G.R. No.

178697               November 17, 2010 Accordingly, petitioner is DIRECTED to PAY the respondent the
deficiency expanded withholding tax in the amount of ₱1,035,879.70
and the following penalties for late remittance of internal revenue
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
taxes in the sum of ₱1,269,593.90:
vs.
SONY PHILIPPINES, INC., Respondent.
Plus 20% delinquency interest from January 17, 2000 until fully paid
pursuant to Section 249(C)(3) of the 1997 Tax Code.
DECISION

SO ORDERED.9
MENDOZA, J.:

The CIR sought a reconsideration of the above decision and submitted

This petition for review on certiorari seeks to set aside the May 17,
the following grounds in support thereof:
2007 Decision and the July 5, 2007 Resolution of the Court of Tax
Appeals – En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming the
October 26, 2004 Decision of the CTA-First Division2 which, in turn, A. The Honorable Court committed reversible error in
partially granted the petition for review of respondent Sony Philippines, holding that petitioner is not liable for the deficiency VAT in
Inc. (Sony). The CTA-First Division decision cancelled the deficiency the amount of ₱11,141,014.41;
assessment issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the
B. The Honorable court committed reversible error in holding
deficiency assessment for expanded withholding tax (EWT) in the
that the commission expense in the amount of
amount of ₱1,035,879.70 and the penalties for late remittance of
P2,894,797.00 should be subjected to 5% withholding tax
internal revenue taxes in the amount of ₱1,269, 593.90.3
instead of the 10% tax rate;

THE FACTS:
C. The Honorable Court committed a reversible error in
holding that the withholding tax assessment with respect to
On November 24, 1998, the CIR issued Letter of Authority No. the 5% withholding tax on rental deposit in the amount of
000019734 (LOA 19734) authorizing certain revenue officers to ₱10,523,821.99 should be cancelled; and
examine Sony’s books of accounts and other accounting records
regarding revenue taxes for "the period 1997 and unverified prior
D. The Honorable Court committed reversible error in
years." On December 6, 1999, a preliminary assessment for 1997
holding that the remittance of final withholding tax on
deficiency taxes and penalties was issued by the CIR which Sony
royalties covering the period January to March 1998 was
protested. Thereafter, acting on the protest, the CIR issued final
filed on time.10
assessment notices, the formal letter of demand and the details of
discrepancies.4 Said details of the deficiency taxes and penalties for
late remittance of internal revenue taxes are as follows: On April 28, 2005, the CTA-First Division denied the motion for
reconsideration.1avvphi1 Unfazed, the CIR filed a petition for review
with the CTA-EB raising identical issues:
Sony sought re-evaluation of the aforementioned assessment by filing
a protest on February 2, 2000. Sony submitted relevant documents in
support of its protest on the 16th of that same month.6 1. Whether or not respondent (Sony) is liable for the
deficiency VAT in the amount of P11, 141,014.41; NO
On October 24, 2000, within 30 days after the lapse of 180 days from
submission of the said supporting documents to the CIR, Sony filed a 2. Whether or not the commission expense in the amount of
petition for review before the CTA.7 ₱2,894,797.00 should be subjected to 10% withholding tax
instead of the 5% tax rate;
After trial, the CTA-First Division disallowed the deficiency VAT
assessment because the subsidized advertising expense paid by Sony 3. Whether or not the withholding assessment with respect
which was duly covered by a VAT invoice resulted in an input VAT to the 5% withholding tax on rental deposit in the amount of
credit. As regards the EWT, the CTA-First Division maintained the ₱10,523,821.99 is proper; and
deficiency EWT assessment on Sony’s motor vehicles and on
professional fees paid to general professional partnerships. It also 4. Whether or not the remittance of final withholding tax on
assessed the amounts paid to sales agents as commissions with five royalties covering the period January to March 1998 was
percent (5%) EWT pursuant to Section 1(g) of Revenue Regulations filed outside of time.11
No. 6-85. The CTA-First Division, however, disallowed the EWT
assessment on rental expense since it found that the total rental
deposit of ₱10,523,821.99 was incurred from January to March 1998 Finding no cogent reason to reverse the decision of the CTA-First
which was again beyond the coverage of LOA 19734. Except for the Division, the CTA-EB dismissed CIR’s petition on May 17, 2007. CIR’s
compromise penalties, the CTA-First Division also upheld the penalties motion for reconsideration was denied by the CTA-EB on July 5, 2007.
for the late payment of VAT on royalties, for late remittance of final
withholding tax on royalty as of December 1997 and for the late The CIR is now before this Court via this petition for review relying on
remittance of EWT by some of Sony’s branches.8 In sum, the CTA-First the very same grounds it raised before the CTA-First Division and the
Division partly granted Sony’s petition by cancelling the deficiency VAT CTA-EB. The said grounds are reproduced below:
assessment but upheld a modified deficiency EWT assessment as well
as the penalties. Thus, the dispositive portion reads:
GROUNDS FOR THE ALLOWANCE OF THE PETITION

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED.

Respondent is ORDERED to CANCEL and WITHDRAW the deficiency I
assessment for value-added tax for 1997 for lack of merit. However,
the deficiency assessments for expanded withholding tax and penalties THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS
for late remittance of internal revenue taxes are UPHELD. NOT LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF
PHP11,141,014.41.
II Resolution, the CIR knew which period should be covered by the
investigation. Thus, if CIR wanted or intended the investigation to
include the year 1998, it should have done so by including it in the
AS TO RESPONDENT’S DEFICIENCY EXPANDED
LOA or issuing another LOA.
WITHHOLDING TAX IN THE AMOUNT OF PHP1,992,462.72:

Upon review, the CTA-EB even added that the coverage of LOA 19734,
A. THE CTA EN BANC ERRED IN RULING
particularly the phrase "and unverified prior years," violated Section C
THAT THE COMMISSION EXPENSE IN THE
of Revenue Memorandum Order No. 43-90 dated September 20, 1990,
AMOUNT OF PHP2,894,797.00 SHOULD BE
the pertinent portion of which reads:
SUBJECTED TO A WITHHOLDING TAX OF
5% INSTEAD OF THE 10% TAX RATE.
3. A Letter of Authority should cover a taxable period not
exceeding one taxable year. The practice of issuing L/As covering
B. THE CTA EN BANC ERRED IN RULING
audit of "unverified prior years is hereby prohibited. If the audit of a
THAT THE ASSESSMENT WITH RESPECT TO
taxpayer shall include more than one taxable period, the other periods
THE 5% WITHHOLDING TAX ON RENTAL
or years shall be specifically indicated in the L/A.16 [Emphasis supplied]
DEPOSIT IN THE AMOUNT OF
PHP10,523,821.99 IS NOT PROPER.
On this point alone, the deficiency VAT assessment should have been
disallowed. Be that as it may, the CIR’s argument, that Sony’s
III
advertising expense could not be considered as an input VAT credit
because the same was eventually reimbursed by Sony International
THE CTA EN BANC ERRED IN RULING THAT THE FINAL Singapore (SIS), is also erroneous.
WITHHOLDING TAX ON ROYALTIES COVERING THE PERIOD
JANUARY TO MARCH 1998 WAS FILED ON TIME.12
The CIR contends that since Sony’s advertising expense was
reimbursed by SIS, the former never incurred any advertising expense.
Upon filing of Sony’s comment, the Court ordered the CIR to file its As a result, Sony is not entitled to a tax credit. At most, the CIR
reply thereto. The CIR subsequently filed a manifestation informing the continues, the said advertising expense should be for the account of
Court that it would no longer file a reply. Thus, on December 3, 2008, SIS, and not Sony.17
the Court resolved to give due course to the petition and to decide the
case on the basis of the pleadings filed.13
The Court is not persuaded. As aptly found by the CTA-First Division
and later affirmed by the CTA-EB, Sony’s deficiency VAT assessment
The Court finds no merit in the petition. stemmed from the CIR’s disallowance of the input VAT credits that
should have been realized from the advertising expense of the
The CIR insists that LOA 19734, although it states "the period 1997 latter.18 It is evident under Section 11019 of the 1997 Tax Code that an
and unverified prior years," should be understood to mean the fiscal advertising expense duly covered by a VAT invoice is a legitimate
year ending in March 31, 1998.14 The Court cannot agree. business expense. This is confirmed by no less than CIR’s own witness,
Revenue Officer Antonio Aluquin.20 There is also no denying that Sony
incurred advertising expense. Aluquin testified that advertising
Based on Section 13 of the Tax Code, a Letter of Authority or LOA is companies issued invoices in the name of Sony and the latter paid for
the authority given to the appropriate revenue officer assigned to the same.21 Indubitably, Sony incurred and paid for advertising
perform assessment functions. It empowers or enables said revenue expense/ services. Where the money came from is another matter all
officer to examine the books of account and other accounting records together but will definitely not change said fact.
of a taxpayer for the purpose of collecting the correct amount of
tax.15 The very provision of the Tax Code that the CIR relies on is
unequivocal with regard to its power to grant authority to examine and The CIR further argues that Sony itself admitted that the
assess a taxpayer. reimbursement from SIS was income and, thus, taxable. In support of
this, the CIR cited a portion of Sony’s protest filed before it:

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

Prescribe Additional Requirements for Tax Administration and The fact that due to adverse economic conditions, Sony-Singapore has
Enforcement. – granted to our client a subsidy equivalent to the latter’s advertising
expenses will not affect the validity of the input taxes from such
expenses. Thus, at the most, this is an additional income of our client
(A)Examination of Returns and Determination of tax Due. – After a subject to income tax. We submit further that our client is not subject
return has been filed as required under the provisions of this Code, the to VAT on the subsidy income as this was not derived from the sale of
Commissioner or his duly authorized representative may authorize the goods or services.22
examination of any taxpayer and the assessment of the correct
amount of tax: Provided, however, that failure to file a return shall not
prevent the Commissioner from authorizing the examination of any Insofar as the above-mentioned subsidy may be considered as income
taxpayer.  [Emphases supplied] and, therefore, subject to income tax, the Court agrees. However, the
Court does not agree that the same subsidy should be subject to the
10% VAT. To begin with, the said subsidy termed by the CIR as
Clearly, there must be a grant of authority before any revenue officer reimbursement was not even exclusively earmarked for Sony’s
can conduct an examination or assessment. Equally important is that advertising expense for it was but an assistance or aid in view of
the revenue officer so authorized must not go beyond the authority Sony’s dire or adverse economic conditions, and was only "equivalent
given. In the absence of such an authority, the assessment or to the latter’s (Sony’s) advertising expenses."
examination is a nullity.
Section 106 of the Tax Code explains when VAT may be imposed or
As earlier stated, LOA 19734 covered "the period 1997 and unverified exacted. Thus:
prior years." For said reason, the CIR acting through its revenue
officers went beyond the scope of their authority because the
deficiency VAT assessment they arrived at was based on records from SEC. 106. Value-added Tax on Sale of Goods or Properties. –
January to March 1998 or using the fiscal year which ended in March
31, 1998. As pointed out by the CTA-First Division in its April 28, 2005
(A) Rate and Base of Tax. – There shall be levied, assessed and The Court also affirms the findings of both the CTA-First Division and
collected on every sale, barter or exchange of goods or properties, the CTA-EB on the deficiency EWT assessment on the rental deposit.
value-added tax equivalent to ten percent (10%) of the gross selling According to their findings, Sony incurred the subject rental deposit in
price or gross value in money of the goods or properties sold, bartered the amount of ₱10,523,821.99 only from January to March 1998. As
or exchanged, such tax to be paid by the seller or transferor. stated earlier, in the absence of the appropriate LOA specifying the
coverage, the CIR’s deficiency EWT assessment from January to March
1998, is not valid and must be disallowed.
Thus, there must be a sale, barter or exchange of goods or properties
before any VAT may be levied. Certainly, there was no such sale,
barter or exchange in the subsidy given by SIS to Sony. It was but a Finally, the Court now proceeds to the third ground relied upon by the
dole out by SIS and not in payment for goods or properties sold, CIR.
bartered or exchanged by Sony.
The CIR initially assessed Sony to be liable for penalties for belated
In the case of CIR v. Court of Appeals (CA) ,23 the Court had the remittance of its FWT on royalties (i) as of December 1997; and (ii) for
occasion to rule that services rendered for a fee even on the period from January to March 1998. Again, the Court agrees with
reimbursement-on-cost basis only and without realizing profit are also the CTA-First Division when it upheld the CIR with respect to the
subject to VAT. The case, however, is not applicable to the present royalties for December 1997 but cancelled that from January to March
case. In that case, COMASERCO rendered service to its affiliates and, 1998.
in turn, the affiliates paid the former reimbursement-on-cost which
means that it was paid the cost or expense that it incurred although
The CIR insists that under Section 328 of Revenue Regulations No. 5-82
without profit. This is not true in the present case. Sony did not render
and Sections 2.57.4 and 2.58(A)(2)(a)29 of Revenue Regulations No. 2-
any service to SIS at all. The services rendered by the advertising
98, Sony should also be made liable for the FWT on royalties from
companies, paid for by Sony using SIS dole-out, were for Sony and not
January to March of 1998. At the same time, it downplays the
SIS. SIS just gave assistance to Sony in the amount equivalent to the
relevance of the Manufacturing License Agreement (MLA) between
latter’s advertising expense but never received any goods, properties
Sony and Sony-Japan, particularly in the payment of royalties.
or service from Sony.

The above revenue regulations provide the manner of withholding

Regarding the deficiency EWT assessment, more particularly Sony’s
remittance as well as the payment of final tax on royalty. Based on the
commission expense, the CIR insists that said deficiency EWT
same, Sony is required to deduct and withhold final taxes on royalty
assessment is subject to the ten percent (10%) rate instead of the five
payments when the royalty is paid or is payable. After which, the
percent (5%) citing Revenue Regulation No. 2-98 dated April 17,
corresponding return and remittance must be made within 10 days
1998.24 The said revenue regulation provides that the 10% rate is
after the end of each month. The question now is when does the
applied when the recipient of the commission income is a natural
royalty become payable?
person. According to the CIR, Sony’s schedule of Selling, General and
Administrative expenses shows the commission expense as
"commission/dealer salesman incentive," emphasizing the word Under Article X(5) of the MLA between Sony and Sony-Japan, the
salesman. following terms of royalty payments were agreed upon:

On the other hand, the application of the five percent (5%) rate by the (5)Within two (2) months following each semi-annual period ending
CTA-First Division is based on Section 1(g) of Revenue Regulations No. June 30 and December 31, the LICENSEE shall furnish to the
6-85 which provides: LICENSOR a statement, certified by an officer of the LICENSEE,
showing quantities of the MODELS sold, leased or otherwise disposed
of by the LICENSEE during such respective semi-annual period and
(g) Amounts paid to certain Brokers and Agents. – On gross payments
amount of royalty due pursuant this ARTICLE X therefore, and the
to customs, insurance, real estate and commercial brokers and agents
LICENSEE shall pay the royalty hereunder to the LICENSOR
of professional entertainers – five per centum (5%).25
concurrently with the furnishing of the above statement.30

In denying the very same argument of the CIR in its motion for
Withal, Sony was to pay Sony-Japan royalty within two (2) months
reconsideration, the CTA-First Division, held:
after every semi-annual period which ends in June 30 and December
31. However, the CTA-First Division found that there was accrual of
x x x, commission expense is indeed subject to 10% withholding tax royalty by the end of December 1997 as well as by the end of June
but payments made to broker is subject to 5% withholding tax 1998. Given this, the FWTs should have been paid or remitted by Sony
pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct
commission expense in the schedule of Selling, General and for the CTA-First Division and the CTA-EB in ruling that the FWT for
Administrative expenses submitted by petitioner (SPI) to the BIR is the royalty from January to March 1998 was seasonably filed. Although
captioned as "commission/dealer salesman incentive" the same does the royalty from January to March 1998 was well within the semi-
not justify the automatic imposition of flat 10% rate. As itemized by annual period ending June 30, which meant that the royalty may be
petitioner, such expense is composed of "Commission Expense" in the payable until August 1998 pursuant to the MLA, the FWT for said
amount of P10,200.00 and ‘Broker Dealer’ of P2,894,797.00.26 royalty had to be paid on or before July 10, 1998 or 10 days from its
accrual at the end of June 1998. Thus, when Sony remitted the same
on July 8, 1998, it was not yet late.
The Court agrees with the CTA-EB when it affirmed the CTA-First
Division decision. Indeed, the applicable rule is Revenue Regulations
No. 6-85, as amended by Revenue Regulations No. 12-94, which was In view of the foregoing, the Court finds no reason to disturb the
the applicable rule during the subject period of examination and findings of the CTA-EB.
assessment as specified in the LOA. Revenue Regulations No. 2-98,
cited by the CIR, was only adopted in April 1998 and, therefore,
WHEREFORE, the petition is DENIED.
cannot be applied in the present case. Besides, the withholding tax on
brokers and agents was only increased to 10% much later or by the
end of July 2001 under Revenue Regulations No. 6-2001.27 Until then, SO ORDERED.
the rate was only 5%.
 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.
G.R. No. 177982              October 17, 2008 (Underscoring supplied)

FITNESS BY DESIGN, INC., petitioner, The Bureau of Internal Revenue (BIR) in fact filed on March 10, 2005 a
vs. criminal complaint before the Department of Justice against the
COMMISSIONER ON INTERNAL REVENUE, respondent. officers and accountant of petitioner for violation of the provisions of
"The National Internal Revenue Code of 1977, as amended, 9 covering
the taxable year 1995." The criminal complaint was docketed as I.S.
DECISION No. 2005-203.

CARPIO MORALES, J.: On motion of petitioner in CTA Case No. 7160, a preliminary hearing
on the issue of prescription 10 was conducted during which petitioner’s
On March 17, 2004, the Commissioner on Internal Revenue former bookkeeper attested that a former colleague – certified public
(respondent) assessed Fitness by Design, Inc. (petitioner) for accountant Leonardo Sablan (Sablan) – illegally took custody of
deficiency income taxes for the tax year 1995 in the total amount of petitioner’s accounting records, invoices, and official receipts and
₱10,647,529.69.1 Petitioner protested the assessment on the ground turned them over to the BIR.11
that it was issued beyond the three-year prescriptive period under
Section 203 of the Tax Code. 2 Additionally, petitioner claimed that On petitioner’s request, a subpoena ad testificandum was issued to
since it was incorporated only on May 30, 1995, there was no basis to Sablan for the hearing before the CTA scheduled on September 4,
assume that it had already earned income for the tax year 1995.3 2006 but he failed to appear.12

On February 1, 2005, respondent issued a warrant of distraint and/or Petitioner thus requested for the issuance of another
levy against petitioner,4 drawing petitioner to file on March 1, 2005 a subpoena ad testificandum to Sablan for the hearing scheduled on
Petition for Review (with Motion to Suspend Collection of Income Tax, October 23, 2006,13 and of subpoena duces tecum to the chief of the
Value Added Tax, Documentary Stamp Tax and Surcharges and National Investigation Division of the BIR for the production of the
Interests subject of this Petition) 5 before the Court of Tax Appeals Affidavit of the Informer bearing on the assessment in
(CTA) before which it reiterated its defense of prescription. The question.14 Petitioner’s requests were granted.15
petition was docketed as CTA Case No. 7160.
During the scheduled hearing of the case on October 23, 2006, on
In his Answer,6 respondent alleged: respondent’s counsel’s manifestation that he was not furnished a copy
of petitioner’s motion for the issuance of subpoenaes, the CTA ordered
The right of the respondent to assess petitioner for deficiency income petitioner to file a motion for the issuance of subpoenas and to furnish
tax, VAT and Documentary Stamp Tax for the year 1995 has not respondent’s counsel a copy thereof.16 Petitioner complied with the
prescribed pursuant to Section 222(a) of the 1997 Tax CTA order.17
Code. Petitioner’s 1995 Income Tax Return (ITR) filed on April 11,
1996 was false and fraudulent for its deliberate failure to declare its In a related move, petitioner submitted written interrogatories
true sales. Petitioner declared in its 1995 Income Tax Return that it addressed to Sablan and to Henry Sarmiento and Marinella German,
was on its pre-operation stage and has not declared its income. revenue officers of the National Investigation Division of the BIR.18
Investigation by the revenue officers of the respondent, however,
disclosed that it has been operating/doing business and had sales
operations for the year 1995 in the total amount of ₱7,156,336.08 By Resolution19 of January 15, 2007, the CTA denied petitioner’s
which it failed to report in its 1995 ITR. Thus, for the year 1995, Motion for Issuance of Subpoenas and disallowed the submission by
petitioner filed a fraudulent annual income return with intent to evade petitioner of written interrogatories to Sablan, who is not a party to the
tax. Likewise, petitioner failed to file Value-Added Tax (VAT) Return case, and the revenue officers,20 it finding that the testimony,
and reported the amount of P7,156,336.08 as its gross sales for the documents, and admissions sought are not relevant.21 Besides, the
year 1995. Hence, for failure to file a VAT return and for filing a CTA found that to require Sablan to testify would violate Section 2 of
fraudulent income tax return for the year 1995, the Republic Act No. 2338, as implemented by Section 12 of Finance
corresponding taxes may be assessed at any time within ten Department Order No. 46-66, proscribing the revelation of identities of
(10) years after the discovery of such omission or informers of violations of internal revenue laws, except when the
fraud pursuant to Section 222(a) of the 1997 Tax Code. information is proven to be malicious or false.22

The subject deficiency tax assessments have already become final, In any event, the CTA held that there was no need to issue a
executory and demandable for failure of the petitioner to file a protest subpoena duces tecum to obtain the Affidavit of the Informer as the
within the reglementary period provided for by law. The "alleged same formed part of the BIR records of the case, the production of
protest" allegedly filed on June 25, 2004 at the Legal Division, which had been ordered by it.23
Revenue Region No. 8, Makati City is nowhere to be found in the BIR
Records nor reflected in the Record Book of the Legal Division as Petitioner’s Motion for Reconsideration24 of the CTA Resolution of
normally done by our receiving clerk when she receive[s] any January 15, 2007 was denied,25 hence, the present Petition for
document. The respondent, therefore, has legal basis to collect the tax Certiorari26 which imputes grave abuse of discretion to the CTA
liability either by distraint and levy or civil action.7 (Emphasis and
underscoring supplied)
I.

The aforecited Section 222(a)8 of the 1997 Tax Code provides:

x x x in holding that the legality of the mode of acquiring the
documents which are the bases of the above discussed deficiency tax
assessments, the subject matter of the Petition for Review now x x x when it required the "clear and unequivocal proof" of relevance
pending in the Honorable Second Division, is not material and relevant of the documents as a condition precedent for the issuance of
to the issue of prescription. subpoena duces tecum.

II. IX.

x x x in holding that Mr. Leonardo Sablan’s testimony, if allowed, x x x when it quashed the subpoena duces tecum as the Honorable
would violate RA 2338 which prohibits the BIR to reveal the identity of Court had issued an outstanding order to the Respondent to certify
the informer since 1) the purpose of the subpoena is to elicit from him and forward to the CTA all the records of the case because up to the
the whereabouts of the original accounting records, documents and date of this Petition the BIR records have not been submitted yet to
receipts owned by the Petitioner and not to discover if he is the the CTA.27
informer since the identity of the informer is not relevant to the issues
raised; 2) RA 2338 cannot legally justify violation of the Petitioner’s
Grave abuse of discretion implies such capricious and whimsical
property rights by a person, whether he is an informer or not, since
exercise of judgment as equivalent to lack of jurisdiction or, in other
such RA cannot allow such invasion of property rights otherwise RA
words, when the power is exercised in an arbitrary or despotic manner
2338 would run counter to the constitutional mandate that "no person
by reason of passion or personal hostility, and it must be so patent and
shall be deprive[d] of life, liberty or property without due process of
gross as to amount to an evasion of positive duty or a virtual refusal of
law."
duty enjoined or to act at all in contemplation of law.28

III.
The Court finds that the issuance by the CTA of the questioned
resolutions was not tainted by arbitrariness.
x x x in holding that the issuance of subpoena ad testificandum would
constitute a violation of the prohibition to reveal the identity of the
The fact that Sablan was not a party to the case aside, the
informer because compliance with such prohibition has been rendered
testimonies, documents, and admissions sought by petitioner are not
moot and academic by the voluntary admissions of the Respondent
indeed relevant to the issue before the CTA. For in requesting the
himself.
issuance of the subpoenas and the submission of written
interrogatories, petitioner sought to establish that its accounting
IV. records and related documents, invoices, and receipts which were the
bases of the assessment against it were illegally obtained. The only
issues, however, which surfaced during the preliminary hearing before
x x x in holding that the constitutional right of an accused to examine
the CTA, were whether respondent’s issuance of assessment against
the witness against him does not exist in this case. The Petitioner’s
petitioner had prescribed and whether petitioner’s tax return was false
liability for tax deficiency assessment which is the main issue in the
or fraudulent.
Petition for Review is currently pending at the Honorable Second
Division. Therefore, it is a prejudicial question raised in the criminal
case filed by the herein Respondent against the officers of the Besides, as the CTA held, the subpoenas and answers to the written
Petitioner with the Department of Justice. interrogatories would violate Section 2 of Republic Act No. 2338 as
implemented by Section 12 of Finance Department Order No. 46-66.
V.
Petitioner claims, however, that it only intended to elicit information on
the whereabouts of the documents it needs in order to refute the
x x x in dismissing the request for subpoena ad testificandum because
assessment, and not to disclose the identity of the
the Opposition thereto submitted by the Respondent was not promptly
informer.29 Petitioner’s position does not persuade. The interrogatories
filed as provided by the Rules of Court thus, it is respectfully submitted
addressed to Sablan and the revenue officers show that they were
that, Respondent has waived his right to object thereto.
intended to confirm petitioner’s belief that Sablan was the informer.
Thus the questions for Sablan read:
VI.
1. Under what circumstances do you know petitioner corporation?
x x x when the Honorable Court of Tax Appeals ruled that the purpose Please state in what capacity, the date or period you obtained said
of the Petitioner in requesting for written interrogatories is to annoy, knowledge.
embarrass, or oppress the witness because such ruling has no factual
basis since Respondent never alleged nor proved that the witnesses to
2. Do you know a Ms. Elnora Carpio, who from 1995 to the early part
whom the interrogatories are addressed will be annoyed, embarrassed
of 1996 was the book keeper of petitioner? Please state how you came
or oppressed; besides the only obvious purpose of the Petitioner is to
to know of Ms. Carpio.
know the whereabouts of accounting records and documents which
are in the possession of the witnesses to whom the interrogatories are
directed and to ultimately get possession thereof. Granting without 3. At the time that Ms. Carpio was book keeper of petitioner did she
admitting that there is annoyance, embarrassment or oppression; the consult you or show any accounting documents and records of
same is not unreasonable. petitioner?

VII. 4. What documents, if any, did you obtain from petitioner?

x x x when it failed to rule that the BIR officers and employees are not 5. Were these documents that you obtained from petitioner submitted
covered by the prohibition under RA 2338 and do not have the to the Bureau of Internal Revenue (BIR)? Please describe said
authority to withhold from the taxpayer documents owned by such documents and under what circumstances the same were submitted.
taxpayer.
6. Was the consent of the petitioner, its officers or employees obtained
VIII. when the documents that you obtained were submitted to the
BIR? Please state when and from whom the consent was obtained.
7. Did you execute an affidavit as an informer  in the assessment which Petitioner’s invocation of the rights of an accused in a criminal
was issued by the BIR against petitioner for the tax year 1995 and prosecution to cross examine the witness against him and to have
other years?30 (Underscoring supplied) compulsory process issued to secure the attendance of witnesses and
the production of other evidence in his behalf does not lie. CTA Case
No. 7160 is not a criminal prosecution, and even granting that it is
while the questions for the revenue officers read:
related to I.S. No. 2005-203, the respondents in the latter proceeding
are the officers and accountant of petitioner-corporation, not
1. Where did you obtain the documents, particularly the invoices and petitioner. From the complaint and supporting affidavits in I.S. No.
official receipts, which [were] used by your office as evidence and as 2005-203, Sablan does not even appear to be a witness against the
basis of the assessment for deficiency income tax and value added tax respondents therein.34
for the tax year 1995 issued against petitioner?
AT ALL EVENTS, issuance of subpoena duces tecum for the production
2. Do you know Mr. Leonardo Sablan? Please state under what of the documents requested by the petitioner – which documents
circumstance you came to know Mr. Sablan?31 (Underscoring supplied) petitioner claims to be crucial to its defense35 – is unnecessary in view
of the CTA order for respondent to certify and forward to it all the
Petitioner impugns the manner in which the documents in question records of the case.36 If the order has not been complied with, the CTA
reached the BIR, Sablan having allegedly submitted them to the BIR can enforce it by citing respondent for indirect contempt.37
without its (petitioner’s) consent. Petitioner’s lack of consent does not,
however, imply that the BIR obtained them illegally or that the WHEREFORE, in light of the foregoing disquisition, the petition
information received is false or malicious. Nor does the lack of consent is DISMISSED.
preclude the BIR from assessing deficiency taxes on petitioner based
on the documents. Thus Section 5 of the Tax Code provides:
Costs against petitioner.

In ascertaining the correctness of any return, or in making a return

SO ORDERED.
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: April 5, 2017
G.R. No. 222743
MEDICARD PHILIPPINES, INC., Petitioner,
(A) To examine any book, paper, record or other data which may be
vs.
relevant or material to such query;
COMMISSIONER OF INTERNAL REVENUE, Respondent.

(B) To obtain on a regular basis from any person other than the

DECISION
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, REYES,, J.:
including the Bangko Sentral ng Pilipinas and government-owned and
–controlled corporations, any information such as, but not limited to,
This appeal by Petition for Review 1 seeks to reverse and set aside the
costs and volume of production, receipts or sales and gross incomes of
Decision2 dated September 2, 2015 and Resolution 3 dated January 29,
taxpayers, and the names, addresses, and financial statements of
2016 of the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224,
corporations, mutual fund companies, insurance companies, regional
affirming with modification the Decision4 dated June 5, 2014 and the
operating headquarters of multinational companies, joint accounts,
Resolution5 dated September 15, 2014.in CTA Case No. 7948 of the
associations, joint ventures or consortia and registered partnerships
CTA Third Division, ordering petitioner Medicard Philippines, Inc.
and their members;
(MEDICARD), to pay respondent Commissioner of Internal Revenue
(CIR) the deficiency
(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
Value-Added Tax. (VAT) assessment in the aggregate amount of
possession, custody, or care of the books of accounts and
₱220,234,609.48, plus 20% interest per annum  starting January 25,
other accounting records containing entries relating to the
2007, until fully paid, pursuant to Section 249(c) 6 of the National
business of the person liable for tax, or any other person , to
Internal Revenue Code (NIRC) of 1997.
appear before the Commissioner or his duly authorized representatives
at a time and place specified in the summons and to produce such
books, papers, records, or other data, and to give testimony; The Facts

(D) To take such testimony of the person concerned, under oath, as MEDICARD is a Health Maintenance Organization (HMO) that provides
may be relevant or material to such inquiry; and prepaid health and medical insurance coverage to its clients.
Individuals enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and
(E) To cause revenue officers and employees to make a canvass from
curative medical services provided by duly licensed physicians,
time to time of any revenue district or region and inquire after and
specialists and other professional technical staff participating in the
concerning all persons therein who may be liable to pay any internal
group practice health delivery system at a hospital or clinic owned,
revenue tax, and all persons owning or having the care, management
operated or accredited by it.7
or possession of any object with respect to which a tax is imposed.

MEDICARD filed its First, Second, and Third Quarterly VAT Returns
x x x x (Emphasis and underscoring supplied)
through Electronic Filing and Payment System (EFPS) on April 20,
2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth
The law thus allows the BIR access to all relevant or material records Quarterly VAT Return on January 25, 2007.8
and data in the person of the taxpayer,32 and the BIR can accept
documents which cannot be admitted in a judicial proceeding where
Upon finding some discrepancies between MEDICARD's Income Tax
the Rules of Court are strictly observed.33 To require the consent of the
Returns (ITR) and VAT Returns, the CIR informed MEDICARD and
taxpayer would defeat the intent of the law to help the BIR assess and
issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated
collect the correct amount of taxes.
September 20, 2007. Subsequently, the CIR also issued a Preliminary Section 248(A)(3) of the NIRC of 1997, as amended, computed as
Assessment Notice (PAN) against MEDICARD for deficiency VAT. A follows:
Memorandum dated December 10, 2007 was likewise issued
recommending the issuance of a Formal Assessment Notice (FAN)
In addition, [MEDICARD] is ordered to pay:
against MEDICARD.9 On. January 4, 2008, MEDICARD received CIR's
FAN dated December' 10, 2007 for alleged deficiency VAT for taxable
year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of a. Deficiency interest at the rate of twenty percent
penalties. 11 (20%) per annum on the basis deficiency VAT of Pl
78,538,566.68 computed from January 25, 2007 until full
payment thereof pursuant to Section 249(B) of the NIRC of
According to the CIR, the taxable base of HMOs for VAT purposes is its
1997, as amended; and
gross receipts without any deduction under Section 4.108.3(k) of
Revenue Regulation (RR) No. 16-2005. Citing Commissioner of
Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR b. Delinquency interest at the rate of twenty percent
argued that since MEDICARD does not actually provide medical and/or (20%) per annum on the total amount of ₱223,173,208.35
hospital services, but merely arranges for the same, its services are representing basic deficiency VAT of ₱l78,538,566.68 and·
not VAT exempt.13 25% surcharge of ₱44,634,64 l .67 and on the 20%
deficiency interest which have accrued as afore-stated in (a),
computed from June 19, 2009 until full payment thereof
MEDICARD argued that: (1) the services it render is not limited merely
pursuant to Section 249(C) of the NIRC of 1997.
to arranging for the provision of medical and/or hospital services by
hospitals and/or clinics but include actual and direct rendition of
medical and laboratory services; in fact, its 2006 audited balance sheet SO ORDERED.19
shows that it owns x-ray and laboratory facilities which it used in
providing medical and laboratory services to its members; (2) out of The CTA Division held that: (1) the determination of deficiency VAT is
the ₱l .9 Billion membership fees, ₱319 Million was received from not limited to the issuance of Letter of Authority (LOA) alone as the
clients that are registered with the Philippine Export Zone Authority CIR is granted vast powers to perform examination and assessment
(PEZA) and/or Bureau of Investments; (3) the processing fees functions; (2) in lieu of an LOA, an LN was issued to MEDICARD
amounting to ₱l 1.5 Million should be excluded from gross receipts informing it· of the discrepancies between its ITRs and VAT Returns
because P5.6 Million of which represent advances for professional fees and this procedure is authorized under Revenue Memorandum Order
due from clients which were paid by MEDICARD while the remainder (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from
was already previously subjected to VAT; (4) the professional fees in questioning the validity of the assessment on the ground of lack of
the amount of Pl 1 Million should also be excluded because it LOA since the assessment issued against MEDICARD contained the
represents the amount of medical services actually and directly requisite legal and factual bases that put MEDICARD on notice of the
rendered by MEDICARD and/or its subsidiary company; and (5) even deficiencies and it in fact availed of the remedies provided by law
assuming that it is liable to pay for the VAT, the 12% VAT rate should without questioning the nullity of the assessment; (4) the amounts
not be applied on the entire amount but only for the period when the that MEDICARD earmarked , and eventually paid to doctors, hospitals
12% VAT rate was already in effect, i.e.,  on February 1, 2006. It and clinics cannot be excluded from · the computation of its gross
should not also be held liable for surcharge and deficiency interest receipts under the provisions of RR No. 4-2007 because the act of
because it did not pass on the VAT to its members.14 earmarking or allocation is by itself an act of ownership and
management over the funds by MEDICARD which is beyond the
On February 14, 2008, the CIR issued a Tax Verification Notice contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its
authorizing Revenue Officer Romualdo Plocios to verify the supporting clinics and laboratory facilities cannot be excluded from its gross
documents of MEDICARD's Protest. MEDICARD also submitted receipts because the operation of these clinics and laboratory is merely
additional supporting documentary evidence in aid of its Protest thru a an incident to MEDICARD's main line of business as HMO and there is
letter dated March 18, 2008.15 no evidence that MEDICARD segregated the amounts pertaining to this
at the time it received the premium from its members; and (6)
MEDICARD was not able to substantiate the amount pertaining to its
On June 19, 2009, MEDICARD received CIR's Final Decision on
January 2006 income and therefore has no basis to impose a 10% VAT
Disputed Assessment dated May 15, 2009, denying MEDICARD's
rate.20
protest, to wit:

Undaunted, MEDICARD filed a Motion for Reconsideration but it was

IN VIEW HEREOF, we deny your letter protest and hereby
denied. Hence, MEDICARD elevated the matter to the CTA en banc.
reiterate in toto assessment of deficiency [VAT] in total sum of
₱196,614,476.99. It is requested that you pay said deficiency taxes
immediately. Should payment be made later, adjustment has to be In a Decision21 dated September 2, 2015, the CTA en banc partially
made to impose interest until date of payment. This is olir final granted the petition only insofar as the 10% VAT rate for January
decision. If you disagree, you may take an appeal to the [CTA] within 2006 is concerned but sustained the findings of the CTA Division in all
the period provided by law, otherwise, said assessment shall become other matters, thus:
final, executory and demandable. 16
WHEREFORE, in view thereof, the instant Petition for Review is
On July 20, 2009, MEDICARD proceeded to file a petition for review hereby PARTIALLY GRANTED. Accordingly, the Decision date June
before the CT A, reiterating its position before the tax authorities. 17 5, 2014 is hereby MODIFIED, as follows:

On June 5, 2014, the CTA Division rendered a Decision18 affirming with "WHEREFORE, premises considered, the deficiency VAT assessment
modifications the CIR's deficiency VAT assessment covering taxable issued by [CIR] against
year 2006, viz.:
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH
WHEREFORE, premises considered, the deficiency VAT assessment MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR]
issued by [CIR] against [MEDICARD] covering taxable year 2006 ·is the amount of ₱220,234,609.48, inclusive of the 25% surcharge
hereby AFFIRMED WITH MODIFICATIONS. Accordingly, imposed under Section 248(A)(3) of the NIRC of 1997, as amended,
[MEDICARD] is ordered to pay [CIR] the amount of P223,l 73,208.35, computed as follows:
inclusive of the twenty-five percent (25%) surcharge imposed under -
In addition, [MEDICARD] is ordered to pay: are simply methods of examining the taxpayer in order to arrive at .the
correct amount of taxes. Hence, unless undertaken by the CIR himself
or his duly authorized representatives, other tax agents may not validly
(a) Deficiency interest at the rate of 20% per annum on the
conduct any of these kinds of examinations without prior authority.
basic deficiency VAT of ₱l 76,187,687.58 computed from
January 25, 2007 until full payment thereof pursuant to
Section 249(B) of the NIRC of 1997, as amended; and With the advances in information and communication technology, the
Bureau of Internal Revenue (BIR) promulgated RMO No. 30-2003 to
lay down the policies and guidelines once its then incipient centralized
(b) Delinquency interest at the rate of 20% per annum on
Data Warehouse (DW) becomes fully operational in conjunction with
the total amount of ₱220,234,609.48 (representing basic
its Reconciliation of Listing for Enforcement System (RELIEF
deficiency VAT of ₱l76,187,687.58 and 25% surcharge of
System).26 This system can detect tax leaks by matching the data
₱44,046,921.90) and on the deficiency interest which have
available under the BIR's Integrated Tax System (ITS) with data
accrued as afore-stated in (a), computed from June 19,
gathered from third-party sources. Through the consolidation and
2009 until full payment thereof pursuant to Section 249(C)
cross-referencing of third-party information, discrepancy reports on
of the NIRC of 1997, as amended."
sales and purchases can be generated to uncover under declared
income and over claimed purchases of Goods and services.
SO ORDERED.22
Under this RMO, several offices of the BIR are tasked with specific
Disagreeing with the CTA en bane's decision, MEDICARD filed a motion functions relative to the RELIEF System, particularly with regard to
for reconsideration but it was denied.23 Hence, MEDICARD now seeks LNs. Thus, the Systems Operations Division (SOD) under the
recourse to this Court via a petition for review on certiorari. Information Systems Group (ISG) is responsible for: (1) coming up
with the List of Taxpayers with discrepancies within the threshold
The Issues amount set by management for the issuance of LN and for the system-
generated LNs; and (2) sending the same to the taxpayer and to the
Audit Information, Tax Exemption and Incentives Division (AITEID).
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; YES. and After receiving the LNs, the AITEID under the Assessment Service
(AS), in coordination with the concerned offices under the ISG, shall be
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED responsible for transmitting the LNs to the investigating offices
AND EVENTUALLY PAID TO THE MEDICAL SERVICE [Revenue District Office (RDO)/Large Taxpayers District Office
PROVIDERS SHOULD STILL FORM PART OF ITS GROSS (LTDO)/Large Taxpayers Audit and Investigation Division (LTAID)]. At
RECEIPTS FOR VAT PURPOSES.24 the level of these investigating offices, the appropriate action on the
LN s issued to taxpayers with RELIEF data discrepancy would be
determined.
Ruling of the Court

RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid
The petition is meritorious. down the "no-contact-audit approach"  in the CIR's exercise of its
·power to authorize any examination of taxpayer arid the assessment
The absence of an LOA violated of the correct amount of tax. The no-contact-audit approach  includes
MEDICARD's right to due process the process of computerized matching of sales and purchases data
contained in the Schedules of Sales and Domestic Purchases and
Schedule of Importation submitted by VAT taxpayers under the RELIEF
An LOA is the authority given to the appropriate revenue officer System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99
assigned to perform assessment functions. It empowers or enables and 8-2002. This may also include the matching of data from other
said revenue officer to examine the books of account and other information or returns filed by the taxpayers with the BIR such as
accounting records of a taxpayer for the purpose of collecting the Alphalist of Payees subject to Final or Creditable Withholding Taxes.
correct amount of tax. 25 An LOA is premised on the fact that the
examination of a taxpayer who has already filed his tax returns is a
power that statutorily belongs only to the CIR himself or his duly Under this policy, even without conducting a detailed examination of
authorized representatives. Section 6 of the NIRC clearly provides as taxpayer's books and records, if the computerized/manual matching of
follows: sales and purchases/expenses appears to reveal discrepancies, the
same shall be communicated to the concerned taxpayer through the
issuance of LN. The LN shall serve as a discrepancy notice to taxpayer
SEC. 6. Power of the Commissioner to Make Assessments and similar to a Notice for Informal Conference to the concerned taxpayer.
Prescribe Additional Requirements for Tax Administration and Thus, under the RELIEF System, a revenue officer may begin an
Enforcement. – examination of the taxpayer even prior to the issuance of an LN or
even in the absence of an LOA with the aid of a computerized/manual
(A) Examination of Return and Determination of Tax Due.- matching of taxpayers': documents/records. Accordingly, under the
After a return has been filed as required under the provisions of this RELIEF System, the presumption that the tax returns are in
Code, the Commissioner or his duly authorized accordance with law and are presumed correct since these are filed
representative may authorize the examinationof any under the penalty of perjury27 are easily rebutted and the taxpayer
taxpayer and the assessment of the correct amount of tax: Provided, becomes instantly burdened to explain a purported discrepancy.
however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer. Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on
the statutory requirement of an LOA before any investigation or
x x x x (Emphasis and underlining ours) examination of the taxpayer may be conducted. As provided in the
RMO No. 42-2003, the LN is merely similar to a Notice for Informal
Conference. However, for a Notice of Informal Conference, which
Based on the afore-quoted provision, it is clear that unless authorized
generally precedes the issuance of an assessment notice to be valid,
by the CIR himself or by his duly authorized representative, through an
the same presupposes that the revenue officer who issued the same is
LOA, an examination of the taxpayer cannot ordinarily be undertaken.
properly authorized in the first place.
The circumstances contemplated under Section 6 where the taxpayer
may be assessed through best-evidence obtainable, inventory-taking,
or surveillance among others has nothing to do with the LOA. These
With this apparent lacuna in the RMOs, in November 2005, RMO No. 11. If the LN discrepancies remained unresolved within One Hundred
30-2003, as supplemented by RMO No. 42-2003, was amended by and Twenty (120) days from issuance thereof, prepare a summary list
RMO No. 32-2005 to fine tune existing procedures in handing of said LN s for conversion to LAs x x x.
assessments against taxpayers'· issued LNs by reconciling various
revenue issuances which conflict with the NIRC. Among the objectives
xxxx
in the issuance of RMO No. 32-2005 is to prescribe procedure in the
resolution of LN discrepancies, conversion of LNs to LOAs and
assessment and collection of deficiency taxes. 16. Effect the service of the above LAs to the concerned
taxpayers.28
IV. POLICIES AND GUIDELINES
In this case, there is no dispute that no LOA was issued prior to the
issuance of a PAN and FAN against MED ICARD. Therefore no LOA was
xxxx
also served on MEDICARD. The LN that was issued earlier was also not
converted into an LOA contrary to the above quoted provision.
8. In the event a taxpayer who has been issued an LN refutes Surprisingly, the CIR did not even dispute the applicability of the above
the discrepancy shown in the LN, the concerned taxpayer will be provision of RMO 32-2005 in the present case which is clear and
given an opportunity to reconcile its records with those of the BIR unequivocal on the necessity of an LOA for the· assessment
within proceeding to be valid. Hence, the CTA's disregard of MEDICARD's
right to due process warrant the reversal of the assailed decision and
resolution.
One Hundred and Twenty (120) days from the date of the issuance of
the LN. However, the subject taxpayer shall no longer be entitled to
the abatement of interest and penalties after the lapse of the sixty In the case of Commissioner of Internal Revenue v. Sony Philippines,
(60)-day period from the LN issuance. Inc.  ,29 the Court said that:

9. In case the above discrepancies remained unresolved at the Clearly, there must be a grant of authority before any revenue officer
end of the One Hundred and Twenty (120)-day period, the can conduct an examination or assessment. Equally important is that
revenue officer (RO) assigned to handle the LN shall the revenue officer so authorized must not go beyond the authority
recommend the issuance of [LOA) to replace the LN. The head given. In the absence of such an authority, the assessment or
of the concerned investigating office shall submit a summary list of LNs examination is a nullity.30 (Emphasis and underlining ours)
for conversion to LAs (using the herein prescribed format in Annex "E"
hereof) to the OACIR-LTS I ORD for the preparation of the
The Court cannot convert the LN into the LOA required under the law
corresponding LAs with the notation "This LA cancels LN_________
even if the same was issued by the CIR himself. Under RR No. 12-
No. "
2002, LN is issued to a person found to have underreported
sales/receipts per data generated under the RELIEF system. Upon
xxxx receipt of the LN, a taxpayer may avail of the BIR's Voluntary
Assessment and Abatement Program. If a taxpayer fails or refuses to
avail of the said program, the BIR may avail of administrative and
V. PROCEDURES
criminal .remedies, particularly closure, criminal action, or audit and
investigation. Since the law specifically requires an LOA and RMO No.
xxxx 32-2005 requires the conversion of the previously issued LN to an LOA,
the absence thereof cannot be simply swept under the rug, as the CIR
B. At the Regional Office/Large Taxpayers Service would have it. In fact Revenue Memorandum Circular No. 40-2003
considers an LN as a notice of audit or investigation only for the
purpose of disqualifying the taxpayer from amending his returns.
xxxx
The following differences between an LOA and LN are crucial. First, an
7. Evaluate the Summary List of LNs for Conversion to LAs submitted LOA addressed to a revenue officer is specifically required under the
by the RDO x x x prior to approval. NIRC before an examination of a taxpayer may be had while an LN is
not found in the NIRC and is only for the purpose of notifying the
8. Upon approval of the above list, prepare/accomplish and sign the taxpayer that a discrepancy is found based on the BIR's RELIEF
corresponding LAs. System. Second, an LOA is valid only for 30 days from date of issue
while an LN has no such limitation. Third, an LOA gives the revenue
officer only a period of 10days from receipt of LOA to conduct his
xxxx examination of the taxpayer whereas an LN does not contain such a
limitation.31 Simply put, LN is entirely different and serves a different
Decision 11 G.R. No. 222743 purpose than an LOA. Due process demands, as recognized under
RMO No. 32-2005, that after an LN has serve its purpose, the revenue
officer should have properly secured an LOA before proceeding with
xxxx the further examination and assessment of the petitioner.
Unfortunarely, this was not done in this case.
10. Transmit the approved/signed LAs, together with the duly
accomplished/approved Summary List of LNs for conversion to LAs, to Contrary to the ruling of the CTA en banc, an LOA cannot be
the concerned investigating offices for the encoding of the required dispensed with just because none of the financial books or records
information x x x and for service to the concerned taxpayers. being physically kept by MEDICARD was examined. To begin with,
Section 6 of the NIRC requires an authority from the CIR or from his
xxxx duly authorized representatives before an examination "of a taxpayer"
may be made. The requirement of authorization is therefore not
dependent on whether the taxpayer may be required to physically
C. At the RDO x x x
open his books and financial records but only on whether a taxpayer is
being subject to examination.
xxxx
The BIR's RELIEF System has admittedly made the BIR's assessment Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated
and collection efforts much easier and faster. The ease by which the for VAT purposes as a dealer in securities whose gross receipts is the
BIR's revenue generating objectives is achieved is no excuse however amount actually received as contract price without allowing any
for its non-compliance with the statutory requirement under Section 6 deduction from the gross receipts.33 This restrictive tenor changed
and with its own administrative issuance. In fact, apart from being a under RR No. 16-2005. Under this RR, an HMO's gross receipts and
statutory requirement, an LOA is equally needed even under the BIR's gross receipts in general were defined, thus:
RELIEF System because the rationale of requirement is the same
whether or not the CIR conducts a physical examination of the
Section 4.108-3. xxx
taxpayer's records: to prevent undue harassment of a taxpayer and
level the playing field between the government' s vast resources for
tax assessment, collection and enforcement, on one hand, and the xxxx
solitary taxpayer's dual need to prosecute its business while at the
same time responding to the BIR exercise of its statutory powers. The HMO's gross receipts shall be the total amount of money or its
balance between these is achieved by ensuring that any examination equivalent representing the service fee actually or constructively
of the taxpayer by the BIR' s revenue officers is properly authorized in received during the taxable period for the services performed or to be
the first place by those to whom the discretion to exercise the power performed for another person, excluding the value-added tax. The
of examination is given by the statute. compensation for their services representing their service fee,
is presumed to be the total amount received as enrollment fee
That the BIR officials herein were not shown to have acted from their members plus other charges received.
unreasonably is beside the point because the issue of their lack of
authority was only brought up during the trial of the case. What is Section 4.108-4. x x x. "Gross receipts"  refers to the total amount of
crucial is whether the proceedings that led to the issuance of VAT money or its equivalent representing the contract price, compensation,
deficiency assessment against MEDICARD had the prior approval and service fee, rental or royalty, including the amount charged for
authorization from the CIR or her duly authorized representatives. Not materials supplied with the services and deposits applied
having authority to examine MEDICARD in the first place, the as payments for services rendered, and advance payments
assessment issued by the CIR is inescapably void. actually or constructively received during the taxable period for the
services performed or to be performed for another person,
At any rate, even if it is assumed that the absence of an LOA is not excluding the VAT. 34
fatal, the Court still partially finds merit in MEDICARD's substantive
arguments. In 2007, the BIR issued RR No. 4-2007 amending portions of RR No.
16-2005, including the definition of gross receipts in general.35
The amounts earmarked and
eventually paid by MEDICARD to According to the CTA en banc, the entire amount of membership fees
the medical service providers do not should form part of MEDICARD's gross receipts because the exclusions
form part of gross receipts.for VAT to the gross receipts under RR No. 4-2007 does not apply to
purposes MEDICARD. What applies to MEDICARD is the definition of gross
receipts of an HMO under RR No. 16-2005 and not the modified
MEDICARD argues that the CTA en banc seriously erred in affirming definition of gross receipts in general under the RR No. 4-2007.
the ruling of the CT A Division that the gross receipts of an HMO for
VAT purposes shall be the total amount of money or its equivalent The CTA en banc  overlooked that the definition of gross receipts
actually received from members undiminished by any amount paid or under. RR No. 16-2005 merely presumed that the amount received by
payable to the owners/operators of hospitals, clinics and medical and an HMO as membership fee is the HMO's compensation for their
dental practitioners. MEDICARD explains that its business as an HMO services. As a mere presumption, an HMO is, thus, allowed to establish
involves two different although interrelated contracts. One is between that a portion of the amount it received as membership fee does NOT
a corporate client and MEDICARD, with the corporate client's actually compensate it but some other person, which in this case are
employees being considered as MEDICARD members; and the other is the medical service providers themselves. It is a well-settled principle
between the health care institutions/healthcare professionals and MED of legal hermeneutics that words of a statute will be interpreted in
ICARD. their natural, plain and ordinary acceptation and signification, unless it
is evident that the legislature intended a technical or special legal
Under the first, MEDICARD undertakes to make arrangements with meaning to those words. The Court cannot read the word "presumed"
healthcare institutions/healthcare professionals for the coverage of in any other way.
MEDICARD members under specific health related services for a
specified period of time in exchange for payment of a more or less It is notable in this regard that the term gross receipts as elsewhere
fixed membership fee. Under its contract with its corporate clients, mentioned as the tax base under the NIRC does not contain any
MEDICARD expressly provides that 20% of the membership fees per specific definition.36 Therefore, absent a statutory definition, this Court
individual, regardless of the amount involved, already includes the VAT has construed the term gross receipts in its plain and ordinary
of 10%/20% excluding the remaining 80o/o because MED ICARD meaning, that is, gross receipts is understood as comprising the entire
would earmark this latter portion for medical utilization of its members. receipts without any deduction.37 Congress, under Section 108, could
Lastly, MEDICARD also assails CIR's inclusion in its gross receipts of its have simply left the term gross receipts similarly undefined and its
earnings from medical services which it actually and directly rendered interpretation subjected to ordinary acceptation,. Instead of doing so,
to its members. Congress limited the scope of the term gross receipts for VAT purposes
only to the amount that the taxpayer received for the services it
Since an HMO like MEDICARD is primarily engaged m arranging for performed or to the amount it received as advance payment for the
coverage or designated managed care services that are needed by services it will render in the future for another person.
plan holders/members for fixed prepaid membership fees and for a
specified period of time, then MEDICARD is principally engaged in the In the proceedings ·below, the nature of MEDICARD's business and
sale of services. Its VAT base and corresponding liability is, thus, the extent of the services it rendered are not seriously disputed. As an
determined under Section 108(A)32 of the Tax Code, as amended by HMO, MEDICARD primarily acts as an intermediary between the
Republic Act No. 9337. purchaser of healthcare services (its members) and the healthcare
providers (the doctors, hospitals and clinics) for a fee. By enrolling
membership with MED ICARD, its members will be able to avail of the
pre-arranged medical services from its accredited healthcare providers rules that they cannot because the language of the NIRC is pretty
without the necessary protocol of posting cash bonds or deposits prior straightforward and clear. As this Court previously ruled:
to being attended to or admitted to hospitals or clinics, especially
during emergencies, at any given time. Apart from this, MEDICARD
What is controlling in this case is the well-settled doctrine of strict
may also directly provide medical, hospital and laboratory services,
interpretation in the imposition of taxes, not the similar doctrine as
which depends upon its member's choice.
applied to tax exemptions. The rule in the interpretation of tax laws is
that a statute will not be construed as imposing a tax unless it does so
Thus, in the course of its business as such, MED ICARD members can clearly, expressly, and unambiguously. A tax cannot be imposed
either avail of medical services from MEDICARD's accredited healthcare without clear and express words for that purpose.
providers or directly from MEDICARD. In the former, MEDICARD Accordingly, the general rule of requiring adherence to the
members obviously knew that beyond the agreement to pre-arrange letter in construing statutes applies with peculiar strictness to
the healthcare needs of its ·members, MEDICARD would not actually tax laws and the provisions of a taxing act are not to be
be providing the actual healthcare service. Thus, based on industry extended by implication. In answering the question of who is
practice, MEDICARD informs its would-be member beforehand that subject to tax statutes, it is basic that in case of doubt, such statutes
80% of the amount would be earmarked for medical utilization and are to be construed most strongly against the government and in favor
only the remaining 20% comprises its service fee. In the latter case, of the subjects or citizens because burdens are not to be imposed nor
MEDICARD's sale of its services is exempt from VAT under Section presumed to be imposed beyond what statutes expressly and clearly
109(G). import. As burdens, taxes should not be unduly exacted nor assumed
beyond the plain meaning of the tax laws. 41 (Citation omitted and
emphasis and underlining ours)
The CTA's ruling and CIR's Comment have not pointed to any portion
of Section 108 of the NIRC that would extend the definition of gross
receipts even to amounts that do not only pertain to the services to be For this Court to subject the entire amount of MEDICARD's gross
performed: by another person, other than the taxpayer, but even to receipts without exclusion, the authority should have been reasonably
amounts that were indisputably utilized not by MED ICARD itself but by founded from the language of the statute. That language is wanting in
the medical service providers. this case. In the scheme of judicial tax administration, the need for
certainty and predictability in the implementation of tax laws is crucial.
Our tax authorities fill in the details that Congress may not have the
It is a cardinal rule in statutory construction that no word, clause,
opportunity or competence to provide. The regulations these
sentence, provision or part of a statute shall be considered surplusage
authorities issue are relied upon by taxpayers, who are certain that
or superfluous, meaningless, void and insignificant. To this end, a
these will be followed by the courts. Courts, however, will not uphold
construction which renders every word operative is preferred over that
these authorities' interpretations when dearly absurd, erroneous or
which makes some words idle and nugatory. This principle is
improper.42 The CIR's interpretation of gross receipts in the present
expressed in the maxim Ut magisvaleat quam pereat, that is, we
case is patently erroneous for lack of both textual and non-textual
choose the interpretation which gives effect to the whole of the statute
support.
– it’s every word.

As to the CIR's argument that the act of earmarking or allocation is by

In Philippine Health Care Providers, Inc. v. Commissioner of Internal
itself an act of ownership and management over the funds, the Court
Revenue,38the Court adopted the principal object and purpose object in
does not agree.1âwphi1 On the contrary, it is MEDICARD's act of
determining whether the MEDICARD therein is engaged in the
earmarking or allocating 80% of the amount it received as
business of insurance and therefore liable for documentary stamp tax.
membership fee at the time of payment that weakens the ownership
The Court held therein that an HMO engaged in preventive, diagnostic
imputed to it. By earmarking or allocating 80% of the amount,
and curative medical services is not engaged in the business of an
MEDICARD unequivocally recognizes that its possession of the funds is
insurance, thus:
not in the concept of owner but as a mere administrator of the same.
For this reason, at most, MEDICARD's right in relation to these
To summarize, the distinctive features of the cooperative are the amounts is a mere inchoate owner which would ripen into actual
rendering of service, its extension, the bringing of physician and ownership if, and only if, there is underutilization of the membership
patient together, the preventive features, the regularization of fees at the end of the fiscal year. Prior to that, MEDI CARD is bound to
service as well as payment, the substantial reduction in cost pay from the amounts it had allocated as an administrator once its
by quantity purchasing in short, getting the medical job done members avail of the medical services of MEDICARD's healthcare
and paid for; not, except incidentally to these features, the providers.
indemnification for cost after .the services is rendered. Except
the last, these are not distinctive or generally characteristic of
Before the Court, the parties were one in submitting the legal issue of
the insurance arrangement. There is, therefore, a substantial
whether the amounts MEDICARD earmarked, corresponding to 80% of
difference between contracting in this way for the rendering of service,
its enrollment fees, and paid to the medical service providers should
even on the contingency that it be needed, and contracting merely to
form part of its gross receipt for VAT purposes, after having paid the
stand its cost when or after it is rendered.39 (Emphasis ours)
VAT on the amount comprising the 20%. It is significant to note in this
regard that MEDICARD established that upon receipt of payment of
In sum, the Court said that the main difference between an HMO arid membership fee it actually issued two official receipts, one pertaining
an insurance company is that HMOs undertake to provide or arrange to the VAT able portion, representing compensation for its services,
for the provision of medical services through participating physicians and the other represents the non-vatable portion pertaining to the
while insurance companies simply undertake to indemnify the insured amount earmarked for medical utilization.: Therefore, the absence of
for medical expenses incurred up to a pre-agreed limit. In the present an actual and physical segregation of the amounts pertaining to two
case, the VAT is a tax on the value added by the performance of the different kinds · of fees cannot arbitrarily disqualify MEDICARD from
service by the taxpayer. It is, thus, this service and the value charged rebutting the presumption under the law and from proving that indeed
thereof by the taxpayer that is taxable under the NIRC. services were rendered by its healthcare providers for which it paid the
amount it sought to be excluded from its gross receipts.
To be sure, there are pros and cons in subjecting the entire amount of
membership fees to VAT.40 But the Court's task however is not to With the foregoing discussions on the nullity of the assessment on due
weigh these policy considerations but to determine if these process grounds and violation of the NIRC, on one hand, and the utter
considerations in favor of taxation can even be implied from the lack of legal basis of the CIR's position on the computation of
statute where the CIR purports to derive her authority. This Court MEDICARD's gross receipts, the Court finds it unnecessary, nay
useless, to discuss the rest of the parties' arguments and counter-
arguments.

In fine, the foregoing discussion suffices for the reversal of the

assailed decision and resolution of the CTA en banc  grounded as it is
on due process violation. The Court likewise rules that for purposes of
determining the VAT liability of an HMO, the amounts earmarked and
actually spent for medical utilization of its members should not be
included in the computation of its gross receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the

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

SO ORDERED.