SECOND DIVISION

G.R. No. 183408, July 12, 2017

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. LANCASTER PHILIPPINES, INC., Respondent.

DECISION

MARTIRES, J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to reverse and set
aside the 30 April 2008 Decision2 and 24 June 2008 Resolution3 of the Court of Tax Appeals (CTA) En Banc
in CTA EB No. 352.

The assailed decision and resolution affirmed the 12 September 2007 Decision4 and 12 December 2007
Resolution5 of the CTA First Division (CTA Division) in CTA Case No. 6753.

THE FACTS

The facts6 are undisputed.

Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among others, to investigate or
examine and, if necessary, issue assessments for deficiency taxes

. On the other hand, respondent Lancaster Philippines, Inc. (Lancaster) is a domestic corporation established
in 1963 and is engaged in the production, processing, and marketing of tobacco.

In 1999, the Bureau of Internal Revenue (BIR) issued Letter of Authority (LOA) No. 00012289 authorizing its
revenue officers to examine Lancaster's books of accounts and other accounting records for all internal
revenue taxes due from taxable year 1998 to an unspecified date. The LOA reads:

SEPT. 30 1999

LETTER OF AUTHORITY

LANCASTER PHILS. INC.

11th Flr. Metro Bank Plaza
Makati City

SIR/MADAM/GENTLEMEN:

The bearer(s) hereof RO's Irene Goze & Rosario Padilla to tbe supervised by GH Catalina Leny Barrion of
the Special Team created pursuant to RSO 770-99 is/are authorized to examine your books of accounts and
other accounting records for all internal revenue taxes for the period from taxable year, 1998 to ____,
19__. He is/[t]hey are provided with the necessary identification card(s) which shall be presented to you
upon request.

It is requested that all facilities be extended to the Revenue Officer(s) in order to expedite the examination.
You will be duly informed of the results of the examination upon approval of the report submitted by the
aforementioned Revenue Officer(s).7

After the conduct of an examination pursuant to the LOA, the BIR issued a Preliminary Assessment Notice
(PAN)8 which cited Lancaster for: 1) overstatement of its purchases for the fiscal year April
1998 to March 1999; and 2) noncompliance with the generally accepted accounting principle of proper
matching of cost and revenue.9 More concretely, the BIR disallowed the purchases of tobacco from farmers
covered by Purchase Invoice Vouchers (PIVs) for the months of February and March 1998 as deductions
against income for the fiscal year April 1998 to March 1999. The computation of Lancaster's tax
deficiency, with the details of discrepancies, is reproduced below:

INCOME TAX:

Taxable Income per ITR -0-

Add: Adjustments-Disallowed purchases 11,496.770.18

Adjusted Taxable Income per Investigation P11,496,770.18

INCOME TAX DUE - Basic

April 1-December 31, 1998

(9/12 x P11,496,770.18 x 34%) P 2,913,676.4

January 1 - March 31, 1999

(3/12 x P11,496,770.18 x 33%) 948,483.54

Income tax still due per investigation P 3,880,159.94

Interest (6/15/99 to 10/15/02) .66 2,560,905.56

Compromise Penalty 25,000

TOTAL DEFICIENCY INCOME TAX P 6,466,065.50

DETAILS OF DISCREPANCIES
Assessment No. LTAID 11-98-00007

A. INCOME TAX (P3,880,159.94) - Taxpayer's fiscal year covers April

1998 to March 1999. Verification of the books of accounts and pertinent
 documents disclosed that there was an overstatement of purchases for
the year. Purchase Invoice Vouchers (PIVs) for February and March
1998 purchases amounting to P11,496,770.18 were included as part of
purchases for taxable year 1998 in violation of Section 45 of the
National Internal Revenue Code in relation to Section 43 of the same
and Revenue Regulations No. 2 which states that the Crop-Basis method
of reporting income may be used by a farmer engaged in producing
crops which take more than one (1) year from the time of planting to
the time of gathering and disposing of crop, in such a case, the entire
cost of producing the crop must be taken as deduction in the year in
which the gross income from the crop is realized and that the taxable
income should be computed upon the basis of the taxpayer's annual
accounting period, (fiscal or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in
keeping with the books of the taxpayer. Furthermore, it did not comply
with the generally accepted principle of proper matching of cost and
revenue.10

Lancaster replied11 to the PAN contending, among other things, that for the past decades, it has used an
entire 'tobacco-cropping season' to determine its total purchases covering a one-year period from 1
October up to 30 September of the following year (as against its fiscal year which is from 1 April up to 31
March of the following year); that it has been adopting the 6-month timing difference to conform to the
matching concept (of cost and revenue); and that this has long been installed as part of the company's
system and consistently applied in its accounting books.12

Invoking the same provisions of the law cited in the assessment, i.e., Sections 4313 and 4514 of the National
Internal Revenue Code (NIRC), in conjunction with Section 4515 of Revenue Regulation No. 2, as amended,
Lancaster argued that the February and March 1998 purchases should not have been disallowed. It
maintained that the situation of farmers engaged in producing tobacco, like Lancaster, is unique in that the
costs, i.e., purchases, are taken as of a different period and posted in the year in which the gross income
from the crop is realized. Lancaster concluded that it correctly posted the subject purchases in the fiscal
year ending March 1999 as it was only in this year that the gross income from the crop was realized.

Subsequently on 6 November 2002, Lancaster received from the BIR a final assessment notice
(FAN),16captioned Formal Letter of Demand and Audit Result/Assessment Notice LTAID II IT-98-00007,
dated 11 October 2002, which assessed Lancaster's deficiency income tax amounting to P11,496,770.18, as
a consequence of the disallowance of purchases claimed for the taxable year ending 31 March 1999.

Lancaster duly protested17 the FAN. There being no action taken by the Commissioner on its protest,
Lancaster filed on 21 August 2003 a petition for review18 before the CTA Division.

The Proceedings before the CTA

In its petition before the CTA Division, Lancaster essentially reiterated its arguments in the protest against
the assessment, maintaining that the tobacco purchases in February and March 1998 are deductible in its
fiscal year ending 31 March 1999.

The issues19 raised by the parties for the resolution of the CTA Division were:

I
WHETHER OR NOT PETITIONER COMPLIED WITH THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLE OF
PROPER MATCHING OF COST AND REVENUE;

II

WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT AGAINST PETITIONER FOR THE TAXABLE YEAR 1998
IN THE AGGREGATE AMOUNT OF P6,466,065.50 SHOULD BE CANCELLED AND WITHDRAWN BY
RESPONDENT.

After trial, the CTA Division granted the petition of Lancaster, disposing as follows:

IN VIEW OF THE FOREGOING, the subject Petition, for Review is hereby GRANTED. Accordingly,
respondent is ORDERED to CANCEL and WITHDRAW the deficiency income tax assessment issued against
petitioner under Formal Letter of Demand and Audit Result/Assessment Notice No. LTAID II IT-98-00007
dated October 11, 2002, in the amount of P6,466,065.50, covering the fiscal year from April 1, 1998 to
March 31,1999.20

The CIR moved21 but failed to obtain reconsideration of the CTA Division ruling.22

Aggrieved, the CIR sought recourse23 from the CTA En Banc to seek a reversal of the decision and the
resolution of the CTA Division.

However, the CTA En Banc found no reversible error in the CTA Division's ruling, thus, it affirmed the
cancellation of the assessment against Lancaster. The dispositive portion of the decision of the CTA En Banc
states:

WHEREFORE, premises considered, the present Petition for Review is hereby DENIED DUE COURSE, and,
accordingly DISMISSED for lack of merit.24

The CTA En Banc likewise denied25 the motion for reconsideration from its Decision,

Hence, this petition.

The CIR assigns the following errors as committed by the CTA En Banc :

I.

THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT PETITIONER'S REVENUE OFFICERS
EXCEEDED THEIR AUTHORITY TO INVESTIGATE THE PERIOD NOT COVERED BY THEIR LETTER OF
AUTHORITY.

II.

THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING PETITIONER TO CANCEL AND WITHDRAW THE
DEFICIENCY ASSESSMENT ISSUED AGAINST RESPONDENT.26

THE COURT'S RULING

We deny the petition.

I.

The CTA EN BANC did not err when it ruled

that the BIR revenue officers had
exceeded their authority.
To support its first assignment of error, the CIR argues that the revenue officers did not exceed their
authority when, upon examination (of the Lancaster's books of accounts and other accounting records), they
verified that Lancaster made purchases for February and March of 1998, which purchases were not declared
in the latter’s fiscal year from 1 April 1997 to 31 March 1998. Additionally, the CIR posits that Lancaster did
not raise the issue on the scope of authority of the revenue examiners at any stage of the proceedings
before the CTA and, consequently, the CTA had no jurisdiction to rule on said issue.

On both counts, the CIR is mistaken.

A. The Jurisdiction of the CTA

Preliminarily, we shall take up the CTA's jurisdiction to rule on the issue of the scope of authority of the
revenue officers to conduct the examination of Lancaster's books of accounts and accounting records.

The law vesting unto the CTA its jurisdiction is Section 7 of Republic Act No. 1125 (R.A. No. 1125),27which in
part provides:

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by
appeal, as herein provided:

(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other
matters arising under the National Internal Revenue Code or other law or part of law administered by the
Bureau of Internal Revenue; xxx (emphasis supplied)

Under the aforecited provision, the jurisdiction of the CTA is not limited only to cases which involve decisions
or inactions of the CIR on matters relating to assessments or refunds but also includes other cases arising
from the NIRC or related laws administered by the BIR.28 Thus, for instance, we had once held that the
question of whether or not to impose a deficiency tax assessment comes within the purview of the words
"other matters arising under the National Internal Revenue Code. "29

The jurisdiction of the CTA on such other matters arising under the NIRC was retained under the
amendments introduced by R.A No. 9282.30 Under R.A. No. 9282, Section 7 now reads:

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

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

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

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

Is the question on the authority of revenue officers to examine the books and records of any person
cognizable by the CTA?

It must be stressed that the assessment of internal revenue taxes is one of the duties of the BIR. Section 2
of the NIRC states:

Sec. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Internal Revenue shall be
under the supervision and control of the Department of Finance and its powers and duties shall comprehend,
the assessment and collection of all national internal revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts.

The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code
or other laws. (emphasis supplied)

In connection therewith, the CIR may authorize the examination of any taxpayer and correspondingly make
an assessment whenever necessary.31 Thus, to give more teeth to such power of the CIR, to make an
assessment, the NIRC authorizes the CIR to examine any book, paper, record, or data of any person.32 The
powers granted by law to the CIR are intended, among other things, to determine the liability of any person
for any national internal revenue tax.

It is pursuant to such pertinent provisions of the NIRC conferring the powers to the CIR that the petitioner
(CIR) had, in this case, authorized its revenue officers to conduct an examination of the books of account
and accounting records of Lancaster, and eventually issue a deficiency assessment against it.

From the foregoing, it is clear that the issue on whether the revenue officers who had conducted the
examination on Lancaster exceeded their authority pursuant to LOA No. 00012289 may be considered as
covered by the terms "other matters" under Section 7 of R.A. No. 1125 or its amendment, R.A. No. 9282.
The authority to make an examination or assessment, being a matter provided for by the NIRC, is well
within the exclusive and appellate jurisdiction of the CTA.

On whether the CTA can resolve an issue which was not raised by the parties, we rule in the affirmative.

Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the Court of Tax Appeals,33the
CTA is not bound by the issues specifically raised by the parties but may also rule upon related issues
necessary to achieve an orderly disposition of the case. The text of the provision reads:

SECTION 1. Rendition of judgment. - x x x

In deciding the case, the Court may not limit itself to the issues stipulated by the parties but may also rule
upon related issues necessary to achieve an orderly disposition of the case.

The above section is clearly worded. On the basis thereof, the CTA Division was, therefore, well within its
authority to consider in its decision the question on the scope of authority of the revenue officers who were
named in the LOA even though the parties had not raised the same in their pleadings or memoranda, The
CTA En Banc was likewise correct in sustaining the CTA Division's view concerning such matter.

B. The Scope of the Authority of the Examining Officers

In the assailed decision of the CTA Division, the trial court observed that LOA No. 00012289 authorized the
BIR officers to examine the books of account of Lancaster for the taxable year 1998 only or, since Lancaster
adopted a fiscal year (FY), for the period 1 April 1997 to 31 March 1998. However, the deficiency income
tax assessment which the BIR eventually issued against Lancaster was based on the disallowance of
expenses reported in FY 1999, or for the period1 April 1998 to 31 March 1999. The CTA concluded that
the revenue examiners had exceeded their authority when they issued the assessment against Lancaster
and, consequently, declared such assessment to be without force and effect.

We agree.

The audit process normally commences with the issuance by the CIR of a Letter of Authority. The LOA gives
notice to the taxpayer that it is under investigation for possible deficiency tax assessment; at the same time
it authorizes or empowers a designated revenue officer to examine, verify, and scrutinize a taxpayer's books
and records, in relation to internal revenue tax liabilities for a particular period.34

In this case, a perusal of LOA No. 00012289 indeed shows that the period of examination is the taxable year
1998, For better clarity, the pertinent portion of the LOA is again reproduced, thus:
The bearer(s) hereof x x x is/are authorized to examine your books of accounts and other accounting
records for all Internal revenue taxes for the period from taxable year, 1998to _____, 19__. x x x."
(emphasis supplied)

Even though the date after the words "taxable year 1998 to" is unstated, it is not at all difficult to discern
that the period of examination is the whole taxable year 1998. This means that the examination of Lancaster
must cover the FY period from 1 April 1997 to 31 March 1998. It could not have contemplated a longer
period. The examination for the full taxable year 1998 only is consistent with the guideline in Revenue
Memorandum Order (RMO) No. 43-90, dated 20 September 1990, that the LOA shall cover a taxable
period not exceeding one taxable year.35 In other words, absent any other valid cause, the LOA issued in
this case is valid in all respects.

Nonetheless, a valid LOA does not necessarily clothe validity to an assessment issued on it, as when the
revenue officers designated in the LOA act in excess or outside of the authority granted them under said
LOA. Recently in CIR v. De La Salle University, Inc.36 we accorded validity to the LOA authorizing the
examination of DLSU for "Fiscal Year Ending 2003 and Unverified Prior Years" and correspondingly held the
assessment for taxable year 2003 as valid because this taxable period is specified in the LOA. However, we
declared void the assessments for taxable years 2001 and 2002 for having been unspecified on separate
LOAs as required under RMO No. 43-90.

Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,37 we affirmed the cancellation of a deficiency VAT
assessment because, while the LOA covered "the period 1997 and unverified prior years, " the said
deficiency was arrived at based on the records of a later year, from January to March 1998, or using the
fiscal year which ended on 31 March 1998. We explained that the CIR knew which period should be covered
by the investigation and that if the CIR wanted or intended the investigation to include the year 1998, it
would have done so by including it in the LOA or by issuing another LOA.38

The present case is no different from Sony in that the subject LOA specified that the examination should be
for the taxable year 1998 only but the subsequent assessment issued against Lancaster involved disallowed
expenses covering the next fiscal year, or the period ending 31 March 1999. This much is clear from the
notice of assessment, the relevant portion of which we again restate as follows:

INCOME TAX:

Taxable Income per ITR -0-

Add: Adjustments-Disallowed purchases 11,496.770.18

Adjusted Taxable Income per Investigation P11,496,770.18

INCOME TAX DUE - Basic

April 1-December 31, 1998

(9/12 x P11,496,770.18 x 34%) P 2,913,676.4

January 1 - March 31, 1999

(3/12 x P11,496,770.18 x 33%) 948,483.54

Income tax still due per investigation P 3,880,159.94

Interest (6/15/99 to 10/15/02) .66 2,560,905.56

Compromise Penalty 25,000

TOTAL DEFICIENCY INCOME TAX (emphasis supplied) P 6,466,065.50

The taxable year covered by the assessment being outside of the period specified in the LOA in this case,
the assessment issued against Lancaster is, therefore, void.

This point alone would have sufficed to invalidate the subject deficiency income tax assessment, thus,
obviating any further necessity to resolve the issue on whether Lancaster erroneously claimed the February
and March 1998 expenses as deductions against income for FY 1999.

But, as the CTA did, we shall discuss the issue on the disallowance for the proper guidance not only of the
parties, but the bench and the bar as well.

II.

The CTA En Banc correctly sustained the

order cancelling and withdrawing
the deficiency tax assessment.

To recall, the assessment against Lancaster for deficiency income tax stemmed from the disallowance of its
February and March 1998 purchases which Lancaster posted in its fiscal year ending on 31 March 1999 (FY
1999) instead of the fiscal year ending on 31 March 1998 (FY 1998).

On the one hand, the BIR insists that the purchases in question should have been reported in FY 1998 in
order to conform to the generally accepted accounting principle of proper matching of cost and revenue.
Thus, when Lancaster reported the said purchases in FY 1999, this resulted in overstatement of expenses
warranting their disallowance and, by consequence, resulting in the deficiency in the payment of its income
tax for FY 1999.

Upon the other hand, Lancaster justifies the inclusion of the February and March 1998 purchases in its FY
1999 considering that they coincided with its crop year covering the period of October 1997 to September
1998. Consistent with Revenue Audit Memorandum (RAM) No. 2-95,39 Lancaster argues that its purchases in
February and March 1998 were properly posted in FY 1999, or the year in which its gross income from the
crop was realized. Lancaster concludes that by doing so, it had complied with the matching concept that was
also relied upon by the BIR in its assessment.

The issue essentially boils down to the proper timing when Lancaster should recognize its purchases
in computing its taxable income. Such issue directly correlates to the fact that Lancaster's 'crop year'
does not exactly coincide with its fiscal year for tax purposes.

Noticeably, the records of this case are rife with terms and concepts in accounting. As a science,
accounting40 pervades many aspects of financial planning, forecasting, and decision making in business. Its
reach, however, has also permeated tax practice.

To put it into perspective, although the foundations of accounting were built principally to analyze finances
and assist businesses, many of its principles have since been adopted for purposes of taxation.41 In our
jurisdiction, the concepts in business accounting, including certain generally accepted accounting principles
(GAAP), embedded in the NIRC comprise the rules on tax accounting.

To be clear, the principles under financial or business accounting, in theory and application, are not
necessarily interchangeable with those in tax accounting. Thus, although closely related, tax and business
accounting had invariably produced concepts that at some point diverge in understanding or usage. For
instance, two of such important concepts are taxable income and business income (or accounting income).
Much of the difference can be attributed to the distinct purposes or objectives that the concepts of tax and
business accounting are aimed at. Chief Justice Querube Makalintal made an apt observation on the nature
of such difference. In Consolidated Mines, Inc. v. CTA,42 he noted:

While taxable income is based on the method of accounting used by the taxpayer, it will almost always differ
from accounting income. This is so because of a fundamental difference in the ends the two concepts serve.
Accounting attempts tomatch cost against revenue. Tax law is aimed atcollecting revenue. It is quick
to treat an item as income, slow to recognize deductions or losses. Thus, the tax law will not recognize
deductions for contingent future losses except in very limited situations. Good accounting, on the other
hand, requires their recognition. Once this fundamental difference in approach is accepted, income tax
accounting methods can be understood more easily.43 (emphasis supplied)

While there may be differences between tax and accounting,44 it cannot be said that the two mutually
exclude each other. As already made clear, tax laws borrowed concepts that had origins from accounting. In
truth, tax cannot do away with accounting. It relies upon approved accounting methods and practices to
effectively carry out its objective of collecting the proper amount of taxes from the taxpayers. Thus, an
important mechanism established in many tax systems is the requirement for taxpayers to make a return of
their true income.45 Maintaining accounting books and records, among other important considerations,
would in turn assist the taxpayers in complying with their obligation to file their income tax returns. At the
same time, such books and records provide vital information and possible bases for the government, after
appropriate audit, to make an assessment for deficiency tax whenever so warranted under the
circumstances.

The NIRC, just like the tax laws in other jurisdictions, recognizes the important facility provided by generally
accepted accounting principles and methods to the primary aim of tax laws to collect the correct amount of
taxes. The NIRC even devoted a whole chapter on accounting periods and methods of accounting, some
relevant provisions of which we cite here for more emphasis:

CHAPTER VIII

ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

Sec. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting
has been so employed, or if the method employed does not clearly reflect the income, the computation shall
be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income.

If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the
taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the
taxable income shall be computed on the basis of the calendar year.

Sec. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be
included in the gross income for the taxable year in which received by the taxpayer, unless, under methods
of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a
different period.

In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable
period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise
properly includible in respect of such period or a prior period.
Sec. 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title
shall be taken for the taxable year in which'paid or accrued' or 'paid or incurred,' dependent upon the
method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect
the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer,
there shall be allowed, as deductions for the taxable period in which falls the date of his death, amounts
accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior
period.

Sec. 46. Change of Accounting Period. - If a taxpayer, other than an individual, changes his accounting
period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another,
the net income shall, with the approval of the Commissioner, be computed on the basis of such new
accounting period, subject to the provisions of Section 47.

xxxx

Sec. 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be reported for
tax purposes in the manner as provided in. this Section.

As used herein, the term 'long-term contracts' means building, installation or construction contracts
covering a period in excess of one (1) year.

Persons whose gross income is derived in whole or in part from such contracts shall report such income
upon the basis of percentage of completion.

The return should be accompanied by a return certificate of architects or engineers showing the percentage
of completion during the taxable year of the entire work performed under contract.

There should be deducted from such gross income all expenditures made during the taxable year on account
of the contract, account being taken of the material and supplies on hand at the beginning and end of the
taxable period for use in connection with the work under the contract but not yet so applied. If upon
completion of a contract, it is found that the taxable net income arising thereunder has not been clearly
reflected for any year or years, the Commissioner may permit or require an amended return.

Sec. 49. Installment Basis. -

(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of
personal property on the installment plan may return as income therefrom in any taxable year that
proportion of the installment payments actually received in that year, which the gross profit realized or to be
realized when payment is completed, bears to the total contract price.

(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual
disposition of personal property (other than property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand
pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do
not exceed twenty-five percent (25%) of the selling price, the income may, under the rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the
basis and ill the manner above prescribed in this Section.

As used in this Section, the term'initial payments' means the payments received in cash or property other
than evidences of indebtedness of the purchaser during the taxable period in which the sale or other
disposition is made.

(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or
disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom
under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A)
elects for any taxable year to report his taxable income on the installment basis, then in computing his
income for the year of change or any subsequent year, amounts actually received during any such year on
account of sales or other dispositions of property made in any prior year shall not be excluded." (emphasis
in the original)

We now proceed to the matter respecting the accounting method employed by Lancaster.

An accounting method is a "set of rules for determining when and how to report income and
deductions."46 The provisions under Chapter VIII, Title II of the NIRC cited above enumerate the methods of
accounting that the law expressly recognizes, to wit:

(1) Cash basis method;47

(2) Accrual method;48
(3) Installment method;49
(4) Percentage of completion method;50 and
(5) Other accounting methods.

Any of the foregoing methods may be employed by any taxpayer so long as it reflects its income properly
and such method is used regularly. The peculiarities of the business or occupation engaged in by a taxpayer
would largely determine how it would report incomes and expenses in its accounting books or records. The
NIRC does not prescribe a uniform, or even specific, method of accounting.

Too, other methods approved by the CIR, even when not expressly mentioned in the NIRC, may be adopted
if such method would enable the taxpayer to properly reflect its income. Section 43 of the NIRC authorizes
the CIR to allow the use of a method of accounting that in its opinion would clearly reflect the income of the
taxpayer. An example of such method not expressly mentioned in the NIRC, but duly approved by the CIR,
is the 'crop method of accounting' authorized under RAM No. 2-95. The pertinent provision reads:

II. Accounting Methods

xxxx

F. Crop Year Basis is a method applicable only to farmers engaged in the production of crops which take
more than a year from the time of planting to the process of gathering and disposal. Expenses paid or
incurred are deductible in the year the gross income from the sale of the crops are realized.

The crop method recognizes that the harvesting and selling of crops do not fall within the same year that
they are planted or grown. This method is especially relevant to farmers, or those engaged in the business
of producing crops who, pursuant to RAM No. 2-95, would then be able to compute their taxable income on
the basis of their crop year. On when to recognize expenses as deductions against income, the governing
rule is found in the second sentence of Subsection F cited above. The rule enjoins the recognition of the
expense (or the deduction of the cost) of crop production in the year that the crops are sold (when
income is realized).

In the present case, we find it wholly justifiable for Lancaster, as a business engaged in the production and
marketing of tobacco, to adopt the crop method of accounting. A taxpayer is authorized to employ what it
finds suitable for its purpose so long as it consistently does so, and in this case, Lancaster does appear to
have utilized the method regularly for many decades already. Considering that the crop year of Lancaster
starts from October up to September of the following year, it follows that all of its expenses in the crop
production made within the crop year starting from October 1997 to September 1998, including the
February and March 1998 purchases covered by purchase invoice vouchers, are rightfully deductible for
income tax purposes in the year when the gross income from the crops are realized. Pertinently, nothing
from the pleadings or memoranda of the parties, or even from their testimonies before the CTA, would
support a finding that the gross income from the crops (to which the subject expenses refer) was actually
realized by the end of March 1998, or the closing of Lancaster's fiscal year for 1998. Instead, the records
show that the February and March 1998 purchases were recorded by Lancaster as advances and later taken
up as purchases by the close of the crop year in September 1998, or as stated very clearly above, within the
fiscal year 199951 On this point, we quote with approval the ruling of the CTA En Banc , thus:
Considering that [Lancaster] is engaged in the production of tobacco, it applied the crop year basis in
determining its total purchases for each fiscal year. Thus, [Lancaster's] total cost for the production of its
crops, which includes its purchases, must be taken as a deduction in the year in which the gross income is
realized. Thus, We agree with the following ratiocination of the First Division:

Evident from the foregoing, the crop year basis is one unusual method of accounting wherein the entire cost
of producing the crops (including purchases) must be taken as a deduction in the year in which the gross
income from the crop is realized. Since the petitioner's crop year starts in October and ends in September of
the following year, the same does not coincide with petitioner's fiscal year which starts in April and ends in
March of the following year. However, the law and regulations consider this peculiar situation and allow the
costs to be taken up at the time the gross income from the crop is realized, as in the instant case.

[Lancaster's] fiscal period is from April 1, 1998 to March 31, 1999. On the other hand, its crop year is from
October 1, 1997 to September 1, 1998. Accordingly, in applying the crop year method, all the purchases
made by the respondent for October 1, 1997 to September 1, 1998 should be deducted from the fiscal year
ending March 31, 1999, since it is the time when the gross income from the crops is realized.52

The matching principle

Both petitioner CIR and respondent Lancaster, it must be noted, rely upon the concept of matching cost
against revenue to buttress their respective theories. Also, both parties cite RAM 2-95 in referencing the
crop method of accounting.

We are tasked to determine which view is legally sound.

In essence, the matching concept, which is one of the generally accepted accounting principles, directs that
the expenses are to be reported in the same period that related revenues are earned. It attempts to match
revenue with expenses that helped earn it.

The CIR posits that Lancaster should not have recognized in FY 1999 the purchases for February and March
1998.53 Apparent from the reasoning of the CIR is that such expenses ought to have been deducted in FY
1998, when they were supposed to be paid or incurred by Lancaster. In other words, the CIR is of the view
that the subject purchases match with revenues in 1998, not in 1999.

A reading of RAM No. 2-95, however, clearly evinces that it conforms with the concept that the
expensespaid or incurred be deducted in the year in which gross income from the sale of the crops
is realized. Put in another way, the expenses are matched with the related incomes which are eventually
earned. Nothing from the provision is it strictly required that for the expense to be deductible, the income to
which such expense is related to be realized in the same year that it is paid or incurred. As noted by the
CTA,54 the crop method is an unusual method of accounting, unlike other recognized accounting methods
that, by mandate of Sec. 45 of the NIRC, strictly require expenses be taken in the same taxable year when
the income is 'paid or incurred,' or 'paid or accrued,' depending upon the method of accounting employed by
the taxpayer.

Even if we were to accept the notion that applying the 1998 purchases as deductions in the fiscal year 1998
conforms with the generally accepted principle of matching cost against revenue, the same would still not
lend any comfort to the CIR. Revenue Memorandum Circular (RMC) No. 22-04, entitled "Supplement to
Revenue Memorandum Circular No. 44-2002 on Accounting Methods to be Used by Taxpayers for Internal
Revenue Tax Purposes"55 dated 12 April 2004, commands that where there is conflict between the provisions
of the Tax Code (NIRC), including its implementing rules and regulations, on accounting methods and the
generally accepted accounting principles, the former shall prevail. The relevant portion of RMC 22-04 reads:

II. Provisions of the Tax Code Shall Prevail.

All returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of
the Tax Code, and the rules and regulations implementing said Tax Code. Taxability of income and
deductibility of expenses shall be determined strictly in accordance with the provisions of the Tax Code and
the rules and regulations issued implementing said Tax Code. In case of difference between the provisions of
the Tax Code and the rules and regulations implementing the Tax Code, on one hand, and the generally
accepted accounting principles (GAAP) and the generally accepted accounting standards (GAAS), on the
other hand, the provisions of the Tax Code and the rules and regulations issued implementing said Tax Code
shall prevail. (italics supplied)

RAM No. 2-95 is clear-cut on the rule on when to recognize deductions for taxpayers using the crop method
of accounting. The rule prevails over any GAAP, including the matching concept as applied in financial or
business accounting.

In sum, and considering the foregoing premises, we find no cogent reason to overturn the assailed decision
and resolution of the CTA. As the CTA decreed, Assessment Notice LTAID II IT-98-00007, dated 11 October
2002, in the amount of P6,466,065.50 for deficiency income tax should be cancelled and set aside. The
assessment is void for being issued without valid authority. Furthermore, there is no legal justification for
the disallowance of Lancaster's expenses for the purchase of tobacco in February and March 1998.

WHEREFORE, the petition isDENIED. The assailed 30 April 2008 Decision and 24 June 2008 Resolution of
the Court of Tax Appeals En Banc are AFFIRMED. No costs.

SO ORDERED.

SECOND DIVISION

G.R. No. 216161, August 09, 2017

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PHILIPPINE ALUMINUM WHEELS,

INC., Respondent.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review on certiorari1 assailing the 19 May 2014 Decision2 and the 5 January
2015 Resolution3 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 994.

The CTA En Banc affirmed the Decision of the CTA First Division ordering the cancellation and withdrawal of
the deficiency tax assessments issued by the Commissioner of Internal Revenue (CIR) against Philippine
Aluminum Wheels, Inc. (respondent).

The Facts

Respondent is a corporation organized and existing under Philippine laws which engages in the manufacture,
production, sale, and distribution of automotive parts and accessories. On 16 December 2003, the Bureau of
Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) against respondent covering
deficiency taxes for the taxable year 2001.4 On 28 March 2004, the BIR issued a Final Assessment Notice
(FAN) against respondent in the amount of P32,100,613.42.5 On 23 June 2004, respondent requested for
reconsideration of the FAN issued by the BIR. On 8 November 2006, the BIR issued a Final Decision on
Disputed Assessment (FDDA) and demanded full payment of the deficiency tax assessment from
respondent.6 On 12 April 2007, the FDDA was served through registered mail.
On 19 July 2007, respondent filed with the BIR an application for the abatement of its tax liabilities under
Revenue Regulations No. 13-2001 for the taxable year 2001.7 In a letter dated 12 September 2007,8 the
BIR denied respondent's application for tax abatement on the ground that the FDDA was already issued by
the BIR and that the FDDA had become final and executory due to the failure of the respondent to appeal
the FDDA with the CTA. The BIR contended that the FDDA had been sent through registered mail on 12 April
2007 and that the FDDA had become final, executory, and demandable because of the failure of the
respondent to appeal the FDDA with the CTA within thirty (30) days from receipt of the FDDA.

In a letter dated 19 September 2007,9 respondent informed the BIR that it already paid its tax deficiency on
withholding tax amounting to P736,726.89 through the Electronic Filing and Payment System of the BIR and
that it was also in the process of availing of the Tax Amnesty Program under Republic Act No. 9480 (RA
9480) as implemented by Revenue Memorandum Circular No. 55-2007 to settle its deficiency tax
assessment for the taxable year 2001. On 21 September 2007, respondent complied with the requirements
of RA 9480 which include: the filing of a Notice of Availment, Tax Amnesty Return and Payment Form, and
remitting the tax payment. In a letter dated 29 January 2008, the BIR denied respondent's request and
ordered respondent to pay the deficiency tax assessment amounting to P29,108,767.63.10

In a second letter dated 16 July 2008, the BIR reiterated that the FDDA had become final and executory for
the failure of the respondent to appeal the FDDA with the CTA within the prescribed period of thirty (30)
days. The BIR demanded the full payment of the tax assessment and contended that the respondent's
availment of the tax amnesty under RA 9480 had no effect on the assessment due to the finality of the
FDDA prior to respondent's tax amnesty availment. On 1 August 2008, respondent filed a Petition for Review
with the CTA assailing the letter of the BIR dated 16 July 2008.

The Decision of the CTA First Division

On 12 November 2012, the CTA granted respondent's Petition for Review and set aside the assessment in
view of respondent's availment of a tax amnesty under RA 9480. The CTA First Division held that RA 9480
covers all national internal revenue taxes for the taxable year 2005 and prior years, with or without
assessments duly issued, that have remained unpaid as of 31 December 2005.11 The CTA First Division ruled
that respondent complied with all the requirements of RA 9480 including the payment of the amnesty tax
and submission of all relevant documents. Having complied with all the requirements of RA 9480,
respondent is fully entitled to the immunities and privileges granted under RA 9480.12

The dispositive portion of the Decision states:

chanRoblesv irt ual Lawlib rary

WHEREFORE, premises considered, the instant Petition for Review is GRANTED. The subject assessment in
the present case against petitioner is hereby SET ASIDE solely in view of petitioner's availment of the Tax
Amnesty Program under R.A. No. 9480; and accordingly, petitioner is hereby DECLARED ENTITLED to the
immunities and privileges provided by the Tax Amnesty Law being a qualified tax amnesty applicant and for
having complied with all the documentary requirements set by law.

SO ORDERED.13
The CIR filed a Motion for Reconsideration14 on 3 December 2012 which the CTA First Division denied on 1
March 2013.15

The Decision of the CTA En Banc

On 19 May 2014, the CTA En Banc held that a qualified tax amnesty applicant who has completed the
requirements of RA 9480 shall be deemed to have fully complied with the Tax Amnesty Program. Upon
compliance with the requirements of the law, the taxpayer shall, as mandated by law, be immune from the
payment of taxes as well as appurtenant civil, criminal, or administrative penalties under the National
Internal Revenue Code. The CTA En Banc ruled that the finality of a tax assessment did not disqualify
respondent from availing of a tax amnesty under RA 9480.

The dispositive portion of the Decision states:

chanRoblesv irt ual Lawlib rary

WHEREFORE, premises considered, the Petition for Review filed by the Commissioner of Internal Revenue is
DENIED, for lack of merit. The Decision of the First Division of this Court promulgated on November 12,
2012 in CTA Case No. 781[7], captioned Philippine Aluminum Wheels, Inc. v. Commissioner of Internal
Revenue, and the Resolution of the said Division dated March 1, 2013, are AFFIRMED in toto.

SO ORDERED.16
The CIR filed a Motion for Reconsideration on 11 June 2014 which was denied on 5 January 2015.17
 The Issue

Whether respondent is entitled to the benefits of the Tax Amnesty Program under RA 9480.

The Decision of this Court

This Court denies the petition in view of the respondent's availment of the Tax Amnesty Program under RA
9480.

A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties
on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute
forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who
wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never
favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed
strictly against the taxpayer and liberally in favor of the taxing authority.18

On 24 May 2007, RA 9480, or "An Act Enhancing Revenue Administration and Collection by Granting an.
Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National Government for Taxable Year 2005
and Prior Years," became law.

The pertinent provisions of RA 9480 are: chanRoblesv irt ual Lawlib rary

Section 1. Coverage. There is hereby authorized and granted a tax amnesty which shall cover all national
internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly
issued therefor, that have remained unpaid as of December 31, 2005: Provided, however, that the
amnesty hereby authorized and granted shall not cover persons or cases enumerated under Section 8
hereof.

xxxx

Section 6. Immunities and Privileges. Those who availed themselves of the tax amnesty under Section 5
hereof, and have fully complied with all its conditions shall be entitled to the following immunities and
privileges: chanRoble svi rtual Lawli bra ry

(a) The taxpayer shall be immune from the' payment of taxes, as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as
amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior
years.

x x x x (Emphasis supplied)
The Department of Finance issued DOF Department Order No. 29-07 (DO 29-07).19 Section 6 of DO 29-07
provides for the method for availing a tax amnesty under RA 9480, to wit: chanRoblesv irt ual Lawlib rary

Section 6. Method of Availment of Tax Amnesty.

1. Forms/Documents to be filed. To avail of the general tax amnesty, concerned taxpayers shall file the
following documents/requirements:

a. Notice of Availment in such forms as may be prescribed by the BIR;

b. Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in such forms, as may be
prescribed by the BIR;

c. Tax Amnesty Return in such forms as may be prescribed by the BIR.

2. x x x.

3. x x x.

The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be
submitted to the RDO, which shall be received only after complete payment. The completion of these
requirements shall be deemed full compliance with the provisions of RA 9480.

x x x x (Emphasis supplied)
In Philippine Banking Corporation v. Commissioner of Internal Revenue,20 this Court held that the taxpayer's
completion of the requirements under RA 9480, as implemented by DO 29-07, will extinguish the taxpayer's
tax liability, additions and all appurtenant civil, criminal, or administrative penalties under the National
Internal Revenue Code, to wit: chanRob lesvi rtua lLawl ibra ry

Considering that the completion of these requirements shall be deemed full compliance with the tax amnesty
program, the law mandates that the taxpayer shall thereafter be immune from the payment of taxes, and
additions thereto, as well as the appurtenant civil, criminal or administrative penalties under the NIRC of
1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005
and prior years.21
Similarly, in Metropolitan Bank and Trust Company (Metrobank) v. Commissioner of Internal Revenue,22this
Court sustained the validity of Metrobank's tax amnesty upon full compliance with the requirements of RA
9480. This Court ruled: "Therefore, by virtue of the availment by Metrobank of the Tax Amnesty Program
under Republic Act No. 9480, it is already immune from the payment of taxes, including DST on the UNISA
for 1999, as well as the addition thereto."23

On 19 September 2007, respondent availed of the Tax Amnesty Program under RA 9480, as implemented
by DO 29-07. Respondent submitted its Notice of Availment, Tax Amnesty Return, Statement of Assets,
Liabilities and Net Worth, and comparative financial statements for 2005 and 2006. Respondent paid the
amnesty tax to the Development Bank of the Philippines, evidenced by its Tax Payment Deposit Slip dated
21 September 2007. Respondent's completion of the requirements of the Tax Amnesty Program under RA
9480 is sufficient to extinguish its tax liability under the FDDA of the BIR.

In Asia International Auctioneers, Inc. v. Commissioner of Internal Revenue,24 this Court ruled that the tax
liability of Asia International Auctioneers, Inc. was fully settled when it was able to avail of the Tax Amnesty
Program under RA 9480 in February 2008 while its Petition for Review was pending before this Court. This
Court declared the pending case involving the tax liability of Asia International Auctioneers, Inc. moot since
the company's compliance with the Tax Amnesty Program under RA 9480 extinguished the company's
outstanding deficiency taxes.

The CIR contends that respondent is disqualified to avail of the tax amnesty under RA 9480. The CIR asserts
that the finality of its assessment, particularly its FDDA is equivalent to a final and executory judgment by
the courts, falling within the exceptions to the Tax Amnesty Program under Section 8 of RA 9480, which
states:chanRoblesvi rtua lLawl ibrary

Section 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the following
persons or cases existing as of the effectivity of this Act:

(a) Withholding agents with respect to their withholding tax liabilities;

(b) Those with pending cases falling under the jurisdiction of the Presidential Commission on Good
Government;

(c) Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft
and Corrupt Practices Act;

(d) Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;

(e) Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X
of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and
transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the
Revised Penal Code; and

(f) Tax cases subject of final and executory judgment by the courts. (Emphasis supplied)
The CIR is wrong. Section 8(f) is clear: only persons with "tax cases subject of final and executory judgment
by the courts" are disqualified to avail of the Tax Amnesty Program under RA 9480. There must be a
judgment promulgated by a court and the judgment must have become final and executory. Obviously,
there is none in this case. The FDDA issued by the BIR is not a tax case "subject to a final and
executory judgment by the courts" as contemplated by Section 8(f) of RA 9480. The determination
of the tax liability of respondent has not reached finality and is still not subject to an executory judgment by
the courts as it is the issue pending before this Court. In fact, in Metrobank, this Court held that the FDDA
issued by the BIR was not a final and executory judgment and did not prevent Metrobank from availing of
the immunities and privileges granted under RA 9480, to wit: chanRob lesvi rtua lLawl ibra ry
x x x. As argued by Metrobank, the very fact that the instant case is still subject of the present proceedings
is proof enough that it has not reached a final and executory stage as to be barred from the tax amnesty
under Republic Act No. 9480.

The assertion of the CIR that deficiency DST is not covered by the Tax Amnesty Program under Republic Act
No. 9480 is downright specious.25
The CIR alleges that respondent is disqualified to avail of the Tax Amnesty Program under Revenue
Memorandum Circular No. 19-2008 (RMC No. 19-2008) dated 22 February 2008 issued by the BIR which
includes "delinquent accounts or accounts receivable considered as assets by the BIR or the Government,
including self-assessed tax" as disqualifications to avail of the Tax Amnesty Program under RA 9480. The
exception of delinquent accounts or accounts receivable by the BIR under RMC No. 19-2008 cannot amend
RA 9480. As a rule, executive issuances including implementing rules and regulations cannot amend a
statute passed by Congress.

In National Tobacco Administration v. Commission on Audit,26 this Court held that in case there is a
discrepancy between the law and a regulation issued to implement the law, the law prevails because the rule
or regulation cannot go beyond the terms and provisions of the law, to wit: "[t]he Circular cannot extend the
law or expand its coverage as the power to amend or repeal a statute is vested with the legislature." To give
effect to the exception under RMC No. 19-2008 of delinquent accounts or accounts receivable by the BIR, as
interpreted by the BIR, would unlawfully create a new exception for availing of the Tax Amnesty Program
under RA 9480.

WHEREFORE, we DENY the petition. We AFFIRM the 19 May 2014 Decision and the 5 January 2015
Resolution of the Court of Tax Appeals En Banc in CTA EB No. 994.

SO ORDERED.

FIRST DIVISION

G.R. No. 185115, February 18, 2015

NORTHERN MINDANAO POWER CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondents.

DECISION

SERENO, C.J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure filed by
Northern Mindanao Power Corporation (petitioner). The Petition assails the Decision2 dated 18 July 2008 and
Resolution3 dated 27 October 2008 issued by the Court of Tax Appeals En Banc (CTA En Banc) in C.T.A. EB
No. 312.

The Facts

Petitioner is engaged in the production sale of electricity as an independent power producer and sells
electricity to National Power Corporation (NPC). It allegedly incurred input value-added tax (VAT) on its
domestic purchases of goods and services that were used in its production and sale of electricity to NPC. For
the 3rd and the 4th quarters of taxable year 1999, petitioner’s input VAT totaled to P2,490,960.29, while that
incurred for all the quarters of taxable year 2000 amounted to
P3,920,932.55.4 chanroble svirtuallaw lib rary

Petitioner filed an administrative claim for a refund on 20 June 2000 for the 3rd and the 4th quarters of
taxable year 1999, and on 25 July 2001 for taxable year 2000 in the sum of P6,411,892.84.5 chanroblesvirtuallawlibrary

Thereafter, alleging inaction of respondent on these administrative claims, petitioner filed a Petition6 with
the CTA on 28 September 2001.

The CTA First Division denied the Petition and the subsequent Motion for Reconsideration for lack of merit.
The Court in Division found that the term “zero-rated” was not imprinted on the receipts or invoices
presented by petitioner in violation of Section 4.108-1 of Revenue Regulations No. 7-95. Petitioner failed to
substantiate its claim for a refund and to strictly comply with the invoicing requirements of the law and tax
regulations.7 In his Concurring and Dissenting Opinion, however, then Presiding Justice Ernesto D. Acosta
opined that the Tax Code does not require that the word “zero-rated” be imprinted on the face of the receipt
or invoice. He further pointed out that the absence of that term did not affect the admissibility and
competence of the receipt or invoice as evidence to support the claim for a refund.8 chanroblesvi rtual lawlib rary

On appeal to the CTA En Banc, the Petition was likewise denied. The court ruled that for every sale of
services, VAT shall be computed on the basis of gross receipts indicated on the official receipt. Official
receipts are proofs of sale of services and cannot be interchanged with sales invoices as the latter are used
for the sale of goods. Further, the requirement of issuing duly registered VAT official receipts with the term
“zero-rated” imprinted is mandatory under the law and cannot be substituted, especially for input VAT
refund purposes. Then Presiding Justice Acosta maintained his dissent.

Hence, this appeal before us.

Issues

Petitioner’s appeal is anchored on the following grounds: chanRoble svirtual Lawli bra ry

Section 4.108-1 of Revenue Regulations (RR) No. 7-95 which expanded the statutory requirements for the
issuance of official receipts and invoices found in Section 113 of the 1997 Tax Code by providing for the
additional requirement of the imprinting of the terms “zero-rated” is unconstitutional.

Company invoices are sufficient to establish the actual amount of sale of electric power services to the
National Power Corporation and therefore sufficient to substantiate Petitioner’s claim for refund.9
The Court’s Ruling

To start with, this Court finds it appropriate to first determine the timeliness of petitioner’s judicial claim in
order to determine whether the tax court properly acquired jurisdiction, although the matter was never
raised as an issue by the parties. Well-settled is the rule that the issue of jurisdiction over the subject
matter may, at any time, be raised by the parties or considered by the Court motu proprio.10 Therefore, the
jurisdiction of the CTA over petitioner’s appeal may still be considered and determined by this Court.

Section 112 of the National Internal Revenue Code (NIRC) of 1997 laid down the manner in which the
refund or credit of input tax may be made. For a VAT-registered person whose sales are zero-rated or
effectively zero-rated, Section 112(A) specifically provides for a two-year prescriptive period after the close
of the taxable quarter when the sales were made within which such taxpayer may apply for the issuance of
a tax credit certificate or refund of creditable input tax. In the consolidated tax cases Commissioner of
Internal Revenue v. San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of Internal
Revenue, and Philex Mining Corporation v. Commissioner of Internal Revenue11(hereby collectively referred
to as San Roque), the Court clarified that the two-year period refers to the filing of an administrative claim
with the BIR.

In this case, petitioner had until 30 September 2001 and 31 December 2001 for the claims covering the
3rd and the 4th quarters of taxable year 1999; and 31 March, 30 June, 30 September and 31 December in
2002 for the claims covering all four quarters of taxable year 2000 - or the close of the taxable quarter
when the zero-rated sales were made - within which to file its administrative claim for a refund. On this
note, we find that petitioner had sufficiently complied with the two-year prescriptive period when it filed its
administrative claim for a refund on 20 June 2000 covering the 3rd and the 4th quarters of taxable year 1999
and on 25 July 2001 covering all the quarters of taxable year 2000.

Pursuant to Section 112(D) of the NIRC of 1997, respondent had one hundred twenty (120) days from the
date of submission of complete documents in support of the application within which to decide on the
administrative claim. The burden of proving entitlement to a tax refund is on the taxpayer. Absent any
evidence to the contrary, it is presumed that in order to discharge its burden, petitioner attached to its
applications complete supporting documents necessary to prove its entitlement to a refund.12 Thus, the 120-
day period for the CIR to act on the administrative claim commenced on 20 June 2000 and 25 July 2001.

As laid down in San Roque, judicial claims filed from 1 January 1998 until the present should strictly adhere
to the 120+30-day period referred to in Section 112 of the NIRC of 1997. The only exception is the period
10 December 2003 until 6 October 2010. Within this period, BIR Ruling No. DA-489-03 is recognized as an
equitable estoppel, during which judicial claims may be filed even before the expiration of the 120-day
period granted to the CIR to decide on a claim for a refund.

For the claims covering the 3rd and the 4th quarters of taxable year 1999 and all the quarters of taxable year
2000, petitioner filed a Petition with the CTA on 28 September 2001.

Both judicial claims must be disallowed.

a) Claim for a refund of input VAT covering the 3rd and the 4th quarters of taxable year 1999

Counting 120 days from 20 June 2000, the CIR had until 18 October 2000 within which to decide on the
claim of petitioner for an input VAT refund attributable to its zero-rated sales for the period covering the
3rd and the 4th quarters of taxable year 1999. If after the expiration of that period respondent still failed to
act on the administrative claim, petitioner could elevate the matter to the court within 30 days or until 17
November 2000.

Petitioner belatedly filed its judicial claim with the CTA on 28 September 2001. Just like in Philex, this was a
case of late filing. The Court explained thus: chanRob lesvi rtual Lawli bra ry

Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing. Philex did not
file any petition with the CTA within the 120-day period. Philex did not also file any petition with the CTA
within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long after the
expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event,
whether governed by jurisprudence before, during, or after the Atlas case, Philex’s judicial claim
will have to be rejected because of late filing. Whether the two-year prescriptive period is counted from
the date of payment of the output VAT following the Atlas doctrine, or from the close of the taxable quarter
when the sales attributable to the input VAT were made following the Mirant and Aichi doctrines, Philex’s
judicial claim was indisputably filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inactionof the
Commissioner on Philex’s claim during the 120-day period is, by express provision of law, “deemed a denial”
of Philex’s claim. Philex had 30 days from the expiration of the 120-day period to file its judicial claim with
the CTA. Philex’s failure to do so rendered the “deemed a denial” decision of the Commissioner final and
inappealable. The right to appeal to the CTA from a decision or “deemed a denial” decision of the
Commissioner is merely a statutory privilege, not a constitutional right. The exercise of such statutory
privilege requires strict compliance with the conditions attached by the statute for its exercise. Philex failed
to comply with the statutory conditions and must thus bear the consequences.

xxxx

Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed very late filing.
BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means non-exhaustion of the
120-day period for the Commissioner to act on an administrative claim. Philex cannot claim the benefit of
BIR Ruling No. DA-489-03 because Philex did not file its judicial claim prematurely but filed it long after the
lapse of the 30-day period following the expiration of the 120-day period. In fact, Philex filed its
judicial claim 426 days after the lapse of the 30-day period.13 (Emphasis in the original)
Petitioner’s claim for the 3rd and the 4th quarters of taxable year 1999 was filed 319 days after the expiration
of the 30-day period. To reiterate, the right to appeal is a mere statutory privilege that requires strict
compliance with the conditions attached by the statute for its exercise. Like Philex, petitioner failed to
comply with the statutory conditions and must therefore bear the consequences. It already lost its right to
claim a refund or credit of its alleged excess input VAT attributable to zero-rated or effectively zero-rated
sales for the 3rd and the 4th quarters of taxable year 1999 by virtue of its own failure to observe the
prescriptive periods.

b) Claim for the refund of input VAT covering all quarters of taxable year 2000

For the year 2000, petitioner timely filed its administrative claim on 25 July 2001within the two-year period
from the close of the taxable quarter when the zero-rated sales were made. Pursuant to Section 112(D) of
the NIRC of 1997, respondent had 120 days or until 22 November 2001 within which to act on petitioner’s
claim. It is only when respondent failed to act on the claim after the expiration of that period that petitioner
could elevate the matter to the tax court.

Records show, however, that petitioner filed its Petition with the CTA on 28 September 2001 without waiting
for the expiration of the 120-day period. Barely 64 days had lapsed when the judicial claim was filed with
the CTA. The Court in San Roque has already settled that failure of the petitioner to observe the mandatory
120-day period is fatal to its judicial claim and renders the CTA devoid of jurisdiction over that claim. On
28 September 2001 – the date on which petitioner filed its judicial claim for the period covering taxable year
2000 - the 120+30 day mandatory period was already in the law and BIR Ruling No. DA-489-03 had not yet
been issued. Considering this fact, petitioner did not have an excuse for not observing the 120+30 day
period. Again, as enunciated in San Roque, it is only the period between 10 December 2003 and 6 October
2010 that the 120-day period may not be observed. While the ponente had disagreed with the majority
ruling in San Roque, the latter is now the judicial doctrine that will govern like cases.

The judicial claim was thus prematurely filed for failure of petitioner to observe the 120-day waiting period.
The CTA therefore did not acquire jurisdiction over the claim for a refund of input VAT for all the quarters of
taxable year 2000.

In addition, the issue of the requirement of imprinting the word “zero-rated” has already been settled by this
Court in a number of cases. In Western Mindanao Power Corporation v. CIR,14 we ruled: chanRob lesvi rtua lLawl ibra ry

RR 7-95, which took effect on 1 January 1996, proceeds from the rule-making authority granted to the
Secretary of Finance by the NIRC for the efficient enforcement of the same Tax Code and its amendments.
In Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue,
we ruled that this provision is “reasonable and is in accord with the efficient collection of VAT from the
covered sales of goods and services.” Moreover, we have held in Kepco Philippines Corporation v.
Commissioner of Internal Revenue that the subsequent incorporation of Section 4.108-1 of RR 7-95 in
Section 113 (B) (2) (c) of R.A. 9337 actually confirmed the validity of the imprinting requirement on VAT
invoices or official receipts – a case falling under the principle of legislative approval of administrative
interpretation by reenactment.

In fact, this Court has consistently held as fatal the failure to print the word “zero-rated” on the VAT invoices
or official receipts in claims for a refund or credit of input VAT on zero-rated sales, even if the claims were
made prior to the effectivity of R.A. 9337. Clearly then, the present Petition must be denied. c ralawred

Finally, as regards the sufficiency of a company invoice to prove the sales of services to NPC, we find this
claim is without sufficient legal basis. Section 113 of the NIRC of 1997 provides that a VAT invoice is
necessary for every sale, barter or exchange of goods or properties, while a VAT official receipt properly
pertains to every lease of goods or properties; as well as to every sale, barter or exchange of services.

The Court has in fact distinguished an invoice from a receipt in Commissioner of Internal Revenue v. Manila
Mining Corporation:15
A “sales or commercial invoice” is a written account of goods sold or services rendered indicating the prices
charged therefor or a list by whatever name it is known which is used in the ordinary course of business
evidencing sale and transfer or agreement to sell or transfer goods and services.

A “receipt” on the other hand is a written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client or
customer. cralawred

A VAT invoice is the seller’s best proof of the sale of goods or services to the buyer, while a VAT receipt is
the buyer’s best evidence of the payment of goods or services received from the seller. A VAT invoice and a
VAT receipt should not be confused and made to refer to one and the same thing. Certainly, neither does
the law intend the two to be used alternatively.16chan roble svi rtual lawlib rary

WHEREFORE, premises considered, the instant Petition is DENIED.

SO ORDERED.
 FIRST DIVISION

G.R. No. 172509, February 04, 2015

CHINA BANKING CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

DECISION

SERENO, C.J.:

This Rule 45 Petition1 requires this Court to address the question of prescription of the government’s right to
collect taxes. Petitioner China Banking Corporation (CBC) assails the Decision2 and Resolution3 of the Court
of Tax Appeals (CTA) En Banc in CTA En Banc Case No. 109. The CTA En Banc affirmed the Decision4 in CTA
Case No. 6379 of the CTA Second Division, which had also affirmed the validity of Assessment No. FAS-5-
82/85-89-000586 and FAS-5-86-89-00587. The Assessment required petitioner CBC to pay the amount of
P11,383,165.50, plus increments accruing thereto, as deficiency documentary stamp tax (DST) for the
taxable years 1982 to 1986. cralawred

FACTS

Petitioner CBC is a universal bank duly organized and existing under the laws of the Philippines. For the
taxable years 1982 to 1986, CBC was engaged in transactions involving sales of foreign exchange to the
Central Bank of the Philippines (now Bangko Sentral ng Pilipinas), commonly known as SWAP
transactions.5 Petitioner did not file tax returns or pay tax on the SWAP transactions for those taxable years.

On 19 April 1989, petitioner CBC received an assessment from the Bureau of Internal Revenue (BIR) finding
CBC liable for deficiency DST on the sales of foreign bills of exchange to the Central Bank. The deficiency
DST was computed as follows: chan roblesv irt uallawl ibra ry

Deficiency Documentary Stamp Tax

Amount
For the years 1982 to 1985 P 8,280,696.00
For calendar year 1986 P 2,481 ,975.60
Add : Surcharge P 620,493.90 P 3,102.469.50
P11 ,383,165.506
On 8 May 1989, petitioner CBC, through its vice-president, sent a letter of protest to the BIR. CBC raised the
following defenses: (1) double taxation, as the bank had previously paid the DST on all its transactions
involving sales of foreign bills of exchange to the Central Bank; (2) absence of liability, as the liability for the
DST in a sale of foreign exchange through telegraphic transfers to the Central Bank falls on the buyer ? in
this case, the Central Bank; (3) due process violation, as the bank’s records were never formally examined
by the BIR examiners; (4) validity of the assessment, as it did not include the factual basis therefore;
(5) exemption, as neither the tax-exempt entity nor the other party was liable for the payment of DST
before the effectivity of Presidential Decree Nos. (PD) 1177 and 1931 for the years 1982 to 1986.7 In the
protest, the taxpayer requested a reinvestigation so as to substantiate its assertions.8 chanRoblesv irtual Lawlib rary

On 6 December 2001, more than 12 years after the filing of the protest, the Commissioner of Internal
Revenue (CIR) rendered a decision reiterating the deficiency DST assessment and ordered the payment
thereof plus increments within 30 days from receipt of the Decision.9 chanRob lesvi rtual Lawl ibra ry
On 18 January 2002, CBC filed a Petition for Review with the CTA. On 11 March 2002, the CIR filed an
Answer with a demand for CBC to pay the assessed DST.10 chanRoble svirtual Lawlib ra ry

On 23 February 2005, and after trial on the merits, the CTA Second Division denied the Petition of CBC. The
CTA ruled that a SWAP arrangement should be treated as a telegraphic transfer subject to documentary
stamp tax.11chanRoblesvi rt ual Lawlib rary

On 30 March 2005, petitioner CBC filed a Motion for Reconsideration, but it was denied in a Resolution dated
14 July 2005.

On 5 August 2005, petitioner appealed to the CTA En Banc. The appellate tax court, however, dismissed the
Petition for Review in a Decision dated 1 December 2005. CBC filed a Motion for Reconsideration on 21
December 2005, but it was denied in a 20 March 2006 Resolution.

The taxpayer now comes to this Court with a Rule 45 Petition, reiterating the arguments it raised at the CTA
level and invoking for the first time the argument of prescription. Petitioner CBC states that the government
has three years from 19 April 1989, the date the former received the assessment of the CIR, to collect the
tax. Within that time frame, however, neither a warrant of distraint or levy was issued, nor a collection case
filed in court.

On 17 October 2006, respondent CIR submitted its Comment in compliance with the Court’s Resolution
dated 26 June 2006.12 The Comment did not have any discussion on the question of prescription.

On 21 February 2007, the Court issued a Resolution directing the parties to file their respective Memoranda.
Petitioner CBC filed its Memorandum13 on 26 April 2007. The CIR, on the other hand, filed on 17 April 2007
a Manifestation stating that it was adopting the allegations and authorities in its Comment in lieu of the
required Memorandum.14 cha nRoblesvi rtua lLaw lib rary

ISSUE

Given the facts and the arguments raised in this case, the resolution of this case hinges on this issue:
whether the right of the BIR to collect the assessed DST from CBC is barred by prescription.15 c hanRoblesv irtual Lawlib rary

RULING OF THE COURT

We grant the Petition on the ground that the right of the BIR to collect the assessed DST is barred by the
statute of limitations.

Prescription Has Set In.

To recall, the Bureau of Internal Revenue (BIR) issued the assessment for deficiency DST on 19 April 1989,
when the applicable rule was Section 319(c) of the National Internal Revenue Code of 1977, as amended.16
In that provision, the time limit for the government to collect the assessed tax is set at three years, to be
reckoned from the date when the BIR mails/releases/sends the assessment notice to the taxpayer. Further,
Section 319(c) states that the assessed tax must be collected by distraint or levy and/or court proceeding
within the three-year period.

With these rules in mind, we shall now determine whether the claim of the BIR is barred by time.

In this case, the records do not show when the assessment notice was mailed, released or sent to CBC.
Nevertheless, the latest possible date that the BIR could have released, mailed or sent the assessment
notice was on the same date that CBC received it, 19 April 1989. Assuming therefore that 19 April 1989 is
the reckoning date, the BIR had three years to collect the assessed DST. However, the records of this case
show that there was neither a warrant of distraint or levy served on CBC's properties nor a collection case
filed in court by the BIR within the three-year period.

The attempt of the BIR to collect the tax through its Answer with a demand for CBC to pay the assessed DST
in the CTA on 11 March 2002 did not comply with Section 319(c) of the 1977 Tax Code, as amended. The
demand was made almost thirteen years from the date from which the prescriptive period is to be
reckoned. Thus, the attempt to collect the tax was made way beyond the three-year prescriptive period.
The BIR’s Answer in the case filed before the CTA could not, by any means, have qualified as a collection
case as required by law. Under the rule prevailing at the time the BIR filed its Answer, the regular courts,
and not the CTA, had jurisdiction over judicial actions for collection of internal revenue taxes. It was only on
23 April 2004, when Republic Act Number 9282 took effect,17 that the jurisdiction of the CTA was expanded
to include, among others, original jurisdiction over collection cases in which the principal amount involved is
one million pesos or more.

Consequently, the claim of the CIR for deficiency DST from petitioner is forever lost, as it is now barred by
time. This Court has no other option but to dismiss the present case.

The running of the statute of

limitations was not suspended
by the request for reinvestigation.

The fact that the taxpayer in this case may have requested a reinvestigation did not toll the running of the
three-year prescriptive period. Section 320 of the 1977 Tax Code states: chanroble svirtuallaw lib rary

Sec. 320. Suspension of running of statute.—The running of the statute of limitations provided in Sections
318 or 319 on the making of assessment and the beginning of distraint or levy or a proceeding in court for
collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty
days thereafter; when the taxpayer requests for a re-investigation which is granted by the
Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, That if the taxpayer informs the Commissioner of any
change in address, the running of the statute of limitations will not be suspended; when the warrant of
distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be located; and when the taxpayer is out of the
Philippines. (Emphasis supplied)

The provision is clear. A request for reinvestigation alone will not suspend the statute of limitations. Two
things must concur: there must be a request for reinvestigation and the CIR must have granted it. BPI v.
Commissioner of Internal Revenue18 emphasized this rule by stating: chanro blesvi rt uallawl ibra ry

In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested for a thorough
reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal Revenue
all the [evidence] he had for such purpose; yet, the Collector ignored the request, and the records and
documents were not at all examined. Considering the given facts, this Court pronounced that—
x x x. The act of requesting a reinvestigation alone does not suspend the period. The request
should first be granted, in order to effect suspension. (Collector v. Suyoc Consolidated, supra; also
Republic v. Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit
his evidence, which the latter did one day before. There were no impediments on the part of the Collector to
file the collection case from April 1, 1949 x x x.
In Republic of the Philippines v. Acebedo, this Court similarly found that —
. . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a
reinvestigation thereof on October 11, 1949 (Exh. “A”). There is no evidence that this request was
considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a
warrant of distraint and levy for the full amount of the assessment (Exh. “D”), but there was follow-up of
this warrant. Consequently, the request for reinvestigation did not suspend the running of the period for
filing an action for collection. (Emphasis in the original)
The Court went on to declare that the burden of proof that the request for reinvestigation had been actually
granted shall be on the CIR. Such grant may be expressed in its communications with the taxpayer or
implied from the action of the CIR or his authorized representative in response to the request for
reinvestigation.

There is nothing in the records of this case which indicates, expressly or impliedly, that the CIR had granted
the request for reinvestigation filed by BPI. What is reflected in the records is the piercing silence and
inaction of the CIR on the request for reinvestigation, as he considered BPI's letters of protest to be.

In the present case, there is no showing from the records that the CIR ever granted the request for
reinvestigation filed by CBC. That being the case, it cannot be said that the running of the three-year
prescriptive period was effectively suspended.
Failure to raise prescription at the
administrative level/lower court as a
defense is of no moment.
When the pleadings or the evidence on record
show that the claim is barred by prescription,
the court must dismiss the claim even if prescription
is not raised as a defense.

We note that petitioner has raised the issue of prescription for the first time only before this Court. While we
are mindful of the established rule of remedial law that the defense of prescription must be raised at the trial
court that has also been applied for tax cases.19 Thus, as a rule, the failure to raise the defense of
prescription at the administrative level prevents the taxpayer from raising it at the appeal stage.

This rule, however, is not absolute.

The facts of the present case are substantially identical to those in the 2014 case, Bank of the Philippine
Islands (BPI) v. Commissioner of Internal Revenue.20 In that case, petitioner received an assessment notice
from the BIR for deficiency DST based on petitioner’s SWAP transactions for the year 1985 on 16 June 1989.
On 23 June 1989, BPI, through its counsel, filed a protest requesting the reinvestigation and/or
reconsideration of the assessment for lack of legal or factual bases. Almost ten years later, the CIR, in a
letter dated 4 August 1998, denied the protest. On 4 January 1999, BPI filed a Petition for Review with the
CTA. On 23 February 1999, the CIR filed an Answer with a demand for BPI to pay the assessed DST. It was
only when the case ultimately reached this Court that the issue of prescription was brought up.
Nevertheless, the Court ruled that the CIR could no longer collect the assessed tax due to prescription.
Basing its ruling on Section 1, Rule 9 of the Rules of Court and on jurisprudence, the Court held as
follows:cha nro blesvi rtua llawli bra ry

In a Resolution dated 5 August 2013, the Court, through the Third Division, found that the assailed tax
assessment may be invalidated because the statute of limitations on the collection of the alleged deficiency
DST had already expired, conformably with Section 1, Rule 9 of the Rules of Court and the Bank of the
Philippine Islands v. Commissioner of Internal Revenue decision. However, to afford due process, the Court
required both BPI and CIR to submit their respective comments on the issue of prescription.

Only the CIR filed his comment on 9 December 2013. In his Comment, the CIR argues that the issue of
prescription cannot be raised for the first time on appeal. The CIR further alleges that even assuming that
the issue of prescription can be raised, the protest letter interrupted the prescriptive period to collect the
assessed DST, unlike in the Bank of the Philippine Islands case.

xxxx

We deny the right of the BIR to collect the assessed DST on the ground of prescription.

Section 1, Rule 9 of the Rules of Court expressly provides that: ChanRoblesVi rtua lawlib rary

Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded either in a motion to
dismiss or in the answer are deemed waived. However, when it appears from the pleadings or the
evidence on record that the court has no jurisdiction over the subject matter, that there is another action
pending between the same parties for the same cause, or that the action is barred by prior judgment or by
the statute of limitations, the court shall dismiss the claim.
If the pleadings or the evidence on record show that the claim is barred by prescription, the
court is mandated to dismiss the claim even if prescription is not raised as a defense. In Heirs of
Valientes v. Ramas, we ruled that the CA may motu proprio dismiss the case on the ground of prescription
despite failure to raise this ground on appeal. The court is imbued with sufficient discretion to review
matters, not otherwise assigned as errors on appeal, if it finds that their consideration is necessary in
arriving at a complete and just resolution of the case. More so, when the provisions on prescription were
enacted to benefit and protect taxpayers from investigation after a reasonable period of time.

Thus, we proceed to determine whether the period to collect the assessed DST for the year 1985 has
prescribed.

To determine prescription, what is essential only is that the facts demonstrating the lapse of the prescriptive
period were sufficiently and satisfactorily apparent on the record either in the allegations of the plaintiff’s
complaint, or otherwise established by the evidence. Under the then applicable Section 319(c) [now, 222(c)]
of the National Internal Revenue Code (NIRC) of 1977, as amended, any internal revenue tax which has
been assessed within the period of limitation may be collected by distraint or levy, and/or court proceeding
within three years following the assessment of the tax. The assessment of the tax is deemed made and the
three-year period for collection of the assessed tax begins to run on the date the assessment notice had
been released, mailed or sent by the BIR to the taxpayer.

In the present case, although there was no allegation as to when the assessment notice had been released,
mailed or sent to BPI, still, the latest date that the BIR could have released, mailed or sent the assessment
notice was on the date BPI received the same on 16 June 1989. Counting the three-year prescriptive period
from 16 June 1989, the BIR had until 15 June 1992 to collect the assessed DST. But despite the lapse of 15
June 1992, the evidence established that there was no warrant of distraint or levy served on BPI’s
properties, or any judicial proceedings initiated by the BIR.

The earliest attempt of the BIR to collect the tax was when it filed its answer in the CTA on 23 February
1999, which was several years beyond the three-year prescriptive period. However, the BIR’s answer in the
CTA was not the collection case contemplated by the law. Before 2004 or the year Republic Act No. 9282
took effect, the judicial action to collect internal revenue taxes fell under the jurisdiction of the regular trial
courts, and not the CTA. Evidently, prescription has set in to bar the collection of the assessed DST.
(Emphasis supplied)

BPI thus provides an exception to the rule against raising the defense of prescription for the first time on
appeal: the exception arises when the pleadings or the evidence on record show that the claim is
barred by prescription.

In this case, the fact that the claim of the government is time-barred is a matter of record. As can be seen
from the previous discussion on the determination of the prescription of the right of the government to claim
deficiency DST, the conclusion that prescription has set in was arrived at using the evidence on record. The
date of receipt of the assessment notice was not disputed, and the date of the attempt to collect was
determined by merely checking the records as to when the Answer of the CIR containing the demand to pay
the tax was filed.

Estoppel or waiver prevents the government

from invoking the rule against raising the
issue of prescription for the first time on appeal.

In this case, petitioner may have raised the question of prescription only on appeal to this Court. The BIR
could have crushed the defense by the mere invocation of the rule against setting up the defense of
prescription only at the appeal stage. The government, however, failed to do so.

On the contrary, the BIR was silent despite having the opportunity to invoke the bar against the issue of
prescription. It is worthy of note that the Court ordered the BIR to file a Comment. The government,
however, did not offer any argument in its Comment about the issue of prescription, even if petitioner raised
it in the latter’s Petition. It merely fell silent on the issue. It was given another opportunity to meet the
challenge when this Court ordered both parties to file their respective memoranda. The CIR, however,
merely filed a Manifestation that it would no longer be filing a Memorandum and, in lieu thereof, it would be
merely adopting the arguments raised in its Comment. Its silence spoke loudly of its intent to waive its right
to object to the argument of prescription.

We are mindful of the rule in taxation that estoppel does not prevent the government from collecting taxes;
it is not bound by the mistake or negligence of its agents. The rule is based on the political law concept “the
king can do no wrong,”21 which likens a state to a king: it does not commit mistakes, and it does not sleep
on its rights. The analogy fosters inequality between the taxpayer and the government, with the balance
tilting in favor of the latter. This concept finds justification in the theory and reality that government is
necessary, and it must therefore collect taxes if it is to survive. Thus, the mistake or negligence of
government officials should not bind the state, lest it bring harm to the government and ultimately the
people, in whom sovereignty resides.22 c hanRoblesv irt ual Lawlib rary

Republic v. Ker & Co. Ltd.23 involved a collection case for a final and executory assessment. The taxpayer
nevertheless raised the prescription of the right to assess the tax as a defense before the Court of First
Instance. The Republic, instead of objecting to the invocation of prescription as a defense by the taxpayer,
litigated on the issue and thereafter submitted it for resolution. The Supreme Court ruled for the taxpayer,
treating the actuations of the government as a waiver of the right to invoke the defense of
prescription. Ker effectively applied to the government the rule of estoppel. Indeed, the no-estoppel rule is
not absolute.

The same ingredients in Ker - procedural matter and injustice - obtain in this case. The procedural matter
consists in the failure to raise the issue of prescription at the trial court/administrative level, and injustice in
the fact that the BIR has unduly delayed the assessment and collection of the DST in this case. The fact is
that it took more than 12 years for it to take steps to collect the assessed tax. The BIR definitely caused
untold prejudice to petitioner, keeping the latter in the dark for so long, as to whether it is liable for DST
and, if so, for how much. cralawred

CONCLUSION

Inasmuch as the government’s claim for deficiency DST is barred by prescription, it is no longer necessary to
dwell on the validity of the assessment. chanroble slaw

WHEREFORE, the Petition is GRANTED. The Court of Tax Appeals En Banc Decision dated 1 December
2005 and its Resolution dated 20 March 2006 in CTA EB Case No. 109 are hereby REVERSED and SET
ASIDE. A new ruling is entered DENYING respondent’s claim for deficiency DST in the amount of
P11,383,165.50.

SO ORDERED. cralawlawlibra ry

THIRD DIVISION

G.R. No. 197525, June 04, 2014

VISAYAS GEOTHERMAL POWER COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

DECISION

MENDOZA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
February 7, 2011 Decision1 and the June 27, 2011 Resolution2 of the Court of Tax Appeals En Banc (CTA En
Banc), in CTA EB Case Nos. 561 and 562, which reversed and set aside the April 17, 2009 Decision of the
CTA Second Division in CTA Case No. 7559.

The Facts:

Petitioner Visayas Geothermal Power Company (VGPC) is a special limited partnership duly organized and
existing under Philippine Laws with its principal office at Milagro, Ormoc City, Province of Leyte. It is
principally engaged in the business of power generation through geothermal energy and the sale of
generated power to the Philippine National Oil Company (PNOC), pursuant to the Energy Conversion
Agreement.

VGPC filed with the Bureau of Internal Revenue (BIR) its Original Quarterly VAT Returns for the first to
fourth quarters of taxable year 2005 on April 25, 2005, July 25, 2005, October 25, 2006, and January 20,
2006, respectively.

On December 6, 2006, it filed an administrative claim for refund for the amount of P14,160,807.95 with the
BIR District Office No. 89 of Ormoc City on the ground that it was entitled to recover excess and unutilized
input VAT payments for the four quarters of taxable year 2005, pursuant to Republic Act (R.A.) No.
9136,3 which treated sales of generated power subject to VAT to a zero percent (0%) rate starting June 26,
2001.

Nearly one month later, on January 3, 2007, while its administrative claim was pending, VGPC filed its
judicial claim via a petition for review with the CTA praying for a refund or the issuance of a tax credit
certificate in the amount of P14,160,807.95, covering the four quarters of taxable year 2005.

In its April 17, 2009 Decision, the CTA Second Division partially granted the petition as follows: ChanRobles Vi rtualaw lib rary

WHEREFORE, in view of the foregoing considerations, the Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, respondent is ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX CREDIT
CERTIFICATE in favor of petitioner the reduced amount of SEVEN MILLION SIX HUNDRED NINENTY NINE
THOUSAND THREE HUNDRED SIXTY SIX PESOS AND 37/100 (P7,699,366.37) representing unutilized input
VAT paid on domestic purchases of non-capital goods and services, services rendered by non-residents, and
importations of non-capital goods for the first to fourth quarters of taxable year 2005.

SO ORDERED.4

The CTA Second Division found that only the amount of P7,699,366.37 was duly substantiated by the
required evidence. As to the timeliness of the filing of the judicial claim, the Court ruled that following the
case of Commissioner of Internal Revenue (CIR) v. Mirant Pagbilao Corporation (Mirant),5 both the
administrative and judicial claims were filed within the two-year prescriptive period provided in Section
112(A) of the National Internal Revenue Code of 1997 (NIRC), the reckoning point of the period being the
close of the taxable quarter when the sales were made.

In its October 29, 2009 Resolution,6 the CTA Second Division denied the separate motions for partial
reconsideration filed by VGPC and the CIR. Thus, both VGPC and the CIR appealed to the CTA En Banc.

In the assailed February 7, 2011 Decision,7 the CTA En Banc reversed and set aside the decision and
resolution of the CTA Second Division, and dismissed the original petition for review for having been filed
prematurely, to wit: ChanRoble sVirt ualawli bra ry

WHEREFORE, premises considered:

i. As regards CTA EB Case No. 562, the Petition for Review is hereby DISMISSED; and

ii. As regards CTA EB Case No. 561, the Petition for Review is hereby GRANTED.

Accordingly, the Decision, dated April 17, 2009, and the Resolution, dated October 29, 2009, of the CTA
Former Second Division are hereby REVERSED and SET ASIDE, and another one is hereby entered
DISMISSING the Petition for Review filed in CTA Case No. 7559 for having been filed prematurely.

SO ORDERED.8

The CTA En Banc explained that although VGPC seasonably filed its administrative claim within the two-year
prescriptive period, its judicial claim filed with the CTA Second Division was prematurely filed under Section
112(D) of the National Internal Revenue Code (NIRC). Citing the case of CIR v. Aichi Forging Company of
Asia, Inc. (Aichi),9 the CTA En Banc held that the judicial claim filed 28 days after the petitioner filed its
administrative claim, without waiting for the expiration of the 120-day period, was premature and, thus, the
CTA acquired no jurisdiction over the case.

The VGPC filed a motion for reconsideration, but the CTA En Banc denied it in the assailed June 27, 2011
Resolution for lack of merit. It stated that the case of Atlas Consolidated Mining v. CIR (Atlas)10 relied upon
by the petitioner had long been abandoned.

Hence, this petition.

ASSIGNMENT OF ERRORS
 I

The CTA En Banc erred in finding that the 120-day and 30-day periods prescribed under Section 112(D) of
the 1997 Tax Code are jurisdictional and mandatory in the filing of the judicial claim for refund. The CTA-
Division should take cognizance of the judicial appeal as long as it is filed with the two-year prescriptive
period under Section 229 of the 1997 Tax Code.

II

The CTA En Banc erred in finding that Aichi prevails over and/or overturned the doctrine in Atlas, which
upheld the primacy of the two-year period under Section 229 of the Tax Code. The law and jurisprudence
have long established the doctrine that the taxpayer is duty-bound to observe the two-year period under
Section 229 of the Tax Code when filing its claim for refund of excess and unutilized VAT.

III

The CTA En Banc erred in finding that Respondent CIR is not estopped from questioning the jurisdiction of
the CTA. Respondent CIR, by her actions and pronouncements, should have been precluded from
questioning the jurisdiction of the CTA-Division.

IV

The CTA En Banc erred in applying Aichi to Petitioner VGPC’s claim for refund. The novel interpretation of
the law in Aichi should not be made to apply to the present case for being contrary to existing jurisprudence
at the time Petitioner VGPC filed its administrative and judicial claims for refund.11

Petitioner VGPC argues that (1) the law and jurisprudence have long established the rule regarding
compliance with the two-year prescriptive period under Section 112(D) in relation to Section 229 of the
1997 Tax Code; (2) Aichi did not overturn the doctrine in Atlas, which upheld the primacy of the two-year
period under Section 229; (3) respondent CIR is estopped from questioning the jurisdiction of the CTA
and Aichi cannot be indiscriminately applied to all VAT refund cases; (4) applying Aichi invariably to all VAT
refund cases would effectively grant respondent CIR unbridled discretion to deprive a taxpayer of the right
to effectively seek judicial recourse, which clearly violates the standards of fairness and equity; and (5) the
novel interpretation of the law in Aichi should not be made to apply to the present case for being contrary to
exisiting jurisprudence at the time VGPC filed its administrative and judicial claims for refund. Aichi should
be applied prospectively.

Ruling of the Court

Judicial claim not premature

The assignment of errors is rooted in the core issue of whether the petitioner’s judicial claim for refund was
prematurely filed.

Two sections of the NIRC are pertinent to the issue at hand, namely Section 112 (A) and (D) and Section
229, to wit:
ChanRobles Vi rtualaw lib rary

SEC. 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent
that such input tax has not been applied against output tax: Provided, however, That in the case of zero-
rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged
in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or
services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any
one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.
 xxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of submission of complete documents in
support of the application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the decision denying the claim or after
the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals.

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, of any sum alleged to have been excessively or in any manner wrongfully
collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit
or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or
credit any tax, where on the face of the return upon which payment was made, such payment appears
clearly to have been erroneously paid.

[Emphases supplied]

It has been definitively settled in the recent En Banc case of CIR v. San Roque Power Corporation (San
Roque),12 that it is Section 112 of the NIRC which applies to claims for tax credit certificates and tax refunds
arising from sales of VAT-registered persons that are zero-rated or effectively zero-rated, which are, simply
put, claims for unutilized creditable input VAT.

Thus, under Section 112(A), the taxpayer may, within 2 years after the close of the taxable quarter when
the sales were made, via an administrative claim with the CIR, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales. Under Section 112(D), the
CIR must then act on the claim within 120 days from the submission of the taxpayer’s complete documents.
In case of (a) a full or partial denial by the CIR of the claim, or (b) the CIR’s failure to act on the claim
within 120 days, the taxpayer may file a judicial claim via an appeal with the CTA of the CIR decision or
unacted claim, within 30 days (a) from receipt of the decision; or (b) after the expiration of the 120-day
period.

The 2-year period under Section 229 does not apply to appeals before the CTA in relation to
claims for a refund or tax credit for unutilized creditable input VAT. Section 229 pertains to the
recovery of taxes erroneously, illegally, or excessively collected.13San Roque stressed that “input VAT is not
‘excessively’ collected as understood under Section 229 because, at the time the input VAT is collected, the
amount paid is correct and proper.”14 It is, therefore, Section 112 which applies specifically with regard to
claiming a refund or tax credit for unutilized creditable input VAT.15
cralawred

Upholding the ruling in Aichi,16San Roque held that the 120+30 day period prescribed under Section 112(D)
mandatory and jurisdictional.17 The jurisdiction of the CTA over decisions or inaction of the CIR is only
appellate in nature and, thus, necessarily requires the prior filing of an administrative case before the CIR
under Section 112.18 The CTA can only acquire jurisdiction over a case after the CIR has rendered its
decision, or after the lapse of the period for the CIR to act, in which case such inaction is considered a
denial.19 A petition filed prior to the lapse of the 120-day period prescribed under said Section would be
premature for violating the doctrine on the exhaustion of administrative remedies.20 cra lawred

There is, however, an exception to the mandatory and jurisdictional nature of the 120+30 day period. The
Court in San Roque noted that BIR Ruling No. DA-489-03, dated December 10, 2003, expressly stated that
the “taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief
with the CTA by way of Petition for Review.”21 This BIR Ruling was recognized as a general interpretative
rule issued by the CIR under Section 422 of the NIRC and, thus, applicable to all taxpayers. Since the CIR
has exclusive and original jurisdiction to interpret tax laws, it was held that taxpayers acting in good faith
should not be made to suffer for adhering to such interpretations. Section 24623 of the Tax Code, in
consonance with equitable estoppel, expressly provides that a reversal of a BIR regulation or ruling cannot
adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal.
Hence, taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on December 10, 2003
up to its reversal by this Court in Aichi on October 6, 2010, where it was held that the 120+30 day period
was mandatory and jurisdictional.

Accordingly, the general rule is that the 120+30 day period is mandatory and jurisdictional from the
effectivity of the 1997 NIRC on January 1, 1998, up to the present. As an exception, judicial claims filed
from December 10, 2003 to October 6, 201024need not wait for the exhaustion of the 120-day period.

A review of the facts of the present case reveals that petitioner VGPC timely filed its administrative claim
with the CIR on December 6, 2006, and later, its judicial claim with the CTA on January 3, 2007. The judicial
claim was clearly filed within the period of exception and was, therefore, not premature and should not have
been dismissed by the CTA En Banc.

In the present petition, VGPC prays that the Court grant its claim for refund or the issuance of a tax credit
certificate for its unutilized input VAT in the amount of P14,160,807.95. The CTA Second Division, however,
only awarded the amount of P7,699,366.37. The petitioner has failed to present any argument to support
its entitlement to the former amount.

In any case, the Court would have been precluded from considering the same as such would require a
review of the evidence, which would constitute a question of fact outside the Court’s purview under Rule 45
of the Rules of Court. The Court, thus, finds that the petitioner is entitled to the refund awarded to it by the
CTA Second Division in the amount of P7,699,366.37.

Atlas doctrine has no relevance

to the 120+30 day period for
filing judicial claim

Although the core issue of prematurity of filing has already been resolved, the Court deems it proper to
discuss the petitioner’s argument that the doctrine in Atlas, which allegedly upheld the primacy of the 2-year
prescriptive period under Section 229, should prevail over the ruling in Aichi regarding the mandatory and
jurisdictional nature of the 120+30 day period in Section 112.

In this regard, it was thoroughly explained in San Roque that the Atlas doctrine only pertains to the
reckoning point of the 2-year prescriptive period from the date of payment of the output VAT under Section
229, and has no relevance to the 120+30 day period under Section 112, to wit: ChanRobles Vi rtua lawlib rary

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-year
prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007
until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the
reckoning of the two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlas
doctrine, the two-year prescriptive period for claiming refund or credit of input VAT should be governed by
Section 112(A) following the verba legis rule. The Mirant ruling, which abandoned the Atlas doctrine,
adopted the verba legis rule, thus applying Section 112(A) in computing the two-year prescriptive period in
claiming refund or credit of input VAT.

The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because the
application of the 120+30 day periods was not in issue in Atlas. The application of the 120+30 day periods
was first raised in Aichi, which adopted the verba legis rule in holding that the 120+30 day periods are
mandatory and jurisdictional. The language of Section 112(C) is plain, clear, and unambiguous. When
Section 112(C) states that “the Commissioner shall grant a refund or issue the tax credit within one hundred
twenty (120) days from the date of submission of complete documents,” the law clearly gives the
Commissioner 120 days within which to decide the taxpayer’s claim. Resort to the courts prior to the
expiration of the 120-day period is a patent violation of the doctrine of exhaustion of administrative
remedies, a ground for dismissing the judicial suit due to prematurity. Philippine jurisprudence is awash with
cases affirming and reiterating the doctrine of exhaustion of administrative remedies. Such doctrine is basic
and elementary.25 cralawre d
[Underscoring supplied]

Thus, Atlas is only relevant in determining when to file an administrative claim with the CIR for refund or
credit of unutilized creditable input VAT, and not for determining when to file a judicial claim with the CTA.
From June 8, 2007 to September 12, 2008, the 2-year prescriptive period to file administrative claims
should be counted from the date of payment of the output VAT tax. Before and after said period, the 2-year
prescriptive period is counted from the close of the taxable quarter when the sales were made, in
accordance with Section 112(A). In either case, the mandatory and jurisdictional 120+30 day period must
be complied with for the filing of the judicial claim with the CTA, except for the period provided under BIR
Ruling No. DA-489-03, as previously discussed.

The Court further noted that Atlas was decided in relation to the 1977 Tax Code which had not yet provided
for the 30-day period for the taxpayer to appeal to the CTA from the decision or inaction of the CIR over
claims for unutilized input VAT. Clearly then, the Atlas doctrine cannot be invoked to disregard compliance
with the 120+30 day mandatory and jurisdictional period.26 In San Roque, it was written: ChanRoble sVirtualawli bra ry

The old rule that the taxpayer may file the judicial claim, without waiting for the Commissioner’s decision if
the two-year prescriptive period is about to expire, cannot apply because that rule was adopted before the
enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old
rule, so that under the VAT System the taxpayer will always have 30 days to file the judicial claim
even if the Commissioner acts only on the 120th day, or does not act at all during the 120-day
period. With the 30-day period always available to the taxpayer, the taxpayer can no longer file a judicial
claim for refund or credit of input VAT without waiting for the Commissioner to decide until the expiration of
the 120-day period.27

At any rate, even assuming that the Atlas doctrine was relevant to the present case, it could not be applied
since it was held to be effective only from its promulgation on June 8, 2007 until its abandonment on
September 12, 2008 when Mirant was promulgated. The petitioner in this case filed both its administrative
and judicial claims outside the said period of effectivity.

Aichi not applied prospectively

Petitioner VGPC also argues that Aichi should be applied prospectively and, therefore, should not be applied
to the present case. This position cannot be given consideration.

Article 8 of the Civil Code provides that judicial decisions applying or interpreting the law shall form part of
the legal system of the Philippines and shall have the force of law. The interpretation placed upon a law by a
competent court establishes the contemporaneous legislative intent of the law. Thus, such interpretation
constitutes a part of the law as of the date the statute is enacted. It is only when a prior ruling of the Court
is overruled, and a different view adopted, that the new doctrine may have to be applied prospectively in
favor of parties who have relied on the old doctrine and have acted in good faith.28 cralawred

Considering that the nature of the 120+30 day period was first settled in Aichi, the interpretation by the
Court of its being mandatory and jurisdictional in nature retroacts to the date the NIRC was enacted. It
cannot be applied prospectively as no old doctrine was overturned.

The petitioner cannot rely either on the alleged jurisprudence prevailing at the time it filed its judicial claim.
The Court notes that the jurisprudence relied upon by the petitioner consists of CTA cases. It is elementary
that CTA decisions do not constitute precedent and do not bind this Court or the public. Only decisions of
this Court constitute binding precedents, forming part of the Philippine legal system.29 cralaw red

As regards the cases30 which were later decided allegedly in contravention of Aichi, it is of note that all of
them were decided by Divisions of this Court, and not by the Court En Banc. Any doctrine or principle of law
laid down by the Court, either rendered En Banc or in Division, may be overturned or reversed only by the
Court sitting En Banc.31 Thus, the cases cited by the petitioner could not have overturned the doctrine laid
down in Aichi.

CIR not estopped

The petitioner’s argument that the CIR should have been estopped from questioning the jurisdiction of the
CTA after actively participating in the proceedings before the CTA Second Division deserves scant
consideration.

It is a well-settled rule that the government cannot be estopped by the mistakes, errors or omissions of its
agents.32 It has been specifically held that estoppel does not apply to the government, especially on matters
of taxation. Taxes are the nation’s lifeblood through which government agencies continue to operate and
with which the State discharges its functions for the welfare of its constituents.33 Thus, the government
cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents. Upon
taxation depends the ability of the government to serve the people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes
should not be allowed to bring harm or detriment to the people.34 c ralaw red

Rules on claims for refund or tax credit of unutilized input VAT

For clarity and guidance, the Court deems it proper to outline the rules laid down in San Roque with regard
to claims for refund or tax credit of unutilized creditable input VAT. They are as follows:
ChanRobles Vi rtualaw lib rary

1. When to file an administrative claim with the CIR:

a. General rule – Section 112(A) and Mirant

Within 2 years from the close of the taxable quarter when the sales were made.

b. Exception – Atlas

Within 2 years from the date of payment of the output VAT, if the administrative claim was
filed from June 8, 2007 (promulgation of Atlas) to September 12, 2008 (promulgation
of Mirant).

2. When to file a judicial claim with the CTA:

a. General rule – Section 112(D); not Section 229

i. Within 30 days from the full or partial denial of the administrative claim by the CIR;
or

ii. Within 30 days from the expiration of the 120-day period provided to the CIR to
decide on the claim. This is mandatory and jurisdictional beginning January 1, 1998
(effectivity of 1997 NIRC).

b. Exception – BIR Ruling No. DA-489-03

The judicial claim need not await the expiration of the 120-day period, if such was filed
from December 10, 2003 (issuance of BIR Ruling No. DA-489-03) to October 6, 2010
(promulgation of Aichi).

WHEREFORE, the petition is PARTIALLY GRANTED. The February 7, 2011 Decision and the June 27, 2011
Resolution of the Court of Tax Appeals En Banc, in CTA EB Case Nos. 561 and 562 are REVERSEDand SET
ASIDE. The April 17, 2009 Decision and the October 29, 2009 Resolution of the CTA Former Second Division
in CTA Case No. 7559 are REINSTATED.

Public respondent is hereby ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX CREDIT
CERTIFICATE, in favor of the petitioner the amount of SEVEN MILLION SIX HUNDRED NINETY NINE
THOUSAND THREE HUNDRED SIXTY SIX PESOS AND 37/100 (P7,699,366.37) representing unutilized input
VAT paid on domestic purchases of non-capital goods and services, services rendered by non-residents, and
importations of non-capital goods for the first to fourth quarters of taxable year 2005.

SO ORDERED.

[G.R. No. 118176. April 12, 2000]

PROTECTOR'S SERVICES, INC., petitioner, vs. COURT OF APPEALS

AND COMMISSIONER OF INTERNAL REVENUE, respondents. Korte

DECISION

QUISUMBING, J.:

Assailed in this petition for review is the Decision of the Court of Appeals
[1]

dated November 28, 1994, in CA-G.R. SP No.31825. It affirmed the judgment

of the Court of Tax Appeals which had dismissed the petition for review of
assessments made by the Commissioner of Internal Revenue imposing
deficiency percentage taxes on petitioner for the years 1983, 1984 and 1985.
The dispositive portion of the CTA's decision states:

"WHEREFORE, in all the foregoing, this case is hereby

DISMISSED for lack of jurisdiction--the subject assessments
having become final and unappealable." [2]

The facts are as follows:

Petitioner Protector's Services, Inc. (PSI) is a contractor engaged in recruiting

security guards for clients. After an audit investigation conducted by the
Bureau of Internal Revenue (BIR), petitioner was assessed for deficiency
percentage taxes including surcharges, penalties and interests thereon, as
follows:

YEAR..........AMOUNT..........DEMAND LETTER NO.

1983..........P503,564.59..........18-452-83B-87-B2

1984........... 831,464.30..........18-451-84B-87-B2

1985..........P1,514,047.86.......18-450-85B-87-B2

On December 7, 1987, respondent Commissioner sent by registered mail,

demand letters for payment of the aforesaid assessments. However, petitioner
alleged that on December 10, 1987, it only received Demand Letter Nos. 18-
452-83B-87 -B2 and 18-451-84B-87 -B2 for the years 1983 and 1984,
respectively. It denied receiving any notice of deficiency percentage tax for the
year 1985.

Petitioner sent a protest letter dated January 02, 1988, to the BIR regarding
the 1983 and 1984 assessments. The petitioner claimed that its gross receipts
subject to percentage taxes should exclude the salaries of the security guards
as well as the corresponding employer's share of Social Security System
(SSS), State Insurance Fund (SIP) and Medicare contributions. Sclaw

Without formally acting on the petitioner's protest, the BIR sent a follow-up
letter dated July 12, 1988, ordering the settlement of taxes based on its
computation. Additional documentary stamp taxes of two thousand twenty-five
(P2,025.00) pesos on petitioner's capitalization for 1983 and 1984, and seven
hundred three pesos and forty-one centavos (P703.41) as deficiency
expanded withholding tax were included in the amount demanded. The total
unsettled tax amounted to two million, eight hundred fifty-one thousand, eight
hundred five pesos and sixteen centavos (P2,851,805.16).

On July 21, 1988, petitioner paid the P2,025.00 documentary stamp tax and
the P703.41 deficiency expanded withholding tax. On the following day, July
22, 1988, petitioner filed its second protest on the 1983 and 1984 percentage
taxes, and included, for the first time, its protest against the 1985 assessment.

On November 9, 1990, BIR Deputy Commissioner Eufracio Santos sent a

letter to the petitioner which denied with finality the latter's protests against the
subject assessments, stating thus:

"...[T]hat the salaries paid to the security guards form part of your
taxable gross receipts in the determination of the 3% and 4%
contractor's tax imposed under Section 191 of the Tax Code prior
to its amendment by the provision of Executive Order No.273.

Considering that the security guards are actually your employees

and not that of your clients, the salaries corresponding to the
services rendered by your employees form part of your taxable
receipts. This contention finds support in the case of Avecilla
Building Corporation versus Commissioner, et al., G.R. L-42395,
17 January 1985 and Resty Arbon Singh versus Commissioner,
CTA Case No.1901, 5 December 1970." [3]

On December 5, 1990, petitioner filed a petition for review before the CTA
contending that:
 1).....Assessments for documentary stamp tax and expanded
withholding tax are without basis since they were paid on July 22,
1988.

2).....The period for collection of the 1985 percentage tax had

prescribed, because PSI denied having received any assessment
letter for the same year. Sc lex

3).....Percentage taxes for the three quarters of 1984 were filed as

follows: 1st Qtr. -April 23, 1984; 2nd Qtr. -July 20, 1984, and; 3rd
Qtr. - October 19, 1984. The three-year prescriptive period to
collect percentage taxes for the 1st, 2nd and 3rd quarters had
prescribed because the BIR sent an assessment letter only on
December 10, 1987.

4).....The base amount for computing percentage tax was

erroneous because the BIR included in the taxable amount, the
salaries of the security guards and the employer's corresponding
remittances to SSS, SIF, and Medicare, which amounts were
earmarked for other persons, and should not form part of PSIs
receipts.

The CTA dismissed the petition on the following grounds: (1) The three-year
period of limitation for assessment of taxes in 1984 commenced from the date
of filing the final return on January 20, 1985, hence assessment made on
December 10, 1987, was within said period. (2) Petitioner could not deny
receipt of the 1985 assessment on the same date, December 10, 1987, for as
supported by testimony of the BIR personnel, all the assessment letters for
the years 1983, 1984, and 1985 were included in one envelope and mailed
together. (3) Petitioner's protest letter dated January 2, 1988, was filed on
January 12, 1988, or thirty-three days from December 10, 1987, hence, the
request for reinvestigation was filed out of time.

Petitioner appealed to the Court of Appeals, which affirmed the decision of the
CTA. Hence, the present petition, wherein petitioner raises the following
issues:

"I. WHETHER THE COURT OF TAX APPEALS HAS

JURISDICTION TO ACT ON THE PETITION FOR REVIEW
FILED BEFORE IT.
 II. WHETHER THE ASSESSMENTS AGAINST THE
PETITIONER FOR DEFICIENCY PERCENTAGE TAX FOR
TAXABLE YEARS 1983 AND 1984 WERE MADE AFTER THE
LAPSE OF THE PRESCRIPTIVE PERIOD.

III. WHETHER THE PERIOD FOR THE COLLECTION OF

TAXES FOR TAXABLE YEARS 1983,1984, AND 1985 HAS
ALREADY PRESCRIBED.

IV. WHETHER THE ASSESSMENTS ARE CORRECT." [4]

As to the first issue, petitioner maintains that the assessments only became
final on November 9, 1990, when the CIR denied the request for
reconsideration. Consequently, the CTA had jurisdiction over the appeal filed
by the petitioner on December 5, 1990. Furthermore, the CTA resolved that
the assessments became final after thirty days from receipt of demand letters
by the petitioner, without the latter interposing a reconsideration. x law

The pertinent provision of the National Internal Revenue Code of 1977 (NIRC
1977), concerning the period within which to file a protest before the CIR,
reads:

"Section 270. Protesting of assessment. --When the

Commissioner of Internal Revenue or his duly authorized
representative finds that proper taxes should be assessed, he
shall first notify the taxpayer of his findings. Within a period to be
prescribed by implementing regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond,
the Commissioner shall issue an assessment based on his
findings.

Such assessment may be protested administratively by filing a

request for reconsideration or reinvestigation in such form and
manner as may be prescribed by the implementing regulations
within thirty (30) days from receipt of the assessment; otherwise,
the assessment shall become final, and unappealable.

If the protest is denied in whole or in part, the individual,

association or corporation adversely affected by the decision on
the protest may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision; otherwise, the decision
shall become final, executory and demandable."
We note that indeed on December 10, 1987, petitioner received the BIR's
assessment notices. On January 12, 1988, petitioner protested the 1983 and
1984 assessments and requested for a reinvestigation. From December 10,
1987 to January 12, 1988, thirty-three days had lapsed. Thereafter petitioner
may no longer dispute the correctness of the assessments. Hence, in our
view, the CTA correctly dismissed the appeal for lack of jurisdiction.

On the second issue, petitioner argues that the government's right to assess
and collect the 1983, 1984 and 1985 taxes had already prescribed. Relying on
Batas Parnbansa (BP) Blg. 700, which reduced the period of limitation for
assessment and collection of internal revenue taxes from five to three years,
petitioner asserts that the government was barred from reviewing the 1983 tax
starting December 10, 1987, the expiry date of the three-year limit. Petitioner
insists that the reckoning period of prescription should start from the date
when the quarterly percentage taxes were paid and not when the Final Annual
Percentage Tax Return for the year was filed. Moreover, he denies having
received the 1985 tax assessment.

Petitioner's contentions lack merit. Sections one and three of BP 700, "An Act
Amending Sections 318 and 319 of the National Internal Revenue Code,
which reduced the period of limitation for assessment and collection of internal
revenue taxes from five to three years," provides: Sc

"Sec. 1, Section 318 of the National Internal Revenue Code, as

amended, is hereby amended to read as follows:

Sec. 318. Period of limitation upon assessment and

collection. --Except as provided in the succeeding
sections, internal revenue taxes shall be assessed
within three years after the last day prescribed by law
for the filing of the return, and no proceeding in court
without assessment for the collection of such taxes
shall be begun after the expiration of such
period: Provided, That in a case where a return is filed
beyond the period prescribed by law, the three-year
period shall be counted from the day the return was
filed. For the 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.

xxx
 "Sec. 3. The period of limitation herein prescribed shall apply to
assessments of internal revenue taxes beginning taxable year
1984."

B.P. 700 was approved on April 5, 1984. The three-year prescriptive period for
assessment and collection of revenue taxes applied to taxes paid beginning
1984. Clearly, the tax assessment made on December 10, 1987, for the year
1983 was still covered by the five-year statutory prescriptive period. This rule
was emphasized in Revenue Memorandum Circular (RMC) No. 33-84,
published on November 12, 1984, which defined the salient features of the
application of BP 700, to wit:

"B. Effectivity of Prescriptive Periods of Assessment and

Collection

1......Assessment made on or after April 5, 1984 (date, of approval

of BP 700) will still be governed by the original five-year period if
the taxes assessed thereby cover taxable years prior to January
1, 1984. (emphasis supplied) Scmis

Corollarily, assessments made before April 5, 1984 shall still be

governed by the original five-year period.

However, assessments made on or April 5, 1984 covering taxable

years beginning January 1, 1984 shall be under the new three-
year period."

Should the three-year limitation be reckoned at the time of the quarterly

payment of contractor's tax or at the due date of the final annual tax?

Section 2 of Revenue Regulation No.6-81, states:

"Sec. 2. Percentage tax. --In general, unless otherwise specifically

provided in the Tax Code, every person conducting business on
which a percentage tax is imposed under Chapter II Title V of the
Tax Code must render quarterly declaration on cumulative basis
of the amount of his sales, receipts or earnings or gross value of
output actually removed from the factory or near warehouse,
compute and pay the tax due thereon.

(a) Quarterly Percentage Return.--

 For each of the first three quarters of the
taxable year, the tax so computed shall
be decreased by the amount of tax
previously paid and by the sum of the tax
credits allowed under this Title for the
preceding current quarters. The tax due
shall be paid not later than twenty (20)
days following the close of each of the
first three quarters of the taxable year.

(b) Final Annual Percentage Tax Return --

On or before the twentieth day of the

second month following the close of the
taxable year, a final percentage tax return
shall be filed under BIR Form No. __
covering the entire taxable year. If the
sum of the total quarterly percentage tax
payments made for the first three quarters
and total tax credit allowable for the
taxable year are not equal to the total tax
due on the entire gross sales, receipts or
earnings or gross value of the output for
that taxable year, the taxpayer shall
either:

(1) Pay the tax still due; or Mis sc

(2) Credit to the extent allowable under

this Title, the amount of excess tax credits
shown in the final adjustment return
against the quarterly percentage tax
liabilities for the succeeding taxable
quarters."

Only recently in G.R. No.115712, Commission of Internal Revenue vs. Court

of Appeals, February 25, 1999, we held, that the three-year prescriptive period
of tax assessment of contractors tax should be computed at the time of the
filing of the "final annual percentage tax return," when it can be finally
[5]

ascertained if the taxpayer still has an unpaid tax, and not from the tentative
quarterly payments.
Turning now to petitioner's denial that he received the 1985 assessment, we
agree with the factual findings of the CTA that the assessment letter may be
presumed to have been received by petitioner. The CTA found as follows: Mis
spped

"The 1985 assessment which petitioner denied as having been

received was negated when the respondent introduced
documentary evidence showing that it was mailed by registered
mail. It was further buttressed by the testimony of witness Mr.
Arnold C. Larroza, Chief Administrative Branch Mailing Section,
Rev. Region No. 4B-1, Quezon City that the 1983, 1984 and 1985
assessments were placed in one envelope when it was mailed by
registered mail. Presumably, it was received in the regular course
of the mail. ... The facts to be proved to raise this presumption are
(a) that the letter was properly addressed with postage prepaid;
and (b) that it was mailed. Once these facts are proved, the
presumption is that the letter was received by the addressee as
soon as it could have been transmitted to him in the ordinary
course of the mails. Such being the case, this Court cannot be
made to believe that the 1985 assessment which incidentally has
a substantially greater amount involved, was not received by the
petitioner. Hence, the same assessment is also considered final
and unappealable for failure of the petitioner to protest the same
within the reglementary period provided by law." [6]

In reviewing administrative decisions, the reviewing court cannot re-examine

the factual basis and sufficiency of the evidence. The findings of fact must be
[7]

respected, so long as they are supported by substantial evidence. [8]

As a subsidiary defense, petitioner interposes the third issue claiming that

since the CIR failed, until now, to commence the collection of the 1983, 1984,
and 1985 deficiency tax, the right to collect had, likewise, prescribed.
Petitioner urges us to consider that for the government's failure to institute
collection remedies either by judicial action or by distraint and levy, the right to
collect the same has prescribed pursuant to Section 219 of the NIRC. Note,
however, that Section 271 of the 1986 Tax Code provides for the suspension
of running of the statute of limitation of tax collection, as follows: Spped

"Sec. 271. Suspension of running of statute. -- The running of the

statute of limitations provided in Sections 268 and 269 on the
making of assessment and the beginning of distraint or levy or a
proceeding in court for collection, in respect of any deficiency,
 shall be suspended for the period during which the
Commissioner is prohibited from making the assessment or
beginning distraint or levy or a proceeding in court and for
sixty days thereafter; when the taxpayer request for a
reinvestigation which is granted by the Commissioner; when the
taxpayer cannot be located in the address given by him in the
return filed upon which a tax is being assessed or
collected: Provided, That, if the taxpayer informs the
Commissioner of any change in address, the running of the
statute of limitation will not be suspended; when the warrant of
distraint and levy is duly served upon the taxpayer, his authorized
representative, or a member of his household with sufficient
discretion, and no property could be located; and when the
taxpayer is out of the Philippines." (Emphasis supplied.)

In the instant case, PSI filed a petition before the CTA to prevent the collection
of the assessed deficiency tax. When the CTA dismissed the case, petitioner
elevated the case before us, hoping for a review in its favor. The actions taken
by the petitioner before the CTA and now before us, suspended the running of
the statute of limitation. In the old case of Republic of the Philippines vs. Ker
and Company, Ltd., we held:
[9]

"Under Section 333 (renumbered to 271 during the instant case)

of the Tax Code the running of the prescriptive period to collect
deficiency taxes shall be suspended for the period during which
the Commissioner of Internal Revenue is prohibited from
beginning a distraint and levy or instituting a proceeding in court,
and for sixty days thereafter. In the case at bar, the pendency of
the taxpayer's appeal in the Court of Tax Appeals and in the
Supreme Court had the effect of temporarily staying the hands of
the said Commissioner. If the taxpayer's stand that the pendency
of the appeal did not stop the running of the period because the
Court of Tax Appeals did not have jurisdiction over the case of
taxes is upheld, taxpayers would be encouraged to delay the
payment of taxes in the hope of ultimately avoiding the same.
Under the circumstances, the running of the prescriptive period
was suspended." Jo spped
[10]

Finally, petitioner contends that the assessments made by the respondent

CIR were erroneous because they included in the gross receipts subject to the
contractor's tax the salaries of the security guards and the employer's share in
the SSS, SIF and Medicare. Petitioner claims that it did not benefit from those
amounts earmarked for other persons or institutions, hence, they must not be
taxable.

Contractors tax on gross receipts imposed on business agents including

private detective watchman agencies, was a tax on the sale of services or
[11]

labor, imposed on the exercise of a privilege. The term "gross receipts"

[12]

means all amounts received by the prime or principal contractor as the total
price, undiminished by the amount paid to the subcontractor under a
subcontract arrangement. Hence, gross receipts could not be diminished by
[13]

employer's SSS, SIF and Medicare contributions. Furthermore, it has been

[14]

consistently ruled by the BIR that the salaries paid to security guards should
form part of the gross receipts, subject to tax, to wit:

"...This Office has consistently ruled that salaries of security

guards form part of the taxable gross receipts of a security agency
for purposes of the 4% [formerly 3%] contractors tax under
Section 205 of the Tax Code, as amended. The reason is that the
salaries of the security guards are actually the liability of the
agency and that the guards are considered their employees;
hence, for percentage tax purposes, the salaries of the security
guards are includible in its gross receipts. (BIR Ruling No.271-81
citing BIR Ruling No. 69-002)" [15]

These rulings were made by the CIR in the exercise of his power to "make
judgments or opinions in connection with the implementation of the provisions
of the internal revenue code." The opinions and rulings of officials of the
government called upon to execute or implement administrative laws,
command respect and weight. We see no compelling reason in this case to
[16]

rule otherwise. Spped jo

WHEREFORE, the assailed decision of the Court of Appeals, in CA- G.R. SP

31825, is AFFIRMED. Costs against petitioner.

SO ORDERED.

Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION
LASCONA LAND CO., INC., G.R. No. 171251
Petitioner, Present:

VELASCO, JR., J., Chairperson,

PERALTA,
- versus - ABAD,
VILLARAMA, JR.,* and
MENDOZA, JJ.

COMMISSIONER OF INTERNAL Promulgated:

REVENUE,
March 5, 2012
Respondent.
x----------------------------------------------------------------------------------------x

DECISION

PERALTA, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court seeking the reversal of the Decision[1] dated October 25, 2005 and
Resolution[2] dated January 20, 2006 of the Court of Appeals (CA) in CA-G.R. SP
No. 58061 which set aside the Decision[3] dated January 4, 2000 and
Resolution[4] dated March 3, 2000 of the Court of Tax Appeals (CTA) in C.T.A.
Case No. 5777 and declared Assessment Notice No. 0000047-93-407 dated March
27, 1998 to be final, executory and demandable.
The facts, as culled from the records, are as follows:

On March 27, 1998, the Commissioner of Internal Revenue (CIR) issued

Assessment Notice No. 0000047-93-407[5] against Lascona Land Co., Inc.
(Lascona) informing the latter of its alleged deficiency income tax for the year
1993 in the amount of P753,266.56.

Consequently, on April 20, 1998, Lascona filed a letter protest, but was denied by
Norberto R. Odulio, Officer-in-Charge (OIC), Regional Director, Bureau of
Internal Revenue, Revenue Region No. 8, Makati City, in his Letter[6] dated March
3, 1999, which reads, thus:
 xxxx

Subject: LASCONA LAND CO., INC.

1993 Deficiency Income Tax

Madam,

Anent the 1993 tax case of subject taxpayer, please be informed that
while we agree with the arguments advanced in your letter protest, we
regret, however, that we cannot give due course to your request to
cancel or set aside the assessment notice issued to your client for the
reason that the case was not elevated to the Court of Tax Appeals as
mandated by the provisions of the last paragraph of Section 228 of the
Tax Code. By virtue thereof, the said assessment notice has become
final, executory and demandable.

In view of the foregoing, please advise your client to pay its 1993
deficiency income tax liability in the amount of P753,266.56.

x x x x (Emphasis ours)

On April 12, 1999, Lascona appealed the decision before the CTA and was
docketed as C.T.A. Case No. 5777. Lascona alleged that the Regional Director
erred in ruling that the failure to appeal to the CTA within thirty (30) days from the
lapse of the 180-day period rendered the assessment final and executory.

The CIR, however, maintained that Lascona's failure to timely file an appeal with
the CTA after the lapse of the 180-day reglementary period provided under Section
228 of the National Internal Revenue Code (NIRC) resulted to the finality of the
assessment.

On January 4, 2000, the CTA, in its Decision,[7] nullified the subject assessment. It
held that in cases of inaction by the CIR on the protested assessment, Section 228
of the NIRC provided two options for the taxpayer: (1) appeal to the CTA within
thirty (30) days from the lapse of the one hundred eighty (180)-day period, or (2)
wait until the Commissioner decides on his protest before he elevates the case.
The CIR moved for reconsideration. It argued that in declaring the subject
assessment as final, executory and demandable, it did so pursuant to Section 3
(3.1.5) of Revenue Regulations No. 12-99 dated September 6, 1999 which reads,
thus:

If the Commissioner or his duly authorized representative fails to act on

the taxpayer's protest within one hundred eighty (180) days from date of
submission, by the taxpayer, of the required documents in support of his
protest, the taxpayer may appeal to the Court of Tax Appeals within
thirty (30) days from the lapse of the said 180-day period; otherwise, the
assessment shall become final, executory and demandable.

On March 3, 2000, the CTA denied the CIR's motion for reconsideration for lack
of merit.[8] The CTA held that Revenue Regulations No. 12-99 must conform to
Section 228 of the NIRC. It pointed out that the former spoke of an assessment
becoming final, executory and demandable by reason of the inaction by the
Commissioner, while the latter referred to decisions becoming final, executory and
demandable should the taxpayer adversely affected by the decision fail to appeal
before the CTA within the prescribed period. Finally, it emphasized that in cases
of discrepancy, Section 228 of the NIRC must prevail over the revenue
regulations.

Dissatisfied, the CIR filed an appeal before the CA.[9]

In the disputed Decision dated October 25, 2005, the Court of Appeals granted the
CIR's petition and set aside the Decision dated January 4, 2000 of the CTA and its
Resolution dated March 3, 2000. It further declared that the subject Assessment
Notice No. 0000047-93-407 dated March 27, 1998 as final, executory and
demandable.

Lascona moved for reconsideration, but was denied for lack of merit.

Thus, the instant petition, raising the following issues:

I
 THE HONORABLE COURT HAS, IN THE REVISED RULES OF
COURT OF TAX APPEALS WHICH IT RECENTLY
PROMULGATED, RULED THAT AN APPEAL FROM THE
INACTION OF RESPONDENT COMMISSIONER IS NOT
MANDATORY.
II
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD
THAT THE ASSESSMENT HAS BECOME FINAL AND
DEMANDABLE BECAUSE, ALLEGEDLY, THE WORD DECISION
IN THE LAST PARAGRAPH OF SECTION 228 CANNOT BE
STRICTLY CONSTRUED AS REFERRING ONLY TO THE
DECISION PER SE OF THE COMMISSIONER, BUT SHOULD ALSO
BE CONSIDERED SYNONYMOUS WITH AN ASSESSMENT
WHICH HAS BEEN PROTESTED, BUT THE PROTEST ON WHICH
HAS NOT BEEN ACTED UPON BY THE COMMISSIONER.[10]

In a nutshell, the core issue to be resolved is: Whether the subject assessment has
become final, executory and demandable due to the failure of petitioner to file an
appeal before the CTA within thirty (30) days from the lapse of the One Hundred
Eighty (180)-day period pursuant to Section 228 of the NIRC.

Petitioner Lascona, invoking Section 3,[11] Rule 4 of the Revised Rules of the
Court of Tax Appeals, maintains that in case of inaction by the CIR on the
protested assessment, it has the option to either: (1) appeal to the CTA within 30
days from the lapse of the 180-day period; or (2) await the final decision of the
Commissioner on the disputed assessment even beyond the 180-day period − in
which case, the taxpayer may appeal such final decision within 30 days from the
receipt of the said decision. Corollarily, petitioner posits that when the
Commissioner failed to act on its protest within the 180-day period, it had the
option to await for the final decision of the Commissioner on the protest, which it
did.
The petition is meritorious.

Section 228 of the NIRC is instructional as to the remedies of a taxpayer in case of

the inaction of the Commissioner on the protested assessment, to wit:

SEC. 228. Protesting of Assessment. − x x x

 xxxx

Within a period to be prescribed by implementing rules and

regulations, the taxpayer shall be required to respond to said notice. If
the taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing
rules and regulations.

Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the
assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon within

one hundred eighty (180) days from submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal to
the Court of Tax Appeals within (30) days from receipt of the said
decision, or from the lapse of the one hundred eighty (180)-day period;
otherwise the decision shall become final, executory and
demandable. (Emphasis supplied).

Respondent, however, insists that in case of the inaction by the Commissioner on

the protested assessment within the 180-day reglementary period, petitioner should
have appealed the inaction to the CTA. Respondent maintains that due to Lascona's
failure to file an appeal with the CTA after the lapse of the 180-day period, the
assessment became final and executory.

We do not agree.

In RCBC v. CIR,[12] the Court has held that in case the Commissioner failed to act
on the disputed assessment within the 180-day period from date of submission of
documents, a taxpayer can either: (1) file a petition for review with the Court of
Tax Appeals within 30 days after the expiration of the 180-day period; or (2) await
the final decision of the Commissioner on the disputed assessments and appeal
such final decision to the Court of Tax Appeals within 30 days after receipt of a
copy of such decision.[13]
This is consistent with Section 3 A (2), Rule 4 of the Revised Rules of the Court of
Tax Appeals,[14] to wit:

SEC. 3. Cases within the jurisdiction of the Court in

Divisions. The Court in Divisions shall exercise:

(a) Exclusive original or appellate jurisdiction to review by appeal

the following:

(1) Decisions of the Commissioner of Internal Revenue in

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

(2) Inaction by the Commissioner of Internal Revenue in

cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal
Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue
Code or other applicable law provides a specific period for
action: Provided, that in case of disputed assessments,
the inaction of the Commissioner of Internal Revenue
within the one hundred eighty day-period under Section
228 of the National Internal revenue Code shall be
deemed a denial for purposes of allowing the taxpayer
to appeal his case to the Court and does not necessarily
constitute a formal decision of the Commissioner of
Internal Revenue on the tax case; Provided, further,
that should the taxpayer opt to await the final decision
of the Commissioner of Internal Revenue on the
disputed assessments beyond the one hundred eighty
day-period abovementioned, the taxpayer may appeal
such final decision to the Court under Section 3(a), Rule
8 of these Rules; and Provided, still further, that in the case
of claims for refund of taxes erroneously or illegally
 collected, the taxpayer must file a petition for review with
the Court prior to the expiration of the two-year period
under Section 229 of the National Internal Revenue Code;
(Emphasis ours)

In arguing that the assessment became final and executory by the sole reason that
petitioner failed to appeal the inaction of the Commissioner within 30 days after
the 180-day reglementary period, respondent, in effect, limited the remedy of
Lascona, as a taxpayer, under Section 228 of the NIRC to just one, that is - to
appeal the inaction of the Commissioner on its protested assessment after the lapse
of the 180-day period. This is incorrect.

As early as the case of CIR v. Villa,[15] it was already established that the word
"decisions" in paragraph 1, Section 7 of Republic Act No. 1125, quoted above, has
been interpreted to mean the decisions of the Commissioner of Internal Revenue
on the protestof the taxpayer against the assessments. Definitely, said word does
not signify the assessment itself. We quote what this Court said aptly in a previous
case:

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, . . . [16]

Therefore, as in Section 228, when the law provided for the remedy to appeal the
inaction of the CIR, it did not intend to limit it to a single remedy of filing of an
appeal after the lapse of the 180-day prescribed period. Precisely, when a taxpayer
protested an assessment, he naturally expects the CIR to decide either positively or
negatively. A taxpayer cannot be prejudiced if he chooses to wait for the final
decision of the CIR on the protested assessment. More so, because the law and
jurisprudence have always contemplated a scenario where the CIR will decide on
the protested assessment.

It must be emphasized, however, that in case of the inaction of the CIR on the
protested assessment, while we reiterate − the taxpayer has two options, either: (1)
file a petition for review with the CTA within 30 days after the expiration of the
180-day period; or (2) await the final decision of the Commissioner on the disputed
assessment and appeal such final decision to the CTA within 30 days after the
receipt of a copy of such decision, these options are mutually exclusive and
resort to one bars the application of the other.

Accordingly, considering that Lascona opted to await the final decision of the
Commissioner on the protested assessment, it then has the right to appeal such
final decision to the Court by filing a petition for review within thirty days after
receipt of a copy of such decision or ruling, even after the expiration of the 180-
day period fixed by law for the Commissioner of Internal Revenue to act on the
disputed assessments.[17] Thus, Lascona, when it filed an appeal on April 12,
1999 before the CTA, after its receipt of the Letter[18] dated March 3,
1999 on March 12, 1999, the appeal was timely made as it was filed within 30 days
after receipt of the copy of the decision.

Finally, the CIR should be reminded that taxpayers cannot be left in quandary by
its inaction on the protested assessment. It is imperative that the taxpayers are
informed of its action in order that the taxpayer should then at least be able to take
recourse to the tax court at the opportune time. As correctly pointed out by the tax
court:

x x x to adopt the interpretation of the respondent will not only sanction

inefficiency, but will likewise condone the Bureau's inaction. This is
especially true in the instant case when despite the fact that respondent
found petitioner's arguments to be in order, the assessment will become
final, executory and demandable for petitioner's failure to appeal before
us within the thirty (30) day period.[19]
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.[20] Thus, even as
we concede the inevitability and indispensability of taxation, it is a requirement in
all democratic regimes that it be exercised reasonably and in accordance with the
prescribed procedure.[21]

WHEREFORE, the petition is GRANTED. The Decision dated October 25,

2005 and the Resolution dated January 20, 2006of the Court of Appeals in CA-
G.R. SP No. 58061 are REVERSED and SET ASIDE. Accordingly, the
Decision dated January 4, 2000 of the Court of Tax Appeals in C.T.A. Case No.
5777 and its Resolution dated March 3, 2000 are REINSTATED.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 190680 September 13, 2012

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
COURT OF TAX APPEALS and AYALA LAND, INC., Respondents.

RESOLUTION

REYES, J.:

Subject of this petition for certiorari under Rule 65 of the Rules of Court is the Resolution1 dated
October 30, 2009 of the Court of Tax Appeals (CTA) en bane in CTA EB No. 402, which dismissed
herein petitioner Commissioner of Internal Revenue's (CIR) petition for relief from judgment under
Rule 38 of the Rules of Court.

The factual antecedents that led to the filing of this petition are as follows: In 2005, private
respondent Ayala Land, Inc. (ALI) filed with the CTA a petition for review2 to question the CIR’s
assessment against it for deficiency value-added tax (VAT) for the calendar year 2003. Before the
tax court, the CIR and ALI filed their Joint Stipulation of Facts and Issues, which was cited in the
present petition to read in part:
Petitioner (herein private respondent) is primarily engaged in the sale and/or lease of real properties
and, among others, likewise owns and operates theatres or cinemas.

Petitioner received respondent’s (herein petitioner) Final Assessment Notice (hereinafter referred to
as the 2003 FAN) dated 29 October 2004 whereby respondent was assessing petitioner alleged
deficiency 10% value added tax (VAT) on its alleged income from cinema operations for the taxable
year 2003 in the aggregate amount of One Hundred Three Million Three Hundred Forty-Six
Thousand Six Hundred Ninety-One and 40/100 Pesos (₱ 103,346,691.40) inclusive of 20% interest.

On 10 December 2004, petitioner filed its protest with the office of respondent contesting the factual
and legal bases of the VAT assessment.

On 28 April 2005, petitioner received respondent’s 25 April 2005 Decision denying petitioner’s
protest, with a notation that the same constitutes respondent’s Final Decision on the matter.

Petitioner received on 23 November 2004, respondent’s 19 November 2004 Letter of Authority No.
0002949 for the examination of ALL INTERNAL REVENUE TAXES of petitioner from 1 January
2003 to 31 December 2003.

In order to protect its right, petitioner filed the Petition for Review pursuant to Section 228 of the Tax
Code.3

Proceedings ensued. On April 11, 2008, the CTA Second Division rendered its Decision granting
ALI’s petition for review. The assessment against ALI for deficiency VAT in the amount of ₱
103,346,691.40 for the calendar year 2003 was ordered cancelled and set aside. The CIR’s motion
for reconsideration was denied, prompting him to file an appeal to the CTA en banc.

On February 12, 2009, the CTA en banc rendered its Decision affirming the decision of the CTA
Second Division. Feeling aggrieved, the CIR filed a motion for reconsideration, but this was denied
by the CTA en banc in its Resolution dated March 25, 2009.

The CIR claims that neither he nor his statutory counsel, the Office of the Solicitor General (OSG),
received a copy of the CTA en banc’s resolution denying his motion for reconsideration. It then came
as a surprise to him when he received on June 17, 2009 a copy of the CTA en banc’s Resolution
dated June 10, 2009 which provided that the CTA Decision dated February 12, 2009 had become
final and executory. The CIR then filed on July 2, 2009 a Manifestation with the Motion to
Reconsider Resolution Ordering Entry of Judgment,4 questioning the CTA’s entry of judgment and
seeking the following reliefs: (1) for the CTA to withdraw its resolution ordering the issuance of entry
of judgment; (2) for the CTA to resolve the CIR’s motion for reconsideration filed on March 4, 2009;
and (3) should there be an existing resolution of the motion for reconsideration, for the CTA to serve
a copy thereof upon the CIR and his counsel. The petitioner explained in his manifestation:

On 17 June 2009, he received Resolution dated 10 June 2009 holding that in the absence of an
appeal, the Honorable Court’s Decision dated 12 February 2009 has become final and executory.

Thus, the Honorable Court ordered the issuance of an Entry of Judgment in this case.

Respondent respectfully manifests that on 4 March 2009, he filed a Motion for Reconsideration of
the Honorable Court’s Decision dated 12 February 2009, the same decision which the Honorable
Court has now deemed to be final and executory.
Further, a check with his records reveals that there is no Resolution which has been issued by the
Honorable Court denying his Motion for Reconsideration. To double check, on three (3) occasions
he has inquired from his counsel the Office of the Solicitor General, particularly State Solicitor
Bernardo C. Villar, on whether he has received any Resolution on the Motion for Reconsideration.
Respondent was informed that there was none.

Finally, he checked with the Honorable Court and was informed that there is a Resolution dated 25
March 2009. In short, while petitioner and his counsel were of the mind that the Motion for
Reconsideration still had to be resolved, it appears that it already was.

However, it is respectfully manifested that petitioner and his counsel have not received the said
Resolution and thus, such failure has prevented petitioner from filing the necessary Petition for
Review before the Honorable Supreme Court. Such petition would have barred the Decision dated
12 February 2009 from attaining finality and eventual entry in the Book of Judgements.5 (Emphasis
ours)

On July 29, 2009, the CTA en banc issued its Resolution denying the motion. It reasoned that per its
records, the CIR and OSG had received on March 27, 2009 and March 30, 2009, respectively, a
copy of the resolution denying the motion for reconsideration.6 The CIR received its copy of said
Resolution dated July 29, 2009 on August 3, 2009.

The CIR then filed on October 2, 2009 with the CTA en banc a petition for relief7 asking that the entry
of judgment in the case be recalled, and for the CIR and OSG to be served with copies of the
Resolution dated March 25, 2009. To show the timeliness of the petition for relief, the CIR claimed
that he knew of the Resolution dated March 25, 2009 only on August 3, 2009, when he received a
copy of the Resolution dated July 29, 2009. He then claimed that the sixty (60)-day period for the
filing of the petition for relief should be reckoned from August 3, 2009, giving him until October 2,
2009 to file it. Further, CIR’s counsel Atty. Felix Paul R. Velasco III (Atty. Velasco) tried to explain
the CIR’s and OSG’s alleged failure to receive the CTA’s Resolution dated March 25, 2009,
notwithstanding the CTA’s records showing the contrary, by alleging in his Affidavit of Merit8 attached
to the petition for relief that:

14. I noted that, as stated by the Honorable CTA in its 29 July 2009 Resolution, there were rubber
stamps of both petitioner and the OSG signifying receipt of the resolution. But given the fact that
both petitioner and the OSG did not have copies of this Resolution, the only logical explanation is
that the front notice page was indeed correct and stamped by both offices but the received enclosed
order of the Honorable Court probably contained a different one. This error has happened to
petitioner in other cases but these were subsequently and timely noticed and no detrimental effects
occurred.9

On October 30, 2009, the CTA en banc dismissed the petition for relief for having been filed out
time, via the assailed resolution which reads in part:

The Supreme Court has ruled that "a party filing a petition for relief from judgment must strictly
comply with two reglementary periods; first, the petition must be filed within sixty (60) days from
knowledge of the judgment, order or other proceeding to be set aside; and second, within a fixed
period of six (6) months from entry of such judgment, order or other proceeding. Strict compliance
with these periods is required because a petition for relief from judgment is a final act of liberality on
the part of the State, which remedy cannot be allowed to erode any further the fundamental principle
that a judgment, order or proceeding must, at some definite time, attain finality in order to put at last
an end to litigation."
 xxxx

In this case, petitioner seeks relief from judgment of the Court En Banc’s Resolution dated March 25,
2009. Records show that petitioner learned of the Resolution dated March 25, 2009 when he
received on June 17, 2009, the Resolution of the Court En Banc dated June 10, 2009 ordering the
Entry of Judgment. This was in fact stated in petitioner’s "Manifestation with Motion to Reconsider
Resolution Ordering Entry of Judgment" which petitioner filed on July 2, 2009. Hence, the 60 days
should be counted from June 17, 2009 and the 60th day fell on August 16, 2009 which was a
Sunday. Hence, the last day for the filing of the petition for relief was on August 17, 2009. Even if the
60-day period is counted from petitioner’s receipt of the Entry of Judgment on July 1, 2009, with the
60th day falling on August 30, 2009, the petition for relief filed on October 2, 2009 will still be filed
beyond the 60-day period.10(Emphasis ours)

Without filing a motion for reconsideration with the CTA en banc, the CIR filed the present petition for
certiorari. The CIR argues that his 60-day period under Rule 38 should have been counted from
August 3, 2009, when he received a copy of the Resolution dated July 29, 2009 and claimed to have
first learned about the Resolution dated March 25, 2009 denying his motion for reconsideration.11

The issue then for this Court’s resolution is: Whether or not the CTA committed grave abuse of
discretion amounting to lack or excess of jurisdiction in ruling that the petition for relief of the CIR
was filed beyond the 60-day reglementary period under Rule 38.

At the outset, this Court holds that a dismissal of the petition is warranted in view of the petitioner’s
failure to file before the CTA en banc a motion for reconsideration of the assailed resolution. The
settled rule is that a motion for reconsideration is a condition sine qua non for the filing of a petition
for certiorari. Its purpose is to grant an opportunity for the court to correct any actual or perceived
error attributed to it by the re-examination of the legal and factual circumstances of the case. The
rationale of the rule rests upon the presumption that the court or administrative body which issued
the assailed order or resolution may amend the same, if given the chance to correct its mistake or
error. The "plain speedy, and adequate remedy" referred to in Section 1, Rule 65 of the Rules of
Court is a motion for reconsideration of the questioned order or resolution.12 While the rule is not
absolute and admits of settled exceptions, none of the exceptions attend the present petition.

Even if we set aside this procedural infirmity, the petition is dismissible. In resolving the substantive
issue, it is crucial to determine the date when the petitioner learned of the CTA en banc’s Resolution
dated March 25, 2009, as Section 3, Rule 38 of the Rules of Court provides:

Sec. 3. Time for filing petition; contents and verification. – A petition provided for in either of the
preceding sections of this Rule must be verified, filed within sixty (60) days after the petitioner learns
of the judgment, final order, or other proceeding to be set aside, and not more than six (6) months
after such judgment or final order was entered, or such proceeding was taken; and must be
accompanied with affidavits showing the fraud, accident, mistake, or excusable negligence relied
upon, and the facts constituting the petitioner’s good and substantial cause of action or defense, as
the case may be. (Emphasis ours)

By the CIR’s own evidence and admissions, particularly in the narration of facts in the petition for
relief, the OSG’s letter and the affidavit of merit attached thereto, it is evident that both the CIR and
the OSG had known of the CTA’s Resolution dated March 25, 2009 long before August 3,

2009. Granting that we give credence to the CIR’s argument that he could not have known of the
Resolution dated March 25, 2009 by his receipt on June 17, 2009 of the Resolution dated June 10,
2009, the CIR’s petition for relief was still filed out of time.
The CIR’s claim that it was only on August 3, 2009 that he learned of the CTA’s denial of his motion
for reconsideration is belied by records showing that as of June 22, 2009, he already knew of such
fact. The information was relayed by the CTA to the CIR, when the latter inquired from the court
about the status of the case and the court’s action on his motion for reconsideration. It was precisely
because of such knowledge that he filed on July 2, 2009 the manifestation and motion pertaining to
the CTA’s order of entry of judgment. Pertinent portions of his petition for relief read:

On 17 June 2009, he received a Resolution of the Honorable Court dated 10 June 2009 ordering the
issuance of the Entry of Judgment in the present case, x x x:

xxxx

Petitioner’s handling counsel was surprised that the above emphasized decision dated 12 February
2009 had become final considering that he had filed a timely Motion for Reconsideration on 4 March
2009.

Investigating further, he called the Honorable Court and was informed that his Motion for
Reconsideration filed by registered mail on 4 March 2009 was received by the Honorable Court on
11 March 2009. He was also informed that the last document on file there was a Resolution dated 25
March 2009. He then searched his records and found no such Resolution. Petitioner then tried to
confirm the same from petitioner’s official counsel, the Office of the Solicitor General (OSG) through
the assigned Solicitor, Atty. Bernardo C. Villar. He was then informed that, same as handling
counsel, the latter was also waiting for the resolution of the Motion for Reconsideration filed on 4
March 2009 and likewise, did not receive any copy of any resolution for that matter. The OSG then
formalized this information through a letter dated 24 June 2009. x x x.13 (Emphasis ours)

In the letter14 dated June 24, 2009 attached to the petition for relief as Annex "A", State Solicitor
Bernardo C. Villar mentioned that on June 22, 2009, he and Atty. Velasco had discussed the CTA’s
prior issuance of a resolution denying their motion for reconsideration, thus:

This pertains to the CTA Notice of Resolution dated June 10, 2009 (directing entry of judgment), a
copy of which was received by the OSG on June 17, 2009, and further to our telephone discussion
on Monday, June 22, 2009.

As we have discussed, the OSG has not previously received any resolution on the motion for
reconsideration which you filed with the CTA. However, you pointed out that CTA records tend to
show that there had been such a resolution and that BIR was already notified of the same sometime
in March 2009.15 (Emphasis ours)

The CIR then can no longer validly dispute that he had known of the CTA’s Resolution dated March
25, 2009 on June 22, 2009. Even as we reckon the 60-day period under Section 3, Rule 38 from
said date, the petitioner only had until August 21, 2009 within which to file a petition for relief. Since
August 21, 2009, a Friday, was a non-working holiday, the petitioner should have filed the petition at
the latest on August 24, 2009. The CIR’s filing with the CTA of the petition for relief on October 2,
2009 then did not conform to the 60-day requirement.

Significantly, the OSG also opined, and had so advised the CIR, that the petition for relief was
indeed filed out of time. Attached to the petitioner’s Compliance16 with this Court’s Resolution17 dated
May 30, 2011 is the OSG’s letter18 dated September 22, 2009, addressed to the BIR and which
reads:
We regret to inform you that we cannot be of help to you in filing a petition for relief since you are the
ones on record representing the BIR before the Court of Tax Appeals. As you well know, our
participation in these matters are limited to filing an appeal with the Supreme Court in due time. This
is precisely what we meant in our previous letters as the kind of assistance that we can provide you.

Furthermore, as far as we are concerned, there is doubt in the propriety of filing a petition for relief at
this time. Please note that from your receipt on June 17, 2009 of the entry of judgment, you filed a
"Manifestation and Motion to Reconsider Resolution Ordering Entry of Judgment" dated July 1, 2009
instead of a petition for relief. In the meantime, the 60 days period (from actual knowledge) under
Section 3, Rule 38 within which to file the edition for relief continued to run and has expired
already.19 (Emphasis ours)

Given the foregoing, this Court finds no cogent reason to grant petitioner's plea for the issuance of a
writ of certiorari. An act of a court or tribunal may only be considered as committed in grave abuse of
discretion when the same is performed in a capricious or whimsical exercise of judgment, which is
equivalent to lack of jurisdiction. The abuse of discretion must be so patent and gross as to amount
to an evasion of positive duty or to a vi1iual refusal to perform a duty enjoined by law or to act at all
in contemplation of law, as where the power is exercised in an arbitrary and despotic manner by
reason of passion or personal hostility.20 There was no such grave abuse of discretion in this case
because the CIR's petition for relief was indeed filed out of time.

WHEREFORE, premises considered, the petition is DISMISSED.

SO ORDERED.

[G.R. No. 135446. September 23, 2003]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BANK OF

THE PHILIPPINE ISLANDS, as liquidator of PARAMOUNT
ACCEPTANCE CORPORATION, respondent.

DECISION
CORONA, J.:

Respondent Bank of the Philippine Islands (BPI) is the liquidator of

Paramount Acceptance Corporation (PAC), a financing corporation which was
dissolved on July 17, 1989 pursuant to the January 30, 1986 resolution of its
Board of Directors and stockholders, shortening its corporate life to March 31,
1987.
After the dissolution of the PAC, respondent BPI learned from the
newspapers that petitioner Commissioner of Internal Revenue (CIR) filed
certain criminal cases against Horacio V. Poblador and Ramon A. Albert,
former president and treasurer of PAC, respectively, for willful failure to pay
the corporations final deficiency tax assessments for the years 1981 and
1982. According to the petitioner, PAC was liable for a total amount
of P411,382.11 in deficiency taxes, computed as follows:

1981
Deficiency Income Tax P166,923.00
Deficiency Expanded
Withholding Tax 3,727.01
Deficiency Documentary
Stamp Tax 44,300.00
__________
TOTAL P214,950.01

1982
Deficiency Income Tax P150,707.20
Deficiency Percentage Tax 35,887.91
Deficiency Expanded
Withholding Tax 9,836.99
___________
TOTAL P196,432.10 [1]

Respondent wrote to the petitioner, claiming that it was not aware of any
assessment regarding any tax deficiency owed by PAC, but that it was willing
to compromise and pay the deficiency tax. At the same time, respondent
asked for the withdrawal of the criminal cases against Poblador and
Albert. The parties agreed to settle for not less than 30% of the basic income
and documentary stamps taxes and 100% of the basic expanded withholding
tax due. Respondent paid to the petitioner a total amount of P119,815.13,
broken down as follows:

1981
Deficiency Income Tax P 31,298.10
Deficiency Expanded
Withholding Tax 1,625.01
Deficiency Documentary
Stamp Tax 44,000.00
__________
TOTAL P 76,923.11

1982
Deficiency Income Tax P 28,257.60
Deficiency Percentage Tax 4,797.43
 Deficiency Expanded
Withholding Tax 9,836.99
___________
TOTAL P 42,892.02 [2]

However, in spite of the payment, petitioner continued to prosecute the

criminal cases against Poblador and Albert: Criminal Cases Nos. 91-5800, 91-
5801 and 91-5802, involving the 1981 assessments, before the Regional Trial
Court of Makati, Branch 150; and, Criminal Case No. 91-4007 involving the
1982 percentage tax deficiency, pending in the Regional Trial Court of Makati,
Branch 143.
Respondent, in its August 18, 1992 letter to petitioner, pointed out that the
assessments were not sent to the proper address and asked for the refund of
the P119,815.13 it paid under the compromise agreement since the criminal
cases against Poblador and Albert were not dropped as agreed upon.
Petitioner did not answer the letter and continued to prosecute the said cases.
At the trial of Criminal Case Nos. 91-5800, 5801 and 5802, the following
facts were established:

(a) that Paramount filed its Annual Income Tax Return for 1985 on April 2,
1986, in which it disclosed in the space provided for in the Return, that
its current address was 8th Floor, FCC Bldg., Paseo de Roxas, Makati,
Metro Manila, while its Previous Address (if different from current year)
was Ground Flr., DCG Building cor. De la Rosa and Legaspi Sts.
Makati, Metro Manila;

(b) that Paramount filed its Annual Income Tax Return for the three months of
1986, i.e., up to March 31, 1986, on April 30, 1986 and indicated in the
proper space provided for in the return that its current address was BPI
Building, Ayala Avenue, Makati, Metro Manila while its Previous
address (if different from current year) was 8th Floor, FCC Building,
Paseo de Roxas, Makati, M.M.

xxx xxx xxx

(e) that on July 17, 1987 the SEC issued to Paramount the Certificate of Filing
of Amended Articles of Incorporation shortening the term of existence
and thereby dissolving the corporation;

(f) that after issuing such Certificate, the SEC sent a letter dated July 14, 1987
to the respondent, informing him that pursuant to Executive Order No.
 1026 which requires a tax clearance before a corporation may be
dissolved, the SEC had dissolved Paramount as of March 31, 1986 in
view of the tax clearance certificate which the respondent had issued on
November 11, 1986. The same letter further informed respondent that
[t]he principal office of the corporation was located at 8th Flr., BPI-FB
Bldg., 8753 Paseo de Roxas, Makati, MM;

(g) that contrary to the testimony of prosecution witness Rolando Bumbay of

the respondents Collection Enforcement Division that he just could not
locate Paramount, he looked everywhere except the Makati BIR Office,
where Paramount had been filing its income tax returns, and the
Litigation Division of the BIR which would have informed him that
instead of disappearing and hiding from the BIR, Paramount even sued
the respondent in the Court of Tax Appeals for the refund of excess
creditable income taxes paid in 1986, docketed as CTA Case No. 4257.
(Citations omitted)
[3]

In an order dated June 22, 1993, Criminal Case Nos. 91-5800 to 5802
were dismissed by the trial court, on motion of the BIR Special Prosecutor.
The motion to dismiss was anchored on the fact that the assessments made
by the BIR on the tax deficiencies of PAC/accused Poblador and Albert for the
year 1981 have already been paid and amicably settled, evidenced by the
Letter of Deputy Commissioner Eufracio D. Santos to Atty. Sabino Padilla, Jr.
dated June 6, 1991. Strangely, however, petitioner did not move for the
[4]

dismissal of Criminal Case No. 91-4007 involving the 1982 corporate

percentage tax deficiency.
On November 15, 1993, petitioner finally replied to respondents August
18, 1992 letter, refusing to grant a refund and denying that a compromise
settlement was reached by them. Petitioner reasoned that it could not have
entered into a compromise agreement with respondent since the criminal
cases had already been filed in court, and to enter into a compromise after the
filing of the cases would have violated Section 204 of the Tax Code. Thus, the
payment of P119,815.13 could not have been accepted by the CIR in the
concept of a compromise settlement.
On December 12, 1993, respondent filed a case with the Court of Tax
Appeals (CTA) for the refund of the money it paid petitioner. The CTA,
however, dismissed it on the ground of litis pendencia. Respondent appealed
to the Court of Appeals, which ruled that litis pendencia was not present and
ordered the CTA to commence trial on the refund case. Thus, petitioner
elevated the case to this Court via a petition for review.
 The petition is denied for being moot.
On January 28, 2000, the Regional Trial Court of Makati City, Branch 143,
rendered a decision in Criminal Case No. 91-4007 acquitting Poblador and
[5]

Albert of willful failure to pay the corporate percentage tax deficiency for 1982.
Furthermore, a copy of the said decision was served on petitioner by
registered mail, prior to the submission of its memorandum in this
[6]

case. Despite being furnished a copy of the RTC decision, petitioner merely
[7]

adopted its comment as its memorandum and did not discuss the effect of
Poblador and Alberts acquittal on the present petition. Petitioner even stated
that respondent BPI may recover the amount it paid once Poblador and Albert
were acquitted in the criminal case.[8]

In its decision in Criminal Case No. 91-4007, the trial court ruled that the
prosecution failed to establish that PAC was in fact liable for deficiency taxes
prior to its liquidation. Assuming arguendo that there was a deficiency tax for
which PAC was liable, petitioners failed to make a valid assessment on it
since the notice of assessment was sent to the PACs old (and therefore
improper) office address. PAC already indicated its new address in its 1986
tax return filed with the BIRs Makati office. This notwithstanding, petitioner
CIR sent the notice of assessment to PACs old business address instead of
its new address, which was also BPIs (PACs liquidator) office address.
Since there was a failure to effect a timely valid assessment, the period for
filing a criminal case for PACs tax liabilities had prescribed by the time
petitioner instituted the criminal cases against its former officers. Thus,
Poblador and Albert were correctly acquitted by the trial court.
WHEREFORE, the petition is hereby DENIED.
SO ORDERED.
SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. No. 185371

REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

NACHURA,
PERALTA,
- versus - ABAD, and
 MENDOZA, JJ.

Promulgated:
METRO STAR SUPERAMA, INC.,
Respondent. December 8, 2010

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

DECISION
MENDOZA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court filed by
the petitioner Commissioner of Internal Revenue (CIR) seeks to reverse and set
aside the 1] September 16, 2008 Decision[1] of the Court of Tax Appeals En
Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008
Resolution[2] denying petitioners motion for reconsideration.

The CTA-En Banc affirmed in toto the decision of its Second

Division (CTA-Second Division) in CTA Case No. 7169 reversing the February 8,
2005 Decision of the CIR which assessed respondent Metro Star Superama,
Inc. (Metro Star) of deficiency value-added tax and withholding tax for the taxable
year 1999.

Based on a Joint Stipulation of Facts and Issues[3] of the parties, the CTA Second
Division summarized the factual and procedural antecedents of the case, the
pertinent portions of which read:

Petitioner is a domestic corporation duly organized and

existing by virtue of the laws of the Republic of the Philippines, x x
x.

On January 26, 2001, the Regional Director of Revenue

Region No. 10, Legazpi City, issued Letter of Authority No.
00006561 for Revenue Officer Daisy G. Justiniana to examine
petitioners books of accounts and other accounting records for
income tax and other internal revenue taxes for the taxable year
1999. Said Letter of Authority was revalidated on August 10,
2001 by Regional Director Leonardo Sacamos.

For petitioners failure to comply with several requests for

the presentation of records and Subpoena Duces Tecum, [the] OIC
of BIR Legal Division issued an Indorsement dated September 26,
2001 informing Revenue District Officer of Revenue Region No.
67, Legazpi City to proceed with the investigation based on the
best evidence obtainable preparatory to the issuance of
assessment notice.

On November 8, 2001, Revenue District Officer Socorro O.

Ramos-Lafuente issued a Preliminary 15-day Letter, which
petitioner received on November 9, 2001. The said letter stated
that a post audit review was held and it was ascertained that there
was deficiency value-added and withholding taxes due from
petitioner in the amount of P 292,874.16.

On April 11, 2002, petitioner received a Formal Letter of

Demand dated April 3, 2002 from Revenue District No. 67,
Legazpi City, assessing petitioner the amount of Two Hundred
Ninety Two Thousand Eight Hundred Seventy Four Pesos and
Sixteen Centavos (P292,874.16.) for deficiency value-added and
withholding taxes for the taxable year 1999, computed as follows:

ASSESSMENT NOTICE NO. 067-99-003-579-072

VALUE ADDED TAX

Gross Sales P1,697,718.90
Output Tax P 154,338.08
Less: Input Tax
VAT Payable P 154,338.08
Add: 25% Surcharge P 38,584.54
20% Interest 79,746.49
Compromise Penalty
Late Payment P16,000.00
Failure to File VAT returns 2,400.00 18,400.00 136,731.01
TOTAL P 291,069.09
WITHHOLDING TAX
Compensation 2,772.91
Expanded 110,103.92
Total Tax Due P 112,876.83
Less: Tax Withheld 111,848.27
Deficiency Withholding Tax P 1,028.56
Add: 20% Interest p.a. 576.51
Compromise Penalty 200.00
TOTAL P 1,805.07

*Expanded Withholding Tax P1,949,334.25 x 5% 97,466.71

Film Rental 10,000.25 x 10% 1,000.00
Audit Fee 193,261.20 x 5% 9,663.00
Rental Expense 41,272.73 x 1% 412.73
Security Service 156,142.01 x 1% 1,561.42
Service Contractor P 110,103.92
Total

SUMMARIES OF DEFICIENCIES
VALUE ADDED TAX P 291,069.09
WITHHOLDING TAX 1,805.07
TOTAL P 292,874.16

Subsequently, Revenue District Office No. 67 sent a copy of

the Final Notice of Seizure dated May 12, 2003, which petitioner
received on May 15, 2003, giving the latter last opportunity to
settle its deficiency tax liabilities within ten (10) [days] from
receipt thereof, otherwise respondent BIR shall be constrained to
serve and execute the Warrants of Distraint and/or Levy and
Garnishment to enforce collection.

On February 6, 2004, petitioner received from Revenue

District Office No. 67 a Warrant of Distraint and/or Levy No. 67-
0029-23 dated May 12, 2003 demanding payment of deficiency
value-added tax and withholding tax payment in the amount
of P292,874.16.

On July 30, 2004, petitioner filed with the Office of

respondent Commissioner a Motion for Reconsideration pursuant
to Section 3.1.5 of Revenue Regulations No. 12-99.
 On February 8, 2005, respondent Commissioner, through
its authorized representative, Revenue Regional Director of
Revenue Region 10, Legaspi City, issued a Decision denying
petitioners Motion for Reconsideration. Petitioner, through
counsel received said Decision on February 18, 2005.
x x x.

Denying that it received a Preliminary Assessment

Notice (PAN) and claiming that it was not accorded due process, Metro Star filed a
petition for review[4] with the CTA. The parties then stipulated on the following
issues to be decided by the tax court:

1. Whether the respondent complied with the due process

requirement as provided under the National Internal Revenue
Code and Revenue Regulations No. 12-99 with regard to the
issuance of a deficiency tax assessment;

1.1 Whether petitioner is liable for the respective

amounts of P291,069.09 and P1,805.07 as deficiency
VAT and withholding tax for the year 1999;

1.2. Whether the assessment has become final and

executory and demandable for failure of petitioner
to protest the same within 30 days from its receipt
thereof on April 11, 2002, pursuant to Section 228 of
the National Internal Revenue Code;

2. Whether the deficiency assessments issued by the respondent

are void for failure to state the law and/or facts upon which
they are based.

2.2 Whether petitioner was informed of the law and

facts on which the assessment is made in compliance
with Section 228 of the National Internal Revenue
Code;
 3. Whether or not petitioner, as owner/operator of a
movie/cinema house, is subject to VAT on sales of services
under Section 108(A) of the National Internal Revenue Code;
4. Whether or not the assessment is based on the best evidence
obtainable pursuant to Section 6(b) of the National Internal
Revenue Code.

The CTA-Second Division found merit in the petition of Metro Star and,
on March 21, 2007, rendered a decision, the decretal portion of which reads:

WHEREFORE, premises considered, the Petition for

Review is hereby GRANTED. Accordingly, the assailed Decision
dated February 8, 2005 is hereby REVERSED and SET ASIDE
and respondent is ORDERED TO DESIST from collecting the
subject taxes against petitioner.

The CTA-Second Division opined that [w]hile there [is] a disputable

presumption that a mailed letter [is] deemed received by the addressee in the
ordinary course of mail, a direct denial of the receipt of mail shifts the burden upon
the party favored by the presumption to prove that the mailed letter was indeed
received by the addressee.[5] It also found that there was no clear showing that
Metro Star actually received the alleged PAN, dated January 16, 2002. It,
accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well as
the Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star
was denied due process.[6]

The CIR sought reconsideration[7] of the decision of the CTA-Second Division, but
the motion was denied in the latters July 24, 2007 Resolution.[8]

Aggrieved, the CIR filed a petition for review[9] with the CTA-En Banc, but the
petition was dismissed after a determination that no new matters were raised.
The CTA-En Banc disposed:

WHEREFORE, the instant Petition for Review is hereby

DENIED DUE COURSE and DISMISSED for lack of merit.
Accordingly, the March 21, 2007 Decision and July 27, 2007
 Resolution of the CTA Second Division in CTA Case No. 7169
entitled, Metro Star Superama, Inc., petitioner vs. Commissioner
of Internal Revenue, respondent are hereby AFFIRMED in toto.

SO ORDERED.

The motion for reconsideration[10] filed by the CIR was likewise denied
by the CTA-En Banc in its November 18, 2008Resolution.[11]

The CIR, insisting that Metro Star received the PAN, dated January 16,
2002, and that due process was served nonetheless because the latter received the
Final Assessment Notice (FAN), comes now before this Court with the sole issue
of whether or not Metro Star was denied due process.

The general rule is that the Court will not lightly set aside the conclusions
reached by the CTA which, by the very nature of its functions, has accordingly
developed an exclusive expertise on the resolution unless there has been an abuse
or improvident exercise of authority.[12] In Barcelon, Roxas Securities, Inc. (now
known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,[13] the Court
wrote:

Jurisprudence has consistently shown that this Court

accords the findings of fact by the CTA with the highest respect.
In Sea-Land Service Inc. v. Court of Appeals [G.R. No. 122605,
30 April 2001, 357 SCRA 441, 445-446], this Court recognizes that
the Court of Tax Appeals, which by the very nature of its function
is dedicated exclusively to the consideration of tax problems, has
necessarily developed an expertise on the subject, and its
conclusions will not be overturned unless there has been an abuse
or improvident exercise of authority. Such findings can only be
disturbed on appeal if they are not supported by substantial
evidence or there is a showing of gross error or abuse on the part
of the Tax Court. In the absence of any clear and convincing proof
to the contrary, this Court must presume that the CTA rendered a
decision which is valid in every respect.

On the matter of service of a tax assessment, a further perusal of our ruling

in Barcelon is instructive, viz:
 Jurisprudence is replete with cases holding that if the
taxpayer denies ever having received an assessment from the BIR, it
is incumbent upon the latter to prove by competent evidence that
such notice was indeed received by the addressee. The onus
probandi was shifted to respondent to prove by contrary evidence
that the Petitioner received the assessment in the due course of
mail. The Supreme Court has consistently held 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
and a direct denial thereof shifts the burden to the party favored
by the presumption to prove that the mailed letter was indeed
received by the addressee (Republic vs. Court of Appeals, 149
SCRA 351). Thus as held by the Supreme Court in Gonzalo P.
Nava vs. Commissioner of Internal Revenue, 13 SCRA 104,
January 30, 1965:

"The facts to be proved to raise this presumption

are (a) that the letter was properly addressed with
postage prepaid, and (b) that it was mailed. Once these
facts are proved, the presumption is that the letter
was received by the addressee as soon as it could have
been transmitted to him in the ordinary course of the
mail. But if one of the said facts fails to appear, the
presumption does not lie. (VI, Moran, Comments on
the Rules of Court, 1963 ed, 56-57 citing Enriquez vs.
Sunlife Assurance of Canada, 41 Phil 269)."

x x x. What is essential to prove the fact of mailing is the

registry receipt issued by the Bureau of Posts or the Registry return
card which would have been signed by the Petitioner or its
authorized representative. And if said documents cannot be located,
Respondent at the very least, should have submitted to the Court a
certification issued by the Bureau of Posts and any other pertinent
document which is executed with the intervention of the Bureau of
Posts. This 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. Thus:
 "While we have held that an assessment is made
when sent within the prescribed period, even if
received by the taxpayer after its expiration (Coll. of
Int. Rev. vs. Bautista, L-12250 and L-12259, May 27,
1959), this ruling makes it the more imperative that
the release, mailing or sending of the notice be clearly
and satisfactorily proved. Mere notations made
without the taxpayers intervention, notice or control,
without adequate supporting evidence cannot suffice;
otherwise, the taxpayer would be at the mercy of the
revenue offices, without adequate protection or
defense." (Nava vs. CIR, 13 SCRA 104, January 30,
1965).

x x x.

The failure of the respondent to prove receipt of the

assessment by the Petitioner leads to the conclusion that no
assessment was issued. Consequently, the governments right to
issue an assessment for the said period has already prescribed.
(Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR
CTA Case 4885, August 22, 1996). (Emphases supplied.)

The Court agrees with the CTA that the CIR failed to discharge its duty and
present any evidence to show that Metro Star indeed received the PAN
dated January 16, 2002. It could have simply presented the registry receipt or the
certification from the postmaster that it mailed the PAN, but failed. Neither did it
offer any explanation on why it failed to comply with the requirement of service of
the PAN. It merely accepted the letter of Metro Stars chairman dated April 29,
2002, that stated that he had received the FAN dated April 3, 2002, but not
the PAN; that he was willing to pay the tax as computed by the CIR; and that he
just wanted to clarify some matters with the hope of lessening its tax liability.

This now leads to the question: Is the failure to strictly comply with notice
requirements prescribed under Section 228 of the National Internal Revenue Code
of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due
process? Specifically, are the requirements of due process satisfied if only the FAN
stating the computation of tax liabilities and a demand to pay within the prescribed
period was sent to the taxpayer?

The answer to these questions require an examination of Section 228 of the

Tax Code which reads:

SEC. 228. Protesting of Assessment. - When the

Commissioner or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of
his findings: provided, however, that a preassessment notice shall
not be required in the following cases:

(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on
the face of the return; or

(b) When a discrepancy has been determined between the

tax withheld and the amount actually remitted by the withholding
agent; or
(c) When a taxpayer who opted to claim a refund or tax
credit of excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the
same amount claimed against the estimated tax liabilities for the
taxable quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not
been paid; or
(e) When the article locally purchased or imported by an
exempt person, such as, but not limited to, vehicles, capital
equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.

The taxpayers shall be informed in writing of the law and the

facts on which the assessment is made; otherwise, the assessment
shall be void.

Within a period to be prescribed by implementing rules and

regulations, the taxpayer shall be required to respond to said
notice. If the taxpayer fails to respond, the Commissioner or his
duly authorized representative shall issue an assessment based on
his findings.
 Such assessment may be protested administratively by filing
a request for reconsideration or reinvestigation within thirty (30)
days from receipt of the assessment in such form and manner as
may be prescribed by implementing rules and regulations. Within
sixty (60) days from filing of the protest, all relevant supporting
documents shall have been submitted; otherwise, the assessment
shall become final.

If the protest is denied in whole or in part, or is not acted

upon within one hundred eighty (180) days from submission of
documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty (30)
days from receipt of the said decision, or from the lapse of one
hundred eighty (180)-day period; otherwise, the decision shall
become final, executory and demandable. (Emphasis supplied).

Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must
first be informed that he is liable for deficiency taxes through the sending of a
PAN. He must be informed of the facts and the law upon which the assessment is
made. The law imposes a substantive, not merely a formal, requirement. To
proceed heedlessly with tax collection without first establishing a valid assessment
is evidently violative of the cardinal principle in administrative investigations - that
taxpayers should be able to present their case and adduce supporting evidence.[14]

This is confirmed under the provisions R.R. No. 12-99 of the BIR which
pertinently provide:

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 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.

3.1.3 Exceptions to Prior Notice of the Assessment. The

notice for informal conference and the preliminary assessment
notice shall not be required in any of the following cases, in which
case, issuance of the formal assessment notice for the payment of
the taxpayer's deficiency tax liability shall be sufficient:

(i) When the finding for any deficiency tax is the result
of mathematical error in the computation of the
 tax appearing on the face of the tax return filed by
the taxpayer; or

(ii) When a discrepancy has been determined between

the tax withheld and the amount actually remitted
by the withholding agent; or

(iii) When a taxpayer who opted to claim a refund or

tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over
and automatically applied the same amount
claimed against the estimated tax liabilities for the
taxable quarter or quarters of the succeeding
taxable year; or

(iv) When the excise tax due on excisable articles has

not been paid; or

(v) When an article locally purchased or imported by

an exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and spare
parts, has been sold, traded or transferred to non-
exempt persons.

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).

The same shall be sent to the taxpayer only by registered

mail or by personal delivery.

If sent by personal delivery, the taxpayer or his duly

authorized representative shall acknowledge receipt thereof in the
duplicate copy of the letter of demand, showing the following: (a)
His name; (b) signature; (c) designation and authority to act for
and in behalf of the taxpayer, if acknowledged received by a
 person other than the taxpayer himself; and (d) date of receipt
thereof.
From the provision quoted above, it is clear that the sending of a PAN to
taxpayer to inform him of the assessment made 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. The use of the
word shall in subsection 3.1.2 describes the mandatory nature of the service of a
PAN. The persuasiveness of the right to due process reaches both substantial and
procedural rights and the failure of the CIR to strictly comply with the
requirements laid down by law and its own rules is a denial of Metro Stars right to
due process.[15] Thus, for its failure to send the PAN stating the facts and the law
on which the assessment was made as required by Section 228 of R.A. No. 8424,
the assessment made by the CIR is void.

The case of CIR v. Menguito[16] cited by the CIR in support of its argument
that only the non-service of the FAN is fatal to the validity of an assessment,
cannot apply to this case because the issue therein was the non-compliance with
the provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old
tax law. RA No. 8424 has already amended the provision of Section 229 on
protesting an assessment. The old requirement of merely notifying the taxpayer of
the CIRs 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.[17] The regulation then, on the other hand,
simply provided that a notice be sent to the respondent in the form prescribed, and
that no consequence would ensue for failure to comply with that form.

The Court need not belabor to discuss the matter of Metro Stars failure to
file its protest, for it is well-settled that a void assessment bears no fruit.[18]

It is an elementary rule enshrined in the 1987 Constitution that no person

shall be deprived of property without due process of law.[19] In balancing the scales
between the power of the State to tax and its inherent right to prosecute perceived
transgressors of the law on one side, and the constitutional rights of a citizen to due
process of law and the equal protection of the laws on the other, the scales must tilt
in favor of the individual, for a citizens right is amply protected by the Bill of
Rights under the Constitution. Thus, while taxes are the lifeblood of the
government, the power to tax has its limits, in spite of all its plenitude. Hence
in Commissioner of Internal Revenue v. Algue, Inc.,[20] it was said

Taxes are the lifeblood of the government and so should be

collected without unnecessary hindrance. On the other hand, such
collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It
is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good,
may be achieved.

It is said that taxes are what we pay for civilized society.

Without taxes, the government would be paralyzed for the lack of
the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of ones hard-earned income
to taxing authorities, every person who is able to must contribute
his share in the running of the government. The government for
its part is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by
those in the seat of power.

But even as we concede the inevitability and indispensability

of taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain
and the courts will then come to his succor. For all the awesome
power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate x x x that the law has not
been observed.[21] (Emphasis supplied).

WHEREFORE, the petition is DENIED.

Republic of the Philippines
Supreme Court
Manila
 FIRST DIVISION

COMMISSIONER OF INTERNAL G.R. No. 169225

REVENUE,
Petitioner, Present:

CORONA, C.J.,
Chairperson,
VELASCO, JR.,
- versus - LEONARDO-DE CASTRO,
PERALTA,* and
PEREZ, JJ.

HAMBRECHT & QUIST Promulgated:

PHILIPPINES, INC.,
Respondent. November 17, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of

Court seeking to set aside the Decision[1] dated August 12, 2005 of the Court of
Tax Appeals (CTA) En Banc in C.T.A. E.B. No. 73 (C.T.A. Case No. 6362),
entitled Commissioner of Internal Revenue vs. Hambrecht & Quist Philippines,
Inc., which affirmed the Decision[2] dated September 24, 2004 of the CTA Original
Division in C.T.A. Case No. 6362 canceling the assessment issued against
respondent for deficiency income and expanded withholding tax for the year 1989
for failure of petitioner Commissioner of Internal Revenue (CIR) to enforce
collection within the period allowed by law.

The CTA summarized the pertinent facts of this case, as follows:

 In a letter dated February 15, 1993, respondent informed the Bureau of Internal
Revenue (BIR), through its West-Makati District Office of its change of business
address from the 2nd Floor Corinthian Plaza, Paseo de Roxas, Makati City to the
22nd Floor PCIB Tower II, Makati Avenue corner H.V. De la Costa Streets,
Makati City. Said letter was duly received by the BIR-West Makati on February
18, 1993.

On November 4, 1993, respondent received a tracer letter or follow-up letter dated

October 11, 1993 issued by the Accounts Receivable/Billing Division of the BIRs
National Office and signed by then Assistant Chief Mr. Manuel B. Mina,
demanding for payment of alleged deficiency income and expanded withholding
taxes for the taxable year 1989 amounting to P2,936,560.87.
On December 3, 1993, respondent, through its external auditors, filed with the
same Accounts Receivable/Billing Division of the BIRs National Office, its
protest letter against the alleged deficiency tax assessments for 1989 as indicated
in the said tracer letter dated October 11, 1993.

The alleged deficiency income tax assessment apparently resulted from an

adjustment made to respondents taxable income for the year 1989, on account of
the disallowance of certain items of expense, namely, professional fees paid,
donations, repairs and maintenance, salaries and wages, and management fees.
The latter item of expense, the management fees, made up the bulk of the
disallowance, the examiner alleging, among others, that petitioner failed to
withhold the appropriate tax thereon. This is also the same basis for the
imposition of the deficiency withholding tax assessment on the management fees.
Revenue Regulations No. 6-85 (EWT Regulations) does not impose or prescribe
EWT on management fees paid to a non-resident.
On November 7, 2001, nearly eight (8) years later, respondents external
auditors received a letter from herein petitioner Commissioner of Internal
Revenue dated October 27, 2001. The letter advised the respondent that petitioner
had rendered a final decision denying its protest on the ground that the protest
against the disputed tax assessment was allegedly filed beyond the 30-day
reglementary period prescribed in then Section 229 of the National Internal
Revenue Code.

On December 6, 2001, respondent filed a Petition for Review docketed as CTA

Case No. 6362 before the then Court of Tax Appeals, pursuant to Section 7 of
Republic Act No. 1125, otherwise known as an Act Creating the Court of Tax
Appeals and Section 228 of the NIRC, to appeal the final decision of the
Commissioner of Internal Revenue denying its protest against the deficiency
income and withholding tax assessments issued for taxable year 1989.[3]

In a Decision dated September 24, 2004, the CTA Original Division held
that the subject assessment notice sent by registered mail on January 8, 1993 to
respondents former place of business was valid and binding since respondent only
gave formal notice of its change of address on February 18, 1993. Thus, the
assessment had become final and unappealable for failure of respondent to file a
protest within the 30-day period provided by law. However, the CTA (a) held that
the CIR failed to collect the assessed taxes within the prescriptive period; and (b)
directed the cancellation and withdrawal of Assessment Notice No. 001543-89-
5668. Petitioners Motion for Reconsideration and Supplemental Motion for
Reconsideration of said Decision filed on October 14, 2004 and November 22,
2004, respectively, were denied for lack of merit.

Undaunted, the CIR filed a Petition for Review with the CTA En Banc but this was
denied in a Decision dated August 12, 2005, the dispositive portion reads:

WHEREFORE, the Petition for Review is DENIED DUE COURSE and

the case is accordingly DISMISSED for lack of merit.[4]

Hence, the instant Petition wherein the following issues are raised:

WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION

TO RULE THAT THE GOVERNMENTS RIGHT TO COLLECT THE TAX
HAS PRESCRIBED.

II

WHETHER OR NOT THE PERIOD TO COLLECT THE ASSESSMENT HAS

PRESCRIBED.[5]

The petition is without merit.

Anent the first issue, petitioner argues that the CTA had no jurisdiction over
the case since the CTA itself had ruled that the assessment had become final and
unappealable. Citing Protectors Services, Inc. v. Court of Appeals,[6] the CIR
argued that, after the lapse of the 30-day period to protest, respondent may no
longer dispute the correctness of the assessment and its appeal to the CTA should
be dismissed. The CIR took issue with the CTAs pronouncement that it had
jurisdiction to decide other matters related to the tax assessment such as the issue
on the right to collect the same since the CIR maintains that when the law says that
the CTA has jurisdiction over other matters, it presupposes that the tax assessment
has not become final and unappealable.

We cannot countenance the CIRs assertion with regard to this point. The
jurisdiction of the CTA is governed by Section 7 of Republic Act No. 1125, as
amended, and the term other matters referred to by the CIR in its argument can be
found in number (1) of the aforementioned provision, to wit:
Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise
exclusive appellate jurisdiction to review by appeal, as herein provided

1. Decisions of the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under the
National Internal Revenue Code or other law as part of law administered by
the Bureau of Internal Revenue. (Emphasis supplied.)

Plainly, the assailed CTA En Banc Decision was correct in declaring that
there was nothing in the foregoing provision upon which petitioners theory with
regard to the parameters of the term other matters can be supported or even
deduced. What is rather clearly apparent, however, is that the term other matters is
limited only by the qualifying phrase that follows it.

Thus, on the strength of such observation, we have previously ruled that the
appellate jurisdiction of the CTA is not limited to cases which involve decisions of
the CIR on matters relating to assessments or refunds. The second part of the
provision covers other cases that arise out of the National Internal Revenue Code
(NIRC) or related laws administered by the Bureau of Internal Revenue (BIR).[7]

In the case at bar, the issue at hand is whether or not the BIRs right to collect
taxes had already prescribed and that is a subject matter falling under Section
223(c) of the 1986 NIRC, the law applicable at the time the disputed assessment
was made.To quote Section 223(c):

Any internal revenue tax which has been assessed within the period of
limitation above-prescribed may be collected by distraint or levy or by a
proceeding in court within three years following the assessment of the
tax. (Emphases supplied.)
 In connection therewith, Section 3 of the 1986 NIRC states that the
collection of taxes is one of the duties of the BIR, to wit:

Sec. 3. Powers and duties of Bureau. - The powers and duties of the
Bureau of Internal Revenue shall comprehend the assessment and collection of all
national internal revenue taxes, fees, and charges and the enforcement of all
forfeitures, penalties, and fines connected therewith including the execution of
judgments in all cases decided in its favor by the Court of Tax Appeals and the
ordinary courts. Said Bureau shall also give effect to and administer the
supervisory and police power conferred to it by this Code or other laws.
(Emphasis supplied.)

Thus, from the foregoing, the issue of prescription of the BIRs right to
collect taxes may be considered as covered by the term other matters over which
the CTA has appellate jurisdiction.

Furthermore, the phraseology of Section 7, number (1), denotes an intent to

view the CTAs jurisdiction over disputed assessments and over other matters
arising under the NIRC or other laws administered by the BIR as separate and
independent of each other. This runs counter to petitioners theory that the latter is
qualified by the status of the former, i.e., an other matter must not be a final and
unappealable tax assessment or, alternatively, must be a disputed assessment.

Likewise, the first paragraph of Section 11 of Republic Act No. 1125,

as amended by Republic Act No. 9282,[8] belies petitioners assertion as the
provision is explicit that, for as long as a party is adversely affected by any
decision, ruling or inaction of petitioner, said party may file an appeal with the
CTA within 30 days from receipt of such decision or ruling. The wording of the
provision does not take into account the CIRs restrictive interpretation as it clearly
provides that the mere existence of an adverse decision, ruling or inaction along
with the timely filing of an appeal operates to validate the exercise of jurisdiction
by the CTA.

To be sure, the fact that an assessment has become final for failure of the
taxpayer to file a protest within the time allowed only means that the validity or
correctness of the assessment may no longer be questioned on appeal. However,
the validity of the assessment itself is a separate and distinct issue from the issue of
whether the right of the CIR to collect the validly assessed tax has prescribed. This
issue of prescription, being a matter provided for by the NIRC, is well within the
jurisdiction of the CTA to decide.
 With respect to the second issue, the CIR insists that its right to collect the
tax deficiency it assessed on respondent is not barred by prescription since the
prescriptive period thereof was allegedly suspended by respondents request for
reinvestigation.

Based on the facts of this case, we find that the CIRs contention is without
basis. The pertinent provision of the 1986 NIRC is Section 224, to wit:

Section 224. Suspension of running of statute. The running of the statute

of limitations provided in Sections 203 and 223 on the making of assessment and
the beginning of distraint or levy or a proceeding in court for collection, in respect
of any deficiency, shall be suspended for the period during which the
Commissioner is prohibited from making the assessment or beginning distraint or
levy or a proceeding in court and for sixty days thereafter; when the taxpayer
requests for a re-investigation which is granted by the Commissioner; when
the taxpayer cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, That, if the taxpayer informs
the Commissioner of any change in address, the statute will not be suspended;
when the warrant of distraint and levy is duly served upon the taxpayer, his
authorized representative, or a member of his household with sufficient discretion,
and no property could be located; and when the taxpayer is out of the Philippines.
(Emphasis supplied.)

The plain and unambiguous wording of the said provision dictates that two
requisites must concur before the period to enforce collection may be suspended:
(a) that the taxpayer requests for reinvestigation, and (b) that petitioner grants such
request.

On this point, we have previously held that:

The above section is plainly worded. In order to suspend the running of

the prescriptive periods for assessment and collection,the request for
reinvestigation must be granted by the CIR.[9] (Emphasis supplied.)

Consequently, the mere filing of a protest letter which is not granted does
not operate to suspend the running of the period to collect taxes. In the case at bar,
the records show that respondent filed a request for reinvestigation on December 3,
1993, however, there is no indication that petitioner acted upon respondents
protest. As the CTA Original Division in C.T.A. Case No. 6362 succinctly pointed
out in its Decision, to wit:
 It is evident that the respondent did not conduct a reinvestigation, the
protest having been dismissed on the ground that the assessment has become final
and executory. There is nothing in the record that would show what action was
taken in connection with the protest of the petitioner. In fact, petitioner did not
hear anything from the respondent nor received any communication from the
respondent relative to its protest, not until eight years later when the final decision
of the Commissioner was issued (TSN, March 7, 2002, p. 24). In other words,
the request for reinvestigation was not granted. x x x.[10] (Emphasis supplied.)

Since the CIR failed to disprove the aforementioned findings of fact of the
CTA which are borne by substantial evidence on record, this Court is constrained
to uphold them as binding and true. This is in consonance with our oft-cited ruling
that instructs this Court to not lightly set aside the conclusions reached by the
CTA, which, by the very nature of its functions, is dedicated exclusively to the
resolution of tax problems and has accordingly developed an expertise on the
subject unless there has been an abuse or improvident exercise of authority.[11]

Indeed, it is contradictory for the CIR to argue that respondents December 3,

1993 protest which contained a request for reinvestigation was filed beyond the
reglementary period but still claim that the same request for reinvestigation was
implicitly granted by virtue of its October 27, 2001 letter. We find no cogent
reason to reverse the CTA when it ruled that the prescriptive period for the CIRs
right to collect was not suspended under the circumstances of this case.

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

Court of Tax Appeals (CTA) En Banc dated August 12, 2005 is AFFIRMED. No
costs.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 169899 February 06, 2013

PHILACOR CREDIT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
 DECISION

BRION, J.:

Before us is a petition for review on certiorari1under Rule 45 of the Rules of Court seeking the
reversal of the decision2 dated September 23, 2005 of the Court of Tax Appeals (CTA) en bane in
C.T.A, E.B. No. 19 (C.T.A. Case No. 5674). In the assailed decision, the CTA en banc affirmed the
CTA Division’s resolution3 of April 6, 2004. Both courts held that petitioner Philacor Credit
Corporation (Philacor), as an assignee of promissory notes, is liable for deficiency documentary
stamp tax (DST) on (1) the issuance of promissory notes; and (2) the assignment of promissory
notes for the fiscal year ended 1993.

The facts are not disputed.

Philacor is a domestic corporation organized under Philippine laws and is engaged in the business
of retail financing. Through retail financing, a prospective buyer of a home appliance – with neither
cash nor any credit card – may purchase appliances on installment basis from an appliance dealer.
After Philacor conducts a credit investigation and approves the buyer’s application, the buyer
executes a unilateral promissory note in favor of the appliance dealer. The same promissory note is
subsequently assigned by the appliance dealer to Philacor.4

Pursuant to Letter of Authority No. 17107 dated July 6, 1974, Revenue Officer Celestino Mejia
examined Philacor’s books of accounts and other accounting records for the fiscal year August 1,
1992 to July 31, 1993. Philacor received tentative computations of deficiency taxes for this year.
Philacor’s Finance Manager, Leticia Pangan, contested the tentative computations of deficiency
taxes (totaling P20,037,013.83) through a letter dated April 17, 1995.5

On May 16, 1995, Mr. Mejia sent a letter to Philacor revising the preliminary assessments as follows:

Deficiency Income Tax P 9,832,098.22

Deficiency Percentage Tax 866,287.60

Deficiency Documentary Stamp Tax 3,368,169. 45
==============
Total P14,066,555.276
==============

Philacor then received Pre-Assessment Notices (PANs), all dated July 18, 1996, covering the
alleged deficiency income, percentage and DSTs, including increments.7

On February 3, 1998, Philacor received demand letters and the corresponding assessment notices,
all dated January 28, 1998. The assessments, inclusive of increments, cover the following:

Deficiency Income Tax P12, 888,085.09

Deficiency Percentage Tax 1,185,977.07
Deficiency DST Tax 3,368,196. 45
 ==============
Total P17,442,231.618
==============

On March 4, 1998, Philacor protested the PANs, with a request for reconsideration and
reinvestigation. It alleged that the assessed deficiency income tax was erroneously computed
when it failed to take into account the reversing entries of the revenue accounts and income
adjustments, such as repossessions, write-offs and legal accounts. Similarly, the Bureau of Internal
Revenue (BIR) failed to take into account the reversing entries of repossessions, legal accounts, and
write-offs when it computed the percentage tax; thus, the total income reported, that the BIR arrived
at, was not equal to the actual receipts of payment from the customers. As for the deficiency DST,
Philacor claims that the accredited appliance dealers were required by law to affix the documentary
stamps on all promissory notes purchased until the enactment of Republic Act No. 7660, otherwise
known as An Act Rationalizing Further the Structure and Administration of the Documentary Stamp
Tax,9 which took effect on January 15, 1994. In addition, Philacor filed, on the following day, a
supplemental protest, arguing that the assessments were void for failure to state the law and the
facts on which they were based.10

On September 30, 1998, Philacor filed a petition for review before the CTA Division, docketed as
C.T.A. Case No. 5674. 11

The CTA Division rendered its decision on August 14, 2003.12 After examining the documents
submitted by the parties, it concluded that Philacor failed to declare part of its income, making it
liable for deficiency income tax and percentage tax. However, it also found that the Commissioner of
Internal Revenue (CIR) erred in his analysis of the entries in Philacor’s books thereby considerably
reducing Philacor’s liability to a deficiency income tax of P1,757,262.47 and a deficiency percentage
tax of P613,987.86. The CTA also ruled that Philacor is liable for the DST on the issuance of the
promissory notes and their subsequent transfer or assignment. Noting that Philacor failed to prove
that the DST on its promissory notes had been paid for these two transactions, the CTA held
Philacor liable for deficiency DST of P673,633.88, which is computed as follows:

Total Notes purchased during the taxable year P 269,453,556.94

Divided by rate under Section 180 200.00

Basis of DST P 1,347,267.78

Multiply by DST rate (Section 180, 1993Tax Code .20

DST on notes purchased P 269,453.55

Add: Total DST on Notes assigned (Section 180) 269,453.55

P 538,907.10
Deficiency Documentary Stamp Tax
Add: 25% surcharge 134,726.78

Total Deficiency Documentary Stamp Tax

P 673,633.8813
 ===============

All sums for deficiency taxes included surcharge and interest.

Both parties filed their motions for reconsideration. The CIR’s motion was denied for having been
filed out of time.14On the other hand, the CTA partially granted Philacor’s motion in the
resolution of April 6, 2004,15 wherein it cancelled the assessment for deficiency income tax
and deficiency percentage tax. These assessments were withdrawn because the CTA found that
Philacor had correctly declared its income; the discrepancy of P2,180,564.00 had been properly
accounted for as proper adjustments to Philacor’s net revenues. Nevertheless, the CTA
Division sustained the assessment for deficiency DST in the amount of P673,633.88.

Philacor filed a petition for review before the CTA en banc.16

In its decision17 dated September 23, 2005, the CTA en banc affirmed the resolution of April 6,
2004 of the CTA Division. It reiterated that Philacor is liable for the DST due on two transactions –
the issuance of promissory notes and their subsequent assignment in favor of Philacor. With respect
to the issuance of the promissory notes, Philacor is liable as the transferee which "accepted" the
promissory notes from the appliance dealer in accordance with Section 180 of Presidential Decree
No. 1158, as amended (1986 Tax Code).18 Further citing Section 4219 of Regulations No. 26,20 the
CTA en banc held that a person "using" a promissory note is one of the persons who can be held
liable to pay the DST. Since the subject promissory notes do not bear documentary stamps, Philacor
can be held liable for DST. As for the assignment of the promissory notes, the CTA en banc held
that each and every transaction involving promissory notes is subject to the DST under Section 173
of the 1986 Tax Code; Philacor is liable as the transferee and assignee of the promissory notes.

On November 18, 2005, Philacor filed the present petition, raising the following assignment of errors:

"USING" IN REGULATIONS NO. 26 DOES NOT APPEAR IN SECTIONS [SIC] 173 NOR 180 OF
THE TAX CODE; AND, THEREFORE WENT BEYOND THE LAW [SIC]

II

"ACCEPTING" IN SECTION 173 OF THE TAX CODE DOES NOT APPLY TO PROMISSORY
NOTES

III

THE CTA EN BANC DECISION EXTENDED THE WORDS "ASSIGNMENT" AND

"TRANSFERRING" IN SECTION 173 TO THE PROMISSORY NOTES; SUCH THAT, THE
"ASSIGNMENT" OR "TRANSFERRING" OF PROMISSORY NOTES IS SUBJECT TO DST.
HOWEVER SECTIONS 176, 178, AND 198 OF TITLE VII OF THE TAX CODE EXPRESSLY
IMPOSES [SIC] DST ON THE TRANSFER/ASSIGNMENT OF CERTAIN DOCUMENTS WHICH
REVEALS THE LEGISLATIVE INTENT THAT ONLY THE ASSIGNMENT/TRANSFER OF CERTAIN
DOCUMENTS IN SECTIONS 176, 178, AND 198 ARE SUBJECT TO DST

IV
BIR RULING 139-97 RULED THAT THE ASSIGNMENT OF A LOAN, WHICH IN SECTION 180 IS
TREATED IN THE SAME BREATH AS A PROMISSORY NOTE, IS NOT SUBJECT TO DST21

We find the petition meritorious.

Philacor is not liable for the DST on the issuance of the promissory notes.

Neither party questions that the issuances of promissory notes are transactions which are taxable
under the DST. The 1986 Tax Code clearly states that:

Section 180. Stamp tax on promissory notes, bills of exchange, drafts, certificates of deposit,
debt instruments used for deposit substitutes and others not payable on sight or demand.—
On all bills of exchange (between points within the Philippines), drafts, or certificates of deposits,
debt instruments used for deposit substitutes or orders for the payment of any sum of money
otherwise than at sight or on demand, 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 twenty centavos on each two hundred pesos, or fractional part
thereof, of the face value of any such bill of exchange, draft certificate of deposit, debt instrument, or
note. [emphasis supplied; underscores ours]

Under the undisputed facts and the above law, the issue that emerges is: who is liable for the tax?

Section 173 of the 1997 National Internal Revenue Code (1997 NIRC) names those who are
primarily liable for the DST and those who would be secondarily liable:

Section 173. Stamp taxes upon documents, instruments, and papers. – Upon documents,
instruments, and papers, and upon acceptances, assignments, sales, and transfers of the obligation,
right, or property incident thereto, there shall be levied, collected and paid for, and in respect of the
transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the
following sections of this Title, by the person making, signing, issuing, accepting, or transferring the
same, and at the same time such act is done or transaction had: Provided, that wherever one party
to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who
is not exempt shall be the one directly liable for the tax. [emphases supplied; underscores ours]

The persons primarily liable for the payment of the DST are the person (1) making; (2) signing; (3)
issuing; (4) accepting; or (5) transferring the taxable documents, instruments or papers. Should
these parties be exempted from paying tax, the other party who is not exempt would then be liable.

Philacor did not make, sign, issue, accept or transfer the promissory notes. The acts of making,
signing, issuing and transferring are unambiguous. The buyers of the appliances made, signed and
issued the documents subject to tax, while the appliance dealer transferred these documents to
Philacor which likewise indisputably received or "accepted" them. "Acceptance," however, is an act
that is not even applicable to promissory notes, but only to bills of exchange.22 Under Section
13223 of the Negotiable Instruments Law (which provides for how acceptance should be made), the
act of acceptance refers solely to bills of exchange. Its object is to bind the drawee of a bill and make
him an actual and bound party to the instrument.24 Further, in a ruling adopted by the BIR as early as
1955, acceptance has already been given a narrow definition with respect to incoming foreign bills of
exchange, not the common usage of the word "accepting" as in receiving:

The word "accepting" appearing in Section 210 of the National Internal Revenue Code has reference
to incoming foreign bills of exchange which are accepted in the Philippines by the drawees thereof.
Accordingly, the documentary stamp tax on freight receipts is due at the time the receipts are issued
and from the transportation company issuing the same. The fact that the transportation contractor
issuing the freight receipts shifts the burden of the tax to the shipper does not make the latter
primarily liable to the payment of the tax.25 (underscore ours)

This ruling, to our mind, further clarifies that a party to a taxable transaction who "accepts" any
documents or instruments in the plain and ordinary meaning of the act (such as the shipper in the
cited case) does not become primarily liable for the tax. In the same way, Philacor cannot be made
primarily liable for the DST on the issuance of the subject promissory notes, just because it had
"accepted" the promissory notes in the plain and ordinary meaning. In this regard, Section 173 of the
1997 NIRC assumes materiality as it determines liability should the parties who are primarily liable
turn out to be exempted from paying tax; the other party to the transaction then becomes liable.

Revenue Regulations No. 9-200026 interprets the law more widely so that all parties to a transaction
are primarily liable for the DST, and not only the person making, signing, issuing, accepting or
transferring the same becomes liable as the law provides. It provides:

SEC. 2. Nature of the Documentary Stamp Tax and Persons Liable for the Tax. –

(a) In General. - The documentary stamp taxes under Title VII of the Code is a tax on certain
transactions. It is imposed against "the person making, signing, issuing, accepting, or
transferring" the document or facility evidencing the aforesaid transactions. Thus, in general,
it may be imposed on the transaction itself or upon the document underlying such act. Any
of the parties thereto shall be liable for the full amount of the tax due: Provided,
however, that as between themselves, the said parties may agree on who shall be liable or
how they may share on the cost of the tax.

(b) Exception. - Whenever one of the parties to the taxable transaction is exempt from the
tax imposed under Title VII of the Code, the other party thereto who is not exempt shall be
the one directly liable for the tax. [emphasis ours]

But even under these terms, the liability of Philacor is not a foregone conclusion as from the face of
the promissory note itself, Philacor is not a party to the issuance of the promissory notes, but merely
to their assignment. On the face of the documents, the parties to the issuance of the promissory
notes would be the buyer of the appliance, as the maker, and the appliance dealer, as the payee.

We are aware that while Philacor denies being a party to the issuance of the promissory notes,27 the
appliance buyer is made to sign a promissory note only after Philacor has approved its credit
application. Moreover, the note Philacor marked as Annex "J" of its petition for review28 is the
standard pro forma promissory note that Philacor uses in all similar transactions;29 the same
document contains the issuance of the notes in favor of the appliance dealer and their assignments
to Philacor. The promissory notes are also transferred to Philacor by the appliance dealer on the
same date that the appliance buyer issues the promissory note in favor of the appliance buyer. Thus,
it would seem that Philacor is the person who ultimately benefits from the issuance of the notes, if
not the intended payee of these notes.

These observations, however, pertain to facts and implications that are found outside the terms of
the documents under discussion and are contradictory to their outright terms. To consider these
externalities would go against the doctrine that the liability for the DST and the amount due are
determined from the document itself – examined through its form and face – and cannot be affected
by proof of facts outside it.30
Nor can the CIR justify his position that Philacor is liable for the tax by citing Section 42 of
Regulations No. 26, which was issued by the Department of Finance on March 26, 1924:

Section 42. Responsibility for payment of tax on promissory notes. - The person who signs or issues
a promissory note and any person transferring or using a promissory note can be held responsible
for the payment of the documentary stamp tax. [emphasis ours; italics supplied]

The rule uses the word "can" which is permissive, rather than the word "shall," which would make
the liability of the persons named definite and unconditional. In this sense, a person using a
promissory note can be made liable for the DST if he or she is: (1) among those persons
enumerated under the law - i.e., the person who makes, issues, signs, accepts or transfers the
document or instrument; or (2) if these persons are exempt, a non-exempt party to the transaction.
Such interpretation would avoid any conflict between Section 173 of the 1997 NIRC and Section 42
of Regulations No. 26 and would make it unnecessary for us to strike down the latter as having gone
beyond the law it seeks to interpret.

However, we cannot interpret Section 42 of Regulations No. 26 to mean that anyone who "uses" the
document, regardless of whether such person is a party to the transaction, should be liable, as this
reading would go beyond Section 173 of the 1986 Tax Code – the law that the rule seeks to
implement. Implementing rules and regulations cannot amend a law for they are intended to carry
out, not supplant or modify, the law.31 To allow Regulations No. 26 to extend the liability for DST to
persons who are not even mentioned in the relevant provisions of any of our Tax Codes, particularly
the 1986 Tax Code (the relevant law at the time of the subject transactions) would be a clear breach
of the rule that a statute must always be superior to its implementing regulations.

This expansive interpretation of Regulations No. 26 becomes even more untenable when we look at
the difference between the way our law has been phrased and the way the Internal Revenue Law of
the United States (US) identified the persons liable for its stamp tax. We also note that despite the
subsequent amendments to our DST provisions, our Congress never saw it fit to phrase our laws
using the US phraseologies.

In Section 110 of our Internal Revenue Code of 1904, the persons liable for the stamp tax are the
"persons who shall make, sign or issue the same[.]" Although our 1904 Tax Code was patterned
after the then existing US Internal Revenue Code, also known as the Act of Congress of July 13,
1866,32 the US provisions on the stamp tax provide for a wider set of taxpayers: Section 158 thereof
places the burden on "persons who shall make, sign or issue, or who shall cause to be made, signed
or issued any instrument, document, or paper of any kind or description whatsoever, or shall accept,
negotiate or pay or cause to be accepted, negotiated and paid, any bill of exchange, draft, or order,
or promissory note for the payment of money." It goes on further by extending the liability not only to
the parties mentioned but also to "any party having an interest therein." Another US law, the War
Revenue Act of June 13, 1898, provides in Section 6 thereof a more succinct phrase whose
coverage is just as extensive: "any persons or party who shall make, sign or issue the same, or for
whose use or benefit the same shall be made, signed or issued." These provisions have been
adopted by various states such as Florida, South Carolina, New Jersey and Pennsylvania.33

Under US laws, liability for the DST is placed on any person who has an interest in the transaction or
document and whoever may benefit from it. A person who would use it or benefit from it, including
parties who are not named in the instrument, would be liable for the tax. In comparison, our
legislators chose to limit the DST liability only to "persons who shall make, sign or issue [the
document or instrument]."
Notably, our revenue laws regarding persons liable for the DST have been repeatedly amended. In
subsequent amendments, the coverage of the liability for DST included persons who "accept" and
"transfer" the instrument, document or paper of the taxable transaction. Thereafter, we included the
proviso that should any of the parties be exempt, the other party to the transaction would become
liable. However, none of these amendments had ever extended the liability to persons who have any
interest in or who would benefit from the document or instrument subject to tax. Thus, we cannot
allow Regulations No. 26 to be interpreted in such a way as to extend the DST liability to persons
who are not the parties named in the taxable document or instrument and are merely using or
benefiting from it, against the clear intention of our legislature.

In our view, it makes more sense to include persons who benefit from or have an interest in the
taxable document, instrument or transaction. There appears no reason for distinguishing between
the persons who make, sign, issue, transfer or accept these documents and the persons who have
an interest in these and/or have caused them to be made, signed or issued. This also limits the
opportunities for avoiding tax. Moreover, there are cases when making all relevant parties taxable
could help our administrative officers collect tax more efficiently. In this case, the BIR could simply
collect from the financing companies, rather than go after each and every appliance buyer or
appliance seller. However, these are matters that are within the prerogatives of Congress so
that any interference from the Court, no matter how well-meaning, would constitute judicial
legislation. At best, we can only air our views in the hope that Congress would take notice.

Philacor is not liable for the DST on the assignment of promissory notes.

Philacor, as an assignee or transferee of the promissory notes, is not liable for the assignment or
transfer of promissory notes as this transaction is not taxed under the law.

The CIR argues that the DST is levied on the exercise of privileges through the execution of specific
instruments, or the privilege to enter into a transaction. Therefore, the DST should be imposed on
every exercise of the privilege to enter into a transaction.34 There is nothing in Section 180 of the
1986 Tax Code that supports this argument; the argument is even contradicted by the way the
provisions on DST were drafted. 1âwphi1

As Philacor correctly points out, there are provisions in the 1997 NIRC that specifically impose the
DST on the transfer and/or assignment of documents evidencing particular transactions. Section
176 imposes a DST on the transfer of due bills, certificates of obligation, or shares or certificates of
stock in a corporation, apart from Section 175 which imposes the DST on the issuance of shares of
stock in a corporation. Section 178 imposes the DST on certificates of profits, or any certificate or
memorandum showing interest in a property or accumulations of any corporation, and on
all transfers of such certificate or memoranda. Section 198 imposes the DST on the assignment
or transfer of any mortgage, lease or policy of insurance, apart from Sections 183, 184, 185, 194
and 195 which impose it on the issuances of mortgages, leases and policies of insurance. Indeed,
the law has set a pattern of expressly providing for the imposition of DST on the transfer and/or
assignment of documents evidencing certain transactions. Thus, we can safely conclude that where
the law did not specify that such transfer and/or assignment is to be taxed, there would be no basis
to recognize an imposition.

A good illustrative example is Section 198 of the 1986 Tax Code which provides that:

Section 198. Stamp tax on assignments and renewals of certain instruments. – Upon each and
every assignment or transfer of any mortgage, lease or policy of insurance, or the renewal or
continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness by
altering or otherwise, there shall be levied, collected and paid a documentary stamp tax, at the same
rate as that imposed on the original instrument.

If we look closely at this provision, we would find that an assignment or transfer becomes taxable
only in connection with mortgages, leases and policies of insurance. The list does not include the
assignment or transfer of evidences of indebtedness; rather, it is the renewal of these that is taxable.
The present case does not involve a renewal, but a mere transfer or assignment of the evidences of
indebtedness or promissory notes. A renewal would involve an increase in the amount of
indebtedness or an extension of a period, and not the mere change in person of the payee.35

In BIR Ruling No. 139-97 issued on December 29, 1997, then CIR Liwayway Vinzons-Chato
pronounced that the assignment of a loan that is not for a renewal or a continuance does not result
in a liability for DST. Revenue Regulations No. 13-2004, issued on December 23, 2004, states that
"[t]he DST on all debt instruments shall be imposed only on every original issue and the tax shall be
based on the issue price thereof. Hence, the sale of a debt instrument in the secondary market will
not be subject to the DST." Included in the enumeration of debt instruments is a promissory note.

The BIR Ruling and Revenue Regulation cited are still applicable to this case, even if they were
issued after the transactions in question had already taken place. They apply because they are
issuances interpreting the same rule imposing a DST on promissory notes. At the time BIR Ruling
No. 139-97 was issued, the law in effect was the 1986 Tax Code; the 1997 NIRC took effect only on
January 1, 1998. Moreover, the BIR Ruling referred to a transaction entered into in 1992, when the
1986 Tax Code had been in effect. On the other hand, the BIR issued Revenue Regulations No. 13-
2004 when Section 180 of the 1986 Tax Code had already been amended. Nevertheless, the rule
would still apply to this case because the pertinent part of Section 180 – the part dealing with
promissory notes – remained the same; it imposed the DST on the promissory notes’ issuances and
renewals, but not on their assignment or transfer:

Section 180 of the 1986 Tax Code, as
amended
Section 180. Stamp tax on promissory notes,
bills of exchange, drafts, certificates of
deposit, debt instruments used for deposit
substitutes and others not payable on sight
or demand on all promissory notes, whether
negotiable or nonnegotiable except bank
notes issued for circulation, and on each
renewal of any such note, there shall be
collected a documentary stamp tax of twenty
centavos on each two hundred pesos, or
fractional part thereof, of the face value of
any such bill of exchange, draft certificate of
deposit, debt instrument, or note.
– On all bills of exchange (between points
within the Philippines), drafts, or certificates
of deposits, debt instruments used for
deposit substitutes or orders for the payment
of any sum of money otherwise than at sight
or on demand,
Section 180 of the 1997 NIRC, as
amended by Republic Act No. 9243
Section 180. Stamp Tax on All Bonds, Loan
Agreements, Promissory Notes, Bills of
Exchange, Drafts, Instruments and Securities
Issued by the Government or Any of its
Instrumentalities, Deposit Substitute Debt
Instruments, Certificates of Deposits Bearing
Interest and Others Not Payable on Sight or
Demand. - On all bonds, loan agreements,
including those 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, deposit substitute debt
instruments, certificates of deposits drawing
interest, orders for the payment of any sum of
money otherwise than at sight or on demand,
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 (P200), 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
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.

The settled rule is that in case of doubt, tax laws must be construed strictly against the State and
liberally in favor of the taxpayer. The reason for this ruling is not hard to grasp taxes, as burdens
which must be endured by the taxpayer, should not be presumed to go beyond what the law
expressly and clearly declares. That such strict construction is necessary in this case is evidenced
by the change in the subject provision as presently worded, which now expressly levies the tax on
shares of stock as against the previlege of issuing certificates of stock as formerly provided.36

WHEREFORE, premises considered, we GRANT the petition. The September 23, 2005 Decision of
the Court of Tax Appeals en banc in C.T.A. E.B. No. 19 (C.T.A. Case No. 5674), ordering Philacor
Credit Corporation to pay a deficiency documentary stamp tax in connection with the issuances and
transfers or assignments of promissory notes for the fiscal year ended July 31, 1993, is SET ASIDE.
No costs.

SO ORDERED.

SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. No. 179063

REVENUE,
Petitioner, Present:
Quisumbing, J., Chairperson,
- versus - Carpio,*
 Carpio Morales,

Bersamin,** and

Abad, JJ.

UNITED COCONUT PLANTERS

BANK, Promulgated:

Respondent.

October 23, 2009

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

DECISION

ABAD, J.:

This is an action involving a disputed assessment for deficiencies in the

payment of creditable withholding tax and documentary stamps tax due from a
foreclosure sale.

The Facts and the Case

Respondent United Coconut Planters Bank (UCPB) granted loans

of P68,840,000.00 and P335,000,000.00 to George C. Co, Go Tong Electrical
Supply Co., Inc., and Tesco Realty Co. that the borrowers caused to be secured by
several real estate mortgages. When the latter later failed to pay their loans,
UCPB filed a petition for extrajudicial foreclosure of the mortgaged
properties. Pursuant to that petition, on December 31, 2001 a notary public
for Manila held a public auction sale of the mortgaged properties. UCPB made the
highest winning bid of P504,785,000.00 for the whole lot.

On January 4, 2002 the notary public submitted the Certificate of Sale to

the Executive Judge of Regional Trial Court (RTC) of Manila for his approval.[1] But,
on February 18, 2002 the executive judge returned it with instruction to the
notary public to explain an inconsistency in the tax declaration of one mortgaged
property. The executive judge further ordered the notary public to show proof of
payment of the Sheriffs percentage of the bid price.[2] The notary public
complied.[3] On March 1, 2002 the executive judge finally signed the certificate of
sale and approved its issuance to UCPB as the highest bidder.[4]

On June 18, 2002 UCPB presented the certificate of sale to the Register of
Deeds of Manila for annotation on the transfer certificates of title of the
foreclosed properties. On July 5, 2002 the bank paid creditable withholding taxes
(CWT) of P28,640,700.00 and documentary stamp taxes (DST) of P7,160,165.00 in
relation to the extrajudicial foreclosure sale. It then submitted an affidavit of
consolidation of ownership to the Bureau of Internal Revenue (BIR) with proof of
tax payments and other documents in support of the banks application for a tax
clearance certificate and certificate authorizing registration.

Petitioner Commissioner of Internal Revenue (CIR), however, charged UCPB

with late payment of the corresponding DST and CWT, citing Section 2.58 of
Revenue Regulation 2-98, which stated that the CWT must be paid within 10 days
after the end of each month, and Section 5 of Revenue Regulation 06-01, which
required payment of DST within five days after the close of the month when the
taxable document was made, signed, accepted or transferred. These taxes
accrued upon the lapse of the redemption period of the mortgaged
properties. The CIR pointed out that the mortgagor, a juridical person, had three
months after foreclosure within which to redeem the properties.[5]

The CIR theorized that the three-month redemption period was to be

counted from the date of the foreclosure sale. Here, he said, the redemption
period lapsed three months from December 31, 2001 or on March 31, 2002. Thus,
UCPB was in default for having paid the CWT and DST only on July 5, 2002. For
this reason the CIR issued a Pre-Assessment Notice[6] and, subsequently, a Final
Assessment Notice[7] to UCPB for deficiency CWT of P8,617,210.00 and deficiency
DST of P2,173,051.75.

UCPB protested the assessment. It claimed that the redemption period

lapsed on June 1, 2002 or three months after the executive judge
of Manila approved the issuance of the certificate of sale. Foreclosure under
Section 47 of the General Banking Law, said UCPB, referred to the date of
approval by the executive judge, and not the date of the auction sale. But the CIR
denied UCPBs protest, prompting UCPB to file a petition for review with the CTA
in CTA Case 7164.

On July 26, 2006 the CTA Second Division set aside the decision of the CIR
and held that the redemption period lapsed three months after the executive
judge approved the certificate of sale. It said that foreclosure under the law
referred to the whole process of foreclosure which included the approval and
issuance of the certificate of sale. There was no sale to speak of which could be
taxed prior to such approval and issuance. Since the executive judge approved the
issuance only on March 1, 2002, the redemption period expired on June 1,
2002. Hence, UCPBs payments of CWT and DST in early July were well within the
prescribed period. On appeal to the CTA En Banc in CTA EB 234, the
latter affirmed the decision of the Second Division on June 5, 2007. With the
denial of its motion for reconsideration, petitioner has taken recourse to this
Court via a petition for review on certiorari.
 Issue

The key issue in this case is whether or not the three-month redemption
period for juridical persons should be reckoned from the date of the auction sale.

Ruling

The CIR argues that he has the more reasonable position: the redemption
period should be reckoned from the date of the auction sale for, otherwise, the
taxing authority would be left at the mercy of the executive judge who may
unnecessarily delay the approval of the certificate of sale and thus prevent the
early payment of taxes.

But the Supreme Court had occasion under its resolution in Administrative
Matter 99-10-05-0[8] to rule that the certificate of sale shall issue only upon
approval of the executive judge who must, in the interest of fairness, first
determine that the requirements for extrajudicial foreclosures have been strictly
followed. For instance, in United Coconut Planters Bank v. Yap,[9]this Court
sustained a judges resolution requiring payment of notarial commission as a
condition for the issuance of the certificate of sale to the highest bidder.

Here, the executive judge approved the issuance of the certificate of sale to UCPB
on March 1, 2002. Consequently, the three-month redemption period ended only
on June 1, 2002. Only on this date then did the deadline for payment of CWT and
DST on the extrajudicial foreclosure sale become due.

Under Section 2.58 of Revenue Regulation 2-98, the CWT return and
payment become due within 10 days after the end of each month, except for
taxes withheld for the month of December of each year, which shall be filed on or
before January 15 of the following year. On the other hand, under Section 5 of
Revenue Regulation 06-01, the DST return and payment become due within five
days after the close of the month when the taxable document was made, signed,
accepted, or transferred.

The BIR confirmed and summarized the above provisions under Revenue
Memorandum Circular 58-2008 in this manner:

[I]f the property is an ordinary asset of the mortgagor, the creditable

expanded withholding tax shall be due and paid within ten (10) days
following the end of the month in which the redemption period
expires. x x x Moreover, the payment of the documentary stamp tax
and the filing of the return thereof shall have to be made within five (5)
days from the end of the month when the redemption period expires.

UCPB had, therefore, until July 10, 2002 to pay the CWT and July 5, 2002 to
pay the DST. Since it paid both taxes on July 5, 2002, it is not liable for
deficiencies. Thus, the Court finds no reason to reverse the decision of the CTA.

Besides, on August 15, 2008, the Bureau of Internal Revenue issued

Revenue Memorandum Circular 58-2008 [10] which clarified among others, the
time within which to reckon the redemption period of real estate mortgages. It
reads:

For purposes of reckoning the one-year redemption period in the

case of individual mortgagors, or the three-month redemption period
for juridical persons/mortgagors, the same shall be reckoned from the
 date of the confirmation of the auction sale which is the date when
the certificate of sale is issued.

The CIR must have in the meantime conceded the unreasonableness of the
previous position it had taken on this matter.
WHEREFORE, the petition is DENIED.

SO ORDERED.

THIRD DIVISION

SUPREME TRANSLINER, INC., G.R. No. 165617

MOISES C. ALVAREZ and
PAULITA S. ALVAREZ,
Petitioners,

- versus -

BPI FAMILY SAVINGS BANK, INC.,

Respondent.

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

BPI FAMILY SAVINGS BANK, INC., G.R. No. 165837

Petitioner,
Present:

BRION, J.,
- versus - Chairperson,
BERSAMIN,
ABAD,
VILLARAMA, JR., and
SERENO, JJ.
SUPREME TRANSLINER,
INC., MOISES C. ALVAREZ Promulgated:
and PAULITA S. ALVAREZ,
Respondents. February 25, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

This case involves the question of the correct redemption price payable to a
mortgagee bank as purchaser of the property in a foreclosure sale.
On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director,
Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount
of P9,853,000.00 from BPI Family Savings Bank with a 714-square meter lot
covered by Transfer Certificate of Title No. T-79193 in the name of Moises C.
Alvarez and Paulita S. Alvarez, as collateral.[1]

For non-payment of the loan, the mortgage was extrajudicially foreclosed and the
property was sold to the bank as the highest bidder in the public auction conducted
by the Office of the Provincial Sheriff of Lucena City. On August 7, 1996, a
Certificate of Sale[2] was issued in favor of the bank and the same was registered
on October 1, 1996.

Before the expiration of the one-year redemption period, the mortgagors notified
the bank of their intention to redeem the property. Accordingly, the following
Statement of Account[3] was prepared by the bank indicating the total amount due
under the mortgage loan agreement:
xxxx

Balance of Principal P 9,551,827.64

Add: Interest Due 1,417,761.24
Late Payment Charges 155,546.25
MRI 0.00
Fire Insurance 0.00
Foreclosure Expenses 155,817.23
Sub-total P 11,280,952.36
Less: Unapplied Payment 908,241.01
Total Amount Due As 10,372,711.35
Of 08/07/96(Auction Date)
Add: Attorneys Fees (15%) 1,555,906.70
 Liquidated Damages (15%) 1,555,906.70
Interest on P 10,372,711.35
from 08/07/96to 04/07/97 (243 days) at
17.25% p.a. 1,207,772.58
xxxx

Asset Acquired Expenses:

Documentary Stamps 155,595.00

Capital Gains Tax 518,635.57
Foreclosure Fee 207,534.23
Registration and Filing Fee 23,718.00
Addl. Registration & Filing Fee 660.00 906,142.79
Interest on P 906,142.79
from 08/07/96 to 04/07/97 (243 days)
at 17.25% p.a. 105,509.00
Cancellation Fee 300.00

Total Amount Due As

Of 04/07/97(Subject to Audit) P 15,704,249.12

xxxx

The mortgagors requested for the elimination of liquidated damages and reduction
of attorneys fees and interest (1% per month) but the bank refused. On May 21,
1997, the mortgagors redeemed the property by paying the sum
of P15,704,249.12. A Certificate of Redemption[4] was issued by the bank on May
27, 1997.

On June 11, 1997, the mortgagors filed a complaint against the bank to recover the
allegedly unlawful and excessive charges totaling P5,331,237.77, with prayer for
damages and attorneys fees, docketed as Civil Case No. 97-72 of
the Regional Trial Courtof Lucena City, Branch 57.

In its Answer with Special and Affirmative Defenses and Counterclaim, the bank
asserted that the redemption price reflecting the stipulated interest, charges and/or
expenses, is valid, legal and in accordance with documents duly signed by the
mortgagors. The bank further contended that the claims are deemed waived and the
mortgagors are already estopped from questioning the terms and conditions of their
contract.
On September 30, 1997, the bank filed a motion to set the case for hearing on the
special and affirmative defenses by way of motion to dismiss. The trial court
denied the motion on January 8, 1998 and also denied the banks motion for
reconsideration. The bank elevated the matter to the Court of Appeals (CA-G.R.
SP No. 47588) which dismissed the petition for certiorari on February 26, 1999.

On February 14, 2002, the trial court rendered its decision [5] dismissing the
complaint and the banks counterclaims. The trial court held that plaintiffs-
mortgagors are bound by the terms of the mortgage loan documents which clearly
provided for the payment of the following interest, charges and expenses: 18% p.a.
on the loan, 3% post-default penalty, 15% liquidated damages, 15% attorneys fees
and collection and legal costs. Plaintiffs-mortgagors claim that they paid the
redemption price demanded by the defendant bank under extreme pressure was
rejected by the trial court since there was active negotiation for the final
redemption price between the banks representatives and plaintiffs-mortgagors who
at the time had legal advice from their counsel, together with Orient Development
Banking Corporation which committed to finance the redemption.

According to the trial court, plaintiffs-mortgagors are estopped from questioning

the correctness of the redemption price as they had freely and voluntarily signed
the letter-agreement prepared by the defendant bank, and along with Orient Bank
expressed their conformity to the terms and conditions therein, thus:
May 14, 1997

ORIENT DEVELOPMENT BANKING CORPORATION

7th Floor Ever Gotesco Corporate Center
C.M. Recto Avenue corner Matapang Street
Manila

Attention: MS. AIDA C. DELA ROSA

Senior Vice-President

Gentlemen:

This refers to your undertaking to settle the account of SUPREME TRANS

LINER, INC. and spouses MOISES C. ALVAREZ and PAULITA S. ALVAREZ,
covering the real estate property located in the Poblacion, City of Lucena under
TCT No. T-79193 which was foreclosed by BPI FAMILY SAVINGS BANK,
INC.
With regard to the proposed refinancing of the account, we interpose no objection
to the annotation of your mortgage lien thereon subject to the following
conditions:

1. That all expenses for the registration of the annotation of mortgage and
other incidental registration and cancellation expenses shall be borne
by the borrower.
2. That you will recognize our mortgage liens as first and superior until the
loan with us is fully paid.
3. That you will annotate your mortgage lien and pay us the full amount to
close the loan within five (5) working days from the receipt of the
titles. If within this period, you have not registered the same and paid
us in full, you will immediately and unconditionally return the titles to
us without need of demand, free from liens/encumbrances other than
our lien.
4. That in case of loss of titles, you will undertake and shoulder the cost of
re-issuance of a new owners titles.
5. That we will issue the Certificate of Redemption after full payment of
P15,704,249.12. representing the outstanding balance of the loan
as of May 15, 1997 including interest and other charges
thereof within a period of five (5) working days after clearance of the
check payment.
6. That we will release the title and the Certificate of Redemption and
other pertinent papers only to your authorized representative with
complete authorization and identification.
7. That all expenses related to the cancellation of your annotated mortgage
lien should the Bank be not fully paid on the period above indicated
shall be charged to you.
If you find the foregoing conditions acceptable, please indicate your
conformity on the space provided below and return to us the duplicate copy.

Very truly yours,

BPI FAMILY BANK

BY:

(SGD.) LOLITA C. CARRIDO

Manager

CONFORME:
 ORIENT DEVELOPMENT BANKING CORPORATION

(SGD.) AIDA C. DELA ROSA

Senior Vice President

CONFORME:

SUPREME TRANS LINER, INC.

(SGD.) MOISES C. ALVAREZ/PAULITA S. ALVAREZ

Mortgagors[6]
(Underscoring in the original; emphasis supplied.)

As to plaintiffs-mortgagors contention that the amounts representing attorneys fees

and liquidated damages were already included in the P10,372,711.35 bid price, the
trial court said this was belied by their own evidence, the Statement of Account
showing the breakdown of the redemption price as computed by the defendant
bank.

The mortgagors appealed to the CA (CA-G.R. CV No. 74761) which, by

Decision[7] dated April 6, 2004 reversed the trial court and decreed as follows:
WHEREFORE, foregoing considered, the appealed decision is hereby
REVERSED and SET ASIDE. A new one is hereby entered as follows:

1. Plaintiffs-appellants complaint for damages against defendant-appellee

is hereby REINSTATED;

2. Defendant-appellee is hereby ORDERED to return to plaintiffs-

appellees (sic) the invalidly collected amount of P3,111,813.40 plus
six (6) percent legal interest from May 21, 1997 until fully returned;

3. Defendant-appellee is hereby ORDERED to pay plaintiffs-

appellees (sic) the amount of P100,000.00 as moral damages,
P100,000.00 as exemplary damages and P100,000.00 as attorneys
fees;

4. Costs against defendant-appellee.

SO ORDERED.[8]

The CA ruled that attorneys fees and liquidated damages were already
included in the bid price of P10,372,711.35 as per the recitals in the Certificate of
Sale that said amount was paid to the foreclosing mortgagee to satisfy not only the
principal loan but also interest and penalty charges, cost of publication and
expenses of the foreclosure proceedings. These penalty charges consist of 15%
attorneys fees and 15% liquidated damages which the bank imposes as penalty in
cases of violation of the terms of the mortgage deed. The total redemption price
thus should only be P12,592,435.72 and the bank should return the amount
of P3,111,813.40 representing attorneys fees and liquidated damages. The
appellate court further stated that the mortgagors cannot be deemed estopped to
question the propriety of the charges because from the very start they had
repeatedly questioned the imposition of attorneys fees and liquidated damages and
were merely constrained to pay the demanded redemption price for fear that the
redemption period will expire without them redeeming their property.[9]

By Resolution[10] dated October 12, 2004, the CA denied the parties respective
motions for reconsideration.

Hence, these petitions separately filed by the mortgagors and the bank.

In G.R. No. 165617, the petitioners-mortgagors raise the single issue of whether
the foreclosing mortgagee should pay capital gains tax upon execution of the
certificate of sale, and if paid by the mortgagee, whether the same should be
shouldered by the redemptioner. They specifically prayed for the return of all
asset-acquired expenses consisting of documentary stamps tax, capital gains tax,
foreclosure fee, registration and filing fee, and additional registration and filing fee
totaling P906,142.79, with 6% interest thereon from May 21, 1997.[11]

On the other hand, the petitioner bank in G.R. No. 165837 assails the CA in
holding that

1. the Certificate of Sale, the bid price of P10,372,711.35 includes penalty

charges and as such for purposes of computing the redemption price petitioner can
no longer impose upon the private respondents the penalty charges in the form of
15% attorneys fees and the 15% liquidated damages in the aggregate amount of
P3,111,813.40, although the evidence presented by the parties show otherwise.

2. private respondents cannot be considered to be under estoppel to question

the propriety of the aforestated penalty charges despite the fact that, as found by
the Honorable Trial Court, there was very active negotiation between the parties
in the computation of the redemption price culminating into the signing freely and
voluntarily by the petitioner, the private respondents and Orient Bank, which
 financed the redemption of the foreclosed property, of Exhibit 3, wherein they
mutually agreed that the redemption price is in the sum of P15,704,249.12.

3. petitioner [to] pay private respondents damages in the aggregate amount

of P300,000.00 on the ground that the former acted in bad faith in the imposition
upon them of the aforestated penalty charges, when in truth it is entitled thereto as
the law and the contract expressly provide and that private respondents agreed to
pay the same.[12]

On the correct computation of the redemption price, Section 78 of Republic Act

No. 337, otherwise known as the General Banking Act, governs in cases where the
mortgagee is a bank.[13] Said provision reads:

SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of

any mortgage on real estate which is security for any loan granted before the
passage of this Act or under the provisions of this Act, the mortgagor or debtor
whose real property has been sold at public auction, judicially or extrajudicially,
for the full or partial payment of an obligation to any bank, banking or credit
institution, within the purview of this Act shall have the right, within one year
after the sale of the real estate as a result of the foreclosure of the respective
mortgage, to redeem the property by paying the amount fixed by the court in the
order of execution, or the amount due under the mortgage deed, as the case
may be, with interest thereon at the rate specified in the mortgage, and all
the costs, and judicial and other expenses incurred by the bank or institution
concerned by reason of the execution and sale and as a result of the custody
of said property less the income received from the property. x x x x (Emphasis
supplied.)

Under the Mortgage Loan Agreement,[14] petitioners-mortgagors undertook to pay

the attorneys fees and the costs of registration and foreclosure. The following
contract terms would show that the said items are separate and distinct from the bid
price which represents only the outstanding loan balance with stipulated interest
thereon.
23. Application of Proceeds of Foreclosure Sale. The proceeds of sale of
the mortgaged property/ies shall be applied as follows:

a) To the payment of the expenses and cost of foreclosure and sale,

including the attorneys fees as herein provided;

b) To the satisfaction of all interest and charges accruing upon the

obligations herein and hereby secured.
 c) To the satisfaction of the principal amount of the obligations herein and
hereby secured.

d) To the satisfaction of all other obligations then owed by the

Borrower/Mortgagor to the Bank or any of its subsidiaries/affiliates such as, but
not limited to BPI Credit Corporation; or to Bank of the Philippine Islands or any
of its subsidiaries/affiliates such as, but not limited to BPI Leasing Corporation,
BPI Express Card Corporation, BPI Securities Corporation and BPI Agricultural
Development Bank; and

e) The balance, if any, to be due to the Borrower/Mortgagor.

xxxx

31. Attorneys Fees: In case the Bank should engage the services of
counsel to enforce its rights under this Agreement, the Borrower/Mortgagor shall
pay an amount equivalent to fifteen (15%) percent of the total amount claimed by
the Bank, which in no case shall be less than P2,000.00, Philippine currency, plus
costs, collection expenses and disbursements allowed by law, all of which shall be
secured by this mortgage.[15]

Additionally, the Disclosure Statement on Loan/Credit Transaction [16] also duly

signed by the petitioners-mortgagors provides:
10. ADDITIONAL CHARGES IN CASE CERTAIN STIPULATIONS ARE
NOT MET BY THE BORROWER

a. Post Default Penalty 3.00% per month

b. Attorneys Services 15% of sum due but not less than P2,000.00
c. Liquidated Damages 15% of sum due but not less than P10,000.00
d. Collection & Legal Cost As provided by the Rules of Court
e. Others (Specify)

As correctly found by the trial court, that attorneys fees and liquidated damages
were not yet included in the bid price of P10,372,711.35 is clearly shown by the
Statement of Account as of April 4, 1997 prepared by the petitioner bank and given
to petitioners-mortgagors. On the other hand, par. 23 of the Mortgage Loan
Agreement indicated that asset acquired expenses were to be added to the
redemption price as part of costs and other expenses incurred by the mortgagee
bank in connection with the foreclosure sale.

Coming now to the issue of capital gains tax, we find merit in petitioners-
mortgagors argument that there is no legal basis for the inclusion of this charge in
the redemption price. Under Revenue Regulations (RR) No. 13-85 (December 12,
1985), every sale or exchange or other disposition of real property classified as
capital asset under Section 34(a)[17] of the Tax Code shall be subject to the final
capital gains tax. The term sale includes pacto de retro and other forms of
conditional sale. Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86
(as amended by RMO No. 16-88 and as further amended by RMO Nos. 27-89 and
6-92) states that these conditional sales necessarily include mortgage foreclosure
sales (judicial and extrajudicial foreclosure sales). Further, for real property
foreclosed by a bank on or after September 3, 1986, the capital gains tax and
documentary stamp tax must be paid before title to the property can be
consolidated in favor of the bank.[18]

Under Section 63 of Presidential Decree No. 1529 otherwise known as

the Property Registration Decree, if no right of redemption exists, the certificate of
title of the mortgagor shall be cancelled, and a new certificate issued in the name
of the purchaser. But where the right of redemption exists, the certificate of title of
the mortgagor shall not be cancelled, but the certificate of sale and the order
confirming the sale shall be registered by brief memorandum thereof made by the
Register of Deeds upon the certificate of title. In the event the property is
redeemed, the certificate or deed of redemption shall be filed with the Register of
Deeds, and a brief memorandum thereof shall be made by the Register of Deeds on
the certificate of title.

It is therefore clear that in foreclosure sale, there is no actual transfer of the

mortgaged real property until after the expiration of the one-year redemption
period as provided in Act No. 3135 and title thereto is consolidated in the name of
the mortgagee in case of non-redemption. In the interim, the mortgagor is given the
option whether or not to redeem the real property.The issuance of the Certificate of
Sale does not by itself transfer ownership.[19]

RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92
relative to the payment of Capital Gains Tax and Documentary Stamp Tax on
extrajudicial foreclosure sale of capital assets initiated by banks, finance and
insurance companies.
SEC. 3. CAPITAL GAINS TAX.

(1) In case the mortgagor exercises his right of redemption within one
year from the issuance of the certificate of sale, no capital gains tax shall be
imposed because no capital gains has been derived by the mortgagor and no sale
or transfer of real property was realized. x x x
 (2) In case of non-redemption, the capital gains [tax] on the foreclosure sale
imposed under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall
become due based on the bid price of the highest bidder but only upon the
expiration of the one-year period of redemption provided for under Sec. 6 of Act
No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days
from the expiration of the said one-year redemption period.

SEC. 4. DOCUMENTARY STAMP TAX.

(1) In case the mortgagor exercises his right of redemption, the

transaction shall only be subject to the P15.00 documentary stamp tax
imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was
sold or transferred for a consideration.

(2) In case of non-redemption, the corresponding documentary stamp tax

shall be levied, collected and paid by the person making, signing, issuing,
accepting, or transferring the real property wherever the document is made,
signed, issued, accepted or transferred where the property is situated in the
Philippines. x x x (Emphasis supplied.)

Although the subject foreclosure sale and redemption took place before the
effectivity of RR No. 4-99, its provisions may be given retroactive effect in this
case.

Section 246 of the NIRC of 1997 states:

SEC. 246. Non-Retroactivity of Rulings. Any revocation, modification,
or reversal of any of the rules and regulations promulgated in accordance with the
preceding Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayers, except in the
following cases:

(a) where the taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the Bureau of Internal Revenue;

(b) where the facts subsequently gathered by the Bureau of Internal

Revenue are materially different from the facts on which the ruling is based; or

(c) where the taxpayer acted in bad faith.

In this case, the retroactive application of RR No. 4-99 is more consistent

with the policy of aiding the exercise of the right of redemption. As the Court of
Tax Appeals concluded in one case, RR No. 4-99 has curbed the inequity of
imposing a capital gains tax even before the expiration of the redemption period
[since] there is yet no transfer of title and no profit or gain is realized by the
mortgagor at the time of foreclosure sale but only upon expiration of the
redemption period.[20] In his commentaries, De Leon expressed the view that while
revenue regulations as a general rule have no retroactive effect, if the revocation is
due to the fact that the regulation is erroneous or contrary to law, such revocation
shall have retroactive operation as to affect past transactions, because a wrong
construction of the law cannot give rise to a vested right that can be invoked by a
taxpayer.[21]

Considering that herein petitioners-mortgagors exercised their right of redemption

before the expiration of the statutory one-year period, petitioner bank is not liable
to pay the capital gains tax due on the extrajudicial foreclosure sale. There was no
actual transfer of title from the owners-mortgagors to the foreclosing bank. Hence,
the inclusion of the said charge in the total redemption price was unwarranted and
the corresponding amount paid by the petitioners-mortgagors should be returned to
them.

WHEREFORE, premises considered, both petitions are PARTLY GRANTED.

In G.R. No. 165617, BPI Family Savings Bank, Inc. is hereby ordered
to RETURN the amounts representing capital gains and documentary stamp taxes
as reflected in the Statement of Account To Redeem as of April 7, 1997, to
petitioners Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez, and
to retain only the sum provided in RR No. 4-99 as documentary stamps tax due on
the foreclosure sale.

In G.R. No. 165837, petitioner BPI Family Savings Bank, Inc. is hereby declared
entitled to the attorneys fees and liquidated damages included in the total
redemption price paid by Supreme Transliner, Inc., Moises C. Alvarez and Paulita
Alvarez. The sums awarded as moral and exemplary damages, attorneys fees and
costs in favor of Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez
are DELETED.

The Decision dated April 6, 2004 of the Court of Appeals in CA-G.R. CV No.
74761 is accordingly MODIFIED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 188497 February 19, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.

RESOLUTION

VILLARAMA, JR., J.:

For resolution are the Motion for Reconsideration dated May 22, 2012 and Supplemental Motion for
Reconsideration dated December 12, 2012 filed by Pilipinas Shell Petroleum Corporation
(respondent). As directed, the Solicitor General on behalf of petitioner Commissioner of Internal
Revenue filed their Comment, to which respondent filed its Reply.

In our Decision promulgated on April 25, 2012, we ruled that the Court of Tax Appeals (CTA) erred
in granting respondent's claim for tax refund because the latter failed to establish a tax exemption in
its favor under Section 135(a) of the National Internal Revenue Code of 1997 (NIRC).

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25,
2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415
are hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by respondent
Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED.1

Respondent argues that a plain reading of Section 135 of the NIRC reveals that it is the petroleum
products sold to international carriers which are exempt from excise tax for which reason no excise
taxes are deemed to have been due in the first place. It points out that excise tax being an indirect
tax, Section 135 in relation to Section 148 should be interpreted as referring to a tax exemption from
the point of production and removal from the place of production considering that it is only at that
point that an excise tax is imposed. The situation is unlike the value-added tax (VAT) which is
imposed at every point of turnover – from production to wholesale, to retail and to end-consumer.
Respondent thus concludes that exemption could only refer to the imposition of the tax on the
statutory seller, in this case the respondent. This is because when a tax paid by the statutory seller
is passed on to the buyer it is no longer in the nature of a tax but an added cost to the purchase
price of the product sold.

Respondent also contends that our ruling that Section 135 only prohibits local petroleum
manufacturers like respondent from shifting the burden of excise tax to international carriers has
adverse economic impact as it severely curtails the domestic oil industry. Requiring local petroleum
manufacturers to absorb the tax burden in the sale of its products to international carriers is contrary
to the State’s policy of "protecting gasoline dealers and distributors from unfair and onerous trade
conditions," and places them at a competitive disadvantage since foreign oil producers, particularly
those whose governments with which we have entered into bilateral service agreements, are not
subject to excise tax for the same transaction. Respondent fears this could lead to cessation of
supply of petroleum products to international carriers, retrenchment of employees of domestic
manufacturers/producers to prevent further losses, or worse, shutting down of their production of jet
A-1 fuel and aviation gas due to unprofitability of sustaining operations. Under this scenario,
participation of Filipino capital, management and labor in the domestic oil industry is effectively
diminished.

Lastly, respondent asserts that the imposition by the Philippine Government of excise tax on
petroleum products sold to international carriers is in violation of the Chicago Convention on
International Aviation ("Chicago Convention") to which it is a signatory, as well as other international
agreements (the Republic of the Philippines’ air transport agreements with the United States of
America, Netherlands, Belgium and Japan).

In his Comment, the Solicitor General underscores the statutory basis of this Court’s ruling that the
exemption under Section 135 does not attach to the products. Citing Exxonmobil Petroleum &
Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue,2 which held that the
excise tax, when passed on to the purchaser, becomes part of the purchase price, the Solicitor
General claims this refutes respondent’s theory that the exemption attaches to the petroleum
product itself and not to the purchaser for it would have been erroneous for the seller to pay the
excise tax and inequitable to pass it on to the purchaser if the excise tax exemption attaches to the
product.

As to respondent’s reliance in the cases of Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal
Revenue3 and Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner
of Internal Revenue,4 the Solicitor General points out that there was no pronouncement in these
cases that petroleum manufacturers selling petroleum products to international carriers are exempt
from paying excise taxes. In fact, Exxonmobil even cited the case of Philippine Acetylene Co, Inc. v.
Commissioner of Internal Revenue.5 Further, the ruling in Maceda v. Macaraig, Jr.6 which confirms
that Section 135 does not intend to exempt manufacturers or producers of petroleum products from
the payment of excise tax.

The Court will now address the principal arguments proffered by respondent: (1) Section 135
intended the tax exemption to apply to petroleum products at the point of production; (2) Philippine
Acetylene Co., Inc. v. Commissioner of Internal Revenue and Maceda v. Macaraig, Jr. are
inapplicable in the light of previous rulings of the Bureau of Internal Revenue (BIR) and the CTA that
the excise tax on petroleum products sold to international carriers for use or consumption outside the
Philippines attaches to the article when sold to said international carriers, as it is the article which is
exempt from the tax, not the international carrier; and (3) the Decision of this Court will not only have
adverse impact on the domestic oil industry but is also in violation of international agreements on
aviation.

Under Section 129 of the NIRC, excise taxes are those applied to goods manufactured or produced
in the Philippines for domestic sale or consumption or for any other disposition and to things
imported. Excise taxes as used in our Tax Code fall under two types – (1) specific tax which is based
on weight or volume capacity and other physical unit of measurement, and (2) ad valorem tax which
is based on selling price or other specified value of the goods. Aviation fuel is subject to specific tax
under Section 148 (g) which attaches to said product "as soon as they are in existence as such."

On this point, the clarification made by our esteemed colleague, Associate Justice Lucas P.
Bersamin regarding the traditional meaning of excise tax adopted in our Decision, is well-taken.
The transformation undergone by the term "excise tax" from its traditional concept up to its current
definition in our Tax Code was explained in the case of Petron Corporation v. Tiangco,7 as follows:

Admittedly, the proffered definition of an excise tax as "a tax upon the performance, carrying on, or
exercise of some right, privilege, activity, calling or occupation" derives from the compendium
American Jurisprudence, popularly referred to as Am Jur and has been cited in previous decisions of
this Court, including those cited by Petron itself. Such a definition would not have been inconsistent
with previous incarnations of our Tax Code, such as the NIRC of 1939, as amended, or the NIRC of
1977 because in those laws the term "excise tax" was not used at all. In contrast, the nomenclature
used in those prior laws in referring to taxes imposed on specific articles was "specific tax." Yet
beginning with the National Internal Revenue Code of 1986, as amended, the term "excise taxes"
was used and defined as applicable "to goods manufactured or produced in the Philippines… and to
things imported." This definition was carried over into the present NIRC of 1997. Further, these two
latest codes categorize two different kinds of excise taxes: "specific tax" which is imposed and based
on weight or volume capacity or any other physical unit of measurement; and "ad valorem tax" which
is imposed and based on the selling price or other specified value of the goods. In other words, the
meaning of "excise tax" has undergone a transformation, morphing from the Am Jur definition to its
current signification which is a tax on certain specified goods or articles.

The change in perspective brought forth by the use of the term "excise tax" in a different connotation
was not lost on the departed author Jose Nolledo as he accorded divergent treatments in his 1973
and 1994 commentaries on our tax laws. Writing in 1973, and essentially alluding to the Am Jur
definition of "excise tax," Nolledo observed:

Are specific taxes, taxes on property or excise taxes –

In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are property
taxes, a ruling which seems to be erroneous. Specific taxes are truly excise taxes for the fact that
the value of the property taxed is taken into account will not change the nature of the tax. It is correct
to say that specific taxes are taxes on the privilege to import, manufacture and remove from storage
certain articles specified by law.

In contrast, after the tax code was amended to classify specific taxes as a subset of excise taxes,
Nolledo, in his 1994 commentaries, wrote:

1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain specified
goods or articles manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition and to things imported into the Philippines. They are
either specific or ad valorem.

2. Nature of excise taxes. – They are imposed directly on certain specified goods. (infra)
They are, therefore, taxes on property. (see Medina vs. City of Baguio, 91 Phil. 854.)

A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as an
incident to, or in connection with, the business to be taxed.

In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax, and
observe that the term is "synonymous with ‘privilege tax’ and [both terms] are often used
interchangeably." At the same time, they offer a caveat that "[e]xcise tax, as [defined by Am Jur], is
not to be confused with excise tax imposed [by the NIRC] on certain specified articles manufactured
or produced in, or imported into, the Philippines, ‘for domestic sale or consumption or for any other
disposition.’"
It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a
specific article, rather than one "upon the performance, carrying on, or the exercise of an activity."

This current definition was already in place when the Code was enacted in 1991, and we can only
presume that it was what the Congress had intended as it specified that local government units
could not impose "excise taxes on articles enumerated under the [NIRC]." This prohibition must
pertain to the same kind of excise taxes as imposed by the NIRC, and not those previously defined
"excise taxes" which were not integrated or denominated as such in our present tax law.8 (Emphasis
supplied.)

That excise tax as presently understood is a tax on property has no bearing at all on the issue of
respondent’s entitlement to refund. Nor does the nature of excise tax as an indirect tax supports
respondent’s postulation that the tax exemption provided in Sec. 135 attaches to the petroleum
products themselves and consequently the domestic petroleum manufacturer is not liable for the
payment of excise tax at the point of production. As already discussed in our Decision, to which
Justice Bersamin concurs, "the accrual and payment of the excise tax on the goods enumerated
under Title VI of the NIRC prior to their removal at the place of production are absolute and admit of
no exception." This also underscores the fact that the exemption from payment of excise tax is
conferred on international carriers who purchased the petroleum products of respondent.

On the basis of Philippine Acetylene, we held that a tax exemption being enjoyed by the buyer
cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any
tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products under
Section 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax
exemption granted to its buyers who are international carriers. And following our pronouncement in
Maceda v. Macarig, Jr. we further ruled that Section 135(a) should be construed as prohibiting the
shifting of the burden of the excise tax to the international carriers who buy petroleum products from
the local manufacturers. Said international carriers are thus allowed to purchase the petroleum
products without the excise tax component which otherwise would have been added to the cost or
price fixed by the local manufacturers or distributors/sellers.

Excise tax on aviation fuel used for international flights is practically nil as most countries are
signatories to the 1944 Chicago Convention on International Aviation (Chicago Convention). Article
249 of the Convention has been interpreted to prohibit taxation of aircraft fuel consumed for
international transport. Taxation of international air travel is presently at such low level that there has
been an intensified debate on whether these should be increased to "finance development rather
than simply to augment national tax revenue" considering the "cross-border environmental damage"
caused by aircraft emissions that contribute to global warming, not to mention noise pollution and
congestion at airports).10 Mutual exemptions given under bilateral air service agreements are seen as
main legal obstacles to the imposition of indirect taxes on aviation fuel. In response to present
realities, the International Civil Aviation Organization (ICAO) has adopted policies on charges and
emission-related taxes and charges.11

Section 135(a) of the NIRC and earlier amendments to the Tax Code represent our Governments’
compliance with the Chicago Convention, its subsequent resolutions/annexes, and the air transport
agreements entered into by the Philippine Government with various countries. The rationale for
exemption of fuel from national and local taxes was expressed by ICAO as follows:

...The Council in 1951 adopted a Resolution and Recommendation on the taxation of fuel, a
Resolution on the taxation of income and of aircraft, and a Resolution on taxes related to the sale or
use of international air transport (cf. Doc 7145) which were further amended and amplified by the
policy statements in Doc 8632 published in 1966. The Resolutions and Recommendation concerned
were designed to recognize the uniqueness of civil aviation and the need to accord tax exempt
status to certain aspects of the operations of international air transport and were adopted because
multiple taxation on the aircraft, fuel, technical supplies and the income of international air transport,
as well as taxes on its sale and use, were considered as major obstacles to the further development
of international air transport. Non-observance of the principle of reciprocal exemption envisaged in
these policies was also seen as risking retaliatory action with adverse repercussions on international
air transport which plays a major role in the development and expansion of international trade and
travel.12

In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF) held on March 18-22, 2013
at Montreal, among matters agreed upon was that "the proliferation of various taxes and duties on
air transport could have negative impact on the sustainable development of air transport and on
consumers." Confirming that ICAO’s policies on taxation remain valid, the Conference recommended
that "ICAO promote more vigorously its policies and with industry stakeholders to develop analysis
and guidance to States on the impact of taxes and other levies on air transport."13 Even as said
conference was being held, on March 7, 2013, President Benigno Aquino III has signed into law
Republic Act (R.A.) No. 1037814 granting tax incentives to foreign carriers which include exemption
from the 12% value-added tax (VAT) and 2.5% gross Philippine billings tax (GPBT). GPBT is a form
of income tax applied to international airlines or shipping companies. The law, based on reciprocal
grant of similar tax exemptions to Philippine carriers, is expected to increase foreign tourist arrivals
in the country.

Indeed, the avowed purpose of a tax exemption is always "some public benefit or interest, which the
law-making body considers sufficient to offset the monetary loss entailed in the grant of the
exemption."15 The exemption from excise tax of aviation fuel purchased by international carriers for
consumption outside the Philippines fulfills a treaty obligation pursuant to which our Government
supports the promotion and expansion of international travel through avoidance of multiple taxation
and ensuring the viability and safety of international air travel. In recent years, developing economies
such as ours focused more serious attention to significant gains for business and tourism sectors as
well. Even without such recent incidental benefit, States had long accepted the need for international
cooperation in maintaining a capital intensive, labor intensive and fuel intensive airline industry, and
recognized the major role of international air transport in the development of international trade and
travel.

Under the basic international law principle of pacta sunt servanda, we have the duty to fulfill our
treaty obligations in good faith. This entails harmonization of national legislation with treaty
provisions. In this case, Sec. 135(a) of the NIRC embodies our compliance with our undertakings
under the Chicago Convention and various bilateral air service agreements not to impose excise tax
on aviation fuel purchased by international carriers from domestic manufacturers or suppliers. In our
Decision in this case, we interpreted Section 135 (a) as prohibiting domestic manufacturer or
producer to pass on to international carriers the excise tax it had paid on petroleum products upon
their removal from the place of production, pursuant to Article 148 and pertinent BIR regulations.
Ruling on respondent’s claim for tax refund of such paid excise taxes on petroleum products sold to
tax-exempt international carriers, we found no basis in the Tax Code and jurisprudence to grant the
refund of an "erroneously or illegally paid" tax.

Justice Bersamin argues that "(T)he shifting of the tax burden by manufacturers-sellers is a business
prerogative resulting from the collective impact of market forces," and that it is "erroneous to
construe Section 135(a) only as a prohibition against the shifting by the manufacturers-sellers of
petroleum products of the tax burden to international carriers, for such construction will deprive the
manufacturers-sellers of their business prerogative to determine the prices at which they can sell
their products."
We maintain that Section 135 (a), in fulfillment of international agreement and practice to exempt
aviation fuel from excise tax and other impositions, prohibits the passing of the excise tax to
international carriers who buys petroleum products from local manufacturers/sellers such as
respondent. However, we agree that there is a need to reexamine the effect of denying the domestic
manufacturers/sellers’ claim for refund of the excise taxes they already paid on petroleum products
sold to international carriers, and its serious implications on our Government’s commitment to the
goals and objectives of the Chicago Convention.

The Chicago Convention, which established the legal framework for international civil aviation, did
not deal comprehensively with tax matters. Article 24 (a) of the Convention simply provides that fuel
and lubricating oils on board an aircraft of a Contracting State, on arrival in the territory of another
Contracting State and retained on board on leaving the territory of that State, shall be exempt from
customs duty, inspection fees or similar national or local duties and charges. Subsequently, the
exemption of airlines from national taxes and customs duties on spare parts and fuel has become a
standard element of bilateral air service agreements (ASAs) between individual countries.

The importance of exemption from aviation fuel tax was underscored in the following observation
made by a British author16 in a paper assessing the debate on using tax to control aviation emissions
and the obstacles to introducing excise duty on aviation fuel, thus:

Without any international agreement on taxing fuel, it is highly likely that moves to impose duty on
international flights, either at a domestic or European level, would encourage 'tankering': carriers
filling their aircraft as full as possible whenever they landed outside the EU to avoid paying
tax. Clearly this would be entirely counterproductive. Aircraft would be travelling further than
1âw phi1

necessary to fill up in low-tax jurisdictions; in addition they would be burning up more fuel when
carrying the extra weight of a full fuel tank.

With the prospect of declining sales of aviation jet fuel sales to international carriers on account of
major domestic oil companies' unwillingness to shoulder the burden of excise tax, or of petroleum
products being sold to said carriers by local manufacturers or sellers at still high prices , the practice
of "tankering" would not be discouraged. This scenario does not augur well for the Philippines'
growing economy and the booming tourism industry. Worse, our Government would be risking
retaliatory action under several bilateral agreements with various countries. Evidently, construction
of the tax exemption provision in question should give primary consideration to its broad implications
on our commitment under international agreements.

In view of the foregoing reasons, we find merit in respondent's motion for reconsideration. We
therefore hold that respondent, as the statutory taxpayer who is directly liable to pay the excise tax
on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum
products sold to international carriers, the latter having been granted exemption from the payment of
said excise tax under Sec. 135 (a) of the NIRC.

WHEREFORE, the Court hereby resolves to:

(1) GRANT the original and supplemental motions for reconsideration filed by respondent
Pilipinas Shell Petroleum Corporation; and

(2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the
Court of Tax Appeals En Banc in CT A EB No. 415; and DIRECT petitioner Commissioner of
Internal Revenue to refund or to issue a tax credit certificate to Pilipinas Shell Petroleum
Corporation in the amount of J195,014,283.00 representing the excise taxes it paid on
petroleum products sold to international carriers from October 2001 to June 2002.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

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

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its
Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure
question of law, which involves the interpretation of Section 27(B) vis-à-vis Section 30(E) and (G) of
the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to
the sick, diseased and disabled persons; provided that purely medical and surgical services
shall be performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;

(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;
 (c) To carry on educational activities related to the maintenance and promotion of health as
well as provide facilities for scientific and medical researches which, in the opinion of the
Board of Trustees, may be justified by the facilities, personnel, funds, or other requirements
that are available;

(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to ₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to
₱63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential
tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's.
According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails
over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of
₱1,730,367,965 or approximately ₱1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less
operating expenses) of ₱334,642,615. 8 St. Luke's also claimed that its income does not inure to the
benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does
not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA
that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment
of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section
30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR
prays that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and expanded
withholding tax for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding
of a part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no
ground for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of
Court, 11 this Court's review power is generally limited to "cases in which only an error or question of
law is involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized
exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision
dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the
amount of ₱110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby
ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable
year 1998 in the respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the
total amount of ₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came
from charitable activities. The CTA cancelled the remainder of the ₱63,113,952.79 deficiency
assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En
Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section
30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services
to its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's
Medical Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes
of St. Luke's under its articles of incorporation and various documents 17 identifying St. Luke's as a
charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a
charitable institution does not lose its charitable character and its consequent exemption from
taxation merely because recipients of its benefits who are able to pay are required to do so, where
funds derived in this manner are devoted to the charitable purposes of the institution x x x." 19 The
generation of income from paying patients does not per se destroy the charitable nature of St.
Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which
ruled that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from
taxation those corporations or associations which, otherwise, would be subject thereto, because of
the existence of x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on
charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very
responsible organization must be run to at least insure its existence, by operating within the limits of
its own resources, especially its regular income. In other words, it should always strive, whenever
possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA
explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit."
On the other hand, Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the
present tax code, indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-
stock, non-profit hospitals operated exclusively for charitable purpose are exempt from income tax
on income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997,
as amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B)
of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall
raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider
relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no other evidence
aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25%
surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the
time prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20%
delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the
amount of ₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section
27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable
and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that
Congress intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the
NIRC of 1997. 33 Section 27(B) of the present NIRC provides:

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

 xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof
shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated
trade, business or other activity' means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational institution or hospital of
its primary purpose or function. A 'proprietary educational institution' is any private school maintained
and administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may
be, in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's
focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30
state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B)
of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand,
can be construed together without the removal of such tax exemption. The effect of the introduction
of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions 36 and proprietary non-profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate
rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any private school maintained and
administered by private individuals or groups" with a government permit. "Non-profit" means no net
income or asset accrues to or benefits any member or specific person, with all the net income or
asset devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu, 37this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf
course. 38 The club was non-profit because of its purpose and there was no evidence that it was
engaged in a profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or [by] otherwise lessening the burden of government." 41A non-profit club for the
benefit of its members fails this test. An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members. However, despite its being a tax
exempt institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a
part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of
taxes by the government is compensated by its relief from doing public works which would have
been funded by appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for
a tax exemption are specified by the law granting it. The power of Congress to tax implies the power
to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that
"[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly construed against the
taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the
government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise as
Hospital de San Juan 45 and Jesus Sacred Heart College 46 which says that receiving income from
paying patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined
in the hospital, or receives subsidies from the government, so long as the money received is devoted
or used altogether to the charitable object which it is intended to achieve; and no money inures to
the private benefit of the persons managing or operating the institution. 47

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable,
or educational purposes shall be exempt from taxation." 48 The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The test requires that the institution
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove from the
tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E)
of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution "actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively"
for charitable purposes. The organization of the institution refers to its corporate form, as shown by
its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members,
trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized." 50 However, under Lung Center, any profit by a charitable institution must
not only be plowed back "whenever necessary or proper," but must be "devoted or used altogether
to the charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
"no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and improvements of the institution is but
a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and exclusively"
for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x
x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever
kind and character" of a charitable institution "from any of its activities conducted for profit,
regardless of the disposition made of such income, shall be subject to tax." Prior to the introduction
of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate
under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot
be disputed that a hospital which receives approximately ₱1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived
profits from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

OPERATING EXPENSES
Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00
Household and Property 91,797,622.00
 ₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the
words "used exclusively" without doing violence to the Constitution and the law. Solely is
synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any
other way. There is a "purpose to make profit over and above the cost" of services. 55 The ₱1.73
billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure of
₱218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said
that the income is "devoted or used altogether to the charitable object which it is intended to
achieve." 56 The income is plowed back to the corporation not entirely for charitable purposes, but for
profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
"any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus
Cuenco, who was a member of the Committee of Conference for the Senate, which introduced the
phrase "or from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es
una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posición social económica, lo que se paga por estos enfermos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any
activity conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase "or any activity
conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation.
Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities from
being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be "operated exclusively" for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if
it earns income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to
the detriment of the government and other taxpayers. 1âw phi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus
exempt from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the
Court said that "good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center,
Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income
tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1,
Rule 45 of the Rules of Court.

SO ORDERED.

EN BANC

G.R. No. 207112, December 08, 2015

PILIPINAS TOTAL GAS, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

MENDOZA, J.:

Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court assailing the
October 11, 2012 Decision2 and the May 8, 2013 Resolution3 of the Court of Tax Appeals (CTA) En Banc, in
CTA EB Case No. 776, which affirmed the January 13, 2011 Decision4 of the CTA Third Division (CTA
Division) in CTA Case No. 7863.

The Facts

Petitioner Pilipinas Total Gas, Inc. (Total Gas) is engaged in the business of selling, transporting and
distributing industrial gas. It is also engaged in the sale of gas equipment and other related businesses. For
this purpose, Total Gas registered itself with the Bureau of Internal Revenue (BIR) as a Value Added Tax
(VAT) taxpayer.

On April 20, 2007 and July 20, 2007, Total Gas filed its Original Quarterly VAT Returns for the First and
Second quarters of 2007, respectively with the BIR.

On May 20, 2008, it filed its Amended Quarterly VAT Returns for the first two quarters of 2007 reflecting its
sales subject to VAT, zero-rated sales, and domestic purchases of non-capital goods and services.

For the First and Second quarters of 2007, Total Gas claimed it incurred unutilized input VAT credits from its
domestic purchases of noncapital goods and services in the total amount of P8,124,400.35. Of this total
accumulated input VAT, Total Gas claimed that it had P7,898,433.98 excess unutilized input VAT.

On May 15, 2008, Total Gas filed an administrative claim for refund of unutilized input VAT for the first two
quarters of taxable year 2007, inclusive of supporting documents.

On August 28, 2008, Total Gas submitted additional supporting documents to the BIR.

On January 23, 2009, Total Gas elevated the matter to the CTA in view of the inaction of the Commissioner
of Internal Revenue (CIR).

During the hearing, Total Gas presented, as witnesses, Rosalia T. Yu and Richard Go, who identified
documentary evidence marked as Exhibits "A" to "ZZ-1," all of which were admitted. Respondent CIR, on
the other hand, did not adduce any evidence and had the case submitted for decision.
Ruling of the CTA Division

In its January 13, 2011 Decision,5 the CTA Division dismissed the petition for being prematurely filed. It
explained that Total Gas failed to complete the necessary documents to substantiate a claim for refund of
unutilized input VAT on purchases of goods and services enumerated under Revenue Memorandum Order
(RMO) No. 53-98. Of note were the lack of Summary List of Local Purchases and the certifications from the
Office of the Board of Investment (BOD), the Bureau of Customs (BOC), and the Philippine Economic Zone
Authority (PEZA) that the taxpayer had not filed any similar claim for refund covering the same period.6

Believing that Total Gas failed to complete the necessary documents to substantiate its claim for refund, the
CTA Division was of the view that the 120-day period allowed to the CIR to decide its claim under Section
112 (C) of the National Internal Revenue Code of 1997 (NIRC), had not even started to run. With this, the
CTA Division opined that the petition for review was prematurely filed because Total Gas failed to exhauist
the appropriate administrative remedies. The CTA Division stressed that tax refunds partake of the nature of
an exemption, putting into operation the rule of strict interpretation, with the taxpayer being charged with
the burden of proving that he had satisfied all the statutory and administrative requirements.7

Total Gas sought for reconsideration8 from the CTA Division, but its motion was denied for lack of merit in a
Resolution, dated April 19, 2011.9 In the same resolution, it reiterated that "that the complete supporting
documents should be submitted to the BIR before the 120-day period for the Commissioner to decide the
claim for refund shall commence to run. It is only upon the lapse of the 120-day period that the taxpayer
can appeal the inaction [to the CTA.]"10 It noted that RMO No. 53-98, which provides a checklist of
documents for the BIR to consider in granting claims for refund, also serves as a guideline for the courts to
determine if the taxpayer had submitted complete supporting documents.11 It also stated that Total Gas
could not invoke Revenue Memorandum Circular (RMC) No. 29-09 because it was issued after the
administrative claim was filed and could not be applied retroactively.12 Thus, the CTA Division disposed:
WHEREFORE, premises considered, the present Petition for Review is hereby DENIED DUE COURSE, and,
accordingly DISMISSED for having been prematurely filed.

SO ORDERED.13 ChanRoblesVi rtua lawlib rary

Ruling of the CTA En Banc

In its assailed decision, the CTA En Banc likewise denied the petition for review of Total Gas for lack of
merit. It condensed its arguments into two core issues, to wit: (1) whether Total Gas seasonably filed its
judicial claim for refund; and (2) whether it was unable to substantiate its administrative claim for refund by
failing to submit the required documents that would allow respondent to act on it.14

As to the first issue, the CTA En Banc ruled that the CTA Division had no jurisdiction over the case because
Total Gas failed to seasonably file its petition. Counting from the date it filed its administrative claim on May
15, 2008, the CTA En Banc explained that the CIR had 120 days to act on the claim (until September 12,
2008), and Total Gas had 30 days from then, or until October 12, 2008, to question the inaction before the
CTA. Considering that Total Gas only filed its petition on January 23, 2009, the CTA En Banc concluded that
the petition for review was belatedly filed. For the tax court, the 120-day period could not commence on the
day Total Gas filed its last supporting document on August 28, 2008, because to allow such would give the
taxpayer unlimited discretion to indefinitely extend the 120-day period by simply filing the required
documents piecemeal.15

As to the second issue, the CTA En Banc affirmed the CTA Division that Total Gas failed to submit the
complete supporting documents to warrant the grant of its application for refund. Quoting the pertinent
portion of the decision of its division, the CTA En Banc likewise concurred in its finding that the judicial claim
of Total Gas was prematurely filed because the 120-day period for the CIR to decide the claim had yet to
commence to run due to the lack of essential documents.16

Total Gas filed a motion for reconsideration,17 but it was denied in the assailed resolution of the CTA En
Banc.18

Hence, the present petition.

ISSUES

(a) whether the judicial claim for refund was belatedly filed on 23 January 2009, or way beyond
the 30-day period to appeal as provided in Section 112(c) of the Tax Code, as amended; and
(b) whether the submission of incomplete documents at the adminstrative level (BIR) renders
the judicial claim premature and dismissible for lack of jurisdiction. 19 ChanRoblesVirt ualawli bra ry

In its petition, Total Gas argues that its judicial claim was filed within the prescriptive period for claiming
excess unutilized input VAT refund as provided under Section 112 of the NIRC and expounded in the Court's
ruling in CIR v. Aichi Forging Company of Asia20 (Aichi) and in compliance with Section 112 of the NIRC. In
addition to citing Section 112 (C) of the Tax Code, Total Gas points out that in one of its previous claims for
refund of excess unutilized input VAT, the CTA En Banc in CTA En Banc Case No. 674,21 faulted the BIR in
not considering that the reckoning period for the 120-period should be counted from the date of submission
of complete documents.22 It then adds that the previous ruling of the CTA En Banc was in accordance with
law because Section 112 (C) of the Tax Code is clear in providing that the 120-day period should be counted
from the date of its submission of the complete documents or from August 28, 2008 and not from the date it
filed its administrative claim on May 15, 2008.23 Total Gas argues that, since its claim was filed within the
period of exception provided in CIR v. San Roque Power Corporation24 (San Roque), it did not have to
strictly comply with 120+30 day period before it could seek judicial relief.25c ralawred

Moreover, Total Gas questions the logic of the CTA En Banc which stated that the petition was filed both
belatedly and prematurely. Total Gas points out that on the one hand, the CTA En Banc ruled that it filed the
judicial claim belatedly as it was way beyond the 120+30 day period. Yet, it also affirmed the findings of its
division that its petition for review was prematurely filed since the 120-day period did not even commence
to run for lack of complete supporting documents.26

For Total Gas, the CTA En Banc violated the doctrine of stare decisis because the tax tribunal had, on
numerous occassions, held that the submission of incomplete supporting documents should not make the
judicial appeal premature and dismissible for lack of jurisdiction. In these decisions, the CTA En Banc had
previously held that non-compliance with RMO No. 53-98 should not be fatal since the requirements listed
therein refer to requirements for refund or tax credit in the administrative level for purposes of establishing
the authenticity of a taxpayer's claim; and that in the judicial level, it is the Rules of Court that govern and,
thus, whether or not the evidence submitted by the party to the court is sufficient lies within the sound
discretion of the court. Total Gas emphasizes that RMO No. 53-98 does not state that non-submission of
supporting documents will nullify the judicial claim. It posits that once a judicial claim is filed, what should
be examined are the evidence formally offered in the judicial proceedings.27

Even assuming that the supporting documents submitted to the BIR were incomplete, Total Gas argues that
there was no legal basis to hold that the CIR could not decide or act on the claim for refund without the
complete supporting documents. It argues that under RMC No. 29-09, the BIR is tasked with the duty to
notify the taxpayer of the incompleteness of its supporting documents and, if the taxpayer fails to complete
the supporting supporting documents despite such notice, the same shall be denied. The same regulation
provides that for purposes of computing the 120-day period, it should be considered tolled when the
taxpayer is notified. Total Gas, however, insists that it was never notified and, therefore, was justified in
seeking judicial relief.28

Although Total Gas admits that RMC No. 29-09 was not yet issued at the time it filed its administrative
claim, the BIR still erred for not notifying them of their lack of supporting documents. According to Total
Gas, the power to notify a taxpayer of lacking documents and to deny its claim if the latter would not
comply is inherent in the CIR's power to decide refund cases pursuant to Section 4 of the NIRC. It adds
"[s]ound policy also dictates that it should be the taxpayer who should determine whether he has already
submitted all documents pertinent to his claim. To rule otherwise would result into a never-ending
conflict/issue as to the completeness of documents which, in turn, would delay the taxpayer's claim, and
would put to naught the protection afforded by Section 112 (C) of the Tax Code."29

In her Comment,30 the CIR echoed the ruling of the CTA En Banc, that Total Gas filed its petition out of time.
She countered that the 120-day period could not be counted from the time Total Gas submitted its
additional documents on August 28, 2008 because such an interpretation of Section 112(D) would
indefinitely extend the prescriptive period as provided in favor of the taxpayer.

In its Reply,31 Total Gas insisted that Section 112(C) stated that the 120-day period should be reckoned
from the date of submission of complete documents, and not from the date of the filing of the administrative
claim.

Ruling of the Court

The petition has merit.

Judicial claim timely filed

Section 112 (C) of the NIRC provides: c hanRoble svirtual Lawlib ra ry

SEC. 112. Refunds or Tax Credits of Input Tax. -

xxxx

(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

xxxx

[Emphasis and Underscoring Supplied]

From the above, it is apparent that the CIR has 120 days from the date of submission of complete
documents to decide a claim for tax credit or refund of creditable input taxes. The taxpayer may, within 30
days from receipt of the denial of the claim or after the expiration of the 120-day period, which is considered
a "denial due to inaction," appeal the decision or unacted claim to the CTA.

To be clear, Section 112(C) categorically provides that the 120-day period is counted "from the date of
submission of complete documents in support of the application." Contrary to this mandate, the CTA En
Banc counted the running of the period from the date the application for refund was filed or May 15, 2008,
and, thus, ruled that the judicial claim was belatedly filed.

This should be corrected.

Indeed, the 120-day period granted to the CIR to decide the administrative claim under the Section 112 is
primarily intended to benefit the taxpayer, to ensure that his claim is decided judiciously and expeditiously.
After all, the sooner the taxpayer successfully processes his refund, the sooner can such resources be
further reinvested to the business translating to greater efficiencies and productivities that would ultimately
uplift the general welfare. To allow the CIR to determine the completeness of the documents submitted and,
thus, dictate the running of the 120-day period, would undermine these objectives, as it would provide the
CIR the unbridled power to indefinitely delay the administrative claim, which would ultimately prevent the
filing of a judicial claim with the CTA.

A hypothetical situation illustrates the hazards of granting the CIR the authority to decide when complete
documents have been submitted - A taxpayer files its administrative claim for VAT refund/credit with
supporting documents. After 121 days, the CIR informs the taxpayer that it must submit additional
documents. Considering that the CIR had determined that complete documents have not yet been
submitted, the 120-day period to decide the administrative claim has not yet begun to run. In the
meantime, more than 120 days have already passed since the application with the supporting documents
was filed to the detriment of the taxpayer, who has no opportunity to file a judicial claim until the lapse of
the 120+30 day period in Section 112(C). With no limitation to the period for the CIR to determine when
complete documents have been submitted, the taxpayer may be left in a limbo and at the mercy of the CIR,
with no adequate remedy available to hasten the processing of its administrative claim.

Thus, the question must be asked: In an administrative claim for tax credit or refund of creditable input
VAT, from what point does the law allow the CIR to determine when it should decide an application for
refund? Or stated differently: Under present law, when should the submission of documents be deemed
"completed" for purposes of determining the running of the 120-day period?

Ideally, upon filing his administrative claim, a taxpayer should complete the necessary documents to
support his claim for tax credit or refund or for excess utilized VAT. After all, should the taxpayer decide to
submit additional documents and effectively extend the 120-period, it grants the CIR more time to decide
the claim. Moreover, it would be prejudicial to the interest of a taxpayer to prolong the period of processing
of his application before he may reap the benefits of his claim. Therefore, ideally, the CIR has a period of
120 days from the date an administrative claim is filed within which to decide if a claim for tax credit or
refund of excess unutilized VAT has merit.

Thus, when the VAT was first introduced through Executive Order No. 273,32 the pertinent rule was that:
(e) Period within which refund of input taxes may be made by the Commissioner. The Commissioner shall
refund input taxes within 60 days from the date the application for refund was filed with him or his
duly authorized representative. No refund or input taxes shall be allowed unless the VAT-registered person
files an application for refund within the period prescribed in paragraphs (a), (b) and (c), as the case maybe.

[Emphasis supplied]
Here, the CIR was not only given 60 days within which to decide an administrative claim for refund of input
taxes, but the beginning of the period was reckoned "from the date the application for refund was filed."

When Republic Act (R.A.) No. 771633 was, however, enacted on May 5, 1994, the law was amended to
read:
(d) Period within which refund or tax credit of input taxes shall be made. - In proper cases, The
Commissioner shall grant a refund or issue the tax credit for creditable input taxes within sixty (60)
days from the date of submission of complete documents in support of the application filed in
accordance with sub-paragraphs (a) and (b) hereof. In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the sixty-day period, appeal the decision or the unacted claim
with the Court of Tax Appeals.

[Emphasis supplied]
Again, while the CIR was given only 60 days within which to act upon an administrative claim for refund or
tax credit, the period came to be reckoned "from the date of submission of complete documents in
support of the application." With this amendment, the date when a taxpayer made its submission of
complete documents became relevant. In order to ensure that such date was at least determinable, RMO
No. 4-94 provides:
REVENUE MEMORANDUM ORDER NO. 40-94

SUBJECT : Prescribing the Modified Procedures on the Processing of Claims for Value-Added Tax
Credit/Refund

III. Procedures
REGIONAL OFFICE
A. Revenue District Office
In General:chanRoblesvi rtua lLaw lib rary

1. Ascertain the completeness of the supporting documents prior to the receipt of the application for VAT
credit/refund from the taxpayer.

2. Receive application for VAT Credit/Refund (BIR Form No. 2552) in three (3) copies in the following
manner:
a. stamp the word "RECEIVED" on the appropriate space provided in all copies of application;

b. indicate the claim number;

c. indicate the date of receipt; and

d. initial by receiving officer.

The application shall be received only if the required attachments prescribed in RAMO 1-91 have been fully
complied with x x x.
Then, when the NIRC34 was enacted on January 1, 1998, the rule was once more amended to read:
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of compete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

[Emphasis supplied]
This time, the period granted to the CIR to act upon an admmistrative claim for refund was extended to 120
days. The reckoning point however, remained "from the date of submission of complete documents."

Aware that not all taxpayers were able to file the complete documents to allow the CIR to properly evaluate
an administrative claim for tax credit or refund of creditable input taxes, the CIR issued RMC No. 49-2003,
which provided:
Q-18: For pending claims with incomplete documents, what is the period within which to submit the
supporting documents required by the investigating/processing office? When should the
investigating/processing office officially receive claims for tax credit/refund and what is the period required
to process such claims?

A-18: For pending claims which have not been acted upon by the investigating/processing office due to
incomplete documentation, the taxpayer-claimants are given thirty (30) days within which to
submit the documentary requirements unless given further extension by the head of the
processing unit, but such extension should not exceed thirty (30) days.

For claims to be filed by claimants with the respective investigating/processing office of the administrative
agency, the same shall be officially received only upon submission of complete documents.

For current and future claims for tax credit/refund, the same shall be processed within one hundred twenty
(120) days from receipt of the complete documents. If, in the course of the investigation and processing of
the claim, additional documents are required for the proper determination of the legitimate amount of claim,
the taxpayer-claimants shall submit such documents within thirty (30) days from request of the
investigating/processing office, which shall be construed as within the one hundred twenty
(120) day period.

[Emphases Supplied]
Consequently, upon filing of his application for tax credit or refund for excess creditable input taxes, the
taxpayer-claimant is given thirty (30) days within which to complete the required documents, unless given
further extension by the head of the processing unit. If, in the course of the investigation and processing of
the claim, additional documents are required for the proper determination of the legitimate amount of claim,
the taxpayer-claimants shall submit such documents within thirty (30) days from request of the
investigating/processing office. Notice, by way of a request from the tax collection authority to produce the
complete documents in these cases, became essential. It is only upon the submission of these documents
that the 120-day period would begin to run.

Then, when R.A. No. 933735 was passed on July 1, 2005, the same provision under the NIRC was retained.
With the amendment to Section 112, particularly the deletion of what was once Section 112(B) of the NIRC,
Section 112 (D) was amended and renamed 112(C). Thus:
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsection (A) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
With the amendments only with respect to its place under Section 112, the Court finds that RMC No. 49-
2003 should still be observed. Thus, taking the foregoing changes to the law altogether, it becomes
apparent that, for purposes of determining when the supporting documents have been completed — it is
the taxpayer who ultimately determines when complete documents have been submitted for the purpose of
commencing and continuing the running of the 120-day period. After all, he may have already completed
the necessary documents the moment he filed his administrative claim, in which case, the 120-day period is
reckoned from the date of filing.
The taxpayer may have also filed the complete documents on the 30th day from filing of his application,
pursuant to RMC No. 49-2003. He may very well have filed his supporting documents on the first day he was
notified by the BIR of the lack of the necessary documents. In such cases, the 120-day period is computed
from the date the taxpayer is able to submit the complete documents in support of his application.

Then, except in those instances where the BIR would require additional documents in order to fully
appreciate a claim for tax credit or refund, in terms what additional document must be presented in support
of a claim for tax credit or refund - it is the taxpayer who has that right and the burden of providing any and
all documents that would support his claim for tax credit or refund. After all, in a claim for tax credit or
refund, it is the taxpayer who has the burden to prove his cause of action. As such, he enjoys relative
freedom to submit such evidence to prove his claim.

The foregoing conclusion is but a logical consequence of the due process guarantee under the Constitution.
Corollary to the guarantee that one be afforded the opportunity to be heard, it goes without saying that the
applicant should be allowed reasonable freedom as to when and how to present his claim within the
allowable period.

Thereafter, whether these documents are actually complete as required by law - is for the CIR
and the courts to determine. Besides, as between a taxpayer-applicant, who seeks the refund of his
creditable input tax and the CIR, it cannot be denied that the former has greater interest in ensuring that
the complete set of documentary evidence is provided for proper evaluation of the State.

Lest it be misunderstood, the benefit given to the taxpayer to determine when it should complete its
submission of documents is not unbridled. Under RMC No. 49-2003, if in the course of the investigation and
processing of the claim, additional documents are required for the proper determination of the legitimacy of
the claim, the taxpayer-claimants shall submit such documents within thirty (30) days from request of the
investigating/processing office. Again, notice, by way of a request from the tax collection authority
to produce the complete documents in these cases, is essential.

Moreover, under Section 112(A) of the NIRC,36 as amended by RA 9337, a taxpayer has two (2) years, after
the close of the taxable quarter when the sales were made, to apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales. Thus, before the
adminstrative claim is barred by prescription, the taxpayer must be able to submit his complete documents
in support of the application filed. This is because, it is upon the complete submission of his documents in
support of his application that it can be said that the application was, "officially received" as provided under
RMC No. 49-2003.

To summarize, for the just disposition of the subject controversy, the rule is that from the date an
administrative claim for excess unutilized VAT is filed, a taxpayer has thirty (30) days within which to submit
the documentary requirements sufficient to support his claim, unless given further extension by the CIR.
Then, upon filing by the taxpayer of his complete documents to support his application, or expiration of the
period given, the CIR has 120 days within which to decide the claim for tax credit or refund. Should the
taxpayer, on the date of his filing, manifest that he no longer wishes to submit any other addition
documents to complete his administrative claim, the 120 day period allowed to the CIR begins to run from
the date of filing.

In all cases, whatever documents a taxpayer intends to file to support his claim must be completed within
the two-year period under Section 112(A) of the NIRC. The 30-day period from denial of the claim or from
the expiration of the 120-day period within which to appeal the denial or inaction of the CIR to the CTA must
also be respected.

It bears mentioning at this point that the foregoing summation of the rules should only be made applicable
to those claims for tax credit or refund filed prior to June 11, 2014, such as the claim at bench. As it now
stands, RMC 54-2014 dated June 11, 2014 mandates that:
The application for VAT refund/tax credit must be accompanied by complete supporting documents as
enumerated in Annex "A" hereof. In addition, the taxpayer shall attach a statement under oath attesting
to the completeness of the submitted documents (Annex B). The affidavit shall further state that the said
documents are the only documents which the taxpayer will present to support the claim. If the taxpayer is a
juridical person, there should be a sworn statement that the officer signing the affidavit (i.e., at the very
least, the Chief Financial Officer) has been authorized by the Board of Directors of the company.
Upon submission of the administrative claim and its supporting documents, the claim shall be processed and
no other documents shall be accepted/required from the taxpayer in the course of its evaluation. A decision
shall be rendered by the Commissioner based only on the documents submitted by the taxpayer. The
application for tax refund/tax credit shall be denied where the taxpayer/claimant failed to submit the
complete supporting documents. For this purpose, the concerned processing/investigating office shall
prepare and issue the corresponding Denial Letter to the taxpayer/claimant.
Thus, under the current rule, the reckoning of the 120-day period has been withdrawn from the taxpayer by
RMC 54-2014, since it requires him at the time he files his claim to complete his supporting documents and
attest that he will no longer submit any other document to prove his claim. Further, the taxpayer is barred
from submitting additional documents after he has filed his administrative claim.

On this score, the Court finds that the foregoing issuance cannot be applied rectroactively to the case
at bar since it imposes new obligations upon taxpayers in order to perfect their administrative claim, that is,
[1] compliance with the mandate to submit the "supporting documents" enumerated under RMC 54-2014
under its "Annex A"; and [2] the filing of "a statement under oath attesting to the completeness of the
submitted documents," referred to in RMC 54-2014 as "Annex B." This should not prejudice taxpayers who
have every right to pursue their claims in the manner provided by existing regulations at the time it was
filed.

As provided under Section 246 of the Tax Code:

SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the following cases: chanRob lesvi rtua lLawl ibra ry

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any document
required of him by the Bureau of Internal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from
the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.

[Emphasis and Italics Supplied]

Applying the foregoing precepts to the case at bench, it is observed that the CIR made no effort to question
the inadequacy of the documents submitted by Total Gas. It neither gave notice to Total Gas that its
documents were inadequate, nor ruled to deny its claim for failure to adequately substantiate its claim.
Thus, for purposes of counting the 120-day period, it should be reckoned from August 28, 2008, the date
when Total Gas made its "submission of complete documents to support its application" for refund of excess
unutilized input VAT. Consequently, counting from this later date, the BIR had 120 days to decide the claim
or until December 26, 2008. With absolutely no action or notice on the part of the BIR for 120 days, Total
Gas had 30 days or until January 25, 2009 to file its judicial claim.

Total Gas, thus, timely filed its judicial claim on January 23, 2009.

Anent RMO No. 53-98, the CTA Division found that the said order provided a checklist of documents for the
BIR to consider in granting claims for refund, and served as a guide for the courts in determining whether
the taxpayer had submitted complete supporting documents.

This should also be corrected.

To quote RMO No. 53-98:

REVENUE MEMORANDUM ORDER NO. 53-98

SUBJECT: Checklist of Documents to be Submitted by a Taxpayer upon Audit of his Tax Liabilities as well as
of the Mandatory Reporting Requirements to be Prepared by a Revenue Officer, all of which Comprise a
Complete Tax Docket.

TO: All Internal Revenue Officers, Employees and Others Concerned

I. BACKGROUND
It has been observed that for the same kind of tax audit case, Revenue Officers differ in their request for
requirements from taxpayers as well as in the attachments to the dockets resulting to tremendous
complaints from taxpayers and confusion among tax auditors and reviewers.

For equity and uniformity, this Bureau comes up with a prescribed list of requirements from taxpayers, per
kind of tax, as well as of the internally prepared reporting requirements, all of which comprise a complete
tax docket.

II. OBJECTIVE

This order is issued to:c hanRoble svirtual Lawlib ra ry

a. Identify the documents to be required from a taxpayer during audit, according to particular kind of tax;
and

b. Identify the different audit reporting requirements to be prepared, submitted and attached to a tax audit
docket.

III. LIST OF REQUIREMENTS PER TAX TYPE

Income Tax/ Withholding Tax

- Annex A (3 pages)

Value Added Tax

- Annex B (2 pages)
- Annex B-1 (5 pages)

xxxx
As can be gleaned from the above, RMO No. 53-98 is addressed to internal revenue officers and employees,
for purposes of equity and uniformity, to guide them as to what documents they may require taxpayers to
present upon audit of their tax liabilities. Nothing stated in the issuance would show that it was intended
to be a benchmark in determining whether the documents submitted by a taxpayer are actually complete to
support a claim for tax credit or refund of excess unutilized excess VAT. As expounded in Commissioner of
Internal Revenue v. Team Sual Corporation (formerely Mir ant Sual Corporation):37
The CIR's reliance on RMO 53-98 is misplaced. There is nothing in Section 112 of the NIRC. RR 3-88 or RMO
K3-Q8 itself that requires submission of the complete documents enumerated in RMO 53-98 for a grant of a
refund or credit of input VAT. The subject of RMO 53-98 states that it is a "Checklist of Documents to be
Submitted by a Taxpayer upon Audit of his Tax Liabilities x x x." In this case, TSC was applying for a grant
of refund or credit of its input tax. There was no allegation of an audit being conducted by the CIR. Even
assuming that RMO 53-98 applies, it specifically states that some documents are required to be submitted
by the taxpayer "if applicable."

Moreover, if TSC indeed failed to submit the complete documents in support of its application, the CIR could
have informed TSC of its failure, consistent with Revenue Memorandum Circular No. (RMC) 42-03. However,
the CIR did not inform TSC of the document it failed to submit, even up to the present petition. The CIR
likewise raised the issue of TSC's alleged failure to submit the complete documents only in its motion for
reconsideration of the CTA Special First Division's 4 March 2010 Decision. Accordingly, we affirm the CTA
EB's finding that TSC filed its administrative claim on 21 December 2005, and submitted the complete
documents in support of its application for refund or credit of its input tax at the same time.

[Emphasis included. Underlining Ours.]

As explained earlier and underlined in Team Sual above, taxpayers cannot simply be faulted for failing to
submit the complete documents enumerated in RMO No. 53-98, absent notice from a revenue officer or
employee that other documents are required. Granting that the BIR found that the documents submitted by
Total Gas were inadequate, it should have notified the latter of the inadequacy by sending it a request to
produce the necessary documents in order to make a just and expeditious resolution of the claim.

Indeed, a taxpayer's failure with the requirements listed under RMO No. 53-98 is not fatal to its claim for tax
credit or refund of excess unutilized excess VAT. This holds especially true when the application for tax
credit or refund of excess unutilized excess VAT has arrived at the judicial level. After all, in the judicial level
or when the case is elevated to the Court, the Rules of Court governs. Simply put, the question of whether
the evidence submitted by a party is sufficient to warrant the granting of its prayer lies within the sound
discretion and judgment of the Court.

At this point, it is worth emphasizing that the reckoning of the 120-day period from August 28, 2008 cannot
be doubted. First, a review of the records of the case undubitably show that Total Gas filed its supporting
documents on August 28, 2008, together with a transmittal letter bearing the same date. These documents
were then stamped and signed as received by the appropriate officer of the BIR. Second, contrary to RMO
No. 40-94, which mandates officials of the BIR to indicate the date of receipt of documents received by their
office in every claim for refund or credit of VAT, the receiving officer failed to indicate the precise date and
time when he received these documents. Clearly, the error is attributable to the BIR officials and should not
prejudice Total Gas.

Third, it is observed that whether before the CTA or this Court, the BIR had never questioned the date it
received the supporting documents filed by Total Gas, or the propriety of the filing thereof. In contrast to
the contiuous efforts of Total Gas to complete the necessary documents needed to support its application, all
that was insisted by the CIR was that the reckoning period should be counted from the date Total Gas filed
its application for refund of excess unutilized input VAT. There being no question as to whether these
documents were actually received on August 28, 2008, this Court shall not, by way of conjecture, cast doubt
on the truthfullness on such submission. Finally, in consonance with the presumption that a person acts in
accordance with the ordinary course of business, it is presumed that such documents were received on the
date stated therein.

Verily, should there be any doubt on whether Total Gas filed its supporting documents on August 28, 2008,
it is incumbent upon the CIR to allege and prove such assertion. As the saying goes, contra preferentum.

If only to settle any doubt, this Court is by no means setting a precedent by leaving it to the mercy of the
taxpayer to determine when the 120- day reckoning period should begin to run by providing absolute
discretion as to when he must comply with the mandate submitting complete documents in support of his
claim. In addition to the limitations thoroughly discussed above, the peculiar circumstance applicable herein,
as to relieve Total Gas from the application of the rule, is the obvious failure of the BIR to comply with
the specific directive, under RMO 40-94, to stamp the date it received the supporting
documents which Total Gas had submitted to the BIR for its consideration in the processing of its claim.
The utter failure of the tax administrative agency to comply with this simple mandate to stamp the date it
receive the documents submitted by Total Gas - should not in any manner prejudice the taxpayer by casting
doubt as to when it was able to submit its complete documents for purposes of determing the 120-day
period.

While it is still true a taxpayer must prove not only his entitlement to a refund but also his compliance with
the procedural due process38 - it also true that when the law or rule mandates that a party or authority must
comply with a specific obligation to perform an act for the benefit of another, the non-compliance therof by
the former should not operate to prejudice the latter, lest it render the nugatory the objective of the rule.
Such is the situation in case at bar.

Judicial claim not prematurely filed

The CTA En Banc curiously ruled in the assailed decision that the judicial claim of Total Gas was not only
belatedly filed, but prematurely filed as well, for failure of Total Gas to prove that it had submitted the
complete supporting documents to warrant the grant of the tax refund and to reckon the commencement of
the 120-day period. It asserted that Total Gas had failed to submit all the required documents to the CIR
and, thus, the 120-day period for the CIR to decide the claim had not yet begun to run, resulting in the
premature filing of the judicial claim. It wrote that the taxpayer must first submit the complete supporting
documents before the 120-day period could commence, and that the CIR could not decide the claim for
refund without the complete supporting documents.

The Court disagrees.

The alleged failure of Total Gas to submit the complete documents at the administrative level did not render
its petition for review with the CTA dismissible for lack of jurisdiction. First, the 120-day period had
commenced to run and the 120+30 day period was, in fact, complied with. As already discussed, it is the
taxpayer who determines when complete documents have been submitted for the purpose of the running of
the 120-day period. It must again be pointed out that this in no way precludes the CIR from requiring
additional documents necessary to decide the claim, or even denying the claim if the taxpayer fails to submit
the additional documents requested.
Second, the CIR sent no written notice informing Total Gas that the documents were incomplete or required
it to submit additional documents. As stated above, such notice by way of a written request is required by
the CIR to be sent to Total Gas. Neither was there any decision made denying the administrative claim of
Total Gas on the ground that it had failed to submit all the required documents. It was precisely the inaction
of the BIR which prompted Total Gas to file the judicial claim. Thus, by failing to inform Total Gas of the
need to submit any additional document, the BIR cannot now argue that the judicial claim should be
dismissed because it failed to submit complete documents.

Finally, it should be mentioned that the appeal made by Total Gas to the CTA cannot be said to be
premature on the ground that it did not observe the otherwise mandatory and juridictional 120+30 day
period. When Total Gas filed its appeal with the CTA on January 23, 2009, it simply relied on BIR Ruling No.
DA-489-03, which, at that time, was not yet struck down by the Court's ruling in Aichi. As explained
in San Roque, this Court recognized a period in time wherein the 120-day period need not be strictly
observed. Thus:
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the
taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is compliance
with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the 120+30 day
periods is necessary for such a claim to prosper, whether before, during, or after the effectivity of the Atlas
doctrine, except for the period from the issuance of BIR Ruling No. DA-489-03 on 10 December
2003 to 6 October 2010 when the Aichi doctrine was adopted, which again reinstated the 120+30
day periods as mandatory and jurisdictional.

xxxx

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR
Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by
this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional.
At this stage, a review of the nature of a judicial claim before the CTA is in order. In Atlas Consolidated
Mining and Development Corporation v. CIR, it was ruled -
x x x First, a judicial claim for refund or tax credit in the CTA is by no means an original action but rather
an appeal by way of petition for review of a previous, unsuccessful administrative claim. Therefore, as in
every appeal or petition for review, a petitioner has to convince the appellate court that the quasi-judicial
agency a quo did not have any reason to deny its claims. In this case, it was necessary for petitioner to
show the CTA not only that it was entitled under substantive law to the grant of its claims but also that it
satisfied all the documentary and evidentiary requirements for an administrative claim for refund or tax
credit. Second, cases filed in the CTA are litigated de novo. Thus, a petitioner should prove every minute
aspect of its case by presenting, formally offering and submitting its evidence to the CTA. Since it is crucial
for a petitioner in a judicial claim for refund or tax credit to show that its administrative claim should have
been granted in the first place, part of the evidence to be submitted to the CTA must necessarily include
whatever is required for the successful prosecution of an administrative claim.39

[Underscoring Supplied]
A distinction must, thus, be made between administrative cases appealed due to inaction and those
dismissed at the administrative level due to the failure of the taxpayer to submit supporting documents. If
an administrative claim was dismissed by the CIR due to the taxpayer's failure to submit complete
documents despite notice/request, then the judicial claim before the CTA would be dismissible, not for lack
of jurisdiction, but for the taxpayer's failure to substantiate the claim at the administrative level. When a
judicial claim for refund or tax credit in the CTA is an appeal of an unsuccessful administrative claim, the
taxpayer has to convince the CTA that the CIR had no reason to deny its claim. It, thus, becomes imperative
for the taxpayer to show the CTA that not only is he entitled under substantive law to his claim for refund or
tax credit, but also that he satisfied all the documentary and evidentiary requirements for an administrative
claim. It is, thus, crucial for a taxpayer in a judicial claim for refund or tax credit to show that its
administrative claim should have been granted in the first place. Consequently, a taxpayer cannot cure its
failure to submit a document requested by the BIR at the administrative level by filing the said document
before the CTA.

In the present case, however, Total Gas filed its judicial claim due to the inaction of the BIR. Considering
that the administrative claim was never acted upon; there was no decision for the CTA to review on
appeal per se. Consequently, the CTA may give credence to all evidence presented by Total Gas, including
those that may not have been submitted to the CIR as the case is being essentially decided in the first
instance. The Total Gas must prove every minute aspect of its case by presenting and formally offering its
evidence to the CTA, which must necessarily include whatever is required for the successful prosecution of
an administrative claim.40

The Court cannot, however, make a ruling on the issue of whether Total Gas is entitled to a refund or tax
credit certificate in the amount of P7,898,433.98. Considering that the judicial claim was denied due course
and dismissed by the CTA Division on the ground of premature and/or belated filing, no ruling on the issue
of Total Gas entitlement to the refund was made. The Court is not a trier of facts, especially when such facts
have not been ruled upon by the lower courts. The case shall, thus, be remanded to the CTA Division for
trial de novo.

WHEREFORE, the petition is PARTIALLY GRANTED. The October 11, 2012 Decision and the May 8, 2013
Resolution of the Court of Tax Appeals En Banc, in CTA EB No. 776 are REVERSED and SET ASIDE.

The case is REMANDED to the CTA Third Division for trial de novo.

SO ORDERED

SECOND DIVISION

COMMISSIONER OF G.R. No. 178697

INTERNAL REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

LEONARDO-DE CASTRO,
PERALTA,
- versus - ABAD, and
MENDOZA, JJ.

SONY PHILIPPINES, INC., Promulgated:

Respondent. November 17, 2010

X ---------------------------------------------------------------------------------------X

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007
Decision and the July 5, 2007 Resolution of the Court of Tax Appeals En
Banc[1] (CTA-EB), in C.T.A. EB No. 90, affirming the October 26, 2004 Decision
of the CTA-First Division[2] which, in turn, partially granted the petition for review
of respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision
cancelled the deficiency assessment issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency
assessment for expanded withholding tax (EWT) in the amount of P1,035,879.70
and the penalties for late remittance of internal revenue taxes in the amount
of P1,269, 593.90.[3]

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No.

000019734 (LOA 19734) authorizing certain revenue officers to examine Sonys
books of accounts and other accounting records regarding revenue taxes for the
period 1997 and unverified prior years. On December 6, 1999, a preliminary
assessment for 1997 deficiency taxes and penalties was issued by the CIR which
Sony protested. Thereafter, acting on the protest, the CIR issued final assessment
notices, the formal letter of demand and the details of discrepancies. [4] Said details
of the deficiency taxes and penalties for late remittance of internal revenue taxes
are as follows:
DEFICIENCY VALUE -ADDED TAX (VAT)
(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.65[5]

 Sony sought re-evaluation of the aforementioned assessment by filing a
protest on February 2, 2000. Sony submitted relevant documents in support of its
protest on the 16th of that same month.[6]

On October 24, 2000, within 30 days after the lapse of 180 days from
submission of the said supporting documents to the CIR, Sony filed a petition for
review before the CTA.[7]

After trial, the CTA-First Division disallowed the deficiency VAT

assessment because the subsidized advertising expense paid by Sony which was
duly covered by a VAT invoice resulted in an input VAT credit. As regards the
EWT, the CTA-First Division maintained the deficiency EWT assessment on
Sonys motor vehicles and on professional fees paid to general professional
partnerships. It also assessed the amounts paid to sales agents as commissions with
five percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85.
The CTA-First Division, however, disallowed the EWT assessment on rental
expense since it found that the total rental deposit of P10,523,821.99 was incurred
from January to March 1998 which was again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTA-First Division also upheld the
penalties for the late payment of VAT on royalties, for late remittance of final
withholding tax on royalty as of December 1997 and for the late remittance of
EWT by some of Sonys branches.[8] In sum, the CTA-First Division partly granted
Sonys petition by cancelling the deficiency VAT assessment but upheld a modified
deficiency EWT assessment as well as the penalties. Thus, the dispositive portion
reads:

WHEREFORE, the petition for review is hereby

PARTIALLY GRANTED. Respondent is ORDERED to CANCEL
and WITHDRAW the deficiency assessment for value-added tax
for 1997 for lack of merit. However, the deficiency assessments for
expanded withholding tax and penalties for late remittance of
internal revenue taxes are UPHELD.
 Accordingly, petitioner is DIRECTED to PAY the
respondent the deficiency expanded withholding tax in the
amount of P1,035,879.70 and the following penalties for late
remittance of internal revenue taxes in the sum of P1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioners Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully
paid pursuant to Section 249(C)(3) of the 1997 Tax Code.

SO ORDERED.[9]

The CIR sought a reconsideration of the above decision and submitted the
following grounds in support thereof:

A. The Honorable Court committed reversible error in holding

that petitioner is not liable for the deficiency VAT in the
amount of P11,141,014.41;

B. The Honorable court committed reversible error in holding

that the commission expense in the amount of
P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in

holding that the withholding tax assessment with respect to
the 5% withholding tax on rental deposit in the amount
of P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding

that the remittance of final withholding tax on royalties
covering the period January to March 1998 was filed on
time.[10]

On April 28, 2005, the CTA-First Division denied the motion for
reconsideration. Unfazed, the CIR filed a petition for review with the CTA-EB
raising identical issues:
 1. Whether or not respondent (Sony) is liable for the deficiency
VAT in the amount of P11,141,014.41;

2. Whether or not the commission expense in the amount

of P2,894,797.00 should be subjected to 10% withholding tax
instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the

5% withholding tax on rental deposit in the amount
of P10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on

royalties covering the period January to March 1998 was filed
outside of time.[11]

Finding no cogent reason to reverse the decision of the CTA-First Division,

the CTA-EB dismissed CIRs petition on May 17, 2007. CIRs motion for
reconsideration was denied by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the
very same grounds it raised before the CTA-First Division and the CTA-EB. The
said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE

PETITION

THE CTA EN BANC ERRED IN RULING THAT

RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN
THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENTS DEFICIENCY EXPANDED

WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE

COMMISSION EXPENSE IN THE AMOUNT OF
 PHP2,894,797.00 SHOULD BE SUBJECTED TO A
WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX
RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE

ASSESSMENT WITH RESPECT TO THE 5%
WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE

FINAL WITHHOLDING TAX ON ROYALTIES COVERING
THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON
TIME.[12]

Upon filing of Sonys comment, the Court ordered the CIR to file its reply
thereto. The CIR subsequently filed a manifestation informing the Court that it
would no longer file a reply. Thus, on December 3, 2008, the Court resolved to
give due course to the petition and to decide the case on the basis of the pleadings
filed.[13]
The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states the period 1997 and
unverified prior years, should be understood to mean the fiscal year ending in
March 31, 1998.[14] The Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the

authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of
account and other accounting records of a taxpayer for the purpose of collecting
the correct amount of tax.[15] The very provision of the Tax Code that the CIR
relies on is unequivocal with regard to its power to grant authority to examine and
assess a taxpayer.
 SEC. 6. Power of the Commissioner to Make Assessments
and Prescribe Additional Requirements for Tax Administration and
Enforcement.

(A)Examination of Returns and Determination of tax Due.

After a return has been filed as required under the provisions of
this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and
the assessment of the correct amount of tax: Provided, however,
That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer. x x x [Emphases
supplied]

Clearly, there must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the revenue
officer so authorized must not go beyond the authority given. In the absence of
such an authority, the assessment or examination is a nullity.

As earlier stated, LOA 19734 covered the period 1997 and unverified prior
years. For said reason, the CIR acting through its revenue officers went beyond the
scope of their authority because the deficiency VAT assessment they arrived at
was based on records from January to March 1998 or using the fiscal year which
ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28,
2005 Resolution, the CIR knew which period should be covered by the
investigation. Thus, if CIR wanted or intended the investigation to include the year
1998, it should have done so by including it in the LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734,
particularly the phrase and unverified prior years, violated Section C of Revenue
Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion of
which reads:

3. A Letter of Authority should cover a taxable period not

exceeding one taxable year. The practice of issuing L/As
covering audit of unverified prior years is hereby prohibited. If
the audit of a taxpayer shall include more than one taxable
period, the other periods or years shall be specifically indicated
in the L/A.[16] [Emphasis supplied]
 On this point alone, the deficiency VAT assessment should have been
disallowed. Be that as it may, the CIRs argument, that Sonys advertising expense
could not be considered as an input VAT credit because the same was eventually
reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sonys advertising expense was reimbursed by
SIS, the former never incurred any advertising expense. As a result, Sony is not
entitled to a tax credit. At most, the CIR continues, the said advertising expense
should be for the account of SIS, and not Sony.[17]

The Court is not persuaded. As aptly found by the CTA-First Division and
later affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from
the CIRs disallowance of the input VAT credits that should have been realized
from the advertising expense of the latter.[18] It is evident under Section 110[19] of
the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIRs own witness,
Revenue Officer Antonio Aluquin.[20] There is also no denying that Sony incurred
advertising expense. Aluquin testified that advertising companies issued invoices
in the name of Sony and the latter paid for the same.[21] Indubitably, Sony incurred
and paid for advertising expense/ services. Where the money came from is another
matter all together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement
from SIS was income and, thus, taxable. In support of this, the CIR cited a portion
of Sonys protest filed before it:

The fact that due to adverse economic conditions, Sony-

Singapore has granted to our client a subsidy equivalent to the
latters advertising expenses will not affect the validity of the input
taxes from such expenses. Thus, at the most, this is an additional
income of our client subject to income tax. We submit further that
our client is not subject to VAT on the subsidy income as this was
not derived from the sale of goods or services.[22]

Insofar as the above-mentioned subsidy may be considered as income and,

therefore, subject to income tax, the Court agrees. However, the Court does not
agree that the same subsidy should be subject to the 10% VAT. To begin with, the
said subsidy termed by the CIR as reimbursement was not even exclusively
earmarked for Sonys advertising expense for it was but an assistance or aid in view
of Sonys dire or adverse economic conditions, and was only equivalent to the
latters (Sonys) advertising expenses.

Section 106 of the Tax Code explains when VAT may be imposed or
exacted. Thus:

SEC. 106. Value-added Tax on Sale of Goods or

Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties
sold, bartered or exchanged, such tax to be paid by the seller or
transferor.

Thus, there must be a sale, barter or exchange of goods or properties before

any VAT may be levied. Certainly, there was no such sale, barter or exchange in
the subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment
for goods or properties sold, bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to
rule that services rendered for a fee even on reimbursement-on-cost basis only and
without realizing profit are also subject to VAT. The case, however, is not
applicable to the present case. In that case, COMASERCO rendered service to its
affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which
means that it was paid the cost or expense that it incurred although without profit.
This is not true in the present case. Sony did not render any service to SIS at all.
The services rendered by the advertising companies, paid for by Sony using SIS
dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the
amount equivalent to the latters advertising expense but never received any goods,
properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sonys

commission expense, the CIR insists that said deficiency EWT assessment is
subject to the ten percent (10%) rate instead of the five percent (5%) citing
Revenue Regulation No. 2-98 dated April 17, 1998.[24] The said revenue regulation
provides that the 10% rate is applied when the recipient of the commission income
is a natural person. According to the CIR, Sonys schedule of Selling, General and
Administrative expenses shows the commission expense as commission/dealer
salesman incentive, emphasizing the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-
First Division is based on Section 1(g) of Revenue Regulations No. 6-85 which
provides:

(g) Amounts paid to certain Brokers and Agents. On gross

payments to customs, insurance, real estate and commercial
brokers and agents of professional entertainers five per centum
(5%).[25]

In denying the very same argument of the CIR in its motion for
reconsideration, the CTA-First Division, held:

x x x, commission expense is indeed subject to 10%

withholding tax but payments made to broker is subject to 5%
withholding tax pursuant to Section 1(g) of Revenue Regulations
No. 6-85. While the commission expense in the schedule of
Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as commission/dealer
salesman incentive the same does not justify the automatic
imposition of flat 10% rate. As itemized by petitioner, such
expense is composed of Commission Expense in the amount of
P10,200.00 and Broker Dealer of P2,894,797.00.[26]

The Court agrees with the CTA-EB when it affirmed the CTA-First Division
decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended
by Revenue Regulations No. 12-94, which was the applicable rule during the
subject period of examination and assessment as specified in the LOA. Revenue
Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case. Besides, the withholding tax on
brokers and agents was only increased to 10% much later or by the end of July
2001 under Revenue Regulations No. 6-2001.[27] Until then, the rate was only 5%.
 The Court also affirms the findings of both the CTA-First Division and the
CTA-EB on the deficiency EWT assessment on the rental deposit. According to
their findings, Sony incurred the subject rental deposit in the amount
of P10,523,821.99 only from January to March 1998. As stated earlier, in the
absence of the appropriate LOA specifying the coverage, the CIRs deficiency
EWT assessment from January to March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated
remittance of its FWT on royalties (i) as of December 1997; and (ii) for the period
from January to March 1998. Again, the Court agrees with the CTA-First Division
when it upheld the CIR with respect to the royalties for December 1997 but
cancelled that from January to March 1998.

The CIR insists that under Section 3[28] of Revenue Regulations No. 5-82
and Sections 2.57.4 and 2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony
should also be made liable for the FWT on royalties from January to March of
1998. At the same time, it downplays the relevance of the Manufacturing License
Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of
royalties.

The above revenue regulations provide the manner of withholding

remittance as well as the payment of final tax on royalty. Based on the same, Sony
is required to deduct and withhold final taxes on royalty payments when the
royalty is paid or is payable. After which, the corresponding return and remittance
must be made within 10 days after the end of each month. The question now is
when does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the
following terms of royalty payments were agreed upon:
(5)Within two (2) months following each semi-annual
period ending June 30 and December 31, the LICENSEE shall
furnish to the LICENSOR a statement, certified by an officer of the
LICENSEE, showing quantities of the MODELS sold, leased or
otherwise disposed of by the LICENSEE during such respective
 semi-annual period and amount of royalty due pursuant this
ARTICLE X therefore, and the LICENSEE shall pay the royalty
hereunder to the LICENSOR concurrently with the furnishing of
the above statement.[30]

Withal, Sony was to pay Sony-Japan royalty within two (2) months after
every semi-annual period which ends in June 30 and December 31. However, the
CTA-First Division found that there was accrual of royalty by the end of December
1997 as well as by the end of June 1998. Given this, the FWTs should have been
paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus,
it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT
for the royalty from January to March 1998 was seasonably filed. Although the
royalty from January to March 1998 was well within the semi-annual period
ending June 30, which meant that the royalty may be payable until August 1998
pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10,
1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of
the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 174157 October 20, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
McGEORGE FOOD INDUSTRIES, INC., Respondent.

DECISION

CARPIO, J.:
 The Case

For review1 are the rulings2 of the Court of Appeals affirming a tax refund despite an earlier decision
of the corporate taxpayer to apply its overpayment to future tax liability.

The Facts

On 15 April 1998, more than three months after Republic Act No. 8424 or the Tax Reform Act of
1997 (1997 NIRC) took effect on 1 January 1998, respondent McGeorge Food Industries, Inc.
(respondent) filed with the Bureau of Internal Revenue (BIR) its final adjustment income tax return
for the calendar year ending 31 December 1997. The return indicated a tax liability of ₱5,393,988
against a total payment of ₱10,130,176 for the first three quarters,3resulting in a net overpayment of
₱4,736,188. Exercising its option to either seek a refund of this amount or carry it over to the
succeeding year as tax credit, respondent chose the latter, indicating in its 1997 final return that it
wished the amount "to be applied as credit to next year."4

On 15 April 1999, respondent filed its final adjustment return for the calendar year ending 31
December 1998, indicating a tax liability of ₱5,799,056. Instead of applying to this amount its unused
tax credit carried over from 1997 (₱4,736,188), as it was supposed to do, respondent merely
deducted from its tax liability the taxes withheld at source for 1998 (₱217,179) and paid the balance
of ₱5,581,877.

On 14 April 2000, respondent simultaneously filed with the BIR and the Court of Tax Appeals (CTA)
a claim for refund of its overpayment in 1997 of ₱4,736,188. Petitioner Commissioner of Internal
Revenue (petitioner) opposed the suit at the CTA, alleging that the action preempted his own
resolution of respondent’s parallel claim for refund, and, at any rate, respondent has to prove its
entitlement to refund.

The Ruling of the Court of Tax Appeals

The CTA5 ruled for respondent and ordered petitioner to refund the reduced amount of
₱4,598,716.98 to account for two tax payments allegedly withheld at source which respondent failed
to substantiate. The CTA held that refund was proper because respondent complied with the
requirements of timely filing of the claim and its substantiation.

Petitioner sought reconsideration, contending that respondent is precluded from seeking a refund for
its overpayment in 1997 after respondent opted to carry-over and apply it to its future tax liability,
following Section 76 of the 1997 NIRC which provides that "[o]nce the option to carry-over and apply
the excess quarterly income tax against income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered irrevocable for that taxable period
and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor."
Petitioner claimed that Section 76 applies to respondent because by the time respondent filed its
final adjustment return for 1997 on 15 April 1998, the 1997 NIRC was already in force, having taken
effect on 1 January 1998.

The CTA denied reconsideration,6 holding that the 1997 NIRC only covers transactions done after 1
January 1998. As the transactions subject of respondent’s claim for refund took place before this
cut-off date, respondent is covered by Section 697 of the former tax code, Presidential Decree No.
1158 (National Internal Revenue Code of 1977 [1977 NIRC]) which, unlike Section 76 of the 1997
NIRC, does not carry an "irrevocability of option" clause. Instead, Section 69 of the 1977 NIRC
merely provides that "[i]n case the corporation is entitled to a refund of the excess estimated
quarterly income taxes paid, the refundable amount shown on its final adjustment return may be
credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year."

Petitioner appealed to the Court of Appeals.

The Ruling of the Court of Appeals

The Court of Appeals affirmed the CTA. Upholding the applicability of Section 69 of the 1977 NIRC,
the appellate court reasoned:

[T]he subject claim for refund pertains to the unutilized creditable withheld taxes for the year 1997
and the transactions which gave rise to the claim for refund occurred in taxable year 1997. Such
being the case, the right to claim for refund or tax credit of these taxes must be governed by the law
in effect at the time the excess credits were earned. Thus, the pertinent law applicable to the case at
bar is Section 69 of the old Tax Code x x x. Hence, respondent corporation aside from opting to
carry-over the excess tax to the next succeeding quarter, may likewise avail of the remedy of refund,
because the old Tax Code does not preclude the exercise of one to the exclusion of the other.8

The Court of Appeals likewise sustained the CTA’s finding on the timeliness and substantiation of
respondent’s refund claim.

Petitioner sought but was denied reconsideration.9

Hence, this petition. Petitioner reiterates his submission that the 1997 NIRC controls this case,
precluding respondent from seeking a refund after it had opted to carry-over and apply its creditable
overpayment in 1997 to its 1998 tax liability. On the other hand, respondent invokes the rulings of
the CTA and Court of Appeals applying in its favor Section 69 of the 1977 NIRC which does not
provide for the irrevocability of a taxpayer’s preference to seek refund or off-set its credit to future
liability.

The Issue

The question is whether respondent is entitled to a tax refund for overpayment in 1997 after it opted,
but failed, to credit such to its tax liability in 1998.

The Ruling of the Court

We hold that respondent is not entitled to a refund under Section 76 of the 1997 NIRC, the law in
effect at the time respondent made known to the BIR its preference to carry over and apply its
overpayment in 1997 to its tax liability in 1998. In lieu of refund, respondent’s overpayment should
be applied to its tax liability for the taxable years following 1998 until it is fully credited.

Section 76 of the 1997 NIRC Controls

Section 76 of the 1997 NIRC which provides:

Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due
on the entire taxable income of that year, the corporation shall either:
 (A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income
taxes paid, the excess amount shown on its final adjustment return may be carried over and credited
against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding
taxable years. Once the option to carry-over and apply the excess quarterly income tax against
income tax due for the taxable quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no application for cash refund or issuance
of a tax credit certificate shall be allowed therefor. (Emphasis supplied)

is, like its predecessor Section 69 of the 1977 NIRC, a tax administration measure crafted to ease
tax collection.10By requiring corporate taxpayers to indicate in their final adjustment return whether,
in case of overpayment, they wish to have the excess amount refunded or carried-over and applied
to their future tax liability, the provision aims to properly manage claims for refund or tax
credit.11 Administratively speaking, Section 76 serves the same purpose as its companion provisions
in Title II, Chapter XII of the 1997 NIRC, namely, Section 74 on the declaration of income tax by
individuals, Section 75 on the declaration of quarterly corporate income tax, and Section 77 on the
place and time of filing and payment of quarterly corporate income tax – they are all tools designed
to promote rational and efficient functioning of the tax system. These provisions should be
distinguished from the provisions in Title II, Chapter IV (Tax on Corporations) and Chapter VII
(Allowable Deductions), among others, relating to the question on the intrinsic taxability of corporate
transactions.

Thus treated, Section 76 and its companion provisions in Title II, Chapter XII should be applied
following the general rule on the prospective application of laws12 such that they operate to govern
the conduct of corporate taxpayers the moment the 1997 NIRC took effect on 1 January 1998. There
is no quarrel that at the time respondent filed its final adjustment return for 1997 on 15 April 1998,
the deadline under Section 77 (B) of the 1997 NIRC (formerly Section 70(b) of the 1977 NIRC), the
1997 NIRC was already in force, having gone into effect a few months earlier on 1 January 1998.
Accordingly, Section 76 is controlling.

The lower courts grounded their contrary conclusion on the fact that respondent’s overpayment in
1997 was based on transactions occurring before 1 January 1998. This analysis suffers from the
twin defects of missing the gist of the present controversy and misconceiving the nature and purpose
of Section 76. None of respondent’s corporate transactions in 1997 is disputed here. Nor can it be
argued that Section 76 determines the taxability of corporate transactions. To sustain the rulings
below is to subscribe to the untenable proposition that, had Congress in the 1997 NIRC moved the
deadline for the filing of final adjustment returns from 15 April to 15 March of each year, taxpayers
filing returns after 15 March 1998 can excuse their tardiness by invoking the 1977 NIRC because the
transactions subject of the returns took place before 1 January 1998. A keener appreciation of the
nature and purpose of the varied provisions of the 1997 NIRC cautions against sanctioning this
reasoning.

Under Section 76, the Exercise of an Option

is Irrevocable and a Decision to Carry-over and Apply Tax
Overpayment Continues Until the Overpayment
has been Fully Applied to Tax Liabilities
Section 76 of the 1997 NIRC wrought two changes to its predecessor, Section 69 of the 1977 NIRC:
first, it mandates that the taxpayer’s exercise of its option to either seek refund or crediting is
irrevocable; and second, the taxpayer’s decision to carry-over and apply its current overpayment to
future tax liability continues until the overpayment has been fully applied, no matter how many tax
cycles it takes. We explained in Asiaworld Properties Philippine Corporation v. Commissioner of
Internal Revenue:13

[S]ection 76 of the NIRC of 1997 clearly states: "Once the option to carry-over and apply the excess
quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be allowed therefore." Section
76 expressly states that "the option shall be considered irrevocable for that taxable period" –
referring to the period comprising the "succeeding taxable years." Section 76 further states that "no
application for cash refund or issuance of a tax credit certificate shall be allowed therefore" –
referring to "that taxable period" comprising the "succeeding taxable years."

Section 76 of the NIRC of 1997 is different from the old provision, Section 69 of the 1977 NIRC,
which reads:

SEC. 69. Final Adjustment Return. – Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum
of the quarterly tax payments made during the said taxable year is not equal to the total tax due on
the entire taxable net income of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid,
the refundable amount shown on its final adjustment return may be credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.

Under this old provision, the option to carry-over the excess or overpaid income tax for a given
taxable year is limited to the immediately succeeding taxable year only. In contrast, under Section 76
of the NIRC of 1997, the application of the option to carry-over the excess creditable tax is not
limited only to the immediately following taxable year but extends to the next succeeding taxable
years. The clear intent in the amendment under Section 76 is to make the option, once exercised,
irrevocable for the "succeeding taxable years."

Thus, once the taxpayer opts to carry-over the excess income tax against the taxes due for the
succeeding taxable years, such option is irrevocable for the whole amount of the excess income tax,
thus, prohibiting the taxpayer from applying for a refund for that same excess income tax in the next
succeeding taxable years. The unutilized excess tax credits will remain in the taxpayer’s account
and will be carried over and applied against the taxpayer’s income tax liabilities in the succeeding
taxable years until fully utilized.14 (Boldfacing in the original; italicization supplied)

As respondent opted to carry-over and credit its overpayment in 1997 to its tax liability in 1998,
Section 76 makes respondent’s exercise of such option irrevocable, barring it from later switching
options to "[apply] for cash refund." Instead, respondent’s overpayment in 1997 will be carried over
to the succeeding taxable years until it has been fully applied to respondent’s tax liabilities.
1avv phi1
We are not unaware of our ruling in another case allowing refund for excess tax payment in 1997
despite the taxpayer’s selection of the carry-over and credit option, following Section 69 of the 1977
NIRC.15 However, the issue of the applicability of the 1997 NIRC was never raised in that case. In
the present case, the applicability of Section 76 of the 1997 NIRC over Section 69 of the 1977 NIRC
was squarely raised as the core issue. In two other cases where the applicability of Section 76 of the
1997 NIRC was also squarely raised, the Court applied the irrevocability of the option clause under
Section 76 to deny, as here, claims for refund without prejudice to the application of the
overpayments to the taxpayers’ liability in the succeeding tax cycles.16 We held in the leading case of
Philam Asset Management, Inc. v. Commissioner of Internal Revenue:17

[S]ection 76 remains clear and unequivocal. Once the carry-over option is taken, actually or
constructively, it becomes irrevocable. Petitioner has chosen that option for its 1998 creditable
withholding taxes. Thus, it is no longer entitled to a tax refund of ₱459,756.07, which corresponds to
its 1998 excess tax credit. Nonetheless, the amount will not be forfeited in the government’s favor,
because it may be claimed by petitioner as tax credits in the succeeding taxable years. (Emphasis
supplied)

Accordingly, we hold that under Section 76 of the 1997 NIRC, respondent’s claim for refund is
unavailing. However, respondent is entitled to apply its unused creditable overpayment in 1997 to its
tax liability arising after 1998 until such has been fully applied.

WHEREFORE, we GRANT the petition. We REVERSE the Decision dated 31 January 2006 and the
Resolution dated 21 July 2006 of the Court of Appeals.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 187589 December 3, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
THE STANLEY WORKS SALES (PHILS.), INCORPORATED, Respondent.

DECISION

SERENO, CJ:

This is a Petition for Review on Certiorari1 filed by the Commissioner of Internal Revenue (petitioner)
under Rule 45 of the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc
(CTA En Banc) Decision2 dated 27 February 2009 and Resolution3 dated 24 April 2009 in C.T.A. EB
No. 406.

THE FACTS

The pertinent findings of fact of the CTA En Banc are as follows:

Petitioner is the duly appointed officer of the Bureau of Internal Revenue (BIR) mandated to exercise
the powers and perform the duties of his office including, among others, the power to decide
disputed assessments, refunds of internal revenue taxes, fees and other charges, penalties imposed
in relation thereto, or other matters arising under the National Internal Revenue Code. Respondent,
on the other hand, is a domestic corporation duly organized and existing under Philippine laws and
duly registered with the Securities and Exchange Commission. Its office address is at the 5th Floor,
Pan Pacific Hotel, Adriatico Street corner Gen. Malvar Street, Manila.

Respondent is authorized "to engage in the business of designing, manufacturing, fabricating, or

otherwise producing, and the purchase, sale at whole sale, importation, export, distribution,
marketing or otherwise dealing with, construction and hardware materials, tools, fixtures and
equipment."

On January 1, 1979, respondent and Stanley Works Agencies (Pte.) Limited, Singapore (Stanley-
Singapore) entered into a Representation Agreement. Under such agreement, Stanley-Singapore
appointed respondent as its sole agent for the selling of its products within the Philippines on an
indent basis.

On April 16, 1990, respondent filed with the BIR its Annual Income Tax Return for taxable year 1989.

On March 19, 1993, pursuant to Letter of Authority dated July 3, 1992, the BIR issued against
respondent a Pre-Assessment Notice (PAN) No. 002523 for 1989 deficiency income tax.

On March 29, 1993, respondent received its copy of the PAN.

On April 12, 1993, petitioner, through OTC Domingo C. Paz of Revenue Region No. 4B-2 of Makati,
issued to respondent Assessment Notice No. 002523-89-6014 for deficiency income tax for taxable
year 1989. The Notice was sent on April 15, 1993 and respondent received it on April 21, 1993.

On May 19, 1993, respondent, through its external auditors Punongbayan & Araullo, filed a protest
letter and requested reconsideration and cancellation of the assessment.

On November 16, 1993, a certain Mr. John Ang, on behalf of respondent, executed a "Waiver of the
Defense of Prescription Under the Statute of Limitations of the National Internal Revenue Code"
(Waiver). Under the terms of the Waiver, respondent waived its right to raise the defense of
prescription under Section 223 of the NIRC of 1977 insofar as the assessment and collection of any
deficiency taxes for the year ended December 31, 1989, but not after June 30, 1994. The Waiver
was not signed by petitioner or any of his authorized representatives and did not state the date of
acceptance as prescribed under Revenue Memorandum Order No. 20-90. Respondent did not
execute any other Waiver or similar document before or after the expiration of the November 16,
1993 Waiver on June 30, 1994.

On January 6, 1994, respondent, through its external auditors Punongbayan & Araullo, wrote a letter
to the Chief of the BIR Appellate Division and requested the latter to take cognizance of
respondent's protest/request for reconsideration, asserting that the dispute involved pure questions
of law. On February 22, 1994, respondent sent a similar letter to the Revenue District Officer (RDO)
of BIR Revenue Region No. 4B-2 and asked for the transmittal of the entire docket of the subject tax
assessment to the BIR Appellate Division.

On September 30, 1994, respondent, through its external auditors Punongbayan & Araullo,
submitted a Supplemental Memorandum on its protest to the BIR Revenue Region No. 4B-2.
On September 20, 1995, respondent, through its external auditors Punongbayan & Araullo, filed a
Supplemental Memorandum with the BIR Appellate Division.

On November 29, 2001, the Chief of the BIR Appellate Division sent a letter to respondent requiring
it to submit duly authenticated financial statements for the worldwide operations of Stanley Works
and a sworn declaration from the home office on the allocated share of respondent as a "branch
office."

On December 11, 2001, respondent, through its counsel, the Quisumbing Torres Law Offices, wrote
the BIR Appellate Division and asked for an extension of period within which to comply with the
request for submission of documents. On January 15, 2002, respondent sent a request for an
extension of period to submit a Supplemental Memorandum.

On March 4, 2002, respondent, through its counsel, the Quisumbing Torres Law Offices, submitted a
Supplemental Memorandum alleging, inter alia, that petitioner's right to collect the alleged deficiency
income tax has prescribed.

On March 22, 2004, petitioner rendered a Decision denying respondent’s request for reconsideration
and ordering respondent to pay the deficiency income tax plus interest that may have accrued. The
dispositive portion reads:

IN VIEW WHEREOF, this Office resolves, as it hereby resolves, to DENY the request for
reconsideration of STANLEY WORK SALES (Philippines), INC. dated May 19, 1993 of Assessment
No. 002523-89-6014 dated April 12, 1993 issued by this Bureau demanding payment of the total
amount of Php41,284,968.34 as deficiency income tax for taxable year 1989. Consequently, Stanley
Works Sales (Philippines), Inc. is hereby ordered to pay the above-stated amount plus interest that
may have accrued thereon to the Collection Service, within thirty (30) days from receipt hereof,
otherwise, collection will be effected through the summary remedies provided by law.

This constitutes the final decision of this Office on the matter.

On March 30, 2004, respondent received its copy of the assailed Decision. Hence, on April 28, 2004,
respondent filed before the Court in Division a Petition for Review docketed as C.T.A. Case No.
6971 entitled "The Stanley Works Sales (Philippines), Inc., petitioner, vs. Commissioner of Internal
Revenue, respondent. x x x

THE CTA FIRST DIVISION RULING4

After trial on the merits, the CTA First Division found that although the assessment was made within
the prescribed period, the period within which petitioner may collect deficiency income taxes had
already lapsed. Accordingly, the court cancelled Assessment Notice No. 002523-89-6014 dated 12
April 1993.

The CTA Division ruled that the request for reconsideration did not suspend the running of the
prescriptive period to collect deficiency income tax. There was no valid waiver of the statute of
limitations, as the following infirmities were found: (1) there was no conformity, either by respondent
or his duly authorized representative; (2) there was no date of acceptance to show that both parties
had agreed on the Waiver before the expiration of the prescriptive period; and (3) there was no proof
that respondent was furnished a copy of the Waiver. Applying jurisprudence and relevant BIR
rulings, the waiver was considered defective; thus, the period for collection of deficiency income tax
had already prescribed.
THE CTA EN BANC RULING5

The CTA En Banc affirmed the CTA First Division Decision dated 6 May 2008 and Resolution dated
14 July 2008. The Waiver executed by respondent on 16 November 1993 could not be used by
petitioner as a basis for extending the period of assessment and collection, as there was no
evidence that the latter had acted upon the waiver. Hence, the unilateral act of respondent in
executing said document did not produce any effect on the prescriptive period for the assessment
and collection of its deficiency tax. As to the issue of estoppel, the court ruled that this measure
could not be used against respondent, as it was petitioner who had failed to act within the prescribed
period on the protest asking for a reconsideration of the assessment. ISSUES

In the present recourse, petitioner raises the following issues:

Whether or not petitioner’s right to collect the deficiency income tax of respondent for taxable year
1989 has prescribed.

Whether or not respondent’s repeated requests and positive acts constitute "estoppel" from setting
up the defense of prescription under the NIRC.6

THE COURT’S RULING

We deny the Petition.

Petitioner mainly argues that in view of respondent’s execution of the Waiver of the statute of
limitations, the period to collect the assessed deficiency income taxes has not yet prescribed.

The resolution of the main issue requires a factual determination of the proper execution of the
Waiver. The CTA Division has already made a factual finding on the infirmities of the Waiver
executed by respondent on 16 November 1993. The Court found that the following requisites were
absent:

(1) Conformity of either petitioner or a duly authorized representative;

(2) Date of acceptance showing that both parties had agreed on the Waiver before the
expiration of the prescriptive period; and

(3) Proof that respondent was furnished a copy of the Waiver.7

These findings are undisputed by petitioner. In fact, it cites BPI v. CIR8 to support its contention that
the approval of the CIR need not be express, but may be implied from the acts of the BIR officials in
response to the request for reinvestigation. Accordingly, petitioner argues that the actual approval of
the Waiver is apparent from the proceedings that were additionally conducted indetermining the
propriety of the subject assessment.9

We do not agree.

The statute of limitations on the right to assess and collect a tax means that once the period
established by law for the assessment and collection of taxes has lapsed, the government’s
corresponding right to enforce that action is barred by provision of law.
The period to assess and collect deficiency taxes may be extended only upon a written agreement
between the CIR and the taxpayer prior to the expiration of the three-year prescribed period in
accordance with Section 222 (b) of the NIRC. In relation to the implementation of this provision, the
CIR issued Revenue Memorandum Order (RMO) No. 20-9010 on 4 April 1990 to provide guidelines
on the proper execution of the Waiver of the Statute of Limitations. In the execution of this waiver,
the following procedures should be followed:

1. The waiver must be in the form identified hereof. This form may be reproduced by the
Office concerned but there should be no deviation from such form. The phrase "but not after
__________ 19___" should be filled up x x x

2. x x x x

Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or
the revenue official authorized by him, as hereinafter provided, shall sign the waiver
indicating that the Bureau has accepted and agreed to the waiver. The date of such
acceptance by the Bureau should be indicated. x x x.

3. The following revenue officials are authorized to sign the waiver.

A. In the National Office

xxxx

3. Commissioner For tax cases involving more than 1M

B. In the Regional Offices

1. The Revenue District Officer with respect to tax cases still pending investigation and the
period toassess is about to prescribe regardless of amount.

xxxx

5. The foregoing procedures shall be strictly followed. Any revenue official found not to have
complied with this Order resulting in prescription of the right to assess/collect shall be
administratively dealt with.

Furthermore, jurisprudence is replete with requisites of a valid waiver:

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but not
after ______ 19 ___", which indicates the expiry date of the period agreed upon to
assess/collect the tax after the regular three-year period of prescription, should be filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative.
In the case of a corporation, the waiver must be signed by any of its responsible officials. In
case the authority is delegated by the taxpayer toa representative, such delegation should be
in writing and duly notarized.

3. The waiver should be duly notarized.

 4. The CIR or the revenue official authorized by him must sign the waiver indicating that the
BIR has accepted and agreed to the waiver. The date of such acceptance by the BIR should
be indicated. However, before signing the waiver, the CIR or the revenue official authorized
by him must make sure that the waiver is in the prescribed form, duly notarized, and
executed by the taxpayer or his duly authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should
be before the expiration of the period of prescription or before the lapse of the period agreed
upon in case a subsequent agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the
docket of the case, the second copy for the taxpayer and the third copy for the Office
accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be
indicated in the original copy to show that the taxpayer was notified of the acceptance of the
BIR and the perfection of the agreement.11

In Philippine Journalist, Inc. v. Commissioner of Internal Revenue,12 the Court categorically stated
that a Waiver must strictly conform to RMO No. 20-90. The mandatory nature of the requirements
set forth in RMO No. 20-90, as ruled upon by this Court, was recognized by the BIR itself in the
latter’s subsequent issuances, namely, Revenue Memorandum Circular (RMC) Nos. 6-200513 and
29-2012.14 Thus, the BIR cannot claim the benefits of extending the period to collect the deficiency
tax as a consequence of the Waiver when, in truth it was the BIR’s inaction which is the proximate
cause of the defects of the Waiver. The BIR has the burden of ensuring compliance with the
requirements of RMO No. 20-90, as they have the burden of securing the right of the government to
assess and collect tax deficiencies. This right would prescribe absent any showing of a valid
extension of the period set by the law.

To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it,
either by conforming to or by disagreeing with the extension. A waiver of the statute of limitations,
whether on assessment or collection, should not be construed asa waiver of the right to invoke the
defense of prescription but, rather, an agreement between the taxpayer and the BIR to extend the
period to a date certain, within which the latter could still assess or collect taxes due. The waiver
does not imply that the taxpayer relinquishes the right to invoke prescription unequivocally.15

Although we recognize that the power of taxation is deemed inherent in order to support the
government, tax provisions are not all about raising revenue. Our legislature has provided
safeguards and remedies beneficial to both the taxpayer, to protect against abuse; and the
government, to promptly act for the availability and recovery ofrevenues. A statute of limitations on
the assessment and collection of internal revenue taxes was adopted to serve a purpose that would
benefit both the taxpayer and the government.

This Court has expounded on the significance of adopting a statute of limitation on tax assessment
and collection in this case:

The provision of law on prescription was adopted in our statute books upon recommendation of the
tax commissioner of the Philippines which declares:

Under the former law, the right of the Government to collect the tax does not prescribe. However, in
fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed
to make the necessary investigation and assessment within 5 years after the filing of the return and
where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the
government is interested in the stability of its collection, so alsoare the taxpayers entitled to an
assurance that they will not be subjected to further investigation for tax purposes after the expiration
of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-
322)

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the
Government and to its citizens; to the Government because tax officers would be obliged to act
promptly in the making of assessment, and to citizens because after the lapse of the period of
prescription citizens would havea feeling of security against unscrupulous tax agents who will always
find an excuse to inspect the books of taxpayers, not to determine the latter's real liability, but to take
advantage of every opportunity to molest peaceful, law-abiding citizens. Without such legal defense
taxpayers would furthermore be under obligation to always keep their books and keep them open for
inspection subject to harassment by unscrupulous tax agents. The law on prescription being a
remedial measure should be interpreted in a way conducive to bringing about the beneficient
purpose of affording protection to the taxpayer within the contemplation of the Commission which
recommends the approval of the law.16

Anent the second issue, we do not agree with petitioner that respondent is now barred from setting
up the defense of prescription by arguing that the repeated requests and positive acts of the latter
constituted estoppels, as these were attempts to persuade the CIR to delay the collection of
respondent’s deficiency income tax.

True, respondent filed a Protest and asked for a reconsideration and cancellation of the assessment
on 19 May 1993; however, it is uncontested that petitioner failed to act on that Protest until 29
November 2001, when the latter required the submission of other supporting documents. In fact, the
Protest was denied only on 22 March 2004.

Petitioner’s reliance on CIR v. Suyoc17 (Suyoc) is likewise misplaced. In Suyoc, the BIR was induced
to extend the collection of tax through repeated requests for extension to pay and for reinvestigation,
which were all denied by the Collector. Contrarily, herein respondent filed only one Protest over the
assessment, and petitioner denied it 10 years after. The subsequent letters of respondent cannot be
construed as inducements to extend the period of limitation, since the letters were intended to urge
petitioner to act on the Protest, and not to persuade the latter to delay the actual collection.

Petitioner cannot take refuge in BPI18 either, considering that respondent and BPI are similarly
situated. Similar to BP I, this is a simple case in which the BIR Commissioner and other BIR officials
1a\^ /phi1

failed to act promptly in resolving and denying the request for reconsideration filed by the taxpayer
and in enforcing the collection on the assessment. Both in BP I and in this case, the BIR presented
no reason or explanation as to why it took many years to address the Protest of the taxpayer. The
statute of limitations imposed by the Tax Code precisely intends to protect the taxpayer from
prolonged and unreasonable assessment and investigation by the BIR.19

Even assuming arguendo that the Waiver executed by respondent on 16 November 1993 is valid,
the right of petitioner to collect the deficiency income tax for the year 1989 would have already
prescribed by 2001 when the latter first acted upon the protest, more so in 2004 when it finally
denied the reconsideration. Records show that the Waiver extends only for the period ending 30
June 1994, and that there were no further extensions or waivers executed by respondent. Again, a
waiver is not a unilateral act of the taxpayer or the BIR, but is a bilateral agreement between two
parties to extend the period to a date certain.20

Since the Waiver in this case is defective and therefore invalid, it produces no effect; thus, the
prescriptive period for collecting deficiency income tax for taxable year 1989 was never suspended
or tolled. Consequently, the right to enforce collection based on Assessment Notice No. 002523-89-
6014 has already prescribed.

WHEREFORE, premises considered, the Petition is DENIED.

SO ORDERED.

THIRD DIVISION

G.R. No. 168331 : October 11, 2012

UNITED INTERNATIONAL PICTURES AB, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE,Respondent.

DECISION

PERALTA, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the Decision1 dated August
ς rν ll

31, 2004 and Resolution2 dated May 17, 2005 of the Court of Appeals in CA-G.R. SP No. 76173.
ςrν ll

The facts follow.

On April 15, 1999, petitioner filed with the Bureau of Internal Revenue (BIR) its Corporation Annual Income
Tax Return for the calendar year ended December 31, 1998 reflecting, among others, a net taxable income
from operations in the sum of P24,961,200.00, an income tax liability of P8,486,808.00, but with an excess
income tax payment in the amount of P4,325,152.00 arising from quarterly income tax payments and
creditable taxes withheld at source, computed as follows:

Gross Income P 42,905,466.00

Less: Deductions 17,944,266.00

Taxable Income P 24,961,200.00

Tax Due P 8,468,808.00
Less: Tax Credits/Payments 12,811,960.00
Tax Overpayment P 4,325,152.00

Petitioner opted to carry-over as tax credit to the succeeding taxable year the said overpayment by putting
an "x" mark on the corresponding box.
On April 17, 2000, petitioner filed its Corporation Annual Income Tax Return for the calendar year ended
December 31, 1999 wherein it reported, among others, a taxable income in the amount of P7,071,651.00 ,
an income tax due of P2,333,645.00, but with an excess income tax payment in the amount of
P9,309,292.00, detailed as follows:

P
Gross Income
25,240,148.00
Less: Deductions 18,168,497.00

Taxable Income P 7,071,651.00

Tax Due P 2,333,645.00
Less: Tax Credits/Payments
a. Prior Years Excess Credits P 4,325,152.00
b. Creditable Tax Withheld 7,317,785.00 11,642,937.00

Tax Overpayment P 9,309,292.00

On the face of the 1999 return, petitioner indicated its option by putting an "x" mark on the box "To be
refunded."

On April 28, 2000, petitioner filed with the BIR an administrative claim for refund in the amount of
P9,309,292.00.

As respondent did not act on petitioners claim, the latter filed a petition for review before the Court of Tax
Appeals (CTA) to toll the running of the two-year prescriptive period.

On September 12, 2001, the CTA rendered a Decision3 denying petitioners claim for refund for taxable year
ςrνll

1998. It reasoned that since petitioner opted to carry over the 1998 tax overpayment as tax credit to the
succeeding taxable year, the same cannot be refunded pursuant to Section 76 of the National Internal
Revenue Code (NIRC) of 1997. The decretal portion of the decision reads: cha nro blesvi rtu allawli bra ry

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE to
petitioner in the amount of P7,269,078.40 representing unutilized creditable withholding tax for the year
1999.4ςrνl l

Dissatisfied, both parties filed their respective motions for reconsideration, but the same were denied by the
CTA per Resolution dated March 11, 2003.

Consequently, respondent elevated the case to the Court of Appeals (CA).

In its petition, respondent argued that petitioner is not entitled to the refund awarded by the CTA, because
it failed to present sufficient proof that the subject taxes were erroneously or illegally collected.

On August 31, 2004, the CA annulled and set aside the decision of the CTA. The CA ruled in this wise: chan rob lesvi rtua llawlib ra ry
All told, the CTA erred in granting respondents claim for tax refund, albeit in a reduced amount. As earlier
discussed, the law specifically outlines the evidentiary requirements for the grant of tax credit or refund and
failure on the part of the taxpayer to justify its claim in accordance with said standard is fatal to its cause.
Considering the doubts cast on the documentary evidence presented by respondent in support of its claim,
said evidence cannot be the basis for the grant of a refund. Indeed, it is the height of absurdity to allow a
taxpayer to claim a refund when there is doubt as to whether it had, in fact, paid the correct amount of
taxes due to the government. ςηα οblενιrυαll αωl ιb rα r

WHEREFORE, the instant petition is GRANTED. The assailed decision of the Court of Tax Appeals is
ANNULLED and SET ASIDE and another rendered DISMISSING the claim for tax refund of respondent.

SO ORDERED.5 ςrνl l

Thereafter, petitioner filed a motion for reconsideration against the aforementioned decision, but the same
was denied in a Resolution dated May 17, 2005.

Accordingly, petitioner filed a petition for review on certiorari before this Court praying that the decision of
the CA be set aside and that an income tax refund or tax credit certificate in the full amount of
P9,260,585.40 be issued in its favor.

In its petition, petitioner submitted the following issues for this Courts disposition:

A. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN ANNULLING THE DECISION OF THE COURT
OF TAX APPEALS THEREBY DENYING THE CLAIM FOR REFUND OF PETITIONER UIP.

B. WHETHER UIP IS PERPETUALLY PRECLUDED FROM SUBMITTING AN APPLICATION FOR INCOME TAX
REFUND ON ITS EXCESS AND UNUTILIZED CREDITABLE WITHHOLDING TAXES FOR THE YEAR 1998 AFTER
IT HAS INDICATED ITS OPTION TO CARRY-OVER THIS EXCESS CREDITABLE INCOME TAX TO THE
FOLLOWING TAXABLE YEAR 1999.6 ςrνl l

The foregoing issues can be simplified as follows: first, whether petitioner is perpetually barred to refund its
tax overpayment for taxable year 1998 since it opted to carry-over its excess tax; and second, whether
petitioner has proven its entitlement to the refund.

Let us discuss the issues in seriatim.

Anent the first issue, petitioner asserts that there is nothing in the law which perpetually prohibits the
refund of carried over excess tax. It maintains that the option to carry-over is irrevocable only for the next
"taxable period" where the excess tax payment was carried over.

We are not convinced.

Section 76 of the NIRC of 1997 states

Section 76. Final Adjustment Return. Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes
paid, the excess amount shown on its final adjustment return may be carried over and credited against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess quarterly income tax against income due for the taxable quarters
of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable
period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefore.
(Emphasis supplied)

From the aforequoted provision, it is clear that once a corporation exercises the option to carry-over, such
option is irrevocable "for that taxable period." Having chosen to carry-over the excess quarterly income tax,
the corporation cannot thereafter choose to apply for a cash refund or for the issuance of a tax credit
certificate for the amount representing such overpayment.7 ςrνll

To avoid confusion, this Court has properly explained the phrase "for that taxable period" in Commissioner
of Internal Revenue v. Bank of the Philippine Islands.8 In said case, the Court held that the phrase merely
ςrνll

identifies the excess income tax, subject of the option, by referring to the "taxable period when it was
acquired by the taxpayer." Thus: chanrob lesvi rtua llawli bra ry

x x x Section 76 remains clear and unequivocal. Once the carry-over option is taken, actually or
constructively, it becomes irrevocable. It mentioned no exception or qualification to the irrevocability rule.

Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option;
and once it had already done so, it could no longer make another one. Consequently, after the taxpayer opts
to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually
gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the
option to carry over has been made, "no application for tax refund or issuance of a tax credit certificate shall
be allowed therefor."

The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and apply the
excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that taxable period and no application for tax
refund or issuance of a tax credit certificate shall be allowed therefore." The phrase "for that taxable period"
merely identifies the excess income tax, subject of the option, by referring to the taxable period when it was
acquired by the taxpayer. In the present case, the excess income tax credit, which BPI opted to carry over,
was acquired by the said bank during the taxable year 1998. The option of BPI to carry over its 1998 excess
income tax credit is irrevocable; it cannot later on opt to apply for a refund of the very same 1998 excess
income tax credit.

The Court of Appeals mistakenly understood the phrase "for that taxable period" as a prescriptive period for
the irrevocability rule x x x. The evident intent of the legislature, in adding the last sentence to Section 76 of
the NIRC of 1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and
complication as regards said taxpayers excess tax credit. The interpretation of the Court of Appeals only
delays the flip-flopping to the end of each succeeding taxable period.9 ςrν ll

Plainly, petitioners claim for refund for 1998 should be denied as its option to carry over has precluded it
from claiming the refund of the excess 1998 income tax payment.

Apropos, we now resolve the issue of whether petitioner had sufficiently proven entitlement to refund its tax
overpayments for taxable year 1999.

As to this issue, petitioner contends that the CA erred when it annulled the decision of the CTA and insists
that it had substantially established its claim for refund through documentary and testimonial evidence.

For its part, respondent maintains that petitioner is not entitled to the refund awarded by the CTA, because
it failed to present sufficient proof that the subject taxes were erroneously or illegally collected. It asserts
that the 1999 certificate of withholding tax is defective, since petitioner failed to file the same together with
the 1999 corporate return and include in its return income payments from which the taxes were withheld.
We find for respondent.

In claiming for the refund of excess creditable withholding tax, petitioner must show compliance with the
following basic requirements:

(1) The claim for refund was filed within two years as prescribed under Section 22910 of the NIRC of 1997;
ςrν ll

(2) The income upon which the taxes were withheld were included in the return of the recipient (Section 10,
Revenue Regulations No. 6-85);

(3) The fact of withholding is established by a copy of a statement (BIR Form 1743.1) duly issued by the
payor (withholding agent) to the payee showing the amount paid and the amount of tax withheld therefrom
(Section 10, Revenue Regulations No. 6-85).

Here, it is undisputed that the claim for refund was filed within the two-year prescriptive period prescribed
under Section 229 of the NIRC of 1997 and that the taxpayer was able to present its certificate of creditable
tax withheld from its payor. However, records show that petitioner failed to reconcile the discrepancy
between income payments per its income tax return and the certificate of creditable tax withheld.

A perusal of the certificate of tax withheld would reveal that petitioner earned P146,355,699.80. On the
contrary, its annual income tax return reflects a gross income from film rentals in the amount of P
145,381,568.00. However, despite the P974,131.80 difference, both the certificate of taxes withheld and
income tax return filed by petitioner for taxable year 1999 indicate the same amount of P7,317,785.00 as
creditable tax withheld. What's more, petitioner failed to present sufficient proof to allow the Court to trace
the discrepancy between the certificate or taxes withheld and the income tax return.

Parenthetically, the Office of the Solicitor General correctly pointed out that the amount of income payments
in the income tax return must correspond and tally to the amount indicated in the certificate of withholding,
since there is no possible and efficacious way by which the BIR can verify the precise identity of the income
payments as reflected in the income tax return.

Therefore, petitioner's claim for tax refund for taxable year 1999 must be denied, since it failed to prove
that the income payments subjected to withholding tax were declared as part of the gross income or the
taxpayer.ςηαοbl ε ν ιrυα llα ω lιbrαr

WHEREFORE, in view of the foregoing, the instant petition is hereby DENIED. The Decision elated August 31,
2004 and Resolution dated May 17, 2005 of the Court of Appeals are hereby AFFIRMED. ςrαlα ω lιbrαr

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 179259 September 25, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
PHILIPPINE AIRLINES, INC. (PAL), Respondent.

DECISION

PEREZ, J.:
Before the Court is a Petition for Review on Certiorari seeking to reverse and set aside the 19 July
2007 Decision1and 23 August 2007 Resolution2 of the Court of Tax Appeals (CTA) En Bane in CTA
EB No. 271 which affirmed the cancellation and withdrawal of Assessment Notice No. INC-FY -99-
2000-000085 and Formal Letter of Demand for the payment by the respondent Philippine Airlines,
Inc. (respondent), of deficiency Minimum Corporate Income Tax (MCIT) in the amount of
₱326,778,723.35, covering the fiscal year ending 31 March 2000.

The Facts

The factual antecedents of the case are undisputed:

Petitioner, the Commissioner of Internal Revenue, has the power to assess and collect national
internal revenue taxes, fees, and charges, including the 2% per centum MCIT imposed under
Section 27(E) of the National Internal Revenue Code (NIRC) of 1997, as amended. Respondent, on
the other hand, is a domestic corporation duly organized and existing under and by virtue of the laws
of the Philippines.

For the fiscal year that ended 31 March 2000, respondent filed on 17July 2000 its Tentative
Corporate Income Tax Return, reflecting a creditable tax withheld for the fourth quarter amounting to
₱524,957.00, and a zero taxable income for said year. Hence, respondent filed on 16 July 2001 a
written claim for refund before the petitioner.

As a consequence thereof, respondent received on 10 September 2001the Letter of Authority No.

200000002247 from the Bureau of Internal Revenue (BIR) Large Taxpayers Service, dated 3
September 2001,authorizing the revenue officers named therein to examine respondent’s books of
accounts and other accounting records for the purpose of evaluating respondent’s "Claim for Refund
on Creditable Withholding Tax – Income Tax" covering the fiscal year ending 31 March 2000.

Numerous correspondences between respondent and the Group Supervisor of the BIR Large
Taxpayers Service, the revenue officers examining its accounting records, and the Chief of LT Audit
& Investigation Division I of the BIR ensued, particularly as to the submission of various supporting
documents and presentation of records.

On 16 July 2003, respondent received a "Summary of Creditable Withholding Tax at Source

Certified by RAD Fiscal Year Ending March 31,2000," together with a computation labeled
"Compromise Penalties for Late Filing of Return." Likewise, on same date, respondent received a
letter dated 8 July 2003 issued by the Chief of LT Audit & Investigation Division I, informing the
former that the results of the investigation of its claim for refund on creditable withholding tax for
fiscal year ending 31 March 2000had already been submitted, and that an informal conference was
set on 17July 2003 to be held on the latter’s office.

On 11 August 2003, respondent received from the same revenue officers a computation of their
initial deficiency MCIT assessment in the amount of ₱537,477,867.64. Consequently, respondent
received on 20October 2003 a Preliminary Assessment Notice and Details of Assessment issued by
the Large Taxpayers Service dated 22 September 2003, assessing respondent deficiency MCIT
including interest, in the aggregate amount of ₱315,566,368.68. A written protest to said preliminary
assessment was filed by respondent on 3 November 2003.

Thereafter, on 16 December 2003, respondent received a Formal Letter of Demand and Details of
Assessment dated 1 December 2003 from the Large Taxpayers Service demanding the payment of
the total amount of ₱326,778,723.35, inclusive of interest, as contained in Assessment Notice No.
INC-FY-99-2000-000085. In response thereto, respondent filed its formal written protest on 13
January 2004 reiterating the following defenses:(1) that it is exempt from, or is not subject to, the 2%
MCIT by virtue of its charter, Presidential Decree No. (PD) 1590;3 and (2) that the three-year period
allowed by law for the BIR to assess deficiency internal revenue taxes for the taxable year ending 31
March 2000 had already lapsed on 15July 2003.

Since no final action has been taken by petitioner on respondent’s formal written protest, respondent
filed a Petition for Review before the Second Division of the CTA on 4 August 2004 docketed as
CTA Case No.7029.

The Ruling of the CTA Second Division

In a Decision dated 22 August 2006,4 the CTA Second Division granted respondent’s petition and
accordingly ordered for the cancellation and withdrawal of Assessment Notice No. INC-FY-99-2000-
000085 and Formal Letter of Demand for the payment of deficiency MCIT in the amount of
₱326,778,723.35, covering the fiscal year ending 31 March 2000, issued against respondent.

The CTA Second Division made the following factual and legal findings, to wit:

(a) Section 13 of PD 1590 acquiring and limiting the extent of the tax liability of respondent
under its franchise is coached in a clear, plain and unambiguous manner, and needs no
further interpretation or construction;

(b) Section 13 clearly provides that respondent is liable only for either the basic corporate
income tax based on its annual net taxable income, or the 2% franchise tax based on gross
revenue, whichever is lower;

(c) Respondent-grantee must only choose between the two alternatives mentioned in
Section 13 in the payment of its tax liability to the government, and its choice must be that
which will result in a lower tax liability;

(d) Since the income tax return of respondent reflected a zero taxable income for the fiscal
year ending 31 March 2000,obviously being lower than the 2% franchise tax, its choice of the
former is definitely a better alternative as basis for its tax liability to the government;5

(e) The basic corporate income tax mentioned in Section 13 of PD1590 does not refer to the
MCIT under Section 27(E) of the NIRC of 1997, as amended, but particularly to the
applicable rate of 32% income tax under Section 27(A) of the same Code, on the taxable
income of domestic corporations;

(f) The MCIT is regarded to belong to "other taxes" as it was not included in the choices
provided by the franchise. To hold otherwise would be to give another option to respondent
which is evidently not within the ambit of PD 1590;6

(g) The "in lieu of all other taxes" clause under Section 13 of respondent’s legislative
franchise exempts it from all taxes necessary in the conduct of its business covered by the
franchise, except the tax on its real property for which respondent is expressly made
payable;7 and

(h) The rationale or purpose for the exemption from all other taxes except the income tax and
real property tax granted to respondent upon the payment of the basic corporate income tax
 or the 2% franchise tax is that such tax exemption is part of inducement for the acceptance
of the franchise and the rendition of public service by the grantee.8

Simply put, it pronounced that the only qualification provided for in the law is the option given to
respondent to choose between the taxes which will yield the lesser liability. Thus, if as a result of the
exercise of the option, the respondent ends up without any tax liability, it should not be held liable for
any other tax, such as the MCIT, except for real property tax.9

On 30 January 2007, the CTA Second Division denied petitioner’s Motion for Reconsideration for
lack of merit.10

Aggrieved, petitioner appealed to the CTA En Banc by filing a Petition for Review pursuant to
Section 18 of Republic Act (RA) No. 9282(should be RA No. 1125, as amended by RA No.
9282)11 on 1 March 2007,docketed as CTA EB No. 271.12

The Ruling of the CTA En Banc

The CTA En Banc affirmed both the aforesaid Decision and Resolution rendered by the CTA Second
Division in CTA Case No. 7029,ruling that under Section 13 of PD 1590, respondent, as
consideration for the franchise, is indeed granted the privilege to choose between two options in the
payment of its tax liability to the government. Naturally, its choice will be that which will result in a
lower tax liability since such choice is "in lieu of all other taxes" imposed by all government entities in
the country.13 The only exception is the real property tax.

The appellate court pointed out that even if respondent opted to be covered by the Income Tax
provisions of the NIRC, it does not follow that it is covered by the MCIT provisions of the same Code.
There is nothing in PD 1590 which obliges the respondent to pay other taxes, much less the MCIT,
in case it suffers a net operating loss. Otherwise, it would negate the tax relief granted under Section
13 of its franchise and would render it useless. The tax relief allows respondent to carry over as a
deduction from taxable income any net loss incurred in any year up to five years following the year of
such loss.14

Likewise, it elucidated that the MCIT is not the basic corporate income tax referred to in Section 13
of PD 1590. There is a distinction between the MCIT and the basic corporate income tax. The MCIT
under Section 27(E)(1) of the NIRC of 1997, as amended, is imposed upon gross income; while the
basic corporate income tax refers to the 32% income tax on the taxable income of domestic
corporations under Section 27(A) of the same Code. In other words, the court a quo ruled that since
the MCIT is imposed upon gross income, it cannot be made to apply to respondent by virtue of the
express provision in its franchise that its basic corporate income tax shall be based on its annual net
taxable income. Hence, it is in this sense that the MCIT qualifies as "other taxes" from which the
respondent had been granted tax exemption by its franchise.15

Moreover, the provision on MCIT, Section 27(E) of the NIRC of 1997, as amended, did not repeal
respondent’s franchise considering that it is a general law which cannot impliedly repeal, alter, or
amend PD 1590, being a special law. Neither can Revenue Memorandum Circular (RMC) No. 66-
2003 amend respondent’s franchise as it is merely an administrative issuance.

Lastly, there is no provision in RA No. 842416 which provides and specifies that the MCIT shall be in
addition to the taxes for which respondent is liable. To rule otherwise would be violative of Section
24 of PD 1590 which states that respondent’s franchise may only be modified, amended, or repealed
expressly by a special law or decree that shall specifically modify, amend or repeal the franchise or
any section or provision thereof. Therefore, in the absence of a law expressly repealing PD1590 at
the time the subject assessment was issued and for the period covered by the assessment,
respondent’s tax exemption privilege under the "in lieu of all other taxes" clause of Section 13
thereof must be applied.

Upon denial of petitioner’s Motion for Reconsideration of the 19 July2007 Decision of the CTA En
Banc, it filed this Petition for Review on Certiorari before this Court seeking the reversal of the
aforementioned Decision and the 23 August 2007 Resolution17 rendered in CTA EB No. 271.

The Issues

The issues submitted before this Court for consideration are as follows:

(1) Whether or not the CTA En Banc erred in holding that the MCIT is properly categorized
as "other taxes" pursuant to respondent’s charter; and

(2) Whether or not the CTA En Banc erred in ruling that respondent is not liable for the 2%
MCIT deficiency for the fiscal year ending 31March 2000.18

The above mentioned issues may be consolidated and restated as follows: whether or not the CTA
En Banc erred when it affirmed the cancellation of Assessment Notice No. INC-FY-99-2000-000085
and Formal Letter of Demand issued by petitioner against respondent for the payment of deficiency
MCIT in the amount of ₱326,778,723.35, covering the fiscal year ending 31 March 2000.

In support thereof, petitioner submits the following arguments: (a) respondent clearly opted to be
covered by the income tax provision of the NIRC of 1997, as amended; hence, it is covered by the
MCIT provision of the same Code and liable to pay the same; (b) the MCIT does not belong to the
category of "other taxes" which may enable respondent to avail of the "in lieu of all other taxes"
clause under Section 13 of PD 1590 because it is a category of an income tax pursuant to Section
27 (E) (1) of the NIRC of 1997,as amended; (c) the MCIT provision of the NIRC of 1997, as
amended, is not an amendment of respondent’s charter, but an amendment of the same Code.
Hence, respondent’s obligation to pay the MCIT is not the result of an implied amendment of PD
1590, but rather, the consequence of respondent’s option of paying income tax rather than franchise
tax; (d) respondent is not only given the privilege to choose between what will give it the benefit of a
lower tax, but also the responsibility of paying its share of the tax burden. Otherwise stated, it is the
legislative intent to give respondent a privilege in the form of an option in paying its taxes which
would result in paying a lower tax liability, but not in dispensing the sharing of a tax burden to which
every taxpayer is obligated to bear; and (e) a claim for exemption from taxation is never presumed;
thus, respondent is liable for the deficiency MCIT.

Respondent, in its Comment thereto, counters among others, that there is nothing in PD 1590 which
obliges respondent to pay other taxes, much less the MCIT, in case it suffers a net operating loss.
Since the MCIT is not the basic corporate income tax, nor the 2% franchise tax, nor the real property
tax mentioned by Section 13 thereof, then it is but logical to conclude that the MCIT belongs to the
category of "other taxes" for which respondent is not liable.

Our Ruling

Respondent’s exemption from the MCIT is already a settled matter.

Section 27 of the NIRC of 1997, as amended, provides as follows:

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

(A) In General. — Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and
taxable under this Title as a corporation, organized in, or existing under the law of the Philippines:
Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000
and thereafter, the rate shall be thirty-two percent (32%).

xxxx

(E) Minimum Corporate Income Tax on Domestic Corporations.—

(1) Imposition of Tax — A minimum corporate income tax of two percent (2%) of the gross income
as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable
under this Title, beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum income tax is greater than the
tax computed under Subsection(A) of this Section for the taxable year. (Emphasis supplied)

Based on the foregoing, a domestic corporation must pay whichever is the higher of: (1) the income
tax under Section 27(A) of the NIRC of 1997,as amended, computed by applying the tax rate therein
to the taxable income of the corporation; or (2) the MCIT under Section 27(E), also of the same
Code, equivalent to 2% of the gross income of the corporation. The Court would like to underscore
that although this may be the general rule in determining the income tax due from a domestic
corporation under the provisions of the NIRC of 1997, as amended, such rule can only be applied to
respondent only as to the extent allowed by the provisions of its franchise.

Relevant thereto, PD 1590, the franchise of respondent, contains the following pertinent provisions
governing its taxation:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the
Philippine Government during the life of this franchise whichever of subsections (a) and (b)
hereunder will result in a lower tax:

(a) The basic corporate income tax based on the grantee’s annual net taxable income
computed in accordance with the provisions of the National Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all
sources, without distinction as to transport or non transport operations; provided, that with
respect to international air-transport service, only the gross passenger, mail, and freight
revenues from its outgoing flights shall be subject to this tax.

The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes,
duties, royalties, registration, license, and other fees and charges of any kind, nature, or description,
imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national
authority or government agency, now or in the future, including but not limited to the following:

xxxx

The grantee, shall, however, pay the tax on its real property in conformity with existing law.
For purposes of computing the basic corporate income tax as provided herein, the grantee is
authorized:

(a) To depreciate its assets to the extent of not more than twice as fast the normal rate of
depreciation; and

(b) To carry over as a deduction from taxable income any net loss incurred in any year up to
five years following the year of such loss.

Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax on
quarterly basis to the Commissioner of Internal Revenue. Within sixty (60) days after the end of each
of the first three quarters of the taxable calendar or fiscal year, the quarterly franchise or income-tax
return shall be filed and payment of either the franchise or income tax shall be made by the grantee.

A final or an adjustment return covering the operation of the grantee for the preceding calendar or
fiscal year shall be filed on or before the fifteenth day of the fourth month following the close of the
calendar or fiscal year. The amount of the fiscal franchise or income tax to be paid by the grantee
shall be the balance of the total franchise or income tax shown in the final or adjustment return after
deducting therefrom the total quarterly franchise or income taxes already paid during the preceding
first three quarters of the same taxable year.

Any excess of the total quarterly payments over the actual annual franchise of income tax due as
shown in the final or adjustment franchise or income-tax return shall either be refunded to the
grantee or credited against the grantee’s quarterly franchise or income-tax liability for the succeeding
taxable year or years at the option of the grantee.

The term "gross revenue" is herein defined as the total gross income earned by the grantee; (a)
transport, nontransport, and other services; (b) earnings realized from investments in money-market
placements, bank deposits, investments in shares of stock and other securities, and other
investments; (c) total gains net of total losses realized from the disposition of assets and foreign-
exchange transactions; and (d) gross income from other sources. (Emphasis supplied)

From the foregoing provisions, during the lifetime of the franchise of respondent, its taxation shall be
strictly governed by two fundamental rules, to wit: (1) respondent shall pay the Government either
the basic corporate income tax or franchise tax, whichever is lower; and (2) the tax paid by
respondent, under either of these alternatives, shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges, except only real property tax.

Parenthetically, the basic corporate income tax of respondent shall be based on its annual net
taxable income, computed in accordance with the NIRC of 1997, as amended. PD 1590 also
explicitly authorizes respondent, in the computation of its basic corporate income tax, to: (1)
depreciate its assets twice as fast the normal rate of depreciation;19 and (2) carry over deduction
from taxable income any net loss incurred in any year up to five years following the year of such
loss.20

The franchise tax, on the other hand, shall be 2% of the gross revenues derived by respondent from
all sources, whether transport or nontransport operations. However, with respect to international air-
transport service, the franchise tax shall only be imposed on the gross passenger, mail, and freight
revenues of respondent from its outgoing flights.21
Accordingly, considering the foregoing precepts, this Court had the opportunity to finally settle this
matter and categorically enunciated in Commissioner of Internal Revenue v. Philippine Airlines,
Inc.,22 that respondent cannot be subjected to MCIT for the following reasons:

First, Section 13(a) of [PD] 1590 refers to "basic corporate income tax." In Commissioner of Internal
Revenue v. Philippine Airlines, Inc.,23 the Court already settled that the "basic corporate income tax,
"under Section 13(a) of [PD] 1590, relates to the general rate of 35%(reduced to 32% by the year
2000) as stipulated in Section 27(A) of the NIRC of 1997.

Section 13(a) of [PD] 1590 requires that the basic corporate income tax be computed in accordance
with the NIRC. This means that PAL shall compute its basic corporate income tax using the rate and
basis prescribed by the NIRC of 1997 for the said tax. There is nothing in Section 13(a) of [PD] 1590
to support the contention of the CIR that PAL is subject to the entire Title II of the NIRC of 1997,
entitled "Tax on Income."

Second, Section 13(a) of Presidential Decree No. 1590 further provides that the basic corporate
income tax of PAL shall be based on its annual net taxable income. This is consistent with Section
27(A) of the NIRC of 1997, which provides that the rate of basic corporate income tax, which is 32%
beginning 1 January 2000, shall be imposed on the taxable income of the domestic corporation.

Taxable income is defined under Section 31 of the NIRC of 1997as the pertinent items of gross
income specified in the said Code, less the deductions and/or personal and additional exemptions, if
any, authorized for such types of income by the same Code or other special laws.

The gross income, referred to in Section 31, is described in Section32 of the NIRC of 1997 as
income from whatever source, including compensation for services; the conduct of trade or business
or the exercise of profession; dealings in property; interests; rents; royalties; dividends; annuities;
prizes and winnings; pensions; and a partner’s distributive share in the net income of a general
professional partnership.

Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be arrived at by
subtracting from gross income deductions authorized, not just by the NIRC of 1997, but also by
special laws. [PD] 1590 may be considered as one of such special laws authorizing PAL, in
computing its annual net taxable income, on which its basic corporate income tax shall be based, to
deduct from its gross income the following: (1) depreciation of assets at twice the normal rate; and
(2) net loss carry-over up to five years following the year of such loss.

In comparison, the 2% MCIT under Section 27 (E) of the NIRC of 1997 shall be based on the gross
income of the domestic corporation. The Court notes that gross income, as the basis for MCIT, is
given a special definition under Section 27(E) (4) of the NIRC of 1997, different from the general one
under Section 34 of the same Code.

According to the last paragraph of Section 27 (E) (4) of the NIRC of 1997, gross income of a
domestic corporation engaged in the sale of service means gross receipts, less sales returns,
allowances, discounts and cost of services. "Cost of services" refers to all direct costs and expenses
necessarily incurred to provide the services required by the customers and clients including (a)
salaries and employee benefits of personnel, consultants, and specialists directly rendering the
service; and (b) cost of facilities directly utilized in providing the service, such as depreciation or
rental of equipment used and cost of supplies. Noticeably, inclusions in and exclusions/deductions
from gross income for MCIT purposes are limited to those directly arising from the conduct of the
taxpayer’s business. It is, thus, more limited than the gross income used in the computation of basic
corporate income tax.
In light of the foregoing, there is an apparent distinction under the NIRC of 1997 between taxable
income, which is the basis for basic corporate income tax under Section 27(A); and gross income,
which is the basis for the MCIT under Section 27(E). The two terms have their respective technical
meanings, and cannot be used interchangeably. The same reasons prevent this Court from
declaring that the basic corporate income tax, for which PAL is liable under Section 13(a) of [PD]
1590, also covers MCIT under Section 27(E) of the NIRC of 1997, since the basis for the first is the
annual net taxable income, while the basis for the second is gross income.

Third, even if the basic corporate income tax and the MCIT are both income taxes under Section 27
of the NIRC of 1997, and one is paid in place of the other, the two are distinct and separate taxes.

The Court again cites Commissioner of Internal Revenue v. Philippine Airlines, Inc.,24 wherein it held
that income tax on the passive income of a domestic corporation, under Section 27(D) of the NIRC
of 1997, is different from the basic corporate income tax on the taxable income of a domestic
corporation, imposed by Section 27(A), also of the NIRC of 1997. Section 13 of [PD] 1590 gives PAL
the option to pay basic corporate income tax or franchise tax, whichever is lower; and the tax so paid
shall be in lieu of all other taxes, except real property tax. The income tax on the passive income of
PAL falls within the category of "allot her taxes" from which PAL is exempted, and which, if already
collected, should be refunded to PAL.

The Court herein treats MCIT in much the same way. Although both are income taxes, the MCIT is
different from the basic corporate income tax, not just in the rates, but also in the bases for their
computation. Not being covered by Section 13(a) of [PD] 1590,which makes PAL liable only for basic
corporate income tax, then MCIT is included in "all other taxes" from which PAL is exempted.

That, under general circumstances, the MCIT is paid in place of the basic corporate income tax,
when the former is higher than the latter, does not mean that these two income taxes are one and
the same. The said taxes are merely paid in the alternative, giving the Government the opportunity
to collect the higher amount between the two. The situation is not much different from Section 13 of
[PD] 1590, which reversely allows PAL to pay, whichever is lower of the basic corporate income tax
or the franchise tax. It does not make the basic corporate income tax in distinguishable from the
franchise tax.

Given the fundamental differences between the basic corporate income tax and the MCIT, presented
in the preceding discussion, it is not baseless for this Court to rule that, pursuant to the franchise of
PAL, said corporation is subject to the first tax, yet exempted from the second.

Fourth, the evident intent of Section 13 of [PD] 1520 (sic) is to extend to PAL tax concessions not
ordinarily available to other domestic corporations. Section 13 of [PD] 1520 (sic) permits PAL to pay
whichever is lower of the basic corporate income tax or the franchise tax; and the tax so paid shall
be in lieu of all other taxes, except only real property tax. Hence, under its franchise, PAL is to pay
the least amount of tax possible.

Section 13 of [PD] 1520 (sic) is not unusual. A public utility is granted special tax treatment
(including tax exceptions/exemptions) under its franchise, as an inducement for the acceptance of
the franchise and the rendition of public service by the said public utility. In this case, in addition to
being a public utility providing air-transport service, PAL is also the official flag carrier of the country.

The imposition of MCIT on PAL, as the CIR insists, would result in a situation that contravenes the
objective of Section 13 of [PD] 1590. In effect, PAL would not just have two, but three tax
alternatives, namely, the basic corporate income tax, MCIT, or franchise tax. More troublesome is
the fact that, as between the basic corporate income tax and the MCIT, PAL shall be made to pay
whichever is higher, irrefragably, in violation of the avowed intention of Section 13 of [PD] 1590 to
make PAL pay for the lower amount of tax.

Fifth, the CIR posits that PAL may not invoke in the instant case the "in lieu of all other taxes" clause
in Section 13 of [PD] No. 1520 (sic),if it did not pay anything at all as basic corporate income tax or
franchise tax. As a result, PAL should be made liable for "other taxes" such as MCIT. This line of
reasoning has been dubbed as the Substitution Theory, and this is not the first time the CIR raised
the same. The Court already rejected the Substitution Theory in

Commissioner of Internal Revenue v. Philippine Airlines, Inc.,25 to wit:

"Substitution Theory"
of the CIR Untenable

A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes
"proviso is a mere incentive that applies only when PAL actually pays something.

It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b)
as consideration for its franchise. Either option excludes the payment of other taxes and dues
imposed or collected by the national or the local government. PAL has the option to choose the
alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the
exercise of its option.

Under Subsection (a), the basis for the tax rate is respondent’s annual net taxable income, which (as
earlier discussed) is computed by subtracting allowable deductions and exemptions from gross
income. By basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized
the situation in which taxable income may result in a negative amount and thus translate into a zero
tax liability.

Notably, PAL was owned and operated by the government at the time the franchise was last
amended. It can reasonably be contemplated that PD 1590 sought to assist the finances of the
government corporation in the form of lower taxes. When respondent operates at a loss(as in the
instant case), no taxes are due; in this instances, it has a lower tax liability than that provided by
Subsection (b).

The fallacy of the CIR’s argument is evident from the fact that the payment of a measly sum of one
peso would suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses
would not. There is no substantial distinction between a zero tax and a one-peso tax liability.
(Emphasis theirs)

Based on the same ratiocination, the Court finds the Substitution Theory unacceptable in the present
Petition.

The CIR alludes as well to Republic Act No. 9337, for reasons similar to those behind the
Substitution Theory. Section 22 of Republic Act No. 9337, more popularly known as the Expanded
Value Added Tax(E-VAT) Law, abolished the franchise tax imposed by the charters of particularly
identified public utilities, including [PD] 1590 of PAL. PAL may no longer exercise its options or
alternatives under Section 13 of [PD] 1590, and is now liable for both corporate income tax and the
12% VAT on its sale of services. The CIR alleges that Republic Act No. 9337reveals the intention of
the Legislature to make PAL share the tax burden of other domestic corporations.
The CIR seems to lose sight of the fact that the Petition at bar involves the liability of PAL for MCIT
for the fiscal year ending 31March 2001. Republic Act No. 9337, which took effect on 1 July
2005,cannot be applied retroactively and any amendment introduced by said statute affecting the
taxation of PAL is immaterial in the present case.

And sixth, [PD] 1590 explicitly allows PAL, in computing its basic corporate income tax, to carry over
as deduction any net loss incurred in any year, up to five years following the year of such loss.
Therefore, [PD] 1590 does not only consider the possibility that, at the end of a taxable period, PAL
shall end up with zero annual net taxable income (when its deductions exactly equal its gross
income), as what happened in the case at bar, but also the likelihood that PAL shall incur net loss
(when its deductions exceed its gross income). If PAL is subjected to MCIT, the provision in [PD]
1590 on net loss carry-over will be rendered nugatory. Net loss carry-over is material only in
computing the annual net taxable income to be used as basis for the basic corporate income tax of
PAL; but PAL will never be able to avail itself of the basic corporate income tax option when it is in a
net loss position, because it will always then be compelled to pay the necessarily higher MCIT.

Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done without
contravening [PD] 1520 (sic).

Between [PD] 1520 (sic), on one hand, which is a special law specifically governing the franchise of
PAL, issued on 11 June 1978;and the NIRC of 1997, on the other, which is a general law on national
internal revenue taxes, that took effect on 1 January 1998, the former prevails. The rule is that on a
specific matter, the special law shall prevail over the general law, which shall be resorted to only to
supply deficiencies in the former. In addition, where there are two statutes, the earlier special and
the later general – the terms of the general broad enough to include the matter provided for in the
special – the fact that one is special and the other is general creates a presumption that the special
is to be considered as remaining an exception to the general, one as a general law of the land, the
other as the law of a particular case. It is a canon of statutory construction that a later statute,
general in its terms and not expressly repealing a prior special statute, will ordinarily not affect the
special provisions of such earlier statute.

xxxx

The MCIT was a new tax introduced by Republic Act No.8424. Under the doctrine of strict
interpretation, the burden is upon the CIR to primarily prove that the new MCIT provisions of the
NIRC of 1997, clearly, expressly, and unambiguously extend and apply to PAL, despite the latter’s
existing tax exemption. To do this, the CIR must convince the Court that the MCIT is a basic
corporate income tax, and is not covered by the "in lieu of all other taxes" clause of [PD] 1590. Since
the CIR failed in this regard, the Court is left with no choice but to consider the MCIT as one of "all
other taxes," from which PAL is exempt under the explicit provisions of its charter. (Emphasis
supplied)

Based on the foregoing pronouncements, it is clear that respondent is exempt from the MCIT
imposed under Section 27(E) of the NIRC of 1997,as amended. Thus, respondent cannot be held
liable for the assessed deficiency MCIT of ₱326,778,723.35 for fiscal year ending 31 March 2000. 1âwphi1

More importantly, as to petitioner’s contention that respondent needs to actually pay a certain
amount as basic corporate income tax or franchise tax before it can enjoy the tax exemption granted
to it since it should retain the responsibility of paying its share of the tax burden, this Court has
categorically ruled in the above-cited cases that it is not the fact of tax payment that exempts it, but
the exercise of its option..
Notably, in another case involving the same parties,26 the Court further expressed that a strict
interpretation of the word "pay" in Section 13of PD 1590 would effectively render nugatory the other
rights categorically conferred upon the respondent by its franchise. Hence, there being no
qualification to the exercise of its options under Section 13, then respondent is free to choose basic
corporate income tax, even if it would have zero liability for the same in light of its net loss position
for the taxable year.

By way of, reiteration, although it appears that respondent is not completely exempt from all forms of
taxes under PD 1590 considering that Section 13 thereof requires it to pay, either the lower amount
of the basic corporate income tax or franchise tax (which are both direct taxes), at its option, mere
exercise of such option already relieves respondent of liability for all other taxes and/or duties,
whether direct or indirect taxes. This is an expression of the same thought in Our ruling that, to
repeat, it is not the fact of tax payment that exempts it, but the exercise of its option. All told, the CTA
En Bane was correct in dismissing the petition in CTA EB No. 271, and affirming the CTA Second
Division's Decision and Resolution dated 22 August 2006 and 30 January 2007, respectively, in CTA
Case No. 7029.

WHEREFORE, the petition is DENIED for lack of merit. No costs.

SO ORDERED.

FIRST DIVISION

G.R. Nos. 193383-84, January 14, 2015

CBK POWER COMPANY LIMITED, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

[G.R. NOS. 193407-08]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CBK POWER COMPANY

LIMITED, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in these consolidated petitions for review on certiorari1 are the Decision2 dated March 29, 2010 and
the Resolution3 dated August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469
and 494, which affirmed the Decision4 dated August 28, 2008, the Amended Decision5 dated February 12,
2009, and the Resolution6 dated May 7, 2009 of the CTA First Division in CTA Case Nos. 6699, 6884, and
7166 granting CBK Power Company Limited (CBK Power) a refund of its excess final withholding tax for the
taxable years 2001 to 2003. cralawred

The Facts

CBK Power is a limited partnership duly organized and existing under the laws of the Philippines, and
primarily engaged in the development and operation of the Caliraya, Botocan, and Kalayaan hydroelectric
power generating plants in Laguna (CBK Project). It is registered with the Board of Investments (BOI) as
engaged in a preferred pioneer area of investment under the Omnibus Investment Code of 1987.7 chanRoblesvirtualLawlibrary

To finance the CBK Project, CBK Power obtained in August 2000 a syndicated loan from several foreign
banks,8 i.e., BNP Paribas, Dai-ichi Kangyo Bank, Limited, Industrial Bank of Japan, Limited, and Societe
General (original lenders), acting through an Inter-Creditor Agent, Dai-ichi Kangyo Bank, a Japanese bank
that subsequently merged with the Industrial Bank of Japan, Limited (Industrial Bank of Japan) and the Fuji
Bank, Limited (Fuji Bank), with the merged entity being named as Mizuho Corporate Bank (Mizuho Bank).
One of the merged banks, Fuji Bank, had a branch in the Philippines, which became a branch of Mizuho
Bank as a result of the merger. The Industrial Bank of Japan and Mizuho Bank are residents of Japan for
purposes of income taxation, and recognized as such under the relevant provisions of the income tax
treaties between the Philippines and Japan.9 chanRoblesvi rtua lLawl ibra ry

Certain portions of the loan were subsequently assigned by the original lenders to various other banks,
including Fortis Bank (Nederland) N.V. (Fortis-Netherlands) and Raiffesen Zentral Bank Osterreich AG
(Raiffesen Bank). Fortis-Netherlands, in turn, assigned its portion of the loan to Fortis Bank S.A./N.V.
(Fortis-Belgium), a resident of Belgium. Fortis-Netherlands and Raiffesen Bank, on the other hand, are
residents of Netherlands and Austria, respectively.10 chanRob lesvi rtua lLawl ibra ry

In February 2001, CBK Power borrowed money from Industrial Bank of Japan, Fortis-Netherlands, Raiffesen
Bank, Fortis-Belgium, and Mizuho Bank for which it remitted interest payments from May 2001 to May
2003.11 It allegedly withheld final taxes from said payments based on the following rates, and paid the
same to the Revenue District Office No. 55 of the Bureau of Internal Revenue (BIR): (a) fifteen percent
(15%) for Fortis-Belgium, Fortis-Netherlands, and Raiffesen Bank; and (b) twenty percent (20%) for
Industrial Bank of Japan and Mizuho Bank.12 chanRoblesvi rt ual Lawlib rary

However, according to CBK Power, under the relevant tax treaties between the Philippines and the
respective countries in which each of the banks is a resident, the interest income derived by the
aforementioned banks are subject only to a preferential tax rate of 10%, viz.:13 cha nRo blesvi rtual Lawli bra ry

BANK COUNTRY OF PREFERENTIAL RATE

RESIDENCE UNDER THE RELEVANT TAX
TREATY
Fortis Bank S.A./N.V. Belgium 10% (Article 111, RP-Belgium Tax
Treaty)
Industrial Bank of Japan 10% (Article 113, RP-Japan Tax
Japan Treaty)
Raiffesen Zentral Bank Austria 10% (Article 113, RP-Austria Tax
Osterreich AG Treaty)
Mizuho Corporate Japan 10% (Article 113, RP-Japan Tax
Bank Treaty)
Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final withholding taxes
allegedly erroneously withheld and collected for the years 2001 and 2002 with the BIR Revenue Region No.
9. The claim for refund of excess final withholding taxes in 2003 was subsequently filed on March 4,
2005.14chanRoble svi rtual Lawli bra ry

The Commissioner of Internal Revenue’s (Commissioner) inaction on said claims prompted CBK Power to file
petitions for review before the CTA, viz.:15 chanRoblesv irt ual Lawlib rary

(1) CTA Case No. 6699 was filed by CBK Power on June 6, 2003 seeking the refund of excess final
withholding tax in the total amount of P6,393,267.20 covering the year 2001 with respect to interest
income derived by [Fortis-Belgium], Industrial Bank of Japan, and [Raiffesen Bank]. An Answer was filed by
the Commissioner on July 25, 2003.

(2) CTA Case No. 6884 was filed by CBK Power on March 5, 2004 seeking for the refund of the amount
of P8,136,174.31 covering [the] year 2002 with respect to interest income derived by [Fortis-Belgium],
Industrial Bank of Japan, [Mizuho Bank], and [Raiffesen Bank]. The Commissioner filed his Answer on May
7, 2004.

xxxx

(3) CTA Case No. 7166 was filed by CBK [Power] on March 9, 2005 seeking for the refund of [the amount
of] P1,143,517.21 covering [the] year 2003 with respect to interest income derived by [Fortis-Belgium],
and [Raiffesen Bank]. The Commissioner filed his Answer on May 9, 2005. (Emphases supplied)

CTA Case Nos. 6699 and 6884 were consolidated first on June 18, 2004. Subsequently, however, all three
cases – CTA Case Nos. 6699, 6884, and 7166 – were consolidated in a Resolution dated August 3,
2005.16chanRoble svi rtual Lawli bra ry

The CTA First Division Rulings

In a Decision17 dated August 28, 2008, the CTA First Division granted the petitions and ordered the refund
of the amount of P15,672,958.42 upon a finding that the relevant tax treaties were applicable to the
case.18 It cited DA-ITAD Ruling No. 099-0319 dated July 16, 2003, issued by the BIR, confirming CBK
Power’s claim that the interest payments it made to Industrial Bank of Japan and Raiffesen Bank were
subject to a final withholding tax rate of only 10% of the gross amount of interest, pursuant to Article 11 of
the Republic of the Philippines (RP)-Austria and RP-Japan tax treaties. However, in DA-ITAD Ruling No. 126-
0320 dated August 18, 2003, also issued by the BIR, interest payments to Fortis-Belgium were likewise
subjected to the same rate pursuant to the Protocol Amending the RP-Belgium Tax Treaty, the provisions of
which apply on income derived or which accrued beginning January 1, 2000. With respect to interest
payments made to Fortis-Netherlands before it assigned its portion of the loan to Fortis-Belgium, the CTA
First Division likewise granted the preferential rate.21 c hanRoble svirtual Lawlib rary

The CTA First Division categorically declared in the August 28, 2008 Decision that the required International
Tax Affairs Division (ITAD) ruling was not a condition sine qua non for the entitlement of the tax relief
sought by CBK Power,22 however, upon motion for reconsideration23 filed by the Commissioner, the CTA First
Division amended its earlier decision by reducing the amount of the refund from P15,672,958.42
to P14,835,720.39 on the ground that CBK Power failed to obtain an ITAD ruling with respect to its
transactions with Fortis-Netherlands.24 In its Amended Decision25 dated February 12, 2009, the CTA First
Division adopted26 the ruling in the case of Mirant (Philippines) Operations Corporation (formerly: Southern
Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue (Mirant),27 cited by the
Commissioner in his motion for reconsideration, where the Court categorically pronounced in its Resolution
dated February 18, 2008 that an ITAD ruling must be obtained prior to availing a preferential tax rate.

CBK Power moved for the reconsideration28 of the Amended Decision dated February 12, 2009, arguing in
the main that the Mirant case, which was resolved in a minute resolution, did not establish a legal
precedent. The motion was denied, however, in a Resolution29 dated May 7, 2009 for lack of merit.

Undaunted, CBK Power elevated the matter to the CTA En Banc on petition for review,30 docketed as C.T.A
E.B. No. 494. The Commissioner likewise filed his own petition for review,31 which was docketed as C.T.A.
E.B. No. 469. Said petitions were subsequently consolidated.32 chanRob lesvi rtual Lawli bra ry

CBK Power raised the lone issue of whether or not an ITAD ruling is required before it can avail of the
preferential tax rate. On the other hand, the Commissioner claimed that CBK Power failed to exhaust
administrative remedies when it filed its petitions before the CTA First Division, and that said petitions were
not filed within the two-year prescriptive period for initiating judicial claims for refund.33 chanRoble svirtual Lawli bra ry

The CTA En Banc Ruling

In a Decision34 dated March 29, 2010, the CTA En Banc affirmed the ruling of the CTA First Division that a
prior application with the ITAD is indeed required by Revenue Memorandum Order (RMO) 1-2000,35which
administrative issuance has the force and effect of law and is just as binding as a tax treaty. The CTA En
Banc declared the Mirant case as without any binding effect on CBK Power, having been resolved by this
Court merely through minute resolutions, and relied instead on the mandatory wording of RMO 1-2000, as
follows:36 c hanRoble svirtual Lawlib ra ry
III. Policies:

xxxx

2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No.
0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction
i.e. payment of dividends, royalties, etc.,accompanied by supporting documents justifying the relief.
x x x.

The CTA En Banc further held that CBK Power’s petitions for review were filed within the two-year
prescriptive period provided under Section 22937 of the National Internal Revenue Code of 199738 (NIRC),
and that it was proper for CBK Power to have filed said petitions without awaiting the final resolution of its
administrative claims for refund before the BIR; otherwise, it would have completely lost its right to seek
judicial recourse if the two-year prescriptive period lapsed with no judicial claim filed.

CBK Power’s motion for partial reconsideration and the Commissioner’s motion for reconsideration of the
foregoing Decision were both denied in a Resolution39 dated August 16, 2010 for lack of merit; hence, the
present consolidated petitions.

The Issues Before the Court

In G.R. Nos. 193383-84, CBK Power submits the sole legal issue of whether the BIR may add a
requirement – prior application for an ITAD ruling – that is not found in the income tax treaties signed by
the Philippines before a taxpayer can avail of preferential tax rates under said treaties.40 chanRoblesv irtual Lawlib rary

On the other hand, in G.R. Nos. 193407-08, the Commissioner maintains that CBK Power is not entitled to
a refund in the amount of P1,143,517.21 for the period covering taxable year 2003 as it allegedly failed to
exhaust administrative remedies before seeking judicial redress.41 cha nRoblesvi rtu alLaw lib rary

The Court’s Ruling

The Court resolves the foregoing in seriatim.

A. G.R. Nos. 193383-84

The Philippine Constitution provides for adherence to the general principles of international law as part of
the law of the land. The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the agreement. In
this jurisdiction, treaties have the force and effect of law.42
chanRoble svirtual Lawlib ra ry

The issue of whether the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations
of the benefit of a tax treaty was squarely addressed in the recent case of Deutsche Bank AG Manila Branch
v. Commissioner of Internal Revenue43 (Deutsche Bank), where the Court emphasized that the obligation
to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000, viz.: cha nrob lesvi rtua llawli bra ry

We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial
of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the
objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly
entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as
required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would
constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty
relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has negative implications on international relations, and
unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000
involve an administrative procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are
entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.44 (Emphases and underscoring supplied)

The objective of RMO No. 1-2000 in requiring the application for treaty relief with the ITAD before a party’s
availment of the preferential rate under a tax treaty is to avert the consequences of any erroneous
interpretation and/or application of treaty provisions, such as claims for refund/credit for overpayment of
taxes, or deficiency tax liabilities for underpayment.45 However, as pointed out in Deutsche Bank, the
underlying principle of prior application with the BIR becomes moot in refund cases – as in the present
case – where the very basis of the claim is erroneous or there is excessive payment arising from the
non-availment of a tax treaty relief at the first instance. Just as Deutsche Bank was not faulted by the Court
for not complying with RMO No. 1-2000 prior to the transaction,46 so should CBK Power. In parallel, CBK
Power could not have applied for a tax treaty relief 15 days prior to its payment of the final withholding tax
on the interest paid to its lenders precisely because it erroneously paid said tax on the basis of the
regular rate as prescribed by the NIRC, and not on the preferential tax rate provided under the different
treaties. As stressed by the Court, the prior application requirement under RMO No. 1-2000 then
becomes illogical.47 chanRoble svi rtual Lawli bra ry

Not only is the requirement illogical, but it is also an imposition that is not found at all in the applicable
tax treaties. In Deutsche Bank, the Court categorically held that the BIR should not impose additional
requirements that would negate the availment of the reliefs provided for under international agreements,
especially since said tax treaties do not provide for any prerequisite at all for the availment of the benefits
under said agreements.48 chanRoble svirtual Lawli bra ry

It bears reiterating that the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.49 Since CBK Power had requested for confirmation
from the ITAD on June 8, 2001 and October 28, 200250 before it filed on April 14, 2003 its administrative
claim for refund of its excess final withholding taxes, the same should be deemed substantial
compliance with RMO No. 1-2000, as in Deutsche Bank. To rule otherwise would defeat the purpose of
Section 229 of the NIRC in providing the taxpayer a remedy for erroneously paid tax solely on the ground of
failure to make prior application for tax treaty relief.51 As the Court exhorted in Republic v. GST Philippines,
Inc.,52 while the taxpayer has an obligation to honestly pay the right taxes, the government has a corollary
duty to implement tax laws in good faith; to discharge its duty to collect what is due to it; and to justly
return what has been erroneously and excessively given to it.53 chanRob lesvi rtua lLawl ibra ry

In view of the foregoing, the Court holds that the CTA En Banc committed reversible error in affirming the
reduction of the amount of refund to CBK Power from P15,672,958.42 to P14,835,720.39 to exclude its
transactions with Fortis-Netherlands for which no ITAD ruling was obtained.54 CBK Power’s petition in G.R.
Nos. 193383-84 is therefore granted.

The opposite conclusion is, however, reached with respect to the Commissioner’s petition in G.R. Nos.
193407-08.

B. G.R. Nos. 193407-08

The Commissioner laments55 that he was deprived of the opportunity to act on the administrative claim for
refund of excess final withholding taxes covering taxable year 2003 which CBK Power filed on March 4,
2005, a Friday, then the following Wednesday, March 9, 2005, the latter hastily elevated the case on
petition for review before the CTA. He argues56 that the failure on the part of CBK Power to give him
a reasonable time to act on said claim is violative of the doctrines of exhaustion of administrative remedies
and of primary jurisdiction.

For its part, CBK Power maintains57 that it would be prejudicial to wait for the Commissioner’s ruling before
it files its judicial claim since it only has 2 years from the payment of the tax within which to file both its
administrative and judicial claims.

The Court rules for CBK Power.

Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes. Section
204 applies to administrative claims for refund, while Section 229 to judicial claims for refund. In both
instances, the taxpayer’s claim must be filed within two (2) years from the date of payment of the tax or
penalty. However, Section 229 of the NIRC further states the condition that a judicial claim for refund may
not be maintained until a claim for refund or credit has been duly filed with the Commissioner. These
provisions respectively read: chan roblesv irtuallawl ib rary

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The
Commissioner may -

xxxx

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund
the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his
discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value
upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files
in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the
tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a
written claim for credit or refund.

xxxx

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, of any
sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any
sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether
or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: x x x.
(Emphases and underscoring supplied)

Indubitably, CBK Power’s administrative and judicial claims for refund of its excess final withholding taxes
covering taxable year 2003 were filed within the two-year prescriptive period, as shown by the table
below:58chanRoble svirtual Lawli bra ry

WHEN WHEN LAST DAY OF WHEN WHEN

FINAL REMITTANCE THE 2-YEAR PETITION
INCOME RETURN ADMINISTRATIVE FOR
TAXES FILED PRESCRIPTIVE CLAIM WAS REVIEW
WERE PERIOD FILED WAS
WITHHELD FILED
February 03/10/03 03/10/05 March 4, 2005 03/09/05
2003
May 2003 06/10/03 06/10/05 March 4, 2005 03/09/05

With respect to the remittance filed on March 10, 2003, the Court agrees with the ratiocination of the
CTA En Banc in debunking the alleged failure to exhaust administrative remedies. Had CBK Power awaited
the action of the Commissioner on its claim for refund prior to taking court action knowing fully well that the
prescriptive period was about to end, it would have lost not only its right to seek judicial recourse but its
right to recover the final withholding taxes it erroneously paid to the government thereby suffering
irreparable damage.59 cha nRoblesv irt ual Lawlib rary

Also, while it may be argued that, for the remittance filed on June 10, 2003 that was to prescribe on June
10, 2005, CBK Power could have waited for, at the most, three (3) months from the filing of the
administrative claim on March 4, 2005 until the last day of the two-year prescriptive period ending June 10,
2005, that is, if only to give the BIR at the administrative level an opportunity to act on said claim, the Court
cannot, on that basis alone, deny a legitimate claim that was, for all intents and purposes, timely filed in
accordance with Section 229 of the NIRC. There was no violation of Section 229 since the law, as worded,
only requires that an administrative claim be priorly filed.

In the foregoing instances, attention must be drawn to the Court’s ruling in P.J. Kiener Co., Ltd. v.
David60 (Kiener), wherein it was held that in no wise does the law, i.e., Section 306 of the old Tax Code
(now, Section 229 of the NIRC), imply that the Collector of Internal Revenue first act upon the taxpayer’s
claim, and that the taxpayer shall not go to court before he is notified of the Collector’s action. In Kiener,
the Court went on to say that the claim with the Collector of Internal Revenue was intended primarily as a
notice of warning that unless the tax or penalty alleged to have been collected erroneously or illegally is
refunded, court action will follow, viz.:
c hanro blesvi rt uallawl ibra ry

The controversy centers on the construction of the aforementioned section of the Tax Code which reads: ChanRoblesVirt ualawli bra ry

SEC. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in
any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any
sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Collector of Internal Revenue; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty.
The preceding provisions seem at first blush conflicting. It will be noticed that, whereas the first sentence
requires a claim to be filed with the Collector of Internal Revenue before any suit is commenced, the last
makes imperative the bringing of such suit within two years from the date of collection. But the conflict is
only apparent and the two provisions easily yield to reconciliation, which it is the office of statutory
construction to effectuate, where possible, to give effect to the entire enactment.

To this end, and bearing in mind that the Legislature is presumed to have understood the language it used
and to have acted with full idea of what it wanted to accomplish, it is fair and reasonable to say without
doing violence to the context or either of the two provisions, that by the first is meant simply that the
Collector of Internal Revenue shall be given an opportunity to consider his mistake, if mistake has been
committed, before he is sued, but not, as the appellant contends that pending consideration of the claim,
the period of two years provided in the last clause shall be deemed interrupted. Nowhere and in no wise
does the law imply that the Collector of Internal Revenue must act upon the claim, or that the
taxpayer shall not go to court before he is notified of the Collector’s action. x x x. We understand
the filing of the claim with the Collector of Internal Revenue to be intended primarily as a notice
of warning that unless the tax or penalty alleged to have been collected erroneously or illegally is
refunded, court action will follow. x x x.61 (Emphases supplied)

That being said, the foregoing refund claims of CBK Power should all be granted, and, the petition of the
Commissioner in G.R. Nos. 193407-08 be denied for lack of merit. chan robles law

WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED. The Decision dated March 29, 2010 and
the Resolution dated August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469
and 494 are hereby REVERSED and SET ASIDE and a new one entered REINSTATING the Decision of the
CTA First Division dated August 28, 2008 ordering the refund in favor of CBK Power Company Limited the
amount of P15,672,958.42 representing its excess final withholding taxes for the taxable years 2001 to
2003. On the other hand, the petition in G.R. Nos. 193407-08 is DENIED for lack of merit.

SO ORDERED

NOT SURE AKO IF ETO YUN BIR VS GONZALES

THIRD DIVISION
COMMISSIONER OF G.R. No. 177279
INTERNAL REVENUE,
Petitioner, Present:

CARPIO MORALES, J.,

Chairperson,
- versus - BRION,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

HON. RAUL M. GONZALEZ,

Secretary of Justice, L. M. CAMUS Promulgated:
ENGINEERING CORPORATION
(represented by LUIS M. CAMUS October 13, 2010
and LINO D. MENDOZA),
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

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

The facts as culled from the records:

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

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

LMCECs alleged underdeclared income was summarized by petitioner as

follows:
Year Income Income Percentage of U
Per ITR Per Investigation ndeclared Underdeclaration
I
ncome
1997 96,638,540.00 283,412,140.84 186,733,600.84 193.30%
1998 86,793,913.00 236,863,236.81 150,069,323.81 172.90%
1999 88,287,792.00 251,507,903.13 163,220,111.13 184.90%[8]

In view of the above findings, assessment notices together with a formal

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

On May 21, 2003, petitioner, through then Commissioner Guillermo L.

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

Camus and Mendoza filed a Joint Counter-Affidavit contending that

LMCEC cannot be held liable whatsoever for the alleged tax deficiency which had
become due and demandable. Considering that the complaint and its annexes all
showed that the suit is a simple civil action for collection and not a tax evasion
case, the Department of Justice (DOJ) is not the proper forum for BIRs complaint.
They also assail as invalid the assessment notices which bear no serial numbers
and should be shown to have been validly served by an Affidavit of Constructive
Service executed and sworn to by the revenue officers who served the same. As
stated in LMCECs letter-protest dated December 12, 2002 addressed to Revenue
District Officer (RDO) Clavelina S. Nacar of RD No. 40, Cubao, Quezon City, the
company had already undergone a series of routine examinations for the years
1997, 1998 and 1999; under the NIRC, only one examination of the books of
accounts is allowed per taxable year.[13]

LMCEC further averred that it had availed of the Bureaus Tax Amnesty
Programs (Economic Recovery Assistance Payment [ERAP] Program and the
Voluntary Assessment Program [VAP]) for 1998 and 1999; for 1997, its tax
liability was terminated and closed under Letter of Termination [14] dated June 1,
1999 issued by petitioner and signed by the Chief of the Assessment
Division.[15] LMCEC claimed it made payments of income tax, VAT and expanded
withholding tax (EWT), as follows:
TAXABLE AMOUNT OF TAXES
YEAR PAID
1997 Termination Letter Under EWT - P 6,000.00
Letter of Authority No. 174600 VAT - 540,605.02
Dated November 4, 1998 IT - 3,000.00
1998 ERAP Program pursuant WC - 38,404.55
to RR #2-99 VAT - 61,635.40
1999 VAP Program pursuant IT - 878,495.28
to RR #8-2001 VAT - 1,324,317.00[16]

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

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

In the Joint Reply-Affidavit executed by the Bureaus revenue officers,

petitioner disagreed with the contention of LMCEC that the complaint filed is not
criminal in nature, pointing out that LMCEC and its officers Camus and Mendoza
were being charged for the criminal offenses defined and penalized under Sections
254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Pay Tax) of the
NIRC. This finds support in Section 205 of the same Code which provides for
administrative (distraint, levy, fine, forfeiture, lien, etc.) and judicial (criminal or
civil action) remedies in order to enforce collection of taxes. Both remedies may be
pursued either independently or simultaneously. In this case, the BIR decided to
simultaneously pursue both remedies and thus aside from this criminal action, the
Bureau also initiated administrative proceedings against LMCEC.[19]
 On the lack of control number in the assessment notice, petitioner explained
that such is a mere office requirement in the Assessment Service for the purpose of
internal control and monitoring; hence, the unnumbered assessment notices should
not be interpreted as irregular or anomalous. Petitioner stressed that LMCEC
already lost its right to file a protest letter after the lapse of the thirty (30)-day
reglementary period. LMCECs protest-letter dated December 12, 2002 to RDO
Clavelina S. Nacar, RD No. 40, Cubao, Quezon City was actually filed only
on December 16, 2002, which was disregarded by the petitioner for being filed out
of time. Even assuming for the sake of argument that the assessment notices were
invalid, petitioner contended that such could not affect the present criminal
action,[20] citing the ruling in the landmark case of Ungab v. Cusi, Jr.[21]

As to the Letter of Termination signed by Ruth Vivian G. Gandia of the

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

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

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

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

In their Joint Rejoinder-Affidavit,[26] Camus and Mendoza reiterated their

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

On September 22, 2003, the Chief State Prosecutor issued a

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

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

Petitioner appealed to respondent Secretary of Justice but the latter denied its
petition for review under Resolution dated December 13, 2005.[29]
 The Secretary of Justice found that petitioners claim that there is yet no
finality as to LMCECs payment of its 1997 taxes since the audit report was still
pending review by higher authorities, is unsubstantiated and misplaced. It was
noted that the Termination Letter issued by the Commissioner on June 1, 1999 is
explicit that the matter is considered closed. As for taxable year 1998, respondent
Secretary stated that the record shows that LMCEC paid VAT and withholding tax
in the amount of P61,635.40 and P38,404.55, respectively. This eventually gave
rise to the issuance of a certificate of immunity from audit for 1998 by the Office
of the Commissioner of Internal Revenue. For taxable year 1999, respondent
Secretary found that pursuant to earlier LA No. 38633 dated July 4, 2000,
LMCECs 1999 tax liabilities were still pending investigation for which reason
LMCEC assailed the subsequent issuance of LA No. 00009361 dated August 25,
2000 calling for a similar investigation of its alleged 1999 tax deficiencies when no
final determination has yet been arrived on the earlier LA No. 38633.[30]

On the allegation of fraud, respondent Secretary ruled that petitioner failed

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

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

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

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

The petition is anchored on the following grounds:

I.

The Honorable Court of Appeals erroneously sustained the findings of the

Secretary of Justice who gravely abused his discretion by dismissing the
complaint based on grounds which are not even elements of the offenses charged.

II.

The Honorable Court of Appeals erroneously sustained the findings of the

Secretary of Justice who gravely abused his discretion by dismissing petitioners
evidence, contrary to law.

III.

The Honorable Court of Appeals erroneously sustained the findings of the

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

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

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

SEC. 255. Failure to File Return, Supply Correct and Accurate

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

x x x x (Emphasis supplied.)

Respondent Secretary concurred with the Chief State Prosecutors conclusion

that there is insufficient evidence to establish probable cause to charge private
respondents under the above provisions, based on the following findings: (1) the
tax deficiencies of LMCEC for taxable years 1997, 1998 and 1999 have all been
settled or terminated, as in fact LMCEC was issued a Certificate of Immunity and
Letter of Termination, and availed of the ERAP and VAP programs; (2) there was
no prior determination of the existence of fraud; (3) the assessment notices are
unnumbered, hence irregular and suspect; (4) the books of accounts and other
accounting records may be subject to audit examination only once in a given
taxable year and there is no proof that the case falls under the exceptions provided
in Section 235 of the NIRC; and (5) petitioner committed forum shopping when it
filed the instant case even as the earlier criminal complaint (I.S. No. 00-956)
dismissed by the City Prosecutor of Quezon City was still pending appeal.
 Petitioner argues that with the finality of the assessment due to failure of the
private respondents to challenge the same in accordance with Section 228 of the
NIRC, respondent Secretary has no jurisdiction and authority to inquire into its
validity.Respondent taxpayer is thereby allowed to do indirectly what it cannot do
directly to raise a collateral attack on the assessment when even a direct challenge
of the same is legally barred. The rationale for dismissing the complaint on the
ground of lack of control number in the assessment notice likewise betrays a lack
of awareness of tax laws and jurisprudence, such circumstance not being an
element of the offense. Worse, the final, conclusive and undisputable evidence
detailing a crime under our taxation laws is swept under the rug so easily on mere
conspiracy theories imputed on persons who are not even the subject of the
complaint.

We grant the petition.

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

As mentioned in the PAN, the revenue officers were not given the
opportunity to examine LMCECs books of accounts and other accounting records
because its officers failed to comply with the subpoena duces tecum earlier issued,
to verify its alleged underdeclarations of income reported by the Bureaus informant
under Section 282 of the NIRC. Hence, a criminal complaint was filed by the
Bureau against private respondents for violation of Section 266 which provides:
SEC. 266. Failure to Obey Summons. Any person who, being duly
summoned to appear to testify, or to appear and produce books of accounts,
records, memoranda, or other papers, or to furnish information as required under
the pertinent provisions of this Code, neglects to appear or to produce such books
of accounts, records, memoranda, or other papers, or to furnish such information,
shall, upon conviction, be punished by a fine of not less than Five thousand pesos
(P5,000) but not more than Ten thousand pesos (P10,000) and suffer
imprisonment of not less than one (1) year but not more than two (2) years.
It is clear that I.S. No. 00-956 involves a separate offense and hence litis
pendentia is not present considering that the outcome of I.S. No. 00-956 is not
determinative of the issue as to whether probable cause exists to charge the private
respondents with the crimes of attempt to evade or defeat tax and willful failure to
supply correct and accurate information and pay tax defined and penalized under
Sections 254 and 255, respectively. For the crime of tax evasion in particular,
compliance by the taxpayer with such subpoena, if any had been issued, is
irrelevant. As we held in Ungab v. Cusi, Jr.,[41] [t]he crime is complete when the
[taxpayer] has x x x knowingly and willfully filed [a] fraudulent [return] with
intent to evade and defeat x x x the tax. Thus, respondent Secretary erred in
holding that petitioner committed forum shopping when it filed the present
criminal complaint during the pendency of its appeal from the City Prosecutors
dismissal of I.S. No. 00-956 involving the act of disobedience to the summons in
the course of the preliminary investigation on LMCECs correct tax liabilities for
taxable years 1997, 1998 and 1999.

In the Details of Discrepancies attached as Annex B of the PAN, [42] private

respondents were already notified that inasmuch as the revenue officers were not
given the opportunity to examine LMCECs books of accounts, accounting records
and other documents, said revenue officers gathered information from third
parties. Such procedure is authorized under Section 5 of the NIRC, which
provides:
SEC. 5. Power of the Commissioner to Obtain Information, and to Summon,
Examine, and Take Testimony of Persons. In ascertaining the correctness of any
return, or in making a return when none has been made, or in determining the
liability of any person for any internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance, the Commissioner is authorized:

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

(B) To obtain on a regular basis from any person other than the person
whose internal revenue tax liability is subject to audit or investigation, or
from any office or officer of the national and local governments, government
agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and
government-owned or -controlled corporations, any information such as, but not
limited to, costs and volume of production, receipts or sales and gross incomes of
taxpayers, and the names, addresses, and financial statements of corporations,
mutual fund companies, insurance companies, regional operating headquarters of
multinational companies, joint accounts, associations, joint ventures or consortia
and registered partnerships, and their members;
 (C) To summon the person liable for tax or required to file a return, or any
officer or employee of such person, or any person having possession, custody, or
care of the books of accounts and other accounting records containing entries
relating to the business of the person liable for tax, or any other person, to appear
before the Commissioner or his duly authorized representative at a time and place
specified in the summons and to produce such books, papers, records, or other
data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry; x x x

x x x x (Emphasis supplied.)

Private respondents assertions regarding the qualifications of the informer of

the Bureau deserve scant consideration. We have held that the lack of consent of
the taxpayer under investigation does not imply that the BIR obtained the
information from third parties illegally or that the information received is false or
malicious. Nor does the lack of consent preclude the BIR from assessing
deficiency taxes on the taxpayer based on the documents.[43] In the same vein,
herein private respondents cannot be allowed to escape criminal prosecution under
Sections 254 and 255 of the NIRC by mere imputation of a fictitious or
disqualified informant under Section 282 simply because other than disclosure of
the official registry number of the third party informer, the Bureau insisted on
maintaining the confidentiality of the identity and personal circumstances of said
informer.

Subsequently, petitioner sent to LMCEC by constructive service allowed under

Section 3 of RR No. 12-99, assessment notice and formal demand informing the
said taxpayer of the law and the facts on which the assessment is made, as required
by Section 228 of the NIRC. Respondent Secretary, however, fully concurred with
private respondents contention that the assessment notices were invalid for being
unnumbered and the tax liabilities therein stated have already been settled and/or
terminated.

We do not agree.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a
Pre-Assessment Notice (PAN) within the prescribed period of time, or whose
reply to the PAN was found to be without merit. The Notice of Assessment shall
 inform the [t]axpayer of this fact, and that the report of investigation submitted by
the Revenue Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayers deficiency tax or
taxes shall state the fact, the law, rules and regulations or jurisprudence on
which the assessment is based, otherwise the formal letter of demand and the
notice of assessment shall be void.[44]

As it is, the formality of a control number in the assessment notice is not a

requirement for its validity but rather the contents thereof which should inform the
taxpayer of the declaration of deficiency tax against said taxpayer. Both the formal
letter of demand and the notice of assessment shall be void if the former failed to
state the fact, the law, rules and regulations or jurisprudence on which the
assessment is based, which is a mandatory requirement under Section 228 of the
NIRC.

Section 228 of the NIRC provides that the taxpayer shall be informed in
writing of the law and the facts on which the assessment is made. Otherwise, the
assessment is void. To implement the provisions of Section 228 of the NIRC, RR
No. 12-99 was enacted. Section 3.1.4 of the revenue regulation reads:
3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter
of demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the
taxpayers deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based, otherwise,
the formal letter of demand and assessment notice shall be void. The same
shall be sent to the taxpayer only by registered mail or by personal delivery. x x
x.[45] (Emphasis supplied.)

The Formal Letter of Demand dated August 7, 2002 contains not only a
detailed computation of LMCECs tax deficiencies but also details of the specified
discrepancies, explaining the legal and factual bases of the assessment. It also
reiterated that in the absence of accounting records and other documents necessary
for the proper determination of the companys internal revenue tax liabilities, the
investigating revenue officers resorted to the Best Evidence Obtainable as provided
in Section 6(B) of the NIRC (third party information) and in accordance with the
procedure laid down in RMC No. 23-2000 dated November 27, 2000. Annex A of
the Formal Letter of Demand thus stated:
 Thus, to verify the validity of the information previously provided by the
informant, the assigned revenue officers resorted to third party
information. Pursuant to Section 5(B) of the NIRC of 1997, access letters
requesting for information and the submission of certain documents (i.e.,
Certificate of Income Tax Withheld at Source and/or Alphabetical List showing
the income payments made to L.M. Camus Engineering Corporation for the
taxable years 1997 to 1999) were sent to the various clients of the subject
corporation, including but not limited to the following:

1. Ayala Land Inc.

2. Filinvest Alabang Inc.
3. D.M. Consunji, Inc.
4. SM Prime Holdings, Inc.
5. Alabang Commercial Corporation
6. Philam Properties Corporation
7. SM Investments, Inc.
8. Shoemart, Inc.
9. Philippine Securities Corporation
10. Makati Development Corporation

From the documents gathered and the data obtained therein, the
substantial underdeclaration as defined under Section 248(B) of the NIRC of
1997 by your corporation of its income had been confirmed. x x x
x[46] (Emphasis supplied.)

In the same letter, Assistant Commissioner Percival T. Salazar informed

private respondents that the estimated tax liabilities arising from LMCECs
underdeclaration amounted to P186,773,600.84 in 1997, P150,069,323.81 in 1998
and P163,220,111.13 in 1999. These figures confirmed that the non-declaration by
LMCEC for the taxable years 1997, 1998 and 1999 of an amount exceeding 30%
income[47] declared in its return is considered a substantial underdeclaration of
income, which constituted prima facie evidence of false or fraudulent return under
Section 248(B)[48] of the NIRC, as amended.[49]

On the alleged settlement of the assessed tax deficiencies by private respondents,

respondent Secretary found the latters claim as meritorious on the basis of the
Certificate of Immunity From Audit issued on December 6, 1999 pursuant to RR
No. 2-99 and Letter of Termination dated June 1, 1999 issued by Revenue Region
No. 7 Chief of Assessment Division Ruth Vivian G. Gandia.Petitioner, however,
clarified that the certificate of immunity from audit covered only income tax for
the year 1997 and does not include VAT and withholding taxes, while the Letter of
Termination involved tax liabilities for taxable year 1997 (EWT, VAT and income
taxes) but which was submitted for review of higher authorities as per the
Certification of RD No. 40 District Officer Pablo C. Cabreros, Jr. [50] For 1999,
private respondents supposedly availed of the VAP pursuant to RR No. 8-2001.

RR No. 2-99 issued on February 7, 1999 explained in its Policy Statement that
considering the scarcity of financial and human resources as well as the time
constraints within which the Bureau has to clean the Bureaus backlog of unaudited
tax returns in order to keep updated and be focused with the most current accounts
in preparation for the full implementation of a computerized tax administration, the
said revenue regulation was issued providing for last priority in audit and
investigation of tax returns to accomplish the said objective without, however,
compromising the revenue collection that would have been generated from audit
and enforcement activities. The program named as Economic Recovery Assistance
Payment (ERAP) Program granted immunity from audit and investigation of
income tax, VAT and percentage tax returns for 1998. It expressly excluded
withholding tax returns (whether for income, VAT, or percentage tax
purposes). Since such immunity from audit and investigation does not preclude the
collection of revenues generated from audit and enforcement activities, it follows
that the Bureau is likewise not barred from collecting any tax deficiency
discovered as a result of tax fraud investigations. Respondent Secretarys opinion
that RR No. 2-99 contains the feature of a tax amnesty is thus misplaced.

Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It
also gives the government a chance to collect uncollected tax from tax evaders
without having to go through the tedious process of a tax case. [51] Even
assuming arguendo that the issuance of RR No. 2-99 is in the nature of tax
amnesty, it bears noting that a tax amnesty, much like a tax exemption, is never
favored nor presumed in law and if granted by statute, the terms of the amnesty
like that of a tax exemption must be construed strictly against the taxpayer and
liberally in favor of the taxing authority.[52]

For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as
amended by RR No. 10-2001, through payment supposedly made in October 29,
2001 before the said program ended on October 31, 2001, did not amount to
settlement of its assessed tax deficiencies for the period 1997 to 1999, nor
immunity from prosecution for filing fraudulent return and attempt to evade or
defeat tax. As correctly asserted by petitioner, from the express terms of the
aforesaid revenue regulations, LMCEC is not qualified to avail of the VAP
granting taxpayers the privilege of last priority in the audit and investigation of all
internal revenue taxes for the taxable year 2000 and all prior years under certain
conditions, considering that first, it was issued a PAN on February 19,
2001, and second, it was the subject of investigation as a result of verified
information filed by a Tax Informer under Section 282 of the NIRC duly recorded
in the BIR Official Registry as Confidential Information (CI) No. 29-2000[53] even
prior to the issuance of the PAN.

Section 1 of RR No. 8-2001 provides:

SECTION 1. COVERAGE. x x x

Any person, natural or juridical, including estates and trusts, liable to pay
any of the above-cited internal revenue taxes for the above specified period/s
who, due to inadvertence or otherwise, erroneously paid his internal revenue tax
liabilities or failed to file tax return/pay taxes may avail of the Voluntary
Assessment Program (VAP), except those falling under any of the following
instances:

1.1 Those covered by a Preliminary Assessment Notice (PAN), Final

Assessment Notice (FAN), or Collection Letter issued on or before July 31,
2001; or

1.2 Persons under investigation as a result of verified information filed

by a Tax Informer under Section 282 of the Tax Code of 1997, duly
processed and recorded in the BIR Official Registry Book on or before July
31, 2001;

1.3 Tax fraud cases already filed and pending in courts for adjudication;
and

x x x x (Emphasis supplied.)

Moreover, private respondents cannot invoke LMCECs availment of VAP to

foreclose any subsequent audit of its account books and other accounting records
in view of the strong finding of underdeclaration in LMCECs payment of correct
income tax liability by more than 30% as supported by the written report of the
TFD detailing the facts and the law on which such finding is based, pursuant to the
tax fraud investigation authorized by petitioner under LA No. 00009361. This
conclusion finds support in Section 2 of RR No. 8-2001 as amended by RR No. 10-
2001 provides:
SEC. 2. TAXPAYERS BENEFIT FROM AVAILMENT OF THE
VAP. A taxpayer who has availed of the VAP shall not be audited except upon
authorization and approval of the Commissioner of Internal Revenue when there
is strong evidence or finding of understatement in the payment of taxpayers
 correct tax liability by more than thirty percent (30%) as supported by a written
report of the appropriate office detailing the facts and the law on which such
finding is based: Provided, however, that any VAP payment should be allowed as
tax credit against the deficiency tax due, if any, in case the concerned taxpayer
has been subjected to tax audit.

xxxx

Given the explicit conditions for the grant of immunity from audit under RR
No. 2-99, RR No. 8-2001 and RR No. 10-2001, we hold that respondent Secretary
gravely erred in declaring that petitioner is now estopped from assessing any tax
deficiency against LMCEC after issuance of the aforementioned documents of
immunity from audit/investigation and settlement of tax liabilities. It is axiomatic
that the State can never be in estoppel, and this is particularly true in matters
involving taxation. The errors of certain administrative officers should never be
allowed to jeopardize the governments financial position.[54]

Respondent Secretarys other ground for assailing the course of action taken
by petitioner in proceeding with the audit and investigation of LMCEC -- the
alleged violation of the general rule in Section 235 of the NIRC allowing the
examination and inspection of taxpayers books of accounts and other accounting
records only once in a taxable year -- is likewise untenable. As correctly pointed
out by petitioner, the discovery of substantial underdeclarations of income by
LMCEC for taxable years 1997, 1998 and 1999 upon verified information
provided by an informer under Section 282 of the NIRC, as well as the necessity of
obtaining information from third parties to ascertain the correctness of the return
filed or evaluation of tax compliance in collecting taxes (as a result of the
disobedience to the summons issued by the Bureau against the private
respondents), are circumstances warranting exception from the general rule in
Section 235.[55]

As already stated, the substantial underdeclared income in the returns filed

by LMCEC for 1997, 1998 and 1999 in amounts equivalent to more than 30% (the
computation in the final assessment notice showed underdeclarations of almost
200%) constitutes prima facie evidence of fraudulent return under Section 248(B)
of the NIRC. Prior to the issuance of the preliminary and final notices of
assessment, the revenue officers conducted a preliminary investigation on the
information and documents showing substantial understatement of LMCECs tax
liabilities which were provided by the Informer, following the procedure under
RMO No. 15-95.[56] Based on the prima facie finding of the existence of fraud,
petitioner issued LA No. 00009361 for the TFD to conduct a formal fraud
investigation of LMCEC.[57] Consequently, respondent Secretarys ruling that the
filing of criminal complaint for violation of Sections 254 and 255 of the NIRC
cannot prosper because of lack of prior determination of the existence of fraud, is
bereft of factual basis and contradicted by the evidence on record.

Tax assessments by tax examiners are presumed correct and made in good
faith, and all presumptions are in favor of the correctness of a tax assessment
unless proven otherwise.[58] We have held that a taxpayers failure to file a petition
for review with the Court of Tax Appeals within the statutory period rendered the
disputed assessment final, executory and demandable, thereby precluding it from
interposing the defenses of legality or validity of the assessment and prescription
of the Governments right to assess.[59] Indeed, any objection against the assessment
should have been pursued following the avenue paved in Section 229 (now Section
228) of the NIRC on protests on assessments of internal revenue taxes.[60]

Records bear out that the assessment notice and Formal Letter of Demand
dated August 7, 2002 were duly served on LMCEC on October 1, 2002. Private
respondents did not file a motion for reconsideration of the said assessment notice
and formal demand; neither did they appeal to the Court of Tax Appeals. Section
228 of the NIRC[61] provides the remedy to dispute a tax assessment within a certain
period of time. It states that an assessment may be protested by filing a request for
reconsideration or reinvestigation within 30 days from receipt of the assessment by
the taxpayer. No such administrative protest was filed by private respondents
seeking reconsideration of the August 7, 2002 assessment notice and formal letter of
demand. Private respondents cannot belatedly assail the said assessment, which they
allowed to lapse into finality, by raising issues as to its validity and correctness
during the preliminary investigation after the BIR has referred the matter for
prosecution under Sections 254 and 255 of the NIRC.

As we held in Marcos II v. Court of Appeals[62]:

It is not the Department of Justice which is the government agency tasked to
determine the amount of taxes due upon the subject estate, but the Bureau of
Internal Revenue, whose determinations and assessments are presumed correct
and made in good faith. The taxpayer has the duty of proving otherwise. In the
absence of proof of any irregularities in the performance of official duties, an
assessment will not be disturbed. Even an assessment based on estimates
is prima facie valid and lawful where it does not appear to have been arrived
at arbitrarily or capriciously. The burden of proof is upon the complaining
party to show clearly that the assessment is erroneous. Failure to present proof of
 error in the assessment will justify the judicial affirmance of said assessment. x x
x.
Moreover, these objections to the assessments should have been raised,
considering the ample remedies afforded the taxpayer by the Tax Code, with
the Bureau of Internal Revenue and the Court of Tax Appeals, as described
earlier, and cannot be raised now via Petition for Certiorari, under the pretext of
grave abuse of discretion. The course of action taken by the petitioner reflects his
disregard or even repugnance of the established institutions for governance in the
scheme of a well-ordered society. The subject tax assessments having become
final, executory and enforceable, the same can no longer be contested by
means of a disguised protest. In the main, Certiorari may not be used as a
substitute for a lost appeal or remedy. This judicial policy becomes more
pronounced in view of the absence of sufficient attack against the actuations of
government. (Emphasis supplied.)

The determination of probable cause is part of the discretion granted to the

investigating prosecutor and ultimately, the Secretary of Justice. However, this
Court and the CA possess the power to review findings of prosecutors in
preliminary investigations. Although policy considerations call for the widest
latitude of deference to the prosecutors findings, courts should never shirk from
exercising their power, when the circumstances warrant, to determine whether the
prosecutors findings are supported by the facts, or by the law. In so doing, courts
do not act as prosecutors but as organs of the judiciary, exercising their mandate
under the Constitution, relevant statutes, and remedial rules to settle cases and
controversies.[63] Clearly, the power of the Secretary of Justice to review does not
preclude this Court and the CA from intervening and exercising our own powers of
review with respect to the DOJs findings, such as in the exceptional case in which
grave abuse of discretion is committed, as when a clear sufficiency or insufficiency
of evidence to support a finding of probable cause is ignored.[64]

WHEREFORE, the petition is GRANTED. The Decision dated October 31,

2006 and Resolution dated March 6, 2007 of the Court of Appeals in CA-G.R. SP
No. 93387 are hereby REVERSED and SET ASIDE. The Secretary of Justice is
hereby DIRECTED to order the Chief State Prosecutor to file before the Regional
Trial Court of Quezon City, National Capital Judicial Region, the corresponding
Information against L. M. Camus Engineering Corporation, represented by its
President Luis M. Camus and Comptroller Lino D. Mendoza, for Violation of
Sections 254 and 255 of the National Internal Revenue Code of 1997.

No costs.
SO ORDERED.
NOT SURE DIN DITO
Republic of the Philippines
Supreme Court
Baguio City
THIRD DIVISION

COMMISSIONER OF G.R. No. 160949

INTERNAL REVENUE,
Petitioner, Present:

CARPIO MORALES, Chairperson,

BRION,
- versus - BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.
PL MANAGEMENT
INTERNATIONAL Promulgated:
PHILIPPINES, INC.,
Respondent. April 4, 2011
x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J.:

How may the respondent taxpayer still recover its unutilized creditable
withholding tax for taxable year 1997 after its written claim for refund was not
acted upon by the petitioner, whose inaction was upheld by the Court of Tax
Appeals (CTA) on the ground of the claim for tax refund being already barred by
prescription?

Nature of the Case

The inaction of petitioner Commissioner of Internal Revenue

(Commissioner) on the respondents written claim for tax refund or tax credit
impelled the latter to commence judicial action for that purpose in the CTA.
However, the CTA denied the claim on December 10, 2001 for being brought
beyond two years from the accrual of the claim.

On appeal, the Court of Appeals (CA) reversed the CTAs denial through the
decision promulgated in C.A.-G.R. Sp. No. 68461 on November 28, 2002, and
directed the petitioner to refund the unutilized creditable withholding tax to the
respondent.[1]

Hence, the petitioner appeals.

Antecedents

In 1997, the respondent, a Philippine corporation, earned an income

of P24,000,000.00 from its professional services rendered to UEM-MARA
Philippines Corporation (UMPC), from which income UMPC
[2]
withheld P1,200,000.00 as the respondents withholding agent.

In its 1997 income tax return (ITR) filed on April 13, 1998, the respondent
reported a net loss of P983,037.00, but expressly signified that it had a creditable
withholding tax of P1,200,000.00 for taxable year 1997 to be claimed as tax credit
in taxable year 1998.[3]

On April 13, 1999, the respondent submitted its ITR for taxable year 1998,
in which it declared a net loss of P2,772,043.00.Due to its net-loss position, the
respondent was unable to claim the P1,200,000.00 as tax credit.

On April 12, 2000, the respondent filed with the petitioner a written claim
for the refund of the P1,200,000.00 unutilized creditable withholding tax for
taxable year 1997.[4] However, the petitioner did not act on the claim.

Ruling of the CTA

 Due to the petitioners inaction, the respondent filed a petition for review in
the CTA (CTA Case No. 6107) on April 14, 2000, thereby commencing its judicial
action.

On December 10, 2001, the CTA denied the respondents claim on the
ground of prescription,[5] to wit:

Records reveal that Petitioner filed its Annual Income Tax Return
for taxable year 1997 on April 13, 1998 (Exhibit A) and its claim for
refund with the BIR on April 12, 2000 (Exhibit D and No. 2 of the
Statement of Admitted Facts and Issues). Several days thereafter, or on
April 14, 2000, Petitioner filed an appeal with this Court.

The aforementioned facts clearly show that the judicial claim for
refund via this Petition for Review was already filed beyond the two-
year prescriptive period mandated by Sections 204 (C) and 229 of the
Tax Code xxx
xxx

As earlier mentioned, Petitioner filed its Annual ITR on April 13,

1998 and filed its judicial claim for refund only on April 14, 2000 which
is beyond the two-year period earlier discussed. The aforequoted
Sections 204 (C) and 229 of the Tax Code mandates that both the
administrative and judicial claims for refund must be filed within the
two-year period, otherwise the taxpayer's cause of action shall be barred
by prescription. Unfortunately, this lapse on the part of Petitioner proved
fatal to its claim.
xxx

WHEREFORE, in view of the foregoing the Petition for Review is

hereby DENIED due to prescription.

Ruling of the CA

Aggrieved, the respondent appealed to the CA, assailing the correctness of

the CTAs denial of its judicial claim for refund on the ground of bar by
prescription.
 As earlier mentioned, the CA promulgated its decision on November 28,
2002, holding that the two-year prescriptive period, which was not jurisdictional
(citing Oral and Dental College v. Court of Tax Appeal[6]and Commissioner of
Internal Revenue v. Philippine American Life Insurance Company[7]), might be
suspended for reasons of equity.[8] The CA thus disposed as follows:

WHEREFORE, the petition is partly GRANTED and the assailed

CTA Decision partly ANNULLED. Respondent Commissioner of
Internal Revenue is hereby ordered to refund to petitioner PL
Management International Phils., Inc., the amount of P1,200,000.00
representing its unutilized creditable withholding tax in taxable year
1997.[9]

The CA rejected the petitioners motion for reconsideration.[10]

Issues

In this appeal, the petitioner insists that:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE

TWO-YEAR PRESCRIPTIVE PERIOD UNDER SECTION 229
OF THE TAX CODE IS NOT JURISDICTIONAL, THUS THE
CLAIM FOR REFUND OF RESPONDENT IS SUSPENDED
FOR REASONS OF EQUITY.

II. THE COURT OF APPEALS ERRED IN HOLDING THAT

RESPONDENTS JUDICIAL RIGHT TO CLAIM FOR REFUND
BROUGHT BEFORE THE COURT OF APPEALS ON APRIL
14, 2000 WAS ONE DAY LATE ONLY.[11]

The petitioner argues that the decision of the CA suspending the running of the
two-year period set by Section 229 of the National Internal Revenue Code of 1997
(NIRC of 1997) on ground of equity was erroneous and had no legal basis; that
equity could not supplant or replace a clear mandate of a law that was still in force
and effect; that a claim for a tax refund or tax credit, being in the nature of a tax
exemption to be treated as in derogation of sovereign authority, must be
construed in strictissimi juris against the taxpayer; that the respondents two-year
prescriptive period under Section 229 of the NIRC of 1997 commenced to run on
April 13, 1998, the date it filed its ITR for taxable year 1997; that by reckoning the
period from April 13, 1998, the respondent had only until April 12, 2000 within
which to commence its judicial action for refund with the CTA, the year 2000
being a leap year; that its filing of the judicial action on April 14, 2000 was already
tardy; and that the factual findings of the CTA, being supported by substantial
evidence, should be accorded the highest respect.

In its comment, the respondent counters that it filed its judicial action for refund
within the statutory two-year period because the correct reckoning started from
April 15, 1998, the last day for the filing of the ITR for taxable year 1997; that the
two-year prescriptive period was also not jurisdictional and might be relaxed on
equitable reasons; and that a disallowance of its claim for refund would result in
the unjust enrichment of the Government at its expense.
Ruling of the Court

We reverse and set aside the decision of the CA to the extent that it orders
the petitioner to refund to the respondent the P1,200,000.00 representing the
unutilized creditable withholding tax in taxable year 1997, but permit the
respondent to apply that amount as tax credit in succeeding taxable years until
fully exhausted.

Section 76 of the NIRC of 1997 provides:

Section 76. Final Adjustment Return. - Every corporation liable to

tax under Section 27 shall file a final adjustment return covering the total
taxable income for the preceding calendar or fiscal year. If the sum of
the quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable income of that year the
corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry over the excess credit; or

 (C) Be credited or refunded with the excess amount paid, as
the case may be.

In case the corporation is entitled to a refund of the excess

estimated quarterly income taxes paid, the refundable amount shown on
its final adjustment return may be credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding
taxable years. Once the option to carry-over and apply the excess
quarterly income tax against income tax due for the taxable quarters
of the succeeding taxable years has been made, such option shall be
considered irrevocable for that taxable period and no application for
tax refund or issuance of a tax credit certificate shall be allowed
therefor.
The predecessor provision of Section 76 of the NIRC of 1997 is Section 79 of the
NIRC of 1985, which provides:

Section 79. Final Adjustment Return. Every corporation liable to

tax under Section 24 shall file a final adjustment return covering the total
net income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable net income of that year the
corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess

estimated quarterly income taxes-paid, the refundable amount shown on
its final adjustment return may be credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding
taxable year.

As can be seen, Congress added a sentence to Section 76 of the NIRC of

1997 in order to lay down the irrevocability rule, to wit:

xxx Once the option to carry-over and apply the excess quarterly
income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered
 irrevocable for that taxable period and no application for tax refund or
issuance of a tax credit certificate shall be allowed therefor.

In Philam Asset Management, Inc. v. Commissioner of Internal Revenue,[12] the

Court expounds on the two alternative options of a corporate taxpayer whose total
quarterly income tax payments exceed its tax liability, and on how the choice of
one option precludes the other, viz:

The first option is relatively simple. Any tax on income that is paid
in excess of the amount due the government may be refunded, provided
that a taxpayer properly applies for the refund.

The second option works by applying the refundable amount, as

shown on the FAR of a given taxable year, against the estimated
quarterly income tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature.

The choice of one precludes the other. Indeed, in Philippine Bank of
Communications v. Commissioner of Internal Revenue, the Court
ruled that a corporation must signify its intention whether to request
a tax refund or claim a tax credit by marking the corresponding
option box provided in the FAR. While a taxpayer is required to
mark its choice in the form provided by the BIR, this requirement is
only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time
for the same excess income taxes paid. xxx

In Commissioner of Internal Revenue v. Bank of the Philippine Islands,[13] the

Court, citing the aforequoted pronouncement in Philam Asset Management,
Inc., points out that Section 76 of the NIRC of 1997 is clear and unequivocal in
providing that the carry-over option, once actually or constructively chosen by a
corporate taxpayer, becomes irrevocable. The Court explains:

Hence, the controlling factor for the operation of the irrevocability

rule is that the taxpayer chose an option; and once it had already done so,
it could no longer make another one. Consequently, after the taxpayer
opts to carry-over its excess tax credit to the following taxable period,
the question of whether or not it actually gets to apply said tax credit is
irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once
the option to carry over has been made, no application for tax refund or
issuance of a tax credit certificate shall be allowed therefor.
The last sentence of Section 76 of the NIRC of 1997 reads: Once
the option to carry-over and apply the excess quarterly income tax
against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that
taxable period and no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor. The phrase for that taxable
period merely identifies the excess income tax, subject of the option, by
referring to the taxable period when it was acquired by the taxpayer. In
the present case, the excess income tax credit, which BPI opted to carry
over, was acquired by the said bank during the taxable year 1998. The
option of BPI to carry over its 1998 excess income tax credit is
irrevocable; it cannot later on opt to apply for a refund of the very same
1998 excess income tax credit.

The Court of Appeals mistakenly understood the phrase for that taxable
period as a prescriptive period for the irrevocability rule. This would
mean that since the tax credit in this case was acquired in 1998, and BPI
opted to carry it over to 1999, then the irrevocability of the option to
carry over expired by the end of 1999, leaving BPI free to again take
another option as regards its 1998 excess income tax credit. This
construal effectively renders nugatory the irrevocability rule. The
evident intent of the legislature, in adding the last sentence to Section 76
of the NIRC of 1997, is to keep the taxpayer from flip-flopping on its
options, and avoid confusion and complication as regards said taxpayer's
excess tax credit. The interpretation of the Court of Appeals only delays
the flip-flopping to the end of each succeeding taxable period.

The Court similarly disagrees in the declaration of the Court of

Appeals that to deny the claim for refund of BPI, because of the
irrevocability rule, would be tantamount to unjust enrichment on the part
of the government. The Court addressed the very same argument
in Philam, where it elucidated that there would be no unjust enrichment
in the event of denial of the claim for refund under such circumstances,
because there would be no forfeiture of any amount in favor of the
government. The amount being claimed as a refund would remain in
the account of the taxpayer until utilized in succeeding taxable
years, as provided in Section 76 of the NIRC of 1997. It is worthy to
 note that unlike the option for refund of excess income tax, which
prescribes after two years from the filing of the FAR, there is no
prescriptive period for the carrying over of the same. Therefore, the
excess income tax credit of BPI, which it acquired in 1998 and opted
to carry over, may be repeatedly carried over to succeeding taxable
years, i.e., to 1999, 2000, 2001, and so on and so forth, until actually
applied or credited to a tax liability of BPI.

Inasmuch as the respondent already opted to carry over its unutilized

creditable withholding tax of P1,200,000.00 to taxable year 1998, the carry-over
could no longer be converted into a claim for tax refund because of the
irrevocability rule provided in Section 76 of the NIRC of 1997. Thereby, the
respondent became barred from claiming the refund.
However, in view of it irrevocable choice, the respondent remained entitled
to utilize that amount of P1,200,000.00 as tax credit in succeeding taxable years
until fully exhausted. In this regard, prescription did not bar it from applying the
amount as tax credit considering that there was no prescriptive period for the
carrying over of the amount as tax credit in subsequent taxable years.[14]

The foregoing result has rendered unnecessary any discussion of the

assigned errors committed by the CA.

WHEREFORE, we reverse and set aside the decision dated November 28,
2002 promulgated in C.A.-G.R. Sp. No. 68461 by the Court of Appeals, and
declare that PL Management International Phils., Inc. is not entitled to the refund
of the unutilized creditable withholding tax of P1,200,000.00 on account of the
irrevocability rule provided in Section 76 of the National Internal Revenue Code of
1997.

We rule that PL Management International Phils., Inc. may still use the
creditable withholding tax of P1,200,000.00 as tax credit in succeeding taxable
years until fully exhausted.

No pronouncement on costs of suit.

SO ORDERED.
 SECOND DIVISION

MICROSOFT PHILIPPINES, INC., G.R. No. 180173

Petitioner,

Present:

CARPIO, J., Chairperson,

- versus - PERALTA,

ABAD,

MENDOZA, and

SERENO, JJ. *

COMMISSIONER OF INTERNAL Promulgated:

REVENUE,

Respondent.
April 6, 2011

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

DECISION

CARPIO, J.:
The Case

Before the Court is a petition for review on certiorari assailing the Decision dated 24
1 2

October 2007 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 258,
which affirmed the Decision dated 31 August 2006 and Resolution dated 8 January
3 4

2007 of the CTA Second Division in CTA Case No. 6681.

The Facts

Petitioner Microsoft Philippines, Inc. (Microsoft) is a value-added tax (VAT) taxpayer

duly registered with the Bureau of Internal Revenue (BIR). Microsoft renders
marketing services to Microsoft Operations Pte Ltd. (MOP) and Microsoft Licensing,
Inc. (MLI), both affiliated non-resident foreign corporations. The services are paid for
in acceptable foreign currency and qualify as zero-rated sales for VAT purposes under
Section 108(B)(2) of the National Internal Revenue Code (NIRC) of 1997, as 5

amended. Section 108(B)(2) states:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of

Properties.

(B) Transactions Subject to Zero Percent (0%) Rate. The following

services performed in the Philippines by VAT-registered persons shall
be subject to zero percent (0%) rate:

(1) Processing, manufacturing or repacking goods for other

persons doing business outside the Philippines which goods are
subsequently exported x x x;
 (2) Services other than those mentioned in the preceding
paragraph, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP); x x x

For the year 2001, Microsoft yielded total sales in the amount of P261,901,858.99. Of
this amount, P235,724,614.68 pertain to sales derived from services rendered to MOP
and MLI while P26,177,244.31 refer to sales to various local customers. Microsoft
paid VAT input taxes in the amount of P11,449,814.99 on its domestic purchases of
taxable goods and services.

On 27 December 2002, Microsoft filed an administrative claim for tax credit of VAT
input taxes in the amount of P11,449,814.99 with the BIR. The administrative claim
for tax credit was filed within two years from the close of the taxable quarters when
the zero-rated sales were made.

On 23 April 2003, due to the BIR's inaction, Microsoft filed a petition for review with
the CTA. Microsoft claimed to be entitled to a refund of unutilized input VAT
6

attributable to its zero-rated sales and prayed that judgment be rendered directing the
claim for tax credit or refund of VAT input taxes for taxable year 2001.

On 16 June 2003, respondent Commissioner of Internal Revenue (CIR) filed his

answer and prayed for the dismissal of the petition for review.

In a Decision dated 31 August 2006, the CTA Second Division denied the claim for
tax credit of VAT input taxes. The CTA explained that Microsoft failed to comply
with the invoicing requirements of Sections 113 and 237 of the NIRC as well as
Section 4.108-1 of Revenue Regulations No. 7-95 (RR 7-95). The CTA stated that
7

Microsoft's official receipts do not bear the imprinted word zero-rated on its face,
thus, the official receipts cannot be considered as valid evidence to prove zero-rated
sales for VAT purposes.

Microsoft filed a motion for reconsideration which was denied by the CTA Second
Division in a Resolution dated 8 January 2007.

Microsoft then filed a petition for review with the CTA En Banc. In a Decision dated
8

24 October 2007, the CTA En Banc denied the petition for review and
affirmed in toto the Decision dated 31 August 2006 and Resolution dated 8 January
2007 of the CTA Second Division. The CTA En Banc found no new matters that have
not been considered and passed upon by the CTA Second Division and stated that the
petition had only been a mere rehash of the arguments earlier raised.

Hence, this petition.

The Issue

The main issue is whether Microsoft is entitled to a claim for a tax credit or refund of
VAT input taxes on domestic purchases of goods or services attributable to zero-rated
sales for the year 2001 even if the word zero-rated is not imprinted on Microsoft's
official receipts.

The Courts Ruling

The petition lacks merit.

Microsoft insists that Sections 113 and 237 of the NIRC and Section 4.108-1 of RR 7-
95 do not provide that failure to indicate the word zero-rated in the invoices or
receipts would result in the outright invalidation of these invoices or receipts and the
disallowance of a claim for tax credit or refund.

At the outset, a tax credit or refund, like tax exemption, is strictly construed against
the taxpayer. The taxpayer claiming the tax credit or refund has the burden of proving
9

that he is entitled to the refund or credit, in this case VAT input tax, by submitting
evidence that he has complied with the requirements laid down in the tax code and the
BIR's revenue regulations under which such privilege of credit or refund is accorded.

Sections 113(A) and 237 of the NIRC which provide for the invoicing requirements
for VAT-registered persons state:

SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.

(A) Invoicing Requirements. A VAT-registered person shall, for every

sale, issue an invoice or receipt. In addition to the information
required under Section 237, the following information shall be
indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by

his taxpayer's identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to
the seller with the indication that such amount includes the value-added
tax. x x x

SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. All

persons subject to an internal revenue tax shall, for each sale or transfer
of merchandise or for services rendered valued at Twenty-five pesos
(P25.00) or more, issue duly registered receipts or sales or commercial
invoices, prepared at least in duplicate, showing the date of transaction,
quantity, unit cost and description of merchandise or nature of
 service: Provided, however, That in the case of sales, receipts or
transfers in the amount of One hundred pesos (P100.00) or more, or
regardless of the amount, where the sale or transfer is made by a person
liable to value-added tax to another person also liable to value-added tax;
or where the receipt is issued to cover payment made as rentals,
commissions, compensations or fees, receipts or invoices shall be issued
which shall show the name, business style, if any, and address of the
purchaser, customer or client: Provided, further, That where the
purchaser is a VAT-registered person, in addition to the information
herein required, the invoice or receipt shall further show the Taxpayer
Identification Number (TIN) of the purchaser.

The original of each receipt or invoice shall be issued to the purchaser,

customer or client at the time the transaction is effected, who, if engaged
in business or in the exercise of profession, shall keep and preserve the
same in his place of business for a period of three (3) years from the
close of the taxable year in which such invoice or receipt was issued,
while the duplicate shall be kept and preserved by the issuer, also in his
place of business, for a like period.

The Commissioner may, in meritorious cases, exempt any person subject

to internal revenue tax from compliance with the provisions of this
Section.

Related to these provisions, Section 4.108-1 of RR 7-95 enumerates the information

which must appear on the face of the official receipts or invoices for every sale of
goods by VAT-registered persons. At the time Microsoft filed its claim for credit of
VAT input tax, RR 7-95 was already in effect. The provision states:

Sec. 4.108-1. Invoicing Requirements. All VAT-registered persons

shall, for every sale or lease of goods or properties or services, issue
duly registered receipts or sales or commercial invoices which must
show:

1. the name, TIN and address of seller;

2. date of transaction;
 3. quantity, unit cost and description of merchandise or nature of
service;
4. the name, TIN, business style, if any, and address of the VAT-
registered purchaser, customer or client;
5. the word zero-rated imprinted on the invoice covering zero-
rated sales; and
6. the invoice value or consideration.

xxx

Only VAT-registered persons are required to print their TIN

followed by the word VAT in their invoices or receipts and this shall
be considered as a VAT invoice. All purchases covered by invoices
other than a VAT invoice shall not give rise to any input
tax.(Emphasis supplied)

The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC

and revenue regulations are clear. A VAT-registered taxpayer is required to comply
with all the VAT invoicing requirements to be able to file a claim for input taxes on
domestic purchases for goods or services attributable to zero-rated sales. A VAT
invoice is an invoice that meets the requirements of Section 4.108-1 of RR 7-95.
Contrary to Microsoft's claim, RR 7-95 expressly states that [A]ll purchases covered
by invoices other than a VAT invoice shall not give rise to any input tax.
Microsoft's invoice, lacking the word zero-rated, is not a VAT invoice, and thus
cannot give rise to any input tax.

The subsequent enactment of Republic Act No. 9337 on 1 November 2005 elevating
10

provisions of RR 7-95 into law merely codified into law administrative regulations
that already had the force and effect of law. Such codification does not mean that prior
to the codification the administrative regulations were not enforceable.
We have ruled in several cases that the printing of the word zero-rated is required to
11

be placed on VAT invoices or receipts covering zero-rated sales in order to be entitled

to claim for tax credit or refund. In Panasonic v. Commissioner of Internal
Revenue, we held that the appearance of the word zero-rated on the face of invoices
12

covering zero-rated sales prevents buyers from falsely claiming input VAT from their
purchases when no VAT is actually paid. Absent such word, the government may be
refunding taxes it did not collect.

Here, both the CTA Second Division and CTA En Banc found that Microsoft's
receipts did not indicate the word zero-rated on its official receipts. The findings of
fact of the CTA are not to be disturbed unless clearly shown to be unsupported by
substantial evidence. We see no reason to disturb the CTA's findings. Indisputably,
13

Microsoft failed to comply with the invoicing requirements of the NIRC and its
implementing revenue regulation to claim a tax credit or refund of VAT input tax for
taxable year 2001.

WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 24

October 2007 of the Court of Tax Appeals En Banc in CTA EB No. 258.

SO ORDERED.
FIRST DIVISION

RIZAL COMMERCIAL G.R. No. 168498

BANKING CORPORATION,
Petitioner, Present:
Panganiban, C.J. (Chairperson),
- versus - Ynares-Santiago,
Austria-Martinez,

Callejo, Sr., and

Chico-Nazario, JJ.

COMMISSIONER OF INTERNAL

REVENUE, Promulgated:

Respondent.

June 16, 2006

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

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the Rules of Court assailing the
Decision[1] of the Court of Tax Appeals (CTA) En Banc dated June 7, 2005 in
C.T.A. EB No. 50 which affirmed the Resolutions of the CTA Second Division
dated May 3, 2004[2]and November 5, 2004[3] in C.T.A. Case No. 6475 denying
petitioners Petition for Relief from Judgment and the Motion for Reconsideration
thereof, respectively.

The undisputed facts are as follows:

On July 5, 2001, petitioner Rizal Commercial Banking Corporation received

a Formal Letter of Demand dated May 25, 2001 from the respondent
Commissioner of Internal Revenue for its tax liabilities particularly for Gross
Onshore Tax in the amount of P53,998,428.29 and Documentary Stamp Tax for its
Special Savings Placements in the amount of P46,717,952.76, for the taxable year
1997.[4]

On July 20, 2001, petitioner filed a protest letter/request for

reconsideration/reinvestigation pursuant to Section 228 of the National Internal
Revenue Code of 1997 (NIRC).[5]

As the protest was not acted upon by the respondent, petitioner filed on April 30,
2002 a petition for review with the CTA for the cancellation of the assessments
which was docketed as C.T.A. Case No. 6475.[6]

On July 15, 2003, respondent filed a motion to resolve first the issue of CTAs
jurisdiction,[7] which was granted by the CTA in a Resolution dated September 10,
2003.[8] The petition for review was dismissed because it was filed beyond the 30-
day period following the lapse of 180 days from petitioners submission of
documents in support of its protest, as provided under Section 228 of the NIRC and
Section 11 of R.A. No. 1125, otherwise known as the Law Creating the Court of
Tax Appeals.

Petitioner did not file a motion for reconsideration or an appeal to the CTA En
Banc from the dismissal of its petition for review.Consequently, the September 10,
2003 Resolution became final and executory on October 1, 2003 and Entry of
Judgment was made on December 1, 2003.[9] Thereafter, respondent sent a
Demand Letter to petitioner for the payment of the deficiency tax assessments.

On February 20, 2004, petitioner filed a Petition for Relief from Judgment[10] on the
ground of excusable negligence of its counsels secretary who allegedly misfiled
and lost the September 10, 2003 Resolution. The CTA Second Division set the
case for hearing on April 2, 2004[11] during which petitioners counsel was
present.[12] Respondent filed an Opposition[13] while petitioner submitted its
Manifestation and Counter-Motion.[14]

On May 3, 2004, the CTA Second Division rendered a Resolution[15] denying

petitioners Petition for Relief from Judgment.
 Petitioners motion for reconsideration was denied in a Resolution dated
November 5, 2004,[16] hence it filed a petition for review with the CTA En Banc,
docketed as C.T.A. EB No. 50, which affirmed the assailed Resolutions of the
CTA Second Division in a Decision dated June 7, 2005.

Hence, this petition for review based on the following grounds:

I.

THE HONORABLE CTA AND CTA EN BANC GRAVELY ERRED

IN DENYING PETITIONERS PETITION FOR RELIEF, WITHOUT
FIRST AFFORDING IT THE OPPORTUNITY TO ADDUCE
EVIDENCE TO ESTABLISH THE FACTUAL ALLEGATIONS
CONSTITUTING ITS ALLEGED EXCUSABLE NEGLIGENCE, IN
CLEAR VIOLATION OF PETITIONERS BASIC RIGHT TO DUE
PROCESS.

II.

CONSIDERING THAT THE SUBJECT ASSESSMENT, INSOFAR AS

IT INVOLVES ALLEGED DEFICIENCY DOCUMENTARY STAMP
TAXES ON SPECIAL SAVINGS ACCOUNTS, IS AN ISSUE
AFFECTING ALL MEMBERS OF THE BANKING INDUSTRY,
PETITIONER, LIKE ALL OTHER BANKS, SHOULD BE
AFFORDED AN EQUAL OPPORTUNITY TO FULLY LITIGATE
THE ISSUE, AND HAVE THE CASE DETERMINED BASED ON
ITS MERITS, RATHER THAN ON A MERE TECHNICALITY.[17]

Relief from judgment under Rule 38 of the Rules of Court is a legal remedy that is
allowed only in exceptional cases whereby a party seeks to set aside a judgment
rendered against him by a court whenever he was unjustly deprived of a hearing or
was prevented from taking an appeal, in either case, because of fraud, accident,
mistake or excusable neglect.[18]

Petitioner argues that it was denied due process when it was not given the
opportunity to be heard to prove that its failure to file a motion for reconsideration
or appeal from the dismissal of its petition for review was due to the failure of its
employee to forward the copy of the September 10, 2003 Resolution which
constitutes excusable negligence.

Petitioners argument lacks merit.

It is basic that as long as a party is given the opportunity to defend his interests in
due course, he would have no reason to complain, for it is this opportunity to be
heard that makes up the essence of due process.[19] In Batongbakal v. Zafra,[20] the
Court held that:

There is no question that the essence of due process is a hearing

before conviction and before an impartial and disinterested tribunal but
due process as a constitutional precept does not, always and in all
situations, require a trial-type proceeding. The essence of due process is
to be found in the reasonable opportunity to be heard and submit any
evidence one may have in support of ones defense. To be heard does
not only mean verbal arguments in court; one may be heard also
through pleadings. Where opportunity to be heard, either through
oral arguments or pleadings, is accorded, there is no denial of
procedural due process. (Emphasis supplied)

As correctly pointed by the Office of the Solicitor General (OSG), the CTA
Second Division set the case for hearing on April 2, 2004 after the filing by the
petitioner of its petition for relief from judgment. Petitioners counsel was present
on the scheduled hearing and in fact orally argued its petition.

Moreover, after the CTA Second Division dismissed the petition for relief
from judgment in a Resolution dated May 3, 2004, petitioner filed a motion for
reconsideration and the court further required both parties to file their respective
memorandum.Indeed, petitioner was not denied its day in court considering the
opportunities given to argue its claim.
Relief cannot be granted on the flimsy excuse that the failure to appeal was
due to the neglect of petitioners counsel.[21]Otherwise, all that a losing party would
do to salvage his case would be to invoke neglect or mistake of his counsel as a
ground for reversing or setting aside the adverse judgment, thereby putting no end
to litigation.[22]
 Negligence to be excusable must be one which ordinary diligence and
prudence could not have guarded against and by reason of which the rights of an
aggrieved party have probably been impaired.[23] Petitioners former counsels
omission could hardly be characterized as excusable, much less unavoidable.

The Court has repeatedly admonished lawyers to adopt a system whereby

they can always receive promptly judicial notices and pleadings intended for
them.[24] Apparently, petitioners counsel was not only remiss in complying with
this admonition but he also failed to check periodically, as an act of prudence and
diligence, the status of the pending case before the CTA Second Division. The fact
that counsel allegedly had not renewed the employment of his secretary, thereby
making the latter no longer attentive or focused on her work, did not relieve him of
his responsibilities to his client. It is a problem personal to him which should not in
any manner interfere with his professional commitments.

In exceptional cases, when the mistake of counsel is so palpable that it

amounts to gross negligence, this Court affords a party a second opportunity to
vindicate his right. But this opportunity is unavailing in the case at bar, especially
since petitioner had squandered the various opportunities available to it at the
different stages of this case. Public interest demands an end to every litigation and
a belated effort to reopen a case that has already attained finality will serve no
purpose other than to delay the administration of justice.[25]

Since petitioners ground for relief is not well-taken, it follows that the
assailed judgment stands. Assuming ex gratia argumenti that the negligence of
petitioners counsel is excusable, still the petition must fail. As aptly observed by
the OSG, even if the petition for relief from judgment would be granted, petitioner
will not fare any better if the case were to be returned to the CTA Second Division
since its action for the cancellation of its assessments had already prescribed.[26]
Petitioner protested the assessments pursuant to Section 228 of the NIRC, which
provides:

SEC. 228. Protesting of Assessment.- x x x.

xxxx
 Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice.If the
taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a

request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60) days
from filing of the protest, all relevant supporting documents shall have
been submitted; otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted

upon within one hundred eighty (180) days from submission of
documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within (30) days
from receipt of the said decision, or from the lapse of the one
hundred eighty (180)-day period; otherwise the decision shall
become final, executory and demandable. (Emphasis supplied)

The CTA Second Division held:

Following the periods provided for in the aforementioned laws,

from July 20, 2001, that is, the date of petitioners filing of protest, it had
until September 18, 2001 to submit relevant documents and
from September 18, 2001, the Commissioner had until March 17,
2002 to issue his decision. As admitted by petitioner, the protest
remained unacted by the Commissioner of Internal Revenue. Therefore,
it had until April 16, 2002 within which to elevate the case to this
court. Thus, when petitioner filed its Petition for Review on April 30,
2002, the same is outside the thirty (30) period.[27]
As provided in Section 228, the failure of a taxpayer to appeal from an assessment
on time rendered the assessment final, executory and demandable. Consequently,
petitioner is precluded from disputing the correctness of the assessment.

In Ker & Company, Ltd. v. Court of Tax Appeals,[28] the Court held that while the
right to appeal a decision of the Commissioner to the Court of Tax Appeals is
merely a statutory remedy, nevertheless the requirement that it must be brought
within 30 days is jurisdictional. If a statutory remedy provides as a condition
precedent that the action to enforce it must be commenced within a prescribed
time, such requirement is jurisdictional and failure to comply therewith may be
raised in a motion to dismiss.

In fine, the failure to comply with the 30-day statutory period would bar the appeal
and deprive the Court of Tax Appeals of its jurisdiction to entertain and determine
the correctness of the assessment.[29]

WHEREFORE, in view of the foregoing, the Decision of the Court of Tax

Appeals En Banc dated June 7, 2005 in C.T.A. EB No. 50 affirming the
Resolutions of the Court of Tax Appeals Second Division dated May 3, 2004 and
November 5, 2004 in C.T.A. Case No. 6475 denying petitioners Petition for Relief
from Judgment and Motion for Reconsideration, respectively, is AFFIRMED.

SO ORDERED.

EN BANC

COMMISSIONER OF G. R. No. 163653

INTERNAL REVENUE,
Petitioner,

-versus-

FILINVEST DEVELOPMENT
CORPORATION,
Respondent.

x-------------------------------------x G. R. No. 167689

COMMISSIONER OF Present:
INTERNAL REVENUE,
Petitioner, CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
-versus- PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
FILINVEST DEVELOPMENT VILLARAMA, JR.,
CORPORATION, PEREZ,
Respondent. MENDOZA, and
SERENO,* JJ.

Promulgated:

July 19, 2011

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

DECISION

PEREZ, J.:

Assailed in these twin petitions for review on certiorari filed pursuant to

Rule 45 of the 1997 Rules of Civil Procedure are the decisions rendered by the
Court of Appeals (CA) in the following cases: (a) Decision dated 16 December
2003 of the then Special Fifth Division in CA-G.R. SP No. 72992;[1] and, (b)
Decision dated 26 January 2005 of the then Fourteenth Division in CA-G.R. SP
No. 74510.[2]

The Facts
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc.
(FAI), respondent Filinvest Development Corporation (FDC) is a holding company
which also owned 67.42% of the outstanding shares of Filinvest Land, Inc.
(FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange with
FLI whereby the former both transferred in favor of the latter parcels of land
appraised at P4,306,777,000.00. In exchange for said parcels which were intended
to facilitate development of medium-rise residential and commercial buildings,
463,094,301 shares of stock of FLI were issued to FDC and FAI.[3] As a result of
the exchange, FLIs ownership structure was changed to the extent reflected in the
following tabular prcis, viz.:

Stockholder Number and Percentage Number of Number and Percentage

of Shares Held Prior to Additional of Shares Held After the
the Exchange Shares Exchange
Issued
FDC 2,537,358,000 67.42% 42,217,000 2,579,575,000 61.03%

FAI 00 420,877,000 420,877,000 9.96%

OTHERS 1,226,177,000 32.58% 0 1,226,177,000 29.01%

----------------- ----------- -------------- ---------------

3,763,535,000 100% 463,094,301 4,226,629,000 (100%)

On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue
(BIR) to the effect that no gain or loss should be recognized in the aforesaid
transfer of real properties. Acting on the request, the BIR issued Ruling No. S-34-
046-97 dated 3 February 1997, finding that the exchange is among those
contemplated under Section 34 (c) (2) of the old National Internal Revenue Code
(NIRC)[4] which provides that (n)o gain or loss shall be recognized if property is
transferred to a corporation by a person in exchange for a stock in such corporation
of which as a result of such exchange said person, alone or together with others,
not exceeding four (4) persons, gains control of said corporation."[5] With the BIRs
reiteration of the foregoing ruling upon the 10 February 1997 request for
clarification filed by FLI,[6] the latter, together with FDC and FAI, complied with
all the requirements imposed in the ruling.[7]
On various dates during the years 1996 and 1997, in the meantime, FDC also
extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central
Corporation (DSCC) and Filinvest Capital, Inc. (FCI).[8] Duly evidenced by
instructional letters as well as cash and journal vouchers, said cash advances
amounted to P2,557,213,942.60 in 1996[9] and P3,360,889,677.48 in 1997.[10] On
15 November 1996, FDC also entered into a Shareholders Agreement with Reco
Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture
company called Filinvest Asia Corporation (FAC), tasked to develop and manage
FDCs 50% ownership of its PBCom Office Tower Project (the Project). With their
equity participation in FAC respectively pegged at 60% and 40% in the
Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in said
joint venture company to RHPLs subscription worth P433.8 million. Having paid
its subscription by executing a Deed of Assignment transferring to FAC a portion
of its rights and interest in the Project worth P500.7 million, FDC eventually
reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the
taxable year 1996.[11]

On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to
pay deficiency income and documentary stamp taxes, plus interests and
compromise penalties,[12] covered by the following Assessment Notices, viz.: (a)
Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in the
sum of P150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-00020-
2000 for deficiency documentary stamp taxes in the sum of P10,425,487.06 for
1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for deficiency income
taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment Notice No. SP-
DST-97-00021-2000 for deficiency documentary stamp taxes in the sum
of P5,796,699.40 for 1997.[13] The foregoing deficiency taxes were assessed on the
taxable gain supposedly realized by FDC from the Deed of Exchange it executed
with FAI and FLI, on the dilution resulting from the Shareholders Agreement FDC
executed with RHPL as well as the arms-length interest rate and documentary
stamp taxes imposable on the advances FDC extended to its affiliates.[14]

On 3 January 2000, FAI similarly received from the BIR a Formal Letter of
Demand for deficiency income taxes in the sum of P1,477,494,638.23 for the year
1997.[15] Covered by Assessment Notice No. SP-INC-97-0027-2000,[16] said
deficiency tax was also assessed on the taxable gain purportedly realized by FAI
from the Deed of Exchange it executed with FDC and FLI.[17] On 26 January 2000
or within the reglementary period of thirty (30) days from notice of the assessment,
both FDC and FAI filed their respective requests for reconsideration/protest, on the
ground that the deficiency income and documentary stamp taxes assessed by the
BIR were bereft of factual and legal basis.[18] Having submitted the relevant
supporting documents pursuant to the 31 January 2000 directive from the BIR
Appellate Division, FDC and FAI filed on 11 September 2000 a letter requesting
an early resolution of their request for reconsideration/protest on the ground that
the 180 days prescribed for the resolution thereof under Section 228 of the NIRC
was going to expire on 20 September 2000.[19]

In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to

resolve their request for reconsideration/protest within the aforesaid period, FDC
and FAI filed on 17 October 2000 a petition for review with the Court of Tax
Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before said
court as CTA Case No. 6182, the petition alleged, among other matters, that as
previously opined in BIR Ruling No. S-34-046-97, no taxable gain should have
been assessed from the subject Deed of Exchange since FDC and FAI collectively
gained further control of FLI as a consequence of the exchange; that correlative to
the CIR's lack of authority to impute theoretical interests on the cash advances
FDC extended in favor of its affiliates, the rule is settled that interests cannot be
demanded in the absence of a stipulation to the effect; that not being promissory
notes or certificates of obligations, the instructional letters as well as the cash and
journal vouchers evidencing said cash advances were not subject to documentary
stamp taxes; and, that no income tax may be imposed on the prospective gain from
the supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC
and FAC both prayed that the subject assessments for deficiency income and
documentary stamp taxes for the years 1996 and 1997 be cancelled and
annulled.[20]

On 4 December 2000, the CIR filed its answer, claiming that the transfer of
property in question should not be considered tax free since, with the resultant
diminution of its shares in FLI, FDC did not gain further control of said
corporation. Likewise calling attention to the fact that the cash advances FDC
extended to its affiliates were interest free despite the interest bearing loans it
obtained from banking institutions, the CIR invoked Section 43 of the old NIRC
which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c),
gave him "the power to allocate, distribute or apportion income or deductions
between or among such organizations, trades or business in order to prevent
evasion of taxes." The CIR justified the imposition of documentary stamp taxes on
the instructional letters as well as cash and journal vouchers for said cash advances
on the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94
which provide that loan transactions are subject to said tax irrespective of whether
or not they are evidenced by a formal agreement or by mere office memo. The CIR
also argued that FDC realized taxable gain arising from the dilution of its shares in
FAC as a result of its Shareholders' Agreement with RHPL.[21]

At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and
Issues[22] which was admitted in the 16 February 2001 resolution issued by the
CTA. With the further admission of the Formal Offer of Documentary Evidence
subsequently filed by FDC and FAI[23] and the conclusion of the testimony of
Susana Macabelda anent the cash advances FDC extended in favor of its
affiliates,[24] the CTA went on to render the Decision dated 10 September 2002
which, with the exception of the deficiency income tax on the interest income FDC
supposedly realized from the advances it extended in favor of its affiliates,
cancelled the rest of deficiency income and documentary stamp taxes assessed
against FDC and FAI for the years 1996 and 1997,[25] thus:

WHEREFORE, in view of all the foregoing, the court finds the

instant petition partly meritorious. Accordingly, Assessment Notice No.
SP-INC-96-00018-2000 imposing deficiency income tax on FDC for
taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and
SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on
FDC for taxable years 1996 and 1997, respectively and Assessment
Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on
FAI for the taxable year 1997 are hereby CANCELLED and SET
ASIDE. However, [FDC] is hereby ORDERED to PAY the amount
of P5,691,972.03 as deficiency income tax for taxable year 1997. In
addition, petitioner is also ORDERED to PAY 20% delinquency
interest computed from February 16, 2000 until full payment thereof
pursuant to Section 249 (c) (3) of the Tax Code.[26]
 Finding that the collective increase of the equity participation of FDC and
FAI in FLI rendered the gain derived from the exchange tax-free, the CTA also
ruled that the increase in the value of FDC's shares in FAC did not result in
economic advantage in the absence of actual sale or conversion thereof. While
likewise finding that the documents evidencing the cash advances FDC extended to
its affiliates cannot be considered as loan agreements that are subject to
documentary stamp tax, the CTA enunciated, however, that the CIR was justified
in assessing undeclared interests on the same cash advances pursuant to his
authority under Section 43 of the NIRC in order to forestall tax evasion. For
persuasive effect, the CTA referred to the equivalent provision in the Internal
Revenue Code of the United States (IRC-US), i.e., Sec. 482, as implemented by
Section 1.482-2 of 1965-1969 Regulations of the Law of Federal Income
Taxation.[27]

Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the
petition for review docketed before the CA as CA-G.R. No. 72992, pursuant to
Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that the
cash advances it extended to its affiliates were interest-free in the absence of the
express stipulation on interest required under Article 1956 of the Civil Code, FDC
questioned the imposition of an arm's-length interest rate thereon on the ground,
among others, that the CIR's authority under Section 43 of the NIRC: (a) does not
include the power to impute imaginary interest on said transactions; (b) is directed
only against controlled taxpayers and not against mother or holding corporations;
and, (c) can only be invoked in cases of understatement of taxable net income or
evident tax evasion.[28] Upholding FDC's position, the CA's then Special Fifth
Division rendered the herein assailed decision dated 16 December 2003,[29] the
decretal portion of which states:

WHEREFORE, premises considered, the instant petition is

hereby GRANTED. The assailed Decision dated September 10, 2002
rendered by the Court of Tax Appeals in CTA Case No. 6182 directing
petitioner Filinvest Development Corporation to pay the amount
of P5,691,972.03 representing deficiency income tax on allegedly
undeclared interest income for the taxable year 1997, plus 20%
delinquency interest computed from February 16, 2000 until full
payment thereof is REVERSED and SET ASIDE and, a new one
entered annulling Assessment Notice No. SP-INC-97-00019-2000
 imposing deficiency income tax on petitioner for taxable year 1997.No
pronouncement as to costs.[30]

With the denial of its partial motion for reconsideration of the same 11
December 2002 resolution issued by the CTA,[31]the CIR also filed the petition for
review docketed before the CA as CA-G.R. No. 74510. In essence, the CIR argued
that the CTA reversibly erred in cancelling the assessment notices: (a) for
deficiency income taxes on the exchange of property between FDC, FAI and FLI;
(b) for deficiency documentary stamp taxes on the documents evidencing FDC's
cash advances to its affiliates; and (c) for deficiency income tax on the gain FDC
purportedly realized from the increase of the value of its shareholdings in
FAC.[32]The foregoing petition was, however, denied due course and dismissed for
lack of merit in the herein assailed decision dated 26 January 2005 [33] rendered by
the CA's then Fourteenth Division, upon the following findings and conclusions, to
wit:

1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the

29 November 1996 Deed of Exchange resulted in the combined
control by FDC and FAI of more than 51% of the outstanding
shares of FLI, hence, no taxable gain can be recognized from the
transaction under Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal vouchers
evidencing the advances FDC extended to its affiliates are not
subject to documentary stamp taxes pursuant to BIR Ruling No.
116-98, dated 30 July 1998, since they do not partake the nature
of loan agreements;

3. Although BIR Ruling No. 116-98 had been subsequently modified by

BIR Ruling No. 108-99, dated 15 July 1999, to the effect that
documentary stamp taxes are imposable on inter-office memos
evidencing cash advances similar to those extended by FDC, said
latter ruling cannot be given retroactive application if to do so
would be prejudicial to the taxpayer;

4. FDC's alleged gain from the increase of its shareholdings in FAC as a

consequence of the Shareholders' Agreement it executed with
RHPL cannot be considered taxable income since, until actually
converted thru sale or disposition of said shares, they merely
represent unrealized increase in capital.[34]
 Respectively docketed before this Court as G.R. Nos. 163653 and 167689,
the CIR's petitions for review on certiorariassailing the 16 December 2003
decision in CA-G.R. No. 72992 and the 26 January 2005 decision in CA-G.R. SP
No. 74510 were consolidated pursuant to the 1 March 2006 resolution issued by
this Courts Third Division.

The Issues

In G.R. No. 163653, the CIR urges the grant of its petition on the following
ground:

THE COURT OF APPEALS ERRED IN REVERSING THE

DECISION OF THE COURT OF TAX APPEALS AND IN
HOLDING THAT THE ADVANCES EXTENDED BY
RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO
INCOME TAX.[35]

In G.R. No. 167689, on the other hand, petitioner proffers the following issues for
resolution:

THE HONORABLE COURT OF APPEALS COMMITTED

GRAVE ABUSE OF DISCRETION IN HOLDING THAT THE
EXCHANGE OF SHARES OF STOCK FOR PROPERTY
AMONG FILINVEST DEVELOPMENT CORPORATION (FDC),
FILINVEST ALABANG, INCORPORATED (FAI) AND
FILINVEST LAND INCORPORATED (FLI) MET ALL THE
REQUIREMENTS FOR THE NON-RECOGNITION OF
TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD
NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW
SECTION 40 (C) (2) (c) OF THE NIRC.

II

THE HONORABLE COURT OF APPEALS COMMITTED

REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF
 INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO
ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS
SUBJECT TO DOCUMENTARY STAMP TAXES UNDER
SECTION 180 OF THE NIRC.

III

THE HONORABLE COURT OF APPEALS GRAVELY ERRED

IN HOLDING THAT GAIN ON DILUTION AS A RESULT OF
THE INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS
IN FAC IS NOT TAXABLE.[36]

The Courts Ruling

While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition
in G.R. No. 167689 impressed with partial merit.

In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs
finding that theoretical interests can be imputed on the advances FDC extended to
its affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted to
interest-bearing fund borrowings from commercial banks. Since considerable
interest expenses were deducted by FDC when said funds were borrowed, the CIR
theorizes that interest income should likewise be declared when the same funds
were sourced for the advances FDC extended to its affiliates. Invoking Section 43
of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the
CIR maintains that it is vested with the power to allocate, distribute or apportion
income or deductions between or among controlled organizations, trades or
businesses even in the absence of fraud, since said power is intended to prevent
evasion of taxes or clearly to reflect the income of any such organizations, trades
or businesses. In addition, the CIR asseverates that the CA should have accorded
weight and respect to the findings of the CTA which, as the specialized court
dedicated to the study and consideration of tax matters, can take judicial notice of
US income tax laws and regulations.[37]

Admittedly, Section 43 of the 1993 NIRC[38] provides that, (i)n any case of
two or more organizations, trades or businesses (whether or not incorporated and
whether or not organized in the Philippines) owned or controlled directly or
indirectly by the same interests, the Commissioner of Internal Revenue is
authorized to distribute, apportion or allocate gross income or deductions between
or among such organization, trade or business, if he determines that such
distribution, apportionment or allocation is necessary in order to prevent evasion of
taxes or clearly to reflect the income of any such organization, trade or business. In
amplification of the equivalent provision[39] under Commonwealth Act No.
466,[40] Sec. 179(b) of Revenue Regulation No. 2 states as follows:

Determination of the taxable net income of controlled

taxpayer. (A) DEFINITIONS. When used in this section
(1) The term organization includes any kind, whether it be a
sole proprietorship, a partnership, a trust, an estate, or a corporation or
association, irrespective of the place where organized, where operated,
or where its trade or business is conducted, and regardless of whether
domestic or foreign, whether exempt or taxable, or whether affiliated or
not.
(2) The terms trade or business include any trade or business
activity of any kind, regardless of whether or where organized, whether
owned individually or otherwise, and regardless of the place where
carried on.
(3) The term controlled includes any kind of control, direct or
indirect, whether legally enforceable, and however exercisable or
exercised. It is the reality of the control which is decisive, not its form or
mode of exercise. A presumption of control arises if income or
deductions have been arbitrarily shifted.
(4) The term controlled taxpayer means any one of two or
more organizations, trades, or businesses owned or controlled directly or
indirectly by the same interests.
(5) The term group and group of controlled taxpayers means
the organizations, trades or businesses owned or controlled by the same
interests.
(6) The term true net income means, in the case of a
controlled taxpayer, the net income (or as the case may be, any item or
element affecting net income) which would have resulted to the
controlled taxpayer, had it in the conduct of its affairs (or, as the case
may be, any item or element affecting net income) which would have
resulted to the controlled taxpayer, had it in the conduct of its affairs (or,
as the case may be, in the particular contract, transaction, arrangement or
other act) dealt with the other members or members of the group at arms
length. It does not mean the income, the deductions, or the item or
 element of either, resulting to the controlled taxpayer by reason of the
particular contract, transaction, or arrangement, the controlled taxpayer,
or the interest controlling it, chose to make (even though such contract,
transaction, or arrangement be legally binding upon the parties thereto).

(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the

Tax Code is to place a controlled taxpayer on a tax parity with an
uncontrolled taxpayer, by determining, according to the standard of an
uncontrolled taxpayer, the true net income from the property and
business of a controlled taxpayer. The interests controlling a group of
controlled taxpayer are assumed to have complete power to cause each
controlled taxpayer so to conduct its affairs that its transactions and
accounting records truly reflect the net income from the property and
business of each of the controlled taxpayers. If, however, this has not
been done and the taxable net income are thereby understated, the statute
contemplates that the Commissioner of Internal Revenue shall intervene,
and, by making such distributions, apportionments, or allocations as he
may deem necessary of gross income or deductions, or of any item or
element affecting net income, between or among the controlled
taxpayers constituting the group, shall determine the true net income of
each controlled taxpayer. The standard to be applied in every case is that
of an uncontrolled taxpayer. Section 44 grants no right to a controlled
taxpayer to apply its provisions at will, nor does it grant any right to
compel the Commissioner of Internal Revenue to apply its provisions.

(C) APPLICATION Transactions between controlled taxpayer and

another will be subjected to special scrutiny to ascertain whether the
common control is being used to reduce, avoid or escape taxes. In
determining the true net income of a controlled taxpayer, the
Commissioner of Internal Revenue is not restricted to the case of
improper accounting, to the case of a fraudulent, colorable, or sham
transaction, or to the case of a device designed to reduce or avoid tax by
shifting or distorting income or deductions. The authority to determine
true net income extends to any case in which either by inadvertence or
design the taxable net income in whole or in part, of a controlled
taxpayer, is other than it would have been had the taxpayer in the
conduct of his affairs been an uncontrolled taxpayer dealing at arms
length with another uncontrolled taxpayer.[41]

As may be gleaned from the definitions of the terms controlled and

"controlled taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it
would appear that FDC and its affiliates come within the purview of Section 43 of
the 1993 NIRC.Aside from owning significant portions of the shares of stock of
FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money
as cash advances to its said affiliates for the purpose of providing them financial
assistance for their operational and capital expenditures seemingly indicate that the
situation sought to be addressed by the subject provision exists. From the tenor of
paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that
the CIR's power to distribute, apportion or allocate gross income or deductions
between or among controlled taxpayers may be likewise exercised whether or not
fraud inheres in the transaction/s under scrutiny. For as long as the controlled
taxpayer's taxable income is not reflective of that which it would have realized had
it been dealing at arm's length with an uncontrolled taxpayer, the CIR can make the
necessary rectifications in order to prevent evasion of taxes.

Despite the broad parameters provided, however, we find that the CIR's
powers of distribution, apportionment or allocation of gross income and deductions
under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2
does not include the power to impute "theoretical interests" to the controlled
taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC,[42] after all, the
term gross income is understood to mean all income from whatever source derived,
including, but not limited to the following items: compensation for services,
including fees, commissions, and similar items; gross income derived from
business; gains derived from dealings in property; interest; rents;
royalties; dividends; annuities; prizes and winnings; pensions; and partners
distributive share of the gross income of general professional partnership.[43] While
it has been held that the phrase "from whatever source derived" indicates a
legislative policy to include all income not expressly exempted within the class of
taxable income under our laws, the term "income" has been variously interpreted to
mean "cash received or its equivalent", "the amount of money coming to a person
within a specific time" or "something distinct from principal or
capital."[44] Otherwise stated, there must be proof of the actual or, at the very least,
probable receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR.

Our circumspect perusal of the record yielded no evidence of actual or

possible showing that the advances FDC extended to its affiliates had resulted to
the interests subsequently assessed by the CIR. For all its harping upon the
supposed fact that FDC had resorted to borrowings from commercial banks, the
CIR had adduced no concrete proof that said funds were, indeed, the source of the
advances the former provided its affiliates. While admitting that FDC obtained
interest-bearing loans from commercial banks,[45] Susan Macabelda - FDC's Funds
Management Department Manager who was the sole witness presented before the
CTA - clarified that the subject advances were sourced from the corporation's
rights offering in 1995 as well as the sale of its investment in Bonifacio Land in
1997.[46] More significantly, said witness testified that said advances: (a) were
extended to give FLI, FAI, DSCC and FCI financial assistance for their operational
and capital expenditures; and, (b) were all temporarily in nature since they were
repaid within the duration of one week to three months and were evidenced by
mere journal entries, cash vouchers and instructional letters.[47]

Even if we were, therefore, to accord precipitate credulity to the CIR's bare

assertion that FDC had deducted substantial interest expense from its gross
income, there would still be no factual basis for the imputation of theoretical
interests on the subject advances and assess deficiency income taxes thereon. More
so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the
Philippines, no interest shall be due unless it has been expressly stipulated in
writing. Considering that taxes, being burdens, are not to be presumed beyond
what the applicable statute expressly and clearly declares,[48] the rule is likewise
settled that tax statutes must be construed strictly against the government and
liberally in favor of the taxpayer.[49] 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.[50] While it is true that taxes are the lifeblood of the government, it has
been held that their assessment and collection should be in accordance with law as
any arbitrariness will negate the very reason for government itself.[51]

In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on
the imposition of deficiency income taxes on the transfer FDC and FAI effected in
exchange for the shares of stock of FLI. With respect to the Deed of Exchange
executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC
pertinently provides as follows:
 Sec. 34. Determination of amount of and recognition of gain or
loss.-
xxxx

(c) Exception x x x x

No gain or loss shall also be recognized if property is transferred to a

corporation by a person in exchange for shares of stock in such
corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four persons, gains control of said
corporation; Provided, That stocks issued for services shall not be
considered as issued in return of property.

As even admitted in the 14 February 2001 Stipulation of Facts submitted by the

parties,[52] the requisites for the non-recognition of gain or loss under the foregoing
provision are as follows: (a) the transferee is a corporation; (b) the transferee
exchanges its shares of stock for property/ies of the transferor; (c) the transfer is
made by a person, acting alone or together with others, not exceeding four persons;
and, (d) as a result of the exchange the transferor, alone or together with others, not
exceeding four, gains control of the transferee.[53] Acting on the 13 January 1997
request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the
foregoing requisites in the Deed of Exchange the former executed with FDC and
FAI by issuing BIR Ruling No. S-34-046-97.[54] With the BIR's reiteration of said
ruling upon the request for clarification filed by FLI,[55] there is also no dispute that
said transferee and transferors subsequently complied with the requirements
provided for the non-recognition of gain or loss from the exchange of property for
tax, as provided under Section 34 (c) (2) of the 1993 NIRC.[56]

Then as now, the CIR argues that taxable gain should be recognized for the
exchange considering that FDC's controlling interest in FLI was actually decreased
as a result thereof. For said purpose, the CIR calls attention to the fact that, prior to
the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000
outstanding capital stock. Upon the issuance of 443,094,000 additional FLI shares
as a consequence of the exchange and with only 42,217,000 thereof accruing in
favor of FDC for a total of 2,579,575,000 shares, said corporations controlling
interest was supposedly reduced to 61%.03 when reckoned from the transferee's
aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's
initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of
420,877,000 FLI shares as a result of the exchange purportedly resulted in its
control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding
shares. On the principle that the transaction did not qualify as a tax-free exchange
under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain in
the sum of P263,386,921.00 should be recognized on the part of FDC and in the
sum of P3,088,711,367.00 on the part of FAI.[57]

The paucity of merit in the CIR's position is, however, evident from the categorical
language of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss
will not be recognized in case the exchange of property for stocks results in the
control of the transferee by the transferor, alone or with other transferors not
exceeding four persons. Rather than isolating the same as proposed by the CIR,
FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding
shares should, therefore, be appreciated in combination with the 420,877,000 new
shares issued to FAI which represents 9.96% control of said transferee
corporation. Together FDC's 2,579,575,000 shares (61.03%) and FAI's
420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or 70.99% of
FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as
"ownership of stocks in a corporation possessing at least fifty-one percent of the
total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6)
[c] of the 1993 NIRC, the exchange of property for stocks between FDC FAI and
FLI clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the same
provision.

Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then
Supreme Court Justice Jose Vitug and CTAJustice Ernesto D. Acosta who, in their
book Tax Law and Jurisprudence, opined that said provision could be inapplicable
if control is already vested in the exchangor prior to exchange.[58] Aside from the
fact that that the 10 September 2002 Decision in CTA Case No. 6182 upholding
the tax-exempt status of the exchange between FDC, FAI and FLI was penned by
no less than Justice Acosta himself,[59] FDC and FAI significantly point out that
said authors have acknowledged that the position taken by the BIR is to the effect
that "the law would apply even when the exchangor already has control of the
corporation at the time of the exchange."[60] This was confirmed when, apprised in
FLI's request for clarification about the change of percentage of ownership of its
outstanding capital stock, the BIR opined as follows:

Please be informed that regardless of the foregoing, the

transferors, Filinvest Development Corp. and Filinvest Alabang, Inc. still
gained control of Filinvest Land, Inc. The term 'control' shall mean
ownership of stocks in a corporation by possessing at least 51% of the
total voting power of all classes of stocks entitled to vote. Control is
determined by the amount of stocks received, i.e., total subscribed,
whether for property or for services by the transferor or transferors. In
determining the 51% stock ownership, only those persons who
transferred property for stocks in the same transaction may be counted
up to the maximum of five (BIR Ruling No. 547-93 dated December 29,
1993.[61]

At any rate, it also appears that the supposed reduction of FDC's shares in FLI
posited by the CIR is more apparent than real. As the uncontested owner of 80% of
the outstanding shares of FAI, it cannot be gainsaid that FDC ideally controls the
same percentage of the 420,877,000 shares issued to its said co-transferor which,
by itself, represents 7.968% of the outstanding shares of FLI. Considered alongside
FDC's 61.03% control of FLI as a consequence of the 29 November 1996 Deed of
Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee
corporation's outstanding shares of stock which is evidently still greater than the
67.42% FDC initially held prior to the exchange. This much was admitted by the
parties in the 14 February 2001 Stipulation of Facts, Documents and Issues they
submitted to the CTA.[62] Inasmuch as the combined ownership of FDC and FAI of
FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that
neither of said transferors can be held liable for deficiency income taxes the CIR
assessed on the supposed gain which resulted from the subject transfer.

On the other hand, insofar as documentary stamp taxes on loan agreements and
promissory notes are concerned, Section 180 of the NIRC provides follows:

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; bill 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 (P250,000.00) 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 documentary stamp tax provided under this Section.

When read in conjunction with Section 173 of the 1993 NIRC,[63] the foregoing
provision concededly applies to "(a)ll loan agreements, whether made or signed in
the Philippines, or abroad when the obligation or right arises from Philippine
sources or the property or object of the contract is located or used in the
Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations
No. 9-94 provide as follows:

Section 3. Definition of Terms. For purposes of these Regulations, the

following term shall mean:

(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."

"Section 6. Stamp on all Loan Agreements. All loan agreements whether

made or signed in the Philippines, or abroad when the obligation or right
arises from Philippine sources or the property or object of the contract is
located in the Philippines shall be subject to the documentary stamp tax
of thirty centavos (P0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreements, pursuant to Section
180 in relation to Section 173 of the Tax Code.

In cases where no formal agreements or promissory notes have

been executed to cover credit facilities, the documentary stamp tax shall
be based on the amount of drawings or availment of the facilities, which
may be evidenced by credit/debit memo, advice or drawings by any form
of check or withdrawal slip, under Section 180 of the Tax Code.

Applying the aforesaid provisions to the case at bench, we find that the
instructional letters as well as the journal and cash vouchers evidencing the
advances FDC extended to its affiliates in 1996 and 1997 qualified as loan
agreements upon which documentary stamp taxes may be imposed. In keeping
with the caveat attendant to every BIR Ruling to the effect that it is valid only if
the facts claimed by the taxpayer are correct, we find that the CA reversibly erred
in utilizing BIR Ruling No. 116-98,dated 30 July 1998 which, strictly speaking,
could be invoked only by ASB Development Corporation, the taxpayer who sought
the same. In said ruling, the CIR opined that documents like those evidencing the
advances FDC extended to its affiliates are not subject to documentary stamp tax,
to wit:

On the matter of whether or not the inter-office memo covering the

advances granted by an affiliate company is subject to documentary
stamp tax, it is informed that nothing in Regulations No. 26
(Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-
94 states that the same is subject to documentary stamp tax. Such being
the case, said inter-office memo evidencing the lendings or borrowings
which is neither a form of promissory note nor a certificate of
indebtedness issued by the corporation-affiliate or a certificate of
obligation, which are, more or less, categorized as 'securities', is not
subject to documentary stamp tax imposed under Section 180, 174 and
 175 of the Tax Code of 1997, respectively. Rather, the inter-office memo
is being prepared for accounting purposes only in order to avoid the co-
mingling of funds of the corporate affiliates.

In its appeal before the CA, the CIR argued that the foregoing ruling was later
modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-
office memos evidencing lendings or borrowings extended by a corporation to its
affiliates are akin to promissory notes, hence, subject to documentary stamp
taxes.[64] In brushing aside the foregoing argument, however, the CA applied
Section 246 of the 1993 NIRC[65] from which proceeds the settled principle that
rulings, circulars, rules and regulations promulgated by the BIR have no retroactive
application if to so apply them would be prejudicial to the
taxpayers.[66] Admittedly, this rule does not apply: (a) where the taxpayer
deliberately misstates or omits material facts from his return or in any document
required of him by the Bureau of Internal Revenue; (b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or (c) where the taxpayer acted in bad
faith.[67] Not being the taxpayer who, in the first instance, sought a ruling from the
CIR, however, FDC cannot invoke the foregoing principle on non-retroactivity of
BIR rulings.

Viewed in the light of the foregoing considerations, we find that both the CTA and
the CA erred in invalidating the assessments issued by the CIR for the deficiency
documentary stamp taxes due on the instructional letters as well as the journal and
cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and
1997. In Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly
assessed the sum of P6,400,693.62 for documentary stamp tax, P3,999,793.44 in
interests and P25,000.00 as compromise penalty, for a total
of P10,425,487.06. Alongside the sum of P4,050,599.62 for documentary stamp
tax, the CIR similarly assessed P1,721,099.78 in interests and P25,000.00 as
compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total
of P5,796,699.40. The imposition of deficiency interest is justified under Sec. 249
(a) and (b) of the NIRC which authorizes the assessment of the same at the rate of
twenty percent (20%), or such higher rate as may be prescribed by regulations,
from the date prescribed for the payment of the unpaid amount of tax until full
payment.[68] The imposition of the compromise penalty is, in turn, warranted under
Sec. 250[69] of the NIRC which prescribes the imposition thereof in case of each
failure to file an information or return, statement or list, or keep any record or
supply any information required on the date prescribed therefor.

To our mind, no reversible error can, finally, be imputed against both the CTA and
the CA for invalidating the Assessment Notice issued by the CIR for the deficiency
income taxes FDC is supposed to have incurred as a consequence of the dilution of
its shares in FAC. Anent FDCs Shareholders Agreement with RHPL, the record
shows that the parties were in agreement about the following factual antecedents
narrated in the 14 February 2001 Stipulation of Facts, Documents and Issues they
submitted before the CTA,[70] viz.:

1.11. On November 15, 1996, FDC entered into a Shareholders

Agreement (SA) with Reco Herrera Pte. Ltd. (RHPL) for the formation
of a joint venture company named Filinvest Asia Corporation (FAC)
which is based in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7,
Answer).

1.12. FAC, the joint venture company formed by FDC and RHPL, is
tasked to develop and manage the 50% ownership interest of FDC in its
PBCom Office Tower Project (Project) with the Philippine Bank of
Communications (par. 6.12, Petition; par. 7, Answer).

1.13. Pursuant to the SA between FDC and RHPL, the equity

participation of FDC and RHPL in FAC was 60% and 40% respectively.

1.14. In accordance with the terms of the SA, FDC subscribed to P500.7
million worth of shares of stock representing a 60% equity participation
in FAC. In turn, RHPL subscribed to P433.8 million worth of shares of
stock of FAC representing a 40% equity participation in FAC.

1.15. In payment of its subscription in FAC, FDC executed a

Deed of Assignment transferring to FAC a portion of FDCs right and
interests in the Project to the extent of P500.7 million.

1.16. FDC reported a net loss of P190,695,061.00 in its Annual

Income Tax Return for the taxable year 1996.[71]
 Alongside the principle that tax revenues are not intended to be liberally
construed,[72] the rule is settled that the findings and conclusions of the CTA are
accorded great respect and are generally upheld by this Court, unless there is a
clear showing of a reversible error or an improvident exercise of
authority.[73] Absent showing of such error here, we find no strong and cogent
reasons to depart from said rule with respect to the CTA's finding that no
deficiency income tax can be assessed on the gain on the supposed dilution and/or
increase in the value of FDC's shareholdings in FAC which the CIR, at any rate,
failed to establish. Bearing in mind the meaning of "gross income" as above
discussed, it cannot be gainsaid, even then, that a mere increase or appreciation in
the value of said shares cannot be considered income for taxation purposes. Since a
mere advance in the value of the property of a person or corporation in no sense
constitute the income specified in the revenue law, it has been held in the early
case of Fisher vs. Trinidad,[74] that it constitutes and can be treated merely as an
increase of capital. Hence, the CIR has no factual and legal basis in assessing
income tax on the increase in the value of FDC's shareholdings in FAC until the
same is actually sold at a profit.

WHEREFORE, premises considered, the CIR's petition for review

on certiorari in G.R. No. 163653 is DENIED for lack of merit and the CAs 16
December 2003 Decision in G.R. No. 72992 is AFFIRMED in toto. The CIRs
petition in G.R. No. 167689 is PARTIALLY GRANTED and the CAs 26 January
2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.

Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-

DST-97-00021-2000 issued for deficiency documentary stamp taxes due on the
instructional letters as well as journal and cash vouchers evidencing the advances
FDC extended to its affiliates are declared valid.

The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-

INC-97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency income
assessed on (a) the arms-length interest from said advances; (b) the gain from
FDCs Deed of Exchange with FAI and FLI; and (c) income from the dilution
resulting from FDCs Shareholders Agreement with RHPL is, however, upheld.
SO ORDERED.