CTA Case 9301 PDF

[C.T.A. CASE NO. 9301. January 4, 2019.
MARKETING CONVERGENCE, INC., petitioner, vs.

COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
UY, J : p
Before Us is a Petition for Review filed on March 18, 2016 by Marketing

Convergence, Inc. against the respondent Commissioner of Internal Revenue, praying
for the cancellation and setting aside of the assailed assessed deficiency taxes,
penalties and interests for the taxable year (TY) 2010 in the total amount of
P1,051,564,124.52, broken down as follows: (1) income tax in the amount of
P678,366,631.32; (2) value added tax (VAT) in the amount of P364,126,054.41; and
(3) expanded withholding tax (EWT) in the amount of P9,071,438.79.
THE FACTS
Petitioner is a corporation duly organized and existing under the laws of the
Philippines, duly registered with the Securities and Exchange Commission, with
company registration no. CS200258645. 1(1) It is also registered with Revenue
District Office No. 116 — Regular LT Division I, Large Taxpayers Service of the
Bureau of Internal Revenue (BIR), with Tax Identification Number
220-916-861-00000. 2(2)
Respondent Commissioner of Internal Revenue, is sued in his official capacity,

having been duly appointed and empowered to perform the duties of his office,
including among others, the duty to act on and approve claims for refund or tax credit
as provided by law, with office at the BIR National Office Building, Diliman, 3(3)
Quezon City.
On September 28, 2011, petitioner received the Letter of Authority No.

Copyright 2019 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia Third Release 2019 1
LOA-116-2011-00000119 dated September 23, 2011, 4(4) authorizing Revenue
Officers Reynoso Bravo, William Sundiam, Miguel Sulit, Meliza Wepee, Maribel
Serafica/Group Supervisor (GS) Wilfredo Reyes of the BIR, to examine petitioner's
books of account and other accounting records for all internal revenue taxes for the
period from January 1, 2010 to December 31, 2010.
Subsequently, Nestor S. Valeroso, then Officer in Charge-Assistant

Commissioner for Large Taxpayers Service (OIC-ACIR), issued the Preliminary
Assessment Notice (PAN) dated August 12, 2014, 5(5) assessing petitioner for alleged
deficiency taxes, penalties and interests in relation to TY 2010 as follows: (1) income
tax in the amount of P734,756,276.01; (2) improperly accumulated earnings tax
(IAET) in the amount of P20,943,292.75; (3) VAT in the amount of P359,623,098.77;
(4) EWT in the amount of P29,231,649.86; and (5) documentary stamp tax in the
amount of P82,470.93. 6(6) Petitioner received the said PAN on August 15, 2014. 7(7)
On September 1, 2014, petitioner filed its protest letter to the PAN, 8(8)
requesting the cancellation of the subject tax assessments for want of factual and/or
legal bases. Thereafter, OIC-ACIR Nestor S. Valeroso issued the Formal Letter of
Demand and Final Assessment Notice (FLD/FAN) dated October 7, 2014, 9(9)
assessing petitioner for alleged deficiency taxes, penalties and interests in relation to
TY 2010 in the same amounts stated in the earlier PAN. 10(10) The said FLD/FAN
was received by the petitioner on October 7, 2014. 11(11)
On November 6, 2014, petitioner filed its protest letter to the FLD/FAN, 12(12)
reiterating its arguments that the assessment lacks legal and/or factual bases.
OIC-ACIR Nestor S. Valeroso then issued the Final Decision on Disputed
Assessment (FDDA) dated November 9, 2015, 13(13) denying petitioner's protest in
part, and found that petitioner is liable for alleged deficiency taxes, penalties and
interest in relation to TY 2010 as follows: (1) income tax in the amount of
P678,366,631.61; (2) VAT in the amount of P364,126,174.44; and (3) EWT in the
amount of P9,071,438.79. 14(14) The said FDDA was received by the petitioner on
November 12, 2015. 15(15)
On December 14, 2015, petitioner filed its letter dated December 12, 2015 with
the office of respondent, 16(16) appealing/requesting for the reconsideration of the
above assessment for lack of legal and/or factual bases. In response to the said Motion
for Reconsideration, respondent issued the letter dated February 11, 2016, 17(17)
denying petitioner's Motion for Reconsideration and reiterating the assessment in the
FDDA. 18(18) Petitioner received the said letter on February 17, 2016. 19(19)
Thereafter, petitioner filed the instant Petition for Review before this Court on
March 18, 2016.
Respondent filed his Answer on June 15, 2016, 20(20) interposing the
following special and affirmative defenses, to wit:
"SPECIAL AND AFFIRMATIVE DEFENSES
4. Respondent adopts the abovementioned admissions and denials as

part of her special and affirmative defenses.
WITH ALL DUE RESPECT,

THE HONORABLE COURT
HAS NO JURISDICTION
OVER THE INSTANT
PETITION, THE INSTANT
PETITION IS FILED OUT OF
TIME.
5. Petitioner argued that on February 17, 2016, it received the Denial

of the Motion for Reconsideration rendered by the Commissioner Kim S.
Jacinto-Henares. Accordingly, pursuant to the above-cited provision in Revenue
Regulations (RR) No. 12-99, as amended by RR No. 18-2013, it has thirty days
from February 17, 2016 or until March 18, 2016 within which to file the instant
petition with the Honorable Court. Hence, the instant petition allegedly filed on
March 18, 2016 was timely filed.
6. Respondent differs. For quick reference, the following facts are

undisputed, viz.:
a. On 07 October 2014, petitioner received the Formal

Letter of Demand (FLD) and Final Assessment Notice
(FAN);
b. On 06 November 2014, petitioner allegedly filed its

protest to the Formal Letter of Demand; and
c. On 12 November 2015, petitioner received the Final

Decision on Disputed Assessment (FDDA).
d. On 14 December 2015, petitioner allegedly filed its

Motion for Reconsideration with the Commissioner of
Internal Revenue.
7. Under Section 228 of the National Internal Revenue Code of 1997

('NIRC' for brevity), an assessment may be protested administratively by filing a
request for reconsideration or reinvestigation within thirty (30) days from
receipt of the assessment. Section 228 provides"
"xxx xxx xxx
Such assessment may be protested administratively by filing a

request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting documents shall
have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted

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

Decision on Disputed Assessment dated 09 November 2015 which was received
by petitioner on 12 November 2015. Under the above-quoted Section 228 of the
1997 Tax Code, petitioner had 30 days to appeal respondent's denial of its
protest before the Honorable Court.
9. Since petitioner received the denial of its administrative protest on

12 November 2015, it had only until 12 December 2015 within which to file a
petition for review before the Honorable Court. However, it was only 18 March
2016 when it filed the instant petition for review, hence, the same was filed out
of time.
10. Such period is not merely directory but mandatory and it is beyond
the power of the courts to extend the same. In Fishwealth Canning Corporation
vs. Commissioner of Internal Revenue, the Honorable Supreme Court ruled that
a motion for reconsideration of the denial of the administrative protest does not
toll the 30-day period to appeal to the CTA, hence:
'Respondent thereafter issued a Final Decision on Disputed

Assessment dated August 2, 2005, which petitioner received on August
4, 2005, denying its letter of protest x x x Respondent added that if
petitioner disagree, it may appeal to the Court of Tax Appeals (CTA)
'within thirty days from date of receipt thereof, otherwise our said
deficiency income and value-added tax assessments shall become final,
executory and demandable.'
Instead of appealing to the CTA, petitioner filed, on September

1, 2005, a Letter of Reconsideration dated August 31, 2005.
xxx xxx xxx
The petition is bereft of merit.
Section 228 of the 1997 Tax Code provides that an assessment
x x x may be protested administratively by filing a request for

reconsideration or reinvestigation within thirty (30) days from receipt of
the assessment in such form and manner as may be prescribed by
implementing rules and regulations. Within sixty (60) days from filing
of the protest, all relevant supporting documents shall have been
submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon

within one hundred eighty (180) days from submission of documents,
the taxpayer adversely affected by the decision or inaction may appeal to
the Court of Tax Appeals within thirty (30) days from receipt of the said
decision, or from the lapse of the one hundred eighty (180)-day period;
otherwise, the decision shall become final, executory and demandable.
(Underscoring supplied)
In the case at bar, petitioner's administrative protest was denied

by Final Decision on Disputed assessment dated August 2, 2005 issued
by respondent and which petitioner received on August 4, 2005. Under
the above-quoted Section 228 of the 1997 Tax Code, petitioner had 30
days to appeal respondent's denial of its protest to the CTA.
(Underscored in the original)
Since petitioner received the denial of its administrative protest

on August 4, 2005, it had until September 3, 2005 to file a petition for
review before the CTA Division. It filed one, however, on October 20,
2005, hence, it was filed out of time. For a motion for reconsideration
of the denial of the administrative protest does not toll the 30-day
period to appeal to the CTA." (Emphasis and underscoring supplied)
11. Going by the established jurisprudence and statutory provision of
the NIRC, petitioner's request for reconsideration filed before the CIR does not
toll the 30-day period to appeal to the CTA. Petitioner cannot find solace on its
alleged reliance on subordinate legislation. Administrative rules and regulations,
cannot override the statute it seeks to implement. As held time and again by the
Honorable Supreme Court:
After all, the power of administrative officials to promulgate

rules in the implementation of a statute is necessarily limited to what is
found in the legislative enactment itself. The implementing rules and
regulations of a law cannot extend the law or expand its coverage, as the
power to amend or repeal a statute is vested in the Legislature. Thus, if a
discrepancy occurs between the basic law and an implementing rule or
regulation, it is the former that prevails, because the law cannot be
broadened by a mere administrative issuance — an administrative
agency certainly cannot amend an act of Congress.
ASSUMING WITHOUT
NECESSARILY CONCEDING
THAT THE HONORABLE
COURT HAS JURISDICTION
OVER THE INSTANT
PETITION, RESPONDENT
MAINTAINS THAT THE
ASSESSMENT IS VALID AND
ISSUED PURSUANT TO A
VALID LETTER OF
AUTHORITY.
12. Petitioner argued that the assessment is void for lack of authority
to conduct the same. In attacking the validity of the assessment, petitioner
interposed that the Letter of Authority (LOA) was issued without complying
with the requirements laid down under Revenue Memorandum Order (RMO)
43-90 dated September 20, 1990 which expressly requires that a Letter of
Authority should cover a taxable period not exceeding one taxable year. In
particular, petitioner pointed to a copy of the Letter of Authority allegedly
attached as Annex D to the instant petition which states that it covers the Audit
Criteria for Taxable Years 2009 & 2010.
13. Respondent differs. First, respondent would like to emphasize that

the allegedly copy of the LOA subject of the assessment was not attached to
Annex D to the instant petition. Contrary to the allegation of petitioner, the
document labeled as Annex D and attached to the instant petition pertains to the
respondent's Preliminary Assessment Notice (PAN). Nevertheless, perusal of
the original copy of the LOA in the BIR Records specifically states, viz.:
'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 January 1, 2010 to December 31, 2010 pursuant to AUDIT
CRITERIA FOR TAXABLE YEARS 2009 & 2010."
14. Clearly, the pertinent LOA was issued to authorize the audit
examination of petitioner for only one taxable period which is January 1, 2010
to December 31, 2010. Petitioner tries to mislead the Honorable Court by
arguing that the LOA covers more than one taxable year. Clearly, it was
pertaining to the AUDIT CRITERIA which is being used as a guideline by the
revenue officers in conducting audit examinations. The audit criteria may be
modified from time to time pursuant to a regulation being issued by the
respondent.
15. In addition, petitioner also interposed that the audit examination

was conducted by unauthorized revenue officers as no new Letter of Authority
was issued in favor of the Revenue Officers to whom the instant case has been
reassigned or transferred to. Hence, since the assessment was done without
authority, the same is null and void.
16. Respondent differs. It is submitted that there is no need for the

issuance of a new Letter of Authority, provided that the taxpayer has been duly
informed of the authorized revenue officer who will conduct the audit. To
emphasize, on 14 May 2016, petitioner received a letter informing it of the
authorized revenue officers who will conduct the audit of the subject taxable
year.
17. Lastly, petitioner never questioned the validity of the Letter of

Authority nor the authority of the revenue officers who conducted the audit
investigation in its reply to the Preliminary Assessment Notice (PAN) nor in its
protest to the Formal Letter of Demand (FLD).
ASSUMING WITHOUT
NECESSARILY CONCEDING
THAT THE HONORABLE
COURT HAS JURISDICTION
OVER THE INSTANT
PETITION, RESPONDENT
MAINTAINS THAT HER RIGHT
TO ASSESS PETITIONER FOR
TAXABLE YEAR 2010 DID NOT
PRESCRIBE.
18. Petitioner alleged that respondent's right to assess petitioner's taxes

for taxable year 2010 has prescribed pursuant to the three (3)-year limitation
period provided for under Section 203 of the NIRC. It further alleged that the
subject Final Assessment Notice (FAN) and the Formal Letter of Demand
(FLD) was issued and received by petitioner only on 07 October 2014, which is
more than three (3) years from the date of filing of petitioner's returns for
taxable year 2010.
19. Petitioner's contention is bereft of merit.
20. True it may that Section 203 provides for such limitation, however,
petitioner failed to consider that such provision is not without exception.
Section 222 of the NIRC provides:
Sec. 222 Exceptions as to Period of Limitation of Assessment and

Collection of Taxes. —
(a) In the case of a false or fraudulent return with intent to evade

tax or of failure to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may be filed
without assessment, at any time within ten (10) years after the
discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which was become final and executory, the fact of fraud
shall be judicially taken cognizance of in the civil or criminal action for
the collection thereof.
(b) If before the expiration of the time prescribed in Section 203

for the assessment of the tax both the Commissioner and the
taxpayer have agreed in writing to its assessment after such time,
the tax may be assessed within the period agreed upon. The period so
agreed upon may be extended by subsequent written agreement made
before the expiration of the period previously agreed upon. (Emphases
ours)
21. Petitioner's taxable year subject of assessment is that of taxable

year 2010. Thus, pursuant to Section 203 of the NIRC respondent only has three
(3) years from the date prescribed by law for the filing of the return for the
applicable tax to make its assessment if it does not fall within the exceptions
provided under Section 222.
22. Assuming arguendo that petitioner regularly filed its Tax Returns
for taxable year 2010 within the period required by law, respondent interposes
that her right to assess petitioner for deficiency income taxes did not prescribe.
23. On 23 May 2013, Ms. Cecilia R. Patricio, petitioner's authorized

signatory, executed a waiver ('first waiver') of the defense of prescription under
the statute of limitations of the National Internal Revenue Code extending the
period to assess petitioner for its internal revenue tax liabilities for taxable year
2010 until 31 December 2013.
24. On 23 September 2013, before the first waiver loses its validity,
Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed another
waiver ('second waiver') of the defense of prescription under the statute of
limitations of the National Internal Revenue Code extending the period to assess
the petitioner for its internal revenue tax liabilities for taxable year 2010 until 30
June 2014.
25. On 03 March 2014, before the second waiver loses its validity, Ms.
Cecilia R. Patricio, petitioner's authorized signatory, executed another waiver
('third waiver') of the defense of prescription under the statute of limitations of
the National Internal Revenue Code extending the period to assess petitioner for
its internal revenue tax liabilities for the taxable year 2010 until 30 September
2014.
26. On 18 July 2018, before the third waiver loses its validity, Ms.
Cecilia R. Patricio, petitioner's authorized signatory, executed another waiver
('fourth waiver') of the defense of prescription under the statute of limitations of
the National Internal Revenue Code extending the period to assess petitioner for
its internal revenue tax liabilities for the taxable year 2010 until 31 December
2014.
27. Petitioner interposed that the waivers are defective for it failed to
specify the type of tax and the amount of tax due. On this ground, allegedly the
waiver is defective and consequently, the assessment is void.
28. Respondent differs. The waiver's failure to state specifically the

specific type tax and the amount of tax due subject of the waiver will not render
invalid the waivers executed by petitioner. This has already been clarified in the
recent Revenue Memorandum Order (RMO) No. 14-2016, viz.:
Except for waiver of collection of taxes which shall indicate the

particular taxes assessed, the waiver need not specify the particular taxes
to be assessed nor the amount thereof, and it may simply state 'all
internal revenue taxes' considering that during the assessment stage, the
Commissioner of Internal Revenue or her duly authorized representative
is still in the process of examining and determining the tax liability of
the taxpayer. (Underscoring ours)
29. Clearly, the waivers were executed by petitioner while the audit
examination is being conducted. Hence, it would be impossible to specify which
taxes petitioner may be subsequently assessed. Further, the Letter of Authority
which authorized the examination of petitioner is not only for a particular kind
of tax but a comprehensive audit for all internal revenue taxes.
30. Petitioner also argued that the date of execution by the taxpayer
and the date of acceptance by the BIR should be before the expiration of the
period of prescription. Hence, as alleged, a waiver is defective if the same is
executed after the prescription had already set in. Save for the audit assessment
for deficiency income taxes, petitioner questioned the validity of the waiver
based on the date of its execution which accordingly are already beyond the last
day to assess petitioner for deficiency Value-Added Tax (VAT) and Expanded
Withholding Tax (EWT).
31. In addition to the waivers executed in relation to this case,

respondent interpose that the three-year period within which to make the
necessary assessment will not apply squarely to the case at hand on the matter
of the assessment of Expanded Withholding Tax (EWT). The same are
imprescriptible.
32. Withholding tax assessments are NOT an assessment for an

internal revenue tax as a statutory taxpayer but rather such assessments were
issued for failure of petitioner to withhold the correct taxes it is duty bound to
collect as an agent. Thus, the assessments issued for Deficiency Expanded
Withholding Tax are imprescriptible. This obligation of petitioner to withhold
and remit the correct tax is its duty as an agent of the government in the
collection of taxes and not as a statutory taxpayer.
33. By operation of law, the relationship between the Government and

the withholding agent is one of agency for which reason the withholding agent
only holds the funds withheld by him in trust for the Government.
34. Clearly, the liability of petitioner as taxpayer is different from its

liability as withholding agent. This is the reason why liabilities arising from
withholding taxes were never covered by tax amnesty programs. Basically,
these liabilities arose from a different source of obligation.
35. The liability of a withholding agent is further established under

Section 251, Title X of the Tax Code, which provides:
Section 251. Failure of a Withholding Agent to Collect and Remit Tax.
— Any person required to withhold, account for, and remit any tax
imposed by this code or who willfully fails to withhold such tax, or
account for and remit such tax, or aids or abets in any manner to
evade any such tax or the payment thereof, shall, in addition to
other penalties provided for under this Chapter, be liable upon
conviction to a penalty equal to the total amount of the tax not
withheld, or not accounted for and remitted. (Emphasis ours)
36. In Filipinas Synthetic Fiber Corporation vs. Court of Appeals and

the Commissioner of Internal Revenue, The Honorable Supreme Court
ratiocinated:
'The law sets no condition for the personal liability of the withholding
agent to attach. The reason is to compel the withholding agent to
withhold the tax under all circumstances. In effect, the responsibility for
the collection of the tax as well as the payment thereof is concentrated
upon the person over whom the government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the government and
the taxpayer. With respect to the collection and/or withholding of the
tax, he is the Government's agent. In regard to the filing of the necessary
income tax return and the payment of the tax to the Government, he is
the agent of the taxpayer. The withholding agent, therefore is no
ordinary government agent especially because under Section 53 (c) he is
held personally liable for the tax he is duty bound to withhold; whereas,
the Commissioner of Internal Revenue and his deputies are not made
liable to law.'
37. The Tax Code only makes petitioner, as withholding agent,

personally liable for the tax arising from breach of its legal duty to withhold as
distinguished from its duty to pay tax, since the government's cause of action
against the withholding agent is not for the collection of income tax, but for the
enforcement of the withholding provision of Section 57 of the Tax Code,
compliance with which is imposed on the withholding agent and not upon the
taxpayer.
38. Accordingly, the tax deducted and withheld by withholding agents

under the said provision shall be held as a special fund in trust for the
government until paid to the collecting officer. It bears emphasis that petitioner
as a withholding agent merely holds in trust the amount of tax it withheld and as
trustee, it is duty bound to remit to the government the proper amount of tax
withheld and this duty is imprescriptible.
39. Further, in Section 58(A) of the Tax Code it is specifically
provided that:
xxx xxx xxx
The taxes deducted and withheld by the withholding agent shall be held
as special fund in trust for the government until paid to collecting
officers.
xxx xxx xxx
40. It is clear that the assessed deficiency withholding tax as a penalty

to petitioner does not fall within the ambit of the period of limitation provided
in Section 203 of the Tax Code, as amended.
41. In the same way, the period of limitation (three years) does not
also apply squarely to petitioner's liability for deficiency Value-Added Tax
(VAT).
42. To reiterate, Section 222 (a) of the Tax Code which specifically
provides:
Sec. 222. Exceptions as to Period of Limitation of Assessment and

Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax
or of failure to file a return, the tax may be assessed, or a proceeding in
court for the collection of such tax may be filed without assessment, at
any time within 10 years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which has become final
and executory, the fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof. (Emphases ours)
43. In the instant case, audit of petitioner disclosed that petitioner

failed to declare its correct sales subject to VAT for the year 2010. Careful
perusal of the Formal Letter of Demand reveals that petitioner only declared
P539,429,502.64 as its VATable sales in its return instead of
P2,208,930,862.17. Based on the result of the audit investigation petitioner
merely declared 24.44% of its Vatable sales. This results to a substantial under
declaration of around 75.56% of the supposed VATable Sales.
44. The Honorable Supreme Court in the case of Aznar vs. CTA, had
the occasion to define fake or fraudulent return in this wise:
That there is a difference between 'false return' and 'fraudulent return'
cannot be denied. While the first merely implies deviation from the
truth, whether intentional or not, the second implies intentional or
deceitful entry with intent to evade the taxes due. (Emphasis ours)
45. Since the correct sales of petitioner did not appear in its VAT
returns, there can only be one inevitable conclusion — that there was a
substantial under-declaration of sales in its VAT returns.
46. To reiterate, a false return implies deviation from the truth,

whether intentional or not. Although the Aznar case distinguishes what
constitute 'false returns' referring to mistake, carelessness or ignorance, from
that of 'fraudulent returns' referring to intent to evade taxes, the same case does
not make a distinction as regards the prescriptive period of 10 years. Indeed, in
the same case of Aznar, the Supreme Court ruled in favor of the CIR for an
extension of 10-year to assess the taxpayer, thus:
The ordinary period of prescription of 5 years now (now 3 years) within

which to assess tax liabilities under Sec. 331 of the National Internal
Revenue Code should be applicable to normal circumstances, but
whenever the government is placed at a disadvantage so as to
prevent its lawful agents from proper assessment of tax liabilities
due to false returns, fraudulent return intended to evade payment of
tax or failure to file returns, the period of 10 years provided for in
Section 332 (a) NIRC, from the time of the discovery of the falsity,
fraud or omission even seems to be inadequate and should be the one
enforced.
There being undoubtedly false tax returns in this case, We affirm

the conclusion of the respondent CTA that Section 332(a) (now Sec.
222) of the NIRC should apply and that the period of 10 years within
which to assess petitioner's tax liability had not expired at the time said
assessment was made. (Emphases ours)
47. It is, therefore clear from the statutory provision in Section 222 of
the NIRC of 1997 in the three different case of (1) false return, (2) fraudulent
return with intent to evade tax, (3) failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may begin
without assessment, at any time within 10 years after the discovery of the (1)
falsity, (2) fraud, (3) omission. The discrepancy of 75.56% in petitioner's return
manifests an evident substantial under declaration which eloquently
demonstrate the falsity or fraudulence of the VAT returns with an intent to
evade the payment of tax. Respondent, could therefore, rightfully invoke
Section 222 because her right to assess has not yet prescribed.
48. Finally, petitioner attacked the validity of the waivers it executed

by arguing that the waivers do not indicate any similar appearance and
acknowledgement by the relevant BIR Officials before a notary public.
Considering that the representation or declaration of the BIR's representatives
are not notarized, the waivers are not valid and binding.
49. Respondent differs. To emphasize, waivers are executed at the

instance of the taxpayer. This means it is petitioner who initiated the execution
of the subject waiver and that he merely submits the same to the respondent for
acceptance. Thus, it is no longer necessary for respondent to appear before a
notary public when she accepts the subject waiver. The acknowledgment of the
waiver before the notary public is for petitioner to attest that the signatory is
duly authorized to execute the same and that the same is his voluntary act.
50. To reiterate this has also been clarified in RMO No. 14-2016, viz.:
xxx xxx xxx
4. The waiver may be notarized. However, it is sufficient that the

waiver is in writing as specifically provided by the NIRC, as amended.
5. Considering that the waiver is a voluntary act of the taxpayer, the

waiver shall take legal effect and be binding on the taxpayer upon its
execution thereof. (Underscoring ours)
51. In the case of Spouses Palada vs. Solid Bank et al., the Honorable
Supreme Court emphasized:
Besides, any irregularity in the notarization or even the lack of

notarization does not affect the validity of the document. Absent any
clear and convincing proof to the contrary, a notarized document enjoys
the presumption of regularity and is conclusive as to the truthfulness of
its contents. (Underscoring ours)
PETITIONER IS ESTOPPED
FROM ASSAILING THE
VALIDITY OF THE WAIVERS
IT EXECUTED
52. It is noteworthy to pinpoint petitioner's conduct amounting to false

representation or concealment or material facts calculated to convey the
impression that the facts are otherwise than, and inconsistent with, those which
the party subsequently attempts to assert.
53. Respondent put emphasis that petitioner executed not only one
waiver, not two but four waivers of Statute of Limitations. This fact alone will
prove that if upon the execution of the first waiver, petitioner believed that the
same was invalid, it should not have executed the remaining three waivers. It
can be deduced from the succeeding acts of petitioner that it was its clear
intention to give force and effect to the waivers.
54. Article 1431 of the Civil Code provides that in order estoppel may
apply to the person, to whom representations have been made and who claims
the estoppel in his favor must have relied or acted on such representations.
Article 1431 states that:
'Art. 1431. Through estoppel an admission or representation is

rendered conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon.'
55. On the other hand, Section 2(a) of Rule 131 of the Rules of Court,
on burden of proof and presumptions, states as follows:
'SEC. 2 Conclusive presumptions. — The following are instances of

conclusive presumptions:
(a) Whenever a party has, by his own declaration, act or omission,

intentionally and deliberately led another to believe a particular thing
true, and to act upon such belief he cannot in any litigation arising out of
such declaration, act or omission, be permitted to falsify it;
56. Respondent humbly submits, that by petitioner's act or

representation, and after benefiting from the effects of the waiver of the defense
or prescription petitioner should not be the first to impugn the validity of such
agreement. Petitioner should not be allowed to profit from its misdoings. To
emphasize, petitioner was initially assessed with deficiency Improperly
Accumulated Earnings Tax (IAET) and Documentary Stamp Tax (DST) in the
Preliminary Assessment Notice (PAN) as well as in the Formal Letter of
Demand (FLD). However, such assessment was cancelled in the Final Decision
on Disputed Assessment (FDDA) after petitioner was allowed to submit the
necessary documents to refute the audit findings. Petitioner benefited from the
extension of the period to assess pursuant to the waivers it executed. It was
allowed to submit the necessary documents in support of its protest and the
same were considered in the evaluation of the protest.
57. Had it been that the parties intended not to extend the Statute of
Limitations, petitioner should have not been allowed to submit additional
supporting documents in its favor. In the same way, respondent should have
issued the FDDA based on already existing audit findings. Based on the
foregoing, both parties with all good faith intended that the Statute of
Limitations be extended by virtue of the waiver executed. Further, the execution
of a subsequent waiver before a prior waiver losses validity is a clear indication
of such intention by the parties.
PETITIONER IS LIABLE FOR

THE CORRESPONDING
DEFICIENCY INTEREST ON
THE DEFICIENCY VALUE-
ADDED TAX (VAT) AND
EXPANDED WITHHOLDING
TAX (EWT) ASSESSMENTS.
58. Petitioner argued the deficiency interest shall only imposed

whenever there is deficiency income tax; deficiency estate tax; or deficiency
donor's tax. Since there was an imposition of deficiency interest on the assessed
value-added tax and expanded withholding tax, allegedly, the impositions
should be cancelled and set aside.
59. Respondent differs. Petitioner failed to consider that the imposition

of deficiency interest is legally mandated under Section 249 of the Tax Code
which provides, viz.:
SEC. 249. Interest. —
(A) In General. — There shall be assessed and collected on any

unpaid amount of tax, interest at the rate of twenty percent (20%) per
annum, or such higher rate as may be prescribed by rules and
regulations, from the date prescribed for payment until the amount is
fully paid.
60. Respondent maintains that the imposition of the deficiency interest

does not limit the same to the imposition on income tax and estate tax only but
also to the other internal revenue taxes. In fact, petitioner failed to consider
preceding Section 247 of the Tax Code which provides explicitly:
CHAPTER I
ADDITIONS TO THE TAX
SEC. 247. General Provisions. —
(a) The additions to the tax or deficiency tax prescribed in this Chapter
shall apply to all taxes, fees and charges imposed in this Code. The
amount so added to the tax shall be collected at the same time, in the
manner and as part of the tax. (Underscoring ours)
61. As can be gleaned from the above provision, the imposition of the
deficiency interest applies to all other taxes or fees imposed under the Tax
Code, including the value-added tax and the expanded withholding tax which
petitioner is contesting.
THE ASSESSMENTS HAVE

BASES BOTH IN FACT AND
IN LAW.
62. Petitioner argued that the deficiency tax assessments imposed upon
it for taxable year 2010 should be declared null and void for having been
arbitrarily made and lacking factual and legal basis.
63. Respondent strongly submits that the assessments have bases both
in fact and in law which can be gleaned from the following discussion.
I. PETITIONER IS LIABLE FOR

DEFICIENCY INCOME TAX IN
THE TOTAL AMOUNT OF
P678,366,631.61 AND THE
CORRESPONDING INTEREST
AND COMPROMISE PENALTY.
A. Petitioner is liable for deficiency income tax due from

undeclared income from unaccounted Accounts Receivable
Deferred Loyalty points in the amount of P757,969,664.70.
64. Petitioner argued that the loyalty fund should not be considered as
income since it is not realized from the sale of goods or services and petitioner
is not free to dispose of said funds. Rather, the fund was remitted to petitioner
for a specific purpose. As alleged, consequently, the receipt of the loyalty fund
should not be subjected to income tax since it is not an income payment.
65. Respondent differs. Discrepancy in Balance per Deferred Loyalty

Points in the Financial Statements vs. remaining portion of receivable held by
petitioner in Accounts Payable Customer Member Points earned by Cardholders
(30%) is assessed pursuant to Section 32 in relation to Section 27 of the Tax
Code. Details of the audit finding is as follows:
Payable to Cardholders
AP Customer Member-Points Earned by (1,383,530,671.00)
Cardholders
Percentage to be Deferred 30%
–––––––––––––––
Remaining Portion of the receivable held by (415,059,201.30)
Co. as deferred loyalty points
Balance in AR Deferred Loyalty (1,173,028,866.00)
Points-Deferred FS
–––––––––––––––
Unaccounted AR Deferred Loyalty 757,969,664.70
Points-Deferred
=============
66. Based on the records of the case, petitioner failed to submit

supporting documents on redemptions, forfeitures and funding of promos to
refute the discrepancy. Hence, the assessment was reiterated from the FLD to
the FDDA.
67. Consequently, the corresponding deficiency Value-added tax

(VAT) was also assessed against the petitioner for this particular audit finding.
B. Petitioner is liable for deficiency Income Tax due from

undeclared income from movements of SM Advantage Points
earned and redeemed in the amount of P266,489,356.35.
68. Petitioner argued that the loyalty fund should not be considered as
income since it is not realized from the sale of goods or services. Consequently,
the receipt of the loyalty fund should not be subjected to income tax since it is
not an income payment.
69. Respondent differs. Analysis of the movement of SM Advantage

points earned and redeemed during the taxable period reveals unaccounted
receipts in the amount of P266,489,356.35. In the case of Perez vs. Court of Tax
Appeals, et al., the Honorable Supreme Court made it explicit that unreflected
sources of funds not accounted for in the taxpayer's returns leads to the
inference that part of his income had not been reported. Hence, the
corresponding income tax due thereon was assessed pursuant to Section 32 in
relation to Section 24 of the Tax Code, as amended, viz.:
Debit Credit
Award Points
––––––––––––––––––––––––––
AR Loyalty Points-Billing to Merchants 875,545,012.91
AR Deferred Loyalty Points - Deferred 477,730,230.76
AP Customer Member 1,815,242,081.55
Billed Merchant
––––––––––––––––––––––––––
Cash in Bank 1,035,050,768.93
AR Loyalty Points-Billing to Merchants 1,035,050,768.93
Points Redemption
Billing by Merchants on Points
redemption by Customer
––––––––––––––––––––––––––
AP Loyalty Points 1,387,428,331.48
Payments by Merchant on points
redemption by Customer
––––––––––––––––––––––––––
AP Loyalty Points 1,312,641,944.14
Cash in Bank 71,875,014.14
AR Deferred Loyalty Points - Deferred 71,875,014.14
–––––––––––––– ––––––––––––––
5,355,748,783.89 5,622,238,140.24
Unaccounted Receipts (266489356.35)
–––––––––––––– ––––––––––––––
5,355,748,783.89 5,355,748,783.89
============== ==============
70. Based on record, petitioner failed to submit supporting documents

on AR Loyalty Points and AP customer members accounts, credit memos on
Nursery Care Corporation and Watson Person Care stores to refute the
discrepancy. Hence, the audit assessment was reiterated from the FLD to the
FDDA.
71. Consequently, the corresponding deficiency VAT was also
assessed against petitioner.
C. Petitioner is liable for deficiency Income Tax due from

undeclared sales per customer's data in the amount of
P2,903,355.73.
72. Petitioner argued that it has no undeclared sales in its transactions.

Allegedly, the noted difference pertains to timing difference in recognizing
output VAT on the part of the petitioner and input VAT on the part of
petitioner's related parties and other customers.
73. Respondent differs. A discrepancy on sales was noted after

comparing the sales made to certain customers declared in petitioner's Summary
List of Sales (SLS) against the company customer data extracted from Summary
List of Purchases (SLP). This audit procedure was pursuant to the RELIEF
system and the TRS.
74. The RELIEF system which stands for 'Reconciliation of Listing for
Enforcement' was purposely to detect tax leaks by matching the data available
under the Bureau's Integrated Tax System (ITS) with data gathered from third
party sources. Through the consolidation and cross-referencing of third
party information, discrepancy reports on sales and purchases can be
generated to uncover under declared income and over claimed purchases
(goods and services). Timely recognition and accurate reporting of
unregistered taxpayers and non-filers can be made possible.
75. The Tax Reconciliation System (TRS) on the other hand is geared
towards enhancing revenue collection by computerized matching of data
available under the Bureau's Integrated Tax System (ITS). Through the
consolidation and cross-referencing of data from withholding agents (WAs)
and declaration of income recipients, discrepancy reports can be generated
to uncover violations on tax rules and regulations such under declaration of
income, non-declaration of income, under remittance and/or
non-remittance of taxes withheld, over withholding, under withholding,
over declaration of credits to name a few. Timely recognition and accurate
reporting of unregistered taxpayers and non-filers will also be possible.
76. Respondent's audit investigation for deficiency taxes is not

confined to the examination of the documents provided or obtained from
petitioner. The Commissioner has the power to promulgate rules to ensure the
accuracy and truthfulness of the taxes declared and paid by taxpayers. Such
power of the Commissioner of Internal Revenue to obtain information from
other sources is enshrined in Section 5 of the Tax Code which specifically
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 regular basis from any person other

than the person whose internal revenue tax liability is
subject to audit and investigation x x x (Emphasis ours)
D. Petitioner is liable for deficiency Income Tax due from

undeclared sales as a result of the difference between
petitioner's Summary List of Sales (SLS) vs. 2307 in the
amount of P21,626,924.64.
77. Petitioner argued that a mere difference in the sale of services per
SLS and income per SAWT does not mean that there is an under-declaration of
sales considering that the two reportorial requirements (SLS and SAWT) are
governed by two different regulations. As alleged, the assessment on the alleged
undeclared sales should be cancelled due to lack of factual and/or legal basis.
78. Respondent differs. Verification of petitioner reveals that there is a

difference in the sales per SLS versus the sales appearing in the BIR Form 2307.
Respondent's audit investigation for deficiency taxes is not confined to the
examination of the documents provided or obtained from the petitioner. The
Commissioner has the power to promulgate rules to ensure the accuracy and
truthfulness of the taxes declared and paid by taxpayers.
79. Respondent further submits that petitioner's sales transactions are

directly related to its customers' purchases and ultimately to the Creditable
Withholding Taxes withheld from the payments made to petitioner. Hence, the
assessment. Further, based on records, petitioner failed to submit supporting
documents to refute the discrepancy. Thus, the assessment in the FLD was
reiterated in the FDDA.
80. Consequently, the deficiency value-added tax is assessed against

the petitioner for the audit finding.
E. Petitioner is liable for deficiency Income Tax due from gross
profit from undeclared purchases in the amount of
P8,222,969.32.
81. Petitioner argued that it does not have undeclared purchases and
submits that the assessment for additional gross income arising from undeclared
purchases be cancelled due to lack of factual and legal bases.
82. Respondent differs. A discrepancy resulted from comparison of

sales made to certain customers declared in petitioner's SLP against its supplier
data extracted from summary list of sales. The same is assessed pursuant to
Section 32 in relation to Section 27 of the Tax Code. Petitioner's purchases are
transactionally related to its suppliers' sales.
83. The audit finding per Formal Letter of Demand was reiterated in
the Final Decision on Disputed Assessment (FDDA) save only the discrepancy
with submitted notarized confirmation certificates.
F. Petitioner is liable for deficiency Income Tax due from

disallowed expenses (Marketing Points) in the amount of
P18,741,247.32.
84. Petitioner interposed that the above expenses are ordinary and
necessary which are directly connected with and approximately resulting from
carrying on the business and shown to be appropriate and helpful in the
development of petitioner's business. Thus, the same is deductible.
85. Respondent differs. Section 34 of the Tax Code provides:
SEC. 34. Deductions from Gross Income. — Except for taxpayers

earning compensation income arising from personal services rendered
under employer-employee relationship where no deductions shall be
allowed under this Section other than under subsection (M) hereof, in
computing taxable income subject to income tax under Sections 24 (A);
25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be allowed the
following deductions from gross income;
(A) Expenses. —
(1) Ordinary and Necessary Trade, Business or

Professional Expenses. —
xxx xxx xxx
(b) Substantiation Requirements. — No deduction from gross
income shall be allowed under Subsection (A) hereof unless the taxpayer
shall substantiate with sufficient evidence, such as official receipts or
other adequate records: (i) the amount of expense being deducted, and
(ii) the direct connection or relation of the expense being deducted to the
development, management, operation and/or conduct of the trade,
business or profession of the taxpayer.
86. Since petitioner was not able to properly substantiate with

sufficient evidence the expenses claimed for, hence, the expense claimed is
disallowed and the corresponding income tax is assessed against petitioner.
G. Petitioner is liable for deficiency Income Tax due from

disallowed expenses for non-withholding of tax in the amount
of P18,741,247.32.
87. Petitioner argued that it has properly withheld and remitted the
expanded withholding tax (EWT) on its income payments.
88. Respondent differs. The audit finding was a result of the matching
of the expenses per income tax return versus its Alpha List. Result of the audit
revealed that corresponding taxes were not withheld. Section 34 (k) of the Tax
Code provides explicitly:
SEC. 34. Deductions from Gross Income. — Except for taxpayers

earning compensation income arising from personal services rendered
under employer-employee relationship where no deductions shall be
allowed under this Section other than under Subsection (M) hereof, in
computing taxable income subject to income tax under Sections 24(A);
25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be allowed the
following deductions from gross income;
xxx xxx xxx
(K) Additional Requirements for Deductibility of Certain

Payments. — Any amount paid or payable which is otherwise
deductible from, or taken into account in computing gross income or for
which depreciation or amortization may be allowed under this Section,
shall be allowed as a deduction only if it is shown that the tax required to
be deducted and withheld therefrom has been paid to the Bureau of
Internal Revenue in accordance with this Sections 58 and 81 of this
Code.
89. Further Section 6 of Revenue Regulations No. 14-2002 explicitly

provides:
Section 6. Requirements for Deductibility of Certain Expenses. —

Section 2.58.5 of Revenue Regulations No. 2-98 is hereby amended to
read as follows:
'Sec. 2.58.5. Requirements for Deductibility — Any income

payment which is otherwise deductible under the Code shall be allowed
as deduction from the payor's gross income only if it is shown that the
income tax required to be withheld has been paid to the Bureau in
accordance with Secs. 57 and 28 of the Code.
90. To put emphasis, the amounts used where those declared by

petitioner per its Income Tax Return and its accomplished BIR Form 1601E.
The audit assessment was reiterated from the FLD to the FDDA save the
discrepancy with submitted supporting documents which were revised.
II. PETITIONER IS LIABLE FOR

DEFICIENCY VALUE-ADDED
TAX (VAT) IN THE TOTAL
AMOUNT OF P364,126,174.44
AND THE CORRESPONDING
INTEREST AND
COMPROMISE PENALTY.
A. Petitioner is liable for deficiency Value-Added Tax (VAT)

due from: 1) Unaccounted AR Deferred Loyalty Points; 2)
Unaccounted Receipts; 3) Undeclared Sales per Customer's
Data; 4) Undeclared Sales (SLS vs. SAWT); and 5) Gross
Sales Attributable to Undeclared Purchases.
91. Petitioner's tax liabilities for deficiency assessment for the above
mentioned audit findings were discussed extensively in petitioner's liability for
deficiency income tax. Respondent thus repleads the same.
B. Petitioner is liable for deficiency Value-Added Tax (VAT)

due from discrepancy in income tax return vs. Value-Added
Tax Return in the amount of P37,730,006.20.
92. Petitioner argued that the difference can be reconciled. Petitioner

maintained that the loyalty points/fund should not be considered as income
since it is not realized from the sale of goods or services.
93. Respondent differs. Comparison of the income declared in
petitioner's ITR against the amount reported in its VAT returns revealed a
discrepancy. Hence, the corresponding VAT is assessed against petitioner
pursuant to Sections 106 and 108 of the Tax Code. The comparison revealed an
additional income of P37,730,006.20.
C. Petitioner is liable for deficiency Value-Added Tax (VAT)

due from deferred loyalty points increase for the year in the
amount of P405,855,217.00.
94. Petitioner argued that the receipt of loyalty fund should not be
subjected to VAT since it is not an income payment.
95. Respondent differs. Audit of petitioner reveals that there is an

increase in the balance of the accounts receivable deferred loyalty points. The
increase is assessed VAT pursuant to Sections 106 and 108 of the Tax Code, as
amended.
D. Petitioner is liable for deficiency Value-Added Tax (VAT)

due from disallowed creditable input tax in the amount of
P892,745.16.
96. Purchase invoices of certain suppliers did not conform with the
invoicing requirement. Hence, the claimed input VAT is disallowed pursuant to
Sections 110 and 113 of the Tax Code. Petitioner did not interpose any
objection on this audit finding. Hence, the same is reiterated from the FLD and
FDDA. Neither did it argued the same in the instant petition. Thus, petitioner
deemed to have accepted the audit finding.
III. PETITIONER IS LIABLE FOR

DEFICIENCY EXPANDED
WITHHOLDING TAX (EWT) IN
THE TOTAL AMOUNT OF
P9,071,438.79 AND THE
CORRESPONDING
INTEREST AND
COMPROMISE PENALTY.
97. This audit finding was fully discussed in Item G of petitioner's

liability of income tax. Hence, the corresponding expanded withholding tax
were assessed from such income payments.
98. The audit finding was merely reiterated from the Formal Letter of
Demand (FLD) to the Final Decision on Disputed Assessment (FDDA) save
those with submitted supporting documents which were revised accordingly.
THE LETTER OF AUTHORITY
(LOA), THE PRELIMINARY
ASSESSMENT NOTICE
(PAN), THE FORMAL LETTER
OF DEMAND (FLD), FINAL
ASSESSMENT NOTICE (FAN)
AND THE FINAL DECISION
ON DISPUTED ASSESSMENT
(FDDA) WERE ISSUED IN
ACCORDANCE WITH LAW,
RULES AND
JURISPRUDENCE.
99. As can be deduced from the following narrations of facts, the

procedure prescribed under Revenue Regulations No. 12-99 had been complied
with by respondent, viz.:
99.1 Letter of Authority (LOA) No. 116-2011-00000119 dated

23 September 2011 was issued authorizing the Revenue Officers of
respondent's LT-Regular Audit Division I to examine petitioner's books
of accounts and other accounting records for all internal revenue taxes
for taxable year 2010. The LOA was issued together with the Checklist
of Requirements.
99.2 On 10 January 2012 the Second Notice for Presentation of

Records/Documents was issued to petitioner.
99.3 Subsequently on 06 February 2012, the Final Notice for

Presentation of Records/Documents was issued to petitioner.
99.4 On 23 May 2013, Ms. Cecilia R. Patricio, petitioner's

authorized signatory, executed a waiver ('first waiver') of the defense of
prescription under the statute of limitations of the National Internal
Revenue Code extending the period to assess petitioner for its internal
revenue tax liabilities for taxable year 2010 until 31 December 2013.
99.5 On 23 September 2013, before the first waiver loses its

validity, Ms. Cecilia R. Patricio, petitioner's authorized signatory,
executed another waiver ('second waiver') of the defense of prescription
under the statute of limitations of the National Internal Revenue Code
extending the period to assess petitioner for its internal revenue tax
liabilities for taxable year 2010 until 30 June 2014.
99.6 On 03 March 2014, before the second waiver loses its

validity, Ms. Cecilia R. Patricio, petitioner's authorized signatory,
executed another waiver ('third waiver') of the defense of prescription
under the statute of limitations of the National Internal Revenue Code
extending the period to assess petitioner for its internal revenue tax
liabilities for taxable year 2010 until 30 September 2014.
99.7 On 18 July 2014, before the third waiver loses its validity,
Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed
another waiver ('fourth waiver') of the defense of prescription under the
statute of limitations of the National Internal Revenue Code extending
the period to assess petitioner for its internal revenue tax liabilities for
taxable year 2010 until 31 December 2014.
99.8 On 12 August 2014 the Preliminary Assessment Notice

('PAN') was issued to petitioner demanding payment of deficiency
Income Tax, Improperly Accumulated Earnings Tax (IAET),
Value-Added Tax (VAT), Expanded Withholding Tax (EWT),
Documentary stamp Tax (DST), surcharge, interest and compromise
penalty for taxable year 2010. The PAN was received by petitioner on
15 August 2014.
99.9 Petitioner did not file its reply to the Preliminary

Assessment Notice (PAN).
99.10 On 07 October 2014, the Formal Letter of Demand

(FLD) with Details of Discrepancies and the Final Assessment Notice
(BIR Form No. 0401) with Assessment Notices Nos.
IT-116-LOA-00000119-10-14-1159,
VT-116-LOA-0000119-10-14-1161,
WE-116-LOA-00000119-10-14-1162,
IAET-116-LOA-00000119-10-14-1160 and
DS-116-LOA-00000119-10-14-1163 were issued and duly received by
petitioner on even date.
99.11 After petitioner filed its administrative protest on

the FLD, respondent issued to petitioner the Final Decision on Disputed
Assessment (FDDA) on 09 November 2015. The FDDA was received
by petitioner on 12 November 2015.
100. Based on the foregoing, the finding of the deficiency Income Tax,
Value-Added Tax (VAT) and Expanded Withholding Tax (EWT), liabilities
against petitioner for taxable year 2010 is proper in all respects. With details as
follows:
Amount of Liability
(inclusive of interest,
Kind of Tax
surcharge and
compromise penalty)
Income Tax P678,366,631.61

Value-Added Tax (VAT) P364,126,174.44
Expanded Withholding Tax P9,071,438.79
(EWT)
––––––––––––––––
Total Tax Liabilities P1,051,564,244.84
==============
101. On a final note, the decision of the Honorable Supreme Court in

the case of Commissioner of Internal Revenue vs. Bank of Philippine Islands
can be well use as a guide, to wit:
'Tax assessments by tax examiners are presumed correct and

made in good faith. The taxpayer has the duty to prove otherwise. In the
absence of proof of any irregularities in the performance of duties,
an assessment duly made by a Bureau of Internal Revenue examiner
and approved by his superior officers will not be disturbed. All
presumptions are in favor of the correctness of tax assessments.'
(Emphasis ours)"
In its Reply (To Answer dated June 15, 2016) filed on July 1, 2016, 21(21)
petitioner argues that this Court has jurisdiction over the instant Petition for Review;
that the assessment is void for lack of authority of the Revenue Officer to conduct the
examination; and that the period to assess petitioner's internal revenue taxes for the
taxable year 2010 has already prescribed. Allegedly, Revenue Memorandum Order
(RMO) No. 14-2006 is void for being contrary to the Tax Code; that RMO No.
14-2016 does not apply retroactively; that withholding taxes are subject to the
prescriptive period in Section 203 of the Tax Code; that petitioner is not estopped
from assailing the validity of the waivers as the doctrine of estoppel is inapplicable to
the instant case; that no deficiency interest should be imposed on the deficiency VAT,
withholding tax on compensation (WTC), and EWT; that the deficiency tax
assessments lack factual and legal bases; and that petitioner is not liable for the
alleged income tax, VAT, WTC, and EWT for taxable year 2010 in the aggregate
amount of P1,051,564,124.52.
The Pre-Trial Conference was set on September 8, 2016. 22(22) However, a
Motion to Defer Pre-Trial Conference was filed by the petitioner on August 4, 2016,
23(23) praying that the Pre-Trial Conference be deferred to November 24, 2016. The
Motion to Defer was granted by the Court in the Order dated August 5, 2016, 24(24)
and the Pre-Trial Conference was reset to November 24, 2016.
Meanwhile, on June 24, 2016, respondent filed a Motion to Defer the

Transmittal of BIR Records, 25(25) praying that the Court defer the transmittal of the
BIR Records until after the filing of her witness' affidavit. The Court granted said
Motion in the Order dated June 28, 2016. 26(26) By way of Compliance, 27(27)
respondent transmitted the BIR Records on January 17, 2017, consisting of three (3)
folders.
Respondent filed his Pre-Trial Brief on January 19, 2017; 28(28) while
petitioner filed its Pre-Trial Brief on January 23, 2017. 29(29)
Moreover, upon motion 30(30) of petitioner filed on October 25, 2016 the
Pre-Trial Conference set on November 24, 2016 was reset for the last time to January
26, 2017. Thereafter, the parties filed their Joint Stipulation of Facts and Issues on
February 15, 2017, 31(31) which was approved by the Court in the Resolution dated
February 22, 2017. 32(32) The Court issued the Pre-Trial Order on March 20, 2017.
33(33)
Trial of the case then ensued.
Petitioner presented its witnesses, namely: Darren Evan S. Santos-Ramos

34(34) and ICPA Ma. Milagros F. Padernal 35(35) who was commissioned on April
20, 2017. 36(36) Upon conclusion of its presentation of evidence, petitioner filed its
Formal Offer of Evidence on December 11, 2017. 37(37)
In the Resolution dated February 12, 2018, 38(38) the Court resolved to admit
petitioner's evidence except Exhibits "P-101-C-9", "P-130-1" to "P-130-80",
"P-130-81" to "P-130-233", and "P-130-234" to "P-130-395", for not being found in
the records, as well as Exhibits "P-136" and "P-138", for failure to correspond to their
description in the said Formal Offer of Evidence.
On March 6, 2018, petitioner filed a Motion for Reconsideration (With Motion

for Additional Time to Submit Missing ICPA Exhibits and Supplemental Offer of
Evidence), 39(39) praying that this Court grant: (1) the ICPA a period of ten (10) days
within which to submit a CD/DVD/USB containing Exhibits "P-101-C-9", "P-130-1"
to "P-130-80", "P-130-81" to "P-130-233", and "P-130-235" to "P-130-395", and
upon submission, admit the same for the purposes for which they are being offered;
and (2) petitioner's Supplemental Offer of Evidence (as embodied in the said Motion)
and admit Exhibits "P-136" and "P-137".
During the hearing held on April 17, 2018, 40(40) the Court partially granted
the Motion for Reconsideration of petitioner, thereby allowing the latter's lead
counsel, Atty. Pierre Martin Reyes, to submit within ten (10) days from the said date
or until April 27, 2018 the exhibits mentioned in the said Motion. Thereafter,
respondent presented his lone witness, Revenue Officer Carolyn V. Mendoza.
On April 24, 2018, respondent filed his Formal Offer of Evidence, 41(41) while
petitioner filed a Submission, submitting to the Court the pertinent Exhibits on April
27, 2018.
In the Resolution dated June 6, 2018, 42(42) the Court admitted: (1) petitioner's
Exhibits "P-101-C-9", "P-130-1" to "P-130-80", "P-130-81" to "P-130-233",
"P-130-235" to "P-130-395", and "P-136" and "P-138"; and (2) all of respondent's
Exhibits. In the same Resolution, the Court directed both parties to file their
respective memoranda within thirty (30) days from receipt hereof.
Respondent filed his Memorandum on August 14, 2018; 43(43) while petitioner
filed its Memorandum on August 28, 2018. 44(44) In the Resolution dated September
3, 2018, 45(45) the case was submitted for decision.
Hence, this Decision.
THE ISSUES
The issues for this Court's resolution are as follows:
"1. Whether the Honorable Court has jurisdiction over the instant
petition; and
2. Whether Petitioner is liable to pay the aggregate amount of One

Billion Fifty-One Million Five Hundred Sixty-Four Thousand
Two Hundred Forty-Four and 84/100 (P1,051,564,244.84) for
deficiency IT, VAT, and EWT for taxable year 2010, as well as
25% surcharge, 20% deficiency and delinquency interest
pursuant to Sections 248 and 249 of the National Internal
Revenue Code of 1997." 46(46)
Petitioner's arguments:
Petitioner argues that the Court has jurisdiction to take cognizance of the
instant Petition for Review, while the assessment is allegedly void for lack of
authority to conduct the same. According to petitioner, the period to assess petitioner's
internal revenue taxes for TY 2010 has already prescribed; the waivers did not validly
extend the original three-year prescriptive period to assess petitioner's internal
revenue taxes for TY 2010; the deficiency tax assessments lack factual and legal
bases; and the amount held in trust by petitioner for its merchant partners, earmarked
to fund the cost of redeemed points under the SM Advantage Card (SMAC) Loyalty
Program is not income, and accordingly, the same is not subject to income tax, VAT,
and EWT.
Moreover, petitioner disputes respondent's findings as follows:
1. Unaccounted AR — Deferred loyalty points and unaccounted

receipts are not income or revenue accounts.
2. Undeclared sales per customer's data represents timing differences

due to the difference in the accounting methods used by the
petitioner and its customers.
3. Mere difference in sales per SLS and income per BIR Form 2307
does not mean that there is under declaration of sales, considering
the two reportorial requirements are governed by two different
regulations.
4. The assessments resulting from the comparison of the supposed

third-party information (SLS) and petitioner's report (SLP) or any
other information are mere naked assessments or has no leg to
stand on, absent the sworn statements/declarations from the said
third-party sources.
5. The disallowed expenses (Marketing Points Issued) pertains to

marketing expenses of the petitioner, which arose from its
redemption thru A-pod and 5x mastercard promotions, and are
properly supported by journal entry screenshots recorded in the
books. As such, these are allowable deductions for income tax
purposes.
Lastly, petitioner concludes that it is not liable for deficiency taxes for TY
2010 in the amount of P1,051,564,124.52.
Respondent's counter-arguments:
Respondent counter-argues that the Honorable Court has no jurisdiction over

the instant petition for being filed out of time. Assuming without necessarily
conceding that the Court has jurisdiction over the instant Petition, respondent
maintains that the assessment is valid and issued pursuant to a valid LOA and that his
right to assess the petitioner for the TY 2010 did not prescribe.
Allegedly, petitioner is estopped from assailing the validity of the waivers it

executed and that petitioner is liable for the corresponding deficiency interest on the
deficiency VAT and EWT assessments.
According to respondent, petitioner is liable for deficiency income tax in the

total amount of P678,366,631.61 and the corresponding interest and compromise
penalty. In support of this argument, respondent alleges that petitioner is liable for
deficiency income tax due to undeclared income from unaccounted Accounts
Receivable Deferred Loyalty points in the amount of P757,969,664.70; from
movements of SM Advantage Points earned and redeemed in the amount of
P266,489,356.35; from undeclared sales per customer's data in the amount of
P2,903,355.73; from gross profit from undeclared purchases in the amount of
P8,222,969.32; from disallowed expenses (Marketing Points) in the amount of
P18,741,247.32; and from disallowed expenses for non-withholding of tax in the
amount of P18,741,247.32.
As regards petitioner's supposed deficiency VAT in the total amount of

P364,126,174.44 and the corresponding interest and compromise penalty, petitioner's
liability allegedly arises from: (1) unaccounted AR Deferred Loyalty Points, (2)
unaccounted receipts, (3) undeclared sales per customer's data, (4) undeclared sales
(SLS vs. SAWT), and (5) gross sales attributable to undeclared purchases; from
discrepancy in income per Income Tax Return vs. VAT Return in the amount of
P37,730,006.20; from deferred loyalty points increase for the year in the amount of
P405,855,217.00; and from disallowed creditable input tax in the amount of
P892,745.16.
Respondent also asserts that petitioner is liable for deficiency EWT in the total
amount of P9,071,438.79 and the corresponding interest and compromise penalty.
In the absence of proof of any irregularities in the performance of duties, an
assessment duly made by a Bureau of Internal Revenue examiner and approved by his
superior officers will allegedly not be disturbed; and that all presumptions are in favor
of the correctness of tax assessments.
THE COURT'S RULING
We find merit in the instant Petition for Review.
This Court has jurisdiction to

entertain the present appeal.
Respondent posits that since petitioner received the denial of its administrative
protest on November 12, 2015, it had only until December 12, 2015 within which to
file a petition for review before this Court. Considering that the instant Petition for
Review was only filed on March 18, 2016, the same was filed out of time.
We disagree.
Section 3.1.4 of Revenue Regulations (RR) No. 12-99, 47(47) as amended by

RR No. 18-2013, 48(48) provides, in part, as follows:
"SECTION 3. Due Process Requirement in the Issuance of a

Deficiency Tax Assessment. —
xxx xxx xxx
3.1.4 Disputed Assessment. —
xxx xxx xxx
If the protest is denied, in whole or in part, by the Commissioner's

duly authorized representative, the taxpayer may either: (i) appeal to the
Court of Tax Appeals (CTA) within thirty (30) days from date of receipt of the
said decision; or (ii) elevate his protest through request for reconsideration
to the Commissioner within thirty (30) days from date of receipt of the said
decision. No request for reinvestigation shall be allowed in administrative
appeal and only issues raised in the decision of the Commissioner's duly
authorized representative shall be entertained by the Commissioner.
xxx xxx xxx
If the protest or administrative appeal is not acted upon by the

Commissioner within one hundred eighty (180) days counted from the date
of filing of the protest, the taxpayer may either: (i) appeal to the CTA within
thirty (30) days from after the expiration of the one hundred eighty (180)-day
period; or (ii) await the final decision of the Commissioner on the disputed
assessment and appeal such final decision to the CTA within thirty (30)
days after the receipt of a copy of such decision." (Emphases and
underscoring supplied)
Based on the foregoing provisions, when a taxpayer's protest is denied by

respondent's duly authorized representative, in whole or in part, the remedy for the
taxpayer is either: (i) to appeal to this Court within thirty (30) days from the date of
receipt of the said representative's decision; or (ii) to elevate his protest "through [a]
request for reconsideration" to respondent within the same thirty (30)-day period. The
latter remedy is referred to as an "administrative appeal." In case such administrative
appeal is not acted upon by respondent within one hundred eighty (180) days from the
filing of the protest, the concerned taxpayer may either: (i) appeal to this Court within
thirty (30) days from after the expiration of the said 180-day period; or (ii) await the
final decision of respondent on the disputed assessment, and appeal such final
decision to this Court within thirty (30) days from receipt of a copy thereof.
In this case, it is undisputed that petitioner filed its protest letter to the
FLD/FAN issued by OIC-ACIR Nestor S. Valeroso on November 6, 2014. 49(49) On
November 12, 2015, petitioner received the FDDA dated November 9, 2015 issued by
the same OIC-ACIR Nestor S. Valeroso, 50(50) denying, in part, petitioner's protest.
Within thirty (30) days from such date of receipt or on December 14, 2015, petitioner
filed its Motion for Reconsideration dated December 12, 2015 with the office of
respondent. 51(51) Subsequently, petitioner received, on February 17, 2016, the letter
dated February 11, 2016 issued by respondent himself, 52(52) denying petitioner's
Motion for Reconsideration. Thereafter, petitioner filed the instant Petition for Review
on March 18, 2016.
As already shown, when the subject protest was denied, in part, by

respondent's duly authorized representative, OIC-ACIR Nestor S. Valeroso, through
the FDDA dated November 9, 2015, petitioner chose the administrative appeal
provided under the aforesaid Regulations, or specifically, elevated its protest, through
a request/motion for reconsideration, to respondent within thirty (30) days from
receipt thereof. Petitioner awaited the decision of respondent, and when such
request/motion for reconsideration was denied by the latter in the said letter dated
February 11, 2016, petitioner then filed the instant Petition for Review, within thirty
(30) days from receipt thereof. Considering that petitioner's actions are consistent
with the remedies provided under the aforequoted Section 3.1.4 of RR No. 12-99, as
amended by RR No. 18-2013, the instant Petition for Review was timely filed. Thus,
this Court is vested with jurisdiction to entertain the same.
Nevertheless, citing the case of Rizal Commercial Banking Corporation vs.

Commissioner of Internal Revenue 53(53) ("RCBC case"), respondent avers that the
thirty (30)-day period to appeal to this Court is not merely directory but mandatory
and it is beyond the power of the courts to extend the same. Relative to the said view,
respondent invokes the ruling of the Supreme Court in Fishwealth Canning
Corporation vs. Commissioner of Internal Revenue 54(54) ("Fishwealth Canning
case") that a motion for reconsideration of the denial of the administrative protest
does not toll the 30-day period to appeal to this Court.
Respondent is clearly in error. His erroneous averment lies on the supposition

that in the said cases (i.e., the RCBC and Fishwealth Canning cases), the thirty
(30)-day mandatory appeal period was held to be reckoned from the date of receipt of
the decision of respondent's duly authorized representative. To be clear, the said two
cases are to the effect that the reckoning of the said period is from the date of receipt
by the taxpayer of the decision of respondent or from the expiration of the 180-day
period, due to the inaction of respondent.
In the RCBC case, the Supreme Court held:
". . . it is clear that the jurisdiction of the Court of Tax Appeals has been
expanded to include not only decisions or rulings but inaction as well of the
Commissioner of Internal Revenue. The decisions, rulings or inaction of the
Commissioner are necessary in order to vest the Court of Tax Appeals with
jurisdiction to entertain the appeal, provided it is filed within 30 days after
receipt of such decision or ruling, or within 30 days after the expiration of
the 180-day period fixed by law for the Commissioner to act on the
disputed assessments. This 30-day period within which to file an appeal is
jurisdictional and failure to comply therewith would bar the appeal and deprive
the Court of Tax Appeals of its jurisdiction to entertain and determine the
correctness of the assessments. Such period is not merely directory but
mandatory and it is beyond the power of the courts to extend the same."
(Emphasis and underscoring supplied)
Clearly from the foregoing, what was held to be mandatory and jurisdictional
is the 30-day period reckoned from the date of receipt by the taxpayer of the
respondent's decision or from the expiration of the 180-day period of inaction by
respondent.
In the same vein, in the Fishwealth Canning case, the Supreme Court ruled as
follows:
"In the case at bar, petitioner's administrative protest was denied by

Final Decision on Disputed Assessment dated August 2, 2005 issued by
respondent and which petitioner received on August 4, 2005. Under the
above-quoted Section 228 of the 1997 Tax Code, petitioner had 30 days to
appeal respondent's denial of its protest to the CTA.
Since petitioner received the denial of its administrative protest on

August 4, 2005, it had until September 3, 2005 to file a petition for review
before the CTA Division. It filed one, however, on October 20, 2005, hence, it
was filed out of time. For a motion for reconsideration of the denial of the
administrative protest does not toll the 30-day period to appeal to the
CTA." (Emphasis supplied)
It is likewise clear from the foregoing pronouncements that the reckoning of

the same 30-day mandatory period to appeal is from respondent's decision, ruling, or
inaction. It is nowhere indicated that such 30-day period should be reckoned from the
decision, ruling or inaction of respondent's duly authorized representative.
Relative thereto, it must be emphasized that the ruling in the Fishwealth

Canning case that a motion for reconsideration does not toll the said 30-day period to
appeal to this Court, clearly refers to the motion for reconsideration of respondent's
"denial of the administrative protest." It does not, in any way, pertain to the denial of
the administrative protest by the duly authorized representative of respondent. Thus,
even when petitioner filed a Motion for Reconsideration of OIC-ACIR Nestor S.
Valeroso's FDDA dated November 9, 2015 before respondent, the same is of no
moment. After all, as already pointed out, the filing of such Motion is consistent, and
in accordance, with the aforequoted Section 3.1.4 of RR No. 12-99, as amended by
RR No. 18-2013.
In any event, respondent cannot validly invoke the rulings in the RCBC and
Fishwealth Canning cases to support its stance that the instant Petition for Review
was not timely filed.
Lastly, respondent contends that petitioner cannot find solace on its alleged
reliance on subordinate legislation; and that administrative rules and regulations
cannot override the statute it seeks to implement. In other words, what respondent is
actually saying is that petitioner cannot validly rely on the aforequoted Section 3.1.4
of RR No. 12-99, as amended by RR No. 18-2013, for being contrary to law.
We, however, disagree with respondent.
In Chevron Philippines, Inc. (Formerly Caltex Philippines, Inc.) vs. Bases

Conversion Development Authority, et al., 55(55) the Supreme Court said:
"Administrative issuances have the force and effect of law. They

benefit from the same presumption of validity and constitutionality enjoyed
by statutes. These two precepts place a heavy burden upon any party
assailing governmental regulations. Petitioner's plain allegations are simply
not enough to overcome the presumption of validity and reasonableness of the
subject imposition." (Emphasis supplied)
Based on the foregoing jurisprudential pronouncements, RR Nos. 12-99 and

RR No. 18-2013 have the force and effect of law, and are presumed valid and
constitutional. Thus, a heavy burden is placed on any party (including respondent)
assailing the same.
It is noted that respondent merely alleged that RR Nos. 12-99 and RR No.
18-2013 have superseded the statute they seek to implement. He was not however
able to corroborate the said allegation. Thus, such plain allegation cannot overcome
the presumption of validity accorded to the said revenue regulations.
Correspondingly, respondent's contention must fail.
In sum, in view of the timely filing of the instant Petition for Review, this
Court has jurisdiction to entertain the same.
The revenue officers, who

conducted the audit of
petitioner, were not authorized
to examine the latter's books of
accounts and other records.
Thus, the subject tax
assessments are void.
In Medicard Philippines, Inc. vs. Commissioner of Internal Revenue,

("Medicard case"), 56(56) the Supreme Court ruled as follows, to wit:
"An LOA is the authority given to the appropriate revenue officer

assigned to perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other accounting
records of a taxpayer for the purpose of collecting the correct amount of
tax. An LOA is premised on the fact that the examination of a taxpayer
who has already filed his tax returns is a power that statutorily belongs
only to the CIR himself or his duly authorized representatives. Section 6 of
the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments

and Prescribe Additional Requirements for Tax Administration and
Enforcement. —
(A) Examination of Return and Determination of Tax Due. —

After a return has been filed as required under the provisions of this
Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the
correct amount of tax: Provided, however, That failure to file a return
shall not prevent the Commissioner from authorizing the examination of
any taxpayer.
xxx xxx xxx (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized

by the CIR himself or by his duly authorized representative, through an
LOA, an examination of the taxpayer cannot ordinarily be undertaken. The
circumstances contemplated under Section 6 where the taxpayer may be
assessed through best-evidence obtainable, inventory-taking, or surveillance
among others has nothing to do with the LOA. These are simply methods of
examining the taxpayer in order to arrive at the correct amount of taxes. Hence,
unless undertaken by the CIR himself or his duly authorized
representatives, other tax agents may not validly conduct any of these kinds
of examinations without prior authority.
xxx xxx xxx
In the case of Commissioner of Internal Revenue v. Sony Philippines,

Inc., 57(57) the Court said that:
Clearly, there must be a grant of authority before any revenue

officer can conduct an examination or assessment. Equally important is
that the revenue officer so authorized must not go beyond the authority
given. In the absence of such an authority, the assessment or
examination is a nullity. (Emphasis and underlining ours)
xxx xxx xxx
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed

with just because none of the financial books or records being physically kept
by MEDICARD was examined. To begin with, Section 6 of the NIRC
requires an authority from the CIR or from his duly authorized
representatives before an examination 'of a taxpayer' may be made. The
requirement of authorization is therefore not dependent on whether the
taxpayer may be required to physically open his books and financial
records but only on whether a taxpayer is being subject to examination.
xxx xxx xxx
That the BIR officials herein were not shown to have acted
unreasonably is beside the point because the issue of their lack of authority
was only brought up during the trial of the case. What is crucial is whether
the proceedings that led to the issuance of VAT deficiency assessment
against MEDICARD had the prior approval and authorization from the
CIR or her duly authorized representatives. Not having authority to
examine MEDICARD in the first place, the assessment issued by the CIR
in inescapably void." (Emphases and underscoring supplied)
Based on the foregoing jurisprudential pronouncements, revenue officers must

be authorized by a valid LOA in order for them to lawfully examine the books of
accounts and other accounting records of a taxpayer. In the absence of said LOA, the
tax assessments issued by the BIR against such taxpayer shall be void.
In the instant case, records show that it was Revenue Officers Reynoso Bravo,
William Sundiam, Miguel Sulit, Meliza Wepee, Maribel Serafica/GS Wilfredo Reyes,
who were authorized by then OIC-ACIR Alfredo V. Misajon to examine the books of
account and other accounting records of petitioner for all internal revenue taxes for
taxable year 2010 under LOA No. LOA-116-2011-00000119 dated September 23,
2011. 58(58) However, it was not the said revenue officers who recommended the
issuance of the tax assessments against petitioner.
In the Memorandum dated September 5, 2014 addressed to the OIC-ACIR,

59(59) the revenue officers, who recommended the issuance of the FLD/FAN against
petitioner, supposedly by virtue of the same LOA No. LOA-116-2011-00000119
dated September 23, 2011, are Reynante P. Martirez; Rosario A. Arriola; and Carolyn
V. Mendoza, as noted by GS Rolando M. Balbido. Clearly, the revenue officers who
conducted the audit or investigation of petitioner are not authorized by appropriate
LOA as required by law and jurisprudence. Correspondingly, the subject tax
assessments, which came about as a result of the said revenue officers' audit or
investigation of petitioner's books of accounts and accounting records for taxable year
2010, are inescapably void.
Respondent, nevertheless, argues that Section 17 of the NIRC of 1997 provides

the transfer or reshuffling of revenue officers, which means that, in natural occurrence
of things, the revenue officer indicated in the LOA need not be the one to complete
the audit; that there will be instances where the revenue officers would either retire,
be reassigned, be taken ill, or die, prior to the completion of the audit investigation;
that an LOA is not an "authorization letter" of the revenue officers; and that there is
no requirement in the law that revenue officers must be identified in the LOA to have
authority.
We disagree with respondent.
For easy reference, Section 17 of the NIRC of 1997 provides as follows:
"SEC. 17. Assignment of Internal Revenue Officers and Other

Employees to Other Duties. — The Commissioner may, subject to the
provisions of Section 16 and the laws on civil service, as well as the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation
of the Commissioner, assign or reassign internal revenue officers and employees
of the Bureau of Internal Revenue, without change in their official rank and
salary, to other or special duties connected with the enforcement or
administration of the revenue laws as the exigencies of the service may require:
Provided, That internal revenue officers assigned to perform assessment or
collection functions shall not remain in the same assignment for more than three
(3) years: Provided, further, That assignment of internal revenue officers and
employees of the Bureau to special duties shall not exceed one (1) year."
A careful reading of the foregoing provision reveals that the NIRC of 1997
grants respondent the power to assign or re-assign internal revenue officers and
employees, subject to certain limitations, one of which is that internal revenue officers
assigned to perform assessment or collection functions shall not remain in the same
assignment for more than three (3) years. However, nothing in the said provision
states that the required LOA can be dispensed with; neither does it provide an
exemption to the legal requirement that a revenue officer must be authorized, through
an LOA, to perform his/her assessment or collection functions.
It must be emphasized that the issue here is not whether a revenue officer can
be re-assigned to another BIR office, without completing the audit being made on a
taxpayer. Rather, it is whether or not the revenue officers who conducted the
investigation of the taxpayer are authorized to do so, as required by law and
jurisprudence.
The Court recognizes that there can be instances where a revenue officer,
previously authorized through an LOA, may not be able to complete the examination
of the concerned taxpayer, by reason of retirement, reassignment, illness, or death, of
the said revenue officer. But what is not acceptable to this Court is respondent's
proposition that because of such instances, there can already be an excuse not to issue
an LOA. As already intimated, the said proposition finds no basis in law and
jurisprudence. To be sure, despite the presence of any of the above-enumerated
instances, respondent or his/her duly authorized representative can still legally issue
another LOA in favor of the revenue officers who are intended to replace the one(s)
previously authorized. In other words, there is nothing in the law which prohibits the
issuance of a subsequent LOA authorizing another revenue officer, or new set of
revenue officers, to continue the examination of books of accounts and other
accounting records of the concerned taxpayer.
Respondent cannot validly argue that only one LOA per taxable year can be
issued to a taxpayer, pursuant to RMO No. 36-2000. 60(60)
It is true that under the said RMO No. 36-2000, the following provisions may
be found, to wit:
"III. AUDIT POLICIES AND GUIDELINES
xxx xxx xxx
4. The policy on the simultaneous investigation of all tax

liabilities of the taxpayer for the same taxable year shall
be followed. One LA 61(61) be issued for each taxable
year under audit to include all internal revenue tax
liabilities of the taxpayer. Accordingly, the LA shall
state the specific year under audit and the indication of
'unverified prior years' or similar statement in the LA
shall not be allowed." (Emphasis supplied)
However, the same RMO is explicit as to what it covers and excludes, to wit:
"II. COVERAGE
1. The Office Audit Program shall cover the audit of tax

returns of individual and corporate taxpayers, estates
and trusts within the Region covering taxable years
1997, 1998 and 1999, x x x
xxx xxx xxx
2. The following cases shall be excluded from the

coverage of this Order:
xxx xxx xxx
2.3 Taxpayers falling under the jurisdiction of Large

Taxpayers Service, Excise Taxpayers Service and other
taxpayers/industries covered by the Audit Program of the
Enforcement Service; and
xxx xxx xxx." (Emphasis

supplied)
Based on the foregoing provisions, RMO No. 36-2000 covers only taxable
years 1997, 1998 and 1999, and does not include taxpayers falling under the
jurisdiction of the Large Taxpayers Service of the BIR.
Considering that the concerned TY is 2010, and that petitioner is a taxpayer

falling under the Large Taxpayers Service of the BIR, 62(62) RMO No. 36-2000
cannot be applied to the instant case.
But even granting that the provision of RMO No. 36-2000 to the effect that
only "one LOA can be issued" covers all taxpayers in all taxable years, without regard
as to whether the authorized revenue officer(s) therein actually performed and
finished the audit, the same is of no moment. This is simply because it would run
counter to the aforequoted Section 6 (A) of the NIRC of 1997, and the corresponding
pronouncement of the Supreme Court in the Medicard case, which became a part of
the legal system of the Philippines. 63(63) As such, the said provision of RMO No.
36-2000 cannot be considered as valid, 64(64) and must not be adhered to, as it is not
legally binding.
Furthermore, We cannot subscribe to respondent's contention that the LOA is

not an "authorization letter" of the revenue officers; and that there is no requirement
in the law that revenue officers must be identified in the LOA to have authority.
The said contention is contrary to the definition given in the Medicard case in
that "[a]n LOA is the authority given to the appropriate revenue officer assigned to
perform assessment functions." The High Court continued: an LOA "empowers or
enables said revenue officer to examine the books of account and other accounting
records of a taxpayer for the purpose of collecting the correct amount of tax. An LOA
is premised on the fact that the examination of a taxpayer who has already filed his
tax returns is a power that statutorily belongs only to the CIR himself or his duly
authorized representatives." Thus, an LOA is, in fact, an authorization letter for the
appropriate revenue officers assigned to perform assessment functions. It is so
because the power to examine was not statutorily given to the said revenue officers,
and for the latter to exercise such power, authority must be given to them by
respondent or his duly authorized representative. Such being the case, it is perforce
required that the revenue officers so authorized must be identified in the LOA.
Without such authority to examine, the revenue officer cannot perform assessment
functions.
In sum, since the said revenue officers who completed the audit of petitioner
for TY 2010, and who recommended the issuance of the subject tax assessments,
were not authorized via an LOA, the said tax assessments are void.
Finding that the subject tax assessments are void, for being issued for lack of
authority to conduct an examination of petitioner's books of account and other
accounting records for TY 2010, on the part of the concerned revenue officers, and
thus, bear no valid fruit, 65(65) it becomes unnecessary to address the remaining
stipulated issue and the other arguments raised by the parties in this case.
WHEREFORE, in light of the foregoing considerations, the instant Petition

for Review is GRANTED. Accordingly, the FDDA dated February 11, 2016 issued
by respondent, finding petitioner liable for deficiency taxes, penalties and interest in
relation to TY 2010 as follows: (1) income tax in the amount of P678,366,631.32; (2)
VAT in the amount of P364,126,054.41; and (3) EWT in the amount of
P9,071,438.79, or in the aggregate amount of P1,051,564,124.52, inclusive of
penalties, is REVERSED and SET ASIDE.
SO ORDERED.
(SGD.) ERLINDA P. UY
Associate Justice
Roman G. del Rosario, P.J. and Cielito N. Mindaro-Grulla, J., concur.
Footnotes
1. Exhibits "P-1" and "P-2", Docket — Vol. III, pp. 1344 to 1349.
2. Exhibit "P-3", Docket — Vol. III, pp. 1350 to 1351.
3. Par. 1, Summary of Admitted Facts, Joint Stipulation of Facts and Issues (JSFI),
Docket — Vol. II, p. 762.
4. Exhibit "R-3" BIR Records — Folder No. 1, p. 526.
5. Exhibit "P-4", Docket — Vol. III, pp. 1352 to 1366; and Exhibits "R-14", BIR
Records — Folder No. 1, pp. 578 to 584.
6. Par. 3, Summary of Admitted Facts, JSFI, Docket — Vol. II, pp. 762 to 763.
7. Exhibit "P-4-1", Docket — Vol. III, p. 1352.
9. Exhibit "P-6", Docket — Vol. III, pp. 1394 to 1411; and Exhibits "R-16", "R-17", and
"R-17-1" to "R-17-4", BIR Records — Folder No. 1, pp. 614 to 623.
14. Par. 5, Summary of Admitted Facts, JSFI, Docket — Vol. II, p. 763.
16. Exhibit "P-9", Docket — Vol. III, pp. 1476 to 1508; and BIR Records — Folder No.
3, pp. 183 to 215.
17. Exhibit "P-10", Docket — Vol. III, p. 1509; and Exhibits "R-22", BIR Records —
Folder No. 3, p. 249.
20. Docket, pp. 245 to 277.
21. Docket — Vol. I, pp. 294 to 337.
22. Docket — Vol. I, Notice of Pre-Trial Conference, pp. 279 to 280.
23. Docket — Vol. I, pp. 342 to 345.
24. Docket — Vol. I, p. 347.
25. Docket — Vol. I, pp. 283 to 286.
26. Docket — Vol. I, p. 288.
27. Docket — Vol. I, pp. 364 to 366.
28. Docket — Vol. I, pp. 493 to 500.
29. Docket — Vol. II, pp. 504 to 517.
30. Petitioner filed a "Motion to Defer Pre-Trial Conference" on October 25, 2016.
32. Docket — Vol. II, pp. 779.
33. Docket — Vol. III, pp. 1050 to 1065.
34. Docket — Vol. II, pp. 537 to 575; and Minutes of the hearing held on March 21,
2017, and Order dated March 21, 2017, Docket — Vol. III, pp. 1066 to 1075.
35. Docket — Vol. III, pp. 1224 to 1256; and Minutes of the hearing held on June 27,
2017, and Order dated June 27, 2017, Docket — Vol. III, pp. 1258 to 1263.
36. Docket — Vol. III, pp. 1109 to 1111. Refer also to her Oath of Commission, Docket
— Vol. III, p. 1108.
40. Order dated April 17, 2018, Docket — Vol. III, pp. 1539 to 1540.
45. Docket — Vol. III, p. 1696.
46. Pre-Trial Order dated March 20, 2017, Docket — Vol. III, pp. 1050 to 1065, at pp.
1052 to 1053.
47. SUBJECT: Implementing the Provisions of the National Internal Revenue Code of
1997 Governing the Rules on Assessment of the National Internal Revenue Taxes,
Civil Penalties and Interest and the Extra-Judicial Settlement of a Taxpayer's
Criminal Violation of the Code Through Payment of a Suggested Compromise
Penalty.
48. SUBJECT: Amending Certain Sections of Revenue Regulations No. 12-99 Relative
to the Due Process Requirement in the Issuance of a Deficiency Tax Assessment.
3, pp. 183 to 215.
52. Exhibit "P-10-1 ", Docket — Vol. III, p. 1509.
53. G.R. No. 168498, April 24, 2007.
54. G.R. No. 179343, January 21, 2010.
55. G.R. No. 173863, September 15, 2010.
56. G.R. No. 222743, April 5, 2017.
57. 649 Phil. 519 (2010).
58. Exhibit "R-3", BIR Records — Folder No. 1, p. 526.
59. Exhibit "R-15", BIR Records — Folder No. 1, pp. 591 to 603.
60. SUBJECT: Prescribing an Office Audit Program in the Assessment Division of
Revenue Regional Offices.
61. That is, "Letter of Authority."
63. Judicial decisions applying or interpreting the laws or the Constitution shall form a
part of the legal system of the Philippines. (Article 8, Civil Code of the Philippines)
64. Administrative or executive acts, orders or regulations shall be valid only when they
are not contrary to the laws or the Constitution. [Article 7 (last paragraph), Civil
Code of the Philippines]
65. Commissioner of Internal Revenue vs. Reyes, etseq., G.R. Nos. 159694 and 163581,
January 27, 2006; Commissioner of Internal Revenue vs. BASF Coating + Inks Phils.,
Inc., G.R. No. 198677, November 26, 2014; and Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue, G.R. No. 193100, December 10, 2014.
Endnotes
1 (Popup - Popup)
1. Exhibits "P-1" and "P-2", Docket — Vol. III, pp. 1344 to 1349.
2 (Popup - Popup)
3 (Popup - Popup)
3. Par. 1, Summary of Admitted Facts, Joint Stipulation of Facts and Issues (JSFI),
Docket — Vol. II, p. 762.
4 (Popup - Popup)
4. Exhibit "R-3" BIR Records — Folder No. 1, p. 526.
5 (Popup - Popup)
6 (Popup - Popup)
7 (Popup - Popup)
8 (Popup - Popup)
9 (Popup - Popup)
9. Exhibit "P-6", Docket — Vol. III, pp. 1394 to 1411; and Exhibits "R-16", "R-17", and
"R-17-1" to "R-17-4", BIR Records — Folder No. 1, pp. 614 to 623.
10 (Popup - Popup)
11 (Popup - Popup)
12 (Popup - Popup)
13 (Popup - Popup)
14 (Popup - Popup)
15 (Popup - Popup)
16 (Popup - Popup)
3, pp. 183 to 215.
17 (Popup - Popup)
17. Exhibit "P-10", Docket — Vol. III, p. 1509; and Exhibits "R-22", BIR Records —
Folder No. 3, p. 249.
18 (Popup - Popup)
19 (Popup - Popup)
20 (Popup - Popup)
20. Docket, pp. 245 to 277.
21 (Popup - Popup)
21. Docket — Vol. I, pp. 294 to 337.
22 (Popup - Popup)
22. Docket — Vol. I, Notice of Pre-Trial Conference, pp. 279 to 280.
23 (Popup - Popup)
23. Docket — Vol. I, pp. 342 to 345.
24 (Popup - Popup)
24. Docket — Vol. I, p. 347.
25 (Popup - Popup)
25. Docket — Vol. I, pp. 283 to 286.
26 (Popup - Popup)
26. Docket — Vol. I, p. 288.
27 (Popup - Popup)
27. Docket — Vol. I, pp. 364 to 366.
28 (Popup - Popup)
28. Docket — Vol. I, pp. 493 to 500.
29 (Popup - Popup)
30 (Popup - Popup)
30. Petitioner filed a "Motion to Defer Pre-Trial Conference" on October 25, 2016.
31 (Popup - Popup)
32 (Popup - Popup)
32. Docket — Vol. II, pp. 779.
33 (Popup - Popup)
34 (Popup - Popup)
34. Docket — Vol. II, pp. 537 to 575; and Minutes of the hearing held on March 21,
2017, and Order dated March 21, 2017, Docket — Vol. III, pp. 1066 to 1075.
35 (Popup - Popup)
35. Docket — Vol. III, pp. 1224 to 1256; and Minutes of the hearing held on June 27,
2017, and Order dated June 27, 2017, Docket — Vol. III, pp. 1258 to 1263.
36 (Popup - Popup)
36. Docket — Vol. III, pp. 1109 to 1111. Refer also to her Oath of Commission, Docket
— Vol. III, p. 1108.
37 (Popup - Popup)
38 (Popup - Popup)
39 (Popup - Popup)
40 (Popup - Popup)
40. Order dated April 17, 2018, Docket — Vol. III, pp. 1539 to 1540.
41 (Popup - Popup)
42 (Popup - Popup)
43 (Popup - Popup)
44 (Popup - Popup)
45 (Popup - Popup)
45. Docket — Vol. III, p. 1696.
46 (Popup - Popup)
46. Pre-Trial Order dated March 20, 2017, Docket — Vol. III, pp. 1050 to 1065, at pp.
1052 to 1053.
47 (Popup - Popup)
47. SUBJECT: Implementing the Provisions of the National Internal Revenue Code of
1997 Governing the Rules on Assessment of the National Internal Revenue Taxes,
Civil Penalties and Interest and the Extra-Judicial Settlement of a Taxpayer's
Criminal Violation of the Code Through Payment of a Suggested Compromise
Penalty.
48 (Popup - Popup)
48. SUBJECT: Amending Certain Sections of Revenue Regulations No. 12-99 Relative
to the Due Process Requirement in the Issuance of a Deficiency Tax Assessment.
49 (Popup - Popup)
50 (Popup - Popup)
51 (Popup - Popup)
3, pp. 183 to 215.
52 (Popup - Popup)
52. Exhibit "P-10-1 ", Docket — Vol. III, p. 1509.
53 (Popup - Popup)
53. G.R. No. 168498, April 24, 2007.
54 (Popup - Popup)
54. G.R. No. 179343, January 21, 2010.
55 (Popup - Popup)
55. G.R. No. 173863, September 15, 2010.
56 (Popup - Popup)
56. G.R. No. 222743, April 5, 2017.
57 (Popup - Popup)
57. 649 Phil. 519 (2010).
58 (Popup - Popup)
58. Exhibit "R-3", BIR Records — Folder No. 1, p. 526.
59 (Popup - Popup)
59. Exhibit "R-15", BIR Records — Folder No. 1, pp. 591 to 603.
60 (Popup - Popup)
60. SUBJECT: Prescribing an Office Audit Program in the Assessment Division of
Revenue Regional Offices.
61 (Popup - Popup)
61. That is, "Letter of Authority."
62 (Popup - Popup)
63 (Popup - Popup)
63. Judicial decisions applying or interpreting the laws or the Constitution shall form a
part of the legal system of the Philippines. (Article 8, Civil Code of the Philippines)
64 (Popup - Popup)
64. Administrative or executive acts, orders or regulations shall be valid only when they
are not contrary to the laws or the Constitution. [Article 7 (last paragraph), Civil Code
of the Philippines]
65 (Popup - Popup)
65. Commissioner of Internal Revenue vs. Reyes, etseq., G.R. Nos. 159694 and 163581,
January 27, 2006; Commissioner of Internal Revenue vs. BASF Coating + Inks
Phils., Inc., G.R. No. 198677, November 26, 2014; and Samar-I Electric Cooperative
vs. Commissioner of Internal Revenue, G.R. No. 193100, December 10, 2014.

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[C.T.A. CASE NO. 9301. January 4, 2019.

MARKETING CONVERGENCE, INC., petitioner, vs.

Before Us is a Petition for Review filed on March 18, 2016 by Marketing

Respondent Commissioner of Internal Revenue, is sued in his official capacity,

On September 28, 2011, petitioner received the Letter of Authority No.

Subsequently, Nestor S. Valeroso, then Officer in Charge-Assistant

"SPECIAL AND AFFIRMATIVE DEFENSES

4. Respondent adopts the abovementioned admissions and denials as

WITH ALL DUE RESPECT,

5. Petitioner argued that on February 17, 2016, it received the Denial

6. Respondent differs. For quick reference, the following facts are

a. On 07 October 2014, petitioner received the Formal

b. On 06 November 2014, petitioner allegedly filed its

c. On 12 November 2015, petitioner received the Final

d. On 14 December 2015, petitioner allegedly filed its

7. Under Section 228 of the National Internal Revenue Code of 1997

"xxx xxx xxx

Such assessment may be protested administratively by filing a

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

8. In the case at bar, the administrative protest was denied by a Final

9. Since petitioner received the denial of its administrative protest on

'Respondent thereafter issued a Final Decision on Disputed

Instead of appealing to the CTA, petitioner filed, on September

xxx xxx xxx

The petition is bereft of merit.

Section 228 of the 1997 Tax Code provides that an assessment

x x x may be protested administratively by filing a request for

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

In the case at bar, petitioner's administrative protest was denied

Since petitioner received the denial of its administrative protest

After all, the power of administrative officials to promulgate

13. Respondent differs. First, respondent would like to emphasize that

'x x x is are authorized to examine your books of accounts and other

15. In addition, petitioner also interposed that the audit examination

16. Respondent differs. It is submitted that there is no need for the

17. Lastly, petitioner never questioned the validity of the Letter of

18. Petitioner alleged that respondent's right to assess petitioner's taxes

19. Petitioner's contention is bereft of merit.

Sec. 222 Exceptions as to Period of Limitation of Assessment and

(a) In the case of a false or fraudulent return with intent to evade

(b) If before the expiration of the time prescribed in Section 203

21. Petitioner's taxable year subject of assessment is that of taxable

23. On 23 May 2013, Ms. Cecilia R. Patricio, petitioner's authorized

28. Respondent differs. The waiver's failure to state specifically the

Except for waiver of collection of taxes which shall indicate the

31. In addition to the waivers executed in relation to this case,

32. Withholding tax assessments are NOT an assessment for an

33. By operation of law, the relationship between the Government and

34. Clearly, the liability of petitioner as taxpayer is different from its

35. The liability of a withholding agent is further established under

Section 251. Failure of a Withholding Agent to Collect and Remit Tax.

36. In Filipinas Synthetic Fiber Corporation vs. Court of Appeals and

37. The Tax Code only makes petitioner, as withholding agent,

38. Accordingly, the tax deducted and withheld by withholding agents

xxx xxx xxx

xxx xxx xxx

40. It is clear that the assessed deficiency withholding tax as a penalty

Sec. 222. Exceptions as to Period of Limitation of Assessment and

43. In the instant case, audit of petitioner disclosed that petitioner

46. To reiterate, a false return implies deviation from the truth,

The ordinary period of prescription of 5 years now (now 3 years) within

There being undoubtedly false tax returns in this case, We affirm

48. Finally, petitioner attacked the validity of the waivers it executed