Commissioner of Internal Revenue v. Lancaster Philippines, Inc.
GR. No. 183408, July 12, 2017.
FACTS: Commissioner of Internal Revenue (CIR) is authorized by law among others,
to investigate or examine and if, necessary, issue assessments for deficiency taxes;
while Lancaster Philippines, Inc. (Lancaster) is a domestic corporation engaged in the
production, processing, and marketing of tobacco. In 1999, BIR issued a Letter of
Authority (LOA) authorizing its revenue officers to examine Lancaster’s books of
accounts and other accounting records for all internal revenue taxes due from taxable
year 1998 to an unspecified date. After the conduct of an examination pursuant to
LOA, the BIR issued a Preliminary Assessment Notice (PAN) which cited Lancaster
for overstatement of its purchases for the fiscal year April 1998 to March 1999; and
noncompliance with the generally accepted accounting principle of proper matching
of cost and revenue. The BIR disallowed the purchases of tobacco from farmers for
the months of February and March 1998 as deductions against income for the fiscal
year April 1998 to March 1999. Lancaster then replied to the PAN contending that for
the past decades, it has used an entire “tobacco-cropping season” to determine its total
purchases covering a one year period from October 1 up to September 30 1999; 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. BIR then sent a Final
Assessment Notice (FAN) to Lancaster, containing the amount of deficiency income
tax and the disallowance of purchase claimed for taxable year ending March 31, 1999.
ISSUES: (1) Whether or not CTA has jurisdiction over the issue on the scope of
authority of revenue examiners; (2) Whether or not CIR’s Revenue Officers exceeded
their authority to investigate the period not covered by the LOA; (3) Whether or not
Lancaster has complied with the Generally Accepted Accounting Principle of Proper
Matching Cost and Revenue; and (4) Whether or not it is correct to cancel and
withdraw the deficiency assessment issued against Lancaster
RULING: (1) Under the NIRC, the jurisdiction of 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 or related laws
administered by the BIR. Moreover, under the same law, the assessment of internal
revenue taxes is one of the duties of the BIR. Thus, it is clear from the foregoing that
the authority to make an examination or assessment, being a matter provided for by
the NIRC is well within the exclusive appellate jurisdiction of the CTA.
(2) In the LOA, even though the date after the words “taxable year 1998 to” is unstated,
it is not at all difficult to discern that the period of examination is the whole taxable
year 1998. This means that the examination of Lancaster must cover the fiscal year
period from April 1 1997 to March 31, 1998. It could not have contemplated a longer
period. The taxable 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. Thus, The CIR’s revenue officers exceeded their authority to investigate.
(3) The NIRC expressly recognizes methods of accounting, one of it is that “other
accounting methods” which means that 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. Also, other methods approved by the CIR,
even when not expressly mentioned in the NIRC, may be adopted if such method
would enable the taxpayer to properly reflect its income, an example of it is the Crop
Method of Accounting which is the method used by Lancaster. Such method is
applicable 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, wherein
expenses paid or incurred are deductible in the year the gross income from the sale of
the crops are realized. In the present case, it is wholly justifiable for Lancaster, as a
business engaged in the production and marketing of tobacco, to adopt the crop method
of accounting. Lancaster is actually utilizing this kind of 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 19987,
including the February and March 1998 are rightfully deductible for income tax
purposes in the year when the gross income from the crops are utilized. Hence, it had
complied with the Proper Matching Cost and Revenue which means that it directs that
the expenses are to be reported in the same period that related revenues are earned.
(4) On the basis of the foregoing, it is correct to cancel and withdraw the deficiency
income tax assessment issued against Lancaster, since the assessment is void for being
issued without valid authority.
PEN: Accounting Method – is a set of rules for determining when and how to report
income deductions.
 The provisions under Chapter VIII, Title II of the NIRC cited above
enumerate the following methods of accounting that the law expressly
recognizes:
1. Cash Basis Method
2. Accrual Method
3. Installment Method
4. Percentage of completion method
5. Other accounting methods
 Any of the foregoing methods may be used by any taxpayer so long as it
reflects its income properly and such method is used regularly.
 Crop Method (Crop Year Basis)
- A method applicable 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, wherein expenses paid
or incurred are deductible in the year the gross income from the
 sale of the crops are realized that the expenses are to be reported
in the same period that related revenues are earned.
- Recognizes that the harvesting and selling of crops do not fall
within the same year that they are planted or grown.
- This rule enjoins the recognition of the expense (or the
deduction of the cost) of crop production in the year that the
crops are sold.
 Matching Concept (Proper Matching Cost and Revenue)
- It is one of the generally accepted accounting principles, which
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 to earn
it.
 Under the Revenue Memorandum Circular, it commands that where there is
conflict between the provisions of the NIRC, including its implementing
rules and regulations, on accounting methods and the generally accepted
accounting principles, the former shall prevail.
Northern Mindanao Power Corporation v. Commissioner of Internal Revenue
GR No. 185115, February 18, 2015.
FACTS: Northern Mindanao Power Corporation (NMPC) is engaged in the
production sale of electricity as an independent power producer and sells electricity to
National Power Corporation (NPC). It allegedly incurred input value-added tax (VAT)
on its domestic purchases of goods and services that were used in its production and
sale of electricity to NPC. NMPC filed an administrative claim for refund for the 3 rd
on June 20, 2000 and 4th quarters of taxable year 1999, and on July 25, 2001 for taxable
year 2000. Thereafter, alleging inaction of Commissioner of Internal Revenue on these
administrative claims, NMPC filed a Petition with the CTA. The latter denied on the
ground that the term “zero-rated” was not imprinted on the receipts or invoices
presented by NMPC, and thus failed to substantiate its claim for refund and to strictly
comply with the invoicing requirements of the law and tax regulations.
ISSUES: (1)Whether or not the judicial claims was timely filed; and (2) Whether or
not the failure to print the word “zero-rated” on the VAT invoices or official receipts
are fatal
RULING: (1) For a VAT-registered person whose sales are zero-rated or effectively
zero-rated, NIRC specifically provides for a two-year prescriptive period after the
close of the taxable quarter when the sales were made within which such taxpayer may
apply for the issuance of a tax credit certificate or refund of creditable input tax. In this
case, NMPC had until September 30, 2001 and December 31, 2001 for the claims
covering the 3rd and the 4th quarters of taxable year 1999; and March 31, June 30,
September 30 and December 31 in 2002 for the claims covering all four quarters of
taxable year 2000 - or the close of the taxable quarter when the zero-rated sales were
made - within which to file its administrative claim for a refund. Thus, NMPC had
sufficiently complied with the two-year prescriptive period when it filed its
administrative claim for a refund on June 20 2000 covering the 3rd and the 4th quarters
of taxable year 1999 and on July 25 2001 covering all the quarters of taxable year
2000. Pursuant to Section 112(D) of the NIRC of 1997, CIR had one hundred twenty
(120) days from the date of submission of complete documents in support of the
application within which to decide on the administrative claim. Thus, the 120-day
period for the CIR to act on the administrative claim commenced on June 20 2000 and
July 25 2001. Judicial claims filed from 1 January 1998 until the present should strictly
adhere to the 120+30-day period referred to in Section 112 of the NIRC of 1997. The
only exception is the period 10 December 2003 until 6 October 2010. Within this
period, BIR Ruling No. DA-489-03 is recognized as an equitable estoppel, during
which judicial claims may be filed even before the expiration of the 120-day period
granted to the CIR to decide on a claim for a refund. Hence, both judicial claims must
be disallowed since the claim for refund of input VAT covering the 3 rd and the 4th
quarters of taxable year 1999 was belatedly filed because it filed after the 120+30 day
period and the claim for refund of input VAT covering all quarters of taxable year
2000 was prematurely filed.
(2) The Supreme Court has consistently held as fatal the failure to print the word “zero-
rated” on the VAT invoices or official receipts in claims for a refund or credit of input
VAT on zero-rated sales, even if the claims were made prior to the effectivity of R.A.
9337. Clearly then, the present Petition must be denied.
PEN:
 Section 113 of the NIRC of 1997 provides that a VAT invoice is necessary
for every sale, barter or exchange of goods or properties, while a VAT
official receipt properly pertains to every lease of goods or properties; as well
as to every sale, barter or exchange of services.
 Sales or commercial invoice - is a written account of goods sold or services
rendered indicating the prices charged therefor or a list by whatever name it
is known which is used in the ordinary course of business evidencing sale
and transfer or agreement to sell or transfer goods and services.
 Receipt - is a written acknowledgment of the fact of payment in money or
other settlement between seller and buyer of goods, debtor or creditor, or
person rendering services and client or customer.
 A VAT invoice is the seller’s best proof of the sale of goods or services to
the buyer, while a VAT receipt is the buyer’s best evidence of the payment
of goods or services received from the seller. A VAT invoice and a VAT
receipt should not be confused and made to refer to one and the same thing.
Certainly, neither does the law intend the two to be used alternatively.