C.

Assessment Process and Reglementary Periods

MEDICARD PHILIPPINES v. CIR

G.R. No. 222743, April 5, 2017
J. Reyes (3rd Division)

DOCTRINES OF THE CASE: LN cannot substitute for LOA requirements; the amounts
earmarked and eventually paid by MEDICARD to the medical service providers do not form part
of gross receipts for VAT purposes

FACTS: MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health
and medical insurance coverage to its clients. Individuals enrolled in its health care programs
pay an annual membership fee and are entitled to various preventive, diagnostic and curative
medical services provided by duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a hospital or clinic
owned, operated or accredited by it.

MEDICARD filed its First, Second, and Third Quarterly VAT Returns.

Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT
Returns, the CIR informed MEDICARD and issued a Letter Notice (LN). CIR also issued a
Preliminary Assessment Notice (PAN) against MEDICARD for deficiency VAT. A Memorandum
was likewise issued recommending the issuance of a Formal Assessment Notice (FAN) against
MEDICARD.

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 P 96,614,476.69,10 inclusive of
penalties.

According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without
any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing
Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR argued
that since MEDICARD. does not actually provide medical and/or hospital services, but merely
arranges for the same, its services are not VAT exempt.

On one hand, MEDICARD argued, among others, that the services it render is not limited
merely to arranging for the provision of medical and/or hospital services by hospitals and/or
clinics but include actual and direct rendition of medical and laboratory services.

MEDICARD received CIR's Final Decision on Disputed Assessment, denying MEDICARD's

protest.

MEDICARD proceeded to file a petition for review before the CTA. CTA Division rendered a
Decision affirming with modifications the CIR's deficiency VAT assessment. It held that:
xx

(4) the amounts that MEDICARD earmarked , and eventually paid to doctors, hospitals and clinics cannot be
excluded from · the computation of its gross receipts under the provisions of RR No. 4-2007 because the act of
earmarking or allocation is by itself an act of ownership and management over the funds by MEDICARD which is
beyond the contemplation of RR No. 4-2007;
(5) MEDICARD's earnings from its clinics and laboratory facilities cannot be excluded from its gross receipts
because the operation of these clinics and laboratory is merely an incident to MEDICARD's main line of business as
HMO and there is no evidence that MEDICARD segregated the amounts pertaining to this at the time it received the
premium from its members; and xx
MEDICARD filed a MR but it was denied. Hence, MEDICARD elevated the matter to the CTA en
banc.

CTA en banc partially granted the petition only insofar as the 10% VAT rate for January 2006
is concerned but sustained the findings of the CTA Division in all other matters.

MEDICARD‘s MR denied. Hence, MEDICARD now seeks recourse to this Court via a petition for
review on certiorari.

Other issues that were raised include the lack of Letter of Authority (LOA) on the part of the
revenue officer who conducted the examination. The CIR, on the other hand, posits that the
Letter of Notice (LN) is enough compliance with the LOA requirement, arguing that the use of
computers to detect discrepancies dispenses with the requirement of LOA.

ISSUES:
1. W/N LN can replace the LOA requirement.
2. W/N LOA requirement can be dispensed with considering the MEDICARD’s book were not
physically examined.
3. W/N the amounts earmarked and eventually paid by MEDICARD to the medical service
provider part of gross receipts for VAT purposes
4. MEDICARD's act of earmarking constitutes an exercise of ownership, thereby proving that
the amounts earmarked form part of gross receipts for VAT purposes

RULING:
1. NO, the LN cannot replace the LOA requirement.

An LOA is the authority given to the appropriate revenue officer assigned to perform
assessment functions. In the absence of such an authority, the assessment or examination is a
nullity.

The LN cannot replace the LOA required under the law even if the same was issued by the CIR
himself. Under RR No. 12-2002, LN is issued to a person found to have underreported
sales/receipts per data generated under the RELIEF system. Upon receipt of the LN, a taxpayer
may avail of the BIR's Voluntary Assessment and Abatement Program. If a taxpayer fails or
refuses to avail of the said program, the BIR may avail of administrative and criminal remedies,
particularly closure, criminal action, or audit and investigation. Since the law specifically
requires an LOA and RMO No. 32-2005 requires the conversion of the previously issued LN to
an LOA, the absence thereof cannot be simply swept under the rug, as the CIR would have it.
In fact, Revenue Memorandum Circular No. 40-2003 considers an LN as a notice of audit or
investigation only for the purpose of disqualifying the taxpayer from amending his returns.

The revenue officers not having authority to examine MEDICARD in the first place, the
assessment issued by the CIR is inescapably void.

2. No, the LOA requirement cannot be dispensed with even if MEDICARD's books have not
been physically examined.

Section 6 of the NIRC requires an authority from the CIR or from his duly authorized
representatives before an examination "of a taxpayer" may be made. The requirement of
authorization is therefore not dependent on whether the taxpayer may be required to physically
open his books and financial records but only on whether a taxpayer is being subject to
examination.
An LOA cannot be dispensed with just because none of the financial books or records being
physically kept by MEDICARD was examined.

3. No. The amounts earmarked and eventually paid by MEDICARD to the medical service
providers do not form part of gross receipts for VAT purposes.

The CTA en banc overlooked that the definition of gross receipts under RR No. 16-2005 merely
presumed that the amount received by an HMO as membership fee is the HMO's compensation
for their services. As a mere presumption, an HMO is, thus, allowed to establish that a portion
of the amount it received as membership fee does NOT actually compensate it but some other
person, which in this case are the medical service providers themselves. The Court cannot read
the word "presumed" in any other way based on the rules of legal hermeneutics.

It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax
base under the NIRC does not contain any specific definition. Therefore, absent a statutory
definition, this Court has construed the term gross receipts in its plain and ordinary
meaning, that is, gross receipts is understood as comprising the entire receipts without
any deduction. Congress, under Section 108, could have simply left the term gross receipts
similarly undefined and its interpretation subjected to ordinary acceptation,. Instead of doing
so, Congress limited the scope of the term gross receipts for VAT purposes only to the
amount that the taxpayer received for the services it performed or to the amount it
received as advance payment for the services it will render in the future for another
person.

In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it
rendered are not seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary
between the purchaser of healthcare services (its members) and the healthcare providers (the
doctors, hospitals and clinics) for a fee. By enrolling membership with MEDICARD, its
members will be able to avail of the pre-arranged medical services from its accredited
healthcare providers without the necessary protocol of posting cash bonds or deposits prior to
being attended to or admitted to hospitals or clinics, especially during emergencies, at any
given time. Apart from this, MEDICARD may also directly provide medical, hospital and
laboratory services, which depends upon its member's choice.

Thus, in the course of its business as such, MEDICARD members can either avail of medical
services from MEDICARD's accredited healthcare providers or directly from MEDICARD. In the
former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the
healthcare needs of its members, MEDICARD would not actually be providing the actual
healthcare service. Thus, based on industry practice, MEDICARD informs its would-be
member beforehand that 80% of the amount would be earmarked for medical utilization
and only the remaining 20% comprises its service fee. In the latter case, MEDICARD's
sale of its services is exempt from VAT under Section 109(G).

The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the
NIRC that would extend the definition of gross receipts even to amounts that do not only
pertain to the services to be performed: by another person, other than the taxpayer, but even to
amounts that were indisputably utilized not by MED ICARD itself but by the medical service
providers.

4. NO. On the contrary, it is MEDICARD's act of earmarking or allocating 80% of the

amount it received as membership fee at the time of payment that weakens the
ownership imputed to it. By earmarking or allocating 80% of the amount, MEDICARD
unequivocally recognizes that its possession of the funds is not in the concept of owner
but as a mere administrator of the same. For this reason, at most, MEDICARD's right in
relation to these amounts is a mere inchoate owner which would ripen into actual ownership if,
and only if, there is underutilization of the membership fees at the end of the fiscal year. Prior
to that, MEDICARD is bound to pay from the amounts it had allocated as an administrator
once its members avail of the medical services of MEDICARD's healthcare providers.

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

SO ORDERED.

G.R. No. 183408

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
LANCASTER PHILIPPINES, INC., Respondent

Doctrine:

1)The jurisdiction of the CTA is not limited only to cases which involve decisions or inactions of the CIR
on matters relating to assessments or refunds but also includes other cases arising from the NIRC or
related laws administered by the BIR.

2)Even if we were to accept the notion that applying the 1998 purchases as deductions in the fiscal year
1998 conforms with the generally accepted principle of matching cost against revenue, the same would
still not lend any comfort to the CIR. Revenue Memorandum Circular (RMC) No. 22-04,
entitled "Supplement to Revenue Memorandum Circular No. 44-2002 on Accounting Methods to be Used
by Taxpayers for Internal Revenue Tax Purposes"dated 12 April 2004, commands that where there is
conflict between the provisions of the Tax Code (NIRC), including its implementing rules and
regulations, on accounting methods and the generally accepted accounting principles, the former shall
prevail. 

Facts:  Lancaster Philippines, Inc. (Lancaster) is a domestic corporation established in 1963 and is

engaged in the production, processing, and marketing of tobacco. In 1999, the Bureau of Internal
Revenue (BIR) issued Letter of Authority (LOA) No. 00012289 authorizing its revenue officers to
examine Lancaster's books of accounts and other accounting records for all internal revenue taxes due
from taxable year 1998 to an unspecified date.

After the conduct of an examination pursuant to the LOA, the BIR issued a Preliminary Assessment
Notice (PAN) which cited Lancaster for:
1)overstatement of its purchases for the fiscal year April 1998 to March1999; and 2) noncompliance with
the generally accepted accounting principle of proper matching of cost and revenue. More concretely, the
BIR disallowed the purchases of tobacco from farmers covered by Purchase Invoice Vouchers (PIVs) for
the months of February and March 1998 as deductions against income for the fiscal year April
1998 to March 1999.

Lancaster replied to the PAN contending, among other things, that for the past decades, it has used an
entire 'tobacco-cropping season' to determine its total purchases covering a one-year period from 1
October up to 30 September of the following year (as against its fiscal year which is from 1 April up to 31
March of the following year); that it has been adopting the 6~month timing difference to conform to the
matching concept (of cost and revenue); and that this has long been installed as part of the company's
system and consistently applied in its accounting books. Invoking the same provisions of the law cited in
the assessment, i.e., Sections 43 and 45 of the National Internal Revenue Code (NIRC), in conjunction
with Section 45 of Revenue Regulation No. 2, as amended, Lancaster argued that the February and March
1998 purchases should not have been disallowed. It maintained that the situation of farmers engaged in
producing tobacco, like Lancaster, is unique in that the costs, i.e., purchases, are taken as of a different
period and posted in the year in which the gross income from the crop is realized. Lancaster concluded
that it correctly posted the subject purchases in the fiscal year ending March 1999 as it was only in this
year that the gross income from the crop was realized.

Subsequently on 6 November 2002, Lancaster received from the BIR a final assessment
notice (FAN), captioned Formal Letter of Demand andAudit Result/Assessment . dated 11 October2002,
which assessed Lancaster's deficiency income tax amounting to Pl l,496,770.18, as a consequence of the
disallowance of purchases claimed for the taxable year ending199931. March 1999. Lancaster duly
protested the FAN. There being no action taken by the Commissioner on its protest, Lancaster filed on 21
August 2003 a petition for review before the CTA Division.

CTA Division’s Ruling: CTA Division granted the petition of Lancaster, disposing as follows;

IN VIEW OF THE FOREGOING, the subject Petition for Review is hereby GRANTED. Accordingly,
respondent is ORDERED to CANCEL and WITHDRAW the deficiency income tax assessment issued
against petitioner under Formal l;etter of Demand and Audit Result/Assessment Notice No. L TAID II IT-
98-00007 dated October 11, 2002, in the amount of ₱6,466,065.50, covering the fiscal year from April l,
1998 to March 31, 1999.

The CIR move but failed to obtain reconsideration of the CTA Division ruling. Aggrieved, the CIR
sought recourse23 from the CTA En Banc to seek a reversal of the decision and the resolution of the CTA
Division.
CTA En Banc’s Ruling: CTA En Banc found no reversible error in the CTA Division's ruling, thus, it
affirmed the cancellation of the assessment against Lancaster. The CTA En Banc likewise denied the
motion for reconsideration from its Decision.

Issue/s:

1) Whether the CTA En Banc erred in ruling that Petitioner’s Revenue Officers exceeded their
authority to investigate the period not covered by their letter of authority.

2) Whether the CTA En Banc erred in ordering the Petitioner to cancel and withdraw the deficiency
assessment issued against the respondent.

Ruling:

1) No. CIR’s Revenue officers exceeded their authority.

A. The Jurisdiction of the CTA

Preliminarily, we shall take up the CTA's jurisdiction to rule on the issue of the scope of authority
of the revenue officers to conduct the examination of Lancaster's books of accounts and
accounting records. The law vesting unto the CTA its jurisdiction is Section 7 of Republic Act
No. 1125 (R.A. No. 1125), which in part provides:

Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction
to review by appeal, as herein provided:
(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other
matters arising under the National Internal Revenue Code or other law or part of law administered by
the Bureau of Internal Revenue; x x x. 

Under the said provision, the jurisdiction of the CTA is not limited only to cases which involve decisions
or inactions of the CIR on matters relating to assessments or refunds but also includes other cases arising
from the NIRC or related laws administered by the BIR. From the foregoing, it is clear that the issue on
whether the revenue officers who had conducted the examination on Lancaster exceeded their authority
pursuant to LOA No. 00012289 may be considered as covered by the terms "other matters" under Section
7 of R.A. No. 1125 or its amendment, R.A. No. 9282. The authority to make an examination or
assessment, being a matter provided for by the NIRC, is well within the exclusive and appellate
jurisdiction of the CTA.
 2) No. It did not err. The CTA En Banc correctly sustained the order cancelling and withdrawing
the deficiency tax assessment.

The issue essentially boils down to the proper timing when Lancaster should recognize its purchases in
computing its taxable income. Such issue directly correlates to the fact that Lancaster's 'crop year ' does
not exactly coincide with its fiscal year for tax purposes.

Noticeably, the records of this case are rife with terms and concepts in accounting. As a science,
accounting pervades many aspects of financial planning, forecasting, and decision making in business. Its
reach, however, has also permeated tax practice.

To put it into perspective, although the foundations of accounting were built principally to analyze
finances and assist businesses, many of its principles have since been adopted for purposes of taxation. In
our jurisdiction, the concepts in business accounting, including certain generally accepted accounting
principles (GAAP), embedded in the NIRC comprise the rules on tax accounting.

In the present case, the SC finds it wholly justifiable for Lancaster, as a business engaged in the
production and marketing of tobacco, to adopt the crop method of accounting. A taxpayer is authorized to
employ what it finds suitable for its purpose so long as it consistently does so, and in this case, Lancaster
does appear to have utilized the method regularly for many decades already. Considering that the crop
year of Lancaster starts from October up to September of the following year, it follows that all of its
expenses in the crop production made within the crop year starting from October 1997 to September
1998, including the February and March 1998 purchases covered by purchase invoice vouchers, are
rightfully deductible for income tax purposes in the year when the gross income from the crops are
realized. Pertinently, nothing from the pleadings or memoranda of the parties, or even from their
testimonies before the CT A, would support a finding that the gross income from the crops (to which the
subject expenses refer) was actually realized by the end of March 1998, or the closing of Lancaster's
fiscal year for 1998. Instead, the records show that the February and March 1998 purchases were recorded
by Lancaster as advances and later taken up as purchases by the close of the crop year in September
1998, or as stated very clearly above, within the fiscal year 1999.

COMMISSION OF INTERNAL REVENUE, Petitioner, v. HANTEX TRADING CO.,

INC., Respondent.

Facts:

Hantex Trading Co is a company organized under the Philippines. It is engaged in the

sale of plastic products, it imports synthetic resin and other chemicals for the
manufacture of its products. For this purpose, it is required to file an Import Entry and
Internal Revenue Declaration (Consumption Entry) with the Bureau of Customs under
Section 1301 of the Tariff and Customs Code. Sometime in October 1989, Lt. Vicente
Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and
Investigation Bureau (EIIB), received confidential information that the respondent had
imported synthetic resin amounting to P115,599,018.00 but only declared
P45,538,694.57. Thus, Hantex receive a subpoena to present its books of account
which it failed to do. The bureau cannot find any original copies of the products Hantex
imported since the originals were eaten by termites. Thus, the Bureau relied on the
certified copies of the respondent’s Profit and Loss Statement for 1987 and1988 on file
with the SEC, the machine copies of the Consumption Entries, Series of 1987,
submitted by the informer, as well as excerpts from the entries certified by Tomas and
Danganan.

The case was submitted to the CTA which ruled that Hantex have tax deficiency and is
ordered to pay, per investigation of the Bureau. The Ca ruled that the income and sales
tax deficiency assessments issued by the petitioner were unlawful and baseless since
the copies of the import entries relied upon in computing the deficiency tax of the
respondent were not duly authenticated by the public officer charged with their custody,
nor verified under oath by the EIIB and the BIR investigator.

Issue:
Whether or not the final assessment of the petitioner against the respondent for
deficiency income tax and sales tax for the latter’s 1987 importation of resins and
calcium bicarbonate is based on competent evidence and the law

Ruling:
No. Section 16 of the NIRC of 1977, as amended, provides that the Commissioner of
Internal Revenue has the power to make assessments and prescribe additional
requirements for tax administration and enforcement. Among such powers are those
provided in paragraph (b), which provides that “Failure to submit required
returns,statements, reports and other documents. – When a report required by law as a
basis for the assessment of any national internal revenue tax shall not be forth coming
within the time fixed by law or regulation or when there is reason to believe that any
such report is false, incomplete or erroneous, the Commissioner shall assess the proper
tax on the best evidence obtainable.” This provision applies when the Commissioner of
Internal Revenue undertakes to perform her administrative duty of assessing the proper
tax against a taxpayer, to make a return in case of a taxpayer’s failure to file one, or to
amend a return already filed in the BIR. The “best evidence” envisaged in Section 16 of
the 1977 NIRC, as amended, includes the corporate and accounting records of the
taxpayer who is the subject of the assessment process, the accounting records of other
taxpayers engaged in the same line of business, including their gross profit and net
profit sales. Such evidence also includes data, record, paper, document or any
evidence gathered by internal revenue officers from other taxpayers who had personal
transactions or from whom the subject tax payer received any income; and record, data,
document and information secured from government offices or agencies, such as the
SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and
Customs Commission. However, the best evidence obtainable under Section 16 of the
1977 NIRC, as amended, does not include mere photocopies of records/documents.
The petitioner, in making a preliminary and final tax deficiency assessment against a
taxpayer, cannot anchor the said assessment on mere machine copies of
records/documents. Mere photocopies of the Consumption Entries have no probative
weight if offered as proof of the contents thereof. The reason for this is that such copies
are mere scraps of paper and are of no probative value as basis for any deficiency
income or business taxes against a taxpayer. 

VISAYAN CEBU TERMINAL VS. COLLECTOR OF INTERNAL REVENUE

G.R. NO. L-12798 MAY 30,2960

FACTS:

Visayan Terminal Co. is an arrastre operator in the port of Cebu. It was awarded the contract for said
arrastre operations by the Bureau of Customs. It filed its income tax return for 1951 on March 1, 1952
reporting a gross income of P420,633.40 and claimed deductions amounting to P379,036.95, leaving a net
income of P41,596.45 on which it paid income tax in the sum of P8,319.20.

Of the claimed deductions inclusive of salaries, representation and miscellaneous expenses, P84,530.88
were disallowed by the Collector of Internal Revenue, thus giving rise to a deficiency assessment of
P18,991.00.

Upon reconsideration, the Collector modified the deficiency income tax assessment by allowing the
deduction of Juan Eugenio Lo’s salary amounting to P1,875 from the gross income of Visayan terminal.
It also allowed as a deduction miscellaneous expenses amounting to P532 and maintained the
disallowance of the full amount of P75,855.88 as representation expenses.
The revised deficiency assessment was itemized in the letter of the Collector dated March 26, 1955 which
has a total amount due on April 30, 1955 amounting to P23,485.76. The issue raised by Visayan Terminal
is the deductibility of the representation expenses.

The lower court held that representation expenses fall under business expenses which are allowable
deductions from gross income if they meet the conditions prescribed by law that is, to be deductible, said
business expenses must ordinary and necessary expenses paid or incurred in carrying on any trade or
business. It must also meet the test of reasonableness in amount. Visayan Terminal likewise failed to
present supporting papers, as allegedly they were destroyed when the house where they were stored was
burned.

ISSUE:

Whether the representation expenses shall be allowed as deductions from the gross income of Visayan
Terminal.

RULING:

NO. In this case, Visayan failed to submit supporting documents for the deductibility of representation
expenses. Moreover, the explanation as to the missing supporting papers which were allegedly destroyed
by fire deserves a scant consideration and unsatisfactory for their records were supposed to be kept in its
offices and not in the residence of any of its officers. Furthermore, it is the task of the court to determine
from all available data the amount properly deductible as representation expenses. Hence, they took into
consideration the gross income, net income, net profits and claimed representation expenses during the
period of 4 years from 1949-1952.

G.R. No. 185371               December 8, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs. METRO STAR SUPERAMA, INC., Respondent.

Doctrine: 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.

Facts: On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City, issued
Letter of Authority to examine METRO STAR SUPERAMA’s books of accounts for income tax and other
internal revenue taxes for the taxable year 1999.

On November 8, 2001, Revenue District Officer issued a Preliminary 15-day Letter, which petitioner
received on November 9, 2001. On April 11, 2002, petitioner received a Formal Letter of Demand,
assessing petitioner the amount of ₱292,874.16 for deficiency value-added and withholding taxes for the
taxable year 1999.

Subsequently, Final Notice of Seizure was sent giving the latter last opportunity to settle its deficiency
tax liabilities within ten (10) [days] from receipt thereof. Metro Star received a Warrant of Distraint
and/or Levy demanding payment of deficiency value-added tax and withholding tax. Respondent
Commissioner, through its authorized representative, Revenue Regional Director of Revenue Region 10,
Legaspi City, denied petitioner’s MR.

Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not
accorded due process, Metro Star filed a petition for review4 with the CTA.

The CTA-Second Division granted the Petition for Review. Respondent is ORDERED TO DESIST from
collecting the subject taxes against petitioner.

While 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."
There was no clear showing that Metro Star actually received the alleged PAN. Accordingly, the
Formal Letter of Demand and the Warrant of Distraint and/or Levy were void, as Metro Star was denied
due process. The CTA-En Banc affirmed the decision.

The CIR, insisting that Metro Star received the PAN, and that due process was served nonetheless
because the latter received the Final Assessment Notice (FAN).

Issue: Whether or not Metro Star was denied due process. YES.

Whether or not due process was served because the latter received the Final Assessment Notice (FAN).
NO.

Held: The SC affirmed the decision of CTA en banc.

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. But if one of the said facts fails to appear, the presumption
does not lie.

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.

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. Also, no explanation on why
it failed to comply with the requirement of service of the PAN.
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 pre-assessment 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.

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.

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. 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.

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.

 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.
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. — (same with Sec 228 of the Tax Code)

3.1.4 Formal Letter of Demand and Assessment Notice.

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.

For BIR’s 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 Court need not belabor to discuss the matter of Metro Star’s failure to file its protest, for it is well-
settled that a void assessment bears no fruit.

COMMISSIONER OF INTERNAL REVENUE

versus

TRANSITIONS OPTICAL PHILIPPINES, INC.

DOCTRINE:

Estoppel applies against a taxpayer who did not only raise at the earliest opportunity its
representative's lack of authority to execute two (2) waivers of defense of prescription, but was
also accorded, through these waivers, more time to comply with the audit requirements of the
Bureau of Internal Revenue. Nonetheless, a tax assessment served beyond the extended period
is void.

FACTS:

On April 28, 2006, Transitions Optical received Letter of Authority No. 00098746 dated March
23, 2006 from Revenue Region No. 9, San Pablo City, of the Bureau of Internal Revenue. It was
signed by then Officer-in-Charge-Regional Director Corazon C. Pangcog and it authorized
Revenue Officers Jocelyn Santos and Levi Visaya to examine Transition Optical's books of
accounts for intenul revenue tax purposes for taxable year 2004.

On October 9, 2007, the parties allegedly executed a Waiver of the Defense of Prescription
(First Waiver). In this supposed First Waiver, the prescriptive period for the assessment of
Transition Optical 's internal revenue taxes for the year 2004 was extended to June 20, 2008.
The document was signed by Transitions Optical 's Finance Manager, Pamela Theresa D. Abad,
and by Bureau of Internal Revenue's Revenue District Officer, Myrna S. Leonida.

This was followed by another supposed Waiver of the Defense of Prescription (Second Waiver)
dated June 2, 2008. This time, the prescriptive period was supposedly extended to November
30, 2008.

Thereafter, the Commissioner of Internal Revenue, through Regional Director Jaime B. Santiago
(Director Santiago), issued a Preliminary Assessment Notice (PAN) dated November 11, 2008,
assessing Transitions Optical for its deficiency taxes for taxable year 2004. Transitions Optical
filed a written protest on November 26, 2008.

The Commissioner of Internal Revenue, again through Director Santiago, subsequently issued
against Transitions Optical a Final Assessment Notice (FAN) and a Formal Letter of Demand
(FLD) dated November 28, 2008 for deficiency income tax, value-added tax, expanded
withholding tax, and final tax for taxable year 2004 amounting to P19, 701,849.68.

In its Protest Letter dated December 8, 2008 against the FAN, Transitions Optical alleged that
the demand for deficiency taxes had already prescribed at the time the FAN was mailed on
December 2, 2008.

ISSUES:

1. WON the two (2) Waivers of the Defense of Prescription entered into by the parties on
October 9, 2007 and June 2, 2008 were valid. YES.

2. WON the assessment of deficiency taxes against respondent Transitions Optical Philippines,
Inc. for taxable year 2004 had prescribed. YES.

RULING:

1. As a general rule, petitioner has three (3) years to assess taxpayers from the filing of the
return. An exception to the rule of prescription is found in Section 222(b) and (d) of this Code,
viz:

Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes-

....

(b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax,
both the Commissioner and the taxpayer have agreed in writing to its assessment after such
time, the tax may be assessed within the period agreed upon. The period so agreed upon may
be extended by subsequent written agreement made before the expiration of the period
previously agreed upon.

....

(d) Any intemal revenue tax, which has been assessed within the period agreed upon as
provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding
in court within the period agreed upon in writing before the expiration of the five (5) year
period. The period so agreed upon may be extended by subsequent written agreements made
before the expiration of the period previously agreed upon.

Thus, the period to assess and collect taxes may be extended upon the Commissioner of
Internal Revenue and the taxpayer's written agreement, executed before the expiration of
the three (3) year period.

In this case, two (2) waivers were supposedly executed by the parties extending the prescriptive
periods for assessment of income tax, value-added tax, and expanded and final withholding
taxes to June 20, 2008, and then to November 30, 2008.

Estoppel applies in this case.

Indeed, the Bureau of Internal Revenue was at fault when it accepted respondent's Waivers
despite their non-compliance with the requirements of RMO No. 20-90 and RDAO No. 05-01.

Nonetheless, respondent's acts also show its implied admission of the validity of the waivers.

First, respondent never raised the invalidity of the Waivers at the earliest opportunity, either in
its Protest to the PAN, Protest to the FAN, or Supplemental Protest to the FAN. It thereby
impliedly recognized these Waivers' validity and its representatives' authority to execute them.
Respondent only raised the issue of these Waivers' validity in its Petition for Review filed with
the Court of Tax Appeals.

Second, respondent does not dispute petitioner's assertion that respondent repeatedly failed
to comply with petitioner's notices, directing it to submit its books of accounts and related
records for examination by the Bureau of Internal Revenue. Respondent also ignored the
Bureau of Internal Revenue's request for an Informal Conference to discuss other
"discrepancies" found in the partial documents submitted. The Waivers were necessary to give
respondent time to fully comply with the Bureau of Internal Revenue notices for audit
examination and to respond to its Informal Conference request to discuss the discrepancies.
Thus, having benefitted from the Waivers executed at its instance, respondent is estopped from
claiming that they were invalid and that prescription had set in.

2. But, even as respondent is estopped from questioning the validity of the Waivers, the
assessment is nonetheless void because it was served beyond the supposedly extended period.

The First Division of the Court of Tax Appeals found that "the date indicated in the
envelope/mail matter containing the FAN and the FLD is December 4, 2008, which is considered
as the date of their mailing. Since the validity period of the second Waiver is only until
November 30, 2008, prescription had already set in at the time the FAN and the FLD were
actually mailed on December 4, 2008.

For lack of adequate supporting evidence, the Court of Tax Appeals rejected petitioner's claim
that the FAN and the FLD were already delivered to the post office for mailing on November 28,
2008 but were actually processed by the post office on December 2, 2008, since December 1,
2008 was declared a Special Holiday.

This Court finds no clear and convincing reason to overturn these factual findings of the Court
of Tax Appeals.

WHEREFORE, the Petition is DENIED.

NOTE:

Considering the functions and effects of a PAN vis a vis a FAN, it is clear that the assessment
contemplated in Sections 203 and 222 of the National Intenial Revenue Code refors to the
service of the FAN upon the taxpayer.

A PAN merely informs the taxpayer of the initial findings of the Bureau of Internal Revenue. It
contains the proposed assessment,

and the facts, law, rules, and regulations or jurisprudence on which the proposed assessment is
based. It does not contain a demand for payment but usually requires the taxpayer to reply
within 15 days from receipt. Otherwise, the Commissioner of Internal Revenue will finalize an
assessment and issue a FAN.

The PAN is a part of due process. It gives both the taxpayer and the Commissioner of Internal
Revenue the opportunity to settle the case at the earliest possible time without the need for
the issuance of a FAN.

On the other hand, a FAN contains not only a computation of tax liabilities but also a demand
for payment within a prescribed period. As soon as it is served, an obligation arises on the part
of the taxpayer concerned to pay the amount assessed and demanded. It also signals the time
when penalties and interests begin to accrue against the taxpayer. Failure to file an
administrative protest within 30 days from receipt of the FAN will render the assessment final,
executory, and demandable.