
licensee, the presumption is strong that the power of taxation, and not the police
power, is being exercised."
Contrary to Smart’s contention, Ordinance No. 18 expressly provides for the
standards which Smart must satisfy prior to the issuance of the specified
permits, clearly indicating that the fees are regulatory in nature.
These requirements are as follows:
SECTION 5. Requirements and Procedures in Securing Preliminary
Development Permit.
The following documents shall be submitted to the SB Secretary in triplicate:
a) zoning clearance
b) Vicinity Map
c) Site Plan
d) Evidence of ownership
e) Certificate true copy of NTC Provisional Authority in case of Cellsites,
telephone or telegraph line, ERB in case of gasoline station, power
plant, and other concerned national agencies
4
f) Conversion order from DAR is located within agricultural zone.
g) Radiation Protection Evaluation.
h) Written consent from subdivision association or the residence of the
area concerned if the special projects is located within the residential
zone.
i) Barangay Council Resolution endorsing the special projects.
SECTION 6. Requirement for Final Development Permit – Upon the expiration
of 180 days and the proponents of special projects shall apply for final
[development permit] and they are require[d] to submit the following:
a) evaluation from the committee where the Vice Mayor refers the
special project
b) Certification that all local fees have been paid.
Considering that the fees in Ordinance No. 18 are not in the nature of local
taxes, and Smart is questioning the constitutionality of the ordinance, the CTA
correctly dismissed the petition for lack of jurisdiction. Likewise, Section 187 of
the LGC,25 which outlines the procedure for questioning the constitutionality of a
tax ordinance, is inapplicable, rendering unnecessary the resolution of the issue
on non-exhaustion of administrative remedies.
On whether the imposition of the fees in Ordinance No. 18 is ultra vire Smart
argues that the Municipality exceeded its power to impose taxes and fees as
provided in Book II, Title One, Chapter 2, Article II of the LGC. Smart maintains
that the mayor’s permit fees in Ordinance No. 18 (equivalent to 1% of the
project cost) are not among those expressly enumerated in the LGC.
As discussed, the fees in Ordinance No.18 are not taxes. Logically, the
imposition does not appear in the enumeration of taxes under Section 143 of the
LGC.
Moreover, even if the fees do not appear in Section 143 or any other provision
in the LGC, the Municipality is empowered to impose taxes, fees and charges,
not specifically enumerated in the LGC or taxed under the Tax Code or other
applicable law. Section 186 of the LGC, granting local government units wide
latitude in imposing fees, expressly provides:
Section 186. Power To Levy Other Taxes, Fees or Charges. - Local government
units may exercise the power to levy taxes, fees or charges on any base or
subject not otherwise specifically enumerated herein or taxed under the
provisions of the National Internal Revenue Code, as amended, or other
applicable laws: Provided, That the taxes, fees, or charges shall not be unjust,
excessive, oppressive, confiscatory or contrary to declared national policy:
Provided, further, That the ordinance levying such taxes, fees or charges shall
not be enacted without any prior public hearing conducted for the purpose.
Smart further argues that the Municipality is encroaching on the regulatory
powers of the National Telecommunications Commission (NTC). Smart cites
Section 5(g) of Republic Act No. 7925 which provides that the National
Telecommunications Commission (NTC), in the exercise of its regulatory
powers, shall impose such fees and charges as may be necessary to cover
reasonable costs and expenses for the regulation and supervision of the
operations of telecommunications entities. Thus, Smart alleges that the
regulation of telecommunications entities and all aspects of its operations is
specifically lodged by law on the NTC.
To repeat, Ordinance No. 18 aims to regulate the "placing, stringing, attaching,
installing, repair and construction of all gas mains, electric, telegraph and
telephone wires, conduits, meters and other apparatus" within the Municipality.
The fees are not imposed to regulate the administrative, technical, financial, or
marketing operations of telecommunications entities, such as Smart’s; rather, to
regulate the installation and maintenance of physical structures – Smart’s cell
sites or telecommunications tower. The regulation of the installation and
maintenance of such physical structures is an exercise of the police power of
the Municipality. Clearly, the Municipality does not encroach on NTC’s
regulatory powers.
The Court likewise rejects Smart’s contention that the power to fix the fees for
the issuance of development permits and locational clearances is exercised by
the Housing and Land Use Regulatory Board (HLURB). Suffice it to state that
the HLURB itself recognizes the local government units’ power to collect fees
related to land use and development. Significantly, the HLURB issued locational
guidelines governing telecommunications infrastructure.1âwphi1Guideline No.
VI relates to the collection of locational clearance fees either by the HLURB or
the concerned local government unit, to wit:
VI. Fees
The Housing and Land Use Regulatory Board in the performance of its functions legislation because "to invalidate [a law] based on xx x baseless supposition is
shall collect the locational clearance fee based on the revised schedule of fees an affront to the wisdom not only of the legislature that passed it but also of the
under the special use project as per Resolution No. 622, series of 1998 or by
the concerned LGUs subject to EO 72.26
On whether Ordinance No. 18 is valid and constitutional
Smart contends that Ordinance No. 18 violates Sections 130(b)(3) 27 and 186 of
the LGC since the fees are unjust, excessive, oppressive and confiscatory.
Aside from this bare allegation, Smart did not present any evidence
substantiating its claims. In Victorias Milling Co., Inc. v. Municipality of
Victorias,28 the Court rejected the argument that the fees imposed by
respondent therein are excessive for lack of evidence supporting such claim, to
wit:
An ordinance carries with it the presumption of validity. The question of
reasonableness though is open to judicial inquiry. Much should be left thus to
the discretion of municipal authorities. Courts will go slow in writing off an
ordinance as unreasonable unless the amount is so excessive as to be
prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule which
has gained acceptance is that factors relevant to such an inquiry are the
municipal conditions as a whole and the nature of the business made subject to
imposition.
Plaintiff, has however not sufficiently proven that, taking these factors together,
the license taxes are unreasonable. The presumption of validity subsists. For,
plaintiff has limited itself to insisting that the amounts levied exceed the cost of
regulation and the municipality has adequate funds for the alleged purposes as
evidenced by the municipality’s cash surplus for the fiscal year ending 1956.
On the constitutionality issue, Smart merely pleaded for the declaration of
unconstitutionality of Ordinance No. 18 in the Prayer of the Petition, without any
argument or evidence to support its plea. Nowhere in the body of the Petition
was this issue specifically raised and discussed. Significantly, Smart failed to
cite any constitutional provision allegedly violated by respondent when it issued
Ordinance No. 18.
Settled is the rule that every law, in this case an ordinance, is presumed valid.
To strike down a law as unconstitutional, Smart has the burden to prove a clear
and unequivocal breach of the Constitution, which Smart miserably failed to do.
In Lawyers Against Monopoly and Poverty (LAMP) v. Secretary of Budget and
Management,29 the Court held, thus:
To justify the nullification of the law or its implementation, there must be a clear
and unequivocal, not a doubtful, breach of the Constitution. In case of doubt in
the sufficiency of proof establishing unconstitutionality, the Court must sustain
executive which approved it." This presumption of constitutionality can be
overcome only by the clearest showing that there was indeed an infraction of
the Constitution, and only when such a conclusion is reached by the required
5
majority may the Court pronounce, in the discharge of the duty it cannot escape,
that the challenged act must be struck down.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

6
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 193100 December 10, 2014
SAMAR-I ELECTRIC COOPERATIVE, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
VILLARAMA, JR., J.:
At bar is a petition for review on certiorari of the Decision1 of the Court of Tax
Appeals En Banc (CTA EB) dated March 11, 2010 and it,s Resolution 2 dated
July 28, 2010 in C.T.A. EB Nos. 460 and 462 (C.T.A. Case No. 6697) affirming
the May 27, 2008 Decision3 and the January 19, 2009 Amended Decision4 of
the CTA's First Division, and ordering petitioner to pay respondent
Commissioner of Internal Revenue (CIR) deficiency withholding tax on
compensation in the aggregate amount of ₱2,690,850.91, plus 20% interest
starting September 30, 2002, until fully paid, pursuant to Section 249( c) of the
National Internal Revenue Code (NIRC) of 1997.
The following facts are undisputed as found by the CTA's First Division and
adopted by the CTA EB:
Samar-I Electric Cooperative, Inc. (Petitioner) is an electric cooperative, with
principal office at Barangay Carayman, Calbayog City.
It was issued a Certificate of Registration by the National Electrification
Administration (NEA) on February 27, 1974 pursuant to Presidential Decree
(PD) 269. Likewise, it was granted a Certificate of Provisional Registration under questioned tax assessments.
Republic Act (RA) 6938, otherwise known as the Cooperative Code of the
Philippines on March 16, 1993, by the Cooperative Development Authority
(CDA).
Respondent Commissioner of InternalRevenue is a public officer authorized
under the National Internal Revenue Code (NIRC) to examine any taxpayer
including inter alia, the power to issue tax assessment, evaluate, and decide
upon protests relative thereto.
On July 13, 1999 and April 17, 2000, petitioner filed its 1998 and 1999 income
tax returns, respectively. Petitioner filed its 1997, 1998, and 1999 Annual
Information Return of Income Tax Withheld on Compensation, Expanded and
Final Withholding Taxes on February 17, 1998, February 1, 1999, and February
4, 2000, in that order.
On November 13, 2000, respondent issued a duly signed Letter of Authority
(LOA) No. 1998 00023803; covering the examination of petitioner’s books of
account and other accounting records for income and withholding taxes for the
period 1997 to 1999. The LOA was received by petitioner on November 14,
2000.
Petitioner cooperated in the audit and investigation conducted by the Special
Investigation Division of the BIR by submitting the required documents on
December 5, 2000.
On October 19, 2001, respondent sent a Notice for Informal Conference which
was received by petitioner in November 2001; indicating the allegedly income
and withholding tax liabilities of petitioner for 1997 to 1999. Attached to the letter
is a summary of the report, with an explanation of the findingsof the
investigators.
In response, petitioner sent a letter dated November 26, 2001 to respondent
maintaining its indifference to the latter’s findings and requesting details of the
assessment.
On December 13, 2001, petitioner executed a Waiver of the Defense of
Prescription under the Statute of Limitations, good until March 29, 2002.
On February 27, 2002, a letter was sent by petitioner to respondent requesting a
detailed computation of the alleged 1997, 1998 and 1999 deficiency withholding
tax on compensation. On February 28, 2002, respondent issued a Preliminary
Assessment Notice (PAN). The PAN was received by petitioner on April 9,
2002, which was protested on April 18, 2002. Respondent’s Reply dated May
27, 2002, contained the explanation of the legal basis of the issuance of the
However, on July 8, 2002, respondent dismissed petitioner’s protest and
recommended the issuance of a Final Assessment Notice.
Consequently, on September 15, 2002, petitioner received a demand letter and
assessments notices (Final Assessment Notices) for the alleged 1997, 1998,
and 1999 deficiency withholding tax in the amount of [P]3,760,225.69, as well as
deficiency income tax covering the years 1998 to 1999 in the amount of
[P]440,545.71, or in the aggregate amount of [P]4,200,771.40. Petitioner filed its
7
protest and Supplemental Protest to the Final Assessment Notices on October
14, 2002 and November 4, 2002, respectively. But on the Final Decision on
Disputed Assessment issued on April 10, 2003, petitioner was still held liable for
the alleged tax liabilities.5
The CTA EB narrates the following succeeding events:
On May 29, 2003, the Petition for Review was filed by SAMELCO-I with the
Court in division.
On May 27, 2008, the assailed Decision partially granting SAMELCO-I’s petition
was promulgated.
Dissatisfied, both parties sought reconsideration of the said decision. CIR filed
the "Motion for Partial Reconsideration (Re: Decision dated 27 May 2008[)]" on
June 13, 2008. On the other hand, SAMELCOI’s "Motion for Reconsideration"
was filed on June 17, 2008.
On January 19, 2009, the Court in division promulgated its Amended Decision
which denied CIR’s motion and partially granted SAMELCO-I’s motion.
Thereafter, CIR and SAMELCO-I filed their "Motion for Extension of Time to File
Petition for Review" on February 6, 2009 and February 11, 2009, respectively.
Both motionswere granted by the Court.6
The following issues were raised by the parties in their petitions for review
before the CTA EB. In C.T.A. EB 460, herein respondent CIR raised the
following grounds:
I. Whether or not SAMELCO-I is entitled to tax privileges accorded to
members in accordance with Republic Act No. 6938, or the Cooperative
Code, or to privileges of Presidential Decree (PD) No. 269.
II. Whether or not SAMELCO-I is liable for the minimum corporate
income tax (MCIT) for taxable years 1998 to 1999.
III. Whether or not SAMELCO-I is liable to pay the total deficiency
expanded withholding tax of [P]3,760,225.69 for taxable years 1997 to
1999.7
On the other hand, petitioner SAMELCO-I raised the following legal and factual
errors in C.T.A. EB No. 462, viz.:
8
I. The Court in Division gravely erred in holding that the 1997 and 1998
assessments on withholding tax on compensation (received by
SAMELCO-I on September 15, 2002), have not prescribed even if the
waiver validly executed was good only until March 29, 2002.
II. The Court in Divisionerred in holding that CIR can validly assess
within the ten (10)-year prescriptive period even if the notice of informal
conference, PAN, formal letter of demand, and assessment notice
mention not a word that the BIR is invoking Section 222 (a) of the 1997
Tax Code [then Sec. 223, NIRC], due to alleged false withholding tax
returns filed by [SAMELCO-I] as the same assertions were mere
afterthought to justify application of the 10-year prescriptive period to
assess.
III. The Court in Division failed to consider that CIR made no findings as
to SAMELCO-I’s filing of a false return as clearly manifested by the non-
imposition of 50% surcharge on the 1997, 1998 and 1999 basic
withholding tax deficiency in the PAN, demand notice and even in the
assessment notice other than interest charges.
IV. The Court in Division erred innot holding that given SAMELCOI’s
filing of its 1997, 1998, and 1999 withholding tax returns in good faith,
and in close consultation with the BIR personnel in Calbayog City where
SAMELCO-I’s place of business is located, the latter should no longer
be imposed the incremental penalties (surcharge and interest).
V. The Court in Division failed to rule that since there was no substantial
under remittance of 1998 withholding tax as the basic deficiency tax per
amended decision is less than 30% of the computed total tax due per
return, SAMELCO-I did not file a false return.
VI. The Court in Division overlooked the fact that for taxable year 1999,
[SAMELCO-I] remitted the amount of [P]844,958.00 as withholding tax
in compensation instead of [P]786,702.43 as indicated in Page 8, Annex
C of the CTA (1st Division) Decision.
VII. The Court in Division erred in failing to declare as void both the
formal letter of demand and assessment notice on withholding tax on
compensation for 1997 taxable year, given its non-compliance with
Section 3.1.4 of RR 12-99.8
On February 26, 2009, the CTA EB consolidated both cases. After the filing of
the respective Comments of both parties, the cases were deemed submitted for
decision. The CTA EB found that the issues and arguments raised by the
parties were "mere reiterations of what have been considered and passed upon
by the Court in division in the assailed Decision and the Amended Decision." 9 It
ruled that SAMELCO-I is exempted in the payment of the Minimum Corporate
Income Tax (MCIT); that due process was observed in the issuance of the
assessments in accordance with Section 228 of the Tax Code; and that the
1997 and 1998 assessments on deficiency withholding tax on compensation
have not prescribed. Finding no reversible error in the Decision and the
Amended Decision, the CTA EB ruled, viz.:
WHEREFORE, premises considered, We deny the petitions for lack of merit.
Accordingly, We AFFIRM the May 27, 2008 Decision and the January 19, 2009
Amended Decision promulgated by the First Division of this Court.
SO ORDERED.10
Petitioner moved for reconsideration.In a Resolution dated July 28, 2010, the
CTA EB denied the motion. Petitioner now comes to this Court raising the
following assignment of errors:
A. The Honorable CTA En Banc gravely erred in holding that
respondent sufficiently complied withthe due process requirements
mandated by Section 228 of the 1997 Tax Code in the issuance of
1997-1999 assessments to petitioner, even if the details of
discrepancies on which the assessments were factually and legally
based as required under Section 3.1.4 of Revenue Regulations (RR)
No[.] 12-99, were not found in the Formal Letter of Demand and Final
Assessment Notice (FAN) sent to petitioner, in clear violation of the
doctrine established in the case of Commissioner of Internal Revenue
vs. Enron Subic Power Corporation, G.R. No. 166387, January 19,
2009, applying Section 3.1.4 of RR 12-99 in relation to Section 228
NIRC. B. The Honorable CTA En Banc erred in holding that respondent
observed due process notwithstanding the missing Annex "A-1" that
was meant to show Details of Discrepancies and to be attached to BIR’s
Letter of Demand/Final Notice dated September 15, 2002, which was
not furnished to petitioner and worse, a file copy of which is not even
found in the BIR records as part of its Exhibit "16" and neither is the
same found in the CTA records.
C. In deciding that the 1997 and 1998 withholding tax assessments
have not yet prescribed, the Honorable CTA En Banc failed to consider
the singular significance of the Waiver of the Defense of Prescription
validly agreed upon and executed by the parties.
D. The Honorable CTA En Bancerred in holding that respondent can
validly assess within the ten (10)-year prescriptive period even if the
Notice of Informal Conference, PAN, and Final Letter of Demand (dated
9
September 15, 2002), mentioned not a word as to the falsity of the
returns filed by petitioner, but as anafter thought that was raised rather
belatedly only in the Answer and during the trial.
E. The Honorable CTA En Bancerred in holding as valid the 1997
deficiency withholding tax assessment being anchored on RR 2-98 (as
cited in Notice of Informal Conference and PAN), as the said RR 2-98
governs compensation income paid beginning January 1, 1998.11
We shall resolve the instant controversy by discussing the following two main
issues in seriatim: whether the 1997 and 1998 assessments on withholding tax
on compensation were issued within the prescriptive period provided by law;
and whether the assessments were issued in accordance with Section 228 of
the NIRC of 1997.
On the issue of prescription, petitioner contends that the subject 1997 and 1998
withholding tax assessments on compensation were issued beyond the
prescriptive period of three years under Section 203 of the NIRC of 1997. Under
this section, the government is allowed a period of only three years to assess
the correct tax liability of a taxpayer, viz.:
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. Relying on Section 203, petitioner argues
that the subject deficiency tax assessments issued by respondent on
September 15, 2002 was issued beyond the three-year prescriptive period.
Petitioner filed its Annual Information Return of Income Tax Withheld on
Compensation, Expanded and Final Withholding Taxeson the following dates:
on February 17, 1998 for the taxable year 1997; and on February 1, 1999 for the
year taxable 1998. Thus, if the period prescribed under Section 203 of the NIRC
of 1997 is to be followed, the three-year prescriptive period to assess for the
taxable years 1997 and 1998 should have ended on February 16,2001 and
January 31, 2002, respectively.
We disagree.
While petitioner is correct that Section 203 sets the three-year prescriptive
period to assess, the following exceptions are provided under Section 222 of the
NIRC of 1997, viz.:
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 factof fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof.
(b) If before the expiration of the time prescribed in Section 203 for the
assessment of the tax, both the Commissioner and the taxpayer have
agreed in writing to its assessment after such time, the tax may be
assessed within the period agreed upon. The period so agreed upon
may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.
(c) Any internal revenue tax which has been assessed within the period different situations of false return, fraudulent return with intent to evade tax, and
of limitation as prescribed in paragraph (a) hereof may be collected by
distraint or levy or by a proceeding in court within five (5) years following
the assessment of the tax.
(d) Any internal revenue tax, which has been assessed within the period deceitful entry with intent to evade the taxes due.
agreed upon as provided in paragraph (b) herein above, may be
collected by distraint orlevy or by a proceeding incourt within the period
agreed upon in writing before the expiration of the five (5)-year period.
The period so agreed upon may be extended by subsequent written
agreements made before the expiration of the period previously agreed circumstances, but whenever the government is placed at a disadvantage so as
upon.
(e) Provided, however, That nothing in the immediately preceding
Section and paragraph (a) hereof shall be construed to authorize the
examination and investigation or inquiry into any tax return filed in
accordance with the provisions of any tax amnesty law or decree.
(Emphasis supplied.)
In the case at bar, it was petitioner’s substantial under declaration of withholding
taxes in the amount of ₱2,690,850.91 which constituted the "falsity" in the
subject returns – giving respondent the benefit of the period under Section 222
of the NIRC of 1997 to assess the correct amount of tax "at any time within ten
(10) years after the discovery of the falsity, fraud or omission." 12 The case of
Aznar v. Court of Tax Appeals13 discusses what acts or omissions may
constitute falsity, viz.:
10
Petitioner argues that Sec. 332 of the NIRC does not apply because the
taxpayer did not file false and fraudulent returns with intent to evade tax, while
respondent Commissioner of Internal Revenue insists contrariwise, with
respondent Court of Tax Appeals concluding that the very "substantial under
declarations ofincome for six consecutive years eloquently demonstrate the
falsity or fraudulence of the income tax returns with an intent to evade the
payment of tax."
To our minds we can dispense with these controversial arguments on facts,
although we do not deny that the findings of facts by the Court of Tax Appeals,
supported as they are by very substantial evidence, carry great weight, by
resorting to a proper interpretation of Section 332 of the NIRC. We believe that
the proper and reasonable interpretation of said provision should be that in the
three different cases of (1) false return, (2) fraudulent return with intent to evade
tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court
for the collection of such tax may be begun without assessment, at any time
within ten years after the discovery of the (1) falsity, (2) fraud,(3) omission. Our
stand that the law should be interpreted to mean a separation of the three
failure to file a return is strengthened immeasurably by the last portion of the
provision which segregates the situations into three different classes, namely
"falsity," "fraud" and "omission." That there is a difference between "false return"
and "fraudulent return" cannot be denied. While the first merely implies deviation
from the truth, whether intentional or not, the second implies intentional or
The ordinary period of prescription of 5 years within which to assess tax
liabilities under Sec. 331 of the NIRC should be applicable to normal
to prevent its lawful agents fromproper assessment of tax liabilities due to false
returns, fraudulent return intended to evade payment of tax or failure to file
returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the time
of the discovery of the falsity, fraud or omission even seems to be inadequate
and should be the one enforced. There being undoubtedly false tax returns in
this case, We affirm the conclusion of the respondent Court of Tax Appeals that
Sec. 332 (a) of the NIRC should apply and that the period of ten years within
which to assess petitioner’s tax liability had not expired at the time said
assessment was made.14
A careful examination of the evidence on record yields to no other conclusion
but that petitioner failed to withhold taxes from its employees’ 13th month pay
and other benefits inexcess of thirty thousand pesos (₱30,000.00) amounting to
₱2,690,850.91for the taxable years 1997 to 1999 – resulting to its filing of the
subject false returns. Petitioner failed to refute this finding, both in fact and in
law, before the courts a quo.
We quote the following portion of the assailed Decision of the CTA EB, viz.:
It is noteworthy to mention that during the trial, the witness for the CIR testified
that SAMELCO-I did not file an accurate return, as follows:
ATTY. FRANCIA:
Q: Did the petitioner file an accurate Return?
MS. RAPATAN:
A: No.
ATTY. FRANCIA:
Q: Can you please explain?
MS. RAPATAN:
A: Because I based the computation of my deficiency withholding taxes on
declared taxable income per alpha list submitted then, I have extracted a data
from the Alpha List, particularly that of the manager and other officials, only their
basic salary and their overtime pay were declared but the other benefits were
not actually subjected to withholding tax. So, the deficiency withholding taxes
from the taxes on the taxable 13th month pay and other benefits in excess of
the [P]12,000.00 for 1997 and for the taxable years 1998 and 1999, in excess of
the [P]30,000.00. I also noticed that the per diem of the Manager was not
included in the withholding tax computation of SAMELCO[-]I.
ATTY. FRANCIA:
Nothing further, your Honors.
JUSTICE BAUTISTA:
Any re-cross?
ATTY. NAPUTO:
No re-cross, your Honors.15
We have consistently held that courts will not interfere in matters which are
addressed to the sound discretion of the government agency entrusted with the
11
regulation of activities coming under its special and technical training and
knowledge.16 The findings of fact of these quasijudicial agencies are generally
accorded respect and even finality as long as they are supported by substantial
evidence– in recognition of their expertise on the specific matters under their
consideration.17 In the case at bar, petitioner failed to proffer convincing
argument and evidence that would persuade us to disturb the factual findings of
the CTA First Division, as affirmed by the CTA EB. As such, we cannot but
affirm the finding of petitioner’s substantial under declaration of withholding
taxes in the amount of ₱2,690,850.91 which constituted the "falsity" in the
subject returns.
Anent the issue of violation of due process in the issuance of the final notice of
assessment and letter of demand, Section 228 of the NIRC of 1997 provides:
SEC. 228. Protesting of Assessment. – x x x
xxxx
The taxpayers shall be informed in writing of the law and the factson which the
assessment is made: otherwise, the assessment shall be void.
Petitioner contends that as the Final Demand Letter and Assessment Notices
(FAN) were silent as to the nature and basis of the assessments, it was denied
due process,18 and the assessments must be declared void. It likewise invokes
Revenue Regulations(RR) No. 12-99 which states, viz.:
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
taxpayer’s 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
We uphold the assessments issued to petitioner.
Both Section 228 of the NIRC of 1997 and Section 3.1.4 of RR No. 12-99 clearly
require the written details on the nature, factual and legal bases of the subject
deficiency tax assessments. The reason for the mandatory nature of this
requirement isexplained in the case of Commissioner of Internal Revenue v.
Reyes:19
A void assessment bears no valid fruit.
The law imposes a substantive, not merely a formal, requirement. To proceed assessing a taxpayer. The requirement for issuing a preliminary or final notice,
heedlessly with tax collection without first establishing a valid assessment is as the case may be, informing a taxpayer of the existence of a deficiency tax
evidently violative of the cardinal principle in administrative investigations: that assessment is markedly different from the requirement of what such notice must
taxpayers should be able to present their case and adduce supporting evidence. contain. Just because the CIR issued an advice, a preliminary letter during the
In the instant case, respondent has not been informed of the basis of the estate pre-assessment stage and a final notice, in the order required by law, does not
tax liability. Without complying with the unequivocal mandate of first informing necessarily mean that Enron was informed of the law and facts on which the
the taxpayer of the government’s claim, there can be no deprivation of property, deficiency tax assessment was made.21 (Emphasis supplied)
because no effective protest can be made. The haphazard shot at slapping an
assessment, supposedly based on estate taxation’s general provisions that are In this case, we agree with the respondent that petitioner was sufficiently
expected to be known by the taxpayer, is utter chicanery. apprised of the nature, factual and legal bases, as well as how the deficiency
taxes being assessed against it were computed. Records reveal that on October
Even a cursory review of the preliminary assessment notice, as well as the 19, 2001, prior to the conduct of an informal conference, petitioner was already
demand letter sent, reveals the lack of basis for – not to mention the informed of the results and findings of the investigations made by the
insufficiency of – the gross figures and details of the itemized deductions respondent, and was duly furnished with a copy of the summary of the report
indicated in the notice and the letter. This Court cannot countenance an submitted by Revenue Officer Elisa G. Ponferrada-Rapatan of the Special
assessment based on estimates that appear to have been arbitrarily or Investigation Division. Said summary report contained an explanation of
capriciously arrived at. Although taxes are the lifeblood of the government, their Findings of Investigation stating the legal and factual bases for the deficiency
assessment and collection "should be made in accordance with law as any assessment. In a letter dated February 27, 2002 petitioner requested for copies
arbitrariness will negate the very reason for government itself." (Emphasis of working papers indicating how the deficiency withholding taxes were
supplied; citations omitted) computed.22 Respondent promptly responded in a letter-reply dated February
28, 2002 stating:
In Commissioner of Internal Revenue v. Enron Subic Power Corporation, 20 we
please be informed that the cooperative’s deficiency withholding taxes on
held that the law requires that the legal and factual bases of the assessment be
stated in the formal letter of demand and assessment notice, and that the compensation were due to the failure of the cooperative to withhold taxes on the
alleged "factual bases" in the advice, preliminary letter and "audit working taxable 13th month pay and other benefits in excess of ₱30,000.00 threshold
papers" did not suffice. Thus: pursuant to Section 3 of Revenue Regulation No. 2-95 implementing Republic
Act No. 7833 and Section 2.78/1 B 11 of Revenue Regulation 2-98
Both the CTA and the CA concluded that the deficiency tax assessment merely implementing Section 32 B e of Republic Act No. 8424. Further, we are
itemized the deductions disallowed and included these in the gross income. It providing you hereunder the computational format on how deficiency
also imposed the preferential rate of 5% on some items categorized by Enron as withholding taxes were computed and sample computation from our working
costs. The legal and factual bases were, however, not indicated. papers, for your information and guidance.23

The CIR insists that an examination of the facts shows that Enron was properly
apprised of its tax deficiency. During the pre-assessment stage, the CIR advised
Enron’s representative of the tax deficiency, informed it of the proposed tax
deficiency assessment through a preliminary five-day letter and furnished Enron
a copy of the audit working paper allegedly showing in detail the legal and
factual bases of the assessment. The CIR argues that these steps sufficed to
inform Enron of the laws and facts on which the deficiency tax assessment was
based.
We disagree. The advice of tax deficiency, given by the CIR to an employee of
Enron, as well as the preliminary five-day letter, were not valid substitutes for
the mandatory notice in writing of the legal and factual bases of the assessment.
These steps were mere perfunctory discharges of the CIR’s duties in correctly
On April 9, 2002, petitioner received the PAN dated February 28, 2002 which
contained the computations of its deficiency income and withholding
taxes.1âwphi1 Attached to the PAN was the detailed explanation of the
particular provision of law and revenue regulation violated, thus: DETAILS OF
DISCREPANCIES
1. Deficiency income taxes for 1998 and 1999 respectively result from
non-payment of the minimum corporate income tax (MCIT) imposed
pursuant to Section 27(E) of the 1997 Tax Reform Act.
2. Deficiency Withholding Taxes on Compensation for 1997-1999 are
the total withholding taxes on compensation of all employees of
SAMELCO[-]I resulting from failureof employer to withhold taxes on the

12
 taxable 13th month pay and other benefits in excess of [P]30,000.00
threshold pursuant to Revenue Regulation 2-98.24

The above information provided to petitioner enabled it to protest the PAN by

questioning respondent's interpretation of the laws cited as legal basis for the
computation of the deficiency withholding taxes and assessment of minimum
corporate income tax despite petitioner's position that it remains exempt
therefrom.25 In its letter-reply dated May 27, 2002, respondent answered the
arguments raised by petitioner in its protest, and requested it to pay the
assessed deficiency on the date of payment stated in the PAN. A second
protest letter dated June 23, 2002 was sent by petitioner, to which respondent
replied (letter dated July 8, 2002) answering each of the two issues reiterated by
petitioner: ( 1) validity of EO 93 withdrawing the tax exemption privileges under
PD 269; and (2) retroactive application of RR No. 8-2000.26 The FAN was finally
received by petitioner on September 24, 2002, and protested by it in a letter
dated October 14, 2002 which reiterated in lengthy arguments its earlier
interpretation of the laws and regulations upon which the assessments were
based.27

Although the FAN and demand letter issued to petitioner were not accompanied
by a written explanation of the legal and factual bases of the deficiency taxes
assessed against the petitioner, the records showed that respondent in its letter
dated April 10, 2003 responded to petitioner's October 14, 2002 letter-protest,
explaining at length the factual and legal bases of the deficiency tax
assessments and denying the protest.28

Considering the foregoing exchange of correspondence and documents

between the parties, we find that the requirement of Section 228 was
substantially complied with. Respondent had fully informed petitioner in writing
of the factual and legal bases of the deficiency taxes assessment, which
enabled the latter to file an "effective" protest, much unlike the taxpayer's
situation in Enron. Petitioner's right to due process was thus not violated.

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of

the Court of Tax Appeals En Banc dated March 11, 2010 and July 28, 2010,
respectively, in C.T.A. EB Nos. 460 and 462 (C.T.A. Case No. 6697), are
hereby AFFIRMED and UPHELD.

With costs against the petitioner.

SO ORDERED.

13
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 207843 July 15, 2015
COMMISSION OF INTERNAL REVENUE, Petitioner,
vs.
COURT OF TAX APPEALS (SECOND DIVISION) and PETRON
CORPORATION,* Respondents.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for certiorari1 are the Resolutions dated February 13,
20132 and May 8, 20133 of the Court of Tax Appeals, Second Division (CTA) in
CTA Case No. 8544 reversing and setting aside the earlier dismissal of the
petition for review filed by private respondent Petron Corporation (Petron) in the
said case on the bases of prematurity and lack of jurisdiction.
The Facts
Petron, which is engaged in the manufacture and marketing of petroleum
products, imports alkylate as a raw material or blending component for the
manufacture of ethanol-blended motor gasoline.4 For the period January 2009
to August 2011, as well as for the month of April 2012, Petron transacted an
aggregate of 22 separate importations for which petitioner the Commissioner of
Internal Revenue (CIR) issued Authorities to Release Imported Goods
(ATRIGs), categorically stating that Petron's importation of alkylate is exempt
from the payment of the excise tax because it was not among those articles
enumerated as subject to excise tax under Title VI of Republic Act No. (RA)
8424,5 as amended, or the 1997 National Internal Revenue Code (NIRC). With
respect, however, to Petron's alkylate importations covering the period
September 2011 to June 2012 (excluding April 2012), the CIR inserted, without
prior notice, a reservation for all ATRIGs issued,6 stating that:
This is without prejudice to the collection of the corresponding excise taxes,
penalties and interest depending on the final resolution of the Office of the
Commissioner on the issue of whether this item is subject to the excise taxes
under the National Internal Revenue Code of 1997, as amended.7
14
In June 2012, Petron imported 12,802,660 liters of alkylate and paid value-
added tax (VAT) in the total amount of ?41,657,533.00 as evidenced by Import
Entry and Internal Revenue Declaration (IEIRD) No. SN 122406532. Based on
the Final Computation, said importation was subjected by the Collector of
Customs of Port Limay, Bataan, upon instructions of the Commissioner of
Customs (COC), to excise taxes of ₱4.35 per liter, or in the aggregate amount
of ₱55,691,571.00, and consequently, to an additional VAT of 12% on the
imposed excise tax in the amount of ₱6,682,989.00.8 The imposition of the
excise tax was supposedly premised on Customs Memorandum Circular (CMC)
No. 164-2012 dated July 18, 2012, implementing the Letter dated June 29, 2012
issued by the CIR, which states that:
[A]lkylate which is a product of distillation similar to that of naphta, is subject to
excise tax under Section 148( e) of the National Internal Revenue Code (NIRC)
of 1997. 9
In view of the CIR's assessment, Petron filed before the CTA a petition for
review,10 docketed as CTA Case No. 8544, raising the issue of whether its
importation of alkylate as a blending component is subject to excise tax as
contemplated under Section 148 (e) of the NIRC.
On October 5, 2012, the CIR filed a motion to dismiss on the grounds of lack of
jurisdiction and prematurity.11
Initially, in a Resolution12 dated November 15, 2012, the CTA granted the CIR's
motion and dismissed the case. However, on Petron's motion for
reconsideration,13 it reversed its earlier disposition in a Resolution14 dated
February 13, 2013, and eventually denied the CIR's motion for
reconsideration15 therefrom in a Resolution16 dated May 8, 2013. In effect, the
CTA gave due course to Petron's petition, finding that: (a) the controversy was
not essentially for the determination of the constitutionality, legality or validity of
a law, rule or regulation but a question on the propriety or soundness of the
CIR's interpretation of Section 148 (e) of the NIRC which falls within the
exclusive jurisdiction of the CTA under Section 4 thereof, particularly under the
phrase "other matters arising under [the NIRC]";17 and (b) there are attending
circumstances that exempt the case from the rule on non-exhaustion of
administrative remedies, such as the great irreparable damage that may be
suffered by Petron from the CIR's final assessment of excise tax on its
importation.18
Aggrieved, the CIR sought immediate recourse to the Court, through the instant
petition, alleging that the CTA committed grave abuse of discretion when it
assumed authority to take cognizance of the case despite its lack of jurisdiction
to do so.19
 The Issue Before the Court
The core issue to be resolved is whether or not the CTA properly assumed
jurisdiction over the petition assailing the imposition of excise tax on Petron's
importation of alkylate based on Section 148 (e) of the NIRC.
The Court's Ruling
The petition is meritorious.
The CIR asserts that the interpretation of the subject tax provision, i.e., Section
148 (e) of the NIRC, embodied in CMC No. 164-2012, is an exercise of her
quasi-legislative function which is reviewable by the Secretary of Finance,
whose decision, in turn, is appealable to the Office of
the President and, ultimately, to the regular courts, and that only her quasi-
judicial functions or the authority to decide disputed assessments, refunds,
penalties and the like are subject to the exclusive appellate jurisdiction of the
CTA.20 She likewise contends that the petition suffers from prematurity due to
Petron 's failure to exhaust all available remedies within the administrative level
in accordance with the Tariff and Customs Code (TCC).21
The CIR's position is well-grounded.
Section 4 of the NIRC confers upon the CIR both: (a) the power to interpret tax
laws in the exercise of her quasi-legislative function; and (b) the power to decide
tax cases in the exercise of her quasi-judicial function. It also delineates the
jurisdictional authority to review the validity of the CIR's exercise of the said
powers, thus:
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.
The power to decide disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties imposed in relation thereto, or other matters
arising under this Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. (Emphases and
underscoring supplied)
The CTA is a court of special jurisdiction, with power to review by appeal
decisions involving tax disputes rendered by either the CIR or the
15
COC.1âwphi1 Conversely, it has no jurisdiction to determine the validity of a
ruling issued by the CIR or the COC in the exercise of their quasi-legislative
powers to interpret tax laws. These observations may be deduced from a
reading of Section 7 of RA 1125,22 as amended by RA 9282,23 entitled "An Act
Creating the Court of Tax Appeals," enumerating the cases over which the CT A
may exercise its jurisdiction:
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;
2. Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relations 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 Comis
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.
b. Jurisdiction over cases involving criminal offenses as herein
provided:
1. Exclusive original jurisdiction over all criminal offenses arising
from violations of the National Internal Revenue Code or Tariff
and Customs Code and other laws administered by the Bureau
of Internal Revenue or the Bureau of Customs: Provided,
however, That offenses or felonies mentioned in this paragraph
where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One million pesos
(₱1,000,000.00) or where there is no specified amount claimed
shall be tried by the regular Courts and the jurisdiction of the
CTA shall be appellate. Any provision of law or the Rules of
Court to the contrary notwithstanding, the criminal action and
the corresponding civil action for the recovery of civil liability for
taxes and penalties shall at all times be simultaneously
instituted with, and jointly determined in the same proceeding
by the CT A, the filing of the criminal action being deemed to
necessarily carry with it the filing of the civil action, and no right
to reserve the filling of such civil action separately from the
criminal action will be recognized.
2. Exclusive appellate jurisdiction in criminal offenses:
a. Over appeals from the judgments, resolutions or
orders of the Regional Trial Courts in tax cases
originally decided by them, in their respective territorial
jurisdiction.
b. Over petitions for review of the judgments,
resolutions or orders of the Regional Trial Courts in the
exercise of their appellate jurisdiction over tax cases
16
originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts
in their respective jurisdiction.
c. Jurisdiction over tax collection cases as herein
provided:
1. Exclusive original jurisdiction in tax collection cases involving final
and executory assessments for taxes, fees, charges and penalties:
Provided, however, That collection cases where the principal amount of
taxes and fees, exclusive of charges and penalties, claimed is less than
One million pesos (₱1,000,000.00) shall be tried by the proper
Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court.
2. Exclusive appellate jurisdiction in tax collection cases:
a. Over appeals from the judgments, resolutions or orders of the
Regional Trial Courts in tax collection cases originally decided
by them, in their respective territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions or
orders of the Regional Trial Courts in the exercise of their
appellate jurisdiction over tax collection cases originally decided
by the Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts, in their respective jurisdiction.
(Emphasis supplied)
In this case, Petron's tax liability was premised on the COC's issuance of CMC
No. 164-2012, which gave effect to the CIR's June 29, 2012 Letter interpreting
Section 148 (e) of the NIRC as to include alkyl ate among the articles subject to
customs duties, hence, Petron's petition before the CTA ultimately challenging
the legality and constitutionality of the CIR's aforesaid interpretation of a tax
provision. In line with the foregoing discussion, however, the CIR correctly
argues that the CT A had no jurisdiction to take cognizance of the petition as its
resolution would necessarily involve a declaration of the validity or
constitutionality of the CIR's interpretation of Section 148 (e) of the NIRC, which
is subject to the exclusive review by the Secretary of Finance and ultimately by
the regular courts. In British American Tobacco v. Camacho,24 the Court ruled
that the CTA's jurisdiction to resolve tax disputes excludes the power to rule on
the constitutionality or validity of a law, rule or regulation, to wit:
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. x x x.25
In asserting its jurisdiction over the present case, the CTA explained that
Petron's petition filed before it "simply puts in question" the propriety or
soundness of the CIR's interpretation and application of Section 148 (e) of the
NIRC (as embodied in CMC No. 164-2012) "in relation to" the imposition of
excise tax on Petron's importation of alkylate; thus, the CTA posits that the case
should be regarded as "other matters arising under [the NIRC]" under the
second paragraph of Section 4 of the NIRC, therefore falling within the CTA's
jurisdiction:26
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.
The power to decide disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties imposed in relation thereto, or other matters
arising under this Code or other laws or portions thereof administered by the
Bureau of Internal Revenue is vested in the commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. (Emphases and
underscoring supplied)
The Court disagrees.
As the CIR aptly pointed out, the phrase "other matters arising under this Code,"
as stated in the second paragraph of Section 4 of the NIRC, should be
understood as pertaining to those matters directly related to the preceding
phrase "disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto" and must therefore not be taken
in isolation to invoke the jurisdiction of the CTA.27 In other words, the subject
phrase should be used only in reference to cases that are, to begin with, subject
to the exclusive appellate jurisdiction of the CTA, i.e., those controversies over
which the CIR had exercised her quasi-judicial functions or her power to decide
disputed assessments, refunds or internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, not to those that involved the CIR's
exercise of quasi-legislative powers.
In Enrile v. Court of Appeals,28 the Court, applying the statutory construction
principle of ejusdem generis,29explained the import of using the general clause
"other matters arising under the Customs Law or other law or part of law
administered by the Bureau of Customs" in the enumeration of cases subject to
the exclusive appellate jurisdiction of the CTA, saying that: [T]he 'other matters'
that may come under the general clause should be of the same nature as those
17
that have preceded them applying the rule of construction known as ejusdem
generis.30(Emphasis and underscoring supplied)
Hence, as the CIR's interpretation of a tax provision involves an exercise of her
quasi-legislative functions, the proper recourse against the subject tax ruling
expressed in CMC No. 164-2012 is a review by the Secretary of Finance and
ultimately the regular courts. In Commissioner of Customs v. Hypermix Feeds
Corporation,31 the Court has held that:
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. x x x. 32
Besides, Petron prematurely invoked the jurisdiction of the CT A. Under Section
7 of RA 1125, as amended by RA 9282, what is appealable to the CT A is the
decision of the COC over a customs collector's adverse ruling on a taxpayer's
protest:
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;
xxxx
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;
xxxx
Section 11 of the same law is no less categorical in stating that what may be the party is allowed to seek the intervention of the courts, it is a pre-condition that
subject of an appeal to the CT A is a decision, ruling or inaction of the CIR or he avail of all administrative processes afforded him, such that if a remedy
the COC, among others: within the administrative machinery can be resorted to by giving the
administrative officer every opportunity to decide on a matter that comes within
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. – Any party his jurisdiction, then such remedy must be exhausted first before the court's
adversely affected by a decision, ruling or inaction of the Commissioner of power of judicial review can be sought, otherwise, the premature resort to the
Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the court is fatal to one's cause of action.40 While there are exceptions to the
Secretary of Trade and Industry or the Secretary of Agriculture or the Central principle of exhaustion of administrative remedies, it has not been sufficiently
Board of Assessment Appeals or the Regional Trial Courts may file an appeal shown that the present case falls under any of the exceptions.
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 WHEREFORE, the petition is GRANTED. The Resolutions dated February 13,
7(a)(2) herein. 2013 and May 8, 2013 of the Court of Tax Appeals (CTA), Second Division in
CTA Case No. 8544 are hereby REVERSED and SET ASIDE. The petition for
xxxx review filed by private respondent Petron Corporation before the CTA is
DISMISSED for lack of jurisdiction and prematurity.
In this case, there was even no tax assessment to speak of. While customs
collector Federico Bulanhagui himself admitted during the CTA's November 8, SO ORDERED.
2012 hearing that the computation he had written at the back page of the IEIRD
served as the final assessment imposing excise tax on Petron's importation of
alkylate,33 the Court concurs with the CIR's stance that the subject IEIRD was
not yet the customs collector's final assessment that could be the proper subject
of review. And even if it were, the same should have been brought first for
review before the COC and not directly to the CTA. It should be stressed that
the CTA has no jurisdiction to review by appeal, decisions of the customs
collector.34 The TCC prescribes that a party adversely affected by a ruling or
decision of the customs collector may protest such ruling or decision upon
payment of the amount due35 and, if aggrieved by the action of the customs
collector on the matter under protest, may have the same reviewed by the
COC.36 It is only after the COC shall have made an adverse ruling on the matter
may the aggrieved party file an

appeal to the CT A.37

Notably, Petron admitted to not having filed a protest of the assessment before
the customs collector and elevating a possible adverse ruling therein to the
COC, reasoning that such a procedure would be costly and impractical, and
would unjustly delay the resolution of the issues which, being purely legal in
nature anyway, were also beyond the authority of the customs collector to
resolve with finality.38 This admission is at once decisive of the issue of the
CTA's jurisdiction over the petition. There being no protest ruling by the customs
collector that was appealed to the COC, the filing of the petition before the CTA
was premature as there was nothing yet to review.39

Verily, the fact that there is no decision by the COC to appeal from highlights
Petron's failure to exhaust administrative remedies prescribed by law. Before a

18
 THIRD DIVISION
2005 2004 District
Officer
G.R. No. 212825, December 07, 2015
Revenue
Second June 30, October 22,
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. NEXT MOBILE, October 22, 2004 District
Waiver 2005 2004
INC. (FORMERLY NEXTEL COMMUNICATIONS PHILS., INC.), Respondent. Officer

DECISION Revenue
September January
Third Waiver January 18, 2005 District
30, 2005 12,2005
VELASCO JR., J.: Officer

Revenue
This is a Petition for Review under Rule 45 of the Rules of Court seeking to Fourth September
None May 3, 2005 District
reverse and set aside the Decision of the Court of Tax Appeals En Waiver 30, 2005
Officer
Banc affirming the earlier decision of its First Division in CTA Case No. 7965,
cancelling and withdrawing petitioner's formal letter of demand and assessment Revenue
notices to respondent for having been issued beyond the prescriptive period October 31, March 17,
Fifth Waiver May 3, 2005 District
provided by law. 2005 2005
Officer
The Facts On September 26, 2005, respondent received from the BIR a Preliminary
Assessment Notice dated September 16, 2005 to which it filed a Reply.
On April 15, 2002, respondent filed with the Bureau of Internal Revenue (BIR)
its Annual Income Tax Return (ITR) for taxable year ending December 31, 2001. On October 25, 2005, respondent received a Formal Letter of Demand (FLD)
Respondent also filed its Monthly Remittance Returns of Final Income Taxes and Assessment Notices/Demand No. 43-734 both dated October 17, 2005
Withheld (BIR Form No. 1601-F), its Monthly Remittance Returns of Expanded from the BIR, demanding payment of deficiency income tax, final withholding tax
Withholding Tax (BIR Form No. 1501-E) and its Monthly Remittance Return of (FWT), expanded withholding tax (EWT), increments for late remittance of taxes
Income Taxes Withheld on Compensation (BIR Form No. 1601-C) for year withheld, and compromise penalty for failure to file returns/late filing/late
ending December 31, 2001. remittance of taxes withheld, in the total amount of P313,339,610.42 for the
taxable year ending December 31, 2001.
On September 25, 2003, respondent received a copy of the Letter of Authority
dated September 8, 2003 signed by Regional Director Nestor S. Valeroso On November 23, 2005, respondent filed its protest against the FLD and
authorizing Revenue Officer Nenita L. Crespo of Revenue District Office 43 to requested the reinvestigation of the assessments. On July 28, 2009, respondent
examine respondent's books of accounts and other accounting records for received a letter from the BIR denying its protest. Thus, on August 27, 2009,
income and withholding taxes for the period covering January 1, 2001 to respondent filed a Petition for Review before the CTA docketed as CTA Case
December 31, 2001. No. 7965.

Ma. Lida Sarmiento (Sarmiento), respondent's Director of Finance, Ruling of the CTA Former First Division
subsequently executed several waivers of the statute of limitations to extend the
prescriptive period of assessment for taxes due in taxable year ending On December 11, 2012, the former First Division of the CTA (CTA First Division)
December 31, 2001 (Waivers), the details of which are summarized as follows: rendered a Decision granting respondent's Petition for Review and declared the
FLD dated October 17, 2005 and Assessment Notices/Demand No. 43-734
Extended dated October 17, 2005 cancelled and withdrawn for being issued beyond the
Date of Date of BIR
Waiver Date of three-year prescriptive period provided by law.
Execution Acknowledgment Signatory
Prescription
It was held that based on the date of filing of respondent's Annual ITR as well as
First Waiver March 30, August 26, August 30, 2004 Revenue the dates of filing of its monthly BIR Form Nos. 1601-F, 1601-E and 1601-C, it is

19
clear that the adverted FLD and the Final Assessment Notices both dated
October 17, 2005 were issued beyond the three-year prescriptive period
provided under Section 203 ot the 1997 National Internal Revenue Code
(NIRC), as amended.
The tax court also rejected petitioner's claim that this case falls under the
exception as to the three-year prescriptive period for assessment and that the
10-year prescriptive period should apply on the ground of filing a false or
fraudulent return. Under Section 222(a) of the 1997 NIRC, as amended, in case
a taxpayer filed a false or fraudulent return, the Commissioner of Internal
Revenue (CIR) may assess a taxpayer for deficiency tax within ten (10) years
after the discovery of the falsity or the fraud. The tax court explained that
petitioner failed to substantiate its allegation by clear and convincing proof that
respondent filed a false or fraudulent return.
Furthermore, the CTA First Division held that the Waivers executed by
Sarmiento did not validly extend the three-year prescriptive period to assess
respondent for deficiency income tax, FWT, EWT, increments for late remittance
of tax withheld and compromise penalty, for, as found, the Waivers were not
properly executed according to the procedure in Revenue Memorandum Order
No. 20-90 (RMO 20-90)1 and Revenue Delegation Authority Order No. 05-01
(RDAO 05-01).2
The tax court declared that, in this case, the Waivers have no binding effect on
respondent for the following reasons:chanRoblesvirtualLawlibrary
First, Sarmiento signed the Waivers without any notarized written authority from
respondent's Board of Directors. Petitioner's witness explicitly admitted that he
did not require Sarmiento to present any notarized written authority from the
Board of Directors of respondent, authorizing her to sign the Waivers.
Petitioner's witness also confirmed that Revenue District Officer Raul Vicente L.
Recto (RDO Recto) accepted the Waivers as submitted.
Second, even assuming that Sarmiento had the necessary board authority, the
Waivers are still invalid as the respective dates of their acceptance by RDO
Recto are not indicated therein.
Third, records of this case reveal additional irregularities in the subject Waivers:
(1) The fact of receipt by respondent of its copy of the Second Waiver was not
indicated on the face of the original Second Waiver;
(2) Respondent received its copy of the First and the Third Waivers on the
same day, May 23, 2005; and
20
(3) Respondent received its copy of the Fourth and the Fifth Waivers on the
same day, May 13, 2005.
Finally, the CTA held that estoppel does not apply in questioning the validity of a
waiver of the statute of limitations. It stated that the BIR cannot hide behind the
doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO
05-01.
Petitioner's Motion for Reconsideration was denied on March 14, 2013.
Petitioner filed a Petition for Review before the CTA En Banc.
On May 28, 2014, the CTA En Banc rendered a Decision denying the Petition
for Review and affirmed that of the former CTA First Division.
It held that the five (5) Waivers of the statute of limitations were not valid and
binding; thus, the three-year period of limitation within which to assess
deficiency taxes was not extended. It also held that the records belie the
allegation that respondent filed false and fraudulent tax returns; thus, the
extension of the period of limitation from three (3) to ten (10) years does not
apply.
Issue
Petitioner has filed the instant petition on the issue of whether or not the CIR's
right to assess respondent's deficiency taxes had already prescribed.
Our Ruling
The petition has merit.
Section 2033 of the 1997 NIRC mandates the BIR to assess internal revenue
taxes within three years from the last day prescribed by law for the filing of the
tax return or the actual date of filing of such return, whichever comes later.
Hence, an assessment notice issued after the three-year prescriptive period is
not valid and effective. Exceptions to this rule are provided under Section
2224 of the NIRC.
Section 222(b) of the NIRC provides that the period to assess and collect taxes
may only be extended upon a written agreement between the CIR and the
taxpayer executed before the expiration of the three-year period. RMO 20-90
issued on April 4, 1990 and RDAO 05-015 issued on August 2, 2001 provide the
procedure for the proper execution of a waiver. RMO 20-90 reads:
April 4, 1990
REVENUE MEMORANDUM ORDER NO. 20-90
Subject: Proper Execution of the Waiver of the Statute of Limitations
under the National Internal Revenue Code
To: All Internal Revenue Officers and Others Concerned
Pursuant to Section 223 of the Tax Code, internal revenue taxes may be
assessed or collected after the ordinary prescriptive period, if before its
expiration, both the Commissioner and the taxpayer have agreed in writing to its
assessment and/or collection after said period. The period so agreed upon may
be extended by subsequent written agreement made before the expiration of the
period previously agreed upon. This written agreement between the
Commissioner and the taxpayer is the so-called Waiver of the Statute of
Limitations. In the execution of said waiver, the following procedures should be
followed:chanRoblesvirtualLawlibrary
1. The waiver must be in the form identified hereof. This form may be
reproduced by the Office concerned but there should be no deviation from such
form. The phrase "but not after ______ 19____" should be filled up. This
indicates the expiry date of the period agreed upon to assess/collect the tax
after the regular three-year period of prescription. The period agreed upon shall
constitute the time within which to effect the assessment/collection of the tax in unscrupulous investigations, waivers of this kind must be carefully and strictly
addition to the ordinary prescriptive period.
2. The waiver shall be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of an assessment and collect the taxes due is extended to a date certain. It is not a
its responsible officials.
Soon after the waiver is signed by the taxpayer, the Commissioner of Internal
Revenue .or the revenue official authorized by him, as hereinafter provided,
shall sign the waiver indicating that the Bureau has accepted and agreed to the
waiver. The date of such acceptance by the Bureau should be indicated. Both
the date of execution by the taxpayer and date of acceptance by the Bureau
should be before the expiration of the period of prescription or before the lapse
of the period agreed upon in case a subsequent agreement is executed.
3. The following revenue officials are authorized to sign the
waiver:chanRoblesvirtualLawlibrary
xxxx
4. The waiver must be executed in three (3) copies, the original copy to be
attached to the docket of the case, the second copy for the taxpayer and the
third copy for the Office accepting the waiver. The fact of receipt by the taxpayer to sign the waivers in behalf of respondent corporation; (2) there was no date of
of his/her file copy shall be indicated in the original copy.
5. The foregoing procedures shall be strictly followed. Any revenue official found
not to have complied with this Order resulting in prescription of the right to
assess/collect shall be administratively dealt with.
This Revenue Memorandum Order shall take effect immediately.
(SGD.)JOSEU. ONG
Commissioner of Internal Revenue
The Court has consistently held that a waiver of the statute of limitations must
faithfully comply with the provisions of RMO No. 20-90 and RDAO 05-01 in
order to be valid and binding.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue6 the Court
declared the waiver executed by petitioner therein invalid because: (1) it did not
specify a definite agreed date between the BIR and petitioner within which the
former may assess and collect revenue taxes; (2) it was signed only by a
revenue district officer, not the Commissioner; (3) there was no date of
acceptance; and (4) petitioner was not furnished a copy of the waiver.
Philippine Journalists tells us that since a waiver of the statute of limitations is a
derogation of the taxpayer's right to security against prolonged and
construed. Philippine Journalists also clarifies that a waiver of the statute of
limitations is not a waiver of the right to invoke the defense of prescription but
rather an agreement between the taxpayer and the BIR that the period to issue
unilateral act by the taxpayer of the BIR but is a bilateral agreement between
two parties.
In Commissioner of Internal Revenue v. FMF Development Corporation7 the
Court found the waiver in question defective because: (1) it was not proved that
respondent therein was furnished a copy of the BIR-accepted waiver; (2) the
waiver was signed by a revenue district officer instead of the Commissioner as
mandated by the NIRC and RMO 20-90 considering that the case involved an
amount of more than P1,000,000.00, and the period to assess was not yet
about to prescribe; and (3) it did not contain the date of acceptance by the CIR.
The Court explained that the date of acceptance by the CIR is a requisite
necessary to determine whether the waiver was validly accepted before the
expiration of the original period.8
In CIR v. Kudos Metal Corporation,9 the waivers executed by Kudos were found
ineffective to extend the period to assess or collect taxes because: (1) the
accountant who executed the waivers had no notarized written board authority
acceptance indicated on the waivers; and (3) the fact of receipt by respondent of
its file copy was not indicated in the original copies of the waivers.
The Court rejected the CIR's argument that since it was the one who asked for
additional time, Kudos should be considered estopped from raising the defense
21
of prescription. The Court held that the BIR cannot hide behind the doctrine of
estoppel to cover its failure to comply with its RMO 20-90 and RDAO 05-01.
Having caused the defects in the waivers, the Court held that the BIR must bear
the consequence.10 Hence, the BIR assessments were found to be issued
beyond the three-year period and declared void.11 Further, the Court stressed
that there is compliance with RMO 20-90 only after the taxpayer receives a copy
of the waiver accepted by the BIR, viz:
The flaw in the appellate court's reasoning stems from its assumption that the
waiver is a unilateral act of the taxpayer when it is in fact and in law an
agreement between the taxpayer and the BIR. When the petitioner's comptroller
signed the waiver on September 22, 1997, it was not yet complete and final
because the BIR had not assented. There is compliance with the provision of
RMO No. 20-90 only after the taxpayer received a copy of the waiver accepted
by the BIR. The requirement to furnish the taxpayer with a copy of the waiver is
not only to give notice of the existence of the document but of the acceptance
by the BIR and the perfection of the agreement.12ChanRoblesVirtualawlibrary
The deficiencies of the Waivers in this case are the same as the defects of the
waiver in Kudos. In the instant case, the CTA found the Waivers because of the
following flaws: (1) they were executed without a notarized board authority; (2)
the dates of acceptance by the BIR were not indicated therein; and (3) the fact
of receipt by respondent of its copy of the Second Waiver was not indicated on
the face of the original Second Waiver.
To be sure, both parties in this case are at fault.
Here, respondent, through Sarmiento, executed five Waivers in favor of
petitioner. However, her authority to sign these Waivers was not presented upon Verily, if the BIR was truly determined to validly assess and collect taxes from
their submission to the BIR. In fact, later on, her authority to sign was
questioned by respondent itself, the very same entity that caused her to sign
such in the first place. Thus, it is clear that respondent violated RMO No. 20-90 followed not only by its revenue officers but also by respondent. The BIR stood
which states that in case of a corporate taxpayer, the waiver must be signed by
its responsible officials13 and RDAO 01-05 which requires the presentation of a
written and notarized authority to the BIR.14
Similarly, the BIR violated its own rules and was careless in performing its
functions with respect to these Waivers. It is very clear that under RDAO 05-01
it is the duty of the authorized revenue official to ensure that the waiver is
duly accomplished and signed by the taxpayer or his authorized
representative before affixing his signature to signify acceptance of the same.
It also instructs that in case the authority is delegated by the taxpayer to a
representative, the concerned revenue official shall see to it that such
delegation is in writing and duly notarized. Furthermore, it mandates that the
waiver should not be accepted by the concerned BIR office and official
unless duly notarized.15
Vis-a-vis the five Waivers it received from respondent, the BIR has failed, for
five times, to perform its duties in relation thereto: to verify Ms. Sarmiento's
authority to execute them, demand the presentation of a notarized document
evidencing the same, refuse acceptance of the Waivers when no such
document was presented, affix the dates of its acceptance on each waiver, and
indicate on the Second Waiver the date of respondent's receipt thereof.
Both parties knew the infirmities of the Waivers yet they continued dealing with
each other on the strength of these documents without bothering to rectify these
infirmities. In fact, in its Letter Protest to the BIR, respondent did not even
question the validity of the Waivers or call attention to their alleged defects.
In this case, respondent, after deliberately executing defective waivers, raised
the very same deficiencies it caused to avoid the tax liability determined by the
BIR during the extended assessment period. It must be remembered that by
virtue of these Waivers, respondent was given the opportunity to gather and
submit documents to substantiate its claims before the CIR during investigation.
It was able to postpone the payment of taxes, as well as contest and negotiate
the assessment against it. Yet, after enjoying these benefits, respondent
challenged the validity of the Waivers when the consequences thereof were not
in its favor. In other words, respondent's act of impugning these Waivers after
benefiting therefrom and allowing petitioner to rely on the same is an act of bad
faith.
On the other hand, the stringent requirements in RMO 20-90 and RDAO 05-01
are in place precisely because the BIR put them there. Yet, instead of strictly
enforcing its provisions, the BIR defied the mandates of its very own issuances.
respondent after the prescriptive period, it should have been prudent enough to
make sure that all the requirements for the effectivity of the Waivers were
to lose millions of pesos in case the Waivers were declared void, as they
eventually were by the CTA, but it appears that it was too negligent to even
comply with its most basic requirements.
The BIR's negligence in this case is so gross that it amounts to malice and bad
faith. Without doubt, the BIR knew that waivers should conform strictly to RMO
20-90 and RDAO 05-01 in order to be valid. In fact, the mandatory nature of the
requirements, as ruled by this Court, has been recognized by the BIR itself in its
issuances such as Revenue Memorandum Circular No. 6-2005,16 among others.
Nevertheless, the BIR allowed respondent to submit, and it duly received, five
defective Waivers when it was its duty to exact compliance with RMO 20-90 and
RDAO 05-01 and follow the procedure dictated therein. It even openly admitted
that it did not require respondent to present any notarized authority to sign the
questioned Waivers.17 The BIR failed to demand respondent to follow the
requirements for the validity of the Waivers when it had the duty to do so, most
especially because it had the highest interest at stake. If it was serious in
22
collecting taxes, the BIR should have meticulously complied with the foregoing
orders, leaving no stone unturned.
The general rule is that when a waiver does not comply with the requisites for its
validity specified under RMO No. 20-90 and RDAO 01-05, it is invalid and
ineffective to extend the prescriptive period to assess taxes. However, due to its
peculiar circumstances, We shall treat this case as an exception to this rule and
find the Waivers valid for the reasons discussed below.
First, the parties in this case are in pari delicto or "in equal fault." In pari
delicto connotes that the two parties to a controversy are equally culpable or
guilty and they shall have no action against each other. However, although the
parties are in pari delicto, the Court may interfere and grant relief at the suit of
one of them, where public policy requires its intervention, even though the result
may be that a benefit will be derived by one party who is in equal guilt with the
other.18
Here, to uphold the validity of the Waivers would be consistent with the public
policy embodied in the principle that taxes are the lifeblood of the government,
and their prompt and certain availability is an imperious need. 19 Taxes are the
nation's lifeblood through which government agencies continue to operate and
which the State discharges its functions for the welfare of its constituents.20 As
between the parties, it would be more equitable if petitioner's lapses were
allowed to pass and consequently uphold the Waivers in order to support this
principle and public policy.
Second, the Court has repeatedly pronounced that parties must come to court
with clean hands.21Parties who do not come to court with clean hands cannot be
allowed to benefit from their own wrongdoing.22 Following the foregoing
principle, respondent should not be allowed to benefit from the flaws in its own
Waivers and successfully insist on their invalidity in order to evade its
responsibility to pay taxes.
Third, respondent is estopped from questioning the validity of its Waivers. While
it is true that the Court has repeatedly held that the doctrine of estoppel must be
sparingly applied as an exception to the statute of limitations for assessment of
taxes, the Court finds that the application of the doctrine is justified in this case.
Verily, the application of estoppel in this case would promote the administration
of the law, prevent injustice and avert the accomplishment of a wrong and
undue advantage. Respondent executed five Waivers and delivered them to
petitioner, one after the other. It allowed petitioner to rely on them and did not
raise any objection against their validity until petitioner assessed taxes and
penalties against it. Moreover, the application of estoppel is necessary to
prevent the undue injury that the government would suffer because of the
cancellation of petitioner's assessment of respondent's tax liabilities.
23
Finally, the Court cannot tolerate this highly suspicious situation. In this case,
the taxpayer, on the one hand, after voluntarily executing waivers, insisted on
their invalidity by raising the very same defects it caused. On the other hand, the
BIR miserably failed to exact from respondent compliance with its rules. The
BIR's negligence in the performance of its duties was so gross that it amounted
to malice and bad faith. Moreover, the BIR was so lax such that it seemed that it
consented to the mistakes in the Waivers. Such a situation is dangerous and
open to abuse by unscrupulous taxpayers who intend to escape their
responsibility to pay taxes by mere expedient of hiding behind technicalities.
It is true that petitioner was also at fault here because it was careless in
complying with the requirements of RMO No. 20-90 and RDAO 01-05.
Nevertheless, petitioner's negligence may be addressed by enforcing the
provisions imposing administrative liabilities upon the officers responsible for
these errors.23 The BIR's right to assess and collect taxes should not be
jeopardized merely because of the mistakes and lapses of its officers, especially
in cases like this where the taxpayer is obviously in bad faith.24
As regards petitioner's claim that the 10-year period of limitation within which to
assess deficiency taxes provided in Section 222(a) of the 1997 NIRC is
applicable in this case as respondent allegedly filed false and fraudulent returns,
there is no reason to disturb the tax court's findings that records failed to
establish, even by prima facie evidence, that respondent Next Mobile filed
false and fraudulent returns on the ground of substantial underdeclaration
of income in respondent Next Mobile's Annual ITR for taxable year ending
December 31, 2001.25cralawred
While the Court rules that the subject Waivers are valid, We, however, refer
back to the tax court the determination of the merits of respondent's petition
seeking the nullification of the BIR Formal Letter of Demand and Assessment
Notices/Demand No. 43-734.
WHEREFORE, premises considered, the Court resolves to GRANT the petition.
The Decision of the Court of Tax Appeals En Banc dated May 28, 2014 in CTA
EB Case No. 1001 is hereby REVERSED and SET ASIDE. Accordingly, let this
case be remanded to the Court of Tax Appeals for further proceedings in order
to determine and rule on the merits of respondent's petition seeking the
nullification of the BIR Formal Letter of Demand and Assessment
Notices/Demand No. 43-734, both dated October 17, 2005.
SO ORDERED.chanroblesvirtuallawlibrary
Peralta, Villarama, Jr., Perez,* and Reyes, JJ., concur.
 Republic of the Philippines Final Income Tax – 11,748,483.99 12,433,808.31 25,000.00 24,207,292.3
SUPREME COURT FCDU
Manila
Withholding Tax – 50,282.59 55,450.48 12,000.00 117,733.0
FIRST DIVISION Compensation
Expanded 678,361.62 748,081.59 20,000.00 1,446,443.2
G.R. No. 192173 July 29, 2015 Withholding Tax

COMMISSIONER OF INTERNAL REVENUE, Petitioner, Final Withholding 56,845.84 62,688.28 12,000.00 131,534.1
vs. Tax
STANDARD CHARTERED BANK, Respondent. TOTAL 16,128,246.04 17,103,965.33 94,000.00 33,326,211.3

DECISION
On August 12, 2004, [respondent] protested the said assessment by filing a
letter-protest dated August 9, 2004 addressed to the BIR Deputy Commissioner
PEREZ, J.: for Large Taxpayers' Service stating the factual and legal bases of the
assessment, and requested that it be withdrawn and cancelled. As of the date of
For the Court's consideration is a Petition for Review on Certiorari which seeks filing of this Petition for Review, [petitioner] has not rendered a decision on
to reverse and set aside the 1 March 2010 Decision1 and the 30 April 2010 [respondent's] protest.
Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA EB Case No.
522, affirming in toto the Decision3 and Resolution4 dated 27 February 2009 and In view of [petitioner's] inaction on [respondent's] protest, on March 9, 2005,
29 July 2009, respectively, of the Second Division of the CTA (CTA in Division) [respondent] filed the present Petition for Review.
in CTA Case No. 7165. The court a quo cancelled and set aside the Formal
Letter of Demand and Assessment Notices dated 24 June 2004 issued by
petitioner against respondent for deficiency income tax, final income tax – xxxx
Foreign Currency Deposit Unit (FCDU), and expanded withholding tax (EWT) in
the aggregate amount of ₱33,076,944.18, including increments covering taxable On October 14, 2005, [respondent] filed a Motion for Leave of Court to Serve
year 1998, for having been issued beyond the reglementary period. Supplemental Petition, with attached Supplemental Petition for Review,
pursuant to Rule 10 of the 1997 Rules of Civil Procedure, as amended, in view
The Facts of the alleged payments made by [respondent] through the BIR's Electronic
Filing and Payment System (eFPS) as regards its deficiency [WTC] and [FWT]
assessments in the amounts of ₱124,967.73 and ₱139,713.l l, respectively. In
As found by the CT A in Division and affirmed by the CT A En Banc, the factual its Supplemental Petition for Review, (respondent) seeks to be fully credited of
antecedents of the case and the proceedings conducted thereon were as the payments it made to cover the deficiency [WTC] and [FWT]. Thus, the
follows: remaining assessments cover only the deficiency income tax, final income tax –
FCDU, and [EWT] in the modified total amount of ₱33,076,944.18, computed as
On July 14, 2004, [respondent] received [petitioner's] Formal Letter of Demand follows:
dated June 24, 2004, for alleged deficiency income tax, final income tax -
FCDU, [withholding tax - compensation (WTC)], EWT, [final withholding tax
(FWT)], and increments for taxable year 1998 in the aggregate amount of Compromise
₱33,326,211.37, broken down as follows: Basic Tax Interest Total
Tax Penalty
Compromise Income Tax 3,594,272.00 3,803,936.67 25,000.00 7,423,208.6
Tax Basic Tax Interest Total
Penalty
Final Income Tax – 11,748,483.99 12,433,808.31 25,000.00 24,207,292.30
ncome Tax 3,594,272.00 3,803,936.67 25,000.00 7,423,208.67

24

CDU
xpanded 678,361.62 748,081.59 20,000.00
1,446,443.21
Withholding Tax
OTAL 16,021,117.61 16,985,826.57 70,000.00 33,076,944.18
Finding merit in [respondent's] motion, the same was granted and the
Supplemental Petition for Review was admitted in a Resolution dated December
12, 2005.
[Respondent] presented Chona G. Reyes, its Vice-President, as witness, and
documentary exhibits which were admitted by the Court in its Resolutions dated
October 1, 2007, and January 31, 2008.
On the other hand, [petitioner] presented Juan M. Luna, Jr., Revenue Officer II
of the BIR LTAID I, as witness, and documentary evidence marked as Exhibits
"1 " to "4 ".
Thereafter, the parties were ordered to file their simultaneous memoranda,
within thirty (30) days from notice, after which the case shall be deemed
submitted for decision.
[Petitioner;s] "Memorandum" was filed on August 4, 2008, while [respondent's]
Memorandum was filed on October 24, 2008 after a series of motions for
extension of time to file memorandum were granted by the [c]ourt. The case
was deemed submitted for decision on November 12, 2008.5
The Ruling of the CTA in Division
In a Decision dated 27 February 2009,6 the CTA in Division granted
respondent's petition for the cancellation and setting aside of the subject Formal
Letter of Demand and Assessment Notices dated 24 June 2004 on the ground
that petitioner's right to assess respondent for the deficiency income tax, final
income tax - FCDU, and EWT covering taxable year 1998 was already barred
by prescription. The court a quo explained that although petitioner offered in
evidence copies of the Waivers of Statute of Limitations executed by the parties,
for the purpose of justifying the extension of period to assess respondent, the
subject waivers, particularly the First and Second Waivers dated 20 July 2001
and 4 April 2002, respectively, failed to strictly comply and conform with the
provisions of Revenue Memorandum Order (RMO) No. 20-90, citing the case of
Philippine Journalists, Inc. v. CIR.7 It therefore concluded that since the
aforesaid waivers were invalid, it necessarily follows that the subsequent
waivers did not in any way cure these defects. Neither did it extend the
prescriptive period to assess. Accordingly, it ruled that the assailed Formal
Letter of Demand and Assessment Notices are void for having been issued
beyond the reglementary period.8 Having rendered such ruling, the CT A in
Division decided not to pass upon other incidental issues raised before it for
being moot.
On 29 July 2009, the CTA in Division denied petitioner's Motion for
Reconsideration thereof for lack of merit.9
Aggrieved, petitioner appealed to the CT A En Banc by filing a Petition for
Review under Section 18 of Republic Act (R.A.) No. 1125, as amended by R.A.
No. 9282,10 on 3 September 2009, docketed as CTA EB No. 522.
The Ruling of the CTA En Banc
The CT A En Banc affirmed in toto both the aforesaid Decision and Resolution
rendered by the CTA in Division in CTA Case No. 7165, pronouncing that there
was no cogent justification to disturb the findings and conclusion spelled out
therein, since what petitioner merely prayed was for the appellate court to view
and appreciate the arguments/discussions raised by petitioner in her own
perspective of things, which unfortunately had already been considered and
passed upon.
In other words, the CT A En Banc simply concurred with the ruling that
petitioner's subject Formal Letter of Demand and Assessment Notices (insofar
as to the deficiency income tax, final income tax - FCDU, and EWT) shall be
cancelled considering that the same was already barred by prescription for
having been issued beyond the three-year prescriptive period provided for in
Section 203 of the National Internal Revenue Code (NIRC) of 1997, as
amended. The waivers of the statute of limitations executed by the parties did
not extend the aforesaid prescriptive period because they were invalid for failure
to comply with and conform to the requirements set forth in RMO No. 20-90.
Upon denial of petitioner's Motion for Reconsideration thereof, it filed the instant
Petition for Review on Certiorari before this Court seeking the reversal of the 1
March 2010 Decision11 and the 30 April 2010 Resolution12 rendered in CTA EB
No. 522, based on the sole ground, to wit: The CT A En Banc committed
reversible error in not holding that respondent is estopped from questioning the
validity of the waivers of the Statute of Limitations executed by its
representatives in view of the partial payments it made on the deficiency taxes
sought to be collected in petitioner's Formal Letter of Demand and Assessment
Notices dated 24 June 2004. The Issues
25
The primary issue presented before this Court is whether or not petitioner's right
to assess respondent for deficiency income tax, final income tax - FCDU, and
EWT covering taxable year 1998 has already prescribed under Section 203 of
the NIRC of 1997, as amended, for failure to comply with the requirements set
forth in RMO No. 20-90 dated 4 April 1990, pertaining to the proper and valid
execution of a waiver of the Statute of Limitations, and in accordance with
existing jurisprudential pronouncements.
or to begin a court proceeding for the collection thereof without an assessment.
However, one of the exceptions to the three-year prescriptive period on the
assessment of taxes is that provided for under Section 222(b) of the NIRC of
1997, as amended, which states:
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection
of Taxes. –

Subsequently, even assuming that petitioner's right to assess had indeed
prescribed, another issue was submitted for our consideration, to wit: whether or
not respondent is estopped from questioning the validity of the waivers of the
Statute of Limitations executed by its representatives in view of the partial
payments it made on the deficiency taxes (i.e. WTC and FWT) sought to be
collected in petitioner's Formal Letter of Demand and Assessment Notices dated
24 June 2004.
Our Ruling
We find no merit in the petition.
At the outset, the period for petitioner to assess and collect an internal revenue
tax is limited only to three years by Section 203 of the NIRC of 1997., as
amended, quoted hereunder as follows: SEC. 203. Period of Limitation Upon
Assessment and Collection. – Except as provided in Section 222, internal
revenue taxes shall be assessed within three 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)
This mandate governs the question of prescription of the government's right to
assess internal revenue taxes primarily to safeguard the interests of taxpayers
from unreasonable investigation by not indefinitely extending the period of
assessment and depriving the taxpayer of the assurance that it will no longer be necessitating the very signatures of both the CIR and the taxpayer to give birth
subjected to further investigation for taxes after the expiration of reasonable
period of time.13
Thus, in the present case, petitioner only had three years, counted from the date expiration of the time prescribed in Section 203 (the three-year prescriptive
of actual filing of the return or from the last date prescribed by law for the filing period) for the assessment of the tax." When the period of prescription has
of such return, whichever comes later, to assess a national internal revenue tax expired, there will be no more need to execute a waiver as there will be nothing
xxxx
(b) If before the expiration of the time prescribed in Section 203 for the
assessment of the tax, both the Commissioner and the taxpayer have agreed in
writing to its assessment after such time, the tax may be assessed within the
period agreed upon.
The period so agreed upon may be extended by subsequent written agreement
made before the expiration of the period previously agreed upon. (Emphasis
supplied)
From the foregoing, the above provision authorizes the extension of the original
three-year prescriptive period by the execution of a valid waiver, where the
taxpayer and the Commissioner of Internal Revenue (CIR) may stipulate to
extend the period of assessment by a written 1 agreement executed prior to the
lapse of the period prescribed by law, and by subsequent written agreements
before the expiration of the period previously agreed upon. It must be kept in
mind that the very reason why the law provided for prescription is to give
taxpayers peace of mind, that is, to safeguard them from unreasonable
examination, investigation, or assessment. The law on prescription, being a
remedial measure, should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law on prescription should
perforce be strictly construed.14
In the landmark case of Philippine Journalists, Inc. v. CIR (PJI case), 15 we
pronounced that a waiver is not automatically a renunciation of the right to
invoke the defense of prescription. A waiver of the Statute of Limitations is
nothing more than "an agreement between the taxpayer and the Bureau of
Internal Revenue (BIR) that the period to issue an assessment and collect the
taxes due is extended to a date certain." It is a bilateral agreement, thus
to a valid agreement. Furthermore, indicating in the waiver the date of
acceptance by the BIR is necessary in order to determine whether the parties
(the taxpayer and the government) had entered into a waiver "before the

26
more to extend. Hence, no implied consent . can be presumed, nor can it be
contended that the concurrence to such waiver is a mere formality.
In delineation of the same sense about the waiver of the Statute of Limitations,
RMO No. 20-90 and Revenue Delegation Authority Order (RDAO) No. 05-01
were issued on 4 April 1990 and 2 August 2001, respectively. The said revenue
orders outline the procedure for the proper execution of a waiver, viz.:16
1. The waiver must be in the proper form prescribed by RMO 20-90.
The phrase "but not after __ 19 _", which indicates the expiry date of
the period agreed upon to assess/collect the tax after the regular three-
year period of prescription, should be filled up.
2. The waiver must be signed by the taxpayer himself or his duly
authorized representative. In the case of a corporation, the waiver must
be signed by any of its responsible officials. In case the authority is
delegated by the taxpayer to a representative, such delegation should
be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the
waiver indicating that the BIR has accepted and agreed to the waiver.
The date of such acceptance by the BIR should be indicated. However,
before signing the waiver, the CIR. or the revenue official authorized by
him must make sure that the waiver is in the prescribed form, duly
notarized, and executed by the taxpayer or his duly authorized
representative.
5. Both the date of execution by the taxpayer and date of acceptance by
the Bureau should be before the expiration of the period of prescription
or before the lapse of the period agreed upon in case a subsequent
agreement is executed.
6. The waiver must be executed in three copies, the original copy to be
attached to the docket of the case, the second copy for the taxpayer
and the third copy for the Office accepting the waiver. The fact of receipt
by the taxpayer of his/her file copy must be indicated in the original copy
to show that the taxpayer was notified of the acceptance of the BIR and
the perfection of the agreement. (Emphases supplied)
The provisions of the RMO and RDAO explicitly show their mandatory nature,
requiring strict compliance. Hence, failure to comply with any of the requisites
renders a waiver defective and ineffectual. It is worth mentioning that strict
compliance with the requirements set forth in RMO No. 20-90 has been upheld
27
in the PJI case.17 In reversing the decision of the Court of Appeals promulgated
on 5 August 2003, this Court ruled that:
The NIRC, under Sections 203 and 222, provides for a statute of limitations on
the assessment and collection of internal revenue taxes in order to safeguard
the interest of the taxpayer against unreasonable investigation. Unreasonable
investigation contemplates cases where the period of assessment extends
indefinitely because this deprives the taxpayer of the assurance that it will no
longer be subjected to further investigation for taxes after the expiration of a
reasonable period of time x x x
xxxx
RMO No. 20-90 implements these provisions of the NIRC relating to the period
of prescription for the assessment and collection of taxes. A cursory reading of
the Order supports petitioner's argument that the RMO must be strictly followed,
x x x"18 (Emphasis supplied)
Applying the rules and rulings, the waivers in question were defective and did
not validly extend the original three-year prescriptive period. As correctly found
by the CT A in Division, and affirmed in toto by the CT A En Banc, the subject
waivers of the Statute of Limitations were in clear violation of RMO No. 20-90:
1) This case involves assessment amounting to more than
₱1,000,000.00. For this, RMO No. 20-90 requires the Commissioner of
Internal Revenue to sign for the BIR.1avvphi1 A perusal of the First and
Second Waivers of the Statute of Limitations shows that they were
signed by Assistant Commissioner-Large Taxpayers Service Virginia L.
Trinidad and Assistant Commissioner-Large Taxpayers Service Edwin
R. Abella respectively, and not by the Commissioner of Internal
Revenue;
2) The date of acceptance by the Assistant Commissioner-Large
Taxpayers Service Virginia L. Trinidad of the First Waiver was not
indicated therein;
3) The date of acceptance by the Assistant Commissioner-Large
Taxpayers Service Edwin R. Abella of the Second Waiver was not
indicated therein;
4) The First and Second Waivers of Statute of Limitations did not
specify the kind and amount of the tax due; and
5) The tenor of the Waiver of the Statute of Limitations signed by
petitioner's authorized representative failed to comply with the
 prescribed requirements of RMO No. 20-90. The subject waiver speaks
of a request for extension of time within which to present additional
documents, whereas the waiver provided under RMO No. 20-90
pertains to the approval by the Commissioner of Internal Revenue of the
taxpayer's request for re-investigation and/or
reconsideration of his/its pending internal revenue case.19
Taking into consideration the foregoing defects in the First and Second Waivers
presented and admitted in evidence before the court a quo, the period to assess
the tax liabilities of respondent for taxable year 1998 was never extended.
Consequently, when the succeeding waivers of Statute of Limitations were
subsequently executed covering the same tax liabilities of respondent, and there
being no assessment having been issued as of that time, prescription has
already set in. We therefore hold that the subject waivers did not extend the
period to assess the subject deficiency tax liabilities of respondent for taxable
year 1998. The aforesaid waivers cannot be considered as "subsequent written
agreement(s) made before the expiration of the period previously agreed upon"
referred to in the second sentence of the earlier quoted Section 222(b) of the
NIRC of 1997, as amended, since there is no "period previously agreed upon" to
speak of.
As regards petitioner's insistence that respondent is already estopped from
impugning the validity of the subject waivers considering that it made partial
payments on the deficiency taxes being collected, particularly as to the payment
of its deficiency WTC and FWT assessments in the amounts of ₱124,967.73
and ₱139,713.11, respectively, we find this argument bereft of merit.
As aptly found in the 29 July 2009 Resolution of the CTA in Division, although
respondent paid the deficiency WTC and FWT assessments, it did not waive the
defense of prescription as regards the remaining tax deficiencies, it being on
record that respondent continued to raise the issue of prescription in its Pre-Trial
Brief filed on 15 August 2005, Joint Stipulations of Facts and Issues filed on 1
September 2005, direct testimonies of its witness, and Memorandum filed on 24
October 2008. More so, even petitioner did not consider such payment of
respondent as a waiver of the defense of prescription, but merely raised the
issue of estoppel in her Motion for Reconsideration of the aforesaid decision.
From the conduct of both parties, there can be no estoppel in this case. 20
Upon payment of the assessed deficiency in the WTC in the amount of
₱124,967.73 and in the FWT in the amount of µ139,713.11, respondent filed a
Motion for Leave of Court to Serve Supplemental Petition, with attached
Supplemental Petition for Review. As stated in the CTA En Banc affirmed
decision of the CTA in Division, "[i]n its Supplemental Petition for Review,
respondent seeks to be fully credited of the payments it made to cover the
28
deficiency WTC and FWT. Thus, the remaining assessments cover only the
deficiency income tax, final income tax – FCDU, and (EWT) in the modified total
amount of ₱33,076,944.18, x x x".21 The aforesaid motion was granted and the
supplemental petition was admitted by the CT A in Division. Undeniably, the
acceptance of said payments was never questioned by petitioner. Indeed, the
decision of the CTA in Division, which decision was affirmed by the CTA En
Banc, covered only the remaining questioned assessment, namely: income tax,
final income tax -FCDU, and EWT. Clearly, the payment of the deficiency WTC
and FWT was made together with the reiteration in the petition for the
cancellation of the assessment notices on the alleged deficiency income tax,
final income tax - FCDU, and EWT.
When respondent paid the deficiency WTC and FWT assessments, petitioner
accepted said payment without any opposition. This effectively extinguished
respondent's obligation to pay the subject taxes. It bears emphasis that,
obligations are extinguished, among others, by payment or
performance.22 Under Article 1232 of the Civil Code, payment means not only
the delivery of money but also the performance, in any other manner, of an
obligation. As intended, which intention was recognized by the CT A in · Division
and CT A En Banc, the question regarding the income tax, final income tax -
FCDU, and EWT, was kept unaffected by the payment of the deficiency WTC
and FWT assessments.
By way of reiteration, taking into consideration the foregoing flaws found in the
subject waivers, the same are void, and the supposed suspensions of the
prescriptive periods within which to issue the subject assessments were not
legally effected. And the facts of this case do not call for the application of the
doctrine of estoppel.
It must be remembered that the execution of a Waiver of Statute of Limitations
may be beneficial to the taxpayer or to the BIR, or to both. Considering
however, that it results to a derogation of some of the rights of the taxpayer, the
same must be executed in accordance with pre-set guidelines and procedural
requirements. Otherwise, it does not serve its purpose, and the taxpayer has all
the right to invoke its nullity. For that reason, this Court cannot turn blind on the
importance of the Statute of Limitations upon the assessment and collection of
internal revenue taxes provided for under the NIRC. The law prescribing a
limitation of actions for the collection of the income tax is beneficial both to the
Government and to its citizens; to the Government because tax officers would
be obliged to act properly in the making of the assessment, and to citizens
because after the lapse of the period of prescription, citizens would have a
feeling of security against unscrupulous tax agents who may find an excuse to
inspect the books of taxpayers, not to determine the latter's real liability, but to
take advantage of every opportunity to molest peaceful, law-abiding citizens.
Without such a legal defense, taxpayers would furthermore be under obligation
to always keep their books and keep them open for inspection subject to
harassment by unscrupulous tax agents. The law on prescription being a
remedial measure should be interpreted in a way conducive to bringing about
the beneficent purpose of affording protection to the taxpayer within the
contemplation of the Commission which recommends the approval of the law. 23

In fine, considering the defects in the First and Second Waivers, the period to
assess or collect deficiency taxes for the taxable year 1998 was never
extended. Consequently, the Formal Letter of Demand and Assessment Notices
dated 24 June 2004 for deficiency income tax, FCDU, and EWT in the
aggregate amount of 1!33,076,944.18, including increments, were issued by the
BIR beyond the three-year prescriptive period and are therefore
void.24WHEREFORE, the petition is DENIED for lack of merit. No costs.

SO ORDERED.

29
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 167134 March 18, 2015
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
TRADERS ROYAL BANK, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
Before this Court is a Petition for Review on Certiorari filed by petitioner
Commissioner of Internal Revenue (CIR) assailing the Decision1 dated February
14, 2005 of the Court of Tax: Appeals (CTA) en bane in C.T.A. EB No. 32,
which denied the CIR's appeal of the Decision2 dated April 28, 2004 and
Resolution3 dated September 10, 2004 of the CT A Division in C.T.A. Case No.
6392. The CTA Division cancelled the assessments issued by the CIR against
respondent Traders Royal Bank (TRB) for deficiency documentary stamp taxes
(DST) on the latter's Trust Indenture Agreements for taxable years 1996 and
1997, in the amounts of ₱10,517,740.57and1!18,349,556.33, respectively. 4
TRB is a domestic corporation duly registered with the Securities and Exchange
Commission and authorized by the Bangko Sentral ng Pilipinas (BSP) to
engage in commercial banking.5 On the strength of the Letter of Authority (L.A.)
No. 000018565 dated July 27, 1998, the Bureau of Internal Revenue (BIR)
conducted an investigation concerning all national internal revenue tax liabilities
of TRB for taxable years 1996-1997. Following the investigation, the BIR issued
a Pre-Assessment Notice dated November 10, 1999 against TRB.
Subsequently, the BIR issued a Formal Letter of Demand and Assessment
Notice Nos. ST-DST-96-0234-996 and ST-DST-97-0233-99,7 all dated
December 27, 1999, against TRB for deficiency DST for 1996 and 1997, in the
total amount of ₱28,867,296.90, broken down as follows:
DEFICIENCY DOCUMENTARY STAMP TAX
Industry Issues on: 1996 1997
Special Savings Deposit ₱5,041,882,798.03 ₱9,579,733,184.65
Trust Fund 567,500,927.00 55,783,860.92
30
Mega Savings Deposit 77,911.32 150,872,997.87
Total 5,609,461,636.35 9,786,390,043.44
Tax Rate .30/200 .30/200
Basic 8,414,192.45 14,679,645.07
Add: Surcharge 2,103,548.11 3,669,911.27
TOTAL P 10,517,740.57 P 18,349,556.33 8
=============== ===============
TRB Vice President Bayani R. Navarro (Navarro) wrote a letter dated January 7,
20009 protesting the foregoing assessments of the BIR on the following
grounds:
In response, we would like to point out that Special Savings Deposits being
savings deposit accounts are not subject to the documentary stamp tax.
Likewise, Trust Indenture Agreement[s] are not subject to documentary stamp
tax for the reason that relationship established between parties is that of the
trustor and trustee, wherein the funds and/or properties of the trustor are given
to the Trustee Bank not as a deposit but under a Common Trust Fund
maintained and to be managed by the Trustee.
The same arguments are being invoked by other banks using similar
instruments and the imposition of the DST is considered as an industry problem
and is being contested by the entire banking community.
In his Decision dated December 20, 2001,10 the CIR denied the protest of TRB.
The CIR adopted the position of the BIR examiners that the Special Savings
Deposit should be deemed a time deposit account subject to DST under Section
180 of the Tax Code of 1977. The CIR reasoned:
[T]his Office believes and so holds that the Special Savings Deposit and Time
Deposit are just one and the same banking transaction. To evade payment of
the DST, efforts were made by banks to place a superficial distinction between
the two (2) deposit accounts by introducing an innovation using a regular
passbook to document the Special Savings Deposit and by claiming that the
said special deposit has no specific maturity date. At first glance, the innovative
scheme may have accomplished in putting a semblance of difference between
the aforesaid two (2) deposit accounts, but an analytical look at the passbook
issued clearly reveals that although it does not have the form of a certificate nor
labelled as such, it has a fixed maturity date and for all intents and purposes, it
has the same nature and substance as a "certificate of deposit bearing interest."
In fact, it could be said that the passbook is in itself a "certificate of deposit." 11
As for the Trust Indenture Agreements, the CIR opined that they were but a
form of deposit, likewise subject to DST. According to the CIR:
In an earlier case involving the same industry issue, We ruled that the essential
features/characteristics of a Trust Agreement are as follows:
A) The required minimum deposit is ₱50,000.00;
B) The shortest maturity date is 30 days;
C) It is not payable on sight or demand, in case of pretermination, prior
written notice is required; D) It is automatically renewed in case the
depositor fails to withdraw the deposit at maturity date; E) The bank
used confirmation of participation to evidence the acceptance of the
funds from the trustor.
Based on the foregoing features, it is evident that the contention of the bank is
misplaced. Although the contract is termed as "trust agreement," it can be
considered as a misnomer because the relationship existing between the parties
in the subject contract is actually not a trustor-trustee relationship but that of a
creditor-debtor relationship, the same relationship governing deposits of money
in banks.
xxxx
In the said contract of trust under the Civil Code, there is only an equitable
transfer of ownership by the trustor to the trustee, the trustor retains his legal
title to the subject property. On the other hand, in the bank’s "trust agreement,"
once the specific funds or properties of the trustor are placed under the common
trust fund, there is a complete transfer of ownership from the trustor to the
trustee-bank. It is manifested by the fact that said funds or properties may be
invested by the bank in whatever manner it may deem necessary, the trustor
has no control whatsoever over his funds. Another point of distinction between
the two contracts is that, in the contract of trust every transaction involving the
trust property must be entered into by the trustee for the benefit of the trustor or
his designated beneficiary; while in the bank’s "trust agreement," all benefits
from the transactions involving properties from the common trust fund will be
received solely by the trustee-bank, the trustor’s only consolation is limited to
receiving higher rate of interest from his property. In effect, the subject "trust
agreement" although termed as such is but a form of a deposit.
31
The fact that the subject trust agreement is evidenced by a "confirmation of
participation" and not by a certificate of deposit is immaterial. As discussed
above, what is important and controlling is the nature or meaning conveyed by
the document and not the particular label or nomenclature attached to it,
inasmuch as its substance is paramount than its form. Therefore, the examiners
are correct in imposing documentary stamp tax on the bank’s "trust
agreements."12
The CIR ruled in the end:
IN VIEW WHEREOF, this Office has resolved to DENY the protest of herein
protestant-bank. Assessment Notice Nos. ST-DST-96-0234-99 and ST-DST-97-
0233-99 demanding payment of the respective amounts of ₱10,517,740.57 and
₱18,349,556.33 as documentary stamp taxes for the taxable years 1996 and
1997 are hereby AFFIRMED in all respects. Consequently, the protestant-bank
is hereby ordered to pay the above-stated amounts plus interest that may have
accrued thereon until actual payment, to the Collection Service, BIR National
Office, Diliman, Quezon City, within thirty (30) days from receipt hereof,
otherwise, collection shall be effected through the summary remedies provided
by law.
This constitutes the final decision of this Office on the matter. 13
TRB filed a Petition for Review14 with the CTA, which was docketed as C.T.A.
Case No. 6392. The parties stipulated the following issues to be resolved by the
CTA Division:
A. Whether or not Special Saving Deposits and Mega Savings Deposits
[both are Special Savings Accounts (SSA)] are subject to documentary
stamp tax (DST) under Section 180 of the Tax Code.
B. Whether or not the ordinary saving account passbook issued by
[TRB] x x x can be considered a certificate of deposit subject to
documentary stamp tax (DST).
C. Whether or not the Trust Indenture Agreements are subject to
documentary stamp tax (DST) under Section 180 of the Tax Code.15
On April 28, 2004, the CTA Division rendered a Decision, resolving the first two
issues in favor of the CIR and the last one in favor of TRB.
The CTA Division agreed with the CIR that the Special Savings Deposits and
Time Deposits were akin to each other in that the bank would acknowledge the
receipt of money on deposit which the bank promised to pay to the depositor,
bearer, or to the order of the bearer after a specified period of time. In both
cases, the deposits could be withdrawn anytime but the depositor would earn a
lower rate of interest. The only difference was the evidence of the deposits: a
passbook for Special Savings Deposits and a certificate of deposit for Time
Deposits. Considering that the passbook and the certificate of time deposit were
evidence of transactions, then both should be subject to DST, an excise tax on
transactions.
The CTA Division, however, concurred with TRB that the Trust Indenture
Agreements were different from the certificate of deposit, thus:
A Trust Indenture Agreement has a different feature and concept from a
certificate of deposit. When a depositor enters into a trust agreement, what is
created is a trustor-trustee relationship. The money deposited is placed in trust
to a common fund and then invested by the Trust Department into a profitable
venture. The yield or return of investment is higher and varies depending on the
actual profit earned. In some trust agreements, a depositor may even get a
negative return of investment. The fact that there is an "expected rate of return"
does not necessarily convert a trust agreement into a time deposit. Under
Section X407 of the Manual of Regulations for Banks it is provided that "the
basic characteristic of trust, other fiduciary and investment management
relationship is the absolute non-existence of a debtor-creditor relationship, thus,
there is no obligation on the part of the trustee, fiduciary or investment manager
to guarantee returns on the funds or properties regardless of the results of the
investment."16
The CTA Division ultimately decreed:
WHEREFORE, the assessments for deficiency documentary stamp taxes on
trust fund against [TRB] for taxable years 1996 and 1997 are hereby
CANCELLED. However, the assessments for deficiency documentary stamp
taxes on special savings deposit and mega savings deposit for same taxable
years 1996 and 1997 are hereby AFFIRMED.
ACCORDINGLY, [TRB] is ORDERED TO PAY the [CIR] the deficiency
documentary stamp taxes for the years 1996 and 1997 in the respective
amounts of ₱9,453,676.33 and ₱18,244,886.69 (all inclusive of 25% surcharge)
totaling ₱27,698,562.92 x x x.
xxxx
In addition, [TRB] is ORDERED TO PAY the [CIR] 20% delinquency interest on
₱27,698,562.92 computed from February 14, 2002 until fully paid pursuant to
Section 249 of the Tax Code, as amended.17
32
The parties each filed motions relative to the aforementioned judgment of the
CTA Division, to wit:
1. "Omnibus Motion for Substitution of Parties and Motion for
Reconsideration (Re: Decision dated April 28, 2004)"filed on May 28,
2004 by [TRB] seeking for the:
a. Substitution of parties from Traders Royal Bank to Bank of
Commerce;
b. Reconsideration and reversal of this court’s Decision
promulgated on April 28, 2004 finding [TRB] liable for deficiency
documentary stamp taxes for the taxable years 1996 and 1997
in the amounts of ₱9,453,676.33 and ₱18,244,886.69,
respectively (all inclusive of the 25% surcharge), plus 20%
delinquency interest computed from February 14, 2002 until
fully paid; and c. Cancellation of the subject deficiency tax
assessments.
2. "Motion for Partial Reconsideration" filed on May 24, 2004 by [CIR]
seeking for a partial reversal of this court’s Decision promulgated on
April 28, 2004 with regard to the cancellation by this court of [CIR’s]
assessment for deficiency documentary stamp taxes on the trust fund
against [TRB] for the taxable years 1996 and 1997.18
The CTA Division issued a Resolution dated September 10, 2004 denying the
motions of the parties:
Based on the allegations of [TRB], the Purchase and Sale Agreement [between
TRB and the Bank of Commerce (BOC)] was executed on November 9, 2001.
Upon the execution of the said agreement, the BOC assumed the deposit
liabilities of [TRB] for the taxable years covering 1996 and 1997. However, it is
noteworthy to emphasize that the Petition for Review was filed by [TRB] only on
February 15, 2002 after the alleged transfer of right happened. To adopt the
view of [TRB] and pursuant to the quoted Section 19,Rule 3 of the 1997 Rules
of Court, it should have been the BOC that should have filed the Petition for
Review instead of [TRB]. Yet, this was not the case. The petition was filed by
petitioner Traders Royal Bank, notwithstanding the alleged transfer of rights to
Bank of Commerce prior to the commencement of the action. Failure of[TRB] to
show justifiable reasons for such negligence and blunder, this court cannot then
allow the substitution of parties.
xxxx
There being no other new issues raised by [TRB] which this court has not yet
passed upon in its Decision of April 28, 2004, this court hereby RESOLVES to
DENY[TRB’s] motion.
xxxx
Finding that the issue raised by the [CIR] had been thoroughly discussed in the
Decision of April 28, 2004, this court finds no compelling reason to modify or
alter the same and thereby RESOLVES to DENY [CIR’s] Motion for Partial
Reconsideration.
WHEREFORE, both motions are hereby DENIED for lack of merit. Accordingly,
this court’s Decision promulgated on April 28, 2004 is AFFIRMED in all
respects.19
The CIR and TRB filed with the CTA en banc separate Petitions for Review,
docketed as C.T.A. EB Nos. 32 and 34, respectively, partially appealing the
Decision dated April 28, 2004 and Resolution dated September 10, 2004 of the
CTA Division.
The CTA en banc promulgated its Decision in C.T.A. EB No. 32 on February 14,
2005, dismissing the Petition of the CIR and affirming the cancellation by the
CTA Division of the assessments against TRB for DST on its Trust Indenture
Agreements for 1996 to 1997. According to the CTA en banc:
[A]n examination of the Petition for Review revealed that the issues raised
therein by the [CIR] have been discussed at length and directly ruled upon in the
assailed Decision and in the subsequent Resolution. The Court is not convinced The CTA en banc, in a Decision dated April 26, 2005 in C.T.A. EB No.
by [CIR’s] arguments on the assigned errors to justify a reversal of the
questioned Decision.
The Manual for Regulations of Banks issued by the Central Bank of the
Philippines has defined the trust business as "xx x any activity resulting from a
trustor-trustee relationship (trusteeship) involving the appointment of a trustee
by a trustor for the administration, holding, management of funds and/or
properties of the trustor by the trustee for use, benefit or advantage of the
trustor or others called beneficiaries (Sec.X403 [a])."
As correctly explained in the questioned Decision, "When a depositor enters into
a trust agreement, what is created is a trustor-trustee relationship. The money
deposited is placed in trust to a common fund and then invested by the Trust
Department into a profitable venture". [CIR’s] contention that there is a complete
transfer of ownership from the trustor to the trustee bank because the funds
may be invested by the bank in whatever manner it may deem necessary and
the trustor having no control whatsoever over his funds runs counter to[CIR’s]
allegation in the Petition that "A contract of trust under the Civil Code is defined
as the legal relationship between one person having an equitable ownership in
property and another person owning [the] legal title to such property, the
equitable ownership of the former entitling him to the performance of duties and
the exercise of certain powers by the latter." (citing Commentaries and
Jurisprudence on the Civil Code of the Philippines, Arturo Tolentino, Volume 4,
p. 669). The [CIR], in effect, admits that the trustee bank holds legal title over
the funds (i.e., has legal ownership of the funds), and is entitled to exercise
certain powers such as the investment of the funds in behalf of the trustor
(which is the essence of the trust business).
[TRB] likewise correctly pointed out that the trust funds managed by its Trust
Department cannot be appropriately alleged as time deposits, because the
acceptance of deposits is beyond the realm of the business of the trust
department of banks as implied under Section X407 of the Manual of
Regulations for Banks inasmuch as no debtor-creditor relationship exists
between the parties in the trust agreement.
The trust placement not being a time deposit, it cannot therefore be subject to
documentary stamp tax as a certificate of deposit.20
Hence, the dispositive portion of the Decision dated February 14, 2005 of the
CTA en banc in C.T.A. EB No. 32 reads:
WHEREFORE, finding that the Petition for Review is patently without merit, the
same is denied due course. Accordingly, the same is DISMISSED.21
34,22 similarly dismissed the Petition of TRB and upheld the ruling of the CTA
Division that TRB was liable for DST on its Special Savings Deposits for 1996 to
1997, plus surcharge and delinquency interest. The CTA en banc concluded:
For all intents and purposes, [TRB’s] Special Savings and Mega Savings
Deposit are deemed to be of the same nature and substance as a certificate of
deposit bearing interest. Therefore, We hold that said Special Savings and
Mega Savings passbooks are in themselves certificates of deposit, subject to
documentary stamp tax in accordance with Section 180, National Internal
Revenue Code of 1993, as amended. While the DST is levied on the document
itself, it is not intended to be a tax on the document alone. Rather, the DST is
levied on the exercise of a privilege of conducting a particular business or
transaction through the execution of specific instruments or documents (Phil.
Home Assurance Corp. vs. Court of Appeals, 301 SCRA 435). Lastly, there is
likewise no merit to [TRB’s] contention that the Division erred in denying the
"Motion for Substitution of Parties".
33
Generally, there is no need of a substitution or joinder of the transferee as a
party-litigant for after all even if the action is continued by or against the original
party, the judgment is binding on all the parties (original party, adverse party
and transferee) (Oria Hnos. v. Gutierrez Hnos., 52 Phil. 156; Correa v. Pascual,
99 Phil. 696;Bustamante v. Azarcon, L-8939, May 28, 1957). This is a settled
rule in this jurisdiction. Indeed, We may say that the transferee is a proper (or
necessary) party, but not an indispensable party to the original case (Fetalino v.
Sanz, 44 Phil. 69).
xxxx
Accordingly, no error was committed by the Division when it denied the "Motion
for Substitution of Parties."23
Consequently, in its Decision dated April 26, 2005 in C.T.A. EB No. 34, the CTA
en banc adjudged:
It appearing that [TRB] in G.R. No. 168491 failed to file a petition for review on
certiorari within the extended period which expired on August 1, 2005, the Court
further resolves to CONSIDER G.R. No. 168491 CLOSED and TERMINATED.25
The Resolution dated June 26, 2006 of the Court in G.R. No. 168491 became
final and executory and Entry of Judgment was made in said case on August
24, 2006.
Presently pending resolution by the Court is the Petition for Review of the CIR in
G.R. No. 167134 which appealed the Decision dated February 14, 2005 of the
CTA en banc in C.T.A. EB No. 32 based on the lone assignment of error, viz:
THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT A
TRUST INDENTURE AGREEMENT IS NOT A CERTIFICATE OF DEPOSIT,
HENCE, NOT SUBJECT TO DOCUMENTARY STAMP TAX UNDER SECTION
180 OF THE TAX CODE.26

All the foregoing considered, We see no reason to reverse the assailed Decision Section 180 of the National Internal Revenue Code (NIRC) of 1977, as
and Resolution of the Division of this Court. amended by Republic Act No. 7660 – in force in1996 and 1997 – imposed DST
on the following documents:
WHEREFORE, premises considered, the instant petition is hereby DENIED
DUE COURSE, and accordingly, DISMISSED for lack of merit.24 Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the government or any of
TRB filed a Motion for Reconsideration of the foregoing Decision, but said its instrumentalities, certificates of deposit bearing interest and others not
Motion was denied by the CTA en banc in a Resolution dated June 10, 2005. payable on sight or demand. – On all loan agreements signed abroad wherein
the object of the contract is located or used in the Philippines; bills of exchange
The CIR filed a Petition for Review before the Court, docketed as G.R. No. (between points within the Philippines), drafts, instruments and securities issued
by the Government or any of its instrumentalities or certificates of deposits
167134, assailing the Decision dated February 14, 2005 of the CTA en banc in
drawing interest, or orders for the payment of any sum of money otherwise than
C.T.A. EB No. 32.
at sight or on demand, or on all promissory notes, whether negotiable or
nonnegotiable, except bank notes issued for circulation, and on each renewal of
TRB initially filed a Motion for Extension of Time to File Petition for Review, any such note, there shall be collected a documentary stamp tax of Thirty
requesting an extension of 30 days (i.e., until August 1, 2005) within which to centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the
appeal the Decision dated April 26, 2005 and Resolution dated June 10, 2005 of face value of any such agreement, bill of exchange, draft, certificate of deposit,
the CTA en banc in C.T.A. EB No. 34. The Motion of TRB was docketed as G.R. or note: Provided, That only one documentary stamp tax shall be imposed on
No. 168491. either loan agreement, or promissory notes issued to secure such loan,
whichever will yield a higher tax: Provided, however, That loan agreements or
In a Resolution dated August 3, 2005, the Court consolidated the Petitions in promissory notes the aggregate of which does not exceed Two hundred fifty
G.R. Nos. 167134 and 168491 considering that they "assail the same decision thousand pesos (₱250,000) executed by an individual for his purchase on
of the Court of Tax Appeals, involve the same parties, and raise interrelated installment for his personal use or that of his family and not for business, resale,
issues." barter or hire of a house, lot, motor vehicle, appliance or furniture shall be
exempt from the payment of the documentary stamp tax provided under this
Eventually, the Court issued a Resolution dated June26, 2006, in which it section.
resolved as follows:

34
The CIR maintains that the relationship between TRB and its clients under the
Trust Indenture Agreements was debtor-creditors and the said Agreements
were actually certificates of deposit drawing/bearing interest subject to DST
under Section 180 of the NIRC of 1977, as amended. The CIR points out that
the only basis of the CTA en banc in ruling that the relationship between TRB
and its clients under the Trust Indenture Agreements was that of trustee-trustors
was Section X407 of the 1993 Manual of Regulations for Banks (MORB) issued
by the BSP, which identified the basic characteristics of a trust. The CIR argues,
however, that the very same provision, Section X407 of the 1993 MORB,
identified exceptions, that is, instances when the agreement or contract would
not constitute a trust. A trust as defined in Section X407 of the 1993 MORB
would be in the nature of an exemption from the payment of DST. Accordingly,
TRB had the burden of proving the legal and factual bases of its claim that its
Trust Indenture Agreements fell under the definition of "trust" and not among the
exceptions in Section X407 of the 1993 MORB. TRB, though, was unable to
discharge such burden, failing to present evidence, whether testimonial or
documentary, to prove its entitlement to DST exemption. The CIR, for its part,
claims that the Trust Indenture Agreements were akin to certificates of deposit
because said Agreements also stated expected rates of return of the investment
or for the use of the amounts of deposits/trust funds for a certain period, clearly
falling under the exception to what constituted a "trust" in Section X407,
paragraph (d) of the 1993 MORB. The CIR also asserts that TRB should not be
permitted to escape/evade the payment of DST by simply labeling its certificates
of deposit drawing/bearing interests as "trust funds." In determining whether a
certain contract/agreement/document/instrument is subject to DST, substance
should control over form and labels.
In addition, the CIR insists that the Trust Indenture Agreements between TRB
and its clients were simple loans governed by Article 1980 of the Civil
Code.27 The trust funds, being generic, could not be segregated from the other
funds/deposits held by TRB. While TRB had the obligation to return the
equivalent amount deposited, it had no obligation to return or deliver the same
money deposited. Legal title to the trust funds was vested/transmitted to TRB
upon perfection of the trust agreement. It then followed that TRB could make
use of the funds/deposits for its banking operations, such as to pay interest on
deposits, to pay withdrawals and dispose of the amount borrowed for any
purpose such as investing the funds/deposits into a profitable venture.
Currently, the CIR avers, the Trust Indenture Agreements may be considered as
"loan agreements" or "debt instruments" subject to DST under Sections
17328 and 17929 of the NIRC of 1997, as amended.
The Petition is meritorious.
Generally, the factual findings of the CTA, a special court exercising expertise
on the subject of tax, are regarded as final, binding and conclusive upon this
Court.30 However, there are well-recognized exceptions to this rule,31 such as
35
when the conclusion is grounded entirely on speculations, surmises, or
conjectures, as well as when the findings are conclusions without citation of
specific evidence on which they are based.
At the crux of the instant controversy are the Trust Indenture Agreements of
TRB. At issue is whether the said Trust Indenture Agreements constituted
deposits or trusts. The BIR posits that the Agreements were deposits subject to
DST, while TRB proffers that the Agreements were trusts exempt from DST.
Surprisingly, not a single copy of a Trust Indenture Agreement and/or the
Certificate of Participation (issued to the client as evidence of the trust) could be
found in the records of the case.
The conduct by banks, such as TRB, of trusts and other fiduciary business (in
1996 and 1997) was governed by the 1993 MORB, which enumerated the
minimum documentary requirements for trusts, including a written agreement or
indenture and a plan (i.e., written declaration of trust) for common trust funds
(CTF). Relevant provisions of the 1993 MORB are quoted in full below:
Sec. X409 Trust and Other Fiduciary Business. The conduct of trust and other
fiduciary business shall be subject to the following regulations.
§ X409.1 Minimum documentary requirements. Each trust or fiduciary account
shall be covered by a written document establishing such account, as follows:
a. In the case of accounts created by an order of the court or other
competent authority, the written order of said court or authority.
b. In the case of accounts created by corporations, business firms,
organizations or institutions, the voluntary written agreement or
indenture entered into by the parties, accompanied by a copy of the
board resolution or other evidence authorizing the establishment of, and
designating the signatories to, the trust or other fiduciary account.
c. In the case of accounts created by individuals, the voluntary written
agreement or indenture entered into by the parties.
The voluntary written agreement or indenture shall include the following
minimum provisions:
(1) Title or nature of contractual agreement in noticeable print;
(2) Legal capacities, in noticeable print, of parties sought to be covered;
 (3) Purposes and objectives;
(4) Funds and/or properties subject of the arrangement;
(5) Distribution of the funds and/or properties;
(6) Duties and powers of trustee or fiduciary;
(7) Liabilities of the trustee or fiduciary;
(8) Reports to the client;
(9) Termination of contractual arrangement and, in appropriate cases,
provision for successor-trustee or fiduciary;
(10) The amount or rate of the compensation of trustee or fiduciary;
(11) A statement in noticeable print to the effect that trust and other
fiduciary business are not covered by the PDIC and that losses, if any,
shall be for the account of the client; and
(12) Disclosure requirements for transactions requiring prior authority
and/or specific written investment directive from the client, court of
competent jurisdiction or other competent authority. x x x x
Sec. X410 Common Trust Funds.(1) The administration of CTFs shall be
subject to the provisions of Subsecs. X409.1 up to X409.6 and to the
following regulations.
As an alternative compliance with the required prior authority and disclosure
under Subsecs. X409.2 and X409.3, a list which shall be updated quarterly of
prospective and/or outstanding investment outlets may be made available by
the trustee for the review of all CTF clients.
xxxx
(3) Minimum documentary requirements for common trust funds. In addition to
the trust agreement or indenture required under Subsec. X409.1, each CTF
shall be established, administered and maintained in accordance with a written
declaration of trust referred to as the plan, which shall be approved by the board
of directors of the trustee and a copy submitted to the appropriate supervising
and examining department of the BSP within thirty (30) banking days prior to its
implementation.
36
The plan shall make provisions on the following matters:
a. Title of the plan;
b. Manner in which the plan is to be operated;
c. Investment powers of the trustee with respect to the plan, including
the character and kind of investments which may be purchased;
d. Allocation, apportionment, distribution dates of income, profit and
losses;
e. Terms and conditions governing the admission or withdrawal as well
as expansion or contraction of participation in the plan including the
minimum initial placement and account balance to be maintained by the
trustor;
f. Auditing and settlement of accounts of the trustee with respect to the
plan;
g. Detailed information on the basis, frequency, and method of valuing
and accounting of CTF assets and each participation in the fund;
h. Basis upon which the plan may be terminated;
i. Liability clause of the trustee;
j. Schedule of fees and commissions which shall be uniformly applied to
all participants in a fund and which shall not be changed between
valuation dates; and
k. Such other matters as may be necessary or proper to define clearly
the rights of participants under the plan.
The legal capacity of the bank administering a CTF shall be indicated in the plan
and other related agreements or contracts as trustee of the fund and not in any
other capacity such as fund manager, financial manager, or like terms.
The provisions of the plan shall control all participations in the fund and the
rights and benefits of all parties in interest.
The plan may be amended by resolution of the board of directors of the trustee:
Provided, however, That participants in the fund shall be immediately notified of
such amendments and shall be allowed to withdraw their participation if they are
not in conformity with the amendments made: Provided, further, That
amendments to the plan shall be submitted to the appropriate supervising and
examining department of the BSP within ten (10) banking days from approval of
the amendments by the board of directors.
A copy of the plan shall be available at the principal office of the trustee during
regular office hours for inspection by any person having an interest in a trust
whose funds are invested in the plan or by his authorized representative. Upon
request, a copy of the plan shall be furnished such person.(Emphases
supplied.)
The importance of the actual Trust Indenture Agreements cannot be gainsaid.
The only way the Court can determine the actual relationship between TRB and
its clients is through a scrutiny of the terms and conditions embodied in the said
Agreements.
Article 1370 of the Civil Code provides:
Art. 1370. If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall
control.
If the words appear to be contrary to the evident intention of the parties, the
latter shall prevail over the former.
In the interpretation of contracts, the ascertainment of the intention of the
contracting parties is to be discharged by looking to the words they used to
project that intention in their contract, all the words, not just a particular word or
two, and words in context, not words standing alone.32 In Bautista v. Court of
Appeals,33 this Court said:
The rule is that where the language of a contract is plain and unambiguous, its
meaning should be determined without reference to extrinsic facts or aids. The
intention of the parties must be gathered from that language, and from that
language alone. x x x.
Following the rules on interpretation of contracts, Rule 130, Section 9 of the
Revised Rules of Court lays down the parol evidence rule:
Sec. 9. Evidence of written agreements.– When the terms of an agreement
have been reduced to writing, it is considered as containing all the terms agreed
upon and there can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written agreement.
37
However, a party may present evidence to modify, explain or add to the terms of
the written agreement if he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake or imperfection in the written
agreement;
(b) The failure of the written agreement to express the true intent and
agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their
successors in interest after the execution of the written agreement.
The term "agreement" includes wills.
The burden fell upon TRB to produce the Trust Indenture Agreements, not only
because the said Agreements were in its possession, but more importantly,
because its protest against the DST assessments was entirely grounded on the
allegation that said Agreements were trusts. TRB was the petitioner before the
CTA in C.T.A. Case No. 6392 and it was among its affirmative allegations that
the said Trust Indenture Agreements were trusts, thus, TRB had the obligation
of proving this fact. It is a basic rule of evidence that each party must prove its
affirmative allegation.34 As Rule 131, Section 1 of the Revised Rules of Court
states:
Section 1. Burden of proof. — Burden of proof is the duty of a party to present
evidence on the facts in issue necessary to establish his claim or defense by the
amount of evidence required by law.
TRB, in its Formal Offer of Evidence,35 submitted only one document, Exhibit
"A," which was page 10 of the 1993 MORB containing Section X407 on Non-
Trust, Non-Fiduciary and/or Non-Investment Management Activities.
Section X407 of the 1993 MORB is reproduced hereunder:
Sec. X407Non-Trust, Non-Fiduciary and/or Non-Investment Management
Activities The basic characteristic of trust, other fiduciary and investment
management relationship is the absolute non-existence of a debtor-creditor
relationship, thus, there is no obligation on the part of the trustee, fiduciary or
investment manager to guarantee returns on the funds or properties regardless
of the results of the investment. The trustee, fiduciary or investment manager is
entitled to fees/commissions which shall be stipulated and fixed in the contract
or indenture and the trustor or principal is entitled to all the funds or properties
less fees/commissions, losses and other charges. Any agreement/arrangement
that does not conform to these shall not be considered as trust, other fiduciary
and/or investment management relationship.
The following shall not constitute a trust, other fiduciary and/or investment
management relationship:
a. When there is a preponderance of purpose or of intent that the
arrangement creates or establishes a relationship other than a trust,
fiduciary and/or investment management;
b. When the agreement or contract is itself used as a certificate of
indebtedness in exchange for money placement from clients and/or as
the medium for confirming placements and investment thereof;
c. When the agreement or contract of an account is accepted under the
signature(s) of those other than the trust officer or subordinate officer of
the trust department or those authorized by the board of directors to
represent the trust officer;
d. Where there is a fixed rate or guaranty of interest, income or return in
favor of its client or beneficiary: Provided, however, That where funds
are placed in fixed income-generating investments, a quotation of
income expectation or like terms, shall neither be considered as
arrangements with a fixed rate nor a guaranty of interest, income or
return when the agreement or indenture categorically states in bold
letters that the quoted income expectation or like terms is neither
assured nor guaranteed by the trustee or fiduciary and it does not,
therefore, entitle the client to a fixed interest or return on his
investments: Provided, further, that any of the following practices or
practices similar and/or tantamount thereto shall be construed as fixing
or guaranteeing the rate of interest, income or return:
(1) Issuance of certificates, side agreements, letters of
undertaking, or other similar documents providing for fixed rates
or guaranteeing interest, income or return;
(2) Paying trust earnings based on indicated or expected yield
regardless of the actual investment results;
(3) Increasing or reducing fees in order to meet a quoted or
expected yield;
(4) Entering into any arrangement, scheme or practice which
results in the payment of fixed rates or yield on trust
38
investments or in the payment of the indicated or expected yield
regardless of the actual investment results; and
e. Where the risk or responsibility is exclusively with the trustee,
fiduciary or investment manager in case of loss in the investment of
trust, fiduciary or investment management funds, when such loss is not
due to the failure of the trustee or fiduciary to exercise the skill, care,
prudence and diligence required by law.
Trust, other fiduciary and investment management activities involving any of the
foregoing which are accepted, renewed or extended after 16 October 1990 shall
be reported as deposit substitutes and shall be subject to the reserve
requirement for deposit substitutes from the time of inception, without prejudice
to the imposition of the applicable sanctions provided for in Sections 36 and 37
of R.A. No. 7653.
A reading of Section X407 of the 1993 MORB reveals that it merely explained
the basic characteristics of a trust or other fiduciary and investment
management relationship, and expressly identified the instances which would
not constitute a trust, fiduciary and/or investment management relationship.
Simply put, Section X407 of the MORB set the standards in determining
whether a contract was one of trust or some other agreement.
Therefore, it was still necessary for TRB to present the Trust Indenture
Agreements to test the terms and conditions thereof against the standards set
by Section X407 of the 1993 MORB. Without the actual Trust Indenture
Agreements, there would be no factual basis for concluding that the same were
trusts under Section X407 of the 1993 MORB. TRB called Mr. Navarro, its Vice
President, to the witness stand to testify on the terms and conditions of the Trust
Indenture Agreements. Mr. Navarro’s testimony, though, cannot be accorded
much weight and credence as it is in violation of the parol evidence rule.
TRB made no attempt to explain why it did not present the Trust Indenture
Agreements, and it also did not take the effort to establish that any of the
exceptional circumstances under Rule 130, Section 9 of the Revised Rules of
Court, allowing "a party to modify, explain or add to the terms of written
agreement," was extant in this case. Moreover, Mr. Navarro’s testimony
consisted essentially of conclusions of law and general descriptions of trusts
using the very same words and terms under Section X407 of the 1993 MORB.
In contrast, records show that the BIR examiners conducted a thorough audit
and investigation of the books of account of TRB. Mr. Alexander D. Martinez, a
BIR Revenue Officer, testified that it took the BIR team of examiners more than
one-year to conduct and complete the audit and examination of the documents
of TRB, which consisted of approximately 20,000 pages.36 The audit and
investigation resulted in the issuance of Assessment Notices against TRB for In addition, TRB is liable for 20%delinquency interest under Section 249 of the
DST tax liabilities for 1996 and 1997, which were duly received by TRB. The tax NIRC of 199340
assessments against TRB are presumed valid. In Sy Po v. Court of Tax
Appeals,37 the Court pronounced: from February 14, 200241 until full payment of its foregoing tax liabilities.

Tax assessments by tax examiners are presumed correct and made in good WHEREFORE, premises considered, the instant Petition for Review on
faith. The taxpayer has the duty to prove otherwise. In the absence of proof of Certiorari is GRANTED. The assailed Decision dated February 14, 2005 of the
any irregularities in the performance of duties, an assessment duly made by a CTA en bane in C.T.A. EB No. 32, affirming the Decision dated April 28, 2004
Bureau of Internal Revenue examiner and approved by his superior officers will and Resolution dated September 10, 2004 of the CT A Division in C.T.A. Case
not be disturbed. All presumptions are in favor of the correctness of tax No. 6392, is REVERSED and SET ASIDE. Respondent Traders Royal Bank is
assessments. (Citations omitted.) ORDERED to pay the deficiency Documentary Stamp Taxes on its Trust
Indenture Agreements for the taxable years 1996 and 1997, in the amounts of
In Marcos II v. Court of Appeals,38 the Court again had the occasion to rule: Pl,064,064.38 and "1104, 595.00, respectively, plus 20% delinquency interest
from February 14, 2002 until full payment thereof.
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 SO ORDERED.
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.
(Citations omitted.)

Given the failure of TRB to present proof of error in the tax assessments of the
BIR, the Court affirms the same.

The liabilities of TRB for deficiency DST on its Trust Indenture Agreements for
1996 and 1997 are computed as follows:

1996 1997
Trust Fund P 567,500,927.000 P 55,783,860.92
Tax Rate .30/200 .30/200

Basic Tax 851,251.50 83,676.00

Add: Surcharge 212,812.88 20,919.00

Total P 1,064,064.38 P 104,595.00 39

39
 SECOND DIVISION Gentlemen:

November 9, 2016 Please be informed that after investigation of your Internal revenue Tax
Liabilities for the year 1995 pursuant to Letter of Authority No. 000029353 dated
G.R. No. 215957 May 13, 2002, there has been found due deficiency taxes as shown hereunder:

COMMISSIONER OF INTERNAL REVENUE, Petitioner Assessment No. _____________

vs.
FITNESS BY DESIGN, INC., Respondent Income Tax

DECISION
Taxable Income per return ₱
LEONEN, J.:
Add: Unreported Sales 7,156,336.08
To avail of the extraordinary period of assessment in Section 222(a) of the Taxable Income per audit 7,156,336.08
National Internal Revenue Code, the Commissioner of Internal Revenue should
show that the facts upon which the fraud' is based is communicated to the
taxpayer. The burden of proving that the facts exist in any subsequent
proceeding is with the Commissioner. Furthermore, the Final Assessment Tax Due (35%) 2,504,717.63
Notice is not valid if it does not contain a definite due date for payment by the Add: Surcharge (50%) ₱ 1,252,358.81
taxpayer.
Interest (20%/annum) until 4-
4,508,491. 73 5, 760,850.54
This resolves a Petition for Review on Certiorari1 filed by the Commissioner of 15-04
Internal Revenue, which assails the Decision2 dated July 14, 2014 and Deficiency Income Tax ₱ 8,265,568.17
Resolution3 dated December 16, 2014 of the Court of Tax Appeals. The Court of
Tax Appeals En Banc affirmed the Decision of the First Division, which declared
the assessment issued against Fitness by Design, Inc. (Fitness) as invalid. 4
Value Added Tax
On April 11, 1996, Fitness filed its Annual Income Tax Return for the taxable
year of 1995.5 According to Fitness, it was still in its pre-operating stage during
the covered period.6 Unreported Sales ₱ 7,156,336.08
Output Tax (10%) 715,633.61
On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated
March 17, 2004.7 The Final Assessment Notice was issued under Letter of Add: Surcharge (50%) ₱ 357,816.80
Authority No. 00002953.8 The Final Assessment Notice assessed that Fitness
Interest (20%/ annum) until 4-
had a tax deficiency in the amount of ₱10,647,529.69. 9 It provides: 1,303,823.60 1,661,640.41
15-04

FINAL ASSESSMENT NOTICE Deficiency VAT ₱ 2,311,214.02

Documentary Stamp Tax
March 17, 2004

FITNESS BY DESIGN, INC Subscribe Capital Stock ₱ 375,000.00

169 Aguirre St., BF Homes,
Paranaque City

40
DST due (2/200) 3,750.00 The Commissioner asserted further that the assessment already became final
and executory for Fitness' failure , to file a protest within the reglementary
Add: Surcharge (25%) 937.50 period.19 The Commissioner denied that there was a protest to the Final
Assessment Notice filed by Fitness on June 25, 2004.20 According to the
Deficiency DST ₱ 4,687.50 Commissioner, the alleged protest was "nowhere to be found in the [Bureau of
Internal Revenue] Records nor reflected in the Record Book of the Legal
Division as normally done by [its]' receiving clerk when she received [sic] any
Total Deficiency Taxes ₱ 10,647,529.69 document."21 Therefore, the Commissioner had sufficient basis to collect the tax
deficiency through the Warrant of Distraint and/or Levy. 22
The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1 of The alleged fraudulent return was discovered through a tip from a confidential
this Notice. The 50% surcharge and 20% interest have been imposed pursuant informant.23 The revenue officers' investigation revealed that Fitness had been
to Sections 248 and 249(B) of the [National Internal Revenue Code], as operating business with sales operations amounting to ₱7,156,336.08 in 1995,
amended. Please note, however, that the interest and the total amount due which it neglected toreport in its income tax return.24 Fitness' failure to report its
will have to be adjusted if paid prior or beyond April 15, 2004. income resulted in deficiencies to its income tax and value-added tax of
₱8,265,568.17 and ₱2,377,274.02 respectively, as well as the documentary
stamp tax with regard to capital stock subscription.25
In view thereof, you are requested to pay your aforesaid deficiency internal
revenue taxes liabilities through the duly authorized agent bank in which you are
enrolled within the time shown in the enclosed assessment notice. 10 (Emphasis Through the report, the revenue officers recommended the filing of a civil case
in the original) for collection of taxes and a criminal case for failure to declare Fitness'
purported sales in its 1995 Income Tax Return.26 Hence, a criminal complaint
against Fitness was filed before the Department of Justice.27
Fitness filed a protest to the Final Assessment Notice on June 25, 2004.
According to Fitness, the Commissioner's period to assess had already
prescribed. Further, the assessment was without basis since the company was The Court of Tax Appeals First Division granted Fitness' Petition on the ground
only incorporated on May 30, 1995.11 that the assessment has already prescribed.28 It cancelled and set aside the
Final Assessment Notice dated March 1 7, 2004 as well as the Warrant of
Distraint and/or Levy issued by the Commissioner.29 It ruled that the Final
On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or
Assessment Notice is invalid for failure to comply with the requirements of
Levy with Reference No. OCN WDL-95-05-005 dated February 1, 2005 to
Section 22830 of the National Internal Revenue Code. The dispositive portion of
Fitness.12
the Decision reads:
Fitness filed before the First Division of the Court of Tax Appeals a Petition for
WHEREFORE, the Petition for Review dated February 24, 2005 filed by
Review (With Motion to Suspend Collection of Income Tax, Value Added Tax,
petitioner Fitness by Design, Inc., is hereby GRANTED. Accordingly, the Final
Documentary Stamp Tax and Surcharges and Interests) on March 1, 2005.13
Assessment Notice dated 'March 17, 2004, finding petitioner liable for deficiency
income tax, documentary stamp tax and value-added tax for taxable year 1995
On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to in the total amount of ₱10,647,529.69 is hereby CANCELLED and SET ASIDE.
Fitness' Petition and raised special and affirmative defenses. 14 The The Warrant of Distraint and Levy dated February 1, 2005 is
Commissioner posited that the Warrant of Distraint and/or Levy was issued in 'likewise CANCELLED and SET ASIDE.
accordance with law.15 The Commissioner claimed that its right to assess had
not yet prescribed under Section 222(a)16 of the National Internal Revenue
SO ORDERED.31 (Emphasis in the original)
Code.17 Because the 1995 Income Tax ,Return filed by Fitness was false and
fraudulent for its alleged intentional failure to reflect its true sales, Fitness'
respective taxes may be assessed at any time within 10 years from the The Commissioner's Motion for Reconsideration and its Supplemental Motion
discovery of fraud or omission.18 for Reconsideration were denied by the Court of Tax Appeals First Division. 32

41
Aggrieved, the Commissioner filed an appeal before the Court of Tax
Appeals En Banc.33 The Commissioner asserted ,that it had 10 years to make
an assessment due to the fraudulent income tax return filed by Fitness. 34 It also
claimed that the assessment already attained finality due to Fitness' failure to
file its protest within the period provided by law.35
Fitness argued that the Final Assessment Notice issued to it could not be
claimed as a valid deficiency assessment that could justify the issuance of a
warrant of distraint and/or levy.36 It asserted that it was a mere request for
payment as it did not provide the period within which to pay the alleged
liabilities.37
The Court of Tax Appeals En Banc ruled in favor of Fitness. It affirmed the
Decision of the Court of Tax Appeals First Division, thus:
WHEREFORE, the instant Petition for Review is DENIED for lack of merit.
Accordingly, both the Decision and Resolution in CTA Case No. 7160 dated July
10, 2012 and November 21, 2012 respectively are AFFIRMED in
toto.38 (Emphasis in the original)
The Commissioner's Motion for Reconsideration was denied by the Court of Tax
Appeals En Banc in the Resolution39 dated December 16, 2014.
Hence, the Commissioner of Internal Revenue filed before this Court a Petition
for Review.
Petitioner Commissioner of Internal Revenue raises the sole issue of whether
the Final Assessment Notice issued against respondent Fitness by Design, Inc.
is a valid assessment under Section 228 of the National Internal Revenue Code
and Revenue Regulations No. 12-99.40
Petitioner argues that the Final Assessment Notice issued to respondent is valid
since it complies with Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99.41 The law states that the taxpayer shall be
informed in writing of the facts, jurisprudence, and law on which the assessment
is based.42 Nothing in the law provides that due date for payment is a
substantive requirement for the validity of a final assessment notice. 43
Petitioner further claims that a perusal of the Final Assessment Notice shows
that April 15, 2004 is the due date for payment.44 The pertinent portion of the
assessment reads:
The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1 of
this Notice. The 50% surcharge and 20% interest have been imposed pursuant
42
to Sections 248 and 249(B) of the [National Internal Revenue Code], as
amended. Please note, however, that the interest and the total amount due will
have to be adjusted if paid prior or beyond April 15, 2004.45 (Emphasis supplied)
This Court, through the Resolution46 dated July 22, 2015, required respondent
to comment on the Petition for Review.
In its Comment,47 respondent argues that the Final Assessment Notice issued
was merely a request and not a demand for payment of tax liabilities.48 The
Final Assessment Notice cannot be considered as a final deficiency assessment
because it deprived respondent of due process when it failed to reflect its fixed
tax liabilities.49Moreover, it also gave respondent an indefinite period to pay its
tax liabilities.50
Respondent points out that an assessment should strictly comply with the law
for its validity.51 Jurisprudence provides that "not all documents coming from the
[Bureau of Internal Revenue] containing a computation of the tax liability can be
deemed assessments[,] which can attain finality."52 Therefore, the Warrant of
Distraint and/or Levy cannot be enforced since it is based on an invalid
assessment.53
Respondent likewise claims that since the Final Assessment Notice was
allegedly based on fraud, it must show the details of the fraudulent acts imputed
to it as part of due process.54
I
The Petition has no merit.
An assessment "refers to the determination of amounts due from a person
obligated to make payments."55 "In the context of national internal revenue
collection, it refers to the determination of the taxes due from a taxpayer under
the National Internal Revenue Code of 1997."56
The assessment process starts with the filing of tax return and payment of tax
by the taxpayer.57 The initial assessment evidenced by the tax return is a self-
assessment of the taxpayer.58 The tax is primarily computed and voluntarily paid
by the taxpayer without need of any demand from government.59 If tax
obligations are properly paid, the Bureau of Internal Revenue may dispense with
its own assessment.60
After filing a return, the Commissioner or his or her representative may allow the
examination of any taxpayer for assessment of proper tax liability. 61 The failure
of a taxpayer to file his or her return will not hinder the Commissioner from
permitting the taxpayer's examination.62 The Commissioner can examine
records or other data relevant to his or her inquiry in order to verify the
correctness of any return, or to make a return in case of noncompliance, as well
as to determine and collect tax liability.63
The indispensability of affording taxpayers sufficient written notice of his or her notice.83 This cannot be presumed.84 Otherwise, the express mandate of
64
tax liability is a clear definite requirement. Section 228 of the National Internal Section 228 and Revenue Regulations No. 12-99 would be nugatory.85 The
Revenue Code and Revenue Regulations No. 12-99, as amended, transparently requirement enables the taxpayer to make an effective protest or appeal of the
outline the procedure in tax assessment.65
Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation
regarding the due process requirement in the issuance of a deficiency tax
assessment, requires a notice for informal conference.67 The revenue officer
who audited the taxpayer's records shall state in his or her report whether the
taxpayer concurs with his or her findings of liability for deficiency taxes. 68 If the
taxpayer does not agree, based on the revenue officer's report, the taxpayer
shall be informed in writing69 of the discrepancies in his or her payment of
internal revenue taxes for "Informal Conference."70 The informal conference
gives the taxpayer an opportunity to present his or her side of the case. 71
The taxpayer is given 15 days from receipt of the notice of informal conference
to respond.72 If the taxpayer fails to respond, he or she will be considered in
default.73 The revenue officer74 endorses the case with the least possible delay
to the Assessment Division of the Revenue Regional Office or the
Commissioner or his or her authorized representative.75 The Assessment
Division of the Revenue Regional Office or the Commissioner or his or her
authorized representative is responsible for the "appropriate review and
issuance of a deficiency tax assessment, if warranted."76
If, after the review conducted, there exists sufficient basis to assess the
taxpayer with deficiency taxes, the officer 'shall issue a preliminary assessment
notice showing in detail the facts, jurisprudence, and law on which the
assessment is based.77 The taxpayer is given 15 days from receipt of the pre-
assessment notice to respond.78 If the taxpayer fails to respond, he or she will
be considered in default, and a formal letter of demand and assessment notice
will be issued.79
The formal letter of demand and assessment notice shall state the facts,
jurisprudence, and law on which the assessment was based; otherwise, these
shall be void.80 The taxpayer or the authorized representative may
administratively protest the formal letter of demand and assessment notice
within 30 days from receipt of the notice.81
II
The word "shall" in Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99 means the act of informing the taxpayer of both
the legal and factual bases of the assessment is mandatory. 82 The law requires
that the bases be reflected in the formal letter of demand and assessment
assessment or decision.86
The rationale behind the requirement that taxpayers should be informed of the
facts and the law on which the assessments are based conforms with the
constitutional mandate that no person shall be deprived of his or her property
without due process of law.87 Between the power of the State to tax and an
individual's right to due process, the scale favors the right of the taxpayer to due
process.88
The purpose of the written notice requirement is to aid the taxpayer in making a
reasonable protest, if necessary.89Merely notifying the taxpayer of his or her tax
liabilities without details or particulars is not enough.90
Commissioner of Internal Revenue v. United Salvage and Towage (Phils.),
Inc.91 held that a final assessment notice that only contained a table of taxes
with no other details was insufficient:
In the present case, a mere perusal of the [Final Assessment Notice] for the
deficiency EWT for taxable year 1994 will show that other than a tabulation of
the alleged deficiency taxes due, no further detail regarding the assessment
was provided by petitioner. Only the resulting interest, surcharge and penalty
were anchored with legal basis. Petitioner should have at least attached a
detailed notice of discrepancy or stated an explanation why the amount of
P48,461.76 is collectible against respondent and how the same was arrived at. 92
Any deficiency to the mandated content of the assessment or its process will not
be tolerated.93 In Commissioner of Internal Revenue v. Enron,94 an advice of tax
deficiency from the Commissioner of Internal Revenue to an employee of Enron,
including the preliminary five (5)-day letter, were not considered valid substitutes
for the mandatory written notice of the legal and factual basis of the
assessment.95 The required issuance of deficiency tax assessment notice to the
taxpayer is different from the required contents of the notice.96 Thus:
The law requires that the legal and factual bases of the assessment be stated in
the formal letter of demand and assessment notice.1âwphi1 Thus, such cannot
be presumed. Otherwise, the express provisions of Article 228 of the [National
Internal Revenue Code] and [Revenue Regulations] No. 12-99 would be
rendered nugatory. The alleged "factual bases" in the advice, preliminary letter
43
and "audit working papers" did not suffice. There was no going around the
mandate of the law that the legal and factual bases of the assessment be stated
in writing in the formal letter of demand accompanying the assessment
notice.97 (Emphasis supplied)
However, the mandate of giving the taxpayer a notice of the facts and laws on
which the assessments are based should not be mechanically applied. 98 To
emphasize, the purpose of this requirement is to sufficiently inform the taxpayer
of the bases for the assessment to enable him or her to make an intelligent
protest.99
In Samar-I Electric Cooperative v. Commissioner of Internal
Revenue,100 substantial compliance with Section 228 of the National Internal
Revenue Code is allowed, provided that the taxpayer would be later apprised in
writing of the factual and legal bases of the assessment to enable him or her to
prepare for an effective protest.101 Thus:
Although the [Final Assessment Notice] and demand letter issued to petitioner
were not accompanied by a written explanation of the legal and factual bases of
the deficiency taxes assessed against the petitioner, the records showed that
respondent in its letter dated April 10, 2003 responded to petitioner's October
14, 2002 letter-protest, explaining at length the factual and legal bases of the
deficiency tax assessments and denying the protest.
Considering the foregoing exchange of correspondence and documents
between the parties, we find that the requirement of Section 228 was
substantially complied with. Respondent had fully informed petitioner in writing
of the factual and legal bases of the deficiency taxes assessment, which
enabled the latter to file an "effective" protest, much unlike the taxpayer's
situation in Enron. Petitioner's right to due process was thus not violated. 102
A final assessment notice provides for the amount of tax due with a demand for
payment.103 This is to determine the amount of tax due to a
taxpayer.104 However, due process requires that taxpayers be informed in
writing of the facts and law on which the assessment is based in order to aid the
taxpayer in making a reasonable protest.105 To immediately ensue with tax
collection without initially substantiating a valid assessment contravenes the
principle in administrative investigations "that taxpayers should be able to
present their case and adduce supporting evidence."106
Respondent filed its income tax return in 1995.107 Almost eight (8) years passed
before the disputed final assessment notice was issued. Respondent pleaded
prescription as its defense when it filed a protest to the Final Assessment
Notice. Petitioner claimed fraud assessment to justify the belated assessment
made on respondent.108If fraud was indeed present, the period of assessment
44
should be within 10 years.109 It is incumbent upon petitioner to clearly state the
allegations of fraud committed by respondent to serve the purpose of an
assessment notice to aid respondent in filing an effective protest.
III
The prescriptive period in making an assessment depends upon whether a tax
return was filed or whether the tax return filed was either false or
fraudulent.1âwphi1 When a tax return that is neither false nor fraudulent has
been filed, the Bureau of Internal Revenue may assess within three (3) years,
reckoned from the date of actual filing or from the last day prescribed by law for
filing.110 However, in case of a false or fraudulent return with intent to evade tax,
Section 222(a) provides:
Section 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. (Emphasis supplied)
In Aznar v. Court of Tax Appeals,111 this Court interpreted Section 332112 (now
Section 222[a] of the National Internal Revenue Code) by dividing it in three (3)
different cases: first, in case of false return; second, in case of a fraudulent
return with intent to evade; and third, in case of failure to file a return.113 Thus:
Our stand that the law should be interpreted to mean a separation of the three
different situations of false return, fraudulent return with intent to evade tax and
failure to file a return is strengthened immeasurably by the last portion of the
provision which aggregates the situations into three different classes, namely
"falsity'', "fraud" and "omission."114
This Court held that there is a difference between "false return" and a
"fraudulent return."115 A false return simply involves a "deviation from the truth,
whether intentional or not" while a fraudulent return "implies intentional or
deceitful entry with intent to evade the taxes due."116
Fraud is a question of fact that should be alleged and duly proven.117 "The willful
neglect to file the required tax return or the fraudulent intent to evade the
payment of taxes, considering that the same is accompanied by legal
consequences, cannot be presumed."118 Fraud entails corresponding sanctions
under the tax law. Therefore, it is indispensable for the Commissioner of Internal
Revenue to include the basis for its allegations of fraud in the assessment
notice.
During the proceedings in the Court of Tax Appeals First Division, respondent
presented its President, Domingo C. Juan Jr. (Juan, Jr.), as witness.119 Juan, Jr.
testified that respondent was, in its pre-operating stage in 1995.120During that
period, respondent "imported equipment and distributed them for market testing
in the Philippines without earning any profit."121 He also confirmed that the Final
Assessment Notice and its attachments failed to substantiate the
Commissioner's allegations of fraud against respondent, thus:
More than three (3) years from the time petitioner filed its 1995 annual income
tax return on April 11, 1996, respondent issued to petitioner a [Final
Assessment Notice] dated March 17, 2004 for the year 1995, pursuant to the
Letter of Authority No. 00002953 dated May 13, 2002. The attached Details of
discrepancy containing the assessment for income tax (IT), value-added tax
(VAT) and documentary stamp tax (DST) as well as the Audit Result/
Assessment Notice do not impute fraud on the part of petitioner. Moreover, it
was obtained on information and documents illegally obtained by a [Bureau of
Internal Revenue] informant from petitioner's accountant Elnora Carpio in
1996.122 (Emphasis supplied)
Petitioner did not refute respondent's allegations. For its defense, it presented
Socrates Regala (Regala), the Group Supervisor of the team, who examined
respondent's tax liabilities.123 Regala confirmed that the investigation was
prompted by a tip from an informant who provided them with respondent's list of
sales.124 He admitted125 that the gathered information did not show that
respondent deliberately failed to reflect its true income in 1995. 126
IV
The issuance of a valid formal assessment is a substantive prerequisite for
collection of taxes.127 Neither the National Internal Revenue Code nor the
revenue regulations provide for a "specific definition or form of an assessment."
However, the National Internal Revenue Code defines its explicit functions and
effects."128 An assessment does not only include a computation of tax liabilities;
it also includes a demand for payment within a period prescribed.129 Its main
purpose is to determine the amount that a taxpayer is liable to pay. 130
A pre-assessment notice "do[es] not bear the gravity of a formal assessment
notice."131 A pre-assessment notice merely gives a tip regarding the Bureau of
Internal Revenue's findings against a taxpayer for an informal conference or a
clarificatory meeting.132
45
A final assessment is a notice "to the effect that the amount therein stated is due
as tax and a demand for payment thereof."133 This demand for payment signals
the time "when penalties and interests begin to accrue against the taxpayer and
enabling the latter to determine his remedies[.]"134 Thus, it must be "sent to and
received by the taxpayer, and must demand payment of the taxes described
therein within a specific period."135
The disputed Final Assessment Notice is not a valid assessment.
First, it lacks the definite amount of tax liability for which respondent is
accountable. It does not purport to be a demand for payment of tax due, which a
final assessment notice should supposedly be. An assessment, in the context of
the National Internal Revenue Code, is a "written notice and demand made by
the [Bureau of Internal Revenue] on the taxpayer for the settlement of a due tax
liability that is there: definitely set and fixed."136 Although the disputed notice
provides for the computations of respondent's tax liability, the amount remains
indefinite. It only provides that the tax due is still subject to modification,
depending on the date of payment. Thus:
The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1 of
this Notice. The 50% surcharge and 20% interest have been imposed pursuant
to Sections 248 and 249 (B) of the [National Internal Revenue Code], as
amended. Please note, however, that the interest and the total amount due will
have to be adjusted if prior or beyond April 15, 2004.137 (Emphasis Supplied)
Second, there are no due dates in the Final Assessment Notice. This negates
petitioner's demand for payment.138Petitioner's contention that April 15, 2004
should be regarded as the actual due date cannot be accepted. The last
paragraph of the Final Assessment Notice states that the due dates for payment
were supposedly reflected in the attached assessment:
In view thereof, you are requested to pay your aforesaid deficiency internal
revenue tax liabilities through the duly authorized agent bank in which you are
enrolled within the time shown in the enclosed assessment notice.139 (Emphasis
in the original)
However, based on the findings of the Court of Tax Appeals First Division, the
enclosed assessment pertained to remained unaccomplished.140
Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual of
penalties and surcharges and not the due date for payment of tax
liabilities.1avvphi1 The total amount depended upon when respondent decides
to pay. The notice, therefore, did not contain a definite and actual demand to
pay.
Compliance with Section 228 of the National Internal Revenue Code is a
substantative requirement.141 It is not a mere formality.142 Providing the taxpayer
with the factual and legal bases for the assessment is crucial before proceeding
with tax collection. Tax collection should be premised on a valid assessment,
which would allow the taxpayer to present his or her case and produce evidence
for substantiation.143

The Court of Tax Appeals did not err in cancelling the Final Assessment Notice
as well as the Audit Result/Assessment Notice issued by petitioner to
respondent for the year 1995 covering the "alleged deficiency income tax, value-
added tax and documentary stamp tax amounting to ₱10,647,529.69, inclusive
of surcharges and interest"144 for lack of due process. Thus, the Warrant of
Distraint and/or Levy is void since an invalid assessment bears no valid
effect.145

Taxes are the lifeblood of government and should be collected without

hindrance.146 However, the collection of taxes should be exercised "reasonably
and in accordance with the prescribed procedure."147

The essential nature of taxes for the existence of the State grants government
with vast remedies to ensure its collection. However, taxpayers are guaranteed
their fundamental right to due process of law, as articulated in various ways in
the process of tax assessment. After all, the State's purpose is to ensure the
well-being of its citizens, not simply to deprive them of their fundamental rights.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax

Appeals En Banc dated July 14, 2014 and Resolution dated December 16, 2014
in CTA EB Case No. 970 (CTA Case No. 7160) are hereby AFFIRMED.

SO ORDERED.

46
 February 22, 2017 compromise penalty. As a result, it filed a petition for review before the CTA
Division.
G.R. No. 221590
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
ASALUS CORPORATION, Respondent
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to reverse and set aside the July 30,
2015 Decision1 and the November 6, 2015 Resolution2 of the Court of Tax
Appeals (CTA) En Banc in CTA EB No. 1191, which affirmed the April 2, 2014
Decision3 of the CTA Third Division (CTA Division).
The Antecedents
On December 16, 2010, respondent Asalus Corporation (Asalus) received a
Notice of Informal Conference from Revenue District Office (RDO) No. 47 of the
Bureau of Internal Revenue (BIR). It was in connection with the investigation
conducted by Revenue Officer Fidel M. Bañares II (Bañares) on the Value-
Added Tax (VAT) transactions of Asalus for the taxable year 2007.4 Asalus filed
its Letter-Reply,5 dated December 29, 2010, questioning the basis of Bañares'
computation for its VAT liability.
The CTA Division Ruling
In its April 2, 2014 Decision, the CT A Division ruled that the VAT assessment
issued on August 26, 2011 had prescribed and consequently deemed invalid. It
opined that the ten (10)-year prescriptive period under Section 222 of the NIRC
was inapplicable as neither the FAN nor the FDDA indicated that Asalus had
filed a false VAT return warranting the application of the ten (10)-year
prescriptive period. It explained that it was only in the PAN where an allegation
of false or fraudulent return was made. The CTA stressed that after Asalus had
protested the PAN, the CIR never mentioned in both the FAN and the FDDA
that the prescriptive period would be ten (10) years. It further pointed out that
the CIR failed to present evidence regarding its allegation of fraud or falsity in
the returns.
The CTA wrote that "the three instances where the three-year prescriptive
period will not apply must always be alleged and established by clear and
convincing evidence and should not be anchored on mere conjectures and
speculations,9 before the ten (10) year prescriptive period could be considered.
Thus, it disposed:
WHEREFORE, the instant Petition for Review is hereby
GRANTED. Accordingly, the deficiency VAT assessment for taxable year 2007
and the compromise penalty are hereby CANCELLED and WITHDRAWN, on
ground of prescription.

On January 10, 2011, petitioner Commissioner of Internal Revenue (CIR) issued SO ORDERED.10
the Preliminary Assessment Notice (PAN) finding Asalus liable for deficiency
VAT for 2007 in the aggregate amount of ₱413, 378, 058.11, inclusive of
surcharge and interest. Asalus filed its protest against the PAN but it was denied The CIR moved for reconsideration but its motion was denied.
by the CIR. 6
The CTA En Banc Ruling
On August 26, 2011, Asalus received the Formal Assessment
Notice (FAN) stating that it was liable for deficiency VAT for 2007 in the total In its July 30, 2015 Decision, the CTA En Banc sustained the assailed decision
amount of ₱95,681,988.64, inclusive of surcharge and interest. Consequently, it of the CT A Division and dismissed the petition for review filed by the CIR. It
filed its protest against the FAN, dated September 6, 2011. Thereafter, Asal us explained that there was nothing in the FAN and the FDDA that would indicate,
filed a supplemental protest stating that the deficiency VAT assessment had the non-application of the three (3) year prescriptive period under Section 203 of
prescribed pursuant to Section 203 of the National Internal Revenue the NIRC. It found that the CIR did not present any evidence during the trial to
Code (NIRC).7 substantiate its claim of falsity in the returns and again missed its chance to do
so when it failed to file its memorandum before the CTA Division.
On October 16, 2012, Asal us received the Final Decision on Disputed
Assessment8 (FDDA) showing VAT deficiency for 2007 in the aggregate amount The CTA En Banc further explained that the PAN alone could not be used as a
of ₱106,761,025.17, inclusive of surcharge and interest and ₱25,000.00 as basis because it was not the assessment contemplated by law. Consequently,

47
the allegation of falsity in Asalus' tax returns could not be considered as it was
not reiterated in the FAN. The dispositive portion thus reads:
WHEREFORE, premises considered, the present Petition for Review is hereby
DENIED, and accordingly, DISMISSED for lack of merit.
SO ORDERED.11
The CIR sought the reconsideration of the decision of the CTA En Banc, but the
latter upheld its decision in its November 6, 2015 resolution.
Hence, this petition.
ISSUES
I state the applicability of the ten-year prescriptive period and the bases thereof
WHETHER PETITIONER HAD SUFFICIENTLY APPRISED RESPONDENT
THAT THE FAN AND FDDA ISSUED AGAINST THE LATTER FALLS UNDER
SECTION 222(A) OF THE 1997 NIRC, AS AMENDED;
II
WHETHER RESPONDENT'S FAILURE TO REPORT IN ITS VAT RETURNS
ALL THE FEES IT COLLECTED FROM ITS MEMBERS APPLYING FOR
HEALTHCARE SERVICES CONSTITUTES "FALSE" RETURN UNDER
SECTION 222(A) OF THE 1997 NIRC, AS AMENDED; AND
II
WHETHER PETITIONER'S RIGHT TO ASSESS RESPONDENT FOR ITS
DEFICIENCY VAT FOR TAXABLE YEAR 2007 HAD ALREADY
PRESCRIBED.12
The CIR, through the Office of the Solicitor General (OSG), argues that the VAT
assessment had yet to prescribe as the applicable prescriptive period is the ten
(10)-year prescriptive period under Section 222 of the NIRC, and not the three
(3) year prescriptive period under Section 203 thereof. It claims that Asalus was
informed in the PAN of the ten (10)-year prescriptive period and that the FAN
made specific reference to the PAN. In turn, the FDDA made reference to the
FAN. Asalus, on the other hand, only raised prescription in its supplemental
protest to the FAN. The CIR insists that Asalus was made fully aware that the
prescriptive period under Section 222 would apply.
48
Moreover, the CIR asserts that there was substantial understatement in Asalus'
income, which exceeded 30% of what was declared in its VAT returns as
appearing in its quarterly VAT returns; and the underdeclaration was supported
by the judicial admission of its lone witness that not all the membership fees
collected from members applying for healthcare services were reported in its
VAT returns. Thus, the CIR concludes that there was prima facie evidence of a
false return.
The Position of Asalus
In its Comment/Opposition,13 dated April 22, 2016, Asalus countered that the
present petition involved a question of fact, which was beyond the ambit of a
petition for review under Rule 45. Moreover, it asserted that the findings of fact
of the CT A Division, which were affirmed by the CTA En Banc, were conclusive
and binding upon the Court. It posited that the CIR could not raise for the first
time on appeal a new argument that "the FDDA and the FAN need not explicitly
as long as the totality of the circumstances show that the taxpayer was
'sufficiently informed' of the facts in support of the assessment. Based on the
totality of the circumstances, it was informed of the facts in support of the
assessment." 14
Asalus reiterated that the CIR, either in the FAN or the FDDA, failed to show
that it had filed false returns warranting the application of the extraordinary
prescriptive period under Section 222 of the NIRC. It insisted that it was not
informed of the facts and law on which the assessment was based because the
FAN did not state that it filed false or fraudulent returns. For this reason, Asalus
averred that the assessment had prescribed because it was made beyond the
three (3)-year period as provided in Section 203 of the NIRC.
The Reply of the CIR
In its Reply, 15 dated August 15, 2016, the CIR argued that the findings of the
CT A might be set aside on appeal if they were not supported with substantial
evidence or if there was a showing of gross error or abuse. It repeated that
there was presumption of falsity in light of the 30% underdeclaration of sales.
The CIR emphasized that even Asalus' own witness testified that not all the
membership fees collected were reported in its VAT returns. It insisted that
Asalus was sufficiently informed of its assessment based on the prescriptive
period under Section 222 of the NIRC as early as when the PAN was issued.
On another note, the CIR manifested that Asalus' counsels made use of
insulting words in its Comment, which could have been dispensed with.
Particularly, it highlighted the use of the following phrases as insulting: "even to
the uninitiated," "petitioner's habit of disregarding firmly established rules of
procedure," "twist establish facts to suit her ends," "just to indulge petitioner,"
and "she then tried to calculate, on her own but without factual basis." It
asserted that "[w]hile a lawyer has a complete discretion on what legal strategy
to employ in a case, the overzealousness in protecting his client's interest does
not warrant the use of insulting and profane language in his pleadings xxx." 16
The Court's Ruling
Petitioner argues that Sec. 332 of the NIRC does not apply because the
taxpayer did not file false and fraudulent returns with intent to' evade tax, while
respondent Commissioner of Internal Revenue insists contrariwise, with
respondent Court of Tax Appeals concluding that the very "substantial under
declarations of income for six consecutive years eloquently demonstrate the
falsity or fraudulence of the income tax returns with an intent to evade the
payment of tax."

There is merit in the petition. xxxx

It is true that the findings of fact of the CT A are, as a rule, respected by the xxx We believe that the proper and reasonable interpretation of said provision
Court, but they can be set aside in exceptional cases. In Barcelon, Roxas should be that in the three different cases of (1) false return, (2) fraudulent
Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal return with intent to evade tax, (3) failure to file a return, the tax may be
Revenue, this Court in Toshiba Information Equipment (Phils.), Inc. v. assessed, or a proceeding in court for the collection of such tax may be begun
Commissioner of Internal Revenue, 17explicitly pronounced- without assessmeμt, at any time within ten years after the discovery of the (1)
falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted
to mean a separation of the three different situations of false return,
Jurisprudence has consistently shown that this Court accords the findings of fact
by the CTA with the highest respect. In Sea-Land Service, Inc. v. Court of fraudulent return with intent to evade tax, and failure to file a return is
Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court strengthened immeasurably by the last portion of the provision which
seggregates the situations into three different classes, namely "falsity",
recognizes that the Court of Tax Appeals, which by the very nature of its
"fraud" and "omission." That there is a difference between "false return"
function is dedicated exclusively to the consideration of tax problems, has
and "fraudulent return" cannot be denied. While the first merely implies
necessarily developed an expertise on the subject, and its conclusions will not
deviation from the truth, whether intentional or not, the second implies
be overturned unless there has been an abuse or improvident exercise of
authority. Such findings can only be disturbed on appeal if they are not intentional or deceitful entry with intent to evade the taxes due.
supported by substantial evidence or there is a showing of gross error or
abuse on the part of the Tax Court. In the absence of any clear and The ordinary period of prescription of 5 years within which to assess tax
convincing proof to the contrary, this Court must presume that the CTA liabilities under Sec. 331 of the NIRC should be applicable to normal
18
rendered a decision which is valid in every respect. [Emphasis supplied] circumstances, but whenever the government is placed, at a disadvantage so as
to prevent its lawful agents from proper assessment of tax liabilities due to false
returns, fraudulent return intended to evade payment of tax or failure to file
After a review of the records and applicable laws and jurisprudence, the Court
returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the time
finds that the CTA erred in concluding that the assessment against Asalus had
of the discovery of the falsity, fraud or omission even seems to be inadequate
prescribed.
and should be the one enforced.
Generally, internal revenue taxes shall be assessed within three (3) years after
There being undoubtedly false tax returns in this case, We affirm the conclusion
the ,last day prescribed by law for the filing of the return, or where the return is
of the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should
filed beyond the period, from the day the return was actually filed. 19Section 222
apply and that the period of ten years within which to assess petitioner's tax
of the NIRC, however, provides for exceptions to the general rule. It states that
liability had not expired at the time said assessment was made. (Emphasis
in the case of a false or fraudulent return with intent to evade tax or of failure to
file a return, the assessment may be made within ten (10) years from the supplied)
discovery of the falsity, fraud or omission.
Thus, a mere showing that the returns filed by the taxpayer were false,
In the oft-cited Aznar v.CTA,20the Court compared a false return to a fraudulent notwithstanding the absence of intent to defraud, is sufficient to warrant the
application of the ten (10) year prescriptive period under Section 222 of the
return in relation to the applicable prescriptive periods for assessments, to wit:
NIRC.

49
Presumption of Falsity of Returns
In the present case, the CTA opined that the CIR failed to substantiate with
clear and convincing evidence its claim that Asalus filed a false return. As it
noted that the CIR never presented any evidence to prove the falsity in the
returns that Asalus filed, the CTA ruled that the assessment was subject to the
three (3) year ordinary prescriptive period.
The Court is of a different view.
Under Section 248(B) of the NIRC,21 there is a prima facie evidence of a false
return if there is a substantial underdeclaration of taxable sales, receipt or
income. The failure to report sales, receipts or income in an amount exceeding
30% what is declared in the returns constitute substantial underdeclaration.
A prima facie evidence is one which that will establish a fact or sustain a
judgment unless contradictory evidence is produced. 22
In other words, when there is a showing that a taxpayer has substantially
underdeclared its sales, receipt or income, there is a presumption that it has
filed a false return. As such, the CIR need not immediately present evidence to
support the falsity of the return, unless the taxpayer fails to overcome the
presumption against it.
Applied in this case, the audit investigation revealed that there were undeclared
VA Table sales more than 30% of that declared in Asalus' VAT returns.
Moreover, Asalus' lone witness testified that not all membership fees,
particularly those pertaining to medical practitioners and hospitals, were
reported in Asalus' VAT returns. The testimony of its witness, in trying to justify
why not all of its sales were included in the gross receipts reflected in the VAT
returns, supported the presumption that the return filed was indeed false
precisely because not all the sales of Asalus were included in the VAT returns.
Hence, the CIR need not present further evidence as the presumption of falsity
of the returns was not overcome. Asalus was bound to refute the presumption of may file an effective protest against the assessment. In the case at bench,
the falsity of the return and to prove that it had filed accurate returns. Its failure Asalus was sufficiently informed that with respect to its tax liability, the
to overcome the same warranted the application of the ten (10)-year prescriptive extraordinary period laid down in Section 222 of the NIRC would apply. This
period for assessment under Section 222 of the NIRC. To require the CIR to
present additional evidence in spite of the presumption provided in Section
248(B) of the NIRC would render the said provision inutile.
Substantial Compliance of Notice Requirement
The CTA also posited that the ordinary prescriptive period of three (3) years
applied in this case because there was no mention in the FAN or the FDDA that
50
what would apply was the extraordinary prescriptive period and that the CIR did
not present any evidence to support its claim of false returns.
Again, the Court disagrees.
It is true that neither the FAN nor the FDDA explicitly stated that the applicable
prescriptive period was the ten (10)-year period set in Section 222 of the NIRC.
They, however, made reference to the PAN, which categorically stated that
"[t]he running of the three-year statute of limitation I as provided un4er Section
203 of the 1997 National Internal Revenue Code (NIRC) is not i applicable xxx
but rather to the ten (10) year prescriptive period pursua11t to Section 222(A) of
the tax code xxx." 23 In Samar-I Electric Cooperative v. COMELEC,24the Court
ruled that it sufficed that the taxpayer was substantially informed of the legal and
factual bases of the assessment enabling him to file an effective protest, to wit:
Although, the FAN and demand letter issued to petitioner were not accompanied
by a written explanation of the legal and factual bases of the deficiency taxes
assessed against the petitioner, the records showed that respondent in its letter
dated April 10, 2003 responded to petitioner's October 14, 2002 letter-protest,
explaining at length the factual and legal bases of the deficiency tax
assessments and denying the protest.
Considerirg the foregoing exchange of correspondence and Document
between the parties, we find that the requirement of Section 228 was
substantially complied with. Respondent had fully informed I petitioner in
writing of the factual and legal bases of the deficiency taxes assessment, which
enabled the latter to file an "effective" protest, much unlike the taxpayer's
situation in Enron. Petitioner's right to due process was thus not violated.
[Emphasis supplied]
Thus, substantial compliance with the requirement as laid down under Section
228 of the NIRC suffices, for what is important is that the taxpayer has been
sufficiently informed of the factual and legal bases of the assessment so that it
was categorically stated in the PAN and all subsequent communications from
the CIR made reference to the PAN. Asalus was eventually able to file a protest
addressing the issue on prescription, although it was done only in its
supplemental protest to the FAN.
Considering the existing circumstances, the assessment was timely made
because the applicable prescriptive period was the ten (10)-year prescriptive
period under Section 222 of the NIRC. To reiterate, there was a prima
facie showing that the returns filed by Asalus were false, which it failed to
controvert. Also, it was adequately informed that it was being assessed within While the Court recognizes and appreciates the passion of Asalus' counsels in
the extraordinary prescriptive period. promoting and protecting its interest, they must still be reminded that they
should be more circumspect in their choice of words to argue their client's
A Reminder position. As much as possible, words which undermine the integrity,
competence and ability of the opposing party, or are otherwise offensive, must
be avoided especially if the message may be delivered in a respectful, yet
A lawyer is indeed expected to champion the cause of his client with utmost zeal
equally emphatic manner. A counsel's mettle will not be viewed any less should
and competence. Such exuberance, however, must be tempered to meet the
standards of civility and decorum. Rule 8.01 of the Code of Professional he choose to pursue his cause without denigrating the other party.
Responsibility mandates that "[a] lawyer shall not, in his professional dealings,
use language which is abusive, offensive or otherwise improper." In Noble v. WHEREFORE, petition is GRANTED. The July 30, 2015 Decision and the
Atty. Ailes, 25 the Court cautioned lawyers to be careful in their: choice of words November 6, 2015 Resolution of the Court of Tax Appeals En
as not to unduly malign the other party, to wit: Banc are REVERSED and SET ASIDE. The case is ordered REMANDED to the
Court of Tax Appeals for the determination of the Value Added Tax liabilities of
Though a lawyer's language may be forceful and emphatic, it should always be the Asalus Corporation.
dignified and respectful, befitting the dignity of the legal profession.1âwphi1 The
use of intemperate language and unkind ascriptions has no place in the dignity SO ORDERED.
of the judicial forum. In Buatis Jr. v. People, the Court treated a lawyer's use of
the words "lousy," "inutile," "carabao English," "stupidity," and "satan" in a letter
addressed to another colleague as defamatory and injurious which effectively
maligned his integrity. Similarly, the hurling of insulting language to describe the
opposing counsel is considered conduct unbecoming of the legal profession.

xxx

On this score, it must be emphasized that membership in the bar is a

privilege burdened with conditions such that a lawyer's words and actions
directly affect the public's opinion of the legal profession. Lawyers are
expected to observe such conduct of nobility and uprightness which
should remain with them, whether in their public or private lives, and may be
disciplined in the event their conduct falls short of the standards imposed upon
them. Thus, in this case, it is inconsequential that the statements were merely
relayed to Orlando's brother in private. As a member of the bar, Orlando
should have been more circumspect in his words, being fully aware that
they pertain to another lawyer to whom fairness as well as candor is
owed. It was highly improper for Orlando to interfere and insult Maximino to his
client.

Indulging in offensive personalities in the course of judicial proceedings, as in

this case, constitutes unprofessional conduct which subjects a lawyer to
disciplinary action. While a lawyer is entitled to. present his case with vigor
and courage, such enthusiasm does not justify the use of offensive and
abusive language. The Court has consistently reminded the members of the
bar to abstain from all offensive personality and to advance no fact prejudicial to
the honor and reputation of a party. xxx26[Emphases supplied]

51
 SECOND DIVISION
March 22, 2017 alleged that based on the computerized matching it conducted on the
G.R. No. 213943
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs
PHILIPPINE DAILY INQUIRER, INC., Respondent
DECISION
CARPIO, J.:
The Case
1 discrepancies found by the BIR. On 30 May 2007, PDI received a letter dated
Before the Court is a petition for review assailing the 4 November 2013
2 3
Decision and the 1 August 2014 Resolution of the Court of Tax. Appeals
(CTA) En Banc in CTA EB Case No. 905. The CTA En Banc affirmed the 16
February 2012 Decision4 and the 8 May 2012 Resolution5 of the CTA First
Division in CTA Case No. 7853 which granted the petition for review filed by
Philippine Daily Inquirer, Inc. (PDI) and cancelled the Formal Letter of Demand
dated 11 March 2008 and Assessment No. LN # 116-AS-04-00-00038-000526
issued by the Bureau of Internal Revenue (BIR) for deficiency Value Added Tax.
(VAT) and income tax. for the taxable year 2004.
The Antecedent Facts
The facts of this case, as presented by the CTA, are as follows:
On 10 August 2006, PDI received a letter dated 30 June 2006 from Region 020
Large Taxpayers' Service of BIR under LN No. 116-AS-04-00- 00038. BIR
information and data provided by third party sources against PDI's declaration
on its VAT Returns for taxable year 2004, there was an underdeclaration of
domestic purchases from its suppliers amounting to P317,705,610.52. The BIR
invited PDI to reconcile the deficiencies with BIR's Large Taxpayers Audit &
Investigation Division I (BIR-LTAID). In response, PDI submitted reconciliation
reports, attached to its letters dated 22 August 2006 and 19 December 2006, to
BIR-LTAID. On 21 March 2007, PDI executed a Waiver of the Statute of
Limitation (First Waiver) consenting to the assessment and/or collection of taxes
for the year 2004 which may be found due after the investigation, at any time
before or after the lapse of the period of limitations fixed by Sections 203 and
222 of the National Internal Revenue Code (NIRC) but not later than 30 June
2007. The First Waiver was received on 23 March 2007 by Nestor Valeroso
(Valeroso), OIC-ACTR of the Large Taxpayer Service. In a letter dated 7 May
2007, PDI submitted additional partial reconciliation and explanations on the
28 May 2007 from Mr. Gerardo Florendo, Chief of the BIR-LTAID, informing it
that the results of the evaluation relative to the matching of sales of its suppliers
against its purchases for the taxable year 2004 had been submitted by Revenue
Officer Narciso Laguerta under Group Supervisor Fe Caling. In the same letter,
BIR invited PDI to an informal conference to present any objections that it might
have on the BIR's findings. On 5 June 2007, PDI executed a Waiver of the
Statute of Limitation (Second Waiver), which Valeroso accepted on 8 June
2007.
In a Preliminary Assessment Notice (PAN) dated 15 October 2007 issued by the
BIR-LTAID, PDI was assessed for alleged deficiency income tax and VAT for
taxable year 2004 on the basis of LN No. 116-AS-04-00- 00038. The PAN
states:

PDI is a corporation engaged in the business of newspaper publication. On 15

April 2005, it filed its Annual Income Tax Return for taxable year 2004. Its COMPUTATION OF DEFICIENCY VAT
Quarterly VAT Returns for the same year showed the following: Undeclared Income ₱1,007,565.03
Add: Overdeclared input VAT 1,601,652.43
Date of Filing
Total undeclared income per Investigation ₱2,609,217.46
For the First Quarter 20 April 2004
Less: Attributable input tax 715,371.17
For the Second Quarter 16 July 2004
VAT still payable per investigation ₱1,893,846.29
For the Third Quarter 18 October 2004
Add: Increments -
For the Fourth Quarter 21 January 20056
Interest from 1/26/05 to 11/15/07 ₱1,062,629.37

52
Compromise penalty 25,000.00 1,087,629.37Interest from 1/26/05 to 11/15/07 ₱l,235,929.28
Amount Due and Collectible ₱2,981,475.66Compromise penalty 25,000.00 1,260,929.28
COMPUTATION OF DEFICIENCY INCOME TAX Amount Due and Collectible ₱3,154,775.56
Undeclared Gross Income ₱10,075,650.28
Less: Cost of Sales 7,153,711.702. COMPUTATION OF [DEFICIENCY INCOME TAX]
Undeclared Net Income ₱2,921,938.58
Multiply by income tax rate 32%Undeclared Gross Income ₱10,075,650.28

Income tax still due per investigation ₱935,020.35Less: Cost of Sales 7,153,711.70

Add: Increments - Undeclared Net Income 2,921,938.58

Interest from 4/16/05 to 11/15/07 ₱483,648.88 Multiply by income tax rate 32%

Compromise penalty 20,000.00 503,648.88Income tax still due per investigation ₱935,020.35

Amount Due and Collectible ₱1,438,669.237Add: Increments -

Interest from 4/16/05 to 11/15/07 ₱569,209.65
PDI received the PAN on 4 December 2007. In a letter dated 12 December
Compromise penalty 20,000.00 589,209.65
2007, PDI sought reconsideration of the PAN and expressed its willingness to
execute another Waiver (Third Waiver), which it did on the same date, thus Amount Due and Collectible ₱1,524,229.998
extending BIR's right to assess and/or collect from it until 30 April 2008. Romulo
L. Aguila, Jr. (Aguila), OIC-Head Revenue Executive Assistant for the Large
Taxpayers Service-Regular, accepted the Third Waiver on 20 December 2007.
On 16 May 2008, PDI filed its protest. On 12 December 2008, PDI filed a
On 17 April 2008, PDI received a Formal Letter of Demand dated 11 March
Petition for Review against the Commissioner of Internal Revenue (CIR)
2008 and an Audit Result/ Assessment Notice from the BIR, demanding for the
alleging that the 180-day period within which the BIR should act on its protest
payment of alleged deficiency VAT and income tax, respectively, computed as
had already lapsed.
follows:
The CTA First Division, quoting at length the CIR's Answer, presented the
1. COMPUTATION OF (DEFICIENCY) VAT following facts:

Undeclared Income ₱1,007,565.03 Petitioner Philippine Daily inquirer is liable to pay the amount of Three Million
One Hundred fifty Four Thousand Seven hundred Seventy Five Pesos and
Add: Overdeclared input VAT 1,601,652.43 56/100 (₱3,154,775.56) and One Million Five Hundred Twenty Four Thousand
Two Hundred Twenty Nine Pesos and 99/100 (₱l,524,299.99) representing
Total Undeclared Income per Investigation ₱2,609,217.46 deficiency Value-Added Tax (VAT and Income Tax, respectively, for the taxable
Less: Attributable input tax 715,371.17 year 2004.
VAT still payable per investigation ₱1,893,846.29 1. The VAT and inc0me tax liabilities of petitioner in the aggregate amount of
Add: Increments - Four Million Six Hundred Seventy Nine Thousand and Five Pesos and 55/100
(₱4,679,005.55) arose on account of the issuance to petitioner of Letter Notice

53
No. 116-AS-04-00-00038 dated June 30, 2006. Computerized matching
conducted by respondent on information/data provided by third party sources
against its declaration per VAT returns revealed the aforesaid discrepancies for
taxable year 2004. The income and value-added tax liabilities were generated
through the Reconciliation of Listing for Enforcement (REUEF) system-
Summary List of Sales and Purchases (SLSP) and Third Party Matching.
Through the system, respondent was able to detect tax leaks through the
matching of data available in the Integrated Tax Systems (ITS) with the
information gathered from third party sources.
On the basis of the consolidation and cross-referencing of third party
information, discrepancy reports on sales and purchases were generated to
uncover under-declared income and over-claimed purchases (goods and
services).
As explicitly provided under Revenue Memorandum Order (RMO) No. 42-2003:
II. POLICIES
[x x x]
2. In order to intensify enforcement, the power of the Commissioner to authorize
the examination of the taxpayer and the assessment of the correct amount of
tax is hereby ordered done through the so called 'no contact-audit- approach '.
3. The 'no contact-audit-approach' includes the process of computerized
matching of sales and purchases data contained in the Schedules of Sales and
Domestic Purchases, and Schedule of Importation submitted by VAT taxpayer
under the RELIEF system pursuant to RR No. 7- 95 as amended by RR Nos.
13-97, 7-99 and 8-2002. This may also include the matching of data from other
information or returns filed by the taxpayers with the BIR such as Alphalist of
Payees subject to Final or Creditable Withholding Taxes.
4. Even without conducting a detailed examination of taxpayer's books and
records, the computerized/manual matching of sales and purchases/expenses
will reveal discrepancies which shall be communicated to the concerned
taxpayer through the issuance of a Letter Notice (LN) by the Commissioner.
5. LNs being served by the Bureau upon the taxpayer found to have
understated their sales or over claimed their purchases/expenses can be
considered notice of audit or investigation in so far as the amendment of any
return is concerned which is the subject of such LN. A taxpayer is therefore
disqualified from amending his return once an LN is served upon him.
III. GUIDELINES
54
Xxx
5. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice of
Informal Conference, thus, the procedures defined in RR 12-99 should likewise
be observed.
Furthermore, in CTA Case No. 7092 entitled 'BIG AA Corporation represented
by Erlinda L. Stohner vs. Bureau of Internal Revenue' dated February 22, 2006,
the Honorable Court had the opportunity to say:
'Letter Notices issued against a taxpayer in connection with the information of
under declaration of sales and purchases gathered through Third Party
Information Program may be considered as a 'notice of audit or
investigation' in the absence of evident error or clear abuse of discretion.'
2. On the basis of the abovementioned LN and after a careful and extensive
scrutiny of petitioner's documents, resulting deficiency in income and Value-
added taxes led to the issuance of the Preliminary Assessment Notice (PAN)
dated October 15, 2007 together with the Details of Discrepancies and
subsequently, a Formal Letter of Demand (FLD) dated March 11, 2008.
Relative thereto, Section 203 of the National Internal Revenue Code (NIRC)
explicitly provides:
Section 203. Period of Limitation Upon Assessment and Collection of
Taxes.
Except as provided in Section 222, internal revenue taxes shall be
assessed within three (3) years after the last day prescribed by law for
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 i[s] filed beyond the period prescribed
by law, the three (3) year period shall be counted from the day [t]he 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 filed on such day.'
However, Section 222 of the NIRC provides the exceptions as regards to the
provisions laid down under Section 203. In particular, as shown under Section
(1) thereof, the three (3) [year] period of limitation in making assessment
shall not apply in cases where it involves false or fraudulent return or in cases
where there is failure to file a return [by] the person obliged to file such return.
Section 222(a) of the National Internal Revenue Code provides:
'Section 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 failure Hundred Seventy One Pesos and 17 /100 (₱715,3 71.17). The details of which
to file a return, the tax may be assessed, or a proceeding in court for the are shown hereunder:
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
Per SLP PerLN Discrepancy
a fraud assessment which has become final and executor[y], [t]he fact of fraud
shall be judicially taken cognizance of in the civil and criminal action for the
Grasco Industries Inc. 202.55 (202.55
collection thereof.'
Harrison Communications Inc. 18,157.89 398,331.12 (380,173.23
Such being the case, the three (3) [year] period of limitation for the assessment
Makati Property Ventures 64.55 (64.55
of internal revenue tax liabilities reckoned from the last day prescribed by law for
Mc[C]an[n] Erikson Phils. Inc.
the filing of the return shall not apply in the case at hand for the simple reason 204,769.38 (204,769.38
that petitioner falsely filed the return for taxable year 2004. Such being the
case, the applicable provision shall be Section 222(a) where the period ofMillennium Cars Inc. 89,545.45 (89,545.45
limitation provides that the assessment may be made within ten (10) years afterMarketing Communications Inc.
WPP 40,616.01 (40,616.01
the discovery of falsity, fraud or omission. In the case at hand, the reckoning
period was from the time during which the LN dated June 30, 2006 was issued Total 18,157.89 733,529.06 (715,371.17
to petitioner. Indubitably, the Formal Letter of Demand dated March 11, 2008
was issued within the prescriptive period provided by law. Such being the case,
On the basis of the aforesaid investigation, it can be observed that the SLP
the FLD is considered valid and has the force and effect of law. which petitioner attached as supporting documents upon filing the quarterly VAT
return revealed the declared amount of ₱l09,462,842.94 as its input VAT for
3. On the basis of the investigation conducted by respondent through the purchases incurred. However, on the basis of the LN, its suppliers recorded in
RELIEF system, respondent though the FLD, outlined how the tax liabilities in its books of account the aggregate amount of ₱107,861,190.51 as its
the aggregate amount of ₱4,679,005.55 representing income and VAT liabilities corresponding VAT. Suffice it to say, the over-declared VAT input tax on the
were arrived at. Upon matching the data gathered from respondent's Integrated part of petitioner led to the under declaration of VAT payable in the amount of
Tax System (ITS) against the Summary of List of Purchases (SLP) attached to ₱1,601,652.43 for the taxable year 2004. Therefore, petitioner is liable to pay
the Quarterly VAT returns filed with respondent, the following discrepancies said outstanding VAT. In addition, the amount of ₱l0,075,650.28 which resulted
remain unsettled despite petitioner's submission of supporting documents: from the excess of the LN over the SLP amounting to ₱715,371.17 must be
likewise added to arrive at the total VAT liability of ₱3,l 54,775.56 (including
(a) An excess of SLP over the Letter Notices (LN) in the amount of increments up to April 30, 2008). Details of the computation are shown in the
₱1,601,652.43 from the following suppliers: FLD.

Per SLP PerLN As stated earlier, the excess of LN over the SLP in the amount of ₱715,371.17
Discrepancy
resulted to under-declared input tax on the part of petitioner which led to an
lliance Media Printing Corp. 109,073,375.58 107,640,812.95 under[-]declared purchases of ₱7,153,711.70, arrived at by dividing
1,432,562.63
₱715,371.17 by the VAT rate of 10%. As can be gleaned from the LN, suppliers
itimotors Inc. 70,454.55 70,056.65 397.90 in its books of accounts output VAT for sales made to petitioner.
declared
iamond Motors Corp. 288,181.82 142,363.64 However, in petitioner's SLP, no declaration of such amount incurred for the
145,818.18
taxable year 2004 was shown. Such being the case, petitioner under-declared
Western Marketing Corp. 30,830.99 7,957.27 22,873.72
its purchases that resulted to the under-declared amount of Input VAT. If
petitioner has under[-]declared its purchases, it would likewise have under-
otal 109,462,842.94 107,861,190.51 1,601,652.43
declared its Gross Income which will be worked back by using the ratio of Cost
of Sales against its Gross Income per Income Tax Return. In the case at hand,
(b) On the other hand, it is likewise evident than an excess of LN over the SLP the ratio of Cost of Sales against its Gross Income per Income Tax Return filed
also occurred in the total amount of Seven Hundred Fifteen Thousand Three for taxable year 2004 is 71%. If petitioner divides the amount of ₱7,153,711.70
by the cost ratio of 71%, the under-declared Gross Income of ₱l0,075,650.28
will be arrived at. Such being the case, petitioner would then be liable to pay the

55
corresponding income tax for the under-declared Net [I]ncome at the rate of
32%. Net Income was arrived at by deducting from the Gross Income of
₱l0,075,650.28 the corresponding Cost of Sales of ₱7,153,711.70. Hence, the
amount of income tax still to be paid is ₱l,524,229.99 (including additional
increments until April 30, 2008). For ready reference of this Honorable Court,
the full details of the aforesaid computation are shown in the Formal Letter of
Demand issued to petitioner.
4. Petitioner emphasized that it is a service company deriving its main source of
income from newspaper and advertising sales, thus any understatement of
expenses or purchases (also mostly from services) does not mean it
understated its sales. It goes further by saying that its transactions pertaining
mostly to services and goods must be reflected as Operating Expenses and not
as part of the Cost of Sales. It revealed that Harrison Communications Inc.,
McCann Erikson Inc., WPP Marketing Corporation are some of the advertising
agencies which rendered direct professional services to petitioner in the form of
marketing or promotional purposes. To bolster its claim, it likewise stated that
the transactions with aforesaid three (3) main entities should not be treated as
cost of sales since what these entities provided were 'not materials' in order for
petitioner to gain income that can be both taxable under the income tax and
VAT provisions.
Corollary thereto, Section 27 E(4) of the NIRC specifically provides:
'(4) Gross Income Defined. For purposes of applying the minimum corporate
income tax provided under Section (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and allowances and cost of
goods sold. 'Cost of goods sold' shall include business expenses directly
incurred to produce the merchandise to bring them to their present location and
use.
xxx
In the case of taxpayers engaged in the sale of service, 'gross income' means
gross receipts less sales returns, allowances, discounts and cost of services.
'Cost of services' shall mean direct costs and expenses necessarily incurred to
provide the services required by the customers and clients including (a) salaries
and employee benefits of personnel, consultants and specialists directly
rendering the service and (b) cost of facilities directly utilized in providing the
service such as depreciation or rental of equipment used and cost of supplies.'
Petitioner, by its own admission, is a service-oriented company which derives its
income from sale of newspaper and advertisement. It is without doubt that in
selling newspapers to the public, it necessarily incurs direct costs to bring about Communications Inc., McCann Erikson Inc., and WPP Marketing Corporation
the merchandise it sells to its present state and/or condition. In the same vein, in
selling advertisements to clients/customers, it likewise incurs direct costs for the
rendition of services in the process. On the basis of the aforesaid provision of
the NIRC, 'cost of services' include[s] direct costs and expenses necessarily
incurred to provide the services required by its customers or clients. Applying
the same at hand, in order for petitioner to boost its sales on advertisement, it
would actually employ services of companies which would handle the promotion
and marketing of the services it is offering. The direct and professional services
rendered by the three (3) advertising companies nan1ely Harrison
Communications Inc., McCann Erikson Inc. and WPP Marketing Corporation
should be considered as part of the cost of advertisement sales/services by
petitioner.
In view of the foregoing, the amount of discrepancy that resulted on account of
the under-declared input tax of P7 l 5,3 71.17 should be treated as Cost of
Sales of services and not just an ordinary operating expenses because the
services provided by the aforementioned three (3) advertising agencies are
direct costs and expenses necessary to bring about the advertisement sales of
petitioner."9
After the presentation of oral and documentary evidence and submission of the
parties' respective Memoranda, the case was submitted for resolution.
The Decision of the CTA First Division
The CTA First Division resolved the following issues raised by the parties:
1. Whether or not respondent's authority to issue an assessment against
petitioner for deficiency value-added and income taxes has prescribed;
2. Whether or not respondent erred in assessing petitioner deficiency value-
added tax and income tax for calendar year 2004;
3. Whether petitioner is liable to pay the aggregate amount of Four Million Six
Hundred Seventy Nine Thousand Five Pesos and 55/100 (Php 4,679,005.55)
representing alleged deficiency income and value-added tax for taxable year
2004, including interest and compromise penalty from 30 April 2008 until fully
paid pursuant to Sections 248 and 249 of the Tax Code, arising from
discrepancies which were generated through the Reconciliation of Listing for
Enforcement (RELIEF) System-Summary List of Sales and Purchases and Third
Party Matching of Data available in the Integrated Tax System (ITS) of
respondent against information gathered from third party sources;
4. Whether the fees paid to the three (3) advertising agencies, namely Harrison
56
are considered part of the cost of sales made by petitioner for taxable year
2004;
5. Whether Section 222 of the Tax Code is applicable in the case at hand;
6. Whether the Formal Letter of Demand dated 11 March 2008 was issued
within the prescriptive period provided by law; and
7. Whether or not petitioner should be assessed a compromise penalty.10
In its 16 February 2012 Decision, the CTA First Division ruled m favor of PDI.
The CTA First Division ruled that the period of limitation in the assessment and
collection of taxes is governed by Section 203 of the NIRC which provides:
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.
The CTA First Division ruled that internal revenue taxes must be assessed on
time. It added that the period of assessment must not extend indefinitely
because doing so will deprive the taxpayer of the assurance that it will not be
subjected to further investigation after the expiration of a reasonable period of
time. Nevertheless, the CTA First Division noted that the three-year prescriptive
period under Section 203 of the NIRC applies only when the returns are filed
pursuant to legal requirements. The CTA First Division explained that for false
or fraudulent tax returns, or for failure to file returns, the prescriptive period is 10
years after the discovery of the falsity or fraud, or from failure to file tax returns.
It also added that in the absence of a false or fraudulent return, or where a
return has been filed, the period of limitation may still be extended in cases
where the taxpayer and the CIR have agreed in writing, prior to the expiration of
the period prescribed under Section 203 of the NIRC, to an assessment within
the time agreed upon.
In ruling on the prescriptive period, the CTA First Division had to determine
whether PDI's tax returns were false or fraudulent. The CTA First Division ruled
that in ascertaining the correctness of any return, or in determining the tax
liability of any person, the CIR is authorized to obtain information, on a regular
basis, from any person other than the taxpayer subject of the audit or
57
investigation. It further ruled that the CIR may rely on the information obtained
from third parties in issuing assessments to taxpayers, and that the CIR enjoys
the presumption of regularity in obtaining such information. Further, the CTA
First Division stated that the determinations and assessments of the CIR are
presumed correct and made in good faith, and it is the duty of the taxpayer to
prove otherwise. The CTA First Division then ruled that in this case, PDI
introduced proof that the determination made by the CIR on the supposed
overdeclared input tax of ₱l,601,652.43 is not correct. The CTA First Division
ruled that the CIR failed to disprove the findings submitted by the Independent
Certified Public Accountant (ICPA) that supported PDI's assertions.
The CTA First Division rejected the CIR's theory that since there was an
underdeclaration of the input tax and of purchases, it translates to taxable
income for tax purposes and taxable gross receipts for VAT purposes.
According to the CTA First Division, the following elements must be present in
the imposition of income tax: (1) there must be gain or profit; (2) the gain or
profit is realized or received, actually or constructively; and (3) it is not exempted
by law or treaty from income tax. In this case, the CTA First Division ruled that in
the imposition or assessment of income tax, it must be clear that there was an
income and the income was received by the taxpayer. The basis could not be
merely an underdeclaration of purchases. The CTA First Division added that for
income tax purposes, a taxpayer may either deduct from its gross income a
lesser amount, or not claim any deduction at all. It stated that what is prohibited
is to claim a deduction beyond the amount authorized by law. According to the
CTA First Division, even when there was underdeclaration of input tax, which
means there was an underdeclaration of purchases and expenses, the same is
not prohibited by law.
As regards the VAT assessment, the CTA First Division ruled that the 10% VAT
is assessed on "gross receipts derived from the sale or exchange of services."
As such, it is critical to show that the taxpayer received an amount of money or
its equivalent, and not only that there was underdeclared input taxes or
purchases. The CTA First Division ruled that it was an error for the CIR to
impose a deficiency income tax based on the underdeclared input tax, and the
income tax return cannot be treated as false. Thus, the CTA First Division ruled
that the prescriptive period applicable to the case is the three-year period, and
the deficiency income tax assessment issued by the BIR beyond the three-year
prescriptive period is void.
The CTA First Division further ruled that Section 222(b) of the NIRC authorizes
the extension of the original three-year prescriptive period by the execution of a
valid waiver upon the agreement in writing between the taxpayer and the BIR,
provided: (1) the agreement was made before the expiration of the three-year
period and (2) the guidelines in the proper execution of the waiver are strictly
foll0wed. The CTA First Division found that while the First and Second Waivers
were executed in three copies, the BIR failed to provide the office accepting the
waivers with their respective third copies. The CTA First Division found that the The dispositive p01iion of the CTA En Bane's Decision reads:
third copies were still attached to the docket of the case. The CTA First Division
also found that the BIR failed to prove that the Third Waiver was executed in WHEREFORE, premises considered, the Petition for Review is hereby DENIED
three copies. Further, the revenue official who accepted the Third Waiver was for lack of merit. Accordingly, the Decision and Resolution dated February 16,
not authorized to do so. The CTA First Division also noted that the Second 2012 and May 8, 2012, respectively, are hereby AFFIRMED in toto.
Waiver would have expired on 31 December 2007 but the Third Waiver was
already executed on 20 December 2007, meaning there was enough time to
SO ORDERED.12
have it signed by the ACIR of the Large Taxpayers Service. The CTA First
Division concluded that due to the defects in the Waivers, the three-year period
within which to assess PDI was not extended. The CTA First Division further The CIR filed a motion for reconsideration. In its 1 August 2014 Resolution, the
ruled that the compromise penalties should likewise be cancelled. The CTA En Banc denied the motion for lack of merit.
dispositive portion 0f ~he CTA First Division's Decision reads:
Hence, the CIR filed a petition for review on certiorari before this Court.
WHEREFORE, premises considered, the instant Petition for Review is hereby
GRANTED. The Formal Letter of Demand dated March 11, 2008 and The Issues
Assessment No. LN # 116-AS-04-00-00038- [000526) for calendar year 2004
issued by the BIR against petitioner are hereby CANCELLED and SET ASIDE. The CIR raised the following issues in her petition:

SO ORDERED.11
The CIR filed a motion for reconsideration. In its 8 May 2012 Resolution, the
CTA First Division denied the motion for lack of merit.
The CIR filed a petition for review before the CTA En Banc.
The Decision of the CTA En Banc
(l) The CTA En Banc erred in ruling that petitioner's assessment for deficiency
VAT and income tax was adequately controverted by respondent;
(2) The CTA En Banc erred in ruling that the petitioner's right to assess
respondent for deficiency VAT and income tax has prescribed; and
(3) The CTA En Banc erred in ruling that respondent is not estopped from
raising the defense of prescription.13

In its 4 November 2013 Decision, the CTA En Banc cited the CTA First The Ruling of this Court
Division's Decision extensively. The CTA En Banc ruled that it found no reason
to depart from the CTA First Division's findings. The CTA En Banc held that PDI BIR 's assessment was not adequately controverted by PDI
sufficiently discharged its burden of proving that the VAT assessment and the
Income Tax assessment made by the CIR were not correct. The CTA En Reconciliation of Listing for Enforcement information technology tool used by
Banc ruled that the presumptions of correctness and regularity cited by the CIR the administration.14 The system was created -
were overturned by the evidence presented by PDI particularly, the final report
of the ICPA, accounts payable, check vouchers, invoices, official receipts, and
x x x to support third party information program and voluntary assessment
credit memoranda. The CTA En Banc noted that the CIR did not present any
program of the Bureau through the cross-referencing of third party information
evidence to the contrary. The CTA En Banc rejected the CIR's allegation that
from the taxpayers' Summary Lists of Sales and Purchases prescribed to be
PDI made a false return and held that the three-year prescriptive period based
submitted on a quarterly basis pursuant to Revenue Regulations Nos. 7-95, as
on Section 203, in relation to Section 222(a) of the NIRC, as amended, should
amended by RR 13-97, RR 7-99 and RR 8-2002.15
apply in this case. The CTA En Banc likewise sustained the CTA First Division's
ruling that the Waivers issued by PDI were defective and could not extend the
three-year prescriptive period. The CTA En Banc also sustained the CTA First In addition -
Division's ruling that it can resolve the issue of prescription because the CIR did
not contest it when it was raised by PDI. [RELIEF] can detect tax leaks by matching the data available under the
Bureau's Integrated Tax System (ITS) with data gathered from third party

58
sources (i.e. Schedules of Sales and Domestic Purchases, and Schedule of
Importations submitted by VAT taxpayers pursuant to RR No. 7-95, as amended
by RR Nos. 13-97, 7-99 and 8-2002).
Through the consolidation and cross-referencing of third party information,
discrepancy reports on sales and purchases can be generated to uncover under
declared income and over claimed purchases (goods and services). Timely
recognition and accurate reporting of unregistered taxpayers and non-filers can
be made possible.16
Using the RELIEF system, the BIR assessed PDI for deficiency VAT and
income tax amounting to ₱3,154,775.57 and ₱l ,525,230.00, respectively.
According to the BIR, the computerized matching conducted by its office, using
information and data from third party sources against PDI's VAT returns for
2004 showed an underdeclaration of domestic purchases from its suppliers
amounting to ₱317,705,610.52. PDI. denied the allegation.
In ruling on the case, the CTA recognized that the BIR may obtain information
from third party sources in assessing taxpayers. The CTA also stated that the
BIR enjoyed a presumption of regularity in obtaining the information, and its
assessments are presumed correct and made in good faith. Indeed, the burden
to controvert the assessments made by the BIR lies with the taxpayer. In this
case, the CTA rejected BIR's finding that PDI underdeclared its input tax and
purchases. According to the CTA, PDI was able to disprove BIR's assessments.
The general rule is that findings of fact of the CTA are not to be disturbed by this
Court unless clearly shown to be unsupported by substantial evidence. 17 Since
by the very nature of its functions, the CTA has developed an expertise to
resolve tax issues, the Court will not set aside lightly the conclusions reached by
them, unless there has been an abuse or improvident exercise of authority.18
In reaching their conclusions, the CTA First Division and En Banc relied on the
report submitted by the ICPA. According to the CTA, the BIR failed to rebut the
ICPA report. After going over the ICPA report, as well as the affidavit
summarizing the examination submitted by Jerome Antonio B. Constantino
(Constantino), a Certified Public Accountant and the Managing Partner of the
firm that conducted the examination, this Court notes that:
(1) Purchases made from Harrison Communications, Inc. were recorded as
general and administrative expenses and selling expenses in the 2004 General
Ledger and 2004 Audited Financial Statements and not as cost of sales;19
(2) The 2004 purchases from Harrison Communications, Inc. and McCann
Erickson, Inc. were recorded in PDI's book in 2005 and 2006 as "Summary List
of Purchases." There was a discrepancy between the purchases from Harrison
59
Communications, Inc. and McCann Erickson, Inc. and the BIR's Letter Notice
amounting to Pl 50,203.29 and Pl 91,406.02, respectively, but the ICPA was not
able to account for the difference because according to PDI, the details were not
provided in the BIR's Letter Notice;20
(3) Promotional services purchased from Harrison Communications, Inc. and
McCann Erickson, Inc. in 2004 were recorded in PDI's books in 2005 and 2006.
According to Constantino, the VAT input on purchases from Harrison
Communications, Inc. and McCann Erickson, Inc. recorded in 2005 and 2006,
amounting to ₱206,713.63 and ₱13,363.36, respectively, were supported only
by photocopies of sales invoices because PDI claimed that it could not find the
original documents despite diligent efforts to locate them;21
(4) Constantino reported that no input taxes were recorded in 2004 from
McCann Erickson, Inc., Millennium Cars, Inc., WPP Marketing Communications,
Inc., Grasco Industries, Inc., and Makati Property Ventures. Constantino was
not able to vouch for supporting documents for purchase transactions from WPP
Marketing Communications, Inc., Grasco Industries, Inc., and Makati Property
Ventures. He established that the purchase from Millennium Cars, Inc. was for a
car loan account for an employee and was recorded to Advances to Officers
and Employees;22
(5) Alliance Media Printing, Inc.'s erroneous posting of data in the BIR RELIEF
caused the discrepancies in the analysis of suppliers' sales and purchases
made by PDI.23
The foregoing showed that there were discrepancies that PDI were able to
explain. In particular, the ICPA report showed that the purchase from Millennium
Cars, Inc. was made on behalf of an employee as a loan. In addition, the
underdeclared input tax insofar as Alliance Printing, Inc. is concerned was due
to the latter's erroneous posting of data, a fact that the corporation admitted.
However, there are still issues that need to be resolved. In particular, PDI failed
to justify its erroneous listing of purchases from Harrison Communications, Inc.,
McCann Erickson, Inc., and WPP Marketing Corporation as general and
administrative expenses.
The CIR pointed out that PDI could not treat purchases from Harrison
Communications, Inc. and McCann Erickson, Inc. as general and administrative
expenses. Indeed, Section 27(E)(4) of the NIRC provides:
xxxx
(4) Gross Income Defined. For purposes of applying the minimum corporate
income tax provided under Subsection (E) hereof, the term "gross income" shall
mean gross sales less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold" shall include business expenses directly
incurred to produce the merchandise to bring them to their present location and
use.
xxxx
In the case of taxpayers engaged in the sale of service, "gross income" means
gross receipts less sales returns, allowances, discounts and cost of services.
"Cost of services" shall mean direct costs and expenses necessarily incurred to shall be judicially taken cognizance of in the civil or criminal action for the
provide the services required by the customers and, clients including (a) salaries collection thereof.
and employee benefits of personnel, consultants and specialists directly
rendering the service and (b) cost of facilities directly utilized in providing the In Commissioner of Internal Revenue v. Javier,24 this Court ruled that fraud is
service such as depreciation or rental of equipment used and cost of
supplies: Provided, however, That in the case of banks, "cost of services" shall
include interest expense.
The ICPA report found nothing wrong in the entries. However, as pointed out by
the Office of the Solicitor General, PDI is a service-oriented company that
derives its income fr0m the sale of newspapers and advertisements. The
services rendered by Harrison Communications, Inc., McCann Erickson, Inc.,
and \VPP Marketing Corporation were meant to promote and market the
advertising services offered by PDI. As such, their services should be
considered part of cost of services instead of general and administrative
expenses and operating expenses.
Such finding would ordinarily call for a recomputation. However, we need to
resolve first whether the BIR's assessment was made within the prescriptive
period.
Prescription and Estoppel
We will discuss the second and third issues jointly.
The CIR alleges that PDT filed a false or fraudulent return. As such, Section 222
of the NIRC should apply to this case and the applicable prescriptive period is
10 years from the discovery of the falsity of the return. The CIR argues that the
ten-year period starts from the time of the issuance of its Letter Notice on 10
August 2006. As such, the assessment made I through the Formal Letter of
Demand dated 11 March 2008 is within the prescriptive period.
We do not agree.
Under Section 203 of the NIRC, the prescriptive period to assess is set at three
years. This rule is subject to the exceptions provided under Section 222 of the
NIRC. The CIR invokes Section 222(a) which provides:
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
never imputed. The Court stated that it will not sustain findings of fraud upon
circumstances which, at most, create only suspicion.25 The Court added that the
mere understatement of a tax is not itself proof of fraud for the purpose of tax
evasion.26 The Court explained:
x x x. The fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or
resorted to in order to induce another to give up some legal right. Negligence,
whether slight or gross, is not equivalent to fraud with intent to evade the tax
contemplated by law. It must amount to intentional wrongdoing with the sole
object of avoiding the tax. x x x.27
In Samar-1 Electric Cooperative v. Commissioner of Internal Revenue, 28 the
Court differentiated between false and fraudulent returns. Quoting Aznar v.
Court of Tax Appeals,29 the Court explained in Samar-l the acts or omissions
that may constitute falsity, thus:
Petitioner argues that Sec. 332 of the NIRC does not apply because the
taxpayer did not file false and fraudulent returns with intent to evade tax, while
respondent Commissioner of Internal Revenue insists contrariwise, with
respondent Court of Tax Appeals concluding that the very "substantial
underdeclarations of income for six consecutive years eloquently demonstrate
the falsity or fraudulence of the income tax returns with an intent to evade the
payment of tax."
To our minds we can dispense with these controversial arguments on facts,
although we do not deny that the findings of facts by the Court of Tax Appeals,
supported as they are by very substantial evidence, carry great weight, by
resorting to a proper interpretation of Section 332 of the NIRC. We believe that
the proper· and reasonable interpretation of said provision should be that in the
three different cases of (1) false return, (2) fraudulent return with intent to evade
tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court
for the collection of such tax may be begun without assessment. at any time
60
within ten years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our
stand that the law should be interpreted to mean a separation of the three
different situations of false return, fraudulent return with intent to evade tax, and
failure to file a return is strengthened immeasurably by the last portion of the
provision which segregates the situation into three different classes, namely
"falsity," "fraud," and "omission." That there is a difference between "false
return" and "fraudulent return" cannot be denied. While the first implies deviation
from the truth, whether intentional or not, the second implies intentional or
deceitful entry with intent to evade the taxes due.
The ordinary period of prescription of 5 years within which to assess tax
liabilities under Sec. 331 of the NIRC should be applicable to normal
circumstances, but whenever the government is placed at a disadvantage so as
to prevent its lawful agents from proper assessment of tax liabilities due to false
returns, fraudulent return intended to evade payment of tax or failure to file
returns, the period of ten years provided for in Sec. 332(a) NIRC, from the time
of discovery of the falsity, fraud or omission even seems to be inadequate and
should be the one enforced.30
Thus, while the filing of a fraudulent return necessarily implies that the act of the
taxpayer was intentional and done with intent to evade the taxes due, the filing
of a false return can be intentional or due to honest mistake. In CIR v. B.F.
Goodrich Phils., Inc.,31 the Court stated that the entry of wrong information due
to mistake, carelessness, or ignorance, without intent to evade tax, does not
constitute a false return. In this case, we do not find enough evidence to prove
fraud or intentional falsity on the part of PDI.
Since the case does not fall under the exceptions, Section 203 of the NIRC
should apply. It provides:
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.
Indeed, the Waivers executed by the BIR and PDI were meant to extend the
three-year prescriptive period, and would have extended such period were it not
for the defects found by the CTA. This further shows that at the outset, the BIR
did not find any ground that would make the assessment fall under the
exceptions.
61
In Commissioner of Internal Revenue v. Kudos Metal Corporation,32 the Court
ruled:
Section 222(b) of the NIRC provides that the period to assess and collect taxes
may only be extended upon a written agreement between the CIR and the
taxpayer executed before the expiration of the three-year period. RMO 20-90
issued on April 4, 1990 and RDAO 05-01 issued on August 2, 2001 lay down
the procedure for the proper execution of the waiver, to wit:
1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase
"but not after __ 19_", which indicates the expiry date of the period agreed upon
to assess/collect the tax after the regular three-year period of prescription,
should be filled up.
2. The waiver must be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of
its responsible officials. In case the authority is delegated by the taxpayer to a
representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver
indicating that the BIR has accepted and agreed to the waiver. The date of such
acceptance by the BIR should be indicated. However, before signing the waiver,
the CIR or the revenue official authorized by him must make sure that the
waiver is in the prescribed form, duly notarized, and executed by the taxpayer or
his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the
Bureau should be before the expiration of the period of prescription or before
the lapse of the period agreed upon in case a subsequent agreement is
executed.
6. The waiver must be executed in three copies, the original copy to be attached
to the docket of the case, the second copy for the taxpayer and the third copy
for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her
file copy must be indicated in the original copy to show that the taxpayer was
notified of the acceptance of the BIR and the perfection of the agreement.33
In this case, the CTA found that contrary to PDI's allegntions, the First and
Second Waivers were executed in three copies.1âwphi1 However, the CTA also
found that the CIR failed to provide the office accepting the First and Second
Waivers with their respective third copies, as the CTA found them still attached
to the docket of the case. In addition, the CTA found that the Third Waiver was
not executed in three copies.
The failure to provide the office accepting the waiver with the third copy violates and collection of internal revenue taxes was adopted to serve a purpose that
RMO 20-90 and RDAO 05-01. Therefore, the First Waiver was not properly would benefit both the taxpayer and the governn1ent.35
executed on 21 March 2007 and thus, could not have extended the three-year
prescriptive period to assess and collect taxes for the year 2004. To make Clearly, the defects in the Waivers resulted to the non-extension of the period to
matters worse, the CIR committed the same error in the execution of the assess or collect taxes, and made the assessments issued by the BIR beyond
Second Waiver on 5 June 2007. Even if we consider that the First Waiver was the three-year prescriptive period void.36
validly executed, the Second Waiver failed to extend the prescriptive period
because its execution was contrary to the procedure set forth in RMO 20-90 and The CIR also argues that PDI is estopped from questioning the validity of the
RDAO 05-01. Granting further that the First and Second Waivers were validly Waivers. We do not agree. As stated by the CTA, the BIR cannot shift the blame
executed, the Third Waiver executed on 12 December 2007 still failed to extend
to the taxpayer for issuing defective waivers.37 The Court has ruled that the BIR
the three-year prescriptive period because it was not executed in three copies.
cannot hide behind the doctrine of estoppel to cover its failure to comply with
In short, the records of the case showed that the CIR's three-year prescriptive
RMO 20-90 and RDAO 05-01 which were issued by the BIR itself.38 A waiver of
period to assess deficiency tax had already prescribed due to the defects of all
the statute of limitations is a derogation of the taxpayer's right to security against
the Waivers. prolonged and unscrupulous investigations and thus, it must be carefully and
strictly construed.39
In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.),
Incorporated,34 the Court explained the nature of a waiver of assessment. The
Since the three Waivers in this case are defective, they do not produce any
Court said:
effect and did not suspend the three-year prescriptive period under Section 203
of the NIRC. As such, we sustain the cancellation of the Formal Letter of
In Philippine Journalist, Inc. v. Commissioner of Internal Revenue, the Court Demand dated 11 March 2008 and Assessment No. LN # 116-AS- 04-00-
categorically stated that a Waiver must strictly conform to RMO No. 20-90. The 00038-000526 for taxable year 2004 issued by the BIR against PDI.
mandatory nature of the requirements set forth in RMO No. 20-90, as ruled
upon by this Court, was recognized by the BIR itself in the latter's subsequent WHEREFORE, we DENY the petition.
issuances, namely, Revenue Memorandum Circular (RMC) Nos. 6-2005 and
29-2012. Thus. the BIR cannot claim the benefits of extending the period to
collect the deficiency tax as a consequence of the Waiver when, in truth it was SO ORDERED.
the BIR's inaction which is the proximate cause of the defects of the Waiver.
The BIR has the burden of ensuring compliance with the requirements of RMO
No. 20-90 as they have the burden of securing the right of the government to
assess and collect tax deficiencies. This right would prescribe absent any
showing of a valid extension of the period set by the law.

To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the
BIR must act on it, either by conforming to or by disagreeing with the extension.
A waiver of the statute of limitations, whether on assessment or collection,
should not be construed as a waiver of the right to invoke the defense 0f
prescription but, rather, an agreement between the taxpayer and the BIR to
extend the period to a date certain, within which the latter could still assess or
collect taxes due. The waiver does not imply that the taxpayer relinquishes the
right to invoke prescription unequivocally.

Although we recognize that the power of taxation is deemed inherent in order to

support the government, tax provisions are not all about raising revenue. Our
legislature has provided safeguards and remedies beneficial to both the
taxpayer, to protect against abuse; and the government, to promptly act for the
availability and recovery of revenues. A statute of limitations on the assessment

62
 THIRD DIVISION
(ITR) and VAT Returns, the CIR informed MEDICARD and issued a Letter
April 5, 2017 Notice (LN) No. 122-VT-06-00-00020 dated
G.R. No. 222743
MEDICARD PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
REYES,, J.:
This appeal by Petition for Review1 seeks to reverse and set aside the
Decision2 dated September 2, 2015 and Resolution3 dated January 29, 2016 of
the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with
modification the Decision4 dated June 5, 2014 and the Resolution5 dated
September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering
petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent
Commissioner of Internal Revenue (CIR) the deficiency
Value-Added Tax. (VAT) assessment in the aggregate amount of
₱220,234,609.48, plus 20% interest per annum starting January 25, 2007, until
fully paid, pursuant to Section 249(c)6 of the National Internal Revenue Code
(NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid
health and medical insurance coverage to its clients. Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by duly licensed
physicians, specialists and other professional technical staff participating in the
group practice health delivery system at a hospital or clinic owned, operated or
accredited by it.7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through
Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006
and October 20, 2006, respectively, and its Fourth Quarterly VAT Return on
January 25, 2007.8
Upon finding some discrepancies between MEDICARD's Income Tax Returns
September 20, 2007. Subsequently, the CIR also issued a Preliminary
Assessment Notice (PAN) against MEDICARD for deficiency VAT. A
Memorandum dated December 10, 2007 was likewise issued recommending
the issuance of a Formal Assessment Notice (FAN) against MEDICARD.9 On.
January 4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007
for alleged deficiency VAT for taxable year 2006 in the total amount of Pl
96,614,476.69,10 inclusive of penalties. 11
According to the CIR, the taxable base of HMOs for VAT purposes is its gross
receipts without any deduction under Section 4.108.3(k) of Revenue Regulation
(RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health
Care Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually
provide medical and/or hospital services, but merely arranges for the same, its
services are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to
arranging for the provision of medical and/or hospital services by hospitals
and/or clinics but include actual and direct rendition of medical and laboratory
services; in fact, its 2006 audited balance sheet shows that it owns x-ray and
laboratory facilities which it used in providing medical and laboratory services to
its members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million was
received from clients that are registered with the Philippine Export Zone
Authority (PEZA) and/or Bureau of Investments; (3) the processing fees
amounting to ₱l 1.5 Million should be excluded from gross receipts because
P5.6 Million of which represent advances for professional fees due from clients
which were paid by MEDICARD while the remainder was already previously
subjected to VAT; (4) the professional fees in the amount of Pl 1 Million should
also be excluded because it represents the amount of medical services actually
and directly rendered by MEDICARD and/or its subsidiary company; and (5)
even assuming that it is liable to pay for the VAT, the 12% VAT rate should not
be applied on the entire amount but only for the period when the 12% VAT rate
was already in effect, i.e., on February 1, 2006. It should not also be held liable
for surcharge and deficiency interest because it did not pass on the VAT to its
members.14
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing
Revenue Officer Romualdo Plocios to verify the supporting documents of
MEDICARD's Protest. MEDICARD also submitted additional supporting
documentary evidence in aid of its Protest thru a letter dated March 18, 2008. 15
63
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed
Assessment dated May 15, 2009, denying MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in
toto assessment of deficiency [VAT] in total sum of ₱196,614,476.99. It is
requested that you pay said deficiency taxes immediately. Should payment be
made later, adjustment has to be made to impose interest until date of payment.
This is olir final decision. If you disagree, you may take an appeal to the [CTA]
within the period provided by law, otherwise, said assessment shall become
final, executory and demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review before the
CT A, reiterating its position before the tax authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming with
modifications the CIR's deficiency VAT assessment covering taxable year 2006,
viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by
[CIR] against [MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED
WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the
amount of P223,l 73,208.35, inclusive of the twenty-five percent (25%)
surcharge imposed under -Section 248(A)(3) of the NIRC of 1997, as amended,
computed as follows:
Basic Deficiency VAT ₱l78,538,566.68
Add: 25% Surcharge 44,634,641.67
Total ₱223.173.208.35
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per annum on
the basis deficiency VAT of Pl 78,538,566.68 computed from January
25, 2007 until full payment thereof pursuant to Section 249(B) of the
NIRC of 1997, as amended; and
b. Delinquency interest at the rate of twenty percent (20%) per
annum on the total amount of ₱223,173,208.35 representing basic
deficiency VAT of ₱l78,538,566.68 and· 25% surcharge of ₱44,634,64 l
.67 and on the 20% deficiency interest which have accrued as afore-
64
stated in (a), computed from June 19, 2009 until full payment thereof
pursuant to Section 249(C) of the NIRC of 1997.
SO ORDERED.19
The CTA Division held that: (1) the determination of deficiency VAT is not
limited to the issuance of Letter of Authority (LOA) alone as the CIR is granted
vast powers to perform examination and assessment functions; (2) in lieu of an
LOA, an LN was issued to MEDICARD informing it· of the discrepancies
between its ITRs and VAT Returns and this procedure is authorized under
Revenue Memorandum Order (RMO) No. 30-2003 and 42-2003; (3)
MEDICARD is estopped from questioning the validity of the assessment on the
ground of lack of LOA since the assessment issued against MEDICARD
contained the requisite legal and factual bases that put MEDICARD on notice of
the deficiencies and it in fact availed of the remedies provided by law without
questioning the nullity of the assessment; (4) the amounts that MEDICARD
earmarked , and eventually paid to doctors, hospitals and clinics cannot be
excluded from · the computation of its gross receipts under the provisions of RR
No. 4-2007 because the act of earmarking or allocation is by itself an act of
ownership and management over the funds by MEDICARD which is beyond the
contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its clinics and
laboratory facilities cannot be excluded from its gross receipts because the
operation of these clinics and laboratory is merely an incident to MEDICARD's
main line of business as HMO and there is no evidence that MEDICARD
segregated the amounts pertaining to this at the time it received the premium
from its members; and (6) MEDICARD was not able to substantiate the amount
pertaining to its January 2006 income and therefore has no basis to impose a
10% VAT rate.20
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied.
Hence, MEDICARD elevated the matter to the CTA en banc.
In a Decision21 dated September 2, 2015, the CTA en banc partially granted the
petition only insofar as the 10% VAT rate for January 2006 is concerned but
sustained the findings of the CTA Division in all other matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is
hereby PARTIALLY GRANTED. Accordingly, the Decision date June 5, 2014 is
hereby MODIFIED, as follows:
"WHEREFORE, premises considered, the deficiency VAT assessment issued
by [CIR] against
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the
amount of ₱220,234,609.48, inclusive of the 25% surcharge imposed under
Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:
Basic Deficiency VAT ₱76,187,687.58
Add: 25% Surcharge 44,046,921.90
Total ₱220,234.609.48
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the basic
deficiency VAT of ₱l 76,187,687.58 computed from January 25, 2007
until full payment thereof pursuant to Section 249(B) of the NIRC of
1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the total
amount of ₱220,234,609.48 (representing basic deficiency VAT of
₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on the
deficiency interest which have accrued as afore-stated in (a), computed
from June 19, 2009 until full payment thereof pursuant to Section
249(C) of the NIRC of 1997, as amended."
SO ORDERED.22
Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for
reconsideration but it was denied.23Hence, MEDICARD now seeks recourse to
this Court via a petition for review on certiorari.
The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND
EVENTUALLY PAID TO THE MEDICAL SERVICE PROVIDERS
SHOULD STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT
PURPOSES.24
Ruling of the Court
The petition is meritorious.
65
The absence of an LOA violated
MEDICARD's right to due process
An 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. 25 An LOA is premised on
the fact that the examination of a taxpayer who has already filed his tax returns
is a power that statutorily belongs only to the CIR himself or his duly authorized
representatives. Section 6 of the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe
Additional Requirements for Tax Administration and Enforcement. –
(A) Examination of Return 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 examinationof 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 x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized by the
CIR himself or by his duly authorized representative, through an LOA, an
examination of the taxpayer cannot ordinarily be undertaken. The circumstances
contemplated under Section 6 where the taxpayer may be assessed through
best-evidence obtainable, inventory-taking, or surveillance among others has
nothing to do with the LOA. These are simply methods of examining the
taxpayer in order to arrive at .the correct amount of taxes. Hence, unless
undertaken by the CIR himself or his duly authorized representatives, other tax
agents may not validly conduct any of these kinds of examinations without prior
authority.
With the advances in information and communication technology, the Bureau of
Internal Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies
and guidelines once its then incipient centralized Data Warehouse (DW)
becomes fully operational in conjunction with its Reconciliation of Listing for
Enforcement System (RELIEF System).26 This system can detect tax leaks by
matching the data available under the BIR's Integrated Tax System (ITS) with
data gathered from third-party sources. Through the consolidation and cross-
referencing of third-party information, discrepancy reports on sales and
purchases can be generated to uncover under declared income and over
claimed purchases of Goods and services.
Under this RMO, several offices of the BIR are tasked with specific functions
relative to the RELIEF System, particularly with regard to LNs. Thus, the
Systems Operations Division (SOD) under the Information Systems Group (ISG)
is responsible for: (1) coming up with the List of Taxpayers with discrepancies
within the threshold amount set by management for the issuance of LN and for
the system-generated LNs; and (2) sending the same to the taxpayer and to the
Audit Information, Tax Exemption and Incentives Division (AITEID). After
receiving the LNs, the AITEID under the Assessment
Service (AS), in coordination with the concerned offices under the ISG, shall be
responsible for transmitting the LNs to the investigating offices [Revenue District
Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers Audit
and Investigation Division (LTAID)]. At the level of these investigating offices,
the appropriate action on the LN s issued to taxpayers with RELIEF data
discrepancy would be determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down
the "no-contact-audit approach" in the CIR's exercise of its ·power to
authorize any examination of taxpayer arid the assessment of the correct
amount of tax. The no-contact-audit approach includes the process of
computerized matching of sales and purchases data contained in the Schedules
of Sales and Domestic Purchases and Schedule of Importation submitted by
VAT taxpayers under the RELIEF System pursuant to RR No. 7-95, as
amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the
matching of data from other information or returns filed by the taxpayers with the
BIR such as Alphalist of Payees subject to Final or Creditable Withholding
Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's
books and records, if the computerized/manual matching of sales and
purchases/expenses appears to reveal discrepancies, the same shall be
communicated to the concerned taxpayer through the issuance of LN. The LN
shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal
Conference to the concerned taxpayer. Thus, under the RELIEF System, a
revenue officer may begin an examination of the taxpayer even prior to the
issuance of an LN or even in the absence of an LOA with the aid of a
computerized/manual matching of taxpayers': documents/records. Accordingly,
under the RELIEF System, the presumption that the tax returns are in
accordance with law and are presumed correct since these are filed under the
penalty of perjury27 are easily rebutted and the taxpayer becomes instantly
burdened to explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the
statutory requirement of an LOA before any investigation or examination of the
taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is
merely similar to a Notice for Informal Conference. However, for a Notice of
66
Informal Conference, which generally precedes the issuance of an assessment
notice to be valid, the same presupposes that the revenue officer who issued
the same is properly authorized in the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003,
as supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 to
fine tune existing procedures in handing assessments against taxpayers'·
issued LNs by reconciling various revenue issuances which conflict with the
NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to prescribe
procedure in the resolution of LN discrepancies, conversion of LNs to LOAs and
assessment and collection of deficiency taxes.
IV. POLICIES AND GUIDELINES
xxxx
8. In the event a taxpayer who has been issued an LN refutes the
discrepancy shown in the LN, the concerned taxpayer will be given an
opportunity to reconcile its records with those of the BIR within
One Hundred and Twenty (120) days from the date of the issuance of the LN.
However, the subject taxpayer shall no longer be entitled to the abatement of
interest and penalties after the lapse of the sixty (60)-day period from the LN
issuance.
9. In case the above discrepancies remained unresolved at the end of the
One Hundred and Twenty (120)-day period, the revenue officer (RO)
assigned to handle the LN shall recommend the issuance of [LOA) to
replace the LN. The head of the concerned investigating office shall submit a
summary list of LNs for conversion to LAs (using the herein prescribed format in
Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of the
corresponding LAs with the notation "This LA cancels LN_________ No. "
xxxx
V. PROCEDURES
xxxx
B. At the Regional Office/Large Taxpayers Service
xxxx
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the
RDO x x x prior to approval.
8. Upon approval of the above list, prepare/accomplish and sign the
corresponding LAs.
xxxx
Decision 11 G.R. No. 222743
xxxx
10. Transmit the approved/signed LAs, together with the duly
accomplished/approved Summary List of LNs for conversion to LAs, to the
concerned investigating offices for the encoding of the required information x x x
and for service to the concerned taxpayers.
xxxx
C. At the RDO x x x
xxxx
11. If the LN discrepancies remained unresolved within One Hundred and
Twenty (120) days from issuance thereof, prepare a summary list of said LN s
for conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the issuance of
a PAN and FAN against MED ICARD. Therefore no LOA was also served on
MEDICARD. The LN that was issued earlier was also not converted into an LOA
contrary to the above quoted provision. Surprisingly, the CIR did not even
dispute the applicability of the above provision of RMO 32-2005 in the present
case which is clear and unequivocal on the necessity of an LOA for the·
assessment proceeding to be valid. Hence, the CTA's disregard of
MEDICARD's right to due process warrant the reversal of the assailed decision
and resolution.
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the The BIR's RELIEF System has admittedly made the BIR's assessment and
Court said that:
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.30 (Emphasis
and underlining ours)
The Court cannot convert the LN into the LOA required under the law even if the
same was issued by the CIR himself. Under RR No. 12-2002, LN is issued to a
person found to have underreported sales/receipts per data generated under
the RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR's
Voluntary Assessment and Abatement Program. If a taxpayer fails or refuses to
avail of the said program, the BIR may avail of administrative and criminal
.remedies, particularly closure, criminal action, or audit and investigation. Since
the law specifically requires an LOA and RMO No. 32-2005 requires the
conversion of the previously issued LN to an LOA, the absence thereof cannot
be simply swept under the rug, as the CIR would have it. In fact Revenue
Memorandum Circular No. 40-2003 considers an LN as a notice of audit or
investigation only for the purpose of disqualifying the taxpayer from amending
his returns.
The following differences between an LOA and LN are crucial. First, an LOA
addressed to a revenue officer is specifically required under the NIRC before an
examination of a taxpayer may be had while an LN is not found in the NIRC and
is only for the purpose of notifying the taxpayer that a discrepancy is found
based on the BIR's RELIEF System. Second, an LOA is valid only for 30 days
from date of issue while an LN has no such limitation. Third, an LOA gives the
revenue officer only a period of 10days from receipt of LOA to conduct his
examination of the taxpayer whereas an LN does not contain such a
limitation.31 Simply put, LN is entirely different and serves a different purpose
than an LOA. Due process demands, as recognized under RMO No. 32-2005,
that after an LN has serve its purpose, the revenue officer should have properly
secured an LOA before proceeding with the further examination and
assessment of the petitioner. Unfortunarely, this was not done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with
just because none of the financial books or records being physically kept by
MEDICARD was examined. To begin with, Section 6 of the NIRC requires an
authority from the CIR or from his duly authorized representatives before an
examination "of a taxpayer" may be made. The requirement of authorization is
therefore not dependent on whether the taxpayer may be required to physically
open his books and financial records but only on whether a taxpayer is being
subject to examination.
collection efforts much easier and faster. The ease by which the BIR's revenue
generating objectives is achieved is no excuse however for its non-compliance
67
with the statutory requirement under Section 6 and with its own administrative
issuance. In fact, apart from being a statutory requirement, an LOA is equally
needed even under the BIR's RELIEF System because the rationale of
requirement is the same whether or not the CIR conducts a physical
examination of the taxpayer's records: to prevent undue harassment of a
taxpayer and level the playing field between the government' s vast resources
for tax assessment, collection and enforcement, on one hand, and the solitary
taxpayer's dual need to prosecute its business while at the same time
responding to the BIR exercise of its statutory powers. The balance between
these is achieved by ensuring that any examination of the taxpayer by the BIR' s
revenue officers is properly authorized in the first place by those to whom the
discretion to exercise the power of examination is given by the statute.
That the BIR officials herein were not shown to have acted unreasonably is
beside the point because the issue of their lack of authority was only brought up
during the trial of the case. What is crucial is whether the proceedings that led to
the issuance of VAT deficiency assessment against MEDICARD had the prior
approval and authorization from the CIR or her duly authorized representatives.
Not having authority to examine MEDICARD in the first place, the assessment
issued by the CIR is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the
Court still partially finds merit in MEDICARD's substantive arguments.
The amounts earmarked and
eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling
of the CT A Division that the gross receipts of an HMO for VAT purposes shall
be the total amount of money or its equivalent actually received from members
undiminished by any amount paid or payable to the owners/operators of
hospitals, clinics and medical and dental practitioners. MEDICARD explains that
its business as an HMO involves two different although interrelated contracts.
One is between a corporate client and MEDICARD, with the corporate client's
employees being considered as MEDICARD members; and the other is
between the health care institutions/healthcare professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare
institutions/healthcare professionals for the coverage of MEDICARD members
under specific health related services for a specified period of time in exchange
for payment of a more or less fixed membership fee. Under its contract with its
corporate clients, MEDICARD expressly provides that 20% of the membership
68
fees per individual, regardless of the amount involved, already includes the VAT
of 10%/20% excluding the remaining 80o/o because MED ICARD would
earmark this latter portion for medical utilization of its members. Lastly,
MEDICARD also assails CIR's inclusion in its gross receipts of its earnings from
medical services which it actually and directly rendered to its members.
Since an HMO like MEDICARD is primarily engaged m arranging for coverage
or designated managed care services that are needed by plan holders/members
for fixed prepaid membership fees and for a specified period of time, then
MEDICARD is principally engaged in the sale of services. Its VAT base and
corresponding liability is, thus, determined under Section 108(A)32 of the Tax
Code, as amended by Republic Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT
purposes as a dealer in securities whose gross receipts is the amount actually
received as contract price without allowing any deduction from the gross
receipts.33 This restrictive tenor changed under RR No. 16-2005. Under this RR,
an HMO's gross receipts and gross receipts in general were defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its equivalent
representing the service fee actually or constructively received during the
taxable period for the services performed or to be performed for another person,
excluding the value-added tax. The compensation for their services
representing their service fee, is presumed to be the total amount received
as enrollment fee from their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or
its equivalent representing the contract price, compensation, service fee, rental
or royalty, including the amount charged for materials supplied with the services
and deposits applied as payments for services rendered, and advance
payments actually or constructively received during the taxable period for the
services performed or to be performed for another person, excluding the
VAT. 34
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005,
including the definition of gross receipts in general.35
According to the CTA en banc, the entire amount of membership fees should
form part of MEDICARD's gross receipts because the exclusions to the gross
receipts under RR No. 4-2007 does not apply to MEDICARD. What applies to
MEDICARD is the definition of gross receipts of an HMO under RR No. 16-2005
and not the modified definition of gross receipts in general under the RR No. 4- case, MEDICARD's sale of its services is exempt from VAT under Section
2007. 109(G).

The CTA en banc overlooked that the definition of gross receipts under. RR No. The CTA's ruling and CIR's Comment have not pointed to any portion of Section
16-2005 merely presumed that the amount received by an HMO as membership 108 of the NIRC that would extend the definition of gross receipts even to
fee is the HMO's compensation for their services. As a mere presumption, an amounts that do not only pertain to the services to be performed: by another
HMO is, thus, allowed to establish that a portion of the amount it received as person, other than the taxpayer, but even to amounts that were indisputably
membership fee does NOT actually compensate it but some other person, utilized not by MED ICARD itself but by the medical service providers.
which in this case are the medical service providers themselves. It is a well-
settled principle of legal hermeneutics that words of a statute will be interpreted It is a cardinal rule in statutory construction that no word, clause, sentence,
in their natural, plain and ordinary acceptation and signification, unless it is provision or part of a statute shall be considered surplusage or superfluous,
evident that the legislature intended a technical or special legal meaning to meaningless, void and insignificant. To this end, a construction which renders
those words. The Court cannot read the word "presumed" in any other way. every word operative is preferred over that which makes some words idle and
nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat,
It is notable in this regard that the term gross receipts as elsewhere mentioned that is, we choose the interpretation which gives effect to the whole of the
as the tax base under the NIRC does not contain any specific statute – it’s every word.
definition.36 Therefore, absent a statutory definition, this Court has construed the
term gross receipts in its plain and ordinary meaning, that is, gross receipts is In Philippine Health Care Providers, Inc. v. Commissioner of Internal
understood as comprising the entire receipts without any deduction. 37 Congress, Revenue,38the Court adopted the principal object and purpose object in
under Section 108, could have simply left the term gross receipts similarly determining whether the MEDICARD therein is engaged in the business of
undefined and its interpretation subjected to ordinary acceptation,. Instead of insurance and therefore liable for documentary stamp tax. The Court held
doing so, Congress limited the scope of the term gross receipts for VAT therein that an HMO engaged in preventive, diagnostic and curative medical
purposes only to the amount that the taxpayer received for the services it services is not engaged in the business of an insurance, thus:
performed or to the amount it received as advance payment for the services it
will render in the future for another person.
To summarize, the distinctive features of the cooperative are the rendering of
service, its extension, the bringing of physician and patient together, the
In the proceedings ·below, the nature of MEDICARD's business and the extent preventive features, the regularization of service as well as payment, the
of the services it rendered are not seriously disputed. As an HMO, MEDICARD substantial reduction in cost by quantity purchasing in short, getting the
primarily acts as an intermediary between the purchaser of healthcare services medical job done and paid for; not, except incidentally to these features,
(its members) and the healthcare providers (the doctors, hospitals and clinics) the indemnification for cost after .the services is rendered. Except the last,
for a fee. By enrolling membership with MED ICARD, its members will be able to these are not distinctive or generally characteristic of the insurance
avail of the pre-arranged medical services from its accredited healthcare arrangement. There is, therefore, a substantial difference between contracting
providers without the necessary protocol of posting cash bonds or deposits prior in this way for the rendering of service, even on the contingency that it be
to being attended to or admitted to hospitals or clinics, especially during needed, and contracting merely to stand its cost when or after it is
emergencies, at any given time. Apart from this, MEDICARD may also directly rendered.39 (Emphasis ours)
provide medical, hospital and laboratory services, which depends upon its
member's choice.
In sum, the Court said that the main difference between an HMO arid an
insurance company is that HMOs undertake to provide or arrange for the
Thus, in the course of its business as such, MED ICARD members can either provision of medical services through participating physicians while insurance
avail of medical services from MEDICARD's accredited healthcare providers or companies simply undertake to indemnify the insured for medical expenses
directly from MEDICARD. In the former, MEDICARD members obviously knew incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the
that beyond the agreement to pre-arrange the healthcare needs of its value added by the performance of the service by the taxpayer. It is, thus, this
·members, MEDICARD would not actually be providing the actual healthcare service and the value charged thereof by the taxpayer that is taxable under the
service. Thus, based on industry practice, MEDICARD informs its would-be NIRC.
member beforehand that 80% of the amount would be earmarked for medical
utilization and only the remaining 20% comprises its service fee. In the latter

69
To be sure, there are pros and cons in subjecting the entire amount of
membership fees to VAT.40 But the Court's task however is not to weigh these
policy considerations but to determine if these considerations in favor of taxation
can even be implied from the statute where the CIR purports to derive her
authority. This Court rules that they cannot because the language of the NIRC is
pretty straightforward and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation
in the imposition of taxes, not the similar doctrine as applied to tax exemptions.
The rule in the interpretation of tax laws is that a statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax
cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. In
answering the question of who is subject to tax statutes, it is basic that in case
of doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens are not to
be imposed nor presumed to be imposed beyond what statutes expressly and
clearly import. As burdens, taxes should not be unduly exacted nor assumed
beyond the plain meaning of the tax laws. 41 (Citation omitted and emphasis and
underlining ours)
For this Court to subject the entire amount of MEDICARD's gross receipts
without exclusion, the authority should have been reasonably founded from the
language of the statute. That language is wanting in this case. In the scheme of
judicial tax administration, the need for certainty and predictability in the
implementation of tax laws is crucial. Our tax authorities fill in the details that
Congress may not have the opportunity or competence to provide. The
regulations these authorities issue are relied upon by taxpayers, who are certain
that these will be followed by the courts. Courts, however, will not uphold these
authorities' interpretations when dearly absurd, erroneous or improper. 42 The
CIR's interpretation of gross receipts in the present case is patently erroneous
for lack of both textual and non-textual support.
As to the CIR's argument that the act of earmarking or allocation is by itself an
act of ownership and management over the funds, the Court does not
agree.1âwphi1 On the contrary, it is MEDICARD's act of earmarking or
allocating 80% of the amount it received as membership fee at the time of
payment that weakens the ownership imputed to it. By earmarking or allocating
80% of the amount, MEDICARD unequivocally recognizes that its possession of
the funds is not in the concept of owner but as a mere administrator of the
same. For this reason, at most, MEDICARD's right in relation to these amounts
is a mere inchoate owner which would ripen into actual ownership if, and only if,
there is underutilization of the membership fees at the end of the fiscal year.
Prior to that, MEDI CARD is bound to pay from the amounts it had allocated as
70
an administrator once its members avail of the medical services of MEDICARD's
healthcare providers.
Before the Court, the parties were one in submitting the legal issue of whether
the amounts MEDICARD earmarked, corresponding to 80% of its enrollment
fees, and paid to the medical service providers should form part of its gross
receipt for VAT purposes, after having paid the VAT on the amount comprising
the 20%. It is significant to note in this regard that MEDICARD established that
upon receipt of payment of membership fee it actually issued two official
receipts, one pertaining to the VAT able portion, representing compensation for
its services, and the other represents the non-vatable portion pertaining to the
amount earmarked for medical utilization.: Therefore, the absence of an actual
and physical segregation of the amounts pertaining to two different kinds · of
fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption
under the law and from proving that indeed services were rendered by its
healthcare providers for which it paid the amount it sought to be excluded from
its gross receipts.
With the foregoing discussions on the nullity of the assessment on due process
grounds and violation of the NIRC, on one hand, and the utter lack of legal basis
of the CIR's position on the computation of MEDICARD's gross receipts, the
Court finds it unnecessary, nay useless, to discuss the rest of the parties'
arguments and counter-arguments.
In fine, the foregoing discussion suffices for the reversal of the assailed decision
and resolution of the CTA en banc grounded as it is on due process violation.
The Court likewise rules that for purposes of determining the VAT liability of an
HMO, the amounts earmarked and actually spent for medical utilization of its
members should not be included in the computation of its gross receipts.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is
hereby GRANTED. The Decision dated September 2, 2015 and Resolution
dated January 29, 2016 issued by the Court of Tax Appeals en bane in CTA EB
No. 1224 are REVERSED and SET ASIDE. The definition of gross receipts
under Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section
108(A) of the National Internal Revenue Code, as amended by Republic Act No.
9337, for purposes of determining its Value-Added Tax liability, is hereby
declared to EXCLUDE the eighty percent (80%) of the amount of the contract
price earmarked as fiduciary funds for the medical utilization of its members.
Further, the Value-Added Tax deficiency assessment issued against Medicard
Philippines, Inc. is hereby declared unauthorized for having been issued without
a Letter of Authority by the Commissioner of Internal Revenue or his duly
authorized representatives.
SO ORDERED.
 FIRST DIVISION
April 17, 2017 Returns of Final Income Taxes Withheld for the months of March 2001 and
G.R. No. 182582 *
METROPOLITAN BANK & TRUST COMPANY, Petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari 1 is the Decision 2 dated April 21,
2008 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 340, which
affirmed the Decision3 dated August 13, 2007 and the Resolution4 dated
November 14, 2007 of the CTA First Division (CTA Division) in CTA Case No.
6765, and consequently, dismissed petitioner Metropolitan Bank & Trust
Company's (Metrobank) claim for refund on the ground of prescription.
The Facts
On June 5, 1997, Solidbank Corporation (Solidbank) entered into an agreement
with Luzon Hydro Corporation (LHC), whereby the former extended to the latter
a foreign currency denominated loan in the principal amount of
US$123,780,000.00 (Agreement). Pursuant to the Agreement, LHC is bound to
shoulder all the corresponding internal revenue taxes required by law to be
deducted or withheld on the said loan, as well as the filing of tax returns and
remittance of the taxes withheld to the Bureau of Internal Revenue (BIR). On
September 1, 2000, Metrobank acquired Solidbank, and consequently,
assumed the latter's rights and obligations under the aforesaid Agreement. 5
On March 2, 2001 and October 31, 2001, LHC paid Metro bank the total
amounts of US$1,538,122.17
6 and US$1,333,268.31, 7 respectively. Pursuant to the Agreement, LHC
withheld, and eventually paid to the BIR, the ten percent (10%) final tax on the
interest portions of the aforesaid payments, on the same months that the
respective payments were made to petitioner. In sum, LHC remitted a total
ofUS$106,178.69,8 or its Philippine Peso equivalent of ₱5,296,773.05,9 as
evidenced by LHC's Schedules of Final Tax and Monthly Remittance Returns
for the said months. 10
According to Metrobank, it mistakenly remitted the aforesaid amounts to the BIR
as well when they were inadvertently included in its own Monthly Remittance
October 2001. Thus, on December 27, 2002, it filed a letter to the BIR
requesting for the refund thereof. Thereafter and in view of respondent the
Commissioner of Internal Revenue's (CIR) inaction, Metrobank filed its judicial
claim for refund via a petition for review filed before the CTA on September 10,
2003, docketed as CTA Case No. 6765. 11
In defense, the CIR averred that: (a) the claim for refund is subject to
administrative investigation; (b) Metro bank must prove that there was double
payment of the tax sought to be refunded; (c) such claim must be filed within the
prescriptive period laid down by law; (d) the burden of proof to establish the right
to a refund is on the taxpayer; and (e) claims for tax refunds are in the nature of
tax exemptions, and as such, should be construed strictissimi Juris against the
taxpayer. 12
The CTA Division Ruling
In a Decision 13 dated August 13, 2007, the CTA Division denied Metrobank's
claims for refund for lack of merit. 14 It ruled that Metrobank's claim relative to
the March 2001 final tax was filed beyond the two (2)-year prescriptive period. It
pointed out that since Metrobank remitted such payment on April 25, 2001, the
latter only had until April 25, 2003 to file its administrative and judicial claim for
refunds. In this regard, while Metro bank filed its administrative claim well within
the afore said period, or on December 27, 2002, the judicial claim was filed only
on September 10, 2003. Hence, the right to claim for such refund has
prescribed. 15 On the other hand, the CTA Division also denied Metrobank's
claim for refund relative to the October 2001 tax payment for insufficiency of
evidence. 16
Metrobank moved for reconsideration, 17 which was partially granted in a
Resolution18 dated November 14, 2007, and thus, was allowed to present
further evidence regarding its claim for refund for the October 2001 final tax.
However, the CTA Division affirmed the denial of the claim relative to its March
2001 final tax on the ground of prescription. 19 Aggrieved, Metrobank filed a
petition for partial review20 before the CTA En Banc, docketed as C.T.A. EB No.
340.
The CTA En Banc Ruling
In a Decision21 dated April 21, 2008, the CTA En Banc affirmed the CTA
Division's ruling. It held that since Metrobank's March 2001 final tax is in the
nature of a final withholding tax, the two (2)-year prescriptive period was
correctly reckoned by the CTA Division from the time the same was paid on
71
April 25, 2001. As such, Metro bank's claim for refund had already prescribed as
it only filed its judicial claim on September 10, 2003. 22
Hence, this petition.
The Issue Before the Court
The issue for the Court's resolution is whether or not the CTA En Banc correctly
held that Metrobank's claim for refund relative to its March 2001 final tax had
already prescribed.
The Court's Ruling
The petition is without merit.
Section 204 of the National Internal Revenue Code, as amended, 23 provides
the CIR with, inter alia, the authority to grant tax refunds. Pertinent portions of
which read:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund
or Credit Taxes. -The Commissioner may-
xxxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed
without authority, refund the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their
value upon proof of destruction.1âwphi1No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the
payment of the tax or penalty: Provided, however, That a return filed showing
an overpayment shall be considered as a written claim for credit or refund.
(Emphasis and underscoring supplied)
In this relation, Section 229 of the same Code provides for the proper procedure
in order to claim for such refunds, to wit:
Section 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or
proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund
72
or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of
two (2) years from the date of payment of the tax or penalty regardless of
any supervening cause that may arise after payment: Provided,
however, That the Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return upon which payment
was made, such payment appears clearly to have been erroneously paid.
(Emphases and underscoring supplied)
As may be gleaned from the foregoing provisions, a claimant for refund must
first file an administrative claim for refund before the CIR, prior to filing a judicial
claim before the CTA. Notably, both the administrative and judicial claims for
refund should be filed within the two (2)-year prescriptive period indicated
therein, and that the claimant is allowed to file the latter even without waiting for
the resolution of the former in order to prevent the forfeiture of its claim through
prescription. In this regard, case law states that "the primary purpose of filing an
administrative claim [is] to serve as a notice of warning to the CIR that court
action would follow unless the tax or penalty alleged to have been collected
erroneously or illegally is refunded. To clarify, Section 229 of the Tax Code -
then Section 306 of the old Tax Code - however does not mean that the
taxpayer must await the final resolution of its administrative claim for refund,
since doing so would be tantamount to the taxpayer's forfeiture of its right to
seek judicial recourse should the two (2)-year prescriptive period expire without
the appropriate judicial claim being filed."24
In this case, Metrobank insists that the filing of its administrative and judicial
claims on December 27, 2002 and September 10, 2003, respectively, were well-
within the two (2)-year prescriptive period. Citing ACCRA Investments
Corporation v. Court of Appeals,25 CIR v. TMX Sales, Inc.,26 CIR v. Philippine
American Life Insurance, Co., 27 and CIR v. CDCP Mining
Corporation, 28 Metrobank contends that the aforesaid prescriptive period should
be reckoned not from April 25, 2001 when it remitted the tax to the BIR, but
rather, from the time it filed its Final Adjustment Return or Annual Income Tax
Return for the taxable year of 2001, or in April 2002, as it was only at that time
when its right to a refund was ascertained. 29
Metrobank's contention cannot be sustained.
As correctly pointed out by the CIR, the cases cited by Metrobank involved
corporate income taxes, in which the corporate taxpayer is required to file and
pay income tax on a quarterly basis, with such payments being subject to an
adjustment at the end of the taxable year. As aptly put in CIR v.TMX Sales,
Inc., "payment of quarterly income tax should only be considered [as] mere
installments of the annual tax due. These quarterly tax payments which are
computed based on the cumulative figures of gross receipts and deductions in
order to arrive at a net taxable income, should be treated as advances or
portions of the annual income tax due, to be adjusted at the end of the calendar
or fiscal year. x x x Consequently, the two-year prescriptive period x x x should
be computed from the time of filing of the Adjustment Return or Annual Income
Tax Return and final payment of income tax."30 Verily, since quarterly income
tax payments are treated as mere "advance payments" of the annual corporate
income tax, there may arise certain situations where such "advance payments"
would cover more than said corporate taxpayer's entire income tax liability for a
specific taxable year. Thus, it is only logical to reckon the two (2)-year
prescriptive period from the time the Final Adjustment Return or the Annual
Income Tax Return was filed, since it is only at that time that it would be
possible to determine whether the corporate taxpayer had paid an amount
exceeding its annual income tax liability.
On the other hand, the tax involved in this case is a ten percent (10%) final
withholding tax on Metrobank's interest income on its foreign currency
denominated loan extended to LHC. In this regard, Section 2.57 (A) of Revenue
Regulations No. 02-9831 explains the characterization of taxes of this nature, to
wit:
Section 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 on the 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. The payee is not required to file an income tax return
for the particular income.
The finality of the withholding tax is limited only to the payee's income tax
liability on the particular income. It does not extend to the payee's other tax
liability on said income, such as when the said income is further subject to a
percentage tax. For example, if a bank receives income subject to final
withholding tax, the same shall be subject to a percentage tax. (Emphasis and
underscoring supplied)
From the foregoing, it may be gleaned that final withholding taxes are
considered as full and final payment of the income tax due, and thus, are not
subject to any adjustments. Thus, the two (2)-year prescriptive period
commences to run from the time the refund is ascertained, i.e., the date such
73
tax was paid, and not upon the discovery by the taxpayer of the erroneous or
excessive payment of taxes. 32
In the case at bar, it is undisputed that Metrobank's final withholding tax liability
in March 2001 was remitted to the BIR on April 25, 2001. As such, it only had
until April 25, 2003 to file its administrative and judicial claims for refund.
However, while Metrobank's administrative claim was filed on December 27,
2002, its corresponding judicial claim was only filed on September 10, 2003.
Therefore, Metrobank's claim for refund had clearly prescribed.
Finally, the Court finds untenable Metrobank's resort to the principle of solutio
indebiti in support of its position. 33 In CIR v. Manila Electric Company, 34 the
Court rejected the application of said principle to tax refund cases, viz.:
In this regard, petitioner is misguided when it relied upon the six (6)-year
prescriptive period for initiating an action on the ground of quasi contract
or solutio indebiti under Article 1145 of the New Civil Code. There is solutio
indebiti where: (1) payment is made when there exists no binding relation
between the payor, who has no duty to pay, and the person who received the
payment; and (2) the payment is made through mistake, and not through
liberality or some other cause. Here, there is· a binding relation between
petitioner as the taxing authority in this jurisdiction and respondent
MERALCO which is bound under the law to act as a withholding agent of
NORD/LB Singapore Branch, the taxpayer. Hence, the first element
of solutio indebiti is lacking. Moreover, such legal precept is inapplicable
to the present case since the Tax Code, a special law, explicitly provides
for a mandatory period for claiming a refund for taxes erroneously paid.
Tax refunds are based on the general premise that taxes have either been
erroneously or excessively paid. Though the Tax Code recognizes the right of
taxpayers to request the return of such excess/erroneous payments from the
government, they must do so within a prescribed period. Further, "a taxpayer
must prove not only his entitlement to a refund, but also his compliance with the
procedural due process as nonobservance of the prescriptive periods within
which to file the administrative and the judicial claims would result in the denial
of his claim."35 (Emphasis and underscoring supplied)
In sum, the CT A Division and CT A En Banc correctly ruled that Metrobank's
claim for refund in connection with its final withholding tax incurred in March
2001 should be denied on the ground of prescription.
WHEREFORE, the petition is DENIED. The Decision dated April 21, 2008 of the
Court of Tax Appeals En Banc in C.T.A. EB No. 340 is hereby AFFIRMED.
SO ORDERED.

FIRST DIVISION
June 5, 2017 P141 dated December 20, 1994 10for Five Billion Five Hundred Thirteen Million
G.R. No. 175772
MITSUBISHI CORPORATION - MANILA BRANCH, Petitioner
vs
COMMISSIONER OF INTERNAL REVENUE, Respondent
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari 1 are the Decision 2 3 . dated May
24, 2006 and the Resolution dated December 4, 2006 of the Court of Tax
Appeals (CTA) En Banc in C.T.A. EB No. 5, reversing the CTA Division's
ruling 4 in CTA Case No. 6139 which granted the claim for refund of erroneously
paid income tax and branch profit remittance tax (BPRT; collectively, subject
taxes) filed by petitioner Mitsubishi Corporation - Manila Branch (petitioner) for
the fiscal year that ended on March 31, 1998.
The Facts
On June 11, 1987, the governments of Japan and the Philippines executed an
Exchange of Notes, 5 whereby the former agreed to extend a loan amounting to
Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000) to the latter
through the then Overseas Economic Cooperation Fund (OECF, now Japan
Bank for International Cooperation) for the implementation of the Calaca II Coal-
Fired Thermal Power Plant Project (Project). 6 In Paragraph 5 (2) of the
Exchange of Notes, the Philippine Government, by itself or through its executing
agency, undertook to assume all taxes imposed by the Philippines on Japanese
contractors engaged in the Project:
(2) The Government of the Republic of the Philippines will, itself or through its
executing agencies or instrumentalities, assume all fiscal levies or taxes
imposed in the Republic of the Philippines on Japanese firms and nationals
operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and
services of Japanese nationals to be provided under the Loan. 7 (Emphases,
underscoring, and italics supplied)
Consequently, the OECF and the Philippine Government entered into Loan
Agreement No. PH-P76 8 dated September 25, 1987 for Forty Billion Four
Hundred Million Japanese Yen (¥40,400,000,000). Due to the need for
additional funding for the Project, they also executed Loan Agreement No. PH-
9
Japanese Yen (¥5,513,000,000).
Meanwhile, on June 21, 1991, the National Power Corporation (NPC), as the
executing government agency, entered into a contract with Mitsubishi
Corporation (i.e., petitioner's head office in Japan) for the engineering, supply,
construction, installation, testing, and commissioning of a steam generator,
auxiliaries, and associated civil works for the Project (Contract). 11 The
Contract's foreign currency portion was funded by the OECF loans. 12 In line
with the Exchange of Notes, Article VIII (B) (1) of the Contract indicated NPC' s
undertaking to pay any and all forms of taxes that are directly imposable under
the Contract:
Article VIII (B) (1)
B. FOR ONSHORE PORTION.
1.) [The] CORPORATION (NPC) shall, subject to the provisions under the
Contract [Document] on Taxes, pay any and all forms of taxes which are directly
imposable under the Contract including VAT, that may be imposed by the
Philippine Government, or any of its agencies and political
subdivisions. 13(Emphases supplied)
Petitioner completed the project on December 2, 1995, but it was only accepted
by NPC on January 31, 1998 through a Certificate of Completion and Final
Acceptance. 14
On July 15, 1998, petitioner filed its Income Tax Return for the fiscal year that
ended on March 31, 1998 with the Bureau of Internal Revenue (BIR). Petitioner
included in its income tax due 15 the amount of ₱44,288,712.00, representing
income from the OECF-funded portion of the Project. 16 On the same day,
petitioner also filed its Monthly Remittance Return of Income Taxes Withheld
and remitted ₱8,324,100.00 as BPRT for branch profits remitted to its head
office in Japan out of its income for the fiscal year that ended on March 31, 1998
.17
On June 30, 2000, petitioner filed with the respondent Commissioner on Internal
Revenue (CIR) an administrative claim for refund of Fifty Two Million Six
Hundred Twelve Thousand, Eight Hundred Twelve Pesos (P52,612,812.00),
representing the erroneously paid amounts of P44,288,712.00 as income tax
and ₱8,324,100.00 as BPRT corresponding to the OECF-funded portion of the
74
Project. 18 To suspend the running of the two-year period to file a judicial claim
for refund, petitioner filed on July 13, 2000 a petition for review 19 before the
CTA pursuant to Section 229 of the National Internal Revenue Code (NIRC),
which was docketed as C.T.A. Case No. 6139. 20 Petitioner anchored its claim
for refund on BIR Ruling No. DA-407-98 dated September 7, 1998, 21 which
interpreted paragraph 5 (2) of the Exchange of Notes, to wit:
In reply, please be informed that the aforequoted provisions of Notes-NAIA and
Notes-Calaca are not grants of direct tax exemption privilege to Japanese firms,
Mitsubishi in this case, and Japanese nationals operating as suppliers,
contractors or consultants involved in either of the two projects because the said
provisions state that it is the Government of the Republic of the Philippines that
is obligated to pay whatever fiscal levies or taxes they may be liable to. Thus,
there is no tax exemption to speak of because the said taxes shall be assumed
by the Philippine Government; hence, the said provision is not violative of the
Constitutional prohibition against the grants of tax exemption without the
concurrence of the majority of the members of Congress. (Citation omitted)
In view thereof, x x x, this office is of the opinion and hereby holds that
Mitsubishi has no liability for income tax and other taxes and fiscal levies,
including VAT, on the 75% of the NAIA II Project and on the 100% of the foreign
currency portion of the Calaca II Project since the said taxes were assumed by
the Philippine Government.22 (Emphases and underscoring supplied)
In a Decision 23 dated December 17, 2003, the CTA Division granted the petition
and ordered the CIR to refund to petitioner the amounts it erroneously paid as
income tax and BPRT. 24 It held that based on the Exchange of Notes, the
Philippine Government, through the NPC as its executing agency, bound itself
to assume or shoulder petitioner's tax obligations. Therefore, petitioner's
payments of income tax and BPR T to the CIR, when such payments should
have been made by the NPC, undoubtedly constitute erroneous payments
under Section 229 of the NIRC. 25
The CTA Division acknowledged that based on Revenue Memorandum Circular
(RMC) No. 42-99 dated June 2, 1999, amending RMC No. 32-99, the proper
remedy for a Japanese contractor who previously paid the taxes directly to the
BIR is to recover or obtain a refund from the government executing agency - the
NPC in this case. It held, however, that RMC No. 42-99 does not apply to
petitioner as it filed its ITR on July 15, 1998 or almost a year before the
issuance of the same. It added that RMC No. 42-99 cannot be given retroactive
effect as it would be unfair • • 26 to petitioner.
The CIR moved for reconsideration27 but was denied in a Resolution 28 dated
April 23, 2004; thus, the CIR elevated the matter to the CTA En Banc. 29
75
The CTA En Bane's Ruling
In a Decision 30 dated May 24, 2006, the CTA En Banc reversed the CTA
Division's rulings and declared that petitioner is not entitled to a refund of the
taxes it paid to the CIR. It held that, first, petitioner failed to establish that its tax
payments were "erroneous" under the law to justify the refund, adding that the
CIR has no power to grant a refund under Section 229 of the NIRC absent any
tax exemption. It further observed that by its clear terms, the Exchange of Notes
granted no tax exemption to petitioner.31 Second, the Exchange of Notes cannot
be read as a treaty validly granting tax exemption considering the lack of Senate
concurrence as required under Article VII, Section 21 of the
Constitution.32 Third, RMC No. 42-99, which was already in effect when
petitioner filed its administrative claim for refund on June 30, 2000, specifies
petitioner's proper remedy - that is, to recover the subject taxes from NPC, and
not from the CIR.33
Petitioner sought reconsideration, 34 but the CTA En Banc denied the motion in
a Resolution 35 dated December 4, 2006; hence, this petition.
The Issues Before the Court
The issues before the Court are two-fold: (a) whether petitioner is entitled to a
refund; and (b) if in the affirmative, from which government entity should the
refund be claimed.
The Court's Ruling
The petition is meritorious.
I.
Sections 204 (C) of the NIRC grants the CIR the authority to credit or refund
taxes which are erroneously collected by the government: 36
SEC.204. Authority of the Commissioner to Compromise, Abate, and Refund or
Credit Taxes. The Commissioner may –
x x xx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed
without authority, refund the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall
be considered as a written claim for credit or refund.
x x xx (Emphases and underscoring supplied)
The authority of the CIR to refund erroneously collected taxes 1s likewise
reflected in Section 229 of the NIRC, which reads: SEC. 229. Recovery of Tax
Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have
been excessively or in any manner wrongfully collected, until a claim for refund
or credit has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress."
x x x x (Emphases and underscoring supplied)
In this case, it is fairly apparent that the subject taxes in the amount of
₱52,612,812.00 was erroneously collected from petitioner, considering that the
obligation to pay the same had already been assumed by the Philippine
Government by virtue of its Exchange of Notes with the Japanese Government.
Case law explains that an exchange of notes is considered as an executive
agreement, which is binding on the State even without Senate concurrence.
In Abaya v. Ebdane:37
An "exchange of notes" is a record of a routine agreement that has many
similarities with the private law contract. The agreement consists of the
exchange of two documents, each of the parties being in the possession of the
one signed by the representative of the other. Under the usual procedure, the
accepting State repeats the text of the offering State to record its assent. The
signatories of the letters may be government Ministers, diplomats or
departmental heads. The technique of exchange of notes is frequently resorted
to, either because of its speedy procedure, or, sometimes, to avoid the process
of legislative approval.
It is stated that "treaties, agreements, conventions, charters, protocols,
declarations, memoranda of understanding, modus vivendi and exchange of
notes" all refer to "international instruments binding at international law."
xxxx
76
Significantly, an exchange of notes is considered a form of an executive
agreement, which becomes binding through executive action without the need
of a vote by the Senate or Congress. 38
Paragraph 5 (2) of the Exchange of Notes provides for a tax assumption
provision whereby:
(2) The Government of the Republic of the Philippines will, itself or through its
executing agencies or instrumentalities, assume all fiscal levies or taxes
imposed in the Republic of the Philippines on Japanese firms and nationals
operating as suppliers, contractors or consultants on and/or in connection
with any income that may accrue from the supply of products of Japan and
services of Japanese nationals to be provided under the Loan. (Emphases and
underscoring supplied)
To "assume" means "[t]o take on, become bound as another is bound, or put
oneself in place of another as to an obligation or liability." 39 This means that the
obligation or liability remains, although the same is merely passed on to a
different person. In this light, the concept of an assumption is therefore different
from an exemption, the latter being the "[f]reedom from a duty, liability or other
requirement" or "[a] privilege given to a judgment debtor by law, allowing the
debtor to retain [a] certain property without liability."40 Thus, contrary to the
CTA En Bane's opinion, the constitutional provisions on tax exemptions would
not apply.
As explicitly worded, the Philippine Government, through its executing
agencies (i.e., NPC in this case) particularly assumed "all fiscal levies or taxes
imposed in the Republic of the Philippines on Japanese firms and nationals
operating as suppliers, contractors or consultants on and/or in connection with
any income that may accrue from the supply of products of Japan and services
of Japanese nationals to be provided under the [OECF] Loan." The Philippine
Government's assumption of "all fiscal levies and taxes," which includes the
subject taxes, is clearly a form of concession given to Japanese suppliers,
contractors or consultants in consideration of the OECF Loan, which proceeds
were used for the implementation of the Project. As part of this, NPC entered
into the June 21, 1991 Contract with Mitsubishi Corporation (i.e., petitioner's
head office in Japan) for the engineering, supply, construction, installation,
testing, and commissioning of a steam generator, auxiliaries, and associated
civil works for the Project,41which foreign currency portion was funded by the
OECF loans. 42 Thus, in line with the tax assumption provision under the
Exchange of Notes, Article VIII (B) (1) of the Contract states that NPC shall pay
any and all forms of taxes that are directly imposable under the Contract:
Article VIII (B) (1)
B. FOR ONSHORE PORTION.
1.) [The] CORPORATION (NPC) shall, subject to the provisions under the
Contract [Document] on Taxes, pay any and all forms of taxes which are directly
imposable under the Contract including VAT, that may be imposed by the
Philippine Government, or any of its agencies and political
subdivisions.43(Emphases supplied)
This notwithstanding, petitioner included in its income tax due the amount of
₱44,288,712.00, representing income from the OECF-funded portion of the
Project, and further remitted ₱8,324,100.00 as BPRT for branch profits remitted
to its head office in Japan out of its income for the fiscal year that ended on
March 31, 1998.45 These taxes clearly fall within the ambit of the tax assumption
provision under the Exchange of Notes, which was further fleshed out in the
Contract. Hence, it is the Philippine Government, through the NPC, which
should shoulder the payment of the same.
It bears stressing that the CIR had already acknowledged, through its
administrative issuances, that Japanese contractors involved in the Project are
not liable for the subject taxes. In RMC No. 42-99, the CIR interpreted the effect
of the tax assumption clause in the Exchange of Notes on petitioner's tax
liability, to wit:
The foregoing provisions of the Exchange of Notes mean that the Japanese
contractors or nationals engaged in EOCF-funded projects in the
Philippines shall not be required to shoulder all fiscal levies or taxes associated
with the project. x x xx
x x xx
x x x Since the executing government agencies are mandated to assume the
payment of [income taxes] under the Exchange of Notes, the said Japanese
firms or nationals need not pay taxes due thereunder.46 (Emphases and
underscoring supplied)
The CIR subsequently affirmed petitioner's non-liability for taxes and entitlement
to tax refunds by issuing Revenue Memorandum Order (RMO) No. 24-
200547 addressed to specified BIR offices. The RMO provides:
Pursuant to the provisions of [RMC] No. 32-99 as amended by RMC No. 42-99,
Japanese contractors and nationals engaged in OECF funded projects in the
Philippines shall not be required to shoulder the fiscal levies or taxes associated
with the project. Thus, the concerned Japanese contractors are entitled to claim
for the refund of all taxes paid and shouldered by them relative to the conduct of
the Project.
77
You are, therefore, directed to expedite/ prioritize the processing of the claims
for refund of Japanese contractors and nationals so [as] not to delay and
jeopardize the release of the funds for OECF funded projects. 48 (Emphases and
underscoring supplied)
Therefore, considering that petitioner paid the subject taxes in the aggregate
amount of ₱52,612,812.00, which it was not required to pay, the BIR
erroneously collected such amount. Accordingly, petitioner is entitled to its
refund.
As above-stated, the NIRC vests upon the CIR, being the head of the BIR, the
authority to credit or refund taxes which are erroneously collected by the
government. This specific statutory mandate cannot be overridden by averse
interpretations made through mere administrative issuances, such as RMC No.
42-99, which - as argued by the CIR - shifts to the executing agencies
(particularly, NPC in this case) the power to refund the subject taxes: 49
B) INCOME TAX
1. Japanese firms or nationals operating as suppliers, contractors or consultants
on and/or in connection with any income that accrue from the supply of products
and/or services to be provided under the Project Loan, shall file the prescribed
income tax returns. Since the executing government agencies are mandated to
assume the payment thereof under the Exchange of Notes, the said Japanese
firms or nationals need not pay taxes thereunder.
2. The concerned Revenue District Officer shall, in turn, collect the said income
taxes from the concerned executing government agencies.1âwphi1
3. In cases where income taxes were previously paid directly by the Japanese
contractors or nationals, the corresponding cash refund shall be recovered from
the government executing agencies upon the presentation of proof of payment
by the Japanese contractors or nationals." (Emphasis and underscoring
supplied)
3. In cases where income taxes were previously paid directly by the Japanese
contractors or nationals, the corresponding cash refund shall be recovered from
the government executing agencies upon the presentation of proof of payment
by the Japanese contractors or nationals. 50 (Emphasis and underscoring
supplied)
A revenue memorandum circular is an administrative ruling issued by the CIR to
interpret tax laws. It is widely accepted that an interpretation by the executive
officers, whose duty is to enforce the law, is entitled to great respect from the
courts. However, such interpretation is not conclusive and will be disregarded if
judicially found to be incorrect.51 Verily, courts will not tolerate administrative
issuances that override, instead of remaining consistent and in harmony with,
the law they seek to implement,52 as in this case. Thus, Item B (3) of RMC No.
42-99, an administrative issuance directing petitioner to claim the refund from
NPC, cannot prevail over Sections 204 and 229 of the NIRC, which provide that
claims for refund of erroneously collected taxes must be filed with the CIR.

All told, petitioner correctly filed its claim for tax refund under Sections 204 and
229 of the NIRC to recover the erroneously paid taxes amounting to
₱44,288,712.00 as income tax and ₱8,324,100.00 as BPRT from the BIR. To
reiterate, petitioner's entitlement to the refund is based on the tax assumption
provision in the Exchange of Notes. Given that this is a case of tax assumption
and not an exemption, the BIR is, therefore, not without recourse; it can properly
collect the subject taxes from the NPC 53 as the proper party that assumed
petitioner's tax liability.

WHEREFORE, the petition is GRANTED. The Decision dated May 24, 2006
and the Resolution dated December 4, 2006 of the Court of Tax Appeals
(CTA) En Banc in C.T.A. EB No. 5 are hereby REVERSED and SET ASIDE.
The Decision dated December 17, 2003 of the CTA in C.T.A. Case No. 6139 is
REINSTATED.

SO ORDERED.

78