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[G.R. No. 202695. February 29, 2016.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. GJM PHILIPPINES MANUFACTURING,


INC., respondent.

DECISION

PERALTA, J p:

For resolution is a Petition for Review under Rule 45 of the Rules of Court which petitioner Commissioner of
Internal Revenue (CIR) filed, praying for the reversal of the Decision 1 of the Court of Tax Appeals (CTA)
En Banc dated March 6, 2012 and its Resolution 2 dated July 12, 2012 in CTA EB CASE No. 637. The
CTA En Banc affirmed the Decision 3 of the CTA First Division dated January 26, 2010 and its
Resolution 4 dated May 4, 2010 in favor of respondent GJM Philippines Manufacturing, Inc. (GJM).

The facts, as culled from the records, are as follows:

On April 12, 2000, GJM filed its Annual Income Tax Return for the year 1999. Thereafter, its parent
company, Warnaco (HK) Ltd., underwent bankruptcy proceedings, resulting in the transfer of ownership
over GJM and its global affiliates to Luen Thai Overseas Limited in December 2001. On August 26, 2002,
GJM informed the Revenue District Officer of Trece Martirez, through a letter, that on April 29, 2002, it
would be canceling its registered address in Makati and transferring to Rosario, Cavite, which is under
Revenue District Office (RDO) No. 54. On August 26, 2002, GJM's request for transfer of its tax registration
from RDO No. 48 to RDO No. 54 was confirmed through Transfer Confirmation Notice No. OCN ITR
000018688.

On October 18, 2002, the Bureau of Internal Revenue (BIR) sent a letter of informal conference informing
GJM that the report of investigation on its income and business tax liabilities for 1999 had been submitted.
The report disclosed that GJM was still liable for an income tax deficiency and the corresponding 20%
interest, as well as for the compromise penalty in the total amount of P1,192,541.51. Said tax deficiency
allegedly resulted from certain disallowances/understatements, to wit: (a) Loading and Shipment/Freight
Out in the amount of P2,354,426.00; (b) Packing expense, P8,859,975.00; (c) Salaries and Wages,
P2,717,910.32; (d) Staff Employee Benefits, P1,191,965.87; and (e) Fringe Benefits Tax, in the amount of
P337,814.57. On October 24, 2002, GJM refuted said findings through its Financial Controller. ITAaHc

On February 12, 2003, the Bureau of Internal Revenue (BIR) issued a Pre-Assessment Notice and Details of
Discrepancies against GJM. On April 14, 2003, it issued an undated Assessment Notice, indicating a
deficiency income tax assessment in the amount of P1,480,099.29. On July 25, 2003, the BIR issued a
Preliminary Collection Letter requesting GJM to pay said income tax deficiency for the taxable year 1999.
Said letter was addressed to GJM's former address in Pio del Pilar, Makati. On August 18, 2003, although
the BIR sent a Final Notice Before Seizure to GJM's address in Cavite, the latter claimed that it did not
receive the same.

On December 8, 2003, GJM received a Warrant of Distraint and/or Levy from the BIR RDO No. 48-West
Makati. The company then filed its Letter Protest on January 7, 2004, which the BIR denied on January 15,
2004. Hence, GJM filed a Petition for Review before the CTA.

On January 26, 2010, the CTA First Division rendered a Decision in favor of GJM, the dispositive portion of
which reads:

WHEREFORE, the deficiency income tax assessment in the amount of P1,480,099.29, inclusive of interest,
for taxable year 1999, covered by Formal Assessment Notice No. IT-17316-99-03-282 and the Warrant of

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Distraint and/or Levy dated November 27, 2003, both issued against petitioner by respondent, are
herebyCANCELLED and WITHDRAWN.

Accordingly, respondent is hereby ORDERED to cease and desist from implementing the said assessment
and Warrant.

SO ORDERED. 5

When its Motion for Reconsideration was denied, the CIR brought the case to the CTA En Banc.

On March 6, 2012, the CTA En Banc denied the CIR's petition, thus:

WHEREFORE, the Petition for Review is hereby DENIED. Accordingly, the impugned Decision dated
January 26, 2010 and Resolution dated May 4, 2010 are hereby AFFIRMED in toto.

SO ORDERED. 6

The CIR filed a Motion for Reconsideration but the same was denied for lack of merit. Thus, the instant
petition.

The CIR raised the following issues:

I.

WHETHER OR NOT THE FORMAL ASSESSMENT NOTICE (FAN) FOR DEFICIENCY INCOME TAX ISSUED TO
GJM FOR TAXABLE YEAR 1999 WAS RELEASED, MAILED, AND SENT WITHIN THE THREE (3)-YEAR
PRESCRIPTIVE PERIOD UNDER SECTION 203 OF THE NIRC OF 1997.

II.

WHETHER OR NOT THE BIR'S RIGHT TO ASSESS GJM FOR DEFICIENCY INCOME TAX FOR TAXABLE YEAR
1999 HAS ALREADY PRESCRIBED.

The petition lacks merit.

Section 203 of the 1997 National Internal Revenue Code (NIRC), as amended, specifically provides for the
period within which the CIR must make an assessment. It provides:

SEC. 203. Period of Limitation Upon Assessment and Collection. Except as provided in Section
222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for
the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall
be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the
period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day. (Emphasis supplied)

Thus, the CIR has three (3) years from the date of the actual filing of the return or from the last day
prescribed by law for the filing of the return, whichever is later, to assess internal revenue taxes. Here, GJM
filed its Annual Income Tax Return for the taxable year 1999 on April 12, 2000. The three (3)-year
prescriptive period, therefore, was only until April 15, 2003. The records reveal that the BIR sent the FAN
through registered mail on April 14, 2003, well-within the required period. The Court has held that when an
assessment is made within the prescriptive period, as in the case at bar, receipt by the taxpayer may or
may not be within said period. But it must be clarified that the rule does not dispense with the requirement
that the taxpayer should actually receive the assessment notice, even beyond the prescriptive
period. 7 GJM, however, denies ever having received any FAN.

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If the taxpayer denies having received an assessment from the BIR, it then becomes incumbent upon the
latter to prove by competent evidence that such notice was indeed received by the addressee. 8 Here,
the onus probandi has shifted to the BIR to show by contrary evidence that GJM indeed received the
assessment in the due course of mail. It has been settled that while a mailed letter is deemed received by
the addressee in the course of mail, this is merely a disputable presumption subject to controversion, the
direct denial of which shifts the burden to the sender to prove that the mailed letter was, in fact, received
by the addressee. 9

To prove the fact of mailing, it is essential to present the registry receipt issued by the Bureau of Posts or
the Registry return card which would have been signed by the taxpayer or its authorized representative.
And if said documents could not be located, the CIR should have, at the very least, submitted to the Court
a certification issued by the Bureau of Posts and any other pertinent document executed with its
intervention. The Court does not put much credence to the self-serving documentations made by the BIR
personnel, especially if they are unsupported by substantial evidence establishing the fact of mailing. While
it is true that an assessment is made when the notice is sent within the prescribed period, the release,
mailing, or sending of the same must still be clearly and satisfactorily proved. Mere notations made without
the taxpayer's intervention, notice or control, and without adequate supporting evidence cannot suffice.
Otherwise, the defenseless taxpayer would be unreasonably placed at the mercy of the revenue
offices. 10 CHTAIc

The BIR's failure to prove GJM's receipt of the assessment leads to no other conclusion but that no
assessment was issued. Consequently, the government's right to issue an assessment for the said period
has already prescribed. The CIR offered in evidence Transmittal Letter No. 282 dated April 14, 2003
prepared and signed by one Ma. Nieva A. Guerrero, as Chief of the Assessment Division of BIR Revenue
Region No. 8-Makati, to show that the FAN was actually served upon GJM. However, it never presented
Guerrero to testify on said letter, considering that GJM vehemently denied receiving the subject FAN and
the Details of Discrepancies. Also, the CIR presented the Certification signed by the Postmaster of Rosario,
Cavite, Nicarter Looc, which supposedly proves the fact of mailing of the FAN and Details of Discrepancy. It
also adduced evidence of mail envelopes stamped February 17, 2003 and April 14, 2003, which were meant
to prove that, on said dates, the Preliminary Assessment Notice (PAN) and the FAN were delivered,
respectively. Said envelopes also indicate that they were posted from the Makati Central Post Office.
However, according to the Postmaster's Certification, of all the mail matters addressed to GJM which were
received by the Cavite Post Office from February 12, 2003 to September 9, 2003, only two (2) came from
the Makati Central Post Office. These two (2) were received by the Cavite Post Office on February 12, 2003
and May 13, 2003. But the registered mail could not have been the PAN since the latter was mailed only on
February 17, 2003, and the FAN, although mailed on April 14, 2003, was not proven to be the mail received
on May 13, 2003. The CIR likewise failed to show that said mail matters received indeed came from it. It
could have simply presented the registry receipt or the registry return card accompanying the envelope
purportedly containing the assessment notice, but it offered no explanation why it failed to do so. Hence,
the CTA aptly ruled that the CIR failed to discharge its duty to present any evidence to show that GJM
indeed received the FAN sent through registered mail on April 14, 2003.

The Court wishes to note and reiterate that it is not a trier of facts. The CIR mainly raised issues on factual
findings which have already been thoroughly discussed below by both the CTA First Division and the
CTA En Banc. Oft-repeated is the rule 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 resolutions of tax
problems, has accordingly developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority. This Court recognizes that the CTA's findings can only be disturbed on
appeal if they are not supported by substantial evidence, or there is a showing of gross error or abuse on
the part of the Tax Court. In the absence of any clear and convincing proof to the contrary, the Court must
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presume that the CTA rendered a decision which is valid in every respect. It has been the Court's long-
standing policy and practice to respect the conclusions of quasi-judicial agencies such as the CTA, a highly
specialized body specifically created for the purpose of reviewing tax cases. 11

The Court hereby sustains the order of cancellation and withdrawal of the Formal Assessment Notice No.
IT-17316-99-03-282, and the Warrant of Distraint and/or Levy dated November 27, 2003.

WHEREFORE, PREMISES CONSIDERED, the petition is DENIED. The Decision of the Court of Tax
Appeals En Banc dated March 6, 2012 and its Resolution dated July 12, 2012 in CTA EB CASE No. 637 are
hereby AFFIRMED.

SO ORDERED.

||| (Commissioner of Internal Revenue v. GJM Philippines Manufacturing, Inc., G.R. No. 202695, [February
29, 2016])

[G.R. No. 213394. April 6, 2016.]

SPOUSES EMMANUEL D. PACQUIAO and JINKEE J. PACQUIAO, petitioners, vs. THE COURT OF
TAX APPEALS-FIRST DIVISION and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION

MENDOZA, J p:

Before this Court is a petition for review on certiorari 1 under Rule 65 of the Rules of Court filed by
petitioner spouses, now Congressman Emmanuel D. Pacquiao (Pacquiao) and Vice-Governor Jinkee J.
Pacquiao (Jinkee),to set aside and annul the April 22, 2014 Resolution 2 and the July 11, 2014
Resolution 3 of the Court of Tax Appeals (CTA),First Division, in CTA Case No. 8683.

Through the assailed issuances, the CTA granted the petitioners' Urgent Motion to Lift Warrants of Distraint
& Levy and Garnishment and for the Issuance of an Order to Suspend the Collection of Tax (with Prayer for
the Issuance of a Temporary Restraining Order 4 [Urgent Motion],dated October 18, 2013, but required
them, as a condition, to deposit a cash bond in the amount of P3,298,514,894.35 or post a bond of
P4,947,772,341.53.

The Antecedents
The genesis of the foregoing controversy began a few years before the petitioners became elected officials
in their own right. Prior to their election as public officers, the petitioners relied heavily on Pacquiao's claim
to fame as a world-class professional boxer. Due to his success, Pacquiao was able to amass income from
both the Philippines and the United States of America (US).His income from the US came primarily from the
purses he received for the boxing matches he took part under Top Rank, Inc. On the other hand, his
income from the Philippines consisted of talent fees received from various Philippine corporations for
product endorsements, advertising commercials and television appearances.

In compliance with his duty to his home country, Pacquiao filed his 2008 income tax return on April 15,
2009 reporting his Philippine-sourced income. 5 It was subsequently amended to include his US-sourced
income. 6

The controversy began on March 25, 2010, when Pacquiao received a Letter of Authority 7 (March LA) from
the Regional District Office No. 43 (RDO) of the Bureau of Internal Revenue (BIR) for the examination of

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his books of accounts and other accounting records for the period covering January 1, 2008 to December
31, 2008.

On April 15, 2010, Pacquiao filed his 2009 income tax return, 8 which although reflecting his Philippines-
sourced income, failed to include his income derived from his earnings in the US. 9 He also failed to file his
Value Added Tax (VAT) returns for the years 2008 and 2009. 10 aScITE

Finding the need to directly conduct the investigation and determine the tax liabilities of the petitioners,
respondent Commissioner on Internal Revenue (CIR)issued another Letter of Authority, dated July 27,
2010 (July LA),authorizing the BIR's National Investigation Division (NID) to examine the books of accounts
and other accounting records of both Pacquiao and Jinkee for the last 15 years, from 1995 to 2009. 11 On
September 21, 2010 and September 22, 2010, the CIR replaced the July LA by issuing to both
Pacquiao 12 and Jinkee 13 separate electronic versions of the July LA pursuant to Revenue Memorandum
Circular (RMC) No. 56-2010. 14

Due to these developments, the petitioners, through counsel, wrote a letter 15 questioning the propriety of
the CIR investigation. According to the petitioners, they were already subjected to an earlier investigation
by the BIR for the years prior to 2007, and no fraud was ever found to have been committed. They added
that pursuant to the March LA issued by the RDO, they were already being investigated for the year 2008.

In its letter, 16 dated December 13, 2010, the NID informed the counsel of the petitioners that the July LA
issued by the CIR had effectively cancelled and superseded the March LA issued by its RDO. The same
letter also stated that:

Although fraud had been established in the instant case as determined by the
Commissioner,your clients would still be given the opportunity to present documents as part of their
procedural rights to due process with regard to the civil aspect thereof. Moreover, any tax credits and/or
payments from the taxable year 2007 & prior years will be properly considered and credited in the current
investigation. 17

[Emphasis Supplied]

The CIR informed the petitioners that its reinvestigation of years prior to 2007 was justified because the
assessment thereof was pursuant to a "fraud investigation" against the petitioners under the "Run After Tax
Evaders" (RATE) program of the BIR.

On January 5 and 21, 2011, the petitioners submitted various income tax related documents for the years
2007-2009. 18 As for the years 1995 to 2006, the petitioners explained that they could not furnish the
bureau with the books of accounts and other tax related documents as they had already been disposed in
accordance with Section 235 of the Tax Code. 19 They added that even if they wanted to, they could no
longer find copies of the documents because during those years, their accounting records were then
managed by previous counsels, who had since passed away. Finally, the petitioners pointed out that their
tax liabilities for the said years had already been fully settled with then CIR Jose Mario Buag, who after a
review, found no fraud against them. 20

On June 21, 2011, on the same day that the petitioners made their last compliance in submitting their tax-
related documents, the CIR issued a subpoena duces tecum,21 requiring the petitioners to submit
additional income tax and VAT-related documents for the years 1995-2009. HEITAD

After conducting its own investigation, the CIR made its initial assessment finding that the petitioners were
unable to fully settle their tax liabilities. Thus, the CIR issued its Notice of Initial Assessment-Informal
Conference (NIC),22 dated January 31, 2012, directly addressed to the petitioners,informing them
that based on the best evidence obtainable, they were liable for deficiency income taxes in the amount of
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P714,061,116.30 for 2008 and P1,446,245,864.33 for 2009, inclusive of interests and surcharges. After
being informed of this development, the counsel for the petitioners sought to have the conference reset but
he never received a response.

Then, on February 20, 2012, the CIR issued the Preliminary Assessment Notice 23 (PAN),informing the
petitioners that based on third-party information allowed under Section 5 (B) 24 and 6 of the National
Internal Revenue Code (NIRC),25 they found the petitioners liable not only for deficiency income taxes in
the amount of P714,061,116.30 for 2008 and P1,446,245,864.33 for 2009, but also for their non-payment
of their VAT liabilities in the amount P4,104,360.01 for 2008 and P24,901,276.77 for 2009.

The petitioners filed their protest against the PAN. 26

After denying the protest, the BIR issued its Formal Letter Demand 27 (FLD),dated May 2, 2012, finding
the petitioners liable for deficiency income tax and VAT amounting to P766,899,530.62 for taxable years
2008 and P1,433,421,214.61 for 2009, inclusive of interests and surcharges. Again, the petitioners
questioned the findings of the CIR. 28

On May 14, 2013, the BIR issued its Final Decision on Disputed Assessment (FDDA),29 addressed
to Pacquiao only,informing him that the CIR found him liable for deficiency income tax and VAT for taxable
years 2008 and 2009 which, inclusive of interests and surcharges, amounted to a total of
P2,261,217,439.92.

Seeking to collect the total outstanding tax liabilities of the petitioners, the Accounts Receivable Monitoring
Division of the BIR (BIR-ARMD),issued the Preliminary Collection Letter (PCL),30 dated July 19, 2013,
demanding that both Pacquiao and Jinkee pay the amount of P2,261,217,439.92, inclusive of interests and
surcharges. ATICcS

Then, on August 7, 2013, the BIR-ARMD sent Pacquiao and Jinkee the Final Notice Before
Seizure (FNBS),31 informing the petitioners of their last opportunity to make the necessary settlement of
deficiency income and VAT liabilities before the bureau would proceed against their property.

Although they no longer questioned the BIR's assessment of their deficiency VAT liability,the petitioners
requested that they be allowed to pay the same in four (4) quarterly installments. Eventually, through a
series of installments, Pacquiao and Jinkee paid a total P32,196,534.40 in satisfaction of their liability for
deficiency VAT. 32

Proceedings at the CTA


Aggrieved that they were being made liable for deficiency income taxes for the years 2008 and 2009,
the petitioners sought redress and filed a petition for review 33 with the CTA.

Before the CTA, the petitioners contended that the assessment of the CIR was defective because it was
predicated on its mere allegation that they were guilty of fraud. 34

They also questioned the validity of the attempt by the CIR to collect deficiency taxes from Jinkee, arguing
that she was denied due process. According to the petitioners, as all previous communications and notices
from the CIR were addressed to both petitioners, the FDDA was void because it was only addressed to
Pacquiao. Moreover, considering that the PCL and FNBS were based on the FDDA, the same should likewise
be declared void. 35

The petitioners added that the CIR assessment, which was not based on actual transaction
documents but simply on "best possible sources," was not sanctioned by the Tax Code. They also
argue that the assessment failed to consider not only the taxes paid by Pacquiao to the US authorities for
his fights, but also the deductions claimed by him for his expenses. 36
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Pending the resolution by the CTA of their appeal, the petitioners sought the suspension of the issuance of
warrants of distraint and/or levy and warrants of garnishment. 37

Meanwhile, in a letter, 38 dated October 14, 2013, the BIR-ARMD informed the petitioners that they were
denying their request to defer the collection enforcement action for lack of legal basis. The same letter also
informed the petitioners that despite their initial payment, the amount to be collected from both of them
still amounted to P3,259,643,792.24, for deficiency income tax for taxable years 2008 and
2009, and P46,920,235.74 for deficiency VAT for the same period. A warrant of distraint and/or
levy 39 against Pacquiao and Jinkee was included in the letter.

Aggrieved, the petitioners filed the subject Urgent Motion for the CTA to lift the warrants of distraint, levy
and garnishments issued by the CIR against their assets and to enjoin the CIR from collecting the assessed
deficiency taxes pending the resolution of their appeal. As for the cash deposit and bond requirement under
Section 11 of Republic Act (R.A.) No. 1125, the petitioners question the necessity thereof, arguing that the
CIR's assessment of their tax liabilities was highly questionable. At the same time, the petitioners
manifested that they were willing to file a bond for such reasonable amount to be fixed by the tax
court. TIADCc

On April 22, 2014, the CTA issued the first assailed resolution granting the petitioner's Urgent Motion,
ordering the CIR to desist from collecting on the deficiency tax assessments against the petitioners. In its
resolution, the CTA noted that the amount sought to be collected was way beyond the petitioners' net
worth, which, based on Pacquiao's Statement of Assets, Liabilities and Net Worth (SALN), only amounted to
P1,185,984,697.00. Considering that the petitioners still needed to cover the costs of their daily
subsistence, the CTA opined that the collection of the total amount of P3,298,514,894.35 from the
petitioners would be highly prejudicial to their interests and should, thus, be suspended pursuant to Section
11 of R.A. No. 1125, as amended.

The CTA, however, saw no justification that the petitioners should deposit less than the disputed amount.
They were, thus, required to deposit the amount of P3,298,514,894.35 or post a bond in the amount of
P4,947,772,341.53.

The petitioners sought partial reconsideration of the April 22, 2014 CTA resolution, praying for the
reduction of the amount of the bond required or an extension of 30 days to file the same. On July 11, 2014,
the CTA issued the second assailed resolution 40 denying the petitioner's motion to reduce the required
cash deposit or bond, but allowed them an extension of thirty (30) days within which to file the same.

Hence, this petition, raising the following

GROUNDS

A.

Respondent Court acted with grave abuse of discretion amounting to lack or excess of
jurisdiction in presuming the correctness of a fraud assessment without evidentiary support
other than the issuance of the fraud assessments themselves, thereby violating Petitioner's
constitutional right to due process.

B.

Respondent Court acted with grave abuse of discretion amounting to lack or excess of
jurisdiction when it required the Petitioners to post a bond even if the tax collection processes
employed by Respondent Commissioner against Petitioners was patently in violation of law
thereby blatantly breaching Petitioners' constitutional right to due process, to wit:

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1. Respondent Commissioner commenced tax collection process against Jinkee without issuing
or serving an FDDA against her.

2. Respondent Commissioner failed to comply with the procedural due process requirements
for summary tax collection remedies under Section 207(A) and (B) of the Tax Code when she
commenced summary collection remedies before the expiration of the period for Petitioners to
pay the assessed deficiency taxes.

3. Respondent Commissioner failed to comply with the procedural due process requirements
for summary tax collection remedies under Section 208 of the Tax Code when she failed to
serve Petitioners with warrants of garnishment against their bank accounts. AIDSTE

4. The Chief of the ARMD, without any authority from Respondent Commissioner, increased
the aggregate amount of deficiency income tax and VAT assessed against Petitioners from
P2,261,217,439.92 to P3,298,514,894.35 after the filing of the Petition for Review with the
Court of Tax Appeals.

5. Respondent Commissioner arbitrarily refused to admit that Petitioners had already paid the
deficiency VAT assessments for the years 2008 and 2009.

C.

Respondent Court acted with grave abuse of discretion amounting to lack or excess of
jurisdiction in requiring Petitioners to post a cash bond in the amount of P3,298,514,894.35 or
a surety bond in the amount of P4,947,772,341.53, which is effectively an impossible
condition given that their undisputed net worth is only P1,185,984,697.00.

D.

Respondent Court acted with grave abuse of discretion amounting to lack or excess of
jurisdiction when it imposed a bond requirement which will effectively prevent Petitioners
from continuing the prosecution of its appeal from the arbitrary and bloated assessments
issued by Respondent Commissioner. 41 SDAaTC

Arguments of the Petitioners


Contending that the CTA En Banc has no certiorari jurisdiction over interlocutory orders issued by its
division, the petitioners come before the Court, asking it to 1] direct the CTA to dispense with the bond
requirement imposed under Section 11 of R.A. No. 1125, as amended; and 2] direct the CIR to suspend the
collection of the deficiency income tax and VAT for the years 2008 and 2009. The petitioners also pray that
a temporary restraining order (TRO) be issued seeking a similar relief pending the disposition of the subject
petition.

In support of their position, the petitioners assert that the CTA acted with grave abuse of discretion
amounting to lack or excess of jurisdiction in requiring them to provide security required under Section 11
of R.A. No. 1125. Under the circumstances, they claim that they should not be required to make a cash
deposit or post a bond to stay the collection of the questioned deficiency taxes considering that the
assessment and collection efforts of the BIR was marred by both procedural and substantive errors. They
are synthesized as follows:

First. The CTA erred when it required them to make a cash deposit or post a bond on the basis of the fraud
assessment by the CIR. Similar to the argument they raised in their petition for review with the CTA, they
insist that the fraud assessment by the CIR could not serve as basis for security because the amount

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assessed by the CIR was made without evidentiary basis, 42 but just grounded on the "best possible
sources," without any detail.

Second. The BIR failed to accord them procedural due process when it initiated summary collection
remedies even before the expiration of the period allowed for them to pay the assessed deficiency
taxes. 43 They also claimed that they were not served with warrants of garnishment and that the warrants
of garnishment served on their banks of account were made even before they received the FDDA and
PCL. 44

Third. The BIR only served the FDDA to Pacquiao. There was no similar notice to Jinkee. Considering such
failure, the CIR effectively did not find Jinkee liable for deficiency taxes. The collection of deficiency taxes
against Jinkee was improper as it violated her right to due process of law. 45 Accordingly, the petitioners
question the propriety of the CIR's attempt to collect deficiency taxes from Jinkee.

Fourth. The amount assessed by the BIR as deficiency taxes included the deficiency VAT for the years 2008
and 2009 which they had already paid, albeit in installments.

Fifth. The posting of the required security is effectively an impossible condition given that their undisputed
net worth is only P1,185,984,697.00.

Considering the issues raised, it is the position of the petitioners that the circumstances of the case warrant
the application of the exception provided under Section 11 of R.A. No. 1125 as affirmed by the ruling of the
Court in Collector of Internal Revenue v. Avelino 46 (Avelino) and Collector of Internal Revenue v.
Zulueta,47(Zulueta) and that they should have been exempted from posting the required security as a
prerequisite to suspend the collection of deficiency taxes from them. acEHCD

On August 18, 2014, the Court resolved to grant the petitioners' prayer for the issuance of a TRO and to
require the CIR to file its comment. 48

Arguments of the CIR


For its part, the CIR asserts that the CTA was correct in insisting that the petitioners post the required cash
deposit or bond as a condition to suspend the collection of deficiency taxes. According to the tax
administrator, Section 11 of R.A. No. 1125, as amended, is without exception when it states that
notwithstanding an appeal to the CTA, a taxpayer, in order to suspend the payment of his tax liabilities, is
required to deposit the amount claimed by the CIR or to file a surety bond for not more than double the
amount due. 49

As for the Court's rulings in Avelino and Zulueta invoked by the petitioners, the CIR argues that they are
inapplicable considering that in the said cases, it was ruled that the requirement of posting a bond to
suspend the collection of taxes could be dispensed with only if the methods employed by the CIR in the tax
collection were clearly null and void and prejudicial to the taxpayer.50 The CIR points out that, in this case,
the CTA itself made no finding that its collection by summary methods was void and even ruled that "the
alleged illegality of the methods employed by the respondent (CIR) to effect the collection of tax [is] not at
all patent or evident ..." and could only be determined after a full-blown trial. 51 The CIR even suggests
that the Court revisit its ruling in Avelino and Zulueta as Section 11 of R.A. No. 1125, as amended, gives
the CTA no discretion to allow the dispensation of the required bond as a condition to suspend the
collection of taxes.

Finally, the CIR adds that whether the assessment and collection of the petitioners' tax liabilities were
proper as to justify the application of Avelino and Zuluetais a question of fact which is not proper in a
petition for certiorari under Rule 65, considering that the rule is only confined to issues of jurisdiction. 52

9
The Court's Ruling
Appeal will not suspend
the collection of tax;
Exception
Section 11 of R.A. No. 1125, as amended by R.A. No. 9282, 53 embodies the rule that an appeal to the
CTA from the decision of the CIR will not suspend the payment, levy, distraint, and/or sale of any property
of the taxpayer for the satisfaction of his tax liability as provided by existing law. When, in the view of the
CTA, the collection may jeopardize the interest of the Government and/or the taxpayer, it may suspend the
said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond.

The application of the exception to the rule is the crux of the subject controversy. Specifically, Section 11
provides:

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

xxx xxx xxx

No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the
Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the
Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may be
shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction
of his tax liability as provided by existing law:

Provided, however, That when in the opinion of the Court the collection by the aforementioned
government agencies may jeopardize the interest of the Government and/or the taxpayer, the
Court at any stage of the proceeding may suspend the said collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more than double the
amount with the Court. HSAcaE

xxx xxx xxx

[Emphasis Supplied]

Essentially, the petitioners ascribe grave abuse of discretion on the part of the CTA when it issued the
subject resolutions requiring them to deposit the amount of P3,298,514,894.35 or post a bond in the
amount of P4,947,772,341.53 as a condition for its order enjoining the CIR from collecting the taxes from
them. The petitioners anchor their contention on the premise that the assessment and collection processes
employed by the CIR in exacting their tax liabilities were in patent violation of their constitutional right to
due process of law. They, thus, posit that pursuant to Avelino and Zulueta,the tax court should have not
only ordered the CIR to suspend the collection efforts it was pursuing in satisfaction of their tax liability, but
also dispensed with the requirement of depositing a cash or filing a surety bond.

To recall, the Court in Avelino upheld the decision of the CTA to declare the warrants of garnishment,
distraint and levy and the notice of sale of the properties of Jose Avelino null and void and ordered the CIR
to desist from collecting the deficiency income taxes which were assessed for the years 1946 to 1948
through summary administrative methods. The Court therein found that the demand of the then CIR was

10
made without authority of law because it was made five (5) years and thirty-five (35) days after the last
two returns of Jose Avelino were filed clearly beyond the three (3)-year prescriptive period provided
under what was then Section 51 (d) of the National Internal Revenue Code. Dismissing the contention of
the CIR that the deposit of the amount claimed or the filing of a bond as required by law was a requisite
before relief was granted, the Court therein concurred with the opinion of the CTA that the courts were
clothed with authority to dispense with the requirement "if the method employed by the Collector of
Internal Revenue in the collection of tax is not sanctioned by law." 54
In Zulueta,the Court likewise dismissed the argument that the CTA erred in issuing the injunction without
requiring the taxpayer either to deposit the amount claimed or to file a surety bond for an amount not more
than double the tax sought to be collected. The Court cited Collector of Internal Revenue v. Aurelio P.
Reyes and the Court of Tax Appeals 55 where it was written:
....At first blush it might be as contended by the Solicitor General, but a careful analysis of the second
paragraph of said Section 11 will lead Us to the conclusion that the requirement of the bond as a condition
precedent to the issuance of a writ of injunction applies only in cases where the processes by which the
collection sought to be made by means thereof are carried out in consonance with law for such cases
provided and not when said processes are obviously in violation of the law to the extreme that they have to
be SUSPENDED for jeopardizing the interests of the taxpayer.56
[Italics included]

The Court went on to explain the reason for empowering the courts to issue such injunctive writs. It
wrote: HESIcT

"Section 11 of Republic Act No. 1125 is therefore premised on the assumption that the collection
by summary proceedings is by itself in accordance with existing laws; and then what is suspended is the act
of collecting, whereas, in the case at bar what the respondent Court suspended was the use of the method
employed to verify the collection which was evidently illegal after the lapse of the three-year limitation
period. The respondent Court issued the injunction in question on the basis of its findings that the means
intended to be used by petitioner in the collection of the alleged deficiency taxes were in violation of law. It
would certainly be an absurdity on the part of the Court of Tax Appeals to declare that the
collection by the summary methods of distraint and levy was violative of the law, and then, on
the same breath require the petitioner to deposit or file a bond as a prerequisite of the
issuance of a writ of injunction.Let us suppose, for the sake of argument, that the Court a quo would
have required the petitioner to post the bond in question and that the taxpayer would refuse or fail to
furnish said bond, would the Court a quo be obliged to authorize or allow the Collector of Internal Revenue
to proceed with the collection from the petitioner of the taxes due by a means it previously declared to be
contrary to law?" 57

[Italics included. Emphases and Underlining Supplied]

Thus, despite the amendments to the law, the Court still holds that the CTA has ample authority to issue
injunctive writs to restrain the collection of tax and to even dispense with the deposit of the amount
claimed or the filing of the required bond,whenever the method employed by the CIR in the
collection of tax jeopardizes the interests of a taxpayer for being patently in violation of the law. Such
authority emanates from the jurisdiction conferred to it not only by Section 11 of R.A. No. 1125, but also by
Section 7 of the same law, which, as amended provides:

Sec. 7. Jurisdiction. The Court of Tax Appeals shall exercise:

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

11
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters
arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;

xxx xxx xxx

[Emphasis Supplied]

From all the foregoing, it is clear that the authority of the courts to issue injunctive writs to restrain the
collection of tax and to dispense with the deposit of the amount claimed or the filing of the required
bond is not simply confined to cases where prescription has set in.As explained by the Court in
those cases,whenever it is determined by the courts that the method employed by the Collector
of Internal Revenue in the collection of tax is not sanctioned by law,the bond requirement under
Section 11 of R.A. No. 1125 should be dispensed with.The purpose of the rule is not only to prevent
jeopardizing the interest of the taxpayer, but more importantly, to prevent the absurd situation wherein the
court would declare "that the collection by the summary methods of distraint and levy was violative of law,
and then, in the same breath require the petitioner to deposit or file a bond as a prerequisite for the
issuance of a writ of injunction." 58 caITAC

The determination of whether


the petitioners' case falls within
the exception provided under
Section 11, R.A. No. 1125 cannot be
determined at this point
Applying the foregoing precepts to the subject controversy, the Court finds no sufficient basis in the records
for the Court to determine whether the dispensation of the required cash deposit or bond provided under
Section 11, R.A. No. 1125 is appropriate.

It should first be highlighted that in rendering the assailed resolution, the CTA, without stating the facts
and law, made a determination that the illegality of the methods employed by the CIR to effect the
collection of tax was not patent. To quote the CTA:

In this case, the alleged illegality of the methods employed by respondent to effect the collection of tax is
not at all patent or evident as in the foregoing cases.At this early stage of the proceedings, it is
premature for this Court to rule on the issues of whether or not the warrants were defectively issued; or
whether the service thereof was done in violation of the rules; or whether or not respondent's assessments
were valid. These matters are evidentiary in nature, the resolution of which can only be made
after a full blown trial.

Apropos, the Court finds no legal basis to apply Avelino and Zulueta to the instant case and exempt
petitioners from depositing a cash bond or filing a surety bond before a suspension order may be
effected. 59

Though it may be true that it would have been premature for the CTA to immediately determine whether
the assessment made against the petitioners was valid or whether the warrants were properly issued and
served, still, it behooved upon the CTA to properly determine, at least preliminarily, whether the
CIR,in its assessment of the tax liability of the petitioners, and its effort of collecting the same, complied
with the law and the pertinent issuances of the BIR itself. The CTA should have conducted a
preliminary hearing and received evidence so it could have properly determined whether the requirement of
providing the required security under Section 11, R.A. No. 1125 could be reduced or dispensed
with pendente lite.
12
The Court cannot make a
preliminary determination
on whether the CIR used
methods not sanctioned by law
Absent any evidence and preliminary determination by the CTA, the Court cannot make any factual finding
and settle the issue of whether the petitioners should comply with the security requirement under Section
11, R.A. No. 1125. The determination of whether the methods, employed by the CIR in its assessment,
jeopardized the interests of a taxpayer for being patently in violation of the law is a question of fact that
calls for the reception of evidence which would serve as basis. In this regard, the CTA is in a better
position to initiate this given its time and resources. The remand of the case to the CTA on this question is,
therefore, more sensible and proper.

For the Court to make any finding of fact on this point would be premature. As stated earlier, there is no
evidentiary basis. All the arguments are mere allegations from both sides. Moreover, any finding by the
Court would pre-empt the CTA from properly exercising its jurisdiction and settle the main issues
presented before it, that is, whether the petitioners were afforded due process; whether the CIR has valid
basis for its assessment; and whether the petitioners should be held liable for the deficiency taxes.

Petition to be remanded to
the CTA; CTA to conduct
preliminary hearing
As the CTA is in a better position to make such a preliminary determination, a remand to the CTA is in
order. To resolve the issue of whether the petitioners should be required to post the security bond under
Section 11 of R.A. No. 1125, and, if so, in what amount, the CTA must take into account, among others,
the following:

First. Whether the requirement of a Notice of Informal Conference was complied with The petitioners
contend that the BIR issued the PAN without first sending a NIC to petitioners. One of the first
requirements of Section 3 of Revenue Regulations (R.R.) No. 12-99, 60 the then prevailing regulation on
the due process requirement in tax audits and/or investigation, 61 is that a NIC be first accorded to the
taxpayer. The use of the word "shall" in subsection 3.1.1 describes the mandatory nature of the service of a
NIC. As with the other notices required under the regulation, the purpose of sending a NIC is but part of
the "due process requirement in the issuance of a deficiency tax assessment," the absence of which
renders nugatory any assessment made by the tax authorities. 62 cDHAES

Second. Whether the 15-year period subject of the CIR's investigation is arbitrary and excessive.
Section 203 63 of the Tax Code provides a 3-year limit for the assessment of internal revenue taxes. While
the prescriptive period to assess deficiency taxes may be extended to 10 years in cases where there is
false, fraudulent, or non-filing of a tax return the fraud contemplated by law must be actual. It must be
intentional, consisting of deception willfully and deliberately done or resorted to in order to induce another
to give up some right. 64

Third. Whether fraud was duly established. In its letter, dated December 13, 2010, the NID had been
conducting a fraud investigation against the petitioners under its RATE program and that it found that
"fraud had been established in the instant case as determined by the Commissioner." Under Revenue
Memorandum Order (RMO) No. 27-10, it is required that a preliminary investigation must first be
conducted before a LA is issued.65

Fourth. Whether the FLD issued against the petitioners was irregular. The FLD issued against the
petitioners allegedly stated that the amounts therein were"estimates based on best possible
13
sources." A taxpayer should be informed in writing of the law and the facts on which the assessment is
made, otherwise, the assessment is void. 66 An assessment, in order to stand judicial scrutiny, must be
based on facts. The presumption of the correctness of an assessment, being a mere presumption, cannot
be made to rest on another presumption. 67

To stress, the petitioners had asserted that the assessment of the CIR was not based on actual transactions
but on "estimates based on best possible sources." This assertion has not been satisfactorily
addressed by the CIR in detail. Thus, there is a need for the CTA to conduct a preliminary hearing. TCAScE

Fifth. Whether the FDDA, the PCL, the FNBS, and the Warrants of Distraint and/or Levy were validly
issued. In its hearing, the CTA must also determine if the following allegations of the petitioners have
merit:

a. The FDDA and PCL were issued against petitioner Pacquiao only.The Warrant of Distraint and/or
Levy/Garnishment issued by the CIR, however, were made against the assets of both petitioners;

b. The warrants of garnishment had been served on the banks of both petitioners even before the
petitioners received the FDDA and PCL;

c. The Warrant of Distraint and/or Levy/Garnishment against the petitioners was allegedly made prior to
the expiration of the period allowed for the petitioners to pay the assessed deficiency taxes;

d. The Warrant of Distraint and/or Levy/Garnishment against petitioners failed to take into consideration
that the deficiency VAT was already paid in full;and

e. Petitioners were not given a copy of the Warrants. Sections 207 68 and 208 69 of the Tax
Code require the Warrant of Distraint and/or Levy/Garnishment be served upon the taxpayer.

Additional Factors
In case the CTA finds that the petitioners should provide the necessary security under Section 11 of R.A.
1125, a recomputation of the amount thereof is in order. If there would be a need for a bond or to reduce
the same, the CTA should take note that the Court, in A.M. No. 15-92-01-CTA, resolved to approve the
CTA En Banc Resolution No. 02-2015, where the phrase "amount claimed" stated in Section 11 of R.A. No.
1125 was construed to refer to the principal amount of the deficiency taxes, excluding penalties,
interests and surcharges.
Moreover, the CTA should also consider the claim of the petitioners that they already paid a total of
P32,196,534.40 deficiency VAT assessed against them. Despite said payment, the CIR still assessed them
the total amount of P3,298,514,894.35, including the amount assessed as VAT deficiency, plus surcharges,
penalties and interest. If so, these should also be deducted from the amount of the bond to be computed
and required.

In the conduct of its preliminary hearing, the CTA must balance the scale between the inherent power of
the State to tax and its right to prosecute perceived transgressors of the law, on one side; and the
constitutional rights of petitioners to due process of law and the equal protection of the laws, on the other.
In case of doubt, the tax court must remember that as in all tax cases, such scale should favor the
taxpayer, for a citizen's right to due process and equal protection of the law is amply protected by the Bill
of Rights under the Constitution. 70 cTDaEH

In view of all the foregoing, the April 22, 2014 and July 11, 2014 Resolutions of the CTA, in so far as it
required the petitioners to deposit first a cash bond in the amount of P3,298,514,894.35 or post a bond of
P4,947,772,341.53, should be further enjoined until the issues aforementioned are settled in a preliminary
hearing to be conducted by it. Thereafter, it should make a determination if the posting of a bond would
14
still be required and, if so, compute it taking into account the CTA En Banc Resolution, which was approved
by the Court in A.M. No. 15-02-01-CTA, and the claimed payment of P32,196,534.40, among others.

WHEREFORE,the petition is PARTIALLY GRANTED.Let a Writ of Preliminary Injunction be issued,


enjoining the implementation of the April 22, 2014 and July 11, 2014 Resolutions of the Court of Tax
Appeals, First Division, in CTA Case No. 8683, requiring the petitioners to first deposit a cash bond in the
amount of P3,298,514,894.35 or post a bond of P4,947,772,341.53, as a condition to restrain the collection
of the deficiency taxes assessed against them.

The writ shall remain in effect until the issues aforementioned are settled in a preliminary hearing to be
conducted by the Court of Tax Appeals, First Division.

Accordingly, the case is hereby REMANDED to the Court of Tax Appeals, First Division, which is ordered to
conduct a preliminary hearing to determine whether the dispensation or reduction of the required cash
deposit or bond provided under Section 11, Republic Act No. 1125 is proper to restrain the collection of
deficiency taxes assessed against the petitioners. ITAaHc

If required, the Court of Tax Appeals, First Division, shall proceed to compute the amount of the bond in
accordance with the guidelines aforestated, particularly the provisions of A.M. No. 15-02-01-CTA. It should
also take into account the amounts already paid by the petitioners.

After the posting of the required bond, or if the Court of Tax Appeals, First Division, determines that no
bond is necessary, it shall proceed to hear and resolve the petition for review pending before it.

SO ORDERED.

||| (Spouses Pacquiao v. Court of Tax Appeals, G.R. No. 213394, [April 6, 2016])

[G.R. No. 215534. April 18, 2016.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LIQUIGAZ PHILIPPINES


CORPORATION, respondent.

[G.R. No. 215557. April 18, 2016.]

LIQUIGAZ PHILIPPINES CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL


REVENUE, respondent.

DECISION

MENDOZA, J p:

Presented before us is a novel issue. When may a Final Decision on Disputed Assessment (FDDA) be
declared void, and in the event that the FDDA is found void, what would be its effect on the tax
assessment?

Assailed in these consolidated petitions for review on certiorari filed under Rule 45 of the Rules of Court are
the May 22, 2014 Decision 1 and the November 26, 2014 Resolution 2 of the Court of Tax Appeals (CTA)
En Banc which affirmed the November 22, 2012 Decision 3 of the CTA Division, Second Division (CTA
Division).
Liquigaz Philippines Corporation (Liquigaz) is a corporation duly organized and existing under Philippine
laws. On July 11, 2006, it received a copy of Letter of Authority (LOA) No. 00067824, dated July 4, 2006,

15
issued by the Commissioner of Internal Revenue (CIR), authorizing the investigation of all internal revenue
taxes for taxable year 2005. 4

On April 9, 2008, Liquigaz received an undated letter purporting to be a Notice of Informal


Conference (NIC), as well as the detailed computation of its supposed tax liability. On May 28, 2008, it
received a copy of the Preliminary Assessment Notice 5 (PAN), dated May 20, 2008, together with the
attached details of discrepancies for the calendar year ending December 31, 2005. 6 Upon investigation,
Liquigaz was initially assessed with deficiency withholding tax liabilities, inclusive of interest, in the
aggregate amount of P23,931,708.72, broken down as follows: AIDSTE

Expanded Withholding Tax (EWT) P5,456,141.82

Withholding Tax on Compensation P4,435,463.97

(WTC)

Fringe Benefits Tax (FBT) P14,040,102.93

TOTAL P23,931,708.72

============

Thereafter, on June 25, 2008, it received a Formal Letter of Demand 7 (FLD)/Formal Assessment
Notice (FAN), together with its attached details of discrepancies, for the calendar year ending December 31,
2005. The total deficiency withholding tax liabilities, inclusive of interest, under the FLD was
P24,332,347.20, which may be broken down as follows:

EWT P5,535,890.38

WTC P4,500,169.94

FBT P14,296,286.88

TOTAL P24,332,347.20

============

On July 25, 2008, Liquigaz filed its protest against the FLD/FAN and subsequently submitted its supporting
documents on September 23, 2008.

Then, on July 1, 2010, it received a copy of the FDDA 8 covering the tax audit under LOA No. 00067824 for
the calendar year ending December 31, 2005. As reflected in the FDDA, the CIR still found Liquigaz liable
for deficiency withholding tax liabilities, inclusive of interest, in the aggregate amount of P22,380,025.19,
which may be broken down as follows:

EWT P3,479,426.75

WTC P4,508,025.93

FBT P14,392,572.51
16

TOTAL P22,380,025.19

============

Consequently, on July 29, 2010, Liquigaz filed its Petition for Review before the CTA Division assailing the
validity of the FDDA issued by the CIR. 9

The CTA Division Ruling


In its November 22, 2012 Decision, the CTA Division partially granted Liquigaz's petition cancelling the EWT
and FBT assessments but affirmed with modification the WTC assessment. It ruled that the portion of the
FDDA relating to the EWT and the FBT assessment was void pursuant to Section 228 of the National
Internal Revenue Code (NIRC) of 1997, as implemented by Revenue Regulations (RR) No. 12-99.

The CTA Division noted that unlike the PAN and the FLD/FAN, the FDDA issued did not provide the details
thereof, hence, Liquigaz had no way of knowing what items were considered by the CIR in arriving at the
deficiency assessments. This was especially true because the FDDA reflected a different amount from what
was stated in the FLD/FAN. The CTA Division explained that though the legal bases for the EWT and FBT
assessment were stated in the FDDA, the taxpayer was not notified of the factual bases thereof, as
required in Section 228 of the NIRC.

On the other hand, it upheld the WTC assessment against Liquigaz. It noted that the factual bases used in
the FLD and the FDDA with regard thereto were the same as the difference in the amount merely resulted
from the use of a different tax rate.

The CTA Division agreed with Liquigaz that the tax rate of 25.40% was more appropriate because it
represents the effective tax compensation paid, computed based on the total withholding tax on
compensation paid and the total taxable compensation income for the taxable year 2005. It did not give
credence to Liquigaz's explanation that the salaries account included accrued bonus, 13th month pay, de
minimis benefits and other benefits and contributions which were not subject to withholding tax on
compensation. The CTA Division relied on the report prepared by Antonio O. Maceda, Jr., the court-
commissioned independent accountant, which found that Liquigaz was unable to substantiate the
discrepancy found by the CIR on its withholding tax liability on compensation. The dispositive portion of the
CTA Division decision reads:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the assessments for
deficiency expanded withholding tax in the amount of P3,479,426.75 and fringe benefits tax in the amount
of P14,392,572.51 issued by respondent against petitioner for taxable year 2005, both inclusive of interest
and compromise penalty is hereby CANCELLED and WITHDRAWN for being void.

However, the assessment for deficiency withholding tax on compensation for taxable year 2005 is
hereby AFFIRMED with MODIFICATIONS. Accordingly, petitioner is
hereby ORDERED to PAY respondent the amount of P2,958,546.23, inclusive of the 25% surcharge
imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:

Salaries per ITR P52,239,313.00

Less: Salaries per Alphalist P42,921,057.16

Discrepancy P9,318,255.84

17
Tax rate 25.40%

Basic Withholding Tax on Compensation P2,366,836.98

Add: 25% Surcharge P591,709.25

Total Amount Due P2,958,546.23

===========

In addition, petitioner is liable to pay: (a) deficiency interest at the rate of twenty percent (20%) per
annum of the basic deficiency withholding tax on compensation of P2,958,546.23 computed from January
20, 2006 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 due of
P2,958,546.23 and on the deficiency interest which have accrued as aforestated in (a) computed from July
1, 2010 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997, as amended. AaCTcI

The compromise penalty of P25,000.00, originally imposed by respondent is hereby excluded there being
no compromise agreement between the parties.

SO ORDERED. 10

Both the CIR and Liquigaz moved for reconsideration, but their respective motions were denied by the CTA
Division in its February 20, 2013 Resolution.

Aggrieved, they filed their respective petitions for review before the CTA En Banc.

The CTA En Banc Ruling


In its May 22, 2014 Decision, the CTA En Banc affirmed the assailed decision of the CTA Division. It
reiterated its pronouncement that the requirement that the taxpayer should be informed in writing of the
law and the facts on which the assessment was made applies to the FDDA otherwise the assessment
would be void. The CTA En Banc explained that the FDDA determined the final tax liability of the taxpayer,
which may be the subject of an appeal before the CTA.

The CTA En Banc echoed the findings of the CTA Division that while the FDDA indicated the legal provisions
relied upon for the assessment, the source of the amounts from which the assessments arose were not
shown. It emphasized the need for stating the factual bases as the FDDA reflected different amounts than
that contained in the FLD/FAN.

On the other hand, the CTA En Banc sustained Liquigaz's WTC assessment. It observed that the basis for
the assessment was the same for the FLD and the FDDA, which was a comparison of the salaries declared
in the Income Tax Return (ITR) and the Alphalist that resulted in a discrepancy of P9,318,255.84. The
CTA En Banc highlighted that the change in the amount of assessed WTC deficiency simply arose from the
revision of the tax rate used from 32% to the effective tax rate of 25.40% suggested by Liquigaz.

Further, it disregarded the explanation of Liquigaz on the ground of its failure to specify how much of the
salaries account pertained to de minimis benefits, accrued bonuses, salaries and wages, and contributions
to the Social Security System, Medicare and Pag-Ibig Fund. The CTA En Banc reiterated that even the
court-commissioned independent accountant reported that Liquigaz was unable to substantiate the
discrepancy found by the CIR.

18
Both parties moved for a partial reconsideration of the CTA En Banc Decision, but the latter denied the
motions in its November 26, 2014 Resolution.

Not satisfied, both parties filed their respective petitions for review, anchored on

SOLE ISSUE

WHETHER THE COURT OF TAX APPEALS EN BANC ERRED IN PARTIALLY UPHOLDING THE
VALIDITY OF THE ASSESSMENT AS TO THE WITHHOLDING TAX ON COMPENSATION BUT
DECLARING INVALID THE ASSESSMENT ON EXPANDED WITHHOLDING TAX AND FRINGE
BENEFITS TAX.

The present consolidated petitions revolve around the same FDDA where Liquigaz seeks the cancellation of
its remaining tax liability and the CIR aims to revive the assessments struck down by the tax court.
Basically, Liquigaz asserts that like its assessment for EWT and FBT deficiency, the WTC assessment should
have been invalidated because the FDDA did not provide for the facts on which the assessment was based.
It argues that it was deprived of due process because in not stating the factual basis of the assessment, the
CIR did not consider the defenses and supporting documents it presented.

Moreover, Liquigaz is adamant that even if the FDDA would be upheld, it should not be liable for the
deficiency WTC liability because the CIR erred in comparing its ITR and Alphalist to determine possible
discrepancies. It explains that the salaries of its employees reflected in its ITR does not reflect the total
taxable income paid and received by the employees because the same refers to the gross salaries of the
employees, which included amounts that were not subject to WTC.

On the other hand, the CIR avers that the assessments for EWT and FBT liability should be upheld because
the FDDA must be taken together with the PAN and FAN, where details of the assessments were attached.
Hence, the CIR counters that Liquigaz was fully apprised of not only the laws, but also the facts on which
the assessment was based, which were likewise evidenced by the fact that it was able to file a protest on
the assessment. Further, the CIR avers that even if the FDDA would be declared void, it should not result in
the automatic abatement of tax liability especially because RR No. 12-99 merely states that a void decision
of the CIR or his representative shall not be considered as a decision on the assessment.

The Court's Ruling

Central to the resolution of the issue is Section 228 11 of the NIRC and RR No. 12-99, 12 as amended.
They lay out the procedure to be followed in tax assessments. Under Section 228 of the NIRC, a taxpayer
shall be informed in writing of the law and the facts on which the assessment is made, otherwise, the
assessment shall be void. In implementing Section 228 of the NIRC, RR No. 12-99 reiterates the
requirement that a taxpayer must be informed in writing of the law and the facts on which his tax liability
was based, to wit: EcTCAD

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 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

19
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 (see illustration in ANNEX A hereof). 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 (see illustration in ANNEX B hereof). . . .
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. If there are several issues involved in the formal letter of demand and
assessment notice but the taxpayer only disputes or protests against the validity of some of the issues
raised, the taxpayer shall be required to pay the deficiency tax or taxes attributable to the undisputed
issues, in which case, a collection letter shall be issued to the taxpayer calling for payment of the said
deficiency tax, inclusive of the applicable surcharge and/or interest. No action shall be taken on the
taxpayer's disputed issues until the taxpayer has paid the deficiency tax or taxes attributable to the said
undisputed issues. The prescriptive period for assessment or collection of the tax or taxes attributable to
the disputed issues shall be suspended. . . .

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 (see illustration in ANNEX C hereof), in which case, the same shall not be considered a decision on a
disputed assessment; and (b) that the same is his final decision.

[Emphases and Underscoring Supplied]

The importance of providing the taxpayer of adequate written notice of his tax liability is undeniable.
Section 228 of the NIRC declares that an assessment is void if the taxpayer is not notified in writing of the
facts and law on which it is made. Again, Section 3.1.4 of RR No. 12-99 requires that the FLD must state
the facts and law on which it is based, otherwise, the FLD/FAN itself shall be void. Meanwhile, Section 3.1.6
of RR No. 12-99 specifically requires that the decision of the CIR or his duly authorized representative on a
disputed assessment shall state the facts, law and rules and regulations, or jurisprudence on which the
decision is based. Failure to do so would invalidate the FDDA.

20
The use of the word "shall" in Section 228 of the NIRC and in RR 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 is mandatory. 13 The requirement of providing the taxpayer with written notice of the factual and legal
bases applies both to the FLD/FAN and the FDDA.

Section 228 of the NIRC should not be read restrictively as to limit the written notice only to the
assessment itself. As implemented by RR No. 12-99, the written notice requirement for both the FLD and
the FAN is in observance of due process to afford the taxpayer adequate opportunity to file a protest on
the assessment and thereafter file an appeal in case of an adverse decision. HSAcaE

To rule otherwise would tolerate abuse and prejudice. Taxpayers will be unable to file an intelligent appeal
before the CTA as they would be unaware on how the CIR or his authorized representative appreciated the
defense raised in connection with the assessment. On the other hand, it raises the possibility that the
amounts reflected in the FDDA were arbitrarily made if the factual and legal bases thereof are not shown.

A void FDDA does not


ipso facto render the
assessment void
The CIR and Liquigaz are at odds with regards to the effect of a void FDDA. Liquigaz harps that a void
FDDA will lead to a void assessment because the FDDA ultimately determines the final tax liability of a
taxpayer, which may then be appealed before the CTA. On the other hand, the CIR believes that a void
FDDA does notipso facto result in the nullification of the assessment.

In resolving the issue on the effects of a void FDDA, it is necessary to differentiate an "assessment" from a
"decision." In St. Stephen's Association v. Collector of Internal Revenue, 14 the Court has long recognized
that a "decision" differs from an "assessment," to wit:

In the first place, we believe the respondent court erred in holding that the assessment in question is the
respondent Collector's decision or ruling appealable to it, and that consequently, the period of thirty days
prescribed by section 11 of Republic Act No. 1125 within which petitioner should have appealed to the
respondent court must be counted from its receipt of said assessment. Where a taxpayer questions an
assessment and asks the Collector to reconsider or cancel the same because he (the taxpayer) believes he
is not liable therefor, the assessment becomes a "disputed assessment" that the Collector must decide, and
the taxpayer can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on
the disputed assessment, in accordance with paragraph (1) of section 7,Republic Act No. 1125, conferring
appellate jurisdiction upon the Court of Tax Appeals to review "decisions of the Collector of Internal
Revenue in cases involvingdisputed assessment . . ."

The difference is likewise readily apparent in Section 7 15 of R.A. 1125, 16 as amended, where the CTA is
conferred with appellate jurisdiction over the decision of the CIR in cases involving disputed assessments,
as well as inaction of the CIR in disputed assessments. From the foregoing, it is clear that what is
appealable to the CTA is the "decision" of the CIR on disputed assessment and not the assessment itself.

An assessment becomes a disputed assessment after a taxpayer has filed its protest to the assessment in
the administrative level. Thereafter, the CIR either issues a decision on the disputed assessment or fails to
act on it and is, therefore, considered denied. The taxpayer may then appeal the decision on the disputed
assessment or the inaction of the CIR. As such, the FDDA is not the only means that the final tax liability of
a taxpayer is fixed, which may then be appealed by the taxpayer. Under the law, inaction on the part of the
CIR may likewise result in the finality of a taxpayer's tax liability as it is deemed a denial of the protest filed
by the latter, which may also be appealed before the CTA.

21
Clearly, a decision of the CIR on a disputed assessment differs from the assessment itself. Hence, the
invalidity of one does not necessarily result to the invalidity of the other unless the law or regulations
otherwise provide.

Section 228 of the NIRC provides that an assessment shall be void if the taxpayer is not informed in writing
of the law and the facts on which it is based. It is, however, silent with regards to a decision on a disputed
assessment by the CIR which fails to state the law and facts on which it is based. This void is filled by RR
No. 12-99 where it is stated that failure of the FDDA to reflect the facts and law on which it is based will
make the decision void. It, however, does not extend to the nullification of the entire assessment.

With the effects of a void FDDA expounded, the next issue to be addressed is whether the assailed FDDA is
void for failure to state the facts and law on which it was based.

The FDDA must state the


facts and law on which it
is based to provide the
taxpayer the opportunity
to file an intelligent
appeal
The CIR and Liquigaz are also in disagreement whether the FDDA issued was compliant with the mandatory
requirement of written notice laid out in the law and implementing rules and regulations. Liquigaz argues
that the FDDA is void as it did not contain the factual bases of the assessment and merely showed the
amounts of its alleged tax liabilities.

A perusal of the FDDA issued in the case at bench reveals that it merely contained a table of Liquigaz's
supposed tax liabilities, without providing any details. The CIR explains that the FDDA still complied with
the requirements of the law as it was issued in connection with the PAN and FLD/FAN, which had an
attachment of the details of discrepancies. Hence, the CIR concludes that Liquigaz was sufficiently informed
in writing of the factual bases of the assessment. HESIcT

The reason for requiring that taxpayers be informed in writing of the facts and law on which the
assessment is made is the constitutional guarantee that no person shall be deprived of his property without
due process of law. 17 Merely notifying the taxpayer of its tax liabilities without elaborating on its details is
insufficient. In CIR v. Reyes, 18 the Court further explained:

In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of
estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied
upon the provisions of former Section 229 prior to its amendment by Republic Act (RA) No. 8424, otherwise
known as the Tax Reform Act of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old
requirement of merely notifying the taxpayer of the CIR's findings was changed in 1998 to informing the
taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the
assessment itself would be invalid. . . .

At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the taxpayer must
be informed of both the law and facts on which the assessment was based. Thus, the CIR should have
required the assessment officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the
new law. The old regulation governing the issuance of estate tax assessment notices ran afoul of the rule
that tax regulations old as they were should be in harmony with, and not supplant or modify, the law.
...

22
Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be accorded due
process. Not only was the law here disregarded, but no valid notice was sent, either. A void assessment
bears no valid fruit.

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. In the
instant case, respondent has not been informed of the basis of the estate tax liability. Without
complying with the unequivocal mandate of first informing the taxpayer of the government's
claim, there can be no deprivation of property, because no effective protest can be made. The
haphazard shot at slapping an assessment, supposedly based on estate taxation's general provisions that
are expected to be known by the taxpayer, is utter chicanery.

Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the
lack of basis for not to mention the insufficiency of the gross figures and details of the itemized
deductions indicated in the notice and the letter. This Court cannot countenance an assessment
based on estimates that appear to have been arbitrarily or capriciously arrived at. 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."

[Emphases Supplied]

In CIR v. United Salvage and Towage (Phils.), Inc., 19 the Court struck down an assessment where the
FAN only contained a table of the taxes due without providing further detail thereto, to wit:

In the present case, a mere perusal of the FAN 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. Any short-cuts to the prescribed content of the assessment or the process thereof
should not be countenanced, in consonance with the ruling in Commissioner of Internal Revenue v. Enron
Subic Power Corporation to wit:
The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax
deficiency. During the pre-assessment stage, the CIR advised Enron's representative of the tax deficiency,
informed it of the proposed tax deficiency assessment through a preliminary five-day letter and furnished
Enron a copy of the audit working paper allegedly showing in detail the legal and factual bases of the
assessment. The CIR argues that these steps sufficed to inform Enron of the laws and facts on which the
deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the
preliminary five-day letter, were not valid substitutes for the mandatory notice in writing of the legal and
factual bases of the assessment. These steps were mere perfunctory discharges of the CIR's duties in
correctly assessing a taxpayer. The requirement for issuing a preliminary or final notice, as the case may
be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different from the
requirement of what such notice must contain. Just because the CIR issued an advice, a preliminary letter
during the pre-assessment stage and a final notice, in the order required by law, does not necessarily mean
that Enron was informed of the law and facts on which the deficiency tax assessment was made. caITAC

The law requires that the legal and factual bases of the assessment be stated in the formal letter of
demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of
23
Article 228 of the NIRC and RR 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 writing in the formal
letter of demand accompanying the assessment notice.

We note that the old law merely required that the taxpayer be notified of the assessment made by the CIR.
This was changed in 1998 and the taxpayer must now be informed not only of the law but also of the facts
on which the assessment is made. Such amendment is in keeping with the constitutional principle that no
person shall be deprived of property without due process. In view of the absence of a fair opportunity for
Enron to be informed of the legal and factual bases of the assessment against it, the assessment in
question was void. . . . .

xxx xxx xxx

Applying the aforequoted rulings to the case at bar, it is clear that the assailed deficiency tax assessment
for the EWT in 1994 disregarded the provisions of Section 228 of the Tax Code, as amended, as well as
Section 3.1.4 of Revenue Regulations No. 12-99 by not providing the legal and factual bases of the
assessment. Hence, the formal letter of demand and the notice of assessment issued relative thereto are
void.

[Emphasis Supplied]

Nevertheless, the requirement of providing the taxpayer with written notice of the facts and law used as
basis for the assessment is not to be mechanically applied. Emphasis on the purpose of the written notice is
important. The requirement should be in place so that the taxpayer could be adequately informed of the
basis of the assessment enabling him to prepare an intelligent protest or appeal of the assessment or
decision. In Samar-I Electric Cooperative v. CIR, 20 the Court elaborated:

The above information provided to petitioner enabled it to protest the PAN by questioning respondent's
interpretation of the laws cited as legal basis for the computation of the deficiency withholding taxes and
assessment of minimum corporate income tax despite petitioner's position that it remains exempt
therefrom. In its letter-reply dated May 27, 2002, respondent answered the arguments raised by petitioner
in its protest, and requested it to pay the assessed deficiency on the date of payment stated in the PAN. A
second protest letter dated June 23, 2002 was sent by petitioner, to which respondent replied (letter dated
July 8, 2002) answering each of the two issues reiterated by petitioner: (1) validity of EO 93 withdrawing
the tax exemption privileges under PD 269; and (2) retroactive application of RR No. 8-2000. The FAN was
finally received by petitioner on September 24, 2002, and protested by it in a letter dated October 14, 2002
which reiterated in lengthy arguments its earlier interpretation of the laws and regulations upon which the
assessments were based.

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

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

24
Thus, substantial compliance with the requirement under Section 228 of the NIRC is permissible, provided
that the taxpayer would be eventually apprised in writing of the factual and legal bases of the assessment
to allow him to file an effective protest against.

The above-cited cases refer to the compliance of the FAN/FLD of the due process requirement embodied in
Section 228 of the NIRC and RR No. 12-99. These may likewise applied to the FDDA, which is similarly
required to include a written notice of the factual and legal bases thereof. Without sounding repetitious, it
is important to note that Section 228 of the NIRC did not limit the requirement of stating the facts and law
only to the FAN/FLD. On the other hand, RR No. 12-99detailed the process of assessment and required that
both the FAN/FLD and the FDDA state the law and facts on which it is based.

Guided by the foregoing, the Court now turns to the FDDA in issue.

It is undisputed that the FDDA merely showed Liquigaz' tax liabilities without any details on the specific
transactions which gave rise to its supposed tax deficiencies. While it provided for the legal bases of the
assessment, it fell short of informing Liquigaz of the factual bases thereof. Thus, the FDDA as regards the
EWT and FBT tax deficiency did not comply with the requirement in Section 3.1.6 of RR No. 12-99, as
amended, for failure to inform Liquigaz of the factual basis thereof.

The CIR erred in claiming that Liquigaz was informed of the factual bases of the assessment because the
FDDA made reference to the PAN and FAN/FLD, which were accompanied by details of the alleged
discrepancies. The CTA En Banc highlighted that the amounts in the FAN and the FDDA were different. As
pointed out by the CTA, the FLD/FAN and the FDDA reflected the following amounts: 21

Basic Expanded Withholding Fringe Total

Deficiency Withholding Tax on Benefits Tax

Tax Tax Compensation

Per FLD P3,675,048.78 P2,981,841.84 P9,501,564.07 P16,158,454.72

Per FDDA P1,823,782.67 P2,366,836.98 P7,572,236.16 P11,762,855.81

Difference P1,851,266.11 P615,004.89 P1,929,327.91 P4,395,598.91

============ ============ ============ ============

As such, the Court agrees with the tax court that it becomes even more imperative that the FDDA contain
details of the discrepancy. Failure to do so would deprive Liquigaz adequate opportunity to prepare an
intelligent appeal. It would have no way of determining what were considered by the CIR in the defenses it
had raised in the protest to the FLD. Further, without the details of the assessment, it would open the
possibility that the reduction of the assessment could have been arbitrarily or capriciously arrived
at. ICHDca

The Court, however, finds that the CTA erred in concluding that the assessment on EWT and FBT deficiency
was void because the FDDA covering the same was void. The assessment remains valid notwithstanding
the nullity of the FDDA because as discussed above, the assessment itself differs from a decision on the
disputed assessment.

25
As established, an FDDA that does not inform the taxpayer in writing of the facts and law on which it is
based renders the decision void. Therefore, it is as if there was no decision rendered by the CIR. It is
tantamount to a denial by inaction by the CIR, which may still be appealed before the CTA and the
assessment evaluated on the basis of the available evidence and documents. The merits of the EWT and
FBT assessment should have been discussed and not merely brushed aside on account of the void FDDA.

On the other hand, the Court agrees that the FDDA substantially informed Liquigaz of its tax liabilities with
regard to its WTC assessment. As highlighted by the CTA, the basis for the assessment was the same for
the FLD and the FDDA, where the salaries reflected in the ITR and the alphalist were compared resulting in
a discrepancy of P9,318,255.84. The change in the amount of assessed deficiency withholding taxes on
compensation merely arose from the modification of the tax rates used 32% in the FLD and the effective
tax rate of 25.40% in the FDDA. The Court notes it was Liquigaz itself which proposed the rate of 25.40%
as a more appropriate tax rate as it represented the effective tax on compensation paid for taxable year
2005. 22 As such, Liquigaz was effectively informed in writing of the factual bases of its assessment for
WTC because the basis for the FDDA, with regards to the WTC, was identical with the FAN which had a
detail of discrepancy attached to it.

Further, the Court sees no reason to reverse the decision of the CTA as to the amount of WTC liability of
Liquigaz. It is a time-honored doctrine that the findings and conclusions of the CTA are accorded the
highest respect and will not be lightly set aside because by the very nature of the CTA, it is dedicated
exclusively to the resolution of tax problems and has accordingly developed an expertise on the
subject. 23 The issue of Liquigaz' WTC liability had been thoroughly discussed in the courts a quo and even
the court-appointed independent accountant had found that Liquigaz was unable to substantiate its claim
concerning the discrepancies in its WTC.

To recapitulate, a "decision" differs from an "assessment" and failure of the FDDA to state the facts and law
on which it is based renders the decision void but not necessarily the assessment. Tax laws may not be
extended by implication beyond the clear import of their language, nor their operation enlarged so as to
embrace matters not specifically provided. 24

WHEREFORE, the May 22, 2014 Decision and the November 26, 2014 Resolution of the Court of Tax
Appeals En Banc are PARTIALLY AFFIRMED in that the assessment on deficiency Withholding Tax in
Compensation is upheld.

The case is REMANDED to the Court of Tax Appeals for the assessment on deficiency Expanded
Withholding Tax and Fringe Benefits Tax.

SO ORDERED.

||| (Commissioner of Internal Revenue v. Liquigaz Philippines Corp., G.R. Nos. 215534 & 215557, [April 18,
2016])

[G.R. No. 180110. May 30, 2016.]

CAPITOL WIRELESS, INC., petitioner, vs. THE PROVINCIAL TREASURER OF BATANGAS, THE
PROVINCIAL ASSESSOR OF BATANGAS, THE MUNICIPAL TREASURER AND ASSESSOR OF
NASUGBU, BATANGAS, respondents.

DECISION

PERALTA, J p:

26
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to annul
and set aside the Court of Appeals' Decision 1 dated May 30, 2007 and Resolution 2 dated October 8, 2007
in CA-G.R. SP No. 82264, which both denied the appeal of petitioner against the decision of the Regional
Trial Court.

Below are the facts of the case.

Petitioner Capitol Wireless, Inc. (Capwire) is a Philippine corporation in the business of providing
international telecommunications services. 3 As such provider, Capwire has signed agreements with other
local and foreign telecommunications companies covering an international network of submarine cable
systems such as the Asia Pacific Cable Network System (APCN) (which connects Australia, Thailand,
Malaysia, Singapore, Hong Kong, Taiwan, Korea, Japan, Indonesia and the Philippines); the Brunei-
Malaysia-Philippines Cable Network System (BMP-CNS), the Philippines-Italy (SEA-ME-WE-3 CNS), and the
Guam Philippines (GP-CNS) systems.4 The agreements provide for co-ownership and other rights among
the parties over the network. 5

Petitioner Capwire claims that it is co-owner only of the so-called "Wet Segment" of the APCN, while the
landing stations or terminals and Segment E of APCN located in Nasugbu, Batangas are allegedly owned by
the Philippine Long Distance Telephone Corporation (PLDT). 6 Moreover, it alleges that the Wet Segment is
laid in international, and not Philippine, waters. 7

Capwire claims that as co-owner, it does not own any particular physical part of the cable system but,
consistent with its financial contributions, it owns the right to use a certain capacity of the said
system. 8 This property right is allegedly reported in its financial books as "Indefeasible Rights in Cable
Systems." 9

However, for loan restructuring purposes, Capwire claims that "it was required to register the value of its
right," hence, it engaged an appraiser to "assess the market value of the international submarine cable
system and the cost to Capwire." 10 On May 15, 2000, Capwire submitted a Sworn Statement of True
Value of Real Properties at the Provincial Treasurer's Office, Batangas City, Batangas Province, for the Wet
Segment of the system, stating:

System Sound Value

APCN P203,300,000.00

BMP-CNS P65,662,000.00

SEA-ME-WE-3 CNSP P7,540,000.00

GP-CNS P1,789,000.00

Capwire claims that it also reported that the system "interconnects at the PLDT Landing Station in Nasugbu,
Batangas," which is covered by a transfer certificate of title and tax declarations in the name of PLDT. 11

As a result, the respondent Provincial Assessor of Batangas (Provincial Assessor) issued the following
Assessments of Real Property (ARP) against Capwire:

ARP Cable System Assessed Value

27
019-00967 BMP-CNS P52,529,600.00

019-00968 APCN P162,640,000.00

019-00969 SEA-ME-WE3-CNS P6,032,000.00

019-00970 GP-CNS P1,431,200.00

In essence, the Provincial Assessor had determined that the submarine cable systems described in
Capwire's Sworn Statement of True Value of Real Properties are taxable real property, a determination that
was contested by Capwire in an exchange of letters between the company and the public
respondent. 12 The reason cited by Capwire is that the cable system lies outside of Philippine territory, i.e.,
on international waters. 13

On February 7, 2003 and March 4, 2003, Capwire received a Warrant of Levy and a Notice of Auction Sale,
respectively, from the respondent Provincial Treasurer of Batangas (Provincial Treasurer). 14

On March 10, 2003, Capwire filed a Petition for Prohibition and Declaration of Nullity of Warrant of Levy,
Notice of Auction Sale and/or Auction Sale with the Regional Trial Court (RTC) of Batangas City. 15 CAIHTE

After the filing of the public respondents' Comment, 16 on May 5, 2003, the RTC issued an Order
dismissing the petition for failure of the petitioner Capwire to follow the requisite of payment under protest
as well as failure to appeal to the Local Board of Assessment Appeals (LBAA), as provided for in Sections
206 and 226 of Republic Act (R.A.) No. 7160, or the Local Government Code. 17

Capwire filed a Motion for Reconsideration, 18 but the same was likewise dismissed by the RTC in an
Order 19 dated August 26, 2003. It then filed an appeal to the Court of Appeals. 20

On May 30, 2007, the Court of Appeals promulgated its Decision dismissing the appeal filed by Capwire and
affirming the order of the trial court. The dispositive portion of the CA's decision states:

WHEREFORE, premises considered, the assailed Orders dated May 5, 2003 and August 26, 2003 of the
Regional Trial Court, Branch II of Batangas City, are AFFIRMED.

SO ORDERED. 21

The appellate court held that the trial court correctly dismissed Capwire's petition because of the latter's
failure to comply with the requirements set in Sections 226 and 229 of the Local Government Code, that is,
by not availing of remedies before administrative bodies like the LBAA and the Central Board of Assessment
Appeals (CBAA). 22 Although Capwire claims that it saw no need to undergo administrative proceedings
because its petition raises purely legal questions, the appellate court did not share this view and noted that
the case raises questions of fact, such as the extent to which parts of the submarine cable system lie within
the territorial jurisdiction of the taxing authorities, the public respondents. 23 Further, the CA noted that
Capwire failed to pay the tax assessed against it under protest, another strict requirement under Section
252 of the Local Government Code. 24

Hence, the instant petition for review of Capwire.

Petitioner Capwire asserts that recourse to the Local Board of Assessment Appeals, or payment of the tax
under protest, is inapplicable to the case at bar since there is no question of fact involved, or that the
question involved is not the reasonableness of the amount assessed but, rather, the authority and power of
the assessor to impose the tax and of the treasurer to collect it. 25 It contends that there is only a pure

28
question of law since the issue is whether its submarine cable system, which it claims lies in international
waters, is taxable. 26 Capwire holds the position that the cable system is not subject to tax. 27

Respondents assessors and treasurers of the Province of Batangas and Municipality of Nasugbu, Batangas
disagree with Capwire and insist that the case presents questions of fact such as the extent and portion of
the submarine cable system that lies within the jurisdiction of the said local governments, as well as the
nature of the so-called indefeasible rights as property of Capwire. 28 Such questions are allegedly
resolvable only before administrative agencies like the Local Board of Assessment Appeals. 29

The Court confronts the following issues: Is the case cognizable by the administrative agencies and covered
by the requirements in Sections 226 and 229 of theLocal Government Code which makes the dismissal of
Capwire's petition by the RTC proper? May submarine communications cables be classified as taxable real
property by the local governments?

The petition is denied. No error attended the ruling of the appellate court that the case involves factual
questions that should have been resolved before the appropriate administrative bodies.

In disputes involving real property taxation, the general rule is to require the taxpayer to first avail of
administrative remedies and pay the tax under protest before allowing any resort to a judicial action, except
when the assessment itself is alleged to be illegal or is made without legal authority. 30 For example, prior
resort to administrative action is required when among the issues raised is an allegedly erroneous
assessment, like when the reasonableness of the amount is challenged, while direct court action is
permitted when only the legality, power, validity or authority of the assessment itself is in
question. 31 Stated differently, the general rule of a prerequisite recourse to administrative remedies
applies when questions of fact are raised, but the exception of direct court action is allowed when purely
questions of law are involved. 32

This Court has previously and rather succinctly discussed the difference between a question of fact and a
question of law. In Cosmos Bottling Corporation v. Nagrama, Jr., 33 it held:

The Court has made numerous dichotomies between questions of law and fact. A reading of these
dichotomies shows that labels attached to law and fact are descriptive rather than definitive. We are not
alone in Our difficult task of clearly distinguishing questions of fact from questions of law. The United States
Supreme Court has ruled that: "we [do not] yet know of any other rule or principle that will unerringly
distinguish a factual finding from a legal conclusion."

In Ramos v. Pepsi-Cola Bottling Co. of the P.I., the Court ruled:

There is a question of law in a given case when the doubt or difference arises as to what the law is on a
certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or the
falsehood of alleged facts. DETACa

We shall label this the doubt dichotomy.

In Republic v. Sandiganbayan, the Court ruled:

. . . A question of law exists when the doubt or controversy concerns the correct application of law or
jurisprudence to a certain set of facts; or when the issue does not call for an examination of the probative
value of the evidence presented, the truth or falsehood of facts being admitted. In contrast, a question of
fact exists when the doubt or difference arises as to the truth or falsehood of facts or when the query
invites calibration of the whole evidence considering mainly the credibility of the witnesses, the existence
and relevancy of specific surrounding circumstances as well as their relation to each other and to the
whole, and the probability of the situation.

29
For the sake of brevity, We shall label this the law application and calibration dichotomy.

In contrast, the dynamic legal scholarship in the United States has birthed many commentaries on the
question of law and question of fact dichotomy. As early as 1944, the law was described as growing
downward toward "roots of fact" which grew upward to meet it. In 1950, the late Professor Louis Jaffe saw
fact and law as a spectrum, with one shade blending imperceptibly into the other. Others have defined
questions of law as those that deal with the general body of legal principles; questions of fact deal with "all
other phenomena . . . ." Kenneth Culp Davis also weighed in and noted that the difference between fact
and law has been characterized as that between "ought" questions and "is" questions. 34

Guided by the quoted pronouncement, the Court sustains the CA's finding that petitioner's case is one
replete with questions of fact instead of pure questions of law, which renders its filing in a judicial forum
improper because it is instead cognizable by local administrative bodies like the Board of Assessment
Appeals, which are the proper venues for trying these factual issues. Verily, what is alleged by Capwire in
its petition as "the crux of the controversy," that is, "whether or not an indefeasible right over a submarine
cable system that lies in international waters can be subject to real property tax in the Philippines," 35 is
not the genuine issue that the case presents as it is already obvious and fundamental that real property
that lies outside of Philippine territorial jurisdiction cannot be subjected to its domestic and sovereign power
of real property taxation but, rather, such factual issues as the extent and status of Capwire's ownership
of the system, the actual length of the cable/s that lie in Philippine territory, and the corresponding
assessment and taxes due on the same, because the public respondents imposed and collected the assailed
real property tax on the finding that at least a portion or some portions of the submarine cable system that
Capwire owns or co-owns lies inside Philippine territory. Capwire's disagreement with such findings of the
administrative bodies presents little to no legal question that only the courts may directly resolve. HEITAD

Instead, Capwire argues and makes claims on mere assumptions of certain facts as if they have been
already admitted or established, when they have not, since no evidence of such have yet been presented in
the proper agencies and even in the current petition. As such, it remains unsettled whether Capwire is a
mere co-owner, not full owner, of the subject submarine cable and, if the former, as to what extent;
whether all or certain portions of the cable are indeed submerged in water; and whether the waters
wherein the cable/s is/are laid are entirely outside of Philippine territorial or inland waters, i.e., in
international waters. More simply, Capwire argues based on mere legal conclusions, culminating on its claim
of illegality of respondents' acts, but the conclusions are yet unsupported by facts that should have been
threshed out quasi-judicially before the administrative agencies. It has been held that "a bare
characterization in a petition of unlawfulness, is merely a legal conclusion and a wish of the pleader, and
such a legal conclusion unsubstantiated by facts which could give it life, has no standing in any court where
issues must be presented and determined by facts in ordinary and concise language." 36 Therefore,
Capwire's resort to judicial action, premised on its legal conclusion that its cables (the equipment being
taxed) lie entirely on international waters, without first administratively substantiating such a factual
premise, is improper and was rightly denied. Its proposition that the cables lie entirely beyond Philippine
territory, and therefore, outside of Philippine sovereignty, is a fact that is not subject to judicial notice
since, on the contrary, and as will be explained later, it is in fact certain that portions of the cable would
definitely lie within Philippine waters. Jurisprudence on the Local Government Code is clear that facts such
as these must be threshed out administratively, as the courts in these types of cases step in at the first
instance only when pure questions of law are involved.

Nonetheless, We proceed to decide on whether submarine wires or cables used for communications may be
taxed like other real estate.

We hold in the affirmative.

30
Submarine or undersea communications cables are akin to electric transmission lines which this Court has
recently declared in Manila Electric Company v. City Assessor and City Treasurer of Lucena City, 37 as "no
longer exempted from real property tax" and may qualify as "machinery" subject to real property tax under
theLocal Government Code. To the extent that the equipment's location is determinable to be within the
taxing authority's jurisdiction, the Court sees no reason to distinguish between submarine cables used for
communications and aerial or underground wires or lines used for electric transmission, so that both pieces
of property do not merit a different treatment in the aspect of real property taxation. Both electric lines and
communications cables, in the strictest sense, are not directly adhered to the soil but pass through posts,
relays or landing stations, but both may be classified under the term "machinery" as real property under
Article 415 (5) 38 of the Civil Code for the simple reason that such pieces of equipment serve the owner's
business or tend to meet the needs of his industry or works that are on real estate. Even objects in or on a
body of water may be classified as such, as "waters" is classified as an immovable under Article 415
(8) 39 of the Code. A classic example is a boathouse which, by its nature, is a vessel and, therefore, a
personal property but, if it is tied to the shore and used as a residence, and since it floats on waters which
is immovable, is considered real property. 40 Besides, the Court has already held that "it is a familiar
phenomenon to see things classed as real property for purposes of taxation which on general principle
might be considered personal property." 41

Thus, absent any showing from Capwire of any express grant of an exemption for its lines and cables from
real property taxation, then this interpretation applies and Capwire's submarine cable may be held subject
to real property tax.

Having determined that Capwire is liable, and public respondents have the right to impose a real property
tax on its submarine cable, the issue that is unresolved is how much of such cable is taxable based on the
extent of Capwire's ownership or co-ownership of it and the length that is laid within respondents' taxing
jurisdiction. The matter, however, requires a factual determination that is best performed by the Local and
Central Boards of Assessment Appeals, a remedy which the petitioner did not avail of.

At any rate, given the importance of the issue, it is proper to lay down the other legal bases for the local
taxing authorities' power to tax portions of the submarine cables of petitioner. It is not in dispute that the
submarine cable system's Landing Station in Nasugbu, Batangas is owned by PLDT and not by Capwire.
Obviously, Capwire is not liable for the real property tax on this Landing Station. Nonetheless, Capwire
admits that it co-owns the submarine cable system that is subject of the tax assessed and being collected
by public respondents. As the Court takes judicial notice that Nasugbu is a coastal town and the
surrounding sea falls within what the United Nations Convention on the Law of the Sea (UNCLOS) would
define as the country's territorial sea (to the extent of 12 nautical miles outward from the nearest baseline,
under Part II, Sections 1 and 2) over which the country has sovereignty, including the seabed and subsoil,
it follows that indeed a portion of the submarine cable system lies within Philippine territory and thus falls
within the jurisdiction of the said local taxing authorities. 42 It easily belies Capwire's contention that the
cable system is entirely in international waters. And even if such portion does not lie in the 12-nautical-mile
vicinity of the territorial sea but further inward, in Prof. Magallona v. Hon. Ermita, et al. 43 this Court held
that "whether referred to as Philippine 'internal waters' under Article I of the Constitution 44or as
'archipelagic waters' under UNCLOS Part III, Article 49 (1, 2, 4), 45 the Philippines exercises sovereignty
over the body of water lying landward of (its) baselines, including the air space over it and the submarine
areas underneath." Further, under Part VI, Article 79 46 of the UNCLOS, the Philippines clearly has
jurisdiction with respect to cables laid in its territory that are utilized in support of other installations and
structures under its jurisdiction. ATICcS

And as far as local government units are concerned, the areas described above are to be considered
subsumed under the term "municipal waters" which, under the Local Government Code, includes "not only
31
streams, lakes, and tidal waters within the municipality, not being the subject of private ownership and not
comprised within the national parks, public forest, timber lands, forest reserves or fishery reserves, but also
marine waters included between two lines drawn perpendicularly to the general coastline from points where
the boundary lines of the municipality or city touch the sea at low tide and a third line parallel with the
general coastline and fifteen (15) kilometers from it." 47 Although the term "municipal waters" appears in
the Code in the context of the grant of quarrying and fisheries privileges for a fee by local
governments, 48 its inclusion in the Code's Book II which covers local taxation means that it may also
apply as guide in determining the territorial extent of the local authorities' power to levy real property
taxation.

Thus, the jurisdiction or authority over such part of the subject submarine cable system lying within
Philippine jurisdiction includes the authority to tax the same, for taxation is one of the three basic and
necessary attributes of sovereignty, 49 and such authority has been delegated by the national legislature to
the local governments with respect to real property taxation. 50

As earlier stated, a way for Capwire to claim that its cable system is not covered by such authority is by
showing a domestic enactment or even contract, or an international agreement or treaty exempting the
same from real property taxation. It failed to do so, however, despite the fact that the burden of proving
exemption from local taxation is upon whom the subject real property is declared. 51 Under the Local
Government Code, every person by or for whom real property is declared, who shall claim tax exemption
for such property from real property taxation "shall file with the provincial, city or municipal assessor within
thirty (30) days from the date of the declaration of real property sufficient documentary evidence in support
of such claim." 52 Capwire omitted to do so. And even under Capwire's legislative franchise, RA 4387,
which amended RA 2037, where it may be derived that there was a grant of real property tax exemption
for properties that are part of its franchise, or directly meet the needs of its business, 53 such had been
expressly withdrawn by the Local Government Code, which took effect on January 1, 1992, Sections 193
and 234 of which provide: 54

Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and nonprofit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.

xxx xxx xxx

Section 234. Exemptions from Real Property Tax. The following are exempted from payment of the real
property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when
the beneficial use thereof has been granted, for consideration of otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or
religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for
religious, charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local water districts
and government-owned or controlled corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and environmental protection.
32
Except as provided herein, any exemption from payment of real property tax previously
granted to, or presently enjoyed by, all persons, whether natural or juridical, including all
government-owned or controlled corporations are hereby withdrawn upon the effectivity of
this Code. 55

Such express withdrawal had been previously held effective upon exemptions bestowed by legislative
franchises granted prior to the effectivity of the Local Government Code. 56 Capwire fails to allege or
provide any other privilege or exemption that were granted to it by the legislature after the enactment of
the Local Government Code. Therefore, the presumption stays that it enjoys no such privilege or
exemption. Tax exemptions are strictly construed against the taxpayer because taxes are considered the
lifeblood of the nation. 57

WHEREFORE, the petition is DENIED. The Court of Appeals' Decision dated May 30, 2007 and Resolution
dated October 8, 2007 are AFFIRMED.

SO ORDERED.

||| (Capitol Wireless, Inc. v. Provincial Treasurer of Batangas, G.R. No. 180110, [May 30, 2016])

[G.R. No. 195147. July 11, 2016.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE NATIONAL


BANK, respondent.

DECISION

BERSAMIN, J. p

At issue is whether or not the respondent bank's interbank call loans transacted in 1997 were subject to
documentary stamp taxes.

The petitioner appeals the September 21, 2010 decision rendered in C.T.A. EB Case No. 512, 1 whereby
the Court of Tax Appeals (CTA) En Banc affirmed the cancellation of Assessment No. 97-000064 for
deficiency documentary stamp taxes imposed on the interbank call loans of respondent Philippine National
Bank (PNB); and the resolution issued on January 10, 2011 2 denying the petitioner's motion for
reconsideration.

Antecedents

On March 23, 2000, the petitioner issued Letter of Authority No. 00058992, which PNB received on March
28, 2000. The letter of authority authorized the examination of PNB's books of accounts and other
accounting records in relation to its internal revenue taxes for taxable year 1997. 3 On May 12, 2003, PNB
received the preliminary assessment notice with details of discrepancies dated March 31, 2003, which
indicated that PNB had deficiency payments of documentary stamp taxes (DST), withholding taxes on
compensation, and expanded withholding taxes for taxable year 1997. 4 On May 26, 2003, the petitioner
issued a formal assessment notice, together with a formal letter of demand and details of discrepancies,
requiring PNB to pay the following deficiency taxes: 5

Assessment No. 97-000064 for deficiency P39,550,963.50

DST arising from PNB's interbank call

loans and special savings account

33
Assessment No. 97-000067 for deficiency 2,173,972.25

expanded withholding tax

TOTAL P41,724,935.75

============

PNB immediately paid Assessment No. 97-000067 on May 30, 2003, but filed a protest against Assessment
No. 97-000064. The petitioner denied PNB's protest through the final decision on disputed assessment
dated December 10, 2003. 6

On January 16, 2004, PNB filed its petition for review in the CTA (C.T.A. Case No. 6850). 7

On March 3, 2009, after trial, the CTA (First Division) rendered judgment, disposing:

WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the
assessment for deficiency documentary stamp taxes on petitioner's Interbank Call Loans for taxable year
1997 is hereby CANCELLED. However, the assessment for deficiency documentary stamp tax on
petitioner's Special Savings Account for taxable year 1997 is hereby AFFIRMED.

Petitioner is hereby ORDERED to PAY respondent the amount of FOURTEEN MILLION SIX HUNDRED
EIGHTY EIGHT THOUSAND FOUR HUNDRED SIXTY THREE PESOS AND FIFTEEN CENTAVOS
(P14,688,463.15), representing deficiency documentary stamp tax for taxable year 1997, computed as
follows: CAIHTE

Special Savings Account 7,833,847,016.00

Documentary Stamp Tax (0.30/200) 11,750,770.52

Surcharge 25% 2,937,692.63

Total Amount Due 14,688,463.15

=============

In addition, petitioner is hereby ORDERED to PAY a penalty equivalent to twenty five percent (25%) and
a delinquency interest equivalent to twenty percent (20%) per annum on the amount of P14,688,463.15
from February 15, 2004 until such amount is paid in full, pursuant to Sections 248 and 249 of the Tax
Code.

SO ORDERED. 8

Both parties moved for partial reconsideration. 9 On July 7, 2009, the CTA in Division denied the
petitioner's motion for partial reconsideration but held in abeyance the resolution of PNB's motion for partial
reconsideration pending its submission of its supplemental formal offer of evidence to admit tax abatement
documents. 10

Consequently, the petitioner appealed to the CTA En Banc on August 10, 2009.

On September 21, 2010, the CTA En Banc promulgated its assailed decision, viz.:

34
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit. The assailed Decision
dated March 3, 2009 and Resolution dated July 7, 2009 insofar as the cancellation of the assessment for
Documentary Stamp Taxes on PNB's Interbank Call Loans for the taxable year 1997 is concerned,
are AFFIRMED. No pronouncement as to costs.

SO ORDERED. 11

The petitioner sought reconsideration, 12 but the CTA En Banc denied the motion through the resolution
dated January 10, 2011. 13

Hence, this appeal by the petitioner.

Issue

The sole issue concerns whether or not PNB's interbank call loans for taxable year 1997 are subject to DST.
The petitioner argues that:

THE PNB'S TRANSACTIONS UNDER INTERBANK CALL LOANS ARE CONSIDERED LOAN AGREEMENTS
BETWEEN PNB AND THE OTHER BANKS, HENCE, THEY ARE SUBJECT TO DOCUMENTARY STAMP TAXES
(DST) UNDER SECTION 180 OF THE NATIONAL INTERNAL REVENUE CODE (NIRC) OF 1977, AS AMENDED
BY REPUBLIC ACT (R.A.) NO. 7660 OF 1994.

II

THE FURTHER AMENDMENTS OF SECTION 180 OF THE 1977 NIRC (AS AMENDED BY R.A. NO. 7660 OF
1994) BY R.A. NO. 8424 OF 1998 AND R.A. NO. 9243 OF 2004 CONFIRM THE NATURE AND CHARACTER
OF INTERBANK CALL LOANS AS LOAN AGREEMENTS AND/OR DEBT INSTRUMENTS, HENCE, THEY ARE
SUBJECT TO DST.

III

THERE IS NO LAW OR PROVISION IN THE 1977 NIRC, AS AMENDED BY R.A. NO. 7660 OF 1994, THAT
SPECIFICALLY AND EXPRESSLY EXEMPTS PNB'S INTERBANK CALL LOANS FOR THE TAXABLE YEAR 1997
FROM THE PAYMENT OF DST. 14

Ruling

The appeal lacks merit.

The petitioner claims that while interbank call loans were not considered as deposit substitute debt
instruments, PNB's interbank call loans, which had a maturity of more than five days, were included in the
concept of loan agreements; hence, the interbank call loans were subject to DST. 15

The petitioner's claim cannot be upheld.

Firstly, the maturity of PNB's interbank call loans was irrelevant in determining its DST liability for taxable
year 1997, relation to which the applicable law was the National Internal Revenue Code of 1977 (1977
NIRC), as amended by Presidential Decree No. 1959 16 and Republic Act No. 7660. 17 The five-day
maturity of interbank call loans came to be introduced only by Section 22 (y) 18 of the National Internal
Revenue Code of 1997 (1997 NIRC), to wit:
xxx xxx xxx

(y) The term 'deposit substitutes' shall mean an alternative from of obtaining funds from the public (the
term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time)
35
other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the
borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or
financing their own needs or the needs of their agent or dealer. These instruments may include, but need
not be limited to bankers' acceptances, promissory notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation and similar instruments with recourse:
Provided, however, That debt instruments issued for interbank call loans with maturity of not
more than five (5) days to cover deficiency in reserves against deposit liabilities, including
those between or among banks and quasi-banks, shall not be considered as deposit substitute
debt instruments. (Bold underscoring supplied for emphasis)

xxx xxx xxx

The provisions of the 1997 NIRC cannot be given retrospective effect to the prejudice of PNB. This is
because tax laws are prospective in application, unless their retroactive application is expressly
provided. 19

Secondly, PNB's interbank call loans are not taxable under Section 180 of the 1977 NIRC, as amended by
R.A. No. 7660, which states:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and
securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest
and others not payable on sight or demand. On all loan agreements signed abroad wherein the object
of the contract is located or used in the Philippines; bills of exchange (between points within the
Philippines), drafts, instruments and securities issued by the Government or any of its
instrumentalities or certificates of deposits drawing interest, or orders for the payment of any
sum of money otherwise than at sight or on demand, or on all promissory notes, whether
negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of
any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each two
hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft,
certificate of deposit, or note: Provided, That only one documentary stamp tax shall be imposed on either
loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax:
Provided, however, That loan agreements or promissory notes the aggregate of which does not exceed
Two hundred fifty thousand pesos (P250,000) executed by an individual for his purchase on installment for
his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of the documentary stamp tax provided
under this section." (Bold underscoring supplied for emphasis) DETACa

The petitioner insists that PNB's interbank call loans fell under the definition of a loan agreement found in
Section 3 (b) of Revenue Regulations No. 9-94, to wit:

xxx xxx xxx

(b) 'Loan agreement' refers to a contract in writing where one of the parties delivers to another money or
other consumable thing, upon the condition that the same amount of the same kind and quality shall be
paid. The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings.

The terms "Loan Agreement" under Section 180 and "Mortgage" under Section 195, both of the Tax Code,
as amended, generally refer to distinct and separate instruments. A loan agreement shall be taxed under
Section 180, while a deed of mortgage shall be taxed under Section 195. 20

xxx xxx xxx

36
The insistence is bereft of merit.

An interbank call loan refers to the cost of borrowings from other resident banks and non-bank financial
institutions with quasi-banking authority that is payable on call or demand. 21 It is transacted primarily to
correct a bank's reserve requirements. 22 Under the Manual of Regulation for Banks (MORB) issued by the
Bangko Sentral ng Pilipinas (BSP), interbank borrowings, 23 which include interbank call loans, shall be
evidenced by deposit substitute instruments containing the minimum features prescribed under Section
X235.3 of the MORB, except those that are settled through the banks' respective demand deposit accounts
with the BSP via Philpass. 24 Simply put, an interbank call loan is considered as a deposit substitute
transaction by a bank performing quasi-banking functions to cover reserve deficiencies. It does not fall
under the definition of a loan agreement. Even if it does, the DST liability under Section 180, supra, will
only attach if the loan agreement was signed abroad but the object of the contract is located or used in the
Philippines, which was not the case in regard to PNB's interbank call loans.

We note, however, that for taxation purposes interbank call loans are not considered as deposit substitutes
by express provision of Section 20 (y) of the 1977 NIRC, as amended by P.D. No. 1959, viz.:

Sec. 1. A new subsection (y) is inserted in Sec. 2 of the National Internal Revenue Code to read as follows:

xxx xxx xxx

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

The foregoing notwithstanding, it can readily be discerned from Section 180, supra, that the DST of P0.30
on each P200.00, or fractional part thereof, shall only be imposed on the face value of: (1) loan
agreements; (2) bills of exchange; (3) drafts; (4) instruments and securities issued by the Government or
any of its instrumentalities; (5) certificates of deposits drawing interest; (6) orders for the payment of any
sum of money otherwise than at sight or on demand; and (7) promissory notes, whether negotiable or non-
negotiable, except bank notes issued for circulation, and on each renewal of any such note. Interbank call
loans, although not considered as deposit substitutes, are not expressly included among the taxable
instruments listed in Section 180; hence, they may not be held as taxable. As the Court has pointedly
pronounced in Commissioner of Internal Revenue vs. Fortune Tobacco Corporation: 25

. . . The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless
it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words
for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt,
such statutes are to be construed most strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the
plain meaning of the tax laws.
37
In fine, the cancellation of Assessment No. 97-000064 was in order.

WHEREFORE, the Court DENIES the petition for review on certiorari; and AFFIRMS the decision
promulgated on September 21, 2010 in C.T.A. EB Case No. 512. No pronouncement on costs of suit.

SO ORDERED.

||| (Commissioner of Internal Revenue v. Philippine National Bank, G.R. No. 195147, [July 11, 2016])

38