Medicard Philippines, Inc. vs. CIR (G.R. No. 222743)

3/5/2021 [ G.R. No.
222743, April 05, 2017 ]
808 Phil. 528
THIRD DIVISION
[ G.R. No. 222743, April 05, 2017 ]
MEDICARD PHILIPPINES, INC., PETITIONER, VS. COMMISSIONER
OF INTERNAL REVENUE, RESPONDENT.
DECISION
REYES, J.:
This appeal by Petition for Review[1] seeks to reverse and set aside the Decision[2] dated
September 2, 2015 and Resolution[3] dated January 29, 2016 of the Court of Tax Appeals (CTA)
en banc in CTA EB No. 1224, affirming with modification the Decision[4] dated June 5, 2014
and the Resolution[5] dated September 15, 2014 in CTA Case No. 7948 of the CTA Third
Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent
Commissioner of Internal Revenue (CIR) the deficiency Value-Added Tax. (VAT) assessment in
the aggregate amount of P220,234,609.48, plus 20% interest per annum starting January 25,
2007, until fully paid, pursuant to Section 249(c)[6] of the National Internal Revenue Code
(NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and
medical insurance coverage to its clients. Individuals enrolled in its health care programs pay an
annual membership fee and are entitled to various preventive, diagnostic and curative medical
services provided by duly licensed physicians, specialists and other professional technical staff
participating in the group practice health delivery system at a hospital or clinic owned, operated
or accredited by it.[7]
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing
and Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006,
respectively, and its Fourth Quarterly VAT Return on January 25, 2007.[8]
Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT
Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-
00020 dated September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment
Notice (PAN) against MEDICARD for deficiency VAT. A Memorandum dated December 10,
2007 was likewise issued recommending the issuance of a Formal Assessment Notice (FAN)
against MEDICARD.[9]
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On January 4, 2008, MEDICARD received CIR's FAN dated December 10, 2007 for alleged
deficiency VAT for taxable year 2006 in the total amount of P196,614,476.69,[10] inclusive of
penalties.[11]
According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without
any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing
Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc.,[12] the CIR argued
that since MEDICARD does not actually provide medical and/or hospital services, but merely
arranges for the same, its services are not VAT exempt.[13]
MEDICARD argued that: (1) the services it render is not limited merely to arranging for the
provision of medical and/or hospital services by hospitals and/or clinics but include actual and
direct rendition of medical and laboratory services; in fact, its 2006 audited balance sheet shows
that it owns x-ray and laboratory facilities which it used in providing medical and laboratory
services to its members; (2) out of the P1.9 Billion membership fees, P319 Million was received
from clients that are registered with the Philippine Export Zone Authority (PEZA) and/or
Bureau of Investments; (3) the processing fees amounting to P11.5 Million should be excluded
from gross receipts because P5.6 Million of which represent advances for professional fees due
from clients which were paid by MEDICARD while the remainder was already previously
subjected to VAT; (4) the professional fees in the amount of P11 Million should also be excluded
because it represents the amount of medical services actually and directly rendered by
MEDICARD and/or its subsidiary company; and (5) even assuming that it is liable to pay for the
VAT, the 12% VAT rate should not be applied on the entire amount but only for the period when
the 12% VAT rate was already in effect, i.e., on February 1, 2006. It should not also be held
liable for surcharge and deficiency interest because it did not pass on the VAT to its members.
[14]
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer
Romualdo Plocios to verify the supporting documents of MEDICARD's Protest. MEDICARD
also submitted additional supporting documentary evidence in aid of its Protest thru a letter
dated March 18, 2008.[15]
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated
May 15, 2009, denying MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto
assessment of deficiency [VAT] in total sum of P196,614,476.99. It is requested that
you pay said deficiency taxes immediately. Should payment be made later,
adjustment has to be made to impose interest until date of payment. This is our final
decision. If you disagree, you may take an appeal to the [CTA] within the period
provided by law, otherwise, said assessment shall become final, executory and
demandable.[16]
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CTA,
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reiterating its position before the tax authorities.[17]
On June 5, 2014, the CTA Division rendered a Decision[18] affirming with modifications the
CIR's deficiency VAT assessment covering taxable year 2006, viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by

[CIR] against [MEDICARD] covering taxable year 2006 is hereby AFFIRMED
WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR]
the amount of P223,173,208.35, inclusive of the twenty-five percent (25%) surcharge
imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as
follows:
Basic Deficiency VAT P178,538,566.68

Add: 25% Surcharge 44,634,641.67
Total P223,173,208.35
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis
deficiency VAT of P178,538,566.68 computed from January 25, 2007 until full
payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and
b. Delinquency interest at the rate of twenty percent (20%) per annum on the total
amount of P223,173,208.35 representing basic deficiency VAT of P178,538,566.68
and 25% surcharge of P44,634,641.67 and on the 20% deficiency interest which
have accrued as afore-stated in (a), computed from June 19, 2009 until full payment
thereof pursuant to Section 249(C) of the NIRC of 1997.
SO ORDERED.[19]
The CTA Division held that: (1) the determination of deficiency VAT is not limited to the
issuance of Letter of Authority (LOA) alone as the CIR is granted vast powers to perform
examination and assessment functions; (2) in lieu of an LOA, an LN was issued to MEDICARD
informing it of the discrepancies between its ITRs d VAT Returns and this procedure is
authorized under Revenue Memorandum Order (RMO) No. 30-2003 and 42-2003; (3)
MEDICARD is estopped from questioning the validity of the assessment on the ground of lack
of LOA since the assessment issued against MEDICARD contained the requisite legal and
factual bases that put MEDICARD on notice of the deficiencies and it in fact availed of the
remedies provided by law without questioning the nullity of the assessment; (4) the amounts that
MEDICARD earmarked and eventually paid to doctors, hospitals and clinics cannot be excluded
from the computation of its gross receipts under the provisions of RR No. 4-2007 because the
act of earmarking or allocation is by itself an act of ownership and management over the funds
by MEDICARD which is beyond the contemplation of RR No. 4-2007; (5) MEDICARD's
earnings from its clinics and laboratory facilities cannot be excluded from its gross receipts
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because the operation of these clinics and laboratory is merely an incident to MEDICARD's
main line of business as an HMO and there is no evidence that MEDICARD segregated the
amounts pertaining to this at the time it received the premium from its members; and (6)
MEDICARD was not able to substantiate the amount pertaining to its January 2006 income and
therefore has no basis to impose a 10% VAT rate.[20]
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence,
MEDICARD elevated the matter to the CTA en banc.
In a Decision[21] dated September 2, 2015, the CTA en banc partially granted the petition only
insofar as the 10% VAT rate for January 2006 is concerned but sustained the findings of the
CTA Division in all other matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is hereby

PARTIALLY GRANTED. Accordingly, the Decision dated June 5, 2014 is hereby
MODIFIED, as follows:
"WHEREFORE, premises considered, the deficiency VAT assessment

issued by [CIR] against [MEDICARD] covering taxable year 2006 is
hereby AFFIRMED WITH MODIFICATIONS. Accordingly,
[MEDICARD] is ordered to pay [CIR] the amount of P220,234,609.48,
inclusive of the 25% surcharge imposed under Section 248(A)(3) of the
NIRC of 1997, as amended, computed as follows:
Basic Deficiency VAT P176,187,687.58

Add: 25% Surcharge 44,046,921.90
Total P220,234,609.48
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the basic
deficiency VAT of P176,187,687.58 computed from January 25, 2007
until full payment thereof pursuant to Section 249(B) of the NIRC of
1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the total amount
of P220,234,609.48 (representing basic deficiency VAT of
P176,187,687.58 and 25% surcharge of P44,046,921.90) and on the
deficiency interest which have accrued as afore-stated in (a), computed
from June 19, 2009 until full payment thereof pursuant to Section 249(C)
of the NIRC of 1997, as amended."
SO ORDERED.[22]
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Disagreeing with the CTA en banc's decision, MEDICARD filed a motion for reconsideration
but it was denied.[23] Hence, MEDICARD now seeks recourse to this Court via a petition for
review on certiorari.
The Issues
1. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND

EVENTUALLY PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD
STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.[24]
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated

MEDICARD's right to due process
An LOA is the authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of account and
other accounting records of a taxpayer for the purpose of collecting the correct amount of tax.
[25] An LOA is premised on the fact that the examination of a taxpayer who has already filed his
tax returns is a power that statutorily belongs only to the CIR himself or his duly authorized
representatives. Section 6 of the NIRC clearly provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. –
(A) Examination of Return and Determination of Tax Due. – After a return has
been filed as required under the provisions of this Code, the Commissioner or his
duly authorized representative may authorize the examination of any taxpayer
and the assessment of the correct amount of tax: Provided, however, That failure to
file a return shall not prevent the Commissioner from authorizing the examination of
any taxpayer.
x x x x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by
his duly authorized representative, through an LOA, an examination of the taxpayer cannot
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ordinarily be undertaken. The circumstances contemplated under Section 6 where the taxpayer
may be assessed through best-evidence obtainable, inventory-taking, or surveillance among
others has nothing to do with the LOA. These are simply methods of examining the taxpayer in
order to arrive at the correct amount of taxes. Hence, unless undertaken by the CIR himself or
his duly authorized representatives, other tax agents may not validly conduct any of these kinds
of examinations without prior authority.
With the advances in information and communication technology, the Bureau of Internal
Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies and guidelines once its
then incipient centralized Data Warehouse (DW) becomes fully operational in conjunction with
its Reconciliation of Listing for Enforcement System (RELIEF System).[26] This system can
detect tax leaks by matching the data available under the BIR's Integrated Tax System (ITS)
with data gathered from third-party sources. Through the consolidation and cross-referencing of
third-party information, discrepancy reports on sales and purchases can be generated to uncover
under declared income and over claimed purchases of goods and services.
Under this RMO, several offices of the BIR are tasked with specific functions relative to the
RELIEF System, particularly with regard to LNs. Thus, the Systems Operations Division (SOD)
under the Information Systems Group (ISG) is responsible for: (1) coming up with the List of
Taxpayers with discrepancies within the threshold amount set by management for the issuance
of LN and for the system-generated LNs; and (2) sending the same to the taxpayer and to the
Audit Information, Tax Exemption and Incentives Division (AITEID). After receiving the LNs,
the AITEID under the Assessment Service (AS), in coordination with the concerned offices
under the ISG, shall be responsible for transmitting the LNs to the investigating offices
[Revenue District Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers
Audit and Investigation Division (LTAID)]. At the level of these investigating offices, the
appropriate action on the LNs issued to taxpayers with RELIEF data discrepancy would be
determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-
audit approach" in the CIR's exercise of its power to authorize any examination of taxpayer
arid the assessment of the correct amount of tax. The no-contact-audit approach includes the
process of computerized matching of sales and purchases data contained in the Schedules of
Sales and Domestic Purchases, and Schedule of Importation submitted by VAT taxpayers under
the RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002.
This may also include the matching of data from other information or returns filed by the
taxpayers with the BIR such as Alphalist of Payees subject to Final or Creditable Withholding
Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's books and
records, if the computerized/manual matching of sales and purchases/expenses appears to reveal
discrepancies, the same shall be communicated to the concerned taxpayer through the issuance
of LN. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal
Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue officer may
begin an examination of the taxpayer even prior to the issuance of an LN or even in the absence
of an LOA with the aid of a computerized/manual matching of taxpayers' documents/records.
Accordingly, under the RELIEF System, the presumption that the tax returns are in accordance
with law and are presumed correct since these are filed under the penalty of perjury[27] are
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easily rebutted and the taxpayer becomes instantly burdened to explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory
requirement of an LOA before any investigation or examination of the taxpayer may be
conducted. As provided in the RMO No. 42-2003, the LN is merely similar to a Notice for
Informal Conference. However, for a Notice of Informal Conference, which generally precedes
the issuance of an assessment notice to be valid, the same presupposes that the revenue officer
who issued the same is properly authorized in the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as
supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine tune existing
procedures in handing assessments against taxpayers' issued LNs by reconciling various revenue
issuances which conflict with the NIRC. Among the objectives in the issuance of RMO No. 32-
2005 is to prescribe procedure in the resolution of LN discrepancies, conversion of LNs to
LOAs and assessment and collection of deficiency taxes.
IV. POLICIES AND GUIDELINES
xxxx
8. In the event a taxpayer who has been issued an LN refutes the discrepancy
shown in the LN, the concerned taxpayer will be given an opportunity to
reconcile its records with those of the BIR within One Hundred and Twenty
(120) days from the date of the issuance of the LN. However, the subject
taxpayer shall no longer be entitled to the abatement of interest and penalties
after the lapse of the sixty (60)-day period from the LN issuance.
9. In case the above discrepancies remained unresolved at the end of the One
Hundred and Twenty (120)-day period, the revenue officer (RO) assigned
to handle the LN shall recommend the issuance of [LOA] to replace the
LN. The head of the concerned investigating office shall submit a summary list
of LNs for conversion to LAs (using the herein prescribed format in Annex "E"
hereof) to the OACIR-LTS / ORD for the preparation of the corresponding LAs
with the notation "This LA cancels LN No. ___________"
xxxx
V. PROCEDURES
xxxx
B. At the Regional Office/Large Taxpayers Service
xxxx
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7. Evaluate the Summary List of LNs for Conversion to LAs

submitted by the RDO x x x prior to approval.
8. Upon approval of the above list, prepare/accomplish and sign the

corresponding LAs.
xxxx
10. Transmit the approved/signed LAs, together with the duly

accomplished/approved Summary List of LNs for conversion to
LAs, to the concerned investigating offices for the encoding of the
required information x x x and for service to the concerned
taxpayers.
xxxx
C. At the RDO x x x
xxxx
11. If the LN discrepancies remained unresolved within One Hundred

and Twenty (120) days from issuance thereof, prepare a summary
list of said LNs for conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned taxpayers.
[28]
In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN
against MEDICARD. Therefore no LOA was also served on MEDICARD. The LN that was
issued earlier was also not converted into an LOA contrary to the above quoted provision.
Surprisingly, the CIR did not even dispute the applicability of the above provision of RMO 32-
2005 in the present case which is clear and unequivocal on the necessity of an LOA for the
assessment proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due
process warrant the reversal of the assailed decision and resolution.
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc.[29] the Court said that:
Clearly, there must be a grant of authority before any revenue officer can conduct an
examination or assessment. Equally important is that the revenue officer so
authorized must not go beyond the authority given. In the absence of such an
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authority, the assessment or examination is a nullity.[30] (Emphasis and

underlining ours)
The Court cannot convert the LN into the LOA required under the law even if the same was
issued by the CIR himself. Under RR No. 12-2002, LN is issued to a person found to have
underreported sales/receipts per data generated under the RELIEF system. Upon receipt of the
LN, a taxpayer may avail of the BIR's Voluntary Assessment and Abatement Program. If a
taxpayer fails or refuses to avail of the said program, the BIR may avail of administrative and
criminal remedies, particularly closure, criminal action, or audit and investigation. Since the law
specifically requires an LOA and RMO No. 32-2005 requires the conversion of the previously
issued LN to an LOA, the absence thereof cannot be simply swept under the rug, as the CIR
would have it. In fact Revenue Memorandum Circular No. 40-2003 considers an LN as a notice
of audit or investigation only for the purpose of disqualifying the taxpayer from amending his
returns.
The following differences between an LOA and LN are crucial. First, an LOA addressed to a
revenue officer is specifically required under the NIRC before an examination of a taxpayer may
be had while an LN is not found in the NIRC and is only for the purpose of notifying the
taxpayer that a discrepancy is found based on the BIR's RELIEF System. Second, an LOA is
valid only for 30 days from date of issue while an LN has no such limitation. Third, an LOA
gives the revenue officer only a period of 120 days from receipt of LOA to conduct his
examination of the taxpayer whereas an LN does not contain such a limitation.[31] Simply put,
LN is entirely different and serves a different purpose than an LOA. Due process demands, as
recognized under RMO No. 32-2005, that after an LN has serve its purpose, the revenue officer
should have properly secured an LOA before proceeding with the further examination and
assessment of the petitioner. Unfortunately, this was not done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none
of the financial books or records being physically kept by MEDICARD was examined. To begin
with, Section 6 of the NIRC requires an authority from the CIR or from his duly authorized
representatives before an examination "of a taxpayer" may be made. The requirement of
authorization is therefore not dependent on whether the taxpayer may be required to physically
open his books and financial records but only on whether a taxpayer is being subject to
examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts
much easier and faster. The ease by which the BIR's revenue generating objectives is achieved is
no excuse however for its non-compliance with the statutory requirement under Section 6 and
with its own administrative issuance. In fact, apart from being a statutory requirement, an LOA
is equally needed even under the BIR's RELIEF System because the rationale of requirement is
the same whether or not the CIR conducts a physical examination of the taxpayer's records: to
prevent undue harassment of a taxpayer and level the playing field between the government's
vast resources for tax assessment, collection and enforcement, on one hand, and the solitary
taxpayer's dual need to prosecute its business while at the same time responding to the BIR
exercise of its statutory powers. The balance between these is achieved by ensuring that any
examination of the taxpayer by the BIR's revenue officers is properly authorized in the first
place by those to whom the discretion to exercise the power of examination is given by the
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statute.
That the BIR officials herein were not shown to have acted unreasonably is beside the point
because the issue of their lack of authority was only brought up during the trial of the case. What
is crucial is whether the proceedings that led to the issuance of VAT deficiency assessment
against MEDICARD had the prior approval and authorization from the CIR or her duly
authorized representatives. Not having authority to examine MEDICARD in the first place, the
assessment issued by the CIR is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially
finds merit in MEDICARD's substantive arguments.
The amounts earmarked and

eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CTA
Division that the gross receipts of an HMO for VAT purposes shall be the total amount of money
or its equivalent actually received from members undiminished by any amount paid or payable
to the owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD
explains that its business as an HMO involves two different although interrelated contracts. One
is between a corporate client and MEDICARD, with the corporate client's employees being
considered as MEDICARD members; and the other is between the healthcare
institutions/healthcare professionals and MEDICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare

institutions/healthcare professionals for the coverage of MEDICARD members under specific
health related services for a specified period of time in exchange for payment of a more or less
fixed membership fee. Under its contract with its corporate clients, MEDICARD expressly
provides that 20% of the membership fees per individual, regardless of the amount involved,
already includes the VAT of 10%/20% excluding the remaining 80% because MEDICARD
would earmark this latter portion for medical utilization of its members. Lastly, MEDICARD
also assails CIR's inclusion in its gross receipts of its earnings from medical services which it
actually and directly rendered to its members.
Since an HMO like MEDICARD is primarily engaged in arranging for coverage or designated
managed care services that are needed by plan holders/members for fixed prepaid membership
fees and for a specified period of time, then MEDICARD is principally engaged in the sale of
services. Its VAT base and corresponding liability is, thus, determined under Section 108(A)[32]
of the Tax Code, as amended by Republic Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a
dealer in securities whose gross receipts is the amount actually received as contract price
without allowing any deduction from the gross receipts.[33] This restrictive tenor changed under
RR No. 16-2005. Under this RR, an HM:O's gross receipts and gross receipts in general were
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defined, thus:
Section 4.108-3. x x x
xxxx
HMO's gross receipts shall be the total amount of money or its equivalent
representing the service fee actually or constructively received during the taxable
period for the services performed or to be performed for another person, excluding
the value-added tax. The compensation for their services representing their
service fee, is presumed to be the total amount received as enrollment fee from
their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or
royalty, including the amount charged for materials supplied with the services and
deposits applied as payments for services rendered, and advance payments actually
or constructively received during the taxable period for the services performed or
to be performed for another person, excluding the VAT.[34]
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the
definition of gross receipts in general.[35]
According to the CTA en banc, the entire amount of membership fees should form part of
MEDICARD's gross receipts because the exclusions to the gross receipts under RR No. 4-2007
does not apply to MEDICARD. What applies to MEDICARD is the definition of gross receipts
of an HMO under RR No. 16-2005 and not the modified definition of gross receipts in general
under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under RR No. 16-2005 merely
presumed that the amount received by an HMO as membership fee is the HMO's compensation
for their services. As a mere presumption, an HMO is, thus, allowed to establish that a portion of
the amount it received as membership fee does NOT actually compensate it but some other
person, which in this case are the medical service providers themselves. It is a well-settled
principle of legal hermeneutics that words of a statute will be interpreted in their natural, plain
and ordinary acceptation and signification, unless it is evident that the legislature intended a
technical or special legal meaning to those words. The Court cannot read the word "presumed"
in any other way.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base
under the N1RC does not contain any specific definition.[36] Therefore, absent a statutory
definition, this Court has construed the term gross receipts in its plain and ordinary meaning,
that is, gross receipts is understood as comprising the entire receipts without any deduction.[37]
Congress, under Section 108, could have simply left the term gross receipts similarly undefined
and its interpretation subjected to ordinary acceptation. Instead of doing so, Congress limited the
scope of the term gross receipts for VAT purposes only to the amount that the taxpayer received
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for the services it performed or to the amount it received as advance payment for the services it
will render in the future for another person.
In the proceedings below, the nature of MEDICARD's business and the extent of the services it
rendered are not seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary
between the purchaser of healthcare services (its members) and the healthcare providers (the
doctors, hospitals and clinics) for a fee. By enrolling membership with MEDICARD, its
members will be able to avail of the pre-arranged medical services from its accredited healthcare
providers without the necessary protocol of posting cash bonds or deposits prior to being
attended to or admitted to hospitals or clinics, especially during emergencies, at any given time.
Apart from this, MEDICARD may also directly provide medical, hospital and laboratory
services, which depends upon its member's choice.
Thus, in the course of its business as such, MEDICARD members can either avail of medical
services from MEDICARD's accredited healthcare providers or directly from MEDICARD. In
the former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the
healthcare needs of its members, MEDICARD would not actually be providing the actual
healthcare service. Thus, based on industry practice, MEDICARD informs its would-be member
beforehand that 80% of the amount would be earmarked for medical utilization and only the
remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of hs services is
exempt from VAT under Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the
NIRC that would extend the definition of gross receipts even to amounts that do not only pertain
to the services to be performed: by another person, other than the taxpayer, but even to amounts
that were indisputably utilized not by MEDICARD itself but by the medical service providers.
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To
this end, a construction which renders every word operative is preferred over that which makes
some words idle and nugatory. This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its
every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,[38] the Court
adopted the principal object and purpose object in determining whether the MEDICARD therein
is engaged in the business of insurance and therefore liable for documentary stamp tax. The
Court held therein that an HMO engaged in preventive, diagnostic and curative medical services
is not engaged in the business of an insurance, thus:
To summarize, the distinctive features of the cooperative are the rendering of

service, its extension, the bringing of physician and patient together, the
preventive features, the regularization of service as well as payment, the
substantial reduction in cost by quantity purchasing in short, getting the
medical job done and paid for; not, except incidentally to these features, the
indemnification for cost after the services is rendered. Except the last, these are
not distinctive or generally characteristic of the insurance arrangement. There
3/5/2021 [ G.R. No. 222743, April 05, 2017 ]
is, therefore, a substantial difference between contracting in this way for the
rendering of service, even on the contingency that it be needed, and contracting
merely to stand its cost when or after it is rendered.[39] (Emphasis ours)
In sum, the Court said that the main difference between an HMO and an insurance company is
that HMOs undertake to provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake to indemnify the insured
for medical expenses incurred up to a pre-agreed limit. In the present case, the VAT is a tax on
the value added by the performance of the service by the taxpayer. It is, thus, this service and the
value charged thereof by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT.
[40] But the Court's task however is not to weigh these policy considerations but to determine if
these considerations in favor of taxation can even be implied from the statute where the CIR
purports to derive her authority. This Court rules that they cannot because the language of the
NIRC is pretty straightforward and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation in

the imposition of taxes, not the similar doctrine as applied to tax. exemptions. The
rule in the interpretation tax laws is that a statute will not be construed as imposing a
tax unless it does so clearly, expressly, and unambiguously. A tax cannot be
imposed without clear and express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing act are not to
be extended by implication. In answering the question of who is subject to tax
statutes, it is basic that in case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import. As burdens, taxes should not be unduly exacted nor
assumed beyond the plain meaning of the tax laws.[41] (Citation omitted and
emphasis and underlining ours)
For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion,
the authority should have been reasonably founded from the language of the statute. That
language is wanting in this case. In the scheme of judicial tax administration, the need for
certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill
in the details that Congress may not have the opportunity or competence to provide. The
regulations these authorities issue are relied upon by taxpayer, who are certain that these will be
followed by the courts. Courts, however, will not uphold these authorities' interpretations when
clearly absurd, erroneous or improper.[42] The CIR's interpretation of gross receipts in the
present case is patently erroneous for lack of both textual and non-textual support.
As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership
and management over the funds, the Court does not agree. On the contrary, it is MEDICARD's
act of earmarking or allocating 80% of the amount it received as membership fee at the time of
3/5/2021 [ G.R. No. 222743, April 05, 2017 ]
payment that weakens the ownership imputed to it. By earmarking or allocating 80% of the
amount, MEDICARD unequivocally recognizes that its possession of the funds is not in the
concept of owner but as a mere administrator of the same. For this reason, at most,
MEDICARD's right in relation to these amounts is a mere inchoate owner which would ripen
into actual ownership if, and only if, there is underutilization of the membership fees at the end
of the fiscal year. Prior to that, MEDICARD is bound to pay from the amounts it had allocated
as an administrator once its members avail of the medical services of MEDICARD's healthcare
providers.
Before the Court, the parties were one in submitting the legal issue of whether the amounts
MEDICARD earmarked, corresponding to 80% of its enrollment fees, and paid to the medical
service providers should form part of its gross receipt for VAT purposes, after having paid the
VAT on the amount comprising the 20%. It is significant to note in this regard that MEDICARD
established that upon receipt of payment of membership fee it actually issued two official
receipts, one pertaining to the VATable portion, representing compensation for its services, and
the other represents the non-vatable portion pertaining to the amount earmarked for medical
utilization. Therefore, the absence of an actual and physical segregation of the amounts
pertaining to two different kinds of fees cannot arbitrarily disqualify MEDICARD from
rebutting the presumption under the law and from proving that indeed services were rendered by
its healthcare providers for which it paid the amount it sought to be excluded from its gross
receipts.
With the foregoing discussions on the nullity of the assessment on due process grounds and
violation of the NIRC, on one hand, and the utter lack of legal basis of the CIR's position on the
computation of MEDICARD's gross receipts, the Court finds it unnecessary, nay useless, to
discuss the rest of the parties' arguments and counter-arguments.
In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution
of the CTA en banc grounded as it is on due process violation. The Court likewise rules that for
purposes of determining the VAT liability of an HMO, the amounts earmarked and actually
spent for medical utilization of its members should not be included in the computation of its
gross receipts.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby

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

3/5/2021 [ G.R. No. 222743, April 05, 2017 ]
N O T I C E OF J U D G M E N T
Sirs /Mesdames:
Please take notice that on April 5, 2017 a Decision, copy attached hereto, was rendered by the
Supreme Court in the above-entitled case, the original of which was received by this Office on
April 26, 2017 at 9:00 a.m.
Very truly yours,
WILFREDO V. LAPITAN
Clerk of Court
By:
(SGD.) MISAEL DOMINGO C. BATTUNG III

Deputy Division Clerk of Court
* Additional Member per Raffle dated April 3, 2017 vice Associate Justice Francis H. Jardeleza.
[1] Rollo, pp. 187-231.
[2] Penned by Associate Justice Juanito C. Castañeda; id. at 13-45.
[3]Id. at 46-59; Presiding Justice Roman G. Del Rosario with Concurring and Dissenting
Opinion, joined by Associate Justice Erlinda P. Uy.
[4]
Penned by Associate Justice Ma. Belen M. Ringpis-Liban, with Associate Justices Lovell R.
Bautista and Esperanza R. Fabon-Victorino concurring; id. at 124-174.
[5] Id. at 175-178.
[6] SEC. 249. Interest. -
xxxx
(C) Delinquency Interest. - In case of failure to pay:

(1) The amount of the tax due on any return to be filed, or
(2) The amount of the tax due for which no return is required, or
3/5/2021 [ G.R. No. 222743, April 05, 2017 ]
(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice
and demand of the Commissioner, there shall be assessed and collected on the unpaid amount,
interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which
interest shall form part of the tax.
[7] Rollo, p. 190.
[8] Id. at 15.
[9] Id. at 15-16.
[10]
Receivable from members, beginning [P]45,265,483.00
Add/Deduct Adjustments
1. Membership fees for the year [P] 1,956,016,629.00
2. Administrative service fees 3,388,889.00
3. Professional fees 11,522,346.00
4. Processing fees 11,008,809.00
5. Rental income 119,942.00
6. Unearned fees, ending 405,616,650.00 2,387,673,265.00
2,432,938,748.00
Less: Receivable from members, 85,189,221.00
ending
Unearned fees, beginning 412,184,856.00 497,374,077.00
Gross receipts su[lject to VAT 1,935,564,671.00
VAT Rate 12%
Output tax due 207,381,929.04
Less: Input tax 25,794,078.24
VAT payable 181,587,850.80
Less: VAT payments 15,816,053.22
VAT payable 165,771,797.58
Add: Increment
Surcharge
Interest (1-26-07 to 12-31-07 or 339 30,792,679.11
days )
Compromise penalty 50,000.00 30,842,679.11
Total Deficiency VAT Payable [P]196,614, 476.69
3/5/2021 [ G.R. No. 222743, April 05, 2017 ]
[11] Rollo, p. 16.
[12] 550 Phil. 304 (2007).
[13] Rollo, pp. 16-17.
[14] Id. at 18-20.
[15] Id. at 20.
[16] Id.
[17] Id.
[18] Id. at 124-174.
[19] Id. at 173.
[20] Id. at 153-170.
[21] Id. at 13-45.
[22] Id. at 43-44.
[23] Id. at 46-59.
[24] Id. at 197-198.
[25] Commissioner of Internal Revenue v. Sony Philippines, Inc., 649 Phil. 519, 529-530 (2010).
[26] The following are the objectives of RMO No. 30-2003: 1. Establish adequate controls to
ensure security/integrity and confidentiality of RELIEF data maintained in the DW, consistent
with relevant statutes and policies concerning Unlawful Disclosure; 2. Delineate the duties and
responsibilities of offices responsible for oversight of the RELIEF system including all activities
associated with requests for access and farming out of RELIEF data to the regional and district
offices; 3. Prescribe procedures in the resolution of matched error or discrepancies, examination
of taxpayer's records, assessment and collection of deficiency taxes; and 4. Prescribe standard
report format to be used by all concerned offices in the implementation of this Order. <
https://www.bir.gov.ph/images/bir_files/old_tiles/pdf/1966rmo03_30.pdf > visited last March 7,
2017.
3/5/2021 [ G.R. No. 222743, April 05, 2017 ]
[27]SMI-Ed Philippines Technology, Inc. v. Commissioner of Internal Revenue, G.R. No.

175410, November 12, 2014, 739 SCRA 691, 701.
[28] < https://www.bir.gov.ph/images/bir_filed/old_files/pdf/27350RMO%2032-2005.pdf >

visited last March 7, 2017.
[29] 649 Phil. 519 (2010).
[30] Id. at 530.
[31] BIR's General Audit Procedures and Documentation
[32] SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.-
(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (12%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties: Provided, That the President, upon the recommendation
of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of

the previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds
one and one-half percent (1 1/2%).
The phrase 'sale or exchange of services' means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors; stock,
real estate, commercial, customs and immigration brokers; lessors of property,
whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, rest-
houses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers;
dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and
other domestic common carriers by land relative to their transport.of goods or
cargoes; common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines; sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric utilities, telephone
and telegraph, radio imd television broadcasting and all other franchise grantees
except those under Section 119 of this Code and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the performance thereof
3/5/2021 [ G.R. No. 222743, April 05, 2017 ]
calls for the exercise or use of the physical or mental faculties. The phrase 'sale or
exchange of services' shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent,
design. or model plan, secret formula or process, goodwill, trademark, trade brand or
other like property or right;
(2) The lease or the use of, or the right to use of any industrial, commercial or,
scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or

information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as
a means of enabling the application or enjoyment of any such property, or right as is
mentioned in subparagraph (2) or any such knowledge or information as is
mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his employee in connection

with the use of property or rights belonging to, or the installation or operation of any
brand, machinery or other apparatus purchased from such nonresident person;
(6) The supply of technical advice, assistance or services rendered in connection with
technical management or administration of any scientific, industrial or commercial
undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission
and cable television time.
Lease of properties shall be subject to the tax herein imposed irrespective of the
place where the contract of lease or licensing agreement was executed if the property
is leased or used in the Philippines.
The term 'gross receipts' means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another
person, excluding value-added tax. (Emphasis ours)
[33] RR No. 14-2005, Section 4.108-3 (i).
[34]
< https://www.bir.gov.ph/images/bir_files/old_files/pdf/26116rr16-2005.pdf > visited last
March 7, 2017.
3/5/2021 [ G.R. No. 222743, April 05, 2017 ]
[35]Gross receipts' refers to the total amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount charged for materials
supplied with the services and deposits applied as payments for services rendered and advance
payments actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding the VAT, except those amounts
earmarked for payment to unrelated third (3rd) party or received as reimbursement for advance
payment on behalf of another which do not redound to the benefit of the payor.
A payment is a payment to a third (3rd) party if the same is made to settle an obligation of
another person, e.g., customer or client, to the said third party, which obligation is evidenced by
the sales invoice/official receipt issued by said third partv to the obligor/debtor (e.g., customer
or client of the payor of the obligation).
An advance payment is an advance payment on behalf of another if the same is paid to a third
(3rd) party for a present or future obligation of said another party which obligation is evidenced
by a sales invoice/official receipt issued by the obligee/creditor to the obligor/debtor (i.e., the
aforementioned 'another party') for the sale of goods or services by the former to the latter.
For this purpose 'unrelated party' shall not include taxpayer's employees, partners, affiliates
(parent, subsidiary and other related companies), relatives by consanguinity or affinity within
the fourth (4th) civil degree, and trust fund where the taxpayer is the trustor, trustee or
beneficiary, even if covered by an agreement to the contrary. (Underlining in the original)
[36]Compare with Section 125 of the NIRC, where the gross receipts for purposes of
amusement tax broadly included "all receipts of the proprietor, lessee or operator of the
amusement place." See Sections 116, 117, 119 and 121 of the NIRC, as amended by R.A. No.
9337.
[37] Commissioner of Internal Revenue v. Bank of Commerce, 498 Phil. 673, 685 (2005).
[38] 616 Phil. 387 (2009).
[39]
Id. at 404-405, citing Jordan v. Group Health Association, 107 F.2d 239, 247-248 (D.C.
App. 1939).
[40] For instance, arguably, excluding from an HMO's gross receipts the amount that they
indisputably utilized for the' benefit of their members could mean lessening the state's burden of
having to spend for the amount of these services were it not for the favorable effect of the
exclusion on the overall healthcare scheme. Similarly, the indirect benefits of an HMO's
diagnostic and preventive medical health service (as distinguished from its curative medical
health service generally associated with the reimbursement scheme of health insurance) to the
state's legitimate interest of maintaining a healthy population may also arguably explain the
exclusion of the medically utilized amount from an HMO's gross receipts.
[41]Commissioner of Internal Revenue v. Fortune Tobacco Corporation, 581 Phil. 146, 168
(2008).
3/5/2021 [ G.R. No. 222743, April 05, 2017 ]
[42]Commissioner of Internal Revenue v. Central Luzon Drug Corporation, 496 Phil. 307, 332
(2005).
Source: Supreme Court E-Library | Date created: December 03, 2020

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3/5/2021 [ G.R. No.

222743, April 05, 2017 ]

808 Phil. 528

reiterating its position before the tax authorities.[17]

WHEREFORE, premises considered, the deficiency VAT assessment issued by

Basic Deficiency VAT P178,538,566.68

In addition, [MEDICARD] is ordered to pay:

WHEREFORE, in view thereof, the instant Petition for Review is hereby

"WHEREFORE, premises considered, the deficiency VAT assessment

Basic Deficiency VAT P176,187,687.58

In addition, [MEDICARD] is ordered to pay:

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

2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND

Ruling of the Court

The petition is meritorious.

The absence of an LOA violated

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

x x x x (Emphasis and underlining ours)

IV. POLICIES AND GUIDELINES

B. At the Regional Office/Large Taxpayers Service

7. Evaluate the Summary List of LNs for Conversion to LAs

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

10. Transmit the approved/signed LAs, together with the duly

11. If the LN discrepancies remained unresolved within One Hundred

authority, the assessment or examination is a nullity.[30] (Emphasis and

The amounts earmarked and

Under the first, MEDICARD undertakes to make arrangements with healthcare

To summarize, the distinctive features of the cooperative are the rendering of

What is controlling in this case is the well-settled doctrine of strict interpretation in

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

Velasco, Jr., (Chairperson), Bersamin, Caguioa,* and Tijam, JJ., concur.

Very truly yours,

(SGD.) MISAEL DOMINGO C. BATTUNG III

[1] Rollo, pp. 187-231.

[2] Penned by Associate Justice Juanito C. Castañeda; id. at 13-45.

[5] Id. at 175-178.

[6] SEC. 249. Interest. -

(C) Delinquency Interest. - In case of failure to pay:

[7] Rollo, p. 190.

[8] Id. at 15.

[9] Id. at 15-16.

[11] Rollo, p. 16.

[12] 550 Phil. 304 (2007).

[13] Rollo, pp. 16-17.

[14] Id. at 18-20.

[15] Id. at 20.

[18] Id. at 124-174.

[19] Id. at 173.

[20] Id. at 153-170.

[21] Id. at 13-45.

[22] Id. at 43-44.

[23] Id. at 46-59.

[24] Id. at 197-198.

[27]SMI-Ed Philippines Technology, Inc. v. Commissioner of Internal Revenue, G.R. No.

[28] < https://www.bir.gov.ph/images/bir_filed/old_files/pdf/27350RMO%2032-2005.pdf >

[29] 649 Phil. 519 (2010).

[30] Id. at 530.

[31] BIR's General Audit Procedures and Documentation

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of

(3) The supply of scientific, technical, industrial or commercial knowledge or