TULAY SA PAG-UNLAD, INC. (TSPI) v.

COMMISSIONER OF INTERNAL REVENUE

C.T.A. Case No. 8480, September 15, 2017

TSPI v. CIR (C.T.A. EB Case No. 1478)

CIR v. TSPI (C.T.A. EB Case No. 1528)

DOCTRINES:

• An appeal to the CTA En Banc must be preceded by the filing of a timely motion for reconsideration or new
trial with the CTA Division. Failure to do so is a ground for the dismissal of the appeal as the word ‘must’ in
Section 1 of Rule 8 of the RRCTA indicates that the filing of a prior motion is mandatory, and not merely
directory.

• The imposition of the 50% surcharge (fraud penalty) requires that the same was done wilfully and
deliberately, with the intention to defraud the Government of its lawful revenue. Fraud, to be sustained, must
be proven by clear and convincing evidence.

• The presumption of correctness of tax assessment does not negate the burden of the CIR to prove, by clear and
convincing evidence, the fraudulent intent required for the imposition of 50% surcharge on the ground of wilful
neglect to file return. In order to stand the test of judicial scrutiny, the assessment must be based on actual facts.

BACKGROUND OF THE CASE:

This is a consolidated Petitions for Review:

• TSPI v. CIR (C.T.A. EB Case No. 1478) — seeks the reversal f the Decision dated October 29, 2015, as well as
the Amended Decision dated June 20, 2016 of the First Division of this Court in the CTA Case No. 8480.

• CIR v. TSPI (C.T.A. EB Case No. 1528) — prays for the partial reversal of the assailed Amended Decision of
the Court in Division insofar as the reduction of the surcharge imposed upon TSPI in the assailed Decision from
50% to 25% and the reversal of its subsequent Resolution dated September 20, 2016.

THE PARTIES:

• Tulay sa Pag-unlad, Inc. (TSPI) is a non-stock, non-profit corporation duly organized and existing under and
by virtue of the laws of the Republic of the Philippines.

• Commissioner of Internal Revenue (CIR) is the duly appointed Chief of the Bureau of Internal Revenue,
vested under the appropriate laws, with the authority too carry out the functions, duties and responsibilities of
said office, including, the power to decided disputed assessments, cancel and abate tax liabilities, pursuant to
the provisions of the NIRC of 1997, as amended, and other tax laws, rules and regulations.

FACTS:

• June 16, 2010 — TSPI received a Preliminary Assessment Notice (PAN) dated June 11, 2010 representing
alleged VAT and DST deficiencies for January to December 2008.

• June 29, 2010 — TSPI filed a protest disputing the findings stated in the PAN.
• July 23, 2010 — TSPI received a Reply Letter recommending the issuance of a Formal Assessment Notice
(FAN).

• August 25, 2010 — TSPI received a FAN dated August 20, 2010 together with an Assessment Notice
representing the alleged VAT deficiencies in the amount of P88,128,486.34 and DST deficiencies in the amount
of P7,352,860.33.

• September 22. 2010 — TSPI filed its Formal Protest Letter against the FAN.

Marinelle M. Fernandez
• November 19, 2010 — TSPI submitted all the necessary documents and evidence to substantiate its protest
against the FAN, in compliance with the 60-day period within which to submit supporting documents.

• March 11, 2011 — TSPI received the Final Decision on Disputed Assessment (FDDA) dated March 7, 2011.
• April 7, 2011 — TSPI appealed the FDDA to the Office of the Commissioner of Internal Revenue.
• May 20, 2011 — TSPI received a Notice dated April 18, 2011 informing TSPI that its appeal was refereed to
the Legal Service.

• March 29, 2012 — TSPI received the Final Decision of the Commissioner denying its Protest against the
alleged VAT and DST deficiencies for January to December 2008 in the amount of P101,235,533.59 wherein a
surcharge of 50% was added for TSPI’s VAT deficiency.

• October 29, 2015* — The Court in Division rendered the assailed Decision denying TSPI’s Petition for
Review and ruled that (1) TSPI is a lending investor subject to VAT and (2) TSPI’s loan agreements are subject
to DST.

(1) TSPI’s contention that microfinancing is different from the business of commercial lending for profit is devoid of
merit. While it is true that a corporation or specifically, a “civil league or organization not organized for profit but
operated exclusively for the promotion of social welfare” is exempted from income tax, the same cannot be said
with regard to its VAT liability.

- Section 109 of the NIRC of 1997, as amended, and RR No. 16-2005 are clear and unambiguous — lending
investors are subject to VAT. To be sure, tax exemptions are never presumed and are strictly construed against
the taxpayer, and liberally in favor of the taxing authority. TSPI must establish by preponderant evidence its
claim for exemption from VAT for its approbation. This, petitioner failed to do.

(2) TSPI invokes as basis for its exemption from DST, Section 9 of R.A. No. 9243 which amended Section 199 of the
NIRC on Documents and Papers Not Subject to Stamp Tax. However, TSPI failed to present evidence to prove that
the loan agreements extended to its borrowers were used to purchase on installment for the borrower’s personal use
or for their family, and not for business or resale, barter or hire of a house, lot , motor vehicle, appliance or furniture.
It is elementary that bare allegations, unsubstantiated by evidence, are not equivalent to proof. Thus, CIR’s
assessment of deficiency DST against TSPI is upheld.

• June 20, 2016* — upon TSPI’s Motion for Reconsideration filed on November 13, 2015, the Court in Division
promulgated an Amended Decision upholding its previous ruling in the assailed Decision but modified the
same insofar as the 50% surcharge imposed therein which was reduced to 25%.

The Court found that the imposition of 50% surcharge is unfounded. In Commissioner of Internal Revenue v.
Japan Air Lines, Inc., the Supreme Court emphasized the importance of proving fraud to justify the imposition of the
50% surcharge since wilful neglect to file the tax return is not presumed.

Noteworthy is that while the imposition of the 50% surcharge was indicated on the FAN which was imposed
accordingly pursuant to Section 248 (B) of the NIRC of 1997, as amended, CIR, however, failed to submit any proof
before this Court to justify the imposition of surcharge as required in the JAL case. Consequently, TSPI is only liable for
25% surcharge pursuant to Section 248 (A) of the NIRC.

ISSUE:

Whether the holding that the 50% surcharge initially imposed should be reduced for alleged failure of CIR to
submit proof before the Court to justify such imposition.

HELD:

C.T.A. EB Case No. 1478

• The Court denies TSPI’s Petition for Review for failure to file a Motion for Reconsideration of the Court in
Division’s Amended Decision basing it in the case of Asiatrust Development Bank v. CIR.

Section 1, Rule 8 of the Revised Rules of the CTA states that:

Marinelle M. Fernandez
 SECTION 1. Review of cases in the Court en banc. — In cases falling under the exclusive
appellate jurisdiction of the Court en banc, the petition for review of a decision or resolution of
the Court in Division must be preceded by the filing of a timely motion for reconsideration or new
trial with the Division.

Thus, in order for the CTA En Banc to take cognizance of an appeal via a petition for review, a timely motion for
reconsideration or new trial must first be filed with the CTA Division that issued the assailed decision or resolution. Failure to do
so is a ground for the dismissal of the appeal as the word ‘must’ indicates that the filing of a prior motion is mandatory, and not
merely directory.

The same is true in the case of an amended decision. Section 3, Rule 14 of the same rules defines an amended decision
as ‘any action modifying or reversing a decision of the Court en banc or in Division.’ As explained in CE Luzon Geothermal Power
Company, Inc. v. CIR, an amended decision is a different decision, and thus, is a proper subject of a motion for reconsideration.

• In the present case, TSPI filed its Petition for Review before the CTA En Banc to assail the Amended Decision
promulgated by the Court in Division on July 22, 2016 without first filing a timely motion for reconsideration
of such Amended Decision. Accordingly, the assailed Amended Decision has attained finality and can no longer
be reopened for review or modification insofar as TSPI is concerned.

C.T.A. EB Case No. 1528

• The Court finds CIR’s Petition lacks merit. The Court in Division correctly reduced the rate of the surcharge
imposed from 50% down to 25% of the amount of deficiency taxes due, in accordance with Section 248 of the
1997 NIRC.

SECTION 248. Civil Penalties. —

(A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to 25%
of the amount due, in the following cases:

(1) Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or

(2) Unless otherwise authorized by the Commissioner, filing a return with an internal
revenue offcier other than those which whom the return is required to be filed; or

(3) Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or

(4) Failure to pay the full or part of the amount of tax shown on any return required to
be filed under the provisions of this Code or rules and regulations, or the full
amount of tax due for which no return is required to be filed, on or before the date
prescribed for its payment.

(B) In case of willful neglect to file the return within the period prescribed by this Code or by the
rules and regulations, or in case of false or fraudulent return is wilfully made, the penalty to
be imposed shall be 50% of the tax or of the deficiency tax, in case any payment has been
made on the basis of such return before the discovery of the falsity or fraud: Provided, That
substantial underdeclaration of taxable sales, receipts or income, or substantial overstatement
of deductions, as determined by the Commissioner pursuant to the rules and regulations to be
promulgated by the Secretary of Finance, shall constitute prima facie evidence of false or
fraudulent return: Provided further, That failure to report sales, receipts or income in an
amount exceeding 30% of that declared per return, and a claim of deductions in an amount
exceeding 30% of actual deductions, shall render the taxpayer liable for substantial
underdeclaration of sales, receipts or income or for overstatement of deductions, as mentioned
therein.

• In the present case, there is no clear and convincing proof that TSPI’s failure to file VAT and DST returns was
done wilfully and deliberately . The Court En Banc cannot simply subscribe to the CIR’s view that TSPI’s
failure to file VAT and DST returns for several instances automatically makes such omission wilful and
deliberate.

• At most, only negligence or mistake may be imputed to TSPI for not ascertaining the need to file returns. As
the facts of the present case show, TSPI erroneously believed that it is not subject to VAT and DST. At any rate,
such negligence or mistake is already subject to 25% surcharge pursuant to Section 248 of the 1997 NIRC.

SEPARATE OPINIONS:

Marinelle M. Fernandez
 J. Del Rosario
(concurring and dissenting)
- concurs with the end result of the
- In the Asiatrust case, the SC had the
- concurs with the ponencia in denying the - The SC, being the court of last resort, is - concurs with the ponencia in denying the
Petition for Review filed by the CIR in CTA
EB No. 1528 for lack of merit.
- constrained to withhold conformity to the
ponencia’s outright denial of the Petition for
Review by TSPI in CTA EB No. 1478 citing
Aisiatrust Development Bank, Inc. v.
Commissioner of Internal Revenue.
- submits that the Court En Banc should
take cognizance of TSPI’s Petition for
Review, albeit no prior Motion for
Reconsideration of the Amended Decision
was filed by TSPI with the Court in
Division.
- It is only the party adversely affected by the
assailed Amended Decision that should
seek reconsideration thereof. Here,
considering that the Assailed Amended
Decision already granted (albeit partially)
TSPI’s motion, it is procedurally improper
f o r i t t o fi l e a n o t h e r M o t i o n f o r
Reconsideration of the assailed Amended
Decision, which, in esse, would be in the
nature of a prohibited second motion for
reconsideration.
- submits that TSPI correctly invoked the
jurisdiction of the Court En Banc by filing
the present Petition for Review to assail
the Amended Decision of the Court in
Division. TSPI clearly observed the
condition precedent required under Section
1, Rule 8 of the RRCTA when it filed its
Motion for Partial Reconsideration within
15 days from its receipt of the October 29,
2015 Decision. The amended decision
considered the arguments raised in TSPI’s
Motion for Reconsideration. Thus, TSPI
m a y N O T fi l e a n o t h e r M o t i o n f o r
Reconsideration. A motion for
reconsideration by TSPI assailing the
COurt in DIvision’s Amended Decision
would be in the nature of a second motion
for reconsideration which is prohibited
under Section 7, Rule 15 of the RRCTA.
J. Casanova
(concurring)
ponencia, however, would like to express
view in the application of the Asiatrust
case.
occasion tor rule on the propriety of timely
filing a motion for reconsideration with the
CTA Division before elevating the case to
the Court En Banc.
the final arbiter of all legal questions
properly brought before it and that its
decision in any given case constitutes the
law of that particular case. Once its
judgment becomes final, it is binding on all
the inferior courts, and hence beyond their
power and authority to alter or modify.
Hence, the Court En Banc need not delve
further into the proper “denomination” of a
Court’s action on a previously issued
Decision depending on whether an entirely
new relief was granted or just a mere
modification thereof.
- dissent from the majority decision which
- the ruling laid down in the Asiatrust case
- In this case, TSPI filed a motion for
- The Assailed Amended Decision,
J. Ringpis-Liban
(concurring and dissenting)
Petition for Review filed by the CIR in CTA
EB No. 1528 for lack of merit.
denied TSPI’s Petition for its failure to seek
reconsideration of the Assailed Amended
Decision dated June 20, 2016.
should only be applied in instances of
similar factual milieu.
reconsideration to the Assailed Decision
dated October 29, 2015 on November 13,
2015. No hearing was set nor additional
evidence presented. Instead, TSPI
substantiated its motion by submitting an
“Additional Authorities & Arguments (In
support of Motion for Reconsideration with
Motion for Leave to File and to Admit” on
January 15, 2016. All these pertained to
evidence already existing in the record.
Unlike Asiatrust, there was no new
evidence to be considered.
thereforem resulted from a reevaluation of
TSPI’s position which the Court originally
rejected but which later on, after
reconsideration, found meritorious. To
o b l i g e T S P I t o fi l e a m o t i o n f o r
reconsideration of the Assailed Amended
Decision would only result in reiterated
arguments that have already been
propounded in its Motion or
Reconsideration of the Assailed Decision,
all of which have already been passed
upon and resolved by the Court in Division
in its Assailed Amended Decision. Hence,
Aisiatrust does not apply in this case, and
that outright dismissal of TSPI’s Petition for
Review its unwarranted.
Marinelle M. Fernandez
NOTES:

TAX AUDIT PROCESS

PROCESS IN THE COURT OF TAX APPEALS

Marinelle M. Fernandez
SURCHARGE: 25% OR 50%

Pursuant to Section 248 of the NIRC, the 3 categories of situations where:

• 25% surcharge is applicable can be summarized as follows:

1. Late filing, late paying, and non-filing [Sec. 248 (a) (1) and (4)]
2. Wrong venue [Sec. 248 (a) (2)]
3. Delinquency surcharge [Sec. 248 (a) (3)]

• 50% surcharge is applicable are:

1. In case of willful neglect to file the return within the period prescribed by the tax code, or
2. in case a false or fraudulent return was wilfully made.

*Rule on Prima Facie Fraud (Sec. 248 (b) of the NIRC)

- Fraud must be proved to justify forfeiture. It must be actual and not constructive, amounting to intentional wrong-doing
with the clear purpose of avoiding the tax. Mere negligence is not equivalent to the fraud contemplated by law. As
corollary thereto, fraudulent intent could not be deduced from the mistakes however fraudulent they may be, especially if
such mistakes emanate from erroneous entries or erroneous classification of items in accounting methods utilized for
determination of tax liabilities.

Marinelle M. Fernandez