COMMISSIONER OF INTERNAL REVENUE v. MID-LAND QC REALTY CORPORATION

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ENBANC ********* COMMISSIONER OF INTERNAL CTA EB No. 1463 REVENUE, (CTA Case No. 8711) Petitioner, Present: -versus - DEL ROSARIO , P.J. , CASTANEDA, JR., BAUTISTA, UY, CASANOVA, FASON-VICTORINO, MINDARO-GRULLA, RINGPIS-LIBAN, and MANAHAN , JJ. MID-LAND QC REALTY Promulgated: CORPORATION, X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION UY, J.: Before the Court En Bane is a Petition for Review filed by Commissioner of Internal Revenue on June 13, 2016 against Mid- land QC Realty Corporation , praying for the reversal and setting aside of the Decision dated January 22 , 20161 and Resolution dated May 11 , 20162 , both rendered by the Second Division of this Court (Court in Division) in CTA Case No. 8711 , entitled "Mid-Land QC Realty Corporation, Petitioner, vs. Commissioner of Internal Revenue, Respondent", the dispositive portions of which respectively read : 1 EB Docket, pp. 18 to 45 ; Penned by Associate Justice Caesar A. Casanova, and concurred by Associate Justice Juani~o C. Castaneda, Jr. and retired Associate Justice Amelia R. Cotangco-Manalastas. 2 EB Docket, pp. 47 to 52; supra.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 2 of22 Decision dated Januar "WHEREFORE, pr mises considered, the Petition for Review is GRANTED. The Final Assessment Notice, Assessment Notice No. F-039-LNTF-07-VT-033 for Value- Added Tax, and Assess ent Notice No. F-039-LNTF-07- IT-033 for Income Tax f r the calendar year 2007, are declared NULL and VOID. Accordingly, the Warrant of Distraint and/or Levy for the amount of Eight Million Two Hundred Fifty Four Thou and Six Hundred Twelve Pesos and 29/100 (P8,254,6 2.29) is CANCELLED and deemed WITHDRAWN. SO ORDERED." "WHEREFORE, pr mises considered, respondent's Motion for Reconside ation, is DENIED for lack of merit. SO ORDERED." T Petitioner is the duly ppointed Commissioner of Internal Revenue, who holds office at he Bureau of Internal Revenue (SIR) National Office Building, Agha Road, Diliman, Quezon City. Respondent Mid-Land Q Realty Development Corporation is a corporation organized and exi ting under the laws of the Philippines with office address at #65 Bro dway Ave., New Manila, Quezon City 1112. It is a registered taxpay r with Taxpayer Identification Number (TIN) I Value-Added Tax (VA ) Registration No. 238-613-832-000 effective June 8, 2005, and w th SIR Certificate of Registration No. 3RC000030931 0 issued by IR Revenue District Office No. 39 (Quezon City). Respondent received a opy of the Letter Notice (LN) No. 039- TRS-07-00-00120 dated Marc 15, 2010 from the BIR, stating that a computerized matching was c nducted on information/data provided by the Details of Withholdin Agents/Payors and Payees/Income Recipients Records of withholding agent, Fresh N Famous Food, Inc. against the declaration of the respondent's income tax returns and VAT for 2007, and alleged tax eficiencies were found.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 3 of22 Subsequently, responde t received a follow-up letter from the BIR, informing the former of the discrepancy resulting from the Reconciliation of Listing as de lared in tax returns filed for calendar year (CY) 2007, instructing it o refute the validity of the findings of the BIR and to present do umentary evidence to reconcile the variances indicated in the LN o. 039-TRS-07-00-00120 dated March 15, 2010 as well as to settle th basic taxes. On May 18, 2011, espondent received a Preliminary Assessment Notice (PAN) ated March 15, 2011, assessing respondent for alleged deficiency income tax and VAT in the aggregate amount of P8,254,6 2.29, inclusive of interests, for the CY 2007. Thereafter, on July 6, 20 2, respondent received a First Notice Before Issuance of Warrant f Distraint and Levy dated June 21, 2012 which indicated that it ertained to Assessment No. F-039- LNTF-07-VT-033/2007 in the a ount of P8,254,612.29 for income tax and VAT for CY 2007. On July 26, 2012, resp ndent received a Final Notice Before Issuance of Warrant of Distrai t and Levy dated July 5, 2012 which indicated the same Assessme t No., in the same amount of taxes, and for the same CY. Respondent received, n August 23, 2013, a Warrant of Distraint and/or Levy, containing only its name and address, assessmenUDemand No. F-0 9-LNTF-07-VT-033/2007, date issued 05-03-12, kind of tax ITIVT, year 2007, amount P8,254,612.29, signed by Clavelina S. Nacar, ith all other blanks unfilled. On September 23, 2013, respondent filed a Petition for Review before the Court in Division. he case was docketed as CTA Case No. 8711. Petitioner filed his An wer on November 26, 2013, and interposed certain Special a d Affirmative Defenses, to wit: that contrary to respondent's cl im, both the Notice for Informal Conference and Final Assess ent Notice (FAN) were duly sent to and received by respondent; that the Court in Division has no jurisdiction over respondent's etition for Review, since the subject assessments already became final, demandable, and unappealable on account of respondent's fail re to file a protest to the Formal Letter of Demand and assessment n tices as mandated by Section 228 of

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 4 of22 the 1997 National Internal Re enue Code (NIRC), as amended, and Section 3.1.5 of Revenue R gulations (RR) No. 12-99; that the assessments have not yet pre cribed, since the same were issued on April 1, 2011 or within the thre (3) year period mandated by Section 203 of the 1997 NIRC, as a ended; that assuming arguendo that petitioner failed to issue the s bject assessments within the three (3) year period under the said Se ion 203, still, the government's right to assess respondent for deficien y income tax and VAT for taxable year 2007 in the total amount of 8,254,612.29 has not yet prescribed; that the income tax and VAT deficiencies for CY 2007 has factual basis; that well-settled is the rule that the tax assessments by tax examiners are presumed corre t and made in good faith; and that it is the taxpayer and not the BIR ho has the duty of proving otherwise. The case was set for pre trial conference on January 16, 2014. After the parties filed th ir Pre- Trial Briefs, they entered into a Joint Stipulation of Facts and Issues (JSFI). The Court in Division then issued the Pre-Trial Ord r, approving the JSFI, terminating the pre-trial, and setting the init al presentation of evidence for the respondent on February 26, 2 14. Respondent presented its witness, Ms. Angelina Salomon- Butac, who by way of Judicial Affidavit, testified that during the time she was retained as responde t's External Auditor, she received from petitioner the following: (1) L tter Notice (LN); (2) Follow-up Letter, (3) Preliminary Assessment; (4) First Notice before Issuance of Warrant of Distraint and Lev ; (5) Final Notice before Issuance of Warrant of Distraint and Lev ; and (6) Warrant of Distraint and/or Levy. However, she denie receipt of the Notice for Informal Conference and Formal Lette of Demand and Assessment Notice. She then filed with petitioner t e letter dated July 20, 2012, protesting the assessment because it us d as basis the Details of Withholding Agents/Payers And Payees/In ome Recipients Records of Fresh N' Famous Foods, Inc. ("Chowki g") which made erroneous reports on ATC WC 158 in the amount o P1 0,294,245.00 and ATC WC 120 in the amount of P467,462.00. Thereafter, respondent ubmitted its Formal Offer of Evidence on March 7, 2014, offering E hibits "A" to "R", with sub-markings. The Court in Division issued the Resolution dated April 15, 2014, admitting all exhibits, except Exhibits "M", "P", and "Q". In the Resolution dated May 20, 2 14, the Court in Division eventually admitted Exhibits "P" and "Q", hile Exhibit "M" was still denied.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 5 of22 On the other hand, p titioner presented his lone witness, Revenue Officer (RO) Cristy E. Rejuso, who testified by way of Judicial Affidavit, that she wa then a member of the LN Task Force assigned to investigate respo dent's discrepancy/ies on income tax and VAT for taxable year 20 7 per LN No. 039-TRS-07-00-00120. The said LN was based on D tails of Withholding Agents/Payers and Payees/Income Recipients Records against respondent's declarations per income tax a d VAT for the year 2007. The Follow- Up Letter dated May 18, 201 and a Notice for Informal Conference with Registry Receipt dated/p sted November 25, 2010 were issued to respondent. She then prep red and submited her Audit Report on VAT and income tax, and a M morandum Report finding respondent liable for deficiency income o P5,857,888.41 and deficiency VAT of P2,396, 723.88. Thereafter, t e PAN with Details of Discrepancies dated March 15, 2011 and F N with Details of Discrepancies dated April 1, 2011 were issued to re pendent. On July 7, 2014, petitio er filed his Formal Offer of Evidence, consisting of Exhibits "R-1" to' R-14-A" which were all admitted by the Court in Division in the Resolu ion dated August 14, 2014. In rebuttal, respondent resented Ms. Clarissa R. Hornilla, Tax Manager of Jollibee Worldwid Services who identified the Letter of Fresh and Famous Foods, In . to respondent dated July 11, 2012. Respondent's second rebuttal witness, Assistant Regional Director of Revenue Region No. 9, Cl velina Sim Nacar, testified on the issuance of the Warrant of Dis raint and/or Levy. Respondent's Supplem ntal Formal Offer of Evidence, offering Exhibit "U-Rebuttal", was dmitted in the Court in Division's Resolution dated October 22, 014. The case was then sub itted for decision on January 23, 2015, after the Memorandum to the respondent and petitioner's Memorandum were filed on ovember 20, 2014 and January 20, 2015, respectively. In the assailed Decision,3 respondent's Petition for Review was granted by the Court in Divis on, and the FAN, Assessment Notice No. F-039-LNTF-07-VT-033 f r VAT, and Assessment Notice No. F- 039-LNTF-07-IT-033 for inco e tax for CY 2007 were declared null and void. As a consequence, he Warrant of Distraint and/or Levy for 3 EB Docket, pp. to; Division Docket ( TA Case No. 8711), pp. 326 to 353.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 6 of22 the amount of P8,254,612.2 was cancelled and withdrawn by the Court in Division Petitioner filed its Motio for Reconsideration on February 9, 2016. 4 On May 11, 2016, the curt in Division rendered the assailed Resolution, 5 denying petitione 's Motion for Reconsideration for lack of merit, and ruled as follows: 1. There was lack of due p ocess in the issuance of assessment notices, and thus, the Wc rrant of Distraint and/or Levy is invalid and unenforceable; 2. Even assuming both P N and FAN were duly served upon respondent, the assessm nt notices would still be cancelled for lack of factual basis. Thereafter, on May 27, 2016, petitioner filed before the Court En Bane a Motion For Extensi n of Time (To file Petition for Review),6 praying for a period of fifteen (15) days from May 28, 2016, within which to file his Petition for Re iew. The Court En Bane th n granted petitioner a final and non- extendible period of fifteen (1 ) days from May 28, 2016 or until June 12, 2016, within which to filet e said Petition for Review. 7 On June 13, 2016, filed the instant Petition for Review. 8 Subsequently, in the R solution dated August 1, 2016,9 the Court En Bane ordered respo dent to file its Comment to the instant Petition for Review ten (10) da s from receipt thereof. On August 24, 2016, lespondent filed its Comment to the instant Petition for Review. 10 ] I 4 Division Docket (CTA Case No. 8711), pp. 356 to 363. 5 EB Docket, pp. 47 to 52; Division D cket (CTA Case No. 8711), pp. 371 to 376. 6 EB Docket, pp. 1 to 3. 7 Minute Resolution dated June 1, 201 , EB Docket, p. 4. 8 EB Docket, pp. 5 to 15. 9 EB Docket, pp. 58 to 59. 10 EB Docket, pp. 60 to 62.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 7 of22 In the Resolution dated September 15, 2016, 11 the Court En Bane gave due course to the in tant Petition for Review, and directed the parties to submit their resp ctive memorandum. Respondent filed its M morandum on October 19, 2016. 12 Petitioner, however, failed to fil his Memorandum. 13 On December 16, 20 6, the instant case was deemed submitted for decision. 14 I Hence, this Decision. I ASSIGNM~NT OF ERRORS r Petitioner assigns the foul wing errors supposedly committed by the Court in Division, to wit: "WITH ALL DUE RESPE T, THE DEFICIENCY INCOME TAX AND VAT ASSESS ENTS FOR THE YEAR 2007 ARE ALREADY FINAL, EXECUTORY, AND DEMANDABLE WITH ALL DUE RESPE T, THE SECOND DIVISION OF THE HONORABLE COURT ERRED IN HOLDING THAT THERE WAS LACK F DUE PROCESS IN THE ISSUANCE OF ASSESS ENT NOTICES WITH ALL DUE RESPE T, THE SECOND DIVISION OF THE HONORABLE COURT ERRED IN HOLDING THAT THE ASSESSMENTS LA K FACTUAL BASIS". 15 Petitioner's arguments: Petitioner avers that t e deficiency income tax and VAT assessments for the year 20 7 are already final, executory, and demandable. He argues that ased on Section 228 of the NIRC of 1997, as amended, and Sectio 3.1.5 of RR No. 12-99, respondent is I 11 EB Docket, pp. 64 to 65. I 12 EB Docket, pp. 66 to 69. I 13 Records Verification dated Novembe~ 23, 2017 issued by the Judicial Records Division ofthis Court, EB Docket, p. 70. 14 Resolution dated December 16, 2016, EB Docket, pp. 72 to 73. 15 EB Docket, pp. 7 to 8.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 8 of22 required to file its protest against the FLO and Assessment Notices within thirty (30) days from th date of receipt thereof. According to petitioner, since the income ta and VAT assessments become final and unappealable by respond nt's default as regards protesting the validity of the said assessme ts, there is no reason why petitioner cannot continue with the col ection of the said deficiency taxes. Petitioner is likewise of the view that any objection against the assessment should have been pursued following the avenue paved in Section 228 of the NIRC of 19 7, as amended. Furthermore, petitioner c ntends that there was no lack of due process in the issuance of as essment notices, since the Notice of Informal Conference and FA with Details of Discrepancies were both validly served to respond nt. Finally, petitioner claims that as early as 2005, assessments based on third party information was already sanctioned by Revenue Memorandum Order (RMO) N . 32-2005; and that this was based on the returns or declarations file by third parties to which respondent had previous transactions, an the latter failed to disclose or declare with the BIR by underdeclarati n or not filing any return. Respondent's counter-argu Respondent contends th t the issues raised in the Petition for Review have already been sufficiently passed upon and fully discussed in the assailed De ision or Resolution of the Motion for Reconsideration. According o respondent, petitioner's allegations that the deficiency tax asse sments in question were issued in accordance with law and ere already final, executory, and demandable, and that there as factual basis for the questioned assessments, are both bereft f merit. ~N THE COURT BANC'S RULING R~view The instant Petition for lacks merit. I ~ue There was indeed lack of ~- process. Petitioner insists that the subject tax assessments have already attained finality, in view of th failure of respondent to file a protest against the same. In conte ding with the finding of lack of due

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 9 of22 1 process, petitioner presupposts that the BIR has validly served to respondent the required Notic of Informal Conference and FAN with Details of Discrepancies. , We do not agree. Petiti ner failed to show that the BIR validly served on respondent the said notices. Thus, the subject tax assessments could not have ttained finality for violation of the due process requirement under the law and regulations. Section 228 of the NIRC f 1997 provides as follows: "SEC. 228. Protes ing of Assessment. - When the Commissioner or his dul authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findin s: xxx XXX XXX XXX The taxpayer shall be informed in writing the law and the facts on whi h the assessment is made; otherwise, the assess ent shall be void. Within a period to be prescribed by implementing rules and regulations, t e taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or hi duly authorized representative shall issue an assessme t based on his findings. Such assessment ay be protested administratively by filing a request for r consideration or reinvestigation within thirty (30) days fr m receipt of the assessment in such form and mann r as may be prescribed by implementing rules and r gulations. xxx. XXX XXX xxx." (Emphasis supplied) Relative thereto, Sectio 3 of RR No. 12-99,16 embodies the due process requirement i the issuance of a deficiency tax assessment. Said provision st tes in part the following: 16 SUBJECT: Implementing the Prov sion of the National Internal Revenue Code of 1997 Governing the R les of Assessment of National Internal Revenue Taxes, Civil Penalties a d Interest and the Extra-Judicial Settlement of a Taxpayer's Criminal iolation of the Code Through Payment of a Suggested Compromise enalty.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 10 of22 "SECTION 3. Du Process Requirement in the Issuance of Deficiency Tax Assessment.- 3.1 Mode of pr cedures in the issuance of a deficiency tax assessme t: 3.1.2 Notice for informal conference - The Revenue Officer who au ited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with h s findings that the taxpayer is liable for deficiency tax r taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigati n, the taxpayer shall be informed, in writing, b the Revenue District Office or by the Special lnvestig tion Division, as the case may be (in the case Reven e Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discre anc or discre ancies in the tax a er's ent of his internal revenue taxes for the ur os of 'Informal Conference' in order to afford the ta a er with an o ortunit to resent his side of the XXX XXX XXX. 3.1.4 Formal Lett r of Demand and Assessment Notice. - The formal I tter of demand and assessment notice shall be issued y the Commissioner or his duly authorized representativ . The letter of demand calling for payment of the taxpa er's deficiency tax or taxes shall state the facts, the I w, rules and regulations, or jurisprudence on whi h the assessment is based, otherwise, the formal le ter of demand and assessment notice shall be void (se illustration in ANNEX B hereof). The same shall be ent to the tax a er only by registered mail or by personal delivery. If sent by personal delivery, the axpayer or his duly authorized representative shall ac nowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; b) signature; (c) designation and authority to act for an in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and I (d) date of receipt thereof." (Emphases and undersc/ring supplied)

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 11 of22 It is an elementary rule nshrined in the 1987 Constitution that no person shall be deprived o property without due process of law. In balancing the scales betwe n the power of the State to tax and its inherent right to prosecute per eived transgressors of the law on one side, and the constitutional ri hts of a citizen to due process of law and the equal protection of th laws on the other, the scales must tilt in favor of the individual, for a itizen's right is amply protected by the Bill of Rights under the Constitution. Thus, while taxes are the lifeblood of the government, th power to tax has its limits, in spite of all its plenitude. 17 Even a We concede the inevitability and indispensability of taxation, i is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure.18 In other words, the pers asiveness of the right to due process reaches both substantial and rocedural rights and the failure of the Commissioner of Internal evenue to strictly comply with the requirements laid down by aw and its own rules is a denial of the taxpayer's right to due p ocess. 19 In this case, to prove th t the BIR has sent to respondent the required Notice of Informal onference and FAN with Details of Discrepancies, petitioner p esented, in his Formal Offer of Evidence, 20 inter alia, the folio ing Exhibits, to wit: Exhibit Registry Receipt ated/ Pur ose "R-5" posted 25 November 2010 To prove that the Notice for (page 182, CTA Informal Conference dated 24 "R-13" docket November 2010 was mailed and Registry Return Recei sent to res ondent . To prove that the FAN with Details of Discrepancies dated 1 April 2011 and Assessment Notices for deficiency VAT and income tax were sent to res ondent. ts. 17 Commissioner of Internal Revenue I Metro Star Superama, Inc., G.R. No. 185371, December 8, 2010 18 Commissioner ofInternal Revenue v . United Salvage and Towage (Phils.), Inc., G.R. No. 197515, July 2, 2014, citing Co missioner ofInternal Revenue vs. Algue, Inc., 241 Phil. 829, 836 (1988). 19 Refer to Commissioner of Internal Revenue vs. Metro Star Superama, Inc., supra, citing Tupas v. Court ofAppeals, G. . No. 89571, February 6, 1991. 20 Division Docket (CTA Case No. 871 ), pp. 273 to 276.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 12 of22 Parenthetically, the fore oing Exhibits of petitioner, as well as his other Exhibits, were admitted by the Court in Division in the Resolution dated August 14, 2014. 21 Nevertheless, the foregoing Exhibits failed to establish tha respondent was informed of the said Notice of Informal Conference nd FAN with Details of Discrepancies, especially considering that res ondent has denied the receipt thereof. In Commissioner of In ernal Revenue vs. GJM Philippines Manufacturing, lnc., 22 the Supr me Court held: I "If the taxpayer denies having received an assessment from the BIR, it then becomes incumbent upon the latter to prove y competent evidence that such notice was indeed recei ed by the addressee. Here, the onus probandi has shifted to the BIR to show by contrary evidence that [the t xpayer] indeed received the assessment in the due course of mail. It has been settled that while a m iled letter is deemed received by the addressee in t e course of the mail, this is merely a disputabl presumption subject to controversion, the dir ct denial of which shifts the burden to the sender o rove that the mailed letter was in fact received b the addressee. To prove the fact of mailing, it is essential to present the registry re eipt issued by the Bureau of Posts or the Re istr eturn card which would have been si ned b the tax a er or its authorized representative. And i said documents could not be located, the CIR should ave, at the very least, submitted to the Court a certificati n issued by the Bureau of Posts and any other pertine t document executed with its intervention. The Court does not put much credence to the self-serving docu entations made by the BIR personnel, especially if they are unsupported by substantial evidence e tablishing the fact of mailing. While it is true that an assessment is made when the notice is sent within th prescribed period, the release, mailing, or sending of t e same must still be clearly and satisfactorily proved. ere notations made without the taxpayer's intervention, notice or control, and without adequate supporting evi ence cannot suffice. Otherwise, the defenseless taxpayer would be unreasonably placed at the mercy of the re enue offices." (Emphases and 21 Division Docket (CTA Case No. 871 ), p. 283. 22 G.R. No. 202695, February 29, 2016.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 13 of22 underscoring supplied) Based on the foreg ing jurisprudential pronouncements, petitioner was able to prove t e fact of mailing as regards the Notice of Informal Conference by vi ue of Registry Receipt dated/posted November 25, 2010 (Exhibit 'R-5"). However, in view of the direct denial of respondent, 23 petitio er should have proven further that the said Notice of Informal Confefi nee was, in fact, received by the latter. Thus, for petitioner's failure to do so, it cannot be considered that the same Notice was received by espondent. As regards the sen ing of the FAN with Details of Discrepancies and the subjec Assessment Notices, while it may be true that petitioner was able t present the supposed Registry Return Receipt (Card) therefor (Exhi it "R-13"),24 the same is unsigned by respondent or its authorized r presentative, or by any person for that matter. Correspondingly, the aid FAN with Details of Discrepancies and the subject Assessment otices cannot even be considered to have been mailed. Hence, respondent ca not be considered to have failed to protest the subject tax asse sments and that these assessments have attained finality, since r spondent was not informed thereof, in violation of its right to due pro ess. Nevertheless, even gra ting that We find that there was no violation of respondent's right to due process, the subject tax assessments may still be str ck down on other grounds, as will be shown hereinafter. Respondent may still refut the findings of the BIR based o the information and data from hird party sources. Petitioner claims that as early as 2005, assessments based on third party information were al eady sanctioned by RMO No. 32-2005; and that this was based on t e returns or declarations filed by third parties to which respondent h d previous transactions, and the latter I 23 Refer to Exhibit "R", Division Docktt (CTA Case No. 8711), pp. 163 to 166, at p. 165 (Q&A, No.5) 24 Division Docket (CTA Case No. 8711 ), p. 277. I

DECISION CTA EB No. 1463 (CTA Case No. 8711) ~ith Page 14 of22 the BIR by underdeclaration or not failed to disclose or declare filing any return. I petiti~ner The contentions of are unmeritorious. I Without doubt, the s stem using third party information obtained by the BIR has alre dy been recognized by this Court and the Supreme Court. However, a finding of the BIR using the said system is not ironclad, and thus, may still be assailed or refuted by the concerned taxpayer. 1 I ! In Commissioner of l~ternal Revenue vs. Philippine Daily Inquirer, Inc. (PDI), 25 the Supr1me Court said: "Reconciliation of isting for Enforcement (RELIEF) System is an informatio technology tool used by the BIR to improve tax administr tion. The system was created- x x x to support t ird party information program and voluntary assessment program of the Bureau through the cross-referencing of t ird party information from the taxpayers' Summary ists of Sales and Purchases prescribed to be submi ted on a quarterly basis pursuant to Revenue Regulation Nos. 7-95, as amended by RR 13-97, RR 7-99 and RR 8-2002. In addition- [RELIEF] can det ct tax leaks by matching the data available under the Bur au's Integrated Tax System (ITS) with data gathered rom third party sources (i.e. Schedules of Sales nd Domestic Purchases, and Schedule of lmportati ns submitted by VAT taxpayers pursuant to RR No. 7- 5, as amended by RR Nos. 13- 97, 7-99 and 8-2002). Through the cons lidation and cross-referencing of third party information, iscrepancy reports on sales and purchases can be gen rated to uncover under declared income and over cl imed purchases (goods and services). Timely reco nition and accurate reporting of unregistered taxpayer and non-filers can be made possible. Using the RELIEF ystem, the BIR assessed POl for deficiency VAT and income tax amounting to P3, 154,775.57 and P1 ,525,230.00, respectively. 25 G.R. No. 213943, March 22, 2017.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 15 of22 According to the Bl , the computerized matching conducted by its office, sing information and data from third party sources aga nst POl's VAT returns for 2004 showed an underdeclar tion of domestic purchases from its suppliers amounting o P317, 705,610.52. POl denied the allegation. In ruling on the ca e, the CTA recognized that the BIR may obtain inform tion from third party sources in assessing taxpayers. The CTA also stated that the BIR enjoyed a presum tion of regularity in obtaining the information, and i s assessments are presumed correct and made in good faith. Indeed, the burden to controvert the assess ents made by the BIR lies with the taxpayer. In this case, the CTA rejected BIR's finding that POl und rdeclared its input tax and purchases. Accordin to the CTA POl was able to dis rove BIR's assess The general rule is that findings of fact of the CTA are not to be disturbed b this Court unless clearly shown to be unsupported by substantial evidence. Since by the very nature of its functi ns, the CTA has developed an expertise to resolve taxi sues, the Court will not set aside lightly the conclusions reached by them, unless there has been an abuse or im rovident exercise of authority." (Emphasis and undersc ring supplied) Moreover, in Medicard hilippines, Inc. vs. Commissioner of Internal Revenue, 26 the Supre e Court held: "With the adv nces in information and communication technol gy, the Bureau of Internal Revenue (BIR) promul ated RMO No. 30-2003 to lay down the policies and uidelines once its then incipient centralized Data War house (OW) becomes fully operational in conjunctio with its Reconciliation of Listing for Enforcement System (RELIEF System). This system can detect tax leaks by atching the data available under the SIR's Integrated Tax System (ITS) with data gathered from third-party sources Through the consolidation and cross-referencing of thi -party information, discrepancy reports on sales and urchases can be generated to uncover under declar d income and over claimed 26 G.R. No. 222743, April 5, 2017.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 16 of22 purchases of goods and ervices. XXX XXX XXX xxx under the REL EF System, the presumption that the tax returns are in accordance with law and are presumed correct since hese are filed under the penalty of perjury are easily reb tted and the taxpayer becomes instantly burdened to explain a purported discrepancy." (Emphas�s and underscoring supplied) In this case, respondent as able to refute the SIR's findings. We quote with approval he ruling of the Court in Division in the assailed Resolution dated Ma 11, 2016 as regards the SIR's findings on the supposed discrepancy between the income declared per tax returns by respondent and t e amount derived from the RELIEF system, to wit: "As records of the case, the assessments arose after a computerized matching was conducted using [petitio er]'s Reconciliation of Listing for Enforcement (RELIEF) nd Third Party Matching - SOC Data Program. There ppeared a discrepancy between the income declared p r tax returns and the amount derived from the syste generated document involving one of [respondent]'s withholding agents, Fresh N Famous Foods, Inc. (FN ). [Petitioner]'s witne s, Ms. Cristy E. Rejuso, testified that she was not involve in the generation of the 'Details of Withholding Agen Payers and Payees/Income Recipient Records', a atching document electronically generated from the Sl 's computer and used in the assessment. She furthe conceded that she did not verify the contents of the docu ent from FNF. Meanwhile, [resp ndent]'s witness Ms. Clarissa Hornilla, Tax Manager f Jollibee Worldwide Services, appeared in open court nd testified that they erroneously posted [respondent]'s n me in their Alpha List. The said witness, a third party, cr dibly testified and acknowledged their oversight while p eparing the FNF Alpha List of Suppliers which errone usly reflected purchases from [respondent] instead of urchases from another client of FNF.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 17 of22 Considering that th sole basis of assessment is an unverified and unauthe ticated document, without any support of externally ourced data, and considering further that the discr pancy between the amount appearing in [responde t]'s tax returns and Details of Withholding Agent/Payo s and Payees/Income Recipient Records was the re ult of an erroneous posting committed by [respon ent]'s withholding agent, the assessment must theref re fail." In any event, even if W assume further that respondent was not able to refute the SIR's fi dings, the subject tax assessments is still considered void. There was no Letter of Auth rity issued for the investigatio of the records of respon ent. Thus, the resulting tax assessments are void. A careful examination of the case a quo would disclose that no Letter of Authority (LOA) was issued against respondent for taxable year 2007. Thus, the subject t x assessments are void. The LN No. 039-TRS- 7-00-00120 dated March 15, 2010 issued to respondent will n t suffice. This is the ruling of the Supreme Court in the same ase of Medicard Philippines, Inc. vs. Commissioner of Internal Rev nue, 27 to wit: "The absence of an violated MEDICARD's to due process An LOA is the au hority given to the appropriate revenue officer assig ed to perform assessment functions. It empowers r enables said revenue officer to examine the books of account and other accounting records of a taxpayer f r the purpose of collecting the correct amount of tax. n LOA is premised on the fact that the examination of taxpayer who has already filed his tax returns is a pow r that statutorily belongs only to the CIR himself or his uly authorized representatives. Section 6 of the NIRC cl arly provides as follows: 27 Supra.

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 18 of22 SEC. 6. Power of the Commissioner to Make Assessments and Pn scribe Additional Requirements for Tax Administration nd Enforcement.- (A) Examinatio of Return and Determination of Tax Due. -After a return has been filed as required under the provisions f this Code, the Commissioner or his dul authorize re resentative may authorize the examination of a y taxpayer and the assessment of the correct amount of tax: Provided, however, That failure to file a turn shall not prevent the Commissioner from a thorizing the examination of any taxpayer. x x x x (Emphasi and underlining ours) Based on the afore quoted provision, it is clear that unless authorized by t e CIR himself or by his duly authorized representativ , through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. The circumstances contempl ted under Section 6 where the taxpayer may be a sessed through best-evidence obtainable, inventory-tak ng, or surveillance among others has nothing to do with th LOA. These are simply methods of examining the taxpay r in order to arrive at the correct amount of taxes. Henc , unless undertaken by the CIR himself or his duly aut orized representatives, other tax agents may not validly conduct any of these kinds of examinations without pri r authority. XXX XXX XXX In the case of Co missioner of Internal Revenue v. Sony Philippines, lnc., 28 t e Court said that: Clearly, there mus be a grant of authority before any revenue officer can conduct an examination or assessment. Equally i portant is that the revenue officer so authorized must not o beyond the authority given. In the absence of such n authori the assessment or examination is a nul it . (Emphasis and underlining ours) The Court cannot co vert the LN into the LOA required under the law even if t e same was issued by the CIR himself. Under RR No. 2-2002, LN is issued to a person found to have underr ported sales/receipts per data generated under the RE IEF system. Upon receipt of the 28 649 Phil. 519 (20 10).

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 19 of22 LN, a taxpayer may avail of the SIR's Voluntary Assessment and Abatem nt Program. If a taxpayer fails or refuses to avail of the s id program, the BIR may avail of administrative and crimi al remedies, particularly closure, criminal action, or audit and investigation. Since the law specifically requires an LOA and RMO No. 32-2005 requires the conversion f the previously issued LN to an LOA, the absence there f cannot be simply swept under the rug, as the CIR ould have it. In fact Revenue Memorandum Circular No. 40-2003 considers an LN as a notice of audit or inve tigation only for the purpose of disqualifying the taxpaye from amending his returns. The following diffe ences between an LOA and LN are crucial. First, an LOA addressed to a revenue officer is specifically r quired under the NIRC before an examination of a ta payer may be had while an LN is not found in the NIR and is only for the purpose of notifying the taxpaye that a discrepancy is found based on the BIR's RE IEF System. Second, an LOA is valid only for 30 days rom date of issue while an LN has no such limitati n. Third, an LOA gives the revenue officer only a eriod of 120 days from receipt of LOA to conduct hi examination of the taxpayer whereas an LN does not contain such a limitation. Simply put, LN is e tirely different and serves a different purpose than n LOA. Due process demands, as reco nized under R 0 No. 32-2005 that after an LN has serve its ur ose he revenue officer should have ro erl secured an L A before roceedin with the further examination and assessment of the etitioner. Unfortunately, this was not done in this case. Contrary to the ruli g of the CTA en bane, an LOA cannot be dispensed ith just because none of the financial books or re ords being physically kept by MEDICARD was examin d. To begin with, Section 6 of the NIRC requires an autho ity from the CIR or from his duly authorized representativ s before an examination "of a taxpayer" may be made. The requirement of authorization is therefore not depende t on whether the taxpayer may be required to physically op n his books and financial records but only on whether taxpayer is being subject to examination. The BIR's RELIEF ystem has admittedly made the BIR's assessment and collection efforts much easier

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 20 of22 which the BIR's revenue achieved is no excuse That the BIR official herein were not shown to have acted unreasonably is b side the point because the issue of their lack of authority as only brought up during the trial of the case. What is c ucial is whether the proceedings that led to the issuanc of VAT deficiency assessment against MEDICARD ad the prior approval and authorization from the Cl R or her duly authorized representatives. Not having authority to examine MEDICARD in the first lace, the assessment issued by the CIR is inescap bly void." (Emphases and underscoring supplied Based on the foregoing j risprudential pronouncements, before an examination of the taxpa er may be validly done, it is a legal requirement that there must fi t be an LOA issued to the concerned revenue examiners, unless he petitioner (the Commissioner of Internal Revenue) himself or is duly authorized representative will conduct such an examination and an LN does not suffice, simply because an LN is entirely di erent and serves a different purpose than an LOA. Without such an LOA, the resulting assessment or examination is a nullity. In this case, there is n indication that an LOA was issued against respondent. The IR came up with the subject tax assessments only on the basi or pursuant to an LN, particularly, LN

DECISION CTA EB No. 1463 (CTA Case No. 8711) Page 21 of22 No. 039-TRS-07-00-00120 da ed March 15, 2010. Thus, for lack of an LOA, the said tax assessm nts are void. All told, the instant Petiti n for Review must perforce fail. WHEREFORE, in light of the foregoing considerations, the instant Petition for Review is ENIED for lack of merit. Accordingly, the assailed Decision dated J nuary 22, 2016 and Resolution dated May 11, 2016, both rendered by the Court in Division in CTA Case No. 8711 are AFFIRMED. SO ORDERED. E~P.UY Associate Justice WE CONCUR: t0;1 Luiivo) LOVELrR. BAUTISTA Associate Justice JUANITO C. CASTANEDA, JR. Associate Justice CAESAR A. CASANOVA ... Associate Justice . FASON-VICTORINO ~~ M~~,G~ MA. BELEN M. RINGPIS-LIBAN Associate Justice CIELITO N. MINDARO-GRULLA Associate Justice i ~f~J./J1~ CATHERINE T. MANAHAN Asso iate Justice

DECISION I CTA EB No. 1463 ! (CTA Case No. 8711) i Page 22 of22 CER~IFICATION I Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the con lusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. Presiding Justice