G.R. No. 143672 April 24, 2003 Loagan, 86 III. App. 294). As held in the case of Welch vs.
Loagan, 86 III. App. 294). As held in the case of Welch vs. Helvering, efforts to establish
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
GENERAL FOODS (PHILS.), INC., respondent.
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution1 of the
Court of Appeals reversing the decision2 of the Court of Tax Appeals which in turn denied the
protest filed by respondent General Foods (Phils.), Inc., regarding the assessment made against
the latter for deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the
manufacture of beverages such as "Tang," "Calumet" and "Kool-Aid," filed its income tax return
for the fiscal year ending February 28, 1985. In said tax return, respondent corporation claimed
as deduction, among other business expenses, the amount of P9,461,246 for media advertising
for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed
by respondent corporation. Consequently, respondent corporation was assessed deficiency
income taxes in the amount of P2,635, 141.42. The latter filed a motion for reconsideration but
the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the
appeal was dismissed:
With such a gargantuan expense for the advertisement of a singular product, which even
excludes "other advertising and promotions" expenses, we are not prepared to accept
that such amount is reasonable "to stimulate the current sale of merchandise" regardless
of Petitioner’s explanation that such expense "does not connote unreasonableness
considering the grave economic situation taking place after the Aquino assassination
characterized by capital fight, strong deterioration of the purchasing power of the
Philippine peso and the slacking demand for consumer products" (Petitioner’s
Memorandum, CTA Records, p. 273). We are not convinced with such an explanation.
The staggering expense led us to believe that such expenditure was incurred "to create
or maintain some form of good will for the taxpayer’s trade or business or for the industry
or profession of which the taxpayer is a member." The term "good will" can hardly be
said to have any precise signification; it is generally used to denote the benefit arising
from connection and reputation (Words and Phrases, Vol. 18, p. 556 citing Douhart vs.
reputation are akin to acquisition of capital assets and, therefore, expenses related
thereto are not business expenses but capital expenditures. (Atlas Mining and
Development Corp. vs. Commissioner of Internal Revenue, supra). For sure such
expenditure was meant not only to generate present sales but more for future and
prospective benefits. Hence, "abnormally large expenditures for advertising are usually
to be spread over the period of years during which the benefits of the expenditures are
received" (Mertens, supra, citing Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we
hereby RESOLVE to DISMISS the instant petition for lack of merit and ORDER the
Petitioner to pay the respondent Commissioner the assessed amount of P2,635,141.42
representing its deficiency income tax liability for the fiscal year ended February 28,
1985."3
Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which
rendered a decision reversing and setting aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as a deduction is
excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby
GRANTED. Accordingly, the Decision, dated 8 February 1994 of respondent Court of
Tax Appeals is REVERSED and SET ASIDE and the letter, dated 31 May 1988 of
respondent Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.4
Thus, the instant petition, wherein the Commissioner presents for the Court’s consideration a
lone issue: whether or not the subject media advertising expense for "Tang" incurred by
respondent corporation was an ordinary and necessary expense fully deductible under the
National Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority;5 and he who claims an
exemption must be able to justify his claim by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications.6
Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media advertising
expense for "Tang" paid or incurred by respondent corporation for the fiscal year ending
February 28, 1985 "necessary and ordinary," hence, fully deductible under the NIRC? Or was it
a capital expenditure, paid in order to create "goodwill and reputation" for respondent
corporation and/or its products, which should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
(a) In general.- There shall be allowed as deduction from gross income all
ordinary and necessary expenses paid or incurred during the taxable year in
carrying on, or which are directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise of a profession.
Simply put, to be deductible from gross income, the subject advertising expense must comply
with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have
been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying
on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or
other pertinent papers.7
The parties are in agreement that the subject advertising expense was paid or incurred within
the corresponding taxable year and was incurred in carrying on a trade or business. Hence, it
was necessary. However, their views conflict as to whether or not it was ordinary. To be
deductible, an advertising expense should not only be necessary but also ordinary. These two
requirements must be met.
The Commissioner maintains that the subject advertising expense was not ordinary on the
ground that it failed the two conditions set by U.S. jurisprudence: first, "reasonableness" of the
amount incurred and second, the amount incurred must not be a capital outlay to create
"goodwill" for the product and/or private respondent’s business. Otherwise, the expense must
be considered a capital expenditure to be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an
advertising expense. There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the type and size of business in which
the taxpayer is engaged; the volume and amount of its net earnings; the nature of the
expenditure itself; the intention of the taxpayer and the general economic conditions. It is the
interplay of these, among other factors and properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone was
almost one-half of its total claim for "marketing expenses." Aside from that, respondent-
corporation also claimed P2,678,328 as "other advertising and promotions expense" and
another P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost double
the amount of respondent corporation’s P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under
then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise
or use of services and (2) advertising designed to stimulate the future sale of merchandise or
use of services. The second type involves expenditures incurred, in whole or in part, to create
or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or
profession of which the taxpayer is a member. If the expenditures are for the advertising of the
first kind, then, except as to the question of the reasonableness of amount, there is no doubt
such expenditures are deductible as business expenses. If, however, the expenditures are for
advertising of the second kind, then normally they should be spread out over a reasonable
period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the second
kind. Not only was the amount staggering; the respondent corporation itself also admitted, in its
letter protest8 to the Commissioner of Internal Revenue’s assessment, that the subject media
expense was incurred in order to protect respondent corporation’s brand franchise, a critical
point during the period under review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to one’s
property. This is a capital expenditure which should be spread out over a reasonable period of
time.9
Respondent corporation’s venture to protect its brand franchise was tantamount to efforts to
establish a reputation. This was akin to the acquisition of capital assets and therefore expenses
related thereto were not to be considered as business expenses but as capital expenditures.10
True, it is the taxpayer’s prerogative to determine the amount of advertising expenses it will incur
and where to apply them.11 Said prerogative, however, is subject to certain considerations. The
first relates to the extent to which the expenditures are actually capital outlays; this necessitates
an inquiry into the nature or purpose of such expenditures.12 The second, which must be applied
in harmony with the first, relates to whether the expenditures are ordinary and necessary.
Concomitantly, for an expense to be considered ordinary, it must be reasonable in amount. The
Court of Tax Appeals ruled that respondent corporation failed to meet the two foregoing
limitations.

We find said ruling to be well founded. Respondent corporation incurred the subject advertising
expense in order to protect its brand franchise. We consider this as a capital outlay since it
created goodwill for its business and/or product. The P9,461,246 media advertising expense for
the promotion of a single product, almost one-half of petitioner corporation’s entire claim for
marketing expenses for that year under review, inclusive of other advertising and promotion
expenses of P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable.

It has been a long standing policy and practice of the Court to respect the conclusions of quasi-
judicial agencies such as the Court of Tax Appeals, a highly specialized body specifically created
for the purpose of reviewing tax cases. The CTA, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems. It has necessarily developed an
expertise on the subject. We extend due consideration to its opinion unless there is an abuse or
improvident exercise of authority.13 Since there is none in the case at bar, the Court adheres to
the findings of the CTA.

Accordingly, we find that the Court of Appeals committed reversible error when it declared the
subject media advertising expense to be deductible as an ordinary and necessary expense on
the ground that "it has not been established that the item being claimed as deduction is
excessive." It is not incumbent upon the taxing authority to prove that the amount of items being
claimed is unreasonable. The burden of proof to establish the validity of claimed deductions is
on the taxpayer.14 In the present case, that burden was not discharged satisfactorily.

WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision
of the Court of Appeals is hereby REVERSED and SET ASIDE. Pursuant to Sections 248 and
249 of the Tax Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay its
deficiency income tax in the amount of P2,635,141.42, plus 25% surcharge for late payment
and 20% annual interest computed from August 25, 1989, the date of the denial of its protest,
until the same is fully paid.

SO ORDERED.
G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of
the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the
Court of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the
Assessment Notices for deficiency income tax and expanded withholding tax issued by the
Bureau of Internal Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending
December 31, 1985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984
and 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for
the months of April and May 1986.6
(2) The alleged understatement of ICC’s interest income on the three promissory notes
due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9,
1995, however, it received a final notice before seizure demanding payment of the amounts
stated in the said notices. Hence, it brought the case to the CTA which held that the petition is
premature because the final notice of assessment cannot be considered as a final decision
appealable to the tax court. This was reversed by the Court of Appeals holding that a demand
letter of the BIR reiterating the payment of deficiency tax, amounts to a final decision on the
protested assessment and may therefore be questioned before the CTA. This conclusion was
sustained by this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded to
the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for professional and security
services were properly claimed by ICC in 1986 because it was only in the said year when the
bills demanding payment were sent to ICC. Hence, even if some of these professional services
were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said
years as the amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory
notes. It found that it was the BIR which made an overstatement of said income when it
compounded the interest income receivable by ICC from the promissory notes of Realty
Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded
interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the
application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation
receipts it presented as evidence. The dispositive portion of the CTA’s Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SET
ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were
rendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at that
time, hence, it could be considered as deductible expenses only in 1986 when ICC received the
billing statements for said services. It further ruled that ICC did not understate its interest income
from the promissory notes of Realty Investment, Inc., and that ICC properly withheld and
remitted taxes on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending
that since ICC is using the accrual method of accounting, the expenses for the professional
services that accrued in 1984 and 1985, should have been declared as deductions from income
during the said years and the failure of ICC to do so bars it from claiming said expenses as
deduction for the taxable year 1986. As to the alleged deficiency interest income and failure to
withhold expanded withholding tax assessment, petitioner invoked the presumption that the
assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction
of the expenses for professional and security services from ICC’s gross income; and (2) held
that ICC did not understate its interest income from the promissory notes of Realty Investment,
Inc; and that ICC withheld the required 1% withholding tax from the deductions for security
services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it
must be supported by receipts, records or other pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is further qualified
by Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or
incurred’, dependent upon the method of accounting upon the basis of which the net income is
computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to
report income and deductions.12 In the instant case, the accounting method used by ICC is the
accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus,
a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year.13
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment.14
For a taxpayer using the accrual method, the determinative question is, when do the facts
present themselves in such a manner that the taxpayer must recognize income or expense?
The accrual of income and expense is permitted when the all-events test has been met. This
test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with reasonable accuracy. The all-
events test is satisfied where computation remains uncertain, if its basis is unchangeable; the
test is satisfied where a computation may be unknown, but is not as much as unknowable, within
the taxable year. The amount of liability does not have to be determined exactly; it must
be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy"
implies something less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
year.[16] Accrual method of accounting presents largely a question of fact; such that the
taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one who
claims an exemption must be able to justify the same by the clearest grant of organic or statute
law. An exemption from the common burden cannot be permitted to exist upon vague
implications. And since a deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees
of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for
reimbursement of the expenses of said firm in connection with ICC’s tax problems for the year
1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960’s.19 From
the nature of the claimed deductions and the span of time during which the firm was retained,
ICC can be expected to have reasonably known the retainer fees charged by the firm as well as
the compensation for its legal services. The failure to determine the exact amount of the expense
during the taxable year when they could have been claimed as deductions cannot thus be
attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise
of due diligence could have inquired into the amount of their obligation to the firm, especially so
that it is using the accrual method of accounting. For another, it could have reasonably
determined the amount of legal and retainer fees owing to its familiarity with the rates charged
by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the
taxpayer bears the burden of establishing the accrual of an expense or income. However, ICC
failed to discharge this burden. As to when the firm’s performance of its services in connection
with the 1984 tax problems were completed, or whether ICC exercised reasonable diligence to
inquire about the amount of its liability, or whether it does or does not possess the information
necessary to compute the amount of said liability with reasonable accuracy, are questions of
fact which ICC never established. It simply relied on the defense of delayed billing by the firm
and the company, which under the circumstances, is not sufficient to exempt it from being
charged with knowledge of the reasonable amount of the expenses for legal and auditing
services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC
for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because
ICC failed to present evidence showing that even with only "reasonable accuracy," as the
standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the
professional fees which said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue
Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income
for the said year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred
by ICC in 198620 and could therefore be properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one
should have been applied by the BIR. There is indeed no stipulation between the latter and ICC
on the application of compounded interest.21 Under Article 1959 of the Civil Code, unless there
is a stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the
BIR is supported by payment order and confirmation receipts.22 Hence, the Assessment Notice
for deficiency expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for
deficiency income tax should be cancelled and set aside but only insofar as the claimed
deductions of ICC for security services. Said Assessment is valid as to the BIR’s disallowance
of ICC’s expenses for professional services. The Court of Appeal’s cancellation of Assessment
Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expanded
withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that
Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of
Isabela Cultural Corporation for professional and security services, is declared valid only insofar
as the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all other
respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability
under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.
August 16, 2016
G.R. No. 198756
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,
METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS,
PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK, AND PLANTERS
DEVELOPMENT BANK, Petitioners
vs.
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION,
Petitioners-Intervenors
x-----------------------x
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intevenor,
vs.
REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL
TREASURER, AND BUREAU OF TREASURY, Respondents.
RESOLUTION
LEONEN, J.:
This resolves separate motions for reconsideration and clarification filed by the Office of the
Solicitor General 1 and petitioners-intervenors Rizal Commercial Banking Corporation and
RCBC Capital Corporation2 of our Decision dated January 13, 2015, which: (1) granted the
Petition and Petitions-in-Intervention and nullified Bureau of Internal Revenue (BIR) Ruling Nos.
370-2011 and DA 378-2011; and (2) reprimanded the Bureau of Treasury for its continued
retention of the amount corresponding to the 20% final withholding tax that it withheld on October
18, 2011, and ordered it to release the withheld amount to the bondholders.
In the notice to all Government Securities Eligible Dealers (GSEDs) entitled Public Offering of
Treasury Bonds3 (Public Offering) dated October 9, 2001, the Bureau of Treasury announced
that "P30.0 [billion] worth of 10- year Zero[-]Coupon Bonds [would] be auctioned on October 16,
2001[.]"4 It stated that "the issue being limited to 19 lenders and while taxable shall not be subject
to the 20% final withholding [tax]."5
On October 12, 2001, the Bureau of Treasury released a memo on the Formula for the Zero-
Coupon Bond. 6 The memo stated in part that the formula, in determining the purchase price
and settlement amount, "is only applicable to the zeroes that are not subject to the 20% final
withholding due to the 19 buyer/lender limit."7
On October 15, 2001, one (1) day before the auction date, the Bureau of Treasury issued the
Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16,
2001 (Auction Guidelines).8 The Auction Guidelines reiterated that the Bonds to be auctioned
are "[n]ot subject to 20% withholding tax as the issue will be limited to a maximum of 19 lenders
in the primary market (pursuant to BIR Revenue Regulation No. 020 2001 )."9
At the auction held on October 16, 2001, Rizal Commercial Banking Corporation (RCBC)
participated on behalf of Caucus of Development NGO Networks (CODE-NGO) and won the
bid. 10 Accordingly, on October 18, 2001, the Bureau of Treasury issued P35 billion worth of
Bonds at yield-tomaturity of 12.75% to RCBC for approximately P10.17 billion, 11 resulting in a
discount of approximately P24.83 billion.
Likewise, on October 16, 2001, RCBC Capital entered into an underwriting agreement12 with
CODE-NGO, where RCBC Capital was appointed as the Issue Manager and Lead Underwriter
for the offering of the PEACe Bonds. 13 RCBC Capital agreed to underwrite14 on a firm basis the
offering, distribution, and sale of the P3 5 billion Bonds at the price of Pll,995,513,716.51. 15 In
Section 7(r) of the underwriting agreement, CODE-NGO represented that "[a]ll income derived
from the Bonds, inclusive of premium on redemption and gains on the trading of the same, are
exempt from all forms of taxation as confirmed by [the] Bureau of Internal Revenue . . . letter
rulings dated 31 May 2001 and 16 August 2001, respectively." 16
RCBC Capital sold and distributed the Government Bonds for an issue price of
Pll,995,513,716.51. 17 Banco de Oro, et al. purchased the PEACe Bonds on different dates. 18
On October 7, 2011, barely 11 days before maturity of the PEACe Bonds, the Commissioner of
Internal Revenue issued BIR Ruling No. 370- 201119 declaring that the PEACe Bonds, being
deposit substitutes, were subject to 20% final withholding tax. 20 Under this ruling, the Secretary
of Finance directed the Bureau of Treasury to withhold a 20% final tax from the face value of
the PEACe Bonds upon their payment at maturity on October 18, 2011.21
On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of
Internal Revenue issued BIR Ruling No. DA 378-201122 clarifying that the final withholding tax
due on the discount or interest earned on the PEACe Bonds should "be imposed and withheld
not only on RCBC/CODE NGO but also [on] 'all subsequent holders of the Bonds. "'23
On October 17, 2011, petitioners filed before this Court a Petition for Certiorari, Prohibition,
and/or Mandamus (with urgent application for a temporary restraining order and/or writ of
preliminary injunction).24
On October 18, 2011, this Court issued a temporary restraining order25 "enjoining the
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] ... subject to the
condition that the 20% final withholding tax on interest income therefrom shall be withheld by
the petitioner banks and placed in escrow pending resolution of [the] petition."26
RCBC and RCBC Capital, as well as CODE-NGO separately moved for leave of court to
intervene and to admit the Petition-in-Intervention. The Motions were granted by this Court. 27
Meanwhile, on November 9, 2011, petitioners filed their Manifestation with Urgent Ex Parte
Motion to Direct Respondents to Comply with the TR0.28
On November 15, 2011, this Court directed respondents to: "(1) show cause why they failed to
comply with the October 18, 2011 resolution; and (2) comply with the Court's resolution in order
that petitioners may place the corresponding funds in escrow pending resolution of the petition.
" 29
On December 6, 2011, this Court noted respondents' compliance. 30
On November 27, 2012, petitioners filed their Manifestation with Urgent Reiterative Motion [To
Direct Respondents to Comply with the Temporary Restraining Order]. 31
On December 4, 2012, this Court noted petitioners' Manifestation with Urgent Reiterative Motion
and required respondents to comment. 32 Respondents filed their Comment, 33 to which
petitioners filed their Reply. 34
On January 13, 2015, this Court promulgated the Decision35 granting the Petition and the
Petitions-in-Intervention. Applying Section 22(Y) of the National Internal Revenue Code, we held
that the number of lenders/investors at every transaction is determinative of whether a debt
instrument is a deposit substitute subject to 20% final withholding tax. When at any transaction,
funds are simultaneously obtained from 20 or more lenders/investors, there is deemed to be a
public borrowing and the bonds at that point in time are deemed deposit substitutes.
Consequently, the seller is required to withhold the 20% final withholding tax on the imputed
interest income from the bonds. We further declared void BIR Rulings Nos. 370-2011 and DA
378-2011 for having disregarded the 20-lender rule provided in Section 22(Y). The Decision
disposed as follows:
WHEREFORE, the petition for review and petitions-in- intervention are GRANTED. BIR Ruling
Nos. 370-2011 and DA 378- 2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of
the amount corresponding to the 20% final withholding tax despite this court's directive in the
temporary restraining order and in the resolution dated November 15, 2011 to deliver the
amounts to the banks to be placed in escrow pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the
bondholders the amount corresponding to the 20% final withholding tax that it withheld on
October 18, 2011. 36
On March 13, 2015, respondents filed by registered mail their Motion for Reconsideration and
Clarification. 37
On March 16, 2015, petitioners-intervenors RCBC and RCBC Capital moved for clarification
and/or partial reconsideration.38
On July 6, 2015, petitioners Banco de Oro, et al. filed their
Consolidated Comment39 on respondents' Motion for Reconsideration and Clarification and
petitioners-intervenors RCBC and RCBC Capital Corporation's Motion for Clarification and/or
Partial Reconsideration.
On October 29, 2015, petitioners Banco de Oro, et al. filed their Urgent Reiterative Motion [to
Direct Respondents to Comply with the Temporary Restraining Order].40
The issues raised in the motions revolve around the following:
First, the proper interpretation and application of the 20-lender rule under Section 22(Y) of the
National Internal Revenue Code, particularly in relation to issuances of government debt
instruments;
Second, whether the seller in the secondary market can be the proper withholding agent of the
final withholding tax due on the yield or interest income derived from government debt
instruments considered as deposit substitutes;
Third, assuming the PEACe Bonds are considered "deposit substitutes," whether government
or the Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final
withholding tax from the face value of these Bonds. Further:
(a) Will the imposition of the 20% final withholding tax violate the non-impairment clause of the
Constitution?
(b) Will it constitute a deprivation of property without due process of law?
Lastly, whether the respondent Bureau of Treasury is liable to pay 6% legal interest.
I SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by
Before going into the substance of the motions for reconsideration, we find it necessary to clarify
on the procedural aspects of this case. This is with special emphasis on the jurisdiction of the
Court of Tax Appeals in view of the previous conflicting rulings of this Court.
Earlier, respondents questioned the propriety of petitioners' direct resort to this Court. They
argued that petitioners should have challenged first the 2011 Bureau of Internal Revenue rulings
before the Secretary of Finance, consistent with the doctrine on exhaustion of administrative
remedies.
In the assailed Decision, we agreed that interpretative rulings of the Bureau of Internal Revenue
are reviewable by the Secretary of Finance under Section 441 of the National Internal Revenue
Code. However, we held that because of the special circumstances availing in this case-namely:
the question involved is purely legal; the urgency of judicial intervention given the impending
maturity of the PEA Ce Bonds; and the futility of an appeal to the Secretary of Finance as the
latter appeared to have adopted the challenged Bureau of Internal Revenue rulings-there was
no need for petitioners to exhaust all administrative remedies before seeking judicial relief.
We also stated that:
[T]he jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the
Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued
in connection with the implementation of the 1997 National Internal Revenue Code on the
taxability of the _interest income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by
Republic Act No. 9282, such rulings of the Commissioner of Internal Revenue are appealable
to that court, thus:
SEC. 7. Jurisdiction. -The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or
other matters arising under the National Internal Revenue or other laws administered by the
Bureau of Internal Revenue;
....
a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of
Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of
Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file
an appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after
the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters
arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as ·herein provided, until and unless an appeal
has been previously filed with the CTA and disposed of in accordance with the provisions of this
Act.
In Commissioner of Internal Revenue v. Leal, citing Rodriguez v. Blaquera, this court
emphasized the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal
Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it
be stressed that the jurisdiction to review the rulings of the Commissioner of Internal Revenue
pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the
Commissioner implementing the Tax Code on the taxability of pawnshops.
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax
Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. - The
Secretary of Finance, upon recommendation of the Commissioner, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those
subject to a rate of sales tax under certain category enumerated in Section 163 and 165 of this
Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make
rulings or opinions in connection with the implementation of the provisions of internal revenue
laws, including ruling on the classification of articles of sales and similar purposes."
....
The Court, in Rodriguez etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue,
but merely an attempt to nullify General Circular No. V-148, which does not adjudicate or settle
any controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax
Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with
the collection of taxes and license fees to adhere strictly to the interpretation given by the
defendant to the statutory provisions above mentioned, as set forth in the Circular. The same
incorporates, therefore, a decision of the Collector of Internal Revenue (now Commissioner of
Internal Revenue) on the manner of enforcement of the said statute, the administration of which
is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of
Republic Act No. 1125, Section 7 of which provides that the Court of Tax Appeals 'shall exercise
exclusive appellate jurisdiction to review by appeal . . . decisions of the Collector of Internal
Revenue in . . . matters arising under the National Internal Revenue Code or other law or part
of the law administered by the Bureau of Internal Revenue. "[['42]]
In Commissioner of Internal Revenue v. Leal, 43 the Commissioner issued Revenue
Memorandum Order (RMO) No. 15-91 imposing 5% lending investors tax on pawnshops, and
Revenue Memorandum Circular (RMC) No. 43-91 subjecting the pawn ticket to documentary
stamp tax.44 Leal, a pawnshop owner and operator, asked for reconsideration of the revenue
orders, but it was denied by the Commissioner in BIR Ruling No. 221-91.45 Thus, Leal filed before
the Regional Trial Court a petition for prohibition seeking to prohibit the Commissioner from
implementing the revenue orders. 46 This Court held that Leal should have filed her petition for
prohibition before the Court of Tax Appeals, not the Regional Trial Court, because "the
questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the
Commissioner implementing the Tax Code on the taxability of pawnshops."47 This Court held
that such rulings in connection with the implementation of internal revenue laws are appealable
to the Court of Tax Appeals under Republic Act No. 1125, as amended.48
Likewise, in Asia International Auctioneers, Inc. v. Hon. Parayno, Jr., 49 this Court upheld the
jurisdiction of the Court of Tax Appeals over the Regional Trial Courts, on the issue of the validity
of revenue memorandum circulars.50 It explained that "the assailed revenue regulations and
revenue memorandum circulars [were] actually rulings or opinions of the [Commissioner of
Internal Revenue] on the tax treatment of motor vehicles sold at public auction within the [Subic
Special Economic Zone] to implement Section 12 of [Republic Act] No. 7227." This Court further
held that the taxpayers' invocation of this Court's intervention was premature for its failure to
first ask the Commissioner of Internal Revenue for reconsideration of the assailed revenue
regulations and revenue memorandum circulars.
However, a few months after the promulgation of Asia International Auctioneers, British
American Tobacco v. Camacho51 pointed out that although Section 7 of Republic Act No. 1125,
as amended, confers on the Court of Tax Appeals jurisdiction to resolve tax disputes in general,
this does not include cases where the constitutionality of a law or rule is challenged. Thus:
The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as amended
by Republic Act No. 9282. Section 7 thereof states, in pertinent part:
....
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this
does not include cases where the constitutionality of a law or rule is challenged. Where what is
assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency in the performance of its quasi-legislative function, the regular courts have
jurisdiction to pass upon the same. The determination of whether a specific rule or set of rules
issued by an administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial review or
the power to declare a law, treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation in the courts, including the regional trial courts. This
is within the scope of judicial power, which includes the authority of the courts to determine in
an appropriate action the validity of the acts of the political departments. Judicial power includes
the duty of the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determin whether or not there has been a grave abuse of
dicretion amounting to lack or execss of jurisdiction on the part of any branch or instrumentality
of the Government.
In Drilon v. Lim, it was held:
We stress at the outset that the lower court had jurisdiction to consider the constitutionality of
Section 187, this authority being embraced in the general definition of the judicial power to
determine what are the valid and binding laws by the criterion of their conformity to the
fundamental law. Specifically, B.P. 129 vests in the regional trial courts jurisdiction over all civil
cases in which the subject of the litigation is incapable of pecuniary estimation, even as the
accused in a criminal action has the right to question in his defense the constitutionality of a law
he is charged with violating and of the proceedings taken against him, particularly as they
contravene the Bill of Rights. Moreover, Article X, Section 5(2), of the Constitution vests in the
Supreme Court appellate jurisdiction over final judgments and orders of lower courts in all cases
in which the constitutionality or validity of any treaty, international or executive agreement, law,
presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.
The petition for injunction filed by petitioner before the RTC is a direct attack on the
constitutionality of Section 145(C) of the NIRC, as amended, and the validity of its implementing
rules and regulations. In fact, the RTC limited the resolution of the subject case to the issue of
the constitutionality of the assailed provisions. The determination of whether the assailed law
and its implementing rules and regulations contravene the Constitution is within the jurisdiction
of regular courts. The Constitution vests the power of judicial review or the power to declare a
law, treaty, international or executive agreement, presidential decree, order, instruction,
ordinance, or regulation in the courts, including the regional trial courts. Petitioner, therefore,
properly filed the subject case before the RTC. 52 (Citations omitted)
British American Tobacco involved the validity of: (1) Section 145 of Republic Act No. 8424; (2)
Republic Act No. 9334, which further amended Section 145 of the National Internal Revenue
Code on January 1, 2005; (3) Revenue Regulations Nos. 1-97, 9-2003, and 22-2003; and (4)
RMO No. 6- 2003.53
A similar ruling was made in Commissioner of Customs v. Hypermix Feeds
Corporation. 54 Central to the case was Customs Memorandum Order (CMO) No. 27-2003
issued by the Commissioner of Customs. This issuance provided for the classification of wheat
for tariff purposes. In anticipation of the implementation of the CMO, Hypermix filed a Petition
for Declaratory Relief before the Regional Trial Court. Hypermix claimed that said CMO was
issued without observing the provisions of the Revised Administrative Code; was confiscatory;
and violated the equal protection clause of the 1987 Constitution. 55 The Commissioner of
Customs moved to dismiss on the ground of lack of jurisdiction. 56 On the issue regarding
declaratory relief, this Court ruled that the petition filed by Hypermix had complied with all the
requisites for an action of declaratory relief to prosper. Moreover:
Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts. This is within the scope of judicial
power, which includes the authority of the courts to determine in an appropriate action the
validity of the acts of the political departments. 57
We revert to the earlier rulings in Rodriguez, Leal, and Asia International Auctioneers, Inc. The
Court of Tax Appeals has exclusive jurisdiction to determine the constitutionality or validity of
tax laws, rules and regulations, and other administrative issuances of the Commissioner of
Internal Revenue.
Article VIII, Section 1 of the 1987 Constitution provides the general definition of judicial power:
ARTICLE VIII
JUDICIAL DEPARTMENT
Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as
may be established by law.
Judicial power includes the duty of the courts of justice to settle actual controversies involving
rights which are legally demandable and enforceable, and to determine whether or not there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of
any branch or instrumentality of the Government. (Emphasis supplied)
Based on this constitutional provision, this Court recognized, for the first time, in The City of
Manila v. Hon. Grecia-Cuerdo,58 the Court of Tax Appeals' jurisdiction over petitions
for certiorari assailing interlocutory orders issued by the Regional Trial Court in a local tax case.
Thus:
[W]hile there is no express grant of such power, with respect to the CTA, Section 1, Article VIII
of the 1987 Constitution provides, nonetheless, that judicial power shall be vested in one
Supreme Court and in such lower courts as may be established by law and that judicial power
includes the duty of the courts of justice to settle actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government.
On the strength of the above constitutional provisions, it can be fairly interpreted that the power
of the CTA includes that of determining whether or not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory
order in cases falling within the exclusive appellate jurisdiction of the tax court. It, thus, fo1lows
that the CTA, by constitutional mandate, is vested with jurisdiction to issue writs of certiorari in
these cases. 59 (Emphasis in the original)
This Court further explained that the Court of Tax Appeals' authority to issue writs of certiorari is
inherent in the exercise of its appellate jurisdiction.
A grant of appellate jurisdiction implies that there is included in it the power necessary to
exercise it effectively, to make all orders that will preserve the subject of the action, and to give
effect to the final determination of the appeal. It carries with it the power to protect that jurisdiction
and to make the decisions of the court thereunder effective. The court, in aid of its appellate
jurisdiction, has authority to control all auxiliary and incidental matters necessary to the efficient
and proper exercise of that jurisdiction. For this purpose, it may, when necessary, prohibit or
restrain the performance of any act which might interfere with the proper exercise of its rightful
jurisdiction in cases pending before it.
Lastly, it would not be amiss to point out that a court which is endowed with a particular
jurisdiction should have powers which are necessary to enable it to act effectively within such
jurisdiction. These should be regarded as powers which are inherent in its jurisdiction and the
court must possess them in order to enforce its rules of practice and to suppress any abuses of
its process and to defeat any attempted thwarting of such process.
In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as the CA
and shall possess all the inherent powers of a court of justice.
Indeed, courts possess certain inherent powers which may be said to be implied from a general
grant of jurisdiction, in addition to those expressly conferred on them. These inherent powers
are such powers as are necessary for the ordinary and efficient exercise of jurisdiction; or are
essential to the existence, dignity and functions of the courts, as well as to the due administration
of justice; or are directly appropriate, convenient and suitable to the execution of their granted
powers; and include the power to maintain the court's jurisdiction and render it effective in behalf
of the litigants.
Thus, this Court has held that "while a court may be expressly granted the incidental powers
necessary to effectuate its jurisdiction, a grant of jurisdiction, in the absence of prohibitive
legislation, implies the necessary and usual incidental powers essential to effectuate it, and,
subject to existing laws and constitutional provisions, every regularly constituted court has
power to do all things that are reasonably necessary for the administration of justice within the
scope of its jurisdiction and for the enforcement of its judgments and mandates." Hence,
demands, matters or questions ancillary or incidental to, or growing out of, the main action, and
coming within the above principles, may be taken cognizance of by the court and determined,
since such jurisdiction is in aid of its authority over the principal matter, even though the court
may thus be called on to consider and decide matters which, as original causes of action, would
not be within its cognizance.60 (Citations omitted)
Judicial power likewise authorizes lower courts to determine the constitutionality or validity of a
law or regulation in the first instance.61 This is contemplated in the Constitution when it speaks
of appellate review of final judgments of inferior courts in cases where such constitutionality is
in issue.62
On, June 16, 1954, Republic Act No. 1125 created the Court of Tax Appeals not as another
superior administrative agency as was its predecessor-the former Board of Tax Appeals-but as
a part of the judicial system63 with exclusive jurisdiction to act on appeals from:
(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;
(2) Decisions of the Commissioner of Customs in cases involving liability for customs duties,
fees or other money charges; seizure, detention or release of property affected fines, forfeitures
or other penalties imposed in relation thereto; or other matters arising under the Customs Law
or other law or part of law administered by the Bureau of Customs; and
(3) Decisions of provincial or city Boards of Assessment Appeals in cases involving the
assessment and taxation of real property or other matters arising under the Assessment Law,
including rules and regulations relative thereto.
Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction over all matters
involving assessments that were previously cognizable by the Regional Trial Courts (then courts
of first instance).64
In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction of the Court of Tax
Appeals and elevated its rank to the level of a collegiate court with special jurisdiction. Section
1 specifically provides that the Court of Tax Appeals is of the same level as the Court of Appeals
and possesses "all the inherent powers of a Court of Justice."65
Section 7, as amended, grants the Court of Tax Appeals the exclusive jurisdiction to resolve all
tax-related issues:
Section 7. Jurisdiction - The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue;
2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific
period of action, in which case the inaction shall be deemed a denial;
3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally
decided or resolved by them in the exercise of their original or appellate jurisdiction;
4) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees
or other money charges, seizure, detention or release of property affected, fines, forfeitures or
other penalties in relation thereto, or other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
5) Decisions of the Central Board of Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment and taxation of real property originally decided
by the provincial or city board of assessment appeals;
6) Decisions of the Secretary of Finance on customs cases elevated to him automatically for
review from decisions of the Commissioner of Customs which are adverse to the Government
under Section 2315 of the Tariff and Customs Code;
7) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product,
commodity or article, and the Secretary of Agriculture in the case of agricultural product,
commodity or article, involving dumping and countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act No.
8800, where either party may appeal the decision to impose or not to impose said duties.
The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or validity
of a tax law or regulation when raised by the taxpayer as a defense in disputing or contesting
an assessment or claiming a refund. It is only in the lawful exercise of its power to pass upon all
matters brought before it, as sanctioned by Section 7 of Republic Act No. 1125, as amended.
This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of
cases directly challenging the constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue memorandum circulars, rulings).
Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes, appeals
from the decisions of quasi-judicial agencies66 (Commissioner of Internal Revenue,
Commissioner of Customs, Secretary of Finance, Central Board of Assessment Appeals,
Secretary of Trade and Industry) on tax-related problems must be brought exclusively to the
Court of Tax Appeals.
In other words, within the judicial system, the law intends the Court of Tax Appeals to have
exclusive jurisdiction to resolve all tax problems. Petitions for writs of certiorari against the acts
and omissions of the said quasi-judicial agencies should, thus, be filed before the Court of Tax
Appeals. 67
Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 12968 provides an
exception to the original jurisdiction of the Regional Trial Courts over actions questioning the
constitutionality or validity of tax laws or regulations. Except for local tax cases, actions directly
challenging the constitutionality or validity of a tax law or regulation or administrative issuance
may be filed directly before the Court of Tax Appeals.
Furthermore, with respect to administrative issuances (revenue orders, revenue memorandum
circulars, or rulings), these are issued by the Commissioner under its power to make rulings or
opinions in connection
with the implementation of the provisions of internal revenue laws. Tax rulings, on the other
hand, are official positions of the Bureau on inquiries of taxpayers who request clarification on
certain provisions of the National Internal Revenue Code, other tax laws, or their implementing
regulations.69 Hence, the determination of the validity of these issuances clearly falls within the
exclusive appellate jurisdiction of the Court of Tax Appeals under Section 7(1) of Republic Act
No. 1125, as amended, subject to prior review by the Secretary of Finance, as required under
Republic Act No. 8424.70
We now proceed to the substantive aspects.
II
Respondents contend that the 20-lender rule should not strictly apply to issuances of
government debt instruments, which by nature, are borrowings from the public. 71 Applying the
rule otherwise leads to an absurd result.72 They point out that in BIR Ruling No. 007-0473 dated
July 16, 2004 (the precursor of BIR Ruling Nos. 370-2011 and DA 378-2011), the Bureau of
Treasury's admitted intent to make the government securities freely tradable to an unlimited
number of lenders/investors in the secondary market was considered in place of an actual head
count of lenders/investors due to the limitations brought about by the absolute confidentiality of
investments in government bonds under Section 2 of Republic Act No. 1405, otherwise known
as the Bank Secrecy Law. 74
Considering that the PEACe Bonds were intended to be freely tradable in the secondary market
to 20 or more lenders/investors, respondents contend. that they, like other similarly situated
government securities-awarded to 19 or less GSEDs in the primary market but freely tradable
to 20 or more lenders/investors in the secondary market-should be treated as deposit substitutes
subject to the 20% final withholding tax. 75
Petitioners and petitioners-intervenors RCBC and RCBC Capital counter that Section 22(Y) of
the National Internal Revenue Code applies to all types of securities, including those issued by
government. They add that under this provision, it is the actual number of lenders at any one
time that is material in determining whether an issuance is to be considered a deposit substitute
and not the intended distribution plan of the issuer.
Moreover, petitioners and petitioners-intervenors RCBC and RCBC Capital argue that the real
intent behind the issuance of the PEACe Bonds, as reflected by the representations and
assurances of government in various issuances and rulings, was to limit the issuance to 19
lenders and below. Hence, they contend that government cannot now take an inconsistent
position.
We find respondents' proposition to consider the intended public distribution of government
securities-in this case, the PEACe Bonds-in place of an actual head count to be untenable.
The general rule of requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by implication. 76
The definition of deposit substitutes in Section 22(Y) specifically defined "public" to mean "twenty
(20) or more individual or corporate lenders at any one time."77 The qualifying phrase for public
introduced78 by the National Internal Revenue Code shows that a change in the meaning of the
provision was intended, and this Court should construe the provision as to give effect to the
amendment.79 Hence, in light of Section 22(Y), the reckoning of whether there are 20 or more
individuals or corporate lenders is crucial in determining the tax treatment of the yield from the
debt instrument. In other words, if there are 20 or more lenders, the debt instrument is
considered a deposit substitute and subject to 20% final withholding tax.
II.A
The definition of deposit substitutes under the National Internal Revenue Code was lifted from
Section 95 of Republic Act No. 7653, otherwise known as the New Central Bank Act:
SEC. 95. Definition of Deposit Substitutes. The term "deposit substitutes" is defined as an
alternative form of obtaining funds from the public. other than deposits. through the issuance.
endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose
ofrelending or purchasing of receivables and other obligations. These instruments may include,
but need not be limited to, bankers' acceptances, promissory notes, participations, certificates
of assignment and similar instruments with recourse, and repurchase agreements. The
Monetary Board shall determine what specific instruments shall be considered as deposit
substitutes for the purposes of Section 94 of this Act: Provided, however, That deposit
substitutes of commercial, industrial and other nonfinancial companies issued for the limited
purpose of financing their own needs or the needs of their agents or dealers shall not be covered
by the provisions of Section 94 of this Act. (Emphasis supplied)
Banks are entities engaged in the lending of funds obtained from the public in the form of
deposits. 80 Deposits of money in banks and similar institutions are considered simple
loans. 81 Hence, the relationship between a depositor and a bank is that of creditor and debtor.
The ownership of the amount deposited is transmitted to the bank upon the perfection of the
contract and it can make use of the amount deposited for its own transactions and other banking
operations. Although the bank has the obligation to return the amount deposited, it has no
obligation to return or deliver the same money that was deposited.82
The definition of deposit substitutes in the banking laws was brought about by an observation
that banks and non-bank financial intermediaries have increasingly resorted to issuing a variety
of debt instruments, other than bank deposits, to obtain funds from the public. The definition
also laid down the groundwork for the supervision by the Central Bank of quasi-banking
functions.83
As defined in the banking sector, the term "public" refers to 20 or more lenders. 84 "What controls
is the actual number of persons or entities to whom the products or instruments are issued. If
there are at least twenty (20) lenders or creditors, then the funds are considered obtained from
the public."85
If a bank or non-bank financial intermediary sells debt instruments to 20 or more lenders/placers
at any one time, irrespective of outstanding amounts, for the purpose of releI].ding or purchasing
of receivables or obligations, it is considered to be performing a quasi-banking function and
consequently subject to the appropriate regulations of the Bangko Sentral ng Pilipinas (BSP).
11.B
Under the National Internal Revenue Code, however, deposit substitutes include not only the
issuances and sales of banks and quasi-banks for relending or purchasing receivables and other
similar obligations, but also debt instruments issued by commercial, industrial, and other
nonfinancial companies to finance their own needs or the needs of their agents or dealers. This
can be deduced from a reading together of Section 22(X) and (Y):
Section 22. Definitions - When used in this Title:
....
(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more
personal or corporate lenders at any one time, through the issuance, endorsement, or
acceptance of debt instruments of any kind other than deposits for the borrower's own account,
or through the issuance of certificates of assignment or similar instruments, with recourse, or of
repurchase agreements for purposes of re-lending or purchasing receivables and other similar
obligations: Provided, however, That commerciali industrial and other non-financial companies,
which borrow funds through any of these means for the limited purpose of financing their own
needs or the needs of their agents or dealers, shall not be considered as performing quasi-
banking functions.
(Y) The term 'deposit substitutes' shall mean an alternative form of
obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more
individual or corporate lenders at any one time), other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. (Emphasis supplied)
For internal re.venue tax purposes, therefore, even debt instruments issued and sold to 20 or
more lenders/investors by commercial or industrial companies to finance their own needs are
considered deposit substitutes, taxable as such.
11.C
The interest income on bank deposits was subjected for the first time to the withholding tax
system under Presidential Decree No. 1156,86 which was promulgated in 1977. The whereas
clauses spell the reasons for the law:
[I]nterest on bank deposit is one of the items includible in gross income .... [M]any bank
depositors fail to declare interest income in their income tax returns. . . . [I]n order to maximize
the collection of the income tax on interest on bank deposits, it is necessary to apply the
withholdings system on this type of fixed or determinable income.
In the same year, Presidential Decree No. 115487 was also promulgated. It imposed a 35%
transaction tax (final tax) on interest income from every commercial paper issued in the primary
market, regardless of whether they are issued to the public or not. 88 Commercial paper was
defined as "an instrument evidencing indebtedness of any person or entity, including banks and
non-banks performing quasi-banking functions, which is issued, endorsed, sold, transferred or
in any manner conveyed to another person or entity, either with or without recourse and
irrespective of maturity." The imposition of a final tax on commercial papers was "aimed primarily
to improve the administrative provisions of the National Internal Revenue Code to ensure the
collection on the tax on interest on commercial papers used as principal instruments issued in
the primary market."89 It was reported that "the [Bureau of Internal Revenue had] no means of
enforcing strictly the taxation on interest income earned in the money market transactions. " 90
These presidential decrees, as well as other new internal revenue laws and various laws and
decrees that have so far amended the provisions of the 1939 National Internal Revenue Code
were consolidated and codified into the 1977 National Internal Revenue Code.91
In 1980, Presidential Decree No. 173992 was promulgated, which further amended certain
provisions of the 1977 National Internal Revenue Code and repealed Section 210 (the provision
embodying the percentage tax on commercial paper transactions). The Decree imposed a final
tax of 20% on interests from yields on deposit substitutes issued to the public.93 The tax was
required to be withheld by banks and non-bank financial intermediaries and paid to the Bureau
of Internal Revenue in accordance with Section 54 of the 1977 National Internal Revenue Code.
Presidential Decree No. 1739, as amended by Presidential Decree No. 1959 in 1984 (which
added the definition of deposit substitutes) was subsequently incorporated in the National
Internal Revenue Code.
These developments in the National Internal Revenue Code reflect the rationale for the
application of the withholding system to yield from deposit substitutes, which is essentially to
maximize and expedite the collection of income taxes by requiring its payment at the
source, 94 as with the case of the interest on bank deposits. When banks sell deposit substitutes
to the public, the final withholding tax is imposed on the interest income because it would be
difficult to collect from the public. Thus, the incipient scheme in the final withholding tax is to
achieve an effective administration in capturing the interest-income windfall from deposit
substitutes as a source of revenue.
It must be emphasized, however, that withholding tax is merely a method of collecting income
tax in advance. The perceived tax is collected at the source of income payment to ensure
collection. Consequently, those subjected to the final withholding tax are no longer subject to
the regular income tax.
III
Respondents maintain that the phrase "at any one time" must be given its ordinary meaning, i.e.
"at any given time" or "during any particular point or moment in the day."95 They submit that the
correct interpretation of Section 22(Y) does .not look at any specific transaction concerning the
security; instead, it considers the existing number of lenders/investors of such security at any
moment in time, whether in the primary or secondary market.96 Hence, when during the lifetime
of the security, there was any one instance where twenty or more individual or corporate lenders
held the security, the borrowing becomes "public" in character and is ipso facto subject to 20%
final withholding tax.97
Respondents further submit that Section 10.1(k) of the Securities Regulation Code and its
Implementing Rules and Regulations may be applied by analogy, such that if at any time, (a)
the lenders/investors number 20 or more; or (b) should the issuer merely offer the securities
publicly or to 20 or more lenders/investors, these securities should be deemed deposit
substitutes.98
On the other hand, petitioners-intervenors RCBC and RCBC Capital insist that the phrase "at
any one time" only refers to transactions made in the primary market. According to them, the
1âwphi1
PEACe Bonds are not deposit substitutes since CODE-NGO, through petitioner-intervenor
RCBC, is the sole lender in the primary market, and all subsequent transactions in the secondary
market merely pertain to a sale and/or assignment of credit and not borrowings from the public.99
Similarly, petitioners contend that for a government security, such as the PEACe Bonds, to be
considered as deposit substitutes, it is an indispensable requirement that there is "borrowing"
between the issuer and the lender/investor in the primary market and between the transferee
and the transferor in the secondary market. Petitioners submit that in the secondary market, the
transferee/buyer must have recourse to the selling investor as required by Section 22(Y) of the
National Internal Revenue Code so that a borrowing "for the borrower's (transferor's) own
account" is created between the buyer and the seller. Should the transferees in the secondary
market who have recourse to the transferor reach 20 or more, the transaction will be subjected
to a-final withholding tax. 100
Petitioners and petitioners-intervenors RCBC and RCBC Capital contend that respondents'
proposed application of Section 10.l(k) of the Securities Regulation Code and its Implementing
Rules is misplaced because: (1) the National Internal Revenue Code clearly provides the
conditions when a security issuance should qualify as a deposit substitute subject to the 20%
final withholding tax; and (2) the two laws govern different matters.
III.A
Generally, a corporation may obtain funds for capital expenditures by floating either shares of
stock (equity) or bonds (debt) in the capital market. Shares of stock or equity securities represent
ownership, interest, or participation in the issuer-corporation. On the other hand, bonds or debt
securities are evidences of indebtedness of the issuer-corporation.
New securities are issued and sold to the investing public for the first time in the primary market.
Transactions in the primary market involve an actual transfer of funds from the investor to the
issuer of the new security. The transfer of funds is evidenced by a security, which becomes a
financial asset in the hands of the buyer/investor.
New issues are usually sold through a registered underwriter, which may be an investment
house or bank registered as an underwriter of securities.101 An underwriter helps the issuer find
buyers for its securities. In some cases, the underwriter buys the whole issue from the issuer
and resells this to other security dealers and the public. 102 When a group of underwriters pool
together their resources to underwrite an issue, they are called the "underwriting syndicate."103
On the other hand, secondary markets refer to the trading of outstanding or already-issued
securities. In any secondary market trade, the cash proceeds normal_ly go to the selling investor
rather than to the issuer.
To illustrate: A decides to issue bonds to raise capital funds. X buys and is issued A bonds. The
proceeds of the sale go to A, the issuer. The sale between A and Xis a primary market
transaction.
Before maturity, X trades its A bonds to Y. The A bonds sold by X are not X's indebtedness. The
cash paid for the bonds no longer go to A, but remains with X, the s_elling investor/holder. The
transfer of A bonds from X to Y is considered a secondary market transaction. Any difference
between the purchase price of the assets (A bonds) and the sale price is a trading gain subject
to a different tax treatment, as will be explained later.
When Y trades its A bonds to Z, the sale is still considered a secondary market transaction. In
other words, the trades from X to Y, Y to Z, and Z to subsequent holders/investors are
considered secondary market transactions. If Z holds on to the bonds and the bonds mature, Z
will receive from A the face value of the bonds.
A bond is similar to a bank deposit in the sense that the investor lends money to the issuer and
the issuer pays interest on the invested amount. However, unlike bank deposits, bonds are
marketable securities. The market mechanism provides quick mobility of money and
securities. 104 Thus, bondholders can sell their bonds before they mature to other investors, in
tum converting their· financial assets to cash. In contrast, deposits, in the form of savings
accounts for instance, can only be redeemed by the issuing bank.
111.B
An investor in bonds may derive two (2) types of income:
First, the interest or the amount paid by the borrower to the lender/investor for the use of the
lender’s money.105 For interest-bearing bonds, interest is normally earned at the coupon date. In
zero-coupon bonds, the discount is an interest amortized up to maturity.
Second, the gain, if any, that is earned when the bonds are traded before maturity date or when
redeemed at maturity.
The 20% final withholding tax imposed on interest income or yield from deposit substitute does
not apply to the gains derived from trading, retirement, or redemption of the instrument.
It must be stressed that interest income, derived by individuals from long-term deposits or
placements made with banks in the form of deposit substitutes, is exempt from income tax.
Consequently, it is likewise exempt from the final withholding tax under Sections 24(B)(l) and
25(A)(2) of the National Internal Revenue Code. However, when it is pre-terminated by the
individual investor, graduated rates of 5%, 12%, or 20%, depending on the remaining maturity
of the instrument, will apply on the entire income, to be deducted and withheld by the depository
bank.
With respect to gains derived from long-term debt instruments, Section 32(B)(7)(g) of the
National Internal Revenue Code provides:
Sec. 32. Gross Income. –
....
(B) Exclusions from Gross Income. - The following items shall not be included in gross income
and shall be exempt from taxation under this title:
....
(7) Miscellaneous Items. -
....
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains
realized from the sale or exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years.
Thus, trading gains, or gains realized from the sale or transfer of bonds (i.e., those with a
maturity of more than five years) in the secondary market, are exempt from income tax. These
"gains" refer to the difference between the selling price of the bonds in the secondary market
and the price at which the bonds were purchased by the seller. For discounted instruments such
as the zero-coupon bonds, the trading gain is the excess of the selling price over the book value
or accreted value (original issue price plus accumulated discount from the time of purchase up
to the time of sale) of the instruments.106
Section 32(B)(7)(g) also includes gains realized by the last holder of the bonds when the bonds
are redeemed at maturity, which is the difference between the proceeds from the retirement of
the bonds and the price at which the last holder acquired the bonds.
On the other hand, gains realized from the trading of short-term bonds (i.e., those with a maturity
of less than five years) in the secondary market are subject to regular income tax rates (ranging
from 5% to 32% for individuals, and 30% for corporations) under Section 32107 of the National
Internal Revenue Code.
111.C
The Secretary of Finance, through the Bureau of Treasury, 108 is authorized under Section 1 of
Republic Act No. 245, as amended, to issue evidences of indebtedness such as treasury bills
and bonds to meet public expenditures or to provide for the purchase, redemption, or refunding
of any obligations.
These treasury bills and bonds are issued and sold by the Bureau of Treasury to
lenders/investors through a network of licensed dealers (called Government Securities Eligible
Dealers or GSEDs ). 109 GSEDs are classified into primary and ordinary dealers. 110 A primary
dealer enjoys certain privileges such as eligibility to participate in the competitive bidding of
regular issues, eligibility to participate in the issuance of special issues such as zero-coupon
treasury bonds, and access to tap facility window. 111 On the other hand, ordinary dealers are
only allowed to participate in the noncompetitive bidding. 112 Moreover, primary dealers are
required to meet the following obligations:
a. Must submit at least one competitive bid in each scheduled auction. personally encounter the third person with whom the agent interacts. 125 The law contemplates
impersonal dealings where the principal need not personally know or meet the third person with
b. Must have total awards of at least 2% of the total amount of bills or bonds awarded within a whom the agent transacts: precisely, the purpose of agency is to extend the personality of the
particular quarter. This requirement does not cover special issues. principal through the facility of the agent. 126 It was also stressed that the manner in which the
parties designate the relationship is not controlling. 127 If an act done by one person on behalf of
c. Must be active in the trading of GS [government securities] in the secondary market. 113 another is in its essential nature one of agency, the former is the agent of the latter,
notwithstanding he or she is not caled.128
A primary dealer who fails to comply with its obligations will be dropped from the roster of primary
dealers and classified as an ordinary dealer. Through the use of GSEDs, particularly primary dealers, government is able to ensure the
absorption of newly issued securities and promote activity in the government securities market.
The primary dealer system allows government to access potential investors in the market by
The auction method is the main channel used for originating government securities. 114 Under
taking advantage of the GSEDs' distribution capacity. The sale transactions executed by the
this method, the Bureau of Treasury issues a public notice offering treasury bills and bonds for
GSED are indirectly for the benefit of the issuer. An investor who purchases bonds from the
sale and inviting tenders. 115 The GSEDs tender their bids electronically; 116 after the cut-off time,
GSED becomes an indirect lender to government. The financial asset in the hand of the investor
the Auction Committee deliberates on the bids and decide on the award. 117
represents a claim to future cash, which the borrower-government must pay at maturity date. 129
The Auction Committee then downloads the awarded securities to the winning bidders' Principal
Accordingly, the existence of 20 or more lenders should be reckoned at the time when the
Securities Account in the Registry of Scrip less Securities (RoSS). The RoSS, an electronic
successful GSED-bidder distributes (either by itself or through an underwriter) the government
book-entry system established by the Bureau of Treasury, is the official Registry of ownership
securities to final holders. When the GSED sells the · government securities to 20 or more
of or interest in government securities. 118 All government securities floated/originated by the
investors, the government securities are deemed to be in the nature of a deposit substitute,
National Government under its scripless policy, as well as subsequent transfers of the same in
taxable as such.
the secondary market, are recorded in the RoSS in the Principal Securities Account of the
GSED. 119
On the other hand, trading of bonds between two (2) investors in the secondary market involves
a purchase or sale transaction. The transferee of the bonds becomes the new owner, who is
A GSED is required to open and maintain Client Securities Accounts in the name of its
entitled to recover the face value of the bonds from the issuer at maturity date. Any profit realized
respective clients for segregating government securities acquired by such clients from the
from the purchase or sale transaction is in the nature of a trading gain subject to a different tax
GSED' s own securities holdings. A GSED may also lump all government securities sold to
treatment, as explained above.
clients in one account, provided ·that the GSED maintains complete records of ownership/other
titles of its clients in the GSED's own books. 120
Respondents contend that the literal application of the "20 or more lenders at any one time" to
government securities would lead to: (1) impossibility of tax enforcement due to limitations
Thus, primary issues of treasury bills and bonds are supposed to be issued only to GSEDs. By
imposed by the Bank Secrecy Law; (2) possible uncertainties130; and (3) loopholes.131These
participating in auctions, the GSED acts as a channel between the Bureau of Treasury and
concerns, however, are not sufficient justification for us to deviate from the text of the
investors in the primary market. The winning GSED bidder acquires the privilege to on-sell
law.132 Determining the wisdom, policy, or expediency of a statute is outside the realm of judicial
government securities to other financial institutions or final investors who need not be
power.133 These are matters that should be addressed to the legislature. Any other interpretation
GSEDs. 121 Further, nothing in the law or the rules of the Bureau of Treasury prevents the GSED
looking into the purported effects of the law would be tantamount to judicial legislation.
from entering into contract with another entity to further distribute government securities.
IV
In effecting a sale or distribution of government securities, a GSED acts in a certain sense as
the "agent" of the Bureau of Treasury. In Doles v. Angeles, 122 the basis of an agency is
representation. 123 The question of whether an agency has been created may be established by Section 57 prescribes the withholding tax on interest or yield on deposit substitutes, among
direct or circumstantial evidence. 124 For an agency to arise, it is not necessary that the princi~al others, and the person obligated to withhold the same. Section 57 reads:
Section 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations, the
Secretary of Finance may promulgate, upon the recommendation of the Commissioner,
requiring the filing of income tax return by certain income payees, the tax imposed or prescribed
by Sections 24(B)(l), 24(B)(2), 24(C), 24(D)(l); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E);
27(D)(l), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c),
28(B)(l), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c), 33 and 282 of the
Code on specified items of income shall be withheld by payor-corporation and/or person and
paid in the same manner and subject to the same conditions as provided in Section 58 of this
Code.
Likewise, Section 2.57 of Revenue Regulations No. 2-98 (implementing the National Internal
Revenue Code relative to the Withholding on Income subject to the Expanded Withholding Tax
and Final Withholding Tax) states that the liability for payment of the tax rests primarily on the
payor as a withholding agent. Section 2.57 reads:
Sec. 2.57. WITHHOLDING OF TAX AT SOURCE. -
(A) Final Withholding Tax - Under the final withholding tax system the amount of income tax
withheld by the withholding agent is constituted as a full and final payment of the income tax
due from the payee of said income. The liability for payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under
withhp;ding the deficiency tax shall be collected from the payor/witholding agent[.] (Emphasis
supplied)
From these provisions, it is the payor-borrower who primarily has the duty to withhold and remit
the 20% final tax on interest income or yield from deposit substitutes.
This does not mean, however, that only the payor-borrower can be constituted as withholding
agent. Under Section 59 of the National Internal Revenue Code, any person who has control,
receipt, custody, or disposal of the income may be constituted as withholding agent:
SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed under
this Title upon gains, profits, and income not falling under the foregoing and not returned and
paid by virtue of the foregoing or as otherwise provided by law shall be assessed by personal
return under rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. The intent and purpose of the Title is that all gains, profits
and income of a taxable class, as defined in this Title, shall be charged and assessed with the
corresponding tax prescribed by this Title, and said tax shall be paid by the owners of such
gains, profits and income, or the proper person having the receipt, custody, control or disposal
of the same. For purposes of this Title, ownership of such gains, profits and income or liability
to pay the tax shall be determined as of the year for which a return is required to be rendered.
(Emphasis supplied)
The intent and purpose of the National Internal Revenue Code provisions on withholding taxes
is also explicitly stated, i.e., that all gains, profits, and income "re charged and assessed with
the corresponding tax" 134 and said tax paid by "the owners of such gains, profits and income, or
the proper person having the receipt, custody, control or disposal of the same." 135
The obligation to deduct and withhold tax at source arises at the time an income subject to
withholding is paid or payable, whichever comes first. 136 In interest-bearing bonds, the interest
is taxed at every instance that interest is paid (and income is earned) on the bond. However, in
a zerocoupon bond, it is expected that no periodic interest payments will be made. Rather, the
investor will be paid the principal and interest (discount) together when the bond reaches
maturity.
As explained by respondents, "the discount is the imputed interest earned on the security, and
since paymnet is made at maturity, there is an accreted interest that causes the price of a zero
coupon instrument to accordingly increase with time, all things being constant." 137
In a 10-year zero-coupon bond, for instance, the discount (or interest) is not earned in the first
period, i.e., the value of the instrument does not equal par at the end of the first period. The total
discount is earned over the life of the instrument. Nonetheless, the total discount is considered
earned on the year of sale based on current value. 138
In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, has the primary
responsibility to withhold the 20% final withholding tax on the interest valued at present value,
when its sale and distribution of the government securities constitutes a deposit substitute
transaction. The 20% final tax is deducted by the buyer from the discount of the bonds and
included in the remittance of the purchase price.
The final tax withheld by the withholding agent is considered as a "full and final payment of the
income tax due from the payee on the said income [and the] payee is not required to file an
income tax return for the particular income." 139 Section 10 of Department of Finance Department
Order No. 020-10140 in relation to the National Internal Revenue Code also provides that no other
tax shall be collected on subsequent trading of the securities that have been subjected to the
final tax.
V
In this case, the PEACe Bonds were awarded to petitionersintervenors RCBC/CODE-NGO as
the winning bidder in the primary auction. At the same time, CODE-NGO got RCBC Capital as
underwriter, to distribute and sell the bonds to the public.
The Underwriting Agreement141 and RCBC Term Sheet142 for the sale of the PEACe bonds show
that the settlement dates for the issuance by the Bureau of Treasury of the Bonds to petitioners-
intervenors RCBC/CODENGO and the distribution by petitioner-intervenor RCBC Capital of the
PEA Ce Bonds to various investors fall on the same day, October 18, 2001.
This implies that petitioner-intervenor RCBC Capital was authorized to perform a book-building
process, 143 a customary method of initial distribution of securities by underwriters, where it could
collate orders for the securities ahead of the auction or before the securities were actually
issued. Through this activity, the underwriter obtains information about market conditions and
preferences ahead of the auction of the government securities.
The reckoning of the phrase "20 or more lenders" should be at the time when petitioner-
intervenor RCBC Capital sold the PEACe bonds to investors. Should the number of investors to
whom petitioner-intervenor RCBC Capital distributed the PEACe bonds, therefore, be found to
be 20 or more, the PEACe Bonds are considered deposit substitutes subject to the 20% final
withholding tax. Petitioner-intervenors RCBC/CODE-NGO and RCBC Capital, as well as the
final bondholders who have recourse to government upon maturity, are liable to pay the 20%
final withholding tax.
We note that although the originally intended negotiated sale of the bonds by government to
CODE-NGO did not materialize, CODE-NGO, a private entity-still through the participation of
petitioners-intervenors RCBC and RCBC Capital-ended up as the winning bidder for the
government securities and was able to use for its projects the profit earned from the sale of the
government securities to final investors.
Giving unwarranted benefits, advantage, or preference to a party and causing undue injury to
government expose the perpetrators or responsible parties to liability under Section 3(e) of
Republic Act No. 3019. Nonetheless, this is not the proper venue to determine and settle any
such liability.
VI
Petitioners-intervenors RCBC and RCBC Capital contend that they cannot be held liable for the
20% final withholding should have been made, their obligation was not clear since BIR Ruling
Nos. 370-2011 and DA 378-2011 stated that the 20% final withholding tax does not apply to
PEACe Bonds. 144 Second, to punish them under the circumstances (i.e., when they secured the
PEACe Bonds from the Bureau of Treasury and sold the Bonds to the lenders/investors, they
had no obligation to remit the 20% final withholding tax) would violate due process of law and
the constitutional proscription on ex facto law.145
Petitioner-intervenor RCBC Capital further posits that it cannot be held liable for the 20% final
withholding tax even as a taxpayer because it never earned interest income from the PEACe
Bonds, and any income earned is deemed in the nature of an underwriting
fee. 146 Petitionersintervenors RCBC and RCBC Capital instead argue that the liability falls on
the Bureau of Treasury and CODE-NGO, as withholding agent and taxpayer, respectively,
considering their explicit representation that the PEACe Bonds are exempt from the final
withholding tax. 147
Petitioners-intervenors RCBC and RCBC Capital add that the Bureau of Internal Revenue is
barred from assessing and collecting the 20% final withholding tax, assuming it was due, on the
ground of prescription. 148 They contend that the three (3)-year prescriptive period under Section
203, rather than the 10-year assessment period under Section 222, is applicable because they
were compliant with the requirement of filing monthly returns that reflect the final withholding
taxes due or remitted for the relevant period. No false or fraudulent return was made because
they relied on the 2001 BIR Rulings and on the representations made by the Bureau of Treasury
and CODE-NGO that the PEACe Bonds were not subject to the 20% final withholding tax. 149
Finally, petitioners-intervenors RCBC and RCBC Capital argue that this Court's interpretation of
the phrase "at any one time" cannot be applied to the PEACe Bonds and should be given
prospective application only because it would cause prejudice to them, among others. They cite
Section 246 of the National Internal Revenue Code on non-retroactivity of rulings, as well
as Commissioner of Internal Revenue v. San Roque Power Corporation, 150 which held that
taxpayers may rely upon a rule or ruling issued by the Commissioner from the time it was issued
up to its reversal by the Commissioner or the court. According to them, the retroactive
application of the court's decision would impair their vested rights, violate the constitutional
prohibition on non-impairment of contracts, and constitute a substantial breach of obligation on
the part of govemment. 151 In addition, the imposition of the 20% final withholding tax on the PEA
Ce Bonds would allegedly have pernicious effects on the integrity of existing securities that is I
contrary to the state policies of stabilizing the financial system and of developing the capital
markets. 152
CODE-NGO likewise contends that it merely relied in good faith on the 2001 BIR Rulings
confirming that the PEA Ce Bonds were not subject to the 20% final withholding
tax. 153 Therefore, it should not be prejudiced if the BIR Rulings are found to be erroneous and
reversed by the Commissioner or this court.154 CODE-NGO argues that this Court's Decision
construing the phrase "at any one time" to determine the phrase "20 or more lenders" to include
both the primary and secondary market should be applied prospectively. 155
Assuming it is liable for the 20% final withholding tax, CODE-NGO argues that the collection of
the final tax was barred by prescription.156 CODE-NGO points out that under Section 203 of the
National Internal Revenue Code, internal revenue taxes such as the final tax, should be
assessed within three (3) years after the last day prescribed by law for the filing of the return. 157 It
further argues that Section 222(a) on exceptions to the prescribed period. for tax assessment
and collection does not apply. 158 It claims that there is no fraud or intent to evade taxes as it
relied in good faith on the assurances of the Bureau of Internal Revenue and Bureau of Treasury
the PEACe Bonds are not subject to the 20% final withholding tax. 159 We find merit on the claim
of petitioners-intervenors RCBC, RCBC Capital, and CODE-NGO for prospective application of
our Decision.
The phrase "at any one time" is ambiguous in the context of the financial market. Hence,
petitioner-intervenor RCBC and the rest of the investors relied on the opinions of the Bureau of
Internal Revenue in BIR Ruling Nos. 020-2001, 035-2001 160 dated August 16, 2001, and DA-
175- 01161 dated September 29, 2001 to vested their rights in the exemption from the final
withholding tax. In sum, these rulings pronounced that to determine whether the financial assets,
i.e., debt instruments and securities, are deposit substitutes, the "20 or more individual or
corporate lenders" rule must apply. Moreover, the determination of the phrase "at any one time"
to determine the "20 or more lenders" is to be determined at the time of the original issuance.
This being the case, the PEACe Bonds were not to be treated as deposit substitutes.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,162 the Commissioner demanded from
petitioner deficiency withholding income tax on film rentals remitted to foreign corporations for
the years 1965 to 1968. The assessment was made under Revised Memo Circular No. 4-71
issued in 1971, which used gross income as tax basis for the required withholding tax, instead
of one-half of the film rentals as provided under General Circular No. V-334. In setting aside the
assessment, this Court ruled that in the interest of justice and fair play, rulings or circulars
promulgated by the Commissioner of Internal Revenue have no retroactive application where
applying them would prove prejudicial to taxpayers who relied in good faith on previous
issuances of the Commissioner. This Court further held that Section 24(b) of then National
Internal Revenue Code sought to be implemented by General Circular No. V-334 was neither
too plain nor simple to understand and was capable of different interpretations. Thus:
The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha[ d]
been determined that the tax is still imposed on income derived from capital, or labor, or both
combined, in accordance with the basic principle of income taxation ... and that a mere return
of capital or investment is not income .... " "A part of the receipts of a non-resident foreign film
distributor derived from said film represents, therefore, a return of investment." The circular thus
fixed the return of capital at 50% to simplify the administrative chore of determining the portion
of the rentals covering the return of capital.
Were the "gross income" base clear from Sec. 24(b), perhaps, the ratiocination of the Tax
Court could be upheld. It should be noted, however, that said Section was not too plain
and simple to understand. The fact that the issuance of the General Circular in question
was rendered necessary leads to no other conclusion than that it was not easy of
comprehension and could be subjected to different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General
Circular No. V-334, was just one in a series of enactments regarding Sec. 24(b) of the Tax Code.
Republic Act No. 3825 came next on June 22, 1963 without changing the basis but merely
adding a proviso (in bold letters).
(b) Tax on foreign corporation. - (1) Non-resident corporations. - There shall be levied, collected,
and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the
amount received by every foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits and income, a tax equal to thirty per centum of
such amount: PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE
REINSURANCE PREMIUMS." (double emphasis ours)
Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso and
inserting some words (also in bold letters).
"(b) Tax on foreign corporations. - (1) Nonresident corporations. - There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph,
upon the amount received by every foreign corporation not engaged in trade or business within
the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries,
wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical OR CASUAL gains, profits and income, AND CAP IT AL
GAINS, a tax equal to thirty per centum of such amount."
The principle of legislative approval of administrative interpretation by re-enactment clearly
obtains in this case. It provides that "the re-enactment of a statute substantially unchanged is
persuasive indication of the adoption by Congress of a prior executive construction." Note
should be taken of the fact that this case involves not a mere opinion of the Commissioner or
ruling rendered on a mere query, but a Circular formally issued to "all internal revenue officials"
by the then Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of
Revenue Memorandum Circular No. 4-71, that Sec. 24(b2 was amended to refer specifically to
35% of the "gross income."163 (Emphasis supplied)
San Roque has held that the 120-day and the 30-day periods under Section 112 of the National
Internal Revenue Code are mandatory and jurisdictional. Nevertheless, San Roque provided an
exception to the rule, such that judicial claims filed by taxpayers who relied on BIR Ruling No.
DA-489-03-from its issuance on December 10, 2003 until its reversal by this Court
in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. 164 on October 6,
2010-are shielded from the vice of prematurity. The BIR Ruling declared that the "taxpayer-
claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with
the C[ourt] [of] T[ax] A[ppeals] by way of Petition for Review." The Court reasoned that:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,
particularly on a difficult question of law. The abandonment of the Atlas doctrine by Mirant and
Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or credit is
a difficult question of law. The abandonment of the Atlas doctrine did not result in Atlas, or other
taxpayers similarly situated, being made to return the tax refund or credit they received or could
have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi
prospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court of a
general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling
under Section 246, should also apply prospectively ....
....
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query
made, not by a particular taxpayer, but by a government agency tasked with processing tax
refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center
of the Department of Finance. This government agency is also the addressee, or the entity
responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in
its query to the Commissioner the administrative claim of Lazi Bay Resources Development,
Inc., the agency was in fact asking the Commissioner what to do in cases like the tax claim of
Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-
day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely
on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its
reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day
periods are mandatory and jurisdictional.165 (Emphasis supplied)
The previous interpretations given to an ambiguous law by the Commissioner of Internal
Revenue, who is charged to carry out its provisions, are entitled to great weight, and taxpayers
who relied on the same should not be prejudiced in their rights. 166 Hence, this Court's
construction should be prospective; otherwise, there will be a violation of due process for failure
to accord persons, especially the parties affected by it, fair notice of the special burdens imposed
on them.
VII
Urgent Reiterative Motion [to Direct Respondents to Comply with the
Temporary Restraining Order]
Petitioners Banco de Oro, et al. allege that the temporary restraining order issued by this Court
on October 18, 2011 continues to be effective under Rule 58, Section 5 of the Rules of Court
and the Decision dated January 13, 2015. Thus, considering respondents' refusal to comply with
their obligation under the temporary restraining order, petitioners ask this Court to issue a
resolution directing respondents, particularly the Bureau of Treasury, "to comply with its order
by immediately releasing to the petitioners during the pendency of the case the 20% final
withholding tax" so that the monies may be placed in escrow pending resolution of the case.167
We recall that in its previous pleadings, respondents remain firm in its stance that the October
18, 2011 temporary restraining order could no longer be implemented because the acts sought
to be enjoined were already fait accompli. 168 They allege that the amount withheld was already
remitted by the Bureau of Treasury to the Bureau of Internal Revenue. Hence, it became part of
the General Fund, which required legislative appropriation before it could validly be
disbursed. 169 Moreover, they argue that since the amount in question pertains to taxes alleged
to be erroneously withheld and collected by government, the proper recourse was for the
taxpayers to file an application for tax refund before the Commissioner of Internal Revenue
under Section 204 of the National Internal Revenue Code. 170
In our January 13, 2015 Decision, we rejected respondents' defense of fait accompli. We held
that the amount withheld were yet to be remitted to the Bureau of Internal Revenue, and the
evidence Gournal entry voucher) submitted by respondents was insufficient to prove the fact of
remittance. Thus:
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that
constitutes both the withholding and remittance of the 20% final withholding tax to the Bureau
of Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final
2011, value date, October 18,
withholding tax when they received the temporary restraining order, it had yet to remit the
2011 per BTr letter authority and
monies it withheld to the Bureau of Internal Revenue, a remittance which"was due only on
BSP Bank Statements.
November 10, 2011. The act enjoined by the temporary restraining order had not yet been fully
satisfied and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A dated July 31, 2001 which prescribes to national
government agencies such as the Bureau of Treasury the procedure for the remittance of all
taxes they withheld to the Bureau of Internal Revenue, a national agency shall file before the
Bureau of Internal Revenue a Tax Remittance Advice (TRA) supported by withholding tax
returns on or before the 1 oth day of the following month after the said taxes had been withheld.
The Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of
Treasury, which shall be the basis in recording the remittance of the tax collection. The Bureau
of Internal Revenue will then record the amount of taxes reflected in the TRA as tax collection
in the Journal of Tax Remittance by government agencies based on its copies of the TRA.
Respondents did not submit any withholding tax return or TRA to prove that the 20% final
withholding tax was indeed remitted by the Bureau of Treasury to the Bureau oflnternal Revenue
on October 18, 2011.
Respondent Bureau of Treasury's Journal Entry Voucher No. 11-10- 10395 dated October 18,
2011 submitted to this court shows:
The foregoing journal entry, however, does not prove that the amount of P4,966,207, 796.41,
representing the 20% final withholding tax on the PEACe Bonds, was disbursed by it and
remitted to the Bureau of Internal Revenue on October 18, 2011. The entries merely show that
the monies corresponding to 20% final withholding tax was set aside for remittance to the
Bureau of Internal Revenue. 171
Respondents did not submit any withholding tax return or tax remittance advice to prove that
the 20% final withholding tax was, indeed, remitted by the Bureau of Treasury to the Bureau of
Internal Revenue on October 18, 2011, and consequently became part of the general fund of
the government. The corresponding journal entry in the books of both the Bureau of Treasury
and Bureau of Internal Revenue showing the transfer of the withheld funds to the Bureau of
Internal Revenue was likewise not submitted to this Court. The burden of proof lies on them to
show their claim of remittance. Until now, respondents have failed to submit sufficient supporting
evidence to prove their claim.

In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing

Corporation, 172 this Court upheld the right of a withholding agent to file a claim for refund of the
withheld taxes of its foreign parent company. This Court, citing Philippine Guaranty Company,
Account Debit Amount Credit
Inc. v. Commissioner of Internal Revenue, 173 ruled that inasmuch as it is an agent of government
Code Amount
for the withholding of the proper amount of tax, it is also an agent of its foreign parent company
Bonds Payable-UT, Dom-Zero 35,000,000,000.00 with respect to the filing of the necessary income tax return and with respect to actual payment
442-360 of the tax to the government. Thus:

Coupon I/Bonds (Peace The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed
Bonds)- 10 yr Sinking Fund- by the Title [on Tax on Income]." It thus becomes important to note that under Section 53(c) of
Cash (BSF) 198-001 30,033,792,203.59 the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made
"personally liable for such tax" and indeed is indemnified against any claims and demands which
Due to BIR 412-002 4,966,207,796.41 the stockholder might wish to make in

To record redemption of 10yr questioning the amount of payments effected by the withholding agent in accordance with the
Zero coupon (Peace Bond) net provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable
of the 20% final withholding tax for the correct amount of the tax that should be withheld from the dividend remittances. The
pursuant to BIR Ruling No. 378- withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges
and penalties should the amount of the tax withheld be finally found to be less than the amount
that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered
a "taxpayer." The terms "liable for tax" and "subject to tax" both connote legal obligation or duty
to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is
statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a
person should be regarded as a party in interest, or as a person having sufficient legal interest,
to bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed
out that a withholding agent is in fact the agent both of the government and of the taxpayer, and
that the withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to attach. The reason
is to compel the withholding agent to withhold the tax under all circumstances. In effect, the
responsibility for the collection of the tax as well as the payment thereof is concentrated upon
the person over whom the Government has jurisdiction. Thus, the withholding agent is
constituted the agent of both the Government and the taxpayer. With respect to the collection
and/or withholding of the tax, he is the Government's agent. In regard to the filing of the
necessary income tax return and the payment of the tax to the Government, he is the agent of
the taxpayer. The withholding agent, therefore, is no ordinary government agent especially
because under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold;
whereas the Commissioner and his deputies are not made liable by law.
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial
owner of the dividends with respect to the filing of the necessary income tax return and with
respect to actual payment of the tax to the government, such authority may reasonably be held
to include the authority to file a claim for refund and to bring an action for recovery of such claim.
This implied authority is especially warranted where, as in the instant case, the withholding agent
is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances of this case, it seems
particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence
an action for such refund.
....
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly
regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized
to file the claim for refund and the suit to recover such claim.174 (Emphasis supplied, citations
omitted)
In Commissioner of Internal Revenue v. Smart Communication, Inc.;175
[W]hile the withholding agent has the right to recover the taxes erroneously or illegally collected,
he nevertheless has the obligation to remit the same to the principal taxpayer. As an agent of
the taxpayer, it is his duty to return what he has recovered; otherwise, he would be unjustly
enriching himself at the expense of the principal taxpayer from whom the taxes were withheld,
and from whom he derives his legal right to file a claim for refund. 176
Since respondents have not sufficiently shown the actual remittance of the 20% final withholding
taxes withheld from the proceeds of the PEACe bonds to the Bureau of Internal Revenue, there
was no legal impediment for the Bureau of Treasury (as agent of petitioners) to release the
monies to petitioners to be placed in escrow, pending resolution of the motions for
reconsideration filed in this case by respondents and petitioners-intervenors RCBC and RCBC
Capital.
Moreover, Sections 204 and 229 of the National Internal Revenue Code are not applicable since
the Bureau of Treasury's act of withholding the 20% final withholding tax was done after the
Petition was filed.
Petitioners also urge177 us to hold respondents liable for 6% legal interest reckoned from October
19, 2011 until they fully pay the amount corresponding to the 20% final withholding tax. This
Court has previously granted interest in cases where patent arbitrariness on the part of the
revenue authorities has been shown, or where the collection of tax was illegal.178
In Philex Mining Corp. v. Commissioner of Internal Revenue: 179
[T]he rule is that no interest on refund of tax can be awarded unless authorized by law or the
collection of the tax was attended by arbitrariness. An action is not arbitrary when exercised
honestly and upon due consideration where there is room for two opinions, however much it
may be believed that an erroneous conclusion was reached. Arbitrariness presupposes
inexcusable or obstinate disregard of legal provisions.180 (Emphasis supplied, citations omitted)
Here, the Bureau of Treasury made no effort to release the amount of ₱4,966,207,796.41,
corresponding to the 20% final withholding tax, when it could have done so.
In the Court's temporary restraining order dated October 18, 2011,181 which respondent received
on October 19, 2011, we "enjoin[ed] the implementation of BIR Ruling No. 370-2011 against the
[PEACe Bonds,] ... subject to the condition that the 20% final withholding tax on interest income SO ORDERED.
there.from shall be withheld by the petitioner banks and placed in escrow pending resolution of
[the} petition." 182

Subsequently, in our November 15, 2011 Resolution, we directed respondents to "show cause
why they failed to comply with the [temporary restraining order]; and [to] comply with the
[temporary restraining order] in order that petitioners may place the corresponding funds in
escrow pending resolution of the petition."183

Respondent did not heed our orders.

In our Decision dated January 13, 2015, we reprimanded the Bureau of Treasury for its
continued retention of the amount corresponding to the 20% final withholding tax, in wanton
disregard of the orders of this Court.

We further ordered the Bureau of Treasury to immediately release and pay the bondholders the
amount corresponding to the 20% final withholding tax that it withheld on October 18, 2011.

However, respondent remained obstinate in its refusal to release the monies and exhibited.utter
disregard and defiance of this Court.

As early as October 19, 2011, petitioners could have deposited the amount of ₱4,966,207,
796.41 in escrow and earned interest, had respondent Bureau of Treasury complied with the
temporary restraining order and

released the funds. It was inequitable for the Bureau of Treasury to have withheld the potential
earnings of the funds in escrow from petitioners.

Due to the Bureau of Treasury's unjustified refusal to release the funds to be deposited in
escrow, in utter disregard of the orders of the Court, it is held liable to pay legal interest of 6% per
annum 184 on the amount of ₱4,966,207, 796.41 representing the 20% final withholding tax on
the PEACe Bonds.

WHEREFORE, respondents' Motion for Reconsideration and Clarification is DENIED, and

petitioners-intervenors RCBC and RCBC Capital Corporation's Motion for Clarification and/or
Partial Reconsideration is PARTLY GRANTED.

Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay the
bondholders the amount of P4,966,207, 796.41, representing the 20% final withholding tax on
the PEACe Bonds, with legal interest of 6% per annum from October 19, 2011 until full payment.
February 26, 2020 On March 27, 2012, the Board of Directors of [Puregold] x x x approved the issuance of
766,406,250 Puregold common shares to [respondents] and [Sy] in exchange for the transfer to
G.R. No. 241424 Puregold of the 1,703,125 shares of Kareila.

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. LUCIO L. CO, SUSAN P. CO, On May 8, 2012, during the Puregold annual stockholders meeting, this exchange was approved
FERDINAND VINCENT P. CO, AND PAMELA JUSTINE P. CO, RESPONDENTS. by the stockholders representing two-thirds of Puregold's outstanding capital stock.

DECISION xxxx

CAGUIOA, J:. On May 11, 2012, [respondents] and [Sy] entered into a Deed of Exchange with [Puregold]
wherein they agreed to transfer all their Kareila shares to Puregold in exchange for Puregold
Before the Court is a Petition for Review on Certiorari1 (Petition) under Rule 45 of the Rules of shares.
Court filed by petitioner Commissioner of Internal Revenue (CIR), assailing the Decision2 dated
February 28, 2018 and Resolution3 dated August 14, 2018 of the Court of Tax Appeals en banc Under the Deed of Exchange, [respondents] and [Sy] each would receive four hundred fifty (450)
(CTA EB) in CTA EB No. 1522, which affirmed the CTA Third Division's (CTA Division) Puregold shares for every one (1) Kareila share that they would transfer to Puregold.
Decision4 dated June 2, 2016 in CTA Case No. 8831 granting respondents' claim for refund of Accordingly, Puregold issued to [respondents] and [Sy] a total of 766,406,250 Puregold shares
erroneously paid capital gains tax (CGT). from the unissued portion of its authorized capital stock in exchange for the 1,703,125 Kareila
shares:
Facts
Share swap per Deed of Exchange:
The facts as summarized by the CTA are as follows:
Shareholder No. of Kareila Shares No. of Puregold Shares
As of March 2012, the four respondents[, Lucio L. Co, Susan P. Co, Ferdinand Vincent P. Co Transferred to Puregold Exchanged for Kareila Shares
and Pamela Justine P. Co (respondents),] collectively were the majority shareholders of Kareila
Management Corporation (Kareila), a domestic corporation engaged as managers, managing Lucio Co 681,250 306,562,500
agents, consignor, concessionaire, or supplier of business engaged in the operation of hotels,
supermarkets, groceries and the like. Susan Co 681,250 306,562,500

[Kareila had an authorized capital stock of P500,000,000.00, wherein 1,703,125 shares were Ferdinand Co 170,312 76,640,400
subscribed and fully paid. Respondents owned 99.9999% of the total subscribed shares while
Anthony Sy (Sy) owned the remaining 0.0001%.] Pamela Co 170,312 76,640,400

Anthony Sy 1 450
[Respondents were also shareholders of Puregold Price Club, Inc. (Puregold), a corporation
organized under the Philippine laws and primarily engaged in the wholesale and retail of general Total 1,703,125 766,406,250
merchandise. From Puregold's authorized capital stock of P3,000,000,000.00,
2,000,000,000.00 shares were subscribed and fully paid. Respondents owned 66.55% of
Puregold's total subscribed shares.] As a result of the share swap under the Deed of Exchange:

xxxx 1. Puregold acquired majority ownership of Kareila; and,

 2. [Respondents,] who, prior to the share swap, already collectively owned 66.5720% of xxxx
the outstanding capital stock of Puregold consequently increased their stockholdings to
75.8329% after the swap: [Due to the CIR's inaction, respondents filed a Petition for Review with the CTA Division.]

Puregold Price Club Inc. In the Answer, the CIR alleged that Revenue Regulations No. 18-2001, Revenue Memorandum
Order Nos. 32-2001 and 17-2002 provide that there are certain conditions or requirements which
Before Swap After Swap should be complied with in order to avail of the non-recognition of gain under Section 40(C)(2).
Specifically, for the share swap transaction to qualify as a tax-free exchange, a prior application
Shareholder No. of Shares Percentage No. of Shares Percentage for a BIR certification or ruling must have been secured. In this case, however, no such prior
Owned Ownership Owned Ownership request from the BIR was made. Accordingly, the CIR contended that, since refund claims are
construed strictly against the taxpayer-claimant, the refund sought by [respondents] should be
Lucio Co 724,376,801 0.362188 1,030,939,302 0.372664 denied.

Susan Co 539,691,310 0.269846 846,253,810 0.305904 In Reply, [respondents] contend that it was impossible for them to make any prior request for a
ruling since they were not aware that their transaction was in fact tax free which, thus,
Ferdinand Co 33,686,354 0.016843 110,326,754 0.039881 establishes that their CGT payments were erroneously paid. Further, they maintained that
Section 40(C)(2) of the NIRC, or any other provision of law or any existing jurisprudence does
Pamela Co 33,686,354 0.016843 110,326,754 0.039881 not impose such condition.5

Total 1,311,440,820 0.65572 2097846620 0.758329 After a Pre-Trial Order was issued, respondents commenced presentation of their witnesses,
namely, Mary S. Demetillo, their consultant on accounting of personal financial transactions,
Total and Atty. Candy H. Dacanay-Datuon, the Corporate Secretary of Kareila and Assistant
Subscribed 2,000,000,000 2,766,406,250 Corporate Secretary of Puregold.6
Capital
xxxx
On June 26 and 28, 2012, [respondents] collectively paid capital gains tax (CGT) including
interest and/or compromise penalty on the said transfer pursuant to Section 24(C) of the Witness Mary S. Demetillo, declared that as [respondents'] consultant on accounting of personal
National Internal Revenue Code of 1997 (NIRC), as amended. x x x financial transactions for almost 5 years, she did the accounting and computation of tax for the
subject share swap transaction.
xxxx
By virtue of the Deed of Exchange dated May 11, 2012, [respondents] and [Sy] transferred
[Respondents], however, contend that their payments of CGT were erroneous because, under 1,703,125 [of] their Kareila common shares to Puregold Price Club, Inc. In return, [respondents]
Section 40(C)(2) of the NIRC, their transfer of shares through the Deed of Exchange was a tax- received 766,406,250 common shares in Puregold. At the time of the transaction, Kareila shares
exempt transaction. had a par value of P100.00 per share, while Puregold had a par value of P21.50 per share. For
the said share swap transaction, [respondents] paid CGT of P1,647,615,290.07, including
Thus, on May 21, 2014, or within the two-year prescriptive period provided under Section 204(c) interest and penalty, on June 26 and 28, 2012.
of the NIRC of 1997, as amended, [respondents] filed their administrative claims for refund of
the CGT including interest and/or compromise penalty with their respective Revenue District Such payments of CGT, including interest and penalty were rejected in [respondents'] Annual
Offices (RDO). Income Tax Returns (AITRs) for the year 2012.
On May 21, 2014, [respondents] separately filed administrative claims for refund of the
erroneously paid CGT with their respective RDO followed by their filing of BIR form No. 1914 or
the Applications for Tax Credits/Refund, for which she was consulted. She learned about the
actual filing of such claims for refund only when she was preparing for her testimony before the
Court. The said administrative claims for refund were not acted upon by [the CIR].
Attorney Candy H. Dacanay-Datuon, the Corporate Secretary of Kareila since 2004 and the
Assistant Corporate Secretary of Puregold since 2011, testified that she is the custodian of the
records of the shares of stocks of Kareila and Puregold. She prepares and files the reportorial
requirements under the law of both entities. Kareila is a domestic corporation whose primary
purpose is to act as managers, managing agents, consignor, concessionaire or supplier of
businesses engaged in manufacturing or trading of general merchandise, the operation of
resorts, hotels, supermarkets, groceries and the like. Puregold is also a domestic corporation
whose primary purpose is to engage in the wholesale and retail of general merchandise.
She further testified that [respondents] are shareholders of both corporations. Under a Deed of
Exchange dated May 11, 2012, [respondents] with [Sy], transferred their 1,703,125 common
shares in Kareila to Puregold in exchange for 766,406,250 common shares of Puregold.
Lucio Co and Susan Co each transferred 681,250 Kareila shares in exchange for 306,562,500
Puregold shares, while both Ferdinand Co and Pamela Co each transferred 170,312 Kareila
shares for 76,640,400 Puregold shares.
The 1,703,125 Kareila shares were valued at P16.467 billion or P9,668.47 per share, while the
766,406,250 Puregold shares had a subscription price of P16,477,734,375.00 or P21.50 per
share.
As a consequence of the share swap, Puregold acquired ownership of all 1,703,125 Kareila
shares, while [respondents] and [Sy] were each given in trust one share or .0001% of Kareila.
On the other hand, [respondents] collectively owned 1,331,440,820 Puregold shares or 66.55%
of the outstanding capital stock of Puregold. After the share swap, [respondents] gained further
control of Puregold as their collective shareholdings therein increased from 66.55% to 75.83%.
The amount of P1,647,615,290.07 CGT was paid for the share swap transaction, including
interest and penalty, and this amount is the subject of the instant claim for refund.
With the admission of all its evidence, [respondents] rested their case.
On the other hand, [the CIR] did not present any evidence on the ground that no investigation
report was submitted to [its] counsel.7
CTA Division Ruling
On June 2, 2016, the CTA Division rendered a Decision granting respondents' claim for refund,
the dispositive portion of which reads:
WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, respondent
Commissioner of Internal Revenue is hereby DIRECTED TO REFUND in favor of petitioners
Lucio Co, Susan Co, Ferdinand Co, and Pamela Co the amounts of P659,045,625.00,
P659,050,632.50, P164,761,860.03 and P164,757,172.54, respectively, or a total amount of
P1,647,615,290.07, representing erroneously paid capital gains tax.
SO ORDERED.8
The CTA Division found that the administrative and judicial claims for refund were timely filed.
According to the CTA Division, respondents' legal counsel, Zambrano and Gruba Law Offices,
had the authority to represent respondents in their administrative claims for refund filed with the
CIR even if the Special Power of Attorney was notarized only after its filing.9
The CTA Division further held that all the requisites for the non-recognition of gain or loss under
Section 40(C)(2) of the National Internal Revenue Code (NIRC) of 1997, as amended, which
effectively exempts the transaction from income tax, are all present in this case.10
The CTA Division also brushed aside the CIR's contention that respondents failed to comply
with the Bureau of Internal Revenue (BIR) issuances relating to the tax exemption under Section
40(C)(2), particularly the requirement of seeking a prior BIR Ruling. According to the CTA
Division, respondents could not be expected to obtain a BIR Ruling for tax exemption as they
previously believed that they were liable to pay the same based on the computation and
recommendation of their accounting consultant. The CTA Division also noted that the BIR
issuances cited by the CIR are mere guidelines in monitoring tax-free exchange of property and
in determining the gain or loss on a subsequent sale or disposition of such property. Thus,
respondents cannot be deprived of their claim for refund simply because they failed to comply
with said guidelines.11
The CIR moved for reconsideration but the same was denied by the CTA Division in its
Resolution12 dated September 1, 2016.
On appeal to the CTA EB, the CIR claimed that the tax exemption in Section 40(C)(2) of the
NIRC of 1997, as amended, does not cover the subject share swap transaction because
respondents, prior to the exchange, already had control of Puregold.13
CTA EB Ruling "No gain or loss shall also be recognized if property is transferred to a corporation by a person
in exchange for stock or unit of participation in such a corporation of which as a result of such
In the assailed Decision, the CTA EB affirmed respondents' entitlement to refund. exchange said person, alone or together with others, not exceeding four (4) persons, gains
control of said corporation: Provided, That stocks issued for services shall not be considered as
The CTA EB ruled that following the Court's pronouncement in the case of Commissioner of issued in return for property.["]
Internal Revenue v. Filinvest Dev't. Corp. (Filinvest),14 Section 40(C)(2) covers instances of
further control, when, as a result of the exchange, the transferors collectively increase their In relation thereto, Section 40(C)(6)(c) of the same Code defines the term "control" as
control of the transferee corporation, as in this case.15 "ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total
voting power of all classes of stocks entitled to vote."
The CTA EB reiterated the Division's ruling that respondents' counsel was properly authorized
to file the administrative claim on their behalf.16 The CTA EB also held that, contrary to the Based on the foregoing, the requisites for the non-recognition of gain or loss are as follows: (a)
CIR's claim, a prior confirmatory ruling is not a condition sine qua non for the availment of tax the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies
exemption and a claim for refund of erroneously paid tax.17 of the transferor; (c) the transfer is made by a person, acting alone or together with others, not
exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together
The CIR moved for reconsideration but the same was denied by the CTA EB in the assailed with others, not exceeding four, gains control of the transferee.18
Resolution.
As regards the element of control, the Court, in Filinvest, clarified that it is not necessary that,
Hence, this Petition. after the exchange, each of the transferors individually gains control of the transferee
corporation. It also does not prohibit instances when the transferor gains further control of the
transferee corporation. The Court explained that the element of control is satisfied even if one
Issue
of the transferors is already owning at least 51% of the shares of the transferee corporation, as
long as after the exchange, the transferors, not more than five, collectively increase their equity
Whether the CTA EB erred in finding that respondents are entitled to the claim for refund for in the transferee corporation by 51% or more.
erroneously paid CGT.
In the said case, Filinvest Development Corporation (FDC) and Filinvest Alabang Incorporated
The Court's Ruling (FAI), entered into a Deed of Exchange with Filinvest Land Incorporated (FLI), whereby the
former both transferred in favor of the latter parcels of land in exchange for FLI shares.19 Prior
The Petition lacks merit. to the exchange, FDC owned 80% of FAI and 67.42% of FLI. After the exchange, FDC retained
80% ownership of FAI but decreased its ownership of FLI to only 61.03%. As a result, FDC
The subject transaction falls under together with FAI owned 70.99% of FLI.20
Section 40(C)(2) of the NIRC of
1997, as amended The Court held that neither FDC nor FAI is liable for income tax because both collectively gained
control of FLI, the transferee corporation, as a result of the exchange:
Respondents anchor their claim for refund on the tax-free exchange provision under Section
40(C)(2) of the NIRC of 1997, as amended. Said provision reads: Then as now, the CIR argues that taxable gain should be recognized for the exchange
considering that FDC's controlling interest in FLI was actually decreased as a result thereof. For
"(C) Exchange of Property. - said purpose, the CIR calls attention to the fact that, prior to the exchange, FDC owned
2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance
xxxx of 443,094,000 additional FLI shares as a consequence of the exchange and with only
42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said
corporation's controlling interest was supposedly reduced to [61.03%] when reckoned from the
transferee's aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's
initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of 420,877,000
FLI shares as a result of the exchange purportedly resulted in its control of only 9.96% of said
transferee corporation's 4,226,629,000 outstanding shares. On the principle that the transaction
did not qualify as a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR
asseverates that taxable gain in the sum of P263,386,921.00 should be recognized on the part
of FDC and in the sum of P3,088,711,367.00 on the part of FAI.
The paucity of merit in the CIR's position is, however, evident from the categorical language of
Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized in
case the exchange of property for stocks results in the control of the transferee by the transferor,
alone or with other transferors not exceeding four persons. Rather than isolating the same as
proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000
outstanding shares should, therefore, be appreciated in combination with the 420,877,000 new
shares issued to FAI which represents 9.96% control of said transferee corporation. Together
FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to
3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. Since the term "control" is
clearly defined as "ownership of stocks in a corporation possessing at least fifty-one
percent of the total voting power of classes of stocks entitled to one vote" under Section
34 (c) (6) [c] of the 1993 NIRC, the exchange of property for stocks between FDC, FAI and
FLI clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the same
provision.
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court
Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and
Jurisprudence, opined that said provision could be inapplicable if control is already vested in the
exchangor prior to exchange. Aside from the fact that that the 10 September 2002 Decision in
CTA Case No. 6182 upholding the tax-exempt status of the exchange between FDC, FAI and
FLI was penned by no less than Justice Acosta himself, FDC and FAI significantly point out that
said authors have acknowledged that the position taken by the BIR is to the effect that "the law
would apply even when the exchangor already has control of the corporation at the time of the
exchange." This was confirmed when, apprised in FLI's request for clarification about the change
of percentage of ownership of its outstanding capital stock, the BIR opined as follows:
Please be informed that regardless of the foregoing, the transferors, Filinvest Development
Corp. and Filinvest Alabang, Inc. still gained control of Filinvest Land, Inc. The term 'control'
shall mean ownership of stocks in a corporation by possessing at least 51% of the total voting
power of all classes of stocks entitled to vote. Control is determined by the amount of stocks
received, i.e., total subscribed, whether for property or for services by the transferor or
transferors. In determining the 51% stock ownership, only those persons who transferred
property for stocks in the same transaction may be counted up to the maximum of five (BIR
Ruling No. 547-93 dated December 29, 1993.)
At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the
CIR is more apparent than real. As the uncontested owner of 80% of the outstanding shares of
FAI, it cannot be gainsaid that FDC ideally controls the same percentage of the 420,877,000
shares issued to its said co-transferor which, by itself, represents 7.968% of the outstanding
shares of FLI. Considered alongside FDC's 61.03% control of FLI as a consequence of the 29
November 1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said
transferee corporation's outstanding shares of stock which is evidently still greater than the
67.42% FDC initially held prior to the exchange. This much was admitted by the parties in the
14 February 2001 Stipulation of Facts, Documents and Issues they submitted to the CTA.
Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds
up to a total of 70.99%, it stands to reason that neither of said transferors can be held liable for
deficiency income taxes the CIR assessed on the supposed gain which resulted from the subject
transfer.21
Thus, based on Filinvest, the CIR clearly has no basis to claim that the share swap transaction
between respondents and Puregold is not covered by the tax-free exchange as provided in
Section 40(C)(2) in relation to Section 40(C)(6)(c) of the NIRC of 1997, as amended. It is
undisputed that after the exchange, respondents collectively increased their control over
Puregold from 66.57% to 75.83%. Accordingly, respondents cannot be held liable for income
taxes on the supposed gain which may have resulted from such transfer. The CGT paid by
respondents on the subject transfer are considered erroneously paid taxes and must perforce
be refunded pursuant to Section 22922 of the NIRC of 1997, as amended.
Respondents filed a valid
administrative claim for refund
The CIR, however, assails the validity and timeliness of respondents' administrative claim, which
was filed through respondents' counsel of record. According to the CIR, such administrative
claim was defective because respondents' counsel failed to show in said letters that they were
authorized by respondents to file the same on their behalf.23 The CIR further contends that the
subsequent submission of a Special Power of Attorney did not cure the defect because the
same was filed beyond the two-year prescriptive period.24
The CIR is mistaken.
The filing of the administrative claim by respondents' counsel of record on behalf of their client
gave rise to the presumption that they have the authority to file the same. This is anchored on
the rule that "[a] lawyer is presumed to be properly authorized to represent any cause in which
he appears, and no written power of attorney is required to authorize him to appear in court for
his client."25
The presumption in favor of the counsel's authority to appear in behalf of its client is a strong
one,26 as it arises from the lawyer's pledge to act with honesty, candor and fairness and not to
do any falsehood or misrepresentation.27 If a lawyer corruptly or willfully appears as an attorney
for a party to a case without authority, he may be disciplined or punished for contempt as an
officer of the court who has misbehaved in his official transaction.28
In addition, an attorney's appearance is also presumed to be with the previous knowledge and
consent of the litigant until the contrary is shown.29 In this case, the presumption of authority of
respondents' counsel remains unrebutted because the CIR failed to represent any proof to the
contrary.
In any event, the supposed lack of authority of respondents' counsel of record was thereafter
cured when respondents executed a Special Power of Attorney and submitted the same with
the CIR and before the court a quo. The CTA held that the said instrument clearly spells out the
extent of authority granted to respondents' counsel and ratifies all prior acts done in pursuit of
said authority, which includes the filing of respondents' administrative claim for refund.
In Land Bank of the Philippines v. Pamintuan Dev't. Co.,30 the Court held that "[r]atification
retroacts to the date of the lawyer's first appearance and validates the action taken by him." The
effect is as if respondents themselves filed the administrative claim for refund on May 21, 2014,
within the two-year prescriptive period provided under the NIRC of 1997, as amended.31 Thus,
the Court agrees with the CTA that respondents' administrative claim was valid and timely filed.
No prior confirmatory ruling is
required for tax exemption or refund
The CIR also insists that the claim should be denied because respondents failed to secure a
prior confirmatory ruling that the subject transaction qualifies as a tax-free
exchange.32 According to the CIR, the certification or ruling is important so as to confirm
whether the transaction satisfies the conditions set by law; and the authority to do such is vested
upon the BIR.33
Again, the CIR is mistaken.
BIR rulings are the official position of the Bureau to queries raised by taxpayers and other
stakeholders relative to clarification and interpretation of tax laws.34 In this regard, the primary
purpose of a BIR Ruling is simply to determine whether a certain transaction, under the law, is
taxable or not based on the circumstances provided by the taxpayer. As admitted by the CIR,
rulings merely operate to "confirm" the existence of the conditions for exemption provided under
the law. If all the requirements for exemption set forth under the law are complied with, the
transaction is considered exempt, whether or not a prior BIR ruling was secured by the taxpayer.
In practice, a taxpayer often secures a BIR ruling, prior to entering into a transaction, to prepare
for any tax liability. However, in case a taxpayer already paid the tax, believing to be liable
therefor, and later on files a claim for refund on the basis of an exemption provided under the
law, requiring a prior BIR ruling as a condition for the approval of the refund claim is clearly
illogical. In this light, the Court echoes its pronouncement in Deutsche Bank AG Manila Branch
v. Commissioner of Internal Revenue,35 to wit:
The underlying principle of prior application with the BIR becomes moot in refund cases, such
as the present case, where the very basis of the claim is erroneous or there is excessive
payment arising from non-availment of a tax treaty relief at the first instance. In this case,
petitioner should not be faulted for not complying with RMO No. 1-2000 prior to the transaction.
It could not have applied for a tax treaty relief within the period prescribed, or 15 days prior to
the payment of its BPRT, precisely because it erroneously paid the BPRT not on the basis of
the preferential tax rate under the RP-Germany Tax Treaty, but on the regular rate as prescribed
by the NIRC. Hence, the prior application requirement becomes illogical. Therefore, the fact that
petitioner invoked the provisions of the RP-Germany Tax Treaty when it requested for a
confirmation from the ITAD before filing an administrative claim for a refund should be deemed
substantial compliance with RMO No. 1-2000.
Corollary thereto, Section 229 of the NIRC provides the taxpayer a remedy for tax recovery
when there has been an erroneous payment of tax. The outright denial of petitioner's claim for
a refund, on the sole ground of failure to apply for a tax treaty relief prior to the payment of the
BPRT, would defeat the purpose of Section 229.36
Moreover, as correctly pointed out by the CTA EB, there is nothing in Section 40(C)(2) of the
NIRC of 1997, as amended, which requires the taxpayer to first secure a prior confirmatory ruling
before the transaction may be considered as a tax-free exchange. The BIR should not impose
additional requirements not provided by law, which would negate the availment of the tax
exemption.37 Instead of resorting to formalities and technicalities, the BIR should have made
its own determination of the merits of respondents' claim for exemption in respondents'
administrative application for refund. However, the Court notes that, in this case, the CIR not
only failed to act on respondents' administrative claim for refund, it also failed to present any
evidence during trial before the CTA to prove that the subject transaction is not covered by the
tax exemption.
Indeed, cases filed before the CTA are litigated de novo. As such, party litigants should prove
every minute aspect of their cases.38 Based on the evidence on record, the CTA found that
respondents were able to establish their entitlement to the claimed refund. Accordingly, the
Court finds no reason to reverse the findings of the CTA.

At this juncture, the Court emphasizes that while tax refunds are strictly construed against the
taxpayer, the Government should not resort to technicalities and legalisms, much less frivolous
appeals, to keep the money it is not entitled to at the expense of the taxpayers.39

Substantial justice, equity and fair play are on the side of [respondents]. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not
belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the State
expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the
same standard against itself in refunding excess payments of such taxes. Indeed, the State
must lead by its own example of honor, dignity and uprightness.40

WHEREFORE, premises considered the Decision dated February 28, 2018 and Resolution
dated August 14, 2018 of the Court of Tax Appeals en banc in CTA EB No. 1522 are hereby
AFFIRMED.

SO ORDERED.
July 12, 2017 LANCASTER PHILS. INC.
11th Flr. Metro Bank Plaza
G.R. No. 183408 Makati City

COMMISSIONER OF INTERNAL REVENUE, Petitioner SIRJMADAM/GENTLEMEN:

vs.
LANCASTER PHILIPPINES, INC., Respondent The bearer(s) hereof RO’s Irene Goze & Rosario Padilla to be Supervise by GH Catalina_Leny
Barrion of the Special Team created pursuant to RSO 770-99 is/are authorized to examine your
DECISION books of accounts and other accounting records for a11 internal revenue taxes for the period
from example year, 1998 to ______, 19___. He is/[t]hey are provided with the necessary
MARTIRES, J.: identification card(s) which shall be presented to you upon request.

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to reverse It is requested that all facilities be extended to the Revenue Officer(s) in order to expedite the
and set aside the 30 April 2008 Decision2 and 24 June 2008 Resolution3 of the Court of Tax examination.
Appeals (CTA) En Banc in CTA EB No. 352.
You will be duly informed of the results of the examination upon approval of the report submitted
The assailed decision and resolution affirmed the 12 September 2007 Decision and 12 4 by the aforementioned Revenue Officer(s).7
December 2007 Resolution5 of the CTA First Division (CTA Division) in CTA Case No. 6753.
After the conduct of an examination pursuant to the LOA, the BIR issued a Preliminary
THE FACTS Assessment Notice (PAN)8 which cited Lancaster for:

The facts6 are undisputed. 1) overstatement of its purchases for the fiscal year April 1998 to March1999; and 2)
noncompliance with the generally accepted accountingprinciple of proper matching of cost and
revenue.9 More concretely, the BIR disallowed the purchases of tobacco from farmers covered
Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among others, to
by Purchase Invoice Vouchers (PIVs) for the months of February and March 1998 as
investigate or examine and, if necessary, issue assessments for deficiency taxes.
deductions against income for the fiscal year April 1998 to March 1999. The computation of
Lancaster's tax deficiency, with the details of discrepancies, is reproduced below:
On the other hand, respondent Lancaster Philippines, Inc. (Lancaster) is a domestic corporation
established in 1963 and is engaged in the production, processing, and marketing of tobacco.
INCOME TAX:
Taxable Income per ITR -0-
In 1999, the Bureau of Internal Revenue (BIR) issued Letter of Authority (LOA) No. 00012289 Add: Adjustments-Disallowed purchases 11,496,770.18
authorizing its revenue officers to examine Lancaster's books of accounts and other accounting Adjusted Taxable Income per Investigation ₱11,496,770.18
records for all internal revenue taxes due from taxable year 1998 to an unspecified date. The INCOME TAX DUE-Basic
LOA reads: April 1 - December 31, 1998 ₱2,913,676.4
(9/12x ₱l1,496,770.18 x 34%)
SEPT. 30 1999 January 1 - March 31, 1999 948,483.54
(3/12x ₱l1,496,770.18 x 33%)
LETTER OF AUTHORITY Income tax still due per investigation ₱3,880,159.94
Interest (6/15/99 to 10115/02) .66 2,560,905.56
Compromise Penalty 25,000
 TOTAL DEFlCIENCY INCOME TAX ₱6,466,065.50
DETAILS OF DISCREPANCIES
Assessment No. LTAID II-98-00007
A. INCOME TAX (₱3,880,159.94) - Taxpayer's fiscal year covers April 1998 to March 1999.
Verification of the books of accounts and pertinent documents disclosed that there was an
overstatement of purchases for the year. Purchase Invoice Vouchers (PIVs) for February and
March 1998 purchases amounting to ₱ll,496,770.18 were included as part of purchases for
taxable year 1998 in violation of Section 45 of the National Internal Revenue Code in relation to
Section 43 of the same and Revenue Regulations No. 2 which states that the Crop-Basis
method of reporting income may be used by a farmer engaged in producing crops which take
more than one (1) year from the time of planting to the time of gathering and disposing of crop,
in such a case, the entire cost of producing the crop must be taken as deduction in the year in
which the gross income from the crop is realized and that the taxable income should be
computed upon the basis of the taxpayer's annual accounting period, (fiscal or calendar year,
as the case may be) in accordance with the method of accounting regularly employed in keeping
with the books of the taxpayer. Furthermore, it did not comply with the generally accepted
principle of proper matching of cost and revenue.10
Lancaster replied11 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 followingyear (as against its fiscal year which
is from 1 April up to 31 March of the followingyear); 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.12
Invoking the same provisions of the law cited in the assessment, i.e., Sections 43 and 45 of
13 14
the National Internal Revenue Code (NJRC), in conjunction with Section 4515 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),16 captioned Formal Letter of Demand andAudit Result/Assessment .Notice LTAID
II IT-98-00007, 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 protested17 the FAN. There being no action taken by the Commissioner on its
protest, Lancaster filed on 21 August 2003 a petition for review18 before the CTA Division.
The Proceedings before the CTA
In its petition before the CTA Division, Lancaster essentially reiterated its arguments in the
protest against the assessment, maintaining that the tobacco purchases in February and March
1998 are deductible in its fiscal year ending 31 March 1999.
The issues19 raised by the parties for the resolution of the CTA Division were:
I
WHETHER OR NOT PETITIONER COMPLIED WITH THE GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE OF PROPER MATCHING OF COST AND REVENUE;
II
WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT AGAINST PETITIONER FOR
THE TAXABLE YEAR 1998 IN THE AGGREGATE AMOUNT OF ₱6,466,065.50 SHOULD BE
CANCEILED AND WITHDRAWN BY RESPONDENT.
After trial, the 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, 1999.20
The CIR move21 but failed to obtain reconsideration of the CTA Division ruling.22
Aggrieved, the CIR sought recourse23 from the CTA En Banc to seek a reversal of the decision
and the resolution of the CTA Division.
However, the CTA En Banc found no reversible error in the CTA Division's ruling, thus, it On both counts, the CIR is mistaken.
affirmed the cancellation of the assessment against Lancaster. The dispositive portion of the
decision of the CTA En Banc states: A. The Jurisdiction of the CTA

WHEREFORE, premises considered, the present Petition for Review is hereby DENIED DUE
COURSE, and, accordingly DISMISSED for lack of merit.24
The CTA En Banc likewise denied25 the motion for reconsideration from its Decision.
Hence, this petition.
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),27 which in part provides:

The CIR assigns the following errors as committed by the CTA En Banc:
I.
THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT PETITIONER'S
REVENUE OFFICERS EXCEEDED THEIR AUTHORITY TO INVESTIGATE THE PERJOD
NOT COVERED BY THEIR LETTER OF AUTHORITY.
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. (emphasis supplied)

II. Under the aforecited 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
THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING PETITIONER TO CANCEL includes other cases arising from the NIRC o:r related laws administered by the BIR. 28 Thus,
AND WITHDRAW THE DEFICIENCY ASSESSMENT ISSUED AGAINST RESPONDENT.26 for instance, we had once held that the question of whether or not to impose a deficiency tax
assessment comes within the purview of the words "othermatters arising under the National
Internal Revenue Code."[[29]
THE COURT'S RULING
The jurisdiction of the CTA on such other matters arising under theNIRC was retained under the
We deny the petition.
amendments introduced by R.A No. 9282.30Under R.A. No. 9282, Section 7 now reads:
The CTA En Banc did not err when it ruled
Sec. 7. Jurisdiction. - The CTA shall exercise:
that the BIR revenue officers had
exceeded their authority.
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
To support its first assignment of error, the CIR argues that the revenue officers did not exceed
their authority when, upon examination (of the Lancaster's books of accounts and other 1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
accounting records), they verified that Lancaster made purchases for February and March of refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
1998, which purchases were not declared in the latter's fiscal year from 1 April 1997 to 31 March matters arising under the National Internal Revenue or other laws administered by the Bureau
1998. Additionally, the CIR posits that Lancaster did not raise the issue on the scope of authority of Internal Revenue;
of the revenue examiners at any stage of the proceedings before the CTA and, consequently,
the CTA had no jurisdiction to rule on said issue. 2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific
period of action. in which case the inaction shall be deemed a denial; x x x." (emphasis supplied)
Is the question on the authority of revenue officers to examine the books and records of any
person cognizable by the CTA?
It must be stressed that the assessment of inten1al revenue taxes is one of the duties of the
BIR. Section 2 of the NIRC states:
Sec. 2. Powers and Duties oftheBureau of Internal Revenue. - The Bureau of Internal Revenue
shall be under the supervision and control of the Department of Fin[:l.11ce and its powers: and
duties shall comprehend the assessment and collection of all national internal revenue taxes,
fees, andcharges, and the enforcement of all forfeitures, penalties, and fines connected
therewith, including the execution of judgments in all cases decided in its favor by the Court of
Tax Appeals and the ordinary courts.
The Bureau shall give effect to and administer the supervisory and police powers conferred to
it by this Code or other laws. (emphasis supplied)
In connection therewith, the CIR may authorize the examination of any taxpayer and
correspondingly make an assessment whenever necessary.31 Thus, to give more teeth to such
power of the CIR, to make an assessment, the NIRC authorizes the CIR to examine any book,
paper, record, or data of any person.32 The powers granted by law to the CIR are intended,
among other things, to determine the liability of any person for any national internal revenue tax.
It is pursuant to such pertinent provisions of the NIRC conferring the powers to the CIR that the
petitioner (CIR) had, in this case, authorized its revenue officers to conduct an examination of
the books of account and accounting records of Lancaster, and eventually issue a deficiency
assessment against it.
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.
On whether the CTA can resolve an issue which was not raised by the parties, we rule in the
affirmative.
Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the Court of Tax
Appeals,33 the CT A is not bound by the issues specifically raised by the parties but may also
rule upon related issues necessary to achieve an orderly disposition of the case. The text of the
provision reads:
SECTION 1. Rendition of judgment. - x xx
In deciding the case, the Court may not limit itself to the issues stipulated by the parties but may
also rule upon related issues necessary to achieve an orderly disposition of the case.
The above section is clearly worded. On the basis thereof, the CTA Division was, therefore, well
within its authority to consider in its decision the question on the scope of authority of the revenue
officers who were named in the LOA even though the parties had not raised the same in their
pleadings or memoranda. The CTA En Banc was likewise correct in sustaining the CTA
Division's view concerning such matter.
B. The Scope of the Authority
of the Examining Officers
In the assailed decision of the CTA Division, the trial court observed that LOA No. 00012289
authorized the BIR officers to examine the books of account of Lancaster for the taxable year
1998 only or, since Lancaster adopted a fiscal year (FY), for the
period 1April1997 to 31March1998. However, the deficiency income tax assessment which the
BIR eventually issued against Lancaster was based on the disallowance of expenses reported
in FY 1999, or for the period 1 April 1998 to 31March1999. The CTA concluded that the revenue
examiners had exceeded their authority when they issued the assessment against Lancaster
and, consequently, declared such assessment to be without force and effect.
We agree.
The audit process normally commences with the issuance by the CIR of a Letter of Authority.
The LOA gives notice to the taxpayer that it is under investigation for possible deficiency tax
assessment; at the same time it authorizes or empowers a designated revenue officer to
examine, verify, and scrutinize a taxpayer's books and records, in relation to internal revenue
tax liabilities for a particular period.34
In this case, a perusal of LOA No. 00012289 indeed shows that the period of examination is the
taxable year 1998. For better clarity, the pertinent portion of the LOA is again reproduced, thus:
The bearer(s) hereof x x x is/are authorized to examine your books of accounts and other INCOME TAX DUE-Basic
accounting records for all internal revenue taxes for the period from taxable year, 1998 to __, April 1 -December 31, 1998 ₱2,913,676.4
19_. x x x." (emphasis supplied) (9/12xPl1,496,770.18 x 34%)
January 1-March 31, 1999 948,483.54
Even though the date after the words "taxable year 1998 to" is unstated, it is not at all difficult to (3/12xPl1,496,770.18 x 33%)
discern that the period of examination is the whole taxable year 1998. This means that the Income tax still due per investigation ₱3,880,159.94
examination of Lancaster must cover the FY period from 1April1997 to 31March1998. It could Interest (6/15/99 to 10/15/02) .66 2,560,905.56
not have contemplated a longer period. The examination for the full taxable year 1998 only is Compromise Penalty 25,000
consistent with the guideline in Revenue Memorandum Order (RMO) No. 43-90, dated 20 TOTAL DEFICIENCY INCOME TAX ₱6,466,065.50
September 1990, that the LOA shall cover a taxable period not exceeding one taxable (emphasis supplied)
year.35 In other words, absent any other valid cause, the LOA issued in this case is valid in all
respects. The taxable year covered by the assessment being outside of the period specified in the LOA
in this case, the assessment issued against Lancaster is, therefore, void.
Nonetheless, a valid LOA does not necessarily clothe validity to an assessment issued on it, as
when the revenue officers designated in the LOA act in excess or outside of the authority granted This point alone would have sufficed to invalidate the subject deficiency income tax assessment,
them under said LOA. Recently in CIR v. De La Salle University, Inc.36 we accorded validity to thus, obviating any further necessity to resolve the issue on whether Lancaster erroneously
the LOA authorizing the examination of DLSU for "Fiscal Year Ending 2003and Unverified Prior claimed the February and March 1998 expenses as deductions against income for FY 1999.
Years" and correspondingly held the assessment fortaxable year 2003 as valid because this
taxable period is specified in the LOA. However, we declared void the assessments for taxable But, as the CTA did, we shall discuss the issue on the disallowance for the proper guidance not
years 2001 and 2002 for having been unspecified on separate LOAs as required under RMO only of the parties, but the bench and the bar as well.
No. 43-90.
II.
Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,37 we affirmed the cancellation of a
deficiency VAT assessment because, while the LOA covered "the period 1997and unverified The CTA En Banc correctly sustained the
prior years, " the said deficiency was arrived at based on the records of a later year, order cancelling and withdrawing
from January to March 1998, or using the fiscal year which ended on 31March1998. We the deficiency tax assessment.
explainedthat the CIR knew which period should be covered by the investigation and that if the
CIR wanted or intended the investigation to include the year 1998, it would have done so by
To recall, the assessment against Lancaster for deficiency income tax stemmed from the
including it in the LOA or by issuing another LOA.38
disallowance of its February and March 1998 purchases which Lancaster posted in its fiscal
year ending on 31 March 1999 (FY 1999) instead of the fiscal year ending on 31March1998 (FY
The present case is no different from Sony in that the subject LOA specified that the examination 1998).
should be for the taxable year 1998 only but the subsequent assessment issued against
Lancaster involved disallowed expenses covering the next fiscal year, or the period ending 31
On the one hand, the BIR insists that the purchases in question should have been reported in
March 1999. This much is clear from the notice of assessment, the relevant portion of which we
FY 1998 in order to conform to the generally accepted accounting principle of proper matching
again restate as follows:
of cost and revenue. Thus, when
1âwphi 1

INCOME TAX: Lancaster reported the said purchases in FY 1999, this resulted in overstatement of expenses
Taxable Income per ITR -0- warranting their disallowance and, by consequence, resulting in the deficiency in the payment
Add: Adjustments-Disallowed purchases 11,496, 770.18 of its income tax for FY 1999.
Adjusted Taxable Income per Investigation ₱l 1,496,770.18
Upon the other hand, Lancaster justifies the inclusion of the February and March 1998
purchases in its FY 1999 considering that they coincided with its crop year covering the period
of October 1997 to September 1998. Consistent with Revenue Audit Memorandum (RAM) No.
2-95,39 Lancaster argues that its purchases in February and March 1998 were properly posted
in FY 1999, or the year in which its gross income from the crop was realized. Lancaster
concludes that by doing so, it had complied with the matching concept that was also relied upon
by the BIR in its 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 40 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.41 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.
To be clear, the principles under financial or business accounting, in theory and application, are
not necessarily interchangeable with those in tax accounting. Thus, although closely related, tax
and business accounting had invariably produced concepts that at some point diverge in
understanding or usage. For instance, two of such important concepts are taxable income and
business income (or accounting income). Much of the difference can be attributed to the distinct
purposes or objectives that the concepts of tax and business accounting are aimed at. Chief
Justice Querube Makalintal made an apt observation on the nature of such difference.
In Consolidated Mines, Inc. v. CTA,42he noted:
While taxable income is based on the method of accounting used by the taxpayer, it will almost
always differ from accounting income. This is so because of a fundamental difference in the
ends the two concepts serve. Accounting attempts to match cost against revenue. Tax law is
aimed at collecting revenue. It is quick to treat an item as income, slow to recognize deductions
or losses. Thus, the tax law will not recognize deductions for contingent future losses except in
very limited situations. Good accounting, on the other hand, requires their recognition. Once this
fundamental difference in approach is accepted, income tax accounting methods can be
understood more easily.43 (emphasis supplied)
While there may be differences between tax and accounting,44 it cannot be said that the two
mutually exclude each other. As already made clear, tax laws borrowed concepts that had
origins from accounting. In truth, tax cannot do away with accounting. It relies upon approved
accounting methods and practices to effectively carry out its objective of collecting the proper
amount of taxes from the taxpayers. Thus, an important mechanism established in many tax
systems is the requirement for taxpayers to make a return of their true income.45 Maintaining
accounting books and records, among other important considerations, would in turn assist the
taxpayers in complying with their obligation to file their income tax returns. At the same time,
such books and records provide vital information and possible bases for the government, after
appropriate audit, to make an assessment for deficiency tax whenever so warranted under the
circumstances.
The NIRC, just like the tax laws in other jurisdictions, recognizes the important facility provided
by generally accepted accounting principles and methods to the primary aim of tax laws to
collect the correct amount of taxes. The NIRC even devoted a whole chapter on accounting
periods and methods of accounting, some relevant provisions of which we cite here for more
emphasis:
CHAPTER VIII
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
Sec. 43. General Rule. - The taxable income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping the books of such
taxpayer; but if no such method of accounting has been so employed, or if the method employed
does not clearly reflect the income, the computation shall be made in accordance with such
method as in the opinion of the Commissioner clearly reflects the income.
If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q),
or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is
an individual, the taxable income shall be computed on the basis of the calendar year.
Sec. 44. Period in which Items of Gross Income Included. - The amount of all items of gross
income shall be included in the gross income for the taxable year in which received by the
taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts
are to be properly accounted for as of a different period.
In the case of the death of a taxpayer, there shall be included in computing taxable income for
the taxable period in which falls the date of his death, amounts accrued up to the date of his
death if not otherwise properly includible in respect of such period or a prior period.
Sec. 45. Period/or which Deductions and Credits Taken. - The deductions provided for in
this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or
incurred,' dependent upon the method of accounting upon the basis of which the net income is
computed, unless in order to clearly reflect the income, the deductions should be taken as of a
different period. In the case of the death of a taxpayer, there shall be allowed as deductions for
the taxable period in which falls the date of his death, amounts accrued up to the date of his
death if not otherwise properly allowable in respect of such period or a prior period.
Sec. 46. Change of Accounting Period. - If a taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from
one fiscal year to another, the net income shall, with the approval of the Commissioner, be
computed on the basis of such new accounting period, subject to the provisions of Section 47.
xxxx
Sec. 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be
repo1ied for tax purposes in the manner as provided in this Section.
As used herein, the term 'long-term contracts' means building, installation or construction
contracts covering a period in excess of one (1) year.
Persons whose gross income is derived in whole or in part from such contracts shall report such
income upon the basis of percentage of completion. 1âwphi1
The return should be accompanied by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire work performed under contract.
There should be deducted from such gross income all expenditures made during the taxable
year on account of the contract, account being taken of the material and supplies on hand at the
beginning and end of the taxable period for use in connection with the work under the contract
but not yet so applied.
If upon completion of a contract, it is found that the taxable net income arising thereunder has
not been clearly reflected for any year or years, the Commissioner may permit or require an
amended return.
Sec. 49. Installment Basis. -
(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells
or otherwise disposes of personal property on the installment plan may return as income
therefrom in any taxable year that proportion of the installment payments actually received in
that year, which the gross profit realized or to be realized when payment is completed, bears to
the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other
casual disposition of personal property (other than property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price
exceeding One thousand pesos (₱1,000), or (2) of a sale or other disposition of real prope1iy,
if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price,
the income may, under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be returned on the basis and in the manner above
prescribed in this Section.
As used in this Section, the term 'initial payments' means the payments received in cash or
property other than evidences of indebtedness of the purchaser during the taxable period in
which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells
or disposes of real property, considered as capital asset, and is otherwise qualified to report the
gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules
and regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of
Subsection (A) elects for any taxable year to report his taxable income on the installment basis,
then in computing his income for the year of change or any subsequent year, amounts actually
received during any such year on account of sales or other dispositions of property made in any
prior year shall not be excluded." (emphasis in the original)
We now proceed to the matter respecting the accounting method employed by Lancaster.
An accounting method is a "set of rules for determining when and how to report income and
deductions."46 The provisions under Chapter VIII, Title II of the NIRC cited above enumerate the
methods of accounting that the law expressly recognizes, to wit:
(1) Cash basis method;47
(2) Accrual method;48
(3) Installment method;49
(4) Percentage of completion method;50 and
(5) Other accounting methods.
Any of the foregoing methods may be employed by any taxpayer so long as it reflects its income
properly and such method is used regularly. The peculiarities of the business or occupation
engaged in by a taxpayer would largely determine how it would report incomes and expenses
in its accounting books or records. The NIRC does not prescribe a uniform, or even specific,
method of accounting.
Too, other methods approved by the CIR, even when not expressly mentioned in the NIRC, may
be adopted if such method would enable the taxpayer to properly reflect its income. Section 43
of the NIRC authorizes the CIR to allow the use of a method of accounting that in its opinion
would clearly reflect the income of the taxpayer. An example of such method not expressly
mentioned in the NIRC, but duly approved by the CIR, is the 'crop method of
accounting' authorized under RAM No. 2-95. The pertinent provision reads:
II. Accounting Methods
xxxx
F. Crop Year Basis is a method applicable only to farmers engaged in the production of crops
which take more than a year from the time of planting to the process of gathering and disposal.
Expenses paid or incurred are deductible in the year the gross income from the sale of the crops
are realized.
The crop method recognizes that the harvesting and selling of crops do not fall within the same
year that they are planted or grown. This method is especially relevant to farmers, or those
engaged in the business of producing crops who, pursuant to RAM No. 2-95, would then be able
to compute their taxable income on the basis of their crop year. On when to recognize expenses
as deductions against income, the governing rule is found in the second sentence of Subsection
F cited above. The rule enjoins the recognition of the expense (or the deduction of the cost) of
crop production in the year that the crops are sold (when income is realized).
In the present case, we find 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 1999.51On this point, we
quote with approval the ruling of the CT A En Banc, thus:
Considering that [Lancaster] is engaged in the production oftobacco, it applied the crop year
basis in determining its total purchases for each fiscal year. Thus, [Lancaster's] total cost for the
production of its crops, which includes its purchases, must be taken as a deduction in the year
in which the gross income is realized. Thus, We agree with the following ratiocination of the First
Division:
Evident from the foregoing, the crop year basis is one unusual method of accounting wherein
the entire cost of producing the crops (including purchases) must be taken as a deduction in the
year in which the gross income from the crop is realized. Since the petitioner's crop year starts
in October and ends in September of the following year, the same does not coincide with
petitioner's fiscal year which starts in April and ends in March of the following year. However,
the law and regulations consider this peculiar situation and allow the costs to be taken up at the
time the gross income from the crop is realized, as in the instant case.
[Lancaster's] fiscal period is from April 1, 1998 to March 31, 1999. On the other hand, its crop
year is from October 1, 1997 to September 1, 1998. Accordingly, in applying the crop year
method, all the purchases made by the respondent for October 1, 1997 to September 1, 1998
should be deducted from the fiscal year ending March 31, 1999, since it is the time when the
gross income from the crops is realized.52
The matching principle
Both petitioner CIR and respondent Lancaster, it must be noted, rely upon the concept of
matching cost against revenue to buttress their respective theories. Also, both parties cite RAM
2-95 in referencing the crop method of accounting.
We are tasked to determine which view is legally sound.
In essence, the matching concept, which is one of the generally accepted accounting principles,
directs that the expenses are to be reported in the same period that related revenues are earned.
It attempts to match revenue with expenses that helped earn it.
The CIR posits that Lancaster should not have recognized in FY 1999 the purchases for
February and March 1998.53 Apparent from the reasoning of the CIR is that such expenses ought
to have been deducted in FY 1998, when they were supposed to be paid or incurred by
Lancaster. In other words, the CIR is of the view that the subject purchases match with revenues
in 1998, not in 1999
A reading of RAM No. 2-95, however, clearly evinces that it conforms with the concept that the
expenses paid or incurred be deducted in the year in which gross income from the sale of the
crops is realized. Put in another way, the expenses are matched with the related incomes which
are eventually earned. Nothing from the provision is it strictly required that for the expense to be
deductible, the income to which such expense is related to be realized in the same year that it
is paid or incurred. As noted by the CTA,54 the crop method is an unusual method of accounting,
unlike other recognized accounting methods that, by mandate of Sec. 45 of the NIRC, strictly
require expenses be taken in the same taxable year when the income is 'paid or incurred, '
or 'paid or accrued, ' depending upon the method of accounting employed by the taxpayer.
Taxability of income and deductibility of expenses shall be determined strictly in accordance
with the provisions of the Tax Code and the rules and regulations issued implementing said Tax
Code. In case of difference between the provisions of the Tax Code and the rules and
regulations implementing the Tax Code, on one hand, and the general(v accepted accounting
principles (GAAP) and the generally accepted accounting standards (GAAS), on the other hand,
the provisions of the Tax Code and the rules and regulations issued implementing said Tax
Code shall prevail. (italics supplied)
RAM No. 2-95 is clear-cut on the rule on when to recognize deductions for taxpayers using the
crop method of accounting. The rule prevails over any GAAP, including the matching concept
as applied in financial or business accounting.
In sum, and considering the foregoing premises, we find no cogent reason to overturn the
assailed decision and resolution of the CT A. As the CTA decreed, Assessment Notice LTAID II
IT-98-00007, dated 11 October 2002, in the amount of ₱6,466,065.50 for deficiency income tax
should be cancelled and set aside. The assessment is void for being issued without valid
authority. Furthermore, there is no legal justification for the disallowance of Lancaster's
expenses for the purchase of tobacco in February and March 1998.
WHEREFORE, the petition is DENIED. The assailed 30 April 2008 Decision and 24 June 2008
Resolution of the Court of Tax Appeals En Banc are AFFIRMED. No cost
SO ORDERED.

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"55dated 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. The relevant
portion of RMC 22-04 reads:

II. Provisions of the Tax Code Shall Prevail.

All returns required to be filed by the Tax Code shall be prepared always in conformity with the
provisions of the Tax Code, and the rules and regulations implementing said Tax Code.
March 7, 2018 taxes, with office address at the Fifth Floor, BIR National Office Building, BIR Road, Diliman ,
Quezon City.
G.R. No. 205955
On April 16, 2007. petitioner filed its Annual Income Tax Return (ITR) for the year ended
UNIVERSITY PHYSICIANS SERVICES INC. - MANAGEMENT, INC., Petitioner December 31, 2006 with the Revenue District No. 34 of the Revenue Region No. 6 of the Bureau
vs. of Internal Revenue (BIR), reflecting an income tax overpayment of 5,159,341.00. computed as
COMMISSIONER OF INTERNAL REVENUE, Respondent follows:4

DECISION Sales/Revenues/Receipts/Fees ₱ 28,808,960.00

MARTIRES, J.: Less: Cost of Sales/Services 23,834,605.00

When a corporation overpays its income tax liability as adjusted at the close of the taxable year, Gross Income from Operation ₱ 4,974,355.00
it has two options: (1) to be refunded or issued a tax credit certificate, or (2) to carry over such
overpayment to the succeeding taxable quarters to be applied as tax credit against income tax Add: Non-Operating & Other Income 5,375.00
due.1 Once the carry-over option is taken, it becomes irrevocable such that the taxpayer cannot
later on change its mind in order to claim a cash refund or the issuance of a tax credit certificate Total Gross Income ₱ 4,979,730.00
of the very same amount of overpayment or excess m. come tax credit.2
Less: Deductions ₱ 4,979,730.00
Does the irrevocability rule apply exclusively to the carry-over option? Such is the novel issue
presented in this case. Taxable Income -

THE FACTS
Tax Rate (except MCIT Rate) 35%
Before the Court is a petition for review under Rule 45 of the Rules of Court filed by petitioner
University Physicians Services Inc.-Management, Inc. (UPSI-MI) which seeks the reversal and Income Tax -
setting aside of the 8 February 2013 Decision3 of the Court of Tax Appeals (CTA) En Banc in
CTA-EB Case No. 828. ·Said decision of the CTA En Banc affirmed the 5 July 2011 Decision Minimum Corporate Income Tax (MCIT) ₱ 99,595.00
and 8 September 2011 Resolution of the CTA Second Division (CTA Division) in CTA Case No.
7908. The CTA Division denied the application of UPSI-MI for tax refund or issuance of Tax
Credit Certificate (TCC) of its excess unutilized creditable income tax for the taxable year 2006.

The Antecedents
Aggregate Income Tax Due ₱ 99,595.00
As narrated by the CTA, the facts are uncomplicated, viz:
Less: Tax Credits/Payments
UPSI-MI is a corporation incorporated and existing under and by virtue of laws of the Republic Prior Year's Excess Credits ₱ 2,331,102.00
of the Philippines, with business address at 1122 General Luna Street, Paco. Manila.
Respondent on the other hand, is the duly appointed Commissioner of Internal Revenue, with Creditable Tax Withheld for the First
power, among others, 10 act upon claims for refund or tax credit of overpaid internal revenue
 Aggregate Income Tax Due 20,562
Three Quarters
Less: Tax Credits/Payments
Creditable Tax Withheld for the Fourth
Prior Year's Excess Credits 5,159,341
Three Quarters 2,972,834.00
Creditable Tax Withheld for the First
Total Tax Credits/Payments ₱ 5,258,936.00) 1,107,228
Three Quarters
Tax Payable/(Overpayment) ₱ (5,159,341.00)
Creditable Tax Withheld for the Fourth

Subsequently, on November 14, 2007, petitioner filed an Annual ITR for the short period fiscal Quarter 6,266,569
year ended March 31, '.W07, reflecting the income tax overpayment of 5. 159.341 from the
previous period as "Prior Year’s Excess Credit", as follows:5 Total Tax Credits/Payments 6,266,569

Tax Payable/(Overpayment) (6,246,007)

Sales/Revenues/Receipts/Fees 7,489,259

Less: Cost of Sales/Services 6,461,650 On the same date, petitioner filed an amended Annual ITR for the short period fiscal year ended
March 31, 2007, reflecting the removal of the amount of the instant claim in the ''Prior Year's
Gross Income from Operation 1,027,609 Excess Credit". Thus, the amount thereof was changed from ₱5, 159,341 to ₱2,231,507.
Add: Non-Operating & Other Income 479
On October 10, 2008, petitioner filed with the respondent's office, a claim for refund and/or
issuance of a Tax Credit Certificate (TCC) in the amount of ₱2,927.834.00, representing the
Total Gross Income 1,028,088
alleged excess and unutilized creditable withholding taxes for 2006.
Less: Deductions 1,206,543
In view of the fact that respondent has not acted upon the foregoing claim for refund/tax credit,
Taxable Income (178,455) petitioner filed with a Petition for Review on April l4, 2009 before the Court in Division.

The Ruling of the CTA Division

Tax Rate (except MCIT Rate)
Income Tax
Minimum Corporate Income Tax (MCIT)
35% After trial, the CT A Division denied the petition for review for lack of merit. It reasoned that
UPSI-MI effectively exercised the carry-over option under Section 76 of the National Internal
- Revenue Code (NIRC) of 1997. On motion for reconsideration, UPSI-MI argued that the
irrevocability rule under Section 76 of the NIRC is not applicable for the reason that it did not
20,562 carry over to the succeeding taxable period the 2006 excess income tax credit. UPSI-MI added
that the subject excess tax credits were inadvertently included in its original 2007 ITR, and such
mistake was rectified in the amended 2007 ITR. Thus, UPSI-MI insisted that what should control
is its election of the option "To be issued a Tax Credit Certificate" in its 2006 ITR.
The CTA Division ruled that UPSI-MI's alleged inadvertent inclusion of the 2006 excess tax
credit in the 2007 original ITR belies its own allegation that it did not carry over the said amount
to the succeeding taxable period. The amendment of the 2007 ITR cannot undo UPSI-MI's
actual exercise of the carry-over option in the original 2007 ITR, for to do so would be against
the irrevocability rule. The dispositive portion of the CTA Division's decision reads:
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.6
Aggrieved, UPSI-MI appealed before the CTA En Banc.
The Ruling of the CTA En Banc
The CTA En Banc ruled that UPSI-MI is barred by Section 76 of the NIRC from claiming a refund
of its excess tax credits for the taxable year 2006. The barring effect applies after UPSI-MI
carried over its excess tax credits to the succeeding quarters of 2007, even if such carry-over
was allegedly done inadvertently. The court emphasized that the prevailing law and
jurisprudence admit of no exception or qualification to the irrevocability rule. Thus, the CTA En
Banc affirmed the assailed decision and resolution of the CTA Division, disposing as follows:
WHEREFORE, all the foregoing considered, the instant Petition for Review is hereby DENIED.
The assailed Decision dated July 5. 2011and Resolution dated September 8, 2011 both
rendered by the Court in Division in CTA Case No. 7908 are hereby AFFIRMED.
SO ORDERED. 7 DECIDED ON THE ISSUE OF WHETHER OR NOT PEITIONER CARRIED OVER ITS 2006
Notably, the said decision was met by a dissent from Justice Esperanza R. Pabon-Victorino.
Invoking Phi/am Asset Management, Inc. v. Commissioner (Philam), 8 Justice Pabon-Victorino
took the view that the irrevocability rule applies as much to the option of refund or tax credit
certificate. She wrote:
A contextual appreciation of the ruling [Philam] would tell us that any of the two alternatives once
chosen is irrevocable - be it for refund or carry over. The controlling factor for the operation
of the irrevocability rule is that the taxpayer chose an option; and once it had already
done so, it could no longer make another one.
Unsatisfied with the decision of the CTA En Banc, UPSI-MI appealed before this Court.
The Present Petition for Review
UPSI-MI interposed the following reasons for its petition:
THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED AND
DECIDED IN A MANNER NOT IN ACCORDANCE WITH THE LAW, PREVAILING
JURISPRUDENCE, AND FACTUAL MILIEU SURROUNDING THE CASE, WHEN IT
ADOPTED THE DECISION OF THE COURT OF TAX APPEALS IN DIVISION AND RULED
THAT:
a. Petitioner is not entitled to the refund or issuance of a Tax Credit Certificate in the amount of
₱2,927,834.00 representing its 2006 excess tax credits because of the application of the
"irrevocability rule" under Section 76 of the NIRC of 1997.
b. The amendment of the original ITR for fiscal year ended 31 March 2007 does not take back,
cancel or rescind the original option to refund through tax credit certificate based on the
argument that the Petitioner allegedly made an option to carry-over the excess credits.
THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED WHEN IT
IGNORED THAT ON JOINT STIPULATIONS, THE RESPONDENT ADMITTED THE FACT
THAT PETITIONER INDICATED IN THE CORRESPONDING BOX ITS
INTENTION TO BE ISSUED A TAX CREDIT CERTIFICATE REPRESENTING ITS
UNUTILIZED CREDITABLE WITHHOLDING TAX WITHHELD FOR THE TAXABLE YEAR
2006 BY MARKING THE APPROPRIATE BOX.
THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED WHEN IT
EXCESS TAX CREDITS TO THE SUCCEEDING SHORT TAXABLE PERIOD OF 2007 WHEN
THE SAME WAS NEVER RAISED IN THE JOINT STIPULATION OF FACTS.
UPSI-MI faults the CTA En Banc for banking too much on the irrevocability of the option to carry
over. It contends that even the option to be refunded through the issuance of a TCC is likewise
irrevocable. Taking cue from the dissent of Justice Pabon-Victorino, UPSI-MI cites Philam in
restating this Court's pronouncement that "the options of a corporate taxpayer, whose total
quarterly income tax payments exceed its tax liability, are alternative in nature and the choice
of one precludes the other." It also cites Commissioner v. PL Management International
Philippines, Inc. (PL Management)9 that reiterated the rule that the choice of one precludes the
other. Thus, when it indicated in its 2006 Annual ITR the option "To be issued a Tax Credit
Certificate," such choice precluded the other option to carry over.10
In other words, UPSI-MI proposes that the options of refund on one hand and carry-over on the
other hand are both irrevocable by nature. Relying again on the dissent of Justice Pabon-
Victorino, UPSI-MI also points to BIR Form 1702 (Annual Income Tax Return) itself which In sum, the question to be resolved is whether UPSI-MI may still be entitled to the refund of its
expressly states under line 31 thereof: 2006 excess tax credits in the amount of ₱2,927,834.00 when it thereafter filed its income tax
return (for the short period ending 31 March 2007) indicating the option of carry-over.
"If overpayment, mark one box only:
OUR RULING
(once the choice is made, the same is irrevocable)"
We affirm the CTA.
Resume of relevant facts
We cannot subscribe to the suggestion that the irrevocability rule enshrined in Section 76 of the
To recapitulate, UPSI-MI had, as of 31 December 2005, an outstanding amount of ₱2,331, National Internal Revenue Code (NIRC) applies to either of the options of refund or carry-over.
102.00 in excess and unutilized creditable withholding taxes. Our reading of the law assumes the interpretation that the irrevocability is limited only to the
option of carry-over such that a taxpayer is still free to change its choice after electing a refund
For the subsequent taxable year ending 31 December 2006, the total sum of creditable taxes of its excess tax credit. But once it opts to carry over such excess creditable tax, after electing
withheld on the management fees of UPSI-MI was ₱2,927,834.00. Per its 2006 Annual Income refund or issuance of tax credit certificate, the carry-over option becomes irrevocable.
Tax Return (ITR), UPSI-MI's income tax due amounted to ₱99,105.00. UPSI-MI applied its "Prior Accordingly, the previous choice of a claim for refund, even if subsequently pursued, may no
Year's Excess Credits" of ₱2,331, 102.00 as tax credit against such 2006 Income Tax due, longer be granted.
leaving a balance of ₱2,231,507.00 of still unutilized excess creditable tax. Meanwhile, the
creditable taxes withheld for the year 2006 (₱2,927,834.00) remained intact and unutilized. In The aforementioned Section 76 of the NIRC provides:
said 2006 Annual ITR, UPSI-MI chose the option "To be issued a tax credit certificate" with
respect to the amount ₱2,927,834.00, representing unutilized excess creditable taxes for the SECTION 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall
taxable year ending 31 December 2006. The figures are summarized in the table below: file a final adjustment return covering the total taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not
Taxable Excess Income Tax Less Tax Balance of equal to the total tax due on the entire taxable income of that year, the corporation shall either:
Year Creditable Due Tax Credit Payable Excess CWT
Withholding Tax (A) Pay the balance of tax still due; or
(CWT)
2005 P 2,331, 102.00 --- --- --- P 2,231,507.00 (B) Carry over the excess credit; or
2006 P 2,927,834.00 P 99, 105.00 P 99,105.00 (A P 0.00 P 2,927,834.00
(MCIT) portion of the (C) Be credited or refunded with the excess amount paid, as the case may be.
excess credit of
Php2,33l,102.00
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly
in 2015)
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the estimated quarterly income tax liabilities for the taxable quarters of the
In the following year, UPSI-MI changed its taxable period from calendar year to fiscal year succeeding taxable years. Once the option to carry-over and apply the excess quarterly
ending on the last day of March. Thus, it filed on 14 November 2007 an Annual ITR covering income tax against income tax due for the taxable quarters of the succeeding taxable years has
the short period from January 1 to March 31 of 2007. In the original 2007 Annual ITR, UPSI-MI been made, such option shall be considered irrevocable for that taxable period and no
opted to carry over as "Prior Year's Excess Credits" the total amount of ₱5,159,341.00 which application for cash refund or issuance of a tax credit certificate shall be allowed therefor.
included the 2006 unutilized creditable withholding tax of ₱2,927,834.00. UPSI-MI amended the (emphasis supplied)
return by excluding the sum of ₱2,927,834.00 under the line "Prior Year's Excess Credits" which
amount is the subject of the refund claim.
Under the cited law, there are two options available to the corporation whenever it overpays its
income tax for the taxable year: (1) to carry over and apply the overpayment as tax credit
against the estimated quarterly income tax liabilities of the succeeding taxable years (also
known as automatic tax credit) until fully utilized (meaning, there is no prescriptive period);
and (2) to apply for a cash refund or issuance of a tax credit certificate within the prescribed
period.11 Such overpayment of income tax is usually occasioned by the over-withholding of taxes
on the income payments to the corporate taxpayer.
The irrevocability rule is provided in the last sentence of Section 76. A perfunctory reading of
the law unmistakably discloses that the irrevocable option referred to is the carry-over option
only. There appears nothing therein from which to infer that the other choice, i.e., cash refund
or tax credit certificate, is also irrevocable. If the intention of the lawmakers was to make such
option of cash refund or tax credit certificate also irrevocable, then they would have clearly
provided so.
In other words, the law does not prevent a taxpayer who originally opted for a refund or tax credit
certificate from shifting to the carry-over of the excess creditable taxes to the taxable quarters
of the succeeding taxable years. However, in case the taxpayer decides to shift its option to
carryover, it may no longer revert to its original choice due to the irrevocability rule. As Section
76 unequivocally provides, once the option to carry over has been made, it shall be irrevocable.
Furthermore, the provision seems to suggest that there are no qualifications or conditions
attached to the rule on irrevocability.
Law and jurisprudence unequivocally support the view that only the option of carry-over is
irrevocable.
Aside from the uncompromising last sentence of Section 76, Section 228 of the NIRC recognizes
such freedom of a taxpayer to change its option from refund to carry-over. This law affords the
government a remedy in case a taxpayer, who had previously claimed a refund or tax credit
certificate (TCC) of excess creditable withholding tax, subsequently applies such amount as
automatic tax credit. The pertinent text of Section 228 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.
The taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void. x x x (emphasis supplied)
The provision contemplates three scenarios:
(1) Deficiency in the payment or remittance of tax to the government (paragraphs [a], [b]
and [d]);
(2) Overclaim of refund or tax credit (paragraph [ c ]); and
(3) Unwarranted claim of tax exemption (paragraph [e]).
In each case, the government is deprived of the rightful amount of tax due it. The law assures
recovery of the amount through the issuance of an assessment against the erring taxpayer.
However, the usual two-stage process in making an assessment is not strictly followed.
Accordingly, the government may immediately proceed to the issuance of a final assessment
notice (FAN), thus dispensing with the preliminary assessment (PAN), for the reason that the
discrepancy or deficiency is so glaring or reasonably within the taxpayer's knowledge such that
a preliminary notice to the taxpayer, through the issuance of a PAN, would be a superfluity.
Pertinently, paragraph (c) contemplates a double recovery by the taxpayer of an overpaid
income tax that arose from an over-withholding of creditable taxes. The refundable amount is
the excess and unutilized creditable withholding tax.
This paragraph envisages that the taxpayer had previously asked for and successfully
recovered from the BIR its excess creditable withholding tax through refund or tax credit
certificate; it could not be viewed any other way. If the government had already granted the
refund, but the taxpayer is determined to have automatically applied the excess creditable
withholding tax against its estimated quarterly tax liabilities in the succeeding taxable year(s),
the taxpayer would undeservedly recover twice the same amount of excess creditable
withholding tax. There appears, therefore, no other viable remedial recourse on the part of the
government except to assess the taxpayer for the double recovery. In this instance, and in
accordance with the above rule, the government can right away issue a FAN.
If, on the other hand, an administrative claim for refund or issuance of TCC is still pending but
the taxpayer had in the meantime automatically carried over the excess creditable tax, it would
appear not only wholly unjustified but also tantamount to adopting an unsound policy if the
government should resort to the remedy of assessment.
First, on the premise that the carry-over is to be sustained, there should be no more reason for
the government to make an assessment for the sum (equivalent to the excess creditable
withholding tax) that has been justifiably returned already to the taxpayer (through automatic tax
credit) and for which the government has no right to retain in the first place. In this instance, all
that the government needs to do is to deny the refund claim.
Second, on the premise that the carry-over is to be disallowed due to the pending application
for refund, it would be more complicated and circuitous if the government were to grant first the
refund claim and then later assess the taxpayer for the claim of automatic tax credit that was
previously disallowed. Such procedure is highly inefficient and expensive on the part of the
government due to the costs entailed by an assessment. It unduly hampers, instead of eases,
tax administration and unnecessarily exhausts the government's time and resources. It defeats,
rather than promotes, administrative feasibility.12 Such could not have been intended by our
lawmakers. Congress is deemed to have enacted a valid, sensible, and just law.13
Thus, in order to place a sensible meaning to paragraph (c) of Section 228, it should be
interpreted as contemplating only that situation when an application for refund or tax credit
certificate had already been previously granted. Issuing an assessment against the taxpayer
who benefited twice because of the application of automatic tax credit is a wholly acceptable
remedy for the government.
Going back to the case wherein the application for refund or tax credit is still pending before the
BIR, but the taxpayer had in the meantime automatically carried over its excess creditable tax
in the taxable quarters of the succeeding taxable year(s), the only judicious course of action that
the BIR may take is to deny the pending claim for refund. To insist on giving due course to the
refund claim only because it was the first option taken, and consequently disallowing the
automatic tax credit, is to encourage inefficiency or to suppress administrative feasibility, as
previously explained. Otherwise put, imbuing upon the choice of refund or tax credit certificate
the character of irrevocability would bring about an irrational situation that Congress did not
intend to remedy by means of an assessment through the issuance of a FAN without a prior
PAN, as provided in paragraph (c) of Section 228. It should be remembered that Congress'
declared national policy in passing the NIRC of 1997 is to rationalize the internal revenue tax
system of the Philippines, including tax administration.14
The foregoing simply shows that the lawmakers never intended to make the choice of refund or
tax credit certificate irrevocable. Sections 76 and 228, paragraph (c), unmistakably evince such
intention.
Philam and PL Management cases
did not categorically declare the
option of refund or TCC irrevocable.
The petitioner hinges its claim of irrevocability of the option of refund on the statement of this
Court in Philam and PL Management that "the options xxx are alternative and the choice of one
precludes the other." This also appears as the basis of Justice Fabon-Victorino’s stance in her
dissent to the majority opinion in the assailed decision.
We do not agree.
The cases cited in the petition did not make an express declaration that the option of cash refund
or TCC, once made, is irrevocable. Neither should this be inferred from the statement of the
Court that the options are alternative and that the choice of one precludes the other. Such
statement must be understood in the light of the factual milieu obtaining in the cases.
Philam involved two cases wherein the taxpayer failed to signify its option in the Final
Adjustment Return (FAR).
In the first case (G.R. No. 156637), the Court ruled that such failure did not mean the outright
barring of the request for a refund should one still choose this option later on. Thy taxpayer did
in fact file on 11 September 1998 an administrative claim for refund of its 1997 excess creditable
taxes. We sustained the refund claim in1 this case.
It was different in the second case (G.R. No. 162004) because the taxpayer filled out the portion
"Prior Year's Excess Credits" in its subsequent FAR. The court considered the taxpayer to have
constructively chosen the carry-over option. It was in this context that the court determined the
taxpayer to be bound by its initial choice (of automatic tax credit), so that it is precluded from
asking for a refund of the excess CWT. It must be so because the carry-over option is
irrevocable, and it cannot be allowed to recover twice for its overpayment of tax.
Unlike the second case, there was no flip-flopping of choices in the first one. The taxpayer did
not indicate in its 1997 FAR the choice of carryover. Neither did it apply automatic tax credit in
subsequent income tax returns so as to be considered as having constructively chosen the
carry-over option. When it later on asked for a refund of its 1997 excess CWT, the taxpayer was
expressing its option for the first time. It must be emphasized that the Court sustained the
application for refund but without expressly declaring that such choice was irrevocable.
In either case, it is clear that the taxpayer cannot avail of both refund and automatic tax credit
at the same time. Thus, as Philam declared: "One cannot get a tax refund and a tax credit at
the same time for the same excess income taxes paid." This is the import of the Court's
pronouncement that the options under Section 76 are alternative in nature.
In declaring that "the choice of one (option) precludes the other," the Court
in Philam cited Philippine Bank of Communications v. Commissioner of Internal Revenue
(PBCom), 15 a case decided under the aegis of the old NIRC of 1977 under which the
irrevocability rule had not yet been established. It was in PBCom that the Court stated for the
first time that "the choice of one precludes the other."16 However, a closer perusal
of PBCom reveals that the taxpayer had opted for an automatic tax credit. Thus, it was
precluded from availing of the other remedy of refund; otherwise, it would recover twice the
same excess creditable tax. Again, nowhere is it even suggested that the choice of refund is
irrevocable. For one thing, it was not the choice taken by the taxpayer. For another, the
irrevocability rule had not yet been provided.
As in PBCom, the Court also said in PL Management that the choice of one (option) precludes
the other. Similarly, the taxpayer in PL Management initially signified in the FAR its choice of
1âwphi1
automatic tax credit. But unlike in PBCom, PL Management was decided under the NIRC of
1997 when the irrevocability rule was already applicable. Thus, although PL Management was
unable to actually apply its excess creditable tax in the next succeeding taxable quarters due to
lack of income tax liability, its subsequent application for TCC was rightfully denied by the Court.
The reason is the irrevocability of its choice of carry-over.
In other words, previous incarnations of the words "the options are alternative... the choice of
one precludes the other" did not lay down a doctrinal rule that the option of refund or tax credit
certificate is irrevocable.
Again, we need not belabor the point that insisting upon the irrevocability of the option for refund,
even though the taxpayer subsequently changed its mind by resorting to automatic tax credit, is
not only contrary to the apparent intention of the lawmakers but is also clearly violative of the
principle of administrative feasibility.
Prior to the NIRC of 1997, the alternative options of refund and carryover of excess creditable
tax had already been firmly established. However, the irrevocability rule was not yet in
place.17 As we explained in PL Management, Congress added the last sentence of Section 76
in order to lay down the irrevocability rule. More recently, in Republic v. Team (Phils.) Energy
Corp., 18 we said that the rationale of the rule is to avoid confusion and complication that could
be brought about by the flip-flopping on the options, viz:
The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC of
1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and
complication as regards said taxpayer's excess tax credit.19
The current rule specifically addresses the problematic situation when a taxpayer, after claiming
cash refund or applying for the issuance of tax credit, and during the pendency of such claim or
application, automatically carries over the same excess creditable tax and applies it against the
estimated quarterly income tax liabilities of the succeeding year. Thus, the rule not only eases
tax administration but also obviates double recovery of the excess creditable tax.
Further, nothing in the contents of BIR 1702 expressly declares that the option of refund or TCC
is irrevocable. Even on the assumption that the irrevocability also applies to the option of refund,
such would be an interpretation of the BIR that, as already demonstrated in the foregoing
discussion, is contrary to the intent of the law. It must be stressed that such erroneous
interpretation is not binding on the court. Philippine Bank of Communications v. CIR20 is apropos:
It is widely accepted that the interpretation placed upon a statute by the executive officers,
whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus,
courts will not countenance administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and implement.21
Applying the foregoing precepts to the given case, UPSI-MI is barred from recovering its excess
creditable tax through refund or TCC. It is undisputed that despite its initial option to refund its
2006 excess creditable tax, UPSI-MI subsequently indicated in its 2007 short-period FAR that it
carried over the 2006 excess creditable tax and applied the same against its 2007 income tax
due. The CTA was correct in considering UPSI-MI to have constructively chosen the option of
carry-over, for which reason, the irrevocability rule forbade it to revert to its initial choice. It does
not matter that UPSI-Ml had not actually benefited from the carry-over on the ground that it did
not have a tax due in its 2007 short period. Neither may it insist that the insertion of the carry-
over in the 2007 FAR was by mere mistake or inadvertence. As we previously laid down, the
irrevocability rule admits of no qualifications or conditions.

In sum, the petitioner is clearly mistaken in its view that the irrevocability rule also applies to the
option of refund or tax credit certificate. In view of the court's finding that it constructively chose
the option of can-y-over, it is already barred from recovering its 2006 excess creditable tax
through refund or TCC even if it was its initial choice.

However, the petitioner remains entitled to the benefit of carry-over and thus may apply the 2006
overpaid income tax as tax credit in succeeding taxable years until fully exhausted. This is
because, unlike the remedy of refund or tax credit certificate, the option of carry-over under
Section 76 is not subject to any prescriptive period.

WHEREFORE, the petition is DENIED for lack of merit. The 8 February 2013 Decision of the
Court of Tax Appeals in CTA-EB Case No. 828 is hereby AFFIRMED.

SO ORDERED.
August 1, 2018 In the meantime, on April 17, 2006, respondent filed its Annual Income Tax Return ("ITR") for
taxable year 2005, detailed, as follows:
G.R. No. 206362
Sales/Revenues/Receipts/Fees ₱59,55l,116.00
RHOMBUS ENERGY, INC., Petitioner Less: Cost of Sales 22,351,923.00
vs. Gross Income from Operations 37,199,193.00
COMMISSIONER OF INTERNAL REVENUE, Respondent Add: Non-Operating and Other Income 209,320,181.00
Gross Income ₱246,5l9,374.00
DECISION Less Deduction 144,421,350.00
Taxable Income ₱102,098,024.00
Income Tax 33,181,858.00
BERSAMIN, J.:
Less: Prior year's Excess Credits ₱0.00
Tax Payments for the First 3 Quarters 6,159,215.00
At issue is whether or not the taxpayer is barred by the irrevocability rule in claiming for the Creditable Tax Withheld for the 1st 3 Quarters 28,523,296.00
refund of its excess and/or unutilized creditable withholding tax. Total Tax Credits/Payments ₱34,682,51l.00
Tax Payable/(Overpayment) 1,500,653.00
The Case
In said Annual ITR for taxable year 2005, respondent indicated that its excess creditable
This appeal assails the decision promulgated on October 11, 2012 in CTA EB Case No. withholding tax ("CWT') for the year 2005 was "To be refunded".
803,1 whereby the Court of Tax Appeals En Banc (CTA En Banc) reversed and set aside the
decision dated March 23, 2011 of the CTA First Division granting the claim for refund of excess On May 29, 2006, respondent filed its Quarterly Income Tax Return for the first quarter of taxable
and/or unutilized creditable withholding tax in the total amount of Pl,500,653.00 filed by year 2006 showing prior year's excess credits of ₱l,500,653.00.
Rhombus Energy, Inc. (Rhombus).2
On August 25, 2006, respondent filed its Quarterly Income Tax Return for the second quarter of
Antecedents taxable year 2006 showing prior year's excess credits of ₱l,500,653.00.

The factual and procedural antecedents are synthesized by the CTA En Banc in its assailed On November 27, 2006, respondent filed its Quarterly Income Tax Return for the third quarter
decision as follows: of taxable year 2006 showing prior year's excess credits of ₱l,500,653.00.

Records show that from October 1998 to July 2007, respondent was registered with and was On December 29, 2006, respondent filed with the Revenue Region No. 8 an administrative claim
under the jurisdiction of Revenue Region No. 8, Revenue District Office ("RDO") No. 50 (South for refund of its alleged excess/unutilized CWT for the year 2005 in the amount of ₱l,500,653.00.
Makati) of the BIR with Taxpayer Identification No. 005-650-790-000. However, due to
respondent's change of address from Suite 1402, BDO Plaza, 8737 Paseo de Roxas, Salcedo
On April 2, 2007, respondent filed its Annual Income Tax Return for taxable year 2006 showing
Village, Makati City to Suite 208, 2nd Floor, the Manila Bank Corporation Condominium Building,
prior year's excess credits of ₱0.00.
6772 Ayala Avenue, Makati City, respondent filed an application for change of home RDO.
On December 7, 2007, pending petitioner's action on respondent's claim for refund or issuance
Thus, on July 18, 2007, respondent was transferred to the jurisdiction of RDO No. 47, with
of a .tax credit certificate of its excess/unutilized CWT for the year 2005 and before the lapse of
Certificate of Registration No. OCN9RC0000211342.
the period for filing an appeal, respondent filed the instant Petition for Review.
In her Answer, by way of special and affirmative defenses, the CIR alleged: assuming without
admitting that respondent filed a claim for refund, the same is subject to investigation by the
BIR; respondent failed to demonstrate that the tax was erroneously or illegally collected; taxes
paid and collected are presumed to have been made in accordance with laws and regulations,
hence, not refundable; it is incumbent upon respondent to show that it has complied with the
provisions of Section 204(C), in relation to Section 229 of the Tax Code, as amended, upon
which its claim for refund was premised; in an action for tax refund the burden is upon the
taxpayer to prove that he is entitled thereto, and failure to discharge said burden is fatal to the
claim; and claims for refund are construed strictly against the claimant, as the same partake of
the nature of exemption from taxation.
After trial on the merits, on March 23, 2011, the First Division rendered the assailed Decision
granting the Petition for Review.
On April 14, 2011, petitioner CIR filed a "Motion for Reconsideration", which was denied for lack
of merit by the First Division in a Resolution dated June 30, 2011.
Not satisfied, petitioner CIR filed the instant Petition for Review xx x.3
Decision of the CTA En Banc
Citing Commissioner of Internal Revenue v. Mirant (Philippines) Operations, Corporation,4 the
CTA En Banc reversed and set aside the decision dated March 23, 2011 of the CTA First
Division, explaining and holding thusly:
x x x Section 76 is clear and unequivocal. Once the carry-over option is taken, actually or
constructively, it becomes irrevocable. It mentioned no exception or qualification to the
irrevocability rule (Commissioner of Internal Revenue vs. Bank of the Philippine Islands 592
SCRA 231). Hence, the controlling factor for the operation of the irrevocability rule is that the
taxpayer chose an option; and once it had already done so, it could no longer make another
one. Consequently, after the taxpayer opts to carry-over its excess tax credit to the following
taxable period, the question of whether or not it actually gets to apply said tax credit is
irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over
has been made[,] no application for tax refund or issuance of a tax credit certificate shall be
allowed therefor' (supra).
Applying the foregoing rulings to the instant case, considering that petitioner opted to carry-over
its unutilized creditable withholding tax of ₱l,500,653.00 for taxable year 2005 to the first, second
and third quarters of taxable year 2006 when it had actually carried-over said excess creditable
withholding tax to the first, second and third quarters in its Quarterly Income Tax Returns for
taxable year 2006, said option to carryover becomes irrevocable. Petitioner's act of reporting in
its Annual Income Tax Return for taxable year 2006 of prior year's excess credits other than
MCIT as 0.00, will not change the fact that petitioner had already opted the carry-over option in
its first, second and third quarters Quarterly Income Tax Returns for taxable year 2006, and said
choice is irrevocable. As previously mentioned, whether or not petitioner actually gets to apply
said excess tax credit is irrelevant and would not change the carry-over option already made.
Thus, the present petition praying for refund or issuance of a TCC of its unutilized creditable
withholding tax for taxable year 2005 in the amount of ₱l,500,653.00 must perforce be denied
in view of the irrevocability rule on carry-over option of unutilized creditable withholding tax.
WHEREFORE, premises considered, the instant Petition for Review is
hereby GRANTED. Accordingly, the Decision of the First Division dated March 23, 2011 and
Resolution dated June 30, 2011 are hereby REVERSED and SET ASIDE, and another one is
hereby entered DISMISSING the Petition for Review filed in C.T.A. Case No. 7711.
SO ORDERED.5
On March 13, 2013, the CTA En Banc denied Rhombus' motion for reconsideration.6
Hence, Rhombus appeals to resolve whether or not it has proved its entitlement to the refund.
Ruling of the Court
The appeal is meritorious.
The irrevocability rule is enunciated in Section 76 of the National Internal Revenue Code
(NIRC), viz.:
Section 76. Final Adjusted Return. - Every corporation liable to tax under Section 27 shall file a
final adjustment return covering the total taxable income for the preceding calendar of fiscal
year. If the sum of the quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry over and apply the excess quarterly income
tax against income tax due for the taxable years of the succeeding taxable years has been
made, such option shall be considered irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed therefor. (Bold underscoring
supplied to highlight the relevant portion)
The application of the irrevocability rule is explained in Republic v. Team (Phils.) Energy
Corporation (formerly Mirant [Phils.] Energy Corporation,7 where the Court stated:
In Commissioner of Internal Revenue v. Bank of the Philippine Islands, the Court, citing the
pronouncement in Philam Asset Management, Inc., points out that Section 76 of the NIRC of
1997 is clear and unequivocal in providing that the carry-over option, once actually or
constructively chosen by a corporate taxpayer, becomes irrevocable. The Court explains:
Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose
an option; and once it had already done so, it could no longer make another one. Consequently,
after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the
question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the
NIRC of 1997 is explicit in stating that once the option to carry over has been made, "no
application for tax refund or issuance of a tax credit certificate shall be allowed therefor."
The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and
apply the excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable for
that taxable period and no application for tax refund or issuance of a tax credit certificate shall
be allowed therefor." The phrase "for that taxable period" merely identifies the excess income
tax, subject of the option, by referring to the taxable period when it was acquired by the
taxpayer. In the present case, the excess income tax credit, which BPI opted to carry over, was
£á⩊ phi£
acquired by the said bank during the taxable year 1998. The option of BPI to carry over its 1998
excess income tax credit is irrevocable; it cannot later on opt to apply for a refund of the very
same 1998 excess income tax credit.
The Court of Appeals mistakenly understood the phrase "for that taxable period" as a
prescriptive period for the irrevocability rule. This would mean that since the tax credit in this
case was acquired in 1998, and BPI opted to carry it over to 1999, then the irrevocability of the
option to carry over expired by the end of 1999, leaving BPI free to again take another option as
regards its 1998 excess income tax credit. This construal effectively renders nugatory
the irrevocability rule. The evident intent of the legislature, in adding the last sentence to Section
76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping on its options, and avoid
confusion and complication as regards said taxpayer's excess tax credit. The interpretation of
the Court of Appeals only delays the flip-flopping to the end of each succeeding taxable period.
The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim
for refund of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment
on the part of the government. The Court addressed the very same argument in Phi/am, where
it elucidated that there would be no unjust enrichment in the event of denial of the claim for
refund under such circumstances, because there would be no forfeiture of any amount in favor
of the government. The amount being claimed as a refund would remain in the account of the
taxpayer until utilized in succeeding taxable years, as provided in Section 76 of the NIRC of
1997. It is worthy to note that unlike the option for refund of excess income tax, which prescribes
after two years from the filing of the FAR, there is no prescriptive period for the carrying over of
the same. Therefore, the excess income tax credit of BPI, which it acquired in 1998 and opted
to carry over, may be repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000,
2001, and so on and so forth, until actually applied or credited to a tax liability of BPI.8
The CTA First Division duly noted the exercise of the option by Rhombus in the following
manner:
The evidence on record shows that petitioner clearly signified its intention to be refunded of its
excess creditable tax withheld for calendar year 2005 in its Annual ITR for the said year.
Petitioner under Line 31 of the said ITR marked "x" on the box "To be refunded". Moreover,
petitioner's 2006 and 2007 Annual ITRs do not have any entries in Line 28A "Prior Year's Excess
Credits" which only prove that petitioner did not carry-over its 2005 excess/unutilized creditable
withholding tax to the succeeding taxable years or quarters.9 (Bold underscoring is supplied for
emphasis)
Although the CTA En Banc recognized that Rhombus had actually exercised the option to be
refunded, it nonetheless maintained that Rhombus was not entitled to the refund for having
reported the prior year's excess credits in its quarterly ITRs for the year 2006, viz.:
Based on the records, it is clear that respondent marked the box "To be refunded" in its Annual
Income Tax Return. It is also clear that the 2005 excess CWT were included in the prior year's
excess credits reported in the 2006 Quarter ITRs. The 2006 Annual ITR did not reflect the 2005
excess CWT in the prior year's excess credits.10 (Emphasis supplied)
The CTA En Banc thereby misappreciated the fact that Rhombus had already exercised the
option for its unutilized creditable withholding tax for the year 2005 to be refunded when it filed
its annual ITR for the taxable year ending December 31, 2005. Based on the disquisition
in Republic v. Team (Phils.) Energy Corporation, supra, the irrevocability rule took effect when
the option was exercised. In the case of Rhombus, therefore, its marking of the box "To be
refunded" in its 2005 annual ITR constituted its exercise of the option, and from then onwards
Rhombus became precluded from carrying-over the excess creditable withholding tax. The fact
that the prior year's excess credits were reported in its 2006 quarterly ITRs did not reverse the
option to be refunded exercised in its 2005 annual ITR. As such, the CTA En Banc erred in
applying the irrevocability rule against Rhombus.
It is relevant to mention the requisites for entitlement to the refund as listed in Republic v. Team
(Phils.) Energy Corporation, supra,11 to wit:
1. That the claim for refund was filed within the two-year reglementary period pursuant to Section
229 of the NIRC;
2. When it is shown on the ITR that the income payment received is being declared part of the
taxpayer's gross income; and
3. When the fact of withholding is established by a copy of the withholding tax statement, duly
issued by the payor to the payee, showing the amount paid and income tax withheld from that
amount.
Finding that Rhombus met the foregoing requisites based on its examination of the documents
submitted, the CTA First Division rendered the following findings:
x x x [P]etitioner filed its Annual ITR for the year 2005 on April 17, 2006. Counting from the said
date, petitioner had until April 17, 2008, within which to file both its administrative and judicial
claim for refund or issuance of a tax credit certificate. Clearly, petitioner's administrative claim
filed on December 29, 2006 and judicial claim via the instant Petition for Review filed on
December 07, 2007, were within the two-year prescriptive limit.
To comply with the second requisite, petitioner presented Certificates of Creditable Tax Withheld
at Source issued by its sole customer Distileria Bago, Inc., a wholly owned subsidiary of La
Tondefia, Inc. (now Ginebra San Miguel, Inc.). The details of the said certificates are
summarized as follows:
xxxx
To show compliance with the third requisite that petitioner declared in its return the income
related to the creditable withholding taxes of Php28,523,295.45, it presented the following
documents:
1. Annual Income tax Return for the year ended December 31, 2005 with attached audited
financial statements and Account Information Form marked as Exhibit "B";
2. Certificates of Creditable Tax Withheld at Source issued to petitioner for the first three
quarters of taxable year 2005 marked as Exhibits "J", "Y", "L" and "K";
3. Summary of invoices issued for taxable year 2005 marked as Exhibit "M"; and
4. The sales invoices issued for taxable year 2005 marked as Exhibits "0-1" to "0-14''.
The withholding tax certificates reveal that the creditable income taxes of Php28,523,295.45
were withheld from petitioner's energy service fees of Php9,313,272.54 and from the sale of its
generation facility amounting to Php472,283,838.00. The energy fees paid by Distileria Bago,
Inc. in the amount of Php9,313,272.54 from which creditable withholding tax in the aggregate
amount of Php186,265.45 was withheld was reported by petitioner as part of its
"Sales/Revenues/Receipts/Fees" amounting to Php59,551,116.00 in Item No. 15A of its 2005
Annual ITR.
As regards the income from the sale of power generation facility in the amount of
Php472,283,838.00 from which the amount of Php28,337,030.00 creditable withholding tax was
withheld, petitioner reported a gain of only Php209,320,181.00 as appearing under Item 18B
(Non-Operating and Other Income) of petitioner's Annual ITR marked as Exhibit B. There was
nothing fallacious in doing so for petitioner could deduct valid cost (i.e. Book Value of the asset)
from the selling price to arrive at the amount of "Non-operating and Other Income" to be reported
in its 2005 Annual ITR.12
The members of the CTA First Division were in the best position as trial judges to examine the
documents submitted in relation thereto,13 and to make the proper findings thereon. Given their
expertise on the matter, we accord weight and respect to their finding that Rhombus had
satisfied the requirements for its claim for refund of its excess creditable withholding taxes for
the year 2005.
WHEREFORE, the Court REVERSES and SETS ASIDE the decision promulgated on October
11, 2012 and the resolution issued on March 13, 2013 by the Court of Tax Appeals En Banc in
CTA EB Case No. 803; REINSTATES the decision rendered on March 23, 2011 and the
resolution issued on June 30, 2011 by the Court of Tax Appeals, First Division, in CTA Case
No. 7711; and DIRECTS the Commissioner of the Bureau of Internal Revenue to refund to or to
issue a tax credit certificate in favor of petitioner Rhombus Energy, Inc. in the amount of
₱l,500,653.00 representing excess creditable withholding tax for the year 2005.

No pronouncement on costs of suit.

SO ORDERED.