G.R. No.

213394, April 06, 2016

SPOUSES EMMANUEL D. PACQUIAO AND JINKEE J. PACQUIAO, Petitioners, v. THE COURT OF

TAX APPEALS - FIRST DIVISION AND THE COMMISSION OF INTERNAL REVENUE, Respondents.

DECISION

MENDOZA, J.:

Before this Court is a petition for review on certiorari1 under Rule 65 of the Rules of Court filed by petitioner
spouses, now Congressman Emmanuel D. Pacquiao (Pacquiao) and Vice-Governor Jinkee J. Pacquiao (Jinkee), to
set aside and annul the April 22, 2014 Resolution2 and the July 11, 2014 Resolution3 of the Court of Tax Appeals
(CTA), First Division, in CTA Case No. 8683.

Through the assailed issuances, the CTA granted the petitioners' Urgent Motion to Lift Warrants of Distraint & Levy
and Garnishment and for the Issuance of an Order to Suspend the Collection of Tax (with Prayer for the Issuance of
a Temporary Restraining Order4[Urgent Motion], dated October 18, 2013, but required them, as a condition, to
deposit a cash bond in the amount of P3,298,514,894.35-or post a bond of P4,947,772,341.53.

The Antecedents

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

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

The controversy began on March 25, 2010, when Pacquiao received a Letter of Authority7(March LA) from the
Regional District Office No. 43 (RDO) of the Bureau of Internal Revenue (BIR) for the examination of his books of
accounts and other accounting records for the period covering January 1, 2008 to December 31, 2008.

On April 15, 2010, Pacquiao filed his 2009 income tax return,8 which although reflecting his Philippines-sourced
income, failed to include his income derived from his earnings in the US.9 He also failed to file his Value Added
Tax (VAT) returns for the years 2008 and 2009.10

Finding the need to directly conduct the investigation and determine the tax liabilities of the petitioners, respondent
Commissioner on Internal Revenue (CIR) issued another Letter of Authority, dated July 27, 2010 (July LA),
authorizing the BIR's National Investigation Division (NID) to examine the books of accounts and other accounting
records of both Pacquiao and Jinkee for the last 15 years, from 1995 to 2009.11 On September 21, 2010 and
September 22, 2010, the CIR replaced the July LA by issuing to both Pacquiao12 and Jinkee13 separate electronic
versions of the July LA pursuant to Revenue Memorandum Circular (RMC) No. 56-2010.14

Due to these developments, the petitioners, through counsel, wrote a letter15 questioning the propriety of the CIR
investigation. According to the petitioners, they were already subjected to an earlier investigation by the BIR for the
years prior to 2007, and no fraud was ever found to have been committed. They added that pursuant to the March
LA issued by the RDO, they were already being investigated for the year 2008.

In its letter,16 dated December 13, 2010, the NID informed the counsel of the petitioners that the July LA issued by
the CIR had effectively cancelled and superseded the March LA issued by its RDO. The same letter also stated that:
Although fraud had been established in the instant case as determined by the Commissioner, your clients
would still be given the opportunity to present documents as part of their procedural rights to due process with
regard to the civil aspect thereof. Moreover, any tax credits and/or payments from the taxable year 2007 & prior
years will be properly considered and credited in the current investigation.17

G.R. No. 215957

COMMISSIONER OF INTERNAL REVENUE, Petitioner 

vs.
FITNESS BY DESIGN, INC., Respondent

DECISION
LEONEN, J.:

To avail of the extraordinary period of assessment in Section 222(a) of the National Internal Revenue Code, the
Commissioner of Internal Revenue should show that the facts upon which the fraud' is based is communicated to the
taxpayer. The burden of proving that the facts exist in any subsequent proceeding is with the Commissioner.
Furthermore, the Final Assessment Notice is not valid if it does not contain a definite due date for payment by the
taxpayer.

This resolves a Petition for Review on Certiorari1 filed by the Commissioner of Internal Revenue, which assails the
Decision2 dated July 14, 2014 and Resolution3 dated December 16, 2014 of the Court of Tax Appeals. The Court of
Tax Appeals En Banc affirmed the Decision of the First Division, which declared the assessment issued against
Fitness by Design, Inc. (Fitness) as invalid.4

On April 11, 1996, Fitness filed its Annual Income Tax Return for the taxable year of 1995.5 According to Fitness, it
was still in its pre-operating stage during the covered period.6

On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated March 17, 2004.7 The Final
Assessment Notice was issued under Letter of Authority No. 00002953.8 The Final Assessment Notice assessed that
Fitness had a tax deficiency in the amount of ₱10,647,529.69.9 It provides:

FINAL ASSESSMENT NOTICE

March 17, 2004

FITNESS BY DESIGN, INC

169 Aguirre St., BF Homes,
Paranaque City

Gentlemen:

Please be informed that after investigation of your Internal revenue Tax Liabilities for the year 1995 pursuant to
Letter of Authority No. 000029353 dated May 13, 2002, there has been found due deficiency taxes as shown
hereunder:

Assessment No. _____________

Income Tax    
     
Taxable Income per return ₱  
Add: Unreported Sales   7,156,336.08
Taxable Income per audit   7,156,336.08
     
Tax Due (35%)   2,504,717.63
Add: Surcharge (50%) ₱ 1,252,358.81  
Interest (20%/annum) until 4-15-04 4,508,491. 73 5, 760,850.54
Deficiency Income Tax   ₱ 8,265,568.17
     
Value Added Tax    
     
Unreported Sales   ₱ 7,156,336.08
Output Tax (10%)   715,633.61
Add: Surcharge (50%) ₱ 357,816.80  
Interest (20%/ annum) until 4-15-04 1,303,823.60 1,661,640.41
Deficiency VAT ₱ 2,311,214.02
Documentary Stamp Tax    
     
Subscribe Capital Stock   ₱ 375,000.00
DST due (2/200)   3,750.00
Add: Surcharge (25%)   937.50
Deficiency DST   ₱ 4,687.50
     
Total Deficiency Taxes   ₱ 10,647,529.69

The complete details covering the aforementioned discrepancies established during the investigation of this case are
shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code], as amended. Please note, however,
that the interest and the total amount due will have to be adjusted if paid prior or beyond April 15, 2004.

In view thereof, you are requested to pay your aforesaid deficiency internal revenue taxes liabilities through the duly
authorized agent bank in which you are enrolled within the time shown in the enclosed assessment
notice.10 (Emphasis in the original)

Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According to Fitness, the Commissioner's
period to assess had already prescribed. Further, the assessment was without basis since the company was only
incorporated on May 30, 1995.11

On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or Levy with Reference No. OCN WDL-
95-05-005 dated February 1, 2005 to Fitness.12

Fitness filed before the First Division of the Court of Tax Appeals a Petition for Review (With Motion to Suspend
Collection of Income Tax, Value Added Tax, Documentary Stamp Tax and Surcharges and Interests) on March 1,
2005.13

On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to Fitness' Petition and raised special and
affirmative defenses.14 The Commissioner posited that the Warrant of Distraint and/or Levy was issued in
accordance with law.15 The Commissioner claimed that its right to assess had not yet prescribed under Section
222(a)16 of the National Internal Revenue Code.17 Because the 1995 Income Tax ,Return filed by Fitness was false
and fraudulent for its alleged intentional failure to reflect its true sales, Fitness' respective taxes may be assessed at
any time within 10 years from the discovery of fraud or omission.18
The Commissioner asserted further that the assessment already became final and executory for Fitness' failure , to
file a protest within the reglementary period.19 The Commissioner denied that there was a protest to the Final
Assessment Notice filed by Fitness on June 25, 2004.20 According to the Commissioner, the alleged protest was
"nowhere to be found in the [Bureau of Internal Revenue] Records nor reflected in the Record Book of the Legal
Division as normally done by [its]' receiving clerk when she received [sic] any document."21 Therefore, the
Commissioner had sufficient basis to collect the tax deficiency through the Warrant of Distraint and/or Levy.22

The alleged fraudulent return was discovered through a tip from a confidential informant.23 The revenue officers'
investigation revealed that Fitness had been operating business with sales operations amounting to ₱7,156,336.08 in
1995, which it neglected toreport in its income tax return.24 Fitness' failure to report its income resulted in
deficiencies to its income tax and value-added tax of ₱8,265,568.17 and ₱2,377,274.02 respectively, as well as the
documentary stamp tax with regard to capital stock subscription.25

Through the report, the revenue officers recommended the filing of a civil case for collection of taxes and a criminal
case for failure to declare Fitness' purported sales in its 1995 Income Tax Return.26 Hence, a criminal complaint
against Fitness was filed before the Department of Justice.27

The Court of Tax Appeals First Division granted Fitness' Petition on the ground that the assessment has already
prescribed.28 It cancelled and set aside the Final Assessment Notice dated March 1 7, 2004 as well as the Warrant of
Distraint and/or Levy issued by the Commissioner.29 It ruled that the Final Assessment Notice is invalid for failure
to comply with the requirements of Section 22830 of the National Internal Revenue Code. The dispositive portion of
the Decision reads:

WHEREFORE, the Petition for Review dated February 24, 2005 filed by petitioner Fitness by Design, Inc., is
hereby GRANTED. Accordingly, the Final Assessment Notice dated 'March 17, 2004, finding petitioner liable for
deficiency income tax, documentary stamp tax and value-added tax for taxable year 1995 in the total amount of
₱10,647,529.69 is hereby CANCELLED and SET ASIDE. The Warrant of Distraint and Levy dated February 1,
2005 is 'likewise CANCELLED and SET ASIDE.

SO ORDERED.31 (Emphasis in the original)

The Commissioner's Motion for Reconsideration and its Supplemental Motion for Reconsideration were denied by
the Court of Tax Appeals First Division.32

Aggrieved, the Commissioner filed an appeal before the Court of Tax Appeals En Banc.33 The Commissioner
asserted ,that it had 10 years to make an assessment due to the fraudulent income tax return filed by Fitness.34 It also
claimed that the assessment already attained finality due to Fitness' failure to file its protest within the period
provided by law.35

Fitness argued that the Final Assessment Notice issued to it could not be claimed as a valid deficiency assessment
that could justify the issuance of a warrant of distraint and/or levy.36 It asserted that it was a mere request for
payment as it did not provide the period within which to pay the alleged liabilities.37

The Court of Tax Appeals En Banc ruled in favor of Fitness. It affirmed the Decision of the Court of Tax Appeals
First Division, thus:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit. Accordingly, both the Decision and
Resolution in CTA Case No. 7160 dated July 10, 2012 and November 21, 2012 respectively are AFFIRMED in
toto.38 (Emphasis in the original)

The Commissioner's Motion for Reconsideration was denied by the Court of Tax Appeals En Banc in the
Resolution39 dated December 16, 2014.
Hence, the Commissioner of Internal Revenue filed before this Court a Petition for Review.

Petitioner Commissioner of Internal Revenue raises the sole issue of whether the Final Assessment Notice issued
against respondent Fitness by Design, Inc. is a valid assessment under Section 228 of the National Internal Revenue
Code and Revenue Regulations No. 12-99.40

Petitioner argues that the Final Assessment Notice issued to respondent is valid since it complies with Section 228
of the National Internal Revenue Code and Revenue Regulations No. 12-99.41 The law states that the taxpayer shall
be informed in writing of the facts, jurisprudence, and law on which the assessment is based.42 Nothing in the law
provides that due date for payment is a substantive requirement for the validity of a final assessment notice.43

Petitioner further claims that a perusal of the Final Assessment Notice shows that April 15, 2004 is the due date for
payment.44 The pertinent portion of the assessment reads:

The complete details covering the aforementioned discrepancies established during the investigation of this case are
shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code], as amended. Please note, however,
that the interest and the total amount due will have to be adjusted if paid prior or beyond April 15,
2004.45 (Emphasis supplied)

This Court, through the Resolution46 dated July 22, 2015, required respondent to comment on the Petition for
Review.

In its Comment,47 respondent argues that the Final Assessment Notice issued was merely a request and not a demand
for payment of tax liabilities.48 The Final Assessment Notice cannot be considered as a final deficiency assessment
because it deprived respondent of due process when it failed to reflect its fixed tax liabilities.49Moreover, it also gave
respondent an indefinite period to pay its tax liabilities.50

Respondent points out that an assessment should strictly comply with the law for its validity.51 Jurisprudence
provides that "not all documents coming from the [Bureau of Internal Revenue] containing a computation of the tax
liability can be deemed assessments[,] which can attain finality."52 Therefore, the Warrant of Distraint and/or Levy
cannot be enforced since it is based on an invalid assessment.53

Respondent likewise claims that since the Final Assessment Notice was allegedly based on fraud, it must show the
details of the fraudulent acts imputed to it as part of due process.54

The Petition has no merit.

An assessment "refers to the determination of amounts due from a person obligated to make payments."55 "In the
context of national internal revenue collection, it refers to the determination of the taxes due from a taxpayer under
the National Internal Revenue Code of 1997."56

The assessment process starts with the filing of tax return and payment of tax by the taxpayer.57 The initial
assessment evidenced by the tax return is a self-assessment of the taxpayer.58 The tax is primarily computed and
voluntarily paid by the taxpayer without need of any demand from government.59 If tax obligations are properly
paid, the Bureau of Internal Revenue may dispense with its own assessment.60

After filing a return, the Commissioner or his or her representative may allow the examination of any taxpayer for
assessment of proper tax liability.61 The failure of a taxpayer to file his or her return will not hinder the
Commissioner from permitting the taxpayer's examination.62 The Commissioner can examine records or other data
relevant to his or her inquiry in order to verify the correctness of any return, or to make a return in case of
noncompliance, as well as to determine and collect tax liability.63

The indispensability of affording taxpayers sufficient written notice of his or her tax liability is a clear definite
requirement.64 Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99, as amended,
transparently outline the procedure in tax assessment.65

Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation regarding the due process requirement
in the issuance of a deficiency tax assessment, requires a notice for informal conference.67 The revenue officer who
audited the taxpayer's records shall state in his or her report whether the taxpayer concurs with his or her findings of
liability for deficiency taxes.68 If the taxpayer does not agree, based on the revenue officer's report, the taxpayer shall
be informed in writing69 of the discrepancies in his or her payment of internal revenue taxes for "Informal
Conference."70 The informal conference gives the taxpayer an opportunity to present his or her side of the case.71

The taxpayer is given 15 days from receipt of the notice of informal conference to respond.72 If the taxpayer fails to
respond, he or she will be considered in default.73 The revenue officer74 endorses the case with the least possible
delay to the Assessment Division of the Revenue Regional Office or the Commissioner or his or her authorized
representative.75 The Assessment Division of the Revenue Regional Office or the Commissioner or his or her
authorized representative is responsible for the "appropriate review and issuance of a deficiency tax assessment, if
warranted."76

If, after the review conducted, there exists sufficient basis to assess the taxpayer with deficiency taxes, the officer
'shall issue a preliminary assessment notice showing in detail the facts, jurisprudence, and law on which the
assessment is based.77 The taxpayer is given 15 days from receipt of the pre-assessment notice to respond.78 If the
taxpayer fails to respond, he or she will be considered in default, and a formal letter of demand and assessment
notice will be issued.79

The formal letter of demand and assessment notice shall state the facts, jurisprudence, and law on which the
assessment was based; otherwise, these shall be void.80 The taxpayer or the authorized representative may
administratively protest the formal letter of demand and assessment notice within 30 days from receipt of the
notice.81

II

The word "shall" in Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99 means
the act of informing the taxpayer of both the legal and factual bases of the assessment is mandatory.82 The law
requires that the bases be reflected in the formal letter of demand and assessment notice.83 This cannot be
presumed.84 Otherwise, the express mandate of Section 228 and Revenue Regulations No. 12-99 would be
nugatory.85 The requirement enables the taxpayer to make an effective protest or appeal of the assessment or
decision.86

The rationale behind the requirement that taxpayers should be informed of the facts and the law on which the
assessments are based conforms with the constitutional mandate that no person shall be deprived of his or her
property without due process of law.87 Between the power of the State to tax and an individual's right to due process,
the scale favors the right of the taxpayer to due process.88

The purpose of the written notice requirement is to aid the taxpayer in making a reasonable protest, if
necessary.89Merely notifying the taxpayer of his or her tax liabilities without details or particulars is not enough.90

Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc.91 held that a final assessment notice
that only contained a table of taxes with no other details was insufficient:
In the present case, a mere perusal of the [Final Assessment Notice] for the deficiency EWT for taxable year
1994 will show that other than a tabulation of the alleged deficiency taxes due, no further detail regarding the
assessment was provided by petitioner. Only the resulting interest, surcharge and penalty were anchored with legal
basis. Petitioner should have at least attached a detailed notice of discrepancy or stated an explanation why the
amount of P48,461.76 is collectible against respondent and how the same was arrived at.92

Any deficiency to the mandated content of the assessment or its process will not be tolerated.93 In Commissioner of
Internal Revenue v. Enron,94 an advice of tax deficiency from the Commissioner of Internal Revenue to an employee
of Enron, including the preliminary five (5)-day letter, were not considered valid substitutes for the mandatory
written notice of the legal and factual basis of the assessment.95 The required issuance of deficiency tax assessment
notice to the taxpayer is different from the required contents of the notice.96 Thus:

The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and
assessment notice.1âwphi1 Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the
[National Internal Revenue Code] and [Revenue Regulations] No. 12-99 would be rendered nugatory. The alleged
"factual bases" in the advice, preliminary letter and "audit working papers" did not suffice. There was no going
around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal
letter of demand accompanying the assessment notice.97 (Emphasis supplied)

However, the mandate of giving the taxpayer a notice of the facts and laws on which the assessments are based
should not be mechanically applied.98 To emphasize, the purpose of this requirement is to sufficiently inform the
taxpayer of the bases for the assessment to enable him or her to make an intelligent protest.99

In Samar-I Electric Cooperative v. Commissioner of Internal Revenue,100 substantial compliance with Section 228 of
the National Internal Revenue Code is allowed, provided that the taxpayer would be later apprised in writing of the
factual and legal bases of the assessment to enable him or her to prepare for an effective protest.101 Thus:

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

Considering the foregoing exchange of correspondence and documents between the parties, we find that the
requirement of Section 228 was substantially complied with. Respondent had fully informed petitioner in writing of
the factual and legal bases of the deficiency taxes assessment, which enabled the latter to file an "effective" protest,
much unlike the taxpayer's situation in Enron. Petitioner's right to due process was thus not violated.102

A final assessment notice provides for the amount of tax due with a demand for payment.103 This is to determine the
amount of tax due to a taxpayer.104 However, due process requires that taxpayers be informed in writing of the facts
and law on which the assessment is based in order to aid the taxpayer in making a reasonable protest.105 To
immediately ensue with tax collection without initially substantiating a valid assessment contravenes the principle in
administrative investigations "that taxpayers should be able to present their case and adduce supporting evidence."106

Respondent filed its income tax return in 1995.107 Almost eight (8) years passed before the disputed final assessment
notice was issued. Respondent pleaded prescription as its defense when it filed a protest to the Final Assessment
Notice. Petitioner claimed fraud assessment to justify the belated assessment made on respondent.108If fraud was
indeed present, the period of assessment should be within 10 years.109 It is incumbent upon petitioner to clearly state
the allegations of fraud committed by respondent to serve the purpose of an assessment notice to aid respondent in
filing an effective protest.

III
The prescriptive period in making an assessment depends upon whether a tax return was filed or whether the tax
return filed was either false or fraudulent.1âwphi1 When a tax return that is neither false nor fraudulent has been
filed, the Bureau of Internal Revenue may assess within three (3) years, reckoned from the date of actual filing or
from the last day prescribed by law for filing.110 However, in case of a false or fraudulent return with intent to evade
tax, Section 222(a) provides:

Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. –

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

In Aznar v. Court of Tax Appeals,111 this Court interpreted Section 332112 (now Section 222[a] of the National
Internal Revenue Code) by dividing it in three (3) different cases: first, in case of false return; second, in case of a
fraudulent return with intent to evade; and third, in case of failure to file a return.113 Thus:

Our stand that the law should be interpreted to mean a separation of the three different situations of false return,
fraudulent return with intent to evade tax and failure to file a return is strengthened immeasurably by the last portion
of the provision which aggregates the situations into three different classes, namely "falsity'', "fraud" and
"omission."114

This Court held that there is a difference between "false return" and a "fraudulent return."115 A false return simply
involves a "deviation from the truth, whether intentional or not" while a fraudulent return "implies intentional or
deceitful entry with intent to evade the taxes due."116

Fraud is a question of fact that should be alleged and duly proven.117 "The willful neglect to file the required tax
return or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal
consequences, cannot be presumed."118 Fraud entails corresponding sanctions under the tax law. Therefore, it is
indispensable for the Commissioner of Internal Revenue to include the basis for its allegations of fraud in the
assessment notice.

During the proceedings in the Court of Tax Appeals First Division, respondent presented its President, Domingo C.
Juan Jr. (Juan, Jr.), as witness.119 Juan, Jr. testified that respondent was, in its pre-operating stage in 1995.120During
that period, respondent "imported equipment and distributed them for market testing in the Philippines without
earning any profit."121 He also confirmed that the Final Assessment Notice and its attachments failed to substantiate
the Commissioner's allegations of fraud against respondent, thus:

More than three (3) years from the time petitioner filed its 1995 annual income tax return on April 11, 1996,
respondent issued to petitioner a [Final Assessment Notice] dated March 17, 2004 for the year 1995, pursuant to the
Letter of Authority No. 00002953 dated May 13, 2002. The attached Details of discrepancy containing the
assessment for income tax (IT), value-added tax (VAT) and documentary stamp tax (DST) as well as the Audit
Result/ Assessment Notice do not impute fraud on the part of petitioner. Moreover, it was obtained on information
and documents illegally obtained by a [Bureau of Internal Revenue] informant from petitioner's accountant Elnora
Carpio in 1996.122 (Emphasis supplied)

Petitioner did not refute respondent's allegations. For its defense, it presented Socrates Regala (Regala), the Group
Supervisor of the team, who examined respondent's tax liabilities.123 Regala confirmed that the investigation was
prompted by a tip from an informant who provided them with respondent's list of sales.124 He admitted125 that the
gathered information did not show that respondent deliberately failed to reflect its true income in 1995.126

IV
The issuance of a valid formal assessment is a substantive prerequisite for collection of taxes.127 Neither the National
Internal Revenue Code nor the revenue regulations provide for a "specific definition or form of an assessment."
However, the National Internal Revenue Code defines its explicit functions and effects."128 An assessment does not
only include a computation of tax liabilities; it also includes a demand for payment within a period prescribed.129 Its
main purpose is to determine the amount that a taxpayer is liable to pay.130

A pre-assessment notice "do[es] not bear the gravity of a formal assessment notice."131 A pre-assessment notice
merely gives a tip regarding the Bureau of Internal Revenue's findings against a taxpayer for an informal conference
or a clarificatory meeting.132

A final assessment is a notice "to the effect that the amount therein stated is due as tax and a demand for payment
thereof."133 This demand for payment signals the time "when penalties and interests begin to accrue against the
taxpayer and enabling the latter to determine his remedies[.]"134 Thus, it must be "sent to and received by the
taxpayer, and must demand payment of the taxes described therein within a specific period."135

The disputed Final Assessment Notice is not a valid assessment.

First, it lacks the definite amount of tax liability for which respondent is accountable. It does not purport to be a
demand for payment of tax due, which a final assessment notice should supposedly be. An assessment, in the
context of the National Internal Revenue Code, is a "written notice and demand made by the [Bureau of Internal
Revenue] on the taxpayer for the settlement of a due tax liability that is there: definitely set and fixed."136 Although
the disputed notice provides for the computations of respondent's tax liability, the amount remains indefinite. It only
provides that the tax due is still subject to modification, depending on the date of payment. Thus:

The complete details covering the aforementioned discrepancies established during the investigation of this case are
shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249 (B) of the [National Internal Revenue Code], as amended. Please note, however,
that the interest and the total amount due will have to be adjusted if prior or beyond April 15, 2004.137 (Emphasis
Supplied)

Second, there are no due dates in the Final Assessment Notice. This negates petitioner's demand for
payment.138Petitioner's contention that April 15, 2004 should be regarded as the actual due date cannot be accepted.
The last paragraph of the Final Assessment Notice states that the due dates for payment were supposedly reflected in
the attached assessment:

In view thereof, you are requested to pay your aforesaid deficiency internal revenue tax liabilities through the duly
authorized agent bank in which you are enrolled within the time shown in the enclosed assessment
notice.139 (Emphasis in the original)

However, based on the findings of the Court of Tax Appeals First Division, the enclosed assessment pertained to
remained unaccomplished.140

Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual of penalties and surcharges and not
the due date for payment of tax liabilities.1avvphi1 The total amount depended upon when respondent decides to
pay. The notice, therefore, did not contain a definite and actual demand to pay.

Compliance with Section 228 of the National Internal Revenue Code is a substantative requirement.141 It is not a
mere formality.142 Providing the taxpayer with the factual and legal bases for the assessment is crucial before
proceeding with tax collection. Tax collection should be premised on a valid assessment, which would allow the
taxpayer to present his or her case and produce evidence for substantiation.143

The Court of Tax Appeals did not err in cancelling the Final Assessment Notice as well as the Audit
Result/Assessment Notice issued by petitioner to respondent for the year 1995 covering the "alleged deficiency
income tax, value-added tax and documentary stamp tax amounting to ₱10,647,529.69, inclusive of surcharges and
interest"144 for lack of due process. Thus, the Warrant of Distraint and/or Levy is void since an invalid assessment
bears no valid effect.145

Taxes are the lifeblood of government and should be collected without hindrance.146 However, the collection of
taxes should be exercised "reasonably and in accordance with the prescribed procedure."147

The essential nature of taxes for the existence of the State grants government with vast remedies to ensure its
collection. However, taxpayers are guaranteed their fundamental right to due process of law, as articulated in various
ways in the process of tax assessment. After all, the State's purpose is to ensure the well-being of its citizens, not
simply to deprive them of their fundamental rights.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax Appeals En Banc dated July 14, 2014
and Resolution dated December 16, 2014 in CTA EB Case No. 970 (CTA Case No. 7160) are hereby AFFIRMED.
SO ORDERED.

G.R. No. 204429               February 18, 2014

SMART COMMUNICATIONS, INC., Petitioner, 

vs.
MUNICIPALITY OF MALVAR, BATANGAS, Respondent.

DECISION

CARPIO, J.:

The Case

This petition for review1 challenges the 26 June 2012 Decision2 and 13 November 2012 Resolution3 of the Court of
Tax. Appeals (CTA) En Banc.

Th e CTA En Banc affirmed the 17 December 2010 Decision4 and 7 April 2011 Resolution5 of the CTA First
Division, which in turn affirmed the 2 December 2008 Decision6 and 21 May 2009 Order7 of the Regional Trial
Court of Tanauan City, Batangas, Branch 6. The trial court declared void the assessment imposed by respondent
Municipality of Malvar, Batangas against petitioner Smart Communications, Inc. for its telecommunications tower
for 2001 to July 2003 and directed respondent to assess petitioner only for the period starting 1 October 2003.

The Facts

Petitioner Smart Communications, Inc. (Smart) is a domestic corporation engaged in the business of providing
telecommunications services to the general public while respondent Municipality of Malvar, Batangas
(Municipality) is a local government unit created by law.

In the course of its business, Smart constructed a telecommunications tower within the territorial jurisdiction of the
Municipality. The construction of the tower was for the purpose of receiving and transmitting cellular
communications within the covered area.

On 30 July 2003, the Municipality passed Ordinance No. 18, series of 2003, entitled "An Ordinance Regulating the
Establishment of Special Projects."
On 24 August 2004, Smart received from the Permit and Licensing Division of the Office of the Mayor of the
Municipality an assessment letter with a schedule of payment for the total amount of ₱389,950.00 for Smart’s
telecommunications tower. The letter reads as follows:

This is to formally submit to your good office your schedule of payments in the Municipal Treasury of the Local
Government Unit of Malvar, province of Batangas which corresponds to the tower of your company built in the
premises of the municipality, to wit:

TOTAL PROJECT COST: PHP 11,000,000.00

For the Year 2001-2003

50% of 1% of the total project cost Php55,000.00

Add: 45% surcharge 24,750.00

Php79,750.00
Multiply by 3 yrs. (2001, 2002, 2003) Php239,250.00
For the year 2004
1% of the total project cost Php110,000.00
37% surcharge 40,700.00
==========
Php150,700.00
TOTAL Php389,950.00

Hoping that you will give this matter your preferential attention.8

Due to the alleged arrears in the payment of the assessment, the Municipality also caused the posting of a closure
notice on the telecommunications tower.

On 9 September 2004, Smart filed a protest, claiming lack of due process in the issuance of the assessment and
closure notice. In the same protest, Smart challenged the validity of Ordinance No. 18 on which the assessment was
based.

In a letter dated 28 September 2004, the Municipality denied Smart’s protest.

On 17 November 2004, Smart filed with Regional Trial Court of Tanauan City, Batangas, Branch 6, an
"Appeal/Petition" assailing the validity of Ordinance No. 18. The case was docketed as SP Civil Case No. 04-11-
1920.

On 2 December 2008, the trial court rendered a Decision partly granting Smart’s Appeal/Petition. The trial court
confined its resolution of the case to the validity of the assessment, and did not rule on the legality of Ordinance No.
18. The trial court held that the assessment covering the period from 2001 to July 2003 was void since Ordinance
No. 18 was approved only on 30 July 2003. However, the trial court declared valid the assessment starting 1 October
2003, citing Article 4 of the Civil Code of the Philippines,9 in relation to the provisions of Ordinance No. 18 and
Section 166 of Republic Act No. 7160 or the Local Government Code of 1991 (LGC).10 The dispositive portion of
the trial court’s Decision reads:
WHEREFORE, in light of the foregoing, the Petition is partly GRANTED. The assessment dated August 24, 2004
against petitioner is hereby declared null and void insofar as the assessment made from year 2001 to July 2003 and
respondent is hereby prohibited from assessing and collecting, from petitioner, fees during the said period and the
Municipal Government of Malvar, Batangas is directed to assess Smart Communications, Inc. only for the period
starting October 1, 2003.

No costs.

SO ORDERED.11

The trial court denied the motion for reconsideration in its Order of 21 May 2009.

On 8 July 2009, Smart filed a petition for review with the CTA First Division, docketed as CTA AC No. 58.

On 17 December 2010, the CTA First Division denied the petition for review. The dispositive portion of the
decision reads:

WHEREFORE, the Petition for Review is hereby DENIED, for lack of merit. Accordingly, the assailed Decision
dated December 2, 2008 and the Order dated May 21, 2009 of Branch 6 of the Regional Trial Court of Tanauan
City, Batangas in SP. Civil Case No. 04-11-1920 entitled "Smart Communications, Inc. vs. Municipality of Malvar,
Batangas" are AFFIRMED.

SO ORDERED.12

On 7 April 2011, the CTA First Division issued a Resolution denying the motion for reconsideration.

Smart filed a petition for review with the CTA En Banc, which affirmed the CTA First Division’s decision and
resolution. The dispositive portion of the CTA En Banc’s 26 June 2012 decision reads:

WHEREFORE, premises considered, the present Petition for Review is hereby DISMISSED for lack of
merit.1âwphi1

Accordingly, the assailed Decision dated December 17, 2010 and Resolution dated April 7, 2011 are hereby
AFFIRMED.

SO ORDERED.13

The CTA En Banc denied the motion for reconsideration.

Hence, this petition.

The Ruling of the CTA En Banc

The CTA En Banc dismissed the petition on the ground of lack of jurisdiction. The CTA En Banc declared that it is
a court of special jurisdiction and as such, it can take cognizance only of such matters as are clearly within its
jurisdiction. Citing Section 7(a), paragraph 3, of Republic Act No. 9282, the CTA En Banc held that the CTA has
exclusive appellate jurisdiction to review on appeal, decisions, orders or resolutions of the Regional Trial Courts in
local tax cases originally resolved by them in the exercise of their original or appellate jurisdiction. However, the
same provision does not confer on the CTA jurisdiction to resolve cases where the constitutionality of a law or rule
is challenged.

The Issues
The petition raises the following arguments:

1. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law
and jurisprudence considering that the CTA En Banc should have exercised its jurisdiction and declared the
Ordinance as illegal.

2. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law
and jurisprudence considering that the doctrine of exhaustion of administrative remedies does not apply in
[this case].

3. The [CTA En Banc Decision and Resolution] should be reversed and set aside for being contrary to law
and jurisprudence considering that the respondent has no authority to impose the so-called "fees" on the
basis of the void ordinance.14

The Ruling of the Court

The Court denies the petition.

On whether the CTA has jurisdiction over the present case

Smart contends that the CTA erred in dismissing the case for lack of jurisdiction. Smart maintains that the CTA has
jurisdiction over the present case considering the "unique" factual circumstances involved.

The CTA refuses to take cognizance of this case since it challenges the constitutionality of Ordinance No. 18, which
is outside the province of the CTA.

Jurisdiction is conferred by law. Republic Act No. 1125, as amended by Republic Act No. 9282, created the Court
of Tax Appeals. Section 7, paragraph (a), sub-paragraph (3)15 of the law vests the CTA with the exclusive appellate
jurisdiction over "decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided
or resolved by them in the exercise of their original or appellate jurisdiction."

The question now is whether the trial court resolved a local tax case in order to fall within the ambit of the CTA’s
appellate jurisdiction This question, in turn, depends ultimately on whether the fees imposed under Ordinance No.
18 are in fact taxes.

Smart argues that the "fees" in Ordinance No. 18 are actually taxes since they are not regulatory, but revenue-
raising. Citing Philippine Airlines, Inc. v. Edu,16 Smart contends that the designation of "fees" in Ordinance No. 18
is not controlling.

The Court finds that the fees imposed under Ordinance No. 18 are not taxes.

Section 5, Article X of the 1987 Constitution provides that "each local government unit shall have the power to
create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as
the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local government."

Consistent with this constitutional mandate, the LGC grants the taxing powers to each local government unit.
Specifically, Section 142 of the LGC grants municipalities the power to levy taxes, fees, and charges not otherwise
levied by provinces. Section 143 of the LGC provides for the scale of taxes on business that may be imposed by
municipalities17 while Section 14718 of the same law provides for the fees and charges that may be imposed by
municipalities on business and occupation.
The LGC defines the term "charges" as referring to pecuniary liability, as rents or fees against persons or property,
while the term "fee" means "a charge fixed by law or ordinance for the regulation or inspection of a business or
activity."19

In this case, the Municipality issued Ordinance No. 18, which is entitled "An Ordinance Regulating the
Establishment of Special Projects," to regulate the "placing, stringing, attaching, installing, repair and construction
of all gas mains, electric, telegraph and telephone wires, conduits, meters and other apparatus, and provide for the
correction, condemnation or removal of the same when found to be dangerous, defective or otherwise hazardous to
the welfare of the inhabitant[s]."20 It was also envisioned to address the foreseen "environmental depredation" to be
brought about by these "special projects" to the Municipality.21 Pursuant to these objectives, the Municipality
imposed fees on various structures, which included telecommunications towers.

As clearly stated in its whereas clauses, the primary purpose of Ordinance No. 18 is to regulate the "placing,
stringing, attaching, installing, repair and construction of all gas mains, electric, telegraph and telephone wires,
conduits, meters and other apparatus" listed therein, which included Smart’s telecommunications tower. Clearly, the
purpose of the assailed Ordinance is to regulate the enumerated activities particularly related to the construction and
maintenance of various structures. The fees in Ordinance No. 18 are not impositions on the building or structure
itself; rather, they are impositions on the activity subject of government regulation, such as the installation and
construction of the structures.22

Since the main purpose of Ordinance No. 18 is to regulate certain construction activities of the identified special
projects, which included "cell sites" or telecommunications towers, the fees imposed in Ordinance No. 18 are
primarily regulatory in nature, and not primarily revenue-raising. While the fees may contribute to the revenues of
the Municipality, this effect is merely incidental. Thus, the fees imposed in Ordinance No. 18 are not taxes.

In Progressive Development Corporation v. Quezon City,23 the Court declared that "if the generating of revenue is
the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax."

In Victorias Milling Co., Inc. v. Municipality of Victorias,24 the Court reiterated that the purpose and effect of the
imposition determine whether it is a tax or a fee, and that the lack of any standards for such imposition gives the
presumption that the same is a tax.

We accordingly say that the designation given by the municipal authorities does not decide whether the imposition is
properly a license tax or a license fee. The determining factors are the purpose and effect of the imposition as may
be apparent from the provisions of the ordinance. Thus, "[w]hen no police inspection, supervision, or regulation is
provided, nor any standard set for the applicant to establish, or that he agrees to attain or maintain, but any and all
persons engaged in the business designated, without qualification or hindrance, may come, and a license on payment
of the stipulated sum will issue, to do business, subject to no prescribed rule of conduct and under no guardian eye,
but according to the unrestrained judgment or fancy of the applicant and licensee, the presumption is strong that the
power of taxation, and not the police power, is being exercised."

Contrary to Smart’s contention, Ordinance No. 18 expressly provides for the standards which Smart must satisfy
prior to the issuance of the specified permits, clearly indicating that the fees are regulatory in nature.

These requirements are as follows:

SECTION 5. Requirements and Procedures in Securing Preliminary Development Permit.

The following documents shall be submitted to the SB Secretary in triplicate:

a) zoning clearance
 b) Vicinity Map

c) Site Plan

d) Evidence of ownership

e) Certificate true copy of NTC Provisional Authority in case of Cellsites, telephone or telegraph line, ERB
in case of gasoline station, power plant, and other concerned national agencies

f) Conversion order from DAR is located within agricultural zone.

g) Radiation Protection Evaluation.

h) Written consent from subdivision association or the residence of the area concerned if the special
projects is located within the residential zone.

i) Barangay Council Resolution endorsing the special projects.

SECTION 6. Requirement for Final Development Permit – Upon the expiration of 180 days and the proponents of
special projects shall apply for final [development permit] and they are require[d] to submit the following:

a) evaluation from the committee where the Vice Mayor refers the special project

b) Certification that all local fees have been paid.

Considering that the fees in Ordinance No. 18 are not in the nature of local taxes, and Smart is questioning the
constitutionality of the ordinance, the CTA correctly dismissed the petition for lack of jurisdiction. Likewise,
Section 187 of the LGC,25 which outlines the procedure for questioning the constitutionality of a tax ordinance, is
inapplicable, rendering unnecessary the resolution of the issue on non-exhaustion of administrative remedies.

On whether the imposition of the fees in Ordinance No. 18 is ultra vire Smart argues that the Municipality exceeded
its power to impose taxes and fees as provided in Book II, Title One, Chapter 2, Article II of the LGC. Smart
maintains that the mayor’s permit fees in Ordinance No. 18 (equivalent to 1% of the project cost) are not among
those expressly enumerated in the LGC.

As discussed, the fees in Ordinance No.18 are not taxes. Logically, the imposition does not appear in the
enumeration of taxes under Section 143 of the LGC.

Moreover, even if the fees do not appear in Section 143 or any other provision in the LGC, the Municipality is
empowered to impose taxes, fees and charges, not specifically enumerated in the LGC or taxed under the Tax Code
or other applicable law. Section 186 of the LGC, granting local government units wide latitude in imposing fees,
expressly provides:

Section 186. Power To Levy Other Taxes, Fees or Charges. - Local government units may exercise the power to
levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the
provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes,
fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy:
Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted without any prior
public hearing conducted for the purpose.

Smart further argues that the Municipality is encroaching on the regulatory powers of the National
Telecommunications Commission (NTC). Smart cites Section 5(g) of Republic Act No. 7925 which provides that
the National Telecommunications Commission (NTC), in the exercise of its regulatory powers, shall impose such
fees and charges as may be necessary to cover reasonable costs and expenses for the regulation and supervision of
the operations of telecommunications entities. Thus, Smart alleges that the regulation of telecommunications entities
and all aspects of its operations is specifically lodged by law on the NTC.

To repeat, Ordinance No. 18 aims to regulate the "placing, stringing, attaching, installing, repair and construction of
all gas mains, electric, telegraph and telephone wires, conduits, meters and other apparatus" within the Municipality.
The fees are not imposed to regulate the administrative, technical, financial, or marketing operations of
telecommunications entities, such as Smart’s; rather, to regulate the installation and maintenance of physical
structures – Smart’s cell sites or telecommunications tower. The regulation of the installation and maintenance of
such physical structures is an exercise of the police power of the Municipality. Clearly, the Municipality does not
encroach on NTC’s regulatory powers.

The Court likewise rejects Smart’s contention that the power to fix the fees for the issuance of development permits
and locational clearances is exercised by the Housing and Land Use Regulatory Board (HLURB). Suffice it to state
that the HLURB itself recognizes the local government units’ power to collect fees related to land use and
development. Significantly, the HLURB issued locational guidelines governing telecommunications
infrastructure.1âwphi1Guideline No. VI relates to the collection of locational clearance fees either by the HLURB or
the concerned local government unit, to wit:

VI. Fees

The Housing and Land Use Regulatory Board in the performance of its functions shall collect the locational
clearance fee based on the revised schedule of fees under the special use project as per Resolution No. 622, series of
1998 or by the concerned LGUs subject to EO 72.26

On whether Ordinance No. 18 is valid and constitutional

Smart contends that Ordinance No. 18 violates Sections 130(b)(3)27 and 186 of the LGC since the fees are unjust,
excessive, oppressive and confiscatory. Aside from this bare allegation, Smart did not present any evidence
substantiating its claims. In Victorias Milling Co., Inc. v. Municipality of Victorias,28 the Court rejected the
argument that the fees imposed by respondent therein are excessive for lack of evidence supporting such claim, to
wit:

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial
inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an
ordinance as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary, unreasonable,
oppressive, or confiscatory. A rule which has gained acceptance is that factors relevant to such an inquiry are the
municipal conditions as a whole and the nature of the business made subject to imposition.

Plaintiff, has however not sufficiently proven that, taking these factors together, the license taxes are unreasonable.
The presumption of validity subsists. For, plaintiff has limited itself to insisting that the amounts levied exceed the
cost of regulation and the municipality has adequate funds for the alleged purposes as evidenced by the
municipality’s cash surplus for the fiscal year ending 1956.

On the constitutionality issue, Smart merely pleaded for the declaration of unconstitutionality of Ordinance No. 18
in the Prayer of the Petition, without any argument or evidence to support its plea. Nowhere in the body of the
Petition was this issue specifically raised and discussed. Significantly, Smart failed to cite any constitutional
provision allegedly violated by respondent when it issued Ordinance No. 18.

Settled is the rule that every law, in this case an ordinance, is presumed valid. To strike down a law as
unconstitutional, Smart has the burden to prove a clear and unequivocal breach of the Constitution, which Smart
miserably failed to do. In Lawyers Against Monopoly and Poverty (LAMP) v. Secretary of Budget and
Management,29 the Court held, thus:

To justify the nullification of the law or its implementation, there must be a clear and unequivocal, not a doubtful,
breach of the Constitution. In case of doubt in the sufficiency of proof establishing unconstitutionality, the Court
must sustain legislation because "to invalidate [a law] based on xx x baseless supposition is an affront to the wisdom
not only of the legislature that passed it but also of the executive which approved it." This presumption of
constitutionality can be overcome only by the clearest showing that there was indeed an infraction of the
Constitution, and only when such a conclusion is reached by the required majority may the Court pronounce, in the
discharge of the duty it cannot escape, that the challenged act must be struck down.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner 
vs.
DE LA SALLE UNIVERSITY, INC., Respondent
x-----------------------x
G.R. No. 198841
DE LA SALLE UNIVERSITY INC., Petitioner, 
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 198941
COMMISSIONER OF INTERNAL REVENUE, Petitioner, 
vs.
DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari:1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the December 10,
2010 decision and March 29, 2011 resolution of the Court of Tax Appeals (CTA) in En Banc Case No. 622;2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision and October 4,
2011 resolution in CTA En Banc Case No. 671;3 and

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4, 2011 resolution in
CTA En Banc Case No. 671.4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA Division) Case No.
7303. G.R. No. 196596 stemmed from CTA En Banc Case No. 622 filed by the Commissioner to challenge CTA
Case No. 7303. G.R. No. 198841 and 198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to
also challenge CTA Case No. 7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) No. 2794
authorizing its revenue officers to examine the latter's books of accounts and other accounting records for all internal
revenue taxes for the period Fiscal Year Ending 2003 and Unverified Prior Years.5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the following
deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and bookstores operating within the
campus; (2) value-added tax (VAI) on business income; and (3) documentary stamp tax (DSI) on loans and lease
contracts. The BIR demanded the payment of ₱17,303,001.12, inclusive of surcharge, interest and penalty
for taxable years 2001, 2002 and 2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on August 3, 2005
a petition for review with the CTA Division.8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV, Section 4
(3)of the Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive portion of the
decision reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan
transactions of [DLSU] in the amount of ₱1,1681,774.00 is hereby CANCELLED. However, [DLSU]
is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts, plus 25% surcharge for the
fiscal years 2001, 2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due computed from
September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the [National Internal Revenue
Code]. Further, the compromise penalties imposed by [the Commissioner] were excluded, there being no
compromise agreement between the parties.

SO ORDERED.9

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010 decision.10 On April 6,
2010, the CTA Division denied the Commissioner's motion for reconsideration while it held in abeyance the
resolution on DLSU's motion for reconsideration.11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622) arguing that
DLSU's use of its revenues and assets for non-educational or commercial purposes removed these items from the
exemption coverage under the Constitution.12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary evidence to
prove that its rental income was used actually, directly and exclusively for educational purposes.13 The
Commissioner did not promptly object to the formal offer of supplemental evidence despite notice.14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the amount of
DLSU's tax deficiencies. The dispositive portion of the amended decision reads:

WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED. [DLSU] is

hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25% surcharge for the fiscal years
2001, 2002 and 2003 in the total adjusted amount of ₱5,506,456.71 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the ... basic deficiency
taxes ... until full payment thereof pursuant to Section 249(B) of the [National Internal Revenue Code] ... xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency taxes, surcharge
and deficiency interest which have accrued ... from September 30, 2004 until fully paid.15

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the CTA
Division erred in admitting DLSU's additional evidence.16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review with the
CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the entire assessment should have been
cancelled because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA Division should still
have cancelled the entire assessment because DLSU submitted evidence similar to those submitted by Ateneo De
Manila University (Ateneo) in a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the CTA
Division erred in finding that a portion of DLSU's rental income was not proved to have been used actually, directly
and exclusively for educational purposes.18
The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the CTA
Division.19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant (Independent CPA),
the CTA En Banc found that DLSU was able to prove that a portion of the assessed rental income was used
actually, directly and exclusively for educational purposes; hence, exempt from tax.20 The CTA En Banc was
satisfied with DLSU's supporting evidence confirming that part of its rental income had indeed been used to pay the
loan it obtained to build the university's Physical Education – Sports Complex.21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not shown by
supporting documents to have been actually, directly and exclusively used for educational purposes, must be
subjected to income tax and VAT.22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST due on its loan and mortgage
documents.23 The CTA En Banc found that DLSU's DST payments had been remitted to the BIR, evidenced by the
stamp on the documents made by a DST imprinting machine, which is allowed under Section 200 (D) of the
National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations (RR) No. 15-2001.25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even if DLSU
formally offered them only when it moved for reconsideration of the CTA Division's original decision. Notably, the
law creating the CTA provides that proceedings before it shall not be governed strictly by the technical rules of
evidence.26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10, 2010
decision.27 Thus, she came to this court for relief through a petition for review on certiorari (G.R. No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities
to ₱2,554,825.47inclusive of surcharge.28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial;29 hence, the issue was deemed properly submitted for
decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and that the practice
of issuing a LOA covering audit of unverified prior years is prohibited.30 The prohibition is consistent with Revenue
Memorandum Order (RMO) No. 43-90, which provides that if the audit includes more than one taxable period, the
other periods or years shall be specifically indicated in the LOA.31
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. Hence, the
assessments for deficiency income tax, VAT and DST for taxable years 2001 and 2002 are void, but the assessment
for taxable year 2003 is valid.32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different parties, factual
settings, bases of assessments, sets of evidence, and defenses.33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held that while DLSU
successfully proved that a portion of its rental income was transmitted and used to pay the loan obtained to fund the
construction of the Sports Complex, the rental income from other sources were not shown to have been actually,
directly and exclusively used for educational purposes.34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner (G.R. No.
198941) came to this Court for relief.

The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed of.35 DLSU's
operations of canteens and bookstores within its campus even though exclusively serving the university community
do not negate income tax liability.36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30
(H) of the Tax Code, which states among others, that the income of whatever kind and character of [a non-stock and
non-profit educational institution] from any of [its] properties, real or personal, or from any of [its] activities
conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed by this
Code.37

The Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner of Internal
Revenue v. YMCA38 to support its conclusion that revenues however generated are covered by the constitutional
exemption, provided that, the revenues will be used for educational purposes or will be held in reserve for such
purposes.39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only from property
tax but not from income tax on the rentals earned from property.40 Thus, DLSU's income from the leases of its real
properties is not exempt from taxation even if the income would be used for educational purposes.41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment42 and that it is not qualified to
use the On-Line Electronic DST Imprinting Machine, which is available only to certain classes of taxpayers under
RR No. 9-2000.43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The belated
submission of supplemental evidence reopened the case for trial, and worse, DLSU offered the supplemental
evidence only after it received the unfavorable CTA Division's original decision.44 In any case, DLSU's submission
of supplemental documentary evidence was unnecessary since its rental income was taxable regardless of its
disposition.45
G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior years. A LOA
issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on such defective LOA must also be
void.46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior Years. On the
basis of this defective LOA, the Commissioner assessed DLSU for deficiency income tax, VAT and DST for taxable
years 2001, 2002 and 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year
2003. According to DLSU, when RMO No. 43-90 provides that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA issued to DLSU
follows this format, then any assessment arising from it must be entirely voided.48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly situated parties,
the same set of evidence should be appreciated and weighed in the same manner.49 The CTA En Banc erred when it
did not similarly appreciate DLSU' s evidence as it did to the pieces of evidence submitted by Ateneo, also a non-
stock, non-profit educational institution.50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the same as those she
raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment on DLSU's petition docketed as G.R. No.
198841.51

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition.52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of
non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes are
exempt from taxes and duties.53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit educational institutions is novel to
the 1987 Constitution and that Section 30 (H) of the 1997 Tax Code cannot amend the 1987 Constitution;54 (2)
Section 30 of the 1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code -with the addition of
non-stock, non-profit educational institutions to the list of tax-exempt entities; and (3) that the 1977 Tax Code was
promulgated when the 1973 Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under the 1973 Constitution was
only for real property tax. Back then, the special tax treatment on income of private educational institutions only
emanates from statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption from tax of all
the assets and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes, was expressly and categorically enshrined.55
DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that is contrary to
the Constitution void and without any force and effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects
to tax the income of whatever kind and character of a non-stock and non-profit educational institution from any of
its properties, real or personal, or from any of its activities conducted for profit regardless of the disposition made of
such income, should be declared without force and effect in view of the constitutionally granted tax exemption on
"all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for
educational purposes."57

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for an exemption to
be granted under Article XIV, Section 4 (3) of the Constitution, the taxpayer must prove that: (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation
is used actually, directly and exclusively for educational purposes.58 Unlike YMCA, which is not an educational
institution, DLSU is undisputedly a non-stock, non-profit educational institution. It had also submitted evidence to
prove that it actually, directly and exclusively used its income for educational purposes.59

DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that the tax
exemption was granted "to incentivize private educational institutions to share with the State the responsibility of
educating the youth."60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled DLSU' s loan
and mortgage transactions had remitted to the BIR the DST through an imprinting machine, a method allowed under
RR No. 15-2001.61 In any case, DLSU argues that it cannot be held liable for DST owing to the exemption granted
under the Constitution.62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of supplemental
evidence. Because of the Commissioner's failure to timely object, she became bound by the results of the submission
of such supplemental evidence.63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it failed to raise this
issue in both the administrative and judicial proceedings.64 That it was asked on cross-examination during the trial
does not make it an issue that the CTA could resolve.65 The Commissioner also maintains that DLSU's rental income
is not tax-exempt because an educational institution is only exempt from property tax but not from tax on the income
earned from the property.66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.67 In addition, DLSU prays that the Court award
attorney's fees in its favor because it was constrained to unnecessarily retain the services of counsel in this separate
petition.68

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which we summarize
as follows:

I. Whether DLSU' s income and revenues proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes;

II. Whether the entire assessment should be voided because of the defective LOA;

III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and
 IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be disturbed by the Court.

Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational institutions proved to have been
used actually, directly and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts. We thus
sustain the CTA En Banc's findings that:

a. DLSU proved that a portion of its rental income was used actually, directly and exclusively for
educational purposes; and

b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and

exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of
the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such

exemptions subject to the limitations provided by law including restrictions on dividends and provisions for
reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-profit
educational institutions and (2) proprietary educational institutions.69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a non-stock,
non-profit educational institution.70
Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the Constitution, in the
same provision, also imposes certain conditions to avail of the exemption. We discuss below the import of the
constitutional text vis-a-vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit educational institutions and
proprietary educational institutions. The tax exemption granted to non-stock, non-profit educational institutions is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational purposes. While
tax exemptions may also be granted to proprietary educational institutions, these exemptions may be subject to
limitations imposed by Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary educational
institution is crucial in determining the nature and extent of the tax exemption granted to non-stock, non-profit
educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the Tax Code. The
relevant text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income shall be subject to tax imposed under this
Code. [underscoring and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock, non-profit
educational institutions such that the revenues and income they derived from their assets, or from any of their
activities conducted for profit, are taxable even if these revenues and income are used for educational purposes.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, non-profit educational
institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,71 the Court in the YMCA case had in fact already
analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution. The Court in that case made
doctrinal pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the YMCA, established
as a "welfare, educational and charitable non-profit corporation," was subject to income tax under the Tax Code and
the Constitution.72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling under Article
VI, Section 28 (3) of the Constitution,73 the YMCA is not tax-exempt per se; " what is exempted is not the
institution itself... those exempted from real estate taxes are lands, buildings and improvements actually, directly
and exclusively used for religious, charitable or educational purposes."74

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last paragraph of then
Section 27 (now Section 30) of the Tax Code, which mandates that the income of exempt organizations from any of
their properties, real or personal, are subject to the same tax imposed by the Tax Code, regardless of how that
income is used. The Court ruled that the last paragraph of Section 27 unequivocally subjects to tax the rent income
of the YMCA from its property.75

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax privilege granted
under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution holding that the
term educational institution, when used in laws granting tax exemptions, refers to the school system (synonymous
with formal education); it includes a college or an educational establishment; it refers to the hierarchically structured
and chronologically graded learnings organized and provided by the formal school system.76

The Court then significantly laid down the requisites for availing the tax exemption under Article XIV, Section 4
(3), namely: (1) the taxpayer falls under the classification non-stock, non-profit educational institution; and (2)
the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational
purposes.77

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-stock, non-profit
educational institutions, provided, that the non-stock, non-profit educational institutions prove that its assets and
revenues are used actually, directly and exclusively for educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not subject to

limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income78 for
educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches,
parsonages or convents, mosques, and non-profit cemeteries), which exempts from tax only the assets,
i.e., "all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes ... ," Article XIV, Section 4 (3) categorically states that "[a]ll revenues and assets ... used
actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is not without
significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of the 1986
Constitutional Commission79 to provide broader tax privilege to non-stock, non-profit educational institutions as
recognition of their role in assisting the State provide a public good. The tax exemption was seen as beneficial to
students who may otherwise be charged unreasonable tuition fees if not for the tax exemption extended
to all revenues and assets of non-stock, non-profit educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the
revenues and income must have also been sourced from educational activities or activities related to the purposes of
an educational institution. The phrase all revenues is unqualified by any reference to the source of revenues. Thus,
so long as the revenues and income are used actually, directly and exclusively for educational purposes, then said
revenues and income shall be exempt from taxes and duties.81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business operations.82 It may refer
to the sale of goods, rendition of services, or the return of an investment. Revenue is a component of the tax base in
income tax,83 VAT,84 and local business tax (LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.86 It may refer to
real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory of goods, or any property
from which the person or entity may derive income or use to generate the same. In Philippine taxation, the fair
market value of real property is a component of the tax base in real property tax (RPT).87 Also, the landed cost of
imported goods is a component of the tax base in VAT on importation88 and tariff duties.89

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and
exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand,
when it also shows that it uses its assets in the form of real property for educational purposes, it shall be exempted
from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax from which
the entity shall be exempted from shall depend on whether the item is an item of revenue or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the leased portion
is not actually, directly and exclusively used for educational purposes, even if the bookstore or canteen caters only
to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley College, Inc. v.
Aquino.90 We ruled in that case that the test of exemption from taxation is the use of the property for purposes
mentioned in the Constitution. We also held that the exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes such asset from
the property tax exemption granted under the Constitution.91 There is no exemption because the asset is not used
actually, directly and exclusively for educational purposes. The commercial use of the property is
also not incidental to and reasonably necessary for the accomplishment of the main purpose of a university, which is
to educate its students.

However, if the university actually, directly and exclusively uses for educational purposes the revenues earned from
the lease of its school building, such revenues shall be exempt from taxes and duties. The tax exemption no longer
hinges on the use of the asset from which the revenues were earned, but on the actual, direct and exclusive use of
the revenues for educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used actually, directly and
exclusively for educational purposes are not exempt from duties and taxes. To avail of the exemption, the taxpayer
must factually prove that it used actually, directly and exclusively for educational purposes the revenues or income
sought to be exempted.
The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are two things that
must be viewed and treated separately. But so long as the assets or revenues are used actually, directly and
exclusively for educational purposes, they are exempt from duties and taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary educational
institutions cannot be doubted. As discussed, the privilege granted to the former is conditioned only on the actual,
direct and exclusive use of their revenues and assets for educational purposes. In clear contrast, the tax privilege
granted to the latter may be subject to limitations imposed by law.

We spell out below the difference in treatment if only to highlight the privileged status of non-stock, non-profit
educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section
30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is covered by
Section 27 (Rates of Income Tax on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational institutions
shall not be taxed on income received by them as such.

Section 27 (B), on the other hand, states that "[p]roprietary educational institutions ... which are nonprofit shall pay a
tax of ten percent (10%) on their taxable income .. . Provided, that if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational
institutions ... [the regular corporate income tax of 30%] shall be imposed on the entire taxable income ... "92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced rate of 10%
corporate income tax. The reduced rate is applicable only if: (1) the proprietary educational institution is nonprofit
and (2) its gross income from unrelated trade, business or activity does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-stock, non-
profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the
Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational institutions
used actually, directly and exclusively for educational purpose. We make this declaration in the exercise of and
consistent with our duty93 to uphold the primacy of the Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions and does not
cover the other exempt organizations under Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually, directly
and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.
DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year 2003 and insists that the
entire LOA should be voided for being contrary to RMO No. 43-90, which provides that if tax audit includes more
than one taxable period, the other periods or years shall be specifically indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and other
accounting records of the taxpayer in order to determine the taxpayer's correct internal revenue liabilities95 and for
the purpose of collecting the correct amount of tax,96 in accordance with Section 5 of the Tax Code, which gives the
CIR the power to obtain information, to summon/examine, and take testimony of persons. The LOA commences the
audit process97 and informs the taxpayer that it is under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and consequently,
disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The practice of
issuing [LO As] covering audit of unverified prior years is hereby prohibited. If the audit of a taxpayer shall include
more than one taxable period, the other periods or years shall be specifically indicated in the [LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior years. RMO
43-90 does not say that a LOA which contains unverified prior years is void. It merely prescribes that if the audit
includes more than one taxable period, the other periods or years must be specified. The provision read as a whole
requires that if a taxpayer is audited for more than one taxable year, the BIR must specify each taxable year or
taxable period on separate LOAs.

Read in this light, the requirement to specify the taxable period covered by the LOA is simply to inform the taxpayer
of the extent of the audit and the scope of the revenue officer's authority. Without this rule, a revenue officer can
unduly burden the taxpayer by demanding random accounting records from random unverified years, which may
include documents from as far back as ten years in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years. The LOA
does not strictly comply with RMO 43-90 because it includes unverified prior years. This does not mean, however,
that the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period is specified in
the LOA. DLSU was fully apprised that it was being audited for taxable year 2003. Corollarily, the assessments for
taxable years 2001 and 2002 are void for having been unspecified on separate LOAs as required under RMO No.
43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s validity at the CTA Division, and
thus, should not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the trial.100 DLSU then
raised the issue in its memorandum and motion for partial reconsideration with the CTA Division. DLSU raised it
again on appeal to the CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the
LOA.101Besides, the Commissioner had the opportunity to argue for the validity of the LOA at the CTA En Banc but
she chose not to file her comment and memorandum despite notice.102

III.The CTA correctly admitted

the supplemental evidence
formally offered by DLSU.
The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of documentary
evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration with the CTA
Division.103 The CTA Division admitted the supplemental evidence, which proved that a portion of DLSU's rental
income was used actually, directly and exclusively for educational purposes. Consequently, the CTA Division
reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually reinforcing
grounds, to wit: (1) the Commissioner failed to timely object to the formal offer of supplemental evidence; and
(2) the CTA is not governed strictly by the technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its own, disregard
such evidence.104

The Court has held that if a party desires the court to reject the evidence offered, it must so state in the form of a
timely objection and it cannot raise the objection to the evidence for the first time on appeal.105 Because of a party's
failure to timely object, the evidence offered becomes part of the evidence in the case. As a consequence, all the
parties are considered bound by any outcome arising from the offer of evidence properly presented.106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence despite
notice.107 The Commissioner objected to the admission of the supplemental evidence only when the case was on
appeal to the CTA En Banc. By the time the Commissioner raised her objection, it was too late; the formal offer,
admission and evaluation of the supplemental evidence were all fait accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality or sufficiency
of the supplemental evidence admitted, she was bound by the outcome of the CTA Division's assessment of the
evidence.108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's admission of the
formal offer of supplemental evidence, without prompt objection from the Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' motion for
reconsideration.1âwphi1

In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant attached to its motion for
reconsideration with the CT A its Final Adjustment Return. The Commissioner, as in the present case, did not
oppose the taxpayer's motion for reconsideration and the admission of the Final Adjustment Return.110 We thus
admitted and gave weight to the Final Adjustment Return although it was only submitted upon motion for
reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of documents after the
trial, the law creating the CTA specifically provides that proceedings before it shall not be governed strictly by the
technical rules of evidence111 and that the paramount consideration remains the ascertainment of truth. We ruled that
procedural rules should not bar courts from considering undisputed facts to arrive at a just determination of a
controversy.112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v. Commissioner of
Internal Revenue113 and Commissioner of Internal Revenue v. PERF Realty Corporation,114 where the taxpayers also
submitted the supplemental supporting document only upon filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application of the technical
rules of evidence in the present tax assessment case. If anything, the liberal application of the rules assumes greater
force and significance in the case of a taxpayer who claims a constitutionally granted tax exemption. While the
taxpayers in the cited cases claimed refund of excess tax payments based on the Tax Code,115 DLSU is claiming
tax exemption based on the Constitution. If liberality is afforded to taxpayers who paid more than they should have
under a statute, then with more reason that we should allow a taxpayer to prove its exemption from tax based on the
Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because the
Commissioner failed to promptly object, but more so because the strict application of the technical rules of evidence
may defeat the intent of the Constitution.

IV. The CTA's appreciation of

evidence is generally binding on
the Court unless compelling
reasons justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature
of its function of being dedicated exclusively to the resolution of tax problems, has developed an expertise on the
subject, unless there has been an abuse or improvident exercise of authority.116 We thus accord the findings of
fact by the CTA with the highest respect. These findings of facts can only be disturbed on appeal if they are not
supported by substantial evidence or there is a showing of gross error or abuse on the part of the CTA. In the
absence of any clear and convincing proof to the contrary, this Court must presume that the CTA rendered a
decision which is valid in every respect.117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used actually, directly
and exclusively for educational purposes a portion of its assessed income and that it had remitted the DST payments
though an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it deduced that
DLSU successfully proved that it used actually, directly and exclusively for educational purposes a portion of its
rental income.

The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the submission of the supplemental
evidence, which consisted of statement of receipts, statement of disbursement and fund balance and statement of
fund changes.118

These documents showed that DLSU borrowed ₱93.86 Million,119 which was used to build the university's Sports
Complex. Based on these pieces of evidence, the CTA found that DLSU' s rental income from its concessionaires
were indeed transmitted and used for the payment of this loan. The CTA held that the degree of preponderance of
evidence was sufficiently met to prove actual, direct and exclusive use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were allegedly deposited to
a fund (CF-CPA Account),120 intended for the university's capital projects, was not proved to have been used
actually, directly and exclusively for educational purposes. The CTA observed that "[DLSU] ... failed to fully
account for and substantiate all the disbursements from the [fund]." Thus, the CTA "cannot ascertain whether rental
income from the [other] concessionaires was indeed used for educational purposes."121

To stress, the CTA's factual findings were based on and supported by the report of the Independent CPA who
reviewed, audited and examined the voluminous documents submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and verification of
receipts, invoices, vouchers and other long accounts; (b) reproduction of, and comparison of such reproduction with,
and certification that the same are faithful copies of original documents, and pre-marking of documentary exhibits
consisting of voluminous documents; (c) preparation of schedules or summaries containing a chronological listing of
the numbers, dates and amounts covered by receipts or invoices or other relevant documents and the amount(s) of
taxes paid; (d) making findings as to compliance with substantiation requirements under pertinent tax laws,
regulations and jurisprudence; (e) submission of a formal report with certification of authenticity and veracity of
findings and conclusions in the performance of the audit; (f) testifying on such formal report; and (g) performing
such other functions as the CTA may direct.122

Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held that only
the portion of the rental income pertaining to the substantiated disbursements (i.e., proved by receipts, vouchers,
etc.) from the CF-CPA Account was considered as used actually, directly and exclusively for educational purposes.
Consequently, the unaccounted and unsubstantiated disbursements must be subjected to income tax and VAT.123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years 2001 and 2002
due to the defective LOA.124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its ruling on the
evidence on record, which we reiterate, were examined and verified by the Independent CPA. Thus, we see no
persuasive reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean that we are bound by
its conclusions. In the present case, we do not agree with the method used by the CTA to arrive at DLSU' s
unsubstantiated rental income (i.e., income not proved to have been actually, directly and exclusively used for
educational purposes).

To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in taxable year 2003.125 DLSU
earned this income from leasing a portion of its premises to: 1) MTG-Sports Complex, 2) La Casita, 3) Alarey, Inc.,
4) Zaide Food Corp., 5) Capri International, and 6) MTO Bookstore.126

To prove that its rental income was used for educational purposes, DLSU identified the transactions where the rental
income was expended, viz.: 1) ₱4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports
Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA Account.128

DLSU also submitted documents to the Independent CPA to prove that the ₱6,602,655.00 transferred to the CF-
CPA Account was used actually, directly and exclusively for educational purposes. According to the Independent
CPA' findings, DLSU was able to substantiate disbursements from the CF-CPA Account amounting
to ₱6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of the ₱l0,610,379.00 rental
income, ₱4,841,066.65 was unsubstantiated, and thus, subject to income tax and VAT.129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements from the CF-CPA
Account for taxable year 2003 is only 26.68%.130 The CTA held as follows:

However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri International and MTO
Bookstore, which were transmitted to the CF-CPA Account, petitioner again failed to fully account for and
substantiate all the disbursements from the CF-CPA Account; thus failing to prove that the rental income derived
therein were actually, directly and exclusively used for educational purposes. Likewise, the findings of the Court-
Commissioned Independent CPA show that the disbursements from the CF-CPA Account for fiscal year 2003
amounts to ₱6,259,078.30 only. Hence, this portion of the rental income, being the substantiated disbursements of
the CF-CPA Account, was considered by the Special First Division as used actually, directly and exclusively for
educational purposes. Since for fiscal year 2003, the total disbursements per voucher is ₱6,259,078.3 (Exhibit "LL-
25-C"), and the total disbursements per subsidiary ledger amounts to ₱23,463,543.02 (Exhibit "LL-29-C"), the ratio
of substantiated disbursements for fiscal year 2003 is 26.68% (₱6,259,078.30/₱23,463,543.02). Thus, the
substantiated portion of CF-CPA Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68%
with the total rent income added to and used in the CF-CPA Account in the amount of ₱6,602,655.00 is
₱1,761,588.35.131 (emphasis supplied)

For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex (₱4,007,724.00) from the
rental income (₱10,610,379.00) earned from the abovementioned concessionaries. The difference (₱6,602,655.00)
was the portion claimed to have been deposited to the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements (₱1,761,308.37) from the
₱6,602,655.00 to arrive at the supposed unsubstantiated portion of the rental income (₱4,841,066.65).132

3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)133 was derived by multiplying the rental

income claimed to have been added to the CF-CPA Account (₱6,602,655.00) by 26.68% or the ratio
of substantiated disbursements to total disbursements (₱23,463,543.02).

4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from the CF-CPA Account as
found by the Independent CPA (₱6,259,078.30) by the total disbursements (₱23,463,543.02) from the same
account.

We find that this system of calculation is incorrect and does not truly give effect to the constitutional grant of tax
exemption to non-stock, non-profit educational institutions. The CTA's reasoning is flawed because it required
DLSU to substantiate an amount that is greater than the rental income deposited in the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental income (which
amounted to a total of ₱10.61 million)135 were used for educational purposes. This amount was divided into two
parts: (a) the ₱4.0l million, which was used to pay the loan obtained for the construction of the Sports Complex; and
(b) the ₱6.60 million,136 which was transferred to the CF-CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46 million.137 These figures, read
in light of the constitutional exemption, raises the question: does DLSU claim that the whole total CF-CPA
disbursement of ₱23.46 million is tax-exempt so that it is required to prove that all these disbursements had
been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of ₱23.46 million had been for
educational purposes and should thus be tax-exempt; DLSU only claimed ₱10.61 million for tax-exemption and
should thus be required to prove that this amount had been used as claimed.

Of this amount, ₱4.01 had been proven to have been used for educational purposes, as confirmed by the
Independent CPA. The amount in issue is therefore the balance of ₱6.60 million which was transferred to the CF-
CPA which in turn made disbursements of ₱23.46 million for various general purposes, among them the ₱6.60
million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational purposes in
year 2003 in the amount ₱6.26 million. Based on these given figures, the CT A concluded that the expenses for
educational purposes that had been coursed through the CF-CPA should be prorated so that only the portion that
₱6.26 million bears to the total CF-CPA disbursements should be credited to DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional requirement that revenues actually and directly
used for educational purposes should be tax-exempt. As already mentioned above, DLSU is not claiming that the
whole ₱23.46 million CF-CPA disbursement had been used for educational purposes; it only claims that ₱6.60
million transferred to CF-CPA had been used for educational purposes. This was what DLSU needed to prove to
have actually and directly used for educational purposes.

That this fund had been first deposited into a separate fund (the CF -CPA established to fund capital projects) lends
peculiarity to the facts of this case, but does not detract from the fact that the deposited funds were DLSU revenue
funds that had been confirmed and proven to have been actually and directly used for educational purposes via the
CF-CPA. That the CF-CPA might have had other sources of funding is irrelevant because the assessment in the
present case pertains only to the rental income which DLSU indisputably earned as revenue in 2003. That the proven
CF-CPA funds used for educational purposes should not be prorated as part of its total CF-CPA disbursements for
purposes of crediting to DLSU is also logical because no claim whatsoever had been made that the totality of the
CF-CPA disbursements had been for educational purposes. No prorating is necessary; to state the obvious,
exemption is based on actual and direct use and this DLSU has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the difference between what it claimed and
what it has proven. In more concrete terms, DLSU only had to prove that its rental income for taxable year 2003
(₱10,610,379.00) was used for educational purposes. Hence, while the total disbursements from the CF-CPA
Account amounted to ₱23,463,543.02, DLSU only had to substantiate its Pl0.6 million rental income, part of which
was the ₱6,602,655.00 transferred to the CF-CPA account. Of this latter amount, ₱6.259 million was substantiated
to have been used for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003 as follows:

  CTA
Decision138 Revised
Rental income 10,610,379.00 10,610,379.00

Less: Rent income used in construction of the Sports 4,007,724.00 4,007,724.00

Complex

     
Rental income deposited to the CF-CPA Account 6,602,655.00 6,602,655.00
     
1,761,588.35 6,259,078.30
Less: Substantiated portion of CF-CPA disbursements

     
Tax base for deficiency income tax and VAT 4,841,066.65 343.576.70

On DLSU' s argument that the CTA should have appreciated its evidence in the same way as it did with the evidence
submitted by Ateneo in another separate case, the CTA explained that the issue in the Ateneo case was not the same
as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes and VAT under
certain BIR and Department of Finance issuances139 that required the educational institution to own and operate the
canteens, or other commercial enterprises within its campus, as condition for tax exemption. The CTA held that the
Constitution does not require the educational institution to own or operate these commercial establishments to avail
of the exemption.140
Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the separate sets of
evidence differently. The CTA likewise stressed that DLSU and Ateneo gave distinct defenses and that its wisdom
"cannot be equated on its decision on two different cases with two different issues."141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it submitted similar,
if not stronger sets of evidence, as Ateneo. We reject DLSU's argument for being non sequitur. Its reliance on the
concept of uniformity of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and materiality of the
evidence supporting their respective claims for tax exemption would necessarily differ because their attendant issues
and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable years they were
assessed varied. The amount of tax assessment also varied. The amount of income proven to have been used for
educational purposes also varied because the amount substantiated varied.142 Thus, the amount of tax assessment
cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for taxable years 2001, 2002 and
2003. On the other hand, the BIR assessed Ateneo a total deficiency tax of ₱8,864,042.35 for the same period.
Notably, DLSU was assessed deficiency DST, while Ateneo was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly and exclusively
for educational purposes by submitting similar evidence, e.g., the testimony of their employees on the use of
university revenues, the report of the Independent CPA, their income summaries, financial statements, vouchers,
etc., the fact remains that DLSU failed to prove that a portion of its income and revenues had indeed been used for
educational purposes.

The CTA significantly found that some documents that could have fully supported DLSU's claim were not produced
in court. Indeed, the Independent CPA testified that some disbursements had not been proven to have been used
actually, directly and exclusively for educational purposes.144

The final nail on the question of evidence is DLSU's own admission that the original of these documents had not in
fact been produced before the CTA although it claimed that there was no bad faith on its part.145 To our mind, this
admission is a good indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU's failure to
substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised

Rules on Evidence, that the contents of the missing supporting documents were proven by its recital in some other
authentic documents on record,146 can no longer be entertained at this late stage of the proceeding. The CTA did not
rule on this particular claim. The CTA also made no finding on DLSU' s assertion of lack of bad faith. Besides, it is
not our duty to go over these documents to test the truthfulness of their contents, this Court not being a trier of facts.

Second, DLSU misunderstands the concept of uniformity of taxation.

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate.147 A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found.148 The concept requires that all subjects of taxation similarly situated should be treated alike
and placed in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because their
income proved to have been used actually, directly and exclusively for educational purposes were exempted from
taxes. The CTA equally applied the requirements in the YMCA case to test if they indeed used their revenues for
educational purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show that, despite proving that it used
actually, directly and exclusively for educational purposes its income and revenues, the CTA still affirmed the
imposition of taxes. That the DLSU secured a different result happened because it failed to fully prove that it used
actually, directly and exclusively for educational purposes its revenues and income.

On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of taxation
similarly situated are treated in literally the same way in all and every occasion. The fact that the Ateneo and DLSU
are both non-stock, non-profit educational institutions, does not mean that the CTA or this Court would similarly
decide every case for (or against) both universities. Success in tax litigation, like in any other litigation, depends to a
large extent on the sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA was correct in not fully
cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid and remitted
through its bank's On-Line Electronic DST Imprinting Machine. The Commissioner argues that DLSU is not
allowed to use this method of payment because an educational institution is excluded from the class of taxpayers
who can use the On-Line Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code and the
relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the person making,
signing, issuing, accepting, or transferring the same.150 The Tax Code provides that whenever one party to the
document enjoys exemption from DST, the other party not exempt from DST shall be directly liable for the tax.
Thus, it is clear that DST shall be payable by any party to the document, such that the payment and compliance by
one shall mean the full settlement of the DST due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These agreements are subject to
DST.151 For the purpose of showing that the DST on the loan agreement has been paid, DLSU presented its
agreements bearing the imprint showing that DST on the document has been paid by the bank, its counterparty. The
imprint should be sufficient proof that DST has been paid. Thus, DLSU cannot be further assessed for deficiency
DST on the said documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay and remit DST
through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this
is irrelevant because it was not DLSU who used the On-Line Electronic DST Imprinting Machine but the bank that
handled its mortgage and loan transactions. RR No. 9-2000 expressly includes banks in the class of taxpayers that
can use the On-Line Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

₱13,265.48.152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal Revenue in G.R. No.
196596 and AFFIRM the December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax
Appeals En Banc in CTA En Banc Case No. 622, except for the total amount of deficiency tax liabilities of De La
Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of the
Commissioner of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011 decision and October 4,
2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 671, with
the MODIFICATION that the base for the deficiency income tax and VAT for taxable year 2003 is ₱343,576.70.

SO ORDERED.

G.R. No. 212825, December 07, 2015

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. NEXT MOBILE, INC. (FORMERLY

NEXTEL COMMUNICATIONS PHILS., INC.), Respondent.

DECISION

VELASCO JR., J.:

This is a Petition for Review under Rule 45 of the Rules of Court seeking to reverse and set aside the Decision of the
Court of Tax Appeals En Banc affirming the earlier decision of its First Division in CTA Case No. 7965, cancelling
and withdrawing petitioner's formal letter of demand and assessment notices to respondent for having been issued
beyond the prescriptive period provided by law.

The Facts
On April 15, 2002, respondent filed with the Bureau of Internal Revenue (BIR) its Annual Income Tax Return (ITR)
for taxable year ending December 31, 2001. Respondent also filed its Monthly Remittance Returns of Final Income
Taxes Withheld (BIR Form No. 1601-F), its Monthly Remittance Returns of Expanded Withholding Tax (BIR Form
No. 1501-E) and its Monthly Remittance Return of Income Taxes Withheld on Compensation (BIR Form No. 1601-
C) for year ending December 31, 2001.

On September 25, 2003, respondent received a copy of the Letter of Authority dated September 8, 2003 signed by
Regional Director Nestor S. Valeroso authorizing Revenue Officer Nenita L. Crespo of Revenue District Office 43
to examine respondent's books of accounts and other accounting records for income and withholding taxes for the
period covering January 1, 2001 to December 31, 2001.

Ma. Lida Sarmiento (Sarmiento), respondent's Director of Finance, subsequently executed several waivers of the
statute of limitations to extend the prescriptive period of assessment for taxes due in taxable year ending December
31, 2001 (Waivers), the details of which are summarized as follows:
Extended Date of Date of
Waiver Date of Execution BIR Signatory
Prescription Acknowledgment
Revenue District
First Waiver March 30, 2005 August 26, 2004 August 30, 2004
Officer
Revenue District
Second Waiver June 30, 2005 October 22, 2004 October 22, 2004
Officer
Revenue District
Third Waiver September 30, 2005 January 12,2005 January 18, 2005
Officer
Revenue District
Fourth Waiver September 30, 2005 None May 3, 2005
Officer
Revenue District
Fifth Waiver October 31, 2005 March 17, 2005 May 3, 2005
Officer
On September 26, 2005, respondent received from the BIR a Preliminary Assessment Notice dated September 16,
2005 to which it filed a Reply.

On October 25, 2005, respondent received a Formal Letter of Demand (FLD) and Assessment Notices/Demand No.
43-734 both dated October 17, 2005 from the BIR, demanding payment of deficiency income tax, final withholding
tax (FWT), expanded withholding tax (EWT), increments for late remittance of taxes withheld, and compromise
penalty for failure to file returns/late filing/late remittance of taxes withheld, in the total amount of P313,339,610.42
for the taxable year ending December 31, 2001.

On November 23, 2005, respondent filed its protest against the FLD and requested the reinvestigation of the
assessments. On July 28, 2009, respondent received a letter from the BIR denying its protest. Thus, on August 27,
2009, respondent filed a Petition for Review before the CTA docketed as CTA Case No. 7965.

Ruling of the CTA Former First Division

On December 11, 2012, the former First Division of the CTA (CTA First Division) rendered a Decision granting
respondent's Petition for Review and declared the FLD dated October 17, 2005 and Assessment Notices/Demand
No. 43-734 dated October 17, 2005 cancelled and withdrawn for being issued beyond the three-year prescriptive
period provided by law.

It was held that based on the date of filing of respondent's Annual ITR as well as the dates of filing of its monthly
BIR Form Nos. 1601-F, 1601-E and 1601-C, it is clear that the adverted FLD and the Final Assessment Notices both
dated October 17, 2005 were issued beyond the three-year prescriptive period provided under Section 203 ot the
1997 National Internal Revenue Code (NIRC), as amended.
The tax court also rejected petitioner's claim that this case falls under the exception as to the three-year prescriptive
period for assessment and that the 10-year prescriptive period should apply on the ground of filing a false or
fraudulent return. Under Section 222(a) of the 1997 NIRC, as amended, in case a taxpayer filed a false or fraudulent
return, the Commissioner of Internal Revenue (CIR) may assess a taxpayer for deficiency tax within ten (10) years
after the discovery of the falsity or the fraud. The tax court explained that petitioner failed to substantiate its
allegation by clear and convincing proof that respondent filed a false or fraudulent return.

Furthermore, the CTA First Division held that the Waivers executed by Sarmiento did not validly extend the three-
year prescriptive period to assess respondent for deficiency income tax, FWT, EWT, increments for late remittance
of tax withheld and compromise penalty, for, as found, the Waivers were not properly executed according to the
procedure in Revenue Memorandum Order No. 20-90 (RMO 20-90)1 and Revenue Delegation Authority Order No.
05-01 (RDAO 05-01).2

The tax court declared that, in this case, the Waivers have no binding effect on respondent for the following
reasons:chanRoblesvirtualLawlibrary

First, Sarmiento signed the Waivers without any notarized written authority from respondent's Board of Directors.
Petitioner's witness explicitly admitted that he did not require Sarmiento to present any notarized written authority
from the Board of Directors of respondent, authorizing her to sign the Waivers. Petitioner's witness also confirmed
that Revenue District Officer Raul Vicente L. Recto (RDO Recto) accepted the Waivers as submitted.

Second, even assuming that Sarmiento had the necessary board authority, the Waivers are still invalid as the
respective dates of their acceptance by RDO Recto are not indicated therein.

Third, records of this case reveal additional irregularities in the subject Waivers:
(1) The fact of receipt by respondent of its copy of the Second Waiver was not indicated on the face of the
original Second Waiver;
(2) Respondent received its copy of the First and the Third Waivers on the same day, May 23, 2005; and
(3) Respondent received its copy of the Fourth and the Fifth Waivers on the same day, May 13, 2005.
Finally, the CTA held that estoppel does not apply in questioning the validity of a waiver of the statute of
limitations. It stated that the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with
RMO 20-90 and RDAO 05-01.

Petitioner's Motion for Reconsideration was denied on March 14, 2013.

Petitioner filed a Petition for Review before the CTA En Banc.

On May 28, 2014, the CTA En Banc rendered a Decision denying the Petition for Review and affirmed that of the
former CTA First Division.

It held that the five (5) Waivers of the statute of limitations were not valid and binding; thus, the three-year period of
limitation within which to assess deficiency taxes was not extended. It also held that the records belie the allegation
that respondent filed false and fraudulent tax returns; thus, the extension of the period of limitation from three (3) to
ten (10) years does not apply.

Issue

Petitioner has filed the instant petition on the issue of whether or not the CIR's right to assess respondent's
deficiency taxes had already prescribed.

Our Ruling

The petition has merit.

Section 2033 of the 1997 NIRC mandates the BIR to assess internal revenue taxes within three years from the last
day prescribed by law for the filing of the tax return or the actual date of filing of such return, whichever comes
later. Hence, an assessment notice issued after the three-year prescriptive period is not valid and effective.
Exceptions to this rule are provided under Section 2224 of the NIRC.

Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written
agreement between the CIR and the taxpayer executed before the expiration of the three-year period. RMO 20-90
issued on April 4, 1990 and RDAO 05-015 issued on August 2, 2001 provide the procedure for the proper execution
of a waiver. RMO 20-90 reads:
April 4, 1990
REVENUE MEMORANDUM ORDER NO. 20-90
Subject: Proper Execution of the Waiver of the Statute of Limitations under the National Internal Revenue
Code
To: All Internal Revenue Officers and Others Concerned

Pursuant to Section 223 of the Tax Code, internal revenue taxes may be assessed or collected after the ordinary
prescriptive period, if before its expiration, both the Commissioner and the taxpayer have agreed in writing to its
assessment and/or collection after said period. The period so agreed upon may be extended by subsequent written
agreement made before the expiration of the period previously agreed upon. This written agreement between the
Commissioner and the taxpayer is the so-called Waiver of the Statute of Limitations. In the execution of said waiver,
the following procedures should be followed:chanRoblesvirtualLawlibrary

1. The waiver must be in the form identified hereof. This form may be reproduced by the Office concerned but there
should be no deviation from such form. The phrase "but not after ______ 19____" should be filled up. This indicates
the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription.
The period agreed upon shall constitute the time within which to effect the assessment/collection of the tax in
addition to the ordinary prescriptive period.

2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a
corporation, the waiver must be signed by any of its responsible officials.

Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue .or the revenue official
authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed
to the waiver. The date of such acceptance by the Bureau should be indicated. Both the date of execution by the
taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription or before
the lapse of the period agreed upon in case a subsequent agreement is executed.

3. The following revenue officials are authorized to sign the waiver:chanRoblesvirtualLawlibrary

xxxx

4. The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case, the
second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the
taxpayer of his/her file copy shall be indicated in the original copy.

5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this
Order resulting in prescription of the right to assess/collect shall be administratively dealt with.

This Revenue Memorandum Order shall take effect immediately.

(SGD.)JOSEU. ONG 
Commissioner of Internal Revenue
The Court has consistently held that a waiver of the statute of limitations must faithfully comply with the provisions
of RMO No. 20-90 and RDAO 05-01 in order to be valid and binding.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue6 the Court declared the waiver executed by
petitioner therein invalid because: (1) it did not specify a definite agreed date between the BIR and petitioner within
which the former may assess and collect revenue taxes; (2) it was signed only by a revenue district officer, not the
Commissioner; (3) there was no date of acceptance; and (4) petitioner was not furnished a copy of the waiver.

Philippine Journalists tells us that since a waiver of the statute of limitations is a derogation of the taxpayer's right to
security against prolonged and unscrupulous investigations, waivers of this kind must be carefully and strictly
construed. Philippine Journalists also clarifies that a waiver of the statute of limitations is not a waiver of the right
to invoke the defense of prescription but rather an agreement between the taxpayer and the BIR that the period to
issue an assessment and collect the taxes due is extended to a date certain. It is not a unilateral act by the taxpayer of
the BIR but is a bilateral agreement between two parties.

In Commissioner of Internal Revenue v. FMF Development Corporation7 the Court found the waiver in question
defective because: (1) it was not proved that respondent therein was furnished a copy of the BIR-accepted waiver;
(2) the waiver was signed by a revenue district officer instead of the Commissioner as mandated by the NIRC and
RMO 20-90 considering that the case involved an amount of more than P1,000,000.00, and the period to assess was
not yet about to prescribe; and (3) it did not contain the date of acceptance by the CIR. The Court explained that the
date of acceptance by the CIR is a requisite necessary to determine whether the waiver was validly accepted before
the expiration of the original period.8

In CIR v. Kudos Metal Corporation,9 the waivers executed by Kudos were found ineffective to extend the period to
assess or collect taxes because: (1) the accountant who executed the waivers had no notarized written board
authority to sign the waivers in behalf of respondent corporation; (2) there was no date of acceptance indicated on
the waivers; and (3) the fact of receipt by respondent of its file copy was not indicated in the original copies of the
waivers.

The Court rejected the CIR's argument that since it was the one who asked for additional time, Kudos should be
considered estopped from raising the defense of prescription. The Court held that the BIR cannot hide behind the
doctrine of estoppel to cover its failure to comply with its RMO 20-90 and RDAO 05-01. Having caused the defects
in the waivers, the Court held that the BIR must bear the consequence.10 Hence, the BIR assessments were found to
be issued beyond the three-year period and declared void.11 Further, the Court stressed that there is compliance with
RMO 20-90 only after the taxpayer receives a copy of the waiver accepted by the BIR, viz:
The flaw in the appellate court's reasoning stems from its assumption that the waiver is a unilateral act of the
taxpayer when it is in fact and in law an agreement between the taxpayer and the BIR. When the petitioner's
comptroller signed the waiver on September 22, 1997, it was not yet complete and final because the BIR had not
assented. There is compliance with the provision of RMO No. 20-90 only after the taxpayer received a copy of the
waiver accepted by the BIR. The requirement to furnish the taxpayer with a copy of the waiver is not only to give
notice of the existence of the document but of the acceptance by the BIR and the perfection of the
agreement.12ChanRoblesVirtualawlibrary
The deficiencies of the Waivers in this case are the same as the defects of the waiver in Kudos. In the instant case,
the CTA found the Waivers because of the following flaws: (1) they were executed without a notarized board
authority; (2) the dates of acceptance by the BIR were not indicated therein; and (3) the fact of receipt by respondent
of its copy of the Second Waiver was not indicated on the face of the original Second Waiver.

To be sure, both parties in this case are at fault.

Here, respondent, through Sarmiento, executed five Waivers in favor of petitioner. However, her authority to sign
these Waivers was not presented upon their submission to the BIR. In fact, later on, her authority to sign was
questioned by respondent itself, the very same entity that caused her to sign such in the first place. Thus, it is clear
that respondent violated RMO No. 20-90 which states that in case of a corporate taxpayer, the waiver must be signed
by its responsible officials13 and RDAO 01-05 which requires the presentation of a written and notarized authority to
the BIR.14

Similarly, the BIR violated its own rules and was careless in performing its functions with respect to these Waivers.
It is very clear that under RDAO 05-01 it is the duty of the authorized revenue official to ensure that the waiver is
duly accomplished and signed by the taxpayer or his authorized representative before affixing his signature to
signify acceptance of the same. It also instructs that in case the authority is delegated by the taxpayer to a
representative, the concerned revenue official shall see to it that such delegation is in writing and duly
notarized. Furthermore, it mandates that the waiver should not be accepted by the concerned BIR office and
official unless duly notarized.15

Vis-a-vis the five Waivers it received from respondent, the BIR has failed, for five times, to perform its duties in
relation thereto: to verify Ms. Sarmiento's authority to execute them, demand the presentation of a notarized
document evidencing the same, refuse acceptance of the Waivers when no such document was presented, affix the
dates of its acceptance on each waiver, and indicate on the Second Waiver the date of respondent's receipt thereof.

Both parties knew the infirmities of the Waivers yet they continued dealing with each other on the strength of these
documents without bothering to rectify these infirmities. In fact, in its Letter Protest to the BIR, respondent did not
even question the validity of the Waivers or call attention to their alleged defects.

In this case, respondent, after deliberately executing defective waivers, raised the very same deficiencies it caused to
avoid the tax liability determined by the BIR during the extended assessment period. It must be remembered that by
virtue of these Waivers, respondent was given the opportunity to gather and submit documents to substantiate its
claims before the CIR during investigation. It was able to postpone the payment of taxes, as well as contest and
negotiate the assessment against it. Yet, after enjoying these benefits, respondent challenged the validity of the
Waivers when the consequences thereof were not in its favor. In other words, respondent's act of impugning these
Waivers after benefiting therefrom and allowing petitioner to rely on the same is an act of bad faith.

On the other hand, the stringent requirements in RMO 20-90 and RDAO 05-01 are in place precisely because the
BIR put them there. Yet, instead of strictly enforcing its provisions, the BIR defied the mandates of its very own
issuances. Verily, if the BIR was truly determined to validly assess and collect taxes from respondent after the
prescriptive period, it should have been prudent enough to make sure that all the requirements for the effectivity of
the Waivers were followed not only by its revenue officers but also by respondent. The BIR stood to lose millions of
pesos in case the Waivers were declared void, as they eventually were by the CTA, but it appears that it was too
negligent to even comply with its most basic requirements.

The BIR's negligence in this case is so gross that it amounts to malice and bad faith. Without doubt, the BIR knew
that waivers should conform strictly to RMO 20-90 and RDAO 05-01 in order to be valid. In fact, the mandatory
nature of the requirements, as ruled by this Court, has been recognized by the BIR itself in its issuances such as
Revenue Memorandum Circular No. 6-2005,16 among others. Nevertheless, the BIR allowed respondent to submit,
and it duly received, five defective Waivers when it was its duty to exact compliance with RMO 20-90 and RDAO
05-01 and follow the procedure dictated therein. It even openly admitted that it did not require respondent to present
any notarized authority to sign the questioned Waivers.17 The BIR failed to demand respondent to follow the
requirements for the validity of the Waivers when it had the duty to do so, most especially because it had the highest
interest at stake. If it was serious in collecting taxes, the BIR should have meticulously complied with the foregoing
orders, leaving no stone unturned.

The general rule is that when a waiver does not comply with the requisites for its validity specified under RMO No.
20-90 and RDAO 01-05, it is invalid and ineffective to extend the prescriptive period to assess taxes. However, due
to its peculiar circumstances, We shall treat this case as an exception to this rule and find the Waivers valid for the
reasons discussed below.

First, the parties in this case are in pari delicto or "in equal fault." In pari delicto connotes that the two parties to a
controversy are equally culpable or guilty and they shall have no action against each other. However, although the
parties are in pari delicto, the Court may interfere and grant relief at the suit of one of them, where public policy
requires its intervention, even though the result may be that a benefit will be derived by one party who is in equal
guilt with the other.18

Here, to uphold the validity of the Waivers would be consistent with the public policy embodied in the principle that
taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need.19 Taxes are
the nation's lifeblood through which government agencies continue to operate and which the State discharges its
functions for the welfare of its constituents.20 As between the parties, it would be more equitable if petitioner's lapses
were allowed to pass and consequently uphold the Waivers in order to support this principle and public policy.

Second, the Court has repeatedly pronounced that parties must come to court with clean hands.21Parties who do not
come to court with clean hands cannot be allowed to benefit from their own wrongdoing.22 Following the foregoing
principle, respondent should not be allowed to benefit from the flaws in its own Waivers and successfully insist on
their invalidity in order to evade its responsibility to pay taxes.

Third, respondent is estopped from questioning the validity of its Waivers. While it is true that the Court has
repeatedly held that the doctrine of estoppel must be sparingly applied as an exception to the statute of limitations
for assessment of taxes, the Court finds that the application of the doctrine is justified in this case. Verily, the
application of estoppel in this case would promote the administration of the law, prevent injustice and avert the
accomplishment of a wrong and undue advantage. Respondent executed five Waivers and delivered them to
petitioner, one after the other. It allowed petitioner to rely on them and did not raise any objection against their
validity until petitioner assessed taxes and penalties against it. Moreover, the application of estoppel is necessary to
prevent the undue injury that the government would suffer because of the cancellation of petitioner's assessment of
respondent's tax liabilities.

Finally, the Court cannot tolerate this highly suspicious situation. In this case, the taxpayer, on the one hand, after
voluntarily executing waivers, insisted on their invalidity by raising the very same defects it caused. On the other
hand, the BIR miserably failed to exact from respondent compliance with its rules. The BIR's negligence in the
performance of its duties was so gross that it amounted to malice and bad faith. Moreover, the BIR was so lax such
that it seemed that it consented to the mistakes in the Waivers. Such a situation is dangerous and open to abuse by
unscrupulous taxpayers who intend to escape their responsibility to pay taxes by mere expedient of hiding behind
technicalities.

It is true that petitioner was also at fault here because it was careless in complying with the requirements of RMO
No. 20-90 and RDAO 01-05. Nevertheless, petitioner's negligence may be addressed by enforcing the provisions
imposing administrative liabilities upon the officers responsible for these errors.23 The BIR's right to assess and
collect taxes should not be jeopardized merely because of the mistakes and lapses of its officers, especially in cases
like this where the taxpayer is obviously in bad faith.24

As regards petitioner's claim that the 10-year period of limitation within which to assess deficiency taxes provided in
Section 222(a) of the 1997 NIRC is applicable in this case as respondent allegedly filed false and fraudulent returns,
there is no reason to disturb the tax court's findings that records failed to establish, even by prima facie evidence,
that respondent Next Mobile filed false and fraudulent returns on the ground of substantial underdeclaration
of income in respondent Next Mobile's Annual ITR for taxable year ending December 31, 2001.25cralawred

While the Court rules that the subject Waivers are valid, We, however, refer back to the tax court the determination
of the merits of respondent's petition seeking the nullification of the BIR Formal Letter of Demand and Assessment
Notices/Demand No. 43-734.

WHEREFORE, premises considered, the Court resolves to GRANT the petition. The Decision of the Court of Tax
Appeals En Banc dated May 28, 2014 in CTA EB Case No. 1001 is hereby REVERSED and SET ASIDE.
Accordingly, let this case be remanded to the Court of Tax Appeals for further proceedings in order to determine
and rule on the merits of respondent's petition seeking the nullification of the BIR Formal Letter of Demand and
Assessment Notices/Demand No. 43-734, both dated October 17, 2005.

SO ORDERED.chanroblesvirtuallawlibrary

G.R. No. 193301               March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x

G.R. No. 194637

MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner, 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CARPIO, J.:

G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as well as the
Resolution3 promulgated on 28 July 2010 by the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No.
513. The CTA En Banc affirmed the 22 September 2008 Decision4 as well as the 26 June 2009 Amended
Decision5 of the First Division of the Court of Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287, and
7317. The CTA First Division denied Mindanao II Geothermal Partnership’s (Mindanao II) claims for refund or tax
credit for the first and second quarters of taxable year 2003 for being filed out of time (CTA Case Nos. 7227 and
7287). The CTA First Division, however, ordered the

Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input value-added tax (VAT)
for the third and fourth quarters of taxable year 2003 (CTA Case No. 7317).

G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May 2010 as well as the
Amended Decision8 promulgated on 24 November 2010 by the CTA En Banc in CTA EB Nos. 476 and 483. In its
Amended Decision, the CTA En Banc reversed its 31 May 2010 Decision and granted the CIR’s petition for review
in CTA Case No. 476. The CTA En Banc denied Mindanao I Geothermal Partnership’s (Mindanao I) claims for
refund or tax credit for the first (CTA Case No. 7228), second (CTA Case No. 7286), third, and fourth quarters
(CTA Case No. 7318) of 2003.

Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission, value added
taxpayers registered with the Bureau of Internal Revenue (BIR), and Block Power Production Facilities accredited
by the Department of Energy. Republic Act No. 9136, or the Electric Power Industry Reform Act of 2000 (EPIRA),
effectively amended Republic Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code),9 when it decreed that
sales of power by generation companies shall be subjected to a zero rate of VAT.10 Pursuant to EPIRA, Mindanao I
and II filed with the CIR claims for refund or tax credit of accumulated unutilized and/or excess input taxes due to
VAT zero-rated sales in 2003. Mindanao I and II filed their claims in 2005.

G.R. No. 193301

Mindanao II v. CIR

The Facts

G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317, which were
consolidated as CTA EB No. 513. CTA Case Nos. 7227, 7287, and 7317 claim a tax refund or credit of Mindanao
II’s alleged excess or unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227, Mindanao II
claims a tax refund or credit of ₱3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287, Mindanao II
claims a tax refund or credit of ₱1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317, Mindanao II
claims a tax refund or credit of ₱3,521,129.50 for the third and fourth quarters of 2003.

The CTA First Division’s narration of the pertinent facts is as follows:

xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT) contract with the
Philippine National Oil Corporation – Energy Development Company (PNOC-EDC) for finance, engineering,
supply, installation, testing, commissioning, operation, and maintenance of a 48.25 megawatt geothermal power
plant, provided that PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In turn, Mindanao II shall
convert the steam into electric capacity and energy for PNOC-EDC and shall deliver the same to the National Power
Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II alleges that its sale of generated power and
delivery of electric capacity and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenue-
generating activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.

xxxx

Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by
generation companies from ten (10%) percent to zero (0%) percent.

In the course of its operation, Mindanao II makes domestic purchases of goods and services and accumulates
therefrom creditable input taxes. Pursuant to the provisions of the National Internal Revenue Code (NIRC),
Mindanao II alleges that it can use its accumulated input tax credits to offset its output tax liability. Considering,
however that its only revenue-generating activity is VAT zero-rated under RA No. 9136, Mindanao II’s input tax
credits remain unutilized.

Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-rating of the
EPIRA in computing for its VAT payable when it filed its Quarterly VAT Returns on the following dates:

CTA Case No. Period Covered Date of Filing

(2003)
Original Return Amended Return
7227 1st Quarter April 23, 2003 July 3, 2002 (sic),
April 1, 2004 &
October 22, 2004
7287 2nd Quarter July 22, 2003 April 1, 2004
7317 3rd Quarter Oct. 27, 2003 April 1, 2004
7317 4th Quarter Jan. 26, 2004 April 1, 2204

Considering that it has accumulated unutilized creditable input taxes from its only income-generating activity,
Mindanao II filed an application for refund and/or issuance of tax credit certificate with the BIR’s Revenue District
Office at Kidapawan City on April 13, 2005 for the four quarters of 2003.

To date (September 22, 2008), the application for refund by Mindanao II remains unacted upon by the CIR. Hence,
these three petitions filed on April 22, 2005 covering the 1st quarter of 2003; July 7, 2005 for the 2nd quarter of
2003; and September 9, 2005 for the 3rd and 4th quarters of 2003. At the instance of Mindanao II, these petitions
were consolidated on March 15, 2006 as they involve the same parties and the same subject matter. The only
difference lies with the taxable periods involved in each petition.11

The Court of Tax Appeals’ Ruling: Division

In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the twin requirements
for VAT zero rating under EPIRA: (1) it is a generation company, and (2) it derived sales from power generation.
The CTA First Division also stated that Mindanao II complied with five requirements to be entitled to a refund:

1. There must be zero-rated or effectively zero-rated sales;

 2. That input taxes were incurred or paid;

3. That such input VAT payments are directly attributable to zero-rated sales or effectively zero-rated sales;

4. That the input VAT payments were not applied against any output VAT liability; and

5. That the claim for refund was filed within the two-year prescriptive period.13

With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of Mindanao II’s return as
well as its administrative and judicial claims, and concluded that Mindanao II’s administrative and judicial claims
were timely filed in compliance with this Court’s ruling in Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue (Atlas).14 The CTA First Division declared that the two-year
prescriptive period for filing a VAT refund claim should not be counted from the close of the quarter but from the
date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to a refund can only be
determined upon the filing of the quarterly VAT return.

CTA Period Date Filing

Case No. Covered
(2003) Original Amended Administrative Judicial Claim
Return Return Return
7227 1st Quarter 23 April 2003 1 April 2004 13 April 2005 22 April 2005
7287 2nd Quarter 22 July 2003 1 April 2004 13 April 2005 7 July 2005
7317 3rd Quarter 25 Oct. 2003 1 April 2004 13 April 2005 9 Sept. 2005
7317 4th Quarter 26 Jan. 2004 1 April 2004 13 April 2005 9 Sept. 200515

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004, when Mindanao II filed
its VAT returns, its administrative claim filed on 13 April 2005 and judicial claims filed on 22 April 2005, 7 July
2005, and 9 September 2005 were timely filed in accordance with Atlas.

The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of ₱7,703,957.79,
after disallowing ₱522,059.91 from input VAT16 and deducting ₱18,181.82 from Mindanao II’s sale of a fully
depreciated ₱200,000.00 Nissan Patrol. The input taxes amounting to ₱522,059.91 were disallowed for failure to
meet invoicing requirements, while the input VAT on the sale of the Nissan Patrol was reduced by ₱18,181.82
because the output VAT for the sale was not included in the VAT declarations.

The dispositive portion of the CTA First Division’s 22 September 2008 Decision reads:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby
ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE in the modified amount of SEVEN
MILLION SEVEN HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND 79/100 PESOS
(₱7,703,957.79) representing its unutilized input VAT for the four (4) quarters of the taxable year 2003.

SO ORDERED.17

Mindanao II filed a motion for partial reconsideration.18 It stated that the sale of the fully depreciated Nissan Patrol
is a one-time transaction and is not incidental to its VAT zero-rated operations. Moreover, the disallowed input taxes
substantially complied with the requirements for refund or tax credit.

The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for the first and second
quarters of 2003 were filed beyond the period allowed by law, as stated in Section 112(A) of the 1997 Tax Code.
The CIR further stated that Section 229 is a general provision, and governs cases not covered by Section 112(A).
The CIR countered the CTA First Division’s 22 September 2008 decision by citing this Court’s ruling in
Commisioner of Internal Revenue v. Mirant Pagbilao Corporation (Mirant),19 which stated that unutilized input VAT
payments must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales
were made regardless of whether said tax was paid.

The CTA First Division denied Mindanao II’s motion for partial reconsideration, found the CIR’s motion for partial
reconsideration partly meritorious, and rendered an Amended Decision20 on 26 June 2009. The CTA First Division
stated that the claim for refund or credit with the BIR and the subsequent appeal to the CTA must be filed within the
two-year period prescribed under Section 229. The two-year prescriptive period in Section 229 was denominated as
a mandatory statute of limitations. Therefore, Mindanao II’s claims for refund for the first and second quarters of
2003 had already prescribed.

The CTA First Division found that the records of Mindanao II’s case are bereft of evidence that the sale of the
Nissan Patrol is not incidental to Mindanao II’s VAT zero-rated operations. Moreover, Mindanao II’s submitted
documents failed to substantiate the requisites for the refund or credit claims.

The CTA First Division modified its 22 September 2008 Decision to read as follows:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby
ORDERED to REFUND or to ISSUE A TAX CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in
the modified amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT HUNDRED EIGHTY
SEVEN AND 77/100 PESOS (₱2,980,887.77) representing its unutilized input VAT for the third and fourth
quarters of the taxable year 2003.

SO ORDERED.21

Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.

The Court of Tax Appeals’ Ruling: En Banc

On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513 and denied Mindanao II’s
petition. The CTA En Banc ruled that (1) Section 112(A) clearly provides that the reckoning of the two-year
prescriptive period for filing the application for refund or credit of input VAT attributable to zero-rated sales or
effectively zero-rated sales shall be counted from the close of the taxable quarter when the sales were made; (2) the
Atlas and Mirant cases applied different tax codes: Atlas applied the 1977 Tax Code while Mirant applied the 1997
Tax Code; (3) the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao II’s VAT zero-rated
transactions pursuant to Section 105; (4) Mindanao II failed to comply with the substantiation requirements provided
under Section 113(A) in relation to Section 237 of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5,
and 4.108-1 of Revenue Regulation No. 7-95; and (5) the doctrine of strictissimi juris on tax exemptions cannot be
relaxed in the present case.

The dispositive portion of the CTA En Banc’s 10 March 2010 Decision reads:

WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en banc is DISMISSED for
lack of merit. Accordingly, the Decision dated September 22, 2008 and the Amended Decision dated June 26, 2009
issued by the First Division are AFFIRMED.

SO ORDERED.24

The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao II’s Motion for
Reconsideration.26 The CTA En Banc highlighted the following bases of their previous ruling:
 1. The Supreme Court has long decided that the claim for refund of unutilized input VAT must be filed
within two (2) years after the close of the taxable quarter when such sales were made.

2. The Supreme Court is the ultimate arbiter whose decisions all other courts should take bearings.

3. The words of the law are clear, plain, and free from ambiguity; hence, it must be given its literal meaning
and applied without any interpretation.27

G.R. No. 194637

Mindanao I v. CIR

The Facts

G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483. Both CTA EB
cases consolidate three cases from the CTA Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case
Nos. 7228, 7286, and 7318 claim a tax refund or credit of Mindanao I’s accumulated unutilized and/or excess input
taxes due to VAT zero-rated sales. In CTA Case No. 7228, Mindanao I claims a tax refund or credit of
₱3,893,566.14 for the first quarter of 2003. In CTA Case No. 7286, Mindanao I claims a tax refund or credit of
₱2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318, Mindanao I claims a tax refund or credit of
₱7,940,727.83 for the third and fourth quarters of 2003.

Mindanao I is similarly situated as Mindanao II. The CTA Second Division’s narration of the pertinent facts is as
follows:

xxxx

In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with the Philippine
National Oil Corporation – Energy Development Corporation (PNOC-EDC) for the finance, design, construction,
testing, commissioning, operation, maintenance and repair of a 47-megawatt geothermal power plant. Under the said
BOT contract, PNOC-EDC shall supply and deliver steam to Mindanao I at no cost. In turn, Mindanao I will convert
the steam into electric capacity and energy for PNOC-EDC and shall subsequently supply and deliver the same to
the National Power Corporation (NPC), for and in behalf of PNOC-EDC.

Mindanao I’s 47-megawatt geothermal power plant project has been accredited by the Department of Energy (DOE)
as a Private Sector Generation Facility, pursuant to the provision of Executive Order No. 215, wherein Certificate of
Accreditation No. 95-037 was issued.

On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of the National Internal
Revenue Code (NIRC) of 1997 were deemed modified. R.A. No. 9136, also known as the "Electric Power Industry
Reform Act of 2001 (EPIRA), was enacted by Congress to ordain reforms in the electric power industry,
highlighting, among others, the importance of ensuring the reliability, security and affordability of the supply of
electric power to end users. Under the provisions of this Republic Act and its implementing rules and regulations,
the delivery and supply of electric energy by generation companies became VAT zero-rated, which previously were
subject to ten percent (10%) VAT.

xxxx

The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by generation
companies from ten (10%) percent to zero percent (0%). Thus, Mindanao I adopted the VAT zero-rating of the
EPIRA in computing for its VAT payable when it filed its VAT Returns, on the belief that its sales qualify for VAT
zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns for the first, second,
third, and fourth quarters of taxable year 2003, which were subsequently amended and filed with the BIR.

On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance of tax credit
certificate on its alleged unutilized or excess input taxes for taxable year 2003, in the accumulated amount of
₱14,185, 294.80.

Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April 22, 2005, July 7,
2005, and September 9, 2005 docketed as CTA Case Nos. 7228, 7286, and 7318, respectively. However, on October
10, 2005, Mindanao I received a copy of the letter dated September 30, 2003 (sic) of the BIR denying its application
for tax credit/refund.28

The Court of Tax Appeals’ Ruling: Division

On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA Case Nos. 7228, 7286, and 7318.
The CTA Second Division found that (1) pursuant to Section 112(A), Mindanao I can only claim 90.27% of the
amount of substantiated excess input VAT because a portion was not reported in its quarterly VAT returns; (2) out
of the ₱14,185,294.80 excess input VAT applied for refund, only ₱11,657,447.14 can be considered substantiated
excess input VAT due to disallowances by the Independent Certified Public Accountant, adjustment on the
disallowances per the CTA Second Division’s further verification, and additional disallowances per the CTA
Second Division’s further verification;

(3) Mindanao I’s accumulated excess input VAT for the second quarter of 2003 that was carried over to the third
quarter of 2003 is net of the claimed input VAT for the first quarter of 2003, and the same procedure was done for
the second, third, and fourth quarters of 2003; and (4) Mindanao I’s administrative claims were filed within the two-
year prescriptive period reckoned from the respective dates of filing of the quarterly VAT returns.

The dispositive portion of the CTA Second Division’s 24 October 2008 Decision reads:

WHEREFORE, premises considered, the consolidated Petitions for Review are hereby PARTIALLY GRANTED.
Accordingly, the CIR is hereby ORDERED TO ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in
the reduced amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND ONE HUNDRED
SEVENTY SEVEN PESOS AND 53/100 (₱10,523,177.53) representing Mindanao I’s unutilized input VAT for the
four quarters of the taxable year 2003.

SO ORDERED.30

Mindanao I filed a motion for partial reconsideration with motion for Clarification31 on 11 November 2008. It
claimed that the CTA Second Division should not have allocated proportionately Mindanao I’s unutilized creditable
input taxes for the taxable year 2003, because the proportionate allocation of the amount of creditable taxes in
Section 112(A) applies only when the creditable input taxes due cannot be directly and entirely attributed to any of
the zero-rated or effectively zero-rated sales. Mindanao I claims that its unreported collection is directly attributable
to its VAT zero-rated sales. The CTA Second Division denied Mindanao I’s motion and maintained the
proportionate allocation because there was a portion of the gross receipts that was undeclared in Mindanao I’s gross
receipts.

The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It claimed that Mindanao I failed to
exhaust administrative remedies before it filed its petition for review. The CTA Second Division denied the CIR’s
motion, and cited Atlas33 as the basis for ruling that it is more practical and reasonable to count the two-year
prescriptive period for filing a claim for refund or credit of input VAT on zero-rated sales from the date of filing of
the return and payment of the tax due.

The dispositive portion of the CTA Second Division’s 10 March 2009 Resolution reads:
WHEREFORE, premises considered, the CIR’s Motion for Partial Reconsideration and Mindanao I’s Motion for
Partial Reconsideration with Motion for Clarification are hereby DENIED for lack of merit.

SO ORDERED.34

The Ruling of the Court of Tax Appeals: En Banc

On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos. 476 and 483 and denied the
petitions filed by the CIR and Mindanao I. The CTA En Banc found no new matters which have not yet been
considered and passed upon by the CTA Second Division in its assailed decision and resolution.

The dispositive portion of the CTA En Banc’s 31 May 2010 Decision reads:

WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for lack of merit.
Accordingly, the October 24, 2008 Decision and March 10, 2009 Resolution of the CTA Former Second Division in
CTA Case Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal Partnership vs. Commissioner of Internal
Revenue" are hereby AFFIRMED in toto.

SO ORDERED.36

Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Banc’s 31 May 2010 Decision. In
an Amended Decision promulgated on 24 November 2010, the CTA En Banc agreed with the CIR’s claim that
Section 229 of the NIRC of 1997 is inapplicable in light of this Court’s ruling in Mirant. The CTA En Banc also
ruled that the procedure prescribed under Section 112(D) now 112(C)37 of the 1997 Tax Code should be followed
first before the CTA En Banc can act on Mindanao I’s claim. The CTA En Banc reconsidered its 31 May 2010
Decision in light of this Court’s ruling in Commissioner of Internal Revenue v. Aichi Forging Company of Asia,
Inc. (Aichi).38

The pertinent portions of the CTA En Banc’s 24 November 2010 Amended Decision read:

C.T.A. Case No. 7228:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the First Quarter
of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from
March 31, 2003 or until March 31, 2005 within which to file its administrative claim for refund;

(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of unutilized input VAT
for the first quarter of taxable year 2003 with the BIR, which is beyond the two-year prescriptive period
mentioned above.

C.T.A. Case No. 7286:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the second
quarter of 2003. Pursuant to

Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from June 30, 2003, within
which to file its administrative claim for refund for the second quarter of 2003, or until June 30, 2005;

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for
the second quarter of taxable year 2003 with the BIR, which is within the two-year prescriptive period,
provided under Section 112 (A) of the NIRC of 1997, as amended;
 (3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I submitted the supporting
documents together with the application for refund) or until August 2, 2005, to decide the administrative
claim for refund;

(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to September 1, 2005,
Mindanao I should have elevated its claim for refund to the CTA in Division;

(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court, docketed as CTA
Case No. 7286, even before the 120-day period for the CIR to decide the claim for refund had lapsed on
August 2, 2005. The Petition for Review was, therefore, prematurely filed and there was failure to exhaust
administrative remedies;

xxxx

C.T.A. Case No. 7318:

(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the third and
fourth quarters of 2003. Pursuant to Section 112(A) of the NIRC of 1997, as amended, Mindanao I
therefore, has two years from September 30, 2003 and December 31, 2003, or until September 30, 2005
and December 31, 2005, respectively, within which to file its administrative claim for the third and fourth
quarters of 2003;

(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for
the third and fourth quarters of taxable year 2003 with the BIR, which is well within the two-year
prescriptive period, provided under Section 112(A) of the NIRC of 1997, as amended;

(3) From April 4, 2005, which is also presumably the date Mindanao I submitted supporting documents,
together with the aforesaid application for refund, the CIR has 120 days or until August 2, 2005, to decide
the claim;

(4) Within thirty (30) days from the lapse of the 120-day period or from August 3, 2005 until September 1,
2005 Mindanao I should have elevated its claim for refund to the CTA;

(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on September 9,
2005, which is 8 days beyond the 30-day period to appeal to the CTA.

Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus, the Petition for Review
should have been dismissed for being filed late.

In recapitulation:

(1) C.T.A. Case No. 7228

Claim for the first quarter of 2003 had already prescribed for having been filed beyond the two-year
prescriptive period;

(2) C.T.A. Case No. 7286

Claim for the second quarter of 2003 should be dismissed for Mindanao I’s failure to comply with a
condition precedent when it failed to exhaust administrative remedies by filing its Petition for Review even
before the lapse of the 120-day period for the CIR to decide the administrative claim;
 (3) C.T.A. Case No. 7318

Petition for Review was filed beyond the 30-day prescribed period to appeal to the CTA.

xxxx

IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenue’s Motion for Reconsideration is hereby
GRANTED; Mindanao I’s Motion for Partial Reconsideration is hereby DENIED for lack of merit.

The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.

Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB No. 476 is hereby
GRANTED and the entire claim of Mindanao I Geothermal Partnership for the first, second, third and fourth
quarters of 2003 is hereby DENIED.

SO ORDERED.39

The Issues

G.R. No. 193301

Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:

I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II for the 1st and 2nd
quarters of year 2003 has already prescribed pursuant to the Mirant case.

A. The Atlas case and Mirant case have conflicting interpretations of the law as to the reckoning
date of the two year prescriptive period for filing claims for VAT refund.

B. The Atlas case was not and cannot be superseded by the Mirant case in light of Section 4(3),
Article VIII of the 1987 Constitution.

C. The ruling of the Mirant case, which uses the close of the taxable quarter when the sales were
made as the reckoning date in counting the two-year prescriptive period cannot be applied
retroactively in the case of Mindanao II.

II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax Code, as
amended in that the sale of the fully depreciated Nissan Patrol is a one-time transaction and is not
incidental to the VAT zero-rated operation of Mindanao II.

III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by the Independent
Certified Public Accountant as Mindanao II substantially complied with the requisites of the 1997 Tax
Code, as amended, for refund/tax credit.

A. The amount of ₱2,090.16 was brought about by the timing difference in the recording of the
foreign currency deposit transaction.

B. The amount of ₱2,752.00 arose from the out-of-pocket expenses reimbursed to SGV &
Company which is substantially suppoerted [sic] by an official receipt.

C. The amount of ₱487,355.93 was unapplied and/or was not included in Mindanao II’s claim for
refund or tax credit for the year 2004 subject matter of CTA Case No. 7507.
 IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the present case.40

G.R. No. 194637

Mindanao I v. CIR

Mindanao I raised the following grounds in its Petition for Review:

I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed pursuant to the case
of Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, which
was then the controlling ruling at the time of filing.

A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao Corporation,
which uses the end of the taxable quarter when the sales were made as the reckoning date in
counting the two-year prescriptive period, cannot be applied retroactively in the case of Mindanao
I.

B. The Atlas case promulgated by the Third Division of this Honorable Court on June 8, 2007 was
not and cannot be superseded by the Mirant Pagbilao case promulgated by the Second Division of
this Honorable Court on September 12, 2008 in light of the explicit provision of Section 4(3),
Article VIII of the 1987 Constitution.

II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal Revenue vs. Aichi
Forging Company of Asia, Inc., cannot be applied retroactively to Mindanao I in the present case.41

In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R. Nos. 193301 and 194637 to
avoid conflicting rulings in related cases.

The Court’s Ruling

Determination of Prescriptive Period

G.R. Nos. 193301 and 194637 both raise the question of the determination of the prescriptive period, or the
interpretation of Section 112 of the 1997 Tax Code, in light of our rulings in Atlas and Mirant.

Mindanao II’s unutilized input VAT tax credit for the first and second quarters of 2003, in the amounts of
₱3,160,984.69 and ₱1,562,085.33, respectively, are covered by G.R. No. 193301, while Mindanao I’s unutilized
input VAT tax credit for the first, second, third, and fourth quarters of 2003, in the amounts of ₱3,893,566.14,
₱2,351,000.83, and ₱7,940,727.83, respectively, are covered by G.R. No. 194637.

Section 112 of the 1997 Tax Code

The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao II’s and Mindanao I’s
administrative and judicial claims, provide:

SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-
registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)
(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been
duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt
sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of
sales.

xxxx

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

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

x x x x 43 (Underscoring supplied)

The relevant dates for G.R. No. 193301 (Mindanao II) are:

CTA Period Close of Last day Actual date of Last day for Actual Date
Case No. covered by quarter for filing filing filing case of filing case
VAT Sales in when sales application application for with CTA45 with CTA
2003 and were of tax tax refund/ (judicial
amount made refund/tax credit with the claim)
credit CIR
certificate (administrative
with the claim)44
CIR
7227 1st Quarter, 31 March 31 March 13 April 2005 12 September 22 April 2005
₱3,160,984.69 2003 2005 2005
7287 2nd Quarter, 30 June 30 June 13 April 2005 12 September 7 July 2005
₱1,562,085.33 2003 2005 2005
7317 3rd and 4th 30 30 13 April 2005 12 September 9 September
Quarters, September September 2005 2005
₱3,521,129.50 2003 2005
31 2 January
December 2006
2003 (31
December
2005 being
a Saturday)

The relevant dates for G.R. No. 194637 (Minadanao I) are:

CTA Period Close of Last day Actual date of Last day for Actual Date
Case covered by quarter for filing filing filing case of filing case
No. VAT Sales in when sales application application for with CTA47 with CTA
2003 and were of tax tax refund/ (judicial
amount made refund/tax credit with the claim)
credit CIR
 certificate (administrative
with the claim)46
CIR
7227 1st Quarter, 31 March 31 March 4 April 2005 1 September 22 April 2005
₱3,893,566.14 2003 2005 2005
7287 2nd Quarter, 30 June 30 June 4 April 2005 1 September 7 July 2005
₱2,351,000.83 2003 2005 2005
7317 3rd 30 30 4 April 2005 1 September 9 September
and 4th September September 2005 2005
Quarters, 2003 2005
₱7,940,727.83
31 2 January
December 2006
2003 (31
December
2005 being
a Saturday)

When Mindanao II and Mindanao I filed their respective administrative and judicial claims in 2005, neither Atlas
nor Mirant has been promulgated. Atlas was promulgated on 8 June 2007, while Mirant was promulgated on 12
September 2008. It is therefore misleading to state that Atlas was the controlling doctrine at the time of filing of the
claims. The 1997 Tax Code, which took effect on 1 January 1998, was the applicable law at the time of filing of the
claims in issue. As this Court explained in the recent consolidated cases of Commissioner of Internal Revenue v.
San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex
Mining Corporation v. Commissioner of Internal Revenue (San Roque):48

Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law to the
Commissioner to decide whether to grant or deny San Roque’s application for tax refund or credit. It is indisputable
that compliance with the 120-day waiting period is mandatory and jurisdictional. The waiting period, originally
fixed at 60 days only, was part of the provisions of the first VAT law, Executive Order No. 273, which took effect
on 1 January 1988. The waiting period was extended to 120 days effective 1 January 1998 under RA 8424 or the
Tax Reform Act of 1997. Thus, the waiting period has been in our statute books for more than fifteen (15) years
before San Roque filed its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine of
exhaustion of administrative remedies and renders the petition premature and thus without a cause of action, with
the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition. Philippine jurisprudence is replete
with cases upholding and reiterating these doctrinal principles.

The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the
Commissioner of Internal Revenue in cases involving x x x refunds of internal revenue taxes." When a taxpayer
prematurely files a judicial claim for tax refund or credit with the CTA without waiting for the decision of the
Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as a court of special
jurisdiction has no jurisdiction over the appeal. The charter of the CTA also expressly provides that if the
Commissioner fails to decide within "a specific period" required by law, such "inaction shall be deemed a denial" of
the application for tax refund or credit. It is the Commissioner’s decision, or inaction "deemed a denial," that the
taxpayer can take to the CTA for review. Without a decision or an "inaction x x x deemed a denial" of the
Commissioner, the CTA has no jurisdiction over a petition for review.

San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with the CTA void.
Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or prohibitory laws shall be
void, except when the law itself authorizes their validity." San Roque’s void petition for review cannot be
legitimized by the CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be
legitimized "except when the law itself authorizes its validity." There is no law authorizing the petition’s validity.

It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law cannot claim or
acquire any right from his void act. A right cannot spring in favor of a person from his own void or illegal act. This
doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or acquired right can arise from acts
or omissions which are against the law or which infringe upon the rights of others." For violating a mandatory
provision of law in filing its petition with the CTA, San Roque cannot claim any right arising from such void
petition. Thus, San Roque’s petition with the CTA is a mere scrap of paper.

This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day period just
because the Commissioner merely asserts that the case was prematurely filed with the CTA and does not question
the entitlement of San Roque to the refund. The mere fact that a taxpayer has undisputed excess input VAT, or that
the tax was admittedly illegally, erroneously or excessively collected from him, does not entitle him as a matter of
right to a tax refund or credit. Strict compliance with the mandatory and jurisdictional conditions prescribed by law
to claim such tax refund or credit is essential and necessary for such claim to prosper. Well-settled is the rule that tax
refunds or credits, just like tax exemptions, are strictly construed against the taxpayer.

The burden is on the taxpayer to show that he has strictly complied with the conditions for the grant of the tax
refund or credit.

This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because the
Commissioner chose not to contest the numerical correctness of the claim for tax refund or credit of the taxpayer.
Non-compliance with mandatory periods, non-observance of prescriptive periods, and non-adherence to exhaustion
of administrative remedies bar a taxpayer’s claim for tax refund or credit, whether or not the Commissioner
questions the numerical correctness of the claim of the taxpayer. This Court should not establish the precedent that
non-compliance with mandatory and jurisdictional conditions can be excused if the claim is otherwise meritorious,
particularly in claims for tax refunds or credit. Such precedent will render meaningless compliance with mandatory
and jurisdictional requirements, for then every tax refund case will have to be decided on the numerical correctness
of the amounts claimed, regardless of non-compliance with mandatory and jurisdictional conditions.

San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San Roque filed its
petition for review with the CTA more than four years before Atlas was promulgated. The Atlas doctrine did not
exist at the time San Roque failed to comply with the 120-day period. Thus, San Roque cannot invoke the Atlas
doctrine as an excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine merely
stated that the two-year prescriptive period should be counted from the date of payment of the output VAT, not from
the close of the taxable quarter when the sales involving the input VAT were made. The Atlas doctrine does not
interpret, expressly or impliedly, the 120+30 day periods.49 (Emphases in the original; citations omitted)

Prescriptive Period for

the Filing of Administrative Claims

In determining whether the administrative claims of Mindanao I and Mindanao II for 2003 have prescribed, we see
no need to rely on either Atlas or Mirant. Section 112(A) of the 1997 Tax Code is clear: "Any VAT-registered
person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales x x x."

We rule on Mindanao I and II’s administrative claims for the first, second, third, and fourth quarters of 2003 as
follows:

(1) The last day for filing an application for tax refund or credit with the CIR for the first quarter of 2003
was on 31 March 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while
 Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims have prescribed,
pursuant to Section 112(A) of the 1997 Tax Code.

(2) The last day for filing an application for tax refund or credit with the CIR for the second quarter of 2003
was on 30 June 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on time,
pursuant to Section 112(A) of the 1997 Tax Code.

(3) The last day for filing an application for tax refund or credit with the CIR for the third quarter of 2003
was on 30 September 2005. Mindanao II filed its administrative claim before the CIR on 13 April 2005,
while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on
time, pursuant to Section 112(A) of the 1997 Tax Code.

(4) The last day for filing an application for tax refund or credit with the CIR for the fourth quarter of 2003
was on 2 January 2006. Mindanao II filed its administrative claim before the CIR on 13 April 2005, while
Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were filed on time,
pursuant to Section 112(A) of the 1997 Tax Code.

Prescriptive Period for

the Filing of Judicial Claims

In determining whether the claims for the second, third and fourth quarters of 2003 have been properly appealed, we
still see no need to refer to either Atlas or Mirant, or even to Section 229 of the 1997 Tax Code. The second
paragraph of Section 112(C) of the 1997 Tax Code is clear: "In case of full or partial denial of the claim for tax
refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the
Court of Tax Appeals."

The mandatory and jurisdictional nature of the 120+30 day periods was explained in San Roque:

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods were already in
the law. Section 112(C) expressly grants the Commissioner 120 days within which to decide the taxpayer’s claim.
The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete
documents." Following the verba legis doctrine, this law must be applied exactly as worded since it is clear, plain,
and unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting for the Commissioner’s
decision within the 120-day mandatory and jurisdictional period. The CTA will have no jurisdiction because there
will be no "decision" or "deemed a denial" decision of the Commissioner for the CTA to review. In San Roque’s
case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim with the Commissioner.
Indisputably, San Roque knowingly violated the mandatory 120-day period, and it cannot blame anyone but itself.

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or inaction of
the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after
the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals. (Emphasis supplied)

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should be applied
exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may, if he wishes, appeal
the decision of the Commissioner to the CTA within 30 days from receipt of the Commissioner’s decision, or if the
Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer may appeal to the CTA
within 30 days from the expiration of the 120-day period.

xxxx

There are three compelling reasons why the 30-day period need not necessarily fall within the two-year prescriptive
period, as long as the administrative claim is filed within the two-year prescriptive period.

First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within two (2) years after
the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund
of the creditable input tax due or paid to such sales." In short, the law states that the taxpayer may apply with the
Commissioner for a refund or credit "within two (2) years," which means at anytime within two years. Thus, the
application for refund or credit may be filed by the taxpayer with the Commissioner on the last day of the two-year
prescriptive period and it will still strictly comply with the law. The two-year prescriptive period is a grace period in
favor of the taxpayer and he can avail of the full period before his right to apply for a tax refund or credit is barred
by prescription.

Second, Section 112(C) provides that the Commissioner shall decide the application for refund or credit "within one
hundred twenty (120) days from the date of submission of complete documents in support of the application filed in
accordance with Subsection (A)." The reference in Section 112(C) of the submission of documents "in support of
the application filed in accordance with Subsection A" means that the application in Section 112(A) is the
administrative claim that the Commissioner must decide within the 120-day period. In short, the two-year
prescriptive period in Section 112(A) refers to the period within which the taxpayer can file an administrative claim
for tax refund or credit. Stated otherwise, the two-year prescriptive period does not refer to the filing of the judicial
claim with the CTA but to the filing of the administrative claim with the Commissioner. As held in Aichi, the
"phrase ‘within two years x x x apply for the issuance of a tax credit or refund’ refers to applications for
refund/credit with the CIR and not to appeals made to the CTA."

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period (equivalent to
730 days), then the taxpayer must file his administrative claim for refund or credit within the first 610 days of the
two-year prescriptive period. Otherwise, the filing of the administrative claim beyond the first 610 days will result in
the appeal to the CTA being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his
administrative claim on the 611th day, the Commissioner, with his 120-day period, will have until the 731st day to
decide the claim. If the Commissioner decides only on the 731st day, or does not decide at all, the taxpayer can no
longer file his judicial claim with the CTA because the two-year prescriptive period (equivalent to 730 days) has
lapsed. The 30-day period granted by law to the taxpayer to file an appeal before the CTA becomes utterly useless,
even if the taxpayer complied with the law by filing his administrative claim within the two-year prescriptive period.

The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is not found
in the law. It results in truncating 120 days from the 730 days that the law grants the taxpayer for filing his
administrative claim with the Commissioner. This Court cannot interpret a law to defeat, wholly or even partly, a
remedy that the law expressly grants in clear, plain, and unequivocal language.

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The taxpayer
can file his administrative claim for refund or credit at anytime within the two-year prescriptive period. If he files his
claim on the last day of the two-year prescriptive

period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide the claim. If
the Commissioner decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30
days to file his judicial claim with the CTA. This is not only the plain meaning but also the only logical
interpretation of Section 112(A) and (C).50 (Emphases in the original; citations omitted)

In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal in Aichi on 6 October 2010, where this Court held that the 120+30
day periods are mandatory and jurisdictional."51 We shall discuss later the effect of San Roque’s recognition of BIR
Ruling No. DA-489-03 on claims filed between 10 December 2003 and 6 October 2010. Mindanao I and II filed
their claims within this period.

We rule on Mindanao I and II’s judicial claims for the second, third, and fourth quarters of 2003 as follows:

G.R. No. 193301

Mindanao II v. CIR

Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April 2005.
Counting 120 days after filing of the administrative claim with the CIR (11 August 2005) and 30 days after the
CIR’s denial by inaction, the last day for filing a judicial claim with the CTA for the second, third, and fourth
quarters of 2003 was on 12 September 2005. However, the judicial claim cannot be filed earlier than 11 August
2005, which is the expiration of the 120-day period for the Commissioner to act on the claim.

(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005,
before the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao
II’s judicial claim for the second quarter of 2003 was prematurely filed.

However, pursuant to San Roque’s recognition of the effect of BIR Ruling No. DA-489-03, we rule that
Mindanao II’s judicial claim for the second quarter of 2003 qualifies under the exception to the strict
application of the 120+30 day periods.

(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005.
Mindanao II’s judicial claim for the third quarter of 2003 was thus filed on time, pursuant to Section
112(C) of the 1997 Tax Code.

(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September 2005.
Mindanao II’s judicial claim for the fourth quarter of 2003 was thus filed on time, pursuant to Section
112(C) of the 1997 Tax Code.

G.R. No. 194637

Mindanao I v. CIR

Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April 2005.
Counting 120 days after filing of the administrative claim with the CIR (2 August 2005) and 30 days after the CIR’s
denial by inaction,52 the last day for filing a judicial claim with the CTA for the second, third, and fourth quarters of
2003 was on 1 September 2005. However, the judicial claim cannot be filed earlier than 2 August 2005, which is the
expiration of the 120-day period for the Commissioner to act on the claim.

(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005, before
the expiration of the 120-day period. Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao I’s
judicial claim for the second quarter of 2003 was prematurely filed. However, pursuant to San Roque’s
recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao I’s judicial claim for the
second quarter of 2003 qualifies under the exception to the strict application of the 120+30 day periods.

(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005.
Mindanao I’s judicial claim for the third quarter of 2003 was thus filed after the prescriptive period,
pursuant to Section 112(C) of the 1997 Tax Code.

(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September 2005.
Mindanao I’s judicial claim for the fourth quarter of 2003 was thus filed after the prescriptive period,
pursuant to Section 112(C) of the 1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-03

In the consolidated cases of San Roque, the Court En Banc53 examined and ruled on the different claims for tax
refund or credit of three different companies. In San Roque, we reiterated that "following the verba legis doctrine,
Section 112(C) must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot
simply file a petition with the CTA without waiting for the Commissioner’s decision within the 120-day mandatory
and jurisdictional period. The CTA will have no jurisdiction because there will be no ‘decision’ or ‘deemed a denial
decision’ of the Commissioner for the CTA to review."

Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San Roque recognized
that BIR Ruling No. DA-489-03 constitutes equitable estoppel54 in favor of taxpayers. BIR Ruling No. DA-489-03
expressly states that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek
judicial relief with the CTA by way of Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and
its effect on taxpayers, thus:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult
question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the
prescriptive periods for input VAT tax refund or credit is a difficult question of law. The abandonment of the Atlas
doctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit
they received or could have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi
prospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court of a general interpretative rule
issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. x x x.

xxxx

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers
or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a
particular taxpayer, but by a government agency tasked with processing tax refunds and credits, that is, the One Stop
Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This government agency is also
the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency
mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the
agency was in fact asking the Commissioner what to do in cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No.
DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional.

xxxx

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR Ruling No.
DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial claim prematurely without
waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the
benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity.
(Emphasis in the original)

Summary of Administrative and Judicial Claims

G.R. No. 193301

Mindanao II v. CIR
   Administrative Judicial Claim Action on Claim
Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the
1997 Tax Code
4th Quarter, 2003 Filed on time Filed on time Grant, pursuant to
Section 112(C) of the
1997 Tax Code

G.R. No. 194637

Mindanao I v. CIR

  Administrative Judicial Claim Action on Claim

Claim
1st Quarter, 2003 Filed late -- Deny, pursuant to
Section 112(A) of the
1997 Tax Code
2nd Quarter, 2003 Filed on time Prematurely filed Grant, pursuant to
BIR Ruling No. DA-489-03
3rd Quarter, 2003 Filed on time Filed late Grant, pursuant to
Section 112(C) of the
1997 Tax Code
4th Quarter, 2003 Filed on time Filed late Grant, pursuant to
Section 112(C) of the
1997 Tax Code

Summary of Rules on Prescriptive Periods Involving VAT

We summarize the rules on the determination of the prescriptive period for filing a tax refund or credit of unutilized
input VAT as provided in Section 112 of the 1997 Tax Code, as follows:

(1) An administrative claim must be filed with the CIR within two years after the close of the taxable
quarter when the zero-rated or effectively zero-rated sales were made.

(2) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit certificate. The
120-day period may extend beyond the two-year period from the filing of the administrative claim if the
claim is filed in the later part of the two-year period. If the 120-day period expires without any decision
from the CIR, then the administrative claim may be considered to be denied by inaction.

(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIR’s decision
denying the administrative claim or from the expiration of the 120-day period without any action from the
CIR.
 (4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal by this Court in Aichi on 6 October 2010, as an exception to the
mandatory and jurisdictional 120+30 day periods.

"Incidental" Transaction

Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course of
its business; hence, it is an isolated transaction that should not have been subject to 10% VAT.

Section 105 of the 1997 Tax Code does not support Mindanao II’s position:

SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases
goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act No. 7716.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged
therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or
not it sells exclusively to members or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines
by nonresident foreign persons shall be considered as being rendered in the course of trade or business. (Emphasis
supplied)

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay)55 and Imperial v.
Collector of Internal Revenue (Imperial)56 to justify its position. Magsaysay, decided under the NIRC of 1986,
involved the sale of vessels of the National Development Company (NDC) to Magsaysay Lines, Inc. We ruled that
the sale of vessels was not in the course of NDC’s trade or business as it was involuntary and made pursuant to the
Government’s policy for privatization. Magsaysay, in quoting from the CTA’s decision, imputed upon Imperial the
definition of "carrying on business." Imperial, however, is an unreported case that merely stated that "‘to engage’ is
to embark in a business or to employ oneself therein."57

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction.1âwphi1 However, it does not follow that
an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section
105 of the 1997 Tax Code would show that a transaction "in the course of trade or business" includes "transactions
incidental thereto."

Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the
electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the
sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan
Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for VAT.

Substantiation Requirements

Mindanao II claims that the CTA’s disallowance of a total amount of ₱492,198.09 is improper as it has substantially
complied with the substantiation requirements of Section 113(A)58 in relation to Section 23759 of the 1997 Tax Code,
as implemented by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 7-95.60
We are constrained to state that Mindanao II’s compliance with the substantiation requirements is a finding of fact.
The CTA En Banc evaluated the records of the case and found that the transactions in question are purchases for
services and that Mindanao II failed to comply with the substantiation requirements. We affirm the CTA En Banc’s
finding of fact, which in turn affirmed the finding of the CTA First Division. We see no reason to overturn their
findings.

WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En Bane in CT
A EB No. 513 promulgated on 10 March 2010, as well as the Resolution promulgated on 28 July 2010, and the
Decision of the Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31 May 2010, as well
as the Amended Decision promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.

For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of 2003 is DENIED
while its claims for the second, third, and fourth quarters of 2003 are GRANTED. For G.R. No. 19463 7, the claims
of Mindanao I Geothermal Partnership for the first, third, and fourth quarters of 2003 are DENIED while its claim
for the second quarter of 2003 is GRANTED.

SO ORDERED.

G.R. No. 205955

UNIVERSITY PHYSICIANS SERVICES INC. - MANAGEMENT, INC., Petitioner 

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent

DECISION

MARTIRES, J.:

When a corporation overpays its income tax liability as adjusted at the close of the taxable year, it has two
options: (1) to be refunded or issued a tax credit certificate, or (2) to carry over such overpayment to the succeeding
taxable quarters to be applied as tax credit against income tax due.1 Once the carry-over option is taken, it becomes
irrevocable such that the taxpayer cannot later on change its mind in order to claim a cash refund or the issuance of a
tax credit certificate of the very same amount of overpayment or excess m. come tax credit.2

Does the irrevocability rule apply exclusively to the carry-over option? Such is the novel issue presented in this case.

THE FACTS

Before the Court is a petition for review under Rule 45 of the Rules of Court filed by petitioner University
Physicians Services Inc.-Management, Inc. (UPSI-MI) which seeks the reversal and setting aside of the 8 February
2013 Decision3 of the Court of Tax Appeals (CTA) En Banc in CTA-EB Case No. 828. ·Said decision of the CTA
En Banc affirmed the 5 July 2011 Decision and 8 September 2011 Resolution of the CTA Second Division (CTA
Division) in CTA Case No. 7908. The CTA Division denied the application of UPSI-MI for tax refund or issuance
of Tax Credit Certificate (TCC) of its excess unutilized creditable income tax for the taxable year 2006.

The Antecedents

As narrated by the CTA, the facts are uncomplicated, viz:

UPSI-MI is a corporation incorporated and existing under and by virtue of laws of the Republic of the Philippines,
with business address at 1122 General Luna Street, Paco. Manila. Respondent on the other hand, is the duly
appointed Commissioner of Internal Revenue, with power, among others, 10 act upon claims for refund or tax credit
of overpaid internal revenue taxes, with office address at the Fifth Floor, BIR National Office Building, BIR Road,
Diliman , Quezon City.

On April 16, 2007. petitioner filed its Annual Income Tax Return (ITR) for the year ended December 31, 2006 with
the Revenue District No. 34 of the Revenue Region No. 6 of the Bureau of Internal Revenue (BIR), reflecting an
income tax overpayment of 5,159,341.00. computed as follows:4

Sales/Revenues/Receipts/Fees ₱ 28,808,960.00

Less: Cost of Sales/Services 23,834,605.00

Gross Income from Operation ₱ 4,974,355.00

Add: Non-Operating & Other Income 5,375.00

Total Gross Income ₱ 4,979,730.00

Less: Deductions ₱ 4,979,730.00

Taxable Income -

   

Tax Rate (except MCIT Rate) 35%

Income Tax -

Minimum Corporate Income Tax (MCIT) ₱ 99,595.00

   

   

Aggregate Income Tax Due ₱ 99,595.00

 Less: Tax Credits/Payments  

Prior Year's Excess Credits ₱ 2,331,102.00

Creditable Tax Withheld for the First  

Three Quarters

Creditable Tax Withheld for the Fourth  

Three Quarters 2,972,834.00

Total Tax Credits/Payments ₱ 5,258,936.00)

Tax Payable/(Overpayment) ₱ (5,159,341.00)

Subsequently, on November 14, 2007, petitioner filed an Annual ITR for the short period fiscal year ended March
31, '.W07, reflecting the income tax overpayment of 5. 159.341 from the previous period as "Prior Year’s Excess
Credit", as follows:5

Sales/Revenues/Receipts/Fees 7,489,259

Less: Cost of Sales/Services 6,461,650

Gross Income from Operation 1,027,609

Add: Non-Operating & Other Income 479

Total Gross Income 1,028,088

Less: Deductions 1,206,543

Taxable Income (178,455)

   

Tax Rate (except MCIT Rate) 35%

Income Tax -

Minimum Corporate Income Tax (MCIT) 20,562

   

Aggregate Income Tax Due 20,562

Less: Tax Credits/Payments  

Prior Year's Excess Credits 5,159,341

Creditable Tax Withheld for the First

1,107,228
Three Quarters

Creditable Tax Withheld for the Fourth  

Quarter 6,266,569
 Total Tax Credits/Payments 6,266,569

Tax Payable/(Overpayment) (6,246,007)

On the same date, petitioner filed an amended Annual ITR for the short period fiscal year ended March 31, 2007,
reflecting the removal of the amount of the instant claim in the ''Prior Year's Excess Credit".Thus, the amount
thereof was changed from ₱5, 159,341 to ₱2,231,507.

On October 10, 2008, petitioner filed with the respondent's office, a claim for refund and/or issuance of a Tax Credit
Certificate (TCC) in the amount of ₱2,927.834.00, representing the alleged excess and unutilized creditable
withholding taxes for 2006.

In view of the fact that respondent has not acted upon the foregoing claim for refund/tax credit, petitioner filed with
a Petition for Review on April l4, 2009 before the Court in Division.

The Ruling of the CTA Division

After trial, the CT A Division denied the petition for review for lack of merit. It reasoned that UPSI-MI effectively
exercised the carry-over option under Section 76 of the National Internal Revenue Code (NIRC) of 1997. On motion
for reconsideration, UPSI-MI argued that the irrevocability rule under Section 76 of the NIRC is not applicable for
the reason that it did not carry over to the succeeding taxable period the 2006 excess income tax credit. UPSI-MI
added that the subject excess tax credits were inadvertently included in its original 2007 ITR, and such mistake was
rectified in the amended 2007 ITR. Thus, UPSI-MI insisted that what should control is its election of the option "To
be issued a Tax Credit Certificate" in its 2006 ITR.

The CTA Division ruled that UPSI-MI's alleged inadvertent inclusion of the 2006 excess tax credit in the 2007
original ITR belies its own allegation that it did not carry over the said amount to the succeeding taxable period. The
amendment of the 2007 ITR cannot undo UPSI-MI's actual exercise of the carry-over option in the original 2007
ITR, for to do so would be against the irrevocability rule. The dispositive portion of the CTA Division's decision
reads:

WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.6

Aggrieved, UPSI-MI appealed before the CTA En Banc.

The Ruling of the CTA En Banc

The CTA En Banc ruled that UPSI-MI is barred by Section 76 of the NIRC from claiming a refund of its excess tax
credits for the taxable year 2006. The barring effect applies after UPSI-MI carried over its excess tax credits to the
succeeding quarters of 2007, even if such carry-over was allegedly done inadvertently. The court emphasized that
the prevailing law and jurisprudence admit of no exception or qualification to the irrevocability rule. Thus, the CTA
En Banc affirmed the assailed decision and resolution of the CTA Division, disposing as follows:

WHEREFORE, all the foregoing considered, the instant Petition for Review is hereby DENIED. The assailed
Decision dated July 5. 2011and Resolution dated September 8, 2011 both rendered by the Court in Division in CTA
Case No. 7908 are hereby AFFIRMED.

SO ORDERED.7

Notably, the said decision was met by a dissent from Justice Esperanza R. Pabon-Victorino. Invoking Phi/am Asset
Management, Inc. v. Commissioner (Philam), 8 Justice Pabon-Victorino took the view that the irrevocability rule
applies as much to the option of refund or tax credit certificate. She wrote:
A contextual appreciation of the ruling [Philam] would tell us that any of the two alternatives once chosen is
irrevocable - be it for refund or carry over. The controlling factor for the operation of the irrevocability rule is
that the taxpayer chose an option; and once it had already done so, it could no longer make another one.

Unsatisfied with the decision of the CTA En Banc, UPSI-MI appealed before this Court.

The Present Petition for Review

UPSI-MI interposed the following reasons for its petition:

THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED AND DECIDED IN A
MANNER NOT IN ACCORDANCE WITH THE LAW, PREVAILING JURISPRUDENCE, AND
FACTUAL MILIEU SURROUNDING THE CASE, WHEN IT ADOPTED THE DECISION OF THE
COURT OF TAX APPEALS IN DIVISION AND RULED THAT:

a. Petitioner is not entitled to the refund or issuance of a Tax Credit Certificate in the amount of ₱2,927,834.00
representing its 2006 excess tax credits because of the application of the "irrevocability rule" under Section 76 of the
NIRC of 1997.

b. The amendment of the original ITR for fiscal year ended 31 March 2007 does not take back, cancel or rescind the
original option to refund through tax credit certificate based on the argument that the Petitioner allegedly made an
option to carry-over the excess credits.

THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED WHEN IT IGNORED
THAT ON JOINT STIPULATIONS, THE RESPONDENT ADMITTED THE FACT THAT PETITIONER
INDICATED IN THE CORRESPONDING BOX ITS

INTENTION TO BE ISSUED A TAX CREDIT CERTIFICATE REPRESENTING ITS UNUTILIZED

CREDITABLE WITHHOLDING TAX WITHHELD FOR THE TAXABLE YEAR 2006 BY MARKING
THE APPROPRIATE BOX.

THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED WHEN IT DECIDED
ON THE ISSUE OF WHETHER OR NOT PEITIONER CARRIED OVER ITS 2006 EXCESS TAX
CREDITS TO THE SUCCEEDING SHORT TAXABLE PERIOD OF 2007 WHEN THE SAME WAS
NEVER RAISED IN THE JOINT STIPULATION OF FACTS.

UPSI-MI faults the CTA En Banc for banking too much on the irrevocability of the option to carry over. It contends
that even the option to be refunded through the issuance of a TCC is likewise irrevocable. Taking cue from the
dissent of Justice Pabon-Victorino, UPSI-MI cites Philam in restating this Court's pronouncement that "the options
of a corporate taxpayer, whose total quarterly income tax payments exceed its tax liability, are alternative in nature
and the choice of one precludes the other." It also cites Commissioner v. PL Management International Philippines,
Inc. (PL Management)9 that reiterated the rule that the choice of one precludes the other. Thus, when it indicated in
its 2006 Annual ITR the option "To be issued a Tax Credit Certificate," such choice precluded the other option to
carry over.10

In other words, UPSI-MI proposes that the options of refund on one hand and carry-over on the other hand are both
irrevocable by nature. Relying again on the dissent of Justice Pabon-Victorino, UPSI-MI also points to BIR Form
1702 (Annual Income Tax Return) itself which expressly states under line 31 thereof:

"If overpayment, mark one box only:

(once the choice is made, the same is irrevocable)"

 Resume of relevant facts

To recapitulate, UPSI-MI had, as of 31 December 2005, an outstanding amount of ₱2,331, 102.00 in excess and
unutilized creditable withholding taxes.

For the subsequent taxable year ending 31 December 2006, the total sum of creditable taxes withheld on the
management fees of UPSI-MI was ₱2,927,834.00. Per its 2006 Annual Income Tax Return (ITR), UPSI-MI's
income tax due amounted to ₱99,105.00. UPSI-MI applied its "Prior Year's Excess Credits" of ₱2,331, 102.00 as
tax credit against such 2006 Income Tax due, leaving a balance of ₱2,231,507.00 of still unutilized excess creditable
tax. Meanwhile, the creditable taxes withheld for the year 2006 (₱2,927,834.00) remained intact and unutilized. In
said 2006 Annual ITR, UPSI-MI chose the option "To be issued a tax credit certificate" with respect to the amount
₱2,927,834.00, representing unutilized excess creditable taxes for the taxable year ending 31 December 2006. The
figures are summarized in the table below:

Taxable Excess Creditable Income Tax Due Less Tax Balance of Excess
Year Withholding Tax Tax Credit Payable CWT
(CWT)

2005 P 2,331, 102.00 --- --- --- P 2,231,507.00

2006 P 2,927,834.00 P 99, 105.00 P 99,105.00 (A portion P 0.00 P 2,927,834.00

(MCIT) of the excess credit of
Php2,33l,102.00 in
2015)

In the following year, UPSI-MI changed its taxable period from calendar year to fiscal year ending on the last day of
March. Thus, it filed on 14 November 2007 an Annual ITR covering the short period from January 1 to March 31 of
2007. In the original 2007 Annual ITR, UPSI-MI opted to carry over as "Prior Year's Excess Credits" the total
amount of ₱5,159,341.00 which included the 2006 unutilized creditable withholding tax of ₱2,927,834.00. UPSI-
MI amended the return by excluding the sum of ₱2,927,834.00 under the line "Prior Year's Excess Credits" which
amount is the subject of the refund claim.

In sum, the question to be resolved is whether UPSI-MI may still be entitled to the refund of its 2006 excess tax
credits in the amount of ₱2,927,834.00 when it thereafter filed its income tax return (for the short period ending 31
March 2007) indicating the option of carry-over.

OUR RULING

We affirm the CTA.

We cannot subscribe to the suggestion that the irrevocability rule enshrined in Section 76 of the National Internal
Revenue Code (NIRC) applies to either of the options of refund or carry-over. Our reading of the law assumes the
interpretation that the irrevocability is limited only to the option of carry-over such that a taxpayer is still free to
change its choice after electing a refund of its excess tax credit. But once it opts to carry over such excess creditable
tax, after electing refund or issuance of tax credit certificate, the carry-over option becomes irrevocable.
Accordingly, the previous choice of a claim for refund, even if subsequently pursued, may no longer be granted.

The aforementioned Section 76 of the NIRC provides:

SECTION 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either:
 (A) Pay the balance of tax still due; or

(B) Carry over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and
apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed therefor. (emphasis supplied)

Under the cited law, there are two options available to the corporation whenever it overpays its income tax for the
taxable year: (1) to carry over and apply the overpayment as tax credit against the estimated quarterly income tax
liabilities of the succeeding taxable years (also known as automatic tax credit) until fully utilized (meaning, there is
no prescriptive period); and (2) to apply for a cash refund or issuance of a tax credit certificate within the
prescribed period.11 Such overpayment of income tax is usually occasioned by the over-withholding of taxes on the
income payments to the corporate taxpayer.

The irrevocability rule is provided in the last sentence of Section 76. A perfunctory reading of the law unmistakably
discloses that the irrevocable option referred to is the carry-over option only. There appears nothing therein from
which to infer that the other choice, i.e., cash refund or tax credit certificate, is also irrevocable. If the intention of
the lawmakers was to make such option of cash refund or tax credit certificate also irrevocable, then they would
have clearly provided so.

In other words, the law does not prevent a taxpayer who originally opted for a refund or tax credit certificate from
shifting to the carry-over of the excess creditable taxes to the taxable quarters of the succeeding taxable years.
However, in case the taxpayer decides to shift its option to carryover, it may no longer revert to its original choice
due to the irrevocability rule. As Section 76 unequivocally provides, once the option to carry over has been made, it
shall be irrevocable. Furthermore, the provision seems to suggest that there are no qualifications or conditions
attached to the rule on irrevocability.

Law and jurisprudence unequivocally support the view that only the option of carry-over is irrevocable.

Aside from the uncompromising last sentence of Section 76, Section 228 of the NIRC recognizes such freedom of a
taxpayer to change its option from refund to carry-over. This law affords the government a remedy in case a
taxpayer, who had previously claimed a refund or tax credit certificate (TCC) of excess creditable withholding tax,
subsequently applies such amount as automatic tax credit. The pertinent text of Section 228 reads:

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a pre-
assessment notice shall not be required in the following cases:

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

(b) When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied the
 same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of
the succeeding taxable year; or

(d) When the excise tax due on exciseable articles has not been paid; or

(e) When the article locally purchased or imported by an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to
non-exempt persons.

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the
assessment shall be void. x x x (emphasis supplied)

The provision contemplates three scenarios:

(1) Deficiency in the payment or remittance of tax to the government (paragraphs [a], [b] and [d]);

(2) Overclaim of refund or tax credit (paragraph [ c ]); and

(3) Unwarranted claim of tax exemption (paragraph [e]).

In each case, the government is deprived of the rightful amount of tax due it. The law assures recovery of the
amount through the issuance of an assessment against the erring taxpayer. However, the usual two-stage process in
making an assessment is not strictly followed. Accordingly, the government may immediately proceed to the
issuance of a final assessment notice (FAN), thus dispensing with the preliminary assessment (PAN), for the reason
that the discrepancy or deficiency is so glaring or reasonably within the taxpayer's knowledge such that a
preliminary notice to the taxpayer, through the issuance of a PAN, would be a superfluity.

Pertinently, paragraph (c) contemplates a double recovery by the taxpayer of an overpaid income tax that arose from
an over-withholding of creditable taxes. The refundable amount is the excess and unutilized creditable withholding
tax.

This paragraph envisages that the taxpayer had previously asked for and successfully recovered from the BIR
its excess creditable withholding tax through refund or tax credit certificate; it could not be viewed any other
way. If the government had already granted the refund, but the taxpayer is determined to have automatically applied
the excess creditable withholding tax against its estimated quarterly tax liabilities in the succeeding taxable year(s),
the taxpayer would undeservedly recover twice the same amount of excess creditable withholding tax. There
appears, therefore, no other viable remedial recourse on the part of the government except to assess the taxpayer for
the double recovery. In this instance, and in accordance with the above rule, the government can right away issue a
FAN.

If, on the other hand, an administrative claim for refund or issuance of TCC is still pending but the taxpayer had in
the meantime automatically carried over the excess creditable tax, it would appear not only wholly unjustified but
also tantamount to adopting an unsound policy if the government should resort to the remedy of assessment.

First, on the premise that the carry-over is to be sustained, there should be no more reason for the government to
make an assessment for the sum (equivalent to the excess creditable withholding tax) that has been justifiably
returned already to the taxpayer (through automatic tax credit) and for which the government has no right to retain in
the first place. In this instance, all that the government needs to do is to deny the refund claim.

Second, on the premise that the carry-over is to be disallowed due to the pending application for refund, it would be
more complicated and circuitous if the government were to grant first the refund claim and then later assess the
taxpayer for the claim of automatic tax credit that was previously disallowed. Such procedure is highly inefficient
and expensive on the part of the government due to the costs entailed by an assessment. It unduly hampers, instead
of eases, tax administration and unnecessarily exhausts the government's time and resources. It defeats, rather than
promotes, administrative feasibility.12 Such could not have been intended by our lawmakers. Congress is deemed to
have enacted a valid, sensible, and just law.13

Thus, in order to place a sensible meaning to paragraph (c) of Section 228, it should be interpreted as contemplating
only that situation when an application for refund or tax credit certificate had already been previously granted.
Issuing an assessment against the taxpayer who benefited twice because of the application of automatic tax credit is
a wholly acceptable remedy for the government.

Going back to the case wherein the application for refund or tax credit is still pending before the BIR, but the
taxpayer had in the meantime automatically carried over its excess creditable tax in the taxable quarters of the
succeeding taxable year(s), the only judicious course of action that the BIR may take is to deny the pending claim
for refund. To insist on giving due course to the refund claim only because it was the first option taken, and
consequently disallowing the automatic tax credit, is to encourage inefficiency or to suppress administrative
feasibility, as previously explained. Otherwise put, imbuing upon the choice of refund or tax credit certificate the
character of irrevocability would bring about an irrational situation that Congress did not intend to remedy by means
of an assessment through the issuance of a FAN without a prior PAN, as provided in paragraph (c) of Section 228. It
should be remembered that Congress' declared national policy in passing the NIRC of 1997 is to rationalize the
internal revenue tax system of the Philippines, including tax administration.14

The foregoing simply shows that the lawmakers never intended to make the choice of refund or tax credit certificate
irrevocable. Sections 76 and 228, paragraph (c), unmistakably evince such intention.

Philam and PL Management cases

did not categorically declare the
option of refund or TCC irrevocable.

The petitioner hinges its claim of irrevocability of the option of refund on the statement of this Court
in Philam and PL Management that "the options xxx are alternative and the choice of one precludes the other." This
also appears as the basis of Justice Fabon-Victorino’s stance in her dissent to the majority opinion in the assailed
decision.

We do not agree.

The cases cited in the petition did not make an express declaration that the option of cash refund or TCC, once
made, is irrevocable. Neither should this be inferred from the statement of the Court that the options are alternative
and that the choice of one precludes the other. Such statement must be understood in the light of the factual milieu
obtaining in the cases.

Philam involved two cases wherein the taxpayer failed to signify its option in the Final Adjustment Return (FAR).

In the first case (G.R. No. 156637), the Court ruled that such failure did not mean the outright barring of the request
for a refund should one still choose this option later on. Thy taxpayer did in fact file on 11 September 1998 an
administrative claim for refund of its 1997 excess creditable taxes. We sustained the refund claim in1 this case.

It was different in the second case (G.R. No. 162004) because the taxpayer filled out the portion "Prior Year's
Excess Credits" in its subsequent FAR. The court considered the taxpayer to have constructively chosen the carry-
over option. It was in this context that the court determined the taxpayer to be bound by its initial choice (of
automatic tax credit), so that it is precluded from asking for a refund of the excess CWT. It must be so because the
carry-over option is irrevocable, and it cannot be allowed to recover twice for its overpayment of tax.

Unlike the second case, there was no flip-flopping of choices in the first one. The taxpayer did not indicate in its
1997 FAR the choice of carryover. Neither did it apply automatic tax credit in subsequent income tax returns so as
to be considered as having constructively chosen the carry-over option. When it later on asked for a refund of its
1997 excess CWT, the taxpayer was expressing its option for the first time. It must be emphasized that the Court
sustained the application for refund but without expressly declaring that such choice was irrevocable.

In either case, it is clear that the taxpayer cannot avail of both refund and automatic tax credit at the same time.
Thus, as Philam declared: "One cannot get a tax refund and a tax credit at the same time for the same excess income
taxes paid." This is the import of the Court's pronouncement that the options under Section 76 are alternative in
nature.

In declaring that "the choice of one (option) precludes the other," the Court in Philam cited Philippine Bank of
Communications v. Commissioner of Internal Revenue (PBCom), 15 a case decided under the aegis of the old NIRC
of 1977 under which the irrevocability rule had not yet been established. It was in PBCom that the Court stated for
the first time that "the choice of one precludes the other."16 However, a closer perusal of PBCom reveals that the
taxpayer had opted for an automatic tax credit. Thus, it was precluded from availing of the other remedy of refund;
otherwise, it would recover twice the same excess creditable tax. Again, nowhere is it even suggested that the choice
of refund is irrevocable. For one thing, it was not the choice taken by the taxpayer. For another, the irrevocability
rule had not yet been provided.

As in PBCom, the Court also said in PL Management that the choice of one (option) precludes the
other.1âwphi1 Similarly, the taxpayer in PL Management initially signified in the FAR its choice of automatic tax
credit. But unlike in PBCom, PL Management was decided under the NIRC of 1997 when the irrevocability rule was
already applicable. Thus, although PL Management was unable to actually apply its excess creditable tax in the next
succeeding taxable quarters due to lack of income tax liability, its subsequent application for TCC was rightfully
denied by the Court. The reason is the irrevocability of its choice of carry-over.

In other words, previous incarnations of the words "the options are alternative... the choice of one precludes the
other" did not lay down a doctrinal rule that the option of refund or tax credit certificate is irrevocable.

Again, we need not belabor the point that insisting upon the irrevocability of the option for refund, even though the
taxpayer subsequently changed its mind by resorting to automatic tax credit, is not only contrary to the apparent
intention of the lawmakers but is also clearly violative of the principle of administrative feasibility.

Prior to the NIRC of 1997, the alternative options of refund and carryover of excess creditable tax had already been
firmly established. However, the irrevocability rule was not yet in place.17 As we explained in PL
Management,Congress added the last sentence of Section 76 in order to lay down the irrevocability rule. More
recently, in Republic v. Team (Phils.) Energy Corp., 18 we said that the rationale of the rule is to avoid confusion and
complication that could be brought about by the flip-flopping on the options, viz:

The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC of 1997, is to keep the
taxpayer from flip-flopping on its options, and avoid confusion and complication as regards said taxpayer's excess
tax credit.19

The current rule specifically addresses the problematic situation when a taxpayer, after claiming cash refund or
applying for the issuance of tax credit, and during the pendency of such claim or application, automatically carries
over the same excess creditable tax and applies it against the estimated quarterly income tax liabilities of the
succeeding year. Thus, the rule not only eases tax administration but also obviates double recovery of the excess
creditable tax.

Further, nothing in the contents of BIR 1702 expressly declares that the option of refund or TCC is irrevocable.
Even on the assumption that the irrevocability also applies to the option of refund, such would be an interpretation
of the BIR that, as already demonstrated in the foregoing discussion, is contrary to the intent of the law. It must be
stressed that such erroneous interpretation is not binding on the court. Philippine Bank of Communications v. CIR20is
apropos:
It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce
it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply and implement.21

Applying the foregoing precepts to the given case, UPSI-MI is barred from recovering its excess creditable tax
through refund or TCC. It is undisputed that despite its initial option to refund its 2006 excess creditable tax, UPSI-
MI subsequently indicated in its 2007 short-period FAR that it carried over the 2006 excess creditable tax and
applied the same against its 2007 income tax due. The CTA was correct in considering UPSI-MI to have
constructively chosen the option of carry-over, for which reason, the irrevocability rule forbade it to revert to its
initial choice. It does not matter that UPSI-Ml had not actually benefited from the carry-over on the ground that it
did not have a tax due in its 2007 short period. Neither may it insist that the insertion of the carry-over in the 2007
FAR was by mere mistake or inadvertence. As we previously laid down, the irrevocability rule admits of no
qualifications or conditions.

In sum, the petitioner is clearly mistaken in its view that the irrevocability rule also applies to the option of refund or
tax credit certificate. In view of the court's finding that it constructively chose the option of can-y-over, it is already
barred from recovering its 2006 excess creditable tax through refund or TCC even if it was its initial choice.

However, the petitioner remains entitled to the benefit of carry-over and thus may apply the 2006 overpaid income
tax as tax credit in succeeding taxable years until fully exhausted. This is because, unlike the remedy of refund or
tax credit certificate, the option of carry-over under Section 76 is not subject to any prescriptive period.

WHEREFORE, the petition is DENIED for lack of merit. The 8 February 2013 Decision of the Court of Tax
Appeals in CTA-EB Case No. 828 is hereby AFFIRMED.

SO ORDERED.