G.R. No.

148380 December 9, 2005

OCEANIC WIRELESS NETWORK, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, THE COURT OF TAX APPEALS, and
THE COURT OF APPEALS, Respondents.

DECISION

AZCUNA, J.:

This is a Petition for Review on Certiorari seeking to reverse and set aside the Decision
of the Court of Appeals dated October 31, 2000, and its Resolution dated May 3, 2001, in
"Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue" docketed as CA-
G.R. SP No. 35581, upholding the Decision of the Court of Tax Appeals dismissing the
Petition for Review in CTA Case No. 4668 for lack of jurisdiction.

Petitioner Oceanic Wireless Network, Inc. challenges the authority of the Chief of the
Accounts Receivable and Billing Division of the Bureau of Internal Revenue (BIR)
National Office to decide and/or act with finality on behalf of the Commissioner of
Internal Revenue (CIR) on protests against disputed tax deficiency assessments.

The facts of the case are as follows:

On March 17, 1988, petitioner received from the Bureau of Internal Revenue (BIR)
deficiency tax assessments for the taxable year 1984 in the total amount of
₱8,644,998.71, broken down as follows:

Kind of Tax Assessment No. Amount

Deficiency Income Tax FAR-4-1984-88-001130 ₱8,381,354.00

Penalties for late payment FAR-4-1984-88-001131 3,000.00

of income and failure to

file quarterly returns

Deficiency Contractor’s FAR-4-1984-88-001132 29,849.06

Tax

Deficiency Fixed Tax FAR-4--88-001133 12,083.65

Deficiency Franchise Tax FAR-4—84-88-001134 ___227,712.00

T o t a l -------- ₱8,644,998.71

Petitioner filed its protest against the tax assessments and requested a reconsideration or
cancellation of the same in a letter to the BIR Commissioner dated April 12, 1988.

Acting in behalf of the BIR Commissioner, then Chief of the BIR Accounts Receivable
and Billing Division, Mr. Severino B. Buot, reiterated the tax assessments while denying
petitioner’s request for reinvestigation in a letter 1 dated January 24, 1991, thus:

"Note: Your request for re-investigation has been denied for failure to submit the
necessary supporting papers as per endorsement letter from the office of the Special
Operation Service dated 12-12-90."

Said letter likewise requested petitioner to pay the total amount of ₱8,644,998.71 within
ten (10) days from receipt thereof, otherwise the case shall be referred to the Collection
Enforcement Division of the BIR National Office for the issuance of a warrant of
distraint and levy without further notice.

Upon petitioner’s failure to pay the subject tax assessments within the prescribed period,
the Assistant Commissioner for Collection, acting for the Commissioner of Internal
Revenue, issued the corresponding warrants of distraint and/or levy and garnishment.
These were served on petitioner on October 10, 1991 and October 17, 1991,
respectively.2

On November 8, 1991, petitioner filed a Petition for Review with the Court of Tax
Appeals (CTA) to contest the issuance of the warrants to enforce the collection of the tax
assessments. This was docketed as CTA Case No. 4668.

The CTA dismissed the petition for lack of jurisdiction in a decision dated September 16,
1994, declaring that said petition was filed beyond the thirty (30)-day period reckoned
from the time when the demand letter of January 24, 1991 by the Chief of the BIR
Accounts Receivable and Billing Division was presumably received by petitioner, i.e.,
"within a reasonable time from said date in the regular course of mail pursuant to Section
2(v) of Rule 131 of the Rules of Court."3

The decision cited Surigao Electric Co., Inc. v. Court of Tax Appeals4 wherein this Court
considered a mere demand letter sent to the taxpayer after his protest of the assessment
notice as the final decision of the Commissioner of Internal Revenue on the protest.
Hence, the filing of the petition on November 8, 1991 was held clearly beyond the
reglementary period.5

The court a quo likewise stated that the finality of the denial of the protest by petitioner
against the tax deficiency assessments was bolstered by the subsequent issuance of the
warrants of distraint and/or levy and garnishment to enforce the collection of the
deficiency taxes. The issuance was not barred by prescription because the mere filing of
the letter of protest by petitioner which was given due course by the Bureau of Internal
Revenue suspended the running of the prescription period as expressly provided under
the then Section 224 of the Tax Code:

SEC. 224. Suspension of Running of the Statute of Limitations. – The running of the
Statute of Limitations provided in Section 203 and 223 on the making of assessment and
the beginning of distraint or levy or a proceeding in court for collection, in respect of any
deficiency, shall be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy or a proceeding in
court and for sixty (60) days thereafter; when the taxpayer requests for a reinvestigation
which is granted by the Commissioner; when the taxpayer cannot be located in the
address given by him in the return files upon which a tax is being assessed or collected:
Provided, That if the taxpayer inform the Commissioner of any change of address, the
running of the statute of limitations will not be suspended; when the warrant of distraint
and levy is duly served upon the taxpayer, his authorized representative, or a member of
his household with sufficient discretion, and no property could located; and when the
taxpayer is out of the Philippines. 6 (Underscoring supplied.)

Petitioner filed a Motion for Reconsideration arguing that the demand letter of January
24, 1991 cannot be considered as the final decision of the Commissioner of Internal
Revenue on its protest because the same was signed by a mere subordinate and not by the
Commissioner himself.7

With the denial of its motion for reconsideration, petitioner consequently filed a Petition
for Review with the Court of Appeals contending that there was no final decision to speak
of because the Commissioner had yet to make a personal determination as regards the
merits of petitioner’s case.8

The Court of Appeals denied the petition in a decision dated October 31, 2000, the
dispositive portion of which reads:

"WHEREFORE, the petition is DISMISSED for lack of merit.

SO ORDERED."

Petitioner’s Motion for Reconsideration was likewise denied in a resolution dated May 3,
2001.

Hence, this petition with the following assignment of errors:9

THE HONORABLE RESPONDENT CA ERRED IN FINDING THAT THE DEMAND

LETTER ISSUED BY THE (THEN) ACCOUNTS RECEIVABLE/BILLING DIVISION
OF THE BIR NATIONAL OFFICE WAS THE FINAL DECISION OF THE
RESPONDENT CIR ON THE DISPUTED ASSESSMENTS, AND HENCE
CONSTITUTED THE DECISION APPEALABLE TO THE HONORABLE
RESPONDENT CTA; AND,

II

THE HONORABLE RESPONDENT CA ERRED IN DECLARING THAT THE

DENIAL OF THE PROTEST OF THE SUBJECT ALLEGED DEFICIENCY TAX
ASSESSMENTS HAD LONG BECOME FINAL AND EXECUTORY FOR FAILURE
OF THE PETITIONER TO INSTITUTE THE APPEAL FROM THE DEMAND
LETTER OF THE CHIEF OF THE ACCOUNTS RECEIVABLE/BILLING DIVISION,
BIR NATIONAL OFFICE, TO THE HONORABLE RESPONDENT CTA, WITHIN
THIRTY (30) DAYS FROM RECEIPT THEREOF.

Thus, the main issue is whether or not a demand letter for tax deficiency assessments
issued and signed by a subordinate officer who was acting in behalf of the Commissioner
of Internal Revenue, is deemed final and executory and subject to an appeal to the Court
of Tax Appeals.

We rule in the affirmative.

A demand letter for payment of delinquent taxes may be considered a decision on a

disputed or protested assessment. The determination on whether or not a demand letter is
final is conditioned upon the language used or the tenor of the letter being sent to the
taxpayer.

We laid down the rule that the Commissioner of Internal Revenue should always indicate
to the taxpayer in clear and unequivocal language what constitutes his final determination
of the disputed assessment, thus:

. . . we deem it appropriate to state that the Commissioner of Internal Revenue should

always indicate to the taxpayer in clear and unequivocal language whenever his action on
an assessment questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of Republic Act No. 1125, as
amended. On the basis of his statement indubitably showing that the Commissioner’s
communicated action is his final decision on the contested assessment, the aggrieved
taxpayer would then be able to take recourse to the tax court at the opportune time.
Without needless difficulty, the taxpayer would be able to determine when his right to
appeal to the tax court accrues.

The rule of conduct would also obviate all desire and opportunity on the part of the
taxpayer to continually delay the finality of the assessment – and, consequently, the
collection of the amount demanded as taxes – by repeated requests for recomputation and
reconsideration. On the part of the Commissioner, this would encourage his office to
conduct a careful and thorough study of every questioned assessment and render a correct
and definite decision thereon in the first instance. This would also deter the
Commissioner from unfairly making the taxpayer grope in the dark and speculate as to
which action constitutes the decision appealable to the tax court. Of greater import, this
rule of conduct would meet a pressing need for fair play, regularity, and orderliness in
administrative action.10

In this case, the letter of demand dated January 24, 1991, unquestionably constitutes the
final action taken by the Bureau of Internal Revenue on petitioner’s request for
reconsideration when it reiterated the tax deficiency assessments due from petitioner, and
requested its payment. Failure to do so would result in the "issuance of a warrant of
distraint and levy to enforce its collection without further notice."11 In addition, the letter
contained a notation indicating that petitioner’s request for reconsideration had been
denied for lack of supporting documents.

The above conclusion finds support in Commissioner of Internal Revenue v. Ayala

Securities Corporation,12 where we held:

The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a
denial of the reconsideration or [respondent corporation’s]…protest o[f] the assessment
made by the petitioner, considering that the said letter [was] in itself a reiteration of the
demand by the Bureau of Internal Revenue for the settlement of the assessment already
made, and for the immediate payment of the sum of P758,687.04 in spite of the vehement
protest of the respondent corporation on April 21, 1961. This certainly is a clear
indication of the firm stand of petitioner against the reconsideration of the disputed
assessment…This being so, the said letter amount[ed] to a decision on a disputed or
protested assessment, and, there, the court a quo did not err in taking cognizance of this
case.

Similarly, in Surigao Electric Co., Inc v. Court of Tax Appeals,13 and in CIR v. Union
Shipping Corporation,14 we held:

". . . In this letter, the commissioner not only in effect demanded that the petitioner pay
the amount of ₱11,533.53 but also gave warning that in the event it failed to pay, the said
commissioner would be constrained to enforce the collection thereof by means of the
remedies provided by law. The tenor of the letter, specifically the statement regarding the
resort to legal remedies, unmistakably indicate[d] the final nature of the determination
made by the commissioner of the petitioner’s deficiency franchise tax liability."

The demand letter received by petitioner verily signified a character of finality. Therefore,
it was tantamount to a rejection of the request for reconsideration. As correctly held by
the Court of Tax Appeals, "while the denial of the protest was in the form of a demand
letter, the notation in the said letter making reference to the protest filed by petitioner
clearly shows the intention of the respondent to make it as [his] final decision."15

This now brings us to the crux of the matter as to whether said demand letter indeed
attained finality despite the fact that it was issued and signed by the Chief of the Accounts
Receivable and Billing Division instead of the BIR Commissioner.

The general rule is that the Commissioner of Internal Revenue may delegate any power
vested upon him by law to Division Chiefs or to officials of higher rank. He cannot,
however, delegate the four powers granted to him under the National Internal Revenue
Code (NIRC) enumerated in Section 7.

As amended by Republic Act No. 8424, Section 7 of the Code authorizes the BIR
Commissioner to delegate the powers vested in him under the pertinent provisions of the
Code to any subordinate official with the rank equivalent to a division chief or higher,
except the following:

(a) The power to recommend the promulgation of rules and regulations by the Secretary
of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau;

(c) The power to compromise or abate under Section 204(A) and (B) of this Code, any
tax deficiency: Provided, however, that assessments issued by the Regional Offices
involving basic deficiency taxes of five hundred thousand pesos (P500,000) or less, and
minor criminal violations as may be determined by rules and regulations to be
promulgated by the Secretary of Finance, upon the recommendation of the
Commissioner, discovered by regional and district officials, may be compromised by a
regional evaluation board which shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, heads of the Legal, Assessment and
Collection Divisions and the Revenue District Officer having jurisdiction over the
taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.

It is clear from the above provision that the act of issuance of the demand letter by the
Chief of the Accounts Receivable and Billing Division does not fall under any of the
exceptions that have been mentioned as non-delegable.

Section 6 of the Code further provides:

"SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. –

(A) Examination of Returns and Determination of Tax Due. - After a return has been filed
as required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of the
correct amount of tax; Provided, however, That failure to file a return shall not prevent
the Commissioner from authorizing the examination of any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand from the
Commissioner or from his duly authorized representative. . . ." (Emphasis supplied)
Thus, the authority to make tax assessments may be delegated to subordinate officers.
Said assessment has the same force and effect as that issued by the Commissioner
himself, if not reviewed or revised by the latter such as in this case.16

A request for reconsideration must be made within thirty (30) days from the taxpayer’s
receipt of the tax deficiency assessment, otherwise, the decision becomes final,
unappealable and therefore, demandable. A tax assessment that has become final,
executory and enforceable for failure of the taxpayer to assail the same as provided in
Section 228 can no longer be contested, thus:

"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…Such assessment may be protested administratively by filing a request
for reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules and
regulations. Within sixty (60) days from filing of the protest, all relevant supporting
documents shall have been submitted; otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred (180)
days from submission of documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of
the said decision, or from the lapse of the one hundred eighty (180) - day period;
otherwise, the decision shall become final, executory and demandable."

Here, petitioner failed to avail of its right to bring the matter before the Court of Tax
Appeals within the reglementary period upon the receipt of the demand letter reiterating
the assessed delinquent taxes and denying its request for reconsideration which
constituted the final determination by the Bureau of Internal Revenue on petitioner’s
protest. Being a final disposition by said agency, the same would have been a proper
subject for appeal to the Court of Tax Appeals.

The rule is that for the Court of Tax Appeals to acquire jurisdiction, an assessment must
first be disputed by the taxpayer and ruled upon by the Commissioner of Internal
Revenue to warrant a decision from which a petition for review may be taken to the Court
of Tax Appeals. Where an adverse ruling has been rendered by the Commissioner of
Internal Revenue with reference to a disputed assessment or a claim for refund or credit,
the taxpayer may appeal the same within thirty (30) days after receipt thereof.17

We agree with the factual findings of the Court of Tax Appeals that the demand letter may
be presumed to have been duly directed, mailed and was received by petitioner in the
regular course of the mail in the absence of evidence to the contrary. This is in
accordance with Section 2(v), Rule 131 of the Rules of Court, and in this case, since the
period to appeal has commenced to run from the time the letter of demand was
presumably received by petitioner within a reasonable time after January 24, 1991, the
period of thirty (30) days to appeal the adverse decision on the request for reconsideration
had already lapsed when the petition was filed with the Court of Tax Appeals only on
November 8, 1991. Hence, the Court of Tax Appeals properly dismissed the petition as
the tax delinquency assessment had long become final and executory.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated October
31, 2000 and its Resolution dated May 3, 2001 in CA-G.R. SP No. 35581 are hereby
AFFIRMED. The petition is accordingly DENIED for lack of merit.

SO ORDERED.

G.R. No. 170389 October 20, 2010

COMMISSION OF INTERNAL REVENUE, Petitioner,

vs.
AQUAFRESH SEAFOODS, INC., Respondent.

DECISION

PERALTA, J.:

Before this Court is a petition for review on certiorari,1 under Rule 45 of the Rules of
Court, seeking to set aside the November 9, 2005 Decision2 of the Court of Tax Appeals
(CTA) En Banc in CTA-E.B. No. 77. The CTA En Banc affirmed the December 22, 2004
Decision of the CTA First Division.

The facts of the case are as follows:

On June 7, 1999, respondent Aquafresh Seafoods Inc. sold to Philips Seafoods, Inc. two
parcels of land, including improvements thereon, located at Barrio Banica, Roxas City,
for the consideration of Three Million One Hundred Thousand Pesos (Php 3,100, 000.00).
Said properties were covered under Transfer Certificate of Titles Nos. T-21799 and T-
21804.

Respondent then filed a Capital Gains Tax Return/Application for Certification

Authorizing Registration and paid the amount of Php186,000.00, representing the Capital
Gains Tax (CGT) and the amount of Php46,500.00, representing the Documentary Stamp
Tax (DST) due from the said sale. Subsequently, Revenue District Officer Gil G. Tabanda
issued Certificate Authorizing Registration No. 1071477.

The Bureau of Internal Revenue (BIR), however, received a report that the lots sold were
undervalued for taxation purposes. This prompted the Special Investigation Division
(SID) of the BIR to conduct an occular inspection over the properties. After the
investigation, the SID concluded that the subject properties were commercial with a zonal
value of Php2,000.00 per square meter.

On September 15, 2000, Regional Director Leonardo Q. Sacamos (Director Sacamos) of

the Revenue Region Iloilo City sent two Assessment Notices apprising respondent of
CGT and DST defencies in the sum of Php1,372,171.46 and Php356,267.62, respectively.
Director Sacamos relied on the findings of the SID that the subject properties were
commercial with a zonal valuation of Php2,000.00 per square meter.

On October 1, 2000, respondent sent a letter protesting the assessments made by Director
Sacamos. On December 1, 2000, Director Sacamos denied respondent's protest for lack
of legal basis. Respondent appealed, but the same was denied with finality on February
13, 2002.

On March 19, 2002, respondent filed a petition for review3 before the CTA seeking the
reversal of the denial of its protest. The main thrust of respondent's petition was that the
subject properties were located in Barrio Banica, Roxas, where the pre-defined zonal
value was Php650.00 per square meter based on the "Revised Zonal Values of Real
Properties in the City of Roxas under Revenue District Office No. 72 – Roxas City"
(1995 Revised Zonal Values of Real Properties). Respondent asserted that the subject
properties were classified as "RR" or residential and not commercial. Respondent argued
that since there was already a pre-defined zonal value for properties located in Barrio
Banica, the BIR officials had no business re-classifying the subject properties to
commercial.

On December 22, 2004, the CTA promulgated a Decision4 ruling in favor of respondent,
the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, respondent's assessments for deficiency capital against

tax and documentary stamp taxes are hereby CANCELLED and SET ASIDE. x x x

SO ORDERED.5

Ruling in favor of respondent, the CTA opined that that the existing Revised Zonal Values
in the City of Roxas should prevail for purposes of determining respondent's tax
liabilities, thus:

While respondent is given the authority to determine the fair market value of the subject
properties for the purpose of computing internal revenue taxes, such authority is not
without restriction or limitation. The first sentence of Section 6(E) sets the limitation or
condition in the exercise of such power by requiring respondent to consult with
competent appraisers both from private and public sectors. As there was no re-evaluation
and no revision of the zonal values of the subject properties in Roxas City at the time of
the sale, respondent cannot unilaterally determine the zonal values of the subject
properties by invoking his powers of obtaining information and making assessments
under Sections 5 and 6 of the NIRC. The existing Revised Zonal Values of Real
Properties in the City of Roxas shall prevail for the purpose of determining the proper tax
liabilities of petitioner.6

Petitioner Commissioner of Internal Revenue filed a Motion for Reconsideration, which

was, however, denied by the CTA in a Resolution7 dated April 4, 2005.
Petitioner then appealed to the CTA En Banc.

In a Decision dated November 9, 2005, the CTA En Banc dismissed petitioner's appeal,
the dispositive portion of which reads:

WHEREFORE, premises considered, the Petition for Review is DISMISSED for lack of
merit.

SO ORDERED.8

The CTA En Banc ruled that the 1995 Revised Zonal Values of Real Properties should
prevail. Said court relied on Section 6 (E) of the National Internal Revenue Code (NIRC)
which requires consultation from appraisers, from both the public and private sectors, in
fixing the zonal valuation of properties. The CTA En Banc held that petitioner failed to
prove any amendment effected on the 1995 Revised Zonal Values of Real Properties at
the time of the sale of the subject properties.

Hence, herein petition, with petitioner raising the following issues for this Court's
resolution, to wit:

I.

WHETHER OR NOT THE REQUIREMENT OF CONSULTATION WITH

COMPETENT APPRAISERS BOTH FROM THE PRIVATE AND PUBLIC SECTORS
IN DETERMINING THE FAIR MARKET VALUE OF THE SUBJECT LOTS IS
APPLICABLE IN THE CASE AT BAR.

II.

WHETHER OR NOT THE COURT OF TAX APPEALS EN BANC COMMITTED

GRAVE ERROR IN APPLYING THE FAIR MARKET VALUE BASED ON THE
ZONAL VALUATION OF A RESIDENTIAL LAND AS TAX BASE IN THE
COMPUTATION OF CAPITAL GAINS TAX AND DOCUMENTARY STAMP TAX
DEFICIENCIES OF RESPONDENT.9

The petition is not meritorious. The issues being interrelated, this Court shall discuss the
same in seriatim.

Under Section 27(D)(5) of the NIRC of 1997, a CGT of six (6%) percent is imposed on
the gains presumed to have been realized in the sale, exchange or disposition of lands
and/or buildings which are not actively used in the business of a corporation and which
are treated as capital assets based on the gross selling price or fair market value as
determined in accordance with Section 6(E) of the NIRC, whichever is higher.

On the other hand, under Section 196 of the NIRC, DST is based on the consideration
contracted to be paid or on its fair market value determined in accordance with Section
6(E) of the NIRC, whichever is higher.

Thus, in determining the value of CGT and DST arising from the sale of a property, the
power of the CIR to assess is subject to Section 6(E) of the NIRC, which provides:

Section 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. -

xxxx

(E) Authority of the Commissioner to Prescribe Real Property Values – The

Commissioner is hereby authorized to divide the Philippines into different zones or area
and shall, upon consultation with competent appraisers both from the private and public
sectors, determine the fair market value of real properties located in each zone or area.
For purposes of computing internal revenue tax, the value of the property shall be,
whichever is higher of:

(1) the fair market value as determined by the Commissioner; or

(2) the fair market value as shown in the schedule of values of the Provincial and
City Assessors.

While the CIR has the authority to prescribe real property values and divide the
Philippines into zones, the law is clear that the same has to be done upon consultation
with competent appraisers both from the public and private sectors. It is undisputed that
at the time of the sale of the subject properties found in Barrio Banica, Roxas City, the
same were classified as "RR," or residential, based on the 1995 Revised Zonal Value of
Real Properties. Petitioner, thus, cannot unilaterally change the zonal valuation of such
properties to "commercial" without first conducting a re-evaluation of the zonal values as
mandated under Section 6(E) of the NIRC.

Petitioner argues, however, that the requirement of consultation with competent

appraisers is mandatory only when it is prescribing real property values – that is when a
formulation or change is made in the schedule of zonal values. Petitioner also contends
that what it did in the instant case was not to prescribe the zonal value, but merely
classify the same as commercial and apply the corresponding zonal value for such
classification based on the existing schedule of zonal values in Roxas City.10

We disagree.

To this Court's mind, petitioner's act of re-classifying the subject properties from
residential to commercial cannot be done without first complying with the procedures
prescribed by law. It bears to stress that ALL the properties in Barrio Banica were
classified as residential, under the 1995 Revised Zonal Values of Real Properties. Thus,
petitioner's act of classifying the subject properties involves a re-classification and
revision of the prescribed zonal values.
In addition, Revenue Memorandum No. 58-69 provides for the procedures on the
establishment of the zonal values of real properties, viz.:

(1) The submission or review by the Revenue District Offices Sub-Technical

Committee of the schedule of recommended zonal values to the TCRPV;

(2) The evaluation by TCRPV of the submitted schedule of recommended zonal

values of real properties;

(3) Except in cases of correction or adjustment, the TCRPV finalizes the schedule
and submits the same to the Executive Committee on Real Property Valuation
(ECRPV);

(3) Upon approval of the schedule of zonal values by the ECRPV, the same is
embodied in a Department Order for implementation and signed by the Secretary of
Finance. Thereafter, the schedule takes effect (15) days after its publication in the
Official Gazette or in any newspaper of general circulation.

Petitioner failed to prove that it had complied with Revenue Memorandum No. 58-69 and
that a revision of the 1995 Revised Zonal Values of Real Properties was made prior to the
sale of the subject properties. Thus, notwithstanding petitioner's disagreement to the
classification of the subject properties, the same must be followed for purposes of
computing the CGT and DST. It bears stressing, and as observed by the CTA En Banc,
that the 1995 Revised Zonal Values of Real Properties was drafted by petitioner, BIR
personnel, representatives from the Department of Finance, National Tax Research
Center, Institute of Philippine Real Estate Appraisers and Philippine Association of
Realtors Board, which duly satisfied the requirement of consultation with public and
private appraisers.11

Petitioner contends, nevertheless, that its act of classifying the subject properties based on
actual use was in accordance with guidelines number 1-b and 2 as set forth in "Certain
Guidelines in the Implementation of Zonal Valuation of Real Properties for RDO 72
Roxas City" (Zonal Valuation Guidelines).12

Section 1 (b) of the Zonal Valuation Guidelines reads:

1. No zonal value has been prescribed for a particular classification of real property.

Where in the approved schedule of zonal values for a particular barangay -

xxxx

b) No zonal value has been prescribed for a particular classification of real property in
one barangay, the zonal value prescribed for the same classification of real property
located in an adjacent barangay of similar conditions shall be used.
Section 1 (b) does not apply to the case at bar for the simple reason that said proviso
operates only when "no zonal valuation has been prescribed." The properties located in
Barrio Banica, Roxas City were already subject to a zonal valuation, a fact which even
petitioner has admitted in its petition, thus:

It must be noted that under the schedule of zonal values, Barangay Banica, where the
subject lots are situated, has a single classification only – that of a residential area.
Accordingly, it has a prescribed zonal value of Php650.00 per square meter.13

Petitioner, however, also relies on Section 2 (a) of the Zonal Valuation Guidelines, to
justify its action. Said section states:

2. Predominant Use of Property.

a) All real properties, regardless of actual use, located in a street/barangay zone, the use
of which are predominantly commercial shall be classified as "Commercial" for purposes
of zonal valuation.

In BIR Ruling No. 041-2001, issued on September 18, 2001, the BIR tackled the
application of a provision which is identical to Section 2 (a) of the Zonal Valuation
Guidelines. BIR Ruling No. 041-2001 involved a request by the Iglesia Ni Cristo that the
re-computation of CGT and DST based on the predominant use of the real properties
located at Mindanao Avenue, Quezon City, be set aside. In said case, the Iglesia ni Cristo
paid the CGT and DST based on the zonal value of residential lots in Quezon City. The
Revenue District Officer, however, ordered a re-computation of the CGT and DST based
on the ground that the real property is located in a predominantly commercial area and
must be classified as commercial for purposes of zonal valuation. The BIR ruled in favor
of Iglesia ni Cristo stating that "Certain Guidelines in the Implementation of Zonal
Valuation of Real Properties for RDO No. 38, applying the predominant use of property
as the basis for the computation of the Capital Gains and Documentary Stamp Taxes,
shall apply only when the real property is located in an area or zone where the properties
are not yet classified and their respective zonal valuation are not yet determined." The
pertinent portion of BIR Ruling No. 041-2001 reads:

In reply, please be informed that this Office finds your request meritorious. The number 2
guideline laid down in Certain Guidelines in the implementation of Zonal valuation of
Real Properties for RDO No. 38- North Quezon City xxx does not apply to this case.

Number 2 of the CERTAIN GUIDELINES IN THE IMPLEMENTATION OF ZONAL

VALUATION OF REAL PROPERTIES FOR RD NO. 38 – NORTH QUEZON CITY"
provides:

"2. PREDOMINANT USE OF PROPERTY:

ALL REAL PROPERTIES REGARDLESS OF ACTUAL USE, LOCATED IN A

STREET/BARANGAY ZONE, THE USE OF WHICH ARE PREDOMINANTLY
COMMERCIAL SHALL BE CLASSIFIED AS 'COMMERICIAL'FOR PURPOSES OF
ZONAL VALUATION."

It is the considered opinion of this Office that the guideline applies when the real property
is located in an area or zone where the properties are not yet classified and their
respective zonal valuation are not yet determined.

In the instant case, however, the classification and valuation of the properties located in
Mindanao Avenue, Bagong Bantay, have already been determined. Under Department of
Finance Order No. 6-2000, the properties along Mindanao Avenue had already been
classified as residential and commercial. The zonal valuation thereof had already been
determined. x x x Therefore, the Revenue District Officer of RDO No. 38 has no
discretion to determine the classification or valuation of the properties located in the
pertinent area. The computation of the capital gains and documentary stamp taxes shall be
based on the zonal of residential properties located at Mindanao Avenue, Bago Bantay,
Quezon City.141avvphil

Based on the foregoing, this Court need not belabour on the applicability of Section 2 (a),
as the BIR itself has already ruled that the same shall apply only when the real property is
located in an area or zone where the properties are not yet classified and their respective
zonal valuation are not yet determined. As mentioned earlier, the subject properties were
already part of the 1995 Revised Zonal Value of Real Properties which classified the
same as residential with a zonal value of Php650.00 per square meter; thus, Section 2 (a)
clearly has no application.

This Court agrees with the observation of the CTA that "zonal valuation was established
with the objective of having an ‘efficient tax administration by minimizing the use of
discretion in the determination of the tax based on the part of the administrator on one
hand and the taxpayer on the other hand.’"15 Zonal value is determined for the purpose
of establishing a more realistic basis for real property valuation. Since internal revenue
taxes, such as CGT and DST, are assessed on the basis of valuation, the zonal valuation
existing at the time of the sale should be taken into account.16

If petitioner feels that the properties in Barrio Banica should also be classified as
commercial, then petitioner should work for its revision in accordance with Revenue
Memorandum Order No. 58-69. The burden was on petitioner to prove that the
classification and zonal valuation in Barrio Banica have been revised in accordance with
the prevailing memorandum. In the absence of proof to the contrary, the 1995 Revised
Zonal Values of Real Properties must be followed.

Lastly, this Court takes note of the wording of Section 2 (b) of the Zonal Valuation
Guidelines, to wit:

2. Predominant Use of Property.

b) The predominant use of other classification of properties located in a street/barangay

zone, regardless of actual use shall be considered for purposes of zonal valuation.

Based thereon, this Court rules that even assuming arguendo that the subject properties
were used for commercial purposes, the same remains to be residential for zonal value
purposes. It appears that actual use is not considered for zonal valuation, but the
predominant use of other classification of properties located in the zone. Again, it is
undisputed that the entire Barrio Banica has been classified as residential.

WHEREFORE, premises considered, the petition is denied. The November 9, 2005

Decision of the Court of Tax Appeals En Banc, in CTA-E.B. No. 77, is hereby
AFFIRMED.

SO ORDERED.

G.R. No. 180884 June 27, 2008

EMERLINDA S. TALENTO, in her capacity as the Provincial Treasurer of the Province

of Bataan, petitioner,
vs.
HON. REMIGIO M. ESCALADA, JR., Presiding Judge of the Regional Trial Court of
Bataan, Branch 3, and PETRON CORPORATION, respondents.

DECISION

YNARES-SANTIAGO, J.:

The instant petition for certiorari under Rule 65 of the Rules of Court assails the
November 5, 2007 Order1 of the Regional Trial Court of Bataan, Branch 3, in Civil Case
No. 8801, granting the petition for the issuance of a writ of preliminary injunction filed
by private respondent Petron Corporation (Petron) thereby enjoining petitioner Emerlinda
S. Talento, Provincial Treasurer of Bataan, and her representatives from proceeding with
the public auction of Petron's machineries and pieces of equipment during the pendency
of the latter's appeal from the revised assessment of its properties.

The facts of the case are as follows:

On June 18, 2007, Petron received from the Provincial Assessor's Office of Bataan a
notice of revised assessment over its machineries and pieces of equipment in Lamao,
Limay, Bataan. Petron was given a period of 60 days within which to file an appeal with
the Local Board of Assessment Appeals (LBAA).2 Based on said revised assessment,
petitioner Provincial Treasurer of Bataan issued a notice informing Petron that as of June
30, 2007, its total liability is P1,731,025,403.06,3 representing deficiency real property
tax due from 1994 up to the first and second quarters of 2007.

On August 17, 2007, Petron filed a petition4 with the LBAA (docketed as LBAA Case
No. 2007-01) contesting the revised assessment on the grounds that the subject
assessment pertained to properties that have been previously declared; and that the
assessment covered periods of more than 10 years which is not allowed under the Local
Government Code (LGC). According to Petron, the possible valid assessment pursuant to
Section 222 of the LGC could only be for the years 1997 to 2006. Petron further
contended that the fair market value or replacement cost used by petitioner included items
which should be properly excluded; that prompt payment of discounts were not
considered in determining the fair market value; and that the subject assessment should
take effect a year after or on January 1, 2008. In the same petition, Petron sought the
approval of a surety bond in the amount of P1,286,057,899.54.5

On August 22, 2007, Petron received from petitioner a final notice of delinquent real
property tax with a warning that the subject properties would be levied and auctioned
should Petron fail to settle the revised assessment due.6

Consequently, Petron sent a letter7 to petitioner stating that in view of the pendency of its
appeal8 with the LBAA, any action by the Treasurer's Office on the subject properties
would be premature. However, petitioner replied that only Petron's payment under protest
shall bar the collection of the realty taxes due,9 pursuant to Sections 231 and 252 of the
LGC.

With the issuance of a Warrant of Levy10 against its machineries and pieces of
equipment, Petron filed on September 24, 2007, an urgent motion to lift the final notice
of delinquent real property tax and warrant of levy with the LBAA. It argued that the
issuance of the notice and warrant is premature because an appeal has been filed with the
LBAA, where it posted a surety bond in the amount of P1,286,057,899.54.11

On October 3, 2007, Petron received a notice of sale of its properties scheduled on

October 17, 2007.12 Consequently, on October 8, 2007, Petron withdrew its motion to lift
the final notice of delinquent real property tax and warrant of levy with the LBAA.13 On
even date, Petron filed with the Regional Trial Court of Bataan the instant case (docketed
as Civil Case No. 8801) for prohibition with prayer for the issuance of a temporary
restraining order (TRO) and preliminary injunction.14

On October 15, 2007, the trial court issued a TRO for 20 days enjoining petitioner from
proceeding with the public auction of Petron's properties.15 Petitioner thereafter filed an
urgent motion for the immediate dissolution of the TRO, followed by a motion to dismiss
Petron's petition for prohibition.

On November 5, 2007, the trial court issued the assailed Order granting Petron's petition
for issuance of writ of preliminary injunction, subject to Petron's posting of a
P444,967,503.52 bond in addition to its previously posted surety bond of
P1,286,057,899.54, to complete the total amount equivalent to the revised assessment of
P1,731,025,403.06. The trial court held that in scheduling the sale of the properties
despite the pendency of Petron's appeal and posting of the surety bond with the LBAA,
petitioner deprived Petron of the right to appeal. The dispositive portion thereof, reads:
 WHEREFORE, the writ of preliminary injunction prayed for by plaintiff is hereby
GRANTED and ISSUED, enjoining defendant Treasurer, her agents, representatives,
or anybody acting in her behalf from proceeding with the scheduled public auction of
plaintiff's real properties, or any disposition thereof, pending the determination of the
merits of the main action, to be effective upon posting by plaintiff to the Court of an
injunction bond in the amount of Four Hundred Forty Four Million Nine Hundred
Sixty Seven Thousand Five Hundred Three and 52/100 Pesos (P444,967,503.52) and
the approval thereof by the Court.

Defendant's Urgent Motion for the Immediate Dissolution of the Temporary

Restraining Order dated October 23, 2007 is hereby DENIED.

SO ORDERED.16

From the said Order of the trial court, petitioner went directly to this Court via the instant
petition for certiorari under Rule 65 of the Rules of Court.

The question posed in this petition, i.e., whether the collection of taxes may be suspended
by reason of the filing of an appeal and posting of a surety bond, is undoubtedly a pure
question of law. Section 2(c) of Rule 41 of the Rules of Court provides:

SEC. 2. Modes of Appeal. -

(c) Appeal by certiorari. - In all cases when only questions of law are raised or
involved, the appeal shall be to the Supreme Court by petition for review on
certiorari under Rule 45. (Emphasis supplied)

Thus, petitioner resorted to the erroneous remedy when she filed a petition for certiorari
under Rule 65, when the proper mode should have been a petition for review on certiorari
under Rule 45. Moreover, under Section 2, Rule 45 of the same Rules, the period to file a
petition for review is 15 days from notice of the order appealed from. In the instant case,
petitioner received the questioned order of the trial court on November 6, 2007, hence,
she had only up to November 21, 2007 to file the petition. However, the same was filed
only on January 4, 2008, or 43 days late. Consequently, petitioner's failure to file an
appeal within the reglementary period rendered the order of the trial court final and
executory.

The perfection of an appeal in the manner and within the period prescribed by law is
mandatory. Failure to conform to the rules regarding appeal will render the judgment
final and executory and beyond the power of the Court's review. Jurisprudence mandates
that when a decision becomes final and executory, it becomes valid and binding upon the
parties and their successors in interest. Such decision or order can no longer be disturbed
or reopened no matter how erroneous it may have been.17

Petitioner's resort to a petition under Rule 65 is obviously a play to make up for the loss
of the right to file an appeal via a petition under Rule 45. However, a special civil action
under Rule 65 can not cure petitioner's failure to timely file a petition for review on
certiorari under Rule 45 of the Rules of Court. Rule 65 is an independent action that
cannot be availed of as a substitute for the lost remedy of an ordinary appeal, including
that under Rule 45, especially if such loss or lapse was occasioned by one's own neglect
or error in the choice of remedies.18

Moreover, even if we assume that a petition under Rule 65 is the proper remedy, the
petition is still dismissible.

We note that no motion for reconsideration of the November 5, 2007 order of the trial
court was filed prior to the filing of the instant petition. The settled rule is that a motion
for reconsideration is a sine qua non condition for the filing of a petition for certiorari.
The purpose is to grant the public respondent an opportunity to correct any actual or
perceived error attributed to it by the re-examination of the legal and factual
circumstances of the case. Petitioner's failure to file a motion for reconsideration deprived
the trial court of the opportunity to rectify an error unwittingly committed or to vindicate
itself of an act unfairly imputed. Besides, a motion for reconsideration under the present
circumstances is the plain, speedy and adequate remedy to the adverse judgment of the
trial court.19

Petitioner also blatantly disregarded the rule on hierarchy of courts. Although the
Supreme Court, Regional Trial Courts, and the Court of Appeals have concurrent
jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, habeas
corpus and injunction, such concurrence does not give the petitioner unrestricted freedom
of choice of court forum. Recourse should have been made first with the Court of
Appeals and not directly to this Court.20

True, litigation is not a game of technicalities. It is equally true, however, that every case
must be presented in accordance with the prescribed procedure to ensure an orderly and
speedy administration of justice.21 The failure therefore of petitioner to comply with the
settled procedural rules justifies the dismissal of the present petition.

Finally, we find that the trial court correctly granted respondent's petition for issuance of
a writ of preliminary injunction. Section 3, Rule 58, of the Rules of Court, provides:

SEC. 3. Grounds for issuance of preliminary injunction. - A preliminary injunction

may be granted by the court when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such
relief consists in restraining the commission or continuance of the acts complained
of, or in the performance of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts

complained of during the litigation would probably work injustice to the applicant; or

(c) That a party, court, or agency or a person is doing, threatening, or attempting to

 do, or is procuring or suffering to be done, some act or acts probably in violation of
the rights of the applicant respecting the subject of the action or proceeding, and
tending to render the judgment ineffectual.

The requisites for the issuance of a writ of preliminary injunction are: (1) the existence of
a clear and unmistakable right that must be protected; and (2) an urgent and paramount
necessity for the writ to prevent serious damage.22

The urgency and paramount necessity for the issuance of a writ of injunction becomes
relevant in the instant case considering that what is being enjoined is the sale by public
auction of the properties of Petron amounting to at least P1.7 billion and which properties
are vital to its business operations. If at all, the repercussions and far-reaching
implications of the sale of these properties on the operations of Petron merit the issuance
of a writ of preliminary injunction in its favor.

We are not unaware of the doctrine that taxes are the lifeblood of the government, without
which it can not properly perform its functions; and that appeal shall not suspend the
collection of realty taxes. However, there is an exception to the foregoing rule, i.e., where
the taxpayer has shown a clear and unmistakable right to refuse or to hold in abeyance the
payment of taxes. In the instant case, we note that respondent contested the revised
assessment on the following grounds: that the subject assessment pertained to properties
that have been previously declared; that the assessment covered periods of more than 10
years which is not allowed under the LGC; that the fair market value or replacement cost
used by petitioner included items which should be properly excluded; that prompt
payment of discounts were not considered in determining the fair market value; and that
the subject assessment should take effect a year after or on January 1, 2008. To our mind,
the resolution of these issues would have a direct bearing on the assessment made by
petitioner. Hence, it is necessary that the issues must first be passed upon before the
properties of respondent is sold in public auction.

In addition to the fact that the issues raised by the respondent would have a direct impact
on the validity of the assessment made by the petitioner, we also note that respondent has
posted a surety bond equivalent to the amount of the assessment due. The Rules of
Procedure of the LBAA, particularly Section 7, Rule V thereof, provides:

Section 7. Effect of Appeal on Collection of Taxes. - An appeal shall not suspend the
collection of the corresponding realty taxes on the real property subject of the appeal
as assessed by the Provincial, City or Municipal Assessor, without prejudice to the
subsequent adjustment depending upon the outcome of the appeal. An appeal may be
entertained but the hearing thereof shall be deferred until the corresponding taxes due
on the real property subject of the appeal shall have been paid under protest or the
petitioner shall have given a surety bond, subject to the following conditions:

(1) the amount of the bond must not be less than the total realty taxes and penalties
due as assessed by the assessor nor more than double said amount;
 (2) the bond must be accompanied by a certification from the Insurance
Commissioner (a) that the surety is duly authorized to issue such bond; (a) that the
surety bond is approved by and registered with said Commission; and (c) that the
amount covered by the surety bond is within the writing capacity of the surety
company; and

(3) the amount of the bond in excess of the surety company's writing capacity, if any,
must be covered by Reinsurance Binder, in which case, a certification to this effect
must likewise accompany the surety bond.

Corollarily, Section 11 of Republic Act No. 9282,23 which amended Republic Act No.
1125 (The Law Creating the Court of Tax Appeals) provides:

Section 11. Who may Appeal; Mode of Appeal; Effect of Appeal; -

xxxx

No appeal taken to the Court of Appeals from the Collector of Internal Revenue x x x
shall suspend the payment, levy, distraint, and/or sale of any property for the
satisfaction of his tax liability as provided by existing law. Provided, however, That
when in the opinion of the Court the collection by the aforementioned government
agencies may jeopardize the interest of the Government and/or the taxpayer the Court
at any stage of the processing may suspend the collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more than double
the amount with the Court.

WHEREFORE, in view of all the foregoing, the instant petition is DISMISSED.

SO ORDERED.

G.R. No. 187589 December 3, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
THE STANLEY WORKS SALES (PHILS.), INCORPORATED, Respondent.

DECISION

SERENO, CJ:

This is a Petition for Review on Certiorari1 filed by the Commissioner of Internal

Revenue (petitioner) under Rule 45 of the 1997 Rules of Civil Procedure assailing the
Court of Tax Appeals En Banc (CTA En Banc) Decision2 dated 27 February 2009 and
Resolution3 dated 24 April 2009 in C.T.A. EB No. 406.

THE FACTS
The pertinent findings of fact of the CTA En Banc are as follows:

Petitioner is the duly appointed officer of the Bureau of Internal Revenue (BIR) mandated
to exercise the powers and perform the duties of his office including, among others, the
power to decide disputed assessments, refunds of internal revenue taxes, fees and other
charges, penalties imposed in relation thereto, or other matters arising under the National
Internal Revenue Code. Respondent, on the other hand, is a domestic corporation duly
organized and existing under Philippine laws and duly registered with the Securities and
Exchange Commission. Its office address is at the 5th Floor, Pan Pacific Hotel, Adriatico
Street corner Gen. Malvar Street, Manila.

Respondent is authorized "to engage in the business of designing, manufacturing,

fabricating, or otherwise producing, and the purchase, sale at whole sale, importation,
export, distribution, marketing or otherwise dealing with, construction and hardware
materials, tools, fixtures and equipment."

On January 1, 1979, respondent and Stanley Works Agencies (Pte.) Limited, Singapore
(Stanley-Singapore) entered into a Representation Agreement. Under such agreement,
Stanley-Singapore appointed respondent as its sole agent for the selling of its products
within the Philippines on an indent basis.

On April 16, 1990, respondent filed with the BIR its Annual Income Tax Return for
taxable year 1989.

On March 19, 1993, pursuant to Letter of Authority dated July 3, 1992, the BIR issued
against respondent a Pre-Assessment Notice (PAN) No. 002523 for 1989 deficiency
income tax.

On March 29, 1993, respondent received its copy of the PAN.

On April 12, 1993, petitioner, through OTC Domingo C. Paz of Revenue Region No. 4B-
2 of Makati, issued to respondent Assessment Notice No. 002523-89-6014 for deficiency
income tax for taxable year 1989. The Notice was sent on April 15, 1993 and respondent
received it on April 21, 1993.

On May 19, 1993, respondent, through its external auditors Punongbayan & Araullo, filed
a protest letter and requested reconsideration and cancellation of the assessment.

On November 16, 1993, a certain Mr. John Ang, on behalf of respondent, executed a
"Waiver of the Defense of Prescription Under the Statute of Limitations of the National
Internal Revenue Code" (Waiver). Under the terms of the Waiver, respondent waived its
right to raise the defense of prescription under Section 223 of the NIRC of 1977 insofar
as the assessment and collection of any deficiency taxes for the year ended December 31,
1989, but not after June 30, 1994. The Waiver was not signed by petitioner or any of his
authorized representatives and did not state the date of acceptance as prescribed under
Revenue Memorandum Order No. 20-90. Respondent did not execute any other Waiver
or similar document before or after the expiration of the November 16, 1993 Waiver on
June 30, 1994.

On January 6, 1994, respondent, through its external auditors Punongbayan & Araullo,
wrote a letter to the Chief of the BIR Appellate Division and requested the latter to take
cognizance of respondent's protest/request for reconsideration, asserting that the dispute
involved pure questions of law. On February 22, 1994, respondent sent a similar letter to
the Revenue District Officer (RDO) of BIR Revenue Region No. 4B-2 and asked for the
transmittal of the entire docket of the subject tax assessment to the BIR Appellate
Division.

On September 30, 1994, respondent, through its external auditors Punongbayan &
Araullo, submitted a Supplemental Memorandum on its protest to the BIR Revenue
Region No. 4B-2.

On September 20, 1995, respondent, through its external auditors Punongbayan &
Araullo, filed a Supplemental Memorandum with the BIR Appellate Division.

On November 29, 2001, the Chief of the BIR Appellate Division sent a letter to
respondent requiring it to submit duly authenticated financial statements for the
worldwide operations of Stanley Works and a sworn declaration from the home office on
the allocated share of respondent as a "branch office."

On December 11, 2001, respondent, through its counsel, the Quisumbing Torres Law
Offices, wrote the BIR Appellate Division and asked for an extension of period within
which to comply with the request for submission of documents. On January 15, 2002,
respondent sent a request for an extension of period to submit a Supplemental
Memorandum.

On March 4, 2002, respondent, through its counsel, the Quisumbing Torres Law Offices,
submitted a Supplemental Memorandum alleging, inter alia, that petitioner's right to
collect the alleged deficiency income tax has prescribed.

On March 22, 2004, petitioner rendered a Decision denying respondent’s request for
reconsideration and ordering respondent to pay the deficiency income tax plus interest
that may have accrued. The dispositive portion reads:

IN VIEW WHEREOF, this Office resolves, as it hereby resolves, to DENY the request
for reconsideration of STANLEY WORK SALES (Philippines), INC. dated May 19,
1993 of Assessment No. 002523-89-6014 dated April 12, 1993 issued by this Bureau
demanding payment of the total amount of Php41,284,968.34 as deficiency income tax
for taxable year 1989. Consequently, Stanley Works Sales (Philippines), Inc. is hereby
ordered to pay the above-stated amount plus interest that may have accrued thereon to the
Collection Service, within thirty (30) days from receipt hereof, otherwise, collection will
be effected through the summary remedies provided by law.
This constitutes the final decision of this Office on the matter.

On March 30, 2004, respondent received its copy of the assailed Decision. Hence, on
April 28, 2004, respondent filed before the Court in Division a Petition for Review
docketed as C.T.A. Case No. 6971 entitled "The Stanley Works Sales (Philippines), Inc.,
petitioner, vs. Commissioner of Internal Revenue, respondent. x x x

THE CTA FIRST DIVISION RULING4

After trial on the merits, the CTA First Division found that although the assessment was
made within the prescribed period, the period within which petitioner may collect
deficiency income taxes had already lapsed. Accordingly, the court cancelled Assessment
Notice No. 002523-89-6014 dated 12 April 1993.

The CTA Division ruled that the request for reconsideration did not suspend the running
of the prescriptive period to collect deficiency income tax. There was no valid waiver of
the statute of limitations, as the following infirmities were found: (1) there was no
conformity, either by respondent or his duly authorized representative; (2) there was no
date of acceptance to show that both parties had agreed on the Waiver before the
expiration of the prescriptive period; and (3) there was no proof that respondent was
furnished a copy of the Waiver. Applying jurisprudence and relevant BIR rulings, the
waiver was considered defective; thus, the period for collection of deficiency income tax
had already prescribed.

THE CTA EN BANC RULING5

The CTA En Banc affirmed the CTA First Division Decision dated 6 May 2008 and
Resolution dated 14 July 2008. The Waiver executed by respondent on 16 November
1993 could not be used by petitioner as a basis for extending the period of assessment and
collection, as there was no evidence that the latter had acted upon the waiver. Hence, the
unilateral act of respondent in executing said document did not produce any effect on the
prescriptive period for the assessment and collection of its deficiency tax. As to the issue
of estoppel, the court ruled that this measure could not be used against respondent, as it
was petitioner who had failed to act within the prescribed period on the protest asking for
a reconsideration of the assessment. ISSUES

In the present recourse, petitioner raises the following issues:

Whether or not petitioner’s right to collect the deficiency income tax of respondent for
taxable year 1989 has prescribed.

Whether or not respondent’s repeated requests and positive acts constitute "estoppel"
from setting up the defense of prescription under the NIRC.6

THE COURT’S RULING

We deny the Petition.

Petitioner mainly argues that in view of respondent’s execution of the Waiver of the
statute of limitations, the period to collect the assessed deficiency income taxes has not
yet prescribed.

The resolution of the main issue requires a factual determination of the proper execution
of the Waiver. The CTA Division has already made a factual finding on the infirmities of
the Waiver executed by respondent on 16 November 1993. The Court found that the
following requisites were absent:

(1) Conformity of either petitioner or a duly authorized representative;

(2) Date of acceptance showing that both parties had agreed on the Waiver before the
expiration of the prescriptive period; and

(3) Proof that respondent was furnished a copy of the Waiver.7

These findings are undisputed by petitioner. In fact, it cites BPI v. CIR8 to support its
contention that the approval of the CIR need not be express, but may be implied from the
acts of the BIR officials in response to the request for reinvestigation. Accordingly,
petitioner argues that the actual approval of the Waiver is apparent from the proceedings
that were additionally conducted indetermining the propriety of the subject assessment.9

We do not agree.

The statute of limitations on the right to assess and collect a tax means that once the
period established by law for the assessment and collection of taxes has lapsed, the
government’s corresponding right to enforce that action is barred by provision of law.

The period to assess and collect deficiency taxes may be extended only upon a written
agreement between the CIR and the taxpayer prior to the expiration of the three-year
prescribed period in accordance with Section 222 (b) of the NIRC. In relation to the
implementation of this provision, the CIR issued Revenue Memorandum Order (RMO)
No. 20-9010 on 4 April 1990 to provide guidelines on the proper execution of the Waiver
of the Statute of Limitations. In the execution of this waiver, the following procedures
should be followed:

1. The waiver must be in the form identified hereof. This form may be reproduced by
the Office concerned but there should be no deviation from such form. The phrase
"but not after __________ 19___" should be filled up x x x

2. x x x x

Soon after the waiver is signed by the taxpayer, the Commissioner of Internal
Revenue or the revenue official authorized by him, as hereinafter provided, shall sign
 the waiver indicating that the Bureau has accepted and agreed to the waiver. The date
of such acceptance by the Bureau should be indicated. x x x.

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

A. In the National Office

xxxx

3. Commissioner For tax cases involving more than 1M

B. In the Regional Offices

1. The Revenue District Officer with respect to tax cases still pending investigation
and the period toassess is about to prescribe regardless of amount.

xxxx

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

Furthermore, jurisprudence is replete with requisites of a valid waiver:

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but
not after ______ 19 ___", which indicates the expiry date of the period agreed upon
to assess/collect the tax after the regular three-year period of prescription, should be
filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of its
responsible officials. In case the authority is delegated by the taxpayer toa
representative, such delegation should be in writing and duly notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating
that the BIR has accepted and agreed to the waiver. The date of such acceptance by
the BIR should be indicated. However, before signing the waiver, the CIR or the
revenue official authorized by him must make sure that the waiver is in the
prescribed form, duly notarized, and executed by the taxpayer or his duly authorized
representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau
should be before the expiration of the period of prescription or before the lapse of the
period agreed upon in case a subsequent agreement is executed.
 6. The waiver must be executed in three copies, the original copy to be attached to
the docket of the case, the second copy for the taxpayer and the third copy for the
Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy
must be indicated in the original copy to show that the taxpayer was notified of the
acceptance of the BIR and the perfection of the agreement.11

In Philippine Journalist, Inc. v. Commissioner of Internal Revenue,12 the Court

categorically stated that a Waiver must strictly conform to RMO No. 20-90. The
mandatory nature of the requirements set forth in RMO No. 20-90, as ruled upon by this
Court, was recognized by the BIR itself in the latter’s subsequent issuances, namely,
Revenue Memorandum Circular (RMC) Nos. 6-200513 and 29-2012.14 Thus, the BIR
cannot claim the benefits of extending the period to collect the deficiency tax as a
consequence of the Waiver when, in truth it was the BIR’s inaction which is the
proximate cause of the defects of the Waiver. The BIR has the burden of ensuring
compliance with the requirements of RMO No. 20-90, as they have the burden of
securing the right of the government to assess and collect tax deficiencies. This right
would prescribe absent any showing of a valid extension of the period set by the law.

To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must
act on it, either by conforming to or by disagreeing with the extension. A waiver of the
statute of limitations, whether on assessment or collection, should not be construed asa
waiver of the right to invoke the defense of prescription but, rather, an agreement
between the taxpayer and the BIR to extend the period to a date certain, within which the
latter could still assess or collect taxes due. The waiver does not imply that the taxpayer
relinquishes the right to invoke prescription unequivocally.15

Although we recognize that the power of taxation is deemed inherent in order to support
the government, tax provisions are not all about raising revenue. Our legislature has
provided safeguards and remedies beneficial to both the taxpayer, to protect against
abuse; and the government, to promptly act for the availability and recovery ofrevenues.
A statute of limitations on the assessment and collection of internal revenue taxes was
adopted to serve a purpose that would benefit both the taxpayer and the government.

This Court has expounded on the significance of adopting a statute of limitation on tax
assessment and collection in this case:

The provision of law on prescription was adopted in our statute books upon
recommendation of the tax commissioner of the Philippines which declares:

Under the former law, the right of the Government to collect the tax does not prescribe.
However, in fairness to the taxpayer, the Government should be estopped from collecting
the tax where it failed to make the necessary investigation and assessment within 5 years
after the filing of the return and where it failed to collect the tax within 5 years from the
date of assessment thereof. Just as the government is interested in the stability of its
collection, so alsoare the taxpayers entitled to an assurance that they will not be subjected
to further investigation for tax purposes after the expiration of a reasonable period of
time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322)

The law prescribing a limitation of actions for the collection of the income tax is
beneficial both to the Government and to its citizens; to the Government because tax
officers would be obliged to act promptly in the making of assessment, and to citizens
because after the lapse of the period of prescription citizens would havea feeling of
security against unscrupulous tax agents who will always find an excuse to inspect the
books of taxpayers, not to determine the latter's real liability, but to take advantage of
every opportunity to molest peaceful, law-abiding citizens. Without such legal defense
taxpayers would furthermore be under obligation to always keep their books and keep
them open for inspection subject to harassment by unscrupulous tax agents. The law on
prescription being a remedial measure should be interpreted in a way conducive to
bringing about the beneficient purpose of affording protection to the taxpayer within the
contemplation of the Commission which recommends the approval of the law.16

Anent the second issue, we do not agree with petitioner that respondent is now barred
from setting up the defense of prescription by arguing that the repeated requests and
positive acts of the latter constituted estoppels, as these were attempts to persuade the
CIR to delay the collection of respondent’s deficiency income tax.

True, respondent filed a Protest and asked for a reconsideration and cancellation of the
assessment on 19 May 1993; however, it is uncontested that petitioner failed to act on that
Protest until 29 November 2001, when the latter required the submission of other
supporting documents. In fact, the Protest was denied only on 22 March 2004.

Petitioner’s reliance on CIR v. Suyoc17 (Suyoc) is likewise misplaced. In Suyoc, the BIR
was induced to extend the collection of tax through repeated requests for extension to pay
and for reinvestigation, which were all denied by the Collector. Contrarily, herein
respondent filed only one Protest over the assessment, and petitioner denied it 10 years
after. The subsequent letters of respondent cannot be construed as inducements to extend
the period of limitation, since the letters were intended to urge petitioner to act on the
Protest, and not to persuade the latter to delay the actual collection.

Petitioner cannot take refuge in BPI18 either, considering that respondent and BPI are
similarly situated.1a\^/phi1 Similar to BP I, this is a simple case in which the BIR
Commissioner and other BIR officials failed to act promptly in resolving and denying the
request for reconsideration filed by the taxpayer and in enforcing the collection on the
assessment. Both in BP I and in this case, the BIR presented no reason or explanation as
to why it took many years to address the Protest of the taxpayer. The statute of limitations
imposed by the Tax Code precisely intends to protect the taxpayer from prolonged and
unreasonable assessment and investigation by the BIR.19

Even assuming arguendo that the Waiver executed by respondent on 16 November 1993
is valid, the right of petitioner to collect the deficiency income tax for the year 1989
would have already prescribed by 2001 when the latter first acted upon the protest, more
so in 2004 when it finally denied the reconsideration. Records show that the Waiver
extends only for the period ending 30 June 1994, and that there were no further
extensions or waivers executed by respondent. Again, a waiver is not a unilateral act of
the taxpayer or the BIR, but is a bilateral agreement between two parties to extend the
period to a date certain.20

Since the Waiver in this case is defective and therefore invalid, it produces no effect; thus,
the prescriptive period for collecting deficiency income tax for taxable year 1989 was
never suspended or tolled. Consequently, the right to enforce collection based on
Assessment Notice No. 002523-89-6014 has already prescribed.

WHEREFORE, premises considered, the Petition is DENIED.

SO ORDERED.

G.R. No. 227544

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
TRANSITIONS OPTICAL PHILIPPINES, INC., Respondent

DECISION

LEONEN, J.:

Estoppel applies against a taxpayer who did not only raise at the earliest opportunity its
representative's lack of authority to execute two (2) waivers of defense of prescription,
but was also accorded, through these waivers, more time to comply with the audit
requirements of the Bureau of Internal Revenue. Nonetheless, a tax assessment served
beyond the extended period is void.

This Petition for Review on Certiorari1 seeks to nullify and set aside the June 7, 2016
Decision2 and September 26, 2016 Resolution3 of the Court of Tax Appeals En Banc in
CTA EB No. 1251. The Court of Tax Appeals En Banc affirmed its First Division's
September 1, 2014 Decision,4 cancelling the deficiency assessments against Transitions
Optical Philippines, Inc. (Transitions Optical).

On April 28, 2006, Transitions Optical received Letter of Authority No. 00098746 dated
March 23, 2006 from Revenue Region No. 9, San Pablo City, of the Bureau of Internal
Revenue. It was signed by then Officer-in-Charge- Regional Director Corazon C.
Pangcog and it authorized Revenue Officers Jocelyn Santos and Levi Visaya to examine
Transition Optical's books of accounts for internal revenue tax purposes for taxable year
2004.5

On October 9, 2007, the parties allegedly executed a Waiver of the Defense of

Prescription (First Waiver).6 In this supposed First Waiver, the prescriptive period for the
assessment of Transition Optical's internal revenue taxes for the year 2004 was extended
to June 20, 2008.7 The document was signed by Transitions Optical's Finance Manager,
Pamela Theresa D. Abad, and by Bureau of Internal Revenue's Revenue District Officer;
Myrna S. Leonida.8

This was followed by another supposed Waiver of the Defense of Prescription (Second
Waiver) dated June 2, 2008. This time, the prescriptive period was supposedly extended
to November 30, 2008.9

Thereafter, the Commissioner of Inte1nal Revenue, through Regional Director Jaime B.

Santiago (Director Santiago), issued a Preliminary Assessment Notice (PAN) dated
November 11, 2008, assessing Transitions Optical for its deficiency taxes for taxable year
2004. Transitions Optical filed a written protest on November 26, 2008.10

The Commissioner of Internal Revenue, again through Director Santiago, subsequently

issued against Transitions Optical a Final Assessment Notice (FAN) and a Formal Letter
of Demand (FLD) dated November 28, 2008 for deficiency income tax, value-added tax,
expanded withholding tax, and final tax for taxable year 2004 amounting to ₱l 9,
701,849.68.11

In its Protest Letter dated December 8, 2008 against the FAN, Transitions Optical alleged
that the demand for deficiency taxes had already prescribed at the time the FAN was
mailed on December 2, 2008. In its Supplemental Protest, Transitions Optical pointed out
that the FAN was void because the FAN indicated 2006 as the return period, but the
assessment covered calendar year 2004.12

Years later, the Commissioner of Internal Revenue, through Regional Director Jose N.
Tan, issued a Final Decision on the Disputed Assessment dated January 24, 2012, holding
Transitions Optical liable for deficiency taxes in the total amount of ₱l9,701,849.68 for
taxable year 2004, broken down as follows;

Tax Amount

Income Tax ₱3,153,371.04

Value-Added Tax 1,231,393.4 7

Expanded Withholding Tax 175,339.51

Final Tax on Royalty 14,026,247.90

Final Tax on Interest Income 1,115,497. 76

Total ₱19,701,849.6813

On March 16, 2012, Transitions Optical filed a Petition for Review before the Court of
Tax Appeals.14
In her Answer, the Commissioner of Internal Revenue interposed that Transitions
Optical's claim of prescription was inappropriate because the executed Waiver of the
Defense of Prescription extended the assessment period. She added that the posting of the
FAN and FLD was within San Pablo City Post Office's exclusive control. She averred
that she could not be faulted if the FAN and FLD were posted for mailing only on
December 2, 20081 since November 28, 2008 fell on a Friday and the next supposed
working day, December 1, 2008, was declared a Special Holiday.15

After trial and upon submission of the parties' memoranda, the First Division of the Court
of Tax Appeals (First Division) rendered a Decision on September 1, 2014.16 It held:

In summary therefore, the Court hereby finds the subject Waivers to be defective and
therefore void. Nevertheless, granting for the sake of argument that the subject Waivers
were validly executed, for failure of respondent however to present adequate supporting
evidence to prove that it issued the FAN and the FLD within the extended period agreed
upon in the 2nd Waiver, the subject assessment must be cancelled for being issued
beyond the prescriptive period provided by law to assess.

WHEREFORE, in light of the foregoing considerations, the instant Petition for Review is
hereby GRANTED. Accordingly, the Final Assessment Notice, Formal Letter of Demand
and Final Decision on Disputed Assessment finding petitioner Transitions Optical
Philippines, Inc. liable for deficiency income tax, deficiency expanded withholding tax,
deficiency value-added tax and deficiency final tax for taxable year 2004 in the total
amount of ₱19,701,849.68 are hereby CANCELLEU and SET ASIDE.

SO ORDER.ED.17 (Emphasis in the original)

The Commissioner of Internal Revenue filed a Motion for Reconsideration, which was
denied by the First Division in its Resolution18 dated November 7, 2014.

The Court of Tax Appeals En Banc affirmed the First Division Decision19 and
subsequently denied the Commissioner of Internal Revenue's Motion for
Reconsideration.20

Hence, this Petition was filed before this Court. Transitions Optical filed its Comment.21

Petitioner contends that "[t]he two Waivers executed by the parties on October 9, 2007
and June 2, 2008 substantially complied with the requirements of Sections 203 and 222 of
the [National Internal Revenue Code]."22 She adds that technical rules of procedure of
administrative bodies, such as those provided in Revenue Memorandum Order (RMO)
No. 20-90 issued on April 4, 1990 and Revenue Delegation Authority Order (RDAO) No.
05-01 issued on August 2, 2001, must be liberally applied to promote justice.23 At any
rate, petitioner maintains that respondent is estopped from questioning the validity of the
waivers since their execution was caused by the delay occasioned by respondent's own
failure to comply with the orders of the Bureau of Internal Revenue to submit documents
for audit and examination.24
Furthermore, petitioner argues that the assessment required to be issued within the three
(3)-year period provided in Sections 203 and 222 of the National Internal Revenue Code
refer to petitioner's actual issuance of the notice of assessment to the taxpayer or what is
usually known as PAN, and not the FAN issued in case the taxpayer files a protest.25

On the other hand, respondent contends that the Court of Tax Appeals properly found the
waivers defective, and therefore, void. It adds that the three (3)-year prescriptive period
for tax assessment primarily benefits the taxpayer, and any waiver of this period must be
strictly scrutinized in light of the requirements of the laws and rules.26 Respondent posits
that the requirements for valid waivers are not mere technical rules of procedure that can
be set aside.27

Respondent further asserts that it is not estopped from questioning the validity of the
waivers as it raised its objections at the earliest opportunity.28 Besides, the duty to ensure
compliance with the requirements of RMO No. 20-90 and RDAO No. 05-01, including
proper authorization of the taxpayer's representative, fell primarily on petitioner and her
revenue officers. Thus, petitioner came to court with unclean hands and cannot be
permitted to invoke the doctrine of estoppel.29 Respondent insists that there was no clear
showing that the signatories in the waivers were duly sanctioned to act on its behalf.30

Even assuming that the waivers were valid, respondent argues that the assessment would
still be void as the FAN was served only on December 4, 2008, beyond the extended
period of November 30, 2008.31 Contrary to petitioner's stance, respondent counters that
the assessment required to be served within the three (3)-year prescriptive period is the
FAN and FLD, not just the PAN.32 According to respondent, ''it is the FAN and FLD that
formally notifly] the taxpayer, and categorica1ly [demand] from him, that a deficiency
tax is due."33

The issues for this Court's resolution are:

First, whether or not the two (2) Waivers of the Defense of Prescription entered into by
the parties on October 9, 2007 and June 2, 2008 were valid; and

Second, whether or not the assessment of deficiency taxes against respondent Transitions
Optical Philippines, Inc. for taxable year 2004 had prescribed.

This Court denies the Petition. The Court of Tax Appeals committed no reversible error in
cancelling the deficiency tax assessments.

As a general rule, petitioner has three (3) years to assess taxpayers from the filing of the
return. Section 203 of the National Internal Revenue Code provides:

Section 203. Period of Limitation Upon Assessment m1d Collection. - Except as provided
in Section 222, internal revenue taxes shall be assessed within three (3) years after the
last day prescribed by law for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of such
period: Provided, That in a case where a return is filed beyond the period prescribed by
law, the three (3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day.

An exception to the rule of prescription is found in Section 222(b) and (d) of this Code,
viz:

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

Taxes. -

....

(b) If before the expiration of the time prescribed in Section 203 for the assessment of the
tax. both the Commissioner and the taxpayer have agreed in writing to its assessment
after such time, the tax may be assessed within the period agreed upon. The period so
agreed upon may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.

....

(d) Any internal revenue tax, which has been assessed within the period agreed upon as
provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a
proceeding in court within the period agreed upon in writing before the expiration of the
five (5) - year period. The period so agreed upon may be extended by subsequent written
agreements made before the expiration of the period previously agreed upon.

Thus, the period to assess and collect taxes may be extended upon the Commissioner of
Internal Revenue and the taxpayer's written agreement, executed before the expiration of
the three (3)-year period.

In this case, two (2) waivers were supposedly executed by the parties extending the
prescriptive periods for assessment of income tax, value-added tax, and expanded and
final withholding taxes to June 20, 2008, and then to November 30, 2008.

The Court of Tax Appeals, both its First Division and En Banc, declared as defective and
void the two (2) Waivers of the Defense of Prescription for non-compliance with the
requirements for the proper execution of a waiver as provided in RMO No. 20-90 and
RDAO No. 05-01. Specifically, the Court of Tax Appeals found that these Waivers were
not accompanied by a notarized written authority from respondent, authorizing the so-
called representatives to act on its behalf. Likewise, neither the Revenue District Office's
acceptance date nor respondent's receipt of the Bureau of Internal Revenue's acceptance
was indicated in either document.34
However, Presiding Justice Roman G. Del Rosario (Justice Del Rosario) in his Separate
Concurring Opinion35 in the Court of Tax Appeals June 7, 2016 Decision, found that
respondent is estopped from claiming that the waivers were invalid by reason of its own
actions, which persuaded the government to postpone the issuance of the assessment. He
discussed:

In the case at bar, respondent performed acts that induced the BIR to defer the issuance of
the assessment. Records reveal that to extend the BIR's prescriptive period to assess
respondent for deficiency taxes for taxable year 2004, respondent executed two (2)
waivers. The first Waiver dated October 2007 extended the period to assess until June 20,
2008, while the second Waiver, which was executed on June 2, 2008, extended the period
to assess the taxes until November 30, 2008. As a consequence of the issuance of said
waivers, petitioner delayed the issuance of the assessment.

Notably, when respondent filed its protest on November 26, 2008 against the Preliminary
Assessment Notice dated November 11, 2008, it merely argued that it is not liable for the
assessed deficiency taxes and did not raise as an issue the invalidity of the waiver and the
prescription of petitioner's right to assess the deficiency taxes. In its protest dated
December 8, 2008 against the FAN, respondent argued that the year being audited in the
FAN has already prescribed at the time such FAN was mailed on December 2, 2008.
Respondent even stated in that protest that it received the letter (referring to the FAN
dated November 28, 2008) on December 5, 2008, which accordingly is five (5) days after
the waiver it issued had prescribed. The foregoing narration plainly does not suggest that
respondent has any objection to its previously executed waivers. By the principle of
estoppel, respondent should not be allowed to question the validity of the waivers.36

In Commissioner of Internal Revenue v. Next Mobile, Inc. (formerly Nextel

Communications Phils., lnc.),37 this Comi recognized the doctrine of estoppel and upheld
the waivers when both the taxpayer and the Bureau of Internal Revenue were in part de
lie to. The taxpayer's act of impugning its waivers after benefitting from them was
considered an act of bad faith:

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 [Commissioner of Internal Revenue] 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.38

This Court found the taxpayer estopped from questioning the validity of its waivers:

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.39
(Emphasis in the original)

Parenthetically, this Court stated that when both parties continued to deal with each other
in spite of knowing and without rectifying the defects of the waivers, their 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."40

Estoppel similarly applies in this case.

Indeed, the Bureau of Internal Revenue was at fault when it accepted respondent's
Waivers despite their non-compliance with the requirements of RMO No. 20-90 and
RDAO No. 05-01.

Nonetheless, respondent's acts also show its implied admission of the validity of the
waivers. First, respondent never raised the invalidity of the Waivers at the earliest
opportunity, either in its Protest to the PAN, Protest to the FAN, or Supplemental Protest
to the FAN.41 It thereby impliedly recognized these Waivers' validity and its
representatives' authority to execute them. Respondent only raised the issue of these
Waivers' validity in its Petition for Review filed with the Court of Tax Appeals.42 In fact,
as pointed out by Justice Del Rosario, respondent's Protest to the FAN clearly recognized
the validity of the Waivers,43 when it stated:

This has reference to the Final Assessment Notice ("[F]AN") issued by your office, dated
November 28, 2008. The said letter was received by Transitions Optical Philippines[,]
Inc. (TOPI) on December 5, 2008, five days after the waiver we issued which was valid
until November 30, 2008 had prescribed.44 (Emphasis supplied)

Second, respondent does not dispute petitioner's assertion45 that respondent repeatedly
failed to comply with petitioner's notices, directing it to submit its books of accounts and
related records for examination by the Bureau of Internal Revenue. Respondent also
ignored the Bureau of Internal Revenue's request for an Informal Conference to discuss
other "discrepancies" found in the partial documents submitted. The Waivers were
necessary to give respondent time to fully comply with the Bureau of Internal Revenue
notices for audit examination and to respond to its Informal Conference request to discuss
the discrepancies.46 Thus, having benefitted from the Waivers executed at its instance,
respondent is estopped from claiming that they were invalid and that prescription had set
in.

II

But, even as respondent is estopped from questioning the validity of the Waivers, the
assessment is nonetheless void because it was served beyond the supposedly extended
period.

The First Division of the Court of Tax Appeals found that "the date indicated in the
envelope/mail matter containing the FAN and the FLD is December 4, 2008, which is
considered as the date of their mailing."47 Since the validity period of the second Waiver
is only until November 30, 2008, prescription had already set in at the time the FAN and
the FLD were actually mailed on December 4, 2008.

For lack of adequate supp01ting evidence, the Court of Tax Appeals rejected petitioner's
claim that the FAN and the FLD were already delivered to the post office for mailing on
November 28, 2008 but were actually processed by the post office on December 2, 2008,
since December 1, 2008 was declared a Special Holiday.48 The testimony of petitioner's
witness, Dario A. Consignado, Jr., that he brought the mail matter containing the FAN
and the FLD to the post office on November 28, 2008 was considered self-serving,
uncorroborated by any other evidence. Additionally, the Certification presented by
petitioner certifying that the FAN issued to respondent was delivered to its Administrative
Division for mailing on November 28, 2008 was found insufficient to prove that the
actual date of mailing was November 28, 2008.

This Court finds no clear and convincing reason to overturn these factual findings of the
Court of Tax Appeals.1âwphi1

Finally, petitioner's contention that the assessment required to be issued within the three
(3)-year or extended period provided in Sections 203 and 222 of the National Internal
Revenue Code refers to the PAN is untenable.

Considering the functions and effects of a PAN vis a vis a FAN, it is clear that the
assessment contemplated in Sections 203 and 222 of the National Internal Revenue Code
refers to the service of the FAN upon the taxpayer.

A PAN merely informs the taxpayer of the initial findings of the Bureau of Internal
Revenue.49 It contains the proposed assessment, and the facts, law, rules, and regulations
or jurisprudence on which the proposed assessment is based.50 It does not contain a
demand for payment but usually requires the taxpayer to reply within 15 days from
receipt. Otherwise, the Commissioner of Internal Revenue will finalize an assessment and
issue a FAN.

The PAN is a part of due process.51 It gives both the taxpayer and the Commissioner of
Internal Revenue the opportunity to settle the case at the earliest possible time without the
need for the issuance of a FAN.

On the other hand, a FAN contains not only a computation of tax liabilities but also a
demand for payment within a prescribed period.52 As soon as it is served, an obligation
arises on the part of the taxpayer concerned to pay the amount assessed and demanded. It
also signals the time when penalties and interests begin to accrue against the taxpayer.
Thus, the National Internal Revenue Code imposes a 25% penalty, in addition to the tax
due, in case the taxpayer fails to pay the deficiency tax within the time prescribed for its
payment in the notice of assessment.53 Likewise, an interest of 20% per annum, or such
higher rate as may be prescribed by rules and regulations, is to be collected from the date
prescribed for payment until the amount is fully paid.54 Failure to file an administrative
protest within 30 days from receipt of the FAN will render the assessment final,
executory, and demandable.

WHEREFORE, the Petition is DENIED. The June 7, 2016 Decision and September 26,
2016 Resolution of the Court of Tax Appeals En Banc in CTAEB No. 1251 are
AFFIRMED.

SO ORDERED.

G.R. No. L-19727 May 20, 1965

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PHOENIX ASSURANCE CO., LTD., respondent.

-----------------------------

G.R. No. L-19903 May 20, 1965

PHOENIX ASSURANCE, CO., LTD., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

Office of the Solicitor General for petitioner-respondent Commissioner of Internal

Revenue.
Sycip, Salazar, Luna & Associates and A. S. Monzon, B. V. Abela & J. M. Castillo for
respondent-petitioner Phoenix Assurance Co., Ltd.

BENGZON, J.P., J.:

From a judgment of the Court of Tax Appeals in C.T.A. Cases Nos. 305 and 543,
consolidated and jointly heard therein, these two appeals were taken. Since they involve
the same facts and interrelated issues, the appeals are herein decided together.

Phoenix Assurance Co., Ltd., a foreign insurance corporation organized under the laws of
Great Britain, is licensed to do business in the Philippines with head office in London.
Through its head office, it entered in London into worldwide reinsurance treaties with
various foreign insurance companies. It agree to cede a portion of premiums received on
original insurances underwritten by its head office, subsidiaries, and branch offices
throughout the world, in consideration for assumption by the foreign insurance
companies of an equivalent portion of the liability from such original
insurances.1äwphï1.ñët
Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd., ceded portions of the
premiums it earned from its underwriting business in the Philippines, as follows:

Year Amount Ceded

1952 P316,526.75
1953 P246,082.04
1954 P203,384.69

upon which the Commissioner of Internal Revenue, by letter of May 6, 1958, assessed the
following withholding tax:

Year Withholding Tax

1952 P 75,966.42
1953 59,059.68
1954 48,812.32

Tota
P183,838.42
l
=============

On April 1, 1951, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for
1950, claiming therein, among others, a deduction of P37,147.04 as net addition to
marine insurance reserve equivalent to 40% of the gross marine insurance premiums
received during the year. The Commissioner of Internal Revenue disallowed P11,772.57
of such claim for deduction and subsequently assessed against Phoenix Assurance Co.,
Ltd. the sum of P1,884.00 as deficiency income tax. The disallowance resulted from the
fixing by the Commissioner of the net addition to the marine insurance reserve at 100%
of the marine insurance premiums received during the last three months of the year. The
Commissioner assumed that "ninety and third, days are approximately the length of time
required before shipments reach their destination or before claims are received by the
insurance companies."

On April 1, 1953, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for
1952, declaring therein a deduction from gross income of P35,912.25 as part of the head
office expenses incurred for its Philippine business, computed at 5% on its gross
Philippine income.

On August 30, 1955 it amended its income tax return for 1952 by excluding from its
gross income the amount of P316,526.75 representing reinsurance premiums ceded to
foreign reinsurers and further eliminating deductions corresponding to the coded
premiums. The amended return showed an income tax due in the amount of P2,502.00.
The Commissioner of Internal Revenue disallowed P15,826.35 of the claimed deduction
for head office expenses and assessed a deficiency tax of P5,667.00 on July 24, 1958.

On April 30, 1954, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for
1953 and claimed therein a deduction from gross income of P33,070.88 as head office
expenses allocable to its Philippine business, equivalent to 5%, of its gross Philippine
income. On August 30, 1955 it amended its 1953 income tax return to exclude from its
gross income the amount of P246,082.04 representing reinsurance premiums ceded to
foreign reinsurers. At the same time, it requested the refund of P23,409.00 as overpaid
income tax for 1953. To avoid the prescriptive period provided for in Section 306 of the
Tax Code, it filed a petition for review on April 11, 1956 in the Court of Tax Appeals
praying for such refund. After verification of the amended income tax return the
Commissioner of Internal Revenue disallowed P12,304.10 of the deduction representing
head office expenses allocable to Philippine business thereby reducing the refundable
amount to P20,180.00.

On April 29, 1955, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for
1954 claiming therein, among others, a deduction from gross income of P99,624.75 as
head office expenses allocable to its Philippine business, computed at 5% of its gross
Philippine income. It also excluded from its gross income the amount of P203,384.69
representing reinsurance premiums ceded to foreign reinsurers not doing business in the
Philippines.

On August 1, 1958 the Bureau of Internal Revenue released the following assessment for
deficiency income tax for the years 1952 and 1954 against Phoenix Assurance Co., Ltd.:

1952
Net income per audited return P 12,511.61
Unallowable deduction & additional income:
Overclaimed Head Office expenses:
Amount
P 35,912.25
claimed . . . . . . . . . . . .
Amount
20,085.90 P 15,826.35
allowed . . . . . . . . . . . .

P 28,337.96
Net income per investigation

Tax due thereon P 5,667.00

==========
=
1954
 Net income per audited P160,320.21
Unallowable deduction & additional income:
Overclaimed Head Office expenses:
Amount
P29,624.73
claimed . . . . . . . . . . . .
Amount
19,455.50 10,16.23
allowed . . . . . . . . . . . .

P170,489.41
Net income per investigation

Tax due thereon P 39,737.00

Less: amount already assessed 36,890.00

P 2,847.00
DEFICIENCY TAX DUE
==========
=

The above assessment resulted from the disallowance of a portion of the deduction
claimed by Phoenix Assurance Co., Ltd. as head office expenses allocable to its business
in the Philippines fixed by the Commissioner at 5% of the net Philippine income instead
of 5% of the gross Philippine income as claimed in the returns.

Phoenix Assurance Co., Ltd. protested against the aforesaid assessments for withholding
tax and deficiency income tax. However, the Commissioner of Internal Revenue denied
such protest. Subsequently, Phoenix Assurance Co., Ltd. appealed to the Court of Tax
Appeals. In a decision dated February 14, 1962, the Court of Tax Appeals allowed in full
the decision claimed by Phoenix Assurance Co., Ltd. for 1950 as net addition to marine
insurance reserve; determined the allowable head office expenses allocable to Philippine
business to be 5% of the net income in the Philippines; declared the right of the
Commissioner of Internal Revenue to assess deficiency income tax for 1952 to have
prescribed; absolved Phoenix Assurance Co., Ltd. from payment of the statutory penalties
for non-filing of withholding tax return; and, rendered the following judgment:

WHEREFORE, petitioner Phoenix Assurance Company, Ltd. is hereby ordered to

pay the Commissioner of Internal Revenue the respective amounts of P75,966.42,
P59,059.68 and P48,812.32, as withholding tax for the years 1952, 1953 and 1954,
and P2,847.00 as income tax for 1954, or the total sum of P186,685.42 within thirty
(30) days from the date this decision becomes final. Upon the other hand, the
respondent Commissioner is ordered to refund to petitioner the sum of P20,180.00 as
overpaid income tax for 1953, which sum is to be deducted from the total sum of
 P186,685.42 due as taxes.

If any amount of the tax is not paid within the time prescribed above, there shall be
collected a surcharge of 5% of the tax unpaid, plus interest at the rate of 1% a month
from the date of delinquency to the date of payment, provided that the maximum
amount that may be collected as interest shall not exceed the amount corresponding
to a period of three (3) years. Without pronouncement as to costs.

Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue have appealed to
this Court raising the following issues: (1) Whether or not reinsurance premiums ceded to
foreign reinsurers not doing business in the Philippines pursuant to reinsurance contracts
executed abroad are subject to withholding tax; (2) Whether or not the right of the
Commissioner of Internal Revenue to assess deficiency income tax for the year 1952
against Phoenix Assurance Co., Ltd., has prescribed; (3) Whether or not the deduction of
claimed by the Phoenix Assurance Co., Ltd.as net addition to reserve for the year 1950 is
excessive; (4) Whether or not the deductions claimed by Phoenix Assurance Co., Ltd. for
head office expenses allocable to Philippine business for the years 1952, 1953 and 1954
are excessive.

The question of whether or not reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines pursuant to contracts executed abroad are income from
sources within the Philippines subject to withholding tax under Sections 53 and 54 of the
Tax Code has already been resolved in the affirmative in British Traders' Insurance Co.,
Ltd.v. Commisioner of Internal Revenue, L-20501, April 30, 1965. 1

We come to the issue of prescription. Phoenix Assurance Co., Ltd. filed its income tax
return for 1952 on April 1, 1953 showing a loss of P199,583.93. It amended said return
on August 30, 1955 reporting a tax liability of P2,502.00. On July 24, 1958, after
examination of the amended return, the Commissioner of Internal Revenue assessed
deficiency income tax in the sum of P5,667.00. The Court of Tax Appeals found the right
of the Commissioner of Internal Revenue barred by prescription, the same having been
exercised more than five years from the date the original return was filed. On the other
hand, the Commissioner of Internal Revenue insists that his right to issue the assessment
has not prescribed inasmuch as the same was availed of before the 5-year period provided
for in Section 331 of the Tax Code expired, counting the running of the period from
August 30, 1955, the date when the amended return was filed.

Section 331 of the Tax Code, which limits the right of the Commissioner of Internal
Revenue to assess income tax within five years from the Filipino of the income tax
return, states:

SEC. 331. Period of limitation upon assessment and collection. — Except as

provided in the succeeding section internal revenue taxes shall be assessed within
five years after the return was filed, and no proceeding in court without assessment
for the collection of such taxes shall be begun after the expiration of such period. For
the purposes of this section, a return filed before the last day prescribed by law for
 the filing thereof shall be considered as filed on such last day: Provided, That this
limitation shall not apply to cases already investigated prior to the approval of this
Code.

The question is: Should the running of the prescriptive period commence from the filing
of the original or amended return?

The Court of Tax Appears that the original return was a complete return containing
"information on various items of income and deduction from which respondent may
intelligently compute and determine the tax liability of petitioner, hence, the prescriptive
period should be counted from the filing of said original return. On the other hand, the
Commissioner of Internal Revenue maintains that:

"... the deficiency income tax in question could not possibly be determined, or
assessed, on the basis of the original return filed on April 1, 1953, for considering
that the declared loss amounted to P199,583.93, the mere disallowance of part of the
head office expenses could not probably result in said loss being completely wiped
out and Phoenix being liable to deficiency tax. Not until the amended return was
filed on August 30, 1955 could the Commissioner assess the deficiency income tax in
question."

Accordingly, he would wish to press for the counting of the prescriptive period from the
filing of the amended return.

To our mind, the Commissioner's view should be sustained. The changes and alterations
embodied in the amended income tax return consisted of the exclusion of reinsurance
premiums received from domestic insurance companies by Phoenix Assurance Co., Ltd.'s
London head office, reinsurance premiums ceded to foreign reinsurers not doing business
in the Philippines and various items of deduction attributable to such excluded
reinsurance premiums thereby substantially modifying the original return. Furthermore,
although the deduction for head office expenses allocable to Philippine business, whose
disallowance gave rise to the deficiency tax, was claimed also in the original return, the
Commissioner could not have possibly determined a deficiency tax thereunder because
Phoenix Assurance Co., Ltd. declared a loss of P199,583.93 therein which would have
more than offset such disallowance of P15,826.35. Considering that the deficiency
assessment was based on the amended return which, as aforestated, is substantially
different from the original return, the period of limitation of the right to issue the same
should be counted from the filing of the amended income tax return. From August 30,
1955, when the amended return was filed, to July 24, 1958, when the deficiency
assessment was issued, less than five years elapsed. The right of the Commissioner to
assess the deficiency tax on such amended return has not prescribed.

To strengthen our opinion, we believe that to hold otherwise, we would be paving the
way for taxpayers to evade the payment of taxes by simply reporting in their original
return heavy losses and amending the same more than five years later when the
Commissioner of Internal Revenue has lost his authority to assess the proper tax
thereunder. The object of the Tax Code is to impose taxes for the needs of the
Government, not to enhance tax avoidance to its prejudice.

We next consider Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 for
1950 representing net addition to reserve computed at 40% of the marine insurance
premiums received during the year. Treating said said deduction to be excessive, the
Commissioner of Internal Revenue reduced the same to P25,374.47 which is equivalent
to 100% of all marine insurance premiums received during the last months of the year.

Paragraph (a) of Section 32 of the Tax Code states:

SEC. 32. Special provisions regarding income and deductions of insurance

companies, whether domestic or foreign. — (a) Special deductions allowed to
insurance companies. — In the case of insurance companies, except domestic life
insurance companies and foreign life insurance companies doing business in the
Philippines, the net additions, if any, required by law to be made within the year to
reserve funds and the sums other than dividends paid within the year on policy and
annuity contracts may be deducted from their gross income: Provided, however, That
the released reserve be treated as income for the year of release.

Section 186 of the Insurance Law requires the setting up of reserves for liability on
marine insurance:

SEC. 186. ... Provided, That for marine risks the insuring company shall be required
to charge as the liability for reinsurance fifty per centum of the premiums written in
the policies upon yearly risks, and the full premiums written in the policies upon all
other marine risks not terminated (Emphasis supplied.)

The reserve required for marine insurance is determined on two bases: 50% of premiums
under policies on yearly risks and 100% of premiums under policies of marine risks not
terminated during the year. Section 32 (a) of the Tax Code quoted above allows the full
amount of such reserve to be deducted from gross income.

It may be noteworthy to observe that the formulas for determining the marine reserve
employed by Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue —
40% of premiums received during the year and 100% of premiums received during the
last three months of the year, respectively — do not comply with Section 186. Said
determination runs short of the requirement. For purposes of the Insurance Law, this
Court therefore cannot countenance the same. The reserve called for in Section 186 is a
safeguard to the general public and should be strictly followed not only because it is an
express provision but also as a matter of public policy. However, for income tax purposes
a taxpayer is free to deduct from its gross income a lesser amount, or not to claim any
deduction at all. What is prohibited by the income tax law is to claim a deduction beyond
the amount authorized therein.

Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 being less than the
amount required in Section 186 of the Insurance Law, the same cannot be and is not
excessive, and should therefore be fully allowed. *

We come now to the controversy on the taxpayer's claim for deduction on head office
expenses incurred during 1952, 1953, and 1954 allocable to its Philippine business
computed at 5% of its gross income in the Philippines The Commissioner of Internal
Revenue redetermined such deduction at 5% on Phoenix Assurance Co., Ltd's net income
thereby partially disallowing the latter's claim. The parties are agreed as to the percentage
— 5% — but differ as to the basis of computation. Phoenix Assurance Co. Lt. insists that
the 5% head office expenses be determined from the gross income, while the
Commissioner wants the computation to be made on the net income. What, therefore,
needs to be resolved is: Should the 5% be computed on the gross or net income?

The record shows that the gross income of Phoenix Assurance Co., Ltd. consists of
income from its Philippine business as well as reinsurance premiums received for its head
office in London and reinsurance premiums ceded to foreign reinsurance. Since the items
of income not belonging to its Philippine business are not taxable to its Philippine branch,
they should be excluded in determining the head office expenses allowable to said
Philippine branch. This conclusion finds support in paragraph 2, subsection (a), Section
30 of the Tax Code, quoted hereunder:

(2) Expenses allowable to non-resident alien individuals and foreign corporations. In

the case of a non-resident alien individual or a foreign corporation, the expenses
deductible are the, necessary expenses paid or incurred in carrying on any business or
trade conducted within the Philippines exclusively. (Emphasis supplied.)

Consequently, the deficiency assessments for 1952, 1953 and 1954, resulting from partial
disallowance of deduction representing head office expenses, are sustained.

Finally, the Commissioner of Internal Revenue assails the dispositive portion of the Tax
Court's decision limiting the maximum amount of interest collectible for deliquency of an
amount corresponding to a period of three years. He contends that since such limitation
was incorporated into Section 51 of the Tax Code by Republic Act 2343 which took effect
only on June 20, 1959, it must not be applied retroactively on withholding tax for the
years 1952, 1953 and 1954.

The imposition of interest on unpaid taxes is one of the statutory penalties for tax
delinquency, from the payments of which the Court of Tax Appeals absolved the Phoenix
Assurance Co., Ltd. on the equitable ground that the latter's failure to pay the withholding
tax was due to the Commissioner's opinion that no withholding tax was due.
Consequently, the taxpayer could be held liable for the payment of statutory penalties
only upon its failure to comply with the Tax Court's judgment rendered on February 14.
1962, after Republic Act 2343 took effect. This part of the ruling of the lower court ought
not to be disturbed.

WHEREFORE, the decision appealed from is modified, Phoenix Assurance Co., Ltd. is
hereby ordered to pay the Commissioner, of Internal Revenue the amount of P75,966.42,
P59,059.68 and P48,812.32 as withholding tax for the years 1952, 1953 and 1954,
respectively, and the sums of P5,667.00 and P2,847.00 as income tax for 1952 and 1954
or a total of P192,352.42. The Commissioner of Internal Revenue is ordered to refund to
Phoenix Assurance Co., Ltd. the amount of P20,180.00 as overpaid income tax for 1953,
which should be deducted from the amount of P192,352.42.

If the amount of P192,352.42 or a portion thereof is not paid within thirty (30) days from
the date this judgment becomes final, there should be collected a surcharge and interest as
provided for in Section 51(c) (2) of the Tax Code. No costs. It is so ordered.

G.R. No. L-29485 November 21, 1980

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF TAX
APPEALS, respondents.

TEEHANKEE, J.:

Before the Court is petitioner Commissioner of Internal Revenue's motion for

reconsideration of the Court's decision of April 8, 1976 wherein the Court affirmed in toto
the appealed decision of respondent Court of Tax Appeals, the dispositive portion of
which provides as follows:

WHEREFORE, the decision of the respondent Commissioner of Internal

Revenue assessing petitioner the amount of P758,687.04 as 25% surtax and
interest is reversed. Accordingly, said assessment of respondent for 1955 is
hereby cancelled and declared of no force and effect, Without pronouncement as
to costs.

This Court's decision under reconsideration held that the assessment made on February
21, 1961 by petitioner against respondent corporation (and received by the latter on
March 22, 1961) in the sum of P758,687.04 on its surplus of P2,758,442.37 for its fiscal
year ending September 30, 1955 fell under the five-year prescriptive period provided in
section 331 of the National Internal Revenue Code and that the assessment had, therefore,
been made after the expiration of the said five-year prescriptive period and was of no
binding force and effect .

Petitioner has urged that

A perusal of Sections 331 and 332(a) will reveal that they refer to a tax, the basis
 of which is required by law to be reported in a return such as for example,
income tax or sales tax. However, the surtax imposed by Section 25 of the Tax
Code is not one such tax. Accumulated surplus are never returned for tax
purposes, as there is no law requiring that such surplus be reported in a return for
purposes of the 25% surtax. In fact, taxpayers resort to all means and devices to
cover up the fact that they have unreasonably accumulated surplus.

Petitioner, therefore, submits that

As there is no law requiring taxpayers to file returns of their accumulated

surplus, it is obvious that neither Section 33 nor Section 332(a) of the Tax Code
applies in a case involving the 25% surtax imposed by Section 25 of the Tax
Code. ...

Petitioner cites the Court of Tax Appeals' ruling in the earlier case of United Equipment
& Supply Company vs. Commissioner of Internal Revenue (CTA Case No. 1795, October
30, 1971) which was appealed by petitioner taxpayer to this Court in G. R. No. L-35653
bearing the same title, which appeal was denied by this Court en banc for lack of merit as
per its Resolution of October 25, 1972, In said case, the tax court squarely ruled that the
provisions of sections 331 and 332 of the National Internal Revenue Code for prescriptive
periods of five 5 and ten (10) years after the filing of the return do not apply to the tax on
the taxpayer's unreasonably accumulated surplus under section 25 of the Tax Code since
no return is required to be filed by law or by regulation on such unduly ac cumulated
surplus on earnings, reasoning as follows:

In resisting the assessment amounting to P10,864.26 as accumulated earnings tax for

1957, petitioner also invoked the defense of prescription against the right of respondent to
assess the said tax. It is contended that since its income tax return for 1957 was filed in
1958, and with the clarification by respondent in his letter dated May 14, 1963, that the
amount sought to be collected was petitioner's surtax liability under Section 25 rather
than deficiency corporate income tax under Section 24 of the National Internal Revenue
Code, the assessment has already prescribed under Section 331 of the same Code.

Section 331 of the Revenue Code provides:

SEC. 331. Period of limitation upon assessment and collection. — Except as

provided in the succeeding section, internal revenue taxes shall be assessed
within five years after the return was filed, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of
such period. For the purpose of this section a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last
day; Provided, That this limitation shall not apply to cases already investigated
prior to the approval of this Code.

Obviously, Section 331 applies to, assessment of National Internal Revenue

Taxes which requires the filing of returns. A return, the filing of which is
necessary to start the running of tile five-year period for making an assessment,
must be one which is required for the particular tax. Consequently, it has been
held that the filing of an income tax return does not start the running of the
statute of limitation for assessment of the sales tax. (Butuan Sawmill, Inc. v.
Court of Tax Appeals, G.R. No. L-20601, Feb. 28, 1966, 16 SCRA 277).

Although petitioner filed an income tax return, no return was filed covering its
surplus profits which were improperly accumulated. In fact, no return could have
been filed, and the law could not possibly require, for obvious reasons, the filing
of a return covering unreasonable accumulation of corporate surplus profits. A
tax imposed upon unreasonable accumulation of surplus is in the nature of a
penalty. (Helvering v. National Grocery Co., 304 U.S. 282). It would not be
proper for the law to compel a corporation to report improper accumulation of
surplus. Accordingly, Section 331 limiting the right to assess internal revenue
taxes within five years from the date the return was filed or was due does not
apply.

Neither does Section 332 apply. Said Section provides:

SEC. 332 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 begun without assessment, at any time within
ten years after the discovery of the falsity, fraud, or omission.

(b) Where before the expiration of the time prescribed in the preceding
section for the assessment of the tax, both the Commissioner of Internal
Revenue and the taxpayer have consented in writing to its assessment
after such time, the tax may be assessed at any time prior to the
expiration of the period agreed upon. The period so agreed upon may be
extended by subsequent agreements in writing made before the
expiration of the period previously agreed upon.

(c) Where the assessment of any internal revenue tax has been made
within the period of limitation above-prescribed such tax may be
collected by distraint or levy by a proceeding in court, but only if begun
(1) within five years after the assessment of the tax, or (2) prior to the
expiration of any period for collection agreed upon in writing by the
Commissioner of Internal Revenue and the taxpayer before the
expiration of such five-year period. The period so agreed upon may be
extended by subsequent agreements in writing made before the
expiration of the period previously agreed upon.

It will be noted that Section 332 has reference to national internal revenue taxes
which require the filing of returns. This is implied, from the provision that the
ten-year period for assessment specified therein treats of the filing of a false or
 fraudulent return or of a failure to file a return. There can be no failure or
omission to file a return where no return is required to be filed by law or by
regulation. It is, therefore, our opinion that the ten-year period for making in
assessment under Section 332 does not apply to internal revenue taxes which do
not require the filing of a return.

It is well settled limitations upon the right of the government to assess and
collect taxes will not be presumed in the absence of clear legislation to the
contrary. The existence of a time limit beyond which the government may
recover unpaid taxes is purely dependent upon some express statutory provision,
(51 Am. Jur. 867; 10 Mertens Law of Federal Income Taxation, par. 57. 02.). It
follows that in the absence of express statutory provision, the right of the
government to assess unpaid taxes is imprescriptible. Since there is no express
statutory provision limiting the right of the Commissioner of Internal Revenue to
assess the tax on unreasonable accumulation of surplus provided in Section 25 of
the Revenue Code, said tax may be assessed at any time. (Emphasis supplied)

Such ruling was in effect upheld by this Court en banc upon its dismissal of the taxpayer's
appeal for lack of merit as above stated.

The Court is persuaded by the fundamental principle invoked by petitioner that

limitations upon the right of the government to assess and collect taxes will not be
presumed in the absence of clear legislation to the contrary and that where the
government has not by express statutory provision provided a limitation upon its right to
assess unpaid taxes, such right is imprescriptible.

The Court, therefore, reconsiders its ruling in its decision under reconsideration that the
right to assess and collect the assessment in question had prescribed after five years, and
instead rules that there is no such time limit on the right of the Commissioner of Internal
Revenue to assess the 25% tax on unreasonably accumulated surplus provided in section
25 of the Tax Code, since there is no express statutory provision limiting such right or
providing for its prescription. The underlying purpose of the additional tax in question on
a corporation's improperly accumulated profits or surplus is as set forth in the text of
section 25 of the Tax Code itself 1 to avoid the situation where a corporation unduly
retains its surplus instead of declaring and paving dividends to its shareholders or
members who would then have to pay the income tax due on such dividends received by
them. The record amply shows that respondent corporation is a mere holding company of
its shareholders through its mother company, a registered co-partnership then set up by
the individual shareholders belonging to the same family and that the prima facie
evidence and presumption set up by the Tax Code, therefore applied without having been
adequately rebutted by the respondent corporation.

Thus, Mr. Lamberto J. Cabral, the accountant of the corporation, testified before the court
as follows:

Atty. Garces
The investigation, Your Honor, shows that for the year 1955, the Ayala
Securities Corporation had 175,000 outstanding shares of stock and out
of these shares of Ayala Securities Corporation, the Ayala and Company
owned 174,996 shares of stock.

Q. Is that right, Mr. Cabral?

Atty. Ong

Objection, Your Honor, on the materiality of the question.

Judge Alvarez

What is the materiality of the question?

Atty. Garces

We want to prove to this honorable Court that Ayala Securities

Corporation is a holding or investment company, the parent company
being Ayala and Company.

Judge Alvarez

Witness may answer.

A. I think so; yes.

Q. And Ayala and Company's owned almost wholly by the Zobel

Family and the Ayala Family?

Atty. Ong

If Your Honor please, objection again on the materiality. What would

counsel for the respondent prove on this point?

Atty. Garces

Same purpose, Your If Honor to prove that Ayala Securities corporation

is a mere investment or holding company

Atty. Ong

What is the materiality of the case if it is a mere investment company. In

fact, we are here in court to prove the reasonableness or
unreasonableness of the accumulation of profit. I think counsel for the
respondent is trying to harp on presumption; but actually we will not be
 delving on presumption but on actual facts proving the reasonableness
of the accumulation based on actual evidence.

Judge Alvarez

In order to determine the reasonableness or unreasonableness, there

must be a basis. witness will have to answer the question.

A. Yes.

xxx xxx xxx

Q. As of September 30, 1955 when the Ayala Securities Corporation

tiled its income tax return, were the officers of the Ayala Securities
Corporation and the Ayala and Company housed in the same building?

A. Yes, sir; they were.

Q. And also are the employees of the Ayala Securities corporation and
the Ayala and Company the same - meaning that the employees of the
Ayala Securities Corporation are also the employees of the Ayala and
Company?

A. At the time, if I remember right, Ayala and Company was the

operating company and the employees were the employees of the Ayala
and Company; (t.s.n., pp. 32-37).

Another witness, Mr. Salvador J. Lorayes the Secretary and head of the Legal Department
of the corporation, also testified that:

Judge Alvarez questions

Q. May we know from you whether Ayala Securities corporation is an

affiliate of Ayala and Company?

A. Yes, Your honor.

Q. Do we understand from you that Ayala and Company is the mother

corporation of this affiliate?
 A. That is correct.

Q. And that the policy of Ayala Securities Corporation is practically

governed by the officers or partners of Ayala and company

A. They have a strong influence over the policy of Ayala Securities

Corporation.

Q. So that whatever is decided by the partners of Ayala and Company

for a certain investment or project would also be followed by Ayala
Securities Corporation?

A. If the project is assigned to Ayala Securities Corporation it will be

followed by Ayala Securities Corporation; if to another affiliate, no
(t.s.n., pp. 149-150). ...

Respondent corporation was therefore fully shown to fall under Revenue Regulation No.
2 implementing the provisions of the income tax law which provides on holding and
investment companies that

SEC. 20. Holding and Investment Companies. — A corporation having

practically no activities except holding property, and collecting the income
therefrom or investing therein, shall be considered a holding company within the
meaning of section 25.

Petitioner commissioner's plausible alternative contention is that even if the 25% surtax
were to be deemed subject to prescription, computed from the filing of the income tax
return in 1955, the intent to evade payment of the surtax is an inherent quality of the
violation and the return filed must necessarily partake of a false and/or fraudulent
character which would make applicable the 10-year prescriptive period provided in
section 332(a) of the Tax Code and since the assessment was made in 1961 (the sixth
year), the assessment was clearly within the 10-year prescriptive period. The Court sees
no necessity, however, for ruling on this point in view of its adherence to the ruling in the
earlier raise of United Equipment & Supply Co., supra, holding that the 25% surtax is not
subject to any statutory prescriptive period.

ACCORDINGLY, the Court's decision of April 8, 1976 is set aside and in lieu thereof,
judgment is hereby rendered ordering respondent corporation to pay the assessment in the
sum of P758,687.04 as 25% surtax on its unreasonably accumulated surplus, plus the 5%
surcharge and 1% monthly interest thereon, pursuant to section 51 (e) of the National
Internal Revenue Code, as amended by R. A. 2343. With Costs.

G.R. No. 170257 September 7, 2011

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 seeking to set aside the July 27,
2005 Decision1 and October 26, 2005 Resolution2 of the Court of Tax Appeals En Banc
(CTA-En Banc) in C.T.A. E.B. No. 83 entitled "Rizal Commercial Banking Corporation
v. Commissioner of Internal Revenue."

THE FACTS

Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation engaged in

general banking operations. It seasonably filed its Corporation Annual Income Tax
Returns for Foreign Currency Deposit Unit for the calendar years 1994 and 1995.3

On August 15, 1996, RCBC received Letter of Authority No. 133959 issued by then
Commissioner of Internal Revenue (CIR) Liwayway Vinzons-Chato, authorizing a
special audit team to examine the books of accounts and other accounting records for all
internal revenue taxes from January 1, 1994 to December 31, 1995.4

On January 23, 1997, RCBC executed two Waivers of the Defense of Prescription Under
the Statute of Limitations of the National Internal Revenue Code covering the internal
revenue taxes due for the years 1994 and 1995, effectively extending the period of the
Bureau of Internal Revenue (BIR) to assess up to December 31, 2000.5

Subsequently, on January 27, 2000, RCBC received a Formal Letter of Demand together
with Assessment Notices from the BIR for the following deficiency tax assessments:6

Particulars Basic Tax Interest Compromise Penalties Total

Deficiency Income Tax

1995 (ST-INC-95-0199-
₱ 252,150,988.01 ₱ 191,496,585.96 ₱ 25,000.00 ₱ 443,672,
2000)
1994 (ST-INC-94-0200-
216,478,397.90 207,819,261.99 25,000.00 424,322,
2000)
Deficiency Gross Receipts Tax
1995 (ST-GRT-95-0201-
13,697,083.68 12,428,696.21 2,819,745.52 28,945,
2000)
1994 (ST-GRT-94-0202-
2,488,462.38 2,755,716.42 25,000.00 5,269,
2000)
Deficiency Final Withholding Tax
1995 (ST-EWT-95-
64,365,610.12 58,757,866.78 25,000.00 123,148,
0203-2000)
1994 (ST-EWT-94-
53,058,075.25 59,047,096.34 25,000.00 112,130,
0204-2000)
Deficiency Final Tax on FCDU Onshore Income
1995 (ST-OT-95-0205-
81,508,718.20 61,901,963,.52 25,000.00 143,435,
2000)
1994 (ST-OT-94-0206-
34,429,503.10 33,052,322.98 25,000.00 67,506,
2000)
Deficiency Expanded Withholding Tax
1995 (ST-EWT-95-
5,051,415.22 4,583,640.33 113,000.00 9,748,
0207-2000)
1994 (ST-EWT-94-
4,482,740.35 4,067,626.31 78,200.00 8,628,
0208-2000)
Deficiency Documentary Stamp Tax
1995 (ST-DST1-95-
351,900,539.39 315,804,946.26 250,000.00 667,955,
0209-2000)
1995 (ST-DST2-95-
367,207,105.29 331,535,844.68 300,000.00 699,042,
0210-2000)
1994 (ST-DST3-94-
460,370,640.05 512,193,460.02 300,000.00 972,864,
0211-2000)
1994 (ST-DST4-94-
223,037,675.89 240,050,706.09 300,000.00 463,388,
0212-2000)

TOTALS ₱2,130,226,954.83 ₱2,035,495,733.89 ₱4,335,945.52 ₱4,170,058,

Disagreeing with the said deficiency tax assessment, RCBC filed a protest on February
24, 2000 and later submitted the relevant documentary evidence to support it. Much later
on November 20, 2000, it filed a petition for review before the CTA, pursuant to Section
228 of the 1997 Tax Code.7

On December 6, 2000, RCBC received another Formal Letter of Demand with

Assessment Notices dated October 20, 2000, following the reinvestigation it requested,
which drastically reduced the original amount of deficiency taxes to the following:8

Particulars Basic Tax Interest Compromise Penalties Total

Deficiency Income Tax

1995 (INC-95-000003) ₱ 374,348.45 ₱ 346,656.92 ₱ 721,
1994 (INC-94-000002) 1,392,366.28 1,568,605.52 2,960,
 Deficiency Gross Receipts Tax
1995 (GRT-95-000004) 2,000,926.96 3,322,589.63 ₱ 1,367,222.04 6,690,
1994 (GRT-94-000003) 138,368.61 161,872.32 300,
Deficiency Final Withholding Tax
1995 (FT-95-000005) 362,203.47 351,287.75 713,
1994 (FT-94-000004) 188,746.43 220,807.47 409,
Deficiency Final Tax on FCDU Onshore Income
1995 (OT-95-000006) 81,508,718.20 79,052,291.08 160,561,
1994 (OT-94-000005) 34,429,503.10 40,277,802.26 74,707,
Deficiency Expanded Withholding Tax
1995 (EWT-95-000004) 520,869.72 505,171.80 25,000.00 1,051,
1994 (EWT-94-000003) 297,949.95 348,560.63 25,000.00 671,
Deficiency Documentary Stamp Tax
1995 (DST-95-000006) 599,890.72 149,972.68 749,
1995 (DST2-95-
24,953,842.46 6,238,460.62 31,192,
000002)
1994 (DST-94-000005) 905,064.74 226,266.18 1,131,
1994 (DST2-94-
17,040,104.84 4,260,026.21 21,300,
000001)

TOTALS ₱ 164,712,903.44 ₱ 126,155,645.38 ₱ 12,291,947.73 ₱ 303,160,

On the same day, RCBC paid the following deficiency taxes as assessed by the BIR:9

Particulars 1994 1995 Total

Deficiency Income Tax ₱ 2,965,549.44 ₱ 722,236.11 ₱ 3,687,785.55
Deficiency Gross Receipts Tax 300,695.84 6,701,893.17 7,002,589.01
Deficiency Final Withholding Tax 410,174.44 714,682.02 1,124,856.46
Deficiency Expanded Withholding
672,490.14 1,052,753.48 1,725,243.62
Tax
Deficiency Documentary Stamp Tax 1,131,330.92 749,863.40 1,881,194.32
TOTALS ₱ 5,480,240.78 ₱ 9,941,428.18 ₱ 15,421,668.96

RCBC, however, refused to pay the following assessments for deficiency onshore tax and
documentary stamp tax which remained to be the subjects of its petition for review:10

Particulars 1994 1995 Total

Deficiency Final Tax on FCDU Onshore Income
Basic ₱ 34,429,503.10 ₱ 81,508,718.20 ₱ 115,938,221.30
Interest 40,277,802.26 79,052,291.08 119,330,093.34
Sub Total ₱ 74,707,305.36 ₱ 160,561,009.28 ₱ 235,268,314.64
Deficiency Documentary Stamp Tax
Basic ₱ 17,040,104.84 ₱ 24,953,842.46 ₱ 41,993,947.30
Surcharge 4,260,026.21 6,238,460.62 10,498,486.83
Sub Total ₱ 21,300,131.05 ₱ 31,192,303.08 ₱ 52,492,434.13
TOTALS ₱ 96,007,436.41 ₱ 191,753,312.36 ₱ 287,760,748.77

RCBC argued that the waivers of the Statute of Limitations which it executed on January
23, 1997 were not valid because the same were not signed or conformed to by the
respondent CIR as required under Section 222(b) of the Tax Code.11 As regards the
deficiency FCDU onshore tax, RCBC contended that because the onshore tax was
collected in the form of a final withholding tax, it was the borrower, constituted by law as
the withholding agent, that was primarily liable for the remittance of the said tax.12

On December 15, 2004, the First Division of the Court of Tax Appeals (CTA-First
Division) promulgated its Decision13 which partially granted the petition for review. It
considered as closed and terminated the assessments for deficiency income tax,
deficiency gross receipts tax, deficiency final withholding tax, deficiency expanded
withholding tax, and deficiency documentary stamp tax (not an industry issue) for 1994
and 1995.14 It, however, upheld the assessment for deficiency final tax on FCDU
onshore income and deficiency documentary stamp tax for 1994 and 1995 and ordered
RCBC to pay the following amounts plus 20% delinquency tax:15

Particulars 1994 1995 Total

Deficiency Final Tax on FCDU Onshore Income
Basic ₱ 22,356,324.43 ₱ 16,067,952.86 ₱ 115,938, 221.30
Interest 26,153,837.08 15,583,713.19 119,330,093.34
Sub Total 48,510,161.51 31,651,666.05 119,330,093.34
Deficiency Documentary Stamp Tax (Industry Issue)
Basic ₱ 17,040,104.84 ₱ 24,953,842.46 ₱ 41,993,947.30
Surcharge 4,260,026.21 6,238,460.62 10,498,486.83
Sub Total 21,300,131.05 31,192,303.08 52,492,434.13
TOTALS ₱ 69,810,292.56 ₱ 62,843,969.13 ₱ 171,822,527.47

Unsatisfied, RCBC filed its Motion for Reconsideration on January 21, 2005, arguing
that: (1) the CTA erred in its addition of the total amount of deficiency taxes and the
correct amount should only be ₱ 132,654,261.69 and not ₱ 171,822,527.47; (2) the CTA
erred in holding that RCBC was estopped from questioning the validity of the waivers;
(3) it was the payor-borrower as withholding tax agent, and not RCBC, who was liable to
pay the final tax on FCDU, and (4) RCBC’s special savings account was not subject to
documentary stamp tax.16

In its Resolution17 dated April 11, 2005, the CTA-First Division substantially upheld its
earlier ruling, except for its inadvertence in the addition of the total amount of deficiency
taxes. As such, it modified its earlier decision and ordered RCBC to pay the amount of ₱
132,654,261.69 plus 20% delinquency tax.18

RCBC elevated the case to the CTA-En Banc where it raised the following issues:

I.

Whether or not the right of the respondent to assess deficiency onshore tax and
documentary stamp tax for taxable year 1994 and 1995 had already prescribed when
it issued the formal letter of demand and assessment notices for the said taxable
years.

II.

Whether or not petitioner is liable for deficiency onshore tax for taxable year 1994
and 1995.

III.

Whether or not petitioner’s special savings account is subject to documentary stamp

tax under then Section 180 of the 1993 Tax Code.19

The CTA-En Banc, in its assailed Decision, denied the petition for lack of merit. It ruled
that by receiving, accepting and paying portions of the reduced assessment, RCBC bound
itself to the new assessment, implying that it recognized the validity of the waivers.20
RCBC could not assail the validity of the waivers after it had received and accepted
certain benefits as a result of the execution of the said waivers.21 As to the deficiency
onshore tax, it held that because the payor-borrower was merely designated by law to
withhold and remit the said tax, it would then follow that the tax should be imposed on
RCBC as the payee-bank.22 Finally, in relation to the assessment of the deficiency
documentary stamp tax on petitioner’s special savings account, it held that petitioner’s
special savings account was a certificate of deposit and, as such, was subject to
documentary stamp tax.23

Hence, this petition.

While awaiting the decision of this Court, RCBC filed its Manifestation dated July 22,
2009, informing the Court that this petition, relative to the DST deficiency assessment,
had been rendered moot and academic by its payment of the tax deficiencies on
Documentary Stamp Tax (DST) on Special Savings Account (SSA) for taxable years
1994 and 1995 after the BIR approved its applications for tax abatement.24

In its November 17, 2009 Comment to the Manifestation, the CIR pointed out that the
only remaining issues raised in the present petition were those pertaining to RCBC’s
deficiency tax on FCDU Onshore Income for taxable years 1994 and 1995 in the
aggregate amount of ₱ 80,161,827.56 plus 20% delinquency interest per annum. The CIR
prayed that RCBC be considered to have withdrawn its appeal with respect to the CTA-
En Banc ruling on its DST on SSA deficiency for taxable years 1994 and 1995 and that
the questioned CTA decision regarding RCBC’s deficiency tax on FCDU Onshore
Income for the same period be affirmed.25

THE ISSUES

Thus, only the following issues remain to be resolved by this Court:

Whether petitioner, by paying the other tax assessment covered by the waivers of the
statute of limitations, is rendered estopped from questioning the validity of the said
waivers with respect to the assessment of deficiency onshore tax.26

and

Whether petitioner, as payee-bank, can be held liable for deficiency onshore tax, which is
mandated by law to be collected at source in the form of a final withholding tax.27

THE COURT’S RULING

Petitioner is estopped from

questioning the validity of the waivers

RCBC assails the validity of the waivers of the statute of limitations on the ground that
the said waivers were merely attested to by Sixto Esquivias, then Coordinator for the
CIR, and that he failed to indicate acceptance or agreement of the CIR, as required under
Section 223 (b) of the 1977 Tax Code.28 RCBC further argues that the principle of
estoppel cannot be applied against it because its payment of the other tax assessments
does not signify a clear intention on its part to give up its right to question the validity of
the waivers.29

The Court disagrees.

Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that
"an admission or representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon." A party is precluded
from denying his own acts, admissions or representations to the prejudice of the other
party in order to prevent fraud and falsehood.30

Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of
the revised assessments issued within the extended period as provided for in the
questioned waivers, impliedly admitted the validity of those waivers. Had petitioner truly
believed that the waivers were invalid and that the assessments were issued beyond the
prescriptive period, then it should not have paid the reduced amount of taxes in the
revised assessment. RCBC’s subsequent action effectively belies its insistence that the
waivers are invalid. The records show that on December 6, 2000, upon receipt of the
revised assessment, RCBC immediately made payment on the uncontested taxes. Thus,
RCBC is estopped from questioning the validity of the waivers. To hold otherwise and
allow a party to gainsay its own act or deny rights which it had previously recognized
would run counter to the principle of equity which this institution holds dear.31

Liability for Deficiency

Onshore Withholding Tax

RCBC is convinced that it is the payor-borrower, as withholding agent, who is directly

liable for the payment of onshore tax, citing Section 2.57(A) of Revenue Regulations No.
2-98 which states:

(A) Final Withholding Tax. — Under the final withholding tax system the amount of
income tax withheld by the withholding agent is constituted as a full and final payment of
the income tax due from the payee on the said income. The liability for payment of the
tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to
withhold the tax or in case of under withholding, the deficiency tax shall be collected
from the payor/withholding agent. The payee is not required to file an income tax return
for the particular income. (Emphasis supplied)

The petitioner is mistaken.

Before any further discussion, it should be pointed out that RCBC erred in citing the
abovementioned Revenue Regulations No. 2-98 because the same governs collection at
source on income paid only on or after January 1, 1998. The deficiency withholding tax
subject of this petition was supposed to have been withheld on income paid during the
taxable years of 1994 and 1995. Hence, Revenue Regulations No. 2-98 obviously does
not apply in this case.

In Chamber of Real Estate and Builders’ Associations, Inc. v. The Executive Secretary,32
the Court has explained that the purpose of the withholding tax system is three-fold: (1)
to provide the taxpayer with a convenient way of paying his tax liability; (2) to ensure the
collection of tax, and (3) to improve the government’s cashflow. Under the withholding
tax system, the payor is the taxpayer upon whom the tax is imposed, while the
withholding agent simply acts as an agent or a collector of the government to ensure the
collection of taxes.33 1avvphi1
It is, therefore, indisputable that the withholding agent is merely a tax collector and not a
taxpayer, as elucidated by this Court in the case of Commissioner of Internal Revenue v.
Court of Appeals,34 to wit:

In the operation of the withholding tax system, the withholding agent is the payor, a
separate entity acting no more than an agent of the government for the collection of the
tax in order to ensure its payments; the payer is the taxpayer – he is the person subject to
tax imposed by law; and the payee is the taxing authority. In other words, the withholding
agent is merely a tax collector, not a taxpayer. Under the withholding system, however,
the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and
independent from the taxpayer, because the income tax is still imposed on and due from
the latter. The agent is not liable for the tax as no wealth flowed into him – he earned no
income. The Tax Code only makes the agent personally liable for the tax arising from the
breach of its legal duty to withhold as distinguished from its duty to pay tax since:

"the government’s cause of action against the withholding agent is not for the collection
of income tax, but for the enforcement of the withholding provision of Section 53 of the
Tax Code, compliance with which is imposed on the withholding agent and not upon the
taxpayer."35 (Emphases supplied)

Based on the foregoing, the liability of the withholding agent is independent from that of
the taxpayer.1âwphi1 The former cannot be made liable for the tax due because it is the
latter who earned the income subject to withholding tax. The withholding agent is liable
only insofar as he failed to perform his duty to withhold the tax and remit the same to the
government. The liability for the tax, however, remains with the taxpayer because the
gain was realized and received by him.

While the payor-borrower can be held accountable for its negligence in performing its
duty to withhold the amount of tax due on the transaction, RCBC, as the taxpayer and the
one which earned income on the transaction, remains liable for the payment of tax as the
taxpayer shares the responsibility of making certain that the tax is properly withheld by
the withholding agent, so as to avoid any penalty that may arise from the non-payment of
the withholding tax due.

RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the
payor-borrower as the withholding agent. As such, it is liable for payment of deficiency
onshore tax on interest income derived from foreign currency loans, pursuant to Section
24(e)(3) of the National Internal Revenue Code of 1993:

Sec. 24. Rates of tax on domestic corporations.

xxxx

(e) Tax on certain incomes derived by domestic corporations

xxxx
(3) Tax on income derived under the Expanded Foreign Currency Deposit System. –
Income derived by a depository bank under the expanded foreign currency deposit system
from foreign currency transactions with nonresidents, offshore banking units in the
Philippines, local commercial banks including branches of foreign banks that may be
authorized by the Central Bank to transact business with foreign currency depository
system units and other depository banks under the expanded foreign currency deposit
system shall be exempt from all taxes, except taxable income from such transactions as
may be specified by the Secretary of Finance, upon recommendation of the Monetary
Board to be subject to the usual income tax payable by banks: Provided, That interest
income from foreign currency loans granted by such depository banks under said
expanded system to residents (other than offshore banking units in the Philippines or
other depository banks under the expanded system) shall be subject to a 10% tax.
(Emphasis supplied)

As a final note, this Court has consistently held that findings and conclusions of the CTA
shall be accorded the highest respect and shall be presumed valid, in the absence of any
clear and convincing proof to the contrary.36 The CTA, as a specialized court dedicated
exclusively to the study and resolution of tax problems, has developed an expertise on the
subject of taxation.37 As such, its decisions shall not be lightly set aside on appeal, unless
this Court finds that the questioned decision is not supported by substantial evidence or
there is a showing of abuse or improvident exercise of authority on the part of the Tax
Court.38

WHEREFORE, the petition is DENIED.

SO ORDERED.

G.R. No. 184145 December 11, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
DASH ENGINEERING PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the 1997 Revised
Rules of Civil Procedure, assailing the July 17, 2008 Decision1 and the August 12, 2008
Resolution2 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 357 (C.T.A.
Case No. 7243) entitled "Commissioner of Internal Revenue v. Dash Engineering
Philippines, inc."

The Facts

Respondent Dash Engineering Philippines, Inc. (DEPJ) is a corporation duly registered

with the Securities and Exchange Commission, authorized to do business in the
Philippines and listed with the Philippine Economic Zone Authority as an ecozone IT
export enterprise.3 It is also a VAT-registered entity engaged in the export sales of
computer-aided engineering and design.4

Respondent filed its monthly and quarterly value-added tax (VAT) returns for the period
from January 1, 2003 to June 30, 2003.5 On August 9, 2004, it filed a claim for tax credit
or refund in the amount of P 2,149,684.88 representing unutilized input VAT attributable
to its zero-rated sales.6 Because petitioner Commissioner of Internal Revenue (CIR)
failed to act upon the said claim, respondent was compelled to file a petition for review
with the CTA on May 5, 2005.7

On October 4, 2007, the Second Division of the CTA rendered its Decision8 partially
granting respondent’s claim for refund or issuance of a tax credit certificate in the
reduced amount of P 1,147,683.78. On the matter of the timeliness of the filing of the
judicial claim, the Tax Court found that respondent’s claims for refund for the first and
second quarters of 2003 were filed within the two-year prescriptive period which is
counted from the date of filing of the return and payment of the tax due. Because DEPI
filed its amended quarterly VAT returns for the first and second quarters of 2003 on July
24, 2004, it had until July 24, 2006 to file its judicial claim. As such, its filing of a
petition for review with the CTA on April 26, 20059 was within the prescriptive period.10
Petitioner moved for reconsideration but the same was denied in a Resolution dated
January 3, 2008.11

Aggrieved, petitioner elevated the case to the CTA En Banc, where it argued that
respondent failed to show that (1) its purchases of goods and services were made in the
course of its trade and business, (2) the said purchases were properly supported by VAT
invoices and/or official receipts and other documents, and (3) that the claimed input VAT
payments were directly attributable to its zero-rated sales. Petitioner also averred that the
petition for review was filed out of time.12

The CTA En Banc in its Decision,13 dated July 17, 2008, upheld the decision of the CTA
Second Division, ruling that the judicial claim was filed on time because the use of the
word "may" in Section 112(D) (now subparagraph C) of the National Internal Revenue
Code (NIRC) indicates that judicial recourse within thirty (30) days after the lapse of the
120-day period is only directory and permissive and not mandatory and jurisdictional, as
long as the petition was filed within the two-year prescriptive period. The Tax Court
further reiterated that the two-year prescriptive period applies to both the administrative
and judicial claims. Petitioner’s motion for reconsideration was denied in the August 12,
2008 Resolution of the CTA.14

Hence, this petition.

The Issues

Petitioner raises the following grounds for the allowance of the petition:
I

The Court of Tax Appeals En Banc erred in holding that respondent’s judicial claim for
refund was filed within the prescriptive period provided under the Tax Code.

II

The Court of Tax Appeals En Banc erred in partially granting respondent’s claim for
refund despite the failure of the latter to substantiate its claim by sufficient documentary
proof.15

The Court’s Ruling

As to the first issue, petitioner argues that the judicial claim was filed out of time because
respondent failed to comply with the 30-day period referred to in Section 112(D) (now
subparagraph C) of the NIRC, citing the case of Commissioner of Internal Revenue v.
Aichi16 where the Court categorically held that compliance with the prescribed periods
in Section 112 is mandatory and jurisdictional. Respondent filed its administrative claim
for refund on August 9, 2004. The 120-day period within which the CIR should act on the
claim expired on December 7, 2004 without any action on the part of petitioner. Thus,
respondent only had 30 days from the lapse of the said period, or until January 6, 2005, to
file a petition for review with the CTA. The petition, however, was filed only on May 5,
2005.17 Petitioner further posits that the 30-day period within which to file an appeal
with the CTA is jurisdictional and failure to comply therewith would bar the appeal and
deprive the CTA of its jurisdiction to entertain the same.18

Conversely, respondent DEPI asserts that its petition was seasonably filed before the CTA
in keeping with the two-year prescriptive period provided for in Sections 204(c) and 229
of the NIRC.19 DEPI interprets Section 112, in relation to Section 229, to mean that the
120-day period is the time given to the CIR to decide the case. The taxpayer, on the other
hand, has the option of either appealing to the CTA the denial by the CIR of the claim for
refund within thirty (30) days from receipt of such denial and within the two-year
prescriptive period, or appealing an unacted claim to the CTA anytime after the expiration
of the 120-day period given to the CIR to resolve the administrative claim for as long as
the judicial claim is made within the two-year prescriptive period.20 Following
respondent’s reasoning, its filing of the judicial claim on April 26, 2005 was filed on time
because it was made after the lapse of the 120-day period and within the two-year period
referred to in Section 229.

The petition is meritorious.

Sec. 229 is inapplicable; two-year period in

Sec. 112 refers only to administrative claims

Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally
collected taxes:

Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit
Taxes. – The Commissioner may –

xxx

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refund their value upon proof of destruction. No
credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or refund within two (2) years after the payment
of the tax or penalty: Provided, however, That a return filed showing an overpayment
shall be considered as a written claim for credit or refund.

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding

shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, or of any sum alleged to have
been excessively or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment xxx. (Emphases supplied)

This Court has previously made a pronouncement as to the inapplicability of Section 229
of the NIRC to claims for excess input VAT. In the recently decided case of
Commissioner of Internal Revenue v. San Roque Power Corporation,21 the Court made a
lengthy disquisition on the nature of excess input VAT, clarifying that "input VAT is not
‘excessively’ collected as understood under Section 229 because at the time the input
VAT is collected the amount paid is correct and proper."22 Hence, respondent cannot
advance its position by referring to Section 229 because Section 112 is the more specific
and appropriate provision of law for claims for excess input VAT.

Section 112(A) also provides for a two-year period for filing a claim for refund, to wit:

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

(A) Zero-rated or Effectively Zero-rated Sales. – Any VATregistered person, whose sales
are zero-rated or effectively zerorated 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

xxx

As explained in San Roque, however, the two-year prescriptive period referred to in

Section 112(A) applies only to the filing of administrative claims with the CIR and not to
the filing of judicial claims with the CTA. In other words, for as long as the
administrative claim is filed with the CIR within the two-year prescriptive period, the 30-
day period given to the taxpayer to file a judicial claim with the CTA need not fall in the
same two-year period.

At any rate, respondent’s compliance with the two-year prescriptive period under Section
112(A) is not an issue. What is being questioned in this case is DEPI’s failure to observe
the requisite 120+30-day period as mandated by Section 112(C) of the NIRC.

120+30 day period under Sec. 112 is mandatory and jurisdictional

Section 112(D) (now subparagraph C) of the NIRC provides that:

Sec. 112. Refunds or Tax Credits of Input Tax

xxx

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

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

Petitioner is entirely correct in its assertion that compliance with the periods provided for
in the abovequoted provision is indeed mandatory and jurisdictional, as affirmed in this
Court’s ruling in San Roque, where the Court En Banc settled the controversy
surrounding the application of the 120+30-day period provided for in Section 112 of the
NIRC and reiterated the Aichi doctrine that the 120+30-day period is mandatory and
jurisdictional. Nonetheless, the Court took into account the issuance by the Bureau of
Internal Revenue (BIR) of BIR Ruling No. DA-489-03 which misled taxpayers by
explicity stating that taxpayers may file a petition for review with the CTA even before
the expiration of the 120-day period given to the CIR to decide the administrative claim
for refund. Even though observance of the periods in Section 112 is compulsory and
failure to do so will deprive the CTA of jurisdiction to hear the case, such a strict
application will be made from the effectivity of the Tax Reform Act of 1997 on January 1,
1998 until the present, except for the period from December 10, 2003 (the issuance of the
erroneous BIR ruling) to October 6, 2010 (the promulgation of Aichi), during which
taxpayers need not wait for the lapse of the 120+30- day period before filing their judicial
claim for refund.

The case at bench, however, does not involve the issue of premature filing of the petition
for review with the CTA. Rather, this petition seeks the denial of DEPI’s claim for refund
for having been filed late or after the expiration of the 30-day period from the denial by
the CIR or failure of the CIR to make a decision within 120 days from the submission of
the documents in support of respondent’s administrative claim.

In San Roque, one of the respondents similarly filed its petition for review with the CTA
well after the 120+30-day period. In denying the taxpayer’s claim for refund, this Court
explained that:

Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late
filing.1âwphi1 Philex did not file any petition with the CTA within the 120-day period.
Philex did not also file any petition with the CTA within 30 days after the expiration of
the 120-day period. Philex filed its judicial claim long after the expiration of the 120-day
period, in fact 426 days after the lapse of the 120-day period. In any event, whether
governed by jurisprudence before, during or after the Atlas case, Philex’s judicial claim
will have to be rejected because of late filing. Whether the two-year prescriptive period is
counted from the date of payment of the output VAT following the Atlas doctrine, or from
the close of the taxable quarter when the sales attributable to the input VAT were made
following the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably filed
late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The
inaction of the Commissioner on Philex’s claim during the 120-day period is, by express
provision of law, "deemed a denial" of Philex’s claim. Philex had 30 days from the
expiration of the 120-day period to file its judicial claim with the CTA. Philex’s failure to
do so rendered the "deemed a denial" decision of the Commissioner final and
inappealable. The right to appeal to the CTA from a decision or "deemed a denial"
decision of the Commissioner is merely a statutory privilege, not a constitutional right.
The exercise of such statutory privilege requires strict compliance with the conditions
attached by the statute for its exercise. Philex failed to comply with the statutory
conditions and must thus bear the consequences.23 (Emphases supplied)

Therefore, in accordance with San Roque, respondent's judicial claim for refund must be
denied for having been filed late. Although respondent filed its administrative claim with
the BIR on August 9, 2004 before the expiration of the two-year period in Section l
12(A), it undoubtedly failed to comply with the 120+ 30-day period in Section l l 2(D)
(now subparagraph C) which requires that upon the inaction of the CIR for 120 days after
the submission of the documents in support of the claim, the taxpayer has to file its
judicial claim within 30 days after the lapse of the said period. The 120 days granted to
the CIR to decide the case ended on December 7, 2004. Thus, DEPI had 30 days
therefrom, or until January 6, 2005, to file a petition for review with the CTA.
Unfortunately, DEPI only sought judicial relief on May 5, 2005 when it belatedly filed its
petition to the CT A, despite having had ample time to file the same, almost four months
after the period allowed by law. As a consequence of DEPI's late filing, the CTA did not
properly acquire jurisdiction over the claim.

The Court has held time and again that taxes are the lifeblood of the government and,
consequently, tax laws must be faithfully and strictly implemented as they are not
intended to be liberally construed.24 Hence, We are left with no other recourse but to
deny respondent's judicial claim for refund for non-compliance with the provisions of
Section 112 of the NIRC.

WHEREFORE, the petition is GRANTED. The July 17, 2008 Decision and the August
12, 2008 Resolution of the CTA En Banc in C.T.A. EB No. 357 (C.T.A. Case No. 7243)
are hereby REVERSED and SET ASIDE. Respondent DEPI's judicial claim for refund or
tax credit through its petition for review before the CTA is DENIED.

SO ORDERED.

G.R. No. 178697 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the
July 5, 2007 Resolution of the Court of Tax Appeals – En Banc1 (CTA-EB), in C.T.A. EB
No. 90, affirming the October 26, 2004 Decision of the CTA-First Division2 which, in
turn, partially granted the petition for review of respondent Sony Philippines, Inc. (Sony).
The CTA-First Division decision cancelled the deficiency assessment issued by petitioner
Commissioner of Internal Revenue (CIR) against Sony for Value Added Tax (VAT) but
upheld the deficiency assessment for expanded withholding tax (EWT) in the amount of
₱1,035,879.70 and the penalties for late remittance of internal revenue taxes in the
amount of ₱1,269, 593.90.3

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734)
authorizing certain revenue officers to examine Sony’s books of accounts and other
accounting records regarding revenue taxes for "the period 1997 and unverified prior
years." On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and
penalties was issued by the CIR which Sony protested. Thereafter, acting on the protest,
the CIR issued final assessment notices, the formal letter of demand and the details of
discrepancies.4 Said details of the deficiency taxes and penalties for late remittance of
internal revenue taxes are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due P 7,958,700.00
Add: Penalties
3,157,314.4
Interest up to 3-31-2000 P
1
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX

(EWT)
(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14
 LATE REMITTANCE OF FINAL WITHHOLDING
TAX
(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
1,729,690.7
Surcharge P
1
Interest up to 3-31-2000 508,783.07
Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

15,895,632.65
GRAND TOTAL P
5

Sony sought re-evaluation of the aforementioned assessment by filing a protest on

February 2, 2000. Sony submitted relevant documents in support of its protest on the 16th
of that same month.6

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the
said supporting documents to the CIR, Sony filed a petition for review before the CTA.7

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the
subsidized advertising expense paid by Sony which was duly covered by a VAT invoice
resulted in an input VAT credit. As regards the EWT, the CTA-First Division maintained
the deficiency EWT assessment on Sony’s motor vehicles and on professional fees paid
to general professional partnerships. It also assessed the amounts paid to sales agents as
commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue
Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT assessment
on rental expense since it found that the total rental deposit of ₱10,523,821.99 was
incurred from January to March 1998 which was again beyond the coverage of LOA
19734. Except for the compromise penalties, the CTA-First Division also upheld the
penalties for the late payment of VAT on royalties, for late remittance of final withholding
tax on royalty as of December 1997 and for the late remittance of EWT by some of
Sony’s branches.8 In sum, the CTA-First Division partly granted Sony’s petition by
cancelling the deficiency VAT assessment but upheld a modified deficiency EWT
assessment as well as the penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent

is ORDERED to CANCEL and WITHDRAW the deficiency assessment for value-added
tax for 1997 for lack of merit. However, the deficiency assessments for expanded
withholding tax and penalties for late remittance of internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded

withholding tax in the amount of ₱1,035,879.70 and the following penalties for late
remittance of internal revenue taxes in the sum of ₱1,269,593.90:

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section
249(C)(3) of the 1997 Tax Code.

SO ORDERED.9

The CIR sought a reconsideration of the above decision and submitted the following
grounds in support thereof:

A. The Honorable Court committed reversible error in holding that petitioner is not
liable for the deficiency VAT in the amount of ₱11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission
expense in the amount of P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the withholding
tax assessment with respect to the 5% withholding tax on rental deposit in the
 amount of ₱10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of
final withholding tax on royalties covering the period January to March 1998 was
filed on time.10

On April 28, 2005, the CTA-First Division denied the motion for
reconsideration.1avvphi1 Unfazed, the CIR filed a petition for review with the CTA-EB
raising identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;

2. Whether or not the commission expense in the amount of ₱2,894,797.00 should be

subjected to 10% withholding tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax
on rental deposit in the amount of ₱10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on royalties covering the
period January to March 1998 was filed outside of time.11

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB
dismissed CIR’s petition on May 17, 2007. CIR’s motion for reconsideration was denied
by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the very same
grounds it raised before the CTA-First Division and the CTA-EB. The said grounds are
reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE

FOR DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE

AMOUNT OF PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION

EXPENSE IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED
TO A WITHHOLDING TAX OF 5% INSTEAD OF THE 10% TAX RATE.
 B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH
RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE
AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX
ON ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998 WAS
FILED ON TIME.12

Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The
CIR subsequently filed a manifestation informing the Court that it would no longer file a
reply. Thus, on December 3, 2008, the Court resolved to give due course to the petition
and to decide the case on the basis of the pleadings filed.13

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior
years," should be understood to mean the fiscal year ending in March 31, 1998.14 The
Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given
to the appropriate revenue officer assigned to perform assessment functions. It empowers
or enables said revenue officer to examine the books of account and other accounting
records of a taxpayer for the purpose of collecting the correct amount of tax.15 The very
provision of the Tax Code that the CIR relies on is unequivocal with regard to its power
to grant authority to examine and assess a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. –

(A)Examination of Returns and Determination of tax Due. – After a return has been filed
as required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of the
correct amount of tax: Provided, however, That failure to file a return shall not prevent
the Commissioner from authorizing the examination of any taxpayer. x x x [Emphases
supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an
examination or assessment. Equally important is that the revenue officer so authorized
must not go beyond the authority given. In the absence of such an authority, the
assessment or examination is a nullity.

As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For
said reason, the CIR acting through its revenue officers went beyond the scope of their
authority because the deficiency VAT assessment they arrived at was based on records
from January to March 1998 or using the fiscal year which ended in March 31, 1998. As
pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR knew
which period should be covered by the investigation. Thus, if CIR wanted or intended the
investigation to include the year 1998, it should have done so by including it in the LOA
or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the
phrase "and unverified prior years," violated Section C of Revenue Memorandum Order
No. 43-90 dated September 20, 1990, the pertinent portion of which reads:

3. A Letter of Authority should cover a taxable period not exceeding one taxable year.
The practice of issuing L/As covering audit of "unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the other
periods or years shall be specifically indicated in the L/A.16 [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that
as it may, the CIR’s argument, that Sony’s advertising expense could not be considered as
an input VAT credit because the same was eventually reimbursed by Sony International
Singapore (SIS), is also erroneous.

The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the
former never incurred any advertising expense. As a result, Sony is not entitled to a tax
credit. At most, the CIR continues, the said advertising expense should be for the account
of SIS, and not Sony.17

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed
by the CTA-EB, Sony’s deficiency VAT assessment stemmed from the CIR’s
disallowance of the input VAT credits that should have been realized from the advertising
expense of the latter.18 It is evident under Section 11019 of the 1997 Tax Code that an
advertising expense duly covered by a VAT invoice is a legitimate business expense. This
is confirmed by no less than CIR’s own witness, Revenue Officer Antonio Aluquin.20
There is also no denying that Sony incurred advertising expense. Aluquin testified that
advertising companies issued invoices in the name of Sony and the latter paid for the
same.21 Indubitably, Sony incurred and paid for advertising expense/ services. Where the
money came from is another matter all together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from SIS was
income and, thus, taxable. In support of this, the CIR cited a portion of Sony’s protest
filed before it:

The fact that due to adverse economic conditions, Sony-Singapore has granted to our
client a subsidy equivalent to the latter’s advertising expenses will not affect the validity
of the input taxes from such expenses. Thus, at the most, this is an additional income of
our client subject to income tax. We submit further that our client is not subject to VAT on
the subsidy income as this was not derived from the sale of goods or services.22
Insofar as the above-mentioned subsidy may be considered as income and, therefore,
subject to income tax, the Court agrees. However, the Court does not agree that the same
subsidy should be subject to the 10% VAT. To begin with, the said subsidy termed by the
CIR as reimbursement was not even exclusively earmarked for Sony’s advertising
expense for it was but an assistance or aid in view of Sony’s dire or adverse economic
conditions, and was only "equivalent to the latter’s (Sony’s) advertising expenses."

Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties. –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, value-added tax equivalent to ten percent
(10%) of the gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may
be levied. Certainly, there was no such sale, barter or exchange in the subsidy given by
SIS to Sony. It was but a dole out by SIS and not in payment for goods or properties sold,
bartered or exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that
services rendered for a fee even on reimbursement-on-cost basis only and without
realizing profit are also subject to VAT. The case, however, is not applicable to the present
case. In that case, COMASERCO rendered service to its affiliates and, in turn, the
affiliates paid the former reimbursement-on-cost which means that it was paid the cost or
expense that it incurred although without profit. This is not true in the present case. Sony
did not render any service to SIS at all. The services rendered by the advertising
companies, paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just
gave assistance to Sony in the amount equivalent to the latter’s advertising expense but
never received any goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sony’s commission

expense, the CIR insists that said deficiency EWT assessment is subject to the ten percent
(10%) rate instead of the five percent (5%) citing Revenue Regulation No. 2-98 dated
April 17, 1998.24 The said revenue regulation provides that the 10% rate is applied when
the recipient of the commission income is a natural person. According to the CIR, Sony’s
schedule of Selling, General and Administrative expenses shows the commission expense
as "commission/dealer salesman incentive," emphasizing the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division
is based on Section 1(g) of Revenue Regulations No. 6-85 which provides:

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs,
insurance, real estate and commercial brokers and agents of professional entertainers –
five per centum (5%).25
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-
First Division, held:

x x x, commission expense is indeed subject to 10% withholding tax but payments made
to broker is subject to 5% withholding tax pursuant to Section 1(g) of Revenue
Regulations No. 6-85. While the commission expense in the schedule of Selling, General
and Administrative expenses submitted by petitioner (SPI) to the BIR is captioned as
"commission/dealer salesman incentive" the same does not justify the automatic
imposition of flat 10% rate. As itemized by petitioner, such expense is composed of
"Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of
P2,894,797.00.26

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision.
Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended by Revenue
Regulations No. 12-94, which was the applicable rule during the subject period of
examination and assessment as specified in the LOA. Revenue Regulations No. 2-98,
cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the
present case. Besides, the withholding tax on brokers and agents was only increased to
10% much later or by the end of July 2001 under Revenue Regulations No. 6-2001.27
Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on
the deficiency EWT assessment on the rental deposit. According to their findings, Sony
incurred the subject rental deposit in the amount of ₱10,523,821.99 only from January to
March 1998. As stated earlier, in the absence of the appropriate LOA specifying the
coverage, the CIR’s deficiency EWT assessment from January to March 1998, is not
valid and must be disallowed.

Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its
FWT on royalties (i) as of December 1997; and (ii) for the period from January to March
1998. Again, the Court agrees with the CTA-First Division when it upheld the CIR with
respect to the royalties for December 1997 but cancelled that from January to March
1998.

The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections
2.57.4 and 2.58(A)(2)(a)29 of Revenue Regulations No. 2-98, Sony should also be made
liable for the FWT on royalties from January to March of 1998. At the same time, it
downplays the relevance of the Manufacturing License Agreement (MLA) between Sony
and Sony-Japan, particularly in the payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as
the payment of final tax on royalty. Based on the same, Sony is required to deduct and
withhold final taxes on royalty payments when the royalty is paid or is payable. After
which, the corresponding return and remittance must be made within 10 days after the
end of each month. The question now is when does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of
royalty payments were agreed upon:

(5)Within two (2) months following each semi-annual period ending June 30 and
December 31, the LICENSEE shall furnish to the LICENSOR a statement, certified by an
officer of the LICENSEE, showing quantities of the MODELS sold, leased or otherwise
disposed of by the LICENSEE during such respective semi-annual period and amount of
royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay the royalty
hereunder to the LICENSOR concurrently with the furnishing of the above statement.30

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-
annual period which ends in June 30 and December 31. However, the CTA-First Division
found that there was accrual of royalty by the end of December 1997 as well as by the
end of June 1998. Given this, the FWTs should have been paid or remitted by Sony to the
CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the CTA-First
Division and the CTA-EB in ruling that the FWT for the royalty from January to March
1998 was seasonably filed. Although the royalty from January to March 1998 was well
within the semi-annual period ending June 30, which meant that the royalty may be
payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid
on or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus,
when Sony remitted the same on July 8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.