TAX CASES-REMEDIES
[ G.R. No. 222743, April 05, 2017 ] actually and directly rendered by MEDICARD and/or its subsidiary company;
MEDICARD PHILIPPINES, INC., PETITIONER, VS. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT.
DECISION
REYES, J.:
This appeal by Petition for Review[1] seeks to reverse and set aside the
Decision[2] dated September 2, 2015 and Resolution[3] dated January 29, 2016
of the Court of Tax Appeals (CTA) en banc in CTA EB No. 1224, affirming with
modification the Decision[4] dated June 5, 2014 and the Resolution[5] 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)[6] of the National Internal Revenue Code (NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides
prepaid health and medical insurance coverage to its clients. Individuals
enrolled in its health care programs pay an annual membership fee and are
entitled to various preventive, diagnostic and curative medical services
provided by duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.[7]
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through
Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006
and October 20, 2006, respectively, and its Fourth Quarterly VAT Return on
January 25, 2007.[8]
Upon finding some discrepancies between MEDICARD's Income Tax Returns
(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.[9]
On January 4, 2008, MEDICARD received CIR's FAN dated December 10,
2007 for alleged deficiency VAT for taxable year 2006 in the total amount of
P196,614,476.69,[10] inclusive of penalties.[11]
According to the CIR, the taxable base of HMOs for VAT purposes is its gross
receipts without any deduction under Section 4.108.3(k) of Revenue
Regulation (RR) No. 16-2005. Citing Commissioner of Internal Revenue v.
Philippine Health Care Providers, Inc.,[12] the CIR argued that since
MEDICARD does not actually provide medical and/or hospital services, but
merely arranges for the same, its services are not VAT exempt. [13]
MEDICARD argued that: (1) the services it render is not limited merely to
arranging for the provision of medical and/or hospital services by hospitals
and/or clinics but include actual and direct rendition of medical and laboratory
services; in fact, its 2006 audited balance sheet shows that it owns x-ray and
laboratory facilities which it used in providing medical and laboratory services
to its members; (2) out of the 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 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
1
and (5) even assuming that it is liable to pay for the VAT, the 12% VAT rate
should not be applied on the entire amount but only for the period when the
12% VAT rate was already in effect, i.e., on February 1, 2006. It should not
also be held liable for surcharge and deficiency interest because it did not pass
on the VAT to its members.[14]
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing
Revenue Officer Romualdo Plocios to verify the supporting documents of
MEDICARD's Protest. MEDICARD also submitted additional supporting
documentary evidence in aid of its Protest thru a letter dated March 18,
2008.[15]
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.[16]
On July 20, 2009, MEDICARD proceeded to file a petition for review before
the CTA, reiterating its position before the tax authorities. [17]
On June 5, 2014, the CTA Division rendered a Decision[18] 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.[19]
The CTA Division held that: (1) the determination of deficiency VAT is not

limited to the issuance of Letter of Authority (LOA) alone as the CIR is granted
vast powers to perform examination and assessment functions; (2) in lieu of
an LOA, an LN was issued to MEDICARD informing it of the discrepancies
between its ITRs 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.[20]
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied.
Hence, MEDICARD elevated the matter to the CTA en banc.
In a Decision[21] 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 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.[22]
Disagreeing with the CTA en banc's decision, MEDICARD filed a motion for
2
TAX CASES-REMEDIES
reconsideration but it was denied.[23] 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.[24]
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.[25] An LOA is premised on
the fact that the examination of a taxpayer who has already filed his tax returns
is a power that statutorily belongs only to the CIR himself or his duly authorized
representatives. Section 6 of the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe
Additional Requirements for Tax Administration and Enforcement. –
(A) Examination of Return and Determination of Tax Due. – After a return
has been filed as required under the provisions of this Code, the
Commissioner or his duly authorized representative may authorize the
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).[26] This system can detect tax
leaks by matching the data available under the BIR's Integrated Tax System
(ITS) with data gathered from third-party sources. Through the consolidation
and cross-referencing of third-party information, discrepancy reports on sales
and purchases can be generated to uncover under declared income and over
claimed purchases of goods and services.
Under this RMO, several offices of the BIR are tasked with specific functions
 TAX CASES-REMEDIES
relative to the RELIEF System, particularly with regard to LNs. Thus, the of interest and penalties after the lapse of the sixty (60)-day period from
Systems Operations Division (SOD) under the Information Systems Group the LN issuance.
(ISG) is responsible for: (1) coming up with the List of Taxpayers with
discrepancies within the threshold amount set by management for the 9. In case the above discrepancies remained unresolved at the end of
issuance of LN and for the system-generated LNs; and (2) sending the same the One Hundred and Twenty (120)-day period, the revenue officer
to the taxpayer and to the Audit Information, Tax Exemption and Incentives (RO) assigned to handle the LN shall recommend the issuance of
Division (AITEID). After receiving the LNs, the AITEID under the Assessment [LOA] to replace the LN. The head of the concerned investigating office
Service (AS), in coordination with the concerned offices under the ISG, shall shall submit a summary list of LNs for conversion to LAs (using the herein
be responsible for transmitting the LNs to the investigating offices [Revenue prescribed format in Annex "E" hereof) to the OACIR-LTS / ORD for the
District Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers preparation of the corresponding LAs with the notation "This LA cancels
Audit and Investigation Division (LTAID)]. At the level of these investigating LN No. ___________"
offices, the appropriate action on the LNs issued to taxpayers with RELIEF x x x x
data discrepancy would be determined.
V. PROCEDURES
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 xxxx
authorize any examination of taxpayer arid the assessment of the correct B. At the Regional Office/Large Taxpayers Service
amount of tax. The no-contact-audit approach includes the process of
computerized matching of sales and purchases data contained in the xxxx
Schedules of Sales and Domestic Purchases, and Schedule of Importation
submitted by VAT taxpayers under the RELIEF System pursuant to RR No. 7- 7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the
95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include RDO x x x prior to approval.
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
8. Upon approval of the above list, prepare/accomplish and sign the
Withholding Taxes.
corresponding LAs.
xxxx
Under this policy, even without conducting a detailed examination of
taxpayer's books and records, if the computerized/manual matching of sales
and purchases/expenses appears to reveal discrepancies, the same shall be 10. Transmit the approved/signed LAs, together with the duly
communicated to the concerned taxpayer through the issuance of LN. The LN accomplished/approved Summary List of LNs for conversion to LAs, to
shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal the concerned investigating offices for the encoding of the required
Conference to the concerned taxpayer. Thus, under the RELIEF System, a information x x x and for service to the concerned taxpayers.
revenue officer may begin an examination of the taxpayer even prior to the
issuance of an LN or even in the absence of an LOA with the aid of a x x x x
computerized/manual matching of taxpayers' documents/records.
Accordingly, under the RELIEF System, the presumption that the tax returns C. At the RDO x x x
are in accordance with law and are presumed correct since these are filed
under the penalty of perjury[27] are easily rebutted and the taxpayer becomes xxxx
instantly burdened to explain a purported discrepancy.
11. If the LN discrepancies remained unresolved within One Hundred and
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the Twenty (120) days from issuance thereof, prepare a summary list of said
statutory requirement of an LOA before any investigation or examination of the LNs for conversion to LAs x x x.
taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is xxxx
merely similar to a Notice for Informal Conference. However, for a Notice of
Informal Conference, which generally precedes the issuance of an 16. Effect the service of the above LAs to the concerned taxpayers.[28]
assessment notice to be valid, the same presupposes that the revenue officer
who issued the same is properly authorized in the first place.
In this case, there is no dispute that no LOA was issued prior to the issuance
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, of a PAN and FAN against MEDICARD. Therefore no LOA was also served
as supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 on MEDICARD. The LN that was issued earlier was also not converted into an
to fine tune existing procedures in handing assessments against taxpayers' LOA contrary to the above quoted provision. Surprisingly, the CIR did not even
issued LNs by reconciling various revenue issuances which conflict with the dispute the applicability of the above provision of RMO 32-2005 in the present
NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to case which is clear and unequivocal on the necessity of an LOA for the
prescribe procedure in the resolution of LN discrepancies, conversion of LNs assessment proceeding to be valid. Hence, the CTA's disregard of
to LOAs and assessment and collection of deficiency taxes. MEDICARD's right to due process warrant the reversal of the assailed decision
and resolution.
IV. POLICIES AND GUIDELINES
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc.[29]
xxxx the Court said that:

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
Clearly, there must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the revenue
officer so authorized must not go beyond the authority given. In the absence
of such an authority, the assessment or examination is a nullity.[30]
(Emphasis and underlining ours)

3

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.[31] Simply put, LN is entirely different and serves a different purpose
than an LOA. Due process demands, as recognized under RMO No. 32-2005,
that after an LN has serve its purpose, the revenue officer should have properly
secured an LOA before proceeding with the further examination and
assessment of the petitioner. 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
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.
4
TAX CASES-REMEDIES
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)[32]
of the Tax Code, as amended by Republic Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT
purposes as a dealer in securities whose gross receipts is the amount actually
received as contract price without allowing any deduction from the gross
receipts.[33] This restrictive tenor changed under RR No. 16-2005. Under this
RR, an HM:O's gross receipts and gross receipts in general were defined,
thus:
Section 4.108-3. x x x
x x x x
HMO's gross receipts shall be the total amount of money or its equivalent
representing the service fee actually or constructively received during the
taxable period for the services performed or to be performed for another
person, excluding the value-added tax. The compensation for their services
representing their service fee, is presumed to be the total amount
received as enrollment fee from their members plus other charges
received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money
or its equivalent representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials supplied with the
services and deposits applied as payments for services rendered, and
advance payments actually or constructively received during the taxable
period for the services performed or to be performed for another person,
excluding the VAT.[34]
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005,
including the definition of gross receipts in general.[35]

According to the CTA en banc, the entire amount of membership fees should
form part of MEDICARD's gross receipts because the exclusions to the gross
receipts under RR No. 4-2007 does not apply to MEDICARD. What applies to
MEDICARD is the definition of gross receipts of an HMO under RR No. 16-
2005 and not the modified definition of gross receipts in general under the RR
No. 4-2007.
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.[36]
Therefore, absent a statutory definition, this Court has construed the term
gross receipts in its plain and ordinary meaning, that is, gross receipts is
understood as comprising the entire receipts without any deduction.[37]
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, 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
5
TAX CASES-REMEDIES
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,[38] 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.[39] (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.[40] But the Court's task however is not to weigh these
policy considerations but to determine if these considerations in favor of
taxation can even be implied from the statute where the CIR purports to derive
her authority. This Court rules that they cannot because the language of the
NIRC is pretty straightforward and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation
in the imposition of taxes, not the similar doctrine as applied to tax.
exemptions. The rule in the interpretation tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be
extended by implication. In answering the question of who is subject to tax
statutes, it is basic that in case of doubt, such statutes are to be construed
most strongly against the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to be imposed beyond
what statutes expressly and clearly import. As burdens, taxes should not be
unduly exacted nor assumed beyond the plain meaning of the tax laws.[41]
(Citation omitted and emphasis and underlining ours)
For this Court to subject the entire amount of MEDICARD's gross receipts
without exclusion, the authority should have been reasonably founded from
the language of the statute. That language is wanting in this case. In the
scheme of judicial tax administration, the need for certainty and predictability
in the implementation of tax laws is crucial. Our tax authorities fill in the details
that Congress may not have the opportunity or competence to provide. The
regulations these authorities issue are relied upon by 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.[42] The
CIR's interpretation of gross receipts in the present case is patently erroneous
for lack of both textual and non-textual support.
As to the CIR's argument that the act of earmarking or allocation is by itself an
act of ownership and management over the funds, the Court does not agree.
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
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.
G.R. Nos. 201398-99, October 03, 2018
6
TAX CASES-REMEDIES
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. AVON
PRODUCTS MANUFACTURING, INC., Respondent.
G.R. Nos. 201418-19, October 3, 2018
AVON PRODUCTS MANUFACTURING, INC., Petitioner, v. THE
COMMISSIONER OF THE INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
Tax assessments issued in violation of the due process rights of a taxpayer
are null and void. While the government has an interest in the swift collection
of taxes, the Bureau of Internal Revenue and its officers and agents cannot
be overreaching in their efforts, but must perform their duties in accordance
with law, with their own rules of procedure, and always with regard to the
basic tenets of due process.
The 1997 National Internal Revenue Code, also known as the Tax Code, and
revenue regulations allow a taxpayer to file a reply or otherwise to submit
comments or arguments with supporting documents at each stage in the
assessment process. Due process requires the Bureau of Internal Revenue
to consider the defenses and evidence submitted by the taxpayer and to
render a decision based on these submissions. Failure to adhere to these
requirements constitutes a denial of due process and taints the
administrative proceedings with invalidity.
These consolidated cases assail the Court of Tax Appeals En Banc
November 9, 2011 Decision1 and April 10, 2012 Resolution2 in CTA EB Case
Nos. 661 and 663. The assailed Decision denied the respective Petitions for
Review by the Commissioner of Internal Revenue (Commissioner)3 and of
Avon Products Manufacturing, Inc. (Avon),4 and affirmed the Court of Tax
Appeals Special First Division May 13, 2010 Decision.5 The assailed
Resolution denied the Commissioner's Motion for Reconsideration6 and
Avon's Motion for Partial Reconsideration.7
Avon filed its Value Added Tax (VAT) Returns and Monthly Remittance
Returns of Income Tax Withheld for the taxable year 1999 on the following
dates:
Return Date Filed
3rd Quarter VAT Return October 25, 1999
4th Quarter VAT Return January 25, 2000
Monthly Remittance
Return of Income Expanded Compensation
Taxes Withheld
January February 25, 1999 February 25, 1999
 TAX CASES-REMEDIES
February March 25, 1999 March 25, 1999 Withhol
ding
Tax 4,702,11 3,040,22 45,000. 7,787,34
1999
March April 26, 1999 April 26, 1999 on 6.38 9.28 00 5.66
Compe
nsation
April May 25, 1999 May 25, 1999
Expand
ed
May June 25, 1999 June 25, 1999 1,187,61 764,626. 25,000. 1,977,23
Withhol 1999
0.88 18 00 7.06
ding
June July 26, 1999 July 26, 1999 Tax

July August 25, 1999 August 25, 1999 P49,102, P30,925, P218,2 P80,246,
TOTAL
260.14 999.01 00.00 459.1513

August September 27, 1999 September 27, 1999

These deficiency assessments were the same deficiency taxes covered by

September October 25, 1999 October 25, 1999 the Preliminary Assessment Notice14 dated November 29, 2002, received by
Avon on December 23, 2002.15
October November 25, 1999 November 25, 1999
On February 14, 2003, Avon filed a letter dated February 13, 2003 protesting
against the Preliminary Assessment Notice.16
November December 27, 1999 December 27, 1999
Without ruling on Avon's protest, the Commissioner prepared the Formal
Letter of Demand17 and Final Assessment Notices,18 all dated February 28,
December January 25, 2000 January 25, 20008 2003, received by Avon on April 11, 2003. Except for the amount of interest,
the Final Assessment Notices were the same as the Preliminary Assessment
Notice.19

Avon signed two (2) Waivers of the Defense of Prescription dated October
14, 2002 and December 27, 2002,9 which expired on January 14, 2003 and In a letter20 dated and filed on May 9, 2003, Avon protested the Final
April 14, 2003, respectively.10 Assessment Notices. Avon resubmitted its protest to the Preliminary
Assessment Notice and adopted the same as its protest to the Final
Assessment Notices.21
On July 14, 2004, Avon was served a Collection Letter11 dated July 9, 2004.
It was required to pay P80,246,459.1512 broken down as follows:
A conference was allegedly held on June 26, 2003 where Avon informed the
revenue officers that all the documents necessary to support its defenses
had already been submitted. Another meeting was held on August 4, 2003,
KIND YE
BASIC COMPRO TOTAL where it showed the original General Ledger Book as previously directed by
OF A INTEREST
TAX MISE AMOUNT the revenue officers. During these meetings, the revenue officers allegedly
TAX R expressed that they would cancel the assessments resulting from the alleged
discrepancy in sales if Avon would pay part of the assessments.22

22,012 13,207 25,0 Thus, on January 30, 2004, Avon paid the following portions of the Final
Incom 19 35,245,
,984.1 ,790.5 00.0 Assessment Notices:
e Tax 99 774.70
9 1 0
a) Disallowed taxes and licenses/Fringe Benefit Tax adjustment
P153,559.37; and

Excise 913,514. 658,675. 73,200. 1,645,39

1999 b) Withholding Tax on Compensation - Late Remittance - P32,829.2823
Tax 87 57 00 0.44

However, in a Memorandum dated May 27, 2004, the Bureau of Internal

Revenue's officers recommended the enforcement and collection of the
20,286,0 13,254,6 50,000. 33,590,7 assessments on the sole justification that Avon failed to submit supporting
VAT 1999
33.82 77.47 00 11.29 documents within the 60-day period as required under Section 228 of the
Tax Code.24

The Large Taxpayers Collection and Enforcement Division thereafter served

Avon with the Collection Letter dated July 9, 2004.25 Avon asserted that even
7

the items already paid on January 30, 2004 were still included in the
deficiency tax assessments covered by this Collection Letter.26
In a letter27 to the Deputy Commissioner for Large Taxpayers Service dated
and filed on July 27, 2004, Avon requested the reconsideration and
withdrawal of the Collection Letter. It argued that it was devoid of legal and
factual basis, and was premature as the Commissioner of Internal Revenue
had not yet acted on its protest against the Final Assessment Notices.28
The Commissioner did not act on Avon's request for reconsideration. Thus,
Avon was constrained to treat the Collection Letter as denial of its protest.29
On August 13, 2004, Avon filed a Petition for Review before the Court of Tax
Appeals.30 On August 24, 2004, it filed an Urgent Motion for Suspension of
Collection of Tax.31
On May 13, 2010, the Court of Tax Appeals Special First Division rendered
its Decision,32 partially granting Avon's Petition for Review insofar as it
ordered the cancellation of the Final Demand and Final Assessment Notices
for deficiency excise tax, VAT, withholding tax on compensation, and
expanded withholding tax. However, it ordered Avon to pay deficiency
income tax in the amount of P357,345.88 including 20% deficiency interest
on the total amount due pursuant to Section 249, paragraphs (b) and (c)(3)
of the Tax Code. The Court of Tax Appeals Special First Division also made
the following pronouncements:33
a) There was no deprivation of due process in the issuance by the CIR of the
assessment for deficiency income tax, deficiency excise tax, deficiency VAT,
deficiency final withholding tax on compensation and deficiency expanded
withholding tax against AVON for the latter was afforded an opportunity to
explain and present its evidence;
b) The Waivers of the Statute of Limitations executed by AVON are invalid
and ineffective as the CIR failed to provide [AVON] a copy of the accepted
Waivers, as required under Revenue Memorandum Order No. 20-90. Hence,
the assessment of AVON's deficiency VAT, deficiency expanded withholding
tax and deficiency withholding tax on compensation is considered to have
prescribed;
c) AVON's failure to submit the relevant documents in support of its protest
did not make the assessment final and executory;
d) As to assessment on AVON's deficiency Income Tax,
(1) there was no undeclared sales/income in the amount of
P62,911,619.58 per ITR for the taxable year 1999;
(2) AVON's liability for disallowed taxes and licenses and December
1998 Fringe Benefit Tax payment adjustment in the amount of
P152,632.10 and P927.27, respectively, or a total of P153,559.37
is extinguished in view of the payment made;
8
TAX CASES-REMEDIES
(3) The discrepancy between Ending Inventories reflected in Balance
Sheet and Cost of Sales represents variance/adjustments on
standard cost to actual cost allocated to ending inventories and
not under-declaration as alleged by CIR;
(4) AVON's claimed tax credits in the amount of P203,645.89 was
disallowed as the same was unsupported by withholding tax
certificates as required under Section 2.58.3 (B) of Revenue
Regulations No. 2-98. However, the amount of P140,505.28 was
upheld as a proper deduction from its 1999 income tax due; and
e) As to assessment on AVON's deficiency excise tax, the same is deemed
cancelled and withdrawn in view of its Application for Abatement over its
deficiency excise tax assessment for the year 1999 and its corresponding
payment.34
The dispositive portion of the Court of Tax Appeals Special First Division May
13, 2010 Decision read:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is ORDERED TO CANCEL/WITHDRAW the Final
Demand and Final Assessment Notices: (1) Assessment No. LTAID-ET-99-
00011 for deficiency Excise Tax, (2) Assessment No. LTAID-II-VAT-99-
00017 for deficiency Value Added Tax, (3) Assessment No. LTAID-II-WTC-
9900002 for deficiency Withholding Tax on Compensation Under Withholding
and Later Remittance, and (4) Assessment No. LTAID-EWT-99-00010 for
deficiency Expanded Withholding Tax.
However, petitioner is ORDERED TO PAY respondent the deficiency Income
Tax under Assessment No. LTAID-II-IT-99-00018 in the amount of
P357,345.88 for taxable year 1999.
In addition, petitioner is liable to pay: i) a deficiency interest on the deficiency
basic income tax due of P100,761.01 at the rate of 20% per annum from
January 31, 2004 until fully paid pursuant to Section 249(B) of the 1997
NIRC and ii) a delinquency interest on the total amount due (inclusive of the
deficiency interest) at the rate of 20% per annum from July 24, 2004 until
fully paid pursuant to Section 249(C)(3) of the 1997 NIRC.
SO ORDERED.35
The parties' Motions for Partial Reconsideration were denied in the July 12,
2010 Resolution.36 Both parties filed their respective Petitions for Review
before the Court of Tax Appeals En Banc.37
In its assailed November 9, 2011 Decision,38 the Court of Tax Appeals En
Banc denied the respective Petitions of the Commissioner and Avon, and
affirmed the Court of Tax Appeals Special First Division May 13, 2010
Decision. It held that the Waivers of the Defense of Prescription were
defective, thereby rendering the assessment of Avon's deficiency VAT,
expanded withholding tax, and withholding tax on compensation to have
prescribed.39 It further ruled that contrary to the Commissioner's argument,
the requirement under Revenue Memorandum Order No. 20-90 to furnish the
taxpayer with copies of the accepted waivers was not merely formal in
nature, and non-compliance with it rendered the Waivers of the Defense of
Prescription invalid and ineffective.40

On the issue of jurisdiction, the Court of Tax Appeals En Banc held that
under Section 228 of the Tax Code, the taxpayer has two (2) options in case
of inaction of the Commissioner on disputed assessments. The first option is
to file a petition with the Court of Tax Appeals within 30 days from the lapse
of the 180-day period for the Commissioner to decide. The second option is
to await the final decision of the Commissioner and appeal this decision
within 30 days from its receipt. Here, Avon opted for the second remedy by
filing its petition on July 14, 2004, within 30 days from receipt of the July 9,
2004 Collection Letter, which also served as the final decision denying its
protest. Hence, the Court of Tax Appeals En Banc ruled that it had
jurisdiction over the case.41
The Court of Tax Appeals En Banc further affirmed the Court of Tax Appeals
Special First Division's factual findings with regard to the cancellation of
deficiency tax assessments42 and disallowance of Avon's claimed tax
credits.43
Finally, the Court of Tax Appeals En Banc rejected Avon's contention
regarding denial of due process. It held that Avon was accorded by the
Commissioner a reasonable opportunity to explain and present evidence.44
Moreover, the Commissioner's failure to appreciate Avon's supporting
documents and arguments did not ipso facto amount to denial of due
process absent any proof of irregularity in the performance of duties.45
In its April 10, 2012 Resolution,46 the Court of Tax Appeals En Banc denied
the Commissioner's Motion for Reconsideration and Avon's Motion for Partial
Reconsideration. It held that the "RCBC case,"47 cited by the Commissioner,
was not on all fours with, and therefore not applicable as stare decisis in this
case. Instead, the ruling in CIR v. Kudos Metal Corporation,48 precluding the
Bureau of Internal Revenue from invoking the doctrine of estoppel to cover
its failure to comply with the procedures in the execution of a waiver, would
apply.49
Hence, the present Petitions via Rule 45 were filed before this Court.
In her Petition,50 docketed as G.R. Nos. 201398-99, the Commissioner
asserts that Avon is estopped from assailing the validity of the Waivers of the
Defense of Prescription as it has paid the other assessments that these
waivers covered. It also avers that Avon's right to appeal its protest before
the Court of Tax Appeals has prescribed and that the assessments have
attained finality. Finally, it states that Avon is liable for the deficiency
assessments.51
Avon, in its separate Petition,52 docketed as G.R. Nos. 201418-19, argues
that the assessments are void ab initio due to the failure of the
Commissioner to observe due process.53 It maintains that from the start up to
the end of the administrative process, the Commissioner ignored all of its
protests and submissions.54
The Petitions were consolidated on July 4, 2012.55 The Commissioner and
Avon subsequently submitted their respective Memoranda56 in compliance
with this Court's June 5, 2013 Resolution.57
The issues for this Court's resolution are:
First, whether or not the Commissioner of Internal Revenue failed to observe
administrative due process, and consequently, whether or not the
assessments are void;
Second, whether or not Avon Products Manufacturing, Inc., by paying the
other tax assessments covered by the Waivers of the Defense of
Prescription, is estopped from assailing their validity;
9
TAX CASES-REMEDIES
Third, whether or not Avon Products Manufacturing, Inc.'s right to appeal its
protest before the Court of Tax Appeals has already prescribed; and whether
or not the assessments against it for deficiency income tax, excise tax,
value-added tax, withholding tax on compensation, and expanded
withholding tax have already attained finality; and
Finally, whether or not Avon Products Manufacturing, Inc. is liable for
deficiency income tax, excise tax, value-added tax, withholding tax on
compensation, and expanded withholding tax for the taxable year 1999.
I.A
Avon asserts that the deficiency tax assessments are void because they
were made without due process58 and were not based on actual facts but on
the erroneous presumptions of the Commissioner.59
It submits that a fundamental part of administrative due process is the
administrative body's due consideration and evaluation of all the evidence
submitted by the affected party. With regard to tax assessment and
collection, Section 228 of the Tax Code and Revenue Regulations No. 12-99
prescribe compliance with due process requirements through all the four (4)
stages of the assessment process, from the preliminary findings up to the
Commissioner's decision on the disputed assessment.60
Avon claims that from the start up to the end of the administrative process,
the Commissioner ignored all of its protests and submissions to contest the
deficiency tax assessments.61 The Commissioner issued identical
Preliminary Assessment Notice, Final Assessment Notices, and Collection
Letters without considering Avon's submissions or its partial payment of the
assessments. Avon asserts that it was not accorded a real opportunity to be
heard, making all of the assessments null and void.62
Avon's arguments are well-taken.
The Bureau of Internal Revenue is the primary agency tasked to assess and
collect proper taxes, and to administer and enforce the Tax Code.63 To
perform its functions of tax assessment and collection properly, it is given
ample powers under the Tax Code, such as the power to examine tax
returns and books of accounts,64 to issue a subpoena,65 and to assess based
on best evidence obtainable,66 among others. However, these powers must
"be exercised reasonably and [under] the prescribed procedure."67 The
Commissioner and revenue officers must strictly comply with the
requirements of the law, with the Bureau of Internal Revenue's own rules,68
and with due regard to taxpayers' constitutional rights.
The Commissioner exercises administrative adjudicatory power or quasi-
judicial function in adjudicating the rights and liabilities of persons under the
Tax Code.
Quasi-judicial power has been described as:
Quasi-judicial or administrative adjudicatory power on the other hand is the
power of the administrative agency to adjudicate the rights of persons before
it. It is the power to hear and determine questions of fact to which the
legislative policy is to apply and to decide in accordance with the
standards laid down by the law itself in enforcing and administering the
same law. The administrative body exercises its quasi-judicial power when it
performs in a judicial manner an act which is essentially of an executive or
administrative nature, where the power to act in such manner is
incidental to or reasonably necessary for the performance of the
executive or administrative duty entrusted to it.69 (Emphasis supplied,
citations omitted)

In carrying out these quasi-judicial functions, the Commissioner is required to
"investigate facts or ascertain the existence of facts, hold hearings, weigh
evidence, and draw conclusions from them as basis for their official action
and exercise of discretion in a judicial nature."70 Tax investigation and
assessment necessarily demand the observance of due process because
they affect the proprietary rights of specific persons.
This Court has stressed the importance of due process in administrative
proceedings:
The principle of due process furnishes a standard to which governmental
action should conform in order to impress it with the stamp of validity. Fidelity
to such standard must of necessity be the overriding concern of government
agencies exercising quasi-judicial functions. Although a speedy
administration of action implies a speedy trial, speed is not the chief objective
of a trial. Respect for the rights of all parties and the requirements of
procedural due process equally apply in proceedings before administrative
agencies with quasi-judicial perspective in administrative decision making
and for maintaining the vision which led to the creation of the administrative
office.71
In Ang Tibay v. The Court of Industrial Relations,72 this Court observed that
although quasi-judicial agencies "may be said to be free from the rigidity of
certain procedural requirements[, it] does not mean that it can, in justiciable
cases coming before it, entirely ignore or disregard the fundamental and
essential requirements of due process in trials and investigations of an
administrative character."73 It then enumerated the fundamental
requirements of due process that must be respected in administrative
proceedings:
(1) The party interested or affected must be able to present his or her
own case and submit evidence in support of it.
(2) The administrative tribunal or body must consider the
evidence presented.
(3) There must be evidence supporting the tribunal's decision.
(4) The evidence must be substantial or "such relevant evidence as a
reasonable mind might accept as adequate to support a
conclusion."74
(5) The administrative tribunal's decision must be rendered on the
evidence presented, or at least contained in the record and
disclosed to the parties affected.
10
TAX CASES-REMEDIES
(6) The administrative tribunal's decision must be based on the
deciding authority's own independent consideration of the law and
facts governing the case.
(7) The administrative tribunal's decision is rendered in a
manner that the parties may know the various issues
involved and the reasons for the decision.75
Mendoza v. Comelec76 explained that the first requirement is the party's
substantive right at the hearing stage of the proceedings, which, in essence,
is the opportunity to explain one's side or to seek a reconsideration of the
adverse action or ruling.
It was emphasized, however, that the mere filing of a motion for
reconsideration does not always result in curing the due process defect,77
"especially if the motion was filed precisely to raise the issue of violation of
the right to due process and the lack of opportunity to be heard on the merits
remained."78
The second to the sixth requirements refer to the party's "inviolable rights
applicable at the deliberative stage."79 The decision-maker must consider
the totality of the evidence presented as he or she decides the case.80
The last requirement relating to the form and substance of the decision is the
decision-maker's '"duty to give reason' to enable the affected person to
understand how the rule of fairness has been administered in his [or her]
case, to expose the reason to public scrutiny and criticism, and to ensure
that the decision will be thought through by the decision-maker."81
The Ang Tibay safeguards were subsequently "simplified into four basic
rights,"82 as follows:
(a) [T]he right to notice, be it actual or constructive, of the institution of the
proceedings that may affect a person's legal right; (b) reasonable opportunity
to appear and defend his rights and to introduce witnesses and relevant
evidence in his favor; (c) a tribunal so constituted as to give him reasonable
assurance of honesty and impartiality, and one of competent jurisdiction; and
(d) a finding or decision by that tribunal supported by substantial evidence
presented at the hearing or at least ascertained in the records or disclosed to
the parties.83 (Emphasis supplied)
Saunar v. Ermita84 expounded on Ang Tibay by emphasizing that while
administrative bodies enjoy a certain procedural leniency, they are
nevertheless obligated to inform themselves of all facts material and relevant
to the case, and to render a decision based on an accurate appreciation of
facts. In this regard, this Court held that Ang Tibay did not necessarily do
away with the conduct of hearing and a party may invoke its right to a
hearing to thresh out substantial factual issues, thus:
A closer perusal of past jurisprudence shows that the Court did not intend to
trivialize the conduct of a formal hearing but merely afforded latitude to
administrative bodies especially in cases where a party fails to invoke the
right to hearing or is given the opportunity but opts not to avail of it. In the

landmark case of Ang Tibay, the Court explained that administrative bodies
are free from a strict application of technical rules of procedure and are given
sufficient leeway. In the said case, however, nothing was said that the
freedom included the setting aside of a hearing but merely to allow matters
which would ordinarily be incompetent or inadmissible in the usual judicial
proceedings.
In fact, the seminal words of Ang Tibay manifest a desire for administrative
bodies to exhaust all possible means to ensure that the decision rendered be
based on the accurate appreciation of facts. The Court reminded that
administrative bodies have the active duty to use the authorized legal
methods of securing evidence and informing itself of facts material and
relevant to the controversy. As such, it would be more in keeping with
administrative due process that the conduct of a hearing be the general rule
rather than the exception.
....
To reiterate, due process is a malleable concept anchored on fairness and
equity. The due process requirement before administrative bodies are not as
strict compared to judicial tribunals in that it suffices that a party is given a
reasonable opportunity to be heard. Nevertheless, such "reasonable
opportunity" should not be confined to the mere submission of position
papers and/or affidavits and the parties must be given the opportunity to
examine the witnesses against them. The right to a hearing is a right which
may be invoked by the parties to thresh out substantial factual issues. It
becomes even more imperative when the rules itself of the administrative
body provides for one. While the absence of a formal hearing does not
necessarily result in the deprivation of due process, it should be acceptable
only when the party does not invoke the said right or waives the same. 85
(Emphasis supplied)
In Saunar, this Court held that the petitioner in that case was denied due
process when he was not notified of the clarificatory hearings conducted by
the Presidential Anti-Graft Commission. Under the Presidential Anti-Graft
Commission's Rules, in the event that a clarificatory hearing was determined
to be necessary, the Presidential Anti-Graft Commission must notify the
parties of the clarificatory hearings. Further, "the parties shall be afforded the
opportunity to be present in the hearings without the right to examine
witnesses. They, however, may ask questions and elicit answers from the
opposing party coursed through the [Presidential Anti-Graft Commission]."86
This Court held that the petitioner in Saunar was not treated fairly in the
proceedings before the Presidential Anti-Graft Commission because he was
deprived of the opportunity to be present in the clarificatory hearings and was
denied the chance to propound questions through the Presidential Anti-Graft
Commission against the opposing parties.
"[A] fair and reasonable opportunity to explain one's side"87 is one aspect of
due process. Another aspect is the due consideration given by the decision-
maker to the arguments and evidence submitted by the affected party.
Baguio Country Club Corp. v. National Labor Relations Commission88
precisely involved the question of the denial of due process for failure of the
labor tribunals to consider the evidence presented by the employer. The
labor tribunals unanimously denied the employer's application for clearance
to terminate the services of an employee on the ground of insufficient
evidence to show a just cause for the employee's dismissal, and ordered the
reinstatement of the employee with backwages.
This Court held that "[t]he summary procedures used by the [labor tribunals]
were too summary to satisfy the requirements of justice and fair play."89 It
noted the irregular procedures adopted by the Labor Arbiter. First, "[he]
allowed a last minute position paper of [the] respondent ... to be filed and
11
TAX CASES-REMEDIES
without requiring a copy to be served upon the Baguio Country Club and
without affording the latter an opportunity to refute or rebut the contents of
the paper, [and] forthwith decided the case."90 Second, "the petitioner
specifically stressed to the arbiter that it was 'adopting the investigations
which were enclosed with the application to terminate, which are now parts
of the record of the Ministry of Labor, as part and parcel of this position
paper."'91 But the Labor Arbiter, instead of calling for the complete records of
the conciliation proceedings, "denied the application for clearance on the
ground that all that was before it was a position paper with mere quotations
about an investigation conducted . . ."92 This Court held that the affirmance
by the Commission of the decision of the Labor Arbiter was a denial of the
elementary principle of fair play.
[I]t was a denial of elementary principles of fair play for the Commission not
to have ordered the elevation of the entire records of the case with the
affidavits earlier submitted as part of the position paper but completely
ignored by the labor arbiter. Or at the very least, the case should have been
remanded to the labor arbiter consonant with the requirements of
administrative due process.
The ever increasing scope of administrative jurisdiction and the statutory
grant of expansive powers in the exercise of discretion by administrative
agencies illustrate our nation's faith in the administrative process as an
efficient and effective mode of public control over sensitive areas of private
activity. Because of the specific constitutional mandates on social justice and
protection to labor, and the fact that major labor management controversies
are highly intricate and complex, the legislature and executive have reposed
uncommon reliance upon what they believe is the expertise, the rational and
efficient modes of ascertaining facts, and the unbiased and discerning
adjudicative techniques of the Ministry of Labor and Employment and its
instrumentalities.
....
The instant petition is a timely reminder to labor arbiters and all who wield
quasi-judicial power to ever bear in mind that evidence is the means,
sanctioned by rules, of ascertaining in a judicial or quasi-judicial proceeding,
the truth respecting a matter of fact ... The object of evidence is to establish
the truth by the use of perceptive and reasoning faculties . . . The statutory
grant of power to use summary procedures should heighten a concern for
due process, for judicial perspectives in administrative decision making, and
for maintaining the visions which led to the creation of the administrative
office.93
In Alliance for the Family Foundation, Philippines, Inc. v. Garin,94 this Court
held that the Food and Drug Administration failed to observe the basic
requirements of due process when it did not act on or address the
oppositions submitted by petitioner Alliance for the Family Foundation,
Philippines, Inc., but proceeded with the registration, recertification, and
distribution of the questioned contraceptive drugs and devices. It ruled that
petitioner was not afforded the genuine opportunity to be heard.
Administrative due process is anchored on fairness and equity in
procedure.95 It is satisfied if the party is properly notified of the charge
against it and is given a fair and reasonable opportunity to explain or defend
itself.96 Moreover, it demands that the party's defenses be considered by the
administrative body in making its conclusions,97 and that the party be
sufficiently informed of the reasons for its conclusions.
I.B

Section 228 of the Tax Code, as implemented by Revenue Regulations No.
12-99, provides certain procedures to ensure that the right of the taxpayer to
procedural due process is observed in tax assessments, thus:
Section 228. Protesting of Assessment. — When the Commissioner or his
duly authorized representative finds that proper taxes should be assessed,
he shall first notify the taxpayer of his findings: Provided, however, That a
preassessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error
in the computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and
the amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or
(d) When the excise tax due on excisable articles has not been paid; or
(e) When an article locally purchased or imported by an exempt person, such
as, but not limited to, vehicles, capital equipment, machineries and spare
parts, has been sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be
void.
Within a period to be prescribed by implementing rules and regulations, the
taxpayer shall be required to respond to said notice. If the taxpayer fails to
respond, the Commissioner or his duly authorized representative shall issue
an assessment based on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing
rules and regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one
hundred eighty (180) days from submission of documents, the taxpayer
adversely affected by the decision or inaction may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of the said decision, or from the
lapse of the one hundred eighty (180)-day period; otherwise, the decision
shall become final, executory and demandable.
Section 3 of Revenue Regulations No. 12-9998 prescribes the due process
requirement for the four (4) stages of the assessment process:
Section 3. Due Process Requirement in the Issuance of a Deficiency Tax
Assessment. —
3.1 Mode of procedures in the issuance of a deficiency tax assessment:
3.1.1 Notice for informal conference. — The Revenue Officer who audited
the taxpayer's records shall, among others, state in his report whether or not
12
TAX CASES-REMEDIES
the taxpayer agrees with his findings that the taxpayer is liable for deficiency
tax or taxes. If the taxpayer is not amenable, based on the said Officer's
submitted report of investigation, the taxpayer shall be informed, in
writing, by the Revenue District Office or by the Special Investigation
Division, as the case may be (in the case Revenue Regional Offices) or by
the Chief of Division concerned (in the case of the BIR National Office) of the
discrepancy or discrepancies in the taxpayer's payment of his internal
revenue taxes, for the purpose of "Informal Conference,” in order to
afford the taxpayer with an opportunity to present his side of the case.
If the taxpayer fails to respond within fifteen (15) days from date of
receipt of the notice for informal conference, he shall be considered in
default, in which case, the Revenue District Officer or the Chief of the
Special Investigation Division of the Revenue Regional Office, or the Chief of
Division in the National Office, as the case may be, shall endorse the case
with the least possible delay to the Assessment Division of the Revenue
Regional Office or to the Commissioner or his duly authorized representative,
as the case may be, for appropriate review and issuance of a deficiency tax
assessment, if warranted.
3.1.2 Preliminary Assessment Notice (PAN). — If after review and
evaluation by the Assessment Division or by the Commissioner or his duly
authorized representative, as the case may be, it is determined that there
exists sufficient basis to assess the taxpayer for any deficiency tax or taxes,
the said Office shall issue to the taxpayer, at least by registered mail, a
Preliminary Assessment Notice (PAN) for the proposed assessment,
showing in detail, the facts and the law, rules and regulations, or
jurisprudence on which the proposed assessment is based . . . If the
taxpayer fails to respond within fifteen (15) days from date of receipt of
the PAN, he shall be considered in default, in which case, a formal letter
of demand and assessment notice shall be caused to be issued by the said
Office, calling for payment of the taxpayer's deficiency tax liability, inclusive
of the applicable penalties.
....
3.1.4 Formal Letter of Demand and Assessment Notice. —The formal letter
of demand and assessment notice shall be issued by the Commissioner or
his duly authorized representative. The letter of demand calling for
payment of the taxpayer's deficiency tax or taxes shall state the facts,
the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of demand and
assessment notice shall be void . . .
3.1.5 Disputed Assessment. — The taxpayer or his duly authorized
representative may protest administratively against the aforesaid
formal letter of demand and assessment notice within thirty (30) days
from date of receipt thereof....
....
The taxpayer shall submit the required documents in support of his protest
within sixty (60) days from date of filing of his letter of protest, otherwise, the
assessment shall become final, executory and demandable. The phrase
"submit the required documents" includes submission or presentation of the
pertinent documents for scrutiny and evaluation by the Revenue Officer
conducting the audit. The said Revenue Officer shall state this fact in his
report of investigation.
If the taxpayer fails to file a valid protest against the formal letter of demand
and assessment notice within thirty (30) days from date of receipt thereof,
the assessment shall become final, executory and demandable.
....

3.1.6 Administrative Decision on a Disputed Assessment. — The decision
of the Commissioner or his duly authorized representative shall (a)
state the facts, the applicable law, rules and regulations, or
jurisprudence on which such decision is based, otherwise, the decision
shall be void . . . in which case, the same shall not be considered a
decision on a disputed assessment; and (b) that the same is his final
decision. (Emphasis supplied)
The importance of providing the taxpayer with adequate written notice of his
or her tax liability is undeniable. Under Section 228, it is explicitly required
that the taxpayer be informed in writing of the law and of the facts on which
the assessment is made; otherwise, the assessment shall be void. Section
3.1.2 of Revenue Regulations No. 12-99 requires the Preliminary
Assessment Notice to show in detail the facts and law, rules and regulations,
or jurisprudence on which the proposed assessment is based. Further,
Section 3.1.4 requires that the Final Letter of Demand must state the facts
and law on which it is based; otherwise, the Final Letter of Demand and Final
Assessment Notices themselves shall be void. Finally, Section 3.1.6
specifically requires that the decision of the Commissioner or of his or her
duly authorized representative on a disputed assessment shall state the facts
and law, rules and regulations, or jurisprudence on which the decision is
based. Failure to do so would invalidate the Final Decision on Disputed
Assessment.
"The use of the word 'shall' in Section 228 of the [National Internal Revenue
Code] and in [Revenue Regulations] No. 12-99 indicates that the
requirement of informing the taxpayer of the legal and factual bases of the
assessment and the decision made against him [or her] is mandatory."99 This
is an essential requirement of due process and applies to the Preliminary
Assessment Notice, Final Letter of Demand with the Final Assessment
Notices, and the Final Decision on Disputed Assessment.
On the other hand, the taxpayer is explicitly given the opportunity to explain
or present his or her side throughout the process, from tax investigation
through tax assessment. Under Section 3.1.1 of Revenue Regulations No.
12-99, the taxpayer is given 15 days from receipt of the Notice for Informal
Conference to respond; otherwise, he or she will be considered in default
and the case will be referred to the Assessment Division for appropriate
review and issuance of deficiency tax assessment, if warranted. Again, under
Section 228 of the Tax Code and Section 3.1.2 of Revenue Regulations No.
12-99, the taxpayer is required to respond within 15 days from receipt of the
Preliminary Assessment Notice; otherwise, he or she will be considered in
default and the Final Letter of Demand and Final Assessment Notices will be
issued. After receipt of the Final Letter of Demand and Final Assessment
Notices, the taxpayer is given 30 days to file a protest, and subsequently, to
appeal his or her protest to the Court of Tax Appeals.
Avon asserts feigned compliance by the Bureau of Internal Revenue officials
and agents of their duties under the law and revenue regulation.100 It adds
that the administrative proceeding conducted by the Bureau of Internal
Revenue was "a farce," an idle ritual tantamount to a denial of its right to be
heard.101 It specifies the Bureau of Internal Revenue's inaction throughout
the proceedings as follows:
First, during the informal conference, Avon orally rebutted and submitted a
written Reply102 dated November 26, 2002, with attached supporting
documents, to the summary of audit findings of the Bureau of Internal
Revenue. Revenue Examiner Enrico Z. Gesmundo (Gesmundo), on cross-
examination, admitted receiving its Reply with the appended documents and
that this Reply should be the basis of the Preliminary Assessment Notice.103
However, the Commissioner issued the Preliminary Assessment Notice
dated November 29, 2002, which simply reiterated the rebutted audit
13
TAX CASES-REMEDIES
findings.104 The alleged under-declared sales was increased by more than
300% based on the alleged sales discrepancy in the Third Quarter VAT
Return vis á vis Financial Statement, without justifiable reason and despite
clean opinion of Avon's external auditor on its financial statements.105
Second, in its protest letter to the Preliminary Assessment Notice, Avon
explained the error in the presentation of export sales in the Third Quarter
VAT Return. That is, instead of presenting the total sales for the third quarter
alone, the presentation was a cumulative or year-to-date sales presentation.
Avon appended copies of the Third Quarter VAT Return and the General
Ledger Pages of Export Sales to its protest letter to prove the cumulative
presentation of its sales. The Bureau of Internal Revenue Examiners
accepted their explanation during their meeting.106
However, within just two (2) weeks from receipt of Avon's protest letter, the
Commissioner issued the Final Letter of Demand and Final Assessment
Notices, reiterating the findings stated in the Preliminary Assessment
Notice.107 The Bureau of Internal Revenue chose to ignore Avon's
explanations and refused to cancel the assessments unless Avon would
agree to pay the other deficiency assessments.108
Third, since the Final Assessment Notices merely reiterated the findings in
the Preliminary Assessment Notice, Avon resubmitted its protest letter and
supporting documents. During the conference with the revenue officers on
August 4, 2003, Avon explained that it had already submitted all the
reconciliation, schedules, and other supporting documents. It also submitted
additional documents as directed by the revenue officers on June 26,
2003,109 and presented the original General Ledger Book for 1999 for
comparison by the Bureau of Internal Revenue's officers with the copies
previously submitted. Again, Avon explained the alleged sales discrepancy to
the revenue officers, who were convinced that there was no under
declaration of sales, and that the sales discrepancy between the Annual
Income Tax Return and Quarterly VAT Return was merely due to erroneous
presentation of sales in the Third Quarter VAT Return.110
By this time, hoping that the Commissioner would cancel the deficiency
income and VAT assessments arising from the alleged sales discrepancy,
Avon informed the Bureau of Internal Revenue examiners that it would make
a partial payment of the assessments, which it did.111
Fourth, however, the Commissioner issued the Collection Letter112 dated July
9, 2004 without deciding on the protest letter to the Final Assessment
Notices. Once again, she failed to even comment on the arguments raised or
address the documents submitted by Avon. Even the amounts supposedly
paid by Avon were not deducted from the amount demanded in the
Collection Letter. To justify its issuance, the Commissioner falsely alleged
Avon of failing to submit its supporting documents. 113
Fifth, Avon filed a request for withdrawal of the Collection Letter, but it was
likewise ignored.114
Finally, the documents which reveal the events after the filing of the protest
to the Final Assessment Notices on May 9, 2004 were missing from the
Bureau of Internal Revenue Records.115 These were (a) the handwritten
Minutes of the Bureau of Internal Revenue/Taxpayer Conference on June
26, 2003; (b) Avon's letter116 dated August 1, 2003, with supporting
documents, received by Revenue Officer Gesmundo on August 4, 2003,
showing Avon's submission of the documents required by the Revenue
Officers during the June 26, 2003 meeting; and (c) the two (2) Bureau of
Internal Revenue Tax Payment Confirmations dated January 30, 2004, and
Payment Forms called Bureau of Internal Revenue Form No. 0605.117

Avon further submits that the presumption of correctness of the assessments
cannot apply in the face of compelling proof that they were issued without
due process. It adds that "[h]ad the administrative process been conducted
with fairness and in accordance with the prescribed procedure, [it] need not
have incurred [filing fees and other litigation expenses to defend against a
bloated deficiency tax assessment]."118
Against these claims of Avon, the Commissioner did not submit any
refutation either in her Comment119 or Memorandum,120 and even in her
pleadings before the Court of Tax Appeals. Instead, she could only give out a
perfunctory resistance that "tax assessments . . . are presumed correct and
made in good faith."121
The Court of Tax Appeals ruled that the difference in the appreciation by the
Commissioner of Avon's supporting documents, which led to the deficiency
tax assessments, was not violative of due process. While the Commissioner
has the duty to receive the taxpayer's clarifications and explanations, she
does not have the duty to accept them on face value.122
This Court disagrees.
The facts demonstrate that Avon was deprived of due process. It was not
fully apprised of the legal and factual bases of the assessments issued
against it. The Details of Discrepancy123 attached to the Preliminary
Assessment Notice, as well as the Formal Letter of Demand with the Final
Assessment Notices, did not even comment or address the defenses and
documents submitted by Avon. Thus, Avon was left unaware on how the
Commissioner or her authorized representatives appreciated the
explanations or defenses raised in connection with the assessments. There
was clear inaction of the Commissioner at every stage of the proceedings.
First, despite Avon's submission of its Reply, together with supporting
documents, to the revenue examiners' initial audit findings, and its
explanation during the informal conference,124 the Preliminary Assessment
Notice was issued. The Preliminary Assessment Notice reiterated the same
audit findings, except for the alleged under-declared sales which ballooned in
amount from P15,700,000.00 to P62,900,000.00,125 without any discussion
or explanation on the merits of Avon's explanations.
Upon receipt of the Preliminary Assessment Notice, Avon submitted its
protest letter and supporting documents,126 and even met with revenue
examiners to explain. Nonetheless, the Bureau of Internal Revenue issued
the Final Letter of Demand and Final Assessment Notices, merely reiterating
the assessments in the Preliminary Assessment Notice. There was no
comment whatsoever on the matters raised by Avon, or discussion of the
Bureau of Internal Revenue's findings in a manner that Avon may know the
various issues involved and the reasons for the assessments.
Under the Bureau of Internal Revenue's own procedures, the taxpayer is
required to respond to the Notice of Informal Conference and to the
Preliminary Assessment Notice within 15 days from receipt. Despite Avon's
timely submission of a Reply to the Notice of Informal Conference and
protest to the Preliminary Assessment Notice, together with supporting
documents, the Commissioner and her agents violated their own procedures
by refusing to answer or even acknowledge the submitted Reply and protest.
The Notice of Informal Conference and the Preliminary Assessment Notice
are a part of due process.127 They give both the taxpayer and the
Commissioner the opportunity to settle the case at the earliest possible time
without the need for the issuance of a Final Assessment Notice. However,
this purpose is not served in this case because of the Bureau of Internal
Revenue's inaction or failure to consider Avon's explanations.
14
TAX CASES-REMEDIES
Upon receipt of the Final Assessment Notices, Avon resubmitted its protest
and submitted additional documents required by the revenue examiners,
including the original General Ledger for 1999. As testified by Avon's Finance
Director, Mildred C. Emlano, the Bureau of Internal Revenue examiners were
convinced with Avon's explanation during the meeting on August 4, 2003,
particularly, that there was no underdeclaration of sales.128 Still, the
Commissioner merely issued a Collection Letter dated July 9, 2004,
demanding from Avon the payment of the same deficiency tax assessments
with a warning that should it fail to do so within the required period, summary
administrative remedies would be instituted without further notice.129 This
Collection Letter was based on the May 27, 2004 Memorandum of the
Revenue Officers stating that "[Avon] failed to submit supporting documents
within 60-day period."130 This inaction on the part of the Bureau of Internal
Revenue and its agents could hardly be considered substantial compliance
of what is mandated by Section 228 of the Tax Code and the Revenue
Regulation No. 12-99.
It is true that the Commissioner is not obliged to accept the taxpayer's
explanations, as explained by the Court of Tax Appeals.131 However, when
he or she rejects these explanations, he or she must give some reason for
doing so. He or she must give the particular facts upon which his or her
conclusions are based, and those facts must appear in the record.
Indeed, the Commissioner's inaction and omission to give due consideration
to the arguments and evidence submitted before her by Avon are deplorable
transgressions of Avon's right to due process.132 The right to be heard, which
includes the right to present evidence, is meaningless if the Commissioner
can simply ignore the evidence without reason.
In Edwards v. McCoy:133
The object of a hearing is as much to have evidence considered as it is to
present it. The right to adduce evidence, without the corresponding duty on
the part of the board to consider it, is vain. Such right is conspicuously futile if
the person or persons to whom the evidence is presented can thrust it aside
without notice or consideration.134
In Ang Tibay, this Court similarly ruled that "[n]ot only must the party be given
an opportunity to present his case and to adduce evidence tending to
establish the rights which he asserts but the tribunal must consider the
evidence presented."135
Furthermore, in Mendoza v. Commission on Elections,136 this Court
explained:
[T]he last requirement, relating to the form and substance of the decision of a
quasi-judicial body, further complements the hearing and decision-making
due process rights and is similar in substance to the constitutional
requirement that a decision of a court must state distinctly the facts and the
law upon which it is based. As a component of the rule of fairness that
underlies due process, this is the "duty to give reason" to enable the
affected person to understand how the rule of fairness has been
administered in his case, to expose the reason to public scrutiny and
criticism, and to ensure that the decision will be thought through by the
decision-maker.137 (Emphasis supplied, citation omitted)
In Villa v. Lazaro,138 this Court held that Anita Villa (Villa) was denied due
process when the then Human Settlement Regulatory Commission ignored
her submission, not once but thrice, of the official documents certifying to her
compliance with the pertinent locational, zoning, and land use requirements,
and plans for the construction of her funeral parlor. It imposed on Villa a fine
of P10,000.00 and required her to cease operations on the spurious premise
that she had failed to submit the required documents. This Court found the

Commissioner's failure or refusal to even acknowledge the documents
submitted by Villa indefensible. It further held that the defects in the
administrative proceedings "translate to a denial of due process against
which the defense of failure to take timely appeal will not avail."139
Similarly, in this case, despite Avon's submission of its explanations and
pieces of evidence to the assessments, the Commissioner failed to
acknowledge these submissions and instead issued identical Preliminary
Assessment Notice, Final Letter of Demand with the Final Assessment
Notices, and Collection Letter, the latter being premised on Avon's alleged
failure to submit supporting documents to its protest. Had the Commissioner
performed her functions properly and considered the explanations and
pieces of evidence submitted by Avon, this case could have been settled at
the earliest possible time. For instance, all the evidence needed to settle the
issue on under-declared sales, which constituted the bulk of the deficiency
tax assessments, have been submitted to the Bureau of Internal Revenue.
Indeed, from these same submissions, the Court of Tax Appeals concluded
that there was no under-declaration of sales. As aptly pointed out by Avon,
"The [Commissioner could not] feign simple mistake or misappreciation of
the evidence . . . because [the issue was] plain and simple."140
Moreover, the Court of Tax Appeals erroneously applied the "presumption of
regularity" in sustaining the Commissioner's assessments.
The presumption that official duty has been regularly performed is a
disputable presumption under Rule 131, Section 3(m) of the Rules of Court.
As a disputable presumption —
[I]t may be accepted and acted on where there is no other evidence to
uphold the contention for which it stands, or one which may be overcome by
other evidence ...
The presumption of regularity of official acts may be rebutted by affirmative
evidence of irregularity or failure to perform a duty.141 (Citation omitted)
In Sevilla v. Cardenas,142 this Court refused to apply the "presumption of
regularity" when it noted that there was documentary and testimonial
evidence that the civil registrar did not exert utmost efforts before certifying
that no marriage license was issued in favor of one of the parties.
This Court also refused to apply the presumption of regularity in Bank of the
Philippine Islands v. Evangelista,143 where the process server failed to show
that he followed the required procedures:
We cannot sustain petitioner's argument, which is anchored on the
presumption of regularity in the process server's performance of duty. The
Court already had occasion to rule that "[c]ertainly, it was never intended that
the presumption of regularity in the performance of official duty will be
applied even in cases where there is no showing of substantial compliance
with the requirements of the rules of procedure." Such presumption does not
apply where it is patent that the sheriff's or server's return is defective. Under
this circumstance, respondents are not duty-bound to adduce further
evidence to overcome the presumption, which no longer holds.144 (Citations
omitted)
Here, contrary to the ruling of the Court of Appeals, the presumption of
regularity in the performance of the Commissioner's official duties cannot
stand in the face of positive evidence of irregularity or failure to perform a
duty.
I.C
15
TAX CASES-REMEDIES
The Commissioner's total disregard of due process rendered the identical
Preliminary Assessment Notice, Final Assessment Notices, and Collection
Letter null and void, and of no force and effect.
This Court has, in several cases, declared void any assessment that failed to
strictly comply with the due process requirements set forth in Section 228 of
the Tax Code and Revenue Regulation No. 12-99.
In Commissioner of Internal Revenue v. Metro Star Superama, Inc.,145 this
Court held that failure to send a Preliminary Assessment Notice stating the
facts and the law on which the assessment was made as required by Section
228 of the Tax Code rendered the assessment made by the Commissioner
as void. This Court explained:
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must
first be informed that he is liable for deficiency taxes through the sending of a
PAN. He must be informed of the facts and the law upon which the
assessment is made. The law imposes a substantive, not merely a formal,
requirement. To proceed heedlessly with tax collection without first
establishing a valid assessment is evidently violative of the cardinal principle
in administrative investigations — that taxpayers should be able to present
their case and adduce supporting evidence.146 (Citation omitted)
In Commissioner of Internal Revenue v. Reyes,147 this Court ruled as void an
assessment for deficiency estate tax issued by the Commissioner for failure
to inform the taxpayer of the law and the facts on which the assessment was
made, in violation of Section 228 of the Tax Code.
In Pilipinas Shell Petroleum Corporation v. Commissioner of Internal
Revenue,148 this Court ruled, among others, that the taxpayer was deprived
of due process when the Commissioner failed to issue a notice of informal
conference and a Preliminary Assessment Notice as required by Revenue
Regulation No. 12-99, in relation to Section 228 of the Tax Code. Hence, the
assessment was void.
Compliance with strict procedural requirements must be followed in the
collection of taxes as emphasized in Commissioner of Internal Revenue v.
Algue, Inc.:149
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be
made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of the common good,
may be achieved.
....
It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's
hard-earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The government
for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be

exercised reasonably and in accordance with the prescribed procedure.
If it is not, then the taxpayer has a right to complain and the courts will
then come to his succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can
demonstrate ... that the law has not been observed.150 (Emphasis
supplied)
In this case, Avon was able to amply demonstrate the Commissioner's
disregard of the due process standards raised in Ang Tibay and subsequent
cases, and of the Commissioner's own rules of procedure. Her disregard of
the standards and rules renders the deficiency tax assessments null and
void. This Court, nonetheless, proceeds to discuss the points raised by the
Commissioner pertaining to estoppel and prescription.
II
As a general rule, petitioner has three (3) years from the filing of the return to
assess taxpayers. Section 203 of the Tax Code provides:
Section 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.
An exception to the rule of prescription is found m Section 222, paragraphs
(b) and (d) of the same Code, viz:
Section 222. Exceptions as to Period of Limitation of Assessment and
Collection of Taxes. —
....
(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.
....
(d) Any internal revenue tax, which has been assessed within the period
agreed upon as provided in paragraph (b) hereinabove, may be collected by
distraint or levy or by a proceeding in court within the period agreed upon in
writing before the expiration of the five (5)-year period. The period so agreed
upon may be extended by subsequent written agreements made before the
expiration of the period previously agreed upon.
Thus, the period to assess and collect taxes may be extended upon the
Commissioner and the taxpayer's written agreement, executed before the
expiration of the three (3)-year period.
In this case, two (2) waivers were supposedly executed by the parties
extending the prescriptive periods for assessment of income tax, VAT, and
expanded and final withholding taxes to January 14, 2003, and then to April
14, 2003.151
16
TAX CASES-REMEDIES
The Court of Tax Appeals, both the Special First Division and En Banc,
declared the two (2) Waivers of the Defense of Prescription defective and
void, for the Commissioner's failure to furnish signed copies of the Waivers to
Avon, in violation of the requirements provided in Revenue Memorandum
Order No. 20-90.152
Indeed, a Waiver of the Defense of Prescription is a bilateral agreement
between a taxpayer and the Bureau of Internal Revenue to extend the period
of assessment and collection to a certain date. "The requirement to furnish
the taxpayer with a copy of the waiver is not only to give notice of the
existence of the document but of the acceptance by the [Bureau of Internal
Revenue] and the perfection of the agreement."153
However, the Commissioner in this case contends that Avon is estopped
from assailing the validity of the Waivers of the Defense of Prescription that it
executed when it paid portions of the disputed assessments.154 The
Commissioner invokes the ruling in Rizal Commercial Banking Corporation v.
Commissioner of Internal Revenue,155 which allegedly must be applied as
stare decisis.156
The Commissioner's contention is untenable.
Rizal Commercial Banking Corporation is not on all fours with this case. The
estoppel upheld in that case arose from the benefit obtained by the taxpayer
from its execution of the waiver, in the form of a drastic reduction of the
deficiency taxes, and the taxpayer's payment of a portion of the reduced tax
assessment. In that case, this Court explained that Rizal Commercial
Banking Corporation's partial payment of the revised assessments effectively
belied its insistence that the waivers were invalid and the assessments were
issued beyond the prescriptive period. Thus:
Estoppel is clearly applicable to the case at bench. RCBC, through its partial
payment of the revised assessments issued within the extended period as
provided for in the questioned waivers, impliedly admitted the validity of
those waivers. Had petitioner truly believed that the waivers were invalid and
that the assessments were issued beyond the prescriptive period, then it
should not have paid the reduced amount of taxes in the revised
assessment. RCBC's subsequent action effectively belies its insistence that
the waivers are invalid. The records show that on December 6, 2000, upon
receipt of the revised assessment, RCBC immediately made payment on the
uncontested taxes. Thus, RCBC is estopped from questioning the validity of
the waivers. To hold otherwise and allow a party to gainsay its own act or
deny rights which it had previously recognized would run counter to the
principle of equity which this institution holds dear.157 (Citation omitted)
Here, Avon claimed that it did not receive any benefit from the waivers.158 On
the contrary, there was even a drastic increase in the assessed deficiency
taxes when the Commissioner increased the alleged sales discrepancy from
P15,700,000.00 in the preliminary findings to P62,900,000.00 in the
Preliminary Assessment Notice and Final Assessment Notices. Furthermore,
Avon was compelled to pay a portion of the deficiency assessments "in
compliance with the Revenue Officer's condition in the hope of cancelling the
assessments on the non-existent sales discrepancy."159 Under these
circumstances, Avon's payment of an insignificant portion of the assessment
cannot be deemed an admission or recognition of the validity of the waivers.
On the other hand, the Court of Tax Appeals' reliance on the general rule
enunciated in Commissioner of Internal Revenue v. Kudos Metal
Corporation160 is proper. In that case, this Court ruled that the Bureau of
Internal Revenue could not hide behind the doctrine of estoppel to cover its
failure to comply with its own procedures. "[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."161
III
The Commissioner of Internal Revenue in this case asserts that since Avon
filed its protest on May 9, 2003, it only had 30 days from November 5, 2003,
i.e., the end of the 180 days, or until December 5, 2003 within which to
appeal to the Court of Tax Appeals. As Avon only filed its appeal on August
13, 2004, its right to appeal has prescribed.162
Avon counters that it acted in good faith and in accordance with Rule 4,
Section 3 of the Revised Rules of the Court of Tax Appeals and
jurisprudence when it opted to wait for the decision of the Commissioner and
appeal it within the 30-day period.163 "The Collection Letter, albeit void,
constitutes a constructive denial of Avon's protest and is the final decision of
the [Commissioner] for purposes of counting the reglementary 30-day period
to appeal[.]"164 Since Avon received the Collection Letter on July 14, 2004, its
Petition for Review was timely filed on August 13, 2004.165 At any rate, Avon
argues that the issue on the timeliness of its appeal was raised by the
Commissioner only in its Motion for Reconsideration of the Court of Tax
Appeals En Banc November 9, 2011 Decision, and a belated consideration
of this matter would violate its right to due process and fair play.166
The issue on whether Avon's Petition for Review before the Court of Tax
Appeals was time-barred requires the interpretation and application of
Section 228 of the Tax Code, viz:
Section 228. Protesting of Assessment. —
....
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing
rules and regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within
one hundred eighty (180) days from submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal to
the Court of Tax Appeals within thirty (30) days from receipt of the said
decision, or from the lapse of the one hundred eighty (180)-day period;
otherwise, the decision shall become final, executory and demandable.
(Emphasis supplied)
Section 228 of the Tax Code amended Section 229167 of the Old Tax Code168
by adding, among others, the 180-day rule. This new provision presumably
avoids the situation in the past when a taxpayer would be held hostage by
the Commissioner's inaction on his or her protest. Under the Old Tax Code,
in conjunction with Section 11 of Republic Act No. 1125, only the decision or
ruling of the Commissioner on a disputed assessment is appealable to the
Court of Tax Appeals. Consequently, the taxpayer then had to wait for the
Commissioner's action on his or her protest, which more often was long-
delayed.169 With the amendment introduced by Republic Act No. 8424, the
taxpayer may now immediately appeal to the Court of Tax Appeals in case of
inaction of the Commissioner for 180 days from submission of supporting
documents.
17
TAX CASES-REMEDIES
Republic Act No. 9282, or the new Court of Tax Appeals Law, which took
effect on April 23, 2004, amended Republic Act No. 1125 and included a
provision complementing Section 228 of the Tax Code, as follows:
Section 7. Jurisdiction. — The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein
provided:
....
(2) Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a
denial[.] (Emphasis supplied)
Under Section 7(a)(2) above, it is expressly provided that the "inaction" of the
Commissioner on his or her failure to decide a disputed assessment within
180 days is "deemed a denial" of the protest.
In Rizal Commercial Banking Corporation v. Commissioner of Internal
Revenue,170 this Court, by way of an obiter, ruled as follows:
In case the Commissioner failed to act on the disputed assessment within
the 180-day period from the date of submission of documents, a taxpayer
can either: 1) file a petition for review with the Court of Tax Appeals within 30
days after the expiration of the 180-day period; or 2) await the final decision
of the Commissioner on the disputed assessment and appeal such final
decision to the Court of Tax Appeals within 30 days after receipt of a copy of
such decision. However, these options are mutually exclusive, and resort to
one bars the application of the other.171
In Rizal Commercial Banking Corporation, the Commissioner failed to act on
the disputed assessment within 180 days from date of submission of
documents. Thus, Rizal Commercial Banking Corporation opted to file a
Petition for Review before the Court of Tax Appeals. Unfortunately, it was
filed more than 30 days following the lapse of the 180-day period.
Consequently, it was dismissed by the Court of Tax Appeals for late filing.
Rizal Commercial Banking Corporation did not file a Motion for
Reconsideration or make an appeal; hence, the disputed assessment
became final and executory.
Subsequently, Rizal Commercial Banking Corporation filed a petition for relief
from judgment on the ground of excusable negligence, but this was denied
by the Court of Tax Appeals for lack of merit. This Court affirmed the Court of
Tax Appeals. It further held that even if the negligence of Rizal Commercial
Banking Corporation's counsel was excusable and the petition for relief from
judgment would be granted, it would not fare any better because its action for
cancellation of assessments had already prescribed since its Petition was
filed beyond the 180+30-day period stated in Section 228.
Rizal Commercial Banking Corporation then filed a Motion for
Reconsideration. Denying the motion, this Court held that it could not
anymore "claim that the disputed assessment is not yet final as it remained
unacted upon by the Commissioner; that it can still await the final decision of
the Commissioner and thereafter appeal the same to the Court of Tax
Appeals."172 Since it had availed of the first option by filing a petition for
review because of the Commissioner's inaction, although late, it could no
longer resort to the second option.

Rizal Commercial Banking Corporation referred to Rule 4, Section 3(a)(2) of
the 2005 Revised Rules of the Court of Tax Appeals, or the 2005 Court of
Tax Appeals Rules, which provides:
Section 3. Cases Within the Jurisdiction of the Court in Divisions. — The
Court in Divisions shall exercise:
(a) Exclusive
original or
appellate
jurisdiction to
review by
appeal the
following:
....
(2) Inaction by the Commissioner of Internal
Revenue in cases involving disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties in
relation thereto, or other matters arising under
the National Internal Revenue Code or other
laws administered by the Bureau of Internal
Revenue, where the National Internal Revenue
Code or other applicable law provides a specific
period for action: Provided, that in case of
disputed assessments, the inaction of the
Commissioner of Internal Revenue within the
one hundred eighty day-period under Section
228 of the National Internal Revenue Code shall
be deemed a denial for purposes of allowing
the taxpayer to appeal his case to the Court
and does not necessarily constitute a formal
decision of the Commissioner of Internal
Revenue on the tax case; Provided, further, that
should the taxpayer opt to await the final
decision of the Commissioner of Internal
Revenue on the disputed assessments beyond
the one hundred eighty day-period
abovementioned, the taxpayer may appeal
such final decision to the Court under Section
3(a), Rule 8 of these Rules; and Provided, still
further, that in the case of claims for refund of
taxes erroneously or illegally collected, the
taxpayer must file a petition for review with the
Court prior to the expiration of the two-year
period under Section 229 of the National
Internal Revenue Code[.] (Emphasis supplied)
In Lascona Land Co., Inc. v. Commissioner of Internal Revenue,173 this Court
reaffirmed Rizal Commercial Banking Corporation, viz:
In arguing that the assessment became final and executory by the sole
reason that petitioner failed to appeal the inaction of the Commissioner within
30 days after the 180-day reglementary period, respondent, in effect, limited
the remedy of Lascona, as a taxpayer, under Section 228 of the NIRC to just
18
TAX CASES-REMEDIES
one, that is — to appeal the inaction of the Commissioner on its protested
assessment after the lapse of the 180-day period. This is incorrect.
....
[W]hen the law provided for the remedy to appeal the inaction of the CIR, it
did not intend to limit it to a single remedy of filing of an appeal after the
lapse of the 180-day prescribed period. Precisely, when a taxpayer protested
an assessment, he naturally expects the CIR to decide either positively or
negatively. A taxpayer cannot be prejudiced if he chooses to wait for the final
decision of the CIR on the protested assessment. More so, because the law
and jurisprudence have always contemplated a scenario where the CIR will
decide on the protested assessment.174
This Court, nonetheless, stressed that these two (2) options of the taxpayer,
i.e., to (1) file a petition for review before the Court of Tax Appeals within 30
days after the expiration of the 180-day period; or (2) to await the final
decision of the Commissioner on the disputed assessment and appeal this
final decision to the Court of Tax Appeals within 30 days from receipt of it,
"are mutually exclusive and resort to one bars the application of the other."
175
Rule 4, Section 3(a)(2) of the 2005 Court of Tax Appeals Rules clarifies
Section 7(a)(2) of Republic Act No. 9282 by stating that the "deemed a
denial'' rule is only for the "purposes of allowing the taxpayer to appeal" in
case of inaction of the Commissioner and "does not necessarily constitute a
formal decision of the Commissioner." Furthermore, the same provision
clarifies that the taxpayer may choose to wait for the final decision of the
Commissioner even beyond the 180-day period, and appeal from it.
The 2005 Court of Tax Appeals Rules were approved by the Court En Banc
on November 22, 2005, in A.M. No. 05-11-07-CTA, pursuant to its
constitutional rule-making authority.176 Under Article VIII, Section 5,
paragraph 5 of the 1987 Constitution:
Section 5. The Supreme Court shall have the following powers:
....
(5) Promulgate rules concerning the protection and enforcement of
constitutional rights, pleading, practice, and procedure in all
courts, the admission to the practice of law, the Integrated Bar,
and legal assistance to the underprivileged. Such rules shall
provide a simplified and inexpensive procedure for the speedy
disposition of cases, shall be uniform for all courts of the same
grade, and shall not diminish, increase, or modify substantive
rights. Rules of procedure of special courts and quasi-judicial
bodies shall remain effective unless disapproved by the Supreme
Court. (Emphases supplied)
In Metro Construction, Inc. v. Chatham Properties, Inc.,177 this Court held:
There is no controversy on the principle that the right to appeal is statutory.
However, the mode or manner by which this right may be exercised is a
question of procedure which may be altered and modified provided that
vested rights are not impaired. The Supreme Court is bestowed by the
Constitution with the power and prerogative, inter alia, to promulgate rules
concerning pleadings, practice and procedure in all courts, as well as to
review rules of procedure of special courts and quasi-judicial bodies, which,

however, shall remain in force until disapproved by the Supreme Court. This
power is constitutionally enshrined to enhance the independence of the
Supreme Court.178 (Citation omitted)
Carpio-Morales v. Court of Appeals179 elucidated that while Congress has
the authority to establish the lower courts, including the Court of Tax
Appeals, and to define, prescribe, and apportion their jurisdiction, the
authority to promulgate rules of procedure is exclusive to this Court:
A court's exercise of the jurisdiction it has acquired over a particular
case conforms to the limits and parameters of the rules of procedure
duly promulgated by this Court. In other words, procedure is the
framework within which judicial power is exercised. In Manila Railroad Co. v.
Attorney-General, the Court elucidated that "[t]he power or authority of the
court over the subject matter existed and was fixed before procedure in a
given cause began. Procedure does not alter or change that power or
authority; it simply directs the manner in which it shall be fully and
justly exercised. To be sure, in certain cases, if that power is not exercised
in conformity with the provisions of the procedural law, purely, the court
attempting to exercise it loses the power to exercise it legally. This does not
mean that it loses jurisdiction of the subject matter."
While the power to define, prescribe, and apportion the jurisdiction of the
various courts is, by constitutional design, vested unto Congress, the power
to promulgate rules concerning the protection and enforcement of
constitutional rights, pleading, practice, and procedure in all courts
belongs exclusively to this Court. (Emphasis in the original, citations
omitted)180
Section 228 of the Tax Code and Section 7 of Republic Act No. 9282 should
be read in conjunction with Rule 4, Section 3(a)(2) of the 2005 Court of Tax
Appeals Rules. In other words, the taxpayer has the option to either elevate
the case to the Court of Tax Appeals if the Commissioner does not act on his
or her protest, or to wait for the Commissioner to decide on his or her protest
before he or she elevates the case to the Court of Tax Appeals. This
construction is reasonable considering that Section 228 states that the
decision of the Commissioner not appealed by the taxpayer becomes final,
executory, and demandable.
IV
In this case, Avon opted to wait for the final decision of the Commissioner on
its protest filed on May 9, 2003.
This Court holds that the Collection Letter dated July 9, 2004 constitutes the
final decision of the Commissioner that is appealable to the Court of Tax
Appeals.181 The Collection Letter dated July 9, 2004 demanded from Avon
the payment of the deficiency tax assessments with a warning that should it
fail to do so within the required period, summary administrative remedies
would be instituted without further notice.182 The Collection Letter was
purportedly based on the May 27, 2004 Memorandum of the Revenue
Officers stating that Avon "failed to submit supporting documents within 60-
day period."183 This Collection Letter demonstrated a character of finality
such that there can be no doubt that the Commissioner had already made a
conclusion to deny Avon's request and she had the clear resolve to collect
the subject taxes.
Avon received the Collection Letter on July 14, 2004. Hence, Avon's appeal
to the Court of Tax Appeals filed on August 13, 2004 was not time-barred.
In any case, even if this Court were to disregard the Collection Letter as a
final decision of the Commissioner on Avon's protest, the Collection Letter
19
TAX CASES-REMEDIES
constitutes an act of the Commissioner on "other matters" arising under the
National Internal Revenue Code, which, pursuant to Philippine Journalists,
Inc. v. CIR,184 may be the subject of an appropriate appeal before the Court
of Tax Appeals.
On a final note, the Commissioner is reminded of her duty enunciated in
Section 3.1.6 of Revenue Regulations No. 12-99 to render a final decision on
disputed assessment. Section 228 of the Tax Code requires taxpayers to
exhaust administrative remedies by filing a request for reconsideration or
reinvestigation within 30 days from receipt of the assessment. Exhaustion of
administrative remedies is required prior to resort to the Court of Tax Appeals
precisely to give the Commissioner the opportunity to "re-examine its findings
and conclusions"185 and to decide the Issues raised within her
competence.186
Paat v. Court of Appeals187 wrote:
This Court in a long line of cases has consistently held that before a party is
allowed to seek the intervention of the court, it is a pre-condition that he
should have availed of all the means of administrative processes afforded
him. Hence, if a remedy within the administrative machinery can still be
resorted to by giving the administrative officer concerned every opportunity to
decide on a matter that comes within his jurisdiction then such remedy
should be exhausted first before court's judicial power can be sought. The
premature invocation of court's intervention is fatal to one's cause of action.
Accordingly, absent any finding of waiver or estoppel the case is susceptible
of dismissal for lack of cause of action. This doctrine of exhaustion of
administrative remedies was not without its practical and legal reasons,
for one thing, availment of administrative remedy entails lesser
expenses and provides for a speedier disposition of controversies. It is
no less true to state that the courts of justice for reasons of comity and
convenience will shy away from a dispute until the system of
administrative redress has been completed and complied with so as to
give the administrative agency concerned every opportunity to correct
its error and to dispose of the case.188 (Emphasis supplied, citations
omitted)
Taxpayers cannot be left in quandary by the Commissioner's inaction on the
protested assessment. It is imperative that the taxpayers are informed of the
Commissioner's action for them to take proper recourse to the Court of Tax
Appeals at the opportune time.189 Furthermore, this Court had time and again
expressed the dictum that "the Commissioner should always indicate to the
taxpayer in clear and unequivocal language what constitutes his [or her] final
determination of the disputed assessment. That procedure is demanded by
the pressing need for fair play, regularity and orderliness in administrative
action."190
While indeed the government has an interest in the swift collection of taxes,
its assessment and collection should be exercised justly and fairly, and
always in strict adherence to the requirements of the law and of the Bureau
of Internal Revenue's own rules.
WHEREFORE, the Petition of the Commissioner of Internal Revenue in G.R.
Nos. 201398-99 is DENIED. The Petition of Avon Products Manufacturing,
Inc. in G.R. Nos. 201418-19 is GRANTED. The remaining deficiency Income
Tax under Assessment No. LTAID-II-IT-99-00018 in the amount of
P357,345.88 for taxable year 1999, including increments, is hereby declared
NULL and VOID and is CANCELLED.
SO ORDERED.
G.R. No. 215957, November 09, 2016
 TAX CASES-REMEDIES
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. FITNESS BY
DESIGN, INC., Respondent.
Tax Due
DECISION 2,504,717.63
(35%)

LEONEN, J.: Add:

P
Surcharge
1,252,358.81
To avail of the extraordinary period of assessment in Section 222(a) of the (50%)
National Internal Revenue Code, the Commissioner of Internal Revenue
should show that the facts upon which the fraud is based is communicated to Interest
the taxpayer. The burden of proving that the facts exist in any subsequent (20%/
4,508,491.73 5,760,850.54
proceeding is with the Commissioner. Furthermore, the Final Assessment annum) until
Notice is not valid if it does not contain a definite due date for payment by the 4-15-04
taxpayer.
Deficiency P
This resolves a Petition for Review on Certiorari1 filed by the Commissioner of Income Tax 8,265,568.17
Internal Revenue, which assails the Decision2 dated July 14, 2014 and
Resolution3 dated December 16, 2014 of the Court of Tax Appeals. The Court
Value Added Tax
of Tax Appeals En Banc affirmed the Decision of the First Division, which
declared the assessment issued against Fitness by Design, Inc. (Fitness) as
invalid.4 Unreported
7, 156,336.08
Sales
On April 11, 1996, Fitness filed its Annul Income Tax Return for the taxable
year of 1995.5 According to Fitness, it was still in its pre-operating stage during
Output Tax
the covered period.6 715,633.61
(10%)
On June 9, 2004, Fitness received a copy of the Final Assessment Notice
dated March 17, 2004.7 The Final Assessment Notice was issued under Letter Add:
P
of Authority No. 00002953.8 The Final Assessment Notice assessed that Surcharge
357,816.80
Fitness had a tax deficiency in the amount of P10,647,529.69.9 It provides: (50%)
chanRoblesvirtualLawlibrary
Interest
(20%/
FINAL ASSESSMENT NOTICE 1,303,823.60 1,661,640.41
annum) until
4-15-04
March 17, 2004
Deficiency P
FITNESS BY DESIGN, INC VAT 2,377,274.02
169 Aguirre St., BF Homes,
Paranaque City
Documentary
Stamp Tax
Gentlemen:

Please be informed that after investigation of your Internal revenue Tax

Liabilities for the year 1995 pursuant to Letter of Authority No. 000029353
dated May 13, 2002, there has been found due deficiency taxes as shown Subscribe
P 375,000.00
hereunder: Capital Stock

Assessment No. __________ DST due

3,750.00
(2/200)
Income Tax
Add:
Surcharge 937.50
Taxable (25%)
Income per P
return Deficiency
P 4,687.50
DST
Add:
7,
Unreported
156,336.08
Sales
Total
P
Taxable Deficiency
7, 10,647,529.69
Income per Taxes
156,336.08
audit

20

The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1
of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code],
as amended. Please note, however, that the interest and the total amount
due will have to be adjusted if paid prior or beyond April 15, 2004.
In view thereof, you are requested to pay your aforesaid deficiency internal
revenue taxes liabilities through the duly authorized agent bank in which you
are enrolled within the time shown in the enclosed assessment notice.10
(Emphasis in the original)ChanRoblesVirtualawlibrary
Fitness filed a protest to the Final Assessment Notice on June 25, 2004.
According to Fitness, the Commissioner's period to assess had already
prescribed. Further, the assessment was without basis since the company was
only incorporated on May 30, 1995.11
On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or
Levy with Reference No. OCN WDL-95-05-005 dated February 1, 2005 to
Fitness.12
Fitness filed before the First Division of the Court of Tax Appeals a Petition for
Review (With Motion to Suspend Collection of Income Tax, Value Added Tax,
Documentary Stamp Tax and Surcharges and Interests) on March 1, 2005.13
On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to
Fitness' Petition and raised special and affirmative defenses.14 The
Commissioner posited that the Warrant of Distraint and/or Levy was issued in
accordance with law.15 The Commissioner claimed that its right to assess had
not yet prescribed under Section 222(a)16 of the National Internal Revenue
Code.17 Because the 1995 Income Tax Return filed by Fitness was false and
fraudulent for its alleged intentional failure to reflect its true sales, Fitness'
respective taxes may be assessed at any time within 10 years from the
discovery of fraud or omission.18
The Commissioner asserted further that the assessment already became final
and executory for Fitness' failure to file a protest within the reglementary
period.19 The Commissioner denied that there was a protest to the Final
Assessment Notice filed by Fitness on June 25, 2004.20 According to the
Commissioner, the alleged protest was "nowhere to be found in the [Bureau
of Internal Revenue] Records nor reflected in the Record Book of the Legal
Division as normally done by [itsr receiving clerk when she received [sic] any
document."21 Therefore, the Commissioner had sufficient basis to collect the
tax deficiency through the Warrant of Distraint and/or Levy.22
The alleged fraudulent return was discovered through a tip from a confidential
informant.23 The revenue officers' investigation revealed that Fitness had been
operating business with sales operations amounting to P7,156,336.08 in 1995,
which it neglected tq report in its income tax return.24 Fitness' failure to report
its income resulted in deficiencies to its income tax and value-added tax of
P8,265,568.17 and P2,377,274.02 respectively, as well as the documentary
stamp tax with regard to capital stock subscription.25cralawred
Through the report, the revenue officers recommended the filing of a civil case
for collection of taxes and a criminal case for failure to declare Fitness'
purported sales in its 1995 Income Tax Return.26 Hence, a criminal complaint
against Fitness was filed before the Department of Justice.27
The Court of Tax Appeals First Division granted Fitness' Petition on the ground
that the assessment has already prescribed.28 It cancelled and set aside the
Final Assessment Notice dated March 17, 2004 as well as the Warrant of
Distraint and/or Levy issued by the C mmissioner.29 It ruled that the Final
Assessment Notice is invalid for failure to comply with the requirements of
Section 22830 of the National Internal Revenue Code. The dispositive portion
21
TAX CASES-REMEDIES
of the Decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review dated February 24, 2005 filed by
petitioner Fitness by Design, Inc., is hereby GRANTED. Accordingly, the Final
Assessment Notice dated March 17, 2004, finding petitioner liable for
deficiency income tax, documentary stamp tax and value-added tax for taxable
year 1995 in the total amount of P10,647,529.69 is hereby CANCELLED and
SET ASIDE. The Warrant of Distraint and Levy dated February 1, 2005 is
likewise CANCELLED and SET ASIDE.
SO ORDERED.31 (Emphasis in the original)ChanRoblesVirtualawlibrary
The Commissioner's Motion for Reconsideration and its Supplemental Motion
for Reconsideration were denied by the Court of Tax Appeals First Division.32
Aggrieved, the Commissioner filed an appeal before the Court of Tax Appeals
En Banc.33 The Commissioner asserted that it had 10 years to make an
assessment due to the fraudulent income tax return filed by Fitness.34 It also
claimed that the assessment already attained finality due to Fitness' failure to
file its protest within the period provided by law.35
Fitness argued that the Final Assessment Notice issued to it could not be
claimed as a valid deficiency assessment that could justify the issuance of a
warrant of distraint and/or levy.36 It asserted that it was a mere request for
payment as it did not provide the period within which to pay the alleged
liabilities.37
The Court of Tax Appeals En Banc ruled in favor of Fitness. It affirmed the
Decision of the Court of Tax Appeals First Division, thus:
chanRoblesvirtualLawlibrary
WHEREFORE, the instant Petition for Review is DENIED for lack of merit.
Accordingly, both the Decision and Resolution in CTA Case No. 7160 dated
July 10, 2012 and November 21, 2012 respectively are AFFIRMED in toto.38
(Emphasis in the original)ChanRoblesVirtualawlibrary
The Commissioner's Motion for Reconsideration was denied by the Court of
Tax Appeals En Banc in the Resolution39 dated December 16, 2014.
Hence, the Commissioner of Internal Revenue filed before this Court a Petition
for Review.
Petitioner Commissioner of Internal Revenue raises the sole issue of whether
the Final Assessment Notice issued against respondent Fitness by Design,
Inc. is a valid assessment under Section 228 of the National Internal Revenue
Code and Revenue Regulations No. 12-99.40
Petitioner argues that the Final Assessment Notice issued to respondent is
valid since it complies with Section 228 of the National Internal Revenue Code
and Revenue Regulations No. 12-99.41 The law states that the taxpayer shall
be informed in writing of the facts, jurisprudence, and law on which the
assessment is based.42 Nothing in the law provides that due date for payment
is a substantive requirement for the validity of a final assessment notice.43
Petitioner further claims that a perusal of the Final Assessment Notice shows
that April 15, 2004 is the due date for payment.44 The pertinent portion of the
assessment reads:
chanRoblesvirtualLawlibrary
The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1
of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code],
as amended. Please note, however, that the interest and the total amount due
will have to be adjusted if paid prior or beyond April 15, 2004.45 (Emphasis
supplied)ChanRoblesVirtualawlibrary
This Court, through the Resolution46 dated July 22, 2015, required respondent
to comment on the Petition for Review.

In its Comment,47 respondent argues that the Final Assessment Notice issued
was merely a request and not a demand for payment of tax liabilities.48 The
Final Assessment Notice cannot be considered as a final deficiency
assessment because it deprived respondent of due process when it failed to
reflect its fixed tax liabilities.49 Moreover, it also gave respondent an indefinite
period to pay its tax liabilities.50
Respondent points out that an assessment should strictly comply with the law
for its validity.51 Jurisprudence provides that "not all documents coming from
the [Bureau of Internal Revenue] containing a computation of the tax liability
can be deemed assessments[,] which can attain finality."52 Therefore, the
Warrant of Distraint and/or Levy cannot be enforced since it is based on an
invalid assessment.53
Respondent likewise claims that since the Final Assessment Notice was
allegedly based on fraud, it must show the details of the fraudulent acts
imputed to it as part of due process.54chanroblesvirtuallawlibrary
I Revenue Regulations No. 12-99 means the act of informing the taxpayer of
The Petition has no merit.
An assessment "refers to the determination of amounts due from a person
obligated to make payments."55 "In the context of national internal revenue
collection, it refers to the determination of the taxes due from a taxpayer under
the National Internal Revenue Code of 1997."56
The assessment process starts with the filing of tax return and payment of tax
by the taxpayer.57 The initial assessment evidenced by the tax return is a self-
assessment of the taxpayer.58 The tax is primarily computed and voluntarily
paid by the taxpayer without need of any demand from govemment.59 If tax
obligations are properly paid, the Bureau of Internal Revenue may dispense
with its own assessment.60
After filing a return, the Commissioner or his or her representative may allow
the examination of any taxpayer for assessment of proper tax liability.61 The
failure of a taxpayer to file his or her return will not hinder the Commissioner
from permitting the taxpayer's examination.62 The Commissioner can examine
records or other data relevant to his or her inquiry in order to verify the
correctness of any return, or to make a return in case of noncompliance, as
well as to determine and collect tax liability.63
The indispensability of affording taxpayers sufficient written notice of his or her
tax liability is a clear definite requirement.64 Section 228 of the National Internal
Revenue Code and Revenue Regulations No. 12-99, as amended,
transparently outline the procedure in tax assessment.65
Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation
regarding the due process requirement in the issuance of a deficiency tax
assessment, requires a notice for informal conference.67 The revenue officer
who audited the taxpayer's records shall state in his or her report whether the
taxpayer concurs with his or her findings of liability for deficiency taxes.68 If the
taxpayer does not agree, based on the revenue officer's report, the taxpayer
shall be informed in writing69 of the discrepancies in his or her payment of
internal revenue taxes for "Informal Conference."70 The informal conference
gives the taxpayer an opportunity to present his or her side of the case. 71
The taxpayer is given 15 days from receipt of the notice of informal conference
to respond.72 If the taxpayer fails to respond, he or she will be considered in
default.73 The revenue officer74 endorses the case with the least possible delay
to the Assessment Division of the Revenue Regional Office or the
Commissioner or his or her authorized representative.75 The Assessment
Division of the Revenue Regional Office or the Commissioner or his or her
authorized representative is responsible for the "appropriate review and
22
TAX CASES-REMEDIES
issuance of a deficiency tax assessment, if warranted."76
If, after the review conducted, there exists sufficient basis to assess the
taxpayer with deficiency taxes, the officer shall issue a preliminary assessment
notice showing in detail the facts, jurisprudence, and law on which the
assessment is based.77 The taxpayer is given 15 days from receipt of the pre-
assessment notice to respond.78 If the taxpayer fails to respond, he or she will
be considered in default, and a formal letter of demand and assessment notice
will be issued.79
The formal letter of demand and assessment notice shall state the facts,
jurisprudence, and law on which the assessment was based; otherwise, these
shall be void.80 The taxpayer or the authorized representative may
administratively protest the formal letter of demand and assessment notice
within 30 days from receipt of the notice.81chanroblesvirtuallawlibrary
II
The word "shall" in Section 228 of the National Internal Revenue Code and
both the legal and factual bases of the assessment is mandatory.82 The law
requires that the bases be reflected in the formal letter of demand and
assessment notice.83 This cannot be presumed.84 Otherwise, the express
mandate of Section 228 and Revenue Regulations No. 12-99 would be
nugatory.85 The requirement enables the taxpayer to make an effective protest
or appeal of the assessment or decision.86
The rationale behind the requirement that taxpayers should be informed of the
facts and the law on which the assessments are based conforms with the
constitutional mandate that no person shall be deprived of his or her property
without due process of law.87 Between the power of the State to tax and an
individual's right to due process, the scale favors the right of the taxpayer to
due process.88
The purpose of the written notice requirement is to aid the taxpayer in making
a reasonable protest, if necessary.89 Merely notifying the taxpayer of his or her
tax liabilities without details or particulars is not enough.90
Commissioner of Internal Revenue v. United Salvage and Towage (Phils.),
Inc.91 held that a final assessment notice that only contained a table of taxes
with no other details was insufficient:
chanRoblesvirtualLawlibrary
In the present case, a mere perusal of the [Final Assessment Notice] for the
deficiency EWT for taxable year 1994 will show that other than a tabulation of
the alleged deficiency taxes due, no further detail regarding the assessment
was provided by petitioner. Only the resulting interest, surcharge and penalty
were anchored with legal basis. Petitioner should have at least attached a
detailed notice of discrepancy or stated an explanation why the amount of
P48,461.76 is collectible against respondent and how the same was arrived
at.92ChanRoblesVirtualawlibrary
Any deficiency to the mandated content of the assessment or its process will
not be tolerated.93 In Commissioner of Internal Revenue v. Enron,94 an advice
of tax deficiency from the Commissioner of Internal Revenue to an employee
of Enron, including the preliminary five (5)-day letter, were not considered valid
substitutes for the mandatory written notice of the legal and factual basis of
the assessment.95 The required issuance of deficiency tax assessment notice
to the taxpayer is different from the required contents of the notice.96 Thus:
chanRoblesvirtualLawlibrary
The law requires that the legal and factual bases of the assessment be stated
in the forma letter of demand and assessment notice. Thus, such cannot be
presumed. Otherwise, the express provisions of Article 228 of the [National
Internal Revenue Code] and [Revenue Regulations] No. 12-99 would be
rendered nugatory. The alleged "factual bases" in the advice, preliminary letter
and "audit working papers" did not suffice. There was no going around the
mandate of the law that the legal and factual bases of the assessment be

stated in writinin the formal letter of demand accompanying the assessment
notice.97 (Emphasis supplied)ChanRoblesVirtualawlibrary
However, the mandate of giving the taxpayer a notice of the facts and laws on
which the assessments are based should not be mechanically applied.98 To
emphasize, the purpose of this requirement is to sufficiently inform the
taxpayer of the bases for the assessment to enable him or her to make an
intelligent protest.99
In Samar-I Electric Cooperative v. Commissioner of Internal Revenue,100
substantial compliance with Section 228 of the National Internal Revenue
Code is allowed, provided that the taxpayer would be later apprised in writing
of the factual and legal bases of the assessment to enable him or her to
prepare for an effective protest.101 Thus:
chanRoblesvirtualLawlibrary
Although the [Final Assessment Notice] and demand letter issued to petitioner
were not accompanied by a written explanation of the legal and factual bases
of the deficiency taxes assessed against the petitioner, the records showed
that respondent in its letter dated April 10, 2003 responded to petitioner's
October 14, 2002 letter-protest, explaining at length the factual and legal
bases of the deficiency tax assessments and denying the protest.
Considering the foregoing exchange of correspondence and documents
between the parties, we find that the requirement of Section 228 was
substantially complied with. Respondent had fully informed petitioner in writing
of the factual and legal bases of the deficiency taxes assessment, which
enabled the latter to file an "effective" protest, much unlike the taxpayer's
situation in Enron. Petitioner's right to due process was thus not
violated.102ChanRoblesVirtualawlibrary
A final assessment notice provides for the amount of tax due with a demand
for payment.103 This is to determine the amount of tax due to a taxpayer. 104
However, due process requires that taxpayers be informed in writing of the
facts and law on which the assessment is based in order to aid the taxpayer
in making a reasonable protest.105 To immediately ensue with tax collection
without initially substantiating a valid assessment contravenes the principle in
administrative investigations "that tax ayers should be able to present their
case and adduce supporting evidence."106
Respondent filed its income tax return in 1995.107 Almost eight (8) years
passed before the disputed final assessment notice was issued. Respondent
pleaded prescription as its defense when it filed a protest to the Final
Assessment Notice. Petitioner claimed fraud assessment to justify the belated
assessment made on respondent.108 If fraud was indeed present, the period
of assessment should be within 10 years.109 It is incumbent upon petitioner to
clearly state the allegations of fraud committed by respondent to serve the
purpose of an assessment notice to aid respondent in filing an effective
protest.chanroblesvirtuallawlibrary
III
The prescriptive period in making an assessment depends upon whether a tax
return was filed or whether the tax return filed was either false or fraudulent.
When a tax return that is neither false nor fraudulent has been filed, the Bureau
of Internal Revenue may assess within three (3) years, reckoned from the date
of actual filing or from the last day prescribed by law for filing. 110 However, in
case of a false or fraudulent return with intent to evade tax, Section 222(a)
provides:
chanRoblesvirtualLawlibrary
Section 222. Exceptions as to Period of Limitation of Assessment and
Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of
failure to file a return, the tax may be assessed, or a proceeding in court for
the collection of such tax may be filed without assessment, at any time within
ten (10) years after the discovery of the falsity, fraud or omission: Provided,
TAX CASES-REMEDIES
That in a fraud assessment which has become final and executory, the fact of
fraud shall be judicially taken cognizance of in the civil or criminal action for
the collection thereof. (Emphasis supplied)ChanRoblesVirtualawlibrary
In Aznar v. Court of Tax Appeals,111 this Court interpreted Section 332112 (now
Section 222[a] of the National Internal Revenue Code) by dividing it in three
(3) different cases: first, in case of false return; second, in case of a fraudulent
return with intent to evade; and third, in case of failure to file a return.113 Thus:
chanRoblesvirtualLawlibrary
Our stand that the law should be interpreted to mean a separation of the three
different situations of false return, fraudulent return with intent to evade tax and
failure to file a return is strengthened immeasurably by the last portion of the
provision which aggregates the situations into three different classes, namely
"falsity", "fraud" and "omission."114ChanRoblesVirtualawlibrary
This Court held that there is a difference between "false return" and a
"fraudulent return."115 A false return simply involves a "deviation from the truth,
whether intentional or not" while a fraudulent return "implies intentional or
deceitful entry with intent to evade the taxes due."116
Fraud is a question of fact that should be alleged and duly proven.117 "The
willful neglect to file the required tax return or the fraudulent intent to evade
the payment of taxes, considering that the same is accompanied by legal
consequences, cannot be presumed."118 Fraud entails corresponding
sanctions under the tax law. Therefore, it is indispensable for the
Commissioner of Internal Revenue to include the basis for its allegations of
fraud in the assessment notice.
During the proceedings in the Court of Tax Appeals First Division, respondent
presented its President, Domingo C. Juan Jr. (Juan, Jr.), as witness.119 Juan,
Jr. testified that respondent was in its pre-operating stage in 1995.120 During
that period, respondent "imported equipment and distributed them for market
testing in the Philippines without earning any profit."121 He also confirmed that
the Final Assessment Notice and its attachments failed to substantiate the
Commissioner's allegations of fraud against respondent, thus:
chanRoblesvirtualLawlibrary
More than three (3) years from the time petitioner filed its 1995 annual income
tax return on April 11, 1996, respondent issued to petitioner a [Final
Assessment Notice] dated March 17, 2004 for the year 1995, pursuant to the
Letter of Authority No. 00002953 dated May 13, 2002. The attached Details of
discrepancy containing the assessment for income tax (IT), value-added tax
(VAT) and documentary stamp tax (DST) as well as the Audit
Result/Assessment Notice do not impute fraud on the part of petitioner.
Moreover, it was obtained on information and documents illegally obtained by
a [Bureau of Internal Revenue] informant from petitioner's accountant Elnora
Carpio in 1996.122 (Emphasis supplied)ChanRoblesVirtualawlibrary
Petitioner did not refute respondent's allegations. For its defense, it presented
Socrates Regala (Regala), the Group Supervisor of the team, who examined
respondent's tax liabilities.123 Regala confirmed that the investigation was
prompted by a tip from an informant who provided them with respondent's list
of sales.124 He admitted125 that the gathered information did not show that
respondent deliberately failed to reflect its true income in
1995.126chanroblesvirtuallawlibrary
IV
The issuance of a valid formal assessment is a substantive prerequisite for
collection of taxes.127 Neither the National Internal Revenue Code nor the
revenue regulations provide for a "specific definition or form of an
assessment." However, the National Internal Revenue Code defines its explicit
-
functions and effects.128 An assessment does not only include a computation
of tax liabilities; it also includes a demand for payment within a period
prescribed.129 Its main purpose is to determine the amount that a taxpayer is
liable to pay.130
A pre-assessment notice "do[es] not bear the gravity of a formal assessment
23

notice."131 A pre-assessment notice merely gives a tip regarding the Bureau of
Internal Revenue's findings against a taxpayer for an informal conference or a
clarificatory meeting.132
A final assessment is a notice "to the effect that the amount therein stated is
due as tax and a demand for payment thereof."133 This demand for payment
signals the time "when penalties and interests begin to accrue against the
taxpayer and enabling the latter to determine his remedies[.]"134 Thus, it must
be "sent to and received by the taxpayer, and must demand payment of the
taxes described therein within a specific period."135
The disputed Final Assessment Notice is not a valid assessment.
First, it lacks the definite amount of tax liability for which respondent is
accountable. It does not purport to be a demand for payment of tax due, which
a final assessment notice should supposedly be. An assessment, in the
context of the National Internal Revenue Code, is a "written notice and demand
made by the [Bureau of Internal Revenue] on the taxpayer for the settlement
of a due tax liability that is there definitely set and fixed."136 Although the
disputed notice provides for the computations of respondent's tax liability, the
amount remains indefinite. It only provides that the tax due is still subject to
modification, depending on the date of payment. Thus:
chanRoblesvirtualLawlibrary
The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1
of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249 (B) of the [National Internal Revenue Code],
as amended. Please note, however, that the interest and the total amount due
will have to be adjusted if prior or beyond April 15, 2004.137 (Emphasis
Supplied)ChanRoblesVirtualawlibrary
Second, there are no due dates in the Final Assessment Notice. This negates
petitioner's demand for payment.138 Petitioner's contention that April 15, 2004
should be regarded as the actual due date cannot be accepted. The last
paragraph of the Final Assessment Notice states that the due dates for
payment were supposedly reflected in the attached assessment:
chanRoblesvirtualLawlibrary
In view thereof, you are requested to pay your aforesaid deficiency internal
revenue tax liabilities through the duly authorized agent bank in which ou are
enrolled within the time shown in the enclosed assessment notice.139
(Emphasis in the original)ChanRoblesVirtualawlibrary
However, based on the findings of the Court of Tax Appeals First Division, the
enclosed assessment pertained to remained unaccomplished.140
Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual
of penalties and surcharges and not the due date for payment of tax liabilities.
The total amount depended upon when respondent decides to pay. The notice,
therefore, did not contain a definite and actual demand to pay.
Compliance with Section 228 of the National Internal Revenue Code is a
substantive requirement.141 It is not a mere formality.142 Providing the taxpayer
with the factual and legal bases for the assessment is crucial before
proceeding with tax collection. Tax collection should be premised on a valid
assessment, which would allow the taxpayer to present his or her case and
produce evidence for substantiation.143
The Court of Tax Appeals did not err in cancelling the Final Assessment Notice
as well as the Audit Result/Assessment Notice issued by petitioner to
respondent for the year 1995 covering the "alleged deficiency income tax,
value-added tax and documentary stamp tax amounting to P10,647,529.69,
inclusive of surcharges and interest"144 for lack of due process. Thus, the
Warrant of Distraint and/or Levy is void since an invalid assessment bears no
valid effect.145
Taxes are the lifeblood of government and should be collected without
24
TAX CASES-REMEDIES
hindrance.146 However, the collection of taxes should be exercised
"reasonably and in accordance with the prescribed procedure."147
The essential nature of taxes for the existence of the State grants government
with vast remedies to ensure its collection. However, taxpayers are
guaranteed their fundamental right to due process of law, as articulated in
various ways in the process of tax assessment. After all, the State's purpose
is to ensure the well-being of its citizens, not simply to deprive them of their
fundamental rights.
WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax
Appeals En Banc dated July 14, 2014 and Resolution dated December 16,
2014 in CTA EB Case No. 970 (CTA Case No. 7160) are hereby AFFIRMED.
SO ORDERED.cralawlawlibrary
G.R. No. 224327, June 11, 2018
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. BANK OF THE
PHILIPPINE ISLANDS, Respondent.
DECISION
PERALTA, J.:
For this Court’s resolution is the Petition for Review on Certiorari1 under Rule
45 of the Revised Rules of Civil Procedure assailing the Decision2 dated
September 16, 2015 and Resolution3 dated April 21, 2016 of the Court of Tax
Appeals (CTA) En Banc in CTA EB No. 1173 (CTA CASE No. 8350) on
petitioner Commissioner of Internal Revenue's (CIR) tax assessment against
respondent Bank of the Philippine Islands (BPI).
The facts follow.
Citytrust Banking Corporation (CBC) filed its Annual Income Tax Returns for
its Regular Banking Unit, and Foreign Currency Deposit Unit for taxable year
1986 on April 15, 1987.
Thereafter, on August 11, 1989, July 12, 1990 and November 8, 1990, CBC
executed Waivers of the Statute of Limitations under the National Internal
Revenue Code (NIRC).
On March 7, 1991, petitioner CIR issued a Pre-Assessment Notice (PAN)
against CBC for deficiency taxes, among which is for deficiency Income Tax
for taxable year 1986 in the total amount of P19,202,589.97. The counsel for
CBC filed its protest against the PAN on April 22, 1991.
Petitioner, on May 6, 1991, issued a Letter, with attached Assessment Notices,
demanding for the payment of the deficiency taxes within thirty (30) days from
receipt thereof. The counsel for CBC filed its Protest against the assessments
on May 27, 1991 and another Protest on February 17, 1992.
A Letter was again issued by petitioner on February 5, 1992 requesting for the
payment of CBC's tax liabilities, within ten (10) days from receipt thereof.
The counsel for CBC, on March 29, 1994, issued a Letter addressed to
petitioner offering a compromise settlement on its deficiency Income Tax
assessment for Taxable year 1986, with an attached Application for
Compromise Settlement/Abatement of Penalties under Revenue
Memorandum Order (RMO) No. 45-93, in the amount of P1,721,503.40, or
twenty percent (20%) of the subject assessment, which was received on

March 30, 1994. On May 2, 1994, the counsel for CBC issued a Letter
addressed to petitioner, reiterating its Letter of offer of compromise settlement
dated March 29, 1994 and Application for Compromise Settlement/Abatement
under RMO No. 45-93.
Petitioner, on October 12, 1994, approved the earlier mentioned Application
for Compromise Settlement of CBC, provided that one hundred percent
(100%) of its deficiency Income Tax assessment for the year 1986, or in the
amount of P8,607,517.00, be paid within fifteen (15) days from receipt thereof.
The counsel for CBC, on November 28, 1994, issued a Letter addressed to
petitioner, requesting for a reconsideration of the approved amount as
compromise settlement, and offering to pay the amount of P1,600,000.00 as
full and final settlement of the subject assessment. The same counsel for CBC
issued a Letter on March 8, 1995 reiterating its request for reconsideration and
offering to increase its full and final settlement in the amount P3,200,000.00.
On March 28, 1995, petitioner approved the Application for Compromise
Settlement of CBC dated March 30, 1994, provided that CBC pay the amount
of P8,607,517.00 within fifteen (15) days from receipt thereof.
Later, on May 4, 1995, the counsel for CBC issued another Letter addressed
to petitioner, requesting for a final reconsideration, and reiterating its offer of
compromise in the amount of P3,200,000.00.
Petitioner, however, disapproved the Application for Compromise Settlement
of CBC dated March 30, 1994. The counsel of CBC, on July 27, 1995, issued
a Letter addressed to petitioner requesting for reconsideration and offering to
pay the increased amount of P4,303,758.50.
Meanwhile, on October 4, 1996, the Securities and Exchange Commission
approved the Articles of Merger between respondent BPI and CBC, with BPI
as the surviving corporation.
Afterwards, on May 26, 2011, petitioner issued a Notice of Denial addressed
to respondent, requesting for the payment of CBC's deficiency Income Tax for
taxable year 1986, within fifteen (15) days from receipt thereof, and on July
28, 2011, petitioner issued another Letter addressed to respondent, denying
the offer of compromise penalty, and requesting for the payment of the amount
of P19,202,589.97, plus all increments incident to delinquency, pursuant to
Sections 248 (A) (3) and 249 (C) (3) of the 1997 NIRC, as amended.
Consequently, on September 21, 2011, petitioner issued a Warrant of Distraint
and/or Levy against respondent BPI which prompted the latter to file a Petition
for Review with the CTA on October 7, 2011.
In a Decision4 dated February 12, 2014, the CTA Special Third Division
granted the petition for review, thus:
WHEREFORE, the Petition for Review is hereby GRANTED. Accordingly, the
Warrant of Distraint and/or Levy dated September 21, 2011 is hereby
CANCELLED and SET ASIDE.
SO ORDERED.5
According to the CTA Special Third Division, BPI can validly assail the Warrant
of Distraint and/or Levy, as its appellate jurisdiction is not limited to cases
which involve decisions of the Commissioner of Internal Revenue on matters
relating to assessments or refunds. The Court further ruled that the
Assessment Notices, being issued only on May 6, 1991, were already issued
beyond the three-year period to assess, counting from April 15, 1987, when
25
TAX CASES-REMEDIES
CBC filed its Annual Income Tax Returns for the taxable year 1986. The same
Court also held that the Waivers of Statute of Limitations executed on July 12,
1990 and November 8, 1990 were not in accordance with the proper form of a
valid waiver pursuant to RMO No. 20-90, thus, the waivers failed to extend the
period given to petitioner to assess.
After the denial of petitioner's motion for reconsideration, a petition for review
was filed with the CTA En Banc, in which the latter Court denied the said
petition, thus:
WHEREFORE, premises considered, the instant Petition for Review is hereby
DENIED. Accordingly, the Decision and the Resolution, dated February 12,
2014 and April 25, 2014, respectively, are hereby AFFIRMED.
SO ORDERED.6
Hence, the present petition after the CTA En Banc denied petitioner's motion
for reconsideration.
Petitioner raises the following grounds for the allowance of the present petition:
THE CTA EN BANC ERRED IN AFFIRMING THE CTA SPECIAL THIRD
DIVISION'S EXERCISE OF JURISDICTION OVER THE INSTANT
CONTROVERSY.
THE CTA EN BANC ERRED IN AFFIRMING THE ANNULMENT OF THE
WARRANT OF DISTRAINT AND/OR LEVY AGAINST RESPONDENT GIVEN
PETITIONER'S CLEAR RIGHT TO THE SAME.7
Petitioner argues that the CTA did not acquire jurisdiction over the case for
respondent's failure to contest the assessments made against it by the Bureau
of Internal Revenue (BIR) within the period prescribed by law. Petitioner also
contends that by the principle of estoppel, respondent is not allowed to raise
the defense of prescription against the efforts of the government to collect the
tax assessed against it.
In its Comment8 dated August 22, 2016, respondent claims that the
assessment notice issued against it, is not yet final and executory and that the
CTA has jurisdiction over the case. It further asserts that the right of petitioner
to assess deficiency income tax for the taxable year 1986 had already
prescribed pursuant to the Tax Code of 1977 and that the right of petitioner to
collect the alleged deficiency income tax for the taxable year 1986 had already
prescribed. Respondent also insists that it is not liable for the alleged
deficiency income tax and increments for the taxable year 1986.
The petition lacks merit.
First of all, the CTA did not err in its ruling that it has jurisdiction over cases
asking for the cancellation and withdrawal of a warrant of distraint and/or levy
as provided under Section 7 of Republic Act (R.A.) No. 9282, thus:
Sec. 7 Jurisdiction. – The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. xxx
2. Inaction by the Commissioner of the Internal Revenue
in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties

in relation thereto, or other matter arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue,
where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall
be deemed a denial;
xxxx
Anent the other grounds relied upon by petitioner, such are factual in nature.
It is doctrinal that the Court will not lightly set aside the conclusions reached
by the CTA which, by the very nature of its function of being dedicated
exclusively to the resolution of tax problems, has developed an expertise on
the subject, unless there has been an abuse or improvident exercise of
authority.9 We thus accord the findings of fact by the CTA with the highest
respect. These findings of facts 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 CTA. 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.10 Nevertheless, the factual findings of the CTA are
supported by substantial evidence.
An assessment becomes final and unappealable if within thirty (30) days from
receipt of the assessment, the taxpayer fails to file his or her protest requesting
for reconsideration or reinvestigation as provided in Section 229 of the NIRC,
thus:
SECTION 229. Protesting of assessment. – When the Commissioner of
Internal Revenue or his duly authorized representative finds that proper taxes
should be assessed, he shall first notify the taxpayer of his findings within a
period to be prescribed by implementing regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the
Commissioner shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request
for reconsideration or reinvestigation in such form and manner as may
be prescribed by implementing regulations within thirty (30) days from
receipt of the assessment; otherwise, the assessment shall become final
and unappealable.
If the protest is denied in whole and in part, the individual, association
or corporation adversely affected by the decision on the protest may
appeal to the Court of Tax Appeals within thirty (30) days from receipt of
the said decision; otherwise, the decision shall become final, executory
and demandable.11
Petitioner insists that respondent failed to elevate the tax assessment against
it to the CTA within the required period. Respondent, on the other hand, claims
that it never received any final decision on the disputed assessment from
petitioner granting or denying the same, whether in whole or in part.
The CTA was correct in ruling that petitioner failed to prove that it sent a notice
of assessment and that it was received by respondent, thus:
The February 5, 1992 Decision of the CIR which she insists to be the reckoning
point to protest, was not proven to have been received by BPI when the latter
denied its receipt. Thus, the assessment notice dated May 6, 1991 should be
deemed as the final decision of the CIR on the matter, in which BPI timely
protested on May 27, 1991. While a mailed letter is deemed received by the
addressee in the ordinary course of mail, this is still merely a disputable
presumption subject to controversion, and a direct denial of the receipt thereof
shifts the burden upon the party favored by the presumption to prove that the
26
TAX CASES-REMEDIES
mailed letter was indeed received by the addressee. (Republic v. Court of
Appeals, G.R. No. L-38540, April 30, 1987, 149 SCRA 351, 355.) In the instant
case, BPI denies receiving the assessment notice, and the CIR was unable to
present substantial evidence that such notice was, indeed, mailed or sent
before the BIR's right to assess had prescribed and that said notice was
received by BPI. As a matter of fact, there was an express admission on the
part of the CIR that there was no proof that indeed the alleged Final
Assessment Notice was ever sent to or received by BPI. As stated in the
Transcript of stenographic Notes on the court hearing dated October 29, 2012:
Q: And you anchor your argument based on this document (Letter dated
February 5, 1992) that this is the final decision of the BIR, is that correct?
A: Yes.
Q: When was this received by the petitioner City Trust Banking Corporation?
A: I think it was only mailed.
Q: What is your proof that it was mailed?
A: Because the BIR...(interrupted by Atty. Nidea)
Q: Do you have any proof that it was mailed?
A: No, I don't have any proof.
Q: So, you don't have any proof. So you don't have any proof that it was
received by the petitioner?
A: I don't have any idea.
Q: You don't have any proof.
Moreover, as correctly pointed out in the assailed Resolution, whether or not
the Letter dated February 5, 1992 constitutes as the Final Decision on the
Disputed Assessment appealable under Section 229 of the 1977 Tax Code, or
whether the same was validly served and duly received by BPI, are immaterial
matters which will not cure the nullity of the said Preliminary Assessment
Notice and Assessment Notices, as they were clearly made beyond the
prescriptive period.12
In the case of Nava v. Commissioner of Internal Revenue,13 this Court stressed
on the importance of proving the release, mailing or sending of the notice.
While we have held that an assessment is made when sent within the
prescribed period, even if received by the taxpayer after its expiration (Coll. Of
Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes
it the more imperative that the release, mailing, or sending of the notice be
clearly and satisfactorily proved. Mere notations made without the taxpayer's
intervention, notice, or control, without adequate supporting evidence, cannot
suffice; otherwise, the taxpayer would be at the mercy of the revenue offices,
without adequate protection or defense.
Thus, the failure of petitioner to prove the receipt of the assessment by
respondent would necessarily lead to the conclusion that no assessment was
issued.
As to the contention of petitioner that through the principle of estoppel,
respondent is not allowed to raise the defense of prescription against the
efforts of the government to collect the tax assessed against it, such is
misplaced. Its argument that respondent's belated assertions relative to the
alleged defects and flaws in the waivers it signed in favor of the government
should not be given merit, is also amiss.
 TAX CASES-REMEDIES
Petitioner cannot implore the doctrine of estoppel just to compensate its failure
to follow the proper procedure. As aptly ruled by the CTA:

It is well established that issues raised for the first time on appeal are barred
by estoppel. However, in the leading case of Commissioner of Internal
Revenue v. Kudos Metal Corporation, the Supreme Court held that:

The doctrine of estoppel cannot be applied in this case as an exception to the

statute of limitations on the assessment of taxes considering that there is a
detailed procedure for the proper execution of the waiver, which the BIR must
strictly follow. xxx As such, the doctrine of estoppel cannot give validity to an
act that is prohibited by law or one that is against public policy. xxx

Moreover, 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
issued. xxx Having caused the defects in the waivers, the BIR must bear the
consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of
the statute of limitations, being a derogation of the taxpayer's right to security
against prolonged and unscrupulous investigations, must be carefully and
strictly construed.

Applying the said ruling in the case at bench, BPI is not estopped from raising
the invalidity of the subject Waivers as the BIR in this case caused the defects
thereof. As such, the invalid Waivers did not operate to toll or extend the period
of prescription. 14

From the above disquisitions, it is clear that the right of petitioner to assess
respondent has already prescribed and respondent is not liable to pay the
deficiency tax assessment. The period of collection has also prescribed. As
held by the CTA:

As to the period of collection, We uphold the ruling of the Division that such
has already prescribed. Regardless if We will reckon the period to collect from
May 6, 1991, or the alleged Final Demand Letter on February 5, 1992, counting
the three-year period therein to collect in accordance with Section 223 (c) of
the 1977 Tax Code, obviously, the mode of collection through the issuance of
Warrant of Distraint and/or Levy on October 05, 2011 was made beyond the
prescriptive period.15

It must be remembered that [T]he law imposes a substantive, not merely a

formal, requirement. To proceed heedlessly with tax collection without first
establishing a valid assessment is evidently violative of the cardinal principle
in administrative investigations: that taxpayers should be able to present their
case and adduce supporting evidence.16 Although taxes are the lifeblood of
the government, their assessment and collection "should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself."17

WHEREFORE, the Petition for Review on Certiorari dated June 16, 2016 of
petitioner Commissioner of Internal Revenue is DENIED for lack of merit.
Consequently, the Decision dated September 16, 2015 and the Resolution
dated April 21, 2016 of the Court of Tax Appeals En Banc in CTA EB No. 1173
(CTA CASE No. 8350), are AFFIRMED.

SO ORDERED.

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