G.R. No.

210987 November 24, 2014

THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

DECISION

VELASCO, JR., J.:

Nature of the Case

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing and
seeking the reversal of the Resolutions of the Court of Appeals (CA) in CA-G.R. SP No. 127984, dated
May 23, 20131 and January 21, 2014, which dismissed outright the petitioner's appeal from the Secretary
of Finance's review of BIR Ruling No. 015-122 for lack of jurisdiction.

The Facts

Petitioner The Philippine American Life and General Insurance Company (Philamlife) used to own
498,590 Class A shares in Philam Care Health Systems, Inc. (PhilamCare), representing 49.89% of the
latter's outstanding capital stock. In 2009, petitioner, in a bid to divest itself of its interests in the health
maintenance organization industry, offered to sell its shareholdings in PhilamCare through competitive
bidding. Thus, on September 24, 2009, petitioner's Class A shares were sold for USD 2,190,000, or PhP
104,259,330 based on the prevailing exchange rate at the time of the sale, to STI Investments, Inc., who
emerged as the highest bidder.3

After the sale was completed and the necessary documentary stamp and capital gains taxes were paid,
Philamlife filed an application for a certificate authorizing registration/tax clearance with the Bureau of
Internal Revenue (BIR) Large Taxpayers Service Division to facilitate the transfer of the shares. Months
later, petitioner was informed that it needed to secure a BIR ruling in connection with its application due
to potential donor’s tax liability. In compliance, petitioner, on January 4, 2012, requested a ruling4 to
confirm that the sale was not subject to donor’s tax, pointing out, in its request, the following: that the
transaction cannot attract donor’s tax liability since there was no donative intent and,ergo, no taxable
donation, citing BIR Ruling [DA-(DT-065) 715-09] dated November 27, 2009;5 that the shares were sold
at their actual fair market value and at arm’s length; that as long as the transaction conducted is at arm’s
length––such that a bona fide business arrangement of the dealings is done inthe ordinary course of
business––a sale for less than an adequate consideration is not subject to donor’s tax; and that donor’s tax
does not apply to saleof shares sold in an open bidding process.

On January 4, 2012, however, respondent Commissioner on Internal Revenue (Commissioner) denied

Philamlife’s request through BIR Ruling No. 015-12. As determined by the Commissioner, the selling
price of the shares thus sold was lower than their book value based on the financial statements of
PhilamCare as of the end of 2008.6 As such, the Commisioner held, donor’s tax became imposable on the
price difference pursuant to Sec. 100 of the National Internal Revenue Code (NIRC), viz:

SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other than real
property referred to in Section 24(D), is transferred for less than an adequate and full consideration in
money or money’s worth, then the amount by which the fair market value of the property exceeded the
value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and
shall be included in computing the amount of gifts made during the calendar year.

The afore-quoted provision, the Commissioner added, is implemented by Revenue Regulation 6-2008
(RR 6-2008), which provides:

SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A

LOCAL STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c),
28(B)(5)(c) OF THE TAX CODE, AS AMENDED. —

xxxx

(c) Determination of Amount and Recognition of Gain or Loss –

(c.1) In the case of cash sale, the selling price shall be the consideration per deed of sale.

xxxx

(c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the
amount of money and/or fair market value of the property received, the excess of the fair market value of
the shares of stock sold, bartered or exchanged overthe amount of money and the fair market value of the
property, if any, received as consideration shall be deemed a gift subject to the donor’stax under Section
100 of the Tax Code, as amended.

xxxx

(c.2) Definition of ‘fair market value’of Shares of Stock. – For purposes of this Section, ‘fair market
value’ of the share of stock sold shall be:

xxxx

(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value of
the shares of stock as shown in the financial statements duly certified by an independent certified public
accountant nearest to the date of sale shall be the fair market value.

In view of the foregoing, the Commissioner ruled that the difference between the book value and the
selling price in the sales transaction is taxable donation subject to a 30% donor’s tax under Section 99(B)
of the NIRC.7Respondent Commissioner likewise held that BIR Ruling [DA-(DT-065) 715-09], on which
petitioner anchored its claim, has already been revoked by Revenue Memorandum Circular (RMC) No.
25-2011.8

Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to review BIR Ruling No.
015-12, but to no avail. For on November 26, 2012, respondent Secretary affirmed the Commissioner’s
assailed ruling in its entirety.9

Ruling of the Court of Appeals

Not contented with the adverse results, petitioner elevated the case to the CA via a petition for review
under Rule 43, assigning the following errors:10
 A.

The Honorable Secretary of Finance gravely erred in not finding that the application of Section 7(c.2.2) of
RR 06-08 in the Assailed Ruling and RMC 25-11 is void insofar as it altersthe meaning and scope of
Section 100 of the Tax Code.

B.

The Honorable Secretary of Finance gravely erred in finding that Section 100 of the Tax Code is
applicable tothe sale of the Sale of Shares.

1.

The Sale of Shares were sold at their fair market value and for fair and full consideration in
money or money’s worth.

2.

The sale of the Sale Shares is a bona fide business transaction without any donative intent and is
therefore beyond the ambit of Section 100 of the Tax Code.

3.

It is superfluous for the BIR to require an express provision for the exemption of the sale of the
Sale Shares from donor’s tax since Section 100 of the Tax Code does not explicitly subject the
transaction to donor’s tax.

C.

The Honorable Secretary of Finance gravely erred in failing to find that in the absence of any of the
grounds mentioned in Section 246 of the Tax Code, rules and regulations, rulings or circulars – such as
RMC 25-11 – cannot be given retroactive application to the prejudice of Philamlife.

On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition, thusly:

WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack of jurisdiction.

SO ORDERED.

In disposing of the CA petition, the appellate court ratiocinated that it is the Court of Tax Appeals (CTA),
pursuant to Sec. 7(a)(1) of Republic Act No. 1125 (RA 1125),11 as amended, which has jurisdiction over
the issues raised. The outright dismissal, so the CA held, is predicated on the postulate that BIR Ruling
No. 015-12 was issued in the exercise of the Commissioner’s power to interpret the NIRC and other tax
laws. Consequently, requesting for its review can be categorized as "other matters arising under the NIRC
or other laws administered by the BIR," which is under the jurisdiction of the CTA, not the CA.

Philamlife eventually sought reconsideration but the CA, in its equally assailed January 21, 2014
Resolution, maintained its earlier position. Hence, the instant recourse.
Issues

Stripped to the essentials, the petition raises the following issues in both procedure and substance:

1. Whether or not the CA erred in dismissing the CA Petition for lack of jurisdiction; and

2. Whether or not the price difference in petitioner’s adverted sale of shares in PhilamCare
attracts donor’s tax.

Procedural Arguments

a. Petitioner’s contentions

Insisting on the propriety of the interposed CA petition, Philamlife, while conceding that respondent
Commissioner issued BIR Ruling No. 015-12 in accordance with her authority to interpret tax laws,
argued nonetheless that such ruling is subject to review by the Secretary of Finance under Sec. 4 of the
NIRC, to wit:

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

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code orother laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals. Petitioner postulates that there is a need to
differentiate the rulings promulgated by the respondent Commissioner relating to those rendered under
the first paragraph of Sec. 4 of the NIRC, which are appealable to the Secretary of Finance, from those
rendered under the second paragraph of Sec. 4 of the NIRC, which are subject to review on appeal with
the CTA.

This distinction, petitioner argues, is readily made apparent by Department Order No. 7-02,12 as
circularized by RMC No. 40-A-02.

Philamlife further averred that Sec.7 of RA 1125, as amended, does not find application in the case at bar
since it only governs appeals from the Commissioner’s rulings under the second paragraph and does not
encompass rulings from the Secretary of Finance in the exercise of his power of review under the first, as
what was elevated to the CA. It added that under RA 1125, as amended, the only decisions of the
Secretary appealable to the CTA are those rendered in customs cases elevated to him automatically under
Section 2315 of the Tariff and Customs Code.13

There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as amended, failed to supply
where the rulings of the Secretary in its exercise of its power of review under Sec. 4 of the NIRC are
appealable to. This gap, petitioner submits, was remedied by British American Tobacco v.
Camacho14 wherein the Court ruled that where what is assailed is the validity or constitutionality of a law,
or a rule or regulation issued by the administrative agency, the regular courts have jurisdiction to pass
upon the same.
In sum, appeals questioning the decisions of the Secretary of Finance in the exercise of its power of
review under Sec. 4 of the NIRC are not within the CTA’s limited special jurisdiction and, according to
petitioner, are appealable to the CA via a Rule 43 petition for review.

b. Respondents’ contentions

Before the CA, respondents countered petitioner’s procedural arguments by claiming that even assuming
arguendo that the CTA does not have jurisdiction over the case, Philamlife, nevertheless,committed a
fatal error when it failed to appeal the Secretary of Finance’s ruling to the Office of the President (OP).
As made apparent by the rules, the Department of Finance is not among the agencies and quasi-judicial
bodies enumerated under Sec. 1, Rule 43 of the Rules of Court whose decisions and rulings are
appealable through a petition for review.15 This is in stark contrast to the OP’s specific mention under the
same provision, so respondents pointed out.

To further reinforce their argument, respondents cite the President’s power of review emanating from his
power of control as enshrined under Sec. 17 of Article VII of the Constitution, which reads:

Section 17.The President shall have control of all the executive departments, bureaus, and offices. He
shall ensure that the laws be faithfully executed.

The nature and extent of the President’s constitutionally granted power of control have beendefined in a
plethora of cases, most recently in Elma v. Jacobi,16 wherein it was held that:

x x x This power of control, which even Congress cannot limit, let alone withdraw, means the power of
the Chief Executive to review, alter, modify, nullify, or set aside what a subordinate, e.g., members of the
Cabinet and heads of line agencies, had done in the performance of their duties and to substitute the
judgment of the former for that of the latter.

In their Comment on the instant petition, however, respondents asseverate that the CA did not err in its
holding respecting the CTA’s jurisdiction over the controversy.

The Court’s Ruling

The petition is unmeritorious.

Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable to the CTA

To recapitulate, three different, if not conflicting, positions as indicated below have been advanced by the
parties and by the CA as the proper remedy open for assailing respondents’ rulings:

1. Petitioners: The ruling of the Commissioner is subject to review by the Secretary under Sec. 4
of the NIRC, and that of the Secretary to the CA via Rule 43;

2. Respondents: The ruling of the Commissioner is subject to review by the Secretary under Sec.
4 of the NIRC, and that of the Secretary to the Office of the President before appealing to the CA
via a Rule 43 petition; and

3. CA: The ruling of the Commissioner is subject to review by the CTA.

We now resolve.

Preliminarily, it bears stressing that there is no dispute that what is involved herein is the respondent
Commissioner’s exercise of power under the first paragraph of Sec. 4 of the NIRC––the power to
interpret tax laws. This, in fact, was recognized by the appellate court itself, but erroneously held that her
action in the exercise of such power is appealable directly to the CTA. As correctly pointed out by
petitioner, Sec. 4 of the NIRC readily provides that the Commissioner’s power to interpret the provisions
of this Code and other tax laws is subject to review by the Secretary of Finance. The issue that now arises
is this––where does one seek immediate recourse from the adverse ruling of the Secretary of Finance in
its exercise of its power of review under Sec. 4?

Admittedly, there is no provision in law that expressly provides where exactly the ruling of the Secretary
of Finance under the adverted NIRC provision is appealable to. However, We find that Sec. 7(a)(1) of RA
1125, as amended, addresses the seeming gap in the law asit vests the CTA, albeit impliedly, with
jurisdiction over the CA petition as "other matters" arising under the NIRC or other laws administered by
the BIR. As stated:

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

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

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

Even though the provision suggests that it only covers rulings of the Commissioner, We hold that it is,
nonetheless, sufficient enough to include appeals from the Secretary’s review under Sec. 4 of the NIRC.

It is axiomatic that laws should be given a reasonable interpretation which does not defeat the very
purpose for which they were passed.17 Courts should not follow the letter of a statute when to do so would
depart from the true intent of the legislature or would otherwise yield conclusions inconsistent with the
purpose of the act.18 This Court has, in many cases involving the construction of statutes, cautioned
against narrowly interpreting a statute as to defeat the purpose of the legislator, and rejected the literal
interpretation of statutes if todo so would lead to unjust or absurd results.19

Indeed, to leave undetermined the mode of appeal from the Secretary of Finance would be an injustice to
taxpayers prejudiced by his adverse rulings. To remedy this situation, Weimply from the purpose of RA
1125 and its amendatory laws that the CTA is the proper forum with which to institute the appeal. This is
not, and should not, in any way, be taken as a derogation of the power of the Office of President but
merely as recognition that matters calling for technical knowledge should be handled by the agency or
quasi-judicial body with specialization over the controversy. As the specialized quasi-judicial agency
mandated to adjudicate tax, customs, and assessment cases, there can be no other court of appellate
jurisdiction that can decide the issues raised inthe CA petition, which involves the tax treatment of the
shares of stocks sold. Petitioner, though, nextinvites attention to the ruling in Ursal v. Court of Tax
Appeals20 to argue against granting the CTA jurisdiction by implication, viz:

Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket authority to decide any
and all tax disputes. Defining such special court’s jurisdiction, the Act necessarily limited its authority to
those matters enumerated therein. Inline with this idea we recently approved said court’s order rejecting
an appeal to it by Lopez & Sons from the decision of the Collector ofCustoms, because in our opinion its
jurisdiction extended only to a review of the decisions of the Commissioner of Customs, as provided
bythe statute — and not to decisions of the Collector of Customs. (Lopez & Sons vs. The Court of Tax
Appeals, 100 Phil., 850, 53 Off. Gaz., [10] 3065).

xxxx

x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates the matters which the
Court of Tax Appeals may consider; such enumeration excludes all others by implication. Expressio unius
est exclusio alterius.

Petitioner’s contention is untenable. Lest the ruling in Ursalbe taken out of context, but worse as a
precedent, it must be noted that the primary reason for the dismissal of the said case was that the
petitioner therein lacked the personality to file the suit with the CTA because he was not adversely
affected by a decision or ruling of the Collector of Internal Revenue, as was required under Sec. 11 of RA
1125.21 As held:

We share the view that the assessor had no personality to resort to the Court of Tax Appeals. The rulings
of the Board of Assessment Appeals did not "adversely affect" him. At most it was the City of Cebu that
had been adversely affected in the sense that it could not thereafter collect higher realty taxes from the
abovementioned property owners. His opinion, it is true had been overruled; but the overruling inflicted
no material damage upon him or his office. And the Court of Tax Appeals was not created to decide mere
conflicts of opinion between administrative officers or agencies. Imagine an income tax examiner
resorting to the Court of Tax Appeals whenever the Collector of Internal Revenue modifies, or lower his
assessment on the return of a tax payer!22

The appellate power of the CTA includes certiorari

Petitioner is quick to point out, however, that the grounds raised in its CA petition included the nullity of
Section 7(c.2.2) of RR 06-08 and RMC 25-11. In an attempt to divest the CTA jurisdiction over the
controversy, petitioner then cites British American Tobacco, wherein this Court has expounded on the
limited jurisdiction of the CTA in the following wise:

While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not
include cases where the constitutionality of a law or rule is challenged. Where what is assailed is the
validity or constitutionality of a law, or a rule or regulation issued by the administrative agency in the
performance of its quasi legislative function, the regular courts have jurisdiction to pass upon the same.
The determination of whether a specific rule or set of rules issued by an administrative agency
contravenes the law or the constitution is within the jurisdiction of the regular courts. Indeed, the
Constitution vests the power of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance, or regulation inthe courts,
including the regional trial courts. This is within the scope of judicial power, which includes the authority
of the courts to determine inan appropriate action the validity of the acts of the political departments.
Judicial power includes the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality
of the Government.23

Vis-a-vis British American Tobacco, it bears to stress what appears to be a contrasting ruling in Asia
International Auctioneers, Inc. v. Parayno, Jr., to wit:
Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158 (The National Internal
Revenue Code, as amended) which states that "[d]ealers in securities shall pay a tax equivalent to six
(6%) per centum of their gross income. Lending investors shall pay a tax equivalent to five (5%) per cent,
of their gross income," the CIR issued Revenue Memorandum Order (RMO) No. 15-91 imposing 5%
lending investor’s tax on pawnshops based on their gross income and requiring all investigating units of
the BIR to investigate and assess the lending investor’s tax due from them. The issuance of RMO No. 15-
91 was an offshoot of the CIR’s finding that the pawnshop business is akin to that of "lending investors"
as defined in Section 157(u) of the Tax Code. Subsequently, the CIR issued RMC No. 43-91 subjecting
pawn tickets to documentary stamp tax. Respondent therein, Josefina Leal, owner and operator of
Josefina’s Pawnshop, asked for a reconsideration of both RMO No. 15-91 and RMC No. 43-91, but the
same was denied by petitioner CIR. Leal then filed a petition for prohibition with the RTC of San Mateo,
Rizal, seeking to prohibit petitioner CIR from implementing the revenue orders. The CIR, through the
OSG, filed a motion to dismiss on the ground of lack of jurisdiction. The RTC denied the motion.
Petitioner filed a petition for certiorari and prohibition with the CA which dismissed the petition "for lack
of basis." In reversing the CA, dissolving the Writ of Preliminary Injunction issued by the trial court and
ordering the dismissal of the case before the trial court, the Supreme Court held that "[t]he questioned
RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing
the Tax Code on the taxability of pawnshops." They were issued pursuant to the CIR’s power under
Section 245 of the Tax Code "to make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws, including ruling on the classification of articles of sales and similar
purposes."The Court held that under R.A. No. 1125 (An Act Creating the Court of Tax Appeals), as
amended, such rulings of the CIR are appealable to the CTA.

In the case at bar, the assailed revenue regulations and revenue memorandum circulars are actually rulings
or opinions of the CIR on the tax treatment of motor vehicles sold at public auction within the SSEZ to
implement Section 12 of R.A. No. 7227 which provides that "exportation or removal of goods from the
territory of the [SSEZ] to the other parts of the Philippine territory shall be subject to customs duties and
taxes under the Customs and Tariff Codeand other relevant tax laws of the Philippines." They were issued
pursuant to the power of the CIR under Section 4 of the National Internal Revenue Code x x
x.24 (emphasis added)

The respective teachings in British American Tobacco and Asia International Auctioneers, at first blush,
appear to bear no conflict––that when the validity or constitutionality of an administrative rule or
regulation is assailed, the regular courts have jurisdiction; and if what is assailed are rulings or opinions of
the Commissioner on tax treatments, jurisdiction over the controversy is lodged with the CTA. The
problem with the above postulates, however, is that they failed to take into consideration one crucial
point––a taxpayer can raise both issues simultaneously.

Petitioner avers that there is now a trend wherein both the CTA and the CA disclaim jurisdiction over tax
cases: on the one hand, mere prayer for the declaration of a tax measure’s unconstitutionality or invalidity
before the CTA can result in a petition’s outright dismissal, and on the other hand, the CA will likewise
dismiss the same petition should it find that the primary issue is not the tax measure’s validity but the
assessment or taxability of the transaction or subject involved. To illustrate this point, petitioner cites the
assailed Resolution, thusly: Admittedly, in British American Tobacco vs. Camacho, the Supreme Court
has ruled that the determination of whether a specific rule or set of rules issued by an administrative
agency contravenes the law or the constitution is within the jurisdiction of the regular courts, not the
CTA.

xxxx
Petitioner essentially questions the CIR’s ruling that Petitioner’s sale of shares is a taxable donation under
Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2) and RMC 25-11 is merely
questioned incidentally since it was used by the CIR as bases for its unfavourable opinion. Clearly, the
Petition involves an issue on the taxability of the transaction rather than a direct attack on the
constitutionality of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-11. Thus, the instant Petition
properly pertains to the CTA under Sec. 7 of RA 9282.

As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers are now at a
quandary on what mode of appeal should be taken, to which court or agency it should be filed, and which
case law should be followed.

Petitioner’s above submission is specious.

In the recent case of City of Manila v. Grecia-Cuerdo,25 the Court en banc has ruled that the CTA now has
the power of certiorari in cases within its appellate jurisdiction. To elucidate:

The prevailing doctrine is that the authority to issue writs of certiorari involves the exercise of original
jurisdiction which must be expressly conferred by the Constitution or by law and cannot be implied from
the mere existence of appellate jurisdiction. Thus, x x x this Court has ruled against the jurisdiction of
courts or tribunals over petitions for certiorari on the ground that there is no law which expressly gives
these tribunals such power. Itmust be observed, however, that x x x these rulings pertain not to regular
courts but to tribunals exercising quasijudicial powers. With respect tothe Sandiganbayan, Republic Act
No. 8249 now provides that the special criminal court has exclusive original jurisdiction over petitions for
the issuance of the writs of mandamus, prohibition, certiorari, habeas corpus, injunctions, and other
ancillary writs and processes in aid of its appellate jurisdiction.

In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power to the Supreme
Court, in the exercise of its original jurisdiction, to issue writs of certiorari, prohibition and mandamus.
With respect to the Court of Appeals, Section 9 (1) of Batas Pambansa Blg. 129 (BP 129) gives the
appellate court, also in the exercise of its original jurisdiction, the power to issue, among others, a writ of
certiorari, whether or not in aid of its appellate jurisdiction. As to Regional Trial Courts, the power to
issue a writ of certiorari, in the exercise of their original jurisdiction, is provided under Section 21 of BP
129.

The foregoing notwithstanding, while there is no express grant of such power, with respect to the CTA,
Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that judicial power shall be vested
in one Supreme Court and in such lower courts as may be established by law and that judicial power
includes the duty of the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the
Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the
CTA includes that of determining whether or not there has been grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling
within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional
mandate, is vested with jurisdiction to issue writs of certiorari in these cases.

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must have the
authority to issue, among others, a writ of certiorari. In transferring exclusive jurisdiction over appealed
tax cases to the CTA, it can reasonably be assumed that the law intended to transfer also such power as is
deemed necessary, if not indispensable, in aid of such appellate jurisdiction. There is no perceivable
reason why the transfer should only be considered as partial, not total. (emphasis added)

Evidently, City of Manilacan be considered as a departure from Ursal in that in spite of there being no
express grant in law, the CTA is deemed granted with powers of certiorari by implication. Moreover, City
of Manila diametrically opposes British American Tobacco to the effect that it is now within the power of
the CTA, through its power of certiorari, to rule on the validity of a particular administrative ruleor
regulation so long as it is within its appellate jurisdiction. Hence, it can now rule not only on the propriety
of an assessment or tax treatment of a certain transaction, but also on the validity of the revenue
regulation or revenue memorandum circular on which the said assessment is based.

Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition not only
contested the applicability of Sec. 100 of the NIRC over the sales transaction but likewise questioned the
validity of Sec. 7 (c.2.2) of RR 06-08 and RMC 25-11 does not divest the CTA of its jurisdiction over the
controversy, contrary to petitioner's arguments.

The price difference is subject to donor's tax

Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the case, does
not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states
that the amount by which the fair market value of the property exceeded the value of the consideration
shall be deemed a gift.1âwphi1 Thus, even if there is no actual donation, the difference in price is
considered a donation by fiction of law.

Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the parameters
for determining the "fair market value" of a sale of stocks. Such issuance was made pursuant to the
Commissioner's power to interpret tax laws and to promulgate rules and regulations for their
implementation.

Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was being
applied retroactively in contravention to Sec. 246 of the NIRC.26 Instead, it merely called for the strict
application of Sec. 100, which was already in force the moment the NIRC was enacted.

WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of Appeals in CA-G.R.
SP No. 127984 dated May 23, 2013 and January 21, 2014 are hereby AFFIRMED.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

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

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

METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND
PLANTERS DEVELOPMENT BANK, Petitioners,
 RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL
CORPORATION, Petitioners,

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor, v. REPUBLIC OF THE

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

DECISION

LEONEN, J.:

The case involves the proper tax treatment of the discount or interest income arising from the P35 billion
worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001
(denominated as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds by the Caucus
of Development NGO Networks).

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

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

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

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

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

d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction,
enjoining Respondents, particularly the BIR and the BTr, from withholding or collecting 20% FWT on
the Government Bonds and the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well as
other related rulings issued by the BIR of similar tenor and import, pending the resolution by [the court]
of the merits of [the] Petition.3

Factual background

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

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

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

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

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

The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently
reiterated in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120 dated
September 29, 2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced that to be able to
determine whether the financial assets, i.e., debt instruments and securities are deposit substitutes, the “20
or more individual or corporate lenders” rule must apply. Moreover, the determination of the phrase “at
any one time” for purposes of determining the “20 or more lenders” is to be determined at the time of the
original issuance. Such being the case, the PEACe Bonds were not to be treated as deposit substitutes.

Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza
(Former Treasurer Edeza) questioned the propriety of issuing the bonds directly to a special purpose
vehicle considering that the latter was not a Government Securities Eligible Dealer (GSED).22 Former
Treasurer Edeza recommended that the issuance of the Bonds “be done through the ADAPS”23 and that
CODE-NGO “should get a GSED to bid in [sic] its behalf.”24chanRoblesvirtualLawlibrary

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25 (Public Offering)
dated October 9, 2001, the Bureau of Treasury announced that “P30.0B worth of 10-year Zero[-] Coupon
Bonds [would] be auctioned on October 16, 2001[.]”26 The notice stated that the Bonds “shall be issued
to not more than 19 buyers/lenders hence, the necessity of a manual auction for this maiden issue.”27 It
also required the GSEDs to submit their bids not later than 12 noon on auction date and to disclose in
their bid submissions the names of the institutions bidding through them to ensure strict compliance with
the 19 lender limit.28 Lastly, it stated that “the issue being limited to 19 lenders and while taxable shall
not be subject to the 20% final withholding [tax].”29chanRoblesvirtualLawlibrary

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

A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the “Auction
Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001” (Auction
Guidelines).32 The Auction Guidelines reiterated that the Bonds to be auctioned are “[n]ot subject to 20%
withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market (pursuant
to BIR Revenue Regulation No. 020 2001).”33 The Auction Guidelines, for the first time, also stated that
the Bonds are “[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September
2001)[.]”34chanRoblesvirtualLawlibrary

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

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

After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder
having tendered the lowest bids.42 Accordingly, on October 18, 2001, the Bureau of Treasury issued P35
billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately P10.17
billion,43resulting in a discount of approximately P24.83 billion.

Also on October 16, 2001, RCBC Capital entered into an underwriting agreement44 with CODE-NGO,
whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the
PEACe Bonds.45 RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution and sale
of the P35 billion Bonds at the price of P11,995,513,716.51.47 In Section 7(r) of the underwriting
agreement, CODE-NGO represented that “[a]ll income derived from the Bonds, inclusive of premium on
redemption and gains on the trading of the same, are exempt from all forms of taxation as confirmed by
Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001,
respectively.”48chanRoblesvirtualLawlibrary

RCBC Capital sold the Government Bonds in the secondary market for an issue price of
P11,995,513,716.51. Petitioners purchased the PEACe Bonds on different
dates.49chanRoblesvirtualLawlibrary

BIR rulings

On October 7, 2011, “the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the
Government Bonds and directing the BIR to withhold said final tax at the maturity thereof, [allegedly
without] consultation with Petitioners as bondholders, and without conducting any
hearing.”50chanRoblesvirtualLawlibrary

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

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

. . . .

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

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

On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal
Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final withholding tax due on the
discount or interest earned on the PEACe Bonds should “be imposed and withheld not only on
RCBC/CODE NGO but also [on] ‘all subsequent holders of the Bonds.’”58chanRoblesvirtualLawlibrary

On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent
application for a temporary restraining order and/or writ of preliminary injunction)59 before this court.

On October 18, 2011, this court issued a temporary restraining order (TRO)60 “enjoining the
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that
the 20% final withholding tax on interest income therefrom shall be withheld by the petitioner banks and
placed in escrow pending resolution of [the] petition.”61chanRoblesvirtualLawlibrary
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to
admit petition-in-intervention62 dated October 27, 2011, which was granted by this court on November
15, 2011.63chanRoblesvirtualLawlibrary

Meanwhile, on November 9, 2011, petitioners filed their “Manifestation with Urgent Ex Parte Motion to
Direct Respondents to Comply with the TRO.”64 They alleged that on the same day that the temporary
restraining order was issued, the Bureau of Treasury paid to petitioners and other bondholders the
amounts representing the face value of the Bonds, net however of the amounts corresponding to the 20%
final withholding tax on interest income, and that the Bureau of Treasury refused to release the amounts
corresponding to the 20% final withholding tax.65chanRoblesvirtualLawlibrary

On November 15, 2011, this court directed respondents to: “(1) SHOW CAUSE why they failed to
comply with the October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution in order that
petitioners may place the corresponding funds in escrow pending resolution of the
petition.”66chanRoblesvirtualLawlibrary

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

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

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

On February 22, 2012, respondents filed their consolidated comment74 on the petitions-in-intervention
filed by RCBC and RCBC Capital and CODE-NGO.

On November 27, 2012, petitioners filed their “Manifestation with Urgent Reiterative Motion (To Direct
Respondents to Comply with the Temporary Restraining Order).”75chanRoblesvirtualLawlibrary

On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative motion (to
direct respondents to comply with the temporary restraining order); and (b) required respondents to
comment thereon.76chanRoblesvirtualLawlibrary

Respondents’ comment77 was filed on April 15, 2013, and petitioners filed their reply78 on June 5,
2013.cralawred

Issues

The main issues to be resolved are:ChanRoblesVirtualawlibrary

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

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

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

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

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

Arguments of petitioners, RCBC and RCBC

Capital, and CODE-NGO

Petitioners argue that “[a]s the issuer of the Government Bonds acting through the BTr, the Government
is obligated . . . to pay the face value amount of PhP35 Billion upon maturity without any deduction
whatsoever.”79 They add that “the Government cannot impair the efficacy of the [Bonds] by arbitrarily,
oppressively and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven
(11) days before maturity and after several, consistent categorical declarations that such bonds are exempt
from the 20% FWT, without violating due process”80 and the constitutional principle on non-impairment
of contracts.81 Petitioners aver that at the time they purchased the Bonds, they had the right to expect that
they would receive the full face value of the Bonds upon maturity, in view of the 2001 BIR Rulings.82
“[R]egardless of whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied [on]
good faith thereon.”83chanRoblesvirtualLawlibrary

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

Petitioners further argue that their income from the Bonds is a “trading gain,” which is exempt from
income tax.88 They insist that “[t]hey are not lenders whose income is considered as ‘interest income or
yield’ subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue
Code]”89 because they “acquired the Government Bonds in the secondary or tertiary
market.”90chanRoblesvirtualLawlibrary
Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue
that the collection of the final tax was barred by prescription.91 They point out that under Section 7 of
DOF Department Order No. 141-95,92 the final withholding tax “should have been withheld at the time of
their issuance[.]”93 Also, under Section 203 of the 1997 National Internal Revenue Code, “internal
revenue taxes, such as the final tax, [should] be assessed within three (3) years after the last day
prescribed by law for the filing of the return.”94chanRoblesvirtualLawlibrary

Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice
to them was in violation of their property rights,95 their constitutional right to due process96 as well as
Section 246 of the 1997 National Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it
would also have “an adverse effect of colossal magnitude on the investors, both local and foreign, the
Philippine capital market, and most importantly, the country’s standing in the international commercial
community.”98 Petitioners explained that “unless enjoined, the government’s threatened refusal to pay the
full value of the Government Bonds will negatively impact on the image of the country in terms of
protection for property rights (including financial assets), degree of legal protection for lender’s rights,
and strength of investor protection.”99 They cited the country’s ranking in the World Economic Forum:
75th in the world in its 2011–2012 Global Competitiveness Index, 111thout of 142 countries worldwide
and 2nd to the last among ASEAN countries in terms of Strength of Investor Protection, and
105th worldwide and last among ASEAN countries in terms of Property Rights Index and Legal Rights
Index.100 It would also allegedly “send a reverberating message to the whole world that there is no
certainty, predictability, and stability of financial transactions in the capital markets[.]” 101 “[T]he
integrity of Government-issued bonds and notes will be greatly shattered and the credit of the Philippine
Government will suffer”102 if the sudden turnaround of the government will be allowed,103 and it will
reinforce “investors’ perception that the level of regulatory risk for contracts entered into by the
Philippine Government is high,”104 thus resulting in higher interest rate for government-issued debt
instruments and lowered credit rating.105chanRoblesvirtualLawlibrary

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

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

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

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

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

Arguments of respondents

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

Respondents further take issue on the timeliness of the filing of the petition and petitions-in-
intervention.124 They argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners are
indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and the
petition insofar as it seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to
Rule 65, Section 4.125chanRoblesvirtualLawlibrary

Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading
gain but interest income subject to income tax.126 They explain that “[w]ith the payment of the PhP35
Billion proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to
about PhP24.8 Billion as payment for interest. Such interest is clearly an income of the Petitioners
considering that the same is a flow of wealth and not merely a return of capital – the capital initially
invested in the Bonds being approximately PhP10.2 Billion[.]”127chanRoblesvirtualLawlibrary

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

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

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

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

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

Finally, respondents submit that “there are a number of variables and factors affecting a capital
market.”146 “[C]apital market itself is inherently unstable.”147 Thus, “[p]etitioners’ argument that the
20% final withholding tax . . . will wreak havoc on the financial stability of the country is a mere
supposition that is not a justiciable issue.”148chanRoblesvirtualLawlibrary

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

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

Summary of arguments

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

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

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

a) It will violate the contract clause;

o It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds,
represented by the government as an inducement and important consideration for the
purchase of the Bonds;

b) It constitutes deprivation of property without due process because there was no prior notice to
bondholders and hearing and publication;

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

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

organizations and development of the capital market; and

e) The assessment had already prescribed.

Respondents counter that:

1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the
challenged 2011 BIR Ruling:
 a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of
Internal Revenue’s power to interpret the provisions of the 1997 National Internal Revenue Code
and other tax laws;

b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in
previously issued BIR Ruling Nos. 007-2004, DA-491-04, and 008-05, which have already
effectively abandoned or revoked the 2001 BIR Rulings;

c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings especially
when the latter’s rulings are not in harmony with the law; and

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

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

a. Petitioners had the basic remedy of filing a claim for refund of the 20% final withholding tax they
allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of
courts.

Court’s ruling

Procedural Issues

Non-exhaustion of administrative
remedies proper

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

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

Thus, it was held that “[i]f superior administrative officers [can] grant the relief prayed for, [then] special
civil actions are generally not entertained.”153 The remedy within the administrative machinery must be
resorted to first and pursued to its appropriate conclusion before the court’s judicial power can be
sought.154chanRoblesvirtualLawlibrary

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative

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

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

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

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

Doctrine on hierarchy of courts

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

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

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

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

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

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

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

. . . .

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

In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized
the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue,
thus:chanroblesvirtuallawlibrary

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

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

. . . .

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

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

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

....

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:chanroblesvirtuallawlibrary

“Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but
merely an attempt to nullify General Circular No. V-148, which does not adjudicate or settle any
controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the
collection of taxes and license fees to adhere strictly to the interpretation given by the defendant to the
statutory provisions abovementioned, as set forth in the Circular. The same incorporates, therefore, a
decision of the Collector of Internal Revenue (now Commissioner of Internal Revenue) on the manner of
enforcement of the said statute, the administration of which is entrusted by law to the Bureau of Internal
Revenue. As such, it comes within the purview of Republic Act No. 1125, Section 7 of which provides
that the Court of Tax Appeals ‘shall exercise exclusive appellate jurisdiction to review by appeal . . .
decisions of the Collector of Internal Revenue in . . . matters arising under the National Internal Revenue
Code or other law or part of the law administered by the Bureau of Internal Revenue.’”163

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

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of
Interior and Local Government,165 this court noted that the petition for prohibition was filed directly
before it “in disregard of the rule on hierarchy of courts. However, [this court] opt[ed] to take primary
jurisdiction over the . . . petition and decide the same on its merits in view of the significant constitutional
issues raised by the parties dealing with the tax treatment of cooperatives under existing laws and in the
interest of speedy justice and prompt disposition of the matter.”166chanRoblesvirtualLawlibrary

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

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

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

Substantive issues

Tax treatment of deposit substitutes

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

SEC. 24. Income Tax Rates.

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

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

Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)

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

. . . .

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

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

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

(A) Tax on Resident Foreign Corporations. -

. . . .

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

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

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

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

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

SECTION 2. Definitions of Terms. . . .

(h) “Deposit substitutes” shall mean –

. . . .

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

(b) All borrowings of the national and local government and its instrumentalities including the Central
Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificates
of indebtedness and similar instruments.

(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment
companies, trust companies, including the trust department of banks and investment houses, evidenced by
deposit substitutes instruments. (Emphasis supplied)

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

SEC. 22. Definitions - When used in this Title:

. . . .

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

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

20-lender rule

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

Financial markets

Financial markets provide the channel through which funds from the surplus units (households and
business firms that have savings or excess funds) flow to the deficit units (mainly business firms and
government that need funds to finance their operations or growth). They bring suppliers and users of
funds together and provide the means by which the lenders transform their funds into financial assets, and
the borrowers receive these funds now considered as their financial liabilities. The transfer of funds is
represented by a security, such as stocks and bonds. Fund suppliers earn a return on their investment; the
return is necessary to ensure that funds are supplied to the financial
markets.172chanRoblesvirtualLawlibrary

“The financial markets that facilitate the transfer of debt securities are commonly classified by the
maturity of the securities[,]”173 namely: (1) the money market, which facilitates the flow of short-term
funds (with maturities of one year or less); and (2) the capital market, which facilitates the flow of long-
term funds (with maturities of more than one year).174chanRoblesvirtualLawlibrary

Whether referring to money market securities or capital market securities, transactions occur either in
the primary market or in the secondary market.175 “Primary markets facilitate the issuance of new
securities. Secondary markets facilitate the trading of existing securities, which allows for a change in
the ownership of the securities.”176 The transactions in primary markets exist between issuers and
investors, while secondary market transactions exist among investors.177chanRoblesvirtualLawlibrary

“Over time, the system of financial markets has evolved from simple to more complex ways of carrying
out financial transactions.”178 Still, all systems perform one basic function: the quick mobilization of
money from the lenders/investors to the borrowers.179chanRoblesvirtualLawlibrary
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect
finance.180chanRoblesvirtualLawlibrary

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

In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby
reducing information costs.184 A broker185 is “an individual or financial institution who provides
information concerning possible purchases and sales of securities. Either a buyer or a seller of securities
may contact a broker, whose job is simply to bring buyers and sellers together.”186 Adealer187 “also
serves as a middleman between buyers and sellers, but the dealer actually acquires the seller’s securities
in the hope of selling them at a later time at a more favorable price.”188 Frequently, “a dealer will split up
a large issue of primary securities into smaller units affordable by . . . buyers . . . and thereby expand the
flow of savings into investment.”189 In semidirect financing, “[t]he ultimate lender still winds up holding
the borrower’s securities, and therefore the lender must be willing to accept the risk, liquidity, and
maturity characteristics of the borrower’s [debt security]. There still must be a fundamental coincidence
of wants and needs between [lenders and borrowers] for semidirect financial transactions to take
place.”190chanRoblesvirtualLawlibrary

“The limitations of both direct and semidirect finance stimulated the development of indirect financial
transactions, carried out with the help of financial intermediaries”191 or financial institutions, like banks,
investment banks, finance companies, insurance companies, and mutual funds.192 Financial
intermediaries accept funds from surplus units and channel the funds to deficit units.193 “Depository
institutions [such as banks] accept deposits from surplus units and provide credit to deficit units through
loans and purchase of [debt] securities.”194 Nondepository institutions, like mutual funds, issue securities
of their own (usually in smaller and affordable denominations) to surplus units and at the same time
purchase debt securities of deficit units.195 “By pooling the resources of [small savers, a financial
intermediary] can service the credit needs of large firms simultaneously.”196chanRoblesvirtualLawlibrary

The financial market, therefore, is an agglomeration of financial transactions in securities performed by

market participants that works to transfer the funds from the surplus units (or investors/lenders) to those
who need them (deficit units or borrowers).

Meaning of “at any one time”

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

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

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

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

 3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market
usually through a broker or dealer; or

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

individual or corporate lenders in the secondary market.

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

For debt instruments that are

not deposit substitutes, regular
income tax applies

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

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

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

This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,200 explained the
rationale behind the withholding tax system:chanroblesvirtuallawlibrary

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

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

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

Interest income v. gains from sale or redemption

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

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

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

The Bureau of Internal

Revenue rulings

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

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

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

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

In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the
nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner of
Internal Revenue because it was contrary to the express provision of Section 230 of the 1977 National
Internal Revenue Code and, hence, “[cannot] be given weight for to do so would, in effect, amend the
statute.”212 Thus:chanroblesvirtuallawlibrary

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

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

This court further held that “[a] memorandum-circular of a bureau head could not operate to vest a
taxpayer with a shield against judicial action [because] there are no vested rights to speak of respecting a
wrong construction of the law by the administrative officials and such wrong interpretation could not
place the Government in estoppel to correct or overrule the same.”214chanRoblesvirtualLawlibrary

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215 this court nullified
Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending
investor's tax on pawnshops.216 It was held that “the [Commissioner] cannot, in the exercise of [its
interpretative] power, issue administrative rulings or circulars not consistent with the law sought to be
applied. Indeed, administrative issuances must not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out. Only Congress can repeal or amend the
law.”217chanRoblesvirtualLawlibrary

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

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

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

Tax treatment of income derived

from the PEACe Bonds

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

1. The issuance of the P35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at P10.2
billion; and

2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe
Bonds to undisclosed investors at P11.996 billion.

It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe
Bonds were issued at the time of origination. However, a reading of the underwriting agreement221and
RCBC term sheet222 reveals that the settlement dates for the sale and distribution by RCBC Capital (as
underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of
approximately P11.996 would fall on the same day, October 18, 2001, when the PEACe Bonds were
supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire P10.2 billion borrowing
received by the Bureau of Treasury in exchange for the P35 billion worth of PEACe Bonds was sourced
directly from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the
PEACe Bonds — all at the time of origination or issuance. At this point, however, we do not know as to
how many investors the PEACe Bonds were sold to by RCBC Capital.

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

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

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

The collection of tax is not

barred by prescription

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

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

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

Reiterative motion on the temporary restraining order

Respondents’ withholding of the

20% final withholding tax on
October 18, 2011 was justified

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

Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized
mode of service of pleadings, court orders, or processes. Moreover, the news reports227cited by
petitioners were posted minutes before the close of office hours or late in the evening of October 18,
2011, and they did not give the exact contents of the temporary restraining order.

“[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that
such injunction or order was served on him personally or that he had notice of the issuance or making of
such injunction or order.”228chanRoblesvirtualLawlibrary

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

Respondents’ retention of the

amounts withheld is a defiance of
the temporary restraining order

Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to the 20%
final withholding tax in order that it may be placed in escrow as directed by this court constitutes a
defiance of this court’s temporary restraining order.231chanRoblesvirtualLawlibrary

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

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

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

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

Account Code Debit Amount Credit Amount

Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) – 10 yr
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002 4,966,207,796.41
To record redemption of 10yr Zero
coupon (Peace Bond) net of the 20%
final withholding tax pursuant to BIR
Ruling No. 378-2011, value date,
October 18, 2011 per BTr letter
authority and BSP Bank Statements.

The foregoing journal entry, however, does not prove that the amount of P4,966,207,796.41, representing
the 20% final withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of
Internal Revenue on October 18, 2011. The entries merely show that the monies corresponding to 20%
final withholding tax was set aside for remittance to the Bureau of Internal Revenue.

We recall the November 15, 2011 resolution issued by this court directing respondents to “show cause
why they failed to comply with the [TRO]; and [to] comply with the [TRO] in order that petitioners may
place the corresponding funds in escrow pending resolution of the petition.”245 The 20% final
withholding tax was effectively placed in custodia legis when this court ordered the deposit of the amount
in escrow. The Bureau of Treasury could still release the money withheld to petitioners for the latter to
place in escrow pursuant to this court’s directive. There was no legal obstacle to the release of the 20%
final withholding tax to petitioners.

Congressional appropriation is not required for the servicing of public debts in view of the automatic
appropriations clause embodied in Presidential Decree Nos. 1177 and 1967.

Section 31 of Presidential Decree No. 1177 provides:chanroblesvirtuallawlibrary

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

Section 1 of Presidential Decree No. 1967 states:chanroblesvirtuallawlibrary

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

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

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

which were relent to public or private institutions;

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

Republic of the Philippines;
d. other public or private institutions and guaranteed by government-owned or controlled corporations
and/or government financial institutions.

The amount of P35 billion that includes the monies corresponding to 20% final withholding tax is a
lawful and valid obligation of the Republic under the Government Bonds. Since said obligation
represents a public debt, the release of the monies requires no legislative appropriation.

Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of
Government Bonds may be lawfully taken from the continuing appropriation out of any monies in the
National Treasury and is not required to be the subject of another appropriation
legislation:chanroblesvirtuallawlibrary

SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in the National Treasury not
otherwise appropriated, or from any sinking funds provided for the purpose by law, any interest falling
due, or accruing, on any portion of the public debt authorized by law. He shall also cause to be paid out
of any such money, or from any such sinking funds the principal amount of any obligations which have
matured, or which have been called for redemption or for which redemption has been demanded in
accordance with terms prescribed by him prior to date of issue . . . In the case of interest-bearing
obligations, he shall pay not less than their face value; in the case of obligations issued at a discount he
shall pay the face value at maturity; or if redeemed prior to maturity, such portion of the face value as is
prescribed by the terms and conditions under which such obligations were originally issued. There are
hereby appropriated as a continuing appropriation out of any moneys in the National Treasury not
otherwise appropriated, such sums as may be necessary from time to time to carry out the provisions of
this section. The Secretary of Finance shall transmit to Congress during the first month of each regular
session a detailed statement of all expenditures made under this section during the calendar year
immediately preceding.

Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds
shall be made through the National Treasury’s account with the Bangko Sentral ng Pilipinas, to
wit:chanroblesvirtuallawlibrary

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

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

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

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

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

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

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

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders
the amount corresponding to the 20% final withholding tax that it withheld on October 18, 2011.

Sereno, C.J., Velasco, Jr., Leonardo-De Castro, Peralta, Bersamin, Del Castillo, Villarama, Jr., Perez,
Mendoza, Reyes, , and Perlas-Bernabe, JJ., concur.
Carpio, J., no part, former lawfirm was aprevious counsel to a party.
Brion, J., on leave.
Jardeleza, J., no part, prior action Solgen.
_____________________________________________________________________________

COMMISSIONER OF INTERNAL G.R. No. 162155

REVENUE and ARTURO V.
PARCERO in his official
capacity as Revenue District
Officer of Revenue District
No. 049 (Makati),
Petitioners, Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ.

PRIMETOWN PROPERTY
GROUP, INC.,
Respondent. Promulgated:
August 28, 2007

x-----------------------------------------x

DECISION
CORONA, J.:

This petition for review on certiorari[1] seeks to set aside the August 1, 2003 decision[2] of the Court of

Appeals (CA) in CA-G.R. SP No. 64782 and its February 9, 2004 resolution denying reconsideration.[3]

On March 11, 1999, Gilbert Yap, vice chair of respondent Primetown Property Group, Inc., applied for

the refund or credit of income tax respondent paid in 1997. In Yap's letter to petitioner revenue district

officer Arturo V. Parcero of Revenue District No. 049 (Makati) of the Bureau of Internal Revenue

(BIR),[4] he explained that the increase in the cost of labor and materials and difficulty in obtaining

financing for projects and collecting receivables caused the real estate industry to slowdown.[5] As a

consequence, while business was good during the first quarter of 1997, respondent suffered losses

amounting to P71,879,228 that year.[6]

According to Yap, because respondent suffered losses, it was not liable for income taxes. [7] Nevertheless,

respondent paid its quarterly corporate income tax and remitted creditable withholding tax from real

estate sales to the BIR in the total amount of P26,318,398.32.[8] Therefore, respondent was entitled to tax

refund or tax credit.[9]

On May 13, 1999, revenue officer Elizabeth Y. Santos required respondent to submit additional

documents to support its claim.[10] Respondent complied but its claim was not acted upon. Thus, on April

14, 2000, it filed a petition for review[11] in the Court of Tax Appeals (CTA).

On December 15, 2000, the CTA dismissed the petition as it was filed beyond the two-year prescriptive

period for filing a judicial claim for tax refund or tax credit.[12] It invoked Section 229 of the National

Internal Revenue Code (NIRC):

Sec. 229. Recovery of Taxes 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 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)

The CTA found that respondent filed its final adjusted return on April 14, 1998. Thus, its right to claim a

refund or credit commenced on that date.[13]

The tax court applied Article 13 of the Civil Code which states:

Art. 13. When the law speaks of years, months, days or nights, it shall be understood
that years are of three hundred sixty-five days each; months, of thirty days; days, of
twenty-four hours, and nights from sunset to sunrise.

If the months are designated by their name, they shall be computed by the number of days
which they respectively have.

In computing a period, the first day shall be excluded, and the last included. (emphasis
supplied)

Thus, according to the CTA, the two-year prescriptive period under Section 229 of the NIRC for the filing

of judicial claims was equivalent to 730 days. Because the year 2000 was a leap year, respondent's

petition, which was filed 731 days[14] after respondent filed its final adjusted return, was filed beyond the

reglementary period.[15]

Respondent moved for reconsideration but it was denied.[16] Hence, it filed an appeal in the CA.[17]

On August 1, 2003, the CA reversed and set aside the decision of the CTA. [18] It ruled that Article 13 of

the Civil Code did not distinguish between a regular year and a leap year. According to the CA:

The rule that a year has 365 days applies, notwithstanding the fact that a particular year is
a leap year.[19]
In other words, even if the year 2000 was a leap year, the periods covered by April 15, 1998 to April 14,

1999 and April 15, 1999 to April 14, 2000 should still be counted as 365 days each or a total of 730 days.

A statute which is clear and explicit shall be neither interpreted nor construed.[20]

Petitioners moved for reconsideration but it was denied.[21] Thus, this appeal.

Petitioners contend that tax refunds, being in the nature of an exemption, should be strictly construed

against claimants.[22] Section 229 of the NIRC should be strictly appliedagainst respondent inasmuch as it

has been consistently held that the prescriptive period (for the filing of tax refunds and tax credits) begins

to run on the day claimants file their final adjusted returns.[23] Hence, the claim should have been filed on

or before April 13, 2000 or within 730 days, reckoned from the time respondent filed its final adjusted

return.

The conclusion of the CA that respondent filed its petition for review in the CTA within the two-year

prescriptive period provided in Section 229 of the NIRC is correct. Its basis, however, is not.

The rule is that the two-year prescriptive period is reckoned from the filing of the final adjusted

return.[24] But how should the two-year prescriptive period be computed?

As already quoted, Article 13 of the Civil Code provides that when the law speaks of a year, it is

understood to be equivalent to 365 days. In National Marketing Corporation v. Tecson,[25] we ruled that a

year is equivalent to 365 days regardless of whether it is a regular year or a leap year.[26]

However, in 1987, EO[27] 292 or the Administrative Code of 1987 was enacted. Section 31, Chapter VIII,

Book I thereof provides:

Sec. 31. Legal Periods. Year shall be understood to be twelve calendar

months; month of thirty days, unless it refers to a specific calendar month in which case
it shall be computed according to the number of days the specific month contains; day, to
a day of twenty-four hours and; night from sunrise to sunset. (emphasis supplied)
A calendar month is a month designated in the calendar without regard to the number of days it may

contain.[28] It is the period of time running from the beginning of a certain numbered day up to, but not

including, the corresponding numbered day of the next month, and if there is not a sufficient number of

days in the next month, then up to and including the last day of that month.[29] To illustrate, one calendar

month from December 31, 2007 will be from January 1, 2008 to January 31, 2008; one calendar month

from January 31, 2008 will be from February 1, 2008 until February 29, 2008.[30]

A law may be repealed expressly (by a categorical declaration that the law is revoked and abrogated by

another) or impliedly (when the provisions of a more recent law cannot be reasonably reconciled with the

previous one).[31] Section 27, Book VII (Final Provisions) of the Administrative Code of 1987 states:

Sec. 27. Repealing clause. All laws, decrees, orders, rules and regulation, or portions
thereof, inconsistent with this Code are hereby repealed or modified accordingly.

A repealing clause like Sec. 27 above is not an express repealing clause because it fails to identify or

designate the laws to be abolished.[32] Thus, the provision above onlyimpliedly repealed all laws

inconsistent with the Administrative Code of 1987.

Implied repeals, however, are not favored. An implied repeal must have been clearly and unmistakably

intended by the legislature. The test is whether the subsequent law encompasses entirely the subject

matter of the former law and they cannot be logically or reasonably reconciled.[33]

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of

1987 deal with the same subject matter the computation of legal periods. Under the Civil Code, a year is

equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of

1987, however, a year is composed of 12 calendar months. Needless to state, under the Administrative

Code of 1987, the number of days is irrelevant.

There obviously exists a manifest incompatibility in the manner of computing legal periods under the

Civil Code and the Administrative Code of 1987. For this reason, we hold that Section 31, Chapter VIII,

Book I of the Administrative Code of 1987, being the more recent law, governs the computation of legal

periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the two-year

prescriptive period (reckoned from the time respondent filed its final adjusted return[34] on April 14, 1998)

consisted of 24 calendar months, computed as follows:

Year 1st calendar April 15, 1998 to May 14, 1998

1 month
2nd calendar May 15, 1998 to June 14, 1998
month
3rd calendar June 15, 1998 to July 14, 1998
month
4th calendar July 15, 1998 to August 14, 1998
month
5th calendar August 15, 1998 to September 14,
month 1998
6th calendar September 15, to October 14, 1998
month 1998
7th calendar October 15, 1998 to November 14,
month 1998
8th calendar November 15, to December 14, 1998
month 1998
9th calendar December 15, to January 14, 1999
month 1998
10th calendar January 15, 1999 to February 14, 1999
month
11th calendar February 15, 1999 to March 14, 1999
month
12th calendar March 15, 1999 to April 14, 1999
month
Year 13th calendar April 15, 1999 to May 14, 1999
2 month
14th calendar May 15, 1999 to June 14, 1999
month
15th calendar June 15, 1999 to July 14, 1999
month
16th calendar July 15, 1999 to August 14, 1999
month
17th calendar August 15, 1999 to September 14,
month 1999
18th calendar September 15, to October 14, 1999
 month 1999
19th calendar October 15, 1999 to November 14,
month 1999
20th calendar November 15, to December 14, 1999
month 1999
21st calendar December 15, to January 14, 2000
month 1999
22nd calendar January 15, 2000 to February 14, 2000
month
23rd calendar February 15, 2000 to March 14, 2000
month
24th calendar March 15, 2000 to April 14, 2000
month

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the

24th calendar month from the day respondent filed its final adjusted return. Hence, it was filed within the

reglementary period.

Accordingly, the petition is hereby DENIED. The case is REMANDED to the Court of Tax Appeals

which is ordered to expeditiously proceed to hear C.T.A. Case No. 6113 entitled Primetown Property

Group, Inc. v. Commissioner of Internal Revenue and Arturo V. Parcero.

No costs.

SO ORDERED.

COMMISSIONER OF INTERNAL G.R. No. 185371

REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,

NACHURA,
PERALTA,
- versus - ABAD, and
MENDOZA, JJ.

Promulgated:
METRO STAR SUPERAMA, INC.,
Respondent. December 8, 2010
x -------------------------------------------------------------------------------------- x

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 petitioners 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 petitioners 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 petitioners 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 P292,874.16.

On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3,
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 returns 2,400.00 18,400.00 136,731.01
TOTAL P 291,069.09

WITHHOLDING TAX
Compensation 2,772.91
Expanded 110,103.92
Total Tax Due P 112,876.83
Less: Tax Withheld 111,848.27
Deficiency Withholding Tax P 1,028.56
Add: 20% Interest p.a. 576.51
Compromise Penalty 200.00
TOTAL P 1,805.07

*Expanded Withholding Tax P1,949,334.25 x 5% 97,466.71

Film Rental 10,000.25 x 10% 1,000.00
Audit Fee 193,261.20 x 5% 9,663.00
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 petitioners 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;

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 onApril 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.
 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 datedApril 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 latters 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 Bancdisposed:

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, 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. 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 taxpayers 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 governments
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 Stars chairman dated April 29, 2002, that stated that he had received
the FAN datedApril 3, 2002, but not the PAN; that he was willing to pay the tax as computed by the CIR;
and that he just 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 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 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

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
Stars 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 CIRs findings was changed in
1998 toinforming 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 Stars 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 citizens 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 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 ones 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.
LASCONA LAND CO., INC., G.R. No. 171251
Petitioner, Present:

VELASCO, JR., J., Chairperson,

PERALTA,
- versus - ABAD,
VILLARAMA, JR.,* and
MENDOZA, JJ.

Promulgated:
COMMISSIONER OF INTERNAL
REVENUE, March 5, 2012

Respondent.
x----------------------------------------------------------------------------------------x

DECISION

PERALTA, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the
reversal of the Decision[1] dated October 25, 2005 and Resolution[2]dated January 20, 2006 of the Court of
Appeals (CA) in CA-G.R. SP No. 58061 which set aside the Decision[3] dated January 4, 2000 and
Resolution[4] dated March 3, 2000 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5777 and
declared Assessment Notice No. 0000047-93-407 dated March 27, 1998 to be final, executory and
demandable.
The facts, as culled from the records, are as follows:

On March 27, 1998, the Commissioner of Internal Revenue (CIR) issued Assessment Notice No.
0000047-93-407[5] against Lascona Land Co., Inc. (Lascona) informing the latter of its alleged deficiency
income tax for the year 1993 in the amount of P753,266.56.

Consequently, on April 20, 1998, Lascona filed a letter protest, but was denied by Norberto R. Odulio,
Officer-in-Charge (OIC), Regional Director, Bureau of Internal Revenue, Revenue Region No.
8, Makati City, in his Letter[6] dated March 3, 1999, which reads, thus:
 xxxx

Subject: LASCONA LAND CO., INC.

1993 Deficiency Income Tax

Madam,

Anent the 1993 tax case of subject taxpayer, please be informed that while we agree with
the arguments advanced in your letter protest, we regret, however, that we cannot give
due course to your request to cancel or set aside the assessment notice issued to your
client for the reason that the case was not elevated to the Court of Tax Appeals as
mandated by the provisions of the last paragraph of Section 228 of the Tax Code. By
virtue thereof, the said assessment notice has become final, executory and demandable.

In view of the foregoing, please advise your client to pay its 1993 deficiency income tax
liability in the amount of P753,266.56.

x x x x (Emphasis ours)

On April 12, 1999, Lascona appealed the decision before the CTA and was docketed as C.T.A. Case No.
5777. Lascona alleged that the Regional Director erred in ruling that the failure to appeal to the CTA
within thirty (30) days from the lapse of the 180-day period rendered the assessment final and executory.

The CIR, however, maintained that Lascona's failure to timely file an appeal with the CTA after the lapse
of the 180-day reglementary period provided under Section 228 of the National Internal Revenue Code
(NIRC) resulted to the finality of the assessment.

On January 4, 2000, the CTA, in its Decision,[7] nullified the subject assessment. It held that in cases of
inaction by the CIR on the protested assessment, Section 228 of the NIRC provided two options for the
taxpayer: (1) appeal to the CTA within thirty (30) days from the lapse of the one hundred eighty (180)-
day period, or (2) wait until the Commissioner decides on his protest before he elevates the case.

The CIR moved for reconsideration. It argued that in declaring the subject assessment as final, executory
and demandable, it did so pursuant to Section 3 (3.1.5) of Revenue Regulations No. 12-99
dated September 6, 1999 which reads, thus:

If the Commissioner or his duly authorized representative fails to act on the taxpayer's
protest within one hundred eighty (180) days from date of submission, by the taxpayer, of
the required documents in support of his protest, the taxpayer may appeal to the Court of
Tax Appeals within thirty (30) days from the lapse of the said 180-day period; otherwise,
the assessment shall become final, executory and demandable.
On March 3, 2000, the CTA denied the CIR's motion for reconsideration for lack of merit.[8] The CTA
held that Revenue Regulations No. 12-99 must conform to Section 228 of the NIRC. It pointed out that
the former spoke of an assessment becoming final, executory and demandable by reason of the inaction
by the Commissioner, while the latter referred to decisions becoming final, executory and demandable
should the taxpayer adversely affected by the decision fail to appeal before the CTA within the prescribed
period.Finally, it emphasized that in cases of discrepancy, Section 228 of the NIRC must prevail over the
revenue regulations.

Dissatisfied, the CIR filed an appeal before the CA.[9]

In the disputed Decision dated October 25, 2005, the Court of Appeals granted the CIR's petition and set
aside the Decision dated January 4, 2000 of the CTA and its Resolution dated March 3, 2000. It further
declared that the subject Assessment Notice No. 0000047-93-407 dated March 27, 1998 as final,
executory and demandable.

Lascona moved for reconsideration, but was denied for lack of merit.

Thus, the instant petition, raising the following issues:

I
THE HONORABLE COURT HAS, IN THE REVISED RULES OF COURT OF TAX
APPEALS WHICH IT RECENTLY PROMULGATED, RULED THAT AN APPEAL
FROM THE INACTION OF RESPONDENT COMMISSIONER IS NOT
MANDATORY.
II
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE
ASSESSMENT HAS BECOME FINAL AND DEMANDABLE BECAUSE,
ALLEGEDLY, THE WORD DECISION IN THE LAST PARAGRAPH OF SECTION
228 CANNOT BE STRICTLY CONSTRUED AS REFERRING ONLY TO THE
DECISION PER SE OF THE COMMISSIONER, BUT SHOULD ALSO BE
CONSIDERED SYNONYMOUS WITH AN ASSESSMENT WHICH HAS BEEN
PROTESTED, BUT THE PROTEST ON WHICH HAS NOT BEEN ACTED UPON BY
THE COMMISSIONER.[10]

In a nutshell, the core issue to be resolved is: Whether the subject assessment has become final, executory
and demandable due to the failure of petitioner to file an appeal before the CTA within thirty (30) days
from the lapse of the One Hundred Eighty (180)-day period pursuant to Section 228 of the NIRC.

Petitioner Lascona, invoking Section 3,[11] Rule 4 of the Revised Rules of the Court of Tax
Appeals, maintains that in case of inaction by the CIR on the protested assessment, it has the option to
either: (1) appeal to the CTA within 30 days from the lapse of the 180-day period; or (2) await the final
decision of the Commissioner on the disputed assessment even beyond the 180-day period − in which
case, the taxpayer may appeal such final decision within 30 days from the receipt of the said decision.
Corollarily, petitioner posits that when the Commissioner failed to act on its protest within the 180-day
period, it had the option to await for the final decision of the Commissioner on the protest, which it did.
The petition is meritorious.

Section 228 of the NIRC is instructional as to the remedies of a taxpayer in case of the inaction of the
Commissioner on the protested assessment, to wit:

SEC. 228. Protesting of Assessment. − x x x

xxxx

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 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 (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. (Emphasis supplied).

Respondent, however, insists that in case of the inaction by the Commissioner on the protested
assessment within the 180-day reglementary period, petitioner should have appealed the inaction to the
CTA. Respondent maintains that due to Lascona's failure to file an appeal with the CTA after the lapse of
the 180-day period, the assessment became final and executory.

We do not agree.

In RCBC v. CIR,[12] the Court has held that in case the Commissioner failed to act on the disputed
assessment within the 180-day period from date of submission of documents, a taxpayer can either: (1)
file a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180-day
period; or (2) await the final decision of the Commissioner on the disputed assessments and appeal such
final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision.[13]

This is consistent with Section 3 A (2), Rule 4 of the Revised Rules of the Court of Tax Appeals, [14] to
wit:

SEC. 3. Cases within the jurisdiction of the Court in Divisions. The Court in
Divisions shall exercise:

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases

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

(2) Inaction by the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code
or other applicable law provides a specific period for action: Provided,
that in case of disputed assessments, the inaction of the
Commissioner of Internal Revenue within the one hundred eighty
day-period under Section 228 of the National Internal revenue Code
shall be deemed a denial for purposes of allowing the taxpayer to
appeal his case to the Court and does not necessarily constitute a
formal decision of the Commissioner of Internal Revenue on the tax
case; Provided, further, that should the taxpayer opt to await the
final decision of the Commissioner of Internal Revenue on the
disputed assessments beyond the one hundred eighty day-period
abovementioned, the taxpayer may appeal such final decision to the
Court under Section 3(a), Rule 8 of these Rules; and Provided, still
further, that in the case of claims for refund of taxes erroneously or
illegally collected, the taxpayer must file a petition for review with the
Court prior to the expiration of the two-year period under Section 229 of
the National Internal Revenue Code;
(Emphasis ours)

In arguing that the assessment became final and executory by the sole reason that petitioner failed to
appeal the inaction of the Commissioner within 30 days after the 180-day reglementary period,
respondent, in effect, limited the remedy of Lascona, as a taxpayer, under Section 228 of the NIRC to just
one, that is - to appeal the inaction of the Commissioner on its protested assessment after the lapse of the
180-day period. This is incorrect.

As early as the case of CIR v. Villa,[15] it was already established that the word "decisions" in paragraph 1,
Section 7 of Republic Act No. 1125, quoted above, has been interpreted to mean the decisions of the
Commissioner of Internal Revenue on the protest of the taxpayer against the assessments. Definitely, said
word does not signify the assessment itself. We quote what this Court said aptly in a previous case:

In the first place, we believe the respondent court erred in holding that the
assessment in question is the respondent Collector's decision or ruling appealable to it,
and that consequently, the period of thirty days prescribed by section 11 of Republic Act
No. 1125 within which petitioner should have appealed to the respondent court must be
counted from its receipt of said assessment. Where a taxpayer questions an assessment
and asks the Collector to reconsider or cancel the same because he (the taxpayer)
believes he is not liable therefor, the assessment becomes a "disputed assessment"
that the Collector must decide, and the taxpayer can appeal to the Court of Tax
Appeals only upon receipt of the decision of the Collector on the disputed
assessment, . . . [16]

Therefore, as in Section 228, when the law provided for the remedy to appeal the inaction of the CIR, it
did not intend to limit it to a single remedy of filing of an appeal after the lapse of the 180-day prescribed
period. Precisely, when a taxpayer protested an assessment, he naturally expects the CIR to decide either
positively or negatively. A taxpayer cannot be prejudiced if he chooses to wait for the final decision of the
CIR on the protested assessment. More so, because the law and jurisprudence have always contemplated a
scenario where the CIR will decide on the protested assessment.

It must be emphasized, however, that in case of the inaction of the CIR on the protested assessment, while
we reiterate − the taxpayer has two options, either: (1) file a petition for review with the CTA within 30
days after the expiration of the 180-day period; or (2) await the final decision of the Commissioner on the
disputed assessment and appeal such final decision to the CTA within 30 days after the receipt of a copy
of such decision, these options are mutually exclusive and resort to one bars the application of the
other.

Accordingly, considering that Lascona opted to await the final decision of the Commissioner on the
protested assessment, it then has the right to appeal such final decision to the Court by filing a petition for
review within thirty days after receipt of a copy of such decision or ruling, even after the expiration of the
180-day period fixed by law for the Commissioner of Internal Revenue to act on the disputed
assessments.[17] Thus, Lascona, when it filed an appeal on April 12, 1999 before the CTA, after its receipt
of the Letter[18] dated March 3, 1999 on March 12, 1999, the appeal was timely made as it was filed
within 30 days after receipt of the copy of the decision.

Finally, the CIR should be reminded that taxpayers cannot be left in quandary by its inaction on the
protested assessment. It is imperative that the taxpayers are informed of its action in order that the
taxpayer should then at least be able to take recourse to the tax court at the opportune time. As correctly
pointed out by the tax court:

x x x to adopt the interpretation of the respondent will not only sanction inefficiency, but
will likewise condone the Bureau's inaction. This is especially true in the instant case
when despite the fact that respondent found petitioner's arguments to be in order, the
assessment will become final, executory and demandable for petitioner's failure to appeal
before us within the thirty (30) day period.[19]

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.[20] Thus, 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.[21]

WHEREFORE, the petition is GRANTED. The Decision dated October 25, 2005 and the
Resolution dated January 20, 2006 of the Court of Appeals in CA-G.R. SP No. 58061
are REVERSED and SET ASIDE. Accordingly, the Decision dated January 4, 2000 of the Court of
Tax Appeals in C.T.A. Case No. 5777 and its Resolution dated March 3, 2000 are REINSTATED.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

G.R. No. 172509, February 04, 2015

CHINA BANKING CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE,Respondent.

DECISION
 SERENO, C.J.:

This Rule 45 Petition1 requires this Court to address the question of prescription of the government’s right
to collect taxes. Petitioner China Banking Corporation (CBC) assails the Decision2 and Resolution3 of the
Court of Tax Appeals (CTA) En Banc in CTA En Banc Case No. 109. The CTA En Banc affirmed the
Decision4 in CTA Case No. 6379 of the CTA Second Division, which had also affirmed the validity of
Assessment No. FAS-5-82/85-89-000586 and FAS-5-86-89-00587. The Assessment required petitioner
CBC to pay the amount of P11,383,165.50, plus increments accruing thereto, as deficiency documentary
stamp tax (DST) for the taxable years 1982 to 1986.cralawred

FACTS

Petitioner CBC is a universal bank duly organized and existing under the laws of the Philippines. For the
taxable years 1982 to 1986, CBC was engaged in transactions involving sales of foreign exchange to the
Central Bank of the Philippines (now Bangko Sentral ng Pilipinas), commonly known as SWAP
transactions.5 Petitioner did not file tax returns or pay tax on the SWAP transactions for those taxable
years.

On 19 April 1989, petitioner CBC received an assessment from the Bureau of Internal Revenue (BIR)
finding CBC liable for deficiency DST on the sales of foreign bills of exchange to the Central Bank. The
deficiency DST was computed as follows:chanroblesvirtuallawlibrary

Deficiency Documentary Stamp Tax

Amount
For the years 1982 to 1985 P 8,280,696.00
For calendar year 1986 P 2,481 ,975.60
Add : Surcharge P 620,493.90 P 3,102.469.50
P11 ,383,165.506
On 8 May 1989, petitioner CBC, through its vice-president, sent a letter of protest to the BIR. CBC raised
the following defenses: (1) double taxation, as the bank had previously paid the DST on all its
transactions involving sales of foreign bills of exchange to the Central Bank; (2) absence of liability,as the
liability for the DST in a sale of foreign exchange through telegraphic transfers to the Central Bank falls
on the buyer ? in this case, the Central Bank; (3) due process violation, as the bank’s records were never
formally examined by the BIR examiners; (4) validity of the assessment, as it did not include the factual
basis therefore; (5) exemption, as neither the tax-exempt entity nor the other party was liable for the
payment of DST before the effectivity of Presidential Decree Nos. (PD) 1177 and 1931 for the years 1982
to 1986.7 In the protest, the taxpayer requested a reinvestigation so as to substantiate its
assertions.8chanRoblesvirtualLawlibrary

On 6 December 2001, more than 12 years after the filing of the protest, the Commissioner of Internal
Revenue (CIR) rendered a decision reiterating the deficiency DST assessment and ordered the payment
thereof plus increments within 30 days from receipt of the Decision.9chanRoblesvirtualLawlibrary

On 18 January 2002, CBC filed a Petition for Review with the CTA. On 11 March 2002, the CIR filed
an Answer with a demand for CBC to pay the assessed DST.10chanRoblesvirtualLawlibrary

On 23 February 2005, and after trial on the merits, the CTA Second Division denied the Petition of CBC.
The CTA ruled that a SWAP arrangement should be treated as a telegraphic transfer subject to
documentary stamp tax.11chanRoblesvirtualLawlibrary
On 30 March 2005, petitioner CBC filed a Motion for Reconsideration, but it was denied in a Resolution
dated 14 July 2005.

On 5 August 2005, petitioner appealed to the CTA En Banc. The appellate tax court, however, dismissed
the Petition for Review in a Decision dated 1 December 2005. CBC filed a Motion for Reconsideration on
21 December 2005, but it was denied in a 20 March 2006 Resolution.

The taxpayer now comes to this Court with a Rule 45 Petition, reiterating the arguments it raised at the
CTA level and invoking for the first time the argument of prescription. Petitioner CBC states that the
government has three years from 19 April 1989, the date the former received the assessment of the CIR,
to collect the tax. Within that time frame, however, neither a warrant of distraint or levy was issued, nor a
collection case filed in court.

On 17 October 2006, respondent CIR submitted its Comment in compliance with the Court’s Resolution
dated 26 June 2006.12 The Comment did not have any discussion on the question of prescription.

On 21 February 2007, the Court issued a Resolution directing the parties to file their respective
Memoranda. Petitioner CBC filed its Memorandum13 on 26 April 2007. The CIR, on the other hand, filed
on 17 April 2007 a Manifestation stating that it was adopting the allegations and authorities in its
Comment in lieu of the required Memorandum.14chanRoblesvirtualLawlibrary

ISSUE

Given the facts and the arguments raised in this case, the resolution of this case hinges on this issue:
whether the right of the BIR to collect the assessed DST from CBC is barred by
prescription.15chanRoblesvirtualLawlibrary

RULING OF THE COURT

We grant the Petition on the ground that the right of the BIR to collect the assessed DST is barred by the
statute of limitations.

Prescription Has Set In.

To recall, the Bureau of Internal Revenue (BIR) issued the assessment for deficiency DST on 19 April
1989, when the applicable rule was Section 319(c) of the National Internal Revenue Code of 1977, as
amended.16 In that provision, the time limit for the government to collect the assessed tax is set at three
years, to be reckoned from the date when the BIR mails/releases/sends the assessment notice to the
taxpayer. Further, Section 319(c) states that the assessed tax must be collected by distraint or levy and/or
court proceeding within the three-year period.

With these rules in mind, we shall now determine whether the claim of the BIR is barred by time.

In this case, the records do not show when the assessment notice was mailed, released or sent to CBC.
Nevertheless, the latest possible date that the BIR could have released, mailed or sent the assessment
notice was on the same date that CBC received it, 19 April 1989. Assuming therefore that 19 April 1989
is the reckoning date, the BIR had three years to collect the assessed DST. However, the records of this
case show that there was neither a warrant of distraint or levy served on CBC's properties nor a collection
case filed in court by the BIR within the three-year period.
The attempt of the BIR to collect the tax through its Answer with a demand for CBC to pay the assessed
DST in the CTA on 11 March 2002 did not comply with Section 319(c) of the 1977 Tax Code, as
amended. The demand was made almost thirteen years from the date from which the prescriptive period
is to be reckoned. Thus, the attempt to collect the tax was made way beyond the three-year prescriptive
period.

The BIR’s Answer in the case filed before the CTA could not, by any means, have qualified as a
collection case as required by law. Under the rule prevailing at the time the BIR filed its Answer, the
regular courts, and not the CTA, had jurisdiction over judicial actions for collection of internal revenue
taxes. It was only on 23 April 2004, when Republic Act Number 9282 took effect,17 that the jurisdiction
of the CTA was expanded to include, among others, original jurisdiction over collection cases in which
the principal amount involved is one million pesos or more.

Consequently, the claim of the CIR for deficiency DST from petitioner is forever lost, as it is now barred
by time. This Court has no other option but to dismiss the present case.

The running of the statute of

limitations was not suspended
by the request for reinvestigation.

The fact that the taxpayer in this case may have requested a reinvestigation did not toll the running of the
three-year prescriptive period. Section 320 of the 1977 Tax Code states:chanroblesvirtuallawlibrary

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)

The provision is clear. A request for reinvestigation alone will not suspend the statute of limitations. Two
things must concur: there must be a request for reinvestigation and the CIR must have granted it. BPI v.
Commissioner of Internal Revenue18 emphasized this rule by stating:chanroblesvirtuallawlibrary

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 [evidence] 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 x x x.
In Republic of the Philippines v. Acebedo, this Court similarly found that —
. . . [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 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)
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 the present case, there is no showing from the records that the CIR ever granted the request for
reinvestigation filed by CBC. That being the case, it cannot be said that the running of the three-year
prescriptive period was effectively suspended.

Failure to raise prescription at the

administrative level/lower court as a
defense is of no moment.
When the pleadings or the evidence on record
show that the claim is barred by prescription,
the court must dismiss the claim even if prescription
is not raised as a defense.

We note that petitioner has raised the issue of prescription for the first time only before this Court. While
we are mindful of the established rule of remedial law that the defense of prescription must be raised at
the trial court that has also been applied for tax cases.19 Thus, as a rule, the failure to raise the defense of
prescription at the administrative level prevents the taxpayer from raising it at the appeal stage.

This rule, however, is not absolute.

The facts of the present case are substantially identical to those in the 2014 case, Bank of the Philippine
Islands (BPI) v. Commissioner of Internal Revenue.20 In that case, petitioner received an assessment
notice from the BIR for deficiency DST based on petitioner’s SWAP transactions for the year 1985 on 16
June 1989. On 23 June 1989, BPI, through its counsel, filed a protest requesting the reinvestigation and/or
reconsideration of the assessment for lack of legal or factual bases. Almost ten years later, the CIR, in a
letter dated 4 August 1998, denied the protest. On 4 January 1999, BPI filed a Petition for Review with
the CTA. On 23 February 1999, the CIR filed an Answer with a demand for BPI to pay the assessed
DST. It was only when the case ultimately reached this Court that the issue of prescription was brought
up. Nevertheless, the Court ruled that the CIR could no longer collect the assessed tax due to prescription.
Basing its ruling on Section 1, Rule 9 of the Rules of Court and on jurisprudence, the Court held as
follows:chanroblesvirtuallawlibrary

In a Resolution dated 5 August 2013, the Court, through the Third Division, found that the assailed tax
assessment may be invalidated because the statute of limitations on the collection of the alleged
deficiency DST had already expired, conformably with Section 1, Rule 9 of the Rules of Court and the
Bank of the Philippine Islands v. Commissioner of Internal Revenue decision. However, to afford due
process, the Court required both BPI and CIR to submit their respective comments on the issue of
prescription.
Only the CIR filed his comment on 9 December 2013. In his Comment, the CIR argues that the issue of
prescription cannot be raised for the first time on appeal. The CIR further alleges that even assuming that
the issue of prescription can be raised, the protest letter interrupted the prescriptive period to collect the
assessed DST, unlike in the Bank of the Philippine Islands case.

xxxx

We deny the right of the BIR to collect the assessed DST on the ground of prescription.

Section 1, Rule 9 of the Rules of Court expressly provides that:ChanRoblesVirtualawlibrary

Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded either in a motion
to dismiss or in the answer are deemed waived. However, when it appears from the pleadings or the
evidence on record that the court has no jurisdiction over the subject matter, that there is another action
pending between the same parties for the same cause, or that the action is barred by prior judgment or by
the statute of limitations, the court shall dismiss the claim.
If the pleadings or the evidence on record show that the claim is barred by prescription, the court is
mandated to dismiss the claim even if prescription is not raised as a defense. In Heirs of Valientes v.
Ramas, we ruled that the CA maymotu proprio dismiss the case on the ground of prescription despite
failure to raise this ground on appeal. The court is imbued with sufficient discretion to review matters, not
otherwise assigned as errors on appeal, if it finds that their consideration is necessary in arriving at a
complete and just resolution of the case. More so, when the provisions on prescription were enacted to
benefit and protect taxpayers from investigation after a reasonable period of time.

Thus, we proceed to determine whether the period to collect the assessed DST for the year 1985 has
prescribed.

To determine prescription, what is essential only is that the facts demonstrating the lapse of the
prescriptive period were sufficiently and satisfactorily apparent on the record either in the allegations of
the plaintiff’s complaint, or otherwise established by the evidence. Under the then applicable Section
319(c) [now, 222(c)] of the National Internal Revenue Code (NIRC) of 1977, as amended, any internal
revenue tax which has been assessed within the period of limitation may be collected by distraint or levy,
and/or court proceeding within three years following the assessment of the tax. The assessment of the tax
is deemed made and the three-year period for collection of the assessed tax begins to run on the date the
assessment notice had been released, mailed or sent by the BIR to the taxpayer.

In the present case, although there was no allegation as to when the assessment notice had been released,
mailed or sent to BPI, still, the latest date that the BIR could have released, mailed or sent the assessment
notice was on the date BPI received the same on 16 June 1989. Counting the three-year prescriptive
period from 16 June 1989, the BIR had until 15 June 1992 to collect the assessed DST. But despite the
lapse of 15 June 1992, the evidence established that there was no warrant of distraint or levy served on
BPI’s properties, or any judicial proceedings initiated by the BIR.

The earliest attempt of the BIR to collect the tax was when it filed its answer in the CTA on 23 February
1999, which was several years beyond the three-year prescriptive period. However, the BIR’s answer in
the CTA was not the collection case contemplated by the law. Before 2004 or the year Republic Act No.
9282 took effect, the judicial action to collect internal revenue taxes fell under the jurisdiction of the
regular trial courts, and not the CTA. Evidently, prescription has set in to bar the collection of the
assessed DST. (Emphasis supplied)

BPI thus provides an exception to the rule against raising the defense of prescription for the first time on
appeal: the exception arises when the pleadings or the evidence on record show that the claim is
barred by prescription.

In this case, the fact that the claim of the government is time-barred is a matter of record. As can be seen
from the previous discussion on the determination of the prescription of the right of the government to
claim deficiency DST, the conclusion that prescription has set in was arrived at using the evidence on
record. The date of receipt of the assessment notice was not disputed, and the date of the attempt to
collect was determined by merely checking the records as to when the Answer of the CIR containing the
demand to pay the tax was filed.

Estoppel or waiver prevents the government

from invoking the rule against raising the
issue of prescription for the first time on appeal.

In this case, petitioner may have raised the question of prescription only on appeal to this Court. The BIR
could have crushed the defense by the mere invocation of the rule against setting up the defense of
prescription only at the appeal stage. The government, however, failed to do so.

On the contrary, the BIR was silent despite having the opportunity to invoke the bar against the issue of
prescription. It is worthy of note that the Court ordered the BIR to file a Comment. The government,
however, did not offer any argument in its Comment about the issue of prescription, even if petitioner
raised it in the latter’s Petition. It merely fell silent on the issue. It was given another opportunity to meet
the challenge when this Court ordered both parties to file their respective memoranda. The CIR, however,
merely filed a Manifestation that it would no longer be filing a Memorandum and, in lieu thereof, it would
be merely adopting the arguments raised in its Comment. Its silence spoke loudly of its intent to waive its
right to object to the argument of prescription.

We are mindful of the rule in taxation that estoppel does not prevent the government from collecting
taxes; it is not bound by the mistake or negligence of its agents. The rule is based on the political law
concept “the king can do no wrong,”21 which likens a state to a king: it does not commit mistakes, and it
does not sleep on its rights. The analogy fosters inequality between the taxpayer and the government, with
the balance tilting in favor of the latter. This concept finds justification in the theory and reality that
government is necessary, and it must therefore collect taxes if it is to survive. Thus, the mistake or
negligence of government officials should not bind the state, lest it bring harm to the government and
ultimately the people, in whom sovereignty resides.22chanRoblesvirtualLawlibrary

Republic v. Ker & Co. Ltd.23 involved a collection case for a final and executory assessment. The taxpayer
nevertheless raised the prescription of the right to assess the tax as a defense before the Court of First
Instance. The Republic, instead of objecting to the invocation of prescription as a defense by the taxpayer,
litigated on the issue and thereafter submitted it for resolution. The Supreme Court ruled for the taxpayer,
treating the actuations of the government as a waiver of the right to invoke the defense of
prescription. Ker effectively applied to the government the rule ofestoppel. Indeed, the no-estoppel rule is
not absolute.

The same ingredients in Ker - procedural matter and injustice - obtain in this case. The procedural matter
consists in the failure to raise the issue of prescription at the trial court/administrative level, and injustice
in the fact that the BIR has unduly delayed the assessment and collection of the DST in this case. The
fact is that it took more than 12 years for it to take steps to collect the assessed tax. The BIR definitely
caused untold prejudice to petitioner, keeping the latter in the dark for so long, as to whether it is liable
for DST and, if so, for how much.cralawred

CONCLUSION
Inasmuch as the government’s claim for deficiency DST is barred by prescription, it is no longer
necessary to dwell on the validity of the assessment.chanrobleslaw

WHEREFORE, the Petition is GRANTED. The Court of Tax Appeals En Banc Decision dated 1
December 2005 and its Resolution dated 20 March 2006 in CTA EB Case No. 109 are
herebyREVERSED and SET ASIDE. A new ruling is entered DENYING respondent’s claim for
deficiency DST in the amount of P11,383,165.50.

SO ORDERED.cralawlawlibrary

Leonardo-De Castro, Bersamin, Perez, and Perlas-Bernabe, JJ., concur.

________________________________________________________

COMMISSIONER OF INTERNAL G.R. No. 212825

REVENUE,
Petitioner, Present:

VELASCO, JR., J, Chairperson,

- versus - PERALTA,
VILLARAMA, JR.,
PEREZ,*
NEXT MOBILE, INC. (formerly REYES, JJ.
Nextel Communications Phils., Inc.),
Respondent. Promulgated:

DECISION

VELASCO, JR., J.:

This is a Petition for Review under Rule 45 of the Rules of Court seeking to reverse and set
aside the Decision of the Court of Tax Appeals En Banc affirming the earlier decision of its First
Division in CTA Case No. 7965, cancelling and withdrawing petitioner's formal letter of demand and
assessment notices to respondent for having been issued beyond the prescriptive period provided by
law.

The Facts
 On April 15, 2002, respondent filed with the Bureau of Internal Revenue (BIR) its Annual
Income Tax Return (ITR) for taxable year ending December 31, 2001. Respondent also filed its
Monthly Remittance Returns of Final Income Taxes Withheld (BIR Form No. 1601-F), its Monthly
Remittance Returns of Expanded Withholding Tax (BIR Form No. 1501-E) and its Monthly
Remittance Return of Income Taxes Withheld on Compensation (BIR Form No. 1601-C) for year
ending December 31, 2001.

On September 25, 2003, respondent received a copy of the Letter of Authority dated
September 8, 2003 signed by Regional Director Nestor S. Valeroso authorizing Revenue Officer
Nenita L. Crespo of Revenue District Office 43 to examine respondent's books of accounts and other
accounting records for income and withholding taxes for the period covering January 1, 2001 to
December 31, 2001.

Ma. Lida Sarmiento (Sarmiento), respondent’s Director of Finance, subsequently executed

several waivers of the statute of limitations to extend the prescriptive period of assessment for taxes due
in taxable year ending December 31, 2001 (Waivers), the details of which are summarized as follows:

On September 26, 2005, respondent received from the BIR a Preliminary Assessment Notice
dated September 16, 2005 to which it filed a Reply.

On October 25, 2005, respondent received a Formal Letter of Demand (FLD) and Assessment
Notices/Demand No. 43-734 both dated October 17, 2005 from the BIR, demanding payment of
deficiency income tax, final withholding tax (FWT), expanded withholding tax (EWT), increments for
late remittance of taxes withheld, and compromise penalty for failure to file returns/late filing/late
remittance of taxes withheld, in the total amount of ₱313,339,610.42 for the taxable year ending
December 31, 2001.

On November 23, 2005, respondent filed its protest against the FLD and requested the
reinvestigation of the assessments. On July 28, 2009, respondent received a letter from the BIR denying
its protest. Thus, on August 27, 2009, respondent filed a Petition for Review before the CTA docketed
as CTA Case No. 7965.

Ruling of the CTA Former First Division

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

It was held that based on the date of filing of respondent’s Annual ITR as well as the dates of
filing of its monthly BIR Form Nos. 1601-F, 1601-E and 1601-C, it is clear that the adverted FLD and
the Final Assessment Notices both dated October 17, 2005 were issued beyond the three-year
prescriptive period provided under Section 203 of the 1997 National Internal Revenue Code (NIRC), as
amended.

The tax court also rejected petitioner’s claim that this case falls under the exception as to the
three-year prescriptive period for assessment and that the 10-year prescriptive period should apply on the
ground of filing a false or fraudulent return. Under Section 222(a) of the 1997 NIRC, as amended, in case
a taxpayer filed a false or fraudulent return, the Commissioner of Internal Revenue (CIR) may assess a
taxpayer for deficiency tax within ten (10) years after the discovery of the falsity or the fraud. The tax
court explained that petitioner failed to substantiate its allegation by clear and convincing proof that
respondent filed a false or fraudulent return.

Furthermore, the CTA First Division held that the Waivers executed by Sarmiento did not validly
extend the three-year prescriptive period to assess respondent for deficiency income tax, FWT, EWT,
increments for late remittance of tax withheld and compromise penalty, for, as found, the Waivers were
not properly executed according to the procedure in Revenue Memorandum Order No. 20-90 (RMO 20-
90)1 and Revenue Delegation Authority Order No. 05-01 (RDAO 05-01).2
The tax court declared that, in this case, the Waivers have no binding effect on respondent for the
following reasons:

First, Sarmiento signed the Waivers without any notarized written authority from respondent’s
Board of Directors. Petitioner’s witness explicitly admitted that he did not require Sarmiento to present
any notarized written authority from the Board of Directors of respondent, authorizing her to sign the
Waivers. Petitioner’s witness also confirmed that Revenue District Officer Raul Vicente L. Recto (RDO
Recto) accepted the Waivers as submitted.
Second, even assuming that Sarmiento had the necessary board authority, the Waivers are still
invalid as the respective dates of their acceptance by RDO Recto are not indicated therein.

Third, records of this case reveal additional irregularities in the subject Waivers:

(1) The fact of receipt by respondent of its copy of the Second Waiver was not indicated
on the face of the original Second Waiver;
(2) Respondent received its copy of the First and the Third Waivers on the same day,
May 23, 2005; and
(3) Respondent received its copy of the Fourth and the Fifth Waivers on the same day,
May 13, 2005.

Finally, the CTA held that estoppel does not apply in questioning the validity of a waiver of the
statute of limitations. It stated that the BIR cannot hide behind the doctrine of estoppel to cover its failure
to comply with RMO 20-90 and RDAO 05-01.

Petitioner’s Motion for Reconsideration was denied on March 14,

2013.

Petitioner filed a Petition for Review before the CTA En Banc.

On May 28, 2014, the CTA En Banc rendered a Decision denying the Petition for Review and
affirmed that of the former CTA First Division.

It held that the five (5) Waivers of the statute of limitations were not valid and binding; thus, the
three-year period of limitation within which to assess deficiency taxes was not extended. It also held that
the records belie the allegation that respondent filed false and fraudulent tax returns; thus, the extension of
the period of limitation from three (3) to ten (10) years does not apply.
 Issue

Petitioner has filed the instant petition on the issue of whether or not the CIR’s right to assess
respondent’s deficiency taxes had already prescribed.

Our Ruling

The petition has merit.

Section 2033 of the 1997 NIRC mandates the BIR to assess internal revenue taxes within three
years from the last day prescribed by law for the filing of the tax return or the actual date of filing of such
return, whichever comes later. Hence, an assessment notice issued after the three-year prescriptive period
is not valid and effective. Exceptions to this rule are provided under Section 2224 of the NIRC.
Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be
extended upon a written agreement between the CIR and the taxpayer executed before the expiration of
the three-year period. RMO 20-90 issued on April 4, 1990 and RDAO 05-015 issued on August 2, 2001
provide the procedure for the proper execution of a waiver. RMO 20-90 reads:

April 4, 1990
REVENUE MEMORANDUM ORDER NO. 20-90
Subject: Proper Execution of the Waiver of the Statute of
Limitations under the National Internal Revenue Code
To : All Internal Revenue Officers and Others Concerned

Pursuant to Section 223 of the Tax Code, internal revenue taxes may be assessed or
collected after the ordinary prescriptive period, if before its expiration, both the
Commissioner and the taxpayer have agreed in writing to its assessment and/or collection
after said period. The period so agreed upon may be extended by subsequent written
agreement made before the expiration of the period previously agreed upon. This written
agreement between the Commissioner and the taxpayer is the so-called Waiver of the
Statute of Limitations. In the execution of said waiver, the following procedures should
be followed:

1. The waiver must be in the form identified hereof. This form may be reproduced
by the Office concerned but there should be no deviation from such form. The phrase
“but not after ______ 19 ___” should be filled up. This indicates the expiry date of the
period agreed upon to assess/collect the tax after the regular three-year period of
prescription. The period agreed upon shall constitute the time within which to effect the
assessment/collection of the tax in addition to the ordinary prescriptive period.

2. The waiver shall be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of its
responsible officials.

Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or
the revenue official authorized by him, as hereinafter provided, shall sign the waiver
indicating that the Bureau has accepted and agreed to the waiver. The date of such
acceptance by the Bureau should be indicated. Both the date of execution by the taxpayer
and date of acceptance by the Bureau should be before the expiration of the period of
 prescription or before the lapse of the period agreed upon in case a subsequent agreement
is executed.

3. The following revenue officials are authorized to sign the waiver:

xxxx

4. The waiver must be executed in three (3) copies, the original copy to be attached
to the docket of the case, the second copy for the taxpayer and the third copy for the
Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall
be indicated in the original copy.

5. The foregoing procedures shall be strictly followed. Any revenue official found
not to have complied with this Order resulting in prescription of the right to assess/collect
shall be administratively dealt with.

This Revenue Memorandum Order shall take effect immediately.

(SGD.) JOSE U. ONG

Commissioner of Internal Revenue

The Court has consistently held that a waiver of the statute of limitations must faithfully comply
with the provisions of RMO No. 20-90 and RDAO 05-01 in order to be valid and binding.

In Philippine Journalists, Inc. v. Commissioner of Internal Revenue6 the Court declared the
waiver executed by petitioner therein invalid because:
(1) it did not specify a definite agreed date between the BIR and petitioner within which the former may
assess and collect revenue taxes; (2) it was signed only by a revenue district officer, not the
Commissioner; (3) there was no date of acceptance; and (4) petitioner was not furnished a copy of the
waiver.

Philippine Journalists tells us that since a waiver of the statute of limitations is a derogation of
the taxpayer’s right to security against prolonged and unscrupulous investigations, waivers of this kind
must be carefully and strictly construed. Philippine Journalists also clarifies that a waiver of the statute of
limitations is not a waiver of the right to invoke the defense of prescription but rather an agreement
between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is
extended to a date certain. It is not a unilateral act by the taxpayer of the BIR but is a bilateral agreement
between two parties.

In Commissioner of Internal Revenue v. FMF Development Corporation7 the Court found the
waiver in question defective because: (1) it was not proved that respondent therein was furnished a copy
of the BIR-accepted waiver; (2) the waiver was signed by a revenue district officer instead of the
Commissioner as mandated by the NIRC and RMO 20-90
considering that the case involved an amount of more than P1,000,000.00, and the period to assess was
not yet about to prescribe; and (3) it did not contain the date of acceptance by the CIR. The Court
explained that the date of acceptance by the CIR is a requisite necessary to determine whether the waiver
was validly accepted before the expiration of the original period.8
In CIR v. Kudos Metal Corporation,9 the waivers executed by Kudos were found ineffective to
extend the period to assess or collect taxes because: (1) the accountant who executed the waivers had no
notarized written board authority to sign the waivers in behalf of respondent corporation; (2) there was no
date of acceptance indicated on the waivers; and (3) the fact of receipt by respondent of its file copy was
not indicated in the original copies of the waivers.

The Court rejected the CIR’s argument that since it was the one who asked for additional time,
Kudos should be considered estopped from raising the defense of prescription. The Court held that the
BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with its RMO 20-90 and
RDAO 05-01. Having caused the defects in the waivers, the Court held that the BIR must bear the
consequence.10 Hence, the BIR assessments were found to be issued beyond the three -year period and
declared void.11 Further, the Court stressed that there is compliance with RMO 20- 90 only after the
taxpayer receives a copy of the waiver accepted by the BIR, viz:

The flaw in the appellate court’s reasoning stems from its assumption that the
waiver is a unilateral act of the taxpayer when it is in fact and in law an agreement
between the taxpayer and the BIR. When the petitioner’s comptroller signed the waiver
on September 22, 1997, it was not yet complete and final because the BIR had not
assented. There is compliance with the provision of RMO No. 20-90 only after the
taxpayer received a copy of the waiver accepted by the BIR. The requirement to furnish
the taxpayer with a copy of the waiver is not only to give notice of the existence of the
document but of the acceptance by the BIR and the perfection of the agreement.12
The deficiencies of the Waivers in this case are the same as the defects of the waiver in Kudos. In
the instant case, the CTA found the Waivers because of the following flaws: (1) they were executed
without a notarized board authority; (2) the dates of acceptance by the BIR were not indicated therein;
and (3) the fact of receipt by respondent of its copy of the Second Waiver was not indicated on the face of
the original Second Waiver.

To be sure, both parties in this case are at fault.

Here, respondent, through Sarmiento, executed five Waivers in favor of petitioner. However, her
authority to sign these Waivers was not presented upon their submission to the BIR. In fact, later on, her
authority to sign was questioned by respondent itself, the very same entity that caused her to sign such in
the first place. Thus, it is clear that respondent violated RMO No. 20-90 which states that in case of a
corporate taxpayer, the waiver must be signed by its responsible officials13 and RDAO 01- 05 which
requires the presentation of a written and notarized authority to the BIR.14

Similarly, the BIR violated its own rules and was careless in performing its functions with respect
to these Waivers. It is very clear that under RDAO 05-01 it is the duty of the authorized revenue official
to ensure that the waiver is duly accomplished and signed by the taxpayer or his authorized
representative before affixing his signature to signify acceptance of the same. It also instructs that in
case the authority is delegated by the taxpayer to a representative, the concerned revenue official
shall see to it that such delegation is in writing and duly notarized. Furthermore, it mandates that the
waiver should not be accepted by the concerned BIR office and official unless duly notarized.15
Vis-à-vis the five Waivers it received from respondent, the BIR has failed, for five times, to
perform its duties in relation thereto: to verify Ms. Sarmiento’s authority to execute them, demand the
presentation of a notarized document evidencing the same, refuse acceptance of the Waivers when no
such document was presented, affix the dates of its acceptance on each waiver, and indicate on the
Second Waiver the date of respondent’s receipt thereof.
 Both parties knew the infirmities of the Waivers yet they continued dealing with each other on the
strength of these documents without bothering to rectify these infirmities. In fact, in its Letter Protest to
the BIR, respondent did not even question the validity of the Waivers or call attention to their alleged
defects.

In this case, respondent, after deliberately executing defective waivers, raised the very same
deficiencies it caused to avoid the tax liability determined by the BIR during the extended assessment
period. It must be remembered that by virtue of these Waivers, respondent was given the opportunity to
gather and submit documents to substantiate its claims before the CIR during investigation. It was able to
postpone the payment of taxes, as well as contest and negotiate the assessment against it. Yet, after
enjoying these benefits, respondent challenged the validity of the Waivers when the consequences thereof
were not in its favor. In other words, respondent’s act of impugning these Waivers after benefiting
therefrom and allowing petitioner to rely on the same is an act of bad faith.

On the other hand, the stringent requirements in RMO 20-90 and RDAO 05-01 are in place
precisely because the BIR put them there. Yet, instead of strictly enforcing its provisions, the BIR defied
the mandates of its very own issuances. Verily, if the BIR was truly determined to validly assess and
collect taxes from respondent after the prescriptive period, it should have been prudent enough to make
sure that all the requirements for the effectivity of the Waivers were followed not only by its revenue
officers but also by respondent. The BIR stood to lose millions of pesos in case the Waivers were
declared void, as they eventually were by the CTA, but it appears that it was too negligent to even comply
with its most basic requirements.

The BIR’s negligence in this case is so gross that it amounts to malice and bad faith. Without
doubt, the BIR knew that waivers should conform strictly to RMO 20-90 and RDAO 05-01 in order to be
valid. In fact, the mandatory nature of the requirements, as ruled by this Court, has been recognized by the
BIR itself in its issuances such as Revenue Memorandum Circular No. 6-2005,16 among others.
Nevertheless, the BIR allowed respondent to submit, and it duly received, five defective Waivers when it
was its duty to exact compliance with RMO 20-90 and RDAO 05-01 and follow the procedure dictated
therein. It even openly admitted that it did not require respondent to present any notarized authority to
sign the questioned Waivers.17 The BIR failed to demand respondent to follow the requirements for the
validity of the Waivers when it had the duty to do so, most especially because it had the highest interest at
stake. If it was serious in collecting taxes, the BIR should have meticulously complied with the foregoing
orders, leaving no stone unturned.

The general rule is that when a waiver does not comply with the requisites for its validity
specified under RMO No. 20-90 and RDAO 01-05, it is invalid and ineffective to extend the prescriptive
period to assess taxes. However, due to its peculiar circumstances, We shall treat this case as an exception
to this rule and find the Waivers valid for the reasons discussed below.

First, the parties in this case are in pari delicto or “in equal fault.” In pari delicto connotes that
the two parties to a controversy are equally culpable or guilty and they shall have no action against each
other. However, although the parties are in pari delicto, the Court may interfere and grant relief at the suit
of one of them, where public policy requires its intervention, even though the result may be that a benefit
will be derived by one party who is in equal guilt with the other.18
Here, to uphold the validity of the Waivers would be consistent with the public policy embodied
in the principle that taxes are the lifeblood of the government, and their prompt and certain availability is
an imperious need.19 Taxes are the nation’s lifeblood through which government agencies continue to
operate and which the State discharges its functions for the welfare of its constituents.20 As between the
parties, it would be more equitable if petitioner’s lapses were allowed to pass and consequently uphold
the Waivers in order to support this principle and public policy.

Second , the Court has repeatedly pronounced that parties must come to court with clean hands.21
Parties who do not come to court with clean hands cannot be allowed to benefit from their own
wrongdoing.22 Following the foregoing principle, respondent should not be allowed to benefit from the
flaws in its own Waivers and successfully insist on their invalidity in order to evade its responsibility to
pay taxes.

Third, respondent is estopped from questioning the validity of its Waivers. While it is true that the
Court has repeatedly held that the doctrine of estoppel must be sparingly applied as an exception to the
statute of limitations for assessment of taxes, the Court finds that the application of the doctrine is
justified in this case. Verily, the application of estoppel in this case would promote the administration of
the law, prevent injustice and avert the accomplishment of a wrong and undue advantage. Respondent
executed five Waivers and delivered them to petitioner, one after the other. It allowed petitioner to rely on
them and did not raise any objection against their validity until petitioner assessed taxes and penalties
against it. Moreover, the application of estoppel is necessary to prevent the undue injury that the
government would suffer because of the cancellation of petitioner’s assessment of respondent’s tax
liabilities.

Finally, the Court cannot tolerate this highly suspicious situation. In this case, the taxpayer, on
the one hand, after voluntarily executing waivers, insisted on their invalidity by raising the very same
defects it caused. On the other hand, the BIR miserably failed to exact from respondent compliance with
its rules. The BIR’s negligence in the performance of its duties was so gross that it amounted to malice
and bad faith. Moreover, the BIR was so lax such that it seemed that it consented to the mistakes in the
Waivers. Such a situation is dangerous and open to abuse by unscrupulous taxpayers who intend to escape
their responsibility to pay taxes by mere expedient of hiding behind technicalities.
It is true that petitioner was also at fault here because it was careless in complying with the
requirements of RMO No. 20-90 and RDAO 01-05. Nevertheless, petitioner's negligence may be
addressed by enforcing the provisions imposing administrative liabilities upon the officers responsible
for these errors.23 The BIR's right to assess and collect taxes should not be jeopardized merely
because of the mistakes and lapses of its officers, especially in cases like this where the taxpayer is
obviously in bad faith. 24

As regards petitioner's claim that the 10-year period of limitation within which to assess
deficiency taxes provided in Section 222(a) of the 1997 NIRC is applicable in this
case as18respondent allegedly filed false and fraudulent returns, there is no reason to
disturb the tax court's findings that records failed to establish, even by prima facic
evidence, that respondent Next Mobile filed false and fraudulent returns on the
ground of substantial underdeclaration of income in respondent Next Mobile's
Annual ITR for taxable year ending December 31, 2001. 25

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

WHEREFORE, premises considered, the Court resolves to GRANT the petition.

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

SO ORDERED.

COMMISSIONER OF INTERNAL G. R. No. 167146

REVENUE
Petitioner, Present:

PANGANIBAN, C.J.,
Chair man,
YNARES -SANT IAGO
- versus - AUSTRIA -MART INEZ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

PHILIPPINE GLOBAL Promulgated:

COMMUNICATION, INC.,
Respondent. October 31, 2006

x--------------------------------------------------x

DECISION

CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside
the en banc Decision of the Court of Tax Appeals (CTA) in CTA EB No. 37 dated 22 February
2005,[1] ordering the petitioner to withdraw and cancel Assessment Notice No. 000688-80-7333 issued
against respondent Philippine Global Communication, Inc. for its 1990 income tax deficiency. The CTA,
in its assailed en banc Decision, affirmed the Decision of the First Division of the CTA dated 9 June
2004[2] and its Resolution dated 22 September 2004 in C.T.A. Case No. 6568.

Respondent, a corporation engaged in telecommunications, filed its Annual Income Tax Return for
taxable year 1990 on 15 April 1991. On 13 April 1992, the Commissioner of Internal Revenue (CIR)
issued Letter of Authority No. 0002307, authorizing the appropriate Bureau of Internal Revenue (BIR)
officials to examine the books of account and other accounting records of respondent, in connection with
the investigation of respondents 1990 income tax liability. On 22 April 1992, the BIR sent a letter to
respondent requesting the latter to present for examination certain records and documents, but respondent
failed to present any document. On 21 April 1994, respondent received a Preliminary Assessment Notice
dated 13 April 1994 for deficiency income tax in the amount of P118,271,672.00, inclusive of surcharge,
interest, and compromise penalty, arising from deductions that were disallowed for failure to pay the
withholding tax and interest expenses that were likewise disallowed. On the following day, 22 April
1994, respondent received a Formal Assessment Notice with Assessment Notice No. 000688-80-7333,
dated 14 April 1994, for deficiency income tax in the total amount ofP118,271,672.00.[3]

On 6 May 1994, respondent, through its counsel Ponce Enrile Cayetano Reyes and Manalastas Law
Offices, filed a formal protest letter against Assessment Notice No. 000688-80-7333. Respondent filed
another protest letter on 23 May 1994, through another
counsel Siguion Reyna Montecillo & Ongsiako Law Offices. In both letters, respondent requested for the
cancellation of the tax assessment, which they alleged was invalid for lack of factual and legal basis.[4]

On 16 October 2002, more than eight years after the assessment was presumably issued, the
Ponce Enrile Cayetano Reyes and Manalastas Law Offices received from the CIR a Final Decision dated
8 October 2002 denying the respondents protest against Assessment Notice No. 000688-80-7333, and
affirming the said assessment in toto.[5]

On 15 November 2002, respondent filed a Petition for Review with the CTA. After due notice
and hearing, the CTA rendered a Decision in favor of respondent on 9 June 2004.[6] The CTA ruled on the
primary issue of prescription and found it unnecessary to decide the issues on the validity and propriety of
the assessment. It decided that the protest letters filed by the respondent cannot constitute a request
for reinvestigation, hence, they cannot toll the running of the prescriptive period to collect the assessed
deficiency income tax.[7] Thus, since more than three years had lapsed from the time Assessment Notice
No. 000688-80-7333 was issued in 1994, the CIRs right to collect the same has prescribed in conformity
with Section 269 of the National Internal Revenue Code of 1977[8] (Tax Code of 1977). The dispositive
portion of this decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

petitioner. Accordingly, respondents Final Decision dated October 8, 2002 is hereby
REVERSED and SET ASIDE and respondent is hereby ORDERED to WITHDRAW and
CANCEL Assessment Notice No. 000688-80-7333 issued against the petitioner for its
1990 income tax deficiency because respondents right to collect the same has
prescribed.[9]
 The CIR moved for reconsideration of the aforesaid Decision but was denied by the CTA in a
Resolution dated 22 September 2004.[10] Thereafter, the CIR filed a Petition for Review with the CTA en
banc, questioning the aforesaid Decision and Resolution. In its en banc Decision, the CTA affirmed the
Decision and Resolution in CTA Case No. 6568. The dispositive part reads:

WHEREFORE, premises considered, the Petition for Review is hereby

DISMISSED for lack of merit. Accordingly, the assailed Decision and Resolution in
CTA Case No. 6568 are hereby AFFIRMED in toto.[11]

Hence, this Petition for Review on Certiorari raising the following grounds:

THE COURT OF TAX APPEALS, SITTING EN BANC, COMMITTED REVERSIBLE

ERROR IN AFFIRMING THE ASSAILED DECISION AND RESOLUTION IN CTA
CASE NO.6568 DECLARING THAT THE RIGHT OF THE GOVERNMENT TO
COLLECT THE DEFICIENCY INCOME TAX FROM RESPONDENT FOR THE
YEAR 1990 HAS PRESCRIBED

A. THE PRESCRIPTIVE PERIOD WAS INTERUPTED WHEN

RESPONDENT FILED TWO LETTERS OF PROTEST
DISPUTING IN DETAIL THE DEFICIENCY ASSESSMENT IN
QUESTION AND REQUESTING THE CANCELLATION OF
SAID ASSESSMENT. THE TWO LETTERS OF PROTEST ARE,
BY NATURE, REQUESTS FOR REINVESTIGATION OF THE
DISPUTED ASSESSMENT.

B. THE REQUESTS FOR REINVESTIGATION OF RESPONDENT

WERE GRANTED BY THE BUREAU OF INTERNAL
REVENUE.[12]

This Court finds no merit in this Petition.

The main issue in this case is whether or not CIRs right to collect respondents alleged deficiency
income tax is barred by prescription under Section 269(c) of the Tax Code of 1977, which reads:

Section 269. Exceptions as to the period of limitation of assessment and collection of

taxes. x x x

xxxx

c. 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.
 The law prescribed a period of three years from the date the return was actually filed or from the
last date prescribed by law for the filing of such return, whichever came later, within which the BIR may
assess a national internal revenue tax.[13] However, the law increased the prescriptive period to assess or
to begin a court proceeding for the collection without an assessment to ten years when a false or
fraudulent return was filed with the intent of evading the tax or when no return was filed at all.[14] In such
cases, the ten-year period began to run only from the date of discovery by the BIR of the falsity, fraud or
omission.

If the BIR issued this assessment within the three-year period or the ten-year period, whichever
was applicable, the law provided another three years after the assessment for the collection of the tax due
thereon through the administrative process of distraint and/or levy or through judicial proceedings.[15] The
three-year period for collection of the assessed tax began to run on the date the assessment notice had
been released, mailed or sent by the BIR.[16]

The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did
not dispute the CIRs claim. Therefore, the BIR had until 13 April 1997.However, as there was no Warrant
of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR, the
earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its Answer in
CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year prescriptive
period.Thus, the CIR is now prescribed from collecting the assessed tax.

The provisions on prescription in the assessment and collection of national internal revenue taxes
became law upon the recommendation of the tax commissioner of thePhilippines. The report submitted by
the tax commission clearly states that these provisions on prescription should be enacted to benefit and
protect taxpayers:

Under the former law, the right of the Government to collect the tax does not
prescribe. However, in fairness to the taxpayer, the Government should be estopped from
collecting the tax where it failed to make the necessary investigation and assessment
within 5 years after the filing of the return and where it failed to collect the tax within 5
years from the date of assessment thereof. Just as the government is interested in the
stability of its collections, so also are the taxpayers entitled to an assurance that they will
not be subjected to further investigation for tax purposes after the expiration of a
reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp.
321-322).[17]

In a number of cases, this Court has also clarified that the statute of limitations on the collection
of taxes should benefit both the Government and the taxpayers. In these cases, the Court further illustrated
the harmful effects that the delay in the assessment and collection of taxes inflicts upon
taxpayers. In Collector of Internal Revenue v. SuyocConsolidated Mining
Company,[18] Justice Montemayor, in his dissenting opinion, identified the potential loss to the taxpayer if
the assessment and collection of taxes are not promptly made.

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 .

In Republic of the Philippines v. Ablaza,[19] this Court emphatically explained that the statute of
limitations of actions for the collection of taxes is justified by the need to protect law-abiding citizens
from possible harassment:

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 latters real liability, but to take advantage of
every opportunity to molest, peaceful, law-abiding citizens.Without such 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 beneficient purpose of affording protection to the taxpayer within the
contemplation of the Commission which recommended the approval of the law.

And again in the recent case Bank of the Philippine Islands v. Commissioner of Internal Revenue,[20] this
Court, in confirming these earlier rulings, pronounced that:

Though the statute of limitations on assessment and collection of national internal

revenue taxes benefits both the Government and the taxpayer, it principally intends to
afford protection to the taxpayer against unreasonable investigation. The indefinite
extension of the period for assessment is unreasonable because it deprives the said
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,[21] this Court affirmed that the law on
prescription should be liberally construed in order to protect taxpayers and that, as a corollary, the
exceptions to the law on prescription should be strictly construed.

The Tax Code of 1977, as amended, provides instances when the running of the statute of
limitations on the assessment and collection of national internal revenue taxes could be suspended, even
in the absence of a waiver, under Section 271 thereof which reads:

Section 224. Suspension of running of statute. The running of the statute of limitation
provided in Sections 268 and 269 on the making of assessments 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 distraintor levy or a proceeding in court and for sixty
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 x x x. (Emphasis
supplied.)

Among the exceptions provided by the aforecited section, and invoked by the CIR as a ground for
this petition, is the instance when the taxpayer requests for a reinvestigation which is granted by the
Commissioner. However, this exception does not apply to this case since the respondent never requested
for a reinvestigation. More importantly, the CIR could not have conducted a reinvestigation where, as
admitted by the CIR in its Petition, the respondent refused to submit any new evidence.

Revenue Regulations No. 12-85, the Procedure Governing Administrative Protests of Assessment
of the Bureau of Internal Revenue, issued on 27 November 1985, defines the two types of protest, the
request for reconsideration and the request for reinvestigation, and distinguishes one from the other in this
manner:

Section 6. Protest. - The taxpayer may protest administratively an assessment by filing a

written request for reconsideration or reinvestigation specifying the following particulars:

xxxx

For the purpose of protest herein

(a) Request for reconsideration-- refers to a plea for a re-evaluation of

an assessment on the basis of existing records without need of additional
evidence. It may involve both a question of fact or of law or both.
 (b) Request for reinvestigationrefers to a plea for re-evaluation of an
assessment on the basis of newly-discovered evidence or additional
evidence that a taxpayer intends to present in the investigation. It may
also involve a question of fact or law or both.

The main difference between these two types of protests lies in the records or evidence to be
examined by internal revenue officers, whether these are existing records or newly discovered or
additional evidence. A re-evaluation of existing records which results from a request for reconsideration
does not toll the running of the prescription period for the collection of an assessed tax. Section 271
distinctly limits the suspension of the running of the statute of limitations to instances
when reinvestigation is requested by a taxpayer and is granted by the CIR. The Court provided a clear-
cut rationale in the case of Bank of the Philippine Islands v. Commissioner of Internal
Revenue[22] explaining why a request for reinvestigation, and not a request for reconsideration, interrupts
the running of the statute of limitations on the collection of the assessed tax:

Undoubtedly, a reinvestigation, which entails the reception and evaluation of

additional evidence, will take more time than a reconsideration of a tax assessment,
which will be limited to the evidence already at hand; this justifies why the former can
suspend the running of the statute of limitations on collection of the assessed tax, while
the latter cannot.

In the present case, the separate letters of protest dated 6 May 1994 and 23 May 1994 are requests
for reconsideration. The CIRs allegation that there was a request for reinvestigation is inconceivable since
respondent consistently and categorically refused to submit new evidence and cooperate in any
reinvestigation proceedings. This much was admitted in the Decision dated 8 October 2002 issued by then
CIR Guillermo Payarno, Jr.

In the said conference-hearing, Revenue Officer Alameda basically testified that Philcom,
despite repeated demands, failed to submit documentary evidences in support of its
claimed deductible expenses. Hence, except for the item of interest expense which was
disallowed for being not ordinary and necessary, the rest of the claimed expenses were
disallowed for non-withholding. In the same token, Revenue Officer Escober testified
that upon his assignment to conduct the re-investigation, he immediately requested the
taxpayer to present various accounting records for the year 1990, in addition to other
documents in relation to the disallowed items (p.171). This was followed by other
requests for submission of documents (pp.199 &217) but these were not heeded by the
taxpayer. Essentially, he stated that Philcom did not cooperate in his reinvestigation of
the case.
 In response to the testimonies of the Revenue Officers, Philcom thru
Atty. Consunji, emphasized that it was denied due process because of the issuance of the
Pre-Assessment Notice and the Assessment Notice on successive dates. x x x Counsel for
the taxpayer even questioned the propriety of the conference-hearing inasmuch as the
only question to resolved (sic) is the legality of the issuance of the assessment. On the
disallowed items, Philcom thru counsel manifested that it has no intention to present
documents and/or evidences allegedly because of the pending legal question on the
validity of the assessment.[23]

Prior to the issuance of Revenue Regulations No. 12-85, which distinguishes a request for
reconsideration and a request for reinvestigation, there have been cases wherein these two terms were
used interchangeably. But upon closer examination, these cases all involved a reinvestigation that was
requested by the taxpayer and granted by the BIR.

In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,[24] the Court weighed
the considerable time spent by the BIR to actually conduct the reinvestigations requested by the taxpayer
in deciding that the prescription period was suspended during this time.

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.

Although the Court used the term requests for reconsideration in reference to the letters sent by
the taxpayer in the case of Querol v. Collector of Internal Revenue,[25] it took into account the
reinvestigation conducted soon after these letters were received and the revised assessment that resulted
from the reinvestigations.

It is true that the Collector revised the original assessment on February 9, 1955; and
appellant avers that this revision was invalid in that it was not made within the five-year
prescriptive period provided by law (Collector vs. Pineda, 112 Phil. 321). But that fact is
that the revised assessment was merely a result of petitioner Querols requests for
reconsideration of the original assessment, contained in his letters of December 14,
1951 and May 25, 1953. The records of the Bureau of Internal Revenue show that after
receiving the letters, the Bureau conducted a reinvestigation of petitioners tax liabilities,
and, in fact, sent a tax examiner to San Fernando, La Union, for that purpose; that
because of the examiners report, the Bureau revised the original assessment, x x x. In
 other words, the reconsideration was granted in part, and the original assessment was
altered. Consequently, the period between the petition for reconsideration and the revised
assessment should be subtracted from the total prescriptive period (Republic vs. Ablaza,
108 Phil 1105).

The Court, in Republic v. Lopez,[26] even gave a detailed accounting of the time the BIR spent for
each reinvestigation in order to deduct it from the five-year period set at that time in the statute of
limitations:

It is now a settled ruled in our jurisdiction that the five-year prescriptive period fixed by
Section 332(c) of the Internal Revenue Code within which the Government may sue to
collect an assessed tax is to be computed from the last revised assessment resulting from
a reinvestigation asked for by the taxpayer and (2) that where a taxpayer demands a
reinvestigation, the time employed in reinvestigating should be deducted from the total
period of limitation.

xxxx

The first reinvestigation was granted, and a reduced assessment issued on 29 May 1954,
from which date the Government had five years for bringing an action to collect.

The second reinvestigation was asked on 16 January 1956, and lasted until it was decided
on 22 April 1960, or a period of 4 years, 3 months, and 6 days, during which the
limitation period was interrupted.

The Court reiterated the ruling in Republic v. Lopez in the case of Commissioner of Internal
Revenue v. Sison,[27] that where a taxpayer demands a reinvestigation, the time employed in
reinvestigating should be deducted from the total period of limitation. Finally, in Republic
v. Arcache,[28] the Court enumerated the reasons why the taxpayer is barred from invoking the defense of
prescription, one of which was that, In the first place, it appears obvious that the delay in the collection of
his 1946 tax liability was due to his own repeated requests for reinvestigation and similarly repeated
requests for extension of time to pay.

In this case, the BIR admitted that there was no new or additional evidence presented.
Considering that the BIR issued its Preliminary Assessment Notice on 13 April 1994and its Formal
Assessment Notice on 14 April 1994, just one day before the three-year prescription period for issuing the
assessment expired on 15 April 1994, it had ample time to make a factually and legally well-founded
assessment. Added to the fact that the Final Decision that the CIR issued on 8 October 2002 merely
affirmed its earlier findings, whatever examination that the BIR may have conducted cannot possibly
outlast the entire three-year prescriptive period provided by law to collect the assessed tax, not to mention
the eight years it actually took the BIR to decide the respondents protest. The factual and legal issues
involved in the assessment are relatively simple, that is, whether certain income tax deductions should be
disallowed, mostly for failure to pay withholding taxes. Thus, there is no reason to suspend the running of
the statute of limitations in this case.

The distinction between a request for reconsideration and a request for reinvestigation is
significant. It bears repetition that a request for reconsideration, unlike a request for reinvestigation,
cannot suspend the statute of limitations on the collection of an assessed tax. If both types of protest can
effectively interrupt the running of the statute of limitations, an erroneous assessment may never
prescribe. If the taxpayer fails to file a protest, then the erroneous assessment would become final
and unappealable.[29] On the other hand, if the taxpayer does file the protest on a patently erroneous
assessment, the statute of limitations would automatically be suspended and the tax thereon may be
collected long after it was assessed. Meanwhile the interest on the deficiencies and the surcharges
continue to accumulate. And for an unrestricted number of years, the taxpayers remain uncertain and are
burdened with the costs of preserving their books and records. This is the predicament that the law on the
statute of limitations seeks to prevent.

The Court, in sustaining for the first time the suspension of the running of the statute of
limitations in cases where the taxpayer requested for a reinvestigation, gave this justification:

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.

xxxx

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 Cardozohas 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 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. v. U.S., 78 L. ed.,
647). (Emphasis supplied.)[30]

This rationale is not applicable to the present case where the respondent did nothing to prevent
the BIR from collecting the tax. It did not present to the BIR any new evidence for its re-evaluation. At
the earliest opportunity, respondent insisted that the assessment was invalid and made clear to the BIR its
refusal to produce documents that the BIR requested. On the other hand, the BIR also communicated to
the respondent its unwavering stance that its assessment is correct. Given that both parties were at a
deadlock, the next logical step would have been for the BIR to issue a Decision denying the respondents
protest and to initiate proceedings for the collection of the assessed tax and, thus, allow the respondent,
should it so choose, to contest the assessment before the CTA. Postponing the collection for eight long
years could not possibly make the taxpayer feel that the demand was not unreasonable or that no
harassment or injustice is meant by the Government. There was no legal, or even a moral, obligation
preventing the CIR from collecting the assessed tax. In a similar case, Cordero v. Conda,[31] the Court did
not suspend the running of the prescription period where the acts of the taxpayer did not prevent the
government from collecting the tax.

The government also urges that partial payment is acknowledgement of the tax
obligation, hence a waiver on the defense of prescription. But partial payment would not
prevent the government from suing the taxpayer. Because, by such act of payment, the
government is not thereby persuaded to postpone collection to make him feel that the
demand was not unreasonable or that no harassment or injustice is meant. Which, as
stated in Collector v. Suyoc Consolidated Mining Co., et al., L-11527, November 25,
1958, is the underlying reason behind the rule that prescriptive period is arrested by the
taxpayers request for reexamination or reinvestigation even if he has not previously
waived it [prescription] in writing.

The Court reminds us, in the case of Commissioner of Internal Revenue v. Algue, Inc., [32] of the
need to balance the conflicting interests of the government and the taxpayers.

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 interest of the authorities and
the taxpayers so that the real purpose of taxation, which is the promotion of common
good, may be achieved.

Thus, the three-year statute of limitations on the collection of an assessed tax provided under Section
269(c) of the Tax Code of 1977, a law enacted to protect the interests of the taxpayer, must be given
effect. In providing for exceptions to such rule in Section 271, the law strictly limits the suspension of the
running of the prescription period to, among other instances, protests wherein the taxpayer requests for a
reinvestigation. In this case, where the taxpayer merely filed two protest letters requesting for a
reconsideration, and where the BIR could not have conducted a reinvestigation because no new or
additional evidence was submitted, the running of statute of limitations cannot be interrupted. The tax
which is the subject of the Decision issued by the CIR on 8 October 2002 affirming the Formal
Assessment issued on 14 April 1994 can no longer be the subject of any proceeding for its
collection. Consequently, the right of the government to collect the alleged deficiency tax is barred by
prescription.
 IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The assailed en
banc Decision of the CTA in CTA EB No. 37 dated 22 February 2005, cancellingAssessment Notice No.
000688-80-7333 issued against Philippine Global Communication, Inc. for its 1990 income tax deficiency
for the reason that it is barred by prescription, is hereby AFFIRMED. No costs.

G.R. No. 184823 October 6, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
AICHI FORGING COMPANY OF ASIA, INC., Respondent.

DECISION

DEL CASTILLO, J.:

A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege,
or incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes erroneously
or illegally collected. In both cases, 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.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the July 30,
2008 Decision1 and the October 6, 2008 Resolution2 of the Court of Tax Appeals (CTA) En Banc.

Factual Antecedents

Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing under the
laws of the Republic of the Philippines, is engaged in the manufacturing, producing, and processing of
steel and its by-products.3 It is registered with the Bureau of Internal Revenue (BIR) as a Value-Added
Tax (VAT) entity4 and its products, "close impression die steel forgings" and "tool and dies," are
registered with the Board of Investments (BOI) as a pioneer status.5

On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1,
2002 to September 30, 2002 in the total amount of P3,891,123.82 with the petitioner Commissioner of
Internal Revenue (CIR), through the Department of Finance (DOF) One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center.6

Proceedings before the Second Division of the CTA

On even date, respondent filed a Petition for Review7 with the CTA for the refund/credit of the same
input VAT. The case was docketed as CTA Case No. 7065 and was raffled to the Second Division of the
CTA.

In the Petition for Review, respondent alleged that for the period July 1, 2002 to September 30, 2002, it
generated and recorded zero-rated sales in the amount of P131,791,399.00,8 which was paid pursuant to
Section 106(A) (2) (a) (1), (2) and (3) of the National Internal Revenue Code of 1997 (NIRC);9 that for
the said period, it incurred and paid input VAT amounting to P3,912,088.14 from purchases and
importation attributable to its zero-rated sales;10and that in its application for refund/credit filed with the
DOF One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center, it only claimed the amount
of P3,891,123.82.11

In response, petitioner filed his Answer12 raising the following special and affirmative defenses, to wit:

4. Petitioner’s alleged claim for refund is subject to administrative investigation by the Bureau;

5. Petitioner must prove that it paid VAT input taxes for the period in question;

6. Petitioner must prove that its sales are export sales contemplated under Sections 106(A) (2) (a),
and 108(B) (1) of the Tax Code of 1997;

7. Petitioner must prove that the claim was filed within the two (2) year period prescribed in
Section 229 of the Tax Code;

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

9. Claims for refund are construed strictly against the claimant for the same partake of the nature
of exemption from taxation.13

Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a Decision
partially granting respondent’s claim for refund/credit. Pertinent portions of the Decision read:

For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section 112 (A) of the
NIRC of 1997, as amended, provides:

SEC. 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales
were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax: x x x

Pursuant to the above provision, petitioner must comply with the following requisites: (1) the taxpayer is
engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer is VAT-registered; (3) the
claim must be filed within two years after the close of the taxable quarter when such sales were made; and
(4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax,
to the extent that such input tax has not been applied against the output tax.

The Court finds that the first three requirements have been complied [with] by petitioner.

With regard to the first requisite, the evidence presented by petitioner, such as the Sales Invoices
(Exhibits "II" to "II-262," "JJ" to "JJ-431," "KK" to "KK-394" and "LL") shows that it is engaged in sales
which are zero-rated.
The second requisite has likewise been complied with. The Certificate of Registration with OCN
1RC0000148499 (Exhibit "C") with the BIR proves that petitioner is a registered VAT taxpayer.

In compliance with the third requisite, petitioner filed its administrative claim for refund on September
30, 2004 (Exhibit "N") and the present Petition for Review on September 30, 2004, both within the two
(2) year prescriptive period from the close of the taxable quarter when the sales were made, which is from
September 30, 2002.

As regards, the fourth requirement, the Court finds that there are some documents and claims of petitioner
that are baseless and have not been satisfactorily substantiated.

xxxx

In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax credit certificate
representing unutilized excess input VAT payments for the period July 1, 2002 to September 30, 2002,
which are attributable to its zero-rated sales for the same period, but in the reduced amount
of P3,239,119.25, computed as follows:

Amount of Claimed Input VAT P 3,891,123.82

Less:
Exceptions as found by the ICPA 41,020.37

Net Creditable Input VAT P 3,850,103.45

Less:
Output VAT Due 610,984.20
Excess Creditable Input VAT P 3,239,119.25

WHEREFORE, premises considered, the present Petition for Review is PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX CREDIT
CERTIFICATE in favor of petitioner [in] the reduced amount of THREE MILLION TWO HUNDRED
THIRTY NINE THOUSAND ONE HUNDRED NINETEEN AND 25/100 PESOS (P3,239,119.25),
representing the unutilized input VAT incurred for the months of July to September 2002.

SO ORDERED.14

Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial
Reconsideration,15 insisting that the administrative and the judicial claims were filed beyond the two-year
period to claim a tax refund/credit provided for under Sections 112(A) and 229 of the NIRC. He reasoned
that since the year 2004 was a leap year, the filing of the claim for tax refund/credit on September 30,
2004 was beyond the two-year period, which expired on September 29, 2004.16 He cited as basis Article
13 of the Civil Code,17 which provides that when the law speaks of a year, it is equivalent to 365 days. In
addition, petitioner argued that the simultaneous filing of the administrative and the judicial claims
contravenes Sections 112 and 229 of the NIRC.18 According to the petitioner, a prior filing of an
administrative claim is a "condition precedent"19 before a judicial claim can be filed. He explained that
the rationale of such requirement rests not only on the doctrine of exhaustion of administrative remedies
but also on the fact that the CTA is an appellate body which exercises the power of judicial review over
administrative actions of the BIR. 20
The Second Division of the CTA, however, denied petitioner’s Motion for Partial Reconsideration for
lack of merit. Petitioner thus elevated the matter to the CTA En Banc via a Petition for Review.21

Ruling of the CTA En Banc

On July 30, 2008, the CTA En Banc affirmed the Second Division’s Decision allowing the partial tax
refund/credit in favor of respondent. However, as to the reckoning point for counting the two-year period,
the CTA En Banc ruled:

Petitioner argues that the administrative and judicial claims were filed beyond the period allowed by law
and hence, the honorable Court has no jurisdiction over the same. In addition, petitioner further contends
that respondent's filing of the administrative and judicial [claims] effectively eliminates the authority of
the honorable Court to exercise jurisdiction over the judicial claim.

We are not persuaded.

Section 114 of the 1997 NIRC, and We quote, to wit:

SEC. 114. Return and Payment of Value-added Tax. –

(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.

[x x x x ]

Based on the above-stated provision, a taxpayer has twenty five (25) days from the close of each taxable
quarter within which to file a quarterly return of the amount of his gross sales or receipts. In the case at
bar, the taxable quarter involved was for the period of July 1, 2002 to September 30, 2002. Applying
Section 114 of the 1997 NIRC, respondent has until October 25, 2002 within which to file its quarterly
return for its gross sales or receipts [with] which it complied when it filed its VAT Quarterly Return on
October 20, 2002.

In relation to this, the reckoning of the two-year period provided under Section 229 of the 1997 NIRC
should start from the payment of tax subject claim for refund. As stated above, respondent filed its VAT
Return for the taxable third quarter of 2002 on October 20, 2002. Thus, respondent's administrative and
judicial claims for refund filed on September 30, 2004 were filed on time because AICHI has until
October 20, 2004 within which to file its claim for refund.

In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires the previous
filing of an administrative claim for refund prior to the judicial claim. This should not be the case as the
law does not prohibit the simultaneous filing of the administrative and judicial claims for refund. What is
controlling is that both claims for refund must be filed within the two-year prescriptive period.

In sum, the Court En Banc finds no cogent justification to disturb the findings and conclusion spelled out
in the assailed January 4, 2008 Decision and March 13, 2008 Resolution of the CTA Second Division.
What the instant petition seeks is for the Court En Banc to view and appreciate the evidence in their own
perspective of things, which unfortunately had already been considered and passed upon.
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for
lack of merit. Accordingly, the January 4, 2008 Decision and March 13, 2008 Resolution of the CTA
Second Division in CTA Case No. 7065 entitled, "AICHI Forging Company of Asia, Inc. petitioner vs.
Commissioner of Internal Revenue, respondent" are hereby AFFIRMED in toto.

SO ORDERED.22

Petitioner sought reconsideration but the CTA En Banc denied23 his Motion for Reconsideration.

Issue

Hence, the present recourse where petitioner interposes the issue of whether respondent’s judicial and
administrative claims for tax refund/credit were filed within the two-year prescriptive period provided in
Sections 112(A) and 229 of

the NIRC.24

Petitioner’s Arguments

Petitioner maintains that respondent’s administrative and judicial claims for tax refund/credit were filed in
violation of Sections 112(A) and 229 of the NIRC.25 He posits that pursuant to Article 13 of the Civil
Code,26 since the year 2004 was a leap year, the filing of the claim for tax refund/credit on September 30,
2004 was beyond the two-year period, which expired on September 29, 2004.27

Petitioner further argues that the CTA En Banc erred in applying Section 114(A) of the NIRC in
determining the start of the two-year period as the said provision pertains to the compliance requirements
in the payment of VAT.28 He asserts that it is Section 112, paragraph (A), of the same Code that should
apply because it specifically provides for the period within which a claim for tax refund/ credit should be
made.29

Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the judicial claim
with the CTA were filed on the same day.30 He opines that the simultaneous filing of the administrative
and the judicial claims contravenes Section 229 of the NIRC, which requires the prior filing of an
administrative claim.31 He insists that such procedural requirement is based on the doctrine of exhaustion
of administrative remedies and the fact that the CTA is an appellate body exercising judicial review over
administrative actions of the CIR.32

Respondent’s Arguments

For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the
period July 1, 2002 to September 30, 2002 as a matter of right because it has substantially complied with
all the requirements provided by law.33 Respondent likewise defends the CTA En Banc in applying
Section 114(A) of the NIRC in computing the prescriptive period for the claim for tax refund/credit.
Respondent believes that Section 112(A) of the NIRC must be read together with Section 114(A) of the
same Code.34

As to the alleged simultaneous filing of its administrative and judicial claims, respondent contends that it
first filed an administrative claim with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback
Center of the DOF before it filed a judicial claim with the CTA.35 To prove this, respondent points out
that its Claimant Information Sheet No. 4970236 and BIR Form No. 1914 for the third quarter of
2002,37 which were filed with the DOF, were attached as Annexes "M" and "N," respectively, to the
Petition for Review filed with the CTA.38 Respondent further contends that the non-observance of the
120-day period given to the CIR to act on the claim for tax refund/credit in Section 112(D) is not fatal
because what is important is that both claims are filed within the two-year prescriptive period.39 In
support thereof, respondent cites Commissioner of Internal Revenue v. Victorias Milling Co., Inc.40 where
it was ruled that "[i]f, however, the [CIR] takes time in deciding the claim, and the period of two years is
about to end, the suit or proceeding must be started in the [CTA] before the end of the two-year period
without awaiting the decision of the [CIR]."41 Lastly, respondent argues that even if the period had
already lapsed, it may be suspended for reasons of equity considering that it is not a jurisdictional
requirement.42

Our Ruling

The petition has merit.

Unutilized input VAT must be claimed within two years after the close of the taxable quarter when the
sales were made

In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the
Second Division of the CTA applied Section 112(A) of the NIRC, which states:

SEC. 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales – Any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales
were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the
amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales. (Emphasis supplied.)

The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the NIRC, which
read:

SEC. 114. Return and Payment of Value-Added Tax. –

(A) In General. – Every person liable to pay the value-added tax imposed under this Title shall file a
quarterly return of the amount of his gross sales or receipts within twenty-five (25) days following the
close of each taxable quarter prescribed for each taxpayer: Provided, however, That VAT-registered
persons shall pay the value-added tax on a monthly basis.

Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and
pay the tax due thereon within twenty-five (25) days from the date of cancellation of registration:
Provided, That only one consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.
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 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.)

Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for
refund/credit of unutilized input VAT should start from the date of payment of tax and not from the close
of the taxable quarter when the sales were made.43

The pivotal question of when to reckon the running of the two-year prescriptive period, however, has
already been resolved in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,44 where we
ruled that Section 112(A) of the NIRC is the applicable provision in determining the start of the two-year
period for claiming a refund/credit of unutilized input VAT, and that Sections 204(C) and 229 of the
NIRC are inapplicable as "both provisions apply only to instances of erroneous payment or illegal
collection of internal revenue taxes."45 We explained that:

The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms that unutilized
input VAT payments not otherwise used for any internal revenue tax due the taxpayer must be
claimed within two years reckoned from the close of the taxable quarter when the relevant sales
were made pertaining to the input VAT regardless of whether said tax was paid or not. As the CA
aptly puts it, albeit it erroneously applied the aforequoted Sec. 112 (A), "[P]rescriptive period commences
from the close of the taxable quarter when the sales were made and not from the time the input VAT was
paid nor from the time the official receipt was issued." Thus, when a zero-rated VAT taxpayer pays its
input VAT a year after the pertinent transaction, said taxpayer only has a year to file a claim for refund or
tax credit of the unutilized creditable input VAT. The reckoning frame would always be the end of the
quarter when the pertinent sales or transaction was made, regardless when the input VAT was paid. Be
that as it may, and given that the last creditable input VAT due for the period covering the progress billing
of September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for unutilized
creditable input VAT refund or tax credit for said quarter prescribed two years after September 30, 1996
or, to be precise, on September 30, 1998. Consequently, MPC’s claim for refund or tax credit filed on
December 10, 1999 had already prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC which, for
the purpose of refund, prescribes a different starting point for the two-year prescriptive limit for the filing
of a claim therefor. Secs. 204(C) and 229 respectively 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
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, 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.

Notably, the above provisions also set a two-year prescriptive period, reckoned from date of payment of
the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both provisions apply
only to instances of erroneous payment or illegal collection of internal revenue taxes.

MPC’s creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax which can be shifted
or passed on to the buyer, transferee, or lessee of the goods, properties, or services of the taxpayer. The
fact that the subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated
or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its right to a refund
for any unutilized creditable input VAT, albeit the erroneous, illegal, or wrongful payment angle does not
enter the equation.

xxxx

Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC, providing a two-year
prescriptive period reckoned from the close of the taxable quarter when the relevant sales or
transactions were made pertaining to the creditable input VAT, applies to the instant case, and not
to the other actions which refer to erroneous payment of taxes.46 (Emphasis supplied.)
In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114(A) and 229 of
the NIRC in computing the two-year prescriptive period for claiming refund/credit of unutilized input
VAT. To be clear, Section 112 of the NIRC is the pertinent provision for the refund/credit of input VAT.
Thus, the two-year period should be reckoned from the close of the taxable quarter when the sales were
made.

The administrative claim was timely filed

Bearing this in mind, we shall now proceed to determine whether the administrative claim was timely
filed.

Relying on Article 13 of the Civil Code,47 which provides that a year is equivalent to 365 days, and taking
into account the fact that the year 2004 was a leap year, petitioner submits that the two-year period to file
a claim for tax refund/ credit for the period July 1, 2002 to September 30, 2002 expired on September 29,
2004.48

We do not agree.

In Commissioner of Internal Revenue v. Primetown Property Group, Inc.,49 we said that as between the
Civil Code, which provides that a year is equivalent to 365 days, and the Administrative Code of 1987,
which states that a year is composed of 12 calendar months, it is the latter that must prevail following the
legal maxim, Lex posteriori derogat priori.50 Thus:

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of
1987 deal with the same subject matter – the computation of legal periods. Under the Civil Code, a year is
equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of
1987, however, a year is composed of 12 calendar months. Needless to state, under the Administrative
Code of 1987, the number of days is irrelevant.

There obviously exists a manifest incompatibility in the manner of

computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, we
hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law,
governs the computation of legal periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the two-year
prescriptive period (reckoned from the time respondent filed its final adjusted return on April 14, 1998)
consisted of 24 calendar months, computed as follows:

Year 1 1st calendar month April 15, 1998 to May 14, 1998
2nd calendar month May 15, 1998 to June 14, 1998
3rd calendar month June 15, 1998 to July 14, 1998
4th calendar month July 15, 1998 to August 14, 1998
5th calendar month August 15, 1998 to September 14, 1998
6th calendar month September 15, 1998 to October 14, 1998
7th calendar month October 15, 1998 to November 14, 1998
 8th calendar month November 15, 1998 to December 14, 1998
9th calendar month December 15, 1998 to January 14, 1999
10th calendar month January 15, 1999 to February 14, 1999
11th calendar month February 15, 1999 to March 14, 1999
12th calendar month March 15, 1999 to April 14, 1999
Year 2 13th calendar month April 15, 1999 to May 14, 1999
14th calendar month May 15, 1999 to June 14, 1999
15th calendar month June 15, 1999 to July 14, 1999
16th calendar month July 15, 1999 to August 14, 1999
17th calendar month August 15, 1999 to September 14, 1999
18th calendar month September 15, 1999 to October 14, 1999
19th calendar month October 15, 1999 to November 14, 1999
20th calendar month November 15, 1999 to December 14, 1999
21st calendar month December 15, 1999 to January 14, 2000
22nd calendar month January 15, 2000 to February 14, 2000
23rd calendar month February 15, 2000 to March 14, 2000
24th calendar month March 15, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the 24th
calendar month from the day respondent filed its final adjusted return. Hence, it was filed within the
reglementary period.51

Applying this to the present case, the two-year period to file a claim for tax refund/credit for the period
July 1, 2002 to September 30, 2002 expired on September 30, 2004. Hence, respondent’s administrative
claim was timely filed.

The filing of the judicial claim was premature

However, notwithstanding the timely filing of the administrative claim, we

are constrained to deny respondent’s claim for tax refund/credit for having been filed in violation of
Section 112(D) of the NIRC, which provides that:

SEC. 112. Refunds or Tax Credits of Input Tax. –

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. – In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
(Emphasis supplied.)

Section 112(D) of the NIRC clearly provides that the CIR has "120 days, from the date of the submission
of the complete documents in support of the application [for tax refund/credit]," within which to grant or
deny the claim. In case of full or partial denial by the CIR, the taxpayer’s recourse is to file an appeal
before the CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day
period the CIR fails to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal
the inaction of the CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on September 30, 2004.
Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For this
reason, we find the filing of the judicial claim with the CTA premature.

Respondent’s assertion that the non-observance of the 120-day period is not fatal to the filing of a judicial
claim as long as both the administrative and the judicial claims are filed within the two-year prescriptive
period52 has no legal basis.

There is nothing in Section 112 of the NIRC to support respondent’s view. Subsection (A) of the said
provision states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales."
The phrase "within two (2) years x x x apply for the issuance of a tax credit certificate or refund" refers to
applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is apparent in
the first paragraph of subsection (D) of the same provision, which states that the CIR has "120 days from
the submission of complete documents in support of the application filed in accordance with Subsections
(A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the
NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or
inaction of the CIR. The second paragraph of Section 112(D) of the NIRC envisions two scenarios: (1)
when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is
made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal
with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA.

With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.53 relied upon by
respondent, we find the same inapplicable as the tax provision involved in that case is Section 306, now
Section 229 of the NIRC. And as already discussed, Section 229 does not apply to refunds/credits of input
VAT, such as the instant case.

In fine, the premature filing of respondent’s claim for refund/credit of input VAT before the CTA
warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.
WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the October
6, 2008 Resolution of the Court of Tax Appeals are hereby REVERSED and SET ASIDE. The Court of
Tax Appeals Second Division is DIRECTED to dismiss CTA Case No. 7065 for having been prematurely
filed.

SO ORDERED.

MARIANO C. DEL CASTILLO

COMMISSIONER OF INTERNAL G.R. No. 184823

REVENUE,
Petitioner,
Present:

CORONA, C. J., Chairperson,

- versus - VELASCO, JR.,
LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.
AICHI FORGING COMPANY OF
ASIA, INC., Promulgated:
Respondent. October 6, 2010
x-------------------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

A taxpayer is entitled to a refund either by authority of a statute expressly granting such right, privilege, or
incentive in his favor, or under the principle of solutio indebiti requiring the return of taxes erroneously or illegally
collected. In both cases, 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.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the July 30,
2008 Decision[1] and the October 6, 2008 Resolution[2] of the Court of Tax Appeals (CTA) En Banc.
Factual Antecedents
 Respondent Aichi Forging Company of Asia, Inc., a corporation duly organized and existing under the
laws of the Republic of the Philippines, is engaged in the manufacturing, producing, and processing of steel and its
by-products.[3] It is registered with the Bureau of Internal Revenue (BIR) as a Value-Added Tax (VAT) entity[4] and
its products, close impression die steel forgings and tool and dies, are registered with the Board of Investments
(BOI) as a pioneer status.[5]

On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1, 2002
to September 30, 2002 in the total amount of P3,891,123.82 with the petitioner Commissioner of Internal Revenue
(CIR), through the Department of Finance (DOF) One-Stop Shop Inter-Agency Tax Credit and Duty Drawback
Center.[6]

Proceedings before the Second Division of the CTA

On even date, respondent filed a Petition for Review[7] with the CTA for the refund/credit of the same input
VAT. The case was docketed as CTA Case No. 7065 and was raffled to the Second Division of the CTA.

In the Petition for Review, respondent alleged that for the period July 1, 2002 to September 30, 2002, it
generated and recorded zero-rated sales in the amount of P131,791,399.00,[8]which was paid pursuant to Section
106(A) (2) (a) (1), (2) and (3) of the National Internal Revenue Code of 1997 (NIRC);[9] that for the said period, it
incurred and paid input VAT amounting to P3,912,088.14 from purchases and importation attributable to its zero-
rated sales;[10] and that in its application for refund/credit filed with the DOF One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center, it only claimed the amount of P3,891,123.82.[11]
In response, petitioner filed his Answer[12] raising the following special and affirmative defenses, to wit:

4. Petitioners alleged claim for refund is subject to administrative investigation by the

Bureau;

5. Petitioner must prove that it paid VAT input taxes for the period in question;

6. Petitioner must prove that its sales are export sales contemplated under Sections 106(A)
(2) (a), and 108(B) (1) of the Tax Code of 1997;

7. Petitioner must prove that the claim was filed within the two (2) year period prescribed
in Section 229 of the Tax Code;

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

9. Claims for refund are construed strictly against the claimant for the same partake of the
nature of exemption from taxation.[13]
 Trial ensued, after which, on January 4, 2008, the Second Division of the CTA rendered a Decision
partially granting respondents claim for refund/credit. Pertinent portions of the Decision read:

For a VAT registered entity whose sales are zero-rated, to validly claim a refund, Section
112 (A) of the NIRC of 1997, as amended, provides:

SEC. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-rated or Effectively Zero-rated Sales. Any VAT-registered

person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for
the issuance of a tax credit certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax: x x x

Pursuant to the above provision, petitioner must comply with the following requisites: (1)
the taxpayer is engaged in sales which are zero-rated or effectively zero-rated; (2) the taxpayer is
VAT-registered; (3) the claim must be filed within two years after the close of the taxable quarter
when such sales were made; and (4) the creditable input tax due or paid must be attributable to
such sales, except the transitional input tax, to the extent that such input tax has not been applied
against the output tax.

The Court finds that the first three requirements have been complied [with] by petitioner.

With regard to the first requisite, the evidence presented by petitioner, such as the Sales
Invoices (Exhibits II to II-262, JJ to JJ-431, KK to KK-394 and LL) shows that it is engaged in
sales which are zero-rated.

The second requisite has likewise been complied with. The Certificate of Registration
with OCN 1RC0000148499 (Exhibit C) with the BIR proves that petitioner is a registered VAT
taxpayer.

In compliance with the third requisite, petitioner filed its administrative claim for refund
on September 30, 2004 (Exhibit N) and the present Petition for Review on September 30, 2004,
both within the two (2) year prescriptive period from the close of the taxable quarter when the
sales were made, which is from September 30, 2002.

As regards, the fourth requirement, the Court finds that there are some documents and
claims of petitioner that are baseless and have not been satisfactorily substantiated.

xxxx

In sum, petitioner has sufficiently proved that it is entitled to a refund or issuance of a tax
credit certificate representing unutilized excess input VAT payments for the period July 1, 2002 to
September 30, 2002, which are attributable to its zero-rated sales for the same period, but in the
reduced amount of P3,239,119.25, computed as follows:

Amount of Claimed Input VAT P 3,891,123.82

 Less:
Exceptions as found by the ICPA 41,020.37
Net Creditable Input VAT P 3,850,103.45
Less:
Output VAT Due 610,984.20
Excess Creditable Input VAT P 3,239,119.25

WHEREFORE, premises considered, the present Petition for Review is PARTIALLY

GRANTED. Accordingly, respondent is hereby ORDERED TO REFUND OR ISSUE A TAX
CREDIT CERTIFICATE in favor of petitioner [in] the reduced amount of THREE MILLION
TWO HUNDRED THIRTY NINE THOUSAND ONE HUNDRED NINETEEN AND 25/100
PESOS (P3,239,119.25), representing the unutilized input VAT incurred for the months of July to
September 2002.

SO ORDERED.[14]

Dissatisfied with the above-quoted Decision, petitioner filed a Motion for Partial
[15]
Reconsideration, insisting that the administrative and the judicial claims were filed beyond the two-year period to
claim a tax refund/credit provided for under Sections 112(A) and 229 of the NIRC. He reasoned that since the year
2004 was a leap year, the filing of the claim for tax refund/credit on September 30, 2004 was beyond the two-year
period, which expired on September 29, 2004.[16] He cited as basis Article 13 of the Civil Code,[17] which provides
that when the law speaks of a year, it is equivalent to 365 days. In addition, petitioner argued that the simultaneous
filing of the administrative and the judicial claims contravenes Sections 112 and 229 of the NIRC.[18] According to
the petitioner, a prior filing of an administrative claim is a condition precedent[19] before a judicial claim can be
filed. He explained that the rationale of such requirement rests not only on the doctrine of exhaustion of
administrative remedies but also on the fact that the CTA is an appellate body which exercises the power of judicial
review over administrative actions of the BIR. [20]

The Second Division of the CTA, however, denied petitioners Motion for Partial Reconsideration for lack
of merit. Petitioner thus elevated the matter to the CTA En Banc via a Petition for Review.[21]

Ruling of the CTA En Banc

On July 30, 2008, the CTA En Banc affirmed the Second Divisions Decision allowing the partial tax
refund/credit in favor of respondent. However, as to the reckoning point for counting the two-year period, the
CTA En Banc ruled:

Petitioner argues that the administrative and judicial claims were filed beyond the period
allowed by law and hence, the honorable Court has no jurisdiction over the same. In addition,
petitioner further contends that respondent's filing of the administrative and judicial [claims]
effectively eliminates the authority of the honorable Court to exercise jurisdiction over the judicial
claim.

We are not persuaded.

Section 114 of the 1997 NIRC, and We quote, to wit:

SEC. 114. Return and Payment of Value-added Tax.

(A) In General. Every person liable to pay the value-added tax imposed
under this Title shall file a quarterly return of the amount of his gross sales or
receipts within twenty-five (25) days following the close of each taxable quarter
prescribed for each taxpayer: Provided, however, That VAT-registered persons
shall pay the value-added tax on a monthly basis.

[x x x x ]

Based on the above-stated provision, a taxpayer has twenty five (25) days from the close
of each taxable quarter within which to file a quarterly return of the amount of his gross sales or
receipts. In the case at bar, the taxable quarter involved was for the period of July 1,
2002 to September 30, 2002. Applying Section 114 of the 1997 NIRC, respondent has until
October 25, 2002 within which to file its quarterly return for its gross sales or receipts [with]
which it complied when it filed its VAT Quarterly Return on October 20, 2002.

In relation to this, the reckoning of the two-year period provided under Section 229 of the
1997 NIRC should start from the payment of tax subject claim for refund. As stated above,
respondent filed its VAT Return for the taxable third quarter of 2002 on October 20, 2002. Thus,
respondent's administrative and judicial claims for refund filed on September 30, 2004 were filed
on time because AICHI has untilOctober 20, 2004 within which to file its claim for refund.

In addition, We do not agree with the petitioner's contention that the 1997 NIRC requires
the previous filing of an administrative claim for refund prior to the judicial claim. This should not
be the case as the law does not prohibit the simultaneous filing of the administrative and judicial
claims for refund. What is controlling is that both claims for refund must be filed within the two-
year prescriptive period.

In sum, the Court En Banc finds no cogent justification to disturb the findings and
conclusion spelled out in the assailed January 4, 2008 Decision and March 13, 2008 Resolution of
the CTA Second Division. What the instant petition seeks is for the Court En Banc to view and
appreciate the evidence in their own perspective of things, which unfortunately had already been
considered and passed upon.

WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and
DISMISSED for lack of merit. Accordingly, the January 4, 2008 Decision and March 13, 2008
Resolution of the CTA Second Division in CTA Case No. 7065 entitled, AICHI Forging
Company of Asia, Inc. petitioner vs. Commissioner of Internal Revenue, respondent are hereby
AFFIRMED in toto.

SO ORDERED.[22]
 Petitioner sought reconsideration but the CTA En Banc denied[23] his Motion for Reconsideration.

Issue

Hence, the present recourse where petitioner interposes the issue of whether respondents judicial and
administrative claims for tax refund/credit were filed within the two-yearprescriptive period provided in Sections
112(A) and 229 of

the NIRC.[24]

Petitioners Arguments

Petitioner maintains that respondents administrative and judicial claims for tax refund/credit were filed in violation
of Sections 112(A) and 229 of the NIRC.[25] He posits that pursuant to Article 13 of the Civil Code,[26] since the year
2004 was a leap year, the filing of the claim for tax refund/credit on September 30, 2004 was beyond the two-year
period, which expired onSeptember 29, 2004.[27]

Petitioner further argues that the CTA En Banc erred in applying Section 114(A) of the NIRC in determining the
start of the two-year period as the said provision pertains to the compliance requirements in the payment of
VAT.[28] He asserts that it is Section 112, paragraph (A), of the same Code that should apply because it specifically
provides for the period within which a claim for tax refund/ credit should be made.[29]

Petitioner likewise puts in issue the fact that the administrative claim with the BIR and the judicial claim with the
CTA were filed on the same day.[30] He opines that the simultaneous filing of the administrative and the judicial
claims contravenes Section 229 of the NIRC, which requires the prior filing of an administrative claim.[31] He insists
that such procedural requirement is based on the doctrine of exhaustion of administrative remedies and the fact that
the CTA is an appellate body exercising judicial review over administrative actions of the CIR.[32]

Respondents Arguments

For its part, respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the period July 1,
2002 to September 30, 2002 as a matter of right because it has substantially complied with all the requirements
provided by law.[33] Respondent likewise defends the CTA En Banc in applying Section 114(A) of the NIRC in
computing the prescriptive period for the claim for tax refund/credit. Respondent believes that Section 112(A) of the
NIRC must be read together with Section 114(A) of the same Code.[34]
As to the alleged simultaneous filing of its administrative and judicial claims, respondent contends that it first filed
an administrative claim with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the DOF
before it filed a judicial claim with the CTA.[35] To prove this, respondent points out that its Claimant Information
Sheet No. 49702[36] and BIR Form No. 1914 for the third quarter of 2002,[37] which were filed with the DOF, were
attached as Annexes M and N, respectively, to the Petition for Review filed with the CTA.[38] Respondent further
contends that the non-observance of the 120-day period given to the CIR to act on the claim for tax refund/credit in
Section 112(D) is not fatal because what is important is that both claims are filed within the two-year prescriptive
period.[39] In support thereof, respondent cites Commissioner of Internal Revenue v. Victorias Milling Co.,
Inc.[40] where it was ruled that [i]f, however, the [CIR] takes time in deciding the claim, and the period of two years is
about to end, the suit or proceeding must be started in the [CTA] before the end of the two-year period without
awaiting the decision of the [CIR].[41] Lastly, respondent argues that even if the period had already lapsed, it may be
suspended for reasons of equity considering that it is not a jurisdictional requirement.[42]

Our Ruling

The petition has merit.

Unutilized input VAT must be claimed within two years after

the close of the taxable quarter when the sales were made

In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the Second
Division of the CTA applied Section 112(A) of the NIRC, which states:

SEC. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-rated or Effectively Zero-rated Sales Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales, except transitional input tax, to the extent that such
input tax has not been applied against output tax: Provided, however, That in the case of zero-rated
sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the
taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale
of goods or properties or services, and the amount of creditable input tax due or paid cannot be
directly and entirely attributed to any one of the transactions, it shall be allocated proportionately
on the basis of the volume of sales. (Emphasis supplied.)
The CTA En Banc, on the other hand, took into consideration Sections 114 and 229 of the NIRC, which read:

SEC. 114. Return and Payment of Value-Added Tax.

(A) In General. Every person liable to pay the value-added tax imposed under this Title
shall file a quarterly return of the amount of his gross sales or receipts within twenty-five
(25) days following the close of each taxable quarter prescribed for each taxpayer: Provided,
however, That VAT-registered persons shall pay the value-added tax on a monthly basis.
Any person, whose registration has been cancelled in accordance with Section 236, shall
file a return and pay the tax due thereon within twenty-five (25) days from the date of cancellation
of registration: Provided, That only one consolidated return shall be filed by the taxpayer for his
principal place of business or head office and all branches.
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 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.)

Hence, the CTA En Banc ruled that the reckoning of the two-year period for filing a claim for refund/credit of
unutilized input VAT should start from the date of payment of tax and not from the close of the taxable quarter
when the sales were made.[43]

The pivotal question of when to reckon the running of the two-year prescriptive period, however, has already been
resolved in Commissioner of Internal Revenue v. Mirant Pagbilao Corporation,[44] where we ruled that Section
112(A) of the NIRC is the applicable provision in determining the start of the two-year period for claiming a
refund/credit of unutilized input VAT, and that Sections 204(C) and 229 of the NIRC are inapplicable as both
provisions apply only to instances of erroneous payment or illegal collection of internal revenue taxes.[45] We
explained that:

The above proviso [Section 112 (A) of the NIRC] clearly provides in no uncertain terms
that unutilized input VAT payments not otherwise used for any internal revenue tax due the
taxpayer must be claimed within two years reckoned from the close of the taxable quarter
when the relevant sales were made pertaining to the input VAT regardless of whether said
tax was paid or not. As the CA aptly puts it, albeit it erroneously applied the aforequoted Sec.
112 (A), [P]rescriptive period commences from the close of the taxable quarter when the sales
were made and not from the time the input VAT was paid nor from the time the official receipt
was issued. Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent
transaction, said taxpayer only has a year to file a claim for refund or tax credit of the unutilized
creditable input VAT. The reckoning frame would always be the end of the quarter when the
pertinent sales or transaction was made, regardless when the input VAT was paid. Be that as it
may, and given that the last creditable input VAT due for the period covering the progress billing
of September 6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for
unutilized creditable input VAT refund or tax credit for said quarter prescribed two years after
September 30, 1996 or, to be precise, on September 30, 1998. Consequently, MPCs claim for
refund or tax credit filed on December 10, 1999 had already prescribed.

Reckoning for prescriptive period under

Secs. 204(C) and 229 of the NIRC inapplicable

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the
NIRC which, for the purpose of refund, prescribes a different starting point for the two-year
prescriptive limit for the filing of a claim therefor. Secs. 204(C) and 229 respectively 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 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, 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.

Notably, the above provisions also set a two-year prescriptive period, reckoned from date
of payment of the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both
provisions apply only to instances of erroneous payment or illegal collection of internal
revenue taxes.

MPCs creditable input VAT not erroneously paid

For perspective, under Sec. 105 of the NIRC, creditable input VAT is an indirect tax
which can be shifted or passed on to the buyer, transferee, or lessee of the goods, properties, or
services of the taxpayer. The fact that the subsequent sale or transaction involves a wholly-tax
exempt client, resulting in a zero-rated or effectively zero-rated transaction, does not, standing
alone, deprive the taxpayer of its right to a refund for any unutilized creditable input VAT, albeit
the erroneous, illegal, or wrongful payment angle does not enter the equation.

xxxx

Considering the foregoing discussion, it is clear that Sec. 112 (A) of the NIRC,
providing a two-year prescriptive period reckoned from the close of the taxable quarter
when the relevant sales or transactions were made pertaining to the creditable input VAT,
applies to the instant case, and not to the other actions which refer to erroneous payment of
taxes.[46] (Emphasis supplied.)

In view of the foregoing, we find that the CTA En Banc erroneously applied Sections 114(A) and 229 of the NIRC
in computing the two-year prescriptive period for claiming refund/credit of unutilized input VAT. To be clear,
Section 112 of the NIRC is the pertinent provision for the refund/credit of input VAT. Thus, the two-year period
should be reckoned from the close of the taxable quarter when the sales were made.
The administrative claim was timely filed

Bearing this in mind, we shall now proceed to determine whether the administrative claim was timely filed.

Relying on Article 13 of the Civil Code,[47] which provides that a year is equivalent to 365 days, and taking
into account the fact that the year 2004 was a leap year, petitioner submits that the two-year period to file a claim for
tax refund/ credit for the period July 1, 2002 to September 30, 2002 expired on September 29, 2004.[48]

We do not agree.

In Commissioner of Internal Revenue v. Primetown Property Group, Inc.,[49] we said that as between the
Civil Code, which provides that a year is equivalent to 365 days, and theAdministrative Code of 1987, which states
that a year is composed of 12 calendar months, it is the latter that must prevail following the legal maxim, Lex
posteriori derogat priori.[50] Thus:

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the
Administrative Code of 1987 deal with the same subject matter the computation of legal periods.
Under the Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year.
Under the Administrative Code of 1987, however, a year is composed of 12 calendar months.
Needless to state, under the Administrative Code of 1987, the number of days is irrelevant.

There obviously exists a manifest incompatibility in the manner of

computing legal periods under the Civil Code and the Administrative Code of 1987. For this
reason, we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being
the more recent law, governs the computation of legal periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this
case, the two-year prescriptive period (reckoned from the time respondent filed its final adjusted
return on April 14, 1998) consisted of 24 calendar months, computed as follows:

Year 1 1st calendar month April 15, 1998 to May 14, 1998
2nd calendar month May 15, 1998 to June 14, 1998
3rd calendar month June 15, 1998 to July 14, 1998
4th calendar month July 15, 1998 to August 14, 1998
5th calendar month August 15, 1998 to September 14, 1998
6th calendar month September 15, 1998 to October 14, 1998
7th calendar month October 15, 1998 to November 14, 1998
8th calendar month November 15, 1998 to December 14, 1998
9th calendar month December 15, 1998 to January 14, 1999
10th calendar month January 15, 1999 to February 14, 1999
11th calendar month February 15, 1999 to March 14, 1999
12th calendar month March 15, 1999 to April 14, 1999
Year 2 13th calendar month April 15, 1999 to May 14, 1999
14th calendar month May 15, 1999 to June 14, 1999
15th calendar month June 15, 1999 to July 14, 1999
16th calendar month July 15, 1999 to August 14, 1999
17th calendar month August 15, 1999 to September 14, 1999
18th calendar month September 15, 1999 to October 14, 1999
19th calendar month October 15, 1999 to November 14, 1999
20th calendar month November 15, 1999 to December 14, 1999
21st calendar month December 15, 1999 to January 14, 2000
22nd calendar month January 15, 2000 to February 14, 2000
23rd calendar month February 15, 2000 to March 14, 2000
24th calendar month March 15, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last
day of the 24th calendar month from the day respondent filed its final adjusted return. Hence, it
was filed within the reglementary period.[51]
 Applying this to the present case, the two-year period to file a claim for tax refund/credit for the period July
1, 2002 to September 30, 2002 expired on September 30, 2004. Hence, respondents administrative claim was timely
filed.

The filing of the judicial claim was premature

However, notwithstanding the timely filing of the administrative claim, we

are constrained to deny respondents claim for tax refund/credit for having been filed in violation of Section 112(D)
of the NIRC, which provides that:

SEC. 112. Refunds or Tax Credits of Input Tax.

xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the decision denying the claim or
after the expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals. (Emphasis supplied.)

Section 112(D) of the NIRC clearly provides that the CIR has 120 days, from the date of the submission of the
complete documents in support of the application [for tax refund/credit], within which to grant or deny the claim. In
case of full or partial denial by the CIR, the taxpayers recourse is to file an appeal before the CTA within 30 days
from receipt of the decision of the CIR.However, if after the 120-day period the CIR fails to act on the application
for tax refund/credit, the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days.

In this case, the administrative and the judicial claims were simultaneously filed on September 30,
2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120-day period. For this
reason, we find the filing of the judicial claim with the CTA premature.

Respondents assertion that the non-observance of the 120-day period is not fatal to the filing of a judicial
claim as long as both the administrative and the judicial claims are filed within the two-year prescriptive
period[52] has no legal basis.
 There is nothing in Section 112 of the NIRC to support respondents view. Subsection (A) of the said
provision states that any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within
two years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales. The phrase within two (2) years x
x x apply for the issuance of a tax credit certificate or refund refers to applications for refund/credit filed with the
CIR and not to appeals made to the CTA. This is apparent in the first paragraph of subsection (D) of the same
provision, which states that the CIR has 120 days from the submission of complete documents in support of
the application filed in accordance with Subsections (A) and (B) within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of the NIRC,
which already provides for a specific period within which a taxpayer should appeal the decision or inaction of the
CIR. The second paragraph of Section 112(D) of the NIRC envisions two scenarios: (1) when a decision is issued
by the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In
both instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we see it then, the 120-day
period is crucial in filing an appeal with the CTA.
With regard to Commissioner of Internal Revenue v. Victorias Milling, Co., Inc.[53] relied upon by
respondent, we find the same inapplicable as the tax provision involved in that case is Section 306, now Section 229
of the NIRC. And as already discussed, Section 229 does not apply to refunds/credits of input VAT, such as the
instant case.

In fine, the premature filing of respondents claim for refund/credit of input VAT before the CTA warrants a
dismissal inasmuch as no jurisdiction was acquired by the CTA.

WHEREFORE, the Petition is hereby GRANTED. The assailed July 30, 2008 Decision and the October
6, 2008 Resolution of the Court of Tax Appeals are hereby REVERSED andSET ASIDE. The Court of Tax
Appeals Second Division is DIRECTED to dismiss CTA Case No. 7065 for having been prematurely filed.

SO ORDERED.

G.R. No. 191498 January 15, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
MINDANAO II GEOTHERMAL PARTNERSHIP, Respondent.

DECISION

SERENO, CJ:
This Rule 45 Petition1 requires this Court to address the question of timeliness with respect to petitioner's
administrative and judicial claims for refund and credit of accumulated unutilized input Value Added Tax
(VAT) under Section 112(A) and Section 112(D) of the 1997 Tax Code. Petitioner Mindanao II
Geothermal Partnership (Mindanao II) assails the Decision2 and Resolution3 of the Court of Tax Appeals
En Banc (CTA En Banc) in CTA En Banc Case No. 448, affirming the Decision in CTA Case No. 7507
of the CTA Second Division.4 The latter ordered the refund or issuance of a tax credit certificate in the
amount of P6,791,845.24 representing unutilized input VAT incurred for the second, third, and fourth
quarters of taxable year 2004 in favor of herein respondent, Mindanao II.

FACTS

Mindanao II is a partnership registered with the Securities and Exchange Commission.5 It is engaged in
the business of power generation and sale of electricity to the National Power Corporation
(NAPOCOR)6 and is accredited by the Department of Energy.7

Mindanao II filed its Quarterly VAT Returns for the second, third and fourth quarters of taxable year
2004 on the following dates:8

Date filed
Quarter Taxable Year
Original Amended
26 July 2004 12 July 2005 2nd 2004
22 October 2004 12 July 2005 3rd 2004
25 January 2005 12 July 2005 4th 2004

On 6 October 2005, Mindanao II filed with the Bureau of Internal Revenue (BIR) an application for the
refund or credit of accumulated unutilized creditable input taxes.9 In support of the administrative claim
for refund or credit, Mindanao II alleged, among others, that it is registered with the BIR as a value-added
taxpayer10 and all its sales are zero-rated under the EPIRA law.11 It further stated that for the second,
third, and fourth quarters of taxable year 2004, it paid input VAT in the aggregate amount
of P7,167,005.84, which were directly attributable to the zero-rated sales. The input taxes had not been
applied against output tax.

Pursuant to Section 112(D) of the 1997 Tax Code, the Commissioner of Internal Revenue (CIR) had a
period of 120 days, or until 3 February 2006, to act on the claim. The administrative claim, however,
remained unresolved on 3 February 2006.

Under the same provision, Mindanao II could treat the inaction of the CIR as a denial of its claim, in
which case, the former would have 30 days to file an appeal to the CTA, that is, on 5 March 2006.
Mindanao II, however, did not file an appeal within the 30-day period.

Apparently, Mindanao II believed that a judicial claim must be filed within the two-year prescriptive
period provided under Section 112(A) and that such time frame was to be reckoned from the filing of its
Quarterly VAT Returns for the second, third, and fourth quarters of taxable year 2004, that is, from 26
July 2004, 22 October 2004, and 25 January 2005, respectively. Thus, on 21 July 2006, Mindanao II,
claiming inaction on the part of the CIR and that the two-year prescriptive period was about to expire,
filed a Petition for Review with the CTA docketed as CTA Case No. 6133.12
On 8 June 2007, while the application for refund or credit of unutilized input VAT of Mindanao II was
pending before the CTA Second Division, this Court promulgated Atlas Consolidated Mining and
Development Corporation v. CIR13 (Atlas). Atlas held that the two-year prescriptive period for the filing
of a claim for an input VAT refund or credit is to be reckoned from the date of filing of the corresponding
quarterly VAT return and payment of the tax.

On 12 August 2008, the CTA Second Division rendered a Decision14 ordering the CIR to grant a refund
or a tax credit certificate, but only in the reduced amount of P6,791,845.24, representing unutilized input
VAT incurred for the second, third and fourth quarters of taxable year 2004.15

In support of its ruling, the CTA Second Division held that Mindanao II complied with the twin requisites
for VAT zero-rating under the EPIRA law: first, it is a generation company, and second, it derived sales
from power generation. It also ruled that Mindanao II satisfied the requirements for the grant of a
refund/credit under Section 112 of the Tax Code: (1) there must be zero-rated or effectively zero-rated
sales; (2) input taxes must have been incurred or paid; (3) the creditable input tax due or paid must be
attributable to zero-rated sales or effectively zero-rated sales; (4) the input VAT payments must not have
been applied against any output liability; and (5) the claim must be filed within the two-year prescriptive
period.16

As to the second requisite, however, the input tax claim to the extent of P375,160.60 corresponding to
purchases of services from Mitsubishi Corporation was disallowed, since it was not substantiated by
official receipts.17

As regards to the fifth requirement in section 112 of the Tax Code, the tax court, citing Atlas, counted
from 26 July 2004, 22 October 2004, and 25 January 2005 – the dates when Mindanao II filed its
Quarterly VAT Returns for the second, third, and fourth quarters of taxable year 2004, respectively – and
determined that both the administrative claim filed on 6 October 2005 and the judicial claim filed on 21
July 2006 fell within the two-year prescriptive period.18

On 1 September 2008, the CIR filed a Motion for Partial Reconsideration,19 pointing out that prescription
had already set in, since the appeal to the CTA was filed only on 21 July 2006, which was way beyond
the last day to appeal – 5 March 2006.20 As legal basis for this argument, the CIR relied on Section
112(D) of the 1997 Tax Code.21

Meanwhile, on 12 September 2008, this Court promulgated CIR v. Mirant Pagbilao Corporation
(Mirant).22 Mirant fixed the reckoning date of the two-year prescriptive period for the application for
refund or credit of unutilized input VAT at the close of the taxable quarter when the relevant sales were
made , as stated in Section 112(A).23

On 3 December 2008, the CTA Second Division denied the CIR’s Motion for Partial
Reconsideration.24 The tax court stood by its reliance on Atlas25 and on its finding that both the
administrative and judicial claims of Mindanao II were timely filed.26

On 7 January 2009, the CIR elevated the matter to the CTA En Banc via a Petition for Review.27 Apart
from the contention that the judicial claim of Mindanao II was filed beyond the 30-day period fixed by
Section 112(D) of the 1997 Tax Code,28 the CIR argued that Mindanao II erroneously fixed 26 July 2004,
the date when the return for the second quarter was filed, as the date from which to reckon the two-year
prescriptive period for filing an application for refund or credit of unutilized input VAT under Section
112(A). As the two-year prescriptive period ended on 30 June 2006, the Petition for Review of Mindanao
II was filed out of time on 21 July 2006.29 The CIR invoked the recently promulgated Mirant to support
this theory.

On 11 November 2009, the CTA En Banc rendered its Decision denying the CIR’s Petition for
Review.30 On the question whether the application for refund was timely filed, it held that the CTA
Second Division correctly applied the Atlas ruling.31 It reasoned that Atlas remained to be the controlling
doctrine. Mirant was a new doctrine and, as such, the latter should not apply retroactively to Mindanao II
who had relied on the old doctrine of Atlas and had acted on the faith thereof.32

As to the issue of compliance with the 30-day period for appeal to the CTA, the CTA En Banc held that
this was a requirement only when the CIR actually denies the taxpayer’s claim. But in cases of CIR
inaction, the 30-day period is not a mandatory requirement; the judicial claim is seasonably filed as long
as it is filed after the lapse of the 120-day waiting period but within two years from the date of filing of
the return.33

The CIR filed a Motion for Partial Reconsideration34 of the Decision, but it was denied for lack of merit.35

Dissatisfied, the CIR filed this Rule 45 Petition, raising the following arguments in support of its appeal:

I.

THE CTA 2ND DIVISION LACKED JURISDICTION TO TAKE COGNIZANCE OF THE CASE.

II.

THE COURT A QUO’S RELIANCE ON THE RULING IN ATLAS IS MISPLACED.36

ISSUES

The resolution of this case hinges on the question of compliance with the following time requirements for
the grant of a claim for refund or credit of unutilized input VAT: (1) the two-year prescriptive period for
filing an application for refund or credit of unutilized input VAT; and (2) the 120+30 day period for filing
an appeal with the CTA.

THE COURT’S RULING

We deny Mindanao II’s claim for refund or credit of unutilized input VAT on the ground that its judicial
claims were filed out of time, even as we hold that its application for refund was filed on time.

I.

MINDANAO II’S APPLICATION FOR

REFUND WAS FILED ON TIME

We find no error in the conclusion of the tax courts that the application for refund or credit of unutilized
input VAT was timely filed. The problem lies with their bases for the conclusion as to: (1) what should be
filed within the prescriptive period; and (2) the date from which to reckon the prescriptive period.
We thus take a different route to reach the same conclusion, initially focusing our discussion on what
should be filed within the two-year prescriptive period.

A. The Judicial Claim Need Not Be Filed Within the Two-Year Prescriptive Period

Section 112(A) provides:

SEC. 112. Refunds or Tax Credits of Input Tax. —

(A) Zero-rated or Effectively Zero-rated Sales — Any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales
were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the
amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales.

Both the CTA Second Division and CTA En Banc decisions held that the phrase "apply for the issuance
of a tax credit certificate or refund" in Section 112(A) is construed to refer to both the administrative
claim filed with the CIR and the judicial claim filed with the CTA. This view, however, has no legal
basis.

In Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi), we dispelled the
misconception that both the administrative and judicial claims must be filed within the two-year
prescriptive period:37

There is nothing in Section 112 of the NIRC to support respondent’s view. Subsection (A) of the said
provision states that "any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales."
The phrase "within two (2) years x x x apply for the issuance of a tax credit certificate or refund" refers to
applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is apparent in
the first paragraph of subsection (D) of the same provision, which states that the CIR has "120 days from
the submission of complete documents in support of the application filed in accordance with Subsections
(A) and (B)" within which to decide on the claim.

In fact, applying the two-year period to judicial claims would render nugatory Section 112 (D) of the
NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or
inaction of the CIR. The second paragraph of Section 112 (D) of the NIRC envisions two scenarios: (1)
when a decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is
made after the 120-day period. In both instances, the taxpayer has 30 days within which to file an appeal
with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA.
(Emphasis supplied)

The message of Aichi is clear: it is only the administrative claim that must be filed within the two-year
prescriptive period; the judicial claim need not fall within the two-year prescriptive period.
Having disposed of this question, we proceed to the date for reckoning the prescriptive period under
Section 112(A).

B. Reckoning Date is the Close of the Taxable Quarter When the Relevant Sales Were Made.

The other flaw in the reasoning of the tax courts is their reliance on the Atlas ruling, which fixed the
reckoning point to the date of filing the return and payment of the tax.

The CIR’s Stand

The CIR’s stand is that Atlas is not applicable to the case at hand as it involves Section 230 of the 1977
Tax Code, which contemplates recovery of tax payments erroneously or illegally collected. On the other
hand, this case deals with claims for tax refund or credit of unutilized input VAT for the second, third,
and fourth quarters of 2004, which are covered by Section 112 of the 1977 Tax Code.38

The CIR further contends that Mindanao II cannot claim good faith reliance on the Atlas doctrine since
the case was decided only on 8 June 2007, two years after Mindanao II filed its claim for refund or credit
with the CIR and one year after it filed a Petition for Review with the CTA on 21 July 2006.39

In lieu of Atlas, the CIR proposes that it is the Court's ruling in Mirant that should apply to this case
despite the fact that the latter was promulgated on 12 September 2008, after Mindanao II had filed its
administrative claim in 2005.40 It argues that Mirant can be applied retroactively to this case, since the
decision merely interprets Section 112, a provision that was already effective when Mindanao II filed its
claims for tax refund or credit.

The Taxpayer’s Defense

On the other hand, Mindanao II counters that Atlas, decided by the Third Division of this Court, could not
have been superseded by Mirant, a Second Division Decision of this Court. A doctrine laid down by the
Supreme Court in a Division may be modified or reversed only through a decision of the Court sitting en
banc.41

Mindanao II further contends that when it filed its Petition for Review, the prevailing rule in the CTA
reckons the two-year prescriptive period from the date of the filing of the VAT return.42 Finally, after
building its case on Atlas, Mindanao II assails the CIR’s reliance on the Mirant doctrine stating that it
cannot be applied retroactively to this case, lest it violate the rock-solid rule that a judicial ruling cannot
be given retroactive effect if it will impair vested rights.43

Section 112(A) is the Applicable Rule

The issue posed is not novel. In the recent case of Commissioner of Internal Revenue v. San Roque Power
Corporation44 (San Roque), this Court resolved the threshold question of when to reckon the two-year
prescriptive period for filing an administrative claim for refund or credit of unutilized input VAT under
the 1997 Tax Code in view of our pronouncements in Atlas and Mirant. In that case, we delineated the
scope and effectivity of the Atlas and Mirant doctrines as follows:

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-
year prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007
until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the reckoning
of the two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlas
doctrine, the two-year prescriptive period for claiming refund or credit of input VAT should be governed
by Section 112(A) following the verba legis rule. The Mirant ruling, which abandoned the Atlas doctrine,
adopted the verba legis rule, thus applying Section 112(A) in computing the two-year prescriptive period
in claiming refund or credit of input VAT. (Emphases supplied)

Furthermore, San Roque distinguished between Section 112 and Section 229 of the 1997 Tax Code:

The input VAT is not "excessively" collected as understood under Section 229 because at the time the
input VAT is collected the amount paid is correct and proper. The input VAT is a tax liability of, and
legally paid by, a VAT-registered seller of goods, properties or services used as input by another VAT-
registered person in the sale of his own goods, properties, or services. This tax liability is true even if the
seller passes on the input VAT to the buyer as part of the purchase price. The second VAT-registered
person, who is not legally liable for the input VAT, is the one who applies the input VAT as credit for his
own output VAT. If the input VAT is in fact "excessively" collected as understood under Section 229,
then it is the first VAT-registered person — the taxpayer who is legally liable and who is deemed to have
legally paid for the input VAT — who can ask for a tax refund or credit under Section 229 as an ordinary
refund or credit outside of the VAT System. In such event, the second VAT-registered taxpayer will have
no input VAT to offset against his own output VAT.

In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the input
VAT is not "excessively" collected as understood under Section 229. At the time of payment of the input
VAT the amount paid is the correct and proper amount. Under the VAT System, there is no claim or issue
that the input VAT is "excessively" collected, that is, that the input VAT paid is more than what is legally
due. The person legally liable for the input VAT cannot claim that he overpaid the input VAT by the mere
existence of an "excess" input VAT. The term "excess" input VAT simply means that the input VAT
available as credit exceeds the output VAT, not that the input VAT is excessively collected because it is
more than what is legally due. Thus, the taxpayer who legally paid the input VAT cannot claim for refund
or credit of the input VAT as "excessively" collected under Section 229.

Under Section 229, the prescriptive period for filing a judicial claim for refund is two years from the date
of payment of the tax "erroneously, . . . illegally, . . . excessively or in any manner wrongfully collected."
The prescriptive period is reckoned from the date the person liable for the tax pays the tax. Thus, if the
input VAT is in fact "excessively" collected, that is, the person liable for the tax actually pays more than
what is legally due, the taxpayer must file a judicial claim for refund within two years from his date of
payment. Only the person legally liable to pay the tax can file the judicial claim for refund. The person to
whom the tax is passed on as part of the purchase price has no personality to file the judicial claim under
Section 229.

Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for "excess"
input VAT is two years from the close of the taxable quarter when the sale was made by the person
legally liable to pay the output VAT. This prescriptive period has no relation to the date of payment of the
"excess" input VAT. The "excess" input VAT may have been paid for more than two years but this does
not bar the filing of a judicial claim for "excess" VAT under Section 112(A), which has a different
reckoning period from Section 229. Moreover, the person claiming the refund or credit of the input VAT
is not the person who legally paid the input VAT. Such person seeking the VAT refund or credit does not
claim that the input VAT was "excessively" collected from him, or that he paid an input VAT that is more
than what is legally due. He is not the taxpayer who legally paid the input VAT.
As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the chain
of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not just on the value
added by the taxpayer, but on the entire selling price of his goods, properties or services. However, the
taxpayer is allowed a refund or credit on the VAT previously paid by those who sold him the inputs for
his goods, properties, or services. The net effect is that the taxpayer pays the VAT only on the value that
he adds to the goods, properties, or services that he actually sells.

Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only
exception is when the taxpayer is expressly "zero-rated or effectively zero-rated" under the law, like
companies generating power through renewable sources of energy. Thus, a non zero-rated VAT-
registered taxpayer who has no output VAT because he has no sales cannot claim a tax refund or credit of
his unused input VAT under the VAT System. Even if the taxpayer has sales but his input VAT exceeds
his output VAT, he cannot seek a tax refund or credit of his "excess" input VAT under the VAT System.
He can only carry-over and apply his "excess" input VAT against his future output VAT. If such "excess"
input VAT is an "excessively" collected tax, the taxpayer should be able to seek a refund or credit for
such "excess" input VAT whether or not he has output VAT. The VAT System does not allow such
refund or credit. Such "excess" input VAT is not an "excessively" collected tax under Section 229. The
"excess" input VAT is a correctly and properly collected tax. However, such "excess" input VAT can be
applied against the output VAT because the VAT is a tax imposed only on the value added by the
taxpayer. If the input VAT is in fact "excessively" collected under Section 229, then it is the person
legally liable to pay the input VAT, not the person to whom the tax was passed on as part of the purchase
price and claiming credit for the input VAT under the VAT System, who can file the judicial claim under
Section 229.

Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected tax
under Section 229 may lead taxpayers to file a claim for refund or credit for such "excess" input VAT
under Section 229 as an ordinary tax refund or credit outside of the VAT System. Under Section 229,
mere payment of a tax beyond what is legally due can be claimed as a refund or credit. There is no
requirement under Section 229 for an output VAT or subsequent sale of goods, properties, or services
using materials subject to input VAT.

From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that is
"erroneously . . . illegally, . . . excessively or in any manner wrongfully collected." In short, there must be
a wrongful payment because what is paid, or part of it, is not legally due. As the Court held in Mirant,
Section 229 should "apply only to instances of erroneous payment or illegal collection of internal revenue
taxes." Erroneous or wrongful payment includes excessive payment because they all refer to payment of
taxes not legally due. Under the VAT System, there is no claim or issue that the "excess" input VAT is
"excessively or in any manner wrongfully collected." In fact, if the "excess" input VAT is an
"excessively" collected tax under Section 229, then the taxpayer claiming to apply such "excessively"
collected input VAT to offset his output VAT may have no legal basis to make such offsetting. The
person legally liable to pay the input VAT can claim a refund or credit for such "excessively" collected
tax, and thus there will no longer be any "excess" input VAT. This will upend the present VAT System as
we know it.45

Two things are clear from the above quoted San Roque disquisitions. First, when it comes to recovery of
unutilized input VAT, Section 112, and not Section 229 of the 1997 Tax Code, is the governing law.
Second, prior to 8 June 2007, the applicable rule is neither Atlas nor Mirant, but Section 112(A).

We present the rules laid down by San Roque in determining the proper reckoning date of the two-year
prescriptive period through the following timeline:
Thus, the task at hand is to determine the applicable period for this case.

In this case, Mindanao II filed its administrative claims for refund or credit for the second, third and
fourth quarters of 2004 on 6 October 2005. The case thus falls within the first period as indicated in the
above timeline. In other words, it is covered by the rule prior to the advent of either Atlas or Mirant.

Accordingly, the proper reckoning date in this case, as provided by Section 112(A) of the 1997 Tax Code,
is the close of the taxable quarter when the relevant sales were made.

C. The Administrative Claims Were Timely Filed

We sum up our conclusions so far: (1) it is only the administrative claim that must be filed within the
two-year prescriptive period; and (2) the two-year prescriptive period begins to run from the close of the
taxable quarter when the relevant sales were made.

Bearing these in mind, we now proceed to determine whether Mindanao II's administrative claims for the
second, third, and fourth quarters of 2004 were timely filed.

Second Quarter

Since the zero-rated sales were made in the second quarter of 2004, the date of reckoning the two-year
prescriptive period is the close of the second quarter, which is on 30 June 2004. Applying Section 112(A),
Mindanao II had two years from 30 June 2004, or until 30 June 2006 to file an administrative claim with
the CIR. Mindanao II filed its administrative claim on 6 October 2005, which is within the two-year
prescriptive period. The administrative claim for the second quarter of 2004 was thus timely filed. For
clarity, we present the rules laid down by San Roque in determining the proper reckoning date of the two-
year prescriptive period through the following timeline:

Third Quarter

As regards the claim for the third quarter of 2004, the two-year prescriptive period started to run on 30
September 2004, the close of the taxable quarter. It ended on 30 September 2006, pursuant to Section
112(A) of the 1997 Tax Code. Mindanao II filed its administrative claim on 6 October 2005. Thus, since
the administrative claim was filed well within the two-year prescriptive period, the administrative claim
for the third quarter of 2004 was timely filed. (See timeline below)

Fourth Quarter

Here, the two-year prescriptive period is counted starting from the close of the fourth quarter which is on
31 December 2004. The last day of the prescriptive period for filing an application for tax refund/credit
with the CIR was on 31 December 2006. Mindanao II filed its administrative claim with the CIR on 6
October 2005. Hence, the claims were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(See timeline below)

II.

MINDANAO II’S JUDICIAL CLAIMS WERE FILED OUT OF TIME

Notwithstanding the timely filing of the administrative claims, we find that the CTA En Banc erred in
holding that Mindanao II’s judicial claims were timely filed.

A. 30-Day Period Also Applies to Appeals from Inaction

Section 112(D) of the 1997 Tax Code states the time requirements for filing a judicial claim for refund or
tax credit of input VAT:

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. — In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsection (A) and (B) hereof. In case of full or partial denial of the
claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application
within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of
the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals. (Emphases supplied)
Section 112(D) speaks of two periods: the period of 120 days, which serves as a waiting period to give
time for the CIR to act on the administrative claim for refund or credit, and the period of 30 days, which
refers to the period for interposing an appeal with the CTA. It is with the 30-day period that there is an
issue in this case.

The CTA En Banc’s holding is that, since the word "or" – a disjunctive term that signifies dissociation
and independence of one thing from another – is used in Section 112(D), the taxpayer is given two
options: 1) file an appeal within 30 days from the CIR’s denial of the administrative claim; or 2) file an
appeal with the CTA after expiration of the 120-day period, in which case the 30-day appeal period does
not apply. The judicial claim is seasonably filed so long as it is filed after the lapse of the 120-day waiting
period but before the lapse of the two-year prescriptive period under Section 112(A).46

We do not agree.

The 30-day period applies not only to instances of actual denial by the CIR of the claim for refund or tax
credit, but to cases of inaction by the CIR as well. This is the correct interpretation of the law, as held in
San Roque:47

Section 112(C)48 also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or
inaction of the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim
or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals.

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should
be applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may,
if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioner's decision, or if the Commissioner does not act on the taxpayer's claim within the 120-day
period, the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day period.
(Emphasis supplied)

The San Roque pronouncement is clear. The taxpayer can file the appeal in one of two ways: (1) file the
judicial claim within thirty days after the Commissioner denies the claim within the 120-day period, or (2)
file the judicial claim within thirty days from the expiration of the 120-day period if the Commissioner
does not act within the 120-day period.

B. The Judicial Claim Was Belatedly Filed

In this case, the facts are not up for debate. Mindanao II filed its administrative claim for refund or credit
for the second, third, and fourth quarters of 2004 on 6 October 2005. The CIR, therefore, had a period of
120 days, or until 3 February 2006, to act on the claim. The CIR, however, failed to do so. Mindanao II
then could treat the inaction as a denial and appeal it to the CTA within 30 days from 3 February 2006, or
until 5 March 2006.

Mindanao II, however, filed a Petition for Review only on 21 July 2006, 138 days after the lapse of the
30-day period on 5 March 2006. The judicial claim was therefore filed late. (See timeline below.)
C. The 30-Day Period to Appeal is Mandatory and Jurisdictional

However, what is up for debate is the nature of the 30-day time requirement. The CIR posits that it is
mandatory. Mindanao II contends that the requirement of judicial recourse within 30 days is only
directory and permissive, as indicated by the use of the word "may" in Section 112(D).49

The answer is found in San Roque. There, we declared that the 30-day period to appeal is both mandatory
and jurisdictional:

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or
inaction of the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim
or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals. (Emphasis supplied)

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should
be applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may,
if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioner's decision, or if the Commissioner does not act on the taxpayer's claim within the 120-day
period, the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day period.

xxxx

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The
taxpayer can file his administrative claim for refund or credit at anytime within the two-year prescriptive
period. If he files his claim on the last day of the two-year prescriptive period, his claim is still filed on
time. The Commissioner will have 120 days from such filing to decide the claim. If the Commissioner
decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30 days to file
his judicial claim with the CTA. This is not only the plain meaning but also the only logical interpretation
of Section 112(A) and (C).

xxxx

When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from receipt of the
decision denying the claim or after the expiration of the one hundred twenty-day period, appeal the
decision or the unacted claim with the Court of Tax Appeals," the law does not make the 120+30 day
periods optional just because the law uses the word " may." The word "may" simply means that the
taxpayer may or may not appeal the decision of the Commissioner within 30 days from receipt of the
decision, or within 30 days from the expiration of the 120-day period. x x x.50

D. Exception to the mandatory and jurisdictional nature of the 120+30 day period not applicable
Nevertheless, San Roque provides an exception to the mandatory and jurisdictional nature of the 120+30
day period ─ BIR Ruling No. DA-489-03 dated 10 December 2003. The BIR ruling declares that the
"taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief
with the CTA by way of Petition for Review."

Although Mindanao II has not invoked the BIR ruling, we deem it prudent as well as necessary to dwell
on this issue to determine whether this case falls under the exception.

For this question, we come back to San Roque, which provides that BIR Ruling No. DA-489-03 is a
general interpretative rule; thus, taxpayers can rely on it from the time of its issuance on 10 December
2003 until its reversal by this Court in Aichi on 6 October 2010, when the 120+30 day periods were held
to be mandatory and jurisdictional. The Court reasoned as follows:

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a

difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the
reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being
made to return the tax refund or credit they received or could have received under Atlas prior to its
abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or
misrepresentation, the reversal by this Court of a general interpretative rule issued by the Commissioner,
like the reversal of a specific BIR ruling under Section 246, should also apply prospectively. x x x.

xxxx

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to
all taxpayers or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not
by a particular taxpayer, but by a government agency tasked with processing tax refunds and credits, that
is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance . This
government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus,
while this government agency mentions in its query to the Commissioner the administrative claim of Lazi
Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in cases
like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse
of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR
Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court
in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional.51

Thus, in San Roque, the Court applied this exception to Taganito Mining Corporation (Taganito), one of
the taxpayers in San Roque. Taganito filed its judicial claim on 14 February 2007, after the BIR ruling
took effect on 10 December 2003 and before the promulgation of Mirant. The Court stated:

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial claim
prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-
03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its
judicial claim from the vice of prematurity.52
San Roque was also careful to point out that the BIR ruling does not retroactively apply to premature
judicial claims filed before the issuance of the BIR ruling:

However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first, it is
admittedly an erroneous interpretation of the law; second, prior to its issuance, the BIR held that the 120-
day period was mandatory and jurisdictional, which is the correct interpretation of the law; third, prior to
its issuance, no taxpayer can claim that it was misled by the BIR into filing a judicial claim prematurely;
and fourth, a claim for tax refund or credit, like a claim for tax exemption, is strictly construed against the
taxpayer.53

Thus, San Roque held that taxpayer San Roque Power Corporation, could not seek refuge in the BIR
ruling as it jumped the gun when it filed its judicial claim on 10 April 2003, prior to the issuance of the
BIR ruling on 10 December 2003.1âwphi1 The Court stated:

San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its judicial claim
prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003.
To repeat, San Roque cannot claim that it was misled by the BIR into filing its judicial claim prematurely
because BIR Ruling No. DA-489-03 was issued only after San Roque filed its judicial claim. At the time
San Roque filed its judicial claim, the law as applied and administered by the BIR was that the
Commissioner had 120 days to act on administrative claims. This was in fact the position of the BIR prior
to the issuance of BIR Ruling No. DA-489-03. Indeed, San Roque never claimed the benefit of BIR
Ruling No. DA-489-03 or RMC 49-03, whether in this Court, the CTA, or before the Commissioner.54

San Roque likewise ruled out the application of the BIR ruling to cases of late filing. The Court held that
the BIR ruling, as an exception to the mandatory and jurisdictional nature of the 120+30 day periods, is
limited to premature filing and does not extend to late filing of a judicial claim. Thus, the Court found that
since Philex Mining Corporation, the other party in the consolidated case San Roque, filed its claim 426
days after the lapse of the 30-day period, it could not avail itself of the benefit of the BIR ruling:

Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed

Very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means
non-exhaustion of the 120-day period for the Commissioner to act on an administrative claim. Philex
cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim
prematurely but filed it long after the lapse of the 30-day period following the expiration of the 120-day
period. In fact, Philex filed its judicial claim 426 days after the lapse of the 30-day period.55

We sum up the rules established by San Roque on the mandatory and jurisdictional nature of the 30-day
period to appeal through the following timeline:

Bearing in mind the foregoing rules for the timely filing of a judicial claim for refund or credit of
unutilized input VAT, we rule on the present case of Mindanao II as follows:
We find that Mindanao II’s situation is similar to that of Philex in San Roque.

As mentioned above, Mindanao II filed its judicial claim with the CTA on 21 July 2006. This was after
the issuance of BIR Ruling No. DA-489-03 on 10 December 2003, but before its reversal on 5 October
2010. However, while the BIR ruling was in effect when Mindanao II filed its judicial claim, the rule
cannot be properly invoked. The BIR ruling, as discussed earlier, contemplates premature filing. The
situation of Mindanao II is one of late filing. To repeat, its judicial claim was filed on 21 July 2006 – long
after 5 March 2006, the last day of the 30-day period for appeal. In fact, it filed its judicial claim 138 days
after the lapse of the 30-day period. (See timeline below)

E. Undersigned dissented in San Roque to the retroactive application of the mandatory and jurisdictional
nature of the 120+30 day period.

It is worthy to note that in San Roque, this ponente registered her dissent to the retroactive application of
the mandatory and jurisdictional nature of the 120+30 day period provided under Section 112(D) of the
Tax Code which, in her view, is unfair to taxpayers. It has been the view of this ponente that the
mandatory nature of 120+30 day period must be completely applied prospectively or, at the earliest, only
upon the finality of Aichi in order to create stability and consistency in our tax laws. Nevertheless, this
ponente is mindful of the fact that judicial precedents cannot be ignored. Hence, the majority view
expressed in San Roque must be applied.

SUMMARY OF RULES ON PRESCRIPTIVE PERIODS FOR CLAIMING REFUND OR CREDIT OF

INPUT VAT

The lessons of this case may be summed up as follows:

A. Two-Year Prescriptive Period

1. It is only the administrative claim that must be filed within the two-year prescriptive period.
(Aichi) 2. The proper reckoning date for the two-year prescriptive period is the close of the
taxable quarter when the relevant sales were made. (San Roque)

3. The only other rule is the Atlas ruling, which applied only from 8 June 2007 to 12 September
2008. Atlas states that the two-year prescriptive period for filing a claim for tax refund or credit
of unutilized input VAT payments should be counted from the date of filing of the VAT return
and payment of the tax. (San Roque)

B. 120+30 Day Period

 1. The taxpayer can file an appeal in one of two ways: (1) file the judicial claim within thirty days
after the Commissioner denies the claim within the 120-day period, or (2) file the judicial claim
within thirty days from the expiration of the 120-day period if the Commissioner does not act
within the 120-day period.

2. The 30-day period always applies, whether there is a denial or inaction on the part of the CIR.

3. As a general rule, the 3 0-day period to appeal is both mandatory and jurisdictional. (Aichi and
San Roque)

4. As an exception to the general rule, premature filing is allowed only if filed between 10
December 2003 and 5 October 2010, when BIR Ruling No. DA-489-03 was still in force. (San
Roque)

5. Late filing is absolutely prohibited, even during the time when BIR Ruling No. DA-489-03 was
in force. (San Roque)

SUMMARY AND CONCLUSION

In sum, our finding is that the three administrative claims for the refund or credit of unutilized input VAT
were all timely filed, while the corresponding judicial claims were belatedly filed.

The foregoing considered, the CT A lost jurisdiction over Mindanao Il’s claims for refund or
credit.1âwphi1 The CTA EB erred in granting these claims.

WHEREFORE, we GRANT the Petition. The assailed Court of Tax Appeals En Banc Decision dated 11
November 2009 and Resolution dated 3 March 2010 of the in CTA EB Case No. 448 (CTA Case No.
7507) are hereby REVERSED and SET ASIDE. A new ruling is entered DENYING respondent s claim
for a tax refund or credit ofP6,791,845.24.

SO ORDERED.

MARIA LOURDES P. A. SERENO

Chief Justice, Chairperson

G.R. No. 168950 January 14, 2015

ROHM APOLLO SEMICONDUCTOR PHILIPPINES, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondents.

DECISION

SERENO, CJ:

This Rule 45 Petition1 requires this Court to address the question of timeliness with respect to petitioner's
judicial claim for refund or credit of unutilized input Value-Added Tax (VAT) under Sections 112(A) and
112(D)2 of the 1997 Tax Code. Petitioner Rohm Apollo Semiconductor Philippines., Inc. (Rohm Apollo)
assails the Decision3 and Resolution4 of the Court of Tax Appeals En Banc (CTA En Banc) in CTA En
Banc Case No. 59, affirming the Decision in CTA Case No. 6534 of the CTA First Division.5 The latter
denied the claim for the refund or issuance of a tax credit certificate filed by petitioner Rohm Apollo in
the amount of P30,359,615.40 representin& unutilized input VAT paid on capital goods purchased for the
months of July and August 2000.

FACTS

Petitioner Rohm Apollo is a domestic corporation registered with the Securities and Exchange
Commission.6 It is also registered with the Philippine Economic Zone Authority as an Ecozone Export
Enterprise.7 Rohm Apollo is in the business of manufacturing semiconductor products, particularly
microchip transistors and tantalium capacitors at the People’s Technology Complex – Special Economic
Zone, Barangay Maduya, Carmona Cavite.8 Further, it is registered with the Bureau of Internal Revenue
(BIR) as a value-added taxpayer.9

Sometime in June 2000, prior to the commencement of its operations on 1 September 2001, Rohm Apollo
engaged the services of Shimizu Philippine Contractors, Inc. (Shimizu) for the construction of a
factory.10 For services rendered by Shimizu, petitioner made initial payments of P198,551,884.28 on 7
July 2000 andP132,367,923.58 on 3 August 2000.11

It should be noted at this point that Section 112(B),12 in relation to Section 112(A)13 of the 1997 Tax
Code, allows a taxpayer to file an application for the refund or tax credit of unutilized input VAT when it
comes to the purchase of capital goods. The provision sets a time frame for the filing of the application at
two years from the close of the taxable quarter when the purchase was made.

Going back to the case, petitioner treated the payments as capital goods purchases and thus filed with the
BIR an administrative claim for the refund or credit of accumulated unutilized creditable input taxes on
11 December 2000.14 As the close of the taxable quarter when the purchases were made was 30
September 2000, the administrative claim was filed well within the two-year prescriptive period.

Pursuant to Section 112(D)15 of the 1997 Tax Code, the Commissioner of Internal Revenue (CIR) had a
period of 120 days from the filing of the application for a refund or credit on 11 December 2000, or until
10 April 2001, to act on the claim. The waiting period, however, lapsed without any action by the CIR on
the claim.

Instead of filing a judicial claim within 30 days from the lapse of the 120-day period on 10 April, or until
10 May 2001, Rohm Apollo filed a Petition for Review with the CTA docketed as CTA Case No. 6534 on
11 September 2002. It was under the belief that a judicial claim had to be filed within the two-year
prescriptive period ending on 30 September 2002.16

On 27 May 2004, the CTA First Division rendered a Decision17 denying the judicial claim for a refund or
tax credit. In support of its ruling, the CTA First Division held, among others, that petitioner must have at
least submitted its VAT return for the third quarter of 2001, since it was in that period that it began its
business operations. The purpose was to verify if indeed petitioner did not carry over the claimed input
VAT to the third quarter or the succeeding quarters.

On 14 July 2004, petitioner RohmApollo filed a Motion for Reconsideration, but the tax court stood by its
Decision.18

On 18 January 2005, the taxpayer elevated the case to the CTA En Bancvia a Petition for Review.19
On 22 June 2005, the CTA En Bancrendered its Decision denying Rohm Apollo’s Petition for
Review.20 The appellate tax court held that the failure to present the VAT returns for the subsequent
taxable year proved to be fatal to the claim for a refund/tax credit, considering that it could not be
determined whether the claimed amount to be refunded remained unutilized. Petitioner filed a Motion for
Reconsideration of the Decision, but it was denied for lack of merit.

Persistent, the taxpayer filed this Rule 45 Petition, arguing that it has satisfied all the legal requirements
for a valid claim for refund or tax credit of unutilized input VAT.

ISSUE

The threshold question to be resolved is whether the CTA acquired jurisdiction over the claim for the
refund or tax credit of unutilized input VAT.

THE COURT’S RULING

We deny the Petition on the ground that the taxpayer’s judicial claim for a refund/tax credit was filed
beyond the prescriptive period.

The judicial claim was filed out of time.

Section 112(D) of the 1997 Tax Code states the time requirements for filing a judicial claim for the refund
or tax credit of input VAT. The legal provision speaks of two periods: the period of 120 days, which
serves as a waiting period to give time for the CIR to act on the administrative claim for a refund or
credit; and the period of 30 days, which refers to the period for filing a judicial claim with the CTA. It is
the 30-day period that is at issue in this case.

The landmark case of Commissioner of Internal Revenue v. San Roque Power Corporation21 has
interpreted Section 112 (D). The Court held that the taxpayer can file an appeal in one of two ways: (1)
file the judicial claim within 30 days after the Commissioner denies the claim within the 120-day waiting
period, or (2) file the judicial claim within 30 days from the expiration of the 120-day period if the
Commissioner does not act within that period.

In this case, the facts are not up for debate. On 11 December 2000, petitioner filed with the BIR an
application for the refund or credit of accumulated unutilized creditable input taxes. Thus, the CIR had a
period of 120 days from 11 December 2000, or until 10 April 2001, to act on the claim. It failed to do so,
however. Rohm Apollo should then have treated the CIR’s inaction as a denial of its claim. Petitioner
would then have had 30 days, or until 10 May 2001, to file a judicial claim withthe CTA. But Rohm
Apollo filed a Petition for Review with the CTA only on 11 September 2002. The judicial claim was thus
filed late.

The error of the taxpayer lies in the fact that it had mistakenly believed that a judicial claim need not be
filed within 30 days from the lapse of the 120-day period. It had believed that the only requirement is that
the judicial claim must be filed withinthe two-year period under Sections 112(A) and (B) of the 1997 Tax
Code. In other words, Rohm Apollo erroneously thought that the 30-day period does not apply to cases of
the CIR’s inaction after the lapse of the 120-day waiting period, and that a judicial claim is seasonably
filed so long as it is done within the two year period. Thus, it filed the Petition for Review with the CTA
only on 11 September 2002.
These mistaken notions have already been dispelled by Commissioner of Internal Revenue v. Aichi
Forging Company of Asia, Inc. (Aichi)22 and San Roque. Aichi clarified that it is only the administrative
claim that must be filed within the two-year prescriptive period.23 San Roque, on the other hand, has ruled
that the 30-day period always applies, whether there is a denial or inaction on the part of the CIR.24

Justice Antonio Carpio, writing for the Court in San Roque, explained that the 30-day period is a 1997
Tax Code innovation that does away with the old rule where the taxpayer could file a judicial claim when
there is inaction on the part of the CIR and the two-year statute of limitations is about to expire. Justice
Carpio stated:

The old rule that the taxpayer may file the judicial claim, without waiting for the Commissioner's decision
if the two-year prescriptive period is about to expire, cannot apply because that rule was adopted before
the enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old
rule, so that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if
the Commissioner acts only on the 120th day, or does not act at all during the 120-day period.With the
30-day period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund
or credit of input VAT without waiting for the Commissioner to decide until the expiration of the 120-day
period.25 (Emphases supplied) The 30-day period to appeal is mandatory and jurisdictional.

As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. The only exception to
the general rule is when BIR Ruling No. DA-489-03 was still in force, thatis, between 10 December 2003
and 5 October 2010, The BIR Ruling excused premature filing, declaring that the taxpayer-claimant need
not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of
Petition for Review. In San Roque, the High Court explained boththe general rule and the exception:

To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the
taxpayer.1âwphi1 One of the conditions for a judicial claim of refund or credit under the VAT System is
with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the 120+30 day
periods is necessary for such a claim to prosper, whether before, during, or after the effectivity of the
Atlas doctrine, except for the period from the issuance of BIR Ruling No. DA-489-03 on 10 December
2003 to 6 October 2010 when the Aichidoctrine was adopted, which again reinstated the 120+30 day
periods as mandatory and jurisdictional.26 (Emphases supplied)

San Roque likewise ruled out the application of the BIR ruling to cases of late filing. The Court held that
the BIR ruling, as an exception to the mandatory and jurisdictional nature of the 120+30 day periods, is
limited to premature filing and does not extend to the late filing of a judicial claim.27

In sum, premature filing is allowed for cases falling during the time when BIR Ruling No. DA-489-03
was in force; nevertheless, late filing is absolutely prohibited even for cases falling within that period.

As mentioned above, the taxpayer filed its judicial claim with the CTA on 11 September 2002. This was
before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Thus, Rohm Apollo could not
have benefited from the BIR Ruling. Besides, its situation was not a case of premature filing of its judicial
claim but one of late filing. To repeat, its judicial claim was filed on 11 September 2002 – long after 10
May 2001, the last day of the 30-day period for appeal. The case thus falls under the general rule – the 30-
day period is mandatory and jurisdictional. CONCLUSION

In fine, our finding is that the judicial claim for the refund or credit of unutilized input VAT was belatedly
filed. Hence, the CTA lost jurisdiction over Rohm Apollo’s claim for a refund or credit. The foregoing
considered, there is no need to go into the merits of this case.
A final note, the taxpayers are reminded that that when the 120-day period lapses and there is inaction on
the part of the CIR, they must no longer wait for it to come up with a decision thereafter. The CIR’s
inaction is the decision itself. It is already a denial of the refund claim. Thus, the taxpayer must file an
appeal within 30 days from the lapse of the 120-day waiting period.

WHEREFORE, the Petition is DENIEDfor lack of merit.

SO ORDERED.

MARIA LOURDES P.A. SERENO

Chief Justice, Chairperson

_________________________________________________________________

G.R. Nos. 193383-84 January 14, 2015

CBK POWER COMPANY LIMITED, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

x-----------------------x

G.R. Nos. 193407-08

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
CBK POWER COMPANY LIMITED, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in these consolidated petitions for review on certiorari1 are the Decision2 dated March 29, 2010
and the Resolution3 dated August 16, 2010 of the Court ofTax Appeals (CTA) En Bancin C.T.A. E.B.
Nos. 469 and 494, which affirmed the Decision4 dated August 28, 2008, the Amended Decision5 dated
February 12, 2009, and the Resolution6 dated May 7, 2009 of the CTA First Division in CTA Case Nos.
6699, 6884,and 7166 granting CBK Power Company Limited (CBK Power) a refund of its excess final
withholding tax for the taxable years 2001 to 2003.

The Facts

CBK Power is a limited partnership duly organized and existing under the laws of the Philippines, and
primarily engaged in the development and operation of the Caliraya, Botocan, and Kalayaan hydro
electric power generating plants in Laguna (CBK Project). It is registered with the Board of Investments
(BOI) as engaged in a preferred pioneer area of investment under the Omnibus Investment Code of 1987.7

To finance the CBK Project, CBK Power obtained in August 2000 a syndicated loan from several foreign
banks,8i.e., BNP Paribas, Dai-ichi Kangyo Bank, Limited, Industrial Bank of Japan, Limited, and Societe
General (original lenders), acting through an Inter-Creditor Agent, Dai-ichi Kangyo Bank, a
Japanesebank that subsequently merged with the Industrial Bank of Japan, Limited (Industrial Bank of
Japan) and the Fuji Bank, Limited (Fuji Bank), with the mergedentity being named as Mizuho Corporate
Bank (Mizuho Bank). One of the merged banks, Fuji Bank, had a branch in the Philippines, which
became a branch of Mizuho Bank as a result of the merger. The Industrial Bank of Japan and Mizuho
Bank are residents of Japan for purposes of income taxation, and recognized as such under the relevant
provisions of the income tax treaties between the Philippines and Japan.9

Certain portions of the loan were subsequently assigned by the original lenders to various other banks,
including Fortis Bank (Nederland) N.V. (Fortis-Netherlands) and Raiffesen Zentral Bank Osterreich AG
(Raiffesen Bank). Fortis-Netherlands, in turn, assigned its portion of the loan to Fortis Bank S.A./N.V.
(Fortis-Belgium), a resident of Belgium. Fortis Netherlands and Raiffesen Bank, on the other hand, are
residents of Netherlands and Austria, respectively.10

In February 2001, CBK Power borrowed money from Industrial Bank of Japan, Fortis-Netherlands,
Raiffesen Bank, Fortis-Belgium, and Mizuho Bank for which it remitted interest payments from May
2001 to May 2003.11 It allegedly withheld final taxes from said payments based on the following rates,
and paid the same to the Revenue District Office No. 55 of the Bureau of Internal Revenue (BIR): (a)
fifteen percent (15%) for Fortis-Belgium, Fortis-Netherlands, and Raiffesen Bank; and (b) twenty percent
(20%) for Industrial Bank of Japan and Mizuho Bank.12

However, according to CBK Power, under the relevant tax treaties between the Philippines and the
respective countries in which each of the banks is a resident, the interest income derived by the
aforementioned banks are subject only to a preferential tax rate of 10%, viz.:13

1âwphi1
COUNTRY OF PREFERENTIAL RATE
BANK
RESIDENCE UNDER THE RELEVANT TAX TREATY

Fortis Bank S.A./N.V. Belgium 10% (Article 11[1], RP-Belgium

Tax Treaty)

Industrial Bank of Japan 10% (Article 11[3], RP-Japan Tax Treaty)

Japan

Raiffesen Zentral Bank Austria 10% (Article 11[3], RP-Austria Tax Treaty)
Osterreich AG

Mizuho Corporate Bank Japan 10% (Article 11[3], RP-Japan Tax Treaty)

Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final withholding taxes
allegedly erroneously withheld and collected for the years 2001 and 2002 with the BIR Revenue Region
No. 9. The claim for refund of excess final withholding taxes in 2003 was subsequently filed on March 4,
2005.14

The Commissioner of Internal Revenue’s (Commissioner) inaction on said claims prompted CBK Power
to file petitions for review before the CTA, viz.:15

(1) CTA Case No. 6699 was filed by CBK Power on June 6, 2003 seeking the refund of excess
final withholding tax in the total amount of P6,393,267.20 covering the year 2001 with respect to
 interest income derived by [Fortis-Belgium], Industrial Bank of Japan, and [Raiffesen Bank]. An
Answer was filed by the Commissioner on July 25, 2003.

(2) CTA Case No. 6884was filed by CBK Power on March 5, 2004 seeking for the refund of the
amount of 8,136,174.31 covering [the] year 2002 with respect to interest income derived by
[Fortis- Belgium], Industrial Bank of Japan, [Mizuho Bank], and [Raiffesen Bank]. The
Commissioner filed his Answer on May 7, 2004.

xxxx

(3) CTA Case No. 7166was filed by CBK [Power] on March 9, 2005 seeking for the refund of
[the amount of] P1,143,517.21covering [the] year 2003 with respect to interest income derived by
[Fortis Belgium], and [Raiffesen Bank]. The Commissioner filed his Answer on May 9, 2005.
(Emphases supplied)

CTA Case Nos. 6699 and 6884 were consolidated first on June 18, 2004. Subsequently, however, all three
cases – CTA Case Nos. 6699, 6884, and 7166 – were consolidated in a Resolution dated August 3,
2005.16

The CTA First Division Rulings

In a Decision17 dated August 28, 2008, the CTA First Division granted the petitions and ordered the
refund of the amount of 15,672,958.42 upon a finding that the relevant tax treaties were applicable to the
case.18 It cited DA-ITAD Ruling No. 099-0319 dated July 16, 2003, issued by the BIR, confirming CBK
Power’s claim that the interest payments it made to Industrial Bank of Japan and Raiffesen Bank were
subject to a final withholding tax rate of only 10%of the gross amount of interest, pursuant to Article 11
of the Republic of the Philippines (RP)-Austria and RP-Japan tax treaties. However, in DA-ITAD Ruling
No. 126-0320 dated August 18, 2003, also issued by the BIR, interest payments to Fortis-Belgium were
likewise subjected to the same rate pursuant to the Protocol Amending the RP-Belgium Tax Treaty, the
provisions of which apply on income derived or which accrued beginning January 1, 2000. With respect
to interest payments made to Fortis-Netherlands before it assigned its portion of the loan to Fortis-
Belgium, the CTA First Division likewise granted the preferential rate.21

The CTA First Division categorically declared in the August 28, 2008 Decision that the required
International Tax Affairs Division (ITAD) ruling was not a condition sine qua non for the entitlement of
the tax relief sought by CBK Power,22 however, upon motion for reconsideration23 filed by the
Commissioner, the CTA First Division amendedits earlier decision by reducing the amount of the refund
from P15,672,958.42 to P14,835,720.39 on the ground that CBK Power failed to obtain an ITAD ruling
with respect to its transactions with Fortis-Netherlands.24 In its Amended Decision25 dated February 12,
2009, the CTA First Division adopted26 the ruling in the case of Mirant (Philippines) Operations
Corporation (formerly: Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of
Internal Revenue (Mirant),27 cited by the Commissioner in his motion for reconsideration, where the
Court categorically pronounced in its Resolution dated February 18, 2008 that an ITAD ruling must be
obtained prior to availing a preferential tax rate.

CBK Power moved for the reconsideration28 of the Amended Decision dated February 12, 2009, arguing
in the main that the Mirantcase, which was resolved in a minute resolution, did not establish a legal
precedent. The motion was denied, however, in a Resolution29 dated May 7, 2009 for lack of merit.
Undaunted, CBK Power elevated the matter to the CTA En Bancon petition for review,30 docketed as
C.T.A E.B. No. 494. The Commissioner likewise filed his own petition for review,31 which was docketed
as C.T.A. E.B. No. 469. Said petitions were subsequently consolidated.32

CBK Power raised the lone issue of whether or not an ITAD ruling is required before it can avail of the
preferential tax rate. On the other hand, the Commissioner claimed that CBK Power failed to exhaust
administrative remedies when it filed its petitions before the CTA First Division, and that said petitions
were not filed within the two-year prescriptive period for initiating judicial claims for refund.33

The CTA En Banc Ruling

In a Decision34 dated March 29, 2010, the CTA En Banc affirmed the ruling of the CTA First Division
that a prior application with the ITAD is indeed required by Revenue Memorandum Order (RMO) 1-
2000,35 which administrative issuance has the force and effect of law and is just as binding as a tax treaty.
The CTA En Banc declared the Mirant case as without any binding effect on CBK Power, having been
resolved by this Court merely through minute resolutions, and relied instead on the mandatory wording of
RMO 1-2000, as follows:36

III. Policies:

xxxx

2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901
(Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e.
payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief. x x x.

The CTA En Banc further held that CBK Power’s petitions for review were filed within the two-year
prescriptive period provided under Section 22937 of the National Internal Revenue Code of
199738 (NIRC), and that it was proper for CBK Power to have filed said petitions without awaiting the
final resolution of its administrative claims for refund before the BIR; otherwise, it would have
completely lost its right to seek judicial recourse if the two-year prescriptive period lapsed with no
judicial claim filed.

CBK Power’s motion for partial reconsideration and the Commissioner’s motion for reconsideration of
the foregoing Decision were both deniedin a Resolution39 dated August 16, 2010 for lack of merit; hence,
the present consolidated petitions.

The Issues Before the Court

In G.R. Nos. 193383-84, CBK Power submits the sole legal issue of whether the BIR may add a
requirement– prior application for an ITAD ruling – that is not found in the income tax treaties signed by
the Philippines before a taxpayer can avail of preferential tax rates under said treaties.40

On the other hand, in G.R. Nos. 193407-08, the Commissioner maintains that CBK Power is not entitled
to a refund in the amount of P1,143,517.21 for the period covering taxable year 2003 as it allegedly failed
to exhaust administrative remedies before seeking judicial redress.41

The Court’s Ruling

The Court resolves the foregoing in seriatim.

A. G.R. Nos. 193383-84

The Philippine Constitution provides for adherence to the general principles of international law as part of
the law of the land. The time honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the agreement. In
this jurisdiction, treaties have the force and effect of law.42 The issue of whether the failure to strictly
comply with RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty was
squarely addressed in the recent case of Deutsche Bank AG Manila Branch v. Commissioner of Internal
Revenue43 (Deutsche Bank), where the Court emphasized that the obligation to comply with a tax treaty
must take precedence over the objective of RMO No. 1-2000, viz.:

We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright
denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with
the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by
duly entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief
as required by RMO No. 1-2000 should not operate to divestentitlement to the reliefas it would constitute
a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment
of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative
issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the
BIR should merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000.
Logically, noncompliance with tax treaties has negative implications on international relations, and
unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-
2000 involve an administrative procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to
the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior
application for tax treaty relief.44 (Emphases and underscoring supplied)

The objective of RMO No. 1-2000 inrequiring the application for treaty relief with the ITAD before a
party’s availment of the preferential rate under a tax treaty is to avert the consequences of any erroneous
interpretation and/or application of treaty provisions, such as claims for refund/credit for overpayment of
taxes, or deficiency tax liabilities for underpayment.45 However, as pointed out in Deutsche Bank, the
underlying principle of prior application with the BIR becomes moot in refund cases– as in the present
case – where the very basis of the claim is erroneous or there is excessive payment arising from the non-
availment of a tax treaty relief at the first instance.Just as Deutsche Bank was not faulted by the Court for
not complying with RMO No. 1-2000 prior to the transaction,46 so should CBK Power. In parallel, CBK
Power could not have applied for a tax treaty relief 15 days prior to its payment of the final withholding
tax on the interest paid to its lenders precisely because it erroneously paid said tax on the basis of the
regular rate as prescribed by the NIRC, and not on the preferential tax rate provided under the different
treaties. As stressed by the Court, the prior application requirement under RMO No. 1-2000 then becomes
illogical.47

Not only is the requirement illogical, butit is also an imposition that is not found at all in the applicable
tax treaties. In Deutsche Bank, the Court categorically held that the BIR should not impose additional
requirements that would negate the availment of the reliefs provided for under international agreements,
especially since said tax treaties do not provide for any prerequisite at all for the availment of the benefits
under said agreements.48

It bears reiterating that the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.49 Since CBK Power had requested for confirmation
from the ITAD on June 8, 2001 and October 28, 200250 before it filed on April 14, 2003 its administrative
claim for refund of its excess final withholding taxes, the same should be deemed substantial compliance
with RMO No. 1-2000, as in Deutsche Bank. To rule otherwise would defeat the purpose of Section 229
of the NIRC in providing the taxpayer a remedy for erroneously paid tax solely on the ground of failure to
make prior application for tax treaty relief.51 As the Court exhorted in Republic v. GST Philippines,
Inc.,52 while the taxpayer has an obligation to honestly pay the right taxes, the government has a corollary
duty to implement tax laws in good faith; to discharge its duty to collect what is due to it; and to justly
return what has been erroneously and excessively given to it.53

In view of the foregoing, the Court holds that the CTA En Banc committed reversible error in affirming
the reduction of the amount of refund to CBK Power from 15,672,958.42 to P14,835,720.39 to exclude its
transactions with Fortis-Netherlands for which no ITAD ruling was obtained.54 CBK Power’s petition in
G.R. Nos. 193383-84 is therefore granted.

The opposite conclusion is, however, reached with respect to the Commissioner’s petition in G.R. Nos.
193407-08.

B. G.R. Nos. 193407-08

The Commissioner laments55 that he was deprived of the opportunity to act on the administrative claim
for refund of excess final withholding taxes covering taxable year 2003 which CBK Power filed on March
4, 2005, a Friday, then the following Wednesday, March 9, 2005, the latter hastily elevated the case on
petition for review before the CTA. He argues56 that the failure on the part of CBK Power to give him a
reasonable timeto act on said claim is violative of the doctrines of exhaustion of administrative remedies
and of primary jurisdiction.

For its part, CBK Power maintains57 that it would be prejudicial to wait for the Commissioner’s ruling
beforeit files its judicial claim since it only has 2 years from the payment of the tax within which to file
both its administrative and judicial claims.

The Court rules for CBK Power.

Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes. Section
204 applies to administrative claims for refund, while Section 229 to judicial claims for refund. In both
instances, the taxpayer’s claim must be filed within two (2) years from the date of payment of the tax or
penalty. However, Section 229 of the NIRC further states the condition that a judicial claim for refund
may not be maintained until a claim for refund or credit has been duly filed with the Commissioner.
These provisions respectively read:

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
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, 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 orin any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: x x x.
(Emphases and underscoring supplied)

Indubitably, CBK Power’s administrative and judicial claims for refund of its excess final withholding
taxes covering taxable year 2003 were filed within the two-year prescriptive period, as shown by the table
below:58

WHEN FINAL WHEN LAST DAY OF WHEN WHEN PETITION

INCOME REMITTANCE THE 2-YEAR ADMINISTRATIVE FOR REVIEW
TAXES WERE RETURN PRESCRIPTIVE CLAIM WAS FILED WAS FILED
WITHHELD FILED PERIOD
February 2003 03/10/03 03/10/05 March 4, 2005 03/09/05
May 2003 06/10/03 06/10/05 March 4, 2005 03/09/05

With respect to the remittance filed on March 10, 2003, the Court agrees with the ratiocination of the
CTA En Banc in debunking the alleged failure to exhaust administrative remedies. Had CBK Power
awaited the action of the Commissioner on its claim for refund prior to taking court action knowing fully
well that the prescriptive period was about to end, it would have lost not only its right to seek judicial
recourse but its right to recover the final withholding taxes it erroneously paid to the government thereby
suffering irreparable damage.59

Also, while it may be argued that, for the remittance filed on June 10, 2003 that was to prescribe on June
10,2005, CBK Power could have waited for, at the most, three (3) months from the filing of the
administrative claim on March 4, 2005 until the last day of the two-year prescriptive period ending June
10, 2005, that is, if only togive the BIR at the administrative level an opportunity to act on said claim, the
Court cannot, on that basis alone, deny a legitimate claim that was, for all intents and purposes, timely
filed in accordance with Section 229 of the NIRC. There was no violation of Section 229 since the law, as
worded, only requires that an administrative claim be priorly filed.
In the foregoing instances, attention must be drawn to the Court’s ruling in P.J. Kiener Co., Ltd. v.
David60 (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, viz.: The controversy centers on the construction of the
aforementioned section of the Tax Code which reads:

SEC. 306. 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 excessive or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the Collector of Internal Revenue; 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 begun after the expiration of two years from the
date of payment of the tax or penalty. The preceding provisions seem at first blush conflicting. It will be
noticed that, whereas the first sentence requires a claim to be filed with the Collector of Internal Revenue
before any suit is commenced, the last makes imperative the bringing of such suit within two years from
the date of collection. But the conflict is only apparent and the two provisions easily yield to
reconciliation, which it is the office of statutory construction to effectuate, where possible, to give effect
to the entire enactment.

To this end, and bearing in mind that the Legislature is presumed to have understood the language it used
and to have acted with full idea of what it wanted to accomplish, it is fair and reasonable to say without
doing violence to the context or either of the two provisions, that by the first is meant simply that the
Collector of Internal Revenue shall be given an opportunity to consider his mistake, if mistake has been
committed, before he is sued, but not, as the appellant contends that pending consideration of the claim,
the period of two years provided in the last clause shall be deemed interrupted. Nowhere and in no wise
does the law imply that the Collector of Internal Revenue must act upon the claim, or that the taxpayer
shall not go to court before he is notified of the Collector’s action. x x x. We understand the filing of the
claim with the Collector of Internal Revenue to be 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.61 (Emphases supplied)

That being said, the foregoing refund claims of CBK Power should all be granted, and, the petition of the
Commissioner in G.R. Nos. 193407-08 be denied for lack of merit.

WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED. The Decision dated March 29, 2010
and the Resolution dated August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B.
Nos. 469 and 494 are hereby REVERSED and SET ASIDE and a new one entered REINSTATING the
Decision of the CTA First Division dated August 28, 2008 ordering the refund in favor of CBK Power
Company Limited the amount of PlS,672,958.42 representing its excess final withholding taxes for the
taxable years 2001 to 2003. On the other hand, the petition in G.R. Nos. 193407-08 is DENIED for lack
of merit.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice
 SILKAIR (SINGAPORE) PTE, LTD., G.R. No. 173594
Petitioner,
Present:

QUISUMBING, J., Chairperson,

CARPIO,
- versus - CARPIO MORALES,
TINGA, and
VELASCO, JR. JJ.

Promulgated:
COMMISSIONER OF INTERNAL February 6, 2008
REVENUE,
Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

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 Review[2] 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 Silkairs 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 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 Reconsideration[6] during the pendency of which or on September 12,
2005 the Bengzon Law Firm entered its appearance as counsel,[7] without Silkairs then-counsel of record
(Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez or JGLaw) having withdrawn as such.

By Resolution[8] of September 22, 2005, the CTA Second Division denied Silkairs motion for
reconsideration. A copy of the Resolution was furnished Silkairs 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/Motion[11] 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
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
xx

3. The undersigned counsel, through petitioner, has received information that the
Honorable Court promulgated a Resolution on petitioners 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
Courts Resolution on petitioners 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,
[13]
2005 CTA Second Division Resolution. Thirty-seven days later or onOctober 28, 2005, Silkair, through
said counsel, filed a Motion for Extension of Time to File Petition for Review[14] 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 Silkairs 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
Review[17] before the CTA En Banc.

By Resolution of May 19,2006, the CTA En Banc dismissed[18] Silkairs 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 onOctober 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 Courts Second Division. This
notwithstanding, Section 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. Castaeda, Jr. posited that
Silkair is not the proper party to claim the tax refund.

Silkair filed a Motion for Reconsideration[21] which the CTA En Banc denied.[22] Hence, the
present Petition for Review[23] 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 Appeals[27] 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 petitioners 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 courts order on December 9,
1974. On January 4, 1975, the therein petitioners, through 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, petitioners 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 138[31] 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,
2005[35] 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 Silkairs 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

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.

Silkairss 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 NPCs
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 [NPCs
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.
CONCHITA CARPIO MORALES

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT
OF TAX APPEALS,respondents.

T.A. Tejada & C.N. Lim for private respondent.

 RESOLUTION

FELICIANO, J.:p

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975,
private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared
dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA)
("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21
representing the thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue
a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that
pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as amended by
Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only
fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a
petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No.
2883. On 31 January 1984, the CTA rendered a decision ordering petitioner Commissioner to refund or
grant the tax credit in the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA
and held that:

(a) P&G-USA, and not private respondent P&G-Phil., was the proper
party to claim the refund or tax credit here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax

Code that allows a credit against the US tax due from P&G-USA of taxes
deemed to have been paid in the Philippines equivalent to twenty percent
(20%) which represents the difference between the regular tax of thirty-
five percent (35%) on corporations and the tax of fifteen percent (15%)
on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions

necessary in order that "the dividends received by its non-resident parent
company in the US (P&G-USA) may be subject to the preferential tax
rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with
them seriatim in this Resolution resolving that Motion.

I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present
claim for refund or tax credit, which need to be examined. This question was raised for the first time on
appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the Commissioner of
Internal Revenue. The question was not raised by the Commissioner on the administrative level, and
neither was it raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise
valid claim for refund by raising this question of alleged incapacity for the first time on appeal before this
Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed
in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting such
refund or tax credit to its parent and sole stockholder. It is commonplace that in the absence of explicit
statutory provisions to the contrary, the government must follow the same rules of procedure which bind
private parties. It is, for instance, clear that the government is held to compliance with the provisions of
Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such compliance,
save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by
the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be
allowed to raise for the first time on appeal questions which had not been litigated either in the lower
court or on the administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the
administrative level, demanded that P&G-Phil. produce an express authorization from its parent
corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and
produce such authorization before filing the action in the instant case. The action here was commenced
just before expiration of the two (2)-year prescriptive period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as
well which, as will be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal
Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally
assessed or collected:

Sec. 306. 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 excessive or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner of Internal Revenue; 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 begun after the
expiration of two years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: . . . (Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to

Refund Taxes.—The Commissioner may:

xxx xxx xxx

 (3) credit or refund taxes erroneously or illegally received, . . . 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. (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil.
a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring
to "any person subject to taximposed by the Title [on Tax on Income]." 2 It thus becomes important to
note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and
withhold any tax" is made " personally 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 3 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 properly considered a
"taxpayer." 4 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, 5 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. 6 (Emphasis supplied)

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, is 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.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some
written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax
credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation
of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. What appears to
be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally
liable to the Government for the taxes and any deficiency assessments to be collected, the Government is
not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s
implied authority from the very beginning. A sovereign government should act honorably and fairly at all
times, even vis-a-vis taxpayers.

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, NIRC, and as impliedly authorized to file the claim for
refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances by
P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of
Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.—

(1) Non-resident corporation. — A foreign corporation not engaged in

trade and business in the Philippines, . . ., shall pay a tax equal to 35% of
the gross income receipt during its taxable year from all sources within
the Philippines, as . . . dividends . . .Provided, still further, that on
dividends received from a domestic corporation liable to tax under this
Chapter, the tax shall be 15% of the dividends, which shall be collected
and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation,
is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular
tax (35%) on corporations and the tax (15%) on dividends as provided in
this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of
domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for
"taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by
the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%)
dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid
in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit
for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty
(20) percentage points which represents the difference between the regular thirty-five percent (35%)
dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed
paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making
applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC
does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage
points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-
USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by
the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions of
the US Intemal Revenue Code ("Tax Code") are the following:

Sec. 901 — Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. — If the taxpayer chooses to have the benefits of

this subpart,the tax imposed by this chapter shall, subject to the
applicable limitation of section 904, be credited with the amounts
provided in the applicable paragraph of subsection (b) plus, in the case
of a corporation, the taxes deemed to have been paid under sections
902 and 960. Such choice for any taxable year may be made or changed
at any time before the expiration of the period prescribed for making a
claim for credit or refund of the tax imposed by this chapter for such
taxable year. The credit shall not be allowed against the tax imposed by
section 531 (relating to the tax on accumulated earnings), against the
additional tax imposed for the taxable year under section 1333 (relating
to war loss recoveries) or under section 1351 (relating to recoveries of
foreign expropriation losses), or against the personal holding company
tax imposed by section 541.

(b) Amount allowed. — Subject to the applicable limitation of section

904, the following amounts shall be allowed as the credit under
subsection (a):

(a) Citizens and domestic corporations. — In the case

of a citizen of the United States and of a domestic
corporation, the amount of any income,war profits, and
excess profits taxes paid or accrued during the taxable
year to any foreign country or to any possession of the
United States; and

xxx xxx xxx

Sec. 902. — Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of

this subject, a domestic corporation which owns at least 10 percent of
the voting stock of a foreign corporation from which it receives
dividends in any taxable year shall —

xxx xxx xxx

(2) to the extent such dividends are paid by such foreign

corporation out of accumulated profits [as defined in
subsection (c) (1) (b)] of a year for which such foreign
 corporation is a less developed country corporation, be
deemed to have paid the same proportion of any
income, war profits, or excess profits taxes paid or
deemed to be paid by such foreign corporation to any
foreign country or to any possession of the United
States on or with respect to such accumulated profits,
which the amount of such dividends bears to the amount
of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined. — For purposes of this section, the term
"accumulated profits" means with respect to any foreign corporation,

(A) for purposes of subsections (a) (1) and (b) (1), the
amount of its gains, profits, or income computed without
reduction by the amount of the income, war profits, and
excess profits taxes imposed on or with respect to such
profits or income by any foreign country. . . .; and

(B) for purposes of subsections (a) (2) and (b) (2), the
amount of its gains, profits, or income in excess of the
income, war profits, and excess profitstaxes imposed on
or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the
accumulated profits of what year or years such dividends were paid,
treating dividends paid in the first 20 days of any year as having been
paid from the accumulated profits of the preceding year or years (unless
to his satisfaction shows otherwise), and in other respects treating
dividends as having been paid from the most recently accumulated gains,
profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7 shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the
amount of the dividend tax actually paid (i.e., withheld) from the
dividend remittances to P&G-USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed

paid' tax credit 8for a proportionate part of the corporate income tax
actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income
taxalthough that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This
"deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in
fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as
dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it
came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business
operations in the Philippines through the medium of P&G-Phil. and here earning profits. What is, under
US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income
taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and
(ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid"
by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA.
These tax credits are allowed because of the US congressional desire to avoid or reduce double taxation
of the same income stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the reduced
or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax

waived by the Philippine government under Section 24 (b) (1), NIRC,
and which hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax
law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by
US law is at least equal to the amount of the dividend tax waived by the
Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically
determined in the following manner:

P100.00 — Pretax net corporate income earned by P&G-Phil.

x 35% — Regular Philippine corporate income tax rate
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA

P65.00 — Dividends remittable to P&G-USA

x 35% — Regular Philippine dividend tax rate under Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax

P65.00 — Dividends remittable to P&G-USA

x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
———
P9.75 — Reduced dividend tax
 P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
———
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount
(a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA
is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under
Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 — Dividends remittable to P&G-USA

- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA

P35.00 — Philippine corporate income tax paid by P&G-Phil.

to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil.
to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine
corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine
government), Section 902, US Tax Code, specifically and clearly complies with the requirements of
Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is
identical with the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the
reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner
of Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which
stated:

However, after a restudy of the decision in the American Chicle Company case and the
provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in
your contention that our computation of the credit which the U.S. tax law allows in such
cases is erroneous as the amount of tax "deemed paid" to the Philippine government for
 purposes of credit against the U.S. tax by the recipient of dividends includes a portion of
the amount of income tax paid by the corporation declaring the dividend in addition to
the tax withheld from the dividend remitted. In other words, the U.S. government will
allow a credit to the U.S. corporation or recipient of the dividend, in addition to the
amount of tax actually withheld, a portion of the income tax paid by the corporation
declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S.
corporation has a net income of P100,000, it will pay P25,000 Philippine income tax
thereon in accordance with Section 24(a) of the Tax Code. The net income, after income
tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15%
tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the
U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit
against its U.S. tax payable on said dividends the amount of P30,000 composed of:

(1) The tax "deemed paid" or indirectly paid on the

dividend arrived at as follows:

P75,000 x P25,000 = P18,750

———
100,000 **

(2) The amount of 15% of

P75,000 withheld = 11,250
———
P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the
dividends received by the U.S. corporation from a Philippine subsidiary is clearly more
than 20% requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends
to be remitted under the above example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby
amended in the sense that the dividends to be remitted by your client to its parent
company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions
of the U.S. Federal Tax Code, which are the bases of the ruling, are not revoked,
amended and modified, the effect of which will reduce the percentage of tax deemed paid
and creditable against the U.S. tax on dividends remitted by a foreign corporation to a
U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods
Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In
other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was
pending before the CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in
Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which
Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United
States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.—In computing net income,
there shall be allowed as deductions — . . .

(c) Taxes. — . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries. —

If the taxpayer signifies in his return his desire to have
the benefits of this paragraphs, the tax imposed by this
Title shall be credited with . . .

(a) Citizen and Domestic Corporation. — In the case of

a citizen of the Philippines and of domestic corporation,
the amount of net income, war profits or excess
profits, taxes paid or accrued during the taxable year to
any foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for
taxes actually paid by it to the US government—e.g., for taxes collected by the US government on
dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section
901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as
follows:

(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic
corporation which owns a majority of the voting stock of a foreign corporation from
which it receives dividends in any taxable year shall be deemed to have paid the same
proportion of any income, war-profits, or excess-profits taxes paid by such foreign
corporation to any foreign country, upon or with respect to the accumulated profits of
such foreign corporation from which such dividends were paid, which the amount of such
dividends bears to the amount of such accumulated profits: Provided, That the amount of
tax deemed to have been paid under this subsection shall in no case exceed the same
proportion of the tax against which credit is taken which the amount of such dividends
bears to the amount of the entire net income of the domestic corporation in which such
dividends are included.The term "accumulated profits" when used in this subsection
reference to a foreign corporation, means the amount of its gains, profits, or income in
excess of the income, war-profits, and excess-profits taxes imposed upon or with respect
to such profits or income; and the Commissioner of Internal Revenue shall have full
power to determine from the accumulated profits of what year or years such dividends
were paid; treating dividends paid in the first sixty days of any year as having been paid
from the accumulated profits of the preceding year or years (unless to his satisfaction
shown otherwise), and in other respects treating dividends as having been paid from the
most recently accumulated gains, profits, or earnings. In the case of a foreign corporation,
the income, war-profits, and excess-profits taxes of which are determined on the basis of
an accounting period of less than one year, the word "year" as used in this subsection
shall be construed to mean such accounting period. (Emphasis supplied)
 Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine
parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US
subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is
"deemed" under our NIRCto have paid a proportionate part of the US corporate income tax paid
by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the
Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law
to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation
with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit
allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid"
tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case
was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held
that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax
authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from
questions of administrative implementation arising after the legal question has been answered. The basic
legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular
thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of whether or not
P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount,
relates to the administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit
shall have actually been granted before the applicable dividend tax rate goes down from thirty-five
percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely
requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither
statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of
the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential
fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax
exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced)
tax rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical
problem of administrative circularity. The Second Division in effect held that the reduced dividend tax
rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required
minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax
credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US,
which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and
collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues
rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of
Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1),
NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the
Philippine subsidiary begins to withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for
the applicability,as a matter of law, of a particular tax rate. Upon the other hand, upon the determination
or recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing
implementing regulations that would require P&G Phil., or any Philippine corporation similarly situated,
to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US
tax authorities to P&G-USA or a US parent corporation for the taxable year involved. Since the US tax
laws can and do change, such implementing regulations could also provide that failure of P&G-Phil. to
submit such certification within a certain period of time, would result in the imposition of a deficiency
assessment for the twenty (20) percentage points differential. The task of this Court is to settle which tax
rate is applicable, considering the state of US law at a given time. We should leave details relating to
administrative implementation where they properly belong — with the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason
alone, necessarily the correct reading of the statute. There are many tax statutes or provisions which are
designed, not to trigger off an instant surge of revenues, but rather to achieve longer-term and broader-
gauge fiscal and economic objectives. The task of our Court is to give effect to the legislative design and
objectives as they are written into the statute even if, as in the case at bar, some revenues have to be
foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five
percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369
which amended Section 24 (b) (1), NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a

developing economy foremost of which is the financing of economic development
programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are

taxed on their earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an

appropriate tax need be imposed on dividends received by non-resident foreign
corporations in the same manner as the tax imposed on interest on foreign loans;

xxx xxx xxx

(Emphasis supplied)

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in
the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends
remittable to the investor. The foreign investor, however, would not benefit from the reduction of the
Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e.,
second-tier taxation) (the home country would simply have more "post-R.P. tax" income to subject to its
own taxing power) by allowing the investor additional tax credits which would be applicable against the
tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the home or
domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to
the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a
positive incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:
 P65.00 — Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.
———
P55.25 — Dividends actually remitted to P&G-USA

P55.25
x 46% — Maximum US corporate income tax rate
———
P25.415—US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
———
P15.66 — US corporate income tax payable after Section 901
——— tax credit.

P55.25
- 15.66
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 — "Deemed paid" tax credit under Section 902 US
——— Tax Code (please see page 18 above)

- 0 - — US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 — Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the
US corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that
P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the dividends
remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this
should encourage additional investment or re-investment in the Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on
Income,"15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a
maximum of twenty percent (20%) of the gross amount of dividends paid to US parent corporations:

Art 11. — Dividends

xxx xxx xxx

 (2) The rate of tax imposed by one of the Contracting States on dividends
derived from sources within that Contracting State by a resident of the
other Contracting State shall not exceed —

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount

of the dividend ifduring the part of the paying corporation's taxable year
which precedes the date of payment of the dividend and during the whole
of its prior taxable year (if any), at least 10 percent of the outstanding
shares of the voting stock of the paying corporation was owned by the
recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United States that
it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax]
credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary]
—.16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax
Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to
reduce the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is still a differential
or additional reduction of five (5) percentage points which compliance of US law (Section 902) with the
requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine
subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for
Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court
promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the
Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for
Review for lack of merit. No pronouncement as to costs.

Narvasa, Gutierrez, Jr., Griño-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.

Separate Opinions

CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.

As I understand it, the intention of Section 24 (b) of our Tax Code is to attract foreign investors to this
country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax
credit at least equal in amount to the 20% waived by the Philippines. This tax credit would offset the tax
payable by them on their profits to their home state. In effect, both the Philippines and the home state of
the foreign investors reduce their respective tax "take" of those profits and the investors wind up with
more left in their pockets. Under this arrangement, the total taxes to be paid by the foreign investors may
be confined to the 35% corporate income tax and 15% dividend tax only, both payable to the Philippines,
with the US tax liability being offset wholly or substantially by the US "deemed paid" tax credits.

Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35%
corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70%
or more on the same amount of dividends. In this circumstance, it is not likely that many such foreign
investors, given the onerous burden of the two-tier system, i.e., local state plus home state, will be
encouraged to do business in the local state.

It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible
by the Republic from the foreign investor is considerably reduced. This may appear unacceptable to the
superficial viewer. But this reduction is in fact the price we have to offer to persuade the foreign company
to invest in our country and contribute to our economic development. The benefit to us may not be
immediately available in instant revenues but it will be realized later, and in greater measure, in terms of a
more stable and robust economy.

BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to
add some observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue
v. Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is
diametrically opposite to that sought to be reached in the instant Motion for Reconsideration.

1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner
Commissioner of Internal Revenue to raise before the Court of Tax Appeals the issue of who should be
the real party in interest in claiming a refund cannot prejudice the government, as such failure is merely a
procedural defect; and that moreover, the government can never be in estoppel, especially in matters
involving taxes. In a word, the dissenting opinion insists that errors of its agents should not jeopardize the
government's position.

The above rule should not be taken absolutely and literally; if it were, the government would never lose
any litigation which is clearly not true. The issue involved here is not merely one of procedure; it is also
one of fairness: whether the government should be subject to the same stringent conditions applicable to
an ordinary litigant. As the Court had declared in Wander:

. . . To allow a litigant to assume a different posture when he comes before the court and
challenge the position he had accepted at the administrative level, would be to sanction a
procedure whereby the
Court — which is supposed to review administrative determinations — would not
 review, but determine and decide for the first time, a question not raised at the
administrative forum. . . . (160 SCRA at 566-577)

Had petitioner been forthright earlier and required from private respondent proof of authority from its
parent corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would
doubtless have been able to show proof of such authority. By any account, it would be rank injustice not
at this stage to require petitioner to submit such proof.

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the
actual amount credited by the US government against the income tax due from P & G USA on the
dividends received from private respondent; (2) to present the 1975 income tax return of P & G USA
when the dividends were received; and (3) to submit any duly authenticated document showing that the
US government credited the 20% tax deemed paid in the Philippines.

I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof, which,
as I understand it, explains that the US tax authorities are unable to determine the amount of the "deemed
paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends actually
remitted by P & G-Phil. to P & G USA, is still unknown. Stated in other words, until dividends have
actually been remitted to the US (which presupposes an actual imposition and collection of the applicable
Philippine dividend tax rate), the US tax authorities cannot determine the "deemed paid" portion of the
tax credit sought by P & G USA. To require private respondent to show documentary proof of its parent
corporation having actually received the "deemed paid" tax credit from the proper tax authorities, would
be like putting the cart before the horse. The only way of cutting through this (what Feliciano, J., termed)
"circularity" is for our BIR to issue rulings (as they have been doing) to the effect that the tax laws of
particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax code for applicability
of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to submit, within a
reasonable period, proof of the amount of "deemed paid" tax credit actually granted by the foreign tax
authority. Imposing such a resolutory condition should resolve the knotty problem of circularity.

3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax
exemptions, are to be construed strictissimi juris against the person or entity claiming the exemption; and
that refunds cannot be permitted to exist upon "vague implications."

Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must
ascertain and give effect to the legislative intent embodied in a particular provision of law. If a statute
(including a tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be
given its ordinary meaning and applied without interpretation. In the instant case, the dissenting opinion
of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when it was promulgated in
1975 to amend Section 24(b), [11 of the National Internal Revenue Code, was "to decrease the tax
liability" of the foreign capital investor and thereby to promote more inward foreign investment. The
same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is
premised on reciprocity."

4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one
find reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b),
[1], NIRC. Upon the other hand, where the law-making authority intended to impose a requirement of
reciprocity as a condition for grant of a privilege, the legislature does so expressly and clearly. For
example, the gross estate of non-citizens and non-residents of the Philippines normally includes intangible
personal property situated in the Philippines, for purposes of application of the estate tax and donor's tax.
However, under Section 98 of the NIRC (as amended by P.D. 1457), no taxes will be collected by the
Philippines in respect of such intangible personal property if the law or the foreign country of which the
decedent was a citizen and resident at the time of his death allows a similar exemption from transfer or
death taxes in respect of intangible personal property located in such foreign country and owned by
Philippine citizens not residing in that foreign country.

There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced dividend
tax rate of 15% Moreover, for the Court to impose such a requirement of reciprocity would be to
contradict the basic policy underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was
promulgated in the effort to promote the inflow of foreign investment capital into the Philippines. A
requirement of reciprocity, i.e., a requirement that the U.S. grant a similar reduction of U.S. dividend
taxes on remittances by the U.S. subsidiaries of Philippine corporations, would assume a desire on the
part of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.. But the
Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had
surplus capital to export, it would not need to import foreign capital into the Philippines. In other words,
to require dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine
corporations to invest outside the Philippines, which would be inconsistent with the notion of attracting
foreign capital into the Philippines in the first place.

5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:

Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance
tax of only 15%. The mere fact that in this Procter and Gamble case, the BIR desires to
charge 35% indicates that the BIR ruling cited in Wander has been obviously discarded
today by the BIR. Clearly, there has been a change of mind on the part of the BIR.

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the
Court of Tax Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late
as 1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no
contrary ruling has been issued by the BIR.

For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I
vote accordingly.

PARAS, J., dissenting:

I dissent.

The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs.
Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April
15, 1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent. Procter
& Gamble Philippines (PMC-Phils., for brevity) assails the Court's findings that:

(a) private respondent (PMC-Phils.) is not a proper party to claim the

refund/tax credit;

(b) there is nothing in Section 902 or other provision of the US Tax Code
that allows a credit against the U.S. tax due from PMC-U.S.A. of taxes
deemed to have been paid in the Phils. equivalent to 20% which
 represents the difference between the regular tax of 35% on corporations
and the tax of 15% on dividends;

(c) private respondent failed to meet certain conditions necessary in order

that the dividends received by the non-resident parent company in the
U.S. may be subject to the preferential 15% tax instead of 35%. (pp. 200-
201, Motion for Reconsideration)

Private respondent's position is based principally on the decision rendered by the Third Division of this
Court in the case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of
Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues as in
the case at bar, but held an apparent contrary view. Private respondent advances the theory that since the
Wander decision had already become final and executory it should be a precedent in deciding similar
issues as in this case at hand.

Yet, it must be noted that the Wander decision had become final and executory only by reason of the
failure of the petitioner therein to file its motion for reconsideration in due time. Petitioner received the
notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or
after the decision had already become final and executory on May 9, 1988. Considering that entry of final
judgment had already been made on May 9, 1988, the Third Division resolved to note without action the
said Motion. Apparently therefore, the merits of the motion for reconsideration were not passed upon by
the Court.

The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or
in Division may be modified or reversed by the court en banc. The case is now before this Court en
banc and the decision that will be handed down will put to rest the present controversy.

It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to
the Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company).
However, such fact does not necessarily connote that private respondent is the real party in interest to
claim reimbursement of the tax alleged to have been overpaid. Payment of tax is an obligation physically
passed off by law on the withholding agent, if any, but the act of claiming tax refund is a right that, in a
strict sense, belongs to the taxpayer which is private respondent's parent company. The role or function of
PMC-Phils., as the remitter or payor of the dividend income, is merely to insure the collection of the
dividend income taxes due to the Philippine government from the taxpayer, "PMC-U.S.A.," the non-
resident foreign corporation not engaged in trade or business in the Philippines, as "PMC-U.S.A." is
subject to tax equivalent to thirty five percent (35%) of the gross income received from "PMC-Phils." in
the Philippines "as . . . dividends . . ." (Sec. 24 [b], Phil. Tax Code). Being a mere withholding agent of
the government and the real party in interest being the parent company in the United States, private
respondent cannot claim refund of the alleged overpaid taxes. Such right properly belongs to PMC-U.S.A.
It is therefore clear that as held by the Supreme Court in a series of cases, the action in the Court of Tax
Appeals as well as in this Court should have been brought in the name of the parent company as petitioner
and not in the name of the withholding agent. This is because the action should be brought under the
name of the real party in interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125; Sutherland,
Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9
SCRA 113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, L-16485,
January 30, 1945).

Rule 3, Sec. 2 of the Rules of Court provides:

 Sec. 2. Parties in interest. — Every action must be prosecuted and defended in the name
of the real party in interest. All persons having an interest in the subject of the action and
in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim an
interest in the controversy or the subject thereof adverse to the plaintiff, or who are
necessary to a complete determination or settlement of the questions involved therein
shall be joined as defendants.

It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no
remittance tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims that
in case of anoverpayment (or claim for refund) the agent must be given the right to sue the Commissioner
by itself (that is, the agent here is also a real party in interest). He further claims that to deny this right
would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the agent the
obtaining of a refund is a RIGHT. While every obligation has a corresponding right (and vice-versa), the
obligation to pay the complete tax has the corresponding right of the government to demand the
deficiency; and the right of the agent to demand a refund corresponds to the government's duty to refund.
Certainly, the obligation of the withholding agent to pay in full does not correspond to its right to claim
for the refund. It is evident therefore that the real party in interest in this claim for reimbursement is the
principal (the mother corporation) and NOT the agent.

This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax
Appeals the issue relating to the real party in interest to claim the refund cannot, and should not, prejudice
the government. Such is merely a procedural defect. It is axiomatic that the government can never be in
estoppel, particularly in matters involving taxes. Thus, for example, the payment by the tax-payer of
income taxes, pursuant to a BIR assessment does not preclude the government from
making further assessments. The errors or omissions of certain administrative officers should never be
allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v. Coll. of
Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v.
Ellen Wood McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L-14874, Sept, 30, 1960;
Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27, 1963).

As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit equivalent to at least 20 percentage paid portion spared or waived as otherwise
deemed waived by the government, We reiterate our ruling that while apparently, a tax-credit is given,
there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law-
87-834 that would justify tax return of the disputed 15% to the private respondent. This is because the
amount of tax credit purportedly being allowed is not fixed or ascertained, hence we do not know whether
or not the tax credit contemplated is within the limits set forth in the law. While the mathematical
computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from a
basic defect, that is we have no way of knowing or checking the figure used as premises. In view of the
ambiguity of Sec. 902 itself, we can conclude that no real tax credit was really intended. In the
interpretation of tax statutes, it is axiomatic that as between the interest of multinational corporations and
the interest of our own government, it would be far better, in the absence of definitive guidelines, to favor
the national interest. As correctly pointed out by the Solicitor General:

. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being

considered as if paid by the foreign taxing authority, the host country.
 In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend
income of PMC-U.S.A. would be reduced to fifteen (15%) percent if & only
if reciprocally PMC-U.S.A's home country, the United States, not only would
allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the fifteen
(15%) percentage-point portion of the thirty five (35%) percent Phil. dividend tax
actually paid or accrued but also would allow a foreign tax "sparing" credit for the twenty
(20%)' percentage-point portion spared, waived, forgiven or otherwise deemed as if
paid by the Phil. govt. by virtue of the "tax credit sparing" proviso of Sec. 24(b), Phil.
Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).

Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S.
corporate taxpayers, whether directly or indirectly. Nowhere under a statute or under a tax treaty, does the
U.S. government recognize much less permit any foreign tax credit for spared or ghost taxes, as in reality
the U.S. foreign-tax credit mechanism under Sections 901-905 of the U.S. Intemal Revenue Code does
not apply to phantom dividend taxes in the form of dividend taxes waived, spared or otherwise considered
"as if" paid by any foreign taxing authority, including that of the Philippine government.

Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A. on the dividends received from private
respondent; (2) to present the income tax return of its parent company for 1975 when the dividends were
received; and (3) to submit any duly authenticated document showing that the U.S. government credited
the 20% tax deemed paid in the Philippines.

Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign
authority and to be construed strictissimi juris against the person or entity claiming the exemption. The
burden of proof is upon him who claims the exemption in his favor and he must be able to justify his
claim by the clearest grant of organic or statute law . . . and cannot be permitted to exist upon vague
implications. (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil Tobacco Corp. v. Mun. of
Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v.
Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v. Commissioner of Custom,
44 SCRA 122). Thus, when tax exemption is claimed, it must be shown indubitably to exist, for every
presumption is against it, and a well founded doubt is fatal to the claim (Farrington v. Tennessee &
Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-29987, Oct. 22, 1975; Manila Electric
Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA 451).

It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the
Philippines was amplified in Presidential Decree No. 369 promulgated in 1975, the purpose of which was
to "encourage more capital investment for large projects." And its ultimate purpose is to decrease the tax
liability of the corporation concerned. But this granting of a preferential right is premised on reciprocity,
without which there is clearly a derogation of our country's financial sovereignty. No such reciprocity has
been proved, nor does it actually exist. At this juncture, it would be useful to bear in mind the following
observations:

The continuing and ever-increasing transnational movement of goods and services, the emergence of
multinational corporations and the rise in foreign investments has brought about tremendous pressures on
the tax system to strengthen its competence and capability to deal effectively with issues arising from the
foregoing phenomena.
International taxation refers to the operationalization of the tax system on an international level. As it is,
international taxation deals with the tax treatment of goods and services transferred on a global basis,
multinational corporations and foreign investments.

Since the guiding philosophy behind international trade is free flow of goods and services, it goes without
saying that the principal objective of international taxation is to see through this ideal by way of feasible
taxation arrangements which recognize each country's sovereignty in the matter of taxation, the need for
revenue and the attainment of certain policy objectives.

The institution of feasible taxation arrangements, however, is hard to come by. To begin with,
international tax subjects are obviously more complicated than their domestic counter-parts. Hence, the
devise of taxation arrangements to deal with such complications requires a welter of information and data
build-up which generally are not readily obtainable and available. Also, caution must be exercised so that
whatever taxation arrangements are set up, the same do not get in the way of free flow of goods and
services, exchange of technology, movement of capital and investment initiatives.

A cardinal principle adhered to in international taxation is the avoidance of double taxation. The
phenomenon of double taxation (i.e., taxing an item more than once) arises because of global movement
of goods and services. Double taxation also occurs because of overlaps in tax jurisdictions resulting in the
taxation of taxable items by the country of source or location (source or situs rule) and the taxation of the
same items by the country of residence or nationality of the
taxpayer (domiciliary or nationality principle).

An item may, therefore, be taxed in full in the country of source because it originated there, and in
another country because the recipient is a resident or citizen of that country. If the taxes in both countries
are substantial and no tax relief is offered, the resulting double taxation would serve as a discouragement
to the activity that gives rise to the taxable item.

As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention
(but may be made multilateral) entered into between sovereign states for purposes of eliminating double
taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and
according fair and equitable tax treatment to foreign residents or nationals. 2

A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as
a tax credit or an item of deduction.

Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that
would be derived therefrom.

A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a
country for the obvious reason of encouraging foreign investments. For instance, if the usual tax rate is 35
percent but a concession rate accrues to the country of the investor rather than to the investor himself To
obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted or reduced are
considered as having been fully paid.

To illustrate:

"X" Foreign Corporation income 100

Tax rate (35%) 35
RP income 100
 Tax rate (general, 35%
concession rate, 15%) 15

1. "X" Foreign Corp. Tax Liability without Tax Sparing

"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55

2. "X" Foreign Corp. Tax Liability with Tax Sparing

"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35

By way of resume, We may say that the Wander decision of the Third Division cannot, and should not
result in the reversal of the Procter & Gamble decision for the following reasons:

1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was
promulgated on the same day the decision of the Second Division was promulgated, and while Wander
has attained finality this is simply because no motion for reconsideration thereof was filed within a
reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account by
said Third Division.

2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino
Padilla aptly said: "More pregnant than anything else is that the court shall be right." We hereby cite
settled doctrines from a treatise on Civil Law:

We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta
movere) for reasons of stability in the law. The doctrine, which is really "adherence to
precedents," states that once a case has been decided one way, then another case,
involving exactly the same point at issue, should be decided in the same manner.

Of course, when a case has been decided erroneously such an error must not be
perpetuated by blind obedience to the doctrine of stare decisis. No matter how sound a
doctrine may be, and no matter how long it has been followed thru the years, still if found
to be contrary to law, it must be abandoned. The principle of stare decisis does not and
should not apply when there is a conflict between the precedent and the law (Tan Chong
v. Sec. of Labor, 79 Phil. 249).

While stability in the law is eminently to be desired, idolatrous reverence for precedent,
simply, as precedent, no longer rules. More pregnant than anything else is that the court
shall be right (Phil. Trust Co. v. Mitchell, 59 Phil. 30).
3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we
have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines and the
United States, a country with which we had no tax treaty, at the time the taxes herein were collected.

4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only
15%. The mere fact that in this Procter and Gamble case the B.I.R. desires to charge 35% indicates that
the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has
been a change of mind on the part of the B.I.R.

5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland
exists. It is evident that without reciprocity the desired consequences of the tax credit under P.D. No. 369
would be rendered unattainable.

6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not
been presented, and therefore even were we inclined to grant the tax credit claimed, we find ourselves
unable to compute the proper amount thereof.

7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the
proper party to bring up the case.

ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for
reconsideration of our own decision should be DENIED.

Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

# Separate Opinions

CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.

As I understand it, the intention of Section 24(b) of our Tax Code is to attract foreign investors to this
country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax
credit at least equal in amount to the 20% waived by the Philippines. This tax credit would offset the tax
payable by them on their profits to their home state. In effect, both the Philippines and the home state of
the foreign investors reduce their respective tax "take" of those profits and the investors wind up with
more left in their pockets. Under this arrangement, the total taxes to be paid by the foreign investors may
be confined to the 35% corporate income tax and 15% dividend tax only, both payable to the Philippines,
with the US tax hability being offset wholly or substantially by the Us "deemed paid' tax credits.

Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35%
corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70%
or more on the same amount of dividends. In this circumstance, it is not likely that many such foreign
investors, given the onerous burden of the two-tier system, i.e., local state plus home state, will be
encouraged to do business in the local state.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible
by the Republic from the foreign investor is considerably reduced. This may appear unacceptable to the
superficial viewer. But this reduction is in fact the price we have to offer to persuade the foreign company
to invest in our country and contribute to our economic development. The benefit to us may not be
immediately available in instant revenues but it will be realized later, and in greater measure, in terms of a
more stable and robust economy.

BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to
add some observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue
v. Wander Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is
diametrically opposite to that sought to be reached in the instant Motion for Reconsideration.

1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner
Commissioner of Internal Revenue to raise before the Court of Tax Appeals the issue of who should be
the real party in interest in claiming a refund cannot prejudice the government, as such failure is merely a
procedural defect; and that moreover, the government can never in estoppel, especially in matters
involving taxes. In a word, the dissenting opinion insists that errors of its agents should not jeopardize the
government's position.

The above rule should not be taken absolutely and literally; if it were, the government would never lose
any litigation which is clearly not true. The issue involved here is not merely one of procedure; it is also
one of fairness: whether the government should be subject to the same stringent conditions applicable to
an ordinary litigant. As the Court had declared in Wander:

. . . To allow a litigant to assume a different posture when he comes before the court and
challenge the position he had accepted at the administrative level, would be to sanction a
procedure whereby the Court — which is supposed to review administrative
determinations — would not review, but determine and decide for the first time, a
question not raised at the administrative forum. ... (160 SCRA at 566-577)

Had petitioner been forthright earlier and required from private respondent proof of authority from its
parent corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would
doubtless have been able to show proof of such authority. By any account, it would be rank injustice not
at this stage to require petitioner to submit such proof.

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the
actual amount credited by the US government against the income tax due from P & G USA on the
dividends received from private respondent; (2) to present the 1975 income tax return of P & G USA
when the dividends were received; and (3) to submit any duly authenticated document showing that the
US government credited the 20% tax deemed paid in the Philippines.

I agree with the main opinion of my colleagues, Feliciano J., specifically in page 23 et seq. thereof,
which, as I understand it, explains that the US tax authorities are unable to determine the amount of the
"deemed paid" credit to be given P & G USA so long as the numerator of the fraction, i.e., dividends
actually remitted by P & G-Phil. to P & G USA, is still unknown. Stated in other words, until dividends
have actually been remitted to the US (which presupposes an actual imposition and collection of the
applicable Philippine dividend tax rate), the US tax authorities cannot determine the "deemed paid"
portion of the tax credit sought by P & G USA. To require private respondent to show documentary proof
of its parent corporation having actually received the "deemed paid" tax credit from the proper tax
authorities, would be like putting the cart before the horse. The only way of cutting through this (what
Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the effect
that the tax laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax
code for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to
submit, within a reasonable period, proof of the amount of "deemed paid" tax credit actually granted by
the foreign tax authority. Imposing such a resolutory condition should resolve the knotty problem of
circularity.

3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax
exemptions, are to be construed strictissimi juris against the person or entity claiming the exemption; and
that refunds cannot be permitted to exist upon "vague implications."

Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must
ascertain and give effect to the legislative intent embodied in a particular provision of law. If a statute
(including a tax statute reducing a certain tax rate) is clear, plain and free from ambiguity, it must be
given its ordinary meaning and applied without interpretation. In the instant case, the dissenting opinion
of Paras, J., itself concedes that the basic purpose of Pres. Decree No. 369, when it was promulgated in
1975 to amend Section 24(b), [11 of the National Internal Revenue Code, was "to decrease the tax
liability" of the foreign capital investor and thereby to promote more inward foreign investment. The
same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is
premised on reciprocity."

4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one
find reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b),
[1], NIRC. Upon the other hand. where the law-making authority intended to impose a requirement of
reciprocity as a condition for grant of a privilege, the legislature does so expressly and clearly. For
example, the gross estate of non-citizens and non-residents of the Philippines normally includes intangible
personal property situated in the Philippines, for purposes of application of the estate tax and donor's tax.
However, under Section 98 of the NIRC (as amended by P.D. 1457), no taxes will be collected by the
Philippines in respect of such intangible personal property if the law or the foreign country of which the
decedent was a citizen and resident at the time of his death allows a similar exemption from transfer or
death taxes in respect of intangible personal property located in such foreign country and owned by
Philippine citizens not residing in that foreign country.

There is no statutory requirement of reciprocity imposed as condition for grant of the reduced dividend
tax rate of 15% Moreover, for the Court to impose such a requirement of reciprocity would be to
contradict the basic policy underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was
promulgated in the effort to promote the inflow of foreign investment capital into the Philippines. A
requirement of reciprocity, i.e., a requirement that the U.S. grant a similar reduction of U.S. dividend
taxes on remittances by the U.S. subsidiary of Philippine corporations, would assume a desire on the part
of the U.S. and of the Philippines to attract the flow of Philippine capital into the U.S.. But the Philippines
precisely is a capital importing, and not a capital exporting country. If the Philippines had surplus capital
to export, it would not need to import foreign capital into the Philippines. In other words, to require
dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine
corporations to invest outside the Philippines, which would be inconsistent with the notion of attracting
foreign capital into the Philippines in the first place.
5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:

Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance
tax of only 15%. The mere fact that in this Procter and Gamble case, the BIR desires to
charge 35% indicates that the BIR ruling cited in Wander has been obviously discarded
today by the BIR. Clearly, there has been a change of mind on the part of the BIR.

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the
Court of Tax Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late
as 1987, recognized the "deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no
contrary ruling has been issued by the BIR.

For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I
vote accordingly.

PARAS, J., dissenting:

I dissent.

The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs.
Procter & Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April
15,1988 is sought to be reviewed in the Motion for Reconsideration filed by private respondent. Procter &
Gamble Philippines (PMC-Phils., for brevity) assails the Court's findings that:

(a) private respondent (PMC-Phils.) is not a proper party to claim the

refund/tax aredit;

(b) there is nothing in Section 902 or other provision of the US Tax Code
that allows a credit against the U.S. tax due from PMC-U.S.A. of taxes
deemed to have been paid in the Phils. equivalent to 20% which
represents the difference between the regular tax of 35% on corporations
and the tax of 15% on dividends;

(c) private respondent failed to meet certain conditions necessary in order

that the dividends received by the non-resident parent company in the
U.S. may be subject to the preferential 15% tax instead of 35%. (pp, 200-
201, Motion for Reconsideration)

Private respondent's position is based principally on the decision rendered by the Third Division of this
Court in the case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of
Tax Appeals," G.R. No. 68375, promulgated likewise on April 15, 1988 which bears the same issues as in
the case at bar, but held an apparent contrary view. Private respondent advances the theory that since the
Wander decision had already become final and executory it should be a precedent in deciding similar
issues as in this case at hand.

Yet, it must be noted that the Wander decision had become final and executory only by reason of the
failure of the petitioner therein to file its motion for reconsideration in due time. Petitioner received the
notice of judgment on April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or
after the decision had already become final and executory on May 9, 1988. Considering that entry of final
judgment had already been made on May 9, 1988, the Third Division resolved to note without action the
said Motion. Apparently therefore, the merits of the motion for reconsideration were not passed upon by
the Court.

The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or
in Division may be modified or reversed by the court en banc. The case is now before this Court en
banc and the decision that will be handed down will put to rest the present controversy.

It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to
the Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company).
However, such fact does not necessarily connote that private respondent is the real party in interest to
claim reimbursement of the tax alleged to have been overpaid. Payment of tax is an obligation physically
passed off by law on the withholding agent, if any, but the act of claiming tax refund is a right that, in a
strict sense, belongs to the taxpayer which is private respondent's parent company. The role or function of
PMC-Phils., as the remitter or payor of the dividend income, is merely to insure the collection of the
dividend income taxes due to the Philippine government from the taxpayer, "PMC-U.S.A.," the non-
resident foreign corporation not engaged in trade or business in the Philippines, as "PMC-U.S.A." is
subject to tax equivalent to thirty five percent (35%) of the gross income received from "PMC-Phils." in
the Philippines "as ... dividends ..."(Sec. 24[b],Phil. Tax Code). Being a mere withholding agent of the
government and the real party in interest being the parent company in the United States, private
respondent cannot claim refund of the alleged overpaid taxes. Such right properly belongs to PMC-U.S.A.
It is therefore clear that as held by the Supreme Court in a series of cases, the action in the Court of Tax
Appeals as well as in this Court should have been brought in the name of the parent company as petitioner
and not in the name of the withholding agent. This is because the action should be brought under the
name of the real party in interest. (See Salonga v. Warner Barnes, & Co., Ltd., 88 Phil. 125; Sutherland,
Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091, Sept. 30, 1963, 9
SCRA 113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, I, 16485,
January 30, 1945).

Rule 3, Sec. 2 of the Rules of Court provides:

Sec. 2. Parties in interest. — Every action must be prosecuted and defended in the name
of the real party in interest. All persons having an interest in the subject of the action and
in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim an
interest in the controversy or the subject thereof adverse to the plaintiff, or who are
necessary to a complete determination or settlement of the questions involved therein
shall be joined as defendants.

It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no
remittance tax is paid, or if what was paid is less than what is due. From this, Justice Feliciano claims that
in case of anoverpayment (or claim for refund) the agent must be given the right to sue the Commissioner
by itself (that is, the agent here is also a real party in interest). He further claims that to deny this right
would be unfair. This is not so. While payment of the tax due is an OBLIGATION of the agent, the
obtaining of a refund la a RIGHT. While every obligation has a corresponding right (and vice-versa), the
obligation to pay the complete tax has the corresponding right of the government to demand the
deficiency; and the right of the agent to demand a refund corresponds to the government's duty to refund.
Certainly, the obligation of the withholding agent to pay in full does not correspond to its right to claim
for the refund. It is evident therefore that the real party in interest in this claim for reimbursement is the
principal (the mother corporation) and NOT the agent.

This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax
Appeals the issue relating to the real party in interest to claim the refund cannot, and should not, prejudice
the government. Such is merely a procedural defect. It is axiomatic that the government can never be in
estoppel, particularly in matters involving taxes. Thus, for example, the payment by the tax-payer of
income taxes, pursuant to a BIR assessment does not preclude the government from
making further assessments. The errors or omissions of certain administrative officers should never be
allowed to jeopardize the government's financial position. (See: Phil. Long Distance Tel. Co. v. Con. of
Internal Revenue, 9(, Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal Revenue v.
Ellen Wood McGrath, L-12710, L-12721, Feb. 28,1961; Perez v. Perez, L-14874, Sept. 30,1960;
Republic v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27,1963).

As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States
Foreign Tax Credit equivalent to at least 20 percentage paid portion spared or waived as otherwise
deemed waived by the government, We reiterate our ruling that while apparently, a tax-credit is given,
there is actually nothing in Section 902 of the U.S. Internal Revenue Code, as amended by Public Law-
87-834 that would justify tax return of the disputed 15% to the private respondent. This is because the
amount of tax credit purportedly being allowed is not fixed or ascertained, hence we do not know whether
or not the tax credit contemplated is within the limits set forth in the law. While the mathematical
computations in Justice Feliciano's separate opinion appear to be correct, the computations suffer from a
basic defect, that is we have no way of knowing or checking the figure used as premises. In view of the
ambiguity of Sec. 902 itself, we can conclude that no real tax credit was really intended. In the
interpretation of tax statutes, it is axiomatic that as between the interest of multinational corporations and
the interest of our own government, it would be far better, in the absence of definitive guidelines, to favor
the national interest. As correctly pointed out by the Solicitor General:

. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being

considered as if paid by the foreign taxing authority, the host country.

In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend
income of PMC-U.S.A. would be reduced to fifteen (15%) percent if & only
if reciprocally PMC-U.S.A's home country, the United States, not only would
allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the fifteen
(15%) percentage-point portion of the thirty five (35%) percent Phil. dividend tax
actually paid or accrued but also would allow a foreign tax 'sparing' credit for the twenty
(20%)' percentage-point portion spared, waived, forgiven or otherwise deemed as if
paid by the Phil. govt. by virtue of . he "tax credit sparing" proviso of Sec. 24(b), Phil.
Tax Code." (Reply Brief, pp. 23-24; Rollo, pp. 239-240).

Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S.
corporate taxpayers, whether directly or indirectly. Nowhere under a statute or under a tax treaty, does the
U.S. government recognize much less permit any foreign tax credit for spared or ghost taxes, as in reality
the U.S. foreign-tax credit mechanism under Sections 901-905 of the U.S. Internal Revenue Code does
not apply to phantom dividend taxes in the form of dividend taxes waived, spared or otherwise considered
"as if' paid by any foreign taxing authority, including that of the Philippine government.
Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A. on the dividends received from private
respondent; (2) to present the income tax return of its parent company for 1975 when the dividends were
received; and (3) to submit any duly authenticated document showing that the U.S. government credited
the 20% tax deemed paid in the Philippines.

Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of sovereign
authority and to be construed strictissimi juris against the person or entity claiming the exemption. The
burden of proof is upon him who claims the exemption in his favor and he must be able to justify, his
claim by the clearest grant of organic or statute law... and cannot be permitted to exist upon vague
implications (Asiatic Petroleum Co. v. Llanes. 49 Phil. 466; Northern Phil Tobacco Corp. v. Mun. of
Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v.
Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc. v. Commissioner of Custom,
44 SCRA 122' Thus, when tax exemption is claimed. it must be shown indubitably to exist, for every
presumption is against it, and a well founded doubt is fatal to the claim (Farrington v. Tennessee &
Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera. L-29987. Oct. 22. 1975: Manila Electric
Co. v. Vera, L-29987, Oct. 22, 1975; Manila Electric Co. v. Tabios, L-23847, Oct. 22, 1975, 67 SCRA
451).

It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the
Philippines was amplified in Presidential Decree 4 No. 369 promulgated in 1975, the purpose of which
was to "encourage more capital investment for large projects." And its ultimate purpose it to decrease the
tax liability of the corporation concerned. But this granting of a preferential right is premised on
reciprocity, without which there is clearly a derogation of our country's financial sovereignty. No such
reciprocity has been proved, nor does it actually exist. At this juncture, it would be useful to bear in mind
the following observations:

The continuing and ever-increasing transnational movement of goods and services, the emergence of
multinational corporations and the rise in foreign investments has brought about tremendous pressures on
the tax system to strengthen its competence and capability to deal effectively with issues arising from the
foregoing phenomena.

International taxation refers to the operationalization of the tax system on an international level. As it is,
international taxation deals with the tax treatment of goods and services transferred on a global basis,
multinational corporations and foreign investments.

Since the guiding philosophy behind international trade is free flow of goods and services, it goes without
saying that the principal objective of international taxation is to see through this ideal by way of feasible
taxation arrangements which recognize each country's sovereignty in the matter of taxation, the need for
revenue and the attainment of certain policy objectives.

The institution of feasible taxation arrangements, however, is hard to come by. To begin with,
international tax subjects are obviously more complicated than their domestic counter-parts. Hence, the
devise of taxation arrangements to deal with such complications requires a welter of information and data
buildup which generally are not readily obtainable and available. Also, caution must be exercised so that
whatever taxation arrangements are set up, the same do not get in the way of free flow of goods and
services, exchange of technology, movement of capital and investment initiatives.

A cardinal principle adhered to in international taxation is the avoidance of double taxation. The
phenomenon of double taxation (i.e., taxing an item more than once) arises because of global movement
of goods and services. Double taxation also occurs because of overlaps in tax jurisdictions resulting in the
taxation of taxable items by the country of source or location (source or situs rule) and the taxation of the
same items by the country of residence or nationality of the
taxpayer (domiciliary or nationality principle).

An item may, therefore, be taxed in full in the country of source because it originated there, and in
another country because the recipient is a resident or citizen of that country. If the taxes in both countries
are substantial and no tax relief is offered, the resulting double taxation would serve as a discouragement
to the activity that gives rise to the taxable item.

As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention
(but may be made multilateral) entered into between sovereign states for purposes of eliminating double
taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and
according fair and equitable tax treatment to foreign residents or nationals. 2

A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as
a tax credit or an item of deduction.

Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that
would be derived therefrom.

A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a
country for the obvious reason of encouraging foreign investments. For instance, if the usual tax rate is 35
percent but a concession rate accrues to the country of the investor rather than to the investor himself To
obviate this, a tax sparing provision may be stipulated. With tax sparing, taxes exempted or reduced are
considered as having been frilly paid.

To illustrate:

"X" Foreign Corporation income 100

Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15

1. "X" Foreign Corp. Tax Liability without Tax Sparing

"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55

2. "X" Foreign Corp. Tax Liability with Tax Sparing

"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
 deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35

By way of resume, We may say that the Wander decision of the Third Division cannot, and should not
result in the reversal of the Procter & Gamble decision for the following reasons:

1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was
promulgated on the same day the decision of the Second Division was promulgated, and while Wander
has attained finality this is simply because no motion for reconsideration thereof was filed within a
reasonable period. Thus, said Motion for Reconsideration was theoretically never taken into account by
said Third Division.

2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino
Padilla aptly said: "More pregnant than anything else is that the court shall be right." We hereby cite
settled doctrines from a treatise on Civil Law:

We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta
movere) for reasons of stability in the law. The doctrine, which is really 'adherence to
precedents,' states that once a case has been decided one way, then another case,
involving exactly the same point at issue, should be decided in the same manner.

Of course, when a case has been decided erroneously such an error must not be
perpetuated by blind obedience to the doctrine of stare decisis. No matter how sound a
doctrine may be, and no matter how long it has been followed thru the years, still if found
to be contrary to law, it must be abandoned. The principle of stare decisis does not and
should not apply when there is a conflict between the precedent and the law (Tan Chong
v. Sec. of Labor, 79 Phil. 249).

While stability in the law is eminently to be desired, idolatrous reverence for precedent,
simply, as precedent, no longer rules. More pregnant than anything else is that the court
shall be right (Phil. Trust Co. v. Mitchell, 69 Phil. 30).

3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we
have a pending tax treaty; our Procter & Gamble case deals with relations between the Philippines and the
United States, a country with which we had no tax treaty, at the time the taxes herein were collected.

4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only
15%. The mere fact that in this Procter and Gamble case the B.I.R. desires; to charge 35% indicates that
the B.I.R. Ruling cited in Wander has been obviously discarded today by the B.I.R. Clearly, there has
been a change of mind on the part of the B.I.R.

5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland
exists. It is evident that without reciprocity the desired consequences of the tax credit under P.D. No. 369
would be rendered unattainable.

6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not
been presented, and therefore even were we inclined to grant the tax credit claimed, we find ourselves
unable to compute the proper amount thereof.
7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the
proper party to bring up the case.

ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for
reconsideration of our own decision should be DENIED.

Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ.,

G.R. No. L-68375 April 15, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS, respondents.

The Solicitor General for petitioner.

Felicisimo R. Quiogue and Cirilo P. Noel for respondents.

BIDIN, J.:

This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax
Appeals * in C.T.A. Case No.2884, entitled Wander Philippines, Inc. vs. Commissioner of Internal
Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of 15% withholding tax
on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-
resident foreign corporation.

Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation
organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro for short), a
Swiss corporation not engaged in trade or business in the Philippines.

On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and
remitted to its parent company, Glaro dividends in the amount of P222,000.00, on which 35%
withholding tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of Internal
Revenue.

Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30,
1976 on the dividends it remitted to Glaro amounting to P355,200.00, on wich 35% tax in the amount of
P124,320.00 was withheld and paid to the Bureau of Internal Revenue.

On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund
and/or tax credit in the amount of P115,400.00, contending that it is liable only to 15% withholding tax in
accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369 and
778, and not on the basis of 35% which was withheld and paid to and collected by the government.

Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a
petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner file his Answer.

On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of which
reads:

WHEREFORE, respondent is hereby ordered to grant a refund and/or tax credit to

petitioner in the amount of P115,440.00 representing overpaid withholding tax on
dividends remitted by it to the Glaro S.A. Ltd. of Switzerland during the second quarter
of the years 1975 and 1976.

On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a Resolution
dated August 13, 1984. Hence, the instant petition.

Petitioner raised two (2) assignment of errors, to wit:

ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE
COURT OF TAX APPEALS ERRED INHOLDING THAT THE HEREIN RESPONDENT WANDER
PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.

II

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME
COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF THE HEREIN RESPONDENT
WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS
INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20 PERCENTAGE-POINT
PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR
OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE
PHILIPPINE TAX CODE.

The sole issue in this case is whether or not private respondent Wander is entitled to the preferential rate
of 15% withholding tax on dividends declared and remitted to its parent corporation, Glaro.

From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party to
claim the refund; and (2) Whether or not Switzerland allows as tax credit the "deemed paid" 20%
Philippine Tax on such dividends.

Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor of the
dividend income and a mere withholding agent for and in behalf of the Philippine Government, which
should be legally entitled to receive the refund if any.

It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in this
Court. It was never raised at the administrative level, or at the Court of Tax Appeals. To allow a litigant to
assume a different posture when he comes before the court and challenge the position he had accepted at
the administrative level, would be to sanction a procedure whereby the Court—which is supposed to
review administrative determinations—would not review, but determine and decide for the first time, a
question not raised at the administrative forum. Thus, it is well settled that under the same underlying
principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the
lower court cannot be raised for the first time on appeal (Aguinaldo Industries Corporation vs.
Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA
725; Garcia vs. Court of Appeals, 102 SCRA 597; Matialonzo vs. Servidad, 107 SCRA 726,

In any event, the submission of petitioner that Wander is but a withholding agent of the government and
therefore cannot claim reimbursement of the alleged overpaid taxes, is untenable. It will be recalled, that
said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that it became a
withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of
the Tax Code, cannot by any stretch of the imagination be considered as an abdication of its responsibility
to its mother company. Thus, this Court construing Section 53 (b) of the Internal Revenue Code held that
"the obligation imposed thereunder upon the withholding agent is compulsory." It is a device to insure the
collection by the Philippine Government of taxes on incomes, derived from sources in the Philippines, by
aliens who are outside the taxing jurisdiction of this Court (Commissioner of Internal Revenue vs.
Malayan Insurance Co., Inc., 21 SCRA 944). In fact, Wander may be assessed for deficiency withholding
tax at source, plus penalties consisting of surcharge and interest (Section 54, NLRC). Therefore, as the
Philippine counterpart, Wander is the proper entity who should for the refund or credit of overpaid
withholding tax on dividends paid or remitted by Glaro.

Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the
foreign country where Glaro is domiciled, grants to Glaro a tax credit against the tax due it, equivalent to
20%, or the difference between the regular 35% rate of the preferential 15% rate. The dispute in this issue
lies on the fact that Switzerland does not impose any income tax on dividends received by Swiss
corporation from corporations domiciled in foreign countries.

Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:

Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal
Revenue Code, as amended, is hereby further amended to read as follows:

(b) Tax on foreign corporations. — 1) Non-resident corporation. A

foreign corporation not engaged in trade or business in the Philippines,
including a foreign life insurance company not engaged in the life
insurance business in the Philippines, shall pay a tax equal to 35% of the
gross income received during its taxable year from all sources within the
Philippines, as interest (except interest on foreign loans which shall be
subject to 15% tax), dividends, premiums, annuities, compensations,
remuneration for technical services or otherwise, emoluments or other
fixed or determinable, annual, periodical or casual gains, profits, and
income, and capital gains: ... Provided, still further That on dividends
received from a domestic corporation liable to tax under this Chapter, the
tax shall be 15% of the dividends received, which shall be collected and
paid as provided in Section 53 (d) of this Code, subject to the condition
that the country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the non-resident
foreign corporation taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular
tax (35%) on corporations and the tax (15%) dividends as provided in
this section: ...
From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the
tax shall be 15% of the dividends received, subject to the condition that the country in which the non-
resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents
the difference between the regular tax (35%) on corporations and the tax (15%) dividends.

In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly,
Wander claims that full credit is granted and not merely credit equivalent to 20%. Petitioner, on the other
hand, avers the tax sparing credit is applicable only if the country of the parent corporation allows a
foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent
twenty percentage point portion spared, waived or otherwise deemed as if paid in the Philippines; that
private respondent does not cite anywhere a Swiss law to the effect that in case where a foreign tax, such
as the Philippine 35% dividend tax, is spared waived or otherwise considered as if paid in whole or in part
by the foreign country, a Swiss foreign-tax credit would be allowed for the whole or for the part, as the
case may be, of the foreign tax so spared or waived or considered as if paid by the foreign country.

While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the
fact that Switzerland did not impose any tax or the dividends received by Glaro from the Philippines
should be considered as a full satisfaction of the given condition. For, as aptly stated by respondent Court,
to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree
No. 369, amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of
said law and definitely will adversely affect foreign corporations" interest here and discourage them from
investing capital in our country.

Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of
the May 19, 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the
dividends to be received by the said parent corporation in the Philippines, the condition imposed under
the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby
affirmed."

Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such
as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study
and consideration of tax problems and has necessarily developed an expertise on the subject unless there
has been an abuse or improvident exercise of authority (Reyes vs. Commissioner of Internal Revenue, 24
SCRA 198, which is not present in the instant case.

WHEREFORE, the petition filed is DISMISSED for lack of merit.

SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes, JJ., concur.

G.R. No. L-41919-24 May 30, 1980

QUIRICO P. UNGAB, petitioner,

vs.
HON. VICENTE N. CUSI, JR., in his capacity as Judge of the Court of First Instance, Branch 1,
16TH Judicial District, Davao City, THE COMMISSIONER OF INTERNAL REVENUE, and
JESUS N. ACEBES, in his capacity as State Prosecutor, respondents.

CONCEPCION JR., J:

Petition for certiorari and prohibition with preliminary injunction and restraining order to annul and set
aside the informations filed in Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court
of First Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico Ungab,
accused;" and to restrain the respondent Judge from further proceeding with the hearing and trial of the
said cases.

It is not disputed that sometime in July, 1974, BIR Examiner Ben Garcia examined the income tax returns
filed by the herein petitioner, Quirico P. Ungab, for the calendar year ending December 31, 1973. In the
course of his examination, he discovered that the petitioner failed to report his income derived from sales
of banana saplings. As a result, the BIR District Revenue Officer at Davao City sent a "Notice of
Taxpayer" to the petitioner informing him that there is due from him (petitioner) the amount of
P104,980.81, representing income, business tax and forest charges for the year 1973 and inviting
petitioner to an informal conference where the petitioner, duly assisted by counsel, may present his
objections to the findings of the BIR Examiner. 1 Upon receipt of the notice, the petitioner wrote the BIR
District Revenue Officer protesting the assessment, claiming that he was only a dealer or agent on
commission basis in the banana sapling business and that his income, as reported in his income tax
returns for the said year, was accurately stated. BIR Examiner Ben Garcia, however, was fully convinced
that the petitioner had filed a fraudulent income tax return so that he submitted a "Fraud Referral Report,"
to the Tax Fraud Unit of the Bureau of Internal Revenue. After examining the records of the case, the
Special Investigation Division of the Bureau of Internal Revenue found sufficient proof that the herein
petitioner is guilty of tax evasion for the taxable year 1973 and recommended his
prosecution: têñ.£îhqwâ£

(1) For having filed a false or fraudulent income tax return for 1973 with intent to evade
his just taxes due the government under Section 45 in relation to Section 72 of the
National Internal Revenue Code;

(2) For failure to pay a fixed annual tax of P50.00 a year in 1973 and 1974, or a total of
unpaid fixed taxes of P100.00 plus penalties of 175.00 or a total of P175.00, in
accordance with Section 183 of the National Internal Revenue Code;

(3) For failure to pay the 7% percentage tax, as a producer of banana poles or saplings, on
the total sales of P129,580.35 to the Davao Fruit Corporation, depriving thereby the
government of its due revenue in the amount of P15,872.59, inclusive of surcharge. 2

In a second indorsement to the Chief of the Prosecution Division, dated December 12, 1974, the
Commissioner of Internal Revenue approved the prosecution of the petitioner. 3

Thereafter, State Prosecutor Jesus Acebes who had been designated to assist all Provincial and City
Fiscals throughout the Philippines in the investigation and prosecution, if the evidence warrants, of all
violations of the National Internal Revenue Code, as amended, and other related laws, in Administrative
Order No. 116 dated December 5, 1974, and to whom the case was assigned, conducted a preliminary
investigation of the case, and finding probable cause, filed six (6) informations against the petitioner with
the Court of First Instance of Davao City, to wit: têñ.£îhqwâ£

(1) Criminal Case No. 1960 — Violation of Sec. 45, in relation to Sec. 72 of the National
Internal-Revenue Code, for filing a fraudulent income tax return for the calendar year
ending December 31, 1973; 4

(2) Criminal Case No. 1961 — Violation of Sec. 182 (a), in relation to Secs. 178, 186,
and 208 of the National Internal Revenue Code, for engaging in business as producer of
saplings, from January, 1973 to December, 1973, without first paying the annual fixed or
privilege tax thereof; 5

(3) Criminal Case No. 1962 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209
of the National Internal Revenue Code, for failure to render a true and complete return on
the gross quarterly sales, receipts and earnings in his business as producer of banana
saplings and to pay the percentage tax due thereon, for the quarter ending December 31,
1973; 6

(4) Criminal Case No. 1963 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209
of the National Internal Revenue Code, for failure to render a true and complete return on
the gross quarterly sales receipts and earnings in his business as producer of saplings, and
to pay the percentage tax due thereon, for the quarter ending on March 31, 1973; 7

(5) Criminal Case No. 1964 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209
of the National Internal Revenue Code, for failure to render a true and complete return on
the gross quarterly sales, receipts and earnings in his business as producer of banana
saplings for the quarter ending on June 30, 1973, and to pay the percentage tax due
thereon; 8

(6) Criminal Case No. 1965 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209
of the National Internal Revenue Code, for failure to render a true and complete return on
the gross quarterly sales, receipts and earnings as producer of banana saplings, for the
quarter ending on September 30, 1973, and to pay the percentage tax due thereon. 9

On September 16, 1975, the petitioner filed a motion to quash the informations upon the grounds that: (1)
the informations are null and void for want of authority on the part of the State Prosecutor to initiate and
prosecute the said cases; and (2) the trial court has no jurisdiction to take cognizance of the above-entitled
cases in view of his pending protest against the assessment made by the BIR Examiner. 10 However, the
trial court denied the motion on October 22, 1975. 11 Whereupon, the petitioner filed the instant recourse.
As prayed for, a temporary restraining order was issued by the Court, ordering the respondent Judge from
further proceeding with the trial and hearing of Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and
1965 of the Court of First Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus
Quirico Ungab, accused."

The petitioner seeks the annulment of the informations filed against him on the ground that the respondent
State Prosecutor is allegedly without authority to do so. The petitioner argues that while the respondent
State Prosecutor may initiate the investigation of and prosecute crimes and violations of penal laws when
duly authorized, certain requisites, enumerated by this Court in its decision in the case of Estrella vs.
Orendain, 12should be observed before such authority may be exercised; otherwise, the provisions of the
Charter of Davao City on the functions and powers of the City Fiscal will be meaningless because
according to said charter he has charge of the prosecution of all crimes committed within his jurisdiction;
and since "appropriate circumstances are not extant to warrant the intervention of the State Prosecution to
initiate the investigation, sign the informations and prosecute these cases, said informations are null and
void." The ruling adverted to by the petitioner reads, as follows: têñ.£îhqwâ£

In view of all the foregoing considerations, it is the ruling of this Court that under
Sections 1679 and 1686 of the Revised Administrative Code, in any instance where a
provincial or city fiscal fails, refuses or is unable, for any reason, to investigate or
prosecute a case and, in the opinion of the Secretary of Justice it is advisable in the public
interest to take a different course of action, the Secretary of Justice may either appoint as
acting provincial or city fiscal to handle the investigation or prosecution exclusively and
only of such case, any practicing attorney or some competent officer of the Department
of Justice or office of any city or provincial fiscal, with complete authority to act therein
in all respects as if he were the provincial or city fiscal himself, or appoint any lawyer in
the government service, temporarily to assist such city of provincial fiscal in the
discharge of his duties, with the same complete authority to act independently of and for
such city or provincial fiscal provided that no such appointment may be made without
first hearing the fiscal concerned and never after the corresponding information has
already been filed with the court by the corresponding city or provincial fiscal without the
conformity of the latter, except when it can be patently shown to the court having
cognizance of the case that said fiscal is intent on prejudicing the interests of justice. The
same sphere of authority is true with the prosecutor directed and authorized under Section
3 of Republic Act 3783, as amended and/or inserted by Republic Act 5184. The
observation in Salcedo vs. Liwag, supra, regarding the nature of the power of the
Secretary of Justice over fiscals as being purely over administrative matters only was not
really necessary, as indicated in the above relation of the facts and discussion of the legal
issues of said case, for the resolution thereof. In any event, to any extent that the opinion
therein may be inconsistent herewith the same is hereby modified.

The contention is without merit. Contrary to the petitioner's claim, the rule therein established had not
been violated. The respondent State Prosecutor, although believing that he can proceed independently of
the City Fiscal in the investigation and prosecution of these cases, first sought permission from the City
Fiscal of Davao City before he started the preliminary investigation of these cases, and the City Fiscal,
after being shown Administrative Order No. 116, dated December 5, 1974, designating the said State
Prosecutor to assist all Provincial and City fiscals throughout the Philippines in the investigation and
prosecution of all violations of the National Internal Revenue Code, as amended, and other related laws,
graciously allowed the respondent State Prosecutor to conduct the investigation of said cases, and in fact,
said investigation was conducted in the office of the City Fiscal. 13

The petitioner also claims that the filing of the informations was precipitate and premature since the
Commissioner of Internal Revenue has not yet resolved his protests against the assessment of the
Revenue District Officer; and that he was denied recourse to the Court of Tax Appeals.

The contention is without merit. What is involved here is not the collection of taxes where the assessment
of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal
prosecution for violations of the National Internal Revenue Code which is within the cognizance of courts
of first instance. While there can be no civil action to enforce collection before the assessment procedures
provided in the Code have been followed, there is no requirement for the precise computation and
assessment of the tax before there can be a criminal prosecution under the Code. têñ.£îhqwâ£
 The contention is made, and is here rejected, that an assessment of the deficiency tax due
is necessary before the taxpayer can be prosecuted criminally for the charges preferred.
The crime is complete when the violator has, as in this case, knowingly and willfully
filed fraudulent returns with intent to evade and defeat a part or all of the tax. 14

An assessment of a deficiency is not necessary to a criminal prosecution for willful

attempt to defeat and evade the income tax. A crime is complete when the violator has
knowingly and willfuly filed a fraudulent return with intent to evade and defeat the tax.
The perpetration of the crime is grounded upon knowledge on the part of the taxpayer
that he has made an inaccurate return, and the government's failure to discover the error
and promptly to assess has no connections with the commission of the crime. 15

Besides, it has been ruled that a petition for reconsideration of an assessment may affect the suspension of
the prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for
violation of law. 16 Obviously, the protest of the petitioner against the assessment of the District Revenue
Officer cannot stop his prosecution for violation of the National Internal Revenue Code. Accordingly, the
respondent Judge did not abuse his discretion in denying the motion to quash filed by the petitioner.

WHEREFORE, the petition should be, as it is hereby dismissed. The temporary restraining order
heretofore issued is hereby set aside. With costs against the petitioner.

SO ORDERED.

Barredo (Chairman), Aquino, Abad Santos and De Castro, JJ., concur.1äwphï1.ñët

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

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. 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 petitioners] 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.

Petitioner also seeks to nullify the February 13, 1997 Resolution[5] of the Court of Appeals denying
reconsideration.

The Facts

As found by the Court of Appeals, the undisputed facts of the case are as follows:

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 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.

Instead, the CIR filed this petition on June 7, 1996, alleging as grounds that:

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:

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. Respondents
ground of denial, therefore, that there was no formal assessment issued, is untenable.

It is the Courts honest belief, that the criminal case for tax evasion is already an 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:

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, Vol. 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 taxpayers 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
respondents 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 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.

Issues

Petitioners submit for the consideration of this Court the following issues:

(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 resolve 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 Courts 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 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 appealable to
the CTA.
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:

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

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.
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:
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.
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.
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.
Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.
Romero (Chairman), J., abroad on official business.

LUCAS G. ADAMSON, THERESE G.R. No. 120935

JUNE D. ADAMSON, and SARA
S. DE LOS REYES, in their capacities
as President, Treasurer and Secretary
of Adamson Management Corporation,
Petitioners,
- versus -
COURT OF APPEALS and
LIWAYWAY VINZONS-CHATO,
in her capacity as Commissioner
of the Bureau of Internal Revenue,
Respondents.

x-- - - - - - - - - - - - - - - - - - - - - - - - x

COMMISSIONER OF G.R. No. 124557

INTERNAL REVENUE,
Petitioner,
Present:

-versus- PUNO, C.J., Chairperson,

CARPIO,
CORONA,
COURT OF APPEALS, COURT LEONARDO-DE CASTRO, and
OF TAX APPEALS, ADAMSON BERSAMIN, JJ.
MANAGEMENT CORPORATION,
LUCAS G. ADAMSON, THERESE
JUNE D. ADAMSON, and SARA Promulgated:
S. DE LOS REYES,
Respondents. May 21, 2009

x--------------------------------------------------x

DECISION

PUNO, C.J.:

Before the Court are the consolidated cases of G.R. No. 120935 and G.R. No. 124557.

G.R. No. 120935 involves a petition for review on certiorari filed by petitioners LUCAS G.
ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES (private respondents), in
their respective capacities as president, treasurer and secretary of Adamson Management Corporation
(AMC) against then Commissioner of Internal Revenue Liwayway Vinzons-Chato (COMMISSIONER),
under Rule 45 of the Revised Rules of Court. They seek to review and reverse the Decision promulgated
onMarch 21, 1995 and Resolution issued on July 6, 1995 of the Court of Appeals in CA-G.R. SP No.
35488 (Liwayway Vinzons-Chato, et al. v. Hon. Judge Erna Falloran-Aliposa, et al.).
G.R. No. 124557 is a petition for review on certiorari filed by the Commissioner, assailing the
Decision dated March 29, 1996 of the Court of Appeals in CA-G.R. SP No. 35520, titled Commissioner
of Internal Revenue v. Court of Tax Appeals, Adamson Management Corporation, Lucas G. Adamson,
Therese June D. Adamson and Sara S. de los Reyes. In the said Decision, the Court of Appeals upheld the
Resolution promulgated on September 19, 1994 by the Court of Tax Appeals (CTA) in C.T.A. Case No.
5075 (Adamson Management Corporation, Lucas G. Adamson, Therese Adamson and Sara de los Reyes
v. Commissioner of Internal Revenue).
The facts, as culled from the findings of the appellate court, follow:

On June 20, 1990, Lucas Adamson and AMC sold 131,897 common shares of stock in Adamson
and Adamson, Inc. (AAI) to APAC Holding Limited (APAC). The shares were valued
[1]
at P7,789,995.00. On June 22, 1990, P159,363.21 was paid as capital gains tax for the transaction.

On October 12, 1990, AMC sold to APAC Philippines, Inc. another 229,870 common shares of
stock in AAI for P17,718,360.00. AMC paid the capital gains tax ofP352,242.96.

On October 15, 1993, the Commissioner issued a Notice of Taxpayer to AMC, Lucas G.
Adamson, Therese June D. Adamson and Sara S. de los Reyes, informing them of deficiencies on their
payment of capital gains tax and Value Added Tax (VAT). The notice contained a schedule for
preliminary conference.
The events preceding G.R. No. 120935 are the following:

On October 22, 1993, the Commissioner filed with the Department of Justice (DOJ) her Affidavit
of Complaint[2] against AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes for
violation of Sections 45 (a) and (d)[3], and 110[4], in relation to Section 100[5], as penalized under Section
255,[6] and for violation of Section 253[7], in relation to Section 252 (b) and (d) of the National Internal
Revenue Code (NIRC).[8]

AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed with the DOJ
a motion to suspend proceedings on the ground of prejudicial question, pendency of a civil case with the
Supreme Court, and pendency of their letter-request for re-investigation with the Commissioner. After the
preliminary investigation, State Prosecutor Alfredo P. Agcaoili found probable cause. The Motion for
Reconsideration against the findings of probable cause was denied by the prosecutor.
 On April 29, 1994, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes were
charged before the Regional Trial Court (RTC) of Makati, Branch 150 in Criminal Case Nos. 94-1842 to
94-1846. They filed a Motion to Dismiss or Suspend the Proceedings. They invoked the grounds that
there was yet no final assessment of their tax liability, and there were still pending relevant Supreme
Court and CTA cases. Initially, the trial court denied the motion. A Motion for Reconsideration was
however filed, this time assailing the trial courts lack of jurisdiction over the nature of the subject
cases. On August 8, 1994, the trial court granted the Motion. It ruled that the complaints for tax evasion
filed by the Commissioner should be regarded as a decision of the Commissioner regarding the tax
liabilities of Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes, and appealable to
the CTA. It further held that the said cases cannot proceed independently of the assessment case pending
before the CTA, which has jurisdiction to determine the civil and criminal tax liability of the respondents
therein.

On October 10, 1994, the Commissioner filed a Petition for Review with the Court of Appeals
assailing the trial courts dismissal of the criminal cases. She averred that it was not a condition
prerequisite that a formal assessment should first be given to the private respondents before she may file
the aforesaid criminal complaints against them. She argued that the criminal complaints for tax evasion
may proceed independently from the assessment cases pending before the CTA.

On March 21, 1995, the Court of Appeals reversed the trial courts decision and reinstated the
criminal complaints. The appellate court held that, in a criminal prosecution for tax evasion,
assessment of tax deficiency is not required because the offense of tax evasion is complete or
consummated when the offender has knowingly and willfully filed a fraudulent return with intent
to evade the tax.[9] It ruled that private respondents filed false and fraudulent returns with intent to
evade taxes, and acting thereupon, petitioner filed an Affidavit of Complaint with the Department
of Justice, without an accompanying assessment of the tax deficiency of private respondents, in
order to commence criminal action against the latter for tax evasion.[10]

Private respondents filed a Motion for Reconsideration, but the trial court denied the motion
on July 6, 1995. Thus, they filed the petition in G.R. No. 120935, raising the following issues:

1. WHETHER OR NOT THE RESPONDENT HONORABLE COURT OF

APPEALS ERRED IN APPLYING THE DOCTRINE IN UNGAB V. CUSI
(Nos. L-41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE AT BAR.
 2. WHETHER OR NOT AN ASSESSMENT IS REQUIRED UNDER THE
SECOND CATEGORY OF THE OFFENSE IN SECTION 253 OF THE NIRC.

3. WHETHER OR NOT THERE WAS A VALID ASSESSMENT MADE BY

THE COMMISSIONER IN THE CASE AT BAR.

4. WHETHER OR NOT THE FILING OF A CRIMINAL COMPLAINT

SERVES AS AN IMPLIED ASSESSMENT ON THE TAX LIABILITY OF
THE TAXPAYER.

5. WHETHER OR NOT THE FILING OF THE CRIMINAL INFORMATION

FOR TAX EVASION IN THE TRIAL COURT IS PREMATURE BECAUSE
THERE IS YET NO BASIS FOR THE CRIMINAL CHARGE OF WILLFULL
INTENT TO EVADE THE PAYMENT OF A TAX.

6. WHETHER OR NOT THE DOCTRINES LAID DOWN IN THE CASES

OF YABES V. FLOJO (No. L-46954, July 20, 1982, 115 SCRA
286) AND CIR V. UNION SHIPPING CORP. (G.R. No. 66160, May 21, 1990,
185 SCRA 547) ARE APPLICABLE TO THE CASE AT BAR.

7. WHETHER OR NOT THE COURT OF TAX

APPEALS HAS JURISDICTION OVER THE DISPUTE ON WHAT
CONSTITUTES THE PROPER TAXES DUE FROM THE TAXPAYER.

In parallel circumstances, the following events preceded G.R. No. 124557:

On December 1, 1993, AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los
Reyes filed a letter request for re-investigation with the Commissioner of the Examiners Findings earlier
issued by the Bureau of Internal Revenue (BIR), which pointed out the tax deficiencies.

On March 15, 1994 before the Commissioner could act on their letter-request, AMC, Lucas G.
Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a Petition for Review with the
CTA. They assailed the Commissioners finding of tax evasion against them. The Commissioner moved to
dismiss the petition, on the ground that it was premature, as she had not yet issued a formal assessment of
the tax liability of therein petitioners. On September 19, 1994, the CTA denied the Motion to Dismiss. It
considered the criminal complaint filed by the Commissioner with the DOJ as an implied formal
assessment, and the filing of the criminal informations with the RTC as a denial of petitioners protest
regarding the tax deficiency.
 The Commissioner repaired to the Court of Appeals on the ground that the CTA acted with grave
abuse of discretion. She contended that, with regard to the protest provided under Section 229 of the
NIRC, there must first be a formal assessment issued by the Commissioner, and it must be in accord with
Section 6 of Revenue Regulation No. 12-85. She maintained that she had not yet issued a formal
assessment of tax liability, and the tax deficiency amounts mentioned in her criminal complaint with the
DOJ were given only to show the difference between the tax returns filed and the audit findings of the
revenue examiner.

The Court of Appeals sustained the CTAs denial of the Commissioners Motion to Dismiss. Thus,
the Commissioner filed the petition for review under G.R. No. 124557, raising the following issues:

1. WHETHER OR NOT THE INSTANT PETITION SHOULD BE

DISMISSED FOR FAILURE TO COMPLY WITH THE MANDATORY
REQUIREMENT OF A CERTIFICATION UNDER OATH AGAINST FORUM
SHOPPING;

2. WHETHER OR NOT THE CRIMINAL CASE FOR TAX EVASION IN

THE CASE AT BAR CAN PROCEED WITHOUT AN ASSESSMENT;

3. WHETHER OR NOT THE COMPLAINT FILED WITH THE

DEPARTMENT OF JUSTICE CAN BE CONSTRUED AS AN IMPLIED
ASSESSMENT; and

4. WHETHER OR NOT THE COURT OF TAX

APPEALS HAS JURISDICTION TO ACT ON PRIVATE RESPONDENTS
PETITION FOR REVIEW FILED WITH THE SAID COURT.

The issues in G.R. No. 124557 and G.R. No. 120935 can be compressed into three:

1. WHETHER THE COMMISSIONER HAS ALREADY RENDERED

AN ASSESSMENT (FORMAL OR OTHERWISE) OF THE TAX
LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D.
ADAMSON AND SARA S. DE LOS REYES;

2. WHETHER THERE IS BASIS FOR THE CRIMINAL CASES FOR

TAX EVASION TO PROCEED AGAINST AMC, LUCAS G. ADAMSON,
THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES; and

3. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION

TO TAKE COGNIZANCE OF BOTH THE CIVIL AND THE CRIMINAL
ASPECTS OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON,
THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES.
 The case of CIR v. Pascor Realty, et al.[11] is relevant. In this case, then BIR Commissioner Jose
U. Ong authorized revenue officers to examine the books of accounts and other accounting records of
Pascor Realty and Development Corporation (PRDC) for 1986, 1987 and 1988. This 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 filed a criminal complaint before the DOJ against 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 filed an Urgent Request for
Reconsideration/Reinvestigation disputing the tax assessment and tax liability.

The Commissioner denied the urgent request for reconsideration/reinvestigation because she had
not yet issued a formal assessment.

Private respondents then elevated the Decision of the Commissioner to the CTA on a petition for
review. The Commissioner 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 yet no formal assessment issued against
the petitioners. The CTA denied the said motion to dismiss and ordered the Commissioner to file an
answer within thirty (30) days. The Commissioner did not file an answer nor did she move to reconsider
the resolution.Instead, the Commissioner filed a petition for review of the CTA decision with the Court of
Appeals. The Court of Appeals upheld the CTA order. However, this Court reversed the Court of Appeals
decision and the CTA order, and ordered the dismissal of the petition. We held:

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.

Neither the NIRC nor the revenue regulations governing the protest of
assessments[12] 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.[13]
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[14] 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,[15] 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[16] 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.[17]

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:

A notice to the effect that the amount therein stated is due as tax
and a demand for payment thereof.[18]
Fixes the liability of the taxpayer and ascertains the facts and
furnishes the data for the proper presentation of tax rolls.[19]

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.

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.
 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.

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.

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.

In the cases at bar, the Commissioner denied that she issued a formal assessment of the tax liability of
AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes. She admits though that
she wrote the recommendation letter[22] addressed to the Secretary of the DOJ recommending the filing of
criminal complaints against AMC and the aforecited persons for fraudulent returns and tax evasion.
The first issue is whether the Commissioners recommendation letter can be considered as a formal
assessment of private respondents tax liability.

In the context in which it is used in the NIRC, an assessment is a written notice and demand made
by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed. A
written communication containing a computation by a revenue officer of the tax liability of a taxpayer and
giving him an opportunity to contest or disprove the BIR examiners findings is not an assessment since it
is yet indefinite.[23]

We rule that the recommendation letter of the Commissioner cannot be considered a formal
assessment. Even a cursory perusal of the said letter would reveal three key points:

1. It was not addressed to the taxpayers.

2. There was no demand made on the taxpayers to pay the tax liability, nor a period for
payment set therein.
3. The letter was never mailed or sent to the taxpayers by the Commissioner.

In fine, the said recommendation letter served merely as the prima facie basis for filing criminal
informations that the taxpayers had violated Section 45 (a) and (d), and 110, in relation to Section 100, as
penalized under Section 255, and for violation of Section 253, in relation to Section 252 9(b) and (d) of
the Tax Code.[24]

The next issue is whether the filing of the criminal complaints against the private respondents by
the DOJ is premature for lack of a formal assessment.

Section 269 of the NIRC (now Section 222 of the Tax Reform Act of 1997) provides:

Sec. 269. 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 after the collection of such tax
may be begun without assessment, at any time within ten 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 collection thereof

The law is clear. When fraudulent tax returns are involved as in the cases at bar, a proceeding in court
after the collection of such tax may be begun without assessment.Here, the private respondents had
already filed the capital gains tax return and the VAT returns, and paid the taxes they have declared due
therefrom. Upon investigation of the examiners of the BIR, there was a preliminary finding of gross
discrepancy in the computation of the capital gains taxes due from the sale of two lots of AAI shares, first
to APAC and then to APAC Philippines, Limited. The examiners also found that the VAT had not been
paid for VAT-liable sale of services for the third and fourth quarters of 1990.Arguably, the gross disparity
in the taxes due and the amounts actually declared by the private respondents constitutes badges of fraud.

Thus, the applicability of Ungab v. Cusi[25] is evident to the cases at bar. In this seminal case, this
Court ruled that there was no need for precise computation and formal assessment in order for criminal
complaints to be filed against him. It quoted Mertens Law of Federal Income Taxation, Vol. 10, Sec.
55A.05, p. 21, thus:

An assessment of a deficiency is not necessary to a criminal prosecution for

willful attempt to defeat and evade the income tax. A crime is complete when the violator
has knowingly and willfully filed a fraudulent return, with intent to evade and defeat the
tax. The perpetration of the crime is grounded upon knowledge on the part of the
taxpayer that he has made an inaccurate return, and the governments failure to discover
the error and promptly to assess has no connections with the commission of the crime.

This hoary principle still underlies Section 269 and related provisions of the present Tax Code.

We now go to the issue of whether the CTA has no jurisdiction to take cognizance of both the
criminal and civil cases here at bar.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals) as amended, the
rulings of the Commissioner are appealable to the CTA, thus:

SEC. 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 laws or part of
law administered by the Bureau of Internal Revenue;

Republic Act No. 8424, titled An Act Amending the National Internal Revenue Code, As
Amended, And For Other Purposes, later expanded the jurisdiction of the Commissioner and,
correspondingly, that of the CTA, thus:

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

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

The latest statute dealing with the jurisdiction of the CTA is Republic Act No. 9282.[26] It provides:
SEC. 7. Section 7 of the same Act is hereby amended to read as follows:

Sec. 7. Jurisdiction. The CTA shall exercise:

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

(1) Decisions of the Commissioner of Internal Revenue in cases

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

(2) Inaction by the Commissioner of Internal Revenue in cases

involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a
denial;
(3) Decisions, orders or resolutions of the Regional Trial Courts in
local tax cases originally decided or resolved by them in the exercise of their
original or appellate jurisdiction;
xxx
(b) Jurisdiction over cases involving criminal offenses as herein provided:
(1) Exclusive original jurisdiction over all criminal offenses arising
from violations of the National Internal Revenue Code or Tariff and
Customs Code and other laws administered by the Bureau of Internal
Revenue or the Bureau of Customs: Provided, however, That offenses or
felonies mentioned in this paragraph where the principal amount of taxes
and fees, exclusive of charges and penalties, claimed is less than One
million pesos (P1,000,000.00) or where there is no specified amount
claimed shall be tried by the regular courts and the jurisdiction of the CTA
shall be appellate. Any provision of law or the Rules of Court to the contrary
notwithstanding, the criminal action and the corresponding civil action for
the recovery of civil liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in the same
proceeding by the CTA, the filing of the criminal action being deemed to
 necessarily carry with it the filing of the civil action, and no right to reserve
the filling of such civil action separately from the criminal action will be
recognized.
(2) Exclusive appellate jurisdiction in criminal offenses:
(a) Over appeals from the judgments, resolutions or orders of
the Regional Trial Courts in tax cases originally decided by them,
in their respected territorial jurisdiction.
(b) Over petitions for review of the judgments, resolutions or
orders of the Regional Trial Courts in the exercise of their
appellate jurisdiction over tax cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts and Municipal
Circuit Trial Courts in their respective jurisdiction.
(c) Jurisdiction over tax collection cases as herein provided:
(1) Exclusive original jurisdiction in tax collection cases
involving final and executory assessments for taxes, fees,
charges and penalties: Provided, however, That collection
cases where the principal amount of taxes and fees, exclusive
of charges and penalties, claimed is less than One million
pesos (P1,000,000.00) shall be tried by the proper Municipal
Trial Court, Metropolitan Trial Court and Regional Trial
Court.
(2) Exclusive appellate jurisdiction in tax collection
cases:
(a) Over appeals from the judgments, resolutions or
orders of the Regional Trial Courts in tax collection cases
originally decided by them, in their respective territorial
jurisdiction.
(b) Over petitions for review of the judgments,
resolutions or orders of the Regional Trial Courts in the
exercise of their appellate jurisdiction over tax collection
cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial
Courts, in their respective jurisdiction.

These laws have expanded the jurisdiction of the CTA. However, they did not change the jurisdiction of
the CTA to entertain an appeal only from a final decision or assessment of the Commissioner, or in cases
where the Commissioner has not acted within the period prescribed by the NIRC. In the cases at bar, the
Commissioner has not issued an assessment of the tax liability of private respondents.

Finally, we hold that contrary to private respondents stance, the doctrines laid down in CIR v.
Union Shipping Co. and Yabes v. Flojo are not applicable to the cases at bar. In these earlier cases, the
Commissioner already rendered an assessment of the tax liabilities of the delinquent taxpayers, for which
reason the Court ruled that the filing of the civil suit for collection of the taxes due was a final denial of
the taxpayers request for reconsideration of the tax assessment.

IN VIEW WHEREOF, premises considered, judgment is rendered:

1. In G.R. No. 120935, AFFIRMING the CA decision dated March 21, 1995,
which set aside the Regional Trial Courts Order dated August 8, 1994, and
REINSTATING Criminal Case Nos. 94-1842 to 94-1846 for further proceedings
before the trial court; and

2. In G.R. No. 124557, REVERSING and SETTING ASIDE the Decision of

the Court of Appeals dated March 29, 1996, and ORDERING the dismissal of
C.T.A. Case No. 5075.

No costs.

SO ORDERED.

COMMISSIONER OF INTERNAL G.R. No. 177279

REVENUE,
Petitioner, Present:

CARPIO MORALES, J.,

Chairperson,
- versus - BRION,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

HON. RAUL M. GONZALEZ, Secretary of

Justice, L. M. CAMUS ENGINEERING Promulgated:
CORPORATION (represented by LUIS M.
CAMUS and LINO D. MENDOZA), October 13, 2010
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the Decision[1] dated October 31, 2006 and Resolution[2]dated March 6, 2007 of the Court
of Appeals (CA) in CA-G.R. SP No. 93387 which affirmed the Resolution[3] dated December 13, 2005 of
respondent Secretary of Justice in I.S. No. 2003-774 for violation of Sections 254 and 255 of the National
Internal Revenue Code of 1997 (NIRC).

The facts as culled from the records:

Pursuant to Letter of Authority (LA) No. 00009361 dated August 25, 2000 issued by then
Commissioner of Internal Revenue (petitioner) Dakila B. Fonacier, Revenue Officers Remedios C.
Advincula, Jr., Simplicio V. Cabantac, Jr., Ricardo L. Suba, Jr. and Aurelio Agustin T. Zamora
supervised by Section Chief Sixto C. Dy, Jr. of the Tax Fraud Division (TFD), National Office, conducted
a fraud investigation for all internal revenue taxes to ascertain/determine the tax liabilities of respondent
L. M. Camus Engineering Corporation (LMCEC) for the taxable years 1997, 1998 and 1999. [4] The audit
and investigation against LMCEC was precipitated by the information provided by an informer that
LMCEC had substantial underdeclared income for the said period. For failure to comply with the
subpoena duces tecum issued in connection with the tax fraud investigation, a criminal complaint was
instituted by the Bureau of Internal Revenue (BIR) against LMCEC on January 19, 2001 for violation of
Section 266 of the NIRC (I.S. No. 00-956 of the Office of the City Prosecutor of Quezon City).[5]

Based on data obtained from an informer and various clients of LMCEC,[6] it was discovered that
LMCEC filed fraudulent tax returns with substantial underdeclarations of taxable income for the years
1997, 1998 and 1999. Petitioner thus assessed the company of total deficiency taxes amounting
to P430,958,005.90 (income tax -P318,606,380.19 and value-added tax [VAT] - P112,351,625.71)
covering the said period. The Preliminary Assessment Notice (PAN) was received by LMCEC
on February 22, 2001.[7]

LMCECs alleged underdeclared income was summarized by petitioner as follows:

Year Income Income Percentage of U

Per ITR Per Investigation ndeclared Underdeclaration
I
ncome
1997 96,638,540.00 283,412,140.84 186,733,600.84 193.30%
1998 86,793,913.00 236,863,236.81 150,069,323.81 172.90%
1999 88,287,792.00 251,507,903.13 163,220,111.13 184.90%[8]

In view of the above findings, assessment notices together with a formal letter of demand
dated August 7, 2002 were sent to LMCEC through personal service on October 1, 2002.[9] Since the
company and its representatives refused to receive the said notices and demand letter, the revenue officers
resorted to constructive service[10] in accordance with Section 3, Revenue Regulations (RR) No. 12-99[11].

On May 21, 2003, petitioner, through then Commissioner Guillermo L. Parayno, Jr., referred to
the Secretary of Justice for preliminary investigation its complaint against LMCEC, Luis M. Camus and
Lino D. Mendoza, the latter two were sued in their capacities as President and Comptroller, respectively.
The case was docketed as I.S. No. 2003-774. In the Joint Affidavit executed by the revenue officers who
conducted the tax fraud investigation, it was alleged that despite the receipt of the final assessment notice
and formal demand letter on October 1, 2002, LMCEC failed and refused to pay the deficiency tax
assessment in the total amount of P630,164,631.61, inclusive of increments, which had become final and
executory as a result of the said taxpayers failure to file a protest thereon within the thirty (30)-day
reglementary period.[12]

Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot be held
liable whatsoever for the alleged tax deficiency which had become due and demandable. Considering that
the complaint and its annexes all showed that the suit is a simple civil action for collection and not a tax
evasion case, the Department of Justice (DOJ) is not the proper forum for BIRs complaint. They also
assail as invalid the assessment notices which bear no serial numbers and should be shown to have been
validly served by an Affidavit of Constructive Service executed and sworn to by the revenue officers who
served the same. As stated in LMCECs letter-protest dated December 12, 2002addressed to Revenue
District Officer (RDO) Clavelina S. Nacar of RD No. 40, Cubao, Quezon City, the company had already
undergone a series of routine examinations for the years 1997, 1998 and 1999; under the NIRC, only one
examination of the books of accounts is allowed per taxable year.[13]

LMCEC further averred that it had availed of the Bureaus Tax Amnesty Programs (Economic
Recovery Assistance Payment [ERAP] Program and the Voluntary Assessment Program [VAP]) for 1998
and 1999; for 1997, its tax liability was terminated and closed under Letter of Termination[14] dated June
1, 1999 issued by petitioner and signed by the Chief of the Assessment Division.[15] LMCEC claimed it
made payments of income tax, VAT and expanded withholding tax (EWT), as follows:

TAXABLE AMOUNT OF TAXES

YEAR PAID
1997 Termination Letter Under Letter EWT - P 6,000.00
of Authority No. 174600 VAT - 540,605.02
DatedNovember 4, 1998 IT - 3,000.00
1998 ERAP Program pursuant WC - 38,404.55
to RR #2-99 VAT - 61,635.40
1999 VAP Program pursuant IT - 878,495.28
to RR #8-2001 VAT - 1,324,317.00[16]

LMCEC argued that petitioner is now estopped from further taking any action against it and its
corporate officers concerning the taxable years 1997 to 1999. With the grant of immunity from audit from
the companys availment of ERAP and VAP, which have a feature of a tax amnesty, the element of fraud
is negated the moment the Bureau accepts the offer of compromise or payment of taxes by the
taxpayer. The act of the revenue officers in finding justification under Section 6(B) of the NIRC (Best
Evidence Obtainable) is misplaced and unavailing because they were not able to open the books of the
company for the second time, after the routine examination, issuance of termination letter and the
availment of ERAP and VAP. LMCEC thus maintained that unless there is a prior determination of fraud
supported by documents not yet incorporated in the docket of the case, petitioner cannot just issue LAs
without first terminating those previously issued. It emphasized the fact that the BIR officers who filed
and signed the Affidavit-Complaint in this case were the same ones who appeared as complainants in an
earlier case filed against Camus for his alleged failure to obey summons in violation of Section 5
punishable under Section 266 of the NIRC of 1997 (I.S. No. 00-956 of the Office of the City Prosecutor
of Quezon City). After preliminary investigation, said case was dismissed for lack of probable cause in a
Resolution issued by the Investigating Prosecutor on May 2, 2001.[17]

LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued by petitioner
for having no basis in fact and law. However, until now the said protest remains unresolved. As to the
alleged informant who purportedly supplied the confidential information, LMCEC believes that such
person is fictitious and his true identity and personality could not be produced. Hence, this case is another
form of harassment against the company as what had been found by the Office of the City Prosecutor of
Quezon City in I.S. No. 00-956. Said case and the present case both have something to do with the
audit/examination of LMCEC for taxable years 1997, 1998 and 1999 pursuant to LA No. 00009361.[18]

In the Joint Reply-Affidavit executed by the Bureaus revenue officers, petitioner disagreed with
the contention of LMCEC that the complaint filed is not criminal in nature, pointing out that LMCEC and
its officers Camus and Mendoza were being charged for the criminal offenses defined and penalized
under Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Pay Tax) of the
NIRC. This finds support in Section 205 of the same Code which provides for administrative (distraint,
levy, fine, forfeiture, lien, etc.) and judicial (criminal or civil action) remedies in order to enforce
collection of taxes. Both remedies may be pursued either independently or simultaneously.In this case, the
BIR decided to simultaneously pursue both remedies and thus aside from this criminal action, the Bureau
also initiated administrative proceedings against LMCEC.[19]

On the lack of control number in the assessment notice, petitioner explained that such is a mere
office requirement in the Assessment Service for the purpose of internal control and monitoring; hence,
the unnumbered assessment notices should not be interpreted as irregular or anomalous. Petitioner
stressed that LMCEC already lost its right to file a protest letter after the lapse of the thirty (30)-day
reglementary period. LMCECs protest-letter dated December 12, 2002 to RDO Clavelina S. Nacar, RD
No. 40, Cubao,Quezon City was actually filed only on December 16, 2002, which was disregarded by the
petitioner for being filed out of time. Even assuming for the sake of argument that the assessment notices
were invalid, petitioner contended that such could not affect the present criminal action,[20] citing the
ruling in the landmark case of Ungab v. Cusi, Jr.[21]

As to the Letter of Termination signed by Ruth Vivian G. Gandia of the Assessment Division,
Revenue Region No. 7, Quezon City, petitioner pointed out that LMCEC failed to mention that the
undated Certification issued by RDO Pablo C. Cabreros, Jr. of RD No. 40, Cubao, Quezon City stated
that the report of the 1997 Internal Revenue taxes of LMCEC had already been submitted for review and
approval of higher authorities. LMCEC also cannot claim as excuse from the reopening of its books of
accounts the previous investigations and examinations. Under Section 235 (a), an exception was provided
in the rule on once a year audit examination in case of fraud, irregularity or mistakes, as determined by
the Commissioner. Petitioner explained that the distinction between a Regular Audit Examination and
Tax Fraud Audit Examination lies in the fact that the former is conducted by the district offices of the
Bureaus Regional Offices, the authority emanating from the Regional Director, while the latter is
conducted by the TFD of the National Office only when instances of fraud had been determined by the
petitioner.[22]

Petitioner further asserted that LMCECs claim that it was granted immunity from audit when it
availed of the VAP and ERAP programs is misleading. LMCEC failed to state that its availment of ERAP
under RR No. 2-99 is not a grant of absolute immunity from audit and investigation, aside from the fact
that said program was only for income tax and did not cover VAT and withholding tax for the taxable
year 1998. As for LMCECS availment of VAP in 1999 under RR No. 8-2001 dated August 1, 2001 as
amended by RR No. 10-2001 dated September 3, 2001, the company failed to state that it covers only
income tax and VAT, and did not include withholding tax. However, LMCEC is not actually entitled to
the benefits of VAP under Section 1 (1.1 and 1.2) of RR No. 10-2001. As to the principle of estoppel
invoked by LMCEC, estoppel clearly does not lie against the BIR as this involved the exercise of an
inherent power by the government to collect taxes.[23]

Petitioner also pointed out that LMCECs assertion correlating this case with I.S. No. 00-956 is
misleading because said case involves another violation and offense (Sections 5 and 266 of the
NIRC). Said case was filed by petitioner due to the failure of LMCEC to submit or present its books of
accounts and other accounting records for examination despite the issuance of subpoena duces
tecum against Camus in his capacity as President of LMCEC. While indeed a Resolution was issued by
Asst. City Prosecutor Titus C. Borlas on May 2, 2001 dismissing the complaint, the same is still on appeal
and pending resolution by the DOJ. The determination of probable cause in said case is confined to the
issue of whether there was already a violation of the NIRC by Camus in not complying with the
subpoena duces tecum issued by the BIR.[24]

Petitioner contended that precisely the reason for the issuance to the TFD of LA No. 00009361 by
the Commissioner is because the latter agreed with the findings of the investigating revenue officers that
fraud exists in this case. In the conduct of their investigation, the revenue officers observed the proper
procedure under Revenue Memorandum Order (RMO) No. 49-2000 wherein it is required that before the
issuance of a Letter of Authority against a particular taxpayer, a preliminary investigation should first be
conducted to determine if a prima facie case for tax fraud exists. As to the allegedly unresolved protest filed
on April 20, 2001 by LMCEC over the PAN, this has been disregarded by the Bureau for being pro forma
and having been filed beyond the 15-day reglementary period. A subsequent letter dated April 20, 2001 was
filed with the TFD and signed by a certain Juan Ventigan. However, this was disregarded and considered a
mere scrap of paper since the said signatory had not shown any prior authorization to represent
LMCEC. Even assuming said protest letter was validly filed on behalf of the company, the issuance of a
Formal Demand Letter and Assessment Notice through constructive service on October 1, 2002 is deemed
an implied denial of the said protest. Lastly, the details regarding the informer being confidential, such
information is entitled to some degree of protection, including the identity of the informant against
LMCEC.[25]

In their Joint Rejoinder-Affidavit,[26] Camus and Mendoza reiterated their argument that the
identity of the alleged informant is crucial to determine if he/she is qualified under Section 282 of the
NIRC. Moreover, there was no assessment that has already become final, the validity of its issuance and
service has been put in issue being anomalous, irregular and oppressive. It is contended that for criminal
prosecution to proceed before assessment, there must be a prima facie showing of a willful attempt to
evade taxes. As to LMCECs availment of the VAP and ERAP programs, the certificate of immunity from
audit issued to it by the BIR is plain and simple, but petitioner is now saying it has the right to renege
with impunity from its undertaking. Though petitioner deems LMCEC not qualified to avail of the
benefits of VAP, it must be noted that if it is true that at the time the petitioner filed I.S. No. 00-956
sometime in January 2001 it had already in its custody that Confidential Information No. 29-2000 dated
July 7, 2000, these revenue officers could have rightly filed the instant case and would not resort to filing
said criminal complaint for refusal to comply with a subpoena duces tecum.

On September 22, 2003, the Chief State Prosecutor issued a Resolution[27] finding no sufficient
evidence to establish probable cause against respondents LMCEC, Camus and Mendoza. It was held that
since the payments were made by LMCEC under ERAP and VAP pursuant to the provisions of RR Nos.
2-99 and 8-2001 which were offered to taxpayers by the BIR itself, the latter is now in estoppel to insist
on the criminal prosecution of the respondent taxpayer. The voluntary payments made thereunder are in
the nature of a tax amnesty. The unnumbered assessment notices were found highly irregular and thus
their validity is suspect; if the amounts indicated therein were collected, it is uncertain how these will be
accounted for and if it would go to the coffers of the government or elsewhere. On the required prior
determination of fraud, the Chief State Prosecutor declared that the Office of the City Prosecutor in I.S.
No. 00-956 has already squarely ruled that (1) there was no prior determination of fraud, (2) there was
indiscriminate issuance of LAs, and (3) the complaint was more of harassment. In view of such findings,
any ensuing LA is thus defective and allowing the collection on the assailed assessment notices would
already be in the context of a fishing expedition or witch-hunting. Consequently, there is nothing to speak
of regarding the finality of assessment notices in the aggregate amount of P630,164,631.61.

Petitioner filed a motion for reconsideration which was denied by the Chief State Prosecutor.[28]

Petitioner appealed to respondent Secretary of Justice but the latter denied its petition for review
under Resolution dated December 13, 2005.[29]

The Secretary of Justice found that petitioners claim that there is yet no finality as to LMCECs
payment of its 1997 taxes since the audit report was still pending review by higher authorities, is
unsubstantiated and misplaced. It was noted that the Termination Letter issued by the Commissioner
on June 1, 1999 is explicit that the matter is considered closed. As for taxable year 1998, respondent
Secretary stated that the record shows that LMCEC paid VAT and withholding tax in the amount
of P61,635.40 and P38,404.55, respectively. This eventually gave rise to the issuance of a certificate of
immunity from audit for 1998 by the Office of the Commissioner of Internal Revenue. For taxable year
1999, respondent Secretary found that pursuant to earlier LA No. 38633 dated July 4, 2000, LMCECs
1999 tax liabilities were still pending investigation for which reason LMCEC assailed the subsequent
issuance of LA No. 00009361 dated August 25, 2000 calling for a similar investigation of its alleged 1999
tax deficiencies when no final determination has yet been arrived on the earlier LA No. 38633.[30]

On the allegation of fraud, respondent Secretary ruled that petitioner failed to establish the
existence of the following circumstances indicating fraud in the settlement of LMCECs tax liabilities: (1)
there must be intentional and substantial understatement of tax liability by the taxpayer; (2) there must be
intentional and substantial overstatement of deductions or exemptions; and (3) recurrence of the foregoing
circumstances. First, petitioner miserably failed to explain why the assessment notices were
unnumbered; second,the claim that the tax fraud investigation was precipitated by an alleged informant
has not been corroborated nor was it clearly established, hence there is no other conclusion but that the
Bureau engaged in a fishing expedition; and furthermore, petitioners course of action is contrary to
Section 235 of the NIRC allowing only once in a given taxable year such examination and inspection of
the taxpayers books of accounts and other accounting records. There was no convincing proof presented
by petitioner to show that the case of LMCEC falls under the exceptions provided in Section
235. Respondent Secretary duly considered the issuance of Certificate of Immunity from Audit and Letter
of Termination dated June 1, 1999 issued to LMCEC.[31]

Anent the earlier case filed against the same taxpayer (I.S. No. 00-956), the Secretary of Justice
found petitioner to have engaged in forum shopping in view of the fact that while there is still pending an
appeal from the Resolution of the City Prosecutor of Quezon City in said case, petitioner hurriedly filed
the instant case, which not only involved the same parties but also similar substantial issues (the joint
complaint-affidavit also alleged the issuance of LA No. 00009361 dated August 25, 2000). Clearly, the
evidence oflitis pendentia is present. Finally, respondent Secretary noted that if indeed LMCEC
committed fraud in the settlement of its tax liabilities, then at the outset, it should have been discovered
by the agents of petitioner, and consequently petitioner should not have issued the Letter of Termination
and the Certificate of Immunity From Audit. Petitioner thus should have been more circumspect in the
issuance of said documents.[32]

Its motion for reconsideration having been denied, petitioner challenged the ruling of respondent
Secretary via a certiorari petition in the CA.

On October 31, 2006, the CA rendered the assailed decision[33] denying the petition and concurred
with the findings and conclusions of respondent Secretary. Petitioners motion for reconsideration was
likewise denied by the appellate court.[34] It appears that entry of judgment was issued by the CA stating
that its October 31, 2006 Decision attained finality on March 25, 2007.[35] However, the said entry of
judgment was set aside upon manifestation by the petitioner that it has filed a petition for review before
this Court subsequent to its receipt of the Resolution dated March 6, 2007 denying petitioners motion for
reconsideration on March 20, 2007.[36]
 The petition is anchored on the following grounds:

I.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of
Justice who gravely abused his discretion by dismissing the complaint based on grounds
which are not even elements of the offenses charged.

II.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of
Justice who gravely abused his discretion by dismissing petitioners evidence, contrary to
law.

III.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of
Justice who gravely abused his discretion by inquiring into the validity of a Final
Assessment Notice which has become final, executory and demandable pursuant to
Section 228 of the Tax Code of 1997 for failure of private respondent to file a protest
against the same.[37]

The core issue to be resolved is whether LMCEC and its corporate officers may be prosecuted for
violation of Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct
and Accurate Information and Pay Tax).

Petitioner filed the criminal complaint against the private respondents for violation of the
following provisions of the NIRC, as amended:

SEC. 254. Attempt to Evade or Defeat Tax. Any person who willfully attempts in
any manner to evade or defeat any tax imposed under this Code or the payment
thereof shall, in addition to other penalties provided by law, upon conviction thereof, be
punished by a fine of not less than Thirty thousand pesos (P30,000) but not more than
One hundred thousand pesos (P100,000) and suffer imprisonment of not less than two (2)
years but not more than four (4) years: Provided, That the conviction or acquittal
obtained under this Section shall not be a bar to the filing of a civil suit for the collection
of taxes.

SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay
Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. Any
person required under this Code or by rules and regulations promulgated thereunder to
pay any tax, make a return, keep any record, or supply any correct and accurate
information, who willfully fails to pay such tax, make such return, keep such record,
or supply such correct and accurate information, or withhold or remit taxes withheld,
or refund excess taxes withheld on compensations at the time or times required by law or
rules and regulations shall, in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000)
and suffer imprisonment of not less than one (1) year but not more than ten (10) years.
 x x x x (Emphasis supplied.)

Respondent Secretary concurred with the Chief State Prosecutors conclusion that there is
insufficient evidence to establish probable cause to charge private respondents under the above
provisions, based on the following findings: (1) the tax deficiencies of LMCEC for taxable years 1997,
1998 and 1999 have all been settled or terminated, as in fact LMCEC was issued a Certificate of
Immunity and Letter of Termination, and availed of the ERAP and VAP programs; (2) there was no prior
determination of the existence of fraud; (3) the assessment notices are unnumbered, hence irregular and
suspect; (4) the books of accounts and other accounting records may be subject to audit examination only
once in a given taxable year and there is no proof that the case falls under the exceptions provided in
Section 235 of the NIRC; and (5) petitioner committed forum shopping when it filed the instant case even
as the earlier criminal complaint (I.S. No. 00-956) dismissed by the City Prosecutor of Quezon City was
still pending appeal.

Petitioner argues that with the finality of the assessment due to failure of the private respondents
to challenge the same in accordance with Section 228 of the NIRC, respondent Secretary has no
jurisdiction and authority to inquire into its validity. Respondent taxpayer is thereby allowed to do
indirectly what it cannot do directly to raise a collateral attack on the assessment when even a direct
challenge of the same is legally barred. The rationale for dismissing the complaint on the ground of lack
of control number in the assessment notice likewise betrays a lack of awareness of tax laws and
jurisprudence, such circumstance not being an element of the offense. Worse, the final, conclusive and
undisputable evidence detailing a crime under our taxation laws is swept under the rug so easily on mere
conspiracy theories imputed on persons who are not even the subject of the complaint.

We grant the petition.

There is no dispute that prior to the filing of the complaint with the DOJ, the report on the tax
fraud investigation conducted on LMCEC disclosed that it made substantial underdeclarations in its
income tax returns for 1997, 1998 and 1999. Pursuant to RR No. 12-99,[38] a PAN was sent to and
received by LMCEC on February 22, 2001 wherein it was notified of the proposed assessment of
deficiency taxes amounting to P430,958,005.90 (income tax - P318,606,380.19 and VAT -
P112,351,625.71) covering taxable years 1997, 1998 and 1999.[39] In response to said PAN, LMCEC sent
a letter-protest to the TFD, which denied the same on April 12, 2001 for lack of legal and factual basis
and also for having been filed beyond the 15-day reglementary period.[40]

As mentioned in the PAN, the revenue officers were not given the opportunity to examine
LMCECs books of accounts and other accounting records because its officers failed to comply with the
subpoena duces tecum earlier issued, to verify its alleged underdeclarations of income reported by the
Bureaus informant under Section 282 of the NIRC. Hence, a criminal complaint was filed by the Bureau
against private respondents for violation of Section 266 which provides:
 SEC. 266. Failure to Obey Summons. Any person who, being duly summoned to
appear to testify, or to appear and produce books of accounts, records, memoranda, or
other papers, or to furnish information as required under the pertinent provisions of this
Code, neglects to appear or to produce such books of accounts, records, memoranda, or
other papers, or to furnish such information, shall, upon conviction, be punished by a fine
of not less than Five thousand pesos (P5,000) but not more than Ten thousand pesos
(P10,000) and suffer imprisonment of not less than one (1) year but not more than two (2)
years.

It is clear that I.S. No. 00-956 involves a separate offense and hence litis pendentia is not present
considering that the outcome of I.S. No. 00-956 is not determinative of the issue as to whether probable
cause exists to charge the private respondents with the crimes of attempt to evade or defeat tax and willful
failure to supply correct and accurate information and pay tax defined and penalized under Sections 254
and 255, respectively. For the crime of tax evasion in particular, compliance by the taxpayer with such
subpoena, if any had been issued, is irrelevant. As we held in Ungab v. Cusi, Jr.,[41] [t]he crime is
complete when the [taxpayer] has x x x knowingly and willfully filed [a] fraudulent [return] with intent to
evade and defeat x x x the tax. Thus, respondent Secretary erred in holding that petitioner committed
forum shopping when it filed the present criminal complaint during the pendency of its appeal from the
City Prosecutors dismissal of I.S. No. 00-956 involving the act of disobedience to the summons in the
course of the preliminary investigation on LMCECs correct tax liabilities for taxable years 1997, 1998
and 1999.

In the Details of Discrepancies attached as Annex B of the PAN,[42] private respondents were already
notified that inasmuch as the revenue officers were not given the opportunity to examine LMCECs books
of accounts, accounting records and other documents, said revenue officers gathered information from
third parties. Such procedure is authorized under Section 5 of the NIRC, which provides:

SEC. 5. Power of the Commissioner to Obtain Information, and to Summon,

Examine, and Take Testimony of Persons. In ascertaining the correctness of any return, or
in making a return when none has been made, or in determining the liability of any
person for any internal revenue tax, or in collecting any such liability, or in evaluating tax
compliance, the Commissioner is authorized:

(A) To examine any book, paper, record or other data which may be relevant or
material to such inquiry;

(B) To obtain on a regular basis from any person other than the person whose
internal revenue tax liability is subject to audit or investigation, or from any office or
officer of the national and local governments, government agencies and instrumentalities,
including the Bangko Sentral ng Pilipinas and government-owned or -controlled
corporations, any information such as, but not limited to, costs and volume of production,
receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial
statements of corporations, mutual fund companies, insurance companies, regional
operating headquarters of multinational companies, joint accounts, associations, joint
ventures or consortia and registered partnerships, and their members;
 (C) To summon the person liable for tax or required to file a return, or any officer
or employee of such person, or any person having possession, custody, or care of the
books of accounts and other accounting records containing entries relating to the business
of the person liable for tax, or any other person, to appear before the Commissioner or his
duly authorized representative at a time and place specified in the summons and to
produce such books, papers, records, or other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevant
or material to such inquiry; x x x

x x x x (Emphasis supplied.)

Private respondents assertions regarding the qualifications of the informer of the Bureau deserve
scant consideration. We have held that the lack of consent of the taxpayer under investigation does not
imply that the BIR obtained the information from third parties illegally or that the information received is
false or malicious. Nor does the lack of consent preclude the BIR from assessing deficiency taxes on the
taxpayer based on the documents.[43] In the same vein, herein private respondents cannot be allowed to
escape criminal prosecution under Sections 254 and 255 of the NIRC by mere imputation of a fictitious or
disqualified informant under Section 282 simply because other than disclosure of the official registry
number of the third party informer, the Bureau insisted on maintaining the confidentiality of the identity
and personal circumstances of said informer.

Subsequently, petitioner sent to LMCEC by constructive service allowed under Section 3 of RR No. 12-
99, assessment notice and formal demand informing the said taxpayer of the law and the facts on which
the assessment is made, as required by Section 228 of the NIRC. Respondent Secretary, however, fully
concurred with private respondents contention that the assessment notices were invalid for being
unnumbered and the tax liabilities therein stated have already been settled and/or terminated.

We do not agree.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-
Assessment Notice (PAN) within the prescribed period of time, or whose reply to the
PAN was found to be without merit. The Notice of Assessment shall inform the
[t]axpayer of this fact, and that the report of investigation submitted by the Revenue
Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes
shall state the fact, the law, rules and regulations or jurisprudence on which the
assessment is based, otherwise the formal letter of demand and the notice of
assessment shall be void.[44]

As it is, the formality of a control number in the assessment notice is not a requirement for its validity but
rather the contents thereof which should inform the taxpayer of the declaration of deficiency tax against
said taxpayer. Both the formal letter of demand and the notice of assessment shall be void if the former
failed to state the fact, the law, rules and regulations or jurisprudence on which the assessment is based,
which is a mandatory requirement under Section 228 of the NIRC.

Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and
the facts on which the assessment is made. Otherwise, the assessment is void. To implement the
provisions of Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue
regulation reads:

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 taxpayers
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. The same shall be sent to the taxpayer
only by registered mail or by personal delivery. x x x.[45](Emphasis supplied.)

The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of
LMCECs tax deficiencies but also details of the specified discrepancies, explaining the legal and factual
bases of the assessment. It also reiterated that in the absence of accounting records and other documents
necessary for the proper determination of the companys internal revenue tax liabilities, the investigating
revenue officers resorted to the Best Evidence Obtainable as provided in Section 6(B) of the NIRC (third
party information) and in accordance with the procedure laid down in RMC No. 23-2000 dated November
27, 2000. Annex A of the Formal Letter of Demand thus stated:

Thus, to verify the validity of the information previously provided by the

informant, the assigned revenue officers resorted to third party information. Pursuant to
Section 5(B) of the NIRC of 1997, access letters requesting for information and the
submission of certain documents (i.e., Certificate of Income Tax Withheld at Source
and/or Alphabetical List showing the income payments made to L.M. Camus Engineering
Corporation for the taxable years 1997 to 1999) were sent to the various clients of the
subject corporation, including but not limited to the following:

1. Ayala Land Inc.

2. Filinvest Alabang Inc.
3. D.M. Consunji, Inc.
4. SM Prime Holdings, Inc.
5. Alabang Commercial Corporation
6. Philam Properties Corporation
7. SM Investments, Inc.
8. Shoemart, Inc.
9. Philippine Securities Corporation
10. Makati Development Corporation

From the documents gathered and the data obtained therein, the substantial
underdeclaration as defined under Section 248(B) of the NIRC of 1997 by your
corporation of its income had been confirmed. x x x x[46] (Emphasis supplied.)
 In the same letter, Assistant Commissioner Percival T. Salazar informed private respondents that
the estimated tax liabilities arising from LMCECs underdeclaration amounted to P186,773,600.84 in
1997, P150,069,323.81 in 1998 and P163,220,111.13 in 1999. These figures confirmed that the non-
declaration by LMCEC for the taxable years 1997, 1998 and 1999 of an amount exceeding 30%
income[47] declared in its return is considered a substantial underdeclaration of income, which
constituted prima facieevidence of false or fraudulent return under Section 248(B)[48] of the NIRC, as
amended.[49]

On the alleged settlement of the assessed tax deficiencies by private respondents, respondent Secretary
found the latters claim as meritorious on the basis of the Certificate of Immunity From Audit issued on
December 6, 1999 pursuant to RR No. 2-99 and Letter of Termination dated June 1, 1999 issued by
Revenue Region No. 7 Chief of Assessment Division Ruth Vivian G. Gandia. Petitioner, however,
clarified that the certificate of immunity from audit covered only income tax for the year 1997 and does
not include VAT and withholding taxes, while the Letter of Termination involved tax liabilities for
taxable year 1997 (EWT, VAT and income taxes) but which was submitted for review of higher
authorities as per the Certification of RD No. 40 District Officer Pablo C. Cabreros, Jr. [50] For 1999,
private respondents supposedly availed of the VAP pursuant to RR No. 8-2001.

RR No. 2-99 issued on February 7, 1999 explained in its Policy Statement that considering the scarcity of
financial and human resources as well as the time constraints within which the Bureau has to clean the
Bureaus backlog of unaudited tax returns in order to keep updated and be focused with the most current
accounts in preparation for the full implementation of a computerized tax administration, the said revenue
regulation was issued providing for last priority in audit and investigation of tax returns to accomplish
the said objective without, however, compromising the revenue collection that would have been generated
from audit and enforcement activities. The program named as Economic Recovery Assistance Payment
(ERAP) Program granted immunity from audit and investigation of income tax, VAT and percentage tax
returns for 1998. It expressly excluded withholding tax returns (whether for income, VAT, or percentage
tax purposes). Since such immunity from audit and investigation does not preclude the collection of
revenues generated from audit and enforcement activities, it follows that the Bureau is likewise not barred
from collecting any tax deficiency discovered as a result of tax fraud investigations. Respondent
Secretarys opinion that RR No. 2-99 contains the feature of a tax amnesty is thus misplaced.

Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the
government a chance to collect uncollected tax from tax evaders without having to go through the tedious
process of a tax case.[51] Even assuming arguendo that the issuance of RR No. 2-99 is in the nature of tax
amnesty, it bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in
law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed
strictly against the taxpayer and liberally in favor of the taxing authority.[52]

For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as amended by RR No. 10-
2001, through payment supposedly made in October 29, 2001 before the said program ended on October
31, 2001, did not amount to settlement of its assessed tax deficiencies for the period 1997 to 1999, nor
immunity from prosecution for filing fraudulent return and attempt to evade or defeat tax. As correctly
asserted by petitioner, from the express terms of the aforesaid revenue regulations, LMCEC is not
qualified to avail of the VAP granting taxpayers the privilege of last priority in the audit and
investigation of all internal revenue taxes for the taxable year 2000 and all prior years under certain
conditions, considering that first, it was issued a PAN on February 19, 2001, and second, it was the
subject of investigation as a result of verified information filed by a Tax Informer under Section 282 of
the NIRC duly recorded in the BIR Official Registry as Confidential Information (CI) No. 29-
2000[53] even prior to the issuance of the PAN.

Section 1 of RR No. 8-2001 provides:

SECTION 1. COVERAGE. x x x

Any person, natural or juridical, including estates and trusts, liable to pay any of
the above-cited internal revenue taxes for the above specified period/s who, due to
inadvertence or otherwise, erroneously paid his internal revenue tax liabilities or failed to
file tax return/pay taxes may avail of the Voluntary Assessment Program (VAP), except
those falling under any of the following instances:

1.1 Those covered by a Preliminary Assessment Notice (PAN), Final

Assessment Notice (FAN), or Collection Letter issued on or before July 31, 2001; or

1.2 Persons under investigation as a result of verified information filed by a

Tax Informer under Section 282 of the Tax Code of 1997, duly processed and
recorded in the BIR Official Registry Book on or before July 31, 2001;

1.3 Tax fraud cases already filed and pending in courts for adjudication; and

x x x x (Emphasis supplied.)

Moreover, private respondents cannot invoke LMCECs availment of VAP to foreclose any
subsequent audit of its account books and other accounting records in view of the strong finding of
underdeclaration in LMCECs payment of correct income tax liability by more than 30% as supported by
the written report of the TFD detailing the facts and the law on which such finding is based, pursuant to
the tax fraud investigation authorized by petitioner under LA No. 00009361. This conclusion finds
support in Section 2 of RR No. 8-2001 as amended by RR No. 10-2001 provides:

SEC. 2. TAXPAYERS BENEFIT FROM AVAILMENT OF THE VAP. A

taxpayer who has availed of the VAP shall not be audited except upon authorization and
approval of the Commissioner of Internal Revenue when there is strong evidence or
finding of understatement in the payment of taxpayers correct tax liability by more than
thirty percent (30%) as supported by a written report of the appropriate office detailing
the facts and the law on which such finding is based: Provided, however, that any VAP
payment should be allowed as tax credit against the deficiency tax due, if any, in case the
concerned taxpayer has been subjected to tax audit.

xxxx
 Given the explicit conditions for the grant of immunity from audit under RR No. 2-99, RR No. 8-
2001 and RR No. 10-2001, we hold that respondent Secretary gravely erred in declaring that petitioner is
now estopped from assessing any tax deficiency against LMCEC after issuance of the aforementioned
documents of immunity from audit/investigation and settlement of tax liabilities. It is axiomatic that the
State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of
certain administrative officers should never be allowed to jeopardize the governments financial
position.[54]

Respondent Secretarys other ground for assailing the course of action taken by petitioner in
proceeding with the audit and investigation of LMCEC -- the alleged violation of the general rule in
Section 235 of the NIRC allowing the examination and inspection of taxpayers books of accounts and
other accounting records only once in a taxable year -- is likewise untenable. As correctly pointed out by
petitioner, the discovery of substantial underdeclarations of income by LMCEC for taxable years 1997,
1998 and 1999 upon verified information provided by an informer under Section 282 of the NIRC, as
well as the necessity of obtaining information from third parties to ascertain the correctness of the return
filed or evaluation of tax compliance in collecting taxes (as a result of the disobedience to the summons
issued by the Bureau against the private respondents), are circumstances warranting exception from the
general rule in Section 235.[55]

As already stated, the substantial underdeclared income in the returns filed by LMCEC for 1997,
1998 and 1999 in amounts equivalent to more than 30% (the computation in the final assessment notice
showed underdeclarations of almost 200%) constitutes prima facie evidence of fraudulent return under
Section 248(B) of the NIRC. Prior to the issuance of the preliminary and final notices of assessment, the
revenue officers conducted a preliminary investigation on the information and documents showing
substantial understatement of LMCECs tax liabilities which were provided by the Informer, following the
procedure under RMO No. 15-95.[56] Based on the prima facie finding of the existence of fraud, petitioner
issued LA No. 00009361 for the TFD to conduct a formal fraud investigation of
LMCEC.[57] Consequently, respondent Secretarys ruling that the filing of criminal complaint for violation
of Sections 254 and 255 of the NIRC cannot prosper because of lack of prior determination of the
existence of fraud, is bereft of factual basis and contradicted by the evidence on record.

Tax assessments by tax examiners are presumed correct and made in good faith, and all
presumptions are in favor of the correctness of a tax assessment unless proven otherwise. [58] We have held
that a taxpayers failure to file a petition for review with the Court of Tax Appeals within the statutory
period rendered the disputed assessment final, executory and demandable, thereby precluding it from
interposing the defenses of legality or validity of the assessment and prescription of the Governments
right to assess.[59]Indeed, any objection against the assessment should have been pursued following the
avenue paved in Section 229 (now Section 228) of the NIRC on protests on assessments of internal
revenue taxes.[60]

Records bear out that the assessment notice and Formal Letter of Demand dated August 7,
2002 were duly served on LMCEC on October 1, 2002. Private respondents did not file a motion for
reconsideration of the said assessment notice and formal demand; neither did they appeal to the Court of
Tax Appeals. Section 228 of the NIRC[61] provides the remedy to dispute a tax assessment within a certain
period of time. It states that an assessment may be protested by filing a request for reconsideration or
reinvestigation within 30 days from receipt of the assessment by the taxpayer. No such administrative
protest was filed by private respondents seeking reconsideration of the August 7, 2002 assessment notice
and formal letter of demand. Private respondents cannot belatedly assail the said assessment, which they
allowed to lapse into finality, by raising issues as to its validity and correctness during the preliminary
investigation after the BIR has referred the matter for prosecution under Sections 254 and 255 of the NIRC.

As we held in Marcos II v. Court of Appeals[62]:

It is not the Department of Justice which is the government agency tasked to
determine the amount of taxes due upon the subject estate, but the Bureau of Internal
Revenue, whose determinations and assessments are presumed correct and made in good
faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any
irregularities in the performance of official duties, an assessment will not be
disturbed. Even an assessment based on estimates is prima facie valid and lawful
where it does not appear to have been arrived at arbitrarily or capriciously. The
burden of proof is upon the complaining party to show clearly that the assessment is
erroneous. Failure to present proof of error in the assessment will justify the judicial
affirmance of said assessment. x x x.
Moreover, these objections to the assessments should have been raised,
considering the ample remedies afforded the taxpayer by the Tax Code, with the
Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and
cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of
discretion. The course of action taken by the petitioner reflects his disregard or even
repugnance of the established institutions for governance in the scheme of a well-ordered
society. The subject tax assessments having become final, executory and enforceable,
the same can no longer be contested by means of a disguised protest. In the main,
Certiorari may not be used as a substitute for a lost appeal or remedy. This judicial policy
becomes more pronounced in view of the absence of sufficient attack against the
actuations of government. (Emphasis supplied.)

The determination of probable cause is part of the discretion granted to the investigating prosecutor and
ultimately, the Secretary of Justice. However, this Court and the CA possess the power to review findings
of prosecutors in preliminary investigations. Although policy considerations call for the widest latitude of
deference to the prosecutors findings, courts should never shirk from exercising their power, when the
circumstances warrant, to determine whether the prosecutors findings are supported by the facts, or by the
law. In so doing, courts do not act as prosecutors but as organs of the judiciary, exercising their mandate
under the Constitution, relevant statutes, and remedial rules to settle cases and controversies. [63] Clearly,
the power of the Secretary of Justice to review does not preclude this Court and the CA from intervening
and exercising our own powers of review with respect to the DOJs findings, such as in the exceptional
case in which grave abuse of discretion is committed, as when a clear sufficiency or insufficiency of
evidence to support a finding of probable cause is ignored.[64]
WHEREFORE, the petition is GRANTED. The Decision dated October 31, 2006 and Resolution
dated March 6, 2007 of the Court of Appeals in CA-G.R. SP No. 93387 are
hereby REVERSED and SET ASIDE. The Secretary of Justice is hereby DIRECTED to order the Chief
State Prosecutor to file before the Regional Trial Court of Quezon City, National Capital Judicial Region,
the corresponding Information against L. M. Camus Engineering Corporation, represented by its
President Luis M. Camus and Comptroller Lino D. Mendoza, for Violation of Sections 254 and 255 of
the National Internal Revenue Code of 1997.

No costs.

SO ORDERED.
COMMISSIONER OF G.R. No. 163345
INTERNAL REVENUE,
Petitioner, Present:
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Promulgated:
PERF REALTY CORPORATION,
Respondent. July 4, 2008

x--------------------------------------------------x

DECISION

REYES, R.T., J.:

FOR Our review on certiorari is the Decision[1] of the Court of Appeals (CA) granting the claim
for refund of respondent PERF Realty Corporation (PERF) for creditable withholding tax for the year
1997.

Facts

Petitioner Commissioner is the head of the Bureau of Internal Revenue (BIR) whose principal
duty is to assess and collect internal revenue taxes. Respondent PERF is a domestic corporation engaged
in the business of leasing properties to various clients including the Philippine American Life and General
Insurance Company (Philamlife) and Read-Rite Philippines (Read-Rite).
 On April 14, 1998, PERF filed its Annual Income Tax Return (ITR) for the year 1997 showing a
net taxable income in the amount of P6,430,345.00 and income tax due ofP2,250,621.00.

For the year 1997, its tenants, Philamlife and Read-Rite, withheld and subsequently remitted
creditable withholding taxes in the total amount of P3,531,125.00.

After deducting creditable withholding taxes in the total amount of P3,531,125.00 from its total
income tax due of P2,250,621.00, PERF showed in its 1997 ITR an overpayment of income taxes in the
amount of P1,280,504.00.

On November 3, 1999, PERF filed an administrative claim with the appellate division of the BIR
for refund of overpaid income taxes in the amount of P1,280,504.00.

On December 3, 1999, due to the inaction of the BIR, PERF filed a petition for review with the
Court of Tax Appeals (CTA) seeking for the refund of the overpaid income taxes in the amount
of P1,280,504.00.

CTA Disposition

In a Decision dated November 20, 2001, the CTA denied the petition of PERF on the ground of
insufficiency of evidence. The CTA noted that PERF did not indicate in its 1997 ITR the option to either
claim the excess income tax as a refund or tax credit pursuant to Section 69[2] (now 76) of the National
Internal Revenue Code (NIRC)

Further, the CTA likewise found that PERF failed to present in evidence its 1998 annual ITR. It
held that the failure of PERF to signify its option on whether to claim for refund or opt for an automatic
tax credit and to present its 1998 ITR left the Court with no way to determine with certainty whether or
not PERF has applied or credited the refundable amount sought for in its administrative and judicial
claims for refund.

PERF moved for reconsideration attaching to its motion its 1998 ITR. The motion was, however, denied
by the CTA in its Resolution dated March 26, 2002.

Aggrieved by the decision of the CTA, PERF filed a petition for review with the CA under Rule
43 of the Rules of Court.
 CA Disposition

In a Decision dated July 18, 2003, the CA ruled in favor of PERF, disposing as follows:

WHEREFORE, the petition is hereby GRANTED. The assailed Decision

dated November 20, 2001, and Resolution of March 26, 2002 of the Court of Tax
Appeals are SET ASIDE. The Commissioner of Internal Revenue is ordered to REFUND
to the petitioner the amount of P1,280,504.00 as creditable withholding tax for the year
1997.

SO ORDERED.[3]

According to the appellate court, even if the taxpayer has indicated its option for refund or tax
credit in its ITR, it does not mean that it will automatically be entitled to either option since the
Commissioner of Internal Revenue (CIR) must be given the opportunity to investigate and confirm the
veracity of the claim. Thus, there is still a need to file a claim for refund.

As to the failure of PERF to present its 1998 ITR, the CA observed that there is no need to rule on
its admissibility since the CTA already held that PERF had complied with the requisites for applying for a
tax refund. The sole purpose of requiring the presentation of PERFs 1998 ITR is to verify whether or
not PERF had carried over the 1997 excess income tax claimed for refund to the year 1998. The
verification process is not incumbent upon PERF; rather, it is the duty of the BIR to disprove the
taxpayers claim.

The CIR filed a motion for reconsideration which was subsequently denied by the CA. Thus, this
appeal to Us under Rule 45.

Issues

Petitioner submits the following assignment:

I
THE COURT OF APPEALS ERRED IN GRANTING RESPONDENTS TAX
REFUND CONSIDERING THE LATTERS FAILURE TO SUBSTANTIALLY
ESTABLISH ITS CLAIM FOR REFUND.

II
 THE COURT OF APPEALS ERRED IN CONSIDERING RESPONDENTS ANNUAL
CORPORATE INCOME TAX RETURN FOR 1998 NOTWITHSTANDING THAT IT
WAS NOT FORMALLY OFFERED IN EVIDENCE.[4] (Underscoring supplied)

Our Ruling

We rule in favor of respondent.

I. Respondent substantially complied with the

requisites for claim of refund.

The CTA, citing Section 10 of Revenue Regulations 6-85 and Citibank, N.A. v. Court of
Appeals,[5] determined the requisites for a claim for refund, thus:

1) That the claim for refund was filed within the two (2) year period as prescribed under
Section 230 of the National Internal Revenue Code;

2) That the income upon which the taxes were withheld were included in the return of the
recipient;

3) That the fact of withholding is established by a copy of a statement (BIR Form 1743.1)
duly issued by the payor (withholding agent) to the payee, showing the amount paid
and the amount of tax withheld therefrom.[6]
We find that PERF filed its administrative and judicial claims for refund on November 3,
1999 and December 3, 1999, respectively, which are within the two-year prescriptive period under
Section 230 (now 229) of the National Internal Tax Code.

The CTA noted that based on the records, PERF presented certificates of creditable withholding
tax at source reflecting creditable withholding taxes in the amount ofP4,153,604.18 withheld from PERFs
rental income of P83,072,076.81 (Exhibits B, C, D, E, and H). In addition, it submitted in evidence the
Monthly Remittance Returns of its withholding agents to prove the fact of remittance of said taxes to
the BIR. Although the certificates of creditable withholding tax at source for 1997 reflected a total
amount ofP4,153,604.18 corresponding to the rental income of P83,072,076.81, PERF is claiming only
the amount of P3,531,125.00 pertaining to a rental income of P70,813,079.00. The amount
of P3,531,125.00 less the income tax due of PERF of P2,250,621.00 leaves the refundable amount
of P1,280,504.00.
It is settled that findings of fact of the CTA are entitled to great weight and will not be disturbed on
appeal unless it is shown that the lower courts committed gross error in the appreciation of facts. We see
no cogent reason not to apply the same principle here.

II. The failure of respondent to indicate its option in its

annual ITR to avail itself of either the tax refund or
tax credit is not fatal to its claim for refund.

Respondent PERF did not indicate in its 1997 ITR the option whether to request a refund or claim
the excess withholding tax as tax credit for the succeeding taxable year.

Citing Section 76 of the NIRC, the CIR opines that such failure is fatal to PERFs claim for
refund.

We do not agree.

In Philam Asset Management, Inc. v. Commissioner of Internal Revenue,[7] the Court had
occasion to trace the history of the Final Adjustment Return found in Section 69 (now 76) of the
NIRC. Thus:

The provision on the final adjustment return (FAR) was originally found in
Section 69 of Presidential Decree (PD) No. 1158, otherwise known as the National
Internal Revenue Code of 1977. On August 1, 1980, this provision was restated as
Section 86 in PD 1705.

On November 5, 1985, all prior amendments and those introduced by PD 1994

were codified into the National Internal Revenue Code (NIRC) of 1985, as a result of
which Section 86 was renumbered as Section 79.
On July 31, 1986, Section 24 of Executive Order (EO) No. 37 changed all net
income phrases appearing in Title II of the NIRC of 1977 to taxable income. Section 79
of the NIRC of 1985, however, was not amended.

On July 25, 1987, EO 273 renumbered Section 86 of the NIRC as Section 76,
which was also rearranged to fall under Chapter of Title II of the NIRC. Section 79,
which had earlier been renumbered by PD 1994, remained unchanged.

Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under PD

1705; later, as Section 79 under PD 1994; then, as Section 76 under EO 273. Finally,
after being renumbered and reduced to the chaff of a grain, Section 69 was repealed by
EO 37.

Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of 1997 as

Section 76, which 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
year.[8]

Section 76 offers two options: (1) filing for tax refund and (2) availing of tax credit. The two
options are alternative and the choice of one precludes the other. However, inPhilam Asset Management,
Inc. v. Commissioner of Internal Revenue,[9] the Court ruled that failure to indicate a choice, however, will
not bar a valid request for a refund, should this option be chosen by the taxpayer later on. The
requirement is only for the purpose of easing tax administration particularly the self-assessment and
collection aspects. Thus:

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. Failure to signify ones intention in the FAR does not mean outright
barring of a valid request for a refund, should one still choose this option later on. A tax
credit should be construed merely as an alternative remedy to a tax refund under Section
76, subject to prior verification and approval by respondent.

The reason for requiring that a choice be made in the FAR upon its filing is to
ease tax administration, particularly the self-assessment and collection aspects. A
taxpayer that makes a choice expresses certainty or preference and thus demonstrates
clear diligence. Conversely, a taxpayer that makes no choice expresses uncertainty or
lack of preference and hence shows simple negligence or plain oversight.

xxxx
Third, there is no automatic grant of a tax refund. As a matter of procedure,
the BIR should be given the opportunity to investigate and confirm the veracity of a
taxpayers claim, before it grants the refund. Exercising the option for a tax refund or a tax
 credit does not ipso facto confer upon a taxpayer the right to an immediate availment of
the choice made. Neither does it impose a duty on the government to allow tax collection
to be at the sole control of a taxpayer.

Fourth, the BIR ought to have on file its own copies of petitioners FAR for the
succeeding year, on the basis of which it could rebut the assertion that there was a
subsequent credit of the excess income tax payments for the previous year. Its failure to
present this vital document to support its contention against the grant of a tax refund to
petitioner is certainly fatal.

Fifth, the CTA should have taken judicial notice of the fact of filing and the
pendency of petitioners subsequent claim for a refund of excess creditable taxes withheld
for 1998. The existence of the claim ought to be known by reason of its judicial
functions. Furthermore, it is decisive to and will easily resolve the material issue in this
case. If only judicial notice were taken earlier, the fact that there was no carry-over of the
excess creditable taxes withheld for 1997 would have already been crystal clear.

Sixth, the Tax Code allows the refund of taxes to a taxpayer that claims it in
writing within two years after payment of the taxes erroneously received by
the BIR. Despite the failure of petitioner to make the appropriate marking in
the BIR form, the filing of its written claim effectively serves as an expression of its
choice to request a tax refund, instead of a tax credit. To assert that any future claim for a
tax refund will be instantly hindered by a failure to signify ones intention in the FAR is to
render nugatory the clear provision that allows for a two-year prescriptive period.

In fact, in BPI-Family Savings Bank v. CA, this Court even ordered the refund of
a taxpayers excess creditable taxes, despite the express declaration in the FAR to apply
the excess to the succeeding year. When circumstances show that a choice of tax credit
has been made, it should be respected. But when indubitable circumstances clearly show
that another choice a tax refund is in order, it should be granted. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not
belonging to it and thereby enrich itself at the expense of its law-abiding citizens.
In the present case, although petitioner did not mark the refund box in its 1997
FAR, neither did it perform any act indicating that it chose a tax credit. On the contrary, it
filed onSeptember 11, 1998, an administrative claim for the refund of its excess taxes
withheld in 1997. In none of its quarterly returns for 1998 did it apply the excess
creditable taxes. Under these circumstances, petitioner is entitled to a tax refund of its
1997 excess tax credits in the amount of P522,092.[10]

In this case, PERF did not mark the refund box in its 1997 FAR. Neither did it perform any act
indicating that it chose tax credit. In fact, in its 1998 ITR, PERF left blank the portion Less: Tax Credit/
Payments. That action coupled with the filing of a claim for refund indicates that PERF opted to claim a
refund. Under these circumstances, PERF is entitled to a refund of its 1997 excess tax credits in the
amount of P1,280,504.00.

III. The failure of respondent to present in evidence the

1998 ITR is not fatal to its claim for refund.
The CIR takes the view that the CA erred in considering the 1998 ITR of PERF. It was not formally
offered in evidence. Section 34, Rule 132 of the Revised Rules of Court states that the court shall consider
no evidence which has not been formally offered.

The reasoning is specious.

PERF attached its 1998 ITR to its motion for reconsideration. The 1998 ITR is a part of the records of the
case and clearly showed that income taxes in the amount ofP1,280,504.00 were not claimed as tax
credit in 1998.

In Filinvest Development Corporation v. Commissioner of Internal Revenue,[11] the Court held that the
1997 ITR attached to the motion for reconsideration is part of the records of that case and cannot be
simply ignored by the CTA. Moreover, technicalities should not be used to defeat substantive rights,
especially those that have been held as a matter of right. We quote:

In the proceedings before the CTA, petitioner presented in evidence its letter of
claim for refund before the BIR to show that it was made within the two-year
reglementary period; its Income Tax Returns for the years 1995 and 1996 to prove its
total creditable withholding tax and the fact that the amounts were declared as part of its
gross income; and several certificates of income tax withheld at source corresponding to
the period of claim to prove the total amount of the taxes erroneously withheld. More
importantly, petitioner attached its 1997 Income Tax Return to its Motion for
Reconsideration, making the same part of the records of the case. The CTA cannot
simply ignore this document.

Thus, we hold that petitioner has complied with all the requirements to prove its
claim for tax refund. The CA, therefore, erred in denying the petition for review of
the CTAs denial of petitioners claim for tax refund on the ground that it failed to present
its 1997 Income Tax Return.

The CAs reliance on Rule 132, Section 34 26 of the Rules on Evidence is

misplaced. This provision must be taken in the light of Republic Act No. 1125, as
amended, the law creating the CTA, which provides that proceedings therein shall
not be governed strictly by technical rules of evidence. Moreover, this Court has
held time and again that technicalities should not be used to defeat substantive
rights, especially those that have been established as a matter of fact.

xxxx
 We must also point out that, simply by exercising the CIRs power to examine
and verify petitioners claim for tax exemption as granted by law, respondent CIR could
have easily verified petitioners claim by presenting the latters 1997 Income Tax Return,
the original of which it has in its files. However, records show that in the proceedings
before the CTA, respondent CIR failed to comment on petitioners formal offer of
evidence, waived its right to present its own evidence, and failed to file its
memorandum. Neither did it file an opposition to petitioners motion to reconsider
the CTA decision to which the 1997 Income Tax Return was appended.

That no one shall unjustly enrich oneself at the expense of another is a long-
standing principle prevailing in our legal system. This applies not only to individuals but
to the State as well.In the field of taxation where the State exacts strict compliance upon
its citizens, the State must likewise deal with taxpayers with fairness and honesty. The
harsh power of taxation must be tempered with evenhandedness. Hence, under the
principle of solutio indebiti, the Government has to restore to petitioner the sums
representing erroneous payments of taxes.[12]

Further, We sustain the CA that there is no need to rule on the issue of the admissibility of the
1998 ITR since the CTA ruled that PERF already complied with the requisites of applying for a tax
refund. The verification process is not incumbent on PERF; it is the duty of the CIR to verify whether or
not PERF had carried over the 1997 excess income taxes.

WHEREFORE, the petition is DENIED for lack of merit.

SO ORDERED.

G.R. No. 197590, November 24, 2014

BUREAU OF INTERNAL REVENUE, AS REPRESENTED BY THE COMMISSIONER OF

INTERNAL REVENUE,Petitioner, v. COURT OF APPEALS, SPOUSES ANTONIO VILLAN
MANLY, AND RUBY ONG MANLY,Respondents.

DECISION

DEL CASTILLO, J.:

There is grave abuse of discretion when the determination of probable cause is exercised in an arbitrary or
despotic manner, due to passion or personal hostility, so patent and gross as to amount to an evasion of a
positive duty or a virtual refusal to perform a duty enjoined by law.1

This Petition for Certiorari 2 under Rule 65 of the Rules of Court assails the Decision3 dated October 28,
2010 and the Resolution4 dated May 10, 2011 of the Court of Appeals (CA) in CA-G.R. SP No. 112479.

Factual Antecedents

Respondent Antonio Villan Manly (Antonio) is a stockholder and the Executive Vice-President of
Standard Realty Corporation, a family-owned corporation.5 He is also engaged in rental business.6 His
spouse, respondent Ruby Ong Manly, is a housewife.7

On April 27, 2005, petitioner Bureau of Internal Revenue (BIR) issued Letter of Authority No. 2001
000123878authorizing its revenue officers to investigate respondent spouses’ internal revenue tax
liabilities for taxable year 2003 and prior years.

On June 6, 2005, petitioner issued a letter9 to respondent spouses requiring them to submit documentary
evidence to substantiate the source of their cash purchase of a 256-square meter log cabin in Tagaytay
City worth P17,511,010.00. Respondent spouses, however, failed to comply with the letter.10

On June 23, 2005, the revenue officers executed a Joint Affidavit11 alleging that respondent Antonio’s
reported or declared annual income for the taxable years 1998-2003 are as
follows:chanroblesvirtuallawlibrary
Net Profit Rental
Taxable
Business (1169-73 Total sources of
Compensation Tax Due/paid CASH
G. Masangkay St., Funds
Income
Tondo, Manila
1998 [P]133,532.36 [P] 191,915.10 [P] 325,447.46 [P]55,834.00 [P] 269,613.46
1999 142,550.50 260,961.78 403,512.28 79,254.00 324,258.28
2000 141,450.00 213,740.67 355,190.67 64,757.21 290,433.46
2001 151,500.00 233,396.62 384,896.62 73,669.00 311,227.62
2002 148,500.00 186,106.62 334,606.62 58,581.00 276,025.62
2003 148,100.00 152,817.53 300.917.93 48,729.00 252,188.93
[Total] P865,633.26 P1,238,938.32 P2,104,571.58 P380,824.21 P1,723,747.3712
and that despite his modest income for the said years, respondent spouses were able to purchase in cash
the following properties:

1) a luxurious vacation house in Tagaytay City valued at P17,511,010.0013 in the year 2000, evidenced by
a Deed of Absolute Sale14 dated October 24, 2000;

2) a Toyota RAV4 for P1,350,000.00 in the year 2001, evidenced by a Sales Invoice15 dated June 28,
2001; and

3) a Toyota Prado for P2,000,000.00 in 2003, evidenced by a Deed of Sale16 dated July 9, 2003.17

Since respondent spouses failed to show the source of their cash purchases, the revenue officers
concluded that respondent Antonio’s Income Tax Returns (ITRs) for taxable years 2000, 2001, and 2003
were underdeclared.18And since the underdeclaration exceeded 30% of the reported or declared income, it
was considered a prima facieevidence of fraud with intent to evade the payment of proper taxes due to the
government.19 The revenue officers, thus, recommended the filing of criminal cases against respondent
spouses for failing to supply correct and accurate information in their ITRs for the years 2000, 2001, and
2003, punishable under Sections 25420 and 25521 in relation to Section 248(B)22 of Republic Act No. 8424
or the “Tax Reform Act of 1997,” hereinafter referred to as the National Internal Revenue Code (NIRC).23

Respondent spouses, in their Joint Counter-Affidavit,24 denied the accusations hurled against them and
alleged that they used their accumulated savings from their earnings for the past 24 years in purchasing
the properties.25They also contended that the criminal complaint should be dismissed because petitioner
failed to issue a deficiency assessment against them.26

In response, the revenue officers executed a Joint Reply-Affidavit.27 Respondent spouses, in turn,
executed a Joint Rejoinder-Affidavit.28

Ruling of the State Prosecutor

On August 31, 2006, State Prosecutor Ma. Cristina A. Montera-Barot issued a Resolution29 in I.S. No.
2005-573 recommending the filing of criminal charges30 against respondent spouses, to
wit:chanroblesvirtuallawlibrary
WHEREFORE, premises considered, it is respectfully recommended that [respondent] spouses
ANTONIO VILLAN MANLY and RUBY ONG MANLY be charged [with] the
following:chanroblesvirtuallawlibrary
(1) Three (3) counts of Violation of Section 254 – Attempt to Evade or Defeat Tax of the NIRC for
taxable years 2000, 2001, and 2003;
(2) Three (3) counts for Violation of Section 255 of the NIRC – Failure to Supply Correct and Accurate
Information for taxable years 2000, 2001 and 2003;
(3) Three counts of Violation of Section 255 of the NIRC – Failure to Pay, as a consequence of
[respondent spouses’] failure to supply correct and accurate information on their tax returns for
taxable years 2000, 2001, and 2003.31
Respondent spouses moved for reconsideration32 but the State Prosecutor denied the same in a
Resolution33dated November 29, 2007.

Ruling of the Secretary of Justice

On appeal to the Secretary of Justice via a Petition for Review,34 Acting Justice Secretary Agnes VST
Devanadera (Devanadera) reversed the Resolution of the State Prosecutor. She found no willful failure to
pay or attempt to evade or defeat the tax on the part of respondent spouses as petitioner allegedly failed to
specify the amount of tax due and the likely source of income from which the same was based.35 She also
pointed out petitioner’s failure to issue a deficiency tax assessment against respondent spouses which is a
prerequisite to the filing of a criminal case for tax evasion.36 The dispositive portion of the
Resolution37 dated July 27, 2009 reads:chanroblesvirtuallawlibrary
WHEREFORE, the assailed Resolution is hereby REVERSED and SET ASIDE. The Chief State
Prosecutor is hereby directed to withdraw the Information filed against [respondent spouses] Antonio
Villan Manly and Ruby Ong Manly, if one has been filed, and report the action taken thereon within ten
(10) days from receipt hereto.

SO ORDERED.38
Petitioner sought reconsideration39 but Acting Justice Secretary Devanadera denied the same in a
Resolution40dated November 5, 2009.

Ruling of the Court of Appeals

Unfazed, petitioner filed a Petition for Certiorari41 with the CA imputing grave abuse of discretion on the
part of Acting Justice Secretary Devanadera in finding no probable cause to indict respondent spouses for
willful attempt to evade or defeat tax and willful failure to supply correct and accurate information for
taxable years 2000, 2001 and 2003.

On October 28, 2010, the CA rendered the assailed Decision42 dismissing the Petition for Certiorari.
Although it disagreed that an assessment is a condition sine qua non in filing a criminal case for tax
evasion, the CA, nevertheless, ruled that there was no probable cause to charge respondent spouses as
petitioner allegedly failed to state their exact tax liability and to show sufficient proof of their likely
source of income.43 The CA further said that before one could be prosecuted for tax evasion, the fact that
a tax is due must first be proved.44 Thus:chanroblesvirtuallawlibrary
IN LIGHT OF ALL THE FOREGOING, the instant petition is hereby DENIED, and the assailed
Resolution of the Secretary of Justice dated July 27, 2009 dismissing I.S. No. 2005-573 against private
respondents, AFFIRMED. However, the dismissal of the instant case is without prejudice to the refiling
by the BIR of a complaint sufficient in form and substance before the appropriate tribunal.

SO ORDERED.45
The CA likewise denied petitioner’s Motion for Reconsideration46 in its Resolution47 dated May 10, 2011.

Issues

Hence, petitioner filed the instant Petition contending that the CA committed grave abuse of discretion
amounting to lack or excess of jurisdiction in holding that:chanroblesvirtuallawlibrary

I. A CATEGORICAL FINDING OF THE EXACT AMOUNT OF TAX DUE FROM THE

PRIVATE RESPONDENT SHOULD BE SPECIFICALLY ALLEGED [AND THAT] SINCE
THE BIR FAILED TO MAKE SUCH FINDINGS THEY CONSEQUENTLY FAILED TO
BUILD A CASE FOR TAX EVASION AGAINST [RESPONDENT SPOUSES] DESPITE THE
WELL ESTABLISHED DOCTRINE THAT IN TAX EVASION CASES, A PRECISE
COMPUTATION OF THE [TAX] DUE IS NOT NECESSARY.

II. THE BIR FAILED TO SHOW SUFFICIENT PROOF OF A LIKELY SOURCE OF

[RESPONDENT SPOUSES’] INCOME DESPITE THE FACT THAT THE BIR WAS
SUFFICIENTLY ABLE TO SHOW PROOF OF SUCH INCOME.48

Petitioner’s Arguments

Petitioner imputes grave abuse of discretion on the part of the CA in affirming the dismissal of the
criminal cases against respondent spouses. Petitioner contends that in filing a criminal case for tax
evasion, a prior computation or assessment of tax is not required because the crime is complete when the
violator knowingly and willfully filed a fraudulent return with intent to evade a part or all of the tax.49 In
this case, an analysis of respondent spouses’ income and expenditure shows that their cash expenditure is
grossly disproportionate to their reported or declared income, leading petitioner to believe that they
underdeclared their income.50 In computing the unreported or undeclared income, which was likely
sourced from respondent Antonio’s rental business,51 petitioner used the expenditure method of
reconstructing income, a method used to determine a taxpayer’s income tax liability when his records are
inadequate or inaccurate.52 And since respondent spouses failed to explain the alleged unreported or
undeclared income, petitioner asserts that criminal charges for tax evasion should be filed against them.

Respondent spouses’ Arguments

Respondent spouses, on the other hand, argue that the instant Petition should be dismissed as petitioner
availed of the wrong remedy in filing a Petition for Certiorari under Rule 65 of the Rules of Court.53 And
even if the Petition is given due course, the same should still be dismissed because no grave abuse of
discretion can be attributed to the CA.54 They maintain that petitioner miserably failed to prove that a tax
is actually due.55 Neither was it able to show the source of the alleged unreported or undeclared income as
required by Revenue Memorandum Order No. 15-95, Guidelines and Investigative Procedures in the
Development of Tax Fraud Cases for Internal Revenue Officers.56 As to the method used by petitioner,
they claim that it completely ignored their lifetime savings because it was limited to the years 1998-
2003.57

Our Ruling
The Petition is meritorious.

Before discussing the merits of this case, we shall first discuss the procedural matter raised by respondent
spouses that petitioner availed of the wrong remedy in filing a Petition for Certiorari under Rule 65 of the
Rules of Court, instead of a Petition for Review on Certiorari under Rule 45.

Indeed, the remedy of a party aggrieved by a decision, final order, or resolution of the CA is to file a
Petition for Review on Certiorari under Rule 45 of the Rules of Court, which is a continuation of the
appellate process over the original case.58 And as a rule, if the remedy of an appeal is available, an action
for certiorari under Rule 65 of the Rules of Court, which is an original or independent action based on
grave abuse of discretion amounting to lack or excess of jurisdiction, will not prosper59 because it is not a
substitute for a lost appeal.60

There are, however, exceptions to this rule, to wit: 1) when public welfare and the advancement of public
policy dictate; 2) when the broader interest of justice so requires; 3) when the writs issued are null and
void; 4) when the questioned order amounts to an oppressive exercise of judicial authority; 5) when, for
persuasive reasons, the rules may be relaxed to relieve a litigant of an injustice not commensurate with his
failure to comply with the prescribed procedure; 6) when the judgment or order is attended by grave
abuse of discretion; or 7) in other meritorious cases.61

In this case, after considering the arguments raised by the parties, we find that there is reason to give due
course to the instant Petition for Certiorari as petitioner was able to convincingly show that the CA
committed grave abuse of discretion when it affirmed the dismissal of the criminal charges against
respondent spouses despite the fact that there is probable cause to indict them.

Although the Court has consistently adopted the policy of non-interference in the conduct and
determination of probable cause,62 which is exclusively within the competence of the Executive
Department, through the Secretary of Justice,63 judicial intrusion, in the form of judicial review, is
allowed when there is proof that the Executive Department gravely abused its discretion in making its
determination and in arriving at the conclusion it reached.64

Grave abuse of discretion is defined as a capricious and whimsical exercise of judgment tantamount to
lack or excess of jurisdiction, a blatant abuse of authority so grave and so severe as to deprive the court of
its very power to dispense justice, or an exercise of power in an arbitrary and despotic manner, due to
passion, prejudice or personal hostility, so patent and gross as to amount to an evasion or to a unilateral
refusal to perform the duty enjoined or to act in contemplation of the law.65 Such is the situation in this
case.

Having resolved the foregoing procedural matter, we shall now proceed to determine the main issue in
this case.

Sections 254 and 255 of the NIRC pertinently provide:chanroblesvirtuallawlibrary

SEC. 254. Attempt to Evade or Defeat Tax. – Any person who willfully attempts in any manner to evade
or defeat any tax imposed under this Code or the payment thereof shall, in addition to other penalties
provided by law, upon conviction thereof, be punished by a fine of not less than Thirty thousand pesos
(P30,000.00) but not more than One hundred thousand pesos (P100,000.00) and suffer imprisonment of
not less than two (2) years but not more than four (4) years: Provided, That the conviction or acquittal
obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes.

SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and
Remit Tax and Refund Excess Taxes Withheld on Compensation. – Any person required under this Code
or by rules and regulations promulgated thereunder to pay any tax, make a return, keep any record, or
supply correct and accurate information, who willfully fails to pay such tax, make such return, keep such
record, or supply such correct and accurate information, or withhold or remit taxes withheld, or refund
excess taxes withheld on compensation at the time or times required by law or rules and regulations shall,
in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less
than Ten thousand pesos (P10,000.00) and suffer imprisonment of not less than one (1) year but not more
than ten (10) years.
In Ungab v. Judge Cusi, Jr.,66 we ruled that tax evasion is deemed complete when the violator has
knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the
tax.67 Corollarily, an assessment of the tax deficiency is not required in a criminal prosecution for tax
evasion.68 However, inCommissioner of Internal Revenue v. Court of Appeals,69 we clarified that although
a deficiency assessment is not necessary, the fact that a tax is due must first be proved before one can be
prosecuted for tax evasion.70

In the case of income, for it to be taxable, there must be a gain realized or received by the taxpayer, which
is not excluded by law or treaty from taxation.71 The government is allowed to resort to all evidence or
resources available to determine a taxpayer’s income and to use methods to reconstruct his income.72 A
method commonly used by the government is the expenditure method, which is a method of
reconstructing a taxpayer’s income by deducting the aggregate yearly expenditures from the declared
yearly income.73 The theory of this method is that when the amount of the money that a taxpayer spends
during a given year exceeds his reported or declared income and the source of such money is unexplained,
it may be inferred that such expenditures represent unreported or undeclared income.74

In the case at bar, petitioner used this method to determine respondent spouses’ tax liability. Petitioner
deducted respondent spouses’ major cash acquisitions from their available funds. Thus:
Loans Withdrawal Major Unexplained
Cash Funds available
(business) of Capital Acquisitions Sources of Funds
1998 P 269,613.46 900,000.00 130,638.98 1,300,252.44
1999 324,258.28 (400,000.00) 39,281.87 1,263,792.59
2000 290,433.46 - 102,024.97 1,656,251.02 17,511,010.00 (15,854,758.98)
2001 311,227.62 - 406,309.70 717,537.32 1,350,000.00 (632,462.68)
2002 276,025.62 (100,000.00) 184,092.03 360,117.65
2003 252,188.93 - 245,167.97 857,474.55 2,000,000.00 (1,142,525.45)
[Total:] P1,723,747.37 20,861,010.00(17,629,747.11)75

2000 2001 2003

Unexplained
funds – under [P]15,854,758.98[P]632,462.68 [P] 1,142,525.45
declaration
Taxable income [P]15,854,758.98[P]632,462.68 [P] 1,142,525.45

Income Tax due

thereon:
First
125,000.00 125,000.00 125,000.00
Php500,000.00
In excess of
4,913,522.87 42,388.06 205,608.14
Php500,000.00
Total income tax
due (net tax 4,973,765.66 93,719.06 281,879.14
paid)
Add: 50%
2,486,882.83 46,859.53 165,304.07
Surcharge
20% Interest (up
to 5/31/2005) - 4,104,376.29 77,337.43 272,751.72
825
Total Tax Due
inclusive of [P]11,565,024.79[P]217,916.02 [P] 655,369.0176
Increments
Particulars 2000 2001 2003
Unexplained Funds
[P] 15,854,758.98 [P] 632,462.68 [P] 1,142,525.45
[Underdeclaration]
Sources of Funds as per
Financial Statements as
attached to the Income
Tax Return [P] 1,656,251.02 [P] 717,537.32 [P] 817,474.55
Percentage of
957.27% 88.14% 133.24%[77]
underdeclaration
And since the underdeclaration is more than 30% of respondent spouses’ reported or declared income,
which under Section 248(B) of the NIRC constitutes as prima facie evidence of false or fraudulent return,
petitioner recommended the filing of criminal cases against respondent spouses under Sections 254 and
255, in relation to Section 248(B) of the NIRC.

The CA, however, found no probable cause to indict respondent spouses for tax evasion. It agreed with
Acting Justice Secretary Devanadera that petitioner failed to make “a categorical finding of the exact
amount of tax due from [respondent spouses]” and “to show sufficient proof of a likely source of
[respondent spouses’] income that enabled them to purchase the real and personal properties adverted to x
x x.”78

We find otherwise.

The amount of tax due from respondent spouses was specifically alleged in the Complaint-
Affidavit.79 The computation, as well as the method used in determining the tax liability, was also clearly
explained. The revenue officers likewise showed that the underdeclaration exceeded 30% of the reported
or declared income.

The revenue officers also identified the likely source of the unreported or undeclared income in their
Reply-Affidavit. The pertinent portion reads:chanroblesvirtuallawlibrary
7. x x x x

[Respondent spouses] are into rental business and the net profit for six (6) years before tax summed only
to P1,238,938.32 (an average of more or less Php200,000.00 annually). We asked respondent [Antonio] if
we can proceed to his rented property to [appraise] the earning capacity of the building [for] lease/ rent,
but he declined our proposition. Due to such refusal made by the respondent, [petitioner], thru its
examiners, took pictures of the subject property and came up with the findings that indeed the
unexplained funds sought to have been used in acquiring the valuable property in Tagaytay x x x came
from the underdeclaration of rental income.80
Apparently, the revenue officers considered respondent Antonio’s rental business to be the likely source
of their unreported or undeclared income due to his unjustified refusal to allow the revenue officers to
inspect the building.
Respondent spouses’ defense that they had sufficient savings to purchase the properties remains self-
serving at this point since they have not yet presented any evidence to support this. And since there is no
evidence yet to suggest that the money they used to buy the properties was from an existing fund, it is
safe to assume that that money is income or a flow of wealth other than a mere return on capital. It is a
basic concept in taxation that income denotes a flow of wealth during a definite period of time, while
capital is a fund or property existing at one distinct point in time.81

Moreover, by just looking at the tables presented by petitioner, there is a manifest showing that
respondent spouses had underdeclared their income. The huge disparity between respondent Antonio’s
reported or declared annual income for the past several years and respondent spouses’ cash acquisitions
for the years 2000, 2001, and 2003 cannot be ignored. In fact, it makes us wonder how they were able to
purchase the properties in cash given respondent Antonio’s meager income.

In view of the foregoing, we are convinced that there is probable cause to indict respondent spouses for
tax evasion as petitioner was able to show that a tax is due from them. Probable cause, for purposes of
filing a criminal information, is defined as such facts that are sufficient to engender a well-founded belief
that a crime has been committed, that the accused is probably guilty thereof, and that he should be held
for trial.82 It bears stressing that the determination of probable cause does not require actual or absolute
certainty, nor clear and convincing evidence of guilt; it only requires reasonable belief or probability that
more likely than not a crime has been committed by the accused.83

In completely disregarding the evidence presented and in affirming the ruling of the Acting Justice
Secretary Devanadera that no probable cause exists, we find that the CA committed grave abuse of
discretion amounting to lack or excess of jurisdiction. As we have said, if there is grave abuse of
discretion, the court may step in and proceed to make its own independent determination of probable
cause as judicial review is allowed to ensure that the Executive Department acts within the permissible
bounds of its authority or does not gravely abuse the same.84

We must make it clear, however, that we are only here to determine probable cause. As to whether
respondent spouses are guilty of tax evasion is an issue that must be resolved during the trial of the
criminal case, where the quantum of proof required is proof beyond reasonable doubt.

Before we close, we must stress that our ruling in this case should not be interpreted as an unbridled
license for our tax officials to engage in fishing expeditions and witch-hunting. They should not abuse
their investigative powers, instead they should exercise the same within the bounds of the law. They must
properly observe the guidelines in making assessments and investigative procedures to ensure that the
constitutional rights of the taxpayers are well protected as we cannot allow the floodgates to be opened
for frivolous and malicious tax suits.

WHEREFORE, the Petition is hereby GRANTED. The Decision dated October 28, 2010 and the
Resolution dated May 10, 2011 of the Court of Appeals in CA-G.R. SP No. 112479 are
hereby REVERSED and SET ASIDE. The Resolutions dated August 31, 2006 and November 29, 2007
of State Prosecutor Ma. Cristina A. Montera-Barot in I.S. No. 2005-573 finding probable cause to indict
respondent spouses Antonio Villan Manly and Ruby Ong Manly for Violation of Sections 254 and 255 of
the National Internal Revenue Code are hereby REINSTATED.

SO ORDERED.

Carpio, (Chairperson), Brion, Mendoza, and Leonen, JJ., concur.

________________________________________________________________