WEEK 2

III. Remedies of the Government

A. Examination/ Investigation
a. Power to make assessments
i. Issuance of letter of Authority

SECOND DIVISION

G.R. No. 178697 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

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

THE FACTS:

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

DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)

Basic Tax Due P 7,958,700.00

Add: Penalties

Interest up to 3-31-2000 P 3,157,314.41

Compromise 25,000.00 3,182,314.41

Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING

TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)

Basic Tax Due P 1,416,976.90

Add: Penalties

Interest up to 3-31-2000 P 550,485.82

Compromise 25,000.00 575,485.82

Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY

PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)

Basic Tax Due P

Add: Penalties

Surcharge P 359,177.80

Interest up to 3-31-2000 87,580.34

Compromise 16,000.00 462,758.14

Penalties Due P 462,758.14

 LATE REMITTANCE OF FINAL
WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)

Basic Tax Due P

Add: Penalties

Surcharge P 1,729,690.71

Interest up to 3-31-2000 508,783.07

Compromise 50,000.00 2,288,473.78

Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME

PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)

Basic Tax Due P

Add: Penalties

25 % Surcharge P 8,865.34

Interest up to 3-31-2000 58.29

Compromise 2,000.00 10,923.60

Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.655

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

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

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the
said supporting documents to the CIR, Sony filed a petition for review before the CTA.7
After trial, the CTA-First Division disallowed the deficiency VAT assessment because
the subsidized advertising expense paid by Sony which was duly covered by a VAT
invoice resulted in an input VAT credit. As regards the EWT, the CTA-First Division
maintained the deficiency EWT assessment on Sony’s motor vehicles and on
professional fees paid to general professional partnerships. It also assessed the
amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however,
disallowed the EWT assessment on rental expense since it found that the total rental
deposit of ₱10,523,821.99 was incurred from January to March 1998 which was again
beyond the coverage of LOA 19734. Except for the compromise penalties, the CTA-
First Division also upheld the penalties for the late payment of VAT on royalties, for late
remittance of final withholding tax on royalty as of December 1997 and for the late
remittance of EWT by some of Sony’s branches.8 In sum, the CTA-First Division partly
granted Sony’s petition by cancelling the deficiency VAT assessment but upheld a
modified deficiency EWT assessment as well as the penalties. Thus, the dispositive
portion reads:

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

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

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

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

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20

3. EWT of Petitioner's Branches 8,923.63

Total P 1,269,593.90

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

SO ORDERED.9

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

A. The Honorable Court committed reversible error in holding that petitioner is

not liable for the deficiency VAT in the amount of ₱11,141,014.41;
 B. The Honorable court committed reversible error in holding that the commission
expense in the amount of P2,894,797.00 should be subjected to 5% withholding
tax instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the

withholding tax assessment with respect to the 5% withholding tax on rental
deposit in the amount of ₱10,523,821.99 should be cancelled; and

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

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

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

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

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

3. Whether or not the withholding assessment with respect to the 5% withholding

tax on rental deposit in the amount of ₱10,523,821.99 is proper; and

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

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

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

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.

II
AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE
AMOUNT OF PHP1,992,462.72:

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

EXPENSE IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE
SUBJECTED TO A WITHHOLDING TAX OF 5% INSTEAD OF THE 10%
TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT

WITH RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL
DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT PROPER.

III

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

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

The Court finds no merit in the petition.

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

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

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

Requirements for Tax Administration and Enforcement. –

(A)Examination of Returns and Determination of tax Due. – After a return has been filed
as required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of
the correct amount of tax: Provided, however, That failure to file a return shall not
prevent the Commissioner from authorizing the examination of any taxpayer. x x x
[Emphases supplied]
Clearly, there must be a grant of authority before any revenue officer can conduct an
examination or assessment. Equally important is that the revenue officer so authorized
must not go beyond the authority given. In the absence of such an authority, the
assessment or examination is a nullity.

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

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

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

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

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

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

The fact that due to adverse economic conditions, Sony-Singapore has granted to our
client a subsidy equivalent to the latter’s advertising expenses will not affect the validity
of the input taxes from such expenses. Thus, at the most, this is an additional income of
our client subject to income tax. We submit further that our client is not subject to VAT
on the subsidy income as this was not derived from the sale of goods or services.22

Insofar as the above-mentioned subsidy may be considered as income and, therefore,

subject to income tax, the Court agrees. However, the Court does not agree that the
same subsidy should be subject to the 10% VAT. To begin with, the said subsidy
termed by the CIR as reimbursement was not even exclusively earmarked for Sony’s
advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse
economic conditions, and was only "equivalent to the latter’s (Sony’s) advertising
expenses."

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

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

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

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

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

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

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

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

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs,
insurance, real estate and commercial brokers and agents of professional entertainers –
five per centum (5%).25

In denying the very same argument of the CIR in its motion for reconsideration, the
CTA-First Division, held:

x x x, commission expense is indeed subject to 10% withholding tax but payments

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

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

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

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

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

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

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

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

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

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

WHEREFORE, the petition is DENIED.

 MEDICARD PHILIPPINES, INC., petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.

G.R. No. 222743 | April 05, 2017 | 808 Phil. 528 | Third Division | Justice Reyes

Taxation | Absence of Letter of Authority | Value-Added Tax | Amounts Earmarked for

Payment to Third Parties

For purposes of determining the VAT liability of an HMO, the amounts earmarked for
payment to unrelated third (3rd) party (or received as reimbursement for advance
payment on behalf of another which do not redound to the benefit of the payor) should
not be included in the computation of its gross receipts.

FACTS:

Petitioner 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.
Petitioner filed its quarterly VAT Returns for 2006.
Respondent CIR found some discrepancies between Medicard’s ITR and VAT returns
and informed MEDICARD and issued a Letter Notice (LN). The CIR subsequently
issued PAN and FAN against Medicard. (~P196M deficiency):
Tax base of HMOs for VAT purposes should be gross receipts without any deduction
under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005.
Medicard protested that:
the processing fees amounting to P11.5 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
the professional fees in the amount of P11 Million should also be excluded because it
represents the amount of medical services actually and directly rendered by
MEDICARD and/or its subsidiary company;
Medicard explains that upon receipt of the membership fee it actually issues two official
receipts, one pertaining to the VATable portion – 20%, representing compensation
for its services, and the other represents the non-vatable portion pertaining to the
amount earmarked for medical utilization- 80%. Its taxable base with regards to VAT
should only be the 20%
Protest was denied. CTA affirmed with modification ruling of CIR:
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.
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 an HMO.
CTA Third Division – ordered petitioner Medicard Philippines, Inc. (MEDICARD), to
pay respondent Commissioner of Internal Revenue (CIR) the deficiency VAT)
assessment in the aggregate amount of ~P220M , plus 20% interest per annum.
CTA en banc – Affirmed with modification (some portion was taxed at 10% VAT instead
of 12% due to timing when incurred); MR denied
ISSUES:

(1) Whether the absence of LOA is fatal?

(2) 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%?

RULING:

1. Yes.

The absence of an LOA violated MEDICARD’s right to due process.

An LOA cannot be dispensed with just because none of the financial books or records
being physically kept by MEDICARD was examined. 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.

In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN
and FAN against MEDICARD. 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.

The CIR did not even dispute the applicability of the above provision of RMO No. 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.

2. No.

The amounts earmarked and eventually paid by MEDICARD to the medical service
providers do not form part of gross receipts for VAT purposes.
An HMO like MEDICARD is primarily engaged in 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, thus MEDICARD is principally
engaged in the sale of services and its VAT base and liability is covered by Sec 108 (A)
of the NIRC. Under the Code, the tax base was to be the gross receipts derived from
the sale or exchange of services.

The RRs provide for the definition of gross receipts:

Under RR No. 16-2005, an HMO’s gross receipts and gross receipts in general were
defined as 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 and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be
performed for another person, excluding value-added tax, and that 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.

Under RR No. 4-2007 which amended portions of RR No. 16-2005, including the
definition of gross receipts in general, adding the clause: except those amounts
earmarked for payment to unrelated third (3rd) party or received as reimbursement for
advance payment on behalf of another which do not redound to the benefit of the payor.

(A payment is a payment to a third (3rd) party if the same is made to settle an obligation
of another person, e.g., customer or client, to the said third party, which obligation is
evidenced by the sales invoice/official receipt issued by said third party to the
obligor/debtor).

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 services to be performed by another person, other than the taxpayer,
but even to amounts that were indisputably utilized not by MEDICARD itself but by the
medical service providers.

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.

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. 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.

Petition granted. CTA decision reversed, 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.

b. Power to obtain Information

i. Keeping of Books of Accounts
ii. Preservation of Books
iii. Examine any relevant books or documents
iv. Third party information

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
prescription10 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 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 Reconsideration24 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.

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 Pilipinas and 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
business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representatives 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; and

(E) To cause revenue officers and employees to make a canvass from time to time of
any revenue district or region and inquire after and concerning all persons therein who
may be liable to pay any internal revenue tax, and all persons owning or having the
care, management or possession of any object with respect to which a tax is imposed.

x x x x (Emphasis and underscoring supplied)

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 accept documents which cannot be admitted
in a judicial proceeding where the Rules of Court are strictly observed.33 To require the
consent of the taxpayer would defeat the intent of the law to help the BIR assess and
collect the correct amount of taxes.

Petitioner’s invocation of the rights of an accused in a criminal prosecution to cross

examine the witness against him and to have compulsory process issued to secure the
attendance of witnesses 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 it is related to
I.S. No. 2005-203, the respondents in the latter proceeding are the officers and
accountant of petitioner-corporation, not petitioner. From the complaint and supporting
affidavits in I.S. No. 2005-203, Sablan does not even appear to be a witness against the
respondents therein.34

AT ALL EVENTS, issuance of subpoena duces tecum for the production of the
documents requested by the petitioner – which documents petitioner claims to be
crucial to its defense35 – is unnecessary in view of the CTA order for respondent to
certify and forward to it all the records of the case.36 If the order has not been complied
with, the CTA can enforce it by citing respondent for indirect contempt.37

WHEREFORE, in light of the foregoing disquisition, the petition is DISMISSED.

Costs against petitioner.

v. Subpoena Duce Tecum and Ad Testificandum

vi. Best Evidence Obtainable

SECOND DIVISION

G.R. No. 81446 August 18, 1988

BONIFACIA SY PO, petitioner,

vs.
HONORABLE COURT OF TAX APPEALS AND HONORABLE COMMISSIONER OF
INTERNAL REVENUE, respondents.

Basilio E. Duaban for petitioner.

SARMIENTO, J.:
This is an appeal from the decision 1 of the respondent Court of Tax Appeals, dated
September 30,1987, which affirmed an earlier decision of the correspondent
Commissioner of Internal Revenue in assessment letters dated August 16, 1972 and
September 26, 1972, which ordered the payment by the petitioner of deficiency income
tax for 1966 to 1970 in the amount of P7,154,685.16 and deficiency specific tax for
January 2, 1964 to January 19, 1972, in the amount of P5,595,003.68.

We adopt the respondent court's finding of facts, to wit:

Petitioner is the widow of the late Mr. Po Bien Sing who died on
September 7, 1980. In the taxable years 1964 to 1972, the deceased Po
Bien Sing was the sole proprietor of Silver Cup Wine Factory (Silver Cup
for brevity), Talisay, Cebu. He was engaged in the business of
manufacture and sale of compounded liquors, using alcohol and other
ingredients as raw materials.

On the basis of a denunciation against Silver Cup allegedly "for tax

evasion amounting to millions of pesos" the then Secretary of Finance
Cesar Virata directed the Finance-BIR--NBI team constituted under
Finance Department Order No. 13-70 dated February 19, 1971 (Exh- 3,
pp. 532-553, Folder II, BIR rec.) to conduct the corresponding
investigation in a memorandum dated April 2, 1971 (p. 528, Folder II, BIR
rec.). Accordingly, a letter and a subpoena duces tecum dated April
13,1971 and May 3,1971, respectively, were issued against Silver Cup
requesting production of the accounting records and other related
documents for the examination of the team. (Exh. 11, pp. 525-526, Folder
II, BIR rec.). Mr. Po Bien Sing did not produce his books of accounts as
requested (Affidavit dated December 24, 1971 of Mr. Generoso. Quinain
of the team, p. 525, Folder H, BIR rec.). This prompted the team with the
assistance of the PC Company, Cebu City, to enter the factory bodega of
Silver Cup and seized different brands, consisting of 1,555 cases of
alcohol products. (Exh. 22, Memorandum Report of the Team dated June
5, 1971, pp. 491-492, Folder II, BIR rec.). The inventory lists of the seized
alcohol products are contained in Volumes I, II, III, IV and V (Exhibits 14,
15, 16, 17, and 18, respectively, BIR rec.). On the basis of the team's
report of investigation, the respondent Commissioner of Internal Revenue
assessed Mr. Po Bien Sing deficiency income tax for 1966 to 1970 in the
amount of P7,154,685.16 (Exh. 6 pp. 17-19, Folder I, BIR rec.) and for
deficiency specific tax for January 2,1964 to January 19, 1972 in the
amount of P5,595,003.68 (Exh. 8, p. 107, Folder I, BIR rec.).

Petitioner protested the deficiency assessments through letters dated

October 9 and October 30, 1972 (Exhs. 7 and 9, pp. 27-28; pp. 152-159,
respectively, BIR rec.), which protests were referred for reinvestigation.
The corresponding report dated August 13, 1981 (Exh. 1 0, pp. 355,
 Folder I, BIR rec.) recommended the reiteration of the assessments in
view of the taxpayer's persistent failure to present the books of accounts
for examination (Exh. 8, p. 107, Folder I, BIR rec.), compelling respondent
to issue warrants of distraint and levy on September 10, 1981 (Exh. 11, p.
361, Folder I, BIR rec.).

The warrants were admittedly received by petitioner on October 14, 1981

(Par. IX, Petition; admitted par. 2, Answer), which petitioner deemed
respondent's decision denying her protest on the subject assessments.
Hence, petitioner's appeal on October 29,1981. 2

The petitioner assigns the following errors:

RESPONDENT INTENTIONALLY ERRED IN HOLDING THAT PETITIONER HAS NOT

PRESENTED ANY EVIDENCE OF RELEVANCE AND COMPETENCE REQUIRED TO
BASH THE TROUBLING DISCREPANCIES AND SQUARE THE ISSUE OF
ILLEGALITY POSITED ON THE SUBJECT ASSESSMENTS.

II

RESPONDENT COURT OF TAX APPEALS PALPABLY ERRED IN DECIDING THE

CASE IN A WAY CONTRARY TO THE DOCTRINES ALREADY LAID DOWN BY THIS
COURT.

III

RESPONDENT COURT OF TAX APPEALS GRAVELY ERRED IN FINDING PO BEEN

SING TO HAVE INCURRED THE ALLEGED DEFICIENCY TAXES IN QUESTION. 3

We affirm.

Settled is the rule that the factual findings of the Court of Tax Appeals are binding upon
this Honorable Court and can only be disturbed on appeal if not supported by
substantial evidence.4

The assignments of errors boils down to a single issue previously raised before the
respondent Court, i.e., whether or not the assessments have valid and legal bases.

The applicable legal provision is Section 16(b) of the National Internal Revenue Code of
1977 as amended. It reads:

Sec. 16. Power of the Commissioner of Internal Revenue to make

assessments.—
 xxx xxx xxx

(b) Failure to submit required returns, statements, reports and other

documents. - When a report required by law as a basis for the assessment
of an 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 of Internal
Revenue 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 documents, 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.

The law is specific and clear. The rule on the "best evidence obtainable" applies when a
tax report required by law for the purpose of assessment is not available or when the
tax report is incomplete or fraudulent.

In the instant case, the persistent failure of the late Po Bien Sing and the herein
petitioner to present their books of accounts for examination for the taxable years
involved left the Commissioner of Internal Revenue no other legal option except to
resort to the power conferred upon him under Section 16 of the Tax Code.

The tax figures arrived at by the Commissioner of Internal Revenue are by no means
arbitrary. We reproduce the respondent court's findings, to wit:

As thus shown, on the basis of the quantity of bottles of wines seized

during the raid and the sworn statements of former employees Messrs.
Nelson S. Po and Alfonso Po taken on May 26, and 27,1971, respectively,
by the investigating team in Cebu City (Exhs. 4 and 5, pp. 514-517, pp.
511-513, Folder 11, BIR rec.), it was ascertained that the Silver Cup for
the years 1964 to 1970, inclusive, utilized and consumed in the
manufacture of compounded liquours and other products 20,105 drums of
alcohol as raw materials 81,288,787 proof liters of alcohol. As determined,
the total specific tax liability of the taxpayer for 1964 to 1971 amounted to
P5,593,003.68 (Exh. E, petition, p. 10, CTA rec.)

Likewise, the team found due from Silver Cup deficiency income taxes for
the years 1966 to 1970 inclusive in the aggregate sum of P7,154,685.16,
as follows:

1966 P207,636.24
 1967 645,335.04

1968 1,683,588.48

1969 1,589,622.48

1970 3,028,502.92

Total amount due.

and collectible P7,154,685.16

The 50% surcharge has been imposed, pursuant to Section 72 * of the Tax Code and
tax 1/2% monthly interest has likewise been imposed pursuant to the provision of
Section 51(d) ** of the Tax Code (Exh. O, petition). 5

The petitioner assails these assessments as wrong.

In the case of Collector of Internal Revenue vs. Reyes, 6 we ruled:

Where the taxpayer is appealing to the tax court on the ground that the
Collector's assessment is erroneous, it is incumbent upon him to prove
there what is the correct and just liability by a full and fair disclosure of all
pertinent data in his possession. Otherwise, if the taxpayer confines
himself to proving that the tax assessment is wrong, the tax court
proceedings would settle nothing, and the way would be left open for
subsequent assessments and appeals in interminable succession.

Tax assessments by tax examiners are presumed correct and made in good faith. The
taxpayer has the duty to prove otherwise. 7 In the absence of proof of any irregularities
in the performance of duties, an assessment duly made by a Bureau of Internal
Revenue examiner and approved by his superior officers will not be disturbed. 8 All
presumptions are in favor of the correctness of tax assessments. 9

On the whole, we find that the fraudulent acts detailed in the decision under review had
not been satisfactorily rebutted by the petitioner. There are indeed clear indications on
the part of the taxpayer to deprive the Government of the taxes due. The Assistant
Factory Superintendent of Silver Cup, Nelson Po gave the following testimony:

Annexes "A", "A-1 " to "A-17" show that from January to December 1970,
Silver Cup had used in production 189 drums of untaxed distilled alcohol
and 3,722 drums of untaxed distilled alcohol. Can you tell us how could
 this be possible with the presence of a revenue inspector in the premises
of Silver Cup during working hours?

Actually, the revenue inspector or storekeeper comes

around once a week on the average. Sometimes, when the
storekeeper is around in the morning and Po Bein Sing
wants to operate with untaxed alcohol as raw materials, Po
Bien Sing tells the storekeeper to go home because the
factory is not going to operate for the day. After the
storekeeper leaves, the illegal operation then begins.
Untaxed alcohol is brought in from Cebu Alcohol Plant into
the compound of Silver Cup sometimes at about 6:00 A.M.
or at 12:00 noon or in the evening or even at mid-night when
the storekeeper is not around. When the storekeeper comes,
he sees nothing because untaxed alcohol is brought directly
to, and stored at, a secret tunnel within the bodega itself
inside the compound of Silver Cup.

In the same vein, the factory personnel manager testified that false entries
were entered in the official register book: thus,

A — As factory personnel manager and all-around handy

man of Po Bien Sing, owner of Silver Cup, these labels were
entrusted to me to make the false entries in the official
register book of Silver Cup, which I did under the direction of
Po Bien Sing. (Sworn statement, p. 512, Folder II, BIR
rec.) 10 (Emphasis ours)

The existence of fraud as found by the respondents can not be lightly set aside absent
substantial evidence presented by the petitioner to counteract such finding. The findings
of fact of the respondent Court of Tax Appeals are entitled to the highest respect.11 We
do not find anything in the questioned decision that should disturb this long-established
doctrine.

WHEREFORE, the Petition is DENIED. The Decision of the respondent Court of Tax
Appeals is hereby AFFIRMED. Costs against the petitioner.

FIRST DIVISION
 [G.R. No. 96262. March 22, 1999]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. EMBROIDERY AND
GARMENTS INDUSTRIES (PHIL.), INC., Respondent.
DECISION
PARDO, J.:
1
The case is an appeal via certiorari from a decision of the Court of Appeals affirming
that of the Court of Tax Appeals2 absolving respondent from liability for deficiency
income tax and advance sales tax in the amounts of P2,756,241.68,
and P3,500,798.47, respectively, for the years 1959 to 1961.
The facts may be related as follows:
On September 22, 1964, on the basis of a sworn report of an informer, the Courts of
First Instance of Manila and Bulacan issued search warrants for the seizure of certain
documents from the offices of respondent Embroidery and Garments Industries (Phil.),
Inc. in Manila and Valenzuela, Bulacan. Armed with the warrants, agents of the Anti-
Technical Smuggling Unit, Bureau of Internal Revenue, seized various business records
and documents from respondents offices.
On January 4, 1966, petitioner assessed respondent the sum of P436,846.44, inclusive
of 75% surcharge and penalty as advance sales tax for the years 1959 to 1961 and, on
March 23, 1966, assessed deficiency income tax in the sum of P4,799.641.95, inclusive
of 50% surcharge and % monthly interest for the years 1960 and 1961.
Respondent protested the assessments, and on December 9, 1970, petitioner issued to
respondent a revised assessment requiring the latter to pay the amount
of P2,756,241.68, inclusive of 50% surcharge and % monthly interest as deficiency
income tax for the years 1959 to 1961. On December 22, 1970, petitioner required
respondent to pay P3,500,798.47, as advance sales tax and 75% surcharge
corresponding to the same years.
On January 7, 1971, respondent filed with the Bureau of Internal Revenue a protest
disputing the revised assessments and requesting further investigation. On the same
date, petitioner denied the protest.
On January 20, 1971, respondent requested petitioner to reconsider the denial of its
protest. On January 29, 1971, petitioner granted the request upon respondents
execution of a waiver of the statute of limitations.
On September 14, 1971, petitioner denied respondents protest on the disputed
assessments.
On October 14, 1971, respondent filed with the Court of Tax Appeals a petition for
review of the disputed tax assessments.
On March 29, 1972, respondent filed its answer to the petition praying for its dismissal.
On January 15, 1990, the Court of Tax Appeals rendered decision finding respondent
not liable for deficiency income tax and advance sales tax assessed against it,
accordingly, reversed the BIR decision. In its decision, the Court of Tax Appeals held
that the assessments were of doubtful validity as they were based on incompetent
evidence consisting of an informants report and the sworn statement of a disgruntled
former general manager of respondent that in the years in question respondent sold all
its dollar quotas to local Chinese textile traders at an overprice or premium on the dollar
value of textile importation of 80% for suiting materials and 70% for womens clothing
materials and faked its invoices to reduce its costs of importation. On the other hand,
respondent adduced evidence consisting of official records of the Bureau of Customs
that its tax-free importations had been re-exported to their suppliers in accordance with
the Embroidery Law and cleared by the Bureau of Customs. The tax court ruled that the
assessments must be based on actual facts and proved by competent evidence, not
imposed based on unverified information supplied by an informant, or disputed
presumptions.
On June 13, 1990, petitioner filed with the Court of Appeals a petition for review of the
decision of the Court of Tax Appeals.3cräläwvirtualibräry
On November 9, 1990, the Court of Appeals promulgated its decision affirming the
appealed decision of the tax court.4cräläwvirtualibräry
On December 4, 1990, petitioner filed a motion for reconsideration of the Court of
Appeals decision.
On February 7, 1991, the Court of Appeals denied the motion.5cräläwvirtualibräry
On March 18, 1991, within the extended time granted, petitioner filed with the Supreme
Court a petition for review on certiorari of the decision of the Court of
Appeals.6cräläwvirtualibräry
In the petition, the Commissioner of Internal Revenue submits that the Court of Appeals
erred:
(1) in not holding that respondent is liable for deficiency income tax and advance sales
tax in view of its failure to declare its income realized for the years 1959 to 1961 from
the sales of its dollar quota to local Chinese textile dealers at a premium of 70% to 80%
of the dollar value, which dollar quota rights were allocated by the Central Bank of the
Philippines to enable respondent to import tax-free textile raw materials to be
manufactured into finished products for re-export pursuant to the provisions of the
Embroidery Law (R.A. No. 3137), and
(2) in not holding that the imposition of 50% surcharge for fraud was legal and
justified.7cräläwvirtualibräry
The issues raised are clearly factual and must be resolved on the basis of the evidence
adduced before the tax court. The case tarried too long in the tax court. In the
meantime, the star witness had died, and the needed originals of documentary evidence
could no longer be located.
What is more, it is a fundamental rule that an appeal via certiorari from a decision of the
Court of Appeals to the Supreme Court may raise only questions of law, which must be
distinctly set forth.8 Findings of fact of the Court of Appeals and even of the tax court are
final, binding or conclusive on the parties9 and upon this Court,10 which will not be
reviewed11 or disturbed on appeal unless these findings are not supported by
evidence,12with certain well recognized exceptions, such as (1) when the conclusion is
grounded entirely on speculations13, surmises or conjectures; (2) when the inference
made is manifestly mistaken, absurd or impossible; (3) where there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the
findings of fact are conflicting; (6) when the Court of Appeals, in making its findings,
went beyond the issues of the case and the same is contrary to the admissions of both
appellant and appellee; (7) when the findings of the Court of Appeals are contrary to
those of the trial courts;14 (8) when the findings of fact are conclusions without citation of
specific evidence on which they are based; (9) when the Court of Appeals overlooked
certain relevant facts not disputed by the parties, which, if properly considered, would
justify a different conclusion; and (10) when the findings of fact of the Court of Appeals
are premised on the absence of evidence and are contradicted by the evidence on
record.15 This case does not come within any of the exceptions.
WHEREFORE, the Court hereby AFFIRMS the appealed decision of the Court of
Appeals in CA-G.R. SP No. 20813.

vii. Conduct of Surveillance

viii. Inquiry to Bank Accounts and Others
ix. Accreditation and Registration of Tax Agents
x. Criminal Prosecution

B. Assessments
a. Definition

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.
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 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.
In addition, what private respondents sent to the commissioner was a motion for a
reconsideration of the tax evasion charges filed, not of an assessment, as shown thus:
This is to request for reconsideration of the tax evasion charges against my client,
PASCOR Realty and Development Corporation 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
Additional Issues:
Assessment Not
Necessary Before Filing of
Criminal Complaint
Private respondents maintain that the filing of a criminal complaint must be preceded by
an assessment. This is incorrect, because 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 without an
assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil
and criminal aspects of the case may be pursued simultaneously. In Ungab v.
Cusi,20 petitioner therein sought the dismissal of the criminal Complaints for being
premature, 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 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 to file a criminal case against the taxpayer or to do both.
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 an assessment is not necessary before a criminal charge can be filed. This is the
general rule. Private respondents failed to show that 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 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.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED
and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No costs.

b. Procedure

COMMISSIONER OF INTERNAL REVENUE, Petitioner, -versus- METRO STAR

SUPERAMA, INC., Respondent
G.R. No. 185371, SECOND DIVISION, DECEMBER 8,
2010

FACTS:

On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente issued a

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

On April 11, 2002, Metro Star received a Formal Letter of Demand dated April 3, 2002
from Revenue District No. 67, Legazpi City, assessing Metro Star the amount of Two
Hundred Ninety Two Thousand Eight Hundred Seventy Four Pesos and Sixteen
Centavos (₱292,874.16.) for deficiency value-added and withholding taxes for the taxable
year 1999.
Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure
dated May 12, 2003, which Metro Star received on May 15, 2003, giving the latter last
opportunity to settle its deficiency tax liabilities within ten (10) [days] from receipt thereof,
otherwise respondent BIR shall be constrained to serve and execute the Warrants of
Distraint and/or Levy and Garnishment to enforce collection.

On February 6, 2004, Metro Star received from Revenue District Office No. 67 a Warrant
of Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding payment of
deficiency value-added tax and withholding tax payment in the amount of ₱292,874.16.
Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was
not accorded due process, Metro Star filed a petition for review with the CTA which ruled
in its favor.
Aggrieved, the CIR filed a petition for review with the CTA-En Banc, but the petition was
dismissed after a determination that no new matters were raised

ISSUE:

Whether failure to strictly comply with notice requirements prescribed under Section 228
of the National Internal Revenue Code of 1997 and Revenue Regulations (R.R.) No. 12-
99 tantamount to a denial of due process
RULING:

YES. Jurisprudence is replete with cases holding that if the taxpayer denies ever having
received an assessment from the BIR, it is incumbent upon the latter to prove by
competent evidence that such notice was indeed received by the addressee. The onus
probandi was shifted to respondent to prove by contrary evidence that the Petitioner
received the assessment in the due course of mail. The Supreme Court has consistently
held that while a mailed letter is deemed received by the addressee in the course of mail,
this is merely a disputable presumption subject to controversion and a direct denial
thereof shifts the burden to the party favored by the presumption to prove that the mailed
letter was indeed received by the addressee

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

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

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

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

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

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

deprived of property without due process of law. In balancing the scales between the
power of the State to tax and its inherent right to prosecute perceived transgressors of
the law on one side, and the constitutional rights of a citizen to due process of law and
the equal protection of the laws on the other, the scales must tilt in favor of the individual,
for a citizen’s right is amply protected by the Bill of Rights under the Constitution. Thus,
while "taxes are the lifeblood of the government," the power to tax has its limits, in spite
of all its plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc. it was said:
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government itself.
It is therefore necessary to reconcile the apparently conflicting interests of the authorities
and the taxpayers so that the real purpose of taxation, which is the promotion of the
common good, may be achieved.

Even as we concede the inevitability and indispensability of taxation, it is a requirement

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

THIRD DIVISION

G.R. No. 227544, November 22, 2017

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. TRANSITIONS

PHILIPPINES, OPTICAL INC., Respondent.

DECISION

LEONEN, J.:

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

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

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

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

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

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

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

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

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

issued against Transitions Optical a Final Assessment Notice (FAN) and a Formal
Letter of Demand (FLD) dated November 28, 2008 for deficiency income tax, value-
added tax, expanded withholding tax, and final tax for taxable year 2004 amounting to
P19,701,849.68.11

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

Years later, the Commissioner of Internal Revenue, through Regional Director Jose N.
Tan, issued a Final Decision on the Disputed Assessment dated January 24, 2012,
holding Transitions Optical liable for deficiency taxes in the total amount of
P19,701,849.68 for taxable year 2004, broken down as follows:

Tax Amount

Income Tax P 3,153,371.04

Value-Added Tax 1,231,393.47

Expanded Withholding Tax 175,339.51

Final Tax on Royalty 14,026,247.90

Final Tax on Interest Income 1,115,497.76

Total P 19,701,849.6813

On March 16, 2012, Transitions Optical filed a Petition for Review before the Court of
Tax Appeals.14

In her Answer, the Commissioner of Internal Revenue interposed that Transitions

Optical's claim of prescription was inappropriate because the executed Waiver of the
Defense of Prescription extended the assessment period. She added that the posting of
the FAN and FLD was within San Pablo City Post Office's exclusive control. She
averred that she could not be faulted if the FAN and FLD were posted for mailing only
on December 2, 2008 since November 28, 2008 fell on a Friday and the next supposed
working day, December 1, 2008, was declared a Special Holiday.15

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

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

WHEREFORE, in light of the foregoing considerations, the instant Petition for Review is
hereby GRANTED. Accordingly, the Final Assessment Notice, Formal Letter of Demand
and Final Decision on Disputed Assessment finding petitioner Transitions Optical
Philippines, Inc. liable for deficiency income tax, deficiency expanded withholding tax,
deficiency value-added tax and de1iciency final tax for taxable year 2004 in the total
amount of P19,701,849.68 are hereby CANCELLED and SET ASIDE.

SO ORDERED.17 (Emphasis in the original)

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

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

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

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

Furthermore, petitioner argues that the assessment required to be issued within the
three (3)-year period provided in Sections 203 and 222 of the National Internal Revenue
Code refer to petitioner's actual issuance of the notice of assessment to the taxpayer or
what is usually known as PAN, and not the FAN issued in case the taxpayer files a
protest.25

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

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

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

The issues for this Court's resolution are:

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

Second, whether or not the assessment of deficiency taxes against respondent

Transitions Optical Philippines, Inc. for taxable year 2004 had prescribed.

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

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

Section 203. Period of Limitation Upon Assessment and Collection. — Except as

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

An exception to the rule of prescription is found in Section 222(b) and (d) of this
Code, viz:
Section 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes. —

....

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

....

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

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

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

The Court of Tax Appeals, both its First Division and En Banc, declared as defective
and void the two (2) Waivers of the Defense of Prescription for non-compliance with the
requirements for the proper execution of a waiver as provided in RMO No. 20-90 and
RDAO No. 05-01. Specifically, the Court of Tax Appeals found that these Waivers were
not accompanied by a notarized written authority from respondent, authorizing the so-
called representatives to act on its behalf. Likewise, neither the Revenue District Office's
acceptance date nor respondent's receipt of the Bureau of Internal Revenue's
acceptance was indicated in either document.34

However, Presiding Justice Roman G. Del Rosario (Justice Del Rosario) in his Separate
Concurring Opinion35 in the Court of Tax Appeals June 7, 2016 Decision, found that
respondent is estopped from claiming that the waivers were invalid by reason of its own
actions, which persuaded the government to postpone the issuance of the assessment.
He discussed:

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

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

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

Communications Phils., Inc.),37 this Court recognized the doctrine of estoppel and
upheld the waivers when both the taxpayer and the Bureau of Internal Revenue were in
pari delicto. The taxpayer's act of impugning its waivers after benefitting from them was
considered an act of bad faith:

In this case, respondent, after deliberately executing defective waivers, raised the ve1y
same deficiencies it caused to avoid the tax liability determined by the BIR during the
extended assessment period. It must be remembered that by virtue of these Waivers,
respondent was given the opportunity to gather and submit documents to substantiate
its claims before the [Commissioner of Internal Revenue] during investigation. It was
able to postpone the payment of taxes, as well as contest and negotiate the
assessment against it. Yet, after enjoying these benefits, respondent challenged the
validity of the Waivers when the consequences thereof were not in its favor. In other
words, respondent's act of impugning these Waivers after benefiting therefrom and
allowing petitioner to rely on the same is an act of bad faith.38

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

Respondent executed five Waivers and delivered them to petitioner, one after the other.
It allowed petitioner to rely on them and did not raise any objection against their validity
until petitioner assessed taxes and penalties against it. Moreover, the application of
estoppel is necessary to prevent the undue injury that the government would suffer
because of the cancellation of petitioner's assessment of respondent's tax
liabilities.39 (Emphasis in the original)

Parenthetically, this Court stated that when both parties continued to deal with each
other in spite of knowing and without rectifying the defects of the waivers, their situation
is "dangerous and open to abuse by unscrupulous taxpayers who intend to escape their
responsibility to pay taxes by mere expedient of hiding behind technicalities."40

Estoppel similarly applies in this case

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

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

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

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

II

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

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

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

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

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

Considering the functions and effects of a PAN vis à vis a FAN, it is clear that the
assessment contemp1ated in Sections 203 and 222 of the National Internal Revenue
Code refers to the service of the FAN upon the taxpayer.

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

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

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

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

SECOND DIVISION

G.R. No. 210604, June 03, 2019

MISNET, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT.

DECISION

REYES, J. JR., J.:

This resolves the Petition for Review on Certiorari from the Decision1 dated July 15,
2013 and Resolution2dated December 9, 2013 of the Court of Tax Appeals (CTA) En
Banc, in CTA EB Case No. 915.

On November 29, 2006, petitioner received a Preliminary Assessment Notice

(PAN)3 from respondent Commissioner of Internal Revenue (CIR) stating that after
examination, there was an alleged deficiency in taxes for taxable year 2003 amounting
to P11,329,803.61, representing the expanded withholding tax (EWT) and final
withholding VAT. Petitioner filed a letter-protest on the PAN.

Thereafter, on January 23, 2007, petitioner received a Formal Assessment Notice

(FAN)4 which states that petitioner's tax deficiency for the year 2003, amounted to
P11,580,749.31, inclusive of P25,000.00 Compromise Penalty. Thus:

Expanded
P
Withholding
1,781,873.55
Tax (EWT)

Final
Withholding 9,773,875.76
of VAT

SUBTOTAL 11,555,749.31

Add:
Compromise 25,000.00
Penalty

P
TOTAL
11,580,749.31

On February 9, 2007, petitioner paid the amount of P2,152.41 for certain undisputed
assessments.5 On the same day, petitioner administratively protested the FAN by filing
a request for reconsideration.6

The CIR acknowledged receipt of the payment and the protest letter and informed the
petitioner that its tax docket had been forwarded to Revenue District Officer (RDO) No.
049, North Makati.7 On May 28, 2007, the CIR informed petitioner that Revenue Officer
(RO) Josephine L. Paralejas has been authorized to verify the documents relative to its
request for reinvestigation and reiterated the previous assessment of petitioner's
deficiency taxes for taxable year 2003 in the amount of P11,580,749.31.8

On June 1, 2007, petitioner sent a letter to RO Josephine L. Paralejas reiterating its

protest to the PAN and the FAN.

On April 28, 2008, the CIR again wrote a letter to petitioner informing it that it found
additional deficiency taxes due.9 On May 8, 2008, petitioner protested this letter.

On March 28, 2011, petitioner received an Amended Assessment Notice reflecting an

amended deficiency EWT after reinvestigation. On the same date, petitioner received a
Final Decision on Disputed Assessment (FDDA) stating that after reinvestigation, there
was still due from petitioner the amount of P14,564,323.34, representing deficiency
taxes, broken down as follows:

Expanded
Withholding P 430,716.17
Tax

(with
Interest)

Final
Withholding 14,108,607.17
of VAT

(with 25%
Surcharge &
Interest)

Compromise
25,000.00
Penalty

P
TOTAL
14,564,323.34

This FDDA was received by petitioner on March 28, 2011.10

On April 8, 2011, petitioner filed a letter-reply11 to the Amended Assessment Notice and
FDDA, which was received by the CIR on April 11, 2011. On May 9, 2011, the CIR sent
a letter12 to petitioner which states in part that petitioner's letter-reply dated April 8, 2011
produced no legal effect since it availed of the improper remedy.13 It should have
appealed the final decision of the CIR to the Court of Tax Appeals within thirty (30) days
from the date of receipt of the said Decision, otherwise, the assessment became final,
executory and demandable.14

On May 27, 2011, petitioner filed a Petition for Relief from Judgment15 with respondent
Commissioner arguing that it was not able to file its proper appeal of the FDDA due to
its mistake and excusable negligence as it was not assisted by counsel. On June 29,
2011, petitioner received a Preliminary Collection Letter16 dated June 22, 2011, which is
deemed a denial of petitioner's Petition for Relief.17

On July 26, 2011, petitioner filed a Petition for Review18 docketed as CTA Case No.
8313, with the Court of Tax Appeals which was raffled to the First Division. Meanwhile,
the CIR filed a Motion to Dismiss the petition on the ground of lack of jurisdiction -
arguing that the assessment against petitioner has become final, executory and
demandable for its failure to file an appeal within the prescribed period of thirty (30)
days.

In a Resolution dated March 27, 2012,19 the CTA 181 Division granted CIR's Motion to
Dismiss. Petitioner filed a Motion for Reconsideration20 of the March 27, 2012
Resolution. On June 27, 2012, petitioner received from CTA 1st Division a Resolution
dated June 22, 201221 denying its Motion for Reconsideration.

On July 12, 2012, petitioner filed a Petition for Review (CTA EB Case No. 915) with the
CTA En Banc.

In a Decision dated July 15, 2013, the CTA En Banc dismissed petitioner's Petition for
Review on the ground of lack of jurisdiction as the lapse of the statutory period to
appeal rendered the subject deficiency taxes final, executory and demandable.22 On
August 6, 2013, petitioner filed a Motion for Reconsideration but the said Motion was
denied in a Resolution dated December 9, 2013.23

Dissatisfied, petitioner filed the instant Petition with this Court raising the lone issue that
-
THE HONORABLE COURT OF TAX APPEALS [EN BANC] GRAVELY ERRED IN
DISMISSING THE PETITION FOR REVIEW FOR LACK OF JURISDICTION,
BECAUSE IT THEREBY DISREGARDED THE REMEDY OF PETITION FOR RELIEF
IN TAX CASES, PURSUANT TO SECTION 3 OF RULE 1 OF THE REVISED RULES
OF THE COURT OF TAX APPEALS, SECTIONS 1 TO 3 OF RULE 38 OF THE RULES
OF COURT, AND THE RULING OF THE SUPREME COURT IN THE CASE OF
GESULGON [V.] NLRC.24
Otherwise stated, the issue obtaining in the instant case is whether or not the CTA En
Banc correctly dismissed petitioner's Petition for Review on the ground of lack of
jurisdiction.

Section 228 of the 1997 National Internal Revenue Code of the Philippines (NIRC)
which provides for the remedies of a taxpayer in case of an adverse final decision by
the CIR on Disputed Assessment, 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: x x x

xxxx

Within a period to be prescribed by implementing rules and regulations, the taxpayer

shall be required to respond to said notice. If the taxpayer fails to respond, the
Commissioner or his duly authorized representative shall issue an assessment based
on his findings.

Such assessment may be protested administratively by filing a request for

reconsideration or reinvestigation within thirty (30) days from receipt of the assessment
in such form and manner as may be prescribed by implementing rules and regulations.

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

If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by the
decision or inaction may appeal to the Court of Tax Appeals within (30) days from
receipt of the said decision, or from the lapse of the one hundred eighty (180)-day
period; otherwise, the decision shall become final, executory and demandable.
(Emphasis supplied)
It bears to stress that the perfection of an appeal within the statutory period is a
jurisdictional requirement and failure to do so renders the questioned decision or decree
final and executory and no longer subject to review.25

In the instant case, petitioner allegedly failed to observe the 30-day period within which
to appeal the final decision of the CIR to the CTA. As records would show, petitioner
admittedly received the FDDA on March 28, 2011. Reckoned from this date of receipt, it
has until April27, 2011, within which to appeal with the CTA. However, petitioner filed its
appeal (Petition for Review) only on July 26, 2011 or after the lapse of ninety-three (93)
days from its receipt of the FDDA. It appears that petitioner's filing of an appeal with the
CTA was beyond the statutory period to appeal.

Nonetheless, this Court has on several occasions relaxed this strict requirement. We
have on several instances allowed the filing of an appeal outside the period prescribed
by law in the interest of justice, and in the exercise of its equity jurisdiction.26 Thus:
x x x [F]or a party to seek exception for its failure to comply strictly with the statutory
requirements for perfecting its appeal, strong compelling reasons such as serving the
ends of justice and preventing a grave miscarriage thereof must be shown, in order to
warrant the Court's suspension of the rules. Indeed, the Court is confronted with the
need to balance stringent application of technical rules vis-a-vis strong policy
considerations of substantial significance to relax said rules based on equity and
justice.27 (Emphasis supplied; citation omitted)
Petitioner averred that after receiving the Amended Assessment Notice and the FDDA
of the CIR on March 28, 2011, it filed, without the assistance of a counsel, a letter
protesting the Amended Assessment Notice, with Regional Director Mr. Jaime B.
Santiago, of RDO No. 049, Makati City. This letter of protest was filed by petitioner on
April 11, 201128 or within the statutory period within which to appeal. Apparently,
petitioner was merely relying on the statement in the said Amended Assessment Notice,
which reads:
IF YOU DISAGREE WITH THIS ASSESSMENT, FILE YOUR PROTEST IN WRITING
INDICATING YOUR REASONS WITH THE COMMISSIONER OF INTERNAL
REVENUE, BIR DILIMAN, QUEZON CITY OR THE REGIONAL DIRECTOR WITHIN
30 DAYS FROM RECEIPT HEREOF: x x x29
Thus, petitioner opted to file the protest with the Regional Director. On May 12, 2011,
petitioner received a letter informing it that its filing of a letter of protest was an improper
remedy.30 Therefore, petitioner, on May 27, 2011, filed a Petition for Relief from
Judgment on the ground of mistake in good faith for relying on the statement provided in
the Amended Assessment Notice. Petitioner contends that the CTA En Banc should
have taken into consideration that the filing of the Petition for Relief from Judgment has
stopped the running of the period to appeal. Petitioner insists that all of these incidents
constitute excusable delay that justified its belated filing of an appeal with the CTA.

We sustain petitioner's argument.

When petitioner sent a letter-reply31 dated April 8, 2011 to the Regional Director, it was
actually protesting both the Amended Assessment Notice and the FDDA. The Amended
Assessment Notice32 reflects the amended deficiency EWT of petitioner after
reinvestigation while the FDDA33 reflects the Final Decision on: (a) petitioner's
deficiency EWT; (b) Final Withholding of VAT; and (c) Compromise Penalty. Since the
deficiency EWT is a mere component of the aggregate tax due as reflected in the
FDDA, then the FDDA cannot be considered as the final decision of the CIR as one of
its components - the amended deficiency EWT - is still under protest.

Petitioner was correct when it protested with the Regional Director the deficiency EWT
as per the Amended Assessment Notice sent by the BIR. However, instead of resolving
the protest, the Regional Director informed the petitioner that it was an improper
remedy. A ruling totally inconsistent with the statement reflected in the Amended
Assessment Notice, which states that protest must be filed with the CIR or the Regional
Director within 30 days from receipt thereof.34 Apparently, the Regional Director has
hastily presumed that petitioner was already protesting the FDDA, which incidentally
was received by petitioner on the same date as that of the Amended Assessment
Notice.

With petitioner's pending protest with the Regional Director on the amended EWT, then
technically speaking, there was yet no final decision that was issued by the CIR that is
appealable to the CTA. It is still incumbent for the Regional Director to act upon the
protest on the amended EWT- whether to grant or to deny it. Only when the CIR settled
(deny/grant) the protest on the deficiency EWT could there be a final decision on
petitioner's liabilities. And only when there is a final decision of the CIR, would the
prescriptive period to appeal with the CTA begin to run.
Hence, petitioner's belated filing of an appeal with the CTA is not without strong,
compelling reason. We could say that petitioner was merely exhausting all
administrative remedies available before seeking recourse to the judicial courts. While
the rule is that a taxpayer has 30 days to appeal to the CTA from the final decision of
the CIR, the said rule could not be applied if the Assessment Notice itself clearly states
that the taxpayer must file a protest with the CIR or the Regional Director within 30 days
from receipt of the Assessment Notice. Under the circumstances obtaining in this case,
we opted not to apply the statutory period within which to appeal with the CTA
considering that no final decision yet was issued by the CIR on petitioner's protest. The
subsequent appeal taken by petitioner is from the inaction of the CIR on its protest.

In this case, petitioner's appeal with the CTA was basically anchored on two points of
contention, to wit: (a) the BIR's assessment of EWT which has no basis in fact and in
law. Petitioner argues that it is not a top 10,000 Corporation, hence, not all its
purchases are subject to the 1% and 2% EWT; and (b) the withholding of the VAT on
royalty payments for the software application it purchased from a non-resident foreign
corporation. Petitioner argues that it is only a reseller (engaged in the buy and sell) of
Microsoft products and not a licensor. Thus, the income payments made to Microsoft do
not constitute royalty income subject to withholding VAT but merely a business income.
It maintained that even Revenue Memorandum Circular (RMC) No. 44-2005 issued by
the Bureau of Internal Revenue (BIR) on September 7, 2005 does not consider
payments for computer software as royalties but business income. And lastly, petitioner
argues that RMC No. 7-2003 issued on November 18, 2003, which was relied upon by
the BIR in assessing it with deficiency withholding tax on VAT on royalties, does not
expressly state when it would take effect. Thus, petitioner opined that it cannot be given
retroactive effect (to cover its case), otherwise, it will impose liabilities not existing at the
time of its passage.

If petitioner's right to appeal would be curtailed by the mere expediency of holding that it
had belatedly filed its appeal, then this Court as the final arbiter of justice would be
deserting its avowed objective, that is to dispense justice based on the merits of the
case and not on a mere technicality.35

Since the CTA First Division has the exclusive appellate jurisdiction over decisions of
the Commissioner of Internal Revenue on disputed assessment36 it is just proper to
remand the case to it in order to determine whether petitioner is indeed liable to pay the
deficiency withholding tax on VAT on royalties. It should be noted that the CTA has
developed an expertise on the subject of taxation because it is a specialized court
dedicated exclusively to the study and resolution of tax problems.37 Thus, this Court has
no jurisdiction to review tax cases at the first instance without first letting the CTA study
and resolve the same.38

WHEREFORE, the instant petition is GRANTED. The case is REMANDED to the Court
of Tax Appeals 1stDivision which is DIRECTED to reinstate petitioner's Petition for
Review (appeal), in CTA Case No. 8313 and to resolve the same on the merits with
reasonable dispatch.

SECOND DIVISION
[ G.R. No. 215534, April 18, 2016 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. LIQUIGAZ
PHILIPPINES CORPORATION, RESPONDENT.

[G.R. NO. 215557]

LIQUIGAZ PHILIPPINES CORPORATION, PETITIONER, VS. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT.

DECISION
MENDOZA, J.:
Presented before us is a novel issue. When may a Final Decision on Disputed
Assessment (FDDA) be declared void, and in the event that the FDD A is found void,
what would be its effect on the tax assessment?

Assailed in these consolidated petitions for review on certiorari filed under Rule 45 of
the Rules of Court are the May 22, 2014 Decision[1] and the November 26, 2014
Resolution[2] of the Court of Tax Appeals (CTA) En Banc which affirmed the November
22, 2012 Decision[3] of the CTA Division, Second Division (CTA Division).

Liquigaz Philippines Corporation (Liquigaz) is a corporation duly organized and existing

under Philippine laws. On July 11, 2006, it received a copy of Letter of Authority (LOA)
No. 00067824, dated July 4, 2006, issued by the Commissioner of Internal Revenue
(CIR), authorizing the investigation of all internal revenue taxes for taxable year 2005.[4]

On April 9, 2008, Liquigaz received an undated letter purporting to be a Notice of

Informal Conference (NIC), as well as the detailed computation of its supposed tax
liability. On May 28, 2008, it received a copy of the Preliminary Assessment
Notice[5] (PAN), dated May 20, 2008, together with the attached details of discrepancies
for the calendar year ending December 31, 2005.[6] Upon investigation, Liquigaz was
initially assessed with deficiency withholding tax liabilities, inclusive of interest, in the
aggregate amount of P23,931,708.72, broken down as follows:

Expanded Withholding Tax (EWT) P5,456,141.82

Withholding Tax on Compensation (WTC) P4,435,463.97
Fringe Benefits Tax (FBT) P14,040,102.93
TOTAL P23,931,708.72
Thereafter, on June 25, 2008, it received a Formal Letter of Demand[7] (FLD)/Formal
Assessment Notice (FAN), together with its attached details of discrepancies, for the
calendar year ending December 31, 2005. The total deficiency withholding tax liabilities,
inclusive of interest, under the FLD was P24,332,347.20, which may be broken down as
follows:

EWT P 5,535,890.38
WTC P 4,500,169.94
FBT P 14,296,286.88
TOTAL P 24,332,347.20

On July 25, 2008, Liquigaz filed its protest against the FLD/FAN and subsequently
submitted its supporting documents on September 23, 2008.

Then, on July 1, 2010, it received a copy of the FDDA[8] covering the tax audit under
LOA No. 00067824 for the calendar year ending December 31, 2005. As reflected in the
FDDA, the CIR still found Liquigaz liable for deficiency withholding tax liabilities,
inclusive of interest, in the aggregate amount of P22,380,025.19, which may be broken
down as follows:

EWT P 3,479,426.75

WTC P 4,508,025.93
FBT P14,392,572.51
TOTAL P 22,380,025.19

Consequently, on July 29, 2010, Liquigaz filed its Petition for Review before the CTA
Division assailing the validity of the FDDA issued by the CIR.[9]

The CTA Division Ruling

In its November 22, 2012 Decision, the CTA Division partially granted Liquigaz's petition
cancelling the EWT and FBT assessments but affirmed with modification the WTC
assessment. It ruled that the portion of the FDDA relating to the EWT and the FBT
assessment was void pursuant to Section 228 of the National Internal Revenue
Code (NIRC) of 1997, as implemented by Revenue Regulations (RR) No. 12-99.

The CTA Division noted that unlike the PAN and the FLD/FAN, the FDDA issued did not
provide the details thereof, hence, Liquigaz had no way of knowing what items were
considered by the CIR in arriving at the deficiency assessments. This was especially
true because the FDDA reflected a different amount from what was stated in the
FLD/FAN. The CTA Division explained that though the legal bases for the EWT and
FBT assessment were stated in the FDDA, the taxpayer was not notified of the factual
bases thereof, as required in Section 228 of the NIRC.

On the other hand, it upheld the WTC assessment against Liquigaz. It noted that the
factual bases used in the FLD and the FDDA with regard thereto were the same as the
difference in the amount merely resulted from the use of a different tax rate.

The CTA Division agreed with Liquigaz that the tax rate of 25.40% was more
appropriate because it represents the effective tax compensation paid, computed based
on the total withholding tax on compensation paid and the total taxable compensation
income for the taxable year 2005. It did not give credence to Liquigaz's explanation that
the salaries account included accrued bonus, 13th month pay, de minimis benefits and
other benefits and contributions which were not subject to withholding tax on
compensation. The CTA Division relied on the report prepared by Antonio O. Maceda,
Jr., the court-commissioned independent accountant, which found that Liquigaz was
unable to substantiate the discrepancy found by the CIR on its withholding tax liability
on compensation. The dispositive portion of the CTA Division decision reads:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly,

the assessments for deficiency expanded withholding tax in the amount of
P3,479,426.75 and fringe benefits tax in the amount of P14,392,572.51 issued by
respondent against petitioner for taxable year 2005, both inclusive of interest and
compromise penalty is hereby CANCELLED and WITHDRAWN for being void.

However, the assessment for deficiency withholding tax on compensation for taxable
year 2005 is hereby AFFIRMED with MODIFICATIONS. Accordingly, petitioner is
hereby ORDERED to PAY respondent the amount of P2,958,546.23, inclusive of the
25% surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended,
computed as follows:

Salaries per ITR P52,239,313.00

Less: Salaries per Alphalist P42,921,057-16
Discrepancy P9,318,255-84
Tax rate 25.40%
Basic Withholding Tax on Compensation P2,366,836.98
Add: 25% Surcharge P591,709.5
 Total Amount Due P2,958,546.23

In addition, petitioner is liable to pay: (a) deficiency interest at the rate of twenty percent
(20%) per annum of the basic deficiency withholding tax on compensation of
P2,958,546.23 computed from January 20, 2006 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 due of £2,958,546.23 and
on the deficiency interest which have accrued as aforestated in (a) computed from July
1, 2010 until full payment thereof, pursuant to Section 249(0(3) of the NIRC of 1997, as
amended.

The compromise penalty of P25,000.00, originally imposed by respondent is hereby

excluded there being no compromise agreement between the parties.

SO ORDERED[10]

Both the CIR and Liquigaz moved for reconsideration, but their respective motions were
denied by the CTA Division in its February 20, 2013 Resolution.

Aggrieved, they filed their respective petitions for review before the CTA En Banc.

The CTA En Bane- Ruling

In its May 22, 2014 Decision, the CTA En Banc affirmed the assailed decision of the
CTA Division. It reiterated its pronouncement that the requirement that the taxpayer
should be informed in writing of the law and the facts on which the assessment was
made applies to the FDDA— otherwise the assessment would be void. The CTA En
Bane explained that the FDDA determined the final tax liability of the taxpayer, which
may be the subject of an appeal before the CTA.

The CTA En Banc echoed the findings of the CTA Division that while the FDDA
indicated the legal provisions relied upon for the assessment, the source of the amounts
from which the assessments arose were not shown. It emphasized the need for stating
the factual bases as the FDDA reflected different amounts than that contained in the
FLD/FAN.

On the other hand, the CTA En Banc sustained Liquigaz' WTC assessment. It observed
that the basis for the assessment was the same for the FLD and the FDDA, which was
a comparison of the salaries declared in the Income Tax Return (ITR) and the Alphalist
that resulted in a discrepancy of P9,318,255.84. The CTA En Banchighlighted that the
change in the amount of assessed WTC deficiency simply arose from the revision of the
tax rate used—from 32% to the effective tax rate of 25.40% suggested by Liquigaz.

Further, it disregarded the explanation of Liquigaz on the ground of its failure to specify
how much of the salaries account pertained to de minimis benefits, accrued bonuses,
salaries and wages, and contributions to the Social Security System, Medicare and
Pag-Ibig Fund. The CTA En Banc reiterated that even the court-commissioned
independent accountant reported that Liquigaz was unable to substantiate the
discrepancy found by the CIR.

Both parties moved for a partial reconsideration of the CTA En Banc Decision, but the
latter denied the motions in its November 26, 2014 Resolution.

Not satisfied, both parties filed their respective petitions for review, anchored on

SOLE ISSUE

WHETHER THE COURT OF TAX APPEALS EN BANC ERRED IN PARTIALLY

UPHOLDING THE VALIDITY OF THE ASSESSMENT AS TO THE WITHHOLDING
TAX ON COMPENSATION BUT DECLARING INVALID THE ASSESSMENT ON
EXPANDED WITHHOLDING TAX AND FRINGE BENEFITS TAX.

The present consolidated petitions revolve around the same FDDA where Liquigaz
seeks the cancellation of its remaining tax liability and the CIR aims to revive the
assessments struck down by the tax court. Basically, Liquigaz asserts that like its
assessment for EWT and FBT deficiency, the WTC assessment should have been
invalidated because the FDDA did not provide for the facts on which the assessment
was based. It argues that it was deprived of due process because in not stating the
factual basis of the assessment, the CIR did not consider the defenses and supporting
documents it presented.

Moreover, Liquigaz is adamant that even if the FDDA would be upheld, it should not be
liable for the deficiency WTC liability because the CIR erred in comparing its ITR and
Alphalist to determine possible discrepancies. It explains that the salaries of its
employees reflected in its ITR does not reflect the total taxable income paid and
received by the employees because the same refers to the gross salaries of the
employees, which included amounts that were not subject to WTC.

On the other hand, the CIR avers that the assessments for EWT and FBT liability
should be upheld because the FDDA must be taken together with the PAN and FAN,
where details of the assessments were attached. Hence, the CIR counters that Liquigaz
was fully apprised of not only the laws, but also the facts on which the assessment was
based, which were likewise evidenced by the fact that it was able to file a protest on the
assessment. Further, the CIR avers that even if the FDDA would be declared void, it
should not result in the automatic abatement of tax liability especially because RR No.
12-99 merely states that a void decision of the CIR or his representative shall not be
considered as a decision on the assessment.

The Court's Ruling

Central to the resolution of the issue is Section 228[11] of the NIRC and RR No. 12-
99,[12] as amended. They lay out the procedure to be followed in tax assessments.
Under Section 228 of the NIRC, a taxpayer shall be informed in writing of the law and
the facts on which the assessment is made, otherwise, the assessment shall be void. In
implementing Section 228 of the NIRC, RR No. 12-99 reiterates the requirement that a
taxpayer must be informed in writing of the law and the facts on which his tax liability
was based, to wit:

SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax

Assessment. —

3.1 Mode of procedures in the issuance of a deficiency tax assessment:

3.1.1 Notice for informal conference. — The Revenue Officer who audited the
taxpayer's records shall, among others, state in his report whether or not the taxpayer
agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the
taxpayer is not amenable, based on the said Officer's submitted report of investigation,
the taxpayer shall be informed, in writing, by the Revenue District Office or by the
Special Investigation Division, as the case may be (in the case Revenue Regional
Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of
the discrepancy or discrepancies in the taxpayer's payment of his internal revenue
taxes, for the purpose of "Informal Conference," in order to afford the taxpayer with an
opportunity to present his side of the case. If the taxpayer fails to respond within.fifteen
(15) days from date of receipt of the notice for informal conference, he shall be
considered in default, in which case, the Revenue District Officer or the Chief of the
Special Investigation Division of the Revenue Regional Office, or the Chief of Division in
the National Office, as the case may be, shall endorse the case with the least possible
delay to the: Assessment Division of the Revenue Regional Office or to the
Commissioner or his duly authorized representative, as the case may be, for
appropriate review and issuance of a deficiency tax assessment, if warranted.

3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the
Assessment Division or by the Commissioner or his duly authorized representative, as
the case may be, it is determined that there exists sufficient basis to assess the
taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at
least by registered, mail, a Preliminary Assessment Notice (PAN) for the proposed
assessment, showing in detail, the facts and the law, rules and regulations, or
jurisprudence on which the proposed assessment is based (see illustration in ANNEX A
hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of
the PAN, he shall be considered in default, in which case, a formal letter of demand and
assessment notice shall be caused to be issued by the said Office, calling for payment
of the taxpayer's deficiency tax liability, inclusive of the applicable penalties. xxx

3.1.4 Formal Letter of Demand and Assessment Notice. — The formal letter of demand
and assessment notice shall be issued by the Commissioner or his duly authorized
representative. The letter of demand calling for payment of the taxpayer's deficiency tax
or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which
the assessment is based, otherwise, the formal letter of demand and assessment notice
shall be void (see illustration in ANNEX B hereof), xxx

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. If there are several issues
involved in the formal letter of demand and assessment notice but the taxpayer only
disputes or protests against the validity of some of-the issues raised, the taxpayer shall
be required to pay the deficiency tax or taxes attributable to the undisputed issues, in
which case, a collection letter shall be issued to the taxpayer calling for payment of the
said deficiency tax, inclusive of the applicable surcharge and/or interest. No action shall
be taken on the taxpayer's disputed issues until the taxpayer has paid the deficiency tax
or taxes attributable to the said undisputed issues. The prescriptive period for
assessment or collection of the tax or taxes attributable to the disputed issues shall be
suspended, xxx

3.1.6 Administrative Decision on a Disputed Assessment. — The decision of the

Commissioner or his duly authorized representative shall (a) state the facts, the
applicable law, rules and regulations, or jurisprudence on which such decision is
based, otherwise, the decision shall be void (see illustration in ANNEX C hereof), in
which case, the same shall not be considered a decision on a disputed assessment;
and (b) that the same is his final decision.

[Emphases and Underscoring Supplied]

The importance of providing the taxpayer of adequate written notice of his tax liability is
undeniable. Section 228 of the NIRC declares that an assessment is void if the taxpayer
is not notified in writing of the facts and law on which it is made. Again, Section 3.1.4 of
RR No. 12-99 requires that the FLD must state the facts and law on which it is based,
otherwise, the FLD/FAN itself shall be void. Meanwhile, Section 3.1.6 of RR No. 12-99
specifically requires that the decision of the CIR or his duly authorized representative on
a disputed assessment shall state the facts, law and rules and regulations, or
jurisprudence on which the decision is based. Failure to do so would invalidate the
FDDA.

The use of the word "shall" in Section 228 of the NIRC and in RR No. 12-99 indicates
that the requirement of informing the taxpayer of the legal and factual bases of the
assessment and the decision made against him is mandatory.[13] The requirement of
providing the taxpayer with written notice of the factual and legal bases applies both to
the FLD/FAN and the FDDA.

Section 228 of the NIRC should not be read restrictively as to limit the written notice'only
to the assessment itself. As implemented by RR No. 12-99, the written notice
requirement for both the FLD and the FAN is in observance of due process—to afford
the taxpayer adequate opportunity to file a protest on the assessment and thereafter file
an appeal in case of an adverse decision.

To rule otherwise would tolerate abuse and prejudice. Taxpayers will be unable to file
an intelligent appeal before the CTA as they would be unaware on how the CIR or his'
authorized representative appreciated the defense raised in connection with the
assessment. On the other hand, it raises the possibility that the amounts reflected in the
FDDA were arbitrarily made if the factual and legal bases thereof are not shown.

A void FDDA does not

ipso facto render the
assessment void

The CIR arid Liquigaz are at odds with regards to the effect of a void FDDA. Liquigaz
harps that a void FDDA will lead to a void assessment because the FDDA ultimately
determines the final tax'liability of a'taxpayer, which may then be appealed before the
CTA. On the other hand, the CIR believes that a void FDDA does not ipso facto result in
the nullification of the assessment.

In resolving the issue on the effects of a void FDDA, it is necessary to differentiate an

"assessment" from a "decision." In St. Stephen's Association v. Collector of Internal
Revenue,[14] the Court has long recognized that a "decision"- differs from an
"assessment," to wit:

In the first place, we believe the respondent court erred in holding that the assessment
in question is the respondent Collector's decision or ruling appealable to it, and that
consequently, the period of thirty days prescribed by section li of Republic Act No. 1125
within which petitioner should have appealed to the respondent court must be counted
from its receipt of said assessment. Where a taxpayer questions an assessment and
asks the Collector to reconsider or cancel the same because he (the taxpayer) believes
he is not liable therefor, the assessment becomes a "disputed assessment" that the
Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only
upon receipt of the decision of the Collector on the disputed assessment, in accordance
with paragraph (1) of section 7, Republic Act No. 1125, conferring appellate jurisdiction
upon the Court of Tax Appeals to review "decisions of the Collector of Internal Revenue
in cases involving disputed assessment..."

The difference is likewise readily apparent in Section 7[15] of R.A. 1125,[16] as amended,
where the CTA is conferred with appellate jurisdiction over the decision of the CIR in
cases involving disputed assessments, as well as inaction of the CIR in disputed
assessments. From the foregoing, it is clear that what is appealable to the CTA is the
"decision" of the CIR on disputed assessment and not the assessment itself.
An assessment becomes a disputed assessment after a taxpayer has filed its protest to
the assessment in the administrative level. Thereafter, the CIR either issues a decision
on the disputed assessment or fails to act on it and is, therefore, considered denied.
The taxpayer may then appeal the decision on the disputed assessment or the inaction
of the CIR. As such, the FDDA is not the only means that the final tax liability of a
taxpayer is fixed, which may then be appealed by the taxpayer. Under the law, inaction
on the part of the CIR may likewise result in the finality of a taxpayer's tax liability as it is
deemed a denial of the protest filed by the latter, which may also be appealed before
the CTA.

Clearly, a decision of the CIR on a disputed assessment differs from the assessment
itself. Hence, the invalidity of one does not necessarily result to the invalidity of the
other—unless the law or regulations otherwise provide.

Section 228 of the NIRC provides that an assessment shall be void if the taxpayer is not
informed in writing of the law and the facts on which it is based. It is, however, silent
with regards to a decision on a disputed assessment by the CIR which fails to state the
law and facts on which it is based. This void is filled by RR No. 12-99 where it is stated
that failure of the FDDA to reflect the facts and law on which it is based will make the
decision void. It, however, does not extend to the nullification of the entire assessment.

With the effects of a void FDDA expounded, the next issue to be addressed is whether
the assailed FDDA is void for failure to state the facts and law on which it was based.

The FDDA must state the

facts and law on which it
is based to provide the
taxpayer the opportunity
to file an intelligent
appeal

The CIR and Liquigaz are also in disagreement whether the FDDA issued was
compliant with the mandatory requirement of written notice laid out in the law and
implementing rules and regulations. Liquigaz argues that the FDDA is void as it did not
contain the factual bases of the assessment and merely showed the amounts of its
alleged tax liabilities.

A perusal of the FDDA issued in the case at bench reveals that it merely contained a
table of Liquigaz's supposed tax liabilities, without providing any details. The CIR
explains that the FDDA still complied with the requirements of the law as it was issued
in connection with the PAN and FLD/FAN, which had an attachment of the details of
discrepancies. Hence, the CIR concludes that Liquigaz was sufficiently informed in
writing of the factual bases of the assessment.
The reason for requiring that taxpayers be informed in writing of the facts and law on
which the assessment is made is the constitutional guarantee that no person shall be
deprived of his property without due process of law.[17] Merely notifying the taxpayer of
its tax liabilities without elaborating on its details is insufficient. In CIR v. Reyes,[18] the
Court further explained:.

In the present case, Reyes was not informed in writing of the law and the facts on which
the assessment of estate taxes had been made:. She was merely notified of the findings
by the CIR, who had simply relied upon the provisions of former Section 229 prior to its
amendment by Republic Act (RA) No. 8424, otherwise known as the Tax Reform Act of
1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an
assessment. The old -requirement- of merely notifying the taxpayer of the CIR's findings
was changed in 1998 to informing the taxpayer of not only the law, but also of the facts
on which an assessment would be made; otherwise, the assessment itself would be
invalid, xxx

At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated
that the taxpayer must be informed of both the law and facts on which the assessment
was based. Thus, the CIR should have required the assessment officers of the Bureau
of Internal Revenue (BIR) to follow the clear mandate of the new law. The old regulation
governing the issuance of estate tax assessment notices ran afoul of the rule that tax
regulations — old as they were — should be in harmony with, and not supplant or
modify, the law. xxx

Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be
accorded due process. Not only was the law here disregarded, but no valid notice was
sent, either. A void assessment bears no valid fruit.

The law imposes a substantive, not merely a formal, requirement. To proceed

heedlessly with tax collection without first establishing a valid assessment is evidently
violative of the cardinal principle in administrative investigations: that taxpayers should
be able to present their case and adduce supporting evidence. In the instant case,
respondent has not been informed of the basis of the estate tax liability. Without
complying with the unequivocal mandate of first informing the taxpayer of the
government's claim, there can be no deprivation of property, because no effective
protest can be made. The haphazard shot at slapping an assessment, supposedly
based on estate taxation's general provisions that are expected to be known by the
taxpayer, is utter chicanery.

Even a cursory review of the preliminary assessment notice, as well as the demand
letter sent, reveals the lack of basis for — not to mention the insufficiency of — the
gross figures and details of the itemized deductions indicated in the notice and the
letter. This Court cannot countenance an assessment based on estimates that appear
to have been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the
government, their assessment .and collection "should be made in accordance with law
as any arbitrariness will negate the very reason for government itself."

[Emphases Supplied]

In CIR v. United Salvage and Towage (Phils.), Inc.,[19] the Court struck down an
assessment where the FAN only contained a table of the taxes due without providing
further detail thereto, to wit:

In the present case, a mere perusal of the FAN for the deficiency EWT for taxable year
1994 will show that other than a tabulation of the alleged deficiency taxes due, no
further detail regarding the assessment was provided by petitioner. Only the resulting
interest, surcharge and penalty were anchored with legal basis. Petitioner should have
at least attached a detailed notice of discrepancy or stated an explanation why the
amount of P48,461.76 is collectible against respondent and how the same was arrived
at. Any short-cuts to the prescribed content of the assessment or the process thereof
should not be countenanced, in consonance with the ruling in Commissioner of Internal
Revenue v. Enron Subic Power Corporation to wit:

The CIR insists that an examination of the facts shows that Enron was properly
apprised of its tax deficiency. During the pre-assessment stage, the CIR advised
Enron's representative of the tax deficiency, informed it of the proposed tax deficiency
assessment through a preliminary five-day letter and furnished Enron a copy of the
audit working paper allegedly showing in detail the legal and factual bases of the
assessment. The CIR argues that these steps sufficed to inform Enron of the laws and
facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron,
as well as the preliminary five-day letter, were not valid substitutes for the mandatory
notice in writing of the legal and factual bases of the assessment. These steps were
mere perfunctory discharges of the CIR's duties in correctly assessing a taxpayer. The
requirement for issuing a preliminary or final notice, as the case may be, informing a
taxpayer of the existence of a deficiency tax assessment is markedly different from the
requirement of what such notice must contain. Just because the CIR issued an advice,
a preliminary letter during the pre-assessment stage and a final notice, in the order
required by law, does not necessarily mean that Enron was informed of the law and
facts on which the deficiency tax assessment was made.

The law requires that the legal and factual bases of the assessment be stated in the
formal letter of demand and assessment notice. Thus, such cannot be presumed.
Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would
be rendered nugatory. The alleged "factual bases" in the advice, preliminary letter and
"audit working papers" did not suffice. There was no going around the mandate of the
law that the legal and factual bases of the assessment be stated in writing in the formal
letter of demand accompanying the assessment notice.

We note that the old law merely required that the taxpayer be notified of the assessment
made by the CIR. This was changed in 1998 and the taxpayer must now be informed
not only of the law but also of the facts on which the assessment is made. Such
amendment is in keeping with the constitutional principle that no ' person shall be
deprived of property without due process. In view of the absence of a fair opportunity for
Enron to be informed of the legal and factual bases of the assessment against it, the
assessment in question was void.....

xxx

Applying the aforequoted rulings to the case at bar, it is clear that the assailed
deficiency tax assessment for the EWT in 1994 disregarded the provisions of Section
228 of the Tax Code, as amended, as well as Section 3.1.4 of Revenue Regulations No.
12-99 by not providing the legal and factual bases of« the assessment. Hence, the
formal letter of demand and the notice of assessment issued relative thereto are void.

[Emphasis Supplied]

Nevertheless, the requirement of providing the taxpayer with written notice of the facts
and law used as basis for the assessment is not to be mechanically. applied. Emphasis
on the purpose of the written notice is important. The requirement should be in place so
that the taxpayer could be adequately informed of the basis of the assessment enabling
him to prepare an intelligent protest or appeal of the assessment or decision. In Samar-I
Electric Cooperative v. CIR,[20] the Court elaborated:

The above information provided to petitioner enabled it to protest the PAN by

questioning respondent's interpretation of the laws cited as legal basis for the
computation of the deficiency withholding taxes and assessment of minimum corporate
income tax despite petitioner's position that it remains exempt therefrom. In its letter-
reply dated May 27, 2002, respondent answered the arguments raised by petitioner in
its protest, and requested it to pay the assessed deficiency on the date of payment
stated in the PAN. A second protest letter dated June 23, 2002 was sent by petitioner,
to which respondent replied (letter dated July 8, 2002) answering each of the. two
issues reiterated by petitioner: (1) validity of EO 93 withdrawing the tax exemption
privileges under PD 269; and (2) retroactive application of RR No. 8-2000. The FAN
was finally received by petitioner on September 24, 2002, and protested by it in a letter
dated October 14, 2002 which reiterated in lengthy arguments its earlier interpretation of
the laws and regulations upon which the assessments were based.

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 documents between the

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

Thus, substantial compliance with the requirement under Section 228 of the NIRC is
permissible, provided that the taxpayer would be eventually apprised in writing of the
factual and legal bases of the assessment to allow him to file an effective protest
against.

The above-cited cases refer to the compliance of the FAN/FLD of the due process
requirement embodied in Section 228 of the NIRC and RR No. 12-99. These may
likewise applied to the FDDA, which is similarly required to include a written notice of
the factual and legal bases thereof. Without sounding repetitious, it is important to note
that Section 228 of the NIRC did not limit the requirement of stating the facts and law
only to the FAN/FLD. On the other hand, RR No. 12-99 detailed the process of
assessment and required that both the FAN/FLD and the FDDA state the law and facts
on which it is based.

Guided by the foregoing, the Court now turns to the FDDA in issue.

It is undisputed that the FDDA merely showed Liquigaz' tax liabilities without any details
on the specific transactions which gave rise to its supposed tax deficiencies. While it
provided for the legal bases of the assessment, it fell short of informing Liquigaz of the
factual bases thereof. Thus, the FDDA as regards the EWT and FBT tax deficiency did
not comply with the requirement in Section 3.1.6 of RR No. 12-99, as amended, for
failure to inform Liquigaz of the factual basis thereof.

The CIR erred in claiming that Liquigaz was informed of the factual bases of the
assessment because the FDDA made reference to the PAN and FAN/FLD, which were
accompanied by details of the alleged discrepancies. The CTA En Banc highlighted that
the amounts in the FAN and the FDDA were different. As pointed out by the CTA, the
FLD/FAN and the FDDA reflected the following amounts:[21]

Basic Expanded Withholding Fringe Total

Deficiency Withholding Tax on Benefits Tax
Tax Tax Compensation
Per FLD P3,675,048.78 P2,981,841.84 P9,501,564-07 P16,158,454.72
Per FDDA P1,823,782.67 P2,366,836.98 P7,572,236.16 P11,762,855.81
Difference P1,851,266.11 P615,004.80 P1,929,327.91 P4,395,598.91

As such, the Court agrees with the tax court that it becomes even more imperative that
the FDDA contain details of the discrepancy. Failure to do so would deprive Liquigaz
adequate opportunity to prepare an intelligent appeal. It would have no way of
determining what were considered by the CIR in the: defenses it had raised in the
protest to the FLD. Further, without the details of the assessment, it would open the
possibility that the reduction of the assessment could have been arbitrarily or
capriciously arrived at.

The Court, however, finds that the CTA erred in concluding that the assessment on
EWT and FBT deficiency was void because the FDDA covering the same was void. The
assessment remains valid notwithstanding the nullity of the FDDA because as
discussed above, the assessment itself differs from a decision on the disputed
assessment.

As established, an FDDA that does not inform the taxpayer in writing of the facts and
law on which it is based renders the decision void. Therefore, it is as if there was no
decision rendered by the CIR. It is tantamount to a denial by inaction by the CIR, which
may still be appealed before the CTA and the assessment evaluated on the basis of the
available evidence and documents. The merits of the EWT and FBT assessment should
have been discussed and not merely brushed aside on account of the void FDDA.

On the other hand, the Court agrees that the FDDA substantially informed Liquigaz of
its tax liabilities with regard to its WTC assessment. As highlighted by the CTA, the
basis for the assessment was the same for the FLD and the FDDA, where the salaries
reflected in the ITR and the alphalist were compared resulting in a discrepancy of
P9,318,255.84. The change in the amount of assessed deficiency withholding taxes on
compensation merely arose from the modification of the tax rates used— 32% in the
FLD and the effective tax rate of 25.40% in the FDDA. The Court notes it was Liquigaz
itself which proposed the rate of 25.40% as a more appropriate tax rate as it
represented the effective tax on compensation paid for taxable year 2005.[22] As such,
Liquigaz was effectively informed in writing of the factual bases of its assessment for
WTC because the basis for the FDDA, with regards to the WTC, was identical with the
FAN— which had a detail of discrepancy attached to it.

Further, the Court sees no reason to reverse the decision of the CTA as to the amount
of WTC liability of Liquigaz. It is a time-honored doctrine that the findings and
conclusions of the CTA are accorded the highest respect and will not be lightly set aside
because by the very nature of the CTA, it is dedicated exclusively to the resolution of
tax problems and has accordingly developed an expertise on the subject.[23] The issue
of Liquigaz' WTC liability had been thoroughly discussed in the courts a quo and even
the court-appointed independent accountant had found that Liquigaz was unable to
substantiate its claim concerning the discrepancies in its WTC.

To recapitulate, a "decision" differs from an "assessment" and failure of the FDDA to

state the facts and law on which it is based renders the decision void—but not
necessarily the assessment. Tax laws may not be extended by implication beyond the
clear import of their language, nor their operation enlarged so as to embrace matters
not specifically provided.[24]

WHEREFORE, the May 22, 2014 Decision and the November 26, 2014 Resolution of
the Court of Tax Appeals En Banc are PARTIALLY AFFIRMED in that the assessment
on deficiency Withholding Tax in Compensation is upheld.

FIRST DIVISION

G.R. No. 222837, July 23, 2018

MACARIO LIM GAW, JR., Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

DECISION

TIJAM, J.:

Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court
filed by Macario Lim Gaw, Jr. (petitioner) assailing the Decision2 dated December 22,
2014 and Resolution3 dated February 2, 2016 of the Court of Tax Appeals (CTA) En
Banc in CTA EB Criminal Case No. 026.

Antecedent Facts

Sometime in November 2007, petitioner acquired six (6) parcels of land. To finance its
acquisition, petitioner applied for, and was granted a Short Term Loan (STL) Facility
from Banco De Oro (BDO) in the amount of P2,021,154,060.00.4

From April to June 2008, petitioner acquired four (4) more parcels of land. Again,
petitioner applied for and was granted an STL Facility from BDO in the amount of
P2,732,666,785.5

Petitioner entered into an Agreement to Sell6 with Azure Corporation for the sale and
transfer of real properties to a joint venture company, which at the time was still to be
formed and incorporated. Then on July 11, 2008, petitioner conveyed the 10 parcels of
land to Eagle I Landholdings, Inc. (Eagle I), the joint venture company referred to in the
Agreement to Sell.7

In compliance with Revenue Memorandum Order No. 15-2003,8 petitioner requested

the Bureau of Internal Revenue (BIR)-Revenue District Office (RDO) No. 52 for the
respective computations of the tax liabilities due on the sale of the 10 parcels of land to
Eagle I.9

In accordance with the One Time Transactions (ONETT) Computation sheets, petitioner
paid Capital Gains Tax amounting to P505,177,213.8110 and Documentary Stamp Tax
amounting to P330,390.00.11

On July 23, 2008, the BIR-RDO No. 52 issued the corresponding Certificates
Authorizing Registration and Tax Clearance Certificates.12

Two years later, Commissioner of Internal Revenue (respondent) opined that petitioner
was not liable for the 6% capital gains tax but for the 32% regular income tax and 12%
value added tax, on the theory that the properties petitioner sold were ordinary assets
and not capital assets. Further, respondent found petitioner to have misdeclared his
income, misclassified the properties and used multiple tax identification numbers to
avoid being assessed the correct amount of taxes.13

Thus, on August 25, 2010, respondent issued a Letter of Authority14 to commence

investigation on petitioner's tax account.

The next day, respondent filed before the Department of Justice (DOJ) a Joint
Complaint Affidavit15 for tax evasion against petitioner for violation of Sections
25416 and 25517 of the National Internal Revenue Code (NIRC).

The DOJ then filed two criminal informations for tax evasion against petitioner docketed
as CTA Criminal Case Nos. O-206 and O-207.18 At the time the Informations were filed,
the respondent has not issued a final decision on the deficiency assessment against
petitioner. Halfway through the trial, the respondent issued a Final Decision on Disputed
Assessment (FDDA)19 against petitioner, assessing him of deficiency income tax and
VAT covering taxable years 2007 and 2008.

With respect to the deficiency assessment against petitioner for the year 2007,
petitioner filed a petition for review with the CTA, docketed as CTA Case No. 8502. The
clerk of court of the CTA assessed petitioner for filing fees which the latter promptly
paid.20

However, with respect to the deficiency assessment against petitioner for the year 2008,
the same involves the same tax liabilities being recovered in the pending criminal cases.
Thus, petitioner was confused as to whether he has to separately file an appeal with the
CTA and pay the corresponding filing fees considering that the civil action for recovery
of the civil liability for taxes and penalties was deemed instituted in the criminal case.21

Thus, petitioner filed before the CTA a motion to clarify as to whether petitioner has to
file a separate petition to question the deficiency assessment for the year 2008.22

On June 6, 2012, the CTA issued a Resolution23 granting petitioner's motion and held
that the recovery of the civil liabilities for the taxable year 2008 was deemed instituted
with the consolidated criminal cases, thus:

WHEREFORE, in light of the foregoing considerations, the prosecution's Motion for

Leave of Court to Amend Information and Admit Attached Amended Information filed on
May 16, 2012 is GRANTED. Accordingly, the Amended Information for CTA Crim. No.
O-206 attached thereto is hereby ADMITTED. Re-arraignment of [petitioner] in said
case is set on June 13, 2012 at 9:00 a.m.

As regards, [petitioner's] Urgent Motion (With Leave of Court for Confirmation that the
Civil Action for Recovery of Civil Liability for Taxes and Penalties is Deemed Instituted
in the Consolidated Criminal Cases) filed on May 30, 2012, the same is
hereby GRANTED. The civil action for recovery of the civil liabilities of [petitioner] for
taxable year 2008 stated in the [FDDA] dated May 18, 2012 is DEEMED
INSTITUTED with the instant consolidated criminal cases, without prejudice to the right
of the [petitioner] to avail of whatever additional legal remedy he may have, to prevent
the said FDDA from becoming final and executory for taxable year 2008.

Additionally, [petitioner] is not precluded from instituting a Petition for Review to assail
the assessments for taxable year 2007, as reflected in the said FDDA dated May 18,
2012.

SO ORDERED.24

However, as a caution, petitioner still filed a Petition for Review Ad Cautelam (with
Motion for Consolidation with CTA Criminal Case Nos. O-206 and O-207).25 Upon filing
of the said petition, the clerk of court of the CTA assessed petitioner with "zero filing
fees."26

Meanwhile, the CTA later acquitted petitioner in Criminal Case Nos. O-206 and O-207
and directed the litigation of the civil aspect in CTA Case No. 8503 in its
Resolution27 dated January 3, 2013, to wit:

WHEREFORE, all the foregoing considered, the [petitioner's] "DEMURRER TO

EVIDENCE" is hereby GRANTED and CTA Crim. Case Nos. O-206 and O-207 are
hereby DISMISSED.Accordingly, [petitioner] is hereby ACQUITTED on reasonable
doubt in said criminal cases.
As regards CTA Case No. 8503, an Answer having been filed in this case on August 17,
2012, let this case be set for Pre-Trial on January 23, 2013 at 9:00 a.m.

SO ORDERED.28

Thereafter, respondent filed a Motion to Dismiss29 the Petition for Review Ad

Cautelam on the ground that the CTA First Division lacks jurisdiction to resolve the case
due to petitioner's non-payment of the filing fees.

On March 1, 2013, the CTA First Division issued a Resolution30 granting the Motion to
Dismiss. His motion for reconsideration being denied, petitioner elevated the case to the
CTA En Banc. The latter however affirmed the dismissal of the case in its
Decision31 dated December 22, 2014, thus:

WHEREFORE, premises considered, the instant Petition for Review is DENIED for lack
of merit. The Resolutions of the First Division of this Court promulgated on 01 March
2013 and 24 June 2013 are hereby AFFIRMED.

Costs against the petitioner.

SO ORDERED.32

Petitioner's motion for reconsideration was likewise denied by the CTA En Banc in its
Resolution33 dated February 2, 2016.

Hence, this petition.

Issues

Petitioner raises the following arguments:

IN RESOLVING CTA EB CRIM. CASE NO. 026, THE CTA EN BANC HAS NOT ONLY
DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW OR
WITH THE APPLICABLE DECISIONS OF THIS HONORABLE COURT, BUT HAS
ALSO DEPRIVED PETITIONER OF HIS RIGHT TO DUE PROCESS AS TO CALL
FOR AN EXERCISE OF SUPERVISION, CONSIDERING THAT:

THE CTA EN BANC COMMITTED SERIOUS REVERSIBLE ERROR AND

EFFECTIVELY DENIED PETITIONER DUE PROCESS BY DISMISSING THE
PETITION FOR REVIEW AD CAUTELAM SUPPOSEDLY FOR LACK OF
JURISDICTION DUE TO PETITIONER'S FAILURE TO PAY DOCKET AND OTHER
LEGAL FEES.

BASED ON APPLICABLE LAWS AND JURISPRUDENCE, AS AFFIRMED BY THE

CTA IN ITS PAST PRONOUNCEMENTS IN THE CONSOLIDATED CASES, IT HAD
ALREADY ACQUIRED JURISDICTION OVER CTA CASE NO. 8503, AND
THEREFORE COULD NOT BE DIVESTED OF SUCH JURISDICTION UNTIL FINAL
JUDGMENT.

THE ZERO-FILING-FEE ASSESSMENT IN CTA CASE NO. 8503 ISSUED BY THE

CLERK OF COURT OF THE CTA WAS CONSISTENT WITH APPLICABLE LAWS
AND JURISPRUDENCE, AS AFFIRMED BY THE CTA IN ITS PAST
PRONOUNCEMENTS IN THE CONSOLIDATED CASES.

PETITIONER WAS DEPRIVED OF DUE PROCESS WHEN HIS PETITION WAS

DISMISSED WITHOUT FIRST BEING AFFORDED A FAIR OPPORTUNITY TO PAY
PROPERLY ASSESSED FILING FEES.

II

THE CTA EN BANC COMMITTED SERIOUS REVERSIBLE ERROR IN DEPRIVING

PETITIONER OF HIS RIGHT TO ASSAIL THE DEFICIENCY ASSESSMENTS
AGAINST HIM FOR TAXABLE YEAR 2008 AND SANCTIONING RESPONDENT'S
DENIAL OF PETITIONER'S RIGHT TO DUE PROCESS DESPITE THE FOLLOWING
FACTUAL CIRCUMSTANCES WHICH RENDER THE ASSESSMENTS NULL AND
VOID:

THE LETTER OF AUTHORITY NO. 2009-00044669 WHICH COVERS THE AUDIT OF

"UNVERIFIED PRIOR YEARS" IS INVALID, BEING IN DIRECT CONTRAVENTION OF
SECTION C OF REVENUE MEMORANDUM ORDER NO. 43-90.

THE FORMAL LETTER OF DEMAND DATED 08 APRIL 2011 AND FINAL DECISION
ON DISPUTED ASSESSMENT NO. 2012-0001 DATED 18 MAY 2012 WERE
IMPROPERLY SERVED ON PETITIONER.
 C

RESPONDENT DISREGARDED PETITIONER'S PROTEST LETTER DATED 07 JUNE

2011 AND ADDITIONAL SUBMISSIONS IN SUPPORT OF HIS PROTEST.

THE DEFICIENCY TAX ASSESSMENTS AGAINST PETITIONER FOR TAXABLE

YEAR 2008 HAVE NO FACTUAL AND LEGAL BASES.

IT HAS BEEN A CASE OF PERSECUTION RATHER THAN PROSECUTION ON THE

PART OF THE RESPONDENT AGAINST PETITIONER, WARRANTING NOT ONLY
AN ACQUITTAL BUT ALSO THE DISMISSAL OF THE CIVIL ASPECT OF CTA
CRIMINAL CASE NOS. O-206 AND O-207.

III

IN THE INTEREST OF THE EXPEDITIOUS ADMINISTRATION OF JUSTICE, THIS

HONORABLE COURT MAY ALREADY RESOLVE THE CIVIL ASPECT OF CTA
CRIMINAL CASE NOS. O-206 AND O-207 ON THE MERITS.34

Ultimately, the issues for Our resolution are: 1) whether the CTA erred in dismissing
CTA Case No. 8503 for failure of the petitioner to pay docket fees; 2) in the event that
the CTA erred in dismissing the case, whether this Court can rule on the merits of the
case; and 3) whether the petitioner is liable for the assessed tax deficiencies.

Arguments of the Petitioner

Petitioner claims that since the FDDA covering the year 2008 was also the subject of
the tax evasion cases, the civil action for the recovery of civil liability for taxes and
penalties was deemed instituted in the consolidated criminal cases as a matter of law.
Thus, if the civil liability for recovery of taxes and penalties is deemed instituted in the
criminal case, it is the State, not the taxpayer that files the Information and pays the
filing fee. Petitioner claims that there is no law or rule that requires petitioner to pay filing
fees in order for the CTA to rule on the civil aspect of the consolidated criminal cases
filed against him.35

Petitioner likewise asserts that when they filed the Petition for Review Ad Cautelam the
clerk of court made a "zero filing fee" assessment. It is therefore a clear evidence that
the civil action for recovery of taxes was deemed instituted in the criminal actions. Thus,
the CTA has long acquired jurisdiction over the civil aspect of the consolidated criminal
cases.36 Therefore, the CTA erred in dismissing the case for nonpayment of docket
fees.

Petitioner further argues that in order not to prolong the resolution of the issues and
considering that the records transmitted to this Court are sufficient to determine and
resolve whether petitioner is indeed liable for deficiency income tax, this Court can
exercise its prerogative to rule on the civil aspect of the CTA Criminal Case Nos. O-206
and O-207.37

Arguments of the Respondent

Respondent, through the Office of the Solicitor General (OSG) argues that the tax
evasion cases filed against petitioner were instituted based on Sections 254 and 255 of
the NIRC, that in all criminal cases instituted before the CTA, the civil aspect of said
cases, which constitutes the recovery by the government of the taxes and penalties
relative to the criminal action shall not be subject to reservation for a separate civil
action.38 On the other hand, the civil remedy to contest the correctness or validity of
disputed tax assessment is covered by Section 939 of Republic Act (R.A.) No.
9282.40 The difference between the criminal case for tax evasion filed by the
government for the imposition of criminal liability on the taxpayer and the Petition for
Review filed by the petitioner for the purpose of questioning the FDDA is glaringly
apparent. The mere appearance of the word "civil action" does not give rise to the
conclusion that all "civil" remedies pertain to the same reliefs. The petitioner cannot
simultaneously allege that the petition for review is the civil action that is deemed
instituted with the criminal action and at the same time avail of the separate taxpayer's
remedy to contest the FDDA through a petition for review.41

Respondent further argues that in ruling upon the merits of the Petition for Review Ad
Cautelam would prompt this Court to become a trier of facts, which is improper,
especially in a Petition for Review under Rule 45 of the Rules of Court. Additionally,
assuming that the CTA En Banc erred in affirming the dismissal ordered by the CTA
First Division due to non-payment of docket fees, the correct remedy is to remand the
case and order the CTA to compute the required docket fees and reinstate the case
upon payment of the same.42

Ruling of the Court

The petition is partly granted.

The civil action filed by the

petitioner to question the FDDA is
not deemed instituted with the
criminal case for tax evasion

Rule 9, Section 11 of A.M. No. 05-11-07-CTA,43 otherwise known as the Revised Rules
of the Court of Tax Appeals (RRCTA), states that:

SEC. 11. Inclusion of civil action in criminal action. – In cases within the jurisdiction of
the Court, the criminal action and the corresponding civil action for the recovery of civil
liability for taxes and penalties shall be deemed jointly instituted in the same
proceeding. The filing of the criminal action shall necessarily carry with it the filing of the
civil action. No right to reserve the filing of such civil action separately from the criminal
action shall be allowed or recognized.

Petitioner claimed that by virtue of the above provision, the civil aspect of the criminal
case, which is the Petition for Review Ad Cautelam, is deemed instituted upon the filing
of the criminal action. Thus, the CTA had long acquired jurisdiction over the civil aspect
of the consolidated criminal cases. Therefore, the CTA erred in dismissing the case.

We do not agree.
Rule 111, Section 1(a)44 of the Rules of Court provides that what is deemed instituted
with the criminal action is only the action to recover civil liability arising from the
crime.45 Civil liability arising from a different source of obligation, such as when the
obligation is created by law, such civil liability is not deemed instituted with the criminal
action.

It is well-settled that the taxpayer's obligation to pay the tax is an obligation that is
created by law and does not arise from the offense of tax evasion, as such, the same is
not deemed instituted in the criminal case.46

In the case of Republic of the Philippines v. Patanao,47 We held that:

Civil liability to pay taxes arises from the fact, for instance, that one has engaged
himself in business, and not because of any criminal act committed by him. The criminal
liability arises upon failure of the debtor to satisfy his civil obligation. The incongruity of
the factual premises and foundation principles of the two cases is one of the reasons for
not imposing civil indemnity on the criminal infractor of the income tax law. x x x
Considering that the Government cannot seek satisfaction of the taxpayer's civil liability
in a criminal proceeding under the tax law or, otherwise stated, since the said civil
liability is not deemed included in the criminal action, acquittal of the taxpayer in the
criminal proceeding does not necessarily entail exoneration from his liability to pay the
taxes. It is error to hold, as the lower court has held that the judgment in the criminal
cases Nos. 2089 and 2090 bars the action in the present case. The acquittal in the said
criminal cases cannot operate to discharge defendant appellee from the duty of paying
the taxes which the law requires to be paid, since that duty is imposed by statute prior to
and independently of any attempts by the taxpayer to evade payment. Said obligation is
not a consequence of the felonious acts charged in the criminal proceeding nor is it a
mere civil liability arising from crime that could be wiped out by the judicial declaration of
non existence of the criminal acts charged. x x x.48(Citations omitted and emphasis
ours)

Further, in a more recent case of Proton Pilipinas Corp. v. Republic of the Phils.,49 We
ruled that:

While it is true that according to the aforesaid Section 4, of Republic Act No. 8249, the
institution of the criminal action automatically carries with it the institution of the civil
action for the recovery of civil liability, however, in the case at bar, the civil case for the
collection of unpaid customs duties and taxes cannot be simultaneously instituted and
determined in the same proceedings as the criminal cases before the Sandiganbayan,
as it cannot be made the civil aspect of the criminal cases filed before it. It should be
borne in mind that the tax and the obligation to pay the same are all created by statute;
so are its collection and payment governed by statute. The payment of taxes is a duty
which the law requires to be paid. Said obligation is not a consequence of the felonious
acts charged in the criminal proceeding nor is it a mere civil liability arising from crime
that could be wiped out by the judicial declaration of non-existence of the criminal acts
charged. Hence, the payment and collection of customs duties and taxes in itself
creates civil liability on the part of the taxpayer. Such civil liability to pay taxes arises
from the fact, for instance, that one has engaged himself in business, and not because
of any criminal act committed by him.50(Citations omitted and emphasis ours)

The civil action for the recovery of

civil liability for taxes and penalties
that is deemed instituted with the
criminal action is not the Petition
for Review Ad Cautelam filed by
petitioner

Under Sections 254 and 255 of the NIRC, the government can file a criminal case for
tax evasion against any taxpayer who willfully attempts in any manner to evade or
defeat any tax imposed in the tax code or the payment thereof. The crime of tax evasion
is committed by the mere fact that the taxpayer knowingly and willfully filed a fraudulent
return with intent to evade and defeat a part or all of the tax. It is therefore not required
that a tax deficiency assessment must first be issued for a criminal prosecution for tax
evasion to prosper.51

While the tax evasion case is pending, the BIR is not precluded from issuing a final
decision on a disputed assessment, such as what happened in this case. In order to
prevent the assessment from becoming final, executory and demandable, Section 9 of
R.A. No. 9282 allows the taxpayer to file with the CTA, a Petition for Review within 30
days from receipt of the decision or the inaction of the respondent.

The tax evasion case filed by the government against the erring taxpayer has, for its
purpose, the imposition of criminal liability on the latter. While the Petition for Review
filed by the petitioner was aimed to question the FDDA and to prevent it from becoming
final. The stark difference between them is glaringly apparent. As such, the Petition for
Review Ad Cautelam is not deemed instituted with the criminal case for tax evasion.

In fact, in the Resolution52 dated June 6, 2012, the CTA recognized the separate and
distinct character of the Petition for Review from the criminal case, to wit:

As regards, [petitioner's] Urgent Motion (With Leave of Court for Confirmation that the
Civil Action for Recovery of Civil Liability for Taxes and Penalties is Deemed Instituted
in the Consolidated Criminal Cases) filed on May 30, 2012, the same is
hereby GRANTED. The civil action for recovery of the civil liabilities of [petitioner] for
taxable year 2008 stated in the [FDDA] dated May 18, 2012 is DEEMED
INSTITUTED with the instant consolidated criminal cases, without prejudice to the right
of the [petitioner] to avail of whatever additional legal remedy he may have, to prevent
the said FDDA from becoming final and executory for taxable year 2008.53(Emphasis
ours)

In the said resolution, what is deemed instituted with the criminal action is only the
government's recovery of the taxes and penalties relative to the criminal case. The
remedy of the taxpayer to appeal the disputed assessment is not deemed instituted with
the criminal case. To rule otherwise would be to render nugatory the procedure in
assailing the tax deficiency assessment.

The CTA En Banc erred in

affirming the dismissal of the case
for nonpayment of docket fees

While it is true that the Petition for Review Ad Cautelam is not deemed instituted with
the criminal case, We hold that the CTA En Banc still erred in affirming the dismissal of
the case.

Rule 6, Section 3 of the RRCTA provides that:

SEC. 3. Payment of docket fees. – The Clerk of Court shall not receive a petition for
review for filing unless the petitioner submits proof of payment of the docket fees. Upon
receipt of the petition or the complaint, it will be docketed and assigned a number, which
shall be placed by the parties on all papers thereafter filed in the proceeding. The Clerk
of Court will then issue the necessary summons to the respondent or defendant.
Basic is the rule that the payment of docket and other legal fees is both mandatory and
jurisdictional. The court acquires jurisdiction over the case only upon the payment of the
prescribed fees.54

However, the mere failure to pay the docket fees at the time of the filing of the
complaint, or in this case the Petition for Review Ad Cautelam, does not necessarily
cause the dismissal of the case. As this Court held in Camaso v. TSM Shipping (Phils.),
Inc.,55 while the court acquires jurisdiction over any case only upon the payment of the
prescribed docket fees, its nonpayment at the time of filing of the initiatory pleading
does not automatically cause its dismissal so long as the docket fees are paid within a
reasonable period; and that the party had no intention to defraud the government.56

In this case, records reveal that petitioner has no intention to defraud the government in
not paying the docket fees. In fact, when he appealed the FDDA insofar as the taxable
year 2007 was concerned, he promptly paid the docket fees when he filed his Petition
for Review.

Confusion resulted when the FDDA also covered tax deficiencies pertaining to taxable
year 2008 which was also the subject of the consolidated criminal cases for tax evasion.
To guide the petitioner, he sought the advise of the CTA First Division on whether he
was still required to pay the docket fees. The CTA First Division issued its
Resolution57 dated June 6, 2012 ruling that the civil action for recovery of the civil
liabilities of petitioner for taxable year 2008 stated in the FDDA was deemed instituted
with the consolidated criminal cases. Pursuant to said CTA Resolution, the Clerk of
Court issued a computed "zero filing fees"58 when petitioner filed his Petition for
Review Ad Cautelam.

Petitioner merely relied on good faith on the pronouncements of the CTA First Division
that he is no longer required to pay the docket fees. As such, the CTA cannot just
simply dismiss the case on the ground of nonpayment of docket fees. The CTA should
have instead directed the clerk of court to assess the correct docket fees and ordered
the petitioner to pay the same within a reasonable period. It should be borne in mind
that technical rules of procedure must sometimes give way, in order to resolve the case
on the merits and prevent a miscarriage of justice.

This Court will not however rule on

the merits of the CTA Case No.
8503

Rule 4, Section 3(a), paragraph 1 of the RRCTA provides that the CTA First Division
has exclusive appellate jurisdiction over decisions of the Commissioner of Internal
Revenue on disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the NIRC or other
laws administered by the BIR, to wit:
SEC. 3. Cases within the jurisdiction of the Court in Divisions. – The Court in Divisions
shall exercise:

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

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed

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

The above provision means that the CTA exercises exclusive appellate jurisdiction to
resolve decisions of the commissioner of internal revenue. There is no other court that
can exercise such jurisdiction. "[I]t should be noted that the CTA has developed an
expertise on the subject of taxation because it is a specialized court dedicated
exclusively to the study and resolution of tax problems."59 Thus, this Court has no
jurisdiction to review tax cases at the first instance without first letting the CTA to study
and resolve the same.

Under Rule 16, Section 160 of the RRCTA, this Court's review of the decision of the
CTA En Banc is limited in determining whether there is grave abuse of discretion on the
part of the CTA in resolving the case. Basic is the rule that delving into factual issues in
a petition for review on certiorari is not a proper recourse, since a Rule 45 petition is
only limited to resolutions on questions of law.61

Here, petitioner insists that the 10 parcels of idle land he sold on July 11, 2008 in a
single transaction to Eagle I are capital assets. Thus, the said parcels of land are
properly subject to capital gains tax and documentary stamp tax and not to the regular
income tax and value-added tax. The CIR, on the other hand argues that the 10 parcels
of land sold by petitioner are ordinary assets, hence should be subject to income tax
and value-added tax. The CIR reasoned that the sole purpose of petitioner in acquiring
the said lots was for the latter to make a profit. Further, the buying and selling of the
said lots all occurred within the period of eight months and it involved sale transactions
with a ready buyer.62

Section 39(A)(1) of the National Internal Revenue Code (NIRC) provides that:

(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held by
the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or property used in the trade or business, of a character which is subject to
the allowance for depreciation provided in Subsection (F) of Section 34; or real property
used in trade or business of the taxpayer.
The distinction between capital asset and ordinary asset was further defined in Section
2(a) and (b) Revenue Regulations No. 7-2003,63 thus:

a. Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real
properties considered as ordinary assets under Sec. 39(A)(1) of the Code.
b. Ordinary assets shall refer to all real properties specifically excluded from the
definition of capital assets under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year; or

2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or

3. Real property used in trade or business (i.e., buildings and/or improvements) of a

character which is subject to the allowance for depreciation provided for under Sec.
34(F) of the Code; or

4. Real property used in trade or business of the taxpayer.

The statutory definition of capital assets is negative in nature. Thus, if the property or
asset is not among the exceptions, it is a capital asset; conversely, assets falling within
the exceptions are ordinary assets.64

To determine as to whether the transaction between petitioner and Eagle I is an isolated

transaction or whether the 10 parcels of land sold by petitioner is classified as capital
assets or ordinary assets should properly be resolved by the CTA. Thus, it would be
more prudent for Us to remand the case to CTA for the latter to conduct a full-blown trial
where both parties are given the chance to present evidence of their claim. Well-settled
is the rule that this Court is not a trier of facts.

Considering Our foregoing disquisitions, the proper remedy is to remand the case to the
CTA First Division and to order the Clerk of Court to assess the correct docket fees for
the Petition for Review Ad Cautelam and for petitioner to pay the same within ten (10)
days from receipt of the correct assessment of the clerk of court.

WHEREFORE, the Petition is hereby PARTIALLY GRANTED. The Decision dated

December 22, 2014 and Resolution dated February 2, 2016 of the Court of Tax
Appeals En Banc in CTA EB Criminal Case No. 026 are REVERSED and SET
ASIDE. The case is REMANDED to the Court of Tax Appeals First Division to conduct
futher proceedings in CTA Case No. 8503 and to ORDER the Clerk of Court to assess
the correct docket fees. Petitioner Mariano Lim Gaw, Jr., is likewise ORDERED to pay
the correct docket fees within ten (10) days from the receipt of the correct assessment
of the Clerk of Court.

(FDDA- TP Remedies)

FIRST DIVISION

G.R. No. 219340, November 07, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. STANDARD INSURANCE

CO., INC., Respondent.

DECISION

BERSAMIN, J.:

At issue is the authority of the Regional Trial Court (RTC) to enjoin the enforcement or
implementation of Section 108 and Section 184 of the National Internal Revenue Code
of 1997 (NIRC) through an original action for declaratory relief.

The Case

This appeal by petition for review on certiorari is being directly brought by the
Commissioner of Internal Revenue (petitioner)1 to challenge the judgment rendered on
May 8, 20152 and the order issued on July 10, 2015,3 whereby the Regional Trial Court
(RTC), Branch 66, in Makati City in Civil Case No. 14-1330, an action for declaratory
relief initiated by the respondent, respectively permanently enjoined the petitioner, or
any persons acting on her behalf from proceeding with the implementation or
enforcement of Section 108 and Section 184 of the NIRC against the respondent, and
denied her motion for reconsideration.

Antecedents

On February 13, 2014, the respondent received from the Bureau of Internal Revenue
(BIR) a Preliminary Assessment Notice (PAN) regarding its liability amounting to
P377,038,679.55 arising from a deficiency in the payment of documentary stamp taxes
(DST) for taxable year 2011. The respondent contested the PAN through its letter dated
February 27, 2014, but the petitioner nonetheless sent to it a formal letter of demand
dated March 27, 2014. Although the respondent requested reconsideration on April 22,
2014,4 it received on December 4, 2014 the Final Decision on Disputed Assessment
(FDDA) dated November 25, 2014, declaring its liability for the DST deficiency,
including interest and compromise penalty, totaling P418,830,567.46.5 On December
11, 2014, it sought reconsideration of the FDDA, and objected to the tax imposed
pursuant to Section 184 of the NIRC as violative of the constitutional limitations on
taxation.6
Meanwhile, the respondent also received a demand for the payment of its deficiency
income tax, value-added tax, premium tax, DST, expanded withholding tax, and fringe
benefit tax for taxable year 2012,7 and deficiency DST for taxable year 2013.8

On December 19, 2014, the respondent commenced Civil Case No. 14-1330 in the RTC
(with prayer for issuance of a temporary restraining order (TRO) or of a writ of
preliminary injunction) for the judicial determination of the constitutionality of Section
108 and Section 184 of the NIRC with respect to the taxes to be paid by non-life
insurance companies. In its petition, the respondent contended that the facts of the case
must be appreciated in light of the effectivity of Republic Act (R.A.) No. 1000 I
entitled An Act Reducing the Taxes on Life Insurance Policies, whereby the tax rate for
life insurance premiums was reduced from 5% to 2%; and the pendency of deliberations
on House Bill (H.B.) No. 3235 entitled An Act Rationalizing the Taxes Imposed on Non-
Life Insurance Policies, whereby an equal treatment for both life and non-life companies
was being sought as a response to the supposed inequality generated by the enactment
of R.A. No. 10001.

On December 23, 2014, the RTC issued the TRO prayed for by enjoining the BIR, its
agents, representatives, assignees, or any persons acting for and in its behalf from
implementing the provisions of the NIRC adverted to with respect to the FDDA for the
respondent's taxable year 2011, and to the pending assessments for taxable years
2012 and 2013.

Later, on January 13, 2015, the RTC issued the writ of preliminary injunction.

On May 8, 2015, the RTC rendered the assailed judgment wherein it opined that
although taxes were self-assessing, the tax system merely created liability on the part of
the taxpayers who still retained the right to contest the particular application of the tax
laws; and holding that the exercise of such right to contest was not considered a breach
of the provision itself as to deter the action for declaratory relief,9 and decreed thusly:
WHEREFORE, premises considered, the respondent, its agents, representatives, or
any persons acting on its behalf is hereby permanently enjoined from proceeding with
the implementation or enforcement of Sections 108 and 184 of the National Internal
Revenue Code against petitioner Standard Insurance Co., Inc. until the Congress shall
have enacted and passed into law House Bill No. 3235 in conformity with the provisions
of the Constitution.

SO ORDERED.10
The petitioner moved for reconsideration of the judgment, but on July 10, 2015 the RTC
denied the motion for reconsideration.11

Hence, the petitioner has appealed directly to the Court,12 stating that:
I.
THE TRIAL COURT ERRED IN TAKING COGNIZANCE OF THE INSTANT CASE
BECAUSE A PETITION FOR DECLARATORY RELIEF IS NOT APPLICABLE TO
CONTEST TAX ASSESSMENTS.

II.

THE TRIAL COURT ERRED IN TAKING COGNIZANCE OF THE INSTANT CASE

BECAUSE THE PETITION FOR DECLARATORY RELIEF IS FATALLY DEFECTIVE
FOR FAILING TO SATISFY THE BASIC REQUISITES UNDER RULE 63 OF THE
RULES OF COURT.

III.

THE TRIAL COURT ERRED IN ADJUDGING SECTIONS 108 AND 184 OF THE NIRC
AS VIOLATIVE OF THE EQUAL PROTECTION CLAUSE.

IV.

THE TRIAL COURT GRAVELY ERRED IN GRANTING INJUNCTIVE RELIEF IN

FAVOR OF RESPONDENT, THE SAME (I) BEING SPECIFICALLY PROHIBITED BY
SECTION 218 OF THE NIRC; AND (II} HAVING BEEN GRANTED WITHOUT
FACTUAL OR LEGAL BASIS.

V.

THE TRIAL COURT ERRED IN ACCORDING THE RELIEF ADJUDGED, GIVEN

THAT: (A) THE RESULTANT REMEDY FALLS OUTSIDE THE PURVIEW OF AN
ACTION FOR DECLARATORY RELIEF; AND (II) IT IS VIOLATIVE OF THE RULE
THAT JUDICIAL DECISIONS MUST FINALLY DETERMINE THE RIGHTS,
OBLIGATIONS AND RESPONSIBILITIES OF PARTIES.13
Two substantial issues are presented for resolution. The first is the propriety of the
action for declaratory relief; the other, the legal competence of the RTC to take
cognizance of the action for declaratory relief.

Ruling of the Court

The appeal is meritorious.

1.

The injunctive relief is not available as a remedy to assail the collection of a tax

The more substantial reason that should have impelled the RTC to desist from taking
cognizance of the respondent's petition for declaratory relief except to dismiss the
petition was its lack of jurisdiction.

We start by reminding the respondent about the inflexible policy that taxes, being the
lifeblood of the Government, should be collected promptly and without hindrance or
delay. Obeisance to this policy is unquestionably dictated by law itself. Indeed, Section
218 of the NIRC expressly provides that "[n]o court shall have the authority to grant an
injunction to restrain the collection of any national internal revenue tax, fee or charge
imposed by th[e] [NIRC]."14 Also, pursuant to Section 1115 of R.A. No. 1125, as
amended, the decisions or rulings of the Commissioner of Internal Revenue, among
others, assessing any tax, or levying, or distraining, or selling any property of taxpayers
for the satisfaction of their tax liabilities are immediately executory, and their
enforcement is not to be suspended by any appeals thereof to the Court of Tax Appeals
unless "in the opinion of the Court [of Tax Appeals] the collection by the Bureau of
Internal Revenue or the Commissioner of Customs may jeopardize the interest of the
Government and/or the taxpayer," in which case the Court of Tax Appeals "at any stage
of the proceeding may suspend the said collection and require the taxpayer either to
deposit the amount claimed or to file a surety bond for not more than double the
amount."

In view of the foregoing, the RTC not only grossly erred in giving due course to the
petition for declaratory relief, and in ultimately deciding to permanently enjoin the
enforcement of the specified provisions of the NIRC against the respondent, but even
worse acted without jurisdiction.

2.

Action for declaratory relief was procedurally improper as a remedy

We further indicate that even assuming, arguendo, that the RTC had jurisdiction to act
on the petition in Civil Case No. 14-1330, it nevertheless misappreciated the propriety of
declaratory relief as a remedy.

An action for declaratory relief is governed by Section 1, Rule 63 of the Rules of

Court.16 It is predicated on the attendance of several requisites, specifically: (1) the
subject matter of the controversy must be a deed, will, contract or other written
instrument, statute, executive order or regulation, or ordinance; (2) the terms of said
documents and the validity thereof are doubtful and require judicial construction; (3)
there must have been no breach of the documents in question; (4) there must be an
actual justiciable controversy or the "ripening seeds" of one between persons whose
interests are adverse; (5) the issue must be ripe for judicial determination; and (6)
adequate relief is not available through other means or other forms of action or
proceeding.17

The third, fourth, fifth and sixth requisites were patently wanting.
Firstly, the third requisite was not met due to the subject of the action (i.e. statute)
having been infringed or transgressed prior to the institution of the action.18 We observe
in this regard that the RTC seemed to believe that the tax assessments issued had
merely created a liability against the respondent as the taxpayer, and that its suit for
declaratory relief was but consistent with protesting the assessments. The RTC's belief
was absolutely devoid of legal foundation, however, simply because internal revenue
taxes, being self-assessing, required no further assessment to give rise to the liability of
the taxpayer.19

Specifically, the assessments for DST deficiencies of the respondent for the years 2011,
2012 and 2013, as imposed pursuant to Section 184 of the NIRC were the subject of
the respondent's petition for declaratory relief. Said legal provision states:
Section 184. Stamp Tax on Policies of Insurance Upon Property. - On all policies of
insurance or other instruments by whatever name the same may be called, by which
insurance shall be made or renewed upon property of any description, including rents or
profits, against peril by sea or on inland waters, or by fire or lightning, there shall be
collected a documentary stamp tax of Fifty centavos (P0.50) on each Four pesos
(P4.00), or fractional part thereof, of the amount of premium charged: Provided,
however, That no documentary stamp tax shall be collected on reinsurance contracts or
on any instrument by which cession or acceptance of insurance risks under any
reinsurance agreement is effected or recorded.
What was being thereby taxed was the privilege of issuing insurance policies;
hence, the taxes accrued at the time the insurance policies were issued. Verily, the
violation of Section 184 of the NIRC occurred upon the taxpayer's failure or refusal to
pay the correct DST due at the time of issuing the non-life insurance policies. Inasmuch
as the cause of action for the payment of the DSTs pursuant to Section 10820 and
Section 184 of the NIRC accrued upon the respondent's failure to pay the DST at least
for taxable year 2011 despite notice and demand, the RTC could not procedurally take
cognizance of the action for declaratory relief.

Secondly, the apprehension of the respondent that it could be rendered technically

insolvent through the imposition of the iniquitous taxes imposed by Section 108 and
Section 184 of the NIRC,21 laws that were valid and binding, did not render the action
for declaratory relief fall within the purview of an actual controversy that was ripe for
judicial determination. The respondent was thereby engaging in speculation or
conjecture, or arguing on probabilities, not actualities. Therein lay the prematurity of its
action, for a justiciable controversy refers to an existing case or controversy that is
appropriate or ripe for judicial determination, not one that is conjectural or merely
anticipatory.22

Admittedly, the respondent sought in the RTC the determination of its right to be
assessed the correct taxes under Section 108 and Section 184 of the NIRC by
contending said tax provisions to be invalid and unconstitutional for their unequal
treatment of life and non-life insurance policies. The respondent cited R.A. No. 10001
and House Bill No. 3235 in support of its contention. Obviously, the challenge mounted
by the respondent against the tax provisions in question could be said to be based on a
contingency that might or might not occur. This is because the Congress has not yet
addressed the difference in tax treatment of the life and non-life insurance policies.
Under the circumstances, the respondent would not be entitled to declaratory relief
because its right - still dependent upon contingent legislation - was still inchoate.

Lastly, the respondent's adequate remedy upon receipt of the FDDA for the DST
deficiency for taxable year 2011 was not the action for declaratory relief but an appeal
taken in due course to the Court of Tax Appeals. Instead of appealing in due course to
the CTA, however, it resorted to the RTC to seek and obtain declaratory relief. By
choosing the wrong remedy, the respondent lost its proper and true recourse. Worse,
the choice of the wrong remedy rendered the assessment for the DST deficiency for
taxable year 2011 final as a consequence. As such, the petition for declaratory relief,
assuming its propriety as a remedy for the respondent, became mooted by the finality of
the assessment.

With not all the requisites for the remedy of declaratory relief being present, the
respondent's petition for declaratory relief had no legal support and should have been
dismissed by the RTC.

WHEREFORE, the Court GRANTS the petition for review

on certiorari; ANNULS and SETS ASIDE the decision rendered in Civil Case No. 14-
1330 on May 8, 2015 by the Regional Trial Court, Branch 66, in Makati
City; DISMISSES Civil Case No. 14-1330 on the ground of lack of
jurisdiction; QUASHES the writ of preliminary injunction issued against the
Commissioner of Internal Revenue in Civil Case No. 14-1330 for being issued without
jurisdiction; and ORDERS the respondent to pay the costs of suit.

(FNBA Remedies)
THIRD DIVISION
G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005
Decision1 of the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26,
2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5211, which
cancelled and set aside the Assessment Notices for deficiency income tax and
expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against
respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from
the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the
amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional
and security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending
December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law
firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the
years 1984 and 1985.5
(c) Expense for security services of El Tigre Security & Investigation
Agency for the months of April and May 1986.6
(2) The alleged understatement of ICC’s interest income on the three promissory
notes due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and
surcharge) was allegedly due to the failure of ICC to withhold 1% expanded withholding
tax on its claimed P244,890.00 deduction for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On
February 9, 1995, however, it received a final notice before seizure demanding payment
of the amounts stated in the said notices. Hence, it brought the case to the CTA which
held that the petition is premature because the final notice of assessment cannot be
considered as a final decision appealable to the tax court. This was reversed by the
Court of Appeals holding that a demand letter of the BIR reiterating the payment of
deficiency tax, amounts to a final decision on the protested assessment and may
therefore be questioned before the CTA. This conclusion was sustained by this Court on
July 1, 2001, in G.R. No. 135210.8 The case was thus remanded to the CTA for further
proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC in 1986 because it was
only in the said year when the bills demanding payment were sent to ICC. Hence, even
if some of these professional services were rendered to ICC in 1984 or 1985, it could
not declare the same as deduction for the said years as the amount thereof could not be
determined at that time.
The CTA also held that ICC did not understate its interest income on the subject
promissory notes. It found that it was the BIR which made an overstatement of said
income when it compounded the interest income receivable by ICC from the promissory
notes of Realty Investment, Inc., despite the absence of a stipulation in the contract
providing for a compounded interest; nor of a circumstance, like delay in payment or
breach of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its
claimed deduction for security services as shown by the various payment orders and
confirmation receipts it presented as evidence. The dispositive portion of the CTA’s
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-
000680 for deficiency income tax in the amount of P333,196.86, and Assessment
Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount
of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986, are
hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services)
were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only in
1986 when ICC received the billing statements for said services. It further ruled that ICC
did not understate its interest income from the promissory notes of Realty Investment,
Inc., and that ICC properly withheld and remitted taxes on the payments for security
services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition
contending that since ICC is using the accrual method of accounting, the expenses for
the professional services that accrued in 1984 and 1985, should have been declared as
deductions from income during the said years and the failure of ICC to do so bars it
from claiming said expenses as deduction for the taxable year 1986. As to the alleged
deficiency interest income and failure to withhold expanded withholding tax assessment,
petitioner invoked the presumption that the assessment notices issued by the BIR are
valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the
deduction of the expenses for professional and security services from ICC’s gross
income; and (2) held that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc; and that ICC withheld the required 1% withholding tax
from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must have been paid or incurred during
the taxable year; (c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be supported by receipts, records or other
pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is further
qualified by Section 45 of the National Internal Revenue Code (NIRC) which states that:
"[t]he deduction provided for in this Title shall be taken for the taxable year in which
‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon
the basis of which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and
how to report income and deductions.12 In the instant case, the accounting method used
by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method
of accounting, expenses not being claimed as deductions by a taxpayer in the current
year when they are incurred cannot be claimed as deduction from income for the
succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and
other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.13
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation
to pay them, in opposition to actual receipt or payment, which characterizes the cash
method of accounting. Amounts of income accrue where the right to receive them
become fixed, where there is created an enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.14
For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income or
expense? The accrual of income and expense is permitted when the all-events test has
been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy. However, the test
does not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it must be determined with "reasonable
accuracy." Accordingly, the term "reasonable accuracy" implies something less than an
exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
year.[16] Accrual method of accounting presents largely a question of fact; such that the
taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and
one who claims an exemption must be able to justify the same by the clearest grant of
organic or statute law. An exemption from the common burden cannot be permitted to
exist upon vague implications. And since a deduction for income tax purposes partakes
of the nature of a tax exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and
auditing services. The expenses for legal services pertain to the 1984 and 1985 legal
and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, and for reimbursement of the expenses of said firm in connection with ICC’s
tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been
its counsel since the 1960’s.19 From the nature of the claimed deductions and the span
of time during which the firm was retained, ICC can be expected to have reasonably
known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable
year when they could have been claimed as deductions cannot thus be attributed solely
to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due
diligence could have inquired into the amount of their obligation to the firm, especially so
that it is using the accrual method of accounting. For another, it could have reasonably
determined the amount of legal and retainer fees owing to its familiarity with the rates
charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the
taxpayer bears the burden of establishing the accrual of an expense or income.
However, ICC failed to discharge this burden. As to when the firm’s performance of its
services in connection with the 1984 tax problems were completed, or whether ICC
exercised reasonable diligence to inquire about the amount of its liability, or whether it
does or does not possess the information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact which ICC never established. It
simply relied on the defense of delayed billing by the firm and the company, which
under the circumstances, is not sufficient to exempt it from being charged with
knowledge of the reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense deductions in
1986. This is so because ICC failed to present evidence showing that even with only
"reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in the year
1985, it cannot determine the professional fees which said company would charge for
its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions
for the professional services were allowable deductions for the taxable year 1986.
Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly
deducted from its gross income for the said year and were therefore properly disallowed
by the BIR.
As to the expenses for security services, the records show that these expenses were
incurred by ICC in 198620 and could therefore be properly claimed as deductions for the
said year.
Anent the purported understatement of interest income from the promissory notes of
Realty Investment, Inc., we sustain the findings of the CTA and the Court of Appeals
that no such understatement exists and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is indeed no stipulation
between the latter and ICC on the application of compounded interest.21 Under Article
1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should
not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the
required withholding tax from its claimed deductions for security services and remitted
the same to the BIR is supported by payment order and confirmation receipts.22 Hence,
the Assessment Notice for deficiency expanded withholding tax was properly cancelled
and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for
deficiency income tax should be cancelled and set aside but only insofar as the claimed
deductions of ICC for security services. Said Assessment is valid as to the BIR’s
disallowance of ICC’s expenses for professional services. The Court of Appeal’s
cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of
P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005
Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the
MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed
the expense deduction of Isabela Cultural Corporation for professional and security
services, is declared valid only insofar as the expenses for the professional fees of SGV
& Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s
liability under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.
c. Due Process

THIRD DIVISION

G.R. Nos. 201398-99, October 03, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. AVON PRODUCTS

MANUFACTURING, INC.,Respondent.

G.R. Nos. 201418-19, October 3, 2018

AVON PRODUCTS MANUFACTURING, INC., Petitioner, v. THE COMMISSIONER OF

THE INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

Tax assessments issued in violation of the due process rights of a taxpayer are null and
void. While the government has an interest in the swift collection of taxes, the Bureau of
Internal Revenue and its officers and agents cannot be overreaching in their efforts, but
must perform their duties in accordance with law, with their own rules of procedure, and
always with regard to the basic tenets of due process.
The 1997 National Internal Revenue Code, also known as the Tax Code, and revenue
regulations allow a taxpayer to file a reply or otherwise to submit comments or arguments
with supporting documents at each stage in the assessment process. Due process
requires the Bureau of Internal Revenue to consider the defenses and evidence submitted
by the taxpayer and to render a decision based on these submissions. Failure to adhere
to these requirements constitutes a denial of due process and taints the administrative
proceedings with invalidity.

These consolidated cases assail the Court of Tax Appeals En Banc November 9, 2011
Decision1 and April 10, 2012 Resolution2 in CTA EB Case Nos. 661 and 663. The
assailed Decision denied the respective Petitions for Review by the Commissioner of
Internal Revenue (Commissioner)3 and of Avon Products Manufacturing, Inc.
(Avon),4 and affirmed the Court of Tax Appeals Special First Division May 13, 2010
Decision.5 The assailed Resolution denied the Commissioner's Motion for
Reconsideration6 and Avon's Motion for Partial Reconsideration.7

Avon filed its Value Added Tax (VAT) Returns and Monthly Remittance Returns of Income
Tax Withheld for the taxable year 1999 on the following dates:

Return Date Filed

3rd Quarter VAT Return October 25, 1999

4th Quarter VAT Return January 25, 2000

Monthly Remittance
Return of Income Expanded Compensation
Taxes Withheld

January February 25, 1999 February 25, 1999

February March 25, 1999 March 25, 1999

March April 26, 1999 April 26, 1999

April May 25, 1999 May 25, 1999

May June 25, 1999 June 25, 1999

June July 26, 1999 July 26, 1999

 July August 25, 1999 August 25, 1999

August September 27, 1999 September 27, 1999

September October 25, 1999 October 25, 1999

October November 25, 1999 November 25, 1999

November December 27, 1999 December 27, 1999

December January 25, 2000 January 25, 20008

Avon signed two (2) Waivers of the Defense of Prescription dated October 14, 2002 and
December 27, 2002,9which expired on January 14, 2003 and April 14, 2003,
respectively.10

On July 14, 2004, Avon was served a Collection Letter11 dated July 9, 2004. It was
required to pay P80,246,459.1512 broken down as follows:

KIND OF YE COMPROM TOTAL

BASIC TAX INTEREST
TAX AR ISE AMOUNT

Income 199 22,012,98 13,207,79 25,000.0 35,245,774

Tax 9 4.19 0.51 0 .70

Excise 199 913,514.8 658,675.5 73,200.0 1,645,390.

Tax 9 7 7 0 44

199 20,286,03 13,254,67 50,000.0 33,590,711

VAT
9 3.82 7.47 0 .29

Withholdi
ng Tax
199 4,702,116 3,040,229 45,000.0 7,787,345.
on
9 .38 .28 0 66
Compen
sation
 Expande
d 199 1,187,610 764,626.1 25,000.0 1,977,237.
Withholdi 9 .88 8 0 06
ng Tax

P49,102,2 P30,925,9 P218,20 P80,246,45

TOTAL
60.14 99.01 0.00 9.1513

These deficiency assessments were the same deficiency taxes covered by the
Preliminary Assessment Notice14dated November 29, 2002, received by Avon on
December 23, 2002.15

On February 14, 2003, Avon filed a letter dated February 13, 2003 protesting against the
Preliminary Assessment Notice.16

Without ruling on Avon's protest, the Commissioner prepared the Formal Letter of
Demand17 and Final Assessment Notices,18 all dated February 28, 2003, received by
Avon on April 11, 2003. Except for the amount of interest, the Final Assessment Notices
were the same as the Preliminary Assessment Notice.19

In a letter20 dated and filed on May 9, 2003, Avon protested the Final Assessment Notices.
Avon resubmitted its protest to the Preliminary Assessment Notice and adopted the same
as its protest to the Final Assessment Notices.21

A conference was allegedly held on June 26, 2003 where Avon informed the revenue
officers that all the documents necessary to support its defenses had already been
submitted. Another meeting was held on August 4, 2003, where it showed the original
General Ledger Book as previously directed by the revenue officers. During these
meetings, the revenue officers allegedly expressed that they would cancel the
assessments resulting from the alleged discrepancy in sales if Avon would pay part of the
assessments.22

Thus, on January 30, 2004, Avon paid the following portions of the Final Assessment
Notices:

a) Disallowed taxes and licenses/Fringe Benefit Tax adjustment P153,559.37; and

b) Withholding Tax on Compensation - Late Remittance - P32,829.2823

However, in a Memorandum dated May 27, 2004, the Bureau of Internal Revenue's
officers recommended the enforcement and collection of the assessments on the sole
justification that Avon failed to submit supporting documents within the 60-day period as
required under Section 228 of the Tax Code.24

The Large Taxpayers Collection and Enforcement Division thereafter served Avon with
the Collection Letter dated July 9, 2004.25 Avon asserted that even the items already paid
on January 30, 2004 were still included in the deficiency tax assessments covered by this
Collection Letter.26

In a letter27 to the Deputy Commissioner for Large Taxpayers Service dated and filed on
July 27, 2004, Avon requested the reconsideration and withdrawal of the Collection Letter.
It argued that it was devoid of legal and factual basis, and was premature as the
Commissioner of Internal Revenue had not yet acted on its protest against the Final
Assessment Notices.28

The Commissioner did not act on Avon's request for reconsideration. Thus, Avon was
constrained to treat the Collection Letter as denial of its protest.29

On August 13, 2004, Avon filed a Petition for Review before the Court of Tax
Appeals.30 On August 24, 2004, it filed an Urgent Motion for Suspension of Collection of
Tax.31

On May 13, 2010, the Court of Tax Appeals Special First Division rendered its
Decision,32 partially granting Avon's Petition for Review insofar as it ordered
the cancellation of the Final Demand and Final Assessment Notices for deficiency excise
tax, VAT, withholding tax on compensation, and expanded withholding tax. However, it
ordered Avon to pay deficiency income tax in the amount of P357,345.88 including 20%
deficiency interest on the total amount due pursuant to Section 249, paragraphs (b) and
(c)(3) of the Tax Code. The Court of Tax Appeals Special First Division also made the
following pronouncements:33

a) There was no deprivation of due process in the issuance by the CIR of the assessment
for deficiency income tax, deficiency excise tax, deficiency VAT, deficiency final
withholding tax on compensation and deficiency expanded withholding tax against AVON
for the latter was afforded an opportunity to explain and present its evidence;

b) The Waivers of the Statute of Limitations executed by AVON are invalid and ineffective
as the CIR failed to provide [AVON] a copy of the accepted Waivers, as required under
Revenue Memorandum Order No. 20-90. Hence, the assessment of AVON's deficiency
VAT, deficiency expanded withholding tax and deficiency withholding tax on
compensation is considered to have prescribed;

c) AVON's failure to submit the relevant documents in support of its protest did not make
the assessment final and executory;

d) As to assessment on AVON's deficiency Income Tax,

 (1) there was no undeclared sales/income in the amount of P62,911,619.58 per
ITR for the taxable year 1999;

(2) AVON's liability for disallowed taxes and licenses and December 1998 Fringe
Benefit Tax payment adjustment in the amount of P152,632.10 and P927.27,
respectively, or a total of P153,559.37 is extinguished in view of the payment
made;

(3) The discrepancy between Ending Inventories reflected in Balance Sheet and
Cost of Sales represents variance/adjustments on standard cost to actual cost
allocated to ending inventories and not under-declaration as alleged by CIR;

(4) AVON's claimed tax credits in the amount of P203,645.89 was disallowed as
the same was unsupported by withholding tax certificates as required under
Section 2.58.3 (B) of Revenue Regulations No. 2-98. However, the amount of
P140,505.28 was upheld as a proper deduction from its 1999 income tax due;
and

e) As to assessment on AVON's deficiency excise tax, the same is deemed cancelled

and withdrawn in view of its Application for Abatement over its deficiency excise tax
assessment for the year 1999 and its corresponding payment.34

The dispositive portion of the Court of Tax Appeals Special First Division May 13, 2010
Decision read:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly,

respondent is ORDERED TO CANCEL/WITHDRAW the Final Demand and Final
Assessment Notices: (1) Assessment No. LTAID-ET-99-00011 for deficiency Excise Tax,
(2) Assessment No. LTAID-II-VAT-99-00017 for deficiency Value Added Tax, (3)
Assessment No. LTAID-II-WTC-9900002 for deficiency Withholding Tax on
Compensation Under Withholding and Later Remittance, and (4) Assessment No. LTAID-
EWT-99-00010 for deficiency Expanded Withholding Tax.

However, petitioner is ORDERED TO PAY respondent the deficiency Income Tax under
Assessment No. LTAID-II-IT-99-00018 in the amount of P357,345.88 for taxable year
1999.
In addition, petitioner is liable to pay: i) a deficiency interest on the deficiency basic income
tax due of P100,761.01 at the rate of 20% per annum from January 31, 2004 until fully
paid pursuant to Section 249(B) of the 1997 NIRC and ii) a delinquency interest on the
total amount due (inclusive of the deficiency interest) at the rate of 20% per annum from
July 24, 2004 until fully paid pursuant to Section 249(C)(3) of the 1997 NIRC.

SO ORDERED.35

The parties' Motions for Partial Reconsideration were denied in the July 12, 2010
Resolution.36 Both parties filed their respective Petitions for Review before the Court of
Tax Appeals En Banc.37

In its assailed November 9, 2011 Decision,38 the Court of Tax Appeals En Banc denied
the respective Petitions of the Commissioner and Avon, and affirmed the Court of Tax
Appeals Special First Division May 13, 2010 Decision. It held that the Waivers of the
Defense of Prescription were defective, thereby rendering the assessment of Avon's
deficiency VAT, expanded withholding tax, and withholding tax on compensation to have
prescribed.39 It further ruled that contrary to the Commissioner's argument, the
requirement under Revenue Memorandum Order No. 20-90 to furnish the taxpayer with
copies of the accepted waivers was not merely formal in nature, and non-compliance with
it rendered the Waivers of the Defense of Prescription invalid and ineffective.40

On the issue of jurisdiction, the Court of Tax Appeals En Banc held that under Section
228 of the Tax Code, the taxpayer has two (2) options in case of inaction of the
Commissioner on disputed assessments. The first option is to file a petition with the Court
of Tax Appeals within 30 days from the lapse of the 180-day period for the Commissioner
to decide. The second option is to await the final decision of the Commissioner and appeal
this decision within 30 days from its receipt. Here, Avon opted for the second remedy by
filing its petition on July 14, 2004, within 30 days from receipt of the July 9, 2004 Collection
Letter, which also served as the final decision denying its protest. Hence, the Court of
Tax Appeals En Banc ruled that it had jurisdiction over the case.41

The Court of Tax Appeals En Banc further affirmed the Court of Tax Appeals Special First
Division's factual findings with regard to the cancellation of deficiency tax
assessments42 and disallowance of Avon's claimed tax credits.43

Finally, the Court of Tax Appeals En Banc rejected Avon's contention regarding denial of
due process. It held that Avon was accorded by the Commissioner a reasonable
opportunity to explain and present evidence.44Moreover, the Commissioner's failure to
appreciate Avon's supporting documents and arguments did not ipso facto amount to
denial of due process absent any proof of irregularity in the performance of duties.45

In its April 10, 2012 Resolution,46 the Court of Tax Appeals En Banc denied the
Commissioner's Motion for Reconsideration and Avon's Motion for Partial
Reconsideration. It held that the "RCBC case,"47 cited by the Commissioner, was not on
all fours with, and therefore not applicable as stare decisis in this case. Instead, the ruling
in CIR v. Kudos Metal Corporation,48 precluding the Bureau of Internal Revenue from
invoking the doctrine of estoppel to cover its failure to comply with the procedures in the
execution of a waiver, would apply.49

Hence, the present Petitions via Rule 45 were filed before this Court.

In her Petition,50 docketed as G.R. Nos. 201398-99, the Commissioner asserts that Avon
is estopped from assailing the validity of the Waivers of the Defense of Prescription as it
has paid the other assessments that these waivers covered. It also avers that Avon's right
to appeal its protest before the Court of Tax Appeals has prescribed and that the
assessments have attained finality. Finally, it states that Avon is liable for the deficiency
assessments.51

Avon, in its separate Petition,52 docketed as G.R. Nos. 201418-19, argues that the
assessments are void ab initio due to the failure of the Commissioner to observe due
process.53 It maintains that from the start up to the end of the administrative process, the
Commissioner ignored all of its protests and submissions.54

The Petitions were consolidated on July 4, 2012.55 The Commissioner and Avon
subsequently submitted their respective Memoranda56 in compliance with this Court's
June 5, 2013 Resolution.57

The issues for this Court's resolution are:

First, whether or not the Commissioner of Internal Revenue failed to observe

administrative due process, and consequently, whether or not the assessments are void;

Second, whether or not Avon Products Manufacturing, Inc., by paying the other tax
assessments covered by the Waivers of the Defense of Prescription, is estopped from
assailing their validity;

Third, whether or not Avon Products Manufacturing, Inc.'s right to appeal its protest before
the Court of Tax Appeals has already prescribed; and whether or not the assessments
against it for deficiency income tax, excise tax, value-added tax, withholding tax on
compensation, and expanded withholding tax have already attained finality; and

Finally, whether or not Avon Products Manufacturing, Inc. is liable for deficiency income
tax, excise tax, value-added tax, withholding tax on compensation, and expanded
withholding tax for the taxable year 1999.

I.A
Avon asserts that the deficiency tax assessments are void because they were made
without due process58 and were not based on actual facts but on the erroneous
presumptions of the Commissioner.59

It submits that a fundamental part of administrative due process is the administrative

body's due consideration and evaluation of all the evidence submitted by the affected
party. With regard to tax assessment and collection, Section 228 of the Tax Code and
Revenue Regulations No. 12-99 prescribe compliance with due process requirements
through all the four (4) stages of the assessment process, from the preliminary findings
up to the Commissioner's decision on the disputed assessment.60

Avon claims that from the start up to the end of the administrative process, the
Commissioner ignored all of its protests and submissions to contest the deficiency tax
assessments.61 The Commissioner issued identical Preliminary Assessment Notice, Final
Assessment Notices, and Collection Letters without considering Avon's submissions or
its partial payment of the assessments. Avon asserts that it was not accorded
a real opportunity to be heard, making all of the assessments null and void.62

Avon's arguments are well-taken.

The Bureau of Internal Revenue is the primary agency tasked to assess and collect proper
taxes, and to administer and enforce the Tax Code.63 To perform its functions of tax
assessment and collection properly, it is given ample powers under the Tax Code, such
as the power to examine tax returns and books of accounts,64to issue a subpoena,65 and
to assess based on best evidence obtainable,66 among others. However, these powers
must "be exercised reasonably and [under] the prescribed procedure."67 The
Commissioner and revenue officers must strictly comply with the requirements of the law,
with the Bureau of Internal Revenue's own rules,68 and with due regard to taxpayers'
constitutional rights.

The Commissioner exercises administrative adjudicatory power or quasi-judicial function

in adjudicating the rights and liabilities of persons under the Tax Code.

Quasi-judicial power has been described as:

Quasi-judicial or administrative adjudicatory power on the other hand is the power of the
administrative agency to adjudicate the rights of persons before it. It is the power to hear
and determine questions of fact to which the legislative policy is to apply and to decide in
accordance with the standards laid down by the law itself in enforcing and administering
the same law. The administrative body exercises its quasi-judicial power when it performs
in a judicial manner an act which is essentially of an executive or administrative
nature, where the power to act in such manner is incidental to or reasonably necessary
for the performance of the executive or administrative duty entrusted to it.69 (Emphasis
supplied, citations omitted)
In carrying out these quasi-judicial functions, the Commissioner is required to "investigate
facts or ascertain the existence of facts, hold hearings, weigh evidence, and draw
conclusions from them as basis for their official action and exercise of discretion in a
judicial nature."70 Tax investigation and assessment necessarily demand the observance
of due process because they affect the proprietary rights of specific persons.

This Court has stressed the importance of due process in administrative proceedings:

The principle of due process furnishes a standard to which governmental action should
conform in order to impress it with the stamp of validity. Fidelity to such standard must of
necessity be the overriding concern of government agencies exercising quasi-judicial
functions. Although a speedy administration of action implies a speedy trial, speed is not
the chief objective of a trial. Respect for the rights of all parties and the requirements of
procedural due process equally apply in proceedings before administrative agencies with
quasi-judicial perspective in administrative decision making and for maintaining the vision
which led to the creation of the administrative office.71

In Ang Tibay v. The Court of Industrial Relations,72 this Court observed that although
quasi-judicial agencies "may be said to be free from the rigidity of certain procedural
requirements[, it] does not mean that it can, in justiciable cases coming before it, entirely
ignore or disregard the fundamental and essential requirements of due process in trials
and investigations of an administrative character."73 It then enumerated the fundamental
requirements of due process that must be respected in administrative proceedings:

(1) The party interested or affected must be able to present his or her own case
and submit evidence in support of it.

(2) The administrative tribunal or body must consider the evidence presented.

(3) There must be evidence supporting the tribunal's decision.

(4) The evidence must be substantial or "such relevant evidence as a reasonable

mind might accept as adequate to support a conclusion."74
 (5) The administrative tribunal's decision must be rendered on the evidence
presented, or at least contained in the record and disclosed to the parties
affected.

(6) The administrative tribunal's decision must be based on the deciding

authority's own independent consideration of the law and facts governing the
case.

(7) The administrative tribunal's decision is rendered in a manner that the parties
may know the various issues involved and the reasons for the decision.75

Mendoza v. Comelec76 explained that the first requirement is the party's substantive right
at the hearing stageof the proceedings, which, in essence, is the opportunity to explain
one's side or to seek a reconsideration of the adverse action or ruling.

It was emphasized, however, that the mere filing of a motion for reconsideration does not
always result in curing the due process defect,77 "especially if the motion was filed
precisely to raise the issue of violation of the right to due process and the lack of
opportunity to be heard on the merits remained."78

The second to the sixth requirements refer to the party's "inviolable rights applicable at
the deliberative stage."79 The decision-maker must consider the totality of the evidence
presented as he or she decides the case.80

The last requirement relating to the form and substance of the decision is the decision-
maker's '"duty to give reason' to enable the affected person to understand how the rule
of fairness has been administered in his [or her] case, to expose the reason to public
scrutiny and criticism, and to ensure that the decision will be thought through by the
decision-maker."81

The Ang Tibay safeguards were subsequently "simplified into four basic rights,"82 as
follows:

(a) [T]he right to notice, be it actual or constructive, of the institution of the proceedings
that may affect a person's legal right; (b) reasonable opportunity to appear and defend
his rights and to introduce witnesses and relevant evidence in his favor; (c) a tribunal so
constituted as to give him reasonable assurance of honesty and impartiality, and one of
competent jurisdiction; and (d) a finding or decision by that tribunal supported by
substantial evidence presented at the hearing or at least ascertained in the records or
disclosed to the parties.83 (Emphasis supplied)

Saunar v. Ermita84 expounded on Ang Tibay by emphasizing that while administrative

bodies enjoy a certain procedural leniency, they are nevertheless obligated to inform
themselves of all facts material and relevant to the case, and to render a decision based
on an accurate appreciation of facts. In this regard, this Court held that Ang Tibay did not
necessarily do away with the conduct of hearing and a party may invoke its right to a
hearing to thresh out substantial factual issues, thus:

A closer perusal of past jurisprudence shows that the Court did not intend to trivialize the
conduct of a formal hearing but merely afforded latitude to administrative bodies
especially in cases where a party fails to invoke the right to hearing or is given the
opportunity but opts not to avail of it. In the landmark case of Ang Tibay, the Court
explained that administrative bodies are free from a strict application of technical rules of
procedure and are given sufficient leeway. In the said case, however, nothing was said
that the freedom included the setting aside of a hearing but merely to allow matters which
would ordinarily be incompetent or inadmissible in the usual judicial proceedings.

In fact, the seminal words of Ang Tibay manifest a desire for administrative bodies to
exhaust all possible means to ensure that the decision rendered be based on the accurate
appreciation of facts. The Court reminded that administrative bodies have the active duty
to use the authorized legal methods of securing evidence and informing itself of facts
material and relevant to the controversy. As such, it would be more in keeping with
administrative due process that the conduct of a hearing be the general rule rather than
the exception.

....

To reiterate, due process is a malleable concept anchored on fairness and equity. The
due process requirement before administrative bodies are not as strict compared to
judicial tribunals in that it suffices that a party is given a reasonable opportunity to be
heard. Nevertheless, such "reasonable opportunity" should not be confined to the mere
submission of position papers and/or affidavits and the parties must be given the
opportunity to examine the witnesses against them. The right to a hearing is a right which
may be invoked by the parties to thresh out substantial factual issues. It becomes even
more imperative when the rules itself of the administrative body provides for one. While
the absence of a formal hearing does not necessarily result in the deprivation of due
process, it should be acceptable only when the party does not invoke the said right or
waives the same. 85(Emphasis supplied)

In Saunar, this Court held that the petitioner in that case was denied due process when
he was not notified of the clarificatory hearings conducted by the Presidential Anti-Graft
Commission. Under the Presidential Anti-Graft Commission's Rules, in the event that a
clarificatory hearing was determined to be necessary, the Presidential Anti-Graft
Commission must notify the parties of the clarificatory hearings. Further, "the parties shall
be afforded the opportunity to be present in the hearings without the right to examine
witnesses. They, however, may ask questions and elicit answers from the opposing party
coursed through the [Presidential Anti-Graft Commission]."86 This Court held that the
petitioner in Saunar was not treated fairly in the proceedings before the Presidential Anti-
Graft Commission because he was deprived of the opportunity to be present in the
clarificatory hearings and was denied the chance to propound questions through the
Presidential Anti-Graft Commission against the opposing parties.

"[A] fair and reasonable opportunity to explain one's side"87 is one aspect of due process.
Another aspect is the due consideration given by the decision-maker to the arguments
and evidence submitted by the affected party.

Baguio Country Club Corp. v. National Labor Relations Commission88 precisely involved
the question of the denial of due process for failure of the labor tribunals to consider the
evidence presented by the employer. The labor tribunals unanimously denied the
employer's application for clearance to terminate the services of an employee on the
ground of insufficient evidence to show a just cause for the employee's dismissal, and
ordered the reinstatement of the employee with backwages.

This Court held that "[t]he summary procedures used by the [labor tribunals] were too
summary to satisfy the requirements of justice and fair play."89 It noted the irregular
procedures adopted by the Labor Arbiter. First, "[he] allowed a last minute position paper
of [the] respondent ... to be filed and without requiring a copy to be served upon the
Baguio Country Club and without affording the latter an opportunity to refute or rebut the
contents of the paper, [and] forthwith decided the case."90 Second, "the petitioner
specifically stressed to the arbiter that it was 'adopting the investigations which were
enclosed with the application to terminate, which are now parts of the record of the
Ministry of Labor, as part and parcel of this position paper."'91 But the Labor Arbiter,
instead of calling for the complete records of the conciliation proceedings, "denied the
application for clearance on the ground that all that was before it was a position paper
with mere quotations about an investigation conducted . . ."92 This Court held that the
affirmance by the Commission of the decision of the Labor Arbiter was a denial of the
elementary principle of fair play.

[I]t was a denial of elementary principles of fair play for the Commission not to have
ordered the elevation of the entire records of the case with the affidavits earlier submitted
as part of the position paper but completely ignored by the labor arbiter. Or at the very
least, the case should have been remanded to the labor arbiter consonant with the
requirements of administrative due process.

The ever increasing scope of administrative jurisdiction and the statutory grant of
expansive powers in the exercise of discretion by administrative agencies illustrate our
nation's faith in the administrative process as an efficient and effective mode of public
control over sensitive areas of private activity. Because of the specific constitutional
mandates on social justice and protection to labor, and the fact that major labor
management controversies are highly intricate and complex, the legislature and executive
have reposed uncommon reliance upon what they believe is the expertise, the rational
and efficient modes of ascertaining facts, and the unbiased and discerning adjudicative
techniques of the Ministry of Labor and Employment and its instrumentalities.

....

The instant petition is a timely reminder to labor arbiters and all who wield quasi-judicial
power to ever bear in mind that evidence is the means, sanctioned by rules, of
ascertaining in a judicial or quasi-judicial proceeding, the truth respecting a matter of fact
... The object of evidence is to establish the truth by the use of perceptive and reasoning
faculties . . . The statutory grant of power to use summary procedures should heighten a
concern for due process, for judicial perspectives in administrative decision making, and
for maintaining the visions which led to the creation of the administrative office.93

In Alliance for the Family Foundation, Philippines, Inc. v. Garin,94 this Court held that the
Food and Drug Administration failed to observe the basic requirements of due process
when it did not act on or address the oppositions submitted by petitioner Alliance for the
Family Foundation, Philippines, Inc., but proceeded with the registration, recertification,
and distribution of the questioned contraceptive drugs and devices. It ruled that petitioner
was not afforded the genuine opportunity to be heard.

Administrative due process is anchored on fairness and equity in procedure.95 It is

satisfied if the party is properly notified of the charge against it and is given a fair and
reasonable opportunity to explain or defend itself.96 Moreover, it demands that the party's
defenses be considered by the administrative body in making its conclusions,97 and that
the party be sufficiently informed of the reasons for its conclusions.

I.B

Section 228 of the Tax Code, as implemented by Revenue Regulations No. 12-99,
provides certain procedures to ensure that the right of the taxpayer to procedural due
process is observed in tax assessments, thus:

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.

Section 3 of Revenue Regulations No. 12-9998 prescribes the due process requirement
for the four (4) stages of the assessment process:

Section 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment.

—

3.1 Mode of procedures in the issuance of a deficiency tax assessment:

3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer's
records shall, among others, state in his report whether or not the taxpayer agrees with
his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not
amenable, based on the said Officer's submitted report of investigation, the taxpayer shall
be informed, in writing, by the Revenue District Office or by the Special Investigation
Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of
Division concerned (in the case of the BIR National Office) of the discrepancy or
discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of
"Informal Conference,” in order to afford the taxpayer with an opportunity to present his
side of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt
of the notice for informal conference, he shall be considered in default, in which case, the
Revenue District Officer or the Chief of the Special Investigation Division of the Revenue
Regional Office, or the Chief of Division in the National Office, as the case may be, shall
endorse the case with the least possible delay to the Assessment Division of the Revenue
Regional Office or to the Commissioner or his duly authorized representative, as the case
may be, for appropriate review and issuance of a deficiency tax assessment, if warranted.

3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the
Assessment Division or by the Commissioner or his duly authorized representative, as
the case may be, it is determined that there exists sufficient basis to assess the taxpayer
for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by
registered mail, a Preliminary Assessment Notice (PAN) for the proposed
assessment, showing in detail, the facts and the law, rules and regulations, or
jurisprudence on which the proposed assessment is based . . . If the taxpayer fails to
respond within fifteen (15) days from date of receipt of the PAN, he shall be considered
in default, in which case, a formal letter of demand and assessment notice shall be caused
to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability,
inclusive of the applicable penalties.

....

3.1.4 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 . . .

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....

....

The taxpayer shall submit the required documents in support of his protest within sixty
(60) days from date of filing of his letter of protest, otherwise, the assessment shall
become final, executory and demandable. The phrase "submit the required documents"
includes submission or presentation of the pertinent documents for scrutiny and
evaluation by the Revenue Officer conducting the audit. The said Revenue Officer shall
state this fact in his report of investigation.
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.

....

3.1.6 Administrative Decision on a Disputed Assessment. — The decision of the

Commissioner or his duly authorized representative shall (a) state the facts, the
applicable law, rules and regulations, or jurisprudence on which such decision is
based, otherwise, the decision shall be void . . . in which case, the same shall not be
considered a decision on a disputed assessment; and (b) that the same is his final
decision. (Emphasis supplied)

The importance of providing the taxpayer with adequate written notice of his or her tax
liability is undeniable. Under Section 228, it is explicitly required that the taxpayer be
informed in writing of the law and of the facts on which the assessment is made;
otherwise, the assessment shall be void. Section 3.1.2 of Revenue Regulations No. 12-
99 requires the Preliminary Assessment Notice to show in detail the facts and law, rules
and regulations, or jurisprudence on which the proposed assessment is based. Further,
Section 3.1.4 requires that the Final Letter of Demand must state the facts and law on
which it is based; otherwise, the Final Letter of Demand and Final Assessment Notices
themselves shall be void. Finally, Section 3.1.6 specifically requires that the decision of
the Commissioner or of his or her duly authorized representative on a disputed
assessment shall state the facts and law, rules and regulations, or jurisprudence on which
the decision is based. Failure to do so would invalidate the Final Decision on Disputed
Assessment.

"The use of the word 'shall' in Section 228 of the [National Internal Revenue Code] and
in [Revenue Regulations] No. 12-99 indicates that the requirement of informing the
taxpayer of the legal and factual bases of the assessment and the decision made against
him [or her] is mandatory."99 This is an essential requirement of due process and applies
to the Preliminary Assessment Notice, Final Letter of Demand with the Final Assessment
Notices, and the Final Decision on Disputed Assessment.

On the other hand, the taxpayer is explicitly given the opportunity to explain or present
his or her side throughout the process, from tax investigation through tax assessment.
Under Section 3.1.1 of Revenue Regulations No. 12-99, the taxpayer is given 15 days
from receipt of the Notice for Informal Conference to respond; otherwise, he or she will
be considered in default and the case will be referred to the Assessment Division for
appropriate review and issuance of deficiency tax assessment, if warranted. Again, under
Section 228 of the Tax Code and Section 3.1.2 of Revenue Regulations No. 12-99, the
taxpayer is required to respond within 15 days from receipt of the Preliminary Assessment
Notice; otherwise, he or she will be considered in default and the Final Letter of Demand
and Final Assessment Notices will be issued. After receipt of the Final Letter of Demand
and Final Assessment Notices, the taxpayer is given 30 days to file a protest, and
subsequently, to appeal his or her protest to the Court of Tax Appeals.

Avon asserts feigned compliance by the Bureau of Internal Revenue officials and agents
of their duties under the law and revenue regulation.100 It adds that the administrative
proceeding conducted by the Bureau of Internal Revenue was "a farce," an idle ritual
tantamount to a denial of its right to be heard.101 It specifies the Bureau of Internal
Revenue's inaction throughout the proceedings as follows:

First, during the informal conference, Avon orally rebutted and submitted a written
Reply102 dated November 26, 2002, with attached supporting documents, to the summary
of audit findings of the Bureau of Internal Revenue. Revenue Examiner Enrico Z.
Gesmundo (Gesmundo), on cross-examination, admitted receiving its Reply with the
appended documents and that this Reply should be the basis of the Preliminary
Assessment Notice.103

However, the Commissioner issued the Preliminary Assessment Notice dated November
29, 2002, which simply reiterated the rebutted audit findings.104 The alleged under-
declared sales was increased by more than 300% based on the alleged sales discrepancy
in the Third Quarter VAT Return vis á vis Financial Statement, without justifiable reason
and despite clean opinion of Avon's external auditor on its financial statements.105

Second, in its protest letter to the Preliminary Assessment Notice, Avon explained the
error in the presentation of export sales in the Third Quarter VAT Return. That is, instead
of presenting the total sales for the third quarter alone, the presentation was a cumulative
or year-to-date sales presentation. Avon appended copies of the Third Quarter VAT
Return and the General Ledger Pages of Export Sales to its protest letter to prove the
cumulative presentation of its sales. The Bureau of Internal Revenue Examiners accepted
their explanation during their meeting.106

However, within just two (2) weeks from receipt of Avon's protest letter, the Commissioner
issued the Final Letter of Demand and Final Assessment Notices, reiterating the findings
stated in the Preliminary Assessment Notice.107 The Bureau of Internal Revenue chose
to ignore Avon's explanations and refused to cancel the assessments unless Avon would
agree to pay the other deficiency assessments.108

Third, since the Final Assessment Notices merely reiterated the findings in the Preliminary
Assessment Notice, Avon resubmitted its protest letter and supporting documents. During
the conference with the revenue officers on August 4, 2003, Avon explained that it had
already submitted all the reconciliation, schedules, and other supporting documents. It
also submitted additional documents as directed by the revenue officers on June 26,
2003,109 and presented the original General Ledger Book for 1999 for comparison by the
Bureau of Internal Revenue's officers with the copies previously submitted. Again, Avon
explained the alleged sales discrepancy to the revenue officers, who were convinced that
there was no under declaration of sales, and that the sales discrepancy between the
Annual Income Tax Return and Quarterly VAT Return was merely due to erroneous
presentation of sales in the Third Quarter VAT Return.110

By this time, hoping that the Commissioner would cancel the deficiency income and VAT
assessments arising from the alleged sales discrepancy, Avon informed the Bureau of
Internal Revenue examiners that it would make a partial payment of the assessments,
which it did.111

Fourth, however, the Commissioner issued the Collection Letter112 dated July 9, 2004
without deciding on the protest letter to the Final Assessment Notices. Once again, she
failed to even comment on the arguments raised or address the documents submitted by
Avon. Even the amounts supposedly paid by Avon were not deducted from the amount
demanded in the Collection Letter. To justify its issuance, the Commissioner falsely
alleged Avon of failing to submit its supporting documents. 113

Fifth, Avon filed a request for withdrawal of the Collection Letter, but it was likewise
ignored.114

Finally, the documents which reveal the events after the filing of the protest to the Final
Assessment Notices on May 9, 2004 were missing from the Bureau of Internal Revenue
Records.115 These were (a) the handwritten Minutes of the Bureau of Internal
Revenue/Taxpayer Conference on June 26, 2003; (b) Avon's letter116 dated August 1,
2003, with supporting documents, received by Revenue Officer Gesmundo on August 4,
2003, showing Avon's submission of the documents required by the Revenue Officers
during the June 26, 2003 meeting; and (c) the two (2) Bureau of Internal Revenue Tax
Payment Confirmations dated January 30, 2004, and Payment Forms called Bureau of
Internal Revenue Form No. 0605.117

Avon further submits that the presumption of correctness of the assessments cannot
apply in the face of compelling proof that they were issued without due process. It adds
that "[h]ad the administrative process been conducted with fairness and in accordance
with the prescribed procedure, [it] need not have incurred [filing fees and other litigation
expenses to defend against a bloated deficiency tax assessment]."118

Against these claims of Avon, the Commissioner did not submit any refutation either in
her Comment119 or Memorandum,120 and even in her pleadings before the Court of Tax
Appeals. Instead, she could only give out a perfunctory resistance that "tax assessments
. . . are presumed correct and made in good faith."121

The Court of Tax Appeals ruled that the difference in the appreciation by the
Commissioner of Avon's supporting documents, which led to the deficiency tax
assessments, was not violative of due process. While the Commissioner has the duty to
receive the taxpayer's clarifications and explanations, she does not have the duty to
accept them on face value.122
This Court disagrees.

The facts demonstrate that Avon was deprived of due process. It was not fully apprised
of the legal and factual bases of the assessments issued against it. The Details of
Discrepancy123 attached to the Preliminary Assessment Notice, as well as the Formal
Letter of Demand with the Final Assessment Notices, did not even comment or address
the defenses and documents submitted by Avon. Thus, Avon was left unaware on how
the Commissioner or her authorized representatives appreciated the explanations or
defenses raised in connection with the assessments. There was clear inaction of the
Commissioner at every stage of the proceedings.

First, despite Avon's submission of its Reply, together with supporting documents, to the
revenue examiners' initial audit findings, and its explanation during the informal
conference,124 the Preliminary Assessment Notice was issued. The Preliminary
Assessment Notice reiterated the same audit findings, except for the alleged under-
declared sales which ballooned in amount from P15,700,000.00 to
P62,900,000.00,125 without any discussion or explanation on the merits of Avon's
explanations.

Upon receipt of the Preliminary Assessment Notice, Avon submitted its protest letter and
supporting documents,126 and even met with revenue examiners to explain. Nonetheless,
the Bureau of Internal Revenue issued the Final Letter of Demand and Final Assessment
Notices, merely reiterating the assessments in the Preliminary Assessment Notice. There
was no comment whatsoever on the matters raised by Avon, or discussion of the Bureau
of Internal Revenue's findings in a manner that Avon may know the various issues
involved and the reasons for the assessments.

Under the Bureau of Internal Revenue's own procedures, the taxpayer is required to
respond to the Notice of Informal Conference and to the Preliminary Assessment Notice
within 15 days from receipt. Despite Avon's timely submission of a Reply to the Notice of
Informal Conference and protest to the Preliminary Assessment Notice, together with
supporting documents, the Commissioner and her agents violated their own procedures
by refusing to answer or even acknowledge the submitted Reply and protest.

The Notice of Informal Conference and the Preliminary Assessment Notice are a part of
due process.127 They give both the taxpayer and the Commissioner the opportunity to
settle the case at the earliest possible time without the need for the issuance of a Final
Assessment Notice. However, this purpose is not served in this case because of the
Bureau of Internal Revenue's inaction or failure to consider Avon's explanations.

Upon receipt of the Final Assessment Notices, Avon resubmitted its protest and submitted
additional documents required by the revenue examiners, including the original General
Ledger for 1999. As testified by Avon's Finance Director, Mildred C. Emlano, the Bureau
of Internal Revenue examiners were convinced with Avon's explanation during the
meeting on August 4, 2003, particularly, that there was no underdeclaration of
sales.128 Still, the Commissioner merely issued a Collection Letter dated July 9, 2004,
demanding from Avon the payment of the same deficiency tax assessments with a
warning that should it fail to do so within the required period, summary administrative
remedies would be instituted without further notice.129 This Collection Letter was based
on the May 27, 2004 Memorandum of the Revenue Officers stating that "[Avon] failed to
submit supporting documents within 60-day period."130 This inaction on the part of the
Bureau of Internal Revenue and its agents could hardly be considered substantial
compliance of what is mandated by Section 228 of the Tax Code and the Revenue
Regulation No. 12-99.

It is true that the Commissioner is not obliged to accept the taxpayer's explanations, as
explained by the Court of Tax Appeals.131 However, when he or she rejects these
explanations, he or she must give some reason for doing so. He or she must give the
particular facts upon which his or her conclusions are based, and those facts must appear
in the record.

Indeed, the Commissioner's inaction and omission to give due consideration to the
arguments and evidence submitted before her by Avon are deplorable transgressions of
Avon's right to due process.132 The right to be heard, which includes the right to present
evidence, is meaningless if the Commissioner can simply ignore the evidence without
reason.

In Edwards v. McCoy:133

The object of a hearing is as much to have evidence considered as it is to present it. The
right to adduce evidence, without the corresponding duty on the part of the board to
consider it, is vain. Such right is conspicuously futile if the person or persons to whom the
evidence is presented can thrust it aside without notice or consideration.134

In Ang Tibay, this Court similarly ruled that "[n]ot only must the party be given an
opportunity to present his case and to adduce evidence tending to establish the rights
which he asserts but the tribunal must consider the evidence presented."135

Furthermore, in Mendoza v. Commission on Elections,136 this Court explained:

[T]he last requirement, relating to the form and substance of the decision of a quasi-
judicial body, further complements the hearing and decision-making due process rights
and is similar in substance to the constitutional requirement that a decision of a court
must state distinctly the facts and the law upon which it is based. As a component of the
rule of fairness that underlies due process, this is the "duty to give reason" to enable the
affected person to understand how the rule of fairness has been administered in his case,
to expose the reason to public scrutiny and criticism, and to ensure that the decision will
be thought through by the decision-maker.137 (Emphasis supplied, citation omitted)
In Villa v. Lazaro,138 this Court held that Anita Villa (Villa) was denied due process when
the then Human Settlement Regulatory Commission ignored her submission, not once
but thrice, of the official documents certifying to her compliance with the pertinent
locational, zoning, and land use requirements, and plans for the construction of her
funeral parlor. It imposed on Villa a fine of P10,000.00 and required her to cease
operations on the spurious premise that she had failed to submit the required documents.
This Court found the Commissioner's failure or refusal to even acknowledge the
documents submitted by Villa indefensible. It further held that the defects in the
administrative proceedings "translate to a denial of due process against which the
defense of failure to take timely appeal will not avail."139

Similarly, in this case, despite Avon's submission of its explanations and pieces of
evidence to the assessments, the Commissioner failed to acknowledge these
submissions and instead issued identical Preliminary Assessment Notice, Final Letter of
Demand with the Final Assessment Notices, and Collection Letter, the latter being
premised on Avon's alleged failure to submit supporting documents to its protest. Had the
Commissioner performed her functions properly and considered the explanations and
pieces of evidence submitted by Avon, this case could have been settled at the earliest
possible time. For instance, all the evidence needed to settle the issue on under-declared
sales, which constituted the bulk of the deficiency tax assessments, have been submitted
to the Bureau of Internal Revenue. Indeed, from these same submissions, the Court of
Tax Appeals concluded that there was no under-declaration of sales. As aptly pointed out
by Avon, "The [Commissioner could not] feign simple mistake or misappreciation of the
evidence . . . because [the issue was] plain and simple."140

Moreover, the Court of Tax Appeals erroneously applied the "presumption of regularity"
in sustaining the Commissioner's assessments.

The presumption that official duty has been regularly performed is a disputable
presumption under Rule 131, Section 3(m) of the Rules of Court. As a disputable
presumption —

[I]t may be accepted and acted on where there is no other evidence to uphold the
contention for which it stands, or one which may be overcome by other evidence ...

The presumption of regularity of official acts may be rebutted by affirmative evidence of

irregularity or failure to perform a duty.141 (Citation omitted)

In Sevilla v. Cardenas,142 this Court refused to apply the "presumption of regularity" when
it noted that there was documentary and testimonial evidence that the civil registrar did
not exert utmost efforts before certifying that no marriage license was issued in favor of
one of the parties.
This Court also refused to apply the presumption of regularity in Bank of the Philippine
Islands v. Evangelista,143 where the process server failed to show that he followed the
required procedures:

We cannot sustain petitioner's argument, which is anchored on the presumption of

regularity in the process server's performance of duty. The Court already had occasion to
rule that "[c]ertainly, it was never intended that the presumption of regularity in the
performance of official duty will be applied even in cases where there is no showing of
substantial compliance with the requirements of the rules of procedure." Such
presumption does not apply where it is patent that the sheriff's or server's return is
defective. Under this circumstance, respondents are not duty-bound to adduce further
evidence to overcome the presumption, which no longer holds.144 (Citations omitted)

Here, contrary to the ruling of the Court of Appeals, the presumption of regularity in the
performance of the Commissioner's official duties cannot stand in the face of positive
evidence of irregularity or failure to perform a duty.

I.C

The Commissioner's total disregard of due process rendered the identical Preliminary
Assessment Notice, Final Assessment Notices, and Collection Letter null and void, and
of no force and effect.

This Court has, in several cases, declared void any assessment that failed to strictly
comply with the due process requirements set forth in Section 228 of the Tax Code and
Revenue Regulation No. 12-99.

In Commissioner of Internal Revenue v. Metro Star Superama, Inc.,145 this Court held that
failure to send a Preliminary Assessment Notice stating the facts and the law on which
the assessment was made as required by Section 228 of the Tax Code rendered the
assessment made by the Commissioner as void. This Court explained:

Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be
informed that he is liable for deficiency taxes through the sending of a PAN. He must be
informed of the facts and the law upon which the assessment is made. The law imposes
a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection
without first establishing a valid assessment is evidently violative of the cardinal principle
in administrative investigations — that taxpayers should be able to present their case and
adduce supporting evidence.146 (Citation omitted)

In Commissioner of Internal Revenue v. Reyes,147 this Court ruled as void an assessment

for deficiency estate tax issued by the Commissioner for failure to inform the taxpayer of
the law and the facts on which the assessment was made, in violation of Section 228 of
the Tax Code.
In Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue,148 this
Court ruled, among others, that the taxpayer was deprived of due process when the
Commissioner failed to issue a notice of informal conference and a Preliminary
Assessment Notice as required by Revenue Regulation No. 12-99, in relation to Section
228 of the Tax Code. Hence, the assessment was void.

Compliance with strict procedural requirements must be followed in the collection of taxes
as emphasized in Commissioner of Internal Revenue v. Algue, Inc.:149

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

....

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

But even as we concede the inevitability and indispensability of taxation, it is a

requirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of the tax collector,
he may still be stopped in his tracks if the taxpayer can demonstrate ... that the law has
not been observed.150 (Emphasis supplied)

In this case, Avon was able to amply demonstrate the Commissioner's disregard of the
due process standards raised in Ang Tibay and subsequent cases, and of the
Commissioner's own rules of procedure. Her disregard of the standards and rules renders
the deficiency tax assessments null and void. This Court, nonetheless, proceeds to
discuss the points raised by the Commissioner pertaining to estoppel and prescription.

II

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

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

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

—

....

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

....

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

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

In this case, two (2) waivers were supposedly executed by the parties extending the
prescriptive periods for assessment of income tax, VAT, and expanded and final
withholding taxes to January 14, 2003, and then to April 14, 2003.151

The Court of Tax Appeals, both the Special First Division and En Banc, declared the two
(2) Waivers of the Defense of Prescription defective and void, for the Commissioner's
failure to furnish signed copies of the Waivers to Avon, in violation of the requirements
provided in Revenue Memorandum Order No. 20-90.152
Indeed, a Waiver of the Defense of Prescription is a bilateral agreement between a
taxpayer and the Bureau of Internal Revenue to extend the period of assessment and
collection to a certain date. "The requirement to furnish the taxpayer with a copy of the
waiver is not only to give notice of the existence of the document but of the acceptance
by the [Bureau of Internal Revenue] and the perfection of the agreement."153

However, the Commissioner in this case contends that Avon is estopped from assailing
the validity of the Waivers of the Defense of Prescription that it executed when it paid
portions of the disputed assessments.154The Commissioner invokes the ruling in Rizal
Commercial Banking Corporation v. Commissioner of Internal Revenue,155 which
allegedly must be applied as stare decisis.156

The Commissioner's contention is untenable.

Rizal Commercial Banking Corporation is not on all fours with this case. The estoppel
upheld in that case arose from the benefit obtained by the taxpayer from its execution of
the waiver, in the form of a drastic reduction of the deficiency taxes, and the taxpayer's
payment of a portion of the reduced tax assessment. In that case, this Court explained
that Rizal Commercial Banking Corporation's partial payment of the revised assessments
effectively belied its insistence that the waivers were invalid and the assessments were
issued beyond the prescriptive period. Thus:

Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of
the revised assessments issued within the extended period as provided for in the
questioned waivers, impliedly admitted the validity of those waivers. Had petitioner truly
believed that the waivers were invalid and that the assessments were issued beyond the
prescriptive period, then it should not have paid the reduced amount of taxes in the
revised assessment. RCBC's subsequent action effectively belies its insistence that the
waivers are invalid. The records show that on December 6, 2000, upon receipt of the
revised assessment, RCBC immediately made payment on the uncontested taxes. Thus,
RCBC is estopped from questioning the validity of the waivers. To hold otherwise and
allow a party to gainsay its own act or deny rights which it had previously recognized
would run counter to the principle of equity which this institution holds dear.157 (Citation
omitted)

Here, Avon claimed that it did not receive any benefit from the waivers.158 On the contrary,
there was even a drastic increase in the assessed deficiency taxes when the
Commissioner increased the alleged sales discrepancy from P15,700,000.00 in the
preliminary findings to P62,900,000.00 in the Preliminary Assessment Notice and Final
Assessment Notices. Furthermore, Avon was compelled to pay a portion of the deficiency
assessments "in compliance with the Revenue Officer's condition in the hope of
cancelling the assessments on the non-existent sales discrepancy."159 Under these
circumstances, Avon's payment of an insignificant portion of the assessment cannot be
deemed an admission or recognition of the validity of the waivers.
On the other hand, the Court of Tax Appeals' reliance on the general rule enunciated
in Commissioner of Internal Revenue v. Kudos Metal Corporation160 is proper. In that
case, this Court ruled that the Bureau of Internal Revenue could not hide behind the
doctrine of estoppel to cover its failure to comply with its own procedures. "[A] waiver of
the statute of limitations [is] a derogation of the taxpayer's right to security against
prolonged and unscrupulous investigations [and thus, it] must be carefully and strictly
construed."161

III

The Commissioner of Internal Revenue in this case asserts that since Avon filed its
protest on May 9, 2003, it only had 30 days from November 5, 2003, i.e., the end of the
180 days, or until December 5, 2003 within which to appeal to the Court of Tax Appeals.
As Avon only filed its appeal on August 13, 2004, its right to appeal has prescribed.162

Avon counters that it acted in good faith and in accordance with Rule 4, Section 3 of the
Revised Rules of the Court of Tax Appeals and jurisprudence when it opted to wait for
the decision of the Commissioner and appeal it within the 30-day period.163 "The
Collection Letter, albeit void, constitutes a constructive denial of Avon's protest and is the
final decision of the [Commissioner] for purposes of counting the reglementary 30-day
period to appeal[.]"164 Since Avon received the Collection Letter on July 14, 2004, its
Petition for Review was timely filed on August 13, 2004.165 At any rate, Avon argues that
the issue on the timeliness of its appeal was raised by the Commissioner only in its Motion
for Reconsideration of the Court of Tax Appeals En Banc November 9, 2011 Decision,
and a belated consideration of this matter would violate its right to due process and fair
play.166

The issue on whether Avon's Petition for Review before the Court of Tax Appeals was
time-barred requires the interpretation and application of Section 228 of the Tax
Code, viz:

Section 228. Protesting of Assessment. —

....

Such assessment may be protested administratively by filing a request for reconsideration

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

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

Section 228 of the Tax Code amended Section 229167 of the Old Tax Code168 by adding,
among others, the 180-day rule. This new provision presumably avoids the situation in
the past when a taxpayer would be held hostage by the Commissioner's inaction on his
or her protest. Under the Old Tax Code, in conjunction with Section 11 of Republic Act
No. 1125, only the decision or ruling of the Commissioner on a disputed assessment is
appealable to the Court of Tax Appeals. Consequently, the taxpayer then had to wait for
the Commissioner's action on his or her protest, which more often was long-
delayed.169 With the amendment introduced by Republic Act No. 8424, the taxpayer may
now immediately appeal to the Court of Tax Appeals in case of inaction of the
Commissioner for 180 days from submission of supporting documents.

Republic Act No. 9282, or the new Court of Tax Appeals Law, which took effect on April
23, 2004, amended Republic Act No. 1125 and included a provision complementing
Section 228 of the Tax Code, as follows:

Section 7. Jurisdiction. — The CTA shall exercise:

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

....

(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)

Under Section 7(a)(2) above, it is expressly provided that the "inaction" of the
Commissioner on his or her failure to decide a disputed assessment within 180 days is
"deemed a denial" of the protest.

In Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue,170 this

Court, by way of an obiter, ruled as follows:

In case the Commissioner failed to act on the disputed assessment within the 180-day
period from the date of submission of documents, a taxpayer can either: 1) file a petition
for review with the Court of Tax Appeals within 30 days after the expiration of the 180-
day period; or 2) await the final decision of the Commissioner on the disputed assessment
and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of
a copy of such decision. However, these options are mutually exclusive, and resort to one
bars the application of the other.171
In Rizal Commercial Banking Corporation, the Commissioner failed to act on the disputed
assessment within 180 days from date of submission of documents. Thus, Rizal
Commercial Banking Corporation opted to file a Petition for Review before the Court of
Tax Appeals. Unfortunately, it was filed more than 30 days following the lapse of the 180-
day period. Consequently, it was dismissed by the Court of Tax Appeals for late filing.
Rizal Commercial Banking Corporation did not file a Motion for Reconsideration or make
an appeal; hence, the disputed assessment became final and executory.

Subsequently, Rizal Commercial Banking Corporation filed a petition for relief from
judgment on the ground of excusable negligence, but this was denied by the Court of Tax
Appeals for lack of merit. This Court affirmed the Court of Tax Appeals. It further held that
even if the negligence of Rizal Commercial Banking Corporation's counsel was excusable
and the petition for relief from judgment would be granted, it would not fare any better
because its action for cancellation of assessments had already prescribed since its
Petition was filed beyond the 180+30-day period stated in Section 228.

Rizal Commercial Banking Corporation then filed a Motion for Reconsideration. Denying
the motion, this Court held that it could not anymore "claim that the disputed assessment
is not yet final as it remained unacted upon by the Commissioner; that it can still await the
final decision of the Commissioner and thereafter appeal the same to the Court of Tax
Appeals."172 Since it had availed of the first option by filing a petition for review because
of the Commissioner's inaction, although late, it could no longer resort to the second
option.

Rizal Commercial Banking Corporation referred to Rule 4, Section 3(a)(2) of the 2005
Revised Rules of the Court of Tax Appeals, or the 2005 Court of Tax Appeals Rules,
which provides:

Section 3. Cases Within the Jurisdiction of the Court in Divisions. — The Court in
Divisions shall exercise:

(a) Exclusive original

or appellate
jurisdiction to
review by appeal
the following:

....

(2) Inaction by the Commissioner of Internal Revenue in

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

In Lascona Land Co., Inc. v. Commissioner of Internal Revenue,173 this Court reaffirmed
Rizal Commercial Banking Corporation, viz:

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

....

[W]hen the law provided for the remedy to appeal the inaction of the CIR, it did not intend
to limit it to a single remedy of filing of an appeal after the lapse of the 180-day prescribed
period. Precisely, when a taxpayer protested an assessment, he naturally expects the
CIR to decide either positively or negatively. A taxpayer cannot be prejudiced if he
chooses to wait for the final decision of the CIR on the protested assessment. More so,
because the law and jurisprudence have always contemplated a scenario where the CIR
will decide on the protested assessment.174
This Court, nonetheless, stressed that these two (2) options of the taxpayer, i.e., to (1)
file a petition for review before the Court of Tax Appeals within 30 days after the expiration
of the 180-day period; or (2) to await the final decision of the Commissioner on the
disputed assessment and appeal this final decision to the Court of Tax Appeals within 30
days from receipt of it, "are mutually exclusive and resort to one bars the application of
the other." 175

Rule 4, Section 3(a)(2) of the 2005 Court of Tax Appeals Rules clarifies Section 7(a)(2)
of Republic Act No. 9282 by stating that the "deemed a denial'' rule is only for the
"purposes of allowing the taxpayer to appeal" in case of inaction of the Commissioner and
"does not necessarily constitute a formal decision of the Commissioner." Furthermore,
the same provision clarifies that the taxpayer may choose to wait for the final decision of
the Commissioner even beyond the 180-day period, and appeal from it.

The 2005 Court of Tax Appeals Rules were approved by the Court En Banc on November
22, 2005, in A.M. No. 05-11-07-CTA, pursuant to its constitutional rule-making
authority.176 Under Article VIII, Section 5, paragraph 5 of the 1987 Constitution:

Section 5. The Supreme Court shall have the following powers:

....

(5) Promulgate rules concerning the protection and enforcement of constitutional

rights, pleading, practice, and procedure in all courts, the admission to the
practice of law, the Integrated Bar, and legal assistance to the underprivileged.
Such rules shall provide a simplified and inexpensive procedure for the speedy
disposition of cases, shall be uniform for all courts of the same grade, and
shall not diminish, increase, or modify substantive rights. Rules of procedure of
special courts and quasi-judicial bodies shall remain effective unless
disapproved by the Supreme Court. (Emphases supplied)

In Metro Construction, Inc. v. Chatham Properties, Inc.,177 this Court held:

There is no controversy on the principle that the right to appeal is statutory. However, the
mode or manner by which this right may be exercised is a question of procedure which
may be altered and modified provided that vested rights are not impaired. The Supreme
Court is bestowed by the Constitution with the power and prerogative, inter alia, to
promulgate rules concerning pleadings, practice and procedure in all courts, as well as to
review rules of procedure of special courts and quasi-judicial bodies, which, however,
shall remain in force until disapproved by the Supreme Court. This power is
constitutionally enshrined to enhance the independence of the Supreme
Court.178(Citation omitted)
Carpio-Morales v. Court of Appeals179 elucidated that while Congress has the authority
to establish the lower courts, including the Court of Tax Appeals, and to define, prescribe,
and apportion their jurisdiction, the authority to promulgate rules of procedure is exclusive
to this Court:

A court's exercise of the jurisdiction it has acquired over a particular case conforms to the
limits and parameters of the rules of procedure duly promulgated by this Court. In other
words, procedure is the framework within which judicial power is exercised. In Manila
Railroad Co. v. Attorney-General, the Court elucidated that "[t]he power or authority of
the court over the subject matter existed and was fixed before procedure in a given cause
began. Procedure does not alter or change that power or authority; it simply directs the
manner in which it shall be fully and justly exercised. To be sure, in certain cases, if that
power is not exercised in conformity with the provisions of the procedural law, purely, the
court attempting to exercise it loses the power to exercise it legally. This does not mean
that it loses jurisdiction of the subject matter."

While the power to define, prescribe, and apportion the jurisdiction of the various courts
is, by constitutional design, vested unto Congress, the power to promulgate rules
concerning the protection and enforcement of constitutional rights, pleading, practice, and
procedure in all courts belongs exclusively to this Court. (Emphasis in the original,
citations omitted)180

Section 228 of the Tax Code and Section 7 of Republic Act No. 9282 should be read in
conjunction with Rule 4, Section 3(a)(2) of the 2005 Court of Tax Appeals Rules. In other
words, the taxpayer has the option to either elevate the case to the Court of Tax Appeals
if the Commissioner does not act on his or her protest, or to wait for the Commissioner to
decide on his or her protest before he or she elevates the case to the Court of Tax
Appeals. This construction is reasonable considering that Section 228 states that
the decision of the Commissioner not appealed by the taxpayer becomes final, executory,
and demandable.

IV

In this case, Avon opted to wait for the final decision of the Commissioner on its protest
filed on May 9, 2003.

This Court holds that the Collection Letter dated July 9, 2004 constitutes the final decision
of the Commissioner that is appealable to the Court of Tax Appeals.181 The Collection
Letter dated July 9, 2004 demanded from Avon the payment of the deficiency tax
assessments with a warning that should it fail to do so within the required period, summary
administrative remedies would be instituted without further notice.182 The Collection Letter
was purportedly based on the May 27, 2004 Memorandum of the Revenue Officers
stating that Avon "failed to submit supporting documents within 60-day period."183 This
Collection Letter demonstrated a character of finality such that there can be no doubt that
the Commissioner had already made a conclusion to deny Avon's request and she had
the clear resolve to collect the subject taxes.

Avon received the Collection Letter on July 14, 2004. Hence, Avon's appeal to the Court
of Tax Appeals filed on August 13, 2004 was not time-barred.

In any case, even if this Court were to disregard the Collection Letter as a final decision
of the Commissioner on Avon's protest, the Collection Letter constitutes an act of the
Commissioner on "other matters" arising under the National Internal Revenue Code,
which, pursuant to Philippine Journalists, Inc. v. CIR,184 may be the subject of an
appropriate appeal before the Court of Tax Appeals.

On a final note, the Commissioner is reminded of her duty enunciated in Section 3.1.6 of
Revenue Regulations No. 12-99 to render a final decision on disputed assessment.
Section 228 of the Tax Code requires taxpayers to exhaust administrative remedies by
filing a request for reconsideration or reinvestigation within 30 days from receipt of the
assessment. Exhaustion of administrative remedies is required prior to resort to the Court
of Tax Appeals precisely to give the Commissioner the opportunity to "re-examine its
findings and conclusions"185and to decide the Issues raised within her competence.186

Paat v. Court of Appeals187 wrote:

This Court in a long line of cases has consistently held that before a party is allowed to
seek the intervention of the court, it is a pre-condition that he should have availed of all
the means of administrative processes afforded him. Hence, if a remedy within the
administrative machinery can still be resorted to by giving the administrative officer
concerned every opportunity to decide on a matter that comes within his jurisdiction then
such remedy should be exhausted first before court's judicial power can be sought. The
premature invocation of court's intervention is fatal to one's cause of action. Accordingly,
absent any finding of waiver or estoppel the case is susceptible of dismissal for lack of
cause of action. This doctrine of exhaustion of administrative remedies was not without
its practical and legal reasons, for one thing, availment of administrative remedy entails
lesser expenses and provides for a speedier disposition of controversies. It is no less true
to state that the courts of justice for reasons of comity and convenience will shy away
from a dispute until the system of administrative redress has been completed and
complied with so as to give the administrative agency concerned every opportunity to
correct its error and to dispose of the case.188 (Emphasis supplied, citations omitted)

Taxpayers cannot be left in quandary by the Commissioner's inaction on the protested

assessment. It is imperative that the taxpayers are informed of the Commissioner's action
for them to take proper recourse to the Court of Tax Appeals at the opportune
time.189 Furthermore, this Court had time and again expressed the dictum that "the
Commissioner should always indicate to the taxpayer in clear and unequivocal language
what constitutes his [or her] final determination of the disputed assessment. That
procedure is demanded by the pressing need for fair play, regularity and orderliness in
administrative action."190

While indeed the government has an interest in the swift collection of taxes, its
assessment and collection should be exercised justly and fairly, and always in strict
adherence to the requirements of the law and of the Bureau of Internal Revenue's own
rules.

WHEREFORE, the Petition of the Commissioner of Internal Revenue in G.R. Nos.

201398-99 is DENIED. The Petition of Avon Products Manufacturing, Inc. in G.R. Nos.
201418-19 is GRANTED. The remaining deficiency Income Tax under Assessment No.
LTAID-II-IT-99-00018 in the amount of P357,345.88 for taxable year 1999, including
increments, is hereby declared NULL and VOID and is CANCELLED.

d. Presumption of Regularity

G.R. No. 104151 March 10, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, ATLAS CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION and COURT OF TAX APPEALS, respondents.

G.R No. 105563 March 10, 1995

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS COMMISSIONER OF INTERNAL REVENUE and COURT OF
TAX APPEALS, respondents.

REGALADO, J.:

Before us for joint adjudication are two petitions for review on certiorari separately filed
by the Commissioner of Internal Revenue in G.R. No. 104151, and by Atlas
Consolidated Mining and Development Corporation in G.R. No. 105563, which
respectively seek the aside of the judgments of respondent Court of Appeals in CA-G.R.
SP No. 25945 promulgated on February 12, 1992 1 and in CA-G.R. SP No. 26087
promulgated on May 22, 1992. 2

Atlas Consolidated Mining and Development Corporation (herein also referred to as

ACMDC) is a domestic corporation which owns and operates a mining concession at
Toledo City, Cebu, the products of which are exported to Japan and other foreign
countries. On April 9, 1980, the Commissioner of Internal Revenue (also Commissioner,
for brevity), acting on the basis of the report of the examiners of the Bureau of Internal
Revenue (BIR), caused the service of an assessment notice and demand for payment
of the amount of P12,391,070.51 representing deficiency ad valorem percentage and
fixed taxes, including increments, for the taxable year 1975 against ACMDC. 3

Likewise, on the basis. of the BIR examiner's report in another investigation separately
conducted, the Commissioner had another assessment notice, with a demand for
payment of the amount of P13,531,466.80 representing the 1976 deficiency ad
valorem and business taxes with P5,000.00 compromise penalty, served on ACMDC on
September 23, 1980. 4

ACMDC protested both assessments but the. same were denied, hence it filed two
separate petitions for review in the Court of Tax Appeals (also, tax court) where they
were docketed as C.T.A. Cases Nos. 3467 and 3825. These two cases, being
substantially identical in most respects except for the taxable periods and the amounts
involved, were eventually consolidated.

On May 31, 1991, the Court of Tax Appeals rendered a consolidated decision
holding, inter alia, that ACMDC was not liable for deficiency ad valorem taxes on copper
and silver for 1975 and 1976 in the respective amounts of P11,276,540.79 and
P12,882,760.80 thereby effectively sustaining the theory of ACMDC that in computing
the ad valorem tax on copper mineral, the refining and smelting charges should be
deducted, in addition to freight and insurance charges, from the London Metal
Exchange (LME) price of manufactured copper.

However, the tax court held ACMDC liable for the amount of P1,572,637.48, exclusive
of interest, consisting of 25% surcharge for late payment of the ad valorem tax and late
filing of notice of removal of silver, gold and pyrite extracted during certain periods, and
for alleged deficiency manufacturer's sales tax and contractor's tax.

The particulars of the reduced amount of said tax obligation is enumerated in detail in
the dispositive portion of the questioned judgment of the tax court, thus:

WHEREFORE, petitioner should and is hereby ORDERED to pay the total

amount of the following:

a) P297,900.39 as 25% surcharge on silver extracted during

the period November 1, 1974 to December 31, 1975.

b) P161,027.53 as 25% surcharge on silver extracted for the

taxable year 1976.
 c) P315,027.30 as 25% surcharge on gold extracted during
the period November 1, 1974 to December 31, 1975.

d) P260,180.55 as 25% surcharge on gold during the taxable

year 1976.

e) P53,585.30 as 25% surcharge on pyrite extracted during

the period November 1, 1974 to December 31, 1975.

f) P53,283.69 as 25% surcharge on pyrite extracted during

the taxable year 1976.

g) P316,117.53 as deficiency manufacturer's sales tax and

surcharge during the taxable year 1975; plus 14% interest
from January 21, 1976 until fully paid as provided under
Section 183 of P.D. No. 69.

h) P23,631.44 as deficiency contractor's tax and surcharge

on the lease of personal property during the taxable year
1975; plus 14% interest from January 21, 1976 until fully
paid as provided under Section 183 of P.D. 69.

i) P91,883.75 as deficiency contractor's tax and surcharge

on the lease of personal property during the taxable year
1976, plus 14% interest from April 21, 1976 until fully paid as
provided under. Section 183 of P.D. No. 69.

With costs against petitioner. 5

As a consequence, both parties elevated their respective contentions to respondent

Court of Appeals in two separate petitions for review. The petition filed by the
Commissioner, which was docketed as CA-G.R. SP No. 25945, questioned the portion
of the judgment of the tax court deleting the ad valorem tax on copper and silver, while
the appeal filed by ACMDC and docketed as CA-G.R. SP No. 26087 assailed that part
of the decision ordering it to pay P1,572,637.48 representing alleged deficiency
assessment.

On February 12, 1992, judgment was rendered by respondent Court of Appeals in CA-
G.R. SP No. 25945, dismissing the petition and affirming the tax court's decision on the
manner of computing the ad valorem tax. 6 Hence, the Commissioner of Internal
Revenue filed a petition before- us in G.R. No. 104151, raising the sole issue of whether
or not, in computing the ad valorem tax on copper, charges for smelting and refining
should also be deducted, in addition to freight and insurance costs, from the price of
copper concentrates.
On May 22, 1992, judgment was likewise rendered by the same respondent court in
CA-G.R. SP No. 26087, modifying the judgment of the tax court and further reducing the
tax liability of ACMDC by deleting therefrom the following items:

(1) the award under paragraph (a) of P297,900.39 as 25% surcharge on

silver extracted during the period November 1, 1974 to December 31,
1975;

(2) the award under paragraph (c) thereof of P315,027.30 as 25%

surcharge on gold extracted during the period November 1, 1974 to
December 31, 1975; and

(3) the award under paragraph (e) thereof of P53,585.30 as 24% (sic,
25%) surcharge on pyrite extracted during the period November 1, 1974 to
December 31, 1975. 7

Still not satisfied with the said judgment which had reduced its tax liability to
P906,124.49, as a final recourse ACMDC came to this Court on a petition for review
on certiorari in G.R. No. 105563, claiming that it is not liable at all for any deficiency. tax
assessments for 1975 and 1976. In our resolution of September 1, 1993, G.R. No.
104151 was ordered consolidated with G.R. No. 105563. 8

I. G.R No. 104151

The Commissioner of Internal Revenue claims that the Court of Appeals and the tax
court erred in allowing the deduction of refining and smelting charges from the price of
copper concentrates. It is the contention of the Commissioner that the actual market
value of the mineral products should be the gross sales realized from copper
concentrates, deducting therefrom mining, milling, refining, transporting, handling,
marketing or any other expenses. He submits that the phrase "or any other expenses"
includes smelting and refining charges and that the law allows deductions for actual
cost of ocean freight and insurance only in instances where the minerals or mineral
products are sold or consigned abroad by the lessees or owner of the mine under C.I.F.
terms, hence it is error to allow smelting and refining charges as deductions.

We are not persuaded by his postulation and find the arguments adduced in support
thereof untenable.

The pertinent provisions of the National Internal Revenue Code (tax code, for facility) at
the time material to this controversy, read as follows:

Sec. 243. Ad valorem taxes on output of mineral lands not covered by

lease. — There is hereby imposed on the actual market value of the
annual gross output of the minerals mineral products extracted or
produced from all mineral lands not covered by lease, an ad valorem tax
 in the amount of two per centum of the value of the output except gold
which shall pay one and one-half per centum.

Before the minerals or mineral products are removed from the mines, the
Commissioner of Internal Revenue or his representatives shall first be
notified of such removal on a form prescribed for the purpose. (As
amended by Rep. Act No. 6110.)

Sec. 246. Definitions of the terms "gross output," "minerals" and "mineral
products." — Disposition of royalties and ad valorem taxes. The term
"gross output" shall be interpreted as the actual market value of minerals
or mineral products, or of bullion from each mine or mineral lands
operated as a separate entity without any deduction from mining, milling,
refining, transporting, handling, marketing, or any other
expenses: Provided, however, That if the minerals or mineral products are
sold or consigned. abroad by the lessee or owner of the mine under C.I.F.
terms, the actual cost of ocean freight and insurance shall be deducted.
The output of any group of contiguous mining claim shall not be
subdivided. The word "minerals" shall mean all inorganic substances
found in nature whether in solid, liquid, gaseous, or any intermediate state.
The term "mineral products" shall mean things produced by the lessee,
concessionaire or owner of mineral lands, at least eighty per cent of which
things must be minerals extracted by such lessee, concessionaire, or
owner of mineral lands. Ten per centumof the royalties and ad
valorem taxes herein provided shall accrue to the municipality and ten per
centum to the province where the-mines are situated, and eighty per
centum to the National Treasury. (As amended by Rep. Acts Nos. 834,
1299, and by Rep. Act No. 1510, approved June 16, 1956)."

To rephrase, under the aforequoted provisions, the ad valorem tax of 2% is imposed on

the actual market value of the annual gross output of the minerals or mineral products
extracted or produced from all mineral lands not covered by lease. In computing the tax,
the term "gross output" shall be the actual market value of minerals or mineral products,
or of bullion from each mine or mineral lands operated as a separate entity, without any
deduction for mining, milling, refining, transporting, handling, marketing or any other
expenses. If the minerals or mineral products are sold or consigned abroad by the
lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and
insurance shall be deducted.

In other words, the assessment shall be based, not upon the cost of production or
extraction of said minerals or mineral products, but on the price which the same —
before or without undergoing a process of manufacture — would command in the
ordinary course of business. 9
In the instant case, the allowance by the tax court of smelting and refining charges as
deductions is not contrary to the above-mentioned provisions of the tax code which
ostensibly prohibit any form of deduction except freight and insurance charges. A review
of the records will show that it was the London Metal Exchange price on wire bar which
was used as tax base by ACMDC for purposes of the 2% ad valorem tax on copper
concentrates since there was no available market price quotation in the commodity
exchange or markets of the world for copper concentrates nor was there any market
quotation locally obtainable. 10Hence, the charges for smelting and refining were
assessed not on the basis of the price of the copper extracted at the mine site which is
prohibited by law, but on the basis of the actual market value of the manufactured
copper which in this case is the price quoted for copper wire bar by the London Metal
Exchange.

The issue of whether the ad valorem tax should be based upon the value of the finished
product, or the value upon extraction of the raw materials or minerals used in the
manufacture of said finished products, has been passed upon by us in several cases
wherein we held that the ad valorem tax is to be computed on the basis of the market
value of the mineral in its condition at the time of such removal and before it undergoes
a chemical change through manufacturing process, as distinguished from a purely
physical process which does not necessarily involve the change or transformation of the
raw material into a composite distinct product. 11

Thus, in the case of Cebu Portland Cement Co. vs. Commissioner of Internal
Revenue, 12 this Court ruled:

. . . ad valorem tax is a tax not on the minerals, but upon the privilege of
severing or extracting the same from the earth, the government's right to
exact the said impost springing from the Regalian theory of State
ownership of its natural resources.

. . . While cement is composed of 80% minerals, it is not merely an

admixture or blending of raw materials, as lime, silica, shale and others. It
is the result of a definite the crushing of minerals, grinding, mixing,
calcining, cooling, adding of retarder or raw gypsum. In short, before
cement reaches its saleable form, the minerals had already undergone a
chemical change through manufacturing process, This could not have
been the state of mineral products' that the law contemplates for purposes
of imposing the ad valorem tax. . . . this tax is imposed on the privilege of
extracting or severing the minerals from the mines. To our minds,
therefore the inclusion of the term mineral products is intended to
comprehend cases where the mined or quarried elements may not be
usable in its original state without application of simple treatments . . .
which process does not necessarily involve the change or transformation
of the raw materials into a composite, distinct product. . . . While the
selling price of cement may reflect the actual market value of cement, said
 selling price cannot be taken as the market value also of the minerals
composing the cement. And it was not the cement that was mined, only
the minerals composing the finished product.

This view was subsequently affirmed in the resolution of the Court denying the motion
for reconsideration of its aforesaid decision, 13 reiterated that the pertinent part of which
reiterated that —

. . . the ad valorem tax in question should be based on the actual market

value of the quarried minerals used in producing cement, . . . the law
intended to impose the ad valorem tax upon the market value of the
component mineral products in their original state before processing into
cement. . . . the law does not impose a tax on cement qua cement, but on
mineral products at least 80% of which must be minerals extracted by the
lessee, concessionaire or owner of mineral lands.

The Court did not, and could not, rule that cement is a manufactured
product subject to sales tax, for the reason that such liability had never
been litigated by the parties. What it did declare is that, while cement is a
mineral product, it is no longer in the state or condition contemplated by
the law; hence the market value of the cement could not be the basis for
computing the ad valorem tax, since the ad valorem tax is a severance tax
i.e., a charge upon the privilege of severing or extracting minerals from the
earth, (Dec. p. 4) and is due and payable upon removal of the mineral
product from its bed or mine (Tax Code s. 245).

Therefore, the imposable ad valorem tax should be based on the selling price of the
quarried minerals, which is its actual market value, and not on the price of the
manufactured product. If the market value chosen for the reckoning is the value of the
manufactured. or finished product, as in the case at bar, then all expenses of
processing or manufacturing should be deducted in order to approximate as closely as
is humanly possible the actual market value of the raw mineral at the mine site.

It was copper ore that was extracted by ACMDC from its mine site which, through a
simple physical process of removing impurities therefrom, was converted into copper
concentrate In turn, this copper concentrate underwent the process of smelting and
refining, and the finished product is called copper cathode or copper wire bar.

The copper wire bar is the manufactured copper. It is not the mineral extracted from the
mine site nor can it be considered a mineral product since it has undergone a
manufacturing process, to wit:

I. The physical process involved in the production of copper concentrate

are the following (p. 19, BIR records; Exh. ‘H’, p. 43, Folder I of Exhibits.)
 A Mining Process —

(1) Blasting — The ore body is broken up by

blasting.

(2) Loading — The ore averaging about 1/2

percent
copper is loaded into ore trucks by electric
shovels.

(3) Hauling — The trucks of ore are hauled to

the mill.

B Milling Process —

(1) Crushing — The ore is crushed to pieces

the size of peanuts.

(2) Grinding — The crushed ore is ground to

powder form.

(3) Concentrating — The mineral bearing

particles in the powdered ore are concentrated.

The ores or rocks, transported by conveyors, are crushed repeatedly by

steel balls into size of peanuts, when they are ground and pulverized. The
powder is fed into concentrators where it is mixed with water and other
reagents. This is known in the industry as a flotation phase. The copper-
bearing materials float while the non-copper materials in the rock sink. The
material that floats is scooped and dried and piled. This is known as
copper concentrate. The material at the bottom is waste, and is known in
the industry as tailings. In Toledo City, tailings are disposed of through
metal pipes from the flotation mills to the open sea. Copper concentrate of
petitioner contains 28-31% copper. The concentrate is loaded in ocean
vessels and shipped to Mitsubishi Metal Corporation mills in Japan, where
the smelting, refining and fabricating processes are done. (Memorandum
of petitioner, p. 71, CTA records.)

II. The chemical or manufacturing process in the production of wire bar is

as follows: (Exh. 'H', p. 43, Folder I of exhibits.)

A. Smelting —

(1) Drying — The copper concentrates (averaging about 30

percent copper) are dried.
 1. Flash Furnace — The dried concentrate is smelted autogenously
and a matte containing 65 percent is produced.
2. Converter — The matte is converted to blister copper with a purity
of about 99 per cent.

B. Refining —

(1) Casting Wheel — Blister copper is treated in an anode

furnace where. copper requiring further treatment is sent to
the casting wheel to produce cathode copper.

(2) Electrolytic Refining — Anode copper is further refined by

electrolytic refining to produce cathode copper.

C. Fabricating —

(1) Rolling — Fire refined or electroly-tic copper-and/or brass

(a mixture Of copper and zinc) is made into tubes, sheets,
rods and wire.

(2) Extruding — Sheet tubes, rods and wire are further

fabricated into the copper articles in everyday use.

The records show that cathodes, with purity of 99.985% are cast or
fabricated into various shapes, depending on their industrial destination.
Cathodes are metal sheets of copper 1 meter x 1 meter x 16-16 millimeter
thick and 160 kilograms in weight, although this thickness is not uniform
for all the sheets. Cathodes sheets are not suitable for direct fabrication,
hence, are further fabricated into the desired shape, like wire bar, billets
and cakes. (p. 1, deposition, London,) Wire bars are rectangular pieces,
100 millimeter x 100 millimeter x 1.37 meters long and weigh some 125
kilos. They are suited for copper wires and copper rods. Billets are
fabricated into tubes and heavy electric sections. Cakes are in the form of
thick sheets and strips. (pp. 13, 18-21, deposition, Japan, Exhs. "C" & "G",
Japan, pp. 1-2, deposition, London, see pp. 70-72, CTA records.) 14

Significantly, the finding that copper wire bar is a product of a manufacturing process
finds support in the definition of a "manufacturer" in Section 194 (x) of the aforesaid tax
code which provides:

"Manufacturer" includes every person who by physical or chemical

process alters the exterior texture or form or inner substance of any raw
material or manufactured or partially manufactured product in such a
manner as to prepare it for a special use or uses to which it could not have
been put in its original condition, or who by any such process alters the
 quality of any such raw material or manufactured or partially manufactured
product so as to reduce it to marketable shape or prepare it for any of the
uses of industry, or who by any such process combines any such raw
material or manufactured or partially manufactured products with other
materials: or products of the same or different kinds and in such manner
that the finished product of such process or manufacture can be put to a
special use or uses to which such raw material or manufactured or
partially manufactured products, or combines the same to produce such
finished products for the purpose of their sale or distribution to others and
not for his own use or consumption.

Moreover, it is also worth noting at this point that the decision of the tax court was
based on its previous ruling in the case of Atlas Consolidated Mining and Development
Corporation vs. Commissioner of Internal Revenue, 15 dated January 23, 1981, which
we quote with approval:

. . . The controlling law is clear and specific; it should therefore be applied

as Since the mineral or mineral product removed from its bed or mine at
Toledo City by petitioner is copper concentrate as admitted by respondent
himself, not copper wire bar, the actual market value of such copper
concentrate in its condition at the time of such removal without any
deduction from mining, milling, refining, transporting, handling, marketing,
or any other expenses should be the basis of the 2% ad valorem tax.

The conclusion reached is rendered clearer when it is taken into

consideration that the ad valorem tax is a severance tax, a charge upon
the privilege of severing or extracting minerals from the earth, and is due
and payable upon removal of the mineral product from its bed or mine, the
tax being computed on the basis of the market value of the mineral in its
condition at the time of such removal and before its being substantially
changed by chemical or manufacturing (as distinguished from purely
physical) processing. (Cebu Portland Cement Co. vs. Commissioner of
Internal Revenue, supra.) Copper wire bars, as discussed above,, have
already undergone chemical or manufacturing processing in Japan, they
are not extracted or produced from the earth by petitioner in its mine site
at Toledo City. Since the ad valorem tax is computed on the basis of the
actual market value of the mineral in its condition at the time of its removal
from the earth, which in this case is copper concentrate, there is no basis
therefore for an assertion that such tax should be measured on the basis
of the London Metal Exchange price quotation of the manufactured wire
bars without any deduction of smelting and refining charges.

In resume:
 1. The mineral or mineral product of petitioner the extraction
or severance from the soil. of which the ad valorem tax is
directed is copper concentrate.

2. The ad valorem tax is computed on the basis of the actual

market value of the copper concentrate in its condition at the
time of removal from the earth and before substantially
changed by chemical or manufacturing process without any
deduction milling, refining, from mining, transporting,
handling, marketing, or any other expenses. However, since
the copper concentrate is sold abroad by petitioner under
C.I.F. terms, the actual cost of ocean freight and insurance is
deductible.

3. There being no market price quotation of copper

concentrate locally or in the commodity exchanges or
markets of the world, the London Metal Exchange price
quotation of copper wire bar, which is used by petitioner and
Mitsubishi Metal Corporation as reference to determine the
selling price of copper concentrate, may likewise be
employed in this case as reference point in ascertaining the
actual market value of copper concentrate for ad valorem tax
purposes. By deducting from the London Metal Exchange
price quotation of copper wire bar all charges and costs
incurred after the copper concentrate has been shipped from
Toledo City to the time the same has been manufactured
into wire bar, namely, smelting, electrolytic refining and
fabricating, the remainder represents to a reasonable degree
the actual market value of the copper concentrate in its
condition at the time of extraction or removal from its bed in
Toledo City for the purposes of the ad valorem tax.

The Commissioner of Internal Revenue argues that the ruling in the case above stated
is not binding, considering that the incumbent Commissioner of Internal Revenue is not
bound by decisions or rulings of his predecessor when he finds that a different
construction of the law should be adopted, invoking therefor the doctrine enunciated
in Hilado vs. Collector of internal Revenue, et a1, 16 This trenches on specious
reasoning. What was involved in the Hilado case was a previous ruling of a former
Commissioner of Internal Revenue. In the case at bar, the Commissioner based his
findings on a previous decision rendered by the Court of Tax Appeals itself.

The Court of Tax Appeals is not a mere superior administrative agency or tribunal but is
a part of the judicial system of the Philippines. 17 It was created by Congress pursuant
to Republic Act No. 1125, effective June 16, 1954, as a centralized court specializing in
tax cases. It is a regular court vested with exclusive appellate jurisdiction over cases
arising under the National Internal Revenue Code, the Tariff and Customs Code, and
the Assessment Law. 18

Although only the decisions of the Supreme Court establish jurisprudence or doctrines
in this jurisdiction, nonetheless the decisions of subordinate courts have a persuasive
effect and may serve as judicial guides. It is even possible that such a conclusion or
pronouncement can be raised to the status of a doctrine if, after it has been subjected to
test in the crucible of analysis and revision the Supreme Court should find that it has
merits and qualities sufficient for its consecration as a rule of jurisprudence. 19

Furthermore, as a matter of practice and principle, the Supreme Court will not set aside
the conclusion reached by an agency such as the Court of Tax Appeals, which is, by the
very nature of its function, dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of authority on its part. 20

II. G.R. No. 105563

The petition herein raises the following issues for resolution:

A. Whether or not petitioner is liable for payment, of the 25%

surcharge for alleged late filing of notice of removal/late
payment of the ad valorem tax on silver, gold and pyrite
extracted during the taxable year 1976.

B. Whether or not petitioner is liable for payment of the

manufacturer' s sales tax and surcharge during the taxable
year 1975, plus interest, on grinding steel balls borrowed by
its competitor; and

C. 'Whether or not petitioner is liable for payment of the

contractor's tax and surcharge on the alleged lease of
personal property during the taxable years 1975 and 1976
plus interest. 21

A. Surcharge on Silver, Gold and Pyrite

ACMDC argues that the Court of Appeals erred in holding it liable to pay 25% surcharge
on silver, gold and pyrite extracted by it during tax year 1976.

Sec. 245 of the then tax code states:

Sec. 245. Time and manner of payment of royalties or ad valorem taxes.

— The royalties or ad valorem taxes as the case may be, shall be due and
payable upon the removal of the mineral products from the locality where
 mined. However, the output of the mine may be removed from such
locality without the pre-payment of such royalties or ad valorem taxes if
the lessee, owner, or operator shall file a bond in the form and amount
and with such sureties as the Commissioner of Internal Revenue may
require,. conditioned upon the payment of such royalties or ad
valorem taxes, in which case it shall be the duty of every lessee, owner, or
operator of a mine to make a true and complete return in duplicate under
oath setting forth the quantity and the actual market value of the output of
his mine removed during each calendar quarter and pay the royalties
or ad valorem taxes due thereon within twenty days after the close of said
quarter.

In case the royalties or ad valorem taxes are not paid within the period
prescribed above, there shall be added thereto a surcharge of twenty-
five per centum. Where a false or fraudulent return is made, there shall be
added to the royalties or ad valorem taxes a surcharge of fifty per
centum of their amount. The surcharge So, added: shall be collected in
the same manner and as part of the royalties or ad valorem taxes, as the
case may be.

Under the aforesaid provision, the payment of the ad valorem tax shall be made upon
removal of the mineral products from the mine site or if payment cannot be made, by
filing a bond in the form and amount to be approved by the Commissioner conditioned
upon the payment of the said tax.

In the instant case, the records show that the payment of the ad valorem tax on gold,
silver and pyrite was belatedly made. ACMDC, however, maintains that it should not be
required to pay the 25% surcharge because the correct quantity of gold and silver could
be determined only after the copper concentrates had gone through the process of
smelting and refining in Japan while the amount of pyrite cannot be determined until
after the flotation process separating the copper mineral from the waste material was
finished.

Prefatorily, it must not be lost sight of that bad faith is ; not essential for the imposition of
the 25% surcharge for late payment of the ad valorem tax. Hence,

MISSING PAGE 19

Q. Now, what do you do with the result of your analysis?

A. These are tabulated and then averaged out to represent

one shipment.

Q. Will you tell this Honorable Court whether in that

laboratory testing you physically separate the gold, you
physically separate the silver and you physically separate
the copper content of that 40 to 50 kilos?

A. No, no, we analyze this in one sample. This sample is

analyzed for gold, silver, and copper, but there is no
recovery made.

Q. You mean there is no physical separation?

A. No, no physical separation.

Q. So these three minerals — copper, gold and silver — are

in that same powder that you have tested?

A Yes, it is in the same powder.

Q. Now how do you reflect the results of the testing?

A. You mean in analysis?

Q. In the analysis, yes.

A. Copper is reported in percent.

Q. Percentage?

A. Yes.

Q. How about gold?

A. Gold and silver part is represented as grams per dmt or

parts per million.

Q. Based on the results of your data gathered in the

laboratory?

A. Yes.

Q. Now where do you submit the results of the laboratory

testing?

A When a shipment is made we prepare a certificate of

analysis signed by me and then which (sic) is sent to Manila.
 Q. Now, as far as you know in connection with your duty do
you know what Manila what do you say, Manila, ACMDC?

A. Makati.

Q. Makati. What does Makati ACMDC do with your assay

report?

A. As far as I know it is used as the basis for the payment

of ad valorem tax. 24

The above-quoted testimony accordingly supports these findings of the tax court in its
decision in this case:

We see it (sic) that even if the silver and gold cannot as yet be physically
separated from the copper concentrate until the process of smelting and
refining was completed, the estimated commercial quantity of the silver
and gold could have been determined in much the same way that
petitioner is able to estimate the commercial quantity of copper during the
assay. If, as stated by petitioner, it is able to estimate the grade of the
copper ore, and it has determined the grade not only of the copper but
also those of the gold and silver during the assay (Petitioner's
Memorandum, p. 207, Record), ergo, the estimated commercial quantity
of the silver and gold subject to ad valorem tax could have also been
determined and provisionally paid as for copper. 25

The other allegation of ACMDC is that there was no removal of pyrite from the mine site
because the pyrite was delivered to its sister company, Atlas Fertilizer Corporation,
whose plant is located inside the mineral concession of ACMDC in Sangi, Toledo City.
ACMDC, however, is already barred by estoppel in pais from putting that matter in
issue.

An ad valorem tax on pyrite for the same tax year was already declared and paid by
ACMDC. In fact, that payment was used as the basis for computing the 25% surcharge.
It was only when ACMDC was assessed for the 25% surcharge that said issue was
raised by it. Also, the evidence shows that deliveries of pyrite were not exclusively made
to its sister company, Atlas Fertilizer Corporation. There were shipments of pyrite to
other companies located outside of its mine site, in addition to those delivered to its
aforesaid sister company. 26

B. Manufacturer's Tax and Contractor's Tax

The manufacturer's tax is imposed under Section 186 of the tax code then in force
which provides:
 Sec. 186. Percentage tax on sales of other articles. — There shall be
levied, assessed and collected once only on every original sale, barter,
exchange, or similar transaction either for nominal or valuable
consideration, intended to transfer ownership of, or title to, the articles not
enumerated in sections one hundred and eighty-four-A, one hundred and
eighty five, one hundred and eighty-five-A, one hundred eighty-five-B, and
one hundred eighty-six-B, a tax equivalent to seven per centum of the
gross selling price or gross value in money of the articles so sold,
bartered, exchanged, or transferred, such tax to be paid by the
manufacturer or producer: Provided, That where the articles subject to tax
under this Section are manufactured out of materials likewise subject to
tax under this section and section one hundred eighty-nine, the total cost
of such materials, as duly established, shall be deductible from the gross
selling price or gross value in money of such manufactured articles. (As
amended by Rep. Act No. 6110 and by Pres. Decree No. 69.)

On the other hand, the contractor's tax is provided for under Section 191 of the same
code, paragraph 17 of which declares that lessors of personal property shall be subject
to a contractor's tax of 3% of the gross receipts.

Sections 186 and 191 fall under Title V of the tax code, entitled "Privilege Taxes on
Business and Occupation." These "privilege taxes on business" are taxes imposed upon
the privilege of engaging in business. They are essentially excise taxes. 27 To be held
liable for the payment of a privilege tax, the person or entity must be engaged in
business, as shown by the fact that the drafters of the tax code had purposely grouped
said provisions under the general heading adverted to above.

"To engage" is to embark on a business or to employ oneself therein. The word

"engaged" connotes more than a single act or a single transaction; it involves some
continuity of action. "To engage in business" is uniformly construed as signifying an
employment or occupation which occupies one's time, attention, and labor for the
purpose of a livelihood or profit. The expressions "engage in business," "carrying on
business" or "doing business" do not have different meanings, but separately or
connectedly convey the idea of progression, continuity, or sustained activity. "Engaged
in business" means occupied or employed in business; carrying on business" does not
mean the performance of a single disconnected act, but means conducting,
prosecuting, and continuing business by performing progressively all the acts normally
incident thereto; while "doing business" conveys the idea of business being done, not
from time to time, but all the time. 28

The foregoing notwithstanding, it has likewise been ruled that one act may be sufficient
to constitute carrying on a business according to the intent with which the act is done. A
single sale of liquor by one who intends to continue selling is sufficient to render him
liable for "engaging in or carrying on" the business of a liquor dealer. 29
There may be a business without any sequence of acts, for if an isolated transaction,
which if repeated would be a transaction in a business, is proved to have been
undertaken with the intent that it should be the first of several transactions, that is, with
the intent of carrying on a business, then it is a first transaction in an existing
business. 30

Thus, where the end sought is to make a profit, the act constitutes "doing- business."
This is not without basis. The term "business," as used in the law imposing a license tax
on business, trades, and so forth, ordinarily means business in the trade or commercial
sense only, carried on with a view to profit or livelihood; 31 It is thus restricted to
activities or affairs where profit is the purpose, or livelihood is the motive. Since the term
"business" is being used without any qualification in our aforesaid tax code, it should
therefore be therefore be construed in its plain and ordinary meaning, restricted to
activities for profit or livelihood. 32

In the case at bar, ACMDC claims exemptions from the payment of manufacturer's tax.
It asserts that it is not engaged in the business of selling grinding steel balls, but it only
produces grinding steel balls solely for its own use or consumption, However, it admits
having lent its grinding steel balls to other entities but only in very isolated cases.

After a careful review of the records and on the basis of the legal concept of "engaging
in business" hereinbefore discussed, we are inclined to agree with ACMDC that it
should not and cannot be held liable for the payment of the manufacturer's tax.

First, under the tax code then in force, the 7% manufacturer's sales tax is imposed on
the manufacturer for every original sale, barter, exchange and other similar transaction
intended to transfer ownership of articles. As hereinbefore quoted, and we repeat the
same for facility of reference, the term "manufacturer" is defined in the tax code as
including "every person who by physical or chemical process alters the exterior texture
or form or inner substance of any raw material or manufactured or partially
manufactured product in such manner as to prepare it for a special use or uses to which
it could not have been put in its original condition, or who by any such process alters the
quality of any such raw material or manufactured or partially manufactured product so
as to reduce it to marketable shape or prepare it for any of the uses of industry, or who
by any such process combines any such raw material or manufactured or partially
manufactured products with other materials or products of the same or of different kinds
and in such manner that the finished product of such process or manufacture can be put
to a special use or uses to which such raw materials or manufactured or partially
manufactured products in their original condition could not have been put, and who in
addition alters such raw material or manufactured or partially manufactured products, or
combines the same to produce such finished products for the purpose of their sale or
distribution to others and not for his own use or consumption. 33

Thus, a manufacturer, in order to be subjected to the necessity of paying the

percentage tax imposed by Section 186 of the tax code, must be 'engaged' in the sale,
barter or exchange of; personal property. Under a statute which imposes a tax on
persons engaged in the sale, barter or exchange of merchandise, a person must be
occupied or employed in the sale, barter or exchange of personal property. A person
can hardly be considered as occupied or employed in the sale, barter or exchange of
personal property when he has made one purchase and sale only. 34

Second, it cannot be legally asserted, for purposes of this particular assessment only,
that ACMDC was engaged in the business of selling grinding steel balls on the basis of
the isolated transaction entered into by it in 1975. There is no showing that said
transaction was undertaken by ACMDC with a view to gaining profit. therefrom and with
the intent of carrying on a business therein. On the contrary, what is clear for us is that
the sale was more of an accommodation to the other mining companies, and that
ACMDC was subsequently replaced by other suppliers shortly thereafter.

This finding is strengthened by the investigation report, dated March 11, 1980, of the
B.I.R. Investigation Team itself which found that —

ACMDC has a foundry shop located at Sangi, Toledo City, and

manufactures grinding steel balls for use in its ball mills in pulverizing the
minerals before they go to the concentrators, For the grinding steel balls
manufactured by ACMDC and used in its operation, we found it not
subject to any business tax. But there were times in 1975 when other
mining companies were short of grinding steel balls and ACMDC supplied
them with these materials manufactured in its foundry shop. According to
the informant, these were merely accommodations and they were
replaced by the other suppliers. 35

At most, whatever profit ACMDC may have realized from that single transaction was
just incidental to its primordial purpose of accommodating other mining companies.
Well-settled is the rule that anything done as a mere incident to, or as a necessary
consequence of, the principal business is not ordinarily taxed as an independent
business in itself. 36 Where a person or corporation is engaged in a distinct business
and, as a feature thereof, in an activity merely incidental which serves no other person
or business, the incidental and restricted activity is not considered as intended to be
separately taxed. 37

In fine, on this particular aspect, we are consequently of the considered opinion and so
hold that ACMDC was not a manufacturer subject to the percentage tax imposed by
Section 186 of the tax code.

The same conclusion; however, cannot be made with respect to the contractor's tax
being imposed on ACMDC. It cannot validly claim that the leasing out of its personal
properties was merely an isolated transaction. Its book of accounts shows that several
distinct payments were made for the use of its personal properties such as its plane,
motor boat and dump truck. 38 The series of transactions engaged in by ACMDC for the
lease of its aforesaid properties could also be deduced from the fact that for the tax
years 1975 and 1976 there were profits earned and reported therefor. It received a
rental income of P630,171.56 for tax year 39 and P2,450,218.62 for tax year 1976. 40

Considering that there was a series of transactions involved, plus the fact that there was
an apparent and protracted intention to profit from such activities, it can be safely
concluded that ACMDC was habitually engaged in the leasing out of its plane, motor
boat and dump truck, and is perforce subject to the contractor's tax.

The allegation of ACMDC that it did not realize any profit from the leasing out of its said
personal properties, since its income therefrom covered only the costs of operation such
as salaries and fuel, is not supported by any documentary or substantial evidence. We
are not, therefore, convinced by such disavowal.

Assessments are prima facie presumed correct and made in good faith. Contrary to the
theory of ACMDC, it is the taxpayer and not the Bureau of Internal Revenue who has
the duty of proving otherwise. It is an elementary rule that in the absence of proof of any
irregularities in the performance of official duties, an assessment will not be disturbed.
All presumptions are in favor of tax assessments. 41 Verily, failure to present proof of
error in assessments will justify judicial affirmance of said assessment. 42

Finally, we deem it opportune to emphasize the oft-repeated rule that tax statutes are to
receive a reasonable construction with a view to carrying out their purposes and
intent. 43 They should not be construed as to permit the taxpayer to easily evade the
payment of the tax. 44 On this note, and under the confluence of the weighty.
considerations and authorities earlier discussed, the challenged assessment against
ACMDC for contractor's tax must be upheld.

WHEREFORE, the impugned judgment of respondent Court of Appeals in CA-G.R. SP

No. 25945, subject of the present petition in G.R. No. 104151 is hereby AFFIRMED;
and its assailed judgment in CA-G.R SP No. 26087 is hereby MODIFIED by exempting
Atlas Consolidated Mining and Development Corporation, petitioner in G.R. No. 105563
of this Court, from the payment of manufacturer's sales tax, surcharge and interest
during the taxable year 1975.
 SECOND DIVISION

[G.R. No. 104151. March 10, 1995.]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. COURT OF APPEALS,

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and
COURT OF TAX APPEALS, Respondents.

[G.R. No. 105563. March 10, 1995.]

ATLAS CONSOLIDATED MINING AND DEVELOPMENT

CORPORATION, Petitioner, v. COURT OF APPEALS, COMMISSIONER OF
INTERNAL REVENUE and COURT OF TAX APPEALS, Respondents.

The Solicitor-General for Petitioner.

M.L. Gadioma Law Office for Atlas.

SYLLABUS

1. TAXATION; NATIONAL INTERNAL REVENUE CODE; AD VALOREM TAX; 2% TAX

ON ACTUAL MARKET VALUE OF ANNUAL GROSS OUTPUT OF MINERALS AND
MINERAL PRODUCTS; "GROSS OUTPUT" ; CONSTRUED. — Under Section 243 of
the National Internal Revenue Code, the ad valorem tax of 2% is imposed on the actual
market value of the annual gross output of the minerals or mineral products extracted or
produced from all mineral lands not covered by lease. In computing the tax, the term
"gross output" shall be the actual market value of minerals or mineral products, or of
bullion from each mine or mineral lands operated as a separate entity, without any
deduction for mining, milling, refining, transporting, handling, marketing or any other
expenses. If the minerals or mineral products are sold or consigned abroad by the
lessee or owner of the mine under C.I.F. terms, the actual cost of ocean freight and
insurance shall be deducted. In other words, the assessment shall be based, not upon
the cost of production or extraction of said minerals or mineral products, but on the price
which the same — before or without undergoing process of manufacture — would
command in the ordinary course of business.

2. ID.; ID.; ID.; ID.; DEDUCTION FOR SMELTING AND REFINING ASSESSED ON
THE BASIS OF ACTUAL MARKET OF MANUFACTURED COPPER, NOT
PROHIBITED. — In the instant case, the allowance by the tax court of smelting and
refining charges as deductions is not contrary to the above-mentioned provisions of the
tax code which ostensibly prohibit any form of deduction except freight and insurance
charges. A review of the record will show that it was the London Metal Exchange price
on wire bar which was used as tax base by ACMDC for purposes of the 2% ad valorem
tax on copper concentrates since there was no available market price quotation in the
commodity exchange or markets of the world for copper concentrates nor was there any
market quotation locally obtainable. Hence, Commissioner of Internal Revenue v. CA
the charges for smelting and refining were assessed not on the basis of the price of the
copper extracted at the mine site which is prohibited by law, but on the basis of the
actual market value of the manufactured copper which in this case is the price quoted
for copper wire bar by the London Metal Exchange.

3. ID.; ID.; ID.; SHOULD BE BASED ON THE VALUE UPON EXTRACTION OF RAW
MATERIALS OR MINERALS USED IN THE MANUFACTURED OF SAID FINISHED
PRODUCTS. — The issue of whether the ad valorem tax should be based upon the
value of the finished product, or the value upon extraction. Or the raw materials or
minerals used in the manufacture of said finished products, has been passed upon by
us in several cases wherein we held that the ad valorem tax is to be computed on the
basis of the market value of the mineral in its condition at the time of such removal and
before it undergoes a chemical change through manufacturing process, as
distinguished from a purely physical process which does not necessarily involve the
change or transformation of the raw material into a composite distinct product.
Therefore, the imposable ad valorem tax should be based on the selling price of the
quarried minerals, which is its actual market value, and not on the price of the
manufactured product. If the market value chosen for the reckoning is the value of the
manufactured or finished product, as in the case at bar, then all expenses of processing
or manufacturing should be deducted in order to approximate as closely as is humanly
possible the actual market value of the raw mineral at the mine site.

4. ID.; ID.; ID.; ID.; COPPER WIRE BAR-, A MANUFACTURED COPPER. — The
copper wire bar is the manufactured copper. It is not the mineral extracted from the
mine site nor can it be considered a mineral product since it has undergone a
manufacturing process, to wit: Significantly, the finding that copper wire bar is a product
of a manufacturing process finds support in the definition of a "manufacturer" in Section
194(x) of the aforesaid tax code. Moreover, it is also worth noting at this point that the
decision of the tax court was based on its previous ruling in the case of Atlas
Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue dated January 23, 1981.

5. REMEDIAL LAW; COURTS; COURT OF TAX APPEALS; REGULAR COURT

VESTED WITH EXCLUSIVE JURISDICTION OVER CASES ARISING UNDER THE
NATIONAL INTERNAL REVENUE CODE; TARIFF AND CUSTOMS CODE AND THE
ASSESSMENT LAW; DECISIONS THEREON BIND THE COMMISSIONER OF
INTERNAL REVENUE. — The Commissioner of Internal Revenue argues that the ruling
in the case above stated is not binding, considering that the incumbent Commissioner of
Internal Revenue is not bound by decisions or rulings of his predecessor when he finds
that a different construction of the law should be adopted, invoking therefor the doctrine
enunciated in Hilado v. Collector of Internal Revenue, Et. Al. This trenches on specious
reasoning. What was involved in the Hilado case was a previous ruling of a former
Commissioner of Internal Revenue. In the case at bar, the Commissioner based his
findings on a previous decision rendered by the Court of Tax Appeals itself. The Court
of Tax Appeals is not a mere superior administrative agency or tribunal but is a part of
the judicial system of the Philippines. It was created by Congress pursuant to Republic
Act No. 1125, effective June 16, 1954, as a centralized Court specializing in tax cases.
It is a regular court vested with exclusive appellate jurisdiction over cases arising under
the National Internal Revenue Code, the Tariff and Customs Code, and the Assessment
Law.

6. ID.; ID., DECISIONS OF SUBORDINATE COURTS HAVE PERSUASIVE EFFECT

AND MAY SERVE AS JUDICIAL GUIDE. — Although only the decisions of the
Supreme Court establish jurisprudence or doctrines in this jurisdiction, nonetheless the
decisions of subordinate courts have a persuasive effect and may serve as judicial
guides. It is even possible that such a conclusion or pronouncement can be raised to
the status of a doctrine if, after it has been subjected to test in the crucible of analysis
and revision the Supreme Court should find that it has merits and qualities sufficient for
its consecration as a rule of jurisprudence.

7. ID.; EVIDENCE; CONCLUSIONS OF THE COURT OF TAX APPEALS GENERALLY

UPHELD ON APPEAL. — As a matter of practice and principle, the Supreme Court will
not set aside the conclusion reached by an agency such as the Court of Tax Appeals,
which is, by the very nature of its function, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the
subject, unless there has been an abuse or improvident exercise of authority on its part.

8. TAXATION; NATIONAL INTERNAL REVENUE CODE; AD VALOREM TAX; 25%

SURCHARGE ON LATE PAYMENT; BAD FAITH, NOT ESSENTIAL. — Prefatorily, it
must not be lost sight of that bad faith is not essential for the imposition of the 25%
surcharge for late payment of the ad valorem tax. Hence, the justification given is not
sufficient to relieve ACMDC of its liability to pay the 25% surcharge for late payment.
Also, the 25% surcharge prescribed in Section 245 for late payment of royalties and ad
valorem tax, when contrasted with the 50% surcharge imposed "where a false or
fraudulent return is made," strongly suggests that bad faith is not essential for the
imposition of the 25% surcharge.

9. ID.; ID.; ID.; ID.; PAYMENT THEREOF IS MANDATORY AND CANNOT BE WAIVED
BY THE COMMISSIONER OF INTERNAL REVENUE. — The law requiring the
payment of the 25% surcharge in case the ad valorem tax is not seasonably paid is
mandatory. It provides a plan which works out automatically. The Commissioner of
Internal Revenue is not vested with any authority to waive or dispense with the
collection thereof.

10. REMEDIAL LAW; ACTIONS; ESTOPPEL; A PARTY IS ESTOPPED FROM

RAISING THE ISSUE OF PAYMENT OF THE .4D VALOREM TAX BY CLAIMING
THAT THERE WAS NO REMOVAL OF PYRITE FROM THE MINE SITE WHERE IT
HAD PAID THE SAME FOR THE TAX YEAR. — The other allegation of ACMDC is that
there was no removal of pyrite from the mine site because the pyrite was delivered to its
sister company, Atlas Fertilizer Corporation, whose plant is located inside the mineral
concession of ACMDC in Sangi, Toledo City. ACMDC, however, is already barred by
estoppel in pais from putting that matter in issue. An ad valorem tax on pyrite for the
same tax year was already declared and paid by ACMDC. In fact, that payment was
used as the basis for computing the 25% surcharge. It was only when ACMDC was
assessed for the 25% surcharge that said issue was raised by it. Also, the evidence
shows that deliveries of pyrite were not exclusively made to its sister company, Atlas
Fertilizer Corporation. There were shipments of pyrite to other companies located
outside of its mine site, in addition to those delivered to its aforesaid sister company.

11. TAXATION; NATIONAL INTERNAL REVENUE CODE; PRIVILEGE TAXES

ESSENTIALLY EXCISE TAXES. — Sections 186 (Percentage tax on sales of other
articles) and 191 (Contractor’s tax) fall under Title V of the tax code, entitled "Privilege
Taxes on Business and Occupation." These "privilege taxes on business" are taxes
imposed upon the privilege of engaging in business. They are essentially excise taxes.
To be held liable for the payment of a privilege tax, the person or entity must be
engaged in business, as shown by the fact that the drafters of the tax code had
purposely grouped said provisions under the general heading adverted to above.

12. ID.; ID.; ID.; "TO ENGAGE" IN BUSINESS; DEFINED. — "To engage" is to embark
on a business or to employ oneself therein. The word "engaged" connotes more than a
single act or a single transaction; it involves some continuity of action. "To engage in
business" is uniformly construed as signifying an employment or occupation which
occupies one’s time, attention, and labor for the purpose of a livelihood or profit. The
expressions "engage in business", "carrying on business" or "doing business" do not
have different meanings, but separately or connectedly convey the idea of progression,
continuity, or sustained activity. "Engaged in business" means occupied or employed in
business: "carrying on business" does not mean the performance of a single
disconnected act but means conducting, prosecuting and continuing business by
performing progressively all the acts normally incident thereto; while "doing business"
conveys the idea of business being done, not from time to time, but all the time.

13. ID.; ID.; ID.; WHEN ONE ACT MAY BE SUFFICIENT TO CONSTITUTE
CARRYING ON A BUSINESS. — The foregoing notwithstanding, it has likewise been
ruled that one act may be sufficient to constitute carrying on a business according to the
intent with which the act is done. A single sale of liquor by one who intends to continue
selling is sufficient to render him liable for "engaging in" or "carrying on" the business of
a liquor dealer.

14. ID.; ID.; ID.; ID.; THERE MAY BE A BUSINESS WITHOUT ANY SEQUENCE OF
ACTS; REQUISITE. — There may be a business without any sequence of acts, for if an
isolated transaction, which if repeated would be a transaction in a business, is proved to
have been undertaken with the intent that it should be the first of several transactions;
that is, with the intent of carrying on a business, then it is a first transaction in an
existing business.

15. ID.; ID.; ID.; ID.; RESTRICTED TO ACTIVITIES OR AFFAIRS WHERE PROFIT IS
A PURPOSE OR LIVELIHOOD IN THE MOTIVE. — Thus, where the end sought is to
make a profit, the act constitutes doing business." This is not without basis. The term
"business," as used in the law imposing a license tax on business, trades and so forth,
ordinarily means business in the trade or commercial sense only, carried on with a view
to profit or livelihood. It is thus restricted to activities or affairs where profit is the
purpose, or livelihood is the motive. Since the term "business" is being used without any
qualification in our aforecited tax code, it should therefore be construed in its plain and
ordinary meaning, restricted to activities for profit or livelihood.

16. ID.; ID.; ID.; CORPORATION NOT ENGAGED IN BUSINESS OF SELLING

GRINDING STEEL BALL, NOT LIABLE TO PAYMENT OF MANUFACTURER’S TAX;
CASE AT BAR. — In the case at bar, ACMDC claims exemptions from the payment of
manufacturer’s tax. It asserts that it is not engaged in the business of selling grinding
steel balls, but it only produces grinding steel balls solely for its own use or
consumption. However, it admits having lent its grinding steel balls to other entities but
only in very isolated cases. After a careful review of the records and on the basis of the
legal concept of "engaging in business" hereinbefore discussed, we are inclined to
agree with ACMDC that it should not and cannot be held liable for the payment of the
manufacturer’s tax. It cannot be legally asserted, for purposes of this particular
assessment only, that ACMDC was engaged in the business of selling grinding steel
balls on the basis of the isolated transaction entered into by it in 1975. There is no
showing that said transaction was undertaken by ACMDC with a view to gaining profit
therefrom and with the intent of carrying on a business therein. On the contrary, what is
clear to us is that the sale was more of an accommodation to the other mining
companies, and that ACMDC was subsequently replaced by other suppliers shortly
thereafter. At most, whatever profit ACMDC may have realized from that single
transaction was just incidental to its primordial purpose of accommodating other mining
companies. Well settled is the rule that anything done as a mere incident to, or as a
necessary consequence of, the principal business is not ordinarily taxed as an
independent business in itself. Where a person or corporation is engaged in a distinct
business and, as a feature thereof, in an activity merely incidental which serves no other
person or business, the incidental and restricted activity is not to be considered as
intended to be separately taxed. In fine, on this particular aspect, we are consequently
of the considered opinion and so hold that ACMDC was not a manufacturer subject to
the percentage tax imposed by Section 186 of the tax code.

17. ID.; ID.; CONTRACTOR’S TAX; HABITUAL LEASING OF PERSONAL

PROPERTIES. — The same conclusion however, cannot be made with respect to the
contractor’s tax being imposed on ACMDC. It cannot validly claim that the leasing out of
its personal properties was merely an isolated transaction. Its book of accounts shows
that several distinct payments were made for the use of its personal properties such as
its plane, motor boat and dump truck. The series of transactions engaged in by ACMDC
for the lease of its aforesaid properties could also be deduced from the fact that for the
tax years 1975 and 1976 there were profits earned and reported therefor. It received a
rental income of P630,171.56 for tax year 1975 and P2,450,218.62 for tax year 1976.
Considering that there was a series of transactions involved, plus the fact that there was
an apparent and protracted intention to profit from such activities, it can be safely
concluded that ACMDC was habitually engaged in the leasing out of its plane, motor
boat and dump truck, and is perforce subject to the contractor’s tax.

18. ID.; ID.; ASSESSMENT; PRESUMED CORRECT AND MADE IN GOOD FAITH;
FAILURE TO PRESENT PROOF OF ERROR IN ASSESSMENT WILL JUSTIFY
JUDICIAL AFFIRMANCE OF ASSESSMENT. — Assessments are prima facie
presumed correct and made in good faith. Contrary to the theory of ACMDC, it is the
taxpayer and not the Bureau of Internal Revenue who has the duty of proving otherwise.
It is an elementary rule that in the absence of proof of any irregularities in the
performance of official duties, an assessment will not be disturbed. All presumptions are
in favor of tax assessments. Verily, failure to present proof of error in the assessment
will justify judicial affirmance of said assessment.

19. STATUTORY CONSTRUCTION; TAX STATUTES; REASONABLY CONSTRUED

WITH A VIEW OF CARRYING OUT THEIR PURPOSE AND INTENT. — Finally, we
deem it opportune to emphasize the oft-repeated rule that tax statutes are to receive a
reasonable construction with a view to carrying out their purposes and intent. They
should not be construed as to permit the taxpayer to easily evade the payment of the
tax. On this note, and under the confluence of the weighty considerations and
authorities earlier discussed, the challenged assessment against ACMDC for
contractor’s tax must be upheld.

DECISION

REGALADO, J.:

Before us for joint adjudication are two petitions for review on certiorari separately filed
by the Commissioner of Internal Revenue in G.R. No. 104151, and by Atlas
Consolidated Mining and Development Corporation in G.R. No. 105563, which
respectively seek the reversal and setting aside of the judgments of respondent Court of
Appeals in CA-G.R. SP No. 25945 promulgated on February 12, 1992 1 and in CA-G.R.
SP No. 26087 promulgated on May 22, 1992. 2

Atlas Consolidated Mining and Development Corporation (herein also referred to as

ACMDC) is a domestic corporation which owns and operates a mining concession at
Toledo City, Cebu, the products of which are exported to Japan and other foreign
countries. On April 9, 1980, the Commissioner of Internal Revenue (also Commissioner,
for brevity), acting on the basis of the report of the examiners of the Bureau of Internal
Revenue (BIR), caused the service of an assessment notice and demand for payment
of the amount of P12,391,070.51 representing deficiency ad valorem percentage and
fixed taxes, including increments, for the taxable year 1975 against ACMDC. 3

Likewise, on the basis of the BIR examiner’s report in another investigation separately
conducted, the Commissioner had another assessment notice, with a demand for
payment of the amount of P13,531,466.80 representing the 1976 deficiency ad valorem
and business taxes with P5,000.00 compromise penalty, served on ACMDC on
September 23, 1980. 4

ACMDC protested both assessments but the same were denied, hence it filed two
separate petitions for review in the Court of Tax Appeals (also, tax court) where they
were docketed as C.T.A. Cases Nos. 3467 and 3825. These two cases, being
substantially identical in most respects except for the taxable periods and the amounts
involved, were eventually consolidated.chanrobles.com.ph : virtual law library

On May 31, 1991, the Court of Tax Appeals rendered a consolidated decision holding,
inter alia, that ACMDC was not liable for deficiency ad valorem taxes on copper and
silver for 1975 and 1976 in the respective amounts of P11,276,540.79 and
P12,882,760.80, thereby effectively sustaining the theory of ACMDC that in computing
the ad valorem tax on copper mineral, the refining and smelting charges should be
deducted, in addition to freight and insurance charges, from the London Metal
Exchange (LME) price of manufactured copper.

However, the tax court held ACMDC liable for the amount of P1,572,637.48, exclusive
of interest, consisting of 25% surcharge for late payment of the ad valorem tax and late
filing of notice of removal of silver, gold and pyrite extracted during certain periods, and
for alleged deficiency manufacturer’s sales tax and contractor’s tax.

The particulars of the reduced amount of said tax obligation is enumerated in detail in
the dispositive portion of the questioned judgment of the tax court,
thus:jgc:chanrobles.com.ph

"WHEREFORE, petitioner should and is hereby ORDERED to pay the total amount of
the following:chanrob1es virtual 1aw library

a) P297,900.39 as 25% surcharge on silver extracted during the period November 1,

1974 to December 31, 1975.

b) P161,027.53 as 25% surcharge on silver extracted for the taxable year, 1976.

c) P315,027.30 as 25% surcharge on gold extracted during the period November 1,

1974 to December 31, 1975.

d) P260,180.55 as 25% surcharge on gold during the taxable year 1976.

e) P53,585.30 as 25% surcharge on pyrite extracted during the period November 1,

1974 to December 31, 1975.

f) P53,283.69 as 25% surcharge on pyrite extracted during the taxable year 1976.

g) P316,117.53 as deficiency manufacturer’s sales tax and surcharge during the taxable
year 1975; plus 14% interest from January 21, 1976 until fully paid as provided under
Section 183 of P.D. No. 69.

h) P23,631.44 as deficiency contractor’s tax surcharge on the lease of personal

property during the taxable year 1975; plus 14% interest from January 21, 1976 until
fully paid as provided under Section 183 of P.D. 69.chanrobles law library : red

i) P91,883.75 as deficiency contractor’s tax and surcharge on the lease of personal

property during the taxable year 1976; plus 14% interest from April 21, 1976 until fully
paid as provided under Section 183 of P.D. No. 69.

With costs against petitioner. 5

As a consequence, both parties elevated their respective contentions to respondent

Court of Appeals in two separate petitions for review. The petition filed by the
Commissioner, which was docketed as CA-G.R. SP No. 25945, questioned the portion
of the judgment of the tax court deleting the ad valorem tax on copper and silver, while
the appeal filed by ACMDC and docketed as CA-C.R. SP No. 26087 assailed that part
of the decision ordering it to pay P1,572,637.48 representing alleged deficiency
assessment.

On February 12, 1992, judgment was rendered by respondent Court of Appeals in CA-
G.R. SP No. 25945, dismissing the petition and affirming the tax court’s decision on the
manner of computing the ad valorem tax. 6 Hence, the Commissioner of Internal
Revenue filed a petition before us in G.R. No. 104151, raising the sole issue of whether
or not, in computing the ad valorem tax on copper, charges for smelting and refining
should also be deducted, in addition to freight and insurance costs, from the price of
copper concentrates.
On May 22, 1992, judgment was likewise rendered by the same respondent court in
CA-G.R. SP No. 26087, modifying the judgment of the tax court and further reducing the
tax liability of ACMDC by deleting therefrom the following items:jgc:chanrobles.com.ph

"(1) the award under paragraph (a) of P297,900.39 as 25% surcharge on silver
extracted during the period November 1, 1974 to December 31, 1975;

"(2) the award under paragraph (c) thereof of P315,027.30 as 25% surcharge on gold
extracted during the period November 1, 1974 to December 31, 1975; and

"(3) the award under paragraph (e) thereof of P53,585.30 as 24% (sic, 25%) surcharge
on pyrite extracted during the period November 1, 1974 to December 31, 1975." 7

Still not satisfied with the said judgment which had reduced its tax liability to
P906,124.49, as a final recourse ACMDC came to this Court on a petition for review
on certiorari in G.R. No. 105563, claiming that it is not liable at all for any deficiency tax
assessments for 1975 and 1976. In our resolution of September 1, 1993, G.R. No.
104151 was ordered consolidated with G.R. No. 105563. 8

I. G.R. No. 104151

The Commissioner of Internal Revenue claims that the Court of Appeals and the tax
court erred in allowing the deduction of refining and smelting charges from the price of
copper concentrates. It is the contention of the Commissioner that the actual market
value of the mineral products should be the gross sales realized from copper
concentrates, deducting therefrom mining, milling, refining, transporting, handling,
marketing or any other expenses. He submits that the phrase "or any other expenses"
includes smelting and refining charges and that the law allows deductions for actual
cost of ocean freight and insurance only in instances where the minerals or mineral
products are sold or consigned abroad by the lessees or owner of the mine under C.I.F.
terms, hence it is error to allow smelting and refining charges as deductions.chanrobles
law library : red

We are not persuaded by his postulation and find the arguments adduced in support
thereof untenable.

The pertinent provisions of the National Internal Revenue Code (tax code, for facility) at
the time material to this controversy, read as follows:jgc:chanrobles.com.ph

"SEC. 243. Ad valorem taxes on output of mineral lands not covered by lease. — There
is hereby imposed on the actual market value of the annual gross output of the minerals
or mineral products extracted or produced from all mineral lands not covered by lease,
an ad valorem tax in the amount of two per centum of the value of the output, except
gold which shall pay one and one-half per centum.
Before the minerals or mineral products are removed from the mines, the Commissioner
of Internal Revenue or his representatives shall first be notified of such removal on a
form prescribed for the purpose. (As amended by Rep. Act No. 6110.)

"SEC. 246. Definitions of the terms ‘gross output,’ ‘minerals’ and ‘mineral products’ . —
Disposition of royalties and ad valorem taxes. — The term ‘gross output’ shall be
interpreted as the actual market value of minerals or mineral products, or of bullion from
each mine or mineral lands operated as a separate entity without any deduction from
mining, milling, refining, transporting, handling, marketing, or any other expenses:
Provided, however, That if the minerals or mineral products are sold or consigned
abroad by the lessee or owner of the mine under C.I.F. terms, the actual cost of ocean
freight and insurance shall be deducted. The output of any group of contiguous mining
claim shall not be subdivided. The word ‘minerals’ shall mean all inorganic substances
found in nature whether in solid, liquid, gaseous, or any intermediate state. The term
‘mineral products’ shall mean things produced by the lessee, concessionaire or owner
of mineral lands, at least eighty per cent of which things must be minerals extracted by
such lessee, concessionaire, or owner of mineral lands. Ten per centum of the royalties
and ad valorem taxes herein provided shall accrue to the municipality and ten per
centum to the province where the mines are situated, and eighty per centum to the
National Treasury. (As amended by Rep. Acts Nos. 834, 1299, and by Rep. Act No.
1510, approved June 16, 1956)."cralaw virtua1aw library

To rephrase, under the aforequoted provisions, the ad valorem tax of 2% is imposed on

the actual market value of the annual gross output of the minerals or mineral products
extracted or produced from all mineral lands not covered by lease. In computing the tax,
the term "gross output" shall be the actual market value of minerals or mineral products,
or of bullion from each mine or mineral lands operated as a separate entity, without any
deduction for mining, milling, refining, transporting, handling, marketing or any other
expenses. If the minerals or mineral products are sold or consigned abroad by the
lessee or owner, of the mine under C.I.F. terms, the actual cost of ocean freight and
insurance shall be deducted.

In other words, the assessment shall be based, not upon the cost of production or
extraction of said minerals or mineral products, but on the price which the same —
before or without undergoing a process of manufacture — would command in the
ordinary course of business. 9

In the instant case, the allowance by the tax court of smelting and refining charges as
deductions is not contrary to the above-mentioned provisions of the tax code which
ostensibly prohibit any form of deduction except freight and insurance charges. A review
of the records will show that it was the London Metal Exchange price on wire bar which
was used as tax base by ACMDC for purposes of the 2% ad valorem tax on copper
concentrates since there was no available market price quotation in the commodity
exchange or markets of the world for copper concentrates nor was there any market
quotation locally obtainable. 10 Hence, the charges for smelting and refining were
assessed not on the basis of the price of the copper extracted at the mine site which is
prohibited by law, but on the basis of the actual market value of the manufactured
copper which in this case is the price quoted for copper wire bar by the London Metal
Exchange.

The issue of whether the ad valorem tax should be based upon the value of the finished
product, or the value upon extraction of the raw materials or minerals used in the
manufacture of said finished products, has been passed upon by us in several cases
wherein we held that the ad valorem tax is to be computed on the basis of the market
value of the mineral in its condition at the time of such removal and before it undergoes
a chemical change through manufacturing process, as distinguished from a purely
physical process which does not necessarily involve the change or transformation of the
raw material into a composite distinct product. 11

Thus, in the case of Cebu Portland Cement Co. v. Commissioner of Internal Revenue,
12 this Court ruled:jgc:chanrobles.com.ph

". . . ad valorem tax is a tax not on the minerals, but upon the privilege of severing or
extracting the same from the earth, the government’s right to exact the said impost
springing from the Regalian theory of State Ownership of its natural
resources.chanroblesvirtualawlibrary

". . . While Cement is composed of 80% minerals, it is not merely an admixture or

blending of raw materials, as lime, silica, shale and others. It is the result of a definite
process — the crushing of minerals, grinding, mixing, calcining, cooling, adding of
retarder or raw gypsum. In short, before cement reaches its saleable form, the minerals
had already undergone a chemical change through manufacturing process. This could
not have been the state of ‘mineral products’ that the law contemplates for purposes of
imposing the ad valorem tax. . . . this tax is imposed on the privilege of extracting or
severing the minerals from the mines. To our minds, therefore, the inclusion of the term
mineral products is intended to comprehend cases where the mined or quarried
elements may not be usable in its original state without application of simple treatments
. . . which process does not necessarily involve the change or transformation of the raw
materials into a composite, distinct product. . . . While the selling price of Cement may
reflect the actual market value of cement, said selling price cannot be taken as the
market value also of the minerals composing the cement. And it was not the cement
that was mined, only the minerals composing the finished product.

This view was subsequently affirmed in the resolution of the Court denying the motion
for reconsideration of its aforesaid decision, 13 the pertinent part of which reiterated that
—
". . . the ad valorem tax in question should be based on the actual market value of the
quarried minerals used in producing cement, . . . the law intended to impose the ad
valorem tax upon the market value of the component mineral products in their original
state before processing into cement. . . . the law does not impose a tax on cement qua
cement, but on mineral products at least 80% of which must be minerals extracted by
the lessee, concessionaire or owner of mineral lands.

"The Court did not, and could not, rule that cement is a manufactured product subject to
sales tax, for the reason that such liability had never been litigated by the parties. What
it did declare is that, while cement is a mineral product, it is no longer in the state or
condition contemplated by the law; hence the market value of the cement could not be
the basis for computing the ad valorem tax, since the ad valorem tax is a severance tax,
i.e., a charge upon the privilege of severing or extracting minerals from the earth, (Dec.
p. 4) and is due and payable upon removal of the mineral product from its bed or mine
(Tax Code s. 245)."cralaw virtua1aw library

Therefore, the imposable ad valorem tax should be based on the selling price of the
quarried minerals, which is its actual market value, and not on the price of the
manufactured product. If the market value chosen for the reckoning is the value of the
manufactured or finished product, as in the case at bar, then all expenses of processing
or manufacturing should be deducted in order to approximate as closely as is humanly
possible the actual market value of the raw mineral at the mine site.chanrobles
lawlibrary : rednad

It was copper ore that was extracted by ACMDC from its mine site which, through a
simple physical process of removing impurities therefrom, was converted into copper
concentrate. In turn, this copper concentrate underwent the process of smelting and
refining, and the finished product is called copper cathode or copper wire bar.

The copper wire bar is the manufactured copper. It is not the mineral extracted from the
mine site nor can it be considered a mineral product since it has undergone a
manufacturing process, to wit:jgc:chanrobles.com.ph

"I. The physical processes involved in the production of copper concentrate are the
following (p. 19, BIR records; Exh.’H’, p. 43, Folder I of Exhibits.)

A. Mining Process —

(1) Blasting — The ore body is broken up by blasting.

(2) Loading — The ore averaging about 1/2 per cent copper is loaded into ore trucks by
electric shovels.

(3) Hauling — The trucks of ore are hauled to the mill.

B. Milling Process —

(1) Crushing — The ore is crushed to pieces the size of peanuts.

(2) Grinding — The crushed ore is ground to powder form.

(3) Concentrating — The mineral bearing particles in the powdered ore are
concentrated.chanrobles.com : virtual law library

The ores or rocks, transported by conveyors, are crushed repeatedly by steel balls into
size of peanuts, when they are ground and pulverized. The powder is fed into
concentrators where it is mixed with water and other reagents. This is known in the
industry as a flotation phase. The copper-bearing materials float while the non-copper
materials in the rock sink. The material that floats is scooped and dried and piled. This
is known as copper concentrate. The material at the bottom is waste, and is known in
the industry as tailings. In Toledo City, tailings are disposed of through metal pipes from
the flotation mills to the open sea. Copper concentrate of petitioner contains 28-3l%
copper. The concentrate is loaded in ocean vessels and shipped to Mitsubishi Metal
Corporation mills in Japan, where the smelting, refining and fabricating processes are
done. (Memorandum of petitioner, p. 71, CTA records.)

II. The chemical or manufacturing process in the production of wire bar is as follows:
(Exh.’H’, p. 43, Folder I of exhibits.)

A. Smelting —

(1) Drying — The copper concentrates (averaging about 30 percent copper) are dried.

(2) Flash Furnace — The dried concentrate is smelted autogenously and a matte
containing 65 percent is produced.

(3) Converter — The matte is converted into blister copper with a purity of about 99 per
cent.

B. Refining —

(1) Casting Wheel — Blister copper is treated in an anode furnace where copper
requiring further treatment is sent to the tasting wheel to produce anode copper.

(2) Electrolytic Refining — Anode copper is further refined by electrolytic refining to

produce cathode copper.

C. Fabricating —
(1) Rolling — Fire refined or electrolytic copper and/or brass (a mixture of copper and
zinc) is made into tubes, sheets, rods and wire.

(2) Extruding — Sheet, tubes, rods and wire are further fabricated into the copper
articles in everyday use.

The records show that cathodes, with purity of 99.985% are cast or fabricated into
various shapes, depending on their industrial Destination. Cathodes are metal sheets of
copper 1 meter x 1 meter x 16-16 millimeter thick and 160 kilograms in weight, although
this thickness is not uniform for all the sheets. Cathodes sheets are not suitable for
direct fabrication, hence, are further fabricated into the desired shape, like wire bar,
billets and cakes. (p. 1, deposition, London,) Wire bars are rectangular pieces, 100
millimeter x 100 millimeter x 1.37 meters long and weigh some 125 kilos. They are
suited for copper wires and copper rods. Billets are fabricated into tubes and heavy
electric sections. Cakes are in the form of thick sheets and strips. (pp. 13, 18-21,
deposition, Japan, Exhs.’C’ & ‘G’, Japan, pp. 1-2, deposition, London, see pp. 70-72,
CTA records.)" 14

Significantly, the finding that copper wire bar is a product of a manufacturing process
finds support in the definition of a "manufacturer" in Section 194 (x) of the aforesaid tax
code which provides:jgc:chanrobles.com.ph

"‘Manufacturer’ includes every person who by physical or chemical process alters the
exterior texture or form or inner substance of any raw material or manufactured or
partially manufactured product in such a manner as to prepare it for a special use or
uses to which it could not have been put in its original condition, or who by any such
process alters the quality of any such raw material or manufactured or partially
manufactured product so as to reduce it to marketable shape or prepare it for any of the
uses of industry, or who by any such process combines any such raw material or
manufactured or partially manufactured products with other materials or products of the
same or different kinds and in such manner that the finished product of such process or
manufacture can be put to a special use or uses to which such raw material or
manufactured or partially manufactured products, or combines the same to produce
such finished products for the purpose of their sale or distribution to others and not for
his own use or consumption."cralaw virtua1aw library

Moreover, it is also worth noting at this point that the decision of the tax court was
based on its previous ruling in the case of Atlas Consolidated Mining and Development
Corporation v. Commissioner of Internal Revenue, 15 dated January 23, 1981, which
we quote with approval:jgc:chanrobles.com.ph

". . . The controlling law is clear and specific; it should therefore be applied as worded.
Since the mineral or mineral product removed from its bed or mine at Toledo City by
petitioner is copper concentrate as admitted by respondent himself, not copper wire bar,
the actual market value of such copper concentrate in its condition at the time of such
removal without any deduction from mining, milling, refining, transporting, handling,
marketing, or any other expenses should be the basis of the 2% ad valorem
tax.chanrobles law library

"The conclusion reached is rendered clearer when it is taken into consideration that the
ad valorem tax is a severance tax, i.e., a charge upon the privilege of severing or
extracting minerals from the earth, and is due and payable upon removal of the mineral
product from its bed or mine, the tax being computed on the basis of the market value of
the mineral in its condition at the time of such removal and before its being substantially
changed by chemical or manufacturing (as distinguished from purely physical)
processing. (Cebu Portland Cement Co. v. Commissioner of Internal Revenue, supra.)
Copper wire bars, as discussed above, have already undergone chemical or
manufacturing processing in Japan, they are not extracted or produced from the earth
by petitioner in its mine site at Toledo City. Since the ad valorem tax is computed on the
basis of the actual market value of the mineral in its condition at the time of its removal
from the earth, which in this case is copper concentrate, there is no basis therefore for
an assertion that such tax should be measured on the basis of the London Metal
Exchange price quotation of the manufactured wire bars without any deduction of
smelting and refining charges.

"In resume:chanrob1es virtual 1aw library

1. The mineral or mineral product of petitioner the extraction or severance from the soil
of which the ad valorem tax is directed is copper concentrate.

2. The ad valorem tax is computed on the basis of the actual market value of the copper
concentrate in its condition at the time of removal from the earth and before it is
substantially changed by chemical or manufacturing process without any deduction from
mining, milling, refining, transporting, handling, marketing or any other expenses.
However, since the copper concentrate is sold abroad by petitioner under C.I.F. terms,
the actual cost of ocean freight and insurance is deductible.

3. There being no market price quotation of copper concentrate locally or in the

commodity exchanges or markets of the world, the London Metal Exchange price
quotation of copper wire bar, which is used by petitioner and Mitsubishi Metal
Corporation as reference to determine the selling price of copper concentrate, may
likewise be employed in this case as reference point in ascertaining the actual market
value of copper concentrate for ad valorem tax purposes. By deducting from the London
Metal Exchange price quotation of copper wire bar all charges and costs incurred after
the copper concentrate has been shipped from Toledo City to the time the same has
been manufactured into wire bar, namely, smelting, electrolytic refining and fabricating,
the remainder represents to a reasonable degree the actual market value of the copper
concentrate in its condition at the time of extraction or removal from its bed in Toledo
City for the purposes of the ad valorem tax."cralaw virtua1aw library

The Commissioner of Internal Revenue argues that the ruling in the case above stated
is not binding, considering that the incumbent Commissioner of Internal Revenue is not
bound by decisions or rulings of his predecessor when he finds that a different
construction of the law should be adopted, invoking therefor the doctrine enunciated in
Hilado v. Collector of Internal Revenue, Et. Al. 16 This trenches on specious reasoning.
What was involved in the Hilado case was a previous ruling of a former Commissioner
of Internal Revenue. In the case at bar, the Commissioner based his findings on a
previous decision rendered by the Court of Tax Appeals itself.

The Court of Tax Appeals is not a mere superior administrative agency or tribunal but is
a part of the judicial system of the Philippines. 17 It was created by Congress pursuant
to Republic Act No. 1125, effective June 16, 1954, as a centralized court specializing in
tax cases. It is a regular court vested with exclusive appellate jurisdiction over cases
arising under the National Internal Revenue Code, the Tariff and Customs Code, and
the Assessment Law. 18

Although only the decisions of the Supreme Court establish jurisprudence or doctrines
in this jurisdiction, nonetheless the decisions of subordinate courts have a persuasive
effect and may serve as judicial guides. It is even possible that such a conclusion or
pronouncement can be raised to the status of a doctrine if, after it has been subjected to
test in the crucible of analysis and revision the Supreme Court should find that it has
merits and qualities sufficient for its consecration as a rule of jurisprudence. 19

Furthermore, as a matter of practice and principle, the Supreme Court will not set aside
the conclusion reached by an agency such as the Court of Tax Appeals, which is, by the
very nature of its function, dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of authority on its part. 20

II. G.R. No. 105563

The petition herein raises the following issues for resolution:jgc:chanrobles.com.ph

"A. Whether or not petitioner is liable for payment of the 25% surcharge for alleged late
filing of notice of removal/late payment of the ad valorem tax on silver, gold and pyrite
extracted during the taxable year 1976.

B. Whether or not petitioner is liable for payment of the manufacturer’s sales tax and
surcharge during the taxable year 1975, plus interest, on grinding steel balls borrowed
by its competitor; and
C. Whether or not petitioner is liable for payment of the contractor’s tax and surcharge
on the alleged lease of personal property during the taxable years 1975 and 1976 plus
interest." 21

A. Surcharge on Silver, Gold and Pyrite

ACMDC argues that the Court of Appeals erred in holding it liable to pay 25% surcharge
on silver, gold and pyrite extracted by it during tax year 1976.

Sec. 245 of the then tax code states:jgc:chanrobles.com.ph

"SEC. 245. Time and manner of payment of royalties or ad valorem taxes. — The
royalties or ad valorem taxes as the case may be, shall be due and payable upon the
removal of the mineral products from the locality where mined. However, the output of
the mine may be removed from such locality without the pre-payment of such royalties
or ad valorem taxes if the lessee, owner, or operator shall file a bond in the form and
amount and with such sureties as the Commissioner of Internal Revenue may require,
conditioned upon the payment of such royalties or ad valorem taxes, in which case it
shall be the duty of every lessee, owner, or operator of a mine to make a true and
complete return in duplicate under oath setting forth the quantity and the actual market
value of the output of his mine removed during each calendar quarter and pay the
royalties or ad valorem taxes due thereon within twenty days after the close of said
quarter.

In case the royalties or ad valorem taxes are not paid within the period prescribed
above, there shall be added thereto a surcharge of twenty-five per centum. Where a
false or fraudulent return is made, there shall be added to the royalties or ad valorem
taxes a surcharge of fifty per centum of their amount. The surcharge so added shall be
collected in the same manner and as part of the royalties or ad valorem taxes, as the
case may be.

Under the aforesaid provision, the payment of the ad valorem tax shall be made upon
removal of the mineral products from the mine site or if payment cannot be made, by
filing a bond in the form and amount to be approved by the Commissioner conditioned
upon the payment of the said tax.

In the instant case, the records show that the payment of the ad valorem tax on gold,
silver and pyrite was belatedly made. ACMDC, however, maintains that it should not be
required to pay the 25% surcharge because the correct quantity of gold and silver could
be determined only after the copper concentrates had gone through the process of
smelting and refining in Japan, while the amount of pyrite cannot be determined until
after the flotation process separating the copper mineral from the waste material was
finished.
Prefatorily, it must not be lost sight of that bad faith is not essential for the imposition of
the 25% surcharge for late payment of the ad valorem tax. Hence, the justification given
is not sufficient to relieve ACMDC of its liability to pay the 25% surcharge for late
payment. Also, the 25% surcharge prescribed in Section 245 for late payment of
royalties and ad valorem tax, when contrasted with the 50% surcharge imposed "where
a false or fraudulent return is made," strongly suggests that bad faith is not essential for
the imposition of the 25% surcharge. 22

The law requiring the payment of the 25% surcharge in case the ad valorem tax is not
seasonably paid is mandatory. It provides a plan which works out automatically. The
Commissioner of Internal Revenue is not vested with any authority to waive or dispense
with the collection thereof. 23

Furthermore, the claim of ACMDC that it is impossible to determine in the Philippines

the quantity of silver and gold involved is belied by its own witness, Francisco Antonio,
who testified:jgc:chanrobles.com.ph

"Q. Now, how do you test, let us say, there is a truck-load of copper concentrate Now,
for purposes of testing that truck-load, about how much quantity do you bring to the
laboratory?

A. For each truck-load, we get about 40 to 50 kilos.

Q. Now, what do you do with the 40 to 50 kilos?

A. This 40 and 50 kilos is dried in the laboratory then reduced in size so that there is
about 100 grams of copper concentrate that is being brought to the laboratory for
analysis. Now, out of this 100 grams we take more or less about 50 grams where we
analyze for gold, silver, and copper.: red

Q. Now, what do you do with the result of your analysis?

A. These are tabulated and then averaged out to represent one shipment.

Q. Will you tell this Honorable Court whether in that laboratory testing you physically
separate the gold, you physically separate the silver and you physically separate the
copper content of that 40 to 50 kilos?

A. No, no, we analyze this in one sample. This sample is analyzed for gold, silver, and
copper, but there is no recovery made.

Q. You mean there is no physical separation?

A. No, no physical separation.

Q. So these three minerals — copper, gold and silver — are in that same powder that
you have tested?

A. Yes, it is in the same powder.

Q. Now how do you reflect the results of the testing?

A. You mean in analysis?

Q. In the analysis, yes.

A. Copper is reported in percent.

Q. Percentage?

A. Yes.

Q. How about gold?

A. Gold and silver part is represented as grams per dmt or parts per million.

Q. Based on the results of your data gathered in the laboratory?

A. Yes.

Q. Now where do you submit the results of the laboratory testing?

A. When a shipment is made we prepare a certificate of analysis signed by me and then

which (sic) is sent to Manila.

Q. Now, as far as you know in connection with your duty do you know what Manila . . .
what do you say, Manila, ACMDC?

A. Makati.

Q. Makati. What does Makati ACMDC do with your assay report?

A. As far as I know it is used as the basis for the payment of ad valorem tax." 24

The above-quoted testimony accordingly supports these findings of the tax court in its
decision in this case:jgc:chanrobles.com.ph

"We see it (sic) that even if the silver and gold cannot as yet be physically separated
from the copper concentrate until the process of smelting and refining was completed,
the estimated commercial quantity of the silver and gold could have been determined in
much the same way that petitioner is able to estimate the commercial quantity of copper
during the assay. If, as stated by petitioner, it is able to estimate the grade of the copper
ore, and it has determined the grade not only of the copper but also those of the gold
and silver during the assay (Petitioner’s Memorandum, p. 207, Record), ergo, the
estimated commercial quantity of the silver and gold subject to ad valorem tax could
have also been determined and provisionally paid as for copper.25cralaw:red

The other allegation of ACMDC is that there was no removal of pyrite from the mine site
because the pyrite was delivered to its sister company, Atlas Fertilizer Corporation,
whose plant is located inside the mineral concession of ACMDC in Sangi, Toledo City.
ACMDC, however, is already barred by estoppel in pais from putting that matter in
issue.

An ad valorem tax on pyrite for the same tax year was already declared and paid by
ACMDC. In fact, that payment was used as the basis for computing the 25% surcharge.
It was only when ACMDC was assessed for the 25% surcharge that said issue was
raised by it. Also, the evidence shows that deliveries of pyrite were not exclusively made
to its sister company, Atlas Fertilizer Corporation. There were shipments of pyrite to
other companies located outside of its mine site, in addition to those delivered to its
aforesaid sister company. 26

B. Manufacturer’s Tax and Contractor’s Tax

The manufacturer’s tax is imposed under Section 186 of the tax code then in force
which provides:jgc:chanrobles.com.ph

"SEC. 186. Percentage tax on sales of other articles. — There shall be levied, assessed
and collected once only on every original sale, barter, exchange, or similar transaction
either for nominal or valuable consideration, intended to transfer ownership of, or title to,
the articles not enumerated in sections one hundred and eighty four-A, one hundred
and eighty five, one hundred and eighty-five-A, one hundred eighty-five-B, and one
hundred eighty-six-B, a tax equivalent to seven per centum of the gross selling price or
gross value in money of the articles so sold, bartered, exchanged, or transferred, such
tax to be paid by the manufacturer or producer: Provided, That where the articles
subject to tax under this section are manufactured out of materials likewise subject to
tax under this section and section one hundred eighty-nine, the total cost of such
materials, as duly established, shall be deductible from the gross selling price or gross
value in money of such manufactured articles. (As amended by Rep. Act No. 6110 and
by Pres. Decree No. 69.)" chanroblesvirtualawlibrary

On the other hand, the contractor’s tax is provided for under Section 191 of the same
code, paragraph 17 of which declares that lessors of personal property shall be subject
to a contractor’s tax of 3% of the gross receipts.

Sections 186 and 191 fall under Title V of the tax code, entitled "Privilege Taxes on
Business and Occupation." These "privilege taxes on business" are taxes imposed upon
the privilege of engaging in business. They are essentially excise taxes. 27 To be held
liable for the payment of a privilege tax, the person or entity must be engaged in
business, as shown by the fact that the drafters of the tax code had purposely grouped
said provisions under the general heading adverted to above.

"To engage" is to embark on a business or to employ oneself therein. The word

"engaged" connotes more than a single act or a single transaction; it involves some
continuity of action. "To engage in business" is uniformly construed as signifying an
employment or occupation which occupies one’s time, attention, and labor for the
purpose of a livelihood or profit. The expressions "engage in business," "carrying on
business" or "doing business" do not have different meanings, but separately or
connectedly convey the idea of progression, continuity, or sustained activity. "Engaged
in business" means occupied or employed in business; "carrying on business" does not
mean the performance of a single disconnected act, but means conducting,
prosecuting, and continuing business by performing progressively all the acts normally
incident thereto; while "doing business" conveys the idea of business being done, not
from time to time, but all the time. 28

The foregoing notwithstanding, it has likewise been ruled that one act may be sufficient
to constitute carrying on a business according to the intent with which the act is done. A
single sale of liquor by one who intends to continue selling is sufficient to render him
liable for "engaging in or carrying on" the business of a liquor dealer. 29

There may be a business without any sequence of acts, for if an isolated transaction,
which if repeated would be a transaction in a business, is proved to have been
undertaken with the intent that it should be the first of several transactions, that is, with
the intent of carrying on a business, then it is a first transaction in an existing business.
30

Thus, where the end sought is to make, a profit, the act constitutes "doing business."
This is not without basis. The term "business," as used in the law imposing a license tax
on business, trades, and so forth, ordinarily means business in the trade or commercial
sense only, carried on with a view to profit or livelihood. 31 It is thus restricted to
activities or affairs where profit is the purpose, or livelihood is the motive. Since the term
"business" is being used, without any qualification in our aforecited tax code, it should
therefore be construed in its plain and ordinary meaning, restricted to activities for profit
or livelihood. 32

In the case at bar, ACMDC claims exemptions from the payment of manufacturer’s tax.
It asserts that it is not engaged in the business of selling grinding steel balls, but it only
produces grinding steel balls solely for its own use, or consumption. However, it admits
having lent its grinding steel balls to other entities but only in very isolated cases.

After a careful review of the records and on the basis of the legal concept of "engaging
in business" hereinbefore discussed, we are inclined to agree with ACMDC that it
should not and cannot be held liable for the payment of the manufacturer’s tax.

First, under the tax code then in force, the 7% manufacturer’s sales tax is imposed on
the manufacturer for every original sale, barter, exchange and other similar transaction
intended to transfer ownership of articles. As hereinbefore quoted, and we repeat the
same for facility of reference, the term "manufacturer" is defined in the tax code as
including "every person who by physical or chemical process alters the exterior texture
or form or inner substance of any raw material or manufactured or partially
manufactured product in such manner as to prepare it for a special use or uses to which
it could not have been put in its original condition, or who by any such process alters the
quality of any such raw material or manufactured or partially manufactured product so
as to reduce it to marketable shape or prepare it for any of the uses of industry, or who
by any such process combines any such raw material or manufactured or partially
manufactured products with other materials or products of the same or of different kinds
and in such manner that the finished product of such process or manufacture can be put
to a special use or uses to which such raw materials or manufactured or partially
manufactured products in their original condition could not have been put, and who in
addition alters such raw material or manufactured or partially manufactured products, or
combines the same to produce such finished products for the purpose of their sale or
distribution to others and not for his own use or consumption. 33

Thus, a manufacturer, in order to be subjected to the necessity of paying the

percentage tax imposed by Section 186 of the tax code, must be ‘engaged’ in the sale,
barter or exchange of personal property. Under a statute which imposes a tax on
persons engaged in the sale, barter or exchange of merchandise, a person must be
occupied or employed in the sale, barter or exchange of personal property. A person
can hardly be considered as occupied or employed in the sale, barter or exchange of
personal property when he has made one purchase and sale only. 34

Second, it cannot be legally asserted, for purposes of this particular assessment only,
that ACMDC was engaged in the business of selling grinding steel balls on the basis of
the isolated transaction entered into by it in 1975. There is no showing that said
transaction was undertaken by ACMDC with a view to gaining profit therefrom and with
the intent of carrying on a business therein. On the contrary, what is clear to us is that
the sale was more of an accommodation to the other mining companies, and that
ACMDC was subsequently replaced by other supplier shortly thereafter.

This finding is strengthened by the investigation report, dated March 11, 1980, of the
B.I.R. Investigation Team itself which found that —
"ACMDC has a foundry shop located at Sangi, Toledo City, and manufactures grinding
steel balls for use in its ball mills in pulverizing the minerals before they go to the
concentrators. For the grinding steel balls manufactured by ACMDC and used in its
operation, we found it not subject to any business tax. But there were times in 1975
when other mining companies were short of grinding steel balls and ACMDC supplied
them with these materials manufactured in its foundry shop. According to the informant,
these were merely accommodations and they were replaced by the other suppliers." 35

At most, whatever profit ACMDC may have realized from that single transaction was
just incidental to its primordial purpose of accommodating other mining companies.
Well-settled is the rule that anything done as a mere incident to, or as a necessary
consequence of, the principal business is not ordinarily taxed as an independent
business in itself. 36 Where a person or corporation is engaged in a distinct business
and, as a feature thereof, in an activity merely incidental which serves no other person
or business, the incidental and restricted activity is not to be considered as intended to
be separately taxed. 37

In fine, on this particular aspect, we are consequently of the considered opinion and so
hold that ACMDC was not a manufacturer subject to the percentage tax imposed by
Section 186 of the tax code.

The same conclusion however, cannot be made with respect to the contractor’s tax
being imposed on ACMDC. It cannot validly claim that the leasing out of its personal
properties was merely an isolated transaction. Its book of accounts shows that several
distinct payments were made for the use of its personal properties such as its plane,
motor boat and dump truck. 38 The series of transactions engaged in by ACMDC for the
lease of its aforesaid properties could also be deduced from the fact that for the tax
years 1975 and 1976 there were profits earned and reported therefor. It received a
rental income of P630,171.56 for tax year 1975 39 and P2,450,218.62 for tax year
1976. 40

Considering that there was a series of transactions involved, plus the fact that there was
an apparent and protracted intention to profit from such activities, it can be safely
concluded that ACMDC was habitually engaged in the leasing out of its plane, motor
boat and dump truck, and is perforce subject to the contractor’s tax.chanrobles law
library : red

The allegation of ACMDC that it did not realize any profit from the leasing out of its said
personal properties, since its income therefrom covered only the costs of operation such
as salaries and fuel, is not supported by any documentary or substantial evidence. We
are not, therefore, convinced by such disavowal.

Assessments are prima facie presumed correct and made in good faith. Contrary to the
theory of ACMDC, it is the taxpayer and not the Bureau of Internal Revenue who has
the duty of proving otherwise. It is an elementary rule that in the absence of proof of any
irregularities in the performance of official duties, an assessment will not be disturbed.
All presumptions are in favor of tax assessments. 41 Verily, failure to present proof of
error in the assessment will justify judicial affirmance of said assessment. 42

Finally, we deem it opportune to emphasize the oft-repeated rule that tax statutes are to
receive a reasonable construction with a view to carrying out their purposes and intent.
43 They should not be construed as to permit the taxpayer to easily evade the payment
of the tax. 44 On this note, and under the confluence of the weighty considerations and
authorities earlier discussed, the challenged assessment against ACMDC for
contractor’s tax must be upheld.

WHEREFORE, the impugned judgment of respondent Court of Appeals in CA-G.R. SP

No. 25945, subject of the present petition in G.R. No. 104151, is hereby AFFIRMED;
and its assailed judgment in CA-G.R. SP No. 26087 is hereby MODIFIED by exempting
Atlas Consolidated Mining and Development Corporation, petitioner in G.R. No. 105563
of this Court, from the payment of manufacturer’s sales tax, surcharge and interest
during the taxable year 1975.

e. Assessment deemed made

EN BANC

G.R. No. L-22492 September 5, 1967

BASILAN ESTATES, INC., petitioner,

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

Felix A. Gulfin and Antonio S. Alano for petitioner.

Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with
principal offices in Basilan City, filed on March 24, 1954 its income tax returns for 1953
and paid an income tax of P8,028. On February 26, 1959, the Commissioner of Internal
Revenue, per examiners' report of February 19, 1959, assessed Basilan Estates, Inc., a
deficiency income tax of P3,912 for 1953 and P86,876.85 as 25% surtax on
unreasonably accumulated profits as of 1953 pursuant to Section 25 of the Tax Code.
On non-payment of the assessed amount, a warrant of distraint and levy was issued but
the same was not executed because Basilan Estates, Inc. succeeded in getting the
Deputy Commissioner of Internal Revenue to order the Director of the district in
Zamboanga City to hold execution and maintain constructive embargo instead. Because
of its refusal to waive the period of prescription, the corporation's request for
reinvestigation was not given due course, and on December 2, 1960, notice was served
the corporation that the warrant of distraint and levy would be executed.

On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a
petition for review of the Commissioner's assessment, alleging prescription of the period
for assessment and collection; error in disallowing claimed depreciations, travelling and
miscellaneous expenses; and error in finding the existence of unreasonably
accumulated profits and the imposition of 25% surtax thereon. On October 31, 1963, the
Court of Tax Appeals found that there was no prescription and affirmed the deficiency
assessment in toto.

On February 21, 1964, the case was appealed to Us by the taxpayer, upon the following
issues:

1. Has the Commissioner's right to collect deficiency income tax prescribed?

2. Was the disallowance of items claimed as deductible proper?

3. Have there been unreasonably accumulated profits? If so, should the 25% surtax be
imposed on the balance of the entire surplus from 1947-1953, or only for 1953?

4. Is the petitioner exempt from the penalty tax under Republic Act 1823 amending
Section 25 of the Tax Code?

PRESCRIPTION

There is no dispute that the assessment of the deficiency tax was made on February
26, 1959; but the petitioner claims that it never received notice of such assessment or if
it did, it received the notice beyond the five-year prescriptive period. To show
prescription, the annotation on the notice (Exhibit 10, No. 52, ACR, p. 54-A of the BIR
records) "No accompanying letter 11/25/" is advanced as indicative of the fact that
receipt of the notice was after March 24, 1959, the last date of the five-year period
within which to assess deficiency tax, since the original returns were filed on March 24,
1954.

Although the evidence is not clear on this point, We cannot accept this interpretation of
the petitioner, considering the presence of circumstances that lead Us to presume
regularity in the performance of official functions. The notice of assessment shows the
assessment to have been made on February 26, 1959, well within the five-year period.
On the right side of the notice is also stamped "Feb. 26, 1959" — denoting the date of
release, according to Bureau of Internal Revenue practice. The Commissioner himself
in his letter (Exh. H, p. 84 of BIR records) answering petitioner's request to lift, the
warrant of distraint and levy, asserts that notice had been sent to petitioner. In the letter
of the Regional Director forwarding the case to the Chief of the Investigation Division
which the latter received on March 10, 1959 (p. 71 of the BIR records), notice of
assessment was said to have been sent to petitioner. Subsequently, the Chief of the
Investigation Division indorsed on March 18, 1959 (p. 24 of the BIR records) the case to
the Chief of the Law Division. There it was alleged that notice was already sent to
petitioner on February 26, 1959. These circumstances pointing to official performance of
duty must necessarily prevail over petitioner's contrary interpretation. Besides, even
granting that notice had been received by the petitioner late, as alleged, under Section
331 of the Tax Code requiring five years within which to assess deficiency taxes, the
assessment is deemed made when notice to this effect is released, mailed or sent by
the Collector to the taxpayer and it is not required that the notice be received by the
taxpayer within the aforementioned five-year period.1

ASSESSMENT

The questioned assessment is as follows:

Net Income per return P40,142.90

Add: Over-claimed
P10,500.49
depreciation
Mis. expenses disallowed 6,759.17

Officer's travelling
2,300.40 19,560.06
expenses disallowed

Net Income per Investigation P59,702.96

20% tax on P59,702.96 11,940.00
Less: Tax already assessed 8,028.00

Deficiency income tax P3,912.00

Add: Additional tax of 25% on
86,876.75
P347,507.01

Tax Due & Collectible P90,788.75

=========

The Commissioner disallowed:

 Over-claimed depreciation P10,500.49
Miscellaneous expenses 6,759.17
Officer's travelling expenses 2,300.40

DEDUCTIONS

A. Depreciation. — Basilan Estates, Inc. claimed deductions for the depreciation of its
assets up to 1949 on the basis of their acquisition cost. As of January 1, 1950 it
changed the depreciable value of said assets by increasing it to conform with the
increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from
gross income the value of depreciation computed on the reappraised value.

In 1953, the year involved in this case, taxpayer claimed the following depreciation
deduction:

Reappraised assets P47,342.53

New assets consisting of hospital building
and equipment 3,910.45
Total depreciation
P51,252.98

Upon investigation and examination of taxpayer's books and papers, the Commissioner
of Internal Revenue found that the reappraised assets depreciated in 1953 were the
same ones upon which depreciation was claimed in 1952. And for the year 1952, the
Commissioner had already determined, with taxpayer's concurrence, the depreciation
allowable on said assets to be P36,842.04, computed on their acquisition cost at rates
fixed by the taxpayer. Hence, the Commissioner pegged the deductible depreciation for
1953 on the same old assets at P36,842.04 and disallowed the excess thereof in the
amount of P10,500.49.

The question for resolution therefore is whether depreciation shall be determined on the
acquisition cost or on the reappraised value of the assets.

Depreciation is the gradual diminution in the useful value of tangible property resulting
from wear and tear and normal obsolescense. The term is also applied to amortization
of the value of intangible assets, the use of which in the trade or business is definitely
limited in duration.2 Depreciation commences with the acquisition of the property and its
owner is not bound to see his property gradually waste, without making provision out of
earnings for its replacement. It is entitled to see that from earnings the value of the
property invested is kept unimpaired, so that at the end of any given term of years, the
original investment remains as it was in the beginning. It is not only the right of a
company to make such a provision, but it is its duty to its bond and stockholders, and, in
the case of a public service corporation, at least, its plain duty to the
public.3 Accordingly, the law permits the taxpayer to recover gradually his capital
investment in wasting assets free from income tax.4 Precisely, Section 30 (f) (1) which
states:

(1)In general. — A reasonable allowance for deterioration of property arising out

of its use or employment in the business or trade, or out of its not being
used: Provided, That when the allowance authorized under this subsection shall
equal the capital invested by the taxpayer . . . no further allowance shall be
made. . . .

allows a deduction from gross income for depreciation but limits the recovery to the
capital invested in the asset being depreciated.

The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed and
allowed. The reason is that deductions from gross income are privileges,5 not matters of
right.6 They are not created by implication but upon clear expression in the law.7

Moreover, the recovery, free of income tax, of an amount more than the invested capital
in an asset will transgress the underlying purpose of a depreciation allowance. For then
what the taxpayer would recover will be, not only the acquisition cost, but also some
profit. Recovery in due time thru depreciation of investment made is the philosophy
behind depreciation allowance; the idea of profit on the investment made has never
been the underlying reason for the allowance of a deduction for depreciation.

Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of

P10,500.49 has no justification in the law. The determination, therefore, of the
Commissioner of Internal Revenue disallowing said amount, affirmed by the Court of
Tax Appeals, is sustained.

B. Expenses. — The next item involves disallowed expenses incurred in 1953, broken
as follows:

Miscellaneous expenses P6,759.17

Officer's travelling expenses 2,300.40

Total
P9,059.57

These were disallowed on the ground that the nature of these expenses could not be
satisfactorily explained nor could the same be supported by appropriate papers.

Felix Gulfin, petitioner's accountant, explained the P6,759.17 was actual expenses
credited to the account of the president of the corporation incurred in the interest of the
corporation during the president's trip to Manila (pp. 33-34 of TSN of Dec. 5, 1962); he
stated that the P2,300.40 was the president's travelling expenses to and from Manila as
to the vouchers and receipts of these, he said the same were made but got burned
during the Basilan fire on March 30, 1962 (p. 40 of same TSN). Petitioner further argues
that when it sent its records to Manila in February, 1959, the papers in support of these
miscellaneous and travelling expenses were not included for the reason that by
February 9, 1959, when the Bureau of Internal Revenue decided to investigate,
petitioner had no more obligation to keep the same since five years had lapsed from the
time these expenses were incurred (p. 41 of same TSN). On this ground, the petitioner
may be sustained, for under Section 337 of the Tax Code, receipts and papers
supporting such expenses need be kept by the taxpayer for a period of five years from
the last entry. At the time of the investigation, said five years had lapsed. Taxpayer's
stand on this issue is therefore sustained.

UNREASONABLY ACCUMULATED PROFITS

Section 25 of the Tax Code which imposes a surtax on profits unreasonably

accumulated, provides:

Sec. 25. Additional tax on corporations improperly accumulating profits or

surplus — (a) Imposition of tax. — If any corporation, except banks, insurance
companies, or personal holding companies, whether domestic or foreign, is
formed or availed of for the purpose of preventing the imposition of the tax upon
its shareholders or members or the shareholders or members of another
corporation, through the medium of permitting its gains and profits to accumulate
instead of being divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five per centum of the
undistributed portion of its accumulated profits or surplus which shall be in
addition to the tax imposed by section twenty-four, and shall be computed,
collected and paid in the same manner and subject to the same provisions of
law, including penalties, as that tax.1awphîl.nèt

The Commissioner found that in violation of the abovequoted section, petitioner had
unreasonably accumulated profits as of 1953 in the amount of P347,507.01, based on
the following circumstances (Examiner's Report pp. 62-68 of BIR records):

1. Strong financial position of the petitioner as of December 31, 1953. Assets

were P388,617.00 while the liabilities amounted to only P61,117.31 or a ratio of
6:1.

2. As of 1953, the corporation had considerable capital adequate to meet the

reasonable needs of the business amounting to P327,499.69 (assets less
liabilities).

3. The P200,000 reserved for electrification of drier and mechanization and the
P50,000 reserved for malaria control were reverted to its surplus in 1953.
 4. Withdrawal by shareholders, of large sums of money as personal loans.

5. Investment of undistributed earnings in assets having no proximate connection

with the business — as hospital building and equipment worth P59,794.72.

6. In 1953, with an increase of surplus amounting to P677,232.01, the capital

stock was increased to P500,000 although there was no need for such increase.

Petitioner tried to show that in considering the surplus, the examiner did not take into
account the possible expenses for cultivation, labor, fertilitation, drainage, irrigation,
repair, etc. (pp. 235-237 of TSN of Dec. 7, 1962). As aptly answered by the examiner
himself, however, they were already included as part of the working capital (pp. 237-238
of TSN of Dec. 7, 1962).

In the unreasonable accumulation of P347,507.01 are included P200,000 for

electrification of driers and mechanization and P50,000 for malaria control which were
reserved way back in 1948 (p. 67 of the BIR records) but reverted to the general fund
only in 1953. If there were any plans for these amounts to be used in further expansion
through projects, it did not appear in the records as was properly indicated in 1948
when such amounts were reserved. Thus, while in 1948 it was already clear that the
money was intended to go to future projects, in 1953 upon reversion to the general
fund, no such intention was shown. Such reversion therefore gave occasion for the
Government to consider the same for tax purposes. The P250,000 reverted to the
general fund was sought to be explained as later used elsewhere: "part of it in the
Hilano Industries, Inc. in building the factory site and buildings to house technical men .
. . part of it was spent in the facilities for the waterworks system and for industrialization
of the coconut industry" (p. 117 of TSN of Dec. 6, 1962). This is not sufficient
explanation. Persuasive jurisprudence on the matter such as those in the United States
from where our tax law was derived,8 has it that: "In order to determine whether profits
were accumulated for the reasonable needs of the business or to avoid the surtax upon
shareholders, the controlling intention of the taxpayer is that which is manifested at the
time of the accumulation, not subsequently declared intentions which are merely the
products of after-thought."9 The reversion here was made because the reserved amount
was not enough for the projects intended, without any intent to channel the same to
some particular future projects in mind.

Petitioner argues that since it has P560,717.44 as its expenses for the year 1953, a
surplus of P347,507.01 is not unreasonably accumulated. As rightly contended by the
Government, there is no need to have such a large amount at the beginning of the
following year because during the year, current assets are converted into cash and with
the income realized from the business as the year goes, these expenses may well be
taken care of (pp. 238 of TSN of Dec. 7, 1962). Thus, it is erroneous to say that the
taxpayer is entitled to retain enough liquid net assets in amounts approximately equal to
current operating needs for the year to cover "cost of goods sold and operating
expenses" for "it excludes proper consideration of funds generated by the collection of
notes receivable as trade accounts during the course of the year."10 In fact, just
because the fatal accumulations are less than 70% of the annual operating expenses of
the year, it does not mean that the accumulations are reasonable as a matter of law."11

Petitioner tried to show that investments were made with Basilan Coconut Producers
Cooperative Association and Basilan Hospital (pp. 103-105 of TSN of Dec. 6, 1962)
totalling P59,794.72 as of December 31, 1953. This shows all the more the
unreasonable accumulation. As of December 31, 1953 already P59,794.72 was spent
— yet as of that date there was still a surplus of P347,507.01.

Petitioner questions why the examiner covered the period from 1948-1953 when the
taxable year on review was 1953. The surplus of P347,507.01 was taken by the
examiner from the balance sheet of petitioner for 1953. To check the figure arrived at,
the examiner traced the accumulation process from 1947 until 1953, and petitioner's
figure stood out to be correct. There was no error in the process applied, for previous
accumulations should be considered in determining unreasonable accumulations for the
year concerned. "In determining whether accumulations of earnings or profits in a
particular year are within the reasonable needs of a corporation, it is neccessary to take
into account prior accumulations, since accumulations prior to the year involved may
have been sufficient to cover the business needs and additional accumulations during
the year involved would not reasonably be necessary."12

Another factor that stands out to show unreasonable accumulation is the fact that large
amounts were withdrawn by or advanced to the stockholders. For the year 1953 alone
these totalled P197,229.26. Yet the surplus of P347,507.01 was left as of December 31,
1953. We find unacceptable petitioner's explanation that these were advances made in
furtherance of the business purposes of the petitioner. As correctly held by the Court of
Tax Appeals, while certain expenses of the corporation were credited against these
amounts, the unspent balance was retained by the stockholders without refunding them
to petitioner at the end of each year. These advances were in fact indirect loans to the
stockholders indicating the unreasonable accumulation of surplus beyond the needs of
the business.

ALLEGED EXEMPTION

Petitioner wishes to avail of the exempting proviso in Sec. 25 of the Internal Revenue
Code as amended by R.A. 1823, approved June 22, 1957, whereby accumulated profits
or surplus if invested in any dollar-producing or dollar-earning industry or in the
purchase of bonds issued by the Central Bank, may not be subject to the 25% surtax.
We have but to point out that the unreasonable accumulation was in 1953. The
exemption was by virtue of Republic Act 1823 which amended Sec. 25 only on June 22,
1957 — more than three years after the period covered by the assessment.

In resume, Basilan Estates, Inc. is liable for the payment of deficiency income tax and
surtax for the year 1953 in the amount of P88,977.42, computed as follows:
 Net Income per return P40,142.90
Add: Over-claimed
10,500.49
depreciation

Net income per finding P50,643.39

20% tax on P50,643.39 P10,128.67

Less: Tax already
8,028.00
assessed

Deficiency income tax P2,100.67

Add: 25% surtax on
86,876.75
P347,507.01

Total tax due and

P88,977.42
collectible
===========

WHEREFORE, the judgment appealed from is modified to the extent that petitioner is
allowed its deductions for travelling and miscellaneous expenses, but affirmed insofar
as the petitioner is liable for P2,100.67 as deficiency income tax for 1953 and
P86,876.75 as 25% surtax on the unreasonably accumulated profit of P347,507.01. No
costs. So ordered.

REPUBLIC vs. CA, and NIELSON & CO.,INC.

149 SCRA 351
GR No. L-38540 April 30, 1987

"The follow-up letter reiterating demand for payment could be considered a notice of
assessment in itself if duly received by the taxpayer."

FACTS: The petitioner sought the review on certiorari of the decision of the respondent
Court of Appeals reversing the decision of the then Court of First Instance of Manila
which ordered private respondent Nielson & Co., Inc. to pay the Government the
amount of P11,496.00 as ad valorem tax, occupation fees, additional residence tax and
25% surcharge for late payment, for the years 1949 to 1952. Petitioner claims that the
demand letter of 16 July 1955 showed an imprint indicating that the original thereof was
released and mailed on 4 August 1955 by the Chief, Records Section of the Bureau of
Internal Revenue, and that the original letter was not returned to said Bureau; thus, said
demand letter must be considered to have been received by the private respondent.
According to petitioner, if service is made by ordinary mail, unless the actual date of
receipt is shown, service is deemed complete and effective upon the expiration of five
(5) days after mailing. As the letter of demand dated 16 July 1955 was actually mailed
to private respondent, there arises the presumption that the letter was received by
private respondent in the absence of evidence to the contrary. More so, where private
respondent did not offer any evidence, except the self-serving testimony of its witness,
that it had not received the original copy of the demand letter dated 16 July 1955.

ISSUE: Was notice of assessment or demand properly served to the respondent?

Should the receipt by the respondent of the succeeding follow-up demand notices be
construed as receipt of the original demand?

HELD: As to the first issue, no. As correctly observed by the respondent court in its
appealed decision, while the contention of petitioner is correct that a mailed letter is
deemed received by the addressee in the ordinary course of mail, still this is merely a
disputable presumption, subject to controversion, and a direct denial of the receipt
thereof shifts the burden upon the party favored by the presumption to prove that the
mailed letter was indeed received by the addressee. Since petitioner has not adduced
proof that private respondent had in fact received the demand letter of 16 July 1955, it
can not be assumed that private respondent received said letter. As to the second
issue, Yes. Records show that petitioner wrote private respondent a follow-up letter
dated 19 September 1956, reiterating its demand for the payment of taxes as originally
demanded in petitioner's letter dated 16 July 1955. This follow-up letter is considered a
notice of assessment in itself which was duly received by private respondent in
accordance with its own admission. And consequently, under Section 7 of Republic Act
No. 1125, the assessment is appealable to the Court of Tax Appeals within thirty (30)
days from receipt of the letter. The taxpayer's failure to appeal in due time, as in the
case at bar, makes the assessment in question final, executory and demandable. Thus,
private respondent is now barred from disputing the correctness of the assessment or
from invoking any defense that would reopen the question of its liability on the merits.
 SECOND DIVISION

G.R. No. L-46893 November 12, 1985

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
FRANCISCO RICARTE, defendant-appellee.

MAKASIAR, C.J.:

The former Court of Appeals, in its resolution dated August 4, 1977, certified this case
to this Court on the ground that the issues involved therein are purely questions of law.

On March 2, 1959, defendant-appellee Francisco Ricarte filed his income tax return for
the year 1958. On April 6, 1959, the Office of the Collector of Internal Revenue made
the corresponding assessment and fixed at P222.00 the defendant's income tax liability
pursuant to the express provision of Section 51(a) of the National Internal Revenue
Code (Commonwealth Act No. 466), then in effect. Defendant paid his income tax in two
equal installments of P 111.00 each the first on May 15, 1959 and the second on
August 17, 1959.

On June 20, 1959, Republic Act No. 2343 took effect amending Commonwealth Act No.
466 including Section 51(a). Under the amendatory act, the taxpayer assesses himself,
files his return and pays the tax as shown in his return upon filing thereof.

In the year 1961, the Bureau of Internal Revenue, after investigation, found that the
defendant had a deficiency of P 1,136.87 in his income tax for 1958. On January 19,
1961, assessment notice No. 17-A-708424-58 for the amount aforestated was issued
and, together with the corresponding audit sheet and letter of demand, was mailed to
the defendant on January 25, 1961.

For failure of defendant to pay his deficiency income tax liability, plaintiff, on January 14,
1966, filed a complaint for collection of unpaid taxes before the City Court of Cebu.

After trial and hearing, the court a quo rendered a decision dated October 29, 1966
dismissing the case on the ground of prescription of action. The trial court reasoned out
that the assessment was made by the Bureau of Internal Revenue on April 6, 1959, but
the present case was filed only on January 14, 1966 or more than the prescriptive
period of five years as provided for in Section 332(c) of the National Internal Revenue
Code.

On appeal to the former Court of First Instance of Cebu, the parties entered into a
stipulation of facts:
1. That the plaintiff is a political entity with capacity to sue and may be
served with processes thru the Revenue Regional Director, Bureau of
Internal Revenue, Revenue Region No. 13, Cebu City; while defendant
Francisco Ricarte is of legal age, with postal address at 278 South
Expressway (formerly at 451-C Tres de Abril Street), Cebu City, where he
may be served with summons.

2. That on or about March 2, 1959, defendant, an arrastre contractor, filed

his income tax return for the year 1958 showing on the face thereof a net
income of P 12,271.26; copy of which is hereto attached as Annex 'A' and
made an integral part hereof.

3. That the amount of P 222.00 was assessed on April 6, 1959 per

Assessment No. 17-A-708424-58 by the plaintiff as defendant's 1958
income tax liability per return filed by the latter which amount was duly
stamped 'Assessed' on defendant's 1958 income tax return.

4. That the aforesaid amount of P222.00 was paid by the defendant in two
installments under Official Receipt No. 1671571 dated May 15, 1959 for
the amount of P111.00 and under Official Receipt No. 2466278 dated
August 17, 1959 for P111.00.

5. That in the verification of defendant's 1958 income tax return by the

plaintiff thru the Bureau of Internal Revenue on January 19, 1961, there
was found due from him the amount of P l,136.87 as deficiency income
tax for said year, computed as follows:

Net income per return........................................ P 12,271.28

Add: Personal living expenses................................. 7,800.00

Total amount of income per audit review ................. 20,071.28

Less: Personal and additional exemption................... 7,800.00

Amount of income subject to tax............................ 12,271.28

Amount of tax due ................................................. 1,265.00

Less: Amount of tax already assessed and paid........... 222.00

Deficiency income tax due..........................…...... P 1,043.00

Add: ½% monthly interest from 6-20-59 to

 12-20-60 (Sec. 51 Tax Code, R.A. 2343 &

implemented by Gen. Cir. No. V-318)................... 93.87

Total amount of tax due & collective (Def'cy )............. P 1,136.87

6. That on January 19, 1961, Assessment Notice No. 17- A-708424-58 for
the aforesaid amount of P l,136.87 together with the letter of demand
bearing same date and the audit sheet were issued by the plaintiff thru the
Bureau of Internal Revenue and officially mailed and released to the
defendant on January 25, 1961, copies of which communications are
hereto attached as Annexes 'B', 'C' and 'D', respectively, and made
integral parts hereof.

7. That in plaintiff's letter dated January l9, 1961, Annex 'C' hereof, an
explanation was made as to how the aforesaid deficiency assessment was
brought about.

8. That a call up letter dated September 23, 1964 was sent by the plaintiff
to the defendant requesting settlement of his liability under Assessment
Notice No. 17-A-708424-58 mentioned in paragraph 6 hereof, copy of
which letter is hereto attached as Annex 'E' and made an integral part
hereof, which letter was officially mailed and released by the plaintiff thru
the Bureau of Internal Revenue on October 13, 1964 per Registry Receipt
No. 863.

9. That another letter dated November 15, 1965 calling for payments of
the aforesaid amount was again officially mailed and released to the
defendant, per Registry Receipt No. 1125, copy of which letter is hereto
attached as Annex 'F' and made an integral part hereof.

10. That the abovementioned assessment has not been contested by the
defendant before the Court of Tax Appeals.

11. That the same assessment has not been paid until date.

12. That the instant case for collection was filed before the City Court of
Cebu City on January 14, 1966" (pp. 46-50, ROA; p. 3, rec.).

On September 29, 1968, the former Court of First Instance, on the basis of the
stipulation of facts, rendered its decision dismissing herein appellant's complaint. The
said court stated that what the Bureau of Internal Revenue sought to collect from the
appellee was based on an assessment which the Bureau made under the provisions of
a new law, R.A. No. 2343, which was not yet in effect at the time of the filing of
appellee's income tax return for 1958; and that the action against the appellee had
already prescribed.

On October 16, 1968, appellant sought reconsideration of the lower court's decision.
The motion was denied on December 14, 1968, hence this appeal, appellant alleging
that the lower court erred in holding:

... that the deficiency assessment has no legal standing.

... that the plaintiff's action has prescribed.

... that plaintiff failed to prove service upon defendant of the deficiency
assessment dated January 19, 1961 (p. 5, Brief for Plaintiff-Appellant; p.
14, rec.).

The issues raised in this case may be synthesized as to whether the appellant can still
collect the alleged deficiency income tax liability thru judicial proceeding.

In holding that the subsequent assessment made by the Bureau of Internal Revenue on
January 19, 1961 has no legal basis, the lower court was of the impression that the
same was made under the provision of a new law, R.A. No. 2343, which was not yet in
effect at the time of the filing of the 1958 income tax return in question. Said court
observed that the unamended provision of Section 51(a) of the National Internal
Revenue Code which was enforcible when the appellant filed his 1958 income tax
return should apply to this case and not that of Section 51(b) of the same Code, as
amended by R.A. No. 2343, which went into effect only on June 20, 1959.

It may be pointed out that before the amendment of the tax code, Section 51(a) relating
to payment and assessment of income tax, prescribed:

Sec. 51. Assessment and payment of income tax.-(a) An assessment shall

be made by the Collector of Internal Revenue and all persons and
corporations subject to tax shall be notified of the amount for which they
are respectively liable on or before the first day of May of each successive
year.

but as amended by R.A. No. 2343, effective on June 20, 1959, it now reads:

Sec. 51. Payment and assessment of income tax.—(a) Payment of tax.—

(1) In general.-The total amount of tax imposed by this Title shall be paid
at the time the return is filed but not later than the fifteenth day of April
following the close of the calendar year, ... ...

xxx xxx xxx

 (b) Assessment and payment of deficiency tax.—After the return is filed
the Commissioner of Internal Revenue shall examine it and assess the
correct amount of the tax. The tax or deficiency in tax so discovered shall
be paid upon notice and demand from the Commissioner of Internal
Revenue.

Clearly, before the amendment, the taxpayer files his income tax return and the
Collector (now Commissioner) of Internal Revenue assesses the tax due and notifies
the taxpayer thereof. On the other hand, under the amendatory act, the taxpayer
assesses himself, files his return and is required to pay the tax as shown in his return
upon filing thereof. This procedure is commonly known as the "pay-as-you-file" system.
In other words, under the old law, the Collector of Internal Revenue was required to
assess the tax due, while under R.A. No. 2343 the taxpayer himself computes the tax
on the basis of the figures appearing in his income tax return.

WE do not agree with the former Court of First Instance of Cebu that the subsequent
assessment made on January 19, 1961 was based on the amendatory act.

Appellee filed his income tax return for the year 1958 on March 2, 1959 and the same
was assessed by the Bureau of Internal Revenue on April 6, 1959. The tax was paid in
two installments. The Bureau of Internal Revenue reviewed the said return and found
out a deficiency in the assessment it previously made and the income tax paid by the
appellee. A notice of assessment was sent to the appellee on January 19, 1961. Such
subsequent assessment undertaken by the Bureau of Internal Revenue was based
merely on the income tax return filed by the appellee where no assessment has been
made by him. As has been said, the amount of tax due was previously computed by the
Bureau of Internal Revenue. Finding that it made an error, the Bureau reassessed the
income tax return of the appellee; but such reassessment was made pursuant to the old
law and not under the amendatory act.

However, We agree with the lower court that the present action was filed after the
prescriptive period of five (5) years provided for in Section 332(c) of the National
Internal Revenue Code which reads:

(c) Where the assessment of any internal revenue tax has been made
within the period of limitation above described such tax may be collected
by distraint or levy or by a proceeding in court, but only if begun (1) within
five years after the assessment of the tax,

xxx xxx xxx

Appellant asseverates that the present action was filed within the five-year prescriptive
period provided for under the abovequoted provision of the tax code; that the
subsequent notice of assessment was made and appellee notified thereof on January
19, 1961; that from January 19, 1961 up to the date this case was filed in court on
January 14, 1966, only four years, eleven months and twenty-five days had elapsed.

Although a subsequent notice of assessment was allegedly made and sent to appellee
on January 19, 1961, it was the finding both of the former City Court of Cebu and the
defunct Court of First Instance of Cebu that no evidence has been presented by the
appellant that the appellee actually received a copy of that assessment notice regarding
the alleged deficiency tax. Such finding, being one of fact, can no longer be reviewed by
this Court. Even in the stipulation of facts entered into between the parties, there is no
stipulation showing that the appellant actually received the subsequent notice of
assessment. Thus, the prescriptive period provided for in Section 332(c) of the tax code
should be counted from April 6, 1959, the date when the Bureau of Internal Revenue
assessed the income tax return of the appellant. From said date until the filing of this
case on January 14, 1966, six years and nine months had elapsed. Verily, the action
had already prescribed.

WHEREFORE THE APPEALED DECISION DATED SEPTEMBER 29, 1968, IS

HEREBY AFFIRMED. NO COSTS

f. Imposition of Civil Penalties

FIRST DIVISION

[G.R. No. 179085 : January 21, 2010]

TAMBUNTING PAWNSHOP, INC., PETITIONER, VS. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO MORALES, J.:

The Commissioner of Internal Revenue (respondent) sent the Tambunting Pawnshop,

Inc. (petitioner) an assessment notice dated January 15, 2003 for P3,055,564.34
deficiency value-added tax (VAT), P406,092.50 deficiency documentary stamp tax on
pawn tickets, P67,201.55 deficiency withholding tax on compensation, and P21,723.75
deficiency expanded withholding tax, all inclusive of interests and surcharges for the
taxable year 1999.[1]

Petitioner protested the assessment.[2] As the protest merited no response, it filed a

Petition for Review[3] with the Court of Tax Appeals (CTA) pursuant to Section 228 of
the National Internal Revenue Code,[4] raising the following arguments:
 A. Pawnshops are not subject to Value Added Tax pursuant to Section
108 of the National Internal Revenue Code.[5]

B. Petitioner properly withheld and remitted to the respondent the

correct amount of expanded withholding tax for taxable year 1999.[6]

C. Petitioner has already paid the assessed amount of P14,398.38 [sic],

representing deficiency withholding tax on compensation, thus,
assessment on withholding on compensation must be cancelled.[7]

D. Petitioner's pawn tickets are not subject to documentary stamp tax

pursuant to existing laws and jurisprudence.[8] (emphasis and
underscoring in the original)

The First Division of the CTA ruled that petitioner is liable for VAT and documentary
stamp tax but not for withholding tax on compensation and expanded withholding
tax.[9] Thus it disposed:

WHEREFORE, premises considered, the Petition for Review is PARTIALLY

GRANTED.Respondent's assessments for deficiency Expanded Withholding Tax and
Withholding Tax on Compensation for the taxable year 1999, in the amounts of Twenty
One Thousand Seven Hundred Twenty Three and 75/100 Pesos (P21,723.75)
and Sixty Seven Thousand Two Hundred One and 55/100 Pesos (P67,201.55),
respectively, are hereby CANCELLED and SET ASIDE. However, the assessments for
deficiency Value-Added Tax and Documentary Stamp Tax are hereby AFFIRMED.

Accordingly, petitioner is ORDERED TO PAY the respondent the amount of Three

Million Fifty Five Thousand Five Hundred Sixty Four and 34/100
Pesos (P3,055,564.34) and Four Hundred Six Thousand Ninety Two and 500/100
Pesos (P406,092.50) representing deficiency Value-Added Tax and Documentary
Stamp Tax, respectively, for the taxable year 1999, plus 20% delinquency interest from
February 18, 2003 up to the time such amount is fully paid pursuant to Section 249
(c) of the 1997 NIRC.

SO ORDERED.[10] (emphasis in the original; underscoring supplied)

Petitioner's Motion for Partial Reconsideration[11] having been denied,[12] it filed a

Petition for Review[13]before the CTA En Banc which dismissed[14] it as it did petitioner's
Motion for Reconsideration.[15]

Hence, the present Petition for Review on Certiorari.[16]

To petitioner, a pawnshop is not enumerated as one of those engaged in "sale or

exchange of services"[17] in Section 108 of the National Internal Revenue
Code.[18] Citing Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshops,
Inc.,[19] it contends that the nature of the business of pawnshops does not fall under
"service" as defined under the Legal Thesaurus of William C. Burton, viz:

accommodate, administer to, advance, afford, aid, assist, attend, be of use, care for,
come to the aid of, commodere, comply, confer a benefit, contribute to, cooperate,
deservire, discharge one's duty, do a service, do one's bidding, fill an office, forward,
furnish aid, furnish assistance, give help, lend, aid, minister to, promote, render help,
servire, submit, succor, supply aid, take care of, tend, wait on, work for.[20]

The petition is in part meritorious.

On the issue of whether pawnshops are liable to pay VAT, the Court, in First Planters
Pawnshop, Inc. v. Commissioner of Internal Revenue,[21] held:

In fine, prior to the [passage of the] EVAT Law [in 1994], pawnshops were treated as
lending investors subject to lending investor's tax. Subsequently, with the Court's ruling
in Lhuillier, pawnshops were then treated as VAT-able enterprises under the general
classification of "sale or exchange of services" under Section 108 (A) of the Tax Code of
1997, as amended. R.A. No. 9238 [which was passed in 2004] finally classified
pawnshops as Other Non-bank Financial Intermediaries.

The Court finds that pawnshops should have been treated as non-bank financial
intermediaries from the very beginning, subject to the appropriate taxes provided by
law, thus --

- Under the National Internal Revenue Code of 1977, pawnshops should have been
levied the 5% percentage tax on gross receipts imposed on bank and non-bank
financial intermediaries under Section 119 (now Section 121 of the Tax Code of 1997);

- With the imposition of the VAT under R.A. No. 7716 or the EVAT Law, pawnshops
should have been subjected to the 10% VAT imposed on banks and non-bank financial
intermediaries and financial institutions under Section 102 of the Tax Code of 1977
(now Section 108 of the Tax Code of 1997);

- This was restated by R.A. No. 8241, 24 which amended R.A. No. 7716, although the
levy, collection and assessment of the 10% VAT on services rendered by banks, non-
bank financial intermediaries, finance companies, and other financial intermediaries not
performing quasi-banking functions, were made effective January 1, 1998;

- R.A. No. 8424 or the Tax Reform Act of 1997 26 likewise imposed a 10% VAT under
Section 108 but the levy, collection and assessment thereof were again deferred until
December 31, 1999;

- The levy, collection and assessment of the 10% VAT was further deferred by R.A. No.
8761 until December 31, 2000, and by R.A. No. 9010, until December 31, 2002;

- With no further deferments given by law, the levy, collection and assessment of the
10% VAT on banks, non-bank financial intermediaries, finance companies, and other
financial intermediaries not performing quasi-banking functions were finally made
effective beginning January 1, 2003;

- Finally, with the enactment of R.A. No. 9238 in 2004, the services of banks, non-
bank financial intermediaries, finance companies, and other financial intermediaries not
performing quasi-banking functions were specifically exempted from VAT, 28 and the
0% to 5% percentage tax on gross receipts on other non-bank financial
intermediaries was reimposed under Section 122 of the Tax Code of 1997.

At the time of the disputed assessment, that is, for the year 2000, pawnshops were not
subject to 10% VAT under the general provision on "sale or exchange of services" as
defined under Section 108 (A) of the Tax Code of 1997, which states: "'sale or
exchange of services' means the performance of all kinds of services in the Philippines
for others for a fee, remuneration or consideration . . . ." Instead, due to the specific
nature of its business, pawnshops were then subject to 10% VAT under the category of
non-bank financial intermediaries[.]

Coming now to the issue at hand -- Since petitioner is a non-bank financial intermediary,
it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy,
assessment and collection of VAT from non-bank financial intermediaries being
specifically deferred by law, then petitioner is not liable for VAT during these tax years.
But with the full implementation of the VAT system on non-bank financial
intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax
year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is
no longer liable for VAT but it is subject to percentage tax on gross receipts from
0% to 5%, as the case may be. (emphasis and underscoring supplied)

In light of the foregoing ruling, since the imposition of VAT on pawnshops, which are
non-bank financial intermediaries, was deferred for the tax years 1996 to 2002,
petitioner is not liable for VAT for the tax year 1999.

In dodging liability for documentary stamp tax on its pawn tickets, petitioner argues that
such tickets are neither securities nor printed evidence of indebtedness.[22] The
argument fails.

Section 195 of the National Internal Revenue Code provides:

Section 195. On every mortgage or pledge of lands, estate or property, real or personal,
heritable or movable, whatsoever, where the same shall be made as a security for the
payment of any definite and certain sum of money lent at the time or previously due and
owing or forborne to be paid, being payable, and on any conveyance of land, estate, or
property whatsoever, in trust or to be sold, or otherwise converted into money which
shall be and intended only as security, either by express stipulation or otherwise, there
shall be collected a documentary stamp tax x x x. (underscoring supplied)

Construing this provision vis a vis pawn tickets, the Court held in Michel J. Lhuillier
Pawnshop, Inc. v. Commissioner of Internal Revenue:

x x x A D[ocumentary] S[tamp] T[ax] is an excise tax on the exercise of a right or

privilege to transfer obligations, rights or properties incident thereto. x x x

xxxx

Pledge is among the privileges, the exercise of which is subject to DST. A pledge may
be defined as an accessory, real and unilateral contract by virtue of which the debtor or
a third person delivers to the creditor or to a third person movable property as security
for the performance of the principal obligation, upon the fulfillment of which the thing
pledged, with all its accessions and accessories, shall be returned to the debtor or to
the third person. This is essentially the business of pawnshops which are defined under
Section 3 of Presidential Decree No. 114, or the Pawnshop Regulation Act, as persons
or entities engaged in lending money on personal property delivered as security for
loans.

xxxx

Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows:

"Pawn ticket" is the pawnbrokers' receipt for a pawn. It is neither a security nor a printed
evidence of indebtedness."

True, the law does not consider said ticket as an evidence of security or indebtedness.
However, for purposes of taxation, the same pawn ticket is proof of an exercise of a
taxable privilege of concluding a contract of pledge. There is therefore no basis in
petitioner's assertion that a DST is literally a tax on a document and that no tax may be
imposed on a pawn ticket.[23] (emphasis and underscoring supplied)

With respect to petitioner's argument against liability for surcharges and interest -- that it
was in good faith in not paying documentary stamp taxes, it having relied on the rulings
of respondent CIR and the CTA that pawn tickets are not subject to documentary stamp
taxes[24] -- the Court finds the same meritorious.

It is settled that good faith and honest belief that one is not subject to tax on the basis of
previous interpretations of government agencies tasked to implement the tax law are
sufficient justification to delete the imposition of surcharges and interest.[25]

WHEREFORE, the petition is IN PART GRANTED. The May 24, 2007 Decision of the
Court of Tax Appeals is AFFIRMED with the MODIFICATION that the assessment
deficiency value-added taxes for the taxable year 1999 and for surcharges and
delinquency interest on deficient Value-Added Tax and Documentary Income Tax
are SET ASIDE.

SECOND DIVISION

G.R. No. 167260 February 27, 2009

The CITY OF ILOILO, Mr. ROMEO V. MANIKAN, in his capacity as the Treasurer of
Iloilo City, Petitioners,
vs.
SMART COMMUNICATIONS, INC. (SMART) Respondent.

DECISION

BRION, J.:

Before this Court is the appeal by certiorari filed by the City of Iloilo (petitioner) under
Rule 45 of the Rules of Court seeking to set aside the decision of the Regional Trial
Court (RTC) of Iloilo City, Branch 28, which declared that respondent SMART
Communications, Inc. (SMART) is exempt from the payment of local franchise and
business taxes.

BACKGROUND FACTS

The facts of the case are not in dispute. SMART received a letter of assessment dated
February 12, 2002 from petitioner requiring it to pay deficiency local franchise and
business taxes (in the amount of ₱764,545.29, plus interests and surcharges) which it
incurred for the years 1997 to 2001. SMART protested the assessment by sending a
letter dated February 15, 2002 to the City Treasurer. It claimed exemption from payment
of local franchise and business taxes based on Section 9 of its legislative franchise
under Republic Act (R.A.) No. 7294 (SMART’s franchise). Under SMART’s franchise, it
was required to pay a franchise tax equivalent to 3% of all gross receipts, which amount
shall be in lieu of all taxes. SMART contends that the "in lieu of all taxes" clause covers
local franchise and business taxes.

SMART similarly invoked R.A. No. 7925 or the Public Telecommunications Policy Act
(Public Telecoms Act) whose Section 23 declares that any existing privilege, incentive,
advantage, or exemption granted under existing franchises shall ipso facto become part
of previously granted-telecommunications franchise. SMART contends that by virtue of
Section 23, tax exemptions granted by the legislature to other holders of
telecommunications franchise may be extended to and availed of by SMART.
Through a letter dated April 4, 2002, petitioner denied SMART’s protest, citing the
failure of SMART to comply with Section 252 of R.A. No. 7160 or the Local Government
Code (LGC) before filing the protest against the assessment. Section 252 of the LGC
requires payment of the tax before any protest against the tax assessment can be
made.

SMART objected to the petitioner’s denial of its protest by instituting a case against
petitioner before the RTC of Iloilo City.1 The trial court ruled in favour of SMART and
declared the telecommunications firm exempt from the payment of local franchise and
business taxes;2 it agreed with SMART’s claim of exemption under Section 9 of its
franchise and Section 23 of the Public Telecoms Act.3

From this judgment, petitioner files this petition for review on certiorari raising the sole
issue of whether SMART is exempt from the payment of local franchise and business
taxes.

THE COURT’S RULING

SMART relies on two provisions of law to support its claim for tax exemption: Section 9
of SMART’s franchise and Section 23 of the Public Telecoms Act. After a review of
pertinent laws and jurisprudence – particularly of SMART Communications, Inc. v. City
of Davao,4 a case which, except for the respondent, involves the same set of facts and
issues – we find SMART’s claim for exemption to be unfounded. Consequently, we find
the petition meritorious.1awphi1

The basic principle in the construction of laws granting tax exemptions has been very
stable. As early as 1916, in the case of Government of the Philippine Islands v. Monte
de Piedad,5 this Court has declared that he who claims an exemption from his share of
the common burden of taxation must justify his claim by showing that the Legislature
intended to exempt him by words too plain to be beyond doubt or mistake. This doctrine
was repeated in the 1926 case of Asiatic Petroleum v. Llanes,6 as well as in the case of
Borja v. Commissioner of Internal Revenue (CIR)7decided in 1961. Citing American
jurisprudence, the Court stated in E. Rodriguez, Inc. v. CIR:8

The right of taxation is inherent in the State. It is a prerogative essential to the perpetuity
of the government; and he who claims an exemption from the common burden, must
justify his claim by the clearest grant of organic or statute law xxx When exemption is
claimed, it must be shown indubitably to exist. At the outset, every presumption is
against it. A well-founded doubt is fatal to the claim; it is only when the terms of the
concession are too explicit to admit fairly of any other construction that the proposition
can be supported.

In the recent case of Digital Telecommunications, Inc. v. City Government of Batangas,

et al.,9 we adhered to the same principle when we said:
A tax exemption cannot arise from vague inference...Tax exemptions must be clear and
unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of
law conferring on the taxpayer, in clear and plain terms, exemption from a common
burden. Any doubt whether a tax exemption exists is resolved against the taxpayer.

The burden therefore is on SMART to prove that, based on its franchise and the Public
Telecoms Act, it is entitled to exemption from the local franchise and business taxes
being collected by the petitioner.

Claim for Exemption under

SMART’s franchise

Section 9 of SMART’s franchise states:

Section 9. Tax provisions. — The grantee, its successors or assigns shall be liable to
pay the same taxes on their real estate buildings and personal property, exclusive of'
this franchise, as other persons or corporations which are now or hereafter may be
required by law to pay. In addition thereto, the grantee, its successors or assigns shall
pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business
transacted under this franchise by the grantee, its successors or assigns and the said
percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided,
That the grantee, its successors or assigns shall continue to be liable for income taxes
payable under Title II of the National Internal Revenue Code pursuant to Section 2 of
Executive Order No. 72 unless the latter enactment is amended or repealed, in which
case the amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner
of Internal Revenue or his duly authorized representative in accordance with the
National Internal Revenue Code and the return shall be subject to audit by the Bureau
of Internal Revenue. [Emphasis supplied.]

The petitioner posits that SMART’s claim for exemption under its franchise is not
equivocal enough to prevail over the specific grant of power to local government units to
exact taxes from businesses operating within its territorial jurisdiction under Section 137
in relation to Section 151 of the LGC. More importantly, it claimed that exemptions from
taxation have already been removed by Section 193 of the LGC:

Section 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under RA No. 6938, non-stock
and non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code. [Emphasis supplied.]
The petitioner argues, too, that SMART’s claim for exemption from taxes under Section
9 of its franchise is not couched in plain and unequivocal language such that it restored
the withdrawal of tax exemptions under Section 193 above. It claims that "if Congress
intended that the tax exemption privileges withdrawn by Section 193 of RA 7160 [LGC]
were to be restored in respondent’s [SMART’s] franchise, it would have so expressly
provided therein and not merely [restored the exemption] by the simple expedient of
including the ‘in lieu of all taxes’ provision in said franchise."10

We have indeed ruled that by virtue of Section 193 of the LGC, all tax exemption
privileges then enjoyed by all persons, save those expressly mentioned, have been
withdrawn effective January 1, 1992 – the date of effectivity of the LGC.11 The first
clause of Section 137 of the LGC states the same rule.12 However, the withdrawal of
exemptions, whether under Section 193 or 137 of the LGC, pertains only to those
already existing when the LGC was enacted. The intention of the legislature was to
remove all tax exemptions or incentives granted prior to the LGC.13 As SMART’s
franchise was made effective on March 27, 1992 – after the effectivity of the LGC –
Section 193 will therefore not apply in this case.

But while Section 193 of the LGC will not affect the claimed tax exemption under
SMART’s franchise, we fail to find a categorical and encompassing grant of tax
exemption to SMART covering exemption from both national and local taxes:

R.A. No 7294 does not expressly provide what kind of taxes SMART is exempted from.
It is not clear whether the "in lieu of all taxes" provision in the franchise of SMART would
include exemption from local or national taxation. What is clear is that SMART shall pay
franchise tax equivalent to three percent (3%) of all gross receipts of the business
transacted under its franchise. But whether the franchise tax exemption would include
exemption from exactions by both the local and the national government is not
unequivocal.

The uncertainty in the "in lieu of all taxes" clause in R.A. No. 7294 on whether SMART
is exempted from both local and national franchise tax must be construed strictly
against SMART which claims the exemption. [Emphasis supplied.]14

Justice Carpio, in his Separate Opinion in PLDT v. City of Davao,15 explains why:

The proviso in the first paragraph of Section 9 of Smart’s franchise states that the
grantee shall "continue to be liable for income taxes payable under Title II of the
National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of
tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly
authorized representative in accordance with the National Internal Revenue Code."
Moreover, the same paragraph declares that the tax returns "shall be subject to audit by
the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes.
The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the
National Internal Revenue Code and not to local taxes.
Nonetheless, even if Section 9 of SMART’s franchise can be construed as covering
local taxes as well, reliance thereon would now be unavailing. The "in lieu of all taxes"
clause basically exempts SMART from paying all other kinds of taxes for as long as it
pays the 3% franchise tax; it is the franchise tax that shall be in lieu of all taxes, and not
any other form of tax.16 Franchise taxes on telecommunications companies, however,
have been abolished by R.A. No. 7716 or the Expanded Value-Added Tax Law (E-VAT
Law), which was enacted by Congress on January 1, 1996.17 To replace the franchise
tax, the E-VAT Law imposed a 10%18 value-added tax on telecommunications
companies under Section 108 of the National Internal Revenue Code.19 The "in lieu of
all taxes" clause in the legislative franchise of SMART has thus become functus officio,
made inoperative for lack of a franchise tax.20

SMART’s claim for exemption from local business and franchise taxes based on Section
9 of its franchise is therefore unfounded.

Claim for Exemption

Under Public Telecoms Act

SMART additionally invokes the "equality clause" under Section 23 of the Public
Telecoms Act:

SECTION 23. Equality of Treatment in the Telecommunications Industry. — Any

advantage, favor, privilege, exemption, or immunity granted under existing franchises,
or may hereafter be granted, shall ipso facto become part of previously granted
telecommunications franchise and shall be accorded immediately and unconditionally to
the grantees of such franchises: Provided, however, That the foregoing shall neither
apply to nor affect provisions of telecommunications franchises concerning territory
covered by the franchise, the life span of the franchise, or the type of service authorized
by the franchise. [Emphasis supplied.]

As in the case of SMART v. City of Davao,21 SMART posits that since the franchise of
telecommunications companies granted after the enactment of its franchise contained
provisions exempting these companies from both national and local taxes, these
privileges should extend to and benefit SMART, applying the "equality clause" above.
The petitioner, on the other hand, believes that the claimed exemption under Section 23
of the Public Telecoms Act is similarly unfounded.

We agree with the petitioner.

Whether Section 23 of the cited law extends tax exemptions granted by Congress to
new franchise holders to existing ones has been answered in the negative in the case of
PLDT v. City of Davao.22 The term "exemption" in Section 23 of the Public Telecoms Act
does not mean tax exemption; rather, it refers to exemption from certain regulatory or
reporting requirements imposed by government agencies such as the National
Telecommunications Commission. The thrust of the Public Telecoms Act is to promote
the gradual deregulation of entry, pricing, and operations of all public
telecommunications entities, and thus to level the playing field in the
telecommunications industry. The language of Section 23 and the proceedings of both
Houses of Congress are bereft of anything that would signify the grant of tax
exemptions to all telecommunications entities.23 Intent to grant tax exemption cannot
therefore be discerned from the law; the term "exemption" is too general to include tax
exemption and runs counter to the requirement that the grant of tax exemption should
be stated in clear and unequivocal language too plain to be beyond doubt or mistake.

Surcharge and Interests

Since SMART cannot validly claim any tax exemption based either on Section 9 of its
franchise or Section 23 of the Public Telecoms Act, it follows that petitioner can impose
and collect the local franchise and business taxes amounting to ₱764,545.29 it
assessed against SMART. Aside from these, SMART should also be made to pay
surcharge and interests on the taxes due.lawphil.net

The settled rule is that good faith and honest belief that one is not subject to tax on the
basis of previous interpretation of government agencies tasked to implement the tax
laws are sufficient justification to delete the imposition of surcharges and interest.24 In
refuting liability for the local franchise and business taxes, we do not believe SMART
relied in good faith in the findings and conclusion of the Bureau of Local Government
and Finance (BLGF).

In a letter dated August 13, 1998, the BLGF opined that SMART should be considered
exempt from the franchise tax that the local government may impose under Section 137
of the LGC.25 SMART, relying on the letter-opinion of the BLGF, invoked the same in
the administrative protest it filed against petitioner on February 15, 2002, as well as in
the petition for prohibition that it filed before the RTC of Iloilo on April 30, 2002.
However, in the 2001 case of PLDT v. City of Davao,26 we declared that we do not find
BLGF’s interpretation of local tax laws to be authoritative and persuasive. The BLGF’s
function is merely to provide consultative services and technical assistance to the local
governments and the general public on local taxation, real property assessment, and
other related matters.27 Unlike the Commissioner of Internal Revenue who has been
given the express power to interpret the Tax Code and other national tax laws,28 no
such power is given to the BLGF. SMART’s dependence on BLGF’s interpretation was
thus misplaced.

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the RTC
dated January 19, 2005 in Civil Case No. 02-27144 and find SMART liable to pay the
local franchise and business taxes amounting to ₱764,545.29, assessed against it by
petitioner, plus the surcharges and interest due thereon.