G.R. No.

211289, January 14, 2019

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, V. LA FLOR DELA ISABELA, INC.,
RESPONDENT.
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking
to reverse and set aside the September 30, 2013 Decision1 and the February 10, 2014
Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 951, which affirmed the
August 3, 2012 Decision3 and the October 5, 2012 Resolution of the CTA Third Division (CTA
Division).

Factual background
Respondent La Flor dela Isabela, Inc. (La Flor) is a domestic corporation duly organized and
existing under Philippine Law. It filed monthly returns for the Expanded Withholding Tax (EWT)
and Withholding Tax on Compensation (WTC) for calendar year 2005.4
On September 3, 2008, La Flor, through its president, executed a Waiver of the Statute of
Limitations (Waiver)5 in connection with its internal revenue liabilities for the calendar year ending
December 31, 2005. On February 16, 2009, it executed another Waiver6 to extend the period of
assessment until December 31, 2009.
On November 20, 2009, La Flor received a copy of the Preliminary Assessment Notice for
deficiency taxes for the taxae year 2005. Meanwhile, on December 2, 2009, it executed another
Waiver.7
On January 7, 2010, La Flor received the following Formal Letter of Demand and Final
Assessment Notices (FANs): (1) LTEADI-II CP-05-00007 for penalties for late filing and payment
of WTC; (2) LTADI-II CP 05-00008 for penalties for late filing and payment of EWT; (3) LTADI-II
WE-05-00062 for deficiency assessment for EWT; and (4) LTEADI-II WC-05-00038 for deficiency
assessment for WTC. The above-mentioned assessment notices were all dated December 17,
2009 and covered the deficiency taxes for the taxae year 2005.8
On January 15, 2010, La Flor filed its Letter of Protest contesting the assessment notices. On
July 20, 2010, petitioner Commissioner of Internal Revenue (CIR) issued the Final Decision on
Disputed Assessment (FDDA) involving the alleged deficiency withholding taxes in the aggregate
amount of P6,835,994.76. Aggrieved, it filed a petition for review before the CTA Division.

CTA Division Decision

In its August 3, 2012 Decision, the CTA Division ruled in favor of La Flor and cancelled the
deficiency tax assessments against it. It noted that based on the dates La Flor had filed its returns
for EWT and WTC, the CIR had until February 15, 2008 to March 1, 2009 to issue an assessment
pursuant to the three-year prescriptive period under Section 203 of the National Internal Revenue
Code (NIRC). The CTA Division pointed out that the assessment was issued beyond the
prescriptive period considering that the CIR issued the FANs only on December 17, 2009. Thus,
it posited that the assessment was barred by prescription.

On the other hand, the CTA Division ruled that the Waivers entered into by the CIR and La Flor
did not effectively extend the prescriptive period for the issuance of the tax assessments. It
pointed out that only the February 16, 2009 Waiver was stipulated upon and the Waivers dated
September 3, 2008 and December 2, 2009 were never presented or offered in evidence. In
addition, the CTA Division highlighted that the Waiver dated February 16, 2009 did not comply
with the provisions of Revenue Memorandum Order (RMO) No. 20-90 because it failed to state
the nature and amount of the tax to be assessed.

Thus, it disposed:
WHEREFORE, the Petition for Review is hereby GRANTED. Accordingly, the Formal Letter of
Demand, with Final Assessment Notices LTEADI-WC-05-00038, LTEADI-WE-05-00062,
LTEADI-CP-05-00007, LTEADI-CP-05-00008, all dated December 17, 2009 are hereby
CANCELLED and SET ASIDE.

SO ORDERED.9
The CIR moved for reconsideration but it was denied by the CTA Division in its October 5, 2012
Resolution.10Undeterred, it filed a Petition for Review11 before the CTA En Banc.
CTA En Banc Decision
In its September 30, 2013 Decision, the CTA En Banc affirmed the Decision of the CTA Division.
The tax court agreed that the EWT and WTC assessments were barred by prescription. It
explained that the Waivers dated September 3, 2008 and December 2, 2009 were inadmissie
because they were never offered in evidence. The CTA En Banc added that these documents
were neither incorporated in the records nor duly identified by testimony. It also elucidated that
the Waiver dated February 16, 2009 was defective because it failed to comply with RMO No. 20-
90 as it did not specify the kind and amount of tax involved. As such, the CTA En Banc concluded
that the prescriptive period for the assessment of EWT and WTC for 2005 was not extended in
view of the inadmissibility and invalidity of the Waivers between the CIR and La Flor. Thus, it
disposed:
WHEREFORE, premises considered, the assailed Decision dated August 3, 2012 and the
Resolution dated October 5, 2012 are AFFIRMED. The Petition for Review is hereby DISMISSED.

SO ORDERED.12
The CIR moved for reconsideration, but it was denied by the CTA En Banc in its February 10,
2014 Resolution.
Hence, this present petition raising the following:

Issues
I. WHETHER THE PRESCRIPTIVE PERIOD UNDER SECTION 203 OF THE NIRC APPLIES
TO EWT AND WTC ASSESSMENTS; and
II. WHETHER LA FLOR'S EWT AND WTC ASSESSMENTS FOR 2005 WERE BARRED BY
PRESCRIPTION.

The CIR argued that the prescriptive period under Section 203 of the NIRC does not apply to
withholding agents such as La Flor. It explained that the amount collected from them is not the
tax itself but rather a penalty. The CIR pointed out that the provision of Section 203 of the NIRC
only mentions assessment of taxes as distinguished from assessment of penalties. It highlighted
that La Flor was made liae for EWT and WTC deficiencies in its capacity as a withholding agent
and not in its personality as a taxpayer.

On the other hand, the CIR maintained that even applying the periods set in Section 203 of the
NIRC, the EWT and WTC assessment of La Flor had not yet prescribed. It pointed out that La
Flor had executed three Waivers extending the prescriptive period under the NIRC. The CIR
lamented that the CTA erred in disregarding them because evidence not formally offered may be
considered if they form part of the records. It noted that in the Answer it filed before the CTA
Division, the subject Waivers were included as annexes. In addition, the CIR assailed that failure
to comply with RMO No. 20-90 does not invalidate the Waivers.
In its Comment13 dated August 15, 2014, La Flor countered that the CIR's petition for review
should be denied outright for procedural infirmities. It pointed out that the petition failed to comply
with Bar Matter (B.M.) No. 1922 because the date of issue of the Mandatory Continuing Legal
Education (MCLE) compliance of the counsels of the CIR was not indicated. In addition, La Flor
noted that the petition for review did not observe Section 2, Rule 7 of the Rules of Court requiring
the paragraphs to be numbered. Further, it asserted that the assessment of the EWT and WTC
had prescribed because it went beyond the prescriptive period provided under Section 203 of the
NIRC. La Flor also assailed that the Waivers should not be considered because they were neither
offered in evidence nor complied with the requirements under RMO No. 20-90.
In its Reply14 dated February 18, 2015, the CIR brushed aside the allegations of procedural
infirmities of its petition for review. It elucidated that failure to indicate the date of issue of the
MCLE compliance is no longer a ground for dismissal and that it had stated the MCLE certificate
compliance numbers of its counsels. The CIR posited that the Rules of Court does not penalize
the failure to number the paragraphs in pleadings.
The Court's Ruling
Other than challenging the merits of the CIR's petition, La Flor believes that the former's petition
for review on certiorari should be dismissed outright on procedural grounds. It points out that
failure to include the date of issue of the MCLE compliance number of a counsel in a pleading is
a ground for dismissal. Further, La Flor highlights that the paragraphs in the CIR's petition for
review on certiorari were not numbered.
In People v. Arrojado,15 the Court had already clarified that failure to indicate the number and date
of issue of the counsel's MCLE compliance will no longer result in the dismissal of the case, to
wit:
In any event, to avoid inordinate delays in the disposition of cases brought about by a counsel's
failure to indicate in his or her pleadings the number and date of issue of his or her MCLE
Certificate of Compliance, this Court issued an En Banc Resolution, dated January 14, 2014
which amended B.M. No. 1922 by repealing the phrase "Failure to disclose the required
information would cause the dismissal of the case and the expunction of the pleadings from the
records" and replacing it with "Failure to disclose the required information would subject the
counsel to appropriate penalty and disciplinary action." Thus, under the amendatory Resolution,
the failure of a lawyer to indicate in his or her pleadings the number and date of issue of his or
her MCLE Certificate of Compliance will no longer result in the dismissal of the case and
expunction of the pleadings from the records. Nonetheless, such failure will subject the lawyer to
the prescribed fine and/or disciplinary action.
On the other hand, even La Flor recognizes that Section 2, Rule 7 of the Rules of Court does not
provide for any punishment for failure to number the paragraphs in a pleading. In short, the
perceived procedural irregularities in the petition for review on certiorari do not justify its outright
dismissal. Procedural rules are in place to facilitate the adjudication of cases and avoid delay in
the resolution of rival claims.16 In addition, courts must strive to resolve cases on their merits,
rather than summarily dismiss them on technicalities.17 This is especially true when the alleged
procedural rules violated do not provide any sanction at all or when the transgression thereof
does not result in a dismissal of the action.
Nevertheless, the Court finds no reason to reverse the CTA in invalidating the assessments
against La Flor.

Withholding taxes are internal

revenue taxes covered by Section 203
of the NIRC.
Section 203 of the NIRC provides for the ordinary prescriptive period for the assessment and
collection of taxes, to wit:
SEC. 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 case where a
return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from
the day the return was filed. For purposes of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis
supplied)
On the other hand, Section 222(a)18 of the NIRC provides for instances where the ordinary
prescriptive period of three years for the assessment and collection of taxes is extended to 10
years, i.e., false return, fraudulent returns, or failure to file a return. In short, the relevant provisions
in the NIRC concerning the prescriptive period for the assessment of internal revenue taxes
provide for an ordinary and extraordinary period for assessment.
The CIR, however, forwards a novel theory that Section 203 is inapplicae in the present
assessment of EWT and WTC deficiency against La Flor. It argues that withholding taxes are not
contemplated under the said provision considering that they are not internal revenue taxes but
are penalties imposed on the withholding agent should it fail to remit the proper amount of tax
withheld.

In Chamber of Real Estate and Builders' Associations, Inc. v. Hon. Executive Secretary
Romulo,19 the Court had succinctly explained the withholding tax system observed in our
jurisdiction, to wit:
We have long recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws. The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner to meet his probae income
tax liability; second, to ensure the collection of income tax which can otherwise be lost or
substantially reduced through failure to file the corresponding returns and third, to improve the
government's cash flow. This results in administrative savings, prompt and efficient collection of
taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through
more complicated means and remedies.

Under the existing withholding tax system, the withholding agent retains a portion of the amount
received by the income earner. In turn, the said amount is credited to the total income tax payae
in transactions covered by the EWT. On the other hand, in cases of income payments subject to
WTC and Final Withholding Tax, the amount withheld is already the entire tax to be paid for the
particular source of income. Thus, it can readily be seen that the payee is the taxpayer, the person
on whom the tax is imposed, while the payor, a separate entity, acts as the government's agent
for the collection of the tax in order to ensure its payment.20
As a consequence of the withholding tax system, two distinct liabilities arise — one for the income
earner/payee and another for the withholding agent. In Rizal Commercial Banking Corporation v.
Commissioner of Internal Revenue,21 the Court elaborated:
It is, therefore, indisputae that the withholding agent is merely a tax collector and not a taxpayer,
as elucidated by this Court in the case of Commissioner of Internal Revenue v. Court of Appeals,
to wit:
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity
acting no more than an agent of the government for the collection of the tax in order to ensure its
payments; the payer is the taxpayer — he is the person subject to tax imposed by law; and the
payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not
a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction
of law. His (agent) liability is direct and independent from the taxpayer, because the income tax
is still imposed on and due from the latter. The agent is not liae for the tax as no wealth flowed
into him — he earned no income. The Tax Code only makes the agent personally liae for the tax
arising from the breach of its legal duty to withhold as distinguished from its duty to pay tax since:

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

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

It is true that withholding tax is a method of collecting tax in advance22 and that a withholding tax
on income necessarily implies that the amount of tax withheld comes from the income earned by
the taxpayer/payee.23Nonetheless, the Court does not agree with the CIR that withholding tax
assessments are merely an imposition of a penalty on the withholding agent, and thus, outside
the coverage of Section 203 of the NIRC.
The CIR cites National Development Company v. Commissioner of Internal Revenue24 as basis
that withholding taxes are only penalties imposed on the withholding agent, to wit:
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders. It was the income of these companies and not the
Repuic of the Philippines that was subject to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to
withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of
the Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax
under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of
each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount
withheld to the officer of the Government of the Philippines authorized to receive it. Every such
person is made personally liae for such tax, and is indemnified against the claims and demands
of any person for the amount of any payments made in accordance with the provisions of this
section. (As amended by Section 9, R.A. No. 2343.)
In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax
Appeals, the Court quoted with approval the following regulation of the BIR on the responsibilities
of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding the tax due, and
promptly causing a query to be addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is not subject to withholding. In case
the Commissioner of Internal Revenue decides that the income paid to an individual is not subject
to withholding, the withholding agent may thereupon remit the amount of tax withheld. (2nd par.,
Sec. 200, Income Tax Regulations).

"Strict observance of said steps is required of a withholding agent before he could be released
from liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns
upon exemption from taxation; hence, an exempting provision should be construed strictissimi
juris."
The petitioner was remiss in the discharge of its oigation as the withholding agent of the
government and so should be held liae for its omission.

A careful analysis of the above-quoted decision, however, reveals that the Court did not equate
withholding tax assessments to the imposition of civil penalties imposed on tax deficiencies. The
word "penalty" was used to underscore the dynamics in the withholding tax system that it is the
income of the payee being subjected to tax and not of the withholding agent. It was never meant
to mean that withholding taxes do not fall within the definition of internal revenue taxes, especially
considering that income taxes are the ones withheld by the withholding agent. Withholding taxes
do not cease to become income taxes just because it is collected and paid by the withholding
agent.

The liability of the withholding agent is distinct and separate from the tax liability of the income
earner. It is premised on its duty to withhold the taxes paid to the payee. Should the withholding
agent fail to deduct the required amount from its payment to the payee, it is liae for deficiency
taxes and applicae penalties. In Commissioner of Internal Revenue v. Procter & Game Philippine
Manufacturing Corporation25 the Court explained:
It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent
who is "required to deduct and withhold any tax" is made "personally liae for such tax" and indeed
is indemnified against any claims and demands which the stockholder might wish to make in
questioning the amount of payments effected by the withholding agent in accordance with the
provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liae
for the correct amount of the tax that should be withheld from the dividend remittances.
The withholding agent is, moreover, subject to and liae for deficiency assessments,
surcharges and penalties should the amount of the tax withheld be finally found to be less
than the amount that should have been withheld under law.
A "person liae for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." The terms "liae for tax" and "subject to tax" both connote legal oigation or duty to pay
a tax. It is very difficult, indeed conceptually impossie, to consider a person who is statutorily
made "liae for tax" as not "subject to tax." By any reasonae standard, such a person should be
regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from him. (Emphasis supplied)
Thus, withholding tax assessments such as EWT and WTC clearly contemplate deficiency
internal revenue taxes. Their aim is to collect unpaid income taxes and not merely to impose a
penalty on the withholding agent for its failure to comply with its statutory duty. Further, a holistic
reading of the Tax Code reveals that the CIR's interpretation of Section 203 is erroneous.
Provisions of the NIRC itself recognize that the tax assessment for withholding tax deficiency is
different and independent from possie penalties that may be imposed for the failure of withholding
agents to withhold and remit taxes. For one, Title X, Chapter I of the NIRC provides for additions
to the tax or deficiency tax and is applicae to all taxes, fees and charges under the Tax Code.

In addition, Section 247(b) of the NIRC provides:

SEC. 247. General Provisions. —

xxxx

(b) If the withholding agent is the Government or any of its agencies, political subdivisions or
instrumentalities, or a government-owned or controlled corporation the employee thereof
responsie for the withholding and remittance of the tax shall be personally liae for the additions to
the tax prescribed herein.
On the other hand, Section 251 of the Tax Code reads:

SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. — Any person required to
withhold, account for and remit any tax imposed by this Code or who willfully fails to withhold such
tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or
the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liae
upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted
for and remitted.
Based on the above-cited provisions, it is clear to see that the "penalties" are amounts collected
on top of the deficiency tax assessments including deficiency withholding tax assessments. Thus,
it was wrong for the CIR to restrict the EWT and WTC assessments against La Floras only for the
purpose of imposing penalties and not for the collection of internal revenue taxes.

The CIR further argues that even if Section 203 of the NIRC was applicae, the assessments
against La Flor had yet to prescribe. It points out that La Flor had executed three Waivers to
extend the statutory prescriptive period. The CIR insists that the Waivers should have been
considered even if they were not offered in evidence because the CTA is not strictly governed by
technical rules of evidence. It adds that the requirements under RMO No. 20-90 are not
mandatory.

In Commissioner of Internal Revenue v. Systems Technology Institute, Inc.,26 the Court had ruled
that waivers extending the prescriptive period of tax assessments must be compliant with RMO
No. 20-90 and must indicate the nature and amount of the tax due, to wit:
These requirements are mandatory and must strictly be followed. To be sure, in a number
of cases, this Court did not hesitate to strike down waivers which failed to strictly comply with the
provisions of RMO 20-90 and RDAO 05-01.
xxxx

The Court also invalidated the waivers executed by the taxpayer in the case of Commissioner of
Internal Revenue v. Standard Chartered Bank, because: (1) they were signed by Assistant
Commissioner-Large Taxpayers Service and not by the CIR; (2) the date of acceptance was not
shown; (3) they did not specify the kind and amount of the tax due; and (4) the waivers speak of
a request for extension of time within which to present additional documents and not for
reinvestigation and/or reconsideration of the pending internal revenue case as required under
RMO No. 20-90.
Tested against the requirements of RMO 20-90 and relevant jurisprudence, the Court cannot but
agree with the CTA's finding that the waivers subject of this case suffer from the following defects:
xxxx

3. Similar to Standard Chartered Bank, the waivers in this case did not specify the kind of tax and
the amount of tax due. It is estaished that a waiver of the statute of limitations is a bilateral
agreement between the taxpayer and the BIR to extend the period to assess or collect deficiency
taxes on a certain date. Logically, there can be no agreement if the kind and amount of the
taxes to be assessed or collected were not indicated. Hence, specific information in the waiver
is necessary for its validity. (Emphasis supplied)
In the present case, the September 3, 2008, February 16, 2009 and December 2, 2009 Waivers
failed to indicate the specific tax involved and the exact amount of the tax to be assessed or
collected. As above-mentioned, these details are material as there can be no true and valid
agreement between the taxpayer and the CIR absent these information. Clearly, the Waivers did
not effectively extend the prescriptive period under Section 203 on account of their invalidity. The
issue on whether the CTA was correct in not admitting them as evidence becomes immaterial
since even if they were properly offered or considered by the CTA, the same conclusion would be
reached — the assessments had prescribed as there was no valid waiver.

WHEREFORE, the petition is DENIED. The September 30, 2013 Decision and the February 10,
2014 Resolution of the Court of Tax Appeals En Banc in CTA EB No. 951 are AFFIRMED.

SO ORDERED.
G.R. No. 205955

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

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent

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

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

THE FACTS

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

The Antecedents

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

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

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

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

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

Gross Income from Operation ₱ 4,974,355.00

Add: Non-Operating & Other Income 5,375.00

 Total Gross Income ₱ 4,979,730.00

Less: Deductions ₱ 4,979,730.00

Taxae Income -

Tax Rate (except MCIT Rate) 35%

Income Tax -

Minimum Corporate Income Tax (MCIT) ₱ 99,595.00

Aggregate Income Tax Due ₱ 99,595.00

Less: Tax Credits/Payments

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

Creditae Tax Withheld for the First

Three Quarters

Creditae Tax Withheld for the Fourth

Three Quarters 2,972,834.00

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

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

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

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

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

Gross Income from Operation 1,027,609

Add: Non-Operating & Other Income 479

Total Gross Income 1,028,088

 Less: Deductions 1,206,543

Taxae Income (178,455)

Tax Rate (except MCIT Rate) 35%

Income Tax -

Minimum Corporate Income Tax (MCIT) 20,562

Aggregate Income Tax Due 20,562

Less: Tax Credits/Payments

Prior Year's Excess Credits 5,159,341

Creditae Tax Withheld for the First

1,107,228
Three Quarters

Creditae Tax Withheld for the Fourth

Quarter 6,266,569

Total Tax Credits/Payments 6,266,569

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

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

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

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

The Ruling of the CTA Division

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

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

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

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

The Ruling of the CTA En Banc

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

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

SO ORDERED.7

Notay, the said decision was met by a dissent from Justice Esperanza R. Pabon-Victorino.
Invoking Phi/am Asset Management, Inc. v. Commissioner (Philam), 8 Justice Pabon-Victorino
took the view that the irrevocability rule applies as much to the option of refund or tax credit
certificate. She wrote:

A contextual appreciation of the ruling Philam would tell us that any of the two alternatives once
chosen is irrevocae - be it for refund or carry over. The controlling factor for the operation of
the irrevocability rule is that the taxpayer chose an option; and once it had already done
so, it could no longer make another one.

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

The Present Petition for Review

UPSI-MI interposed the following reasons for its petition:

THE HONORAE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED AND DECIDED
IN A MANNER NOT IN ACCORDANCE WITH THE LAW, PREVAILING JURISPRUDENCE,
AND FACTUAL MILIEU SURROUNDING THE CASE, WHEN IT ADOPTED THE DECISION OF
THE COURT OF TAX APPEALS IN DIVISION AND RULED THAT:
a. Petitioner is not entitled to the refund or issuance of a Tax Credit Certificate in the amount of
₱2,927,834.00 representing its 2006 excess tax credits because of the application of the
"irrevocability rule" under Section 76 of the NIRC of 1997.

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

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

INTENTION TO BE ISSUED A TAX CREDIT CERTIFICATE REPRESENTING ITS UNUTILIZED

CREDITAE WITHHOLDING TAX WITHHELD FOR THE TAXAE YEAR 2006 BY MARKING THE
APPROPRIATE BOX.

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

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

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

"If overpayment, mark one box only:

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

Resume of relevant facts

To recapitulate, UPSI-MI had, as of 31 December 2005, an outstanding amount of ₱2,331, 102.00

in excess and unutilized creditae withholding taxes.

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

Taxae Excess Creditae Income Less Tax Balance of

Year Withholding Tax Tax Due Tax Credit Payae Excess CWT
(CWT)

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

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

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

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

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

OUR RULING

We affirm the CTA.

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

The aforementioned Section 76 of the NIRC provides:

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

(A) Pay the balance of tax still due; or

(B) Carry over the excess credit; or

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

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

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

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

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

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

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

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

(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
 (b) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or

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

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

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

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

The provision contemplates three scenarios:

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

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

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

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

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

This paragraph envisages that the taxpayer had previously asked for and successfully
recovered from the BIR its excess creditae withholding tax through refund or tax credit
certificate; it could not be viewed any other way. If the government had already granted the
refund, but the taxpayer is determined to have automatically applied the excess creditae
withholding tax against its estimated quarterly tax liabilities in the succeeding taxae year(s), the
taxpayer would undeservedly recover twice the same amount of excess creditae withholding tax.
There appears, therefore, no other viae remedial recourse on the part of the government except
to assess the taxpayer for the doue recovery. In this instance, and in accordance with the above
rule, the government can right away issue a FAN.
If, on the other hand, an administrative claim for refund or issuance of TCC is still pending but
the taxpayer had in the meantime automatically carried over the excess creditae tax, it would
appear not only wholly unjustified but also tantamount to adopting an unsound policy if the
government should resort to the remedy of assessment.

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

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

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

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

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

Philam and PL Management cases

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

The petitioner hinges its claim of irrevocability of the option of refund on the statement of this
Court in Philam and PL Management that "the options xxx are alternative and the choice of one
precludes the other." This also appears as the basis of Justice Fabon-Victorino’s stance in her
dissent to the majority opinion in the assailed decision.
We do not agree.

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

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

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

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

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

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

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

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

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

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

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

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

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

Further, nothing in the contents of BIR 1702 expressly declares that the option of refund or TCC
is irrevocae. Even on the assumption that the irrevocability also applies to the option of refund,
such would be an interpretation of the BIR that, as already demonstrated in the foregoing
discussion, is contrary to the intent of the law. It must be stressed that such erroneous
interpretation is not binding on the court. Philippine Bank of Communications v. CIR20is apropos:

It is widely accepted that the interpretation placed upon a statute by the executive officers, whose
duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is
not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in
harmony with, the law they seek to apply and implement.21

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

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

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

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

SO ORDERED.
G.R. No. 209289, July 09, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. THE SECRETARY OF JUSTICE

AND METROPOLITAN CEBU WATER DISTRICT (MCWD), Respondents.

DECISION

TIJAM, J.:

Before Us is a Petition for Review on Certiorari1 filed by petitioner Commissioner of Internal

Revenue (CIR), assailing the Decision2 dated January 23, 2013 and Resolution3 dated August
29, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 117577 dismissing the petition
for certiorari filed by CIR.

The Antecedent Facts

Metropolitan Cebu Water District (respondent) received a Preliminary Assessment Notice from
the Bureau of Internal Revenue (BIR) for alleged . tax deficiencies for the year 2000 in the total
amount of P70,660,389.00, representing alleged deficiency income, franchise and value added
taxes with surcharge and interest, as well as compromise penalties.4

Respondent filed a formal protest with the Regional Director, BIR Revenue Region No. 13. The
CIR however failed to act on the protest within 180 days from submission of the supporting
documents. Thus, respondent filed a Petition for Review before the Court of Tax Appeals (CTA).
The CIR however opposed the said petition on the ground that the Secretary of Justice (SOJ) has
jurisdiction over the dispute considering that respondent is a government-owned or controlled
corporation (GOCC). As such, the CTA dismissed the petition.5

Respondent then filed a Petition for Arbitration before the SOJ. In a complete turnaround, the CIR
claimed that the SOJ has no jurisdiction over the case since the issue in dispute is the validity of
the tax assessment against respondent.6

The case proceeded and the SOJ rendered its Decision7 dated April 23, 2010 disposing as
follows:

WHEREFORE, premises considered, MCWD is declared (a) exempt from payment of income tax
from gross income pursuant to Section 32(B)(7)(b) of the National Internal Revenue Code of 1997,
(b) liae for franchise tax of two percent (2%) of its gross receipts, (c) exempt from value-added
tax, and (d) not liae to pay surcharge, interest, and compromise penalty on the deficiency taxes.

No cost.

SO ORDERED.8

The motion for reconsideration of the CIR was likewise denied by the SOJ in the Order dated
August 20, 2010.9

Aggrieved, the CIR filed a Petition for Certiorari before the CA imputing grave abuse of discretion
on the SOJ for assuming jurisdiction over the case.
The CA, in its Decision10 dated January 23, 2013, dismissed the petition for certiorari. The motion
for reconsideration was also denied in the CA Resolution11 dated August 29, 2013.

Thus, the CIR comes before Us claiming that the SOJ has no jurisdiction to decide the Petition
for Arbitration filed by respondent which assails the tax assessment issued by the BIR.

Ruling of the Court

The petition is denied.

At the outset, We must emphasize that the decision of the SOJ was reviewed by the CA through
a petition for certiorari under Rule 65 of the Rules of Court. As such, the CA must resolve the
question of whether the SOJ committed grave abuse of discretion amounting to lack of excess of
jurisdiction necessitating the reversal of the same. Necessarily, when the CA Decision is brought
before Us through a petition for review on certiorari under Rule 45 of the Rules of Court, We must
determine whether the CA erred in not finding any grave abuse of discretion on the part of the
SOJ in rendering the assailed decision.

We hold that the CA correctly ruled that the SOJ did not commit any grave abuse of discretion in
holding that the dispute between the CIR and the respondent is properly within the jurisdiction of
the SOJ.

The SOJ has jurisdiction to decide the case

Here, respondent filed a protest with the CIR to assail the tax assessment issued to respondent.
For failure of the CIR to act within 180 days from submission of the supporting documents,
respondent filed a petition for review before the CTA. Interestingly, the CIR filed a motion to
dismiss the petition for review on the ground that the CTA has no jurisdiction to resolve the said
matter since the SOJ has exclusive jurisdiction over all disputes between the government and
GOCCs pursuant to Section 6612 and 67,13Chapter 14, Book IV of the Administrative Code of
1987. As a result, the CTA dismissed the petition. When the SOJ assumed jurisdiction over the
petition for arbitration filed by the respondent, the CIR, completely changed its stand and claimed
that the SOJ has no jurisdiction over the case.

This turnaround by the CIR cannot be countenanced. The CIR cannot invoke jurisdiction of the
SOJ and then completely reject the same. "A party cannot invoke jurisdiction at one time and
reject it at another time in the same controversy to suit its interests and
convenience."14 Jurisdiction is conferred by law and cannot be made dependent on the whims
and caprices of a party.15 "Jurisdiction, once acquired, continues until the case is finally
terminated."16 Thus, the SOJ having acquired jurisdiction over the dispute between the CIR and
the respondent, continues to exercise the same until the termination of the case.

Nevertheless, the SOJ's jurisdiction over tax disputes between the government and government-
owned and controlled corporations has been finally settled by this Court in the recent case
of Power Sector Assets and Liabilities Management Corporation v. Commissioner of Internal
Revenue,17 to wit:

The primary issue in this case is whether the DOJ Secretary has jurisdiction over OSJ Case No.
2007-3 which involves the resolution of whether the sale of the Pantabangan-Masiway Plant and
Magat Plant is subject to VAT.
We agree with the Court of Appeals that jurisdiction over the subject matter is vested by the
Constitution or by law, and not by the parties to an action. Jurisdiction cannot be conferred by
consent or acquiescence of the parties or by erroneous belief of the court, quasi-judicial office or
government agency that it exists.

However, contrary to the ruling of the Court of Appeals, we find that the DOJ is vested by law with
jurisdiction over this case. This case involves a dispute between PSALM and NPC, which are
both wholly government owned corporations, and the BIR, a government office, over the
imposition of VAT on the sale of the two power plants. There is no question
that original jurisdiction is with the CIR, who issues the preliminary and the final tax assessments.
However, if the government entity disputes the tax assessment, the dispute is already between
the BIR (represented by the CIR) and another government entity, in this case, the petitioner
PSALM. Under Presidential Decree No. 242 (PD 242), all disputes and claims solely between
government agencies and offices, including government-owned or controlled
corporations, shall be administratively settled or adjudicated by the Secretary of Justice,
the Solicitor General, or the Government Corporate Counsel, depending on the issues and
government agencies involved. As regards cases involving only questions of law, it is the
Secretary of Justice who has jurisdiction. Sections 1, 2, and 3 of PD 242 read:

Section 1. Provisions of law to the contrary notwithstanding, all disputes, claims and
controversies solely between or among the departments, bureaus, offices, agencies and
instrumentalities of the National Government, including constitutional offices or agencies,
arising from the interpretation and application of statutes, contracts or
agreements, shall henceforth be administratively settled or adjudicated as provided
hereinafter: Provided, That, this shall not apply to cases already pending in court at the time of
the effectivity of this decree.

Section 2. In all cases involving only questions of law, the same shall be submitted to and
settled or adjudicated by the Secretary of Justice, as Attorney General and ex officio adviser
of all government owned or controlled corporations and entities, in consonance with Section 83
of the Revised Administrative Code. His ruling or determination of the question in each case
shall be conclusive and binding upon all the parties concerned.

Section 3. Cases involving mixed questions of law and of fact or only factual issues shall be
submitted to and settled or adjudicated by:

(a) The Solicitor General, with respect to disputes or claims or controversies between or among
the departments, bureaus, offices and other agencies of the National Government;
(b) The Government Corporate Counsel, with respect to disputes or claims or controversies
between or among the government-owned or controlled corporations or entities being served by
the Office of the Government Corporate Counsel; and
(c) The Secretary of Justice, with respect to all other disputes or claims or controversies which do
not fall under the categories mentioned in paragraphs (a) and (b). x x x

The use of the word "shall" in a statute connotes a mandatory order or an imperative oigation. Its
use rendered the provisions mandatory and not merely permissive, and unless PD 242 is declared
unconstitutional, its provisions must be followed. The use of the word "shall” means that
administrative settlement or adjudication of disputes and claims between government agencies
and offices, including government-owned or controlled corporations, is not merely permissive but
mandatory and imperative. Thus, under PD 242, it is mandatory that disputes and claims "solely"
between government agencies and offices, including government-owned or controlled
corporations, involving only questions of law, be submitted to and settled or adjudicated by the
Secretary of Justice.

The law is clear and covers "all disputes, claims and controversies solely between or among
the departments, bureaus, offices, agencies and instrumentalities of the National
Government, including constitutional offices or agencies arising from the interpretation
and application of statutes, contracts or agreements." When the law says "all disputes, claims
and controversies solely" among government agencies, the law means all, without exception.
Only those cases already pending in court at the time of the effectivity of PD 242 are not covered
by the law.

The purpose of PD 242 is to provide for a speedy and efficient administrative settlement or
adjudication of disputes between government offices or agencies under the Executive
branch, as well as to filter cases to lessen the clogged dockets of the courts. As explained
by the Court in Philippine Veterans Investment Development Corp. (PHIVIDEC) v. Judge Velez:

Contrary to the opinion of the lower court, P.D. No. 242 is not unconstitutional. It does not diminish
the jurisdiction of the courts but only prescribes an administrative procedure for the settlement of
certain types of disputes between or among departments, bureaus, offices, agencies, and
instrumentalities of the National Government, including government-owned or controlled
corporations, so that they need not always repair to the courts for the settlement of controversies
arising from the interpretation and application of statutes, contracts or agreements. The procedure
is not much different, and no less desirae, than the arbitration procedures provided in Repuic Act
No. 876 (Arbitration Law) and in Section 26, R.A. 6715 (The Labor Code). It is an alternative to,
or a substitute for, traditional litigation in court with the added advantage of avoiding the delays,
vexations and expense of court proceedings. Or, as P.D. No. 242 itself explains, its purpose is
"the elimination of needless clogging of court dockets to prevent the waste of time and energies
not only of the government lawyers but also of the courts, and eliminates expenses incurred in
the filing and prosecution of judicial actions."

PD 242 is only applicae to disputes, claims, and controversies solelybetween or among the
departments, bureaus, offices, agencies and instrumentalities of the National Government,
including government-owned or controlled corporations, and where no private party is involved. In
other words, PD 242 will only apply when all the parties involved are purely government
offices and government-owned or controlled corporations.

x x x.18 (Emphasis in the original)

P.D. No. 24219 is now embodied in Chapter 14, Book IV of Executive Order (E.O.) No. 292,
otherwise known as the Administrative Code of 1987. The pertinent provisions of which provides:

SEC. 66. How Settled. - All disputes, claims and controversies, solely between or among
the departments, bureaus, offices, agencies and instrumentalities of the National
Government, including government-owned or controlled corporations, such as those
arising from the interpretation and application of statutes, contracts or agreements, shall
be administratively settled or adjudicated in the manner provided in this Chapter. This
Chapter shall, however, not apply to disputes involving the Congress, the Supreme Court, the
Constitutional Commissions, and local governments.
SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions of law
shall be submitted to and settled or adjudicated by the Secretary of Justice as Attorney-
General of the National Government and as ex officio legal adviser of all government-owned or
controlled corporations. His ruling or decision thereon shall be conclusive and binding on all the
parties concerned. (Emphasis ours)

SEC. 68. Disputes Involving Questions of Fact and Law. - Cases involving mixed questions of law
and of fact or only factual issues shall be submitted to and settled or adjudicated by:

(1) The Solicitor General, if the dispute, claim or controversy involves only departments, bureaus,
offices and other agencies of the National Government as well as government-owned or
controlled corporations or entities of whom he is the principal law officer or general counsel; and

(2) The Secretary of Justice, in all other cases not falling under paragraph (1). (Emphasis ours)

Since this case is a dispute between the CIR and respondent, a local water district, which is a
GOCC pursuant to P.D. No. 198,20 also known as the Provincial Water Utilities Act of 1973,
clearly, the SOJ has jurisdiction to decide over the case.

The petition should be dismissed for failure

of the CIR to exhaust administrative
remedies

In the case of Power Sector Assets and Liabilities Management Corporation,21 this Court held
that:

Furthermore, under the doctrine of exhaustion of administrative remedies, it is mandated

that where a remedy before an administrative body is provided by statute, relief must be
sought by exhausting this remedy prior to bringing an action in court in order to give the
administrative body every opportunity to decide a matter that comes within its
jurisdiction. A litigant cannot go to court without first pursuing his administrative remedies;
otherwise, his action is premature and his case is not ripe for judicial determination. PD 242 (now
Chapter 14, Book IV of Executive Order No. 292), provides for such administrative remedy. Thus,
only after the President has decided the dispute between government offices and agencies can
the losing party resort to the courts, if it so desires. Otherwise, a resort to the courts would be
premature for failure to exhaust administrative remedies. Non-observance of the doctrine of
exhaustion of administrative remedies would result in lack of cause of action, which is one of the
grounds for the dismissal of a complaint.22 (Citations omitted and emphasis in the original)

Under Section 70,23 Chapter 14, Book IV of the Administrative Code of 1987, it is provided that
where the amount of the claim exceeds, one million pesos, the decision of the SOJ should be
appealed to the Office of the President (OP). Here, the value subject of the case is
P70,660,389.00. As such, the CIR should have first appealed the decision of the SOJ to the OP
rather than to file a Petition for Certiorari to the CA.

In the case of Samar II Electric Cooperative Inc. (SAMELCO), et al. v. Seludo, Jr.,24 this Court
discussed the importance of exhausting administrative remedies, thus:
The Court, in a long line of cases, has held that before a party is allowed to seek the intervention
of the courts, it is a pre-condition that he avail himself of all administrative processes afforded
him. Hence, if a remedy within the administrative machinery can be resorted to by giving the
administrative officer every opportunity to decide on a matter that comes within his jurisdiction,
then such remedy must be exhausted first before the court's power of judicial review can be
sought. The premature resort to the court is fatal to one's cause of action. Accordingly, absent
any finding of waiver or estoppel, the case may be dismissed for lack of cause of
action.25 (Citations omitted)

Also, the petition for certiorari filed by the CIR before the CA is dismissie on the ground that the
same is not a plain, speedy, and adequate remedy granted to the CIR.

It is well settled that a petition for certiorari can be availed of when a tribunal, board or officer
exercising judicial or quasi-judicial functions has acted without or in excess its or his jurisdiction,
or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no
appeal, or any plain, speedy, and adequate remedy in the ordinary course of law.26 As such, the
same "may be resorted to only in the absence of appeal or any plain, speedy and adequate
remedy in the ordinary course of law."27

In the present case, there is a plain, speedy and adequate remedy in the ordinary course of law
which is availae to the CIR, which is an appeal to the OP. The CIR, however, failed to avail the
same through its own fault.

WHEREFORE, the petition is DENIED. The Decision dated January 23, 2013 and Resolution
dated August 29, 2013 of the Court of Appeals in CA-G.R. SP No. 117577 are hereby AFFIRMED.

SO ORDERED.
G.R. No. 198146

POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the 27 September 2010 Decision2 and the 3 August 2011
Resolution3 of the Court of Appeals in CA-G.R. SP No. 108156. The Court of Appeals nullified the
Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of Justice in OSJ Case
No. 2007- 3 for lack of jurisdiction.

The Facts

Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a

government-owned and controlled corporation created under Repuic Act No. 9136 (RA 9136),
also known as the Electric Power Industry Reform Act of 2001 (EPIRA).4 Section 50 of RA 9136
states that the principal purpose of PSALM is to manage the orderly sale, disposition, and
privatization of the National Power Corporation (NPC) generation assets, real estate and other
disposae assets, and Independent Power Producer (IPP) contracts with the objective of
liquidating all NPC financial oigations and stranded contract costs in an optimal manner.

PSALM conducted puic biddings for the privatization of the Pantabangan-Masiway Hydroelectric
Power Plant (Pantabangan-Masiway Plant) and Magat Hydroelectric Power Plant (Magat Plant)
on 8 September 2006 and 14 December 2006, respectively. First Gen Hydropower Corporation
with its $129 Million bid and SN Aboitiz Power Corporation with its $530 Million bid were the
winning bidders for the PantabanganMasiway Plant and Magat Plant, respectively.

On 28 August 2007, the NPC received a letter5 dated 14 August 2007 from the Bureau of Internal
Revenue (BIR) demanding immediate payment of ₱3,813,080,4726 deficiency value-added tax
(VAT) for the sale of the Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR's
demand letter to PSALM.

On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of Agreement
(MOA),7 wherein they agreed that:

A) NPC/PSALM shall remit under protest to the BIR the amount of Php 3,813,080,472.00,
representing basic VAT as shown in the BIR letter dated August 14, 2007, upon execution of this
Memorandum of Agreement (MOA).

B) This remittance shall be without prejudice to the outcome of the resolution of the Issues before
the appropriate courts or body.
C) NPC/PSALM and BIR mutually undertake to seek final resolution of the Issues by the
appropriate courts or body.

D) BIR shall waive any and all interests and surcharges on the aforesaid BIR letter, except when
the case is elevated by the BIR before an appellate court.

E) Nothing contained in this MOA shall be claimed or construed to be an admission against

interest as to any party or evidence of any liability or wrongdoing whatsoever nor an abandonment
of any position taken by NPC/PSALM in connection with the Issues.

F) Each Party to this MOA hereto expressly represents that the authorized signatory hereto has
the legal authority to bind the party to all the terms of this MOA.

G) Any resolution by the appropriate courts or body in favor of the BIR, other than a decision by
the Supreme Court, shall not constitute as precedent and sufficient legal basis as to the taxability
of NPC/PSALM's transactions pursuant to the privatization of NPC's assets as mandated by the
EPIRA Law.

H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be immediately
executory without necessity of notice or demand from NPC/PSALM. A ruling from the Department
of Justice (DOJ) that is favorae to NPC/PSALM shall be tantamount to the filing of an application
for refund (in cash)/tax credit certificate (TCC), at the option of NPC/PSALM. BIR undertakes to
immediately process and approve the application, and release the tax refund/TCC within fifteen
(15) working days from issuance of the DOJ ruling that is favorae to NPC/PSALM.

I) Either party has the right to appeal any adverse decision against it before any appropriate court
or body.

J) In the event of failure by the BIR to fulfill the undertaking referred to in (H) above, NPC/PSALM
shall assign to DOF its right to the refund of the subject remittance, and the DOF shall offset such
amount against any liability of NPC/PSALM to the National Government pursuant to the objectives
of the EPIRA on the application of the privatization proceeds.8

In compliance with the MOA, PSALM remitted under protest to the BIR the amount of ₱3, 813,
080, 472, representing the total basic VAT due.

On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for the
adjudication of the dispute with the BIR to resolve the issue of whether the sale of the power
plants should be subject to VAT. The case was docketed as OSJ Case No. 2007-3.

On 13 March 2008, the DOJ ruled in favor of PSALM, thus:

In cases involving purely questions of law, such as in the instant case, between and among the
government-owned and controlled corporation and government bureau, the issue is best settled
in this Department. In the final analysis, there is but one party in interest, the Government itself in
this litigation.

xxxx
The instant petition is an original petition involving only a question of law on whether or not the
sale of the Pantabangan-Masiway and Magat Power Plants to private entities under the mandate
of the EPIRA is subject to VAT. It is to be stressed that this is not an appeal from the decision of
the Commissioner of Internal Revenue involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, or other matters arising under the National Internal Revenue
Code or other law.

xxxx

Moreover, it must be noted that respondent already invoked this Office's jurisdiction over it by
praying in respondent's Motion for Extension of Time to File Comment (On Petitioner's Petition
dated 21 September 2007) and later, Omnibus Motion To Lift Order dated 22 October 2007 and
To Admit Attached Comment. The Court has held that the filing of motions seeking affirmative
relief, such as, to admit answer, for additional time to answer, for reconsideration of a default
judgment, and to lift order of default with motion for reconsideration, are considered voluntary
submission to the jurisdiction of the court. Having sought this Office to grant extension of time to
file answer or comment to the instant petition, thereby submitting to the jurisdiction of this Court
sic, respondent cannot now repudiate the very same authority it sought.

xxxx

When petitioner was created under Section 49 of R.A. No. 9136, for the principal purpose to
manage the orderly sale, disposition, and privatization of NPC generation assets, real estate and
other disposae assets, IPP contracts with the objective of liquidating all NPC financial oigations
and stranded contract costs in an optimal manner, there was, by operation of law, the transfer of
ownership of NPC assets. Such transfer of ownership was not carried out in the ordinary course
of transfer which must be accorded with the required elements present for a valid transfer, but in
this case, in accordance with the mandate of the law, that is, EPIRA. Thus, respondent cannot
assert that it was NPC who was the actual seller of the Pantabangan-Masiway :md Magat Power
Plants, because at the time of selling the aforesaid power plants, the owner then was already the
petitioner and not the NPC. Consequently, petitioner cannot also be considered a successor-in-·
interest of NPC.

Since it was petitioner who sold the Pantabangan-Masiway and Magat Power Plants and not the
NPC, through a competitive and puic bidding to the private entities, Section 24(A) of R.A. No.
9337 cannot be applied to the instant case. Neither the grant of exemption and revocation of the
tax exemption accorded to the NPC, be also affected to petitioner.

xxxx

Clearly, the disposition of Pantabangan-Masiway and Magat Power Plants was not in the regular
conduct or pursuit of a commercial or an economic activity, but was effected by the mandate of
the EPIRA upon petitioner to direct the orderly sale, disposition, and privatization of NPC
generation assets, real estate and other disposae assets, and IPP contracts, and afterward, to
liquidate the outstanding oigations of the NPC.

xxxx

Verily, to subject the sale of generation assets in accordance with a privatization plan submitted
to and approved by the President, which is a one time sale, to VAT would run counter to the
purpose of obtaining optimal proceeds since potential bidders would necessarily have to take into
account such extra cost of VAT.

WHEREFORE, premises considered, the imposition by respondent Bureau of lnternal Revenue

of deficiency Value-Added Tax in the amount of ₱3,813,080,472.00 on the privatization sale of
the Pantabangan Masiway and Magat Power Plants, done in accordance with the mandate of the
Electric Power Industry Reform Act of 2001, is hereby declared NULL and VOID. Respondent is
directed to refund the amount of ₱3,813,080,472.00 remitted under protest by petitioner to
respondent.9

The BIR moved for reconsideration, alleging that the DOJ had no jurisdiction since the dispute
involved tax laws administered by the BIR and therefore within the jurisdiction of the Court of Tax
Appeals (CTA). Furthermore, the BIR stated that the sale of the subject power plants by PSALM
to private entities is in the course of trade or business, as contemplated under Section 105 of the
National Internal Revenue Code (NIRC) of 1997, which covers incidental transactions. Thus, the
sale is subject to VAT. On 14 January 2009, the DOJ denied BIR's Motion for Reconsideration.10

On 7 April 2009,11 the BIR Commissioner (Commissioner of Internal Revenue) filed with the Court
of Appeals a petition for certiorari, seeking to set aside the DOJ's decision for lack of jurisdiction.
In a Resolution dated 23 April 2009, the Court of Appeals dismissed the petition for failure to
attach the relevant pleadings and documents.12 Upon motion for reconsideration, the Court of
Appeals reinstated the petition in its Resolution dated 10 July 2009.13

The Ruling of the Court of Appeals

The Court of Appeals held that the petition filed by PSALM with the DOJ was really a protest
against the assessment of deficiency VAT, which under Section 20414 of the NIRC of 1997 is
within the authority of the Commissioner of Internal Revenue (CIR) to resolve. In fact, PSALM's
objective in filing the petition was to recover the ₱3,813,080,472 VAT which was allegedly
assessed erroneously and which PSALM paid under protest to the BIR.

Quoting paragraph H15 of the MOA among the BIR, NPC, and PSALM, the Court of Appeals stated
that the parties in effect agreed to consider a DOJ ruling favorae to PSALM as the latter's
application for refund.

Citing Section 416 of the NIRC of 1997, as amended by Section 3 of Repuic Act No. 8424 (RA
8424)17 and Section 718 of Repuic Act No. 9282 (RA 9282),19 the Court of Appeals ruled that the
CIR is the proper body to resolve cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters
arising under the NIRC or other laws administered by the BIR. The Court of Appeals stressed that
jurisdiction is conferred by law or by the Constitution; the parties, such as in this case, cannot
agree or stipulate on it by conferring jurisdiction in a body that has none. Jurisdiction over the
person can be waived but not the jurisdiction over the subject matter which is neither subject to
agreement nor conferred by consent of the parties. The Court of Appeals held that the DOJ
Secretary erred in ruling that the CIR is estopped from assailing the jurisdiction of the DOJ after
having agreed to submit to its jurisdiction. As a general rule, estoppel does not confer jurisdiction
over a cause of action to a tribunal where none, by law, exists.
In conclusion, the Court of Appeals found that the DOJ Secretary gravely abused his discretion
amounting to lack of jurisdiction when he assumed jurisdiction over OSJ Case No. 2007-3. The
dispositive portion of the Court of Appeals' 27 September 2010 Decision reads:

WHEREFORE, premises considered, we hereby GRANT the petition. Accordingly: (1) the
Decision dated March 13, 2008, and the Decision dated January 14, 2009 both issued by the puic
respondent Secretary of Justice in OSJ Case No. 2007-3 are declared NULL and VOID for having
been issued without jurisdiction.

No costs.

SO ORDERED.20

PSALM moved for reconsideration, which the Court of Appeals denied in its 3 August 2011
Resolution. Hence, this petition.

The Issues

Petitioner PSALM raises the following issues:

I. DID THE COURT OF APPEALS MISAPPLY THE LAW IN GIVING DUE COURSE TO THE
PETITION FOR CERTIORARI IN CA-G.R. SP NO. 108156?

II. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW IN ASSUMING
JURISDICTION AND SETTLING THE DISPUTE BY AND BETWEEN THE BIR AND PSALM?

III. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW AND
JURISPRUDENCE IN RENDERING JUDGMENT THAT THERE SHOULD BE·NO VAT ON THE
PRIVATIZATION, SALE OR DISPOSAL OF GENERATION ASSETS?

IV. DOES PUIC RESPONDENT DESERVE THE RELIEF OF CERTIORARI?21

The Ruling of the Court

We find the petition meritorious.

I. Whether the Secretary of Justice has jurisdiction over the case.

The primary issue in this case is whether the DOJ Secretary has jurisdiction over OSJ Case No.
2007-3 which involves the resolution of whether the sale of the Pantabangan-Masiway Plant and
Magat Plant is subject to VAT.

We agree with the Court of Appeals that jurisdiction over the subject matter is vested by the
Constitution or by law, and not by the parties to an action.22 Jurisdiction cannot be conferred by
consent or acquiescence of the parties23 or by erroneous belief of the court, quasi-judicial office
or government agency that it exists.

However, contrary to the ruling of the Court of Appeals, we find that the DOJ is vested by law with
jurisdiction over this case. This case involves a dispute between PSALM and NPC, which are
both wholly government owned corporations, and the BIR, a government office, over the
imposition of VAT on the sale of the two power plants. There is no question
that original jurisdiction is with the CIR, who issues the preliminary and the final tax assessments.
However, if the government entity disputes the tax assessment, the dispute is already between
the BIR (represented by the CIR) and another government entity, in this case, the petitioner
PSALM. Under Presidential Decree No. 24224 (PD 242), all disputes and
claims solely between government agencies and offices, including government-owned or
controlled· corporations, shall be administratively settled or adjudicated by the Secretary
of Justice, the Solicitor General, or the Government Corporate Counsel, depending on the
issues and government agencies involved. As regards cases involving only questions of law,
it is the Secretary of Justice who has jurisdiction. Sections 1, 2, and 3 of PD 242 read:

Section 1. Provisions of law to the contrary notwithstanding, all disputes, claims and
controversies solely between or among the departments, bureaus, offices, agencies and
instrumentalities of the National Government, including constitutional offices or agencies,
arising from the interpretation and application of statutes, contracts or
agreements, shallhenceforth be administratively settled or adjudicated as provided
hereinafter: Provided, That, this shall not apply to cases already pending in court at the time of
the effectivity of this decree.

Section 2. In all cases involving only questions of law, the same shall be submitted to and
settled or adjudicated by the Secretary of Justice, as Attorney General and ex officio adviser
of all government owned or controlled corporations and entities, in consonance with Section 83
of the Revised Administrative Code. His ruling or determination of the question in each case
shall be conclusive and binding upon all the parties concerned.

Section 3. Cases involving mixed questions of law and of fact or only factual issues shall be
submitted to and settled or adjudicated by:

(a) The Solicitor General, with respect to disputes or claims or controversies between or
among the departments, bureaus, offices and other agencies of the National Government;

(b) The Government Corporate Counsel, with respect to disputes or claims or

controversies between or among the government-owned or controlled corporations or
entities being served by the Office of the Government Corporate Counsel; and

(c) The Secretary of Justice, with respect to all other disputes or claims or controversies
which do not fall under the categories mentioned in paragraphs (a) and (b). (Emphasis
supplied)

The use of the word "shall" in a statute connotes a mandatory order or an imperative oigation.25 Its
use rendered the provisions mandatory and not merely permissive, and unless PD 242 is declared
unconstitutional, its provisions must be followed. The use of the word "shall" means that
administrative settlement or adjudication of disputes and claims between government agencies
and offices, including government-owned or controlled corporations, is not merely permissive but
mandatory and imperative. Thus, under PD 242, it is mandatory that disputes and claims "solely"
between government agencies and offices, including government-owned or controlled
corporations, involving only questions of law, be submitted to and settled or adjudicated by the
Secretary of Justice.
The law is clear and covers "all disputes, claims and controversies solely between or among
the departments, bureaus, offices, agencies and instrumentalities of the National
Government, including constitutional offices or agencies arising from the interpretation
and application of statutes, contracts or agreements." When the law says "all disputes, claims
and controversies solely" among government agencies, the law means all, without exception.
Only those cases already pending in court at the time of the effectivity of PD 242 are not covered
by the law.

The purpose of PD 242 is to provide for a speedy and efficient administrative settlement or
adjudication of disputes between government offices or agencies under the Executive
branch, as well as to filter cases to lessen the clogged dockets of the courts. As explained
by the Court in Philippine Veterans Investment Development Corp. (PHIVIDEC) v. Judge Velez:26

Contrary to the opinion of the lower court, P.D. No. 242 is not unconstitutional. It does not diminish
the jurisdiction of the courts but only prescribes an administrative procedure for the settlement of
certain types of disputes between or among departments, bureaus, offices, agencies, and
instrumentalities of the National Government, including government-owned or controlled
corporations, so that they need not always repair to the courts for the settlement of controversies
arising from the interpretation and application of statutes, contracts or agreements. The procedure
is not much different, and no less desirae, than the arbitration procedures provided in Repuic Act
No. 876 (Arbitration Law) and in Section 26, R.A. 6715 (The Labor Code). It is an alternative to,
or a substitute for, traditional litigation in court with the added advantage of avoiding the delays,
vexations and expense of court proceedings. Or, as P.D. No. 242 itself explains, its purpose is
"the elimination of needless clogging of court dockets to prevent the waste of time and energies
not only of the government lawyers but also of the courts, and eliminates expenses incurred in
the filing and prosecution of judicial actions."27

PD 242 is only applicae to disputes, claims, and controversies solely between or among the
departments, bureaus, offices, agencies and instrumentalities of the National Government,
including government-owned or controlled corporations, and where no private party is involved. In
other words, PD 242 will only apply when all the parties involved are purely government
offices and government-owned or controlled corporations.28Since this case is a dispute
between PSALM arid NPC, both government owned and controlled corporations, and the BIR, a
National Government office, PD 242 clearly applies and the Secretary of Justice has jurisdiction
over this case. In fact, the MOA executed by the BIR, NPC, and PSALM explicitly provides that
"a ruling from the Department of Justice (DOJ) that is favorae to NPC/PSALM shall be tantamount
to the filing of an application for refund (in cash)/tax credit certificate (TCC), at the option of
NPC/PSALM."29 Such provision indicates that the BIR and petitioner PSALM and the NPC
acknowledged that the Secretary of Justice indeed has jurisdiction to resolve their dispute.

This case is different from the case of Philippine National Oil Company v. Court of
Appeals,30 (PNOC v. CA) which involves not only the BIR (a government bureau) and the PNOC
and PNB (both government-owned or controlled corporations), but also respondent Tirso
Savellano, a private citizen. Clearly, PD 242 is not applicae to the case of PNOCv.CA. Even
the ponencia in PNOC v. CA stated that the dispute in that case is not covered by PD 242, thus:

Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act No. 1125, the
present dispute would still not be covered by P.D. No. 242. Section 1 of P.D. No. 242 explicitly
provides that only disputes, claims and controversies solely between or among departments,
bureaus, offices, agencies, and instrumentalities of the National Government, including
constitutional offices or agencies, as well as government-owned and controlled corporations, shall
be administratively settled or adjudicated. While the BIR is obviously a government bureau,
and both PNOC and PNB are government-owned and controlled corporations, respondent
Savellano is a private. citizen. His standing in the controversy could not be lightly brushed aside.
It was private respondent Savellano who gave the BIR the information that resulted in the
investigation of PNOC and PNB; who requested the BIR Commissioner to reconsider the
compromise agreement in question; and who initiated the CTA Case No. 4249 by filing a Petition
for Review.31 (Emphasis supplied)

In contrast, since this case is a dispute solely between PSALM and NPC, both government-
owned and controlled corporations, and the BIR, a National Government office, PD 242 clearly
applies and the Secretary of Justice has jurisdiction over this case.

It is only proper that intra-governmental disputes be settled administratively since the opposing
government offices, agencies and instrumentalities are all under the President's executive
control and supervision.Section 17, Article VII of the Constitution states unequivocally
that: "The President shall have control of all the executive departments, bureaus and
offices. He shall ensure that the laws be faithfully executed." In Carpio v. Executive
Secretary,32 the Court expounded on the President's control over all the executive departments,
bureaus and offices, thus:

This presidential power of control over the executive branch of government extends over all
executive officers from Cabinet Secretary to the lowliest clerk and has been held by us, in the
landmark case of Mondano vs. Silvosa, to mean "the power of the President to alter or modify or
nullify or set aside what a subordinate officer had done in the performance of his duties and to
substitute the judgment of the former with that of the latter." It is said to be at the very "heart of
the meaning of Chief Executive."

Equally well accepted, as a corollary rule to the control powers of the President, is the "Doctrine
of Qualified Political Agency." As the President cannot be expected to exercise his control powers
all at the same time and in person, he will have to delegate some of them to his Cabinet members.

Under this doctrine, which recognizes the estaishment of a single executive, "all executive and
administrative organizations are adjuncts of the Executive Department, the heads of the various
executive departments are assistants and agents of the Chief Executive, and, except in cases
where the Chief Executive is required by the Constitution or law to act in person on the exigencies
of the situation demand that he act personally, the multifarious executive and administrative
functions of the Chief Executive are performed by and through the executive departments, and
the acts of the Secretaries of such departments, performed and promulgated in the regular course
of business, are, unless disapproved or reprobated by the Chief Executive presumptively the acts
of the Chief Executive."

Thus, and in short, "the President's power of control is directly exercised by him over the members
of the Cabinet who, in turn, and by his authority, control the bureaus and other offices under their
respective jurisdictions in the executive department. "33

This power of control vested by the Constitution in the President cannot be diminished by law. As
held in Rufino v. Endriga,34 Congress cannot by law deprive the President of his power of control,
thus:
The Legislature cannot validly enact a law· that puts a government office in the Executive branch
outside the control of the President in the guise of insulating that office from politics or making it
independent. If the office is part of the Executive branch, it must remain subject to the
control of the President. Otherwise, the Legislature can deprive the President of his
constitutional power of control over "all the executive x x x offices." If the Legislature can
do this with the Executive branch, then the Legislature can also deal a similar ow to the
Judicial branch by enacting a law putting decisions of certain lower courts beyond the
review power of the Supreme Court.This will destroy the system of checks and balances finely
structured in the 1987 Constitution among the Executive, Legislative, and Judicial
branches.35 (Emphasis supplied)

Clearly, the President's constitutional power of control over all the executive departments,
bureaus and offices cannot be curtailed or diminished by law. "Since the Constitution has given
the President the power of control, with all its awesome implications, it is the Constitution alone
which can curtail such power."36 This. constitutional power of control of the President cannot
be diminished by the CTA. Thus, if two executive offices or agencies cannot agree, it is
only proper and logical that the President, as the sole Executive who under the
Constitution has control over both offices or agencies in dispute, should resolve the
dispute instead of the courts. The judiciary should not intrude in this executive function of
determining which is correct between the opposing government offices or agencies, which
are both under the sole control of the President. Under his constitutional power of control,
the President decides the dispute between the two executive offices. The judiciary cannot
substitute its decision over that of the President. Only after the President has decided or
settled the dispute can the courts' jurisdiction be invoked. Until such time, the judiciary should not
interfere since the issue is not yet ripe for judicial adjudication. Otherwise, the judiciary would
infringe on the President's exercise of his constitutional power of control over all the executive
departments, bureaus, and offices.

Furthermore, under the doctrine of exhaustion of administrative remedies, it is mandated

that where a remedy before an administrative body is provided by statute, relief must be
sought by exhausting this remedy prior to bringing an action in court in order to give the
administrative body every opportunity to decide a matter that comes within its
jurisdiction.37 A litigant cannot go to court without first pursuing his administrative remedies;
otherwise, his action is premature and his case is not ripe for judicial determination.38 PD 242
(now Chapter 14, Book IV of Executive Order No. 292), provides for such administrative remedy.
Thus, only after the President has decided the dispute between government offices and agencies
can the losing party resort to the courts, if it so desires. Otherwise, a resort to the courts would be
premature for failure to exhaust administrative remedies. Non-observance of the doctrine of
exhaustion of administrative remedies would result in lack of cause of action,39 which is one of
the grounds for the dismissal of a complaint.

The rationale of the doctrine of exhaustion. of administrative remedies was aptly explained by the
Court in Universal Robina Corp. (Corn Division) v. Laguna Lake Development Authority:40

The doctrine of exhaustion of administrative remedies is a cornerstone of our judicial system. The
thrust of the rule is that courts must allow administrative agencies to carry out their functions and
discharge their responsibilities within the specialized areas of their respective competence. The
rationale for this doctrine is obvious. It entails lesser expenses and provides for the speedier
resolution of the controversies. Comity and convenience also impel courts of justice to shy away
from a dispute until the system of administrative redress has been completed.41
In requiring parties to exhaust administrative remedies before pursuing action in a court, the
doctrine prevents overworked courts from considering issues when remedies are availae through
administrative channels.42Furthermore, the doctrine endorses a more economical and less formal
means of resolving disputes,43 and promotes efficiency since disputes and claims are generally
resolved more quickly and economically through administrative proceedings rather than through
court litigations.44

The Court of Appeals ruled that under the 1997 NIRC, the dispute between the parties is within
the authority of the CIR to resolve. Section 4 of the 1997 NIRC reads:

SEC 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power
to interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds in internal revenue taxes, fees or other
charges. penalties imposed in relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
(Emphasis supplied)

The first paragraph of Section 4 of the 1997 NIRC provides that the power of the CIR to interpret
the NIRC provisions and other tax laws is subject to review by the Secretary of Finance, who
is the alter ego of the President. Thus, the constitutional power of control of the President over
all the executive departments, bureaus, and offices45 is still preserved. The President's power of
control, which cannot be limited or withdrawn by Congress, means the power of the President to
alter, modify, nullify, or set aside the judgment or action of a subordinate in the performance of
his duties.46

The second paragraph of Section 4 of the 1997 NIRC, providing for the exclusive appellate
jurisdiction of the CTA as regards the CIR's decisions on matters involving disputed assessments,
refunds in internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or
other matters arising under NIRC, is in conflict with PD 242. Under PD 242, all disputes and
claims solely between government agencies and offices, including government-owned or
controlled corporations, shall be administratively settled or adjudicated by the Secretary of
Justice, the Solicitor General, or the Government Corporate Counsel, depending on the issues
and government agencies involved.

To harmonize Section 4 of the 1997 NIRC with PD 242, the following interpretation should be
adopted: (1) As regards private entities and the BIR, the power to decide 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 is vested in the CIR subject
to the exclusive appellate jurisdiction of the CTA, in accordance with Section 4 of the NIRC; and
(2) Where the disputing parties are all puic entities (covers disputes between the BIR and other
government entities), the case shall be governed by PD 242.

Furthermore, it should be noted that the 1997 NIRC is a general law governing the imposition of
national internal revenue taxes, fees, and charges.47 On the other hand, PD 242 is a special
law that applies only to disputes involving solely government offices, agencies, or
instrumentalities. The difference between a special law and a general law was clarified
in Vinzons-Chato v. Fortune Tobacco Corporation:48
A general statute is one which embraces a class of subjects or places and does not omit any
subject or place naturally belonging to such class. A special statute, as the term is generally
understood, is one which relates to particular persons or things of a class or to a particular portion
or section of the state only.

A general law and a special law on the same subject are statutes in pari materia and should,
accordingly, be read together and harmonized, if possie, with a view to giving effect to both. The
rule is that where there are two acts, one of which is special and particular and the other general
which, if standing alone, would include the same matter and thus conflict with the special act, the
special law must prevail since it evinces the legislative intent more clearly than that of a general
statute and must not be taken as intended to affect the more particular and specific provisions of
the earlier act, unless it is absolutely necessary so to construe it in order to give its words any
meaning at all.

The circumstance that the special law is passed before or after the general act does not change
the principle. Where the special law is later, it will be regarded as an exception to, or a qualification
of, the prior general act; and where the general act is later, the special statute will be construed
as remaining an exception to its terms, unless repealed expressly or by necessary implication.49

Thus, even if the 1997 NIRC, a general statute, is a later act, PD 242, which is a special law,
will still prevail and is treated as an exception to the terms of the 1997 NIRC with regard
solely to intragovernmental disputes. PD 242 is a special law while the 1997 NIRC is a general
law, insofar as disputes solely between or among government agencies are concerned.
Necessarily, such disputes must be resolved under PD 242 and not under the NIRC, precisely
because PD 242 specifically mandates the settlement of such disputes in accordance with PD
242. PD 242 is a valid law prescribing the procedure for administrative settlement or adjudication
of disputes among government offices, agencies, and instrumentalities under the executive
control and supervision of the President.50

Even the BIR, through its authorized representative, then OIC-Commissioner of Internal Revenue
Lilian B. Hefti, acknowledged in the MOA executed by the BIR, NPC, and PSALM, that the
Secretary of Justice has jurisdiction to resolve its dispute with petitioner PSALM and the NPC.
This is clear from the provision in the MOA which states:

H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be immediately
executory without necessity of notice or demand from NPC/PSALM. A ruling from the
Department of Justice (DOJ) that is favorae to NPC/PSALM shall be tantamount to the filing
of an application for refund (in cash)/tax credit certificate (TCC), at the option of
NPC/PSALM. BIR undertakes to immediately process and approve the application, and
release the tax refund/TCC within fifteen (15) working days from issuance of the DOJ ruling
that is favorae to NPC/PSALM. (Emphasis supplied)

PD 242 is now embodied in Chapter 14, Book IV of Executive Order No. 292 (EO 292), otherwise
known as the Administrative Code of 1987, which took effect on 24 November 1989.51 The
pertinent provisions read:

Chapter 14- Controversies Among Government

Offices and Corporations

SEC. 66. How Settled. - All disputes, claims and controversies, solely between or among the
departments, bureaus, offices, agencies and instrumentalities of the National Government,
including government-owned or controlled corporations, such as those arising from the
interpretation and application of statutes, contracts or agreements, shall be administratively
settled or adjudicated in the manner provided in this Chapter. This Chapter shall, however, not
apply to disputes involving the Congress, the Supreme Court, the Constitutional Commissions,
and local governments.

SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions of law shall be
submitted to and settled or adjudicated by the Secretary of Justice as Attorney-General of the
National Government and as ex officio legal adviser of all government-owned or controlled
corporations. His ruling or decision thereon shall be conclusive and binding on all the parties
concerned.

SEC. 68. Disputes Involving Questions of Fact and Law. - Cases involving mixed questions of law
and of fact or only factual issues shall be submitted to and settled or adjudicated by:

(1) The Solicitor General, if the dispute, claim or controversy involves only departments,
bureaus, offices and other agencies of the National Government as well as government-
owned or controlled corporations or entities of whom he is the principal law officer or
general counsel; and

(2) The Secretary of Justice, in all other cases not falling under paragraph (1).

SEC. 69. Arbitration. - The determination of factual issues may be referred to an arbitration panel
composed of one representative each of the parties involved and presided over by a
representative of the Secretary of Justice or the Solicitor General, as the case may be.

SEC. 70. Appeals. - The decision of the Secretary of Justice as well as that of the Solicitor
General, when approved by the Secretary of Justice, shall be final and binding upon the parties
involved. Appeals may, however, be taken to the President where the amount of the claim or the
value of the property exceeds one million pesos. The decision of the President shall be final.

SEC. 71. Rules and Regulations. - The Secretary of Justice shall promulgate the rules and
regulations necessary to carry out the provisions of this Chapter.

Since the amount involved in this case is more than one million pesos, the DOJ Secretary's
decision may be appealed to the Office of the President in accordance with Section 70, Chapter
14, Book IV of EO 292 and Section 552 of PD 242. If the appeal to the Office of the President is
denied, the aggrieved party can still appeal to the Court of Appeals under Section 1, Rule 43 of
the 1997 Rules of Civil Procedure.53 However, in order not to further delay the disposition of this
case, the Court resolves to decide the substantive issue raised in the petition.54

II. Whether the sale of the power plants is subject to VAT.

To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat Power Plants
by petitioner PSALM to private entities is subject to VAT, the Court must determine whether the
sale is "in the course of trade or business" as contemplated under Section 105 of the NIRC, which
reads:
SEC 105. Persons Liae. - Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports
.goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this
Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
Repuic Act 7716.

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

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

Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly sale,
disposition, and privatization of the NPC generation assets, real estate and other disposae assets,
and IPP contracts with the objective of liquidating all NPC financial oigations and stranded
contract costs in an optimal manner.

PSALM asserts that the privatization of NPC assets, such as the sale of the Pantabangan-
Masiway and Magat Power Plants, is pursuant to PSALM's mandate under the EPIRA law and is
not conducted in the course of trade or business. PSALM cited the 13 May 2002 BIR Ruling No.
020- 02, that PSALM' s sale of assets is not conducted in pursuit of any commercial or profitae
activity as to fall within the ambit of a VAT-ae transaction under Sections 105 and 106 of the
NIRC. The pertinent portion of the ruling adverted to states:

2. Privatization of assets by PSALM is not subject to VAT

Pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997, a value-added
tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods,
is collected from any person, who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties, which tax shall be paid by the seller or transferor.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial activity, including transactions incidental thereto.

Since the disposition or sale of the assets is a consequence of PSALM's mandate to ensure the
orderly sale or disposition of' the property and thereafter to liquidate the outstanding loans and
oigations of NPC, utilizing the proceeds from sales and other property contributed to it, including
the proceeds from the Universal Charge, and not conducted in pursuit of any commercial or
profitae activity, including transactions incidental thereto, the same will be considered an
isolated ,transaction, which will therefore not be subject to VAT. (BIR Ruling No. 113-98
dated July 23, 1998)55 (Emphasis supplied)
On the other hand, the CIR argues that the previous exemption of NPC from VAT under Section
13 of Repuic Act No. 639556 (RA 6395) was expressly repealed by Section 24 of Repuic Act No.
933757 (RA 9337), which reads:

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and
the persons and/or transactions affected herein are made subject to the value-added tax subject
to the provisions of Title IV of the National Internal Revenue Code of 1997, as amended:

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of National Power
Corporation (NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sale
of generated power by generation companies; and

(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations
or parts thereof which are contrary to and inconsistent with any provisions of this Act are
hereby repealed, amended or modified accordingly.

As a consequence, the CIR posits that the VAT exemption accorded to PSALM under BIR Ruling
No. 020-02 is also deemed revoked since PSALM is a successor-in-interest of NPC. Furthermore,
the CIR avers that prior to the sale, NPC still owned the power plants and not PSALM, which is
just considered as the trustee of the NPC properties. Thus, the sale made by NPC or its
successors-in-interest of its power plants should be subject to the 10% VAT beginning 1
November 2005 and 12% VAT beginning 1 February 2007.

We do not agree with the CIR's position, which is anchored on the wrong premise that PSALM is
a successor-in-interest of NPC. PSALM is not a successor-in-interest of NPC. Under its charter,
NPC is mandated to "undertake the development of hydroelectric generation of power and the
production of electricity from nuclear, geothermal and other sources, as well as the transmission
of electric power on a nationwide basis."58 With the passage of the EPIRA law which restructured
the electric power industry into generation, transmission, distribution, and supply sectors, the NPC
is now primarily mandated to perform missionary electrification function through the Small Power
Utilities Group (SPUG) and is responsie for providing power generation and associated power
delivery systems in areas that are not connected to the transmission system.59 On the other hand,
PSALM, a government-owned and controlled corporation, was created under the EPIRA law to
manage the orderly sale and privatization of NPC assets with the objective of liquidating all of
NPC's financial oigations in an optimal manner. Clearly, NPC and PSALM have different
functions. Since PSALM is not a successor-in-interest of NPC, the repeal by RA 9337 of
NPC's VAT exemption does not affect PSALM.

In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power
plants is not "in the course of trade or business" as contemplated under Section 105 of the NIRC,
and thus, not subject to VAT. The sale of the power plants is not in pursuit of a commercial
or economic activity but a governmental function mandated by law to privatize NPC
generation assets. PSALM was created primarily to liquidate all NPC financial oigations and
stranded contract costs in an optimal manner. The purpose and objective of PSALM are explicitly
stated in Section 50 of the EPIRA law, thus:

SEC. 50. Purpose and Objective, Domicile and Term of Existence. - The principal purpose of
the PSALM Corp. is to manage the orderly sale, disposition, and privatization of NPC
generation assets, real estate and other disposae assets, and IPP contracts with the
objective of liquidating all NPC financial oigations and stranded contract costs in an
optimal manner.

The PSALM Corp. shall have its principal office and place of business within Metro Manila.

The PSALM Corp. shall exist for a period of twenty-five (25) years from the effectivity of this Act,
unless otherwise provided by law, and all assets held by it, all moneys and properties belonging
to it, and all its liabilities outstanding upon the expiration of its term of existence shall revert to and
be assumed by the National Government. (Emphasis supplied)

PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC assets
by PSALM is not "in the course of trade or business" but purely for the specific purpose of
privatizing NPC assets in order to liquidate all NPC financial oigations. PSALM is tasked to sell
and privatize the NPC assets within the term of its existence.60The EPIRA law even requires
PSALM to submit a plan for the endorsement by the Joint Congressional Power Commission and
the approval of the President of the total privatization of the NPC assets and IPP contracts.
Section 47 of the EPIRA law provides:

SEC 47. NPC Privatization. - Except for the assets of SPUG, the generation assets, real estate,
and other disposae assets as well as IPP contracts of NPC shall be privatized in accordance with
this Act. Within six (6) months from the effectivity of this Act, the PSALM Corp. shall submit a plan
for the endorsement by the Joint Congressional Power Commission and the approval of the
President of the Philippines, on the total privatization of the generation assets, real estate, other
disposae assets as well as existing IPP contracts of NPC and thereafter, implement the same, in
accordance with the following guidelines, except as provided for in Paragraph (f) herein:

(a) The privatization value to the National Government of the NPC generation assets, real
estate, other disposae assets as well as IPP contracts shall be optimized;

(b) The participation by Filipino citizens and corporations in the purchase of NPC assets
shall be encouraged. In the case of foreign investors, at least seventy-five percent (75%)
of the funds used to acquire NPC-generation assets and IPP contracts shall be inwardly
remitted and registered with the Bangko Sentral ng Pilipinas;

(c) The NPC plants and/or its IPP contracts assigned to IPP Administrators, its related
assets and assigned liabilities, if any, shall be grouped in a manner which shall promote
the viability of the resulting generation companies (gencos), ensure economic efficiency,
encourage competition, foster reasonae electricity rates and create market appeal to
optimize returns to the government from the sale and disposition of such assets in a
manner consistent with the objectives of this Act. In the grouping of the generation assets
and IPP contracts of NPC, the following criteria shall be considered:

(1) A sufficient scale of operations and balance sheet strength to promote the
financial viability of the restructured units;

(2) Broad geographical groupings to ensure efficiency of operations but without the
formation of regional companies or consolidation of market power;
 (3) Portfolio of plants and IPP contracts to achieve management and operational
synergy without dominating any part of the market or the load curve; and

(4) Such other factors as may be deemed beneficial to the best interest of the
National Government while ensuring attractiveness to potential investors.

(d) All assets of NPC shall be sold in open and transparent manner through puic bidding,
and the same shall apply to the disposition of IPP contracts;

(e) In cases of transfer of possession, control, operation or privatization of multi-purpose

hydro facilities, safeguards shall be prescribed to ensure that the national government
may direct water usage in cases of shortage to protect potae water, irrigation, and all other
requirements imbued with puic interest;

(f) The Agus and Pulangi complexes in Mindanao shall be excluded from an1ong the
generation companies that will be initially privatized. Their ownership shall be transferred
to the PSALM Corp. and both shall continue to be operated by the NPC. Said complexes
may be privatized not earlier than ten (10) years from the effectivity of this Act, and, except
for Agus Ill, shall not be subject to BuildOperate-Transfer (B-0-T), Build-Rehabilitate-
OperateTransfer (B-R-0-T) and other variations thereof pursuant to Repuic Act No. 6957.
as amended by Repuic Act No. 7718. The privatization of Agus and Pulangi complexes
hall be left to the discretion of PSALM Corp. in consultation with Congress;

(g) The steamfield assets and generating plants of each geothermal complex shall not be
sold separately. They shall be combined and each geothermal complex shall be sold as
one package through puic bidding. The geothermal complexes covered by this
requirement include, but are not limited to, Tiwi-Makban, Leyte A and B (Tongonan),
Palinpinon, and Mt. Apo;

(h) The ownership of the Caliraya-Botokan-Kalayaan (CBK) pump storage complex shall
be transferred to the PSALM Corporation;

(i) Not later than three (3) years from the effectivity of this Act, and in no case later than
the initial implementation of open access, at least seventy percent (70%) of the total
capacity of generating assets of NPC and of the total capacity of the power plants under
contract with NPC located in Luzon and Visayas spall have been privatized: Provided,
That any unsold capacity shall be privatized not later than eight (8) years from the
effectivity of this Act; and

(j) NPC may generate and sell electricity only from the undisposed generating assets and
IPP contracts of PSALM Corp. and shall not incur any new oigations to purchase power
through bilateral contracts with generation companies or other suppliers.

Thus, it is very clear that the sale of the power plants was an exercise of a governmental
function mandated by law for the primary purpose of privatizing NPC assets in accordance
with the guidelines imposed by the EPIRA law.

In the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc.

(Magsaysay),61 the Court ruled that the sale of the vessels of the National Development Company
(NDC) to Magsaysay Lines, Inc. is not subject to VAT since it was not in the course of trade or
business, as it was involuntary and made pursuant to the government's policy of privatization.
The Court cited the CT A ruling that the phrase "course of business" or "doing business" connotes
regularity of activity. Thus, since the sale of the vessels was an isolated transaction, made
pursuant to the government's privatization policy, and which transaction could no longer be
repeated or carried on with regularity, such sale was not in the course of trade or business and
was not subject to VAT.

Similarly, the sale of the power plants in this case is not subject to VAT since the sale was made
pursuant to PSALM' s mandate to privatize NPC assets, and was not undertaken in the course of
trade or business. In selling the power plants, PSALM was merely exercising a governmental
function for which it was created under the EPIRA law.

The CIR argues that the Magsaysay case, which involved the sale in 1988 of NDC vessels, is not
applicae in this case since it was decided under the 1986 NIRC. The CIR maintains that under
Section 105 of the 1997 NIRC, which amended Section 9962 of the 1986 NIRC, the phrase "in the
course of trade or business" was expanded, and now covers incidental transactions. Since NPC
still owns the power plants and PSALM may only be considered as trustee of the NPC assets, the
sale of the power plants is considered an incidental transaction which is subject to VAT.

We disagree with the CIR's position. PSALM owned the power plants which were sold. PSALM's
ownership of the NPC assets is clearly stated under Sections 49, 51, and 55 of the EPIRA law.
The pertinent provisions read:

SEC. 49. Creation of Power Sector Assets and Liabilities Management Corporation. - There is
hereby created a government-owned and -controlled corporation to be known as the
"Power Sector Assets and Liabilities Management Corporation," hereinafter referred to as
"PSALM Corp.," which shall take ownership of all existing NPC generation assets,
liabilities, IPP contracts, real estate and all other disposae assets. All outstanding oigations
of the NPC arising from loans, issuances of bonds, securities and other instruments of
indebtedness shall be transferred to and assumed by the PSALM Corp. within one hundred eighty
(180) days from the approval of this Act.

SEC 51. Powers. - The Corporation shall, in the performance of its functions and for the attainment
of its objectives, have the following powers:

(a) To formulate and implement a program for the sale and privatization of the NPC assets
and IPP contracts and the liquidation of the NPC debts and stranded costs, such
liquidation to be completed within the term of existence of the PSALM Corp.;

(b) To take title to and possession of, administer and conserve the assets
transferred to it;to sell or dispose of the same at such price and under such terms and
conditions as it may deem necessary or proper, subject to applicae laws, rules and
regulations;

xxxx

SEC. 55. Property of PSALM Corp. -The following funds, assets, contributions and other
property shall constitute the property of PSALM Corp.:
 (a) The generation assets, real estate, IPP contracts, other disposae assets of
NPC,proceeds from the sale or disposition of such assets and residual assets from B-0-
T, R-0-T, and other variations thereof;

(b) Transfers from the National Government;

(c) Proceeds from loans incurred to restructure or refinance NPC's transferred

liabilities: Provided, however, That all borrowings shall be fully paid for by the end of the
life of the PSALM Corp.;

(d) Proceeds from the universal charge allocated for stranded contract costs and the
stranded debts of the NPC;

(e) Net profit of NPC;

(f) Net profit of TRANSCO;

(g) Official assistance, grants, and donations from external sources; and

(h) Other sources of funds as may be determined by PSALM Corp. necessary for the
above-mentioned purposes. (Emphasis supplied)

Under the EPIRA law, the ownership of the generation assets, real estate, IPP contracts, and
other disposae assets of the NPC was transferred to PSALM. Clearly, PSALM is not a mere
trustee of the NPC assets but is the owner thereof. Precisely, PSALM, as the owner of the NPC
assets, is the government entity tasked under the EPIRA law to privatize such NPC assets.

In the more recent case of Mindanao II Geothermal Partnership v. Commissioner of Internal

Revenue (Mindanao 11),63 which was decided under the 1997 NIRC, the Court held that the sale
of a fully depreciated vehicle that had been used in Mindanao II's business was subject to VAT,
even if such sale may be considered isolated. The Court ruled that it does not follow that an
isolated transaction cannot be an incidental transaction for VAT purposes. The Court then cited
Section 105 of the 1997 NIRC which shows that a transaction "in the course of trade or business"
includes "transactions incidental thereto." Thus, the Court held that the sale of the vehicle is an
incidental transaction made in the course of Mindanao II's business which should be subject to
VAT.

The CIR alleges that the sale made by NPC and/or its successors-in-interest of the power plants
is an incidental transaction which should be subject to VAT. This is erroneous. As previously
discussed, the power plants are already owned by PSALM, not NPC. Under the EPIRA law, the
ownership of these power plants was transferred to PSALM for sale, disposition, and privatization
in order to liquidate all NPC financial oigations. Unlike the Mindanao II case, the power plants in
this case were not previously used in PSALM's business. The power plants, which were previously
owned by NPC were transferred to PSALM for the specific purpose of privatizing such assets.
The sale of the power plants cannot be considered as an incidental transaction made in the course
of NPC's or PSALM's business. Therefore, the sale of the power plants should not be subject to
VAT.

Hence, we agree with the Decisions dated 13 March 2008 and 14 January 2009 of the Secretary
of Justice in OSJ Case No. 2007-3 that it was erroneous for the BIR to hold PSALM liae for
deficiency VAT in the amount of ₱3,813,080,472 for the sale of the Pantabangan-Masiway and
Magat Power Plants. The ₱3,813,080,472 deficiency VAT remitted by PSALM under protest
should therefore be refunded to PSALM.

However, to give effect to Section 70, Chapter 14, Book IV of the Administrative Code of 1987 on
appeals from decisions of the Secretary of Justice, the BIR is given an opportunity to appeal the
Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of Justice to the Office of
the President within 10 days from finality of this Decision.64

WHEREFORE, we GRANT the petition. We SETASIDE the 27 September 2010 Decision and the
3 August 2011 Resolution of the Court of Appeals in CA-G.R. SP No. 108156. The Decisions
dated 13 March 2008 and 14 January 2009 of the Secretary of Justice in OSJ Case No. 2007- 3
are REINSTATED. No costs.

SO ORDERED.
G.R. No. 175651, September 14, 2016

PILMICO-MAURI FOODS CORP., Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

RESOLUTION

REYES, J.:

Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court pursuant
to Repuic Act (R.A.) No. 1125,2 Section 19,3 as amended by R.A. No. 9282,4 Section 12.5 The
petition filed by Pilmico-Mauri Foods Corp. (PMFC) against the Commissioner of Internal
Revenue (CIR) assails the Decision6 and Resolution7 of the Court of Appeals (CTA) en banc,
dated August 29, 2006 and December 4, 2006, respectively, in C.T.A. EB No. 97.

Antecedents

The CTA aptly summed up the facts of the case as follows:

PMFC is a corporation, organized and existing under the laws of the Philippines, with principal
place of business at Aboitiz Corporate Center, Banilad, Cebu City.

The books of accounts of PMFC pertaining to 1996 were examined by the CIR thru Revenue
Officer Eugenio D. Maestrado of Revenue District No. 81 (Cebu City North District) for deficiency
income, value-added tax (VAT) and withholding tax liabilities.

As a result of the investigation, the following assessment notices were issued against PMFC:

esvirtualLawlibrary

(a) Assessment Notice No. 81-WT-13-96-98-11-126, dated November 26, 1998,

demanding payment for deficiency withholding taxes for the year 1996 in the sum of
P384,925.05 (inclusive of interest and other penalties);

(b) Assessment Notice No. 81-VAT-13-96-98-11-127, dated November 26, 1998,

demanding payment of deficiency value-added tax in the sum of P5,017,778.01
(inclusive of interest and other penalties); and

(c) Assessment Notice No. 81-IT-13-96-98-11-128, dated November 26, 1998, demanding
payment of. deficiency income tax for the year 1996 in the sum of P4,359,046.96
(inclusive of interest and other penalties).

The foregoing Assessment Notices were all received by PMFC on December 1, 1998. On
December 29, 1998, PMFC filed a protest letter against the aforementioned deficiency tax
assessments through the Regional Director, Revenue Region No. 13, Cebu City.
In a final decision of the CIR on the disputed assessments dated July 3, 2000, the deficiency tax
liabilities of PMFC were reduced from P9,761,750.02 to P3,020,259.30, broken down as follows:

esvirtualLawlibrarya) Deficiency withholding tax from P384,925.05 to P197,780.67;

b) Deficiency value-added tax from P5,017,778.01 to P1,642,145.79; and
c) Deficiency Income Tax from P4,359,046.96 to P1,180,332.84.

xxxx
On the basis of the foregoing facts, PMFC filed its Petition for Review on August 9, 2000. In the
"Joint Stipulation of Facts" filed on March 7, 2001, the parties have agreed that the following are
the issues to be resolved:

I. Whether or not PMFC is liae for the payment of deficiency income, value-
added, expanded withholding, final withholding and withholding tax (on
compensation).

II. On the P1,180,382.84 deficiency income tax

A. Whether or not the P5,895,694.66 purchases of raw materials are
unsupported;

B. Whether or not the cancelled invoices and expenses for taxes,

repairs and freight are unsupported;

C. Whether or not commission, storage and trucking charges claimed

are deductie; and

D. Whether or not the alleged deficiency income tax for the year 1996
was correctly computed.

x x x x

V. Whether or not CIR's decision on the 1996 internal revenue tax liabilities of PMFC is
contrary to law and the facts.

After trial on the merits, the CTA in Division rendered the assailed Decision affirming the
assessments but in the reduced amount of P2,804,920.36 (inclusive of surcharge and deficiency
interest) representing PMFC's Income, VAT and Withholding Tax deficiencies for the taxae year
1996 plus 20% delinquency interest per annum until fully paid. The CTA in Division ruled as
follows:
"However, PMFC's contention that the NIRC of 1977 did not impose substantiation requirements
on deductions from gross income is bereft of merit. Section 238 of the 1977 Tax Code now Section
237 of the National Internal Revenue Code of 1997 provides:
SEC. 238. Issuance of receipts or sales or commercial invoices. - All persons, subject to an
internal revenue tax shall for each sale or transfer of merchandise or for services rendered valued
at P25.00 or more, issue receipts or sales or commercial invoices, prepared at least in duplicate,
showing the date of transaction, quantity, unit cost and description of merchandise or nature of
service: Provided, That in the case of sales, receipts or transfers in the amount of P100.00 or
more, or, regardless of amount, where the sale or transfer is made by persons subject to value-
added tax to other persons, also subject to value-added tax; or, where the receipt is issued to
cover payment made as rentals, commissions, compensations or fees, receipts or invoices shall
be issued which shall show the name, business style, if any, and address of the purchaser,
customer, or client. The original of each receipt or invoice shall be issued to the purchaser,
customer or client at the time the transaction is effected, who, if engaged in business or
in the exercise of profession, shall keep and preserve the same in his place of business
for a period of three (3) years from the close of the taxae year in which such invoice or
receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his
place of business for a like period. x x x
From the foregoing provision of law, a person who is subject to an internal revenue tax shall issue
receipts, sales or commercial invoices, prepared at least in duplicate. The provision likewise
imposed a responsibility upon the purchaser to keep and preserve the original copy of the invoice
or receipt for a period of three years from the close of the taxae year in which such invoice or
receipt was issued. The rationale behind the latter requirement is the duty of the taxpayer to keep
adequate records of each and every transaction entered into in the conduct of its business. So
that when their books of accounts are subjected to a tax audit examination, all entries therein,
could be shown as adequately supported and proven as legitimate business transactions. Hence,
PMFC's claim that the NIRC of 1977 did not require substantiation requirements is erroneous.

In fact, in its effort to prove the above-mentioned purchases of raw materials, PMFC presented
the following sales invoices:

esvirtualLawlibrary

Exhibit Invoice
Date Gross Amount 10% VAT Net Amount
Number No.

B-3 2072 04/18/96 P2,312,670.00 P210,242.73 P2,102,427.27

B-7,

B-11 2026 Undated 2,762,099.10 251,099.92 2,510,999.18

P5,074,769.10 P461,342.65 P4,613,426.45

The mere fact that PMFC submitted the foregoing sales invoices belies its claim that the NIRC of
1977 did not require that deductions must be substantiated by adequate records.

From the total purchases of P5,893,694.64 which have been disallowed, it seems that a portion
thereof amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no supporting sales invoices
because of PMFC's failure to present said invoices.

A scrutiny of the invoices supporting the remaining balance of P4,613,426.45 (P5,893,694.64 less
P1,280,268.19) revealed the following:

a) In Sales Invoice No. 2072 marked as Exhibit B-3, the name Pilmico Foods Corporation
was erased and on top of it the name PMFC was inserted but with a counter signature
therein;
 b) For undated Sales Invoice No. 2026, PMFC presented two exhibits marked as Exhibits
B-7 and B-11. Exhibit B-11 is the original sales invoice whereas Exhibit B-7 is a
photocopy thereof. Both exhibits contained the word Mauri which was inserted on top
and between the words Pilmico and Foods. The only difference is that in the original
copy (Exhibit B-11), there was a counter signature although the ink used was different
from that used in the rest of the writings in the said invoice; while in the photocopied
invoice (Exhibit B-7), no such counter signature appeared. PMFC did not explain why
the said countersignature did not appear in the photocopied invoice considering it was
just a mere reproduction of the original copy.

The sales invoices contain alterations particularly in the name of the purchaser giving rise to
serious doubts regarding their authenticity and if they were really issued to PMFC. Exhibit B-11
does not even have any date indicated therein, which is a clear violation of Section 238 of the
NIRC of 1977 which required that the official receipts must show the date of the transaction.

Furthermore, PMFC should have presented documentary evidence estaishing that Pilmico Foods
Corporation did not claim the subject purchases as deduction from its gross income. After all, the
records revealed that both PMFC and its parent company, Pilmico Foods Corporation, have the
same AVP Comptroller in the person of Mr. Eugenio Gozon, who is in-charge of the financial
records of both entities x x x.

Similarly, the official receipts presented by PMFC x x x, cannot be considered as valid proof of
PMFC's claimed deduction for raw materials purchases. The said receipts did not conform to the
requirements provided for under Section 238 of the NIRC of 1977, as amended. First the official
receipts were not in the name of PMFC but in the name of Golden Restaurant. And second, these
receipts were issued by PFC and not the alleged seller, JTE.

Likewise, PMFC's allegations regarding the offsetting of accounts between PMFC, PFC and JTE
is untenae. The following circumstances contradict PMFC's proposition: 1) the Credit Agreement
itself does not provide for the offsetting arrangement; 2) PMFC was not even a party to the credit
agreement; and 3) the official receipts in question pertained to the year 1996 whereas the Credit
Agreement (Exhibit M) and the Real Estate Mortgage Agreement (Exhibit N) submitted by PMFC
to prove the fact of the offsetting of accounts, were both executed only in 1997.

Besides, in order to support its claim, PMFC should have presented the following vital documents,
namely, 1) Written Offsetting Agreement; 2) proof of payment by PMFC to Pilmico Foods
Corporation; and 3) Financial Statements for the year 1996 of Pilmico Foods Corporation to
estaish the fact that Pilmico Foods Corporation did not deduct the amount of raw materials being
claimed by PMFC.

Considering that the official receipts and sales invoices presented by PMFC failed to comply with
the requirements of Section 238 of the NIRC of 1977, the disallowance by the CIR of the claimed
deduction for raw materials is proper.
PMFC filed a Motion for Partial Consideration on January 21, 2005 x x x but x x x PMFC's Motion
for Reconsideration was denied in a Resolution dated May 19, 2005 for lack of merit, x x
x.8 (Citation omitted, italics ours and emphasis in the original)
Unperturbed, PMFC then filed a petition for review before the CTA en banc, which adopted the
CTA First Division's ruling and ratiocinations. Additionally, the CTA en banc declared that:
The language of Section 238 of the 1977 NIRC, as amended, is clear. It requires that for each
sale valued at P100.00 or more, the name, business style and address of the purchaser, customer
or client shall be indicated and that the purchaser is required to keep and preserve the same in
his place of business. The purpose of the law in requiring the preservation by the purchaser of
the official receipts or sales invoices for a period of three years is two-fold: 1) to enae said
purchaser to substantiate his claimed deductions from the gross income, and 2) to enae
the Bureau of Internal Revenue to verify the accuracy of the gross income of the seller from
external sources such as the customers of said seller. Hence, PMFC's argument that there was
no substantiation requirement under the 1977 NIRC is without basis.

Moreover, the Supreme Court had ruled that in claiming deductions for business expenses , it is
not enough to prove the business test but a claimant must substantially prove by evidence or
records the deductions claimed under the law, thus:
The principle is recognized that when a taxpayer claims a deduction, he must point to some
specific provision of the statute in which that deduction is authorized and must be ae to prove that
he is entitled to the deduction which the law allows. As previously adverted to, the law allowing
expenses as deduction from gross income for purposes of the income tax is Section 30 (a) (l) of
the National Internal Revenue which allows a deduction of "all the ordinary and necessary
expenses paid or incurred during the taxae year in carrying on any trade or business." An item of
expenditure, in order to be deductie under this section of the statute must fall squarely within its
language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be deductie as a
business expense, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary; (2) it must be paid or incurred within the taxae year, and (3) it must be paid or incurred
in carrying on a trade or business. In addition, not only must the taxpayer meet the business
test, he must substantially prove by evidence or records the deductions claimed under the
law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item
of expense is ordinary and necessary does not justify its deduction. x x x
And in proving claimed deductions from gross income, the Supreme Court held that invoices and
official receipts are the best evidence to substantiate deductie business expenses. x x x

xxxx

The irregularities found on the official receipts and sales invoices submitted in evidence by PMFC,
i.e. not having been issued in the name of PMFC as the purchaser and the fact that the same
were not issued by the alleged seller himself directly to the purchaser, rendered the same of no
probative value.

Parenthetically, the "Cohan Rule" which according to PMFC was adopted by the Supreme Court
in the case of Visayan Cebu Terminal v. Collector, x x x, is not applicae because in both of these
cases, there were natural calamities that prevented the taxpayers therein to fully substantiate their
claimed deductions. In the Visayan Cebu Terminal case, there was a fire that destroyed some of
the supporting documents for the claimed expenses. There is no such circumstance in PMFC's
case, hence, the ruling therein is not applicae. It is noteworthy that notwithstanding the destruction
of some of the supporting documents in the aforementioned Visayan Cebu Terminal case, the
Supreme Court, in denying the appeal, issued the following caveat noting the violation of the
provision of the Tax Code committed by PMFC therein:
"It may not be amiss to note that the explanation to the effect that the supporting paper of some
of those expenses had been destroyed when the house of the treasurer was burned, can hardly
be regarded as satisfactory, for appellant's records are supposed to be kept in its offices,
not in the residence of one of its officers." x x x
From the above-quoted portion of the Supreme Court's Decision, it is clear that compliance with
the mandatory record-keeping requirements of the National Internal Revenue Code should not be
taken lightly. Raw materials are indeed deductie provided they are duly supported by official
receipts or sales invoices prepared and issued in accordance with the invoicing requirements of
the National Internal Revenue Code. x x x PMFC failed to show compliance with the requirements
of Section 238 of the 1977 NIRC as shown by the fact that the sales invoices presented by it were
not in its name but in the name of Pilmico Foods Corporation.

xxxx

In the Joint Stipulation of Facts filed on March 7, 2001, the parties have agreed that with respect
to the deficiency income tax assessment, the following are the issues to be resolved:
Whether or not the P5,895,694.66 purchases of raw materials are unsupported;
xxxx

Clearly, the issue of proper substantiation of the deduction from gross income pertaining to the
purchases of raw materials was properly raised even before PMFC began presenting its evidence.
PMFC was aware that the CIR issued the assessment from the standpoint of lack of supporting
documents for the claimed deduction and the fact that the assessments were not based on the
deductibility of the cost of raw materials. There is no difference in the basis of the assessment
and the issue presented to the CTA in Division for resolution since both pertain to the issue of
proper supporting documents for ordinary and necessary business expenses.9(Citation omitted,
italics ours and emphasis in the original)
PMFC moved for reconsideration. Pending its resolution, the CIR issued Revenue Regulation
(RR) No. 15-2006,10the abatement program of which was availed by PMFC on October 27, 2006.
Out of the total amount of P2,804,920.36 assessed as income, value-added tax (VAT) and
withholding tax deficiencies, plus surcharges and deficiency interests, PMFC paid the CIR
P1,101,539.63 as basic deficiency tax. The PMFC, thus, awaits the CIR's approval of the
abatement, which can render moot the resolution of the instant petition.11

Meanwhile, the CTA en banc denied the motion for reconsideration12 of PMFC, in its
Resolution13 dated December 4, 2006.

Issues

In the instant petition, what is essentially being assailed is the CTA en banc's concurrence with
the CTA First Division's ruling, which affirmed but reduced the CIR's income deficiency tax
assessment against PMFC. More specifically, the following errors are ascribed to the CTA:
I

The Honorae CTA First Division deprived PMFC of due process of law and the CTA assumed an
executive function when it substituted a legal basis other than that stated in the assessment and
pleading of the CIR, contrary to law.

II

The decision of the Honorae CTA First Division must conform to the pleadings and the theory of
the action under which the case was tried. A judgment going outside the issues and purporting to
adjudicate something on which the parties were not heard is invalid. Since the legal basis cited
by the CTA supporting the validity of the assessment was never raised by the CIR, PMFC was
deprived of its constitutional right to be apprised of the legal basis of the assessment.

III

The nature of evidence required to prove an ordinary expense like raw materials is governed by
Section 2914 of the 1977 National Internal Revenue Code (NIRC) and not by Section 238 as found
by the CTA.15 esvirtuallawlibrary
In support of the instant petition, PMFC claims that the deficiency income tax assessment issued
against it was anchored on Sect on 34(A)(l)(b)16 of the 1997 NIRC. In disallowing the deduction
of the purchase of raw materials from PMFC's gross income, the CIR never m any reference to
Section 238 of the 1977 NIRC relative to the mandatory requirement of keeping records of official
receipts, upon which the CTA had misplaced reliance. Had substantiation requirements under
Section 23 the 1977 NIRC been made an issue during the trial, PMFC could have presented
official receipts or invoices, or could have compelled its suppliers to issue the same.17

PMFC further argues that in determining the deductibility of the purchase of raw materials from
gross income, Section 29 of the 1977 NIRC is the applicae provision. According to the said
section, for the deduction to be allowed, the expenses must be (a) both ordinary and necessary;
(b) incurred in carrying on a trade or business; and (c) paid or incurred within the taxae year.
PMFC, thus, claims that prior to the promulgation of the 1997 NIRC, the law does not require the
production of official receipts to prove an expense.18

In its Comment,19 the Office of the Solicitor General (OSG) counters that the arguments advanced
by PMFC are mere reiterations of those raised in the proceedings below. Further, PMFC was fully
apprised of the assailed tax assessments and had all the opportunities to prove its claims.20

The OSG also avers that in the Joint Stipulation of Facts filed before the CTA First Division on
March 7, 2001, it was stated that one of the issues for resolution was "whether or not the
Php5,895,694.66 purchases of raw materials are unsupported." Hence, PMFC was aware that
the CIR issued the assessments due to lack of supporting documents for the deductions claimed.
Essentially then, even in the proceedings before the CIR, the primary issue has always been the
lack or inadequacy of supporting documents for ordinary and necessary business expenses.21

The OSG likewise points out that PMFC failed to satisfactorily discharge the burden of proving
the propriety of the tax deductions claimed. Further, there were discrepancies in the names of the
sellers and purchasers i indicated in the receipts casting doubts on their authenticity.22

Ruling of the Court

The Court affirms but modifies the herein assailed decision and resolution.

Preliminary matters

On December 19, 2006, PMFC filed before the Court a motion for extension of time to file a
petition for review.23 In the said motion, PMFC informed the Court that it had availed of the CIR's
tax abatement program, the details of which were provided for in RR No. 15-2006. PMFC paid
the CIR the amount of P1,101,539.63 as basic deficiency tax. PMFC manifested that if the
abatement application would be approved by the CIR, the instant petition filed before the Court
may be rendered superfluous.
According to Section 4 of RR No. 15-2006, after the taxpayer's payment of the assessed basic
deficiency tax, the docket of the case shall forwarded to the CIR, thru the Deputy Commissioner
for Operations Group, for issuance of a termination letter. However, as of this Resolution's writing,
none of the parties have presented the said termination letter. Hence, the Court cannot outrightly
dismiss the instant petition on the ground of mootness.

On the procedural issues raised by PMFC

The first and second issues presented by PMFC are procedural in nature. They both pertain to
the alleged omission of due process of law by the CTA since in its rulings, it invoked Section 238
of the 1977 NIRC, while in the proceedings below, the CIR's tax deficiency assessments issued
against PMFC were instead anchored on Section 34 of the 1997 NIRC.

Due process was not violated.

In CIR v. Puregold Duty Free, Inc.,24 the Court is emphatic that:

It is well settled that matters that were neither alleged in the pleadings nor raised during the
proceedings below cannot be ventilated for the first time on appeal and are barred by estoppel.
To allow the contrary would constitute a violation of the other party's right to due process, and is
contrary to the principle of fair play. x x x
x x x Points of law, theories, issues, and arguments not brought to the attention of the trial court
ought not to be considered by a reviewing court, as these cannot be raised for the first time on
appeal. To consider the alleged facts and arguments belatedly raised would amount to trampling
on the basic principles of fair play, justice, and due process.25cralawred (Citations omitted)
In the case at bar, the CIR issued assessment notices against PMFC for deficiency income, VAT
and withholding tax for the year 1996. PMFC assailed the assessments before the Bureau of
Internal Revenue and late before the CTA.

In the Joint Stipulation of Facts, dated March 7, 2001, filed before CTA First Division, the CIR and
PMFC both agreed that among the issues for resolution was "whether or not the P5,895,694.66
purchases of raw materials are unsupported."26 Estoppel, thus, operates against PMFC anent its
argument that the issue of lack or inadequacy of documents to justify the costs of purchase of raw
materials as deductions from the gross income had not been presented in the proceedings below,
hence, barred for being belatedly raised only on appeal.

Further, in issuing the assessments, the CIR had stated the material facts and the law upon which
they were based. In the petition for review filed by PMFC before the CTA, it was the former's
burden to properly invoke the applicae legal provisions in pursuit of its goal to reduce its tax
liabilities. The CTA, on the other hand, is not bound to rule solely on the basis of the laws cited
by the CIR. Were it otherwise, the tax court's appellate power of review shall be rendered useless.
An absurd situation would arise leaving the CTA with only two options, to wit: (a) affirming the
CIR's legal findings; or (b) altogether absolving the taxpayer from liability if the CIR relied on
misplaced legal provisions. The foregoing is not what the law intends.

To reiterate, PMFC was at the outset aware that the lack or inadequacy of supporting documents
to justify the deductions claimed from the gross income was among the issues raised for resolution
before the CTA. With PMFC's acquiescence to the Joint Stipulation of Facts filed before the CTA
and thenceforth, the former's participation in the proceedings with all opportunities it was afforded
to ventilate its claims, the alleged deprivation of due process is bereft of basis.
On the applicability of Section 29 of the 1977 NIRC

The third issue raised by PMFC is substantive in nature. At its core is the alleged application of
Section 29 of the 1977 NIRC as regards the deductibility from the gross income of the cost of raw
materials purchased by PMFC.

It bears noting that while the CIR issued the assessments on the basis of Section 34 of the 1997
NIRC, the CTA and PMFC are in agreement that the 1977 NIRC finds application.

However, while the CTA ruled on the basis of Section 238 of the 1977 NIRC, PMFC now insists
that Section 29 of the same code should be applied instead. Citing Atlas Consolidated Mining and
Development Corporation v. CIR,27 PMFC argues that Section 29 imposes less stringent
requirements and the presentation of official receipts as evidence of the claimed deductions
dispensae. PMFC further posits that the mandatory nature of the submission of official receipts
as proof is a mere innovation in the 19 NIRC, which cannot be applied retroactively.28

PMFC's argument fails.

The Court finds that the alleged differences between the requirements of Section 29 of the 1977
NIRC invoked by PMFC, on one hand, and Section 238 relied upon by the CTA, on the other, are
more imagined than real.

In CIR v. Pilipinas Shell Petroleum Corporation,29 the Count enunciated that:

It is a rule in statutory construction that every part of the statute must be interpreted with reference
to the context, i.e., that every part of the statute must be considered together with the other parts,
and kept subservient to the general intent of the whole enactment. The law must not be read in
truncated parts, its provisions must be read in relation to the whole law. The particular words,
clauses and phrases should not be studied as detached and isolated expression, but the whole
and every part of the statute must be considered in fixing the meaning of any of its parts and in
order to produce a harmonious whole.30 (Citations omitted)
The law, thus, intends for Sections 29 and 238 of the 1977 NIRC to be read together, and not for
one provision to be accorded preference over the other.

It is undisputed that among the evidence adduced by PMFC on it behalf are the official receipts
of alleged purchases of raw materials. Thus, the CTA cannot be faulted for making references to
the same, and for applying Section 238 of the 1977 NIRC in rendering its judgment. Required or
not, the official receipts were submitted by PMFC as evidence. Inevitay, the said receipts were
subjected to scrutiny, and the CTA exhaustively explained why it had found them wanting.

PMFC cites Atlas31 to contend that the statutory test, as provided in Section 29 of the 1977 NIRC,
is sufficient to allow the deductibility of a business expense from the gross income. As long as the
expense is: (a) both ordinary and necessary; (b) incurred in carrying a business or trade; and (c)
paid or incurred within the taxae year, then, it shall be allowed as a deduction from the gross
income.32

Let it, however, be noted that in Atlas, the Court likewise declared that:
In addition, not only must the taxpayer meet the business test, he must substantially prove by
evidence or records the deductions claimed under the law, otherwise, the same will be disallowed.
The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not
justify its deduction.33 (Citation omitted and italics ours)
It is, thus, clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from
substantiating claims for deductions. While official receipts are not the only pieces of evidence
which can prove deductie expenses, if presented, they shall be subjected to examination. PMFC
submitted official receipts as among its evidence, and the CTA doubted their veracity. PMFC was,
however, unae to persuasively explain and prove through other documents the discrepancies in
the said receipts. Consequently, the CTA disallowed the deductions claimed, and in its ruling,
invoked Section 238 of the 1977 NIRC considering that official receipts are matters provided for
in the said section.

Conclusion

The Court recognizes that the CTA, which by the very nature of its function is dedicated
exclusively to the consideration of tax proems, has necessarily developed an expertise on the
subject, and its conclusions will not be overturned unless there has been an abuse or improvident
exercise of authority. Such findings can only be disturbed on appeal if they are not supported by
substantial evidence or there is a showing of gross error or abuse on the part of the tax court. In
the absence of any clear and convincing proof to the contrary, the Court must presume that the
CTA rendered a decision which is valid in every respect.34 leslaw

Further, revenue laws are not intended to be liberally construed. Taxes are the lifeood of the
government and in Holmes' memorae metaphor, the price we pay for civilization; hence, laws
relative thereto must be faithfully and strictly implemented.35 While the 1977 NIRC required
substantiation requirements for claimed deductions to be allowed, PMFC insists on leniency,
which is not warranted under the circumstances.

Lastly, the Court notes too that PMFC's tax liabilities have been me than substantially reduced to
P2,804,920.36 from the CIR's initial assessment of P9,761,750.02.36

In precis, the affirmation of the herein assailed decision and resolution is in order.

However, the Court finds it proper to modify the herein assail decision and resolution to conform
to the interest rates prescribed in Nacar v. Gallery Frames, et al.37 The total amount of
P2,804,920.36 to be paid PMFC to the CIR shall be subject to an interest of six percent (6%) per
annum to be computed from the finality of this Resolution until full payment.

WHEREFORE, the instant petition is DENIED. The Decision dated August 29, 2006 and
Resolution dated December 4, 2006 of the Court of Tax Appeals en banc in C.T.A. EB No. 97
are AFFIRMED. However, MODIFICATION thereof, the legal interest of six percent (6%) per
annum reckoned from the finality of this Resolution until full satisfaction, is here imposed upon
the amount of P2,804,920.36 to be paid by Pilmico-Mauri Foods Corporation to the Commissioner
of Internal Revenue.

SO ORDERED.
G.R. No. 216130, August 03, 2016

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. GOODYEAR PHILIPPINES,

INC., Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated August 14, 2014 and the
Resolution3 dated January 5, 2015 of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No.
1041, which affirmed the Decision4 dated March 25, 2013 and the Resolution5 dated June 26,
2013 of the CTA Second Division (CTA Division) in C.T.A. Case No. 8188, ordering petitioner
Commissioner of Internal Revenue (petitioner) to refund or issue a tax credit certificate (TCC) in
the sum of P14,659,847.10 to respondent Goodyear Philippines, Inc. (respondent), representing
erroneously withheld and remitted final withholding tax (FWT).

The Facts

Respondent is a domestic corporation duly organized and existing under the laws of the
Philippines, and registered with the Bureau of Internal Revenue (BIR) as a large taxpayer with
Taxpayer Identification Number 000-409-561-000.6 On August 19, 2003, the authorized capital
stock of respondent was increased from P400,000,000.00 divided into 4,000,000 shares with a
par value of P100.00 each, to P1,731,863,000.00 divided into 4,000,000 common shares and
13,318,630 preferred shares with a par value of P100.00 each. Consequently, all the preferred
shares were solely and exclusively subscribed by Goodyear Tire and Rubber Company (GTRC),
which was a foreign company organized and existing under the laws of the State of Ohio, United
States of America (US) and is unregistered in the Philippines.7

On May 30, 2008, the Board of Directors of respondent authorized the redemption of GTRC's
3,729,216 preferred shares on October 15, 2008 at the redemption price of P470,653,914.00,
broken down as follows: P372,921,600.00 representing the aggregate par value and
P97,732,314.00, representing accrued and unpaid dividends.8

On October 15, 2008, respondent filed an application for relief from doue taxation before the
International Tax Affairs Division of the BIR to confirm that the redemption was not subject to
Philippine income tax, pursuant to the Repuic of the Philippines (RP) - US Tax Treaty.9 This
notwithstanding, respondent still took the conservative approach, and thus, withheld and remitted
the sum of P14,659,847.10 to the BIR on November 3, 2008, representing fifteen percent (15%)
FWT, computed based on the difference of the redemption price and aggregate par value of the
shares.10

On October 21, 2010, respondent filed an administrative claim for refund or issuance of TCC,
representing 15% FWT in the sum of P14,659,847.10 before the BIR. Thereafter, or on
November 3, 2010, it filed a judicial claim, by way of petition for review, before the CTA, docketed
as C.T.A. Case No. 8188.11

For her part, petitioner maintained that respondent's claim must be denied, considering that: (a)
it failed to exhaust administrative remedies by prematurely filing its petition before the CTA; and
(b) it failed to submit complete supporting documents before the BIR.12

The CTA Division Ruling

In a Decision13 dated March 25, 2013, the CTA Division granted the petition and thereby ordered
petitioner to refund or issue a TCC in the sum of P14,659,847.10 to respondent for being
erroneously withheld and remitted as FWT.14 Concerning the procedural issue, the CTA Division
ruled that it was appropriate for respondent to dispense with the administrative remedy before the
BIR, considering that court action should be instituted within two (2) years after the payment of
the tax regardless of the pendency of the administrative claim; otherwise, the taxpayer would be
barred from recovering the same.15

On the merits, the CTA Division found that the redemption of the 3,729,216 shares issued to
GTRC – which were then converted to treasury shares – was not subject to Philippine income
tax. The CTA Division elucidated that while the general rule is that the net capital gain obtained
by a non-resident foreign corporation, such as GTRC, in the redemption of shares would be
subjected to tax rates of five percent (5%) and ten percent (10%) under Section 28 (B) (5) (c)16 of
the National Internal Revenue Code, as amended (Tax Code), the provisions, however, of the
RP-US Tax Treaty would also apply in determining the tax implications of the redemption of
GTRC's preferred shares because it is a resident of the US.17 It pointed out that under Article
1418 of the RP-US Tax Treaty, any gain derived by a US resident (i.e., GTRC) from the alienation
of its properties (i.e., the preferred shares), other than those described in paragraph 1 thereof,
shall only be taxae in the US. Nonetheless, the CTA Division remained mindful of the Reservation
Clause19 in the same treaty which provided that the gains derived by a US resident from the
disposition of shares in a domestic corporation may be taxed in the Philippines, provided that the
latter's assets principally20 consist of real property. After evaluating the Audited Financial
Statements (AFS) of respondent for the years 2007 and 2008, and noting that the value of its real
properties – i.e., property, plant, and equipment – comprise less than 50% of its total assets, the
CTA Division held that respondent's assets did not principally consist of real property and, hence,
exempt from capital gains tax under Section 28 (B) (5) (c) of the Tax Code.21

The CTA Division then determined whether the net capital gain derived by GTRC would be
subjected to 15% FWT imposed on intercorporate dividends under Section 28 (B) (5) (b)22 of the
Tax Code. Citing the RP-US Tax Treaty, the CTA Division noted that dividend income shall be
determined by the law of the state in which the distributing corporation is a resident,23 which in
the Philippines' case, would be Section 73 (A)24 of the Tax Code, defining dividends for income
tax purposes as distributions to shareholders arising out of its earnings or profits. Accordingly, the
CTA Division held that the net capital gain of GTRC could not be regarded as "dividends,"
considering that it did not come from respondent's unrestricted earnings or profits, as the records
would show that it did not have any unrestricted earnings from the years 2003-2009 to cover any
dividend pay-outs.25cralawred Finally, the CTA Division explained that there is only one instance
in the Tax Code which treated the gains derived from redemptions or buy back of shares as
dividends, and this is found in Section 73 (B),26 which contemplated the issuance of stock
dividends. The CTA Division, however, dispelled the application of this provision, considering that
the shares which respondent redeemed were neither stock dividends nor were they redeemed
using unrestricted retained earnings. In sum, the CTA Division ruled that absent any law which
specifically treats the gain derived by GTRC as dividends, the same could not be subjected to
15% FWT under Section 28 (B) (5) (b).27
Dissatisfied, petitioner moved for reconsideration,28 which was, however, denied in a
Resolution29 dated June 26, 2013. Thereafter, she appealed30 to the CTA En Banc.

The CTA En Banc Ruling

In a Decision31 dated August 14, 2014, the CTA En Banc affirmed the findings of the CTA Division.
Echoing the ruling of the CTA Division, the CTA En Banc found that respondent was compelled
to seek judicial recourse after thirteen (13) days from filing its administrative claim so as not to
forfeit its right to appeal to the CTA. Anent the tax treatment of the redemption price paid by
respondent to GTRC, the CTA En Banc fully agreed with the disposition of the CTA Division,
ruling that the net capital gain received by GTRC was not subject to Philippine income
tax.32 Undaunted, petitioner filed a motion for reconsideration,33 which was, however, denied in a
Resolution34 dated January 5, 2015; hence, this petition.

The Issues Before the Court

The issues raised by petitioner in this case are: (a) whether or not the judicial claim of respondent
should be dismissed for non-exhaustion of administrative remedies; and (b) whether or not the
CTA En Banccorrectly ruled that the gain derived by GTRC was not subject to 15% FWT on
dividends.

The Court's Ruling

The petition is devoid of merit.

I.

At the onset, petitioner contends that by filing the administrative and judicial claims only 13 days
apart, respondent, in effect, pursued an empty remedy before the BIR, and thereby deprived the
latter of the opportunity to ascertain the validity of the claim. In this regard, petitioner maintained
that the mere filing of the administrative claim before the BIR did not outrightly satisfy the
requirement of exhaustion of administrative remedy.35

The contentions are untenae.

Section 229 of the Tax Code states that judicial claims for refund must be filed within two (2) years
from the date of payment of the tax or penalty, providing further that the same may not be
maintained until a claim for refund or credit has been duly filed with the Commissioner of Internal
Revenue (CIR), viz.:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed
to have been collected without authority, or of any sum alleged to have been excessively or in
any manner wrongfully collected, until a claim for refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment x x x. (Emphases and underscoring supplied)
Verily, the primary purpose of filing an administrative claim was to serve as a notice of warning to
the CIR that court action would follow unless the tax or penalty alleged to have been collected
erroneously or illegally is refunded. To clarify, Section 229 of the Tax Code – then Section 306 of
the old Tax Code – however does not mean that the taxpayer must await the final resolution of its
administrative claim for refund, since doing so would be tantamount to the taxpayer's forfeiture of
its right to seek judicial recourse should the two (2)-year prescriptive period expire without the
appropriate judicial claim being filed. In CBK Power Company, Ltd. v. CIR,36 the Court enunciated:
In the foregoing instances, attention must be drawn to the Court's ruling in P.J. Kiener Co., Ltd.
v. David (Kiener), wherein it was held that in no wise does the law, i.e., Section 306 of the old
Tax Code (now, Section 229 of the NIRC), imply that the Collector of Internal Revenue first
act upon the taxpayer's claim, and that the taxpayer shall not go to court before he is
notified of the Collector's action. In Kiener, the Court went on to say that the claim with the
Collector of Internal Revenue was intended primarily as a notice of warning that unless the
tax or penalty alleged to have been collected erroneously or illegally is refunded, court
action will follow x x x.37 (Emphases and underscoring supplied)
In the case at bar, records show that both the administrative and judicial claims for refund of
respondent for its erroneous withholding and remittance of FWT were indubitay filed within the
two-year prescriptive period.38 Notay, Section 229 of the Tax Code, as worded, only required that
an administrative claim should first be filed. It bears stressing that respondent could not be faulted
for resorting to court action, considering that the prescriptive period stated therein was about to
expire. Had respondent awaited the action of petitioner knowing fully well that the prescriptive
period was about to lapse, it would have resultantly forfeited its right to seek a judicial review of
its claim, thereby suffering irreparae damage.

Thus, in view of the aforesaid circumstances, respondent correctly and timely sought judicial
redress, notwithstanding that its administrative and judicial claims were filed only 13 days apart.

II.

For another, petitioner asserts that the net capital gain derived by GTRC from the redemption of
its 3,729,216 preferred shares should be subject to 15% FWT on dividends; She claims that while
the payment of the original subscription price could not be taxed as it represented a return of
capital, the additional amount, however, or the component of the redemption price representing
the amount of P97,732,314.00 should not be treated as a mere premium and part of the
subscription price, but as accumulated dividend in arrears, and, hence, subject to 15% FWT.39

Again, the assertions are wrong.

The imposition of 15% FWT on intercorporate dividends received by a non-resident foreign

corporation is found in Section 28 (B) (5) (b) of the Tax Code which reads:
SEC. 28. Rates of Income Tax on Foreign Corporations. –

xxxx

(B) Tax on Nonresident Foreign Corporation. –

xxxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. –
(b) Intercorporate Dividends. – A final withholding tax at the rate of fifteen percent (15%) is
hereby imposed on the amount of cash and/or property dividends received from a
domestic corporation, which shall be collected and paid as provided in Section 57 (A) of
this Code, subject to the condition that the country in which the nonresident foreign corporation
is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes
deemed to have been paid in the Philippines equivalent to twenty percent (20%), which represents
the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent
(15%) tax on dividends as provided in this subparagraph: Provided, That effective January 1,
2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents
the difference between the regular income tax of thirty percent (30%) and the fifteen percent
(15%) tax on dividends;

xxxx (Emphasis and underscoring supplied)

It must be noted, however, that GTRC is a non-resident foreign corporation, specifically a resident
of the US. Thus, pursuant to the cardinal principle that treaties have the force and effect of law in
this jurisdiction,40 the RP-US Tax Treaty complementarily governs the tax implications of
respondent's transactions with GTRC.

Under Article 11 (5)41 of the RP-US Tax Treaty, the term "dividends" should be understood
according to the taxation law of the State in which the corporation making the distribution is a
resident, which, in this case, pertains to respondent, a resident of the Philippines. Accordingly,
attention should be drawn to the statutory definition of what constitutes "dividends," pursuant to
Section 73 (A)42 of the Tax Code which provides that "the term 'dividends' x x x means any
distribution made by a corporation to its shareholders out of its earnings or profits and
payae to its shareholders, whether in money or in other property."

In light of the foregoing, the Court therefore holds that the redemption price representing the
amount of P97,732,314.00 received by GTRC could not be treated as accumulated dividends in
arrears that could be subjected to 15% FWT. Verily, respondent's AFS covering the years 2003
to 2009 show that it did not have unrestricted retained earnings, and in fact, operated from a
position of deficit.43Thus, absent the availability of unrestricted retained earnings, the board
of directors of respondent had no power to issue dividends.44 Consistent with Section 73 (A)
of the Tax Code, this rule on dividend declaration – i.e., that it is dependent upon the availability
of unrestricted retained earnings – was further edified in Section 43 of The Corporation Code of
the Philippines45 which reads:
Section 43. Power to Declare Dividends. – The board of directors of a stock corporation may
declare dividends out of the unrestricted retained earnings which shall be payae in cash,
in property, or in stock to all stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the approval of stockholders representing
not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly
called for the purpose.

x x x x (Emphasis and underscoring supplied)

It is also worth mentioning that one of the primary features of an ordinary dividend is that the
distribution should be in the nature of a recurring return on stock46 which, however, does not
obtain in this case. As aptly pointed out by the CTA En Banc, the amount of P97,732,314.00
received by GTRC did not represent a periodic distribution of dividend, but rather a payment by
respondent for the redemption47 of GTRC's 3,729,216 preferred shares. In Wise & Co., Inc. v.
Meer:48
The amounts thus distributed among the plaintiffs were not in the nature of a recurring
return on stock — in fact, they surrendered and relinquished their stock in return for said
distributions, thus ceasing to be stockholders of the Hongkong Company, which in turn ceased
to exist in its own right as a going concern during its more or less brief administration of the
business as trustee for the Manila Company, and finally disappeared even as such trustee.
"The distinction between a distribution in liquidation and an ordinary dividend is factual; the result
in each case depending on the particular circumstances of the case and the intent of the parties. If
the distribution is in the nature of a recurring return on stock it is an ordinary dividend.
However, if the corporation is really winding up its business or recapitalizing and
narrowing its activities, the distribution may properly be treated as in complete or partial
liquidation and as payment by the corporation to the stockholder for his stock. The
corporation is, in the latter instances, wiping out all parts of the stockholders' interest in the
company * * * ." (Montgomery, Federal Income Tax Handbook 1938-1939, 258 x x x)49 (Emphases
and underscoring supplied)
All told, the amount of P97,732,314.00 received by GTRC from respondent for the redemption of
its 3,729,216 preferred shares were not accumulated dividends in arrears. Contrary to petitioner's
claims, it is therefore not subject to 15% FWT on dividends in accordance with Section 28 (B) (5)
(b) of the Tax Code.

WHEREFORE, the petition is DENIED. The Decision dated August 14, 2014 and the Resolution
dated January 5, 2015 of the Court of Tax Appeals En Banc in C.T.A. EB No. 1041 are
hereby AFFIRMED.

SO ORDERED.
G.R. No. 198756 January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,

METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS,
PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS
DEVELOPMENT BANK, Petitioners,

RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL

CORPORATION, Petitioners-Intervenors,

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,

vs.
REPUIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU
OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE
NATIONAL TREASURER AND BUREAU OF TREASURY, Respondent.

DECISION

LEONEN, J.:

The case involves the proper tax treatment of the discount or interest income arising from the ₱35
billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October
18, 2001 (denominated as the Poverty Eradication and Alleviation Certificates or the PEA Ce
Bonds by the Caucus of Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-
20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are subject
to the 20% final withholding tax. Pursuant to this ruling, the Secretary of Finance directed the
Bureau of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds upon
their payment at maturity on October 18, 2011.

This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under Rule 65 of
the Rules of Court seeking to:

a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 and other related
rulings issued by BIR of similar tenor and import, for being unconstitutional and for having
been issued without jurisdiction or with grave abuse of discretion amounting to lack or·
excess of jurisdiction ... ;

b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20%
FWT from the payment of the face value of the Government Bonds upon their maturity;

c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value
of the Government Bonds upon maturity ... ; and

d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary

injunction, enjoining Respondents, particularly the BIR and the BTr, from withholding or
collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing
 the assailed 2011 BIR Ruling, as well asother related rulings issued by the BIR of similar
tenor and import, pending the resolution by the court of the merits of the Petition.3

Factual background

By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) "with
the assistance of its financial advisors, Rizal Commercial Banking Corp. ("RCBC"), RCBC Capital
Corp. ("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX") and SEED Capital
Ventures, Inc. (SEED),"5 requested an approval from the Department of Finance for the issuance
by the Bureau of Treasury of 10-year zerocoupon Treasury Certificates (T-notes).6 The T-notes
would initially be purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged
and sold at a premium to investors as the PEACe Bonds.7 The net proceeds from the sale of the
Bonds"will be used to endow a permanent fund (Hanapbuhay® Fund) to finance meritorious
activities and projects of accredited non-government organizations (NGOs) throughout the
country."8

Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of
zero-coupon bonds were also presented by banks and financial institutions, such as First Metro
Investment Corporation (proposal dated March 1, 2001),9 International Exchange Bank (proposal
dated July 27, 2000),10 Security Bank Corporation and SB Capital Investment Corporation
(proposal dated July 25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August
25, 1999).12 "Both the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income
indicate that the interest income or discount earned on the proposed zerocoupon bonds would be
subject to the prevailing withholding tax."13

A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a
deep discount), with the face value repaid at the time of maturity.14 It does not make periodic
interest payments, or have socalled "coupons," hence the term zero-coupon bond.15 However,
the discount to face value constitutes the return to the bondholder.16

On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated May 10,
15, and 25, 2001, issued BIR Ruling No. 020-200117 on the tax treatment of the proposed PEACe
Bonds. BIR Ruling No. 020-2001, signed by then Commissioner ofInternal Revenue René G.
Bañez confirmed that the PEACe Bonds would not be classified as deposit substitutes and would
not be subject to the corresponding withholding tax:

Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from
twenty (20) or more individuals or corporate lenders at any one time. In the light of your
representation that the PEACe Bonds will be issued only to one entity, i.e., Code NGO, the same
shall not be considered as "deposit substitutes" falling within the purview of the above definition.
Hence, the withholding tax on deposit substitutes will not apply.18 (Emphasis supplied)

The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently
reiterated in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-
0120 dated September 29, 2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced
that to be ae to determine whether the financial assets, i.e., debt instruments and securities are
deposit substitutes, the "20 or more individual or corporate lenders" rule must apply. Moreover,
the determination of the phrase "at any one time" for purposes of determining the "20 or more
lenders" is to be determined at the time of the original issuance. Such being the case, the PEACe
Bonds were not to be treated as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G.
Edeza (Former Treasurer Edeza) questioned the propriety of issuing the bonds directly to a
special purpose vehicle considering that the latter was not a Government Securities Eligie Dealer
(GSED).22 Former Treasurer Edeza recommended that the issuance of the Bonds "be done
through the ADAPS"23 and that CODE-NGO "should get a GSED to bid in sic its behalf."24

Subsequently, in the notice to all GSEDs entitled Puic Offering of Treasury Bonds25 (Puic Offering)
dated October 9, 2001, the Bureau of Treasury announced that "₱30.0B worth of 10-year Zero-
Coupon Bonds would be auctioned on October 16, 2001."26 The notice stated that the Bonds
"shall be issued to not morethan 19 buyers/lenders hence, the necessity of a manual auction for
this maiden issue."27 It also required the GSEDs to submit their bids not later than 12 noon on
auction date and to disclose in their bid submissions the names of the institutions bidding through
them to ensure strict compliance with the 19 lender limit.28 Lastly, it stated that "the issue being
limitedto 19 lenders and while taxae shall not be subject to the 20% final withholding tax."29

On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula for the Zero-
Coupon Bond." The memo stated inpart that the formula (in determining the purchase price and
settlement amount) "is only applicae to the zeroes that are not subject to the 20% final withholding
due to the 19 buyer/lender limit."31

A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the "Auction
Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001"
(Auction Guidelines).32 The Auction Guidelines reiterated that the Bonds to be auctioned are "not
subject to 20% withholding tax as the issue will be limited to a maximum of 19 lenders in the
primary market (pursuant to BIR Revenue Regulation No. 020 2001)."33The Auction Guidelines,
for the first time, also stated that the Bonds are "eligie as liquidity reserves (pursuant to MB
Resolution No. 1545 dated 27 September 2001)."34

On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon
bonds.35 Also on the same date, the Bureau of Treasury issued another memorandum36 quoting
excerpts of the ruling issued by the Bureau of Internal Revenue concerning the Bonds’ exemption
from 20% final withholding tax and the opinion of the Monetary Board on reserve eligibility.37

During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide, from
as low as 12.248% to as high as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the
auction results.40 The cut-off was at 12.75%.41

After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning
bidder having tendered the lowest bids.42 Accordingly, on October 18, 2001, the Bureau of
Treasury issued ₱35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for
approximately ₱10.17 billion,43 resulting in a discount of approximately ₱24.83 billion.

Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement44 with CODE-
NGO, whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the
offering of the PEACe Bonds.45RCBC Capital agreed to underwrite46 on a firm basis the offering,
distribution and sale of the 35 billion Bonds at the price of ₱11,995,513,716.51.47 In Section 7(r)
of the underwriting agreement, CODE-NGO represented that "all income derived from the Bonds,
inclusive of premium on redemption and gains on the trading of the same, are exempt from all
forms of taxation as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31 May
2001 and 16 August 2001, respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an issue price of
₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on different dates.49

BIR rulings

On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the
Government Bonds and directing the BTr to withhold said final tax at the maturity thereof, allegedly
without consultation with Petitioners as bond holders, and without conducting any hearing."50

"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary
of Finance on the proper tax treatment of the discount or interest income derived from the
Government Bonds."51 The Bureau of Internal Revenue, citing three (3) of its rulings rendered in
2004 and 2005, namely: BIR Ruling No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-491-
0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the
following:

The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20%
Final Tax on interest income from deposit substitutes. It is now settled that all treasury bonds
(including PEACe Bonds), regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes. In the case of zero-coupon bonds, the
discount (i.e. difference between face value and purchase price/discounted value of the bond) is
treated as interest income of the purchaser/holder. Thus, the Php 24.3 interest income should
have been properly subject to the 20% Final Tax as provided in Section 27(D)(1) of the Tax Code
of 1997. . . .

....

However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not ae tocollect
the final tax on the discount/interest income realized by RCBC as a result of the 2001 Rulings.
Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies
and supersedes the 2001 Rulings by stating that the 1997 Tax Code is clear that the "term puic
means borrowing from twenty (20) or more individual or corporate lenders at any one time." The
word "any" plainly indicates that the period contemplated is the entire term of the bond, and not
merely the point of origination or issuance. . . . Thus, by taking the PEACe bonds out of the ambit
of deposits sic substitutes and exempting it from the 20% Final Tax, an exemption in favour of the
PEACe Bonds was created when no such exemption is found in the law.55

On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine
Dealing System Holdings Corporation and Subsidiaries ("PDS Group"). The Memo provides that
in view of the pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the
Government Bonds, no transferof the same shall be allowed to be recorded in the Registry of
Scripless Securities ("ROSS") from 12 October 2011 until the redemption payment date on 18
October 2011. Thus, the bondholders of record appearing on the ROSS as of 18 October 2011,
which include the Petitioners, shall be treated by the BTr asthe beneficial owners of such
securities for the relevant tax payments to be imposed thereon."56

On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau of
Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final withholding tax
due on the discount or interest earned on the PEACe Bonds should "be imposed and withheld
not only on RCBC/CODE NGO but also on ‘all subsequent holders of the Bonds.’"58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with
urgent application for a temporary restraining order and/or writ of preliminary injunction)59 before
this court.

On October 18, 2011, this court issued a temporary restraining order (TRO)60 "enjoining the
implementation of BIR Ruling No. 370-2011 against the PEACe Bonds, . . . subject to the condition
that the 20% final withholding tax on interest income there from shall be withheld by the petitioner
banks and placed in escrow pending resolution of the petition."61

On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and
to admit petition-in-intervention62 dated October 27, 2011, which was granted by this court on
November 15, 2011.63

Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte
Motion to Direct Respondents to Comply with the TRO."64 They alleged that on the same day that
the temporary restraining order was issued, the Bureau of Treasury paid to petitioners and other
bondholders the amounts representing the face value of the Bonds, net however of the amounts
corresponding to the 20% final withholding tax on interest income, and that the Bureau of Treasury
refused to release the amounts corresponding to the 20% final withholding tax.65On November
15, 2011, this court directed respondents to: "(1) SHOW CAUSE why they failed to comply with
the October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution in order that
petitioners may place the corresponding funds in escrow pending resolution of the petition."66

On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-
in-intervention with comment on the petitionin-intervention of RCBC and RCBC Capital).67 The
motion was granted by this court on November 22, 2011.68

On December 1, 2011, puic respondents filed their compliance.69 They explained that: 1) "the
implementation of BIR Ruling No. 370-2011, which has already been performed on October 18,
2011 with the withholding of the 20% final withholding tax on the face value of the PEACe bonds,
is already fait accompli . . . when the Resolution and TRO were served to and received by
respondents BTr and National Treasurer on October 19, 2011";70 and 2) the withheld amount has
ipso facto become puic funds and cannot be disbursed or released to petitioners without
congressional appropriation.71 Respondents further aver that"inasmuch as the . . . TRO has
already become moot . . . the condition attached to it, i.e., ‘that the 20% final withholding tax on
interest income therefrom shall be withheld by the banks and placed in escrow . . .’has also been
rendered moot."72

On December 6, 2011, this court noted respondents' compliance.73

On February 22, 2012, respondents filed their consolidated comment74 on the petitions-in-
intervention filed by RCBC and RCBC Capital and On November 27, 2012, petitioners filed their
"Manifestation with Urgent Reiterative Motion (To Direct Respondents to Comply with the
Temporary Restraining Order)."75

On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative
motion (to direct respondents to comply with the temporary restraining order); and (b) required
respondents to comment thereon.76
Respondents’ comment77 was filed on April 15,2013, and petitioners filed their reply78 on June 5,
2013.

Issues

The main issues to be resolved are:

I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final
withholding tax under the 1997 National Internal Revenue Code. Related to this question
is the interpretation of the phrase "borrowing from twenty (20) or more individual or
corporate lenders at any one time" under Section 22(Y) of the 1997 National Internal
Revenue Code, particularly on whether the reckoning of the 20 lenders includes trading
of the bonds in the secondary market; and

II. If the PEACe Bonds are considered "deposit substitutes," whether the government or
the Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final
withholding tax from the face value of these Bonds

a. Will the imposition of the 20% final withholding tax violate the non-impairment
clause of the Constitution?

b. Will it constitute a deprivation of property without due process of law?

c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings?

Arguments of petitioners, RCBC and RCBC

Capital, and CODE-NGO

Petitioners argue that "as the issuer of the Government Bonds acting through the BTr, the
Government is oigated . . . to pay the face value amount of Ph₱35 Billion upon maturity without
any deduction whatsoever."79 They add that "the Government cannot impair the efficacy of the
Bonds by arbitrarily, oppressively and unreasonay imposing the withholding of 20% FWT upon
the Bonds a mere eleven (11) days before maturity and after several, consistent categorical
declarations that such bonds are exempt from the 20% FWT, without violating due process"80 and
the constitutional principle on non-impairment of contracts.81 Petitioners aver that at the time they
purchased the Bonds, they had the right to expect that they would receive the full face value of
the Bonds upon maturity, in view of the 2001 BIR Rulings.82 "Regardless of whether or not the
2001 BIR Rulings are correct, the fact remains that they relied on good faith thereon."83

At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under
Section 22(Y) of the 1997 National Internal Revenue Code because there was only one lender
(RCBC) to whom the Bureau of Treasury issued the Bonds.84 They allege that the 2004, 2005,
and 2011 BIR Rulings "erroneously interpreted that the number of investors that participate in the
‘secondary market’ is the determining factor in reckoning the existence or non-existence of twenty
(20) or more individual or corporate lenders."85 Furthermore, they contend that the Bureau of
Internal Revenue unduly expanded the definition of deposit substitutes under Section 22 of the
1997 National Internal Revenue Code in concluding that "the mere issuance of government debt
instruments and securities is deemed as falling within the coverage of ‘deposit
substitutes.’"86 Thus, "the 2011 BIR Ruling clearly amounted to an unauthorized act of
administrative legislation."87

Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt
from income tax.88They insist that "they are not lenders whose income is considered as ‘interest
income or yield’ subject to the 20% FWT under Section 27 (D)(1) of the 1997 National Internal
Revenue Code"89 because they "acquired the Government Bonds in the secondary or tertiary
market."90

Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners
argue that the collection of the final tax was barred by prescription.91 They point out that under
Section 7 of DOF Department Order No. 141-95,92 the final withholding tax "should have been
withheld at the time of their issuance."93 Also, under Section 203 of the 1997 National Internal
Revenue Code, "internal revenuetaxes, such as the final tax, should be assessed within three (3)
years after the last day prescribed by law for the filing of the return."94

Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior
notice to them was in violation of their property rights,95 their constitutional right to due
process96 as well as Section 246 of the 1997 National Internal Revenue Code on non-retroactivity
of rulings.97 Allegedly, it would also have "an adverse effect of colossal magnitude on the
investors, both localand foreign, the Philippine capital market, and most importantly, the country’s
standing in the international commercial community."98 Petitioners explained that "unless
enjoined, the government’s threatened refusal to pay the full value of the Government Bonds will
negatively impact on the image of the country in terms of protection for property rights (including
financial assets), degree of legal protection for lender’s rights, and strength of investor
protection."99 They cited the country’s ranking in the World Economic Forum: 75th in the world in
its 2011–2012 Global Competitiveness Index, 111th out of 142 countries worldwide and 2nd to
the last among ASEAN countries in terms of Strength of Investor Protection, and 105th worldwide
and last among ASEAN countries in terms of Property Rights Index and Legal Rights Index.100 It
would also allegedly "send a reverberating message to the whole world that there is no certainty,
predictability, and stability of financial transactions in the capital markets."101 "The integrity of
Government-issued bonds and notes will be greatly shattered and the credit of the Philippine
Government will suffer"102 if the sudden turnaround of the government will be allowed,103 and it
will reinforce "investors’ perception that the level of regulatory risk for contracts entered into by
the Philippine Government is high,"104 thus resulting in higher interestrate for government-issued
debt instruments and lowered credit rating.105

Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of

Internal Revenue "gravely and seriously abused her discretion in the exercise of her rule-making
power"106 when she issued the assailed 2011 BIR Ruling which ruled that "all treasury bonds are
‘deposit substitutes’ regardless of the number of lenders, in clear disregard of the requirement of
twenty (20)or more lenders mandated under the NIRC."107 They argue that "by her anket and
arbitrary classification of treasury bonds as deposit substitutes, respondent CIR not only amended
and expanded the NIRC, but effectively imposed a new tax on privately-placed treasury
bonds."108Petitioners-intervenors RCBC and RCBC Capital further argue that the 2011 BIR Ruling
will cause substantial impairment of their vested rights109 under the Bonds since the ruling
imposes new conditions by "subjecting the PEACe Bonds to the twenty percent (20%) final
withholding tax notwithstanding the fact that the terms and conditions thereof as previously
represented by the Government, through respondents BTr and BIR, expressly state that it is not
subject to final withholding tax upon their maturity."110 They added that "the exemption from the
twenty percent (20%) final withholding tax was the primary inducement and principal
consideration for their participation in the auction and underwriting of the PEACe Bonds."111

Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent
Commissioner of Internal Revenue violated their rights to due process when she arbitrarily issued
the 2011 BIR Ruling without prior notice and hearing, and the oppressive timing of such ruling
deprived them of the opportunity to challenge the same.112

Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors
RCBC and RCBC Capital claim that respondents Bureau of Treasury and CODE-NGO should be
held liae "as these parties explicitly represented . . . that the said bonds are exempt from the final
withholding tax."113

Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the
2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011 will have pernicious effects on the
integrity of existing securities, which is contrary to the State policies of stabilizing the financial
system and of developing capital markets."114

For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011
are "invalid because they contravene Section 22(Y) of the 1997 NIRC when the said rulings
disregarded the applicability of the ‘20 or more lender’ rule to government debt instruments";115 (b)
"when it sold the PEACe Bonds in the secondary market instead of holding them until maturity, it
derived . . . long-term trading gains, not interest income, which are exempt . . . under Section
32(B)(7)(g) of the 1997 NIRC";116 (c) "the tax exemption privilege relating to the issuance of the
PEACe Bonds . . . partakes of a contractual commitment granted by the Government in exchange
for a valid and material consideration i.e., the issue price paid and savings in borrowing cost
derived by the Government, thus protected by the non-impairment clause of the 1987
Constitution";117 and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the 2001
BIR Rulings since no notice of revocation was issued to it, RCBC and RCBC Capital and
petitioners-bondholders, nor was there any BIR administrative guidance issued and
puished."118CODE-NGO additionally argues that impleading it in a Rule 65 petition was improper
because: (a) it involves determination of a factual question;119 and (b) it is premature and states
no cause of action as it amounts to an anticipatory third-party claim.120

Arguments of respondents

Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling
violates the doctrines of exhaustion of administrative remedies and hierarchy ofcourts, resulting
in a lack of cause of action that justifies the dismissal of the petition.121 According to them, "the
jurisdiction to review the rulings of the Commissioner of Internal Revenue, after the aggrieved
party exhausted the administrative remedies, pertains to the Court of Tax Appeals."122 They point
out that "a case similar to the present Petition was in fact filed with the CTA on October 13, 2011,
docketed as CTA Case No. 8351 and entitled, ‘Rizal Commercial Banking Corporation and RCBC
Capital Corporation vs. Commissioner of Internal Revenue, et al.’"123

Respondents further take issue on the timeliness of the filing of the petition and petitions-in-
intervention.124 They argue that under the guise of mainly assailing the 2011 BIR Ruling,
petitioners are indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally
prohibited, and the petition insofar as it seeks to nullify the 2004 and 2005 BIR Rulings was filed
way out of time pursuant to Rule 65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe Bonds is not a
trading gain but interest income subject to income tax.126 They explain that "with the payment of
the Ph₱35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of
money equivalent to about Ph₱24.8 Billion as payment for interest. Such interest is clearly an
income of the Petitioners considering that the same is a flow of wealth and not merely a return of
capital – the capital initially invested in the Bonds being approximately Ph₱10.2 Billion."127

Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not
constitute an impairment of the oigations of contract, respondents aver that: "The BTr has no
power to contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings
cannot be considered a material term of the Bonds";128 "there has been no change in the laws
governing the taxability of interest income from deposit substitutes and said laws are read into
every contract";129 "the assailed BIR Rulings merely interpret the term "deposit substitute" in
accordance with the letter and spirit of the Tax Code";130 "the withholding of the 20% FWT does
not result in a default by the Government as the latter performed its oigations to the bondholders
in full";131 and "if there was a breach of contract or a misrepresentation it was between
RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the PEACe Bonds."132

Similarly, respondents counter that the withholding of "the 20% final withholding tax on the PEACe
Bonds does not amount to a deprivation of property without due process of law."133 Their
imposition of the 20% final withholding tax is not arbitrary because they were only performing a
duty imposed by law;134 "the 2011 BIR Ruling is aninterpretative rule which merely interprets the
meaning of deposit substitutes and upheld the earlier construction given to the termby the 2004
and 2005 BIR Rulings."135 Hence, respondents argue that "there was no need to observe the
requirements of notice, hearing, and puication."136

Nonetheless, respondents add that "there is every reason to believe that Petitioners — all major
financial institutions equipped with both internal and external accounting and compliance
departments as wellas access to both internal and external legal counsel; actively involved in
industry organizations such as the Bankers Association of the Philippines and the Capital Market
Development Council; all actively taking part in the regular and special debt issuances of the BTr
and indeed regularly proposing products for issue by BTr — had actual notice of the 2004 and
2005 BIR Rulings."137 Allegedly, "the sudden and drastic drop — including virtually zero trading
for extended periods of six months to almost a year — in the trading volume of the PEACe Bonds
after the release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market
participants, including the Petitioners herein, were aware of the ruling and its consequences for
the PEACe Bonds."138

Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner
of Internal Revenue’s rule-making power;139 that it and the 2004 and 2005 BIR Rulings did not
unduly expand the definition of deposit substitutes by creating an unwarranted exception to the
requirement of having 20 or more lenders/purchasers;140 and the word "any" in Section 22(Y) of
the National Internal Revenue Code plainly indicates that the period contemplated is the entire
term of the bond and not merely the point of origination or issuance.141

Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiay
prejudice petitioners.142 "With or without the 2011 BIR Ruling, Petitioners would be liae topay a
20% final withholding tax just the same because the PEACe Bonds in their possession are legally
in the nature of deposit substitutes subject to a 20% final withholding tax under the
NIRC."143 Section 7 of DOF Department Order No. 141-95 also provides that incomederived from
Treasury bonds is subject to the 20% final withholding tax.144 "While revenue regulations as a
general rule have no retroactive effect, if the revocation is due to the fact that the regulation is
erroneous or contrary to law, such revocation shall have retroactive operation as to affect past
transactions, because a wrong construction of the law cannot give rise to a vested right that can
be invoked by a taxpayer."145

Finally, respondents submit that "there are a number of variaes and factors affecting a capital
market."146 "Capital market itself is inherently unstae."147 Thus, "petitioners’ argument that the
20% final withholding tax . . . will wreak havoc on the financial stability of the country is a mere
supposition that is not a justiciae issue."148

On the prayer for the temporary restraining order, respondents argue that this order "could no
longer be implemented because the acts sought to be enjoined are already fait accompli."149 They
add that "to disburse the funds withheld to the Petitioners at this time would violate Section 29,
Article VI of the Constitution prohibiting ‘money being paid out of the Treasury except in pursuance
of an appropriation made by law.’"150 "The remedy of petitioners is to claim a tax refund under
Section 204(c) of the Tax Code should their position be upheld by the Honorae Court."151

Respondents also argue that "the implementation of the TRO would violate Section 218 of the
Tax Code in relation to Section 11 of Repuic Act No. 1125 (as amended by Section 9 of Repuic
Act No. 9282) which prohibits courts, except the Court of Tax Appeals, from issuing injunctions to
restrain the collection of any national internal revenue tax imposed by the Tax Code."152

Summary of arguments

In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO
argue that:

1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal
Revenue Code when it declared that all government debt instruments are deposit
substitutes regardless of the 20-lender rule; and

2. The 2011 BIR Ruling cannot be applied retroactively because:

a) It will violate the contract clause;

● It constitutes a unilateral amendment of a material term (tax exempt status) in

the Bonds, represented by the government as an inducement and important
consideration for the purchase of the Bonds;

b) It constitutes deprivation ofproperty without due process because there was no

prior notice to bondholders and hearing and puication;

c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue
Code;

d) It violates the constitutional provision on supporting activities of non-government

organizations and development of the capital market; and
 e) The assessment had already prescribed.

Respondents counter that:

1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in
issuing the challenged 2011 BIR Ruling:

a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the
Commissioner of Internal Revenue’s power to interpret the provisions of the 1997 National
Internal Revenue Code and other tax laws;

b. Commissioner of Internal Revenue merely restates and confirms the interpretations

contained in previously issued BIR Ruling Nos. 007-2004, DA-491-04,and 008-05, which
have already effectively abandoned or revoked the 2001 BIR Rulings;

c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings

especially when the latter’s rulings are not in harmony with the law; and

d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot
give rise to a vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.

2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy
in the ordinary course of law:

a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they
allege to have been wrongfully collected; and

b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of

courts.

Court’s ruling

Procedural Issues
Non-exhaustion of
administrative remedies proper

Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewae
by the Secretary of Finance.

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power
to interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Emphasis
supplied)

Thus, it was held that "if superior administrative officers can grant the relief prayed for, then special
civil actions are generally not entertained."153 The remedy within the administrative machinery
must be resorted to first and pursued to its appropriate conclusion before the court’s judicial power
can be sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative
remedies:

The doctrine of exhaustion of administrative remedies is a relative one and its flexibility is called
upon by the peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence,
it is disregarded (1) when there is a violation of due process, (2) when the issue involved is purely
a legal question,155 (3) when the administrative action is patently illegal amounting to lack or
excess of jurisdiction,(4) when there is estoppel on the part of the administrative agency
concerned,(5) when there is irreparae injury, (6) when the respondent is a department secretary
whose acts as an alter ego of the President bears the implied and assumed approval of the latter,
(7) when to require exhaustion of administrative remedies would be unreasonae, (8) when it would
amount to a nullification of a claim, (9) when the subject matter is a private land in land case
proceedings, (10) when the rule does not provide a plain, speedy and adequate remedy, (11)
when there are circumstances indicating the urgency of judicial intervention.156 (Emphasis
supplied, citations omitted)

The exceptions under (2) and (11)are present in this case. The question involved is purely legal,
namely: (a) the interpretation of the 20-lender rule in the definition of the terms puic and deposit
substitutes under the 1997 National Internal Revenue Code; and (b) whether the imposition of the
20% final withholding tax on the PEACe Bonds upon maturity violates the constitutional provisions
on non-impairment of contracts and due process. Judicial intervention is likewise urgent with the
impending maturity of the PEACe Bonds on October 18, 2011.

The rule on exhaustion of administrative remedies also finds no application when the exhaustion
will result in an exercise in futility.157

In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would
be a futile exercise because it was upon the request of the Secretary of Finance that the 2011
BIR Ruling was issued by the Bureau of Internal Revenue. It appears that the Secretary of Finance
adopted the Commissioner of Internal Revenue’s opinions as his own.158 This position was in fact
confirmed in the letter159 dated October 10, 2011 where he ordered the Bureau of Treasury to
withhold the amount corresponding to the 20% final withholding tax on the interest or discounts
allegedly due from the bondholders on the strength of the 2011 BIR Ruling. Doctrine on hierarchy
of courts

We agree with respondents that the jurisdiction to review the rulings of the Commissioner of
Internal Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011
and DA 378-2011 were issued in connection with the implementation of the 1997 National Internal
Revenue Code on the taxability of the interest income from zero-coupon bonds issued by the
government.

Under Repuic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Repuic
Act No. 9282,160such rulings of the Commissioner of Internal Revenue are appealae to that court,
thus:

SEC. 7.Jurisdiction.- The CTA shall exercise:

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

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;

....

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by
a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of
Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of
Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an
appeal with the CTA within thirty (30) days after the receipt of such decision or rulingor after the
expiration of the period fixed by law for action as referred toin Section 7(a)(2) herein.

....

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters
arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as herein provided, until and unless an appeal has
been previously filed with the CTA and disposed of in accordance with the provisions of this Act.

In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. aquera,162 this court

emphasized the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal
Revenue, thus:

While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it
be stressed that the jurisdiction to review the rulings of the Commissioner of Internal Revenue
pertains to the Court of Tax Appeals, not to the RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the
Commissioner implementing the Tax Code on the taxability of pawnshops.. . .

....

Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax
Code, which states:

"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or analogous to those
subject to a rate of sales tax under certain category enumerated in Section 163 and 165 of this
Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make
rulings or opinions in connection with the implementation of the provisionsof internal revenue
laws, including ruling on the classification of articles of sales and similar purposes." (Emphasis in
the original)

....
The Court, in Rodriguez, etc. vs. aquera, etc., ruled:

"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but
merely an attempt to nullify General Circular No. V-148, which does not adjudicate or settle any
controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax
Appeals.

We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the
collection of taxes and license fees to adhere strictly to the interpretation given by the defendant
tothe statutory provisions abovementioned, as set forth in the Circular. The same incorporates,
therefore, a decision of the Collector of Internal Revenue (now Commissioner of Internal
Revenue) on the manner of enforcement of the said statute, the administration of which is
entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of Repuic
Act No. 1125, Section 7 of which provides that the Court of Tax Appeals ‘shall exercise exclusive
appellate jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . .
. matters arising under the National Internal Revenue Code or other law or part of the law
administered by the Bureau of Internal Revenue.’"163

In exceptional cases, however, this court entertained direct recourse to it when "dictated by puic
welfare and the advancement of puic policy, or demanded by the broader interest of justice, or
the orders complained of were found to be patent nullities, or the appeal was considered as clearly
an inappropriate remedy."164

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary,

Department of Interior and Local Government,165 this court noted that the petition for prohibition
was filed directly before it "in disregard of the rule on hierarchy of courts. However, this court
opted to take primary jurisdiction over the . . . petition and decide the same on its merits in viewof
the significant constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt disposition of
the matter."166

Here, the nature and importance of the issues raised167 to the investment and banking industry
with regard to a definitive declaration of whether government debt instruments are deposit
substitutes under existing laws, and the novelty thereof, constitute exceptional and compelling
circumstances to justify resort to this court in the first instance.

The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other
financial instrument or product that may be issued and traded in the market. Due to the changing
positions of the Bureau of Internal Revenue on this issue, there isa need for a final ruling from
this court to stabilize the expectations in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of
courts had been rendered moot by this court’s issuance of the temporary restraining order
enjoining the implementation of the 2011 BIR Ruling. The temporary restraining order effectively
recognized the urgency and necessity of direct resort to this court.

Substantive issues

Tax treatment of deposit substitutes

Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a
final withholdingtax at the rate of 20% is imposed on interest on any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements. These provisions read:

SEC. 24. Income Tax Rates.

....

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest fromany currency bank deposit and yield or
any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements; . . . Provided, further, That interest income from long-term deposit or investment
in the form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit
or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and
shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit
or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%. (Emphasis supplied)

SEC. 27. Rates of Income Tax on Domestic Corporations. -

....

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements received by domestic corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived by a domestic corporation from a
depository bank under the expanded foreign currency deposit system shall be subject to a final
income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis
supplied)

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust
Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements and royalties derived from sources within the Philippines shall be subject to a final
income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation from a depository bank under the expanded
foreign currency deposit system shall be subject to a final income tax at the rate of seven and
one-half percent (7 1/2%) of such interest income. (Emphasis supplied)

This tax treatment of interest from bank deposits and yield from deposit substitutes was first
introduced in the 1977 National Internal Revenue Code through Presidential Decree No.
1739168 issued in 1980. Later, Presidential Decree No. 1959, effective on October 15, 1984,
formally added the definition of deposit substitutes, viz:

(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the puic, other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of relending or purchasing of receivaes and other
oigations, or financing their own needs or the needs of their agent or dealer.These promissory
notes, repurchase agreements, certificates of assignment or participation and similar instrument
with recourse as may be authorized by the Central Bank of the Philippines, for banks and non-
bank financial intermediaries or by the Securities and Exchange Commission of the Philippines
for commercial, industrial, finance companies and either non-financial companies: Provided,
however, that only debt instruments issued for inter-bank call loans to cover deficiency in reserves
against deposit liabilities including those between or among banks and quasi-banks shall not be
considered as deposit substitute debt instruments. (Emphasis supplied)

Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted
verbatim the same definition and specifically identified the following borrowings as "deposit
substitutes":

SECTION 2. Definitions of Terms. . . .

(h) "Deposit substitutes" shall mean –

....

(a) All interbank borrowings by or among banks and non-bank financial institutions
authorized to engage in quasi-banking functions evidenced by deposit substitutes
instruments, except interbank call loans to cover deficiency in reserves against deposit
liabilities as evidenced by interbank loan advice or repayment transfer tickets.

(b) All borrowings of the national and local government and its instrumentalities including
the Central Bank of the Philippines, evidenced by debt instruments denoted as treasury
bonds, bills, notes, certificates of indebtedness and similar instruments.
 (c) All borrowings of banks, non-bank financial intermediaries, finance companies,
investment companies, trust companies, including the trust department of banks and
investment houses, evidenced by deposit substitutes instruments. (Emphasis supplied)

The definition of deposit substitutes was amended under the 1997 National Internal Revenue
Code with the addition of the qualifying phrase for puic – borrowing from 20 or more individual or
corporate lenders at any one time. Under Section 22(Y), deposit substitute is defined thus: SEC.
22. Definitions- When used in this Title:

....

(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the
puic(the term 'puic' means borrowing from twenty (20) or more individual or corporate lenders at
any one time) other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower’s own account, for the purpose of relending or purchasing of
receivaes and other oigations, or financing their own needs or the needs of their agent or dealer.
These instruments may include, but need not be limited to, bankers’ acceptances, promissory
notes, repurchase agreements, including reverse repurchase agreements entered into by and
between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of
assignment or participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5) days to cover
deficiency in reserves against deposit liabilities, including those between or among banks and
quasi-banks, shall not be considered as deposit substitute debt instruments. (Emphasis supplied)

Under the 1997 National Internal Revenue Code, Congress specifically defined "puic" to mean
"twenty (20) or more individual or corporate lenders at any one time." Hence, the number of
lenders is determinative of whether a debt instrument should be considered a deposit substitute
and consequently subject to the 20% final withholding tax.

20-lender rule

Petitioners contend that "there isonly one (1) lender (i.e. RCBC) to whom the BTr issued the
Government Bonds."169 On the other hand, respondents theorize that the word "any" "indicates
that the period contemplated is the entire term of the bond and not merely the point of origination
or issuance,"170 such that if the debt instruments "were subsequently sold in secondary markets
and so on, insuch a way that twenty (20) or more buyers eventually own the instruments, then it
becomes indubitae that funds would be obtained from the "puic" as defined in Section 22(Y) of
the NIRC."171 Indeed, in the context of the financial market, the words "at any one time" create an
ambiguity.

Financial markets

Financial markets provide the channel through which funds from the surplus units (households
and business firms that have savings or excess funds) flow to the deficit units (mainly business
firms and government that need funds to finance their operations or growth). They bring suppliers
and users of funds together and provide the means by which the lenders transform their funds
into financial assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and bonds. Fund
suppliers earn a return on their investment; the return is necessary to ensure that funds are
supplied to the financial markets.172
"The financial markets that facilitate the transfer of debt securities are commonly classified by the
maturity of the securities,"173 namely: (1) the money market, which facilitates the flow of short-
term funds (with maturities of one year or less); and (2) the capital market, which facilitates the
flow of long-term funds (with maturities of more than one year).174

Whether referring to money marketsecurities or capital market securities, transactions occur

either in the primary market or in the secondary market.175 "Primary markets facilitate the issuance
of new securities. Secondary markets facilitate the trading of existing securities, which allows for
a change in the ownership of the securities."176 The transactions in primary markets exist between
issuers and investors, while secondary market transactions exist among investors.177

"Over time, the system of financial markets has evolved from simple to more complex ways of
carrying out financial transactions."178 Still, all systems perform one basic function: the quick
mobilization of money from the lenders/investors to the borrowers.179

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3)
indirect finance.180

With direct financing, the "borrower and lender meet each other and exchange funds in returnfor
financial assets"181(e.g., purchasing bonds directly from the company issuing them). This method
provides certain limitations such as: (a) "both borrower and lender must desire to exchange the
same amount of funds at the same time";182 and (b) "both lender and borrower must frequently
incur substantial information costs simply to find each other."183

In semidirect financing, a securities broker or dealer brings surplus and deficit units together,
thereby reducing information costs.184 A Broker185 is "an individual or financial institution who
provides information concerning possie purchases and sales of securities. Either a buyer or a
seller of securities may contact a broker, whose job is simply to bring buyers and sellers
together."186 A dealer187 "also serves as a middleman between buyers and sellers, but the dealer
actually acquires the seller’s securities in the hope of selling them at a later time at a more favorae
price."188 Frequently, "a dealer will split up a large issue of primary securities into smaller units
affordae by . . . buyers . . . and thereby expand the flow of savings into investment."189 In semi
direct financing, "the ultimate lender still winds up holding the borrower’s securities, and therefore
the lender must be willing to accept the risk, liquidity, and maturity characteristics of the borrower’s
debt security. There still must be a fundamental coincidence of wants and needs between lenders
and borrowers for semidirect financial transactions to take place."190

"The limitations of both direct and semidirect finance stimulated the development of indirect
financial transactions, carried out with the help of financial intermediaries"191 or financial
institutions, like banks, investment banks, finance companies, insurance companies, and mutual
funds.192 Financial intermediaries accept funds from surplus units and channel the funds to deficit
units.193 "Depository institutions such as banks accept deposits from surplus units and provide
credit to deficit units through loans and purchase of debt securities."194 Nondepository institutions,
like mutual funds, issue securities of their own (usually in smaller and affordae denominations) to
surplus units and at the same time purchase debt securities of deficit units.195 "By pooling the
resources ofsmall savers, a financial intermediary can service the credit needs of large firms
simultaneously."196
The financial market, therefore, is an agglomeration of financial transactions in securities
performed by market participants that works to transfer the funds from the surplus units (or
investors/lenders) to those who need them (deficit units or borrowers).

Meaning of "at any one time"

Thus, from the point of view of the financial market, the phrase "at any one time" for purposes of
determining the "20 or more lenders" would mean every transaction executed in the primary or
secondary market in connection with the purchase or sale of securities.

For example, where the financial assets involved are government securities like bonds, the
reckoning of "20 or more lenders/investors" is made at any transaction in connection with the
purchase or sale of the Government Bonds, such as:

1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;

2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;

3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary

market usually through a broker or dealer; or

4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to

individual or corporate lenders in the secondary market.

When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or
more lenders/investors, there is deemed to be a puic borrowing and the bonds at that point intime
are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final
withholding tax on the imputed interest income from the bonds.

For debt instruments that are not deposit substitutes, regular income tax applies

It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes
under the 1997 National Internal Revenue Code are subject to the regular income tax.

The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross
Income, Section 32(A) of the 1997 National Internal Revenue Code discloses a legislative policy
to include all income not expressly exempted as within the class of taxae income under our laws.

"The definition of gross income isbroad enough to include all passive incomes subject to specific
tax rates or final taxes."197 Hence, interest income from deposit substitutes are necessarily part
of taxae income. "However, since these passive incomes are already subject to different rates
and taxed finally at source, they are no longer included in the computation of gross income, which
determines taxae income."198 "Stated otherwise . . . if there were no withholding tax system in
place in this country, this 20 percent portion of the ‘passive’ income of creditors/lenders would
actually be paid to the creditors/lenders and then remitted by them to the government in payment
of their income tax."199

This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,200 explained
the rationale behind the withholding tax system:
The withholding of tax at source was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probae income tax liability; second, to ensure the
collection of income tax which can otherwise be lost or substantially reduced through failure to file
the corresponding returns; and third, to improve the government’s cash flow. This results in
administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated means and
remedies.201 (Citations omitted)

"The application of the withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source."202

Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the
seller isrequired to withhold the 20% final income tax on the imputed interest income from the
bonds.

Interest income v. gains from sale or redemption

The interest income earned from bonds is not synonymous with the "gains" contemplated under
Section 32(B)(7)(g)203 of the 1997 National Internal Revenue Code, which exempts gains derived
from trading, redemption, or retirement of long-term securities from ordinary income tax.

The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents
forbearance for the use of money. Gains from sale or exchange or retirement of bonds orother
certificate of indebtedness fall within the general category of "gainsderived from dealings in
property" under Section 32(A)(3), while interest from bonds or other certificate of indebtedness
falls within the category of "interests" under Section 32(A)(4).204 The use of the term "gains from
sale" in Section 32(B)(7)(g) shows the intent of Congress not toinclude interest as referred under
Sections 24, 25, 27, and 28 in the exemption.205

Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading
of the bonds before their maturity date, which is the difference between the selling price of the
bonds in the secondary market and the price at which the bonds were purchased by the seller;
and (2) gain realized by the last holder of the bonds when the bonds are redeemed at maturity,
which is the difference between the proceeds from the retirement of the bonds and the price
atwhich such last holder acquired the bonds. For discounted instruments,like the zero-coupon
bonds, the trading gain shall be the excess of the selling price over the book value or accreted
value (original issue price plus accumulated discount from the time of purchase up to the time of
sale) of the instruments.206

The Bureau of Internal Revenue rulings

The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is
not consistent with law.207 Its interpretation of "at any one time" to mean at the point of origination
alone is unduly restrictive.

BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005
BIR Rulings) that "all treasury bonds . . . regardlessof the number of purchasers/lenders at the
time of origination/issuance are considered deposit substitutes."208 Being the subject of this
petition, it is, thus, declared void because it completely disregarded the 20 or more lender rule
added by Congress in the 1997 National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private corporations when there was
none in the law.

Tax statutes must be reasonay construed as to give effect to the whole act. Their constituent
provisions must be read together, endeavoring to make every part effective, harmonious, and
sensie.209 That construction which will leave every word operative will be favored over one that
leaves some word, clause, or sentence meaningless and insignificant.210

It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of
executing the 1997 National Internal Revenue Code is an authoritative construction ofgreat
weight, but the principle is not absolute and may be overcome by strong reasons to the contrary.
If through a misapprehension of law an officer has issued an erroneous interpretation, the error
must be corrected when the true construction is ascertained.

In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld

the nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting
Commissioner of Internal Revenue because it was contrary to the express provision of Section
230 of the 1977 National Internal Revenue Codeand, hence, "cannot be given weight for to do so
would, in effect, amend the statute."212 Thus:

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive
period of two years to ten years on claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR
did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by
Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in
the sense of more specific and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the law they seek to apply and
implement.213(Citations omitted)

This court further held that "a memorandum-circular of a bureau head could not operate to vest a
taxpayer with a shield against judicial action because there are no vested rights to speak of
respecting a wrong construction of the law by the administrative officials and such wrong
interpretation could not place the Government in estoppel to correct or overrule the same."214 In
Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215 this court nullified
Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5%
lending investor's tax on pawnshops.216 It was held that "the Commissioner cannot, in the exercise
of its interpretative power, issue administrative rulings or circulars not consistent with the law
sought to be applied. Indeed, administrative issuances must not override, supplant or modify the
law, but must remain consistent with the law they intend to carry out. Only Congress can repeal
or amend the law."217

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,218 this
court stated that the Commissioner of Internal Revenue is not bound by the ruling of his
predecessors,219 but, to the contrary, the overruling of decisions is inherent in the interpretation
of laws:

In considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within
the delegated authority of the administrative agency; (ii) whether itis reasonae; and (iii) whether it
was issued pursuant to proper procedure. But the court is not free to substitute its judgment as to
the desirability or wisdom of the rule for the legislative body, by its delegation of administrative
judgment, has committed those questions to administrative judgments and not to judicial
judgments. In the case of an interpretative rule, the inquiry is not into the validity but into the
correctness or propriety of the rule. As a matter of power a court, when confronted with an
interpretative rule, is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and
substitute its judgment; or (iii) give some intermediate degree of authoritative weight to the
interpretative rule.

In the case at bar, we find no reason for holding that respondent Commissioner erred in not
considering copra as an "agricultural food product" within the meaning of § 103(b) of the NIRC.
As the Solicitor General contends, "copra per se is not food, that is, it is not intended for human
consumption. Simply stated, nobody eats copra for food." That previous Commissioners
considered it so, is not reason for holding that the present interpretation is wrong. The
Commissioner of Internal Revenue is not bound by the ruling of his predecessors. To the contrary,
the overruling of decisions is inherent in the interpretation of laws.220 (Emphasis supplied, citations
omitted)

Tax treatment of income derived from the PEACe Bonds

The transactions executed for the sale of the PEACe Bonds are:

1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO

at 10.2 billion; and

2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the
PEACe Bonds to undisclosed investors at ₱11.996 billion.

It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the
PEACe Bonds were issued at the time of origination. However, a reading of the underwriting
agreement221 and RCBC term sheet222reveals that the settlement dates for the sale and
distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe Bonds to various
undisclosed investors at a purchase price of approximately ₱11.996 would fall on the same day,
October 18, 2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In
reality, therefore, the entire ₱10.2 billion borrowing received by the Bureau of Treasury in
exchange for the ₱35 billion worth of PEACe Bonds was sourced directly from the undisclosed
number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at
the time of origination or issuance. At this point, however, we do not know as to how many
investors the PEACe Bonds were sold to by RCBC Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds
are deemed deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal
Revenue Code and RCBC Capital/CODE-NGO would have been oiged to pay the 20% final
withholding tax on the interest or discount from the PEACe Bonds. Further, the oigation to withhold
the 20% final tax on the corresponding interest from the PEACe Bonds would likewise be required
of any lender/investor had the latter turnedaround and sold said PEACe Bonds, whether in whole
or part, simultaneously to 20 or more lenders or investors.

We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest
income received by individuals from longterm deposits or investments with a holding period of not
less than five (5) years is exempt from the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the
proper procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to
the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding tax
directly from RCBC Capital/CODE-NGO, orany lender or investor if such be the case, as the
withholding agents.

The collection of tax is not barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue
Code to assess and collect internal revenue taxes is extended to 10 years in cases of (1)
fraudulent returns; (2) false returns with intent to evade tax; and (3) failureto file a return, to be
computed from the time of discovery of the falsity, fraud, or omission. Section 203 states:

SEC. 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. (Emphasis
supplied)

....

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

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of such tax may be filed
without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which 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.

Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more
lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from RCBC
Capital/CODE-NGO within 10 years after the discovery of the omission.

In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and
petitioners-intervenors.

Reiterative motion on the temporary restraining order

Respondents’ withholding of the 20% final withholding tax on October 18, 2011 was justified

Under the Rules of Court, court orders are required to be "served upon the parties
affected."224 Moreover, service may be made personally or by mail.225 And, "personal service is
complete upon actual delivery of the order."226This court’s temporary restraining order was
received only on October 19, 2011, or a day after the PEACe Bonds had matured and the 20%
final withholding tax on the interest income from the same was withheld.

Puication of news reports in the print and broadcast media, as well as on the internet, is not a
recognized mode of service of pleadings, court orders, or processes. Moreover, the news
reports227 cited by petitioners were posted minutes before the close of office hours or late in the
evening of October 18, 2011, and they did not givethe exact contents of the temporary restraining
order.

"One cannot be punished for violating an injunction or an order for an injunction unless it is shown
that suchinjunction or order was served on him personally or that he had notice of the issuance
or making of such injunction or order."228

At any rate, "in case of doubt, a withholding agent may always protect himself or herself by
withholding the tax due"229 and return the amount of the tax withheld should it be finally determined
that the income paid is not subject to withholding.230 Hence, respondent Bureau of Treasury was
justified in withholding the amount corresponding to the 20% final withholding tax from the
proceeds of the PEACe Bonds, as it received this court’s temporary restraining order only on
October 19, 2011, or the day after this tax had been withheld.

Respondents’ retention of the amounts withheld is a defiance of the temporary restraining

order

Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding

to the 20% final withholding tax in order that it may be placed in escrow as directed by this court
constitutes a defiance of this court’s temporary restraining order.231

The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli.
For an act to be considered fait accompli, the act must have already been fully accomplished and
consummated.232 It must be irreversie, e.g., demolition of properties,233 service of the penalty of
imprisonment,234 and hearings on cases.235When the act sought to be enjoined has not yet been
fully satisfied, and/or is still continuing in nature,236 the defense of fait accomplicannot prosper.

The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that
constitutes both the withholding and remittance of the 20% final withholding tax to the Bureau of
Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final
withholding tax237 when it received the temporary restraining order, it had yet to remit the monies
it withheld to the Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.238 The act enjoined by the temporary restraining order had not yet been fully satisfied and
was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national
government agencies such as the Bureau of Treasury the procedure for the remittance of all taxes
it withheld to the Bureau of Internal Revenue, a national agency shall file before the Bureau of
Internal Revenue a Tax Remittance Advice (TRA) supported by withholding tax returns on or
before the 10th day of the following month after the said taxes had been withheld.240 The Bureau
of Internal Revenue shall transmit an original copy of the TRA to the Bureau of Treasury,241which
shall be the basis for recording the remittance of the tax collection.242 The Bureau of Internal
Revenue will then record the amount of taxes reflected in the TRA as tax collection in the Journal
ofTax Remittance by government agencies based on its copies of the TRA.243 Respondents did
not submit any withholding tax return or TRA to provethat the 20% final withholding tax was indeed
remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.

Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated October 18,
2011 submitted to this court shows:

Account Debit Amount Credit

Code Amount

Bonds Payae-L/T, Dom-Zero 442-360 35,000,000,000.00

Coupon T/Bonds

(Peace Bonds) – 10 yr

Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59

Due to BIR 412-002 4,966,207,796.41

To record redemption of 10yr Zero

coupon (Peace Bond) net of the 20%
final
withholding tax pursuant to BIR Ruling
No.
378-2011, value date, October 18, 2011
per
BTr letter authority and BSP Bank
Statements.

The foregoing journal entry, however, does not prove that the amount of ₱4,966,207,796.41,
representing the 20% final withholding tax on the PEACe Bonds, was disbursed by it and remitted
to the Bureau of Internal Revenue on October 18, 2011. The entries merely show that the monies
corresponding to 20% final withholding tax was set aside for remittance to the Bureau of Internal
Revenue.

We recall the November 15, 2011 resolution issued by this court directing respondents to "show
cause why they failed to comply with the TRO; and to comply with the TRO in order that petitioners
may place the corresponding funds in escrow pending resolution of the petition."245 The 20% final
withholding tax was effectively placed in custodia legiswhen this court ordered the deposit of the
amount in escrow. The Bureau of Treasury could still release the money withheld to petitioners
for the latter to place in escrow pursuant to this court’s directive. There was no legal obstacle to
the release of the 20% final withholding tax to petitioners. Congressional appropriation is not
required for the servicing of puic debts in view of the automatic appropriations clause embodied
in Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:

Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums,
government service insurance, and other similar fixed expenditures, (b) principal and interest on
puic debt, (c) national government guarantees of oigations which are drawn upon, are
automatically appropriated: provided, that no oigations shall be incurred or payments made from
funds thus automatically appropriated except as issued in the form of regular budgetary
allotments.

Section 1 of Presidential Decree No. 1967 states:

Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise
appropriated, such amounts as may be necessary to effect payments on foreign or domestic
loans, or foreign or domestic loans whereon creditors make a call on the direct and indirect
guarantee of the Repuic of the Philippines, obtained by:

a. the Repuic of the Philippines the proceeds of which were relent to government-owned
or controlled corporations and/or government financial institutions;

b. government-owned or controlled corporations and/or government financial institutions

the proceeds of which were relent to puic or private institutions;

c. government-owned or controlled corporations and/or financial institutions and

guaranteed by the Repuic of the Philippines;

d. other puic or private institutions and guaranteed by government owned or controlled

corporations and/or government financial institutions.

The amount of ₱35 billion that includes the monies corresponding to 20% final withholding tax is
a lawfuland valid oigation of the Repuic under the Government Bonds. Since said oigation
represents a puic debt, the release of the monies requires no legislative appropriation.

Section 2 of Repuic Act No. 245 likewise provides that the money to be used for the payment of
Government Bonds may be lawfully taken from the continuing appropriation out of any monies in
the National Treasury and is not required to be the subject of another appropriation legislation:
SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in the National
Treasury not otherwise appropriated, or from any sinking funds provided for the purpose by law,
any interest falling due, or accruing, on any portion of the puic debt authorized by law. He shall
also cause to be paid out of any such money, or from any such sinking funds the principal amount
of any oigations which have matured, or which have been called for redemption or for which
redemption has been demanded in accordance with terms prescribed by him prior to date of issue.
. . In the case of interest-bearing oigations, he shall pay not less than their face value; in the case
of oigations issued at a discount he shall pay the face value at maturity; or if redeemed prior to
maturity, such portion of the face value as is prescribed by the terms and conditions under which
such oigations were originally issued. There are hereby appropriated as a continuing
appropriation out of any moneys in the National Treasury not otherwise appropriated, such sums
as may be necessary from time to time to carry out the provisions of this section. The Secretary
of Finance shall transmit to Congress during the first month of each regular session a detailed
statement of all expenditures made under this section during the calendar year immediately
preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills
and bonds shall be made through the National Treasury’s account with the Bangko Sentral ng
Pilipinas, to wit:

Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains a Demand
Deposit Account with the Bangko Sentral ng Pilipinas to which all proceeds from the sale of
Treasury Bills and Bonds under R.A. No. 245, as amended, shall be credited and all payments
for redemption of Treasury Bills and Bonds shall be charged.

Regarding these legislative enactments ordaining an automatic appropriations provision for debt
servicing, this court has held:

Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the
exercise of its own judgment and wisdom formulates an appropriation act precisely following the
process estaished by the Constitution, which specifies that no money may be paid from the
Treasury except in accordance with an appropriation made by law.

Debt service is not included inthe General Appropriation Act, since authorization therefor already
exists under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light of this
subsisting authorization as embodied in said Repuic Acts and PD for debt service, Congress does
not concern itself with details for implementation by the Executive, butlargely with annual levels
and approval thereof upon due deliberations as part of the whole oigation program for the year.
Upon such approval, Congress has spoken and cannot be said to havedelegated its wisdom to
the Executive, on whose part lies the implementation or execution of the legislative
wisdom.246 (Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by
this court, which remained in full force and effect, until set aside, vacated, or modified. Its conduct
finds no justification and is reprehensie.247

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling
Nos. 370-2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the
amount corresponding to the 20% final withholding tax despite this court's directive in the
temporary restraining order and in the resolution dated November 15, 2011 to deliver the amounts
to the banks to be placed in escrow pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay to the
bondholders the amount corresponding-to the 20% final withholding tax that it withheld on October
18, 2011.
G.R. No. 182582 *

METROPOLITAN BANK & TRUST COMPANY, Petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari 1 is the Decision 2 dated April 21, 2008 of the Court
of Tax Appeals (CTA) En Banc in C.T.A. EB No. 340, which affirmed the Decision3 dated August
13, 2007 and the Resolution4 dated November 14, 2007 of the CTA First Division (CTA Division)
in CTA Case No. 6765, and consequently, dismissed petitioner Metropolitan Bank & Trust
Company's (Metrobank) claim for refund on the ground of prescription.

The Facts

On June 5, 1997, Solidbank Corporation (Solidbank) entered into an agreement with Luzon Hydro
Corporation (LHC), whereby the former extended to the latter a foreign currency denominated
loan in the principal amount of US$123,780,000.00 (Agreement). Pursuant to the Agreement,
LHC is bound to shoulder all the corresponding internal revenue taxes required by law to be
deducted or withheld on the said loan, as well as the filing of tax returns and remittance of the
taxes withheld to the Bureau of Internal Revenue (BIR). On September 1, 2000, Metrobank
acquired Solidbank, and consequently, assumed the latter's rights and oigations under the
aforesaid Agreement. 5

On March 2, 2001 and October 31, 2001, LHC paid Metro bank the total amounts of
US$1,538,122.17
6
and US$1,333,268.31, 7 respectively. Pursuant to the Agreement, LHC withheld, and eventually
paid to the BIR, the ten percent (10%) final tax on the interest portions of the aforesaid payments,
on the same months that the respective payments were made to petitioner. In sum, LHC remitted
a total ofUS$106,178.69,8 or its Philippine Peso equivalent of ₱5,296,773.05,9 as evidenced by
LHC's Schedules of Final Tax and Monthly Remittance Returns for the said months. 10

According to Metrobank, it mistakenly remitted the aforesaid amounts to the BIR as well when
they were inadvertently included in its own Monthly Remittance Returns of Final Income Taxes
Withheld for the months of March 2001 and October 2001. Thus, on December 27, 2002, it filed
a letter to the BIR requesting for the refund thereof. Thereafter and in view of respondent the
Commissioner of Internal Revenue's (CIR) inaction, Metrobank filed its judicial claim for refund
via a petition for review filed before the CTA on September 10, 2003, docketed as CTA Case No.
6765. 11

In defense, the CIR averred that: (a) the claim for refund is subject to administrative investigation;
(b) Metro bank must prove that there was doue payment of the tax sought to be refunded; (c) such
claim must be filed within the prescriptive period laid down by law; (d) the burden of proof to
estaish the right to a refund is on the taxpayer; and (e) claims for tax refunds are in the nature of
tax exemptions, and as such, should be construed strictissimi Juris against the taxpayer. 12
The CTA Division Ruling

In a Decision 13 dated August 13, 2007, the CTA Division denied Metrobank's claims for refund
for lack of merit. 14 It ruled that Metrobank's claim relative to the March 2001 final tax was filed
beyond the two (2)-year prescriptive period. It pointed out that since Metrobank remitted such
payment on April 25, 2001, the latter only had until April 25, 2003 to file its administrative and
judicial claim for refunds. In this regard, while Metro bank filed its administrative claim well within
the afore said period, or on December 27, 2002, the judicial claim was filed only on September
10, 2003. Hence, the right to claim for such refund has prescribed. 15 On the other hand, the CTA
Division also denied Metrobank's claim for refund relative to the October 2001 tax payment for
insufficiency of evidence. 16

Metrobank moved for reconsideration, 17 which was partially granted in a Resolution18 dated
November 14, 2007, and thus, was allowed to present further evidence regarding its claim for
refund for the October 2001 final tax. However, the CTA Division affirmed the denial of the claim
relative to its March 2001 final tax on the ground of prescription. 19 Aggrieved, Metrobank filed a
petition for partial review20 before the CTA En Banc, docketed as C.T.A. EB No. 340.

The CTA En Banc Ruling

In a Decision21 dated April 21, 2008, the CTA En Banc affirmed the CTA Division's ruling. It held
that since Metrobank's March 2001 final tax is in the nature of a final withholding tax, the two (2)-
year prescriptive period was correctly reckoned by the CTA Division from the time the same was
paid on April 25, 2001. As such, Metro bank's claim for refund had already prescribed as it only
filed its judicial claim on September 10, 2003. 22

Hence, this petition.

The Issue Before the Court

The issue for the Court's resolution is whether or not the CTA En Banc correctly held that
Metrobank's claim for refund relative to its March 2001 final tax had already prescribed.

The Court's Ruling

The petition is without merit.

Section 204 of the National Internal Revenue Code, as amended, 23 provides the CIR with, inter
alia, the authority to grant tax refunds. Pertinent portions of which read:

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

xxxx

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

In this relation, Section 229 of the same Code provides for the proper procedure in order to claim
for such refunds, to wit:

Section 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without a
written claim therefor, refund or credit any tax, where on the face of the return upon which payment
was made, such payment appears clearly to have been erroneously paid. (Emphases and
underscoring supplied)

As may be gleaned from the foregoing provisions, a claimant for refund must first file an
administrative claim for refund before the CIR, prior to filing a judicial claim before the CTA. Notay,
both the administrative and judicial claims for refund should be filed within the two (2)-year
prescriptive period indicated therein, and that the claimant is allowed to file the latter even without
waiting for the resolution of the former in order to prevent the forfeiture of its claim through
prescription. In this regard, case law states that "the primary purpose of filing an administrative
claim is to serve as a notice of warning to the CIR that court action would follow unless the tax or
penalty alleged to have been collected erroneously or illegally is refunded. To clarify, Section 229
of the Tax Code - then Section 306 of the old Tax Code - however does not mean that the taxpayer
must await the final resolution of its administrative claim for refund, since doing so would be
tantamount to the taxpayer's forfeiture of its right to seek judicial recourse should the two (2)-year
prescriptive period expire without the appropriate judicial claim being filed."24

In this case, Metrobank insists that the filing of its administrative and judicial claims on December
27, 2002 and September 10, 2003, respectively, were well-within the two (2)-year prescriptive
period. Citing ACCRA Investments Corporation v. Court of Appeals,25 CIR v. TMX Sales,
Inc.,26 CIR v. Philippine American Life Insurance, Co., 27 and CIR v. CDCP Mining
Corporation, 28 Metrobank contends that the aforesaid prescriptive period should be reckoned not
from April 25, 2001 when it remitted the tax to the BIR, but rather, from the time it filed its Final
Adjustment Return or Annual Income Tax Return for the taxae year of 2001, or in April 2002, as
it was only at that time when its right to a refund was ascertained. 29

Metrobank's contention cannot be sustained.

As correctly pointed out by the CIR, the cases cited by Metrobank involved corporate income
taxes, in which the corporate taxpayer is required to file and pay income tax on a quarterly basis,
with such payments being subject to an adjustment at the end of the taxae year. As aptly put
in CIR v.TMX Sales, Inc., "payment of quarterly income tax should only be considered as mere
installments of the annual tax due. These quarterly tax payments which are computed based on
the cumulative figures of gross receipts and deductions in order to arrive at a net taxae income,
should be treated as advances or portions of the annual income tax due, to be adjusted at the
end of the calendar or fiscal year. x x x Consequently, the two-year prescriptive period x x x should
be computed from the time of filing of the Adjustment Return or Annual Income Tax Return and
final payment of income tax."30 Verily, since quarterly income tax payments are treated as mere
"advance payments" of the annual corporate income tax, there may arise certain situations where
such "advance payments" would cover more than said corporate taxpayer's entire income tax
liability for a specific taxae year. Thus, it is only logical to reckon the two (2)-year prescriptive
period from the time the Final Adjustment Return or the Annual Income Tax Return was filed,
since it is only at that time that it would be possie to determine whether the corporate taxpayer
had paid an amount exceeding its annual income tax liability.

On the other hand, the tax involved in this case is a ten percent (10%) final withholding tax on
Metrobank's interest income on its foreign currency denominated loan extended to LHC. In this
regard, Section 2.57 (A) of Revenue Regulations No. 02-9831 explains the characterization of
taxes of this nature, to wit:

Section 2.57. Withholding of Tax at Source

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

The finality of the withholding tax is limited only to the payee's income tax liability on the particular
income. It does not extend to the payee's other tax liability on said income, such as when the said
income is further subject to a percentage tax. For example, if a bank receives income subject to
final withholding tax, the same shall be subject to a percentage tax. (Emphasis and underscoring
supplied)

From the foregoing, it may be gleaned that final withholding taxes are considered as full and final
payment of the income tax due, and thus, are not subject to any adjustments. Thus, the two (2)-
year prescriptive period commences to run from the time the refund is ascertained, i.e., the date
such tax was paid, and not upon the discovery by the taxpayer of the erroneous or excessive
payment of taxes. 32

In the case at bar, it is undisputed that Metrobank's final withholding tax liability in March 2001
was remitted to the BIR on April 25, 2001. As such, it only had until April 25, 2003 to file its
administrative and judicial claims for refund. However, while Metrobank's administrative claim was
filed on December 27, 2002, its corresponding judicial claim was only filed on September 10,
2003. Therefore, Metrobank's claim for refund had clearly prescribed.

Finally, the Court finds untenae Metrobank's resort to the principle of solutio indebiti in support of
its position. 33 In CIR v. Manila Electric Company, 34 the Court rejected the application of said
principle to tax refund cases, viz.:
In this regard, petitioner is misguided when it relied upon the six (6)-year prescriptive period for
initiating an action on the ground of quasi contract or solutio indebiti under Article 1145 of the New
Civil Code. There is solutio indebiti where: (1) payment is made when there exists no binding
relation between the payor, who has no duty to pay, and the person who received the payment;
and (2) the payment is made through mistake, and not through liberality or some other
cause. Here, there is· a binding relation between petitioner as the taxing authority in this
jurisdiction and respondent MERALCO which is bound under the law to act as a
withholding agent of NORD/LB Singapore Branch, the taxpayer. Hence, the first element
of solutio indebiti is lacking. Moreover, such legal precept is inapplicae to the present case
since the Tax Code, a special law, explicitly provides for a mandatory period for claiming
a refund for taxes erroneously paid.

Tax refunds are based on the general premise that taxes have either been erroneously or
excessively paid. Though the Tax Code recognizes the right of taxpayers to request the return of
such excess/erroneous payments from the government, they must do so within a prescribed
period. Further, "a taxpayer must prove not only his entitlement to a refund, but also his
compliance with the procedural due process as nonobservance of the prescriptive periods within
which to file the administrative and the judicial claims would result in the denial of his
claim."35 (Emphasis and underscoring supplied)

In sum, the CT A Division and CT A En Banc correctly ruled that Metrobank's claim for refund in
connection with its final withholding tax incurred in March 2001 should be denied on the ground
of prescription.

WHEREFORE, the petition is DENIED. The Decision dated April 21, 2008 of the Court of Tax
Appeals En Banc in C.T.A. EB No. 340 is hereby AFFIRMED.

SO ORDERED.
G.R. No. 222743

MEDICARD PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

REYES,, J.:

This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated September
2, 2015 and Resolution3 dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in
CTA EB No. 1224, affirming with modification the Decision4 dated June 5, 2014 and the
Resolution5 dated September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering
petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal
Revenue (CIR) the deficiency

Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20%
interest per annum starting January 25, 2007, until fully paid, pursuant to Section 249(c)6 of the
National Internal Revenue Code (NIRC) of 1997.

The Facts

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and
medical insurance coverage to its clients. Individuals enrolled in its health care programs pay an
annual membership fee and are entitled to various preventive, diagnostic and curative medical
services provided by duly licensed physicians, specialists and other professional technical staff
participating in the group practice health delivery system at a hospital or clinic owned, operated
or accredited by it.7

MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and
Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively,
and its Fourth Quarterly VAT Return on January 25, 2007.8

Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT
Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020
dated

September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN)
against MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise
issued recommending the issuance of a Formal Assessment Notice (FAN) against
MEDICARD.9 On. January 4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007
for alleged deficiency VAT for taxae year 2006 in the total amount of Pl 96,614,476.69,10 inclusive
of penalties. 11

According to the CIR, the taxae base of HMOs for VAT purposes is its gross receipts without any
deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005.
Citing Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR
argued that since MEDICARD. does not actually provide medical and/or hospital services, but
merely arranges for the same, its services are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to arranging for the
provision of medical and/or hospital services by hospitals and/or clinics but include actual and
direct rendition of medical and laboratory services; in fact, its 2006 audited balance sheet shows
that it owns x-ray and laboratory facilities which it used in providing medical and laboratory
services to its members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million was received
from clients that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau
of Investments; (3) the processing fees amounting to ₱l 1.5 Million should be excluded from gross
receipts because P5.6 Million of which represent advances for professional fees due from clients
which were paid by MEDICARD while the remainder was already previously subjected to VAT;
(4) the professional fees in the amount of Pl 1 Million should also be excluded because it
represents the amount of medical services actually and directly rendered by MEDICARD and/or
its subsidiary company; and (5) even assuming that it is liae to pay for the VAT, the 12% VAT rate
should not be applied on the entire amount but only for the period when the 12% VAT rate was
already in effect, i.e., on February 1, 2006. It should not also be held liae for surcharge and
deficiency interest because it did not pass on the VAT to its members.14

On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer
Romualdo Plocios to verify the supporting documents of MEDICARD's Protest. MEDICARD also
submitted additional supporting documentary evidence in aid of its Protest thru a letter dated
March 18, 2008.15

On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated
May 15, 2009, denying MEDICARD's protest, to wit:

IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment of
deficiency VAT in total sum of ₱196,614,476.99. It is requested that you pay said deficiency taxes
immediately. Should payment be made later, adjustment has to be made to impose interest until
date of payment. This is olir final decision. If you disagree, you may take an appeal to the CTA
within the period provided by law, otherwise, said assessment shall become final, executory and
demandae. 16

On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating
its position before the tax authorities. 17

On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications the CIR's
deficiency VAT assessment covering taxae year 2006, viz.:

WHEREFORE, premises considered, the deficiency VAT assessment issued by CIR against
MEDICARD covering taxae year 2006 ·is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, MEDICARD is ordered to pay CIR the amount of P223,l
73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under -Section 248(A)(3)
of the NIRC of 1997, as amended, computed as follows:

Basic Deficiency VAT ₱l78,538,566.68

Add: 25% Surcharge 44,634,641.67

Total ₱223.173.208.35
In addition, MEDICARD is ordered to pay:

a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis
deficiency VAT of Pl 78,538,566.68 computed from January 25, 2007 until full payment
thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and

b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount
of ₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68 and· 25%
surcharge of ₱44,634,64 l .67 and on the 20% deficiency interest which have accrued as
afore-stated in (a), computed from June 19, 2009 until full payment thereof pursuant to
Section 249(C) of the NIRC of 1997.

SO ORDERED.19

The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance
of Letter of Authority (LOA) alone as the CIR is granted vast powers to perform examination and
assessment functions; (2) in lieu of an LOA, an LN was issued to MEDICARD informing it· of the
discrepancies between its ITRs and VAT Returns and this procedure is authorized under Revenue
Memorandum Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from
questioning the validity of the assessment on the ground of lack of LOA since the assessment
issued against MEDICARD contained the requisite legal and factual bases that put MEDICARD
on notice of the deficiencies and it in fact availed of the remedies provided by law without
questioning the nullity of the assessment; (4) the amounts that MEDICARD earmarked , and
eventually paid to doctors, hospitals and clinics cannot be excluded from · the computation of its
gross receipts under the provisions of RR No. 4-2007 because the act of earmarking or allocation
is by itself an act of ownership and management over the funds by MEDICARD which is beyond
the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its clinics and laboratory
facilities cannot be excluded from its gross receipts because the operation of these clinics and
laboratory is merely an incident to MEDICARD's main line of business as HMO and there is no
evidence that MEDICARD segregated the amounts pertaining to this at the time it received the
premium from its members; and (6) MEDICARD was not ae to substantiate the amount pertaining
to its January 2006 income and therefore has no basis to impose a 10% VAT rate.20

Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD
elevated the matter to the CTA en banc.

In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only
insofar as the 10% VAT rate for January 2006 is concerned but sustained the findings of the CTA
Division in all other matters, thus:

WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, the Decision date June 5, 2014 is hereby MODIFIED, as follows:

"WHEREFORE, premises considered, the deficiency VAT assessment issued by CIR against

MEDICARD covering taxae year 2006 is hereby AFFIRMED WITH

MODIFICATIONS. Accordingly, MEDICARD is ordered to pay CIR the amount of
₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC
of 1997, as amended, computed as follows:
 Basic Deficiency VAT ₱76,187,687.58

Add: 25% Surcharge 44,046,921.90

Total ₱220,234.609.48

In addition, MEDICARD is ordered to pay:

(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l
76,187,687.58 computed from January 25, 2007 until full payment thereof pursuant to
Section 249(B) of the NIRC of 1997, as amended; and

(b) Delinquency interest at the rate of 20% per annum on the total amount of
₱220,234,609.48 (representing basic deficiency VAT of ₱l76,187,687.58 and 25%
surcharge of ₱44,046,921.90) and on the deficiency interest which have accrued as afore-
stated in (a), computed from June 19, 2009 until full payment thereof pursuant to Section
249(C) of the NIRC of 1997, as amended."

SO ORDERED.22

Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but
it was denied.23Hence, MEDICARD now seeks recourse to this Court via a petition for review
on certiorari.

The Issues

l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and

2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY

PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS
GROSS RECEIPTS FOR VAT PURPOSES.24

Ruling of the Court

The petition is meritorious.

The absence of an LOA violated

MEDICARD's right to due process

An LOA is the authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enaes said revenue officer to examine the books of account and other
accounting records of a taxpayer for the purpose of collecting the correct amount of tax. 25 An
LOA is premised on the fact that the examination of a taxpayer who has already filed his tax
returns is a power that statutorily belongs only to the CIR himself or his duly authorized
representatives. Section 6 of the NIRC clearly provides as follows:

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

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

x x x x (Emphasis and underlining ours)

Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by
his duly authorized representative, through an LOA, an examination of the taxpayer cannot
ordinarily be undertaken. The circumstances contemplated under Section 6 where the taxpayer
may be assessed through best-evidence obtainae, inventory-taking, or surveillance among others
has nothing to do with the LOA. These are simply methods of examining the taxpayer in order to
arrive at .the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly
authorized representatives, other tax agents may not validly conduct any of these kinds of
examinations without prior authority.

With the advances in information and communication technology, the Bureau of Internal Revenue
(BIR) promulgated RMO No. 30-2003 to lay down the policies and guidelines once its then
incipient centralized Data Warehouse (DW) becomes fully operational in conjunction with its
Reconciliation of Listing for Enforcement System (RELIEF System).26 This system can detect tax
leaks by matching the data availae under the BIR's Integrated Tax System (ITS) with data
gathered from third-party sources. Through the consolidation and cross-referencing of third-party
information, discrepancy reports on sales and purchases can be generated to uncover under
declared income and over claimed purchases of Goods and services.

Under this RMO, several offices of the BIR are tasked with specific functions relative to the
RELIEF System, particularly with regard to LNs. Thus, the Systems Operations Division (SOD)
under the Information Systems Group (ISG) is responsie for: (1) coming up with the List of
Taxpayers with discrepancies within the threshold amount set by management for the issuance
of LN and for the system-generated LNs; and (2) sending the same to the taxpayer and to the
Audit Information, Tax Exemption and Incentives Division (AITEID). After receiving the LNs, the
AITEID under the Assessment

Service (AS), in coordination with the concerned offices under the ISG, shall be responsie for
transmitting the LNs to the investigating offices Revenue District Office (RDO)/Large Taxpayers
District Office (LTDO)/Large Taxpayers Audit and Investigation Division (LTAID). At the level of
these investigating offices, the appropriate action on the LN s issued to taxpayers with RELIEF
data discrepancy would be determined.

RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-
audit approach" in the CIR's exercise of its ·power to authorize any examination of taxpayer arid
the assessment of the correct amount of tax. The no-contact-audit approach includes the process
of computerized matching of sales and purchases data contained in the Schedules of Sales and
Domestic Purchases and Schedule of Importation submitted by VAT taxpayers under the RELIEF
System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may
also include the matching of data from other information or returns filed by the taxpayers with the
BIR such as Alphalist of Payees subject to Final or Creditae Withholding Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's books and
records, if the computerized/manual matching of sales and purchases/expenses appears to
reveal discrepancies, the same shall be communicated to the concerned taxpayer through the
issuance of LN. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for
Informal Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue
officer may begin an examination of the taxpayer even prior to the issuance of an LN or even in
the absence of an LOA with the aid of a computerized/manual matching of taxpayers':
documents/records. Accordingly, under the RELIEF System, the presumption that the tax returns
are in accordance with law and are presumed correct since these are filed under the penalty of
perjury27 are easily rebutted and the taxpayer becomes instantly burdened to explain a purported
discrepancy.

Noticeay, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement
of an LOA before any investigation or examination of the taxpayer may be conducted. As provided
in the RMO No. 42-2003, the LN is merely similar to a Notice for Informal Conference. However,
for a Notice of Informal Conference, which generally precedes the issuance of an assessment
notice to be valid, the same presupposes that the revenue officer who issued the same is properly
authorized in the first place.

With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented
by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine tune existing procedures in
handing assessments against taxpayers'· issued LNs by reconciling various revenue issuances
which conflict with the NIRC. Among the objectives in the issuance of RMO No. 32-2005 is to
prescribe procedure in the resolution of LN discrepancies, conversion of LNs to LOAs and
assessment and collection of deficiency taxes.

IV. POLICIES AND GUIDELINES

xxxx

8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in
the LN, the concerned taxpayer will be given an opportunity to reconcile its records with those of
the BIR within

One Hundred and Twenty (120) days from the date of the issuance of the LN. However, the
subject taxpayer shall no longer be entitled to the abatement of interest and penalties after the
lapse of the sixty (60)-day period from the LN issuance.

9. In case the above discrepancies remained unresolved at the end of the One Hundred
and Twenty (120)-day period, the revenue officer (RO) assigned to handle the LN shall
recommend the issuance of LOA) to replace the LN. The head of the concerned investigating
office shall submit a summary list of LNs for conversion to LAs (using the herein prescribed format
in Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of the corresponding LAs with
the notation "This LA cancels LN_________ No. "

xxxx

V. PROCEDURES

xxxx
B. At the Regional Office/Large Taxpayers Service

xxxx

7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to
approval.

8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.

xxxx

Decision 11 G.R. No. 222743

xxxx

10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary
List of LNs for conversion to LAs, to the concerned investigating offices for the encoding of the
required information x x x and for service to the concerned taxpayers.

xxxx

C. At the RDO x x x

xxxx

11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from
issuance thereof, prepare a summary list of said LN s for conversion to LAs x x x.

xxxx

16. Effect the service of the above LAs to the concerned taxpayers.28

In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN
against MED ICARD. Therefore no LOA was also served on MEDICARD. The LN that was issued
earlier was also not converted into an LOA contrary to the above quoted provision. Surprisingly,
the CIR did not even dispute the applicability of the above provision of RMO 32-2005 in the
present case which is clear and unequivocal on the necessity of an LOA for the· assessment
proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due process warrant
the reversal of the assailed decision and resolution.

In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that:

Clearly, there must be a grant of authority before any revenue officer can conduct an examination
or assessment. Equally important is that the revenue officer so authorized must not go beyond
the authority given. In the absence of such an authority, the assessment or examination is
a nullity.30 (Emphasis and underlining ours)

The Court cannot convert the LN into the LOA required under the law even if the same was issued
by the CIR himself. Under RR No. 12-2002, LN is issued to a person found to have underreported
sales/receipts per data generated under the RELIEF system. Upon receipt of the LN, a taxpayer
may avail of the BIR's Voluntary Assessment and Abatement Program. If a taxpayer fails or
refuses to avail of the said program, the BIR may avail of administrative and criminal .remedies,
particularly closure, criminal action, or audit and investigation. Since the law specifically requires
an LOA and RMO No. 32-2005 requires the conversion of the previously issued LN to an LOA,
the absence thereof cannot be simply swept under the rug, as the CIR would have it. In fact
Revenue Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation
only for the purpose of disqualifying the taxpayer from amending his returns.

The following differences between an LOA and LN are crucial. First, an LOA addressed to a
revenue officer is specifically required under the NIRC before an examination of a taxpayer may
be had while an LN is not found in the NIRC and is only for the purpose of notifying the taxpayer
that a discrepancy is found based on the BIR's RELIEF System. Second, an LOA is valid only for
30 days from date of issue while an LN has no such limitation. Third, an LOA gives the revenue
officer only a period of 10days from receipt of LOA to conduct his examination of the taxpayer
whereas an LN does not contain such a limitation.31 Simply put, LN is entirely different and serves
a different purpose than an LOA. Due process demands, as recognized under RMO No. 32-2005,
that after an LN has serve its purpose, the revenue officer should have properly secured an LOA
before proceeding with the further examination and assessment of the petitioner. Unfortunarely,
this was not done in this case.

Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none
of the financial books or records being physically kept by MEDICARD was examined. To begin
with, Section 6 of the NIRC requires an authority from the CIR or from his duly authorized
representatives before an examination "of a taxpayer" may be made. The requirement of
authorization is therefore not dependent on whether the taxpayer may be required to physically
open his books and financial records but only on whether a taxpayer is being subject to
examination.

The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much
easier and faster. The ease by which the BIR's revenue generating objectives is achieved is no
excuse however for its non-compliance with the statutory requirement under Section 6 and with
its own administrative issuance. In fact, apart from being a statutory requirement, an LOA is
equally needed even under the BIR's RELIEF System because the rationale of requirement is the
same whether or not the CIR conducts a physical examination of the taxpayer's records: to
prevent undue harassment of a taxpayer and level the playing field between the government' s
vast resources for tax assessment, collection and enforcement, on one hand, and the solitary
taxpayer's dual need to prosecute its business while at the same time responding to the BIR
exercise of its statutory powers. The balance between these is achieved by ensuring that any
examination of the taxpayer by the BIR' s revenue officers is properly authorized in the first place
by those to whom the discretion to exercise the power of examination is given by the statute.

That the BIR officials herein were not shown to have acted unreasonay is beside the point
because the issue of their lack of authority was only brought up during the trial of the case. What
is crucial is whether the proceedings that led to the issuance of VAT deficiency assessment
against MEDICARD had the prior approval and authorization from the CIR or her duly authorized
representatives. Not having authority to examine MEDICARD in the first place, the assessment
issued by the CIR is inescapay void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially
finds merit in MEDICARD's substantive arguments.

The amounts earmarked and

eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes

MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A
Division that the gross receipts of an HMO for VAT purposes shall be the total amount of money
or its equivalent actually received from members undiminished by any amount paid or payae to
the owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD
explains that its business as an HMO involves two different although interrelated contracts. One
is between a corporate client and MEDICARD, with the corporate client's employees being
considered as MEDICARD members; and the other is between the health care
institutions/healthcare professionals and MED ICARD.

Under the first, MEDICARD undertakes to make arrangements with healthcare

institutions/healthcare professionals for the coverage of MEDICARD members under specific
health related services for a specified period of time in exchange for payment of a more or less
fixed membership fee. Under its contract with its corporate clients, MEDICARD expressly provides
that 20% of the membership fees per individual, regardless of the amount involved, already
includes the VAT of 10%/20% excluding the remaining 80o/o because MED ICARD would
earmark this latter portion for medical utilization of its members. Lastly, MEDICARD also assails
CIR's inclusion in its gross receipts of its earnings from medical services which it actually and
directly rendered to its members.

Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated
managed care services that are needed by plan holders/members for fixed prepaid membership
fees and for a specified period of time, then MEDICARD is principally engaged in the sale of
services. Its VAT base and corresponding liability is, thus, determined under Section 108(A)32 of
the Tax Code, as amended by Repuic Act No. 9337.

Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a
dealer in securities whose gross receipts is the amount actually received as contract price without
allowing any deduction from the gross receipts.33 This restrictive tenor changed under RR No. 16-
2005. Under this RR, an HMO's gross receipts and gross receipts in general were defined, thus:

Section 4.108-3. xxx

xxxx

HMO's gross receipts shall be the total amount of money or its equivalent representing the service
fee actually or constructively received during the taxae period for the services performed or to be
performed for another person, excluding the value-added tax. The compensation for their
services representing their service fee, is presumed to be the total amount received as
enrollment fee from their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits applied as payments for services
rendered, and advance payments actually or constructively received during the taxae period for
the services performed or to be performed for another person, excluding the VAT. 34

In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the
definition of gross receipts in general.35

According to the CTA en banc, the entire amount of membership fees should form part of
MEDICARD's gross receipts because the exclusions to the gross receipts under RR No. 4-2007
does not apply to MEDICARD. What applies to MEDICARD is the definition of gross receipts of
an HMO under RR No. 16-2005 and not the modified definition of gross receipts in general under
the RR No. 4-2007.

The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely
presumed that the amount received by an HMO as membership fee is the HMO's compensation
for their services. As a mere presumption, an HMO is, thus, allowed to estaish that a portion of
the amount it received as membership fee does NOT actually compensate it but some other
person, which in this case are the medical service providers themselves. It is a well-settled
principle of legal hermeneutics that words of a statute will be interpreted in their natural, plain and
ordinary acceptation and signification, unless it is evident that the legislature intended a technical
or special legal meaning to those words. The Court cannot read the word "presumed" in any other
way.

It is notae in this regard that the term gross receipts as elsewhere mentioned as the tax base
under the NIRC does not contain any specific definition.36 Therefore, absent a statutory definition,
this Court has construed the term gross receipts in its plain and ordinary meaning, that is, gross
receipts is understood as comprising the entire receipts without any deduction.37 Congress, under
Section 108, could have simply left the term gross receipts similarly undefined and its
interpretation subjected to ordinary acceptation,. Instead of doing so, Congress limited the scope
of the term gross receipts for VAT purposes only to the amount that the taxpayer received for the
services it performed or to the amount it received as advance payment for the services it will
render in the future for another person.

In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it
rendered are not seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary
between the purchaser of healthcare services (its members) and the healthcare providers (the
doctors, hospitals and clinics) for a fee. By enrolling membership with MED ICARD, its members
will be ae to avail of the pre-arranged medical services from its accredited healthcare providers
without the necessary protocol of posting cash bonds or deposits prior to being attended to or
admitted to hospitals or clinics, especially during emergencies, at any given time. Apart from this,
MEDICARD may also directly provide medical, hospital and laboratory services, which depends
upon its member's choice.

Thus, in the course of its business as such, MED ICARD members can either avail of medical
services from MEDICARD's accredited healthcare providers or directly from MEDICARD. In the
former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the
healthcare needs of its ·members, MEDICARD would not actually be providing the actual
healthcare service. Thus, based on industry practice, MEDICARD informs its would-be member
beforehand that 80% of the amount would be earmarked for medical utilization and only the
remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of its services is
exempt from VAT under Section 109(G).

The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC
that would extend the definition of gross receipts even to amounts that do not only pertain to the
services to be performed: by another person, other than the taxpayer, but even to amounts that
were indisputay utilized not by MED ICARD itself but by the medical service providers.

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To
this end, a construction which renders every word operative is preferred over that which makes
some words idle and nugatory. This principle is expressed in the maxim Ut magisvaleat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute – it’s
every word.

In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the Court

adopted the principal object and purpose object in determining whether the MEDICARD therein
is engaged in the business of insurance and therefore liae for documentary stamp tax. The Court
held therein that an HMO engaged in preventive, diagnostic and curative medical services is not
engaged in the business of an insurance, thus:

To summarize, the distinctive features of the cooperative are the rendering of service, its
extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after .the services is rendered. Except the last,
these are not distinctive or generally characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in this way for the rendering of service,
even on the contingency that it be needed, and contracting merely to stand its cost when or after
it is rendered.39 (Emphasis ours)

In sum, the Court said that the main difference between an HMO arid an insurance company is
that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the
value added by the performance of the service by the taxpayer. It is, thus, this service and the
value charged thereof by the taxpayer that is taxae under the NIRC.

To be sure, there are pros and cons in subjecting the entire amount of membership fees to
VAT.40 But the Court's task however is not to weigh these policy considerations but to determine
if these considerations in favor of taxation can even be implied from the statute where the CIR
purports to derive her authority. This Court rules that they cannot because the language of the
NIRC is pretty straightforward and clear. As this Court previously ruled:

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition
of taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax
laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly,
and unambiguously. A tax cannot be imposed without clear and express words for that
purpose. Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are
not to be extended by implication. In answering the question of who is subject to tax statutes,
it is basic that in case of doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes
should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. 41 (Citation
omitted and emphasis and underlining ours)

For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the
authority should have been reasonay founded from the language of the statute. That language is
wanting in this case. In the scheme of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that
Congress may not have the opportunity or competence to provide. The regulations these
authorities issue are relied upon by taxpayers, who are certain that these will be followed by the
courts. Courts, however, will not uphold these authorities' interpretations when dearly absurd,
erroneous or improper.42 The CIR's interpretation of gross receipts in the present case is patently
erroneous for lack of both textual and non-textual support.

As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership
and management over the funds, the Court does not agree. On the contrary, it is MEDICARD's
act of earmarking or allocating 80% of the amount it received as membership fee at the time of
payment that weakens the ownership imputed to it. By earmarking or allocating 80% of the
amount, MEDICARD unequivocally recognizes that its possession of the funds is not in the
concept of owner but as a mere administrator of the same. For this reason, at most, MEDICARD's
right in relation to these amounts is a mere inchoate owner which would ripen into actual
ownership if, and only if, there is underutilization of the membership fees at the end of the fiscal
year. Prior to that, MEDI CARD is bound to pay from the amounts it had allocated as an
administrator once its members avail of the medical services of MEDICARD's healthcare
providers.

Before the Court, the parties were one in submitting the legal issue of whether the amounts
MEDICARD earmarked, corresponding to 80% of its enrollment fees, and paid to the medical
service providers should form part of its gross receipt for VAT purposes, after having paid the
VAT on the amount comprising the 20%. It is significant to note in this regard that MEDICARD
estaished that upon receipt of payment of membership fee it actually issued two official receipts,
one pertaining to the VAT ae portion, representing compensation for its services, and the other
represents the non-vatae portion pertaining to the amount earmarked for medical utilization.:
Therefore, the absence of an actual and physical segregation of the amounts pertaining to two
different kinds · of fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption
under the law and from proving that indeed services were rendered by its healthcare providers
for which it paid the amount it sought to be excluded from its gross receipts.

With the foregoing discussions on the nullity of the assessment on due process grounds and
violation of the NIRC, on one hand, and the utter lack of legal basis of the CIR's position on the
computation of MEDICARD's gross receipts, the Court finds it unnecessary, nay useless, to
discuss the rest of the parties' arguments and counter-arguments.

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution
of the CTA en banc grounded as it is on due process violation. The Court likewise rules that for
purposes of determining the VAT liability of an HMO, the amounts earmarked and actually spent
for medical utilization of its members should not be included in the computation of its gross
receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is

hereby GRANTED. The Decision dated September 2, 2015 and Resolution dated January 29,
2016 issued by the Court of Tax Appeals en bane in CTA EB No. 1224 are REVERSED and SET
ASIDE. The definition of gross receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in
relation to Section 108(A) of the National Internal Revenue Code, as amended by Repuic Act No.
9337, for purposes of determining its Value-Added Tax liability, is hereby declared
to EXCLUDE the eighty percent (80%) of the amount of the contract price earmarked as fiduciary
funds for the medical utilization of its members. Further, the Value-Added Tax deficiency
assessment issued against Medicard Philippines, Inc. is hereby declared unauthorized for having
been issued without a Letter of Authority by the Commissioner of Internal Revenue or his duly
authorized representatives.

SO ORDERED.
G.R. No. 183408

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
LANCASTER PHILIPPINES, INC., Respondent

DECISION

MARTIRES, J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to reverse
and set aside the 30 April 2008 Decision2 and 24 June 2008 Resolution3 of the Court of Tax
Appeals (CTA) En Banc in CTA EB No. 352.

The assailed decision and resolution affirmed the 12 September 2007 Decision4 and 12
December 2007 Resolution5of the CTA First Division (CTA Division) in CTA Case No. 6753.

THE FACTS

The facts6 are undisputed.

Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among others, to

investigate or examine and, if necessary, issue assessments for deficiency taxes.

On the other hand, respondent Lancaster Philippines, Inc. (Lancaster) is a domestic corporation
estaished in 1963 and is engaged in the production, processing, and marketing of tobacco.

In 1999, the Bureau of Internal Revenue (BIR) issued Letter of Authority (LOA) No. 00012289
authorizing its revenue officers to examine Lancaster's books of accounts and other accounting
records for all internal revenue taxes due from taxae year 1998 to an unspecified date. The LOA
reads:

SEPT. 30 1999

LETTER OF AUTHORITY

LANCASTER PHILS. INC.

11th Flr. Metro Bank Plaza
Makati City

SIRJMADAM/GENTLEMEN:

The bearer(s) hereof RO’s Irene Goze & Rosario Padilla to be Supervise by GH Catalina_Leny
Barrion of the Special Team created pursuant to RSO 770-99 is/are authorized to examine your
books of accounts and other accounting records for a11 internal revenue taxes for the period from
example year, 1998 to ______, 19___. He is/they are provided with the necessary identification
card(s) which shall be presented to you upon request.
It is requested that all facilities be extended to the Revenue Officer(s) in order to expedite the
examination.

You will be duly informed of the results of the examination upon approval of the report submitted
by the aforementioned Revenue Officer(s).7

After the conduct of an examination pursuant to the LOA, the BIR issued a Preliminary
Assessment Notice (PAN)8which cited Lancaster for:

1) overstatement of its purchases for the fiscal year April 1998 to March1999; and 2)
noncompliance with the generally accepted accounting principle of proper matching of cost and
revenue.9 More concretely, the BIR disallowed the purchases of tobacco from farmers covered
by Purchase Invoice Vouchers (PIVs) for the months of February and March 1998 as deductions
against income for the fiscal year April 1998 to March 1999. The computation of Lancaster's tax
deficiency, with the details of discrepancies, is reproduced below:

INCOME TAX:

Taxae Income per ITR -0-

Add: Adjustments-Disallowed purchases 11,496,770.18

Adjusted Taxae Income per Investigation ₱11,496,770.18

INCOME TAX DUE-Basic

April 1 - December 31, 1998

(9/12x ₱l1,496,770.18 x 34%) ₱2,913,676.4

January 1 - March 31, 1999

(3/12x ₱l1,496,770.18 x 33%) 948,483.54

Income tax still due per investigation ₱3,880,159.94

Interest (6/15/99 to 10115/02) .66 2,560,905.56

Compromise Penalty 25,000

TOTAL DEFlCIENCY INCOME TAX ₱6,466,065.50

DETAILS OF DISCREPANCIES

Assessment No. LTAID II-98-00007

A. INCOME TAX (₱3,880,159.94) - Taxpayer's fiscal year covers April 1998 to March 1999.
Verification of the books of accounts and pertinent documents disclosed that there was an
overstatement of purchases for the year. Purchase Invoice Vouchers (PIVs) for February and
March 1998 purchases amounting to ₱ll,496,770.18 were included as part of purchases for taxae
year 1998 in violation of Section 45 of the National Internal Revenue Code in relation to Section
43 of the same and Revenue Regulations No. 2 which states that the Crop-Basis method of
reporting income may be used by a farmer engaged in producing crops which take more than one
(1) year from the time of planting to the time of gathering and disposing of crop, in such a case,
the entire cost of producing the crop must be taken as deduction in the year in which the gross
income from the crop is realized and that the taxae income should be computed upon the basis
of the taxpayer's annual accounting period, (fiscal or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping with the books of the
taxpayer. Furthermore, it did not comply with the generally accepted principle of proper matching
of cost and revenue.10

Lancaster replied11 to the PAN contending, among other things, that for the past decades, it has
used an entire 'tobacco-cropping season' to determine its total purchases covering a one-year
period from 1 October up to 30 September of the followingyear (as against its fiscal year which is
from 1 April up to 31 March of the followingyear);that it has been adopting the 6~month timing
difference to conform to the matching concept (of cost and revenue); and that this has long been
installed as part of the company's system and consistently applied in its accounting books.12

Invoking the same provisions of the law cited in the assessment, i.e., Sections 4313 and 4514 of
the National Internal Revenue Code (NJRC), in conjunction with Section 4515 of Revenue
Regulation No. 2, as amended, Lancaster argued that the February and March 1998 purchases
should not have been disallowed. It maintained that the situation of farmers engaged in producing
tobacco, like Lancaster, is unique in that the costs, i.e., purchases, are taken as of a different
period and posted in the year in which the gross income from the crop is realized. Lancaster
concluded that it correctly posted the subject purchases in the fiscal year ending March 1999 as
it was only in this year that the gross income from the crop was realized.

Subsequently on 6 November 2002, Lancaster received from the BIR a final assessment
notice (FAN),16 captioned Formal Letter of Demand andAudit Result/Assessment .Notice LTAID
II IT-98-00007, dated 11 October2002, which assessed Lancaster's deficiency income tax
amounting to Pl l,496,770.18, as a consequence of the disallowance of purchases claimed for
the taxae year ending199931. March 1999.

Lancaster duly protested17 the FAN. There being no action taken by the Commissioner on its
protest, Lancaster filed on 21 August 2003 a petition for review18 before the CTA Division.

The Proceedings before the CTA

In its petition before the CTA Division, Lancaster essentially reiterated its arguments in the protest
against the assessment, maintaining that the tobacco purchases in February and March 1998 are
deductie in its fiscal year ending 31 March 1999.

The issues19 raised by the parties for the resolution of the CTA Division were:

WHETHER OR NOT PETITIONER COMPLIED WITH THE GENERALLY ACCEPTED

ACCOUNTING PRINCIPLE OF PROPER MATCHING OF COST AND REVENUE;

II
WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT AGAINST PETITIONER FOR THE
TAXAE YEAR 1998 IN THE AGGREGATE AMOUNT OF ₱6,466,065.50 SHOULD BE
CANCEILED AND WITHDRAWN BY RESPONDENT.

After trial, the CTA Division granted the petition of Lancaster, disposing as follows;

IN VIEW OF THE FOREGOING, the subject Petition for Review is hereby GRANTED.
Accordingly, respondent is ORDERED to CANCEL and WITHDRAW the deficiency income tax
assessment issued against petitioner under Formal l;etter of Demand and Audit
Result/Assessment Notice No. L TAID II IT-98-00007 dated October 11, 2002, in the amount of
₱6,466,065.50, covering the fiscal year from April l, 1998 to March 31, 1999.20

The CIR move21 but failed to obtain reconsideration of the CTA Division ruling.22

Aggrieved, the CIR sought recourse23 from the CTA En Banc to seek a reversal of the decision
and the resolution of the CTA Division.

However, the CTA En Banc found no reversie error in the CTA Division's ruling, thus, it affirmed
the cancellation of the assessment against Lancaster. The dispositive portion of the decision of
the CTA En Banc states:

WHEREFORE, premises considered, the present Petition for Review is hereby DENIED DUE
COURSE, and, accordingly DISMISSED for lack of merit.24

The CTA En Banc likewise denied25 the motion for reconsideration from its Decision.

Hence, this petition.

The CIR assigns the following errors as committed by the CTA En Banc:

I.

THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT PETITIONER'S

REVENUE OFFICERS EXCEEDED THEIR AUTHORITY TO INVESTIGATE THE PERJOD NOT
COVERED BY THEIR LETTER OF AUTHORITY.

II.

THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING PETITIONER TO CANCEL

AND WITHDRAW THE DEFICIENCY ASSESSMENT ISSUED AGAINST RESPONDENT.26

THE COURT'S RULING

We deny the petition.

The CTA En Banc did not err when it ruled that the BIR revenue officers had
exceeded their authority.
To support its first assignment of error, the CIR argues that the revenue officers did not exceed
their authority when, upon examination (of the Lancaster's books of accounts and other
accounting records), they verified that Lancaster made purchases for February and March of
1998, which purchases were not declared in the latter's fiscal year from 1 April 1997 to 31 March
1998. Additionally, the CIR posits that Lancaster did not raise the issue on the scope of authority
of the revenue examiners at any stage of the proceedings before the CTA and, consequently, the
CTA had no jurisdiction to rule on said issue.

On both counts, the CIR is mistaken.

A. The Jurisdiction of the CTA

Preliminarily, we shall take up the CTA's jurisdiction to rule on the issue of the scope of authority
of the revenue officers to conduct the examination of Lancaster's books of accounts and
accounting records.

The law vesting unto the CTA its jurisdiction is Section 7 of Repuic Act No. 1125 (R.A. No.
1125),27 which in part provides:

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction
to review by appeal, as herein provided:

(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto,
or other matters arising under the National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue; x x x. (emphasis supplied)

Under the aforecited provision, the jurisdiction of the CTA is not limited only to cases which involve
decisions or inactions of the CIR on matters relating to assessments or :refunds but also includes
other cases arising from the NIRC o:r related laws administered by the BIR. 28 Thus, for instance,
we had once held that the question of whether or not to impose a deficiency tax assessment
comes within the purview of the words "othermatters arising under the National Internal Revenue
Code."29

The jurisdiction of the CTA on such other matters arising under theNIRC was retained under the
amendments introduced by R.A No. 9282.30Under R.A. No. 9282, Section 7 now reads:

Sec. 7. Jurisdiction. - The CTA shall exercise:

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

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

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

2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period
of action. in which case the inaction shall be deemed a denial; x x x." (emphasis supplied)

Is the question on the authority of revenue officers to examine the books and records of any
person cognizae by the CTA?

It must be stressed that the assessment of inten1al revenue taxes is one of the duties of the BIR.
Section 2 of the NIRC states:

Sec. 2. Powers and Duties oftheBureau of Internal Revenue. - The Bureau of Internal Revenue
shall be under the supervision and control of the Department of Fin:l.11ce and its powers: and
duties shall comprehend the assessment and collection of all national internal revenue taxes,
fees, andcharges, and the enforcement of all forfeitures, penalties, and fines connected therewith,
including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals
and the ordinary courts.

The Bureau shall give effect to and administer the supervisory and police powers conferred to it
by this Code or other laws. (emphasis supplied)

In connection therewith, the CIR may authorize the examination of any taxpayer and
correspondingly make an assessment whenever necessary.31 Thus, to give more teeth to such
power of the CIR, to make an assessment, the NIRC authorizes the CIR to examine any book,
paper, record, or data of any person.32 The powers granted by law to the CIR are intended, among
other things, to determine the liability of any person for any national internal revenue tax.

It is pursuant to such pertinent provisions of the NIRC conferring the powers to the CIR that the
petitioner (CIR) had, in this case, authorized its revenue officers to conduct an examination of the
books of account and accounting records of Lancaster, and eventually issue a deficiency
assessment against it.

From the foregoing, it is clear that the issue on whether the revenue officers who had conducted
the examination on Lancaster exceeded their authority pursuant to LOA No. 00012289 may be
considered as covered by the terms "other matters" under Section 7 of R.A. No. 1125 or its
amendment, R.A. No. 9282. The authority to make an examination or assessment, being a matter
provided for by the NIRC, is well within the exclusive and appellate jurisdiction of the CTA.

On whether the CTA can resolve an issue which was not raised by the parties, we rule in the
affirmative.

Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the Court of Tax
Appeals,33 the CT A is not bound by the issues specifically raised by the parties but may also rule
upon related issues necessary to achieve an orderly disposition of the case. The text of the
provision reads:

SECTION 1. Rendition of judgment. - x xx

In deciding the case, the Court may not limit itself to the issues stipulated by the parties but may
also rule upon related issues necessary to achieve an orderly disposition of the case.
The above section is clearly worded. On the basis thereof, the CTA Division was, therefore, well
within its authority to consider in its decision the question on the scope of authority of the revenue
officers who were named in the LOA even though the parties had not raised the same in their
pleadings or memoranda. The CTA En Banc was likewise correct in sustaining the CTA Division's
view concerning such matter.

B. The Scope of the Authority of the Examining Officers

In the assailed decision of the CTA Division, the trial court observed that LOA No. 00012289
authorized the BIR officers to examine the books of account of Lancaster for the taxae year 1998
only or, since Lancaster adopted a fiscal year (FY), for the
period 1April1997 to 31March1998. However, the deficiency income tax assessment which the
BIR eventually issued against Lancaster was based on the disallowance of expenses reported
in FY 1999, or for the period 1 April 1998 to 31March1999. The CTA concluded that the revenue
examiners had exceeded their authority when they issued the assessment against Lancaster and,
consequently, declared such assessment to be without force and effect.

We agree.

The audit process normally commences with the issuance by the CIR of a Letter of Authority. The
LOA gives notice to the taxpayer that it is under investigation for possie deficiency tax
assessment; at the same time it authorizes or empowers a designated revenue officer to examine,
verify, and scrutinize a taxpayer's books and records, in relation to internal revenue tax liabilities
for a particular period.34

In this case, a perusal of LOA No. 00012289 indeed shows that the period of examination is the
taxae year 1998. For better clarity, the pertinent portion of the LOA is again reproduced, thus:

The bearer(s) hereof x x x is/are authorized to examine your books of accounts and other
accounting records for all internal revenue taxes for the period from taxae year, 1998 to __, 19_.
x x x." (emphasis supplied)

Even though the date after the words "taxae year 1998 to" is unstated, it is not at all difficult to
discern that the period of examination is the whole taxae year 1998. This means that the
examination of Lancaster must cover the FY period from 1April1997 to 31March1998. It could not
have contemplated a longer period. The examination for the full taxae year 1998 only is consistent
with the guideline in Revenue Memorandum Order (RMO) No. 43-90, dated 20 September 1990,
that the LOA shall cover a taxae period not exceeding one taxae year.35 In other words, absent
any other valid cause, the LOA issued in this case is valid in all respects.

Nonetheless, a valid LOA does not necessarily clothe validity to an assessment issued on it, as
when the revenue officers designated in the LOA act in excess or outside of the authority granted
them under said LOA. Recently in CIR v. De La Salle University, Inc.36 we accorded validity to the
LOA authorizing the examination of DLSU for "Fiscal Year Ending 2003and Unverified Prior
Years" and correspondingly held the assessment fortaxae year 2003 as valid because this taxae
period is specified in the LOA. However, we declared void the assessments for taxae
years 2001 and 2002 for having been unspecified on separate LOAs as required under RMO No.
43-90.
Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,37 we affirmed the cancellation of a
deficiency VAT assessment because, while the LOA covered "the period 1997and unverified
prior years, " the said deficiency was arrived at based on the records of a later year, from January
to March 1998, or using the fiscal year which ended on 31March1998. We explainedthat the CIR
knew which period should be covered by the investigation and that if the CIR wanted or intended
the investigation to include the year 1998, it would have done so by including it in the LOA or by
issuing another LOA.38

The present case is no different from Sony in that the subject LOA specified that the examination
should be for the taxae year 1998 only but the subsequent assessment issued against Lancaster
involved disallowed expenses covering the next fiscal year, or the period ending 31 March 1999.
This much is clear from the notice of assessment, the relevant portion of which we again restate
as follows:

INCOME TAX:

Taxae Income per ITR -0-

Add: Adjustments-Disallowed purchases 11,496, 770.18

Adjusted Taxae Income per Investigation ₱l 1,496,770.18

INCOME TAX DUE-Basic

April 1 -December 31, 1998

(9/12xPl1,496,770.18 x 34%) ₱2,913,676.4

January 1-March 31, 1999

(3/12xPl1,496,770.18 x 33%) 948,483.54

Income tax still due per investigation ₱3,880,159.94

Interest (6/15/99 to 10/15/02) .66 2,560,905.56

Compromise Penalty 25,000

TOTAL DEFICIENCY INCOME TAX ₱6,466,065.50

(emphasis supplied)

The taxae year covered by the assessment being outside of the period specified in the LOA in
this case, the assessment issued against Lancaster is, therefore, void.

This point alone would have sufficed to invalidate the subject deficiency income tax assessment,
thus, obviating any further necessity to resolve the issue on whether Lancaster erroneously
claimed the February and March 1998 expenses as deductions against income for FY 1999.

But, as the CTA did, we shall discuss the issue on the disallowance for the proper guidance not
only of the parties, but the bench and the bar as well.
II.

The CTA En Banc correctly sustained the order cancelling and withdrawing the deficiency tax
assessment.

To recall, the assessment against Lancaster for deficiency income tax stemmed from the
disallowance of its February and March 1998 purchases which Lancaster posted in its fiscal year
ending on 31 March 1999 (FY 1999) instead of the fiscal year ending on 31March1998 (FY 1998).

On the one hand, the BIR insists that the purchases in question should have been reported in FY
1998 in order to conform to the generally accepted accounting principle of proper matching of
cost and revenue. Thus, when

Lancaster reported the said purchases in FY 1999, this resulted in overstatement of expenses
warranting their disallowance and, by consequence, resulting in the deficiency in the payment of
its income tax for FY 1999.

Upon the other hand, Lancaster justifies the inclusion of the February and March 1998 purchases
in its FY 1999 considering that they coincided with its crop year covering the period of October
1997 to September 1998. Consistent with Revenue Audit Memorandum (RAM) No. 2-
95,39 Lancaster argues that its purchases in February and March 1998 were properly posted in
FY 1999, or the year in which its gross income from the crop was realized. Lancaster concludes
that by doing so, it had complied with the matching concept that was also relied upon by the BIR
in its assessment.

The issue essentially boils down to the proper timing when Lancaster should recognize its
purchases in computing its taxae income. Such issue directly correlates to the fact that
Lancaster's 'crop year ' does not exactly coincide with its fiscal year for tax purposes.

Noticeay, the records of this case are rife with terms and concepts in accounting. As a science,
accounting 40pervades many aspects of financial planning, forecasting, and decision making in
business. Its reach, however, has also permeated tax practice.

To put it into perspective, although the foundations of accounting were built principally to analyze
finances and assist businesses, many of its principles have since been adopted for purposes of
taxation.41 In our jurisdiction, the concepts in business accounting, including certain generally
accepted accounting principles (GAAP), embedded in the NIRC comprise the rules on tax
accounting.

To be clear, the principles under financial or business accounting, in theory and application, are
not necessarily interchangeae with those in tax accounting. Thus, although closely related, tax
and business accounting had invariay produced concepts that at some point diverge in
understanding or usage. For instance, two of such important concepts are taxae income and
business income (or accounting income). Much of the difference can be attributed to the distinct
purposes or objectives that the concepts of tax and business accounting are aimed at. Chief
Justice Querube Makalintal made an apt observation on the nature of such difference.
In Consolidated Mines, Inc. v. CTA,42he noted:

While taxae income is based on the method of accounting used by the taxpayer, it will almost
always differ from accounting income. This is so because of a fundamental difference in the ends
the two concepts serve. Accounting attempts to match cost against revenue. Tax law is aimed
at collecting revenue. It is quick to treat an item as income, slow to recognize deductions or losses.
Thus, the tax law will not recognize deductions for contingent future losses except in very limited
situations. Good accounting, on the other hand, requires their recognition. Once this fundamental
difference in approach is accepted, income tax accounting methods can be understood more
easily.43 (emphasis supplied)

While there may be differences between tax and accounting,44 it cannot be said that the two
mutually exclude each other. As already made clear, tax laws borrowed concepts that had origins
from accounting. In truth, tax cannot do away with accounting. It relies upon approved accounting
methods and practices to effectively carry out its objective of collecting the proper amount of taxes
from the taxpayers. Thus, an important mechanism estaished in many tax systems is the
requirement for taxpayers to make a return of their true income.45 Maintaining accounting books
and records, among other important considerations, would in turn assist the taxpayers in
complying with their oigation to file their income tax returns. At the same time, such books and
records provide vital information and possie bases for the government, after appropriate audit, to
make an assessment for deficiency tax whenever so warranted under the circumstances.

The NIRC, just like the tax laws in other jurisdictions, recognizes the important facility provided
by generally accepted accounting principles and methods to the primary aim of tax laws to collect
the correct amount of taxes. The NIRC even devoted a whole chapter on accounting periods and
methods of accounting, some relevant provisions of which we cite here for more emphasis:

CHAPTER VIII

ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

Sec. 43. General Rule. - The taxae income shall be computed upon the basis of the taxpayer's
annual accounting period (fiscal year or calendar year, as the case may be) in accordance with
the method of accounting regularly employed in keeping the books of such taxpayer; but if no
such method of accounting has been so employed, or if the method employed does not clearly
reflect the income, the computation shall be made in accordance with such method as in the
opinion of the Commissioner clearly reflects the income.

If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q),
or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is
an individual, the taxae income shall be computed on the basis of the calendar year.

Sec. 44. Period in which Items of Gross Income Included. - The amount of all items of gross
income shall be included in the gross income for the taxae year in which received by the taxpayer,
unless, under methods of accounting permitted under Section 43, any such amounts are to be
properly accounted for as of a different period.

In the case of the death of a taxpayer, there shall be included in computing taxae income for the
taxae period in which falls the date of his death, amounts accrued up to the date of his death if
not otherwise properly includie in respect of such period or a prior period.

Sec. 45. Period/or which Deductions and Credits Taken. - The deductions provided for in this
Title shall be taken for the taxae 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, unless in
order to clearly reflect the income, the deductions should be taken as of a different period. In the
case of the death of a taxpayer, there shall be allowed as deductions for the taxae period in which
falls the date of his death, amounts accrued up to the date of his death if not otherwise properly
allowae in respect of such period or a prior period.

Sec. 46. Change of Accounting Period. - If a taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one
fiscal year to another, the net income shall, with the approval of the Commissioner, be computed
on the basis of such new accounting period, subject to the provisions of Section 47.

xxxx

Sec. 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be
repo1ied for tax purposes in the manner as provided in this Section.

As used herein, the term 'long-term contracts' means building, installation or construction
contracts covering a period in excess of one (1) year.

Persons whose gross income is derived in whole or in part from such contracts shall report such
income upon the basis of percentage of completion.

The return should be accompanied by a return certificate of architects or engineers showing the
percentage of completion during the taxae year of the entire work performed under contract.

There should be deducted from such gross income all expenditures made during the taxae year
on account of the contract, account being taken of the material and supplies on hand at the
beginning and end of the taxae period for use in connection with the work under the contract but
not yet so applied.

If upon completion of a contract, it is found that the taxae net income arising thereunder has not
been clearly reflected for any year or years, the Commissioner may permit or require an amended
return.

Sec. 49. Installment Basis. -

(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells
or otherwise disposes of personal property on the installment plan may return as income
therefrom in any taxae year that proportion of the installment payments actually received in that
year, which the gross profit realized or to be realized when payment is completed, bears to the
total contract price.

(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other
casual disposition of personal property (other than property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxae year), for a price
exceeding One thousand pesos (₱1,000), or (2) of a sale or other disposition of real prope1iy, if
in either case the initial payments do not exceed twenty-five percent (25%) of the selling price,
the income may, under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be returned on the basis and in the manner above
prescribed in this Section.
As used in this Section, the term 'initial payments' means the payments received in cash or
property other than evidences of indebtedness of the purchaser during the taxae period in which
the sale or other disposition is made.

(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells
or disposes of real property, considered as capital asset, and is otherwise qualified to report the
gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and
regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.

(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection
(A) elects for any taxae year to report his taxae income on the installment basis, then in computing
his income for the year of change or any subsequent year, amounts actually received during any
such year on account of sales or other dispositions of property made in any prior year shall not
be excluded." (emphasis in the original)

We now proceed to the matter respecting the accounting method employed by Lancaster.

An accounting method is a "set of rules for determining when and how to report income and
deductions."46 The provisions under Chapter VIII, Title II of the NIRC cited above enumerate the
methods of accounting that the law expressly recognizes, to wit:

(1) Cash basis method;47

(2) Accrual method;48

(3) Installment method;49

(4) Percentage of completion method;50 and

(5) Other accounting methods.

Any of the foregoing methods may be employed by any taxpayer so long as it reflects its income
properly and such method is used regularly. The peculiarities of the business or occupation
engaged in by a taxpayer would largely determine how it would report incomes and expenses in
its accounting books or records. The NIRC does not prescribe a uniform, or even specific, method
of accounting.

Too, other methods approved by the CIR, even when not expressly mentioned in the NIRC, may
be adopted if such method would enae the taxpayer to properly reflect its income. Section 43 of
the NIRC authorizes the CIR to allow the use of a method of accounting that in its opinion would
clearly reflect the income of the taxpayer. An example of such method not expressly mentioned
in the NIRC, but duly approved by the CIR, is the 'crop method of accounting' authorized under
RAM No. 2-95. The pertinent provision reads:

II. Accounting Methods

xxxx
F. Crop Year Basis is a method applicae only to farmers engaged in the production of crops which
take more than a year from the time of planting to the process of gathering and disposal. Expenses
paid or incurred are deductie in the year the gross income from the sale of the crops are realized.

The crop method recognizes that the harvesting and selling of crops do not fall within the same
year that they are planted or grown. This method is especially relevant to farmers, or those
engaged in the business of producing crops who, pursuant to RAM No. 2-95, would then be ae to
compute their taxae income on the basis of their crop year. On when to recognize expenses as
deductions against income, the governing rule is found in the second sentence of Subsection F
cited above. The rule enjoins the recognition of the expense (or the deduction of the cost) of crop
production in the year that the crops are sold (when income is realized).

In the present case, we find it wholly justifiae for Lancaster, as a business engaged in the
production and marketing of tobacco, to adopt the crop method of accounting. A taxpayer is
authorized to employ what it finds suitae for its purpose so long as it consistently does so, and in
this case, Lancaster does appear to have utilized the method regularly for many decades already.
Considering that the crop year of Lancaster starts from October up to September of the following
year, it follows that all of its expenses in the crop production made within the crop year starting
from October 1997 to September 1998, including the February and March 1998 purchases
covered by purchase invoice vouchers, are rightfully deductie for income tax purposes in the year
when the gross income from the crops are realized. Pertinently, nothing from the pleadings or
memoranda of the parties, or even from their testimonies before the CT A, would support a finding
that the gross income from the crops (to which the subject expenses refer) was actually realized
by the end of March 1998, or the closing of Lancaster's fiscal year for 1998. Instead, the records
show that the February and March 1998 purchases were recorded by Lancaster as advances and
later taken up as purchases by the close of the crop year in September 1998, or as stated very
clearly above, within the fiscal year 1999.51On this point, we quote with approval the ruling of the
CT A En Banc, thus:

Considering that Lancaster is engaged in the production oftobacco, it applied the crop year basis
in determining its total purchases for each fiscal year. Thus, Lancaster's total cost for the
production of its crops, which includes its purchases, must be taken as a deduction in the year in
which the gross income is realized. Thus, We agree with the following ratiocination of the First
Division:

Evident from the foregoing, the crop year basis is one unusual method of accounting wherein the
entire cost of producing the crops (including purchases) must be taken as a deduction in the year
in which the gross income from the crop is realized. Since the petitioner's crop year starts in
October and ends in September of the following year, the same does not coincide with petitioner's
fiscal year which starts in April and ends in March of the following year. However, the law and
regulations consider this peculiar situation and allow the costs to be taken up at the time the gross
income from the crop is realized, as in the instant case.

Lancaster's fiscal period is from April 1, 1998 to March 31, 1999. On the other hand, its crop year
is from October 1, 1997 to September 1, 1998. Accordingly, in applying the crop year method, all
the purchases made by the respondent for October 1, 1997 to September 1, 1998 should be
deducted from the fiscal year ending March 31, 1999, since it is the time when the gross income
from the crops is realized.52

The matching principle

Both petitioner CIR and respondent Lancaster, it must be noted, rely upon the concept of matching
cost against revenue to buttress their respective theories. Also, both parties cite RAM 2-95 in
referencing the crop method of accounting.

We are tasked to determine which view is legally sound.

In essence, the matching concept, which is one of the generally accepted accounting principles,
directs that the expenses are to be reported in the same period that related revenues are earned.
It attempts to match revenue with expenses that helped earn it.

The CIR posits that Lancaster should not have recognized in FY 1999 the purchases for February
and March 1998.53 Apparent from the reasoning of the CIR is that such expenses ought to have
been deducted in FY 1998, when they were supposed to be paid or incurred by Lancaster. In
other words, the CIR is of the view that the subject purchases match with revenues in 1998, not
in 1999

A reading of RAM No. 2-95, however, clearly evinces that it conforms with the concept that the
expenses paid or incurred be deducted in the year in which gross income from the sale of the
crops is realized. Put in another way, the expenses are matched with the related incomes which
are eventually earned. Nothing from the provision is it strictly required that for the expense to be
deductie, the income to which such expense is related to be realized in the same year that it
is paid or incurred. As noted by the CTA,54 the crop method is an unusual method of accounting,
unlike other recognized accounting methods that, by mandate of Sec. 45 of the NIRC, strictly
require expenses be taken in the same taxae year when the income is 'paid or incurred, '
or 'paid or accrued, ' depending upon the method of accounting employed by the taxpayer.

Even if we were to accept the notion that applying the 1998 purchases as deductions in the fiscal
year 1998 conforms with the generally accepted principle of matching cost against revenue, the
same would still not lend any comfort to the CIR. Revenue Memorandum Circular (RMC) No. 22-
04, entitled "Supplement to Revenue Memorandum Circular No. 44-2002 on Accounting Methods
to be Used by Taxpayers for Internal Revenue Tax Purposes"55dated 12 April 2004, commands
that where there is conflict between the provisions of the Tax Code (NIRC), including its
implementing rules and regulations, on accounting methods and the generally accepted
accounting principles, the former shall prevail. The relevant portion of RMC 22-04 reads:

II. Provisions of the Tax Code Shall Prevail.

All returns required to be filed by the Tax Code shall be prepared always in conformity with the
provisions of the Tax Code, and the rules and regulations implementing said Tax Code. Taxability
of income and deductibility of expenses shall be determined strictly in accordance with the
provisions of the Tax Code and the rules and regulations issued implementing said Tax Code. In
case of difference between the provisions of the Tax Code and the rules and regulations
implementing the Tax Code, on one hand, and the general(v accepted accounting principles
(GAAP) and the generally accepted accounting standards (GAAS), on the other hand, the
provisions of the Tax Code and the rules and regulations issued implementing said Tax Code
shall prevail. (italics supplied)

RAM No. 2-95 is clear-cut on the rule on when to recognize deductions for taxpayers using the
crop method of accounting. The rule prevails over any GAAP, including the matching concept as
applied in financial or business accounting.
In sum, and considering the foregoing premises, we find no cogent reason to overturn the assailed
decision and resolution of the CT A. As the CTA decreed, Assessment Notice LTAID II IT-98-
00007, dated 11 October 2002, in the amount of ₱6,466,065.50 for deficiency income tax should
be cancelled and set aside. The assessment is void for being issued without valid authority.
Furthermore, there is no legal justification for the disallowance of Lancaster's expenses for the
purchase of tobacco in February and March 1998.

WHEREFORE, the petition is DENIED. The assailed 30 April 2008 Decision and 24 June 2008
Resolution of the Court of Tax Appeals En Banc are AFFIRMED. No cost

SO ORDERED.
 G.R. No. 213943

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs
PHILIPPINE DAILY INQUIRER, INC., Respondent

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review1 assailing the 4 November 2013 Decision2 and the 1
August 2014 Resolution3 of the Court of Tax. Appeals (CTA) En Banc in CTA EB Case No. 905.
The CTA En Banc affirmed the 16 February 2012 Decision4 and the 8 May 2012 Resolution5 of
the CTA First Division in CTA Case No. 7853 which granted the petition for review filed by
Philippine Daily Inquirer, Inc. (PDI) and cancelled the Formal Letter of Demand dated 11 March
2008 and Assessment No. LN # 116-AS-04-00-00038-000526 issued by the Bureau of Internal
Revenue (BIR) for deficiency Value Added Tax. (VAT) and income tax. for the taxae year 2004.

The Antecedent Facts

The facts of this case, as presented by the CTA, are as follows:

PDI is a corporation engaged in the business of newspaper puication. On 15 April 2005, it filed its
Annual Income Tax Return for taxae year 2004. Its Quarterly VAT Returns for the same year
showed the following:

Date of Filing

For the First Quarter 20 April 2004

For the Second Quarter 16 July 2004

For the Third Quarter 18 October 2004

For the Fourth Quarter 21 January 20056

On 10 August 2006, PDI received a letter dated 30 June 2006 from Region 020 Large Taxpayers'
Service of BIR under LN No. 116-AS-04-00- 00038. BIR alleged that based on the computerized
matching it conducted on the information and data provided by third party sources against PDI's
declaration on its VAT Returns for taxae year 2004, there was an underdeclaration of domestic
purchases from its suppliers amounting to P317,705,610.52. The BIR invited PDI to reconcile the
deficiencies with BIR's Large Taxpayers Audit & Investigation Division I (BIR-LTAID). In response,
PDI submitted reconciliation reports, attached to its letters dated 22 August 2006 and 19
December 2006, to BIR-LTAID. On 21 March 2007, PDI executed a Waiver of the Statute of
Limitation (First Waiver) consenting to the assessment and/or collection of taxes for the year 2004
which may be found due after the investigation, at any time before or after the lapse of the period
of limitations fixed by Sections 203 and 222 of the National Internal Revenue Code (NIRC) but
not later than 30 June 2007. The First Waiver was received on 23 March 2007 by Nestor Valeroso
(Valeroso), OIC-ACTR of the Large Taxpayer Service. In a letter dated 7 May 2007, PDI submitted
additional partial reconciliation and explanations on the discrepancies found by the BIR. On 30
May 2007, PDI received a letter dated 28 May 2007 from Mr. Gerardo Florendo, Chief of the BIR-
LTAID, informing it that the results of the evaluation relative to the matching of sales of its
suppliers against its purchases for the taxae year 2004 had been submitted by Revenue Officer
Narciso Laguerta under Group Supervisor Fe Caling. In the same letter, BIR invited PDI to an
informal conference to present any objections that it might have on the BIR's findings. On 5 June
2007, PDI executed a Waiver of the Statute of Limitation (Second Waiver), which Valeroso
accepted on 8 June 2007.

In a Preliminary Assessment Notice (PAN) dated 15 October 2007 issued by the BIR-LTAID, PDI
was assessed for alleged deficiency income tax and VAT for taxae year 2004 on the basis of LN
No. 116-AS-04-00- 00038. The PAN states:

COMPUTATION OF DEFICIENCY VAT

Undeclared Income ₱1,007,565.03

Add: Overdeclared input VAT 1,601,652.43

Total undeclared income per Investigation ₱2,609,217.46

Less: Attributae input tax 715,371.17

VAT still payae per investigation ₱1,893,846.29

Add: Increments -

Interest from 1/26/05 to 11/15/07 ₱1,062,629.37

Compromise penalty 25,000.00 1,087,629.37

Amount Due and Collectie ₱2,981,475.66

COMPUTATION OF DEFICIENCY INCOME TAX

Undeclared Gross Income ₱10,075,650.28

Less: Cost of Sales 7,153,711.70

Undeclared Net Income ₱2,921,938.58

Multiply by income tax rate 32%

Income tax still due per investigation ₱935,020.35

Add: Increments -

Interest from 4/16/05 to 11/15/07 ₱483,648.88

Compromise penalty 20,000.00 503,648.88

 Amount Due and Collectie ₱1,438,669.237

PDI received the PAN on 4 December 2007. In a letter dated 12 December 2007, PDI sought
reconsideration of the PAN and expressed its willingness to execute another Waiver (Third
Waiver), which it did on the same date, thus extending BIR's right to assess and/or collect from it
until 30 April 2008. Romulo L. Aguila, Jr. (Aguila), OIC-Head Revenue Executive Assistant for the
Large Taxpayers Service-Regular, accepted the Third Waiver on 20 December 2007.

On 17 April 2008, PDI received a Formal Letter of Demand dated 11 March 2008 and an Audit
Result/ Assessment Notice from the BIR, demanding for the payment of alleged deficiency VAT
and income tax, respectively, computed as follows:

1. COMPUTATION OF (DEFICIENCY) VAT

Undeclared Income ₱1,007,565.03

Add: Overdeclared input VAT 1,601,652.43

Total Undeclared Income per Investigation ₱2,609,217.46

Less: Attributae input tax 715,371.17

VAT still payae per investigation ₱1,893,846.29

Add: Increments -

Interest from 1/26/05 to 11/15/07 ₱l,235,929.28

Compromise penalty 25,000.00 1,260,929.28

Amount Due and Collectie ₱3,154,775.56

2. COMPUTATION OF DEFICIENCY INCOME TAX

Undeclared Gross Income ₱10,075,650.28

Less: Cost of Sales 7,153,711.70

Undeclared Net Income 2,921,938.58

Multiply by income tax rate 32%

Income tax still due per investigation ₱935,020.35

Add: Increments -

Interest from 4/16/05 to 11/15/07 ₱569,209.65

 Compromise penalty 20,000.00 589,209.65

Amount Due and Collectie ₱1,524,229.998

On 16 May 2008, PDI filed its protest. On 12 December 2008, PDI filed a Petition for Review
against the Commissioner of Internal Revenue (CIR) alleging that the 180-day period within which
the BIR should act on its protest had already lapsed.

The CTA First Division, quoting at length the CIR's Answer, presented the following facts:

Petitioner Philippine Daily inquirer is liae to pay the amount of Three Million One Hundred fifty
Four Thousand Seven hundred Seventy Five Pesos and 56/100 (₱3,154,775.56) and One Million
Five Hundred Twenty Four Thousand Two Hundred Twenty Nine Pesos and 99/100
(₱l,524,299.99) representing deficiency Value-Added Tax (VAT and Income Tax, respectively, for
the taxae year 2004.

1. The VAT and inc0me tax liabilities of petitioner in the aggregate amount of Four Million Six
Hundred Seventy Nine Thousand and Five Pesos and 55/100 (₱4,679,005.55) arose on account
of the issuance to petitioner of Letter Notice No. 116-AS-04-00-00038 dated June 30, 2006.
Computerized matching conducted by respondent on information/data provided by third party
sources against its declaration per VAT returns revealed the aforesaid discrepancies for taxae
year 2004. The income and value-added tax liabilities were generated through the Reconciliation
of Listing for Enforcement (REUEF) system-Summary List of Sales and Purchases (SLSP) and
Third Party Matching. Through the system, respondent was ae to detect tax leaks through the
matching of data availae in the Integrated Tax Systems (ITS) with the information gathered from
third party sources.

On the basis of the consolidation and cross-referencing of third party information, discrepancy
reports on sales and purchases were generated to uncover under-declared income and over-
claimed purchases (goods and services).

As explicitly provided under Revenue Memorandum Order (RMO) No. 42-2003:

II. POLICIES

xxx

2. In order to intensify enforcement, the power of the Commissioner to authorize the examination
of the taxpayer and the assessment of the correct amount of tax is hereby ordered done through
the so called 'no contact-audit- approach '.

3. The 'no contact-audit-approach' includes the process of computerized matching of sales and
purchases data contained in the Schedules of Sales and Domestic Purchases, and Schedule of
Importation submitted by VAT taxpayer under the RELIEF system pursuant to RR No. 7- 95 as
amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the matching of data from
other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees subject
to Final or Creditae Withholding Taxes.
4. Even without conducting a detailed examination of taxpayer's books and records, the
computerized/manual matching of sales and purchases/expenses will reveal discrepancies which
shall be communicated to the concerned taxpayer through the issuance of a Letter Notice (LN)
by the Commissioner.

5. LNs being served by the Bureau upon the taxpayer found to have understated their sales or
over claimed their purchases/expenses can be considered notice of audit or investigation in so
far as the amendment of any return is concerned which is the subject of such LN. A taxpayer is
therefore disqualified from amending his return once an LN is served upon him.

III. GUIDELINES

Xxx

5. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice of Informal

Conference, thus, the procedures defined in RR 12-99 should likewise be observed.

Furthermore, in CTA Case No. 7092 entitled 'BIG AA Corporation represented by Erlinda L.
Stohner vs. Bureau of Internal Revenue' dated February 22, 2006, the Honorae Court had the
opportunity to say:

'Letter Notices issued against a taxpayer in connection with the information of under declaration
of sales and purchases gathered through Third Party Information Program may be considered as
a 'notice of audit or investigation' in the absence of evident error or clear abuse of discretion.'

2. On the basis of the abovementioned LN and after a careful and extensive scrutiny of petitioner's
documents, resulting deficiency in income and Value-added taxes led to the issuance of the
Preliminary Assessment Notice (PAN) dated October 15, 2007 together with the Details of
Discrepancies and subsequently, a Formal Letter of Demand (FLD) dated March 11, 2008.

Relative thereto, Section 203 of the National Internal Revenue Code (NIRC) explicitly provides:

Section 203. Period of Limitation Upon Assessment and Collection of Taxes.

Except as provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for 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 filed on such day.'

However, Section 222 of the NIRC provides the exceptions as regards to the provisions laid down
under Section 203. In particular, as shown under Section (1) thereof, the three (3) year period of
limitation in making assessment shall not apply in cases where it involves false or fraudulent
return or in cases where there is failure to file a return by the person oiged to file such return.
Section 222(a) of the National Internal Revenue Code provides:

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

(a) In the case of a false or fraudulent return with intent to evade tax or 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 and criminal action for the collection
thereof.'

Such being the case, the three (3) year period of limitation for the assessment of internal revenue
tax liabilities reckoned from the last day prescribed by law for the filing of the return shall not apply
in the case at hand for the simple reason that petitioner falsely filed the return for taxae year
2004. Such being the case, the applicae provision shall be Section 222(a) where the period of
limitation provides that the assessment may be made within ten (10) years after the discovery of
falsity, fraud or omission. In the case at hand, the reckoning period was from the time during which
the LN dated June 30, 2006 was issued to petitioner. Indubitay, the Formal Letter of Demand
dated March 11, 2008 was issued within the prescriptive period provided by law. Such being the
case, the FLD is considered valid and has the force and effect of law.

3. On the basis of the investigation conducted by respondent through the RELIEF system,
respondent though the FLD, outlined how the tax liabilities in the aggregate amount of
₱4,679,005.55 representing income and VAT liabilities were arrived at. Upon matching the data
gathered from respondent's Integrated Tax System (ITS) against the Summary of List of
Purchases (SLP) attached to the Quarterly VAT returns filed with respondent, the following
discrepancies remain unsettled despite petitioner's submission of supporting documents:

(a) An excess of SLP over the Letter Notices (LN) in the amount of ₱1,601,652.43 from the
following suppliers:

Per SLP PerLN Discrepancy

Alliance Media Printing Corp. 109,073,375.58 107,640,812.95 1,432,562.63

Citimotors Inc. 70,454.55 70,056.65 397.90

Diamond Motors Corp. 288,181.82 142,363.64 145,818.18

Western Marketing Corp. 30,830.99 7,957.27 22,873.72

Total 109,462,842.94 107,861,190.51 1,601,652.43

(b) On the other hand, it is likewise evident than an excess of LN over the SLP also occurred in
the total amount of Seven Hundred Fifteen Thousand Three Hundred Seventy One Pesos and 17
/100 (₱715,3 71.17). The details of which are shown hereunder:

Per SLP PerLN Discrepancy

Grasco Industries Inc. 202.55 (202.55)

Harrison Communications Inc. 18,157.89 398,331.12 (380,173.23)

 Makati Property Ventures 64.55 (64.55)

McCann Erikson Phils. Inc. 204,769.38 (204,769.38)

Millennium Cars Inc. 89,545.45 (89,545.45)

WPP Marketing Communications Inc. 40,616.01 (40,616.01)

Total 18,157.89 733,529.06 (715,371.17)

On the basis of the aforesaid investigation, it can be observed that the SLP which petitioner
attached as supporting documents upon filing the quarterly VAT return revealed the declared
amount of ₱l09,462,842.94 as its input VAT for purchases incurred. However, on the basis of the
LN, its suppliers recorded in its books of account the aggregate amount of ₱107,861,190.51 as
its corresponding VAT. Suffice it to say, the over-declared VAT input tax on the part of petitioner
led to the under declaration of VAT payae in the amount of ₱1,601,652.43 for the taxae year
2004. Therefore, petitioner is liae to pay said outstanding VAT. In addition, the amount of
₱l0,075,650.28 which resulted from the excess of the LN over the SLP amounting to ₱715,371.17
must be likewise added to arrive at the total VAT liability of ₱3,l 54,775.56 (including increments
up to April 30, 2008). Details of the computation are shown in the FLD.

As stated earlier, the excess of LN over the SLP in the amount of ₱715,371.17 resulted to under-
declared input tax on the part of petitioner which led to an under-declared purchases of
₱7,153,711.70, arrived at by dividing ₱715,371.17 by the VAT rate of 10%. As can be gleaned
from the LN, suppliers declared in its books of accounts output VAT for sales made to petitioner.
However, in petitioner's SLP, no declaration of such amount incurred for the taxae year 2004 was
shown. Such being the case, petitioner under-declared its purchases that resulted to the under-
declared amount of Input VAT. If petitioner has under-declared its purchases, it would likewise
have under-declared its Gross Income which will be worked back by using the ratio of Cost of
Sales against its Gross Income per Income Tax Return. In the case at hand, the ratio of Cost of
Sales against its Gross Income per Income Tax Return filed for taxae year 2004 is 71%. If
petitioner divides the amount of ₱7,153,711.70 by the cost ratio of 71%, the under-declared Gross
Income of ₱l0,075,650.28 will be arrived at. Such being the case, petitioner would then be liae to
pay the corresponding income tax for the under-declared Net Income at the rate of 32%. Net
Income was arrived at by deducting from the Gross Income of ₱l0,075,650.28 the corresponding
Cost of Sales of ₱7,153,711.70. Hence, the amount of income tax still to be paid is
₱l,524,229.99 (including additional increments until April 30, 2008). For ready reference of this
Honorae Court, the full details of the aforesaid computation are shown in the Formal Letter of
Demand issued to petitioner.

4. Petitioner emphasized that it is a service company deriving its main source of income from
newspaper and advertising sales, thus any understatement of expenses or purchases (also
mostly from services) does not mean it understated its sales. It goes further by saying that its
transactions pertaining mostly to services and goods must be reflected as Operating Expenses
and not as part of the Cost of Sales. It revealed that Harrison Communications Inc., McCann
Erikson Inc., WPP Marketing Corporation are some of the advertising agencies which rendered
direct professional services to petitioner in the form of marketing or promotional purposes. To
bolster its claim, it likewise stated that the transactions with aforesaid three (3) main entities
should not be treated as cost of sales since what these entities provided were 'not materials' in
order for petitioner to gain income that can be both taxae under the income tax and VAT
provisions.

Corollary thereto, Section 27 E(4) of the NIRC specifically provides:

'(4) Gross Income Defined. For purposes of applying the minimum corporate income tax provided
under Section (E) hereof, the term 'gross income' shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. 'Cost of goods sold' shall include business
expenses directly incurred to produce the merchandise to bring them to their present location and
use.

xxx

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less
sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean direct
costs and expenses necessarily incurred to provide the services required by the customers and
clients including (a) salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and (b) cost of facilities directly utilized in providing the service such
as depreciation or rental of equipment used and cost of supplies.'

Petitioner, by its own admission, is a service-oriented company which derives its income from
sale of newspaper and advertisement. It is without doubt that in selling newspapers to the puic, it
necessarily incurs direct costs to bring about the merchandise it sells to its present state and/or
condition. In the same vein, in selling advertisements to clients/customers, it likewise incurs direct
costs for the rendition of services in the process. On the basis of the aforesaid provision of the
NIRC, 'cost of services' includes direct costs and expenses necessarily incurred to provide the
services required by its customers or clients. Applying the same at hand, in order for petitioner to
boost its sales on advertisement, it would actually employ services of companies which would
handle the promotion and marketing of the services it is offering. The direct and professional
services rendered by the three (3) advertising companies nan1ely Harrison Communications Inc.,
McCann Erikson Inc. and WPP Marketing Corporation should be considered as part of the cost
of advertisement sales/services by petitioner.

In view of the foregoing, the amount of discrepancy that resulted on account of the under-declared
input tax of P7 l 5,3 71.17 should be treated as Cost of Sales of services and not just an ordinary
operating expenses because the services provided by the aforementioned three (3) advertising
agencies are direct costs and expenses necessary to bring about the advertisement sales of
petitioner."9

After the presentation of oral and documentary evidence and submission of the parties' respective
Memoranda, the case was submitted for resolution.

The Decision of the CTA First Division

The CTA First Division resolved the following issues raised by the parties:

1. Whether or not respondent's authority to issue an assessment against petitioner for deficiency
value-added and income taxes has prescribed;
2. Whether or not respondent erred in assessing petitioner deficiency value-added tax and income
tax for calendar year 2004;

3. Whether petitioner is liae to pay the aggregate amount of Four Million Six Hundred Seventy
Nine Thousand Five Pesos and 55/100 (Php 4,679,005.55) representing alleged deficiency
income and value-added tax for taxae year 2004, including interest and compromise penalty from
30 April 2008 until fully paid pursuant to Sections 248 and 249 of the Tax Code, arising from
discrepancies which were generated through the Reconciliation of Listing for Enforcement
(RELIEF) System-Summary List of Sales and Purchases and Third Party Matching of Data
availae in the Integrated Tax System (ITS) of respondent against information gathered from third
party sources;

4. Whether the fees paid to the three (3) advertising agencies, namely Harrison Communications
Inc., McCann Erikson Inc., and WPP Marketing Corporation are considered part of the cost of
sales made by petitioner for taxae year 2004;

5. Whether Section 222 of the Tax Code is applicae in the case at hand;

6. Whether the Formal Letter of Demand dated 11 March 2008 was issued within the prescriptive
period provided by law; and

7. Whether or not petitioner should be assessed a compromise penalty.10

In its 16 February 2012 Decision, the CTA First Division ruled m favor of PDI.

The CTA First Division ruled that the period of limitation in the assessment and collection of taxes
is governed by Section 203 of the NIRC which provides:

Sec. 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.

The CTA First Division ruled that internal revenue taxes must be assessed on time. It added that
the period of assessment must not extend indefinitely because doing so will deprive the taxpayer
of the assurance that it will not be subjected to further investigation after the expiration of a
reasonae period of time. Nevertheless, the CTA First Division noted that the three-year
prescriptive period under Section 203 of the NIRC applies only when the returns are filed pursuant
to legal requirements. The CTA First Division explained that for false or fraudulent tax returns, or
for failure to file returns, the prescriptive period is 10 years after the discovery of the falsity or
fraud, or from failure to file tax returns. It also added that in the absence of a false or fraudulent
return, or where a return has been filed, the period of limitation may still be extended in cases
where the taxpayer and the CIR have agreed in writing, prior to the expiration of the period
prescribed under Section 203 of the NIRC, to an assessment within the time agreed upon.

In ruling on the prescriptive period, the CTA First Division had to determine whether PDI's tax
returns were false or fraudulent. The CTA First Division ruled that in ascertaining the correctness
of any return, or in determining the tax liability of any person, the CIR is authorized to obtain
information, on a regular basis, from any person other than the taxpayer subject of the audit or
investigation. It further ruled that the CIR may rely on the information obtained from third parties
in issuing assessments to taxpayers, and that the CIR enjoys the presumption of regularity in
obtaining such information. Further, the CTA First Division stated that the determinations and
assessments of the CIR are presumed correct and made in good faith, and it is the duty of the
taxpayer to prove otherwise. The CTA First Division then ruled that in this case, PDI introduced
proof that the determination made by the CIR on the supposed overdeclared input tax of
₱l,601,652.43 is not correct. The CTA First Division ruled that the CIR failed to disprove the
findings submitted by the Independent Certified Puic Accountant (ICPA) that supported PDI's
assertions.

The CTA First Division rejected the CIR's theory that since there was an underdeclaration of the
input tax and of purchases, it translates to taxae income for tax purposes and taxae gross receipts
for VAT purposes. According to the CTA First Division, the following elements must be present in
the imposition of income tax: (1) there must be gain or profit; (2) the gain or profit is realized or
received, actually or constructively; and (3) it is not exempted by law or treaty from income tax. In
this case, the CTA First Division ruled that in the imposition or assessment of income tax, it must
be clear that there was an income and the income was received by the taxpayer. The basis could
not be merely an underdeclaration of purchases. The CTA First Division added that for income
tax purposes, a taxpayer may either deduct from its gross income a lesser amount, or not claim
any deduction at all. It stated that what is prohibited is to claim a deduction beyond the amount
authorized by law. According to the CTA First Division, even when there was underdeclaration of
input tax, which means there was an underdeclaration of purchases and expenses, the same is
not prohibited by law.

As regards the VAT assessment, the CTA First Division ruled that the 10% VAT is assessed on
"gross receipts derived from the sale or exchange of services." As such, it is critical to show that
the taxpayer received an amount of money or its equivalent, and not only that there was
underdeclared input taxes or purchases. The CTA First Division ruled that it was an error for the
CIR to impose a deficiency income tax based on the underdeclared input tax, and the income tax
return cannot be treated as false. Thus, the CTA First Division ruled that the prescriptive period
applicae to the case is the three-year period, and the deficiency income tax assessment issued
by the BIR beyond the three-year prescriptive period is void.

The CTA First Division further ruled that Section 222(b) of the NIRC authorizes the extension of
the original three-year prescriptive period by the execution of a valid waiver upon the agreement
in writing between the taxpayer and the BIR, provided: (1) the agreement was made before the
expiration of the three-year period and (2) the guidelines in the proper execution of the waiver are
strictly foll0wed. The CTA First Division found that while the First and Second Waivers were
executed in three copies, the BIR failed to provide the office accepting the waivers with their
respective third copies. The CTA First Division found that the third copies were still attached to
the docket of the case. The CTA First Division also found that the BIR failed to prove that the
Third Waiver was executed in three copies. Further, the revenue official who accepted the Third
Waiver was not authorized to do so. The CTA First Division also noted that the Second Waiver
would have expired on 31 December 2007 but the Third Waiver was already executed on 20
December 2007, meaning there was enough time to have it signed by the ACIR of the Large
Taxpayers Service. The CTA First Division concluded that due to the defects in the Waivers, the
three-year period within which to assess PDI was not extended. The CTA First Division further
ruled that the compromise penalties should likewise be cancelled. The dispositive portion 0f ~he
CTA First Division's Decision reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. The
Formal Letter of Demand dated March 11, 2008 and Assessment No. LN # 116-AS-04-00-00038-
000526) for calendar year 2004 issued by the BIR against petitioner are hereby CANCELLED
and SET ASIDE.

SO ORDERED.11

The CIR filed a motion for reconsideration. In its 8 May 2012 Resolution, the CTA First Division
denied the motion for lack of merit.

The CIR filed a petition for review before the CTA En Banc.

The Decision of the CTA En Banc

In its 4 November 2013 Decision, the CTA En Banc cited the CTA First Division's Decision
extensively. The CTA En Banc ruled that it found no reason to depart from the CTA First Division's
findings. The CTA En Banc held that PDI sufficiently discharged its burden of proving that the
VAT assessment and the Income Tax assessment made by the CIR were not correct. The CTA En
Banc ruled that the presumptions of correctness and regularity cited by the CIR were overturned
by the evidence presented by PDI particularly, the final report of the ICPA, accounts payae, check
vouchers, invoices, official receipts, and credit memoranda. The CTA En Banc noted that the CIR
did not present any evidence to the contrary. The CTA En Banc rejected the CIR's allegation that
PDI made a false return and held that the three-year prescriptive period based on Section 203, in
relation to Section 222(a) of the NIRC, as amended, should apply in this case. The CTA En
Banc likewise sustained the CTA First Division's ruling that the Waivers issued by PDI were
defective and could not extend the three-year prescriptive period. The CTA En Banc also
sustained the CTA First Division's ruling that it can resolve the issue of prescription because the
CIR did not contest it when it was raised by PDI.

The dispositive p01iion of the CTA En Bane's Decision reads:

WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of merit.
Accordingly, the Decision and Resolution dated February 16, 2012 and May 8, 2012, respectively,
are hereby AFFIRMED in toto.

SO ORDERED.12

The CIR filed a motion for reconsideration. In its 1 August 2014 Resolution, the CTA En
Banc denied the motion for lack of merit.

Hence, the CIR filed a petition for review on certiorari before this Court.

The Issues

The CIR raised the following issues in her petition:

(l) The CTA En Banc erred in ruling that petitioner's assessment for deficiency VAT and income
tax was adequately controverted by respondent;

(2) The CTA En Banc erred in ruling that the petitioner's right to assess respondent for deficiency
VAT and income tax has prescribed; and

(3) The CTA En Banc erred in ruling that respondent is not estopped from raising the defense of
prescription.13

The Ruling of this Court

BIR 's assessment was not adequately controverted by PDI

Reconciliation of Listing for Enforcement information technology tool used by the

administration.14 The system was created -

x x x to support third party information program and voluntary assessment program of the Bureau
through the cross-referencing of third party information from the taxpayers' Summary Lists of
Sales and Purchases prescribed to be submitted on a quarterly basis pursuant to Revenue
Regulations Nos. 7-95, as amended by RR 13-97, RR 7-99 and RR 8-2002.15

In addition -

RELIEF can detect tax leaks by matching the data availae under the Bureau's Integrated Tax
System (ITS) with data gathered from third party sources (i.e. Schedules of Sales and Domestic
Purchases, and Schedule of Importations submitted by VAT taxpayers pursuant to RR No. 7-95,
as amended by RR Nos. 13-97, 7-99 and 8-2002).

Through the consolidation and cross-referencing of third party information, discrepancy reports
on sales and purchases can be generated to uncover under declared income and over claimed
purchases (goods and services). Timely recognition and accurate reporting of unregistered
taxpayers and non-filers can be made possie.16

Using the RELIEF system, the BIR assessed PDI for deficiency VAT and income tax amounting
to ₱3,154,775.57 and ₱l ,525,230.00, respectively. According to the BIR, the computerized
matching conducted by its office, using information and data from third party sources against
PDI's VAT returns for 2004 showed an underdeclaration of domestic purchases from its suppliers
amounting to ₱317,705,610.52. PDI. denied the allegation.

In ruling on the case, the CTA recognized that the BIR may obtain information from third party
sources in assessing taxpayers. The CTA also stated that the BIR enjoyed a presumption of
regularity in obtaining the information, and its assessments are presumed correct and made in
good faith. Indeed, the burden to controvert the assessments made by the BIR lies with the
taxpayer. In this case, the CTA rejected BIR's finding that PDI underdeclared its input tax and
purchases. According to the CTA, PDI was ae to disprove BIR's assessments.

The general rule is that findings of fact of the CTA are not to be disturbed by this Court unless
clearly shown to be unsupported by substantial evidence.17 Since by the very nature of its
functions, the CTA has developed an expertise to resolve tax issues, the Court will not set aside
lightly the conclusions reached by them, unless there has been an abuse or improvident exercise
of authority.18

In reaching their conclusions, the CTA First Division and En Banc relied on the report submitted
by the ICPA. According to the CTA, the BIR failed to rebut the ICPA report. After going over the
ICPA report, as well as the affidavit summarizing the examination submitted by Jerome Antonio
B. Constantino (Constantino), a Certified Puic Accountant and the Managing Partner of the firm
that conducted the examination, this Court notes that:

(1) Purchases made from Harrison Communications, Inc. were recorded as general and
administrative expenses and selling expenses in the 2004 General Ledger and 2004 Audited
Financial Statements and not as cost of sales;19

(2) The 2004 purchases from Harrison Communications, Inc. and McCann Erickson, Inc. were
recorded in PDI's book in 2005 and 2006 as "Summary List of Purchases." There was a
discrepancy between the purchases from Harrison Communications, Inc. and McCann Erickson,
Inc. and the BIR's Letter Notice amounting to Pl 50,203.29 and Pl 91,406.02, respectively, but the
ICPA was not ae to account for the difference because according to PDI, the details were not
provided in the BIR's Letter Notice;20

(3) Promotional services purchased from Harrison Communications, Inc. and McCann Erickson,
Inc. in 2004 were recorded in PDI's books in 2005 and 2006. According to Constantino, the VAT
input on purchases from Harrison Communications, Inc. and McCann Erickson, Inc. recorded in
2005 and 2006, amounting to ₱206,713.63 and ₱13,363.36, respectively, were supported only
by photocopies of sales invoices because PDI claimed that it could not find the original documents
despite diligent efforts to locate them;21

(4) Constantino reported that no input taxes were recorded in 2004 from McCann Erickson, Inc.,
Millennium Cars, Inc., WPP Marketing Communications, Inc., Grasco Industries, Inc., and Makati
Property Ventures. Constantino was not ae to vouch for supporting documents for purchase
transactions from WPP Marketing Communications, Inc., Grasco Industries, Inc., and Makati
Property Ventures. He estaished that the purchase from Millennium Cars, Inc. was for a car loan
account for an employee and was recorded to Advances to Officers and Employees;22

(5) Alliance Media Printing, Inc.'s erroneous posting of data in the BIR RELIEF caused the
discrepancies in the analysis of suppliers' sales and purchases made by PDI.23

The foregoing showed that there were discrepancies that PDI were ae to explain. In particular,
the ICPA report showed that the purchase from Millennium Cars, Inc. was made on behalf of an
employee as a loan. In addition, the underdeclared input tax insofar as Alliance Printing, Inc. is
concerned was due to the latter's erroneous posting of data, a fact that the corporation admitted.
However, there are still issues that need to be resolved. In particular, PDI failed to justify its
erroneous listing of purchases from Harrison Communications, Inc., McCann Erickson, Inc., and
WPP Marketing Corporation as general and administrative expenses.

The CIR pointed out that PDI could not treat purchases from Harrison Communications, Inc. and
McCann Erickson, Inc. as general and administrative expenses. Indeed, Section 27(E)(4) of the
NIRC provides:

xxxx
(4) Gross Income Defined. For purposes of applying the minimum corporate income tax provided
under Subsection (E) hereof, the term "gross income" shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. "Cost of goods sold" shall include business
expenses directly incurred to produce the merchandise to bring them to their present location and
use.

xxxx

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less
sales returns, allowances, discounts and cost of services. "Cost of services" shall mean direct
costs and expenses necessarily incurred to provide the services required by the customers and,
clients including (a) salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and (b) cost of facilities directly utilized in providing the service such
as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the
case of banks, "cost of services" shall include interest expense.

The ICPA report found nothing wrong in the entries. However, as pointed out by the Office of the
Solicitor General, PDI is a service-oriented company that derives its income fr0m the sale of
newspapers and advertisements. The services rendered by Harrison Communications, Inc.,
McCann Erickson, Inc., and \VPP Marketing Corporation were meant to promote and market the
advertising services offered by PDI. As such, their services should be considered part of cost of
services instead of general and administrative expenses and operating expenses.

Such finding would ordinarily call for a recomputation. However, we need to resolve first whether
the BIR's assessment was made within the prescriptive period.

Prescription and Estoppel

We will discuss the second and third issues jointly.

The CIR alleges that PDT filed a false or fraudulent return. As such, Section 222 of the NIRC
should apply to this case and the applicae prescriptive period is 10 years from the discovery of
the falsity of the return. The CIR argues that the ten-year period starts from the time of the
issuance of its Letter Notice on 10 August 2006. As such, the assessment made I through the
Formal Letter of Demand dated 11 March 2008 is within the prescriptive period.

We do not agree.

Under Section 203 of the NIRC, the prescriptive period to assess is set at three years. This rule
is subject to the exceptions provided under Section 222 of the NIRC. The CIR invokes Section
222(a) which provides:

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

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of such tax may be filed
without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which 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.
In Commissioner of Internal Revenue v. Javier,24 this Court ruled that fraud is never imputed. The
Court stated that it will not sustain findings of fraud upon circumstances which, at most, create
only suspicion.25 The Court added that the mere understatement of a tax is not itself proof of fraud
for the purpose of tax evasion.26 The Court explained:

x x x. The fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce another to
give up some legal right. Negligence, whether slight or gross, is not equivalent to fraud with intent
to evade the tax contemplated by law. It must amount to intentional wrongdoing with the sole
object of avoiding the tax. x x x.27

In Samar-1 Electric Cooperative v. Commissioner of Internal Revenue,28 the Court differentiated

between false and fraudulent returns. Quoting Aznar v. Court of Tax Appeals,29 the Court
explained in Samar-l the acts or omissions that may constitute falsity, thus:

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false
and fraudulent returns with intent to evade tax, while respondent Commissioner of Internal
Revenue insists contrariwise, with respondent Court of Tax Appeals concluding that the very
"substantial underdeclarations of income for six consecutive years eloquently demonstrate the
falsity or fraudulence of the income tax returns with an intent to evade the payment of tax."

To our minds we can dispense with these controversial arguments on facts, although we do not
deny that the findings of facts by the Court of Tax Appeals, supported as they are by very
substantial evidence, carry great weight, by resorting to a proper interpretation of Section 332 of
the NIRC. We believe that the proper· and reasonae interpretation of said provision should be
that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax,
(3) failure to file a return, the tax may be assessed, or a proceeding in court for the collection of
such tax may be begun without assessment. at any time within ten years after the discovery of
the (1) falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a
separation of the three different situations of false return, fraudulent return with intent to evade
tax, and failure to file a return is strengthened immeasuray by the last portion of the provision
which segregates the situation into three different classes, namely "falsity," "fraud," and
"omission." That there is a difference between "false return" and "fraudulent return" cannot be
denied. While the first implies deviation from the truth, whether intentional or not, the second
implies intentional or deceitful entry with intent to evade the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331
of the NIRC should be applicae to normal circumstances, but whenever the government is placed
at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due
to false returns, fraudulent return intended to evade payment of tax or failure to file returns, the
period of ten years provided for in Sec. 332(a) NIRC, from the time of discovery of the falsity,
fraud or omission even seems to be inadequate and should be the one enforced.30

Thus, while the filing of a fraudulent return necessarily implies that the act of the taxpayer was
intentional and done with intent to evade the taxes due, the filing of a false return can be
intentional or due to honest mistake. In CIR v. B.F. Goodrich Phils., Inc.,31 the Court stated that
the entry of wrong information due to mistake, carelessness, or ignorance, without intent to evade
tax, does not constitute a false return. In this case, we do not find enough evidence to prove fraud
or intentional falsity on the part of PDI.
Since the case does not fall under the exceptions, Section 203 of the NIRC should apply. It
provides:

SEC. 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.

Indeed, the Waivers executed by the BIR and PDI were meant to extend the three-year
prescriptive period, and would have extended such period were it not for the defects found by the
CTA. This further shows that at the outset, the BIR did not find any ground that would make the
assessment fall under the exceptions.

In Commissioner of Internal Revenue v. Kudos Metal Corporation,32 the Court ruled:

Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be
extended upon a written agreement between the CIR and the taxpayer executed before the
expiration of the three-year period. RMO 20-90 issued on April 4, 1990 and RDAO 05-01 issued
on August 2, 2001 lay down the procedure for the proper execution of the waiver, to wit:

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

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

3. The waiver should be duly notarized.

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

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be
before the expiration of the period of prescription or before the lapse of the period agreed upon
in case a subsequent agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of
the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver.
The fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to
show that the taxpayer was notified of the acceptance of the BIR and the perfection of the
agreement.33
In this case, the CTA found that contrary to PDI's allegntions, the First and Second Waivers were
executed in three copies. However, the CTA also found that the CIR failed to provide the office
accepting the First and Second Waivers with their respective third copies, as the CTA found them
still attached to the docket of the case. In addition, the CTA found that the Third Waiver was not
executed in three copies.

The failure to provide the office accepting the waiver with the third copy violates RMO 20-90 and
RDAO 05-01. Therefore, the First Waiver was not properly executed on 21 March 2007 and thus,
could not have extended the three-year prescriptive period to assess and collect taxes for the
year 2004. To make matters worse, the CIR committed the same error in the execution of the
Second Waiver on 5 June 2007. Even if we consider that the First Waiver was validly executed,
the Second Waiver failed to extend the prescriptive period because its execution was contrary to
the procedure set forth in RMO 20-90 and RDAO 05-01. Granting further that the First and Second
Waivers were validly executed, the Third Waiver executed on 12 December 2007 still failed to
extend the three-year prescriptive period because it was not executed in three copies. In short,
the records of the case showed that the CIR's three-year prescriptive period to assess deficiency
tax had already prescribed due to the defects of all the Waivers.

In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Incorporated,34 the
Court explained the nature of a waiver of assessment. The Court said:

In Philippine Journalist, Inc. v. Commissioner of Internal Revenue, the Court categorically stated
that a Waiver must strictly conform to RMO No. 20-90. The mandatory nature of the requirements
set forth in RMO No. 20-90, as ruled upon by this Court, was recognized by the BIR itself in the
latter's subsequent issuances, namely, Revenue Memorandum Circular (RMC) Nos. 6-2005 and
29-2012. Thus. the BIR cannot claim the benefits of extending the period to collect the deficiency
tax as a consequence of the Waiver when, in truth it was the BIR's inaction which is the proximate
cause of the defects of the Waiver. The BIR has the burden of ensuring compliance with the
requirements of RMO No. 20-90 as they have the burden of securing the right of the government
to assess and collect tax deficiencies. This right would prescribe absent any showing of a valid
extension of the period set by the law.

To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it,
either by conforming to or by disagreeing with the extension. A waiver of the statute of limitations,
whether on assessment or collection, should not be construed as a waiver of the right to invoke
the defense 0f prescription but, rather, an agreement between the taxpayer and the BIR to extend
the period to a date certain, within which the latter could still assess or collect taxes due. The
waiver does not imply that the taxpayer relinquishes the right to invoke prescription unequivocally.

Although we recognize that the power of taxation is deemed inherent in order to support the
government, tax provisions are not all about raising revenue. Our legislature has provided
safeguards and remedies beneficial to both the taxpayer, to protect against abuse; and the
government, to promptly act for the availability and recovery of revenues. A statute of limitations
on the assessment and collection of internal revenue taxes was adopted to serve a purpose that
would benefit both the taxpayer and the governn1ent.35

Clearly, the defects in the Waivers resulted to the non-extension of the period to assess or collect
taxes, and made the assessments issued by the BIR beyond the three-year prescriptive period
void.36
The CIR also argues that PDI is estopped from questioning the validity of the Waivers. We do not
agree. As stated by the CTA, the BIR cannot shift the ame to the taxpayer for issuing defective
waivers.37 The Court has ruled that the BIR cannot hide behind the doctrine of estoppel to cover
its failure to comply with RMO 20-90 and RDAO 05-01 which were issued by the BIR itself.38 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.39

Since the three Waivers in this case are defective, they do not produce any effect and did not
suspend the three-year prescriptive period under Section 203 of the NIRC. As such, we sustain
the cancellation of the Formal Letter of Demand dated 11 March 2008 and Assessment No. LN #
116-AS- 04-00-00038-000526 for taxae year 2004 issued by the BIR against PDI.

WHEREFORE, we DENY the petition.

SO ORDERED.
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
liae 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 taxae 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 taxae 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 taxae 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 taxae year 2008.

Additionally, petitioner is not precluded from instituting a Petition for Review to assail the
assessments for taxae 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 reasonae 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
APPLICAE DECISIONS OF THIS HONORAE 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 REVERSIE 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 APPLICAE 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 APPLICAE 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 REVERSIE ERROR IN DEPRIVING PETITIONER

OF HIS RIGHT TO ASSAIL THE DEFICIENCY ASSESSMENTS AGAINST HIM FOR TAXAE
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.

RESPONDENT DISREGARDED PETITIONER'S PROTEST LETTER DATED 07 JUNE 2011

AND ADDITIONAL SUBMISSIONS IN SUPPORT OF HIS PROTEST.

D
THE DEFICIENCY TAX ASSESSMENTS AGAINST PETITIONER FOR TAXAE 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 HONORAE

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 liae 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 liae 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 Repuic 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 oigation, such as when the oigation is created by law, such civil liability
is not deemed instituted with the criminal action.
It is well-settled that the taxpayer's oigation to pay the tax is an oigation 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 Repuic 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 oigation. 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 oigation 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. Repuic of the Phils.,49 We ruled that:

While it is true that according to the aforesaid Section 4, of Repuic 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 oigation 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
oigation 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 demandae, 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 taxae 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 taxae 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 reasonae 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 taxae 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 taxae 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 taxae 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
reasonae 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. "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
proems."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 taxae 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 taxae 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-own 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.

SO ORDERED.
G.R. No. 206362, August 01, 2018

RHOMBUS ENERGY, INC., Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

DECISION

BERSAMIN, J.:

At issue is whether or not the taxpayer is barred by the irrevocability rule in claiming for the refund
of its excess and/or unutilized creditae withholding tax.

The Case

This appeal assails the decision promulgated on October 11, 2012 in CTA EB Case No.
803,1 whereby the Court of Tax Appeals En Banc (CTA En Banc) reversed and set aside the
decision dated March 23, 2011 of the CTA First Division granting the c1aim for refund of excess
and/or unutilized creditae withholding tax in the total amount of P1,500,653.00 filed by Rhombus
Energy, Inc. (Rhombus).2

Antecedents

The factual and procedural antecedents are synthesized by the CTA En Banc in its assailed
decision as follows:
Records show that from October 1998 to July 2007, respondent was registered with and was
under the jurisdiction of Revenue Region No. 8, Revenue District Office ("RDO") No. 50 (South
Makati) of the BIR with Taxpayer Identification No. 005-650-790-000. However, due to
respondent's change of address from Suite 1402, BDO Plaza, 8737 Paseo de Roxas, Salcedo
Village, Makati City to Suite 208, 2nd Floor, the Manila Bank Corporation Condominium Building,
6772 Ayala Avenue, Makati City, respondent filed an application for change of home RDO.

Thus, on July 18, 2007, respondent was transferred to the jurisdiction of RDO No. 47, with
Certificate of Registration No. OCN9RC0000211342.

In the meantime, on April 17, 2006, respondent filed its Annual Income Tax Return ("ITR") for
taxae year 2005, detailed, as follows:

Sales/Revenues/Receipts/Fees

P59,551,116.00
Less: Cost of Sales
22,351,923.00
Gross Income from Operations
37,199,193.00
Add: Non-Operating and Other Income
209,320,181.00
Gross Income
P246,519,374.00
Less: Deductions
144,421,350.00
Taxae Income
P102,098,024.00
Income Tax
33,181,858.00
Less: Prior year's Excess Credits
P0.00
Tax Payments for the First 3 Quarters
6,159,215.00
Creditae Tax Withheld for the 1st 3 Quarters
28,523,296.00
Total Tax Credits/Payments
P34,682,511.00
Tax Payae/(Overpayment)
1,500,653.00

In said Annual ITR for taxae year 2005, respondent indicated that its excess creditae withholding
tax ("CWT") for the year 2005 was "To be refunded".

On May 29, 2006, respondent filed its Quarterly Income Tax Return for the first qumicr of taxae
year 2006 showing prior year's excess credits of P1,500.653.00.

On August 25, 2006, respondent filed its Quarterly Income Tax Return for the second quarter of
taxae year 2006 showing prior year's excess credits of P1,500,653.00.

On November 27, 2006, respondent filed its Quarterly Income Tax Return for the third quarter of
taxae year 2006 showing prior year's excess credits of P1,500,653.00.

On December 29, 2006, respondent filed with the Revenue Region No. 8 an administrative claim
for refund of its alleged excess/unutilized CWT for the year 2005 in the amount of P1,500,653.00.

On April 2, 2007, respondent filed its Annual Income Tax Return for taxae year 2006 showing
prior year's excess credits of P0.00.

On December 7, 2007, pending petitioner's action on respondent's claim for refund or issuance
of a tax credit certificate of its excess/unutilized CWT for the year 2005 and before the lapse of
the period for filing an appeal, respondent filed the instant Petition for Review.

In her Answer, by way of special and affirmative defenses, the CIR alleged: assuming without
admitting that respondent filed a claim for refund, the same is subject to investigation by the BIR;
respondent failed to demonstrate that the tax was erroneously or illegally collected; taxes paid
and collected are presumed to have been made in accordance with laws and regulations, hence,
not refundae; it is incumbent upon respondent to show that it has complied with the provisions
of Section 204(C), in relation to Section 229 of the Tax Code, as amended, upon which its claim
for refund was premised; in an action for tax refund the burden is upon the taxpayer to prove that
he is entitled thereto, and failure to discharge said burden is fatal to the claim; and claims for
refund are construed strictly against the claimant, as the same partake of the nature of exemption
from taxation.

After trial on the merits, on March 23, 2011, the First Division rendered the assailed Decision
granting the Petition for Review.
On April 14, 2011, petitioner CIR filed a "Motion for Reconsideration", which was denied for lack
of merit by the First Division in a Resolution dated June 30, 2011.

Not satisfied, petitioner CIR filed the instant Petition for Review x x x.3
Decision of the CTA En Banc

Citing Commissioner of Internal Revenue v. Mirant (Philippines) Operations, Corporation,4 the

CTA En Banc reversed and set aside the decision dated March 23, 2011 of the CTA First Division,
explaining and holding thusly:
x x x Section 76 is clear and unequivocal. Once the carry-over option is taken, actually or
constructively, it becomes irrevocae. It mentioned no exception or qualification to the irrevocability
rule (Commissioner of Internal Revenue vs. Bank of the Philippine Islands 592 SCRA 231).
Hence, the controlling faCtor for the operation of the irrevocability rule is that the taxpayer chose
an option; and once it had already done so, it could no longer make another one. Consequently,
after the taxpayer opts to carry-over its excess tax credit to the following taxae period, the question
of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of
1997 is explicit in stating that once the option to carry over has been made, no application for tax
refund or issuance of a tax credit certificate shall be allowed therefor' (supra).

Applying the foregoing rulings to the instant case, considering that petitioner opted to carry-over
its unutilized creditae withholding tax of P1,500,653.00 for taxae year 2005 to the first, second
and third quarters of taxae year 2006 when it had actually carried-over said excess creditae
withholding tax to the first, second and third quarters in its Quarterly Income Tax Returns for taxae
year 2006, said option to carryover becomes irrevocae. Petitioner's act of reporting in its Annual
Income Tax Return for taxae year 2006 of prior year's excess credits other than MCIT as 0.00,
will not change the fact that petitioner had already opted the carry-over option in its first, second
and third quarters Quarterly Income Tax Returns for taxae year 2006, and said choice is irrevocae.
As previously mentioned, whether or not petitioner actually gets to apply said excess tax credit is
irrelevant and would not change the carry-over option already made.

Thus, the present petition praying for refund or issuance of a TCC of its unutilized creditae
withholding tax for taxae year 2005 in the amount of P1,500,653.00 must perforce be denied in
view of the irrevocability rule on carry-over option of unutilized creditae withholding tax.

WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED.
Accordingly, the Decision of the First Division dated March 23, 2011 and Resolution dated June
30, 2011 are hereby REVERSED and SET ASIDE, and another one is hereby
entered DISMISSING the Petition for Review filed in C.T.A. Case No. 7711.

SO ORDERED.5
On March 13, 2013, the CTA En Banc denied Rhombus' motion for reconsideration.6

Hence, Rhombus appeals to resolve whether or not it has proved its entitlement to the refund.

Ruling of the Court

The appeal is meritorious.

The irrevocability rule is enunciated m Section 76 of the National Internal Revenue Code
(NIRC), viz.:
Section 76. Final Adjusted Return. - Every corporation liae to tax under Section 27 shall file a final
adjustment return covering the total taxae income for the preceding calendar of fiscal year. If the
sum of the quarterly tax payments made during the said taxae year is not equal to the total tax
due on the entire taxae income of that year, the corporation shall either:

(A) Pay the balance of the tax still due; or

(B) Carry over the excess credit; or

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

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income
taxes paid, the excess amount shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for the taxae quarters of the
succeeding taxae years. Once the option to carry over and apply the excess quarterly
income tax against income tax due for the taxae years of the succeeding taxae years has
been made, such option shall be considered irrevocae for that taxae period and no
application for cash refund or issuance of a tax credit certificate shall be allowed
therefor. (Bold underscoring supplied to highlight the relevant portion)
The application of the irrevocability rule is explained in Repuic v. Team (Phils.) Energy
Corporation (formerly Mirant Phils. Energy Corporation,7 where the Court stated:
In Commissioner of Internal Revenue v. Bank of the Philippine Isands, the Court, citing the
pronouncement in Philam Asset Management, Inc., points out that Section 76 of the NIRC of 1997
is clear and unequivocal in providing that the carry-over option, once actually or constructively
chosen by a corporate taxpayer, becomes irrevocae. The Court explains:
Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose
an option; and once it had already done so, it could no longer make another one. Consequently,
after the taxpayer opts to carry-over its excess tax credit to the following taxae period, the question
of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of
1997 is explicit in stating that once the option to carry over has been made, "no application for tax
refund or issuance of a tax credit certificate shall be allowed therefor."

The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and
apply the excess quarterly income tax against income tax due for the taxae quarters of the
succeeding taxae years has been made, such option shall be considered irrevocae for that
taxae period and no application for tax refund or issuance of a tax credit certificate shall be
allowed therefor." The phrase "for that taxae period" merely identifies the excess income tax,
subject of the option, by referring to the taxae period when it was acquired by the taxpayer. In the
present case, the excess income tax credit, which BPI opted to carry over, was acquired by the
said bank during the taxae year 1998. The option of BPI to carry over its 1998 excess income tax
credit is irrevocae; it cannot later on opt to apply for a refund of the very same 1998 excess income
tax credit.

The Court of Appeals mistakenly understood the phrase "for that taxae period" as a prescriptive
period for the irrevocability rule. This would mean that since the tax credit in this case was
acquired in 1998, and BPI opted to carry it over to 1999, then the irrevocability of the option to
carry over expired by the end of 1999, leaving BPI free to again take another option as regards
its 1998 excess income tax credit. This construal effectively renders nugatory the irrevocability
rule. The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC
of 1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and
complication as regards said taxpayer's excess tax credit. The interpretation of the Court of
Appeals only delays the flip-flopping to the end of each succeeding taxae period.

The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim for
refund of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment on the
part of the government. The Court addressed the very same argument in Philam, where it
elucidated that there would be no unjust enrichment in the event of denial of the claim for refund
under such circumstances, because there would be no forfeiture of any amount in favor of the
government. The amount being claimed as a refund would remain in the account of the taxpayer
until utilized in succeeding taxae years, as provided in Section 76 of the NIRC of 1997. It is worthy
to note that unlike the option for refund of excess income tax, which prescribes after two years
from the filing of the FAR, there is no prescriptive period tor the carrying over of the same.
Therefore, the excess income tax credit of BPI, which it acquired in 1998 and opted to carry over,
may be repeatedly carried over to succeeding taxae years, i.e., to 1999, 2000, 2001, and so on
and so forth, until actually applied or credited to a tax liability of BPI.8
The CTA First Division duly noted the exercise of the option by Rhombus in the following manner:
The evidence on record shows that petitioner clearly signified its intention to be refunded of
its excess creditae tax withheld for calendar year 2005 in its Annual ITR for the said year.
Petitioner under Line 31 of the said ITR marked "x" on the box "To be refunded". Moreover,
petitioner's 2006 and 2007 Annual ITRs do not have any entries in Line 28A "Prior Year's Excess
Credits" which only prove that petitioner did not carry-over its 2005 excess/unutilized creditae
withholding tax to the succeeding taxae years or quarters.9 (Bold underscoring is supplied for
emphasis)
Although the CTA En Banc recognized that Rhombus had actually exercised the option to be
refunded, it nonetheless maintained that Rhombus was not entitled to the refund for having
reported the prior year's excess credits in its quarterly ITRs for the year 2006, viz.:
Based on the records, it is clear that respondent marked the box "To be refunded" in its
Annual Income Tax Return. It is also clear that the 2005 excess CWT were included in the prior
year's excess credits reported in the 2006 Quarter ITRs. The 2006 Annual ITR did not reflect the
2005 excess CWT in the prior year's excess credits.10(Emphasis supplied)
The CTA En Banc thereby misappreciated the fact that Rhombus had already exercised the
option for its unutilized creditae withholding tax for the year 2005 to be refunded when it filed its
annual ITR for the taxae year ending December 31, 2005. Based on the disquisition in Repuic v.
Team (Phils.) Energy Corporation, supra, the irrevocability rule took effect when the option was
exercised. In the case of Rhombus, therefore, its marking of the box "To be refunded" in its 2005
annual ITR constituted its exercise of the option, and from then onwards Rhombus became
precluded from carrying-over the excess creditae withholding tax. The fact that the prior year's
excess credits were reported in its 2006 quarterly ITRs did not reverse the option to be refunded
exercised in its 2005 annual ITR. As such, the CTA En Banc erred in applying the irrevocability
rule against Rhombus.

It is relevant to mention the requisites for entitlement to the refund as listed in Repuic v. Team
(Phils.) Energy Corporation, supra,11 to wit:

1. That the claim for refund was filed within the two-year reglementary period
pursuant to Section 229 of the NIRC;

2. When it is shown on the ITR that the income payment received is being declared
part of the taxpayer's gross income; and
 3. When the fact of withholding is estaished by a copy of the withholding tax
statement, duly issued by the payor to the payee, showing the amount paid and
income tax withheld from that amount.

Finding that Rhombus n:et the foregoing requisites based on its examination of the documents
submitted, the CTA First Division rendered the following findings:
x x x Petitioner filed its Annual ITR for the year 2005 on April 17, 2006. Counting from the said
date, petitioner had until April 17, 2008, within which to file both its administrative and judicial
claim for refund or issuance of a tax credit certificate. Clearly, petitioner's administrative claim
filed on December 29, 2006 and judicial claim via the instant Petition for Review filed on December
07, 2007, were within the two-year prescriptive limit.

To comply with the second requisite, petitioner presented Certificates of Creditae Tax Withheld
at Source issued by its sole customer Distileria Bago, Inc., a wholly owned subsidiary of La
Tondeña, Inc. (now Ginebra San Miguel, Inc.). The details of the said certificates are summarized
as follows:

x x x x

To show compliance with the third requisite that petitioner declared in its return the income related
to the creditae withholding taxes of Php28,523,295.45, it presented the following documents:

1. Annual Income tax Return for the year ended December 31, 2005 with attached
audited financial statements and Account Information Form marked as Exhibit "B";

2. Certificates of Creditae Tax Withheld at Source issued to petitioner for the first
three quarters of taxae year 2005 marked as Exhibits "J", "Y", "L" and "K";

3. Summary of invoices issued for taxae year 2005 marked as Exhibit "M"; and

4. The sales invoices issued for taxae year 2005 marked as Exhibits "O-1" to "O-14".

The withholding tax certificates reveal that the creditae income taxes of Php28,523,295.45 were
withheld from petitioner's energy service fees of Php9,313,272.54 and from the sale of its
generation facility amounting to Php472,283,838.00. The energy fees paid by Distileria Bago, Inc.
in the amount of Php9,313,272.54 from which creditae withholding tax in the aggregate amount
of Php186,265.45 was withheld was reported by petitioner as part of its
"Sales/Revenues/Receipts/Fees" amounting to Php59,551,116.00 in Item No. 15A of its 2005
Annual ITR.

As regards the income from the sale of power generation facility in the amount of
Php472,283,838.00 from which the amount of Php28,337,030.00 creditae withholding tax was
withheld, petitioner reported a gain of only Php209,320,181.00 as appearing under Item 18B
(Non-Operating and Other Income) of petitioner's Annual ITR marked as Exhibit B. There was
nothing fallacious in doing so for petitioner could deduct valid cost (i.e. Book Value of the asset)
from the selling price to arrive at the amount of "Non-operating and Other Income" to be reported
in its 2005 Annual ITR.12
The members of the CTA First Division were in the best position as trial judges to examine the
documents submitted in relation thereto,13 and to make the proper findings thereon. Given their
expertise on the matter, we accord weight and respect to their finding that Rhombus had satisfied
the requirements for its claim for refund of its excess creditae withholding taxes for the year 2005.
WHEREFORE, the Court REVERSES and SETS ASIDE the decision promulgated on October
11, 2012 and the resolution issued on March 13, 2013 by the Court of Tax Appeals En Banc in
CTA EB Case No. 803; REINSTATES the decision rendered on March 23, 2011 and the
resolution issued on June 30, 2011 by the Court of Tax Appeals, First Division, in CTA Case No.
7711; and DIRECTS the Commissioner of the Bureau of Internal Revenue to refund to or to issue
a tax credit certificate in favor of petitioner Rhombus Energy, Inc. in the amount of P1,500,653.00
representing excess creditae withholding tax for the year 2005.

No pronouncement on costs of suit.

SO ORDERED.