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FIRST DIVISION 20% Interest Per Annum (4/15/06-

19,995,151.71
[ G.R. No. 203514, February 13, 2017 ] 4/15/08)

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. ST. Compromise Penalty for Late
25,000.00
LUKE'S MEDICAL CENTER, INC., RESPONDENT. Payment
DECISION Total increments 32,500,025.81
DEL CASTILLO, J.:
Total Amount Due P82,419,522.21
The doctrine of stare decisis dictates that "absent any powerful countervailing
considerations, like cases ought to be decided alike." For Taxable Year 2006:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court ASSESSMENT NO. QA-07-000097
assails the May 9, 2012 Decision and the September 17, 2012 Resolution of PARTICULARS [AMOUNT]
the Court of Tax Appeals (CTA) in CTA EB Case No. 716.
Sales/Revenues/Receipts/Fees P3,815,922,240.00
Factual Antecedents
On December 14, 2007, respondent St. Luke's Medical Center, Inc. (SLIVIC) Less: Cost of Sales/Service 2,760,518,437.00
received from the Large Taxpayers Service-Documents Processing and Quality Gross Income From Operation 1,055,403,803.00
Assurance Division of the Bureau of Internal Revenue (BIR) Audit
Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097, assessing Add: Non-Operating & Other
-
respondent SLMC deficiency income tax under Section 27(B) of the 1997 Income
National Internal Revenue Code (NIRC), as amended, for taxable year 2005 in
Total Gross Income 1,055,403,803.00
the amount of P78,617,434.54 and for taxable year 2006 in the amount of
P57,119,867.33. Less: Deductions 640,147,719.00
On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Net Income Subject to Tax 415,256,084.00
Revenue (CIR) an administrative protest assailing the assessments. SLMC
claimed that as a non-stock, non-profit charitable and social welfare X Tax Rate 10%
organization under Section 30(E) and (G) of the 1997 NIRC, as amended, it is
Tax Due 41,525,608.40
exempt from paying income tax.
On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Less: Tax Credits -
Disputed Assessment dated April 9, 2008 increasing the deficiency income for Deficiency Income Tax 41,525,608.40
the taxable year 2005 tax to P82,419,522.21 and for the taxable year 2006 to
P60,259,885.94, computed as follows: Add: Increments -
For Taxable Year 2005: 25% Surcharge 10,381,402.10
ASSESSMENT NO. QA-07-000096
20% Interest Per Annum
8,327,875.44
PARTICULARS AMOUNT (4/15/07-4/15/08)

Sales/Revenues/Receipts/Fees P3,623,511,616.00 Compromise Penalty for Late

25,000.00
Payment
Less: Cost of Sales/Services 2,643,049,769.00
Total increments 18,734,277.54
Gross Income From Operation 980,461,847.00
Total Amount Due P60,259,885.94
Add: Non-Operating & Other
- Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,
Income
docketed as CTA Case No. 7789.
Total Gross Income 980,461,847.00
Ruling of the Court of Tax Appeals Division
Less: Deductions 481,266,883.00 On August 26, 2010, the CTA Division rendered a Decision finding SLMC not
Net Income Subject to Tax 499,194,964.00 liable for deficiency income tax under Section 27(B) of the 1997 NIRC, as
amended, since it is exempt from paying income tax under Section 30(E) and
X Tax Rate 10% (G) of the same Code. Thus:

Tax Due 49,919,496.40 WHEREFORE, premises considered, the Petition for Review
is hereby GRANTED. Accordingly, Audit Results/Assessment
Less: Tax Credits - Notice Nos. QA-07-000096 and QA-07-000097, assessing
Deficiency Income Tax 49,919,496.40 petitioner for alleged deficiency income taxes for the taxable
years 2005 and 2006, respectively, are hereby CANCELLED
Add: Increments and SET ASIDE.

25% Surcharge 12,479,874.10 SO ORDERED.


CIR moved for reconsideration but the CTA Division denied the same in its
December 28, 2010 Resolution.
This prompted CIR to file a Petition for Review before the CTA En Banc.
Ruling of the Court of Tax Appeals En Banc
On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside
of the Audit Results/Assessment Notices issued against SLMC. It sustained
the findings of the CTA Division that SLMC complies with all the requisites
under Section 30(E) and (G) of the 1997 NIRC and thus, entitled to the tax
exemption provided therein.
On September 17, 2012, the CTA En Banc denied CIR's Motion for
Reconsideration.
Issue
Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court
contending that the CTA erred in exempting SLMC from the payment of
income tax.
Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R.
Nos. 195909 and 195960, entitled Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc., finding SLMC not entitled to the tax exemption
under Section 30(E) and (G) of the NIRC of 1997 as it does not operate
exclusively for charitable or social welfare purposes insofar as its revenues
from paying patients are concerned. Thus, the Court disposed of the case in
this manner:
WHEREFORE, the petition of the Commissioner of Internal
Revenue in G.R. No. 195909 is PARTLY GRANTED. The
Decision of the Court of Tax Appeals En Banc dated 19
November 2010 and its Resolution dated 1 March 2011 in
CTA Case No. 6746 are MODIFIED. St Luke's Medical
Center, Inc. is ORDERED TO PAY the deficiency income tax
in 1998 based on the 10% preferential income tax rate under
Section 27(B) of the National h1ternal Revenue Code.
However, it is not liable for surcharges and interest on such
deficiency income tax under Sections 248 and 249 of the
National Internal Revenue Code. All other parts of the
Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No.
195960 is DENIED for violating Section I, Rule 45 of the
Rules of Court.
SO ORDERED.
Considering the foregoing, SLMC then filed a Manifestation and Motion
informing the Court that on April 30, 2013, it paid the BIR the amount of basic
taxes due for taxable years 1998, 2000-2002, and 2004-2007, as evidenced by
the payment confirmation from the BIR, and that it did not pay any surcharge,
interest, and compromise penalty in accordance with the above-mentioned
Decision of the Court. In view of the payment it made, SLMC moved for the
dismissal of the instant case on the ground of mootness.
CIR opposed the motion claiming that the payment confirmation submitted by
SLMC is not a competent proof of payment as it is a mere photocopy and does
not even indicate the quarter/s and/or year/s said payment covers.
In reply, SLMC submitted a copy of the Certification issued by the Large
Taxpayers Service of the BIR dated May 27, 2013, certifying that, "[a]s far as
the basic deficiency income tax for taxable years 2000, 2001, 2002, 2004,
2005, 2006, 2007 are concerned, this Office considers the cases closed due to
the payment made on April 30, 2013." SLMC likewise submitted a letter from
the BIR dated November 26, 2013 with attached Certification of Payment and
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application for abatement, which it earlier submitted to the Court in a related
case, G.R. No. 200688, entitled Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.
Thereafter, the parties submitted their respective memorandum.
CIR's Arguments
CIR argues that under the doctrine of stare decisis SLMC is subject to 10%
income tax under Section 27(B) of the 1997 NIRC. It likewise asserts that
SLMC is liable to pay compromise penalty pursuant to Section 248(A) of the
1997 NIRC for failing to file its quarterly income tax returns.
As to the alleged payment of the basic tax, CIR contends that this does not
render the instant case moot as the payment confirmation submitted by SLMC
is not a competent proof of payment of its tax liabilities.
SLMC's Arguments
SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling
in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.) positing that earning a profit by a charitable,
benevolent hospital or educational institution does not result in the withdrawal
of its tax exempt privilege. SLMC further claims that the income it derives
from operating a hospital is not income from "activities conducted for profit."
Also, it maintains that in accordance with the ruling of the Court in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.), it is not liable for compromise penalties.
In any case, SLMC insists that the instant case should be dismissed in view of
its payment of the basic taxes due for taxable years 1998, 2000-2002, and
2004-2007 to the BIR on April 30, 2013.
Our Ruling
SLMC is liable for income tax under Section 27(B) of the 1997 NIRC
insofar as its revenues from paying patients are concerned.
The issue of whether SLMC is liable for income tax under Section 27(B) of
the 1997 NIRC insofar as its revenues from paying patients are concerned has
been settled in G.R. Nos. 195909 and 195960 (Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.), where the Court ruled that:
xxx We hold that Section 27(B) of the NIRC does not remove
the income tax exemption of proprietary non-profit hospitals
under Section 30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the other hand, can be construed
together without the removal of such tax exemption. The effect
of the introduction of Section 27(B) is to subject the taxable
income of two specific institutions, namely, proprietary non-
profit educational institutions and proprietary non-profit
hospitals, among the institutions covered by Section 30, to the
10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of
Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate
on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary
and non-profit. 'Proprietary' means private, following the
definition of a 'proprietary educational institution' as 'any
private school maintained and administered by private
individuals or groups' with a government permit. 'Non-profit'
means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset

devoted to the institution's purposes and all its activities
conducted not for profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector
of Internal Revenue v. Club Filipino, Inc. de Cebu, this Court
considered as non-profit a sports club organized for recreation
and entertainment of its stockholders and members. The club
was primarily funded by membership fees and dues. If it had
profits, they were used for overhead expenses and improving
its golf course. The club was non-profit because of its purpose
and there was no evidence that it was engaged in a profit-
making enterprise.
The sports club in Club Filipino, Inc. de Cebu may be non-
profit, but it was not charitable. The Court defined 'charity' in
Lung Center of the Philippines v. Quezon City as 'a gift, to be
applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by
assisting them to establish themselves in life or [by] otherwise
lessening the burden of government.' A non-profit club for the
benefit of its members fails this test. An organization may be
considered as non-profit if it does not distribute any part of its
income to stockholders or members. However, despite its
being a tax exempt institution, any income such institution
earns from activities conducted for profit is taxable, ad
expressly provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must
meet the substantive test of charity in Lung Center. The issue
in Lung Center concerns exemption from real property tax and
not income tax. However, it provides for the test of charity in
our jurisdiction. Charity is essentially a gift to an indefinite
number of persons which lessens the burden of government. In
other words, charitable institutions provide for free goods and
services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to
address public needs, because certain private entities already
assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public
works which would have been funded by appropriations from
the Treasury.
Charitable institutions, however, are not ipso facto entitled to a
tax exemption. The requirements for a tax exemption are
specified by the law granting it. The power of Congress to tax
implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that '[n]o
law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of Congress.'
The requirements for a tax exemption are strictly construed
against tl1e taxpayer because an exemption restricts the
collection of taxes necessary for the existence of the
government.
The Court in Lung Center declared that the Lung Center of the
Philippines is a charitable institution for the purpose of
exemption from real property taxes. This ruling uses the same
premise as Hospital de San Juan and Jesus Sacred Heart
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College which says that receiving income from paying patients
does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution
does not lose its character as such and its
exemption from taxes simply because it
derives income from paying patients, whether
outpatient, or confined in the hospital, or
receives subsidies from the government, so
long as the money received is devoted or used
altogether to the charitable object which it is
intended to achieve; and no money inures to
the private benefit of the persons managing or
operating the institution.
For real property taxes, the incidental generation of income is
permissible because the test of exemption is the use of the
property. The Constitution provides that '[c]haritable
institutions, churches and personages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.' The test of exemption
is not strictly a requirement on the intrinsic nature or character
of the institution. The test requires that the institution use
property in a certain way, i.e., for a charitable purpose. Thus,
the Court held that the Lung Center of the Philippines did not
lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that
portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real
property taxes. In the NIRC, Congress decided to extend the
exemption to income taxes. However, the way Congress
crafted Section 30(E) of the NIRC is materially different from
Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt
from income tax. On the other hand, Section 28(3), Article VI
of the Constitution does not define a charitable institution, but
requires that the institution 'actually, directly and exclusively'
use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable
institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific
person.
Thus, both the organization and operations of the charitable
institution must be devoted 'exclusively' for charitable
purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-
laws and other constitutive documents. Section 30(E) of the
NIRC specifically requires that the corporation or association
be non-stock, which is defined by the Corporation Code as
'one where no part of its income is distributable as dividends to
its members, trustees, or officers' and that any profit

'obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used tor the furtherance of the purpose
or purposes for which the corporation was organized.'
However, under Lung Center, any profit by a charitable
institution must not only be plowed back 'whenever necessary
or proper,' but must be 'devoted or used altogether to the
charitable object which it is intended to achieve.'
The operations of the charitable institution generally refer to
its regular activities. Section 30(E) of the NIRC requires that
these operations be exclusive to charity. There is also a
specific requirement that 'no part of [the] net income or asset
shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.' The use of lands,
buildings and improvements of the institution is but a part of
its operations.
There is no dispute that St. Luke's is organized as a non-stock
and non profit charitable institution. However, this does not
automatically exempt St Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso
facto tax exempt To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property 'actually, directly and
exclusively' for charitable purposes. To be exempt from
income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be 'organized and operated
exclusively' for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that
the institution be 'operated exclusively' for social welfare.
However, the last paragraph of Section 30 of the NIRC
qualifies the words 'organized and operated exclusively' by
providing that:
Notwithstanding the provisions in the
preceding paragraphs, the income of whatever
kind and character of the foregoing
organizations from any of their properties, real
or personal, or from any of their activities
conducted for profit regardless of the
disposition made of such income, shall be
subject to tax imposed under this Code.
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts 'any' activity for profit,
such activity is not tax exempt even as its not-for-profit
activities remain tax exempt. This paragraph qualifies the
requirements in Section 30(E) that the [n]on-stock corporation
or association [must be] organized and operated exclusively
for . . . charitable . . . purposes . . . It likewise qualifies the
requirement in Section 30(G) that the civic organization must
be 'operated exclusively' for the promotion of social welfare.
Thus, even if the charitable institution must be 'organized and
operated exclusively' for charitable purposes, it is nevertheless
allowed to engage in 'activities conducted for profit' without
losing its tax exempt status for its not for profit activities. The
only consequence is that the 'income of whatever kind and
character' of a charitable institution 'from any of its activities
conducted for profit, regardless of the disposition made of
such income, shall be subject to tax.' Prior to the introduction
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of Section 27(B), the tax rate on such income from for profit
activities was the ordinary corporate rate under Section 27(A).
With the introduction of Section 27(B), the tax rate is now
10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from
services to paying patients. It cannot be disputed that a hospital
which receives approximately P1.73 billion from paying
patients is not an institution 'operated exclusively' for
charitable purposes. Clearly, revenues from paying patients are
income received from 'activities conducted for profit.' Indeed,
St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared P1,730,367,965 as 'Revenues
from Services to Patients' in contrast to its 'Free Services'
expenditure of P218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following 'calculation' to
support its claim that 65.20% of its 'income after expenses was
allocated to free or charitable services' in 1998.
xxxx
In Lung Center, this Court declared
'[e]xclusive' is defined as possessed and
enjoyed to the exclusion of others; debarred
from participation or enjoyment; and
'exclusively' is defined, 'in a manner to
exclude; as enjoying a privilege exclusively.' ...
The words 'dominant use' or 'principal use'
cannot be substituted for the words 'used
exclusively' without doing violence to the
Constitution and the law. Solely is
synonymous with exclusively.
The Court cannot expand the meaning of the words 'operated
exclusively' without violating the NIRC. Services to paying
patients are activities conducted for profit. They cannot be
considered any other way. There is a 'purpose to make profit
over and above the cost' of services. The P1.73 billion total
revenues :from paying patients is not even incidental to St.
Luke's charity expenditure of P218,187,498 for non-paying
patients.
St Luke's claims that its charity expenditure of P218,187,498
is 65.20% of its operating income in 1998. However, if a part
of the remaining 34.80% of the operating income is reinvested
in property, equipment or facilities used for services to paying
and non-paying patients, then it cannot be said that the income
is 'devoted or used altogether to the charitable object which it
is intended to achieve.' The income is plowed back to the
corporation not entirely for charitable purposes, but for profit
as well. In any case, the last paragraph of Section 30 of the
NIRC expressly qualifies that income from activities for profit
is taxable 'regardless of the disposition made of such income.
Jesus Sacred Heart College declared that there is no official
legislative record explaining the phrase 'any activity conducted
for profit.' However, it quoted a deposition of Senator Mariano
Jesus Cuenco, who was a member of the Committee of
Conference for the Senate, which introduced the phrase 'or
from any activity conducted for profit.'
P. Cuando ha hablado de la Universidad de
Santo Tomas que tiene un hospital, no cree Vd.

que es una actividad esencial dicho hospital
para el funcionamiento del colegio de
medicina de medicina de dicha universidad?
xxx xxx xxx
R. Si el hospital se limita a recibir enformos pobres, mi
contestacion seria afirmativa; pero considerando que el
hospital tiene cuartos de pago, y a los mismos generalmente
van enformos de buena posicion social economica, lo que se
paga por estos enformos debe estar sujeto a 'income tax', y es
una de las razones que hemos tenido para insertar las palabras
o frase 'or from any activity conducted for profit.'
The question was whether having a hospital is essential to an
educational institution like the College of Medicine of the
University of Santo Tomas. Senator Cuenco answered that if
the hospital has paid rooms generally occupied by people of
good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted
the phrase 'or any activity conducted for profit.'
The question in Jesus Sacred Heart College involves an
educational institution. However, it is applicable to charitable
institutions because Senator Cuenco's response shows an intent
to focus on the activities of charitable institutions. Activities
for profit should not escape the reach of taxation. Being a non-
stock and non-profit corporation does not, by this reason alone,
completely exempt an institution from tax. An institution
cannot use its corporate form to prevent its profitable activities
from being taxed.
The Court finds that St. Luke's is a corporation that is not
'operated exclusively' for charitable or social welfare purposes
insofar as its revenues from paying patients are C.Qncemed.
This ruling is bacred not only on a strict interpretation of a
provision granting tax exemption, but also on the clear and
plain text of Section 30(E) and (G). Section 30(E) and (G) of
the NIRC requires that an institution be 'operated exclusively'
for charitable or social welfare purposes to be completely
exempt from income tax. An institution tmder Section 30(E) or
(G) does not lose its tax exemption if it earns income from its
for-profit activities. Such income from for-profit activities,
tmder the last paragraph of Section 30, is merely subject to
income tax, previously at the ordinary corporate rate but now
at the preferential tO% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the
State because an exempt institution is spared from sharing in
the expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be
limited to institutions beneficial to the public and those which
improve social welfare. A profit-making entity should not be
allowed to exploit this subsidy to the detriment of the
government and other taxpayers
St. Luke's fails to meet the requirements tmder Section 30(E)
and (G) of the NlRC to be completely tax exempt from all its
income. However, it remains a proprietary non-profit hospital
tmder Section 27(B) of the NIRC as long as it does not
distribute any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St. Luke's, as a
proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities
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St. Luke's is therefore liable for deficiency income tax in 1998
tmder Section 27(B) of the NIRC. However, St. Luke's has
good reasons to rely on the letter dated 6 June 1990 by the
BIR, which opined that St. Luke's is 'a corporation for purely
charitable and social welfare purposes' and thus exempt from
income tax. In Michael J. Lhuillier, Inc. v. Commissioner of
Internal Revenue, the Court said that 'good faith and honest
belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the
tax law, are sufficient justification to delete the imposition of
surcharges and interest.'
A careful review of the pleadings reveals that there is no countervailing
consideration for the Court to revisit its aforequoted ruling in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.). Thus, under the doctrine of stare decisis, which states that
"[o]nce a case has been decided in one way, any other case involving exactly
the same point at issue xxx should be decided in the same manner," the Court
finds that SLMC is subject to 10% income tax insofar as its revenues from
paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax,
Section 30(E) and (G) of the 1997 NIRC requires said institution to operate
exclusively for charitable or social welfare purpose. But in case an exempt
institution under Section 30(E) or (G) of the said Code earns income from its
for-profit activities, it will not lose its tax exemption. However, its income
from for profit activities will be subject to income tax at the preferential 10%
rate pursuant to Section 27(B) thereof.
SLMC is not liable for Compromise Penalty.
As to whether SLMC is liable for compromise penalty under Section 248(A)
of the 1997 NIRC for its alleged failure to file its quarterly income tax returns,
this has also been resolved in G.R. Nos. 195909 and 195960 (Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc.), where the imposition of
surcharges and interest under Sections 248 and 249 of the 1997 NIRC were
deleted on the basis of good faith and honest belief on the part SLMC that it is
not subject to tax. Thus, following the ruling of the Court in the said case,
SLMC is not liable to pay compromise penalty under Section 248(A) of the
1997 NIRC.
The Petition is rendered moot by the payment made by SLMC on April 30,
2013.
However, in view of the payment of the basic taxes made by SLMC on April
30, 2013, the instant Petition has become moot.
While the Court agrees with the CIR that the payment confirmation from the
BIR presented by SLMC is not a competent proof of payment as it does not
indicate the specific taxable period the said payment covers, the Court fmds
that the Certification issued by the Large Taxpayers Service of the BIR dated
May 27, 2013, and the letter from the BIR dated November 26, 2013 with
attached Certification of Payment and application for abatement are sufficient
to prove payment especially since CIR never questioned the authenticity of
these documents. In fact, in a related case, G.R. No. 200688, entitled
Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc., the Court
dismissed the petition based on a letter issued by CIR confirming SLMC's
payment of taxes, which is the same letter submitted by SLMC in the instant
case.
In fine, the Court resolves to dismiss the instant Petition as the same has been
rendered moot by the payment made by SLMC of the basic taxes for the
taxable years 2005 and 2006, in the amounts of P49,919,496.40 and
P41,525,608.40, respectively.

WHEREFORE, the Petition is hereby DISMISSED.
SO ORDERED.
Sereno, C. J., (Chairperson), Leonardo-De Castro, Perlas-Bernabe, and
Caguioa, JJ., concur.
SECOND DIVISION
[ G.R. No. 221590, February 22, 2017 ]
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 Decision and the November 6, 2015 Resolution of the Court of Tax
Appeals (CTA) En Banc in CTA EB No. 1191, which affirmed the April 2,
2014 Decision 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.
Asalus filed its Letter-Reply, dated December 29, 2010, questioning the basis
of Bañares' computation for its VAT liability.
On January 10, 2011, petitioner Commissioner of Internal Revenue (CIR)
issued the Preliminary Assessment Notice (PAN) finding Asalus liable for
deficiency VAT for 2007 in the aggregate amount of P413,378,058.11,
inclusive of surcharge and interest. Asalus filed its protest against the PAN but
it was denied by the CIR.
On August 26, 2011, Asalus received the Formal Assessment Notice (FAN)
stating that it was liable for deficiency VAT for 2007 in the total amount of
P95,681,988.64, inclusive of surcharge and interest. Consequently, it filed its
protest against the FAN, dated September 6, 2011. Thereafter, Asalus filed a
supplemental protest stating that the deficiency VAT assessment had
prescribed pursuant to Section 203 of the National Internal Revenue Code
(NIRC).
On October 16, 2012, Asalus received the Final Decision on Disputed
Assessment (FDDA) showing VAT deficiency for 2007 in the aggregate
amount of P106,761,025.17, inclusive of surcharge and interest and
P25,000.00 as compromise penalty. As a result, it filed a petition for review
before the CTA Division.
The CTA Division Ruling
In its April 2, 2014 Decision, the CTA 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.
6 of 40
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, 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.
SO ORDERED.
The CIR moved for reconsideration but its motion was denied.
The CTA En Banc Ruling
In its July 30, 2015 Decision, the CTA En Banc sustained the assailed decision
of the CTA Division and dismissed the petition for review filed by the CIR. It
explained that there was nothing in the FAN and the FDDA that would
indicate the non-application of the three (3) year prescriptive period under
Section 203 of the NIRC. It found that the CIR did not present any evidence
during the trial to 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.
The CTA En Banc further explained that the PAN alone could not be used as a
basis because it was not the assessment contemplated by law. Consequently,
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.
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
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.
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 (lO)-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.
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 iin 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, 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 CTA 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 state the applicability of the ten-year prescriptive period and the
bases thereof 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."
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, dated August 15, 2016, the CIR argued that the findings of the
CTA 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."
The Court's Ruling
There is merit in the petition.
It is true that the findings of fact of the CTA are, as a rule, respected by the
Court, but they can be set aside in exceptional cases. In Barcelon, Roxas
Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of
Internal Revenue, this Court in Toshiba Information Equipment (Phils.), Inc. v.
Commissioner of Internal Revenue, explicitly pronounced —
7 of 40
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 Appeals [G.R. No. 122605,
30 April 2001, 357 SCRA 441, 445-446], this Court recognizes
that the Court of Tax Appeals, which by the very nature of its
function is dedicated exclusively to the consideration of tax
problems, has necessarily developed an expertise on the
subject, and its conclusions will not 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
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 convincing proof to the contrary, this
Court must presume that the CTA rendered a decision which is
valid in every respect. [Emphasis supplied]
After a review of the records and applicable laws and jurisprudence, the Court
finds that the CTA erred in concluding that the assessment against Asalus had
prescribed.
Generally, internal revenue taxes shall be assessed within three (3) years after
the last day prescribed by law for the filing of the return, or where the return is
filed beyond the period, from the day the return was actually filed. Section 222
of the NIRC, however, provides for exceptions to the general rule. It states that
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
discovery of the falsity, fraud or omission.
In the oft-cited Aznar v. CTA, the Court compared a false return to a fraudulent
return in relation to the applicable prescriptive periods for assessments, to wit:
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."
xxxx
xxx 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
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 seggregates 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
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 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. (Emphasis
supplied)
Thus, a mere showing that the returns filed by the taxpayer were false,
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
NIRC.
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, 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.
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 VAT able 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 the falsity of the return and to prove that it had filed accurate returns. Its
failure to overcome the same warranted the application of the ten (lO)-year
prescriptive 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
8 of 40
that 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 as provided
under Section 203 of the 1997 National Internal Revenue Code (NIRC) is not
applicable xxx but rather to the ten (10) year prescriptive period pursuant to
Section 222(A) of the tax code xxx." In Samar-I Electric Cooperative v.
COMELEC, the 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.
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. [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
may file an effective protest against the assessment. In the case at bench,
Asalus was sufficiently informed that with respect to its tax liability, the
extraordinary period laid down in Section 222 of the NIRC would apply. This
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
the extraordinary prescriptive period.
A Reminder
A lawyer is indeed expected to champion the cause of his client with utmost
zeal and competence. Such exuberance, however, must be tempered to meet
the standards of civility and decorum. Rule 8.01 of the Code of Professional
Responsibility mandates that "[a] lawyer shall not, in his professional
dealings, use language which is abusive, offensive or otherwise improper." In
Noble v. Atty. Ailes, the Court cautioned lawyers to be careful in their choice of
words as not to unduly malign the other party, to wit:
Though a lawyer's language may be forceful and emphatic, it
should always be dignified and respectful, befitting the dignity
of the legal profession. The use of intemperate language and

unkind ascriptions has no place in the dignity 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. xxx [Emphases supplied]
While the Court recognizes and appreciates the passion of Asalus' counsels in
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
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
equally emphatic manner. A counsel's mettle will not be viewed any less
should he choose to pursue his cause without denigrating the other party.
WHEREFORE, petition is GRANTED. The July 30, 2015 Decision and the
November 6, 2015 Resolution of the Court of Tax Appeals En 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 the Asalus Corporation.
SO ORDERED.
Carpio, (Chairperson), Peralta, Perlas-Bernabe, and Leonen, JJ., concur.
SECOND DIVISION
[ G.R. No. 213943, March 22, 2017 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS.
PHILIPPINE DAILY INQUIRER, INC., RESPONDENT.
DECISION
CARPIO, J.:
The Case
9 of 40
Before the Court is a petition for review assailing the 4 November 2013
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 Decision and the 8 May 2012 Resolution 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:
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
Quarterly VAT Returns for the same year showed the following:
Date of Filing
For the First Quarter 20 April 2004
For the Second Quarter 16 July 2004
For the Third Quarter 18 October 2004
For the Fourth Quarter 21 January 2005
On 10 August 2006, PDI received a letter dated 30 June 2006 from Region
020 Large Taxpayers' Service of BTR under LN No. 116-AS-04-00-00038.
BIR alleged that based on the computerized matching it conducted on the
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-ACIR of the Large Taxpayer
Service. In a letter dated 7 May 2007, PDI submitted additional partial
reconciliation and explanations on the discrepancies found by the BIR. On 30
May 2007, PDI received a letter dated 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:
COMPUTATION OF DEFICIENCY VAT
 10 of 40
Undeclared Income P 1,007,565.03
Add: Overdeclared input VAT 1,601,652.43 P
Undeclared Gross Income
Total undeclared income per Investigation P 2,609,217.46 10,075,650.28

Less: Attributable input tax 715,371.17 Less: Cost of Sales 7,153,711.70

VAT still payable per investigation P 1,893,846.29 Undeclared Net Income 2,921,938.58

Add: Increments - Multiply by income tax rate 32%

Interest from 1/26/05 to Income tax still due per investigation P 935,020.35
P1,062,629.37
11/15/07 Add: Increments -
Compromise penalty 25,000.00 1,087,629.37 Interest from 4/16/05 to 11/15/07 P 569,209.65
Amount Due and Collectible P 2,981,475.66 Compromise penalty 20,000.00 589,209.65
Amount Due and Collectible P 1,524,229.99
COMPUTATION OF DEFICIENCY INCOME TAX On 16 May 2008, PDI filed its protest. On 12 December 2008, PDI filed a
Petition for Review against the Commissioner of Internal Revenue (CIR)
alleging that the 180-day period within which the BIR should act on its protest
Undeclared Gross Income P 10,075,650.28 had already lapsed.
Less: Cost of Sales 7,153,711.70 The CTA First Division, quoting at length the CIR's Answer, presented the
Undeclared Net Income P 2,921,938.58 following facts:
Multiply by income tax rate 32% Petitioner Philippine Daily Inquirer is liable to pay the amount
of Three Million One Hundred Fifty Four Thousand Seven
Income tax still due per investigation P 935,020.35
Hundred Seventy Five Pesos and 56/100 (P3,154,775.56) and
Add: Increments - One Million Five Hundred Twenty Four Thousand Two
Interest from 4/16/05 to Hundred Twenty Nine Pesos and 99/100 (P1,524,299.99)
P 483,648.88
11/15/07 representing deficiency Value-Added Tax (VAT and Income
Tax, respectively, for the taxable year 2004.
Compromise penalty 20,000.00 503,648.88
1. The VAT and income tax liabilities of petitioner in the
Amount Due and Collectible P 1,438,669.23
aggregate amount of Four Million Six Hundred Seventy Nine
PDI received the PAN on 4 December 2007. In a letter dated 12 December Thousand and Five Pesos and 55/100 (P4,679,005.55) arose on
2007, PDI sought reconsideration of the PAN and expressed its willingness to account of the issuance to petitioner of Letter Notice No. 116-
execute another Waiver (Third Waiver), which it did on the same date, thus AS-04-00-00038 dated June 30, 2006. Computerized matching
extending BIR's right to assess and/or collect from it until 30 April 2008. conducted by respondent on information/data provided by
Romulo L. Aguila, Jr. (Aguila), OIC-Head Revenue Executive Assistant for third party sources against its declaration per VAT returns
the Large Taxpayers Service-Regular, accepted the Third Waiver on 20 revealed the aforesaid discrepancies for taxable year 2004. The
December 2007. income and value-added tax liabilities were generated through
On 17 April 2008, PDI received a Formal Letter of Demand dated 11 March the Reconciliation of Listing for Enforcement (RELIEF)
2008 and an Audit Result/Assessment Notice from the BIR, demanding for the svstem-Summary List of Sales and Purchases (SLSP) and
payment of alleged deficiency VAT and income tax, respectively, computed as Third Party Matching. Through the system, respondent was
follows: able to detect tax leaks through the matching of data available
in the Integrated Tax Systems (ITS) with the information
1. COMPUTATION OF (DEFICIENCY) VAT
gathered from third party sources.
On the basis of the consolidation and cross-referencing of third
Undeclared Income P 1,007,565.03 party information, discrepancy reports on sales and purchases
Add: Overdeclared input VAT 1,601,652.43 were generated to uncover under-declared income and over-
claimed purchases (goods and services)
Total Undeclared Income per Investigation P 2,609,217.46
As explicitly provided under Revenue Memorandum Order
Less: Attributable input tax 715,371.17
(RMO) No. 42-2003:
VAT still payable per investigation P 1,893,846.29
II. POLICIES [x x x]
Add: Increments -
2. In order to intensify enforcement, the power
Interest from 1/26/05 to 11/15/07 P1,235,929.28 of the Commissioner to authorize the
Compromise penalty 25,000.00 1,260,929.28 examination of the taxpayer and the
assessment of the correct amount of tax is
Amount Due and Collectible P 3,154,775.56
hereby ordered done through the so called 'no
contact-audit-approach'.
2. COMPUTATION OF [DEFICIENCY INCOME TAX]

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
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.
11 of 40
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 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], [t]he fact of fraud shall be
judicially taken cognizance of in the civil and
criminal action for the collection thereof.'
Such being the case, the three (3) [year] period of limitation
for the assessment of internal revenue tax liabilities reckoned
from the last day prescribed by law for the filing of the return
shall not apply in the case at hand for the simple reason 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 of limitation provides that the assessment
may be made within ten (10) years after 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 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, the
FLD is considered valid and has the force and effect of law.
3. On the basis of the investigation conducted by respondent
through the RELIEF system, respondent though the FLD,
outlined how the tax liabilities in the aggregate amount of
P4,679,005.55 representing income and VAT liabilities were
arrived at. Upon matching the data gathered from respondent's
Integrated Tax System (ITS) against the Summary of List of
Purchases (SLP) attached to the Quarterly VAT returns filed

with respondent, the following discrepancies remain unsettled
despite petitioner's submission of supporting documents:
(a) An excess of SLP over the Letter Notices (LN) in the
amount of P1,601,652.43 from the following suppliers:
Per SLP Per LN Discrepancy
Alliance Media Printing
109,073,375.58 107,640,812.95 1,432,562.63
Corp.
Citimotors Inc. 70,454.55 70,056.65 397.90
Diamond Motors Corp. 288,181.82 142,363.64 145,818.18
Western Marketing Corp. 30,830.99 7,957.27 22,873.72
Total 109,462,842.94 107,861,190.51 1,601,652.43
(b) On the other hand, it is likewise evident than an excess of
LN over the SLP also occurred in the total amount of Seven
Hundred Fifteen Thousand Three Hundred Seventy One Pesos
and 17/100 (P715,371.17). The details of which are shown
hereunder:
Per SLP Per LN Discrepancy
Grasco Industries Inc. 202.55 (202.55)
Harrison Communications Inc. 18,157.89 398,331.12 (380,173.23)
Makati Property Ventures 64.55 (64.55)
Mc[C]an[n] Erikson Phils. Inc. 204,769.38 (204,769.38)
Millennium Cars Inc. 89,545.45 (89,545.45)
WPP Marketing Communications
40,616.01 (40,616.01)
Inc.
Total 18,157.89 733,529.06 (715,371.17)
On the basis of the aforesaid investigation, it can be observed
that the SLP which petitioner attached as supporting
documents upon filing the quarterly VAT return revealed the
declared amount of P109,462,842.94 as its input VAT for
purchases incurred. However, on the basis of the LN, its
suppliers recorded in its books of account the aggregate
amount of P107,861,190.51 as its corresponding VAT. Suffice
it to say, the over-declared VAT input tax on the part of
petitioner led to the under declaration of VAT payable in the
amount of P1,601,652.43 for the taxable year 2004. Therefore,
petitioner is liable to pay said outstanding VAT. In addition, the
amount of P10,075,650.28 which resulted from the excess of
the LN over the SLP amounting to P715,371.17 must be
likewise added to arrive at the total VAT liability of
P3,154,775.56 (including increments up to April 30, 2008).
Details of the computation are shown in the FLD.
As stated earlier, the excess of LN over the SLP in the amount
of P715,371.17 resulted to under-declared input tax on the part
of petitioner which led to an under[-]declared purchases of
P7,153,711.70, arrived at by dividing P715,371.17 by the VAT
rate of 10%. As can be gleaned from the LN, suppliers
declared in its books of accounts output VAT for sales made to
petitioner. However, in petitioner's SLP, no declaration of such
amount incurred for the taxable year 2004 was shown. Such
being the case, petitioner under-declared its purchases that
resulted to the under-declared amount of Input VAT. If
petitioner has under[-]declared its purchases, it would likewise
have under-declared its Gross Income which will be worked
12 of 40
back by using the ratio of Cost of Sales against its Gross
Income per Income Tax Return. In the case at hand, the ratio of
Cost of Sales against its Gross Income per Income Tax Return
filed for taxable year 2004 is 71%. If petitioner divides the
amount of P7,153,711.70 by the cost ratio of 71%, the under-
declared Gross Income of P10,075,650.28 will be arrived at.
Such being the case, petitioner would then be liable to pay the
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 P10,075,650.28 the corresponding
Cost of Sales of P7,153,711.70. Hence, the amount of income
tax still to be paid is P1,524,229.99 (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 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 namely 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
P715,371.17 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.
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 Llarrison Communications Inc., McCann Erikson Inc.,
and WPP Marketing Corporation 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
13 of 40
7. Whether or not petitioner should be assessed a compromise
penalty.
In its 16 February 2012 Decision, the CTA First Division ruled in 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
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 overdeelared input tax of P1,601,652.43 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 followed. 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 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 three copies.
Further, the revenue official who accepted the Third Waiver was not
authorized to do so. The CTA First Division also noted that the Second 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 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 ruled
that the compromise penalties should likewise be cancelled. The dispositive
portion of the CTA First Division's Decision reads:
WHEREFORE, premises considered, the instant Petition for
Review is hereby GRANTED. The Formal Letter of Demand
dated March 11, 2008 and 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.
SO ORDERED.
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
In its 4 November 2013 Decision, the CTA En Banc cited the CTA First
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 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 Banc ruled that the presumptions of correctness and regularity
cited by the CIR were overturned by the evidence presented by PDI
particularly, the final report of the ICPA, accounts payable, check vouchers,
invoices, official receipts, and credit memoranda. The CTA En Banc noted that
14 of 40
the CIR did not present any evidence to the contrary. The CTA En Banc
rejected the CIR's allegation that PDI made a false return and held that the
three-year prescriptive period based on Section 203, in relation to Section
222(a) of the NIRC, as amended, should 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 Division's ruling that it can
resolve the issue of prescription because the CIR did not contest it when it was
raised by PDI.
The dispositive portion of the CTA En Banc's Decision reads:
WHEREFORE, premises considered, the Petition for Review
is hereby DENIED for lack of merit. Accordingly, the Decision
and Resolution dated February 16, 2012 and May 8, 2012,
respectively, are hereby AFFIRMED in toto.
SO ORDERED.
The CIR filed a motion for reconsideration. In its 1 August 2014 Resolution,
the CTA En Banc denied the motion for lack of merit.
Hence, the CIR filed a petition for review on certiorari before this Court.
The Issues
The CIR raised the following issues in her petition:
(1) 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.
The Ruling of this Court
BIR's assessment was not adequately controverted by PDI
Reconciliation of Listing for Enforcement (RELIEF) System is an information
technology tool used by the BIR to improve tax administration. The system
was created -
x x x to support third party information program and voluntary
assessment program of the Bureau through the cross-
referencing of third party information from the taxpayers'
Summary Lists of Sales and Purchases prescribed to be
submitted on a quarterly basis pursuant to Revenue
Regulations Nos. 7-95, as amended by RR 13-97, RR 7-99 and
RR 8-2002.
In addition -
[RELIEF] can detect tax leaks by matching the data available
under the Bureau's Integrated Tax System (ITS) with data
gathered from third party 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
RRNos. 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.

Using the RELIEF system, the BIR assessed PDI for deficiency VAT and
income tax amounting to P3,154,775.57 and P1,525,230.00, 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 P317,705,610.52. 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.
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.
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;
(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
Communications, Tnc. and McCann Erickson, Inc. and the
BIR's Letter Notice amounting to P450,203.29 and
P191,406.02, 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 Police;
(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 P206,713.63 and P13,363.36,
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;
(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
15 of 40
loan account for an employee and was recorded to Advances to
Officers and Employees;
(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.
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 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:
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 from the sale of newspapers and advertisements. The
services rendered by Harrison Communications, Inc., McCann Erickson, Inc.,
and WPP 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 PDI 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 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 shall be judicially taken
cognizance of in the civil or criminal action for the collection
thereof.
In Commissioner of Internal Revenue v. Javier, this Court ruled that fraud is
never imputed. The Court stated that it will not sustain findings of fraud upon
circumstances which, at most, create only suspicion. The Court added that the
mere understatement of a tax is not itself proof of fraud for the purpose of tax
evasion. 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.
In Samar-I Electric Cooperative v. Commissioner of Internal Revenue, the
Court differentiated between false and fraudulent returns. Quoting Aznar v.
Court of Tax Appeals, the Court explained in Samar-I 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 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
16 of 40
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.
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., 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.
In Commissioner of Internal Revenue v. Kudos Metal Corporation, the Court
ruled:
Section 222(b) of the NIR.C 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, She original copy to be attached to the
docket of the case, the second copy for the
taxpayer raid 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.
In this case, the CTA found that contrary to PDI's allegations, the First and
Second Waivers were executed in three copies. 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 RMO 20-90 and RDAO 05-01. Therefore, the First Waiver was not
properly 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 matters worse, the CIR committed the same error in the execution of the
Second Waiver on 5 June 2007. Even if we consider that the First Waiver was
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 RDAO 05-01. Granting further that the First and Second Waivers were
validly executed, the Third Waiver executed on 12 December 2007 still failed
to extend the three-year prescriptive period because it was not executed in
three copies. In short, the records of the case showed that the CIR's three-year
prescriptive period to assess deficiency tax had already prescribed due to the
defects of all the Waivers.
17 of 40
In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.),
Incorporated, the Court explained the nature of a waiver of assessment. The
Court said:
In Philippine Journalist, Inc. v. Commissioner of Internal
Revenue, the Court categorically stated that a Waiver must
strictly conform to RMO No. 20-90. The mandatory nature of
the requirements set forth in RMO No. 20-90, as ruled upon by
this Court, was recognized by the B1R itself in the latter's
subsequent 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 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 of
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 and collection of internal
revenue taxes was adopted to serve a purpose that would
benefit both the taxpayer and the government.
Clearly, the defects in the Waivers resulted to the non-extension of the period
to assess or collect taxes, and made the assessments issued by the BIR beyond
the three-year prescriptive period void.
The CIR also argues that PDI is estopped from questioning the validity of the
Waivers. We do not agree. As stated by the CTA, the BIR cannot shift the
blame to the taxpayer for issuing defective waivers. The Court has ruled that
the BIR cannot hide behind the doctrine of estoppel to cover its failure to
comply with RMO 20-90 and RDAO 05-01 which were issued by the BIR
itself. A waiver of the statute of limitations is a derogation of the taxpayer's
right to security against prolonged and unscrupulous investigations and thus, it
must be carefully and strictly construed.
Since the three Waivers in this case are defective, they do not produce any
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
Demand dated 11 March 2008 and Assessment No. LN # 116-AS-04-00-
00038-000526 for taxable year 2004 issued by the BIR against PDI.
WHEREFORE, we DENY the petition.
SO ORDERED.
Peralta, Mendoza, Leonen, and Martires, JJ., concur.

THIRD DIVISION
[ G.R. No. 222743, April 05, 2017 ]
MEDICARD PHILIPPINES, INC., PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
REYES, J.:
This appeal by Petition for Review seeks to reverse and set aside the Decision
dated September 2, 2015 and Resolution dated January 29, 2016 of the Court
of Tax Appeals (CTA) en banc in CTA EB No. 1224, affirming with
modification the Decision dated June 5, 2014 and the Resolution 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 P220,234,609.48,
plus 20% interest per annum starting January 25, 2007, until fully paid,
pursuant to Section 249(c) 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.
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.
Upon finding some discrepancies between MEDICARD's Income Tax Returns
(ITR) and VAT Returns, the CIR informed MEDICARD and issued a Letter
Notice (LN) No. 122-VT-06-00-00020 dated 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.
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
P196,614,476.69, inclusive of penalties.
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., 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.
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 P1.9 Billion membership fees, P319 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 P11.5 Million should be excluded from gross receipts because
P5.6 Million of which represent advances for professional fees due from
18 of 40
clients which were paid by MEDICARD while the remainder was already
previously subjected to VAT; (4) the professional fees in the amount of P11
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.
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.
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
P196,614,476.99. 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
our 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.
On July 20, 2009, MEDICARD proceeded to file a petition for review before
the CTA, reiterating its position before the tax authorities.
On June 5, 2014, the CTA Division rendered a Decision 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 P223,173,208.35, 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 P178,538,566.68
Add: 25% Surcharge 44,634,641.67
Total P223,173.208.35
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 P178,538,566.68
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 P223,173,208.35 representing
basic deficiency VAT of P178,538,566.68 and 25% surcharge
of P44,634,641.67 and on the 20% 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.
SO ORDERED.

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 d 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 an 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.
Undaunted, MEDICARD filed a Motion for Reconsideration but it was
denied. Hence, MEDICARD elevated the matter to the CTA en banc
In a Decision 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 dated 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 P220,234,609.48, inclusive of the
25% surcharge imposed under Section
248(A)(3) of the NIRC of 1997, as amended,
computed as follows:
Basic Deficiency VAT P176,187,687.58
Add: 25% Surcharge 44,046,921.90
Total P220,234.609.48
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per
annum on the basic deficiency VAT of
P176,187,687.58 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 P220,234,609.48
(representing basic deficiency VAT of
19 of 40
P176,187,687.58 and 25% surcharge of
P44,046,921.90) 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.
Disagreeing with the CTA en banc's decision, MEDICARD filed a motion for
reconsideration but it was denied. Hence, MEDICARD now seeks recourse to
this Court via a petition for review on certiorari.
The Issues
1. 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.
Ruling of the Court
The petition is meritorious.
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. 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 examination of any
taxpayer and the assessment of the correct amount of tax:
Provided, however, That failure to file a return shall not
prevent the Commissioner from authorizing the examination of
any taxpayer.
x x x 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). 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 LNs 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.
20 of 40
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 / 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

Under this policy, even without conducting a detailed examination of 7. Evaluate the Summary List of LNs
taxpayer's books and records, if the computerized/manual matching of sales for Conversion to LAs submitted by
and purchases/expenses appears to reveal discrepancies, the same shall be the RDO x x x prior to approval.
communicated to the concerned taxpayer through the issuance of LN. The LN 8. Upon approval of the above list,
shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal prepare/accomplish and sign the
Conference to the concerned taxpayer. Thus, under the RELIEF System, a corresponding LAs.
revenue officer may begin an examination of the taxpayer even prior to the
xxxx
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, 10. Transmit the approved/signed LAs,
under the RELIEF System, the presumption that the tax returns are in together with the duly
accordance with law and are presumed correct since these are filed under the accomplished/approved Summary
penalty of perjury are easily rebutted and the taxpayer becomes instantly List of LNs for conversion to LAs, to
burdened to explain a purported discrepancy. the concerned investigating offices
for the encoding of the required
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the
information x x x and for service to
statutory requirement of an LOA before any investigation or examination of
the concerned taxpayers.
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 xxxx
of Informal Conference, which generally precedes the issuance of an C. At the RDO x x x
assessment notice to be valid, the same presupposes that the revenue officer
xxxx
who issued the same is properly authorized in the first place.
11. If the LN discrepancies remained
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-
unresolved within One Hundred and
2003, as supplemented by RMO No. 42-2003, was amended by RMO No. 32-
Twenty (120) days from issuance
2005 to fine tune existing procedures in handing assessments against
thereof, prepare a summary list of
taxpayers' issued LNs by reconciling various revenue issuances which conflict
said LNs for conversion to LAs x x
with the NIRC. Among the objectives in the issuance of RMO No. 32-2005 is
x.
to prescribe procedure in the resolution of LN discrepancies, conversion of
LNs to LOAs and assessment and collection of deficiency taxes. xxxx

IV. POLICIES AND


16. Effect the service of the above LAs
to the concerned taxpayers.
In this case, there is no dispute that no LOA
was issued prior to the issuance of a PAN and
FAN against MEDICARD. 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. the 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.
(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 120 days from receipt of LOA to
conduct his examination of the taxpayer whereas an LN does not contain such
a limitation. 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. Unfortunately, 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
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open his books and financial records but only on whether a taxpayer is being
subject to examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and
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
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 CTA 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 healthcare
institutions/healthcare professionals and MEDICARD.
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 fees per individual, regardless of the
amount involved, already includes the VAT of 10%/20% excluding the
remaining 80% because MEDICARD 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 in 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) 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. This restrictive tenor changed under RR No. 16-2005. Under
this RR, an HM:O's gross receipts and gross receipts in general were defined,
thus:
Section 4.108-3. x x x
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.
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-
2005, including the definition of gross receipts in general.
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. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under RR
No. 16-2005 merely presumed that the amount received by an HMO as
membership fee is the HMO's compensation for their services. As a mere
presumption, an HMO is, thus, allowed to establish that a portion of the
amount it received as membership fee does NOT actually compensate it but
some other person, 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 in their natural, plain and ordinary acceptation and
signification, unless it is evident that the legislature intended a technical or
special legal meaning to those words. The Court cannot read the word
"presumed" in any other way.
It is notable in this regard that the term gross receipts as elsewhere mentioned
as the tax base under the N1RC does not contain any specific definition.
Therefore, absent a statutory definition, this Court has construed the term
gross receipts in its plain and ordinary meaning, that is, gross receipts is
understood as comprising the entire receipts without any deduction. Congress,
under Section 108, could have simply left the term gross receipts similarly
undefined and its interpretation subjected to ordinary acceptation. Instead of
doing so, Congress limited the scope of the term gross receipts for VAT
purposes only to the amount that the taxpayer received for the services it
performed or to the amount it received as advance payment for the services it
will render in the future for another person.
In the proceedings below, the nature of MEDICARD's business and the extent
of the services it rendered are not seriously disputed. As an HMO,
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MEDICARD primarily acts as an intermediary between the purchaser of
healthcare services (its members) and the healthcare providers (the doctors,
hospitals and clinics) for a fee. By enrolling membership with MEDICARD,
its members will be able to avail of the pre-arranged medical services from its
accredited healthcare providers without the necessary protocol of posting cash
bonds or deposits prior to being attended to or admitted to hospitals or clinics,
especially during emergencies, at any given time. Apart from this,
MEDICARD may also directly provide medical, hospital and laboratory
services, which depends upon its member's choice.
Thus, in the course of its business as such, MEDICARD members can either
avail of medical services from MEDICARD's accredited healthcare providers
or directly from MEDICARD. In the former, MEDICARD members obviously
knew that beyond the agreement to pre-arrange the healthcare needs of its
members, MEDICARD would not actually be providing the actual healthcare
service. Thus, based on industry practice, MEDICARD informs its would-be
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
case, MEDICARD's sale of hs services is exempt from VAT under Section
109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of
Section 108 of the NIRC that would extend the definition of gross receipts
even to amounts that do not only pertain to the services to be performed: by
another person, other than the taxpayer, but even to amounts that were
indisputably utilized not by MEDICARD itself but by the medical service
providers.
It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some words idle and
nugatory. This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of
the statute – its every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal
Revenue, the Court adopted the principal object and purpose object in
determining whether the MEDICARD therein is engaged in the business of
insurance and therefore liable for documentary stamp tax. The Court held
therein that an HMO engaged in preventive, diagnostic and curative medical
services is not engaged in the business of an insurance, thus:
To summarize, the distinctive features of the cooperative are
the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial
reduction in cost by quantity purchasing in short, getting
the medical job done and paid for; not, except incidentally
to these features, the indemnification for cost after the
services is rendered. Except the last, these are not
distinctive or generally characteristic of the insurance
arrangement. There is, therefore, a substantial difference
between contracting in this way for the rendering of service,
even on the contingency that it be needed, and contracting
merely to stand its cost when or after it is rendered. (Emphasis
ours)
In sum, the Court said that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the
provision of medical services through participating physicians while insurance
companies simply undertake to indemnify the insured for medical expenses
incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the

value added by the performance of the service by the taxpayer. It is, thus, this
service and the value charged thereof by the taxpayer that is taxable under the
NIRC.
To be sure, there are pros and cons in subjecting the entire amount of
membership fees to VAT. 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 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. (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 taxpayer, who are
certain that these will be followed by the courts. Courts, however, will not
uphold these authorities' interpretations when clearly absurd, erroneous or
improper. 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.
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, MEDICARD is bound to pay from the amounts it had allocated as 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
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receipts, one pertaining to the VATable 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 banc 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.
Velasco, Jr., (Chairperson), Bersamin, Caguioa, and Tijam, JJ., concur.
THIRD DIVISION
[ G.R. No. 205279, April 26, 2017 ]
VISAYAS GEOTHERMAL POWER COMPANY, PETITIONER, V.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
RESOLUTION
REYES, J.:
Subjects of this Petition for Review on Certiorari are the Decision dated
October 8, 2012 and Resolution dated January 7, 2013 of the Court of Tax
Appeals (CTA) en banc in CTA EB Case No. 864. The CTA en banc affirmed
via the challenged issuances the CTA First Division's dismissal of Visayas
Geothermal Power Company's (petitioner) petition for review on the ground of
premature filing.
The Antecedents
The petitioner is a special purpose limited partnership established primarily to
"invest in, acquire, finance, complete, construct, develop, improve, operate,
maintain and hold that certain partially constructed power production
geothermal electrical generating facility in Malitbog, Leyte Province,
Philippines (the "Project"), and other property incidental thereto, for the
production and sale of electricity from geothermal resources, to sell or
otherwise dispose of the Project and such other property." It is registered with

the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT) taxpayer
with Taxpayer Identification No. 003-832-538-000.
On February 13, 2009, the petitioner filed with the BIR an administrative
claim for refund of unutilized input VAT covering the taxable year 2007 in the
amount of P11,902,576.07. On March 30, 2009, it proceeded to immediately
file a petition for review with the CTA, as it claimed that the BIR failed to act
upon the claim for refund.
Proceedings ensued before the CTA. To substantiate its claim for refund, the
petitioner cited, among other laws, Section 6 of Republic Act (R.A.) No. 9136,
otherwise known as the "Electric Power Industry Reform Act of 2001," which
provides in part that "[p]ursuant to the objective of lowering electricity rates to
end-users, sales of generated power by generation companies shall be [VAT]
zero-rated." It also referred to the 1997 National Internal Revenue Code
(NIRC), as amended by R.A. No. 9337, which imposes a zero percent VAT
rate on sale of power generated through renewable sources of energy.
Ruling of the CTA Division
On October 19, 2011, the CTA First Division rendered its Decision, with
dispositive portion that reads:
WHEREFORE, the instant Petition for Review is hereby
DENIED for being prematurely filed.
SO ORDERED.
Cited in the decision is Section 112(C) of the 1997 NIRC, which provides that
the Commissioner of Internal Revenue (CIR) has 120 days within which to
decide on an application for refund or tax credit, to be reckoned from the date
of submission of complete documents in support of the application. Since the
administrative claim for refund was filed on February 13, 2009, the CIR had
until June 13, 2009 within which to act on the claim. The petition for review,
however, was prematurely filed on March 30, 2009, or a mere 45 days from
the filing of the administrative claim with the BIR. The dismissal of the case
was based solely on this ground, as the tax court found it needless to still
address the petitioner's compliance with the requisites for entitlement to tax
refund or credit.
The petitioner moved to reconsider, as it explained that it no longer waited for
the CIR's action on the administrative claim to be able to still satisfy the two-
year prescriptive period for filing a judicial claim for tax refund. The
petitioner's motion for reconsideration was still denied by the CTA First
Division via a Resolution dated January 16, 2012, prompting the petitioner to
elevate the case to the CTA en banc.
The CTA en banc, in its Decision dated October 8, 2012, affirmed in toto the
rulings of the CTA First Division. It stated, thus:
In the case at bench, the CTA First Division is correct in its
findings that petitioner's administrative claim for refund/credit
of its unutilized input VAT was timely filed on February 13,
2009. Applying subsections (A) and (C) of Section 112 of the
1997 NIRC, as amended, the [CIR] has one hundred twenty
(120) days or until June 13, 2009 to act on the said application.
However, as can be gleaned from the records, its judicial claim
was prematurely filed on March 30, 2009 or barely forty five
(45) days after it filed its application for refund with the [BIR].
For this reason, applying the ruling in Commissioner of
Internal Revenue vs. Aichi Forging Company of Asia, Inc.
(Aichi case), this Court acquires no jurisdiction to act on the
said claim in view of the premature filing of the instant
Petition for Review.
xxxx
24 of 40
WHEREFORE, premises considered, the Petition for Review
is hereby DISMISSED for lack of merit. Accordingly, the
October 19, 2011 Decision and the January 16, 2012
Resolution of the CTA First Division in CTA Case No. 7889
entitled, "Visayas Geothermal Power Company vs.
Commissioner of Internal Revenue", are hereby AFFIRMED
in toto.
SO ORDERED. (Citation omitted)
Hence, this petition for review on certiorari.
The Present Petition
The petitioner asks the Court to, first, reverse the rulings of the CTA en banc
and, second, to order the CIR to grant the refund or tax credit certificate being
applied for.
The petitioner insists that when it sought an immediate recourse to the CTA
without waiting for the decision of the CIR in the administrative claim, it
merely relied on the guidelines that were set forth in BIR Ruling No. DA-489-
03, which provides that a taxpayer-claimant need not wait for the lapse of the
120-day period before seeking judicial relief. The petitioner also cites the
Court's ruling in CIR v. San Roque Power Corporation, which recognized the
effects of a taxpayer's reliance on the said BIR ruling.
The CIR, on the other hand, maintains that the petition for review filed with
the CTA was prematurely filed, as the petitioner still had to wait for the lapse
of the 120-day period allowed for the resolution of its administrative claim.
Ruling of the Court
The petition is partly granted. The CTA erred in ruling that the petitioner's
judicial claim was prematurely filed. However, considering that the tax court
had not made a disposition on the merits of the claim for tax refund, the case
needs to be remanded to the CTA First Division, so that it may decide on the
issue.
120+30-Day Periods; Exception
In a line of cases, the Court has underscored the need to strictly comply with
the 120+30-day periods provided in Section 112 of the 1997 NIRC, which
reads:
Sec. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-
registered person, whose sales are zero-rated or effectively
zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales x x x.
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes
shall be Made. - In proper cases, the Commissioner shall
grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120)
days from the date of submission of complete documents in
support of the application filed in accordance with Subsection
(A) hereof.
In case of full or partial denial of the claim for tax refund or
tax credit, or the failure on the part of the Commissioner to act
on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the
expiration of the one hundred twenty-day period, appeal

the decision or the unacted claim with the Court of Tax
Appeals.
x x x x (Emphasis ours)
The Court ruled in San Roque that "[f]ailure to comply with the 120-day
waiting period violates a mandatory provision of law. It violates the doctrine
of exhaustion of administrative remedies and renders the petition premature
and thus without a cause of action, with the effect that the CTA does not
acquire jurisdiction over the taxpayer's petition." "The old rule that the
taxpayer may file the judicial claim, without waiting for the [CIR's] decision if
the two-year prescriptive period is about to expire, cannot apply because that
rule was adopted before the enactment of the 30-day period." With the current
rule that gives a taxpayer 30 days to file the judicial claim even if the CIR fails
to act within the 120-day period, the remedy of a judicial claim for refund or
credit is always available to a taxpayer.
As the petitioner correctly pointed out, this general rule that calls for a strict
compliance with the 120+30-day mandatory periods admits of an exception.
The Court has declared, also in San Roque:
[S]trict compliance with the 120+30[-]day periods is necessary
for such a claim to prosper, whether before, during, or after the
effectivity of the Atlas doctrine, except for the period from
the issuance of BIR Ruling No. DA-489-03 on 10 December
2003 to 6 October 2010 when the Aichi doctrine was
adopted, which again reinstated the 120+30[-]day periods as
mandatory and jurisdictional. (Emphasis ours)
The BIR Ruling No. DA-489-03 referred to in the exception was recognized
by the Court to be a general interpretative rule applicable to all taxpayers, as it
was a response to a query made, not by a particular taxpayer but by a
government agency tasked with processing tax refunds and credits.
VI. BIR Ruling No. DA-489-03 dated 10 December 2003
BIR Ruling No. DA-489-03 does provide a valid claim for
equitable estoppel under Section 246 of the Tax Code. BIR
Ruling No. DA-489-03 expressly states that the "taxpayer-
claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of
Petition for Review." Prior to this ruling, the BIR held x x x
that the expiration of the 120-day period is mandatory and
jurisdictional before a judicial claim can be filed. (Emphasis
ours)
All taxpayers can rely on it from the time of its issuance on December 10,
2003 up to its reversal by the Court in CIR v. Aichi Forging Company of Asia,
Inc. on October 6, 2010, where this Court held that the 120+30-day periods
are mandatory and jurisdictional.
It is material that both administrative and judicial claims in the present case
were filed by the petitioner in 2009. The CTA en banc's reliance on the general
rule enunciated by the Court in San Roque is misplaced. Notwithstanding the
fact that the petitioner failed to wait for the expiration of the 120-day
mandatory period, the CTA could still take cognizance of the petition for
review.
Entitlement to Tax Refund
In its Decision dated October 19, 2011, the CTA First Division recognized that
the petitioner's entitlement to tax refund required proof of satisfaction of the
following requisites:
1. that there must be zero-rated or effectively zero-rated sales;
2. that input taxes were incurred or paid;
25 of 40
3. that such input taxes are attributable to zero-rated or effectively
zero-rated sales;
4. that the input taxes were not applied against any output VAT
liability; and
5. that the claim for refund was filed within the two-year prescriptive
period.
The foregoing matters call for factual findings, which are not for the Court to
now determine. Given the Court's ruling that the CTA should have taken
cognizance of the petitioner's claim, the Court finds it necessary to remand the
case to the CTA, which shall determine and rule on the entitlement of the
petitioner to the claimed tax refund. Notwithstanding the fact that the CTA
First Division allowed the parties' presentation of evidence, it opted not to rule
on the presence or absence of the foregoing requisites, except for the fifth
requisite, and instead decided to dismiss the petition on the ground that the
case was prematurely filed. Even the CTA en banc affirmed the dismissal on
the same sole ground.
WHEREFORE, the petition is PARTLY GRANTED. The Decision dated
October 8, 2012 and Resolution dated January 7, 2013 of the Court of Tax
Appeals en banc in CTA EB Case No. 864 are REVERSED and SET ASIDE.
The case is REMANDED to the Court of Tax Appeals, which is DIRECTED
to determine petitioner Visayas Geothermal Power Company's entitlement to a
tax refund.
SO ORDERED.
Velasco, Jr., (Chairperson), Peralta, Bersamin, and Tijam, JJ., concur.
SECOND DIVISION
[ G.R. No. 204277, May 30, 2016 ]
PROCTER AND GAMBLE ASIA PTE LTD., PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
BRION, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court seeking the reversal of the decision dated June 18, 2012, and the
resolution dated November 8, 2012 of the Court of Tax Appeals (CTA) en
banc in CTA EB Case No. 740 (CTA Case No. 7683). In the assailed decision
and resolution, the CTA en banc affirmed the decision dated November 9,
2010 and resolution dated March 7, 2011, of the CTA Second Division (CTA
Division). The latter dismissed the petition of Procter & Gamble Asia Pte. Ltd.
(PGAPL) for premature filing.
The Facts
Petitioner PGAPL is a foreign corporation duly organized and existing under
the laws of Singapore, with a Regional Operating Headquarters (ROHQ) in the
Philippines. The ROHQ provides management, marketing, technical and
financial advisory, and other qualified services to its related parties. PGAPL is
registered as a Value Added Tax (VAT) taxpayer with the Bureau of Internal
Revenue (BIR). On the other hand, respondent is the duly appointed
Commissioner of Internal Revenue (CIR), empowered to perform the duties of
said office including, among others, the duty to act upon and approve claims
for refunds or tax credits as provided by law.
On October 24, 2005, and January 26, 2006, PGAPL filed with the BIR its
Original Quarterly VAT returns for the Third and Fourth quarters of 2005,
respectively.
On April 4, 2007, PGAPL amended its Quarterly VAT returns for the last two
quarters of 2005, reporting both sales subject to 10% VAT and zero-rated sales.

For the last two quarters of 2005, PGAPL claimed it incurred unutilized input
VAT amounting to P53,624,427.14.
On August 21, 2007, PGAPL filed an administrative claim for tax refund with
the BIR for input VAT attributable to its zero-rated sales covering the period
July 2005 to September 2005 and October 2005 to December 2005.
Claiming that the CIR has not acted on its application, PGAPL elevated the
case to the CTA by filing a petition for review before the CTA division on
September 27, 2007.
The CTA Division dismissed PGAPL's petition. It ruled that the filing of the
judicial claim for tax refund or credit before the CTA is premature, because the
petitioner proceeded with its appeal even before the expiration of the 120-day
period given to the CIR to decide on its claim for tax refund or credit of excess
input VAT. Section 112 of the National Internal Revenue Code of 1997 (NIRC)
provides that in case of denial of his claim for tax credit or refund or failure of
the CIR to act on the application within 120 days, the taxpayer may, within 30
days from the receipt of the notice of denial or after the expiration of the 120-
day period, appeal the decision or unacted claim with the CTA. The CTA
Division emphasized that, as enunciated in Commissioner of Internal Revenue
v. Aichi Forging Company of Asia, Inc., compliance with the aforesaid 120-
and 30-day periods is crucial in filing an appeal before the CTA (Aichi
Doctrine).
PGAPL moved for reconsideration, but the CTA denied its motion in a
resolution dated March 7, 2011. The CTA Division struck down PGAPL's
argument that respondent is already estopped from raising the issue of
jurisdiction considering that it already actively participated in all stages of the
proceedings and that the CTA has proceeded to try the case without bringing
into petitioner's attention that it has no jurisdiction to do so. It ruled that
parties are not barred from assailing the jurisdiction of the court, even when
the case has already been tried and decided upon. Jurisdiction must exist as a
matter of law and may not be conferred by the consent of the parties or by
estoppel.
Thereafter, petitioner filed a petition for review before the CTA en banc.
In its decision dated June 18, 2012, the CTA en banc affirmed the decision and
resolution of the CTA Division. It found that PGAPL's administrative claim
for excess input VAT credit or refund was timely filed with the BIR on August
21, 2007. However, its judicial claim before the CTA was filed on September
27, 2007, or only 37 days after it had filed its administrative claim.
Based on these timelines, the CTA en banc held that PGAPL's petition was
prematurely filed. Thus, the CTA had no jurisdiction to hear and decide its
appeal. The CTA en banc reiterated that, based on Aichi, the premature filing
of a taxpayer's claim for tax credit or refund on input VAT before the CTA
warrants dismissal as the CTA did not acquire jurisdiction over the claim.
The CTA en banc further held that, contrary to petitioner's claim, the Aichi
Doctrine was not effectively abandoned by the Supreme Court in its rulings in
Hitachi Global Storage Technologies Corp v. Commissioner of Internal
Revenue, Silicon Philippines, Inc. v. Commissioner of Internal Revenue, and
Kepco Philippines Corporation v. Commissioner of Internal Revenue. It
observed that in PGAPL's cited cases, the issue of compliance with the 120-
and 30-day periods under Section 112 of the NIRC was never squarely raised.
Thus, Aichi remains the prevailing doctrine on the compliance with the 120-
and 30-day periods.
The CTA en banc further ruled that Hitachi, Silicon, and Kepco could not have
overturned Aichi. Such reversal would run counter to the constitutional
mandate that no doctrine or principle of law laid down by the court in a
decision rendered en banc or in division may be modified or reversed except
by the Supreme Court sitting en banc.
26 of 40
The CTA en banc also denied petitioner's motion for reconsideration. Hence,
on December 28, 2010, PGAPL filed the present petition.
PGAPL insists that this Court had abandoned the Aichi Doctrine not only in
Hitachi, Silicon, and Kepco, but also in Microsoft Philippines, Inc. vs.
Commissioner of Internal Revenue, Southern Philippines Power Corporation
v. Commissioner of Internal Revenue, and Western Mindanao Power
Corporation v. Commissioner of Internal Revenue.
PGAPL also posits that the premature filing of its judicial claim is not fatal to
its case. It is not jurisdictional, but merely a failure to exhaust administrative
remedies, which, when analyzed more closely, only amounts to a lack of cause
of action. Thus, its petition before the CTA might have been infirm, but the
CIR should be deemed to have waived this infirmity when it did not file a
motion to dismiss and opted to participate at the trial.
PGAPL further argues that its constitutional rights to due process and equal
protection of laws were violated when their judicial claim for tax credit or
refund was dismissed due to noncompliance with the Aichi Doctrine. It noted
that the claims filed by the taxpayers in Intel, San Roque, Panasonic, AT&T,
Hitachi, Silicon, Kepco, Microsoft, Southern Philippines Power, and Western
Mindanao Power were given due course despite the similar failure to observe
the 120- and 30-day periods.
Finally, petitioner claims that even assuming that the Aichi Doctrine has not
been overturned, it does not apply to its case, because the facts in Aichi are not
identical with those in the present case. Further, the respondent should be
considered estopped from questioning the jurisdiction of the CTA, considering
that it has participated in all stages of the case.
On February 6, 2013, we required the CIR to comment on the petition.
In the meantime, on February 12, 2013, we decided the consolidated cases of
Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito
Mining Corporation v. Commissioner of Internal Revenue, and Philex Mining
Corporation v. Commissioner of Internal Revenue. In San Roque-Taganito, we
recognized the effectivity of BIR Ruling No. DA-489-03, which expressly
stated that the "taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA by way of Petition for
Review." We said:
There is no dispute that the 120-day period is mandatory and
jurisdictional, and that the CTA does not acquire jurisdiction
over a judicial claim that is filed before the expiration of the
120-day period. There are, however, two exceptions to this
rule. The first exception is if the Commissioner, through a
specific ruling, misleads a particular taxpayer to prematurely
file a judicial claim with the CTA. The second exception is
where the Commissioner, through a general interpretative
rule issued under Section 4 of the Tax Code, misleads all
taxpayers into filing prematurely judicial claims with the
CTA. In these cases, the Commissioner cannot be allowed to
later on question the CTA's assumption of jurisdiction over
such claim since equitable estoppel has set in as expressly
authorized under Section 246 of the Tax Code (emphasis ours).
In finding that the said BIR ruling is a general interpretative rule, which is
an exception to the doctrine laid down in Aichi, this court held that taxpayers
acting in good faith should not be made to suffer for adhering to general
interpretative rules of the CIR interpreting tax laws, should such interpretation
later turn out to be erroneous and be reversed by the CIR or this court. Thus,
We clarified that strict compliance with the 120- and 30-day periods is
necessary for a judicial claim of tax credit or refund to prosper, except for
the period from December 10, 2003, the issuance of BIR DA-489-03, to

October 6, 2010, when this court adopted the Aichi Doctrine. Hence, a
judicial claim for tax credit or refund filed within the period mentioned above
will be deemed to have been filed on time.
On May 6, 2013, even before the CIR could comment, PGAPL filed a
manifestation invoking in its favor this court's ruling San Roque-Taganito.
Petitioner claims that since its judicial claim was filed before the CTA on
September 27, 2007, when BIR Ruling No. DA-489-03 was in effect, its
judicial claim should be deemed as having been timely filed.
In her comment dated June 11, 2013, the CIR argues that her office has the
exclusive and original jurisdiction to interpret tax laws, subject to the review
of the Secretary of Finance, as provided in Section 4 of the NIRC. Hence, BIR
Ruling No. DA-489-03 was issued ultra vires, having been issued by BIR
Deputy Commissioner Jose Mario C. Bunag, not by the CIR. The CIR further
claims that even if we assume that the said ruling is valid, it still does not
apply to the case of PGAPL, because it did not prove that it acted in good
faith. According to respondent, if PGAPL truly relied on the BIR ruling in
good faith, it should have raised the rule set forth in the said BIR ruling as
early as the time the present case was pending before the CTA.
The Court's Ruling
We find the petition meritorious.
BIR Ruling No. DA-489-03 is an exception to the Aichi Doctrine
Under Section 112 of the NIRC, if the administrative claim for tax credit or
refund of input taxes is not acted upon by the CIR within 120 days from the
date of submission of complete documents in support of the application, the
taxpayer affected may appeal the unacted claim with the CTA within 30 days
from the expiration of the 120-day period.
In Aichi, this Court ruled that observance of the 120- and 30-day periods is
crucial in the filing of an appeal before the CTA. By "crucial," this Court
meant that its observance is jurisdictional and mandatory, not merely
permissive.
Contrary to the PGAPL's claim, this court has not abandoned the Aichi
doctrine, more specifically in Intel, San Roque (2009), Panasonic, AT&T,
Hitachi, Silicon, Kepco, Microsoft, Southern Philippines Power Corporation,
and Western Mindanao Power Corporation.
While all such cases dealt with claims for tax credit or refund of excess input
tax, the rulings of this Court were on the issue of compliance with applicable
requirements supporting the taxpayer's claim. The issue of whether
compliance with the 120- and 30-day periods under Section 112 of the NIRC
is mandatory and jurisdictional was never squarely raised in any of the
petitioner's cited cases.
The basic rule is that past decisions of this Court be followed in the
adjudication of cases. However, for a ruling of this Court to come within this
rule (known as stare decisis), the Court must categorically rule on an issue
expressly raised by the parties; it must be a ruling on an issue directly raised.
When the court resolves an issue merely sub silentio, stare decisis does not
apply on the issue touched upon.
In fact, the same argument was struck down by this court in San Roque-
Taganito. There, we held that, "[a]ny issue, whether raised or not by the
parties, but not passed upon by the court, does not have any value as a
precedent." (emphasis in the original)
From this perspective, the Aichi Doctrine could not have been overturned by
subsequent cases before this Court that were decided based on another issue
and the application of a different doctrine or rule of law. In the same vein, the
cases cited by PGAPL are irrelevant to the present case, because they did not
rule on the jurisdictional and mandatory nature of the 120- and 30-day periods.
27 of 40
Indeed, Aichi is the prevailing doctrine on the matter of mandatory compliance
with the 120- and 30-day periods in the filing of judicial claims of tax credit or
refund before the CTA. However, in the manner of most rules, the Aichi
Doctrine is also subject to exceptions.
In accordance with the equitable estoppel principle under Section 246 of the
NIRC, we ruled in San Roque-Taganito that there are exceptions to the strict
rule that compliance with the Aichi Doctrine is mandatory and jurisdictional,
one of which is BIR Ruling No. DA-489-03. If the CIR issues a ruling, either a
specific one applicable to a particular taxpayer or a general interpretative rule
applicable to all taxpayers, and, as a result, misleads the taxpayers affected by
the rule, into filing prematurely judicial claims with the CTA, the CIR cannot
be allowed to later on question the CTA's assumption of jurisdiction over such
claim.
Since then, this Court has consistently adopted the ruling in San Roque-
Taganito in holding that BIR Ruling No. DA-489-03 is an exception to the
Aichi Doctrine. We see no reason to disturb what is now a settled ruling.
Therefore, as a general interpretative rule, all taxpayers may rely on BIR
Ruling No. DA-489-03 from the time of its issuance on December 10, 2003,
until its effective reversal by the Aichi Doctrine adopted on October 6, 2010.
Thus, judicial claims for tax credit or refund instituted before the CTA should
be given due course, despite their failure to comply with the 120- and 30-day
periods.
BIR Ruling No. DA-489-03 is valid even if issued by the Deputy
Commissioner.
The respondent now impugns the validity of BIR Ruling No. DA-489-03. The
CIR argues that the BIR ruling was issued only by the Deputy Commissioner
and not by the CIR, who, under Section 4 of the NIRC, has original and
exclusive jurisdiction in interpreting provisions of the NIRC.
We are not persuaded by the CIR's contention.
This issue has been settled in the Court en banc's resolution dated October 8,
2013 in the consolidated cases of San Roque-Taganito where we upheld the
validity of the BIR ruling, because the power to interpret rules and regulations
is not exclusive and may be delegated by the CIR to the Deputy
Commissioner.
PGAPL is presumed to have relied on BIR Ruling No. DA-489-03 in
good faith.
Finally, the CIR questions PGAPL's good faith in relying on BIR Ruling No.
DA-489-03. To the CIR, if PGAPL truly relied on the BIR ruling in good faith,
it should have cited the ruling as basis as early as the proceedings before the
CTA. The CIR claims that since PGAPL failed to establish that it acted in
good faith, it cannot raise the exception set forth in BIR Ruling No. DA-489-
03.
We disagree with the CIR's reasoning.
First, good faith is always presumed and this presumption can only be
overcome by clear and convincing evidence. Good faith, or its absence, is a
question of fact that is better determined by the lower courts. This Court
cannot, without sufficient reason, throw out a presumption that arises as a
matter of law and is well-entrenched in our legal system.
The mere allegation that the petitioner failed to raise BIR Ruling No. DA-489-
03 before the CTA is insufficient to negate this presumption.
Second, even if petitioner did not raise the BIR ruling before the CTA, we can
take cognizance of an official act emanating from the BIR, an executive
department of the government. Judicial notice of BIR Ruling No. DA-489-03
is all the more mandatory especially when it has been applied consistently by
this Court in its past rulings.

Based on the foregoing, we rule that the judicial claim that PGAPL filed with
the CTA on September 27, 2007 (during the effectivity of BIR Ruling No. DA-
489-03) was timely filed.
WHEREFORE, premises considered, we GRANT the petition. The decision
dated June 18, 2012, and the resolution dated November 8, 2012 of the CTA
en banc in CTA EB Case No. 740 are hereby REVERSED and SET ASIDE.
Accordingly, we REMAND the case to the CTA Second Division for the
proper determination of the creditable or refundable amount due to the
petitioner, if any.
SO ORDERED.
Carpio, (Chairperson), Brion, Del Castillo, Mendoza, and Leonen, JJ., concur.
FIRST DIVISION
[ G.R. No. 198485, June 05, 2017 ]
MARUBENI PHILIPPINES CORPORATION, PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CAGUIOA, J:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court filed by petitioner Marubeni Philippines Corporation
(Marubeni), assailing the Decision dated March 23, 2011 and Resolution dated
August 31, 2011 of the Court of Tax Appeals (CTA) En Banc in CTA EB Case
No. 557. The CTA En Banc affirmed with modification the CTA Second
Division's Decision dated June 2, 2009 in C.T.A. Case No. 6469. The CTA
Second Division dismissed Marubeni's claim for refund and/or issuance of a
tax credit certificate (TCC) for having been filed beyond the two-year
prescriptive period. The CTA En Banc, on the other hand, dismissed
Marubeni's claim for refund and/or issuance of a TCC because it was
premature.
Facts
Marubeni is a domestic corporation duly registered with the Bureau of Internal
Revenue (BIR) as a Value-Added Tax (VAT) taxpayer.
On April 25, 2000, Marubeni filed its Quarterly VAT Return for the 1st quarter
of Calendar Year (CY) 2000 with the BIR.
On March 27, 2002, Marubeni filed with the BIR a written claim for a refund
and/or the issuance of a TCC, which it later amended on April 25, 2002,
reducing its claim to P3,887,419.31. On the same date, Marubeni filed a
petition for review before the CTA claiming a refund and/or issuance of a TCC
in the amount of P3,887,419.31.
During the proceedings in the CTA, Marubeni presented its witnesses and
offered its evidence while respondent Commissioner of Internal Revenue
(CIR) submitted the case for decision based on the pleadings. After submitting
its Memorandum, Marubeni moved to be allowed to present additional
evidence, which the CTA Second Division granted.
On December 8, 2008, Marubeni filed its Memorandum and on January 15,
2009, the case was deemed submitted for decision.
In a Decision dated June 2, 2009, the CTA Second Division dismissed
Marubeni's judicial claim, the dispositive portion of which states:
WHEREFORE, premises considered, the petition is hereby
DENIED DUE COURSE, and accordingly, DISMISSED.
SO ORDERED.
The CTA Second Division ruled that following Commissioner of Internal
Revenue v. Mirant Pagbilao Corporation, Marubeni timely filed its
28 of 40
administrative claim for refund and/or the issuance of a TCC on March 27,
2002, which was within the two-year period from the close of the 1st quarter
of CY 2000, but that Marubeni's judicial claim for refund and/or issuance of
TCC that was filed on April 25, 2002 (or the same day Marubeni amended its
administrative claim for a refund and/or the issuance of a TCC to
P3,887,419.31) was late because this should have been filed also within the
two-year period from the close of the 1st quarter of CY 2000.
Marubeni moved for reconsideration, but this was denied by the CTA Second
Division in its Resolution dated October 20, 2009.
Marubeni then elevated the matter to the CTA En Banc, raising the following
arguments: (1) the two-year prescriptive period for the filing of the
administrative and judicial claims for refund and/or issuance of TCC is
reckoned from the date of the filing of the Quarterly VAT Return and payment
of the output tax as held by the Court in Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue; (2) Mirant
could not validly overturn the ruling in Atlas; and (3) assuming that Mirani
validly overturned the ruling in Atlas, the ruling should be applied
prospectively and should not be made to apply to pending judicial claims for
refund of excess input VAT.
On March 23, 2011, the CTA En Banc rendered a Decision affirming with
modification the Decision and Resolution of the CTA Second Division, the
dispositive portion of which states:
WHEREFORE, premises considered, the petition is
DENIED. Accordingly, the Decision of the former Second
Division of this Court in CTA Case No. 6469 dated June 2,
2009 and its Resolution dated October 20, 2009 are hereby
AFFIRMED, with the modification that the dismissal of the
Petition for Review is on the ground for having been
prematurely filed. No pronouncement as to costs.
SO ORDERED.
The CTA En Banc agreed with the CTA Second Division that Marubeni timely
filed its administrative claim for refund. But as to Marubeni's judicial claim
for refund, the CTA En Banc ruled that following Section 112 (D) of the
National Internal Revenue Code (1997 Tax Code) and the Court's ruling in
Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc., the
filing of the petition for review with the CTA was premature. According to the
CTA En Banc, Marubeni should have filed its petition for review with the CTA
30 days from receipt of the decision of the CIR denying the claim or after the
expiration of the 120-day period from the filing of the administrative claim
with the CIR.
Marubeni moved for reconsideration but the CTA En Banc denied this in a
Resolution dated August 31, 2011.
Hence, this petition.
Issues
Marubeni raised the following issues:
a. Whether Aichi is applicable to its claim for refund;
b. Whether Aichi should only be applied prospectively; and,
c. Whether the CIR waived the defense of non-exhaustion of
administrative remedies.
The Court's Ruling
The petition lacks merit.
Prescriptive period for filing of judicial claim for refund.
The first and second issues are discussed together.

Marubeni claims that the Court's ruling in Atlas should be the one applicable
to it instead of Aichi. In Atlas, the Court held that the two-year period for the
filing of claims for refund and/or issuance of TCC for input VAT must be
counted from the date of filing of the quarterly VAT return. On the other hand,
in Aichi, the Court ruled that the compliance with the 120+30 day periods in
Section 112 (C) of the 1997 Tax Code were mandatory and jurisdictional.
Marubeni thus argues that the prospective application of Aichi means that
Aichi will only be applied to claims for refund that were filed with the CTA
after the promulgation of Aichi (which was promulgated by the Court on
October 6, 2010). And since Marubeni filed its petition with the CTA on April
25, 2002, the Court's ruling in Atlas, and not Aichi, should be applied to it.
This claim is wrong.
The issue of the retroactive application of Aichi and the applicability of Atlas
was also raised in Mindanao II Geothermal Partnership v. Commissioner of
Internal Revenue. The facts and issue here and in Mindanao II are identical,
except only for the covered taxable period — Marubeni's claim involved the
1st quarter of CY 2000, while the claim in Mindanao II involved different
quarters of CY 2003. Thus, the ruling of the Court in Mindanao II squarely
applies here.
The Court ruled in Mindanao II that a taxpayer cannot claim that Atlas, which
was promulgated on June 8, 2007, is controlling on the timeliness of a judicial
claim that was filed prior to June 8, 2007. According to the Court, it is the
1997 Tax Code, which took effect on January 1, 1998, that applies to the
taxpayer, thus:
When Mindanao II and Mindanao I filed their respective
administrative and judicial claims in 2005, neither Atlas nor
Mirant has been promulgated. Atlas was promulgated on 8
June 2007, while Mirant was promulgated on 12 September
2008. It is therefore misleading to state that Atlas was the
controlling doctrine at the time of filing of the claims. The
1997 Tax Code, which took effect on 1 January 1998, was the
applicable law at the time of filing of the claims in issue. x x x
(Emphasis in the original)
In this regard, the Court had already clarified in Commissioner of Internal
Revenue v. San Roque Power Corp., that Atlas did not interpret, expressly or
impliedly, the 120+30 day periods, thus:
San Roque cannot also claim [to] being misled, misguided or
confused by the Atlas doctrine because San Roque filed its
petition for review with the CTA more than four years
before Atlas was promulgated. The Atlas doctrine did not
exist at the time San Roque failed to comply with the 120-day
period. Thus, San Roque cannot invoke the Atlas doctrine as
an excuse for its failure to wait for the 120-day period to lapse.
In any event, the Atlas doctrine merely stated that the two-year
prescriptive period should be counted from the date of
payment of the output VAT, not from the close of the taxable
quarter when the sales involving the input VAT were made.
The Atlas doctrine does not interpret, expressly or
impliedly, the 120+30 day periods. (Emphasis in original.)
Similarly, it was misleading for Marubeni to invoke Atlas given that Atlas
could not have been applicable as it was promulgated years after Marubeni
had filed its administrative and judicial claims in 2002; accordingly, it cannot
escape the applicability of the 1997 Tax Code.
Section 112 of the 1997 Tax Code provides for the rules on claiming refunds
of and/or the issuance of a TCC for unutilized input VAT, the pertinent
portions of which read as follows:
29 of 40
SEC. 112. Refunds or Tax Credits of Input Tax. –
(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-
registered person, whose sales are zero-rated or effectively
zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been applied
against output tax: x x x
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes
shall be Made. – In proper cases, the Commissioner shall grant
a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date
of submission of complete documents in support of the
application filed in accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or
tax credit, or the failure on the part of the Commissioner to act
on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt
of the decision denying the claim or after the expiration of the
one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals. (Emphasis
supplied)
According to the Court in Mindanao II, it is the above-quoted Section 112 (C)
of the 1997 Tax Code that applies to the judicial claim for refund, and, citing
San Roque, compliance with the 120+30 day periods is mandatory and
jurisdictional. Thus:
In determining whether the claims for the second, third and
fourth quarters of 2003 have been properly appealed, we still
see no need to refer to either Atlas or Mirant, or even to
Section 229 of the 1997 Tax Code. The second paragraph of
Section 112 (C) of the 1997 Tax Code is clear: "In case of full
or partial denial of the claim for tax refund or tax credit, or the
failure on the part of the Commissioner to act on the
application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day
periods was explained in San Roque:
At the time San Roque filed its petition for
review with the CTA, the 120+30 day
mandatory periods were already in the law.
Section 112(C) expressly grants the
Commissioner 120 days within which to
decide the taxpayer's claim. The law is clear,
plain, and unequivocal: "x x x the
Commissioner shall grant a refund or issue the
tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the
date of submission of complete documents."
Following the verba legis doctrine, this law
must be applied exactly as worded since it is
clear, plain, and unequivocal. The taxpayer

cannot simply file a petition with the CTA
without waiting for the Commissioner's
decision within the 120-day mandatory and
jurisdictional period. The CTA will have no
jurisdiction because there will be no "decision"
or "deemed a denial" decision of the
Commissioner for the CTA to review. In San
Roque's case, it filed its petition with the CTA
a mere 13 days after it filed its administrative
claim with the Commissioner. Indisputably,
San Roque knowingly violated the mandatory
120-day period, and it cannot blame anyone
but itself.
Section 112(C) also expressly grants the
taxpayer a 30-day period to appeal to the CTA
the decision or inaction of the Commissioner,
thus:
x x x the taxpayer affected may, within thirty
(30) days from the receipt of the decision
denying the claim or after the expiration of
the one hundred twenty day-period, appeal
the decision or the unacted claim with the
Court of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal.
Following the well-settled verba legis doctrine,
this law should be applied exactly as worded
since it is clear, plain, and unequivocal. As this
law states, the taxpayer may, if he wishes,
appeal the decision of the Commissioner to the
CTA within 30 days from receipt of the
Commissioner's decision, or if the
Commissioner does not act on the taxpayer's
claim within the 120-day period, the taxpayer
may appeal to the CTA within 30 days from the
expiration of the 120-day period.
xxxx
Section 112(A) and (C) must be interpreted
according to its clear, plain, and unequivocal
language. The taxpayer can file his
administrative claim for refund or credit at
anytime within the two-year prescriptive
period. If he files his claim on the last day of
the two-year prescriptive period, his claim is
still filed on time. The Commissioner will have
120 days from such filing to decide the claim.
If the Commissioner decides the claim on the
120th day, or does not decide it on that day, the
taxpayer still has 30 days to file his judicial
claim with the CTA. This is not only the plain
meaning but also the only logical interpretation
of Section 112(A) and (C). (Emphases in the
original; citations omitted)
Marubeni therefore failed to comply with the mandatory and jurisdictional
requirement of Section 112 (C) when it filed its petition for review with the
CTA on April 25, 2002, or just 29 days after filing its administrative claim
before the BIR on March 27, 2002.
30 of 40
Since Marubeni filed its judicial claim for refund on April 25, 2002, it could
not benefit from BIR Ruling No. DA-489-03 that was subsequently issued on
December 10, 2003. As the Court ruled in San Roque:
To repeat, a claim for tax refund or credit, like a claim for tax
exemption, is construed strictly against the taxpayer. One of
the conditions for a judicial claim of refund or credit under the
VAT System is compliance with the 120+30 day mandatory
and jurisdictional periods. Thus, strict compliance with the
120+30 day periods is necessary for such a claim to
prosper, whether before, during, or after the effectivity of
the Atlas doctrine, except for the period from the issuance
of BIR Ruling No. DA-489-03 on 10 December 2003 to 6
October 2010 when the Aichi doctrine was adopted, which
again reinstated the 120+30 day periods as mandatory and
jurisdictional. (Emphasis and underscoring supplied.)
In fine, Marubeni's judicial claim for refund was, as correctly found by the
CTA En Banc, premature and the CTA was devoid of any jurisdiction over the
petition for review because of Marubeni's failure to strictly comply with the
120+30 day periods required by Section 112 (C) of the 1997 Tax Code. To
recall, Marubeni filed its administrative claim on March 27, 2002. The CIR
had 120 days from that date within which to rule on that administrative claim.
But within 29 days from March 27, 2002, or on April 25, 2002, Marubeni
already filed its petition for review with the CTA.
Marubeni could also not benefit from BIR Ruling No. DA-489-03 because that
ruling was issued on December 10, 2003, or after Marubeni had already filed
its petition for review with the CTA on April 25, 2002.
Waiver of objection to non-exhaustion of administrative remedies.
Marubeni also argues that even assuming that the 120+30 day periods are
applicable, failure to comply with said periods violates only the rule on non-
exhaustion of administrative remedies which can be waived when not objected
to. Stated otherwise, Marubeni posits that the CIR's failure to raise the issue of
prematurity in its Answer to Marubeni's petition before the CTA should be
deemed a waiver of that objection. Again, this has no basis.
In Applied Food Ingredients Company, Inc. v. Commissioner of Internal
Revenue, the Court, citing San Roque, ruled that the failure to observe the 120
days prior to filing of a judicial claim for refund is not a mere non-exhaustion
of administrative remedies but is jurisdictional in nature, thus:
Considering further that the 30-day period to appeal to the
CTA is dependent on the 120-day period, both periods are
hereby rendered jurisdictional. Failure to observe 120 days
prior to the filing of a judicial claim is not a mere non-
exhaustion of administrative remedies, but is likewise
considered jurisdictional. The period of 120 days is a
prerequisite for the commencement of the 30-day period to
appeal to the CTA. In both instances, whether the CIR renders
a decision (which must be made within 120 days) or there was
inaction, the period of 120 days is material.
Accordingly, the CIR's failure to raise the issue of compliance with the
120+30 day periods in its Answer to Marubeni's petition for review cannot be
deemed a waiver of such objection. As the Court ruled in Applied Food, the
periods are jurisdictional, and "x x x the issue of jurisdiction over the subject
matter may, at any time, be raised by the parties or considered by the Court
motu proprio." Marubeni cannot therefore escape compliance with the 120+39
day periods. Its failure to observe the periods is fatal to its judicial claim for
refund.

WHEREFORE, premises considered, the instant petition for review is hereby
DENIED. The Decision dated March 23, 2011 and the Resolution dated
August 31, 2011 of the CTA En Banc in CTA EB Case No. 557 are hereby
AFFIRMED.
SO ORDERED.
Sereno, C.J., (Chairperson), Leonardo-De Castro, Del Castillo, and Perlas-
Bernabe, JJ., concur.
FIRST DIVISION
[ G.R. No. 220835, July 26, 2017 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS.
SYSTEMS TECHNOLOGY INSTITUTE, INC., RESPONDENT.
DECISION
CAGUIOA, J:
Before the Court is a petition for review on certiorari under Rule 45 of the
Rules of Court filed by petitioner Commissioner of Internal Revenue (CIR),
assailing the Decision dated March 24, 2015 and Resolution dated September
2, 2015 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 1050. The
CTA En Banc affirmed the Decision dated April 17, 2013 and the Resolution
dated July 17, 2013 of the CTA Second Division, which granted the petition
for review filed by respondent Systems Technology Institute, Inc. (STI) and
cancelled the assessments against STI for deficiency income tax, deficiency
expanded withholding tax (EWT), and deficiency value-added tax (VAT) for
fiscal year ending March 31, 2003.
Facts
The facts of this case, as presented by the CTA En Banc, are as follows:
STI filed its Amended Annual Income Tax Return for fiscal year 2003 on
August 15, 2003; its Quarterly VAT Returns on July 23, 2002, October 25,
2002, January 24, 2003, and May 23, 2003; and its Bureau of Internal
Revenue (BIR) Form 1601E for EWT from May 10, 2002 to April 15, 2003.
On May 30, 2006, STI's Amiel C. Sangalang signed a Waiver of the Defense
of Prescription Under the Statute of Limitations of the National Internal
Revenue Code (NIRC), with the proviso that the assessment and collection of
taxes of fiscal year 2003 shall come "no later than December 31, 2006." On
June 2, 2006, the waiver was accepted by Virgilio R. Cembrano, Large
Taxpayers District Officer of Makati and was notarized on even date.
On December 12, 2006, another waiver was executed extending the period to
assess and collect the assessed taxes to March 31, 2007. It was also signed by
Sangalang and accepted by Cembrano and notarized on the same date. A third
waiver was executed by the same signatories extending further the period to
June 30, 2007.
On June 28, 2007, STI received a Formal Assessment Notice from the CIR,
assessing STI for deficiency income tax, VAT and EWT for fiscal year 2003,
in the aggregate amount of P161,835,737.98.
On July 25, 2007, STI filed a request for reconsideration/reinvestigation dated
July 23, 2007.
On September 11, 2009, STI received from the CIR the Final Decision on
Disputed Assessment (FDDA) dated August 17, 2009 finding STI liable for
deficiency income tax, VAT and EWT in the lesser amount of
P124,257,764.20.
On October 12, 2009, STI appealed the FDDA by filing a petition for review
with the CTA. The case was docketed as CTA Case No. 7984 and was heard
by the CTA Second Division.
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On April 17, 2013, the CTA Second Division promulgated its Decision
denying the assessment on the ground of prescription, the dispositive portion
of which reads as follows:
WHEREFORE, premises considered, the instant Petition for
Review is hereby GRANTED. Accordingly, the assessments
against petitioner for deficiency income tax, deficiency
expanded withholding tax, and deficiency value-added tax for
fiscal year ending March 31, 2003 are hereby CANCELLED
and SET ASIDE on the ground of prescription.
The CTA Division found the waivers executed by STI defective for failing to
strictly comply with the requirements provided by Revenue Memorandum
Order (RMO) No. 20-90 issued on April 4, 1990 and Revenue Delegation
Authority Order (RDAO) No. 05-01 issued on August 2, 2001. Consequently,
the periods for the CIR to assess or collect internal revenue taxes were never
extended; and the subject assessment for deficiency income tax, VAT and
EWT against STI, which the CIR issued beyond the three-year prescriptive
period provided by law, was already barred by prescription.
On May 9, 2013, the CIR filed a motion for reconsideration, but this was
denied by the CTA Division in its Resolution dated July 17, 2013.
Undaunted, the CIR appealed to the CTA En Banc.
In the assailed Decision, the CTA En Banc denied the CIR's petition for lack
of merit. The CTA En Banc affirmed the Decision and Resolution of the CTA
Division, reiterating that the requirements for the execution of a waiver must
be strictly complied with; otherwise, the waiver will be rendered defective and
the period to assess or collect taxes will not be extended. It further held that
the execution of a waiver did not bar STI from questioning the validity thereof
or invoking the defense of prescription.
On September 2, 2015, the CTA En Banc issued the assailed Resolution
denying the CIR's motion for reconsideration for lack of merit.
Hence, the instant petition raising the following issue:
WHETHER OR NOT PRESCRIPTION HAD SET IN
AGAINST THE ASSESSMENTS FOR DEFICIENCY
INCOME TAX, DEFICIENCY VAT AND DEFICIENCY
EXPANDED WITHHOLDING TAX.
The CIR asserts that prescription had not set in on the subject assessments
because the waivers executed by the parties are valid. It also claims that STI's
active participation in the administrative investigation by filing a request for
reinvestigation, which resulted in a reduced assessment, amounts to estoppel
that prescription can no longer be invoked. To support its contention, the CIR
cites the case of Rizal Commercial Banking Corporation v. Commissioner of
Internal Revenue, where the Court considered the taxpayer's partial payment
of the revised assessment as an implied admission of the validity of the
waivers.
For its part, STI contends that the requisites under RMO No. 20-90 are
mandatory and no less than this Court has affirmed that the failure to comply
therewith results in the nullity of the waiver and consequently, the
assessments. Tested against these requisites and settled jurisprudence, the
subject waivers are defective and invalid and, thus, did not extend the period
to assess.
STI further claims, that contrary to the CIR's insistence, it is not estopped from
invoking the defense of prescription because: (1) STI did not admit the
validity or correctness of the deficiency assessments; (2) it did not receive or
accept any benefit from the execution of the waivers since it continued to
dispute the assessment; and (3) STI did not, in any way, lead the CIR to
believe that the waivers were valid.

Finally, STI avers that the doctrine in RCBC does not apply to this case
because the estoppel upheld in said case arose from the act of payment, which
is not obtaining in the instant case.
The Court's Ruling
The petition lacks merit.
The Waivers of Statute of Limitations, being defective and invalid, did not
extend the CIR's period to issue the subject assessments. Thus, the right of
the government to assess or collect the alleged deficiency taxes is already
barred by prescription.
Section 203 of the NIRC of 1997, as amended, limits the CIR's period to
assess and collect internal revenue taxes to three (3) years counted from the
last day prescribed by law for the filing of the return or from the day the return
was filed, whichever comes later. Thus, assessments issued after the expiration
of such period are no longer valid and effective.
In SMI-Ed Philippines Technology, Inc. v. Commissioner of Internal Revenue,
the Court explained the primary reason behind the prescriptive period on the
CIR's right to assess or collect internal revenue taxes: that is, to safeguard the
interests of taxpayers from unreasonable investigation. Accordingly, the
government must assess internal revenue taxes on time so as not to extend
indefinitely the period of assessment and deprive 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.
In this regard, the CTA Division found that the last day for the CIR to issue an
assessment on STI's income tax for fiscal year ending March 31, 2003 was on
August 15, 2006; while the latest date for the CIR to assess STI of EWT for
the fiscal year ending March 31, 2003 was on April 17, 2006; and the latest
date for the CIR to assess STI of deficiency VAT for the four quarters of the
same fiscal year was on May 25, 2006. Clearly, on the basis of these dates, the
final assessment notice dated June 16, 2007, assessing STI for deficiency
income tax, VAT and EWT for fiscal year 2003, in the aggregate amount of
P161,835,737.98, which STI received on June 28, 2007, was issued beyond
the three-year prescriptive period.
However, the CIR maintains that prescription had not set in because the parties
validly executed a waiver of statute of limitations under Section 222(b) of the
NIRC, as amended. Said provision reads:
SEC. 222. Exceptions as to Period of Limitation of Assessment
and Collection of Taxes. -
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.
xxxx
To implement the foregoing provisions, the BIR issued RMO 20-90 and
RDAO 05-01, outlining the procedures for the proper execution of a valid
waiver, viz.:
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.
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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.
These requirements are mandatory and must strictly be followed. To be sure,
in a number of cases, this Court did not hesitate to strike down waivers which
failed to strictly comply with the provisions of RMO 20-90 and RDAO 05-01.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue, the Court
declared the waiver invalid because: (1) it did not specify the date within
which the BIR may assess and collect revenue taxes, such that the waiver
became unlimited in time; (2) it was signed only by a revenue district officer,
and not the CIR; (3) there was no date of acceptance; and (4) the taxpayer was
not furnished a copy of the waiver.
In Commissioner of Internal Revenue v. FMF Development Corporation, the
waiver was found defective and thus did not validly extend the original three-
year prescriptive period because: (1) it was not proven that the taxpayer was
furnished a copy of the waiver; (2) it was signed only by a revenue district
officer, and not the CIR as mandated by law; and (3) it did not contain the date
of acceptance by the CIR, which is necessary to determine whether the waiver
was validly accepted before the expiration of the original three-year period.
In another case, the waivers executed by the taxpayer's accountant were found
defective for the following reasons: (1) the waivers were executed without the
notarized written authority of the taxpayer's representative to sign the waiver
on its behalf; (2) the waivers failed to indicate the date of acceptance; and (3)
the fact of receipt by the taxpayer of its file copy was not indicated in the
original copies of the waivers.
In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Inc.,
the Court nullified the waivers because the following requisites were absent:
(1) conformity of either the CIR or a duly authorized representative; (2) date
of acceptance showing that both parties had agreed on the waiver before the
expiration of the prescriptive period; and (3) proof that the taxpayer was
furnished a copy of the waiver.
The Court also invalidated the waivers executed by the taxpayer in the case of
Commissioner of Internal Revenue v. Standard Chartered Bank, because: (1)

they were signed by Assistant Commissioner-Large Taxpayers Service and not
by the CIR; (2) the date of acceptance was not shown; (3) they did not specify
the kind and amount of the tax due; and (4) the waivers speak of a request for
extension of time within which to present additional documents and not for
reinvestigation and/or reconsideration of the pending internal revenue case as
required under RMO No. 20-90.
Tested against the requirements of RMO 20-90 and relevant jurisprudence, the
Court cannot but agree with the CTA's finding that the waivers subject of this
case suffer from the following defects:
1. At the time when the first waiver took effect, on June 2, 2006, the
period for the CIR to assess STI for deficiency EWT and deficiency
VAT for fiscal year ending March 31, 2003, had already prescribed.
To recall, the CIR only had until April 17, 2006 (for EWT) and May
25, 2006 (for VAT), to issue the subject assessments.
2. STI's signatory to the three waivers had no notarized written
authority from the corporation's board of directors. It bears to
emphasize that RDAO No. 05-01 mandates 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; and in case the authority
is delegated by the taxpayer to a representative, as in this case, the
concerned revenue official shall see to it that such delegation is in
writing and duly notarized. The waiver should not be accepted by
the concerned BIR office and official unless notarized.
3. Similar to Standard Chartered Bank, the waivers in this case did not
specify the kind of tax and the amount of tax due. It is established
that a waiver of the statute of limitations is a bilateral agreement
between the taxpayer and the BIR to extend the period to assess or
collect deficiency taxes on a certain date. Logically, there can be no
agreement if the kind and amount of the taxes to be assessed or
collected were not indicated. Hence, specific information in the
waiver is necessary for its validity.
Verily, considering the foregoing defects in the waivers executed by STI, the
periods for the CIR to assess or collect the alleged deficiency income tax,
deficiency EWT and deficiency VAT were not extended. The assessments
subject of this case, which were issued by the BIR beyond the three-year
prescriptive, are therefore considered void and of no legal effect. Hence, the
CTA committed no reversible error in cancelling and setting aside the subject
assessments on the ground of prescription.
STI is not estopped from invoking the defense of prescription.
As regards the CIR's reliance on the case of RCBC and its insistence that STI's
request for reinvestigation, which resulted in a reduced assessment, bars STI
from raising the defense of prescription, the Court finds the same bereft of
merit.
As correctly stated by the CTA, RCBC is not on all fours with the instant case.
The estoppel upheld in the said case arose from the taxpayer's act of payment
and not on the reduction in the amount of the assessed taxes. The Court
explained that RCBC's partial payment of the revised assessments effectively
belied its insistence that the waivers are invalid and the assessments were
issued beyond the prescriptive period. Here, as no such payment was made by
STI, mere reduction of the amount of the assessment because of a request for
reinvestigation should not bar it from raising the defense of prescription.
At this juncture, the Court deems it important to reiterate its ruling in
Commissioner of Internal Revenue v. Kudos Metal Corporation, that the
doctrine of estoppel cannot be applied as an exception to the statute of
limitations on the assessment of taxes considering that there is a detailed
33 of 40
procedure for the proper execution of the waiver, which the BIR must strictly
follow. The BIR cannot hide behind the doctrine of estoppel to cover its failure
to comply with RMO 20-90 and RDAO 05-01, which the BIR itself had
issued. Having caused the defects in the waivers, the BIR must bear the
consequence. It cannot simply shift the blame to the taxpayer.
WHEREFORE, premises considered, the instant petition for review is hereby
DENIED. The Decision dated March 24, 2015 and the Resolution dated
September 2, 2015 of the Court of Tax Appeals En Banc in CTA EB No. 1050
are hereby AFFIRMED.
SO ORDERED.
Sereno, C. J., (Chairperson), Leonardo-De Castro, Del Castillo, and Perlas-
Bernabe, JJ., concur.
SECOND DIVISION
[ G.R. No. 216161, August 09, 2017 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS.
PHILIPPINE ALUMINUM WHEELS, INC., RESPONDENT.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review on certiorari assailing the 19 May
2014 Decision and the 5 January 2015 Resolution of the Court of Tax Appeals
(CTA) En Banc in CTA EB No. 994.
The CTA En Banc affirmed the Decision of the CTA First Division ordering
the cancellation and withdrawal of the deficiency tax assessments issued by
the Commissioner of Internal Revenue (CIR) against Philippine Aluminum
Wheels, Inc. (respondent).
The Facts
Respondent is a corporation organized and existing under Philippine laws
which engages in the manufacture, production, sale, and distribution of
automotive parts and accessories. On 16 December 2003, the Bureau of
Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) against
respondent covering deficiency taxes for the taxable year 2001. On 28 March
2004, the BIR issued a Final Assessment Notice (FAN) against respondent in
the amount of P32,100,613.42. On 23 June 2004, respondent requested for
reconsideration of the FAN issued by the BIR. On 8 November 2006, the BIR
issued a Final Decision on Disputed Assessment (FDDA) and demanded full
payment of the deficiency tax assessment from respondent. On 12 April 2007,
the FDDA was served through registered mail.
On 19 July 2007, respondent filed with the BIR an application for the
abatement of its tax liabilities under Revenue Regulations No. 13-2001 for the
taxable year 2001. In a letter dated 12 September 2007, the BIR denied
respondent's application for tax abatement on the ground that the FDDA was
already issued by the BIR and that the FDDA had become final and executory
due to the failure of the respondent to appeal the FDDA with the CTA. The
BIR contended that the FDDA had been sent through registered mail on 12
April 2007 and that the FDDA had become final, executory, and demandable
because of the failure of the respondent to appeal the FDDA with the CTA
within thirty (30) days from receipt of the FDDA.
In a letter dated 19 September 2007, respondent informed the BIR that it
already paid its tax deficiency on withholding tax amounting to P736,726.89
through the Electronic Filing and Payment System of the BIR and that it was
also in the process of availing of the Tax Amnesty Program under Republic
Act No. 9480 (RA 9480) as implemented by Revenue Memorandum Circular
No. 55-2007 to settle its deficiency tax assessment for the taxable year 2001.

On 21 September 2007, respondent complied with the requirements of RA
9480 which include: the filing of a Notice of Availment, Tax Amnesty Return
and Payment Form, and remitting the tax payment. In a letter dated 29 January
2008, the BIR denied respondent's request and ordered respondent to pay the
deficiency tax assessment amounting to P29,108,767.63.
In a second letter dated 16 July 2008, the BIR reiterated that the FDDA had
become final and executory for the failure of the respondent to appeal the
FDDA with the CTA within the prescribed period of thirty (30) days. The BIR
demanded the full payment of the tax assessment and contended that the
respondent's availment of the tax amnesty under RA 9480 had no effect on the
assessment due to the finality of the FDDA prior to respondent's tax amnesty
availment. On 1 August 2008, respondent filed a Petition for Review with the
CTA assailing the letter of the BIR dated 16 July 2008.
The Decision of the CTA First Division
On 12 November 2012, the CTA granted respondent's Petition for Review and
set aside the assessment in view of respondent's availment of a tax amnesty
under RA 9480. The CTA First Division held that RA 9480 covers all national
internal revenue taxes for the taxable year 2005 and prior years, with or
without assessments duly issued, that have remained unpaid as of 31
December 2005. The CTA First Division ruled that respondent complied with
all the requirements of RA 9480 including the payment of the amnesty tax and
submission of all relevant documents. Having complied with all the
requirements of RA 9480, respondent is fully entitled to the immunities and
privileges granted under RA 9480.
The dispositive portion of the Decision states:
WHEREFORE, premises considered, the instant Petition for
Review is GRANTED. The subject assessment in the present
case against petitioner is hereby SET ASIDE solely in view of
petitioner's availment of the Tax Amnesty Program under R.A.
No. 9480; and accordingly, petitioner is hereby DECLARED
ENTITLED to the immunities and privileges provided by the
Tax Amnesty Law being a qualified tax amnesty applicant and
for having complied with all the documentary requirements set
by law.
SO ORDERED.
The CIR filed a Motion for Reconsideration on 3 December 2012 which the
CTA First Division denied on 1 March 2013.
The Decision of the CTA En Banc
On 19 May 2014, the CTA En Banc held that a qualified tax amnesty applicant
who has completed the requirements of RA 9480 shall be deemed to have fully
complied with the Tax Amnesty Program. Upon compliance with the
requirements of the law, the taxpayer shall, as mandated by law, be immune
from the payment of taxes as well as appurtenant civil, criminal, or
administrative penalties under the National Internal Revenue Code. The CTA
En Banc ruled that the finality of a tax assessment did not disqualify
respondent from availing of a tax amnesty under RA 9480.
The dispositive portion of the Decision states:
WHEREFORE, premises considered, the Petition for Review
filed by the Commissioner of Internal Revenue is DENIED,
for lack of merit. The Decision of the First Division of this
Court promulgated on November 12, 2012 in CTA Case No.
781[7], captioned Philippine Aluminum Wheels, Inc. v.
Commissioner of Internal Revenue, and the Resolution of the
said Division dated March 1, 2013, are AFFIRMED in toto.
SO ORDERED.
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The CIR filed a Motion for Reconsideration on 11 June 2014 which was
denied on 5 January 2015.
The Issue
Whether respondent is entitled to the benefits of the Tax Amnesty Program
under RA 9480.
The Decision of this Court
This Court denies the petition in view of the respondent's availment of the Tax
Amnesty Program under RA 9480.
A tax amnesty is a general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law. It partakes of an absolute forgiveness or
waiver by the government of its right to collect what is due it and to give tax
evaders who wish to relent a chance to start with a clean slate. A tax amnesty,
much like a tax exemption, is never favored nor presumed in law. The grant of
a tax amnesty, similar to a tax exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing authority.
On 24 May 2007, RA 9480, or "An Act Enhancing Revenue Administration
and Collection by Granting an. Amnesty on All Unpaid Internal Revenue
Taxes Imposed by the National Government for Taxable Year 2005 and Prior
Years," became law.
The pertinent provisions of RA 9480 are:
Section 1. Coverage. There is hereby authorized and granted a
tax amnesty which shall cover all national internal revenue
taxes for the taxable year 2005 and prior years, with or
without assessments duly issued therefor, that have
remained unpaid as of December 31, 2005: Provided, however,
that the amnesty hereby authorized and granted shall not cover
persons or cases enumerated under Section 8 hereof.
xxxx
Section 6. Immunities and Privileges. Those who availed
themselves of the tax amnesty under Section 5 hereof, and
have fully complied with all its conditions shall be entitled to
the following immunities and privileges:
(a) The taxpayer shall be immune from the'
payment of taxes, as well as additions thereto,
and the appurtenant civil, criminal or
administrative penalties under the National
Internal Revenue Code of 1997, as amended,
arising from the failure to pay any and all
internal revenue taxes for taxable year 2005
and prior years.
x x x x (Emphasis supplied)
The Department of Finance issued DOF Department Order No. 29-07 (DO 29-
07). Section 6 of DO 29-07 provides for the method for availing a tax amnesty
under RA 9480, to wit:
Section 6. Method of Availment of Tax Amnesty.
1. Forms/Documents to be filed. To avail of the general tax
amnesty, concerned taxpayers shall file the following
documents/requirements:
a. Notice of Availment in such forms as may be prescribed by
the BIR;

b. Statement of Assets, Liabilities and Networth (SALN) as of
December 31, 2005 in such forms, as may be prescribed by the
BIR;
c. Tax Amnesty Return in such forms as may be prescribed by
the BIR.
2. x x x.
3. x x x.
The Acceptance of Payment Form, the Notice of Availment,
the SALN, and the Tax Amnesty Return shall be submitted to
the RDO, which shall be received only after complete
payment. The completion of these requirements shall be
deemed full compliance with the provisions of RA 9480.
x x x x (Emphasis supplied)
In Philippine Banking Corporation v. Commissioner of Internal Revenue, this
Court held that the taxpayer's completion of the requirements under RA 9480,
as implemented by DO 29-07, will extinguish the taxpayer's tax liability,
additions and all appurtenant civil, criminal, or administrative penalties under
the National Internal Revenue Code, to wit:
Considering that the completion of these requirements shall be
deemed full compliance with the tax amnesty program, the law
mandates that the taxpayer shall thereafter be immune from the
payment of taxes, and additions thereto, as well as the
appurtenant civil, criminal or administrative penalties under
the NIRC of 1997, as amended, arising from the failure to pay
any and all internal revenue taxes for taxable year 2005 and
prior years.
Similarly, in Metropolitan Bank and Trust Company (Metrobank) v.
Commissioner of Internal Revenue, this Court sustained the validity of
Metrobank's tax amnesty upon full compliance with the requirements of RA
9480. This Court ruled: "Therefore, by virtue of the availment by Metrobank
of the Tax Amnesty Program under Republic Act No. 9480, it is already
immune from the payment of taxes, including DST on the UNISA for 1999, as
well as the addition thereto."
On 19 September 2007, respondent availed of the Tax Amnesty Program under
RA 9480, as implemented by DO 29-07. Respondent submitted its Notice of
Availment, Tax Amnesty Return, Statement of Assets, Liabilities and Net
Worth, and comparative financial statements for 2005 and 2006. Respondent
paid the amnesty tax to the Development Bank of the Philippines, evidenced
by its Tax Payment Deposit Slip dated 21 September 2007. Respondent's
completion of the requirements of the Tax Amnesty Program under RA 9480 is
sufficient to extinguish its tax liability under the FDDA of the BIR.
In Asia International Auctioneers, Inc. v. Commissioner of Internal Revenue,
this Court ruled that the tax liability of Asia International Auctioneers, Inc.
was fully settled when it was able to avail of the Tax Amnesty Program under
RA 9480 in February 2008 while its Petition for Review was pending before
this Court. This Court declared the pending case involving the tax liability of
Asia International Auctioneers, Inc. moot since the company's compliance
with the Tax Amnesty Program under RA 9480 extinguished the company's
outstanding deficiency taxes.
The CIR contends that respondent is disqualified to avail of the tax amnesty
under RA 9480. The CIR asserts that the finality of its assessment, particularly
its FDDA is equivalent to a final and executory judgment by the courts, falling
within the exceptions to the Tax Amnesty Program under Section 8 of RA
9480, which states:
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Section 8. Exceptions. The tax amnesty provided in Section 5
hereof shall not extend to the following persons or cases
existing as of the effectivity of this Act:
(a) Withholding agents with respect to their withholding tax
liabilities;
(b) Those with pending cases falling under the jurisdiction of
the Presidential Commission on Good Government;
(c) Those with pending cases involving unexplained or
unlawfully acquired wealth or under the Anti-Graft and
Corrupt Practices Act;
(d) Those with pending cases filed in court involving violation
of the Anti-Money Laundering Law;
(e) Those with pending criminal cases for tax evasion and
other criminal offenses under Chapter II of Title X of the
National Internal Revenue Code of 1997, as amended, and the
felonies of frauds, illegal exactions and transactions, and
malversation of public funds and property under Chapters III
and IV of Title VII of the Revised Penal Code; and
(f) Tax cases subject of final and executory judgment by
the courts. (Emphasis supplied)
The CIR is wrong. Section 8(f) is clear: only persons with "tax cases subject of
final and executory judgment by the courts" are disqualified to avail of the Tax
Amnesty Program under RA 9480. There must be a judgment promulgated by
a court and the judgment must have become final and executory. Obviously,
there is none in this case. The FDDA issued by the BIR is not a tax case
"subject to a final and executory judgment by the courts" as contemplated
by Section 8(f) of RA 9480. The determination of the tax liability of
respondent has not reached finality and is still not subject to an executory
judgment by the courts as it is the issue pending before this Court. In fact, in
Metrobank, this Court held that the FDDA issued by the BIR was not a final
and executory judgment and did not prevent Metrobank from availing of the
immunities and privileges granted under RA 9480, to wit:
x x x. As argued by Metrobank, the very fact that the instant
case is still subject of the present proceedings is proof enough
that it has not reached a final and executory stage as to be
barred from the tax amnesty under Republic Act No. 9480.
The assertion of the CIR that deficiency DST is not covered by
the Tax Amnesty Program under Republic Act No. 9480 is
downright specious.
The CIR alleges that respondent is disqualified to avail of the Tax Amnesty
Program under Revenue Memorandum Circular No. 19-2008 (RMC No. 19-
2008) dated 22 February 2008 issued by the BIR which includes "delinquent
accounts or accounts receivable considered as assets by the BIR or the
Government, including self-assessed tax" as disqualifications to avail of the
Tax Amnesty Program under RA 9480. The exception of delinquent accounts
or accounts receivable by the BIR under RMC No. 19-2008 cannot amend RA
9480. As a rule, executive issuances including implementing rules and
regulations cannot amend a statute passed by Congress.
In National Tobacco Administration v. Commission on Audit, this Court held
that in case there is a discrepancy between the law and a regulation issued to
implement the law, the law prevails because the rule or regulation cannot go
beyond the terms and provisions of the law, to wit: "[t]he Circular cannot
extend the law or expand its coverage as the power to amend or repeal a
statute is vested with the legislature." To give effect to the exception under
RMC No. 19-2008 of delinquent accounts or accounts receivable by the BIR,
 36 of 40
as interpreted by the BIR, would unlawfully create a new exception for
availing of the Tax Amnesty Program under RA 9480.
WHEREFORE, we DENY the petition. We AFFIRM the 19 May 2014
Decision and the 5 January 2015 Resolution of the Court of Tax Appeals En
Banc in CTA EB No. 994.
SO ORDERED.
Peralta, Mendoza, Leonen, and Martires, JJ., concur.

SECOND DIVISION
[ G.R. No. 205652, September 06, 2017 ]
PROCTER & GAMBLE ASIA PTE LTD., PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CAGUIOA, J:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court filed by petitioner Procter & Gamble Asia Pte Ltd. (P&G)
against the Commissioner of Internal Revenue (CIR) seeking the reversal of
the Decision dated September 21, 2012 and Resolution dated January 30, 2013
of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB Case No. 742. The
CTA En Banc affirmed the CTA Special Second Division's dismissal of P&G's
claim for refund of unutilized input value-added tax (VAT) attributable to its
zero-rated sales covering the first and second quarters of calendar year 2005,
for being prematurely filed.
Facts
P&G is a foreign corporation duly organized and existing under the laws of
Singapore and is maintaining a Regional Operating Headquarter in the
Philippines. It provides management, marketing, technical and financial
advisory, and other qualified services to related companies as specified by its
Certificate of Registration and License issued by the Securities and Exchange
Commission. It is a VAT-registered taxpayer and is covered by Bureau of
Internal Revenue (BIR) Certificate of Registration No. 9RC0000071787.
P&G filed its Monthly VAT Declarations and Quarterly VAT Returns on the
following dates:
VAT DATE FILED DATE FILED
RETURN/DECLARATION (ORIGINAL) (AMENDED)
January (Monthly) February 21, 2005
February (Monthly) March 18, 2005
Ending March (Quarterly) April 25, 2005 March 19, 2007
April (Monthly) May 20, 2005
May (Monthly) June 21, 2005
Ending June (Quarterly) July 26, 2005 March 20, 2007
On March 22, 2007 and May 2, 2007, P&G filed applications and letters
addressed to the BIR Revenue District Office (RDO) No. 49, requesting the
refund or issuance of tax credit certificates (TCCs) of its input VAT
attributable to its zero-rated sales covering the taxable periods of January 2005
to March 2005, and April 2005 to June 2005.
On March 28, 2007, P&G filed a petition for review with the CTA seeking the
refund or issuance of TCC in the amount of P23,090,729.17 representing input
VAT paid on goods or services attributable to its zero-rated sales for the first
quarter of taxable year 2005. The case was docketed as CTA Case No. 7581.
On June 8, 2007, P&G filed with the CTA another judicial claim for refund or
issuance of TCC in the amount of P19,006,753.58 representing its unutilized
input VAT paid on goods and services attributable to its zero-rated sales for the
second quarter of taxable year 2005. The case was docketed as CTA Case No.
7639.
On July 30, 2007, the CTA Division granted P&G's Motion to Consolidate
CTA Case No. 7581 with 7639, inasmuch as the two cases involve the same
parties and common questions of law and/or facts.
37 of 40
Proceedings ensued before the CTA Division. P&G presented testimonial and
voluminous documentary evidence to prove its entitlement to the amount
claimed for VAT refund. The CIR, on the other hand, submitted the case for
decision based on the pleadings, as the claim for refund was still pending
before the BIR RDO No. 40.
Meanwhile, on October 6, 2010, while P&G's claim for refund or tax credit
was pending before the CTA Division, this Court promulgated Commissioner
of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi). In that
case, the Court held that compliance with the 120-day period granted to the
CIR, within which to act on an administrative claim for refund or credit of
unutilized input VAT, as provided under Section 112(C) of the National
Internal Revenue Code of 1997 (NIRC), as amended, is mandatory and
jurisdictional in filing an appeal with the CTA.
In a Decision dated November 17, 2010, the CTA Division dismissed P&G's
judicial claim, for having been prematurely filed.
Citing Aichi, the CTA Division held that the CIR is granted by law a period of
120 days to act on the administrative claim for refund. Upon denial of the
claim, or after the expiration of the 120-day period without action by the CIR,
only then may the taxpayer-claimant seek judicial recourse to appeal the CIR's
action or inaction on a refund/tax credit claim, within a period of 30 days.
According to the CTA Division, P&G failed to observe the 120-day period
granted to the CIR. Its judicial claims were prematurely filed with the CTA on
March 28, 2007 (CTA Case No. 7581) and June 8, 2007 (CTA Case No. 7639),
or only six (6) days and thirty-seven (37) days, respectively, from the filing of
the applications at the administrative level. Thus, the CTA Division ruled that
inasmuch as P&G's petitions were prematurely filed, it did not acquire
jurisdiction over the same.
P&G moved for reconsideration but this was denied by the CTA Division in its
Resolution dated March 9, 2011.
Aggrieved, P&G elevated the matter to the CTA En Banc insisting, among
others, that the Court's ruling in Aichi should not be given a retroactive effect.
On September 21, 2012, the CTA En Banc rendered the assailed Decision
affirming in toto the CTA Division's Decision and Resolution. It agreed with
the CTA Division in applying the ruling in Aichi which warranted the
dismissal of P&G's judicial claim for refund on the ground of prematurity.
P&G moved for reconsideration, but the same was denied by the Court En
Banc for lack of merit.
In the meantime, on February 12, 2013, this Court decided the consolidated
cases of Commissioner of Internal Revenue v. San Roque Power Corporation,
Taganito Mining Corporation v. Commissioner of Internal Revenue, and
Philex Mining Corporation v. Commissioner of Internal Revenue (San Roque),
where the Court recognized BIR Ruling No. DA-489-03 as an exception to the
mandatory and jurisdictional nature of the 120-day waiting period.
On March 27, 2013, P&G filed the present petition.
Issue
Culled from the submissions of the parties, the singular issue for this Court's
resolution is whether the CTA En Banc erred in dismissing P&G's judicial
claims for refund on the ground of prematurity.
P&G avers that its judicial claims for tax refund/credit was filed with the CTA
Division on March 28, 2007 and June 8, 2007, after the issuance of BIR
Ruling No.DA-489-03 on December 10, 2003, but before the adoption of the
Aichi doctrine on October 6, 2010. Accordingly, pursuant to the Court's ruling
in San Roque, its judicial claims with the CTA was deemed timely filed.
P&G further contends that the CTA En Banc gravely erred in applying the
Aichi doctrine retroactively. According to P&G, the retroactive application of

Aichi amounts to a denial of its constitutional right to due process and unjust
enrichment of the CIR.
Lastly, P&G claims that assuming, without conceding, that its judicial claims
were prematurely filed, its failure to observe the 120-day period was not
jurisdictional but violates only the rule on exhaustion of administrative
remedies, which was deemed waived when the CIR did not file a motion to
dismiss and opted to actively participate at the trial.
The CIR, on the other hand, insists that the plain language of Section 112(C)
of the NIRC, as amended, demands mandatory compliance with the 120+30-
day rule; and P&G cannot claim reliance in good faith with BIR Ruling No.
DA-489-03 to shield the filing of its judicial claims from the vice of
prematurity.
The Court's Ruling
The Court finds the petition meritorious.
Exception to the mandatory and jurisdictional 120+30-day periods under
Section 112(C) of the NIRC
Section 112 of the NIRC, as amended, provides for the rules on claiming
refunds or tax credits of unutilized input VAT, the pertinent portions of which
read as follows:
SEC. 112. Refunds or Tax Credits of Input Tax. —
(A) Zero-rated or Effectively Zero-rated Sales. — Any VAT-
registered person, whose sales are zero-rated or effectively
zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional
input tax, to the extent that such input tax has not been applied
against output tax: x x x
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes
shall be Made. — In proper cases, the Commissioner shall
grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the
date of submission of complete documents in support of the
application filed in accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or
tax credit, or the failure on the part of the Commissioner to act
on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt
of the decision denying the claim or after the expiration of the
one hundred twenty-day period, appeal the decision or the
unacted claim with the Court of Tax Appeals. (Emphasis
supplied)
Based on the plain language of the foregoing provision, the CIR is given 120
days within which to grant or deny a claim for refund. Upon receipt of CIR's
decision or ruling denying the said claim, or upon the expiration of the 120-
day period without action from the CIR, the taxpayer has 30 days within
which to file a petition for review with the CTA.
In Aichi, the Court ruled that compliance with the 120+30-day periods is
mandatory and jurisdictional and is fatal to the filing of a judicial claim with
the CTA.
Subsequently, however, in San Roque, while the Court reiterated the
mandatory and jurisdictional nature of the 120+30-day periods, it recognized
as an exception BIR Ruling No. DA-489-03, issued prior to the promulgation
38 of 40
of Aichi, where the BIR expressly allowed the filing of judicial claims with the
CTA even before the lapse of the 120-day period. The Court held that BIR
Ruling No. DA-489-03 furnishes a valid basis to hold the CIR in estoppel
because the CIR had misled taxpayers into filing judicial claims with the CTA
even before the lapse of the 120-day period:
There is no dispute that the 120-day period is mandatory and
jurisdictional, and that the CTA does not acquire jurisdiction
over a judicial claim that is filed before the expiration of the
120-day period. There are, however, two exceptions to this
rule. The first exception is if the Commissioner, through a
specific ruling, misleads a particular taxpayer to prematurely
file a judicial claim with the CTA. Such specific ruling is
applicable only to such particular taxpayer. The second
exception is where the Commissioner, through a general
interpretative rule issued under Section 4 of the Tax Code,
misleads all taxpayers into filing prematurely judicial
claims with the CTA. In these cases, the Commissioner
cannot be allowed to later on question the CTA's
assumption of jurisdiction over such claim since equitable
estoppel has set in as expressly authorized under Section
246 of the Tax Code.
xxxx
BIR Ruling No. DA-489-03 is a general interpretative rule
because it was a response to a query made, not by a particular
taxpayer, but by a government agency tasked with processing
tax refunds and credits, that is, the One Stop Shop Inter-
Agency Tax Credit and Drawback Center of the
Department of Finance. This government agency is also the
addressee, or the entity responded to, in BIR Ruling No. DA-
489-03. Thus, while this government agency mentions in its
query to the Commissioner the administrative claim of Lazi
Bay Resources Development, Inc., the agency was in fact
asking the Commissioner what to do in cases like the tax claim
of Lazi Bay Resources Development, Inc., where the taxpayer
did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general
interpretative rule. Thus, all taxpayers can rely on BIR
Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal by this Court in Aichi on
6 October 2010, where this Court held that the 120+30 day
periods are mandatory and jurisdictional. (Emphasis
supplied)
In Visayas Geothermal Power Company v. Commissioner of Internal Revenue,
the Court came up with an outline summarizing the pronouncements in San
Roque, to wit:
For clarity and guidance, the Court deems it proper to outline
the rules laid down in San Roque with regard to claims for
refund or tax credit of unutilized creditable input VAT. They
are as follows:
1. When to file an administrative claim with the CIR:
a. General rule - Section 112(A) and Mirant,
b. Within 2 years from the close of the
taxable quarter when the sales were
made. .
c. Exception – Atlas
 39 of 40
Within 2 years from the date of payment of RR 16-2005 may have re-established the necessity of the 120-day period,
the output VAT, if the administrative claim taxpayers cannot be faulted for still relying on BIR Ruling No. DA-489-03
was filed from June 8, 2007 (promulgation even after the issuance of RR 16-2005 because the issue on the mandatory
of Atlas) to September 12, 2008 compliance of the 120-day period was only brought before the Court and
(promulgation of Mirant). resolved with finality in Aichi.
2. When to file a judicial claim with the CTA: Accordingly, in consonance with the doctrine laid down in San Roque, the
Court finds that P&G's judicial claims were timely filed and should be given
a. General rule - Section 112(D); not
due course and consideration by the CTA.
Section 229
WHEREFORE, premises considered, the instant petition for review is hereby
i. Within 30 days from the full or
GRANTED. The Decision dated September 21, 2012 and the Resolution
partial denial of the
administrative claim by the dated January 30, 2013 of the CTA En Banc in C.T.A. EB Case No. 742 are
hereby REVERSED AND SET ASIDE. Accordingly, CTA Case Nos. 7581
CIR; or
and 7639 are REINSTATED and REMANDED to the CTA Special Second
ii. Within 30 days from the Division for the proper determination of the refundable amount due to
expiration of the 120-day petitioner Procter & Gamble Asia Pte Ltd., if any.
period provided to the CIR to
decide on the claim. This is SO ORDERED.
mandatory and jurisdictional Carpio, (Chairperson), Peralta, Perlas-Bernabe, and Reyes, Jr., JJ., concur.
beginning January 1, 1998
(effectivity of 1997 NIRC).
b. Exception - BIR Ruling No. DA-489-03
The judicial claim need
not await the expiration
of the 120-day period, if
such was filed from
December 10, 2003
(issuance of BIR Ruling
No. DA-489-03) to
October 6, 2010
(promulgation oi Aichi).
(Emphasis and
underscoring supplied)
In this case, records show that P&G filed its judicial claims for refund on
March 28, 2007 and June 8, 2007, respectively, or after the issuance of BIR
Ruling No. DA-489-03, but before the date when Aichi was promulgated.
Thus, even though P&G filed its judicial claim without waiting for the
expiration of the 120-day mandatory period, the CTA may still take
cognizance of the case because the claim was filed within the excepted period
stated in San Roque. In other words, P&G's judicial claims were deemed
timely filed and should not have been dismissed by the CTA.
Application and validity of BIR Ruling No. DA-489-03
The CIR, however, argues that BIR Ruling No. DA-489-03 was already
repealed and superseded on November 1, 2005 by Revenue Regulation No.
16-2005 (RR 16-2005), which echoed the mandatory and jurisdictional nature
of the 120-day period under Section 112(C) of the NIRC. Thus, P&G cannot
rely, in good faith, on BIR Ruling No. DA-489-03 because its judicial claims
were filed in March and June 2007 or after RR 16-2005 took effect. In other
words, it is the CIR's position that reliance on BIR Ruling No. DA-489-03
should only be permissible from the date of its issuance, on December 10,
2003, until October 31, 2005, or prior to the effectivity of RR 16-2005.
The Court disagrees.
This issue was also raised by the CIR in Commissioner of Internal Revenue v.
Deutsche Knowledge Services, Pte. Ltd., where the Court reiterated that all
taxpayers may rely upon BIR Ruling No. DA-489-03, as a general
interpretative rule, from the time of its issuance on December 10, 2003 until
its effective reversal by the Court in Aichi. The Court further held that while
40 of 40