gr_222743_2017

THIRD DIVISION April 5, 2017 G.R. No. 222743 MEDICARD PHILIPPINES, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. REYES,, J .: This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated September 2, 2015 and Resolution3 dated January 29, 2016 of the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with modification the Decision4 dated June 5, 2014 and the Resolution5 dated September 15, 2014.in CTA Case No. 7948 of the CTA Third Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal Revenue (CIR) the deficiency Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus 20% interest per annum starting January 25, 2007, until fully paid, pursuant to Section 249(c)6 of the National Internal Revenue Code (NIRC) of 1997.

The Facts MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical insurance coverage to its clients. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it.7 MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January 25, 2007.8 Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated September 20, 2007.

Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against MEDICARD for deficiency VAT. A Memorandum dated December 10, 2007 was likewise issued recommending the issuance of a Formal Assessment Notice (FAN) against MEDICARD.9 On. January 4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007 for alleged deficiency VAT for taxable year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of penalties.

11 According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually provide medical and/or hospital services, but merely arranges for the same, its services are not VAT exempt.13 MEDICARD argued that: (1) the services it render is not limited merely to arranging for the provision of medical and/or hospital services by hospitals and/or clinics but include actual and direct rendition of medical and laboratory services; in fact, its 2006 audited balance sheet shows that it owns x-ray and laboratory facilities which it used in providing medical and laboratory services to its members; (2) out of the ₱l .9 Billion membership fees, ₱319 Million was received from clients that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau of Investments; (3) the processing fees amounting to ₱l 1.5 Million should be excluded from gross receipts because P5.6 Million of which represent advances for professional fees due from clients which were paid by MEDICARD while the remainder was already previously subjected to VAT; (4) the professional fees in the amount of Pl 1 Million should also be excluded because it represents the amount of medical services actually and directly rendered by MEDICARD and/or its subsidiary company; and (5) even assuming that it is liable to pay for the VAT, the 12% VAT rate should not be applied on the entire amount but only for the period when the 12% VAT rate was already in effect, i.e., on February 1, 2006.

It should not also be held liable for surcharge and deficiency interest because it did not pass on the VAT to its members.14 On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue Officer Romualdo Plocios to verify the supporting documents of MEDICARD's Protest. MEDICARD also submitted additional supporting documentary evidence in aid of its Protest thru a letter dated March 18, 2008.15 On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment dated May 15, 2009, denying MEDICARD's protest, to wit:

IN VIEW HEREOF , we deny your letter protest and hereby reiterate in toto assessment of deficiency [VAT] in total sum of ₱196,614,476.99. It is requested that you pay said deficiency taxes immediately. Should payment be made later, adjustment has to be made to impose interest until date of payment. This is olir final decision. If you disagree, you may take an appeal to the [CTA] within the period provided by law, otherwise, said assessment shall become final, executory and demandable. 16 On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A, reiterating its position before the tax authorities. 17 On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications the CIR's deficiency VAT assessment covering taxable year 2006, viz.: WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against [MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under -Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows: Basic Deficiency VAT ₱l78,538,566.68 Add: 25% Surcharge 44,634,641.67 Total ₱223.173.208.35