process was closely supervised by the BIR, and the Manufacturer’s Sworn
[5] CIR v. CA
GR No. 119322 | June 4, 1996 | Remedies: Criminal Action & Other
Penalties | Sy (edited by Yiela)
Petitioner: Commissioner on Internal Revenue, Senior State Prosecutor Aurora S. Lagman,
Senior State Prosecutor Bernelito R. Fernandez, Senior State Prosecutor Henrick P. Gingoyon,
Rogelio F. Vista, State Prosecutor Alfredo Agcaoili, Prosecuting Attorney Emmanuel Velasco, City
Prosecutor Candido V. Rivera, And Assistant City Prosecutor Leopoldo E. Baraquia
Respondents: The Honorable Court Of Appeals, The Honorable Tirso D'c Velasco, Presiding
Judge, Regional Trial Court Of Quezon City, Branch 88, Fortune Tobacco Corporation, Lucio Tan,
Harry C. Tan, Carmen Kao Tan, Florencio Santos, Salvador Mison, Chung Poe Kee, Rojas Chua,
Mariano Tanenglian, Juanita Lee And Antonio P. Abaya
Recit-Ready Facts:
The President issued a Memorandum creating a Task Force to investigate
alleged tax evasion liabilities of manufacturers. Subsequently, the CIR issued
a letter-assessment to Fortune Tobacco, assessing it of deficiency income, ad
valorem, and VAT for year 1992, and demanding payment; Fortune timely filed
a motion for reconsideration, which however is still pending.
The CIR then filed a complaint with DOJ against Fortune, its corporate officers,
9 other corporations and their respective officers for alleged fraudulent tax
evasion for supposed non-payment by Fortune of the correct amount of taxes.
The DOJ Task Force found that respondents adopted a scheme of selling
to fictitious wholesalers.
Fortune filed motion to dismiss instead of counter-affidavit, and also filed to
have the CIR produce the “Daily Manufacturer’s Sworn Statements” which
were the basis for the CIR’s conclusion that Fortune had engaged in tax
evasion, but the CIR failed to produce such. Fortune then filed for injunction
before the trial court, which granted such, and the CA affirmed the injunction.
Is Fortune liable for fraudulent tax evasion? NO
The ad valorem tax is based on the registered wholesale price, which is
approved by the BIR. BIR Revenue Enforcement Officers are detailed on a 24-
hour basis in the premises of the manufacturer to secure production and
removal of finished products. For the purposes of determining the
“Manufacturer’s Registered Wholesale Price”, a manufacturer is required to file
a Manufacturer’s Declaration Form, which is verified by the Revenue Officers
and approved by the Commissioner. Considering these, if every step in the
Declarations were also closely scrutinized and approved by the BIR, and the
manufacturer’s wholesale price was also approved by the BIR, then it is
presumed that such is the same, or at least closely approximates, “the price,
excluding the value-added tax, at which goods are sold in wholesale in the
place of production”, otherwise, the BIR would not have approved the
registered wholesale price in the first place. Absent contrary evidence, it was
precipitate and premature to conclude that private respondents made
fraudulent returns or willfully attempted to evade payment of taxes due.
Fraud cannot be presumed; the SC agrees with the opinion of both the trial
court and the CA that, before Fortune and other private respondents can
be prosecuted for tax evasion, the fact that there is deficiency income,
ad valorem, and value-added taxes that were due from Fortune for 1992
should first be established. In plain words, before one is prosecuted for
willful attempt to evade or defeat any tax due under Sec. 253 and 255, the
fact that a tax is due must first be proved.
Under Sec. 229, the taxpayer has the right to move for reconsideration of the
assessment. Fortune received the assessment on Aug. 24, and timely moved
for reconsideration on Sept. 17. The CIR has not yet resolved this request up
to present; should he eventually resolve this request by pronouncing that
Fortune is not liable for any deficiency assessment, then the criminal
complaint will have no leg to stand on. Petition denied.
Ingles book (p. 361): NOTE however that for criminal prosecution to proceed
before assessment, there must be a prima facie showing of a wil[l]ful attempt
to evade taxes. If there was none, then the criminal case may not be filed
without the computation and assessment of taxes. (CIR v. CA, where the
Court noted that there was a real issue on what amount of taxes were meant
to be paid; hence, there was no willful attempt to evade taxes.)
FACTS:
1. June 1, 1993 – the President issued a Memorandum creating a Task
Force to investigate alleged tax evasion liabilities of manufacturers,
such as selling products through dummy marketing corporations to
avoid payment of correct internal revenue tax, to collect from them
any tax liabilities discovered from such investigation, and to file the
necessary criminal actions against those who may have
violated the tax code.
2. July 1, 1993 – CIR issued RMC No. 37-93 reclassifying cigarettes of
brands “Hope”, “More”, and “Champion” as cigarettes of foreign
brands, subject to higher rates of tax.
3. August 3, 1993 – respondent Fortune Tobacco Corp. questioned the
validity of the reclassification for violating due process and equal
 protection. Parenthetically, on Sep. 8, the CTA found the
reclassification of “doubtful validity” and enjoined its enforcement.
4. August 13, 1993 – CIR issued a letter to Fortune (which was
received on Aug. 24) assessing the total amount of
P7,685,942,221.66 of deficiency income, ad valorem, and value-
added taxes for 1992, with request for payment within 30 days of
receipt. On Sep. 17, Fortune moved for reconsideration of the
assessment.
5. September 7, 1993 – CIR filed a complaint with DOJ against
Fortune, its corporate officers, 9 other corporations and their
respective officers for alleged fraudulent tax evasion for supposed
non-payment by Fortune of the correct amount of income tax, ad
valorem tax and VAT for the year 1992. The DOJ Task Force found
that respondents adopted a scheme of selling to fictitious
wholesalers. The "ghosts wholesale buyers" then ostensibly sold
the products to customers and other wholesalers/retailers at higher
wholesale prices determined by Fortune. The tax returns and
manufacturer's sworn statements filed by Fortune would then declare
the fictitious sales it made to the conduit corporators and non-
existing individual buyers as its gross sales. It issued a subpoena
requiring them to submit counter-affidavits. Private respondents filed
motions to dismiss, which the prosecutors treated as counter-
affidavits.
6. Private respondents subsequently moved to require the
production of “Daily Manufacturer’s Sworn Statements” which,
according to the CIR, was the basis of her conclusion that
Fortune’s tax declarations were false and fraudulent. Private
respondents also sought the production of “Daily Manufacturer’s
Sworn Statements” from other companies that were similarly situated
as Fortune but were not proceeded against, proving that Fortune and
its corporate officers were being discriminated against and singled
out for criminal prosecution, in violation of the equal protection
clause, and also moved to have the prosecutors inhibit for partiality.1
7. Since the panel of prosecutors denied their motion, private
respondents filed for certiorari and prohibition, which the trial court
granted, and issued a TRO, and later a writ of preliminary injunction.
8. Petitioners filed before the SC for certiorari and prohibition with
prayer for preliminary injunction to prevent the trial court from
hearing the case. The SC referred the request to the CA, which
denied the petition and upheld the trial court, thus this petition.
9. Private respondents contend that per Fortune's VAT returns, correct
taxable sales for 1992 was in the amount of P11,736,658,580.00
which was the "manufacturer's registered wholesale price" in
1
Assistant City Prosecutor Baraquia was a former classmate of Presidential Legal Counsel
Antonio T. Carpio.
accordance with Section 142(c) of the Tax Code and paid the
amount of P4,805,254,523 as ad valorem tax.
10. Petitioners allege that "based on the daily manufacturer's sworn
statements submitted to the BIR by the Taxpayer (Fortune's) total
taxable sales during the year 1992 is P16,686,372,295.00," as result
of which Fortune "was able to evade the payment of ad valorem
taxes in the aggregate amount of P5,792,479,816.24."
11. Petitioners now argue that Section 127(b) lays down the rule that in
determining the gross selling price of goods subject to ad valorem
tax, it is the price, excluding the value-added tax, at which the goods
are sold at wholesale price in the place of production or through their
sales agents to the public. The registered wholesale price shall then
be used for computing the ad valorem tax which is imposable upon
removal of the taxable goods from the place of production. However,
petitioners claim that Fortune used the "manufacturer's registered
wholesale price" in selling the goods to alleged fictitious individuals
and dummy corporations for the purpose of evading the payment of
the correct ad valorem tax.
a. In essence, the complaints charged private respondents with
fraudulent tax evasion or willfully attempting to evade or
defeat payment of income tax, ad valorem tax and VAT for
the year 1992, as well as for the years 1990-1991.
ISSUE: Are private respondents liable for fraudulent tax evasion? – NO
RATIO:
Private respondents are NOT liable for fraudulent tax evasion.
 Under Sec. 127(b) of the NIRC, the ad valorem tax should be based
2
on the correct price (exclusive of VAT), at which the goods are sold
at wholesale in the place of production. It is significant to note that,
per Sec. 142(c), the corresponding tax should be levied, assessed,
and collected based on the “manufacturer’s registered wholesale
price”; the registration is significant because it ensures payment of
correct taxes through close supervision by the BIR.
 The purchase and use of raw materials are subject to prior
authorization and approval by the National Tobacco Administration.
Importations of bobbins or cigarette paper, the manufacture, sale,
2
(b) Determination of gross selling price of goods subject to ad valorem tax. -- Unless otherwise
provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in
the place of production or through their sales agents to the public shall constitute the gross
selling price. If the manufacturer also sells or allows such goods to be sold at wholesale price in
another establishment of which he is the owner or in the profits at which he has an interest, the
wholesale price in such establishment shall constitute the gross selling price. Should such price
be less than the costs of manufacture plus expenses incurred until the goods are finally sold,
then a proportionate margin of profit, not less than 10% of such manufacturing costs and
expenses, shall be added to constitute the gross selling price.
 and utilization of the same, are subject to BIR supervision and
approval. Moreover, for purposes of closer supervision, BIR
Revenue Enforcement Officers are detailed on a 24-hour basis
in the premises of the manufacturer to secure production and
removal of finished products.
 For the purposes of determining the “Manufacturer’s Registered
Wholesale Price”, a manufacturer is required to file a Manufacturer’s
Declaration Form, which is verified by the Revenue Officers and
approved by the Commissioner.
 Clearly, as observed by the trial court, Fortune’s registered
wholesale price was duly approved by the BIR, which fact is not
disputed by petitioners.
 Now, if every step in the process was closely supervised by the BIR,
and the Manufacturer’s Sworn Declarations were also closely
scrutinized and approved by the BIR, and the manufacturer’s
wholesale price was also approved by the BIR, then it is presumed
that such is the same, or at least closely approximates, “the price,
excluding the value-added tax, at which goods are sold in wholesale
in the place of production”; otherwise, the BIR would not have
approved the registered wholesale price in the first place.
 Absent contrary evidence, it was precipitate and premature to
conclude that private respondents made fraudulent returns or
willfully attempted to evade payment of taxes due.
 “Willful” means “premeditated; malicious; done with intent, or with
bad motive or purpose, or indifferent to the natural consequence”;
“fraud” in its general sense “is deemed to comprise anything
calculated to deceive, including all acts, omissions, and concealment
involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue
and unconscionable advantage taken of another”
 Fraud cannot be presumed; if there really was fraud through the
manipulation of the wholesale price, it must have been done with the
connivance of certain BIR employees. However, there is no
allegation, much less evidence, of such misfeasance; at the very
least, there is the presumption that the BIR personnel performed
their duties in the regular course in ensuring that correct taxes were
paid by Fortune.
 The SC agrees with the opinion of both the trial court and the CA
that, before Fortune and other private respondents can be
prosecuted for tax evasion, the fact that there is deficiency
income, ad valorem, and value-added taxes that were due from
Fortune for 1992 should first be established. In plain words,
before one is prosecuted for willful attempt to evade or defeat
any tax due under Sec. 253 and 255, the fact that a tax is due
must first be proved.
 Under Sec. 229, the taxpayer has the right to move for
reconsideration of the assessment. Fortune received the assessment
on Aug. 24, and timely moved for reconsideration on Sept. 17. The
CIR has not yet resolved this request up to present; should he
eventually resolve this request by pronouncing that Fortune is not
liable for any deficiency assessment, then the criminal complaint will
have no leg to stand on.
 Contrary to petitioners’ claim that the case of Ungab v. Cusi
[deficiency assessment is not necessary prior to prosecution] is
applicable, such that the lack of a final determination of Fortune's
exact or correct tax liability is not a bar to criminal prosecution, and
that while a precise computation and assessment is required for a
civil action to collect tax deficiencies, the Tax Code does not require
such computation and assessment prior to criminal prosecution, it
must be noted that the ruling therein is qualified by the Court with the
statement quoted from Guzik v. U.S.: "The crime is complete when
the violator has knowingly and wil[l]fully filed a fraudulent return with
intent to evade and defeat apart or all of the tax." In plain words, for
criminal prosecution to proceed before assessment, there must
be a prima facie showing of a willful attempt to evade taxes.
o In that case, there was a failure of the taxpayer to declare in
this ITR “his income derived from banana sapplings”; as
opposed to this case, in which the registered wholesale price
of the goods, which was approved by the BIR, is presumed
to be correct until the BIR has made a final determination on
what should be the correct taxes.
 On the claim by petitioners that criminal prosecutions (preliminary
investigation) cannot be enjoined, generally this is true, but this
policy is subject to exceptions, as summarized by Brocka v. Enrile.3
o The trial court found that there are exceptional
circumstances to warrant an injunction; afford private
respondents adequate protection of their constitutional
rights; avoid oppression; acts of the state prosecutors were
without or in excess of authority; and there is a prejudicial
question.
3
(1) afford adequate protection to constitutional rights of accused
(2) necessary for the orderly administration of justice or to avoid oppression or multiplicity of
actions
(3) there is a prejudicial question which is sub judice
(4) acts of the officer are without or in excess of authority
(5) prosecution is under an invalid law, ordinance or regulation
(6) double jeopardy is clearly apparent
(7) court had no jurisdiction over the offense
(8) it is a case of persecution rather than prosecution
(9) charges are manifestly false and motivated by a lust for vengeance
(10) there is clearly no prima facie case against the accused and a motion to quash on that
ground has been denied
  As noted by the CA, there was precipitate haste by which the
subpoena was issued to private respondents, just the day after the
complaint was filed, which justified their misgivings as to the
objectivity and neutrality of the prosecutors in the conduct of the
preliminary investigation.
 The complaint filed by the CIR itself states that the primary evidence
to show the falsity of the declared taxable sales is the “Daily
Manufacturer’s Sworn Statements”; however, she did not present
these, prompting the taxpayer to move for their production to verify
the basis of the complaint, but still the CIR filed to produce the
declarations.
 The prosecutors should also have produced the “Daily
Manufacturer’s Sworn Statements” of other cigarette companies, to
show the basis of not charging them with tax evasion, but they did
not, indicating that only Fortune was singled out for prosecution.
Separate Opinion/s
1. J. Bellosillo, concurring and dissenting
 There is no showing that there was “selective prosecution” in charging
private respondents.
 However, agree with the majority in holding that there was no GADALEJ by
the trial court.
 Also agree with the finding of the trial court that the constitutional rights of
private respondents may not had been accorded adequate protection
2. J. Padilla, dissenting
 The decision of the majority is a usurpation of the function of the prosecutors
to conduct the preliminary investigation and the power of the Sec. of Justice
to review the resolution of the prosecutors.
 Right to due process is not violated, as private respondents were given the
chance to file counter-affidavits, which is sufficient protection at this early
stage.
 As to the argument of selective prosecution, this is ludicrous; more than
1,000 cases of tax evasion were filed in Metro Manila alone, which shows
that they are not the only one being prosecuted for tax evasion. Moreover,
even assuming that other similar corporations are also engaging in tax
evasion, the proper remedy is for them to be prosecuted as well.
 The allegations of lack of impartiality are speculative.
 On the issue of jurisdiction, city and state prosecutors are authorized to
conduct preliminary investigations of violations of the NIRC, which are
within the jurisdiction of the RTC.
 The issue of whether or not the evidence submitted by petitioners is
sufficient to warrant the filing of criminal informations for fraudulent tax
evasion is prematurely raised.
 The holding of the CA and the trial court that a previous assessment of the
correct amount of taxes due is necessary before private respondents may
be charged criminally is not supported by law and jurisprudence; the lack of
a final determination of respondent Fortune’s exact tax liability is not a bar
to criminal prosecution for fraudulent tax evasion, per the Ungab doctrine,
and no reason had been advanced to abandon this doctrine.
 The current case before the CTA involving the validity of RMC No. 37-93 is
not a prejudicial question to this case; a final decision either way will not
affect private respondents’ criminal liability.
 The arguments by private respondents as to the applicability of Secs.127(b)
and 142(c) are both misleading and erroneous; they are applicable in
determining the correct amount of taxes, while Fortune is being charged
with evasion of higher but legally correct taxes.
 Payment of ad valorem taxes based on the wholesale price registered with
the BIR presupposes that the registered wholesale price corresponds to the
actual wholesale price.
 The argument that the close supervision by BIR officials ensure payment of
correct taxes is baseless; it does not prove that the cited procedure is a
guarantee against fraudulent schemes resorted to by tax evaders.
Moreover, the Manufacturer’s Declaration which is the basis for determining
the registered wholesale price does not necessarily reflect the actual
wholesale price. It should also be pointed out that the offense allegedly
committed by private respondents makes use of dummy companies to
make it appear that Fortune sells at alleged lower wholesale prices; the
difference between the price at which Fortune sells to the dummy
companies and the price at which the dummy companies sell thus
constitute amounts for which Fortune should actually incur tax liabilities.
 The ruling that there is violation of private respondents’ constitutional rights
is wrong; it must be emphasized that this is still the early preliminary
investigation stage, and only the complainant has finished presenting its
affidavits and supporting documents, and it is now the turn of private
respondents to present evidence. Declaring that there are reasonable
grounds to continue with a preliminary investigation is not the same as
pronouncing that the respondent is guilty of the offense charge
 Neither can private respondents claim violation of due process; in fact, the
investigating panel was concerned with just that when they ordered
submission of counter-affidavits.
 There is public interest in ensuring that the investigation should continue; the
government alleges that it was defrauded of allegedly P25.6 Billion Pesos
3. J. Vitug, dissenting
 The court should not interfere with the prosecuting agencies, lest it preempt
the process of investigation.