TAXATION 2 (Atty.
Percy Valsan Jun Donalvo) 1
ORGANIZATION AND FUNCTION
POWERS OF THE CIR
DEFINITIONS
REVENUE BULLETINS
CIR v. FORTUNE TOBACCO
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. Nos. 167274-75               July 21, 2008
COMMISSIONER OF INTERNAL REVENUE, Petitioner,  Twelve (₱12.00) per pack;
vs.
FORTUNE TOBACCO CORPORATION, Respondent.
DECISION
TINGA, J.:
Simple and uncomplicated is the central issue involved, yet
whopping is the amount at stake in this case.
After much wrangling in the Court of Tax Appeals (CTA) and the
Court of Appeals, Fortune Tobacco Corporation (Fortune Tobacco)
was granted a tax refund or tax credit representing specific taxes
erroneously collected from its tobacco products. The tax refund is
being re-claimed by the Commissioner of Internal Revenue
(Commissioner) in this petition.
The following undisputed facts, summarized by the Court of
Appeals, are quoted in the assailed Decision 1 dated 28 September
2004:
CAG.R. SP No. 80675
xxxx
Petitioner2 is a domestic corporation duly organized and existing
under and by virtue of the laws of the Republic of the Philippines,
with principal address at Fortune Avenue, Parang, Marikina City.
Petitioner is the manufacturer/producer of, among others, the
following cigarette brands, with tax rate classification based on net
retail price prescribed by Annex "D" to R.A. No. 4280, to wit:
(List Deleted)
Immediately prior to January 1, 1997, the above-mentioned cigarette
brands were subject to ad valorem tax pursuant to then Section 142
of the Tax Code of 1977, as amended. However, on January 1,
1997, R.A. No. 8240 took effect whereby a shift from the ad valorem
tax (AVT) system to the specific tax system was made and
subjecting the aforesaid cigarette brands to specific tax under
COMPILATION OF CASES
[S]ection 142 thereof, now renumbered as Sec. 145 of the Tax Code
of 1997, pertinent provisions of which are quoted thus:
Section 145. Cigars and Cigarettes-
(A) Cigars. – There shall be levied, assessed and collected on
cigars a tax of One peso (₱1.00) per cigar.
"(B) Cigarettes packed by hand. – There shall be levied,
assessesed and collected on cigarettes packed by hand a tax of
Forty centavos (P0.40) per pack.
(C) Cigarettes packed by machine. – There shall be levied,
assessed and collected on cigarettes packed by machine a tax at
the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-
added tax) is above Ten pesos (₱10.00) per pack, the tax shall be
(2) If the net retail price (excluding the excise tax and the value
added tax) exceeds Six pesos and Fifty centavos (₱6.50) but does
not exceed Ten pesos (₱10.00) per pack, the tax shall be Eight
Pesos (₱8.00) per pack.
(3) If the net retail price (excluding the excise tax and the value-
added tax) is Five pesos (₱5.00) but does not exceed Six Pesos and
fifty centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00)
per pack;
(4) If the net retail price (excluding the excise tax and the value-
added tax) is below Five pesos (₱5.00) per pack, the tax shall
be One peso (₱1.00) per pack;
"Variants of existing brands of cigarettes which are introduced in the
domestic market after the effectivity of R.A. No. 8240 shall be taxed
under the highest classification of any variant of that brand.
The excise tax from any brand of cigarettes within the next three (3)
years from the effectivity of R.A. No. 8240 shall not be lower than
the tax, which is due from each brand on October 1, 1996. Provided,
however, that in cases were (sic) the excise tax rate imposed in
paragraphs (1), (2), (3) and (4) hereinabove will result in an increase
in excise tax of more than seventy percent (70%), for a brand of
cigarette, the increase shall take effect in two tranches: fifty percent
(50%) of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.
Duly registered or existing brands of cigarettes or new brands
thereof packed by machine shall only be packed in twenties.
The rates of excise tax on cigars and cigarettes under
paragraphs (1), (2) (3) and (4) hereof, shall be increased by
twelve percent (12%) on January 1, 2000. (Emphasis supplied)
New brands shall be classified according to their current net retail
price.
For the above purpose, ‘net retail price’ shall mean the price at
which the cigarette is sold on retail in twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to cover the applicable
excise tax and value-added tax. For brands which are marketed only

outside Metro [M]anila, the ‘net retail price’ shall mean the price at
which the cigarette is sold in five (5) major supermarkets in the
region excluding the amount intended to cover the applicable excise
tax and the value-added tax.
The classification of each brand of cigarettes based on its average
retail price as of October 1, 1996, as set forth in Annex "D," shall
remain in force until revised by Congress.
Variant of a brand shall refer to a brand on which a modifier is
prefixed and/or suffixed to the root name of the brand and/or a
different brand which carries the same logo or design of the existing
brand.
To implement the provisions for a twelve percent (12%) increase of
excise tax on, among others, cigars and cigarettes packed by
machines by January 1, 2000, the Secretary of Finance, upon
recommendation of the respondent Commissioner of Internal
Revenue, issued Revenue Regulations No. 17-99, dated December
16, 1999, which provides the increase on the applicable tax rates on
cigar and cigarettes as follows:
(Table Deleted)
Revenue Regulations No. 17-99 likewise provides in the last
paragraph of Section 1 thereof, "(t)hat the new specific tax rate for
any existing brand of cigars, cigarettes packed by machine,
distilled spirits, wines and fermented liquor shall not be lower
than the excise tax that is actually being paid prior to January
1, 2000."
For the period covering January 1-31, 2000, petitioner allegedly paid
specific taxes on all brands manufactured and removed in the total
amounts of ₱585,705,250.00.
On February 7, 2000, petitioner filed with respondent’s Appellate
Division a claim for refund or tax credit of its purportedly overpaid
excise tax for the month of January 2000 in the amount of
₱35,651,410.00
On June 21, 2001, petitioner filed with respondent’s Legal Service a
letter dated June 20, 2001 reiterating all the claims for refund/tax
credit of its overpaid excise taxes filed on various dates, including
the present claim for the month of January 2000 in the amount of
₱35,651,410.00.
As there was no action on the part of the respondent, petitioner filed
the instant petition for review with this Court on December 11, 2001,
in order to comply with the two-year period for filing a claim for
refund.
In his answer filed on January 16, 2002, respondent raised the
following Special and Affirmative Defenses;
4. Petitioner’s alleged claim for refund is subject to administrative
routinary investigation/examination by the Bureau;
5. The amount of ₱35,651,410 being claimed by petitioner as
alleged overpaid excise tax for the month of January 2000 was not
properly documented.
6. In an action for tax refund, the burden of proof is on the taxpayer
to establish its right to refund, and failure to sustain the burden is
fatal to its claim for refund/credit.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 2
COMPILATION OF CASES
7. Petitioner must show that it has complied with the provisions of
Section 204(C) in relation [to] Section 229 of the Tax Code on the
prescriptive period for claiming tax refund/credit;
8. Claims for refund are construed strictly against the claimant for
the same partake of tax exemption from taxation; and
9. The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-
99 is a valid implementing regulation which has the force and effect
of law."
CA G.R. SP No. 83165
The petition contains essentially similar facts, except that the said
case questions the CTA’s December 4, 2003 decision in CTA Case
No. 6612 granting respondent’s 3 claim for refund of the amount of
₱355,385,920.00 representing erroneously or illegally collected
specific taxes covering the period January 1, 2002 to December 31,
2002, as well as its March 17, 2004 Resolution denying a
reconsideration thereof.
xxxx
In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court
of Tax Appeals reduced the issues to be resolved into two as
stipulated by the parties, to wit: (1) Whether or not the last
paragraph of Section 1 of Revenue Regulation[s] [No.] 17-99 is in
accordance with the pertinent provisions of Republic Act [No.] 8240,
now incorporated in Section 145 of the Tax Code of 1997; and (2)
Whether or not petitioner is entitled to a refund of ₱35,651,410.00 as
alleged overpaid excise tax for the month of January 2000.
xxxx
Hence, the respondent CTA in its assailed October 21, 2002 [twin]
Decisions[s] disposed in CTA Case Nos. 6365 & 6383:
WHEREFORE, in view of the foregoing, the court finds the instant
petition meritorious and in accordance with law. Accordingly,
respondent is hereby ORDERED to REFUND to petitioner the
amount of ₱35,651.410.00 representing erroneously paid excise
taxes for the period January 1 to January 31, 2000.
SO ORDERED.
Herein petitioner sought reconsideration of the above-quoted
decision. In [twin] resolution[s] [both] dated July 15, 2003, the Tax
Court, in an apparent change of heart, granted the petitioner’s
consolidated motions for reconsideration, thereby denying the
respondent’s claim for refund.
However, on consolidated motions for reconsideration filed by the
respondent in CTA Case Nos. 6363 and 6383, the July 15, 2002
resolution was set aside, and the Tax Court ruled, this time with a
semblance of finality, that the respondent is entitled to the refund
claimed. Hence, in a resolution dated November 4, 2003, the tax
court reinstated its December 21, 2002 Decision and disposed as
follows:

WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are
hereby REINSTATED. Accordingly, respondent is hereby
ORDERED to REFUND petitioner the total amount of
₱680,387,025.00 representing erroneously paid excise taxes for the
period January 1, 2000 to January 31, 2000 and February 1, 2000 to
December 31, 2001.
SO ORDERED.
Meanwhile, on December 4, 2003, the Court of Tax Appeals
rendered decision in CTA Case No. 6612 granting the prayer for the
refund of the amount of ₱355,385,920.00 representing overpaid
excise tax for the period covering January 1, 2002 to December 31,
2002. The tax court disposed of the case as follows:
IN VIEW OF THE FOREGOING, the Petition for Review is
GRANTED. Accordingly, respondent is hereby ORDERED to
REFUND to petitioner the amount of ₱355,385,920.00 representing
overpaid excise tax for the period covering January 1, 2002 to
December 31, 2002.
SO ORDERED.
Petitioner sought reconsideration of the decision, but the same was
denied in a Resolution dated March 17, 2004. 4(Emphasis supplied)
(Citations omitted)
The Commissioner appealed the aforesaid decisions of the CTA.
The petition questioning the grant of refund in the amount of
₱680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas
that assailing the grant of refund in the amount of ₱355,385,920.00
was docketed as CA-G.R. SP No. 83165. The petitions were
consolidated and eventually denied by the Court of Appeals. The
appellate court also denied reconsideration in its Resolution 5 dated 1
March 2005.
In its Memorandum6 22 dated November 2006, filed on behalf of the
Commissioner, the Office of the Solicitor General (OSG) seeks to
convince the Court that the literal interpretation given by the CTA
and the Court of Appeals of Section 145 of the Tax Code of 1997
(Tax Code) would lead to a lower tax imposable on 1 January 2000
than that imposable during the transition period. Instead of an
increase of 12% in the tax rate effective on 1 January 2000 as
allegedly mandated by the Tax Code, the appellate court’s ruling
would result in a significant decrease in the tax rate by as much as
66%.
The OSG argues that Section 145 of the Tax Code admits of several
interpretations, such as:
1. That by January 1, 2000, the excise tax on cigarettes should be
the higher tax imposed under the specific tax system and the tax
imposed under the ad valorem tax system plus the 12% increase
imposed by par. 5, Sec. 145 of the Tax Code;
2. The increase of 12% starting on January 1, 2000 does not apply
to the brands of cigarettes listed under Annex "D" referred to in par.
8, Sec. 145 of the Tax Code;
3. The 12% increment shall be computed based on the net retail
price as indicated in par. C, sub-par. (1)-(4), Sec. 145 of the Tax
Code even if the resulting figure will be lower than the amount
already being paid at the end of the transition period. This is the
interpretation followed by both the CTA and the Court of Appeals.7
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 3
COMPILATION OF CASES
This being so, the interpretation which will give life to the legislative
intent to raise revenue should govern, the OSG stresses.
Finally, the OSG asserts that a tax refund is in the nature of a tax
exemption and must, therefore, be construed strictly against the
taxpayer, such as Fortune Tobacco.
In its Memorandum8 dated 10 November 2006, Fortune Tobacco
argues that the CTA and the Court of Appeals merely followed the
letter of the law when they ruled that the basis for the 12% increase
in the tax rate should be the net retail price of the cigarettes in the
market as outlined in paragraph C, sub paragraphs (1)-(4), Section
145 of the Tax Code. The Commissioner allegedly has gone beyond
his delegated rule-making power when he promulgated, enforced
and implemented Revenue Regulation No. 17-99, which effectively
created a separate classification for cigarettes based on the excise
tax "actually being paid prior to January 1, 2000."9
It should be mentioned at the outset that there is no dispute between
the fact of payment of the taxes sought to be refunded and the
receipt thereof by the Bureau of Internal Revenue (BIR). There is
also no question about the mathematical accuracy of Fortune
Tobacco’s claim since the documentary evidence in support of the
refund has not been controverted by the revenue agency. Likewise,
the claims have been made and the actions have been filed within
the two (2)-year prescriptive period provided under Section 229 of
the Tax Code.
The power to tax is inherent in the State, such power being
inherently legislative, based on the principle that taxes are a grant of
the people who are taxed, and the grant must be made by the
immediate representatives of the people; and where the people have
laid the power, there it must remain and be exercised. 10
This entire controversy revolves around the interplay between
Section 145 of the Tax Code and Revenue Regulation 17-99. The
main issue is an inquiry into whether the revenue regulation has
exceeded the allowable limits of legislative delegation.
For ease of reference, Section 145 of the Tax Code is again
reproduced in full as follows:
Section 145. Cigars and Cigarettes-
(A) Cigars.—There shall be levied, assessed and collected on
cigars a tax of One peso (₱1.00) per cigar.
(B). Cigarettes packed by hand.—There shall be levied, assessed
and collected on cigarettes packed by hand a tax of Forty centavos
(₱0.40) per pack.
(C) Cigarettes packed by machine.—There shall be levied,
assessed and collected on cigarettes packed by machine a tax at
the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the value-
added tax) is above Ten pesos (₱10.00) per pack, the tax shall be
Twelve pesos (₱12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value
added tax) exceeds Six pesos and Fifty centavos (₱6.50) but does
not exceed Ten pesos (₱10.00) per pack, the tax shall be Eight
Pesos (₱8.00) per pack.

(3) If the net retail price (excluding the excise tax and the value-
added tax) is Five pesos (₱5.00) but does not exceed Six Pesos and
fifty centavos (₱6.50) per pack, the tax shall be Five pesos (₱5.00)
per pack;
(4) If the net retail price (excluding the excise tax and the value-
added tax) is below Five pesos (₱5.00) per pack, the tax shall be
One peso (₱1.00) per pack;
Variants of existing brands of cigarettes which are introduced in the
domestic market after the effectivity of R.A. No. 8240 shall be taxed
under the highest classification of any variant of that brand.
The excise tax from any brand of cigarettes within the next three (3)
years from the effectivity of R.A. No. 8240 shall not be lower than
the tax, which is due from each brand on October 1, 1996. Provided,
however, That in cases where the excise tax rates imposed in
paragraphs (1), (2), (3) and (4) hereinabove will result in an increase
in excise tax of more than seventy percent (70%), for a brand of
cigarette, the increase shall take effect in two tranches: fifty percent
(50%) of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.
Duly registered or existing brands of cigarettes or new brands
thereof packed by machine shall only be packed in twenties.
The rates of excise tax on cigars and cigarettes under
paragraphs (1), (2) (3) and (4) hereof, shall be increased by
twelve percent (12%) on January 1, 2000.
New brands shall be classified according to their current net retail
price.
For the above purpose, ‘net retail price’ shall mean the price at
which the cigarette is sold on retail in twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to cover the applicable
excise tax and value-added tax. For brands which are marketed only
outside Metro Manila, the ‘net retail price’ shall mean the price at
which the cigarette is sold in five (5) major intended to cover the
applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average
retail price as of October 1, 1996, as set forth in Annex "D," shall
remain in force until revised by Congress.
Variant of a brand’ shall refer to a brand on which a modifier is
prefixed and/or suffixed to the root name of the brand and/or a
different brand which carries the same logo or design of the existing
brand.11 (Emphasis supplied)
Revenue Regulation 17-99, which was issued pursuant to the
unquestioned authority of the Secretary of Finance to promulgate
rules and regulations for the effective implementation of the Tax
Code,12 interprets the above-quoted provision and reflects the 12%
increase in excise taxes in the following manner:
(Table Deleted)
This table reflects Section 145 of the Tax Code insofar as it
mandates a 12% increase effective on 1 January 2000 based on the
taxes indicated under paragraph C, sub-paragraph (1)-(4). However,
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 4
COMPILATION OF CASES
Revenue Regulation No. 17-99 went further and added that "[T]he
new specific tax rate for any existing brand of cigars, cigarettes
packed by machine, distilled spirits, wines and fermented liquor shall
not be lower than the excise tax that is actually being paid prior to
January 1, 2000."13
Parenthetically, Section 145 states that during the transition
period, i.e., within the next three (3) years from the effectivity of the
Tax Code, the excise tax from any brand of cigarettes shall not be
lower than the tax due from each brand on 1 October 1996. This
qualification, however, is conspicuously absent as regards the 12%
increase which is to be applied on cigars and cigarettes packed by
machine, among others, effective on 1 January 2000. Clearly and
unmistakably, Section 145 mandates a new rate of excise tax for
cigarettes packed by machine due to the 12% increase effective on
1 January 2000 without regard to whether the revenue collection
starting from this period may turn out to be lower than that collected
prior to this date.
By adding the qualification that the tax due after the 12% increase
becomes effective shall not be lower than the tax actually paid prior
to 1 January 2000, Revenue Regulation No. 17-99 effectively
imposes a tax which is the higher amount between the ad
valorem tax being paid at the end of the three (3)-year transition
period and the specific tax under paragraph C, sub-paragraph (1)-
(4), as increased by 12%—a situation not supported by the plain
wording of Section 145 of the Tax Code.
This is not the first time that national revenue officials had ventured
in the area of unauthorized administrative legislation.
In Commissioner of Internal Revenue v. Reyes,14 respondent was
not informed in writing of the law and the facts on which the
assessment of estate taxes was made pursuant to Section 228 of
the 1997 Tax Code, as amended by Republic Act (R.A.) No. 8424.
She was merely notified of the findings by the Commissioner, who
had simply relied upon the old provisions of the law and Revenue
Regulation No. 12-85 which was based on the old provision of the
law. The Court held that in case of discrepancy between the law as
amended and the implementing regulation based on the old law, the
former necessarily prevails. The law must still be followed, even
though the existing tax regulation at that time provided for a different
procedure.15
In Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,16 the tax authorities gave the term "tax credit" in
Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly
disparate from what R.A. No. 7432 provides. Their interpretation
muddled up the intent of Congress to grant a mere discount privilege
and not a sales discount. The Court, striking down the revenue
regulation, held that an administrative agency issuing regulations
may not enlarge, alter or restrict the provisions of the law it
administers, and it cannot engraft additional requirements not
contemplated by the legislature. The Court emphasized that tax
administrators are not allowed to expand or contract the legislative
mandate and that the "plain meaning rule" or verba legis in statutory
construction should be applied such that where the words of a
statute are clear, plain and free from ambiguity, it must be given its
literal meaning and applied without attempted interpretation.
As we have previously declared, rule-making power must be
confined to details for regulating the mode or proceedings in order to
carry into effect the law as it has been enacted, and it cannot be
extended to amend or expand the statutory requirements or to
embrace matters not covered by the statute. Administrative
regulations must always be in harmony with the provisions of the law

because any resulting discrepancy between the two will always be
resolved in favor of the basic law.17
In Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshop, Inc.,18 Commissioner Jose Ong issued Revenue
Memorandum Order (RMO) No. 15-91, as well as the clarificatory
Revenue Memorandum Circular (RMC) 43-91, imposing a 5%
lending investor’s tax under the 1977 Tax Code, as amended by
Executive Order (E.O.) No. 273, on pawnshops. The Commissioner
anchored the imposition on the definition of lending investors
provided in the 1977 Tax Code which, according to him, was broad
enough to include pawnshop operators. However, the Court noted
that pawnshops and lending investors were subjected to different tax
treatments under the Tax Code prior to its amendment by the
executive order; that Congress never intended to treat pawnshops in
the same way as lending investors; and that the particularly involved
section of the Tax Code explicitly subjected lending investors and
dealers in securities only to percentage tax. And so the Court
affirmed the invalidity of the challenged circulars, stressing that
"administrative issuances must not override, supplant or modify the
law, but must remain consistent with the law they intend to carry
out."19
In Philippine Bank of Communications v. Commissioner of Internal
Revenue,20 the then acting Commissioner issued RMC 7-85,
changing the prescriptive period of two years to ten years for claims
of excess quarterly income tax payments, thereby creating a clear
inconsistency with the provision of Section 230 of the 1977 Tax
Code. The Court nullified the circular, ruling that the BIR did not
simply interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress. The Court held:
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific and
less general interpretations of tax laws) which are issued from time
to time by the Commissioner of Internal Revenue. It is widely
accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous.
Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement. 21
In Commissioner of Internal Revenue v. CA, et al.,22 the central issue
was the validity of RMO 4-87 which had construed the amnesty
coverage under E.O. No. 41 (1986) to include only assessments
issued by the BIR after the promulgation of the executive order on
22 August 1986 and not assessments made to that date. Resolving
the issue in the negative, the Court held:
x x x all such issuances must not override, but must remain
consistent and in harmony with, the law they seek to apply and
implement. Administrative rules and regulations are intended to
carry out, neither to supplant nor to modify, the law.23
xxx
If, as the Commissioner argues, Executive Order No. 41 had not
been intended to include 1981-1985 tax liabilities already assessed
(administratively) prior to 22 August 1986, the law could have simply
so provided in its exclusionary clauses. It did not. The conclusion is
unavoidable, and it is that the executive order has been designed to
be in the nature of a general grant of tax amnesty subject only to the
cases specifically excepted by it.24
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 5
COMPILATION OF CASES
In the case at bar, the OSG’s argument that by 1 January 2000, the
excise tax on cigarettes should be the higher tax imposed under the
specific tax system and the tax imposed under the ad valorem tax
system plus the 12% increase imposed by paragraph 5, Section 145
of the Tax Code, is an unsuccessful attempt to justify what is clearly
an impermissible incursion into the limits of administrative
legislation. Such an interpretation is not supported by the clear
language of the law and is obviously only meant to validate the
OSG’s thesis that Section 145 of the Tax Code is ambiguous and
admits of several interpretations.
The contention that the increase of 12% starting on 1 January 2000
does not apply to the brands of cigarettes listed under Annex "D" is
likewise unmeritorious, absurd even. Paragraph 8, Section 145 of
the Tax Code simply states that, "[T]he classification of each brand
of cigarettes based on its average net retail price as of October 1,
1996, as set forth in Annex ‘D’, shall remain in force until revised by
Congress." This declaration certainly does not lend itself to the
interpretation given to it by the OSG. As plainly worded, the average
net retail prices of the listed brands under Annex "D," which classify
cigarettes according to their net retail price into low, medium or high,
obviously remain the bases for the application of the increase in
excise tax rates effective on 1 January 2000.
The foregoing leads us to conclude that Revenue Regulation No. 17-
99 is indeed indefensibly flawed. The Commissioner cannot seek
refuge in his claim that the purpose behind the passage of the Tax
Code is to generate additional revenues for the government.
Revenue generation has undoubtedly been a major consideration in
the passage of the Tax Code. However, as borne by the legislative
record,25 the shift from the ad valorem system to the specific tax
system is likewise meant to promote fair competition among the
players in the industries concerned, to ensure an equitable
distribution of the tax burden and to simplify tax administration by
classifying cigarettes, among others, into high, medium and low-
priced based on their net retail price and accordingly graduating tax
rates.
At any rate, this advertence to the legislative record is merely
gratuitous because, as we have held, the meaning of the law is clear
on its face and free from the ambiguities that the Commissioner
imputes. We simply cannot disregard the letter of the law on the
pretext of pursuing its spirit.26
Finally, the Commissioner’s contention that a tax refund partakes the
nature of a tax exemption does not apply to the tax refund to which
Fortune Tobacco is entitled. There is parity between tax refund and
tax exemption only when the former is based either on a tax
exemption statute or a tax refund statute. Obviously, that is not the
situation here. Quite the contrary, Fortune Tobaccos claim for refund
is premised on its erroneous payment of the tax, or better still the
government’s exaction in the absence of a law.
Tax exemption is a result of legislative grace. And he who claims an
exemption from the burden of taxation must justify his claim by
showing that the legislature intended to exempt him by words too
plain to be mistaken. 27 The rule is that tax exemptions must be
strictly construed such that the exemption will not be held to be
conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention. 28
A claim for tax refund may be based on statutes granting tax
exemption or tax refund. In such case, the rule of strict interpretation
against the taxpayer is applicable as the claim for refund partakes of
the nature of an exemption, a legislative grace, which cannot be
allowed unless granted in the most explicit and categorical

language. The taxpayer must show that the legislature intended to
exempt him from the tax by words too plain to be mistaken. 29
Tax refunds (or tax credits), on the other hand, are not founded
principally on legislative grace but on the legal principle which
underlies all quasi-contracts abhorring a person’s unjust enrichment
at the expense of another.30The dynamic of erroneous payment of
tax fits to a tee the prototypic quasi-contract, solutio indebiti, which
covers not only mistake in fact but also mistake in law.31
The Government is not exempt from the application of solutio
indebiti.32 Indeed, the taxpayer expects fair dealing from the
Government, and the latter has the duty to refund without any
unreasonable delay what it has erroneously collected.33 If the State
expects its taxpayers to observe fairness and honesty in paying their
taxes, it must hold itself against the same standard in refunding
excess (or erroneous) payments of such taxes. It should not unjustly
enrich itself at the expense of taxpayers. 34 And so, given its essence,
a claim for tax refund necessitates only preponderance of evidence
for its approbation like in any other ordinary civil case.
Under the Tax Code itself, apparently in recognition of the pervasive
quasi-contract principle, a claim for tax refund may be based on the
following: (a) erroneously or illegally assessed or collected internal
revenue taxes; (b) penalties imposed without authority; and (c) any
sum alleged to have been excessive or in any manner wrongfully
collected.35
What is controlling in this case is the well-settled doctrine of strict
interpretation in the imposition of taxes, not the similar doctrine as
applied to tax exemptions. The rule in the interpretation of tax laws is
that a statute will not be construed as imposing a tax unless it does
so clearly, expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. In
answering the question of who is subject to tax statutes, it is basic
that in case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import. 36 As
burdens, taxes should not be unduly exacted nor assumed beyond
the plain meaning of the tax laws.37
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA G.R. SP No. 80675, dated 28 September 2004, and
its Resolution, dated 1 March 2005, are AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 6
COMPILATION OF CASES
MISAMIS ORIENTAL ASSOCIATION v. DEPT. OF FINANCE
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 108524 November 10, 1994
MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS,
INC., petitioner, 
vs.
DEPARTMENT OF FINANCE SECRETARY, COMMISSIONER OF
THE BUREAU OF INTERNAL REVENUE (BIR), AND REVENUE
DISTRICT OFFICER, BIR MISAMIS ORIENTAL, respondents.
Damasing Law Office for petitioner.
MENDOZA, J.:
This is a petition for prohibition and injunction seeking to nullify
Revenue Memorandum Circular No. 47-91 and enjoin the collection
by respondent revenue officials of the Value Added Tax (VAT) on
the sale of copra by members of petitioner organization. 1
Petitioner Misamis Oriental Association of Coco Traders, Inc. is a
domestic corporation whose members, individually or collectively,
are engaged in the buying and selling of copra in Misamis Oriental.
The petitioner alleges that prior to the issuance of Revenue
Memorandum Circular 47-91 on June 11, 1991, which implemented
VAT Ruling 190-90, copra was classified as agricultural food product
under $ 103(b) of the National Internal Revenue Code and,
therefore, exempt from VAT at all stages of production or
distribution.
Respondents represent departments of the executive branch of
government charged with the generation of funds and the
assessment, levy and collection of taxes and other imposts.
The pertinent provision of the NIRC states:
Sec. 103. Exempt Transactions. — The following shall be exempt
from the value-added tax:
(a) Sale of nonfood agricultural, marine and forest products in their
original state by the primary producer or the owner of the land where
the same are produced;
(b) Sale or importation in their original state of agricultural and
marine food products, livestock and poultry of a kind generally used
as, or yielding or producing foods for human consumption, and
breeding stock and genetic material therefor;
Under §103(a), as above quoted, the sale of agricultural non-food
products in their original state is exempt from VAT only if the sale is
made by the primary producer or owner of the land from which the

same are produced. The sale made by any other person or entity,
like a trader or dealer, is not exempt from the tax. On the other hand,
under §103(b) the sale of agricultural food products in their original
state is exempt from VAT at all stages of production or distribution
regardless of who the seller is.
The question is whether copra is an agricultural food or non-food
product for purposes of this provision of the NIRC. On June 11,
1991, respondent Commissioner of Internal Revenue issued the
circular in question, classifying copra as an agricultural non-food
product and declaring it "exempt from VAT only if the sale is made
by the primary producer pursuant to Section 103(a) of the Tax Code,
as amended." 2
The reclassification had the effect of denying to the petitioner the
exemption it previously enjoyed when copra was classified as an
agricultural food product under §103(b) of the NIRC. Petitioner
challenges RMC No. 47-91 on various grounds, which will be
presently discussed although not in the order raised in the petition
for prohibition.
First. Petitioner contends that the Bureau of Food and Drug of the
Department of Health and not the BIR is the competent government
agency to determine the proper classification of food products.
Petitioner cites the opinion of Dr. Quintin Kintanar of the Bureau of
Food and Drug to the effect that copra should be considered "food"
because it is produced from coconut which is food and 80% of
coconut products are edible.
On the other hand, the respondents argue that the opinion of the
BIR, as the government agency charged with the implementation
and interpretation of the tax laws, is entitled to great respect.
We agree with respondents. In interpreting §103(a) and (b) of the
NIRC, the Commissioner of Internal Revenue gave it a strict
construction consistent with the rule that tax exemptions must be
strictly construed against the taxpayer and liberally in favor of the
state. Indeed, even Dr. Kintanar said that his classification of copra
as food was based on "the broader definition of food which includes
agricultural commodities and other components used in the
manufacture/processing of food." The full text of his letter reads:
10 April 1991
Mr. VICTOR A. DEOFERIO, JR.
Chairman VAT Review Committee
Bureau of Internal Revenue
Diliman, Quezon City
Dear Mr. Deoferio:
This is to clarify a previous communication made by this Office about
copra in a letter dated 05 December 1990 stating that copra is not
classified as food. The statement was made in the context of BFAD's
regulatory responsibilities which focus mainly on foods that are
processed and packaged, and thereby copra is not covered.
However, in the broader definition of food which include agricultural
commodities and other components used in the manufacture/
processing of food, it is our opinion that copra should be classified
as an agricultural food product since copra is produced from coconut
meat which is food and based on available information, more than
80% of products derived from copra are edible products.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 7
COMPILATION OF CASES
Very truly yours,
QUINTIN L. KINTANAR, M.D., Ph.D. 
Director
Assistant Secretary of Health for Standards and Regulations
Moreover, as the government agency charged with the enforcement
of the law, the opinion of the Commissioner of Internal Revenue, in
the absence of any showing that it is plainly wrong, is entitled to
great weight. Indeed, the ruling was made by the Commissioner of
Internal Revenue in the exercise of his power under § 245 of the
NIRC to "make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including
rulings on the classification of articles for sales tax and similar
purposes."
Second. Petitioner complains that it was denied due process
because it was not heard before the ruling was made. There is a
distinction in administrative law between legislative rules and
interpretative rules. 3 There would be force in petitioner's argument if
the circular in question were in the nature of a legislative rule. But it
is not. It is a mere interpretative rule.
The reason for this distinction is that a legislative rule is in the nature
of subordinate legislation, designed to implement a primary
legislation by providing the details thereof. In the same way that laws
must have the benefit of public hearing, it is generally required that
before a legislative rule is adopted there must be hearing. In this
connection, the Administrative Code of 1987 provides:
Public Participation. — If not otherwise required by law, an agency
shall, as far as practicable, publish or circulate notices of proposed
rules and afford interested parties the opportunity to submit their
views prior to the adoption of any rule.
(2) In the fixing of rates, no rule or final order shall be valid unless
the proposed rates shall have been published in a newspaper of
general circulation at least two (2) weeks before the first hearing
thereon.
(3) In case of opposition, the rules on contested cases shall be
observed. 4
In addition such rule must be published. 5 On the other hand,
interpretative rules are designed to provide guidelines to the law
which the administrative agency is in charge of enforcing.
Accordingly, in considering a legislative rule a court is free to make
three inquiries: (i) whether the rule is within the delegated authority
of the administrative agency; (ii) whether it is reasonable; and (iii)
whether it was issued pursuant to proper procedure. But the court is
not free to substitute its judgment as to the desirability or wisdom of
the rule for the legislative body, by its delegation of administrative
judgment, has committed those questions to administrative
judgments and not to judicial judgments. In the case of an
interpretative rule, the inquiry is not into the validity but into the
correctness or propriety of the rule. As a matter of power a court,
when confronted with an interpretative rule, is free to (i) give the
force of law to the rule; (ii) go to the opposite extreme and substitute
its judgment; or (iii) give some intermediate degree of authoritative
weight to the interpretative rule. 6
In the case at bar, we find no reason for holding that respondent
Commissioner erred in not considering copra as an "agricultural food
product" within the meaning of § 103(b) of the NIRC. As the Solicitor

General contends, "copra per se is not food, that is, it is not intended
for human consumption. Simply stated, nobody eats copra for food."
That previous Commissioners considered it so, is not reason for
holding that the present interpretation is wrong. The Commissioner
of Internal Revenue is not bound by the ruling of his
predecessors. 7 To the contrary, the overruling of decisions is
inherent in the interpretation of laws.
Third. Petitioner likewise claims that RMC No. 47-91 is
discriminatory and violative of the equal protection clause of the
Constitution because while coconut farmers and copra producers
are exempt, traders and dealers are not, although both sell copra in
its original state. Petitioners add that oil millers do not enjoy tax
credit out of the VAT payment of traders and dealers.
The argument has no merit. There is a material or substantial
difference between coconut farmers and copra producers, on the
one hand, and copra traders and dealers, on the other. The
former produce and sell copra, the latter merely sell copra. The
Constitution does not forbid the differential treatment of persons so
long as there is a reasonable basis for classifying them differently. 8
It is not true that oil millers are exempt from VAT. Pursuant to § 102
of the NIRC, they are subject to 10% VAT on the sale of services.
Under § 104 of the Tax Code, they are allowed to credit the input tax
on the sale of copra by traders and dealers, but there is no tax credit
if the sale is made directly by the copra producer as the sale is VAT
exempt. In the same manner, copra traders and dealers are allowed
to credit the input tax on the sale of copra by other traders and
dealers, but there is no tax credit if the sale is made by the producer.
Fourth. It is finally argued that RMC No. 47-91 is counterproductive
because traders and dealers would be forced to buy copra from
coconut farmers who are exempt from the VAT and that to the extent
that prices are reduced the government would lose revenues as the
10% tax base is correspondingly diminished.
This is not so. The sale of agricultural non-food products is exempt
from VAT only when made by the primary producer or owner of the
land from which the same is produced, but in the case of agricultural
food products their sale in their original state is exempt at all stages
of production or distribution. At any rate, the argument that the
classification of copra as agricultural non-food product is
counterproductive is a question of wisdom or policy which should be
addressed to respondent officials and to Congress.
WHEREFORE, the petition is DISMISSED.
SO ORDERED.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 8
COMPILATION OF CASES
OBTAIN INFORMATION, TO SUMMON, TAKE TESTIMONY, ETC.
CIR v. GONZALES
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 177279               October 13, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner, 
vs.
HON. RAUL M. GONZALEZ, Secretary of Justice, L. M. CAMUS
ENGINEERING CORPORATION (represented by LUIS M. CAMUS
and LINO D. MENDOZA), Respondents.
DECISION
VILLARAMA, JR., J.:
This is a petition for review on certiorari under Rule 45 of the 1997
Rules of Civil Procedure, as amended, assailing the Decision 1 dated
October 31, 2006 and Resolution2 dated March 6, 2007 of the Court
of Appeals (CA) in CA-G.R. SP No. 93387 which affirmed the
Resolution3 dated December 13, 2005 of respondent Secretary of
Justice in I.S. No. 2003-774 for violation of Sections 254 and 255 of
the National Internal Revenue Code of 1997 (NIRC).
The facts as culled from the records:
Pursuant to Letter of Authority (LA) No. 00009361 dated August 25,
2000 issued by then Commissioner of Internal Revenue (petitioner)
Dakila B. Fonacier, Revenue Officers Remedios C. Advincula, Jr.,
Simplicio V. Cabantac, Jr., Ricardo L. Suba, Jr. and Aurelio Agustin
T. Zamora supervised by Section Chief Sixto C. Dy, Jr. of the Tax
Fraud Division (TFD), National Office, conducted a fraud
investigation for all internal revenue taxes to ascertain/determine the
tax liabilities of respondent L. M. Camus Engineering Corporation
(LMCEC) for the taxable years 1997, 1998 and 1999. 4 The audit and
investigation against LMCEC was precipitated by the information
provided by an "informer" that LMCEC had substantial
underdeclared income for the said period. For failure to comply with
the subpoena duces tecum issued in connection with the tax fraud
investigation, a criminal complaint was instituted by the Bureau of
Internal Revenue (BIR) against LMCEC on January 19, 2001 for
violation of Section 266 of the NIRC (I.S. No. 00-956 of the Office of
the City Prosecutor of Quezon City).5
Based on data obtained from an "informer" and various clients of
LMCEC,6 it was discovered that LMCEC filed fraudulent tax returns
with substantial underdeclarations of taxable income for the years
1997, 1998 and 1999. Petitioner thus assessed the company of total
deficiency taxes amounting to ₱430,958,005.90 (income tax -
₱318,606,380.19 and value-added tax [VAT] - ₱112,351,625.71)
covering the said period. The Preliminary Assessment Notice (PAN)
was received by LMCEC on February 22, 2001.7

LMCEC’s alleged underdeclared income was summarized by
petitioner as follows:
(Table Deleted)
In view of the above findings, assessment notices together with a
formal letter of demand dated August 7, 2002 were sent to LMCEC
through personal service on October 1, 2002. 9 Since the company
and its representatives refused to receive the said notices and
demand letter, the revenue officers resorted to constructive
service10 in accordance with Section 3, Revenue Regulations (RR)
No. 12-9911.
On May 21, 2003, petitioner, through then Commissioner Guillermo
L. Parayno, Jr., referred to the Secretary of Justice for preliminary
investigation its complaint against LMCEC, Luis M. Camus and Lino
D. Mendoza, the latter two were sued in their capacities as President
and Comptroller, respectively. The case was docketed as I.S. No.
2003-774. In the Joint Affidavit executed by the revenue officers who
conducted the tax fraud investigation, it was alleged that despite the
receipt of the final assessment notice and formal demand letter on
October 1, 2002, LMCEC failed and refused to pay the deficiency
tax assessment in the total amount of ₱630,164,631.61, inclusive of
increments, which had become final and executory as a result of the
said taxpayer’s failure to file a protest thereon within the thirty (30)-
day reglementary period.12
Camus and Mendoza filed a Joint Counter-Affidavit contending that
LMCEC cannot be held liable whatsoever for the alleged tax
deficiency which had become due and demandable. Considering
that the complaint and its annexes all showed that the suit is a
simple civil action for collection and not a tax evasion case, the
Department of Justice (DOJ) is not the proper forum for BIR’s
complaint. They also assail as invalid the assessment notices which
bear no serial numbers and should be shown to have been validly
served by an Affidavit of Constructive Service executed and sworn
to by the revenue officers who served the same. As stated in
LMCEC’s letter-protest dated December 12, 2002 addressed to
Revenue District Officer (RDO) Clavelina S. Nacar of RD No. 40,
Cubao, Quezon City, the company had already undergone a series
of routine examinations for the years 1997, 1998 and 1999; under
the NIRC, only one examination of the books of accounts is allowed
per taxable year.13
LMCEC further averred that it had availed of the Bureau’s Tax
Amnesty Programs (Economic Recovery Assistance Payment
[ERAP] Program and the Voluntary Assessment Program [VAP]) for
1998 and 1999; for 1997, its tax liability was terminated and closed
under Letter of Termination14 dated June 1, 1999 issued by petitioner
and signed by the Chief of the Assessment Division. 15 LMCEC
claimed it made payments of income tax, VAT and expanded
withholding tax (EWT), as follows:
(Table Deleted)
LMCEC argued that petitioner is now estopped from further taking
any action against it and its corporate officers concerning the taxable
years 1997 to 1999. With the grant of immunity from audit from the
company’s availment of ERAP and VAP, which have a feature of a
tax amnesty, the element of fraud is negated the moment the
Bureau accepts the offer of compromise or payment of taxes by the
taxpayer. The act of the revenue officers in finding justification under
Section 6(B) of the NIRC (Best Evidence Obtainable) is misplaced
and unavailing because they were not able to open the books of the
company for the second time, after the routine examination,
issuance of termination letter and the availment of ERAP and VAP.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 9
COMPILATION OF CASES
LMCEC thus maintained that unless there is a prior determination of
fraud supported by documents not yet incorporated in the docket of
the case, petitioner cannot just issue LAs without first terminating
those previously issued. It emphasized the fact that the BIR officers
who filed and signed the Affidavit-Complaint in this case were the
same ones who appeared as complainants in an earlier case filed
against Camus for his alleged "failure to obey summons in violation
of Section 5 punishable under Section 266 of the NIRC of 1997" (I.S.
No. 00-956 of the Office of the City Prosecutor of Quezon City). After
preliminary investigation, said case was dismissed for lack of
probable cause in a Resolution issued by the Investigating
Prosecutor on May 2, 2001.17
LMCEC further asserted that it filed on April 20, 2001 a protest on
the PAN issued by petitioner for having no basis in fact and law.
However, until now the said protest remains unresolved. As to the
alleged informant who purportedly supplied the "confidential
information," LMCEC believes that such person is fictitious and his
true identity and personality could not be produced. Hence, this case
is another form of harassment against the company as what had
been found by the Office of the City Prosecutor of Quezon City in
I.S. No. 00-956. Said case and the present case both have
something to do with the audit/examination of LMCEC for taxable
years 1997, 1998 and 1999 pursuant to LA No. 00009361.18
In the Joint Reply-Affidavit executed by the Bureau’s revenue
officers, petitioner disagreed with the contention of LMCEC that the
complaint filed is not criminal in nature, pointing out that LMCEC and
its officers Camus and Mendoza were being charged for the criminal
offenses defined and penalized under Sections 254 (Attempt to
Evade or Defeat Tax) and 255 (Willful Failure to Pay Tax) of the
NIRC. This finds support in Section 205 of the same Code which
provides for administrative (distraint, levy, fine, forfeiture, lien, etc.)
and judicial (criminal or civil action) remedies in order to enforce
collection of taxes. Both remedies may be pursued either
independently or simultaneously. In this case, the BIR decided to
simultaneously pursue both remedies and thus aside from this
criminal action, the Bureau also initiated administrative proceedings
against LMCEC.19
On the lack of control number in the assessment notice, petitioner
explained that such is a mere office requirement in the Assessment
Service for the purpose of internal control and monitoring; hence, the
unnumbered assessment notices should not be interpreted as
irregular or anomalous. Petitioner stressed that LMCEC already lost
its right to file a protest letter after the lapse of the thirty (30)-day
reglementary period. LMCEC’s protest-letter dated December 12,
2002 to RDO Clavelina S. Nacar, RD No. 40, Cubao, Quezon City
was actually filed only on December 16, 2002, which was
disregarded by the petitioner for being filed out of time. Even
assuming for the sake of argument that the assessment notices
were invalid, petitioner contended that such could not affect the
present criminal action, 20 citing the ruling in the landmark case of
Ungab v. Cusi, Jr.21
As to the Letter of Termination signed by Ruth Vivian G. Gandia of
the Assessment Division, Revenue Region No. 7, Quezon City,
petitioner pointed out that LMCEC failed to mention that the undated
Certification issued by RDO Pablo C. Cabreros, Jr. of RD No. 40,
Cubao, Quezon City stated that the report of the 1997 Internal
Revenue taxes of LMCEC had already been submitted for review
and approval of higher authorities. LMCEC also cannot claim as
excuse from the reopening of its books of accounts the previous
investigations and examinations. Under Section 235 (a), an
exception was provided in the rule on once a year audit examination
in case of "fraud, irregularity or mistakes, as determined by the
Commissioner". Petitioner explained that the distinction between a

Regular Audit Examination and Tax Fraud Audit Examination lies in
the fact that the former is conducted by the district offices of the
Bureau’s Regional Offices, the authority emanating from the
Regional Director, while the latter is conducted by the TFD of the
National Office only when instances of fraud had been determined
by the petitioner.22
Petitioner further asserted that LMCEC’s claim that it was granted
immunity from audit when it availed of the VAP and ERAP programs
is misleading. LMCEC failed to state that its availment of ERAP
under RR No. 2-99 is not a grant of absolute immunity from audit
and investigation, aside from the fact that said program was only for
income tax and did not cover VAT and withholding tax for the
taxable year 1998. As for LMCEC’S availment of VAP in 1999 under
RR No. 8-2001 dated August 1, 2001 as amended by RR No. 10-
2001 dated September 3, 2001, the company failed to state that it
covers only income tax and VAT, and did not include withholding
tax. However, LMCEC is not actually entitled to the benefits of VAP
under Section 1 (1.1 and 1.2) of RR No. 10-2001. As to the principle
of estoppel invoked by LMCEC, estoppel clearly does not lie against
the BIR as this involved the exercise of an inherent power by the
government to collect taxes.23
Petitioner also pointed out that LMCEC’s assertion correlating this
case with I.S. No. 00-956 is misleading because said case involves
another violation and offense (Sections 5 and 266 of the NIRC). Said
case was filed by petitioner due to the failure of LMCEC to submit or
present its books of accounts and other accounting records for
examination despite the issuance of subpoena duces tecum against
Camus in his capacity as President of LMCEC. While indeed a
Resolution was issued by Asst. City Prosecutor Titus C. Borlas on
May 2, 2001 dismissing the complaint, the same is still on appeal
and pending resolution by the DOJ. The determination of probable
cause in said case is confined to the issue of whether there was
already a violation of the NIRC by Camus in not complying with the
subpoena duces tecum issued by the BIR.24
Petitioner contended that precisely the reason for the issuance to
the TFD of LA No. 00009361 by the Commissioner is because the
latter agreed with the findings of the investigating revenue officers
that fraud exists in this case. In the conduct of their investigation, the
revenue officers observed the proper procedure under Revenue
Memorandum Order (RMO) No. 49-2000 wherein it is required that
before the issuance of a Letter of Authority against a particular
taxpayer, a preliminary investigation should first be conducted to
determine if a prima facie case for tax fraud exists. As to the
allegedly unresolved protest filed on April 20, 2001 by LMCEC over
the PAN, this has been disregarded by the Bureau for being pro
forma and having been filed beyond the 15-day reglementary period.
A subsequent letter dated April 20, 2001 was filed with the TFD and
signed by a certain Juan Ventigan. However, this was disregarded
and considered a mere scrap of paper since the said signatory had
not shown any prior authorization to represent LMCEC. Even
assuming said protest letter was validly filed on behalf of the
company, the issuance of a Formal Demand Letter and Assessment
Notice through constructive service on October 1, 2002 is deemed
an implied denial of the said protest. Lastly, the details regarding the
"informer" being confidential, such information is entitled to some
degree of protection, including the identity of the informant against
LMCEC.25
In their Joint Rejoinder-Affidavit,26 Camus and Mendoza reiterated
their argument that the identity of the alleged informant is crucial to
determine if he/she is qualified under Section 282 of the NIRC.
Moreover, there was no assessment that has already become final,
the validity of its issuance and service has been put in issue being
anomalous, irregular and oppressive. It is contended that for criminal
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 10
COMPILATION OF CASES
prosecution to proceed before assessment, there must be a prima
facie showing of a willful attempt to evade taxes. As to LMCEC’s
availment of the VAP and ERAP programs, the certificate of
immunity from audit issued to it by the BIR is plain and simple, but
petitioner is now saying it has the right to renege with impunity from
its undertaking. Though petitioner deems LMCEC not qualified to
avail of the benefits of VAP, it must be noted that if it is true that at
the time the petitioner filed I.S. No. 00-956 sometime in January
2001 it had already in its custody that "Confidential Information No.
29-2000 dated July 7, 2000", these revenue officers could have
rightly filed the instant case and would not resort to filing said
criminal complaint for refusal to comply with a subpoena duces
tecum.
On September 22, 2003, the Chief State Prosecutor issued a
Resolution27 finding no sufficient evidence to establish probable
cause against respondents LMCEC, Camus and Mendoza. It was
held that since the payments were made by LMCEC under ERAP
and VAP pursuant to the provisions of RR Nos. 2-99 and 8-2001
which were offered to taxpayers by the BIR itself, the latter is now in
estoppel to insist on the criminal prosecution of the respondent
taxpayer. The voluntary payments made thereunder are in the
nature of a tax amnesty. The unnumbered assessment notices were
found highly irregular and thus their validity is suspect; if the
amounts indicated therein were collected, it is uncertain how these
will be accounted for and if it would go to the coffers of the
government or elsewhere. On the required prior determination of
fraud, the Chief State Prosecutor declared that the Office of the City
Prosecutor in I.S. No. 00-956 has already squarely ruled that (1)
there was no prior determination of fraud, (2) there was
indiscriminate issuance of LAs, and (3) the complaint was more of
harassment. In view of such findings, any ensuing LA is thus
defective and allowing the collection on the assailed assessment
notices would already be in the context of a "fishing expedition" or
"witch-hunting." Consequently, there is nothing to speak of regarding
the finality of assessment notices in the aggregate amount of
₱630,164,631.61.
Petitioner filed a motion for reconsideration which was denied by the
Chief State Prosecutor.28
Petitioner appealed to respondent Secretary of Justice but the latter
denied its petition for review under Resolution dated December 13,
2005.29
The Secretary of Justice found that petitioner’s claim that there is yet
no finality as to LMCEC’s payment of its 1997 taxes since the audit
report was still pending review by higher authorities, is
unsubstantiated and misplaced. It was noted that the Termination
Letter issued by the Commissioner on June 1, 1999 is explicit that
the matter is considered closed. As for taxable year 1998,
respondent Secretary stated that the record shows that LMCEC paid
VAT and withholding tax in the amount of ₱61,635.40 and
₱38,404.55, respectively. This eventually gave rise to the issuance
of a certificate of immunity from audit for 1998 by the Office of the
Commissioner of Internal Revenue. For taxable year 1999,
respondent Secretary found that pursuant to earlier LA No. 38633
dated July 4, 2000, LMCEC’s 1999 tax liabilities were still pending
investigation for which reason LMCEC assailed the subsequent
issuance of LA No. 00009361 dated August 25, 2000 calling for a
similar investigation of its alleged 1999 tax deficiencies when no final
determination has yet been arrived on the earlier LA No. 38633.30
On the allegation of fraud, respondent Secretary ruled that petitioner
failed to establish the existence of the following circumstances
indicating fraud in the settlement of LMCEC’s tax liabilities: (1) there

must be intentional and substantial understatement of tax liability by
the taxpayer; (2) there must be intentional and substantial
overstatement of deductions or exemptions; and (3) recurrence of
the foregoing circumstances. First, petitioner miserably failed to
explain why the assessment notices were unnumbered; second, the
claim that the tax fraud investigation was precipitated by an alleged
"informant" has not been corroborated nor was it clearly established,
hence there is no other conclusion but that the Bureau engaged in a
"fishing expedition"; and furthermore, petitioner’s course of action is
contrary to Section 235 of the NIRC allowing only once in a given
taxable year such examination and inspection of the taxpayer’s
books of accounts and other accounting records. There was no
convincing proof presented by petitioner to show that the case of
LMCEC falls under the exceptions provided in Section 235.
Respondent Secretary duly considered the issuance of Certificate of
Immunity from Audit and Letter of Termination dated June 1, 1999
issued to LMCEC.31
Anent the earlier case filed against the same taxpayer (I.S. No. 00-
956), the Secretary of Justice found petitioner to have engaged in
forum shopping in view of the fact that while there is still pending an
appeal from the Resolution of the City Prosecutor of Quezon City in
said case, petitioner hurriedly filed the instant case, which not only
involved the same parties but also similar substantial issues (the
joint complaint-affidavit also alleged the issuance of LA No.
00009361 dated August 25, 2000). Clearly, the evidence of litis
pendentia is present. Finally, respondent Secretary noted that if
indeed LMCEC committed fraud in the settlement of its tax liabilities,
then at the outset, it should have been discovered by the agents of
petitioner, and consequently petitioner should not have issued the
Letter of Termination and the Certificate of Immunity From Audit.
Petitioner thus should have been more circumspect in the issuance
of said documents.32
Its motion for reconsideration having been denied, petitioner
challenged the ruling of respondent Secretary via a certiorari petition
in the CA.
On October 31, 2006, the CA rendered the assailed
decision33 denying the petition and concurred with the findings and
conclusions of respondent Secretary. Petitioner’s motion for
reconsideration was likewise denied by the appellate court. 34 It
appears that entry of judgment was issued by the CA stating that its
October 31, 2006 Decision attained finality on March 25,
2007.35 However, the said entry of judgment was set aside upon
manifestation by the petitioner that it has filed a petition for review
before this Court subsequent to its receipt of the Resolution dated
March 6, 2007 denying petitioner’s motion for reconsideration on
March 20, 2007.36
The petition is anchored on the following grounds:
I. The Honorable Court of Appeals erroneously sustained the
findings of the Secretary of Justice who gravely abused his
discretion by dismissing the complaint based on grounds which are
not even elements of the offenses charged.
II. The Honorable Court of Appeals erroneously sustained the
findings of the Secretary of Justice who gravely abused his
discretion by dismissing petitioner’s evidence, contrary to law.
III. The Honorable Court of Appeals erroneously sustained the
findings of the Secretary of Justice who gravely abused his
discretion by inquiring into the validity of a Final Assessment Notice
which has become final, executory and demandable pursuant to
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 11
COMPILATION OF CASES
Section 228 of the Tax Code of 1997 for failure of private respondent
to file a protest against the same.37
The core issue to be resolved is whether LMCEC and its corporate
officers may be prosecuted for violation of Sections 254 (Attempt to
Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct and
Accurate Information and Pay Tax).
Petitioner filed the criminal complaint against the private
respondents for violation of the following provisions of the NIRC, as
amended:
SEC. 254. Attempt to Evade or Defeat Tax. – Any person who
willfully attempts in any manner to evade or defeat any tax imposed
under this Code or the payment thereof shall, in addition to other
penalties provided by law, upon conviction thereof, be punished by a
fine of not less than Thirty thousand pesos (P30,000) but not more
than One hundred thousand pesos (P100,000) and suffer
imprisonment of not less than two (2) years but not more than four
(4) years: Provided, That the conviction or acquittal obtained under
this Section shall not be a bar to the filing of a civil suit for the
collection of taxes.
SEC. 255. Failure to File Return, Supply Correct and Accurate
Information, Pay Tax, Withhold and Remit Tax and Refund Excess
Taxes Withheld on Compensation. – Any person required under this
Code or by rules and regulations promulgated thereunder to pay any
tax, make a return, keep any record, or supply any correct and
accurate information, who willfully fails to pay such tax, make such
return, keep such record, or supply such correct and accurate
information, or withhold or remit taxes withheld, or refund excess
taxes withheld on compensations at the time or times required by
law or rules and regulations shall, in addition to other penalties
provided by law, upon conviction thereof, be punished by a fine of
not less than Ten thousand pesos (P10,000) and suffer
imprisonment of not less than one (1) year but not more than ten
(10) years.
x x x x (Emphasis supplied.)
Respondent Secretary concurred with the Chief State Prosecutor’s
conclusion that there is insufficient evidence to establish probable
cause to charge private respondents under the above provisions,
based on the following findings: (1) the tax deficiencies of LMCEC
for taxable years 1997, 1998 and 1999 have all been settled or
terminated, as in fact LMCEC was issued a Certificate of Immunity
and Letter of Termination, and availed of the ERAP and VAP
programs; (2) there was no prior determination of the existence of
fraud; (3) the assessment notices are unnumbered, hence irregular
and suspect; (4) the books of accounts and other accounting records
may be subject to audit examination only once in a given taxable
year and there is no proof that the case falls under the exceptions
provided in Section 235 of the NIRC; and (5) petitioner committed
forum shopping when it filed the instant case even as the earlier
criminal complaint (I.S. No. 00-956) dismissed by the City
Prosecutor of Quezon City was still pending appeal.
Petitioner argues that with the finality of the assessment due to
failure of the private respondents to challenge the same in
accordance with Section 228 of the NIRC, respondent Secretary has
no jurisdiction and authority to inquire into its validity. Respondent
taxpayer is thereby allowed to do indirectly what it cannot do directly
– to raise a collateral attack on the assessment when even a direct
challenge of the same is legally barred. The rationale for dismissing
the complaint on the ground of lack of control number in the
assessment notice likewise betrays a lack of awareness of tax laws

and jurisprudence, such circumstance not being an element of the
offense. Worse, the final, conclusive and undisputable evidence
detailing a crime under our taxation laws is swept under the rug so
easily on mere conspiracy theories imputed on persons who are not
even the subject of the complaint.
We grant the petition.
There is no dispute that prior to the filing of the complaint with the
DOJ, the report on the tax fraud investigation conducted on LMCEC
disclosed that it made substantial underdeclarations in its income tax
returns for 1997, 1998 and 1999. Pursuant to RR No. 12-99, 38 a PAN
was sent to and received by LMCEC on February 22, 2001 wherein
it was notified of the proposed assessment of deficiency taxes
amounting to ₱430,958,005.90 (income tax - ₱318,606,380.19 and
VAT - ₱112,351,625.71) covering taxable years 1997, 1998 and
1999.39 In response to said PAN, LMCEC sent a letter-protest to the
TFD, which denied the same on April 12, 2001 for lack of legal and
factual basis and also for having been filed beyond the 15-day
reglementary period.40
As mentioned in the PAN, the revenue officers were not given the
opportunity to examine LMCEC’s books of accounts and other
accounting records because its officers failed to comply with the
subpoena duces tecum earlier issued, to verify its alleged
underdeclarations of income reported by the Bureau’s informant
under Section 282 of the NIRC. Hence, a criminal complaint was
filed by the Bureau against private respondents for violation of
Section 266 which provides:
SEC. 266. Failure to Obey Summons. – Any person who, being duly
summoned to appear to testify, or to appear and produce books of
accounts, records, memoranda, or other papers, or to furnish
information as required under the pertinent provisions of this Code,
neglects to appear or to produce such books of accounts, records,
memoranda, or other papers, or to furnish such information, shall,
upon conviction, be punished by a fine of not less than Five
thousand pesos (P5,000) but not more than Ten thousand pesos
(P10,000) and suffer imprisonment of not less than one (1) year but
not more than two (2) years.
It is clear that I.S. No. 00-956 involves a separate offense and hence
litis pendentia is not present considering that the outcome of I.S. No.
00-956 is not determinative of the issue as to whether probable
cause exists to charge the private respondents with the crimes of
attempt to evade or defeat tax and willful failure to supply correct
and accurate information and pay tax defined and penalized under
Sections 254 and 255, respectively. For the crime of tax evasion in
particular, compliance by the taxpayer with such subpoena, if any
had been issued, is irrelevant. As we held in Ungab v. Cusi,
Jr.,41 "[t]he crime is complete when the [taxpayer] has x x x
knowingly and willfully filed [a] fraudulent [return] with intent to evade
and defeat x x x the tax." Thus, respondent Secretary erred in
holding that petitioner committed forum shopping when it filed the
present criminal complaint during the pendency of its appeal from
the City Prosecutor’s dismissal of I.S. No. 00-956 involving the act of
disobedience to the summons in the course of the preliminary
investigation on LMCEC’s correct tax liabilities for taxable years
1997, 1998 and 1999.
In the Details of Discrepancies attached as Annex B of the
PAN,42 private respondents were already notified that inasmuch as
the revenue officers were not given the opportunity to examine
LMCEC’s books of accounts, accounting records and other
documents, said revenue officers gathered information from third
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 12
COMPILATION OF CASES
parties. Such procedure is authorized under Section 5 of the NIRC,
which provides:
SEC. 5. Power of the Commissioner to Obtain Information, and to
Summon, Examine, and Take Testimony of Persons. – In
ascertaining the correctness of any return, or in making a return
when none has been made, or in determining the liability of any
person for any internal revenue tax, or in collecting any such liability,
or in evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record or other data which may be
relevant or material to such inquiry;
(B) To obtain on a regular basis from any person other than the
person whose internal revenue tax liability is subject to audit or
investigation, or from any office or officer of the national and local
governments, government agencies and instrumentalities, including
the Bangko Sentral ng Pilipinas and government-owned or
-controlled corporations, any information such as, but not limited to,
costs and volume of production, receipts or sales and gross incomes
of taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies,
regional operating headquarters of multinational companies, joint
accounts, associations, joint ventures or consortia and registered
partnerships, and their members;
(C) To summon the person liable for tax or required to file a return,
or any officer or employee of such person, or any person having
possession, custody, or care of the books of accounts and other
accounting records containing entries relating to the business of the
person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and
place specified in the summons and to produce such books, papers,
records, or other data, and to give testimony;
(D) To take such testimony of the person concerned, under oath, as
may be relevant or material to such inquiry; x x x
x x x x (Emphasis supplied.)
Private respondents’ assertions regarding the qualifications of the
"informer" of the Bureau deserve scant consideration. We have held
that the lack of consent of the taxpayer under investigation does not
imply that the BIR obtained the information from third parties illegally
or that the information received is false or malicious. Nor does the
lack of consent preclude the BIR from assessing deficiency taxes on
the taxpayer based on the documents. 43 In the same vein, herein
private respondents cannot be allowed to escape criminal
prosecution under Sections 254 and 255 of the NIRC by mere
imputation of a "fictitious" or disqualified informant under Section 282
simply because other than disclosure of the official registry number
of the third party "informer," the Bureau insisted on maintaining the
confidentiality of the identity and personal circumstances of said
"informer."
Subsequently, petitioner sent to LMCEC by constructive service
allowed under Section 3 of RR No. 12-99, assessment notice and
formal demand informing the said taxpayer of the law and the facts
on which the assessment is made, as required by Section 228 of the
NIRC. Respondent Secretary, however, fully concurred with private
respondents’ contention that the assessment notices were invalid for
being unnumbered and the tax liabilities therein stated have already
been settled and/or terminated.
We do not agree.

A notice of assessment is:
[A] declaration of deficiency taxes issued to a [t]axpayer who fails to
respond to a Pre-Assessment Notice (PAN) within the prescribed
period of time, or whose reply to the PAN was found to be without
merit. The Notice of Assessment shall inform the [t]axpayer of this
fact, and that the report of investigation submitted by the Revenue
Officer conducting the audit shall be given due course.
The formal letter of demand calling for payment of the taxpayer’s
deficiency tax or taxes shall state the fact, the law, rules and
regulations or jurisprudence on which the assessment is
based, otherwise the formal letter of demand and the notice of
assessment shall be void.44
As it is, the formality of a control number in the assessment notice is
not a requirement for its validity but rather the contents thereof which
should inform the taxpayer of the declaration of deficiency tax
against said taxpayer. Both the formal letter of demand and the
notice of assessment shall be void if the former failed to state the
fact, the law, rules and regulations or jurisprudence on which the
assessment is based, which is a mandatory requirement under
Section 228 of the NIRC.
Section 228 of the NIRC provides that the taxpayer shall be
informed in writing of the law and the facts on which the assessment
is made. Otherwise, the assessment is void. To implement the
provisions of Section 228 of the NIRC, RR No. 12-99 was enacted.
Section 3.1.4 of the revenue regulation reads:
3.1.4. Formal Letter of Demand and Assessment Notice. – The
formal letter of demand and assessment notice shall be issued by
the Commissioner or his duly authorized representative. The letter
of demand calling for payment of the taxpayer’s deficiency tax
or taxes shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based, otherwise,
the formal letter of demand and assessment notice shall be
void. The same shall be sent to the taxpayer only by registered mail
or by personal delivery. x x x.45 (Emphasis supplied.)
The Formal Letter of Demand dated August 7, 2002 contains not
only a detailed computation of LMCEC’s tax deficiencies but also
details of the specified discrepancies, explaining the legal and
factual bases of the assessment. It also reiterated that in the
absence of accounting records and other documents necessary for
the proper determination of the company’s internal revenue tax
liabilities, the investigating revenue officers resorted to the "Best
Evidence Obtainable" as provided in Section 6(B) of the NIRC (third
party information) and in accordance with the procedure laid down in
RMC No. 23-2000 dated November 27, 2000. Annex "A" of the
Formal Letter of Demand thus stated:
Thus, to verify the validity of the information previously provided by
the informant, the assigned revenue officers resorted to third party
information. Pursuant to Section 5(B) of the NIRC of 1997, access
letters requesting for information and the submission of certain
documents (i.e., Certificate of Income Tax Withheld at Source and/or
Alphabetical List showing the income payments made to L.M.
Camus Engineering Corporation for the taxable years 1997 to 1999)
were sent to the various clients of the subject corporation, including
but not limited to the following:
(List Deleted)
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 13
COMPILATION OF CASES
From the documents gathered and the data obtained therein, the
substantial underdeclaration as defined under Section 248(B) of the
NIRC of 1997 by your corporation of its income had been confirmed.
x x x x46 (Emphasis supplied.)
In the same letter, Assistant Commissioner Percival T. Salazar
informed private respondents that the estimated tax liabilities arising
from LMCEC’s underdeclaration amounted to ₱186,773,600.84 in
1997, ₱150,069,323.81 in 1998 and ₱163,220,111.13 in 1999.
These figures confirmed that the non-declaration by LMCEC for the
taxable years 1997, 1998 and 1999 of an amount exceeding 30%
income47 declared in its return is considered a substantial
underdeclaration of income, which constituted prima facie evidence
of false or fraudulent return under Section 248(B) 48 of the NIRC, as
amended.49
On the alleged settlement of the assessed tax deficiencies by private
respondents, respondent Secretary found the latter’s claim as
meritorious on the basis of the Certificate of Immunity From Audit
issued on December 6, 1999 pursuant to RR No. 2-99 and Letter of
Termination dated June 1, 1999 issued by Revenue Region No. 7
Chief of Assessment Division Ruth Vivian G. Gandia. Petitioner,
however, clarified that the certificate of immunity from audit covered
only income tax for the year 1997 and does not include VAT and
withholding taxes, while the Letter of Termination involved tax
liabilities for taxable year 1997 (EWT, VAT and income taxes) but
which was submitted for review of higher authorities as per the
Certification of RD No. 40 District Officer Pablo C. Cabreros,
Jr.50 For 1999, private respondents supposedly availed of the VAP
pursuant to RR No. 8-2001.
RR No. 2-99 issued on February 7, 1999 explained in its Policy
Statement that considering the scarcity of financial and human
resources as well as the time constraints within which the Bureau
has to "clean the Bureau’s backlog of unaudited tax returns in order
to keep updated and be focused with the most current accounts" in
preparation for the full implementation of a computerized tax
administration, the said revenue regulation was issued "providing for
last priority in audit and investigation of tax returns" to accomplish
the said objective "without, however, compromising the revenue
collection that would have been generated from audit and
enforcement activities." The program named as "Economic
Recovery Assistance Payment (ERAP) Program" granted immunity
from audit and investigation of income tax, VAT and percentage tax
returns for 1998. It expressly excluded withholding tax returns
(whether for income, VAT, or percentage tax purposes). Since such
immunity from audit and investigation does not preclude the
collection of revenues generated from audit and enforcement
activities, it follows that the Bureau is likewise not barred from
collecting any tax deficiency discovered as a result of tax fraud
investigations. Respondent Secretary’s opinion that RR No. 2-99
contains the feature of a tax amnesty is thus misplaced.
Tax amnesty is a general pardon to taxpayers who want to start a
clean tax slate. It also gives the government a chance to collect
uncollected tax from tax evaders without having to go through the
tedious process of a tax case.51Even assuming arguendo that the
issuance of RR No. 2-99 is in the nature of tax amnesty, it bears
noting that a tax amnesty, much like a tax exemption, is never
favored nor presumed in law and if granted by statute, the terms of
the amnesty like that of a tax exemption must be construed strictly
against the taxpayer and liberally in favor of the taxing authority.52

For the same reason, the availment by LMCEC of VAP under RR
No. 8-2001 as amended by RR No. 10-2001, through payment
supposedly made in October 29, 2001 before the said program
ended on October 31, 2001, did not amount to settlement of its
assessed tax deficiencies for the period 1997 to 1999, nor immunity
from prosecution for filing fraudulent return and attempt to evade or
defeat tax. As correctly asserted by petitioner, from the express
terms of the aforesaid revenue regulations, LMCEC is not qualified
to avail of the VAP granting taxpayers the privilege of last priority in
the audit and investigation of all internal revenue taxes for the
taxable year 2000 and all prior years under certain conditions,
considering that first, it was issued a PAN on February 19, 2001,
and second, it was the subject of investigation as a result of verified
information filed by a Tax Informer under Section 282 of the NIRC
duly recorded in the BIR Official Registry as Confidential Information
(CI) No. 29-200053 even prior to the issuance of the PAN.
Section 1 of RR No. 8-2001 provides:
SECTION 1. COVERAGE. – x x x
Any person, natural or juridical, including estates and trusts, liable to
pay any of the above-cited internal revenue taxes for the above
specified period/s who, due to inadvertence or otherwise,
erroneously paid his internal revenue tax liabilities or failed to file tax
return/pay taxes may avail of the Voluntary Assessment Program
(VAP), except those falling under any of the following instances:
1.1 Those covered by a Preliminary Assessment Notice (PAN), Final
Assessment Notice (FAN), or Collection Letter issued on or before
July 31, 2001; or
1.2 Persons under investigation as a result of verified information
filed by a Tax Informer under Section 282 of the Tax Code of 1997,
duly processed and recorded in the BIR Official Registry Book on or
before July 31, 2001;
1.3 Tax fraud cases already filed and pending in courts for
adjudication; and
x x x x (Emphasis supplied.)
Moreover, private respondents cannot invoke LMCEC’s availment of
VAP to foreclose any subsequent audit of its account books and
other accounting records in view of the strong finding of
underdeclaration in LMCEC’s payment of correct income tax liability
by more than 30% as supported by the written report of the TFD
detailing the facts and the law on which such finding is based,
pursuant to the tax fraud investigation authorized by petitioner under
LA No. 00009361. This conclusion finds support in Section 2 of RR
No. 8-2001 as amended by RR No. 10-2001 provides:
SEC. 2. TAXPAYER’S BENEFIT FROM AVAILMENT OF THE
VAP. – A taxpayer who has availed of the VAP shall not be audited
except upon authorization and approval of the Commissioner of
Internal Revenue when there is strong evidence or finding of
understatement in the payment of taxpayer’s correct tax liability by
more than thirty percent (30%) as supported by a written report of
the appropriate office detailing the facts and the law on which such
finding is based: Provided, however, that any VAP payment should
be allowed as tax credit against the deficiency tax due, if any, in
case the concerned taxpayer has been subjected to tax audit.
xxxx
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 14
COMPILATION OF CASES
Given the explicit conditions for the grant of immunity from audit
under RR No. 2-99, RR No. 8-2001 and RR No. 10-2001, we hold
that respondent Secretary gravely erred in declaring that petitioner is
now estopped from assessing any tax deficiency against LMCEC
after issuance of the aforementioned documents of immunity from
audit/investigation and settlement of tax liabilities. It is axiomatic that
the State can never be in estoppel, and this is particularly true in
matters involving taxation. The errors of certain administrative
officers should never be allowed to jeopardize the government’s
financial position.54
Respondent Secretary’s other ground for assailing the course of
action taken by petitioner in proceeding with the audit and
investigation of LMCEC -- the alleged violation of the general rule in
Section 235 of the NIRC allowing the examination and inspection of
taxpayer’s books of accounts and other accounting records only
once in a taxable year -- is likewise untenable. As correctly pointed
out by petitioner, the discovery of substantial underdeclarations of
income by LMCEC for taxable years 1997, 1998 and 1999 upon
verified information provided by an "informer" under Section 282 of
the NIRC, as well as the necessity of obtaining information from third
parties to ascertain the correctness of the return filed or evaluation
of tax compliance in collecting taxes (as a result of the disobedience
to the summons issued by the Bureau against the private
respondents), are circumstances warranting exception from the
general rule in Section 235. 55
As already stated, the substantial underdeclared income in the
returns filed by LMCEC for 1997, 1998 and 1999 in amounts
equivalent to more than 30% (the computation in the final
assessment notice showed underdeclarations of almost 200%)
constitutes prima facie evidence of fraudulent return under Section
248(B) of the NIRC. Prior to the issuance of the preliminary and final
notices of assessment, the revenue officers conducted a preliminary
investigation on the information and documents showing substantial
understatement of LMCEC’s tax liabilities which were provided by
the Informer, following the procedure under RMO No. 15-95. 56 Based
on the prima facie finding of the existence of fraud, petitioner issued
LA No. 00009361 for the TFD to conduct a formal fraud investigation
of LMCEC.57 Consequently, respondent Secretary’s ruling that the
filing of criminal complaint for violation of Sections 254 and 255 of
the NIRC cannot prosper because of lack of prior determination of
the existence of fraud, is bereft of factual basis and contradicted by
the evidence on record.
Tax assessments by tax examiners are presumed correct and made
in good faith, and all presumptions are in favor of the correctness of
a tax assessment unless proven otherwise.58 We have held that a
taxpayer’s failure to file a petition for review with the Court of Tax
Appeals within the statutory period rendered the disputed
assessment final, executory and demandable, thereby precluding it
from interposing the defenses of legality or validity of the
assessment and prescription of the Government’s right to
assess.59 Indeed, any objection against the assessment should have
been pursued following the avenue paved in Section 229 (now
Section 228) of the NIRC on protests on assessments of internal
revenue taxes.60
Records bear out that the assessment notice and Formal Letter of
Demand dated August 7, 2002 were duly served on LMCEC on
October 1, 2002. Private respondents did not file a motion for
reconsideration of the said assessment notice and formal demand;
neither did they appeal to the Court of Tax Appeals. Section 228 of
the NIRC61 provides the remedy to dispute a tax assessment within a

certain period of time. It states that an assessment may be protested
by filing a request for reconsideration or reinvestigation within 30
days from receipt of the assessment by the taxpayer. No such
administrative protest was filed by private respondents seeking
reconsideration of the August 7, 2002 assessment notice and formal
letter of demand. Private respondents cannot belatedly assail the
said assessment, which they allowed to lapse into finality, by raising
issues as to its validity and correctness during the preliminary
investigation after the BIR has referred the matter for prosecution
under Sections 254 and 255 of the NIRC.
As we held in Marcos II v. Court of Appeals62:
It is not the Department of Justice which is the government agency
tasked to determine the amount of taxes due upon the subject
estate, but the Bureau of Internal Revenue, whose determinations
and assessments are presumed correct and made in good faith. The
taxpayer has the duty of proving otherwise. In the absence of proof
of any irregularities in the performance of official duties, an
assessment will not be disturbed. Even an assessment based on
estimates is prima facie valid and lawful where it does not appear to
have been arrived at arbitrarily or capriciously. The burden of proof
is upon the complaining party to show clearly that the assessment is
erroneous. Failure to present proof of error in the assessment will
justify the judicial affirmance of said assessment. x x x.
Moreover, these objections to the assessments should have been
raised, considering the ample remedies afforded the taxpayer by the
Tax Code, with the Bureau of Internal Revenue and the Court of Tax
Appeals, as described earlier, and cannot be raised now via Petition
for Certiorari, under the pretext of grave abuse of discretion. The
course of action taken by the petitioner reflects his disregard or even
repugnance of the established institutions for governance in the
scheme of a well-ordered society. The subject tax assessments
having become final, executory and enforceable, the same can no
longer be contested by means of a disguised protest. In the main,
Certiorari may not be used as a substitute for a lost appeal or
remedy. This judicial policy becomes more pronounced in view of
the absence of sufficient attack against the actuations of
government. (Emphasis supplied.)
The determination of probable cause is part of the discretion granted
to the investigating prosecutor and ultimately, the Secretary of
Justice. However, this Court and the CA possess the power to
review findings of prosecutors in preliminary investigations. Although
policy considerations call for the widest latitude of deference to the
prosecutor’s findings, courts should never shirk from exercising their
power, when the circumstances warrant, to determine whether the
prosecutor’s findings are supported by the facts, or by the law. In so
doing, courts do not act as prosecutors but as organs of the
judiciary, exercising their mandate under the Constitution, relevant
statutes, and remedial rules to settle cases and
controversies.63 Clearly, the power of the Secretary of Justice to
review does not preclude this Court and the CA from intervening and
exercising our own powers of review with respect to the DOJ’s
findings, such as in the exceptional case in which grave abuse of
discretion is committed, as when a clear sufficiency or insufficiency
of evidence to support a finding of probable cause is ignored.64
WHEREFORE, the petition is GRANTED. The Decision dated
October 31, 2006 and Resolution dated March 6, 2007 of the Court
of Appeals in CA-G.R. SP No. 93387 are hereby REVERSED and
SET ASIDE. The Secretary of Justice is hereby DIRECTED to order
the Chief State Prosecutor to file before the Regional Trial Court of
Quezon City, National Capital Judicial Region, the corresponding
Information against L. M. Camus Engineering Corporation,
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 15
COMPILATION OF CASES
represented by its President Luis M. Camus and Comptroller Lino D.
Mendoza, for Violation of Sections 254 and 255 of the National
Internal Revenue Code of 1997.
No costs.
SO ORDERED.
FITNESS BY DESIGN, INC. v. CIR
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 177982              October 17, 2008
FITNESS BY DESIGN, INC., petitioner, 
vs.
COMMISSIONER ON INTERNAL REVENUE, respondent.
DECISION
CARPIO MORALES, J.:
On March 17, 2004, the Commissioner on Internal Revenue
(respondent) assessed Fitness by Design, Inc. (petitioner) for
deficiency income taxes for the tax year 1995 in the total amount of
₱10,647,529.69.1 Petitioner protested the assessment on the ground
that it was issued beyond the three-year prescriptive period under
Section 203 of the Tax Code. 2 Additionally, petitioner claimed that
since it was incorporated only on May 30, 1995, there was no basis
to assume that it had already earned income for the tax year 1995. 3
On February 1, 2005, respondent issued a warrant of distraint and/or
levy against petitioner,4 drawing petitioner to file on March 1, 2005 a
Petition for Review (with Motion to Suspend Collection of Income
Tax, Value Added Tax, Documentary Stamp Tax and Surcharges
and Interests subject of this Petition) 5 before the Court of Tax
Appeals (CTA) before which it reiterated its defense of prescription.
The petition was docketed as CTA Case No. 7160.
In his Answer,6 respondent alleged:
The right of the respondent to assess petitioner for deficiency
income tax, VAT and Documentary Stamp Tax for the year 1995 has
not prescribed pursuant to Section 222(a) of the 1997 Tax
Code. Petitioner’s 1995 Income Tax Return (ITR) filed on April 11,
1996 was false and fraudulent for its deliberate failure to declare its
true sales. Petitioner declared in its 1995 Income Tax Return that it
was on its pre-operation stage and has not declared its income.
Investigation by the revenue officers of the respondent, however,
disclosed that it has been operating/doing business and had sales
operations for the year 1995 in the total amount of ₱7,156,336.08
which it failed to report in its 1995 ITR. Thus, for the year 1995,
petitioner filed a fraudulent annual income return with intent to evade
tax. Likewise, petitioner failed to file Value-Added Tax (VAT) Return
and reported the amount of P7,156,336.08 as its gross sales for the
year 1995. Hence, for failure to file a VAT return and for filing a
fraudulent income tax return for the year 1995, the

corresponding taxes may be assessed at any time within ten
(10) years after the discovery of such omission or
fraud pursuant to Section 222(a) of the 1997 Tax Code.
The subject deficiency tax assessments have already become final,
executory and demandable for failure of the petitioner to file a
protest within the reglementary period provided for by law. The
"alleged protest" allegedly filed on June 25, 2004 at the Legal
Division, Revenue Region No. 8, Makati City is nowhere to be found
in the BIR Records nor reflected in the Record Book of the Legal
Division as normally done by our receiving clerk when she receive[s]
any document. The respondent, therefore, has legal basis to collect
the tax liability either by distraint and levy or civil action.7 (Emphasis
and underscoring supplied)
The aforecited Section 222(a)8 of the 1997 Tax Code provides:
In the case of a false or fraudulent return with intent to evade tax or
of failure to file a return, the tax may be assessed, or a proceeding in
court for the collection of such tax may be filed without assessment,
at any time within ten (10) years after the discovery of the falsity,
fraud, or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection thereof.
(Underscoring supplied)
The Bureau of Internal Revenue (BIR) in fact filed on March 10,
2005 a criminal complaint before the Department of Justice against
the officers and accountant of petitioner for violation of the
provisions of "The National Internal Revenue Code of 1977, as
amended,9 covering the taxable year 1995." The criminal complaint
was docketed as I.S. No. 2005-203.
On motion of petitioner in CTA Case No. 7160, a preliminary hearing
on the issue of prescription 10 was conducted during which
petitioner’s former bookkeeper attested that a former colleague –
certified public accountant Leonardo Sablan (Sablan) – illegally took
custody of petitioner’s accounting records, invoices, and official
receipts and turned them over to the BIR.11
On petitioner’s request, a subpoena ad testificandum was issued to
Sablan for the hearing before the CTA scheduled on September 4,
2006 but he failed to appear.12
Petitioner thus requested for the issuance of another
subpoena ad testificandum to Sablan for the hearing scheduled on
October 23, 2006,13 and of subpoena duces tecum to the chief of the
National Investigation Division of the BIR for the production of the
Affidavit of the Informer bearing on the assessment in
question.14 Petitioner’s requests were granted.15
During the scheduled hearing of the case on October 23, 2006, on
respondent’s counsel’s manifestation that he was not furnished a
copy of petitioner’s motion for the issuance of subpoenaes, the CTA
ordered petitioner to file a motion for the issuance of subpoenas and
to furnish respondent’s counsel a copy thereof. 16 Petitioner complied
with the CTA order.17
In a related move, petitioner submitted written interrogatories
addressed to Sablan and to Henry Sarmiento and Marinella
German, revenue officers of the National Investigation Division of
the BIR.18
By Resolution19 of January 15, 2007, the CTA denied petitioner’s
Motion for Issuance of Subpoenas and disallowed the submission by
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 16
COMPILATION OF CASES
petitioner of written interrogatories to Sablan, who is not a party to
the case, and the revenue officers, 20 it finding that the testimony,
documents, and admissions sought are not relevant. 21 Besides, the
CTA found that to require Sablan to testify would violate Section 2 of
Republic Act No. 2338, as implemented by Section 12 of Finance
Department Order No. 46-66, proscribing the revelation of identities
of informers of violations of internal revenue laws, except when the
information is proven to be malicious or false.22
In any event, the CTA held that there was no need to issue a
subpoena duces tecum to obtain the Affidavit of the Informer as the
same formed part of the BIR records of the case, the production of
which had been ordered by it.23
Petitioner’s Motion for Reconsideration 24 of the CTA Resolution of
January 15, 2007 was denied,25 hence, the present Petition for
Certiorari26 which imputes grave abuse of discretion to the CTA
I. x x x in holding that the legality of the mode of acquiring the
documents which are the bases of the above discussed deficiency
tax assessments, the subject matter of the Petition for Review now
pending in the Honorable Second Division, is not material and
relevant to the issue of prescription.
II. x x x in holding that Mr. Leonardo Sablan’s testimony, if allowed,
would violate RA 2338 which prohibits the BIR to reveal the identity
of the informer since 1) the purpose of the subpoena is to elicit from
him the whereabouts of the original accounting records, documents
and receipts owned by the Petitioner and not to discover if he is the
informer since the identity of the informer is not relevant to the
issues raised; 2) RA 2338 cannot legally justify violation of the
Petitioner’s property rights by a person, whether he is an informer or
not, since such RA cannot allow such invasion of property rights
otherwise RA 2338 would run counter to the constitutional mandate
that "no person shall be deprive[d] of life, liberty or property without
due process of law."
III. x x x in holding that the issuance of subpoena ad testificandum
would constitute a violation of the prohibition to reveal the identity of
the informer because compliance with such prohibition has been
rendered moot and academic by the voluntary admissions of the
Respondent himself.
IV. x x x in holding that the constitutional right of an accused to
examine the witness against him does not exist in this case. The
Petitioner’s liability for tax deficiency assessment which is the main
issue in the Petition for Review is currently pending at the Honorable
Second Division. Therefore, it is a prejudicial question raised in the
criminal case filed by the herein Respondent against the officers of
the Petitioner with the Department of Justice.
V. x x x in dismissing the request for subpoena ad testificandum
because the Opposition thereto submitted by the Respondent was
not promptly filed as provided by the Rules of Court thus, it is
respectfully submitted that, Respondent has waived his right to
object thereto.
VI. x x x when the Honorable Court of Tax Appeals ruled that the
purpose of the Petitioner in requesting for written interrogatories is to
annoy, embarrass, or oppress the witness because such ruling has
no factual basis since Respondent never alleged nor proved that the
witnesses to whom the interrogatories are addressed will be
annoyed, embarrassed or oppressed; besides the only obvious
purpose of the Petitioner is to know the whereabouts of accounting
records and documents which are in the possession of the

witnesses to whom the interrogatories are directed and to ultimately
get possession thereof. Granting without admitting that there is
annoyance, embarrassment or oppression; the same is not
unreasonable.
VII. x x x when it failed to rule that the BIR officers and employees
are not covered by the prohibition under RA 2338 and do not have
the authority to withhold from the taxpayer documents owned by
such taxpayer.
VIII. x x x when it required the "clear and unequivocal proof" of
relevance of the documents as a condition precedent for the
issuance of subpoena duces tecum.
IX. x x x when it quashed the subpoena duces tecum as the
Honorable Court had issued an outstanding order to the Respondent
to certify and forward to the CTA all the records of the case because
up to the date of this Petition the BIR records have not been
submitted yet to the CTA.27
Grave abuse of discretion implies such capricious and whimsical
exercise of judgment as equivalent to lack of jurisdiction or, in other
words, when the power is exercised in an arbitrary or despotic
manner by reason of passion or personal hostility, and it must be so
patent and gross as to amount to an evasion of positive duty or a
virtual refusal of duty enjoined or to act at all in contemplation of
law.28
The Court finds that the issuance by the CTA of the questioned
resolutions was not tainted by arbitrariness.
The fact that Sablan was not a party to the case aside, the
testimonies, documents, and admissions sought by petitioner are not
indeed relevant to the issue before the CTA. For in requesting the
issuance of the subpoenas and the submission of written
interrogatories, petitioner sought to establish that its accounting
records and related documents, invoices, and receipts which were
the bases of the assessment against it were illegally obtained. The
only issues, however, which surfaced during the preliminary hearing
before the CTA, were whether respondent’s issuance of assessment
against petitioner had prescribed and whether petitioner’s tax return
was false or fraudulent.
Besides, as the CTA held, the subpoenas and answers to the written
interrogatories would violate Section 2 of Republic Act No. 2338 as
implemented by Section 12 of Finance Department Order No. 46-66.
Petitioner claims, however, that it only intended to elicit information
on the whereabouts of the documents it needs in order to refute the
assessment, and not to disclose the identity of the
informer.29 Petitioner’s position does not persuade. The
interrogatories addressed to Sablan and the revenue officers show
that they were intended to confirm petitioner’s belief that Sablan was
the informer. Thus the questions for Sablan read:
1. Under what circumstances do you know petitioner corporation?
Please state in what capacity, the date or period you obtained said
knowledge.
2. Do you know a Ms. Elnora Carpio, who from 1995 to the early part
of 1996 was the book keeper of petitioner? Please state how you
came to know of Ms. Carpio.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 17
COMPILATION OF CASES
3. At the time that Ms. Carpio was book keeper of petitioner did she
consult you or show any accounting documents and records of
petitioner?
4. What documents, if any, did you obtain from petitioner?
5. Were these documents that you obtained from petitioner
submitted to the Bureau of Internal Revenue (BIR)? Please describe
said documents and under what circumstances the same were
submitted.
6. Was the consent of the petitioner, its officers or employees
obtained when the documents that you obtained were submitted to
the BIR? Please state when and from whom the consent was
obtained.
7. Did you execute an affidavit as an informer  in the assessment
which was issued by the BIR against petitioner for the tax year 1995
and other years?30 (Underscoring supplied) while the questions for
the revenue officers read:
1. Where did you obtain the documents, particularly the invoices and
official receipts, which [were] used by your office as evidence and as
basis of the assessment for deficiency income tax and value added
tax for the tax year 1995 issued against petitioner?
2. Do you know Mr. Leonardo Sablan? Please state under what
circumstance you came to know Mr. Sablan?31 (Underscoring
supplied)
Petitioner impugns the manner in which the documents in question
reached the BIR, Sablan having allegedly submitted them to the BIR
without its (petitioner’s) consent. Petitioner’s lack of consent does
not, however, imply that the BIR obtained them illegally or that the
information received is false or malicious. Nor does the lack of
consent preclude the BIR from assessing deficiency taxes on
petitioner based on the documents. Thus Section 5 of the Tax Code
provides:
In ascertaining the correctness of any return, or in making a return
when none has been made, or in determining the liability of any
person for any internal revenue tax, or in collecting any such liability,
or in evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record or other data which may be
relevant or material to such query;
(B) To obtain on a regular basis from any person other than the
person whose internal revenue tax liability is subject to audit or
investigation, or from any office or officer of the national and local
governments, government agencies and instrumentalities, including
the Bangko Sentral ng Pilipinasand government-owned and –
controlled corporations, any information such as, but not limited to,
costs and volume of production, receipts or sales and gross incomes
of taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies,
regional operating headquarters of multinational companies, joint
accounts, associations, joint ventures or consortia and registered
partnerships and their members;
(C) To summon the person liable for tax or required to file a return,
or any officer or employee of such person, or  any person having
possession, custody, or care of the books of accounts and
other accounting records containing entries relating to the
 TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 18
COMPILATION OF CASES

business of the person liable for tax, or any other person, to POWER TO MAKE ASSESSMENTS, ETC.
appear before the Commissioner or his duly authorized
representatives at a time and place specified in the summons and to BEST EVIDENCE OBTAINABLE
produce such books, papers, records, or other data, and to give
testimony; CIR v. HANTEX TRADING

(D) To take such testimony of the person concerned, under oath, as SECOND DIVISION
may be relevant or material to such inquiry; and
G.R. No. 136975             March 31, 2005
(E) To cause revenue officers and employees to make a canvass
from time to time of any revenue district or region and inquire after
COMMISSION OF INTERNAL REVENUE, Petitioner, 
and concerning all persons therein who may be liable to pay any
vs.
internal revenue tax, and all persons owning or having the care,
HANTEX TRADING CO., INC., respondent.
management or possession of any object with respect to which a tax
is imposed.

x x x x (Emphasis and underscoring supplied)

DECISION

The law thus allows the BIR access to all relevant or material
records and data in the person of the taxpayer, 32 and the BIR can CALLEJO, SR., J.:
accept documents which cannot be admitted in a judicial proceeding
where the Rules of Court are strictly observed. 33 To require the Before us is a petition for review of the Decision1 of the Court of
consent of the taxpayer would defeat the intent of the law to help the Appeals (CA) which reversed the Decision 2 of the Court of Tax
BIR assess and collect the correct amount of taxes. Appeals (CTA) in CTA Case No. 5126, upholding the deficiency
income and sales tax assessments against respondent Hantex
Petitioner’s invocation of the rights of an accused in a criminal Trading Co., Inc.
prosecution to cross examine the witness against him and to have
compulsory process issued to secure the attendance of witnesses The Antecedents
and the production of other evidence in his behalf does not lie. CTA
Case No. 7160 is not a criminal prosecution, and even granting that
The respondent is a corporation duly organized and existing under
it is related to I.S. No. 2005-203, the respondents in the latter
the laws of the Philippines. Being engaged in the sale of plastic
proceeding are the officers and accountant of petitioner-corporation,
products, it imports synthetic resin and other chemicals for the
not petitioner. From the complaint and supporting affidavits in I.S.
manufacture of its products. For this purpose, it is required to file an
No. 2005-203, Sablan does not even appear to be a witness against
Import Entry and Internal Revenue Declaration (Consumption Entry)
the respondents therein.34
with the Bureau of Customs under Section 1301 of the Tariff and
Customs Code.
AT ALL EVENTS, issuance of subpoena duces tecum for the
production of the documents requested by the petitioner – which
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of
documents petitioner claims to be crucial to its defense 35 – is
Counter-Intelligence Division of the Economic Intelligence and
unnecessary in view of the CTA order for respondent to certify and
Investigation Bureau (EIIB), received confidential information that
forward to it all the records of the case. 36 If the order has not been
the respondent had imported synthetic resin amounting
complied with, the CTA can enforce it by citing respondent for
to P115,599,018.00 but only declared P45,538,694.57.3 According to
indirect contempt.37
the informer, based on photocopies of 77 Consumption Entries
furnished by another informer, the 1987 importations of the
WHEREFORE, in light of the foregoing disquisition, the petition respondent were understated in its accounting records. 4 Amoto
is DISMISSED. submitted a report to the EIIB Commissioner recommending that an
inventory audit of the respondent be conducted by the Internal
Costs against petitioner. Inquiry and Prosecution Office (IIPO) of the EIIB. 5

SO ORDERED. Acting on the said report, Jose T. Almonte, then Commissioner of

the EIIB, issued Mission Order No. 398-896 dated November 14,
1989 for the audit and investigation of the importations of Hantex for
1987. The IIPO issued subpoena duces tecum and ad
testificandum for the president and general manager of the
respondent to appear in a hearing and bring the following:

1. Books of Accounts for the year 1987;

2. Record of Importations of Synthetic Resin and Calcium Carbonate

for the year 1987;

3. Income tax returns & attachments for 1987; and

4. Record of tax payments.7


However, the respondent’s president and general manager refused
to comply with the subpoena, contending that its books of accounts
and records of importation of synthetic resin and calcium
bicarbonate had been investigated repeatedly by the Bureau of
Internal Revenue (BIR) on prior occasions. 8 The IIPO explained that
despite such previous investigations, the EIIB was still authorized to
conduct an investigation pursuant to Section 26-A of Executive
Order No. 127. Still, the respondent refused to comply with the
subpoena issued by the IIPO. The latter forthwith secured certified
copies of the Profit and Loss Statements for 1987 filed by the
respondent with the Securities and Exchange Commission
(SEC).9 However, the IIPO failed to secure certified copies of the
respondent’s 1987 Consumption Entries from the Bureau of
Customs since, according to the custodian thereof, the original
copies had been eaten by termites.10
In a Letter dated June 28, 1990, the IIPO requested the Chief of the
Collection Division, Manila International Container Port, and the
Acting Chief of the Collection Division, Port of Manila, to
authenticate the machine copies of the import entries supplied by
the informer. However, Chief of the Collection Division Merlita D.
Tomas could not do so because the Collection Division did not have
the original copies of the entries. Instead, she wrote the IIPO that, as
gleaned from the records, the following entries had been duly
processed and released after the payment of duties and taxes:
(Table Deleted)
Acting Chief of the Collection Division of the Bureau of Customs
Augusto S. Danganan could not authenticate the machine copies of
the import entries as well, since the original copies of the said
entries filed with the Bureau of Customs had apparently been eaten
by termites. However, he issued a certification that the following
enumerated entries were filed by the respondent which were
processed and released from the Port of Manila after payment of
duties and taxes, to wit:
(Table Deleted)
Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo
Dionela, Lt. Vicente Amoto and Lt. Rolando Gatmaitan conducted an
investigation. They relied on the certified copies of the respondent’s
Profit and Loss Statement for 1987 and 1988 on file with the SEC,
the machine copies of the Consumption Entries, Series of 1987,
submitted by the informer, as well as excerpts from the entries
certified by Tomas and Danganan.
Based on the documents/records on hand, inclusive of the machine
copies of the Consumption Entries, the EIIB found that for 1987, the
respondent had importations totaling P105,716,527.00 (inclusive of
advance sales tax). Compared with the declared sales based on the
Profit and Loss Statements filed with the SEC, the respondent had
unreported sales in the amount of P63,032,989.17, and its
corresponding income tax liability was P41,916,937.78, inclusive of
penalty charge and interests.
EIIB Commissioner Almonte transmitted the entire docket of the
case to the BIR and recommended the collection of the total tax
assessment from the respondent.13
On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a
Memorandum to the BIR Assistant Commissioner for Special
Operations Service, directing the latter to prepare a conference letter
advising the respondent of its deficiency taxes. 14
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 19
COMPILATION OF CASES
Meanwhile, as ordered by the Regional Director, Revenue
Enforcement Officers Saturnino D. Torres and Wilson Filamor
conducted an investigation on the 1987 importations of the
respondent, in the light of the records elevated by the EIIB to the
BIR, inclusive of the photocopies of the Consumption Entries. They
were to ascertain the respondent’s liability for deficiency sales and
income taxes for 1987, if any. Per Torres’ and Filamor’s Report
dated March 6, 1991 which was based on the report of the EIIB and
the documents/records appended thereto, there was a prima
facie case of fraud against the respondent in filing its 1987
Consumption Entry reports with the Bureau of Customs. They found
that the respondent had unrecorded importation in the total amount
of P70,661,694.00, and that the amount was not declared in its
income tax return for 1987. The District Revenue Officer and the
Regional Director of the BIR concurred with the report. 15
Based on the said report, the Acting Chief of the Special
Investigation Branch wrote the respondent and invited its
representative to a conference at 10:00 a.m. of March 14, 1991 to
discuss its deficiency internal revenue taxes and to present
whatever documentary and other evidence to refute the
same.16 Appended to the letter was a computation of the deficiency
income and sales tax due from the respondent, inclusive of
increments:
(Table Deleted)
The invitation was reiterated in a Letter dated March 15, 1991. In his
Reply dated March 15, 1991, Mariano O. Chua, the President and
General Manager of the respondent, requested that the report of
Torres and Filamor be set aside on the following claim:
… [W]e had already been investigated by RDO No. 23 under Letters
of Authority Nos. 0322988 RR dated Oct. 1, 1987, 0393561 RR
dated Aug. 17, 1988 and 0347838 RR dated March 2, 1988, and re-
investigated by the Special Investigation Team on Aug. 17, 1988
under Letter of Authority No. 0357464 RR, and the Intelligence and
Investigation Office on Sept. 27, 1988 under Letter of Authority No.
0020188 NA, all for income and business tax liabilities for 1987. The
Economic Intelligence and Investigation Bureau on Nov. 20, 1989,
likewise, confronted us on the same information for the same year.
In all of these investigations, save your request for an informal
conference, we welcomed them and proved the contrary of the
allegation. Now, with your new inquiry, we think that there will be no
end to the problem.
Madam, we had been subjected to so many investigations and re-
investigations for 1987 and nothing came out except the payment of
deficiency taxes as a result of oversight. Tax evasion through
underdeclaration of income had never been proven. 18
Invoking Section 23519 of the 1977 National Internal Revenue Code
(NIRC), as amended, Chua requested that the inquiry be set aside.
The petitioner, the Commissioner of Internal Revenue, through
Assistant Commissioner for Collection Jaime M. Maza, sent a Letter
dated April 15, 1991 to the respondent demanding payment of its
deficiency income tax of P13,414,226.40 and deficiency sales tax
of P14,752,903.25, inclusive of surcharge and interest.20 Appended
thereto were the Assessment Notices of Tax Deficiency Nos. FAS-1-
87-91-001654 and FAS-4-87-91-001655.21

On February 12, 1992, the Chief of the Accounts Receivables/Billing
Division of the BIR sent a letter to the respondent demanding
payment of its tax liability due for 1987 within ten (10) days from
notice, on pain of the collection tax due via a warrant of distraint and
levy and/or judicial action. 22 The Warrant of Distraint and/or
Levy23was actually served on the respondent on January 21, 1992.
On September 7, 1992, it wrote the Commissioner of Internal
Revenue protesting the assessment on the following grounds:
I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS
LEGAL BASIS, THE FACT THAT NO INVESTIGATION OF OUR
RECORDS WAS EVER MADE BY THE EIIB WHICH
RECOMMENDED ITS ISSUANCE.24
II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR
PURCHASES FOR 1987 AMOUNTED TO P105,716,527.00 AS
CLAIMED BY THE EIIB, THE ASSESSMENT OF A DEFICIENCY
INCOME TAX IS STILL DEFECTIVE FOR IT FAILED TO
CONSIDER OUR REAL PURCHASES OF P45,538,694.57.25
III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS
ALSO BASELESS AND UNFOUNDED CONSIDERING THAT WE
HAVE DUTIFULLY PAID THE SALES TAX DUE FROM OUR
BUSINESS.26
In view of the impasse, administrative hearings were conducted on
the respondent’s protest to the assessment. During the hearing of
August 20, 1993, the IIPO representative presented the photocopies
of the Consumption and Import Entries and the Certifications issued
by Tomas and Danganan of the Bureau of Customs. The IIPO
representative testified that the Bureau of Customs failed to furnish
the EIIB with certified copies of the Consumption and Import Entries;
hence, the EIIB relied on the machine copies from their informer.27
The respondent wrote the BIR Commissioner on July 12, 1993
questioning the assessment on the ground that the EIIB
representative failed to present the original, or authenticated, or duly
certified copies of the Consumption and Import Entry Accounts, or
excerpts thereof if the original copies were not readily available; or, if
the originals were in the official custody of a public officer, certified
copies thereof as provided for in Section 12, Chapter 3, Book VII,
Administrative Procedure, Administrative Order of 1987. It stated
that the only copies of the Consumption Entries submitted to the
Hearing Officer were mere machine copies furnished by an informer
of the EIIB. It asserted that the letters of Tomas and Danganan were
unreliable because of the following:
In the said letters, the two collection officers merely submitted a
listing of alleged import entry numbers and dates released of alleged
importations by Hantex Trading Co., Inc. of merchandise in 1987, for
which they certified that the corresponding duties and taxes were
paid after being processed in their offices. In said letters, no
amounts of the landed costs and advance sales tax and duties were
stated, and no particulars of the duties and taxes paid per import
entry document was presented.
The contents of the two letters failed to indicate the particulars of the
importations per entry number, and the said letters do not constitute
as evidence of the amounts of importations of Hantex Trading Co.,
Inc. in 1987.28
The respondent cited the following findings of the Hearing Officer:
… [T]hat the import entry documents do not constitute evidence only
indicate that the tax assessments in question have no factual basis,
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 20
COMPILATION OF CASES
and must, at this point in time, be withdrawn and cancelled. Any new
findings by the IIPO representative who attended the hearing could
not be used as evidence in this hearing, because all the issues on
the tax assessments in question have already been raised by the
herein taxpayer.29
The respondent requested anew that the income tax deficiency
assessment and the sales tax deficiency assessment be set aside
for lack of factual and legal basis.
The BIR Commissioner30 wrote the respondent on December 10,
1993, denying its letter-request for the dismissal of the
assessments.31 The BIR Commissioner admitted, in the said letter,
the possibility that the figures appearing in the photocopies of the
Consumption Entries had been tampered with. She averred,
however, that she was not proscribed from relying on other
admissible evidence, namely, the Letters of Torres and Filamor
dated August 7 and 22, 1990 on their investigation of the
respondent’s tax liability. The Commissioner emphasized that her
decision was final.32
The respondent forthwith filed a petition for review in the CTA of the
Commissioner’s Final Assessment Letter dated December 10, 1993
on the following grounds:
First. The alleged 1987 deficiency income tax assessment (including
increments) and the alleged 1987 deficiency sales tax assessment
(including increments) are void ab initio, since under Sections 16(a)
and 49(b) of the Tax Code, the Commissioner shall examine a return
after it is filed and, thereafter, assess the correct amount of tax. The
following facts obtaining in this case, however, are indicative of the
incorrectness of the tax assessments in question: the deficiency
interests imposed in the income and percentage tax deficiency
assessment notices were computed in violation of the provisions of
Section 249(b) of the NIRC of 1977, as amended; the percentage
tax deficiency was computed on an annual basis for the year 1987 in
accordance with the provision of Section 193, which should have
been computed in accordance with Section 162 of the 1977 NIRC,
as amended by Pres. Decree No. 1994 on a quarterly basis; and the
BIR official who signed the deficiency tax assessments was the
Assistant Commissioner for Collection, who had no authority to sign
the same under the NIRC.
Second. Even granting arguendo that the deficiency taxes and
increments for 1987 against the respondent were correctly
computed in accordance with the provisions of the Tax Code, the
facts indicate that the above-stated assessments were based on
alleged documents which are inadmissible in either administrative or
judicial proceedings. Moreover, the alleged bases of the tax
computations were anchored on mere presumptions and not on
actual facts. The alleged undeclared purchases for 1987 were based
on mere photocopies of alleged import entry documents, not the
original ones, and which had never been duly certified by the public
officer charged with the custody of such records in the Bureau of
Customs. According to the respondent, the alleged undeclared sales
were computed based on mere presumptions as to the alleged gross
profit contained in its 1987 financial statement. Moreover, even the
alleged financial statement of the respondent was a mere machine
copy and not an official copy of the 1987 income and business tax
returns. Finally, the respondent was following the accrual method of
accounting in 1987, yet, the BIR investigator who computed the
1987 income tax deficiency failed to allow as a deductible item the
alleged sales tax deficiency for 1987 as provided for under Section
30(c) of the NIRC of 1986.33

The Commissioner did not adduce in evidence the original or
certified true copies of the 1987 Consumption Entries on file with the
Commission on Audit. Instead, she offered in evidence as proof of
the contents thereof, the photocopies of the Consumption Entries
which the respondent objected to for being inadmissible in
evidence.34 She also failed to present any witness to prove the
correct amount of tax due from it. Nevertheless, the CTA
provisionally admitted the said documents in evidence, subject to its
final evaluation of their relevancy and probative weight to the issues
involved.35
On December 11, 1997, the CTA rendered a decision, the
dispositive portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby
rendered DENYING the herein petition. Petitioner is hereby
ORDERED TO PAY the respondent Commissioner of Internal
Revenue its deficiency income and sales taxes for the year 1987 in
the amounts of P11,182,350.26 and P12,660,382.46, respectively,
plus 20% delinquency interest per annum on both deficiency taxes
from April 15, 1991 until fully paid pursuant to Section 283(c)(3) of
the 1987 Tax Code, with costs against the petitioner.
SO ORDERED.36
The CTA ruled that the respondent was burdened to prove not only
that the assessment was erroneous, but also to adduce the correct
taxes to be paid by it. The CTA declared that the respondent failed
to prove the correct amount of taxes due to the BIR. It also ruled that
the respondent was burdened to adduce in evidence a certification
from the Bureau of Customs that the Consumption Entries in
question did not belong to it.
On appeal, the CA granted the petition and reversed the decision of
the CTA. The dispositive portion of the decision reads:
FOREGOING PREMISES CONSIDERED, the Petition for Review is
GRANTED and the December 11, 1997 decision of the CTA in CTA
Case No. 5162 affirming the 1987 deficiency income and sales tax
assessments and the increments thereof, issued by the BIR is
hereby REVERSED. No costs.37
The Ruling of the Court of Appeals
The CA held that the income and sales tax deficiency assessments
issued by the petitioner were unlawful and baseless since the copies
of the import entries relied upon in computing the deficiency tax of
the respondent were not duly authenticated by the public officer
charged with their custody, nor verified under oath by the EIIB and
the BIR investigators.38 The CA also noted that the public officer
charged with the custody of the import entries was never presented
in court to lend credence to the alleged loss of the originals. 39 The
CA pointed out that an import entry is a public document which falls
within the provisions of Section 19, Rule 132 of the Rules of Court,
and to be admissible for any legal purpose, Section 24, Rule 132 of
the Rules of Court should apply.40 Citing the ruling of this Court
in Collector of Internal Revenue v. Benipayo,41 the CA ruled that the
assessments were unlawful because they were based on hearsay
evidence. The CA also ruled that the respondent was deprived of its
right to due process of law.
The CA added that the CTA should not have just brushed aside the
legal requisites provided for under the pertinent provisions of the
Rules of Court in the matter of the admissibility of public documents,
considering that substantive rules of evidence should not be
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 21
COMPILATION OF CASES
disregarded. It also ruled that the certifications made by the two
Customs Collection Chiefs under the guise of supporting the
respondent’s alleged tax deficiency assessments invoking the best
evidence obtainable rule under the Tax Code should not be
permitted to supplant the best evidence rule under Section 7, Rule
130 of the Rules of Court.
Finally, the CA noted that the tax deficiency assessments were
computed without the tax returns. The CA opined that the use of the
tax returns is indispensable in the computation of a tax deficiency;
hence, this essential requirement must be complied with in the
preparation and issuance of valid tax deficiency assessments. 42
The Present Petition
The Commissioner of Internal Revenue, the petitioner herein, filed
the present petition for review under Rule 45 of the Rules of Court
for the reversal of the decision of the CA and for the reinstatement of
the ruling of the CTA.
As gleaned from the pleadings of the parties, the threshold issues
for resolution are the following: (a) whether the petition at bench is
proper and complies with Sections 4 and 5, Rule 7 of the Rules of
Court; (b) whether the December 10, 1991 final assessment of the
petitioner against the respondent for deficiency income tax and sales
tax for the latter’s 1987 importation of resins and calcium
bicarbonate is based on competent evidence and the law; and (c)
the total amount of deficiency taxes due from the respondent for
1987, if any.
On the first issue, the respondent points out that the petition raises
both questions of facts and law which cannot be the subject of an
appeal by certiorari under Rule 45 of the Rules of Court. The
respondent notes that the petition is defective because the
verification and the certification against forum shopping were not
signed by the petitioner herself, but only by the Regional Director of
the BIR. The respondent submits that the petitioner should have filed
a motion for reconsideration with the CA before filing the instant
petition for review.43
We find and so rule that the petition is sufficient in form. A
verification and certification against forum shopping signed by the
Regional Director constitutes sufficient compliance with the
requirements of Sections 4 and 5, Rule 7 of the Rules of Court.
Under Section 10 of the NIRC of 1997, 44 the Regional Director has
the power to administer and enforce internal revenue laws, rules and
regulations, including the assessment and collection of all internal
revenue taxes, charges and fees. Such power is broad enough to
vest the Revenue Regional Director with the authority to sign the
verification and certification against forum shopping in behalf of the
Commissioner of Internal Revenue. There is no other person in a
better position to know the collection cases filed under his
jurisdiction than the Revenue Regional Director.
Moreover, under Revenue Administrative Order No. 5-83,45 the
Regional Director is authorized to sign all pleadings filed in
connection with cases referred to the Revenue Regions by the
National Office which, otherwise, require the signature of the
petitioner.
We do not agree with the contention of the respondent that a motion
for reconsideration ought to have been filed before the filing of the
instant petition. A motion for reconsideration of the decision of the
CA is not a condition sine qua non for the filing of a petition for
review under Rule 45. As we held in Almora v. Court of Appeals:46

Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides
that:
A party may appeal by certiorari from a judgment of the Court of
Appeals, by filing with the Supreme Court a petition for certiorari
within fifteen (15) days from notice of judgment, or of the denial of
his motion for reconsideration filed in due time. (Emphasis supplied)
The conjunctive "or" clearly indicates that the 15-day reglementary
period for the filing of a petition for certiorari under Rule 45
commences either from notice of the questioned judgment or from
notice of denial of the appellant’s motion for reconsideration. A prior
motion for reconsideration is not indispensable for a petition for
review on certiorari under Rule 45 to prosper. …47
While Rule 45 of the Rules of Court provides that only questions of
law may be raised by the petitioner and resolved by the Court, under
exceptional circumstances, the Court may take cognizance thereof
and resolve questions of fact. In this case, the findings and
conclusion of the CA are inconsistent with those of the CTA, not to
mention those of the Commissioner of Internal Revenue. The issues
raised in this case relate to the propriety and the correctness of the
tax assessments made by the petitioner against the respondent, as
well as the propriety of the application of Section 16, paragraph (b)
of the 1977 NIRC, as amended by Pres. Decree Nos. 1705, 1773,
1994 and Executive Order No. 273, in relation to Section 3, Rule 132
of the Rules of Evidence. There is also an imperative need for the
Court to resolve the threshold factual issues to give justice to the
parties, and to determine whether the CA capriciously ignored,
misunderstood or misinterpreted cogent facts and circumstances
which, if considered, would change the outcome of the case.
On the second issue, the petitioner asserts that since the
respondent refused to cooperate and show its 1987 books of
account and other accounting records, it was proper for her to resort
to the best evidence obtainable – the photocopies of the import
entries in the Bureau of Customs and the respondent’s financial
statement filed with the SEC.48 The petitioner maintains that these
import entries were admissible as secondary evidence under the
best evidence obtainable rule, since they were duly authenticated by
the Bureau of Customs officials who processed the documents and
released the cargoes after payment of the duties and taxes
due.49 Further, the petitioner points out that under the best evidence
obtainable rule, the tax return is not important in computing the tax
deficiency.50
The petitioner avers that the best evidence obtainable rule under
Section 16 of the 1977 NIRC, as amended, legally cannot be
equated to the best evidence rule under the Rules of Court; nor can
the best evidence rule, being procedural law, be made strictly
operative in the interpretation of the best evidence obtainable rule
which is substantive in character. 51 The petitioner posits that the
CTA is not strictly bound by technical rules of evidence, the reason
being that the quantum of evidence required in the said court is
merely substantial evidence.52
Finally, the petitioner avers that the respondent has the burden of
proof to show the correct assessments; otherwise, the presumption
in favor of the correctness of the assessments made by it
stands.53 Since the respondent was allowed to explain its side, there
was no violation of due process.54
The respondent, for its part, maintains that the resort to the best
evidence obtainable method was illegal. In the first place, the
respondent argues, the EIIB agents are not duly authorized to
undertake examination of the taxpayer’s accounting records for
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 22
COMPILATION OF CASES
internal revenue tax purposes. Hence, the respondent’s failure to
accede to their demands to show its books of accounts and other
accounting records cannot justify resort to the use of the best
evidence obtainable method. 55 Secondly, when a taxpayer fails to
submit its tax records upon demand by the BIR officer, the remedy is
not to assess him and resort to the best evidence obtainable rule,
but to punish the taxpayer according to the provisions of the Tax
Code.56
In any case, the respondent argues that the photocopies of import
entries cannot be used in making the assessment because they
were not properly authenticated, pursuant to the provisions of
Sections 2457 and 2558 of Rule 132 of the Rules of Court. It avers
that while the CTA is not bound by the technical rules of evidence, it
is bound by substantial rules.59 The respondent points out that the
petitioner did not even secure a certification of the fact of loss of the
original documents from the custodian of the import entries. It simply
relied on the report of the EIIB agents that the import entry
documents were no longer available because they were eaten by
termites. The respondent posits that the two collectors of the Bureau
of Customs never authenticated the xerox copies of the import
entries; instead, they only issued certifications stating therein the
import entry numbers which were processed by their office and the
date the same were released.60
The respondent argues that it was not necessary for it to show the
correct assessment, considering that it is questioning the
assessments not only because they are erroneous, but because
they were issued without factual basis and in patent violation of the
assessment procedures laid down in the NIRC of 1977, as
amended.61 It is also pointed out that the petitioner failed to use the
tax returns filed by the respondent in computing the deficiency taxes
which is contrary to law; 62 as such, the deficiency assessments
constituted deprivation of property without due process of law.63
Central to the second issue is Section 16 of the NIRC of 1977, as
amended,64 which provides that the Commissioner of Internal
Revenue has the power to make assessments and prescribe
additional requirements for tax administration and enforcement.
Among such powers are those provided in paragraph (b) thereof,
which we quote:
(b) Failure to submit required returns, statements, reports and other
documents. – When a report required by law as a basis for the
assessment of any national internal revenue tax shall not be
forthcoming within the time fixed by law or regulation or when there
is reason to believe that any such report is false, incomplete or
erroneous, the Commissioner shall assess the proper tax on the
best evidence obtainable.
In case a person fails to file a required return or other document at
the time prescribed by law, or willfully or otherwise files a false or
fraudulent return or other document, the Commissioner shall make
or amend the return from his own knowledge and from such
information as he can obtain through testimony or otherwise, which
shall be prima facie correct and sufficient for all legal purposes. 65
This provision applies when the Commissioner of Internal Revenue
undertakes to perform her administrative duty of assessing the
proper tax against a taxpayer, to make a return in case of a
taxpayer’s failure to file one, or to amend a return already filed in the
BIR.
The petitioner may avail herself of the best evidence or other
information or testimony by exercising her power or authority under
paragraphs (1) to (4) of Section 7 of the NIRC:

(1) To examine any book, paper, record or other data which may be
relevant or material to such inquiry;
(2) To obtain information from any office or officer of the national and
local governments, government agencies or its instrumentalities,
including the Central Bank of the Philippines and government owned
or controlled corporations;
(3) To summon the person liable for tax or required to file a return, or
any officer or employee of such person, or any person having
possession, custody, or care of the books of accounts and other
accounting records containing entries relating to the business of the
person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and
place specified in the summons and to produce such books, papers,
records, or other data, and to give testimony;
(4) To take such testimony of the person concerned, under oath, as
may be relevant or material to such inquiry; …66
The "best evidence" envisaged in Section 16 of the 1977 NIRC, as
amended, includes the corporate and accounting records of the
taxpayer who is the subject of the assessment process, the
accounting records of other taxpayers engaged in the same line of
business, including their gross profit and net profit sales. 67 Such
evidence also includes data, record, paper, document or any
evidence gathered by internal revenue officers from other taxpayers
who had personal transactions or from whom the subject taxpayer
received any income; and record, data, document and information
secured from government offices or agencies, such as the SEC, the
Central Bank of the Philippines, the Bureau of Customs, and the
Tariff and Customs Commission.
The law allows the BIR access to all relevant or material records and
data in the person of the taxpayer. It places no limit or condition on
the type or form of the medium by which the record subject to the
order of the BIR is kept. The purpose of the law is to enable the BIR
to get at the taxpayer’s records in whatever form they may be kept.
Such records include computer tapes of the said records prepared
by the taxpayer in the course of business. 68 In this era of developing
information-storage technology, there is no valid reason to immunize
companies with computer-based, record-keeping capabilities from
BIR scrutiny. The standard is not the form of the record but where it
might shed light on the accuracy of the taxpayer’s return.
In Campbell, Jr. v. Guetersloh,69 the United States (U.S.) Court of
Appeals (5th Circuit) declared that it is the duty of the Commissioner
of Internal Revenue to investigate any circumstance which led him to
believe that the taxpayer had taxable income larger than reported.
Necessarily, this inquiry would have to be outside of the books
because they supported the return as filed. He may take the sworn
testimony of the taxpayer; he may take the testimony of third parties;
he may examine and subpoena, if necessary, traders’ and brokers’
accounts and books and the taxpayer’s book accounts. The
Commissioner is not bound to follow any set of patterns. The
existence of unreported income may be shown by any practicable
proof that is available in the circumstances of the particular situation.
Citing its ruling in Kenney v. Commissioner,70 the U.S. appellate
court declared that where the records of the taxpayer are manifestly
inaccurate and incomplete, the Commissioner may look to other
sources of information to establish income made by the taxpayer
during the years in question.71
We agree with the contention of the petitioner that the best evidence
obtainable may consist of hearsay evidence, such as the testimony
of third parties or accounts or other records of other taxpayers
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 23
COMPILATION OF CASES
similarly circumstanced as the taxpayer subject of the investigation,
hence, inadmissible in a regular proceeding in the regular
courts.72 Moreover, the general rule is that administrative agencies
such as the BIR are not bound by the technical rules of evidence. It
can accept documents which cannot be admitted in a judicial
proceeding where the Rules of Court are strictly observed. It can
choose to give weight or disregard such evidence, depending on its
trustworthiness.
However, the best evidence obtainable under Section 16 of the 1977
NIRC, as amended, does not include mere photocopies of
records/documents. The petitioner, in making a preliminary and final
tax deficiency assessment against a taxpayer, cannot anchor the
said assessment on mere machine copies of records/documents.
Mere photocopies of the Consumption Entries have no probative
weight if offered as proof of the contents thereof. The reason for this
is that such copies are mere scraps of paper and are of no probative
value as basis for any deficiency income or business taxes against a
taxpayer. Indeed, in United States v. Davey,73 the U.S. Court of
Appeals (2nd Circuit) ruled that where the accuracy of a taxpayer’s
return is being checked, the government is entitled to use the
original records rather than be forced to accept purported copies
which present the risk of error or tampering. 74
In Collector of Internal Revenue v. Benipayo,75 the Court ruled that
the assessment must be based on actual facts. The rule assumes
more importance in this case since the xerox copies of the
Consumption Entries furnished by the informer of the EIIB were
furnished by yet another informer. While the EIIB tried to secure
certified copies of the said entries from the Bureau of Customs, it
was unable to do so because the said entries were allegedly eaten
by termites. The Court can only surmise why the EIIB or the BIR, for
that matter, failed to secure certified copies of the said entries from
the Tariff and Customs Commission or from the National Statistics
Office which also had copies thereof. It bears stressing that under
Section 1306 of the Tariff and Customs Code, the Consumption
Entries shall be the required number of copies as prescribed by
regulations.76 The Consumption Entry is accomplished in
sextuplicate copies and quadruplicate copies in other places. In
Manila, the six copies are distributed to the Bureau of Customs, the
Tariff and Customs Commission, the Declarant (Importer), the
Terminal Operator, and the Bureau of Internal Revenue.
Inexplicably, the Commissioner and the BIR personnel ignored the
copy of the Consumption Entries filed with the BIR and relied on the
photocopies supplied by the informer of the EIIB who secured the
same from another informer. The BIR, in preparing and issuing its
preliminary and final assessments against the respondent, even
ignored the records on the investigation made by the District
Revenue officers on the respondent’s importations for 1987.
The original copies of the Consumption Entries were of prime
importance to the BIR. This is so because such entries are under
oath and are presumed to be true and correct under penalty of
falsification or perjury. Admissions in the said entries of the
importers’ documents are admissions against interest and
presumptively correct.77
In fine, then, the petitioner acted arbitrarily and capriciously in relying
on and giving weight to the machine copies of the Consumption
Entries in fixing the tax deficiency assessments against the
respondent.
The rule is that in the absence of the accounting records of a
taxpayer, his tax liability may be determined by estimation. The
petitioner is not required to compute such tax liabilities with
mathematical exactness. Approximation in the calculation of the

taxes due is justified. To hold otherwise would be tantamount to
holding that skillful concealment is an invincible barrier to
proof.78 However, the rule does not apply where the estimation is
arrived at arbitrarily and capriciously.79
We agree with the contention of the petitioner that, as a general rule,
tax assessments by tax examiners are presumed correct and made
in good faith. All presumptions are in favor of the correctness of a
tax assessment. It is to be presumed, however, that such
assessment was based on sufficient evidence. Upon the introduction
of the assessment in evidence, a prima facie case of liability on the
part of the taxpayer is made. 80 If a taxpayer files a petition for review
in the CTA and assails the assessment, the prima facie presumption
is that the assessment made by the BIR is correct, and that in
preparing the same, the BIR personnel regularly performed their
duties. This rule for tax initiated suits is premised on several factors
other than the normal evidentiary rule imposing proof obligation on
the petitioner-taxpayer: the presumption of administrative regularity;
the likelihood that the taxpayer will have access to the relevant
information; and the desirability of bolstering the record-keeping
requirements of the NIRC.81
However, the prima facie correctness of a tax assessment does not
apply upon proof that an assessment is utterly without foundation,
meaning it is arbitrary and capricious. Where the BIR has come out
with a "naked assessment," i.e., without any foundation character,
the determination of the tax due is without rational basis. 82 In such a
situation, the U.S. Court of Appeals ruled 83 that the determination of
the Commissioner contained in a deficiency notice
disappears. Hence, the determination by the CTA must rest on all
the evidence introduced and its ultimate determination must find
support in credible evidence.
The issue that now comes to fore is whether the tax deficiency
assessment against the respondent based on the certified copies of
the Profit and Loss Statement submitted by the respondent to the
SEC in 1987 and 1988, as well as certifications of Tomas and
Danganan, is arbitrary, capricious and illegal. The CTA ruled that the
respondent failed to overcome the prima facie correctness of the tax
deficiency assessment issued by the petitioner, to wit:
The issue should be ruled in the affirmative as petitioner has failed
to rebut the validity or correctness of the aforementioned tax
assessments. It is incongruous for petitioner to prove its cause by
simply drawing an inference unfavorable to the respondent by
attacking the source documents (Consumption Entries) which were
the bases of the assessment and which were certified by the Chiefs
of the Collection Division, Manila International Container Port and
the Port of Manila, as having been processed and released in the
name of the petitioner after payment of duties and taxes and the
duly certified copies of Financial Statements secured from the
Securities and Exchange Commission. Any such inference cannot
operate to relieve petitioner from bearing its burden of proof and this
Court has no warrant of absolution. The Court should have been
persuaded to grant the reliefs sought by the petitioner should it have
presented any evidence of relevance and competence required, like
that of a certification from the Bureau of Customs or from any other
agencies, attesting to the fact that those consumption entries did not
really belong to them.
The burden of proof is on the taxpayer contesting the validity or
correctness of an assessment to prove not only that the
Commissioner of Internal Revenue is wrong but the taxpayer is right
(Tan Guan v. CTA, 19 SCRA 903), otherwise, the presumption in
favor of the correctness of tax assessment stands (Sy Po v. CTA,
164 SCRA 524). The burden of proving the illegality of the
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 24
COMPILATION OF CASES
assessment lies upon the petitioner alleging it to be so. In the case
at bar, petitioner miserably failed to discharge this duty. 84
We are not in full accord with the findings and ratiocination of the
CTA. Based on the letter of the petitioner to the respondent dated
December 10, 1993, the tax deficiency assessment in question was
based on (a) the findings of the agents of the EIIB which was based,
in turn, on the photocopies of the Consumption Entries; (b) the Profit
and Loss Statements of the respondent for 1987 and 1988; and (c)
the certifications of Tomas and Danganan dated August 7, 1990 and
August 22, 1990:
In reply, please be informed that after a thorough evaluation of the
attending facts, as well as the laws and jurisprudence involved, this
Office holds that you are liable to the assessed deficiency taxes. The
conclusion was arrived at based on the findings of agents of the
Economic Intelligence & Investigation Bureau (EIIB) and of our own
examiners who have painstakingly examined the records furnished
by the Bureau of Customs and the Securities & Exchange
Commission (SEC). The examination conducted disclosed that while
your actual sales for 1987 amounted to P110,731,559.00, you
declared for taxation purposes, as shown in the Profit and Loss
Statements, the sum of P47,698,569.83 only. The difference,
therefore, of P63,032,989.17 constitutes as undeclared or
unrecorded sales which must be subjected to the income and sales
taxes.
You also argued that our assessment has no basis since the alleged
amount of underdeclared importations were lifted from uncertified or
unauthenticated xerox copies of consumption entries which are not
admissible in evidence. On this issue, it must be considered that in
letters dated August 7 and 22, 1990, the Chief and Acting Chief of
the Collection Division of the Manila International Container Port and
Port of Manila, respectively, certified that the enumerated
consumption entries were filed, processed and released from the
port after payment of duties and taxes. It is noted that the
certification does not touch on the genuineness, authenticity and
correctness of the consumption entries which are all xerox copies,
wherein the figures therein appearing may have been tampered
which may render said documents inadmissible in evidence, but for
tax purposes, it has been held that the Commissioner is not required
to make his determination (assessment) on the basis of evidence
legally admissible in a formal proceeding in Court (Mertens, Vol. 9,
p. 214, citing Cohen v. Commissioner). A statutory notice may be
based in whole or in part upon admissible evidence (Llorente v.
Commissioner, 74 TC 260 (1980); Weimerskirch v. Commissioner,
67 TC 672 (1977); and Rosano v. Commissioner, 46 TC 681 (1966).
In the case also of Weimerskirch v. Commissioner (1977), the
assessment was given due course in the presence of admissible
evidence as to how the Commissioner arrived at his determination,
although there was no admissible evidence with respect to the
substantial issue of whether the taxpayer had unreported or
undeclared income from narcotics sale. …85
Based on a Memorandum dated October 23, 1990 of the IIPO, the
source documents for the actual cost of importation of the
respondent are the machine copies of the Consumption Entries from
the informer which the IIPO claimed to have been certified by Tomas
and Danganan:
The source documents for the total actual cost of importations,
abovementioned, were the different copies of Consumption Entries,
Series of 1987, filed by subject with the Bureau of Customs, marked
Annexes "F-1" to "F-68." The total cost of importations is the sum of
the Landed Costs and the Advance Sales Tax as shown in the
annexed entries. These entries were duly authenticated as having

been processed and released, after payment of the duties and taxes
due thereon, by the Chief, Collection Division, Manila International
Container Port, dated August 7, 1990, "Annex-G," and the Port of
Manila, dated August 22, 1990, "Annex-H." So, it was established
that subject-importations, mostly resins, really belong to HANTEX
TRADING CO., INC.86
It also appears on the worksheet of the IIPO, as culled from the
photocopies of the Consumption Entries from its informer, that the
total cost of the respondent’s importation for 1987
was P105,761,527.00. Per the report of Torres and Filamor, they
also relied on the photocopies of the said Consumption Entries:
The importations made by taxpayer verified by us from the records
of the Bureau of Customs and xerox copies of which are hereto
attached shows the big volume of importations made and not
declared in the income tax return filed by taxpayer.
Based on the above findings, it clearly shows that a prima facie case
of fraud exists in the herein transaction of the taxpayer, as a
consequence of which, said transaction has not been possibly
entered into the books of accounts of the subject taxpayer.87
In fine, the petitioner based her finding that the 1987 importation of
the respondent was underdeclared in the amount
of P105,761,527.00 on the worthless machine copies of the
Consumption Entries. Aside from such copies, the petitioner has no
other evidence to prove that the respondent imported goods
costing P105,761,527.00. The petitioner cannot find solace on the
certifications of Tomas and Danganan because they did not
authenticate the machine copies of the Consumption Entries, and
merely indicated therein the entry numbers of Consumption Entries
and the dates when the Bureau of Customs released the same. The
certifications of Tomas and Danganan do not even contain the
landed costs and the advance sales taxes paid by the importer, if
any. Comparing the certifications of Tomas and Danganan and the
machine copies of the Consumption Entries, only 36 of the entry
numbers of such copies are included in the said certifications; the
entry numbers of the rest of the machine copies of the Consumption
Entries are not found therein.
Even if the Court would concede to the petitioner’s contention that
the certification of Tomas and Danganan authenticated the machine
copies of the Consumption Entries referred to in the certification, it
appears that the total cost of importations inclusive of advance sales
tax is only P64,324,953.00 – far from the amount
of P105,716,527.00 arrived at by the EIIB and the BIR, 88 or even the
amount of P110,079,491.61 arrived at by Deputy Commissioner
Deoferio, Jr.89 As gleaned from the certifications of Tomas and
Danganan, the goods covered by the Consumption Entries were
released by the Bureau of Customs, from which it can be presumed
that the respondent must have paid the taxes due on the said
importation. The petitioner did not adduce any documentary
evidence to prove otherwise.
Thus, the computations of the EIIB and the BIR on the quantity and
costs of the importations of the respondent in the amount
of P105,761,527.00 for 1987 have no factual basis, hence, arbitrary
and capricious. The petitioner cannot rely on the presumption that
she and the other employees of the BIR had regularly performed
their duties. As the Court held in Collector of Internal Revenue v.
Benipayo,90 in order to stand judicial scrutiny, the assessment must
be based on facts. The presumption of the correctness of an
assessment, being a mere presumption, cannot be made to rest on
another presumption.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 25
COMPILATION OF CASES
Moreover, the uncontroverted fact is that the BIR District Revenue
Office had repeatedly examined the 1987 books of accounts of the
respondent showing its importations, and found that the latter had
minimal business tax liability. In this case, the presumption that the
District Revenue officers performed their duties in accordance with
law shall apply. There is no evidence on record that the said officers
neglected to perform their duties as mandated by law; neither is
there evidence aliunde that the contents of the 1987 and 1988 Profit
and Loss Statements submitted by the respondent with the SEC are
incorrect.
Admittedly, the respondent did not adduce evidence to prove its
correct tax liability. However, considering that it has been
established that the petitioner’s assessment is barren of factual
basis, arbitrary and illegal, such failure on the part of the respondent
cannot serve as a basis for a finding by the Court that it is liable for
the amount contained in the said assessment; otherwise, the Court
would thereby be committing a travesty.
On the disposition of the case, the Court has two options, namely, to
deny the petition for lack of merit and affirm the decision of the CA,
without prejudice to the petitioner’s issuance of a new assessment
against the respondent based on credible evidence; or, to remand
the case to the CTA for further proceedings, to enable the petitioner
to adduce in evidence certified true copies or duplicate original
copies of the Consumption Entries for the respondent’s 1987
importations, if there be any, and the correct tax deficiency
assessment thereon, without prejudice to the right of the respondent
to adduce controverting evidence, so that the matter may be
resolved once and for all by the CTA. In the higher interest of justice
to both the parties, the Court has chosen the latter option. After all,
as the Tax Court of the United States emphasized in Harbin v.
Commissioner of Internal Revenue,91 taxation is not only practical; it
is vital. The obligation of good faith and fair dealing in carrying out its
provision is reciprocal and, as the government should never be over-
reaching or tyrannical, neither should a taxpayer be permitted to
escape payment by the concealment of material facts.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED.
The Decision of the Court of Appeals is SET ASIDE. The records
are REMANDED to the Court of Tax Appeals for further
proceedings, conformably with the decision of this Court. No costs.
SO ORDERED.

TAX REMEDIES
PRESCRIPTIVE PERIOD OF ASSESSMENT
GENERAL RULE
RATIONAL
BPI v. CIR
Republic of the Philippines
SUPREME COURT
SECOND DIVISION
G.R. No. 139736 October 17, 2005
BANK OF THE PHILIPPINE ISLANDS, Petitioner, 
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CHICO-NAZARIO, J.:
This Petition for Review on Certiorari, under Rule 45 of the 1997
Rules of Civil Procedure, assails the Decision of the Court of
Appeals in CA-G.R. SP No. 51271, dated 11 August 1999, 1 which
reversed and set aside the Decision of the Court of Tax Appeals
(CTA), dated 02 February 1999,2 and which reinstated Assessment
No. FAS-5-85-89-002054 requiring petitioner Bank of the Philippine
Islands (BPI) to pay the amount of ₱28,020.00 as deficiency
documentary stamp tax (DST) for the taxable year 1985, inclusive of
the compromise penalty.
There is hardly any controversy as to the factual antecedents of this
Petition.
Petitioner BPI is a commercial banking corporation organized and
existing under the laws of the Philippines. On two separate
occasions, particularly on 06 June 1985 and 14 June 1985, it sold
United States (US) $500,000.00 to the Central Bank of the
Philippines (Central Bank), for the total sales amount of
US$1,000,000.00.
On 10 October 1989, the Bureau of Internal Revenue (BIR) issued
Assessment No. FAS-5-85-89-002054, 3 finding petitioner BPI liable
for deficiency DST on its afore-mentioned sales of foreign bills of
exchange to the Central Bank, computed as follows –
1985 Deficiency Documentary Stamp Tax
Foreign Bills of Exchange…………………………..
Tax Due Thereon:
₱18,480,000.00 x ₱0.30 (Sec. 182 NIRC).
₱200.00
Add: Suggested compromise penalty………….……
TOTAL AMOUNT DUE AND COLLECTIBLE….
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 26
COMPILATION OF CASES
Petitioner BPI received the Assessment, together with the attached
Assessment Notice,4 on 20 October 1989.
Petitioner BPI, through its counsel, protested the Assessment in a
letter dated 16 November 1989, and filed with the BIR on 17
November 1989. The said protest letter is reproduced in full below –
November 16, 1989
The Commissioner of Internal Revenue
Quezon City
Attention of: Mr. Pedro C. Aguillon
Asst. Commissioner for Collection
Sir:
On behalf of our client, Bank of the Philippine Islands (BPI), we have
the honor to protest your assessment against it for deficiency
documentary stamp tax for the year 1985 in the amount of
₱28,020.00, arising from its sale to the Central Bank of U.S.
$500,000.00 on June 6, 1985 and another U.S. $500,000.00 on
June 14, 1985.
1. Under established market practice, the documentary stamp tax on
telegraphic transfers or sales of foreign exchange is paid by the
buyer. Thus, when BPI sells to any party, the cost of documentary
stamp tax is added to the total price or charge to the buyer and the
seller affixes the corresponding documentary stamp on the
document. Similarly, when the Central Bank sells foreign exchange
to BPI, it charges BPI for the cost of the documentary stamp on the
transaction.
2. In the two transactions subject of your assessment, no
documentary stamps were affixed because the buyer, 
Central Bank of the Philippines, was exempt from such tax. And
while it is true that under P.D. 1994, a proviso was added to sec.
222 (now sec. 186) of the Tax Code "that whenever one party to a
taxable document enjoys exemption from the tax herein imposed,
the other party thereto who is not exempt shall be the one directly
liable for the tax," this proviso (and the other amendments of P.D.
1994) took effect only on January 1, 1986, according to sec. 49 of
P.D. 1994. Hence, the liability for the documentary stamp tax could
not be shifted to the seller.
In view of the foregoing, we request that the assessment be revoked
and cancelled.
Very truly yours,
PADILLA LAW OFFICE
By:
(signed)
SABINO PADILLA, JR.5
Petitioner BPI did not receive any immediate reply to its protest
letter. However, on 15 October 1992, the BIR issued a Warrant of

Distraint and/or Levy6 against petitioner BPI for the assessed
deficiency DST for taxable year 1985, in the amount of ₱27,720.00
(excluding the compromise penalty of ₱300.00). It served the
Warrant on petitioner BPI only on 23 October 1992. 7
Then again, petitioner BPI did not hear from the BIR until 11
September 1997, when its counsel received a letter, dated 13
August 1997, signed by then BIR Commissioner Liwayway Vinzons-
Chato, denying its "request for reconsideration," and addressing the
points raised by petitioner BPI in its protest letter, dated 16
November 1989, thus –
In reply, please be informed that after a thorough and careful study
of the facts of the case as well as the law and jurisprudence
pertinent thereto, this Office finds the above argument to be legally
untenable. It is admitted that while industry practice or market
convention has the force of law between the members of a particular
industry, it is not binding with the BIR since it is not a party thereto.
The same should, therefore, not be allowed to prejudice the Bureau
of its lawful task of collecting revenues necessary to defray the
expenses of the government. (Art. 11 in relation to Art. 1306 of the
New Civil Code.)
Moreover, let it be stated that even before the amendment of Sec.
222 (now Sec. 173) of the Tax Code, as amended, the same was
already interpreted to hold that the other party who is not exempt
from the payment of documentary stamp tax liable from the tax. This
interpretation was further strengthened by the following BIR Rulings
which in substance state:
1. BIR Unnumbered Ruling dated May 30, 1977 –
"x x x Documentary stamp taxes are payable by either person,
signing, issuing, accepting, or transferring the instrument, document
or paper. It is now settled that where one party to the instrument is
exempt from said taxes, the other party who is not exempt should be
liable."
2. BIR Ruling No. 144-84 dated September 3, 1984 –
"x x x Thus, where one party to the contract is exempt from said tax,
the other party, who is not exempt, shall be liable therefore.
Accordingly, since A.J.L. Construction Corporation, the other party to
the contract and the one assuming the payment of the expenses
incidental to the registration in the vendee’s name of the property
sold, is not exempt from said tax, then it is the one liable therefore,
pursuant to Sec. 245 (now Sec. 196), in relation to Sec. 222 (now
Sec. 173), both of the Tax Code of 1977, as amended."
Premised on all the foregoing considerations, your request for
reconsideration is hereby DENIED.8
Upon receipt of the above-cited letter from the BIR, petitioner BPI
proceeded to file a Petition for Review with the CTA on 10 October
1997;9 to which respondent BIR Commissioner, represented by the
Office of the Solicitor General, filed an Answer on 08 December
1997.10
Petitioner BPI raised in its Petition for Review before the CTA, in
addition to the arguments presented in its protest letter, dated 16
November 1989, the defense of prescription of the right of
respondent BIR Commissioner to enforce collection of the assessed
amount. It alleged that respondent BIR Commissioner only had three
years to collect on Assessment No. FAS-5-85-89-002054, but she
waited for seven years and nine months to deny the protest. In her
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 27
COMPILATION OF CASES
Answer and subsequent Memorandum, respondent BIR
Commissioner merely reiterated her position, as stated in her letter
to petitioner BPI, dated 13 August 1997, which denied the latter’s
protest; and remained silent as to the expiration of the prescriptive
period for collection of the assessed deficiency DST.
After due trial, the CTA rendered a Decision on 02 February 1999, in
which it identified two primary issues in the controversy between
petitioner BPI and respondent BIR Commissioner: (1) whether or not
the right of respondent BIR Commissioner to collect from petitioner
BPI the alleged deficiency DST for taxable year 1985 had
prescribed; and (2) whether or not the sales of US$1,000,000.00 on
06 June 1985 and 14 June 1985 by petitioner BPI to the Central
Bank were subject to DST.
The CTA answered the first issue in the negative and held that the
statute of limitations for respondent BIR Commissioner to collect on
the Assessment had not yet prescribed. In resolving the issue of
prescription, the CTA reasoned that –
In the case of Commissioner of Internal Revenue vs. Wyeth
Suaco Laboratories, Inc., G.R. No. 76281, September 30, 1991,
202 SCRA 125, the Supreme Court laid to rest the first issue. It
categorically ruled that a "protest" is to be treated as request for
reinvestigation or reconsideration and a mere request for
reexamination or reinvestigation tolls the prescriptive period of the
Commissioner to collect on an assessment. . .
. . . In the case at bar, there being no dispute that petitioner filed its
protest on the subject assessment on November 17, 1989, there can
be no conclusion other than that said protest stopped the running of
the prescriptive period of the Commissioner to collect.
Section 320 (now 223) of the Tax Code, clearly states that a request
for reinvestigation which is granted by the Commissioner, shall
suspend the prescriptive period to collect. The underscored portion
above does not mean that the Commissioner will cancel the subject
assessment but should be construed as when the same was
entertained by the Commissioner by not issuing any warrant of
distraint or levy on the properties of the taxpayer or any action
prejudicial to the latter unless and until the request for
reinvestigation is finally given due course. Taking into consideration
this provision of law and the aforementioned ruling of the Supreme
Court in Wyeth Suaco which specifically and categorically states that
a protest could be considered as a request for reinvestigation, We
rule that prescription has not set in against the government. 11
The CTA had likewise resolved the second issue in the negative.
Referring to its own decision in an earlier case, Consolidated Bank &
Trust Co. v. The Commissioner of Internal Revenue,12 the CTA
reached the conclusion that the sales of foreign currency by
petitioner BPI to the Central Bank in taxable year 1985 were not
subject to DST –
From the abovementioned decision of this Court, it can be gleaned
that the Central Bank, during the period June 11, 1984 to March 9,
1987 enjoyed tax exemption privilege, including the payment of
documentary stamp tax (DST) pursuant to Resolution No. 35-85
dated May 3, 1985 of the Fiscal Incentive Review Board. As such,
the Central Bank, as buyer of the foreign currency, is exempt from
paying the documentary stamp tax for the period above-mentioned.
This Court further expounded that said tax exemption of the Central
Bank was modified beginning January 1, 1986 when Presidential
Decree (P.D.) 1994 took effect. Under this decree, the liability for
DST on sales of foreign currency to the Central Bank is shifted to the
seller.

Applying the above decision to the case at bar, petitioner cannot be
held liable for DST on its 1985 sales of foreign currencies to the
Central Bank, as the latter who is the purchaser of the subject
currencies is the one liable thereof. However, since the Central Bank
is exempt from all taxes during 1985 by virtue of Resolution No. 35-
85 of the Fiscal Incentive Review Board dated March 3, 1985,
neither the petitioner nor the Central Bank is liable for the payment
of the documentary stamp tax for the former’s 1985 sales of foreign
currencies to the latter. This aforecited case of Consolidated Bank
vs. Commissioner of Internal Revenue was affirmed by the Court of
Appeals in its decision dated March 31, 1995, CA-GR Sp. No.
35930. Said decision was in turn affirmed by the Supreme Court in
its resolution denying the petition filed by Consolidated Bank dated
November 20, 1995 with the Supreme Court under Entry of
Judgment dated March 1, 1996.13
In sum, the CTA decided that the statute of limitations for
respondent BIR Commissioner to collect on Assessment No. FAS-5-
85-89-002054 had not yet prescribed; nonetheless, it still ordered
the cancellation of the said Assessment because the sales of foreign
currency by petitioner BPI to the Central Bank in taxable year 1985
were tax-exempt.
Herein respondent BIR Commissioner appealed the Decision of the
CTA to the Court of Appeals. In its Decision dated 11 August
1999,14 the Court of Appeals sustained the finding of the CTA on the
first issue, that the running of the prescriptive period for collection on
Assessment No. FAS-5-85-89-002054 was suspended when herein
petitioner BPI filed a protest on 17 November 1989 and, therefore,
the prescriptive period for collection on the Assessment had not yet
lapsed. In the same Decision, however, the Court of Appeals
reversed the CTA on the second issue and basically adopted the
position of the respondent BIR Commissioner that the sales of
foreign currency by petitioner BPI to the Central Bank in taxable year
1985 were subject to DST. The Court of Appeals, thus, ordered the
reinstatement of Assessment No. FAS-5-85-89-002054 which
required petitioner BPI to pay the amount of ₱28,020.00 as
deficiency DST for taxable year 1985, inclusive of the compromise
penalty.
Comes now petitioner BPI before this Court in this Petition for
Review on Certiorari, seeking resolution of the same two legal
issues raised and discussed in the courts below, to reiterate: (1)
whether or not the right of respondent BIR Commissioner to collect
from petitioner BPI the alleged deficiency DST for taxable year 1985
had prescribed; and (2) whether or not the sales of
US$1,000,000.00 on 06 June 1985 and 14 June 1985 by petitioner
BPI to the Central Bank were subject to DST.
I. The efforts of respondent Commissioner to collect on Assessment
No. FAS-5-85-89-002054 were already barred by prescription.
Anent the question of prescription, this Court disagrees in the
Decisions of the CTA and the Court of Appeals, and herein
determines the statute of limitations on collection of the deficiency
DST in Assessment No. FAS-5-85-89-002054 had already
prescribed.
The period for the BIR to assess and collect an internal revenue tax
is limited to three years by Section 203 of the Tax Code of 1977, as
amended,15 which provides that –
SEC. 203. Period of limitation upon assessment and collection. –
Except as provided in the succeeding section, internal revenue taxes
shall be assessed within three years after the last day prescribed by
law for the filing of the return, and no proceeding in court without
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 28
COMPILATION OF CASES
assessment for the collection of such taxes shall be begun after the
expiration of such period: Provided, That in a case where a return is
filed beyond the period prescribed by law, the three-year period shall
be counted from the day the return was filed. For the purposes of
this section, a return filed before the last day prescribed by law for
the filing thereof shall be considered as filed on such last day.16
The three-year period of limitations on the assessment and
collection of national internal revenue taxes set by Section 203 of
the Tax Code of 1977, as amended, can be affected, adjusted, or
suspended, in accordance with the following provisions of the same
Code –
SEC. 223. – 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: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud
shall be judicially taken cognizance of in the civil or criminal action
for the collection thereof.
(b) If before the expiration of the time prescribed in the preceding
section 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.
(c) Any internal revenue tax which has been assessed within the
period of limitation above-prescribed may be collected by distraint or
levy or by a proceeding in court within three years following the
assessment of the tax.
(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 three-year
period. The period so agreed upon may be extended by subsequent
written agreements made before the expiration of the period
previously agreed upon.
(e) Provided, however, That nothing in the immediately preceding
section and paragraph (a) hereof shall be construed to authorize the
examination and investigation or inquiry into any tax returns filed in
accordance with the provisions of any tax amnesty law or decree. 17
SEC. 224. Suspension of running of statute. – The running of the
statute of limitation provided in Section[s] 203 and 223 on the
making of assessment and the beginning of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall
be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy
or a proceeding in court and for sixty days thereafter; when the
taxpayer requests for a reinvestigation which is granted by the
Commissioner; when the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is being assessed
or collected: Provided, That, if the taxpayer informs the
Commissioner of any change in address, the running of the statute
of limitations will not be suspended; when the warrant of distraint
and levy is duly served upon the taxpayer, his authorized
representative, or a member of his household with sufficient
discretion, and no property could be located; and when the taxpayer
is out of the Philippines. 18

As enunciated in these statutory provisions, the BIR has three years,
counted from the date of actual filing of the return or from the last
date prescribed by law for the filing of such return, whichever comes
later, to assess a national internal revenue tax or to begin a court
proceeding for the collection thereof without an assessment. In case
of a false or fraudulent return with intent to evade tax or the failure to
file any return at all, the prescriptive period for assessment of the tax
due shall be 10 years from discovery by the BIR of the falsity, fraud,
or omission. When the BIR validly issues an assessment, within
either the three-year or ten-year period, whichever is appropriate,
then the BIR has another three years19 after the assessment within
which to collect the national internal revenue tax due thereon by
distraint, levy, and/or court proceeding. The assessment of the tax is
deemed made and the three-year period for collection of the
assessed tax begins to run on the date the assessment notice had
been released, mailed or sent by the BIR to the taxpayer.20
In the present Petition, there is no controversy on the timeliness of
the issuance of the Assessment, only on the prescription of the
period to collect the deficiency DST following its Assessment. While
Assessment No. FAS-5-85-89-002054 and its corresponding
Assessment Notice were both dated 10 October 1989 and were
received by petitioner BPI on 20 October 1989, there was no
showing as to when the said Assessment and Assessment Notice
were released, mailed or sent by the BIR. Still, it can be granted that
the latest date the BIR could have released, mailed or sent the
Assessment and Assessment Notice to petitioner BPI was on the
same date they were received by the latter, on 20 October 1989.
Counting the three-year prescriptive period, for a total of 1,095
days,21 from 20 October 1989, then the BIR only had until 19
October 1992 within which to collect the assessed deficiency DST.
The earliest attempt of the BIR to collect on Assessment No. FAS-5-
85-89-002054 was its issuance and service of a Warrant of Distraint
and/or Levy on petitioner BPI. Although the Warrant was issued on
15 October 1992, previous to the expiration of the period for
collection on 19 October 1992, the same was served on petitioner
BPI only on 23 October 1992.
Under Section 223(c) of the Tax Code of 1977, as amended, it is not
essential that the Warrant of Distraint and/or Levy be fully executed
so that it can suspend the running of the statute of limitations on the
collection of the tax. It is enough that the proceedings have validly
began or commenced and that their execution has not been
suspended by reason of the voluntary desistance of the respondent
BIR Commissioner. Existing jurisprudence establishes that distraint
and levy proceedings are validly begun or commenced by the
issuance of the Warrant and service thereof on the taxpayer. 22 It is
only logical to require that the Warrant of Distraint and/or Levy be, at
the very least, served upon the taxpayer in order to suspend the
running of the prescriptive period for collection of an assessed tax,
because it may only be upon the service of the Warrant that the
taxpayer is informed of the denial by the BIR of any pending protest
of the said taxpayer, and the resolute intention of the BIR to collect
the tax assessed.
If the service of the Warrant of Distraint and/or Levy on petitioner
BPI on 23 October 1992 was already beyond the prescriptive period
for collection of the deficiency DST, which had expired on 19
October 1992, then what more the letter of respondent BIR
Commissioner, dated 13 August 1997 and received by the counsel
of the petitioner BPI only on 11 September 1997, denying the protest
of petitioner BPI and requesting payment of the deficiency DST?
Even later and more unequivocally barred by prescription on
collection was the demand made by respondent BIR Commissioner
for payment of the deficiency DST in her Answer to the Petition for
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 29
COMPILATION OF CASES
Review of petitioner BPI before the CTA, filed on 08 December
1997.23
II. There is no valid ground for the suspension of the running of the
prescriptive period for collection of the assessed DST under the Tax
Code of 1977, as amended.
In their Decisions, both the CTA and the Court of Appeals found that
the filing by petitioner BPI of a protest letter suspended the running
of the prescriptive period for collecting the assessed DST. This
Court, however, takes the opposing view, and, based on the
succeeding discussion, concludes that there is no valid ground for
suspending the running of the prescriptive period for collection of the
deficiency DST assessed against petitioner BPI.
A. The statute of limitations on assessment and collection of taxes is
for the protection of the taxpayer and, thus, shall be construed
liberally in his favor.
Though the statute of limitations on assessment and collection of
national internal revenue taxes benefits both the Government and
the taxpayer, it principally intends to afford protection to the taxpayer
against unreasonable investigation. The indefinite extension of the
period for assessment is unreasonable because it deprives the said
taxpayer of the assurance that he will no longer be subjected to
further investigation for taxes after the expiration of a reasonable
period of time.24 As aptly explained in Republic of the Philippines v.
Ablaza25 –
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 have a 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 a 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 beneficent purpose of affording protection to
the taxpayer within the contemplation of the Commission which
recommend the approval of the law.
In order to provide even better protection to the taxpayer against
unreasonable investigation, the Tax Code of 1977, as amended,
identifies specifically in Sections 223 and 224 26 thereof the
circumstances when the prescriptive periods for assessing and
collecting taxes could be suspended or interrupted.
To give effect to the legislative intent, these provisions on the statute
of limitations on assessment and collection of taxes shall be
construed and applied liberally in favor of the taxpayer and strictly
against the Government.
B. The statute of limitations on assessment and collection of national
internal revenue taxes may be waived, subject to certain conditions,
under paragraphs (b) and (d) of Section 223 of the Tax Code of
1977, as amended, respectively. Petitioner BPI, however, did not
execute any such waiver in the case at bar.

According to paragraphs (b) and (d) of Section 223 of the Tax Code
of 1977, as amended, the prescriptive periods for assessment and
collection of national internal revenue taxes, respectively, could be
waived by agreement, to wit –
SEC. 223. – Exceptions as to period of limitation of assessment and
collection of taxes. –
. . . (b) If before the expiration of the time prescribed in the preceding
section 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 three-year
period. The period so agreed upon may be extended by subsequent
written agreements made before the expiration of the period
previously agreed upon.27
The agreements so described in the afore-quoted provisions are
often referred to as waivers of the statute of limitations. The waiver
of the statute of limitations, whether on assessment or collection,
should not be construed as a 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 mean that the taxpayer relinquishes the right to invoke
prescription unequivocally.28
A valid waiver of the statute of limitations under paragraphs (b) and
(d) of Section 223 of the Tax Code of 1977, as amended, must be:
(1) in writing; (2) agreed to by both the Commissioner and the
taxpayer; (3) before the expiration of the ordinary prescriptive
periods for assessment and collection; and (4) for a definite period
beyond the ordinary prescriptive periods for assessment and
collection. The period agreed upon can still be extended by
subsequent written agreement, provided that it is executed prior to
the expiration of the first period agreed upon. The BIR had issued
Revenue Memorandum Order (RMO) No. 20-90 on 04 April 1990 to
lay down an even more detailed procedure for the proper execution
of such a waiver. RMO No. 20-90 mandates that the procedure for
execution of the waiver shall be strictly followed, and any revenue
official who fails to comply therewith resulting in the prescription of
the right to assess and collect shall be administratively dealt with.
This Court had consistently ruled in a number of cases that a
request for reconsideration or reinvestigation by the taxpayer,
without a valid waiver of the prescriptive periods for the assessment
and collection of tax, as required by the Tax Code and implementing
rules, will not suspend the running thereof. 29
In the Petition at bar, petitioner BPI executed no such waiver of the
statute of limitations on the collection of the deficiency DST per
Assessment No. FAS-5-85-89-002054. In fact, an internal
memorandum of the Chief of the Legislative, Ruling & Research
Division of the BIR to her counterpart in the Collection Enforcement
Division, dated 15 October 1992, expressly noted that, "The
taxpayer fails to execute a Waiver of the Statute of Limitations
extending the period of collection of the said tax up to December 31,
1993 pending reconsideration of its protest. . ." 30 Without a valid
waiver, the statute of limitations on collection by the BIR of the
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 30
COMPILATION OF CASES
deficiency DST could not have been suspended under paragraph (d)
of Section 223 of the Tax Code of 1977, as amended.
C. The protest filed by petitioner BPI did not constitute a request for
reinvestigation, granted by the respondent BIR Commissioner,
which could have suspended the running of the statute of limitations
on collection of the assessed deficiency DST under Section 224 of
the Tax Code of 1977, as amended.
The Tax Code of 1977, as amended, also recognizes instances
when the running of the statute of limitations on the assessment and
collection of national internal revenue taxes could be suspended,
even in the absence of a waiver, under Section 224 thereof, which
reads –
SEC. 224. Suspension of running of statute. – The running of the
statute of limitation provided in Section[s] 203 and 223 on the
making of assessment and the beginning of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall
be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy
or a proceeding in court and for sixty days thereafter; when the
taxpayer requests for a reinvestigation which is granted by the
Commissioner; when the taxpayer cannot be located in the address
given by him in the return filed upon which a tax is being assessed
or collected: Provided, That, if the taxpayer informs the
Commissioner of any change in address, the running of the statute
of limitations will not be suspended; when the warrant of distraint
and levy is duly served upon the taxpayer, his authorized
representative, or a member of his household with sufficient
discretion, and no property could be located; and when the taxpayer
is out of the Philippines. 31
Of particular importance to the present case is one of the
circumstances enumerated in Section 224 of the Tax Code of 1977,
as amended, wherein the running of the statute of limitations on
assessment and collection of taxes is considered suspended "when
the taxpayer requests for a reinvestigation which is granted by the
Commissioner."
This Court gives credence to the argument of petitioner BPI that
there is a distinction between a request for reconsideration and a
request for reinvestigation. Revenue Regulations (RR) No. 12-85,
issued on 27 November 1985 by the Secretary of Finance, upon the
recommendation of the BIR Commissioner, governs the procedure
for protesting an assessment and distinguishes between the two
types of protest, as follows –
PROTEST TO ASSESSMENT
SEC. 6. Protest. The taxpayer may protest administratively an
assessment by filing a written request for reconsideration or
reinvestigation. . .
. . . For the purpose of the protest herein –
(a) Request for reconsideration. – refers to a plea for a re-evaluation
of an assessment on the basis of existing records without need of
additional evidence. It may involve both a question of fact or of law
or both.
(b) Request for reinvestigation. – refers to a plea for re-evaluation of
an assessment on the basis of newly-discovered or additional
evidence that a taxpayer intends to present in the reinvestigation. It
may also involve a question of fact or law or both.

With the issuance of RR No. 12-85 on 27 November 1985 providing
the above-quoted distinctions between a request for reconsideration
and a request for reinvestigation, the two types of protest can no
longer be used interchangeably and their differences so lightly
brushed aside. It bears to emphasize that under Section 224 of the
Tax Code of 1977, as amended, the running of the prescriptive
period for collection of taxes can only be suspended by a request
for reinvestigation, not a request for reconsideration. Undoubtedly,
a reinvestigation, which entails the reception and evaluation of
additional evidence, will take more time than a reconsideration of a
tax assessment, which will be limited to the evidence already at
hand; this justifies why the former can suspend the running of the
statute of limitations on collection of the assessed tax, while the
latter can not.
The protest letter of petitioner BPI, dated 16 November 1989 and
filed with the BIR the next day, on 17 November 1989, did not
specifically request for either a reconsideration or reinvestigation. A
close review of the contents thereof would reveal, however, that it
protested Assessment No. FAS-5-85-89-002054 based on a
question of law, in particular, whether or not petitioner BPI was liable
for DST on its sales of foreign currency to the Central Bank in
taxable year 1985. The same protest letter did not raise any
question of fact; neither did it offer to present any new evidence. In
its own letter to petitioner BPI, dated 10 September 1992, the BIR
itself referred to the protest of petitioner BPI as a request for
reconsideration.32 These considerations would lead this Court to
deduce that the protest letter of petitioner BPI was in the nature of a
request for reconsideration, rather than a request for reinvestigation
and, consequently, Section 224 of the Tax Code of 1977, as
amended, on the suspension of the running of the statute of
limitations should not apply.
Even if, for the sake of argument, this Court glosses over the
distinction between a request for reconsideration and a request for
reinvestigation, and considers the protest of petitioner BPI as a
request for reinvestigation, the filing thereof could not have
suspended at once the running of the statute of limitations. Article
224 of the Tax Code of 1977, as amended, very plainly requires that
the request for reinvestigation had been granted by the BIR
Commissioner to suspend the running of the prescriptive periods
for assessment and collection.
That the BIR Commissioner must first grant the request for
reinvestigation as a requirement for suspension of the statute of
limitations is even supported by existing jurisprudence.
In the case of Republic of the Philippines v. Gancayco,33 taxpayer
Gancayco requested for a thorough reinvestigation of the
assessment against him and placed at the disposal of the Collector
of Internal Revenue all the evidences he had for such purpose; yet,
the Collector ignored the request, and the records and documents
were not at all examined. Considering the given facts, this Court
pronounced that –
. . .The act of requesting a reinvestigation alone does not
suspend the period. The request should first be granted, in
order to effect suspension. (Collector vs. Suyoc Consolidated,
supra; also Republic vs. Ablaza, supra). Moreover, the Collector
gave appellee until April 1, 1949, within which to submit his
evidence, which the latter did one day before. There were no
impediments on the part of the Collector to file the collection case
from April 1, 1949. . . .34
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 31
COMPILATION OF CASES
In Republic of the Philippines v. Acebedo,35 this Court similarly found
that –
. . . [T]he defendant, after receiving the assessment notice of
September 24, 1949, asked for a reinvestigation thereof on October
11, 1949 (Exh. A). There is no evidence that this request was
considered or acted upon. In fact, on October 23, 1950 the then
Collector of Internal Revenue issued a warrant of distraint and levy
for the full amount of the assessment (Exh. D), but there was no
follow-up of this warrant. Consequently, the request for
reinvestigation did not suspend the running of the period for
filing an action for collection.
The burden of proof that the taxpayer’s request for reinvestigation
had been actually granted shall be on respondent BIR
Commissioner. The grant may be expressed in communications with
the taxpayer or implied from the actions of the respondent BIR
Commissioner or his authorized BIR representatives in response to
the request for reinvestigation.
In Querol v. Collector of Internal Revenue, 36 the BIR, after receiving
the protest letters of taxpayer Querol, sent a tax examiner to San
Fernando, Pampanga, to conduct the reinvestigation; as a result of
which, the original assessment against taxpayer Querol was revised
by permitting him to deduct reasonable depreciation. In another
case, Republic of the Philippines v. Lopez,37 taxpayer Lopez filed a
total of four petitions for reconsideration and reinvestigation. The first
petition was denied by the BIR. The second and third petitions were
granted by the BIR and after each reinvestigation, the assessed
amount was reduced. The fourth petition was again denied and,
thereafter, the BIR filed a collection suit against taxpayer Lopez.
When the taxpayers spouses Sison, in Commissioner of Internal
Revenue v. Sison,38 contested the assessment against them and
asked for a reinvestigation, the BIR ordered the reinvestigation
resulting in the issuance of an amended assessment. Lastly,
in Republic of the Philippines v. Oquias, 39 the BIR granted taxpayer
Oquias’s request for reinvestigation and duly notified him of the date
when such reinvestigation would be held; only, neither taxpayer
Oquias nor his counsel appeared on the given date.
In all these cases, the request for reinvestigation of the assessment
filed by the taxpayer was evidently granted and actual
reinvestigation was conducted by the BIR, which eventually resulted
in the issuance of an amended assessment. On the basis of these
facts, this Court ruled in the same cases that the period between the
request for reinvestigation and the revised assessment should be
subtracted from the total prescriptive period for the assessment of
the tax; and, once the assessment had been reconsidered at the
taxpayer’s instance, the period for collection should begin to run
from the date of the reconsidered or modified assessment.40
The rulings of the foregoing cases do not apply to the present
Petition because: (1) the protest filed by petitioner BPI was a request
for reconsideration, not a reinvestigation, of the assessment against
it; and (2) even granting that the protest of petitioner BPI was a
request for reinvestigation, there was no showing that it was granted
by respondent BIR Commissioner and that actual reinvestigation
had been conducted.
Going back to the administrative records of the present case, it
would seem that the BIR, after receiving a copy of the protest letter
of petitioner BPI on 17 November 1989, did not attempt to
communicate at all with the latter until 10 September 1992, less than
a month before the prescriptive period for collection on Assessment
No. FAS-5-85-89-002054 was due to expire. There were internal
communications, mostly indorsements of the docket of the case from

one BIR division to another; but these hardly fall within the same sort
of acts in the previously discussed cases that satisfactorily
demonstrated the grant of the taxpayer’s request for reinvestigation.
Petitioner BPI, in the meantime, was left in the dark as to the status
of its protest in the absence of any word from the BIR. Besides, in its
letter to petitioner BPI, dated 10 September 1992, the BIR
unwittingly admitted that it had not yet acted on the protest of the
former –
This refers to your protest against and/or request for reconsideration
of the assessment/s of this Office against you involving the amount
of ₱28,020.00 under FAS-5-85-89-002054 dated October 23, 1989
as deficiency documentary stamp tax inclusive of compromise
penalty for the year 1985.
In this connection, it is requested that the enclosed waiver of the
statute of limitations extending the period of collection of the said
tax/es to December 31, 1993 be executed by you as a condition
precedent of our giving due course to your protest…41
When the BIR stated in its letter, dated 10 September 1992, that the
waiver of the statute of limitations on collection was a condition
precedent to its giving due course to the request for reconsideration
of petitioner BPI, then it was understood that the grant of such
request for reconsideration was being held off until compliance with
the given condition. When petitioner BPI failed to comply with the
condition precedent, which was the execution of the waiver, the
logical inference would be that the request was not granted and was
not given due course at all.
III. The suspension of the statute of limitations on collection of the
assessed deficiency DST from petitioner BPI does not find support
in jurisprudence.
It is the position of respondent BIR Commissioner, affirmed by the
CTA and the Court of Appeals, that the three-year prescriptive
period for collecting on Assessment No. FAS-5-85-89-002054 had
not yet prescribed, because the said prescriptive period was
suspended, invoking the case of Commissioner of Internal Revenue
v. Wyeth Suaco Laboratories, Inc. 42 It was in this case in which this
Court ruled that the prescriptive period provided by law to make a
collection is interrupted once a taxpayer requests for reinvestigation
or reconsideration of the assessment.
Petitioner BPI, on the other hand, is requesting this Court to revisit
the Wyeth Suaco case contending that it had unjustifiably expanded
the grounds for suspending the prescriptive period for collection of
national internal revenue taxes.
This Court finds that although there is no compelling reason to
abandon its decision in the Wyeth Suaco case, the said case cannot
be applied to the particular facts of the Petition at bar.
A. The only exception to the statute of limitations on collection of
taxes, other than those already provided in the Tax Code, was
recognized in the Suyoc case.
As had been previously discussed herein, the statute of limitations
on assessment and collection of national internal revenue taxes may
be suspended if the taxpayer executes a valid waiver thereof, as
provided in paragraphs (b) and (d) of Section 223 of the Tax Code of
1977, as amended; and in specific instances enumerated in Section
224 of the same Code, which include a request for reinvestigation
granted by the BIR Commissioner. Outside of these statutory
provisions, however, this Court also recognized one other exception
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 32
COMPILATION OF CASES
to the statute of limitations on collection of taxes in the case
of Collector of Internal Revenue v. Suyoc Consolidated Mining Co.43
In the said case, the Collector of Internal Revenue issued an
assessment against taxpayer Suyoc Consolidated Mining Co. on 11
February 1947 for deficiency income tax for the taxable year 1941.
Taxpayer Suyoc requested for at least a year within which to pay the
amount assessed, but at the same time, reserving its right to
question the correctness of the assessment before actual payment.
The Collector granted taxpayer Suyoc an extension of only three
months to pay the assessed tax. When taxpayer Suyoc failed to pay
the assessed tax within the extended period, the Collector sent it a
demand letter, dated 28 November 1950. Upon receipt of the
demand letter, taxpayer Suyoc asked for a reinvestigation and
reconsideration of the assessment, but the Collector denied the
request. Taxpayer Suyoc reiterated its request for reconsideration
on 25 April 1952, which was denied again by the Collector on 06
May 1953. Taxpayer Suyoc then appealed the denial to the
Conference Staff. The Conference Staff heard the appeal from 02
September 1952 to 16 July 1955, and the negotiations resulted in
the reduction of the assessment on 26 July 1955. It was the
collection of the reduced assessment that was questioned before
this Court for being enforced beyond the prescriptive period.44
In resolving the issue on prescription, this Court ratiocinated thus –
It is obvious from the foregoing that petitioner refrained from
collecting the tax by distraint or levy or by proceeding in court within
the 5-year period from the filing of the second amended final return
due to the several requests of respondent for extension to which
petitioner yielded to give it every opportunity to prove its claim
regarding the correctness of the assessment. Because of such
requests, several reinvestigations were made and a hearing was
even held by the Conference Staff organized in the collection office
to consider claims of such nature which, as the record shows, lasted
for several months. After inducing petitioner to delay collection as he
in fact did, it is most unfair for respondent to now take advantage of
such desistance to elude his deficiency income tax liability to the
prejudice of the Government invoking the technical ground of
prescription.
While we may agree with the Court of Tax Appeals that a mere
request for reexamination or reinvestigation may not have the effect
of suspending the running of the period of limitation for in such case
there is need of a written agreement to extend the period between
the Collector and the taxpayer, there are cases however where a
taxpayer may be prevented from setting up the defense of
prescription even if he has not previously waived it in writing as
when by his repeated requests or positive acts the Government
has been, for good reasons, persuaded to postpone collection
to make him feel that the demand was not unreasonable or that
no harassment or injustice is meant by the Government. And
when such situation comes to pass there are authorities that hold,
based on weighty reasons, that such an attitude or behavior should
not be countenanced if only to protect the interest of the
Government.45
By the principle of estoppel, taxpayer Suyoc was not allowed to raise
the defense of prescription against the efforts of the Government to
collect the tax assessed against it. This Court adopted the following
principle from American jurisprudence: "He who prevents a thing
from being done may not avail himself of the nonperformance which
he has himself occasioned, for the law says to him in effect ‘this is
your own act, and therefore you are not damnified.’"46

In the Suyoc case, this Court expressly conceded that a mere
request for reconsideration or reinvestigation of an assessment may
not suspend the running of the statute of limitations. It affirmed the
need for a waiver of the prescriptive period in order to effect
suspension thereof. However, even without such waiver, the
taxpayer may be estopped from raising the defense of prescription
because by his repeated requests or positive acts, he had induced
Government authorities to delay collection of the assessed tax.
Based on the foregoing, petitioner BPI contends that the declaration
made in the later case of Wyeth Suaco, that the statute of limitations
on collection is suspended once the taxpayer files a request for
reconsideration or reinvestigation, runs counter to the ruling made
by this Court in the Suyoc case.
B. Although this Court is not compelled to abandon its decision in
the Wyeth Suaco case, it finds that Wyeth Suaco is not applicable to
the Petition at bar because of the distinct facts involved herein.
In the case of Wyeth Suaco, taxpayer Wyeth Suaco was assessed
for failing to remit withholding taxes on royalties and dividend
declarations, as well as, for deficiency sales tax. The BIR issued two
assessments, dated 16 December 1974 and 17 December 1974,
both received by taxpayer Wyeth Suaco on 19 December 1974.
Taxpayer Wyeth Suaco, through its tax consultant, SGV & Co., sent
to the BIR two letters, dated 17 January 1975 and 08 February
1975, protesting the assessments and requesting their cancellation
or withdrawal on the ground that said assessments lacked factual or
legal basis. On 12 September 1975, the BIR Commissioner advised
taxpayer Wyeth Suaco to avail itself of the compromise settlement
being offered under Letter of Instruction No. 308. Taxpayer Wyeth
Suaco manifested its conformity to paying a compromise amount,
but subject to certain conditions; though, apparently, the said
compromise amount was never paid. On 10 December 1979, the
BIR Commissioner rendered a decision reducing the assessment for
deficiency withholding tax against taxpayer Wyeth Suaco, but
maintaining the assessment for deficiency sales tax. It was at this
point when taxpayer Wyeth Suaco brought its case before the CTA
to enjoin the BIR from enforcing the assessments by reason of
prescription. Although the CTA decided in favor of taxpayer Wyeth
Suaco, it was reversed by this Court when the case was brought
before it on appeal. According to the decision of this Court –
Settled is the rule that the prescriptive period provided by law to
make a collection by distraint or levy or by a proceeding in court is
interrupted once a taxpayer requests for reinvestigation or
reconsideration of the assessment. . .
. . . Although the protest letters prepared by SGV & Co. in behalf of
private respondent did not categorically state or use the words
"reinvestigation" and "reconsideration," the same are to be treated
as letters of reinvestigation and reconsideration…
These letters of Wyeth Suaco interrupted the running of the five-year
prescriptive period to collect the deficiency taxes. The Bureau of
Internal Revenue, after having reviewed the records of Wyeth
Suaco, in accordance with its request for reinvestigation,
rendered a final assessment… It was only upon receipt by Wyeth
Suaco of this final assessment that the five-year prescriptive period
started to run again.47
The foremost criticism of petitioner BPI of the Wyeth Suaco decision
is directed at the statement made therein that, "settled is the rule
that the prescriptive period provided by law to make a collection by
distraint or levy or by a proceeding in court is interrupted once a
taxpayer requests for reinvestigation or reconsideration of the
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 33
COMPILATION OF CASES
assessment."48 It would seem that both petitioner BPI and
respondent BIR Commissioner, as well as, the CTA and Court of
Appeals, take the statement to mean that the filing alone of the
request for reconsideration or reinvestigation can already interrupt or
suspend the running of the prescriptive period on collection. This
Court therefore takes this opportunity to clarify and qualify this
statement made in the Wyeth Suaco case. While it is true that, by
itself, such statement would appear to be a generalization of the
exceptions to the statute of limitations on collection, it is best
interpreted in consideration of the particular facts of the Wyeth
Suaco case and previous jurisprudence.
The Wyeth Suaco case cannot be in conflict with the Suyoc case
because there are substantial differences in the factual backgrounds
of the two cases. The Suyoc case refers to a situation where there
were repeated requests or positive acts performed by the taxpayer
that convinced the BIR to delay collection of the assessed tax. This
Court pronounced therein that the repeated requests or positive acts
of the taxpayer prevented or estopped it from setting up the defense
of prescription against the Government when the latter attempted to
collect the assessed tax. In the Wyeth Suaco case, taxpayer Wyeth
Suaco filed a request for reinvestigation, which was apparently
granted by the BIR and, consequently, the prescriptive period was
indeed suspended as provided under Section 224 of the Tax Code
of 1977, as amended.49
To reiterate, Section 224 of the Tax Code of 1977, as amended,
identifies specific circumstances when the statute of limitations on
assessment and collection may be interrupted or suspended, among
which is a request for reinvestigation that is granted by the BIR
Commissioner. The act of filing a request for reinvestigation alone
does not suspend the period; such request must be granted.50 The
grant need not be express, but may be implied from the acts of the
BIR Commissioner or authorized BIR officials in response to the
request for reinvestigation.51
This Court found in the Wyeth Suaco case that the BIR actually
conducted a reinvestigation, in accordance with the request of the
taxpayer Wyeth Suaco, which resulted in the reduction of the
assessment originally issued against it. Taxpayer Wyeth Suaco was
also aware that its request for reinvestigation was granted, as written
by its Finance Manager in a letter dated 01 July 1975, addressed to
the Chief of the Tax Accounts Division, wherein he admitted that,
"[a]s we understand, the matter is now undergoing review and
consideration by your Manufacturing Audit Division…" The statute of
limitations on collection, then, started to run only upon the issuance
and release of the reduced assessment.
The Wyeth Suaco case, therefore, is correct in declaring that the
prescriptive period for collection is interrupted or suspended when
the taxpayer files a request for reinvestigation, provided that, as
clarified and qualified herein, such request is granted by the BIR
Commissioner.
Thus, this Court finds no compelling reason to abandon its decision
in the Wyeth Suaco case. It also now rules that the said case is not
applicable to the Petition at bar because of the distinct facts involved
herein. As already heretofore determined by this Court, the protest
filed by petitioner BPI was a request for reconsideration, which
merely required a review of existing evidence and the legal basis for
the assessment. Respondent BIR Commissioner did not require,
neither did petitioner BPI offer, additional evidence on the matter.
After petitioner BPI filed its request for reconsideration, there was no
other communication between it and respondent BIR Commissioner
or any of the authorized representatives of the latter. There was no
 TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 34
COMPILATION OF CASES

showing that petitioner BPI was informed or aware that its request correctness of the said Assessment for the latter would only be
for reconsideration was granted or acted upon by the BIR. unenforceable.

IV. Conclusion Wherefore, based on the foregoing, the instant Petition is

To summarize all the foregoing discussion, this Court lays down the
following rules on the exceptions to the statute of limitations on
collection.
The statute of limitations on collection may only be interrupted or
suspended by a valid waiver executed in accordance with paragraph
(d) of Section 223 of the Tax Code of 1977, as amended, and the
existence of the circumstances enumerated in Section 224 of the
same Code, which include a request for reinvestigation granted by
the BIR Commissioner.
GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No.
51271, dated 11 August 1999, which reinstated Assessment No.
FAS-5-85-89-002054 requiring petitioner BPI to pay the amount of
₱28,020.00 as deficiency documentary stamp tax for the taxable
year 1985, inclusive of the compromise penalty, is REVERSED and
SET ASIDE. Assessment No. FAS-5-85-89-002054 is hereby
ordered CANCELED.
SO ORDERED.
INTERPRETATION

BPI v. CIR
Even when the request for reconsideration or reinvestigation is not
accompanied by a valid waiver or there is no request for
reinvestigation that had been granted by the BIR Commissioner, the XXX
taxpayer may still be held in estoppel and be prevented from setting
up the defense of prescription of the statute of limitations on EXCEPTION
collection when, by his own repeated requests or positive acts, the
Government had been, for good reasons, persuaded to postpone FALSE OR FRAUDULENT RETURN
collection to make the taxpayer feel that the demand is not
unreasonable or that no harassment or injustice is meant by the PRIMA FACIE EVIDENCE
Government, as laid down by this Court in the Suyoc case.
CIR v. ASALUS CORPORATION

Applying the given rules to the present Petition, this Court finds that
– G.R. No. 221590 February 22, 2017

(a) The statute of limitations for collection of the deficiency DST in COMMISSIONER OF INTERNAL REVENUE, Petitioner 
Assessment No. FAS-5-85-89-002054, issued against petitioner vs.
BPI, had already expired; and ASALUS CORPORATION, Respondent

(b) None of the conditions and requirements for exception from the
statute of limitations on collection exists herein: Petitioner BPI did
not execute any waiver of the prescriptive period on collection as
mandated by paragraph (d) of Section 223 of the Tax Code of 1977,
as amended; the protest filed by petitioner BPI was a request for
reconsideration, not a request for reinvestigation that was granted by
respondent BIR Commissioner which could have suspended the
prescriptive period for collection under Section 224 of the Tax Code
of 1977, as amended; and, petitioner BPI, other than filing a request
for reconsideration of Assessment No. FAS-5-85-89-002054, did not
make repeated requests or performed positive acts that could have
persuaded the respondent BIR Commissioner to delay collection,
and that would have prevented or estopped petitioner BPI from
setting up the defense of prescription against collection of the tax
assessed, as required in the Suyoc case.
This is a simple case wherein respondent BIR Commissioner and
other BIR officials failed to act promptly in resolving and denying the
request for reconsideration filed by petitioner BPI and in enforcing
collection on the assessment. They presented no reason or
explanation as to why it took them almost eight years to address the
protest of petitioner BPI. The statute on limitations imposed by the
Tax Code precisely intends to protect the taxpayer from such
prolonged and unreasonable assessment and investigation by the
BIR.
Considering that the right of the respondent BIR Commissioner to
collect from petitioner BPI the deficiency DST in Assessment No.
FAS-5-85-89-002054 had already prescribed, then, there is no more
need for this Court to make a determination on the validity and
DECISION
MENDOZA, J.:
This petition for review on certiorari seeks to reverse and set aside
the July 30, 2015 Decision 1 and the November 6, 2015
Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA EB
No. 1191, which affirmed the April 2, 2014 Decision 3 of the CTA
Third Division (CTA Division).
The Antecedents
On December 16, 2010, respondent Asalus
Corporation (Asalus) received a Notice of Informal Conference from
Revenue District Office (RDO) No. 47 of the Bureau of Internal
Revenue (BIR). It was in connection with the investigation
conducted by Revenue Officer Fidel M. Bañares II (Bañares) on the
Value-Added Tax (VAT) transactions of Asalus for the taxable year
2007.4 Asalus filed its Letter-Reply,5 dated December 29, 2010,
questioning the basis of Bañares' computation for its VAT liability.
On January 10, 2011, petitioner Commissioner of Internal
Revenue (CIR) issued the Preliminary Assessment
Notice (PAN) finding Asalus liable for deficiency VAT for 2007 in the
aggregate amount of ₱413, 378, 058.11, inclusive of surcharge and
interest. Asalus filed its protest against the PAN but it was denied by
the CIR. 6

On August 26, 2011, Asalus received the Formal Assessment
Notice (FAN) stating that it was liable for deficiency VAT for 2007 in
the total amount of ₱95,681,988.64, inclusive of surcharge and
interest. Consequently, it filed its protest against the FAN, dated
September 6, 2011. Thereafter, Asal us filed a supplemental protest
stating that the deficiency VAT assessment had prescribed pursuant
to Section 203 of the National Internal Revenue Code (NIRC).7
On October 16, 2012, Asal us received the Final Decision on
Disputed Assessment8 (FDDA) showing VAT deficiency for 2007 in
the aggregate amount of ₱106,761,025.17, inclusive of surcharge
and interest and ₱25,000.00 as compromise penalty. As a result, it
filed a petition for review before the CTA Division.
The CTA Division Ruling
In its April 2, 2014 Decision, the CT A Division ruled that the VAT
assessment issued on August 26, 2011 had prescribed and
consequently deemed invalid. It opined that the ten (10)-year
prescriptive period under Section 222 of the NIRC was inapplicable
as neither the FAN nor the FDDA indicated that Asalus had filed a
false VAT return warranting the application of the ten (10)-year
prescriptive period. It explained that it was only in the PAN where an
allegation of false or fraudulent return was made. The CTA stressed
that after Asalus had protested the PAN, the CIR never mentioned in
both the FAN and the FDDA that the prescriptive period would be
ten (10) years. It further pointed out that the CIR failed to present
evidence regarding its allegation of fraud or falsity in the returns.
The CTA wrote that "the three instances where the three-year
prescriptive period will not apply must always be alleged and
established by clear and convincing evidence and should not be
anchored on mere conjectures and speculations, 9 before the ten (10)
year prescriptive period could be considered. Thus, it disposed:
WHEREFORE, the instant Petition for Review is hereby
GRANTED. Accordingly, the deficiency VAT assessment for taxable
year 2007 and the compromise penalty are hereby CANCELLED
and WITHDRAWN, on ground of prescription.
SO ORDERED.10
The CIR moved for reconsideration but its motion was denied.
The CTA En Banc Ruling
In its July 30, 2015 Decision, the CTA En Banc sustained the
assailed decision of the CT A Division and dismissed the petition for
review filed by the CIR. It explained that there was nothing in the
FAN and the FDDA that would indicate, the non-application of the
three (3) year prescriptive period under Section 203 of the NIRC. It
found that the CIR did not present any evidence during the trial to
substantiate its claim of falsity in the returns and again missed its
chance to do so when it failed to file its memorandum before the
CTA Division.
The CTA En Banc further explained that the PAN alone could not be
used as a basis because it was not the assessment contemplated by
law. Consequently, the allegation of falsity in Asalus' tax returns
could not be considered as it was not reiterated in the FAN. The
dispositive portion thus reads:
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 35
COMPILATION OF CASES
WHEREFORE, premises considered, the present Petition for
Review is hereby DENIED, and accordingly, DISMISSED for lack of
merit.
SO ORDERED.11
The CIR sought the reconsideration of the decision of the CTA En
Banc, but the latter upheld its decision in its November 6, 2015
resolution.
Hence, this petition.
ISSUES
I. WHETHER PETITIONER HAD SUFFICIENTLY APPRISED
RESPONDENT THAT THE FAN AND FDDA ISSUED AGAINST
THE LATTER FALLS UNDER SECTION 222(A) OF THE 1997
NIRC, AS AMENDED;
II. WHETHER RESPONDENT'S FAILURE TO REPORT IN ITS VAT
RETURNS ALL THE FEES IT COLLECTED FROM ITS MEMBERS
APPLYING FOR HEALTHCARE SERVICES CONSTITUTES
"FALSE" RETURN UNDER SECTION 222(A) OF THE 1997 NIRC,
AS AMENDED; AND
III. WHETHER PETITIONER'S RIGHT TO ASSESS RESPONDENT
FOR ITS DEFICIENCY VAT FOR TAXABLE YEAR 2007 HAD
ALREADY PRESCRIBED.12
The CIR, through the Office of the Solicitor General (OSG), argues
that the VAT assessment had yet to prescribe as the applicable
prescriptive period is the ten (10)-year prescriptive period under
Section 222 of the NIRC, and not the three (3) year prescriptive
period under Section 203 thereof. It claims that Asalus was informed
in the PAN of the ten (10)-year prescriptive period and that the FAN
made specific reference to the PAN. In turn, the FDDA made
reference to the FAN. Asalus, on the other hand, only raised
prescription in its supplemental protest to the FAN. The CIR insists
that Asalus was made fully aware that the prescriptive period under
Section 222 would apply.
Moreover, the CIR asserts that there was substantial
understatement in Asalus' income, which exceeded 30% of what
was declared in its VAT returns as appearing in its quarterly VAT
returns; and the underdeclaration was supported by the judicial
admission of its lone witness that not all the membership fees
collected from members applying for healthcare services were
reported in its VAT returns. Thus, the CIR concludes that there
was prima facie evidence of a false return.
The Position of Asalus
In its Comment/Opposition, 13 dated April 22, 2016, Asalus countered
that the present petition involved a question of fact, which was
beyond the ambit of a petition for review under Rule 45. Moreover, it
asserted that the findings of fact of the CT A Division, which were
affirmed by the CTA En Banc, were conclusive and binding upon the
Court. It posited that the CIR could not raise for the first time on
appeal a new argument that "the FDDA and the FAN need not
explicitly state the applicability of the ten-year prescriptive period
and the bases thereof as long as the totality of the circumstances
show that the taxpayer was 'sufficiently informed' of the facts in
support of the assessment. Based on the totality of the

circumstances, it was informed of the facts in support of the
assessment." 14
Asalus reiterated that the CIR, either in the FAN or the FDDA, failed
to show that it had filed false returns warranting the application of
the extraordinary prescriptive period under Section 222 of the NIRC.
It insisted that it was not informed of the facts and law on which the
assessment was based because the FAN did not state that it filed
false or fraudulent returns. For this reason, Asalus averred that the
assessment had prescribed because it was made beyond the three
(3)-year period as provided in Section 203 of the NIRC.
The Reply of the CIR
In its Reply, 15 dated August 15, 2016, the CIR argued that the
findings of the CT A might be set aside on appeal if they were not
supported with substantial evidence or if there was a showing of
gross error or abuse. It repeated that there was presumption of
falsity in light of the 30% underdeclaration of sales. The CIR
emphasized that even Asalus' own witness testified that not all the
membership fees collected were reported in its VAT returns. It
insisted that Asalus was sufficiently informed of its assessment
based on the prescriptive period under Section 222 of the NIRC as
early as when the PAN was issued.
On another note, the CIR manifested that Asalus' counsels made
use of insulting words in its Comment, which could have been
dispensed with. Particularly, it highlighted the use of the following
phrases as insulting: "even to the uninitiated," "petitioner's habit of
disregarding firmly established rules of procedure," "twist establish
facts to suit her ends," "just to indulge petitioner," and "she then tried
to calculate, on her own but without factual basis." It asserted that
"[w]hile a lawyer has a complete discretion on what legal strategy to
employ in a case, the overzealousness in protecting his client's
interest does not warrant the use of insulting and profane language
in his pleadings xxx." 16
The Court's Ruling
There is merit in the petition.
It is true that the findings of fact of the CT A are, as a rule, respected
by the Court, but they can be set aside in exceptional cases.
In Barcelon, Roxas Securities, Inc. (now known as UBP Securities,
Inc.) v. Commissioner of Internal Revenue, this Court in Toshiba
Information Equipment (Phils.), Inc. v. Commissioner of Internal
Revenue,  17explicitly pronounced-
Jurisprudence has consistently shown that this Court accords the
findings of fact by the CTA with the highest respect. In Sea-Land
Service, Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001,
357 SCRA 441, 445-446], this Court recognizes that the Court of
Tax Appeals, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not
be overturned unless there has been an abuse or improvident
exercise of authority. Such findings can only be disturbed on
appeal if they are not supported by substantial evidence or
there is a showing of gross error or abuse on the part of the Tax
Court. In the absence of any clear and convincing proof to the
contrary, this Court must presume that the CTA rendered a decision
which is valid in every respect. 18 [Emphasis supplied]
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 36
COMPILATION OF CASES
After a review of the records and applicable laws and jurisprudence,
the Court finds that the CTA erred in concluding that the assessment
against Asalus had prescribed.
Generally, internal revenue taxes shall be assessed within three (3)
years after the ,last day prescribed by law for the filing of the return,
or where the return is filed beyond the period, from the day the
return was actually filed. 19Section 222 of the NIRC, however,
provides for exceptions to the general rule. It states that in the case
of a false or fraudulent return with intent to evade tax or of failure to
file a return, the assessment may be made within ten (10) years
from the discovery of the falsity, fraud or omission.
In the oft-cited Aznar v. CTA,20the Court compared a false return to a
fraudulent return in relation to the applicable prescriptive periods for
assessments, to wit:
Petitioner argues that Sec. 332 of the NIRC does not apply because
the taxpayer did not file false and fraudulent returns with intent to'
evade tax, while respondent Commissioner of Internal Revenue
insists contrariwise, with respondent Court of Tax Appeals
concluding that the very "substantial under declarations of income
for six consecutive years eloquently demonstrate the falsity or
fraudulence of the income tax returns with an intent to evade the
payment of tax."
xxxx
xxx We believe that the proper and reasonable interpretation of said
provision should be that in the three different cases of (1) false
return, (2) fraudulent return with intent to evade tax, (3) failure to file
a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessmeμt, at any time
within ten years after the discovery of the (1) falsity, (2) fraud, (3)
omission. Our stand that the law should be interpreted to mean
a separation of the three different situations of false return,
fraudulent return with intent to evade tax, and failure to file a
return is strengthened immeasurably by the last portion of the
provision which seggregates the situations into three different
classes, namely "falsity", "fraud" and "omission." That there is
a difference between "false return" and "fraudulent return"
cannot be denied. While the first merely implies deviation from
the truth, whether intentional or not, the second implies
intentional or deceitful entry with intent to evade the taxes due.
The ordinary period of prescription of 5 years within which to assess
tax liabilities under Sec. 331 of the NIRC should be applicable to
normal circumstances, but whenever the government is placed, at a
disadvantage so as to prevent its lawful agents from proper
assessment of tax liabilities due to false returns, fraudulent return
intended to evade payment of tax or failure to file returns, the period
of ten years provided for in Sec. 332 (a) NIRC, from the time of the
discovery of the falsity, fraud or omission even seems to be
inadequate and should be the one enforced.
There being undoubtedly false tax returns in this case, We affirm the
conclusion of the respondent Court of Tax Appeals that Sec. 332 (a)
of the NIRC should apply and that the period of ten years within
which to assess petitioner's tax liability had not expired at the time
said assessment was made. (Emphasis supplied)
Thus, a mere showing that the returns filed by the taxpayer were
false, notwithstanding the absence of intent to defraud, is sufficient
to warrant the application of the ten (10) year prescriptive period
under Section 222 of the NIRC.

Presumption of Falsity of Returns
In the present case, the CTA opined that the CIR failed to
substantiate with clear and convincing evidence its claim that Asalus
filed a false return. As it noted that the CIR never presented any
evidence to prove the falsity in the returns that Asalus filed, the CTA
ruled that the assessment was subject to the three (3) year ordinary
prescriptive period.
The Court is of a different view.
Under Section 248(B) of the NIRC, 21 there is a prima facie evidence
of a false return if there is a substantial underdeclaration of taxable
sales, receipt or income. The failure to report sales, receipts or
income in an amount exceeding 30% what is declared in the returns
constitute substantial underdeclaration. A prima facie evidence is
one which that will establish a fact or sustain a judgment unless
contradictory evidence is produced. 22
In other words, when there is a showing that a taxpayer has
substantially underdeclared its sales, receipt or income, there is a
presumption that it has filed a false return. As such, the CIR need
not immediately present evidence to support the falsity of the return,
unless the taxpayer fails to overcome the presumption against it.
Applied in this case, the audit investigation revealed that there were
undeclared VA Table sales more than 30% of that declared in
Asalus' VAT returns. Moreover, Asalus' lone witness testified that not
all membership fees, particularly those pertaining to medical
practitioners and hospitals, were reported in Asalus' VAT returns.
The testimony of its witness, in trying to justify why not all of its sales
were included in the gross receipts reflected in the VAT returns,
supported the presumption that the return filed was indeed false
precisely because not all the sales of Asalus were included in the
VAT returns.
Hence, the CIR need not present further evidence as the
presumption of falsity of the returns was not overcome. Asalus was
bound to refute the presumption of the falsity of the return and to
prove that it had filed accurate returns. Its failure to overcome the
same warranted the application of the ten (10)-year prescriptive
period for assessment under Section 222 of the NIRC. To require
the CIR to present additional evidence in spite of the presumption
provided in Section 248(B) of the NIRC would render the said
provision inutile.
Substantial Compliance of Notice Requirement
The CTA also posited that the ordinary prescriptive period of three
(3) years applied in this case because there was no mention in the
FAN or the FDDA that what would apply was the extraordinary
prescriptive period and that the CIR did not present any evidence to
support its claim of false returns.
Again, the Court disagrees.
It is true that neither the FAN nor the FDDA explicitly stated that the
applicable prescriptive period was the ten (10)-year period set in
Section 222 of the NIRC. They, however, made reference to the
PAN, which categorically stated that "[t]he running of the three-year
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 37
COMPILATION OF CASES
statute of limitation I as provided un4er Section 203 of the 1997
National Internal Revenue Code (NIRC) is not i applicable xxx but
rather to the ten (10) year prescriptive period pursua11t to Section
222(A) of the tax code xxx." 23 In Samar-I Electric Cooperative v.
COMELEC,24the Court ruled that it sufficed that the taxpayer was
substantially informed of the legal and factual bases of the
assessment enabling him to file an effective protest, to wit:
Although, the FAN and demand letter issued to petitioner were not
accompanied by a written explanation of the legal and factual bases
of the deficiency taxes assessed against the petitioner, the records
showed that respondent in its letter dated April 10, 2003 responded
to petitioner's October 14, 2002 letter-protest, explaining at length
the factual and legal bases of the deficiency tax assessments and
denying the protest.
Considering the foregoing exchange of correspondence and
Document between the parties, we find that the requirement of
Section 228 was substantially complied with. Respondent had
fully informed I petitioner in writing of the factual and legal bases of
the deficiency taxes assessment, which enabled the latter to file an
"effective" protest, much unlike the taxpayer's situation
in Enron. Petitioner's right to due process was thus not violated.
[Emphasis supplied]
Thus, substantial compliance with the requirement as laid down
under Section 228 of the NIRC suffices, for what is important is that
the taxpayer has been sufficiently informed of the factual and legal
bases of the assessment so that it may file an effective protest
against the assessment. In the case at bench, Asalus was
sufficiently informed that with respect to its tax liability, the
extraordinary period laid down in Section 222 of the NIRC would
apply. This was categorically stated in the PAN and all subsequent
communications from the CIR made reference to the PAN. Asalus
was eventually able to file a protest addressing the issue on
prescription, although it was done only in its supplemental protest to
the FAN.
Considering the existing circumstances, the assessment was timely
made because the applicable prescriptive period was the ten (10)-
year prescriptive period under Section 222 of the NIRC. To reiterate,
there was a prima facie showing that the returns filed by Asalus
were false, which it failed to controvert. Also, it was adequately
informed that it was being assessed within the extraordinary
prescriptive period.
A Reminder
A lawyer is indeed expected to champion the cause of his client with
utmost zeal and competence. Such exuberance, however, must be
tempered to meet the standards of civility and decorum. Rule 8.01 of
the Code of Professional Responsibility mandates that "[a] lawyer
shall not, in his professional dealings, use language which is
abusive, offensive or otherwise improper." In Noble v. Atty.
Ailes,  25 the Court cautioned lawyers to be careful in their: choice of
words as not to unduly malign the other party, to wit:
Though a lawyer's language may be forceful and emphatic, it should
always be dignified and respectful, befitting the dignity of the legal
profession.1âwphi1 The use of intemperate language and unkind
ascriptions has no place in the dignity of the judicial forum. In Buatis
Jr. v. People, the Court treated a lawyer's use of the words "lousy,"
"inutile," "carabao English," "stupidity," and "satan" in a letter
addressed to another colleague as defamatory and injurious which
effectively maligned his integrity. Similarly, the hurling of insulting

language to describe the opposing counsel is considered conduct
unbecoming of the legal profession.
xxx
On this score, it must be emphasized that membership in the
bar is a privilege burdened with conditions such that a lawyer's
words and actions directly affect the public's opinion of the
legal profession. Lawyers are expected to observe such
conduct of nobility and uprightness which should remain with
them, whether in their public or private lives, and may be disciplined
in the event their conduct falls short of the standards imposed upon
them. Thus, in this case, it is inconsequential that the statements
were merely relayed to Orlando's brother in private. As a member
of the bar, Orlando should have been more circumspect in his
words, being fully aware that they pertain to another lawyer to
whom fairness as well as candor is owed. It was highly improper
for Orlando to interfere and insult Maximino to his client.
Indulging in offensive personalities in the course of judicial
proceedings, as in this case, constitutes unprofessional conduct
which subjects a lawyer to disciplinary action. While a lawyer is
entitled to. present his case with vigor and courage, such
enthusiasm does not justify the use of offensive and abusive
language. The Court has consistently reminded the members of the
bar to abstain from all offensive personality and to advance no fact
prejudicial to the honor and reputation of a party. xxx26[Emphases
supplied]
While the Court recognizes and appreciates the passion of Asalus'
counsels in promoting and protecting its interest, they must still be
reminded that they should be more circumspect in their choice of
words to argue their client's position. As much as possible, words
which undermine the integrity, competence and ability of the
opposing party, or are otherwise offensive, must be avoided
especially if the message may be delivered in a respectful, yet
equally emphatic manner. A counsel's mettle will not be viewed any
less should he choose to pursue his cause without denigrating the
other party.
WHEREFORE, petition is GRANTED. The July 30, 2015 Decision
and the November 6, 2015 Resolution of the Court of Tax
Appeals En Banc are REVERSED and SET ASIDE. The case is
ordered REMANDED to the Court of Tax Appeals for the
determination of the Value Added Tax liabilities of the Asalus
Corporation.
SO ORDERED.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 38
COMPILATION OF CASES
EXTENDED ASSESSMENT
REQUISITES FOR VALIDITY
CIR v. STANDARD CHARTERED BANK
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 192173               July 29, 2015
COMMISSIONER OF INTERNAL REVENUE, Petitioner, 
vs.
STANDARD CHARTERED BANK, Respondent.
DECISION
PEREZ, J.:
For the Court's consideration is a Petition for Review on Certiorari
which seeks to reverse and set aside the 1 March 2010
Decision1 and the 30 April 2010 Resolution 2 of the Court of Tax
Appeals (CTA) En Banc in CTA EB Case No. 522, affirming in toto
the Decision3 and Resolution4 dated 27 February 2009 and 29 July
2009, respectively, of the Second Division of the CTA (CTA in
Division) in CTA Case No. 7165. The court a quo cancelled and set
aside the Formal Letter of Demand and Assessment Notices dated
24 June 2004 issued by petitioner against respondent for deficiency
income tax, final income tax – Foreign Currency Deposit Unit
(FCDU), and expanded withholding tax (EWT) in the aggregate
amount of ₱33,076,944.18, including increments covering taxable
year 1998, for having been issued beyond the reglementary period.
The Facts
As found by the CT A in Division and affirmed by the CT A En Banc,
the factual antecedents of the case and the proceedings conducted
thereon were as follows:
On July 14, 2004, [respondent] received [petitioner's] Formal Letter
of Demand dated June 24, 2004, for alleged deficiency income tax,
final income tax - FCDU, [withholding tax - compensation (WTC)],
EWT, [final withholding tax (FWT)], and increments for taxable year
1998 in the aggregate amount of ₱33,326,211.37, broken down as
follows:
(Table Deleted)
On August 12, 2004, [respondent] protested the said assessment by
filing a letter-protest dated August 9, 2004 addressed to the BIR
Deputy Commissioner for Large Taxpayers' Service stating the
factual and legal bases of the assessment, and requested that it be
withdrawn and cancelled. As of the date of filing of this Petition for

Review, [petitioner] has not rendered a decision on [respondent's]
protest.
In view of [petitioner's] inaction on [respondent's] protest, on March
9, 2005, [respondent] filed the present Petition for Review.
xxxx
On October 14, 2005, [respondent] filed a Motion for Leave of Court
to Serve Supplemental Petition, with attached Supplemental Petition
for Review, pursuant to Rule 10 of the 1997 Rules of Civil
Procedure, as amended, in view of the alleged payments made by
[respondent] through the BIR's Electronic Filing and Payment
System (eFPS) as regards its deficiency [WTC] and [FWT]
assessments in the amounts of ₱124,967.73 and ₱139,713.l l,
respectively. In its Supplemental Petition for Review, (respondent)
seeks to be fully credited of the payments it made to cover the
deficiency [WTC] and [FWT]. Thus, the remaining assessments
cover only the deficiency income tax, final income tax – FCDU, and
[EWT] in the modified total amount of ₱33,076,944.18, computed as
follows:
(Table Deleted)
Finding merit in [respondent's] motion, the same was granted and
the Supplemental Petition for Review was admitted in a Resolution
dated December 12, 2005.
[Respondent] presented Chona G. Reyes, its Vice-President, as
witness, and documentary exhibits which were admitted by the Court
in its Resolutions dated October 1, 2007, and January 31, 2008.
On the other hand, [petitioner] presented Juan M. Luna, Jr.,
Revenue Officer II of the BIR LTAID I, as witness, and documentary
evidence marked as Exhibits "1 " to "4 ".
Thereafter, the parties were ordered to file their simultaneous
memoranda, within thirty (30) days from notice, after which the case
shall be deemed submitted for decision.
[Petitioner;s] "Memorandum" was filed on August 4, 2008, while
[respondent's] Memorandum was filed on October 24, 2008 after a
series of motions for extension of time to file memorandum were
granted by the [c]ourt. The case was deemed submitted for decision
on November 12, 2008.5
The Ruling of the CTA in Division
In a Decision dated 27 February 2009, 6 the CTA in Division granted
respondent's petition for the cancellation and setting aside of the
subject Formal Letter of Demand and Assessment Notices dated 24
June 2004 on the ground that petitioner's right to assess respondent
for the deficiency income tax, final income tax - FCDU, and EWT
covering taxable year 1998 was already barred by prescription. The
court a quo explained that although petitioner offered in evidence
copies of the Waivers of Statute of Limitations executed by the
parties, for the purpose of justifying the extension of period to
assess respondent, the subject waivers, particularly the First and
Second Waivers dated 20 July 2001 and 4 April 2002, respectively,
failed to strictly comply and conform with the provisions of Revenue
Memorandum Order (RMO) No. 20-90, citing the case of Philippine
Journalists, Inc. v. CIR.7 It therefore concluded that since the
aforesaid waivers were invalid, it necessarily follows that the
subsequent waivers did not in any way cure these defects. Neither
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 39
COMPILATION OF CASES
did it extend the prescriptive period to assess. Accordingly, it ruled
that the assailed Formal Letter of Demand and Assessment Notices
are void for having been issued beyond the reglementary
period.8 Having rendered such ruling, the CT A in Division decided
not to pass upon other incidental issues raised before it for being
moot.
On 29 July 2009, the CTA in Division denied petitioner's Motion for
Reconsideration thereof for lack of merit.9
Aggrieved, petitioner appealed to the CT A En Banc by filing a
Petition for Review under Section 18 of Republic Act (R.A.) No.
1125, as amended by R.A. No. 9282, 10 on 3 September 2009,
docketed as CTA EB No. 522.
The Ruling of the CTA En Banc
The CT A En Banc affirmed in toto both the aforesaid Decision and
Resolution rendered by the CTA in Division in CTA Case No. 7165,
pronouncing that there was no cogent justification to disturb the
findings and conclusion spelled out therein, since what petitioner
merely prayed was for the appellate court to view and appreciate the
arguments/discussions raised by petitioner in her own perspective of
things, which unfortunately had already been considered and
passed upon.
In other words, the CT A En Banc simply concurred with the ruling
that petitioner's subject Formal Letter of Demand and Assessment
Notices (insofar as to the deficiency income tax, final income tax -
FCDU, and EWT) shall be cancelled considering that the same was
already barred by prescription for having been issued beyond the
three-year prescriptive period provided for in Section 203 of the
National Internal Revenue Code (NIRC) of 1997, as amended. The
waivers of the statute of limitations executed by the parties did not
extend the aforesaid prescriptive period because they were invalid
for failure to comply with and conform to the requirements set forth
in RMO No. 20-90.
Upon denial of petitioner's Motion for Reconsideration thereof, it filed
the instant Petition for Review on Certiorari before this Court seeking
the reversal of the 1 March 2010 Decision11 and the 30 April 2010
Resolution12 rendered in CTA EB No. 522, based on the sole
ground, to wit: The CT A En Banc committed reversible error in not
holding that respondent is estopped from questioning the validity of
the waivers of the Statute of Limitations executed by its
representatives in view of the partial payments it made on the
deficiency taxes sought to be collected in petitioner's Formal Letter
of Demand and Assessment Notices dated 24 June 2004. The
Issues
The primary issue presented before this Court is whether or not
petitioner's right to assess respondent for deficiency income tax,
final income tax - FCDU, and EWT covering taxable year 1998 has
already prescribed under Section 203 of the NIRC of 1997, as
amended, for failure to comply with the requirements set forth in
RMO No. 20-90 dated 4 April 1990, pertaining to the proper and
valid execution of a waiver of the Statute of Limitations, and in
accordance with existing jurisprudential pronouncements.
Subsequently, even assuming that petitioner's right to assess had
indeed prescribed, another issue was submitted for our
consideration, to wit: whether or not respondent is estopped from
questioning the validity of the waivers of the Statute of Limitations
executed by its representatives in view of the partial payments it
made on the deficiency taxes (i.e. WTC and FWT) sought to be

collected in petitioner's Formal Letter of Demand and Assessment
Notices dated 24 June 2004.
Our Ruling
We find no merit in the petition.
At the outset, the period for petitioner to assess and collect an
internal revenue tax is limited only to three years by Section 203 of
the NIRC of 1997., as amended, quoted hereunder as follows: SEC.
203. Period of Limitation Upon Assessment and Collection. – Except
as provided in Section 222, internal revenue taxes shall be assessed
within three years after the last day prescribed by law for the filing of
the return, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such
period: Provided, That in a case where a return is filed beyond the
period prescribed by law, the three (3)-year period shall be counted
from the day the return was filed.
For purposes of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on
such last day. (Emphasis supplied)
This mandate governs the question of prescription of the
government's right to assess internal revenue taxes primarily to
safeguard the interests of taxpayers from unreasonable investigation
by not indefinitely extending the period of assessment and depriving
the taxpayer of the assurance that it will no longer be subjected to
further investigation for taxes after the expiration of reasonable
period of time.13
Thus, in the present case, petitioner only had three years, counted
from the date of actual filing of the return or from the last date
prescribed by law for the filing of such return, whichever comes later,
to assess a national internal revenue tax or to begin a court
proceeding for the collection thereof without an assessment.
However, one of the exceptions to the three-year prescriptive period
on the assessment of taxes is that provided for under Section 222(b)
of the NIRC of 1997, as amended, which states:
SEC. 222. Exceptions as to Period of Limitation of Assessment and
Collection of Taxes. –
xxxx
(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. (Emphasis supplied)
From the foregoing, the above provision authorizes the extension of
the original three-year prescriptive period by the execution of a valid
waiver, where the taxpayer and the Commissioner of Internal
Revenue (CIR) may stipulate to extend the period of assessment by
a written 1 agreement executed prior to the lapse of the period
prescribed by law, and by subsequent written agreements before the
expiration of the period previously agreed upon. It must be kept in
mind that the very reason why the law provided for prescription is to
give taxpayers peace of mind, that is, to safeguard them from
unreasonable examination, investigation, or assessment. The law on
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 40
COMPILATION OF CASES
prescription, being a remedial measure, should be liberally
construed in order to afford such protection. As a corollary, the
exceptions to the law on prescription should perforce be strictly
construed.14
In the landmark case of Philippine Journalists, Inc. v. CIR (PJI
case),15 we pronounced that a waiver is not automatically a
renunciation of the right to invoke the defense of prescription. A
waiver of the Statute of Limitations is nothing more than "an
agreement between the taxpayer and the Bureau of Internal
Revenue (BIR) that the period to issue an assessment and collect
the taxes due is extended to a date certain." It is a bilateral
agreement, thus necessitating the very signatures of both the CIR
and the taxpayer to give birth to a valid agreement. Furthermore,
indicating in the waiver the date of acceptance by the BIR is
necessary in order to determine whether the parties (the taxpayer
and the government) had entered into a waiver "before the
expiration of the time prescribed in Section 203 (the three-year
prescriptive period) for the assessment of the tax." When the period
of prescription has expired, there will be no more need to execute a
waiver as there will be nothing more to extend. Hence, no implied
consent . can be presumed, nor can it be contended that the
concurrence to such waiver is a mere formality.
In delineation of the same sense about the waiver of the Statute of
Limitations, RMO No. 20-90 and Revenue Delegation Authority
Order (RDAO) No. 05-01 were issued on 4 April 1990 and 2 August
2001, respectively. The said revenue orders outline the procedure
for the proper execution of a waiver, viz.:16
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 to a 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.
(Emphases supplied)

The provisions of the RMO and RDAO explicitly show their
mandatory nature, requiring strict compliance. Hence, failure to
comply with any of the requisites renders a waiver defective and
ineffectual. It is worth mentioning that strict compliance with the
requirements set forth in RMO No. 20-90 has been upheld in the PJI
case.17 In reversing the decision of the Court of Appeals
promulgated on 5 August 2003, this Court ruled that:
The NIRC, under Sections 203 and 222, provides for a statute of
limitations on the assessment and collection of internal revenue
taxes in order to safeguard the interest of the taxpayer against
unreasonable investigation. Unreasonable investigation
contemplates cases where the period of assessment extends
indefinitely because this deprives the taxpayer of the assurance that
it will no longer be subjected to further investigation for taxes after
the expiration of a reasonable period of time x x x
xxxx
RMO No. 20-90 implements these provisions of the NIRC relating to
the period of prescription for the assessment and collection of taxes.
A cursory reading of the Order supports petitioner's argument that
the RMO must be strictly followed, x x x"18 (Emphasis supplied)
Applying the rules and rulings, the waivers in question were
defective and did not validly extend the original three-year
prescriptive period. As correctly found by the CT A in Division, and
affirmed in toto by the CT A En Banc, the subject waivers of the
Statute of Limitations were in clear violation of RMO No. 20-90:
1) This case involves assessment amounting to more than
₱1,000,000.00. For this, RMO No. 20-90 requires the Commissioner
of Internal Revenue to sign for the BIR.1avvphi1 A perusal of the
First and Second Waivers of the Statute of Limitations shows that
they were signed by Assistant Commissioner-Large Taxpayers
Service Virginia L. Trinidad and Assistant Commissioner-Large
Taxpayers Service Edwin R. Abella respectively, and not by the
Commissioner of Internal Revenue;
2) The date of acceptance by the Assistant Commissioner-Large
Taxpayers Service Virginia L. Trinidad of the First Waiver was not
indicated therein;
3) The date of acceptance by the Assistant Commissioner-Large
Taxpayers Service Edwin R. Abella of the Second Waiver was not
indicated therein;
4) The First and Second Waivers of Statute of Limitations did not
specify the kind and amount of the tax due; and
5) The tenor of the Waiver of the Statute of Limitations signed by
petitioner's authorized representative failed to comply with the
prescribed requirements of RMO No. 20-90. The subject waiver
speaks of a request for extension of time within which to present
additional documents, whereas the waiver provided under RMO No.
20-90 pertains to the approval by the Commissioner of Internal
Revenue of the taxpayer's request for re-investigation and/or
reconsideration of his/its pending internal revenue case. 19
Taking into consideration the foregoing defects in the First and
Second Waivers presented and admitted in evidence before the
court a quo, the period to assess the tax liabilities of respondent for
taxable year 1998 was never extended. Consequently, when the
succeeding waivers of Statute of Limitations were subsequently
executed covering the same tax liabilities of respondent, and there
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 41
COMPILATION OF CASES
being no assessment having been issued as of that time,
prescription has already set in. We therefore hold that the subject
waivers did not extend the period to assess the subject deficiency
tax liabilities of respondent for taxable year 1998. The aforesaid
waivers cannot be considered as "subsequent written agreement(s)
made before the expiration of the period previously agreed upon"
referred to in the second sentence of the earlier quoted Section
222(b) of the NIRC of 1997, as amended, since there is no "period
previously agreed upon" to speak of.
As regards petitioner's insistence that respondent is already
estopped from impugning the validity of the subject waivers
considering that it made partial payments on the deficiency taxes
being collected, particularly as to the payment of its deficiency WTC
and FWT assessments in the amounts of ₱124,967.73 and
₱139,713.11, respectively, we find this argument bereft of merit.
As aptly found in the 29 July 2009 Resolution of the CTA in Division,
although respondent paid the deficiency WTC and FWT
assessments, it did not waive the defense of prescription as regards
the remaining tax deficiencies, it being on record that respondent
continued to raise the issue of prescription in its Pre-Trial Brief filed
on 15 August 2005, Joint Stipulations of Facts and Issues filed on 1
September 2005, direct testimonies of its witness, and Memorandum
filed on 24 October 2008. More so, even petitioner did not consider
such payment of respondent as a waiver of the defense of
prescription, but merely raised the issue of estoppel in her Motion for
Reconsideration of the aforesaid decision. From the conduct of both
parties, there can be no estoppel in this case.20
Upon payment of the assessed deficiency in the WTC in the amount
of ₱124,967.73 and in the FWT in the amount of µ139,713.11,
respondent filed a Motion for Leave of Court to Serve Supplemental
Petition, with attached Supplemental Petition for Review. As stated
in the CTA En Banc affirmed decision of the CTA in Division, "[i]n its
Supplemental Petition for Review, respondent seeks to be fully
credited of the payments it made to cover the deficiency WTC and
FWT. Thus, the remaining assessments cover only the deficiency
income tax, final income tax – FCDU, and (EWT) in the modified
total amount of ₱33,076,944.18, x x x". 21 The aforesaid motion was
granted and the supplemental petition was admitted by the CT A in
Division. Undeniably, the acceptance of said payments was never
questioned by petitioner. Indeed, the decision of the CTA in Division,
which decision was affirmed by the CTA En Banc, covered only the
remaining questioned assessment, namely: income tax, final income
tax -FCDU, and EWT. Clearly, the payment of the deficiency WTC
and FWT was made together with the reiteration in the petition for
the cancellation of the assessment notices on the alleged deficiency
income tax, final income tax - FCDU, and EWT.
When respondent paid the deficiency WTC and FWT assessments,
petitioner accepted said payment without any opposition. This
effectively extinguished respondent's obligation to pay the subject
taxes. It bears emphasis that, obligations are extinguished, among
others, by payment or performance. 22 Under Article 1232 of the Civil
Code, payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. As intended,
which intention was recognized by the CT A in · Division and CT A
En Banc, the question regarding the income tax, final income tax -
FCDU, and EWT, was kept unaffected by the payment of the
deficiency WTC and FWT assessments.
By way of reiteration, taking into consideration the foregoing flaws
found in the subject waivers, the same are void, and the supposed
suspensions of the prescriptive periods within which to issue the

subject assessments were not legally effected. And the facts of this
case do not call for the application of the doctrine of estoppel.
It must be remembered that the execution of a Waiver of Statute of
Limitations may be beneficial to the taxpayer or to the BIR, or to
both. Considering however, that it results to a derogation of some of
the rights of the taxpayer, the same must be executed in accordance
with pre-set guidelines and procedural requirements. Otherwise, it
does not serve its purpose, and the taxpayer has all the right to
invoke its nullity. For that reason, this Court cannot turn blind on the
importance of the Statute of Limitations upon the assessment and
collection of internal revenue taxes provided for under the NIRC.
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
properly in the making of the assessment, and to citizens because
after the lapse of the period of prescription, citizens would have a
feeling of security against unscrupulous tax agents who may 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 a 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 beneficent purpose of affording protection to
the taxpayer within the contemplation of the Commission which
recommends the approval of the law.23
In fine, considering the defects in the First and Second Waivers, the
period to assess or collect deficiency taxes for the taxable year 1998
was never extended. Consequently, the Formal Letter of Demand
and Assessment Notices dated 24 June 2004 for deficiency income
tax, FCDU, and EWT in the aggregate amount of 1!33,076,944.18,
including increments, were issued by the BIR beyond the three-year
prescriptive period and are therefore void.24WHEREFORE, the
petition is DENIED for lack of merit. No costs.
SO ORDERED.
RCBC v. CIR
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 170257               September 7, 2011
RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,  to be the subjects of its petition for review:10
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 Decision 1 and October 26, 2005
Resolution2 of the Court of Tax Appeals En Banc (CTA-En Banc) in
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 42
COMPILATION OF CASES
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
(Table Deleted)
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
(Table Deleted)
On the same day, RCBC paid the following deficiency taxes as
assessed by the BIR:9
(Table Deleted)
RCBC, however, refused to pay the following assessments for
deficiency onshore tax and documentary stamp tax which remained
(Table Deleted)
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 Decision13which
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
(Table Deleted)
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
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 43
COMPILATION OF CASES
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 actioneffectively 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:
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 44
COMPILATION OF CASES
"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.
ASSESSMENT PROCESS
TAX AUDIT
LETTER OF AUTHORITY
CIR v. SONY
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 178697               November 17, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,  cancelling the deficiency VAT assessment but upheld a modified
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 Banc 1 (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:
(Table Deleted)
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 45
COMPILATION OF CASES
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
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
I. 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
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 46
COMPILATION OF CASES
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 110 19 of the 1997 Tax Code
that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than 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-
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 47
COMPILATION OF CASES
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.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 48
COMPILATION OF CASES
MEDICARD PHILIPPINES v. CIR
THIRD DIVISION
G.R. No. 222743 April 5, 2017
MEDICARD PHILIPPINES, INC., Petitioner, 
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
REYES,, J.:
This appeal by Petition for Review 1 seeks to reverse and set aside
the Decision2 dated September 2, 2015 and Resolution 3 dated
January 29, 2016 of the Court of Tax Appeals (CTA) en bane in CTA
EB No. 1224, affirming with modification the Decision 4 dated June 5,
2014 and the Resolution5 dated September 15, 2014.in CTA Case
No. 7948 of the CTA Third Division, ordering petitioner Medicard
Philippines, Inc. (MEDICARD), to pay respondent Commissioner of
Internal Revenue (CIR) the deficiency
Value-Added Tax. (VAT) assessment in the aggregate amount of
₱220,234,609.48, plus 20% interest per annum starting January 25,
2007, until fully paid, pursuant to Section 249(c) 6 of the National
Internal Revenue Code (NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that
provides prepaid health and medical insurance coverage to its
clients. Individuals enrolled in its health care programs pay an
annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by duly licensed
physicians, specialists and other professional technical staff
participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns
through Electronic Filing and Payment System (EFPS) on April 20,
2006, July 25, 2006 and October 20, 2006, respectively, and its
Fourth Quarterly VAT Return on January 25, 2007. 8
Upon finding some discrepancies between MEDICARD's Income
Tax Returns (ITR) and VAT Returns, the CIR informed MEDICARD
and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated
September 20, 2007. Subsequently, the CIR also issued a
Preliminary Assessment Notice (PAN) against MEDICARD for
deficiency VAT. A Memorandum dated December 10, 2007 was
likewise issued recommending the issuance of a Formal
Assessment Notice (FAN) against MEDICARD.9 On. January 4,
2008, MEDICARD received CIR's FAN dated December' 10, 2007
for alleged deficiency VAT for taxable year 2006 in the total amount
of Pl 96,614,476.69,10 inclusive of penalties. 11

According to the CIR, the taxable base of HMOs for VAT purposes is
its gross receipts without any deduction under Section 4.108.3(k) of
Revenue Regulation (RR) No. 16-2005. Citing Commissioner of
Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR
argued that since MEDICARD. does not actually provide medical
and/or hospital services, but merely arranges for the same, its
services are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited
merely to arranging for the provision of medical and/or hospital
services by hospitals and/or clinics but include actual and direct
rendition of medical and laboratory services; in fact, its 2006 audited
balance sheet shows that it owns x-ray and laboratory facilities
which it used in providing medical and laboratory services to its
members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million
was received from clients that are registered with the Philippine
Export Zone Authority (PEZA) and/or Bureau of Investments; (3) the
processing fees amounting to ₱l 1.5 Million should be excluded from
gross receipts because P5.6 Million of which represent advances for
professional fees due from clients which were paid by MEDICARD
while the remainder was already previously subjected to VAT; (4)
the professional fees in the amount of Pl 1 Million should also be
excluded because it represents the amount of medical services
actually and directly rendered by MEDICARD and/or its subsidiary
company; and (5) even assuming that it is liable to pay for the VAT,
the 12% VAT rate should not be applied on the entire amount but
only for the period when the 12% VAT rate was already in
effect, i.e., on February 1, 2006. It should not also be held liable for
surcharge and deficiency interest because it did not pass on the
VAT to its members.14
On February 14, 2008, the CIR issued a Tax Verification Notice
authorizing Revenue Officer Romualdo Plocios to verify the
supporting documents of MEDICARD's Protest. MEDICARD also
submitted additional supporting documentary evidence in aid of its
Protest thru a letter dated March 18, 2008. 15
On June 19, 2009, MEDICARD received CIR's Final Decision on
Disputed Assessment dated May 15, 2009, denying MEDICARD's
protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby
reiterate in toto assessment of deficiency [VAT] in total sum of
₱196,614,476.99. It is requested that you pay said deficiency taxes
immediately. Should payment be made later, adjustment has to be
made to impose interest until date of payment. This is olir final
decision. If you disagree, you may take an appeal to the [CTA] within
the period provided by law, otherwise, said assessment shall
become final, executory and demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review
before the CT A, reiterating its position before the tax authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming
with modifications the CIR's deficiency VAT assessment covering
taxable year 2006, viz.:
WHEREFORE, premises considered, the deficiency VAT
assessment issued by [CIR] against [MEDICARD] covering taxable
year 2006 ·is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR]
the amount of P223,l 73,208.35, inclusive of the twenty-five percent
(25%) surcharge imposed under -Section 248(A)(3) of the NIRC of
1997, as amended, computed as follows:
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 49
COMPILATION OF CASES
(Table Deleted)
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per
annum on the basis deficiency VAT of Pl 78,538,566.68 computed
from January 25, 2007 until full payment thereof pursuant to Section
249(B) of the NIRC of 1997, as amended; and
b. Delinquency interest at the rate of twenty percent (20%) per
annum on the total amount of ₱223,173,208.35 representing basic
deficiency VAT of ₱l78,538,566.68 and· 25% surcharge of
₱44,634,64 l .67 and on the 20% deficiency interest which have
accrued as afore-stated in (a), computed from June 19, 2009 until
full payment thereof pursuant to Section 249(C) of the NIRC of 1997.
SO ORDERED.19
The CTA Division held that: (1) the determination of deficiency VAT
is not limited to the issuance of Letter of Authority (LOA) alone as
the CIR is granted vast powers to perform examination and
assessment functions; (2) in lieu of an LOA, an LN was issued to
MEDICARD informing it· of the discrepancies between its ITRs and
VAT Returns and this procedure is authorized under Revenue
Memorandum Order (RMO) No. 30-2003 and 42-2003; (3)
MEDICARD is estopped from questioning the validity of the
assessment on the ground of lack of LOA since the assessment
issued against MEDICARD contained the requisite legal and factual
bases that put MEDICARD on notice of the deficiencies and it in fact
availed of the remedies provided by law without questioning the
nullity of the assessment; (4) the amounts that MEDICARD
earmarked , and eventually paid to doctors, hospitals and clinics
cannot be excluded from · the computation of its gross receipts
under the provisions of RR No. 4-2007 because the act of
earmarking or allocation is by itself an act of ownership and
management over the funds by MEDICARD which is beyond the
contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its
clinics and laboratory facilities cannot be excluded from its gross
receipts because the operation of these clinics and laboratory is
merely an incident to MEDICARD's main line of business as HMO
and there is no evidence that MEDICARD segregated the amounts
pertaining to this at the time it received the premium from its
members; and (6) MEDICARD was not able to substantiate the
amount pertaining to its January 2006 income and therefore has no
basis to impose a 10% VAT rate.20
Undaunted, MEDICARD filed a Motion for Reconsideration but it
was denied. Hence, MEDICARD elevated the matter to the CTA en
banc.
In a Decision21 dated September 2, 2015, the CTA en banc partially
granted the petition only insofar as the 10% VAT rate for January
2006 is concerned but sustained the findings of the CTA Division in
all other matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is
hereby PARTIALLY GRANTED. Accordingly, the Decision date
June 5, 2014 is hereby MODIFIED, as follows:
"WHEREFORE, premises considered, the deficiency VAT
assessment issued by [CIR] against

[MEDICARD] covering taxable year 2006 is hereby AFFIRMED
WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to
pay [CIR] the amount of ₱220,234,609.48, inclusive of the 25%
surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as
amended, computed as follows:
(Table Deleted)
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the basic
deficiency VAT of ₱l 76,187,687.58 computed from January 25,
2007 until full payment thereof pursuant to Section 249(B) of the
NIRC of 1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the total
amount of ₱220,234,609.48 (representing basic deficiency VAT of
₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on the
deficiency interest which have accrued as afore-stated in (a),
computed from June 19, 2009 until full payment thereof pursuant to
Section 249(C) of the NIRC of 1997, as amended."
SO ORDERED.22
Disagreeing with the CTA en bane's decision, MEDICARD filed a
motion for reconsideration but it was denied. 23Hence, MEDICARD
now seeks recourse to this Court via a petition for review
on certiorari.
The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED
AND EVENTUALLY PAID TO THE MEDICAL SERVICE
PROVIDERS SHOULD STILL FORM PART OF ITS GROSS
RECEIPTS FOR VAT PURPOSES. 24
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated
MEDICARD's right to due process
An LOA is the authority given to the appropriate revenue officer
assigned to perform assessment functions. It empowers or enables
said revenue officer to examine the books of account and other
accounting records of a taxpayer for the purpose of collecting the
correct amount of tax. 25 An LOA is premised on the fact that the
examination of a taxpayer who has already filed his tax returns is a
power that statutorily belongs only to the CIR himself or his duly
authorized representatives. Section 6 of the NIRC clearly provides
as follows:
SEC. 6. Power of the Commissioner to Make Assessments and
Prescribe Additional Requirements for Tax Administration and
Enforcement. –
(A) Examination of Return and Determination of Tax Due.- After
a return has been filed as required under the provisions of this
Code, the Commissioner or his duly authorized
representative may authorize the examinationof any
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 50
COMPILATION OF CASES
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 x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless
authorized by the CIR himself or by his duly authorized
representative, through an LOA, an examination of the taxpayer
cannot ordinarily be undertaken. The circumstances contemplated
under Section 6 where the taxpayer may be assessed through best-
evidence obtainable, inventory-taking, or surveillance among others
has nothing to do with the LOA. These are simply methods of
examining the taxpayer in order to arrive at .the correct amount of
taxes. Hence, unless undertaken by the CIR himself or his duly
authorized representatives, other tax agents may not validly conduct
any of these kinds of examinations without prior authority.
With the advances in information and communication technology,
the Bureau of Internal Revenue (BIR) promulgated RMO No. 30-
2003 to lay down the policies and guidelines once its then incipient
centralized Data Warehouse (DW) becomes fully operational in
conjunction with its Reconciliation of Listing for Enforcement System
(RELIEF System).26 This system can detect tax leaks by matching
the data available under the BIR's Integrated Tax System (ITS) with
data gathered from third-party sources. Through the consolidation
and cross-referencing of third-party information, discrepancy reports
on sales and purchases can be generated to uncover under
declared income and over claimed purchases of Goods and
services.
Under this RMO, several offices of the BIR are tasked with specific
functions relative to the RELIEF System, particularly with regard to
LNs. Thus, the Systems Operations Division (SOD) under the
Information Systems Group (ISG) is responsible for: (1) coming up
with the List of Taxpayers with discrepancies within the threshold
amount set by management for the issuance of LN and for the
system-generated LNs; and (2) sending the same to the taxpayer
and to the Audit Information, Tax Exemption and Incentives Division
(AITEID). After receiving the LNs, the AITEID under the Assessment
Service (AS), in coordination with the concerned offices under the
ISG, shall be responsible for transmitting the LNs to the investigating
offices [Revenue District Office (RDO)/Large Taxpayers District
Office (LTDO)/Large Taxpayers Audit and Investigation Division
(LTAID)]. At the level of these investigating offices, the appropriate
action on the LN s issued to taxpayers with RELIEF data
discrepancy would be determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which
laid down the "no-contact-audit approach" in the CIR's exercise of
its ·power to authorize any examination of taxpayer arid the
assessment of the correct amount of tax. The no-contact-audit
approach includes the process of computerized matching of sales
and purchases data contained in the Schedules of Sales and
Domestic Purchases and Schedule of Importation submitted by VAT
taxpayers under the RELIEF System pursuant to RR No. 7-95, as
amended by RR Nos. 13-97, 7-99 and 8-2002. This may also
include the matching of data from other information or returns filed
by the taxpayers with the BIR such as Alphalist of Payees subject to
Final or Creditable Withholding Taxes.
Under this policy, even without conducting a detailed examination of
taxpayer's books and records, if the computerized/manual matching
of sales and purchases/expenses appears to reveal discrepancies,
the same shall be communicated to the concerned taxpayer through

the issuance of LN. The LN shall serve as a discrepancy notice to
taxpayer similar to a Notice for Informal Conference to the
concerned taxpayer. Thus, under the RELIEF System, a revenue
officer may begin an examination of the taxpayer even prior to the
issuance of an LN or even in the absence of an LOA with the aid of
a computerized/manual matching of taxpayers': documents/records.
Accordingly, under the RELIEF System, the presumption that the tax
returns are in accordance with law and are presumed correct since
these are filed under the penalty of perjury27 are easily rebutted and
the taxpayer becomes instantly burdened to explain a purported
discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent
on the statutory requirement of an LOA before any investigation or
examination of the taxpayer may be conducted. As provided in the
RMO No. 42-2003, the LN is merely similar to a Notice for Informal
Conference. However, for a Notice of Informal Conference, which
generally precedes the issuance of an assessment notice to be
valid, the same presupposes that the revenue officer who issued the
same is properly authorized in the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO
No. 30-2003, as supplemented by RMO No. 42-2003, was amended
by RMO No. 32-2005 to fine tune existing procedures in handing
assessments against taxpayers'· issued LNs by reconciling various
revenue issuances which conflict with the NIRC. Among the
objectives in the issuance of RMO No. 32-2005 is to prescribe
procedure in the resolution of LN discrepancies, conversion of LNs
to LOAs and assessment and collection of deficiency taxes.
IV. POLICIES AND GUIDELINES
xxxx
8. In the event a taxpayer who has been issued an LN refutes
the discrepancy shown in the LN, the concerned taxpayer will be
given an opportunity to reconcile its records with those of the BIR
within
One Hundred and Twenty (120) days from the date of the issuance
of the LN. However, the subject taxpayer shall no longer be entitled
to the abatement of interest and penalties after the lapse of the sixty
(60)-day period from the LN issuance.
9. In case the above discrepancies remained unresolved at the
end of the One Hundred and Twenty (120)-day period, the
revenue officer (RO) assigned to handle the LN shall
recommend the issuance of [LOA) to replace the LN. The head
of the concerned investigating office shall submit a summary list of
LNs for conversion to LAs (using the herein prescribed format in
Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of
the corresponding LAs with the notation "This LA cancels
LN_________ No. "
xxxx
V. PROCEDURES
xxxx
B. At the Regional Office/Large Taxpayers Service
xxxx
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 51
COMPILATION OF CASES
7. Evaluate the Summary List of LNs for Conversion to LAs
submitted by the RDO x x x prior to approval.
8. Upon approval of the above list, prepare/accomplish and sign the
corresponding LAs.
xxxx
Decision 11 G.R. No. 222743
xxxx
10. Transmit the approved/signed LAs, together with the duly
accomplished/approved Summary List of LNs for conversion to LAs,
to the concerned investigating offices for the encoding of the
required information x x x and for service to the concerned
taxpayers.
xxxx
C. At the RDO x x x
xxxx
11. If the LN discrepancies remained unresolved within One
Hundred and Twenty (120) days from issuance thereof, prepare a
summary list of said LN s for conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned
taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the
issuance of a PAN and FAN against MED ICARD. Therefore no LOA
was also served on MEDICARD. The LN that was issued earlier was
also not converted into an LOA contrary to the above quoted
provision. Surprisingly, the CIR did not even dispute the applicability
of the above provision of RMO 32-2005 in the present case which is
clear and unequivocal on the necessity of an LOA for the·
assessment proceeding to be valid. Hence, the CTA's disregard of
MEDICARD's right to due process warrant the reversal of the
assailed decision and resolution.
In the case of Commissioner of Internal Revenue v. Sony
Philippines, Inc. ,29 the Court said that:
Clearly, there must be a grant of authority before any revenue officer
can conduct an examination or assessment. Equally important is
that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the
assessment or examination is a nullity.30 (Emphasis and
underlining ours)
The Court cannot convert the LN into the LOA required under the
law even if the same was issued by the CIR himself. Under RR No.
12-2002, LN is issued to a person found to have underreported
sales/receipts per data generated under the RELIEF system. Upon
receipt of the LN, a taxpayer may avail of the BIR's Voluntary
Assessment and Abatement Program. If a taxpayer fails or refuses
to avail of the said program, the BIR may avail of administrative and
criminal .remedies, particularly closure, criminal action, or audit and
investigation. Since the law specifically requires an LOA and RMO

No. 32-2005 requires the conversion of the previously issued LN to
an LOA, the absence thereof cannot be simply swept under the rug,
as the CIR would have it. In fact Revenue Memorandum Circular No.
40-2003 considers an LN as a notice of audit or investigation only for
the purpose of disqualifying the taxpayer from amending his returns.
The following differences between an LOA and LN are crucial. First,
an LOA addressed to a revenue officer is specifically required under
the NIRC before an examination of a taxpayer may be had while an
LN is not found in the NIRC and is only for the purpose of notifying
the taxpayer that a discrepancy is found based on the BIR's RELIEF
System. Second, an LOA is valid only for 30 days from date of issue
while an LN has no such limitation. Third, an LOA gives the revenue
officer only a period of 10days from receipt of LOA to conduct his
examination of the taxpayer whereas an LN does not contain such a
limitation.31 Simply put, LN is entirely different and serves a different
purpose than an LOA. Due process demands, as recognized under
RMO No. 32-2005, that after an LN has serve its purpose, the
revenue officer should have properly secured an LOA before
proceeding with the further examination and assessment of the
petitioner. Unfortunarely, this was not done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be
dispensed with just because none of the financial books or records
being physically kept by MEDICARD was examined. To begin with,
Section 6 of the NIRC requires an authority from the CIR or from his
duly authorized representatives before an examination "of a
taxpayer" may be made. The requirement of authorization is
therefore not dependent on whether the taxpayer may be required to
physically open his books and financial records but only on whether
a taxpayer is being subject to examination.
The BIR's RELIEF System has admittedly made the BIR's
assessment and collection efforts much easier and faster. The ease
by which the BIR's revenue generating objectives is achieved is no
excuse however for its non-compliance with the statutory
requirement under Section 6 and with its own administrative
issuance. In fact, apart from being a statutory requirement, an LOA
is equally needed even under the BIR's RELIEF System because
the rationale of requirement is the same whether or not the CIR
conducts a physical examination of the taxpayer's records: to
prevent undue harassment of a taxpayer and level the playing field
between the government' s vast resources for tax assessment,
collection and enforcement, on one hand, and the solitary taxpayer's
dual need to prosecute its business while at the same time
responding to the BIR exercise of its statutory powers. The balance
between these is achieved by ensuring that any examination of the
taxpayer by the BIR' s revenue officers is properly authorized in the
first place by those to whom the discretion to exercise the power of
examination is given by the statute.
That the BIR officials herein were not shown to have acted
unreasonably is beside the point because the issue of their lack of
authority was only brought up during the trial of the case. What is
crucial is whether the proceedings that led to the issuance of VAT
deficiency assessment against MEDICARD had the prior approval
and authorization from the CIR or her duly authorized
representatives. Not having authority to examine MEDICARD in the
first place, the assessment issued by the CIR is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not
fatal, the Court still partially finds merit in MEDICARD's substantive
arguments.
The amounts earmarked and
eventually paid by MEDICARD to
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 52
COMPILATION OF CASES
the medical service providers do not
form part of gross receipts.for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming
the ruling of the CT A Division that the gross receipts of an HMO for
VAT purposes shall be the total amount of money or its equivalent
actually received from members undiminished by any amount paid
or payable to the owners/operators of hospitals, clinics and medical
and dental practitioners. MEDICARD explains that its business as an
HMO involves two different although interrelated contracts. One is
between a corporate client and MEDICARD, with the corporate
client's employees being considered as MEDICARD members; and
the other is between the health care institutions/healthcare
professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with
healthcare institutions/healthcare professionals for the coverage of
MEDICARD members under specific health related services for a
specified period of time in exchange for payment of a more or less
fixed membership fee. Under its contract with its corporate clients,
MEDICARD expressly provides that 20% of the membership fees
per individual, regardless of the amount involved, already includes
the VAT of 10%/20% excluding the remaining 80o/o because MED
ICARD would earmark this latter portion for medical utilization of its
members. Lastly, MEDICARD also assails CIR's inclusion in its
gross receipts of its earnings from medical services which it actually
and directly rendered to its members.
Since an HMO like MEDICARD is primarily engaged m arranging for
coverage or designated managed care services that are needed by
plan holders/members for fixed prepaid membership fees and for a
specified period of time, then MEDICARD is principally engaged in
the sale of services. Its VAT base and corresponding liability is, thus,
determined under Section 108(A)32 of the Tax Code, as amended by
Republic Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is
treated for VAT purposes as a dealer in securities whose gross
receipts is the amount actually received as contract price without
allowing any deduction from the gross receipts. 33 This restrictive
tenor changed under RR No. 16-2005. Under this RR, an HMO's
gross receipts and gross receipts in general were defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its
equivalent representing the service fee actually or constructively
received during the taxable period for the services performed or to
be performed for another person, excluding the value-added
tax. The compensation for their services representing their
service fee, is presumed to be the total amount received as
enrollment fee from their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount
of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits
applied as payments for services rendered, and advance
payments actually or constructively received during the taxable
period for the services performed or to be performed for another
person, excluding the VAT. 34

In 2007, the BIR issued RR No. 4-2007 amending portions of RR
No. 16-2005, including the definition of gross receipts in general.35
According to the CTA en banc, the entire amount of membership
fees should form part of MEDICARD's gross receipts because the
exclusions to the gross receipts under RR No. 4-2007 does not
apply to MEDICARD. What applies to MEDICARD is the definition of
gross receipts of an HMO under RR No. 16-2005 and not the
modified definition of gross receipts in general under the RR No. 4-
2007.
The CTA en banc overlooked that the definition of gross receipts
under. RR No. 16-2005 merely presumed that the amount received
by an HMO as membership fee is the HMO's compensation for their
services. As a mere presumption, an HMO is, thus, allowed to
establish that a portion of the amount it received as membership fee
does NOT actually compensate it but some other person, which in
this case are the medical service providers themselves. It is a well-
settled principle of legal hermeneutics that words of a statute will be
interpreted in their natural, plain and ordinary acceptation and
signification, unless it is evident that the legislature intended a
technical or special legal meaning to those words. The Court cannot
read the word "presumed" in any other way.
It is notable in this regard that the term gross receipts as elsewhere
mentioned as the tax base under the NIRC does not contain any
specific definition.36 Therefore, absent a statutory definition, this
Court has construed the term gross receipts in its plain and ordinary
meaning, that is, gross receipts is understood as comprising the
entire receipts without any deduction.37 Congress, under Section
108, could have simply left the term gross receipts similarly
undefined and its interpretation subjected to ordinary acceptation,.
Instead of doing so, Congress limited the scope of the term gross
receipts for VAT purposes only to the amount that the taxpayer
received for the services it performed or to the amount it received as
advance payment for the services it will render in the future for
another person.
In the proceedings ·below, the nature of MEDICARD's business and
the extent of the services it rendered are not seriously disputed. As
an HMO, MEDICARD primarily acts as an intermediary between the
purchaser of healthcare services (its members) and the healthcare
providers (the doctors, hospitals and clinics) for a fee. By enrolling
membership with MED ICARD, its members will be able to avail of
the pre-arranged medical services from its accredited healthcare
providers without the necessary protocol of posting cash bonds or
deposits prior to being attended to or admitted to hospitals or clinics,
especially during emergencies, at any given time. Apart from this,
MEDICARD may also directly provide medical, hospital and
laboratory services, which depends upon its member's choice.
Thus, in the course of its business as such, MED ICARD members
can either avail of medical services from MEDICARD's accredited
healthcare providers or directly from MEDICARD. In the former,
MEDICARD members obviously knew that beyond the agreement to
pre-arrange the healthcare needs of its ·members, MEDICARD
would not actually be providing the actual healthcare service. Thus,
based on industry practice, MEDICARD informs its would-be
member beforehand that 80% of the amount would be earmarked for
medical utilization and only the remaining 20% comprises its service
fee. In the latter case, MEDICARD's sale of its services is exempt
from VAT under Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any
portion of Section 108 of the NIRC that would extend the definition of
gross receipts even to amounts that do not only pertain to the
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 53
COMPILATION OF CASES
services to be performed: by another person, other than the
taxpayer, but even to amounts that were indisputably utilized not by
MED ICARD itself but by the medical service providers.
It is a cardinal rule in statutory construction that no word, clause,
sentence, provision or part of a statute shall be considered
surplusage or superfluous, meaningless, void and insignificant. To
this end, a construction which renders every word operative is
preferred over that which makes some words idle and nugatory. This
principle is expressed in the maxim Ut magisvaleat quam pereat,
that is, we choose the interpretation which gives effect to the whole
of the statute – it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal
Revenue,38the Court adopted the principal object and purpose object
in determining whether the MEDICARD therein is engaged in the
business of insurance and therefore liable for documentary stamp
tax. The Court held therein that an HMO engaged in preventive,
diagnostic and curative medical services is not engaged in the
business of an insurance, thus:
To summarize, the distinctive features of the cooperative are the
rendering of service, its extension, the bringing of physician and
patient together, the preventive features, the regularization of
service as well as payment, the substantial reduction in cost by
quantity purchasing in short, getting the medical job done and
paid for; not, except incidentally to these features, the
indemnification for cost after .the services is rendered. Except
the last, these are not distinctive or generally characteristic of
the insurance arrangement. There is, therefore, a substantial
difference between contracting in this way for the rendering of
service, even on the contingency that it be needed, and contracting
merely to stand its cost when or after it is rendered. 39 (Emphasis
ours)
In sum, the Court said that the main difference between an HMO
arid an insurance company is that HMOs undertake to provide or
arrange for the provision of medical services through participating
physicians while insurance companies simply undertake to
indemnify the insured for medical expenses incurred up to a pre-
agreed limit. In the present case, the VAT is a tax on the value
added by the performance of the service by the taxpayer. It is, thus,
this service and the value charged thereof by the taxpayer that is
taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount
of membership fees to VAT. 40 But the Court's task however is not to
weigh these policy considerations but to determine if these
considerations in favor of taxation can even be implied from the
statute where the CIR purports to derive her authority. This Court
rules that they cannot because the language of the NIRC is pretty
straightforward and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict
interpretation in the imposition of taxes, not the similar doctrine as
applied to tax exemptions. The rule in the interpretation of tax laws is
that a statute will not be construed as imposing a tax unless it does
so clearly, expressly, and unambiguously. A tax cannot be
imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the
letter in construing statutes applies with peculiar strictness to
tax laws and the provisions of a taxing act are not to be
extended by implication. In answering the question of who is
subject to tax statutes, it is basic that in case of doubt, such statutes

are to be construed most strongly against the government and in
favor of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes
expressly and clearly import. As burdens, taxes should not be
unduly exacted nor assumed beyond the plain meaning of the tax
laws. 41 (Citation omitted and emphasis and underlining ours)
For this Court to subject the entire amount of MEDICARD's gross
receipts without exclusion, the authority should have been
reasonably founded from the language of the statute. That language
is wanting in this case. In the scheme of judicial tax administration,
the need for certainty and predictability in the implementation of tax
laws is crucial. Our tax authorities fill in the details that Congress
may not have the opportunity or competence to provide. The
regulations these authorities issue are relied upon by taxpayers, who
are certain that these will be followed by the courts. Courts,
however, will not uphold these authorities' interpretations when
dearly absurd, erroneous or improper. 42 The CIR's interpretation of
gross receipts in the present case is patently erroneous for lack of
both textual and non-textual support.
As to the CIR's argument that the act of earmarking or allocation is
by itself an act of ownership and management over the funds, the
Court does not agree.1âwphi1 On the contrary, it is MEDICARD's
act of earmarking or allocating 80% of the amount it received as
membership fee at the time of payment that weakens the ownership
imputed to it. By earmarking or allocating 80% of the amount,
MEDICARD unequivocally recognizes that its possession of the
funds is not in the concept of owner but as a mere administrator of
the same. For this reason, at most, MEDICARD's right in relation to
these amounts is a mere inchoate owner which would ripen into
actual ownership if, and only if, there is underutilization of the
membership fees at the end of the fiscal year. Prior to that, MEDI
CARD is bound to pay from the amounts it had allocated as an
administrator once its members avail of the medical services of
MEDICARD's healthcare providers.
Before the Court, the parties were one in submitting the legal issue
of whether the amounts MEDICARD earmarked, corresponding to
80% of its enrollment fees, and paid to the medical service providers
should form part of its gross receipt for VAT purposes, after having
paid the VAT on the amount comprising the 20%. It is significant to
note in this regard that MEDICARD established that upon receipt of
payment of membership fee it actually issued two official receipts,
one pertaining to the VAT able portion, representing compensation
for its services, and the other represents the non-vatable portion
pertaining to the amount earmarked for medical utilization.:
Therefore, the absence of an actual and physical segregation of the
amounts pertaining to two different kinds · of fees cannot arbitrarily
disqualify MEDICARD from rebutting the presumption under the law
and from proving that indeed services were rendered by its
healthcare providers for which it paid the amount it sought to be
excluded from its gross receipts.
With the foregoing discussions on the nullity of the assessment on
due process grounds and violation of the NIRC, on one hand, and
the utter lack of legal basis of the CIR's position on the computation
of MEDICARD's gross receipts, the Court finds it unnecessary, nay
useless, to discuss the rest of the parties' arguments and counter-
arguments.
In fine, the foregoing discussion suffices for the reversal of the
assailed decision and resolution of the CTA en banc grounded as it
is on due process violation. The Court likewise rules that for
purposes of determining the VAT liability of an HMO, the amounts
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 54
COMPILATION OF CASES
earmarked and actually spent for medical utilization of its members
should not be included in the computation of its gross receipts.
WHEREFORE, in consideration of the foregoing disquisitions, the
petition is hereby GRANTED. The Decision dated September 2,
2015 and Resolution dated January 29, 2016 issued by the Court of
Tax Appeals en bane in CTA EB No. 1224 are REVERSED and
SET ASIDE. The definition of gross receipts under Revenue
Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A)
of the National Internal Revenue Code, as amended by Republic Act
No. 9337, for purposes of determining its Value-Added Tax liability,
is hereby declared to EXCLUDE the eighty percent (80%) of the
amount of the contract price earmarked as fiduciary funds for the
medical utilization of its members. Further, the Value-Added Tax
deficiency assessment issued against Medicard Philippines, Inc. is
hereby declared unauthorized for having been issued without a
Letter of Authority by the Commissioner of Internal Revenue or his
duly authorized representatives.
SO ORDERED.
FINAL ASSESSMENT NOTICE
EFFECT
CIR v. PASCOR REALTY DEVELOPMENT
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 128315 June 29, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner, 
vs.
PASCOR REALTY AND DEVELOPMENT CORPORATION,
ROGELIO A. DIO and VIRGINIA S. DIO, respondents.
 
PANGANIBAN, J.:
An assessment contains not only a computation of tax liabilities, but
also a demand for payment within a prescribed period. It also signals
the time when penalties and protests begin to accrue against the
taxpayer. To enable the taxpayer to determine his remedies thereon,
due process requires that it must be served on and received by the
taxpayer. Accordingly, an affidavit, which was executed by revenue
officers stating the tax liabilities of a taxpayer and attached to a
criminal complaint for tax evasion, cannot be deemed an
assessment that can be questioned before the Court of Tax
Appeals.
Statement of the Case
Before this Court is a Petition for Review on Certiorari under Rule 45
of the Rules of Court praying for the nullification of the October 30,
1996
Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40853, which
effectively affirmed the January 25, 1996 Resolution 3 of the Court of
Tax Appeals 4 CTA Case No. 5271. The CTA disposed as follows:

WHEREFORE, finding [the herein petitioner's] "Motion to Dismiss"
as UNMERITORIOUS, the same is hereby DENIED. [The CIR] is
hereby given a period of thirty (30) days from receipt hereof to file
her answer.
Petitioner also seeks to nullify the February 13, 1997 Resolution 5 of
the Court of Appeals denying reconsideration.
The Facts
As found by the Court of Appeals, the undisputed facts of the case
are as follows:
It appears that by virtue of Letter of Authority No. 001198, then BIR
Commissioner Jose U. Ong authorized Revenue Officers Thomas T.
Que, Sonia T. Estorco and Emmanuel M. Savellano to examine the
books of accounts and other accounting records of Pascor Realty
and Development Corporation. (PRDC) for the years ending 1986,
1987 and 1988. The said examination resulted in a recommendation
for the issuance of an assessment in the amounts of P7,498,434.65
and P3,015,236.35 for the years 1986 and 1987, respectively.
On March 1, 1995, the Commissioner of Internal Revenue filed a
criminal complaint before the Department of Justice against the
PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S.
Dio, alleging evasion of taxes in the total amount of P10,513,671 .
00. Private respondents PRDC, et. al. filed an Urgent Request for
Reconsideration/Reinvestigation disputing the tax assessment and
tax liability.
On March 23, 1995, private respondents received a subpoena from
the DOJ in connection with the criminal complaint filed by the
Commissioner of Internal Revenue (BIR) against them.1âwphi1.nêt
In a letter dated May 17, 1995, the CIR denied the urgent request for
reconsideration/reinvestigation of the private respondents on the
ground that no formal assessment of the has as yet been issued by
the Commissioner.
Private respondents then elevated the Decision of the CIR dated
May 17, 1995 to the Court of Tax Appeals on a petition for review
docketed as CTA Case No. 5271 on July 21, 1995. On September 6,
1995, the CIR filed a Motion to Dismiss the petition on the ground
that the CTA has no jurisdiction over the subject matter of the
petition, as there was no formal assessment issued against the
petitioners. The CTA denied the said motion to dismiss in a
Resolution dated January 25, 1996 and ordered the CIR to file an
answer within thirty (30) days from receipt of said resolution. The
CIR received the resolution on January 31, 1996 but did not file an
answer nor did she move to reconsider the resolution.
Instead, the CIR filed this petition on June 7, 1996, alleging as
grounds that:
Respondent Court of Tax Appeals acted with grave abuse of
discretion and without jurisdiction in considering the affidavit/report
of the revenue officer and the indorsement of said report to the
secretary of justice as assessment which may be appealed to the
Court of Tax Appeals;
Respondent Court Tax Appeals acted with grave abuse of discretion
in considering the denial by petitioner of private respondents' Motion
for Reconsideration as [a] final decision which may be appealed to
the Court of Tax Appeals.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 55
COMPILATION OF CASES
In denying the motion to dismiss filed by the CIR, the Court of Tax
Appeals stated:
We agree with petitioners' contentions, that the criminal complaint
for tax evasion is the assessment issued, and that the letter denial of
May 17, 1995 is the decision properly appealable to [u]s.
Respondent's ground of denial, therefore, that there was no formal
assessment issued, is untenable.
It is the Court's honest belief, that the criminal case for tax evasion is
already anassessment. The complaint, more particularly, the Joint
Affidavit of Revenue Examiners Lagmay and Savellano attached
thereto, contains the details of the assessment like the kind and
amount of tax due, and the period covered:
Petitioners are right, in claiming that the provisions of Republic Act
No. 1125, relating to exclusive appellate jurisdiction of this Court, do
not, make any mention of "formal assessment." The law merely
states, that this Court has exclusive appellate jurisdiction over
decisions of the Commissioner of Internal Revenue on disputed
assessments, and other matters arising under the National Internal
Revenue Code, other law or part administered by the Bureau of
Internal Revenue Code.
As far as this Court is concerned, the amount and kind of tax due,
and the period covered, are sufficient details needed for an
"assessment." These details are more than complete, compared to
the following definitions of the term as quoted hereunder. Thus:
Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43
S.W. (2d) 386, 387, 163 Tenn. 332. (Words and Phrases,
Permanent Edition, Vol. 4, p. 446).
The word assessment when used in connection with taxation, may
have more than one meaning. The ultimate purpose of an
assessment to such a connection is to ascertain the amount that
each taxpayer is to pay. More commonly, the word "assessment"
means the official valuation of a taxpayer's property for purpose of
taxation. State v. New York, N.H. and H.R. Co. 22 A. 765, 768, 60
Conn. 326, 325. (Ibid. p. 445)
From the above, it can be gleaned that an assessment simply states
how much tax is due from a taxpayer. Thus, based on these
definitions, the details of the tax as given in the Joint Affidavit of
respondent's examiners, which was attached to the tax evasion
complaint, more than suffice to qualify as an assessment. Therefore,
this assessment having been disputed by petitioners, and there
being a denial of their letter disputing such assessment, this Court
unquestionably acquired jurisdiction over the instant petition for
review. 6
As earlier observed, the Court of Appeals sustained the CTA and
dismissed the petition.
Hence, this recourse to this Court. 7
Ruling of the Court of Appeals
The Court of Appeals held that the tax court committed no grave
abuse of discretion in ruling that the Criminal Complaint for tax
evasion filed by the Commissioner of Internal Revenue with the
Department of Justice constituted an "assessment" of the tax due,
and that the said assessment could be the subject of a protest. By
definition, an assessment is simply the statement of the details and

the amount of tax due from a taxpayer. Based on this definition, the
details of the tax contained in the BIR examiners' Joint
Affidavit, 8 which was attached to the criminal Complaint, constituted
an assessment. Since the assailed Order of the CTA was merely
interlocutory and devoid of grave abuse of discretion, a petition
for certiorari did not lie.
Issues
Petitioners submit for the consideration of this Court following
issues:
(1) Whether or not the criminal complaint for tax evasion can be
construed as an assessment.
(2) Whether or not an assessment is necessary before criminal
charges for tax evasion may be instituted.
(3) Whether or not the CTA can take cognizance of the case in the
absence of an assessment. 9
In the main, the Court will resolve whether the revenue officers'
Affidavit-Report, which was attached to criminal revenue Complaint
filed the Department of Justice, constituted an assessment that
could be questioned before the Court of Tax Appeals.
The Court's Ruling
The petition is meritorious.
Main Issue: Assessment
Petitioner argues that the filing of the criminal complaint with the
Department of Justice cannot in any way be construed as a formal
assessment of private respondents' tax liabilities. This position is
based on Section 205 of the National Internal Revenue
Code 10 (NIRC), which provides that remedies for the collection of
deficient taxes may be by either civil or criminal action. Likewise,
petitioner cites Section 223(a) of the same Code, which states that
in case of failure to file a return, the tax may be assessed or a
proceeding in court may be begun without assessment.
Respondents, on the other hand, maintain that an assessment is not
an action or proceeding for the collection of taxes, but merely a
notice that the amount stated therein is due as tax and that the
taxpayer is required to pay the same. Thus, qualifying as an
assessment was the BIR examiners' Joint Affidavit, which contained
the details of the supposed taxes due from respondent for taxable
years ending 1987 and 1988, and which was attached to the tax
evasion Complaint filed with the DOJ. Consequently, the denial by
the BIR of private respondents' request for reinvestigation of the
disputed assessment is properly appealable to the CTA.
We agree with petitioner. Neither the NIRC nor the regulations
governing the protest of assessments 11 provide a specific definition
or form of an assessment. However, the NIRC defines the specific
functions and effects of an assessment. To consider the affidavit
attached to the Complaint as a proper assessment is to subvert the
nature of an assessment and to set a bad precedent that will
prejudice innocent taxpayers.
True, as pointed out by the private respondents, an assessment
informs the taxpayer that he or she has tax liabilities. But not all
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 56
COMPILATION OF CASES
documents coming from the BIR containing a computation of the tax
liability can be deemed assessments.
To start with, an assessment must be sent to and received by a
taxpayer, and must demand payment of the taxes described therein
within a specific period. Thus, the NIRC imposes a 25 percent
penalty, in addition to the tax due, in case the taxpayer fails to pay
deficiency tax within the time prescribed for its payment in the notice
of assessment. Likewise, an interest of 20 percent per annum, or
such higher rates as may be prescribed by rules and regulations, is
to be collected form the date prescribed for its payment until the full
payment. 12
The issuance of an assessment is vital in determining, the period of
limitation regarding its proper issuance and the period within which
to protest it. Section 203 13 of the NIRC provides that internal
revenue taxes must be assessed within three years from the last day
within which to file the return. Section 222, 14 on the other hand,
specifies a period of ten years in case a fraudulent return with intent
to evade was submitted or in case of failure to file a return. Also,
Section 228 15 of the same law states that said assessment may be
protested only within thirty days from receipt thereof. Necessarily,
the taxpayer must be certain that a specific document constitutes an
assessment. Otherwise, confusion would arise regarding the period
within which to make an assessment or to protest the same, or
whether interest and penalty may accrue thereon.
It should also be stressed that the said document is a notice duly
sent to the taxpayer. Indeed, an assessment is deemed made only
when the collector of internal revenue releases, mails or sends such
notice to the taxpayer. 16
In the present case, the revenue officers' Affidavit merely contained
a computation of respondents' tax liability. It did not state a demand
or a period for payment. Worse, it was addressed to the justice
secretary, not to the taxpayers.
Respondents maintain that an assessment, in relation to taxation, is
simply understood' to mean:
A notice to the effect that the amount therein stated is due as tax
and a demand for payment thereof. 17
Fixes the liability of the taxpayer and ascertains the facts and
furnishes the data for the proper presentation of tax rolls. 18
Even these definitions fail to advance private respondents' case.
That the BIR examiners' Joint Affidavit attached to the Criminal
Complaint contained some details of the tax liabilities of private
respondents does not ipso facto make it an assessment. The
purpose of the Joint Affidavit was merely to support and substantiate
the Criminal Complaint for tax evasion. Clearly, it was not meant to
be a notice of the tax due and a demand to the private respondents
for payment thereof.
The fact that the Complaint itself was specifically directed and sent
to the Department of Justice and not to private respondents shows
that the intent of the commissioner was to file a criminal complaint
for tax evasion, not to issue an assessment. Although the revenue
officers recommended the issuance of an assessment, the
commissioner opted instead to file a criminal case for tax evasion.
What private respondents received was a notice from the DOJ that a
criminal case for tax evasion had been filed against them, not a
notice that the Bureau of Internal Revenue had made an
assessment.
 TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 57
COMPILATION OF CASES

In addition, what private respondents sent to the commissioner was CIR v. LIQUIGAS
a motion for a reconsideration of the tax evasion charges filed, not of
an assessment, as shown thus: (In PDF Form)

TAXPAYER’S ADMINISTRATIVE REMEDIES

This is to request for reconsideration of the tax evasion charges
against my client, PASCOR Realty and Development Corporation FORMS
and for the same to be referred to the Appellate Division in order to
give my client the opportunity of a fair and objective hearing. 19 REINVESTIGATION

Additional Issues: BPI v. CIR

Assessment Not Necessary Before Filing of Criminal Complaint XXX

SUBMISSION OF SUPPORTING DOCUMENTS

Private respondents maintain that the filing of a criminal complaint
must be preceded by an assessment. This is incorrect, because CIR v. FIRST EXPRESS PAWNSHOP
Section 222 of the NIRC specifically states that in cases where a
false or fraudulent return is submitted or in cases of failure to file a
return such as this case, proceedings in court may be commenced Republic of the Philippines
without an assessment. Furthermore, Section 205 of the same Code SUPREME COURT
clearly mandates that the civil and criminal aspects of the case may Manila
be pursued simultaneously. In Ungab v. Cusi,20 petitioner therein
sought the dismissal of the criminal Complaints for being premature, FIRST DIVISION
since his protest to the CTA had not yet been resolved. The Court
held that such protests could not stop or suspend the criminal action
G.R. Nos. 172045-46               June 16, 2009
which was independent of the resolution of the protest in the CTA.
This was because the commissioner of internal revenue had, in such
tax evasion cases, discretion on whether to issue an assessment or COMMISSIONER OF INTERNAL REVENUE, Petitioner, 
to file a criminal case against the taxpayer or to do both. vs.
FIRST EXPRESS PAWNSHOP COMPANY, INC., Respondent.
Private respondents insist that Section 222 should be read in
relation to Section 255 of the NLRC, 21 which penalizes failure to file
a return. They add that a tax assessment should precede a criminal
indictment. We disagree. To reiterate, said Section 222 states that DECISION
an assessment is not necessary before a criminal charge can be
filed. This is the general rule. Private respondents failed to show that
CARPIO, J.:
they are entitled to an exception. Moreover, the criminal charge
need only be supported by a prima facie showing of failure to file a
required return. This fact need not be proven by an assessment. The Case

The issuance of an assessment must be distinguished from the filing
of a complaint. Before an assessment is issued, there is, by practice,
a pre-assessment notice sent to the taxpayer. The taxpayer is then
given a chance to submit position papers and documents to prove
that the assessment is unwarranted. If the commissioner is
unsatisfied, an assessment signed by him or her is then sent to the
taxpayer informing the latter specifically and clearly that an
assessment has been made against him or her. In contrast, the
criminal charge need not go through all these. The criminal charge is
filed directly with the DOJ. Thereafter, the taxpayer is notified that a
criminal case had been filed against him, not that the commissioner
has issued an assessment. It must be stressed that a criminal
complaint is instituted not to demand payment, but to penalize the
taxpayer for violation of the Tax Code.
The Commissioner of Internal Revenue (petitioner) filed this Petition
for Review1 to reverse the Court of Tax Appeals’ Decision2 dated 24
March 2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62.
In the assailed decision, the Court of Tax Appeals (CTA) En Banc
partially reconsidered the CTA First Division’s Decision 3 dated 24
September 2004.
The Facts
On 28 December 2001, petitioner, through Acting Regional Director
Ruperto P. Somera of Revenue Region 6 Manila, issued the
following assessment notices against First Express Pawnshop
Company, Inc. (respondent):

a. Assessment No. 31-1-984 for deficiency income tax of ₱20,712.58

WHEREFORE, the petition is hereby GRANTED. The assailed
with compromise penalty of ₱3,000;
Decision is REVERSED and SET ASIDE. CTA Case No. 5271 is
likewise DISMISSED. No costs.
b. Assessment No. 31-14-000053-985 for deficiency value-added tax
(VAT) of ₱601,220.18 with compromise penalty of ₱16,000;
SO ORDERED.

c. Assessment No. 31-14-000053-986 for deficiency documentary

CIR v. HANTEX
stamp tax (DST) of ₱12,328.45 on deposit on subscription with
compromise penalty of ₱2,000; and
XXX

d. Assessment No. 31-1-000053-987 for deficiency DST of
₱62,128.87 on pawn tickets with compromise penalty of ₱8,500.
Respondent received the assessment notices on 3 January 2002.
On 1 February 2002, respondent filed its written protest on the
above assessments. Since petitioner did not act on the protest
during the 180-day period, 8respondent filed a petition before the
CTA on 28 August 2002.9
Respondent contended that petitioner did not consider the
supporting documents on the interest expenses and donations which
resulted in the deficiency income tax. 10 Respondent maintained that
pawnshops are not lending investors whose services are subject to
VAT, hence it was not liable for deficiency VAT. 11 Respondent also
alleged that no deficiency DST was due because Section 180 12 of
the National Internal Revenue Code (Tax Code) does not cover any
document or transaction which relates to respondent. Respondent
also argued that the issuance of a pawn ticket did not constitute a
pledge under Section 19513 of the Tax Code.14
In its Answer filed before the CTA, petitioner alleged that the
assessment was valid and correct and the taxpayer had the burden
of proof to impugn its validity or correctness. Petitioner maintained
that respondent is subject to 10% VAT based on its gross receipts
pursuant to Republic Act No. 7716, or the Expanded Value-Added
Tax Law (EVAT). Petitioner also cited BIR Ruling No. 221-91 which
provides that pawnshop tickets are subject to DST. 15
On 1 July 2003, respondent paid ₱27,744.88 as deficiency income
tax inclusive of interest.16
After trial on the merits, the CTA First Division ruled, thus:
IN VIEW OF ALL THE FOREGOING, the instant petition is
hereby PARTIALLY GRANTED. Assessment No. 31-1-000053-98
for deficiency documentary stamp tax in the amount of Sixty-Two
Thousand One Hundred Twenty-Eight Pesos and 87/100
(₱62,128.87) and Assessment No. 31-14-000053-98 for deficiency
documentary stamp tax on deposits on subscription in the amount of
Twelve Thousand Three Hundred Twenty-Eight Pesos and 45/100
(₱12,328.45) are CANCELLED and SET ASIDE. However,
Assessment No. 31-14-000053-98 is hereby AFFIRMED except the
imposition of compromise penalty in the absence of showing that
petitioner consented thereto (UST vs. Collector, 104 SCRA 1062;
Exquisite Pawnshop Jewelry, Inc. vs. Jaime B. Santiago, et al.,
supra).
Accordingly petitioner is ORDERED to PAY the deficiency value
added tax in the amount of Six Hundred One Thousand Two
Hundred Twenty Pesos and 18/100 (₱601,220.18) inclusive of
deficiency interest for the year 1998. In addition, petitioner
is ORDERED to PAY 25% surcharge and 20% delinquency
interest per annum from February 12, 2002 until fully paid pursuant
to Sections 248 and 249 of the 1997 Tax Code.
17
SO ORDERED.  (Boldfacing in the original)
Both parties filed their Motions for Reconsideration which were
denied by the CTA First Division for lack of merit. Thereafter, both
parties filed their respective Petitions for Review under Section 11 of
Republic Act No. 9282 (RA 9282) with the CTA En Banc.18
On 24 March 2006, the CTA En Banc promulgated a Decision
affirming respondent’s liability to pay the VAT and ordering it to pay
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 58
COMPILATION OF CASES
DST on its pawnshop tickets. However, the CTA En Banc found that
respondent’s deposit on subscription was not subject to DST.19
Aggrieved by the CTA En Banc’s Decision which ruled that
respondent’s deposit on subscription was not subject to DST,
petitioner elevated the case before this Court.
The Ruling of the Court of Tax Appeals
On the taxability of deposit on subscription, the CTA, citing First
Southern Philippines Enterprises, Inc. v. Commissioner of Internal
Revenue,20 pointed out that deposit on subscription is not subject to
DST in the absence of proof that an equivalent amount of shares
was subscribed or issued in consideration for the deposit. Expressed
otherwise, deposit on stock subscription is not subject to DST if: (1)
there is no agreement to subscribe; (2) there are no shares issued
or any additional subscription in the restructuring plan; and (3) there
is no proof that the issued shares can be considered as issued
certificates of stock.21
The CTA ruled that Section 175 22 of the Tax Code contemplates a
subscription agreement. The CTA explained that there can be
subscription only with reference to shares of stock which have been
unissued, in the following cases: (a) the original issuance from
authorized capital stock at the time of incorporation; (b) the opening,
during the life of the corporation, of the portion of the original
authorized capital stock previously unissued; or (c) the increase of
authorized capital stock achieved through a formal amendment of
the articles of incorporation and registration of the articles of
incorporation with the Securities and Exchange Commission.23
The CTA held that in this case, there was no subscription or any
contract for the acquisition of unissued stock for ₱800,000 in the
taxable year assessed. The General Information Sheet (GIS) of
respondent showed only a capital structure of ₱500,000 as
Subscribed Capital Stock and ₱250,000 as Paid-up Capital Stock
and did not include the assessed amount. Mere reliance on the
presumption that the assessment was correct and done in good faith
was unavailing vis-à-vis the evidence presented by respondent.
Thus, the CTA ruled that the assessment for deficiency DST on
deposit on subscription has not become final.24
The Issue
Petitioner submits this sole issue for our consideration: whether the
CTA erred on a question of law in disregarding the rule on finality of
assessments prescribed under Section 228 of the Tax Code.
Corollarily, petitioner raises the issue on whether respondent is
liable to pay ₱12,328.45 as DST on deposit on subscription of
capital stock.
The Ruling of the Court
Petitioner contends that the CTA erred in disregarding the rule on
the finality of assessments prescribed under Section 228 of the Tax
Code.25 Petitioner asserts that even if respondent filed a protest, it
did not offer evidence to prove its claim that the deposit on
subscription was an "advance" made by respondent’s
stockholders.26 Petitioner alleges that respondent’s failure to submit
supporting documents within 60 days from the filing of its protest as
required under Section 228 of the Tax Code caused the assessment
of ₱12,328.45 for deposit on subscription to become final and
unassailable.27

Petitioner alleges that revenue officers are afforded the presumption
of regularity in the performance of their official functions, since they
have the distinct opportunity, aside from competence, to peruse
records of the assessments. Petitioner invokes the principle that by
reason of the expertise of administrative agencies over matters
falling under their jurisdiction, they are in a better position to pass
judgment thereon; thus, their findings of fact are generally accorded
great respect, if not finality, by the courts. Hence, without the
supporting documents to establish the non-inclusion from DST of the
deposit on subscription, petitioner’s assessment pursuant to Section
228 of the Tax Code had become final and unassailable.28
Respondent, citing Standard Chartered Bank-Philippine Branches v.
Commissioner of Internal Revenue,29 asserts that the submission of
all the relevant supporting documents within the 60-day period from
filing of the protest is directory.
Respondent claims that petitioner requested for additional
documents in petitioner’s letter dated 12 March 2002, to wit: (1) loan
agreement from lender banks; (2) official receipts of interest
payments issued to respondent; (3) documentary evidence to
substantiate donations claimed; and (4) proof of payment of DST on
subscription.30 It must be noted that the only document requested in
connection with respondent’s DST assessment on deposit on
subscription is proof of DST payment. However, respondent could
not produce any proof of DST payment because it was not required
to pay the same under the law considering that the deposit on
subscription was an advance made by its stockholders for future
subscription, and no stock certificates were issued. 31 Respondent
insists that petitioner could have issued a subpoena requiring
respondent to submit other documents to determine if the latter is
liable for DST on deposit on subscription pursuant to Section 5(c) of
the Tax Code.32
Respondent argues that deposit on future subscription is not subject
to DST under Section 175 of the Tax Code. Respondent explains:
It must be noted that deposits on subscription represent advances
made by the stockholders and are in the nature of liabilities for which
stocks may be issued in the future. Absent any express agreement
between the stockholders and petitioner to convert said
advances/deposits to capital stock, either through a subscription
agreement or any other document, these deposits remain as
liabilities owed by respondent to its stockholders. For these deposits
to be subject to DST, it is necessary that a conversion/subscription
agreement be made by First Express and its stockholders. Absent
such conversion, no DST can be imposed on said deposits under
Section 175 of the Tax Code.33 (Underscoring in the original)
Respondent contends that by presenting its GIS and financial
statements, it had already sufficiently proved that the amount sought
to be taxed is deposit on future subscription, which is not subject to
DST.34 Respondent claims that it cannot be required to submit proof
of DST payment on subscription because such payment is non-
existent. Thus, the burden of proving that there was an agreement to
subscribe and that certificates of stock were issued for the deposit
on subscription rests on petitioner and his examiners. Respondent
states that absent any proof, the deficiency assessment has no
basis and should be cancelled. 35
On the Taxability of Deposit on Stock Subscription
DST is a tax on documents, instruments, loan agreements, and
papers evidencing the acceptance, assignment, sale or transfer of
an obligation, right or property incident thereto. DST is actually an
excise tax because it is imposed on the transaction rather than on
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 59
COMPILATION OF CASES
the document.36 DST is also levied on the exercise by persons of
certain privileges conferred by law for the creation, revision, or
termination of specific legal relationships through the execution of
specific instruments.37 The Tax Code provisions on DST relating to
shares or certificates of stock state:
Section 175. Stamp Tax on Original Issue of Shares of Stock. - On
every original issue, whether on organization, reorganization or for
any lawful purpose, of shares of stock by any association, company
or corporation, there shall be collected a documentary stamp tax of
Two pesos (₱2.00) on each Two hundred pesos (₱200), or fractional
part thereof, of the par value, of such shares of stock: Provided, That
in the case of the original issue of shares of stock without par value
the amount of the documentary stamp tax herein prescribed shall be
based upon the actual consideration for the issuance of such shares
of stock: Provided, further, That in the case of stock dividends, on
the actual value represented by each share. 38
Section 176. Stamp Tax on Sales, Agreements to Sell, Memoranda
of Sales, Deliveries or Transfer of Due-bills, Certificates of
Obligation, or Shares or Certificates of Stock. - On all sales, or
agreements to sell, or memoranda of sales, or deliveries, or transfer
of due-bills, certificates of obligation, or shares or certificates of
stock in any association, company or corporation, or transfer of such
securities by assignment in blank, or by delivery, or by any paper or
agreement, or memorandum or other evidences of transfer or sale
whether entitling the holder in any manner to the benefit of such
due-bills, certificates of obligation or stock, or to secure the future
payment of money, or for the future transfer of any due-bill,
certificate of obligation or stock, there shall be collected a
documentary stamp tax of One peso and fifty centavos (₱1.50) on
each Two hundred pesos (₱200), or fractional part thereof, of the
par value of such due-bill, certificate of obligation or stock: Provided,
That only one tax shall be collected on each sale or transfer of stock
or securities from one person to another, regardless of whether or
not a certificate of stock or obligation is issued, indorsed, or
delivered in pursuance of such sale or transfer: And provided,
further, That in the case of stock without par value the amount of the
documentary stamp tax herein prescribed shall be equivalent to
twenty-five percent (25%) of the documentary stamp tax paid upon
the original issue of said stock.39
In Section 175 of the Tax Code, DST is imposed on the original
issue of shares of stock. The DST, as an excise tax, is levied upon
the privilege, the opportunity and the facility of issuing shares of
stock. In Commissioner of Internal Revenue v. Construction
Resources of Asia, Inc.,40 this Court explained that the DST attaches
upon acceptance of the stockholder’s subscription in the
corporation’s capital stock regardless of actual or constructive
delivery of the certificates of stock. Citing Philippine Consolidated
Coconut Ind., Inc. v. Collector of Internal Revenue,41 the Court held:
The documentary stamp tax under this provision of the law may be
levied only once, that is upon the original issue of the certificate. The
crucial point therefore, in the case before Us is the proper
interpretation of the word ‘issue.’ In other words, when is the
certificate of stock deemed ‘issued’ for the purpose of imposing the
documentary stamp tax? Is it at the time the certificates of stock are
printed, at the time they are filled up (in whose name the stocks
represented in the certificate appear as certified by the proper
officials of the corporation), at the time they are released by the
corporation, or at the time they are in the possession (actual or
constructive) of the stockholders owning them?
xxx
 TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 60
COMPILATION OF CASES

Ordinarily, when a corporation issues a certificate of stock The GIS submitted to the Securities and Exchange Commission on
(representing the ownership of stocks in the corporation to fully paid 31 March 1999 shows the following Capital Structure:46
subscription) the certificate of stock can be utilized for the exercise
of the attributes of ownership over the stocks mentioned on its face. B. Financial Profile
The stocks can be alienated; the dividends or fruits derived
therefrom can be enjoyed, and they can be conveyed, pledged or
encumbered. The certificate as issued by the corporation, 1. Capital Structure :
irrespective of whether or not it is in the actual or constructive
possession of the stockholder, is considered issued because it is AUTHORIZED - ₱2,000,000.00
with value and hence the documentary stamp tax must be paid as
imposed by Section 212 of the National Internal Revenue Code, as SUBSCRIBED - 500,000.00
amended.
PAID-UP - 250,000.00

In Section 176 of the Tax Code, DST is imposed on the sales,

agreements to sell, memoranda of sales, deliveries or transfer of
shares or certificates of stock in any association, company, or
corporation, or transfer of such securities by assignment in blank, or
by delivery, or by any paper or agreement, or memorandum or other
evidences of transfer or sale whether entitling the holder in any
manner to the benefit of such certificates of stock, or to secure the
future payment of money, or for the future transfer of certificates of
stock. In Compagnie Financiere Sucres et Denrees v. Commissioner
of Internal Revenue, this Court held that under Section 176 of the
Tax Code, sales to secure the future transfer of due-bills, certificates
of obligation or certificates of stock are subject to documentary
stamp tax.42
These entries were explained by Miguel Rosario, Jr. (Rosario),
respondent’s external auditor, during the hearing before the CTA on
11 June 2003. Rosario testified in this wise:
Atty. Napiza
Q. Mr. Rosario, I refer you to the balance sheet of First Express for
the year 1998 particularly the entry of deposit on subscription in the
amount of ₱800 thousand, will you please tell us what is (sic) this
entry represents?
Mr. Rosario Jr.

Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the

guidelines on the corporate stock documentary stamp tax program. A. This amount of ₱800 thousand represents the case given by
RMO 08-98 states that: the stockholders to the company but does not necessarily
made (sic) payment to subscribed portion.

1. All existing corporations shall file the Corporation Stock DST

Declaration, and the DST Return, if applicable when DST is still Atty. Napiza
due on the subscribed share issued by the corporation, on or
before the tenth day of the month following publication of this Order. Q. What is (sic) that payment stands for?

xxx Mr. Rosario Jr.

3. All existing corporations with authorization for increased capital A. This payment stands as (sic) for the deposit for future
stock shall file their Corporate Stock DST Declaration, together with subscription.
the DST Return, if applicable when DST is due on subscriptions
made after the authorization, on or before the tenth day of the Atty. Napiza
month following the date of authorization. (Boldfacing supplied)

Q. Would you know if First Express issued corresponding shares

RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 pertinent to the amount being deposited?
(RMC 47-97), also states that what is being taxed is the privilege of
issuing shares of stock, and, therefore, the taxes accrue at the time
the shares are issued. RMC 47-97 also defines issuance as the Mr. Rosario Jr.
point in which the stockholder acquires and may exercise attributes
of ownership over the stocks. A. No.

As pointed out by the CTA, Sections 175 and 176 of the Tax Code Atty. Napiza
contemplate a subscription agreement in order for a taxpayer to be
liable to pay the DST. A subscription contract is defined as any Q. What do you mean by no? Did they or they did not?
contract for the acquisition of unissued stocks in an existing
corporation or a corporation still to be formed. 43 A stock subscription
is a contract by which the subscriber agrees to take a certain Mr. Rosario Jr.
number of shares of the capital stock of a corporation, paying for the
same or expressly or impliedly promising to pay for the same.44 A. They did not issue any shares because that is not the
payment of subscription. That is just a mere deposit.
In this case, respondent’s Stockholders’ Equity section of its Balance
Sheet as of 31 December 199845 shows: Atty. Napiza

(Table Deleted) Q. Would you know, Mr. Rosario, how much is the Subscribed
Capital of First Express Pawnshop?

Mr. Rosario Jr.
A. The Subscribed Capital of First Express Pawnshop Company,
Inc. for the year 1998 is ₱500 thousand.
Atty. Napiza
Q. How about the Paid Up Capital?
Mr. Rosario Jr.
A. The Paid Up Capital is ₱250 thousand.
Atty. Napiza
Q. Are (sic) all those figures appear in the balance sheet?
Mr. Rosario Jr.
A. The Paid Up Capital appeared here but the Subscribed Portion
was not stated. (Boldfacing supplied)
Based on Rosario’s testimony and respondent’s financial statements
as of 1998, there was no agreement to subscribe to the unissued
shares. Here, the deposit on stock subscription refers to an amount
of money received by the corporation as a deposit with the
possibility of applying the same as payment for the future issuance
of capital stock.47 In Commissioner of Internal Revenue v.
Construction Resources of Asia, Inc.,48 we held:
We are firmly convinced that the Government stands to lose nothing
in imposing the documentary stamp tax only on those stock
certificates duly issued, or wherein the stockholders can freely
exercise the attributes of ownership and with value at the time they
are originally issued. As regards those certificates of stocks
temporarily subject to suspensive conditions they shall be
liable for said tax only when released from said conditions, for
then and only then shall they truly acquire any practical value
for their owners. lavvphil (Boldfacing supplied)
Clearly, the deposit on stock subscription as reflected in
respondent’s Balance Sheet as of 1998 is not a subscription
agreement subject to the payment of DST. There is no ₱800,000
worth of subscribed capital stock that is reflected in respondent’s
GIS. The deposit on stock subscription is merely an amount of
money received by a corporation with a view of applying the same
as payment for additional issuance of shares in the future, an event
which may or may not happen. The person making a deposit on
stock subscription does not have the standing of a stockholder and
he is not entitled to dividends, voting rights or other prerogatives and
attributes of a stockholder. Hence, respondent is not liable for the
payment of DST on its deposit on subscription for the reason that
there is yet no subscription that creates rights and obligations
between the subscriber and the corporation.
On the Finality of Assessment as Prescribed  supporting documents shall have been submitted; otherwise, the
under Section 228 of the Tax Code
Section 228 of the Tax Code provides:
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
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 61
COMPILATION OF CASES
findings: Provided, however, That a preassessment notice shall not
be required in the following cases:
(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the
face of the return; or
(b) When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding agent;
or
(c) When a taxpayer who opted to claim a refund or tax credit of
excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the same
amount claimed against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on excisable articles has not been paid;
or
(e) When an article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital equipment,
machineries and spare parts, has been sold, traded or transferred to
non-exempt persons.
The taxpayer shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be
void.
Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his
findings.
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting
documents shall have been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within
one hundred eighty (180) days from submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal
to the Court of Tax Appeals within thirty (30) days from receipt of the
said decision, or from the lapse of the one hundred eighty (180)-day
period; otherwise, the decision shall become final, executory and
demandable. (Boldfacing supplied)
Section 228 of the Tax Code 49 provides the remedy to dispute a tax
assessment within a certain period of time. It states that an
assessment may be protested by filing a request for reconsideration
or reinvestigation within 30 days from receipt of the assessment by
the taxpayer. Within 60 days from filing of the protest, all relevant
assessment shall become final.
In this case, respondent received the tax assessment on 3 January
2002 and it had until 2 February 2002 to submit its protest. On 1
February 2002, respondent submitted its protest and attached the
GIS and Balance Sheet as of 31 December 1998. Respondent
explained that it received ₱800,000 as a deposit with the possibility
 TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 62
COMPILATION OF CASES

of applying the same as payment for the future issuance of capital

stock.
PERIOD TO ACT UPON A PROTEST
Within 60 days from the filing of protest or until 2 April 2002,
DENIAL
respondent should submit relevant supporting documents.
Respondent, having submitted the supporting documents
ALLIED BANKING v. CIR
together with its protest, did not present additional documents
anymore.
Republic of the Philippines
In a letter dated 12 March 2002, petitioner requested respondent to SUPREME COURT
present proof of payment of DST on subscription. In a letter-reply, Manila
respondent stated that it could not produce any proof of DST
payment because it was not required to pay DST under the law SECOND DIVISION
considering that the deposit on subscription was an advance made
by its stockholders for future subscription, and no stock certificates
G.R. No. 175097              
were issued.

ALLIED BANKING CORPORATION, Petitioner, 

Since respondent has not allegedly submitted any relevant
vs.
supporting documents, petitioner now claims that the assessment
COMMISSIONER OF INTERNAL REVENUE, Respondent.
has become final, executory and demandable, hence, unappealable.

We reject petitioner’s view that the assessment has become final

and unappealable. It cannot be said that respondent failed to submit
relevant supporting documents that would render the assessment DECISION
final because when respondent submitted its protest, respondent
attached the GIS and Balance Sheet. Further, petitioner cannot DEL CASTILLO, J.:
insist on the submission of proof of DST payment because such
document does not exist as respondent claims that it is not liable to
The key to effective communication is clarity.
pay, and has not paid, the DST on the deposit on subscription.

The Commissioner of Internal Revenue (CIR) as well as his duly

The term "relevant supporting documents" should be understood as
authorized representative must indicate clearly and unequivocally to
those documents necessary to support the legal basis in disputing a
the taxpayer whether an action constitutes a final determination on a
tax assessment as determined by the taxpayer. The BIR can only
disputed assessment.1 Words must be carefully chosen in order to
inform the taxpayer to submit additional documents. The BIR cannot
avoid any confusion that could adversely affect the rights and
demand what type of supporting documents should be submitted.
interest of the taxpayer.
Otherwise, a taxpayer will be at the mercy of the BIR, which may
require the production of documents that a taxpayer cannot
submit.1awphi1 Assailed in this Petition for Review on Certiorari2 under Section 12 of
Republic Act (RA) No. 9282, 3 in relation to Rule 45 of the Rules of
Court, are the August 23, 2006 Decision 4 of the Court of Tax
After respondent submitted its letter-reply stating that it could not
Appeals (CTA) and its October 17, 2006 Resolution 5 denying
comply with the presentation of the proof of DST payment, no reply
petitioner’s Motion for Reconsideration.
was received from petitioner.

Section 228 states that if the protest is not acted upon within 180
days from submission of documents, the taxpayer adversely affected
by the inaction may appeal to the CTA within 30 days from the lapse
of the 180-day period. Respondent, having submitted its supporting
documents on the same day the protest was filed, had until 31 July
2002 to wait for petitioner’s reply to its protest. On 28 August 2002
or within 30 days after the lapse of the 180-day period counted from
the filing of the protest as the supporting documents were
simultaneously filed, respondent filed a petition before the CTA.
Factual Antecedents
On April 30, 2004, the Bureau of Internal Revenue (BIR) issued a
Preliminary Assessment Notice (PAN) to petitioner Allied Banking
Corporation for deficiency Documentary Stamp Tax (DST) in the
amount of ₱12,050,595.60 and Gross Receipts Tax (GRT) in the
amount of ₱38,995,296.76 on industry issue for the taxable year
2001.6 Petitioner received the PAN on May 18, 2004 and filed a
protest against it on May 27, 2004. 7

Respondent has complied with the requisites in disputing an
assessment pursuant to Section 228 of the Tax Code. Hence, the
tax assessment cannot be considered as final, executory and
demandable. Further, respondent’s deposit on subscription is not
subject to the payment of DST. Consequently, respondent is not
liable to pay the deficiency DST of ₱12,328.45.
Wherefore, we DENY the petition. We AFFIRM the Court of Tax
Appeals’ Decision dated 24 March 2006 in the consolidated cases of
C.T.A. EB Nos. 60 and 62.
SO ORDERED.
On July 16, 2004, the BIR wrote a Formal Letter of Demand with
Assessment Notices to petitioner, which partly reads as follows:8
It is requested that the above deficiency tax be paid immediately
upon receipt hereof, inclusive of penalties incident to delinquency.
This is our final decision based on investigation. If you disagree, you
may appeal the final decision within thirty (30) days from receipt
hereof, otherwise said deficiency tax assessment shall become final,
executory and demandable.
Petitioner received the Formal Letter of Demand with Assessment
Notices on August 30, 2004.9

Proceedings before the CTA First Division
On September 29, 2004, petitioner filed a Petition for Review 10 with
the CTA which was raffled to its First Division and docketed as CTA
Case No. 7062.11
On December 7, 2004, respondent CIR filed his Answer. 12 On July
28, 2005, he filed a Motion to Dismiss13 on the ground that petitioner
failed to file an administrative protest on the Formal Letter of
Demand with Assessment Notices. Petitioner opposed the Motion to
Dismiss on August 18, 2005. 14
On October 12, 2005, the First Division of the CTA rendered a
Resolution15 granting respondent’s Motion to Dismiss. It ruled:
Clearly, it is neither the assessment nor the formal demand letter
itself that is appealable to this Court. It is the decision of the
Commissioner of Internal Revenue on the disputed assessment that
can be appealed to this Court (Commissioner of Internal Revenue
vs. Villa, 22 SCRA 3). As correctly pointed out by respondent, a
disputed assessment is one wherein the taxpayer or his duly
authorized representative filed an administrative protest against the
formal letter of demand and assessment notice within thirty (30)
days from date [of] receipt thereof. In this case, petitioner failed to
file an administrative protest on the formal letter of demand with the
corresponding assessment notices. Hence, the assessments did not
become disputed assessments as subject to the Court’s review
under Republic Act No. 9282. (See also Republic v. Liam Tian Teng
Sons & Co., Inc., 16 SCRA 584.)
WHEREFORE, the Motion to Dismiss is GRANTED. The Petition for
Review is hereby DISMISSED for lack of jurisdiction.
SO ORDERED.16
Aggrieved, petitioner moved for reconsideration but the motion was
denied by the First Division in its Resolution dated February 1,
2006.17
Proceedings before the CTA En Banc
On February 22, 2006, petitioner appealed the dismissal to the CTA
En Banc.18 The case was docketed as CTA EB No. 167.
Finding no reversible error in the Resolutions dated October 12,
2005 and February 1, 2006 of the CTA First Division, the CTA En
Banc denied the Petition for Review19as well as petitioner’s Motion
for Reconsideration.20
The CTA En Banc declared that it is absolutely necessary for the
taxpayer to file an administrative protest in order for the CTA to
acquire jurisdiction. It emphasized that an administrative protest is
an integral part of the remedies given to a taxpayer in challenging
the legality or validity of an assessment. According to the CTA En
Banc, although there are exceptions to the doctrine of exhaustion of
administrative remedies, the instant case does not fall in any of the
exceptions.
Issue
Hence, the present recourse, where petitioner raises the lone issue
of whether the Formal Letter of Demand dated July 16, 2004 can be
construed as a final decision of the CIR appealable to the CTA
under RA 9282.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 63
COMPILATION OF CASES
Our Ruling
The petition is meritorious.
Section 7 of RA 9282 expressly provides that the CTA exercises
exclusive appellate jurisdiction to review by appeal decisions of the
CIR in cases involving disputed assessments
The CTA, being a court of special jurisdiction, can take cognizance
only of matters that are clearly within its jurisdiction. 21 Section 7 of
RA 9282 provides:
Sec. 7. Jurisdiction. — The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein
provided:
(1) Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where the National
Internal Revenue Code provides a specific period of action, in which
case the inaction shall be deemed a denial; (Emphasis supplied)
xxxx
The word "decisions" in the above quoted provision of RA 9282 has
been interpreted to mean the decisions of the CIR on the protest of
the taxpayer against the assessments. 22 Corollary thereto, Section
228 of the National Internal Revenue Code (NIRC) provides for the
procedure for protesting an assessment. It states:
SECTION 228. Protesting of Assessment. – When the
Commissioner or his duly authorized representative finds that proper
taxes should be assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a preassessment notice shall not
be required in the following cases:
(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the
face of the return; or
(b) When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding agent;
or
(c) When a taxpayer who opted to claim a refund or tax credit of
excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the same
amount claimed against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on excisable articles has not been paid;
or

(e) When an article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital equipment,
machineries and spare parts, has been sold, traded or transferred to
non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be
void.
Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his
findings.
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting documents
shall have been submitted; otherwise, the assessment shall become
final.
If the protest is denied in whole or in part, or is not acted upon within
one hundred eighty (180) days from submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal
to the Court of Tax Appeals within thirty (30) days from receipt of the
said decision, or from the lapse of the one hundred eighty (180)-day
period; otherwise, the decision shall become final, executory and
demandable.
In the instant case, petitioner timely filed a protest after receiving the
PAN. In response thereto, the BIR issued a Formal Letter of
Demand with Assessment Notices. Pursuant to Section 228 of the
NIRC, the proper recourse of petitioner was to dispute the
assessments by filing an administrative protest within 30 days from
receipt thereof. Petitioner, however, did not protest the final
assessment notices. Instead, it filed a Petition for Review with the
CTA. Thus, if we strictly apply the rules, the dismissal of the Petition
for Review by the CTA was proper.
The case is an exception to the  hereof, otherwise said deficiency tax assessment shall become final,
rule on exhaustion of administrative remedies
However, a careful reading of the Formal Letter of Demand with
Assessment Notices leads us to agree with petitioner that the instant
case is an exception to the rule on exhaustion of administrative
remedies, i.e., estoppel on the part of the administrative agency
concerned.
In the case of Vda. De Tan v. Veterans Backpay Commission, 23 the
respondent contended that before filing a petition with the court,
petitioner should have first exhausted all administrative remedies by
appealing to the Office of the President. However, we ruled that
respondent was estopped from invoking the rule on exhaustion of
administrative remedies considering that in its Resolution, it said,
"The opinions promulgated by the Secretary of Justice are advisory
in nature, which may either be accepted or ignored by the office
seeking the opinion, and any aggrieved party has the court for
recourse". The statement of the respondent in said case led the
petitioner to conclude that only a final judicial ruling in her favor
would be accepted by the Commission.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 64
COMPILATION OF CASES
Similarly, in this case, we find the CIR estopped from claiming that
the filing of the Petition for Review was premature because
petitioner failed to exhaust all administrative remedies.
The Formal Letter of Demand with Assessment Notices reads:
Based on your letter-protest dated May 26, 2004, you alleged the
following:
1. That the said assessment has already prescribed in accordance
with the provisions of Section 203 of the Tax Code.
2. That since the exemption of FCDUs from all taxes found in the
Old Tax Code has been deleted, the wording of Section 28(A)(7)(b)
discloses that there are no other taxes imposable upon FCDUs
aside from the 10% Final Income Tax.
Contrary to your allegation, the assessments covering GRT and
DST for taxable year 2001 has not prescribed for [sic] simply
because no returns were filed, thus, the three year prescriptive
period has not lapsed.
With the implementation of the CTRP, the phrase "exempt from all
taxes" was deleted. Please refer to Section 27(D)(3) and 28(A)(7) of
the new Tax Code. Accordingly, you were assessed for deficiency
gross receipts tax on onshore income from foreign currency
transactions in accordance with the rates provided under Section
121 of the said Tax Code. Likewise, deficiency documentary stamp
taxes was [sic] also assessed on Loan Agreements, Bills Purchased,
Certificate of Deposits and related transactions pursuant to Sections
180 and 181 of NIRC, as amended.
The 25% surcharge and 20% interest have been imposed pursuant
to the provision of Section 248(A) and 249(b), respectively, of the
National Internal Revenue Code, as amended.
It is requested that the above deficiency tax be paid immediately
upon receipt hereof, inclusive of penalties incident to delinquency.
This is our final decision based on investigation. If you disagree, you
may appeal this final decision within thirty (30) days from receipt
executory and demandable.24 (Emphasis supplied)
It appears from the foregoing demand letter that the CIR has already
made a final decision on the matter and that the remedy of petitioner
is to appeal the final decision within 30 days.
In Oceanic Wireless Network, Inc. v. Commissioner of Internal
Revenue,25 we considered the language used and the tenor of the
letter sent to the taxpayer as the final decision of the CIR.
In this case, records show that petitioner disputed the PAN but not
the Formal Letter of Demand with Assessment Notices.
Nevertheless, we cannot blame petitioner for not filing a protest
against the Formal Letter of Demand with Assessment Notices since
the language used and the tenor of the demand letter indicate that it
is the final decision of the respondent on the matter. We have time
and again reminded the CIR to indicate, in a clear and unequivocal
language, whether his action on a disputed assessment constitutes
his final determination thereon in order for the taxpayer concerned to
determine when his or her right to appeal to the tax court
accrues.26 Viewed in the light of the foregoing, respondent is now
estopped from claiming that he did not intend the Formal Letter of
Demand with Assessment Notices to be a final decision.
 TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 65
COMPILATION OF CASES

Moreover, we cannot ignore the fact that in the Formal Letter of OCEANIC WIRELESS v. CIR
Demand with Assessment Notices, respondent used the word
"appeal" instead of "protest", "reinvestigation", or "reconsideration".
Republic of the Philippines
Although there was no direct reference for petitioner to bring the
SUPREME COURT
matter directly to the CTA, it cannot be denied that the word "appeal"
under prevailing tax laws refers to the filing of a Petition for Review
with the CTA. As aptly pointed out by petitioner, under Section 228 FIRST DIVISION
of the NIRC, the terms "protest", "reinvestigation" and
"reconsideration" refer to the administrative remedies a taxpayer G.R. No. 148380 December 9, 2005
may take before the CIR, while the term "appeal" refers to the
remedy available to the taxpayer before the CTA. Section 9 of RA
OCEANIC WIRELESS NETWORK, INC., Petitioner, 
9282, amending Section 11 of RA 1125,27 likewise uses the term
vs.
"appeal" when referring to the action a taxpayer must take when
COMMISSIONER OF INTERNAL REVENUE, THE COURT OF TAX
adversely affected by a decision, ruling, or inaction of the CIR. As
APPEALS, and THE COURT OF APPEALS,Respondents.
we see it then, petitioner in appealing the Formal Letter of Demand
with Assessment Notices to the CTA merely took the cue from
respondent. Besides, any doubt in the interpretation or use of the
word "appeal" in the Formal Letter of Demand with Assessment
Notices should be resolved in favor of petitioner, and not the DECISION
respondent who caused the confusion.

AZCUNA, J.:
To be clear, we are not disregarding the rules of procedure under
Section 228 of the NIRC, as implemented by Section 3 of BIR
This is a Petition for Review on Certiorari seeking to reverse and set
Revenue Regulations No. 12-99. 28 It is the Formal Letter of Demand
aside the Decision of the Court of Appeals dated October 31, 2000,
and Assessment Notice that must be administratively protested or
and its Resolution dated May 3, 2001, in "Oceanic Wireless
disputed within 30 days, and not the PAN. Neither are we deviating
Network, Inc. v. Commissioner of Internal Revenue" docketed as
from our pronouncement in St. Stephen’s Chinese Girl’s School v.
CA-G.R. SP No. 35581, upholding the Decision of the Court of Tax
Collector of Internal Revenue, 29 that the counting of the 30 days
Appeals dismissing the Petition for Review in CTA Case No. 4668
within which to institute an appeal in the CTA commences from the
for lack of jurisdiction.
date of receipt of the decision of the CIR on the disputed
assessment, not from the date the assessment was issued.1avvphi1
Petitioner Oceanic Wireless Network, Inc. challenges the authority of
the Chief of the Accounts Receivable and Billing Division of the
What we are saying in this particular case is that, the Formal Letter
Bureau of Internal Revenue (BIR) National Office to decide and/or
of Demand with Assessment Notices which was not administratively
act with finality on behalf of the Commissioner of Internal Revenue
protested by the petitioner can be considered a final decision of the
(CIR) on protests against disputed tax deficiency assessments.
CIR appealable to the CTA because the words used, specifically the
words "final decision" and "appeal", taken together led petitioner to
believe that the Formal Letter of Demand with Assessment Notices The facts of the case are as follows:
was in fact the final decision of the CIR on the letter-protest it filed
and that the available remedy was to appeal the same to the CTA. On March 17, 1988, petitioner received from the Bureau of Internal
Revenue (BIR) deficiency tax assessments for the taxable year 1984
We note, however, that during the pendency of the instant case, in the total amount of ₱8,644,998.71, broken down as follows:
petitioner availed of the provisions of Revenue Regulations No. 30-
2002 and its implementing Revenue Memorandum Order by (Table Deleted)
submitting an offer of compromise for the settlement of the GRT,
DST and VAT for the period 1998-2003, as evidenced by a
Petitioner filed its protest against the tax assessments and
Certificate of Availment dated November 21, 2007. 30 Accordingly,
requested a reconsideration or cancellation of the same in a letter to
there is no reason to reinstate the Petition for Review in CTA Case
the BIR Commissioner dated April 12, 1988.
No. 7062.

Acting in behalf of the BIR Commissioner, then Chief of the BIR

WHEREFORE, the petition is hereby GRANTED. The assailed
August 23, 2006 Decision and the October 17, 2006 Resolution of
the Court of Tax Appeals are REVERSED and SET ASIDE. The
Petition for Review in CTA Case No. 7062 is hereby DISMISSED
based solely on the Bureau of Internal Revenue’s acceptance of
petitioner’s offer of compromise for the settlement of the gross
receipts tax, documentary stamp tax and value added tax, for the
years 1998-2003.
SO ORDERED.
Accounts Receivable and Billing Division, Mr. Severino B. Buot,
reiterated the tax assessments while denying petitioner’s request for
reinvestigation in a letter 1dated 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
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 66
COMPILATION OF CASES
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
I. 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.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 67
COMPILATION OF CASES
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.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 68
COMPILATION OF CASES
CIR v. ISABELA CULTURAL CORPORATION
THIRD DIVISION
G.R. No. 135210      July 11, 2001
COMMISSIONER OF INTERNAL REVENUE, petitioner, 
vs.
ISABELA CULTURAL CORPORATION, respondent.
PANGANIBAN, J.:
A final demand letter from the Bureau of Internal Revenue,
reiterating to the taxpayer the immediate payment of a tax deficiency
assessment previously made, is tantamount to a denial of the
taxpayer's request for reconsideration. Such letter amounts to a final
decision on a disputed assessment and is thus appealable to the
Court of Tax Appeals (CTA).
The Case
Before this Court is a Petition for Review on Certiorari1 pursuant to
Rule 45 of the Rules of Court, seeking to set aside the August 19,
1998 Decision2 of the Court of Appeals 3 (CA) in CA-GR SP No.
46383 and ultimately to affirm the dismissal of CTA Case No. 5211.
The dispositive portion of the assailed Decision reads as follows:
"WHEREFORE, the assailed decision is REVERSED and SET
ASIDE. Accordingly, judgment is hereby rendered REMANDING the
case to the CTA for proper disposition." 4
The Facts
The facts are undisputed. The Court of Appeals quoted the summary
of the CTA as follows:
"As succinctly summarized by the Court of Tax appeals (CTA for
brevity), the antecedent facts are as follows:
'In an investigation conducted on the 1986 books of account of
[respondent, petitioner] had the preliminary [finding] that
[respondent] incurred a total income tax deficiency of
P9,985,392.15, inclusive of increments. Upon protest by
[respondent's] counsel, the said preliminary assessment was
reduced to the amount of P325,869.44, a breakdown of which
follows:
(Table Deleted)'
On February 23, 1990, [respondent] received from [petitioner] an
assessment letter, dated February 9, 1990, demanding payment of
the amounts of P333,196.86 and P4,897.79 as deficiency income
tax and expanded withholding tax inclusive of surcharge and
interest, respectively, for the taxable period from January 1, 1986 to
December 31, 1986. (pp. 204 and 205, BIR rec.)
In a letter, dated March 22, 1990, filed with the [petitioner's] office on
March 23, 1990 (pp. 296-311, BIR rec.), [respondent] requested x x
x a reconsideration of the subject assessment.

Supplemental to its protest was a letter, dated April 2, 1990, filed
with the [petitioner's] office on April 18, 1990 (pp. 224 & 225, BIR
rec.), to which x x x were attached certain documents supportive of
its protest, as well as a Waiver of Statute of Limitation, dated April
17, 1990, where it was indicated that [petitioner] would only have
until April 5, 1991 within which to asses and collect the taxes that
may be found due from [respondent] after the re-investigation.
On February 9, 1995, [respondent] received from [petitioner] a Final
Notice Before Seizure, dated December 22, 1994 (p. 340, BIR rec.).
In said letter, [petitioner] demanded payment of the subject
assessment within ten (10) days from receipt thereof. Otherwise,
failure on its part would constrain [petitioner] to collect the subject
assessment through summary remedies.
[Respondent] considered said final notice of seizure as [petitioner's]
final decision. Hence, the instant petition for review filed with this
Court on March 9, 1995.
The CTA having rendered judgment dismissing the petition,
[respondent] filed the instant petition anchored on the argument that
[petitioner's] issuance of the Final Notice Before Seizure constitutes
[its] decision on [respondent's] request for reinvestigation, which the
[respondent] may appeal to the CTA."5
Ruling of the Court of Appeals
In its Decision, the Court of Appeals reversed the Court of Tax
Appeals. The CA considered the final notice sent by petitioner as the
latter's decision, which was appealable to the CTA. The appellate
court reasoned that the final Notice before seizure had effectively
denied petitioner's request for a reconsideration of the
commissioner's assessment. The CA relied on the long-settled tax
jurisprudence that a demand letter reiterating payment of delinquent
taxes amounted to a decision on a disputed assessment.
Hence, this recourse.6
Issues
In his Memorandum,7 petitioner presents for this Court's
consideration a solitary issue:
"Whether or not the Final Notice Before Seizure dated February 9,
1995 signed by Acting Chief Revenue Collection Officer Milagros
Acevedo against ICC constitutes the final decision of the CIR
appealable to the CTA."8
The Court's Ruling
The Petition is not meritorious.
Sole Issue: 
The Nature of the Final Notice Before Seizure
The Final Notice Before Seizure sent by the Bureau of Internal
Revenue (BIR) to respondent reads as follows:
"On Feb. 9, 1990, [this] Office sent you a letter requesting you to
settle the above-captioned assessment. To date, however, despite
the lapse of a considerable length of time, we have not been
honored with a reply from you.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 69
COMPILATION OF CASES
In this connection, we are giving you this LAST OPPORTUNITY to
settle the adverted assessment within ten (10) days after receipt
hereof. Should you again fail, and refuse to pay, this Office will be
constrained to enforce its collection by summary remedies of
Warrant of Levy of Road Property, Distraint of Personal Property or
Warrant of Garnishment, and/or simultaneous court action.
Please give this matter your preferential attention.
Very truly yours,
ISIDRO B. TECSON, JR.
Revenue District Officer
By:
(Signed)
MILAGROS M. ACEVEDO
Actg. Chief Revenue Collection Officer"9
Petitioner maintains that this Final Notice was a mere reiteration of
the delinquent taxpayer's obligation to pay the taxes due. It was
supposedly a mere demand that should not have been mistaken for
a decision on a protested assessment. Such decision, the
commissioner contends, must unequivocably indicate that it is the
resolution of the taxpayer's request for reconsideration and must
likewise state the reason therefor.
Respondent, on the other hand, points out that the Final Notice
Before Seizure should be considered as a denial of its request for
reconsideration of the disputed assessment. The Notice should be
deemed as petitioner's last act, since failure to comply with it would
lead to the distraint and levy of respondent's properties, as indicated
therein.
We agree with respondent. In the normal course, the revenue district
officer sends the taxpayer a notice of delinquent taxes, indicating the
period covered, the amount due including interest, and the reason
for the delinquency. If the taxpayer disagrees with or wishes to
protest the assessment, it sends a letter to the BIR indicating its
protest, stating the reasons therefor, and submitting such proof as
may be necessary. That letter is considered as the taxpayer's
request for reconsideration of the delinquent assessment. After the
request is filed and received by the BIR, the assessment becomes a
disputed assessment on which it must render a decision. That
decision is appealable to the Court of Tax Appeals for review.
Prior to the decision on a disputed assessment, there may still be
exchanges between the commissioner of internal revenue (CIR) and
the taxpayer. The former may ask clarificatory questions or require
the latter to submit additional evidence. However, the CIR's position
regarding the disputed assessment must be indicated in the final
decision. It is this decision that is properly appealable to the CTA for
review.
Indisputably, respondent received an assessment letter dated
February 9, 1990, stating that it had delinquent taxes due; and it
subsequently filed its motion for reconsideration on March 23, 1990.
In support of its request for reconsideration, it sent to the CIR
additional documents on April 18, 1990. The next communication
respondent received was already the Final Notice Before Seizure
dated November 10, 1994.

In the light of the above facts, the Final Notice Before Seizure
cannot but be considered as the commissioner's decision disposing
of the request for reconsideration filed by respondent, who received
no other response to its request. Not only was the Notice the only
response received; its content and tenor supported the theory that it
was the CIR's final act regarding the request for reconsideration.
The very title expressly indicated that it was a finalnotice prior to
seizure of property. The letter itself clearly stated that respondent
was being given "this LAST OPPORTUNITY" to pay; otherwise, its
properties would be subjected to distraint and levy. How then could it
have been made to believe that its request for reconsideration was
still pending determination, despite the actual threat of seizure of its
properties?
Furthermore, Section 228 of the National Internal Revenue Code
states that a delinquent taxpayer may nevertheless directly appeal a
disputed assessment, if its request for reconsideration remains
unacted upon 180 days after submission thereof. We quote:
"Sec. 228. Protesting an Assessment. – x x x
Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his
findings.
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting documents
shall have become final.
If the protest is denied in whole or in part, or is not acted upon within
one hundred eighty (180) days from submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal
to the Court of Tax Appeals within (30) days from receipt of the said
decision, or from the lapse of the one hundred eighty (180)-day
period; otherwise the decision shall become final, executory and
demandable."10
In this case, the said period of 180 days had already lapsed when
respondent filed its request for reconsideration on March 23, 1990,
without any action on the part of the CIR.
Lastly, jurisprudence dictates that a final demand letter for payment
of delinquent taxes may be considered a decision on a disputed or
protested assessment. In Commissioner of Internal Revenue v.
Ayala Securities Corporation, this Court 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] x x x 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, in view of the continued refusal of the
respondent corporation to execute the waiver of the period of
limitation upon the assessment in question.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 70
COMPILATION OF CASES
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."11
Similarly, in Surigao Electric Co., Inc. v. Court of Tax Appeals 12 and
again in CIR v. Union Shipping Corp.,13 we ruled:
"x x x. The letter of demand dated April 29, 1963 unquestionably
constitutes the final action taken by the commissioner on the
petitioner's several requests for reconsideration and recomputation.
In this letter the commissioner not only in effect demanded that the
petitioner pay the amount of P11,533.53 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."
As in CIR v. Union Shipping,14 petitioner failed to rule on the Motion
for Reconsideration filed by private respondent, but simply continued
to demand payment of the latter's alleged tax delinquency. Thus, the
Court reiterated the dictum that the BIR should always indicate to
the taxpayer in clear and unequivocal language what constitutes
final action on a disputed assessment. The object of this policy is to
avoid repeated requests for reconsideration by the taxpayer, thereby
delaying the finality of the assessment and, consequently, the
collection of the taxes due. Furthermore, the taxpayer would not be
groping in the dark, speculating as to which communication or action
of the BIR may be the decision appealable to the tax court.15
In the instant case, the second notice received by private
respondent verily indicated its nature – that it was final.
Unequivocably, therefore, it was tantamount to a rejection of the
request for reconsideration.
Commissioner v. Algue16 is not in point here. In that case, the
Warrant of Distraint and Levy, issued to the taxpayer without any
categorical ruling on its request for reconsideration, was not deemed
equivalent to a denial of the request. Because such request could
not in fact be found in its records, the BIR cannot be presumed to
have taken it into consideration. The request was considered only
when the taxpayer gave a copy of it, duly stamp-received by the
BIR. Hence, the Warrant was deemed premature.1âwphi1.nêt
In the present case, petitioner does not deny receipt of private
respondent's protest letter. As a matter of fact, it categorically relates
the following in its "Statement of Relevant Facts":17
"3. On March 23, 1990, respondent ICC wrote the CIR requesting for
a reconsideration of the assessment on the ground that there was
an error committed in the computation of interest and that there were
expenses which were disallowed (Ibid., pp. 296-311).
"4. On April 2, 1990, respondent ICC sent the CIR additional
documents in support of its protest/reconsideration. The letter was
received by the BIR on April 18, 1990. Respondent ICC further
executed a Waiver of Statute of Limitation (dated April 17, 1990)
whereby it consented to the BIR to assess and collect any taxes that
may be discovered in the process of reinvestigation, until April 3,
1991 (Ibid., pp. 296-311). A copy of the waiver is hereto attached as
Annex 'C'."

Having admitted as a fact private respondent's request for
reconsideration, petitioner must have passed upon it prior to the
issuance of the Final Notice Before Seizure.
WHEREFORE, the Petition is hereby DENIED and the assailed
Decision AFFIRMED.
SO ORDERED.
INACTION
PAGCOR v. BIR
SECOND DIVISION
G.R. No. 208731 January 27, 2016
PHILIPPINE AMUSEMENT AND GAMING
CORPORATION, Petitioner, 
vs.
BUREAU OF INTERNAL REVENUE, COMMISSIONER OF
INTERNAL REVENUE, and REGIONAL DIRECTOR, REVENUE
REGION No. 6, Respondents.
DECISION
CARPIO, J.:
The Case
G.R. No. 208731 is a petition for review 1 assailing the
Decision2 promulgated on 18 February 2013 as well as the
Resolution3 promulgated on 23 July 2013 by the Court of Tax
Appeals En Banc (CTA En Banc) in CTA EB No. 844. The CTA EB
affirmed the Decision dated 6 July 2011 4 and Resolution5 dated 13
October 2011 of the Court of Tax Appeals' First Division (CTA 1st
Division) in CTA Case No. 7880.
In its 6 July 2011 Decision, the CTA 1st Division ruled in favor of the
Bureau of Internal Revenue (BIR), Commissioner of Internal
Revenue (CIR), and the Regional Director of Revenue Region No. 6
(collectively, respondents) and against petitioner Philippine
Amusement and Gaming Corporation (PAGCOR). The CTA 1st
Division dismissed PAGCOR's petition for review seeking the
cancellation of the Final Assessment Notice (FAN) dated 14 January
2008 which respondents issued for alleged deficiency fringe benefits
tax in 2004. The CTA 1st Division ruled that PAGCOR's petition was
filed out of time.
The Facts
The CTA 1st Division recited the facts as follows:
[PAGCOR] claims that it is a duly organized government-owned and
controlled corporation existing under and by virtue of Presidential
Decree No. 1869, as amended, with business address at the 6th
Floor, Hyatt Hotel and Casino, Pedro Gil comer M.H. Del Pilar
Streets, Malate, Manila. It was created to regulate, establish and
operate clubs and casinos for amusement and recreation, including
sports gaming pools, and such other forms of amusement and
recreation.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 71
COMPILATION OF CASES
Respondent [CIR], on the other hand, is the Head of the [BIR] with
authority, among others, to resolve protests on assessments issued
by her office or her authorized representatives. She holds office at
the BIR National Office Building, Agham Road, Diliman, Quezon
City.
[PAGCOR] provides a car plan program to its qualified officers under
which sixty percent (60%) of the car plan availment is shouldered by
PAGCOR and the remaining forty percent (40%) for the account of
the officer, payable in five (5) years.
On October 10, 2007, [PAGCOR] received a Post Reporting Notice
dated September 28, 2007 from BIR Regional Director Alfredo
Misajon [RD Misajon] of Revenue Region 6, Revenue District No.
33, for an informal conference to discuss the result of its
investigation on [PAGCOR's] internal revenue taxes in 2004. The
Post Reporting Notice shows that [PAGCOR] has deficiencies on
Value Added Tax (VAT), Withholding Tax on VAT (WTV), Expanded
Withholding Tax (EWT), and Fringe Benefits Tax (FBI).
Subsequently, the BIR abandoned the claim for deficiency
assessments on VAT, WTV and EWT in the Letter to [PAGCOR]
dated November 23, 2007 in view of the principles laid down
in Commissioner of Internal Revenue vs. Acesite Hotel
Corporation [G.R. No. 147295] exempting [PAGCOR] and its
contractors from VAT. However, the assessment on deficiency FBT
subsists and remains due to date.
On January 17, 2008, [PAGCOR] received a Final Assessment
Notice [FAN] dated January 14, 2008, with demand for payment of
deficiency FBT for taxable year 2004 in the amount of
P48,589,507.65.
On January 24, 2008, [PAGCOR] filed a protest to the FAN
addressed to [RD Misajon] of Revenue Region No. 6 of the BIR.
On August 14, 2008, [PAGCOR] elevated its protest to respondent
CIR in a Letter dated August 13, 2008, there being no action taken
thereon as of that date.
In a Letter dated September 23, 2008 received on September 25,
2008, [PAGCOR] was informed that the Legal Division of Revenue
Region No. 6 sustained Revenue Officer Ma. Elena Llantada on the
imposition of FBT against it based on the provisions of Revenue
Regulations (RR) No. 3-98 and that its protest was forwarded to the
Assessment Division for further action.
On November 19, 2008, [PAGCOR] received a letter from the OIC-
Regional Director, Revenue Region No. 6 (Manila), stating that its
letter protest was referred to Revenue District Office No. 33 for
appropriate action.
On March 11, 2009, [PAGCOR] filed the instant Petition for Review
alleging respondents' inaction in its protest on the disputed
deficiency FBT.6
The CTA 1st Division's Ruling
The CTA 1st Division issued the assailed decision dated 6 July 2011
and ruled in favor of respondents. The CTA 1st Division ruled that
RD Misajon's issuance of the FAN was a valid delegation of
authority, and PAGCOR's administrative protest was validly and
seasonably filed on 24 January 2008. The petition for review filed

with the CTA 1st Division, however, was filed out of time. The CTA
1st Division stated:
As earlier stated, [PAGCOR] timely filed its administrative protest on
January 24, 2008. In accordance with Section 228 of the Tax Code,
respondent CIR or her duly authorized representative had 180 days
or until July 22, 2008 to act on the protest. After the expiration of the
180-day period without action on the protest, as in the instant case,
the taxpayer, specifically [PAGCOR], had 30 days or until August 21,
2008 to assail the non-determination of its protest.
Clearly, the conclusion that the instant Petition for Review was filed
beyond the reglementary period for appeal on March 11, 2009,
effectively depriving the Court of jurisdiction over the petition, is
inescapable.
And as provided in Section 228 of the NIRC, the failure of
[PAGCOR] to appeal from an assessment on time rendered the
same final, executory and demandable. Consequently, [PAGCOR] is
already precluded from disputing the correctness of the assessment.
The failure to comply with the 30-day statutory period would bar the
appeal and deprive the Court of Tax Appeals of its jurisdiction to
entertain and determine the correctness of the assessment.
Even assuming in gratia argumenti that the [CTA] has jurisdiction
over the case as claimed by [PAGCOR], the petition must still fail on
the ground that [PAGCOR] is not exempt from payment of the
assessed FBT under its charter.
xxxx
Since the car plan provided by [PAGCOR] partakes of the nature of
a personal expense attributable to its employees, it shall be treated
as taxable fringe benefit of its employees, whether or not the same
is duly receipted in the name of the employer. Therefore,
[PAGCOR's] obligation as an agent of the government to withhold
and remit the final tax on the fringe benefit received by its
employees is personal and direct. The government's cause of action
against [PAGCOR] is not for the collection of income tax, for which
[PAGCOR] is exempted, but for the enforcement of the withholding
provision of the 1997 NIRC, compliance of which is imposed on
[PAGCOR] as, the withholding agent, and not upon its employees.
Consequently, [PAGCOR's] non-compliance with said obligation to
withhold makes it personally liable for the tax arising from the breach
of its legal duty.7
PAGCOR filed a motion for reconsideration, dated 26 July 2011, of
the 6 July 2011 Decision of the CTA 1st Division. The CIR filed a
comment,8 and asked that PAGCOR be ordered to pay
P48,589,507.65 representing deficiency fringe benefits tax for
taxable year 2004 plus 25% surcharge and 20% delinquency
interest from late payment beyond 15 February 2008 until fully paid,
pursuant to Sections 248 and 249 of the National Internal Revenue
Code (NIRC) of 1997.
In the meantime, the CIR sent PAGCOR a letter dated 18 July
2011.9 The letter stated that PAGCOR should be subjected to the
issuance of a Warrant of Distraint and/or Levy and a Warrant of
Garnishment because of its failure to pay its outstanding delinquent
account in the amount of P46,589,507.65, which included surcharge
and interest. Settlement of the tax liability is necessary to obviate the
issuance of a Warrant of Distraint and/or Levy and a Warrant of
Garnishment.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 72
COMPILATION OF CASES
Subsequently, PAGCOR filed a reply dated 28 September 2011 to
ask that an order be issued directing respondents to hold in
abeyance the execution of the Warrant of Distraint and/or Levy and
the Warrant of Garnishment, as well as to suspend the collection of
tax insofar as the 2004 assessment is concerned. PAGCOR also
asked for exemption from filing a bond or depositing the amount
claimed by respondents.10
PAGCOR filed a petition for review with urgent motion to suspend
tax collection11 with the CTA En Banc on 23 November 2011.
The CTA En Banc's Ruling
The CTA En Banc dismissed PAGCOR's petition for review and
affirmed the CTA 1st Division's Decision and Resolution. The CTA
En Banc ruled that the protest filed before the RD is a valid protest;
hence, it was superfluous for PAGCOR to raise the protest before
the CIR. When PAGCOR filed its administrative protest on 24
January 2008, the CIR or her duly authorized representative had
180 days or until 22 July 2008 to act on the protest. After the
expiration of the 180 days, PAGCOR had 30 days or until 21 August
2008 to assail before the CTA the non-determination of its protest.
Moreover, Section 223 of the NIRC merely suspends the period
within which the BIR can make assessments on a certain taxpayer.
A taxpayer's request for reinvestigation only happens upon the BIR's
issuance of an assessment within the three-year prescriptive period.
The reinvestigation of the assessment suspends the prescriptive
period for either a revised assessment or a retained assessment.
PAGCOR filed its Motion for Reconsideration on 22 March 2013,
while respondents filed their Comment/Opposition on 3 June 2013.
The CTA En Banc denied PAGCOR's motion in a Resolution 12 dated
23 July 2013.
PAGCOR filed the present petition for review on 14 October 2013.
Respondents filed their comment through the Office of the Solicitor
General on 20 March 2014. On 23 April 2014, this Court required
PAGCOR to file a reply to the comment within 10 days from notice.
This period expired on 26 June 2014. On 15 September 2014, this
Court issued another resolution denying PAGCOR's petition for
failure to comply with its lawful order without any valid cause. On 31
October 2014, PAGCOR filed a motion for reconsideration of the
Court's 15 September 2014 Resolution. We granted PAGCOR's
motion in a Resolution dated 10 December 2014.
The Issues
PAGCOR presented the following issues in its petition:
1. Whether or not the CTA En Banc gravely erred in affirming the
CTA 1st Division's Decision dismissing the Petition for Review for
having been filed out of time.
2. Whether or not the CTA En Banc seriously erred when it affirmed
the CTA 1st Division's failure to decide the case on substantive
matters, i.e., the full import of PAGCOR's tax exemption under its
charter which necessarily includes its exemption from the fringe
benefits tax (FBT).
2.1 Assuming that PAGCOR is not exempt from the FBT, whether or
not the car plan extended to its officers inured to its benefit and it is
required or necessary in the conduct of its business.

2.2 Assuming that PAGCOR is subject to the alleged deficiency
FBT, whether or not it is only liable for the basic tax, i.e., excluding
surcharge and interest.13
In their Comment,14 respondents argue that the CTA properly
dismissed PAGCOR's petition because it was filed beyond the
periods provided by law.
The Court's Ruling
The petition has no merit. The CTA En Banc and 1st Division were
correct in dismissing PAGCOR's petition. However, as we shall
explain below, the dismissal should be on the ground of premature,
rather than late, filing.
Timeliness of PAGCOR's Petition before the CTA
The CTA 1st Division and CTA En Banc both established that
PAGCOR received a FAN on 17 January 2008, filed its protest to the
FAN addressed to RD Misajon on 24 January 2008, filed yet another
protest addressed to the CIR on 14 August 2008, and then filed a
petition before the CTA on 11 March 2009. There was no action on
PAGCOR's protests filed on 24 January 2008 and 14 August 2008.
PAGCOR would like this Court to rule that its protest before the CIR
starts a new period from which to determine the last day to file its
petition before the CTA.
The CIR, on the other hand, denied PAGCOR's claims of exemption
with the issuance of its 18 July 2011 letter. The letter asked
PAGCOR to settle its obligation of P46,589,507.65, which consisted
of tax, surcharge and interest. PAGCOR's failure to settle its
obligation would result in the issuance of a Warrant of Distraint
and/or Levy and a Warrant of Garnishment.
The relevant portions of Section 228 of the NIRC of 1997 provide:
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: x x x.
xxxx
Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his
findings.
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations.
Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within
one hundred eighty (180) days from submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal
to the Court of Tax Appeals within thirty (30) days from receipt of the
said decision, or from the lapse of one hundred eighty (180)-day
period; otherwise, the decision shall become final, executory and
demandable.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 73
COMPILATION OF CASES
Section 3.1.5 of Revenue Regulations No. 12-99, implementing
Section 228 above, provides:
3.1.5. Disputed Assessment. - The taxpayer or his duly authorized
representative may protest administratively against the aforesaid
formal letter of demand and assessment notice within thirty (30)
days from date of receipt thereof.xx x.
xxxx
If the taxpayer fails to file a valid protest against the formal letter of
demand and assessment notice within thirty (30) days from date of
receipt thereof, the assessment shall become final, executory and
demandable.
If the protest is denied, in whole or in part, by the Commissioner, the
taxpayer may appeal to the Court of Tax Appeals within thirty (30)
days from the date of receipt of the said decision, otherwise, the
assessment shall become final, executory and demandable.
In general, if the protest is denied, in whole or in part, by the
Commissioner or his duly authorized representative, the taxpayer
may appeal to the Court of Tax Appeals within thirty (30) days from
date of receipt of the said decision, otherwise, the assessment shall
become final executory and demandable: Provided, however, that if
the taxpayer elevates his protest to the Commissioner within thirty
(30) days from date of receipt of the final decision of the
Commissioner's duly authorized representative, the latter's decision
shall not be considered final, executory and demandable, in which
case, the protest shall be decided by the Commissioner.
If the Commissioner or his duly authorized representative fails to act
on the taxpayer's protest within one hundred eighty (180) days from
date of submission, by the taxpayer, of the required documents in
support of his protest, the taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from the lapse of the said 180-day
period, otherwise the assessment shall become final, executory and
demandable.
Following the verba legis doctrine, the law must be applied exactly
as worded since it is clear, plain, and unequivocal. 15 A textual
reading of Section 3.1.5 gives a protesting taxpayer like PAGCOR
only three options:
1. If the protest is wholly or partially denied by the CIR or his
authorized representative, then the taxpayer may appeal to the CTA
within 30 days from receipt of the whole or partial denial of the
protest.
2. If the protest is wholly or partially denied by the CIR's authorized
representative, then the taxpayer may appeal to the CIR within 30
days from receipt of the whole or partial denial of the protest.
3. If the CIR or his authorized representative failed to act upon the
protest within 180 days from submission of the required supporting
documents, then the taxpayer may appeal to the CTA within 30 days
from the lapse of the 180-day period.
To further clarify the three options: A whole or partial denial by the
CIR's authorized representative may be appealed to the CIR or the
CTA. A whole or partial denial by the CIR may be appealed to the
CTA. The CIR or the CIR's authorized representative's failure to act
may be appealed to the CTA. There is no mention of an appeal to

the CIR from the failure to act by the CIR's authorized
representative.
PAGCOR did not wait for the RD or the CIR's decision on its protest.
PAGCOR made separate and successive filings before the RD and
the CIR before it filed its petition with the CTA. We shall illustrate
below how PAGCOR failed to follow the clear directive of Section
228 and Section 3.1.5.
PAGCOR's protest to the RD on 24 January 2008 was filed within
the 30-day period prescribed in Section 228 and Section 3.1.5. The
RD did not release any decision on PAGCOR's protest; thus,
PAGCOR was unable to make use of the first option as described
above to justify an appeal to the CTA. The effect of the lack of
decision from the RD is the same, whether we consider PAGCOR's
April 2008 submission of documents 16 or not.
Under the third option described above, even if we grant leeway to
PAGCOR and consider its unspecified April 2008 submission,
PAGCOR still should have waited for the RD's decision until 27
October 2008, or 180 days from 30 April 2008. PAGCOR then had
30 days from 27 October 2008, or until 26 November 2008, to file its
petition before the CTA. PAGCOR, however, did not make use of
the third option. PAGCOR did not file a petition before the CTA on or
before 26 November 2008.
Under the second option, PAGCOR ought to have waited for the
RD's whole or partial denial of its protest before it filed an appeal
before the CIR. PAGCOR rendered the second option moot when it
formulated its own rule and chose to ignore the clear text of Section
3.1.5. PAGCOR "elevated an appeal" to the CIR on 13 August
2008 without any decision from the RD, then filed a petition before
the CTA on 11 March 2009. A textual reading of Section 228 and
Section 3 .1.5 will readily show that neither Section 228 nor Section
3 .1.5 provides for the remedy of an appeal to the CIR in case of the
RD's failure to act. The third option states that the remedy for failure
to act by the CIR or his authorized representative is to file an appeal
to the CTA within 30 days after the lapse of 180 days from the
submission of the required supporting documents. PAGCOR clearly
failed to do this.1âwphi1
If we consider, for the sake of argument, PAGCOR's submission
before the CIR as a separate protest and not as an appeal, then
such protest should be denied for having been filed out of time.
PAGCOR only had 30 days from 17 January 2008 within which to
file its protest. This period ended on 16 February 2008. PAGCOR
filed its submission before the CIR on 13 August 2008.
When PAGCOR filed its petition before the CTA, it is clear that
PAGCOR failed to make use of any of the three options described
above. A petition before the CTA may only be made after a
whole or partial denial of the protest by the CIR or the CIR's
authorized representative. When PAGCOR filed its petition before
the CTA on 11 March 2009, there was still no denial of PAGCOR's
protest by either the RD or the CIR. Therefore, under the first option,
PAGCOR's petition before the CTA had no cause of action because
it was prematurely filed. The CIR made an unequivocal denial of
PAGCOR's protest only on 18 July 2011, when the CIR sought to
collect from PAGCOR the amount of P46,589,507.65. The CIR's
denial further puts PAGCOR in a bind, because it can no longer
amend its petition before the CTA.17
It thus follows that a complaint whose cause of action has not yet
accrued cannot be cured or remedied by an amended or
supplemental pleading alleging the existence or accrual of a cause
of action while the case is pending. Such an action is prematurely
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 74
COMPILATION OF CASES
brought and is, therefore, a groundless suit, which should be
dismissed by the court upon proper motion seasonably filed by the
defendant. The underlying reason for this rule is that a person
should not be summoned before the public tribunals to answer for
complaints which are [premature]. As this Court eloquently said
in Surigao Mine Exploration Co., Inc. v. Harris:
It is a rule of law to which there is, perhaps, no exception, either at
law or in equity, that to recover at all there must be some cause of
action at the commencement of the suit. As observed by counsel for
appellees, there are reasons of public policy why there should be no
needless haste in bringing up litigation, and why people who are in
no default and against whom there is yet no cause of action should
not be summoned before the public tribunals to answer complaints
which are groundless. We say groundless because if the action is
[premature], it should not be entertained, and an action prematurely
brought is a groundless suit.
It is true that an amended complaint and the answer thereto take the
place of the originals which are thereby regarded as
abandoned (Reynes vs. Compañia General de Tabacos [1912], 21
Phil. 416; Ruyman and Farris vs. Director of Lands [1916], 34 Phil.
428) and that "the complaint and answer having been superseded
by the amended complaint and answer thereto, and the answer to
the original complaint not having been presented in evidence as an
exhibit, the trial court was not authorized to take it into
account." (Bastida vs. Menzi & Co. [1933], 58 Phil. 188.) But in none
of these cases or in any other case have we held that if a right of
action did not exist when the original complaint was filed, one could
be created by filing an amended complaint. In some jurisdictions in
the United States what was termed an "imperfect cause of action"
could be perfected by suitable amendment (Brown vs. Galena
Mining & Smelting Co., 32 Kan., 528; Hooper vs. City of Atlanta, 26
Ga. App., 221) and this is virtually permitted in Banzon and Rosaura
vs. Sellner ([1933], 58 Phil. 453); Asiatic Potroleum [sic] Co. vs.
Veloso ([1935], 62 Phil. 683); and recently in Ramos vs. Gibbon (38
Off. Gaz. 241). That, however, which is no cause of action
whatsoever cannot by amendment or supplemental pleading be
converted into a cause of action: Nihil de re accrescit ei qui nihil in re
quando jus accresceret habet.
We are therefore of the opinion, and so hold, that unless the plaintiff
has a valid and subsisting cause of action at the time his action is
commenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-
accrued cause of action is not permissible. (Italics ours)18
PAGCOR has clearly failed to comply with the requisites in disputing
an assessment as provided by Section 228 and Section 3.1.5.
Indeed, PAGCOR's lapses in procedure have made the BIR's
assessment final, executory and demandable, thus obviating the
need to further discuss the issue of the propriety of imposition of
fringe benefits tax.
WHEREFORE, we DENY the petition. The Decision promulgated on
18 February 2013 and the Resolution promulgated on 23 July 2013
by the Court of Tax Appeals - En Banc in CTA EB No. 844
are AFFIRMED with the MODIFICATION that the denial of
Philippine Amusement and Gaming Corporation's petition is due to
lack of jurisdiction because of premature filing. We REMAND the
case to the Court of Tax Appeals for the determination of the final
amount to be paid by PAGCOR after the imposition of surcharge
and delinquency interest.
SO ORDERED.
 TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 75
COMPILATION OF CASES

REMEDIES – COLLECTION which was received by a respresentative of the Maritime Company

of the Philippines, was issued by the Commissioner of Internal
PRESCRIPTIVE PERIOD Revenue. 3 Among the properties seized were six (6) barges, Barge
MCP-1 to Barge MCP-6.
EXTRAORDINARY
On 11 June 1986, respondent sheriff levied on two (2) barges of the
BPI v. CIR
Maritime Company of the Philippines, pursuant to a writ of execution
issued on 19 February 1986 by the Regional Trial Court of Manila,
XXX Branch 31, in Civil Case No. 85-30134, entitled "Genstar Container
Corporation vs. Maritime Company of the Philippines", in favor of the
WHEN INTERRUPTED plaintiff therein. Respondent sheriff scheduled a public auction sale,
of the levied barges on 23 June 1986. The barges, particularly Barge
SEC. 203
MCP-1 and Barge MCP-4, were among the aforementioned
properties distrained and seized by petitioner, through the
BPI v. CIR
Commissioner of Internal Revenue.

XXX
On 18 June 1986, the Commissioner of Internal Revenue wrote
SUMMARY REMEDIES respondent sheriff informing the latter that Barge MCP-1 and Barge
MCP-4 were no longer owned by the Maritime Company of the
TAX LIEN Philippines as said barges had been distrained and seized by the
Bureau of Internal Revenue in satisfaction of various deficiency
CIVIL CODE taxes of Maritime Company of the Philippines, thereby registering its
adverse claim over said barges. The letter, together with the affidavit
REPUBLIC v. ENRIQUEZ of adverse claim and other supporting papers, was filed on 19 June
1986 at the office of respondent deputy sheriff and was received by
one Zenriquez, 6-19-86, Staff II." 4
Republic of the Philippines
SUPREME COURT
On 23 June 1986, respondent deputy sheriff sold at public auction
Manila
the two (2) barges, MCP-1 and MCP-4, and issued the
corresponding sheriffs certificate of sale on the same date to the
SECOND DIVISION highest bidder which was the levying creditor. On 24 July 1986,
petitioner filed before the Court of Appeals the aforementioned
G.R. No. 78391 October 21, 1988 petition for prohibition with preliminary injunction, alleging that
respondent sheriff, Ramon G. Enriquez, acted in excess of his
authority or with grave abuse of discretion when he levied on
REPUBLIC OF THE PHILIPPINES, petitioner, 
execution and subsequently auctioned the abovesaid two (2) barges
vs.
which were the subject of a warrant of distraint and notice of seizure
RAMON G. ENRIQUEZ, Deputy Sheriff of Manila, respondent.
by the Commissioner of Internal Revenue. Petitioner prayed that
respondent be ordered to desist and refrain from further proceedings
The Solicitor General for petitioner. in connection with the execution and that respondent's notice of levy
be declared null and void.
Sison, Ortiz & Associates for petitioner.
In its decision, dated 30 April 1987, the Court of Appeals dismissed
the petition after finding that "(H)e appears to have acted in
accordance with law and in keeping with his duties. There is no
perceived abuse of authority or grave abuse of discretion." Hence,
PADILLA, J.:
this appeal.

Appeal by way of certiorari from the decision * of the Court of

The only issue to be resolved in this appeal is the validity and
Appeals in CA-G.R. SP. No. 09582, dated 30 April 1987, dismissing
effectiveness of the BIR warrant of distraint and notice of seizure of
the petition for prohibition with preliminary injunction, filed by
personal property as against the writ of execution issued by the
petitioner Republic of the Philippines against respondent Ramon G.
Regional Trial Court and the levy on execution and auction sale of
Enriquez, Deputy Sheriff of Manila.
the barges in question.

On 28 January 1985, the petitioner, through the Commissioner of

It is settled that the claim of the government predicated on a tax lien
Internal Revenue, served a Warrant of Distraint of Personal Property
is superior to the claim of a private litigant predicated on a judgment.
on the Maritime Company of the. Philippines to satisfy various
The tax lien attaches not only from the service of the warrant of
deficiency taxes of said company in the total amount of
distraint of personal property but from the time the tax became due
P17,284,882.45, pursuant to unappealed and final tax
and payable. 5 Besides, the distraint on the subject properties of
assessments. 1 On 16 April 1985, a Receipt for Goods, and Things
Maritime Company of the Philippines as well as the notice of their
Seized Under Authority of the National Internal Revenue Code was
seizure were made by petitioner, through the Commissioner of
executed, wherein Headquarters, First Coast Guard District, Farola
Internal Revenue, long before the writ of execution was issued by
Compound, Binondo, Manila, acknowledged receipt from the
the Regional Trial Court of Manila, Branch 31. There is no question
Commissioner of Internal Revenue of several barges, vehicles and
then that at the time the writ of execution was issued, the two (2)
two (2) bodegas of spare parts belonging to the taxpayer (Maritime
barges, MCP-1 and MCP-4, were no longer properties of the
Company of the Philippines). 2 On 4 October 1985, the
Maritime Company of the Philippines. The power of the court in
corresponding Notice of Seizure of Personal Property, a copy of

execution of judgments extends only to properties unquestionably
belonging to the judgment debtor. Execution sales affect the rights of
the judgment debtor only, and the purchaser in an auction sale
acquires only such right as the judgment debtor had at the time of
sale. It is also well-settled that the sheriff is not authorized to attach
or levy on property not belonging to the judgment debtor. 6
While it is correct for the Court of Appeals to declare that there are
other remedies available to the government in connection with its tax
claims, yet, the filing of a separate action, in accordance with
Section 17, Rule 39, of the Rules of Court would only delay final
satisfaction of the tax liabilities of the Maritime Company of the
Philippines. The purpose of said rule is to afford a claimant an
opportunity to vindicate his ownership over the property levied upon
by the sheriff. In the case at bar, however, there is no further need
for petitioner to establish its rights over the two (2) barges in
question as the evidence on record clearly proves that the barges
are under distraint and, in fact, seized by petitioner, through the
Commissioner of Internal Revenue, in satisfaction of various final
deficiency taxes of the Maritime Company of the Philippines.
The Court of Appeals gave much weight to the claim of respondent
sheriff that he was unaware of any adverse claim over the subject
barges. This claim is belied by receipt in the office of respondent by
one "Zenriquez, 6-19-86, Staff II" of the letter dated 18 June 1986,
from the Commissioner of Internal Revenue informing respondent
that the two (2) barges were under distraint and no longer owned by
the Maritime Company of the Philippines. It was incumbent upon
respondent to have reminded members of his staff to notify him
immediately of important communications or papers affecting the
discharge of his official duties. Proof of due receipt by respondent's
office of the petitioner's adverse claim prevails over respondent's
denial thereof. It was not necessary that
respondent's personal receipt of the BIR Commissioner's letter be
shown on the face of the letter. It is standard operating procedure in
government offices to maintain log books which record the inward
and outward flow of official documents and papers. Besides,
respondent never denied that Zenriquez Staff II" was a member of
his office staff on 19 June 1986 when the BIR Commissioner's letter
registering the petitioner's adverse claim to the subject barges, was
received in respondent's office.
WHEREFORE, the instant petition is GRANTED, The appealed
decision is SET ASIDE. The notice of levy upon as well as execution
sale of Barges MCP-1 and MCP-4 are ANNULLED and the
respondent is ENJOINED from further proceeding with their sale in
Civil Case No. 85-30134 of the Regional Trial Court of Manila,
Branch 31.
In the event that the execution sale, having been consummated,
results in
non-recovery of the aforesaid barges, respondent is ordered to remit
to the Bureau of Internal Revenue the proceeds of the execution
sale of said barges, to be applied in partial satisfaction of the tax
liabilities of Maritime Company of the Philippines to the Philippine
government.
SO ORDERED.
LABOR CODE
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 76
COMPILATION OF CASES
CIR v. NLRC
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 74965 November 9, 1994
COMMISSIONER OF INTERNAL REVENUE, petitioner, 
vs.
NATIONAL LABOR RELATIONS COMMISSION, DEPUTY CITY
SHERIFF CARMELO V. CACHERO, MARITIME COMPANY OF
THE PHILIPPINES, DOMINGO C. NIANGAR, DANIEL C. SABINO,
FERNANDO S. TULIAO and TULMAR TRADING
CORPORATION, respondents.
Reynaldo L. Libanan for respondent deputy sheriff.
Joaquin G. Chung, Jr. Law Office for respondent Tulmar Trading
Corp.
Eliodoro C. Cruz & Arsenio P. Dizon for Maritime Co. of the
Philippines.
MENDOZA, J.:
This is a petition for certiorari to set aside the resolution dated April
4, 19861 of the National Labor Relations Commission in NLRC Case
No. NCR-12-4233-84 (Domingo C. Niangar v. Maritime Company of
the Philippines), affirming the denial by the Labor Arbiter 2 of
petitioner's motion to annul the sheriff's sale of four barges or, in the
alternative, to order him to remit the proceeds of his sale to the
Bureau of the Internal Revenue for the satisfaction of the tax
liabilities of private respondent Maritime Company of the Philippines.
The facts are as follows:
On January 12, 1984 the Commissioner of the Internal Revenue
sent two letters3 of demand to the respondent Maritime Company of
the Philippines for deficiency common carrier's tax, fixed tax, 6%
Commercial Broker's tax, documentary stamp tax, income tax and
withholding taxes in the total amount of P17,284,882.45.
The assessment became final and executory as private respondent
did not contest it. But as private respondent did not pay its tax
liability either, the Commissioner of Internal Revenue issued
warrants of distraint of personal property and levy of real property of
private respondent. Copies of the warrants, both dated January 23,
1985, were served on January 28, 1985 on Yoly T. Petrache, private
respondent's accountant.4
On April 16, 1985 a "Receipt for Goods, Articles, and Things
Seized5 under Authority of the National Internal Revenue Code" was
executed, covering, among other things, six barges identified as
MCP-1,2,3,4,5 and 6. This receipt is required by § 303 (now § 206)
of the NIRC as proof of the constructive distraint of property. It is an
undertaking by the taxpayer or person in possession of the property
covered that he will preserve the property and deliver it upon order
of the court or the Internal Revenue Commissioner.

The receipt was prepared by the BIR for the signature of a
representative of respondent Maritime Company of the Philippines,
but it was not in fact signed. Petitioner later explained that the
individuals who had possession of the barges had refused to sign
the receipt.
This circumstance has given rise to the question in this case as it
appears that four of the barges placed under constructive distraint
were levied upon execution by respondent deputy sheriff of Manila
on July 20, 1985 to satisfy a judgment for unpaid wages and other
benefits of employees of respondent Maritime Company of the
Philippines. More specifically, the question in this case is the validity
of the warrant of distraint served by the Revenue Seizure Officer
against the writ of execution subsequently levied upon the same
property by the deputy sheriff of Manila to satisfy the claims of
employees in NLRC Case No. NCR-12-4233-84 (Domingo C.
Niangar, et al. v. Maritime Company of the Philippines) for
P490,749.21.
The four barges were sold by respondent deputy sheriff at a public
auction on August 12, 1985. The highest bidder, Daniel C. Sabino,
subsequently sold them to private respondents Fernando S. Tuliao
and Tulmar Trading Corporation.
On September 4, 1985, petitioner asked the Labor Arbiter to annul
the sale and to enjoin the sheriff from disposing of the proceeds of
the sale or, in the alternative, to remit them to the Bureau of Internal
Revenue so that the amount could be applied to the payment of
private respondent Maritime Company's tax liabilities.
In an order dated September 30, 1985, Labor Arbiter Ceferina
Diosana denied the motion on the ground that petitioner
Commissioner of Internal Revenue failed to show that the barges
which were levied upon in execution and sold at public auction had
been validly placed under constructive distraint. 6 The Labor Arbiter
likewise rejected petitioner's contention that the government's claim
for taxes was preferred under Art. 2247, in relation to Art. 2241(1) of
the Civil Code, on the ground that under this provisions only taxes
and fees which are due on specific movables enjoy preference,
whereas the taxes claimed by petitioner were not due on the four
barges in question.
The order was appealed to the NLRC, which in resolution dated April
4, 1986, affirmed the denial of the Internal Revenue Commissioner's
motion. Hence this petition for certiorari.
For reasons to be presently stated, the petition is granted.
The National Internal Revenue Code provides for the collection of
delinquent taxes by any of the following remedies: (a) distraint of
personal property or levy of real property of the delinquent taxpayer
and (b) civil or criminal action.
With respect to the four barges in question, petitioner resorted to
constructive distraint pursuant to § 303 (now § 206) of the NLRC.
This provisions states:
Constructive distraint of the property of a taxpayer. — To safeguard
the interest of the Government, the Commissioner of Internal
Revenue may place under constructive distraint the property of a
delinquent taxpayer or any taxpayer who, in his opinion, is retiring
from any business subject to tax, or intends to leave the Philippines,
or remove his property therefrom, or hide or conceal his property, or
perform any act tending to obstruct the proceedings, for collecting
the tax due or which may be due from him.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 77
COMPILATION OF CASES
The constructive distraint of personal property shall be effected by
requiring the taxpayer or any person having possession or control of
such property to sign a receipt covering the property distrained and
obligate himself to preserve the same intact and unaltered and not to
dispose of the same in any manner whatever without the express
authority of the Commissioner of Internal Revenue.
In case the taxpayer or the person having the possession and
control of the property sought to be placed under constructive
distraint refuses or fails to sign the receipt herein referred to, the
revenue officer effecting the constructive distraint shall proceed to
prepare a list of such property and in the presence of two witnesses
leave a copy thereof in the premises where the property distrained is
located, after which the said property shall be deemed to have been
placed under constructive distraint..
Although the warrant of distraint in this case had been issued earlier
(January 23,1985) than the levy on execution in the labor case on
July 20, 1985, the Labor Arbiter nevertheless held that there was no
valid distraint of personal property on the ground that the receipt of
property distrained had not been signed by the taxpayer as required
above. In her order, which the NLRC affirmed in toto, the Labor
Arbiter said:
It is claimed by the Commissioner of the Internal Revenue that on
January 23, 1984, he issued a warrant of distraint of personal
property on respondent to satisfy the collection of the deficiency
taxes in the aggregate sum of P17,284,882.45 and a copy of said
warrant was served upon Maritime Company on January 28, 1985
and pursuant to the warrant, the Commissioner, through Revenue
Seizure Agent Roland L. Bombay, issued on April 16, 1985, to
Maritime Company a receipt for goods, articles and things seized
pursuant to authority granted to him under the National Internal
Revenue Code. Such personal properties seized includes, among
others, "Six (6) units of barges MCI-6 . . . " However, his own
receipts for goods attached to his motions does not show that it was
received by Maritime; neither does it show any signature of any of
Maritime's Officers.
Apart from the foregoing, in his affidavit of 11 September 1985,
Sheriff Cachero stated that before he sold the subject four barges at
public auction, he conducted an investigation on the ownership of
the said four barges. In brief, he found out that the said four barges
were purchased by respondent through Makati Leasing and that the
whole purchase price has been paid by respondent. In fact, the
corresponding deed of sale has already been signed. He did not find
any lien or encumbrance on any of the said four barges. Thus it
cannot be true that the Commissioner effected a valid warrant of
distraint of personal property on the four barges in question.7
However, this case arose out of the same facts involved in Republic
v. Enriquez,8 in which we sustained the validity of the distraint of the
six barges, which included the four involved in this case, against the
levy on execution made by another deputy sheriff of Manila in
another case filed against Maritime Company. Two barges (MCP-1
and MCP-4) were the subject of a levy in the case. There we found
that the "Receipt for Goods, Articles and Things Seized under
Authority of the National Internal Revenue Code" covering the six
barges had been duly executed, with the Headquarters, First Coast
Guard District, Farola Compound Binondo, Manila acknowledging
receipt of several barges, vehicles and two (2) bodegas of spare
parts belonging to Maritime Company of the Philippines.
Apparently, what had been attached to the petitioner's motion filed
by the government with the Labor Arbiter in this case was a copy,
not the original one showing the rubber stamp of the Coast Guard

and duly signed by its representative. A xerox copy of this signed
receipt was submitted in the prior case. 9 This could be due to the
fact that, except for Solicitor Erlinda B. Masakayan, the government
lawyers who prepared the petition in the prior case were different
from those who filed the present petition. They admitted that the
receipt of property distrained had not been signed by the taxpayer or
person in possession of the taxpayer's property allegedly because
they had refused to do so. What apparently they did not know is that
the receipt had been acknowledged by the Coast Guard which
obviously had the barges in its possession.
In addition to the receipt duly acknowledged by the Coast Guard, the
record of the prior case also shows that on October 4, 1985, the
Commissioner of the Internal Revenue issued a "Notice of Seizure of
Personal Property" stating that the goods and chattels listed on its
reverse side, among which were the four barges (MCP-2, MCP-3,
MCP-5, and MCP-6), had been distrained by the Commissioner of
Internal Revenue.10
The "Notice of Seizure of Personal Property," a copy of which was
received by Atty. Redentor R. Melo in behalf of Maritime Company
of the Philippines, together with the receipt of the Coast Guard,
belies the claim of respondent deputy sheriff that when he levied
upon the four barges there was no indication that the barges had
previously been placed under distraint by the Commissioner of
Internal Revenue.
Accordingly, what we said in the prior case 11 in upholding the
validity of distraint of two of the six barges (MCP Nos. 1 and 4), fully
applies in this case:
It is settled that the claim of the government predicated on a tax lien
is superior to the claim of a private litigant predicated on a judgment.
The tax lien attaches not only from the service of the warrant of
distraint of personal property but from the time the tax became due
and payable. Besides, the distraint on the subject properties of the
Maritime Company of the Philippines as well as the notice of their
seizure were made by petitioner, through the Commissioner of the
Internal Revenue, long before the writ of the execution was issued
by the Regional Trial Court of Manila, Branch 31. There is no
question then that at the time the writ of execution was issued, the
two (2) barges, MPC-1 and MCP-4, were no longer properties of the
Maritime Company of the Philippines. The power of the court in
execution of judgments extends only to properties unquestionably
belonging to the judgment debtor. Execution sales affect the rights of
the judgment debtor only, and the purchaser in an auction sale
acquires only such right as the judgment debtor had at the time of
sale. It is also well-settled that the sheriff is not authorized to attach
or levy on property not belonging to the judgment debtor.
Nor is there any merit in the contention of the NLRC that taxes are
absolutely preferred claims only with respect to movable or
immovable properties on which they are due and that since the
taxes sought to be collected in this case are not due on the barges
in question the government's claim cannot prevail over the claims of
employees of the Maritime Company of the Philippines which,
pursuant to Art. 110 of the Labor Code, "enjoy first preference."
In Republic v. Peralta 12 this Court rejected a similar contention.
Through Mr. Justice Feliciano we held:
. . . [T]he claim of the Bureau of Internal Revenue for unpaid tobacco
inspection fees constitutes a claim for unpaid internal revenue taxes
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 78
COMPILATION OF CASES
which gives rise to a tax lien upon all the properties and assets,
movable or immovable, of the insolvent as taxpayer. Clearly, under
Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the Civil Code,
this tax claim must be given preference over any other claim of any
other creditor, in respect of any and all properties of the insolvent.
xxx xxx xxx
Article 110 of the Labor Code does not purport to create a lien in
favor of workers or employees for unpaid wages either upon all of
the properties or upon any particular property owned by their
employer. Claims for unpaid wages do not therefore fall at all within
the category of specially preferred claims established under Articles
2241 and 2242 of the Civil Code, except to the extent that such
claims for unpaid wages are already covered by Article 2241,
number 6: "claims for laborer's wages, on the goods manufactured
or the work done," or by Article 2242, number 3: "claims of laborers
and other workers engaged in the construction, reconstruction or
repair of buildings, canals and other works, upon said buildings,
canals or other works." To the extent that claims for unpaid wages
fall outside the scope of Article 2241, number 6 and 2242, number 3,
they would come with the ambit of the category of ordinary preferred
credits under Article 2244.
Applying Article 2241, number 6 to the instant case, the claims of the
Unions for separation pay of their members constitute liens attaching
to the processed leaf tobacco, cigars and cigarettes and other
products produced or manufactured by the Insolvent, but not to other
assets owned by the Insolvent. And even in respect of such tobacco
and tobacco products produced by the Insolvent, the claims of the
Unions may be given effect only after the Bureau of Internal
Revenue's claim for unpaid tobacco inspection fees shall have been
satisfied out of the products so manufactured by the Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a
building or other real property of the Insolvent in favor of workmen
who constructed or repaired such building or other real property.
Article 2242, number 3, does not however appear relevant in the
instant case, since the members of the Unions to whom separation
pay is due rendered services to the Insolvent not (so far as the
record of this case would show) in the construction or repair of
buildings or other real property, but rather, in the regular course of
the manufacturing operations of the Insolvent. The Unions' claims do
not therefore constitute a lien or encumbrance upon any immovable
property owned by the insolvent, but rather, as already indicated,
upon the Insolvent's existing inventory (if any) of processed tobacco
and tobacco products.
In addition, we have held 13 that Art. 110 of the Labor Code applies
only in case of bankruptcy or judicial liquidation of the employer.
This is clear from the text of the law.
Art. 110. Worker preference in case of bankruptcy. — In the event of
bankruptcy or liquidation of an employer's business, his workers
shall enjoy first preference as regards wages due them for services
rendered during the period prior to the bankruptcy or liquidation, any
provision of law to the contrary notwithstanding. Unpaid wages shall
be paid in full before other creditors may establish any claims to a
share in the assets of the employer.
This case does not involve the liquidation of the employer's
business.
WHEREFORE, the petition for certiorari is GRANTED and the
resolution dated April 4, 1986 of respondent NLRC in NLRC Case

No. NCR-12-4233-84 is SET ASIDE insofar as it denies the
government's claim for taxes, and respondent deputy sheriff
Carmelo V. Cachero or his successor is ORDERED to remit the
proceeds of the auction sale to the Bureau of Internal Revenue to be
applied as part payment of respondent Maritime Company's tax
liabilities.
SO ORDERED.
COMPROMISE AND ABATEMENT
ABATEMENT
DEFINITION
PP. v. SANDIGANBAYAN
Republic of the Philippines
SUPREME COURT
THIRD DIVISION
G.R. No. 152532. August 16, 2005
PEOPLE OF THE PHILIPPINES, Petitioners,  amount of ₱342,616,217.88. Apparently, the letter was received by
vs.
SANDIGANBAYAN (Fourth Division) and BIENVENIDO A. TAN
JR., Respondent.
DECISION
PANGANIBAN, J.:
A judgment of acquittal made by a competent court on a valid
information after the accused has entered a plea bars an appeal by
the prosecution. Only a clear showing of grave abuse of discretion or
denial of due process to the State can justify a review (through a
petition for certiorari) of such decision by this Court. In acquitting
private respondent in the present case, the Sandiganbayan has not
been shown to have acted arbitrarily or whimsically. Equally
important, the herein accused, Commissioner Bienvenido A. Tan Jr.,
has not been proven to have exceeded his discretion in the exercise
of his functions. Taking into account the relevant facts and
applicable laws in this very perplexing subject of taxation, this Court
cannot fault him for abating an excessive and erroneous tax
assessment. Quite the contrary, he has acted fairly and sensibly
under the circumstances.
The Case
Before us is a Petition for Certiorari1 under Rule 65 of the Rules of
Court, seeking to nullify and set aside the January 23, 2002
Resolution2 of the Sandiganbayan (SB) in Criminal Case No. 20685.
The dispositive part of the Resolution reads as follows:
"WHEREFORE, premises considered, the Decision dated 02 March
2001 is hereby RECONSIDERED and SET ASIDE, and the accused
is hereby ACQUITTED of the charge in the instant case.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 79
COMPILATION OF CASES
"The bailbond of the accused is hereby cancelled and the Hold
Departure order previously issued by the court is hereby lifted and
set aside."3
The Facts
The facts are narrated by the SB in its original Decision dated March
2, 2001, as follows:
"Pursuant to Letter of Authority No. ATD-035-STO dated January 2,
1986 and Memorandum of Authority dated March 3, 1986, an
investigation was conducted by [Bureau of Internal Revenue (BIR)]
examiners on the ad valorem and specific tax liabilities of [San
Miguel Corp. (SMC)] covering the period from January 1, 1985 to
March 31, 1986. The result of the investigation showed that [SMC]
has a deficiency on specific and ad valorem taxes totaling
₱342,616,217.88 broken down as follows:
‘Specific Tax ₱ 33,817,613.21
Ad Valorem Tax ₱308,798,604.67’
"On the basis of these findings, the BIR sent a letter dated July 13,
1987 to SMC demanding the payment of its deficiency tax in the
the SMC, as it protested the assessment in its letter dated August
10, 1987 with the information: 1) that the alleged specific tax
deficiency was already paid when the BIR approved SMC’s request
that its excess ad valorem payments be applied to its specific tax
balance; 2) that the computation of the ad valorem tax deficiency
was erroneous since the BIR examiners disallowed the deduction of
the price differential (cost of freight from brewery to warehouse) and
ad valorem tax.
"The protest was denied by the BIR thru a letter dated October [8],
1987 signed by accused Commissioner Bienvenido Tan, Jr., but the
original assessment of ₱342,616,217.88 was reduced to ₱302,
[0]51,048.93 due to the crediting of the taxpayer’s excess ad
valorem tax deposit of ₱21,805,409.10 with a reiteration of the
payment of the x x x assessed specific and ad valorem tax as
reduced.
"On October 27, 1987, herein accused referred the matter to Jaime
M. Maza, Assistant BIR Commissioner, Legal Service Division and
thereafter different BIR officials also reviewed the case of SMC and
rendered varying legal opinions on the issue x x x
"On the part of Alicia P. Clemeno, Chief, Legislative Ruling and
Research Division, she recommended the reduction of SMC’s tax
liability, first to ₱21,856,985.29, and later to ₱22,000,000.00. Balbino
E. Gatdula, Jr., Assistant Revenue Service Chief, Legal Service,
supported the demand for ad valorem tax deficiency from SMC. In a
letter dated August 31, 1988, SMC, thru a certain Avendano offered
the amount of ₱10,000,000.00 for the settlement of the assessment.
This was concurred in by Juanito Urbi, Chief, Prosecutor Division,
BIR in a Memorandum dated December 20, 1988. Jaime Maza,
Assistant Commissioner, Legal Service, BIR, also gave his
concurrence to the recommendation that the offer of SMC for
₱10,000,000.00 in compromise settlement be accepted. The
recommendation was approved by accused Bienvenido Tan; and
accordingly, in a letter dated December 20, 1988, SMC was
informed that its offer to compromise was accepted." 4

Subsequently, the SB reversed its original March 2, 2001 Decision
with its now assailed January 23, 2002 Resolution. The antecedents
leading to the Petition before this Court are narrated by the SB in
this manner:
"In our Decision of March 2, 2001, herein accused Bienvenido A.
Tan, former Commissioner of the [BIR], was convicted for violation
of Section 3(e) of Republic Act [(RA)] No. 3019 as amended,
otherwise known as the Anti-Graft and Corrupt Practices Act, the
dispositive portion of which states as follows:
‘WHEREFORE, premises considered, judgment is hereby rendered
convicting the accused for Violation of Section 3(e) of [(RA)] 3019 as
amended, and appreciating in his favor the presence of the
mitigating circumstance of age, accused being over seventy (70)
years old, and in the absence of aggravating circumstances to offset
the same, applying the Indeterminate Sentence Law, he is hereby
sentenced to suffer imprisonment of six (6) years and one (1) month
as minimum to fifteen (15) years as maximum. He is further
disqualified perpetually from holding public office.
‘As the Court finds the compromise agreement to have been entered
into illegally, the [BIR] is hereby ordered to collect from [SMC] the
amount of ₱292,951,048.93 representing its tax liabilities covering
the period from January 1, 1985 to March 31, 1986.
‘SO ORDERED.’
"In his Motion for Reconsideration filed on March 12, 2001, accused
seeks to reconsider aforesaid Decision and posits the following
grounds: (1) the Court erred in holding that the assessment
contained in the letter of accused dated 08 October 1987 was final
and executory; (2) corollarily, the Court erred in holding that the
referral of the 08 October 1987 assessment to the Assistant
Commissioner for further study was uncalled for, given that there
was no request for a reconsideration of the 08 October 1987
assessment; (3) the Court erred in not holding that the specific tax
assessment of [₱]33,817,613.21 had been paid through the
application of SMC’s excess ad valorem tax deposits to its unpaid
specific tax; (4) the Court erred in not holding that the abatement of
SMC’s ad valorem tax was proper on the ground that there exists a
reasonable doubt as to the correctness of said assessment; [(5)] the
Court erred in holding that accused exercise of his authority under
Section 204 of the [National Internal Revenue Code (NIRC)] to abate
the assessment of ad valorem tax was improper; and [(6)] the Court
erred in holding that there was a compromise of the SMC tax case
which resulted in undue injury to the government.
"In its Comment, the prosecution asserts that (1) the assessment
contained in the letter of SMC dated October 8, 1987 was final and
executory; (2) the referral of the 08 October 1987 assessment to the
Assistant Commissioner for further study was uncalled for given that
there was no request for a reconsideration from SMC; (3) SMC’s
total tax due and collectible as Specific Tax of [₱]33,817,613.21 has
not been settled; (4) the Court correctly held that the abatement of
SMC’s ad valorem taxes is improper; and (5) the Court is correct in
ruling that there was a compromise of SMC’s tax which resulted in
undue injury to the government.
"Thereafter, the accused and the prosecution made a further
exchange of pleadings elaborating on their respective positions on
the matter.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 80
COMPILATION OF CASES
"The Motion is impressed with merit. After a careful and exhaustive
review of the pleadings, the records and the evidence, we
reconsider our Decision dated March 2, 2001 and hereby acquit the
accused of the charge in the instant case."5
Ruling of the Sandiganbayan
In acquitting herein private respondent, the SB adduced several
reasons.
First, the SB failed to give weight to the October 27, 1987 meeting
between Commissioner Tan and SMC’s representatives -- a meeting
which resulted in the referral of the assessment to Tan’s
subordinates for further review and study. The referral showed that
the disputed assessment had not yet become final and executory.
Second, notwithstanding the prosecution’s observation that the BIR
rejected SMC’s protest against the inclusion of the water component
of beer, private respondent unequivocally approved SMC’s
application of its excess ad valorem deposit to complete the
payment of its specific tax deficiency.
Third, the abatement of SMC’s ad valorem taxes is proper. The tax
base for computing them should not include the ad valorem tax itself
and the price differential. Reliance upon Executive Order (EO) No.
273 is not misplaced, because that law simply affirms general
principles of taxation as well as BIR’s long-standing practice and
policy not to impose a tax on a tax. Moreover, nothing precludes
private respondent from applying EO 273 on an assessment made
prior to its effectivity, because that law was merely intended to
formalize such long-standing practice and policy.
Fourth, after inquiring into the discretionary prerogative of private
respondent to compromise, the SB found no reason to conclude that
he had acted contrary to law or been impelled by any motive other
than honest good faith. The compromise he had entered into
regarding SMC’s tax did not result in any injury to the government.
No genuine compromise is impeccable, since the parties to it must
perforce give up something in exchange for something else. No
basis existed to hold him liable for violation of Section 3(e) of RA
3019.
Hence, this Petition.6
The Issues
Petitioner raises the following issues for our consideration:
"A. "The respondent court acted with grave abuse of discretion
amounting to lack or excess of jurisdiction when, in upholding private
respondent’s act in ruling upon SMC’s Motion for Reconsideration, it
disregarded Section 228 (previously Section 246) of the NIRC.
"B. "The respondent court acted with grave abuse of discretion
amounting to lack or excess of jurisdiction when, in upholding private
respondent’s act in accepting SMC’s offer of compromise of
₱10,000,000.00 for its tax liability of ₱302,051,048.93, it disregarded
Sections 124 and 228 of the NIRC.
"C. "The respondent court acted with grave abuse of discretion
amounting to lack or excess of jurisdiction when it declared the
validity of private respondent’s act of approving SMC’s application of
the excess ad valorem to its specific tax deficiency despite its being
contrary to law.

"D. "The respondent court acted with grave abuse of discretion
amounting to lack or excess of jurisdiction when it acquitted private
respondent for violation of Sec. 3(e) of RA 3019 despite the
overwhelming evidence proving his guilt beyond reasonable doubt." 7
We shall tackle the foregoing issues seriatim, with the exception of
the third issue that will be discussed ahead of the second.
The Court’s Ruling
The Petition has no merit.
First Issue:
Viability of SMC’s Motion for Reconsideration
Section 229 of the NIRC8 provides thus:
"Sec. 229. Protesting of assessment. -- When the Commissioner of
Internal Revenue or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of
his findings. Within a period to be prescribed by implementing
regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner shall issue an
assessment based on his findings.
"Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation in such form and
manner as may be prescribed by implementing regulation within
thirty (30) days from receipt of the assessment; otherwise, the
assessment shall become final and unappealable.
"If the protest is denied in whole or in part, the individual, association
or corporation adversely affected by the decision on the protest may
appeal to the Court of Tax Appeals within thirty (30) days from
receipt of the said decision; otherwise, the decision shall become
final, executory and demandable."9
Petitioner argues that "on October 8, 1987, a final decision was
rendered by private respondent as to SMC’s tax liability totaling
₱302,051,048.93 x x x." Since SMC did not appeal to the CTA, this
decision became final and could no longer be compromised by
private respondent. We disagree.
A careful reading of the quoted tax provision readily shows that the
"Motion for Reconsideration" filed by SMC was aptly ruled upon by
private respondent. Despite the use of the phrase "finally decided,"
his October 8, 1987 letter to SMC did not constitute a final
assessment.
First, the phrase "finally decided" referred not to the total amount of
deficiency specific and ad valorem taxes, but to the reduction of
such assessment. The reduction was the result of SMC’s protest, by
way of two requests for reconsideration dated June 9, 1987 and
August 10, 1987. Contrary to petitioner’s assertion, the rules on
statutory construction did not apply; the October 8, 1987 letter was
not even a law. Grantia argumenti that the letter partook of the
nature of a final assessment, its finality was suspended by private
respondent’s handwritten note on the bottom left of the second
page, extending the tender of payment for another 15 days from
October 27, 1987, because of a referral of the assessment to the
BIR’s Legal Service.10
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 81
COMPILATION OF CASES
Second, SMC filed on November 2, 1987 a timely request for
reinvestigation -- technically not a motion for reconsideration. Under
Section 229 of the NIRC, this request was a proper administrative
protest11 done within 30 days from receipt of the assessment and
substantiated by facts and law. 12 The assessment was received by
SMC only on October 26, 1987. Its request for reinvestigation was in
turn received by the BIR on November 10, 1987, well within the 30-
day period allowed by Section 229; thus, the assessment had not
yet become final.
Moreover, a day after SMC’s receipt of the assessment, the SB
found that a meeting had indeed been held between private
respondent and the representatives of SMC, resulting in the
suspension of the alleged finality of the assessment. The meeting
partook of the nature of an oral, in advance of the written, request for
reinvestigation. In both instances, the taxpayer’s request was not
merely pro forma; it had the effect of suspending -- not interrupting --
the 30-day period for appeal.13
We do not agree with petitioner’s contention that, contrary to the
finding of the SB in its March 2, 2001 Decision, no conference had
been held on that date. A careful perusal of the Decision would,
however, reveal that the date of the supposed conference was not
indicated with certainty.14 And even if it were, the conference was
supposed to have been held between SMC’s representatives and
BIR officials, other than private respondent, on the computation (not
the assessment) that was followed by SMC and that bore the
alleged approval by the BIR.
Third, after SMC’s request for reinvestigation, no other issuance
emanated from the BIR that could be considered a decision.
Therefore, no appeal to the Tax Court 15 could have been made
under Section 229 of the NIRC, since the protest filed with the BIR
had not been acted upon. Appealable to the Tax Court is a decision
that refers not to the assessment itself, but to one made on
the protest against such assessment.16 The commissioner of internal
revenue’s action in response to a taxpayer’s request for
reconsideration or reinvestigation of the assessment constitutes the
decision, the receipt of which will start the 30-day period for appeal. 17
Section 229 does not prevent a taxpayer from exhausting
administrative remedies by filing a request for reconsideration, then
a request for reinvestigation. 18 Furthermore, under Section 7(1) of
RA 112519 as amended,20the Tax Court exercised exclusive
appellate jurisdiction to review not the assessments themselves, but
the decisions involving disputed ones arising under the NIRC.21
Fourth, quite obviously, no decision could as yet be made by the
BIR, because the protest filed by SMC had been referred by private
respondent to several top BIR officials for further review. In fact,
various intra-office Memoranda were issued in 1988 involving the
chiefs of the (1) Legislative Ruling and Research and (2)
Prosecution Divisions of the BIR, as well as its assistant
commissioners for legal service and excise tax. Had the assessment
already become final in 1987, there would then be no more reason
to reinvestigate and study the merits of SMC’s protest in 1988.
Fifth, totally misplaced is petitioner’s reference to the 180-day period
from the submission of documents, within which time the BIR should
act upon the protest, followed by a 30-day period of appeal to the
Tax Court. This provision did not exist in either 1987 or 1988. It
appeared only in a much later law, RA 8424, as Section 228 -- again
erroneously referred to by petitioner as the basis for the present
controversy.

Consequently, there was no legal impediment either to the referral of
the protest by private respondent to his subordinates or to the action
taken by them -- a process that lasted for more than 180 days.
Neither was there a need to make a 30-day appeal to the Tax Court
due to the BIR’s inaction on the protest within the 180-day period.
The assessment was clearly not yet final, executory or demandable.
While it is pending with the commissioner of internal revenue, it
cannot yet serve as the basis of collection by distraint or levy or by
judicial action.22 No grave abuse of discretion can be attributed to the
SB for upholding private respondent’s act of reinvestigation upon
SMC’s request.
Second Issue:
Application of the Ad Valorem Tax
to the Specific Tax Deficiency
In like manner, no grave abuse of discretion was committed when
the SB upheld private respondent’s approval of SMC’s application of
its excess ad valorem tax deposits to its specific tax deficiency.
First, the approval given by private respondent was correct. Ad
valorem taxes23 and specific taxes24 are both excise taxes25 on
alcohol products.26 The payment by installment of a portion of the
total specific tax deficiency of SMC, in addition to the application of
its excess and unused ad valorem tax deposits to the remaining
portion, fully covered the total net specific tax shortfall. BIR
committed an oversight in failing to credit the amount of deposits to
the specific tax deficiency, as well as an error in crediting the same
amount to a subsequent ad valorem tax liability. A confusion was
thus created when it issued a later assessment for the same specific
tax deficiency, this time inclusive of increments. 27 Proper was the
BIR officials’ abatement or cancellation of the specific taxes of SMC,
after the amount of its ad valorem tax deposits had already been
credited to it.
To state that the balances of accounts pertaining to different tax
deposits could only be applied to cover certain tax liabilities upon the
approval of a request for tax credit is to validate the proposition that
the acceptance of payment by installment of a portion of the specific
tax deficiency was indeed tantamount to the approval of the request.
No law or regulation prevented such approval.
Private respondent’s letter states a condition: should the final
computation of specific and ad valorem taxes yield a different result,
the difference plus penalties would be paid in addition to them.
Obviously, this condition referred solely to the discrepancy, not to
the application, and had nothing to do with the approval that was
given.
Second, such approval had the concurrence of top tax officials within
the Bureau. Not only was there a presumption of regularity in the
performance of official functions; 28 also, their collective conclusion
was controlling. Besides, the disclosure of the change in beer
formulation was timely and voluntary; no attribution of bad faith or
fraud could be made. A change in technology that would result in a
change in the manner of computing taxes was well within the realm
of tax administration, 29 on which private respondent had reasonable
discretion to rule.
Third, the law and revenue regulations 30 allowed pre-payment
schemes,31 whereby excise taxes on alcohol products could be paid
in advance of the dates they were due. Since the equivalent value
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 82
COMPILATION OF CASES
of specific taxes by way of advance ad valorem tax deposits had
already been paid, the government lost nothing. It was a simple
request properly granted for applying the advance deposits made on
one type of excise tax to another type. Granting such request was
well within private respondent’s authority to administer tax laws and
regulations.32 Again, the assessment was not final, demandable or
executory at the time.
Fourth, in a letter to the Blue Ribbon Committee of the Senate, no
less than the succeeding commissioner of internal revenue declared
that the abatement of the specific tax deficiency through the
proposed application was proper. Even if the new commissioner had
admittedly been advised by private respondent, there remained the
unrebutted presumptions of good faith and regularity in the
performance of official functions.
Third Issue:
Acceptance of the ₱10 Million Alleged Compromise
The SB did not gravely abuse its discretion when it upheld private
respondent’s acceptance of SMC’s compromise offer of ₱10 million.
In computing its ad valorem tax liabilities for the taxable period
involved in the present case, SMC deducted from its brewer’s gross
selling price the specific tax, price differential, and ad valorem tax.
The BIR allowed the deduction of the specific tax, but not the
deduction of the price differential and ad valorem tax, thus
increasing the tax base and consequently the ad valorem
tax liabilities of SMC for the said period.
Prior to and during the taxable period involved in the present case,
several changes were made in the NIRC of 1977, particularly its
provisions pertaining to fermented liquor. We must therefore trace
the NIRC’s pertinent history to be able to rule properly on the validity
of SMC’s deduction of both the price differential and the ad valorem
taxfrom the brewer’s gross selling price.
Section 147(A) of the NIRC, as amended by PD 1959 33 in 1984,
provides for the collection of a specific tax on each liter of the
volume capacity of fermented liquor. In addition to the provision on
the specific tax, the first paragraph of its Section 147(B) provides for
the levying, assessment and collection of an ad valorem tax. The
latter tax is equivalent to a certain percentage of the brewer’s gross
selling price, net of the specific tax, of the product to be removed
from the brewery or other place of manufacture. The ad valorem
tax shall be paid by the brewer at the same time as the specific tax.
Added in 1984 were provisions of Section 186-A34 governing the
determination of the gross selling price of cigarettes, as well as the
administrative requirements and penalties imposable. Such
provisions shall apply to the determination of the gross selling price
of fermented liquor.35 Basically, this means that the amount of tax
due on the fermented liquor shall be determined by the price at
which it is sold either wholesale in the factory of SMC or directly to
the public through its sales agents. If the fermented liquor is sold or
allowed to be sold wholesale by SMC in another establishment
which it owns, the wholesale price in that establishment shall
determine the tax applicable to the fermented liquor sold there.
When the price is less than the cost of manufacture plus all
expenses incurred, until the fermented liquor is finally sold by SMC,
such cost plus expenses shall be the basis for determining the
amount of tax to be collected.
 TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 83
COMPILATION OF CASES

In 1986, PD 1994 amended the NIRC of 1977 by renumbering, valorem tax figure properly chargeable against a taxpayer. Quoted
among others, Section 147 as Section 124. 36 In the new Section 124, verbatim, his presentation is as follows:
the provisions on the specific and ad valorem taxes imposed on
fermented liquors remained substantially the same, except for the "If [SMC] wants to make ₱42.7269 on a case of beer and because of
tax rates. price differential and specific taxes has to fix a price of ₱51.2722 ex
brewery, what would the ad valorem tax be?
On July 1, 1986, Section 4 of EO 22 amended said Section 124 by
essentially providing that an ad valorem taxequivalent to a certain "The prosecution’s method is to charge the 20% ad valorem on the
percentage of the brewer’s wholesale selling price -- this time selling price ex brewery of P51.2722 and to tack that on the SMC
excluding the ad valorem tax -- shall be levied, assessed and price as follows:
collected on fermented liquors. It was only in 1988 that EO 273
renumbered Section 124 as Section 140, and thereby amended it
further to exclude also from such wholesale price the value-added ‘₱51.2722 - price ex brewery
tax already imposed at the time upon the same articles.37
x .20
Price Differential Deduction
₱10.2544 - ad valorem tax
Section 110 of the NIRC of 1977, as amended in 1986 by PD 1994,
explicitly provides that the excise taxes on domestic products shall and 42.7269 - SMC price
be paid by the manufacturer or producer before the removal of those
products from the place of production. 38 "It does not matter to what ₱52.9813 - this should be the new selling price ex
use the article[s] subject to tax is put"; 39 the excise taxes are still due,
even though the articles are removed merely for storage in some
other place and are not actually sold or consumed. 40 The intent of the brewery but SMC only charged ₱51.2722’
law is reiterated in several implementing regulations. 41 This means,
therefore, that the price that should be used as the tax base for "Following the prosecution’s theory, since there is a new selling price
computing the ad valorem tax on fermented liquor is the price at the ex brewery, i.e., ₱52.9813, the ad valorem tax should be adjusted to
brewery. After all, excise taxes are taxes on property, 42 not on the the new selling price or tax base or 20% of ₱52.9813, resulting in:
sale of the property.
‘₱42.7269 - SMC price
Verily, the price differential cannot be ascertained at the time the
fermented liquor is removed from the brewery, because such 10.5962 - new ad valorem tax P53.3231
ascertainment will involve amounts that cannot be determined with
certainty in advance, and that vary from one commercial outlet to
₱53.3231 - another new selling price ex brewery’
another. The price differential, according to SMC, represents the
cost of discounts, promotions, rebates, and transportation. To
require the inclusion of the price differential in, not its deduction "Then following the prosecution’s theory, the 20% ad valorem tax is
from, the tax base for purposes of computing the ad valorem again charged on the new selling price ex brewery.
tax would certainly lead to the impossible situation of computing for
such tax, because the price differential itself cannot be determined ‘20% of ₱53.3231 the new tax base or
unless the fermented liquor is actually sold.

₱10.6646 - the new ad valorem tax

Hence, no ad valorem tax can ever be paid before the removal of
the fermented liquor from the place of production. This outcome
Resulting in ₱42.7269 - SMC price
cannot be countenanced, for it would be contrary to what the law
mandates -- payment before removal. It follows that the tax base to
be used should be net of the price differential. In other words, the 10.6646 - new ad valorem tax
gross selling price should be that which is charged at the brewery
prior to the removal of the fermented liquor. ₱53.3915 - new selling price ex warehouse

Ad Valorem Tax Deduction
The taxable period covered in this case is January 1, 1985 to March
31, 1986. Prior to the amendment of the NIRC of 1977 by EO 22 on
July 1, 1986, the ad valorem tax was not excluded from the brewer’s
wholesale price. Does this mean that such tax cannot be deducted?
The answer is no.
"Therefore, the ad valorem tax is not ₱10.2544 or ₱10.5962 but
₱10.6646 ad infinitum.
"The obvious untenability of the above situation is a clear enough
argument to prove that ad valorem tax should be excluded from the
tax base.

"The correct method is that used by the BIR and that is:
A tax should not be imposed upon another tax. This is tax
pyramiding, which has no basis either in fact or in law.
‘₱51.2722 - original price to public

Private respondent has shown by mathematical analysis that the

[1.20]
inclusion of the ad valorem tax in the tax base would only yield a
circuitous manner of computation that will never end in just one ad
= ₱42.726[8] - SMC warehouse price.’"43

Expectedly, though, petitioner is unable to negate the mathematics
proffered by private respondent.
Equally important, tax pyramiding has since 1922 been rejected by
this Court, the legislature, and our tax authorities. The intent behind
the law is clearly to obviate a tax imposed upon another tax. Ratio
legis est anima legis. The reason for the law is its spirit.
For instance, Regulations No. 27, 44 promulgated March 1, 1923,
already excludes the specific tax on cigars and cigarettes from the
tax base upon which such tax is computed. 45 This is reiterated in the
more recent amendments to our tax law, among which are EOs 22
and 273,46 and their implementing rules. In fact, Commissioner of
Internal Revenue v. American Rubber Co. held that a taxpayer
cannot be "compelled to pay a x x x tax on the tax itself."47
Having shown the appropriateness of deducting the ad valorem
tax from the tax base upon which it is computed, private respondent
has shown prudence in exercising his power under Section
204(2) 48 of the NIRC of 1977 to abate an unjust, excessively
assessed, and unreasonable tax; and to accept the offer of ₱10
million,49 if only to avoid protracted and costly litigation.
Abatement,
Not Compromise
Although referred to in the pleadings as a compromise, the matter at
hand is actually an abatement or a cancellation. Abatement is the
"diminution or decrease in the amount of tax imposed;" 50 it refers to
"the act of eliminating or nullifying; x x x of lessening or moderating x
x x."51 To abate is "to nullify or reduce in value or amount"; 52 while to
cancel is "to obliterate, cross out, or invalidate"; 53 and "to strike out; x
x x delete; x x x erase; x x x make void or invalid; x x x annul; x x x
destroy; x x x revoke or recall."54
The BIR may therefore abate or cancel the whole or any unpaid
portion of a tax liability, inclusive of increments, if its assessment is
excessive or erroneous;55 or if the administration costs involved do
not justify the collection of the amount due. 56 No mutual concessions
need be made,57 because an excessive or erroneous tax is not
compromised; it is abated or canceled. Only correct taxes should be
paid.58 Besides, as we have discussed earlier, there was no finality in
the assessment that could be settled.
Moreover, petitioner did not prove the alleged bad faith attributed to
private respondent, who simply relied upon his subordinates. Mere
assertion will not suffice. Even reference to the approval by the
Evaluation Board was misleading, for such approval was inexistent
at the time and was merely a product of RA 8424 as
amended.59Actual, not presumed, fraud should be the bench mark of
liability.
Fourth Issue:
Violation of Section 3(e) of RA 3019
Clearly, the court a quo did not commit grave abuse of discretion in
upholding private respondent in his act of ruling upon the request of
SMC for reinvestigation, leading, first, to his approval of its
application of the excess tax deposit to its tax deficiency;
and, second, to his acceptance of its offer to pay for its tax liability,
which was a little over the assessed amount, inclusive of
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 84
COMPILATION OF CASES
increments. It necessarily follows that his acquittal is proper and
inevitable.
Basic is the rule that no person shall be twice put in jeopardy of
punishment for the same offense. 60 It is a constitutional guarantee
repeated in Section 7 of Rule 117 of the Rules of Court. A judgment
of acquittal cannot be reopened, absent a grave abuse of discretion
or a denial of due process to the State. 61 In this light, pertinent is the
following excerpt, showing how a similar attempt was made by the
prosecution to overturn an acquittal through a Petition
for Certiorari in this Court:
"The rule against double jeopardy proscribes an appeal from a
judgment of acquittal. If said judgment is assailed in a petition
for certiorari under Rule 65 of the Rules of Court, x x x the petitioner
must prove that the lower court, in acquitting the accused,
committed not merely reversible errors, but grave abuse of
discretion amounting to lack or excess of jurisdiction. A judgment
rendered with grave abuse of discretion or without due process is
void, does not exist in legal contemplation and, thus, cannot be the
source of an acquittal. However, where the petition demonstrate[s]
mere errors in judgment not amounting to grave abuse of discretion
or deprivation of due process, the writ of certiorari cannot issue. A
review of the alleged errors of judgment cannot be made without
trampling upon the right of the accused against double jeopardy." 62
As aptly put by private respondent, error in the exercise of
jurisdiction is not the same as error in judgment. The latter is not
reviewable by certiorari,63 since evidence has been duly considered
and passed upon by the SB.
Epilogue
Former BIR Commissioner Bienvenido A. Tan Jr. was charged with
"having willfully, unlawfully and criminally cause[d] undue injury to
the government by effecting a compromise of the tax liabilities" of
SMC amounting to ₱302,051,048.93 for only ₱10,000,000, a
"compromise [that] is grossly disadvantageous to the government."
In no uncertain terms, the assailed Resolution of the Sandiganbayan
acquitted him of violating Section 3(e) of Republic Act No. 3019 (the
Anti-Graft Law).
Under the Constitution, no person shall be twice put in jeopardy of
punishment for the same offense. To implement this constitutional
mandate, the Rules of Court64 bars an appeal by the State from a
judgment of acquittal, provided the following requisites are present:
(1) a valid complaint or information was filed; (2) before a competent
court; (3) the defendant pleaded to the charge; and (4) the accused
was acquitted.
Petitioner alleges, however, that in acquitting the accused, the
Sandiganbayan acted in a "capricious, whimsical, arbitrary or
despotic manner" equivalent to lack or excess of jurisdiction.
Indeed, the double jeopardy principle will not protect the accused, if
the prosecution can show that the court gravely abused its discretion
in rendering the judgment of acquittal. The prosecution’s burden is
heavy: to show grave -- not just ordinary -- abuse of discretion
equivalent to lack or excess of jurisdiction.
This Court notes the tenacity of the Ombudsman and the Office the
Special Prosecutor in doggedly pursuing what they believe is the
public weal. But after a careful review of the assailed judgment and
the relevant facts and laws, this Court cannot ascribe capricious or
whimsical conduct on the part of the Sandiganbayan. The SB

Resolution assessed the facts and applied the governing laws and
jurisprudence. It analyzed the arguments of both the prosecution
and the defense. It then concluded that the elements of the crime
charged had not been sufficiently proven. Hence, it acquitted the
accused.
Because of the importance of this case and the need to assist the
government in collecting the correct amount of taxes, this Court
even went further by inquiring whether private respondent (not just
the Sandiganbayan) acted within the confines of his duties and
prerogatives.
As can be seen from the foregoing discussions, Commissioner
Bienvenido A. Tan Jr. acted fairly, honestly and in good faith in
discharging his functions. To compromise a tax liability of more than
₱300 million for only ₱10 million may appear to be an arbitrary
action grossly disadvantageous to the government. The fact
remains, however, that the initial tax assessment of ₱300 million
was correctly found by the SB to be overly excessive and erroneous.
Under the circumstances, the abatement of the excessive and
erroneous taxes was not only within the discretion of respondent; it
was just and fair to all concerned. After all, the purpose of tax
assessment is to collect only what is legally and justly due the
government; not to overburden, much less harass, the taxpayers.
WHEREFORE, the Petition is DENIED, and the assailed Resolution
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
TAX REFUNDS AND CREDITS
NATURE AND BASIS
PHIL. PHOSPHATE FERTILIZER CORP. v. CIR
SECOND DIVISION
G.R. No. 141973               June 28, 2005
PHILIPPINE PHOSPHATE FERTILIZER
CORPORATION, petitioner,  petitioner, tax credit shall be granted to the latter. The fact that
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Once more, we stand by our ruling that:
If the State expects its taxpayers to observe fairness and honesty in
paying their taxes, so must it apply the same standard against itself
in refunding excess payments. When it is undisputed that a taxpayer
is entitled to a refund, the State should not invoke technicalities to
keep money not belonging to it. No one, not even the State, should
enrich oneself at the expense of another. 1
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 85
COMPILATION OF CASES
The antecedents of this case are as follows:
Philippine Phosphate Fertilizer Corporation (Philphos) is a domestic
corporation registered with the Export Processing Zone Authority
(EPZA). It manufactures fertilizers for domestic and international
distribution and as such, utilizes fuel, oil and other petroleum
products which it procures locally from Petron Philippines
Corporation (Petron). Petron initially pays the Bureau of Internal
Revenue (BIR) and the Bureau of Customs the taxes and duties
imposed upon the petroleum products. Petron is then reimbursed by
petitioner when Petron sells such petroleum products to the
petitioner. In a letter dated August 28, 1995, petitioner sought a
refund of specific taxes paid on the purchases of petroleum products
from Petron for the period of September 1993 to December 1994 in
the total amount of ₱602,349.00 which claim is pursuant to the
incentives it enjoyed by virtue of its EPZA registration. Since the
two-year period within which petitioner could file a case for tax
refund before the Court of Tax Appeals (CTA) was about to expire
and no action had been taken by the BIR, petitioner instituted a
petition for review before the CTA against the Commissioner of
Internal Revenue (CIR).2 During the trial, to prove that the duties
imposed upon the petroleum products delivered to petitioner by
Petron had been duly paid for by petitioner, petitioner presented a
Certification from Petron dated August 17, 1995; a schedule of
petroleum products sold and delivered to petitioner detailing the
volume of sales and the excise taxes paid thereon; photocopies of
Authority to Accept Payment for Excise Taxes issued by the CIR
pertaining to petroleum products purchased; as well as the
testimony of Sylvia Osorio, officer of Petron, to attest to the
summary and certification presented.3 The CIR did not present any
evidence to controvert the ones presented by petitioner nor did it file
an opposition to petitioner’s formal offer of evidence. 4
On August 11, 1998, the CTA promulgated its Decision finding that
while petitioner is exempt from the payment of excise taxes, it failed
to sufficiently prove that it is entitled to refund in this particular case
since it did not submit invoices to support the summary of petroleum
products sold and delivered to it by Petron. 5 The CTA rationalized
thus:
…[P]etitioner, as an EPZA registered enterprise is exempted
from the payment of excise taxes, and if said taxes were passed
on by the supplier to EPZA registered enterprise like the
it was not the petitioner who had paid the taxes directly to the
Bureau of Internal Revenue does not have an adverse effect on
petitioner’s action for refund. The law granting the exemption
makes no distinction as to the circumstances when the law shall
apply. Since the law makes no distinction, neither should we. The
exemption is so broad as to cover the present situation. Since an
export processing zone is not considered to be covered by
Philippine customs and internal revenue laws, the taxes paid by
the petitioner on the petroleum products should be refunded or
credited in its favor. Thus, the only thing left for us to do is to
determine whether or not petitioner is entitled to the amount
claimed for refund. After a careful scrutiny of the evidence
presented, however, there appears to be a dispute with respect to
the amount claimed. Petitioner submitted in evidence a certification
issued by Petron to prove that the duties imposed upon the
petroleum products delivered to petitioner by Petron had been duly
paid for by petitioner (Exhibit "A", p. 71, CTA records). Petitioner
likewise presented a schedule of petroleum products sold and
delivered to petitioner detailing the volume of sales and the excise
taxes paid thereon (Exhibits "A-1" to "A-1a", pp. 72-73, CTA
records). However, to show that Petron had previously paid the
excise taxes on these petroleum products, petitioner presented
photocopies of Authority to Accept Payment for Excise Taxes issued

by respondent pertaining to petroleum products purchased (Exhibits
"A-2" to "A-80), pp. 74-152, CTA records).
Although these Authority to Accept Payment for Excise Taxes reflect
therein the amount of excise taxes paid by Petron to
respondent, this Court cannot verify the exact amount of excise
taxes which correspond to the petroleum products delivered to
petitioner. This Authority to Accept Payment for Excise Taxes only
proves the payment of millions of pesos in excise taxes made by
Petron during the period covered by the claim but they fail to show to
this Court which part of this huge amount actually represents the
excise taxes paid on the petroleum products actually delivered to
herein petitioner. Petitioner merely presented a summary of
petroleum products sold and delivered by Petron during the
period covered by the claim. We cannot, by the summary alone,
ascertain the veracity of the amount being claimed neither can
it prove the existence of the invoices being referred to
therein. Petitioner should have submitted the invoices
supporting the schedules of petroleum products sold and
delivered to it by Petron. These invoices would reveal whether
or not the amount claimed for refund by petitioner is correct….
In an action for refund/credits the taxpayer has the burden of
showing that the taxes paid are erroneously collected and that
failure to meet such a burden is fatal to his cause. Tax refunds
partake of the nature of the tax exemptions and therefore cannot be
allowed unless granted in the most explicit and categorical
language. The grant of refund privileges must be strictly construed
against the taxpayer and liberally in favor of the government.
(citations omitted)lawphil.net
Petitioner has the burden to prove the material allegations in its
petition as well as the truth of its claim.6 (Emphasis supplied)
disposing of the case as follows:
WHEREFORE, in view of the foregoing, the claim of refund of
petitioner in the amount of ₱602,349.00 is hereby DENIED for lack
of merit.7
On August 31, 1998, petitioner filed a motion for reconsideration
alleging that it failed to submit invoices because it thought that the
presentation of said invoices was not necessary to prove the claim
for refund, since petitioner’s previous claims, in CTA Case Nos.
4654, 4993 and 4994,8 involving similar facts, were granted by the
CTA even without the presentation of invoices. It then prayed that
the CTA decision be reconsidered and its claim for refund be
allowed, or in the alternative, allow petitioner to present and offer the
invoices in evidence to present its claim.9
The CTA denied the motion for reconsideration on January 6, 1999,
explaining as follows:
It is important to note at the outset that Petitioner’s reliance on CTA
Case Nos. 4994, 4654 and 4993 is misplaced because during the
hearings of these cases up to the time of formal offer of evidence,
CTA Circular No. 1-95 was not yet in effect. The nature and
presentation of evidence involving voluminous documents prior to
the effectivity of CTA Circular No. 1-95 differ from that which is
required by this Court from the effectivity of said Circular beginning
January 25, 1995. In the instant case, the Petition for Review was
filed on September 1, 1995. It is obviously clear that the provisions
of CTA Circular 1-95 already applied to Petitioner’s presentation of
evidence. Quoted hereunder are portions of CTA Circular 1-95:
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 86
COMPILATION OF CASES
1. The party who desires to introduce as evidence such voluminous
documents must present: (a) Summary containing the total amount/s
of the tax account or tax paid for the period involved and a
chronological or numerical list of the numbers, dates and amounts
covered by the invoices or receipts; and (b) a Certification of an
independent Certified Public Accountant attesting to the correctness
of the contents of the summary after making an examination and
evaluation of the voluminous receipts and invoices. Such summary
and certification must properly be identified by a competent witness
from the accounting firm.
2. The method of individual presentation of each and every receipt
or invoice or other documents for marking, identification and
comparison with the originals thereof need not be done before the
Court or the Commissioner anymore after the introduction of the
summary and CPA certification. It is enough that the receipts,
invoices and other documents covering the said accounts or
payments must be pre-marked by the party concerned and
submitted to the Court in order to be made accessible to the adverse
party whenever she/he desires to check and verify the correctness
of the summary and CPA certification. However, the originals of the
said receipts, invoices or documents should be ready for verification
and comparison in case doubts on the authenticity of the particular
documents presented is raised during the hearing of the case.
It can be revealed from the evidence presented by the Petitioner
that it failed to present a certification of an independent
Certified Public Accountant, as well as the invoices supporting
the schedules of petroleum products sold and delivered to it by
Petron. From this perspective alone, the claim for refund was
correctly denied. Now that an unfavorable decision has been
rendered by this Court, Petitioner belatedly seeks to present the
invoices as additional evidence.
The prayer to present additional evidence partakes of the nature of a
motion for new trial under Section 1 Rule 37 of the 1997 Rules of
Civil Procedure. It has already been emphasized in several cases
that failure to present evidence already existing at the time of trial
does not warrant the grant of a new trial because said evidence can
no longer be considered newly discovered but is more in the nature
of forgotten evidence. Neither can such inadvertence on the part of
the counsel to present said evidence qualify as excusable
negligence.10 (Emphasis supplied)
CTA Presiding Judge Ernesto D. Acosta dissented with the view that
in the interest of justice, petitioner should be given a chance to prove
its case by allowing it to present the invoices of its purchases. 11 He
reasoned that:
…A review of the schedule of invoices, Exhibits "A-1" "A-1-a",
reveals that there are only about ninety four (94) invoices which
does not need the assistance of an independent CPA. It can easily
be presented before this Court or before a Clerk of Court for
markings and comparison.
The reason advanced by the Petitioner was that they thought the
presentation by the Manager of Petron Corporation of a duly
notarized certification (supporting the schedules of invoices),
coupled with testimonies of witness, Mrs. Sylvia Osorio of Petron
Corporation, are enough to prove their case. Respondent did not
even controvert said exhibits and testimonies.1avvphi1.zw+ It is this
Court that raised doubts on the veracity of the claim in view of the
absence of the invoices. This ground could easily fall under the
phrase "mistake or excusable negligence" as a ground for new trial
under Sec. 1(a) of Rule 37 and not under the phrase "newly
discovered evidence" as stated in our said resolution. The denial of

this motion is too harsh considering that this case is only civil in
nature, govern (sic) merely by the rule on preponderance of
evidence.12
On January 25, 1999, petitioner filed another motion for
reconsideration with motion for new trial praying that it be allowed to
present an additional witness and to have invoices and receipts pre-
marked in accordance with CTA Circular No. 1-95. 13 The CTA
denied the same for the reason that it found no convincing reason to
reverse its earlier decision and the motion for new trial was filed
beyond the period prescribed by Sec. 1, Rule 37 of the Rules of
Court as well as for appeals as provided under Sec. 4, Rule 43.14
Petitioner then went to the Court of Appeals (CA) which issued the
herein assailed Resolution dismissing the petition for review, to wit:
Considering that the "AFFIDAVIT OF NON-FORUM SHOPPING"
was executed by petitioner’s counsel, when under Adm. Circular No.
04-94, the petitioner should be the one to certify as to the facts and
undertakings as required; and since any violation of the circular
"shall be a cause for the dismissal" of the petition, the petition for
review is hereby DENIED DUE COURSE OUTRIGHT, and is
DISMISSED.
SO ORDERED.15
The motion for reconsideration was likewise denied.16
Hence the present petition raising the following issues:
1. Whether or not the Court of Tax Appeals should have granted
petitioner’s claim for refund.
2. Whether or not the Court of Appeals should have given due
course to the Petition for Review.17
Anent the first issue, petitioner argues that: the CTA erred in denying
its claim for refund for its failure to present invoices and receipts; the
evidence it adduced, which the CIR did not controvert nor contest, is
sufficient to support petitioner’s claim for refund or tax credit; as
opined by the Presiding Judge of the CTA in his dissenting opinion,
the failure of petitioner to present invoices and receipts is a minor
infraction of CTA Circular No. 1-95 which should not defeat
petitioner’s right to refund; there is nothing in said circular which will
support the contention of the CTA that the petitioner is mandated to
present the invoices in the present case; the CTA, in its previous
decisions involving the petitioner, one of which was even affirmed by
the CA, held that a refund may be granted solely on the basis of
certifications issued by Petron; 18 if it is the avowed purpose of CTA
Circular No. 1-95 to ensure the speedy administration of justice, it
should not compel petitioner to present additional voluminous
evidence which will require the presentation of a Certified Public
Accountant (CPA) for court examination aside from entailing
additional costs to petitioner; petitioner’s counsel was of the honest
belief that he was not required to adhere to what is provided in CTA
Circular No. 1-95; petitioner should not be burdened by the infraction
of its counsel and should be given the fullest opportunity to establish
the merits of its action rather than for it to lose property on mere
technicalities; it has also been held that evidence not offered and
formally presented in evidence during the trial may still be
considered by a court in the exercise of its discretion so as not to
allow a mere technicality to overcome justice and fairness; petitioner
should be granted its claim for refund, or, in the alternative, be given
an opportunity to present the pre-marked invoices in accordance
with CTA Circular No. 1-95.19
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 87
COMPILATION OF CASES
As to the second issue, petitioner explains that: its counsel was of
the belief that he was authorized to execute the affidavit of non-
forum shopping; in any event, its counsel immediately attached to
the motion a copy of the affidavit of non-forum shopping executed by
petitioner’s President, Ramon C. Avecilla as soon as he learned of
his error; and Supreme Court Administrative Circular No. 04-94
should be liberally construed following Maricalum Mining Corp. vs.
NLRC,20 Loyola vs. Court of Appeals, 21 and Philippine Fishing Boat
Officers and Engineers Union vs. Court of Industrial Relations.22
It then prayed that: the resolutions of the CA and the Decision of the
CTA be reversed; and an order be issued to award petitioner tax
credit certificate/refund in the amount of ₱602,349.00 representing
excise taxes paid for the period of September 1993 to December
1994 or in the alternative to allow petitioner to adduce evidence
before the CTA to support its case.23
The CIR, in his Comment, contends that: the burden of proving
entitlement to the refund/credit rests upon petitioner; the CTA was
correct in requiring the submission of the invoices to support the
schedules presented especially in this case where the CTA cannot
determine which part of the huge amount paid by Petron actually
represents the excise taxes paid on the petroleum products actually
delivered to petitioner; the schedules are self-serving and if not
corroborated by evidence have no evidentiary weight; the CTA is not
precluded from requiring other evidence which will once and for all
erase doubts to the claim for refund; claims for refund, partaking of
the nature of tax exemptions, are construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority;
even setting aside the requirements in CTA Circular No. 1-95,
petitioner is still obliged to present the invoices in order to
corroborate the entries in the summary and to reveal whether or not
the amount claimed for refund by petitioner is correct; petitioner’s
Motion for Reconsideration and Motion for New Trial filed on
January 25, 1999 were properly denied by the CTA for having been
filed out of time; and the CTA’s decision must be respected on
appeal since it has developed an expertise on the subject. 24
Anent the second issue, respondent avers that the CA did not err in
dismissing the petition for review on the ground that the affidavit of
non-forum shopping was executed by petitioner’s counsel contrary
to the requirements in Sec. 5, Rule 7 of the Rules of Court; and that
the denial of the motion for reconsideration was also proper since
the failure to comply with the requirements of non-forum shopping
shall not be curable by mere amendment to the complaint.25
For clarity, we shall first discuss the issue of whether or not the CA
should have given due course to the petition for review.
The primary question that has to be resolved is whether an Affidavit
of Non-Forum Shopping, erroneously signed by counsel, may be
cured by subsequent compliance.
Generally, subsequent compliance with the requirement of affidavit
of non-forum shopping does not excuse a party from failure to
comply in the first instance.26
Supreme Court Administrative Circular No. 04-94 of Section 5, Rule
7 of the 1997 Rules of Civil Procedure which requires the pleader to
submit a certificate of non-forum shopping to be executed by the
plaintiff or principal party is mandatory. 27 A certification of the
plaintiff’s counsel will not suffice for the reason that it is petitioner,
and not the counsel, who is in the best position to know whether he
actually filed or caused the filing of a petition.28 A certification against
forum shopping signed by counsel is a defective certification that is
equivalent to non-compliance with the requirement and constitutes a

valid cause for the dismissal of the petition. 29 Hence, strictly
speaking, the CA was correct in dismissing the petition.
There are instances, however, when we treated compliance with the
rule with relative liberality, especially when there are circumstances
or compelling reasons making the strict application of the rule clearly
unjustified.30
In the case of Far Eastern Shipping Co. vs. Court of Appeals,31 while
we said that, strictly, a certification against forum shopping by
counsel is a defective certification, the verification, signed by
petitioner’s counsel in said case, is substantial compliance inasmuch
as it served the purpose of the Rules of informing the Court of the
pendency of another action or proceeding involving the same
issues.32 We then explained that procedural rules are instruments in
the speedy and efficient administration of justice which should be
used to achieve such end and not to derail it.33
In Damasco vs. NLRC,34 the certifications against forum shopping
were erroneously signed by petitioners’ lawyers, which, generally,
would warrant the outright dismissal of their actions. 35 We resolved
however that as a matter of social justice, technicality should not be
allowed to stand in the way of equitably and completely resolving the
rights and obligations of the parties. 36 In Cavile vs. Heirs of Clarita
Cavile,37 we likewise held that the merits of the substantive aspects
of the case may be deemed as "special circumstance" for the Court
to take cognizance of a petition although the certification against
forum shopping was executed and signed by only one of the
petitioners.38Finally, in Sy Chin vs. Court of Appeals,39 we
categorically stated that while a petition may be flawed as the
certificate of non-forum shopping was signed only by counsel and
not by the party, such procedural lapse may be overlooked in the
interest of substantial justice.40
Here, the affidavit of non-forum shopping was signed by petitioner’s
counsel. Upon receipt of the resolution of the CA, however, which
dismissed its petition for non-compliance with the rules on affidavit of
non-forum shopping, petitioner submitted, together with its motion
for reconsideration, an affidavit signed by petitioner’s president in
compliance with the said rule. 41 We deem this to be sufficient
especially in view of the merits of the case, which may be
considered as a special circumstance or a compelling reason that
would justify tempering the hard consequence of the procedural
requirement on non-forum shopping. 42
Which brings us to the other issue of whether or not the CTA should
have granted petitioner’s claim for refund.
The general rule is that claimants of tax refunds bear the burden of
proving the factual basis of their claims. 43 This is because tax
refunds are in the nature of tax exemptions, the statutes of which are
construed strictissimi juris against the taxpayer and liberally in favor
of the taxing authority.44 Taxes are the lifeblood of the nation,
therefore statutes that allow exemptions are construed strictly
against the grantee and liberally in favor of the government. 45
In this case, there is no dispute that petitioner is entitled to
exemption from the payment of excise taxes by virtue of its being an
EPZA registered enterprise. 46 As stated by the CTA, the only thing
left to be determined is whether or not petitioner is entitled to
the amount claimed for refund.47
Petitioner’s entire claim for refund, however, was denied for
petitioner’s failure to present invoices allegedly in violation of CTA
Circular No. 1-95. But nowhere in said Circular is it stated that
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 88
COMPILATION OF CASES
invoices are required to be presented in claiming refunds. What the
Circular states is that:
1. The party who desires to introduce as evidence such voluminous
documents must present: (a) Summary containing the total amount/s
of the tax account or tax paid for the period involved and a
chronological or numerical list of the numbers, dates and amounts
covered by the invoices or receipts; and (b) a Certification of an
independent Certified Public Accountant attesting to the correctness
of the contents of the summary after making an examination and
evaluation of the voluminous receipts and invoices. Such summary
and certification must properly be identified by a competent witness
from the accounting firm. (Emphasis supplied)
The CTA in denying petitioner’s motion for reconsideration, also
mentioned for the first time that petitioner’s failure to present "a
certification of an independent CPA" is another ground that justified
the denial of its claim for refund.
Again, we find such reasoning to be erroneous. The certification of
an independent CPA is not another mandatory requirement under
the Circular which petitioner failed to comply with. It is rather a
requirement that must accompany the invoices should one decide to
present invoices under the Circular. Since petitioner did not present
invoices, on the assumption that such were not necessary in this
case, it logically did not present a certification because there was
nothing to certify.
The CTA also could not deny that in its previous decisions involving
petitioner’s claims for refund, invoices were not deemed necessary
to grant such claims. It merely said that in said decisions, CTA
Circular No. 1-95 was not yet in effect. 48 Since CTA Circular No. 1-
95 did not make it mandatory to present invoices, coupled with the
previous cases of petitioner where the certifications issued by Petron
sufficed, it is understandable that petitioner did not think it necessary
to present invoices and the accompanying certifications when it filed
the present case for refund before the CTA.
Even then, petitioner, in its motion for reconsideration, asked the
CTA for an opportunity to present invoices to substantiate its claims.
But this was denied by the CTA explaining that its prayer to present
additional evidence partakes of the nature of a motion for new trial
under Section 1, Rule 37 of the Rules of Court. The CTA held that
under such rule, failure to present evidence already existing at the
time of trial does not warrant the grant of a new trial because such
evidence is not newly discovered but is more in the nature of
forgotten evidence which is not excusable.49
On this point, we agree with the dissenting opinion of CTA Presiding
Judge Ernesto D. Acosta who stated that:
The reason advanced by the Petitioner…that they thought the
presentation by the Manager of Petron Corporation of a duly
notarized certification (supporting the schedules of invoices),
coupled with testimonies of witness, Mrs. Sylvia Osorio of Petron
Corporation, are enough to prove their case… could easily fall under
the phrase "mistake or excusable negligence" as a ground for new
trial under Sec. 1(a) of Rule 37 and not under the phrase "newly
discovered evidence" as stated in our said resolution. The denial of
this motion is too harsh considering that this case is only civil in
nature, govern (sic) merely by the rule on preponderance of
evidence.50

Sec. 1, Rule 37 of the Rules of Court provides as follows:
SECTION 1. Grounds of and period for filing motion for new trial or
reconsideration.--- Within the period for taking an appeal, the
aggrieved party may move the trial court to set aside the judgment
or final order and grant a new trial for one or more of the following
causes materially affecting the substantial rights of said party:
(a) Fraud, accident, mistake or excusable negligence which ordinary
prudence could not have guarded against and by reason of which
such aggrieved party has probably been impaired in his rights; or
(b) Newly discovered evidence, which could not, with reasonable
diligence, have discovered and produced at the trial, and which if
presented would probably alter the result.
… It is true that petitioner could not move for new trial on the basis
of newly discovered evidence because in order to have a new trial
on the basis of newly discovered evidence, it must be proved that:
(a) the evidence was discovered after the trial; (b) such evidence
could not have been discovered and produced at the trial with
reasonable diligence; (c) it is material, not merely cumulative,
corroborative or impeaching; and (d) it is of such weight that, if
admitted, will probably change the judgment. 51 This does not mean
however, that petitioner is altogether barred from having a new trial.
As pointed out by Judge Acosta, the reasons put forth by petitioner
could fall under mistake or excusable negligence.
The "mistake" that is allowable in Rule 37 is one which ordinary
prudence could not have guarded against. 52Negligence to be
"excusable" must also be one which ordinary diligence and prudence
could not have guarded against and by reason of which the rights of
an aggrieved party have probably been impaired. 53 The test of
excusable negligence is whether a party has acted with ordinary
prudence while transacting important business.54
In this case, it cannot be said that petitioner did not act with ordinary
prudence in claiming its refund with the CTA, in light of its previous
cases with the CTA which did not require invoices and the non-
mandatory nature of CTA Circular No. 1-95.
Respondent also argues that petitioner’s motion for new trial was
filed out of time and should therefore be dismissed in view of Sec. 1,
Rule 37 and Sec. 4, Rule 43 of the Rules of Court.
Sec. 1, Rule 37 provides that:
Section 1. Grounds of and period for filing motion for new trial or
reconsideration.--- Within the period for taking an appeal, the
aggrieved party may move the trial court to set aside the judgment
or final order and grant a new trial …
and Sec. 4, Rule 43 holds that:
Section 4. Period of appeal. --- The appeal shall be taken within
fifteen (15) days from notice of the award, judgment, final order or
resolution, or from the date of its last publication, if publication is
required by law for its effectivity, or of the denial of petitioner’s
motion for new trial or reconsideration duly filed in accordance with
the governing law of the court or agency a quo. Only one (1) motion
for reconsideration shall be allowed. Upon proper motion and the
payment of the full amount of the docket fee before the expiration of
the reglementary period, the Court of Appeals may grant an
additional period of fifteen (15) days only within which to file the
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 89
COMPILATION OF CASES
petition for review. No further extension shall be granted except for
the most compelling reason and in no case to exceed fifteen (15)
days.
It is borne by the records however that in its first motion for
reconsideration duly filed on time, petitioner had already prayed that
it be allowed to present and offer the pieces of evidence deemed
lacking by the CTA in its Decision dated August 11, 1998. 55 Thus,
while it named its pleading as a Motion for New Trial only in its
motion dated January 25, 1999, petitioner should not be deemed to
have moved for new trial only at such time.
We reiterate the fundamental principle that technical rules of
procedure are not ends in themselves but are primarily designed to
aid in the administration of justice. 56 And in cases before tax courts,
Rules of Court applies only by analogy or in a suppletory character
and whenever practicable and convenient shall be liberally
construed in order to promote its objective of securing a just, speedy
and inexpensive disposition of every action and proceeding. 57The
quest for orderly presentation of issues is not an absolute.58 It should
not bar the courts from considering undisputed facts to arrive at a
just determination of a controversy.59 This is because, after all, the
paramount consideration remains the ascertainment of
truth.60 Section 8 of R.A. No. 1125 creating the CTA also expressly
provides that it shall not be governed strictly by technical rules of
evidence.61
Since it is not disputed that petitioner is entitled to tax exemption, it
should not be precluded from presenting evidence to substantiate
the amount of refund it is claiming on mere technicality especially in
this case, where the failure to present invoices at the first instance
was adequately explained by petitioner.
As we pronounced in BPI-Family Savings Bank, Inc. vs. Court of
Appeals:62
…Technicalities and legalisms, however exalted, should not be
misused by the government to keep money not belonging to it and
thereby enrich itself at the expense of its law-abiding citizens. If the
State expects its taxpayers to observe fairness and honesty in
paying their taxes, so must it apply the same standard against itself
in refunding excess payments of such taxes. Indeed, the State must
lead by its own example of honor, dignity and uprightness.63
WHEREFORE, the petition is GRANTED. The assailed resolution is
SET ASIDE and the case REMANDED to the Court of Tax Appeals
for the reception of evidence, particularly invoices supporting the
schedules of petroleum products sold and delivered to petitioner by
Petron and the corresponding certification of an independent
Certified Public Accountant, for the proper and immediate
determination of the amount to be refunded to petitioner.
SO ORDERED.
CIR v. FORTUNE TOBACCO
XXX

REQUISITES
CONDITIONS FOR GRANT
CIR v. PERF REALTY CORPORATION
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 163345             July 4, 2008
COMMISSIONER OF INTERNAL REVENUE, petitioners, 
vs.
PERF REALTY CORPORATION, respondent.
DECISION
REYES, R.T., J.:
FOR Our review on certiorari is the Decision1 of the Court of Appeals
(CA) granting the claim for refund of respondent PERF Realty
Corporation (PERF) for creditable withholding tax for the year 1997.
Facts
Petitioner Commissioner is the head of the Bureau of Internal
Revenue (BIR) whose principal duty is to assess and collect internal
revenue taxes. Respondent PERF is a domestic corporation
engaged in the business of leasing properties to various clients
including the Philippine American Life and General Insurance
Company (Philamlife) and Read-Rite Philippines (Read-Rite).
On April 14, 1998, PERF filed its Annual Income Tax Return (ITR)
for the year 1997 showing a net taxable income in the amount
of P6,430,345.00 and income tax due of P2,250,621.00.
For the year 1997, its tenants, Philamlife and Read-Rite, withheld
and subsequently remitted creditable withholding taxes in the total
amount of P3,531,125.00.
After deducting creditable withholding taxes in the total amount
of P3,531,125.00 from its total income tax due of P2,250,621.00,
PERF showed in its 1997 ITR an overpayment of income taxes in
the amount of P1,280,504.00.
On November 3, 1999, PERF filed an administrative claim with the
appellate division of the BIR for refund of overpaid income taxes in
the amount of P1,280,504.00.
On December 3, 1999, due to the inaction of the BIR, PERF filed a
petition for review with the Court of Tax Appeals (CTA) seeking for
the refund of the overpaid income taxes in the amount
of P1,280,504.00.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 90
COMPILATION OF CASES
CTA Disposition
In a Decision dated November 20, 2001, the CTA denied the petition
of PERF on the ground of insufficiency of evidence. The CTA noted
that PERF did not indicate in its 1997 ITR the option to either claim
the excess income tax as a refund or tax credit pursuant to Section
692 (now 76) of the National Internal Revenue Code (NIRC)
Further, the CTA likewise found that PERF failed to present in
evidence its 1998 annual ITR. It held that the failure of PERF to
signify its option on whether to claim for refund or opt for an
automatic tax credit and to present its 1998 ITR left the Court with
no way to determine with certainty whether or not PERF has applied
or credited the refundable amount sought for in its administrative
and judicial claims for refund.
PERF moved for reconsideration attaching to its motion its 1998
ITR. The motion was, however, denied by the CTA in its Resolution
dated March 26, 2002.
Aggrieved by the decision of the CTA, PERF filed a petition for
review with the CA under Rule 43 of the Rules of Court.
CA Disposition
In a Decision dated July 18, 2003, the CA ruled in favor of PERF,
disposing as follows:
WHEREFORE, the petition is hereby GRANTED. The assailed
Decision dated November 20, 2001, and Resolution of March 26,
2002 of the Court of Tax Appeals are SET ASIDE. The
Commissioner of Internal Revenue is ordered to REFUND to the
petitioner the amount of P1,280,504.00 as creditable withholding tax
for the year 1997.
SO ORDERED.3
According to the appellate court, even if the taxpayer has indicated
its option for refund or tax credit in its ITR, it does not mean that it
will automatically be entitled to either option since the Commissioner
of Internal Revenue (CIR) must be given the opportunity to
investigate and confirm the veracity of the claim. Thus, there is still a
need to file a claim for refund.
As to the failure of PERF to present its 1998 ITR, the CA observed
that there is no need to rule on its admissibility since the CTA
already held that PERF had complied with the requisites for applying
for a tax refund. The sole purpose of requiring the presentation of
PERF's 1998 ITR is to verify whether or not PERF had carried over
the 1997 excess income tax claimed for refund to the year 1998.
The verification process is not incumbent upon PERF; rather, it is
the duty of the BIR to disprove the taxpayer's claim.
The CIR filed a motion for reconsideration which was subsequently
denied by the CA. Thus, this appeal to Us under Rule 45.

Issues
Petitioner submits the following assignment:
I. THE COURT OF APPEALS ERRED IN GRANTING
RESPONDENT'S TAX REFUND CONSIDERING THE LATTER'S
FAILURE TO SUBSTANTIALLY ESTABLISH ITS CLAIM FOR
REFUND.
II. THE COURT OF APPEALS ERRED IN CONSIDERING
RESPONDENT'S ANNUAL CORPORATE INCOME TAX RETURN
FOR 1998 NOTWITHSTANDING THAT IT WAS NOT FORMALLY
OFFERED IN EVIDENCE.4(Underscoring supplied)
Our Ruling
We rule in favor of respondent.
I. Respondent substantially complied with the requisites for
claim of refund.
The CTA, citing Section 10 of Revenue Regulations 6-85 and
Citibank, N.A. v. Court of Appeals, 5 determined the requisites for a
claim for refund, thus:
1) That the claim for refund was filed within the two (2) year period
as prescribed under Section 230 of the National Internal Revenue
Code;
2) That the income upon which the taxes were withheld were
included in the return of the recipient;
3) That the fact of withholding is established by a copy of a
statement (BIR Form 1743.1) duly issued by the payor (withholding
agent) to the payee, showing the amount paid and the amount of tax
withheld therefrom.6
We find that PERF filed its administrative and judicial claims for
refund on November 3, 1999 and December 3, 1999, respectively,
which are within the two-year prescriptive period under Section 230
(now 229) of the National Internal Tax Code.
The CTA noted that based on the records, PERF presented
certificates of creditable withholding tax at source reflecting
creditable withholding taxes in the amount of P4,153,604.18
withheld from PERF's rental income of P83,072,076.81 (Exhibits B,
C, D, E, and H). In addition, it submitted in evidence the Monthly
Remittance Returns of its withholding agents to prove the fact of
remittance of said taxes to the BIR. Although the certificates of
creditable withholding tax at source for 1997 reflected a total amount
of P4,153,604.18 corresponding to the rental income
of P83,072,076.81, PERF is claiming only the amount
of P3,531,125.00 pertaining to a rental income of P70,813,079.00.
The amount of P3,531,125.00 less the income tax due of PERF
of P2,250,621.00 leaves the refundable amount of P1,280,504.00.
It is settled that findings of fact of the CTA are entitled to great
weight and will not be disturbed on appeal unless it is shown that the
lower courts committed gross error in the appreciation of facts. We
see no cogent reason not to apply the same principle here.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 91
COMPILATION OF CASES
II. The failure of respondent to indicate its option in its annual
ITR to avail itself of either the tax refund or tax credit is not fatal
to its claim for refund.
Respondent PERF did not indicate in its 1997 ITR the option
whether to request a refund or claim the excess withholding tax as
tax credit for the succeeding taxable year.
Citing Section 76 of the NIRC, the CIR opines that such failure is
fatal to PERF's claim for refund.
We do not agree.
In Philam Asset Management, Inc. v. Commissioner of Internal
Revenue,7 the Court had occasion to trace the history of the Final
Adjustment Return found in Section 69 (now 76) of the NIRC. Thus:
The provision on the final adjustment return (FAR) was originally
found in Section 69 of Presidential Decree (PD) No. 1158, otherwise
known as the "National Internal Revenue Code of 1977." On August
1, 1980, this provision was restated as Section 86 in PD 1705.
On November 5, 1985, all prior amendments and those introduced
by PD 1994 were codified into the National Internal Revenue Code
(NIRC) of 1985, as a result of which Section 86 was renumbered as
Section 79.
On July 31, 1986, Section 24 of Executive Order (EO) No. 37
changed all "net income" phrases appearing in Title II of the NIRC of
1977 to "taxable income." Section 79 of the NIRC of 1985, however,
was not amended.
On July 25, 1987, EO 273 renumbered Section 86 of the NIRC as
Section 76, which was also rearranged to fall under Chapter of Title
II of the NIRC. Section 79, which had earlier been renumbered by
PD 1994, remained unchanged.
Thus, Section 69 of the NIRC of 1977 was renumbered as Section
86 under PD 1705; later, as Section 79 under PD 1994; then, as
Section 76 under EO 273. Finally, after being renumbered and
reduced to the chaff of a grain, Section 69 was repealed by EO 37.
Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of
1997 as Section 76, which reads:
"Section 76. Final Adjustment Return. - Every corporation liable to
tax under Section 24 shall file a final adjustment return covering the
total net income for the preceding calendar or fiscal year. If the sum
of the quarterly tax payments made during the said taxable year is
not equal to the total tax due on the entire taxable net income of that
year the corporation shall either:
"(a) Pay the excess tax still due; or
"(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess
estimated quarterly income taxes paid, the refundable amount
shown on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters of
the succeeding taxable year."8

Section 76 offers two options: (1) filing for tax refund and (2) availing
of tax credit. The two options are alternative and the choice of one
precludes the other. However, in Philam Asset Management, Inc. v.
Commissioner of Internal Revenue,9 the Court ruled that failure to
indicate a choice, however, will not bar a valid request for a refund,
should this option be chosen by the taxpayer later on. The
requirement is only for the purpose of easing tax administration
particularly the self-assessment and collection aspects. Thus:
These two options under Section 76 are alternative in nature. The
choice of one precludes the other. Indeed, in Philippine Bank of
Communications v. Commissioner of Internal Revenue, the Court
ruled that a corporation must signify its intention - whether to request
a tax refund or claim a tax credit - by marking the corresponding
option box provided in the FAR. While a taxpayer is required to mark
its choice in the form provided by the BIR, this requirement is only
for the purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at the same time for the
same excess income taxes paid. Failure to signify one's intention in
the FAR does not mean outright barring of a valid request for a
refund, should one still choose this option later on. A tax credit
should be construed merely as an alternative remedy to a tax refund
under Section 76, subject to prior verification and approval by
respondent.
The reason for requiring that a choice be made in the FAR upon its
filing is to ease tax administration, particularly the self-assessment
and collection aspects. A taxpayer that makes a choice expresses
certainty or preference and thus demonstrates clear diligence.
Conversely, a taxpayer that makes no choice expresses uncertainty
or lack of preference and hence shows simple negligence or plain
oversight.
xxxx
Third, there is no automatic grant of a tax refund. As a matter of
procedure, the BIR should be given the opportunity "to investigate
and confirm the veracity" of a taxpayer's claim, before it grants the
refund. Exercising the option for a tax refund or a tax credit does not
ipso facto confer upon a taxpayer the right to an immediate
availment of the choice made. Neither does it impose a duty on the
government to allow tax collection to be at the sole control of a
taxpayer.
Fourth, the BIR ought to have on file its own copies of petitioner's
FAR for the succeeding year, on the basis of which it could rebut the
assertion that there was a subsequent credit of the excess income
tax payments for the previous year. Its failure to present this vital
document to support its contention against the grant of a tax
refund to petitioner is certainly fatal.
Fifth, the CTA should have taken judicial notice of the fact of filing
and the pendency of petitioner's subsequent claim for a refund of
excess creditable taxes withheld for 1998. The existence of the
claim ought to be known by reason of its judicial functions.
Furthermore, it is decisive to and will easily resolve the material
issue in this case. If only judicial notice were taken earlier, the fact
that there was no carry-over of the excess creditable taxes withheld
for 1997 would have already been crystal clear.
Sixth, the Tax Code allows the refund of taxes to a taxpayer that
claims it in writing within two years after payment of the taxes
erroneously received by the BIR. Despite the failure of petitioner to
make the appropriate marking in the BIR form, the filing of its written
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 92
COMPILATION OF CASES
claim effectively serves as an expression of its choice to request
a tax refund, instead of a tax credit. To assert that any future claim
for a tax refund will be instantly hindered by a failure to signify one's
intention in the FAR is to render nugatory the clear provision that
allows for a two-year prescriptive period.
In fact, in BPI-Family Savings Bank v. CA, this Court even ordered
the refund of a taxpayer's excess creditable taxes, despite the
express declaration in the FAR to apply the excess to the
succeeding year. When circumstances show that a choice of tax
credit has been made, it should be respected. But when indubitable
circumstances clearly show that another choice - a tax refund - is in
order, it should be granted. "Technicalities and legalisms, however
exalted, should not be misused by the government to keep money
not belonging to it and thereby enrich itself at the expense of its law-
abiding citizens."
In the present case, although petitioner did not mark the refund box
in its 1997 FAR, neither did it perform any act indicating that it chose
a tax credit. On the contrary, it filed on September 11, 1998, an
administrative claim for the refund of its excess taxes withheld in
1997. In none of its quarterly returns for 1998 did it apply the excess
creditable taxes. Under these circumstances, petitioner is entitled to
a tax refund of its 1997 excess tax credits in the amount
of P522,092.10
In this case, PERF did not mark the refund box in its 1997 FAR.
Neither did it perform any act indicating that it chose tax credit. In
fact, in its 1998 ITR, PERF left blank the portion "Less: Tax Credit/
Payments." That action coupled with the filing of a claim for refund
indicates that PERF opted to claim a refund. Under these
circumstances, PERF is entitled to a refund of its 1997 excess tax
credits in the amount of P1,280,504.00.
III. The failure of respondent to present in evidence the 1998
ITR is not fatal to its claim for refund.
The CIR takes the view that the CA erred in considering the 1998
ITR of PERF. It was not formally offered in evidence. Section 34,
Rule 132 of the Revised Rules of Court states that the court shall
consider no evidence which has not been formally offered.
The reasoning is specious.
PERF attached its 1998 ITR to its motion for reconsideration. The
1998 ITR is a part of the records of the case and clearly showed that
income taxes in the amount of P1,280,504.00 were not claimed as
tax credit in 1998.
In Filinvest Development Corporation v. Commissioner of Internal
Revenue,11 the Court held that the 1997 ITR attached to the motion
for reconsideration is part of the records of that case and cannot be
simply ignored by the CTA. Moreover, technicalities should not be
used to defeat substantive rights, especially those that have been
held as a matter of right. We quote:
In the proceedings before the CTA, petitioner presented in evidence
its letter of claim for refund before the BIR to show that it was made
within the two-year reglementary period; its Income Tax Returns for
the years 1995 and 1996 to prove its total creditable withholding tax
and the fact that the amounts were declared as part of its gross
income; and several certificates of income tax withheld at source
corresponding to the period of claim to prove the total amount of the
taxes erroneously withheld. More importantly, petitioner attached its
1997 Income Tax Return to its Motion for Reconsideration, making

the same part of the records of the case. The CTA cannot simply
ignore this document.1avvphi1
Thus, we hold that petitioner has complied with all the requirements
to prove its claim for tax refund. The CA, therefore, erred in denying
the petition for review of the CTA's denial of petitioner's claim for tax
refund on the ground that it failed to present its 1997 Income Tax
Return.
The CA's reliance on Rule 132, Section 34 26 of the Rules on
Evidence is misplaced. This provision must be taken in the light
of Republic Act No. 1125, as amended, the law creating the
CTA, which provides that proceedings therein shall not be
governed strictly by technical rules of evidence. Moreover, this
Court has held time and again that technicalities should not be
used to defeat substantive rights, especially those that have
been established as a matter of fact.
xxxx
We must also point out that, simply by exercising the CIR's power to
examine and verify petitioner's claim for tax exemption as granted by
law, respondent CIR could have easily verified petitioner's claim by
presenting the latter's 1997 Income Tax Return, the original of which
it has in its files. However, records show that in the proceedings
before the CTA, respondent CIR failed to comment on petitioner's
formal offer of evidence, waived its right to present its own evidence,
and failed to file its memorandum. Neither did it file an opposition to
petitioner's motion to reconsider the CTA decision to which the 1997
Income Tax Return was appended.
That no one shall unjustly enrich oneself at the expense of another
is a long-standing principle prevailing in our legal system. This
applies not only to individuals but to the State as well. In the field of
taxation where the State exacts strict compliance upon its citizens,
the State must likewise deal with taxpayers with fairness and
honesty. The harsh power of taxation must be tempered with even
handedness. Hence, under the principle of solutio indebiti, the
Government has to restore to petitioner the sums representing
erroneous payments of taxes.12
Further, We sustain the CA that there is no need to rule on the issue
of the admissibility of the 1998 ITR since the CTA ruled that PERF
already complied with the requisites of applying for a tax refund. The
verification process is not incumbent on PERF; it is the duty of the
CIR to verify whether or not PERF had carried over the 1997 excess
income taxes.
WHEREFORE, the petition is DENIED for lack of merit.
SO ORDERED.
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 93
COMPILATION OF CASES
CASES
MITSUBISHI v. CIR
FIRST DIVISION
G.R. No. 175772 June 5, 2017
MITSUBISHI CORPORATION - MANILA BRANCH, Petitioner 
vs
COMMISSIONER OF INTERNAL REVENUE, Respondent
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari  1 are the Decision 2 3 .
dated May 24, 2006 and the Resolution dated December 4, 2006 of
the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 5,
reversing the CTA Division's ruling 4 in CTA Case No. 6139 which
granted the claim for refund of erroneously paid income tax and
branch profit remittance tax (BPRT; collectively, subject taxes) filed
by petitioner Mitsubishi Corporation - Manila Branch (petitioner) for
the fiscal year that ended on March 31, 1998.
The Facts
On June 11, 1987, the governments of Japan and the Philippines
executed an Exchange of Notes, 5 whereby the former agreed to
extend a loan amounting to Forty Billion Four Hundred Million
Japanese Yen (¥40,400,000,000) to the latter through the then
Overseas Economic Cooperation Fund (OECF, now Japan Bank for
International Cooperation) for the implementation of the Calaca II
Coal-Fired Thermal Power Plant Project (Project). 6 In Paragraph 5
(2) of the Exchange of Notes, the Philippine Government, by itself or
through its executing agency, undertook to assume all taxes
imposed by the Philippines on Japanese contractors engaged in the
Project:
(2) The Government of the Republic of the Philippines
will, itself or through its executing agencies or instrumentalities,
assume all fiscal levies or taxes imposed in the Republic of the
Philippines on Japanese firms and nationals operating as suppliers,
contractors or consultants on and/or in connection with any
income that may accrue from the supply of products of Japan and
services of Japanese nationals to be provided under the
Loan. 7 (Emphases, underscoring, and italics supplied)
Consequently, the OECF and the Philippine Government entered
into Loan Agreement No. PH-P76 8 dated September 25, 1987 for
Forty Billion Four Hundred Million Japanese Yen (¥40,400,000,000).
Due to the need for additional funding for the Project, they also
executed Loan Agreement No. PH-P141 9 dated December 20, 1994
for Five Billion Five Hundred Thirteen Million Japanese Yen
(¥5,513,000,000). 10
Meanwhile, on June 21, 1991, the National Power Corporation
(NPC), as the executing government agency, entered into a contract
with Mitsubishi Corporation (i.e., petitioner's head office in Japan) for
the engineering, supply, construction, installation, testing, and
commissioning of a steam generator, auxiliaries, and associated civil
works for the Project (Contract). 11 The Contract's foreign currency

portion was funded by the OECF loans. 12 In line with the Exchange
of Notes, Article VIII (B) (1) of the Contract indicated NPC' s
undertaking to pay any and all forms of taxes that are directly
imposable under the Contract:
Article VIII (B) (1)
B. FOR ONSHORE PORTION.
1.) [The] CORPORATION (NPC) shall, subject to the provisions
under the Contract [Document] on Taxes, pay any and all forms of
taxes which are directly imposable under the Contract including
VAT, that may be imposed by the Philippine Government, or any of
its agencies and political subdivisions. 13(Emphases supplied)
Petitioner completed the project on December 2, 1995, but it was
only accepted by NPC on January 31, 1998 through a Certificate of
Completion and Final Acceptance. 14
On July 15, 1998, petitioner filed its Income Tax Return for the fiscal
year that ended on March 31, 1998 with the Bureau of Internal
Revenue (BIR). Petitioner included in its income tax due 15 the
amount of ₱44,288,712.00, representing income from the OECF-
funded portion of the Project. 16 On the same day, petitioner also
filed its Monthly Remittance Return of Income Taxes Withheld and
remitted ₱8,324,100.00 as BPRT for branch profits remitted to its
head office in Japan out of its income for the fiscal year that ended
on March 31, 1998 .17
On June 30, 2000, petitioner filed with the respondent Commissioner
on Internal Revenue (CIR) an administrative claim for refund of Fifty
Two Million Six Hundred Twelve Thousand, Eight Hundred Twelve
Pesos (P52,612,812.00), representing the erroneously paid amounts
of P44,288,712.00 as income tax and ₱8,324,100.00 as BPRT
corresponding to the OECF-funded portion of the Project. 18 To
suspend the running of the two-year period to file a judicial claim for
refund, petitioner filed on July 13, 2000 a petition for review 19 before
the CTA pursuant to Section 229 of the National Internal Revenue
Code (NIRC), which was docketed as C.T.A. Case No.
6139. 20 Petitioner anchored its claim for refund on BIR Ruling No.
DA-407-98 dated September 7, 1998, 21 which interpreted paragraph
5 (2) of the Exchange of Notes, to wit:
In reply, please be informed that the aforequoted provisions of
Notes-NAIA and Notes-Calaca are not grants of direct tax exemption
privilege to Japanese firms, Mitsubishi in this case, and Japanese
nationals operating as suppliers, contractors or consultants involved
in either of the two projects because the said provisions state that it
is the Government of the Republic of the Philippines that is obligated
to pay whatever fiscal levies or taxes they may be liable to. Thus,
there is no tax exemption to speak of because the said taxes shall
be assumed by the Philippine Government; hence, the said
provision is not violative of the Constitutional prohibition against the
grants of tax exemption without the concurrence of the majority of
the members of Congress. (Citation omitted)
In view thereof, x x x, this office is of the opinion and hereby holds
that Mitsubishi has no liability for income tax and other taxes and
fiscal levies, including VAT, on the 75% of the NAIA II Project and on
the 100% of the foreign currency portion of the Calaca II Project
since the said taxes were assumed by the Philippine Government.22
(Emphases and underscoring supplied)
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 94
COMPILATION OF CASES
In a Decision 23 dated December 17, 2003, the CTA Division granted
the petition and ordered the CIR to refund to petitioner the amounts
it erroneously paid as income tax and BPRT. 24 It held that based on
the Exchange of Notes, the Philippine Government, through the
NPC as its executing agency, bound itself to assume or shoulder
petitioner's tax obligations. Therefore, petitioner's payments of
income tax and BPR T to the CIR, when such payments should have
been made by the NPC, undoubtedly constitute erroneous payments
under Section 229 of the NIRC. 25
The CTA Division acknowledged that based on Revenue
Memorandum Circular (RMC) No. 42-99 dated June 2, 1999,
amending RMC No. 32-99, the proper remedy for a Japanese
contractor who previously paid the taxes directly to the BIR is to
recover or obtain a refund from the government executing agency -
the NPC in this case. It held, however, that RMC No. 42-99 does not
apply to petitioner as it filed its ITR on July 15, 1998 or almost a year
before the issuance of the same. It added that RMC No. 42-99
cannot be given retroactive effect as it would be unfair • • 26 to
petitioner.
The CIR moved for reconsideration27 but was denied in a
Resolution 28 dated April 23, 2004; thus, the CIR elevated the matter
to the CTA En Banc.  29
The CTA En Bane's Ruling
In a Decision 30 dated May 24, 2006, the CTA En Banc reversed the
CTA Division's rulings and declared that petitioner is not entitled to a
refund of the taxes it paid to the CIR. It held that, first, petitioner
failed to establish that its tax payments were "erroneous" under the
law to justify the refund, adding that the CIR has no power to grant a
refund under Section 229 of the NIRC absent any tax exemption. It
further observed that by its clear terms, the Exchange of Notes
granted no tax exemption to petitioner. 31 Second, the Exchange of
Notes cannot be read as a treaty validly granting tax exemption
considering the lack of Senate concurrence as required under Article
VII, Section 21 of the Constitution. 32 Third, RMC No. 42-99, which
was already in effect when petitioner filed its administrative claim for
refund on June 30, 2000, specifies petitioner's proper remedy - that
is, to recover the subject taxes from NPC, and not from the CIR.33
Petitioner sought reconsideration, 34 but the CTA En Banc denied
the motion in a Resolution 35 dated December 4, 2006; hence, this
petition.
The Issues Before the Court
The issues before the Court are two-fold: (a) whether petitioner is
entitled to a refund; and (b) if in the affirmative, from which
government entity should the refund be claimed.
The Court's Ruling
The petition is meritorious.
I. Sections 204 (C) of the NIRC grants the CIR the authority to credit
or refund taxes which are erroneously collected by the
government: 36
SEC.204. Authority of the Commissioner to Compromise, Abate,
and Refund or Credit Taxes. The Commissioner may –
x x xx

(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.
x x xx (Emphases and underscoring supplied)
The authority of the CIR to refund erroneously collected taxes 1s
likewise reflected in Section 229 of the NIRC, which reads: 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."
x x x x (Emphases and underscoring supplied)
In this case, it is fairly apparent that the subject taxes in the amount
of ₱52,612,812.00 was erroneously collected from petitioner,
considering that the obligation to pay the same had already been
assumed by the Philippine Government by virtue of its Exchange of
Notes with the Japanese Government. Case law explains that an
exchange of notes is considered as an executive agreement, which
is binding on the State even without Senate concurrence. In Abaya
v. Ebdane:37
An "exchange of notes" is a record of a routine agreement that has
many similarities with the private law contract. The agreement
consists of the exchange of two documents, each of the parties
being in the possession of the one signed by the representative of
the other. Under the usual procedure, the accepting State repeats
the text of the offering State to record its assent. The signatories of
the letters may be government Ministers, diplomats or departmental
heads. The technique of exchange of notes is frequently resorted to,
either because of its speedy procedure, or, sometimes, to avoid the
process of legislative approval.
It is stated that "treaties, agreements, conventions, charters,
protocols, declarations, memoranda of understanding, modus
vivendi and exchange of notes" all refer to "international instruments
binding at international law."
xxxx
Significantly, an exchange of notes is considered a form of an
executive agreement, which becomes binding through executive
action without the need of a vote by the Senate or Congress. 38
Paragraph 5 (2) of the Exchange of Notes provides for a tax
assumption provision whereby:
TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 95
COMPILATION OF CASES
(2) The Government of the Republic of the Philippines
will, itself or through its executing agencies or instrumentalities,
assume all fiscal levies or taxes imposed in the Republic of the
Philippines on Japanese firms and nationals operating as suppliers,
contractors or consultants on and/or in connection with any
income that may accrue from the supply of products of Japan and
services of Japanese nationals to be provided under the Loan.
(Emphases and underscoring supplied)
To "assume" means "[t]o take on, become bound as another is
bound, or put oneself in place of another as to an obligation or
liability."39 This means that the obligation or liability remains,
although the same is merely passed on to a different person. In this
light, the concept of an assumption is therefore different from an
exemption, the latter being the "[f]reedom from a duty, liability or
other requirement" or "[a] privilege given to a judgment debtor by
law, allowing the debtor to retain [a] certain property without
liability."40 Thus, contrary to the CTA En Bane's opinion, the
constitutional provisions on tax exemptions would not apply.
As explicitly worded, the Philippine Government, through its
executing agencies (i.e., NPC in this case) particularly assumed "all
fiscal levies or taxes imposed in the Republic of the Philippines on
Japanese firms and nationals operating as suppliers, contractors or
consultants on and/or in connection with any income that may
accrue from the supply of products of Japan and services of
Japanese nationals to be provided under the [OECF] Loan." The
Philippine Government's assumption of "all fiscal levies and taxes,"
which includes the subject taxes, is clearly a form of concession
given to Japanese suppliers, contractors or consultants in
consideration of the OECF Loan, which proceeds were used for the
implementation of the Project. As part of this, NPC entered into the
June 21, 1991 Contract with Mitsubishi Corporation (i.e., petitioner's
head office in Japan) for the engineering, supply, construction,
installation, testing, and commissioning of a steam generator,
auxiliaries, and associated civil works for the Project, 41which foreign
currency portion was funded by the OECF loans. 42 Thus, in line with
the tax assumption provision under the Exchange of Notes, Article
VIII (B) (1) of the Contract states that NPC shall pay any and all
forms of taxes that are directly imposable under the Contract:
Article VIII (B) (1)
B. FOR ONSHORE PORTION.
1.) [The] CORPORATION (NPC) shall, subject to the provisions
under the Contract [Document] on Taxes, pay any and all forms of
taxes which are directly imposable under the Contract including
VAT, that may be imposed by the Philippine Government, or any of
its agencies and political subdivisions.43(Emphases supplied)
This notwithstanding, petitioner included in its income tax due the
amount of ₱44,288,712.00, representing income from the OECF-
funded portion of the Project, and further remitted ₱8,324,100.00 as
BPRT for branch profits remitted to its head office in Japan out of its
income for the fiscal year that ended on March 31, 1998. 45 These
taxes clearly fall within the ambit of the tax assumption provision
under the Exchange of Notes, which was further fleshed out in the
Contract. Hence, it is the Philippine Government, through the NPC,
which should shoulder the payment of the same.
It bears stressing that the CIR had already acknowledged, through
its administrative issuances, that Japanese contractors involved in
the Project are not liable for the subject taxes. In RMC No. 42-99,
the CIR interpreted the effect of the tax assumption clause in the
Exchange of Notes on petitioner's tax liability, to wit:
 TAXATION 2 (Atty. Percy Valsan Jun Donalvo) 96
COMPILATION OF CASES

The foregoing provisions of the Exchange of Notes mean that the
Japanese contractors or nationals engaged in EOCF-funded
projects in the Philippines shall not be required to shoulder all fiscal
levies or taxes associated with the project. x x xx
xxxx
x x x Since the executing government agencies are mandated to
assume the payment of [income taxes] under the Exchange of
Notes, the said Japanese firms or nationals need not pay taxes due
thereunder.46 (Emphases and underscoring supplied)
The CIR subsequently affirmed petitioner's non-liability for taxes and
entitlement to tax refunds by issuing Revenue Memorandum Order
(RMO) No. 24-200547 addressed to specified BIR offices. The RMO
provides:
Pursuant to the provisions of [RMC] No. 32-99 as amended by RMC
No. 42-99, Japanese contractors and nationals engaged in OECF
funded projects in the Philippines shall not be required to shoulder
the fiscal levies or taxes associated with the project. Thus, the
concerned Japanese contractors are entitled to claim for the refund
of all taxes paid and shouldered by them relative to the conduct of
the Project.
You are, therefore, directed to expedite/ prioritize the processing of
the claims for refund of Japanese contractors and nationals so [as]
not to delay and jeopardize the release of the funds for OECF
funded projects.48 (Emphases and underscoring supplied)
Therefore, considering that petitioner paid the subject taxes in the
aggregate amount of ₱52,612,812.00, which it was not required to
pay, the BIR erroneously collected such amount. Accordingly,
petitioner is entitled to its refund.
As above-stated, the NIRC vests upon the CIR, being the head of
the BIR, the authority to credit or refund taxes which are erroneously
collected by the government. This specific statutory mandate cannot
be overridden by averse interpretations made through mere
administrative issuances, such as RMC No. 42-99, which - as
argued by the CIR - shifts to the executing agencies (particularly,
NPC in this case) the power to refund the subject taxes:49
3. In cases where income taxes were previously paid directly by the
Japanese contractors or nationals, the corresponding cash refund
shall be recovered from the government executing agencies upon
the presentation of proof of payment by the Japanese contractors or
nationals. 50 (Emphasis and underscoring supplied)
A revenue memorandum circular is an administrative ruling issued
by the CIR to interpret tax laws. It is widely accepted that an
interpretation by the executive officers, whose duty is to enforce the
law, is entitled to great respect from the courts. However, such
interpretation is not conclusive and will be disregarded if judicially
found to be incorrect.51 Verily, courts will not tolerate administrative
issuances that override, instead of remaining consistent and in
harmony with, the law they seek to implement, 52 as in this case.
Thus, Item B (3) of RMC No. 42-99, an administrative issuance
directing petitioner to claim the refund from NPC, cannot prevail over
Sections 204 and 229 of the NIRC, which provide that claims for
refund of erroneously collected taxes must be filed with the CIR.
All told, petitioner correctly filed its claim for tax refund under
Sections 204 and 229 of the NIRC to recover the erroneously paid
taxes amounting to ₱44,288,712.00 as income tax and
₱8,324,100.00 as BPRT from the BIR. To reiterate, petitioner's
entitlement to the refund is based on the tax assumption provision in
the Exchange of Notes. Given that this is a case of tax assumption
and not an exemption, the BIR is, therefore, not without recourse; it
can properly collect the subject taxes from the NPC 53 as the proper
party that assumed petitioner's tax liability.
WHEREFORE, the petition is GRANTED. The Decision dated May
24, 2006 and the Resolution dated December 4, 2006 of the Court of
Tax Appeals (CTA) En Banc in C.T.A. EB No. 5 are hereby
REVERSED and SET ASIDE. The Decision dated December 17,
2003 of the CTA in C.T.A. Case No. 6139 is REINSTATED.
SO ORDERED.

B) INCOME TAX

1. Japanese firms or nationals operating as suppliers, contractors or

consultants on and/or in connection with any income that accrue
from the supply of products and/or services to be provided under the
Project Loan, shall file the prescribed income tax returns. Since the
executing government agencies are mandated to assume the
payment thereof under the Exchange of Notes, the said Japanese
firms or nationals need not pay taxes thereunder.

2. The concerned Revenue District Officer shall, in turn, collect the

said income taxes from the concerned executing government
agencies.1âwphi1

3. In cases where income taxes were previously paid directly by the

Japanese contractors or nationals, the corresponding cash refund
shall be recovered from the government executing agencies upon
the presentation of proof of payment by the Japanese contractors or
nationals." (Emphasis and underscoring supplied)