REPUBLIC OF THE PHILIPPINES

COURT OF TAX APPEALS

Quezon City

Soecial
... Third Division

MSEI CORPORATION, CTA CASE NO. 9167

Petitione0

-versus- Members:

FABON-VICT ORIN O, and

RINGPIS-LIBAN, J1
COMMISSIONER OF INTERNAL
REVENUE,
Respondent.

c- J:r~ ~·-.
X-----------------------------------------------------------------------------------------------X

DECISION

RINGPIS-LIBAN, J.

STATEMENT OF THE CASE

The case involves the Petition for Review 1 filed on October 9, 2015 by
MSEI Corporation, praying for the cancellation of the Final Assessment
Notice (FAN) and the Final Decision on Disputed Assessment (FDDA) that
found it liable for alleged deficiency income tax and value-added tax 0fAT) in
the aggregate amount of P1,175,855.77, inclusive of surcharges and interests,
for calendar year (CY) 2009.

THE FACTS

Petitioner MSEI Corporation is a corporation engaged in the business of

trading goods such as electrical equipment/individual filters on wholesale or
retail basis. Its principal office address is at Governor Drive, Brgy. Mabuhay,
Carmona, Cavite. 2
~
1 Docket, pp. 12-24.
2 Par. 1, Petition for Review, docket, p. 12.

..-
.r·
DECISION
CTA CASE NO. 9167
Page 2 of20

On the other hand, respondent is the duly appointed Commissioner of

the Bureau of Internal Revenue (BIR) who has the power to decide disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto or other matters arising under the National Internal
Revenue Code (NIRC) or other laws or portions thereof administered by the
BIR. He holds office at srh Floor, BIR National Office Building, Agham Road,
Diliman, Quezon City.

On September 1, 2011 3 , petitioner was sent a Letter Notice (LN) No.

54A-RLF-09-03-00042 4 dated August 8, 2011 issued by former BIR
Commissioner Kim S. Jacinto-Henares, for alleged discrepancies as a result of
the computerized matching conducted by the BIR on the information provided
by third-party sources against petitioner's declaration per returns for CY 2009.

Thereafter, petitioner received a Letter5 dated August 17, 2011 inviting it

for a dialogue concerning the issuance of the LN.

Petitioner sent a Letter6 dated September 13, 2011 to the BIR, stating
that a certain Emerald Garments Manufacturing Corporation appearing in the
LN is not a client of petitioner. 7

Petitioner received a Follow-Up Letter8 dated September 21, 2011 issued

by Revenue District Officer (RDO) Honorata S. Aguilar. Petitioner sent a
Letter9 dated October 18, 2011 to the BIR in response to the Follow-Up Letter
dated September 21, 2011.

On March 6, 201210 , petitioner received a Notice for Informal

Conference11 dated February 22, 2012 from RDO Honorata Aguilar. Petitioner
sent a Letter12 dated March 8, 2012 in response to the Notice for Informal
Conference13 , alleging that the deficiencies were part of the false transactions
made by some clients that are not familiar to its normal sales transactions.

Petitioner then received the Preliminary Assessment Notice (PAN)

dated May 16, 2014 with Details of Discrepancies 1\ assessing it for alleged
deficiency taxes for CY 2009. 15
/V
3 Par. 1,Joint Stipulation of Facts and Issues OSFI), docket, p. 173.
4 Exhibit "P-1", docket, p. 214; Exhibit "R-1", BIR Records, p. 3.
5 Exhibit "P-2", docket, p. 215.
6 Exhibit "P-3", docket, p. 217.

7 Par. 2(a),JSFI, docket, p. 173.

8 Exhibit "P-4", docket, pp. 218-219; Exhibit "R-2", BIR Records, pp. 12-13.
9 Exhibit "P-5", docket, p. 220.
10 As culled from Exhibit "P-7", docket, p. 223.
11 Exhibit "P-6", docket, pp. 221-222; Exhibit "R-3", BIR Records, pp. 18-19.
12 Exhibit "P-7", docket, p. 223.

13 Par. 2(b), JSFI, docket, p. 173.

14 Exhibit "P-8", docket, pp. 224-227; Exhibit "R-9", BIR Records, pp. 116-119.

15 Par. 2(e),JSFI, docket, p. 174.

DECISION
CTA CASE NO. 9167
Page 3 of20

On July 25, 201416 , petitioner received the Formal Letter of Demand

(FLD) dated June 27, 2014 with Details of Discrepancies and Final Assessment
Notices 17 issued by Revenue Region No. 9 - Regional Director Jose N. Tan,
assessing it for alleged deficiency income tax and VAT, including surcharges
and interests, in the total amount of P1,175,855.77 for CY 2009. Petitioner
sent a Letter of Dispute 18 dated July 30, 2014, stating that it is not amenable to
the conclusion of the Assessment Notice and Details of Discrepancies. 19

On October 9, 201420 , petitioner received a Letter21 dated September 25,

2014 issued by Regional Director Jose N. Tan, requiring it to file a protest
stating the supporting facts, applicable laws, rules and regulations, or
jurisprudence.

Mr. Tagumpay L. Marasigan, President and CEO of petitioner, sent a

Protest Letter (LN # 54A-RLF-09-03-00042) 22 dated October 20, 2014 to the
Regional Director of Revenue Region No. 9. 23 Petitioner was informed that its
letter request together with the whole docket was forwarded to Revenue
District Office No. 54A-Trece Martirez City for further evaluation. 24

On September 9, 2015 25 , petitioner received the FDDA dated August

18, 2015. Consequently, petitioner flied the present Petition for Review before
the Court on October 9, 2015.

Respondent filed his Answer26 through registered mail on December 28,

2015 and received by the Court on January 7, 2016, interposing the following
Special and Affirmative Defenses:

"SPECIAL AND AFFIRMATIVE DEFENSES

4. On the basis of the foregoing allegations and in

further support of the Specific Denials herein set forth,
respondent respectfully alleges as her defense that:

The requirement ofdue process

was properly complied with in
issuing the Formal Letter of
?
16 As culled from Exhibit "P-10", docket, p. 233.
17 Exhibit "P-9", docket, pp. 228-232; Exhibit "R-10", BIR Records, pp. 120-125.
18 Exhibit "P-10," docket, p. 233.

19 Par. 2(c),JSFI, docket, p. 173.

20
As culled from Exhibit "P-12", docket, p. 238.
21 Exhibit "P-11", docket, p. 237.
22
Exhibit "P-12", docket, p. 238.
23 Par. 2(d), JSFI, docket, p. 17 4.

24 Exhibit "P-13'', docket, p. 239.

25 Par. 3, Petition for Review, docket, p. 12.
26 Docket, pp. 71-81.
DECISION
CTA CASE NO. 9167
Page 4 of20

Demand/Final Assessment
Notice and Final Decision on
Disputed Assessment

5. In compliance with Section 228 of the NIRC, the

Notice of Informal Conference, Preliminary Assessment Notice
(PAN) and Formal Letter of Demand/Final Assessment Notice
(FLD /FAN) and the Final Decision on Disputed Assessment
contained the facts and law on which the assessment was based.

6. Petitioner was apprised of and was able to effectively

protest the tax assessment against it when it replied and
continuously communicated with respondent in the course of
investigation. A testament to this communication are the
following letters from petitioner:

a. Letter dated September 13, 2011

b. Letter dated March 8, 2012 with Informal
Conference as the Subject
c. Letter dated January 29, 2013
d. Letter of Dispute dated July 30, 2014

7. The chance afforded to petitioner is a clear

opportunity to be heard and to refute the findings of its deficiency
tax assessment. As such, procedural due process was satisfied. In
the case of Ledesma v. Court of Appeals, the Honorable Supreme
Court elaborates on the well-established doctrine of due process
in administrative proceedings as follows:

'Due process, as a constitutional precept does

not always and in all situations require a trial-type
proceeding. Due process is satisfied when a
person is notified of the charge against him and
given an opportunity to explain or defend
himself. In administrative proceedings, the
filing of charges and giving reasonable
opportunity for the person so charged to answer
the accusations against him constitute the
minimum requirements of due process. The
essence of due process is simply to be heard, or
as applied to administrative proceedings, an
opportunity to explain one's side, or an
opportunity to seek reconsideration of the action
or ruling complained of. (Emphasis supplied)

8. Further, in the case of St. Maria vs. Department of

Agrarian Reform Adjudication Board the Honorable Supreme
Court held:
fo
DECISION
CTA CASE NO. 9167
Page 5 of20

'Finally, anent petitioners' lamentation that

they had been denied due process, we differ. In
administrative proceedings, a fair and reasonable
opportunity to explain one's side suffices to meet the
requirements of due process. As we held in Casimiro
v. Tandog. The essence of procedural due process
is embodied in the basic requirement of notice
and a real opportunity to be heard. In
administrative proceedings, such as in the case
at bar, procedural due process simply means the
opportunity to explain one's side or the
opportunity to seek a reconsideration of the
action or ruling complained of. 'To be heard' does
not mean only verbal arguments in court; one may
be heard also thru pleadings. Where opportunity to
be heard, either through oral arguments or
pleadings, is accorded, there is no denial of
procedural due process. (emphasis supplied)

9. Based on the above discussion, respondent CIR

properly cited the pertinent provision of the law and facts to
support her findings and the assessment issued was in compliance
with Section 228 of the NIRC of 1997, as amended.

The present case squarely falls

within exceptions stated under
Section 222 of the Tax Code.

10. Section 222 of the NIRC of 1997, as amended

provides for the exceptions from the three year period to assess.
It specifically enumerates the circumstances in which the period
of limitation under Section 203 of the Tax Code cannot be
applied. Section 222 states that:

SEC. 222. Exceptions as to Period of

Limitation of Assessment and Collection of Taxes.

(a) In the case of a false or fraudulent return

with intent to evade tax or of failure to
file a return, the tax may be assessed, or a
proceeding in court for the collection of
such tax may be filed without assessment,
at any time within ten (1 0) years after the
discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment
which has become final and executory,
the fact of fraud shall be judicially taken
~
DECISION
C:TA CASE NO. 9167
Page 6 of20

cogmzance of in the civil or criminal

action for the collection thereof.

11. As stated in the Final Decision on Disputed

Assessment, a fifty percent surcharge was imposed for deficiency
income tax and value added taxes pursuant to the provision of
Section 248 (B) of the NIRC which states:

'In case of willful neglect to flle the return within the

period prescribed by the Code or rules and
regulation, or in case a false or fraudulent return is
willfully made, the penalty to be imposed shall be
fifty percent (50%) of the tax or deficiency tax, in
case any payment has been made on the basis of
such return before the discovery of the falsity or
fraud: Provided, that a substantial under-declaration
of taxable sales, receipts or income, or a substantial
overstatement of deductions, as determined by the
Commissioner pursuant to the rules and regulations
to be promulgated by the Secretary of Finance, shall
constitute a prima facie evidence of a false or
fraudulent return.'

12. The discussion of the Honorable Supreme Court in

the case of Commissioner of Internal Revenue vs. Arturo Tulio is
enlightening in the instant case, to wit:

'Section 223 specifies three (3) instances

when the running of the three-year prescriptive
period does not apply. These are: (1) filing a
false return, (2) filing a fraudulent return with
intent to evade tax or (3) failure to file a return.
The period within which to assess tax is ten years
from discovery of the fraud, falsification or
OmlSSlOn.

Here, respondent failed to file his tax

returns for 1986 and 1987. On September 14,
1989, petitioner found respondent's omission.
Hence, the running of the ten-year prescriptive
period within which to assess and collect taxes
due from respondent commenced on that date
until September 14, 1999. The two final assessment
notices were issued on February 28, 1991, well
within the prescriptive period of three (3) years.
When respondent failed to question or protest the
deficiency assessments within thirty (30) days
therefrom, or until March 30, 1991, the same
became final and executory.
/V
DECISION
CTA CASE NO. 9167
Page 7 of20

As we held in Marcos II vs. Court of Appeals,

the omission to file an estate tax return, and the
subsequent failure to contest or appeal the
assessment made by the BIR is fatal, considering
that under Section 223 of the NIRC, in case of
failure to file a return, the tax may be assessed at
any time within ten years after the omission, and
any tax so assessed may be collected by levy
upon real property within three years following
the assessment of the tax (as was done here).
Since the estate tax assessment had become final and
unappealable, there is now no reason why petitioner
should not enforce its authority to collect
respondent's deficiency percentage taxes for 1986
and 1987.

13. Clearly the period of limitations finds no application

in the present case.

Petitioner is liable to pay its

deficiency income tax, value
added tax and 50% surcharge
aD for taxable year 2009.

14. Respondent correctly assessed pettttoner for

deficiency income tax, value added tax as stated in the Final
Decision on Disputed Assessment, to wit:

INCOME TAX

Additional Gross Income (P 561,747,47) - Computerized

verification on information/ data provided by third party sources
as stated per LN No. 054A-RLF-09-03-00042 against the
declaration per ITR pursuant to RMO No. 13-2012, resulted to
discrepancy on undeclared income amounting to P561,747.47,
thus, assessed pursuant to the provision of Sections 5, 6 (B) and
32 (A) of the National Internal Revenue Code.

Sales per LN p 3,176,172.93

Sales per ITR 577 896.00
Undeclared Sales 2,598,276.93
Multiply by: GP Rate 21.62%
Undeclared Income p 561 747.47
Percentage of Undeclared Sales 449.61%
/£"
DECISION
C:TA CASE NO. 9167
Page 8 of20

15. VALUE-ADDED TAX

Computerized matching on information/ data provided by

third party sources as stated per LN No. 054A-RLF-09-03-00042
against the declaration per VAT Return pursuant to RMO No. 13-
2012, resulted to discrepancy on sales amounting to
P2,729,122.97, thus, assessed pursuant to the provision of
Sections 5, 6 (B) and 106 of the National Revenue Code, as
implemented by of Revenue Regulation No. 16-2005.

Sales _per LN p 3,176,172.93

Sales per VAT returns 447.049.96
Undeclared Sales p 2,729,122.97

Percentage of Undeclared Sales 610.470,::::o

16. :PIFTY PERCENT (50%) SURCHARGE

ADDITION ON INCOME AND VALUE-ADDED TAXES

Fifty percent (50%) surcharge has been imposed for the

deficiency income and value-added taxes pursuant to the
provision of Section 248 (B) of the National Internal Revenue
Code, which states that, 'In case of willfully neglect to file the
return within the period prescribed by the Code or rules and
regulation, or in case a false or fraudulent return is willful made,
the penalty to be imposed shall be fifty percent (50%) of the
deficiency tax, in case any payment has been made on the basis of
such return before the discovery of the falsity or fraud: Provided,
that a substantial under-declaration of taxable sales, receipts or
income, or a substantial overstatement of deductions, as
determined by the Commissioner pursuant to the rules and
regulations to be promulgated by the Secretary of Finance, shall
constitute a prima facie evidence of a false or fraudulent return'.

17. All told, the burden of proof is on the taxpayer

contesting the validity or correctness of an assessment to prove
not only that the Commissioner of Internal Revenue is wrong, but
also that the taxpayer is right. The presumption in favor of the
correctness of tax assessment stands where evidence to the
contrary is wanting.

18. Well-settled is the rule that tax assessments are

entitled to the presumption of correctness and made in good
faith. The taxpayer has the duty to prove otherwise. In the
absence of proof of any irregularities in the performance of
duties, an assessment duly made by a Bureau of Internal Revenue
examiner, and approved by his superior officers will not be
disturbed. All presumptions are in favor of the correctness of tax
assessments (Sy Po vs. Court of tax Appeals, 164 SCRA 524).
/'-"
DECISION
CTA CASE NO. 9167
Page 9 of20

Dereliction on the part of petitioner to satisfactorily overcome the

presumption of regularity and correctness of the assessment will
justify the judicial upholding of said assessment notices."

The pre-trial conference was set on March 29, 2016. 27 Respondent's Pre-
Trial Brief8 was flled on March 22, 2016; while petitioner's Pre-Trial Brief9
was flled on March 23, 2016.

The parties flied their Joint Stipulation of Facts and Issues 30 on April 12,
2016. Subsequently, the Court issued the Pre-Trial Order31 on April25, 2016.

Petitioner presented Mr. Tagumpay L. Marasigan as its witness. 32

On August 12, 2016, petitioner flled its Formal Offer of Evidence 33 ,

offering Exhibits "P-1" "P-2" "P-3" "P-4" "P-5" "P-6" "P-7" "P-8" "P-
' ' ' ' ' ' ' '
9" "P-10" "P-11" "P-12" "P-13" "P-14" "P-15" "P-15-A" "P-15-B" and
' ' ' ' ' ' ' ' '
"P-16-A" as its documentary evidence. Respondent flled his Comment with
Manifestation34 on October 11, 2016.

In the Resolution35 dated October 21, 2016, the Court admitted all the
exhibits formally offered by petitioner.

On the other hand, respondent presented Revenue Officers Wilma G.

Enrique36 and Grace Nario-Mangubat as witnesses. 37

On August 17, 2017, respondent filed his Formal Offer of Evidence38 ,

offering Exhibits "R-1" "R-2" "R-3" "R-4" "R-5" "R-6" "R-7" "R-8" "R-
' ' ' ' ' ' ' '
9", "R-10", "R-11", and "R-12". Petitioner flled its Comment and
Opposition39 on October 12, 2017.

In the Resolution40 dated October 20, 2017, the Court admitted all the
exhibits formally offered by respondent.
/'
27 Notice of Pre-Trial Conference dated January 11, 2016, docket, pp. 83-84.
28 Docket, pp. 93-97.
29 Docket, pp. 117-120.
30 Docket, pp. 173-177.
31 Docket, pp. 180-185.
32 Minutes of the hearing dated July 11, 2016, docket, p. 192.

33 Docket, pp. 206-213.

34 Docket, pp. 287-290.
35 Docket, p. 297.

36 Minutes of the hearing dated February 6, 2017, docket, p. 298.

37 Minutes of the hearing dated July 10, 2017, docket, p. 303.

38 Docket, pp. 311-314.

39 Docket, pp. 322-325.
4° Docket, pp. 327-328.
DECISION
CTA CASE NO. 9167
Page 10 of20

On December 4, 2017, pet1t10ner filed its Memorandum41 . In the

Records Verification Report42 of the Judicial Records Division of this Court, it
was stated that respondent failed to ftle his Memorandum in this case. Hence,
in the Resolution dated January 10, 2018, the Court declared the case
submitted for decision. 43

THE ISSUE

The parties submitted the following issue for the Court's resolution: 44

Whether petitioner is liable to pay the total amount of One

Million One Hundred Seventy-Five Thousand Eight Hundred
Fifty-Five Pesos and Seventy-Seven Centavos (P1,175,855.77), the
alleged deficiency taxes for taxable year 2009, as well as applicable
surcharges and deficiency and delinquency interests, pursuant to
Sections 248 and 249 of the NIRC of 1997.

THE RULING OF THE COURT

The Court will determine first whether the case was timely ftled.

Pertinent to the resolution of this matter is Section 228 of the National

Internal Revenue Code of 1997, as amended, which provides:

"SEC. 228. Protesting of Assessment. When the

Commissioner or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer
of his findings: Provided, however, That a preassessment notice shall
not be required in the following cases:

XXX XXX XXX

The taxpayers shall be informed in writing of the law and

the facts on which the assessment is made; otherwise, the
assessment shall be void.

Within a period to be prescribed by implementing rules

and regulations, the taxpayer shall be required to respond to said
notice. If the taxpayer fails to respond, the Commissioner or his
~
41 Docket, pp. 333-350.
42 Records Verification dated December 28, 2017, docket, p. 354.
43 Resolution dated January 10,2018, docket, p. 356.
44 JSFI, docket, p. 17 4.
DECISION
C:TA CASE NO. 9167
Page 11 of 20

duly authorized representative shall issue an assessment based on

his findings.

Such assessment may be protested administratively by

filing a request for reconsideration or reinvestigation within thirty
(30) days from receipt of the assessment in such form and
manner as may be prescribed by implementing rules and
regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted;
otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted

upon within one hundred eighty (180) days from submission of
documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision, or from the lapse of
the one hundred eighty (180)-day period; otherwise, the decision
shall become final, executory and demandable."

Pursuant to Section 228 of the NIRC of 1997, petitioner has 30 days

from receipt of the FLD /FAN within which to file its administrative protest
and another 30 days from receipt of respondent's decision, or from the lapse of
the 180-day period within which to file its Petition for Review with the Court
of Tax Appeals.

Petitioner received the FLD dated June 27, 2014 with Details of
Discrepancies and Final Assessment Notices issued by Regional Director Jose
N. Tan on July 25, 2014, assessing it for alleged deficiency income tax and
VAT, including surcharges and interests, in the total amount of P1,175,855.77
for CY 2009. Petitioner had 30 days from July 25, 2014 or until August 25,
201445 within which to file its administrative protest with respondent.
Petitioner sent a Letter of Dispute dated July 30, 2014, reiterating that it is not
amenable to the conclusion of the FAN and Details of Discrepancies.

On September 9, 2015, petitioner received the FDDA dated August 18,

2015. Counting 30 days from September 9, 2015, petitioner had until October
9, 2015 within which to file its Petition for Review with the Court. Hence, the
Petition for Review filed by petitioner on October 9, 2015 was timely filed
within the 30-day prescriptive period.

Records of the case show that no Letter of Authority (LOA) was issued
for the examination of petitioner's books of accounts and other accounting
records for its internal revenue taxes for CY 2009. For this reason, it is
necessary to rule first on whether the Court has jurisdiction to decide on the
~
45 August 24, 2014 fell on Sunday.
DECISION
CTA CASE NO. 9167
Page 12 of 20

scope of the authority of the revenue officers to examine petitioner, although

this issue was not raised by the parties in their respective pleadings.

In the case of Commissioner if Internal Revenue vs. Lancaster Philippines, Inc. 46 ,

the Supreme Court reiterated and confirmed the power and jurisdiction of the
Court of Tax Appeals to resolve the issue regarding the authority of Revenue
Officers to conduct audit, as follows:

"The law vesting unto the CTA its jurisdiction is Section 7

of Republic Act No. 1125 (RA. No. 1125) which in part provides:

Section 7. Jurisdiction. - The Court of Tax

Appeals shall exercise exclusive appellate jurisdiction
to review by appeal, as herein provided:

(1) Decisions of the Collector of Internal

Revenue in cases involving disputed
assessments, refunds of internal revenue
taxes, fees or other 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; xxx. (emphasis supplied)

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
includes other cases arising from the NIRC or related laws
administered by the BIR. Thus, 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 'other matters
arising under the National Internal Revenue Code.'

The jurisdiction of the CTA on such other matters

arising under the NIRC was retained under the amendments
introduced by R.A. No. 9282. Under R.A. No. 9282, Section 7
now reads:

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

a. Exclusive appellate jurisdiction to review by appeal, as

herein provided:
~
+6 G.R. No. 183408,July 12,2017.
DECISION
CTA CASE NO. 9167
Page 13 of20

1. Decisions of the Commissioner of Internal

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

2. Inaction by the Commissioner of Internal

Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal
Revenue Code provides a specific period of action,
in which case the inaction shall be deemed a denial;
xxx. (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 internal revenue

taxes 1s one of the duties of the BIR. Section 2 of the NIRC
states:

Sec. 2. Powers and Duties of the Bureau of Internal

Revenue. -The Bureau of Internal Revenue shall be
under the supemswn and control of the
Department of Finance and its powers and duties
shall comprehend the assessment and collection of
all national internal revenue taxes, fees, and charges,
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. Thus, to give more teeth to such
power of the CIR, to make an assessment, the NIRC authorizes
~
DECISION
CTA CASE NO. 9167
Page 14 of20

the CIR to examine any book, paper, record, or data of any

person. 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 4 of A.M. No. 05-11-07-CTA, or the

Revised Rules of the Court of Tax Appeals, the CTA 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 ofjudgment.- x x x

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
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 Bane was likewise correct in sustaining the CTA
Division's view concerning such matter."
~
DECISION
CTA CASE NO. 9167
Page 15 of20

Based on the afore-quoted jurisprudence, 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 under the phrase
"other matters" arising under the NIRC or other laws administered by the BIR.
Moreover, the Court 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.

As earlier stated, records show that no LOA was issued against

petitioner for CY 2009. The question now is whether Letter Notice No. 54A-
RLF-09-03-00042 dated August 8, 2011, issued by former BIR Commissioner
Kim S. Jacinto-Henares, would suffice.

The answer is in the negative.

Section 6(A) of the NIRC of 1997, as amended, grants the

Commissioner of Internal Revenue the power to authorize the examination of
any taxpayer and the assessment of the correct amount of tax due, to wit:

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

Prescribe Additional Requirements for Tax Administration and
Enforcement. -

(A) Examination of Returns and Determination of Tax Due. -

After a return has been filed as required under the provisions of
this Code, the Commissioner or his duly authorized
representative may authorize the examination of any
taxpayer and the assessment of the correct amount of tax:
Provided, however, That failure to ft.le a return shall not prevent the
Commissioner from authorizing the examination of any
taxpayer." (Emphasis supplied)

In relation thereto, Section 13 of the NIRC of 1997, as amended,

provides that a Letter of Authority is the authority given to the appropriate
revenue officer assigned to perform assessment functions. Section 13 provides:

"SEC. 13. Authority of a Revenue Officer. - Subject to the rules

and regulations to be prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, a Revenue Officer
assigned to perform assessment functions in any district
may, pursuant to a Letter of Authority issued by the
Revenue Regional Director, examine taxpayers within the
jurisdiction of the district in order to collect the correct
amount of tax, or to recommend the assessment of any
deficiency tax due in the same manner that the said acts could
~
DECISION
C:TA CASE NO. 9167
Page 16 of20

have been performed by the Revenue Regional Director himself."

(Emphasis supplied)

The Supreme Court's pronouncement 1n Medicard Philippines, Inc. vs.

Commissioner if Internal Revenue47 is instructive:

"The absence of an LOA

violated MEDICARD's right to
due process

An LOA is the authority given to the appropriate revenue

officer assigned to perform assessment functions. It empowers or
enables said revenue officer to examine the books of account and
other accounting records of a taxpayer for the purpose of
collecting the correct amount of tax. An LOA is premised on the
fact that the examination of a taxpayer who has already filed his
tax returns is a power that statutorily belongs only to the CIR
himself or his duly authorized representatives. Section 6 of the
NIRC clearly provides as follows:

XXX XXX XXX

Based on the afore-quoted provision, it is clear that unless

authorized by the CIR himself or by his duly authorized
representative, through an LOA, an examination of the taxpayer
cannot ordinarily be undertaken. The circumstances contemplated
under Section 6 where the taxpayer may be assessed through best-
evidence obtainable, inventory-taking, or surveillance among
others has nothing to do with the LOA. These are simply
methods of examining the taxpayer in order to arrive at the
correct amount of taxes. Hence, unless undertaken by the CIR
himself or his duly authorized representatives, other tax agents
may not validly conduct any of these kinds of examinations
without prior authority.

XXX XXX XXX

In the case of Commissioner if Internal Revenue v. S Of!Y

Philippines, Inc., the Court said that:

Clearly, there must be a grant of authority

before any revenue officer can conduct an
examination or assessment. Equally important is that

47 G.R. No. 222743, AprilS, 2017.

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DECISION
CTA CASE NO. 9167
Page 17 of20

the revenue officer so authorized must not go

beyond the authority given. In the absence of such
an authority, the assessment or examination is a
nullity. (Emphasis and underlining ours)

The Court cannot convert the LN into the LOA required

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

The following differences between an LOA and LN are

crucial. First, an LOA addressed to a revenue officer is specifically
required under the NIRC before an examination of a taxpayer
may be had while an LN is not found in the NIRC and is only for
the purpose of notifying the taxpayer that a discrepancy is found
based on the BIR's RELIEF System. Second, an LOA is valid
only for 30 days from date of issue while an LN has no such
limitation. Third, an LOA gives the revenue officer only a period
of 120 days from receipt of LOA to conduct his examination of
the taxpayer whereas an LN does not contain such a
limitation. Simply put, LN is entirely different and serves a
different purpose than an LOA. Due process demands, as
recognized under RMO No. 32-2005, that after an LN has serve
its purpose, the revenue officer should have properly secured an
LOA before proceeding with the further examination and
assessment of the petitioner. Unfortunately, this was not done in
this case.

Contrary to the ruling of the CTA en bane, an LOA cannot

be dispensed with just because none of the financial books or
records being physically kept by MEDICARD was examined. To
begin with, Section 6 of the NIRC requires an authority from the
CIR or from his duly authorized representatives before an
examination 'of a taxpayer' may be made. The requirement of
authorization is therefore not dependent on whether the taxpayer
may be required to physically open his books and financial
~
DECISION
CTA CASE NO. 9167
Page 18 of20

records but only on whether a taxpayer 1s being subject to

examination.

The BIR's RELIEF System has admittedly made the BIR's

assessment and collection efforts much easier and faster. The ease
by which the BIR's revenue generating objectives is achieved is no
excuse however for its non-compliance with the statutory
requirement under Section 6 and with its own administrative
issuance. In fact, apart from being a statutory requirement, an
LOA is equally needed even under the BIR's RELIEF System
because the rationale of requirement is the same whether or not
the CIR conducts a physical examination of the taxpayer's
records: to prevent undue harassment of a taxpayer and level the
playing field between the government's vast resources for tax
assessment, collection and enforcement, on one hand, and the
solitary taxpayer's dual need to prosecute its business while at the
same time responding to the BIR exercise of its statutory powers.
The balance between these is achieved by ensuring that any
examination of the taxpayer by the BIR' s revenue officers is
properly authorized in the first place by those to whom the
discretion to exercise the power of examination is given by the
statute.

That the BIR officials herein were not shown to have acted
unreasonably is beside the point because the issue of their lack of
authority was only brought up during the trial of the case. What is
crucial is whether the proceedings that led to the issuance of VAT
deficiency assessment against MEDICARD had the prior
approval and authorization from the CIR or her duly authorized
representatives. Not having authority to examine MEDICARD in
the first place, the assessment issued by the CIR is inescapably
void."

In other words, there must first be a grant of authority before a revenue

officer can conduct an examination and issue a tax assessment. For these
reasons, the issuance of a mere LN instead of an LOA would not suffice.

To emphasize, the audit process normally commences with the issuance

by the BIR Commissioner of an LOA. 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. 48
/'-'

48 Commissioner !if Internal Revenue vs. Lanmster Philippines, lm:, supra.

DECISION
CTA CASE NO. 9167
Page 19 of20

In this case, there is no indication that an LOA was issued against

petitioner but only LN No. 54A-RLF-09-03-00042 dated August 8, 2011 issued
by former BIR Commissioner Kim S. Jacinto-Henares. In the absence of
competent proof that the revenue examiners who conducted the audit and
investigation of petitioner's books of accounts and other accounting records
for CY 2009 were duly authorized pursuant to a valid LOA, the deficiency tax
assessment issued against petitioner, arising from the audit they conducted, is
void ab initio.

It is said that taxes are what we pay for civilized society. Without taxes,
the government would be paralyzed for lack of the motive power to activate
and operate it. Hence, despite the natural reluctance to surrender part of one's
hard-earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by
those in the seat of power. But even as we concede the inevitability and
indispensability of taxation, it is a requirement in all democratic regimes that it
be exercised reasonably and in accordance with the prescribed procedure. If it
is not, then the taxpayer has a right to complain and the courts will then come
to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that the
law has not been observed. 49

Finding that the assessment for CY 2009 is void for being issued without
a valid authority, the Court finds it no longer necessary to discuss the issue
raised by the parties.

WHEREFORE, premises considered, the Petition for Review is

GRANTED. Accordingly, the assessment notices and the Final Decision on
Disputed Assessment that found petitioner liable for alleged deficiency income
tax and value-added tax in the aggregate amount of P1,175,855.77 for calendar
year 2009 are CANCELLED.

SO ORDERED.
Qt~. ~ ,4 '-.
MA. BELEN M. RINGPIS-LIBAN
Associate Justice

~9 Commissioner o/ Internal &venue vs. San Miguel Corporation, G.R. Nos. 205045 and 205723, January 25, 2017,
citing Commissioner !if Internal &venue vs. A{gue, Inc., et aL, G.R. No. L-28896, February 17, 1988.
DECISION
CTA CASE NO. 9167
Page 20 of20

I CONCUR:

ATTESTATION

I attest that the conclusions in the above decision were reached in

consultation before the case was assigned to the writer of the opinion of the
Court's Division.

ESPE
ciate Justice
Acting Chairperson

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Acting

Division Chairperson's Attestation, is it hereby certified that the conclusions in
the above decision were reached in consultation before the case was assigned
to the writer of the opinion of the Court.

Presiding] ustice