MARKETING CONVERGENCE, INC., v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SPECIAL FIRST DIVISION ********* MARKETING CONVERGENCE, CTA Case No. 9301 INC., Members: Petitioner, -versus - DEL ROSARIO, P.J., Chairperson, UY, and MINDARO-GRULLA, JJ. COMMISSIONER OF INTERNAL REVENUE, Promulgated: Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - DECISION UY, J.: Before Us is a Petition for Review filed on March 18, 2016 by Marketing Convergence, Inc. against the respondent Commissioner of Internal Revenue, praying for the cancellation and setting aside of the assailed assessed deficiency taxes, penalties and interests for the taxable year (TY) 2010 in the total amount of P1 ,051 ,564 ,124.52, broken down as follows: (1) income tax in the amount of P678,366,631.32; (2) value added tax (VAT) in the amount of P364, 126,054.41; and (3) expanded withholding tax (EWT) in the amount of P9,071 ,438 .79. THE FACTS Petitioner is a corporation duly organized and existing under the laws of the Philippines, duly registered with the Securities and Exchange Commission , with company registration no. CS200258645. 1 It is also registered with Revenue District Office No. 116- Regular LT Division I, Large Taxpayers Service of the Bureau 1 Exhibits "P-1 " and "P-2", Docket - Vol. III, pp. 1344 to 1349.

DECISION CTA Case No. 9301 of Internal Revenue (BIR), with Tax Identification Number 220-916- 861-00000. 2 Respondent Commissioner of Internal Revenue, is sued in his official capacity, having been duly appointed and empowered to perform the duties of his office, including among others, the duty to act on and approve claims for refund or tax credit as provided by law, with office at the BIR National Office Building, Diliman,3 Quezon City. On September 28, 2011, petitioner received the Letter of Authority No. LOA-116-2011-00000119 dated September 23, 2011,4 authorizing Revenue Officers Reynoso Bravo, William Sundiam, Miguel Sulit, Meliza Wepee, Maribel Serafica I Group Supervisor (GS) Wilfreda Reyes of the BIR, to examine petitioner's books of account and other accounting records for all internal revenue taxes for the period from January 1, 2010 to December 31, 2010. Subsequently, Nestor S. Valeroso, then Officer in Charge- Assistant Commissioner for Large Taxpayers Service (OIC-ACIR), issued the Preliminary Assessment Notice (PAN) dated August 12, 2014, 5 assessing petitioner for alleged deficiency taxes, penalties and interests in relation to TY 2010 as follows: (1) income tax in the amount of P734, 756,276.01; (2) improperly accumulated earnings tax (IAET) in the amount of P20,943,292.75; (3) VAT in the amount of P359,623,098.77; (4) EWT in the amount of P29,231 ,649.86; and (5) documentary stamp tax in the amount of P82,470.93.6 Petitioner received the said PAN on August 15, 2014. 7 On September 1, 2014, petitioner filed its protest letter to the PAN,8 requesting the cancellation of the subject tax assessments for want of factual and/or legal bases. Thereafter, OIC-ACIR Nestor S. Valeroso issued the Formal Letter of Demand and Final Assessment Notice (FLO/FAN) dated October 7, 2014,9 assessing petitioner for alleged deficiency taxes, penalties and interests in relation to TY 2 Exhibit "P-3", Docket - Vol. III, pp. 1350 to 1351. 3 Par. 1, Summary of Admitted Facts, Joint Stipulation of Facts and Issues (JSFI), Docket -Vol. II, p. 762. 4 Exhibit "R-3" BIR Records- Folder No. 1, p. 526. 5 Exhibit "P-4", Docket- Vol. III, pp. 1352 to 1366; and Exhibits "R-14", BIR Records- Folder No. 1, pp. 578 to 584. 6 Par. 3, Summary of Admitted Facts, JSFI, Docket- Vol. II, pp. 762 to 763. 7 Exhibit "P-4-1", Docket- Vol. III, p. 1352. 8 Exhibit "P-5", Docket- Vol. III, pp. 1367 to 1393. 9 Exhibit "P-6", Docket- Vol. III, pp. 1394 to 1411; and Exhibits "R-16", "R-17", and "R-17-1" to "R-17-4", BIR Records- Folder No. 1, pp. 614 to 623. ~

DECISION CTA Case No. 9301 2010 in the same amounts stated in the earlier PAN. 10 The said FLO/FAN was received by the petitioner on October 7, 2014. 11 On November 6, 2014, petitioner filed its protest letter to the FLO/FAN, 12 reiterating its arguments that the assessment lacks legal and/or factual bases. OIC-ACIR Nestor S. Valeroso then issued the Final Decision on Disputed Assessment (FDDA) dated November 9, 2015, 13 denying petitioner's protest in part, and found that petitioner is liable for alleged deficiency taxes, penalties and interest in relation to TY 2010 as follows: (1) income tax in the amount of P678,366,631.61; (2) VAT in the amount ofP364,126,174.44; and (3) EWT in the amount of P9,071 ,438. 79. 14 The said FDDA was received by the petitioner on November 12, 2015. 15 On December 14, 2015, petitioner filed its letter dated December 12, 2015 with the office of respondent, 16 appealing/requesting for the reconsideration of the above assessment for lack of legal and/or factual bases. In response to the said Motion for Reconsideration, respondent issued the letter dated February 11, 2016, 17 denying petitioner's Motion for Reconsideration and reiterating the assessment in the FDDA. 18 Petitioner received the said letter on February 17, 2016. 19 Thereafter, petitioner filed the instant Petition for Review before this Court on March 18, 2016. Respondent filed his Answer on June 15, 2016,20 interposing the following special and affirmative defenses, to wit: "SPECIAL AND AFFIRMATIVE DEFENSES 4. Respondent adopts the abovementioned 10 Par. 4, Summary of Admitted Facts, JSFI, Docket- Vol. II, pp. 762 to 763. 11 Exhibit "P-6-1 ", Docket - Vol. III, p. 1394. 12 Exhibit "P-7", Docket- Vol. III, pp. 1412 to 1465. 13 Exhibit "P-8", Docket- Vol. III, pp. 1466 to 1475; and Exhibits "R-19", BIR Records -Folder No.3, pp. 219 to 225. 14 Par. 5, Summary of Admitted Facts, JSFI, Docket- Vol. II, p. 763. 15 Exhibit "P-8-1", Docket- Vol. Ill, p. 1466. 16 Exhibit "P-9", Docket- Vol. III, pp. 1476 to 1508; and BIR Records- Folder No. 3, pp. 183 to 215. 17 Exhibit "P-10", Docket- Vol. III, p. 1509; and Exhibits "R-22", BIR Records- Folder No.3, p. 249. 18 Par. 6, Summary of Admitted Facts, JSFI, Docket- Vol. II, p. 764. 19 Exhibit "P-10-1", Docket- Vol. III, p. 1509. 20 Docket, pp. 245 to 277. ~

DECISION CTA Case No. 9301 admissions and denials as part of her special and affirmative defenses. WITH ALL DUE RESPECT, THE HONORABALE COURT HAS NO JURISDICTION OVER THE INSTANT PETITION, THE INSTANT PETITION IS FILED OUT OF TIME. 5. Petitioner argued that on February 17, 2016, it received the Denial of the Motion for Reconsideration rendered by the Commissioner Kim S. Jacinto-Henares. Accordingly, pursuant to the above-cited provision in Revenue Regulations (RR) No. 12-99, as amended by RR No. 18-2013, it has thirty days from February 17, 2016 or until March 18, 2016 within which to file the instant petition with the Honorable Court. Hence, the instant petition allegedly filed on March 18, 2016 was timely filed. 6. Respondent differs. For quick reference, the following facts are undisputed, viz: a. On 07 October 2014, petitioner received the Formal Letter of Demand (FLO) and Final Assessment Notice (FAN); b. On 06 November 2014, petitioner allegedly filed its protest to the Formal Letter of Demand; and c. On 12 November 2015, petitioner received the Final Decision on Disputed Assessment (FDDA). d. On 14 December 2015, petitioner allegedly filed its Motion for Reconsideration with the Commissioner of Internal Revenue. 7. Under Section 228 of the National Internal Revenue Code of 1997 ('NIRC' for brevity), an assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty f

DECISION CTA Case No. 9301 (30) days from receipt of the assessment. Section 228 provides" 'XXX XXX XXX 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. (Emphasis supplied) 8. In the case at bar, the administrative protest was denied by a Final Decision on Disputed Assessment dated 09 November 2015 which was received by petitioner on 12 November 2015. Under the above- qouted Section 228 of the 1997 Tax Code, petitioner had 30 days to appeal respondent's denial of its protest before the Honorable Court. 9. Since petitioner received the denial of its administrative protest on 12 November 2015, it had only until 12 December 2015 within which to file a petition for review before the Honorable Court. However, it was only 18 March 2016 when it filed the instant petition for review, hence, the same was filed out of time. 10. Such period is not merely directory but mandatory and it is beyond the power of the courts to extend the same. In Fishwealth Canning Corporation vs. ~

DECISION CTA Case No. 9301 Commissioner of Internal Revenue, the Honorable Supreme Court ruled that a motion for reconsideration of the denial of the administrative protest does not toll the 30-day period to appeal to the CTA, hence: 'Respondent thereafter issued a Final Decision on Disputed Assessment dated August 2, 2005, which petitioner received on August 4, 2005, denying its letter of protest xxx Respondent added that if petitioner disagree, it may appeal to the Court of Tax Appeals (CTA) 'within thirty days from date of receipt thereof, otherwise our said deficiency income and value-added tax assessments shall become final, executory and demandable.' Instead of appealing to the CTA, petitioner filed, on September 1, 2005, a Letter of Reconsideration dated August 31, 2005. XXX XXX XXX The petition is bereft of merit. Section 228 of the 1997 Tax Code provides that an assessment xxx 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 t\

DECISION CTA Case No. 9301 period; otherwise, the decision shall become final, executory and demandable. (Underscoring supplied) In the case at bar, petitioner's administrative protest was denied by Final Decision on Disputed assessment dated August 2, 2005 issued by respondent and which petitioner received on August 4, 2005. Under the above-qouted Section 228 of the 1997 Tax Code, petitioner had 30 days to appeal respondent's denial of its protest to the CTA. (Underscored in the original) Since petitioner received the denial of its administrative protest on August 4, 2005, it had until September 3, 2005 to file a petition for review before the CTA Division. It filed one, however, on October 20, 2005, hence, it was filed out of time. For a motion for reconsideration of the denial of the administrative protest does not toll the 30- day period to appeal to the CTA." (Emphasis and underscoring supplied) 11. Going by the established jurisprudence and statutory provision of the NIRC, petitioner's request for reconsideration filed before the CIR does not toll the 30- day period to appeal to the CTA. Petitioner cannot find solace on its alleged reliance on subordinate legislation. Administrative rules and regulations, cannot override the statute it seeks to implement. As held time and again by the Honorable Supreme Court: After all, the power of administrative officials to promulgate rules in the implementation of a statute is necessarily limited to what is found in the legislative enactment itself. The implementing rules and regulations of a law cannot extend the law or expand its coverage, as the power to amend or repeal a statute is vested in the Legislature. Thus, if a discrepancy occurs between the basic law and an implementing rule or regulation, it is the former that prevails, because the law cannot be broadened by a ~

DECISION CTA Case No. 9301 mere administrative issuance - an administrative agency certainly cannot amend an act of Congress. ASSUMING WITHOUT NECESSARILY CONCEEDING THAT THE HONORABLE COURT HAS JURISDICTION OVER THE INSTANT PETITION, RESPONDENT MAINTAINS THAT THE ASSESSMENT IS VALID AND ISSUED PURSUANT TO A VALID LETTER OF AUTHORITY. 12. Petitioner argued that the assessment is void for lack of authority to conduct the same. In attacking the validity of the assessment, petitioner interposed that the Letter of Authority (LOA) was issued without complying with the requirements laid down under Revenue Memorandum Order (RMO) 43-90 dated September 20, 1990 which expressly requires that a Letter of Authority should cover a taxable period not exceeding one taxable year. In particular, petitioner pointed to a copy of the Letter of Authority allegedly attached as Annex D to the instant petition which states that it covers the Audit Criteria for Taxable Years 2009 & 2010. 13. Respondent differs. First, respondent would like to emphasize that the allegedly copy of the LOA subject of the assessment was not attached to Annex D to the instant petition. Contrary to the allegation of petitioner, the document labeled as Annex D and attached to the instant petition pertains to the respondent's Preliminary Assessment Notice (PAN). Nevertheless, perusal of the original copy of the LOA in the Bl R Records specifically states, viz: 'xxx is are authorized to examine your books of accounts and other accounting records for ALL INTERNAL REVENUE TAXES for the period from January 1, 2010 to December 31. 2010 pursuant to AUDIT CRITERIA FOR TAXABLE YEARS 2009 & 2010." ~

DECISION CTA Case No. 9301 14. Clearly, the pertinent LOA was issued to authorize the audit examination of petitioner for only one taxable period which is January 1, 2010 to December 31, 2010. Petitioner tries to mislead the Honorable Court by arguing that the LOA covers more than one taxable year. Clearly, it was pertaining to the AUDIT CRITERIA which is being used as a guideline by the revenue officers in conducting audit examinations. The audit criteria may be modified from time to time pursuant to a regulation being issued by the respondent. 15. In addition, petitioner also interposed that the audit examination was conducted by unauthorized revenue officers as no new Letter of Authority was issued in favor of the Revenue Officers to whom the instant case has been reassigned or transferred to. Hence, since the assessment was done without authority, the same is null and void. 16. Respondent differs. It is submitted that there is no need for the issuance of a new Letter of Authority, provided that the taxpayer has been duly informed of the authorized revenue officer who will conduct the audit. To emphasize, on 14 May 2016, petitioner received a letter informing it of the authorized revenue officers who will conduct the audit of the subject taxable year. 17. Lastly, petitioner never questioned the validity of the Letter of Authority nor the authority of the revenue officers who conducted the audit investigation in its reply to the Preliminary Assessment Notice (PAN) nor in its protest to the Formal Letter of Demand (FLO). ASSUMING WITHOUT NECESSARILY CONCEEDING THAT THE HONORABLE COURT HAS JURISDICTION OVER THE INSTANT PETITION, RESPONDENT MAINTAINS THAT HER RIGHT TO ASSESS PETITIONER FOR TAXABLE YEAR 2010 DID NOT PRESCRIBE. 18. Petitioner alleged that respondent's right to assess petitioner's taxes for taxable year 2010 has ~

DECISION CTA Case No. 9301 prescribed pursuant to the three (3) year limitation period provided for under Section 203 of the NIRC. It further alleged that the subject Final Assessment Notice (FAN) and the Formal Letter of Demand (FLO) was issued and received by petitioner only on 07 October 2014, which is more than three (3) years from the date of filing of petitioner's returns for taxable year 2010. 19. Petitioner's contention is bereft of merit. 20. True it may that Section 203 provides for such limitation, however, petitioner failed to consider that such provision is not without exception. Section 222 of the NIRC provides: 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 was become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (Emphases ours) ~

DECISION CTA Case No. 9301 Page 11 of53 21. Petitioner's taxable year subject of assessment is that of taxable year 2010. Thus, pursuant to Section 203 of the NIRC respondent only has three (3) years from the date prescribed by law for the filing of the return for the applicable tax to make its assessment if it does not fall within the exceptions provided under Section 222. 22. Assuming arguendo that petitioner regularly filed its Tax Returns for taxable year 2010 within the period required by law, respondent interposes that her right to assess petitioner for deficiency income taxes did not prescribe. 23. On 23 May 2013, Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed a waiver ('first waiver) of the defense of prescription under the statute of limitations of the National Internal Revenue Code extending the period to assess petitioner for its internal revenue tax liabilities for taxable year 2010 until 31 December 2013. 24. On 23 September 2013, before the first waiver loses its validity, Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed another waiver ('second waiver') of the defense of prescription under the statute of limitations of the National Internal Revenue Code extending the period to assess the petitioner for its internal revenue tax liabilities for taxable year 2010 until 30 June 2014. 25. On 03 March 2014, before the second waiver loses its validity, Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed another waiver ('third waiver') of the defense of prescription under the statute of limitations of the National Internal Revenue Code extending the period to assess petitioner for its internal revenue tax liabilities for the taxable year 2010 until 30 September 2014. 26. On 18 July 2018, before the third waiver loses its validity, Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed another waiver ('fourth waiver') of the defense of prescription under the statute of limitations of the National Internal Revenue Code extending the period ~

DECISION CTA Case No. 9301 to assess petitioner for its internal revenue tax liabilities for the taxable year 2010 until 31 December 2014. 27. Petitioner interposed that the waivers are defective for it failed to specify the type of tax and the amount of tax due. On this ground, allegedly the waiver is defective and consequently, the assessment is void. 28. Respondent differs. The waiver's failure to state specifically the specific type tax and the amount of tax due subject of the waiver will not render invalid the waivers executed by petitioner. This has already been clarified in the recent Revenue Memorandum Order (RMO) No. 14-2016, viz: Except for waiver of collection of taxes which shall indicate the particular taxes assessed, the waiver need not specify the particular taxes to be assessed nor the amount thereof, and it may simply state 'all internal revenue taxes' considering that during the assessment stage, the Commissioner of Internal Revenue or her duly authorized representative is still in the process of examining and determining the tax liability of the taxpayer. (Underscoring ours) 29. Clearly, the waivers were executed by petitioner while the audit examination is being conducted. Hence, it would be impossible to specify which taxes petitioner may be subsequently assessed. Further, the Letter of Authority which authorized the examination of petitioner is not only for a particular kind of tax but a comprehensive audit for all internal revenue taxes. 30. Petitioner also argued that the date of execution by the taxpayer and the date of acceptance by the BIR should be before the expiration of the period of prescription. Hence, as alleged, a waiver is defective if the same is executed after the prescription had already set in. Save for the audit assessment for deficiency income taxes, petitioner questioned the validity of the waiver based on the date of its execution which accordingly are already beyond the last day to assess petitioner for deficiency Value-Added Tax (VAT) and Expanded Withholding Tax (WE). ~

DECISION CTA Case No. 9301 31. In addition to the waivers executed in relation to this case, respondent interpose that the three-year period within which to make the necessary assessment will not apply squarely to the case at hand on the matter of the assessment of Expanded Withholding Tax (WE). The same are imprescriptible. 32. Withholding tax assessments are NOT an assessment for an internal revenue tax as a statutory taxpayer but rather such assessments were issued for failure of petitioner to withhold the correct taxes it is duty bound to collect as an agent. Thus, the assessments issued for Deficiency Expanded Withholding Tax are imprescriptible. This obligation of petitioner to withhold and remit the correct tax is its duty as an agent of the government in the collection of taxes and not as a statutory taxpayer. 33. By operation of law, the relationship between the Government and the withholding agent is one of agency for which reason the withholding agent only holds the funds withheld by him in trust for the Government. 34. Clearly, the liability of petitioner as taxpayer is different from its liability as withholding agent. This is the reason why liabilities arising from withholding taxes were never covered by tax amnesty programs. Basically, these liabilities arose from a different source of obligation. 35. The liability of a withholding agent is further established under Section 251, Title X of the Tax Code, which provides: Section 251. Failure of a Withholding Agent to Collect and Remit Tax. - Any person required to withhold, account for, and remit any tax imposed by this code or who willfully fails to withhold such tax, or account for and remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof, shall, in addition to other penalties provided for under this Chapter, be liable upon conviction to a penalty equal to the total amount of the tax not withheld, or not accounted for and remitted. (Emphasis ours) ~

DECISION CTA Case No. 9301 36. In Filipinas Synthetic Fiber Corporation vs. Court of Appeals and the Commissioner of Internal Revenue, The Honorable Supreme Court ratiocinated: '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 of Internal Revenue and his deputies are not made liable to law.' 37. The Tax Code only makes petitioner, as withholding agent, personally liable for the tax arising from breach of its legal duty to withhold as distinguished from its duty to pay tax, since the government's cause of action against the withholding agent is not for the collection of income tax, but for the enforcement of the withholding provision of Section 57 of the Tax Code, compliance with which is imposed on the withholding agent and not upon the taxpayer. 38. Accordingly, the tax deducted and withheld by withholding agents under the said provision shall be held as a special fund in trust for the government until paid to the collecting officer. It bears emphasis that petitioner as a withholding agent merely holds in trust the amount of tax it withheld and as trustee, it is duty bound to remit to the government the proper amount of tax withheld and this duty is imprescriptible. l'\\

DECISION CTA Case No. 9301 39. Further, in Section 58(A) of the Tax Code it is specifically provided that: XXX XXX XXX The taxes deducted and withheld by the withholding agent shall be held as special fund in trust for the government until paid to collecting officers. XXX XXX XXX 40. It is clear that the assessed deficiency withholding tax as a penalty to petitioner does not fall within the ambit of the period of limitation provided in Section 203 of the Tax Code, as amended. 41. In the same way, the period of limitation (three years) does not also apply squarely to petitioner's liability for deficiency Value-Added Tax (VAT). 42. To reiterate, Section 222 (a) of the Tax Code which specifically provides: 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 10 years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (Emphases ours) 43. In the instant case, audit of petitioner disclosed that petitioner failed to declare its correct sales subject to VAT for the year 2010. Careful perusal of the ~

DECISION CTA Case No. 9301 Formal Letter of Demand reveals that petitioner only declared P539,429,502.64 as its Vatable sales in its return instead of P2,208,930,862.17. Based on the result of the audit investigation petitioner merely declared 24.44% of its Vatable sales. This results to a substantial under declaration of around 75.56% of the supposed Vatable Sales. 44. The Honorable Supreme Court in the case of Aznar vs. CTA, had the occasion to define fake or fraudulent return in this wise: That there is a difference between 'false return' and 'fraudulent return' cannot be denied. While the first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due. (Emphasis ours) 45. Since the correct sales of petitioner did not appear in its VAT returns, there can only be one inevitable conclusion - that there was a substantial under-declaration of sales in its VAT returns. 46. To reiterate, a false return implies deviation from the truth, whether intentional or not. Although the Aznar case distinguishes what constitute 'false returns' referring to mistake, carelessness or ignorance, from that of 'fraudulent returns' referring to intent to evade taxes, the same case does not make a distinction as regards the prescriptive period of 10 years. Indeed, in the same case of Aznar, the Supreme Court ruled in favor of the CIR for an extension of 10 year to assess the taxpayer, thus: The ordinary period of prescription of 5 years now (now 3 years) within which to assess tax liabilities under Sec. 331 of the National Internal Revenue Code should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of 10 years provided for ~

DECISION CTA Case No. 9301 Page17of53 in Section 332 (a) NIRC, from the time of the discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced. There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent CTA that Section 332(a) (now Sec. 222) of the NIRC should apply and that the period of 10 years within which to assess petitioner's tax liability had not expired at the time said assessment was made. (Emphases ours) 47. It is, therefore clear from the statutory provision in Section 222 of the NIRC of 1997 in the three different case of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may begin without assessment, at any time within 10 years after the discovery of the (1) falsity, (2) fraud, (3) omission. The discrepancy of 75.56% in petitioner's return manifests an evident substantial under declaration which eloquently demonstrate the falsity or fraudulence of the VAT returns with an intent to evade the payment of tax. Respondent, could therefore, rightfully invoke Section 222 because her right to assess has not yet prescribed. 48. Finally, petitioner attacked the validity of the waivers it executed by arguing that the waivers do not indicate any similar appearance and acknowledgement by the relevant BIR Officials before a notary public. Considering that the representation or declaration of the SIR's representatives are not notarized, the waivers are not valid and binding. 49. Respondent differs. To emphasize, waivers are executed at the instance of the taxpayer. This means it is petitioner who initiated the execution of the subject waiver and that he merely submits the same to the respondent for acceptance. Thus, it is no longer necessary for respondent to appear before a notary public when she accepts the subject waiver. The acknowledgment of the waiver before the notary public is for petitioner to attest that the signatory is duly authorized ~

DECISION CTA Case No. 9301 to execute the same and that the same is his voluntary act. 50. To reiterate this has also been clarified 1n RMO No. 14-2016, viz: XXX XXX XXX 4. The waiver may be notarized. However. it is sufficient that the waiver is in writing as specifically provided by the NIRC. as amended. 5.Considering that the waiver is a voluntary act of the taxpayer. the waiver shall take legal effect and be binding on the taxpayer upon its execution thereof. (Underscoring ours) 51 . In the case of Spouses Palada vs. Solid Bank et. a/. the Honorable Supreme Court emphasized: Besides, any irregularity in the notarization or even the lack of notarization does not affect the validity of the document. Absent any clear and convincing proof to the contrary, a notarized document enjoys the presumption of regularity and is conclusive as to the truthfulness of its contents. (Underscoring ours) PETITIONER IS ESTOPPED FROM ASSAILING THE VALIDITY OF THE WAIVERS IT EXECUTED 52. It is noteworthy to pinpoint petitioner's conduct amounting to false representation or concealment or material facts calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert. 53. Respondent put emphasis that petitioner executed not only one waiver, not two but four waivers of Statute of Limitations. This fact alone will prove that if upon the execution of the first waiver, petitioner believed ~

DECISION CTA Case No. 9301 that the same was invalid, it should not have executed the remaining three waivers. It can be deduced from the succeeding acts of petitioner that it was its clear intention to give force and effect to the waivers. 54. Article 1431 of the Civil Code provides that in order estoppel may apply to the person, to whom representations have been made and who claims the estoppel in his favor must have relied or acted on such representations. Article 1431 states that: 'Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon.' 55. On the other hand, Section 2(a) of Rule 131 of the Rules of Court, on burden of proof and presumptions, states as follows: 'SEC. 2 Conclusive presumptions. -The following are instances of conclusive presumptions: (a) Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief he cannot in any litigation arising out of such declaration, act or omission, be permitted to falsify it; 56. Respondent humbly submits, that by petitioner's act or representation, and after benefiting from the effects of the waiver of the defense or prescription petitioner should not be the first to impugn the validity of such agreement. Petitioner should not be allowed to profit from its misdoings. To emphasize, petitioner was initially assessed with deficiency Improperly Accumulated Earnings Tax (IAET) and Documentary Stamp Tax (DST) in the Preliminary Assessment Notice (PAN) as well as in the Formal Letter of Demand (FLO). However, such assessment was cancelled in the Final Decision on Disputed Assessment (FDDA) after petitioner was allowed to submit the necessary documents to refute the ~

DECISION CTA Case No. 9301 audit findings. Petitioner benefited from the extension of the period to assess pursuant to the waivers it executed. It was allowed to submit the necessary documents in support of its protest and the same were considered in the evaluation of the protest. 57. Had it been that the parties intended not to extend the Statute of Limitations, petitioner should have not been allowed to submit additional supporting documents in its favor. In the same way, respondent should have issued the FDDA based on already existing audit findings. Based on the foregoing, both parties with all good faith intended that the Statute of Limitations be extended by virtue of the waiver executed. Further, the execution of a subsequent waiver before a prior waiver losses validity is a clear indication of such intention by the parties. PETITIONER IS LIABLE FOR THE CORRESPONDING DEFICIENCY INTEREST ON THE DEFICIENCY VALUE- ADDED TAX (VAT) AND EXPANDED WITHHOLDING TAX (WE) ASSESSMENTS. 58. Petitioner argued the deficiency interest shall only imposed whenever there is deficiency income tax; deficiency estate tax; or deficiency donor's tax. Since there was an imposition of deficiency interest on the assessed value-added tax and expanded withholding tax, allegedly, the impositions should be cancelled and set aside. 59. Respondent differs. Petitioner failed to consider that the imposition of deficiency interest is legally mandated under Section 249 of the Tax Code which provides, viz: SEC. 249. Interest. - (A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20�/o) per annum, or such higher rate as may be prescribed ~

DECISION CTA Case No. 9301 by rules and regulations, from the date prescribed for payment until the amount is fully paid. 60. Respondent maintains that the imposition of the deficiency interest does not limit the same to the imposition on income tax and estate tax only but also to the other internal revenue taxes. In fact, petitioner failed to consider preceding Section 247 of the Tax Code which provides explicitly: CHAPTER I ADDITIONS TO THE TAX SEC. 247. General Provisions.- (a) The additions to the tax or deficiency tax prescribed in this Chapter shall apply to all taxes, fees and charges imposed in this Code. The amount so added to the tax shall be collected at the same time. in the manner and as part of the tax. (Underscoring ours) 61. As can be gleaned from the above provision, the imposition of the deficiency interest applies to all other taxes or fees imposed under the Tax Code, including the value-added tax and the expanded withholding tax which petitioner is contesting. THE ASSESSMENTS HAVE BASES BOTH IN FACT AND IN LAW. 62. Petitioner argued that the deficiency tax assessments imposed upon it for taxable year 2010 should be declared null and void for having been arbitrarily made and lacking factual and legal basis. 63. Respondent strongly submits that the assessments have bases both in fact and in law which can be gleaned from the following discussion. I. PETITIONER IS LIABLE FOR DEFICIENCY INCOME TAX IN THE TOTAL AMOUNT OF P678,366,631.61 AND THE ~

DECISION CTA Case No. 9301 CORRESPONDING INTEREST AND COMPROMISE PENALTV. A. Petitioner is liable for deficiency income tax due from undeclared income from unaccounted Accounts Receivable Deferred Loyalty points in the amount of P757,969,664.70. 64. Petitioner argued that the loyalty fund should not be considered as income since it is not realized from the sale of goods or services and petitioner is not free to dispose of said funds. Rather, the fund was remitted to petitioner for a specific purpose. As alleged, consequently, the receipt of the loyalty fund should not be subjected to income tax since it is not an income payment. 65. Respondent differs. Discrepancy in Balance per Deferred Loyalty Points in the Financial Statements vs. remaining portion of receivable held by petitioner in Accounts Payable Customer Member Points earned by Cardholders (30�/o) is assessed pursuant to Section 32 in relation to Section 27 of the Tax Code. Details of the audit finding is as follows: Payable to Cardholders (1 ,383,530,671.00 AP Customer Member-Points Earned by 30% Cardholders Percentage to be Deferred (415,059,201.30) Remaining Portion of the receivable held by (1 '173,028,866.00) Co. as deferred loyalty points Balance in AR Deferred Loyalty Points- 757,969,664.70 Deferred FS Unaccounted AR Deferred Loyalty Points- Deferred 66. Based on the records of the case, petitioner failed to submit supporting documents on redemptions, forfeitures and funding of promos to refute the discrepancy. Hence, the assessment was reiterated from the FLO to the FDDA. 67. Consequently, the corresponding deficiency Value-added tax (VAT) was also assessed against the petitioner for this particular audit finding. B. Petitioner is liable for deficiency Income Tax due from undeclared income from movements of SM ~

DECISION CTA Case No. 9301 Advantage Points earned and redeemed in the amount of P266,489,356.35. 68. Petitioner argued that the loyalty fund should not be considered as income since it is not realized from the sale of goods or services. Consequently, the receipt of the loyalty fund should not be subjected to income tax since it is not an income payment. 69. Respondent differs. Analysis of the movement of SM Advantage points earned and redeemed during the taxable period reveals unaccounted receipts in the amount of P266,489,356.35. In the case of Perez vs. Court of Tax Appeals, et. a/ the Honorable Supreme Court made it explicit that unreflected sources of funds not accounted for in the taxpayer's returns leads to the inference that part of his income had not been reported. Hence, the corresponding income tax due thereon was assessed pursuant to Section 32 in relation to Section 24 of the Tax Code, as amended, viz: I I Debit Credit Award Points AR Loyalty Points-Billing 875,545,012.91 to Merchants 477,730,230.76 AR Deferred Loyalty Points- Deferred 1,815,242,081.55 AP Customer Member Billed Merchant Cash in Bank 1,035,050,768.93 AR Loyalty Points- Billing to Merchants 1,035,050,768.93 Points Redemption Billing by Merchants on Points redemption by Customer AP Customer Member 1,582,905,813.01 AP Loyalty Points Payments by Merchant on 1,387,428,331.48 points redemption by Customer AP Customer Member 1,312,641,944.14 AP Loyalty Points 1,312,641 ,944.14 Cash in Bank 71,875,014.14 AR Deferred Loyalty 71,875,014.14 Points - Deferred 5,355,748,783.89 5,622,238,140.24 (266489356.35) Unaccounted Receipts 5,355, 748,783.89 5,355, 748,783.89 70. Based on record, petitioner failed to submit supporting documents on AR Loyalty Points and AP customer members accounts, credit memos on Nursery Care Corporation and Watson Person Care stores to ~

DECISION CTA Case No. 9301 refute the discrepancy. Hence, the audit assessment was reiterated from the FLO to the FDDA. 71. Consequently, the corresponding deficiency VAT was also assessed against petitioner. C. Petitioner is liable for deficiency Income Tax due from undeclared sales per customer's data in the amount of P2,903,355.73. 72. Petitioner argued that it has no undeclared sales in its transactions. Allegedly, the noted difference pertains to timing difference in recognizing output VAT on the part of the petitioner and input VAT on the part of petitioner's related parties and other customers. 73. Respondent differs. A discrepancy on sales was noted after comparing the sales made to certain customers declared in petitioner's Summary List of Sales (SLS) against the company customer data extracted from Summary List of Purchases (SLP). This audit procedure was pursuant to the RELIEF system and the TRS. 74. The RELIEF system which stands for 'Reconciliation of Listing for Enforcement' was purposely to detect tax leaks by matching the data available under the Bureau's Integrated Tax System (ITS) with data gathered from third party sources. Through the consolidation and cross-referencing of third party information, discrepancy reports on sales and purchases can be generated to uncover under declared income and over claimed purchases (goods and services). Timely recognition and accurate reporting of unregistered taxpayers and non-filers can be made possible. 75. The Tax Reconciliation system (TRS) on the other hand is geared towards enhancing revenue collection by computerized matching of data available under the Bureau's Integrated Tax System (ITS). Through the consolidation and cross-referencing of data from withholding agents (WAs) and declaration of income recipients, discrepancy reports can be generated to uncover violations on tax rules and regulations such under declaration of income, non- declaration of income, under remittance and /or non- ~

DECISION CTA Case No. 9301 remittance of taxes withheld. over withholding. under withholding. over declaration of credits to name a few. Timely recognition and accurate reporting of unregistered taxpayers and non-filers will also be possible. 76. Respondent's audit investigation for deficiency taxes is not confined to the examination of the documents provided or obtained from petitioner. The Commissioner has the power to promulgate rules to ensure the accuracy and truthfulness of the taxes declared and paid by taxpayers. Such power of the Commissioner of Internal Revenue to obtain information from other sources is enshrined in Section 5 of the Tax Code which specifically provides: Sec. 5. Power of the Commissioner to obtain Information, and to Summon/Examine, and Take Testimony of Persons. - In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized: A. To examine any book, paper, record, or other data which may be relevant or material to such inquiry; B. To obtain on regular basis from any person other than the person whose internal revenue tax liability is subject to audit and investigation xxx (Emphasis ours) D. Petitioner is liable for deficiency Income Tax due from undeclared sales as a result of the difference between petitioner's Summary List of Sales (SLS) vs. 2307 in the amount of P21 ,626,924.64. f

DECISION CTA Case No. 9301 77. Petitioner argued that a mere difference in the sale of services per SLS and income per SAWT does not mean that there is an under-declaration of sales considering that the two reportorial requirements (SLS and SAWT) are governed by two different regulations. As alleged, the assessment on the alleged undeclared sales should be cancelled due to lack of factual and/or legal basis. 78. Respondent differs. Verification of petitioner reveals that there is a difference in the sales per SLS versus the sales appearing in the BIR Form 2307. Respondent's audit investigation for deficiency taxes is not confined to the examination of the documents provided or obtained from the petitioner. The Commissioner has the power to promulgate rules to ensure the accuracy and truthfulness of the taxes declared and paid by taxpayers. 79. Respondent further submits that petitioner's sales transactions are directly related to its customers' purchases and ultimately to the Creditable Withholding Taxes withheld from the payments made to petitioner. Hence, the assessment. Further, based on records, petitioner failed to submit supporting documents to refute the discrepancy. Thus, the assessment in the FLO was reiterated in the FDDA, 80. Consequently, the deficiency value-added tax is assessed against the petitioner for the audit finding. E. Petitioner is liable for deficiency Income Tax due from gross profit from undeclared purchases in the amount of P8,222,969.32. 81. Petitioner argued that it does not have undeclared purchases and submits that the assessment for additional gross income arising from undeclared purchases be cancelled due to lack of factual and legal bases. 82. Respondent differs. A discrepancy resulted from comparison of sales made to certain customers declared in petitioner's SLP against its supplier data extracted from summary list of sales. The same is assessed pursuant to Section 32 in relation to Section 27 ~

DECISION CTA Case No. 9301 of the Tax Code. Petitioner's purchases are transactionally related to its suppliers' sales. 83. The audit finding per Formal Letter of Demand was reiterated in the Final Decision on Disputed Assessment (FDDA) save only the discrepancy with submitted notarized confirmation certificates. F. Petitioner is liable for deficiency Income Tax due from disallowed expenses (Marketing Points) in the amount of P18,741,247.32. 84. Petitioner interposed that the above expenses are ordinary and necessary which are directly connected with and approximately resulting from carrying on the business and shown to be appropriate and helpful in the development of petitioner's business. Thus, the same is deductible. 85. Respondent differs. Section 34 of the Tax Code provides: SEC. 34. Deductions from Gross Income.- Except for taxpayers earning compensation income arising from personal services rendered under employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1 ), there shall be allowed the following deductions from gross income; (A) Expenses.- (1 )Ordinary and Necessary Trade, Business or Professional Expenses.- xxx XXX XXX (b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate ~

DECISION CTA Case No. 9301 with sufficient evidence, such as official receipts or other adequate records: (i) the amount of expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. 86. Since petitioner was not able to properly substantiate with sufficient evidence the expenses claimed for, hence, the expense claimed is disallowed and the corresponding income tax is assessed against petitioner. G. Petitioner is liable for deficiency Income Tax due from disallowed expenses for non-withholding of tax in the amount of P18,741,247.32. 87. Petitioner argued that it has properly withheld and remitted the expanded withholding tax (EWT) on its income payments. 88. Respondent differs. The audit finding was a result of the matching of the expenses per income tax return versus its Alpha List. Result of the audit revealed that corresponding taxes were not withheld. Section 34 (k) of the Tax Code provides explicitly: SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1 ), there shall be allowed the following deductions from gross income; XXX XXX XXX ~

DECISION CTA Case No. 9301 (K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of internal Revenue in accordance with this section 58 and 81 of this Code. 89. Further Section 6 of Revenue Regulation No. 14-2002 explicitly provides: Section 6. Requirements for Deductibility of Certain Expenses. - Section 2.58.5 of Revenue Regulations No. 2-98 is hereby amended to read as follows: 'Sec. 2.58.5. Requirements for Deductibility - Any income payment which is otherwise deductible under the Code shall be allowed as deduction from the payor's gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in accordance with Sees. 57 and 28 of the Code. 90. To put emphasis, the amounts used where those declared by petitioner per its Income Tax Return and its accomplished BIR Form 1601 E. The audit assessment was reiterated from the FLO to the FDDA save the discrepancy with submitted supporting documents which were revised. II. PETITIONER IS LIABLE FOR DEFICIENCY VALUE-ADDED TAX (VAT) IN THE TOTAL AMOUNT OF P364,126,174.44 AND THE CORRESPONDING fJ

DECISION CTA Case No. 9301 INTEREST AND COMPROMISE PENALTY. A. Petitioner is liable for deficiency Value-Added Tax (VAT) due from: 1) Unaccounted AR Deferred Loyalty Points; 2) Unaccounted Receipts; 3) Undeclared Sales per Customer's Data; 4) Undeclared Sales (SLS vs. SAWT); and 5) Gross Sales Attributable to Undeclared Purchases. 91. Petitioner's tax liabilities for deficiency assessment for the above mentioned audit findings were discussed extensively in petitioner's liability for deficiency income tax. Respondent thus repleads the same. B. Petitioner is liable for deficiency Value-Added Tax (VAT) due from discrepancy in income tax return vs. Value-Added Tax Return in the amount of P37, 730,006.20. 92. Petitioner argued that the difference can be reconciled. Petitioner maintained that the loyalty points/fund should not be considered as income since it is not realized from the sale of goods or services. 93. Respondent differs. Comparison of the income declared in petitioner's ITR against the amount reported in its VAT returns revealed a discrepancy. Hence, the corresponding VAT is assessed against petitioner pursuant to Section 106 and 108 of the Tax Code. The comparison revealed an additional income of P37,730,006.20. C. Petitioner is liable for deficiency Value-Added Tax (VAT) due from deferred loyalty points increase for the year in the amount of P405,855,217.00. 94. Petitioner argued that the receipt of loyalty fund should not be subjected to VAT since it is not an income payment. 95. Respondent differs. Audit of petitioner reveals that there is an increase in the balance of the accounts receivable deferred loyalty points. The increase is assessed VAT pursuant to Sections 106 and 108 of the Tax Code, as amended. ~

DECISION CTA Case No. 9301 D. Petitioner is liable for deficiency Value-Added Tax (VAT) due from disallowed creditable input tax in the amount of P892,745.16. 96. Purchase invoices of certain suppliers did not conform with the invoicing requirement. Hence, the claimed input VAT is disallowed pursuant to Sections 110 and 113 of the Tax Code. Petitioner did not interpose any objection on this audit finding. Hence, the same is reiterated from the FLO and FDDA. Neither did it argued the same in the instant petition. Thus, petitioner deemed to have accepted the audit finding. Ill. PETITIONER IS LIABLE FOR DEFICIENCY EXPANDED WITHHOLDING TAX (WE) IN THE TOTAL AMOUNT OF P9,071,438.79 AND THE CORRESPONDING INTEREST AND COMPROMISE PENALTY. 97. This audit finding was fully discussed in Item G of petitioner's liability of income tax. Hence, the corresponding expanded withholding tax were assessed from such income payments. 98. The audit finding was merely reiterated from the Formal Letter of Demand (FLO) to the Final Decision on Disputed Assessment (FDDA) save those with submitted supporting documents which were revised accordingly. THE LETTER OF AUTHORITY (LOA), THE PRELIMINARY ASSESSMENT NOTICE (PAN), THE FORMAL LETTER OF DEMAND (FLO), FINAL ASSESSMENT NOTICE (FAN) AND THE FINAL DECISION ON DISPUTED ASSESSMENT (FDDA) WERE ISSUED IN ACCORDANCE WITH LAW, RULES AND JURISPRUDENCE. ~

DECISION CTA Case No. 9301 99. As can be deduced from the following narrations of facts, the procedure prescribed under Revenue Regulations No. 12-99 had been complied with by respondent, viz: 99.1 Letter of Authority (LOA) No. 116-2011- 00000119 dated 23 September 2011 was issued authorizing the Revenue Officers of respondent's LT-Regular Audit Division I to examine petitioner's books of accounts and other accounting records for all internal revenue taxes for taxable year 2010. The LOA was issued together with the Checklist of Requirements. 99.2 On 10 January 2012 the Second Notice for Presentation of Records/Documents was issued to petitioner. 99.3 Subsequently on 06 February 2012, the Final Notice for Presentation of Records/Documents was issued to petitioner. 99.4 On 23 May 2013, Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed a waiver ('first waiver') of the defense of prescription under the statute of limitations of the National Internal Revenue Code extending the period to assess petitioner for its internal revenue tax liabilities for taxable year 2010 until 31 December 2013. 99.5 On 23 September 2013, before the first waiver loses its validity, Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed another waiver ('second waiver') of the defense of prescription under the statute of limitations of the National Internal Revenue Code extending the period to assess petitioner for its internal revenue tax liabilities for taxable year 2010 until 30 June 2014. 99.6 On 03 March 2014, before the second waiver loses its validity, Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed another waiver ('third waiver') of the defense of prescription under the statute of limitations of the National Internal Revenue Code extending the period to ~

DECISION CTA Case No. 9301 assess petitioner for its internal revenue tax liabilities for taxable year 2010 until 30 September 2014. 99.7 On 18 July 2014, before the third waiver loses its validity, Ms. Cecilia R. Patricio, petitioner's authorized signatory, executed another waiver ('fourth waiver') of the defense of prescription under the statute of limitations of the National Internal Revenue Code extending the period to assess petitioner for its internal revenue tax liabilities for taxable year 2010 until 31 December 2014. 99.8 On 12 August 2014 the Preliminary Assessment Notice ('PAN') was issued to petitioner demanding payment of deficiency Income Tax, Improperly Accumulated Earnings Tax (IAET), Value-Added Tax (VAT), Expanded Withholding Tax (EWT), Documentary stamp Tax (DST), surcharge, interest and compromise penalty for taxable year 2010. The PAN was received by petitioner on 15 August 2014. 99.9 Petitioner did not file its reply to the Preliminary Assessment Notice (PAN). 99.10 On 07 October 2014, the Formal Letter of Demand (FLO) with Details of Discrepancies and the Final Assessment Notice (BIR Form No. 0401) with Assessment Notices Nos. IT-116-LOA- 00000119-10-14-1159, VT-116-LOA-0000119-10- 14-1161, WE-116-LOA-00000119-10-14-1162, IAET-116-LOA-00000119-10-14-1160 and DS-116- LOA-00000119-10-14-1163 were issued and duly received by petitioner on even date. 99.11 After petitioner filed its administrative protest on the FLO, respondent issued to petitioner the Final Decision on Disputed Assessment (FDDA) on 09 November 2015. The FDDA was received by petitioner on 12 November 2015. 100. Based on the foregoing, the finding of the deficiency Income Tax, Value-Added Tax (VAT) and Expanded Withholding Tax (EWT), liabilities against r

DECISION CTA Case No. 9301 petitioner for taxable year 2010 is proper in all respects. With details as follows: Kind of Tax Amount of Liability (inclusive of interest, Income Tax Value-Added Tax (VAT) surcharge and Expanded Withholding Tax compromise (EWT) Total Tax Liabilities penai!Y) P678,366,631.61 P364, 126,174.44 P9,071 ,438.79 P1 ,051 ,564,244.84 101. On a final note, the decision of the Honorable Supreme Court in the case of Commissioner of Internal Revenue vs. Bank of Philippine Islands can be well use as a guide, to wit: 'Tax assessments by tax examiners are presumed correct 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.' (Emphasis ours)" In its Reply (To Answer dated June 15, 2016) filed on July 1, 2016, 21 petitioner argues that this Court has jurisdiction over the instant Petition for Review; that the assessment is void for lack of authority of the Revenue Officer to conduct the examination; and that the period to assess petitioner's internal revenue taxes for the taxable year 2010 has already prescribed. Allegedly, Revenue Memorandum Order (RMO) No. 14-2006 is void for being contrary to the Tax Code; that RMO No. 14-2016 does not apply retroactively; that withholding taxes are subject to the prescriptive period in Section 203 of the Tax Code; that petitioner is not estopped from assailing the validity of the waivers as the doctrine of estoppel is inapplicable to the instant case; that no deficiency interest should be imposed on the deficiency VAT, withholding tax on compensation (WTC), and EWT; 21 Docket- Vol. I, pp. 294 to 337. A

DECISION CTA Case No. 9301 that the deficiency tax assessments lack factual and legal bases; and that petitioner is not liable for the alleged income tax, VAT, WTC, and EWT for taxable year 2010 in the aggregate amount of P1,051,564,124.52. The Pre-Trial Conference was set on September 8, 2016. 22 However, a Motion to Defer Pre-Trial Conference was filed by the petitioner on August 4, 2016, 23 praying that the Pre-Trial Conference be deferred to November 24, 2016. The Motion to Defer was granted by the Court in the Order dated August 5, 2016, 24 and the Pre-Trial Conference was reset to November 24,2016. Meanwhile, on June 24, 2016, respondent filed a Motion to Defer the Transmittal of BIR Records, 25 praying that the Court defer the transmittal of the BIR Records until after the filing of her witness' affidavit. The Court granted said Motion in the Order dated June 28, 2016. 26 By way of Compliance, 27 respondent transmitted the BIR Records on January 17, 2017, consisting of three (3) folders. Respondent filed his Pre-Trial Brief on January 19, 2017; 28 while petitioner filed its Pre- Trial Brief on January 23, 2017. 29 Moreover, upon motion30 of petitioner filed on October 25, 2016 the Pre-Trial Conference set on November 24,2016 was reset for the last time to January 26, 2017. Thereafter, the parties filed their Joint Stipulation of Facts and Issues on February 15, 2017, 31 which was approved by the Court in the Resolution dated February 22, 2017. 32 The Court issued the Pre-Trial Order on March 20, 2017. 33 Trial of the case then ensued. 22 Docket- Vol. I, Notice of Pre-Trial Conference, pp. 279 to 280. 23 Docket- Vol. I, pp. 342 to 345. 24 Docket- Vol. I, p. 347. 25 Docket- Vol. I, pp. 283 to 286. 26 Docket- Vol. I, p. 288. 27 Docket- Vol. I, pp. 364 to 366. 28 Docket- Vol. I, pp. 493 to 500. 29 Docket- Vol. II, pp. 504 to 517. 30 Petitioner filed a "Motion to Defer Pre-Trial Conference on October 25,2016 31 Docket- Vol. II, pp. 762 to 772. 32 Docket- Vol. II, pp. 779. 33 Docket- Vol. Ill, pp. 1050 to 1065. ~

DECISION CTA Case No. 9301 Petitioner presented its witnesses, namely: Darren Evan S. Santos-Ramos34 and ICPA Ma. Milagros F. Padernal35 who was commissioned on April 20, 2017. 36 Upon conclusion of its presentation of evidence, petitioner filed its Formal Offer of Evidence on December 11, 2017. 37 In the Resolution dated February 12, 2018, 38 the Court resolved to admit petitioner's evidence except Exhibits "P-101-C-9", "P-130-1" to "P-130-80" , "P-130-81" to "P-130-233" ' and "P-130-234" to "P-130- 395", for not being found in the records, as well as Exhibits "P-136" and "P-138", for failure to correspond to their description in the said Formal Offer of Evidence. On March 6, 2018, petitioner filed a Motion for Reconsideration (With Motion for Additional Time to Submit Missing /CPA Exhibits and Supplemental Offer of Evidence), 39 praying that this Court grant: (1) the ICPA a period of ten (10) days within which to submit a CD/DVD/USB containing Exhibits "P-101-C-9", "P-130-1" to "P-130- 8u0p"o'n"Psu-1b3m0i-s8s1io" nt,o "P-130-233" and "P-130-235" to "P-130-395" and admit the sam' e for the purposes for which they' are being offered; and (2) petitioner's Supplemental Offer of Evidence (as embodied in the said Motion) and admit Exhibits "P-136" and "P-137". During the hearing held on April 17, 2018,40 the Court partially granted the Motion for Reconsideration of petitioner, thereby allowing the latter's lead counsel, Atty. Pierre Martin Reyes, to submit within ten (1 0) days from the said date or until April 27, 2018 the exhibits mentioned in the said Motion. Thereafter, respondent presented his lone witness, Revenue Officer Carolyn V. Mendoza. On April 24, 2018, respondent filed his Formal Offer of Evidence, 41 while petitioner filed a Submission, submitting to the Court the pertinent Exhibits on April 27, 2018. 34 Docket- Vol. II, pp. 537 to 575; and Minutes of the hearing held on March 21, 2017, and Order dated March 21,2017, Docket- Vol. III, pp. 1066 to 1075. 35 Docket- Vol. III, pp. 1224 to 1256; and Minutes of the hearing held on June 27, 2017, and Order dated June 27, 2017, Docket- Vol. III, pp. 1258 to 1263. 36 Docket - Vol. III, pp. 1109 to 1111. Refer also to her Oath of Commission, Docket - Vol. III, p. 1108. 37 Docket- Vol. III, pp. 1309 to 1342. 38 Docket- Vol. III, pp. 1523 to 1525. 39 Docket- Vol. III, pp. 1528 to 1533. 40 Order dated April17, 2018, Docket- Vol. III, pp. 1539 to 1540. 41 Docket- Vol. III, pp. 1542 to 1555. ~

DECISION CTA Case No. 9301 In the Resolution dated June 6, 2018,42 the Court admitted: (1) taPonedt"iPtio-(12n3)e0ra-'sl2l 3Eo3xf"h' ri"ebPsit-ps1o3"nP0d--21e30n51t's"-CtoE-9x""hP' i-b"1Pit3s-01. -3309I-n51""t'htaoen"dsPa-"1Pm3-e103-8R60"e"sa'on"ldPut-"i1oP3n-01, -38t8h1"e"�' Court directed both parties to file their respective memoranda within thirty (30) days from receipt hereof. Respondent filed his Memorandum on August 14, 2018;43 while petitioner filed its Memorandum on August 28, 2018. 44 In the Resolution dated September 3, 2018,45 the case was submitted for decision. Hence, this Decision. THE ISSUES The issues for this Court's resolution are as follows: "1. Whether the Honorable Court has jurisdiction over the instant petition; and 2. Whether Petitioner is liable to pay the aggregate amount of One Billion Fifty-One Million Five Hundred Sixty-Four Thousand Two Hundred Forty-Four and 84/100 (P1,051,564,244.84) for deficiency IT, VAT, and EWT for taxable year 2010, as well as 25�/o surcharge, 20% deficiency and delinquency interest pursuant to Sections 248 and 249 of the National Internal Revenue Code of 1997."46 Petitioner's arguments: Petitioner argues that the Court has jurisdiction to take cognizance of the instant Petition for Review, while the assessment is allegedly void for lack of authority to conduct the same. According to petitioner, the period to assess petitioner's internal revenue taxes for TY 2010 has already prescribed; the waivers did not validly extend the original three-year prescriptive period to assess petitioner's 42 Docket- Vol. III, pp. 1574 to 1576. 43 Docket- Vol. III, pp. 1597 to 1627. 44 Docket- Vol. III, pp. 1631 to 1693. 45 Docket- Vol. III, p. 1696. 46 Pre-Trial Order dated March 20, 2017, Docket- Vol. Ill, pp. 1050 to 1065, at pp. 1052 to 1053. ~

DECISION CTA Case No. 9301 internal revenue taxes for TY 201 0; the deficiency tax assessments lack factual and legal bases; and the amount held in trust by petitioner for its merchant partners, earmarked to fund the cost of redeemed points under the SM Advantage Card (SMAC) Loyalty Program is not income, and accordingly, the same is not subject to income tax, VAT, and EWT. Moreover, petitioner disputes respondent's findings as follows: 1. Unaccounted AR - Deferred loyalty points and unaccounted receipts are not income or revenue accounts. 2. Undeclared sales per customer's data represents timing differences due to the difference in the accounting methods used by the petitioner and its customers. 3. Mere difference in sales per SLS and income per BIR Form 2307 does not mean that there is under declaration of sales, considering the two reportorial requirements are governed by two different regulations. 4. The assessments resulting from the comparison of the supposed third-party information (SLS) and petitioner's report (SLP) or any other information are mere naked assessments or has no leg to stand on, absent the sworn statements/declarations from the said third-party sources. 5. The disallowed expenses (Marketing Points Issued) pertains to marketing expenses of the petitioner, which arose from its redemption thru A-pod and 5x mastercard promotions, and are properly supported by journal entry screenshots recorded in the books. As such, these are allowable deductions for income tax purposes. Lastly, petitioner concludes that it is not liable for deficiency taxes forTY 2010 in the amount of P1 ,051 ,564, 124.52. ~

DECISION CTA Case No. 9301 Respondent's counter-arguments: Respondent counter-argues that the Honorable Court has no jurisdiction over the instant petition for being filed out of time. Assuming without necessarily conceding that the Court has jurisdiction over the instant Petition, respondent maintains that the assessment is valid and issued pursuant to a valid LOA and that his right to assess the petitioner for the TY 2010 did not prescribe. Allegedly, petitioner is estopped from assailing the validity of the waivers it executed and that petitioner is liable for the corresponding deficiency interest on the deficiency VAT and EWT assessments. According to respondent, petitioner is liable for deficiency income tax in the total amount of P678,366,631.61 and the corresponding interest and compromise penalty. In support of this argument, respondent alleges that petitioner is liable for deficiency income tax due to undeclared income from unaccounted Accounts Receivable Deferred Loyalty points in the amount of P757,969,664.70; from movements of SM Advantage Points earned and redeemed in the amount of P266,489,356.35; from undeclared sales per customer's data in the amount of P2,903,355.73; from gross profit from undeclared purchases in the amount of P8,222,969.32; from disallowed expenses (Marketing Points) in the amount of P18,741,247.32; and from disallowed expenses for non- withholding of tax in the amount ofP18,741,247.32. As regards petitioner's supposed deficiency VAT in the total amount of P364, 126,174.44 and the corresponding interest and compromise penalty, petitioner's liability allegedly arises from: (1) unaccounted AR Deferred Loyalty Points, (2) unaccounted receipts, (3) undeclared sales per customer's data, (4) undeclared sales (SLS vs. SAWT), and (5) gross sales attributable to undeclared purchases; from discrepancy in income per Income Tax Return vs. VAT Return in the amount of P37, 730,006.20; from deferred loyalty points increase for the year in the amount of P405,855,217.00; and from disallowed creditable input tax in the amount of P892, 745.16. Respondent also asserts that petitioner is liable for deficiency EWT in the total amount of P9,071 ,438. 79 and the corresponding interest and compromise penalty. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue ~

DECISION CTA Case No. 9301 examiner and approved by his superior officers will allegedly not be disturbed; and that all presumptions are in favor of the correctness of tax assessments. THE COURT'S RULING We find merit in the instant Petition for Review. This Court has jurisdiction to entertain the present appeal. Respondent posits that since petitioner received the denial of its administrative protest on November 12, 2015, it had only until December 12, 2015 within which to file a petition for review before this Court. Considering that the instant Petition for Review was only filed on March 18, 2016, the same was filed out of time. We disagree. Section 3.1.4 of Revenue Regulations (RR) No. 12-99,47 as amended by RR No. 18-2013,48 provides, in part, as follows: "SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. - XXX XXX XXX 3.1.4 Disputed Assessment.- xxx XXX XXX XXX If the protest is denied, in whole or in part, by the Commissioner's duly authorized representative, the taxpayer may either: (i) appeal to the Court of Tax Appeals (CTA) within thirty (30) days from date of receipt of the said decision; or (ii) elevate his protest through 47 SUBJECT Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of the National Internal Revenue Taxes, Civil Penalties and Interest and the Extra-Judicial Settlement of a Taxpayer's Criminal Violation of the Code Through Payment of a Suggested Compromise Penalty. 48 SUBJECT: Amending Certain Sections of Revenue Regulations No. 12-99 Relative to the Due Process Requirement in the Issuance of a Deficiency Tax Assessment. ~

DECISION CTA Case No. 9301 request for reconsideration to the Commissioner within thirty (30) days from date of receipt of the said decision. No request for reinvestigation shall be allowed in administrative appeal and only issues raised in the decision of the Commissioner's duly authorized representative shall be entertained by the Commissioner. XXX XXX XXX If the protest or administrative appeal is not acted upon by the Commissioner within one hundred eighty (180) days counted from the date of filing of the protest, the taxpayer may either: (i) appeal to the CTA within thirty (30) days from after the expiration of the one hundred eighty (180)-day period; or (ii) await the final decision of the Commissioner on the disputed assessment and appeal such final decision to the CTA within thirty (30) days after the receipt of a copy of such decision." (Emphases and underscoring supplied) Based on the foregoing provisions, when a taxpayer's protest is denied by respondent's duly authorized representative, in whole or in part, the remedy for the taxpayer is either: (i) to appeal to this Court within thirty (30) days from the date of receipt of the said representative's decision; or (ii) to elevate his protest "through [a] request for reconsideration" to respondent within the same thirty (30)- day period. The latter remedy is referred to as an "administrative appeal". In case such administrative appeal is not acted upon by respondent within one hundred eighty (180) days from the filing of the protest, the concerned taxpayer may either: (i) appeal to this Court within thirty (30) days from after the expiration of the said 180-day period; or (ii) await the final decision of respondent on the disputed assessment, and appeal such final decision to this Court within thirty (30) days from receipt of a copy thereof. In this case, it is undisputed that petitioner filed its protest letter to the FLO/FAN issued by OIC-ACIR Nestor S. Valeroso on November 6, 2014.49 On November 12, 2015, petitioner received the FDDA dated November 9, 2015 issued by the same OIC-ACIR Nestor S. Valeroso, 50 denying, in part, petitioner's protest. Within thirty (30) days from such date of receipt or on December 14, 2015, petitioner 49 Exhibit "P-7", Docket- Vol. III, pp. 1412 to 1465. 50 Exhibit "P-8-1 ", Docket- Vol. III, p. 1466. ~

DECISION CTA Case No. 9301 filed its Motion for Reconsideration dated December 12, 2015 with the office of respondent. 51 Subsequently, petitioner received, on February 17, 2016, the letter dated February 11, 2016 issued by respondent himself, 52 denying petitioner's Motion for Reconsideration. Thereafter, petitioner filed the instant Petition for Review on March 18,2016. As already shown, when the subject protest was denied, in part, by respondent's duly authorized representative, OIC-ACIR Nestor S. Valeroso, through the FDDA dated November 9, 2015, petitioner chose the administrative appeal provided under the aforesaid Regulations, or specifically, elevated its protest, through a request/motion for reconsideration, to respondent within thirty (30) days from receipt thereof. Petitioner awaited the decision of respondent, and when such request/motion for reconsideration was denied by the latter in the said letter dated February 11, 2016, petitioner then filed the instant Petition for Review, within thirty (30) days from receipt thereof. Considering that petitioner's actions are consistent with the remedies provided under the aforequoted Section 3.1.4 of RR No. 12-99, as amended by RR No. 18-2013, the instant Petition for Review was timely filed. Thus, this Court is vested with jurisdiction to entertain the same. Nevertheless, citing the case of Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue53 ("RCBC case"), respondent avers that the thirty (30)-day period to appeal to this Court is not merely directory but mandatory and it is beyond the power of the courts to extend the same. Relative to the said view, respondent invokes the ruling of the Supreme Court in Fishwealth Canning Corporation vs. Commissioner of Internal Revenue54 ("Fishwealth Canning case") that a motion for reconsideration of the denial of the administrative protest does not toll the 30-day period to appeal to this Court. Respondent is clearly in error. His erroneous averment lies on the supposition that in the said cases (i.e., the RCBC and Fishwealth Canning cases), the thirty (30)-day mandatory appeal period was held to be reckoned from the date of receipt of the decision of respondent's duly authorized representative. To be clear, the said two cases are to the effect that the reckoning of the said period is 51 Exhibit "P-9", Docket- Vol. III, pp. 1476 to 1508; and BIR Records- Folder No. 3, pp. 183 to 215. 52 Exhibit "P-1 0-1 ", Docket- Vol. III, p. 1509. 53 G.R. No. 168498, April24, 2007. 54 G.R. No. 179343, January 21,2010. ~

DECISION CTA Case No. 9301 from the date of receipt by the taxpayer of the decision of respondent or from the expiration of the 180-day period, due to the inaction of respondent. In the RCBC case, the Supreme Court held: "... it is clear that the jurisdiction of the Court of Tax Appeals has been expanded to include not only decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The decisions, rulings or inaction of the Commissioner are necessary in order to vest the Court of Tax Appeals with jurisdiction to entertain the appeal, provided it is filed within 30 days after receipt of such decision or ruling, or within 30 days after the expiration of the 180-day period fixed by law for the Commissioner to act on the disputed assessments. This 30-day period within which to file an appeal is jurisdictional and failure to comply therewith would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessments. Such period is not merely directory but mandatory and it is beyond the power of the courts to extend the same." (Emphasis and underscoring supplied) Clearly from the foregoing, what was held to be mandatory and jurisdictional is the 30-day period reckoned from the date of receipt by the taxpayer of the respondent's decision or from the expiration of the 180-day period of inaction by respondent. In the same vein, in the Fish wealth Canning case, the Supreme Court ruled as follows: "In the case at bar, petitioner's administrative protest was denied by Final Decision on Disputed Assessment dated August 2, 2005 issued by respondent and which petitioner received on August 4, 2005. Under the above- quoted Section 228 of the 1997 Tax Code, petitioner had 30 days to appeal respondent's denial of its protest to the CTA. Since petitioner received the denial of its administrative protest on August 4, 2005, it had until September 3, 2005 to file a petition for review before ~

DECISION CTA Case No. 9301 the CTA Division. It filed one, however, on October 20, 2005, hence, it was filed out of time. For a motion for reconsideration of the denial of the administrative protest does not toll the 30-day period to appeal to the CTA." (Emphasis supplied) It is likewise clear from the foregoing pronouncements that the reckoning of the same 30-day mandatory period to appeal is from respondent's decision, ruling, or inaction. It is nowhere indicated that such 30-day period should be reckoned from the decision, ruling or inaction of respondent's duly authorized representative. Relative thereto, it must be emphasized that the ruling in the Fishwealth Canning case that a motion for reconsideration does not toll the said 30-day period to appeal to this Court, clearly refers to the motion for reconsideration of respondent's "denial of the administrative protest". It does not, in any way, pertain to the denial of the administrative protest by the duly authorized representative of respondent. Thus, even when petitioner filed a Motion for Reconsideration of OIC-ACIR Nestor S. Valeroso's FDDA dated November 9, 2015 before respondent, the same is of no moment. After all, as already pointed out, the filing of such Motion is consistent, and in accordance, with the aforequoted Section 3.1.4 of RR No. 12-99, as amended by RR No. 18-2013. In any event, respondent cannot validly invoke the rulings in the RCBC and Fishwealth Canning cases to support its stance that the instant Petition for Review was not timely filed. Lastly, respondent contends that petitioner cannot find solace on its alleged reliance on subordinate legislation; and that administrative rules and regulations cannot override the statute it seeks to implement. In other words, what respondent is actually saying is that petitioner cannot validly rely on the aforequoted Section 3.1.4 of RR No. 12-99, as amended by RR No. 18-2013, for being contrary to law. We, however, disagree with respondent. In Chevron Philippines, Inc. (Formerly Caltex Philippines, Inc.) vs. Bases Conversion Development Authority, et a/., 55 the Supreme Court said: 55 G.R. No. 173863, September 15,2010. ~

DECISION CTA Case No. 9301 "Administrative issuances have the force and effect of law. They benefit from the same presumption of validity and constitutionality enjoyed by statutes. These two precepts place a heavy burden upon any party assailing governmental regulations. Petitioner's plain allegations are simply not enough to overcome the presumption of validity and reasonableness of the subject imposition." (Emphasis supplied) Based on the foregoing jurisprudential pronouncements, RR Nos. 12-99 and RR No. 18-2013 have the force and effect of law, and are presumed valid and constitutional. Thus, a heavy burden is placed on any party (including respondent) assailing the same. It is noted that respondent merely alleged that RR Nos. 12-99 and RR No. 18-2013 have superseded the statute they seek to implement. He was not however able to corroborate the said allegation. Thus, such plain allegation cannot overcome the presumption of validity accorded to the said revenue regulations. Correspondingly, respondent's contention must fail. In sum, in view of the timely filing of the instant Petition for Review, this Court has jurisdiction to entertain the same. The revenue officers, who conducted the audit of petitioner, were not authorized to examine the latter's books of accounts and other records. Thus, the subject tax assessments are void. In Medicard Philippines, Inc. vs. Commissioner of Internal Revenue, ('Medicard case"), 6 the Supreme Court ruled as follows, to 5 wit: "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 56 G.R. No. 222743, April 5, 2017. ~

DECISION CTA Case No. 9301 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: SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. - (A) Examination of Return 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 file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer. x x x x (Emphasis and underlining ours) 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 of Internal Revenue v. Sony Philippines, Inc., 57 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 57 649 Phil. 519 (20 10). ~

DECISION CTA Case No. 9301 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) XXX XXX XXX 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 records but only on whether a taxpayer is being subject to examination. XXX XXX XXX 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 in inescapably void." (Emphases and underscoring supplied) Based on the foregoing jurisprudential pronouncements, revenue officers must be authorized by a valid LOA in order for them to lawfully examine the books of accounts and other accounting records of a taxpayer. In the absence of said LOA, the tax assessments issued by the BIR against such taxpayer shall be void. In the instant case, records show that it was Revenue Officers Reynoso Bravo, William Sundiam, Miguel Sulit, Meliza Wepee, Maribel Serafica I GS Wilfreda Reyes, who were authorized by then OIC-ACIR Alfredo V. Misajon to examine the books of account and other accounting records of petitioner for all internal revenue taxes for ~

DECISION CTA Case No. 9301 taxable year 2010 under LOA No. LOA-116-2011-00000119 dated September 23, 2011.58 However, it was not the said revenue officers who recommended the issuance of the tax assessments against petitioner. In the Memorandum dated September 5, 2014 addressed to the OIC-ACIR, 59 the revenue officers, who recommended the issuance of the FLO/FAN against petitioner, supposedly by virtue of the same LOA No. LOA-116-2011-00000119 dated September 23, 2011, are Reynante P. Martirez; Rosario A. Arriola; and Carolyn V. Mendoza, as noted by GS Rolando M. Balbido. Clearly, the revenue officers who conducted the audit or investigation of petitioner are not authorized by appropriate LOA as required by law and jurisprudence. Correspondingly, the subject tax assessments, which came about as a result of the said revenue officers' audit or investigation of petitioner's books of accounts and accounting records for taxable year 2010, are inescapably void. Respondent, nevertheless, argues that Section 17 of the NIRC of 1997 provides the transfer or reshuffling of revenue officers, which means that, in natural occurrence of things, the revenue officer indicated in the LOA need not be the one to complete the audit; that there will be instances where the revenue officers would either retire, be reassigned, be taken ill, or die, prior to the completion of the audit investigation; that an LOA is not an "authorization letter" of the revenue officers; and that there is no requirement in the law that revenue officers must be identified in the LOA to have authority. We disagree with respondent. For easy reference, Section 17 of the NIRC of 1997 provides as follows: "SEC. 17. Assignment of Internal Revenue Officers and Other Employees to Other Duties. - The Commissioner may, subject to the provisions of Section 16 and the laws on civil service, as well as the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, assign or reassign internal revenue officers and employees of the Bureau of Internal Revenue, without change in their official rank and salary, to other or special duties connected with the enforcement or administration of the 58 Exhibit "R-3", BIR Records- Folder No. 1, p. 526. 59 Exhibit "R-15", BIR Records- Folder No. 1, pp. 591 to 603. ~

DECISION CTA Case No. 9301 revenue laws as the exigencies of the service may require: Provided, That internal revenue officers assigned to perform assessment or collection functions shall not remain in the same assignment for more than three (3) years: Provided, further, That assignment of internal revenue officers and employees of the Bureau to special duties shall not exceed one (1) year." A careful reading of the foregoing provision reveals that the NIRC of 1997 grants respondent the power to assign or re-assign internal revenue officers and employees, subject to certain limitations, one of which is that internal revenue officers assigned to perform assessment or collection functions shall not remain in the same assignment for more than three (3) years. However, nothing in the said provision states that the required LOA can be dispensed with; neither does it provide an exemption to the legal requirement that a revenue officer must be authorized, through an LOA, to perform his/her assessment or collection functions. It must be emphasized that the issue here is not whether a revenue officer can be re-assigned to another BIR office, without completing the audit being made on a taxpayer. Rather, it is whether or not the revenue officers who conducted the investigation of the taxpayer are authorized to do so, as required by law and jurisprudence. The Court recognizes that there can be instances where a revenue officer, previously authorized through an LOA, may not be able to complete the examination of the concerned taxpayer, by reason of retirement, reassignment, illness, or death, of the said revenue officer. But what is not acceptable to this Court is respondent's proposition that because of such instances, there can already be an excuse not to issue an LOA. As already intimated, the said proposition finds no basis in law and jurisprudence. To be sure, despite the presence of any of the above-enumerated instances, respondent or his/her duly authorized representative can still legally issue another LOA in favor of the revenue officers who are intended to replace the one(s) previously authorized. In other words, there is nothing in the law which prohibits the issuance of a subsequent LOA authorizing another revenue officer, or new set of revenue officers, to continue the examination of books of accounts and other accounting records of the concerned taxpayer. ~

DECISION CTA Case No. 9301 Respondent cannot validly argue that only one LOA per taxable year can be issued to a taxpayer, pursuant to RMO No. 36-200060. It is true that under the said RMO No. 36-2000, the following provisions may be found, to wit: "Ill. AUDIT POLICIES AND GUIDELINES XXX XXX XXX 4. The policy on the simultaneous investigation of all tax liabilities of the taxpayer for the same taxable year shall be followed. One LA61 be issued for each taxable year under audit to include all internal revenue tax liabilities of the taxpayer. Accordingly, the LA shall state the specific year under audit and the indication of 'unverified prior years' or similar statement in the LA shall not be allowed." (Emphasis supplied) However, the same RMO is explicit as to what it covers and excludes, to wit: "II. COVERAGE 1. The Office Audit Program shall cover the audit of tax returns of individual and corporate taxpayers, estates and trusts within the Region covering taxable years 1997, 1998 and 1999, XXX XXX XXX XXX 2. The following cases shall be excluded from the coverage of this Order: XXX XXX XXX 2.3 Taxpayers falling under the jurisdiction of Large Taxpayers Service, Excise Taxpayers Service and other 60 SUBJECT: Prescribing an Office Audit Program in the Assessment Division of Revenue Regional Offices. 61 That is, "Letter of Authority". ~

DECISION CTA Case No. 9301 Page51of53 taxpayers/industries covered by the Audit Program of the Enforcement Service; and XXX XXX xxx." (Emphasis supplied) Based on the foregoing provisions, RMO No. 36-2000 covers only taxable years 1997, 1998 and 1999, and does not include taxpayers falling under the jurisdiction of the Large Taxpayers Service of the BIR. Considering that the concerned TY is 2010, and that petitioner is a taxpayer falling under the Large Taxpayers Service of the BIR,62 RMO No. 36-2000 cannot be applied to the instant case. But even granting that the provision of RMO No. 36-2000 to the effect that only "one LOA can be issued" covers all taxpayers in all taxable years, without regard as to whether the authorized revenue officer(s) therein actually performed and finished the audit, the same is of no moment. This is simply because it would run counter to the aforequoted Section 6(A) of the NIRC of 1997, and the corresponding pronouncement of the Supreme Court in the Medicard case, which became a part of the legal system of the Philippines.53 As such, the said provision of RMO No. 36-2000 cannot be considered as valid, 64 and must not be adhered to, as it is not legally binding. Furthermore, We cannot subscribe to respondent's contention that the LOA is not an "authorization letter" of the revenue officers; and that there is no requirement in the law that revenue officers must be identified in the LOA to have authority. The said contention is contrary to the definition given in the Medicard case in that '1a]n LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions." The High Court continued: an LOA "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 62 Exhibit "P-3", Docket- Vol. III, pp. 1350 to 1351. 63 Judicial decisions applying or interpreting the laws or the Constitution shall form a part ofthe legal system ofthe Philippines. (Article 8, Civil Code ofthe Philippines) 64 Administrative or executive acts, orders or regulations shall be valid only when they are not contrary to the laws or the Constitution. [Article 7 (last paragraph), Civil Code of the Philippines] ~

DECISION CTA Case No. 9301 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." Thus, an LOA is, in fact, an authorization letter for the appropriate revenue officers assigned to perform assessment functions. It is so because the power to examine was not statutorily given to the said revenue officers, and for the latter to exercise such power, authority must be given to them by respondent or his duly authorized representative. Such being the case, it is perforce required that the revenue officers so authorized must be identified in the LOA. Without such authority to examine, the revenue officer cannot perform assessment functions. In sum, since the said revenue officers who completed the audit of petitioner forTY 2010, and who recommended the issuance of the subject tax assessments, were not authorized via an LOA, the said tax assessments are void. Finding that the subject tax assessments are void, for being issued for lack of authority to conduct an examination of petitioner's books of account and other accounting records for TY 2010, on the part of the concerned revenue officers, and thus, bear no valid fruit, 65 it becomes unnecessary to address the remaining stipulated issue and the other arguments raised by the parties in this case. WHEREFORE, in light of the foregoing considerations, the instant Petition for Review is GRANTED. Accordingly, the FDDA dated February 11, 2016 issued by respondent, finding petitioner liable for deficiency taxes, penalties and interest in relation to TY 2010 as follows: (1) income tax in the amount of P678,366,631.32; (2) VAT in the amount of P364, 126,054.41; and (3) EWT in the amount of P9,071 ,438. 79, or in the aggregate amount of P1 ,051 ,564, 124.52, inclusive of penalties, is REVERSED and SET ASIDE. SO ORDERED. ~ ER~.UY Associate Justice 65 Commissioner of Internal Revenue vs. Reyes, etseq., G.R. Nos. 159694 and 163581, January 27, 2006; Commissioner of Internal Revenue vs. BASF Coating+Jnks Phils., Inc., G.R. No. 198677, November 26, 2014; and Samar-! Electric Cooperative vs. Commissioner ofInternal Revenue, G.R. No. 193100, December 10, 2014.

DECISION GiLt; ~ .M~~~ li~ CTA Case No. 9301 Page 53 of 53 CIELITO N. MINDARO-GRULLA Associate Justice WE CONCUR: Presiding Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is 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's Division. ROMAN G. DEL ROSARIO Presiding Justice Chairperson, Special 1st Division