[G.R. No. 128315. June 29, 1999.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PASCOR REALTY

AND DEVELOPMENT CORPORATION, ROGELIO A. DIO and VIRGINIA S.
DIO, Respondents.

DECISION
PANGANIBAN, J.:
An assessment contains not only a computation of tax liabilities, but also a
demand for payment within a prescribed period. It also signals the time when
penalties and interests begin to accrue against the taxpayer. To enable the
taxpayer to determine his remedies thereon, due process requires that it must be
served on and received by the taxpayer. Accordingly, an affidavit, which was
executed by revenue officers stating the tax liabilities of a taxpayer and attached
to a criminal complaint for tax evasion, cannot be deemed an assessment that
can be questioned before the Court of Tax Appeals.

Statement of the Case

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court praying for the nullification of the October 30, 1996 Decision 1 of the
Court of Appeals 2 in CA-GR SP No. 40853, which effectively affirmed the January
25, 1996 Resolution 3 of the Court of Tax Appeals 4 in CTA Case No. 5271. The
CTA disposed as follows:

"WHEREFORE, finding [the herein petitioner’s] ‘Motion to dismiss’ as

UNMERITORIOUS, the same is hereby DENIED. [The CIR] is hereby given a
period of thirty (30) days from receipt hereof to file her answer."cralaw virtua1aw
library

Petitioner also seeks to nullify the February 13, 1997 Resolution 5 of the Court of
Appeals denying reconsideration.chanrobles virtual lawlibrary
The Facts

As found by the Court of Appeals, the undisputed facts of the case are as
follows:jgc:chanrobles.com.ph

"It appears that by virtue of Letter of Authority No. 001198, then BIR
Commissioner Jose U. Ong authorized Revenue Officers Thomas T. Que, Sonia T.
Estorco and Emmanuel M. Savellano to examine the books of accounts and other
accounting records of Pascor Realty and Development Corporation, (PRDC) for the
years ending 1986, 1987 and 1988. The said examination resulted in a
recommendation for the issuance of an assessment in the amounts of
P7,498,434.65 and P3,015,236.35 for the years 1986 and 1987, respectively.
"On March 1, 1995, the Commissioner of Internal Revenue filed a criminal
1
complaint before the Department of Justice against the PRDC, its President
Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the
total amount of P10,513,671.00. Private respondents PRDC, Et. Al. filed an
Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment
and tax liability.

"On March 23, 1995, private respondents received a subpoena from the DOJ in
connection with the criminal complaint filed by the Commissioner of Internal
Revenue (BIR) against them.

"In a letter dated May 17, 1995, the CIR denied the urgent request for
reconsideration/reinvestigation of the private respondents on the ground that no
formal assessment has as yet been issued by the Commissioner.

"Private respondents then elevated the Decision of the CIR dated May 17, 1995 to
the Court of Tax Appeals on a petition for review docketed as CTA Case No. 5271
on July 21,1995. On September 6, 1995, the CIR filed a Motion to Dismiss the
petition on the ground that the CTA has no jurisdiction over the subject matter of
the petition, as there was no formal assessment issued against the petitioners.
The CTA denied the said motion to dismiss in a Resolution dated January 25,
1996 and ordered the CIR to file an answer within thirty (30) days from receipt of
said resolution. The CIR received the resolution on January 31, 1996 but did not
file an answer nor did she move to reconsider the
resolution.chanroblesvirtual|awlibrary

"Instead, the CIR filed this petition on June 7, 1996, alleging as grounds
that:chanrob1es virtual 1aw library

‘Respondent Court of Tax Appeals acted with grave abuse of discretion and
without jurisdiction in considering the affidavit/report of the revenue officer and
the indorsement of said report to the secretary of justice as assessment which
may be appealed to the Court of Tax Appeals;

Respondent Court of Tax Appeals acted with grave abuse of discretion in

considering the denial by petitioner of private respondents’ Motion for
Reconsideration as [a] final decision which may be appealed to the Court of Tax
Appeals.’

"In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals
stated:chanrob1es virtual 1aw library

‘We agree with petitioners’ contentions, that the criminal complaint for tax
evasion is the assessment issued, and that the letter denial of May 17, 1995 is
the decision properly appealable to [u]s. Respondent’s ground of denial,
therefore, that there was no formal assessment issued, is untenable.

‘It is the Court’s honest belief, that the criminal case for tax evasion is already an

2
assessment. The complaint, more particularly, the Joint Affidavit of Revenue
Examiners Lagmay and Savellano attached thereto, contains the details of the
assessment like the kind and amount of tax due, and the period covered.

‘Petitioners are right, in claiming that the provisions of Republic Act No. 1125,
relating to exclusive appellate jurisdiction of this Court, do not, make any
mention of ‘formal assessment.’ The law merely states, that this Court has
exclusive appellate jurisdiction over decisions of the Commissioner of Internal
Revenue on disputed assessments, and other matters arising under the National
Internal Revenue Code, other law or part administered by the Bureau of Internal
Revenue Code.

‘As far as this Court is concerned, the amount and kind of tax due, and the period
covered, are sufficient details needed for an ‘assessment’ these details are more
than complete, compared to the following definitions of the term as quoted
hereunder. Thus:chanroblesvirtuallawlibrary:red

‘Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386,
387, 163 Tenn. 332. (Words and Phrases, Permanent Edition, Vo. 4, p. 446)

‘The word assessment when used in connection with taxation, may have more
than one meaning. The ultimate purpose of an assessment to such a connection
is to ascertain the amount that each taxpayer is to pay. More commonly, the
word ‘assessment’ means the official valuation of a taxpayer’s property for
purpose of taxation. State v. New York, N.H. and H.R. Co. 22 A. 765, 768, 60
Conn. 326, 325. (Ibid. p. 445)’

‘From the above, it can be gleaned that an assessment simply states how much
tax is due from a taxpayer. Thus, based on these definitions, the details of the
tax as given in the Joint Affidavit of respondent’s examiners, which was attached
to the tax evasion complaint, more than suffice to qualify as an assessment.
Therefore, this assessment having been disputed by petitioners, and there being
a denial of their letter disputing such assessment, this Court unquestionably
acquired jurisdiction over the instant petition for review.’" 6

As earlier observed, the Court of Appeals sustained the CTA and dismissed the
petition.

Hence, this recourse to this Court. 7

Ruling of the Court of Appeals

The Court of Appeals held that the tax court committed no grave abuse of
discretion in ruling that the Criminal Complaint for tax evasion filed by the
Commissioner of Internal Revenue with the Department of Justice constituted an
"assessment" of the tax due, and that the said assessment could be the subject
of a protest. By definition, an assessment is simply the statement of the details

3
and the amount of tax due from a taxpayer. Based on this definition, the details
of the tax contained in the BIR examiners’ Joint Affidavit, 8 which was attached to
the criminal Complaint, constituted an assessment. Since the assailed Order of
the CTA was merely interlocutory and devoid of grave abuse of discretion, a
petition for certiorari did not lie.chanrobles lawlibrary : rednad
Issues

Petitioners submit for the consideration of this Court the following

issues:jgc:chanrobles.com.ph

"(1) Whether or not the criminal complaint for tax evasion can be construed as an
assessment.

(2) Whether or not an assessment is necessary before criminal charges for tax
evasion may be instituted.

(3) Whether or not the CTA can take cognizance of the case in the absence of an
assessment." 9

In the main, the Court will revolve whether the revenue officers’ Affidavit-Report,
which was attached to the criminal Complaint filed with the Department of
Justice, constituted an assessment that could be questioned before the Court of
Tax Appeals.
The Court’s Ruling

The petition is meritorious.

Main Issue: Assessment

Petitioner argues that the filing of the criminal complaint with the Department of
Justice cannot in any way be construed as a formal assessment of private
respondents’ tax liabilities. This position is based on Section 205 of the National
Internal Revenue Code 10 (NIRC), which provides that remedies for the collection
of the deficient taxes may be by either civil or criminal action. Likewise, petitioner
cites Section 223 (a) of the same Code, which states that in case of failure to file
a return, the tax may be assessed or a proceeding in court may be begun without
assessment.

Respondents, on the other hand, maintain that an assessment is not an action or

proceeding for the collection of taxes, but merely a notice that the amount stated
therein is due as tax and that the taxpayer is required to pay the same. Thus,
qualifying as an assessment was the BIR examiners’ Joint Affidavit, which
contained the details of the supposed taxes due from respondent for taxable
years ending 1987 and 1988, and which was attached to the tax evasion
Complaint filed with the DOJ. Consequently, the denial by the BIR of private
respondents’ request for reinvestigation of the disputed assessment is properly
4
appealable to the CTA.chanroblesvirtuallawlibrary:red

We agree with petitioner. Neither the NIRC nor the revenue regulations governing
the protest of assessments 11 provide a specific definition or form of an
assessment. However, the NIRC defines the specific functions and effects of an
assessment. To consider the affidavit attached to the Complaint as a proper
assessment is to subvert the nature of an assessment and to set a bad precedent
that will prejudice innocent taxpayers.

True, as pointed out by the private respondents, an assessment informs the

taxpayer that he or she has tax liabilities. But not all documents coming from the
BIR containing a computation of the tax liability can be deemed assessments.

To start with, an assessment must be sent to and received by a taxpayer, and

must demand payment of the taxes described therein within a specific period.
Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case
the taxpayer fails to pay the deficiency tax within the time prescribed for its
payment in the notice of assessment. Likewise, an interest of 20 percent per
annum, or such higher rate as may be prescribed by rules and regulations, is to
be collected from the date prescribed for its payment until the full payment. 12

The issuance of an assessment is vital in determining the period of limitation

regarding its proper issuance and the period within which to protest it. Section
203 13 of the NIRC provides that internal revenue taxes must be assessed within
three years from the last day within which to file the return. Section 222, 14 on
the other hand, specifies a period of ten years in case a fraudulent return with
intent to evade was submitted or in case of failure to file a return. Also, Section
228 15 of the same law states that said assessment may be protested only within
thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a
specific document constitutes an assessment. Otherwise, confusion would arise
regarding the period within which to make an assessment or to protest the same,
or whether interest and penalty may accrue thereon.

It should also be stressed that the said document is a notice duly sent to the
taxpayer. Indeed, an assessment is deemed made only when the collector of
internal revenue releases, mails or sends such notice to the taxpayer. 16

In the present case, the revenue officers’ Affidavit merely contained a

computation of respondents’ tax liability. It did not state a demand or a period for
payment. Worse, it was addressed to the justice secretary, not to the taxpayers.

Respondents maintain that an assessment, in relation to taxation, is simply

understood to mean:jgc:chanrobles.com.ph

"A notice to the effect that the amount therein stated is due as tax and a demand
for payment thereof." 17

5
"Fixes the liability of the taxpayer and ascertains the facts and furnishes the data
for the proper presentation of tax rolls." 18

Even these definitions fail to advance private respondents’ case. That the BIR
examiners’ Joint Affidavit attached to the Criminal Complaint contained some
details of the tax liabilities of private respondents does not ipso facto make it an
assessment. The purpose of the Joint Affidavit was merely to support and
substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to
be a notice of the tax due and a demand to the private respondents for payment
thereof.chanroblesvirtuallawlibrary

The fact that the Complaint itself was specifically directed and sent to the
Department of Justice and not to private respondents shows that the intent of the
commissioner was to file a criminal complaint for tax evasion, not to issue an
assessment. Although the revenue officers recommended the issuance of an
assessment, the commissioner opted instead to file a criminal case for tax
evasion. What private respondents received was a notice from the DOJ that a
criminal case for tax evasion had been filed against them, not a notice that the
Bureau of Internal Revenue had made an assessment.

In addition, what private respondents sent to the commissioner was a motion for
a reconsideration of the tax evasion charges filed, not of an assessment, as
shown thus:jgc:chanrobles.com.ph

"This is to request for reconsideration of the tax evasion charges against my

client PASCOR Realty and Development Corporation and for the same to be
referred to the Appellate Division in order to give my client the opportunity of a
fair and objective hearing." 19

Additional Issues: Assessment Not Necessary

Before Filing of Criminal Complaint

Private respondents maintain that the filing of a criminal complaint must be

preceded by an assessment. This is incorrect, because Section 222 of the NIRC
specifically states that in cases where a false or fraudulent return is submitted or
in cases of failure to file a return such as this case, proceedings in court may be
commenced without an assessment. Furthermore, Section 205 of the same Code
clearly mandates that the civil and criminal aspects of the case may be pursued
simultaneously. In Ungab v. Cusi, 20 petitioner therein sought the dismissal of
the criminal Complaints for being premature, since his protest to the CTA had not
yet been resolved. The Court held that such protests could not stop or suspend
the criminal action which was independent of the resolution of the protest in the
CTA. This was because the commissioner of internal revenue had, in such tax
evasion cases, discretion on whether to issue an assessment or to file a criminal
case against the taxpayer or to do both.

6
Private respondents insist that Section 222 should be read in relation to Section
255 of the NIRC, 21 which penalizes failure to file a return. They add that a tax
assessment should precede a criminal indictment. We disagree. To reiterate, said
Section 222 states that an assessment is not necessary before a criminal charge
can be filed. This is the general rule. Private respondents failed to show that they
are entitled to an exception. Moreover, the criminal charge need only be
supported by a prima facie showing of failure to file a required return. This fact
need not be proven by an assessment.chanrobles law library : red

The issuance of an assessment must be distinguished from the filing of a

complaint. Before an assessment is issued, there is, by practice, a pre-
assessment notice sent to the taxpayer. The taxpayer is then given a chance to
submit position papers and documents to prove that the assessment is
unwarranted. If the commissioner is unsatisfied, an assessment signed by him or
her is then sent to the taxpayer informing the latter specifically and clearly that
an assessment has been made against him or her. In contrast, the criminal
charge need not go through all these. The criminal charge is filed directly with the
DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed
against him, not that the commissioner has issued an assessment. It must be
stressed that a criminal complaint is instituted not to demand payment, but to
penalize the taxpayer for violation of the Tax Code.

WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED

and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No costs.

SO ORDERED.

[G.R. NO. 167560 : September 17, 2008]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DOMINADOR
MENGUITO, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court, assailing the March 31, 2005 Decision1 of the Court of Appeals (CA)
which reversed and set aside the Court of Tax Appeals (CTA) April 2, 2002
Decision2 and October 10, 2002 Resolution3 ordering Dominador Menguito
(respondent) to pay the Commissioner of Internal Revenue (petitioner) deficiency
income and percentage taxes and delinquency interest.

Based on the Joint Stipulation of Facts and Admissions4 of the parties, the CTA
summarized the factual and procedural antecedents of the case, the relevant
portions of which read:
Petitioner Dominador Menguito [herein respondent] is a Filipino citizen, of legal
age, married to Jeanne Menguito and is engaged in the restaurant and/or
7
cafeteria business. For the years 1991, 1992 and 1993, its principal place of
business was at Gloriamaris, CCP Complex, Pasay City and later transferred to
Kalayaan Bar (Copper Kettle Cafeteria Specialist or CKCS), Departure Area, Ninoy
Aquino International Airport, Pasay City. During the same years, he also operated
a branch at Club John Hay, Baguio City carrying the business name of Copper
Kettle Cafeteria Specialist (Joint Stipulation of Facts and Admissions, p. 133, CTA
records).

xxxx

Subsequently, BIR Baguio received information that Petitioner [herein

respondent] has undeclared income from Texas Instruments and Club
John Hay, prompting the BIR to conduct another investigation. Through a
letter dated July 28, 1997, Spouses Dominador Menguito and Jeanne
Menguito (Spouses Menguito) were informed by the Assessment Division
of the said office that they have underdeclared sales totaling
P48,721,555.96 (Exhibit 11, p. 83, BIR records). This was followed by a
Preliminary Ten (10) Day Letter dated August 11, 1997, informing
Petitioner [herein respondent] that in the investigation of his 1991, 1992
and 1993 income, business and withholding tax case, it was found out
that there is still due from him the total sum of P34,193,041.55 as
deficiency income and percentage tax.

On September 2, 1997, the assessment notices subject of the instant

petition were issued. These were protested by Ms. Jeanne Menguito,
through a letter dated September 28, 1997 (Exhibit 14, p. 112, BIR
Records), on the ground that the 40% deduction allowed on their
computed gross revenue, is unrealistic. Ms. Jeanne Menguito requested
for a period of thirty (30) days within which to coordinate with the BIR
regarding the contested assessment.

On October 10, 1997, BIR Baguio replied, informing the Spouses Menguito that
the source of assessment was not through the disallowance of claimed expenses
but on data received from Club John Hay and Texas Instruments Phils., Inc. Said
letter gave the spouses ten (10) days to present evidence (Exhibit 15, p. 110,
BIR Records).

In an effort to clear an alleged confusion regarding Copper Kettle

Cafeteria Specialist (CKCS) being a sole proprietorship owned by the
Spouses, and Copper Kettle Catering Services, Inc. (CKCS, Inc.) being a
corporation with whom Texas Instruments and Club John Hay entered
into a contract, Petitioner [respondent] submitted to BIR Baguio a
photocopy of the SEC Registration of Copper Kettle Catering Services,
Inc. on March 23, 1999 (pp. 134-141, BIR Records).

On April 12, 1999, BIR Baguio wrote a letter to Spouses Menguito, informing the
latter that a reinvestigation or reconsideration cannot be given due course by the

8
mere submission of an uncertified photocopy of the Certificate of Incorporation.
Thus, it avers that the amendment issued is still valid and enforceable.

On May 26, 1999, Petitioner [respondent] filed the present case, praying for the
cancellation and withdrawal of the deficiency income tax and percentage tax
assessments on account of prescription, whimsical factual findings, violation of
procedural due process on the issuance of assessment notices, erroneous address
of notices and multiple credit/ investigation by the Respondent [petitioner] of
Petitioner's [respondent's] books of accounts and other related records for the
same tax year.

Instead of filing an Answer, Respondent [herein petitioner] moved to dismiss the

instant petition on July 1, 1999, on the ground of lack of jurisdiction. According to
Respondent [petitioner], the assessment had long become final and executory
when Petitioner [respondent] failed to comply with the letter dated October 10,
1997.

Petitioner opposed said motion on July 21, 1999, claiming that the final decision
on Petitioner's [respondent's] protest is the April 12, 1999 letter of the Baguio
Regional Office; therefore, the filing of the action within thirty (30) days from
receipt of the said letter was seasonably filed. Moreover, Petitioner [respondent]
asserted that granting that the April 12, 1999 letter in question could not be
construed to mean as a denial or final decision of the protest, still Petitioner's
[respondent's] appeal was timely filed since Respondent [petitioner] issued a
Warrant of Distraint and/or Levy against the Petitioner [respondent] on May 3,
1999, which warrant constituted a final decision of the Respondent [petitioner] on
the protest of the taxpayer.
On September 3, 1999, this Court denied Respondent's [petitioner's] 'Motion to
Dismiss' for lack of merit.

Respondent [petitioner] filed his Answer on September 24, 1999, raising the
following Special and Affirmative Defenses:

xxxx
5. Investigation disclosed that for taxable years 1991, 1992 and 1993,
petitioner [respondent] filed false or fraudulent income and percentage tax
returns with intent to evade tax by under declaring his sales.
6. The alleged duplication of investigation of petitioner [respondent] by the BIR
Regional Office in Baguio City and by the Revenue District Office in Pasay
City is justified by the finding of fraud on the part of the petitioner
[respondent], which is an exception to the provision in the Tax Code that
the examination and inspection of books and records shall be made only
once in a taxable year (Section 235, Tax Code). At any rate, petitioner
[respondent], in a letter dated July 18, 1994, waived his right to the
consolidation of said investigation.

9
 7. The aforementioned falsity or fraud was discovered on August 5,
1997. The assessments were issued on September 2, 1997, or
within ten (10) years from the discovery of such falsity or fraud
(Section 223, Tax Code). Hence, the assessments have not
prescribed.
8. Petitioner's [respondent's] allegation that the assessments were
not properly addressed is rendered moot and academic by his
acknowledgment in his protest letter dated September 28, 1997 that
he received the assessments.
9. Respondent [petitioner] complied with the provisions of Revenue
Regulations No. 12-85 by informing petitioner [respondent] of the
findings of the investigation in letters dated July 28, 1997 and
August 11, 1997 prior to the issuance of the assessments.
10. Petitioner [respondent] did not allege in his administrative
protest that there was a duplication of investigation, that the
assessments have prescribed, that they were not properly
addressed, or that the provisions of Revenue Regulations No. 12-85
were not observed. Not having raised them in the administrative
level, petitioner [respondent] cannot raise the same for the first
time on appeal (Aguinaldo Industries Corp. vs. Commissioner of
Internal Revenue, 112 SCRA 136).
11. The assessments were issued in accordance with law and regulations.
12. All presumptions are in favor of the correctness of tax assessments
(CIR vs. Construction Resources of Asia, Inc., 145 SCRA 67), and the
burden to prove otherwise is upon petitioner [respondent].5 (Emphasis
supplied)
On April 2, 2002, the CTA rendered a Decision, the dispositive portion of which
reads:
Accordingly, Petitioner [herein respondent] is ORDERED to PAY the Respondent
[herein petitioner] the amount of P11,333,233.94 and P2,573,655.82 as
deficiency income and percentage tax liabilities, respectively for taxable years
1991, 1992 and 1993 plus 20% delinquency interest from October 2, 1997 until
full payment thereof.

SO ORDERED.6
Respondent filed a motion for reconsideration but the CTA denied the same in its
Resolution of October 10, 2002.7

Through a Petition for Review8 filed with the CA, respondent questioned the CTA
Decision and Resolution mainly on the ground that Copper Kettle Catering
Services, Inc. (CKCS, Inc.) was a separate and distinct entity from Copper Kettle
Cafeteria Specialist (CKCS); the sales and revenues of CKCS, Inc. could not be
ascribed to CKCS; neither may the taxes due from one, charged to the other; nor
the notices to be served on the former, coursed through the latter.9 Respondent
10
cited the Joint Stipulation in which petitioner acknowledged that its
(respondent's) business was called Copper Kettle Cafeteria Specialist, not Copper
Kettle Catering Services, Inc.10

Based on the unrefuted11 CTA summary, the CA rendered the Decision assailed
herein, the dispositive portion of which reads:
WHEREFORE, the instant petition is GRANTED. Reversing the assailed Decision
dated April 2, 2002 and Resolution dated October 10, 2002, the deficiency income
tax and percentage income tax assessments against petitioner in the amounts of
P11,333,233.94 and P2,573,655.82 for taxable years 1991, 1992 and 1993 plus
the 20% delinquency interest thereon are annulled.

SO ORDERED.12
Petitioner filed a motion for reconsideration but the CA denied the same in its
October 10, 2002 Resolution.13

Hence, herein recourse to the Court for the reversal of the CA decision and
resolution on the following grounds:
I

The Court of Appeals erred in reversing the decision of the Court of Tax Appeals
and in holding that Copper Kettle Cafeteria Specialist owned by respondent and
Copper Kettle Catering Services, Inc. owned and managed by respondent's wife
are not one and the same.
II

The Court of Appeals erred in holding that respondent was denied due process for
failure of petitioner to validly serve respondent with the post-reporting and pre-
assessment notices as required by law.
On the first issue, the CTA has ruled that CKCS, Inc. and CKCS are one and the
same corporation because "[t]he contract between Texas Instruments and Copper
Kettle was signed by petitioner's [respondent's] wife, Jeanne Menguito as
proprietress"14

However, the CA reversed the CTA on these grounds:

Respondent's [herein petitioner's] allegation that Copper Kettle Catering Services,
Inc. and Copper Kettle Cafeteria Specialists are not distinct entities and that the
under-declared sales/revenues of Copper Kettle Catering Services, Inc. pertain to
Copper Kettle Cafeteria Specialist are belied by the evidence on record. In the
Joint Stipulation of Facts submitted before the tax court, respondent [petitioner]
admitted "that petitioner's [herein respondent's] business name is Copper Kettle
Cafeteria Specialist."

Also, the Certification of Club John Hay and Letter dated July 9, 1997 of Texas
11
Instruments both addressed to respondent indicate that these companies
transacted with Copper Kettle Catering Services, Inc., owned and managed by
JEANNE G. MENGUITO, NOT petitioner Dominador Menguito. The alleged under-
declared sales income subject of the present assessments were shown to have
been earned by Copper Kettle Catering Services, Inc. in its commercial
transaction with Texas Instruments and Camp John Hay; NOT by petitioner's
dealing with these companies. In fact, there is nothing on record which shows
that Texas Instruments and Camp John Hay conducted business relations with
Copper Kettle Cafeteria Specialist, owned by herein petitioner Dominador
Menguito. In the absence, therefore, of clear and convincing evidence showing
that Copper Kettle Cafeteria Specialist and Copper Kettle Catering Services, Inc.
are one and the same, respondent can NOT validly impute alleged underdeclared
sales income earned by Copper Kettle Catering Services, Inc. as sales income of
Copper Kettle Cafeteria Specialist.15 (Emphasis supplied)
Respondent is adamant that the CA is correct. Many times in the past, the BIR
had treated CKCS separately from CKCS, Inc.: from May 1994 to June 1995, the
BIR sent audit teams to examine the books of account and other accounting
records of CKCS, and based on said audits, respondent was held liable for
deficiency taxes, all of which he had paid.16 Moreover, the certifications17 issued
by Club John Hay and Texas Instruments identify the concessionaire operating
therein as CKCS, Inc., owned and managed by his spouse Jeanne Menguito, and
not CKCS.18

Petitioner impugns the findings of the CA, claiming that these are contradicted by
evidence on record consisting of a reply to the September 2, 1997 assessment
notice of BIR Baguio which Jeanne Menguito wrote on September 28, 1997, to
wit:
We are in receipt of the assessment notice you have sent us, dated September 2,
1997. Having taken hold of the same only now following our travel overseas,
we were not able to respond immediately and manifest our protest. Also,
with the impending termination of our businesses at 19th Tee, Club John Hay
and at Texas Instruments, Loakan, Baguio City, we have already started the
transfer of our records and books in Baguio City to Manila that we will need more
time to review and sort the records that may have to be presented relative to the
assessment x x x.19 (Emphasis supplied)
Petitioner insists that said reply confirms that the assessment notice is directed
against the businesses which she and her husband, respondent herein, own and
operate at Club John Hay and Texas Instruments, and establishes that she is
protesting said notice not just for herself but also for respondent.20

Moreover, petitioner argues that if it were true that CKCS, Inc. and CKCS are
separate and distinct entities, respondent could have easily produced the articles
of incorporation of CKCS, Inc.; instead, what respondent presented was merely a
photocopy of the incorporation articles.21 Worse, petitioner adds, said document
was not offered in evidence before the CTA, but was presented only before the
CA.22
12
Petitioner further insists that CKCS, Inc. and CKCS are merely employing the
fiction of their separate corporate existence to evade payment of proper taxes;
that the CTA saw through their ploy and rightly disregarded their corporate
individuality, treating them instead as one taxable entity with the same tax base
and liability;23 and that the CA should have sustained the CTA.24

In effect, petitioner would have the Court resolve a purely factual issue25 of
whether or not there is substantial evidence that CKCS, Inc. and CKCS are one
and the same taxable entity.

As a general rule, the Court does not venture into a trial of facts in proceedings
under Rule 45 of the Rules of Courts, for its only function is to review errors of
law.26 The Court declines to inquire into errors in the factual assessment of the
CA, for the latter's findings are conclusive, especially when these are synonymous
to those of the CTA.27 But when the CA contradicts the factual findings of the
CTA, the Court deems it necessary to determine whether the CA was justified in
doing so, for one basic rule in taxation is that the factual findings of the CTA,
when supported by substantial evidence, will not be disturbed on appeal unless it
is shown that the CTA committed gross error in its appreciation of facts. 28

The Court finds that the CA gravely erred when it ignored the substantial
evidence on record and reversed the CTA.

In a number of cases, the Court has shredded the veil of corporate identity and
ruled that where a corporation is merely an adjunct, business conduit or alter ego
of another corporation or when they practice fraud on our internal revenue laws,29
the fiction of their separate and distinct corporate identities shall be disregarded,
and both entities treated as one taxable person, subject to assessment for the
same taxable transaction.

The Court considers the presence of the following circumstances, to wit: when the
owner of one directs and controls the operations of the other, and the payments
effected or received by one are for the accounts due from or payable to the
other;30 or when the properties or products of one are all sold to the other, which
in turn immediately sells them to the public,31 as substantial evidence in support
of the finding that the two are actually one juridical taxable personality.

In the present case, overwhelming evidence supports the CTA in disregarding the
separate identity of CKCS, Inc. from CKCS and in treating them as one taxable
entity.

First, in respondent's Petition for Review before the CTA, he expressly admitted
that he "is engaged in restaurant and/or cafeteria business" and that "[i]n 1991,
1992 and 1993, he also operated a branch at Club John Hay, Baguio
Citywith a business name of Copper Kettle Cafeteria Specialist"32
Respondent repeated such admission in the Joint Stipulation.33 And then in

13
Exhibit "1">34 for petitioner, a July 18, 1994 letter sent by Jeanne Menguito to
BIR, Baguio City, she stated thus:
"in connection with the investigation of Copper Kettle Cafeteria Specialist
which is located at 19th Tee Club John Hay, Baguio City under letter of authority
nos. 0392897, 0392898, and 0392690 dated May 16, 1994, investigating my
income, business, and withholding taxes for the years 1991, 1992, and 1993"35
(Emphasis supplied)
Jeanne Menguito signed the letter as proprietor of Copper Kettle Cafeteria
Specialist.36

Related to Exhibit "1" is petitioner's Exhibit "14," which is another letter dated
September 28, 1997, in which Jeanne Menguito protested the September 2, 1997
assessment notices directed at Copper Kettle Cafeteria Specialist and referred to
the latter as "our business at 19th Tee Club John Hay and at Texas Instruments"37
Taken along with the Joint Stipulation, Exhibits "A" through "C" and the August 3,
1993 Certification of Camp John Hay, Exhibits "1" and "14," confirm that
respondent, together with his spouse Jeanne Menguito, own, operate and manage
a branch of Copper Kettle Cafeteria Specialist, also called Copper Kettle Catering
Services at Camp John Hay.

Moreover, in Exhibits "A" to "A-1"38 Exhibits "B" to "B-1">39and Exhibits "C" to "C-
1">40 which are lists of concessionaires that operated in Club John Hay in 1992,
1993 and 1991, respectively,41 it appears that there is no outlet with the name
"Copper Kettle Cafeteria Specialist" as claimed by respondent. The name that
appears in the lists is "19th TEE CAFETERIA (Copper Kettle, Inc.)." However, in
the light of the express admission of respondent that in 1991, 1992 and 1993, he
operated a branch called Copper Kettle Cafeteria Specialist in Club John Hay, the
entries in Exhibits "A" through "C" could only mean that said branch refers to
"19th Tee Cafeteria (Copper Kettle, Inc.)." There is no evidence presented by
respondent that contradicts this conclusion.

In addition, the August 9, 1993 Certification issued by Club John Hay that
"COPPER KETTLE CATERING SERVICES owned and managed by MS. JEANNE G.
MENGUITO is a concessionaire in John Hay since July 1991 up to the present and
is operating the outlet 19TH TEE CAFETERIA AND THE TEE BAR">42 convincingly
establishes that respondent's branch which he refers to as Copper Kettle Cafeteria
Specialist at Club John Hay also appears in the latter's records as "Copper Kettle
Catering Services" with an outlet called "19th Tee Cafeteria and The Tee Bar."

Second, in Exhibit "8">43 and Exhibit "E"44 Texas Instruments identified the
concessionaire operating its canteen as "Copper Kettle Catering Services, Inc" 45
and/or "COPPER KETTLE CAFETERIA SPECIALIST SVCS"46 It being settled that
respondent's "Copper Kettle Cafeteria Specialist" is also known as "Copper Kettle
Catering Services," and that respondent and Jeanne Menguito both own, manage
and act as proprietors of the business, Exhibit "8" and Exhibit "E" further
establish that, through said business, respondent also had taxable transactions

14
with Texas Instruments.

In view of the foregoing facts and circumstances, the Articles of Incorporation of

CKCS, Inc. -- a certified true copy of which respondent attached only to his Reply
filed with the CA47 -- cannot insulate it from scrutiny of its real identity in relation
to CKCS. It is noted that said Articles of Incorporation of CKCS, Inc. was issued in
1989, but documentary evidence indicate that after said date, CKCS, Inc. has
also assumed the name CKCS, and vice-versa. The most concrete indication of
this practice is the 1991 Quarterly Percentage Tax Returns covering the business
name/trade "19th Tee Camp John Hay." In said returns, the taxpayer is identified
as "Copper Kettle Cafeteria Specialist">48or CKCS, not CKCS, Inc. Yet, in several
documents already cited, the purported owner of 19th Tee Bar at Club John Hay is
CKCS, Inc.

All these pieces of evidence buttress the finding of the CTA that in 1991, 1992
and 1993, respondent, together with his spouse Jeanne Menguito, owned and
operated outlets in Club John Hay and Texas Instruments under the names
Copper Kettle Cafeteria Specialist or CKCS and Copper Kettle Catering Services or
Copper Kettle Catering Services, Inc..

Turning now to the second issue.

In respondent's Petition for Review with the CTA, he questioned the validity of the
Assessment Notices,49 all dated September 2, 1997, issued by BIR, Baguio City
against him on the following grounds:
1. The assessment notices, based on income and percentage tax returns filed
for 1991, 1992 and 1993, were issued beyond the three-year prescriptive
period under Section 203 of the Tax Code;50
2. The assessment notices were addressed to Copper Kettle Specialist, Club
John Hay, Baguio City, despite notice to petitioner that respondent's
principal place of business was at the CCP Complex, Pasay City.51
3. The assessment notices were issued in violation of the requirement of
Revenue Regulations No. 12-85, dated November 27, 1985, that the
taxpayer be issued a post-reporting notice and pre-assessment notice
before the preliminary findings of deficiency may ripen into a formal
assessment;52 and
4. The assessment notices did not give respondent a 15-day period to reply to
the findings of deficiency.53
The Court notes that nowhere in his Petition for Review did respondent deny that
he received the September 2, 1997 assessment notices. Instead, during the trial,
respondent's witness, Ma. Theresa Nalda (Nalda), testified that she informed the
BIR, Baguio City "that there was no Notice or letter, that we did not receive,
perhaps, because they were not addressed to Mr. Menguito's head office" 54

The CTA correctly upheld the validity of the assessment notices. Citing Section
15
223 of the Tax Code which provides that the prescriptive period for the issuance
of assessment notices based on fraud is 10 years, the CTA ruled that the
assessment notices issued against respondent on September 2, 1997 were timely
because petitioner discovered the falsity in respondent's tax returns for 1991,
1992 and 1993 only on February 19, 1997.55 Moreover, in accordance with
Section 2 of Revenue Regulation No. 12-85, which requires that assessment
notices be sent to the address indicated in the taxpayer's return, unless the latter
gives a notice of change of address, the assessment notices in the present case
were sent by petitioner to Camp John Hay, for this was the address respondent
indicated in his tax returns.56 As to whether said assessment notices were
actually received, the CTA correctly held that since respondent did not testify that
he did not receive said notices, it can be presumed that the same were actually
sent to and received by the latter. The Court agrees with the CTA in considering
as hearsay the testimony of Nalda that respondent did not receive the notices,
because Nalda was not competent to testify on the matter, as she was employed
by respondent only in June 1998, whereas the assessment notices were sent on
September 2, 1997.57

Anent compliance with the requirements of Revenue Regulation No. 12-85, the
CTA held:
BIR records show that on July 28, 1997, a letter was issued by BIR Baguio to
Spouses Menguito, informing the latter of their supposed underdeclaration of
sales totaling P48,721,555.96 and giving them 5 days to communicate any
objection to the results of the investigation (Exhibit 11, p. 83, BIR Records).
Records likewise reveal the issuance of a Preliminary Ten (10) Day Letter on
August 11, 1997, informing Petitioner [respondent herein] that the sum of
P34,193,041.55 is due from him as deficiency income and percentage tax (Exhibit
13, p. 173, BIR Records). Said letter gave the Petitioner [respondent herein] a
period of ten (10) days to submit his objection to the proposed assessment,
either personally or in writing, together with any evidence he may want to
present.

xxxx

As to Petitioner's allegation that he was given only ten (10) days to reply to the
findings of deficiency instead of fifteen (15) days granted to a taxpayer under
Revenue Regulations No. 12-85, this Court believes that when Respondent
[petitioner herein] gave the Petitioner [respondent herein] on October 10, 1997
an additional period of ten (10) days to present documentary evidence or a total
of twenty (20) days, there was compliance with Revenue Regulations No. 12-85
and the latter was amply given opportunity to present his side x x x.58
The CTA further held that respondent was estopped from raising procedural
issues against the assessment notices, because these were not cited in the
September 28, 1997 letter-protest which his spouse Jeanne Menguito filed with
petitioner.59
On appeal by respondent,60 the CA resolved the issue, thus:

16
Moreover, if the taxpayer denies ever having received an assessment
from the BIR, it is incumbent upon the latter to prove by competent
evidence that such notice was indeed received by the addressee. Here,
respondent [petitioner herein] merely alleged that it "forwarded" the assessment
notices to petitioner [respondent herein]. The respondent did not show any proof
of mailing, registry receipt or acknowledgment receipt signed by the petitioner
[respondent herein]. Since respondent [petitioner herein] has not adduced
sufficient evidence that petitioner [respondent herein] had in fact
received the pre-assessment notice and post-reporting notice required by
law, it cannot be assumed that petitioner [respondent herein] had been
served said notices.61
No other ground was cited by the CA for the reversal of the finding of the CTA on
the issue.

The CA is gravely mistaken.

In their Petition for Review with the CTA, respondent expressly stated that
"[s]ometime in September 1997, petitioner [respondent herein] received various
assessment notices, all dated 02 September 1997, issued by BIR-Baguio for
alleged deficiency income and percentage taxes for taxable years ending 31
December 1991, 1992 and 1993 x x x"62 In their September 28, 1997 protest to
the September 2, 1997 assessment notices, respondent, through his spouses
Jeanne Menguito, acknowledged that "[they] are in receipt of the assessment
notice you have sent us, dated September 2, 1997 x x x"63

Respondent is therefore estopped from denying actual receipt of the September

2, 1997 assessment notices, notwithstanding the denial of his witness Nalda.

As to the address indicated on the assessment notices, respondent cannot

question the same for it is the said address which appears in its percentage tax
returns.64 While respondent claims that he had earlier notified petitioner of a
change in his business address, no evidence of such written notice was
presented. Under Section 11 of Revenue Regulation No. 12-85, respondent's
failure to give written notice of change of address bound him to whatever
communications were sent to the address appearing in the tax returns for the
period involved in the investigation.65

Thus, what remain in question now are: whether petitioner issued and mailed a
post-reporting notice and a pre-assessment notice; and whether respondent
actually received them.

There is no doubt that petitioner failed to prove that it served on respondent a

post-reporting notice and a pre-assessment notice. Exhibit "11">66 of petitioner is
a mere photocopy of a July 28, 1997 letter it sent to respondent, informing him of
the initial outcome of the investigation into his sales, and the release of a
preliminary assessment upon completion of the investigation, with notice for the
latter to file any objection within five days from receipt of the letter. "Exhibit
17
"13">67 of petitioner is also a mere photocopy of an August 11, 1997 Preliminary
Ten (10) Day Letter to respondent, informing him that he had been found to be
liable for deficiency income and percentage tax and inviting him to submit a
written objection to the proposed assessment within 10 days from receipt of
notice. But nowhere on the face of said documents can be found evidence that
these were sent to and received by respondent. Nor is there separate evidence,
such as a registry receipt of the notices or a certification from the Bureau of
Posts, that petitioner actually mailed said notices.

However, while the lack of a post-reporting notice and pre-assessment notice is a

deviation from the requirements under Section 168and Section 269 of Revenue
Regulation No. 12-85, the same cannot detract from the fact that formal
assessments were issued to and actually received by respondents in accordance
with Section 228 of the National Internal Revenue Code which was in effect at the
time of assessment.

It should be emphasized that the stringent requirement that an assessment

notice be satisfactorily proven to have been issued and released or, if receipt
thereof is denied, that said assessment notice have been served on the
taxpayer,70 applies only to formal assessments prescribed under Section 228 of
the National Internal Revenue Code, but not to post-reporting notices or pre-
assessment notices. The issuance of a valid formal assessment is a substantive
prerequisite to tax collection,71 for it contains not only a computation of tax
liabilities but also a demand for payment within a prescribed period, thereby
signaling the time when penalties and interests begin to accrue against the
taxpayer and enabling the latter to determine his remedies therefor. Due process
requires that it must be served on and received by the taxpayer.72

A post-reporting notice and pre-assessment notice do not bear the gravity of a

formal assessment notice. The post-reporting notice and pre-assessment notice
merely hint at the initial findings of the BIR against a taxpayer and invites the
latter to an "informal" conference or clarificatory meeting. Neither notice contains
a declaration of the tax liability of the taxpayer or a demand for payment thereof.
Hence, the lack of such notices inflicts no prejudice on the taxpayer for as long as
the latter is properly served a formal assessment notice. In the case of
respondent, a formal assessment notice was received by him as acknowledged in
his Petition for Review and Joint Stipulation; and, on the basis thereof, he filed a
protest with the BIR, Baguio City and eventually a petition with the CTA.

WHEREFORE, the petition is GRANTED. The March 31, 2005 Decision of the
Court of Appeals is REVERSED and SET ASIDE and the April 2, 2002 Decision
and October 10, 2002 Resolution of the Court of Tax Appeals are REINSTATED.

SO ORDERED.

18
[G.R. No. 185371 : December 08, 2010]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. METRO STAR

SUPERAMA, INC., RESPONDENT.

DECISION
MENDOZA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court filed by
the petitioner Commissioner of Internal Revenue (CIR) seeks to reverse and set
aside the 1] September 16, 2008 Decision[1] of the Court of Tax Appeals En Banc
(CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008 Resolution[2]
denying petitioner's motion for reconsideration.

The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second
Division) in CTA Case No. 7169 reversing the February 8, 2005 Decision of the
CIR which assessed respondent Metro Star Superama, Inc. (Metro Star) of
deficiency value-added tax and withholding tax for the taxable year 1999.

Based on a Joint Stipulation of Facts and Issues[3] of the parties, the CTA Second
Division summarized the factual and procedural antecedents of the case, the
pertinent portions of which read:
Petitioner is a domestic corporation duly organized and existing by virtue of the
laws of the Republic of the Philippines, x x x.

On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi
City, issued Letter of Authority No. 00006561 for Revenue Officer Daisy G.
Justiniana to examine petitioner's books of accounts and other accounting records
for income tax and other internal revenue taxes for the taxable year 1999. Said
Letter of Authority was revalidated on August 10, 2001 by Regional Director
Leonardo Sacamos.

For petitioner's failure to comply with several requests for the presentation of
records and Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an
Indorsement dated September 26, 2001 informing Revenue District Officer of
Revenue Region No. 67, Legazpi City to proceed with the investigation based on
the best evidence obtainable preparatory to the issuance of assessment notice.

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

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

On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3,

19
2002 from Revenue District No. 67, Legazpi City, assessing petitioner the amount
of Two Hundred Ninety Two Thousand Eight Hundred Seventy Four Pesos and
Sixteen Centavos (P292,874.16.) for deficiency value-added and withholding
taxes for the taxable year 1999, computed as follows:
ASSESSMENT NOTICE NO. 067-99-003-579-072

VALUE ADDED TAX

Gross Sales P1,697,718.90
Output Tax P 154,338.08
Less: Input Tax
VAT Payable P 154,338.08
Add: 25% Surcharge P
38,584.54
20% Interest 79,746.49
Compromise Penalty
Late Payment P16,000.00
Failure to File VAT 2,400.00 18,400.00136,731.01
returns
TOTAL P 291,069.09
WITHHOLDING TAX
Compensation 2,772.91
Expanded div
align="RIGHT">110,103.92
Total Tax Due P 112,876.83
Less: Tax Withheld 111,848.27
Deficiency P 1,028.56
Withholding Tax
Add: 20% Interest
p.a.
Compromise Penalty 576.51
TOTAL 200.00 P 1,805.07
*Expanded P1,949,334.25x 5% 97,466.71
Withholding Tax
Film Rental 10,000.25 x 10% 1,000.00
Audit Fee 193,261.20 x 5% 9,663.00

20
 Rental Expense 41,272.73 x 1% 412.73
Security Service 156,142.01 x 1% ____1,561.42
Service Contractor P 110,103.92
Total
SUMMARIES OF
DEFICIENCIES
VALUE ADDED TAX P 291,069.09
WITHHOLDING TAX 1,805.07
TOTAL P 292,874.16
Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of
Seizure dated May 12, 2003, which petitioner received on May 15, 2003, giving
the latter last opportunity to settle its deficiency tax liabilities within ten (10)
[days] from receipt thereof, otherwise respondent BIR shall be constrained to
serve and execute the Warrants of Distraint and/or Levy and Garnishment to
enforce collection.

On February 6, 2004, petitioner received from Revenue District Office No. 67 a

Warrant of Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding
payment of deficiency value-added tax and withholding tax payment in the
amount of P292,874.16.

On July 30, 2004, petitioner filed with the Office of respondent Commissioner a
Motion for Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No.
12-99.

On February 8, 2005, respondent Commissioner, through its authorized

representative, Revenue Regional Director of Revenue Region 10, Legaspi City,
issued a Decision denying petitioner's Motion for Reconsideration. Petitioner,
through counsel received said Decision on February 18, 2005.

x x x.

Denying that it received a Preliminary Assessment Notice (PAN) and claiming

that it was not accorded due process, Metro Star filed a petition for review[4] with
the CTA. The parties then stipulated on the following issues to be decided by the
tax court:
1. Whether the respondent complied with the due process requirement as
provided under the National Internal Revenue Code and Revenue Regulations No.
12-99 with regard to the issuance of a deficiency tax assessment;
1.1 Whether petitioner is liable for the respective amounts of P291,069.09 and
P1,805.07 as deficiency VAT and withholding tax for the year 1999;

21
1.2. Whether the assessment has become final and executory and demandable
for failure of petitioner to protest the same within 30 days from its receipt thereof
on April 11, 2002, pursuant to Section 228 of the National Internal Revenue
Code;

2. Whether the deficiency assessments issued by the respondent are void for
failure to state the law and/or facts upon which they are based.
2.2 Whether petitioner was informed of the law and facts on which the
assessment is made in compliance with Section 228 of the National Internal
Revenue Code;

3. Whether or not petitioner, as owner/operator of a movie/cinema house, is

subject to VAT on sales of services under Section 108(A) of the National Internal
Revenue Code;

4. Whether or not the assessment is based on the best evidence obtainable

pursuant to Section 6(b) of the National Internal Revenue Code.br>

The CTA-Second Division found merit in the petition of Metro Star and, on March
21, 2007, rendered a decision, the decretal portion of which reads:
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.
Accordingly, the assailed Decision dated February 8, 2005 is hereby REVERSED
and SET ASIDE and respondent is ORDERED TO DESIST from collecting the
subject taxes against petitioner.

The CTA-Second Division opined that "[w]hile there [is] a disputable presumption
that a mailed letter [is] deemed received by the addressee in the ordinary course
of mail, a direct denial of the receipt of mail shifts the burden upon the party
favored by the presumption to prove that the mailed letter was indeed received
by the addressee."[5] It also found that there was no clear showing that Metro
Star actually received the alleged PAN, dated January 16, 2002. It, accordingly,
ruled that the Formal Letter of Demand dated April 3, 2002, as well as the
Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star
was denied due process.[6]

The CIR sought reconsideration[7] of the decision of the CTA-Second Division, but
the motion was denied in the latter's July 24, 2007 Resolution.[8]

Aggrieved, the CIR filed a petition for review[9] with the CTA-En Banc, but the
petition was dismissed after a determination that no new matters were raised.
The CTA-En Banc disposed:
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and
DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision and July
27, 2007 Resolution of the CTA Second Division in CTA Case No. 7169 entitled,
22
"Metro Star Superama, Inc., petitioner vs. Commissioner of Internal Revenue,
respondent" are hereby AFFIRMED in toto.

SO ORDERED.

The motion for reconsideration[10] filed by the CIR was likewise denied by the
CTA-En Banc in its November 18, 2008 Resolution.[11]

The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and
that due process was served nonetheless because the latter received the Final
Assessment Notice (FAN), comes now before this Court with the sole issue of
whether or not Metro Star was denied due process.

The general rule is that the Court will not lightly set aside the conclusions reached
by the CTA which, by the very nature of its functions, has accordingly developed
an exclusive expertise on the resolution unless there has been an abuse or
improvident exercise of authority.[12] In Barcelon, Roxas Securities, Inc. (now
known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,[13] the Court
wrote:
Jurisprudence has consistently shown that this Court accords the findings of fact
by the CTA with the highest respect. In Sea-Land Service Inc. v. Court of Appeals
[G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court recognizes
that the Court of Tax Appeals, which by the very nature of its function is
dedicated exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not be overturned
unless there has been an abuse or improvident exercise of authority. Such
findings can only be disturbed on appeal if they are not supported by substantial
evidence or there is a showing of gross error or abuse on the part of the Tax
Court. In the absence of any clear and convincing proof to the contrary, this
Court must presume that the CTA rendered a decision which is valid in every
respect.

On the matter of service of a tax assessment, a further perusal of our ruling in

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

23
Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo
P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965:
"The facts to be proved to raise this presumption are (a) that the letter
was properly addressed with postage prepaid, and (b) that it was mailed.
Once these facts are proved, the presumption is that the letter was received by
the addressee as soon as it could have been transmitted to him in the ordinary
course of the mail. But if one of the said facts fails to appear, the presumption
does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing
Enriquez vs. Sunlife Assurance of Canada, 41 Phil 269)."

x x x. What is essential to prove the fact of mailing is the registry receipt

issued by the Bureau of Posts or the Registry return card which would
have been signed by the Petitioner or its authorized representative. And
if said documents cannot be located, Respondent at the very least,
should have submitted to the Court a certification issued by the Bureau
of Posts and any other pertinent document which is executed with the
intervention of the Bureau of Posts. This 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. Thus:
"While we have held that an assessment is made when sent within the prescribed
period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs.
Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more
imperative that the release, mailing or sending of the notice be clearly and
satisfactorily proved. Mere notations made without the taxpayer's intervention,
notice or control, without adequate supporting evidence cannot suffice;
otherwise, the taxpayer would be at the mercy of the revenue offices, without
adequate protection or defense." (Nava vs. CIR, 13 SCRA 104, January 30,
1965).

x x x.

The failure of the respondent to prove receipt of the assessment by the Petitioner
leads to the conclusion that no assessment was issued. Consequently, the
government's right to issue an assessment for the said period has already
prescribed. (Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA
Case 4885, August 22, 1996). (Emphases supplied.)

The Court agrees with the CTA that the CIR failed to discharge its duty and
present any evidence to show that Metro Star indeed received the PAN dated
January 16, 2002. It could have simply presented the registry receipt or the
certification from the postmaster that it mailed the PAN, but failed. Neither did it
offer any explanation on why it failed to comply with the requirement of service of
the PAN. It merely accepted the letter of Metro Star's chairman dated April 29,
2002, that stated that he had received the FAN dated April 3, 2002, but not the
PAN; that he was willing to pay the tax as computed by the CIR; and that he just
24
wanted to clarify some matters with the hope of lessening its tax liability.

This now leads to the question: Is the failure to strictly comply with notice
requirements prescribed under Section 228 of the National Internal Revenue Code
of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due
process? Specifically, are the requirements of due process satisfied if only the
FAN stating the computation of tax liabilities and a demand to pay within the
prescribed period was sent to the taxpayer?

The answer to these questions require an examination of Section 228 of the Tax
Code which reads:
SEC. 228. Protesting of Assessment. - When the Commissioner or his duly
authorized representative finds that proper taxes should be assessed, he
shall first notify the taxpayer of his findings: provided, however, that a
preassessment notice shall not be required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in
the computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or

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

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

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

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

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

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

Such assessment may be protested administratively by filing a request for

reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing
rules and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment
25
shall become final.

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

Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first
be informed that he is liable for deficiency taxes through the sending of a PAN. He
must be informed of the facts and the law upon which the assessment is made.
The law imposes a substantive, not merely a formal, requirement. To proceed
heedlessly with tax collection without first establishing a valid assessment is
evidently violative of the cardinal principle in administrative investigations - that
taxpayers should be able to present their case and adduce supporting
evidence.[14]

This is confirmed under the provisions R.R. No. 12-99 of the BIR which
pertinently provide:
SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax
Assessment. --

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

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

3.1.2 Preliminary Assessment Notice (PAN). -- If after review and evaluation by

the Assessment Division or by the Commissioner or his duly authorized

26
representative, as the case may be, it is determined that there exists sufficient
basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall
issue to the taxpayer, at least by registered mail, a Preliminary Assessment
Notice (PAN) for the proposed assessment, showing in detail, the facts and the
law, rules and regulations, or jurisprudence on which the proposed assessment is
based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within
fifteen (15) days from date of receipt of the PAN, he shall be considered in
default, in which case, a formal letter of demand and assessment notice shall be
caused to be issued by the said Office, calling for payment of the taxpayer's
deficiency tax liability, inclusive of the applicable penalties.

3.1.3 Exceptions to Prior Notice of the Assessment. -- The notice for informal
conference and the preliminary assessment notice shall not be required in any of
the following cases, in which case, issuance of the formal assessment notice for
the payment of the taxpayer's deficiency tax liability shall be sufficient:
(i) When the finding for any deficiency tax is the result of mathematical error in
the computation of the tax appearing on the face of the tax return filed by the
taxpayer; or

(ii) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or

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

(iv) When the excise tax due on excisable articles has not been paid; or

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

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

The same shall be sent to the taxpayer only by registered mail or by personal
delivery.

If sent by personal delivery, the taxpayer or his duly authorized representative

27
shall acknowledge receipt thereof in the duplicate copy of the letter of demand,
showing the following: (a) His name; (b) signature; (c) designation and authority
to act for and in behalf of the taxpayer, if acknowledged received by a person
other than the taxpayer himself; and (d) date of receipt thereof.

x x x.

From the provision quoted above, it is clear that the sending of a PAN to taxpayer
to inform him of the assessment made is but part of the "due process
requirement in the issuance of a deficiency tax assessment," the absence of
which renders nugatory any assessment made by the tax authorities. The use of
the word "shall" in subsection 3.1.2 describes the mandatory nature of the
service of a PAN. The persuasiveness of the right to due process reaches both
substantial and procedural rights and the failure of the CIR to strictly comply with
the requirements laid down by law and its own rules is a denial of Metro Star's
right to due process.[15] Thus, for its failure to send the PAN stating the facts and
the law on which the assessment was made as required by Section 228 of R.A.
No. 8424, the assessment made by the CIR is void.

The case of CIR v. Menguito[16] cited by the CIR in support of its argument that
only the non-service of the FAN is fatal to the validity of an assessment, cannot
apply to this case because the issue therein was the non-compliance with the
provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old tax
law. RA No. 8424 has already amended the provision of Section 229 on protesting
an assessment. The old requirement of merely notifying the taxpayer of the CIR's
findings was changed in 1998 to informing the taxpayer of not only the law, but
also of the facts on which an assessment would be made. Otherwise, the
assessment itself would be invalid.[17] The regulation then, on the other hand,
simply provided that a notice be sent to the respondent in the form prescribed,
and that no consequence would ensue for failure to comply with that form.

The Court need not belabor to discuss the matter of Metro Star's failure to file its
protest, for it is well-settled that a void assessment bears no fruit.[18]

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

be deprived of property without due process of law.[19] In balancing the scales
between the power of the State to tax and its inherent right to prosecute
perceived transgressors of the law on one side, and the constitutional rights of a
citizen to due process of law and the equal protection of the laws on the other,
the scales must tilt in favor of the individual, for a citizen's right is amply
protected by the Bill of Rights under the Constitution. Thus, while "taxes are the
lifeblood of the government," the power to tax has its limits, in spite of all its
plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc.,[20] it was
said -
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in

28
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.
xxx xxx xxx

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

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

it is a requirement in all democratic regimes that it be exercised
reasonably and in accordance with the prescribed procedure. If it is not,
then the taxpayer has a right to complain and the courts will then come to his
succor. For all the awesome power of the tax collector, he may still be stopped in
his tracks if the taxpayer can demonstrate x x x that the law has not
been observed.[21] (Emphasis supplied).

WHEREFORE, the petition is DENIED.

SO ORDERED.
G.R. No. 198677, November 26, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. BASF COATING +
INKS PHILS., INC., Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari assailing the Decision1 of the
Court of Tax Appeals (CTA) En Banc, dated June 16, 2011, and Resolution2 dated
September 16, 2011, in C.T.A. EB No. 664 (C.T.A. Case No. 7125).

The pertinent factual and procedural antecedents of the case are as

follows:cralawlawlibrary

Respondent was a corporation which was duly organized under and by virtue of
the laws of the Republic of the Philippines on August 1, 1990 with a term of
existence of fifty (50) years. Its BIR-registered address was at 101 Marcos
Alvarez Avenue, Barrio Talon, Las Piñas City. In a joint special meeting held on
March 19, 2001, majority of the members of the Board of Directors and the
29
stockholders representing more than two-thirds (2/3) of the entire subscribed and
outstanding capital stock of herein respondent corporation, resolved to dissolve
the corporation by shortening its corporate term to March 31, 2001.3
Subsequently, respondent moved out of its address in Las Piñas City and
transferred to Carmelray Industrial Park, Canlubang, Calamba, Laguna.

On June 26, 2001, respondent submitted two (2) letters to the Bureau of Internal
Revenue (BIR) Revenue District Officer of Revenue District Office (RDO) No. 53,
Region 8, in Alabang, Muntinlupa City. The first letter, dated April 26, 2001, was
a notice of respondent's dissolution, in compliance with the requirements of
Section 52(c) of the National Internal Revenue Code.4 On the other hand, the
second letter, dated June 22, 2001, was a manifestation indicating the
submission of various documents supporting respondent's dissolution, among
which was BIR Form No. 1905, which refers to an update of information contained
in its tax registration.5chanroblesvirtuallawlibrary

Thereafter, in a Formal Assessment Notice (FAN) dated January 17, 2003,

petitioner assessed respondent the aggregate amount of P18,671,343.14
representing deficiencies in income tax, value added tax, withholding tax on
compensation, expanded withholding tax and documentary stamp tax, including
increments, for the taxable year 1999.6 The FAN was sent by registered mail on
January 24, 2003 to respondent's former address in Las Piñas City.

On March 5, 2004, the Chief of the Collection Section of BIR Revenue Region No.
7, RDO No. 39, South Quezon City, issued a First Notice Before Issuance of
Warrant of Distraint and Levy, which was sent to the residence of one of
respondent's directors.7chanroblesvirtuallawlibrary

On March 19, 2004, respondent filed a protest letter citing lack of due process
and prescription as grounds.8 On April 16, 2004, respondent filed a supplemental
letter of protest.9 Subsequently, on June 14, 2004, respondent submitted a letter
wherein it attached documents to prove the defenses raised in its protest
letters.10chanroblesvirtuallawlibrary

On January 10, 2005, after 180 days had lapsed without action on the part of
petitioner on respondent's protest, the latter filed a Petition for Review 11 with the
CTA.

Trial on the merits ensued.

On February 17, 2010, the CTA Special First Division promulgated its Decision, 12
the dispositive portion of which reads, thus:chanroblesvirtuallawlibrary
WHEREFORE, the Petition for Review is hereby GRANTED. The assessments for
deficiency income tax in the amount of P14,227,425.39, deficiency value-added
tax of P3,981,245.66, deficiency withholding tax on compensation of P49,977.21,
deficiency expanded withholding tax of P156,261.97 and deficiency documentary
stamp tax of P256,432.91, including increments, in the aggregate amount of
30
P18,671,343.14 for the taxable year 1999 are hereby CANCELLED and SET
ASIDE.

SO ORDERED.13

The CTA Special First Division ruled that since petitioner was actually aware of
respondent's new address, the former's failure to send the Preliminary
Assessment Notice and FAN to the said address should not be taken against the
latter. Consequently, since there are no valid notices sent to respondent, the
subsequent assessments against it are considered void.

Aggrieved by the Decision, petitioner filed a Motion for Reconsideration, but the
CTA Special First Division denied it in its Resolution14 dated July 13, 2010.

Petitioner then filed a Petition for Review with the CTA En

Banc.15chanroblesvirtuallawlibrary

On June 16, 2011, the CTA En Banc promulgated its assailed Decision denying
petitioner's Petition for Review for lack of merit. The CTA En Banc held that
petitioner's right to assess respondent for deficiency taxes for the taxable year
1999 has already prescribed and that the FAN issued to respondent never
attained finality because respondent did not receive it.

Petitioner filed a Motion for Reconsideration, but the CTA En Banc denied it in its
Resolution dated September 16, 2011.

Hence, the present petition with the following Assignment of

Errors:chanroblesvirtuallawlibrary
I

THE HONORABLE CTA EN BANC ERRED IN RULING THAT THE RIGHT OF

PETITIONER TO ASSESS HEREIN RESPONDENT FOR DEFICIENCY INCOME
TAX, VALUE-ADDED TAX, WITHHOLDING TAX ON COMPENSATION,
EXPANDED WITHHOLDING TAX AND DOCUMENTARY STAMP TAX, FOR
TAXABLE YEAR 1999 IS BARRED BY PRESCRIPTION.
II

THE HONORABLE COURT OF TAX APPEALS, EN BANC, ERRED IN RULING

THAT THE FORMAL ASSESSMENT NOTICE (FAN) FOR RESPONDENT'S
DEFICIENCY INCOME TAX, VALUE-ADDED TAX, WITHHOLDING TAX ON
COMPENSATION, EXPANDED WITHHOLDING TAX AND DOCUMENTARY
STAMP TAX FOR TAXABLE YEAR 1999 HAS NOT YET BECOME FINAL,
EXECUTORY AND DEMAND ABLE.16ChanRoblesVirtualawlibrary

The petition lacks merit.

31
Petitioner contends that, insofar as respondent's alleged deficiency taxes for the
taxable year 1999 are concerned, the running of the three-year prescriptive
period to assess, under Sections 203 and 222 of the National Internal Revenue
Act of 1997 (Tax Reform Act of 1997) was suspended when respondent failed to
notify petitioner, in writing, of its change of address, pursuant to the provisions of
Section 223 .of the same Act and Section 11 of BIR Revenue Regulation No. 12-
85.

Sections 203, 222 and 223 of the Tax Reform Act of 1997 provide,
respectively:chanroblesvirtuallawlibrary
Sec. 203. Period of Limitation Upon Assessment and Collection. -
Except as provided in Section 222, internal revenue taxes shall be assessed
within three (3) years after the last day prescribed by law for the filing of
the return, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such
period: Provided, That in a case where a return is filed beyond the period
prescribed by law, the three (3)-year period shall be counted from the day the
return was filed. For purposes of this Section, a return filed before the .last day
prescribed by law for the filing thereof shall be considered as filed on such last
day. (emphasis supplied)

Sec. 222. Exceptions as to Period of Limitation of Assessment and Collection of

Taxes. -
(a) In the case of a false or fraudulent return with intent to evade tax or of failure
to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be filed without assessment, at any time within ten
(10) years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for the collection
thereof.

(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.

(c) Any internal revenue tax which has been assessed within the period of
limitation as prescribed in paragraph (a) hereof may be collected by distraint or
levy or by a proceeding in court within five (5) years following the assessment of
the tax.

(d) Any internal revenue tax, which has been assessed within the period agreed

32
upon as provided in paragraph (b) hereinabove, may be collected by distraint or
levy or by a proceeding in court within the period agreed upon in writing before
the expiration of the five (5) -year period.

The period so agreed upon may be extended by subsequent written agreements

made before the expiration of the period previously agreed upon.

(e) Provided, however, That nothing in the immediately preceding and paragraph
(a) hereof shall be construed to authorize the examination and investigation or
inquiry into any tax return filed in accordance with the provisions of any tax
amnesty law or decree.

Sec. 223. Suspension of Running of Statute of Limitations. - The running of the

Statute of Limitations provided in Sections 203 and 222 on the making of
assessment and the beginning of distraint or levy a proceeding in court for
collection, in respect of any deficiency, shall be suspended for the period
during which the Commissioner is prohibited from making the
assessment or beginning distraint or levy or a proceeding in court and for
sixty (60) days thereafter; when the taxpayer requests for a reinvestigation
which is granted by the Commissioner; when the taxpayer cannot be located
in the address given by him in the return filed upon which a tax is being
assessed or collected: Provided, that, if the taxpayer informs the
Commissioner of any change in address, the running of the Statute of
Limitations will not be suspended; when the warrant of distraint or levy is
duly served upon the taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be located; and when
the taxpayer is out of the Philippines, (emphasis supplied)

In addition, Section 11 of BIR Revenue Regulation No. 12-85

states:chanroblesvirtuallawlibrary
Sec. 11. Change of Address. - In case of change of address, the taxpayer must
give a written notice thereof to the Revenue District Officer or the district having
jurisdiction over his former legal residence and/or place of business, copy
furnished the Revenue District Officer having jurisdiction over his new legal
residence or place of business, the Revenue Computer Center and the Receivable
Accounts Division, BIR, National Office, Quezon City, and in case of failure to do
so, any communication referred to in these regulations previously sent to his
former legal residence or business address as appear in is tax return for the
period involved shall be considered valid and binding for purposes of the period
within which to reply.

It is true that, under Section 223 of the Tax Reform Act of 1997, the running of
the Statute of Limitations provided under the provisions of Sections 203 and 222
of the same Act shall be suspended when the taxpayer cannot be located in the
address given by him in the return filed upon which a tax is being assessed or

33
collected. In addition, Section 11 of Revenue Regulation No. 12-85 states that, in
case of change of address, the taxpayer is required to give a written notice
thereof to the Revenue District Officer or the district having jurisdiction over his
former legal residence and/or place of business. However, this Court agrees with
both the CTA Special First Division and the CTA En Banc in their ruling that the
abovementioned provisions on the suspension of the three-year period to assess
apply only if the BIR Commissioner is not aware of the whereabouts of the
taxpayer.

In the present case, petitioner, by all indications, is well aware that respondent
had moved to its new address in Calamba, Laguna, as shown by the following
documents which form part of respondent's records with the BIR:cralawlawlibrary

1) Checklist on Income Tax/Withholding Tax/Documentary Stamp Tax/Value-

Added Tax and Other Percentage Taxes;17
2) General Information (BIR Form No. 23-02);18
3) Report on Taxpayer's Delinquent Account, dated June 27, 2002;19
4) Activity Report, dated October 17, 2002;20
5) Memorandum Report of Examiner, dated June 27, 2002;21
6) Revenue Officer's Audit Report on Income Tax;22
7) Revenue Officer's Audit Report on Value-Added Tax;23
8) Revenue Officer's Audit Report on Compensation Withholding Taxes;24
9) Revenue Officer's Audit Report on Expanded Withholding Taxes;25cralawred
10) Revenue Officer's Audit Report on Documentary Stamp
Taxes.26chanroblesvirtuallawlibrary

The above documents, all of which were accomplished and .signed by officers of
the BIR, clearly show that respondent's address is at Carmelray Industrial Park,
Canlubang, Calamba, Laguna.

The CTA also found that BIR officers, at various times prior to the issuance of the
subject FAN, conducted examination and investigation of respondent's tax
liabilities for 1999 at the latter's new address in Laguna as evidenced by the
following, in addition to the abovementioned records:cralawlawlibrary

1) Letter, dated September 27, 2001, signed by Revenue Officer I Eugene R.

Garcia;27
2) Final Request for Presentation of Records Before Subpoena Duces Tecum,
dated March 20, 2002, signed by Revenue Officer I Eugene R.
Garcia.28chanroblesvirtuallawlibrary

Moreover, the CTA found that, based on records, the RDO sent respondent a
letter dated April 24, 2002 informing the latter of the results of their investigation
and inviting it to an informal conference.29 Subsequently, the RDO also sent
respondent another letter dated May 30, 2002, acknowledging receipt of the
latter's reply to his April 24, 2002 letter.30 These two letters were sent to
respondent's new address in Laguna. Had the RDO not been informed or was not

34
aware of respondent's new address, he could not have sent the said letters to the
said address.

Furthermore, petitioner should have been alerted by the fact that prior to mailing
the FAN, petitioner sent to respondent's old address a Preliminary Assessment
Notice but it was "returned to sender." This was testified to by petitioner's
Revenue Officer II at its Revenue District Office 39 in Quezon City.31 Yet, despite
this occurrence, petitioner still insisted in mailing the FAN to respondent's old
address.

Hence, despite the absence of a formal written notice of respondent's change of

address, the fact remains that petitioner became aware of respondent's new
address as shown by documents replete in its records. As a consequence, the
running of the three-year period to assess respondent was not suspended and
has already prescribed.

It bears stressing that, in a number of cases, this Court has explained that the
statute of limitations on the collection of taxes primarily benefits the taxpayer. In
these cases, the Court exemplified the detrimental effects that the delay in the
assessment and collection of taxes inflicts upon the taxpayers. Thus, in
Commissioner of Internal Revenue v. Philippine Global Communication, Inc.,32
this Court echoed Justice Montemayor's disquisition in his dissenting opinion in
Collector of Internal Revenue v. Suyoc Consolidated Mining Company,33 regarding
the potential loss to the taxpayer if the assessment and collection of taxes are not
promptly made, thus:chanroblesvirtuallawlibrary
Prescription in the assessment and in the collection of taxes is provided by the
Legislature for the benefit of both the Government and the taxpayer; for the
Government for the purpose of expediting the collection of taxes, so that the
agency charged with the assessment and collection may not tarry too long or
indefinitely to the prejudice of the interests of the Government, which needs
taxes to run it; and for the taxpayer so that within a reasonable time after filing
his return, he may know the amount of the assessment he is required to pay,
whether or not such assessment is well founded and reasonable so that he may
either pay the amount of the assessment or contest its validity in court x x x. It
would surely be prejudicial to the interest of the taxpayer for the Government
collecting agency to unduly delay the assessment and the collection because by
the time the collecting agency finally gets around to making the assessment or
making the collection, the taxpayer may then have lost his papers and books to
support his claim and contest that of the Government, and what is more, the tax
is in the meantime accumulating interest which the taxpayer eventually has to
pay.34ChanRoblesVirtualawlibrary

Likewise, in Republic of the Philippines v. Ablaza,35 this Court elucidated that the
prescriptive period for the filing of actions for collection of taxes is justified by the
need to protect law-abiding citizens from possible harassment. Also, in Bank of
the Philippine Islands v. Commissioner of Internal Revenue,36 it was held that the

35
statute of limitations on the assessment and collection of taxes is principally
intended to afford protection to the taxpayer against unreasonable investigations
as the indefinite extension of the period for assessment deprives the taxpayer of
the assurance that he will no longer be subjected to further investigation for
taxes after the expiration of a reasonable period of time. Thus, in Commissioner
of Internal Revenue v. B.F. Goodrich Phils., Inc.,37 this Court ruled that the legal
provisions on prescription should be liberally construed to protect taxpayers and
that, as a corollary, the exceptions to the rule on prescription should be strictly
construed.

It might not also be amiss to point out that petitioner's issuance of the First
Notice Before Issuance of Warrant of Distraint and Levy38 violated respondent's
right to due process because no valid notice of assessment was sent to it. An
invalid assessment bears no valid fruit. The law imposes a substantive, not
merely a formal, requirement. To proceed heedlessly with tax collection without
first establishing a valid assessment is evidently violative of the cardinal principle
in administrative investigations: that taxpayers should be able to present their
case and adduce supporting evidence.[39 In the instant case, respondent has not
properly been informed of the basis of its tax liabilities. Without complying with
the unequivocal mandate of first informing the taxpayer of the government's
claim, there can be no deprivation of property, because no effective protest can
be made.

It is true that taxes are the lifeblood of the government. However, in spite of all
its plenitude, the power to tax has its limits.40 Thus, in Commissioner of Internal
Revenue v. Algue, Inc.,41 this Court held:chanroblesvirtuallawlibrary
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.

xxxx

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

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

requirement in all democratic regimes that it be exercised reasonably and in
36
accordance with the prescribed procedure. If it is not, then the taxpayer has a
right to complain and the courts will then come to his succor. For all the awesome
power of the tax collector, he may still be stopped in his tracks if the taxpayer
can demonstrate x x x that the law has not been
observed.42ChanRoblesVirtualawlibrary

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

be deprived of property without due process of law. In balancing the scales
between the power of the State to tax and its inherent right to prosecute
perceived transgressors of the law on one side, and the constitutional rights of a
citizen to due process of law and the equal protection of the laws on the other,
the scales must tilt in favor of the individual, for a citizen's right is amply
protected by the Bill of Rights under the Constitution.43chanroblesvirtuallawlibrary

As to the second assigned error, petitioner's reliance on the provisions of Section

3.1.7 of BIR Revenue Regulation No. 12-9944 as well as on the case of Nava v.
Commissioner of Internal Revenue45 is misplaced, because in the said case, one
of the requirements of a valid assessment notice is that the letter or notice must
be properly addressed. It is not enough that the notice is sent by registered mail
as provided under the said Revenue Regulation. In the instant case, the FAN was
sent to the wrong address. Thus, the CTA is correct in holding that the FAN never
attained finality because respondent never received it, either actually or
constructively.

WHEREFORE, the instant petition is DENIED. The Decision of the Court of Tax
Appeals En Banc, dated June 16, 2011, and its Resolution dated September 16,
2011, in C.T.A. EB No. 664 (C.T.A. Case No. 7125), are AFFIRMED.

SO ORDERED.

G.R. No. 169225 : November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. HAMBRECHT &
QUIST PHILIPPINES, INC., Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking to set aside the Decision[1] dated August 12, 2005 of the Court of Tax
Appeals (CTA) En Banc in C.T.A. E.B. No. 73 (C.T.A. Case No. 6362), entitled
“Commissioner of Internal Revenue vs. Hambrecht & Quist Philippines, Inc.,”
which affirmed the Decision[2] dated September 24, 2004 of the CTA Original
Division in C.T.A. Case No. 6362 canceling the assessment issued against
respondent for deficiency income and expanded withholding tax for the year 1989
for failure of petitioner Commissioner of Internal Revenue (CIR) to enforce
collection within the period allowed by law.
37
The CTA summarized the pertinent facts of this case, as
follows:chanroblesvirtuallawlibrary
In a letter dated February 15, 1993, respondent informed the Bureau of Internal
Revenue (BIR), through its West-Makati District Office of its change of business
address from the 2nd Floor Corinthian Plaza, Paseo de Roxas, Makati City to the
22nd Floor PCIB Tower II, Makati Avenue corner H.V. De la Costa Streets, Makati
City. Said letter was duly received by the BIR-West Makati on February 18, 1993.
On November 4, 1993, respondent received a tracer letter or follow-up letter
dated October 11, 1993 issued by the Accounts Receivable/Billing Division of the
BIR’s National Office and signed by then Assistant Chief Mr. Manuel B. Mina,
demanding for payment of alleged deficiency income and expanded withholding
taxes for the taxable year 1989 amounting to P2,936,560.87.
On December 3, 1993, respondent, through its external auditors, filed with the
same Accounts Receivable/Billing Division of the BIR’s National Office, its protest
letter against the alleged deficiency tax assessments for 1989 as indicated in the
said tracer letter dated October 11, 1993.
The alleged deficiency income tax assessment apparently resulted from an
adjustment made to respondent’s taxable income for the year 1989, on account
of the disallowance of certain items of expense, namely, professional fees paid,
donations, repairs and maintenance, salaries and wages, and management fees.
The latter item of expense, the management fees, made up the bulk of the
disallowance, the examiner alleging, among others, that petitioner failed to
withhold the appropriate tax thereon. This is also the same basis for the
imposition of the deficiency withholding tax assessment on the management fees.
Revenue Regulations No. 6-85 (EWT Regulations) does not impose or prescribe
EWT on management fees paid to a non-resident.
On November 7, 2001, nearly eight (8) years later, respondent’s external
auditors received a letter from herein petitioner Commissioner of Internal
Revenue dated October 27, 2001. The letter advised the respondent that
petitioner had rendered a final decision denying its protest on the ground that the
protest against the disputed tax assessment was allegedly filed beyond the 30-
day reglementary period prescribed in then Section 229 of the National Internal
Revenue Code.
On December 6, 2001, respondent filed a Petition for Review docketed as CTA
Case No. 6362 before the then Court of Tax Appeals, pursuant to Section 7 of
Republic Act No. 1125, otherwise known as an ‘Act Creating the Court of Tax
Appeals’ and Section 228 of the NIRC, to appeal the final decision of the
Commissioner of Internal Revenue denying its protest against the deficiency
income and withholding tax assessments issued for taxable year 1989.[3]cralaw
In a Decision dated September 24, 2004, the CTA Original Division held that the
subject assessment notice sent by registered mail on January 8, 1993 to
respondent’s former place of business was valid and binding since respondent
only gave formal notice of its change of address on February 18, 1993. Thus, the
assessment had become final and unappealable for failure of respondent to file a
38
protest within the 30-day period provided by law. However, the CTA (a) held that
the CIR failed to collect the assessed taxes within the prescriptive period; and (b)
directed the cancellation and withdrawal of Assessment Notice No. 001543-89-
5668. Petitioner’s Motion for Reconsideration and Supplemental Motion for
Reconsideration of said Decision filed on October 14, 2004 and November 22,
2004, respectively, were denied for lack of merit.
Undaunted, the CIR filed a Petition for Review with the CTA En Banc but this was
denied in a Decision dated August 12, 2005, the dispositive portion
reads:chanroblesvirtuallawlibrary
WHEREFORE, the Petition for Review is DENIED DUE COURSE and the case is
accordingly DISMISSED for lack of merit.[4]cralaw
Hence, the instant Petition wherein the following issues are
raised:chanroblesvirtuallawlibrary
I
WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION TO RULE
THAT THE GOVERNMENT’S RIGHT TO COLLECT THE TAX HAS PRESCRIBED.
II
WHETHER OR NOT THE PERIOD TO COLLECT THE ASSESSMENT HAS
PRESCRIBED.[5]cralaw
The petition is without merit.
Anent the first issue, petitioner argues that the CTA had no jurisdiction over the
case since the CTA itself had ruled that the assessment had become final and
unappealable. Citing Protector’s Services, Inc. v. Court of Appeals,[6] the CIR
argued that, after the lapse of the 30-day period to protest, respondent may no
longer dispute the correctness of the assessment and its appeal to the CTA should
be dismissed. The CIR took issue with the CTA’s pronouncement that it had
jurisdiction to decide “other matters” related to the tax assessment such as the
issue on the right to collect the same since the CIR maintains that when the law
says that the CTA has jurisdiction over “other matters,” it presupposes that the
tax assessment has not become final and unappealable.
We cannot countenance the CIR’s assertion with regard to this point. The
jurisdiction of the CTA is governed by Section 7 of Republic Act No. 1125, as
amended, and the term “other matters” referred to by the CIR in its argument
can be found in number (1) of the aforementioned provision, to
wit:chanroblesvirtuallawlibrary
Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise 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
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law as part of law administered by the Bureau of Internal
Revenue. (Emphasis supplied.)
39
Plainly, the assailed CTA En Banc Decision was correct in declaring that there was
nothing in the foregoing provision upon which petitioner’s theory with regard to
the parameters of the term “other matters” can be supported or even deduced.
What is rather clearly apparent, however, is that the term “other matters” is
limited only by the qualifying phrase that follows it.
Thus, on the strength of such observation, we have previously ruled that the
appellate jurisdiction of the CTA is not limited to cases which involve decisions of
the CIR on matters relating to assessments or refunds. The second part of the
provision covers other cases that arise out of the National Internal Revenue Code
(NIRC) or related laws administered by the Bureau of Internal Revenue
(BIR).cra[7]cralaw
In the case at bar, the issue at hand is whether or not the BIR’s right to collect
taxes had already prescribed and that is a subject matter falling under Section
223(c) of the 1986 NIRC, the law applicable at the time the disputed assessment
was made. To quote Section 223(c):chanroblesvirtuallawlibrary
Any internal revenue tax which has been assessed within the period of limitation
above-prescribed may be collected by distraint or levy or by a proceeding in court
within three years following the assessment of the tax. (Emphases supplied.)
In connection therewith, Section 3 of the 1986 NIRC states that the collection of
taxes is one of the duties of the BIR, to wit:chanroblesvirtuallawlibrary
Sec. 3. Powers and duties of Bureau. - The powers and duties of the Bureau of
Internal Revenue shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges 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.
Said Bureau shall also give effect to and administer the supervisory and police
power conferred to it by this Code or other laws. (Emphasis supplied.)
Thus, from the foregoing, the issue of prescription of the BIR’s right to collect
taxes may be considered as covered by the term “other matters” over which the
CTA has appellate jurisdiction.
Furthermore, the phraseology of Section 7, number (1), denotes an intent to view
the CTA’s jurisdiction over disputed assessments and over “other matters” arising
under the NIRC or other laws administered by the BIR as separate and
independent of each other. This runs counter to petitioner’s theory that the latter
is qualified by the status of the former, i.e., an “other matter” must not be a final
and unappealable tax assessment or, alternatively, must be a disputed
assessment.
Likewise, the first paragraph of Section 11 of Republic Act No. 1125,
as amended by Republic Act No. 9282,[8] belies petitioner’s assertion as the
provision is explicit that, for as long as a party is adversely affected by any
decision, ruling or inaction of Petitioner, said party may file an appeal with the
CTA within 30 days from receipt of such decision or ruling. The wording of the
provision does not take into account the CIR’s restrictive interpretation as it
40
clearly provides that the mere existence of an adverse decision, ruling or inaction
along with the timely filing of an appeal operates to validate the exercise of
jurisdiction by the CTA.
To be sure, the fact that an assessment has become final for failure of the
taxpayer to file a protest within the time allowed only means that the validity or
correctness of the assessment may no longer be questioned on appeal. However,
the validity of the assessment itself is a separate and distinct issue from the issue
of whether the right of the CIR to collect the validly assessed tax has prescribed.
This issue of prescription, being a matter provided for by the NIRC, is well within
the jurisdiction of the CTA to decide.
With respect to the second issue, the CIR insists that its right to collect the tax
deficiency it assessed on respondent is not barred by prescription since the
prescriptive period thereof was allegedly suspended by respondent’s request for
reinvestigation.
Based on the facts of this case, we find that the CIR’s contention is without basis.
The pertinent provision of the 1986 NIRC is Section 224, to
wit:chanroblesvirtuallawlibrary
Section 224. Suspension of running of statute. – The running of the statute of
limitations provided in Sections 203 and 223 on the making of assessment and
the beginning of distraint or levy or a proceeding in court for collection, in respect
of any deficiency, shall be suspended for the period during which the
Commissioner is prohibited from making the assessment or beginning distraint or
levy or a proceeding in court and for sixty days thereafter; when the taxpayer
requests for a re-investigation which is granted by the Commissioner; when the
taxpayer cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, That, if the taxpayer informs
the Commissioner of any change in address, the statute will not be suspended;
when the warrant of distraint and levy is duly served upon the taxpayer, his
authorized representative, or a member of his household with sufficient
discretion, and no property could be located; and when the taxpayer is out of the
Philippines. (Emphasis supplied.)
The plain and unambiguous wording of the said provision dictates that two
requisites must concur before the period to enforce collection may be suspended:
(a) that the taxpayer requests for reinvestigation, and (b) that petitioner grants
such request.
On this point, we have previously held that:chanroblesvirtuallawlibrary
The above section is plainly worded. In order to suspend the running of the
prescriptive periods for assessment and collection, the request for reinvestigation
must be granted by the CIR.[9] (Emphasis supplied.)
Consequently, the mere filing of a protest letter which is not granted does not
operate to suspend the running of the period to collect taxes. In the case at bar,
the records show that respondent filed a request for reinvestigation on December
3, 1993, however, there is no indication that petitioner acted upon respondent’s

41
protest. As the CTA Original Division in C.T.A. Case No. 6362 succinctly pointed
out in its Decision, to wit:chanroblesvirtuallawlibrary
It is evident that the respondent did not conduct a reinvestigation, the protest
having been dismissed on the ground that the assessment has become final and
executory. There is nothing in the record that would show what action was taken
in connection with the protest of the petitioner. In fact, petitioner did not hear
anything from the respondent nor received any communication from the
respondent relative to its protest, not until eight years later when the final
decision of the Commissioner was issued (TSN, March 7, 2002, p. 24).craIn other
words, the request for reinvestigation was not granted. x x x.[10] (Emphasis
supplied.)
Since the CIR failed to disprove the aforementioned findings of fact of the CTA
which are borne by substantial evidence on record, this Court is constrained to
uphold them as binding and true. This is in consonance with our oft-cited ruling
that instructs this Court to not lightly set aside the conclusions reached by the
CTA, which, by the very nature of its functions, is dedicated exclusively to the
resolution of tax problems and has accordingly developed an expertise on the
subject unless there has been an abuse or improvident exercise of
authority.[11]cralaw
Indeed, it is contradictory for the CIR to argue that respondent’s December 3,
1993 protest which contained a request for reinvestigation was filed beyond the
reglementary period but still claim that the same request for reinvestigation was
implicitly granted by virtue of its October 27, 2001 letter. We find no cogent
reason to reverse the CTA when it ruled that the prescriptive period for the CIR’s
right to collect was not suspended under the circumstances of this case.
WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Tax
Appeals (CTA) En Banc dated August 12, 2005 is AFFIRMED. No costs.
SO ORDERED.

[G.R. NO. 174942 : March 7, 2008]

BANK OF THE PHILIPPINE ISLANDS (Formerly: Far East Bank and Trust
Company), Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,
Respondent.
DECISION
TINGA, J.:
The Bank of the Philippine Islands (BPI) seeks a review of the Decision1 dated 15
August 2006 and the Resolution2 dated 5 October 2006, both of the Court of Tax
Appeals (CTA or tax court), which ruled that BPI is liable for the deficiency
documentary stamp tax (DST) on its cabled instructions to its foreign
correspondent bank and that prescription had not yet set in against the
government.
The following undisputed facts are culled from the CTA decision:
42
Petitioner, the surviving bank after its merger with Far East Bank and Trust
Company, is a corporation duly created and existing under the laws of the
Republic of the Philippines with principal office at Ayala Avenue corner Paseo de
Roxas Ave., Makati City.
Respondent thru then Revenue Service Chief Cesar M. Valdez, issued to the
petitioner a pre-assessment notice (PAN) dated November 26, 1986.
Petitioner, in a letter dated November 29, 1986, requested for the details of the
amounts alleged as 1982-1986 deficiency taxes mentioned in the November 26,
1986 PAN.
On April 7, 1989, respondent issued to the petitioner, assessment/demand
notices FAS-1-82 to 86/89-000 and FAS 5-82 to 86/89-000 for deficiency
withholding tax at source (Swap Transactions) and DST involving the amounts of
P190,752,860.82 and P24,587,174.63, respectively, for the years 1982 to 1986.
On April 20, 1989, petitioner filed a protest on the demand/assessment notices.
On May 8, 1989, petitioner filed a supplemental protest.
On March 12, 1993, petitioner requested for an opportunity to present or submit
additional documentation on the Swap Transactions with the then Central Bank
(page 240, BIR Records). Attached to the letter dated June 17, 1994, in
connection with the reinvestigation of the abovementioned assessment, petitioner
submitted to the BIR, Swap Contracts with the Central Bank.
Petitioner executed several Waivers of the Statutes of Limitations, the last of
which was effective until December 31, 1994.
On August 9, 2002, respondent issued a final decision on petitioner's protest
ordering the withdrawal and cancellation of the deficiency withholding tax
assessment in the amount of P190,752,860.82 and considered the same as
closed and terminated. On the other hand, the deficiency DST assessment in the
amount of P24,587,174.63 was reiterated and the petitioner was ordered to pay
the said amount within thirty (30) days from receipt of such order. Petitioner
received a copy of the said decision on January 15, 2003. Thereafter, on January
24, 2003, petitioner filed a Petition for Review before the Court.
On August 31, 2004, the Court rendered a Decision denying the petitioner's
Petition for Review, the dispositive portion of which is quoted hereunder:
IN VIEW OF ALL THE FOREGOING, the petition is hereby DENIED for lack of
merit. Accordingly, petitioner is ORDERED to PAY the respondent the amount of
P24,587,174.63 representing deficiency documentary stamp tax for the period
1982-1986, plus 20% interest starting February 14, 2003 until the amount is fully
paid pursuant to Section 249 of the Tax Code.
SO ORDERED.
On September 21, 2004, petitioner filed a Motion for Reconsideration of the
abovementioned Decision which was denied for lack of merit in a Resolution dated
February 14, 2005.

43
On March 9, 2005, petitioner filed with the Court En Banc a Motion for Extension
of Time to File Petition for Review praying for an extension of fifteen (15) days
from March 10, 2005 or until March 25, 2005. Petitioner's motion was granted in
a Resolution dated March 16, 2005.
On March 28, 2005, (March 25 was Good Friday), petitioner filed the instant
Petition for Review, advancing the following assignment of errors.
I. THIS HONORABLE COURT OVERLOOKED THE SIGNIFICANCE OF THE WAIVER
DULY AND VALIDLY AGREED UPON BY THE PARTIES AND EFFECTIVE UNTIL
DECEMBER 31, 1994;
II. THIS TAX COURT ERRED IN HOLDING THAT THE COLLECTION OF ALLEGED
DEFICIENCY TAX HAS NOT PRESCRIBED.
III. THIS HONORABLE COURT ERRED IN HOLDING THAT RESPONDENT DID NOT
VIOLATE PROCEDURAL DUE PROCESS IN THE ISSUANCE OF ASSESSMENT
NOTICE RELATIVE TO DOCUMENTARY STAMP DEFICIENCY.
IV. THIS HONORABLE COURT ERRED IN HOLDING THAT THE 4 MARCH 1987
MEMORANDUM OF THE LEGAL SERVICE CHIEF DULY APPROVED BY THE BIR
COMMISISONER VESTS NO RIGHTS TO PETITIONER.
V. THIS HONORABLE COURT ERRED IN HOLDING THAT PETITIONER IS LIABLE
FOR DOCUMENTARY STAMP TAX ON SWAP LOANS TRANSACTIONS FROM 1982
TO 1986.3
The CTA synthesized the foregoing issues into whether the collection of the
deficiency DST is barred by prescription and whether BPI is liable for DST on its
SWAP loan transactions.
On the first issue, the tax court, applying the case of Commissioner of Internal
Revenue v. Wyeth Suaco Laboratories, Inc.,4 (Wyeth Suaco case), ruled that
BPI's protest and supplemental protest should be considered requests for
reinvestigation which tolled the prescriptive period provided by law to collect a
tax deficiency by distraint, levy, or court proceeding. It further held, as regards
the second issue, that BPI's cabled instructions to its foreign correspondent bank
to remit a specific sum in dollars to the Federal Reserve Bank, the same to be
credited to the account of the Central Bank, are in the nature of a telegraphic
transfer subject to DST under Section 195 of the Tax Code.
In its Petition for Review5 dated 24 November 2006, BPI argues that the
government's right to collect the DST had already prescribed because the
Commissioner of Internal Revenue (CIR) failed to issue any reply granting BPI's
request for reinvestigation manifested in the protest letters dated 20 April and 8
May 1989. It was only through the 9 August 2002 Decision ordering BPI to pay
deficiency DST, or after the lapse of more than thirteen (13) years, that the CIR
acted on the request for reinvestigation, warranting the conclusion that
prescription had already set in. It further claims that the CIR was not precluded
from collecting the deficiency within three (3) years from the time the notice of
assessment was issued on 7 April 1989, or even until the expiration on 31
December 1994 of the last waiver of the statute of limitations signed by BPI.
44
Moreover, BPI avers that the cabled instructions to its correspondent bank are not
subject to DST because the National Internal Revenue Code of 1977 (Tax Code of
1977) does not contain a specific provision that cabled instructions on SWAP
transactions are subject to DST.
The Office of the Solicitor General (OSG) filed a Comment6 dated 1 June 2007, on
behalf of the CIR, asserting that the prescriptive period was tolled by the protest
letters filed by BPI which were granted and acted upon by the CIR. Such action
was allegedly communicated to BPI as, in fact, the latter submitted additional
documents pertaining to its SWAP transactions in support of its request for
reinvestigation. Thus, it was only upon BPI's receipt on 13 January 2003 of the 9
August 2002 Decision that the period to collect commenced to run again.
The OSG cites the case of Collector of Internal Revenue v. Suyoc Consolidated
Mining Company, et al.7 (Suyoc case) in support of its argument that BPI is
already estopped from raising the defense of prescription in view of its repeated
requests for reinvestigation which allegedly induced the CIR to delay the
collection of the assessed tax.
In its Reply8 dated 30 August 2007, BPI argues against the application of the
Suyoc case on two points: first, it never induced the CIR to postpone tax
collection; second, its request for reinvestigation was not categorically acted upon
by the CIR within the three-year collection period after assessment. BPI
maintains that it did not receive any communication from the CIR in reply to its
protest letters.
We grant the petition.
Section 3189 of the Tax Code of 1977 provides:
Sec. 318. Period of limitation upon assessment and collection.' Except as provided
in the succeeding section, internal revenue taxes shall be assessed within five
years after the return was filed, and no proceeding in court without assessment
for the collection of such taxes shall be begun after the expiration of such period.
For the purposes of this section, a return filed before the last day prescribed by
law for the filing thereof shall be considered as filed on such last day: Provided,
That this limitation shall not apply to cases already investigated prior to the
approval of this Code.
The statute of limitations on assessment and collection of national internal
revenue taxes was shortened from five (5) years to three (3) years by Batas
Pambansa Blg. 700.10 Thus, the CIR has three (3) years from the date of actual
filing of the tax return to assess a national internal revenue tax or to commence
court proceedings for the collection thereof without an assessment.
When it validly issues an assessment within the three (3)-year period, it has
another three (3) years within which to collect the tax due by distraint, levy, or
court proceeding. The assessment of the tax is deemed made and the three (3)-
year period for collection of the assessed tax begins to run on the date the
assessment notice had been released, mailed or sent to the taxpayer. 11

45
As applied to the present case, the CIR had three (3) years from the time he
issued assessment notices to BPI on 7 April 1989 or until 6 April 1992 within
which to collect the deficiency DST. However, it was only on 9 August 2002 that
the CIR ordered BPI to pay the deficiency.
In order to determine whether the prescriptive period for collecting the tax
deficiency was effectively tolled by BPI's filing of the protest letters dated 20 April
and 8 May 1989 as claimed by the CIR, we need to examine Section 320 12 of the
Tax Code of 1977, which states:
Sec. 320. Suspension of running of statute.' The running of the statute of
limitations provided in Sections 318 or 319 on the making of assessment and the
beginning of distraint or levy or a proceeding in court for collection, in respect of
any deficiency, shall be suspended for the period during which the Commissioner
is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court and for sixty days thereafter; when the taxpayer requests
for a re-investigation which is granted by the Commissioner; when the
taxpayer cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, That if the taxpayer informs
the Commissioner of any change in address, the running of the statute of
limitations will not be suspended; when the warrant of distraint and levy is duly
served upon the taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be located; and when
the taxpayer is out of the Philippines. (Emphasis supplied)cralawlibrary
The above section is plainly worded. In order to suspend the running of the
prescriptive periods for assessment and collection, the request for reinvestigation
must be granted by the CIR.
In BPI v. Commissioner of Internal Revenue,13 the Court emphasized the rule that
the CIR must first grant the request for reinvestigation as a requirement for the
suspension of the statute of limitations. The Court said:
In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco
requested for a thorough reinvestigation of the assessment against him and
placed at the disposal of the Collector of Internal Revenue all the evidences he
had for such purpose; yet, the Collector ignored the request, and the records and
documents were not at all examined. Considering the given facts, this Court
pronounced that -
x x x The act of requesting a reinvestigation alone does not suspend the
period. The request should first be granted, in order to effect suspension.
(Collector v. Suyoc Consolidated, supra; also Republic v. Ablaza, supra).
Moreover, the Collector gave appellee until April 1, 1949, within which to submit
his evidence, which the latter did one day before. There were no impediments on
the part of the Collector to file the collection case from April 1, 1949'
In Republic of the Philippines v. Acebedo, this Court similarly found that'
x x x T]he defendant, after receiving the assessment notice of September 24,
1949, asked for a reinvestigation thereof on October 11, 1949 (Exh. "A"). There
is no evidence that this request was considered or acted upon. In fact, on
46
October 23, 1950 the then Collector of Internal Revenue issued a warrant of
distraint and levy for the full amount of the assessment (Exh. "D"), but there was
follow-up of this warrant. Consequently, the request for reinvestigation did
not suspend the running of the period for filing an action for collection.
[Emphasis in the original]14
The Court went on to declare that the burden of proof that the request for
reinvestigation had been actually granted shall be on the CIR. Such grant may be
expressed in its communications with the taxpayer or implied from the action of
the CIR or his authorized representative in response to the request for
reinvestigation.
There is nothing in the records of this case which indicates, expressly or
impliedly, that the CIR had granted the request for reinvestigation filed by BPI.
What is reflected in the records is the piercing silence and inaction of the CIR on
the request for reinvestigation, as he considered BPI's letters of protest to be.
In fact, it was only in his comment to the present petition that the CIR, through
the OSG, argued for the first time that he had granted the request for
reinvestigation. His consistent stance invoking the Wyeth Suaco case, as reflected
in the records, is that the prescriptive period was tolled by BPI's request for
reinvestigation, without any assertion that the same had been granted or at least
acted upon.15
In the Wyeth Suaco case, private respondent Wyeth Suaco Laboratories, Inc. sent
letters seeking the reinvestigation or reconsideration of the deficiency tax
assessments issued by the BIR. The records of the case showed that as a result
of these protest letters, the BIR Manufacturing Audit Division conducted a review
and reinvestigation of the assessments. The records further showed that the
company, thru its finance manager, communicated its inability to settle the tax
deficiency assessment and admitted that it knew of the ongoing review and
consideration of its protest.
As differentiated from the Wyeth Suaco case, however, there is no evidence in
this case that the CIR actually conducted a reinvestigation upon the request of
BPI or that the latter was made aware of the action taken on its request. Hence,
there is no basis for the tax court's ruling that the filing of the request for
reinvestigation tolled the running of the prescriptive period for collecting the tax
deficiency.
Neither did the waiver of the statute of limitations signed by BPI supposedly
effective until 31 December 1994 suspend the prescriptive period. The CIR
himself contends that the waiver is void as it shows no date of acceptance in
violation of RMO No. 20-90.16 At any rate, the records of this case do not disclose
any effort on the part of the Bureau of Internal Revenue to collect the deficiency
tax after the expiration of the waiver until eight (8) years thereafter when it
finally issued a decision on the protest.
We also find the Suyoc case inapplicable. In that case, several requests for
reinvestigation and reconsideration were filed by Suyoc Consolidated Mining
Company purporting to question the correctness of tax assessments against it. As
47
a result, the Collector of Internal Revenue refrained from collecting the tax by
distraint, levy or court proceeding in order to give the company every opportunity
to prove its claim. The Collector also conducted several reinvestigations which
eventually led to a reduced assessment. The company, however, filed a petition
with the CTA claiming that the right of the government to collect the tax had
already prescribed.
When the case reached this Court, we ruled that Suyoc could not set up the
defense of prescription since, by its own action, the government was induced to
delay the collection of taxes to make the company feel that the demand was not
unreasonable or that no harassment or injustice was meant by the government.
In this case, BPI's letters of protest and submission of additional documents
pertaining to its SWAP transactions, which were never even acted upon, much
less granted, cannot be said to have persuaded the CIR to postpone the collection
of the deficiency DST.
The inordinate delay of the CIR in acting upon and resolving the request for
reinvestigation filed by BPI and in collecting the DST allegedly due from the latter
had resulted in the prescription of the government's right to collect the
deficiency. As this Court declared in Republic of the Philippines v. Ablaza:17
The law prescribing a limitation of actions for the collection of the income tax is
beneficial both to the Government and to its citizens; to the Government because
tax officers would be obliged to act promptly in the making of assessment, and to
citizens because after the lapse of the period of prescription citizens would have a
feeling of security against unscrupulous tax agents who will always find an excuse
to inspect the books of taxpayers, not to determine the latter's real liability, but
to take advantage of every opportunity to molest peaceful, law-abiding citizens.
Without such a legal defense taxpayers would furthermore be under obligation to
always keep their books and keep them open for inspection subject to
harassment by unscrupulous tax agents. The law on prescription being a remedial
measure should be interpreted in a way conducive to bringing about the
beneficent purpose of affording protection to the taxpayer within the
contemplation of the Commission which recommend the approval of the law.18
Given the prescription of the government's claim, we no longer deem it necessary
to pass upon the validity of the assessment.
WHEREFORE, the petition is GRANTED. The Decisionof the Court of Tax Appeals
dated 15 August 2006 and its Resolution dated 5 October 2006, are hereby
REVERSED and SET ASIDE. No pronouncement as to costs.
SO ORDERED.

[G.R. No. 66160. May 21, 1990.]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. UNION SHIPPING

CORPORATION and THE COURT OF TAX APPEALS, Respondents.
DECISION
48
PARAS, J.:
This is a petition for review on certiorari of the December 9, 1983 decision ** of
the Court of Tax Appeals in CTA Case No. 2989 reversing the Commissioner of
Internal Revenue.

In a letter dated December 27, 1974 (Exhibit "A"), herein petitioner

Commissioner of Internal Revenue assessed against Yee Fong Hong, Ltd. and/or
herein private respondent Union Shipping Corporation, the total sum of
P583,155.22 as deficiency income taxes due for the years 1971 and 1972. Said
letter was received on January 4, 1975, and in a letter dated January 10, 1975
(Exhibit "B"), received by petitioner on January 13, 1975, private respondent
protested the assessment.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph

Petitioner, without ruling on the protest, issued a Warrant of Distraint and Levy
(Exhibit "C"), which was served on private respondent’s counsel, Clemente Celso,
on November 25, 1976.

In a letter dated November 27, 1976 (Exhibit "D"), received by petitioner on

November 29, 1976 (Exhibit "D-1"), private respondent reiterated its request for
reinvestigation of the assessment and for the reconsideration of the summary
collection thru the Warrant of Distraint and Levy.

Petitioner, again, without acting on the request for reinvestigation and

reconsideration of the Warrant of Distraint and Levy, filed a collection suit before
Branch XXI of the then Court of First Instance of Manila and docketed as Civil
Case No. 120459 against private Respondent. Summons (Exhibit "E") in the said
collection case was issued to private respondent on December 28, 1978.

On January 10, 1979, private respondent filed with respondent court its Petition
for Review of the petitioner’s assessment of its deficiency income taxes in a letter
dated December 27, 1974, docketed therein as CTA Case No. 2989 (Rollo, pp.
44-49), wherein it prays that after hearing, judgment be rendered holding that it
is not liable for the payment of the income tax herein involved, or which may be
due from foreign shipowner Yee Fong Hong, Ltd.; to which petitioner filed his
answer on March 29, 1979 (Rollo, pp. 50-53).
Respondent Tax Court, in a decision dated December 9, 1983, ruled in favor of
private respondent —

"WHEREFORE, the decision of the Commissioner of Internal Revenue appealed

from, assessing against and demanding from petitioner the payment of deficiency
income tax, inclusive of 50% surcharge, interest and compromise penalties, in
the amounts of P73,958.76 and P583,155.22 for the years 1971 and 1972,
respectively, is reversed."cralaw virtua1aw library

Hence, the instant petition.

49
The Second Division of this Court, after the filing of the required pleadings, in a
resolution dated January 28, 1985, resolved to give due course to the petition,
and directed petitioner therein, to file his brief (Rollo, p. 145). In compliance,
petitioner filed his brief on May 10, 1985 (Rollo, p. 151). Respondents, on the
other hand, filed their brief on June 6, 1985 (Rollo, p. 156).

The main issues in this case are: (a) on the procedural aspect, whether or not the
Court of Tax Appeals has jurisdiction over thus case and (b) on the merits,
whether or not Union Shipping Corporation acting as a mere "husbanding agent"
of Yee Fong Hong Ltd. is liable for payment of taxes on the gross receipts or
earnings of the latter.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph

The main thrust of this petition is that the issuance of a warrant of distraint and
levy is proof of the finality of an assessment because it is the most drastic action
of all media of enforcing the collection of tax, and is tantamount to an outright
denial of a motion for reconsideration of an assessment. Among others, petitioner
contends that the warrant of distraint and levy was issued after respondent
corporation filed a request for reconsideration of subject assessment, thus
constituting petitioner’s final decision in the disputed assessments (Brief for
petitioner, pp. 9 and 12).

Petitioner argues therefore that the period to appeal to the Court of Tax Appeals
commenced to run from receipt of said warrant on November 25, 1976, so that
on January 10, 1979 when respondent corporation sought redress from the Tax
Court, petitioner’s decision has long become final and executory.

On this issue, this Court had already laid down the dictum that the Commissioner
should always indicate to the taxpayer in clear and unequivocal language what
constitutes his final determination of the disputed assessment.

Specifically, this Court ruled:jgc:chanrobles.com.ph

". . . we deem it appropriate to state that the Commissioner of Internal Revenue

should always indicate to the taxpayer in clear and unequivocal language
whenever his action on an assessment questioned by a taxpayer constitutes his
final determination on the disputed assessment, as contemplated by sections 7
and 11 of Republic Act 1125, as amended. On the basis of this statement
indubitably showing that the Commissioner’s communicated action is his final
decision on the contested assessment, the aggrieved taxpayer would then be able
to take recourse to the tax court at the opportune time. Without needless
difficulty, the taxpayer would be able to determine when his right to appeal to the
tax court accrues. This rule of conduct would also obviate all desire and
opportunity on the part of the taxpayer to continually delay the finality of the
assessment - and, consequently, the collection of the amount demanded as taxes
- by repeated requests for recomputation and reconsideration. On the part of the
Commissioner, this would encourage his office to conduct a careful and thorough

50
study of every questioned assessment and render a correct and definite decision
thereon in the first instance. This would also deter the Commissioner from
unfairly making the taxpayer grope in the dark and speculate as to which action
constitutes the decision appealable to the tax court. Of greater import, this rule of
conduct would meet a pressing need for fair play, regularity, and orderliness in
administrative action." (Surigao Electric Co., Inc. v. C.T.A., 57 SCRA 523, 528,
[1974]).

There appears to be no dispute that petitioner did not rule on private

respondent’s motion for reconsideration but contrary to the above ruling of this
Court, left private respondent in the dark as to which action of the Commissioner
is the decision appealable to the Court of Tax Appeals. Had he categorically stated
that he denies private respondent’s motion for reconsideration and that his action
constitutes his final determination on the disputed assessment, private
respondent without needless difficulty would have been able to determine when
his right to appeal accrues and the resulting confusion would have been avoided.

Much later, this Court reiterated the above-mentioned dictum in a ruling

applicable on all fours to the issue in the case at bar, that the reviewable decision
of the Bureau of Internal Revenue is that contained in the letter of its
Commissioner, that such constitutes the final decision on the matter which may
be appealed to the Court of Tax Appeals and not the warrants of distraint
(Advertising Associates, Inc. v. Court of Appeals, 133 SCRA 769 [1984] Italics
supplied). It was likewise stressed that the procedure enunciated is demanded by
the pressing need for fair play, regularity and orderliness in administrative
action.cralawnad

Under the circumstances, the Commissioner of Internal Revenue, not having

clearly signified his final action on the disputed assessment, legally the period to
appeal has not commenced to run. Thus, it was only when private respondent
received the summons on the civil suit for collection of deficiency income on
December 28, 1978 that the period to appeal commenced to run.

The request for reinvestigation and reconsideration was in effect considered

denied by petitioner when the latter filed a civil suit for collection of deficiency
income. So that on January 10, 1979 when private respondent filed the appeal
with the Court of Tax Appeals, it consumed a total of only thirteen (13) days well
within the thirty day period to appeal pursuant to Section 11 of R.A. 1125.

On the merits, it was found fully substantiated by the Court of Tax Appeals that,
respondent corporation is the husbanding agent of the vessel Yee Fong Hong, Ltd.
as follows:jgc:chanrobles.com.ph

"Coming to the second issue, petitioner contended and was substantiated by

satisfactory uncontradicted testimonies of Clemente Celso, Certified Public
Accountant, and Rodolfo C. Cabalquinto, President and General Manager, of
petitioner that it is actually and legally the husbanding agent of the vessel of Yee

51
Fong Hong, Ltd. as (1) it neither performed nor transacted any shipping business,
for and in representation, of Yee Fong Hong, Ltd. or its vessels or otherwise
negotiated or procured cargo to be loaded in the vessels of Yee Fong Hong, Ltd.
(p. 21, t.s.n., July 16, 1980); (2) it never solicited or procured cargo or freight in
the Philippines or elsewhere for loading in said vessels of Yee Fong Hong, Ltd.
(pp. 21 & 38, ibid.); (3) it had not collected any freight income or receipts for the
said Yee Fong Hong Ltd. (pp. 22 & 38, ibid.; pp. 46 & 48, t.s.n., Nov. 14, 1980.);
(4) it never had possession or control, actual or constructive, over the funds
representing payment by Philippine shippers for cargo loaded on said vessels (pp.
21 & 38, ibid; p. 48, ibid); petitioner never remitted to Yee Fong Hong, Ltd. any
sum of money representing freight incomes of Yee Fong Hong, Ltd. (p. 21, ibid.;
p. 48, ibid); and (5) that the freight payments made for cargo loaded in the
Philippines for foreign destination were actually paid directly by the shippers to
the said Yee Fong Hong, Ltd. upon arrival of the goods in the foreign ports."
(Rollo, pp. 58-59).

On the same issue, the Commissioner of Internal Revenue Misael P. Vera, on

query of respondent’s counsel, opined that respondent corporation being merely a
husbanding agent is not liable for the payment of the income taxes due from the
foreign ship owners loading cargoes in the Philippines (Rollo, p. 63; Exhibit "I",
Rollo, pp. 64-66).chanroblesvirtualawlibrary

Neither can private respondent be liable for withholding tax under Section 53 of
the Internal Revenue Code since it is not in possession, custody or control of the
funds received by and remitted to Yee Fong Hong, Ltd., a non-resident taxpayer.
As correctly ruled by the Court of Tax Appeals, "if an individual or corporation like
the petitioner in this case, is not in the actual possession, custody, or control of
the funds, it can neither be physically nor legally liable or obligated to pay the so-
called withholding tax on income claimed by Yee Fong Hong, Ltd." (Rollo, p. 67).

Finally, it must be stated that factual findings of the Court of Tax Appeals are
binding on this Court (Industrial Textiles Manufacturing Company of the Phil., Inc.
(ITEMCOP) v. Commissioner of Internal Revenue, Et. Al. (136 SCRA 549 [1985]).
It is well-settled that in passing upon petitions for review of the decisions of the
Court of Tax Appeals, this Court is generally confined to questions of law. The
findings of fact of said Court are not to be disturbed unless clearly shown to be
unsupported by substantial evidence (Commissioner of Internal Revenue v.
Manila Machinery & Supply Company, 135 SCRA 8 [1985]).

A careful scrutiny of the records reveals no cogent reason to disturb the findings
of the Court of Tax Appeals.

PREMISES CONSIDERED, the instant petition is hereby DISMISSED and the

assailed decision of the Court of Tax Appeals is hereby AFFIRMED.

SO ORDERED.

52
[G.R. No. L-25289. June 28, 1974.]

SURIGAO ELECTRIC CO., INC., Petitioner, v. THE HONORABLE COURT OF

TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents.

David G. Nitafan for Petitioner.

Solicitor General Antonio P. Barredo, Assistant Solicitor General

Felicisimo R. Rosete and Special Attorney Francisco J . Malate, Jr. for
Respondents.
DECISION
CASTRO, J.:
The Court denies the present petition for review of the decision of the Court of
Appeals dated October 1, 1965 in its CTA Case No. 1438, which dismissed the
appeal filed by the petitioner Surigao Electric Company, Inc. with the tax court on
August 1, 1963 on the ground that it was time-barred. cd

In November 1961 the petitioner Surigao Electric Co., Inc., grantee of a

legislative electric franchise, received a warrant of distraint and levy to enforce
the collection from "Mainit Electric" of a deficiency franchise tax plus surcharge in
the total amount of P718.59. In a letter to the Commissioner of Internal Revenue,
the petitioner contested this warrant, stating that it did not have a franchise in
Mainit, Surigao.

Thereafter the Commissioner, by letter dated April 2, 1961, advised the petitioner
to take up the matter with the General Auditing Office, enclosing a copy of the
4th Indorsement of the Auditor General dated November 23, 1960. This
indorsement indicated that the petitioner’s liability for deficiency franchise tax for
the period from September 1947 to June 1959 was P21,156.06, excluding
surcharge. Subsequently, in a letter to the Auditor General dated August 2, 1962,
the petitioner asked for reconsideration of the assessment, admitting liability only
for the 2% franchise tax in accordance with its legislative franchise and not at the
higher rate of 5% imposed by section 259 of the National Internal Revenue Code,
as amended, which latter rate the Auditor General used as basis in computing the
petitioner’s deficiency franchise tax.

An exchange of correspondence between the petitioner, on the one hand, and the
Commissioner and the Auditor General, on the other, ensued, all on the matter of
the petitioner’s liability for deficiency franchise tax.

The controversy culminated in a revised assessment dated April 29, 1963

(received by the petitioner on May 8, 1963) in the amount of P11,533.53,
representing the petitioner’s deficiency franchise tax and surcharges thereon for
the period from April 1, 1956 to June 30, 1959. The petitioner then requested a
recomputation of the revised assessment in a letter to the Commissioner dated
June 6, 1963 (sent by registered mail on June 7, 1963). The Commissioner,
53
however, in a letter dated June 28, 1963 (received by the petitioner on July 16,
1963), denied the request for recomputation.

On August 1, 1963 the petitioner appealed to the Court of Tax Appeals. The tax
court dismissed the appeal on October 1, 1965 on the ground that the appeal was
filed beyond the thirty-day period of appeal provided by section 11 of Republic
Act 1125.

Hence, the present recourse.

The case at bar raises only one issue: whether or not the petitioner’s appeal to
the Court of Tax Appeals was timebarred. The parties disagree on which letter of
the Commissioner embodies the decision or ruling appealable to the tax court.

A close reading of the numerous letters exchanged between the petitioner and
the Commissioner clearly discloses that the letter of demand issued by the
Commissioner on April 29, 1963 and received by the petitioner on May 8, 1963
constitutes the definite determination of the petitioner’s deficiency franchise tax
liability or the decision on the disputed assessment and, therefore, the decision
appealable to the tax court. This letter of April 29, 1963 was in response to the
communications of the petitioner, particularly the letter of August 2, 1962
wherein it assailed the 4th Indorsement’s data and findings on its deficiency
franchise tax liability computed at 5% (on the ground that its franchise precludes
the imposition of a rate higher than the 2% fixed in its legislative franchise), and
the letter of April 24, 1963 wherein it again questioned the assessment and
requested for a recomputation (on the ground that the Government could make
an assessment only for the period from May 29, 1956 to June 30, 1959). Thus, as
early as August 2, 1962, the petitioner already disputed the assessment made by
the Commissioner.

Moreover, the letter of demand dated April 29, 1963 unquestionably constitutes
the final action taken by the Commissioner on the petitioner’s several requests for
reconsideration and recomputation. In this letter, the Commissioner not only in
effect demanded that the petitioner pay the amount of P11,533.53 but also gave
warning that in the event it failed to pay, the said Commissioner would be
constrained to enforce the collection thereof by means of the remedies provided
by law. The tenor of the letter, specifically the statement regarding the resort to
legal remedies, unmistakably indicates the final nature of the determination made
by the Commissioner of the petitioner’s deficiency franchise tax liability.

The foregoing view accords with settled jurisprudence — and this despite the fact
that nothing in Republic Act 1125, 1 as amended, even remotely suggests the
element truly determinative of the appealability to the Court of Tax Appeals of a
ruling of the Commissioner of Internal Revenue. Thus, this Court has considered
the following communications sent by the Commissioner to taxpayers as
embodying rulings appealable to the tax court: (a) a letter which stated the result
of the reinvestigation requested by the taxpayer and the consequent modification

54
of the assessment; 2 (b) a letter which denied the request of the taxpayer for the
reconsideration, cancellation, or withdrawal of the original assessment; 3 (c) a
letter which contained a demand on the taxpayer for the payment of the revised
or reduced assessment; 4 and (d) a letter which notified the taxpayer of a
revision of previous assessments. 5

To sustain the petitioner’s contention that the Commissioner’s letter of June 28,
1963 denying its request for further amendment of the revised assessment
constitutes the ruling appealable to the tax court and that the thirty-day period
should, therefore, be counted from July 16, 1963, the day it received the June
28, 1963 letter, would, in effect, leave soley to the petitioner’s will the
determination of the commencement of the statutory thirty-day period, and place
the petitioner — and for that matter, any taxpayer — in a position to delay at will
and on convenience the finality of a tax assessment. This absurd interpretation
espoused by the petitioner would result in grave detriment to the interests of the
Government, considering that taxes constitute its life-blood and their prompt and
certain availability is an imperative need. 6

The revised assessment embodied in the Commissioner’s letter dated April 29,
1963 being, in legal contemplation, the final ruling reviewable by the tax court,
the thirty-day appeal period should be counted from May 8, 1963 (the day the
petitioner received a copy of the said letter). From May 8, 1963 to June 7, 1963
(the day the petitioner, by registered mail, sent to the Commissioner its letter of
June 6, 1963 requesting for further recomputation of the amount demanded from
it) saw the lapse of thirty days. The June 6, 1963 request for further
recomputation, partaking of a motion for reconsideration, tolled the running of
the thirty-day period from June 7, 1963 (the day the petitioner sent its letter by
registered mail) to July 16, 1963 (the day the petitioner received the letter of the
Commissioner dated June 28, 1963 turning down its request). The prescriptive
period commenced to run again on July 16, 1963. The petitioner filed its petition
for review with the tax court on August 1, 1963 — after the lapse of an additional
sixteen days. The petition for review having been filed beyond the thirty-day
period, we rule that the Court of Tax Appeals correctly dismissed the same.

The thirty-day period prescribed by section 11 of Republic Act 1125, as amended,

within which a taxpayer adversely affected by a decision of the Commissioner of
Internal Revenue should file his appeal with the tax court, is a jurisdictional
requirement, 7 and the failure of a taxpayer to lodge his appeal within the
prescribed period bars his appeal and renders the questioned decision final and
executory. 8

Prescinding from all the foregoing, we deem it appropriate to state that the
Commissioner of Internal Revenue should always indicate to the taxpayer in clear
and unequivocal language whenever his action on an assessment questioned by a
taxpayer constitutes his final determination on the disputed assessment, as
contemplated by sections 7 and 11 of Republic Act 1125, as amended. On the
basis of this indicium indubitably showing that the Commissioner’s communicated

55
action is his final decision on the contested assessment, the aggrieved taxpayer
would then be able to take recourse to the tax court at the opportune time.
Without needless difficulty, the taxpayer would be able to determine when his
right to appeal to the tax court accrues. This rule of conduct would also obviate
all desire and opportunity on the part of the taxpayer to continually delay the
finality of the assessment — and, consequently, the collection of the amount
demanded as taxes — by repeated requests for recomputation and
reconsideration. On the part of the Commissioner, this would encourage his office
to conduct a careful and thorough study of every questioned assessment and
render a correct and definite decision thereon in the first instance. This would also
deter the Commissioner from unfairly making the taxpayer grope in the dark and
speculate as to which action constitutes the decision appealable to the tax court.
Of greater import, this rule of conduct would meet a pressing need for fair play,
regularity, and orderliness in administrative action.

ACCORDINGLY, the decision of the Court of Tax Appeals dated October 1, 1965 is
affirmed, at petitioner’s cost.

G.R. No. 135210 July 11, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ISABELA CULTURAL CORPORATION, respondent.
PANGANIBAN, J.:
A final demand letter from the Bureau of Internal Revenue, reiterating to the
taxpayer the immediate payment of a tax deficiency assessment previously
made, is tantamount to a denial of the taxpayer's request for reconsideration.
Such letter amounts to a final decision on a disputed assessment and is thus
appealable to the Court of Tax Appeals (CTA).
The Case
Before this Court is a Petition for Review on Certiorari1 pursuant to Rule 45 of the
Rules of Court, seeking to set aside the August 19, 1998 Decision2 of the Court of
Appeals3 (CA) in CA-GR SP No. 46383 and ultimately to affirm the dismissal of
CTA Case No. 5211. The dispositive portion of the assailed Decision reads as
follows:
"WHEREFORE, the assailed decision is REVERSED and SET ASIDE. Accordingly,
judgment is hereby rendered REMANDING the case to the CTA for proper
disposition."4
The Facts
The facts are undisputed. The Court of Appeals quoted the summary of the CTA
as follows:
"As succinctly summarized by the Court of Tax appeals (CTA for brevity), the
antecedent facts are as follows:
56
'In an investigation conducted on the 1986 books of account of [respondent,
petitioner] had the preliminary [finding] that [respondent] incurred a total income
tax deficiency of P9,985,392.15, inclusive of increments. Upon protest by
[respondent's] counsel, the said preliminary assessment was reduced to the
amount of P325,869.44, a breakdown of which follows:

Deficiency Income P321,022.68

Tax

Deficiency Expanded 4,846.76

Withholding Tax

Total P325,869.44

(pp. 187-189, BIR records)'

On February 23, 1990, [respondent] received from [petitioner] an assessment
letter, dated February 9, 1990, demanding payment of the amounts of
P333,196.86 and P4,897.79 as deficiency income tax and expanded withholding
tax inclusive of surcharge and interest, respectively, for the taxable period from
January 1, 1986 to December 31, 1986. (pp. 204 and 205, BIR rec.)
In a letter, dated March 22, 1990, filed with the [petitioner's] office on March 23,
1990 (pp. 296-311, BIR rec.), [respondent] requested x x x a reconsideration of
the subject assessment.
Supplemental to its protest was a letter, dated April 2, 1990, filed with the
[petitioner's] office on April 18, 1990 (pp. 224 & 225, BIR rec.), to which x x x
were attached certain documents supportive of its protest, as well as a Waiver of
Statute of Limitation, dated April 17, 1990, where it was indicated that
[petitioner] would only have until April 5, 1991 within which to asses and collect
the taxes that may be found due from [respondent] after the re-investigation.
On February 9, 1995, [respondent] received from [petitioner] a Final Notice
Before Seizure, dated December 22, 1994 (p. 340, BIR rec.). In said letter,
[petitioner] demanded payment of the subject assessment within ten (10) days
from receipt thereof. Otherwise, failure on its part would constrain [petitioner] to
collect the subject assessment through summary remedies.
[Respondent] considered said final notice of seizure as [petitioner's] final
decision. Hence, the instant petition for review filed with this Court on March 9,
1995.
The CTA having rendered judgment dismissing the petition, [respondent] filed the
instant petition anchored on the argument that [petitioner's] issuance of the Final
Notice Before Seizure constitutes [its] decision on [respondent's] request for
reinvestigation, which the [respondent] may appeal to the CTA."5
Ruling of the Court of Appeals
In its Decision, the Court of Appeals reversed the Court of Tax Appeals. The CA
considered the final notice sent by petitioner as the latter's decision, which was
57
appealable to the CTA. The appellate court reasoned that the final Notice before
seizure had effectively denied petitioner's request for a reconsideration of the
commissioner's assessment. The CA relied on the long-settled tax jurisprudence
that a demand letter reiterating payment of delinquent taxes amounted to a
decision on a disputed assessment.
Hence, this recourse.6
Issues
In his Memorandum,7 petitioner presents for this Court's consideration a solitary
issue:
"Whether or not the Final Notice Before Seizure dated February 9, 1995 signed by
Acting Chief Revenue Collection Officer Milagros Acevedo against ICC constitutes
the final decision of the CIR appealable to the CTA."8
The Court's Ruling
The Petition is not meritorious.
Sole Issue:
The Nature of the Final Notice Before Seizure
The Final Notice Before Seizure sent by the Bureau of Internal Revenue (BIR) to
respondent reads as follows:
"On Feb. 9, 1990, [this] Office sent you a letter requesting you to settle the
above-captioned assessment. To date, however, despite the lapse of a
considerable length of time, we have not been honored with a reply from you.
In this connection, we are giving you this LAST OPPORTUNITY to settle the
adverted assessment within ten (10) days after receipt hereof. Should you again
fail, and refuse to pay, this Office will be constrained to enforce its collection by
summary remedies of Warrant of Levy of Road Property, Distraint of Personal
Property or Warrant of Garnishment, and/or simultaneous court action.
Please give this matter your preferential attention.

Very truly yours,

ISIDRO B. TECSON, JR.

Revenue District Officer

By:

(Signed)
MILAGROS M. ACEVEDO
Actg. Chief Revenue Collection
Officer"9

Petitioner maintains that this Final Notice was a mere reiteration of the delinquent
taxpayer's obligation to pay the taxes due. It was supposedly a mere demand
58
that should not have been mistaken for a decision on a protested assessment.
Such decision, the commissioner contends, must unequivocably indicate that it is
the resolution of the taxpayer's request for reconsideration and must likewise
state the reason therefor.
Respondent, on the other hand, points out that the Final Notice Before Seizure
should be considered as a denial of its request for reconsideration of the disputed
assessment. The Notice should be deemed as petitioner's last act, since failure to
comply with it would lead to the distraint and levy of respondent's properties, as
indicated therein.
We agree with respondent. In the normal course, the revenue district officer
sends the taxpayer a notice of delinquent taxes, indicating the period covered,
the amount due including interest, and the reason for the delinquency. If the
taxpayer disagrees with or wishes to protest the assessment, it sends a letter to
the BIR indicating its protest, stating the reasons therefor, and submitting such
proof as may be necessary. That letter is considered as the taxpayer's request for
reconsideration of the delinquent assessment. After the request is filed and
received by the BIR, the assessment becomes a disputed assessment on which it
must render a decision. That decision is appealable to the Court of Tax Appeals
for review.
Prior to the decision on a disputed assessment, there may still be exchanges
between the commissioner of internal revenue (CIR) and the taxpayer. The
former may ask clarificatory questions or require the latter to submit additional
evidence. However, the CIR's position regarding the disputed assessment must
be indicated in the final decision. It is this decision that is properly appealable to
the CTA for review.
Indisputably, respondent received an assessment letter dated February 9, 1990,
stating that it had delinquent taxes due; and it subsequently filed its motion for
reconsideration on March 23, 1990. In support of its request for reconsideration,
it sent to the CIR additional documents on April 18, 1990. The next
communication respondent received was already the Final Notice Before Seizure
dated November 10, 1994.
In the light of the above facts, the Final Notice Before Seizure cannot but be
considered as the commissioner's decision disposing of the request for
reconsideration filed by respondent, who received no other response to its
request. Not only was the Notice the only response received; its content and
tenor supported the theory that it was the CIR's final act regarding the request
for reconsideration. The very title expressly indicated that it was a final notice
prior to seizure of property. The letter itself clearly stated that respondent was
being given "this LAST OPPORTUNITY" to pay; otherwise, its properties would be
subjected to distraint and levy. How then could it have been made to believe that
its request for reconsideration was still pending determination, despite the actual
threat of seizure of its properties?
Furthermore, Section 228 of the National Internal Revenue Code states that a
delinquent taxpayer may nevertheless directly appeal a disputed assessment, if

59
its request for reconsideration remains unacted upon 180 days after submission
thereof. We quote:
"Sec. 228. Protesting an Assessment. – x x x
Within a period to be prescribed by implementing rules and regulations, the
taxpayer shall be required to respond to said notice. If the taxpayer fails to
respond, the Commissioner or his duly authorized representative shall issue an
assessment based on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing
rules and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have become final.
If the protest is denied in whole or in part, or is not acted upon within one
hundred eighty (180) days from submission of documents, the taxpayer
adversely affected by the decision or inaction may appeal to the Court of Tax
Appeals within (30) days from receipt of the said decision, or from the lapse of
the one hundred eighty (180)-day period; otherwise the decision shall become
final, executory and demandable."10
In this case, the said period of 180 days had already lapsed when respondent
filed its request for reconsideration on March 23, 1990, without any action on the
part of the CIR.
Lastly, jurisprudence dictates that a final demand letter for payment of delinquent
taxes may be considered a decision on a disputed or protested assessment. In
Commissioner of Internal Revenue v. Ayala Securities Corporation, this Court
held:
"The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount
to a denial of the reconsideration or [respondent corporation's] x x x protest o[f]
the assessment made by the petitioner, considering that the said letter [was] in
itself a reiteration of the demand by the Bureau of Internal Revenue for the
settlement of the assessment already made, and for the immediate payment of
the sum of P758,687.04 in spite of the vehement protest of the respondent
corporation on April 21, 1961. This certainly is a clear indication of the firm stand
of petitioner against the reconsideration of the disputed assessment, in view of
the continued refusal of the respondent corporation to execute the waiver of the
period of limitation upon the assessment in question.
This being so, the said letter amount[ed] to a decision on a disputed or protested
assessment and, there, the court a quo did not err in taking cognizance of this
case."11
Similarly, in Surigao Electric Co., Inc. v. Court of Tax Appeals12 and again in CIR
v. Union Shipping Corp.,13 we ruled:
"x x x. The letter of demand dated April 29, 1963 unquestionably constitutes the
final action taken by the commissioner on the petitioner's several requests for
reconsideration and recomputation. In this letter the commissioner not only in
60
effect demanded that the petitioner pay the amount of P11,533.53 but also gave
warning that in the event it failed to pay, the said commissioner would be
constrained to enforce the collection thereof by means of the remedies provided
by law. The tenor of the letter, specifically the statement regarding the resort to
legal remedies, unmistakably indicate[d] the final nature of the determination
made by the commissioner of the petitioner's deficiency franchise tax liability."
As in CIR v. Union Shipping,14 petitioner failed to rule on the Motion for
Reconsideration filed by private respondent, but simply continued to demand
payment of the latter's alleged tax delinquency. Thus, the Court reiterated the
dictum that the BIR should always indicate to the taxpayer in clear and
unequivocal language what constitutes final action on a disputed assessment. The
object of this policy is to avoid repeated requests for reconsideration by the
taxpayer, thereby delaying the finality of the assessment and, consequently, the
collection of the taxes due. Furthermore, the taxpayer would not be groping in
the dark, speculating as to which communication or action of the BIR may be the
decision appealable to the tax court.15
In the instant case, the second notice received by private respondent verily
indicated its nature – that it was final. Unequivocably, therefore, it was
tantamount to a rejection of the request for reconsideration.
Commissioner v. Algue16 is not in point here. In that case, the Warrant of
Distraint and Levy, issued to the taxpayer without any categorical ruling on its
request for reconsideration, was not deemed equivalent to a denial of the
request. Because such request could not in fact be found in its records, the BIR
cannot be presumed to have taken it into consideration. The request was
considered only when the taxpayer gave a copy of it, duly stamp-received by the
BIR. Hence, the Warrant was deemed premature.1âwphi1.nêt
In the present case, petitioner does not deny receipt of private respondent's
protest letter. As a matter of fact, it categorically relates the following in its
"Statement of Relevant Facts":17
"3. On March 23, 1990, respondent ICC wrote the CIR requesting for a
reconsideration of the assessment on the ground that there was an error
committed in the computation of interest and that there were expenses which
were disallowed (Ibid., pp. 296-311).
"4. On April 2, 1990, respondent ICC sent the CIR additional documents in
support of its protest/reconsideration. The letter was received by the BIR on April
18, 1990. Respondent ICC further executed a Waiver of Statute of Limitation
(dated April 17, 1990) whereby it consented to the BIR to assess and collect any
taxes that may be discovered in the process of reinvestigation, until April 3, 1991
(Ibid., pp. 296-311). A copy of the waiver is hereto attached as Annex 'C'."
Having admitted as a fact private respondent's request for reconsideration,
petitioner must have passed upon it prior to the issuance of the Final Notice
Before Seizure.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision
AFFIRMED.
61
SO ORDERED.

[G.R. No. 160949, April 04 : 2011]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. PL

MANAGEMENT INTERNATIONAL PHILIPPINES, INC., RESPONDENT.

DECISION
BERSAMIN, J.:
How may the respondent taxpayer still recover its unutilized creditable
withholding tax for taxable year 1997 after its written claim for refund was not
acted upon by the petitioner, whose inaction was upheld by the Court of Tax
Appeals (CTA) on the ground of the claim for tax refund being already barred by
prescription?
Nature of the Case

The inaction of petitioner Commissioner of Internal Revenue (Commissioner) on

the respondent's written claim for tax refund or tax credit impelled the latter to
commence judicial action for that purpose in the CTA. However, the CTA denied
the claim on December 10, 2001 for being brought beyond two years from the
accrual of the claim.

On appeal, the Court of Appeals (CA) reversed the CTA's denial through the
decision promulgated in C.A.-G.R. Sp. No. 68461 on November 28, 2002, and
directed the petitioner to refund the unutilized creditable withholding tax to the
respondent.[1]

Hence, the petitioner appeals.

Antecedents

In 1997, the respondent, a Philippine corporation, earned an income of

P24,000,000.00 from its professional services rendered to UEM-MARA Philippines
Corporation (UMPC), from which income UMPC withheld P1,200,000.00 as the
respondent's withholding agent.[2]

In its 1997 income tax return (ITR) filed on April 13, 1998, the respondent
reported a net loss of P983,037.00, but expressly signified that it had a creditable
withholding tax of P1,200,000.00 for taxable year 1997 to be claimed as tax
credit in taxable year 1998.[3]

On April 13, 1999, the respondent submitted its ITR for taxable year 1998, in
which it declared a net loss of P2,772,043.00. Due to its net-loss position, the
respondent was unable to claim the P1,200,000.00 as tax credit.

62
On April 12, 2000, the respondent filed with the petitioner a written claim for the
refund of the P1,200,000.00 unutilized creditable withholding tax for taxable year
1997.[4] However, the petitioner did not act on the claim.
Ruling of the CTA

Due to the petitioner's inaction, the respondent filed a petition for review in the
CTA (CTA Case No. 6107) on April 14, 2000, thereby commencing its judicial
action.

On December 10, 2001, the CTA denied the respondent's claim on the ground of
prescription,[5] to wit:
Records reveal that Petitioner filed its Annual Income Tax Return for taxable year
1997 on April 13, 1998 (Exhibit "A") and its claim for refund with the BIR on April
12, 2000 (Exhibit "D" and No. 2 of the Statement of Admitted Facts and Issues).
Several days thereafter, or on April 14, 2000, Petitioner filed an appeal with this
Court.

The aforementioned facts clearly show that the judicial claim for refund via this
Petition for Review was already filed beyond the two-year prescriptive period
mandated by Sections 204 (C) and 229 of the Tax Code xxx
xxx

As earlier mentioned, Petitioner filed its Annual ITR on April 13, 1998 and filed its
judicial claim for refund only on April 14, 2000 which is beyond the two-year
period earlier discussed. The aforequoted Sections 204 (C) and 229 of the Tax
Code mandates that both the administrative and judicial claims for refund must
be filed within the two-year period, otherwise the taxpayer's cause of action shall
be barred by prescription. Unfortunately, this lapse on the part of Petitioner
proved fatal to its claim.
xxx

WHEREFORE, in view of the foregoing the Petition for Review is hereby DENIED
due to prescription.

Ruling of the CA

Aggrieved, the respondent appealed to the CA, assailing the correctness of the
CTA's denial of its judicial claim for refund on the ground of bar by prescription.

As earlier mentioned, the CA promulgated its decision on November 28, 2002,

holding that the two-year prescriptive period, which was not jurisdictional (citing
Oral and Dental College v. Court of Tax Appeal[6]and Commissioner of Internal

63
Revenue v. Philippine American Life Insurance Company[7]), might be suspended
for reasons of equity.[8] The CA thus disposed as follows:
WHEREFORE, the petition is partly GRANTED and the assailed CTA Decision partly
ANNULLED. Respondent Commissioner of Internal Revenue is hereby ordered to
refund to petitioner PL Management International Phils., Inc., the amount of
P1,200,000.00 representing its unutilized creditable withholding tax in taxable
year 1997.[9]

The CA rejected the petitioner's motion for reconsideration.[10]

Issues

In this appeal, the petitioner insists that:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE TWO-YEAR
PRESCRIPTIVE PERIOD UNDER SECTION 229 OF THE TAX CODE IS NOT
JURISDICTIONAL, THUS THE CLAIM FOR REFUND OF RESPONDENT IS
SUSPENDED FOR REASONS OF EQUITY.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT'S
JUDICIAL RIGHT TO CLAIM FOR REFUND BROUGHT BEFORE THE COURT OF
APPEALS ON APRIL 14, 2000 WAS ONE DAY LATE ONLY.[11]

The petitioner argues that the decision of the CA suspending the running of the
two-year period set by Section 229 of the National Internal Revenue Code of
1997 (NIRC of 1997) on ground of equity was erroneous and had no legal basis;
that equity could not supplant or replace a clear mandate of a law that was still in
force and effect; that a claim for a tax refund or tax credit, being in the nature of
a tax exemption to be treated as in derogation of sovereign authority, must be
construed in strictissimi juris against the taxpayer; that the respondent's two-
year prescriptive period under Section 229 of the NIRC of 1997 commenced to
run on April 13, 1998, the date it filed its ITR for taxable year 1997; that by
reckoning the period from April 13, 1998, the respondent had only until April 12,
2000 within which to commence its judicial action for refund with the CTA, the
year 2000 being a leap year; that its filing of the judicial action on April 14, 2000
was already tardy; and that the factual findings of the CTA, being supported by
substantial evidence, should be accorded the highest respect.

In its comment, the respondent counters that it filed its judicial action for refund
within the statutory two-year period because the correct reckoning started from
April 15, 1998, the last day for the filing of the ITR for taxable year 1997; that
the two-year prescriptive period was also not jurisdictional and might be relaxed
on equitable reasons; and that a disallowance of its claim for refund would result
in the unjust enrichment of the Government at its expense.
Ruling of the Court

64
We reverse and set aside the decision of the CA to the extent that it orders the
petitioner to refund to the respondent the P1,200,000.00 representing the
unutilized creditable withholding tax in taxable year 1997, but permit the
respondent to apply that amount as tax credit in succeeding taxable years until
fully exhausted.

Section 76 of the NIRC of 1997 provides:

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

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

(B) Carry over the excess credit; or

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

In case the corporation is entitled to a refund of the excess estimated quarterly

income taxes paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years. Once the option to carry-
over and apply the excess quarterly income tax against income tax due
for the taxable quarters of the succeeding taxable years has been made,
such option shall be considered irrevocable for that taxable period and
no application for tax refund or issuance of a tax credit certificate shall
be allowed therefor.

The predecessor provision of Section 76 of the NIRC of 1997 is Section 79 of the

NIRC of 1985, which provides:
Section 79. Final Adjustment Return. - Every corporation liable to tax under
Section 24 shall file a final adjustment return covering the total net income for
the preceding calendar or fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly

income taxes-paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable year.
65
As can be seen, Congress added a sentence to Section 76 of the NIRC of 1997 in
order to lay down the irrevocability rule, to wit:
xxx Once the option to carry-over and apply the excess quarterly income tax
against income tax due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable for that taxable
period and no application for tax refund or issuance of a tax credit certificate shall
be allowed therefor.

In Philam Asset Management, Inc. v. Commissioner of Internal Revenue,[12] the

Court expounds on the two alternative options of a corporate taxpayer whose
total quarterly income tax payments exceed its tax liability, and on how the
choice of one option precludes the other, viz:
The first option is relatively simple.Any tax on income that is paid in excess of the
amount due the government may be refunded, provided that a taxpayer properly
applies for the refund.

The second option works by applying the refundable amount, as shown on the
FAR of a given taxable year, against the estimated quarterly income tax liabilities
of the succeeding taxable year.

These two options under Section 76 are alternative in nature. The choice
of one precludes the other. Indeed, in Philippine Bank of Communications
v. Commissioner of Internal Revenue, the Court ruled that a corporation
must signify its intention - whether to request a tax refund or claim a tax
credit - by marking the corresponding option box provided in the
FAR.While a taxpayer is required to mark its choice in the form provided
by the BIR, this requirement is only for the purpose of facilitating tax
collection.

One cannot get a tax refund and a tax credit at the same time for the
same excess income taxes paid. xxx

In Commissioner of Internal Revenue v. Bank of the Philippine Islands, [13] the

Court, citing the aforequoted pronouncement in Philam Asset Management, Inc.,
points out that Section 76 of the NIRC of 1997 is clear and unequivocal in
providing that the carry-over option, once actually or constructively chosen by a
corporate taxpayer, becomes irrevocable. The Court explains:
Hence, the controlling factor for the operation of the irrevocability rule is that the
taxpayer chose an option; and once it had already done so, it could no longer
make another one. Consequently, after the taxpayer opts to carry-over its excess
tax credit to the following taxable period, the question of whether or not it
actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997
is explicit in stating that once the option to carry over has been made, "no
application for tax refund or issuance of a tax credit certificate shall be allowed
66
therefor."

The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to
carry-over and apply the excess quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no application for tax
refund or issuance of a tax credit certificate shall be allowed therefor." The phrase
"for that taxable period" merely identifies the excess income tax, subject of the
option, by referring to the taxable period when it was acquired by the taxpayer.
In the present case, the excess income tax credit, which BPI opted to carry over,
was acquired by the said bank during the taxable year 1998. The option of BPI to
carry over its 1998 excess income tax credit is irrevocable; it cannot later on opt
to apply for a refund of the very same 1998 excess income tax credit.

The Court of Appeals mistakenly understood the phrase "for that taxable period"
as a prescriptive period for the irrevocability rule. This would mean that since the
tax credit in this case was acquired in 1998, and BPI opted to carry it over to
1999, then the irrevocability of the option to carry over expired by the end of
1999, leaving BPI free to again take another option as regards its 1998 excess
income tax credit. This construal effectively renders nugatory the irrevocability
rule. The evident intent of the legislature, in adding the last sentence to Section
76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping on its options,
and avoid confusion and complication as regards said taxpayer's excess tax
credit. The interpretation of the Court of Appeals only delays the flip-flopping to
the end of each succeeding taxable period.

The Court similarly disagrees in the declaration of the Court of Appeals that to
deny the claim for refund of BPI, because of the irrevocability rule, would be
tantamount to unjust enrichment on the part of the government. The Court
addressed the very same argument in Philam, where it elucidated that there
would be no unjust enrichment in the event of denial of the claim for refund
under such circumstances, because there would be no forfeiture of any amount in
favor of the government. The amount being claimed as a refund would
remain in the account of the taxpayer until utilized in succeeding taxable
years, as provided in Section 76 of the NIRC of 1997. It is worthy to note
that unlike the option for refund of excess income tax, which prescribes
after two years from the filing of the FAR, there is no prescriptive period
for the carrying over of the same. Therefore, the excess income tax credit
of BPI, which it acquired in 1998 and opted to carry over, may be
repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000,
2001, and so on and so forth, until actually applied or credited to a tax
liability of BPI.

Inasmuch as the respondent already opted to carry over its unutilized creditable
withholding tax of P1,200,000.00 to taxable year 1998, the carry-over could no
longer be converted into a claim for tax refund because of the irrevocability rule
provided in Section 76 of the NIRC of 1997. Thereby, the respondent became
67
barred from claiming the refund.

However, in view of it irrevocable choice, the respondent remained entitled to

utilize that amount of P1,200,000.00 as tax credit in succeeding taxable years
until fully exhausted. In this regard, prescription did not bar it from applying the
amount as tax credit considering that there was no prescriptive period for the
carrying over of the amount as tax credit in subsequent taxable years. [14]

The foregoing result has rendered unnecessary any discussion of the assigned
errors committed by the CA.

WHEREFORE, we reverse and set aside the decision dated November 28, 2002
promulgated in C.A.-G.R. Sp. No. 68461 by the Court of Appeals, and declare that
PL Management International Phils., Inc. is not entitled to the refund of the
unutilized creditable withholding tax of P1,200,000.00 on account of the
irrevocability rule provided in Section 76 of the National Internal Revenue Code of
1997.

We rule that PL Management International Phils., Inc. may still use the creditable
withholding tax of P1,200,000.00 as tax credit in succeeding taxable years until
fully exhausted.

No pronouncement on costs of suit.

SO ORDERED.

[G.R. No. 181298 : January 10, 2011]

BELLE CORPORATION, PETITIONER, VS. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT.

DECISION
DEL CASTILLO, J.:

Section 69 of the old National Internal Revenue Code (NIRC) allows unutilized tax
credits to be refunded as long as the claim is filed within the prescriptive
period. This, however, no longer holds true under Section 76 of the 1997 NIRC
as the option to carry-over excess income tax payments to the succeeding
taxable year is now irrevocable.

This Petition for Review on Certiorari [1] under Rule 45 of the Rules of Court seeks
to set aside the January 25, 2007 Decision [2] and the January 21, 2008
Resolution [3] of the Court of Appeals (CA).

Factual Antecedents
68
Petitioner Belle Corporation is a domestic corporation engaged in the real estate
and property business. [4]

On May 30, 1997, petitioner filed with the Bureau of Internal Revenue (BIR) its
Income Tax Return (ITR) for the first quarter of 1997, showing a gross income of
P741,607,495.00, a deduction of P65,381,054.00, a net taxable income of
P676,226,441.00 and an income tax due of P236,679,254.00, which petitioner
paid on even date through PCI Bank, Tektite Tower Branch, an Authorized Agent
Bank of the BIR. [5]

On August 14, 1997, petitioner filed with the BIR its second quarter ITR,
declaring an overpayment of income taxes in the amount of P66,634,290.00. The
computation of which is reproduced below:
Gross Income P 833,186,319.00
Less: Deductions 347,343,565.00
Taxable Income P 485,842,754.00
Tax Rate x 35%
Tax Due P 170,044,964.00
Less: Tax Credits/Payments
(a) Prior Year's Excess Tax Credit -
(b) 1st Quarter Payment P236,679,254.00
(c) Creditable Withholding Tax - ____________
(P 66,634,290.00)
[6]

In view of the overpayment, no taxes were paid for the second and third quarters
of 1997. [7] Petitioner's ITR for the taxable year ending December 31, 1997
thereby reflected an overpayment of income taxes in the amount of
P132,043,528.00, computed as follows:
Gross Income P 1,182,473,910.00
Less: Deductions 879,485,278.00
Taxable Income P 302,988,362.00
Tax Rate x 35%
Tax Due P 106,046,021.00
Less: Tax Credits/Payments
(a) Prior Year's Excess Tax Credit -

69
(b) 1st Quarter Payment P236,679,254.00
(c) Creditable Withholding Tax (1,410,295.00) (238,089,549.00)
[8]
REFUNDABLE AMOUNT (P 132,043,528.00)

Instead of claiming the amount as a tax refund, petitioner decided to apply it as a

tax credit to the succeeding taxable year by marking the tax credit option box in
its 1997 ITR. [9]

For the taxable year 1998, petitioner's amended ITR showed an overpayment of
P106,447,318.00, computed as follows:
Gross Income P 1,279,810,489.00
Less: Deduction 1,346,553,546.00
Taxable Income (Loss) (P 66,743,057.00)
Tax Rate 34%
Tax Due (Regular Income Tax) - NIL
Minimum Corporate Income Tax P 25,596,210.00
Tax Due 25,596,210.00
Less: Tax Credits/Payments
(a) Prior year's excess Tax Credits (P 132,041,528.00)
(b) Quarterly payment -
(c) Creditable tax withheld -
Tax Payable/Overpayment (P 106,447,318.00)
[10]

On April 12, 2000, petitioner filed with the BIR an administrative claim for refund
of its unutilized excess income tax payments for the taxable year 1997 in the
amount of P106,447,318.00. [11]

Notwithstanding the filing of the administrative claim for refund, petitioner carried
over the amount of P106,447,318.00 to the taxable year 1999 and applied a
portion thereof to its 1999 Minimum Corporate Income Tax (MCIT) liability, as
evidenced by its 1999 ITR. [12] Thus:
Gross Income P 708,888,638.00
Less: Deduction 1,328,101,776.00
Taxable Income (P 619,213,138.00)
Tax Due -
Minimum Corporate Income Tax P 14,185,874.00

70
Less: Tax Credits/Payments
(a) Prior year's excess Credit P 106,447,318.00
(b) Tax Payments for the 1st & 3rd 0
Qtrs.
(c) Creditable tax withheld 0 P 106,447,318.00
TAX PAYABLE/REFUNDABLE (P 92,261,444.00)
[13]

Proceedings before the Court of Tax Appeals (CTA)

On April 14, 2000, due to the inaction of the respondent Commissioner of Internal
Revenue (CIR) and in order to toll the running of the two-year prescriptive
period, petitioner appealed its claim for refund of unutilized excess income tax
payments for the taxable year 1997 in the amount of P106,447,318.00 with the
CTA via a Petition for Review, [14] docketed as CTA Case No. 6070.

In answer thereto, respondent interposed that:

4. Petitioner's alleged claim for refund/tax credit is subject to administrative
routinary investigation/examination by respondent's Bureau;

5. Petitioner failed miserably to show that the total amount of P106,447,318.00

claimed as overpaid or excess income tax is refundable;

6. Taxes paid and collected are presumed to have been paid in accordance with
law; hence, not refundable;

7. In an action for tax refund, the burden is on the taxpayer to establish its right
to refund, and failure to sustain the burden is fatal to the claim for refund;

8. It is incumbent upon petitioner to show that it has complied with the provisions
of Section 204 (c) in relation to Section 229 of the tax Code;

9. Well-established is the rule that refunds/tax credits are construed strictly

against the taxpayer as they partake the nature of tax exemptions. [15]

To prove entitlement to the refund, petitioner submitted, among others, the

following documents: its ITR for the first quarter of taxable year 1997 (Exhibit
"B"), [16] its tentative ITRs for taxable years 1997 (Exhibit "D") [17] and 1998
(Exhibit "H"), [18] its final ITRs for taxable years 1997 (Exhibit "E"), [19] 1998
(Exhibit "I") [20] and 1999 (Exhibit "J"), [21] its Letter Claim for Refund filed with
the BIR (Exhibit "K") [22] and the Official Receipt issued by PCI Bank showing the
income tax payment made by petitioner in the amount of P236,679,254.00 for
the first quarter of 1997 (Exhibit "C"). [23]

71
 [24]
On April 10, 2001, the CTA rendered a Decision denying petitioner's claim for
refund. It found:
[T]hat all the allegations made by the Petitioner as well as the figures
accompanying Petitioner's claim are substantiated by documentary evidence but
noticed some flaws in Petitioner's application of the pertinent laws involved.

It bears stressing that the applicable provision in the case at bar is Section
69 of the old Tax Code and not Section 76 of the 1997 Tax Code. Settled is
the rule that under Section 69 of the old Tax Code, the carrying forward of any
excess/overpaid income tax for a given taxable year is limited only up to the
succeeding taxable year.

A painstaking scrutiny of Petitioner's income tax returns would show that

Petitioner carried over its 1997 refundable tax of P132,043,528.00 to the
succeeding year of 1998 yielding an overpayment of P106,447,318.00 (Exhibit I-
1) after deducting therefrom the minimum Corporate Income tax of
P25,596,210.00. However, Petitioner even went further to the taxable
year 1999 and applied the Prior Year's (1998) Excess Credit of
P106,447,318.00 to its income tax liability.

True enough, upon verification of Petitioner's 1999 Corporate Annual Income Tax
Return (Exh. I), this Court found that the whole amount of
P106,447,318.00 representing its prior year's excess credit (subject of
this claim) was carried forward to its 1999 income tax liability, details of
the 1999 Income Tax Return are shown below as follows:
Gross Income P 708,888,638.00
Less: Deduction 1,328,101,776.00
Taxable Income (P 619,213,138.00)
Tax Due -
Minimum Corporate Income Tax P 14,185,874.00
Less: Tax Credits/Payments
(a) Prior year's excess Credit P 106,447,318.00
(b) Tax Payments for the 1st & 3rd 0
Qtrs.
(c) Creditable tax withheld 0 P 106,447,318.00
TAX PAYABLE/REFUNDABLE (P 92,261,444.00)
[13]

It is an elementary rule in taxation that an automatic carry over of an

excess income tax payment should only be made for the succeeding year.
(Paseo Realty and Dev't. Corp. vs. CIR, CTA Case No. 4528, April 30, 1993) True
enough, implicit from the provisions of Section 69 of the NIRC, as amended,
72
(supra) is the fact that the refundable amount may be credited against the
income tax liabilities for the taxable quarters of the succeeding taxable year not
succeeding years; and that the carry-over is only limited to the quarters of the
succeeding taxable year. (citing ANSCOR Hagedorn Securities Inc. vs. CIR, CA-GR
SP 38177, December 21, 1999) To allow the application of excess taxes paid for
two successive years would run counter to the specific provision of the law above-
mentioned. [25] (Emphasis supplied.)

Petitioner sought reconsideration [26] of the CTA's denial of its claim for refund,
but the same was denied in a Resolution [27] dated June 5, 2001, prompting
petitioner to elevate the matter to the CA via a Petition for Review [28] under Rule
43 of the Rules of Court.

Ruling of the Court of Appeals

On January 25, 2007, the CA, applying Philippine Bank of Communications v.

Commissioner of Internal Revenue, [29] denied the petition. The CA explained
that the overpayment for taxable year 1997 can no longer be carried over to
taxable year 1999 because excess income payments can only be credited against
the income tax liabilities of the succeeding taxable year, in this case up to 1998
only and not beyond. [30] Neither can the overpayment be refunded as the
remedies of automatic tax crediting and tax refund are alternative remedies.
[31]
Thus, the CA ruled:
[W]hile BELLE may not have fully enjoyed the complete utilization of its option
and the sum of Php106,447,318 still remained after it opted for a tax carry over
of its excess payment for the taxable year 1998, but be that as it may, BELLE has
only itself to blame for making such useless and damaging option, and BELLE
may no longer opt to claim for a refund considering that the remedy of
refund is barred after the corporation has previously opted for the tax
carry over remedy. As a matter of fact, the CTA even made the factual findings
that BELLE committed an aberration to exhaust its unutilized overpaid
income tax by carrying it over further to the taxable year 1999, which is
a blatant transgression of the "succeeding taxable year limit" provided
for under Section 69 of the old NIRC. [32] (Emphasis supplied)

Hence, the fallo of the Decision reads:

WHEREFORE, premises considered, the instant Petition for Review is DENIED,
and accordingly, the herein impugned April 10, 2001 Decision and June 5, 2001
Resolution of the CTA are hereby affirmed.

[33]
SO ORDERED.

Petitioner moved for reconsideration. [34] The CA, however, denied the same in a
Resolution [35] dated January 21, 2008.
Issues
73
Aggrieved, petitioner availed of the present recourse, raising the following
assignment of errors:
A. THE CA COMMITTED SERIOUS ERROR OF LAW IN APPLYING THE PBCOM
CASE.

A.1. THE [DECISION IN THE] PBCOM CASE HAS ALREADY BEEN REPEALED.

A.2. ASSUMING ARGUENDO THAT THE [DECISION IN THE] PBCOM CASE

HAS NOT BEEN REPEALED, IT HAS NO APPLICATION TO BELLE.
B. THE CA COMMITTED SERIOUS ERROR OF LAW IN FINDING THAT BELLE'S
REFUND CLAIM IS NOT ON ALL FOURS WITH THE CASES OF BPI FAMILY
AND AB LEASING.

B.1. BELLE'S `CARRYING-OVER' OF ITS EXCESS INCOME TAX PAID FOR

1997 TO 1999 (BEYOND THE SUBSEQUENT YEAR) IS IMMATERIAL.

B.2. BELLE'S PARTIAL USE OF ITS EXCESS INCOME TAX PAID IN 1998
(THE SUBSEQUENT YEAR) DOES NOT PRECLUDE BELLE FROM ASKING FOR
A REFUND. [36]

In a nutshell, the issue boils down to whether petitioner is entitled to a refund of

its excess income tax payments for the taxable year 1997 in the amount of
P106,447,318.00.

Petitioner's Arguments

Petitioner insists that it is entitled to a refund as the ruling in Philippine Bank of

Communications v. Commissioner of Internal Revenue [37] relied upon by the CA
in denying its claim has been overturned by BPI-Family Savings Bank, Inc. v.
Court of Appeals, [38] AB Leasing and Finance Corporation v. Commissioner of
Internal Revenue, [39] Calamba Steel Center, Inc. v. Commissioner of Internal
Revenue, [40] and State Land Investment Corporation v. Commissioner of Internal
Revenue. [41] In these cases, the taxpayers were allowed to claim refund of
unutilized tax credits. [42] Similarly, in this case, petitioner asserts that it may
still recover unutilized tax credits via a claim for refund. [43]

And while petitioner admits that it has committed a "blatant transgression" of the
"succeeding taxable year limit" when it carried over its 1997 excess income tax
payments beyond the taxable year 1998, petitioner believes that this should not
result in the denial of its claim for refund but should only invalidate the
application of its 1997 unutilized excess income tax payments to its 1999 income
tax liabilities. [44] Hence, petitioner postulates that a claim for refund of its
unutilized tax credits for the taxable year 1997 may still be made because the
carry-over thereof to the taxable year 1999 produced no legal effect, and is,
therefore, immaterial to the resolution of its claim for refund. [45]
74
Respondent's Arguments

Respondent, on the other hand, maintains that the cases of BPI-Family Savings
Bank [46] and AB Leasing [47] are inapplicable as the facts obtaining therein are
different from those of the present case. [48] What is controlling, therefore, is the
ruling in Philippine Bank of Communications, [49] that tax refund and tax credit are
alternative remedies; thus, "the choice of one precludes the other."
[50]
Respondent, therefore, submits that since petitioner has already applied its
1997 excess income tax payments to its liabilities for taxable year 1998, it is
precluded from carrying over the same to taxable year 1999, or from filing a
claim for refund. [51]
Our Ruling

The petition has no merit.

[52]
Both the CTA and the CA erred in applying Section 69 of the old NIRC. The
law applicable is Section 76 of the NIRC.

Unutilized excess income tax payments

may be refunded within two years from the date
of payment under Section 69 of the old NIRC

Under Section 69 of the old NIRC, in case of overpayment of income taxes, a

corporation may either file a claim for refund or carry-over the excess payments
to the succeeding taxable year. Availment of one remedy, however, precludes
the other. [53]

Although these remedies are mutually exclusive, we have in several cases

allowed corporations, which have previously availed of the tax credit option, to
file a claim for refund of their unutilized excess income tax payments.

In BPI-Family Savings Bank, [54] the bank availed of the tax credit option but
since it suffered a net loss the succeeding year, the tax credit could not be
applied; thus, the bank filed a claim for refund to recover its excess creditable
taxes. Brushing aside technicalities, we granted the claim for refund.

Likewise, in Calamba Steel Center, Inc., [55] we allowed the refund of excess
income taxes paid in 1995 since these could not be credited to taxable year 1996
due to business losses. In that case, we declared that "a tax refund may be
claimed even beyond the taxable year following that in which the tax credit arises
x x x provided that the claim for such a refund is made within two years after
payment of said tax." [56]

In State Land Investment Corporation, [57] we reiterated that "if the excess
income taxes paid in a given taxable year have not been entirely used by a x x x

75
corporation against its quarterly income tax liabilities for the next taxable year,
the unused amount of the excess may still be refunded, provided that the claim
for such a refund is made within two years after payment of the tax." [58]

Thus, under Section 69 of the old NIRC, unutilized tax credits may be refunded as
long as the claim is filed within the two-year prescriptive period.

The option to carry over excess income

tax payments is irrevocable under
Section 76 of the 1997 NIRC

This rule, however, no longer applies as Section 76 of the 1997 NIRC now reads:
Section 76. Final Adjustment Return. - Every corporation liable to tax under
Section 24 shall file a final adjustment return covering the total net income for
the preceding calendar or fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly

income taxes paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years. Once the option to
carry over and apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years has been
made, such option shall be considered irrevocable for that taxable period
and no application for tax refund or issuance of a tax credit certificate
shall be allowed therefor. (Emphasis supplied)

Under the new law, in case of overpayment of income taxes, the remedies are
still the same; and the availment of one remedy still precludes the other. But
unlike Section 69 of the old NIRC, the carry-over of excess income tax payments
is no longer limited to the succeeding taxable year. Unutilized excess income tax
payments may now be carried over to the succeeding taxable years until fully
utilized. In addition, the option to carry-over excess income tax payments is now
irrevocable. Hence, unutilized excess income tax payments may no longer be
refunded.

In the instant case, both the CTA and the CA applied Section 69 of the old NIRC
in denying the claim for refund. We find, however, that the applicable provision
should be Section 76 of the 1997 NIRC because at the time petitioner filed its
1997 final ITR, the old NIRC was no longer in force. In Commissioner of Internal
Revenue v. McGeorge Food Industries, Inc., [59] we explained that:

76
Section 76 and its companion provisions in Title II, Chapter XII should be
applied following the general rule on the prospective application of laws
such that they operate to govern the conduct of corporate taxpayers the
moment the 1997 NIRC took effect on 1 January 1998. There is no quarrel
that at the time respondent filed its final adjustment return for 1997 on
15 April 1998, the deadline under Section 77 (B) of the 1997 NIRC
(formerly Section 70(b) of the 1977 NIRC), the 1997 NIRC was already in
force, having gone into effect a few months earlier on 1 January 1998.
Accordingly, Section 76 is controlling.

The lower courts grounded their contrary conclusion on the fact that respondent's
overpayment in 1997 was based on transactions occurring before 1 January
1998. This analysis suffers from the twin defects of missing the gist of the
present controversy and misconceiving the nature and purpose of Section 76.
None of respondent's corporate transactions in 1997 is disputed here. Nor can it
be argued that Section 76 determines the taxability of corporate transactions. To
sustain the rulings below is to subscribe to the untenable proposition that, had
Congress in the 1997 NIRC moved the deadline for the filing of final adjustment
returns from 15 April to 15 March of each year, taxpayers filing returns after 15
March 1998 can excuse their tardiness by invoking the 1977 NIRC because the
transactions subject of the returns took place before 1 January 1998. A keener
appreciation of the nature and purpose of the varied provisions of the 1997 NIRC
cautions against sanctioning this reasoning. [60]

Accordingly, since petitioner already carried over its 1997 excess income tax
payments to the succeeding taxable year 1998, it may no longer file a claim for
refund of unutilized tax credits for taxable year 1997.

To repeat, under the new law, once the option to carry-over excess income tax
payments to the succeeding years has been made, it becomes irrevocable. Thus,
applications for refund of the unutilized excess income tax payments may no
longer be allowed.

WHEREFORE, the petition is hereby DENIED. The Decision dated January 25,
2007 and the Resolution dated January 21, 2008 of the Court of Appeals are
hereby AFFIRMED only insofar as the denial of petitioner's claim for refund is
concerned.

SO ORDERED.

[G.R. NO. 176290 : September 21, 2007]

SYSTRA PHILIPPINES, INC., Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE, Respondent.
RESOLUTION
CORONA, J.:
77
This resolves petitioner Systra Philippines, Inc.'s (1) motion for leave to file a
second motion for reconsideration and (2) second motion for reconsideration of
the Court's March 28, 2007 resolution.
On March 9, 2007, petitioner filed a Petition for Review on Certiorari assailing the
January 18, 2007 decision1 of the Court of Tax Appeals (CTA) in CTA EB Case No.
135. The Court denied the petition in its March 28, 2007 resolution on the
following grounds:
(a) failure of petitioner's counsel to submit his IBP2 O.R.3 number showing proof
of payment of IBP dues for the current year (the IBP O.R. No. was for 2006, i.e.,
it was dated November 20, 2006);
(b) submitting a verification of the petition, certification of non-forum shopping
and affidavit of service that failed to comply with the 2004 Rules on Notarial
Practice with respect to competent evidence of affiants' identities and
(c) failure to give an explanation why service was not done personally as required
by Section 11, Rule 13 in relation to Section 3, Rule 45 and Section 5(d), Rule 56
of the Rules of Court.
On July 5, 2007, petitioner's motion for reconsideration was denied with finality
as there was no compelling reason to warrant a modification of the March 28,
2007 resolution. Thus, the present motions.
Petitioner claims that this Court has granted second and even third motions for
reconsideration for "extraordinarily persuasive reasons." It avers that this Court
should look into the importance of the issues involved in deciding whether leave
to file a second motion for reconsideration should be granted or not. It prays that
its petition should not be denied on the basis of procedural lapses alone and
points out that the substantial amount involved in the petition justifies relaxation
of technical rules. It asserts that there is an important legal issue involved in this
case: whether the exercise of the option to carry over excess income tax credits
under Section 76 of the National Internal Revenue Code of 1997, as amended
(Tax Code) bars a taxpayer from claiming the excess tax credits for refund even if
the amount remains unutilized in the succeeding taxable year. Finally, it contends
that the assailed CTA decision was contradictory to the decisions of the Court of
Appeals (CA)4 in Bank of the Philippine Islands v. Commissioner of Internal
Revenue5 and Raytheon Ebasco Overseas Ltd. Philippine Branch v. Commissioner
of Internal Revenue6 which involved the same issue as that in this case.
According to petitioner, in view of those CA decisions, it is unjust to deprive it of
the right to claim a refund.
We deny petitioner's motions.
A Second Motion For
Reconsideration Is
Prohibited
The denial of a motion for reconsideration is final. It means that the Court will no
longer entertain and consider further arguments or submissions from the parties
respecting the correctness of its decision or resolution.7 It signifies that, in the
78
Court's considered view, nothing more is left to be discussed, clarified or done in
the case since all issues raised have been passed upon and definitely resolved.
Any other issue which could and should have been raised is deemed waived and
is no longer available as ground for a second motion. A denial with finality
underscores that the case is considered closed.8 Thus, as a rule, a second motion
for reconsideration is a prohibited pleading.9 The Court stressed in Ortigas and
Company Limited Partnership v. Velasco:10
A second motion for reconsideration is forbidden except for extraordinarily
persuasive reasons, and only upon express leave first obtained.11 (emphasis
supplied)
It is true that procedural rules may be relaxed in the interest of substantial
justice. They are not, however, to be disdained as mere technicalities that may be
ignored at will to suit the convenience of a party.12 They are intended to ensure
the orderly administration of justice and the protection of substantive rights in
judicial proceedings.13 Thus, procedural rules are not to be belittled or dismissed
simply because their non-observance may have resulted in prejudicing a party's
substantive rights.14 Like all rules, they are required to be followed except only
when, for the most persuasive of reasons, they may be relaxed to relieve a
litigant of negative consequences commensurate with the degree of
thoughtlessness in not complying with the prescribed procedure. 15
In this case, contrary to petitioner's claim, there was no compelling reason to
excuse non-compliance with the rules. Nor were the grounds raised by it
extraordinarily persuasive.16
Moreover, petitioner can neither properly nor successfully rely on the decisions of
the CA in the Bank of the Philippine Islands and Raytheon Ebasco Overseas Ltd.
Philippine Branch cases. First, the CA and the CTA are now of the same level
pursuant to RA 9282.17 Decisions of the CA are thus no longer superior to nor
reversive of those of the CTA. Second, a decision of the CA in an action in
personam binds only the parties in that case. A third party in an action in
personam cannot claim any right arising from a decision therein. Finally and most
importantly, while a ruling of the CA on any question of law is not conclusive on
this Court, all rulings of this Court on questions of law are conclusive and binding
on all courts including the CA. All courts must take their bearings from the
decisions of this Court.18
On The Substantive Aspect, The Petition Has No Merit
The antecedents of this case are as follows:
On April 16, 2001, petitioner filed with the [Bureau of Internal Revenue (BIR)] its
Annual Income Tax Return ("ITR") for the taxable year ended December 31, 2000
declaring revenues in the amount of [P18,252,719] the bulk of which consists of
income from management consultancy services rendered to the Philippine Branch
of Group Systra SA, France. Subjecting said income from consultancy services of
petitioner to 5% creditable withholding tax, a total amount of [P4,703,019] was
declared by petitioner as creditable taxes withheld for the taxable year 2000.

79
For the same period, petitioner reflected a total gross income of [P3,752,129], a
net loss of [P17,930] and a minimum corporate income tax (MCIT) of [P75,043].
Said MCIT of P75,043 was offset against its total tax credits for the year 2000
amounting to [P4,703,019] thereby leaving a total unutilized tax credits of
[P4,627,976], computed as follows:

Gross Income P3,752,129.00

Less: Deductions P3,770,059.00

Net loss P 17,930.00

Minimum Corporate Income Tax Due P75,043.00

Less: Tax Credits

Prior year's excess credits P -

Creditable taxes withheld P 4,703,019.00 P 4,703,019.00

during the year

Tax Overpayment P 4,627,976.00

Petitioner opted to carry over the said excess tax credit to the succeeding taxable
year 2001.
For the taxable year ended December 31, 2001, petitioner filed with the BIR its
Annual ITR on April 12, 2002, reflecting a total gross income of [P4,771,419] and
a total creditable taxes withheld of [P1,111,587] for consultancy services. It
likewise declared a taxable income of [P1,936,851] with corresponding normal
income tax due in the amount of [P619,792]. After deducting the unexpired
excess of the previous year MCIT [1999 and 2000] in the amount of [P222,475]
from the normal income tax due for the period, petitioner's net tax due of
[P397,317] was applied against the accumulated tax credits of [P5,739,563]. Said
reported tax credits comprised of prior year's excess tax credits in the amount of
[P4,627,976] and creditable taxes withheld during the year 2001 in the sum of
[P1,111,587]. These excess tax credits were utilized to pay off the income tax
still due of [P397,317] resulting to an overpayment of [P5,342,246], computed as
follows:

Gross Income P4,771,419.00

Less: Deductions P 2,834,568.00

80
Taxable Income P 1,936,851.00

Income Tax Due at the Normal Rate of 32% P 619,792.00

Less: Unexpired Excess of Prior Year's MCIT

Over Normal Income Tax Rate P 222,475.00

P 397,317.00

Income Tax Still Due

Less: Tax Credits

Prior year's excess credits P4,627,976.00

Creditable taxes withheld 1,111,587.00 P 5,739,563.00

during the year

P 5,342,246.00
Tax Overpayment

Petitioner indicated in the 2001 ITR the option "To be issued a Tax Credit
Certificate" relative to its tax overpayments.
On August 9, 2002, petitioner instituted a claim for refund or issuance of a tax
credit certificate with the BIR of its unutilized creditable withholding taxes in the
amount of P5,342,246.00 as of December 31, 2001."
Due to the inaction of the BIR on petitioner's claim for refund and to preserve its
right to claim for the refund to its unutilized CWT for CYs 2000 and 2001 by
judicial action, petitioner filed a Petition for Review with the Court in Division on
April 14, 2003.19
In its August 3, 2005 decision, the First Division of the CTA partially granted the
petition and ordered the issuance of a tax credit certificate to petitioner in the
amount of P1,111,587 representing the excess or unutilized creditable
withholding taxes for taxable year 2001. The CTA, however, denied petitioner's
claim for refund of the excess tax credits for the year 2000 in the amount of
P4,627,976. It ruled that petitioner was precluded from claiming a refund thereof
or requesting a tax credit certificate therefor. Once it was made for a particular
taxable period, the option to carry over became irrevocable.chanrobles virtual law
library
Petitioner moved for reconsideration but it was denied. Petitioner elevated the
case to the CTA en banc which rendered the assailed decision. Thus, this petition.
81
As already stated, petitioner formulated the issue in this petition as follows:
whether the exercise of the option to carry-over excess income tax credits under
Section 76 of the Tax Code bars a taxpayer from claiming the excess tax credits
for refund even if the amount remains unutilized in the succeeding taxable year.
Petitioner contends that it does not.
We disagree.
Section 76 of the Tax Code provides:
SEC. 76. Final Adjustment Return. - Every corporation liable to tax under Section
27 shall file a final adjustment return covering the total taxable income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable
net income of that year the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the excess amount shown on its final
adjustment return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable
years. Once the option to carry-over and apply the excess quarterly
income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefor. (emphasis
supplied)
A corporation entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid has two options: (1) to carry over the excess credit or (2) to
apply for the issuance of a tax credit certificate or to claim a cash refund. If the
option to carry over the excess credit is exercised, the same shall be irrevocable
for that taxable period.
In exercising its option, the corporation must signify in its annual corporate
adjustment return (by marking the option box provided in the BIR form) its
intention either to carry over the excess credit or to claim a refund. To facilitate
tax collection, these remedies are in the alternative and the choice of one
precludes the other.20
This is known as the irrevocability rule and is embodied in the last sentence of
Section 76 of the Tax Code. The phrase "such option shall be considered
irrevocable for that taxable period" means that the option to carry over the
excess tax credits of a particular taxable year can no longer be revoked.
The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid:
(1) as automatic credit against taxes for the taxable quarters of the succeeding
years for which no tax credit certificate has been issued and (2) as a tax credit
82
either for which a tax credit certificate will be issued or which will be claimed for
cash refund.21
In this case, it was in the year 2000 that petitioner derived excess tax credits and
exercised the irrevocable option to carry them over as tax credits for the next
taxable year. Under Section 76 of the Tax Code, a claim for refund of such excess
credits can no longer be made. The excess credits will only be applied "against
income tax due for the taxable quarters of the succeeding taxable years."
The legislative intent to make the option irrevocable becomes clearer when
Section 76 is viewed in comparison to Section 69 of the (old) 1977 Tax Code:
SECTION 69. Final Adjustment Return. - Every corporation liable to tax under
Section 24 shall file a final adjustment return covering the total net income for
the preceding calendar or fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to the total tax due on the entire
taxable net income of that year the corporation shall either:
(A) Pay the excess tax still due; or
(B) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the refundable amount shown on its final
adjustment return may be credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable year.
Under Section 69 of the 1977 Tax Code, there was no irrevocability rule. Instead
of claiming a refund, the excess tax credits could be "credited against the
estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year," that is, the immediately following year only. In
contrast, Section 76 of the present Tax Code formulates an irrevocability rule
which stresses and fortifies the nature of the remedies or options as alternative,
not cumulative. It also provides that the excess tax credits "may be carried over
and credited against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years" until fully utilized.
Furthermore, this case is closely similar to Philam Asset Management, Inc. v.
Commissioner of Internal Revenue.22 In that case, Philam Asset Management,
Inc. had an unapplied creditable withholding tax in the amount of P459,756.07
for the year 1998. It carried over the said excess tax to the following taxable
year, 1999. In the next succeeding year, it had a tax due in the amount of
P80,042 and a creditable withholding tax in the amount of P915,995.
As such, the amount due for the year 1999 (P80,042) was credited to its
P915,995 creditable withholding tax for that year. Thus, its 1998 creditable
withholding tax in the amount of P459,756.07 remained unutilized. Thereafter, it
filed a claim for refund with respect to the unapplied creditable withholding tax of
P459,756.07 for the year 1998. The Court denied the claim and ruled:
Section 76 [is] clear and unequivocal. Once the carry-over option is taken,
actually or constructively, it becomes irrevocable. Petitioner has chosen that
option for its 1998 creditable withholding taxes. Thus, it is no longer entitled to a
83
tax refund of P459,756.07, which corresponds to its 1998 excess tax credit.
Nonetheless, the amount will not be forfeited in the government's favor, because
it may be claimed by petitioner as tax credits in the succeeding taxable years.
(emphasis supplied)
Since petitioner elected to carry over its excess credits for the year 2000 in the
amount of P4,627,976 as tax credits for the following year, it could no longer
claim a refund. Again, at the risk of being repetitive, once the carry over option
was made, actually or constructively, it became forever irrevocableregardless of
whether the excess tax credits were actually or fully utilized. Nevertheless, as
held in Philam Asset Management, Inc., the amount will not be forfeited in favor
of the government but will remain in the taxpayer's account. Petitioner may claim
and carry it over in the succeeding taxable years, creditable against future
income tax liabilities until fully utilized.23
WHEREFORE, petitioner's motion for leave to file a second motion for
reconsideration and the second motion for reconsideration are hereby DENIED.
Costs against petitioner.
No further pleadings shall be entertained. Let entry of judgment be made in due
course.
SO ORDERED.

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

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

Respondent is a domestic corporation duly organized and existing under the laws
of the Philippines, and registered with the Bureau of Internal Revenue (BIR) as a
large taxpayer with Taxpayer Identification Number 000-409-561-000.6 On
August 19, 2003, the authorized capital stock of respondent was increased from
P400,000,000.00 divided into 4,000,000 shares with a par value of P100.00 each,
84
to P1,731,863,000.00 divided into 4,000,000 common shares and 13,318,630
preferred shares with a par value of P100.00 each. Consequently, all the
preferred shares were solely and exclusively subscribed by Goodyear Tire and
Rubber Company (GTRC), which was a foreign company organized and existing
under the laws of the State of Ohio, United States of America (US) and is
unregistered in the Philippines.7chanrobleslaw

On May 30, 2008, the Board of Directors of respondent authorized the

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

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

On October 21, 2010, respondent filed an administrative claim for refund or

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

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

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

On the merits, the CTA Division found that the redemption of the 3,729,216
shares issued to GTRC – which were then converted to treasury shares – was not

85
subject to Philippine income tax. The CTA Division elucidated that while the
general rule is that the net capital gain obtained by a non-resident foreign
corporation, such as GTRC, in the redemption of shares would be subjected to tax
rates of five percent (5%) and ten percent (10%) under Section 28 (B) (5) (c)16
of the National Internal Revenue Code, as amended (Tax Code), the provisions,
however, of the RP-US Tax Treaty would also apply in determining the tax
implications of the redemption of GTRC's preferred shares because it is a resident
of the US.17 It pointed out that under Article 1418 of the RP-US Tax Treaty, any
gain derived by a US resident (i.e., GTRC) from the alienation of its properties
(i.e., the preferred shares), other than those described in paragraph 1 thereof,
shall only be taxable in the US. Nonetheless, the CTA Division remained mindful
of the Reservation Clause19 in the same treaty which provided that the gains
derived by a US resident from the disposition of shares in a domestic corporation
may be taxed in the Philippines, provided that the latter's assets principally20
consist of real property. After evaluating the Audited Financial Statements (AFS)
of respondent for the years 2007 and 2008, and noting that the value of its real
properties – i.e., property, plant, and equipment – comprise less than 50% of its
total assets, the CTA Division held that respondent's assets did not principally
consist of real property and, hence, exempt from capital gains tax under Section
28 (B) (5) (c) of the Tax Code.21chanrobleslaw

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

Dissatisfied, petitioner moved for reconsideration,28 which was, however, denied

in a Resolution29 dated June 26, 2013. Thereafter, she appealed30 to the CTA En
Banc.
The CTA En Banc Ruling
86
In a Decision31 dated August 14, 2014, the CTA En Banc affirmed the findings of
the CTA Division. Echoing the ruling of the CTA Division, the CTA En Banc found
that respondent was compelled to seek judicial recourse after thirteen (13) days
from filing its administrative claim so as not to forfeit its right to appeal to the
CTA. Anent the tax treatment of the redemption price paid by respondent to
GTRC, the CTA En Banc fully agreed with the disposition of the CTA Division,
ruling that the net capital gain received by GTRC was not subject to Philippine
income tax.32 Undaunted, petitioner filed a motion for reconsideration,33 which
was, however, denied in a Resolution34 dated January 5, 2015; hence, this
petition.
The Issues Before the Court

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

The petition is devoid of merit.

I.

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

The contentions are untenable.

Section 229 of the Tax Code states that judicial claims for refund must be filed
within two (2) years from the date of payment of the tax or penalty, providing
further that the same may not be maintained until a claim for refund or credit has
been duly filed with the Commissioner of Internal Revenue (CIR), viz.:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. – No suit or
proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessively or in
any manner wrongfully collected, until a claim for refund or credit has been
duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under
87
protest or duress.

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

Thus, in view of the aforesaid circumstances, respondent correctly and timely

sought judicial redress, notwithstanding that its administrative and judicial claims
were filed only 13 days apart.
II.

For another, petitioner asserts that the net capital gain derived by GTRC from the
redemption of its 3,729,216 preferred shares should be subject to 15% FWT on
dividends; She claims that while the payment of the original subscription price
could not be taxed as it represented a return of capital, the additional amount,
88
however, or the component of the redemption price representing the amount of
P97,732,314.00 should not be treated as a mere premium and part of the
subscription price, but as accumulated dividend in arrears, and, hence, subject to
15% FWT.39chanrobleslaw

Again, the assertions are wrong.

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

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

xxxx

(B) Tax on Nonresident Foreign Corporation. –

xxxx

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. –

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

xxxx (Emphasis and underscoring supplied)

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

Under Article 11 (5)41 of the RP-US Tax Treaty, the term "dividends" should be
understood according to the taxation law of the State in which the corporation
making the distribution is a resident, which, in this case, pertains to respondent,
a resident of the Philippines. Accordingly, attention should be drawn to the
statutory definition of what constitutes "dividends," pursuant to Section 73 (A) 42
of the Tax Code which provides that "[t]he term 'dividends' x x x means any
89
distribution made by a corporation to its shareholders out of its earnings
or profits and payable to its shareholders, whether in money or in other
property."

In light of the foregoing, the Court therefore holds that the redemption price
representing the amount of P97,732,314.00 received by GTRC could not be
treated as accumulated dividends in arrears that could be subjected to 15% FWT.
Verily, respondent's AFS covering the years 2003 to 2009 show that it did not
have unrestricted retained earnings, and in fact, operated from a position of
deficit.43Thus, absent the availability of unrestricted retained earnings,
the board of directors of respondent had no power to issue dividends.44
Consistent with Section 73 (A) of the Tax Code, this rule on dividend declaration
– i.e., that it is dependent upon the availability of unrestricted retained earnings
– was further edified in Section 43 of The Corporation Code of the Philippines 45
which reads:
Section 43. Power to Declare Dividends. – The board of directors of a stock
corporation may declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while stock dividends
shall be withheld from the delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the
purpose.

x x x x (Emphasis and underscoring supplied)

It is also worth mentioning that one of the primary features of an ordinary
dividend is that the distribution should be in the nature of a recurring return on
stock46 which, however, does not obtain in this case. As aptly pointed out by the
CTA En Banc, the amount of P97,732,314.00 received by GTRC did not represent
a periodic distribution of dividend, but rather a payment by respondent for the
redemption47 of GTRC's 3,729,216 preferred shares. In Wise & Co., Inc. v.
Meer:48
The amounts thus distributed among the plaintiffs were not in the nature
of a recurring return on stock — in fact, they surrendered and
relinquished their stock in return for said distributions, thus ceasing to be
stockholders of the Hongkong Company, which in turn ceased to exist in its own
right as a going concern during its more or less brief administration of the
business as trustee for the Manila Company, and finally disappeared even as such
trustee.
"The distinction between a distribution in liquidation and an ordinary dividend is
factual; the result in each case depending on the particular circumstances of the
case and the intent of the parties. If the distribution is in the nature of a

90
recurring return on stock it is an ordinary dividend. However, if the
corporation is really winding up its business or recapitalizing and
narrowing its activities, the distribution may properly be treated as in
complete or partial liquidation and as payment by the corporation to the
stockholder for his stock. The corporation is, in the latter instances, wiping out
all parts of the stockholders' interest in the company * * * ." (Montgomery,
Federal Income Tax Handbook [1938-1939], 258 x x x)49 (Emphases and
underscoring supplied)
All told, the amount of P97,732,314.00 received by GTRC from respondent for the
redemption of its 3,729,216 preferred shares were not accumulated dividends in
arrears. Contrary to petitioner's claims, it is therefore not subject to 15% FWT on
dividends in accordance with Section 28 (B) (5) (b) of the Tax Code.

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

SO ORDERED.chanRoblesvirtualLawlibrary

G.R. No. 181459, June 09, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. MANILA ELECTRIC
COMPANY (MERALCO), Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Revised
Rules of Court which seeks to annul and set aside the Decision1 of the Court of
Tax Appeals, dated October 15, 2007, and its Resolution2 dated January 9, 2008
denying petitioner’s Motion for Reconsideration in the case entitled Commissioner
of Internal Revenue v. Manila Electric Company (MERALCO), docketed as C.T.A
EB No. 262.

The facts of this case are uncontroverted.

On July 6, 1998, respondent Manila Electric Company (MERALCO) obtained a loan

from Norddeutsche Landesbank Girozentrale (NORD/LB) Singapore Branch in the
amount of USD120,000,000.00 with ING Barings South East Asia Limited (ING
Barings) as the Arranger.3 On September 4, 2000, respondent MERALCO
executed another loan agreement with NORD/LB Singapore Branch for a loan
facility in the amount of USD100,000,000.00 with Citicorp International Limited
as Agent.4cralawred

Under the foregoing loan agreements, the income received by NORD/LB, by way
of respondent MERALCO’s interest payments, shall be paid in full without
deductions, as respondent MERALCO shall bear the obligation of paying/remitting
91
to the BIR the corresponding ten percent (10%) final withholding tax.5 Pursuant
thereto, respondent MERALCO paid/remitted to the Bureau of Internal Revenue
(BIR) the said withholding tax on its interest payments to NORD/LB Singapore
Branch, covering the period from January 1999 to September 2003 in the
aggregate sum of P264,120,181.44.6cralawred

However, sometime in 2001, respondent MERALCO discovered that NORD/LB

Singapore Branch is a foreign government-owned financing institution of
Germany.7 Thus, on December 20, 2001, respondent MERALCO filed a request for
a BIR Ruling with petitioner Commissioner of Internal Revenue (CIR) with regard
to the tax exempt status of NORD/LB Singapore Branch, in accordance with
Section 32(B)(7)(a) of the 1997 National Internal Revenue Code (Tax Code), as
amended.8cralawred

On October 7, 2003, the BIR issued Ruling No. DA-342-2003 declaring that the
interest payments made to NORD/LB Singapore Branch are exempt from the ten
percent (10%) final withholding tax, since it is a financing institution owned and
controlled by the foreign government of Germany.9cralawred

Consequently, on July 13, 2004, relying on the aforesaid BIR Ruling, respondent
MERALCO filed with petitioner a claim for tax refund or issuance of tax credit
certificate in the aggregate amount of P264,120,181.44, representing the
erroneously paid or overpaid final withholding tax on interest payments made to
NORD/LB Singapore Branch.10cralawred

On November 5, 2004, respondent MERALCO received a letter from petitioner

denying its claim for tax refund on the basis that the same had already prescribed
under Section 204 of the Tax Code, which gives a taxpayer/claimant a period of
two (2) years from the date of payment of tax to file a claim for refund before the
BIR.11cralawred

Aggrieved, respondent MERALCO filed a Petition for Review with the Court of Tax
Appeals (CTA) on December 6, 2004.12 After trial on the merits, the CTA-First
Division rendered a Decision partially granting respondent MERALCO’s Petition for
Review in the following wise:chanRoblesvirtualLawlibrary
IN VIEW OF THE FOREGOING, petitioner’s claim in the amount of TWO
HUNDRED TWENTY-FOUR MILLION SEVEN HUNDRED SIXTY THOUSAND NINE
HUNDRED TWENTY-SIX PESOS & SIXTY-FIVE CENTAVOS (P224,760,926.65)
representing erroneously paid and remitted final income taxes for the period
January 1999 to July 2002 is hereby DENIED on the ground of prescription.
However, petitioner’s claim in the amount of THIRTY-NINE MILLION THREE
HUNDRED FIFTY NINE THOUSAND TWO HUNDRED FIFTY-FOUR PESOS &
SEVENTY-NINE CENTAVOS (P39,359,254.79) is hereby GRANTED.

Accordingly, respondent is ORDERED TO REFUND or ISSUE A TAX CREDIT

CERTIFICATE to petitioner in the amount of THIRTY-NINE MILLION THREE
HUNDRED FIFTY-NINE THOUSAND TWO HUNDRED FIFTY-FOUR PESOS &
92
SEVENTY-NINE CENTAVOS (P39,359,254.79) representing the final withholding
taxes erroneously paid and remitted for the period December 2002 to September
2003.

SO ORDERED.13

On November 2, 2006, petitioner filed its Motion for Reconsideration with the
CTA-First Division, while on November 7, 2006, respondent MERALCO filed its
Partial Motion for Reconsideration.14 Finding no justifiable reason to overturn its
Decision, the CTA-First Division denied both the petitioner’s Motion for
Reconsideration and respondent MERALCO’s Partial Motion for Reconsideration in
a Resolution dated January 11, 2007.15cralawred

Unyielding to the Decision of the CTA, both petitioner and respondent MERALCO
filed their respective Petitions for Review before the Court of Tax Appeals En
Banc (CTA En Banc) docketed as C.T.A. EB Nos. 264 and 262, respectively.16 In a
Resolution dated May 9, 2007, the CTA En Banc ordered the consolidation of both
cases in accordance with Section 1, Rule 31 of the Revised Rules of Court and
gave due course thereto, requiring both parties to submit their respective
consolidated memoranda.17 Only petitioner filed its Consolidated Memorandum on
July 2, 2007.18cralawred

In its Decision19 dated October 15, 2007, the CTA En Banc denied both petitions
and upheld in toto the Decision of the CTA-First Division, the dispositive portion of
which states:chanRoblesvirtualLawlibrary
In the light of the laws and jurisprudence on the matter, We see no reason to
reverse the assailed Decision dated October 16, 2006 and Resolution dated
January 11, 2007 of the First Division.

WHEREFORE, premises considered, both petitions are hereby DISMISSED.

SO ORDERED.20

In the same vein, the motions for reconsideration filed by the respective parties
were also denied in a Resolution21 dated January 9, 2008.

Hence, the instant petition.

The sole issue presented before us is whether or not respondent MERALCO is

entitled to a tax refund/credit relative to its payment of final withholding taxes on
interest payments made to NORD/LB from January 1999 to September 2003.

Petitioner maintains that respondent MERALCO is not entitled to a tax

refund/credit, considering that its testimonial and documentary evidence failed to
categorically establish that NORD/LB is owned and controlled by the Federal
Republic of Germany; hence, exempted from final withholding taxes on income
93
derived from investments in the Philippines.22cralawred

On the other hand, respondent MERALCO claims that the evidence it presented in
trial, consisting of the testimony of Mr. German F. Martinez, Jr., Vice-President
and Head of Tax and Tariff of MERALCO, which was affirmed by a certification
issued by the Embassy of the Federal Republic of Germany, dated March 27,
2002, through its Mr. Lars Leymann, clearly defined the status of NORD/LB as
one being owned by various German States.23 Respondent MERALCO further
argues that in the Joint Stipulation of Facts, petitioner admitted the fact that
NORD/LB is a financial institution owned and controlled by a foreign
government.24cralawred

Petitioner’s argument fails to persuade.

After a careful scrutiny of the records and evidence presented before us, we find
that respondent MERALCO has discharged the requisite burden of proof in
establishing the factual basis for its claim for tax refund.

First, as correctly decided by the CTA En Banc, the certification issued by the
Embassy of the Federal Republic of Germany, dated March 27, 2002, explicitly
states that NORD/LB is owned by the State of Lower Saxony, Saxony-Anhalt and
Mecklenburg-Western Pomerania, and serves as a regional bank for the said
states which offers support in the public sector financing, to
wit:chanRoblesvirtualLawlibrary
x x x x.

Regarding your letter dated March 1, 2002, I can confirm the following:

NORD/LB is owned by the State (Land) of Lower Saxony to the extent of

40%, by the States of [Saxony-]Anhalt and Mecklenburg-Western
Pomerania to the extent of 10% each. The Lower Saxony Savings Bank and
Central Savings Bank Association have a share of [26.66%]. The Savings Bank
Association Saxony-Anhalt and the Savings Bank Association Mecklenburg-
Western Pomerania have a share of [6.66%] each.

As the regional bank for Lower Saxony, Saxony-Anhalt and Mecklenburg-Western

Pomerania, NORD/LB offers support in public sector financing. It fulfills as
Girozentrale the function of a central bank for the savings bank in these
three states (Lander).

x x x25cralawlawlibrary

Given that the same was issued by the Embassy of the Federal Republic of
Germany in the regular performance of their official functions, and the due
execution and authenticity thereof was not disputed when it was presented in
trial, the same may be admitted as proof of the facts stated therein. Further, it is

94
worthy to note that the Embassy of the Federal Republic of Germany was in the
best position to confirm such information, being the representative of the Federal
Republic of Germany here in the Philippines.

To bolster this, respondent MERALCO presented as witness its Vice-President and

Head of Tax and Tariff, German F. Martinez, Jr., who testified on and identified
the existence of such certification. In this regard, we concur with the CTA En Banc
that absent any strong evidence to disprove the truthfulness of such certification,
there is no basis to controvert the findings of the CTA-First Division, to
wit:chanRoblesvirtualLawlibrary
The foregoing documentary and testimonial evidence were given probative value
as the First Division ruled that there was no strong evidence to disprove the
truthfulness of the said pieces of evidence, considering that the CIR did not
present any rebuttal evidence to prove otherwise. The weight of evidence is not a
question of mathematics, but depends on its effects in inducing belief, under all of
the facts and circumstances proved. The probative weight of any document or
any testimonial evidence must be evaluated not in isolation but in conjunction
with other evidence, testimonial, admissions, judicial notice, and presumptions,
adduced or given judicial cognizance of, and if the totality of the evidence
presented by both parties supports the claimant’s claim, then he is entitled to a
favorable judgment. (Donato C. Cruz Trading Corp. v. Court of Appeals, 347
SCRA 13).26

Consequently, such certification was used by petitioner as basis in issuing BIR

Ruling No. DA-342-2003, which categorically declared that the interest income
remitted by respondent MERALCO to NORD/LB Singapore Branch is not subject to
Philippine income tax, and accordingly, not subject to ten percent (10%)
withholding tax. Contrary to petitioner’s view, therefore, the same constitutes a
compelling basis for establishing the tax-exempt status of NORD/LB, as was held
in Miguel J. Ossorio Pension Foundation, Incorporated v. Court of Appeals,27 which
may be applied by analogy to the present case, to
wit:chanRoblesvirtualLawlibrary
Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a
ruling exempting it from the payment of withholding tax on the sale of the land
by various BIR-approved trustees and tax-exempt private employees' retirement
benefit trust funds represented by Citytrust. The BIR ruled that the private
employees’ benefit trust funds, which included petitioner, have met the
requirements of the law and the regulations and, therefore, qualify as reasonable
retirement benefit plans within the contemplation of Republic Act No. 4917 (now
Sec. 28 [b] 7 [A], Tax Code). The income from the trust fund investments is,
therefore, exempt from the payment of income tax and, consequently, from the
payment of the creditable withholding tax on the sale of their real property.

Thus, the documents issued and certified by Citytrust showing that money from
the Employees' Trust Fund was invested in the MBP lot cannot simply be brushed
aside by the BIR as self-serving, in the light of previous cases holding that
95
Citytrust was indeed handling the money of the Employees' Trust Fund. These
documents, together with the notarized Memorandum of Agreement, clearly
establish that petitioner, on behalf of the Employees' Trust Fund, indeed invested
in the purchase of the MBP lot. Thus, the Employees' Trust Fund owns 49.59% of
the MBP lot.

Since petitioner has proven that the income from the sale of the MBP lot came
from an investment by the Employees' Trust Fund, petitioner, as trustee of the
Employees' Trust Fund, is entitled to claim the tax refund of P3,037,500 which
was erroneously paid in the sale of the MBP lot.28

Second, in the parties’ Joint Stipulation of Facts, petitioner admitted the issuance
of the aforesaid BIR Ruling and did not contest it as one of the admitted
documentary evidence in Court. A judicial admission binds the person who
makes the same, and absent any showing that this was made thru palpable
mistake, no amount of rationalization can offset it.29 In Camitan v. Fidelity
Investment Corporation,30 we sustained the judicial admission of petitioner’s
counsel for failure to prove the existence of palpable mistake,
thus:chanRoblesvirtualLawlibrary
x x x. A judicial admission is an admission, verbal or written, made by a party in
the course of the proceedings in the same case, which dispenses with the
need for proof with respect to the matter or fact admitted. It may be
contradicted only by a showing that it was made through palpable
mistake or that no such admission was made.

xxxx

Upon examination of the said exhibits on record, it appears that the alleged
discrepancies are more imagined than real. Had these purported discrepancies
been that evident during the preliminary conference, it would have been easy for
petitioners' counsel to object to the authenticity of the owner's duplicate copy of
the TCT presented by Fidelity. As shown in the transcript of the proceedings,
there was ample opportunity for petitioners' counsel to examine the
document, retract his admission, and point out the alleged
discrepancies. But he chose not to contest the document. Thus, it
cannot be said that the admission of the petitioners' counsel was made
through palpable mistake.31

Based on the foregoing, we are of the considered view that respondent MERALCO
has shown clear and convincing evidence that NORD/LB is owned, controlled or
enjoying refinancing from the Federal Republic of Germany, a foreign
government, pursuant to Section 32(B)(7)(a) of the Tax Code, as amended,
which provides that:chanRoblesvirtualLawlibrary
Section 32. Gross Income. –

96
x x x x.

(B) Exclusions from Gross Income. - The following items shall not be included in
gross income and shall be exempt from taxation under this
title:ChanRoblesVirtualawlibrary
xxxx

(7) Miscellaneous Items. -

(a) Income Derived by Foreign Government. - Income derived from

investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on deposits in banks in the Philippines by (i) foreign
governments, (ii) financing institutions owned, controlled, or enjoying
refinancing from foreign governments, and (iii) international or regional
financial institutions established by foreign governments.

x x x x.32

Notwithstanding the foregoing, however, we uphold the ruling of the CTA En Banc
that the claim for tax refund in the aggregate amount of Thirty-Nine Million Three
Hundred Fifty-Nine Thousand Two Hundred Fifty-Four Pesos and Seventy-Nine
Centavos (P39,359,254.79) pertaining to the period from January 1999 to July
2002 must fail since the same has already prescribed under Section 229 of the
Tax Code, to wit:chanRoblesvirtualLawlibrary
Section 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or
proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any manner
wrongfully collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration
of two (2) years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment:
Provided, however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly to have been erroneously
paid.33

As can be gleaned from the foregoing, the prescriptive period provided is

mandatory regardless of any supervening cause that may arise after payment. It

97
should be pointed out further that while the prescriptive period of two (2) years
commences to run from the time that the refund is ascertained, the propriety
thereof is determined by law (in this case, from the date of payment of tax), and
not upon the discovery by the taxpayer of the erroneous or excessive payment of
taxes. The issuance by the BIR of the Ruling declaring the tax-exempt status of
NORD/LB, if at all, is merely confirmatory in nature. As aptly held by the CTA-
First Division, there is no basis that the subject exemption was provided and
ascertained only through BIR Ruling No. DA-342-2003, since said ruling is not the
operative act from which an entitlement of refund is determined.34 In other
words, the BIR is tasked only to confirm what is provided under the Tax Code on
the matter of tax exemptions as well as the period within which to file a claim for
refund.

In this regard, petitioner is misguided when it relied upon the six (6)-year
prescriptive period for initiating an action on the ground of quasi-contract or
solutio indebiti under Article 1145 of the New Civil Code. There is solutio indebiti
where: (1) payment is made when there exists no binding relation between the
payor, who has no duty to pay, and the person who received the payment; and
(2) the payment is made through mistake, and not through liberality or some
other cause.35 Here, there is a binding relation between petitioner as the taxing
authority in this jurisdiction and respondent MERALCO which is bound under the
law to act as a withholding agent of NORD/LB Singapore Branch, the taxpayer.
Hence, the first element of solutio indebiti is lacking. Moreover, such legal
precept is inapplicable to the present case since the Tax Code, a special law,
explicitly provides for a mandatory period for claiming a refund for taxes
erroneously paid.

Tax refunds are based on the general premise that taxes have either been
erroneously or excessively paid. Though the Tax Code recognizes the right of
taxpayers to request the return of such excess/erroneous payments from the
government, they must do so within a prescribed period. Further, “a taxpayer
must prove not only his entitlement to a refund, but also his compliance with the
procedural due process as non-observance of the prescriptive periods within
which to file the administrative and the judicial claims would result in the denial
of his claim.”36cralawred

In the case at bar, respondent MERALCO had ample opportunity to verify on the
tax-exempt status of NORD/LB for purposes of claiming tax refund. Even
assuming that respondent MERALCO could not have emphatically known the
status of NORD/LB, its supposition of the same was already confirmed by the BIR
Ruling which was issued on October 7, 2003. Nevertheless, it only filed its claim
for tax refund on July 13, 2004, or ten (10) months from the issuance of the
aforesaid Ruling. We agree with the CTA-First Division, therefore, that respondent
MERALCO’s claim for refund in the amount of Two Hundred Twenty-Four Million
Seven Hundred Sixty Thousand Nine Hundred Twenty-Six Pesos and Sixty-Five
Centavos (P224,760,926.65) representing erroneously paid and remitted final
income taxes for the period January 1999 to July 2002 should be denied on the

98
ground of prescription.

Finally, we ought to remind petitioner that the arguments it raised in support of

its position have already been thoroughly discussed both by 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.37 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.38 In the absence of any clear and convincing proof to the contrary, this
Court must presume that the CTA rendered a decision which is valid in every
respect.39 It has been a long-standing policy and practice of the Court 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.40cralawred

WHEREFORE, the petition is DENIED. The October 15, 2007 Decision and
January 9, 2008 Resolution of the Court of Tax Appeals in C.T.A. EB No. 262 are
hereby AFFIRMED.

SO ORDERED.

[G.R. Nos. 179045-46 : August 25, 2010]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. SMART

COMMUNICATION, INC.,* RESPONDENT.

DECISION

DEL CASTILLO, J.:

The right of a withholding agent to claim a refund of erroneously or illegally

withheld taxes comes with the responsibility to return the same to the principal
taxpayer.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to
set aside the Decision[1] dated June 28, 2007 and the Resolution[2] dated July 31,
2007 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Respondent Smart Communications, Inc. is a corporation organized and existing

under Philippine law. It is an enterprise duly registered with the Board of
Investments.
99
On May 25, 2001, respondent entered into three Agreements for Programming
and Consultancy Services[3] with Prism Transactive (M) Sdn. Bhd. (Prism), a non-
resident corporation duly organized and existing under the laws of
Malaysia. Under the agreements, Prism was to provide programming and
consultancy services for the installation of the Service Download Manager (SDM)
and the Channel Manager (CM), and for the installation and implementation of
Smart Money and Mobile Banking Service SIM Applications (SIM Applications) and
Private Text Platform (SIM Application).

On June 25, 2001, Prism billed respondent in the amount of US$547,822.45,

broken down as follows:
SDM Agreement US$236,000.00
CM Agreement 296,000.00
SIM Application Agreement 15,822.45
Total US$547,822.45[4]

Thinking that these payments constitute royalties, respondent withheld the

amount of US$136,955.61 or P7,008,840.43,[5] representing the 25% royalty tax
under the RP-Malaysia Tax Treaty.[6]

On September 25, 2001, respondent filed its Monthly Remittance Return of Final
Income Taxes Withheld (BIR Form No. 1601-F)[7] for the month of August 2001.

On September 24, 2003, or within the two-year period to claim a refund,

respondent filed with the Bureau of Internal Revenue (BIR), through the
International Tax Affairs Division (ITAD), an administrative claim for refund[8] of
the amount of P7,008,840.43.

Proceedings before the CTA Second Division

Due to the failure of the petitioner Commissioner of Internal Revenue (CIR) to act
on the claim for refund, respondent filed a Petition for Review[9] with the CTA,
docketed as CTA Case No. 6782 which was raffled to its Second Division.

In its Petition for Review, respondent claimed that it is entitled to a refund

because the payments made to Prism are not royalties[10] but "business
profits,"[11] pursuant to the definition of royalties under the RP-Malaysia Tax
Treaty,[12] and in view of the pertinent Commentaries of the Organization for
Economic Cooperation and Development (OECD) Committee on Fiscal Affairs
through the Technical Advisory Group on Treaty Characterization of Electronic
Commerce Payments.[13] Respondent further averred that since under Article 7 of
the RP-Malaysia Tax Treaty, "business profits" are taxable in the Philippines "only
if attributable to a permanent establishment in the Philippines, the payments
made to Prism, a Malaysian company with no permanent establishment in the
Philippines,"[14] should not be taxed.[15]

100
On December 1, 2003, petitioner filed his Answer[16] arguing that respondent, as
withholding agent, is not a party-in-interest to file the claim for refund,[17] and
that assuming for the sake of argument that it is the proper party, there is no
showing that the payments made to Prism constitute "business profits."[18]

Ruling of the CTA Second Division

In a Decision[19] dated February 23, 2006, the Second Division of the CTA upheld
respondent's right, as a withholding agent, to file the claim for refund citing the
cases of Commissioner of Internal Revenue v. Wander Philippines, Inc.,[20]
Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing
Corporation[21] and Commissioner of Internal Revenue v. The Court of Tax
Appeals.[22]

However, as to the claim for refund, the Second Division found respondent
entitled only to a partial refund. Although it agreed with respondent that the
payments for the CM and SIM Application Agreements are "business profits," [23]
and therefore, not subject to taxsup style="color: rgb(255, 0, 0);">[24] under
the RP-Malaysia Tax Treaty, the Second Division found the payment for the SDM
Agreement a royalty subject to withholding tax.[25] Accordingly, respondent was
granted refund in the amount of P3,989,456.43, computed as follows: [26]

Particulars Amount (in US$)

1. CM 296,000.00

2. SIM Application 15,822.45

Total US$311,822.45

Particulars Amount

Tax Base US$311,822.45

Multiply by: Withholding Tax Rate 25%

Final Withholding Tax US$ 77,955.61

Multiply by: Prevailing Exchange Rate 51.176

Tax Refund Due P3,989,456.43

The dispositive portion of the Decision of the CTA Second Division reads:
WHEREFORE, premises considered, the instant petition is partially
GRANTED. Accordingly, respondent Commissioner of Internal Revenue is hereby
ORDERED to REFUND or ISSUE a TAX CREDIT CERTIFICATE to petitioner Smart
101
Communications, Inc. in the amount of P3,989,456.43, representing overpaid
final withholding taxes for the month of August 2001.

SO ORDERED.[27]

Both parties moved for partial reconsideration[28] but the CTA Second Division
denied the motions in a Resolution[29] dated July 18, 2006.

Ruling of the CTA En Banc

Unsatisfied, both parties appealed to the CTA En Banc by filing their respective
Petitions for Review,[30] which were consolidated per Resolution[31] dated February
8, 2007.

On June 28, 2007, the CTA En Banc rendered a Decision affirming the partial
refund granted to respondent. In sustaining respondent's right to file the claim
for refund, the CTA En Banc said that although respondent "and Prism are
unrelated entities, such circumstance does not affect the status of [respondent]
as a party-in-interest [as its legal interest] is based on its direct and independent
liability under the withholding tax system."[32] The CTA En Banc also concurred
with the Second Division's characterization of the payments made to Prism,
specifically that the payments for the CM and SIM Application Agreements
constitute "business profits,"[33] while the payment for the SDM Agreement is a
royalty.[34]

The dispositive portion of the CTA En Banc Decision reads:

WHEREFORE, the instant petition is hereby DISMISSED. Accordingly, the assailed
Decision and Resolution are hereby AFFIRMED.

SO ORDERED.[35]

Only petitioner sought reconsideration[36] of the Decision. The CTA En Banc,

however, found no cogent reason to reverse its Decision, and thus, denied
petitioner's motion for reconsideration in a Resolution[37] dated July 31, 2007.

Unfazed, petitioner availed of the present recourse.

Issues

The two issues to be resolved are: (1) whether respondent has the right to file
the claim for refund; and (2) if respondent has the right, whether the payments
made to Prism constitute "business profits" or royalties.

Petitioner's Arguments

Petitioner contends that the cases relied upon by the CTA in upholding
102
respondent's right to claim the refund are inapplicable since the withholding
agents therein are wholly owned subsidiaries of the principal taxpayers, unlike in
the instant case where the withholding agent and the taxpayer are unrelated
entities. Petitioner further claims that since respondent did not file the claim on
behalf of Prism, it has no legal standing to claim the refund. To rule otherwise
would result to the unjust enrichment of respondent, who never shelled-out any
amount to pay the royalty taxes. Petitioner, thus, posits that the real party-in-
interest to file a claim for refund of the erroneously withheld taxes is Prism. He
cites as basis the case of Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal
Revenue,[38] where it was ruled that the proper party to file a refund is the
statutory taxpayer.[39] Finally, assuming that respondent is the proper party,
petitioner counters that it is still not entitled to any refund because the payments
made to Prism are taxable as royalties, having been made in consideration for the
use of the programs owned by Prism.

Respondent's Arguments

Respondent, on the other hand, maintains that it is the proper party to file a
claim for refund as it has the statutory and primary responsibility and liability to
withhold and remit the taxes to the BIR. It points out that under the withholding
tax system, the agent-payor becomes a payee by fiction of law because the law
makes the agent personally liable for the tax arising from the breach of its duty to
withhold. Thus, the fact that respondent is not in any way related to Prism is
immaterial.

Moreover, respondent asserts that the payments made to Prism do not fall under
the definition of royalties since the agreements are for programming and
consultancy services only, wherein Prism undertakes to perform services for the
creation, development or the bringing into existence of software applications
solely for the satisfaction of the peculiar needs and requirements of respondent.
Our Ruling

The petition is bereft of merit.

Withholding agent may file a claim for refund

Sections 204(c) and 229 of the National Internal Revenue Code (NIRC) provide:
Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or
Credit Taxes. - The Commissioner may -

xxxx

(C) Credit or refund taxes erroneously or illegally received or penalties imposed

without authority, refund the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their
103
value upon proof of destruction. No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a claim
for credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund.

xxxx

Sec. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or

proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed
with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or duress.

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

Pursuant to the foregoing, the person entitled to claim a tax refund is the
taxpayer. However, in case the taxpayer does not file a claim for refund, the
withholding agent may file the claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine

Manufacturing Corporation,[40] a withholding agent was considered a proper party
to file a claim for refund of the withheld taxes of its foreign parent
company. Pertinent portions of the Decision read:
The term "taxpayer" is defined in our NIRC as referring to "any person subject to
tax imposed by the Title [on Tax on Income]." It thus becomes important to note
that under Section 53(c)[41] of the NIRC, the withholding agent who is "required
to deduct and withhold any tax" is made "personally liable for such tax" and
indeed is indemnified against any claims and demands which the stockholder
might wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The withholding
agent, P&G-Phil., is directly and independently liable for the correct amount of the
tax that should be withheld from the dividend remittances. The withholding agent
is, moreover, subject to and liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be finally found to be less than
the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and

104
properly considered a "taxpayer." The terms "liable for tax" and "subject to tax"
both connote legal obligation or duty to pay a tax. It is very difficult, indeed
conceptually impossible, to consider a person who is statutorily made
"liable for tax" as not "subject to tax." By any reasonable standard, such
a person should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he believes
were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this

Court pointed out that a withholding agent is in fact the agent both of the
government and of the taxpayer, and that the withholding agent is not an
ordinary government agent:
"The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax under
all circumstances. In effect, the responsibility for the collection of the tax as well
as the payment thereof is concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding agent is constituted the agent
of both the Government and the taxpayer. With respect to the collection and/or
withholding of the tax, he is the Government's agent. In regard to the filing of the
necessary income tax return and the payment of the tax to the Government, he is
the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53 (c) he is held personally
liable for the tax he is duty bound to withhold; whereas the Commissioner and his
deputies are not made liable by law."

If, as pointed out in Philippine Guaranty, the withholding agent is also an

agent of the beneficial owner of the dividends with respect to the filing of
the necessary income tax return and with respect to actual payment of
the tax to the government, such authority may reasonably be held to
include the authority to file a claim for refund and to bring an action for
recovery of such claim. This implied authority is especially warranted where, as
in the instant case, the withholding agent is the wholly owned subsidiary of the
parent-stockholder and therefore, at all times, under the effective control of such
parent-stockholder. In the circumstances of this case, it seems particularly unreal
to deny the implied authority of P&G-Phil. to claim a refund and to commence an
action for such refund.

xxxx

We believe and so hold that, under the circumstances of this case, P&G-Phil. is
properly regarded as a "taxpayer" within the meaning of Section 309,[42] NIRC,
and as impliedly authorized to file the claim for refund and the suit to recover
such claim. (Emphasis supplied.)

Petitioner, however, submits that this ruling applies only when the withholding
agent and the taxpayer are related parties, i.e., where the withholding agent is a
105
wholly owned subsidiary of the taxpayer.

We do not agree.

Although such relation between the taxpayer and the withholding agent is a factor
that increases the latter's legal interest to file a claim for refund, there is nothing
in the decision to suggest that such relationship is required or that the lack of
such relation deprives the withholding agent of the right to file a claim for refund.
Rather, what is clear in the decision is that a withholding agent has a legal right
to file a claim for refund for two reasons. First, he is considered a "taxpayer"
under the NIRC as he is personally liable for the withholding tax as well as for
deficiency assessments, surcharges, and penalties, should the amount of the tax
withheld be finally found to be less than the amount that should have been
withheld under law. Second, as an agent of the taxpayer, his authority to file the
necessary income tax return and to remit the tax withheld to the government
impliedly includes the authority to file a claim for refund and to bring an action for
recovery of such claim.

In this connection, it is however significant to add that while the withholding

agent has the right to recover the taxes erroneously or illegally collected, he
nevertheless has the obligation to remit the same to the principal taxpayer. As
an agent of the taxpayer, it is his duty to return what he has recovered;
otherwise, he would be unjustly enriching himself at the expense of the principal
taxpayer from whom the taxes were withheld, and from whom he derives his
legal right to file a claim for refund.

As to Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue[43] cited

by the petitioner, we find the same inapplicable as it involves excise taxes, not
withholding taxes. In that case, it was ruled that the proper party to question, or
seek a refund of, an indirect tax "is the statutory taxpayer, the person on whom
the tax is imposed by law and who paid the same even if he shifts the burden
thereof to another."

In view of the foregoing, we find no error on the part of the CTA in upholding
respondent's right as a withholding agent to file a claim for refund.

The payments for the CM and the SIM Application Agreements constitute

"business profits"

Under the RP-Malaysia Tax Treaty, the term royalties is defined as payments of
any kind received as consideration for: "(i) the use of, or the right to use, any
patent, trade mark, design or model, plan, secret formula or process, any
copyright of literary, artistic or scientific work, or for the use of, or the right to
use, industrial, commercial, or scientific equipment, or for information concerning
industrial, commercial or scientific experience; (ii) the use of, or the right to use,
cinematograph films, or tapes for radio or television broadcasting."[44] These are

106
taxed at the rate of 25% of the gross amount.[45]

Under the same Treaty, the "business profits" of an enterprise of a Contracting

State is taxable only in that State, unless the enterprise carries on business in the
other Contracting State through a permanent establishment.[46] The term
"permanent establishment" is defined as a fixed place of business where the
enterprise is wholly or partly carried on.[47] However, even if there is no fixed
place of business, an enterprise of a Contracting State is deemed to have a
permanent establishment in the other Contracting State if it carries on
supervisory activities in that other State for more than six months in connection
with a construction, installation or assembly project which is being undertaken in
that other State.[48]

In the instant case, it was established during the trial that Prism does not have a
permanent establishment in the Philippines. Hence, "business profits" derived
from Prism's dealings with respondent are not taxable. The question is whether
the payments made to Prism under the SDM, CM, and SIM Application
agreements are "business profits" and not royalties.

Paragraph 1.3 of the Programming Services (Schedule A) of the SDM

Agreement,[49] reads:
1.3 Intellectual Property Rights (IPR)

The SDM shall be installed by PRISM, including the SDM Libraries, the IPR of
which shall be retained by PRISM. PRISM, however, shall provide the Client
the APIs for the SDM at no cost to the Client. The Client shall be permitted to
develop programs to interface with the SDM or the SDM Libraries, using the
related APIs as appropriate.[50] (Emphasis supplied.)

Whereas, paragraph 1.4 of the Programming Services (Schedule A) of the CM

Agreement and paragraph 1.3 of the Programming Services (Schedule A) of the
SIM Agreement provide:
1.4 Intellectual Property Rights (IPR)

The IPR of all components of the CM belong to the Client with the exception
of the following components, which are provided, without technical or commercial
restraints or obligations:
 ConfigurationException.java
 DataStructures (DblLinkedListjava, DbIListNodejava, List
 EmptyException.java, ListFullException.java,
ListNodeNotFoundException.java,
 QueueEmptyException.java, QueueFullException.java, QueueList.java,
QueuListEx.java, and QueueNodeNotFoundException.java)
107
  Field MappedObjeet.java
 LogFileEx.java
 Logging (BaseLogger.java and Logger.java)
 PrismGeneric Exception.java
 PrismGenericObject.java
 ProtocolBuilders/CIMD2 (Alive.java, BaseMessageData.
 java, DeliverMessage.java, Login.java, Logout.java, Nack.java,
SubmitMessage.java,
 TemplateManagement (FileTemplateDataBag.java, Template
 DataBag.java, TemplateManagerExBag.java, and
TemplateParserExBag.java)
 TemplateManager.class
 TemplateServer.class
 TemplateServer$RequestThread.class
 Template Server_skel.class
 TemplateServer_stub.class
 TemplateService.class
 Prism Crypto Server module for PHP4[51]
xxxx

1.3 Intellectual Property Rights (IPR)

The Client shall own the IPR for the Specifications and the Source Code
for the SIM Applications. PRISM shall develop an executable compiled code
(the "Executable Version") of the SIM Applications for use on the aSIMetric card
which, however, shall only be for the Client's use. The Executable Version may
not be provided by PRISM to any third [party] without the prior written consent of
the Client. It is further recognized that the Client anticipates licensing the use of
the SIM Applications, but it is agreed that no license fee will be charged to PRISM
or to a licensee of the aSIMetrix card from PRISM when SIMs are supplied to the
Client.[52] (Emphases supplied.)

The provisions in the agreements are clear. Prism has intellectual property right
over the SDM program, but not over the CM and SIM Application programs as the
proprietary rights of these programs belong to respondent. In other words, out
of the payments made to Prism, only the payment for the SDM program is a
royalty subject to a 25% withholding tax. A refund of the erroneously withheld
royalty taxes for the payments pertaining to the CM and SIM Application
Agreements is therefore in order.

108
Indeed, the government has no right to retain what does not belong to it. "No
one, not even the State, should enrich oneself at the expense of another." [53]

WHEREFORE, the petition is DENIED. The assailed Decision dated June 28,
2007 and the Resolution dated July 31, 2007 of the Court of Tax Appeals En Banc
are hereby AFFIRMED. The Bureau of Internal Revenue is hereby ordered to
issue a Tax Credit Certificate to Prism Transactive (M) Sdn. Bhd. in the amount
of P3,989,456.43 representing the overpaid final withholding taxes for the month
of August 2001.

SO ORDERED.

G.R. No. 173594 February 6, 2008

SILKAIR (SINGAPORE) PTE, LTD., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
CARPIO MORALES, J.:
Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under
the laws of Singapore which has a Philippine representative office, is an online
international air carrier operating the Singapore-Cebu-Davao-Singapore,
Singapore-Davao-Cebu-Singapore, and Singapore-Cebu-Singapore routes.
On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) a
written application for the refund of P4,567,450.79 excise taxes it claimed to
have paid on its purchases of jet fuel from Petron Corporation from January to
June 2000.1
As the BIR had not yet acted on the application as of December 26, 2001, Silkair
filed a Petition for Review2 before the CTA following Commissioner of Internal
Revenue v. Victorias Milling Co., Inc., et al.3
Opposing the petition, respondent Commissioner on Internal Revenue (CIR)
alleged in his Answer that, among other things,
Petitioner failed to prove that the sale of the petroleum products was directly
made from a domestic oil company to the international carrier. The excise tax on
petroleum products is the direct liability of the manufacturer/producer, and when
added to the cost of the goods sold to the buyer, it is no longer a tax but part of
the price which the buyer has to pay to obtain the article.4 (Emphasis and
underscoring supplied)
By Decision of May 27, 2005, the Second Division of the CTA denied Silkair’s
petition on the ground that as the excise tax was imposed on Petron Corporation
as the manufacturer of petroleum products, any claim for refund should be filed
109
by the latter; and where the burden of tax is shifted to the purchaser, the amount
passed on to it is no longer a tax but becomes an added cost of the goods
purchased. Thus the CTA discoursed:
The liability for excise tax on petroleum products that are being removed from its
refinery is imposed on the manufacturer/producer (Section 130 of the NIRC of
1997). x x x
xxxx
While it is true that in the case of excise tax imposed on petroleum products, the
seller thereof may shift the tax burden to the buyer, the latter is the proper party
to claim for the refund in the case of exemption from excise tax. Since the excise
tax was imposed upon Petron Corporation as the manufacturer of petroleum
products, pursuant to Section 130(A)(2), and that the corresponding excise taxes
were indeed, paid by it, . . . any claim for refund of the subject excise taxes
should be filed by Petron Corporation as the taxpayer contemplated under the
law. Petitioner cannot be considered as the taxpayer because it merely
shouldered the burden of the excise tax and not the excise tax itself.
Therefore, the right to claim for the refund of excise taxes paid on petroleum
products lies with Petron Corporation who paid and remitted the excise tax to the
BIR. Respondent, on the other hand, may only claim from Petron Corporation the
reimbursement of the tax burden shifted to the former by the latter. The excise
tax partaking the nature of an indirect tax, is clearly the liability of the
manufacturer or seller who has the option whether or not to shift the burden of
the tax to the purchaser. Where the burden of the tax is shifted to the
[purchaser], the amount passed on to it is no longer a tax but becomes an added
cost on the goods purchased which constitutes a part of the purchase price. The
incidence of taxation or the person statutorily liable to pay the tax falls on Petron
Corporation though the impact of taxation or the burden of taxation falls on
another person, which in this case is petitioner Silkair.5 (Italics in the original;
emphasis and underscoring supplied)
Silkair filed a Motion for Reconsideration6 during the pendency of which or on
September 12, 2005 the Bengzon Law Firm entered its appearance as counsel,7
without Silkair’s then-counsel of record (Jimenez Gonzales Liwanag Bello Valdez
Caluya & Fernandez or "JGLaw") having withdrawn as such.
By Resolution8 of September 22, 2005, the CTA Second Division denied Silkair’s
motion for reconsideration. A copy of the Resolution was furnished Silkair’s
counsel JGLaw which received it on October 3, 2005.9
On October 13, 2005, JGLaw, with the conformity of Silkair, filed its Notice of
Withdrawal of Appearance.10 On even date, Silkair, through the Bengzon Law
Firm, filed a Manifestation/Motion11 stating:
Petitioner was formerly represented xxx by JIMENEZ GONZALES LIWANAG BELLO
VALDEZ CALUYA & FERNANDEZ (JGLaw).
1. On 24 August 2005, petitioner served notice to JGLaw of its decision to cease
all legal representation handled by the latter on behalf of the petitioner. Petitioner
110
also requested JGLaw to make arrangements for the transfer of all files relating to
its legal representation on behalf of petitioner to the undersigned counsel. x x x
2. The undersigned counsel was engaged to act as counsel for the petitioner in
the above-entitled case; and thus, filed its entry of appearance on 12 September
2005. x x x
3. The undersigned counsel, through petitioner, has received information that the
Honorable Court promulgated a Resolution on petitioner’s Motion for
Reconsideration. To date, the undersigned counsel has yet to receive an official
copy of the above-mentioned Resolution. In light of the foregoing, undersigned
counsel hereby respectfully requests for an official copy of the Honorable Court’s
Resolution on petitioner’s Motion for Reconsideration x x x.12 (Underscoring
supplied)
On October 14, 2005, the Bengzon Law Firm received its requested copy of the
September 22, 200513 CTA Second Division Resolution. Thirty-seven days later
or on October 28, 2005, Silkair, through said counsel, filed a Motion for Extension
of Time to File Petition for Review14 before the CTA En Banc which gave it until
November 14, 2005 to file a petition for review.
On November 11, 2005, Silkair filed another Motion for Extension of Time.15 On
even date, the Bengzon Law Firm informed the CTA of its withdrawal of
appearance as counsel for Silkair with the information, that Silkair would continue
to be represented by Atty. Teodoro A. Pastrana, who used to be with the firm but
who had become a partner of the Pastrana and Fallar Law Offices.16
The CTA En Banc granted Silkair’s second Motion for Extension of Time, giving
Silkair until November 24, 2005 to file its petition for review. On November 17,
2005, Silkair filed its Petition for Review17 before the CTA En Banc.
By Resolution of May 19,2006, the CTA En Banc dismissed18 Silkair’s petition for
review for having been filed out of time in this wise:
A petitioner is given a period of fifteen (15) days from notice of award, judgment,
final order or resolution, or denial of motion for new trial or reconsideration to
appeal to the proper forum, in this case, the CTA En Banc. This is clear from both
Section 11 and Section 9 of Republic Act No. 9282 x x x.
xxxx
The petitioner, through its counsel of record Jimenez, Gonzalez, L[iwanag], Bello,
Valdez, Caluya & Fernandez Law Offices, received the Resolution dated
September 22, 2005 on October 3, 2005. At that time, the petitioner had two
counsels of record, namely, Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya
& Fernandez Law Offices and The Bengzon Law Firm which filed its Entry of
Appearance on September 12, 2005. However, as of said date, Atty. Mary Jane B.
Austria-Delgado of Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya &
Fernandez Law Offices was still the counsel of record considering that the Notice
of Withdrawal of Appearance signed by Atty. Mary Jane B. Austria-Delgado was
filed only on October 13, 2005 or ten (10) days after receipt of the September
22, 2005 Resolution of the Court’s Second Division. This notwithstanding, Section
111
2 of Rule 13 of the Rules of Court provides that if any party has appeared by
counsel, service upon him shall be made upon his counsel or one of them, unless
service upon the party himself is ordered by the Court. Where a party is
represented by more than one counsel of record, "notice to any one of the several
counsel on record is equivalent to notice to all the counsel (Damasco vs. Arrieta,
et. al., 7 SCRA 224)." Considering that petitioner, through its counsel of record,
had received the September 22, 2005 Resolution as early as October 3, 2005, it
had only until October 18, 2005 within which to file its Petition for Review.
Petitioner only managed to file the Petition for Review with the Court En Banc on
November 17, 2005 or [after] thirty (30) days had lapsed from the final date of
October 18, 2005 to appeal.
The argument that it requested Motions for Extension of Time on October 28,
2005 or ten (10) days from the appeal period and the second Motion for
Extension of Time to file its Petition for Review on November 11, 2005 and its
allowance by the CTA En Banc notwithstanding, the questioned Decision is no
longer appealable for failure to timely file the necessary Petition for Review.19
(Emphasis in the original)
In a Separate Concurring Opinion,20 CTA Associate Justice Juanito C. Castañeda,
Jr. posited that Silkair is not the proper party to claim the tax refund.
Silkair filed a Motion for Reconsideration21 which the CTA En Banc denied.22
Hence, the present Petition for Review23 which raises the following issues:
I. WHETHER OR NOT THE PETITION FOR REVIEW FILED WITH THE HONORABLE
COURT OF TAX APPEALS EN BANC WAS TIMELY FILED.
II. APPEAL BEING AN ESSENTIAL PART OF OUR JUDICIAL SYSTEM, WHETHER OR
NOT PETITIONER SHOULD BE DEPRIVED OF ITS RIGHT TO APPEAL ON THE
BASIS OF TECHNICALITY.
III. ASSUMING THE HONORABLE SUPREME COURT WOULD HOLD THAT THE
FILING OF THE PETITITON FOR REVIEW WITH THE HONORABLE COURT OF TAX
APPEALS EN BANC WAS TIMELY, WHETHER OR NOT THE PETITIONER IS THE
PROPER PARTY TO CLAIM FOR REFUND OR TAX CREDIT.24 (Underscoring
supplied)
Silkair posits that "the instant case does not involve a situation where the
petitioner was represented by two (2) counsels on record, such that notice to the
former counsel would be held binding on the petitioner, as in the case of
Damasco v. Arrieta, etc., et al.25 x x x heavily relied upon by the respondent";26
and that "the case of Dolores De Mesa Abad v. Court of Appeals27 has more
appropriate application to the present case."28
In Dolores De Mesa Abad, the trial court issued an order of November 19, 1974
granting the therein private respondents’ Motion for Annulment of documents and
titles. The order was received by the therein petitioner’s counsel of record, Atty.
Escolastico R. Viola, on November 22, 1974 prior to which or on July 17, 1974,
Atty. Vicente Millora of the Millora, Tobias and Calimlim Law Office had filed an
"Appearance and Manifestation." Atty. Millora received a copy of the trial court’s
order on December 9, 1974. On January 4, 1975, the therein petitioners, through
112
Atty. Ernesto D. Tobias also of the Millora, Tobias and Calimlim Law Office, filed
their Notice of Appeal and Cash Appeal Bond as well as a Motion for Extension of
the period to file a Record on Appeal. They filed the Record on Appeal on January
24, 1975. The trial court dismissed the appeal for having been filed out of time,
which was upheld by the Court of Appeals on the ground that the period within
which to appeal should be counted from November 22, 1974, the date Atty. Viola
received a copy of the November 19, 1974 order. The appellate court held that
Atty. Viola was still the counsel of record, he not having yet withdrawn his
appearance as counsel for the therein petitioners. On petition for certiorari,29 this
Court held
x x x [R]espondent Court reckoned the period of appeal from the time petitioners’
original counsel, Atty. Escolastico R. Viola, received the Order granting the Motion
for Annulment of documents and titles on November 22, 1974. But as petitioners
stress, Atty. Vicente Millora of the Millora, Tobias and Calimlim Law Office had
filed an "Appearance and Manifestation" on July 16, 1974. Where there may have
been no specific withdrawal by Atty. Escolastico R. Viola, for which he should be
admonished, by the appearance of a new counsel, it can be said that Atty. Viola
had ceased as counsel for petitioners. In fact, Orders subsequent to the aforesaid
date were already sent by the trial Court to the Millora, Tobias and Calimlim Law
Office and not to Atty. Viola.
Under the circumstances, December 9, 1974 is the controlling date of receipt by
petitioners’ counsel and from which the period of appeal from the Order of
November 19, 1974 should be reckoned. That being the case, petitioner’s x x x
appeal filed on January 4, 1975 was timely filed.30 (Underscoring supplied)
The facts of Dolores De Mesa Abad are not on all fours with those of the present
case. In any event, more recent jurisprudence holds that in case of failure to
comply with the procedure established by Section 26, Rule 13831 of the Rules of
Court re the withdrawal of a lawyer as a counsel in a case, the attorney of record
is regarded as the counsel who should be served with copies of the judgments,
orders and pleadings.32 Thus, where no notice of withdrawal or substitution of
counsel has been shown, notice to counsel of record is, for all purposes, notice to
the client.33 The court cannot be expected to itself ascertain whether the counsel
of record has been changed.34
In the case at bar, JGLaw filed its Notice of Withdrawal of Appearance on October
13, 200535 after the Bengzon Law Firm had entered its appearance. While Silkair
claims it dismissed JGLaw as its counsel as early as August 24, 2005, the same
was communicated to the CTA only on October 13, 2005.36 Thus, JGLaw was still
Silkair’s counsel of record as of October 3, 2005 when a copy of the September
22, 2005 resolution of the CTA Second Division was served on it. The service
upon JGLaw on October 3, 2005 of the September 22, 2005 resolution of CTA
Second Division was, therefore, for all legal intents and purposes, service to
Silkair, and the CTA correctly reckoned the period of appeal from such date.
TECHNICALITY ASIDE, on the merits, the petition just the same fails.
Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of
1997 which reads
113
Sec. 135. Petroleum Products sold to International Carriers and Exempt Entities
of Agencies. – Petroleum products sold to the following are exempt from excise
tax:
xxxx
(b) Exempt entities or agencies covered by tax treaties, conventions, and other
international agreements for their use and consumption: Provided, however, That
the country of said foreign international carrier or exempt entities or agencies
exempts from similar taxes petroleum products sold to Philippine carriers, entities
or agencies; x x x
x x x x,
and Article 4(2) of the Air Transport Agreement between the Government of the
Republic of the Philippines and the Government of the Republic of Singapore (Air
Transport Agreement between RP and Singapore) which reads
Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced
into, or taken on board aircraft in the territory of one Contracting party by, or on
behalf of, a designated airline of the other Contracting Party and intended solely
for use in the operation of the agreed services shall, with the exception of
charges corresponding to the service performed, be exempt from the same
customs duties, inspection fees and other duties or taxes imposed in the
territories of the first Contracting Party , even when these supplies are to be used
on the parts of the journey performed over the territory of the Contracting Party
in which they are introduced into or taken on board. The materials referred to
above may be required to be kept under customs supervision and control.
The proper party to question, or seek a refund of, an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the same
even if he shifts the burden thereof to another.37 Section 130 (A) (2) of the NIRC
provides that "[u]nless otherwise specifically allowed, the return shall be filed and
the excise tax paid by the manufacturer or producer before removal of domestic
products from place of production." Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section 135 of the
NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and
Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is not a tax but part of the price
which Silkair had to pay as a purchaser.38
Silkair nevertheless argues that it is exempt from indirect taxes because the Air
Transport Agreement between RP and Singapore grants exemption "from the
same customs duties, inspection fees and other duties or taxes imposed in the
territory of the first Contracting Party."39 It invokes Maceda v. Macaraig, Jr.40
which upheld the claim for tax credit or refund by the National Power Corporation
(NPC) on the ground that the NPC is exempt even from the payment of indirect
taxes.

114
Silkairs’s argument does not persuade. In Commissioner of Internal Revenue v.
Philippine Long Distance Telephone Company,41 this Court clarified the ruling in
Maceda v. Macaraig, Jr., viz:
It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption
from "all taxes" granted to the National Power Corporation (NPC) under its
charter includes both direct and indirect taxes. But far from providing PLDT
comfort, Maceda in fact supports the case of herein petitioner, the correct lesson
of Maceda being that an exemption from "all taxes" excludes indirect taxes,
unless the exempting statute, like NPC’s charter, is so couched as to include
indirect tax from the exemption. Wrote the Court:
x x x However, the amendment under Republic Act No. 6395 enumerated the
details covered by the exemption. Subsequently, P.D. 380, made even more
specific the details of the exemption of NPC to cover, among others, both direct
and indirect taxes on all petroleum products used in its operation. Presidential
Decree No. 938 [NPC’s amended charter] amended the tax exemption by
simplifying the same law in general terms. It succinctly exempts NPC from "all
forms of taxes, duties[,] fees…"
The use of the phrase "all forms" of taxes demonstrates the intention of the law
to give NPC all the tax exemptions it has been enjoying before…
xxxx
It is evident from the provisions of P.D. No. 938 that its purpose is to maintain
the tax exemption of NPC from all forms of taxes including indirect taxes as
provided under R.A. No. 6395 and P.D. 380 if it is to attain its goals. (Italics in
the original; emphasis supplied)42
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article
4(2) of the Air Transport Agreement between RP and Singapore cannot, without a
clear showing of legislative intent, be construed as including indirect taxes.
Statutes granting tax exemptions must be construed in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority, 43 and if an exemption
is found to exist, it must not be enlarged by construction.44
WHEREFORE, the petition is DENIED.
Costs against petitioner.
SO ORDERED.

[G.R. No. 166134 : June 29, 2010]

ANGELES CITY, PETITIONER, VS. ANGELES CITY ELECTRIC CORPORATION

AND REGIONAL TRIAL COURT BRANCH 57, ANGELES CITY,
RESPONDENTS.

DECISION

115
DEL CASTILLO, J.:

The prohibition on the issuance of a writ of injunction to enjoin the collection of

taxes applies only to national internal revenue taxes, and not to local taxes.

This Petition[1] for Certiorari under Rule 65 of the Rules of Court seeks to set
aside the Writ of Preliminary Injunction issued by the Regional Trial Court (RTC)
of Angeles City, Branch 57, in Civil Case No. 11401, enjoining Angeles City and its
City Treasurer from levying, seizing, disposing and selling at public auction the
properties owned by Angeles Electric Corporation (AEC).

Factual Antecedents

On June 18, 1964, AEC was granted a legislative franchise under Republic Act No.
(RA) 4079[2] to construct, maintain and operate an electric light, heat, and power
system for the purpose of generating and distributing electric light, heat and
power for sale in Angeles City, Pampanga. Pursuant to Section 3-A thereof,[3]
AEC's payment of franchise tax for gross earnings from electric current sold was
in lieu of all taxes, fees and assessments.

On September 11, 1974, Presidential Decree No. (PD) 551 reduced the franchise
tax of electric franchise holders. Section 1 of PD 551 provided that:
SECTION 1. Any provision of law or local ordinance to the contrary
notwithstanding, the franchise tax payable by all grantees of franchises to
generate, distribute and sell electric current for light, heat and power shall be two
percent (2%) of their gross receipts received from the sale of electric current and
from transactions incident to the generation, distribution and sale of electric
current.

Such franchise tax shall be payable to the Commissioner of Internal Revenue or

his duly authorized representative on or before the twentieth day of the month
following the end of each calendar quarter or month as may be provided in the
respective franchise or pertinent municipal regulation and shall, any provision of
the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of
all taxes and assessments of whatever nature imposed by any national or local
authority on earnings, receipts, income and privilege of generation, distribution
and sale of electric current.

On January 1, 1992, RA 7160 or the Local Government Code (LGC) of 1991 was
passed into law, conferring upon provinces and cities the power, among others, to
impose tax on businesses enjoying franchise.[4] In accordance with the LGC, the
Sangguniang Panlungsod of Angeles City enacted on December 23, 1993 Tax
Ordinance No. 33, S-93, otherwise known as the Revised Revenue Code of
116
Angeles City (RRCAC).

On February 7, 1994, a petition seeking the reduction of the tax rates and a
review of the provisions of the RRCAC was filed with the Sangguniang Panlungsod
by Metro Angeles Chamber of Commerce and Industry Inc. (MACCI) of which AEC
is a member. There being no action taken by the Sangguniang Panlungsod on the
matter, MACCI elevated the petition[5] to the Department of Finance, which
referred the same to the Bureau of Local Government Finance (BLGF). In the
petition, MACCI alleged that the RRCAC is oppressive, excessive, unjust and
confiscatory; that it was published only once, simultaneously on January 22,
1994; and that no public hearings were conducted prior to its enactment. Acting
on the petition, the BLGF issued a First Indorsement[6] to the City Treasurer of
Angeles City, instructing the latter to make representations with the Sangguniang
Panlungsod for the appropriate amendment of the RRCAC in order to ensure
compliance with the provisions of the LGC, and to make a report on the action
taken within five days.

Thereafter, starting July 1995, AEC has been paying the local franchise tax to the
Office of the City Treasurer on a quarterly basis, in addition to the national
franchise tax it pays every quarter to the Bureau of Internal Revenue (BIR).

Proceedings before the City Treasurer

On January 22, 2004, the City Treasurer issued a Notice of Assessment [7] to AEC
for payment of business tax, license fee and other charges for the period 1993 to
2004 in the total amount of P94,861,194.10. Within the period prescribed by law,
AEC protested the assessment claiming that:

(a) pursuant to RA 4079, it is exempt from paying local business tax;

(b) since it is already paying franchise tax on business, the payment of business
tax would result in double taxation;

(c) the period to assess had prescribed because under the LGC, taxes and fees
can only be assessed and collected within five (5) years from the date they
become due; and

(d) the assessment and collection of taxes under the RRCAC cannot be made
retroactive to 1993 or prior to its effectivity.[8]

On February 17, 2004, the City Treasurer denied the protest for lack of merit and
requested AEC to settle its tax liabilities.[9]

Proceedings before the RTC

Aggrieved, AEC appealed the denial of its protest to the RTC of Angeles City via a
Petition for Declaratory Relief,[10] docketed as Civil Case No. 11401.

117
On April 5, 2004, the City Treasurer levied on the real properties of AEC.[11] A
Notice of Auction Sale[12] was published and posted announcing that a public
auction of the levied properties of AEC would be held on May 7, 2004.

This prompted AEC to file with the RTC, where the petition for declaratory relief
was pending, an Urgent Motion for Issuance of Temporary Restraining Order
and/or Writ of Preliminary Injunction[13] to enjoin Angeles City and its City
Treasurer from levying, annotating the levy, seizing, confiscating, garnishing,
selling and disposing at public auction the properties of AEC.

Meanwhile, in response to the petition for declaratory relief filed by AEC, Angeles
City and its City Treasurer filed an Answer with Counterclaim[14] to which AEC
filed a Reply.[15]

After due notice and hearing, the RTC issued a Temporary Restraining Order
(TRO)[16] on May 4, 2004, followed by an Order[17] dated May 24, 2004 granting
the issuance of a Writ of Preliminary Injunction, conditioned upon the filing of a
bond in the amount of P10,000,000.00. Upon AEC's posting of the required bond,
the RTC issued a Writ of Preliminary Injunction on May 28, 2004,[18] which was
amended on May 31, 2004 due to some clerical errors.[19]

On August 5, 2004, Angeles City and its City Treasurer filed a "Motion for
Dissolution of Preliminary Injunction and Motion for Reconsideration of the Order
dated May 24, 2004,"[20] which was opposed by AEC.[21]

Finding no compelling reason to disturb and reconsider its previous findings, the
RTC denied the joint motion on October 14, 2004.[22]
Issue

Being a special civil action for certiorari, the issue in the instant case is limited to
the determination of whether the RTC gravely abused its discretion in issuing the
writ of preliminary injunction enjoining Angeles City and its City Treasurer from
levying, selling, and disposing the properties of AEC. All other matters pertaining
to the validity of the tax assessment and AEC's tax exemption must therefore be
left for the determination of the RTC where the main case is pending decision.

Petitioner's Arguments

Petitioner's main argument is that the collection of taxes cannot be enjoined by

the RTC, citing Valley Trading Co., Inc. v. Court of First Instance of Isabela,
Branch II,[23] wherein the lower court's denial of a motion for the issuance of a
writ of preliminary injunction to enjoin the collection of a local tax was upheld.
Petitioner further reasons that since the levy and auction of the properties of a
delinquent taxpayer are proper and lawful acts specifically allowed by the LGC,
these cannot be the subject of an injunctive writ. Petitioner likewise insists that

118
AEC must first pay the tax before it can protest the assessment. Finally,
petitioner contends that the tax exemption claimed by AEC has no legal basis
because RA 4079 has been expressly repealed by the LGC.

Private respondent's Arguments

Private respondent AEC on the other hand asserts that there was no grave abuse
of discretion on the part of the RTC in issuing the writ of preliminary injunction
because it was issued after due notice and hearing, and was necessary to prevent
the petition from becoming moot. In addition, AEC claims that the issuance of the
writ of injunction was proper since the tax assessment issued by the City
Treasurer is not yet final, having been seasonably appealed pursuant to Section
195[24] of the LGC. AEC likewise points out that following the case of Pantoja v.
David,[25] proceedings to invalidate a warrant of distraint and levy to restrain the
collection of taxes do not violate the prohibition against injunction to restrain the
collection of taxes because the proceedings are directed at the right of the City
Treasurer to collect the tax by distraint or levy. As to its tax liability, AEC
maintains that it is exempt from paying local business tax. In any case, AEC
counters that the issue of whether it is liable to pay the assessed local business
tax is a factual issue that should be determined by the RTC and not by the
Supreme Court via a petition for certiorari under Rule 65 of the Rules of Court.
Our Ruling

We find the petition bereft of merit.

The LGC does not specifically prohibit an injunction enjoining the collection of
taxes

A principle deeply embedded in our jurisprudence is that taxes being the lifeblood
of the government should be collected promptly,[26] without unnecessary
hindrance[27] or delay.[28] In line with this principle, the National Internal Revenue
Code of 1997 (NIRC) expressly provides that no court shall have the authority to
grant an injunction to restrain the collection of any national internal revenue tax,
fee or charge imposed by the code.[29] An exception to this rule obtains only when
in the opinion of the Court of Tax Appeals (CTA) the collection thereof may
jeopardize the interest of the government and/or the taxpayer.[30]

The situation, however, is different in the case of the collection of local taxes as
there is no express provision in the LGC prohibiting courts from issuing an
injunction to restrain local governments from collecting taxes. Thus, in the case
of Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, cited by
the petitioner, we ruled that:
Unlike the National Internal Revenue Code, the Local Tax Code[31] does not
contain any specific provision prohibiting courts from enjoining the collection of
local taxes. Such statutory lapse or intent, however it may be viewed, may have

119
allowed preliminary injunction where local taxes are involved but cannot negate
the procedural rules and requirements under Rule 58. [32]

In light of the foregoing, petitioner's reliance on the above-cited case to support

its view that the collection of taxes cannot be enjoined is misplaced. The lower
court's denial of the motion for the issuance of a writ of preliminary injunction to
enjoin the collection of the local tax was upheld in that case, not because courts
are prohibited from granting such injunction, but because the circumstances
required for the issuance of writ of injunction were not present.

Nevertheless, it must be emphasized that although there is no express prohibition

in the LGC, injunctions enjoining the collection of local taxes are frowned upon.
Courts therefore should exercise extreme caution in issuing such injunctions.

No grave abuse of discretion was committed by the RTC

Section 3, Rule 58, of the Rules of Court lays down the requirements for the
issuance of a writ of preliminary injunction, viz:
(a) That the applicant is entitled to the relief demanded, and the whole or part of
such relief consists in restraining the commission or continuance of the acts
complained of, or in the performance of an act or acts, either for a limited period
or perpetually;

(b) That the commission, continuance or non-performance of the act or acts

complained of during the litigation would probably work injustice to the applicant;
or

(c) That a party, court, or agency or a person is doing, threatening, or attempting

to do, or is procuring or suffering to be done, some act or acts probably in
violation of the rights of the applicant respecting the subject of the action or
proceeding, and tending to render the judgment ineffectual.

Two requisites must exist to warrant the issuance of a writ of preliminary

injunction, namely: (1) the existence of a clear and unmistakable right that must
be protected; and (2) an urgent and paramount necessity for the writ to prevent
serious damage.[33]

In issuing the injunction, the RTC ratiocinated that:

It is very evident on record that petitioner[34] resorted and filed an urgent motion
for issuance of a temporary restraining order and preliminary injunction to stop
the scheduled auction sale only when a warrant of levy was issued and published
in the newspaper setting the auction sale of petitioner's property by the City
Treasurer, merely few weeks after the petition for declaratory relief has been
filed, because if the respondent will not be restrained, it will render this petition
moot and academic. To the mind of the Court, since there is no other plain,

120
speedy and adequate remedy available to the petitioner in the ordinary course of
law except this application for a temporary restraining order and/or writ of
preliminary injunction to stop the auction sale and/or to enjoin and/or restrain
respondents from levying, annotating the levy, seizing, confiscating, garnishing,
selling and disposing at public auction the properties of petitioner, or otherwise
exercising other administrative remedies against the petitioner and its properties,
this alone justifies the move of the petitioner in seeking the injunctive reliefs
sought for.

Petitioner in its petition is questioning the assessment or the ruling of the City
Treasurer on the business tax and fees, and not the local ordinance concerned.
This being the case, the Court opines that notice is not required to the Solicitor
General since what is involved is just a violation of a private right involving the
right of ownership and possession of petitioner's properties. Petitioner, therefore,
need not comply with Section 4, Rule 63 requiring such notice to the Office of the
Solicitor General.

The Court is fully aware of the Supreme Court pronouncement that injunction is
not proper to restrain the collection of taxes. The issue here as of the moment is
the restraining of the respondent from pursuing its auction sale of the petitioner's
properties. The right of ownership and possession of the petitioner over the
properties subject of the auction sale is at stake.

Respondents assert that not one of the witnesses presented by the petitioner
have proven what kind of right has been violated by the respondent, but merely
mentioned of an injury which is only a scenario based on speculation because of
petitioner's claim that electric power may be disrupted.

Engr. Abordo's testimony reveals and even his Affidavit Exhibit "S" showed that if
the auction sale will push thru, petitioner will not only lose control and operation
of its facility, but its employees will also be denied access to equipments vital to
petitioner's operations, and since only the petitioner has the capability to operate
Petersville sub station, there will be a massive power failure or blackout which will
adversely affect business and economy, if not lives and properties in Angeles City
and surrounding communities.

Petitioner, thru its witnesses, in the hearing of the temporary restraining order,
presented sufficient and convincing evidence proving irreparable damages and
injury which were already elaborated in the temporary restraining order although
the same may be realized only if the auction sale will proceed. And unless
prevented, restrained, and enjoined, grave and irreparable damage will be
suffered not only by the petitioner but all its electric consumers in Angeles, Clark,
Dau and Bacolor, Pampanga.

The purpose of injunction is to prevent injury and damage from being incurred,
otherwise, it will render any judgment in this case ineffectual.

121
"As an extraordinary remedy, injunction is calculated to preserve or maintain the
status quo of things and is generally availed of to prevent actual or threatened
acts, until the merits of the case can be heard" (Cagayan de Oro City Landless
Res. Assn. Inc. vs. CA, 254 SCRA 220)

It appearing that the two essential requisites of an injunction have been satisfied,
as there exists a right on the part of the petitioner to be protected, its right[s] of
ownership and possession of the properties subject of the auction sale, and that
the acts (conducting an auction sale) against which the injunction is to be
directed, are violative of the said rights of the petitioner, the Court has no other
recourse but to grant the prayer for the issuance of a writ of preliminary
injunction considering that if the respondent will not be restrained from doing the
acts complained of, it will preempt the Court from properly adjudicating on the
merits the various issues between the parties, and will render moot and academic
the proceedings before this court.[35]

As a rule, the issuance of a preliminary injunction rests entirely within the

discretion of the court taking cognizance of the case and will not be interfered
with, except where there is grave abuse of discretion committed by the court.[36]
For grave abuse of discretion to prosper as a ground for certiorari, it must be
demonstrated that the lower court or tribunal has exercised its power in an
arbitrary and despotic manner, by reason of passion or personal hostility, and it
must be patent and gross as would amount to an evasion or to a unilateral refusal
to perform the duty enjoined or to act in contemplation of law.[37] In other words,
mere abuse of discretion is not enough.[38]

Guided by the foregoing, we find no grave abuse of discretion on the part of the
RTC in issuing the writ of injunction. Petitioner, who has the burden to prove
grave abuse of discretion,[39] failed to show that the RTC acted arbitrarily and
capriciously in granting the injunction. Neither was petitioner able to prove that
the injunction was issued without any factual or legal justification. In assailing the
injunction, petitioner primarily relied on the prohibition on the issuance of a writ
of injunction to restrain the collection of taxes. But as we have already said, there
is no such prohibition in the case of local taxes. Records also show that before
issuing the injunction, the RTC conducted a hearing where both parties were
given the opportunity to present their arguments. During the hearing, AEC was
able to show that it had a clear and unmistakable legal right over the properties
to be levied and that it would sustain serious damage if these properties, which
are vital to its operations, would be sold at public auction. As we see it then, the
writ of injunction was properly issued.

A final note. While we are mindful that the damage to a taxpayer's property rights
generally takes a back seat to the paramount need of the State for funds to
sustain governmental functions,[40] this rule finds no application in the instant
case where the disputed tax assessment is not yet due and demandable.
Considering that AEC was able to appeal the denial of its protest within the period
prescribed under Section 195 of the LGC, the collection of business taxes[41]
122
through levy at this time is, to our mind, hasty, if not premature.[42] The issues of
tax exemption, double taxation, prescription and the alleged retroactive
application of the RRCAC, raised in the protest of AEC now pending with the RTC,
must first be resolved before the properties of AEC can be levied. In the
meantime, AEC's rights of ownership and possession must be respected.

WHEREFORE, the petition is hereby DISMISSED.

SO ORDERED.

[ G.R. No. 213394, April 06, 2016 ]

SPOUSES EMMANUEL D. PACQUIAO AND JINKEE J. PACQUIAO, PETITIONERS, VS.
THE COURT OF TAX APPEALS - FIRST DIVISION AND THE COMMISSION OF
INTERNAL REVENUE, RESPONDENTS.

DECISION
MENDOZA, J.:
Before this Court is a petition for review on certiorari[1] under Rule 65 of the Rules
of Court filed by petitioner spouses, now Congressman Emmanuel D. Pacquiao
(Pacquiao) and Vice-Governor Jinkee J. Pacquiao (Jinkee), to set aside and annul
the April 22, 2014 Resolution[2] and the July 11, 2014 Resolution[3] of the Court of
Tax Appeals (CTA), First Division, in CTA Case No. 8683.

Through the assailed issuances, the CTA granted the petitioners' Urgent Motion to
Lift Warrants of Distraint & Levy and Garnishment and for the Issuance of an
Order to Suspend the Collection of Tax (with Prayer for the Issuance of a
Temporary Restraining Order[4] [Urgent Motion], dated October 18, 2013, but
required them, as a condition, to deposit a cash bond in the amount of
P3,298,514,894.35-or post a bond of P4,947,772,341.53.

The Antecedents

The genesis of the foregoing controversy began a few years before the petitioners
became elected officials in their own right. Prior to their election as public officers,
the petitioners relied heavily on Pacquiao's claim to fame as a world-class
professional boxer. Due to his success, Pacquiao was able to amass income from
both the Philippines and the United States of America (US). His income from the
US came primarily from the purses he received for the boxing matches he took
part under Top Rank, Inc. On the other hand, his income from the Philippines
consisted of talent fees received from various Philippine corporations for product
endorsements, advertising commercials and television appearances.

In compliance with his duty to his home country, Pacquiao filed his 2008 income
tax return on April 15, 2009 reporting his Philippine-sourced income.[5] It was
subsequently amended to include his US-sourced income.[6]
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The controversy began on March 25, 2010, when Pacquiao received a Letter of
Authority[7] (March LA) from the Regional District Office No. 43 (RDO) of the
Bureau of Internal Revenue (BIR) for the examination of his books of accounts
and other accounting records for the period covering January 1, 2008 to
December 31, 2008.

On April 15, 2010, Pacquiao filed his 2009 income tax return,[8] which although
reflecting his Philippines-sourced income, failed to include his income derived
from his earnings in the US.[9] He also failed to file his Value Added Tax (VAT)
returns for the years 2008 and 2009.[10]

Finding the need to directly conduct the investigation and determine the tax
liabilities of the petitioners, respondent Commissioner on Internal Revenue (CIR)
issued another Letter of Authority, dated July 27, 2010 (July LA), authorizing the
BIR's National Investigation Division (NID) to examine the books of accounts and
other accounting records of both Pacquiao and Jinkee for the last 15 years, from
1995 to 2009.[11] On September 21, 2010 and September 22, 2010, the CIR
replaced the July LA by issuing to both Pacquiao[12] and Jinkee[13] separate
electronic versions of the July LA pursuant to Revenue Memorandum Circular
(RMC) No. 56-2010.[14]

Due to these developments, the petitioners, through counsel, wrote a letter [15]
questioning the propriety of the CIR investigation. According to the petitioners,
they were already subjected to an earlier investigation by the BIR for the years
prior to 2007, and no fraud was ever found to have been committed. They added
that pursuant to the March LA issued by the RDO, they were already being
investigated for the year 2008.

In its letter,[16] dated December 13, 2010, the NID informed the counsel of the
petitioners that the July LA issued by the CIR had effectively cancelled and
superseded the March LA issued by its RDO. The same letter also stated that:

Although fraud had been established in the instant case as determined by

the Commissioner, your clients would still be given the opportunity to present
documents as part of their procedural rights to due process with regard to the
civil aspect thereof. Moreover, any tax credits and/or payments from the taxable
year 2007 & prior years will be properly considered and credited in the current
investigation.[17]

[Emphasis Supplied]

The CIR informed the petitioners that its reinvestigation of years prior to 2007
was justified because the assessment thereof was pursuant to a "fraud
investigation" against the petitioners under the "Run After Tax Evaders" (RATE)
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program of the BIR.

On January 5 and 21, 2011, the petitioners submitted various income tax related
documents for the years 2007-2009.[18] As for the years 1995 to 2006, the
petitioners explained that they could not furnish the bureau with the books of
accounts and other, tax related documents as they had already been disposed in
accordance with Section 235 of the Tax Code.[19] They added that even if they
wanted to, they could no longer find copies of the documents because during
those years, their accounting records were then managed by previous counsels,
who had since passed away. Finally, the petitioners pointed out that their tax
liabilities for the said years had already been fully settled with then CIR Jose
Mario Buñag, who after a review, found no fraud against them. [20]

On June 21; 2011, on the same day that the petitioners made their last
compliance in submitting their tax-related documents, the CIR issued a subpoena
duces tecum[21] requiring the petitioners rto submit additional income tax and
VAT-related documents for the years 1995-2009.

After conducting its own- investigation, the CIR made its initial assessment
finding that the petitioners were unable to fully settle their tax liabilities. Thus,
the CIR issued its Notice of Initial Assessment-Informal Conference (NIC),[22]
dated January 31, 2012, directly addressed to the petitioners, informing
them that based on the best evidence obtainable, they were liable for deficiency
income taxes in the amount of P714,061,116.30 for 2008 and
P1,446,245,864.33 for 2009, inclusive of interests and surcharges. After being
informed of this development, the counsel for the petitioners sought to have the
conference reset but he never received a response.

Then, on "February 20, 2012, the CIR issued the Preliminary Assessment
Notice[23] (PAN), informing the petitioners that based on third-party information
allowed under Section 5(B)[24] and 6 of the National Internal Revenue Code
(NIRC),[25] they found the petitioners liable not only for deficiency income taxes
in the amount of P714,061,116.30 for 2008 and P1,446;245,864.33 for 2009, but
aiso for their non-payment of their VAT liabilities in the amount P4,104,360.01
for 2008 and P 24,901,276.77 for 2009.

The petitioners filed their protest against the PAN.[26]

After denying the protest, the BIR issued its Formal Letter Demand[27] (FLD),
dated May 2, 2012, finding the petitioners liable for deficiency income tax and
VAT amounting to P766,899,530.62 for taxable years 2008 and
P1,433,421,214.61 for 2009, inclusive of interests and surcharges. Again, the
petitioners questioned the findings of the CIR.[28]

On May 14, 2013, the BIR issued its Final Decision on Disputed Assessment
(FDDA),[29] addressed to Pacquiao only, informing him that the CIR found him
liable for deficiency income tax and VAT for taxable years 2008 and 2009 which,

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inclusive of interests and surcharges, amounted to a total of P2,261,217,439.92.

Seeking to collect the total outstanding tax liabilities of the petitioners, the
Accounts Receivable Monitoring Division of the BIR (BIR-ARMD), issued the
Preliminary Collection Letter (PCL),[30] dated July 19, 2013, demanding that both
Pacquiao and Jinkee pay the amount of P2,261,217,439.92, inclusive of interests
and surcharges.

Then, on August 7, 2013, the BIR-ARMD sent Pacquiao and Jinkee the Final
Notice Before Seizure (FNBS),[31] informing the petitioners of their last
opportunity to make the necessary settlement of deficiency income and VAT
liabilities before the bureau would proceed against their property.

Although they no longer questioned the BIR's assessment of their deficiency

VAT liability, the petitioners requested that they be allowed to pay the same in
four (4) quarterly installments. Eventually, through a series of installments,
Pacquiao and Jinkee paid a total P32,196,534.40 in satisfaction of their liability
for deficiency VAT.[32]

Proceedings at the CTA

Aggrieved that they were being made liable for deficiency income taxes for the
years 2008 and 2009, the petitioners sought redress and filed a petition for
review[33] with the CTA.

Before the CTA, the petitioners contended that the assessment of the CIR was
defective because it was predicated on its mere allegation that they were guilty of
fraud.[34]

They also questioned the validity of the attempt by the CIR to collect deficiency
taxes from Jinkee, arguing that she was denied due process. According to the
petitioners, as all previous communications and notices from the CIR were
addressed to both petitioners, the FDDA was void because it was only addressed
to Pacquiao. Moreover, considering that the PCL and FNBS were based on the
FDDA, the same should likewise be declared void.[35]

The petitioners added that the CIR assessment, which was not based on actual
transaction documents but simply on "best possible sources," was not
sanctioned by the Tax Code. They also argue that the assessment failed to
consider not only the taxes paid by Pacquiao to the US authorities for his fights,
but also the deductions claimed by him for his expenses.[36]

Pending the resolution by the CTA of their appeal, the petitioners sought the
suspension of the issuance of warrants of distraint and/or levy and warrants of
garnishment.[37]

Meanwhile, in a letter,[38] dated October 14, 2013, the BIR-ARMD informed the

126
petitioners that they were denying their request to defer the collection
enforcement action for lack of legal basis. The same letter also informed the
petitioners that despite their initial payment, the amount to be collected from
both of them still amounted to P3,259,643,792.24, for deficiency income tax
for taxable years 2008 and 2009, and P46,920,235.74 for deficiency VAT for
the same period. A warrant of distraint and/or levy[39] against Pacquiao and
Jinkee was included in the letter.

Aggrieved, the petitioners filed the subject Urgent Motion for the CTA to lift the
warrants of distraint, levy and garnishments issued by the CIR against their
.assets and to enjoin the CIR from collecting the assessed deficiency taxes
pending the resolution of their appeal. As for- the cash deposit and bond
requirement under Section 11 of Republic Act (R.A.) No. 1125, the petitioners
question the necessity thereof, arguing that the CIR's assessment of their tax
liabilities was highly questionable. At the same time, the petitioners manifested
that they were willing to file a bond for such reasonable amount to be fixed by
the tax court.

On April 22, 2014, the CTA issued the first assailed resolution granting the
petitioner's Urgent Motion, ordering the CIR to desist from collecting on the
deficiency tax assessments against the petitioners. In its resolution, the CTA
noted that the amount sought to be collected was way beyond the petitioners' net
worth, which, based on Pacquiao's Statement of Assets, Liabilities and Net Worth
(SALN), only amounted to P1,185,984,697.00. Considering that the petitioners
still needed to cover the costs of their daily subsistence, the CTA opined that the
collection of the total amount of P3,298,514,894.35 from the petitioners would be
highly prejudicial to their interests and should, thus, be suspended pursuant to
Section 11 of R.A. No. 1125, as amended.

The CTA, however, saw no justification that the petitioners should deposit less
than the disputed amount. They were, thus, required to deposit the amount of
P3,298,514,894.35 or post a bond in the amount of P4,947,772,341.53.

The petitioners sought partial reconsideration of the April 22, 2014 CTA
resolution, praying for the reduction of the amount of the bond required or an
extension of 30 days to file the same. On July 11, 2014, the CTA issued the
second assailed resolution[40] denying the petitioner's motion to reduce the
required cash deposit or bond, but allowed them an extension of thirty (30) days
within which to file the same.

Hence, this petition, raising the following

GROUNDS

A.

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Respondent Court acted with grave abuse of discretion amounting to lack
or excess of jurisdiction in presuming the correctness of a fraud
assessment without evidentiary support other than the issuance of the
fraud assessments themselves, thereby violating Petitioner's
constitutional right to due process.

B.

Respondent Court acted with grave abuse of discretion amounting to lack

or excess of jurisdiction when it required the Petitioners to post a bond
even if the tax collection processes employed by Respondent
Commissioner against Petitioners was patently in violation of law
thereby blatantly breaching Petitioners' constitutional right to due
process, to wit:

1. Respondent Commissioner commenced tax collection process

against Jinkee without issuing or serving an FDDA against her.

2. Respondent Commissioner failed to comply with the procedural due

process requirements for summary tax collection remedies under
Sections 207(A) and (B) of the Tax Code when she commenced
summary collection remedies before the expiration of the period for
Petitioners to pay the assessed deficiency taxes.

3. Respondent Commissioner failed to comply with the procedural due

process requirements for summary tax collection remedies under
Section 208 of the Tax Code when she failed to serve Petitioners
with warrants of garnishment against their bank accounts.

4. The Chief of the ARMD, without any authority from Respondent

Commissioner, increased the aggregate amount of deficiency
income tax and VAT assessed against Petitioners from
P2,261,217,439.92 to P3,298,514,894.35 after the filing of the
Petition for Review with the Court of Tax Appeals.

5. Respondent Commissioner arbitrarily refused to admit that

Petitioners had already paid the deficiency VAT assessments for the
years 2008 and 2009.

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C.

Respondent Court acted with grave abuse of discretion amounting to lack

or excess of jurisdiction in requiring Petitioners to post a cash bond in
the amount of P3,298,514,894.35 or a surety bond in the amount of
P4,947,772,341.53, which is effectively an impossible condition given
that their undisputed net worth is only P1,185,984,697.00.

D.

Respondent Court acted with grave abuse of discretion amounting to lack

or excess of jurisdiction when it imposed a bond requirement which will
effectively prevent Petitioners from continuing the prosecution of its
appeal from the arbitrary and bloated assessments issued by Respondent
Commissioner.[41]

Arguments of the Petitioners

Contending that the CTA En Bane has no certiorari jurisdiction over interlocutory
orders issued by its division, the petitioners come before the Court, asking it to 1]
direct the CTA to dispense with the bond requirement imposed under Section 11
of R.A. No. 1125, as amended; and 2] direct the CIR to suspend the collection of
the deficiency income tax and VAT for the years 2008 and 2009. The petitioners
also pray that a temporary restraining order (TRO) be issued seeking a similar
relief pending the disposition of the subject petition.

In support of their position, the petitioners assert that the CTA acted with grave
abuse of discretion amounting to lack or excess of jurisdiction in requiring them
to provide security required under Section 11 of R.A. No. 1125. Under the
circumstances, they claim that they should not be required to make a cash
deposit or post a bond to stay the collection of the questioned deficiency taxes
considering that the assessment and collection efforts of the BIR was marred by
both procedural and substantive errors. They are synthesized as follows:

First. The CTA erred when it required them to make a cash deposit or post a bond
on the basis of the fraud assessment by the CIR. Similar to the argument they
raised in their petition for review with the CTA, they insist that the fraud
assessment by the CIR could not serve as basis for security because the amount
assessed by the CIR was made without evidentiary basis,[42] but just grounded on
the "best possible sources," without any detail.

Second... The BIR failed to accord them procedural due process when it initiated
summary collection remedies even before the expiration of the period allowed for
them to pay the assessed deficiency taxes.[43] They also claimed that they were

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not served with warrants of garnishment and that the warrants of garnishment
served on their banks of account were made even before they received the FDDA
and PCL.[44]

Third. The BIR only served the FDDA to Pacquiao. There was no similar notice to
Jinkee. Considering such failure, the CIR effectively did not find Jinkee liable for
deficiency taxes. The collection of deficiency taxes against Jinkee was improper as
it violated her right to due process of law.[45] Accordingly, the petitioners question
the propriety of the CIR's attempt to collect deficiency taxes from Jinkee.

Fourth. The amount assessed by the BIR as deficiency taxes included the
deficiency VAT for the years 2008 and 2009 which they had already paid, albeit in
installments.

Fifth. The posting of the required security is effectively an impossible condition

given that their undisputed net worth is only P1,185,984,697.00

Considering the issues raised, it is the position of the petitioners that the
circumstances of the case warrant the application of the exception provided under
Section 11 of R.A. No. 1125 as affirmed by the ruling of the Court in Collector of
Internal Revenue v. Avelino[46] (Avelino) and Collector of Internal Revenue v.
Zulueta,[47] (Zulueta) and that they should have been exempted from posting the
required security as a prerequisite to suspend the collection of deficiency taxes
from them.

On August 18, 2014, the Court resolved to grant the petitioners' prayer for the
issuance of a TRO and to require the CIR to file its comment.[48]

Arguments of the CIR

For its part,- the CIR asserts that the CTA was correct in insisting that the
petitioners post the required cash deposit or bond as a condition to suspend the
collection of deficiency taxes. According to. the tax administrator, Section 11 of
R.A. No. 1125, as amended, is without exception when it states that
notwithstanding an appeal to the CTA, a taxpayer, in order to suspend the
payment of his tax liabilities, is required to deposit the amount claimed by the
CIR or to file a surety bond for not more than double the amount due.[49]

As for the Court's rulings in Avelino and Zulueta invoked by the petitioners, the
CIR argues that they are inapplicable considering that in the said cases, it was
ruled that the requirement of posting a bond to suspend the collection of taxes
could be dispensed with only if the methods employed by the CIR in the tax
collection were clearly null and void and prejudicial to the taxpayer.[50] The CIR
points out that, in this case, the CTA itself made, no finding that its collection by
summary methods was void and even ruled that "the alleged illegality of the
methods employed by the respondent (CIR) to effect the collection of tax [is] not
at all patent or evident xxx" and could only be determined after a full-blown

130
trial.[51] The CIR even suggests that the Court revisit its ruling in Avelino and
Zulueta as Section 11 of R.A. No. 1125, as amended, gives the CTA no discretion
to allow the dispensation of the required bond as a condition to suspend the
collection of taxes.

Finally, the CIR adds that whether the assessment and collection of the
petitioners' tax liabilities were proper as to justify the application of Avelino and
Zulueta is a question of fact which is not proper in a petition for certiorari under
Rule 65, considering that the rule is only confined to issues of jurisdiction.[52]

The Court's Ruling

Appeal will not suspend

the collection of tax;
Exception

Section 11 of R.A. No. 1125, as amended by R.A. No. 9282,[53] embodies the rule
that an appeal to the CTA from the decision of the CIR will not suspend the
payment, levy, distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing law. When, in the view of
the CTA, the collection may jeopardize the interest of the Government and/or the
taxpayer, it may suspend the said collection and require the taxpayer either to
deposit the amount claimed or to file a surety bond.

The application of the exception to the rule is the crux of the subject controversy.
Specifically, Section 11 provides:

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

xxxx

No appeal taken to the CTA from the decision of the Commissioner of Internal
Revenue or the Commissioner of Customs or the Regional Trial Court, provincial,
city or municipal treasurer or the Secretary of Finance, the Secretary of Trade
131
and Industry and Secretary of Agriculture, as the case may be shall suspend the
payment, levy, distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing law:

Provided, however, That when in the opinion of the Court the collection
by the aforementioned government agencies may jeopardize the interest
of the Government and/or the taxpayer, the Court at any stage of the
proceeding may suspend the said collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more
than double the amount with the Court.

xxxx

[Emphasis Supplied]

Essentially, the petitioners ascribe grave abuse of discretion on the part of the
CTA when it issued the subject resolutions requiring them to deposit-the amount
of P3,298,514,894.35 or post a bond in the amount of P4,947,772,341.53 as a
condition for its order enjoining the CIR from collecting the taxes from them. The
petitioners anchor their contention on the premise that the assessment and
collection processes employed by the CIR in exacting their tax liabilities were in
patent violation of their constitutional right to due process of law. They, thus,
posit that pursuant to Avelino and Zulueta, the tax court should have not only
ordered the CIR to suspend the collection efforts it was pursuing in satisfaction of
their tax liability, but also dispensed with the requirement of depositing a cash or
filing a surety bond.

To recall, the Court in Avelino upheld the decision of the CTA to declare the
warrants of garnishment, distraint and levy and the notice of sale of the
properties of Jose Avelino null and void and ordered the CIR to desist from
collecting the deficiency income taxes which were assessed for the years 1946 to
1948 through summary administrative methods. The Court therein found that the
demand of the then CIR was made without authority of law because it was made
five (5) years and thirty-five (35) days after the last two returns of Jose Avelino
were filed - clearly beyond the three (3)-year prescriptive period provided under
what was then Section 51(d) of the National Internal Revenue Code. Dismissing
the contention of the CIR that the deposit of the amount claimed or the filing of a
bond as required by law was a requisite before relief was granted, the Court
therein concurred with the opinion of the CTA that the courts were clothed with
authority to dispense with the requirement "if the method employed by the
Collector of Internal Revenue in the collection of tax is not sanctioned by law."[54]

In Zulueta, the Court likewise dismissed the argument that the CTA erred in
issuing the injunction without requiring the taxpayer either to deposit the amount

132
claimed or to file a surety bond for an amount not more than double the tax
sought to be collected. The Court cited Collector of Internal Revenue v. Aurelio P.
Reyes and the Court of Tax Appeals[55] where it was written:

Xxx. At first blush it might be as contended by the Solicitor General, but a careful
analysis of the second paragraph of said Section 11 will lead Us to the conclusion
that the requirement of the bond as a condition precedent to the issuance of a
writ of injunction applies only in cases where the processes by which the
collection sought to be made by means thereof are carried out in consonance with
law for such cases provided and not when said processes are obviously in
violation of the law to the extreme that they have to be SUSPENDED for
jeopardizing the interests of the taxpayer.[56]

[Italics included]

The Court went on to explain the reason for empowering the courts to issue such
injunctive writs. It wrote:

"Section 11 of Republic Act No. 1125 is therefore premised on the assumption

that the collection by summary proceedings is by itself in accordance with
existing laws; and then what is suspended is the act of collecting, whereas, in the
case at bar what the respondent Court suspended was the use of the method
employed to verify the collection which was evidently illegal after the lapse of the
three-year limitation period. The respondent Court issued the injunction in
question on the basis of its findings that the means intended to be used by
petitioner in the collection of the alleged deficiency taxes were in violation of law.
It would certainly be an absurdity on the part of the Court of Tax Appeals
to declare that the collection by the summary methods of distraint and
levy was violative of the law, and then, on the same breath require the
petitioner to deposit or file a bond as a prerequisite of the issuance of a
writ of injunction. Let us suppose, for the sake of argument, that the Court a
quo would have required the petitioner to post the bond in question and that the
taxpayer would refuse or fail to furnish said bond, would the Court a quo be
obliged to authorize or allow the Collector of Internal Revenue to proceed with the
collection from the petitioner of the taxes due by a means it previously declared
to be contrary to law?"[57]

[Italics included. Emphases and Underlining Supplied]

Thus, despite the amendments to the law, the Court still holds that the CTA has
ample authority to issue injunctive writs to restrain the collection of tax and to
even dispense with the deposit of the amount claimed or the filing of the
required bond, whenever the method employed by the CIR in the collection of.
133
tax jeopardizes the interests of a taxpayer for being patently in violation of the
law. Such authority emanates from the jurisdiction conferred to it not only by
Section 11 of R.A. No. 1125, but also by Section 7 of the same law, which, as
amended provides:

Sec. 7. Jurisdiction. - The Court of Tax Appeals shall exercise:

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

l. Decisions of the Commissioner 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 or other laws administered by the Bureau of Internal
Revenue;

xxxx

[Emphasis Supplied]

From all the foregoing, it is clear that the authority of the courts to issue
injunctive writs to restrain the collection of tax and to dispense with the deposit
of the amount claimed or the filing of the required bond is not simply confined
to cases where prescription has set in. As explained by the Court in those
cases, whenever it is determined by the courts that the method employed
by the Collector of Internal Revenue in the collection of tax is not
sanctioned by law, the bond requirement under Section 11 of R.A. No. 1125
should be dispensed with. The purpose of the rule is not only to prevent
jeopardizing the interest of the taxpayer, but more importantly, to prevent the
absurd situation wherein the court would declare "that the collection by the
summary methods of distraint and levy was violative of law, and then, in the
same breath require the petitioner to deposit or file a bond as a prerequisite for
the issuance of a writ of injunction."[58]

The determination of whether

the petitioners.' case falls
within the exception provided
under Section 11, R.A No. 1125
cannot be determined
at this point

Applying the foregoing precepts to the subject controversy, the Court finds no
sufficient basis in the records for the Court to determine whether the dispensation
of the required cash deposit or bond provided under Section 11, R.A No. 1125 is
appropriate.

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It should first be highlighted that in rendering the assailed resolution, the CTA,
without stating the facts and law, made a determination that the illegality of the
methods employed by the CIR to effect the collection of tax was not patent. To
quote the CTA:

In this case, the alleged illegality of the methods employed by respondent to

effect the collection of tax is not at all patent or evident as in the foregoing
cases. At this early stage of the proceedings, it is premature for this Court to rule
on the issues of whether or not the warrants were defectively issued; or whether
the service thereof was done in violation of the rules; or whether or not
respondent's assessments were valid. These matters are evidentiary in
nature, the resolution of which can only be made after a full blown trial.

Apropos, the Court finds no legal basis to apply Avelino and Zulueta to the instant
case and exempt petitioners from depositing a cash bond or filing a surety bond
before a suspension order may be effected.[59]

Though it may be true that it would have been premature for the CTA to
immediately determine whether the assessment made against the petitioners was
valid or whether the warrants were properly issued and served, still, it behooved
upon the CTA to properly determine, at least preliminarily, whether the CIR,
in its assessment of the tax liability of the petitioners, and its effort of collecting
the same, complied with the law and the pertinent issuances of the BIR
itself. The CTA should have conducted a preliminary hearing and received
evidence so it could have properly determined whether the requirement of
providing the required security under Section 11, R.A. No. 1125 could be reduced
or dispensed with pendente lite.

The Court cannot make a

preliminary determination
on whether the CIR used
methods not sanctioned by law

Absent any evidence and preliminary determination by the CTA, the Court cannot
make any factual finding and settle the issue of whether the petitioners should
comply with the security requirement under Section 11, R.A. No. 1125. The
determination of whether the methods, employed by the CIR in its assessment,
jeopardized the interests of a taxpayer for being patently in violation of the law is
a question of fact that calls for the reception of evidence which would serve
as basis. In this regard, the CTA is in a better position to initiate this given its
time and resources. The remand of the "case to the CTA on this question is,
therefore, more sensible and proper.

For the Court to make any finding of fact on this point would be premature. As
stated earlier, there is no evidentiary basis. All the arguments are mere

135
allegations from both sides. Moreover, any finding by the Court would pre-
empt the CTA from properly exercising its jurisdiction and settle the main issues
presented before it, that is, whether the petitioners were afforded due process;
whether the CIR has valid basis for its assessment; and whether the petitioners
should be held liable for the deficiency taxes.

Petition to be remanded to
the CTA; CTA to conduct
preliminary hearing

As the CTA is in a better, position to make such a preliminary determination, a

remand to the CTA is in order. To resolve the issue of whether the petitioners
should be required to post the security bond under Section 11 of R.A. No. 1125,
and, if so, in what, amount, the CTA must take into account, among others, the
following:

First. Whether the requirement of a Notice of Informal Conference was complied

with - The petitioners contend that the BIR issued the PAN without first sending a
NIC to petitioners. One of the first requirements of Section 3 of Revenue
Regulation (R.R.) No. 12-99,[60] the then prevailing regulation on the due process
requirement in tax audits and/or investigation,[61] is that a NIC be first accorded
to the taxpayer. The use of the word "shall" in subsection 3.1.1 describes the
mandatory nature of the service of a NIC. As with the other notices required
under the regulation, the purpose of sending a NIC is but part of the "due process
requirement in the issuance of a deficiency tax assessment," the absence of
which renders nugatory any assessment made by the tax authorities.[62]

Second. Whether the 15-year period subject of the CIR's investigation is

arbitrary and excessive. - Section 203[63] of the Tax Code provides a 3-year limit
for the assessment. of internal revenue taxes. While the prescriptive period to
assess deficiency taxes may be extended to 10 years in cases where there is
false, fraudulent, or non-filing of a tax return - the fraud contemplated by law
must be actual. It must be intentional, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up some
right.[64]

Third. Whether fraud was duly established. - In its letter, dated December 13,
2010, the NID had been conducting a fraud investigation against the petitioners
under its RATE program and that it found that "fraud had been established in the
instant case as determined by the Commissioner." Under Revenue Memorandum
Order (RMO) No. 27-10, it is required that a preliminary investigation must
first be conducted before a LA is issued.[65]

Fourth. Whether the FLD issued against the petitioners was irregular. - The FLD
issued against the petitioners allegedly stated that the amounts therein were
"estimates based on best possible sources." A taxpayer should be informed
in writing of the law and the facts on which the assessment is made, otherwise,

136
the assessment is void.[66] An assessment, in order to stand judicial scrutiny,
must be based on facts. The presumption of the correctness of an assessment,
being a mere presumption, cannot be made to rest on another presumption.[67]

To stress, the petitioners had asserted that the assessment of the CIR was not
based on actual transactions but on "estimates based on best possible
sources." This assertion has not been satisfactorily addressed by the CIR in
detail. Thus, there is a need for the CTA to conduct a preliminary hearing.

Fifth. Whether the FDDA, the PCL, the FNBS, and the Warrants of Distraint
and/or Levy were validly issued. In its hearing, the CTA must also determine if
the following allegations of the petitioners have merit:,

a. The FDDA and PCL were issued against petitioner Pacquiao only. The Warrant
of Distraint and/or Levy/Garnishment issued by the CIR, however, were made
against the assets of both petitioners;

b. The warrants of garnishment had been served on the banks of both petitioners
even before the petitioners received the FDDA and PCL;

c. The Warrant of Distraint and/or Levy/Garnishment against the petitioners was

allegedly made prior to the expiration of the period allowed for the
petitioners to pay the assessed deficiency taxes;

d. The Warrant of Distraint and/or Levy/Garnishment against petitioners failed to

take into consideration that the deficiency VAT was already paid in full; and

e. Petitioners were not given a copy of the Warrants. Sections 207[68] and
208[69] of the Tax Code require the Warrant of Distraint and/or Levy/Garnishment
be served upon the taxpayer.

Additional Factors

In case the CTA finds that the petitioners should provide the necessary security
under Section 11 of R.A. 1125, a recomputation of the amount thereof is in
order.- If there would be a need for a bond or to reduce the same, the CTA
should take note that the Court, in A.M. No. 15-92-01-CTA, resolved to approve
the CTA En Banc Resolution No. 02-2015, where the phrase "amount claimed"
stated in Section 11 of R.A. No. 1125 was construed to refer to the principal
amount of the deficiency taxes, excluding penalties, interests and
surcharges.

Moreover, the CTA should.also consider the claim of the petitioners that they
already paid a total of P32,196,534.40 deficiency VAT assessed against' them..
Despite said payment, the CIR still assessed them the total amount of

137
P3,298,514,894.35, including the amount assessed as VAT deficiency, plus
surcharges, penalties and interest. If so, these should also be deducted from
the.amount of the bond to be computed and required.

In the conduct of its preliminary hearing, the CTA must balance the scale
between the inherent power of the State to tax and its right to prosecute
perceived transgressors of the law, on one side; and the constitutional rights of
petitioners to due process of law and the equal protection of the laws, on the
other. In case of doubt, the tax court must remember that as in all tax cases,
such scale should favor the taxpayer, for a citizen's right to due process and
equal protection of the law is amply protected by the Bill of Rights under the
Constitution.[70]

In view of all the foregoing, the April 22, 2014 and July 11, 2014 Resolutions of
the CTA, in so far as it required the petitioners to deposit first a cash bond in the
amount of P3,298,514,894.35 or post a bond of P4,947,772,341.53, should be
further enjoined until the issues aforementioned are settled in a preliminary
hearing to be conducted by it. Thereafter, it should make a determination if the
posting of a bond would still be required and, if so, compute it taking into account
the CTA En Banc Resolution, which was approved by the Court in A.M. No. 15-02-
01-CTA, and the claimed payment of P32,196,534.40, among others.

WHEREFORE, the petition is PARTIALLY GRANTED. Let a Writ of Preliminary

Injunction be issued, enjoining the implementation of the April 22, 2014 and July
11, 2014 Resolutions of the Court of Tax Appeals, First Division, in CTA Case No.
8683, requiring the petitioners to first deposit a cash bond in the amount of
P3,298,514,894.35 or post a bond of P4,947,772,341.53, as a condition to
restrain the collection of the deficiency taxes assessed against them.

The writ shall remain in effect until the issues aforementioned are settled in a
preliminary hearing to be conducted by the Court of Tax Appeals, First Division.

Accordingly, the case is hereby REMANDED to the Court of Tax Appeals, First
Division, which is ordered to conduct a preliminary hearing to determine whether
the dispensation or reduction of the required cash deposit or bond provided under
Section 11, Republic Act No. 1125 is proper to restrain the collection of deficiency
taxes assessed against the petitioners.

If required, the Court of Tax Appeals, First Division, shall proceed to compute the
amount of the bond in accordance with the guidelines aforestated, particularly the
provisions of A.M. No. 15-02-01-CTA. It should also take into account the
amounts already paid by the petitioners.

After the posting of the required bond, or if the Court of Tax Appeals, First
Division, determines that no bond is necessary, it shall proceed to hear and
resolve the petition for review pending before it.

138
SO ORDERED.

G.R. No. 215950, June 20, 2016

TRIDHARMA MARKETING CORPORATION, Petitioner, v. COURT OF TAX
APPEALS, SECOND DIVISION, AND THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
BERSAMIN, J.:
In this special civil action for certiorari,1 the taxpayer assails t he resolutions
issued on July 8, 20142 and December 22, 20143 in CTA Case No. 8833 whereby
the Court of Tax Appeals (CTA), Second Division, granted its motion for
suspension of the collection of tax but required it to post a surety bond
amounting to P4,467,391,881.76.

The relevant facts follow.

On August 16, 2013, the petitioner received a Preliminary Assessment Notice

(PAN) from the Bureau of Internal Revenue (BIR) assessing it with various
deficiency taxes - income tax (IT), value-added tax (VAT), withholding tax on
compensation (WTC), expanded withholding tax (EWT) and documentary stamp
tax (DST) - totalling P4,640,394,039.97, inclusive of surcharge and interest. A
substantial portion of the deficiency income tax and VAT arose from the complete
disallowance4 by the BIR of the petitioner's purchases from Etheria Trading in
2010 amounting to P4,942,937,053.82. The petitioner replied to the PAN through
its letter dated August 30, 2013.5chanrobleslaw

On September 23, 2013, the petitioner received from the BIR a Formal Letter of
Demand assessing it with deficiency taxes for the taxable year ending December
31, 2010 amounting to P4,697,696,275.25, inclusive of surcharge and interest. It
filed a protest against the formal letter of demand. Respondent Commissioner of
Internal Revenue (CIR) required the petitioner to submit additional documents in
support of its protest, and the petitioner complied.6chanrobleslaw

On February 28, 2014, the petitioner received a Final Decision on Disputed

Assessment worth P4,473,228,667.87, computed as follows:7

Tax
Basic Tax Surcharge Interest Total
Type

1,527,100,903.9 P3,169,257,355.5
1. IT 763,550,451.99 878,605,999.55
8 2

139
2.
612,723,525.25 306,361,762.63 379,049,238.36 1,298,134,526.24
VAT

3.
1,679,413.14 1,048,137.84 2,727,550.98
WHT

4.
534,493.40 336,511.18 871,004.58
DST

5.
1,378,127.78 860,102.76 2,238,230.54
EWT

TOTA 2,143,416,463.5 1,069,912,214.6 1,259,899,989.6

4,473,228,667.87
L 5 2 9

The petitioner filed with the CIR a protest through a Request for Reconsideration.
However, the CIR rendered a decision dated May 26, 2014 denying the request
for reconsideration.8chanrobleslaw

Prior to the CIR's decision, the petitioner paid the assessments corresponding to
the WTC, DST and EWT deficiency assessments, inclusive of interest, amounting
to P5,836,786.10. It likewise reiterated its offer to compromise the alleged
deficiency assessments on IT and VAT.9chanrobleslaw

On June 13, 2014, the petitioner appealed the CIR's decision to the CTA via its
so-called Petition for Review with Motion to Suspend Collection of Tax, which was
docketed as CTA Case No. 8833 and raffled to the CTA Second
Division.10chanrobleslaw

The CTA in Division issued the first assailed resolution on July 8, 2014, stating
thusly:ChanRoblesVirtualawlibrary
In the instant case, petitioner's Financial Statements and Independent Auditor's
Report for December 31, 2013 and 2012, as identified by its witness, indicate
that the company's total equity for the year 2012 and 2013 was P955,095,301
and P916,768,767, respectively. To yield to respondent's alleged assessment and
collection in the amount of P4,467,391,881.76 would definitely jeopardize the
normal business operations of petitioner thereby causing irreparable injury to its
ability to continue.

Moreover, considering petitioner's willingness to post bond, as manifested during

the June 19, 2014 hearing, in such reasonable amount as may be fixed by this
Court, pursuant to Section 11 of R.A. No. 1125, as amended, this Court in the
interest of substantial justice, resolves to grant petitioner's Motion.

xxxx

WHEREFORE, considering the urgency of the action to be enjoined, petitioner's

140
Motion for Suspension of Collection of Tax in the amount of P4,467,391,881.76
allegedly representing its deficiency Income Tax and Value Added Tax for taxable
year 2010 is GRANTED. Provided, however, that petitioner deposits with this
Court an acceptable surety bond equivalent to 150% of the assessment or in the
amount of SIX BILLION SEVEN HUNDRED ONE MILLION EIGHTY SEVEN
THOUSAND EIGHT HUNDRED TWENTY TWO and 64/100 PESOS
(P6,701,087,822.64) within fifteen (15) days from notice hereof.

Moreover, pursuant to Supreme Court Circular A.M. No. 04-7-02-SC, otherwise

known as the "Proposed Guidelines on Corporate Surety Bonds", petitioner is
hereby ORDERED to submit the following documents with the surety bond stated
above:ChanRoblesVirtualawlibrary
1. Certified copy of a valid Certificate of Accreditation and Authority issued by the
Office of the Court Administrator;

2. Copy of the Certificate of Compliance with Circular No. 66 of the Insurance

Commission duly certified by the Insurance Commission;

3. Proof of payment of legal fees under the Rules of Court and the documentary
stamp tax (thirty centavos [P0.30J on each four pesos [P4.00] or fractional part
thereof, of the premium charged, pursuant to Section 187 Title VII of Rep. Act
No. 8424) and Value Added Tax (VAT) under the National Internal Revenue Code;

4. Photocopy of the Certificate of Accreditation and Authority issued by the Court

Administrator containing the photograph of the authorized agent (after
presentation to the Clerk of Court of the original copy thereof as Copy of the
Certificate of Accreditation and Authority containing the photograph of the
agent); and cralawlawlibrary

5. Secretary Certificate containing the specimen signatures of the agents

authorized to transact business with the courts.
In addition, the said bond must be a continuing bond which shall remain effective
until the above-captioned case is finally decided, resolved or terminated by this
Court without necessity of renewal on a yearly basis, or its validity being
dependent on the payment of a renewal premium pursuant to Section 177 of the
Insurance Code.

Failure to comply with the above requirements will cause the setting aside of this
Resolution granting petitioner's motion for the suspension of the collection of the
tax liability.

xxxx

SO ORDERED.11chanroblesvirtuallawlibrary
The petitioner filed its Motion for Partial Reconsideration praying, among others,
for the reduction of the bond to an amount it could obtain.
141
On December 22, 2014, the CTA in Division issued its second assailed resolution
reducing the amount of the petitioner's surety bond to P4,467,391,881.76, which
was the equivalent of the BIR's deficiency assessment for IT and
VAT.12chanrobleslaw

Hence, the petitioner has commenced this special civil action for certiorari,
asserting:ChanRoblesVirtualawlibrary
I.

WITH ALL DUE RESPECT, THE CTA SECOND DIVISION COMMITTED GRAVE
ABUSE OF DISCRETION IN REFUSING TO CONSIDER, AND IN
COMPLETELY IGNORING, THE PATENT ILLEGALITY OF THE ASSESSMENT
THAT, UNDER LAW AND JURISPRUDENCE, FULLY JUSTIFIED DISPENSING
WITH THE REQUIREMENT OF POSTING A BOND.
II.

WITH ALL DUE RESPECT, THE CTA SECOND DIVISION COMMITTED GRAVE
ABUSE OF DISCRETION IN IMPOSING A GARGANTUAN BOND IN THE
AMOUNT OF P4,467,391,881.76 THAT PETITIONER HAS DEMONSTRATED
BY UNREFUTED EVIDENCE TO BE FACTUALLY AND LEGALLY IMPOSSIBLE
TO PROCURE.
III.

WITH ALL DUE RESPECT, THE CTA SECOND DIVISION COMMITTEED

GRAVE ABUSE OF DISCRETION IN GRANTING AN ILLUSORY RELIEF, AND
IN EFFECTIVELY DENYING PETITIONER ACCESS TO THE REMEDY
PROVIDED BY LAW. UPON UNCONTRADICTED EVIDENCE, THE
IMPOSITION OF A BOND IS NOT ONLY UNJUST, BUT WILL CAUSE
IRREPARABLE INJURY UPON PETITIONER EVEN BEFORE IT IS HEARD.13
On February 9, 2015, the Court issued a temporary restraining order14 enjoining
the implementation of July 8, 2014 and December 22, 2014 resolutions of the
CTA in Division, and the collection of the deficiency assessments.
Issue

Did the CTA in Division commit grave abuse of discretion in requiring the
petitioner to file a surety bond despite the supposedly patent illegality of the
assessment that was beyond the petitioner's net worth but equivalent to the
deficiency assessment for IT and VAT?
Ruling of the Court

The petition for certiorari is meritorious.

142
Section 11 of Republic Act No. 1125 (R.A. No. 1125),15 as amended by Republic
Act No. 9282 (RA 9282)16 it is stated that:ChanRoblesVirtualawlibrary
Sec. 11. Who may appeal; effect of appeal. — x x x

xxxx

No appeal taken to the Court of Tax Appeals from the decision of the Collector of
Internal Revenue or the Collector of Customs shall suspend the payment, levy,
distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax
liability as provided by existing law: Provided, however, That when in the
opinion of the Court the collection by the Bureau of Internal Revenue or
the Commissioner of Customs may jeopardize the interest of the
Government and/or the taxpayer the Court at any stage of the
proceeding may suspend the said collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more
than double the amount with the Court. (bold Emphasis supplied.)
Clearly, the CTA may order the suspension of the collection of taxes provided that
the taxpayer either: (1) deposits the amount claimed; or (2) files a surety bond
for not more than double the amount.

The petitioner argues that the surety bond amounting to P4,467,391,881.76

greatly exceeds its net worth and makes it legally impossible to procure the bond
from bonding companies that are limited in their risk assumptions.17 As shown in
its audited financial statements for the year ending December 31, 2013, its net
worth only amounted to P916,768,767.00,18 making the amount of
P4,467,391,881.76 fixed for the bond nearly five times greater than such net
worth.

The surety bond amounting to P4,467,391,881.76 imposed by the CTA was within
the parameters delineated in Section 11 of R.A. 1125, as amended. The Court
holds, however, that the CTA in Division gravely abused its discretion under
Section 11 because it fixed the amount of the bond at nearly five times the net
worth of the petitioner without conducting a preliminary hearing to ascertain
whether there were grounds to suspend the collection of the deficiency
assessment on the ground that such collection would jeopardize the interests of
the taxpayer. Although the amount of P4,467,391,881.76 was itself the amount
of the assessment, it behoved the CTA in Division to consider other factors
recognized by the law itself towards suspending the collection of the assessment,
like whether or not the assessment would jeopardize the interest of the taxpayer,
or whether the means adopted by the CIR in determining the liability of the
taxpayer was legal and valid. Simply prescribing such high amount of the bond
like the initial 150% of the deficiency assessment of P4,467,391,881.76 (or
P6,701,087,822.64), or later on even reducing the amount of the bond to equal
the deficiency assessment would practically deny to the petitioner the meaningful
opportunity to contest the validity of the assessments, and would likely even

143
impoverish it as to force it out of business.

At this juncture, it becomes imperative to reiterate the principle that the power to
tax is not the power to destroy. In Philippine Health Care Providers, Inc. v.
Commissioner of Internal Revenue,19 the Court has stressed
that:ChanRoblesVirtualawlibrary
As a general rule, the power to tax is an incident of sovereignty and is unlimited
in its range, acknowledging in its very nature no limits, so that security against its
abuse is to be found only in the responsibility of the legislature which imposes the
tax on the constituency who is to pay it. So potent indeed is the power that it was
once opined that the power to tax involves the power to destroy.

Petitioner claims that the assessed DST to date which amounts to P376 million is
way beyond its net worth of P259 million. Respondent never disputed these
assertions. Given the realities on the ground, imposing the DST on petitioner
would be highly oppressive. It is not the purpose of the government to throttle
private business. On the contrary, the government ought to encourage private
enterprise. Petitioner, just like any concern organized for a lawful economic
activity, has a right to maintain a legitimate business. As aptly held in Roxas, et
al. v. CTA, et al.:ChanRoblesVirtualawlibrary
The power of taxation is sometimes called also the power to destroy. Therefore it
should be exercised with caution to minimize injury to the proprietary rights of a
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector
"kill the hen that lays the golden egg."
Legitimate enterprises enjoy the constitutional protection not to be taxed out of
existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not
be allowed. It is counter-productive and ultimately subversive of the nation's
thrust towards a better economy which will ultimately benefit the majority of our
people.
Moreover, Section 11 of R.A. 1125, as amended, indicates that the requirement
of the bond as a condition precedent to suspension of the collection applies only
in cases where the processes by which the collection sought to be made by
means thereof are carried out in consonance with the law, not when the
processes are in plain violation of the law that they have to be suspended for
jeopardizing the interests of the taxpayer.20chanrobleslaw

The petitioner submits that the patent illegality of the assessment was sufficient
ground to dispense with the bond requirement because the CIR was essentially
taxing its sales revenues without allowing the deduction of the cost of goods sold
by virtue of the CIR refusing to consider evidence showing that it had really
incurred costs.21 However, the Court is not in the position to rule on the
correctness of the deficiency assessment, which is a matter still pending in the
CTA. Conformably with the pronouncement in Pacquiao v. Court of Tax Appeals,
First Division, and the Commissioner of Internal Revenue,22 a ruling that has

144
precedential value herein, the Court deems it best to remand the matter involving
the petitioner's plea against the correctness of the deficiency assessment to the
CTA for the conduct of a preliminary hearing in order to determine whether the
required surety bond should be dispensed with or reduced.

In Pacquiao, the petitioners were issued deficiency IT and VAT assessments for
2008 and 2009 in the aggregate amount of P2,261,217,439.92, which amount
was above their net worth of P1,185,984,697.00 as reported in their joint
Statement of Assets, Liabilities and Net Worth (SALN). They had paid the VAT
assessments but appealed to the CTA the IT assessments. Notwithstanding their
appeal, the CIR still initiated collection proceedings against them by issuing
warrants of distraint or levy against their properties, and warrants of garnishment
against their bank accounts. As a consequence, they went to the CTA through an
urgent motion to lift the warrants and to suspend the collection of taxes. The CTA
in Division found the motion to suspend tax collection meritorious, and lifted the
warrant of distraint or levy and garnishment on the condition that they post a
cash bond of P3,298,514,894.35, or surety bond of P4,947,772,341.53. They
thus came to the Court to challenge the order to post the cash or surety bond as
a condition for the suspension of collection of their deficiency taxes. In resolving
their petition, the Court held and disposed:ChanRoblesVirtualawlibrary
Absent any evidence and preliminary determination by the CTA, the Court cannot
make any factual finding and settle the issue of whether the petitioners should
comply with the security requirement under Section 11, R.A. No. 1125. The
determination of whether the methods, employed by the CIR in its assessment,
jeopardized the interests of a taxpayer for being patently in violation of the law is
a question of fact that calls for the reception of evidence which would serve
as basis. In this regard, the CTA is in a better position to initiate this given its
time and resources. The remand of the case to the CTA on this question is,
therefore, more sensible and proper.

For the Court to make any finding of fact on this point would be premature. As
stated earlier, there is no evidentiary basis. All the arguments are mere
allegations from both sides. Moreover, any finding by the Court would pre-
empt the CTA from properly exercising its jurisdiction and settle the main issues
presented before it, that is, whether the petitioners were afforded due process;
whether the CIR has valid basis for its assessment; and whether the petitioners
should be held liable for the deficiency taxes.

xxxx

In the conduct of its preliminary hearing, the CTA must balance the scale
between the inherent power of the State to tax and its right to prosecute
perceived transgressors of the law, on one side; and the constitutional rights of
petitioners to due process of law and the equal protection of the laws, on the
other. In case of doubt, the tax court must remember that as in all tax cases,
such scale should favor the taxpayer, for a citizen's right to due process and

145
equal protection of the law is amply protected by the Bill of Rights under the
Constitution.23chanroblesvirtuallawlibrary
Consequently, to prevent undue and irreparable damage to the normal business
operations of the petitioner, the remand to the CTA of the questions involving the
suspension of collection and the correct amount of the bond is the proper course
of action.

WHEREFORE, the Court GRANTS the petition for certiorari; ANNULS and SETS
ASIDE the resolutions issued on July 8, 2014 and December 22, 2014 in CTA
Case No. 8833 requiring the petitioner to post a surety bond of
P4,467,391,881.76 as a condition to restrain the collection of the deficiency taxes
assessed against it; PERMANENTLY ENJOINS the enforcement of the
resolutions issued on July 8, 2014 and December 22, 2014 in CTA Case No. 8833;
and REQUIRES the Court of Tax Appeals, Second Division, to forthwith conduct a
preliminary hearing in CTA Case No. 8833 to determine and rule on whether the
bond required under Section 11 of Republic Act No. 1125 may be dispensed with
or reduced to restrain the collection of the deficiency taxes assessed against the
petitioner.

No pronouncement on costs of suit.

SO ORDERED.chanRoblesvirtualLawlibrary

G.R. No. 224764, April 24, 2017

BUREAU OF INTERNAL REVENUE, ASSISTANT COMMISSIONER ALFREDO
V. MISAJON, GROUP SUPERVISOR ROLANDO M. BALBIDO, AND
EXAMINER REYNANTE DP. MARTIREZ, Petitioners, v. LEPANTO CERAMICS,
INC., Respondent.
DECISION
PERLAS-BERNABE, J.:
This is a direct recourse to the Court from the Regional Trial Court (RTC) of
Calamba City, Province of Laguna, Branch 35 (RTC Br. 35), through a petition for
review on certiorari,1 raising a pure question of law. In particular, petitioners
Bureau of Internal Revenue (BIR), Assistant Commissioner Alfredo V. Misajon
(Misajon), Group Supervisor Rolando M. Balbido (Balbido), and Examiner
Reynante DP. Martirez (Martirez; collectively, petitioners) assail the Decision2
dated June 1, 2015 and the Order3 dated October 26, 2015 of the RTC Br. 35 in
Civil Case No. 4813-2014-C, which found Misajon, Balbido, and Martirez (Misajon,
et al.) guilty of indirect contempt and, accordingly, ordered them to pay a fine of
P5,000.00 each.
The Facts

On December 23, 2011, respondent Lepanto Ceramics, Inc. (LCI) a corporation

146
duly organized and existing under Philippine Laws with principal office address in
Calamba City, Laguna - filed a petition4 for corporate rehabilitation pursuant to
Republic Act No. (RA) 10142,5 otherwise known as the "Financial Rehabilitation
and Insolvency Act (FRIA) of 2010," docketed before the RTC of Calamba City,
Branch 34, the designated Special Commercial Court in Laguna (Rehabilitation
Court). Essentially, LCI alleged that due to the financial difficulties it has been
experiencing dating back to the Asian financial crisis, it had entered into a state
of insolvency considering its inability to pay its obligations as they become due
and that its total liabilities amounting to P4,213,682,715.00 far exceed its total
assets worth P1,112,723,941.00. Notably, LCI admitted in the annexes attached
to the aforesaid Petition its tax liabilities to the national government in the
amount of at least P6,355,368.00.6

On January 13, 2012, the Rehabilitation Court issued a Commencement Order,7

which, inter alia: (a) declared LCI to be under corporate rehabilitation; (b)
suspended all actions or proceedings, in court or otherwise, for the enforcement
of claims against LCI; (c) prohibited LCI from making any payment of its liabilities
outstanding as of even date, except as may be provided under RA 10142; and (d)
directed the BIR to file and serve on LCI its comment or opposition to the
petition, or its claims against LCI.8 Accordingly, the Commencement Order was
published in a newspaper of general circulation and the same, together with the
petition for corporate rehabilitation, were personally served upon LCI's creditors,
including the BIR.9

Despite the foregoing, Misajon, et al., acting as Assistant Commissioner, Group

Supervisor, and Examiner, respectively, of the BIR's Large Taxpayers Service,
sent LCI a notice of informal conference10 dated May 27, 2013, informing the
latter of its deficiency internal tax liabilities for the Fiscal Year ending June 30,
2010. In response, LCI's court-appointed receiver, Roberto L. Mendoza, sent BIR
a letter-reply, reminding the latter of the pendency of LCI's corporate
rehabilitation proceedings, as well as the issuance of a Commencement Order in
connection therewith. Undaunted, the BIR sent LCI a Formal Letter of Demand 11
dated May 9, 2014, requiring LCI to pay deficiency taxes in the amount of
P567,519,348.39.12 This prompted LCI to file a petition13 for indirect contempt
dated August 13, 2014 against petitioners before RTC Br. 35. In said petition, LCI
asserted that petitioners' act of pursuing the BIR's claims for deficiency taxes
against LCI outside of the pending rehabilitation proceedings in spite of the
Commencement Order issued by the Rehabilitation Court is a clear defiance of the
aforesaid Order. As such, petitioners must be cited for indirect contempt in
accordance with Rule 71 of the Rules of Court in relation to Section 16 of RA
10142.14

For their part, petitioners maintained that: (a) RTC Br. 35 had no jurisdiction to
cite them in contempt as it is only the Rehabilitation Court, being the one that
issued the Commencement Order, which has the authority to determine whether
or not such Order was defied; (b) the instant petition had already been mooted
by the Rehabilitation Court's Order15 dated August 28, 2014 which declared LCI to

147
have been successfully rehabilitated resulting in the termination of the corporate
rehabilitation proceedings; (c) their acts do not amount to a defiance of the
Commencement Order as it was done merely to toll the prescriptive period in
collecting deficiency taxes, and thus, sanctioned by the Rules of Procedure of the
FRIA; (d) their acts of sending a Notice of Informal Conference and Formal Letter
of Demand do not amount to a "legal action or other recourse" against LCI
outside of the rehabilitation proceedings; and (e) the indirect contempt
proceedings interferes with the exercise of their functions to collect taxes due to
the government.16
The RTC Br. 35 Ruling

In a Decision17 dated June 1, 2015, the RTC Br. 35 found Misajon, et al. guilty of
indirect contempt and, accordingly, ordered them to pay a fine of P5,000.00
each.18 Preliminarily, the RTC Br. 35 ruled that it has jurisdiction over LCI's
petition for indirect contempt as it is docketed, heard, and decided separately
from the principal action.19 Going to petitioners' other contentions, the RTC found
that: (a) the supervening termination of the rehabilitation proceedings and the
consequent lifting of the Commencement Order did not render moot the petition
for indirect contempt as the acts complained of were already consummated; (b)
petitioners' acts of sending LCI a notice of informal conference and Formal Letter
of Demand are covered by the Commencement Order as they were for the
purpose of pursuing and enforcing a claim for deficiency taxes, and thus, are in
clear defiance of the Commencement Order; and (c) petitioners could have tolled
the prescriptive period to collect deficiency taxes without violating the
Commencement Order by simply ventilating their claim before the rehabilitation
proceedings, which they were adequately notified of. In this relation, the RTC Br.
35 held that while the BIR is a juridical entity which can only act through its
authorized intermediaries, it cannot be concluded that it authorized the latter to
commit the contumacious acts complained of, i.e., defiance of the
Commencement Order. Thus, absent any contrary evidence, only those
individuals who performed such acts, namely, Misajon, et al., should be cited for
indirect contempt of court.20

Aggrieved, Misajon, et al. moved for reconsideration,21 which was, however,

denied in an Order22 dated October 26, 2015; hence, this petition.
The Issue Before the Court

The issue for the Court's resolution is whether or not the RTC Br. 35 correctly
found Misajon, et al. to have defied the Commencement Order and, accordingly,
cited them for indirect contempt.
The Court's Ruling

The petition is without merit. Section 4 (gg) of RA 10142

states:chanRoblesvirtualLawlibrary

148
Section 4. Definition of Terms. - As used in this Act, the term:

xxxx

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of

successful operation and solvency, if it is shown that its continuance of operation
is economically feasible and its creditors can recover by way of the present value
of payments projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated.

xxxx
"[C]ase law has defined corporate rehabilitation as an attempt to conserve and
administer the assets of an insolvent corporation in the hope of its eventual
return from financial stress to solvency. It contemplates the continuance of
corporate life and activities in an effort to restore and reinstate the corporation to
its former position of successful operation and liquidity." 23

Verily, the inherent purpose of rehabilitation is to find ways and means to

minimize the expenses of the distressed corporation during the rehabilitation
period by providing the best possible framework for the corporation to gradually
regain or achieve a sustainable operating form.24 [It] enable[s] the company to
gain a new lease in life and thereby allow creditors to be paid [t]heir claims from
its earnings. Thus, rehabilitation shall be undertaken when it is shown that the
continued operation of the corporation is economically more feasible and its
creditors can recover, by way of the present value of payments projected in the
plan, more, if the corporation continues as a going concern than if it is
immediately liquidated.25

In order to achieve such objectives, Section 16 of RA 10142 provides, inter alia,

that upon the issuance of a Commencement Order which includes a Stay or
Suspension Order - all actions or proceedings, in court or otherwise, for the
enforcement of "claims" against the distressed company shall be suspended.26
Under the same law, claim "shall refer to all claims or demands of whatever
nature or character against the debtor or its property, whether for money or
otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured,
disputed or undisputed, including, but not limited to; (1) all claims of the
government, whether national or local, including taxes, tariffs and
customs duties; and (2) claims against directors and officers of the debtor
arising from acts done in the discharge of their functions falling within the scope
of their authority: Provided, That, this inclusion does not prohibit the creditors or
third parties from filing cases against the directors and officers acting in their
personal capacities."27

To clarify, however, creditors of the distressed corporation are not without

remedy as they may still submit their claims to the rehabilitation court for proper
consideration so that they may participate in the proceedings, keeping in mind
the general policy of the law "to ensure or maintain certainty and predictability in
149
commercial affairs, preserve and maximize the value of the assets of these
debtors, recognize creditor rights and respect priority of claims, and ensure
equitable treatment of creditors who are similarly situated." 28 In other words, the
creditors must ventilate their claims before the rehabilitation court, and any
"[a]ttempts to seek legal or other resource against the distressed corporation
shall be sufficient to support a finding of indirect contempt of court." 29

In the case at bar, it is undisputed that LCI filed a petition for corporate
rehabilitation. Finding the same to be sufficient in form and substance, the
Rehabilitation Court issued a Commencement Order30 dated January 13, 2012
which, inter alia: (a) declared LCI to be under corporate rehabilitation; (b)
suspended all actions or proceedings, in court or otherwise, for the enforcement
of claims against LCI; (c) prohibited LCI from making any payment of its
outstanding liabilities as of even date, except as may be provided under RA
10142; and (d) directed the BIR to file and serve on LCI its comment or
opposition to the petition, or its claims against LCL It is likewise undisputed that
the BIR - personally and by publication - was notified of the rehabilitation
proceedings involving LCI and the issuance of the Commencement Order related
thereto. Despite the foregoing, the BIR, through Misajon, et al., still opted to
send LCI: (a) a notice of informal conference31 dated May 27, 2013, informing the
latter of its deficiency internal tax liabilities for the Fiscal Year ending June 30,
2010; and (b) a Formal Letter of Demand32 dated May 9, 2014, requiring LCI to
pay deficiency taxes in the amount of P567,519,348.39, notwithstanding the
written reminder coming from LCI's court-appointed receiver of the pendency of
rehabilitation proceedings concerning LCI and the issuance of a commencement
order. Notably, the acts of sending a notice of informal conference and a Formal
Letter of Demand are part and parcel of the entire process for the assessment
and collection of deficiency taxes from a delinquent taxpayer,33 - an action or
proceeding for the enforcement of a claim which should have been suspended
pursuant to the Commencement Order. Unmistakably, Misajon, et al.'s foregoing
acts are in clear defiance of the Commencement Order.

Petitioners' insistence that: (a) Misajon, et al. only performed such acts to toll the
prescriptive period for the collection of deficiency taxes; and (b) to cite them in
indirect contempt would unduly interfere with their function of collecting taxes
due to the government, cannot be given any credence. As aptly put by the RTC
Br. 35, they could have easily tolled the running of such prescriptive period, and
at the same time, perform their functions as officers of the BIR, without defying
the Commencement Order and without violating the laudable purpose of RA
10142 by simply ventilating their claim before the Rehabilitation Court.34 After all,
they were adequately notified of the LCI's corporate rehabilitation and the
issuance of the corresponding Commencement Order.

In sum, it was improper for Misajon, et al. to collect, or even attempt to collect,
deficiency taxes from LCI outside of the rehabilitation proceedings concerning the
latter, and in the process, willfully disregard the Commencement Order lawfully
issued by the Rehabilitation Court. Hence, the RTC Br. 35 correctly cited them for

150
indirect contempt.35

WHEREFORE, the petition is DENIED. The Decision dated June 1, 2015 and the
Order dated October 26, 2015 of the Regional Trial Court of Calamba City,
Province of Laguna, Branch 35 in Civil Case No. 4813-2014-C are hereby
AFFIRMED.

SO ORDERED.

[G.R. No. 178087 : May 05, 2010]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. KUDOS METAL

CORPORATION, RESPONDENT.

DECISION

DEL CASTILLO, J.:

The prescriptive period on when to assess taxes benefits both the government
and the taxpayer.[1] Exceptions extending the period to assess must, therefore,
be strictly construed.

This Petition for Review on Certiorari seeks to set aside the Decision[2] dated
March 30, 2007 of the Court of Tax Appeals (CTA) affirming the cancellation of
the assessment notices for having been issued beyond the prescriptive period and
the Resolution[3] dated May 18, 2007 denying the motion for reconsideration.

Factual Antecedents

On April 15, 1999, respondent Kudos Metal Corporation filed its Annual Income
Tax Return (ITR) for the taxable year 1998.

Pursuant to a Letter of Authority dated September 7, 1999, the Bureau of

Internal Revenue (BIR) served upon respondent three Notices of Presentation of
Records. Respondent failed to comply with these notices, hence, the BIR issued a
Subpeona Duces Tecum dated September 21, 2006, receipt of which was
acknowledged by respondent's President, Mr. Chan Ching Bio, in a letter dated
October 20, 2000.

A review and audit of respondent's records then ensued.

On December 10, 2001, Nelia Pasco (Pasco), respondent's accountant, executed

a Waiver of the Defense of Prescription,[4] which was notarized on January 22,
2002, received by the BIR Enforcement Service on January 31, 2002 and by the
151
BIR Tax Fraud Division on February 4, 2002, and accepted by the Assistant
Commissioner of the Enforcement Service, Percival T. Salazar (Salazar).

This was followed by a second Waiver of Defense of Prescription[5] executed by

Pasco on February 18, 2003, notarized on February 19, 2003, received by the BIR
Tax Fraud Division on February 28, 2003 and accepted by Assistant
Commissioner Salazar.

On August 25, 2003, the BIR issued a Preliminary Assessment Notice for the
taxable year 1998 against the respondent. This was followed by a Formal Letter
of Demand with Assessment Notices for taxable year 1998, dated September 26,
2003 which was received by respondent on November 12, 2003.

Respondent challenged the assessments by filing its "Protest on Various Tax

Assessments" on December 3, 2003 and its "Legal Arguments and Documents in
Support of Protests against Various Assessments" on February 2, 2004.

On June 22, 2004, the BIR rendered a final Decision[6] on the matter, requesting
the immediate payment of the following tax liabilities:
Kind of Tax Amount

Income Tax P 9,693,897.85

VAT 13,962,460.90
EWT 1,712,336.76
Withholding Tax-Compensation 247,353.24
Penalties 8,000.00
Total P25,624,048.76

Ruling of the Court of Tax Appeals, Second Division

Believing that the government's right to assess taxes had prescribed, respondent
filed on August 27, 2004 a Petition for Review[7] with the CTA. Petitioner in turn
filed his Answer.[8]

On April 11, 2005, respondent filed an "Urgent Motion for Preferential Resolution
of the Issue on Prescription."[9]

On October 4, 2005, the CTA Second Division issued a Resolution[10] canceling the
assessment notices issued against respondent for having been issued beyond the
prescriptive period. It found the first Waiver of the Statute of Limitations
incomplete and defective for failure to comply with the provisions of Revenue
Memorandum Order (RMO) No. 20-90. Thus:
152
First, the Assistant Commissioner is not the revenue official authorized to sign the
waiver, as the tax case involves more than P1,000,000.00. In this regard, only
the Commissioner is authorized to enter into agreement with the petitioner in
extending the period of assessment;

Secondly, the waiver failed to indicate the date of acceptance. Such date of
acceptance is necessary to determine whether the acceptance was made within
the prescriptive period;

Third, the fact of receipt by the taxpayer of his file copy was not indicated on the
original copy. 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 also of the
acceptance by the BIR and the perfection of the agreement.

The subject waiver is therefore incomplete and defective. As such, the three-year
prescriptive period was not tolled or extended and continued to run. x x x [11]

Petitioner moved for reconsideration but the CTA Second Division denied the
motion in a Resolution[12] dated April 18, 2006.

Ruling of the Court of Tax Appeals, En Banc

On appeal, the CTA En Banc affirmed the cancellation of the assessment notices.
Although it ruled that the Assistant Commissioner was authorized to sign the
waiver pursuant to Revenue Delegation Authority Order (RDAO) No. 05-01, it
found that the first waiver was still invalid based on the second and third grounds
stated by the CTA Second Division. Pertinent portions of the Decision read as
follows:
While the Court En Banc agrees with the second and third grounds for invalidating
the first waiver, it finds that the Assistant Commissioner of the Enforcement
Service is authorized to sign the waiver pursuant to RDAO No. 05-01, which
provides in part as follows:
A. For National Office cases

Designated Revenue Official

1. Assistant Commissioner (ACIR), For tax fraud and policy

Enforcement Service cases

For large taxpayers

2. ACIR, Large Taxpayers Service
cases

153
 other than those cases
falling
under Subsection B
hereof

3. ACIR, Legal Service For cases pending

verification and
awaiting

resolution of certain
legal
issues prior to
prescription
and for
issuance/compliance
of Subpoena Duces
Tecum

4. ACIR, Assessment Service (AS) For cases which are

pending in or subject to
review or approval by
the ACIR, AS

Based on the foregoing, the Assistant Commissioner, Enforcement Service is

authorized to sign waivers in tax fraud cases. A perusal of the records reveals
that the investigation of the subject deficiency taxes in this case was conducted
by the National Investigation Division of the BIR, which was formerly named the
Tax Fraud Division. Thus, the subject assessment is a tax fraud case.

Nevertheless, the first waiver is still invalid based on the second and third
grounds stated by the Court in Division. Hence, it did not extend the prescriptive
period to assess.

Moreover, assuming arguendo that the first waiver is valid, the second waiver is
invalid for violating Section 222(b) of the 1997 Tax Code which mandates that
the period agreed upon in a waiver of the statute can still be extended by
subsequent written agreement, provided that it is executed prior to the expiration
of the first period agreed upon. As previously discussed, the exceptions to the law
on prescription must be strictly construed.

154
In the case at bar, the period agreed upon in the subject first waiver expired on
December 31, 2002. The second waiver in the instant case which was supposed
to extend the period to assess to December 31, 2003 was executed on February
18, 2003 and was notarized on February 19, 2003. Clearly, the second waiver
was executed after the expiration of the first period agreed upon. Consequently,
the same could not have tolled the 3-year prescriptive period to assess.[13]

Petitioner sought reconsideration but the same was unavailing.

Issue

Hence, the present recourse where petitioner interposes that:

THE COURT OF TAX APPEALS EN BANC ERRED IN RULING THAT THE
GOVERNMENT'S RIGHT TO ASSESS UNPAID TAXES OF RESPONDENT
PRESCRIBED.[14]

Petitioner's Arguments

Petitioner argues that the government's right to assess taxes is not barred by
prescription as the two waivers executed by respondent, through its accountant,
effectively tolled or extended the period within which the assessment can be
made. In disputing the conclusion of the CTA that the waivers are invalid,
petitioner claims that respondent is estopped from adopting a position contrary to
what it has previously taken. Petitioner insists that by acquiescing to the audit
during the period specified in the waivers, respondent led the government to
believe that the "delay" in the process would not be utilized against it. Thus,
respondent may no longer repudiate the validity of the waivers and raise the
issue of prescription.

Respondent's Arguments

Respondent maintains that prescription had set in due to the invalidity of the
waivers executed by Pasco, who executed the same without any written authority
from it, in clear violation of RDAO No. 5-01. As to the doctrine of estoppel by
acquiescence relied upon by petitioner, respondent counters that the principle of
equity comes into play only when the law is doubtful, which is not present in the
instant case.
Our Ruling

The petition is bereft of merit.

Section 203[15] of the National Internal Revenue Code of 1997 (NIRC) mandates
the government 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
155
three-year prescriptive period is no longer valid and effective. Exceptions
however are provided under Section 222[16] of the NIRC.

The waivers executed by respondent's

accountant did not extend the period
within which the assessment can be made

Petitioner does not deny that the assessment notices were issued beyond the
three-year prescriptive period, but claims that the period was extended by the
two waivers executed by respondent's accountant.

We do not agree.

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[17]
issued on April 4, 1990 and RDAO 05-01[18] issued on August 2, 2001 lay down
the procedure for the proper execution of the waiver, to wit:

1. The waiver must be in the proper form prescribed by RMO 20-90. The
phrase "but not after ______ 19 ___", which indicates the expiry date of the
period agreed upon to assess/collect the tax after the regular three-year
period of prescription, should be filled up.
2. The waiver must be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by
any of its responsible officials. In case the authority is delegated by the
taxpayer to a representative, such delegation should be in writing and duly
notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver
indicating that the BIR has accepted and agreed to the waiver. The date of
such acceptance by the BIR should be indicated. However, before signing
the waiver, the CIR or the revenue official authorized by him must make
sure that the waiver is in the prescribed form, duly notarized, and executed
by the taxpayer or his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the
Bureau should be before the expiration of the period of prescription or
before the lapse of the period agreed upon in case a subsequent agreement
is executed.
6. The waiver must be executed in three copies, the original copy to be
attached to the docket of the case, the second copy for the taxpayer and
the third copy for the Office accepting the waiver. The fact of receipt by the
taxpayer of his/her file copy must be indicated in the original copy to show

156
 that the taxpayer was notified of the acceptance of the BIR and the
perfection of the agreement.[19]

A perusal of the waivers executed by respondent's accountant reveals the

following infirmities:

1. The waivers were executed without the notarized written authority of Pasco
to sign the waiver in behalf of respondent.
2. The waivers failed to indicate the date of acceptance.
3. The fact of receipt by the respondent of its file copy was not indicated in the
original copies of the waivers.

Due to the defects in the waivers, the period to assess or collect taxes was not
extended. Consequently, the assessments were issued by the BIR beyond the
three-year period and are void.

Estoppel does not apply in this case

We find no merit in petitioner's claim that respondent is now estopped from

claiming prescription since by executing the waivers, it was the one which asked
for additional time to submit the required documents.

In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,[20] the

doctrine of estoppel prevented the taxpayer from raising the defense of
prescription against the efforts of the government to collect the assessed tax.
However, it must be stressed that in the said case, estoppel was applied as an
exception to the statute of limitations on collection of taxes and not on the
assessment of taxes, as the BIR was able to make an assessment within the
prescribed period. More important, there was a finding that the taxpayer made
several requests or positive acts to convince the government to postpone the
collection of taxes, viz:
It appears that the first assessment made against respondent based on its second
final return filed on November 28, 1946 was made on February 11, 1947. Upon
receipt of this assessment respondent requested for at least one year within
which to pay the amount assessed although it reserved its right to question the
correctness of the assessment before actual payment. Petitioner granted an
extension of only three months. When it failed to pay the tax within the period
extended, petitioner sent respondent a letter on November 28, 1950 demanding
payment of the tax as assessed, and upon receipt of the letter respondent asked
for a reinvestigation and reconsideration of the assessment. When this request
was denied, respondent again requested for a reconsideration on April 25, 1952,
which was denied on May 6, 1953, which denial was appealed to the Conference
Staff. The appeal was heard by the Conference Staff from September 2, 1953 to
July 16, 1955, and as a result of these various negotiations, the assessment was
157
finally reduced on July 26, 1955. This is the ruling which is now being questioned
after a protracted negotiation on the ground that the collection of the tax has
already prescribed.

It is obvious from the foregoing that petitioner refrained from collecting the tax
by distraint or levy or by proceeding in court within the 5-year period from the
filing of the second amended final return due to the several requests of
respondent for extension to which petitioner yielded to give it every opportunity
to prove its claim regarding the correctness of the assessment. Because of such
requests, several reinvestigations were made and a hearing was even held by the
Conference Staff organized in the collection office to consider claims of such
nature which, as the record shows, lasted for several months. After inducing
petitioner to delay collection as he in fact did, it is most unfair for respondent to
now take advantage of such desistance to elude his deficiency income tax liability
to the prejudice of the Government invoking the technical ground of prescription.

While we may agree with the Court of Tax Appeals that a mere request for
reexamination or reinvestigation may not have the effect of suspending the
running of the period of limitation for in such case there is need of a written
agreement to extend the period between the Collector and the taxpayer, there
are cases however where a taxpayer may be prevented from setting up the
defense of prescription even if he has not previously waived it in writing as when
by his repeated requests or positive acts the Government has been, for good
reasons, persuaded to postpone collection to make him feel that the demand was
not unreasonable or that no harassment or injustice is meant by the Government.
And when such situation comes to pass there are authorities that hold, based on
weighty reasons, that such an attitude or behavior should not be countenanced if
only to protect the interest of the Government.

This case has no precedent in this jurisdiction for it is the first time that such has
risen, but there are several precedents that may be invoked in American
jurisprudence. As Mr. Justice Cardozo has said: "The applicable principle is
fundamental and unquestioned. `He who prevents a thing from being done may
not avail himself of the nonperformance which he has himself occasioned, for the
law says to him in effect "this is your own act, and therefore you are not
damnified."' "(R. H. Stearns Co. vs. U.S., 78 L. ed., 647). Or, as was aptly said,
"The tax could have been collected, but the government withheld action at the
specific request of the plaintiff. The plaintiff is now estopped and should not be
permitted to raise the defense of the Statute of Limitations." [Newport Co. vs.
U.S., (DC-WIS), 34 F. Supp. 588].[21]

Conversely, in this case, the assessments were issued beyond the prescribed
period. Also, there is no showing that respondent made any request to persuade
the BIR to postpone the issuance of the assessments.

The doctrine of estoppel cannot be applied in this case as an exception to the

statute of limitations on the assessment of taxes considering that there is a
158
detailed procedure for the proper execution of the waiver, which the BIR must
strictly follow. As we have often said, the doctrine of estoppel is predicated on,
and has its origin in, equity which, broadly defined, is justice according to natural
law and right.[22] As such, the doctrine of estoppel cannot give validity to an act
that is prohibited by law or one that is against public policy.[23] It should be
resorted to solely as a means of preventing injustice and should not be permitted
to defeat the administration of the law, or to accomplish a wrong or secure an
undue advantage, or to extend beyond them requirements of the transactions in
which they originate.[24] Simply put, the doctrine of estoppel must be sparingly
applied.

Moreover, 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 issued. As
stated earlier, the BIR failed to verify whether a notarized written authority was
given by the respondent to its accountant, and to indicate the date of acceptance
and the receipt by the respondent of the waivers. Having caused the defects in
the waivers, the BIR must bear the consequence. It cannot shift the blame to the
taxpayer. To stress, a waiver of the statute of limitations, being a derogation of
the taxpayer's right to security against prolonged and unscrupulous
investigations, must be carefully and strictly construed.[25]

As to the alleged delay of the respondent to furnish the BIR of the required
documents, this cannot be taken against respondent. Neither can the BIR use this
as an excuse for issuing the assessments beyond the three-year period because
with or without the required documents, the CIR has the power to make
assessments based on the best evidence obtainable.[26]

WHEREFORE, the petition is DENIED. The assailed Decision dated March 30,
2007 and Resolution dated May 18, 2007 of the Court of Tax Appeals are hereby
AFFIRMED.

SO ORDERED.

159