HERMANO (SAN) MIGUEL FEBRES CORDERO MEDICAL EDUCATION FOUNDATION (DE LA SALLE - HEALTH SCIENCES INSTITUTE), INC. herein represented by BR. AUGUSTINE BOQUER FSC and DR. ALVIN CRUDO v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court of Tax Appeals QUEZON CITY En Bane HERMANO (SAN) MIGUEL CTA EB CASE NO. 908 FEBRES CORDERO MEDICAL (CTA Case No. 8194) EDUCATION FOUNDATION (DE LA SALLE - HEALTH SCIENCES Present: INSTITUTE), INC., herein Del Rosario, P.J. represented by BR. AUGUSTINE Castaneda, Jr., BOQUER, FSC and DR. ALVIN Bautista, CRUDO, Uy, Casanova, Petitioner, Fa bon-Victorino, Mindaro-Grulla, - versus- Cotangco-Manalastas, and Ringpis-Liban, IL COMMISSIONER OF INTERNAL Promulgated: ~~~ REVENUE, SEP 12 2013 ?."~5'" ~1' ;tU/, Respon dent. X-------------------------------------------------------------------------------------------------X DECISION BAUTISTA, [.: The Case Before the Court En Bane is a Petition for Review,1 filed on June 20, 2012, pursuant to Section 4 of Rule 8 of the Revised Rules of the Court of Tax Appeals,2 assailing the Am ended Decision dated May 15, 2012,3 1 Rollo, CTA EB Case No. 908 (CTA Case No. 8194), pp. 37-115, w ith Annexes. 2 RULE 8 PROCEDURE IN CIVIL CASES XXX XXX XXX SEC. 4. Where to appeal; mode of appeal. - XXX XXX XXX (b) An a ppeal from a decision or resolu tion of the Court in Division on a motion for reconsid eration or new trial shall be ta ken to the Co urt by petition for review as prov ided in Rule 43 of the Rules of Cour t. The Court en bane shall act on the a ppeal. 3 Penned by Associa te Justice Am elia R. Cotangco-Man a las tas, with Associa te Justices Lovell R. Bau tista and Olg~ Polonc.-Emiq uez, oon cu ,�cing; Rollo, pp. 57-70, Annex "A. " ~

DECISION CTA EB CASE NO. 908 (CTA Case No . 8194) rendered by the then Third Division of the Court ("Court in Division"), which modified the Decision dated January 9, 2012;4 and accordingly, praying for the cancellation and setting aside of the Final Assessment Notice and Assessment Notice No. F-054-LNTF-06-VT-007 dated January 19, 2010. The Antecedent Facts The relevant antecedents are succinctly recited by the Court In Division in its Decision dated January 9, 2012, as follows: Petitioner Hermano (San) Miguel Febres Cordero Medical Education Foundation (De La Salle - Health Sciences Institute), Inc. is a non-stock, non-profit medical and educational institution engaged in health sciences, with principal office address at Congressional Avenue, Dasmariftas, Cavite. It has a pharmacy that purchases medicines that are used by its in-patients during medical procedures or sold to out-patients. Respondent, on the other hand, is the Commissioner of the Bureau of Internal Revenue (BIR) appointed and empowered to perform the duties of her office including, among others, the duty to act on protest of tax assessments as provided by law. She holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City. On December 23, 2009, petitioner received a copy of a Preliminary Assessment Notice (PAN) from respondent stating that it is liable for deficiency VAT in the amount of ~2,546,106.34. Alleging that respondent failed to take into consideration that its sales of pharmacy items to its in-patients are exempt from VAT pursuant to Section 109[(G)] of the National Internal Revenue Code (NIRC) and BIR Ruling No. DA-122-2005 dated April 6, 2005, petitioner submitted to respondent its protest against the PAN on January 7, 2010. I On February 2, 2010, petitioner received a copy of the Final Assessment Notice (FAN) and BIR Form No. 1708, both dated I

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) January 19, 2010, stating that it is liable for deficiency VAT in the amount of ~2,607,933.07. On March 4, 2010, respondent received petitioner's protest against the FAN. In the said protest, petitioner moved that the findings stated in the FAN should be reversed and set aside on the following grounds; namely: (a) the FAN and BIR Form No. 1708 are void for failure to comply with Section 228 of the NIRC and Section 3.1.4 of Revenue Regulations (RR) No. 12-99; and (b) the alleged deficiency VAT is being assessed against the sales of pharmacy items for in-patients and/ or special units which are necessarily included in the term "hospital services" that are exempt from VAT under Section 109[(G)] of the NIRC and BIR Ruling No. DA-112-2005 dated April 6, 2005. On April 30, 2010, petitioner, through registered mail, submitted its supporting documents in support of its protest. Alleging inaction on the part of respondent within the period of one hundred eighty (180) days from the submission of the complete documents, petitioner filed this Petition for Review on November 26,2010. In her Answer, respondent alleged the following Special and Affirmative Defenses: "4. Contrary to the claims of petitioner, the subject Final Assessment Notice (FAN) and Assessment Notice with Demand No. F-054-LNTF-06-VT-007 are valid. The complete details as required by law were attached as Annex 'A' as Details of Discrepancy of the FAN and such is repleaded herein. 5. The statements contained in Annex 'A' are the factual verifications which resulted in the assessment and the discovery of fraud. It also contains the legal basis for such assessments. 6. The Details of Discrepancy is adequate enough to inform the legal and factual bases of the assessments. Petitioner was properly informed of the findings of the Revenue Officers. The belief of inadequate information I

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) on the basis and facts gives petitioner an option to file an administrative protest. 7. Contrary to petitioner's claim that they are exempt from VAT by citing BIR Ruling No. DA-122- 2005, it should be noted that the aforementioned ruling was issued to Preferential Services, Inc. /Medical City Hospital and not petitioner. Petitioner is not exempt from VAT as the BIR Ruling is only for the applicant who has submitted the proper documents for the BIR to fully thresh out the details whether the applicant is truly deserving of such exemption. 8. The statements comparing petitioner with Preferential Services, Inc. /Medical City Hospital in providing medical and hospital services is merely self- serving and should not be given any weight. 9. Finally, it is well-settled rule in taxation that assessments are prima facie presumed correct and made in good faith. The taxpayer has the duty of proving otherwise, and in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed." During trial, petitioner presented Arlene C. Lacorte as its witness, and Exhibits "A" to "S" and "U" to "W," inclusive of their sub-markings, as its documentary evidence. All these pieces of evidence were admitted by this Court in the Resolution dated June 28, 2011. Upon manifestation of respondent that she will no longer present any evidence, both parties were required to submit their respective memorandurn. On September 6, 2011, this case was submitted for decision upon the filing of respondent's Memorandum on August 25, 201~ and petitioner's Memorandum on August 31,2011.5 7 s Ibid. , pp. 73-76.

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) The Ruling of the Court in Division The Court in Division issued a Decision dated January 9, 2012, ruling as follows: WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. Accordingly, the Final Assessment Notice and the Assessment Notice No. F-054-LNTF-06-VT-007 dated January 19,2010 is hereby CANCELLED and SET ASIDE. SO ORDERED.6 Aggrieved, respondent filed a Motion for Reconsideration on January 27, 2012; the Court finding merit thereto, promulgated an Amended Decision dated May 15, 2012, which reads: WHEREFORE, finding merit in respondent's Motion for Reconsideration, the same is hereby GRANTED. Accordingly, the Decision dated January 9, 2012 is hereby MODIFIED with respect to the issue on sale of drugs or pharmaceutical items by petitioner. Petitioner Hermano (San) Miguel Febres Cordero Medical Education Foundation is hereby ORDERED to PAY respondent Commissioner of Internal Revenue the amount of TWO MILLION SIX HUNDRED SEVEN THOUSAND NINE HUNDRED THIRTY THREE AND 07/100 (P2,607,933.07) representing deficiency value added tax for taxable year 2006, and the 20 % deficiency interest per annum from the date prescribed for its payment until full payment thereof, pursuant to Section 249(B) of the NIRC of 1997, as amended. SO ORDERED.? The Issues Hence, the present Petition for Review, where petitioner assigns th~~ following issues of: ( 6 Ibid., p . 83. 7 Ibid., p. 69.

DECISION CTA EB CASE NO. 908 (CTA Case N o. 8194) I. WHETHER OR NOT THE [THEN] THIRD DIVISION ERRED IN TAKING COGNIZANCE OF AN ISSUE NOT RAISED IN THE PLEADINGS OR DURING TRIAL; and II. WHETHER OR NOT THE THIRD DIVISION ERRED IN RULING THAT THE FAN AND ASSESSMENT NOTICE IS VALID.8 Petitioner's Arguments Petitioner claims that evidence on record supports that it operates a hospital. It further asserts that the said issue was never raised, nor disputed by respondent in her Answer dated January 17, 2011, Pre-Trial Brief dated January 28, 2011, Memorandum dated August 25, 2011 and even in her Motion for Reconsideration dated January 27, 2012. It then attaches a Certification (A nnex "C") to show that De La Salle University Medical Center is owned and operated by petitioner as a "teaching hospital"; and its Audited Financial Statement (A nnex "D") to show that the operations of the former is under the control of the latter. Petitioner also insists that in the Itemized Summary and Comparative Table of value-added tax ("VAT") returns for the year 2006, the same shows that the Net Discrepancy was due to difference in reporting and computation, and due to the inclusion of purchases not subject to VAT, i.e., VAT-exempt. It further posits that since respondent did not assail the Net Discrepancy, she has the duty to establish that her assessment is correct. Respondent's Counter-Arguments Respondent counters that petitioner failed to prove that it operates a hospital, and that even in arguendo that it operates one, it failed to substantiate its claim. She argues as well that petitioner cannot be exempt from VAT by merely relying on BIR Ruling DA-122-2005, for the said ruling wa.s .issued to Preferential Services, Inc.,/Medical City Hospital, and !} not to petitioner. J_ I 8 ibid., p. 43.

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) The Ruling of the Court En Bane The Petition for Review is bereft of merit. It is a basic tenet that once a Court acquires jurisdiction over a case, it has wide discretion to look upon matters which, although not raised as an issue, would give life and m eaning to the law.9 Indeed, the interest of justice dictates that the Court considers and resolves issues even though not particularly raised if it is necessary for the complete adjudication of the rights and obligations of the parties and it falls within the issues already found thereo�.10 Lest it be forgotten further that tax exemptions are to be construed strictissimi juris against the taxpayer.11 Thus, the Court cannot simply close its eyes to the fact that petitioner failed to establish that it operates a hospital, and to fully account for the net discrepancy in the VAT assessment. The Court En Bane affirms the findings of the Court in Division, to quote: First, petitioner Hermano (San) Miguel Febres Cordero Medical Education Foundation (De La Salle - Health Institute) failed to establish by competent evidence that it is an entity that operates a hospital. The above finding was arrived at after due consideration of the following notable precepts in this jurisdiction: (1) Under Section 109(G) of the NIRC of 1997, as amended, those contemplated to be exempt from VAT are taxpayers engaged in the performance of medical, dental, hospital and veterinary services; and 9 Comilang v. Burcena, G.R. No. 146853, February 13, 2006,482 SCRA 342. IO Insular life Assurance Co., Ltd., Employees Association- NATU, v. Insular Life Assurance Co., Ltd., G.R. No. L- 25291, March 10, 1977, 76 SCRA 50. II Atlas Consolidated Mining and Development Corpo ration v. Commissioner of Internal Revenue, G.R. No. 159490, I February 18, 2008, 546 SCRA 150; citing Commissioner of Internal Revenue v . Solidbank Corp., G.R. No. 148191, November ~ 25,2003, 416 SCRA 436, 461.

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) (2) In line with the foregoing, it is now well-settled that the sale of drugs or pharmaceutical items to in- patients of the hospital is considered part of the term "hospital services" covered by the VAT exemption under Section 109(G) of the 1997 N IRC, as amended. This is so "because the maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and essential service or facility rendered by any hospital for its patients"; and also because "unlike the sale of retailing of drugs or medicines by drugstores in general, the procurement of medicines and pharmaceutical items from the hospital drugstore or pharmacy amounts to the availment of service rendered or made available .Qy the hospital for its in-patients and not simply the buying of such goods." Clearly, before a taxpayer may claim that its sale of drugs or pharmaceutical items is classified as "hospital service" exempt from VAT under Section 109(G) of the NIRC of 1997, as amended, the following must be established: (i) that the taxpayer operates a hospital; (ii) that the said hospital has a pharmacy or drugstore; and (iii) that the sale of drugs - claimed to be exempt from VAT - was made by the said hospital drugstore or pharmacy to in- patients of the hospital being operated by the taxpayer. Now, in this case, since petitioner is claiming that its sale of drugs and pharmacy items to in-patients is part of the term "hospital services" exempt from VAT under Section 109(G) of the NIRC of 1997, as amended, it is essential for the petitioner to first establish that it operates a hospital. Records show that petitioner utterly failed to discharge this duty. No substantial evidence was presented to prove that petitioner actually operates a hospital or is engaged in the operation of a hospital as defined under Republic Act No. 4226. Under RA No. 4226, "hospital" means a place devoted primarily to the maintenance and operation of facilities for the diagnosis, treatment and care of individuals suffering from illness, disease, I injury or deformity, or in need of obstetrical or other medical and nursing care (Section 2(a) thereof).

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) A perusal of petitioner's Articles of Incorporation reveals that, essentially, petitioner is a non-stock, non-profit educational corporation, formed to provide institutional medium for financing programs dedicated to the establishment, maintenance, operation and management of educational facility in the field of medical and physical sciences; to organize, conduct and carry on the operation of health science, educational institutions such as Medicine, Dentistry, Nursing, Midwifery, Pharmacy, Physical Medicine and other health and medical sciences; to promote for the scientific development of the institution of medicine; to conduct applied researches and development activities and studies; to function and operate on private science and research foundation; to provide financial support, within the Philippines and abroad for the studies of selected students and for the attendance at scientific influences by qualified and competent scholars; to receive and/ or give grants, gifts, legacies, donations, contributions, endowments and financial aids or loans from any source; to establish, maintain and operate medical research centers, technological, vocational and manpower development schools; to establish scholarship and professional chairs in the social, medical and physical sciences; and to do any and all things which may be reasonably necessary for the due carrying on of the purposes of the corporation. Further, petitioner itself made the representation in its Petition for Review which states that "Hermano is a non-stock, non- profit educational corporation duly organized and existing under the laws of the Philippines, with principal office address at x xx." Likewise, an examination of the Joint Stipulation of Facts and Issues reveals that the parties have not agreed or stipulated on the information that petitioner operates a hospital. Petitioner alleges that it is engaged in providing medical and hospital services including the operation of a pharmacy in its hospital, however, although its Articles of Incorporation could have implied the operation of a hospital, the records of this case and the evidence offered before this Court does not indicate so. There is nowhere in the records or in the documents formally offered by petitioner from which this Court can at the very least infer the fact that petitioner actually operates a hospital or :;-

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) engaged in the operation of a hospital as defined under Republic Act No. 4226. "The offer of evidence is necessary because it is the duty of the court to rest its findings of facts and its judgment only and strictly upon the evidence offered by the parties. Unless and until admitted by the court in evidence for the purpose or purposes for which such documents is offered, the same is merely a scrap of paper barren of probative value." Thus, considering that petitioner failed to establish by competent evidence that it operates a hospitat its alleged sale of drugs or pharmaceutical items cannot be considered as part of the term "hospital services" exempt from VAT under Section 109(G) of the NIRC of 1997, as amended; thereby making the alleged sale of drugs and pharmaceutical items by petitioner an appropriate subject of the deficiency VAT assessment. Second, even if petitioner is able to prove that it operates a hospitat the denial of its petition for cancellation of deficiency VAT assessment is still in order, this is because petitioner likewise failed to fully account for and substantiate by competent evidence its stance that the NET discrepancy in the deficiency VAT assessment consists of [1] sales of pharmacy items to its in-patients and/or special units such as operating and delivery rooms during medical procedures, 'Which are exempt from VAT under Section 109(G) of the NIRC of 1997, as amended; [2] items which are no longer sold or passed on to patients or clients such as equipment and supplies; and thus, not subject to VAT. To support its stance, petitioner offered in evidence an Itemized Summary and Comparative Table for its VAT returns for the year 2006, and the Monthly Value-Added Tax Returns for the period of January to December 2006. However, We find that the truth in petitioner's stance cannot be verified solely by examining the above-mentioned documents. The hands of this Court are tied from giving credence to the Itemized Summary and Comparative Table and the Monthly Value-Added Tax Returns in view of the facts that the source documents (e.g., receipts, invoices, financial statement of income for services to patients, inventory) where the inputs in the itemized~

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) summary and tax returns were taken were not offered as evidence for the petitioner; consequently these documents cannot stand to support petitioner's claim. In view of the fact that the records of this case is wanting in competent evidence, the Court cannot verify if there were indeed sales of pharmacy items to in-patients and items not sold to clients; as well as identify the actual portion or amount of the NET discrepancy that pertains to sales of pharmacy items to in- patients and/ or special units such as operating and delivery rooms during medical procedures/ and the actual portion or amount of the NET discrepancy attributable to items which are no longer sold or passed on to patients or clients such as equipment and supplies.12 Clearly/ petitioner failed to prove that it operates a hospitat and to fully account for and substantiate the Net Discrepancy in the deficiency VAT assessment. Nonetheless/ petitioner attached/ in its Petition for Review/ a Certification dated June 19f 2012f signed by President/ Br. Augustine Boquerf FSCf and Chairman of the Boardf Br. Ricardo Lagudaf FSCf stating that De La Salle University Medical Center is owned and operated by Hermano (San) Miguel Febres Cordero Medical Education Foundation/ Inc.f as a teaching hospitat and that the former has no separate corporate existence/ the same being con sidered as a mere unit or division of the latter;13 it attached as well an Audited Financial Statement as of May 31f 2006.14 It is well-settled that the most competent evidence must be adduced and presented to prove the allegations in a complaint petition/ or protest before a judicial court.15 It may not be amiss to note further that Section 34 of Rule 132 of the Revised Rules on Evidence is clear that no evidence which has not been formally offered shall be considered. Furthermore/ save for the most compelling and cogent reasonsf16 it is too late at this stage 12 Rollo, pp. 63-68. 13 Jbid., p. 85; Annex "C." 14Jbid., pp. 86-115; Annex "D." Supra, note 11. Ramon R. Olbes r Js R. v. 152082, 10, 2006, 484 SCR~ 16 a nd Ricardo Olbes China Banking Corporation, G.R . No. March ,} 330, citing Omandan v. Court ofAppeals, G.R. No. 128750, january 18, 2001, 349 SCRA 483.

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) to do the same in order to sway the Court En Bane to overturn the assailed Amended Decision rendered by the Court in Division. In addition, the findings of the Court in Division as to the validity of the Final Assessment Notice and Assessment Notice No. F-054-LNTF-06- VT-007 is still binding, to quote: Taxpayers must be informed of the facts and the law upon which the assessment is made. Failure to do so shall make the assessment void. Section 228 of the NIRC provides: XXX XXX XXX The reason for the requirement of informing the taxpayer in writing of the facts and law surrounding its assessment is obvious: to ensure that taxpayers are duly appraised of the basis of the tax assessments against them. This is in keeping with the settled doctrine that before a person can be deprived of his property, he should first be informed of the claim against him and the theory on which such claim is premised. The Court agrees with respondent that the "Details of Discrepancies" attached to the FAN sufficiently complied with Section 228 of the NIRC. xxx. XXX XXX XXX Based on the afore-quoted "Details of Discrepancies," the details contained therein showed that the factual basis for assessing petitioner for deficiency VAT was the discrepancy from RELIEF and Third-Party Matching. While the legal basis for assessing the taxpayer were Sections 31, 32, 106 and 108 of the NIRC of 1997, as amended and Revenue Memorandum Order (RMO) No. 32-2007. In a long line of cases, the Supreme Court has ruled that the requirement of the law to inform the taxpayer of the basis of the assessment does not necessarily mean that it be a full narration of the facts and laws on which the assessment is based. The purpose of the assessment is to enable the taxpayer to know the law and ~

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) the facts on which the assessment is made, and to afford him his right to due process once it is served and received. Thus, so long as the parties are notified and given the opportunity to explain their side, the requirements of due process are satisfactorily complied with. In this case, petitioner has intelligently made its protest by stating that its sales of pharmaceutical items in favor of its in- patients are exempt VAT. This circumstance proves that petitioner was sufficiently informed of the facts and the law as to why the assessment has been issued against it. Clearly, petitioner's contention that the assessment issued against it failed to disclose the facts and the law upon which the assessment was based in untenable.17 In sum, the Court En Bane finds no compelling reason to warrant a reversal of the assailed Amended Decision. WHEREFORE, the Petition for Review is hereby DISMISSED for lack of merit. The Amended Decision dated May 15, 2012 promulgated by the then Third Division of the Court is hereby AFFIRMED in toto. SO ORDERED. WE CONCUR: Presiding Justice ~hC.~~"\) ER~P.UY JOANITO. C. CASTANEDA, jtf. . Associate Justice Associate Justice 17 Rollo, pp. 78-80.

DECISION CTA EB CASE NO. 908 (CTA Case No. 8194) ~ CAESAR A. CASANOVA Associate Justice ~ N . I\.1~- C~ (On Leave) CIELITO N. MINDARO-GRULLA AMELIA R. COTANGCO-MANALASTAS Associate Justice Associate Justice <?Ni~ ~ ~,~ MA. BELEN M. RINGPIS-LIBAN Associate Justice C E R T IF I CAT I 0 N Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the above Decision has been reached in consultation with the members of the Court En Bane before the case was assigned to the writer of the opinion of this Court. Presiding Justice