G.R. No.
220835 On September 11, 2009, STI received from the CIR the Final Decision on Disputed
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
SYSTEMS TECHNOLOGY INSTITUTE, INC., Respondent
DECISION
CAGUIOA, J.:
Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of
Court filed by petitioner Commissioner of Internal Revenue (CIR), assailing the
Decision2 dated March 24, 2015 and Resolution3 dated September 2, 2015 of the
Court of Tax Appeals (CTA) En Banc in CTA EB No. 1050. The CTA En Banc
affirmed the Decision dated April 17, 2013 and the Resolution dated July 17, 2013 of
the CTA Second Division, which granted the petition for review filed by respondent
Systems Technology Institute, Inc. (STI) and cancelled the assessments against STI
for deficiency income tax, deficiency expanded withholding tax (EWT), and deficiency
value-added tax (VAT) for fiscal year ending March 31, 2003.4
Facts
The facts of this case, as presented by the CTA En Banc, are as follows:
STI filed its Amended Annual Income Tax Return for fiscal year 2003 on August 15,
2003; its Quarterly VAT Returns on July 23, 2002, October 25, 2002, January 24,
2003, and May 23, 2003; and its Bureau of Internal Revenue (BIR) Form 1601E for
EWT from May 10, 2002 to April 15, 2003.5
On May 30, 2006, STI's Amiel C. Sangalang signed a Waiver of the Defense of
Prescription Under the Statute of Limitations of the National Internal Revenue Code
(NIRC), with the proviso that the assessment and collection of taxes of fiscal year
2003 shall come "no later than December 31, 2006."6 On June 2, 2006, the waiver
was accepted by Virgilio R. Cembrano, Large Taxpayers District Officer of Makati and
was notarized on even date.7
On December 12, 2006, another waiver was executed extending the period to assess
and collect the assessed taxes to March 31, 2007.8 It was also signed by Sangalang
and accepted by Cembrano and notarized on the same date.9 A third waiver was
executed by the same signatories extending further the period to June 30, 2007.10
On June 28, 2007, STI received a Formal Assessment Notice from the CIR,
assessing STI for deficiency income tax, VAT and EWT for fiscal year 2003, in the
aggregate amount of ₱161,835,737.98.11
On July 25, 2007, STI filed a request for reconsideration/reinvestigation dated July 23,
2007.12
Assessment (FDDA) dated August 17, 2009 finding STI liable for deficiency income
tax, VAT and EWT in the lesser amount of ₱124,257,764.20.13
On October 12, 2009, STI appealed the FDDA by filing a petition for review with the
CTA.14 The case was docketed as CTA Case No. 7984 and was heard by the CTA
Second Division.15
On April 17, 2013, the CTA Second Division promulgated its Decision denying the
assessment on the ground of prescription, the dispositive portion of which reads as
follows:
WHEREFORE, premises considered, the instant Petition for Review is hereby
GRANTED. Accordingly, the assessments against petitioner for deficiency income
tax, deficiency expanded withholding tax, and deficiency value-added tax for fiscal
year ending March 31, 2003 are hereby CANCELLED and SET ASIDE on the ground
of prescription.16
The CTA Division found the waivers executed by STI defective for failing to strictly
comply with the requirements provided by Revenue Memorandum Order (RMO) No.
20-90 issued on April 4, 1990 and Revenue Delegation Authority Order (RDAO) No.
05-01 issued on August 2, 2001. Consequently, the periods for the CIR to assess or
collect internal revenue taxes were never extended; and the subject assessment for
deficiency income tax, VAT and EWT against STI, which the CIR issued beyond the
three-year prescriptive period provided by law, was already barred by prescription.17
On May 9, 2013, the CIR filed a motion for reconsideration, but this was denied by the
CTA Division in its Resolution dated July 17, 2013.18
Undaunted, the CIR appealed to the CTA En Banc.19
In the assailed Decision, 20 the CTA En Banc denied the CIR's petition for lack of
merit. The CTA En Banc affirmed the Decision and Resolution of the CTA Division,
reiterating that the requirements for the execution of a waiver must be strictly
complied with; otherwise, the waiver will be rendered defective and the period to
assess or collect taxes will not be extended. It further held that the execution of a
waiver did not bar STI from questioning the validity thereof or invoking the defense of
prescription.21
On September 2, 2015, the CTA En Banc issued the assailed Resolution22 denying
the CIR's motion for reconsideration for lack of merit.
Hence, the instant petition raising the following issue:
WHETHER OR NOT PRESCRIPTION HAD SET IN AGAINST THE ASSESSMENTS
FOR DEFICIENCY INCOME TAX, DEFICIENCY VAT AND DEFICIENCY
EXPANDED WITHHOLDING TAX.23
The CIR asserts that prescription had not set in on the subject assessments because
the waivers executed by the parties are valid.24 It also claims that STI' s active
participation in the administrative investigation by filing a request for reinvestigation,
which resulted in a reduced assessment, amounts to estoppel that prescription can no
longer be invoked.25 To support its contention, the CIR cites the case of Rizal
Commercial Banking Corporation v. Commissioner of Internal Revenue,26 where the
Court considered the taxpayer's partial payment of the revised assessment as an
implied admission of the validity of the waivers.27
For its part, STI contends that the requisites under RMO No. 20-90 are mandatory
and no less than this Court has affirmed that the failure to comply therewith results in
the nullity of the waiver and consequently, the assessments.28 Tested against these
requisites and settled jurisprudence, the subject waivers are defective and invalid
and, thus, did not extend the period to assess.29
STI further claims, that contrary to the CIR's insistence, it is not estopped from
invoking the defense of prescription because: (1) STI did not admit the validity or
correctness of the deficiency assessments; (2) it did not receive or accept any benefit
from the execution of the waivers since it continued to dispute the assessment; and
(3) STI did not, in any way, lead the CIR to believe that the waivers were valid.30
Finally, STI avers that the doctrine in RCBC does not apply to this case because the
estoppel upheld in said case arose from the act of payment, which is not obtaining in
the instant case.31
The Court's Ruling
The petition lacks merit.
The Waivers of Statute of
Limitations, being defective and
invalid, did not extend the CIR's
period to issue the subject
assessments. Thus, the right of the
government to assess or collect the
alleged deficiency taxes is already
barred by prescription.
Section 203 of the NIRC of 1997, as amended, limits the CIR's period to assess and
collect internal revenue taxes to three (3) years counted from the last day prescribed
by law for the filing of the return or from the day the return was filed, whichever comes
later.32 Thus, assessments issued after the expiration of such period are no longer
valid and effective.33
In SMI-Ed Philippines Technology, Inc. v. Commissioner of Internal Revenue,34 the
Court explained the primary reason behind the prescriptive period on the CIR's right
to assess or collect internal revenue taxes: that is, to safeguard the interests of
taxpayers from unreasonable investigation.35 Accordingly, the government must
assess internal revenue taxes on time so as not to extend indefinitely the period of
assessment and deprive the taxpayer of the assurance that it will no longer be
subjected to further investigation for taxes after the expiration of a reasonable period
of time.36
In this regard, the CTA Division found that the last day for the CIR to issue an
assessment on STI's income tax for fiscal year ending March 31, 2003 was on
August 15, 2006; while the latest date for the CIR to assess STI of EWT for the fiscal
year ending March 31, 2003 was on April 17, 2006; and the latest date for the CIR to
assess STI of deficiency VAT for the four quarters of the same fiscal year was on May
25, 2006.37 Clearly, on the basis of these dates, the final assessment notice dated
June 16, 2007,38 assessing STI for deficiency income tax, VAT and EWT for fiscal
year 2003, in the aggregate amount of ₱l61,835,737.98, which STI received on June
28, 2007,39 was issued beyond the three-year prescriptive period.
However, the CIR maintains that prescription had not set in because the parties
validly executed a waiver of statute of limitations under Section 222(b) of the NIRC,
as amended. Said provision reads:
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes. -
xxxx
(b) If before the expiration of the time prescribed in Section 203 for the assessment of
the tax, both the Commissioner and the taxpayer have agreed in writing to its
assessment after such time, the tax may be assessed within the period agreed upon.
The period so agreed upon may be extended by subsequent written agreement made
before the expiration of the period previously agreed upon.
xxxx
To implement the foregoing provisions, the BIR issued RMO 20-90 and RDAO 05-01,
outlining the procedures for the proper execution of a valid waiver, viz.:
1. The waiver must be in the proper form prescribed by RMO 20- 90. The phrase "but
not after __________ 19 _",which indicates the expiry date of the period agreed upon
to assess/collect the tax after the regular three-year period of prescription, should be
filled up.
2. The waiver must be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of its
responsible officials. In case the authority is delegated by the taxpayer to a
representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver indicating
that the BIR has accepted and agreed to the waiver.1âwphi1 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.40
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.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue,41 the Court
declared the waiver invalid because: (1) it did not specify the date within which the
BIR may assess and collect revenue taxes, such that the waiver became unlimited in
time; (2) it was signed only by a revenue district officer, and not the CIR; (3) there was
no date of acceptance; and (4) the taxpayer was not furnished a copy of the waiver.42
In Commissioner of Internal Revenue v. FMF Development Corporation,43 the waiver
was found defective and thus did not validly extend the original three-year prescriptive
period because: (1) it was not proven that the taxpayer was furnished a copy of the
waiver; (2) it was signed only by a revenue district officer, and not the CIR as
mandated by law; and (3) it did not contain the date of acceptance by the CIR, which
is necessary to determine whether the waiver was validly accepted before the
expiration of the original three-year period.44
In another case,45 the waivers executed by the taxpayer's accountant were found
defective for the following reasons: (1) the waivers were executed without the
notarized written authority of the taxpayer's representative to sign the waiver on its
behalf; (2) the waivers failed to indicate the date of acceptance; and (3) the fact of
receipt by the taxpayer of its file copy was not indicated in the original copies of the
waivers.46
In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Inc.,47 the
Court nullified the waivers because the following requisites were absent: (1)
conformity of either the CIR or a duly authorized representative; (2) date of
acceptance showing that both parties had agreed on the waiver before the expiration
of the prescriptive period; and (3) proof that the taxpayer was furnished a copy of the
waiver.48
The Court also invalidated the waivers executed by the taxpayer in the case o.f
Commissioner of Internal Revenue v. Standard Chartered Bank,49 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-
90.50
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:
1. At the time when the first waiver took effect, on June 2, 2006, the period for the CIR
to assess STI for deficiency EWT and deficiency VAT for fiscal year ending March 31,
2003, had already prescribed. To recall, the CIR only had until April 17, 2006 (for
EWT) and May 25, 2006 (for VAT), to issue the subject assessments.
2. STI's signatory to the three waivers had no notarized written authority from the
corporation's board of directors. It bears to emphasize that RDAO No. 05-01
mandates the authorized revenue official to ensure that the waiver is duly
accomplished and signed by the taxpayer or his authorized representative before
affixing his signature to signify acceptance of the same; and in case the authority is
delegated by the taxpayer to a representative, as in this case, the concerned revenue
official shall see to it that such delegation is in writing and duly notarized. The waiver
should not be accepted by the concerned BIR office and official unless notarized.51
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 established 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.52 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.
Verily, considering the foregoing defects in the waivers executed by STI, the periods
for the CIR to assess or collect the alleged deficiency income tax, deficiency EWT
and deficiency VAT were not extended. The assessments subject of this case, which
were issued by the BIR beyond the three-year prescriptive, are therefore considered
void and of no legal effect. Hence, the CT A committed no reversible error in
cancelling and setting aside the subject assessments on the ground of prescription.
STI is not estopped from invoking
the defense of prescription.
As regards the CIR's reliance on the case of RCBC and its insistence that STI's
request for reinvestigation, which resulted in a reduced assessment, bars STI from
raising the defense of prescription, the Court finds the same bereft of merit.
As correctly stated by the CTA, RCBC is not on all fours with the instant case. The
estoppel upheld in the said case arose from the taxpayer's act of payment and not on
the reduction in the amount of the assessed taxes. The Court explained that RCBC's
partial payment of the revised assessments effectively belied its insistence that the
waivers are invalid and the assessments were issued beyond the prescriptive period.
Here, as no such payment was made by STI, mere reduction of the amount of the
assessment because of a request for reinvestigation should not bar it from raising the
defense of prescription.

At this juncture, the Court deems it important to reiterate its ruling in Commissioner of
Internal Revenue v. Kudos Metal Corporation,53 that the doctrine of estoppel cannot
be applied as an exception to the statute of limitations on the assessment of taxes
considering that there is a detailed procedure for the proper execution of the waiver,
which the BIR must strictly follow. The BIR cannot hide behind the doctrine of
estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01, which the
BIR itself had issued. Having caused the defects in the waivers, the BIR must bear
the consequence. It cannot simply shift the blame to the taxpayer.54

WHEREFORE, premises considered, the instant petition for review is hereby

DENIED. The Decision dated March 24, 2015 and the Resolution dated September 2,
2015 of the Court of Tax Appeals En Banc in CTA EB No. 1050 are hereby
AFFIRMED.

SO ORDERED.
G.R. No. 204142 November 19, 2014
HONDA CARS PHILIPPINES, INC., Petitioner,
vs.
HONDA CARS TECHNICAL SPECIALIST AND SUPERVISORS UNION,
Respondent.
DECISION
BRION, J.:
We resolve the present petition for review on certiorari1 seeking to nullify the March
30, 2012 decision2 and October 25, 2012 resolution3 of the Court of Appeals (CA) in
CA-G.R. SP No. 109297. These rulings were penned by Associate Justice Noel G.
Tijam and concurred in by Associate Justices Romeo F. Barza and Edwin D.
Sorongon.
The Factual Antecedents
On December 8, 2006, petitioner Honda Cars Philippines, Inc., (company) and
respondent Honda Cars Technical Specialists and Supervisory Union (union), the
exclusive collective bargaining representative of the company’s supervisors and
technical specialists, entered into a collective bargaining agreement (CBA) effective
April 1, 2006 to March 31, 2011.4
Prior to April 1, 2005, the union members were receiving a transportation allowance of
3,300.00 a month. On September 3, 2005, the company and the union entered into a
Memorandum of Agreement5 (MOA) converting the transportation allowance into a
monthly gasoline allowance starting at 125 liters effective April 1,2005. The allowance
answers for the gasoline consumed by the union members for official business
purposes and for home to office travel and vice-versa. The company claimed that the
grant of the gasoline allowance is tied up to a similar company policy for managers
and assistant vice-presidents (AVPs), which provides that in the event the amount of
gasoline is not fully consumed, the gasoline not used may be converted into cash,
subject to whatever tax may be applicable. Since the cash conversion is paid in the
monthly payroll as an excess gas allowance, the company considers the amount as
part of the managers’ and AVPs’ compensation that is subject to income tax on
compensation.
Accordingly, the company deducted from the union members’ salaries the withholding
tax corresponding to the conversion to cash of their unused gasoline allowance.
The union, on the other hand, argued that the gasoline allowance for its members is a
"negotiated item" under Article XV, Section 15 of the new CBA on fringe benefits. It
thus opposed the company’s practice of treating the gasoline allowance that, when
converted into cash, is considered as compensation income that is subject to
withholding tax.
The disagreement between the company and the union on the matter resulted in a
grievance which they referred to the CBA grievance procedure for resolution. As it
remained unsettled there, they submitted the issue to a panel of voluntary arbitrators
as required by the CBA.
The Voluntary Arbitration Decision
On February 6, 2009, the Panel of Voluntary Arbitrators6 rendered a decision/award7
declaring that the cash conversion of the unused gasoline allowance enjoyed by the
members of the union is a fringe benefit subject to the fringe benefit tax, not to income
tax. The panel held that the deductions made by the company shall be considered as
advances subject to refund in future remittances of withholding taxes.
The company moved for partial reconsideration of the decision, but the panel denied
the motion in its June 3, 2009 order,8 prompting the company to appeal to the CA
through a Rule 43 petition for review. The core issue in this appeal was whether the
cash conversion of the unused gasoline allowance is a fringe benefit subject to the
fringe benefit tax, and not to a compensation income subject to withholding tax.
The CA Ruling
The CA Eight Division denied the petition and upheld with modification the voluntary
arbitration decision. It agreed with the panel’s ruling that the cash conversion of the
unused gasoline allowance is a fringe benefit granted under Section 15, Article XV of
the CBA on "Fringe Benefits." Accordingly, the CA held that the benefit is not
compensation income subject to withholding tax.
This conclusion notwithstanding, the CA clarified that while the gasoline allowance or
the cash conversion of its unused portion is a fringe benefit, it is "not necessarily
subject to fringe benefit tax."9 It explained that Section 33 (A) of the National Internal
Revenue Code (NIRC) of 1997 imposed a fringe benefit tax, effective January 1, 2000
and thereafter, on the grossed-up monetary value of fringe benefit furnished or
granted to the employee (except rank-and-file employees) by the employer (unless
the fringe benefit is required by the nature of, or necessary to the trade, business or
profession of the employer, or when the fringe benefit is for the convenience or
advantage of the employer).
According to the CA, "it is undisputed that the reason behind the grant of the gasoline
allowance to the union members is primarily for the convenience and advantage of
Honda, their employer."10 It thus declared that the gasoline allowance or the cash
conversion of the unused portion thereof is not subject to fringe benefit tax.11
The Petition
Its motion for reconsideration denied, the company appeals to this Court to set aside
the CA’s dispositions, raising the very same issue it brought to the appellate court —
whether the cash conversion of the gasoline allowance of the union members is a
fringe benefit or compensation income, for taxation purposes.
The company reiterates its position that the cash conversion of the union members’
gasoline allowance is compensation income subject to income tax, and not to a fringe
benefit tax. It argues that the tax treatment of a benefit extended by the employer to
the employees is governed by law and the applicable tax regulations, and notby the
nomenclature or definition provided by the parties. The fact that the CBA erroneously
classified the gasoline allowance as a fringe benefit is immaterial as it is the law –
Section 33 of the NIRC – that provides for the legal classification of the benefit.
It adds that there is no basis for the CA conclusion that the cash conversion of the
unused gasoline allowance redounds to the benefit of management. Common sense
dictates that it is the individual union members who solely benefit from the cash
conversion of the gasoline allowance as it goes into their compensation income.
In any event, the company submits that even assuming that the cash conversion of
the unused gasoline allowance is a tax-exempt fringe benefit and that it erred in
withholding the income taxes due, still the union members would have no cause of
action against it for the refund of the amounts withheld from them and remitted to the
Bureau of Internal Revenue (BIR).
Citing Section 204 of the NIRC, the company contends that an action for the refund of
an erroneous withholding and payment of taxes should be in the nature of a tax
refund claim with the BIR. It further contends that when it withheld the income tax due
from the cash conversion of the unused gasoline allowance of the union members, it
was simply acting as an agent of the government for the collection and payment of
taxes due from the members.
The Union’s Position
In its Comment12 dated April 19, 2013, the union argues for the denial of the petition
for lack of merit. Itposits that its members’ gasoline allowance and its unused gas
equivalent are fringe benefits under the CBA and the law [Section 33 (A) of NIRC] and
is therefore not subject to withholding tax on compensation income. Moreover, under
that law and BIR Revenue Regulations 2-98, the same benefit is not subject to the
fringe benefit tax because it is required by the nature of, or necessary to the trade or
business of the company.
The union further submits that in 2007, the BIR ruled that fixed and/or pre-computed
transportation allowance given to supervisory employees in pursuit of the business of
the company, shall not be taxable as compensation or fringe benefits of the
employees.13 It maintains that the gasoline allowance is already pre-computed by the
company as sufficient to cover the gasoline consumption of the supervisors whenever
they perform work for the company. The fact that the company allowed its members
to convert it to cash when not fully consumed is no longer their problem because the
benefit was already given.
Our Ruling
We partly grant the petition.
The Voluntary Arbitrator has no
jurisdiction to settle tax matters
The Labor Code vests the Voluntary Arbitrator original and exclusive jurisdiction to
hear and decide all unresolved grievances arising from the interpretation or
implementation of the Collective Bargaining Agreement and those arising from the
interpretation or enforcement of company personnel policies.14 Upon agreement of
the parties, the Voluntary Arbitrator shall also hear and decide allother labor disputes,
including unfair labor practices and bargaining deadlocks.15
In short, the Voluntary Arbitrator’s jurisdiction is limited to labor disputes. Labor
dispute means "any controversy or matter concerning terms and conditions of
employment or the association or representation of persons in negotiating, fixing,
maintaining, changing, or arranging the terms and conditions of employment,
regardless of whether the disputants stand in the proximate relation of employer and
employee."16
The issues raised before the Panel of Voluntary Arbitrators are: (1) whether the cash
conversion of the gasoline allowance shall be subject to fringe benefit tax or the
graduated income tax rate on compensation; and (2) whether the company wrongfully
withheld income tax on the converted gas allowance.
The Voluntary Arbitrator has no competence to rule on the taxability of the gas
allowance and on the propriety of the withholding of tax. These issues are clearly tax
matters, and do not involve labor disputes. To be exact, they involve tax issues within
a labor relations setting as they pertain to questions of law on the application of
Section 33 (A) of the NIRC. They do not require the application of the Labor Code or
the interpretation of the MOA and/or company personnel policies. Furthermore, the
company and the union cannot agree or compromise on the taxability of the gas
allowance. Taxation is the State’s inherent power; its imposition cannot be subject to
the will of the parties.
Under paragraph 1, Section 4 of the NIRC, the CIR shall have the exclusive and
original jurisdiction to interpret the provisions of the NIRC and other tax laws, subject
to review by the Secretary of Finance. Consequently, if the company and/or the union
desire/s to seek clarification of these issues, it/they should have requested for a tax
ruling17 from the Bureau of Internal Revenue (BIR). Any revocation, modification or
reversal of the CIR’s ruling shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the following
cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his
return or any document required of him by the BIR;
 (b) Where the facts subsequently gathered by the BIR are materially different March 30, 2012 decision and the October 25, 2012 resolution of the Court of Appeals
from the facts on which the ruling is based; or in CA-G.R. SP No. 109297. We declare NULL AND VOID the February 6, 2009
decision and June 3, 2009 resolution of the Panel of Voluntary Arbitrators. No costs.
(c) Where the taxpayer acted in bad faith.18
SO ORDERED
On the other hand, if the union disputes the withholding of tax and desires a refund of
the withheld tax, it should have filed an administrative claim for refund with the CIR.
Paragraph 2, Section 4 of the NIRC expressly vests the CIR original jurisdiction over
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation
thereto, or other tax matters. The union has no cause of action against the company

Under the withholding tax system, the employer as the withholding agent acts as both
the government and the taxpayer’s agent. Except in the case of a minimum wage
earner, every employer has the duty to deduct and withhold upon the employee’s
wages a tax determined in accordance with the rules and regulations to be prescribed
by the Secretary of Finance, upon the CIR’s recommendation.19 As the
Government’s agent, the employer collects tax and serves as the payee by fiction of
law.20 As the employee’s agent, the employer files the necessary income tax return
and remits the tax to the Government.21

Based on these considerations, we hold that the union has no cause of action against
the company.1âwphi1 The company merely performed its statutory duty to withhold
tax based on its interpretation of the NIRC, albeit that interpretation may later be
found to be erroneous. The employer did not violate the employee's right by the mere
act of withholding the tax that may be due the government.22

Moreover, the NIRC only holds the withholding agent personally liable for the tax
arising from the breach of his legal duty to withhold, as distinguished from his duty to
pay tax.23 Under Section 79 (B) of the NIRC, if the tax required to be deducted and
withheld is not collected from the employer, the employer shall not be relieved from
liability for any penalty or addition to the unwithheld tax.

Thus, if the BIR illegally or erroneously collected tax, the recourse of the taxpayer,
and in proper cases, the withholding agent, is against the BIR, and not against the
withholding agent.24 The union's cause of action for the refund or non-withholding of
tax is against the taxing authority, and not against the employer. Section 229 of the
NIRC provides:

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.

WHEREFORE, premises considered, we PARTLY GRANT the petition for review on

certiorari filed by Honda Cars Philippines, Inc. We REVERSE AND SET ASIDE the
 FIRST DIVISION
Documentary Stamp Tax P 13,497,227.80

G.R. No. 201530, April 19, 2017 Final Withholding Tax - Trust 8,770,265.07

ASIATRUST DEVELOPMENT BANK, INC., Petitioner, v. COMMISSIONER OF Documentary Stamp Tax - Industry Issue 88,584,931.39
INTERNAL REVENUE, Respondent.
TOTAL P 110,852,424.26
G.R. Nos. 201680-81

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ASIATRUST

DEVELOPMENT BANK, INC., Respondent. Fiscal Year 1997

DECISION Documentary Stamp Tax P 10,156,408.63

Documentary Stamp Tax - Industry Issue 39,163,539.57

DEL CASTILLO, J.:
TOTAL P 49,319,948.20
An application for tax abatement is deemed approved only upon the issuance of a
termination letter by the Bureau of Internal Revenue (BIR).

These consolidated Petitions for Review on Certiorari1 under Ru1e 45 of the Rules of
Court assail the November 16, 2011 Decision2 and the April 16, 2012 Resolution3 of
the Court of Tax Appeals (CTA) En Banc in CTA EB Case Nos. 614 and 677.
Factual Antecedents
On separate dates in February 2000, Asiatrust Development Bank, Inc. (Asiatrust)
received from the Commissioner of Internal Revenue (CIR) three Formal Letters of
Demand (FLD) with Assessment Notices4 for deficiency internal revenue taxes in the
amounts of P131,909,161.85, P83,012,265.78, and P144,012,918.42 for fiscal years
ending June 30, 1996, 1997, and 1998, respectively. 5
On March 17, 2000, Asiatrust timely protested the assessment notices. 6
Due to the inaction of the CIR on the protest, Asiatrust filed before the CTA a Petition
for Review7 docketed as CTA Case No. 6209 praying for the cancellation of the tax
assessments for deficiency income tax, documentary stamp tax (DST) - regular, DST
- industry issue, final withholding tax, expanded withholding tax, and fringe benefits
tax issued against it by the CIR.
On December 28, 2001, the CIR issued against Asiatrust new Assessment Notices
for deficiency taxes in the amounts of P112,816,258.73, P53,314,512.72, and
P133,013,458.73, covering the fiscal years ending June 30, 1996, 1997, and 1998,
respectively.8
On the same day, Asiatrust partially paid said deficiency tax assessments thus
leaving the following balances:
Fiscal Year 1996
Fiscal year 1998
Documentary Stamp Tax P 20,425,770.07
Final Withholding Tax - Trust 10,183,367.80
Documentary Stamp Tax - Industry Issue 93,430,878.54
TOTAL P 124,040,016.419
On April 19, 2005, the CIR approved Asiatrust's Offer of Compromise of DST - regular
assessments for the fiscal years ending June 30, 1996, 1997, and 1998. 10
During the trial, Asiatrust manifested that it availed of the Tax Abatement Program for
its deficiency final withholding tax - trust assessments for fiscal years ending June 30,
1996 and 1998; and that on June 29, 2007, it paid the basic taxes in the amounts of
P4,187,683.27 and P6,097,825.03 for the said fiscal years, respectively. 11 Asiatrust
also claimed that on March 6, 2008, it availed of the provisions of Republic Act (RA)
No. 9480, otherwise known as the Tax Amnesty Law of 2007. 12
Ruling of the Court of Tax Appeals Division
On January 20, 2009, the CTA Division rendered a Decision13 partially granting the
Petition. The CTA Division declared void the tax assessments for fiscal year ending
June 30, 1996 for having been issued beyond the three-year prescriptive period.14
However, due to the failure of Asiatrust to present documentary and testimonial
evidence to prove its availment of the Tax Abatement Program and the Tax Anmesty
Law, the CTA Division affirmed the deficiency DST - Special Savings Account (SSA)
assessments for the fiscal years ending June 30, 1997 and 1998 and the deficiency
DST - Interbank Call Loans (IBCL) and deficiency final withholding tax - trust
assessments for fiscal year ending June 30, 1998, in the total amount of
P142,777,785.91.15 Thus:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the instant Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, Assessment Notices issued against [Asiatrust]
for deficiency documentary stamp, final withholding, expanded withholding, and fringe
benefits tax assessments for the fiscal year ended June 30, 1996 are VOID for being
[issued] beyond the prescriptive period allowed by law.
The Assessment Notices issued by [CIR] against [Asiatrust] for deficiency income,
documentary stamp - regular, documentary stamp - trust, and fringe benefits tax
assessments for the fiscal years ended June 30, 1997 & 1998 are hereby ordered
CANCELLED and WITHDRAWN. Moreover, [Asiatrust's] deficiency documentary
stamp tax IBCL assessment for the fiscal year ended June 30, 1997 is ordered
CANCELLED and WITHDRAWN.
However, [Asiatrust's] deficiency documentary stamp tax - Special Savings Account
assessments for the fiscal years ended June 30, 1997 & 1998, and deficiency
documentary stamp tax - IBCL and deficiency final withholding tax - trust
assessments for the fiscal year ended June 30, 1998, in the aggregate amount of
P142,777,785.91 are hereby AFFIRMED. The said amount is broken down as
follows:chanRoblesvirtualLawlibrary
Fiscal Year 1997
Documentary Stamp Tax - Industry Issue P 39,163,539.57
Fiscal Year 1998
Final Withholding Tax - Trust 10,183,367.80
Documentary Stamp Tax - Industry Issue 93,430,878.54
Total Deficiency Tax P 142,777,785.91
SO ORDERED.16
Asiatrust filed a Motion for Reconsideration17 attaching photocopies of its Application
for Abatement Program, BIR Payment Form, BIR Tax Payment Deposit Slip,
Improved Voluntary Assessment Program Application Forms, Tax Amnesty Return,
Tax Amnesty Payment Form, Notice of Availment of Tax Amnesty and Statement of
Assets and Liabilities and Networth (SALN) as of June 30, 2005.
The CIR, on the other hand, filed a Motion for Partial Reconsideration of the
assessments assailing the CTA Division's finding of prescription and cancellation of
assessment notices for deficiency income, DST - regular, DST trust, and fringe
benefit tax for fiscal years ending June 30, 1997 and 1998. 18
On July 6, 2009, the CTA Division issued a Resolution 19 denying the motion of the
CIR while partially granting the motion of Asiatrust. The CTA Division refused to
consider Asiatrust's availment of the Tax Abatement Program due to its failure to
submit a termination letter from the BIR.20 However, as to Asiatrust's availment of the
Tax Amnesty Law, the CTA Division resolved to set the case for hearing for the
presentation of the originals of the documents attached to Asiatrust's motion for
reconsideration.21
Meanwhile, the CIR appealed the January 20, 2009 Decision and the July 6, 2009
Resolution before the CTA En Banc via a Petition for Review22 docketed as CTA EB
No. 508. The CTA En Banc however dismissed the Petition for being premature
considering that the proceedings before the CTA Division was still pending. 23
On December 7, 2009, Asiatrust filed a Manifestation 24 informing the CTA Division
that the BIR issued a Certification25 dated August 20, 2009 certifying that Asiatrust
paid the amounts of P4,187,683.27 and P6,097,825.03 at the Development Bank of
the Philippines in connection with the One-Time Administrative Abatement under
Revenue Regulations (RR) No. 15-2006.26
On March 16, 2010, the CTA Division rendered an Amended Decision 27 finding that
Asiatrust is entitled to the immunities and privileges granted in the Tax Amnesty
Law.28 However, it reiterated its ruling that in the absence of a termination letter fium
the BIR, it cannot consider Asiatrust's availment of the Tax Abatement Program. 29
Thus, the CTA Division disposed of the case in this wise:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, [Asiatrust's] Motion for Reconsideration is
hereby PARTIALLY GRANTED and this Court's Decision dated January 20, 2009 is
hereby MODIFIED. Accordingly, the above captioned case as regards [Asiatrust's]
liability for deficiency documentary stamp tax is CLOSED and TERMINATED, subject
to the provisions of R.A. No. 9480. However, [Asiatrust's] liability for deficiency final
withholding tax assessment for fiscal year ended June 30, 1998, subject of this
litigation, in the amount of P10,183,367.80, is hereby REAFFIRMED.
SO ORDERED.30
Still unsatisfied, Asiatrust moved for partial reconsideration31 insisting that the
Certification issued by the BIR is sufficient proof of its availment of the Tax Abatement
Program considering that the CIR, despite Asiatrust's request, has not yet issued a
termination letter. Asiatrust attached to the motion photocopies of its letter 32 dated
March 17, 2009. requesting the BIR to issue a termination letter, Payment Form 33 BIR
Tax Payment Deposit Slips,34 Improved Voluntary Assessment Program (IVAP)
Payment Form,35 and a letter36 dated October 17, 2007 issued by Revenue District
Officer (RDO) Ms. Clavelina S. Nacar.
On July 28, 2010, the CTA Division issued a Resolution 37 denying Asiatrust's motion.
The CTA Division maintained that it cannot consider Asiatrust's availment of the Tax
Abatement Program in the absence of a termination letter from the BIR. 38 As to the
Certification issued by BIR, the CTA Division noted that it pertains to fiscal period July
1, 1995 to June 30, 1996.39
Both parties appealed to CTA En Banc.
Ruling of the Court of Tax Appeals En Banc
On November 16, 2011, the CTA En Banc denied both appeals. It denied the CIR's
appeal for failure to file a prior motion for reconsideration of the Amended Decision, 40
while it denied Asiatrust's appeal for lack of merit.41 The CTA En Banc sustained the
ruling of the CTA Division that in the absence of a termination letter, it cannot be
established that Asiatrust validly availed of the Tax Abatement Program. 42 As to the
Certification issued by the BIR, the CTA En Banc noted that it only covers the fiscal
year ending June 30, 1996.43 As to the letter issued by RDO Nacar and the various
BIR Tax Payment Deposit Slips, the CTA En Banc pointed out that these have no
probative value because these were not authenticated nor formally offered in
evidence and are mere photocopies of the purported documents. 44
On April 16, 2012, the CTA En Banc denied the motions for partial reconsideration of
the CIR and Asiatrust.45
Issues
Hence, the instant consolidated Petitions under Rule 45 of the Rules of Court, with
the following issues:chanRoblesvirtualLawlibrary
G.R. No. 201530
I.
WHETHER X X X THE [CTA] EN BANC ERRED IN FINDING THAT [ASIATRUST] IS
LIABLE FOR DEFICIENCY FINAL WITHHOLDING TAX FOR FISCAL YEAR
ENDING JUNE 30, 1998.
II.
WHETIIER X X X THE ORDER OF THE [CTA] EN BANC FOR PETITIONER TO PAY
AGAIN THE FINAL WITHHOLDING TAX FOR FISCAL YEAR ENDING JUNE 30,
1998 WOULD AMOUNT TO DOUBLE TAXATION.
III.
WHETHER X X X THE [CTA] EN BANC ERRED IN RESOLVING THE ISSUE OF
ALLEGED DEFICIENCY FINAL WITHHOLDING TAX FOR FISCAL YEAR ENDING
JUNE 30, 1998 BASED ON MERE TECHNICALITIES.46
G.R. Nos. 201680-81
I.
WHETHER X X X THE [CTA] EN BANC COMMITTED REVERSIBLE ERROR WHEN
IT DISMISSED [THE CIR'S] PETITION FOR REVIEW ON THE GROUND THAT THE
LATTER ALLEGEDLY FAILED TO COMPLY WITH SECTION 1, RULE 8 OF THE
REVISED RULES OF THE [CTA].
II.
WHETHER X X X THE [CTA] EN BANC COMMITTED REVERSIBLE ERROR WHEN
IT SUSTAINED THE AMENDED DECISION DATED 16 MARCH 2010 OF THE
FIRST DIVISION DECLARING CLOSED AND TERMINATED RESPONDENT'S
LIABILITY FOR DEFICIENCY DOCUMENTARY STAMP TAX FOR TAXABLE
YEARS 1997 AND 1998.47
G.R. No. 201530
Asiatrust's Arguments
Asiatrust contends that the CTA En Banc erred in affirming the assessment for
deficiency final withholding tax for fiscal year ending June 30, 1998 considering that it
already availed of the Tax Abatement Program as evidenced by the Certification
issued by the BIR the letter issued by RDO Nacar, and the BIR Tax Payment Deposit
Slips.48 Asiatrust maintains that the BIR Certification is sufficient proof of its availment
of the Tax Abatement Program considering CIR's unjustifiable refusal to issue a
termination letter.49 And although the letter and the BIR Tax Payment Deposit Slips
were not formally offered in evidence, Asiatrust insists that the CTA En Banc should
have relaxed the rules as the Supreme Court in several cases has relaxed procedural
rules in the interest of substantial justice.50 Moreover, Asiatrust posits that since it
already paid the basic taxes, the affirmance of the deficiency fmal withholding tax
assessment for fiscal year ending June 30, 1998 would constitute double taxation as
Asiatrust would be made to pay the basic tax twice. 51
The CIR's Arguments
The CIR, however, points out that the BIR Certification relied upon by Asiatrust does
not cover fiscal year ending June 30, 1998.52 And even if the letter issued by RDO
Nacar and the BIR Tax Payment Deposit Slips were admitted in evidence, the result
would still be the same as these are not sufficient to prove that Asiatrust validly
availed of the Tax Abatement Program.53
G.R. Nos. 201680-81
The CIR's Arguments
The CIR contends that the CTA En Banc erred in dismissing his appeal for failing to
file a motion for reconsideration on the Amended Decision as a perusal of the
Amended Decision shows that it is a mere resolution, modifying the original
Decision.54
Furthermore, the CIR claims that Asiatrust is not entitled to a tax amnesty because it
failed to submit its income tax returns (ITRs).55 The CIR likewise imputes bad faith on
the part of Asiatrust in belatedly submitting the documents before the CTA Division.56
Asiatrust's Arguments
Asiatrust on the other hand argues that the CTA En Banc correctly dismissed the
CIR's appeal for failure to file a motion for reconsideration on the Amended
Decision.57 It asserts that an amended decision is not a mere resolution but a new
decision.58
Asiatrust insists that the CIR can no longer assail the Amended Decision of the CTA
Division before the Court considering the dismissal ofhis appeal for failing to file a
motion for reconsideration on the Amended Decision.59 In any case, Asiatrust claims
that the submission of its ITRs is not required as the Tax Amnesty Law only requires
the submission of a SALN as of December 31, 2005,60 As to its belated submission of
the documents, Asiatrust contends that recent jurisprudence allows the presentation
of evidence before the CTA En Banc even after trial.61 Thus, it follows that the
presentation of evidence before the CTA Division should likewise be allowed. 62
Our Ruling
The Petitions lack merit.
G.R. No. 201530
An application for tax abatement is considered approved only upon the
issuance of a termination letter.
Section 204(B)63 of the 1997 National Internal Revenue Code (NIRC) empowers the
CIR to abate or cancel a tax liability.
On Septembr 27, 2006 the BIR issued RR No. 15-06 prescribing tho guidelines on the
implementation of the one-time administrative abatement of all penalties/surcharges
and interest on delinquent accounts and assessments (preliminary or final, disputed
or not) as of June 30, 2006. Section 4 of RR No. 15-06
provides:chanRoblesvirtualLawlibrary
SECTION 4. Who May Avail. - Any person/taxpayer, natural or juridical, may settle
thru this abatement program any delinquent account or assessment which has been
released as of June 30, 2006, by paying an amount equal to One Hundred Percent
(100%) of the Basic Tax assessed with the Accredited Agent Bank (AAB) of the
Revenue District Office (RDO)/Large Taxpayers Service (LTS)/Large Taxpayers
District Office (LTDO) that has jurisdiction over the taxpayer. In the absence of an
AAB, payment may be made with the Revenue Collection Officer/Deputized Treasurer
of the RDO that has jurisdiction over the taxpayer. After payment of the basic tax, the
assessment for penalties/surcharge and interest shall be cancelled by the concerned
BIR Office following existing rules and procedures. Thereafter, the docket of the case
shall be fmwarded to the Office of the Commissioner, thru the Deputy Commissioner
for Operations Group, for issuance of Termination Letter.
Based on the guidelines, the last step in the tax abatement process is the issuance of
the termination letter. The presentation of the termination letter is essential as it
proves that the taxpayer's application for tax abatement has been approved. Thus,
without a termination letter, a tax assessment cannot be considered closed and
terminated.
In this case, Asiatrust failed to present a termination letter from the BIR. Instead, it
presented a Certification issued by the BIR to prove that it availed of the Tax
Abatement Program and paid the basic tax. It also attached copies of its BIR
'I'ax Payment Deposit Slips and a letter issued by RDO Nacar. These documents,
however, do not prove that Asiatrust's application for tax abatement has been
approved. If at all, these documents only prove Asiatrust's payment of basic taxes,
which is not a ground to consider its deficiency tax assessment closed and
terminated.
Since no tennination letter has been issued by the BIR, there is no reason tor the
Court to consider as closed and terminated the tax assessment on Asiatrust's fmal
withholding tax for fiscal year ending June 30, 1998. Asiatrust's application for tax
abatement will be deemed approved only upon the issuance of a termination letter,
and only then will the deficiency tax assessment be considered closed and
terminated. However, in case Asiatrust's application for tax abatement is denied, any
payment made by it would be applied to its out ding tax liability. For this reason,
Asiatrust's allegation of double taxation must also fail.
Thus, the Court finds no error on the part of the CTA En Banc in affirming the said tax
assessment.
G.R. Nos. 201680-81
An appeal to the CTA En Banc must be preceded by the filing of a timely motion
for reconsideration or new trial with the CTA Division.
Section 1, Rule 8 of the Revised Rules of the CTA states:chanRoblesvirtualLawlibrary
SECTION 1. Review of cases in the Court en banc. - In cases falling under the
exclusive appellate jurisdiction of the Court en banc, the petition for review of a
decision or resolution of the Court in Division must be preceded by the filing of a
timely motion for reconsideration or new trial With the pivision.
Thus, in order for the CTA En Banc to take cognizance of an appeal via a petition for
review, a timely motion for reconsideration or new trial must first be filed with the CTA
Division that issued the assailed decision or resolution. Failure to do so is a ground
for the dismissal of the appeal as the word "must" indicates that the filing of a prior
motion is mandatory, and not merely directory.64
The same is true in the case of an amended decision. Section 3, Rule 14 of the same
rules defines an amended decision as "[a]ny action modifying or reversing a decision
of the Court en banc or in Division." As explained in CE Luzon Geothermal Power
Company, Inc. v. Commissioner of Internal Revenue,65 an amended decision is a
different decision, and thus, is a proper subject of a motion for reconsideration.
In this case, the CIR's failure to move for a reconsideration of the Amended Decision
of the CTA Division is a ground for the dismissal of its Petition for Review before the
CTA En Banc. Thus, the CTA En Banc did not err in denying the CIR's appeal on
procedural grounds.
Due to this procedural lapse, the Amended Decision has attained fmality insofar as
the CIR is concerned. The CIR, therefore, may no longer question the merits of the.
case before this Court. Accordingly, there is no reason for the Court to discuss the
other issues raised by the CIR
As the Court has often held, procedural rules exist to be followed, not to be trifled
with, and thus, may be relaxed only for the most persua.Sive reasons.66
WHEREFORE, the Petitions are hereby DENIED. The assailed November 16, 2011
Decision and the April 16, 2012 Resolution of the Court of Tax Appeals En Banc in
CTA EB Case Nos. 614 and 677 are hereby AFFIRMED, without prejudice to the
action of the Bureau of Internal Revenue on Asiatrust Development Bank, Inc.'s
application for abatement. The Bureau of Internal Revenue is DIRECTED to act on
Asiatrust Development Bank, Inc.'s applicationfor abatementin view of Section 5,
Revenue Regulations No. 13-2001.SO ORDERED.
 SECOND DIVISION
G.R. No. 205652, September 06, 2017
PROCTER & GAMBLE ASIA PTE LTD., Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE, Respondent.
DECISION
Before the Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of
Court filed by petitioner Procter & Gamble Asia Pte Ltd. (P&G) against the
Commissioner of Internal Revenue (CIR) seeking the reversal of the Decision 2 dated
September 21, 2012 and Resolution3 dated January 30, 2013 of the Court of Tax
Appeals (CTA) En Banc in C.T.A. EB Case No. 742. The CTA En Banc affirmed the
CTA Special Second Division's dismissal of P&G's claim for refund of unutilized input
value-added tax (VAT) attributable to its zero-rated sales covering the first and second
quarters of calendar year 2005, for being prematurely filed.
On March 28, 2007, P&G filed a petition for review with the CTA seeking the refund or
issuance of TCC in the amount of P23,090,729.17 representing input VAT paid on
goods or services attributable to its zero-rated sales for the first quarter of taxable
year 2005. The case was docketed as CTA Case No. 7581.10
On June 8, 2007, P&G filed with the CTA another judicial claim for refund or issuance
of TCC in the amount of P19,006,753.58 representing its unutilized input VAT paid on
goods and services attributable to its zero-rated sales for the second quarter of
taxable year 2005. The case was docketed as CTA Case No. 7639.11
On July 30, 2007, the CTA Division granted P&G's Motion to Consolidate CTA Case
No. 7581 with 7639, inasmuch as the two cases involve the same parties and
common questions of law and/or facts.12
Proceedings ensued before the CTA Division. P&G presented testimonial and
voluminous documentary evidence to prove its entitlement to the amount claimed for
VAT refund. The CIR, on the other hand, submitted the case for decision based on
the pleadings, as the claim for refund was still pending before the BIR RDO No. 40. 13

Facts Meanwhile, on October 6, 2010, while P&G's claim for refund or tax credit was
P&G is a foreign corporation duly organized and existing under the laws of Singapore pending before the CTA Division, this Court promulgated Commissioner of Internal
and is maintaining a Regional Operating Headquarter in the Philippines.4 It provides Revenue v. Aichi Forging Company of Asia, Inc.14 (Aichi). In that case, the Court held
management, marketing, technical and financial advisory, and other qualified services that compliance with the 120-day period granted to the CIR, within which to act on an
to related companies as specified by its Certificate of Registration and License issued administrative claim for refund or credit of unutilized input VAT, as provided under
by the Securities and Exchange Commission.5 It is a VAT-registered taxpayer and is Section 112(C) of the National Internal Revenue Code of 1997 (NIRC), as amended,
covered by Bureau of Internal Revenue (BIR) Certificate of Registration No. is mandatory and jurisdictional in filing an appeal with the CTA.
9RC0000071787.6
In a Decision15 dated November 17, 2010, the CTA Division dismissed P&G's judicial
P&G filed its Monthly VAT Declarations and Quarterly VAT Returns on the following claim, for having been prematurely filed.16
dates:
Citing Aichi, the CTA Division held that the CIR is granted by law a period of 120 days
VAT DATE FILED DATE FILED
to act on the administrative claim for refund.17 Upon denial of the claim, or after the
RETURN/DECLARATION (ORIGINAL) (AMENDED)
expiration of the 120-day period without action by the CIR, only then may the
taxpayer-claimant seek judicial recourse to appeal the CIR's action or inaction on a
January (Monthly) February 21, 2005 refund/tax credit claim, within a period of 30 days.18 According to the CTA Division,
P&G failed to observe the 120-day period granted to the CIR.19 Its judicial claims
February (Monthly) March 18, 2005 were prematurely filed with the CTA on March 28, 2007 (CTA Case No. 7581) and
June 8, 2007 (CTA Case No. 7639), or only six (6) days and thirty-seven (37) days,
Ending March (Quarterly) April 25, 2005 March 19, 2007 respectively, from the filing of the applications at the administrative level. 20 Thus, the
CTA Division ruled that inasmuch as P&G's petitions were prematurely filed, it did not
April (Monthly) May 20, 2005 acquire jurisdiction over the same.21

May (Monthly) June 21, 2005 P&G moved for reconsideration but this was denied by the CTA Division in its
Resolution22 dated March 9, 2011.
Ending June (Quarterly) July 26, 20057 March 20, 20078
Aggrieved, P&G elevated the matter to the CTA En Banc insisting, among others, that
On March 22, 2007 and May 2, 2007, P&G filed applications and letters addressed to the Court's ruling in Aichi should not be given a retroactive effect.23
the BIR Revenue District Office (RDO) No. 49, requesting the refund or issuance of
tax credit certificates (TCCs) of its input VAT attributable to its zero-rated sales On September 21, 2012, the CTA En Banc rendered the assailed Decision affirming
covering the taxable periods of January 2005 to March 2005, and April 2005 to June in toto the CTA Division's Decision and Resolution. It agreed with the CTA Division in
2005.9 applying the ruling in Aichi which warranted the dismissal of P&G's judicial claim for
refund on the ground of prematurity.
P&G moved for reconsideration,24 but the same was denied by the Court En Banc for
lack of merit.25
In the meantime, on February 12, 2013, this Court decided the consolidated cases of
Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining
Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v.
Commissioner of Internal Revenue26(San Roque), where the Court recognized BIR
Ruling No. DA-489-03 as an exception to the mandatory and jurisdictional nature of
the 120-day waiting period.
On March 27, 2013, P&G filed the present petition.27
Issue
Culled from the submissions of the parties, the singular issue for this Court's
resolution is whether the CTA En Banc erred in dismissing P&G's judicial claims for
refund on the ground of prematurity.
P&G avers that its judicial claims for tax refund/credit was filed with the CTA Division
on March 28, 2007 and June 8, 2007, after the issuance of BIR Ruling No.DA-489-03
on December 10, 2003, but before the adoption of the Aichi doctrine on October 6,
2010. Accordingly, pursuant to the Court's ruling in San Roque, its judicial claims with
the CTA was deemed timely filed.28 .
P&G further contends that the CTA En Banc gravely erred in applying the Aichi
doctrine retroactively. According to P&G, the retroactive application of Aichi amounts
to a denial of its constitutional right to due process and unjust enrichment of the
CIR.29
Lastly, P&G claims that assuming, without conceding, that its judicial claims were
prematurely filed, its failure to observe the 120-day period was not jurisdictional but
violates only the rule on exhaustion of administrative remedies, which was deemed
waived when the CIR did not file a motion to dismiss and opted to actively participate
at the trial.30
The CIR, on the other hand, insists that the plain language of Section 112(C) of the
NIRC, as amended, demands mandatory compliance with the 120+30-day rule; and
P&G cannot claim reliance in good faith with BIR Ruling No. DA-489-03 to shield the
filing of its judicial claims from the vice of prematurity. 31
The Court's Ruling
The Court finds the petition meritorious.
Exception to the mandatory and jurisdictional 120+30-day periods under
Section 112(C) of the NIRC
Section 112 of the NIRC, as amended, provides for the rules on claiming refunds or
tax credits of unutilized input VAT, the pertinent portions of which read as follows:
SEC. 112. Refunds or Tax Credits of Input Tax. —
(A) Zero-rated or Effectively Zero-rated Sales. — Any VAT-registered person, whose
sales are zero-rated or effectively zero-rated may, within two (2) years after the close
of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been applied
against output tax: x x x
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. — In
proper cases, the Commissioner shall grant a refund or issue the tax credit certificate
for creditable input taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application filed in
accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed
above, the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty-day
period, appeal the decision or the unacted claim with the Court of Tax Appeals.
(Emphasis supplied)
Based on the plain language of the foregoing provision, the CIR is given 120 days
within which to grant or deny a claim for refund. Upon receipt of CIR's decision or
ruling denying the said claim, or upon the expiration of the 120-day period without
action from the CIR, the taxpayer has 30 days within which to file a petition for review
with the CTA.
In Aichi, the Court ruled that compliance with the 120+30-day periods is mandatory
and jurisdictional and is fatal to the filing of a judicial claim with the CTA.
Subsequently, however, in San Roque, while the Court reiterated the mandatory and
jurisdictional nature of the 120+30-day periods, it recognized as an exception BIR
Ruling No. DA-489-03, issued prior to the promulgation of Aichi, where the BIR
expressly allowed the filing of judicial claims with the CTA even before the lapse of
the 120-day period. The Court held that BIR Ruling No. DA-489-03 furnishes a valid
basis to hold the CIR in estoppel because the CIR had misled taxpayers into filing
judicial claims with the CTA even before the lapse of the 120-day period:
There is no dispute that the 120-day period is mandatory and jurisdictional, and that
the CTA does not acquire jurisdiction over a judicial claim that is filed before the
expiration of the 120-day period. There are, however, two exceptions to this rule. The
first exception is if the Commissioner, through a specific ruling, misleads a particular
taxpayer to prematurely file a judicial claim with the CTA. Such specific ruling is
applicable only to such particular taxpayer. The second exception is where the
Commissioner, through a general interpretative rule issued under Section 4 of
the Tax Code, misleads all taxpayers into filing prematurely judicial claims with
the CTA. In these cases, the Commissioner cannot be allowed to later on
question the CTA's assumption of jurisdiction over such claim since equitable
estoppel has set in as expressly authorized under Section 246 of the Tax Code.
xxxx
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response
to a query made, not by a particular taxpayer, but by a government agency tasked
with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency
Tax Credit and Drawback Center of the Department of Finance. This government
agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-
03. Thus, while this government agency mentions in its query to the Commissioner
the administrative claim of Lazi Bay Resources Development, Inc., the agency was in
fact asking the Commissioner what to do in cases like the tax claim of Lazi Bay
Resources Development, Inc., where the taxpayer did not wait for the lapse of the
120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all
taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on
10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010,
where this Court held that the 120+30 day periods are mandatory and
jurisdictional.32 (Emphasis supplied)
In Visayas Geothermal Power Company v. Commissioner of Internal Revenue,33 the
Court came up with an outline summarizing the pronouncements in San Roque, to
wit:
For clarity and guidance, the Court deems it proper to outline the rules laid down in
San Roque with regard to claims for refund or tax credit of unutilized creditable input
VAT. They are as follows:
1. When to file an administrative claim with the CIR:
a. General rule - Section 112(A) and Mirant,
Within 2 years from the close of the taxable quarter when
the sales were made. .
b. Exception - Atlas
Within 2 years from the date of payment of the output
VAT, if the administrative claim was filed from June 8,
2007 (promulgation of Atlas) to September 12, 2008
(promulgation of Mirant).
c.
2. When to file a judicial claim with the CTA:
a. General rule - Section 112(D); not Section 229
i. Within 30 days from the full or partial denial of
the administrative claim by the CIR; or
ii. Within 30 days from the expiration of the 120-
day period provided to the CIR to decide on
the claim. This is mandatory and jurisdictional
beginning January 1, 1998 (effectivity of 1997
NIRC).
b. Exception - BIR Ruling No. DA-489-03
The judicial claim need not await the
expiration of the 120-day period, if such was
filed from December 10, 2003 (issuance of BIR
Ruling No. DA-489-03) to October 6, 2010
(promulgation oi Aichi).34 (Emphasis and
underscoring supplied)
In this case, records show that P&G filed its judicial claims for refund on March 28,
2007 and June 8, 2007, respectively, or after the issuance of BIR Ruling No. DA-489-
03, but before the date when Aichi was promulgated. Thus, even though P&G filed its
judicial claim without waiting for the expiration of the 120-day mandatory period, the
CTA may still take cognizance of the case because the claim was filed within the
excepted period stated in San Roque. In other words, P&G's judicial claims were
deemed timely filed and should not have been dismissed by the CTA.
Application and validity of BIR Ruling No. DA-489-03
The CIR, however, argues that BIR Ruling No. DA-489-03 was already repealed and
superseded on November 1, 2005 by Revenue Regulation No. 16-2005 (RR 16-
2005), which echoed the mandatory and jurisdictional nature of the 120-day period
under Section 112(C) of the NIRC. Thus, P&G cannot rely, in good faith, on BIR
Ruling No. DA-489-03 because its judicial claims were filed in March and June 2007
or after RR 16-2005 took effect.35 In other words, it is the CIR's position that reliance
on BIR Ruling No. DA-489-03 should only be permissible from the date of its
issuance, on December 10, 2003, until October 31, 2005, or prior to the effectivity of
RR 16-2005.
The Court disagrees.
This issue was also raised by the CIR in Commissioner of Internal Revenue v.
Deutsche Knowledge Services, Pte. Ltd.,36 where the Court reiterated that all
taxpayers may rely upon BIR Ruling No. DA-489-03, as a general interpretative rule,
from the time of its issuance on December 10, 2003 until its effective reversal by the
Court in Aichi.37 The Court further held that while RR 16-2005 may have re-
established the necessity of the 120-day period, taxpayers cannot be faulted for still
relying on BIR Ruling No. DA-489-03 even after the issuance of RR 16-2005 because
the issue on the mandatory compliance of the 120-day period was only brought
before the Court and resolved with finality in Aichi.38
Accordingly, in consonance with the doctrine laid down in San Roque, the Court finds
that P&G's judicial claims were timely filed and should be given due course and
consideration by the CTA.
WHEREFORE, premises considered, the instant petition for review is hereby
GRANTED. The Decision dated September 21, 2012 and the Resolution dated
January 30, 2013 of the CTA En Banc in C.T.A. EB Case No. 742 are hereby
REVERSED AND SET ASIDE. Accordingly, CTA Case Nos. 7581 and 7639 are
REINSTATED and REMANDED to the CTA Special Second Division for the proper
determination of the refundable amount due to petitioner Procter & Gamble Asia Pte
Ltd., if any. SO ORDERED.
 SECOND DIVISION
G.R. No. 204277, May 30, 2016
PROCTER AND GAMBLE ASIA PTE LTD., Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE, Respondent.
DECISION
BRION, J.:
Before us is a petition for review on certiorari1 under Rule 45 of the Rules of Court
seeking the reversal of the decision2 dated June 18, 2012, and the resolution3 dated
November 8, 2012 of the Court of Tax Appeals (CTA) en banc in CTA EB Case No.
740 (CTA Case No. 7683). In the assailed decision and resolution, the CTA en banc
affirmed the decision4 dated November 9, 2010 and resolution5 dated March 7, 2011,
of the CTA Second Division (CTA Division). The latter dismissed the petition of
Procter & Gamble Asia Pte. Ltd. (PGAPL) for premature filing.
The Facts
Petitioner PGAPL is a foreign corporation duly organized and existing under the laws
of Singapore, with a Regional Operating Headquarters (ROHQ) in the Philippines.
The ROHQ provides management, marketing, technical and financial advisory, and
other qualified services to its related parties. PGAPL is registered as a Value Added
Tax (VAT) taxpayer with the Bureau of Internal Revenue (BIR). On the other hand,
respondent is the duly appointed Commissioner of Internal Revenue (CIR),
empowered to perform the duties of said office including, among others, the duty to
act upon and approve claims for refunds or tax credits as provided by law.
On October 24, 2005, and January 26, 2006, PGAPL filed with the BIR its Original
Quarterly VAT returns for the Third and Fourth quarters of 2005, respectively.
On April 4, 2007, PGAPL amended its Quarterly VAT returns for the last two quarters
of 2005, reporting both sales subject to 10% VAT and zero-rated sales. For the last
two quarters of 2005, PGAPL claimed it incurred unutilized input VAT amounting to
P53,624,427.14.
On August 21, 2007, PGAPL filed an administrative claim for tax refund with the BIR
for input VAT attributable to its zero-rated sales covering the period July 2005 to
September 2005 and October 2005 to December 2005.
Claiming that the CIR has not acted on its application, PGAPL elevated the case to
the CTA by filing a petition for review6 before the CTA division on September 27,
2007.
The CTA Division dismissed PGAPL's petition.7 It ruled that the filing of the judicial
claim for tax refund or credit before the CTA is premature, because the petitioner
proceeded with its appeal even before the expiration of the 120-day period given to
the CIR to decide on its claim for tax refund or credit of excess input VAT. Section
112 of the National Internal Revenue Code of 1997 (NIRC) provides that in case of
denial of his claim for tax credit or refund or failure of the CIR to act on the application
within 120 days, the taxpayer may, within 30 days from the receipt of the notice of
denial or after the expiration of the 120-day period, appeal the decision or unacted
claim with the CTA. The CTA Division emphasized that, as enunciated in
Commissioner of Internal Revenue v. Aichi Forging Company of Asia,
Inc.,8compliance with the aforesaid 120- and 30-day periods is crucial in filing
an appeal before the CTA (Aichi Doctrine).
PGAPL moved for reconsideration, but the CTA denied its motion in a resolution
dated March 7, 2011.9 The CTA Division struck down PGAPL's argument that
respondent is already estopped from raising the issue of jurisdiction considering that it
already actively participated in all stages of the proceedings and that the CTA has
proceeded to try the case without bringing into petitioner's attention that it has no
jurisdiction to do so. It ruled that parties are not barred from assailing the jurisdiction
of the court, even when the case has already been tried and decided upon.
Jurisdiction must exist as a matter of law and may not be conferred by the consent of
the parties or by estoppel.10
Thereafter, petitioner filed a petition for review11 before the CTA en banc.
In its decision12 dated June 18, 2012, the CTA en banc affirmed the decision and
resolution of the CTA Division. It found that PGAPL's administrative claim for excess
input VAT credit or refund was timely filed with the BIR on August 21, 2007. However,
its judicial claim before the CTA was filed on September 27, 2007, or only 37 days
after it had filed its administrative claim.
Based on these timelines, the CTA en banc held that PGAPL's petition was
prematurely filed. Thus, the CTA had no jurisdiction to hear and decide its appeal.
The CTA en banc reiterated that, based on Aichi, the premature filing of a taxpayer's
claim for tax credit or refund on input VAT before the CTA warrants dismissal as the
CTA did not acquire jurisdiction over the claim.
The CTA en banc further held that, contrary to petitioner's claim, the Aichi Doctrine
was not effectively abandoned by the Supreme Court in its rulings in Hitachi Global
Storage Technologies Corp v. Commissioner of Internal Revenue, 13Silicon
Philippines, Inc. v. Commissioner of Internal Revenue,14 and Kepco Philippines
Corporation v. Commissioner of Internal Revenue.15 It observed that in PGAPL's cited
cases, the issue of compliance with the 120- and 30-day periods under Section 112 of
the NIRC was never squarely raised. Thus, Aichi remains the prevailing doctrine on
the compliance with the 120- and 30-day periods.
The CTA en banc further ruled that Hitachi, Silicon, and Kepco could not have
overturned Aichi. Such reversal would run counter to the constitutional mandate that
no doctrine or principle of law laid down by the court in a decision rendered en banc
or in division may be modified or reversed except by the Supreme Court sitting en
banc.16
The CTA en banc also denied petitioner's motion for reconsideration.17 Hence, on
December 28, 2010, PGAPL filed the present petition.
PGAPL insists that this Court had abandoned the Aichi Doctrine not only in Hitachi,
Silicon, and Kepco, but also in Microsoft Philippines, Inc. vs. Commissioner of Internal
Revenue,18Southern Philippines Power Corporation v. Commissioner of Internal
Revenue,19 and Western Mindanao Power Corporation v. Commissioner of Internal
Revenue.20
PGAPL also posits that the premature filing of its judicial claim is not fatal to its case.
It is not jurisdictional, but merely a failure to exhaust administrative remedies, which,
when analyzed more closely, only amounts to a lack of cause of action. Thus, its
petition before the CTA might have been infirm, but the CIR should be deemed to
have waived this infirmity when it did not file a motion to dismiss and opted to
participate at the trial.
PGAPL further argues that its constitutional rights to due process and equal
protection of laws were violated when their judicial claim for tax credit or refund was
dismissed due to noncompliance with the Aichi Doctrine. It noted that the claims filed
by the taxpayers in Intel,21San Roque,22Panasonic,23AT&T,24Hitachi, Silicon, Kepco,
Microsoft, Southern Philippines Power, and Western Mindanao Power were given due
course despite the similar failure to observe the 120- and 30-day periods.
Finally, petitioner claims that even assuming that the Aichi Doctrine has not been
overturned, it does not apply to its case, because the facts in Aichi are not identical
with those in the present case. Further, the respondent should be considered
estopped from questioning the jurisdiction of the CTA, considering that it has
participated in all stages of the case.
On February 6, 2013,25 we required the CIR to comment on the petition.
In the meantime, on February 12, 2013, we decided the consolidated cases of
Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining
Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v.
Commissioner of Internal Revenue.26 In San Roque-Taganito, we recognized the
effectivity of BIR Ruling No. DA-489-03, which expressly stated that the "taxpayer-
claimant need not wait for the lapse of the 120-day period before it could seek judicial
relief with the CTA by way of Petition for Review." We said:
There is no dispute that the 120-day period is mandatory and jurisdictional, and that
the CTA does not acquire jurisdiction over a judicial claim that is filed before the
expiration of the 120-day period. There are, however, two exceptions to this rule.
The first exception is if the Commissioner, through a specific ruling, misleads a
particular taxpayer to prematurely file a judicial claim with the CTA. The second
exception is where the Commissioner, through a general interpretative rule
issued under Section 4 of the Tax Code, misleads all taxpayers into filing
prematurely judicial claims with the CTA. In these cases, the Commissioner
cannot be allowed to later on question the CTA's assumption of jurisdiction over such
claim since equitable estoppel has set in as expressly authorized under Section 246
of the Tax Code (emphasis ours).
In finding that the said BIR ruling is a general interpretative rule, which is an
exception to the doctrine laid down in Aichi, this court held that taxpayers acting in
good faith should not be made to suffer for adhering to general interpretative rules of
the CIR interpreting tax laws, should such interpretation later turn out to be erroneous
and be reversed by the CIR or this court. Thus, We clarified that strict compliance
with the 120- and 30-day periods is necessary for a judicial claim of tax credit or
refund to prosper, except for the period from December 10, 2003, the issuance
of BIR DA-489-03, to October 6, 2010, when this court adopted the Aichi
Doctrine. Hence, a judicial claim for tax credit or refund filed within the period
mentioned above will be deemed to have been filed on time.
On May 6, 2013, even before the CIR could comment, PGAPL filed a manifestation27
invoking in its favor this court's ruling San Roque-Taganito. Petitioner claims that
since its judicial claim was filed before the CTA on September 27, 2007, when BIR
Ruling No. DA-489-03 was in effect, its judicial claim should be deemed as having
been timely filed.
In her comment28 dated June 11, 2013, the CIR argues that her office has the
exclusive and original jurisdiction to interpret tax laws, subject to the review of the
Secretary of Finance, as provided in Section 4 of the NIRC. Hence, BIR Ruling No.
DA-489-03 was issued ultra vires, having been issued by BIR Deputy Commissioner
Jose Mario C. Bunag, not by the CIR. The CIR further claims that even if we assume
that the said ruling is valid, it still does not apply to the case of PGAPL, because it did
not prove that it acted in good faith. According to respondent, if PGAPL truly relied on
the BIR ruling in good faith, it should have raised the rule set forth in the said BIR
ruling as early as the time the present case was pending before the CTA.
The Court's Ruling
We find the petition meritorious.
BIR Ruling No. DA-489-03 is an
exception to the Aichi Doctrine
Under Section 112 of the NIRC,29 if the administrative claim for tax credit or refund of
input taxes is not acted upon by the CIR within 120 days from the date of submission
of complete documents in support of the application, the taxpayer affected may
appeal the unacted claim with the CTA within 30 days from the expiration of the 120-
day period.
In Aichi, this Court ruled that observance of the 120- and 30-day periods is crucial in
the filing of an appeal before the CTA. By "crucial," this Court meant that its
observance is jurisdictional and mandatory, not merely permissive.
Contrary to the PGAPL's claim, this court has not abandoned the Aichi doctrine, more
specifically in Intel, San Roque (2009), Panasonic, AT&T, Hitachi, Silicon, Kepco,
Microsoft, Southern Philippines Power Corporation, and Western Mindanao Power
Corporation.
While all such cases dealt with claims for tax credit or refund of excess input tax, the
rulings of this Court were on the issue of compliance with applicable requirements
supporting the taxpayer's claim. The issue of whether compliance with the 120- and
30-day periods under Section 112 of the NIRC is mandatory and jurisdictional was
never squarely raised in any of the petitioner's cited cases.
The basic rule is that past decisions of this Court be followed in the adjudication of
cases. However, for a ruling of this Court to come within this rule (known as stare
decisis), the Court must categorically rule on an issue expressly raised by the parties;
it must be a ruling on an issue directly raised.30 When the court resolves an issue
merely sub silentio, stare decisis does not apply on the issue touched upon.
In fact, the same argument was struck down by this court in San Roque-Taganito.
There, we held that, "[a]ny issue, whether raised or not by the parties, but not
passed upon by the court, does not have any value as a precedent."32 (emphasis
in the original)
From this perspective, the Aichi Doctrine could not have been overturned by
subsequent cases before this Court that were decided based on another issue and
the application of a different doctrine or rule of law. In the same vein, the cases cited
by PGAPL are irrelevant to the present case, because they did not rule on the
jurisdictional and mandatory nature of the 120- and 30-day periods.
Indeed, Aichi is the prevailing doctrine on the matter of mandatory compliance with
the 120- and 30-day periods in the filing of judicial claims of tax credit or refund before
the CTA. However, in the manner of most rules, the Aichi Doctrine is also subject to
exceptions.
In accordance with the equitable estoppel principle under Section 246 of the NIRC, 33
we ruled in San Roque-Taganito that there are exceptions to the strict rule that
compliance with the Aichi Doctrine is mandatory and jurisdictional, one of which is
BIR Ruling No. DA-489-03. If the CIR issues a ruling, either a specific one applicable
to a particular taxpayer or a general interpretative rule applicable to all taxpayers,
and, as a result, misleads the taxpayers affected by the rule, into filing prematurely
judicial claims with the CTA, the CIR cannot be allowed to later on question the CTA's
assumption of jurisdiction over such claim.34
Since then, this Court has consistently adopted the ruling in San Roque-Taganito in
holding that BIR Ruling No. DA-489-03 is an exception to the Aichi Doctrine.35 We
see no reason to disturb what is now a settled ruling.
Therefore, as a general interpretative rule, all taxpayers may rely on BIR Ruling No.
DA-489-03 from the time of its issuance on December 10, 2003, until its effective
reversal by the Aichi Doctrine adopted on October 6, 2010. Thus, judicial claims for
tax credit or refund instituted before the CTA should be given due course, despite
their failure to comply with the 120- and 30-day periods.
BIR Ruling No. DA-489-03 is valid
even if issued by the Deputy
Commissioner.
The respondent now impugns the validity of BIR Ruling No. DA-489-03. The CIR
argues that the BIR ruling was issued only by the Deputy Commissioner and not by
the CIR, who, under Section 4 of the NIRC,36 has original and exclusive jurisdiction in
interpreting provisions of the NIRC.
We are not persuaded by the CIR's contention.
This issue has been settled in the Court en banc's resolution dated October 8, 2013 in
the consolidated cases of San Roque-Taganito37 where we upheld the validity of the
BIR ruling, because the power to interpret rules and regulations is not exclusive and
may be delegated by the CIR38 to the Deputy Commissioner.
PGAPL is presumed to have relied
on BIR Ruling No. DA-489-03 in
good faith.
Finally, the CIR questions PGAPL's good faith in relying on BIR Ruling No. DA-489-
03. To the CIR, if PGAPL truly relied on the BIR ruling in good faith, it should have
cited the ruling as basis as early as the proceedings before the CTA. The CIR claims
that since PGAPL failed to establish that it acted in good faith, it cannot raise the
exception set forth in BIR Ruling No. DA-489-03.
We disagree with the CIR's reasoning.
First, good faith is always presumed and this presumption can only be overcome by
clear and convincing evidence.39 Good faith, or its absence, is a question of fact that
is better determined by the lower courts. This Court cannot, without sufficient reason,
throw out a presumption that arises as a matter of law and is well-entrenched in our
legal system.40cralawred
The mere allegation that the petitioner failed to raise BIR Ruling No. DA-489-03
before the CTA is insufficient to negate this presumption.
Second, even if petitioner did not raise the BIR ruling before the CTA, we can take
cognizance of an official act emanating from the BIR, an executive department of the
government.41 Judicial notice of BIR Ruling No. DA-489-03 is all the more mandatory
especially when it has been applied consistently by this Court in its past rulings.42
Based on the foregoing, we rule that the judicial claim that PGAPL filed with the CTA
on September 27, 2007 (during the effectivity of BIR Ruling No. DA-489-03) was
timely filed.chanrobleslaw
WHEREFORE, premises considered, we GRANT the petition. The decision dated
June 18, 2012, and the resolution dated November 8, 2012 of the CTA en banc in
CTA EB Case No. 740 are hereby REVERSED and SET ASIDE. Accordingly, we
REMAND the case to the CTA Second Division for the proper determination of the
creditable or refundable amount due to the petitioner, if any.
SO ORDERED
 SECOND DIVISION of Mariveles, Bataan8 and such other export processing zones that may be created by
virtue of the decree.9chanRoblesvirtualLawlibrary
G.R. No. 184203, November 26, 2014
The decree declared the EPZA non-profit in character10 with all its revenues devoted
to its development, improvement, and maintenance.11 To maintain this non-profit
CITY OF LAPU-LAPU, Petitioner, v. PHILIPPINE ECONOMIC ZONE AUTHORITY, character, the EPZA was declared exempt from all taxes that may be due to the
Respondent. Republic of the Philippines, its provinces, cities, municipalities, and other government
agencies and instrumentalities.12 Specifically, Section 21 of Presidential Decree No.
G.R. NO. 187583 66 declared the EPZA exempt from payment of real property
taxes:chanroblesvirtuallawlibrary
PROVINCE OF BATAAN, REPRESENTED BY GOVERNOR ENRIQUE T. GARCIA,
JR., AND EMERLINDA S. TALENTO, IN HER CAPACITY AS PROVINCIAL Section 21. Non-profit Character of the Authority; Exemption from Taxes. The
TREASURER OF BATAAN, Petitioners, v. PHILIPPINE ECONOMIC ZONE Authority shall be non-profit and shall devote and use all its returns from its capital
AUTHORITY, Respondent. investment, as well as excess revenues from its operations, for the development,
improvement and maintenance and other related expenditures of the Authority to pay
DECISION its indebtedness and obligations and in furtherance and effective implementation of
the policy enunciated in Section 1 of this Decree. In consonance therewith, the
Authority is hereby declared exempt:
LEONEN, J.: ....

The Philippine Economic Zone Authority is exempt from payment of real property (b) From all income taxes, franchise taxes, realty taxes and all other kinds of taxes
taxes. and licenses to be paid to the National Government, its provinces, cities,
municipalities and other government agencies and instrumentalities[.]
These are consolidated1 petitions for review on certiorari the City of Lapu-Lapu and
the Province of Bataan separately filed against the Philippine Economic Zone
In 1979, President Marcos issued Proclamation No. 1811, establishing the Mactan
Authority (PEZA).
Export Processing Zone. Certain parcels of land of the public domain located in the
City of Lapu-Lapu in Mactan, Cebu were reserved to serve as site of the Mactan
In G.R. No. 184203, the City of Lapu-Lapu (the City) assails the Court of Appeals’
Export Processing Zone.
decision2 dated January 11, 2008 and resolution3 dated August 6, 2008, dismissing
the City’s appeal for being the wrong mode of appeal. The City appealed the
In 1995, the PEZA was created by virtue of Republic Act No. 7916 or “the Special
Regional Trial Court, Branch 111, Pasay City’s decision finding the PEZA exempt
Economic Zone Act of 1995”13 to operate, administer, manage, and develop
from payment of real property taxes.
economic zones in the country.14 The PEZA was granted the power to register,
regulate, and supervise the enterprises located in the economic zones. 15 By virtue of
In G.R. No. 187583, the Province of Bataan (the Province) assails the Court of
the law, the export processing zone in Mariveles, Bataan became the Bataan
Appeals’ decision4 dated August 27, 2008 and resolution5 dated April 16, 2009,
Economic Zone16 and the Mactan Export Processing Zone the Mactan Economic
granting the PEZA’s petition for certiorari. The Court of Appeals ruled that the
Zone.17chanRoblesvirtualLawlibrary
Regional Trial Court, Branch 115, Pasay City gravely abused its discretion in finding
the PEZA liable for real property taxes to the Province of Bataan.
As for the EPZA, the law required it to “evolve into the PEZA in accordance with the
guidelines and regulations set forth in an executive order issued for [the]
Facts common to the consolidated petitions
purpose.”18chanRoblesvirtualLawlibrary
In the exercise of his legislative powers,6 President Ferdinand E. Marcos issued
On October 30, 1995, President Fidel V. Ramos issued Executive Order No. 282,
Presidential Decree No. 66 in 1972, declaring as government policy the establishment
directing the PEZA to assume and exercise all of the EPZA’s powers, functions, and
of export processing zones in strategic locations in the Philippines. Presidential
responsibilities “as provided in Presidential Decree No. 66, as amended, insofar as
Decree No. 66 aimed “to encourage and promote foreign commerce as a means of
they are not inconsistent with the powers, functions, and responsibilities of the PEZA,
making the Philippines a center of international trade, of strengthening our export
as mandated under [the Special Economic Zone Act of 1995].”19 All of EPZA’s
trade and foreign exchange position, of hastening industrialization, of reducing
properties, equipment, and assets, among others, were ordered transferred to the
domestic unemployment, and of accelerating the development of the
PEZA.20chanRoblesvirtualLawlibrary
country.”7chanRoblesvirtualLawlibrary
Facts of G.R. No. 184203
To carry out this policy, the Export Processing Zone Authority (EPZA) was created to
operate, administer, and manage the export processing zones established in the Port
In the letter21 dated March 25, 1998, the City of Lapu-Lapu, through the Office of the
Treasurer, demanded from the PEZA ?32,912,350.08 in real property taxes for the
period from 1992 to 1998 on the PEZA’s properties located in the Mactan Economic
Zone.
The City reiterated its demand in the letter22 dated May 21, 1998. It cited Sections
193 and 234 of the Local Government Code of 1991 that withdrew the real property
tax exemptions previously granted to or presently enjoyed by all persons. The City
pointed out that no provision in the Special Economic Zone Act of 1995 specifically
exempted the PEZA from payment of real property taxes, unlike Section 21 of
Presidential Decree No. 66 that explicitly provided for EPZA’s exemption. Since no
legal provision explicitly exempted the PEZA from payment of real property taxes, the
City argued that it can tax the PEZA.
The City made subsequent demands23 on the PEZA. In its last reminder24 dated May
13, 2002, the City assessed the PEZA ?86,843,503.48 as real property taxes for the
period from 1992 to 2002.
On September 11, 2002, the PEZA filed a petition for declaratory relief25 with the
Regional Trial Court of Pasay City, praying that the trial court declare it exempt from
payment of real property taxes. The case was raffled to Branch 111.
The City answered26 the petition, maintaining that the PEZA is liable for real property
taxes. To support its argument, the City cited a legal opinion dated September 6,
1999 issued by the Department of Justice,27 which stated that the PEZA is not exempt
from payment of real property taxes. The Department of Justice based its opinion on
Sections 193 and 234 of the Local Government Code that withdrew the tax
exemptions, including real property tax exemptions, previously granted to all persons.
A reply28 was filed by the PEZA to which the City filed a
rejoinder.29chanRoblesvirtualLawlibrary
Pursuant to Rule 63, Section 3 of Rules of Court,30 the Office of the Solicitor General
filed a comment31 on the PEZA’s petition for declaratory relief. It agreed that the
PEZA is exempt from payment of real property taxes, citing Sections 24 and 51 of the
Special Economic Zone Act of 1995.
The trial court agreed with the Solicitor General. Section 24 of the Special Economic
Zone Act of 1995 provides:chanroblesvirtuallawlibrary
SEC. 24. Exemption from National and Local Taxes. – Except for real property taxes
on land owned by developers, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu thereof, five percent
(5%) of the gross income earned by all business enterprises within the ECOZONE
shall be paid and remitted as follows:
a. Three percent (3%) to the National Government;
b. Two percent (2%) which shall be directly remitted by the business establishments
to the treasurer’s office of the municipality or city where the enterprise is located.
Section 51 of the law, on the other hand, provides:
SEC. 51. Ipso-Facto Clause. – All privileges, benefits, advantages or exemptions
granted to special economic zones under Republic Act No. 7227, shall ipso-facto be
accorded to special economic zones already created or to be created under this Act.
The free port status shall not be vested upon new special economic zones.
Based on Section 51, the trial court held that all privileges, benefits, advantages, or
exemptions granted to special economic zones created under the Bases Conversion
and Development Act of 1992 apply to special economic zones created under the
Special Economic Zone Act of 1995. Since these benefits include exemption from
payment of national or local taxes, these benefits apply to special economic zones
owned by the PEZA.
According to the trial court, the PEZA remained tax-exempt regardless of Section 24
of the Special Economic Zone Act of 1995. It ruled that Section 24, which taxes real
property owned by developers of economic zones, only applies to private developers
of economic zones, not to public developers like the PEZA. The PEZA, therefore, is
not liable for real property taxes on the land it owns.
Characterizing the PEZA as an agency of the National Government, the trial court
ruled that the City had no authority to tax the PEZA under Sections 133(o) and 234(a)
of the Local Government Code of 1991.
In the resolution32 dated June 14, 2006, the trial court granted the PEZA’s petition for
declaratory relief and declared it exempt from payment of real property taxes.
The City filed a motion for reconsideration,33 which the trial court denied in its
resolution34 dated September 26, 2006.
The City then appealed35 to the Court of Appeals.
The Court of Appeals noted the following issues the City raised in its appellant’s brief:
(1) whether the trial court had jurisdiction over the PEZA’s petition for declaratory
relief; (2) whether the PEZA is a government agency performing governmental
functions; and (3) whether the PEZA is exempt from payment of real property taxes.
The issues presented by the City, according to the Court of Appeals, are pure
questions of law which should have been raised in a petition for review on certiorari
directly filed before this court. Since the City availed itself of the wrong mode of
appeal, the Court of Appeals dismissed the City’s appeal in the decision 36 dated
January 11, 2008.
The City filed a motion for extension of time to file a motion for reconsideration,37
which the Court of Appeals denied in the resolution38 dated April 11, 2008.
Despite the denial of its motion for extension, the City filed a motion for
reconsideration.39 In the resolution40 dated August 6, 2008, the Court of Appeals
denied that motion.
In its petition for review on certiorari with this court,41 the City argues that the Court of
Appeals “hid under the skirts of technical rules”42 in resolving its appeal. The City
maintains that its appeal involved mixed questions of fact and law. According to the
City, whether the PEZA performed governmental functions “cannot completely be
addressed by law but [by] the factual and actual activities [the PEZA is] carrying
out.”43chanRoblesvirtualLawlibrary
Even assuming that the petition involves pure questions of law, the City contends that
the subject matter of the case “is of extreme importance with [far-reaching]
consequence that [its magnitude] would surely shape and determine the course of our
nation’s future.”44 The Court of Appeals, the City argues, should have resolved the
case on the merits.
The City insists that the trial court had no jurisdiction to hear the PEZA’s petition for
declaratory relief. According to the City, the case involves real property located in the
City of Lapu-Lapu. The petition for declaratory relief should have been filed before
the Regional Trial Court of the City of Lapu-Lapu.45chanRoblesvirtualLawlibrary
Moreover, the Province of Bataan, the City of Baguio, and the Province of Cavite
allegedly demanded real property taxes from the PEZA. The City argues that the
PEZA should have likewise impleaded these local government units as respondents
in its petition for declaratory relief. For its failure to do so, the PEZA violated Rule 63,
Section 2 of the Rules of Court, and the trial court should have dismissed the
petition.46chanRoblesvirtualLawlibrary
This court ordered the PEZA to comment on the City’s petition for review on
certiorari.47chanRoblesvirtualLawlibrary
At the outset of its comment, the PEZA argues that the Court of Appeals’ decision
dated January 11, 2008 had become final and executory. After the Court of Appeals
had denied the City’s appeal, the City filed a motion for extension of time to file a
motion for reconsideration. Arguing that the time to file a motion for reconsideration is
not extendible, the PEZA filed its motion for reconsideration out of time. The City has
no more right to appeal to this court.48chanRoblesvirtualLawlibrary
The PEZA maintains that the City availed itself of the wrong mode of appeal before
the Court of Appeals. Since the City raised pure questions of law in its appeal, the
PEZA argues that the proper remedy is a petition for review on certiorari with this
court, not an ordinary appeal before the appellate court. The Court of Appeals,
therefore, correctly dismissed outright the City’s appeal under Rule 50, Section 2 of
the Rules of Court.49chanRoblesvirtualLawlibrary
On the merits, the PEZA argues that it is an agency and instrumentality of the
National Government. It is therefore exempt from payment of real property taxes
under Sections 133(o) and 234(a) of the Local Government Code. 50 It adds that the
tax privileges under Sections 24 and 51 of the Special Economic Zone Act of 1995
applied to it.51chanRoblesvirtualLawlibrary
Considering that the site of the Mactan Economic Zone is a reserved land under
Proclamation No. 1811, the PEZA claims that the properties sought to be taxed are
lands of public dominion exempt from real property
taxes.52chanRoblesvirtualLawlibrary
As to the jurisdiction issue, the PEZA counters that the Regional Trial Court of Pasay
had jurisdiction to hear its petition for declaratory relief under Rule 63, Section 1 of the
Rules of Court.53 It also argued that it need not implead the Province of Bataan, the
City of Baguio, and the Province of Cavite as respondents considering that their
demands came after the PEZA had already filed the petition in
court.54chanRoblesvirtualLawlibrary
Facts of G.R. No. 187583
After the City of Lapu-Lapu had demanded payment of real property taxes from the
PEZA, the Province of Bataan followed suit. In its letter55 dated May 29, 2003, the
Province, through the Office of the Provincial Treasurer, informed the PEZA that it
would be sending a real property tax billing to the PEZA. Arguing that the PEZA is a
developer of economic zones, the Province claimed that the PEZA is liable for real
property taxes under Section 24 of the Special Economic Zone Act of 1995.
In its reply letter56 dated June 18, 2003, the PEZA requested the Province to suspend
the service of the real property tax billing. It cited its petition for declaratory relief
against the City of Lapu-Lapu pending before the Regional Trial Court, Branch 111,
Pasay City as basis.
The Province argued that serving a real property tax billing on the PEZA “would not in
any way affect [its] petition for declaratory relief before [the Regional Trial Court] of
Pasay City.”57 Thus, in its letter58 dated June 27, 2003, the Province notified the
PEZA of its real property tax liabilities for June 1, 1995 to December 31, 2002 totalling
?110,549,032.55.
After having been served a tax billing, the PEZA again requested the Province to
suspend collecting its alleged real property tax liabilities until the Regional Trial Court
of Pasay City resolves its petition for declaratory relief.59chanRoblesvirtualLawlibrary
The Province ignored the PEZA’s request. On January 20, 2004, the Province served
on the PEZA a statement of unpaid real property tax for the period from June 1995 to
December 2004.60chanRoblesvirtualLawlibrary
The PEZA again requested the Province to suspend collecting its alleged real
property taxes.61 The Province denied the request in its letter62 dated January 29,
2004, then served on the PEZA a warrant of levy63 covering the PEZA’s real
properties located in Mariveles, Bataan.
The PEZA’s subsequent requests64 for suspension of collection were all denied by the
Province.65 The Province then served on the PEZA a notice of delinquency in the
payment of real property taxes66 and a notice of sale of real property for unpaid real
property tax.67 The Province finally sent the PEZA a notice of public auction of the
latter’s properties in Mariveles, Bataan.68chanRoblesvirtualLawlibrary
On June 14, 2004, the PEZA filed a petition for injunction69 with prayer for issuance of
a temporary restraining order and/or writ of preliminary injunction before the Regional
Trial Court of Pasay City, arguing that it is exempt from payment of real property
taxes. It added that the notice of sale issued by the Province was void because it was
not published in a newspaper of general circulation as required by Section 260 of the
Local Government Code.70chanRoblesvirtualLawlibrary
The case was raffled to Branch 115.
In its order71 dated June 18, 2004, the trial court issued a temporary restraining order
against the Province. After the PEZA had filed a P100,000.00 bond,72 the trial court
issued a writ of preliminary injunction,73 enjoining the Province from selling the
PEZA’s real properties at public auction.
On March 3, 2006, the PEZA and Province both manifested that each would file a
memorandum after which the case would be deemed submitted for decision. The
parties then filed their respective memoranda.74chanRoblesvirtualLawlibrary
In the order75 dated January 31, 2007, the trial court denied the PEZA’s petition for
injunction. The trial court ruled that the PEZA is not exempt from payment of real
property taxes. According to the trial court, Sections 193 and 234 of the Local
Government Code had withdrawn the real property tax exemptions previously granted
to all persons, whether natural or juridical.76 As to the tax exemptions under Section
51 of the Special Economic Zone Act of 1995, the trial court ruled that the provision
only applies to businesses operating within the economic zones, not to the
PEZA.77chanRoblesvirtualLawlibrary
The PEZA filed before the Court of Appeals a petition for certiorari 78 with prayer for
issuance of a temporary restraining order.
The Court of Appeals issued a temporary restraining order, enjoining the Province
and its Provincial Treasurer from selling PEZA's properties at public auction
scheduled on October 17, 2007.79 It also ordered the Province to comment on the
PEZA’s petition.
In its comment,80 the Province alleged that it received a copy of the temporary
restraining order only on October 18, 2007 when it had already sold the PEZA’s
properties at public auction. Arguing that the act sought to be enjoined was already
fait accompli, the Province prayed for the dismissal of the petition for certiorari.
The PEZA then filed a supplemental petition for certiorari, prohibition, and
mandamus81 against the Province, arguing that the Provincial Treasurer of Bataan
acted with grave abuse of discretion in issuing the notice of delinquency and notice of
sale. It maintained that it is exempt from payment of real property taxes because it is
a government instrumentality. It added that its lands are property of public dominion
which cannot be sold at public auction.
The PEZA also filed a motion82 for issuance of an order affirming the temporary
restraining order and a writ of preliminary injunction to enjoin the Province from
consolidating title over the PEZA’s properties.
In its resolution83 dated January 16, 2008, the Court of Appeals admitted the
supplemental petition for certiorari, prohibition, and mandamus. It required the
Province to comment on the supplemental petition and to file a memorandum on the
PEZA’s prayer for issuance of temporary restraining order.
The Province commented84 on the PEZA’s supplemental petition, to which the PEZA
replied.85chanRoblesvirtualLawlibrary
The Province then filed a motion86 for leave to admit attached rejoinder with motion to
dismiss. In the rejoinder with motion to dismiss,87 the Province argued for the first
time that the Court of Appeals had no jurisdiction over the subject matter of the action.
According to the Province, the PEZA erred in filing a petition for certiorari. Arguing
that the PEZA sought to reverse a Regional Trial Court decision in a local tax case,
the Province claimed that the court with appellate jurisdiction over the action is the
Court of Tax Appeals. The PEZA then prayed that the Court of Appeals dismiss the
petition for certiorari for lack of jurisdiction over the subject matter of the action.
The Court of Appeals held that the issue before it was whether the trial court judge
gravely abused his discretion in dismissing the PEZA’s petition for prohibition. This
issue, according to the Court of Appeals, is properly addressed in a petition for
certiorari over which it has jurisdiction to resolve. It, therefore, maintained jurisdiction
to resolve the PEZA’s petition for certiorari.88chanRoblesvirtualLawlibrary
Although it admitted that appeal, not certiorari, was the PEZA’s proper remedy to
reverse the trial court’s decision,89 the Court of Appeals proceeded to decide the
petition for certiorari in “the broader interest of justice.”90chanRoblesvirtualLawlibrary
The Court of Appeals ruled that the trial court judge gravely abused his discretion in
dismissing the PEZA’s petition for prohibition. It held that Section 21 of Presidential
Decree No. 66 and Section 51 of the Special Economic Zone Act of 1995 granted the
PEZA exemption from payment of real property taxes.91 Based on the criteria set in
Manila International Airport Authority v. Court of Appeals,92 the Court of Appeals
found that the PEZA is an instrumentality of the national government. No taxes,
therefore, could be levied on it by local government
units.93chanRoblesvirtualLawlibrary
In the decision94 dated August 27, 2008, the Court of Appeals granted the PEZA’s
petition for certiorari. It set aside the trial court’s decision and nullified all the
Province’s proceedings with respect to the collection of real property taxes from the
PEZA.
The Province filed a motion for reconsideration,95 which the Court of Appeals denied
in the resolution96 dated April 16, 2009 for lack of merit.
In its petition for review on certiorari with this court,97 the Province of Bataan insists
that the Court of Appeals had no jurisdiction to take cognizance of the PEZA’s petition
for certiorari. The Province maintains that the Court of Tax Appeals had jurisdiction to
hear the PEZA’s petition since it involved a local tax case decided by a Regional Trial
Court.98chanRoblesvirtualLawlibrary
The Province reiterates that the PEZA is not exempt from payment of real property
taxes. The Province points out that the EPZA, the PEZA’s predecessor, had to be
categorically exempted from payment of real property taxes. The EPZA, therefore,
was not inherently exempt from payment of real property taxes and so is the
PEZA. Since Congress omitted from the Special Economic Zone Act of 1995 a
provision specifically exempting the PEZA from payment of real property taxes, the
Province argues that the PEZA is a taxable entity. It cited the rule in statutory
construction that provisions omitted in revised statutes are deemed
repealed.99chanRoblesvirtualLawlibrary
With respect to Sections 24 and 51 of the Special Economic Zone Act of 1995
granting tax exemptions and benefits, the Province argues that these provisions only
apply to business establishments operating within special economic zones, 100 not to
the PEZA.
This court ordered the PEZA to comment on the Province’s petition for review on
certiorari.101chanRoblesvirtualLawlibrary
In its comment,102 the PEZA argues that the Court of Appeals had jurisdiction to hear
its petition for certiorari since the issue was whether the trial court committed grave
abuse of discretion in denying its petition for injunction. The PEZA maintains that it is
exempt from payment of real property taxes under Section 21 of Presidential Decree
No. 66 and Section 51 of the Special Economic Zone Act of 1995.
The Province filed its reply,103 reiterating its arguments in its petition for review on
certiorari.
On the PEZA’s motion,104 this court consolidated the petitions filed by the City of
Lapu-Lapu and the Province of Bataan.105chanRoblesvirtualLawlibrary
The issues for our resolution are the following:
I. Whether the Court of Appeals erred in dismissing the City of Lapu-Lapu’s appeal for
raising pure questions of law;
II. Whether the Regional Trial Court, Branch 111, Pasay City had jurisdiction to hear,
try, and decide the City of Lapu-Lapu’s petition for declaratory relief;
III. Whether the petition for injunction filed before the Regional Trial Court, Branch
115, Pasay City, is a local tax case appealable to the Court of Tax Appeals; and
IV. Whether the PEZA is exempt from payment of real property taxes.
We deny the consolidated petitions.
I.
The Court of Appeals did not err in
dismissing the City of Lapu-Lapu’s
appeal for raising pure questions of law
Under the Rules of Court, there are three modes of appeal from Regional Trial Court
decisions. The first mode is through an ordinary appeal before the Court of Appeals
where the decision assailed was rendered in the exercise of the Regional Trial Court’s
original jurisdiction. Ordinary appeals are governed by Rule 41, Sections 3 to 13 of
the Rules of Court. In ordinary appeals, questions of fact or mixed questions of fact
and law may be raised.106chanRoblesvirtualLawlibrary
The second mode is through a petition for review before the Court of Appeals where
the decision assailed was rendered by the Regional Trial Court in the exercise of its
appellate jurisdiction. Rule 42 of the Rules of Court governs petitions for review
before the Court of Appeals. In petitions for review under Rule 42, questions of fact,
of law, or mixed questions of fact and law may be
raised.107chanRoblesvirtualLawlibrary
The third mode is through an appeal by certiorari before this court under Rule 45
where only questions of law shall be raised.108chanRoblesvirtualLawlibrary
A question of fact exists when there is doubt as to the truth or falsity of the alleged
facts.109 On the other hand, there is a question of law if the appeal raises doubt as to
the applicable law on a certain set of facts.110chanRoblesvirtualLawlibrary
Under Rule 50, Section 2, an improper appeal before the Court of Appeals is
dismissed outright and shall not be referred to the proper
court:chanroblesvirtuallawlibrary
SEC. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under
Rule 41 taken from the Regional Trial Court to the Court of Appeals raising only
questions of law shall be dismissed, issues purely of law not being reviewable by said
court. Similarly, an appeal by notice of appeal instead of by petition for review from
the appellate judgment of a Regional Trial Court shall be dismissed.
An appeal erroneously taken to the Court of Appeals shall not be transferred to the
appropriate court but shall be dismissed outright.
Rule 50, Section 2 repealed Rule 50, Section 3 of the 1964 Rules of Court, which
provided that improper appeals to the Court of Appeals shall not be dismissed but
shall be certified to the proper court for resolution:chanroblesvirtuallawlibrary
Sec. 3. Where appealed case erroneously, brought. — Where the appealed case has
been erroneously brought to the Court of Appeals, it shall not dismiss the appeal, but
shall certify the case to the proper court, with a specific and clear statement of the
grounds therefor.
With respect to appeals by certiorari directly filed before this court but which raise
questions of fact, paragraph 4(b) of Circular No. 2-90 dated March 9, 1990 states that
this court “retains the option, in the exercise of its sound discretion and considering
the attendant circumstances, either itself to take cognizance of and decide such
issues or to refer them to the Court of Appeals for determination.”
In Indoyon, Jr. v. Court of Appeals,111 we said that this court “cannot tolerate
ignorance of the law on appeals.”112 It is not this court’s task to determine for litigants
their proper remedies under the Rules.113chanRoblesvirtualLawlibrary
We agree that the City availed itself of the wrong mode of appeal before the Court of
Appeals. The City raised pure questions of law in its appeal. The issue of whether the
Regional Trial Court of Pasay had jurisdiction over the PEZA’s petition for declaratory
relief is a question of law, jurisdiction being a matter of law. 114 The issue of whether
the PEZA is a government instrumentality exempt from payment of real property taxes
is likewise a question of law since this question is resolved by examining the
provisions of the PEZA’s charter as well as other laws relating to the
PEZA.115chanRoblesvirtualLawlibrary
The Court of Appeals, therefore, did not err in dismissing the City’s appeal pursuant to
Rule 50, Section 2 of the Rules of Court.
Nevertheless, considering the important questions involved in this case, we take
cognizance of the City’s petition for review on certiorari in the interest of justice.
In Municipality of Pateros v. The Honorable Court of Appeals,116 the Municipality of
Pateros filed an appeal under Rule 42 before the Court of Appeals, which the Court of
Appeals denied outright for raising pure questions of law. This court agreed that the
Municipality of Pateros “committed a procedural infraction”117 and should have directly
filed a petition for review on certiorari before this court. Nevertheless, “in the interest
of justice and in order to write finis to [the] controversy,”118 this court “opt[ed] to relax
the rules”119 and proceeded to decide the case. This court
said:chanroblesvirtuallawlibrary
While it is true that rules of procedure are intended to promote rather than frustrate
the ends of justice, and while the swift unclogging of the dockets of the courts is a
laudable objective, it nevertheless must not be met at the expense of substantial
justice.
The Court has allowed some meritorious cases to proceed despite inherent
procedural defects and lapses. This is in keeping with the principle that rules of
procedure are mere tools designed to facilitate the attainment of justice, and that strict
and rigid application of rules which should result in technicalities that tend to frustrate
rather than promote substantial justice must always be avoided. It is a far better and
more prudent cause of action for the court to excuse a technical lapse and afford the
parties a review of the case to attain the ends of justice, rather than dispose of the
case on technicality and cause grave injustice to the parties, giving a false impression
of speedy disposal of cases while actually resulting in more delay, if not a miscarriage
of justice.120
Similar to Municipality of Pateros, we opt to relax the rules in this case. The PEZA
operates or otherwise administers special economic zones all over the
country. Resolving the substantive issue of whether the PEZA is taxable for real
property taxes will clarify the taxing powers of all local government units where
special economic zones are operated. This case, therefore, should be decided on the
merits.
II.
The Regional Trial Court of Pasay had
no jurisdiction to hear, try, and decide
the PEZA’s petition for declaratory relief
against the City of Lapu-Lapu
Rule 63 of the Rules of Court governs actions for declaratory relief. Section 1 of Rule
63 provides:chanroblesvirtuallawlibrary
SECTION 1. Who may file petition. – Any person interested under a deed, will,
contract or other written instrument, or whose rights are affected by a statute,
executive order or regulation, ordinance, or any other governmental regulation may,
before breach or violation, thereof, bring an action in the appropriate Regional Trial
Court to determine any question of construction or validity arising, and for a
declaration of his rights or duties, thereunder.
An action for reformation of an instrument, to quiet title to real property or remove
clouds therefrom, or to consolidate ownership under Article 1607 of the Civil Code,
may be brought under this Rule.
The court with jurisdiction over petitions for declaratory relief is the Regional Trial
Court, the subject matter of litigation in an action for declaratory relief being incapable
of pecuniary estimation.121 Section 19 of the Judiciary Reorganization Act of 1980
provides:chanroblesvirtuallawlibrary
SEC. 19. Jurisdiction in Civil Cases. – Regional Trial Courts shall exercise exclusive
original jurisdiction:
(1) In all civil actions in which the subject of litigation is incapable of pecuniary
estimation[.]
Consistent with the law, the Rules state that a petition for declaratory relief is filed “in
the appropriate Regional Trial Court.”122
A special civil action for declaratory relief is filed for a judicial determination of any
question of construction or validity arising from, and for a declaration of rights and
duties, under any of the following subject matters: a deed, will, contract or other
written instrument, statute, executive order or regulation, ordinance, or any other
governmental regulation.123 However, a declaratory judgment may issue only if there
has been “no breach of the documents in question.”124 If the contract or statute
subject matter of the action has already been breached, the appropriate ordinary civil
action must be filed.125 If adequate relief is available through another form of action
or proceeding, the other action must be preferred over an action for declaratory
relief.126chanRoblesvirtualLawlibrary
In Ollada v. Central Bank of the Philippines,127 the Central Bank issued CB-IED Form
No. 5 requiring certified public accountants to submit an accreditation under oath
before they were allowed to certify financial statements submitted to the
bank. Among those financial statements the Central Bank disallowed were those
certified by accountant Felipe B. Ollada. 128chanRoblesvirtualLawlibrary
Claiming that the requirement “restrained the legitimate pursuit of one’s trade,” 129
Ollada filed a petition for declaratory relief against the Central Bank.
This court ordered the dismissal of Ollada’s petition “without prejudice to [his] seeking
relief in another appropriate action.”130 According to this court, Ollada’s right had
already been violated when the Central Bank refused to accept the financial
statements he prepared. Since there was already a breach, a petition for declaratory
relief was not proper. Ollada must pursue the “appropriate ordinary civil action or
proceeding.”131 This court explained:chanroblesvirtuallawlibrary
Petitioner commenced this action as, and clearly intended it to be one for Declaratory
Relief under the provisions of Rule 66 of the Rules of Court. On the question of when
a special civil action of this nature would prosper, we have already held that the
complaint for declaratory relief will not prosper if filed after a contract, statute or right
has been breached or violated. In the present case such is precisely the situation
arising from the facts alleged in the petition for declaratory relief. As vigorously
claimed by petitioner himself, respondent had already invaded or violated his right
and caused him injury — all these giving him a complete cause of action enforceable
in an appropriate ordinary civil action or proceeding. The dismissal of the action was,
therefore, proper in the light of our ruling in De Borja vs. Villadolid, 47 O.G. (5) p.
2315, and Samson vs. Andal, G.R. No. L-3439, July 31, 1951, where we held that an
action for declaratory relief should be filed before there has been a breach of a
contract, statutes or right, and that it is sufficient to bar such action, that there had
been a breach — which would constitute actionable violation. The rule is that an
action for Declaratory Relief is proper only if adequate relief is not available through
the means of other existing forms of action or proceeding (1 C.J.S. 1027-1028). 132
It is also required that the parties to the action for declaratory relief be those whose
rights or interests are affected by the contract or statute in question. 133 “There must
be an actual justiciable controversy or the ‘ripening seeds’ of one” 134 between the
parties. The issue between the parties “must be ripe for judicial determination.”135 An
action for declaratory relief based on theoretical or hypothetical questions cannot be
filed for our courts are not advisory courts.136chanRoblesvirtualLawlibrary
In Republic v. Roque,137 this court dismissed respondents’ petition for declaratory
relief for lack of justiciable controversy. According to this court, “[the respondents’]
fear of prospective prosecution [under the Human Security Act] was solely based on
remarks of certain government officials which were addressed to the general
public.”138chanRoblesvirtualLawlibrary
In Velarde v. Social Justice Society,139 this court refused to resolve the issue of
“whether or not [a religious leader’s endorsement] of a candidate for elective office or
in urging or requiring the members of his flock to vote for a specific candidate is
violative [of the separation clause].”140 According to the court, there was no justiciable
controversy and ordered the dismissal of the Social Justice Society’s petition for
declaratory relief. This court explained:chanroblesvirtuallawlibrary
Indeed, SJS merely speculated or anticipated without factual moorings that, as
religious leaders, the petitioner and his co-respondents below had endorsed or
threatened to endorse a candidate or candidates for elective offices; and that such
actual or threatened endorsement "will enable [them] to elect men to public office who
[would] in turn be forever beholden to their leaders, enabling them to control the
government"[;] and "pos[ing] a clear and present danger of serious erosion of the
people’s faith in the electoral process[;] and reinforc[ing] their belief that religious
leaders determine the ultimate result of elections," which would then be violative of
the separation clause.
Such premise is highly speculative and merely theoretical, to say the least. Clearly, it
does not suffice to constitute a justiciable controversy. The Petition does not even
allege any indication or manifest intent on the part of any of the respondents below to
champion an electoral candidate, or to urge their so-called flock to vote for, or not to
vote for, a particular candidate. It is a time-honored rule that sheer speculation does
not give rise to an actionable right.
Obviously, there is no factual allegation that SJS’ rights are being subjected to any
threatened, imminent and inevitable violation that should be prevented by the
declaratory relief sought. The judicial power and duty of the courts to settle actual
controversies involving rights that are legally demandable and enforceable cannot be
exercised when there is no actual or threatened violation of a legal right.
All that the 5-page SJS Petition prayed for was "that the question raised in paragraph
9 hereof be resolved." In other words, it merely sought an opinion of the trial court on
whether the speculated acts of religious leaders endorsing elective candidates for
political offices violated the constitutional principle on the separation of church and
state. SJS did not ask for a declaration of its rights and duties; neither did it pray for
the stoppage of any threatened violation of its declared rights. Courts, however, are
proscribed from rendering an advisory opinion.141
In sum, a petition for declaratory relief must satisfy six
requisites:chanroblesvirtuallawlibrary
[F]irst, the subject matter of the controversy must be a deed, will, contract or other
written instrument, statute, executive order or regulation, or ordinance; second, the
terms of said documents and the validity thereof are doubtful and require judicial
construction; third, there must have been no breach of the documents in question;
fourth, there must be an actual justiciable controversy or the "ripening seeds" of one
between persons whose interests are adverse; fifth, the issue must be ripe for judicial
determination; and sixth, adequate relief is not available through other means or other
forms of action or proceeding.142 (Emphases omitted)
We rule that the PEZA erred in availing itself of a petition for declaratory relief against
the City. The City had already issued demand letters and real property tax
assessment against the PEZA, in violation of the PEZA’s alleged tax-exempt status
under its charter. The Special Economic Zone Act of 1995, the subject matter of
PEZA’s petition for declaratory relief, had already been breached. The trial court,
therefore, had no jurisdiction over the petition for declaratory relief.
There are several aspects of jurisdiction.143 Jurisdiction over the subject matter is
“the power to hear and determine cases of the general class to which the proceedings
in question belong.”144 It is conferred by law, which may either be the Constitution or
a statute.145 Jurisdiction over the subject matter means “the nature of the cause of
action and the relief sought.”146 Thus, the cause of action and character of the relief
sought as alleged in the complaint are examined to determine whether a court had
jurisdiction over the subject matter.147 Any decision rendered by a court without
jurisdiction over the subject matter of the action is void. 148chanRoblesvirtualLawlibrary
Another aspect of jurisdiction is jurisdiction over the person. It is “the power of [a]
court to render a personal judgment or to subject the parties in a particular action to
the judgment and other rulings rendered in the action.” 149 A court automatically
acquires jurisdiction over the person of the plaintiff upon the filing of the initiatory
pleading.150 With respect to the defendant, voluntary appearance in court or a valid
service of summons vests the court with jurisdiction over the defendant’s
person.151 Jurisdiction over the person of the defendant is indispensable in actions in
personam or those actions based on a party’s personal liability.152 The proceedings
in an action in personam are void if the court had no jurisdiction over the person of the
defendant.153chanRoblesvirtualLawlibrary
Jurisdiction over the res or the thing under litigation is acquired either “by the seizure
of the property under legal process, whereby it is brought into actual custody of the
law; or as a result of the institution of legal proceedings, in which the power of the
court is recognized and made effective.”154 Jurisdiction over the res is necessary in
actions in rem or those actions “directed against the thing or property or status of a
person and seek judgments with respect thereto as against the whole world.” 155 The
proceedings in an action in rem are void if the court had no jurisdiction over the thing
under litigation.156chanRoblesvirtualLawlibrary
In the present case, the Regional Trial Court had no jurisdiction over the subject
matter of the action, specifically, over the remedy sought. As this court explained in
Malana v. Tappa:157chanRoblesvirtualLawlibrary
. . . an action for declaratory relief presupposes that there has been no actual breach
of the instruments involved or of rights arising thereunder. Since the purpose of an
action for declaratory relief is to secure an authoritative statement of the rights and
obligations of the parties under a statute, deed, or contract for their guidance in the
enforcement thereof, or compliance therewith, and not to settle issues arising from an
alleged breach thereof, it may be entertained only before the breach or violation of the
statute, deed, or contract to which it refers. A petition for declaratory relief gives a
practical remedy for ending controversies that have not reached the state where
another relief is immediately available; and supplies the need for a form of action that
will set controversies at rest before they lead to a repudiation of obligations, an
invasion of rights, and a commission of wrongs.
Where the law or contract has already been contravened prior to the filing of an action
for declaratory relief, the courts can no longer assume jurisdiction over the action. In
other words, a court has no more jurisdiction over an action for declaratory relief if its
subject has already been infringed or transgressed before the institution of the
action.158 (Emphasis supplied)
The trial court should have dismissed the PEZA’s petition for declaratory relief for lack
of jurisdiction.
Once an assessment has already been issued by the assessor, the proper remedy of
a taxpayer depends on whether the assessment was erroneous or illegal.
An erroneous assessment “presupposes that the taxpayer is subject to the tax but is
disputing the correctness of the amount assessed.”159 With an erroneous
assessment, the taxpayer claims that the local assessor erred in determining any of
the items for computing the real property tax, i.e., the value of the real property or the
portion thereof subject to tax and the proper assessment levels. In case of an
erroneous assessment, the taxpayer must exhaust the administrative remedies
provided under the Local Government Code before resorting to judicial action.
The taxpayer must first pay the real property tax under protest. Section 252 of the
Local Government Code provides:chanroblesvirtuallawlibrary
SECTION 252. Payment Under Protest. -(a) No protest shall be entertained unless
the taxpayer first pays the tax. There shall be annotated on the tax receipts the words
"paid under protest". The protest in writing must be filed within thirty (30) days from
payment of the tax to the provincial, city treasurer or municipal treasurer, in the case
of a municipality within Metropolitan Manila Area, who shall decide the protest within
sixty (60) days from receipt.
(b) The tax or a portion thereof paid under protest, shall be held in trust by the
treasurer concerned.
(c) In the event that the protest is finally decided in favor of the taxpayer, the amount
or portion of the tax protested shall be refunded to the protestant, or applied as tax
credit against his existing or future tax liability.
(d) In the event that the protest is denied or upon the lapse of the sixty day period
prescribed in subparagraph (a), the taxpayer may avail of the remedies as provided
for in Chapter 3, Title II, Book II of this Code.
Should the taxpayer find the action on the protest unsatisfactory, the taxpayer may
appeal with the Local Board of Assessment Appeals within 60 days from receipt of the
decision on the protest:chanroblesvirtuallawlibrary
SECTION 226. Local Board of Assessment Appeals. - Any owner or person having
legal interest in the property who is not satisfied with the action of the provincial, city
or municipal assessor in the assessment of his property may, within sixty (60) days
from the date of receipt of the written notice of assessment, appeal to the Board of
Assessment Appeals of the provincial or city by filing a petition under oath in the form
prescribed for the purpose, together with copies of the tax declarations and such
affidavits or documents submitted in support of the appeal.
Payment under protest and appeal to the Local Board of Assessment Appeals are
“successive administrative remedies to a taxpayer who questions the correctness of
an assessment.”160 The Local Board Assessment Appeals shall not entertain an
appeal “without the action of the local assessor”161 on the protest.
If the taxpayer is still unsatisfied after appealing with the Local Board of Assessment
Appeals, the taxpayer may appeal with the Central Board of Assessment Appeals
within 30 days from receipt of the Local Board’s decision:chanroblesvirtuallawlibrary
SECTION 229. Action by the Local Board of Assessment Appeals. - (a) The Board
shall decide the appeal within one hundred twenty (120) days from the date of receipt
of such appeal. The Board, after hearing, shall render its decision based on
substantial evidence or such relevant evidence on record as a reasonable mind might
accept as adequate to support the conclusion.
(b) In the exercise of its appellate jurisdiction, the Board shall have the power to
summon witnesses, administer oaths, conduct ocular inspection, take depositions,
and issue subpoena and subpoena duces tecum. The proceedings of the Board shall
be conducted solely for the purpose of ascertaining the facts without necessarily
adhering to technical rules applicable in judicial proceedings.
(c) The secretary of the Board shall furnish the owner of the property or the person
having legal interest therein and the provincial or city assessor with a copy of the
decision of the Board. In case the provincial or city assessor concurs in the revision or
the assessment, it shall be his duty to notify the owner of the property or the person
having legal interest therein of such fact using the form prescribed for the purpose.
The owner of the property or the person having legal interest therein or the assessor
who is not satisfied with the decision of the Board, may, within thirty (30) days after
receipt of the decision of said Board, appeal to the Central Board of Assessment
Appeals, as herein provided. The decision of the Central Board shall be final and
executory. (Emphasis supplied)
In the present case, the PEZA did not avail itself of any of the remedies against a
notice of assessment. A petition for declaratory relief is not the proper remedy once a
notice of assessment was already issued.
Instead of a petition for declaratory relief, the PEZA should have directly resorted to a
judicial action. The PEZA should have filed a complaint for injunction, the
“appropriate ordinary civil action”166 to enjoin the City from enforcing its demand and
collecting the assessed taxes from the PEZA. After all, a declaratory judgment as to
the PEZA’s tax-exempt status is useless unless the City is enjoined from enforcing its
demand.
Injunction “is a judicial writ, process or proceeding whereby a party is ordered to do or
refrain from doing a certain act.”167 “It may be the main action or merely a provisional
remedy for and as incident in the main action.”168 The essential requisites of a writ of
injunction are: “(1) there must be a right in esse or the existence of a right to be
protected; and (2) the act against which the injunction is directed to constitute a
violation of such right.”169chanRoblesvirtualLawlibrary

We note, however, that the City confused the concepts of jurisdiction and venue in
On the other hand, an assessment is illegal if it was made without authority under the
contending that the Regional Trial Court of Pasay had no jurisdiction because the real
law.162 In case of an illegal assessment, the taxpayer may directly resort to judicial
properties involved in this case are located in the City of Lapu-Lapu.
action without paying under protest the assessed tax and filing an appeal with the
Local and Central Board of Assessment Appeals.
On the one hand, jurisdiction is “the power to hear and determine cases of the
general class to which the proceedings in question belong.”170 Jurisdiction is a matter
In Ty v.Trampe,163 the Municipal Assessor of Pasig sent Alejandro B. Ty a notice of
of substantive law.171 Thus, an action may be filed only with the court or tribunal
assessment with respect to Ty’s real properties in Pasig. Without resorting to the
where the Constitution or a statute says it can be brought.172 Objections to
administrative remedies under the Local Government Code, Ty filed before the
jurisdiction cannot be waived and may be brought at any stage of the proceedings,
Regional Trial Court a petition, praying that the trial court nullify the notice of
even on appeal.173 When a case is filed with a court which has no jurisdiction over
assessment. In assessing the real property taxes due, the Municipal Assessor used a
the action, the court shall motu proprio dismiss the
schedule of market values solely prepared by him. This, Ty argued, was void for
case.174chanRoblesvirtualLawlibrary
being contrary to the Local Government Code requiring that the schedule of market
values be jointly prepared by the provincial, city, and municipal assessors of the
On the other hand, venue is “the place of trial or geographical location in which an
municipalities within the Metropolitan Manila Area.
action or proceeding should be brought.”175 In civil cases, venue is a matter of
procedural law.176 A party’s objections to venue must be brought at the earliest
This court ruled that the assessment was illegal for having been issued without
opportunity either in a motion to dismiss or in the answer; otherwise the objection
authority of the Municipal Assessor. Reconciling provisions of the Real Property Tax
shall be deemed waived.177 When the venue of a civil action is improperly laid, the
Code and the Local Government Code, this court held that the schedule of market
court cannot motu proprio dismiss the case.178chanRoblesvirtualLawlibrary
values must be jointly prepared by the provincial, city, and municipal assessors of the
municipalities within the Metropolitan Manila Area.
The venue of an action depends on whether the action is a real or personal
action. Should the action affect title to or possession of real property, or interest
As to the issue of exhaustion of administrative remedies, this court held that Ty did
therein, it is a real action. The action should be filed in the proper court which has
not err in directly resorting to judicial action. According to this court, payment under
jurisdiction over the area wherein the real property involved, or a portion thereof, is
protest is required only “where there is a question as to the reasonableness of the
situated.179 If the action is a personal action, the action shall be filed with the proper
amount assessed.”164 As to appeals before the Local and Central Board of
court where the plaintiff or any of the principal plaintiffs resides, or where the
Assessment Appeals, they are “fruitful only where questions of fact are
defendant or any of the principal defendants resides, or in the case of a non-resident
involved.”165chanRoblesvirtualLawlibrary
defendant where he may be found, at the election of the
plaintiff.180chanRoblesvirtualLawlibrary
Ty raised the issue of the legality of the notice of assessment, an issue that did not go
into the reasonableness of the amount assessed. Neither did the issue involve a
The City was objecting to the venue of the action, not to the jurisdiction of the
question of fact. Ty raised a question of law and, therefore, need not resort to the
Regional Trial Court of Pasay. In essence, the City was contending that the PEZA’s
administrative remedies provided under the Local Government Code.
petition is a real action as it affects title to or possession of real property, and,
therefore, the PEZA should have filed the petition with the Regional Trial Court of
Lapu-Lapu City where the real properties are located.
However, whatever objections the City has against the venue of the PEZA’s action for
declaratory relief are already deemed waived. Objections to venue must be raised at
the earliest possible opportunity.181 The City did not file a motion to dismiss the
petition on the ground that the venue was improperly laid. Neither did the City raise
this objection in its answer.
In any event, the law sought to be judicially interpreted in this case had already been
breached. The Regional Trial Court of Pasay, therefore, had no jurisdiction over the
PEZA’s petition for declaratory relief against the City.
III.
The Court of Appeals had no jurisdiction
over the PEZA’s petition for certiorari
against the Province of Bataan
Appeal is the remedy “to obtain a reversal or modification of a judgment on the
merits.”182 A judgment on the merits is one which “determines the rights and liabilities
of the parties based on the disclosed facts, irrespective of the formal, technical or
dilatory objections.”183 It is not even necessary that the case proceeded to trial.184 So
long as the “judgment is general”185 and “the parties had a full legal opportunity to be
heard on their respective claims and contentions,” 186 the judgment is on the merits.
On the other hand, certiorari is a special civil action filed to annul or modify a
proceeding of a tribunal, board, or officer exercising judicial or quasi-judicial
functions.187 Certiorari, which in Latin means “to be more fully informed,”188 was
originally a remedy in the common law. This court discussed the history of the
remedy of certiorari in Spouses Delos Santos v. Metropolitan Bank and Trust
Company:189chanRoblesvirtualLawlibrary
In the common law, from which the remedy of certiorari evolved, the writ of certiorari
was issued out of Chancery, or the King’s Bench, commanding agents or officers of
the inferior courts to return the record of a cause pending before them, so as to give
the party more sure and speedy justice, for the writ would enable the superior court to
determine from an inspection of the record whether the inferior court’s judgment was
rendered without authority. The errors were of such a nature that, if allowed to stand,
they would result in a substantial injury to the petitioner to whom no other remedy was
available. If the inferior court acted without authority, the record was then revised and
corrected in matters of law. The writ of certiorari was limited to cases in which the
inferior court was said to be exceeding its jurisdiction or was not proceeding
according to essential requirements of law and would lie only to review judicial or
quasi-judicial acts.190
In our jurisdiction, the term “certiorari” is used in two ways. An appeal before this
court raising pure questions of law is commenced by filing a petition for review on
certiorari under Rule 45 of the Rules of Court. An appeal by certiorari, which
continues the proceedings commenced before the lower courts, 191 is filed to reverse
or modify judgments or final orders.192 Under the Rules, an appeal by certiorari must
be filed within 15 days from notice of the judgment or final order, or of the denial of
the appellant’s motion for new trial or reconsideration. 193chanRoblesvirtualLawlibrary
A petition for certiorari under Rule 65, on the other hand, is an independent and
original action filed to set aside proceedings conducted without or in excess of
jurisdiction or with grave abuse of discretion amounting to lack or excess of
jurisdiction.194 Under the Rules, a petition for certiorari may only be filed if there is no
appeal or any plain, speedy, or adequate remedy in the ordinary course of
law.195 The petition must be filed within 60 days from notice of the judgment, order, or
resolution.196chanRoblesvirtualLawlibrary
Because of the longer period to file a petition for certiorari, some litigants attempt to
file petitions for certiorari as substitutes for lost appeals by certiorari. However, Rule
65 is clear that a petition for certiorari will not prosper if appeal is available. Appeal is
the proper remedy even if the error, or one of the errors, raised is grave abuse of
discretion on the part of the court rendering judgment.197 If appeal is available, a
petition for certiorari cannot be filed.
In this case, the trial court’s decision dated January 31, 2007 is a judgment on the
merits. Based on the facts disclosed by the parties, the trial court declared the PEZA
liable to the Province of Bataan for real property taxes. The PEZA’s proper remedy
against the trial court’s decision, therefore, is appeal.
Since the PEZA filed a petition for certiorari against the trial court’s decision, it availed
itself of the wrong remedy. As the Province of Bataan contended, the trial court’s
decision dated January 31, 2007 “is only an error of judgment appealable to the
higher level court and may not be corrected by filing a petition for certiorari.” 198 That
the trial court judge allegedly committed grave abuse of discretion does not make the
petition for certiorari the correct remedy. The PEZA should have raised this ground in
an appeal filed within 15 days from notice of the assailed resolution.
This court, “in the liberal spirit pervading the Rules of Court and in the interest of
substantial justice,”199 has treated petitions for certiorari as an appeal: “(1) if the
petition for certiorari was filed within the reglementary period within which to file a
petition for review on certiorari; (2) when errors of judgment are averred; and (3) when
there is sufficient reason to justify the relaxation of the rules.”200 Considering that “the
nature of an action is determined by the allegations of the complaint or the petition
and the character of the relief sought,”201 a petition which “actually avers errors of
judgment rather than errors than that of jurisdiction”202 may be considered a petition
for review.
However, suspending the application of the Rules has its disadvantages. Relaxing
procedural rules may reduce the “effective enforcement of substantive rights,”203
leading to “arbitrariness, caprice, despotism, or whimsicality in the settlement of
disputes.”204 Therefore, for this court to suspend the application of the Rules, the
accomplishment of substantial justice must outweigh the importance of predictability
of court procedures.
The PEZA’s petition for certiorari may be treated as an appeal. First, the petition for
certiorari was filed within the 15-day reglementary period for filing an appeal. The
PEZA filed its petition for certiorari before the Court of Appeals on October 15,
2007,205 which was 12 days from October 3, 2007206 when the PEZA had notice of the
trial court’s order denying the motion for reconsideration.
Second, the petition for certiorari raised errors of judgment. The PEZA argued that
the trial court erred in ruling that it is not exempt from payment of real property taxes
given Section 21 of Presidential Decree No. 66 and Sections 11 and 51 of the Special
Economic Zone Act of 1995.207chanRoblesvirtualLawlibrary
Third, there is sufficient reason to relax the rules given the importance of the
substantive issue presented in this case.
However, the PEZA’s petition for certiorari was filed before the wrong court. The
PEZA should have filed its petition before the Court of Tax Appeals.
The Court of Tax Appeals has the exclusive appellate jurisdiction over local tax cases
decided by Regional Trial Courts. Section 7, paragraph (a)(3) of Republic Act No.
1125, as amended by Republic Act No. 9282, provides:chanroblesvirtuallawlibrary
Sec. 7. Jurisdiction. – The [Court of Tax Appeals] shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
....
3. Decisions, orders or resolutions of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the exercise of their original or appellate
jurisdiction[.]
The local tax cases referred to in Section 7, paragraph (a)(3) of Republic Act No.
1125, as amended, include cases involving real property taxes. Real property
taxation is governed by Book II of the Local Government Code on “Local Taxation and
Fiscal Matters.” Real property taxes are collected by the Local Treasurer, 208 not by
the Bureau of Internal Revenue in charge of collecting national internal revenue taxes,
fees, and charges.209chanRoblesvirtualLawlibrary
Section 7, paragraph (a)(5) of Republic Act No. 1125, as amended by Republic Act
No. 9282, separately provides for the exclusive appellate jurisdiction of the Court of
Tax Appeals over decisions of the Central Board of Assessment Appeals involving the
assessment or collection of real property taxes:chanroblesvirtuallawlibrary
Sec. 7. Jurisdiction. – The [Court of Tax Appeals] shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
....
5. Decisions of the Central Board of Assessment Appeals in the exercise of its
appellate jurisdiction over cases involving the assessment and taxation of real
property originally decided by the provincial or city board of assessment appeals[.]
This separate provision, nevertheless, does not bar the Court of Tax Appeals from
taking cognizance of trial court decisions involving the collection of real property tax
cases. Sections 256210 and 266211 of the Local Government Code expressly allow
local government units to file “in any court of competent jurisdiction” civil actions to
collect basic real property taxes. Should the trial court rule against them, local
government units cannot be barred from appealing before the Court of Tax Appeals –
the “highly specialized body specifically created for the purpose of reviewing tax
cases.”212chanRoblesvirtualLawlibrary
We have also ruled that the Court of Tax Appeals, not the Court of Appeals, has the
exclusive original jurisdiction over petitions for certiorari assailing interlocutory orders
issued by Regional Trial Courts in a local tax case. We explained in The City of
Manila v. Hon. Grecia-Cuerdo213 that while the Court of Tax Appeals has no express
grant of power to issue writs of certiorari under Republic Act No. 1125,214 as
amended, the tax court’s judicial power as defined in the Constitution 215 includes the
power to determine “whether or not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of the [Regional Trial Court] in
issuing an interlocutory order of jurisdiction in cases falling within the exclusive
appellate jurisdiction of the tax court.”216 We further
elaborated:chanroblesvirtuallawlibrary
Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction,
it must have the authority to issue, among others, a writ of certiorari. In transferring
exclusive jurisdiction over appealed tax cases to the CTA, it can reasonably be
assumed that the law intended to transfer also such power as is deemed necessary, if
not indispensable, in aid of such appellate jurisdiction. There is no perceivable reason
why the transfer should only be considered as partial, not total.
....
If this Court were to sustain petitioners' contention that jurisdiction over their certiorari
petition lies with the CA, this Court would be confirming the exercise by two judicial
bodies, the CA and the CTA, of jurisdiction over basically the same subject matter –
precisely the split-jurisdiction situation which is anathema to the orderly administration
of justice. The Court cannot accept that such was the legislative motive, especially
considering that the law expressly confers on the CTA, the tribunal with the
specialized competence over tax and tariff matters, the role of judicial review over
local tax cases without mention of any other court that may exercise such power.
Thus, the Court agrees with the ruling of the CA that since appellate jurisdiction over
private respondents' complaint for tax refund is vested in the CTA, it follows that a
petition for certiorari seeking nullification of an interlocutory order issued in the said
case should, likewise, be filed with the same court. To rule otherwise would lead to an
absurd situation where one court decides an appeal in the main case while another
court rules on an incident in the very same case.
Stated differently, it would be somewhat incongruent with the pronounced judicial
abhorrence to split jurisdiction to conclude that the intention of the law is to divide the
authority over a local tax case filed with the RTC by giving to the CA or this Court
jurisdiction to issue a writ of certiorari against interlocutory orders of the RTC but
giving to the CTA the jurisdiction over the appeal from the decision of the trial court in
the same case. It is more in consonance with logic and legal soundness to conclude
that the grant of appellate jurisdiction to the CTA over tax cases filed in and decided Local Board’s decision.223chanRoblesvirtualLawlibrary
by the RTC carries with it the power to issue a writ of certiorari when necessary in aid
of such appellate jurisdiction. The supervisory power or jurisdiction of the CTA to The decision of the Central Board of Assessment Appeals is appealable before the
issue a writ of certiorari in aid of its appellate jurisdiction should co-exist with, and be Court of Tax Appeals En Banc.224 The appeal before the Court of Tax Appeals shall
a complement to, its appellate jurisdiction to review, by appeal, the final orders and be filed following the procedure under Rule 43 of the Rules of
decisions of the RTC, in order to have complete supervision over the acts of the Court.225chanRoblesvirtualLawlibrary
latter.217 (Citations omitted)
The Court of Tax Appeals’ decision may then be appealed before this court through a
petition for review on certiorari under Rule 45 of the Rules of Court raising pure
In this case, the petition for injunction filed before the Regional Trial Court of Pasay
questions of law.226chanRoblesvirtualLawlibrary
was a local tax case originally decided by the trial court in its original
jurisdiction. Since the PEZA assailed a judgment, not an interlocutory order, of the
In case of an illegal assessment where the assessment was issued without authority,
Regional Trial Court, the PEZA’s proper remedy was an appeal to the Court of Tax
exhaustion of administrative remedies is not necessary and the taxpayer may directly
Appeals.
resort to judicial action.227 The taxpayer shall file a complaint for injunction before the
Regional Trial Court228 to enjoin the local government unit from collecting real
Considering that the appellate jurisdiction of the Court of Tax Appeals is to the
property taxes.
exclusion of all other courts, the Court of Appeals had no jurisdiction to take
cognizance of the PEZA’s petition. The Court of Appeals acted without jurisdiction in
The party unsatisfied with the decision of the Regional Trial Court shall file an appeal,
rendering the decision in CA-G.R. SP No. 100984. Its decision in CA-G.R. SP No.
not a petition for certiorari, before the Court of Tax Appeals, the complaint being a
100984 is void.218chanRoblesvirtualLawlibrary
local tax case decided by the Regional Trial Court.229 The appeal shall be filed within
fifteen (15) days from notice of the trial court’s decision.
The filing of appeal in the wrong court does not toll the period to
appeal. Consequently, the decision of the Regional Trial Court, Branch 115, Pasay
The Court of Tax Appeals’ decision may then be appealed before this court through a
City, became final and executory after the lapse of the 15th day from the PEZA’s
petition for review on certiorari under Rule 45 of the Rules of Court raising pure
receipt of the trial court’s decision.219 The denial of the petition for injunction became
questions of law.230chanRoblesvirtualLawlibrary
final and executory.
In case the local government unit has issued a notice of delinquency, the taxpayer
IV. may file a complaint for injunction to enjoin the impending sale of the real property at
public auction. In case the local government unit has already sold the property at
public auction, the taxpayer must first deposit with the court the amount for which the
The remedy of a taxpayer depends on the real property was sold, together with interest of 2% per month from the date of sale to
stage in which the local government unit is the time of the institution of action. The taxpayer may then file a complaint to assail
enforcing its authority to impose real the validity of the public auction.231 The decisions of the Regional Trial Court in these
property taxes cases shall be appealable before the Court of Tax Appeals, 232 and the latter’s
decisions appealable before this court through a petition for review on certiorari under
The proper remedy of a taxpayer depends on the stage in which the local government Rule 45 of the Rules of Court.233chanRoblesvirtualLawlibrary
unit is enforcing its authority to collect real property taxes. For the guidance of the
members of the bench and the bar, we reiterate the taxpayer’s remedies against the
V.
erroneous or illegal assessment of real property taxes.
The PEZA is exempt from payment
Exhaustion of administrative remedies under the Local Government Code is
of real property taxes
necessary in cases of erroneous assessments where the correctness of the amount
assessed is assailed. The taxpayer must first pay the tax then file a protest with the
The jurisdictional errors in this case render these consolidated petitions moot. We do
Local Treasurer within 30 days from date of payment of tax. 220 If protest is denied or
not review void decisions rendered without jurisdiction.
upon the lapse of the 60-day period to decide the protest, the taxpayer may appeal to
the Local Board of Assessment Appeals within 60 days from the denial of the protest
However, the PEZA alleged that several local government units, including the City of
or the lapse of the 60-day period to decide the protest.221 The Local Board of
Baguio and the Province of Cavite, have issued their respective real property tax
Assessment Appeals has 120 days to decide the
assessments against the PEZA. Other local government units will likely follow suit,
appeal.222chanRoblesvirtualLawlibrary
and either the PEZA or the local government units taxing the PEZA may file their
respective actions against each other.
If the taxpayer is unsatisfied with the Local Board’s decision, the taxpayer may appeal
before the Central Board of Assessment Appeals within 30 days from receipt of the
In the interest of judicial economy234 and avoidance of conflicting decisions involving
the same issues,235 we resolve the substantive issue of whether the PEZA is exempt SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. –
from payment of real property taxes. Unless otherwise provided herein, the exercise of taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
Real property taxes are annual taxes levied on real property such as lands, buildings,
machinery, and other improvements not otherwise specifically exempted under the ....
Local Government Code.236 Real property taxes are ad valorem, with the amount
charged based on a fixed proportion of the value of the property.237 Under the law, (o) Taxes, fees or charges of any kind on the National Government, its agencies and
provinces, cities, and municipalities within the Metropolitan Manila Area have the instrumentalities and local government units.
power to levy real property taxes within their respective
territories.238chanRoblesvirtualLawlibrary
Specifically on real property taxes, Section 234 enumerates the persons and real
property exempt from real property taxes:chanroblesvirtuallawlibrary
The general rule is that real properties are subject to real property taxes. This is true
especially since the Local Government Code has withdrawn exemptions from real
property taxes of all persons, whether natural or juridical:chanroblesvirtuallawlibrary SEC. 234. Exemptions from Real Property Tax. – The following are exempted from
payment of real property tax:
SEC. 234. Exemptions from Real Property Tax. – The following are exempted from
(a) Real property owned by the Republic of the Philippines or any of its political
payment of real property tax:
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
consideration or otherwise, to a taxable person;
mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements
actually, directly, and exclusively used for religious, charitable or educational
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
purposes;
mosques, nonprofit or religious cemeteries and all lands, buildings, and improvements
actually, directly, and exclusively used for religious, charitable or educational
(c) All machineries and equipment that are actually, directly and exclusively used by
purposes;
local water districts and government-owned or –controlled corporations engaged in
the supply and distribution of water and/or generation and transmission of electric
(c) All machineries and equipment that are actually, directly and exclusively used by
power;
local water districts and government-owned or –controlled corporations engaged in
the supply and distribution of water and/or generation and transmission of electric
(d) All real property owned by duly registered cooperatives as provided under R.A.
power;
No. 6938; and
(d) All real property owned by duly registered cooperatives as provided under R.A.
(e) Machinery and equipment used for pollution control and environmental protection.
No. 6938; and
Except as provided herein, any exemption from payment of real property tax
(e) Machinery and equipment used for pollution control and environmental protection.
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or -controlled corporations are hereby
Except as provided herein, any exemption from payment of real property taxes
withdrawn upon the effectivity of this Code. (Emphasis supplied)
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including government-owned or -controlled corporations are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied) For persons granted tax exemptions or incentives before the effectivity of the Local
Government Code, Section 193 withdrew these tax exemption privileges. These
persons consist of both natural and juridical persons, including government-owned or
The person liable for real property taxes is the “taxable person who had actual or
controlled corporations:chanroblesvirtuallawlibrary
beneficial use and possession [of the real property for the taxable period,] whether or
not [the person owned the property for the period he or she is being
taxed].”239chanRoblesvirtualLawlibrary SEC. 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in
this code, tax exemptions or incentives granted to or presently enjoyed by all persons,
The exceptions to the rule are provided in the Local Government Code. Under whether natural or juridical, including government-owned or controlled corporations,
Section 133(o), local government units have no power to levy taxes of any kind on the except local water districts, cooperatives duly registered under R.A. 6938, non stock
national government, its agencies and instrumentalities and local government and non profit hospitals and educational institutions, are hereby withdrawn upon
units:chanroblesvirtuallawlibrary effectivity of this Code.

As discussed, Section 234 withdrew all tax privileges with respect to real property
taxes.
Nevertheless, local government units may grant tax exemptions under such terms
and conditions as they may deem necessary:chanroblesvirtuallawlibrary
SEC. 192. Authority to Grant Tax Exemption Privileges. – Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.
In Mactan Cebu International Airport Authority v. Hon. Marcos,240
this court classified
the exemptions from real property taxes into ownership, character, and usage
exemptions.
Ownership exemptions are exemptions based on the ownership of the real
property. The exemptions of real property owned by the Republic of the Philippines,
provinces, cities, municipalities, barangays, and registered cooperatives fall under this
classification.241chanRoblesvirtualLawlibrary
Character exemptions are exemptions based on the character of the real
property. Thus, no real property taxes may be levied on charitable institutions,
houses and temples of prayer like churches, parsonages, or convents appurtenant
thereto, mosques, and non profit or religious
cemeteries.242chanRoblesvirtualLawlibrary
Usage exemptions are exemptions based on the use of the real property. Thus, no
real property taxes may be levied on real property such as: (1) lands and buildings
actually, directly, and exclusively used for religious, charitable or educational purpose;
(2) machineries and equipment actually, directly and exclusively used by local water
districts or by government-owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of electric power; and (3)
machinery and equipment used for pollution control and environmental
protection.243chanRoblesvirtualLawlibrary
Persons may likewise be exempt from payment of real properties if their charters,
which were enacted or reenacted after the effectivity of the Local Government Code,
exempt them payment of real property taxes.244chanRoblesvirtualLawlibrary
V. (A)
The PEZA is an instrumentality of the national government
An instrumentality is “any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a
charter.”245chanRoblesvirtualLawlibrary
Examples of instrumentalities of the national government are the Manila International
Airport Authority,246 the Philippine Fisheries Development Authority,247 the
Government Service Insurance System,248 and the Philippine Reclamation
Authority.249 These entities are not integrated within the department framework but
are nevertheless vested with special functions to carry out a declared policy of the
national government.
Similarly, the PEZA is an instrumentality of the national government. It is not
integrated within the department framework but is an agency attached to the
Department of Trade and Industry.250 Book IV, Chapter 7, Section 38(3)(a) of the
Administrative Code of 1987 defines “attachment”:chanroblesvirtuallawlibrary
SEC. 38. Definition of Administrative Relationship. – Unless otherwise expressly
stated in the Code or in other laws defining the special relationships of particular
agencies, administrative relationships shall be categorized and defined as follows:
....
(3) Attachment.–(a) This refers to the lateral relationship between the department or
its equivalent and the attached agency or corporation for purposes of policy and
program coordination. The coordination may be accomplished by having the
department represented in the governing board of the attached agency or corporation,
either as chairman or as a member, with or without voting rights, if this is permitted by
the charter; having the attached corporation or agency comply with a system of
periodic reporting which shall reflect the progress of the programs and projects; and
having the department or its equivalent provide general policies through its
representative in the board, which shall serve as the framework for the internal
policies of the attached corporation or agency[.]
Attachment, which enjoys “a larger measure of independence” 251 compared with other
administrative relationships such as supervision and control, is further explained in
Beja, Sr. v. Court of Appeals:252chanRoblesvirtualLawlibrary
An attached agency has a larger measure of independence from the Department to
which it is attached than one which is under departmental supervision and control or
administrative supervision. This is borne out by the “lateral relationship” between the
Department and the attached agency. The attachment is merely for “policy and
program coordination.” With respect to administrative matters, the independence of
an attached agency from Departmental control and supervision is further reinforced
by the fact that even an agency under a Department’s administrative supervision is
free from Departmental interference with respect to appointments and
other personnel actions “in accordance with the decentralization of personnel
functions” under the Administrative Code of 1987. Moreover, the Administrative Code
explicitly provides that Chapter 8 of Book IV on supervision and control shall not apply
to chartered institutions attached to a Department.253
With the PEZA as an attached agency to the Department of Trade and Industry, the
13-person PEZA Board is chaired by the Department Secretary.254 Among the
powers and functions of the PEZA is its ability to coordinate with the Department of
Trade and Industry for policy and program formulation and implementation. 255 In
strategizing and prioritizing the development of special economic zones, the PEZA
coordinates with the Department of Trade and
Industry.256chanRoblesvirtualLawlibrary
The PEZA also administers its own funds and operates autonomously, with the PEZA
Board formulating and approving the PEZA’s annual budget.257 Appointments and
other personnel actions in the PEZA are also free from departmental interference,
with the PEZA Board having the exclusive and final authority to promote, transfer,
assign and reassign officers of the PEZA.258chanRoblesvirtualLawlibrary
As an instrumentality of the national government, the PEZA is vested with special
functions or jurisdiction by law. Congress created the PEZA to operate, administer,
manage and develop special economic zones in the Philippines. 259 Special economic
zones are areas with highly developed or which have the potential to be developed
into agro-industrial, industrial tourist/recreational, commercial, banking, investment
and financial centers.260 By operating, administering, managing, and developing
special economic zones which attract investments and promote use of domestic
labor, the PEZA carries out the following policy of the
Government:chanroblesvirtuallawlibrary
SECTION 2. Declaration of Policy. — It is the declared policy of the government to
translate into practical realities the following State policies and mandates in the 1987
Constitution, namely:
(a) “The State recognizes the indispensable role of the private sector, encourages
private enterprise, and provides incentives to needed investments.” (Sec. 20, Art. II)
(b) “The State shall promote the preferential use of Filipino labor, domestic materials
and locally produced goods, and adopt measures that help make them competitive.”
(Sec. 12, Art. XII)
In pursuance of these policies, the government shall actively encourage, promote,
induce and accelerate a sound and balanced industrial, economic and social
development of the country in order to provide jobs to the people especially those in
the rural areas, increase their productivity and their individual and family income, and
thereby improve the level and quality of their living condition through the
establishment, among others, of special economic zones in suitable and strategic
locations in the country and through measures that shall effectively attract legitimate
and productive foreign investments.261
Being an instrumentality of the national government, the PEZA cannot be taxed by
local government units.
Although a body corporate vested with some corporate powers, 262 the PEZA is not a
government-owned or controlled corporation taxable for real property taxes.
Section 2(13) of the Introductory Provisions of the Administrative Code of 1987
defines the term “government-owned or controlled
corporation”:chanroblesvirtuallawlibrary
SEC. 2. General Terms Defined. – Unless the specific words of the text, or the
context as a whole, or a particular statute, shall require a different meaning:
....
(13) Government-owned or controlled corporation refers to any agency organized as
a stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government directly
or through its instrumentalities either wholly, or, where applicable as in the case of
stock corporations, to the extent of at least fifty-one (51) per cent of its capital stock:
Provided, That government-owned or controlled corporations may be further
categorized by the Department of the Budget, the Civil Service Commission, and the
Commission on Audit for purposes of the exercise and discharge of their respective
powers, functions and responsibilities with respect to such corporations.
Government entities are created by law, specifically, by the Constitution or by
statute. In the case of government-owned or controlled corporations, they are
incorporated by virtue of special charters263 to participate in the market for special
reasons which may be related to dysfunctions or inefficiencies of the market
structure. This is to adjust reality as against the concept of full competition where all
market players are price takers. Thus, under the Constitution, government-owned or
controlled corporations are created in the interest of the common good and should
satisfy the test of economic viability.264 Article XII, Section 16 of the Constitution
provides:chanroblesvirtuallawlibrary
Section 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability.
Economic viability is “the capacity to function efficiently in business.” 265 To be
economically viable, the entity “should not go into activities which the private sector
can do better.”266chanRoblesvirtualLawlibrary
To be considered a government-owned or controlled corporation, the entity must have
been organized as a stock or non-stock corporation.267chanRoblesvirtualLawlibrary
Government instrumentalities, on the other hand, are also created by law but partake
of sovereign functions. When a government entity performs sovereign functions, it
need not meet the test of economic viability. In Manila International Airport Authority
v. Court of Appeals,268 this court explained:chanroblesvirtuallawlibrary
In contrast, government instrumentalities vested with corporate powers and
performing governmental or public functions need not meet the test of economic
viability. These instrumentalities perform essential public services for the common
good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-
owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental
or public functions. Congress has plenary authority to create government
instrumentalities vested with corporate powers provided these instrumentalities
perform essential government functions or public services. However, when the
legislature creates through special charters corporations that perform economic or
commercial activities, such entities — known as "government-owned or controlled
corporations" — must meet the test of economic viability because they compete in the
market place.
....
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to
the Constitutional Commission the purpose of this test, as
follows:chanroblesvirtuallawlibrary
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past.
If a government corporation loses, then it makes its claim upon the taxpayers' money
through new equity infusions from the government and what is always invoked is the
common good. That is the reason why this year, out of a budget of P115 billion for the
entire government, about P28 billion of this will go into equity infusions to support a
few government financial institutions. And this is all taxpayers' money which could
have been relocated to agrarian reform, to social services like health and education,
to augment the salaries of grossly underpaid public employees. And yet this is all
going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they
become viable. And so, Madam President, I reiterate, for the committee's
consideration and I am glad that I am joined in this proposal by Commissioner Foz,
the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC TEST,"
together with the common good.
....
Clearly, the test of economic viability does not apply to government entities vested
with corporate powers and performing essential public services. The State is
obligated to render essential public services regardless of the economic viability of
providing such service. The non-economic viability of rendering such essential public
service does not excuse the State from withholding such essential services from the
public.269 (Emphases and citations omitted)
The law created the PEZA’s charter. Under the Special Economic Zone Act of 1995,
the PEZA was established primarily to perform the governmental function of
operating, administering, managing, and developing special economic zones to attract
investments and provide opportunities for preferential use of Filipino labor.
Under its charter, the PEZA was created a body corporate endowed with some
corporate powers. However, it was not organized as a stock270 or non-stock271
corporation. Nothing in the PEZA’s charter provides that the PEZA’s capital is divided
into shares.272 The PEZA also has no members who shall share in the PEZA’s
profits.
The PEZA does not compete with other economic zone authorities in the
country. The government may even subsidize the PEZA’s operations. Under Section
47 of the Special Economic Zone Act of 1995, “any sum necessary to augment [the
PEZA’s] capital outlay shall be included in the General Appropriations Act to be
treated as an equity of the national government.”273chanRoblesvirtualLawlibrary
The PEZA, therefore, need not be economically viable. It is not a government-owned
or controlled corporation liable for real property taxes.
V. (B)
The PEZA assumed the non-profit character, including the tax exempt status, of
the EPZA
The PEZA’s predecessor, the EPZA, was declared non-profit in character with all its
revenues devoted for its development, improvement, and maintenance. Consistent
with this non-profit character, the EPZA was explicitly declared exempt from real
property taxes under its charter. Section 21 of Presidential Decree No. 66
provides:chanroblesvirtuallawlibrary
Section 21. Non-profit Character of the Authority; Exemption from Taxes. The
Authority shall be non-profit and shall devote and use all its returns from its capital
investment, as well as excess revenues from its operations, for the development,
improvement and maintenance and other related expenditures of the Authority to pay
its indebtedness and obligations and in furtherance and effective implementation of
the policy enunciated in Section 1 of this Decree. In consonance therewith, the
Authority is hereby declared exempt:ChanRoblesVirtualawlibrary
....
(b) From all income taxes, franchise taxes, realty taxes and all other kinds of taxes
and licenses to be paid to the National Government, its provinces, cities,
municipalities and other government agencies and instrumentalities[.]
The Special Economic Zone Act of 1995, on the other hand, does not specifically
exempt the PEZA from payment of real property taxes.
Nevertheless, we rule that the PEZA is exempt from real property taxes by virtue of its
charter. A provision in the Special Economic Zone Act of 1995 explicitly exempting
the PEZA is unnecessary. The PEZA assumed the real property exemption of the
EPZA under Presidential Decree No. 66.
Section 11 of the Special Economic Zone Act of 1995 mandated the EPZA “to evolve
into the PEZA in accordance with the guidelines and regulations set forth in an
executive order issued for this purpose.” President Ramos then issued Executive
Order No. 282 in 1995, ordering the PEZA to assume the EPZA’s powers, functions,
and responsibilities under Presidential Decree No. 66 not inconsistent with the
Special Economic Zone Act of 1995:chanroblesvirtuallawlibrary
SECTION 1. Assumption of EPZA’s Powers and Functions by PEZA. All the powers,
functions and responsibilities of EPZA as provided under its Charter, Presidential
Decree No. 66, as amended, insofar as they are not inconsistent with the powers,
functions and responsibilities of the PEZA, as mandated under Republic Act No.
7916, shall hereafter be assumed and exercised by the PEZA. Henceforth, the EPZA
shall be referred to as the PEZA.
The following sections of the Special Economic Zone Act of 1995 provide for the
PEZA’s powers, functions, and responsibilities:chanroblesvirtuallawlibrary
SEC. 5. Establishment of ECOZONES. – To ensure the viability and geographical
dispersal of ECOZONES through a system of prioritization, the following areas are
initially identified as ECOZONES, subject to the criteria specified in Section 6:
....
The metes and bounds of each ECOZONE are to be delineated and more particularly
described in a proclamation to be issued by the President of the Philippines, upon the
recommendation of the Philippine Economic Zone Authority (PEZA), which shall be
established under this Act, in coordination with the municipal and / or city council,
National Land Use Coordinating Committee and / or the Regional Land Use
Committee.
SEC. 6. Criteria for the Establishment of Other ECOZONES. – In addition to the
ECOZONES identified in Section 5 of this Act, other areas may be established as
ECOZONES in a proclamation to be issued by the President of the Philippines subject
to the evaluation and recommendation of the PEZA, based on a detailed feasibility
and engineering study which must conform to the following criteria:
(a) The proposed area must be identified as a regional growth center in the Medium-
Term Philippine Development Plan or by the Regional Development Council;
(b) The existence of required infrastructure in the proposed ECOZONE, such as
roads, railways, telephones, ports, airports, etc., and the suitability and capacity of the
proposed site to absorb such improvements;
(c) The availability of water source and electric power supply for use of the
ECOZONE;
(d) The extent of vacant lands available for industrial and commercial development
and future expansion of the ECOZONE as well as of lands adjacent to the ECOZONE
available for development of residential areas for the ECOZONE workers;
(e) The availability of skilled, semi-skilled and non-skilled trainable labor force in and
around the ECOZONE;
(f) The area must have a significant incremental advantage over the existing
economic zones and its potential profitability can be established;
(g) The area must be strategically located; and
(h) The area must be situated where controls can easily be established to curtail
smuggling activities.
Other areas which do not meet the foregoing criteria may be established as
ECOZONES: Provided, That the said area shall be developed only through local
government and/or private sector initiative under any of the schemes allowed in
Republic Act No. 6957 (the build-operate-transfer law), and without any financial
exposure on the part of the national government: Provided, further, That the area can
be easily secured to curtail smuggling activities: Provided, finally, That after five (5)
years the area must have attained a substantial degree of development, the indicators
of which shall be formulated by the PEZA.
SEC. 7. ECOZONE to be a Decentralized Agro-Industrial, Industrial, Commercial /
Trading, Tourist, Investment and Financial Community. - Within the framework of the
Constitution, the interest of national sovereignty and territorial integrity of the
Republic, ECOZONE shall be developed, as much as possible, into a decentralized,
self-reliant and self-sustaining industrial, commercial/trading, agro-industrial, tourist,
banking, financial and investment center with minimum government intervention.
Each ECOZONE shall be provided with transportation, telecommunications, and other
facilities needed to generate linkage with industries and employment opportunities for
its own inhabitants and those of nearby towns and cities.
The ECOZONE shall administer itself on economic, financial, industrial, tourism
development and such other matters within the exclusive competence of the national
government.
The ECOZONE may establish mutually beneficial economic relations with other
entities within the country, or, subject to the administrative guidance of the
Department of Foreign Affairs and/or the Department of Trade and Industry, with
foreign entities or enterprises.
Foreign citizens and companies owned by non-Filipinos in whatever proportion may
set up enterprises in the ECOZONE, either by themselves or in joint venture with
Filipinos in any sector of industry, international trade and commerce within the
ECOZONE. Their assets, profits and other legitimate interests shall be protected:
Provided, That the ECOZONE through the PEZA may require a minimum investment
for any ECOZONE enterprises in freely convertible currencies: Provided, further, That
the new investment shall fall under the priorities, thrusts and limits provided for in the
Act.
SEC. 8. ECOZONE to be Operated and Managed as Separate Customs Territory. –
The ECOZONE shall be managed and operated by the PEZA as separate customs
territory.
The PEZA is hereby vested with the authority to issue certificate of origin for products
manufactured or processed in each ECOZONE in accordance with the prevailing
rules or origin, and the pertinent regulations of the Department of Trade and Industry
and/or the Department of Finance.
SEC. 9. Defense and Security. – The defense of the ECOZONE and the security of its
perimeter fence shall be the responsibility of the national government in coordination
with the PEZA. Military forces sent by the national government for the purpose of
defense shall not interfere in the internal affairs of any of the ECOZONE and
expenditure for these military forces shall be borne by the national government. The
PEZA may provide and establish the ECOZONES’ internal security and firefighting
forces.
SEC. 10. Immigration. – Any investor within the ECOZONE whose initial investment
shall not be less than One Hundred Fifty Thousand Dollars ($150,000.00), his/her
spouse and dependent children under twenty-one (21) years of age shall be granted
permanent resident status within the ECOZONE. They shall have freedom of ingress
and egress to and from the ECOZONE without any need of special authorization from
the Bureau of Immigration.
The PEZA shall issue working visas renewable every two (2) years to foreign
executives and other aliens, processing highly-technical skills which no Filipino within
the ECOZONE possesses, as certified by the Department of Labor and Employment.
The names of aliens granted permanent resident status and working visas by the
PEZA shall be reported to the Bureau of Immigration within thirty (30) days after
issuance thereof.
SEC. 13. General Powers and Functions of the Authority. – The PEZA shall have the
following powers and functions:
(a) To operate, administer, manage and develop the ECOZONE according to the
principles and provisions set forth in this Act;
(b) To register, regulate and supervise the enterprises in the ECOZONE in an efficient
and decentralized manner;
(c) To coordinate with local government units and exercise general supervision over
the development, plans, activities and operations of the ECOZONES, industrial
estates, export processing zones, free trade zones, and the like;
(d) In coordination with local government units concerned and appropriate agencies,
to construct, acquire, own, lease, operate and maintain on its own or through contract,
franchise, license, bulk purchase from the private sector and build-operate-transfer
scheme or joint venture, adequate facilities and infrastructure, such as light and
power systems, water supply and distribution systems, telecommunication and
transportation, buildings, structures, warehouses, roads, bridges, ports and other
facilities for the operation and development of the ECOZONE;
(e) To create, operate and/or contract to operate such agencies and functional units
or offices of the authority as it may deem necessary;
(f) To adopt, alter and use a corporate seal; make contracts, lease, own or otherwise
dispose of personal or real property; sue and be sued; and otherwise carry out its
duties and functions as provided for in this Act;
(g) To coordinate the formulation and preparation of the development plans of the
different entities mentioned above;
(h) To coordinate with the National Economic Development Authority (NEDA), the
Department of Trade and Industry (DTI), the Department of Science and Technology
(DOST), and the local government units and appropriate government agencies for
policy and program formulation and implementation; and
(i) To monitor and evaluate the development and requirements of entities in
subsection (a) and recommend to the local government units or other appropriate
authorities the location, incentives, basic services, utilities and infrastructure required
or to be made available for said entities.
SEC. 17. Investigation and Inquiries. – Upon a written formal complaint made under
oath, which on its face provides reasonable basis to believe that some anomaly or
irregularity might have been committed, the PEZA or the administrator of the
ECOZONE concerned, shall have the power to inquire into the conduct of firms or
employees of the ECOZONE and to conduct investigations, and for that purpose may
subpoena witnesses, administer oaths, and compel the production of books, papers,
and other evidences: Provided, That to arrive at the truth, the investigator(s) may
grant immunity from prosecution to any person whose testimony or whose
possessions of documents or other evidence is necessary or convenient to determine
the truth in any investigation conducted by him or under the authority of the PEZA or
the administrator of the ECOZONE concerned.
SEC. 21. Development Strategy of the ECOZONE. - The strategy and priority of
development of each ECOZONE established pursuant to this Act shall be formulated
by the PEZA, in coordination with the Department of Trade and Industry and the
National Economic and Development Authority; Provided, That such development
strategy is consistent with the priorities of the national government as outlined in the
medium-term Philippine development plan. It shall be the policy of the government
and the PEZA to encourage and provide Incentives and facilitate private sector
participation in the construction and operation of public utilities and infrastructure in
the ECOZONE, using any of the schemes allowed in Republic Act No. 6957 (the
build-operate-transfer law).
SEC. 22. Survey of Resources. The PEZA shall, in coordination with appropriate
authorities and neighboring cities and
municipalities, immediately conduct a survey of the physical, natural assets and
potentialities of the ECOZONE areas under its
jurisdiction.
SEC. 26. Domestic Sales. – Goods manufactured by an ECOZONE enterprise shall
be made available for immediate retail sales in the domestic market, subject to
payment of corresponding taxes on the raw materials and other regulations that may
be adopted by the Board of the PEZA.
However, in order to protect the domestic industry, there shall be a negative list of
Industries that will be drawn up by the PEZA. Enterprises engaged in the industries
included in the negative list shall not be allowed to sell their products locally. Said
negative list shall be regularly updated by the PEZA.
The PEZA, in coordination with the Department of Trade and Industry and the Bureau
of Customs, shall jointly issue the necessary implementing rules and guidelines for
the effective Implementation of this section.

SEC. 29. Eminent Domain. – The areas comprising an ECOZONE may be expanded
or reduced when necessary. For this purpose, the government shall have the power
to acquire, either by purchase, negotiation or condemnation proceedings, any private
lands within or adjacent to the ECOZONE for:
a. Consolidation of lands for zone development purposes;
b. Acquisition of right of way to the ECOZONE; and
c. The protection of watershed areas and natural assets valuable to the prosperity of
the ECOZONE.
If in the establishment of a publicly-owned ECOZONE, any person or group of
persons who has been occupying a parcel of land within the Zone has to be evicted,
the PEZA shall provide the person or group of persons concerned with proper
disturbance compensation: Provided, however, That in the case of displaced agrarian
reform beneficiaries, they shall be entitled to the benefits under the Comprehensive
Agrarian Reform Law, including but not limited to Section 36 of Republic Act No.
3844, in addition to a homelot in the relocation site and preferential employment in the
project being undertaken.
SEC. 32. Shipping and Shipping Register. – Private shipping and related business
including private container terminals may operate freely in the ECOZONE, subject
only to such minimum reasonable regulations of local application which the PEZA
may prescribe.
The PEZA shall, in coordination with the Department of Transportation and
Communications, maintain a shipping register for each ECOZONE as a business
register of convenience for ocean-going vessels and issue related certification.
Ships of all sizes, descriptions and nationalities shall enjoy access to the ports of the
ECOZONE, subject only to such reasonable requirement as may be prescribed by the
PEZA In coordination with the appropriate agencies of the national government.
SEC. 33. Protection of Environment. - The PEZA, in coordination with the appropriate
agencies, shall take concrete and appropriate steps and enact the proper measure for
the protection of the local environment.
SEC. 34. Termination of Business. - Investors In the ECOZONE who desire to
terminate business or operations shall comply with such requirements and
procedures which the PEZA shall set, particularly those relating to the clearing of
debts. The assets of the closed enterprise can be transferred and the funds con be
remitted out of the ECOZONE subject to the rules, guidelines and procedures
prescribed jointly by the Bangko Sentral ng Pilipinas, the Department of Finance and
the PEZA.
SEC. 35. Registration of Business Enterprises. - Business enterprises within a
designated ECOZONE shall register with the PEZA to avail of all incentives and
benefits provided for in this Act.
SEC. 36. One Stop Shop Center. - The PEZA shall establish a one stop shop center
for the purpose of facilitating the registration of new enterprises in the ECOZONE.
Thus, all appropriate government agencies that are Involved In registering, licensing
or issuing permits to investors shall assign their representatives to the ECOZONE to
attend to Investor’s requirements.
SEC. 39. Master Employment Contracts. - The PEZA, in coordination with the
Department of Tabor and Employment, shall prescribe a master employment contract
for all ECOZONE enterprise staff members and workers, the terms of which provide
salaries and benefits not less than those provided under this Act, the Philippine Labor
Code, as amended, and other relevant issuances of the national government.
SEC. 41. Migrant Worker. - The PEZA, in coordination with the Department of Labor
and Employment, shall promulgate appropriate measures and programs leading to
the expansion of the services of the ECOZONE to help the local governments of
nearby areas meet the needs of the migrant workers.
SEC. 42. Incentive Scheme. - An additional deduction equivalent to one- half (1/2) of
the value of training expenses incurred in developing skilled or unskilled labor or for
managerial or other management development programs incurred by enterprises in
the ECOZONE can be deducted from the national government's share of three
percent (3%) as provided In Section 24.
The PEZA, the Department of Labor and Employment, and the Department of
Finance shall jointly make a review of the incentive scheme provided In this section
every two (2) years or when circumstances so warrant.
SEC. 43. Relationship with the Regional Development Council. - The PEZA shall
determine the development goals for the ECOZONE within the framework of national
development plans, policies and goals, and the administrator shall, upon approval by
the PEZA Board, submit the ECOZONE plans, programs and projects to the regional
development council for inclusion in and as inputs to the overall regional development
plan.
SEC. 44. Relationship with the Local Government Units. - Except as herein provided,
the local government units comprising the ECOZONE shall retain their basic
autonomy and identity. The cities shall be governed by their respective charters and
the municipalities shall operate and function In accordance with Republic Act No.
7160, otherwise known as the Local Government
Code of 1991.
SEC. 45. Relationship of PEZA to Privately-Owned Industrial Estates. – Privately-
owned industrial estates shall retain their autonomy and independence and shall be
monitored by the PEZA for the implementation of incentives.
SEC. 46. Transfer of Resources. - The relevant functions of the Board of Investments
over industrial estates and agri-export processing estates shall be transferred to the
PEZA. The resources of government-owned Industrial estates and similar bodies
except the Bases Conversion Development Authority and those areas identified under
Republic Act No. 7227, are hereby transferred to the PEZA as the holding agency.
They are hereby detached from their mother agencies and attached to the PEZA for
policy, program and operational supervision.

The Boards of the affected government-owned industrial estates shall be phased out
and only the management level and an appropriate number of personnel shall be
retained.
Government personnel whose services are not retained by the PEZA or any
government office within the ECOZONE shall be entitled to separation pay and such
retirement and other benefits they are entitled to under the laws then in force at the
time of their separation: Provided, That in no case shall the separation pay be less
than one and one-fourth (1 1/4) month of every year of service.
The non-profit character of the EPZA under Presidential Decree No. 66 is not
inconsistent with any of the powers, functions, and responsibilities of the PEZA. The
EPZA’s non-profit character, including the EPZA’s exemption from real property
taxes, must be deemed assumed by the PEZA.
In addition, the Local Government Code exempting instrumentalities of the national
government from real property taxes was already in force 274 when the PEZA’s charter
was enacted in 1995. It would have been redundant to provide for the PEZA’s
exemption in its charter considering that the PEZA is already exempt by virtue of
Section 133(o) of the Local Government Code.
As for the EPZA, Commonwealth Act No. 470 or the Assessment Law was in force
when the EPZA’s charter was enacted. Unlike the Local Government Code,
Commonwealth Act No. 470 does not contain a provision specifically exempting
instrumentalities of the national government from payment of real property taxes. 275 It
was necessary to put an exempting provision in the EPZA’s charter.
Contrary to the PEZA’s claim, however, Section 24 of the Special Economic Zone Act
of 1995 is not a basis for the PEZA’s exemption. Section 24 of the Special Economic
Zone Act of 1995 provides:chanroblesvirtuallawlibrary
Sec. 24. Exemption from National and Local Taxes. — Except for real property taxes
on land owned by developers, no taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE. In lieu thereof, five percent
(5%) of the gross income earned by all business enterprises within the ECOZONE
shall be paid and remitted as follows:chanroblesvirtuallawlibrary
(a) Three percent (3%) to the National Government;
(b) Two percent (2%) which shall be directly remitted by the business establishments
to the treasurer's office of the municipality or city where the enterprise is located.
(Emphasis supplied)
Tax exemptions provided under Section 24 apply only to business establishments
operating within economic zones. Considering that the PEZA is not a business
establishment but an instrumentality performing governmental functions, Section 24 is
inapplicable to the PEZA.
Also, contrary to the PEZA’s claim, developers of economic zones, whether public or
private developers, are liable for real property taxes on lands they own. Section 24
does not distinguish between a public and private developer. Thus, courts cannot
distinguish.276 Unless the public developer is exempt under the Local Government
Code or under its charter enacted after the Local Government Code’s effectivity, the
public developer must pay real property taxes on their land.
At any rate, the PEZA cannot be taxed for real property taxes even if it acts as a
developer or operator of special economic zones. The PEZA is an instrumentality of
the national government exempt from payment of real property taxes under Section
133(o) of the Local Government Code. As this court said in Manila International
Airport Authority, “there must be express language in the law empowering local
governments to tax national government instrumentalities. Any doubt whether such
power exists is resolved against local governments.”277chanRoblesvirtualLawlibrary
V. (C)
Real properties under the PEZA’s title are owned by the Republic of the
Philippines
Under Section 234(a) of the Local Government Code, real properties owned by the
Republic of the Philippines are exempt from real property
taxes:chanroblesvirtuallawlibrary
SEC. 234. Exemptions from Real Property Tax. – The following are exempted from
payment of real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person[.]
Properties owned by the state are either property of public dominion or patrimonial
property. Article 420 of the Civil Code of the Philippines enumerates property of
public dominion:chanroblesvirtuallawlibrary
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;
(2) Those which belong to the State, without belonging for public use, and are
intended for some public service or for the development of the national wealth.
Properties of public dominion are outside the commerce of man. These properties
are exempt from “levy, encumbrance or disposition through public or private
sale.”278 As this court explained in Manila International Airport
Authority:chanroblesvirtuallawlibrary
Properties of public dominion, being for public use, are not subject to levy,
encumbrance or disposition through public or private sale. Any encumbrance, levy on
execution or auction sale of any property of public dominion is void for being contrary
to public policy. Essential public services will stop if properties of public dominion are
subject to encumbrances, foreclosures and auction sale[.] 279
On the other hand, all other properties of the state that are not intended for public use
or are not intended for some public service or for the development of the national
wealth are patrimonial properties. Article 421 of the Civil Code of the Philippines
provides:chanroblesvirtuallawlibrary
Art. 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.
Patrimonial properties are also properties of the state, but the state may dispose of its
patrimonial property similar to private persons disposing of their property. Patrimonial
properties are within the commerce of man and are susceptible to prescription, unless
otherwise provided.280chanRoblesvirtualLawlibrary
In this case, the properties sought to be taxed are located in publicly owned economic
zones. These economic zones are property of public dominion. The City seeks to tax
properties located within the Mactan Economic Zone, 281 the site of which was
reserved by President Marcos under Proclamation No. 1811, Series of
1979. Reserved lands are lands of the public domain set aside for settlement or
public use, and for specific public purposes by virtue of a presidential
proclamation.282 Reserved lands are inalienable and outside the commerce of
man,283 and remain property of the Republic until withdrawn from public use either by
law or presidential proclamation.284 Since no law or presidential proclamation has
been issued withdrawing the site of the Mactan Economic Zone from public use, the
property remains reserved land.
As for the Bataan Economic Zone, the law consistently characterized the property as
a port. Under Republic Act No. 5490, Congress declared Mariveles, Bataan “a
principal port of entry”285 to serve as site of a foreign trade zone where foreign and
domestic merchandise may be brought in without being subject to customs and
internal revenue laws and regulations of the Philippines. 286 Section 4 of Republic Act
No. 5490 provided that the foreign trade zone in Mariveles, Bataan “shall at all times
remain to be owned by the Government”:chanroblesvirtuallawlibrary
SEC. 4. Powers and Duties. – The Foreign Trade Zone Authority shall have the
following powers and duties:
a. To fix and delimit the site of the Zone which at all times remain to
be owned by the Government, and which shall have a contiguous
and adequate area with well defined and policed boundaries, with
adequate enclosures to segregate the Zone from the customs
territory for protection of revenues, together with suitable provisions
for ingress and egress of persons, conveyance, vessels and
merchandise sufficient for the purpose of this Act[.] (Emphasis
supplied)
The port in Mariveles, Bataan then became the Bataan Economic Zone under the
Special Economic Zone Act of 1995.287 Republic Act No. 9728 then converted the
Bataan Economic Zone into the Freeport Area of
Bataan.288chanRoblesvirtualLawlibrary
A port of entry, where imported goods are unloaded then introduced in the market for
public consumption, is considered property for public use. Thus, Article 420 of the
Civil Code classifies a port as property of public dominion. The Freeport Area of
Bataan, where the government allows tax and duty-free importation of goods,289 is
considered property of public dominion. The Freeport Area of Bataan is owned by the
state and cannot be taxed under Section 234(a) of the Local Government Code.
Properties of public dominion, even if titled in the name of an instrumentality as in this
case, remain owned by the Republic of the Philippines. If property registered in the
name of an instrumentality is conveyed to another person, the property is considered
conveyed on behalf of the Republic of the Philippines. Book I, Chapter 12, Section 48
of the Administrative Code of 1987 provides:chanroblesvirtuallawlibrary
SEC. 48. Official Authorized to Convey Real Property. – Whenever real property of
the government is authorized by law to be conveyed, the deed of conveyance shall be
executed in behalf of the government by the following:
....
(2) For property belonging to the Republic of the Philippines, but titled in the name of
any political subdivision or of any corporate agency or instrumentality, by the
executive head of the agency or instrumentality. (Emphasis supplied)
In Manila International Airport Authority, this court
explained:chanroblesvirtuallawlibrary
[The exemption under Section 234(a) of the Local Government Code] should be read
in relation with Section 133(o) of the same Code, which prohibits local governments
from imposing “[t]axes, fess or charges of any kind on the National Government, its
agencies and instrumentalities x x x.” The real properties owned by the Republic are
titled either in the name of the Republic itself or in the name of agencies or
instrumentalities of the National Government. The Administrative Code allows real
property owned by the Republic to be titled in the name of agencies or
instrumentalities of the national government. Such real properties remained owned by
the Republic of the Philippines and continue to be exempt from real estate tax.
The Republic may grant the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when title of the real
property is transferred to an agency or instrumentality even as the Republic remains
the owner of the real property. Such arrangement does not result in the loss of the tax
exemption/ Section 234(a) of the Local Government Code states that real property
owned by the Republic loses its tax exemption only if the “beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person.” . . .290 (Emphasis
in the original; italics supplied)
Even the PEZA’s lands and buildings whose beneficial use have been granted to (c) One per centum (1%) to the treasurer's office of the Municipality of Mariveles; and
other persons may not be taxed with real property taxes. The PEZA may only lease
its lands and buildings to PEZA-registered economic zone enterprises and (d) Two per centum (2%) to the Authority of the Freeport of Area of Bataan. 294
entities.291 These PEZA-registered enterprises and entities, which operate within (Emphasis supplied)
economic zones, are not subject to real property taxes. Under Section 24 of the
Special Economic Zone Act of 1995, no taxes, whether local or national, shall be
Petitioners, therefore, are not deprived of revenues from the operations of economic
imposed on all business establishments operating within the economic
zones within their respective territorial jurisdictions. The national government ensured
zones:chanroblesvirtuallawlibrary
that local government units comprising economic zones shall retain their basic
autonomy and identity.295chanRoblesvirtualLawlibrary
SEC. 24. Exemption from National and Local Taxes. – Except for real property on
land owned by developers, no taxes, local and national, shall be imposed on business All told, the PEZA is an instrumentality of the national government. Furthermore, the
establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of lands owned by the PEZA are real properties owned by the Republic of the
the gross income earned by all business enterprises within the ECOZONE shall be Philippines. The City of Lapu-Lapu and the Province of Bataan cannot collect real
paid and remitted as follows: property taxes from the PEZA.cha
a. Three percent (3%) to the National Government; WHEREFORE, the consolidated petitions are DENIED
b. Two percent (2%) which shall be directly remitted by the business establishments
to the treasurer’s office of the municipality or city where the enterprise is located.292
(Emphasis supplied)

In lieu of revenues from real property taxes, the City of Lapu-Lapu collects two-fifths
of 5% final tax on gross income paid by all business establishments operating within
the Mactan Economic Zone:chanroblesvirtuallawlibrary

SEC. 24. Exemption from National and Local Taxes. – Except for real property on
land owned by developers, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of
the gross income earned by all business enterprises within the ECOZONE shall be
paid and remitted as follows:

a. Three percent (3%) to the National Government;

b. Two percent (2%) which shall be directly remitted by the business establishments
to the treasurer’s office of the municipality or city where the enterprise is located. 293
(Emphasis supplied)

For its part, the Province of Bataan collects a fifth of the 5% final tax on gross income
paid by all business establishments operating within the Freeport Area of
Bataan:chanroblesvirtuallawlibrary

Section 6. Imposition of a Tax Rate of Five Percent (5%) on Gross Income Earned. -
No taxes, local and national, shall be imposed on business establishments operating
within the FAB. In lieu thereof, said business establishments shall pay a five percent
(5%) final tax on their gross income earned in the following percentages:

(a) One per centum (1%) to the National Government;

(b) One per centum (1%) to the Province of Bataan;

 THIRD DIVISION
Extended
Date of Date of BIR
Waiver Date of
G.R. No. 212825, December 07, 2015 Execution Acknowledgment Signatory
Prescription

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. NEXT MOBILE, INC. Revenue

(FORMERLY NEXTEL COMMUNICATIONS PHILS., INC.), Respondent. March 30, August 26,
First Waiver August 30, 2004 District
2005 2004
Officer
DECISION
Revenue
Second June 30, October 22,
October 22, 2004 District
VELASCO JR., J.: Waiver 2005 2004
Officer

This is a Petition for Review under Rule 45 of the Rules of Court seeking to reverse Revenue
and set aside the Decision of the Court of Tax Appeals En Banc affirming the earlier September January
Third Waiver January 18, 2005 District
decision of its First Division in CTA Case No. 7965, cancelling and withdrawing 30, 2005 12,2005
Officer
petitioner's formal letter of demand and assessment notices to respondent for having
been issued beyond the prescriptive period provided by law. Revenue
Fourth September
None May 3, 2005 District
The Facts Waiver 30, 2005
Officer

On April 15, 2002, respondent filed with the Bureau of Internal Revenue (BIR) its
Annual Income Tax Return (ITR) for taxable year ending December 31, 2001.
Respondent also filed its Monthly Remittance Returns of Final Income Taxes
Withheld (BIR Form No. 1601-F), its Monthly Remittance Returns of Expanded
Withholding Tax (BIR Form No. 1501-E) and its Monthly Remittance Return of Income
Taxes Withheld on Compensation (BIR Form No. 1601-C) for year ending December
31, 2001.
On September 25, 2003, respondent received a copy of the Letter of Authority dated
September 8, 2003 signed by Regional Director Nestor S. Valeroso authorizing
Revenue Officer Nenita L. Crespo of Revenue District Office 43 to examine
respondent's books of accounts and other accounting records for income and
withholding taxes for the period covering January 1, 2001 to December 31, 2001.
Ma. Lida Sarmiento (Sarmiento), respondent's Director of Finance, subsequently
executed several waivers of the statute of limitations to extend the prescriptive period
of assessment for taxes due in taxable year ending December 31, 2001 (Waivers),
the details of which are summarized as follows:
Revenue
October 31, March 17,
Fifth Waiver May 3, 2005 District
2005 2005
Officer
On September 26, 2005, respondent received from the BIR a Preliminary Assessment
Notice dated September 16, 2005 to which it filed a Reply.
On October 25, 2005, respondent received a Formal Letter of Demand (FLD) and
Assessment Notices/Demand No. 43-734 both dated October 17, 2005 from the BIR,
demanding payment of deficiency income tax, final withholding tax (FWT), expanded
withholding tax (EWT), increments for late remittance of taxes withheld, and
compromise penalty for failure to file returns/late filing/late remittance of taxes
withheld, in the total amount of P313,339,610.42 for the taxable year ending
December 31, 2001.
On November 23, 2005, respondent filed its protest against the FLD and requested
the reinvestigation of the assessments. On July 28, 2009, respondent received a
letter from the BIR denying its protest. Thus, on August 27, 2009, respondent filed a
Petition for Review before the CTA docketed as CTA Case No. 7965.

Ruling of the CTA Former First Division

On December 11, 2012, the former First Division of the CTA (CTA First Division)
rendered a Decision granting respondent's Petition for Review and declared the FLD
dated October 17, 2005 and Assessment Notices/Demand No. 43-734 dated October
17, 2005 cancelled and withdrawn for being issued beyond the three-year prescriptive
period provided by law.

It was held that based on the date of filing of respondent's Annual ITR as well as the
dates of filing of its monthly BIR Form Nos. 1601-F, 1601-E and 1601-C, it is clear
that the adverted FLD and the Final Assessment Notices both dated October 17,
2005 were issued beyond the three-year prescriptive period provided under Section
203 ot the 1997 National Internal Revenue Code (NIRC), as amended.
The tax court also rejected petitioner's claim that this case falls under the exception
as to the three-year prescriptive period for assessment and that the 10-year
prescriptive period should apply on the ground of filing a false or fraudulent return.
Under Section 222(a) of the 1997 NIRC, as amended, in case a taxpayer filed a false
or fraudulent return, the Commissioner of Internal Revenue (CIR) may assess a
taxpayer for deficiency tax within ten (10) years after the discovery of the falsity or the
fraud. The tax court explained that petitioner failed to substantiate its allegation by
clear and convincing proof that respondent filed a false or fraudulent return.
Furthermore, the CTA First Division held that the Waivers executed by Sarmiento did
not validly extend the three-year prescriptive period to assess respondent for
deficiency income tax, FWT, EWT, increments for late remittance of tax withheld and
compromise penalty, for, as found, the Waivers were not properly executed according
to the procedure in Revenue Memorandum Order No. 20-90 (RMO 20-90)1 and
Revenue Delegation Authority Order No. 05-01 (RDAO 05-01).2
The tax court declared that, in this case, the Waivers have no binding effect on
respondent for the following reasons:chanRoblesvirtualLawlibrary
First, Sarmiento signed the Waivers without any notarized written authority from
respondent's Board of Directors. Petitioner's witness explicitly admitted that he did not
require Sarmiento to present any notarized written authority from the Board of
Directors of respondent, authorizing her to sign the Waivers. Petitioner's witness also
confirmed that Revenue District Officer Raul Vicente L. Recto (RDO Recto) accepted
the Waivers as submitted.
Second, even assuming that Sarmiento had the necessary board authority, the
Waivers are still invalid as the respective dates of their acceptance by RDO Recto are
not indicated therein.
Third, records of this case reveal additional irregularities in the subject Waivers:
(1) The fact of receipt by respondent of its copy of the Second Waiver was not
indicated on the face of the original Second Waiver;
(2) Respondent received its copy of the First and the Third Waivers on the
same day, May 23, 2005; and
(3) Respondent received its copy of the Fourth and the Fifth Waivers on the
same day, May 13, 2005.
Finally, the CTA held that estoppel does not apply in questioning the validity of a
waiver of the statute of limitations. It stated that the BIR cannot hide behind the
doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01.
Petitioner's Motion for Reconsideration was denied on March 14, 2013.
Petitioner filed a Petition for Review before the CTA En Banc.
On May 28, 2014, the CTA En Banc rendered a Decision denying the Petition for
Review and affirmed that of the former CTA First Division.
It held that the five (5) Waivers of the statute of limitations were not valid and binding;
thus, the three-year period of limitation within which to assess deficiency taxes was
not extended. It also held that the records belie the allegation that respondent filed
false and fraudulent tax returns; thus, the extension of the period of limitation from
three (3) to ten (10) years does not apply.
Issue
Petitioner has filed the instant petition on the issue of whether or not the CIR's right to
assess respondent's deficiency taxes had already prescribed.
Our Ruling
The petition has merit.
Section 2033 of the 1997 NIRC mandates the BIR to assess internal revenue taxes
within three years from the last day prescribed by law for the filing of the tax return or
the actual date of filing of such return, whichever comes later. Hence, an assessment
notice issued after the three-year prescriptive period is not valid and effective.
Exceptions to this rule are provided under Section 222 4 of the NIRC.
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 05-015 issued on August 2, 2001 provide the procedure for the
proper execution of a waiver. RMO 20-90 reads:
April 4, 1990
REVENUE MEMORANDUM ORDER NO. 20-90
Subject: Proper Execution of the Waiver of the Statute of Limitations under the
National Internal Revenue Code
To: All Internal Revenue Officers and Others Concerned
Pursuant to Section 223 of the Tax Code, internal revenue taxes may be assessed or
collected after the ordinary prescriptive period, if before its expiration, both the
Commissioner and the taxpayer have agreed in writing to its assessment and/or
collection after said period. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the period previously
agreed upon. This written agreement between the Commissioner and the taxpayer is
the so-called Waiver of the Statute of Limitations. In the execution of said waiver, the
following procedures should be followed:chanRoblesvirtualLawlibrary
1. The waiver must be in the form identified hereof. This form may be reproduced by
the Office concerned but there should be no deviation from such form. The phrase
"but not after ______ 19____" should be filled up. This indicates the expiry date of the
period agreed upon to assess/collect the tax after the regular three-year period of
prescription. The period agreed upon shall constitute the time within which to effect
the assessment/collection of the tax in addition to the ordinary prescriptive period.
2. The waiver shall be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of its
responsible officials.
Soon after the waiver is signed by the taxpayer, the Commissioner of Internal
Revenue .or the revenue official authorized by him, as hereinafter provided, shall sign
the waiver indicating that the Bureau has accepted and agreed to the waiver. The
date of such acceptance by the Bureau should be indicated. 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.
3. The following revenue officials are authorized to sign the
waiver:chanRoblesvirtualLawlibrary
xxxx
4. The waiver must be executed in three (3) 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
shall be indicated in the original copy.
5. The foregoing procedures shall be strictly followed. Any revenue official found not
to have complied with this Order resulting in prescription of the right to assess/collect
shall be administratively dealt with.
This Revenue Memorandum Order shall take effect immediately.
(SGD.)JOSEU. ONG
Commissioner of Internal Revenue
The Court has consistently held that a waiver of the statute of limitations must
faithfully comply with the provisions of RMO No. 20-90 and RDAO 05-01 in order to
be valid and binding.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue 6 the Court
declared the waiver executed by petitioner therein invalid because: (1) it did not
specify a definite agreed date between the BIR and petitioner within which the former
may assess and collect revenue taxes; (2) it was signed only by a revenue district
officer, not the Commissioner; (3) there was no date of acceptance; and (4) petitioner
was not furnished a copy of the waiver.
Philippine Journalists tells us that since a waiver of the statute of limitations is a
derogation of the taxpayer's right to security against prolonged and unscrupulous
investigations, waivers of this kind must be carefully and strictly construed. Philippine
Journalists also clarifies that a waiver of the statute of limitations is not a waiver of the
right to invoke the defense of prescription but rather an agreement between the
taxpayer and the BIR that the period to issue an assessment and collect the taxes
due is extended to a date certain. It is not a unilateral act by the taxpayer of the BIR
but is a bilateral agreement between two parties.
In Commissioner of Internal Revenue v. FMF Development Corporation 7 the Court
found the waiver in question defective because: (1) it was not proved that respondent
therein was furnished a copy of the BIR-accepted waiver; (2) the waiver was signed
by a revenue district officer instead of the Commissioner as mandated by the NIRC
and RMO 20-90 considering that the case involved an amount of more than
P1,000,000.00, and the period to assess was not yet about to prescribe; and (3) it did
not contain the date of acceptance by the CIR. The Court explained that the date of
acceptance by the CIR is a requisite necessary to determine whether the waiver was
validly accepted before the expiration of the original period. 8
In CIR v. Kudos Metal Corporation,9 the waivers executed by Kudos were found
ineffective to extend the period to assess or collect taxes because: (1) the accountant
who executed the waivers had no notarized written board authority to sign the waivers
in behalf of respondent corporation; (2) there was no date of acceptance indicated on
the waivers; and (3) the fact of receipt by respondent of its file copy was not indicated
in the original copies of the waivers.
The Court rejected the CIR's argument that since it was the one who asked for
additional time, Kudos should be considered estopped from raising the defense of
prescription. The Court held that the BIR cannot hide behind the doctrine of estoppel
to cover its failure to comply with its RMO 20-90 and RDAO 05-01. Having caused the
defects in the waivers, the Court held that the BIR must bear the consequence. 10
Hence, the BIR assessments were found to be issued beyond the three-year period
and declared void.11 Further, the Court stressed that there is compliance with RMO
20-90 only after the taxpayer receives a copy of the waiver accepted by the BIR, viz:
The flaw in the appellate court's reasoning stems from its assumption that the waiver
is a unilateral act of the taxpayer when it is in fact and in law an agreement between
the taxpayer and the BIR. When the petitioner's comptroller signed the waiver on
September 22, 1997, it was not yet complete and final because the BIR had not
assented. There is compliance with the provision of RMO No. 20-90 only after the
taxpayer received a copy of the waiver accepted by the BIR. The requirement to
furnish the taxpayer with a copy of the waiver is not only to give notice of the
existence of the document but of the acceptance by the BIR and the perfection of the
agreement.12ChanRoblesVirtualawlibrary
The deficiencies of the Waivers in this case are the same as the defects of the waiver
in Kudos. In the instant case, the CTA found the Waivers because of the following
flaws: (1) they were executed without a notarized board authority; (2) the dates of
acceptance by the BIR were not indicated therein; and (3) the fact of receipt by
respondent of its copy of the Second Waiver was not indicated on the face of the
original Second Waiver.
To be sure, both parties in this case are at fault.
Here, respondent, through Sarmiento, executed five Waivers in favor of petitioner.
However, her authority to sign these Waivers was not presented upon their
submission to the BIR. In fact, later on, her authority to sign was questioned by
respondent itself, the very same entity that caused her to sign such in the first place.
Thus, it is clear that respondent violated RMO No. 20-90 which states that in case of
a corporate taxpayer, the waiver must be signed by its responsible officials 13 and
RDAO 01-05 which requires the presentation of a written and notarized authority to
the BIR.14
Similarly, the BIR violated its own rules and was careless in performing its functions
with respect to these Waivers. It is very clear that under RDAO 05-01 it is the duty of
the authorized revenue official to ensure that the waiver is duly accomplished and
signed by the taxpayer or his authorized representative before affixing his
signature to signify acceptance of the same. It also instructs that in case the
authority is delegated by the taxpayer to a representative, the concerned
revenue official shall see to it that such delegation is in writing and duly
notarized. Furthermore, it mandates that the waiver should not be accepted by the
concerned BIR office and official unless duly notarized.15
Vis-a-vis the five Waivers it received from respondent, the BIR has failed, for five
times, to perform its duties in relation thereto: to verify Ms. Sarmiento's authority to
execute them, demand the presentation of a notarized document evidencing the
same, refuse acceptance of the Waivers when no such document was presented,
affix the dates of its acceptance on each waiver, and indicate on the Second Waiver
the date of respondent's receipt thereof.
Both parties knew the infirmities of the Waivers yet they continued dealing with each
other on the strength of these documents without bothering to rectify these infirmities.
In fact, in its Letter Protest to the BIR, respondent did not even question the validity of
the Waivers or call attention to their alleged defects.
In this case, respondent, after deliberately executing defective waivers, raised the
very same deficiencies it caused to avoid the tax liability determined by the BIR during
the extended assessment period. It must be remembered that by virtue of these
Waivers, respondent was given the opportunity to gather and submit documents to
substantiate its claims before the CIR during investigation. It was able to postpone the
payment of taxes, as well as contest and negotiate the assessment against it. Yet,
after enjoying these benefits, respondent challenged the validity of the Waivers when
the consequences thereof were not in its favor. In other words, respondent's act of
impugning these Waivers after benefiting therefrom and allowing petitioner to rely on
the same is an act of bad faith.
On the other hand, the stringent requirements in RMO 20-90 and RDAO 05-01 are in
place precisely because the BIR put them there. Yet, instead of strictly enforcing its
provisions, the BIR defied the mandates of its very own issuances. Verily, if the BIR
was truly determined to validly assess and collect taxes from respondent after the
prescriptive period, it should have been prudent enough to make sure that all the
requirements for the effectivity of the Waivers were followed not only by its revenue
officers but also by respondent. The BIR stood to lose millions of pesos in case the
Waivers were declared void, as they eventually were by the CTA, but it appears that it
was too negligent to even comply with its most basic requirements.
The BIR's negligence in this case is so gross that it amounts to malice and bad faith.
Without doubt, the BIR knew that waivers should conform strictly to RMO 20-90 and
RDAO 05-01 in order to be valid. In fact, the mandatory nature of the requirements,
as ruled by this Court, has been recognized by the BIR itself in its issuances such as
Revenue Memorandum Circular No. 6-2005,16 among others. Nevertheless, the BIR
allowed respondent to submit, and it duly received, five defective Waivers when it was
its duty to exact compliance with RMO 20-90 and RDAO 05-01 and follow the
procedure dictated therein. It even openly admitted that it did not require respondent
to present any notarized authority to sign the questioned Waivers. 17 The BIR failed to
demand respondent to follow the requirements for the validity of the Waivers when it
had the duty to do so, most especially because it had the highest interest at stake. If it
was serious in collecting taxes, the BIR should have meticulously complied with the
foregoing orders, leaving no stone unturned.
The general rule is that when a waiver does not comply with the requisites for its
validity specified under RMO No. 20-90 and RDAO 01-05, it is invalid and ineffective
to extend the prescriptive period to assess taxes. However, due to its peculiar
circumstances, We shall treat this case as an exception to this rule and find the
Waivers valid for the reasons discussed below.
First, the parties in this case are in pari delicto or "in equal fault." In pari delicto
connotes that the two parties to a controversy are equally culpable or guilty and they
shall have no action against each other. However, although the parties are in pari
delicto, the Court may interfere and grant relief at the suit of one of them, where
public policy requires its intervention, even though the result may be that a benefit will
be derived by one party who is in equal guilt with the other. 18
Here, to uphold the validity of the Waivers would be consistent with the public policy
embodied in the principle that taxes are the lifeblood of the government, and their
prompt and certain availability is an imperious need. 19 Taxes are the nation's lifeblood
through which government agencies continue to operate and which the State
discharges its functions for the welfare of its constituents. 20 As between the parties, it
would be more equitable if petitioner's lapses were allowed to pass and consequently
uphold the Waivers in order to support this principle and public policy.
Second, the Court has repeatedly pronounced that parties must come to court with
clean hands.21 Parties who do not come to court with clean hands cannot be allowed
to benefit from their own wrongdoing.22 Following the foregoing principle, respondent
should not be allowed to benefit from the flaws in its own Waivers and successfully
insist on their invalidity in order to evade its responsibility to pay taxes.
Third, respondent is estopped from questioning the validity of its Waivers. While it is
true that the Court has repeatedly held that the doctrine of estoppel must be sparingly
applied as an exception to the statute of limitations for assessment of taxes, the Court
finds that the application of the doctrine is justified in this case. Verily, the application
of estoppel in this case would promote the administration of the law, prevent injustice
and avert the accomplishment of a wrong and undue advantage. Respondent
executed five Waivers and delivered them to petitioner, one after the other. It allowed
petitioner to rely on them and did not raise any objection against their validity until
petitioner assessed taxes and penalties against it. Moreover, the application of
estoppel is necessary to prevent the undue injury that the government would suffer
because of the cancellation of petitioner's assessment of respondent's tax liabilities.
Finally, the Court cannot tolerate this highly suspicious situation. In this case, the
taxpayer, on the one hand, after voluntarily executing waivers, insisted on their
invalidity by raising the very same defects it caused. On the other hand, the BIR
miserably failed to exact from respondent compliance with its rules. The BIR's
negligence in the performance of its duties was so gross that it amounted to malice
and bad faith. Moreover, the BIR was so lax such that it seemed that it consented to
the mistakes in the Waivers. Such a situation is dangerous and open to abuse by
unscrupulous taxpayers who intend to escape their responsibility to pay taxes by
mere expedient of hiding behind technicalities.

It is true that petitioner was also at fault here because it was careless in complying
with the requirements of RMO No. 20-90 and RDAO 01-05. Nevertheless, petitioner's
negligence may be addressed by enforcing the provisions imposing administrative
liabilities upon the officers responsible for these errors.23 The BIR's right to assess
and collect taxes should not be jeopardized merely because of the mistakes and
lapses of its officers, especially in cases like this where the taxpayer is obviously in
bad faith.24

As regards petitioner's claim that the 10-year period of limitation within which to
assess deficiency taxes provided in Section 222(a) of the 1997 NIRC is applicable in
this case as respondent allegedly filed false and fraudulent returns, there is no reason
to disturb the tax court's findings that records failed to establish, even by prima
facie evidence, that respondent Next Mobile filed false and fraudulent returns
on the ground of substantial underdeclaration of income in respondent Next
Mobile's Annual ITR for taxable year ending December 31, 2001.25cralawred

While the Court rules that the subject Waivers are valid, We, however, refer back to
the tax court the determination of the merits of respondent's petition seeking the
nullification of the BIR Formal Letter of Demand and Assessment Notices/Demand
No. 43-734.

WHEREFORE, premises considered, the Court resolves to GRANT the petition. The
Decision of the Court of Tax Appeals En Banc dated May 28, 2014 in CTA EB Case
No. 1001 is hereby REVERSED and SET ASIDE. Accordingly, let this case be
remanded to the Court of Tax Appeals for further proceedings in order to determine
and rule on the merits of respondent's petition seeking the nullification of the BIR
Formal Letter of Demand and Assessment Notices/Demand No. 43-734, both dated
October 17, 2005.

SO ORDERED.
G.R. No. 202695
COMMISSIONER OF INTERNAL REVENUE,Petitioner ,
vs.
GJM PHILIPPINES MANUFACTURING, INC., Respondent.
DECISION
PERALTA, J.:
For resolution is a Petition for Review under Rule 45 of the Rules of Court which
petitioner Commissioner of Internal Revenue (CIR) filed, praying for the reversal of
the Decision1 of the Court of Tax Appeals (CTA) En Banc dated March 6, 2012 and
its Resolution2 dated July 12, 2012 in CTA EB CASE No. 637. The CTA En Banc
affirmed the Decision3 of the CTA First Division dated January 26, 2010 and its
Resolution4 dated May 4, 2010 in favor of respondent GJM Philippines
Manufacturing, Inc. (GJM).
The facts, as culled from the records, are as follows:
On April 12, 2000, GJM filed its Annual Income Tax Return for the year 1999.
Thereatler, its parent company, Warnaco (HK) Ltd., underwent bankruptcy
proceedings, resulting in the transfer of ownership over GJM and its global affiliates to
Luen Thai Overseas Limited in December 2001. On August 26, 2002, GJM informed
the Revenue District Officer of Trece Martirez, through a letter, that on April 29, 2002,
it would be canceling its registered address in Makati and transferring to Rosario,
Cavite, which is under Revenue District Office (RDO) No. 54. On August 26, 2002,
GJM's request for transfer of its tax registration from RDO No. 48 to RDO No. 54 was
confirmed through Transfer Confirmation Notice No. OCN ITR 000018688.
On October 18, 2002, the Bureau of Internal Revenue (BIR) sent a letter of informal
conference informing GJM that the report of investigation on its income and business
tax liabilities for 1999 had been submitted. The report disclosed that GJM was still
liable for an income tax deficiency and the corresponding 20% interest, as well as for
the compromise penalty in the total amount of P1,192,541.51. Said tax deficiency
allegedly resulted from certain disallowances/understatements, to wit: (a) Loading and
Shipment/Freight Out in the amount of P2,354,426.00; (b) Packing expense,
P8,859,975.00; (c) Salaries and Wages, P2,717,910.32; (d) Staff Employee Benefits,
P1,191,965.87; and (e) Fringe Benefits Tax, in the amount of P337,814.57. On
October 24, 2002, GJM refuted said findings through its Financial Controller.
On February l 2, 2003, the Bureau of Internal Revenue (BIR) issued a Pre-
Assessment Notice and Details of Discrepancies against GJM. On April 14, 2003, it
issued an undated Assessment Notice, indicating a deficiency income tax
assessment in the amount of P1,480,099.29. On July 25, 2003, the BIR issued a
Preliminary Collection Letter requesting GJM to pay said income tax deficiency for the
taxable year 1999. Said letter was addressed to GJM's former address in Pio del
Pilar, Makati. On August 18, 2003, although the BIR sent a Final Notice Before
Seizure to GJM's address in Cavite, the latter claimed that it did not receive the same.
On December 8, 2003, GJM received a Warrant of Distraint and/or Levy from the BIR
RDO No. 48-West Makati. The company then filed its Letter Protest on January 7,
2004, which the BIR denied on January 15, 2004. Hence, G.JM filed a Petition for
Review before the CTA.
On January 26, 20 l 0, the CTA First Division rendered a Decision in favor of GJM, the
dispositive portion of which reads:
WHEREFORE, the deficiency income tax assessment in the amount of
P1,480,099.29, inclusive of interest, for taxable year 1999, covered by Formal
Assessment Notice No. IT-17316-99-03-282 and the Warrant of Distraint and/or Levy
dated November 27, 2003, both issued against petitioner by respondent, are hereby
CANCELLED and WITHDRAWN.
Accordingly, respondent is hereby ORDERED to cease and desist from implementing
the said assessment and Warrant.
SO ORDERED.5
When its Motion for Reconsideration was denied, the CIR brought the case to the CT
A En Banc.
On March 6, 2012, the CTA En Banc denied the CIR's petition, thus:
WHEREFORE, the Petition for Review is hereby DENIED. Accordingly, the impugned
Decision dated January 26, 2010 and Resolution dated May 4, 2010 are hereby
AFFIRMED in toto.
SO ORDERED.6
The CIR filed a Motion for Reconsideration but the same was denied for Jack of merit.
Thus, the instant petition.
The CIR raised the following issues:
I.
WHETHER OR NOT THE FORMAL ASSESSMENT NOTICE (FAN) FOR
DEFICIENCY INCOME TAX ISSUED TO GJM FOR TAXABLE YEAR 1999 WAS
RELEASED, MAILED, AND SENT WITHIN THE THREE (3)-YEAR PRESCRIPTIVE
PERIOD UNDER SECTION 203 OF THE NIRC OF 1997.
II.
WHETHER OR NOT THE BIR'S RIGHT TO ASSESS GJM FOR DEFICIENCY
INCOME TAX FOR TAXABLE YEAR 1999 HAS ALREADY PRESCRIBED.
The petition lacks merit.
Section 203 of the 1997 National Internal Revenue Code (NIRC), as amended,
specifically provides for the period within which the CIR must make an
assessment.1âwphi1 It provides:
SEC. 203. Period of Limitation Upon Assessmentand Collection. - Except as
provide0 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)
Thus, the CIR has three (3) years from the date of the actual filing of the return or
from the last day prescribed by law for the filing of the return, whichever is later, to
assess internal revenue taxes. Here, GJM filed its Annual Income Tax Return for the
taxable year 1999 on April 12, 2000. The three (3)-year prescriptive period, therefore,
was only until April 15, 2003. The records reveal that the BIR sent the FAN through
registered mail on April 14, 2003, well-within the required period. The Court has held
that when an assessment is made within the prescriptive period, as in the case at bar,
receipt by the taxpayer may or may not be within said period. But it must be clarified
that the rule does not dispense with the requirement that the taxpayer should actually
receive the assessment notice, even beyond the prescriptive period.7 GJM, however,
denies ever having received any FAN.
If the taxpayer denies having received an assessment from the BIR, it then becomes
incumbent upon the latter to prove by competent evidence that such notice was
indeed received by the addressee.8 Here, the onus probandi has shifted to the BIR to
show by contrary evidence that GJM indeed received the assessment in the clue
course of mail. It has been settled that while a mailed letter is deemed received by the
addressee in the course of mail, this is merely a disputable presumption subject to
controversion, the direct denial of which shifts the burden to the sender to prove that
the mailed letter was, in fact, received by the addressee. 9
To prove the fact of mailing, it is essential to present the registry receipt issued by the
Bureau of Posts or the Registry return card which would have been signed by the
taxpayer or its authorized representative. And if said documents could not be located,
the CIR should have, at the very least, submitted to the Court a certification issued by
the Bureau of Posts and any other pertinent document executed with its intervention.
The Court does not put much credence to the self-serving documentations made by
the BIR personnel, especially if they are unsupported by substantial evidence
establishing the fact of mailing. While it is true that an assessment is made when the
notice is sent within the prescribed period, the release, mailing, or sending of the
same must still be clearly and satisfactorily proved. Mere notations made without the
taxpayer's intervention, notice or control, and without adequate supporting evidence
cannot suffice. Otherwise, the defenseless taxpayer would be unreasonably placed at
the mercy of the revenue offices. 10
The BIR's failure to prove GJM's receipt of the assessment leads to no other
conclusion but that no assessment was issued. Consequently, the government's right
to issue an assessment for the said period has already prescribed. The CIR offered in
evidence Transmittal Letter No. 282 dated April 14, 2003 prepared and signed by one
Ma. Nieva A. Guerrero, as Chief of the Assessment Division of BIR Revenue Region
No. 8-Makati, to show that the FAN was actually served upon GJM. However, it never
presented Guerrero to testify on said letter, considering that GJM vehemently denied
receiving the subject FAN and the Details of Discrepancies. Also, the CIR presented
the Certification signed by the Postmaster of Rosario, Cavite, Ni carter Looc, which
supposedly proves the fact of mailing of the FAN and Details of Discrepancy. It also
adduced evidence of mail envelopes stamped February 17, 2003 and April 14, 2003,
which were meant to prove that, on said dates, the Preliminary Assessment Notice
(PAN) and the FAN were delivered, respectively. Said envelopes also indicate that
they were posted from the Makati Central Post Office. However, according to the
Postmaster's Certification, of all the mail matters addressed to GJM which were
received by the Cavite Post Office from February 12, 2003 to September 9, 2003,
only two (2) came from the Makati Central Post Office. These two (2) were received
by the Cavite Post Office on February 12, 2003 and May 13, 2003. But the registered
mail could not have been the PAN since the latter was mailed only on February 17,
2003, and the FAN, although mailed on April 14, 2003, was not proven to be the mail
received on May 13, 2003. The CIR likewise failed to show that said mail matters
received indeed came from it. It could have simply presented the registry receipt or
the registry return card accompanying the envelope purportedly containing the
assessment notice, but it offered no explanation why it failed to do so. Hence, the CT
A aptly ruled that the CIR failed to discharge its duty to present any evidence to show
that GJM indeed received the FAN sent through registered mail on April 14, 2003.
The Court wishes to note and reiterate that it is not a trier of facts. The CIR mainly
raised issues on factual findings which have already been thoroughly discussed
below by both the CTA First Division and the CTA En Banc. Oft-repeated is the rule
that the Court will not lightly set aside the conclusions reached by the CTA which, by
the very nature of its function of being dedicated exclusively to the resolution of tax
problems, has accordingly developed an expertise on the subject, unless there has
been an abuse or improvident exercise of authority. This Court recognizes that the
CTA's 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. It has
been the Court's long-standing policy and practice to respect the conclusions of
quasi-judicial agencies such as the CTA, a highly specialized body specifically
created for the purpose of reviewing tax cases.11
The Court hereby sustains the order of cancellation and withdrawal of the Formal
Assessment Notice No. IT-17316-99-03-282, and the Warrant of Distraint and/or Levy
dated November 27, 2003.
WHEREFORE, PREMISES CONSIDERED, the petition is DENIED. The Decision of
the Court of Tax Appeals En Banc dated March 6, 2012 and its Resolution dated July
12, 2012 in CTA EB CASE No. 637 are hereby AFFIRMED. SO ORDERED.
G.R. No. 202695
COMMISSIONER OF INTERNAL REVENUE,Petitioner ,
vs.
GJM PHILIPPINES MANUFACTURING, INC., Respondent.
DECISION
PERALTA, J.:
For resolution is a Petition for Review under Rule 45 of the Rules of Court which
petitioner Commissioner of Internal Revenue (CIR) filed, praying for the reversal of
the Decision1 of the Court of Tax Appeals (CTA) En Banc dated March 6, 2012 and
its Resolution2 dated July 12, 2012 in CTA EB CASE No. 637. The CTA En Banc
affirmed the Decision3 of the CTA First Division dated January 26, 2010 and its
Resolution4 dated May 4, 2010 in favor of respondent GJM Philippines
Manufacturing, Inc. (GJM).
The facts, as culled from the records, are as follows:
On April 12, 2000, GJM filed its Annual Income Tax Return for the year 1999.
Thereatler, its parent company, Warnaco (HK) Ltd., underwent bankruptcy
proceedings, resulting in the transfer of ownership over GJM and its global affiliates to
Luen Thai Overseas Limited in December 2001. On August 26, 2002, GJM informed
the Revenue District Officer of Trece Martirez, through a letter, that on April 29, 2002,
it would be canceling its registered address in Makati and transferring to Rosario,
Cavite, which is under Revenue District Office (RDO) No. 54. On August 26, 2002,
GJM's request for transfer of its tax registration from RDO No. 48 to RDO No. 54 was
confirmed through Transfer Confirmation Notice No. OCN ITR 000018688.
On October 18, 2002, the Bureau of Internal Revenue (BIR) sent a letter of informal
conference informing GJM that the report of investigation on its income and business
tax liabilities for 1999 had been submitted. The report disclosed that GJM was still
liable for an income tax deficiency and the corresponding 20% interest, as well as for
the compromise penalty in the total amount of P1,192,541.51. Said tax deficiency
allegedly resulted from certain disallowances/understatements, to wit: (a) Loading and
Shipment/Freight Out in the amount of P2,354,426.00; (b) Packing expense,
P8,859,975.00; (c) Salaries and Wages, P2,717,910.32; (d) Staff Employee Benefits,
P1,191,965.87; and (e) Fringe Benefits Tax, in the amount of P337,814.57. On
October 24, 2002, GJM refuted said findings through its Financial Controller.
On February l 2, 2003, the Bureau of Internal Revenue (BIR) issued a Pre-
Assessment Notice and Details of Discrepancies against GJM. On April 14, 2003, it
issued an undated Assessment Notice, indicating a deficiency income tax
assessment in the amount of P1,480,099.29. On July 25, 2003, the BIR issued a
Preliminary Collection Letter requesting GJM to pay said income tax deficiency for the
taxable year 1999. Said letter was addressed to GJM's former address in Pio del
Pilar, Makati. On August 18, 2003, although the BIR sent a Final Notice Before
Seizure to GJM's address in Cavite, the latter claimed that it did not receive the same.
On December 8, 2003, GJM received a Warrant of Distraint and/or Levy from the BIR
RDO No. 48-West Makati. The company then filed its Letter Protest on January 7,
2004, which the BIR denied on January 15, 2004. Hence, G.JM filed a Petition for
Review before the CTA.
On January 26, 20 l 0, the CTA First Division rendered a Decision in favor of GJM, the
dispositive portion of which reads:
WHEREFORE, the deficiency income tax assessment in the amount of
P1,480,099.29, inclusive of interest, for taxable year 1999, covered by Formal
Assessment Notice No. IT-17316-99-03-282 and the Warrant of Distraint and/or Levy
dated November 27, 2003, both issued against petitioner by respondent, are hereby
CANCELLED and WITHDRAWN.
Accordingly, respondent is hereby ORDERED to cease and desist from implementing
the said assessment and Warrant.
SO ORDERED.5
When its Motion for Reconsideration was denied, the CIR brought the case to the CT
A En Banc.
On March 6, 2012, the CTA En Banc denied the CIR's petition, thus:
WHEREFORE, the Petition for Review is hereby DENIED. Accordingly, the impugned
Decision dated January 26, 2010 and Resolution dated May 4, 2010 are hereby
AFFIRMED in toto.
SO ORDERED.6
The CIR filed a Motion for Reconsideration but the same was denied for Jack of merit.
Thus, the instant petition.
The CIR raised the following issues:
I.
WHETHER OR NOT THE FORMAL ASSESSMENT NOTICE (FAN) FOR
DEFICIENCY INCOME TAX ISSUED TO GJM FOR TAXABLE YEAR 1999 WAS
RELEASED, MAILED, AND SENT WITHIN THE THREE (3)-YEAR PRESCRIPTIVE
PERIOD UNDER SECTION 203 OF THE NIRC OF 1997.
II.
WHETHER OR NOT THE BIR'S RIGHT TO ASSESS GJM FOR DEFICIENCY
INCOME TAX FOR TAXABLE YEAR 1999 HAS ALREADY PRESCRIBED.
The petition lacks merit.
Section 203 of the 1997 National Internal Revenue Code (NIRC), as amended,
specifically provides for the period within which the CIR must make an
assessment.1âwphi1 It provides:
SEC. 203. Period of Limitation Upon Assessmentand Collection. - Except as
provide0 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)
Thus, the CIR has three (3) years from the date of the actual filing of the return or
from the last day prescribed by law for the filing of the return, whichever is later, to
assess internal revenue taxes. Here, GJM filed its Annual Income Tax Return for the
taxable year 1999 on April 12, 2000. The three (3)-year prescriptive period, therefore,
was only until April 15, 2003. The records reveal that the BIR sent the FAN through
registered mail on April 14, 2003, well-within the required period. The Court has held
that when an assessment is made within the prescriptive period, as in the case at bar,
receipt by the taxpayer may or may not be within said period. But it must be clarified
that the rule does not dispense with the requirement that the taxpayer should actually
receive the assessment notice, even beyond the prescriptive period.7 GJM, however,
denies ever having received any FAN.
If the taxpayer denies having received an assessment from the BIR, it then becomes
incumbent upon the latter to prove by competent evidence that such notice was
indeed received by the addressee.8 Here, the onus probandi has shifted to the BIR to
show by contrary evidence that GJM indeed received the assessment in the clue
course of mail. It has been settled that while a mailed letter is deemed received by the
addressee in the course of mail, this is merely a disputable presumption subject to
controversion, the direct denial of which shifts the burden to the sender to prove that
the mailed letter was, in fact, received by the addressee. 9
To prove the fact of mailing, it is essential to present the registry receipt issued by the
Bureau of Posts or the Registry return card which would have been signed by the
taxpayer or its authorized representative. And if said documents could not be located,
the CIR should have, at the very least, submitted to the Court a certification issued by
the Bureau of Posts and any other pertinent document executed with its intervention.
The Court does not put much credence to the self-serving documentations made by
the BIR personnel, especially if they are unsupported by substantial evidence
establishing the fact of mailing. While it is true that an assessment is made when the
notice is sent within the prescribed period, the release, mailing, or sending of the
same must still be clearly and satisfactorily proved. Mere notations made without the
taxpayer's intervention, notice or control, and without adequate supporting evidence
cannot suffice. Otherwise, the defenseless taxpayer would be unreasonably placed at
the mercy of the revenue offices. 10
The BIR's failure to prove GJM's receipt of the assessment leads to no other
conclusion but that no assessment was issued. Consequently, the government's right
to issue an assessment for the said period has already prescribed. The CIR offered in
evidence Transmittal Letter No. 282 dated April 14, 2003 prepared and signed by one
Ma. Nieva A. Guerrero, as Chief of the Assessment Division of BIR Revenue Region
No. 8-Makati, to show that the FAN was actually served upon GJM. However, it never
presented Guerrero to testify on said letter, considering that GJM vehemently denied
receiving the subject FAN and the Details of Discrepancies. Also, the CIR presented
the Certification signed by the Postmaster of Rosario, Cavite, Ni carter Looc, which
supposedly proves the fact of mailing of the FAN and Details of Discrepancy. It also
adduced evidence of mail envelopes stamped February 17, 2003 and April 14, 2003,
which were meant to prove that, on said dates, the Preliminary Assessment Notice
(PAN) and the FAN were delivered, respectively. Said envelopes also indicate that
they were posted from the Makati Central Post Office. However, according to the
Postmaster's Certification, of all the mail matters addressed to GJM which were
received by the Cavite Post Office from February 12, 2003 to September 9, 2003,
only two (2) came from the Makati Central Post Office. These two (2) were received
by the Cavite Post Office on February 12, 2003 and May 13, 2003. But the registered
mail could not have been the PAN since the latter was mailed only on February 17,
2003, and the FAN, although mailed on April 14, 2003, was not proven to be the mail
received on May 13, 2003. The CIR likewise failed to show that said mail matters
received indeed came from it. It could have simply presented the registry receipt or
the registry return card accompanying the envelope purportedly containing the
assessment notice, but it offered no explanation why it failed to do so. Hence, the CT
A aptly ruled that the CIR failed to discharge its duty to present any evidence to show
that GJM indeed received the FAN sent through registered mail on April 14, 2003.
The Court wishes to note and reiterate that it is not a trier of facts. The CIR mainly
raised issues on factual findings which have already been thoroughly discussed
below by both the CTA First Division and the CTA En Banc. Oft-repeated is the rule
that the Court will not lightly set aside the conclusions reached by the CTA which, by
the very nature of its function of being dedicated exclusively to the resolution of tax
problems, has accordingly developed an expertise on the subject, unless there has
been an abuse or improvident exercise of authority. This Court recognizes that the
CTA's 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. It has
been the Court's long-standing policy and practice to respect the conclusions of
quasi-judicial agencies such as the CTA, a highly specialized body specifically
created for the purpose of reviewing tax cases.11
The Court hereby sustains the order of cancellation and withdrawal of the Formal
Assessment Notice No. IT-17316-99-03-282, and the Warrant of Distraint and/or Levy
dated November 27, 2003.
WHEREFORE, PREMISES CONSIDERED, the petition is DENIED. The Decision of
the Court of Tax Appeals En Banc dated March 6, 2012 and its Resolution dated July
12, 2012 in CTA EB CASE No. 637 are hereby AFFIRMED. SO ORDERED.
G.R. No. 201665 Due to the inaction of the CIR, EBCC elevated the matter to the CTA via a Petition for
Review, docketed as CTA Case No. 7104 and raffled to the Second Division of the
EDISON (BATAAN) COGENERATION CORPORATION, Petitioner, CTA.
vs.
COMMISSIONER OF INTERNAL While the case was pending, EBCC availed itself of the Tax Amnesty Program under
Republic Act (RA) No. 9480.7 Thus, in a November 7, 2008 Resolution, the CTA
REVENUE, Respondent. Second Division deemed the Petition partially withdrawn and the case closed and
terminated with regard to EBCC's deficiency income tax and VAT for the year 2000.8
DECISION
On March 18, 2009, the CTA Second Division issued a Resolution setting aside the
assessments against EBC for deficiency income tax and VAT for the taxable year
DEL CASTILLO, J.: 2000 m view of its availment of the Tax Amnesty Program.9

The findings and conclusions of the tax court are accorded great weight because of
its expertise on the subject.1
Before us are consolidated Petitions for Review on Certiorari2 under Rule 45 of the
Rules of Court assailing the January 30, 2012 Decision3 and the April 17, 2012
Resolution4 of the Court of Tax Appeals (CTA) in CTA EB Case Nos. 766 and 769.
Factual Antecedents
On February 2, 2004, Edison (Bataan) Cogeneration Corporation [EBCC] received
from the Commissioner of Internal Revenue (CIR) a Formal Letter of Demand and
Final Assessment Notice dated January 23, 2004 assessing EBCC of deficiency
income tax, Value Added Tax (VAT), withholding tax on compensation, Expanded
Withholding Tax (EWT) and Final Withholding Tax (FWT) for taxable year 2000 in the
total amount of ₱84,868,390. 16, broken down as follows:
Deficiency Tax Amount
₱65,571,268.0
Income Tax
1
Value-Added Tax 168,866.15
Ruling of the Court of Tax Appeals Former Second Division
On November 30, 2010, the CTA Former Second Division rendered a Decision10
partly granting the Petition. After reviewing the evidence on record, the CTA Former
Second Division found EBCC to have paid the correct amount of EWT and
withholding tax on compensation of its employees.11 Thus, the CTA Former Second
Division cancelled and set aside the assessments for the deficiency EWT and the
deficiency withholding tax on compensation.12 As to the deficiency FWT, the CTA
Former Second Division found EBCC liable to pay FWT in a reduced amount of
₱2,232,146.91.13 The CTA Former Second Division agreed with EBCC that it was
not liable for the deficiency FWT assessment of ₱7,707,504.96 on interest payments
on loan agreements with Ogden Power International Holdings, Inc. (Ogden) for
taxable year 2000 since its liability for interest payment became due and demandable
only on June 1, 2002.14 Likewise cancelled and set aside were the deficiency tax
assessments on loan interest payment of EBCC to Philippine National Bank and
Security Bank Corporation in the amounts of ₱346,988.77 and P387,411.46,
respectively, as these had already been remitted by EBCC.15 Thus:
WHEREFORE, premises considered, the instant Petition for Review is hereby
PARTLY GRANTED. Accordingly, the assessments for deficiency withholding tax on
compensation in the amount of ₱128,087.84 and expanded withholding tax in the
amount of ₱79,066.13 for taxable year 2000 are hereby CANCELLED and SET
ASIDE.

>Withholding Tax on Compensation
Expanded Withholding Tax
Final Withholding Tax
TOTAL
128,087.84 As regards the deficiency final withholding tax assessment against petitioner for
taxable year 2000, the same is hereby AFFIRMED, with modification. Accordingly,
79,066.13
petitioner is hereby ORDERED TO PAY respondent Commissioner of Internal
18,921,102.03 Revenue the amount of TWO MILLION TWO HUNDRED THIRTY TWO
[THOUSAND] ONE HUNDRED FORTY SIX AND 91/100 (₱2,232,146.91),
₱84,868 390.16 5 representing deficiency final withholding tax, computed, as follows:

On March 3, 2004, EBCC filed with the CIR a letter-protest dated March 2, 2004 and RWT Due per Assessment ₱10,227 ,
furnished the CIR with the required documents.6
Less: Substantiated FWT on interest on syndicated ₱734.400.23
loans
 Issues
FWT on interest on foreign Joan from Ogden 7,707,504.96 8,441,905.19

Basic deficiency FWT ₱1,785,717.53

Hence, the instant consolidated Petitions under Rule 45 of the Rules of Court, with
the following issues:
Add: 25% Surcharge 446,429.38
G.R. No. 201665
Total Deficiency FWT ₱2,232,146.91

I.
In addition, petitioner is ordered to pay:
Whether the CTA EnBanc erred in not recognizing [the CIR’s] judicial admission that
1) deficiency interest at the rate of twenty percent (20%) per annum on the basic she reduced her assessment for deficiency FWT for taxable year 2000 from
deficiency final withholding tax of ₱1,785,717.53 computed from January 25, 2001 [₱]10,227,622[.]72 to [₱]7,384,922.52.
until full payment thereof: pursuant to Section 249(B) of the NIRC of 1997, as
amended; and II.

2) delinquency interest at the rate of twenty percent (20%) per annum on the total Whether [EBCC] is raising a question of fact before the Honorable Court.26
deficiency final withholding tax of ₱2,232,146.91, and on the deficiency interest which
have accrued as afore-stated in paragraph 1 hereof, computed from January 23, 2004
until full payment thereof, pursuant to Section 249(C) of the NIRC of 1997 as G.R. No. 201668
amended.
I.
SO ORDERED.16
Whether x x x EBCC is liable for deficiency final withholding tax for the year 2000.
The CIR filed a Motion for Reconsideration while EBCC filed a Motion for Partial
Reconsideration and/ or Clarification.17 II.

On April 7, 2011, the CTA Former Second Division issued a Resolution18 denying
both Motions.19
Both parties appealed to the CTA En Banc.
Ruling of the Court of Tax Appeals En Banc
On January 30, 2012, the CTA En Banc denied both appeals. It sustained the findings
of the CT A Former Second Division that the assessment over EBCC’s FWT on
interest payments arising from its loan from Ogden was without basis as EBCC had
no obligation to withhold any taxes on the interest payment for the year 2000.20
Under Revenue Regulation (RR) No. 02-98, the obligation to withhold only accrues
when the loan is paid or becomes payable or when it becomes due, demandable or
legally enforceable, whichever comes first.21 In this case, the obligation to withhold
the interest over the loan only commenced on June 1, 2002.22 As to the alleged
interest payments on the syndicated loans in dollars, the CTA En Banc noted that
EBCC failed to present sufficient evidence to prove the remittance of its payment.23
Thus, the CTA En Banc adopted the computation of the CTA Former Second
Division.24
On April 17, 2012, the CTA EnBanc denied the CIR’s Motion for Reconsideration and
EBCC’s Motion for Partial Reconsideration.25
Whether x x x Revenue Regulation No. 12-01 should be applied in this case.27
G.R. No. 201665
EBCC’s Arguments
EBCC insists that it was not liable for any deficiency taxes for the year 2000 since it
had already remitted the amount of ₱2,842,630.20 as payment for its FWT for 2000,
and that no proof of such payment was necessary considering the CIR’s admission in
her Memorandum28 that the original assessment of ₱10,227,622.72 was reduced to
₱7,384,992.52.29
The CIR’s Arguments
The CIR, however, denies that she made any judicial admission of payment and
maintains that in the absence of evidence of payment, EBCC was liable to pay the
deficiency assessment as the patty who alleges payment bears the burden of proving
the same.30 Moreover, the CIR claims that the issue raised by EBCC is a question of
fact, which is not allowed in a Petition for Review on Certiorari under Rule 45 of the
Rules of Court.31
G.R. No. 201668
The CIR’s Arguments
As to the cancellation of the assessments against EBCC's FWT on its intercorporate
loan from Ogden, the CIR argues that the assessment enjoys the presumption of
validity and may only be disproved by evidence to the contrary.32 The CIR contends
that EBCC was liable to pay the interest from the date of the execution of the contract
on January 5, 2000, not from the date of the first payment on June 1, 2002, as the
loan agreement clearly indicated that the interest was to be paid separately from the
principal.33 In addition, the CIR calls for the retroactive application of RR No. 12-
01,34 which provides that the withholding of final tax commences "at the time an
income payment is paid or payable, or the income payment is accrued or recorded as
an expense or asset, whichever is applicable in the payor’s book, whichever comes
first," on the ground that EBCC omitted a material fact and acted in bad faith when it
refused to present documents on its interest payments to show the exact date of
payment.35 In fact, based on the loan agreement, the CIR claims that the payment for
the first interest period was due on January 4, 2001, not June 1, 2002.36
EBCC’s Arguments
EBCC, on the other hand, asserts that it was not required to withhold FWT at the end
of taxable year 2000 as the interest payment became due and demandable only on
June 1, 2002.37 And even if the first payment were due on January 4, 2001, such fact
would not give rise to any liability for FWT in the year 2000 under RR No. 02-98.38 As
to the retroactive application of RR No. 12-0 I, EBCC contends that this is the first
time that such issue was brought up as it was not raised before the CT A.39 In
addition, to allow the retroactive application due process of as the RR Formal No. 12-
01 Letter would of be Demand a clear was violation issued of EBCC’s pursuant to the
provisions of RR No. 02-98.40 Lastly, EBCC also points out that the issues of whether
EBCC withheld certain facts or whether it acted in bad faith are factual in nature,
which are not allowed in a Petition under Rule 45 of the Rules of Court.41
Our Ruling
The Petitions lack merit.
G.R. No. 201665
The CIR made no judicial admission
that EBCC remitted the amount of
₱2,842,630.20 as payment for its FWT
for the year 2000.
Section 4 of Rule 129 of the Rules of Court states:
SEC. 4. JudicialAdmissions. - An admission, verbal or written, made by a party in the
course of the proceedings in the same case, does not require proof. The admission
may be contradicted only by showing that it was made through palpable mistake or
that no such admission was made.
In this case, EBCC claims that the CTA EnBanc erred in failing to consider the judicial
admission made by the CIR in her Memorandum that EBCC remitted FWT in the
amount of ₱2,842,630.20.
We do not agree.
A careful reading of the Memorandum reveals that the alleged remittance of the
amount of ₱2,842,630.20 was based on a Memorandum Report prepared by the
revenue officers recommending the denial of EBCC’s protest, which was issued prior
to EBCC's filing of its Petition for Review before the CTA. In fact, there was no
mention of such remittance in the Joint Stipulations of Facts and Issues by the parties
and in the Answer filed by the CIR. Thus, we find no error on the part of the CTA
EnBanc in not considering such statement as a judicial admission.
Besides, the CTA Former Second Division, in its April 7, 2011 Resolution already
explained how it computed EBCC’s deficiency FWT, to wit:
It must be emphasized that the assessment for deficiency FWT against [EBCC] in the
amom1t of ₱10,227,622.72 is composed of FWT on Interest Payments on Syndicated
Loan in Dollars in the amount of ₱2,520, 117. 76 and FWT on Interest on Loan
Agreement with Ogden Power International Holdings, Inc. (Ogden) in the amount of
₱7,707,504.96. Since [EBCC] presented documentary evidence in support of its
Petition for Review assailing respondent's assessments, the Court considered said
documentary evidence in deciding the instant case. In other words, the Court did not
consider outright the alleged withholding remittances of ₱2,842,630.20 as a deduction
to [EBCC's] FWT liability, but first examined the supporting documents presented by
[EBCC].
At the risk of being repetitive, although we found that [EBCC] is not liable to pay FWT
on interest payment on loan from Ogden in the amount of ₱7,707,504.96; however,
as regards the deficiency assessment of FWT on Interest Payments on Syndicated
Loan in Dollars, in the amount of ₱2,520,117.76, the Court found that petitioner failed
to present proof of withholding and/or remittance of FWT on its interest payments to
UCPB and Sm1g Hung Kai Bank. Likewise, BIR Forms No. 2306 (Certificates of Final
Income Tax Withheld), pertaining to petitioner's alleged interest payments to First
Metro Investment Corporation and United Overseas Bank/Westmont Bank, were not
considered by the Court for reasons stated in our Decision dated November 30,
2010.1âwphi1
Therefore, [EBCC'sj contention that the amount of ₱2,842,630.20 should still be
deducted from the deficiency assessment, as found by this Court in the amount of
₱1,785,717.53 is misplaced. As heretofore discussed, out of ₱2,520,117.76
deficiency FWT assessment on Interest Paid on Syndicated Loan in US Dollars,
[EBCC] was able to substantiate FWT remittance in the total amount of ₱734,400.23
only. Thus, we found [EBCC] liable to pay basic deficiency FWT for the year 2000 in
the amount of ₱1,785,717.53.42
Moreover, considering that EBCC filed the Petition for Review before the CT A to
question the deficiency tax assessment issued by the CIR, it was incumbent upon
EBCC to prove that the deficiency tax assessment had no legal or factual basis or
that it had already paid or remitted the deficiency tax assessment as it is the taxpayer
that has the burden of proof to impugn the validity and correctness of the disputed
deficiency tax assessment.43 In addition, it is a basic rule in evidence that the person
who alleges payment has the burden of proving that payment has indeed been
made.44 More so, in cases filed before the CTA, which are litigated denova, party-
litigants must prove every minute aspect of their cases.45
G.R No. 201668
RR No. 02-98 provides that the term
payable refers to the date the obligation
becomes due, demandable or legally
enforceable.
Section 2.57.4 of Revenue Regulations No. 2-98 provides:
SEC. 2.57.4. Time of Withholding. - The obligation of the payor to deduct and
withhold the tax under Section 2.57 of these regulations arises at the time an income
is paid or payable, whichever comes first, the term ‘payable’ refers to the date the
obligation becomes due, demandable or legally enforceable.
In this case, the CIR insists that EBCC was liable to pay the interest from the date of
the execution of the contract on January 5, 2000, not from the date of the first
payment on June 1, 2002.
We are not convinced.
EBCC’s loan agreement with Ogden stated that:
3. Repayment and Interest
3.1 The BORROWER shall repay the Loan to the LENDER (or as it
may in writing direct) in sixteen (16) consecutive semi-annual
[installments] of US DOLLARS EIGHT HUNDRED and EIGHTY
ONE THOUSAND and TWO HUNDRED and FIFTY
(US$881,250.00) commencing on 1 June 2002 and thereafter on
June l and December 1 of each year.
3.2 Interest shall accrue on the Loan from the date hereof until the
date of repayment at a rate equal to the 90- day LIBOR rate plus
2.5%, subject to review every 90 days.
3.3 Notwithstanding the provisions of Clause 3.2 above, if the
BORROWER fails to make payment of an amount due on a
payment date, the BORROWER shall pay additional interest on
such past due and unpaid amount from the due date until the date
of payment at the rate of ½ % per month.
3.4 The interest payable to the LENDER shall be exclusive of
withholding tax and/or any other similar taxes which shall be to the
account of the BORROWER. Every payment to the LENDER
hereunder shall be net of any present or future tax assessment or
other governmental charge imposed by any taxing authority of any
jurisdiction.46
Clearly, EBCC's liability for interest payment became due and demandable starting
June I, 2002. And considering that under RR No. 02-98, the obligation of EBCC to
deduct or withhold tax arises at the time an income is paid or payable, whichever
comes first, and considering further that under the said RR, the term "payable" refers
to the date the obligation becomes due, demandable or legally enforceable, we find
no error on the part of the CT A EnBanc in ruling that EBCC had no obligation to
withhold any taxes on the interest payment for the year 2000 as the obligation to
withhold only commenced on June 1, 2002, and thus cancelling the assessment for
deficiency FWT on interest payments arising from EBCC' s loan from Ogden.
Neither do we find any reason for the retroactive application of RR No. 12-01, which
provides that the withholding of final tax commences "at the time an income payment
is paid or payable, or the income payment is accrued or recorded as an expense or
asset, whichever is applicable in the payor’s book, whichever comes first." To begin
with, this issue was never raised before the CTA. Thus, we cannot rule on this matter
now. It is a settled rule that issues not raised below cannot be pleaded for the first
time on appeal because a party is not allowed to change his theory on appeal; to do
so would be unfair to the other party and offensive to rules of fair play, justice and due
process.47
Moreover, as aptly pointed out by EBCC, whether it omitted to state a material fact or
acted in bad faith in failing to present documents on its interest payments to show the
exact date of payment is a factual issue, which is not allowed under Rule 45.1âwphi1
In any case, even if the first payment was due on January 4, 2001 as claimed by the
CIR, EBCC would still not be liable, as the tax assessment pertained to taxable year
2000 and not 2001.
All told, we find no reason to reverse the January 30, 2012 Decision and the April 17,
2012 Resolution of the CTA in CTA EB Case Nos. 766 and 769.
We need not belabor that "findings and conclusions of the CTA are accorded the
highest respect and will not be lightly set aside because by [its] very nature x x x, it is
dedicated exclusively to the resolution of tax problems and has accordingly developed
an expertise on the subject."48
WHEREFORE, the Petitions are hereby DENIED. The assailed January 30, 2012
Decision and the April 17, 2012 Resolution of the Court of Tax Appeals in CTA EB
Case Nos. 766 and 769 are hereby AFFIRMED.SO ORDERE
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 taxable
year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of penalties. 11
According to the CIR, the taxable base of HMOs for VAT purposes is its gross
receipts without any deduction under Section 4.108.3(k) of Revenue Regulation (RR)
No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health Care
Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually provide
medical and/or hospital services, but merely arranges for the same, its services are
not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to arranging
for the provision of medical and/or hospital services by hospitals and/or clinics but
include actual and direct rendition of medical and laboratory services; in fact, its 2006
audited balance sheet shows that it owns x-ray and laboratory facilities which it used
in providing medical and laboratory services to its members; (2) out of the ₱l .9 Billion
membership fees, ₱319 Million was received from clients that are registered with the
Philippine Export Zone Authority (PEZA) and/or Bureau of Investments; (3) the
processing fees amounting to ₱l 1.5 Million should be excluded from gross receipts
because P5.6 Million of which represent advances for professional fees due from
clients which were paid by MEDICARD while the remainder was already previously
subjected to VAT; (4) the professional fees in the amount of Pl 1 Million should also
be excluded because it represents the amount of medical services actually and
directly rendered by MEDICARD and/or its subsidiary company; and (5) even
assuming that it is liable to pay for the VAT, the 12% VAT rate should not be applied
on the entire amount but only for the period when the 12% VAT rate was already in
effect, i.e., on February 1, 2006. It should not also be held liable for surcharge and
deficiency interest because it did not pass on the VAT to its members.14
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue
Officer Romualdo Plocios to verify the supporting documents of MEDICARD's Protest.
MEDICARD also submitted additional supporting documentary evidence in aid of its
Protest thru a letter dated March 18, 2008.15
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed
Assessment dated May 15, 2009, denying MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto
assessment of deficiency [VAT] in total sum of ₱196,614,476.99. It is requested that
you pay said deficiency taxes immediately. Should payment be made later,
adjustment has to be made to impose interest until date of payment. This is olir final
decision. If you disagree, you may take an appeal to the [CTA] within the period
provided by law, otherwise, said assessment shall become final, executory and
demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A,
reiterating its position before the tax authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications
the CIR's deficiency VAT assessment covering taxable year 2006, viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR]
against [MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of
P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under
-Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:
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 able to
substantiate the amount pertaining to its January 2006 income and therefore has no
basis to impose a 10% VAT rate.20
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence,
MEDICARD elevated the matter to the CTA en banc.
In a Decision21 dated September 2, 2015, the CTA en banc partially granted the
petition only insofar as the 10% VAT rate for January 2006 is concerned but
sustained the findings of the CTA Division in all other matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, the Decision date June 5, 2014 is hereby MODIFIED, as
follows:
"WHEREFORE, premises considered, the deficiency VAT assessment issued by
[CIR] against
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of
₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)(3) of
the NIRC of 1997, as amended, computed as follows:
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.23 Hence, MEDICARD now seeks recourse to this
Court via a petition for review on certiorari.
The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
 2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND
EVENTUALLY PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD
STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.24
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated
MEDICARD's right to due process
An LOA is the authority given to the appropriate revenue officer assigned to perform
assessment functions. It empowers or enables said revenue officer to examine the
books of account and other accounting records of a taxpayer for the purpose of
collecting the correct amount of tax. 25 An LOA is premised on the fact that the
examination of a taxpayer who has already filed his tax returns is a power that
statutorily belongs only to the CIR himself or his duly authorized representatives.
Section 6 of the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. –
(A) Examination of Return and Determination of Tax Due.- After a return has been
filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examinationof any taxpayer and the
assessment of the correct amount of tax: Provided, however, That failure to file a
return shall not prevent the Commissioner from authorizing the examination of any
taxpayer.
x x x x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized by the CIR
himself or by his duly authorized representative, through an LOA, an examination of
the taxpayer cannot ordinarily be undertaken. The circumstances contemplated under
Section 6 where the taxpayer may be assessed through best-evidence obtainable,
inventory-taking, or surveillance among others has nothing to do with the LOA. These
are simply methods of examining the taxpayer in order to arrive at .the correct amount
of taxes. Hence, unless undertaken by the CIR himself or his duly authorized
representatives, other tax agents may not validly conduct any of these kinds of
examinations without prior authority.
With the advances in information and communication technology, the Bureau of
Internal Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies and
guidelines once its then incipient centralized Data Warehouse (DW) becomes fully
operational in conjunction with its Reconciliation of Listing for Enforcement System
(RELIEF System).26 This system can detect tax leaks by matching the data available
under the BIR's Integrated Tax System (ITS) with data gathered from third-party
sources. Through the consolidation and cross-referencing of third-party information,
discrepancy reports on sales and purchases can be generated to uncover under
declared income and over claimed purchases of Goods and services.
Under this RMO, several offices of the BIR are tasked with specific functions relative
to the RELIEF System, particularly with regard to LNs. Thus, the Systems Operations
Division (SOD) under the Information Systems Group (ISG) is responsible for: (1)
coming up with the List of Taxpayers with discrepancies within the threshold amount
set by management for the issuance of LN and for the system-generated LNs; and (2)
sending the same to the taxpayer and to the Audit Information, Tax Exemption and
Incentives Division (AITEID). After receiving the LNs, the AITEID under the
Assessment
Service (AS), in coordination with the concerned offices under the ISG, shall be
responsible for transmitting the LNs to the investigating offices [Revenue District
Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers Audit and
Investigation Division (LTAID)]. At the level of these investigating offices, the
appropriate action on the LN s issued to taxpayers with RELIEF data discrepancy
would be determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the
"no-contact-audit approach" in the CIR's exercise of its ·power to authorize any
examination of taxpayer arid the assessment of the correct amount of tax. The no-
contact-audit approach includes the process of computerized matching of sales and
purchases data contained in the Schedules of Sales and Domestic Purchases and
Schedule of Importation submitted by VAT taxpayers under the RELIEF System
pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may
also include the matching of data from other information or returns filed by the
taxpayers with the BIR such as Alphalist of Payees subject to Final or Creditable
Withholding Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's books
and records, if the computerized/manual matching of sales and purchases/expenses
appears to reveal discrepancies, the same shall be communicated to the concerned
taxpayer through the issuance of LN. The LN shall serve as a discrepancy notice to
taxpayer similar to a Notice for Informal Conference to the concerned taxpayer. Thus,
under the RELIEF System, a revenue officer may begin an examination of the
taxpayer even prior to the issuance of an LN or even in the absence of an LOA with
the aid of a computerized/manual matching of taxpayers': documents/records.
Accordingly, under the RELIEF System, the presumption that the tax returns are in
accordance with law and are presumed correct since these are filed under the penalty
of perjury27 are easily rebutted and the taxpayer becomes instantly burdened to
explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory
requirement of an LOA before any investigation or examination of the taxpayer may
be conducted. As provided in the RMO No. 42-2003, the LN is merely similar to a
Notice for Informal Conference. However, for a Notice of Informal Conference, which
generally precedes the issuance of an assessment notice to be valid, the same
presupposes that the revenue officer who issued the same is properly authorized in
the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as xxxx
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 10. Transmit the approved/signed LAs, together with the duly accomplished/approved
reconciling various revenue issuances which conflict with the NIRC. Among the Summary List of LNs for conversion to LAs, to the concerned investigating offices for
objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the the encoding of the required information x x x and for service to the concerned
resolution of LN discrepancies, conversion of LNs to LOAs and assessment and taxpayers.
collection of deficiency taxes.
xxxx
IV. POLICIES AND GUIDELINES
C. At the RDO x x x
xxxx
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 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.
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. xxxx

9. In case the above discrepancies remained unresolved at the end of the One 16. Effect the service of the above LAs to the concerned taxpayers.28
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 In this case, there is no dispute that no LOA was issued prior to the issuance of a
head of the concerned investigating office shall submit a summary list of LNs for PAN and FAN against MED ICARD. Therefore no LOA was also served on
conversion to LAs (using the herein prescribed format in Annex "E" hereof) to the MEDICARD. The LN that was issued earlier was also not converted into an LOA
OACIR-LTS I ORD for the preparation of the corresponding LAs with the notation contrary to the above quoted provision. Surprisingly, the CIR did not even dispute the
"This LA cancels LN_________ No. " 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
xxxx valid. Hence, the CTA's disregard of MEDICARD's right to due process warrant the
reversal of the assailed decision and resolution.
V. PROCEDURES
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the
Court said that:
xxxx
Clearly, there must be a grant of authority before any revenue officer can conduct an
B. At the Regional Office/Large Taxpayers Service 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
xxxx authority, the assessment or examination is a nullity.30 (Emphasis and
underlining ours)
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x
x prior to approval. 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
8. Upon approval of the above list, prepare/accomplish and sign the corresponding person found to have underreported sales/receipts per data generated under the
LAs. 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
xxxx 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
Decision 11 G.R. No. 222743 an LOA, the absence thereof cannot be simply swept under the rug, as the CIR would
have it. In fact Revenue Memorandum Circular No. 40-2003 considers an LN as a
notice of audit or investigation only for the purpose of disqualifying the taxpayer from
amending his returns.
The following differences between an LOA and LN are crucial. First, an LOA
addressed to a revenue officer is specifically required under the NIRC before an
examination of a taxpayer may be had while an LN is not found in the NIRC and is
only for the purpose of notifying the taxpayer that a discrepancy is found based on the
BIR's RELIEF System. Second, an LOA is valid only for 30 days from date of issue
while an LN has no such limitation. Third, an LOA gives the revenue officer only a
period of 10days from receipt of LOA to conduct his examination of the taxpayer
whereas an LN does not contain such a limitation.31 Simply put, LN is entirely
different and serves a different purpose than an LOA. Due process demands, as
recognized under RMO No. 32-2005, that after an LN has serve its purpose, the
revenue officer should have properly secured an LOA before proceeding with the
further examination and assessment of the petitioner. Unfortunarely, this was not
done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just
because none of the financial books or records being physically kept by MEDICARD
was examined. To begin with, Section 6 of the NIRC requires an authority from the
CIR or from his duly authorized representatives before an examination "of a taxpayer"
may be made. The requirement of authorization is therefore not dependent on
whether the taxpayer may be required to physically open his books and financial
records but only on whether a taxpayer is being subject to examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and collection
efforts much easier and faster. The ease by which the BIR's revenue generating
objectives is achieved is no excuse however for its non-compliance with the statutory
requirement under Section 6 and with its own administrative issuance. In fact, apart
from being a statutory requirement, an LOA is equally needed even under the BIR's
RELIEF System because the rationale of requirement is the same whether or not the
CIR conducts a physical examination of the taxpayer's records: to prevent undue
harassment of a taxpayer and level the playing field between the government' s vast
resources for tax assessment, collection and enforcement, on one hand, and the
solitary taxpayer's dual need to prosecute its business while at the same time
responding to the BIR exercise of its statutory powers. The balance between these is
achieved by ensuring that any examination of the taxpayer by the BIR' s revenue
officers is properly authorized in the first place by those to whom the discretion to
exercise the power of examination is given by the statute.
That the BIR officials herein were not shown to have acted unreasonably is beside the
point because the issue of their lack of authority was only brought up during the trial
of the case. What is crucial is whether the proceedings that led to the issuance of
VAT deficiency assessment against MEDICARD had the prior approval and
authorization from the CIR or her duly authorized representatives. Not having
authority to examine MEDICARD in the first place, the assessment issued by the CIR
is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court
still partially finds merit in MEDICARD's substantive arguments.
The amounts earmarked and
eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the
CT A Division that the gross receipts of an HMO for VAT purposes shall be the total
amount of money or its equivalent actually received from members undiminished by
any amount paid or payable to the owners/operators of hospitals, clinics and medical
and dental practitioners. MEDICARD explains that its business as an HMO involves
two different although interrelated contracts. One is between a corporate client and
MEDICARD, with the corporate client's employees being considered as MEDICARD
members; and the other is between the health care institutions/healthcare
professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare
institutions/healthcare professionals for the coverage of MEDICARD members under
specific health related services for a specified period of time in exchange for payment
of a more or less fixed membership fee. Under its contract with its corporate clients,
MEDICARD expressly provides that 20% of the membership fees per individual,
regardless of the amount involved, already includes the VAT of 10%/20% excluding
the remaining 80o/o because MED ICARD would earmark this latter portion for
medical utilization of its members. Lastly, MEDICARD also assails CIR's inclusion in
its gross receipts of its earnings from medical services which it actually and directly
rendered to its members.
Since an HMO like MEDICARD is primarily engaged m arranging for coverage or
designated managed care services that are needed by plan holders/members for
fixed prepaid membership fees and for a specified period of time, then MEDICARD is
principally engaged in the sale of services. Its VAT base and corresponding liability is,
thus, determined under Section 108(A)32 of the Tax Code, as amended by Republic
Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT
purposes as a dealer in securities whose gross receipts is the amount actually
received as contract price without allowing any deduction from the gross receipts.33
This restrictive tenor changed under RR No. 16-2005. Under this RR, an HMO's gross
receipts and gross receipts in general were defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its equivalent
representing the service fee actually or constructively received during the taxable
period for the services performed or to be performed for another person, excluding
the value-added tax. The compensation for their services representing their
service fee, is presumed to be the total amount received as enrollment fee from
their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or
royalty, including the amount charged for materials supplied with the services and
deposits applied as payments for services rendered, and advance payments
actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding the VAT. 34
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005,
including the definition of gross receipts in general.35
According to the CTA en banc, the entire amount of membership fees should form
part of MEDICARD's gross receipts because the exclusions to the gross receipts
under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD is
the definition of gross receipts of an HMO under RR No. 16-2005 and not the
modified definition of gross receipts in general under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-
2005 merely presumed that the amount received by an HMO as membership fee is
the HMO's compensation for their services. As a mere presumption, an HMO is, thus,
allowed to establish that a portion of the amount it received as membership fee does
NOT actually compensate it but some other person, which in this case are the
medical service providers themselves. It is a well-settled principle of legal
hermeneutics that words of a statute will be interpreted in their natural, plain and
ordinary acceptation and signification, unless it is evident that the legislature intended
a technical or special legal meaning to those words. The Court cannot read the word
"presumed" in any other way.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the
tax base under the NIRC does not contain any specific definition.36 Therefore, absent
a statutory definition, this Court has construed the term gross receipts in its plain and
ordinary meaning, that is, gross receipts is understood as comprising the entire
receipts without any deduction.37 Congress, under Section 108, could have simply
left the term gross receipts similarly undefined and its interpretation subjected to
ordinary acceptation,. Instead of doing so, Congress limited the scope of the term
gross receipts for VAT purposes only to the amount that the taxpayer received for the
services it performed or to the amount it received as advance payment for the
services it will render in the future for another person.
In the proceedings ·below, the nature of MEDICARD's business and the extent of the
services it rendered are not seriously disputed. As an HMO, MEDICARD primarily
acts as an intermediary between the purchaser of healthcare services (its members)
and the healthcare providers (the doctors, hospitals and clinics) for a fee. By enrolling
membership with MED ICARD, its members will be able to avail of the pre-arranged
medical services from its accredited healthcare providers without the necessary
protocol of posting cash bonds or deposits prior to being attended to or admitted to
hospitals or clinics, especially during emergencies, at any given time. Apart from this,
MEDICARD may also directly provide medical, hospital and laboratory services,
which depends upon its member's choice.
Thus, in the course of its business as such, MED ICARD members can either avail of
medical services from MEDICARD's accredited healthcare providers or directly from
MEDICARD. In the former, MEDICARD members obviously knew that beyond the
agreement to pre-arrange the healthcare needs of its ·members, MEDICARD would
not actually be providing the actual healthcare service. Thus, based on industry
practice, MEDICARD informs its would-be member beforehand that 80% of the
amount would be earmarked for medical utilization and only the remaining 20%
comprises its service fee. In the latter case, MEDICARD's sale of its services is
exempt from VAT under Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108
of the NIRC that would extend the definition of gross receipts even to amounts that do
not only pertain to the services to be performed: by another person, other than the
taxpayer, but even to amounts that were indisputably utilized not by MED ICARD itself
but by the medical service providers.
It is a cardinal rule in statutory construction that no word, clause, sentence, provision
or part of a statute shall be considered surplusage or superfluous, meaningless, void
and insignificant. To this end, a construction which renders every word operative is
preferred over that which makes some words idle and nugatory. This principle is
expressed in the maxim Ut magisvaleat quam pereat, that is, we choose the
interpretation which gives effect to the whole of the statute – it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the
Court adopted the principal object and purpose object in determining whether the
MEDICARD therein is engaged in the business of insurance and therefore liable for
documentary stamp tax. The Court held therein that an HMO engaged in preventive,
diagnostic and curative medical services is not engaged in the business of an
insurance, thus:
To summarize, the distinctive features of the cooperative are the rendering of service,
its extension, the bringing of physician and patient together, the preventive
features, the regularization of service as well as payment, the substantial
reduction in cost by quantity purchasing in short, getting the medical job done
and paid for; not, except incidentally to these features, the indemnification for
cost after .the services is rendered. Except the last, these are not distinctive or
generally characteristic of the insurance arrangement. There is, therefore, a
substantial difference between contracting in this way for the rendering of service,
even on the contingency that it be needed, and contracting merely to stand its cost
when or after it is rendered.39 (Emphasis ours)
In sum, the Court said that the main difference between an HMO arid an insurance
company is that HMOs undertake to provide or arrange for the provision of medical
services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit. In the present case, the VAT is a tax on the value added by the performance of
the service by the taxpayer. It is, thus, this service and the value charged thereof by
the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership
fees to VAT.40 But the Court's task however is not to weigh these policy
considerations but to determine if these considerations in favor of taxation can even
be implied from the statute where the CIR purports to derive her authority. This Court
rules that they cannot because the language of the NIRC is pretty straightforward and
clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation in the
imposition of taxes, not the similar doctrine as applied to tax exemptions. The rule in
the interpretation of tax laws is that a statute will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose. Accordingly, the general rule
of requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended
by implication. In answering the question of who is subject to tax statutes, it is basic
that in case of doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes expressly and clearly
import. As burdens, taxes should not be unduly exacted nor assumed beyond the
plain meaning of the tax laws. 41 (Citation omitted and emphasis and underlining
ours)
For this Court to subject the entire amount of MEDICARD's gross receipts without
exclusion, the authority should have been reasonably founded from the language of
the statute. That language is wanting in this case. In the scheme of judicial tax
administration, the need for certainty and predictability in the implementation of tax
laws is crucial. Our tax authorities fill in the details that Congress may not have the
opportunity or competence to provide. The regulations these authorities issue are
relied upon by taxpayers, who are certain that these will be followed by the courts.
Courts, however, will not uphold these authorities' interpretations when dearly absurd,
erroneous or improper.42 The CIR's interpretation of gross receipts in the present
case is patently erroneous for lack of both textual and non-textual support.
As to the CIR's argument that the act of earmarking or allocation is by itself an act of
ownership and management over the funds, the Court does not agree.1âwphi1 On
the contrary, it is MEDICARD's act of earmarking or allocating 80% of the amount it
received as membership fee at the time of payment that weakens the ownership
imputed to it. By earmarking or allocating 80% of the amount, MEDICARD
unequivocally recognizes that its possession of the funds is not in the concept of
owner but as a mere administrator of the same. For this reason, at most,
MEDICARD's right in relation to these amounts is a mere inchoate owner which would
ripen into actual ownership if, and only if, there is underutilization of the membership
fees at the end of the fiscal year. Prior to that, MEDI CARD is bound to pay from the
amounts it had allocated as an administrator once its members avail of the medical
services of MEDICARD's healthcare providers.
Before the Court, the parties were one in submitting the legal issue of whether the
amounts MEDICARD earmarked, corresponding to 80% of its enrollment fees, and
paid to the medical service providers should form part of its gross receipt for VAT
purposes, after having paid the VAT on the amount comprising the 20%. It is
significant to note in this regard that MEDICARD established that upon receipt of
payment of membership fee it actually issued two official receipts, one pertaining to
the VAT able portion, representing compensation for its services, and the other
represents the non-vatable portion pertaining to the amount earmarked for medical
utilization.: Therefore, the absence of an actual and physical segregation of the
amounts pertaining to two different kinds · of fees cannot arbitrarily disqualify
MEDICARD from rebutting the presumption under the law and from proving that
indeed services were rendered by its healthcare providers for which it paid the
amount it sought to be excluded from its gross receipts.
With the foregoing discussions on the nullity of the assessment on due process
grounds and violation of the NIRC, on one hand, and the utter lack of legal basis of
the CIR's position on the computation of MEDICARD's gross receipts, the Court finds
it unnecessary, nay useless, to discuss the rest of the parties' arguments and
counter-arguments.
In fine, the foregoing discussion suffices for the reversal of the assailed decision and
resolution of the CTA en banc grounded as it is on due process violation. The Court
likewise rules that for purposes of determining the VAT liability of an HMO, the
amounts earmarked and actually spent for medical utilization of its members should
not be included in the computation of its gross receipts.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby
GRANTED. The Decision dated September 2, 2015 and Resolution dated January
29, 2016 issued by the Court of Tax Appeals en bane in CTA EB No. 1224 are
REVERSED and SET ASIDE. The definition of gross receipts under Revenue
Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of the National
Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of
determining its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty
percent (80%) of the amount of the contract price earmarked as fiduciary funds for the
medical utilization of its members. Further, the Value-Added Tax deficiency
assessment issued against Medicard Philippines, Inc. is hereby declared
unauthorized for having been issued without a Letter of Authority by the
Commissioner of Internal Revenue or his duly authorized representatives.
SO ORDERED.
G.R. No. 167679 July 22, 2015 Particulars Basic Tax( ) Surcharge( ) Interest( ) Total( )
Deficiency Income Tax
ING BANK N.V., engaged in banking operations in the Philippines as ING BANK
1996 (ST- 20,916,785.03 11,346,639.55 32,263,424.58
N.V. MANILA BRANCH, Petitioner,
INC-96-
vs.
0174-99)
COMMISSIONER OF INTERNAL REVENUE, Respondent.
1997 (ST- 133,533,114.54 45,730,518.68 179,263,633.22
INC-97-
DECISION 0185-99)

LEONEN, J.:
Deficiency Withholding Tax
on Compensation
Qualified taxpayers with pending tax cases may still avail themselves of the tax
1996 (ST- 1,027,267.20 602,288.17 1,629,555.37
amnesty program under Republic Act No. 9480,1 otherwise known as the 2007 Tax
WC-96-
Amnesty Act. Thus, the provision in BIR Revenue Memorandum Circular No. 19-2008
0175-99)
excepting "[i]ssues and cases which were ruled by any court (even without finality) in
favor of the BIR prior to amnesty availment of the taxpayer" from the benefits of the 1997 (ST- 2,505,925.25 968,042.36 3,473,967.61
law is illegal, invalid, and null and void.2 The duty to withhold the tax on WC-97-
compensation arises upon its accrual. 0184-99)

This is a Petition for Review3 appealing the April 5, 2005 Decision4 of the Court of Deficiency Onshore Tax
Tax Appeals En Banc, which in turn affirmed the August 9, 2004 Decision5 and 1996 (ST- 8,267,437.54 4,847,209.95 13,114,647.49
November 12, 2004 Resolution6 of the Court of Tax Appeals Second Division. The OT-96-
August 9, 2004 Decision held petitioner ING Bank, N.V. Manila Branch (ING Bank) 0176-99)
liable for (a) deficiency documentary stamp tax for the taxable years 1996 and 1997 in
the total amount of ₱238,545,052.38 inclusive of surcharges; (b) deficiency onshore
tax for the taxable year 1996 in the total amount of ₱997,333.89 inclusive of Deficiency Branch Profit
surcharges and interest; and (c) deficiency withholding tax on compensation for the Remittance Tax
taxable years 1996 and 1997 in the total amount of ₱564,542.67 inclusive of interest. 1996 (ST- 39,215,700.00 22,992,218[.]63 62,207,918.63
The Resolution denied ING Bank’s Motion for Reconsideration.7 RT-96-
0177-99)
While this case was pending before this court, ING Bank filed a Manifestation and 1997 (ST- 92,587,381.60 6,729,180.18 40,799,690.39 140,116,252.17
Motion8 stating that it availed itself of the government’s tax amnesty program under RT-97-
Republic Act No. 9480 with respect to its deficiency documentary stamp tax and 0181-99)
deficiency onshore tax liabilities.9 What is at issue now is whether ING Bank is
entitled to the immunities and privileges under Republic Act No. 9480,and whether the
assessment for deficiency withholding tax on compensation is proper. Deficiency Documentary
Stamp Tax
ING Bank, "the Philippine branch of Internationale Nederlanden Bank N.V., a foreign 1996 (ST- 3,838,753.06 959,688.27 4,798,441.33
banking corporation incorporated in the Netherlands[,] is duly authorized by the DST-96-
Bangko Sentral ng Pilipinas to operate as a branch with full banking authority in the 0178-99
Philippines."10 1997 (ST- 1,569,990.18 392,497.55 1,962,487.73
DST-97-
On January 3, 2000, ING Bank received a Final Assessment Notice11 dated 0181-99)
December 3, 1999.12 The Final Assessment Notice also contained the Details of 1997 (ST- 186,997,288.84 46,749,322.21 233,746,611.05
Assessment13 and 13 Assessment Notices "issued by the Enforcement Service of DST-97-
the Bureau of Internal Revenue through its Assistant Commissioner Percival T. 0180-99)
Salazar[.]"14 The Final Assessment Notice covered the following deficiency tax
assessments for taxable years 1996 and 1997:15
Compromise Penalty
 1996 (ST- 1,000.00 1,000.00 1996 (ST-OT-96-0176-99) 544,991.20 P 136,247.80 316,094.89 997,333.89
CP-96- Deficiency Documentary
0179-99) Stamp Tax
1997 (ST- 1,000.00 1,000.00 1996 (ST-DST-96-0178-99) 3,838,753.06 959,688.27 4,798,441.33
CP-97-
0186-99) 1997 (ST-DST-97-0180-99) 186,997,288.84 46,749,322.21 233,746,611.05
TOTALS ₱191,774,768.40 ₱47,845,258.28 P 486,902.26 ₱240,106,928.94
Deficiency Final Tax
1997 (ST- 53,200.89 20,551.58 73,752.47 Accordingly, petitioner is ORDERED to PAY the respondent the aggregate amount of
FT-97- ₱240,106,928.94, plus 20% delinquency interest per annum from February 3, 2000
0183-99) until fully paid, pursuant to Section 249(C) of the National Internal Revenue Code of
1997.
TOTALS 490,514,844.13 54,830,688.21 127,307,159.31 672,652,691.65
============= ============= ============= ============= SO ORDERED.20 (Emphasis in the original)

Both the Commissioner of Internal Revenue and ING Bank filed their respective
On February 2, 2000, ING Bank "paid the deficiency assessments for [the] 1996 Motions for Reconsideration.21 Both Motions were denied through the Second
compromise penalty, 1997 deficiency documentary stamp tax and 1997 deficiency Division’s Resolution dated November 12, 2004, as follows:
final tax in the respective amounts of ₱1,000.00, ₱1,000.00 and ₱75,013.25 [the
original amount of ₱73,752.47 plus additional interest]."16 ING Bank, however,
"protested [on the same day] the remaining ten (10) deficiency tax assessments in the WHEREFORE, the respondent’s Motion for Partial Reconsideration and the
total amount of ₱672,576,939.18."17 petitioner’s Motion for Reconsideration are hereby DENIED for lack of merit. The
pronouncement reached in the assailed decision is REITERATED.
ING Bank filed a Petition for Review before the Court of Tax Appeals on October 26,
2000. This case was docketed as C.T.A. Case No. 6187.18 The Petition was filed to SO ORDERED.22
seek "the cancellation and withdrawal of the deficiency tax assessments for the years
1996 and 1997, including the alleged deficiency documentary stamp tax on special On December 8, 2004, ING Bank filed its appeal before the Court of Tax Appeals En
savings accounts, deficiency onshore tax, and deficiency withholding tax on Banc.23 The Court of Tax Appeals En Banc denied due course to ING Bank’s Petition
compensation mentioned above."19 for Review and dismissed the same for lack of merit in the Decision promulgated on
April 5, 2005.24
After trial, the Court of Tax Appeals Second Division rendered its Decision on August
9, 2004, with the following disposition: Hence, ING Bank filed its Petition for Review25 before this court. The Commissioner
of Internal Revenue filed its Comment26 on October 5, 2005 and ING Bank its
WHEREFORE, the assessments for 1996 and 1997 deficiency income tax, 1996 and Reply27 on December 14, 2005. Pursuant to this court’s Resolution28 dated January
1997 deficiency branch profit remittance tax and 1997 deficiency documentary stamp 25, 2006, the Commissioner of Internal Revenue filed its Manifestation and Motion29
tax on IBCLs exceeding five days are hereby CANCELLED and WITHDRAWN. on February 14, 2006, stating that it is adopting its Comment as its Memorandum,
However, the assessments for 1996 and 1997 deficiency withholding tax on and ING Bank filed its Memorandum30 on March 9, 2006.
compensation, 1996 deficiency onshore tax and 1996 and 1997 deficiency
documentary stamp tax on special savings accounts are hereby UPHELD in the On December 20, 2007, ING Bank filed a Manifestation and Motion31 informing this
following amounts: court that it had availed itself of the tax amnesty authorized and granted under
Republic Act No. 9480 covering "all national internal revenue taxes for the taxable
year 2005 and prior years, with or without assessments duly issued therefor, that
Particulars Basic Tax Surcharge Interest Total
have remained unpaid as of December 31, 2005[.]"32 ING Bank stated that it filed
before the Bureau of Internal Revenue its Notice of Availment of Tax Amnesty Under
Deficiency Withholding Tax Republic Act No. 948033 on December 14, 2007, together with the following
on Compensation documents:
1996 (ST-WC-96-0175-99) P 105,939.86 P 61,445.11 P 167,384.97
1997 (ST-WC-97-0184-99) 287,795.44 109,362.26 397,157.70 (1) Statement of Assets, Liabilities and Net Worth (SALN) as of December
Deficiency Onshore Tax 31, 2005 (original and amended declarations);34
 (2) Tax Amnesty Return For Taxable Year 2005 and Prior Years (BIR Form
No. 2116);35 and (3) Tax Amnesty Payment Form (Acceptance of Payment
Form) for Taxable Year 2005 and Prior Years (BIR Form No. 0617)36
showing payment of the amnesty tax in the amount of ₱500,000.00.
ING Bank prayed that this court issue a resolution taking note of its availment of the
tax amnesty, and confirming its entitlement to all the immunities and privileges under
Section 6 of Republic Act No. 9480, particularly with respect to the "payment of
deficiency documentary stamp taxes on its special savings accounts for the taxable
years 1996 and 1997 and deficiency tax on onshore interest income derived under
the foreign currency deposit system for taxable year 1996[.]"37
Pursuant to this court’s Resolution38 dated January 23, 2008, the Commissioner of
Internal Revenue filed its Comment39 and ING Bank, its Reply.40
Originally, ING Bank raised the following issues in its pleadings:
First, whether "[t]he Court of Tax Appeals En Banc erred in concluding that
petitioner’s Special Saving Accounts are subject to documentary stamp tax (DST) as
certificates of deposit under Section 180 of the 1977 Tax Code";41
Second, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable
for deficiency onshore tax considering that under the 1977 Tax Code and the
pertinent revenue regulations, the obligation to pay the ten percent (10%) final tax on
onshore interest income rests on the payors-borrowers and not on petitioner as
payee-lender";42 and
Third, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable
for deficiency withholding tax on compensation for the accrued bonuses in the taxable
years 1996 and 1997 considering that these were not distributed to petitioner’s
officers and employees during those taxable years, hence, were not yet subject to
withholding tax."43
However, ING Bank availed itself of the tax amnesty under Republic Act No. 9480,
with respect to its liabilities for deficiency documentary stamp taxes on its special
savings accounts for the taxable years 1996 and 1997 and deficiency tax on onshore
interest income under the foreign currency deposit system for taxable year 1996.
Consequently, the issues now for resolution are:
First, whether petitioner ING Bank may validly avail itself of the tax amnesty granted
by Republic Act No. 9480; and
Second, whether petitioner ING Bank is liable for deficiency withholding tax on
accrued bonuses for the taxable years 1996 and 1997.
Tax amnesty availment
Petitioner ING Bank asserts that it is "qualified to avail of the tax amnesty under
Section 5 [of Republic Act No. 9480] and . . . not disqualified under Section 8 [of the
same law]."44 Respondent Commissioner of Internal Revenue, for its part, does not
deny the authenticity of the documents submitted by petitioner ING Bank or dispute
the payment of the amnesty tax. However, respondent Commissioner of Internal
Revenue claims that petitioner ING Bank is not qualified to avail itself of the tax
amnesty granted under Republic Act No. 9480 because both the Court of Tax
Appeals En Banc and Second Division ruled in its favor that confirmed the liability of
petitioner ING Bank for deficiency documentary stamp taxes, onshore taxes, and
withholding taxes.45
Respondent Commissioner of Internal Revenue asserts that BIR Revenue
Memorandum Circular No. 19-2008 specifically excludes "cases which were ruled by
any court (even without finality) in favor of the BIR prior to amnesty availment of the
taxpayer" from the coverage of the tax amnesty under Republic Act No. 9480.46 In
any case, respondent Commissioner of Internal Revenue argues that petitioner ING
Bank’s availment of the tax amnesty is still subject to its evaluation,47 that it is
"empowered to exercise [its] sound discretion . . . in the implementation of a tax
amnesty in favor of a taxpayer,"48 and "petitioner cannot presume that its application
. . . would be granted[.]"49 Accordingly, respondent Commissioner of Internal
Revenue prays that "petitioner [ING Bank’s] motion be denied for lack of merit."50
Petitioner ING Bank counters that BIR Revenue Memorandum Circular No. 19-2008
cannot override Republic Act No. 9480 and its Implementing Rules and Regulations,
which only exclude from tax amnesty "tax cases subject of final and [executory]
judgment by the courts."51 Petitioner ING Bank asserts that its full compliance with
the conditions prescribed in Republic Act No. 9480 (the conditions being submission
of the requisite documents and payment of the amnesty tax), which respondent
Commissioner of Internal Revenue does not dispute, confirms that it is "qualified to
avail itself, and has actually availed itself, of the tax amnesty."52 It argues that there
is nothing in the law that gives respondent Commissioner of Internal Revenue the
discretion to rescind or erase the legal effects of its tax amnesty availment.53 Thus,
the issue is no longer about whether "[it] is entitled to avail itself of the tax
amnesty[,]"54 but rather whether the effects of its tax amnesty availment extend to
the assessments of deficiency documentary stamp taxes on its special savings
accounts for 1996 and 1997 and deficiency tax on onshore interest income for
1996.55
Petitioner ING Bank points out the Court of Tax Appeals’ ruling in Metropolitan Bank
and Trust Company v. Commissioner of Internal Revenue,56 to the effect that full
compliance with the requirements of the tax amnesty law extinguishes the tax
deficiencies subject of the amnesty availment.57 Thus, with its availment of the tax
amnesty and full compliance with all the conditions prescribed in the statute, petitioner
ING Bank asserts that it is entitled to all the immunities and privileges under Section 6
of Republic Act No. 9480.58
Withholding tax on compensation
Petitioner ING Bank claims that it is not liable for withholding taxes on bonuses
accruing to its officers and employees during taxable years 1996 and 1997.59 It
maintains its position that the liability of the employer to withhold the tax does not
arise until such bonus is actually distributed. It cites Section 72 of the 1977 National
Internal Revenue Code, which states that "[e]very employer making payment of
wages shall deduct and withhold upon such wages a tax," and BIR Ruling No. 555-88
(November 23, 1988) declaring that "[t]he withholding tax on the bonuses should be
deducted upon the distribution of the same to the officers and employees[.]"60 Since
the supposed bonuses were not distributed to the officers and employees in 1996 and
1997 but were distributed in the succeeding year when the amounts of the bonuses
were finally determined, petitioner ING Bank asserts that its duty as employer to
withhold the tax during these taxable years did not arise.61
Petitioner ING Bank further argues that the Court of Tax Appeals’ discussion on
Section 29(j) of the 1993 National Internal Revenue Code and Section 3 of Revenue
Regulations No. 8-90 is not applicable because the issue in this case "is not whether
the accrued bonuses should be allowed as deductions from petitioner’s taxable
income but, rather, whether the accrued bonuses are subject to withholding tax on
compensation in the respective years of accrual[.]"62 Respondent Commissioner of
Internal Revenue counters that petitioner ING Bank’s application of BIR Ruling No.
555-88 is misplaced because as found by the Second Division of the Court of Tax
Appeals, the factual milieu is different:63
In that ruling, bonuses are determined and distributed in the succeeding year "[A]fter
[sic] the audit of each company is completed (on or before April 15 of the succeeding
year)". The withholding and remittance of income taxes were also made in the year
they were distributed to the employees. . . .
In petitioner’s case, bonuses were determined during the year but were distributed in
the succeeding year. No withholding of income tax was effected but the bonuses were
claimed as an expense for the year. . . .
Since the bonuses were not subjected to withholding tax during the year they were
claimed as an expense, the same should be disallowed pursuant to the above-quoted
law.64
Respondent Commissioner of Internal Revenue contends that petitioner ING Bank’s
act of "claim[ing] [the] subject bonuses as deductible expenses in its taxable income
although it has not yet withheld and remitted the [corresponding withholding] tax"65 to
the Bureau of Internal Revenue contravened Section 29(j) of the 1997 National
Internal Revenue Code, as amended.66 Respondent Commissioner of Internal
Revenue claims that "subject bonuses should also be disallowed as deductible
expenses of petitioner."67
I by a Statement of Assets, Liabilities and Networth (SALN) as of December 31, 2005,
Taxpayers with pending tax cases may avail themselves of the tax amnesty program
under Republic Act No. 9480.
In CS Garment, Inc. v. Commissioner of Internal Revenue,68 this court has
"definitively declare[d] . . . the exception ‘[i]ssues and cases which were ruled by any
court (even without finality) in favor of the BIR prior to amnesty availment of the
taxpayer’ under BIR [Revenue Memorandum Circular No.] 19-2008 [as] invalid, [for
going] beyond the scope of the provisions of the 2007 Tax Amnesty Law."69 Thus:
[N]either the law nor the implementing rules state that a court ruling that has not
attained finality would preclude the availment of the benefits of the Tax Amnesty Law.
Both R.A. 9480 and DOF Order No. 29-07 are quite precise in declaring that "[t]ax
cases subject of final and executory judgment by the courts" are the ones excepted
from the benefits of the law. In fact, we have already pointed out the erroneous
interpretation of the law in Philippine Banking Corporation (Now: Global Business
Bank, Inc.) v. Commissioner of Internal Revenue, viz:
The BIR’s inclusion of "issues and cases which were ruled by any court (even without
finality) in favor of the BIR prior to amnesty availment of the taxpayer" as one of the
exceptions in RMC 19-2008 is misplaced. RA 9480 is specifically clear that the
exceptions to the tax amnesty program include "tax cases subject of final and
executory judgment by the courts." The present case has not become final and
executory when Metrobank availed of the tax amnesty program.70 (Emphasis in the
original, citation omitted)
Moreover, in the fairly recent case of LG Electronics Philippines, Inc. v. Commissioner
of Internal Revenue,71 we confirmed that only cases that involve final and executory
judgments are excluded from the tax amnesty program as explicitly provided under
Section 8 of Republic Act No. 9480.72
Thus, petitioner ING Bank is not disqualified from availing itself of the tax amnesty
under the law during the pendency of its appeal before this court.
II
Petitioner ING Bank showed that it complied with the requirements set forth under
Republic Act No. 9480. Respondent Commissioner of Internal Revenue never
questioned or rebutted that petitioner ING Bank fully complied with the requirements
for tax amnesty under the law. Moreover, the contestability period of one (1) year from
the time of petitioner ING Bank’s availment of the tax amnesty law on December 14,
2007 lapsed. Correspondingly, it is fully entitled to the immunities and privileges
mentioned under Section 6 of Republic Act No. 9480. This is clear from the following
provisions:
SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to
avail himself of the tax amnesty authorized and granted under this Act shall file with
the Bureau of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied
in such form asmay be prescribed in the implementing rules and regulations (IRR) of
this Act, and pay the applicable amnesty tax within six months from the effectivity of
the IRR.
....
SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31,
2005 shall be considered as true and correct except where the amount of declared
networth is understated to the extent of thirty percent (30%) or more as may be
established in proceedings initiated by, or at the instance of, parties other than the
BIR or its agents: Provided, That such proceedings must be initiated within one year
following the date of the filing of the tax amnesty return and the SALN. Findings of or
admission in congressional hearings, other administrative agencies of government,
and/or courts shall be admissible to prove a thirty percent (30%) under-declaration. . .
..
SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax
amnesty under Section 5 hereof, and have fully complied with all its conditions shall
be entitled to the following immunities and privileges:
a. The taxpayer shall be immune from the payment of taxes, as well as
addition thereto, and the appurtenant civil, criminal or administrative
penalties under the National Internal Revenue Code of 1997, as amended,
arising from the failure to pay any and all internal revenue taxes for taxable
year 2005 and prior years.
b. The taxpayer’s Tax Amnesty Returns and the SALN as of December 31,
2005 shall not be admissible as evidence in all proceedings that pertain to
taxable year 2005 and prior years, insofar as such proceedings relate to
internal revenue taxes, before judicial, quasi-judicial or administrative bodies
in which he is a defendant or respondent, and except for the purpose of
ascertaining the networth beginning January 1, 2006, the same shall not be
examined, inquired or looked into by any person or government office.
However, the taxpayer may use this as a defense, whenever appropriate, in
cases brought against him.
c. The books of accounts and other records of the taxpayer for the years
covered by the tax amnesty availed of shall not be examined: Provided, That
the Commissioner of Internal Revenue may authorize in writing the
examination of the said books of accounts and other records to verify the
validity or correctness of a claim for any tax refund, tax credit (other than
refund or credit of taxes withheld on wages), tax incentives, and/or
exemptions under existing laws. (Emphasis supplied)
Contrary to respondent Commissioner of Internal Revenue’s stance, Republic Act No.
9480 confers no discretion on respondent Commissioner of Internal Revenue. The
provisions of the law are plain and simple. Unlike the power to compromise or abate a
taxpayer’s liability under Section 20473 of the 1997 National Internal Revenue Code
that is within the discretion of respondent Commissioner of Internal Revenue,74 its
authority under Republic Act No. 9480 is limited to determining whether (a) the
taxpayer is qualified to avail oneself of the tax amnesty; (b) all the requirements for
availment under the law were complied with; and (c) the correct amount of amnesty
tax was paid within the period prescribed by law. There is nothing in Republic Act No.
9480 which can be construed as authority for respondent Commissioner of Internal
Revenue to introduce exceptions and/or conditions to the coverage of the law nor to
disregard its provisions and substitute his own personal judgment.
Republic Act No. 9480 provides a general grant of tax amnesty subject only to the
cases specifically excepted by it. A tax amnesty "partakes of an absolute. . . waiver by
the Government of its right to collect what otherwise would be due it[.]"75 The effect
of a qualified taxpayer’s submission of the required documents and the payment of
the prescribed amnesty tax was immunity from payment of all national internal
revenue taxes as well as all administrative, civil, and criminal liabilities founded upon
or arising from non-payment of national internal revenue taxes for taxable year 2005
and prior taxable years.76
Finally, the documentary stamp tax and onshore income tax are covered by the tax
amnesty program under Republic Act No. 9480 and its Implementing Rules and
Regulations.77 Moreover, as to the deficiency tax on onshore interest income, it is
worthy to state that petitioner ING Bank was assessed by respondent Commissioner
of Internal Revenue, not as a withholding agent, but as one that was directly liable for
the tax on onshore interest income and failed to pay the same.
Considering petitioner ING Bank’s tax amnesty availment, there is no more issue
regarding its liability for deficiency documentary stamp taxes on its special savings
accounts for 1996 and 1997 and deficiency tax on onshore interest income for 1996,
including surcharge and interest. III.
The Court of Tax Appeals En Banc affirmed the factual finding of the Second Division
that accrued bonuses were recorded in petitioner ING Bank’s books as expenses for
taxable years 1996 and 1997, although no withholding of tax was effected:
With the preceding defense notwithstanding, petitioner now maintained that the
portion of the disallowed bonuses in the amounts of ₱3,879,407.85 and
₱9,004,402.63 for the respective years 1996 and 1997, were actually payments for
reimbursements of representation, travel and entertainment expenses of its officers.
These expenses according to petitioner are not considered compensation of
employees and likewise not subject to withholding tax.
In order to prove that the discrepancy in the accrued bonuses represents
reimbursement of expenses, petitioner availed of the services of an independent CPA
pursuant to CTA Circular No. 1-95, as amended. As a consequence, Mr. Ruben
Rubio was commissioned by the court to verify the accuracy of petitioner’s position
and to check its supporting documents.
In a report dated January 29, 2002, the commissioned independent CPA noted the
following pertinent findings: . .
.
 Findings and Observations 1997 1996 Reimbursement of Expense 3,479,332.84 7,970,283.92

Supporting document is under the P 930,307.56 P 1,849,040.70

name of the employee Unsubstantiated P 400,075.01 P 1,034,119.43
Tax Rate 26.48% 27.83%
Supporting document is not under 537,456.37 53,384.80
the name of the Bank nor its
employees (addressee is Basic Withholding Tax Due
"cash"/blank)
Thereon P 105,939.86 P 287,795.44
Supporting document is under the 7,039,976.36 1,630,292.14 Interest (Sec. 249) 61,445.11 109,362.26
name of the Bank
Supporting document is in the 362,919.59 62,615.91 Deficiency Withholding Tax on
name
Compensation P 167,384.97 P 397,157.70 78
of another person (other than the
employee claiming the expense)
Supporting document is not dated 13,404.00 423,199.07
An expense, whether the same is paid or payable, "shall be allowed as a deduction
within the period (i.e., 1996 and
1997) only if it is shown that the tax required to be deducted and withheld therefrom [was]
paid to the Bureau of Internal Revenue[.]"79
Date/year of transaction is not 31,510.00 26,126.49
Indicated Section 29(j) of the 1977 National Internal Revenue Code80 (now Section 34(K) of
the 1997 National Internal Revenue Code) provides:
Amount is not supported by 313,319.09 935,044.28
liquidation document(s)
Section 29. Deductions from gross income. — In computing taxable income subject to
TOTAL ₱9,228,892.97 ₱4,979,703.39 tax under Sec. 21(a); 24(a), (b) and (c); and 25(a) (1), there shall be allowed as
Based on the above report, only the expenses in the name of petitioner’s employee deductions the items specified in paragraphs (a) to (i) of this section: . . . .

1996 1997 ....

Supporting document is under the ₱1,849,040.70 P 930,307.56
name of the employee (a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade
Supporting document is under the 1,630,292.14 7,039,976.36 or business, including a reasonable allowance for salaries or other compensation for
name of the Bank personal services actually rendered; travelling expenses while away from home in the
pursuit of a trade, profession or business, rentals or other payments required to be
TOTAL ₱3,479,332.84 P 7,970,283.92 made as a condition to the continued use or possession, for the purpose of the trade,
and those under its name can be given credence. Therefore, the following expenses profession or business, of property to which the taxpayer has not taken or is not
are valid expenses for income tax purposes: taking title or in which he has no equity.

Consequently, petitioner is still liable for the amounts of ₱167,384.97 and ....
₱397,157.70 representing deficiency withholding taxes on compensation for the
respective years of 1996 and 1997, computed as follows: (j) Additional requirement for deductibility of certain payments. — Any amount paid or
payable which is otherwise deductible from, or taken into account in computing gross
1996 1997 income for which depreciation or amortization may be allowed under this section,
shall be allowed as a deduction only if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the Bureau of Internal Revenue in
Total Disallowed Accrued Bonus P 3,879,407.85 P 9,004,402.63 accordance with this section, Sections 5181 and 7482 of this Code. (Emphasis
supplied)
Less: Substantiated
Section 3 of Revenue Regulations No. 8-90 (now Section 2.58.5 of Revenue
Regulations No. 2-98) provides:
Section 3. Section 9 of Revenue Regulations No. 6-85 is hereby amended to read as
follows:
Section 9. (a) Requirement for deductibility. Any income payment, which is otherwise
deductible under Sections 29 and 54 of the Tax Code, as amended, shall be allowed
as a deduction from the payor’s gross income only if it is shown that the tax required
to be withheld has been paid to the Bureau of Internal Revenue in accordance with
Sections 50, 51, 72, and 74 also of the Tax Code.(Emphasis supplied)
Under the National Internal Revenue Code, every form of compensation for personal
services is subject to income tax and, consequently, to withholding tax. The term
"compensation" means all remunerations paid for services performed by an employee
for his or her employer, whether paid in cash or in kind, unless specifically excluded
under Sections 32(B)83 and 78(A)84 of the 1997 National Internal Revenue Code.85
The name designated to the remuneration for services is immaterial. Thus, "salaries,
wages, emoluments and honoraria, bonuses, allowances (such as transportation,
representation, entertainment, and the like), [taxable] fringe benefits[,] pensions and
retirement pay, and other income of a similar nature constitute compensation
income"86 that is taxable.
Hence, petitioner ING Bank is liable for the withholding tax on the bonuses since it
claimed the same as expenses in the year they were accrued.
Petitioner ING Bank insists, however, that the bonus accruals in 1996 and 1997 were
not yet subject to withholding tax because these bonuses were actually distributed
only in the succeeding years of their accrual (i.e., in 1997 and 1998) when the
amounts were finally determined.
Petitioner ING Bank’s contention is untenable.
The tax on compensation income is withheld at source under the creditable
withholding tax system wherein the tax withheld is intended to equal or at least
approximate the tax due of the payee on the said income. It was designed to enable
(a) the individual taxpayer to meet his or her income tax liability on compensation
earned; and (b) the government to collect at source the appropriate taxes on
compensation.87 Taxes withheld are creditable in nature.88 Thus, the employee is
still required to file an income tax return to report the income and/or pay the difference
between the tax withheld and the tax due on the income.89 For over withholding, the
employee is refunded.90 Therefore, absolute or exact accuracy in the determination
of the amount of the compensation income is not a prerequisite for the employer’s
withholding obligation to arise.
It is true that the law and implementing regulations require the employer to deduct
and pay the income tax on compensation paid to its employees, either actually or
constructively.
Section 72 of the 1977 National Internal Revenue Code, as amended,91 states:
SECTION 72. Income tax collected at source. — (a) Requirement of withholding. —
Every employer making payment of wages shall deduct and withhold upon such
wages a tax determined in accordance with regulations to be prepared and
promulgated by the Minister of Finance. (Emphasis supplied)
Sections 7 and 14 of Revenue Regulations No. 6-82,92 as amended,93 relative to the
withholding of tax on compensation income, provide:
Section 7. Requirement of withholding.— Every employer or any person who pays or
controls the payment of compensation to an employee, whether resident citizen or
alien, non-resident citizen, or nonresident alien engaged in trade or business in the
Philippines, must withhold from such compensation paid, an amount computed in
accordance with these regulations.
I. Withholding of tax on compensation paid to resident employees. – (a)In general,
every employer making payment of compensation shall deduct and withhold from
such compensation income for the entire calendar year, a tax determined in
accordance with the prescribed new Withholding Tax Tables effective January 1,
1992 (ANNEX "A").
....
Section 14. Liability for the Tax.— The employer is required to collect the tax by
deducting and withholding the amount thereof from the employee’s compensation as
when paid, either actually or constructively. An employer is required to deduct and
withhold the tax notwithstanding that the compensation is paid in something other
than money (for example, compensation paid in stocks or bonds) and to pay the tax to
the collecting officer. If compensation is paid in property other than money, the
employer should make necessary arrangements to ensure that the amount of the tax
required to be withheld is available for payment to the collecting officer.
Every person required to deduct and withhold the tax from the compensation of an
employee is liable for the payment of such tax whether or not collected from the
employee. If, for example, the employer deducts less than the correct amount of tax,
or if he fails to deduct any part of the tax, he is nevertheless liable for the correct
amount of the tax. However, if the employer in violation of the provisions of Chapter
XI, Title II of the Tax Code fails to deduct and withhold and thereafter the employee
pays the tax, it shall no longer be collected from the employer. Such payment does
not, however, operate to relieve the employer from liability for penalties or additions to
the tax for failure to deduct and withhold within the time prescribed by law or
regulations. The employer will not be relieved of his liability for payment of the tax
required to be withheld unless he can show that the tax has been paid by the
employee.
The amount of any tax withheld/collected by the employer is a special fund in trust for
the Government of the Philippines.
When the employer or other person required to deduct and withhold the tax under this
Chapter XI, Title II of the Tax Code has withheld and paid such tax to the
Commissioner of Internal Revenue or to any authorized collecting officer, then such
employer or person shall be relieved of any liability to any person. (Emphasis
supplied)
Constructive payment of compensation is further defined in Revenue Regulations No.
6-82:
Section 25. Applicability; constructive receipt of compensation.
—....
Compensation is constructively paid within the meaning of these regulations when it is
credited to the account of or set apart for an employee so that it may be drawn upon
by him at any time although not then actually reduced to possession. To constitute
payment in such a case, the compensation must be credited or set apart for the
employee without any substantial limitation or restriction as to the time or manner of
payment or condition upon which payment is to be made, and must be made
available to him so that it may be drawn upon at any time, and its payment brought
within his control and disposition. (Emphasis supplied)
On the other hand, it is also true that under Section 45 of the 1997 National Internal
Revenue Code (then Section 39 of the 1977 National Internal Revenue Code, as
amended), deductions from gross income are taken for the taxable year in which
"paid or accrued" or "paid or incurred" is dependent upon the method of accounting
income and expenses adopted by the taxpayer.
In Commissioner of Internal Revenue v. Isabela Cultural Corporation,94 this court
explained the accrual method of accounting, as against the cash method:
Accounting methods for tax purposes comprise a set of rules for determining when
and how to report income and deductions. . . .
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as deduction from income for
the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses
and other allowable deductions for the current year but failed to do so cannot deduct
the same for the next year.
The accrual method relies upon the taxpayer’s right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which characterizes
the cash method of accounting. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability. Similarly, liabilities
are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.
For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income
or expense? The accrual of income and expense is permitted when the all-events test
has been met. This test requires: (1) fixing of a right to income or liability to pay; and
(2) the availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy.1âwphi1 However,
the test does not demand that the amount of income or liability be known absolutely,
only that a taxpayer has at his disposal the information necessary to compute the
amount with reasonable accuracy. The all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the test is satisfied where a
computation may be unknown, but is not as much as unknowable, within the taxable
year. The amount of liability does not have to be determined exactly; it must be
determined with "reasonable accuracy. "Accordingly, the term "reasonable accuracy"
implies something less than anex act or completely accurate amount.95 (Emphasis
supplied, citations omitted)
Thus, if the taxpayer is on cash basis, he expense is deductible in the year it was
paid, regardless of the year it was incurred. If he is on the accrual method, he can
deduct the expense upon accrual thereof. An item that is reasonably ascertained as
to amount and acknowledged to be due has "accrued"; actual payment is not
essential to constitute "expense."
Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the
obligation to pay is already fixed; (2) the amount can be determined with reasonable
accuracy; and (3) it is already knowable or the taxpayer can reasonably be expected
to have known at the closing of its books for the taxable year.
Section 29(j) of the 1977 National Internal Revenue Code96 (Section 34(K) of the
1997 National Internal Revenue Code) expressly requires, as a condition for
deductibility of an expense, that the tax required to be withheld on the amount paid or
payable is shown to have been remitted to the Bureau of Internal Revenue by the
taxpayer constituted as a withholding agent of the government.
The provision of Section 72 of the 1977 National Internal Revenue Code (Section 79
of the 1997 National Internal Revenue Code) regarding withholding on wages must be
read and construed in harmony with Section 29(j) of the 1977 National Internal
Revenue Code (Section 34(K) of the 1997 National Internal Revenue Code) on
deductions from gross income. This is in accordance with the rule on statutory
construction that an interpretation is to be sought which gives effect to the whole of
the statute, such that every part is made effective, harmonious, and sensible,97 if
possible, and not defeated nor rendered insignificant, meaningless, and nugatory.98 If
we go by the theory of petitioner ING Bank, then the condition imposed by Section
29(j) would have been rendered nugatory, or we would in effect have created an
exception to this mandatory requirement when there was none in the law.
Reading together the two provisions, we hold that the obligation of the
payor/employer to deduct and withhold the related withholding tax arises at the time
the income was paid or accrued or recorded as an expense in the payor’s/employer’s taxable years 1996 and 1997 in the total amount of ₱564,542.67 inclusive of interest,
books, whichever comes first. is AFFIRMED.

Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its SO ORDERED
books. Therefore, its obligation to withhold the related withholding tax due from the
deductions for accrued bonuses arose at the time of accrual and not at the time of
actual payment.

In Filipinas Synthetic Fiber Corporation v. Court of Appeals,99 the issue was raised
on "whether the liability to withhold tax at source on income payments to non-resident
foreign corporations arises upon remittance of the amounts due to the foreign
creditors or upon accrual thereof."100 In resolving this issue, this court considered the
nature of the accounting method employed by the withholding agent, which was the
accrual method, wherein it was the right to receive income, and not the actual receipt,
that determined when to report the amount as part of the taxpayer’s gross income.101
It upheld the lower court’s finding that there was already a definite liability on the part
of petitioner at the maturity of the loan contracts.102 Moreover, petitioner already
deducted as business expense the said amounts as interests due to the foreign
corporation.103 Consequently, the taxpayer could not claim that there was "no duty to
withhold and remit income taxes as yet because the loan contract was not yet due
and demandable."104 Petitioner, "[h]aving ‘written-off’ the amounts as business
expense in its books, . . . had taken advantage of the benefit provided in the law
allowing for deductions from gross income."105

Here, petitioner ING Bank already recognized a definite liability on its part considering
that it had deducted as business expense from its gross income the accrued bonuses
due to its employees. Underlying its accrual of the bonus expense was a reasonable
expectation or probability that the bonus would be achieved. In this sense, there was
already a constructive payment for income tax purposes as these accrued bonuses
were already allotted or made available to its officers and employees.

We note petitioner ING Bank's earlier claim before the Court of Tax Appeals that the
bonus accruals in 1996 and 1997 were disbursed in the following year of accrual, as
reimbursements of representation, travel, and entertainment expenses incurred by its
employees.106 This shows that the accrued bonuses in the amounts of ₱400,075.0l
(1996) and Pl,034,119.43 (1997) on which deficiency withholding taxes of
Pl67,384.97 (1996) and ₱397,157.70 (1997) were imposed, respectively, were
already set apart or made available to petitioner ING Bank's officers and employees.
To avoid any tax issue, petitioner ING Bank should likewise have recognized the
withholding tax liabilities associated with the bonuses at the time of accrual.

WHEREFORE, the Petition is PARTLY GRANTED. The assessments with respect to

petitioner ING Bank's liabilities for deficiency documentary stamp taxes on its special
savings accounts for the taxable years 1996 and 1997 and deficiency tax on onshore
interest income under the foreign currency deposit system for taxable year 1996 are
hereby SET ASIDE solely in view of petitioner ING Bank's availment of the tax
amnesty program under Republic Act No. 9480. The April 5, 2005 Decision of the
Court of Tax Appeals En Banc, which affirmed the August 9, 2004 Decision and
November 12, 2004 Resolution of the Court of Tax Appeals Second Division holding
petitioner ING Bank liable for deficiency withholding tax on compensation for the
 G.R. No. 193381
DEFICIENCY TAXES AMOUNT

COMMISSIONER OF INTERNAL REVENUE, Petitioner Income Tax ₱ 9,305,697.74

vs.
APO CEMENT CORPORATION, Respondent Value-Added Tax 1,610,070.51

Withholding Tax on Compensation 20,916,611.66

DECISION
Unremitted Withholding Tax on Compensation 13,479,061.25
LEONEN, J.:
Expanded Withholding Tax 23,664,416.39
This resolves a Petition for Review1 seeking to reverse and set aside the Court of Tax Unremitted Expanded Withholding Tax 4,549,677.32
Appeals En Banc’s Decision2 dated June 24, 2010, which affirmed the Second
Division's Resolution3 dated June 11, 2009 granting respondent's Motion to Cancel Final Withholding Tax 3,095,786.45
Tax Assessment; and Resolution4 dated August 23, 2010 denying respondent's
motion for reconsideration. Fringe Benefits Tax 213,656.36

On September 1, 2003, the Bureau of Internal Revenue sent Apo Cement Documentary Stamp Tax 67,433,862. 97
Corporation (Apo Cement) a Final Assessment Notice (FAN) for deficiency taxes for
Administrative Penalties 25,000.00
the taxable year 1999, as follows:
Total ₱ 144,293,840.658
(Emphasis supplied)
DEFICIENCY TAXES AMOUNT

Income Tax ₱ 479,977,176.22

On August 3, 2006, Apo Cement filed a Petition for Review with the Court of Tax
Appeals.9
Value-Added Tax 181,345,963.86

VAT Withholding 23,536,374.48 In its Answer, the Commissioner of Internal Revenue admitted that Apo Cement had
already paid the deficiency assessments reflected in the Bureau's Final Decision on
Withholding Tax on Compensation 15,595,098.12 Disputed Assessment, except for the documentary stamp taxes.10 The deficiency
documentary stamp taxes were allegedly based on several real property transactions
Unremitted Withholding Tax on Compensation 10,388,757.86 of the corporation consisting of the assignment of several parcels of land with mineral
deposits to Apo Land and Quarry Corporation, a wholly owned subsidiary, and land
Expanded Withholding Tax 17,642,981.74
acquisitions in 1999.11 According to the Commissioner, Apo Cement should have
Unremitted Expanded Withholding Tax 3,510,390.71 paid documentary stamp taxes based on the zonal value of property with
mineral/quarry content, not on the zonal value of regular residential property.12
Final Withholding Tax 53,808,355.59
On January 25, 2008, Apo Cement availed of the tax amnesty under Republic Act No.
Fringe Benefits Tax 167,337.31 9480, particularly affecting the 1999 deficiency documentary stamp taxes.13
Documentary Stamp Tax 52,480,372.77
After stipulation of facts and presentation of evidence, Apo Cement filed on April 17,
Administrative Penalties 25,000.005 2009 a Motion to Cancel Tax Assessment (with Motion to Admit Attached Formal
Offer of Evidence).14 The Commissioner filed her Opposition.15

Apo Cement protested the FAN.6 The Bureau issued the Final Decision on Disputed
Assessment dated June 15, 2006 denying the Apo Cement's protest.7 The Final
Decision contained the following deficiency assessments, viz:
On June 11, 2009, the Court of Tax Appeals (Second Division) granted16 Apo
Cement's Motion to Cancel Tax Assessment. It found Apo Cement a qualified tax
amnesty applicant under Republic Act No. 9480;17 and fully compliant with the
requirements of the law, the Department Order No. 29-07, and Revenue
Memorandum Circular No. 19-2008. The Decision disposed as follows:
WHEREFORE, premises considered:
1) the Assessment Notices for deficiency Documentary Stamp
Taxes for taxable year 1999 issued against [Apo Cement
Corporation] are hereby CANCELLED and SET ASIDE, solely in
view of [its] availment of the Tax Amnesty under RA 9480;
2) the Assessment Notices for deficiency Income Tax, Value-Added
Tax, VAT Withholding Tax, Withholding Tax on Compensation,
Unremitted Withholding Tax on Compensation, Expanded
Withholding Tax, Unremitted Expanded Withholding Tax, Final
Withholding Tax, and Fringe Benefits Tax are CANCELLED and
SET ASIDE in view of petitioner's payment of said taxes.
Accordingly, the -above-captioned case is hereby considered CLOSED and
TERMINATED.
SO ORDERED.18
The Commissioner filed a Motion for Reconsideration, which the Court of Tax Appeals
denied in a Resolution dated October 19, 2009 for lack of merit.
On November 19, 2009, the Commissioner appealed to the En Banc.19 However, in a
Decision promulgated on June 24, 2010, the Court of Tax Appeals En Banc
dismissed the Commissioner's appeal and affirmed the Second Division's resolution
ordering the cancellation of the assessment for deficiency documentary stamp taxes
in view of the Apo Cement's availment of the tax amnesty program. The En Banc
ruled that (a) Apo Cement is qualified to avail of the tax amnesty;20 (b) it submitted
the required documents to the court;21 (c) the Commissioner is not the proper party
to challenge the SALN;22 (d) the one-year prescriptive period already lapsed;23 and
(e) in another tax case involving the same parties (CTA EB No. 256, CTA Case No.
6710), it was already adjudged that Apo Cement complied with the requirements of
Tax Amnesty.24
The Commissioner filed a Motion for Reconsideration, but the same was denied in the
Court of Tax Appeals En Banc’s Resolution dated August 23, 2010.25
Hence, the petitioner filed its Petition for Review with this Court. Respondent filed its
Comment26 and petitioner her Reply.27
In a Resolution28 dated June 15, 2011, the Court expunged from the records
respondent's Rejoinder to petitioner's Reply.
The core issue is whether respondent had fully complied with all the requirements to
avail of the tax amnesty granted under Republic Act No. 9480.
The Petition is devoid of merit. The Court of Tax Appeals committed no reversible
error.
I
We shall first address the procedural issue of defective verification raised by the
respondent.
Through the Verification and Certification of Non-Forum Shopping29 attached to the
present Petition, Deputy Commissioner Estela V. Sales of the Legal and Inspection
Group of the Bureau of Internal Revenue states that the contents of the Petition are
true and correct of her own "knowledge and belief based on authentic records."30
In the Court's Resolution31 dated December 8, 2010, the petitioner was directed to
submit a sufficient verification within five (5) days from notice. Petitioner did not
comply.
Petitioner would argue however that while the verification still stated "belief," it was
qualified by "based on authentic records." Hence, "the statement implies that the
contents of the petition were based not only on the pleader's belief but ultimately they
are recitals from authentic records."32
We are not persuaded.
The amendment to Section 4, Rule 7 entirely removed any reference to "belief" as
basis.33 This is to ensure that the pleading is anchored on facts and not on
imagination or speculation, and is filed in good faith.
In Go v. Court of Appeals:34
Mere belief is insufficient basis and negates the verification which should be on the
basis of personal knowledge or authentic records. Verification is required to secure an
assurance that the allegations of the petition have been made in good faith, or are
true and correct and not merely speculative.35
To emphasize this further, the third paragraph of Rule 7, Section 4 of the 1997 Rules
of Civil Procedure, as amended, expressly treats pleadings with a verification based
on "information and belief' or "knowledge, information and belief," as unsigned.36
In Negros Oriental Planters Association, Inc. v. Hon. Presiding Judge of RTC-Negros
Occidental, Branch 52, Bacolod City,37 the Court explained that the amendment in
the rules was made stricter so that a party cannot be allowed to base his statements
on his belief. Otherwise, the pleading is treated as unsigned which produces no legal
effect. The court, though, in its discretion, may give the party a chance to remedy the
insufficiency. Thus:
Clearly, the amendment was introduced in order to make the verification requirement
stricter, such that the party cannot now merely state under oath that he believes the
statements made in the pleading. He cannot even merely state under oath that he has
knowledge that such statements are true and correct. His knowledge must be
specifically alleged under oath to be either personal knowledge or at least based on
authentic records.
Unlike, however, the requirement for a Certification against Forum Shopping in
Section 5, wherein failure to comply with the requirements is not curable by
amendment of the complaint or other initiatory pleading, Section 4 of Rule 7, as
amended, states that the effect of the failure to properly verify a pleading is that the
pleading shall be treated as unsigned:
A pleading required to be verified which contains a verification based on
"information and belief", or upon "knowledge, information and belief", or lacks a
proper verification, shall be treated as an unsigned pleading.
Unsigned pleadings are discussed in the immediately preceding section of Rule 7:
SEC. 3. Signature and address. - ....
....
An unsigned pleading produces no legal effect. However, the court may, in its
discretion, allow such deficiency to be remedied if it shall appear that the same was
due to mere inadvertence and not intended for delay. Counsel who deliberately files
an unsigned pleading, or signs a pleading in violation of this Rule, or alleges
scandalous or indecent matter therein, or fails to promptly report to the court a change
of his address, shall be subject to appropriate disciplinary action. (5a)
A pleading, therefore, wherein the Verification is merely based on the party's
knowledge and belief produces no legal effect, subject to the discretion of the
court to allow the deficiency to be remedied.38
In this case, petitioner did not submit a corrected verification despite the order of this
Court. This alone merits the denial of the Petition outright.
In any case, we find respondent had fully complied with the requirements of Republic
Act No. 9480. Hence, the Court of Tax Appeals properly cancelled the remaining
assessment for deficiency documentary stamp taxes.
II.
The pertinent provisions on the grant and availment of tax amnesty under Republic
Act No. 9480 state:
SECTION 1. Coverage. -There is hereby authorized and granted a tax amnesty which
shall cover all national internal revenue taxes for the taxable year 2005 and prior
years, with or without assessments duly issued therefor, that have remained unpaid
as of December 31, 2005: Provided, however, That the amnesty hereby authorized
and granted shall not cover persons or cases enumerated under Section 8 hereof.
SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to
avail himself of the tax amnesty authorized and granted under this Act shall file with
the Bureau of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied
by a Statement of Assets, Liabilities and Net worth (SALN) as of December 31, 2005,
in such form as may be prescribed in the implementing rules and regulations (IRR) of
this Act, and pay the applicable amnesty tax within six months from the effectivity of
the IRR.
SECTION 3. What to Declare in the SALN - The SALN shall contain a declaration of
the assets, liabilities and net worth as of December 31, 2005, as follows:
(a) Assets within or without the Philippines, whether real or
personal, tangible or intangible, whether or not used in trade or
business: Provided, That property other than money shall be valued
at the cost at which the property was acquired: Provided, further,
That foreign currency assets and/or securities shall be valued at the
rate of exchange prevailing as of the date of the SALN;
(b) All existing liabilities which are legitimate and enforceable,
secured or unsecured, whether or not incurred in trade or business;
and
(c) The net worth of the taxpayer, which shall be the difference
between the total assets and total liabilities.
....
SEC. S. Grant of Tax Amnesty. - Except for the persons or cases covered in Section
8 hereof, any person, whether natural or juridical, may avail himself of the benefits of
tax amnesty under this Act, and pay the amnesty tax due thereon, based on his net
worth as of December 31, 200S as declared in the SALN as of said period, in
accordance with the following schedule of amnesty tax rates and minimum amnesty
tax payments required:
....
(b) Corporations
(1) With subscribed capital of above ₱50 5% or ₱500,000, whichever is higher
Million
(2) With subscribed capital of above ₱20 5% or ₱250,000, whichever is higher
Million up to ₱50 Million
(3) With subscribed capital of ₱5 Million to 5% or ₱100,000, whichever is higher
₱20 Million

(4) With subscribed capital of below ₱5 5% or ₱25,000, whichever is higher
Million
....
(d) Taxpayers who filed their balance sheet/SALN, together with their income tax
returns for 2005, and who desire to avail of the tax amnesty under this Act shall
amend such previously filed statements by including still undeclared assets and/or
liabilities and pay an amnesty tax equal to five percent (5%) based on the resulting
increase in net worth: Provided, That such taxpayers shall likewise be categorized in
accordance with, and subjected to the minimum amounts of amnesty tax prescribed
under the provisions of this Section. (Emphasis supplied)
In addition to the above provisions of law, the Department of Finance Department
Order No. 29-0739 provides:
SECTION 6. Method of Availment of Tax Amnesty. –
1. Forms/Documents to be filed. - To avail of the general tax amnesty, concerned
taxpayers shall file the following documents/requirements:
a. Notice of A vailment in such form as may be prescribed by the
BIR.
b. Statements of Assets, Liabilities and Net worth (SALN) as of
December 31, 2005 in such form, as may be prescribed by the BIR.
c. Tax Amnesty Return in such form as may be prescribed by the
BIR.
2. Place of Filing of Amnesty Tax Return. - The Tax Amnesty Return, together with
the other documents stated in Sec. 6 (1) hereof, shall be filed as follows:
a. Residents shall file with the Revenue District Officer (RDO)/Large
Taxpayer District Office of the BIR which has jurisdiction over the
legal residence or principal place of business of the taxpayer, as
the case may be.
b. Non-residents shall file with the office of the Commissioner of the
BIR, or with any RDO.
c. At the option of the taxpayer, the RDO may assist the taxpayer in
accomplishing the forms and computing the taxable base and the
amnesty tax payable, but may not look into, question or examine
the veracity of the entries contained in the Tax Amnesty Return,
Statement of Assets, Liabilities and Net worth, or such other
documents submitted by the taxpayer.
3. Payment of Amnesty Tax and Full Compliance. - Upon filing of the Tax Amnesty
Return in accordance with Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to
the authorized agent bank or in the absence thereof, the Collection Agent or duly
authorized Treasurer of the city or municipality in which such person has his legal
residence or principal place of business.
The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed
by the BIR for the use of - or to be accomplished by - the bank, the collection agent or
the Treasurer, showing the acceptance of the amnesty tax payment. In case of the
authorized agent bank, the branch manager or the assistant branch manager shall
sign the acceptance of payment form.
The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax
Amnesty Return shall be submitted to the RDO, which shall be received only after
complete payment. The completion of these requirements shall be deemed full
compliance with the provisions of RA 9480.
4. Time for Filing and Payment of Amnesty Tax. - The filing of the Tax Amnesty
Return, together with the SALN, and the payment of the amnesty tax shall be made
within six (6) months from the effectivity of these Rules.
Taxpayers who availed themselves of the tax amnesty program are entitled to the
immunities and privileges under Section 6 of the law:
SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax
amnesty under Section 5 hereof, and have fully complied with all its conditions shall
be entitled to the following immunities and privileges:
(a) The taxpayer shall be immune from the payment of taxes, as well as additions
thereto, and the appurtenant civil, criminal or administrative penalties under the
National Internal Revenue Code of 1997, as amended, arising from the failure to pay
any and all internal revenue taxes for taxable year 2005 and prior years.
(b) The taxpayer's Tax Amnesty Return and the SALN as of December 31, 2005 shall
not be admissible as evidence in all proceedings that pertain to taxable year 2005 and
prior years, insofar as such proceedings relate to internal revenue taxes, before
judicial, quasi-judicial or administrative bodies in which he is a defendant or
respondent, and except for the purpose of ascertaining the net worth beginning
January 1, 2006, the same shall not be examined, inquired or looked into by any
person or government office. However, the taxpayer may use this as a defense,
whenever appropriate, in cases brought against him.
(c) The books of accounts and other records of the taxpayer for the years covered by
the tax amnesty availed of shall not be examined: Provided, That the Commissioner
of Internal Revenue may authorize in writing the examination of the said books of
accounts and other records to verify the validity or correctness of a claim for any tax
refund, tax credit (other than refund or credit of taxes withheld on wages), tax
incentives, and/or exemptions under existing laws.
All these immunities and privileges shall not apply where the person failed to file a
SALN and the Tax Amnesty Return, or where the amount of net worth as of
December 31, 2005 is proven to be understated to the extent of thirty percent (30%)
or more, in accordance with the provisions of Section 3 hereof.
This Court has declared40 that submission of the documentary requirements and
payment of the amnesty tax is considered full compliance with Republic Act No. 9480
and the taxpayer can immediately enjoy the immunities and privileges enumerated in
Section 6 of the law.
The plain and straightforward conditions were obviously meant to encourage
taxpayers to avail of the amnesty program, thereby enhancing revenue administration
and collection.41
Here, it is undisputed that respondent had submitted all the documentary
requirements. The Court of Tax Appeals En Banc found that respondent had
submitted the following:
i. Letter to the Commissioner of Internal Revenue, addressed to the Chief-LT Audit
and Investigation Division II, Ms. Olivia O. Lao, received on January 25, 2008;
ii. Notice of Availment of the Tax Amnesty;
iii. Tax Amnesty Payment Form/Acceptance of Payment Form (BIR Form No. 0617);
iv. Tax Amnesty Return (BIR Form No. 2116);
v. Statement of Assets, Liabilities and Net worth;
vi. Annual Income Tax Return for the taxable year 2005 with Audited Financial
Statements for the year 2005; and
vii. Development Bank of the Philippines BIR Tax Payment Deposit Slip in the amount
of ₱3,668,951.06.42
The Court of Tax Appeals further found that there was nothing in the records, which
would show that proceedings to question the correctness of the Statement of Assets,
Liabilities, and Net Worth (SALN) have been filed within the one-year period stated in
Section 4 of the law.43 Hence, it concluded that respondent had duly complied with
the requisites enumerated under Republic Act No. 9480 and is therefore entitled to
the benefits under Section 6.44
III.
The Commissioner disputes, however, the correctness of respondent's 2005 SALN
because respondent allegedly did not include the 57,500,000 shares of stocks it
acquired in 1999 from its subsidiary - Apo Land and Quarry Corporation - in exchange
for several parcels of land.45
Consequently, respondent underpaid its amnesty tax by ₱89,858,951.05,
corresponding to the value of the shares of stocks, which respondent allegedly did not
include in its declaration of assets in the SALN.46
Petitioner further submits that the one-year contestability period under Section 4 has
not yet lapsed - as it had not yet even commenced - due to respondent's failure to file
a complete SALN and to pay the correct amnesty tax.47
Respondent counters that the petitioner is not the proper party to question the
correctness of its SALN.48 Under Section 4 of Republic Act No. 9480, there is a
presumption of correctness of the SALN and only parties other than the Bureau of
Internal Revenue or its agents may dispute the correctness of the SALN.49
Even assuming that petitioner has the standing to question the SALN, Republic Act
No. 9480 provides that the proceeding to challenge the SALN must be initiated within
one year following the date of filing of the Tax Amnesty documents.50 Respondent
asserts that it availed of the tax amnesty program on January 25, 2008.51 Hence,
petitioner's challenge, made only in April 2009, was already time-barred.52
In her Reply, petitioner argues that: (1) she is the proper party to question the
completeness of the applicant's SALN; and (2) the State is not bound by the acts of
the Bureau's officials, who examined respondent's SALN and accepted the wrong
amnesty tax payment.53
IV.
Section 4 of Republic Act No. 9480 provides:
SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31,
2005 shall be considered as true and correct except where the amount of declared
net worth is understated to the extent of thirty percent (30%) or more as may be
established in proceedings initiated by, or at the instance of, parties other than the
BIR or its agents: Provided, That such proceedings must be initiated within one year
following the date of the filing of the tax amnesty return and the SALN. Findings of or
admission in congressional hearings, other administrative agencies of government,
and/or courts shall be admissible to prove a thirty percent (30%) under-declaration.
(Emphasis and underscoring supplied)
Under the above-stated provision, the SALN is presumed correct unless there is a
concurrence of the following:
a. There is under-declaration of net worth by 30%;
 b. The under-declaration is established in proceedings initiated by parties
other than the BIR; and
c. The proceedings were initiated within one (1) year from the filing of the tax
amnesty.
The Court of Tax Appeals ruled that petitioner is not the proper party to question the
veracity of respondent's SALN. It emphasized that "the presumption of correctness of
the SALN applies even against the Commissioner . . . Thus, the thirty percent (30%)
threshold can be established in proceedings initiated by, or at the instance of, parties
other than the B[ureau of] I[ntemal] R[evenue] or its agents."54
The Court of Tax Appeals is correct.
We cannot disregard the plain and categorical text of Section 4. It is a basic rule of
statutory construction that where the language of the law is clear and unambiguous, it
should be applied as written.55 Determining its wisdom or policy is beyond the realm
of judicial power.56
In CS Garment, Inc. v. Commissioner of Internal Revenue,57 the Court clarified that –
The one-year period referred to in the law should ... be considered only as a
prescriptive period within which third parties, meaning 'parties other than the BIR or
its agents,' can question the SALN - not as a waiting period during which the BIR may
contest the SALN and the taxpayer prevented from enjoying the immunities and
privileges under the law.58
The Court explained that the documentary requirements and payment of the amnesty
tax operate as a suspensive condition, such that completion of these requirements
entitles the taxpayer-applicant to immediately enjoy the immunities and privileges
under Republic Act No. 9480.
However, the Court further stated that Section 6 of the law contains a resolutory
condition. Immunities and privileges will cease to apply to taxpayers who, in their
SALN, were proven to have understated their net worth by 30% or more.
This clarification, however, does not mean that the amnesty taxpayers would go scot-
free in case they substantially understate the amounts of their net worth in their
SALN. The 2007 Tax Amnesty Law imposes a resolutory condition insofar as the
enjoyment of immunities and privileges under the law is concerned. Pursuant to
Section 4 of the law, third parties may initiate proceedings contesting the declared
amount of net worth of the amnesty taxpayer within one year following the date of the
filing of the tax amnesty return and the SALN. Section 6 then states that "All these
immunities and privileges shall not apply ... where the amount of net worth as of
December 31, 2005 is proven to be understated to the extent of thirty percent (30%)
or more, in accordance with the provisions of Section 3 hereof." Accordingly, Section
10 provides that amnesty taxpayers who willfully understate their net worth shall be
(a) liable for perjury under the Revised Penal Code; and (b) subject to immediate tax
fraud investigation in order to collect all taxes due and to criminally prosecute those
found to have willfully evaded lawful taxes due.59
Thus, the amnesty granted under the law is revoked once the taxpayer is proven to
have under-declared his assets in his SALN by 30% or more.1âwphi1 Pursuant to
Section 1060 of the Tax Amnesty Law, amnesty taxpayers who wilfully understate
their net worth shall not only be liable for perjury under the Revised Penal Code, but,
upon conviction, also subject to immediate tax fraud investigation in order to collect all
taxes due and to criminally prosecute for tax evasion.
Here, the requisites to overturn the presumption of correctness of respondent's 2005
SALN were not met.
Respondent filed its Tax Amnesty documents on January 25, 2008.61 Since then,
and up to the time of the filing of respondent's Motion to Cancel Tax Assessment on
April 1 7, 2009, there had been no proceeding initiated to question its declared
amount of net worth.62 Petitioner never alleged, before the Court of Tax Appeals and
this Court, the existence of any such proceeding to challenge respondent's 2005
SALN during this period. Indeed, petitioner first raised the possibility of under-
declaration of assets only in her Opposition to respondent's Motion to Cancel Tax
Assessment.63 Thus, the lapse of the one-year period effectively closed the window
to question respondent's 2005 SALN.
Significantly, as explained by respondent, there was no understatement in its 2005
SALN because the shares of stocks, which the BIR repeatedly referred to, were sold
in 2002 or more than three (3) years prior to the tax amnesty availment.64 This was
already discussed and detailed before the Court of Tax Appeals together with proofs
of the transfer of ownership.65
Our judicial review under Rule 45 of the Rules of Court is confined only to errors of
law and does not extend to questions of fact.66 This Court is not a trier of facts.67 At
any rate, petitioner's utter failure to refute these material points constitutes an implied
admission.
WHEREFORE, the Petition is DENIED.
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 Resolution5 of 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 established 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 taxable year
1998 to an unspecified date. The LOA reads:
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/[t]hey 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)8 which cited Lancaster for:
1) overstatement of its purchases for the fiscal year April 1998 to March1999; and 2)
noncompliance with the generally accepted accountingprinciple 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:
Taxable Income per ITR -0-
Add: Adjustments-Disallowed purchases 11,496,770.18
Adjusted Taxable 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

SEPT. 30 1999 January 1 - March 31, 1999

(3/12x ₱l1,496,770.18 x 33%) 948,483.54
LETTER OF AUTHORITY Income tax still due per investigation ₱3,880,159.94

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

11th Flr. Metro Bank Plaza
Compromise Penalty 25,000
Makati City
TOTAL DEFlCIENCY INCOME TAX ₱6,466,065.50
SIRJMADAM/GENTLEMEN:

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 In its petition before the CTA Division, Lancaster essentially reiterated its arguments
1999. Verification of the books of accounts and pertinent documents disclosed that in the protest against the assessment, maintaining that the tobacco purchases in
there was an overstatement of purchases for the year. Purchase Invoice Vouchers February and March 1998 are deductible in its fiscal year ending 31 March 1999.
(PIVs) for February and March 1998 purchases amounting to ₱ll,496,770.18 were
included as part of purchases for taxable year 1998 in violation of Section 45 of the The issues19 raised by the parties for the resolution of the CTA Division were:
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 I
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 WHETHER OR NOT PETITIONER COMPLIED WITH THE GENERALLY
which the gross income from the crop is realized and that the taxable income should ACCEPTED ACCOUNTING PRINCIPLE OF PROPER MATCHING OF COST AND
be computed upon the basis of the taxpayer's annual accounting period, (fiscal or REVENUE;
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 II
comply with the generally accepted principle of proper matching of cost and
revenue.10
WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT AGAINST
PETITIONER FOR THE TAXABLE YEAR 1998 IN THE AGGREGATE AMOUNT OF
Lancaster replied11 to the PAN contending, among other things, that for the past ₱6,466,065.50 SHOULD BE CANCEILED AND WITHDRAWN BY RESPONDENT.
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 After trial, the CTA Division granted the petition of Lancaster, disposing as follows;
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 IN VIEW OF THE FOREGOING, the subject Petition for Review is hereby GRANTED.
part of the company's system and consistently applied in its accounting books.12 Accordingly, respondent is ORDERED to CANCEL and WITHDRAW the deficiency
income tax assessment issued against petitioner under Formal l;etter of Demand and
Invoking the same provisions of the law cited in the assessment, i.e., Sections 4313 Audit Result/Assessment Notice No. L TAID II IT-98-00007 dated October 11, 2002,
and 4514 of the National Internal Revenue Code (NJRC), in conjunction with Section in the amount of ₱6,466,065.50, covering the fiscal year from April l, 1998 to March
4515 of Revenue Regulation No. 2, as amended, Lancaster argued that the February 31, 1999.20
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 CIR move21 but failed to obtain reconsideration of the CTA Division ruling.22
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
Aggrieved, the CIR sought recourse23 from the CTA En Banc to seek a reversal of the
posted the subject purchases in the fiscal year ending March 1999 as it was only in
decision and the resolution of the CTA Division.
this year that the gross income from the crop was realized.

However, the CTA En Banc found no reversible error in the CTA Division's ruling,
Subsequently on 6 November 2002, Lancaster received from the BIR a final
thus, it affirmed the cancellation of the assessment against Lancaster. The dispositive
assessment notice (FAN),16 captioned Formal Letter of Demand andAudit
portion of the decision of the CTA En Banc states:
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 taxable year WHEREFORE, premises considered, the present Petition for Review is hereby
ending199931. March 1999. DENIED DUE COURSE, and, accordingly DISMISSED for lack of merit.24

Lancaster duly protested17 the FAN. There being no action taken by the The CTA En Banc likewise denied25 the motion for reconsideration from its Decision.
Commissioner on its protest, Lancaster filed on 21 August 2003 a petition for
review18 before the CTA Division. Hence, this petition.

The Proceedings before the CTA 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 Republic 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 matters arising 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 cognizable 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 taxable 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
possible 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 taxable 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 taxable
year, 1998 to __, 19_. x x x." (emphasis supplied)
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 FY period from 1April1997 to
31March1998. It could not have contemplated a longer period. The examination for
the full taxable 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 taxable period not exceeding one taxable 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 fortaxable year 2003 as valid because this taxable period is
specified in the LOA. However, we declared void the assessments for taxable 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 taxable 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:
 1âwphi1 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
INCOME TAX:
principle of proper matching of cost and revenue. Thus, when
Taxable Income per ITR -0-
Lancaster reported the said purchases in FY 1999, this resulted in overstatement of
Add: Adjustments-Disallowed purchases 11,496, 770.18 expenses warranting their disallowance and, by consequence, resulting in the
deficiency in the payment of its income tax for FY 1999.
Adjusted Taxable Income per Investigation ₱l 1,496,770.18

INCOME TAX DUE-Basic
April 1 -December 31, 1998
(9/12xPl1,496,770.18 x 34%)
January 1-March 31, 1999
(3/12xPl1,496,770.18 x 33%)
Income tax still due per investigation
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
₱2,913,676.4 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
948,483.54 complied with the matching concept that was also relied upon by the BIR in its
assessment.
₱3,880,159.94

Interest (6/15/99 to 10/15/02) .66 2,560,905.56 The issue essentially boils down to the proper timing when Lancaster should
recognize its purchases in computing its taxable income. Such issue directly
Compromise Penalty 25,000 correlates to the fact that Lancaster's 'crop year ' does not exactly coincide with its
fiscal year for tax purposes.
TOTAL DEFICIENCY INCOME TAX ₱6,466,065.50
(emphasis supplied) Noticeably, the records of this case are rife with terms and concepts in accounting. As
a science, accounting 40 pervades many aspects of financial planning, forecasting,
and decision making in business. Its reach, however, has also permeated tax
The taxable year covered by the assessment being outside of the period specified in practice.
the LOA in this case, the assessment issued against Lancaster is, therefore, void.
To put it into perspective, although the foundations of accounting were built principally
This point alone would have sufficed to invalidate the subject deficiency income tax to analyze finances and assist businesses, many of its principles have since been
assessment, thus, obviating any further necessity to resolve the issue on whether adopted for purposes of taxation.41 In our jurisdiction, the concepts in business
Lancaster erroneously claimed the February and March 1998 expenses as accounting, including certain generally accepted accounting principles (GAAP),
deductions against income for FY 1999. embedded in the NIRC comprise the rules on tax accounting.

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 be clear, the principles under financial or business accounting, in theory and
application, are not necessarily interchangeable with those in tax accounting. Thus,
although closely related, tax and business accounting had invariably produced
concepts that at some point diverge in understanding or usage. For instance, two of
such important concepts are taxable 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:

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).
While taxable 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 established 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 obligation to file their income tax returns. At the same time,
such books and records provide vital information and possible 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 taxable 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 taxable 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 taxable 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 taxable
income for the taxable period in which falls the date of his death, amounts accrued up
to the date of his death if not otherwise properly includible 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 taxable year in which 'paid or accrued'
or 'paid or incurred,' dependent upon the method of accounting upon the basis of
which the net income is computed, 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 taxable period in which falls the
date of his death, amounts accrued up to the date of his death if not otherwise
properly allowable 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.1âwphi1
The return should be accompanied by a return certificate of architects or engineers
showing the percentage of completion during the taxable year of the entire work
performed under contract.
There should be deducted from such gross income all expenditures made during the
taxable year on account of the contract, account being taken of the material and
supplies on hand at the beginning and end of the taxable 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 taxable 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 taxable 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 taxable 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
taxable 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 taxable year to report his taxable 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 enable 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 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. Expenses paid or incurred are deductible 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 able to compute their taxable 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 justifiable 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 suitable 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 deductible 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 deductible, 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 taxable 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. 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 Republic 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 disposable assets, and Independent Power
Producer (IPP) contracts with the objective of liquidating all NPC financial obligations
and stranded contract costs in an optimal manner.
PSALM conducted public 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 favorable 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 favorable 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 question[s] 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 disposable assets, IPP contracts with the objective of
liquidating all NPC financial obligations 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 public 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
disposable assets, and IPP contracts, and afterward, to liquidate the outstanding
obligations 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 favorable to
PSALM as the latter's application for refund.
Citing Section 416 of the NIRC of 1997, as amended by Section 3 of Republic Act No.
8424 (RA 8424)17 and Section 718 of Republic 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 [D]ecision dated March 13, 2008, and the Decision dated January 14, 2009 both
issued by the public 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 PUBLIC 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, 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). (Emphasis supplied)
The use of the word "shall" in a statute connotes a mandatory order or an imperative
obligation.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 desirable, than the arbitration procedures provided
in Republic 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 applicable 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.28 Since 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
favorable 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 applicable
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 establishment 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 blow 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 available through administrative channels.42 Furthermore, 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 public 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 possible, 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 favorable 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 favorable 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 Liable. - 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 Republic 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 disposable assets, and IPP contracts with the objective of liquidating all
NPC financial obligations 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 profitable activity as to fall within the ambit
of a VAT-able 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 obligations 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 profitable 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 Republic Act No. 639556 (RA 6395) was expressly repealed by
Section 24 of Republic 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 responsible 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 obligations 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 obligations 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 disposable assets,
and IPP contracts with the objective of liquidating all NPC financial obligations
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
obligations. PSALM is tasked to sell and privatize the NPC assets within the term of
its existence.60 The 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 disposable 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
disposable 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 disposable 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 reasonable 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 public 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 potable water, irrigation, and
all other requirements imbued with public 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 Republic Act No.
6957. as amended by Republic 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
public 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 obligations 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 applicable 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 disposable assets. All outstanding obligations 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 applicable 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
disposable 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 disposable 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
obligations. 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 liable 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.