Commissioner of Internal Revenue and Perfecto L. Aranas vs. Elric Auxiliary Services Corporation/Sacred Heart Gas Station

The CTA has jurisdiction under the “other matters” clause of Section 7(a)(1) of RA 1125, as amended by RA 9282, to determine the validity of a 48-hour notice and a 5-day VAT compliance notice issued under Section 115 of the Tax Code; and such notices are void when used as substitutes for a valid assessment under Section 228, which requires the taxpayer to be informed in writing of the legal and factual bases of the assessment.

Respondent Elric Auxiliary Services Corporation/Sacred Heart Gas Station is a VAT-registered taxpayer operating a gas station in Cogon, Digos City, Davao del Sur. Petitioners are the Commissioner of Internal Revenue and the Regional Director of Revenue Region No. 19, Davao City. Section 115 of the Tax Code authorizes the CIR or authorized representative to suspend the business operations of a VAT-registered taxpayer for failure to issue receipts or invoices, failure to file a VAT return, or understatement of taxable sales or receipts by thirty percent or more in a taxable quarter, as implemented by Revenue Memorandum Order No. 3-2009. Section 228 of the Tax Code prescribes the due process requirements for tax assessments, including written notice of the legal and factual bases.

On June 1, 2011, Elric Auxiliary received a 48-hour notice signed by BIR Regional Director Perfecto L. Aranas of Revenue Region No. 19, Davao City. The notice informed Elric Auxiliary that after a 10-day surveillance of its gas station in Cogon, Digos City, Davao del Sur, conducted from April 16 to 25, 2010, it was shown to be liable for deficiency VAT in the amount of PHP 1,196,583.13. Elric Auxiliary submitted its explanation addressing the findings of the BIR regional officers who conducted the surveillance and insisted that it was not liable for the alleged VAT deficiency.

On June 21, 2011, Elric Auxiliary received a 5-day VAT compliance notice, wherein the demand for payment of the alleged deficiency tax was reiterated. Three days later, or on June 24, 2011, its counsel sent a follow-up letter requesting a response to the explanation previously submitted. Elric Auxiliary received a response on July 5, 2011, denying its plea and holding it liable for the alleged VAT deficiency of PHP 1,196,583.13.

Aggrieved, Elric Auxiliary filed a petition for review before the CTA. The CTA found that the 48-hour notice and the 5-day VAT compliance notice failed to sufficiently inform Elric Auxiliary of the issues or violations that should be rectified or the basis for the assessment of its VAT liability. It also found that the factual basis of the surveillance conducted was not explained, preventing Elric Auxiliary from properly responding to or specifically refuting the alleged deficiency. The CTA further noted that fluctuations in daily sales rebutted the extrapolation made by the revenue officers, as there were peak and non-peak sales periods during the year and petroleum prices would have varied over time.

The CTA En Banc likewise found that the notices lacked factual bases, as they merely stated that the surveillance resulted in a VAT liability, without any further explanation. The CTA later referred to the notices as dated May 26, 2011 and June 9, 2011, respectively.

• CTA Jurisdiction: The CIR insisted that the CTA had no jurisdiction over the case because Elric Auxiliary did not assail any assessment; what was being challenged was the denial of its protest letter, and the next step—recommendation for the closure of the establishment, subject to the CIR’s approval—was yet to be performed.
• Validity of Notices: The CIR argued that the 48-hour notice and the 5-day VAT compliance notice were issued in accordance with law and that the violations committed by Elric Auxiliary had factual and legal bases.
• Due Process: The CIR asserted that Elric Auxiliary was afforded due process.

• CTA Jurisdiction: Elric Auxiliary argued that the CIR’s denial of its protest against the 48-hour notice and the 5-day VAT compliance notice, which are assessments, constituted a decision within the jurisdiction of the CTA.
• Section 228 Compliance: Elric Auxiliary contended that the notices merely contained a computation of the alleged tax deficiency and a demand for payment, which failed to comply with the mandatory requirements under Section 228 of the Tax Code.
• Standard of Review: Elric Auxiliary maintained that the Supreme Court is confined to questions of law and should not disturb the factual findings of the CTA absent a showing that such findings are unsupported by substantial evidence.

• CTA Jurisdiction: Whether the CTA has jurisdiction over the petition challenging the 48-hour notice and the 5-day VAT compliance notice.
• Validity of Notices: Whether the 48-hour notice and the 5-day VAT compliance notice are valid.

• CTA Jurisdiction: Yes. The CTA has jurisdiction under Section 7(a)(1) of RA 1125, as amended by RA 9282, because the issuance of the notices falls within the broad “other matters arising under the Tax Code or other laws administered by the BIR” clause, even if the case does not directly involve a disputed assessment.
• Validity of Notices: No. The notices are void for lack of factual bases and for failure to comply with Section 228; they were used as substitutes for a valid assessment to collect deficiency VAT without due process.

• CTA Jurisdiction: Section 7(a)(1) of RA 1125, as amended by RA 9282, grants the CTA exclusive appellate jurisdiction to review decisions of the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties, or other matters arising under the NIRC or other laws administered by the BIR. The “other matters” clause is broad and residual; it covers cases arising from the Tax Code and other laws administered by the BIR even if they do not directly involve a disputed assessment or a claim for refund. The Court cited Philippine Journalists, Inc. vs. Commissioner of Internal Revenue, Commissioner of Internal Revenue vs. Hambrecht & Quist Philippines, Inc., Commissioner of Internal Revenue vs. Lancaster Phils., Inc., St. Marys Academy of Caloocan City, Inc. vs. Commissioner Henares, and Commissioner of Internal Revenue vs. Manila Medical Services, Inc. The notices were issued pursuant to the CIR’s power under Section 115, as implemented by RMO 3-2009. The Court did not need to resolve whether the notices constituted a decision of the CIR because their issuance already fell within the “other matters” clause. Thus, the CTA Second Division correctly exercised jurisdiction.
• Validity of Notices: The CTA’s factual findings are not lightly set aside; they may be disturbed only if not supported by substantial evidence, or upon gross error or abuse. None of these grounds obtained. The CTA En Banc sustained the finding that the 48-hour notice and 5-day VAT compliance notice were void for lack of factual bases. The notices merely stated that the surveillance resulted in a VAT liability and claimed sales in various dates and amounts but failed to indicate the basis; the BIR did not describe how the surveillance was conducted or explain the methods used in arriving at estimates. Without such information, the sales amounts could not be considered prima facie valid, and the taxpayer could not be sufficiently informed to respond or refute. Although Section 6(C) allows surveillance findings to be used as basis for assessing taxes for other months or quarters of the same or different taxable years, the assessment must still comply with the test of reasonableness and must not be arbitrary or capricious. In any event, the notices were invalid for failure to comply with Section 228. Section 115 authorizes suspension of business operations for specified violations, and RMO 3-2009 sets out the procedure: a 48-hour notice requiring explanation under oath, then a 5-day VAT compliance notice containing details of findings and provisions violated, after which the taxpayer may again refute; if the response is insufficient or noncompliance occurs, the BIR may recommend closure subject to the CIR’s approval. Section 228, however, governs due process for tax assessments. Under Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corp., the BIR must first make an assessment then enforce collection; a valid assessment sufficiently informs the taxpayer in writing of the legal and factual bases, allowing protest and evidence. Section 228 requires written notice of both legal basis and factual grounds; otherwise the assessment is void. Sections 115 and 228 concern different matters. Here, the CIR was not merely exercising Section 115 powers: the 5-day VAT compliance notice included a demand for payment of deficiency VAT of PHP 1,196,583.13, which reasonably led Elric to believe payment was the only means to avoid closure. The CIR’s act was an attempt to collect deficiency taxes without a valid assessment. Due process required that after the 5-day notice served its purpose, the CIR should have issued a letter of authority and followed Section 228 assessment procedures before holding Elric liable. The notices, used as substitutes for a valid assessment, were void for clear disregard of statutory requirements and due process.

• CTA jurisdiction over “other matters” — Under Section 7(a)(1) of RA 1125, as amended by RA 9282, the CTA has exclusive appellate jurisdiction over decisions of the CIR in cases involving disputed assessments, refunds, fees or other charges, penalties, or other matters arising under the NIRC or other laws administered by the BIR. The “other matters” clause is broad and residual and covers cases arising from the Tax Code and other laws administered by the BIR even if they do not directly involve a disputed assessment or a claim for refund. The Court applied this to uphold CTA jurisdiction over the validity of the 48-hour notice and 5-day VAT compliance notice issued under Section 115.
• Due process in tax assessments — Section 228 of the Tax Code requires that the taxpayer be informed in writing of both the legal basis and the factual grounds for any assessment; otherwise the assessment is void. The BIR must first make a valid assessment before enforcing collection, and administrative due process vitally includes the issuance of a valid assessment. The Court applied this to hold that the notices could not be used to collect deficiency VAT without a valid assessment.
• Non-circumvention of assessment requirements through Section 115 — The CIR cannot bypass the requirements of a valid assessment by invoking Section 115 to surreptitiously collect taxes from a taxpayer. When a 5-day VAT compliance notice includes a demand for payment of deficiency VAT and effectively makes payment the only practical means to avoid closure, it becomes an attempt to collect taxes without a valid assessment. The Court applied this to void the notices.
• Assessment based on estimates — An assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. However, the BIR must disclose the factual basis and method used; absent such explanation, the estimate cannot be considered prima facie valid. The Court applied this to the surveillance-based findings, which lacked any description of how the surveillance was conducted or how the estimates were reached.
• Factual findings of the CTA — As a specialized court, the CTA’s factual findings are not lightly set aside and may be disturbed only when not supported by substantial evidence, or upon a showing of gross error or abuse. The Court applied this to affirm the CTA’s findings that the notices lacked factual bases.

• “The clause “other matters arising under the [Tax Code] or other laws administered by the [Bureau]” is broad and residual in character. It covers cases that arise from the Tax Code and other laws administered by the BIR, even if they do not directly involve a disputed assessment or a claim of refund.” — This passage states the ratio for the CTA’s jurisdiction, holding that the “other matters” clause is broad enough to cover the validity of the notices even without a disputed assessment.
• “Without a doubt, the CIR's act constituted an attempt to collect deficiency taxes without a valid assessment. This Court rules and so holds that it cannot bypass the requirements of a valid assessment by invoking Section 115 to surreptitiously collect taxes from a taxpayer.” — This is the core ruling that Section 115 cannot be used to circumvent the assessment and due process requirements of Section 228.
• “Due process requires that after the 5-day VAT compliance notice had served its purpose, the CIR should have issued a letter of authority to Elric Auxiliary and followed the assessment procedures under Section 228 before holding it liable for any deficiency VAT.” — This passage defines the procedural step the CIR should have taken before enforcing collection.
• “Section 228 expressly requires that the taxpayer be informed in writing of both the legal basis and the factual grounds for any assessment; otherwise, the assessment is void.” — This states the canonical due process requirement for tax assessments applied against the notices.

• Philippine Journalists, Inc. vs. Commissioner of Internal Revenue, 488 Phil. 218 (2004) — Cited as precedent upholding CTA jurisdiction to determine the validity of a warrant of distraint and levy issued by the BIR under the second part of Section 7(a)(1).
• Commissioner of Internal Revenue vs. Hambrecht & Quist Philippines, Inc., 649 Phil. 446 (2010) — Cited for the rule that the CTA has jurisdiction over the issue of prescription of the BIR’s right to collect taxes, and that the CTA’s jurisdiction over disputed assessments and over “other matters” are separate and independent.
• Commissioner of Internal Revenue vs. Lancaster Phils., Inc., 813 Phil. 622 (2017) — Cited for the rule that the authority to examine or assess, being governed by the Tax Code, falls within the CTA’s exclusive appellate jurisdiction under the “other matters” clause.
• St. Marys Academy of Caloocan City, Inc. vs. Commissioner Henares, 893 Phil. 798 (2021) — Cited for the rule that the CTA has exclusive jurisdiction to determine the constitutionality or validity of tax laws, rules and regulations, and other administrative issuances of the CIR under Section 7(a)(1).
• Commissioner of Internal Revenue vs. Manila Medical Services, Inc., 935 Phil. 1007 (2023) — Cited as a more recent reiteration upholding the CTA’s jurisdiction to determine the validity of a warrant of distraint and levy.
• Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corp., 835 Phil. 875 (2018) — Cited for the summary of the assessment and collection procedure and the rule that a valid assessment must inform the taxpayer in writing of the legal and factual bases, as part of administrative due process.
• Commissioner of Internal Revenue vs. Philippine Airlines, Inc., 952 Phil. 1 (2024) — Cited for the rule that only questions of law may be raised in a petition under Rule 45, since factual issues are within the province of lower courts.
• Mannasoft Technology Corporation vs. Commissioner of Internal Revenue, 943 Phil. 633 (2023) — Cited for the rule that the CTA’s factual findings are not lightly set aside and may be disturbed only if not supported by substantial evidence, or upon gross error or abuse.

• Section 7(a)(1), Republic Act No. 1125, as amended by Republic Act No. 9282 — Grants the CTA exclusive appellate jurisdiction to review decisions of the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties, or other matters arising under the NIRC or other laws administered by the BIR. Applied to uphold CTA jurisdiction over the validity of the notices under the “other matters” clause.
• Section 115, National Internal Revenue Code — Empowers the CIR or authorized representative to suspend the business operations and temporarily close the business establishment of any person for failure to issue receipts or invoices, failure to file a VAT return, or understatement of taxable sales or receipts by thirty percent or more of correct taxable sales or receipts for the taxable quarter. Applied as the source of the power under which the notices were issued, but held not to authorize collection of deficiency VAT without a valid assessment.
• Revenue Memorandum Order No. 3-2009 — Provides guidelines for surveillance and stock-taking activities and implementation of suspension and temporary closure of business. Applied to describe the 48-hour notice, 5-day VAT compliance notice, and closure recommendation procedure.
• Section 228, National Internal Revenue Code — Governs protesting of assessment and requires that the taxpayer be informed in writing of the law and the facts on which the assessment is made; otherwise the assessment is void. Applied to invalidate the notices for failure to comply with due process requirements for assessments.
• Section 6(C), National Internal Revenue Code — Allows findings from surveillance to be used as basis for assessing taxes for other months or quarters of the same or different taxable years. Applied with the qualification that the assessment must still comply with the test of reasonableness and must not be arbitrary or capricious.
• Rule 45, Rules of Court — Limits petitions for review on certiorari to questions of law. Applied as the general rule against disturbing the CTA’s factual findings absent recognized exceptions.

Caguioa (Chairperson), Inting, Gaerlan, and Singh, JJ., concur.

• Presiding Justice Roman G. Del Rosario (CTA En Banc) — Rendered a Dissenting Opinion in CTA EB No. 1174 and maintained it in the September 9, 2016 Resolution; the provided text does not recount the grounds or legal basis of the dissent.