G.R. No.

222743

MEDICARD PHILIPPINES, INC., Petitioner, 

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, [Link] 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 ₱[Link]

In addition, [MEDICARD] is ordered to pay:

a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis deficiency VAT of Pl 78,538,566.68
computed from January 25, 2007 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as
amended; and

b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount of ₱223,173,208.35
representing basic deficiency VAT of ₱l78,538,566.68 and· 25% surcharge of ₱44,634,64 l .67 and on the 20%
deficiency interest which have accrued as afore-stated in (a), computed from June 19, 2009 until full payment thereof
pursuant to Section 249(C) of the NIRC of 1997.

SO ORDERED.19

The CTA Division held that: (1) the determination of deficiency VAT is not limited to the issuance of Letter of Authority (LOA)
alone as the CIR is granted vast powers to perform examination and assessment functions; (2) in lieu of an LOA, an LN was
issued to MEDICARD informing it· of the discrepancies between its ITRs and VAT Returns and this procedure is authorized
under Revenue Memorandum Order (RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from questioning the validity
of the assessment on the ground of lack of LOA since the assessment issued against MEDICARD contained the requisite legal and
factual bases that put MEDICARD on notice of the deficiencies and it in fact availed of the remedies provided by law without
questioning the nullity of the assessment; (4) the amounts that MEDICARD earmarked , and eventually paid to doctors, hospitals
and clinics cannot be excluded from · the computation of its gross receipts under the provisions of RR No. 4-2007 because the act
of earmarking or allocation is by itself an act of ownership and management over the funds by MEDICARD which is beyond the
contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its clinics and laboratory facilities cannot be excluded from its
gross receipts because the operation of these clinics and laboratory is merely an incident to MEDICARD's main line of business as
HMO and there is no evidence that MEDICARD segregated the amounts pertaining to this at the time it received the premium
from its members; and (6) MEDICARD was not able to substantiate the amount pertaining to its January 2006 income and
therefore has no basis to impose a 10% VAT rate.20

Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD elevated the matter to the
CTA en banc.

In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition only insofar as the 10% VAT rate for
January 2006 is concerned but sustained the findings of the CTA Division in all other matters, thus:

WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the Decision
date June 5, 2014 is hereby MODIFIED, as follows:

"WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR] against

[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] is

Basic Deficiency VAT ₱76,187,687.58

Total ₱220,234.609.48

In addition, [MEDICARD] is ordered to pay:

(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l 76,187,687.58 computed from
January 25, 2007 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and

(b) Delinquency interest at the rate of 20% per annum on the total amount of ₱220,234,609.48 (representing basic
deficiency VAT of ₱l76,187,687.58 and 25% surcharge of ₱44,046,921.90) and on the deficiency interest which have
accrued as afore-stated in (a), computed from June 19, 2009 until full payment thereof pursuant to Section 249(C) of the
NIRC of 1997, as amended."

SO ORDERED.22

Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for reconsideration but it was denied. 23Hence,
MEDICARD now seeks recourse to this Court via a petition for review on certiorari.

The Issues

l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and

2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY PAID TO THE
MEDICAL SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS GROSS RECEIPTS FOR VAT
PURPOSES.24

Ruling of the Court

The petition is meritorious.

The absence of an LOA violated MEDICARD's right to due process

An LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or
enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the purpose of
collecting the correct amount of tax. 25 An LOA is premised on the fact that the examination of a taxpayer who has already filed
his tax returns is a power that statutorily belongs only to the CIR himself or his duly authorized representatives. Section 6 of the
NIRC clearly provides as follows:

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and
Enforcement. –

(A) Examination of Return and Determination of Tax Due.- After a return has been filed as required under the provisions of
this Code, the Commissioner or his duly authorized representative may authorize the examinationof any taxpayer and the
assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the Commissioner from
authorizing the examination of any taxpayer.

x xxx (Emphasis and underlining ours)

Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly authorized representative,
through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. The circumstances contemplated under Section
6 where the taxpayer may be assessed through best-evidence obtainable, inventory-taking, or surveillance among others has
nothing to do with the LOA. These are simply methods of examining the taxpayer in order to arrive at .the correct amount of
taxes. Hence, unless undertaken by the CIR himself or his duly authorized representatives, other tax agents may not validly
conduct any of these kinds of examinations without prior authority.

With the advances in information and communication technology, the Bureau of Internal Revenue (BIR) promulgated RMO No.
30-2003 to lay down the policies and guidelines once its then incipient centralized Data Warehouse (DW) becomes fully
operational in conjunction with its Reconciliation of Listing for Enforcement System (RELIEF System).26 This system can detect
tax leaks by matching the data available under the BIR's Integrated Tax System (ITS) with data gathered from third-party sources.
Through the consolidation and cross-referencing of third-party information, discrepancy reports on sales and purchases can be
generated to uncover under declared income and over claimed purchases of Goods and services.
Under this RMO, several offices of the BIR are tasked with specific functions relative to the RELIEF System, particularly with
regard to LNs. Thus, the Systems Operations Division (SOD) under the Information Systems Group (ISG) is responsible for: (1)
coming up with the List of Taxpayers with discrepancies within the threshold amount set by management for the issuance of LN
and for the system-generated LNs; and (2) sending the same to the taxpayer and to the Audit Information, Tax Exemption and
Incentives Division (AITEID). After receiving the LNs, the AITEID under the Assessment

Service (AS), in coordination with the concerned offices under the ISG, shall be responsible for transmitting the LNs to the
investigating offices [Revenue District Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers Audit and
Investigation Division (LTAID)]. At the level of these investigating offices, the appropriate action on the LN s issued to taxpayers
with RELIEF data discrepancy would be determined.

RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "no-contact-audit approach" in the CIR's
exercise of its ·power to authorize any examination of taxpayer arid the assessment of the correct amount of tax. The no-contact-
audit approach includes the process of computerized matching of sales and purchases data contained in the Schedules of Sales
and Domestic Purchases and Schedule of Importation submitted by VAT taxpayers under the RELIEF System pursuant to RR No.
7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the matching of data from other information or
returns filed by the taxpayers with the BIR such as Alphalist of Payees subject to Final or Creditable Withholding Taxes.

Under this policy, even without conducting a detailed examination of taxpayer's books and records, if the computerized/manual
matching of sales and purchases/expenses appears to reveal discrepancies, the same shall be communicated to the concerned
taxpayer through the issuance of LN. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal
Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue officer may begin an examination of the
taxpayer even prior to the issuance of an LN or even in the absence of an LOA with the aid of a computerized/manual matching of
taxpayers': documents/records. Accordingly, under the RELIEF System, the presumption that the tax returns are in accordance
with law and are presumed correct since these are filed under the penalty of perjury 27 are easily rebutted and the taxpayer becomes
instantly burdened to explain a purported discrepancy.

Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an LOA before any
investigation or examination of the taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is merely similar to
a Notice for Informal Conference. However, for a Notice of Informal Conference, which generally precedes the issuance of an
assessment notice to be valid, the same presupposes that the revenue officer who issued the same is properly authorized in the first
place.

With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by RMO No. 42-2003, was
amended by RMO No. 32-2005 to fine tune existing procedures in handing assessments against taxpayers'· issued LNs by
reconciling various revenue issuances which conflict with the NIRC. Among the objectives in the issuance of RMO No. 32-2005
is to prescribe procedure in the resolution of LN discrepancies, conversion of LNs to LOAs and assessment and collection of
deficiency taxes.

IV. POLICIES AND GUIDELINES

x xxx

8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN , the concerned taxpayer will
be given an opportunity to reconcile its records with those of the BIR within One Hundred and Twenty (120) days from the date
of the issuance of the LN. However, the subject taxpayer shall no longer be entitled to the abatement of interest and penalties after
the lapse of the sixty (60)-day period from the LN issuance.

9. In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty (120)-day period, the
revenue officer (RO) assigned to handle the LN shall recommend the issuance of [LOA) to replace the LN. The head of the
concerned investigating office shall submit a summary list of LNs for conversion to LAs (using the herein prescribed format in
Annex "E" hereof) to the OACIR-LTS I ORD for the preparation of the corresponding LAs with the notation "This LA cancels
LN_________ No. "

x xxx

V. PROCEDURES

x xxx

B. At the Regional Office/Large Taxpayers Service

x xxx
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x xx prior to approval.

8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.

x xxx

Decision 11 G.R. No. 222743

x xxx

10. Transmit the approved/signed LAs, together with the duly accomplished/approved Summary List of LNs for conversion to
LAs, to the concerned investigating offices for the encoding of the required information x xx and for service to the concerned
taxpayers.

x xxx

C. At the RDO x xx

x xxx

11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from issuance thereof, prepare a
summary list of said LN s for conversion to LAs x xx.

x xxx

16. Effect the service of the above LAs to the concerned taxpayers.28

In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against MED ICARD. Therefore
no LOA was also served on MEDICARD. The LN that was issued earlier was also not converted into an LOA contrary to the
above quoted provision. Surprisingly, the CIR did not even dispute the applicability of the above provision of RMO 32-2005 in
the present case which is clear and unequivocal on the necessity of an LOA for the· assessment proceeding to be valid. Hence, the
CTA's disregard of MEDICARD's right to due process warrant the reversal of the assailed decision and resolution.

In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court said that:

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment. Equally
important is that the revenue officer so authorized must not go beyond the authority given. In the absence of such an authority,
the assessment or examination is a nullity.30 (Emphasis and underlining ours)

The Court cannot convert the LN into the LOA required under the law even if the same was issued by the CIR himself. Under RR
No. 12-2002, LN is issued to a person found to have underreported sales/receipts per data generated under the RELIEF system.
Upon receipt of the LN, a taxpayer may avail of the BIR's Voluntary Assessment and Abatement Program. If a taxpayer fails or
refuses to avail of the said program, the BIR may avail of administrative and criminal .remedies, particularly closure, criminal
action, or audit and investigation. Since the law specifically requires an LOA and RMO No. 32-2005 requires the conversion of
the previously issued LN to an LOA, the absence thereof cannot be simply swept under the rug, as the CIR would have it. In fact
Revenue Memorandum Circular No. 40-2003 considers an LN as a notice of audit or investigation only for the purpose of
disqualifying the taxpayer from amending his returns.

The following differences between an LOA and LN are crucial. First, an LOA addressed to a revenue officer is specifically
required under the NIRC before an examination of a taxpayer may be had while an LN is not found in the NIRC and is only for
the purpose of notifying the taxpayer that a discrepancy is found based on the BIR's RELIEF System. Second, an LOA is valid
only for 30 days from date of issue while an LN has no such limitation. Third, an LOA gives the revenue officer only a period of
10days from receipt of LOA to conduct his examination of the taxpayer whereas an LN does not contain such a
limitation.31 Simply put, LN is entirely different and serves a different purpose than an LOA. Due process demands, as recognized
under RMO No. 32-2005, that after an LN has serve its purpose, the revenue officer should have properly secured an LOA before
proceeding with the further examination and assessment of the petitioner. Unfortunarely, this was not done in this case.

Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because none of the financial books or records
being physically kept by MEDICARD was examined. To begin with, Section 6 of the NIRC requires an authority from the CIR or
from his duly authorized representatives before an examination "of a taxpayer" may be made. The requirement of authorization is
therefore not dependent on whether the taxpayer may be required to physically open his books and financial records but only on
whether a taxpayer is being subject to examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and collection efforts much easier and faster. The ease by
which the BIR's revenue generating objectives is achieved is no excuse however for its non-compliance with the statutory
requirement under Section 6 and with its own administrative issuance. In fact, apart from being a statutory requirement, an LOA is
equally needed even under the BIR's RELIEF System because the rationale of requirement is the same whether or not the CIR
conducts a physical examination of the taxpayer's records: to prevent undue harassment of a taxpayer and level the playing field
between the government' s vast resources for tax assessment, collection and enforcement, on one hand, and the solitary taxpayer's
dual need to prosecute its business while at the same time responding to the BIR exercise of its statutory powers. The balance
between these is achieved by ensuring that any examination of the taxpayer by the BIR' s revenue officers is properly authorized
in the first place by those to whom the discretion to exercise the power of examination is given by the statute.

That the BIR officials herein were not shown to have acted unreasonably is beside the point because the issue of their lack of
authority was only brought up during the trial of the case. What is crucial is whether the proceedings that led to the issuance of
VAT deficiency assessment against MEDICARD had the prior approval and authorization from the CIR or her duly authorized
representatives. Not having authority to examine MEDICARD in the first place, the assessment issued by the CIR is inescapably
void.

At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially finds merit in MEDICARD's
substantive arguments.

The amounts earmarked and eventually paid by MEDICARD to the medical service providers do not form part of gross
receipts for VAT purposes

MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT A Division that the gross receipts of
an HMO for VAT purposes shall be the total amount of money or its equivalent actually received from members undiminished by
any amount paid or payable to the owners/operators of hospitals, clinics and medical and dental practitioners. MEDICARD
explains that its business as an HMO involves two different although interrelated contracts. One is between a corporate client and
MEDICARD, with the corporate client's employees being considered as MEDICARD members; and the other is between the
health care institutions/healthcare professionals and MED ICARD.

Under the first, MEDICARD undertakes to make arrangements with healthcare institutions/healthcare professionals for the
coverage of MEDICARD members under specific health related services for a specified period of time in exchange for payment
of a more or less fixed membership fee. Under its contract with its corporate clients, MEDICARD expressly provides that 20% of
the membership fees per individual, regardless of the amount involved, already includes the VAT of 10%/20% excluding the
remaining 80o/o because MEDICARD would earmark this latter portion for medical utilization of its members. Lastly,
MEDICARD also assails CIR's inclusion in its gross receipts of its earnings from medical services which it actually and directly
rendered to its members.

Since an HMO like MEDICARD is primarily engaged m arranging for coverage or designated managed care services that are
needed by plan holders/members for fixed prepaid membership fees and for a specified period of time, then MEDICARD is
principally engaged in the sale of services. Its VAT base and corresponding liability is, thus, determined under Section 108(A) 32 of
the Tax Code, as amended by Republic Act No. 9337.

Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in securities whose gross
receipts is the amount actually received as contract price without allowing any deduction from the gross receipts. 33 This restrictive
tenor changed under RR No. 16-2005. Under this RR, an HMO's gross receipts and gross receipts in general were defined, thus:

Section [Link]

x xxx

HMO's gross receipts shall be the total amount of money or its equivalent representing the service fee actually or constructively
received during the taxable period for the services performed or to be performed for another person, excluding the value-added
tax. The compensation for their services representing their service fee, is presumed to be the total amount received as
enrollment fee from their members plus other charges received.

Section 4.108-4. x xx. "Gross receipts" refers to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits
applied as payments for services rendered, and advance payments actually or constructively received during the taxable
period for the services performed or to be performed for another person, excluding the VAT. 34

In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the definition of gross receipts in
general.35
According to the CTA en banc, the entire amount of membership fees should form part of MEDICARD's gross receipts because
the exclusions to the gross receipts under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD is the
definition of gross receipts of an HMO under RR No. 16-2005 and not the modified definition of gross receipts in general under
the RR No. 4-2007.

The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely presumed that the amount
received by an HMO as membership fee is the HMO's compensation for their services. As a mere presumption, an HMO is, thus,
allowed to establish that a portion of the amount it received as membership fee does NOT actually compensate it but some other
person, which in this case are the medical service providers themselves. It is a well-settled principle of legal hermeneutics that
words of a statute will be interpreted in their natural, plain and ordinary acceptation and signification, unless it is evident that the
legislature intended a technical or special legal meaning to those words. The Court cannot read the word "presumed" in any other
way.

It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under the NIRC does not contain any
specific definition.36 Therefore, absent a statutory definition, this Court has construed the term gross receipts in its plain and
ordinary meaning, that is, gross receipts is understood as comprising the entire receipts without any deduction. 37 Congress, under
Section 108, could have simply left the term gross receipts similarly undefined and its interpretation subjected to ordinary
acceptation,. Instead of doing so, Congress limited the scope of the term gross receipts for VAT purposes only to the amount that
the taxpayer received for the services it performed or to the amount it received as advance payment for the services it will render
in the future for another person.

In the proceedings ·below, the nature of MEDICARD's business and the extent of the services it rendered are not seriously
disputed. As an HMO, MEDICARD primarily acts as an intermediary between the purchaser of healthcare services (its members)
and the healthcare providers (the doctors, hospitals and clinics) for a fee. By enrolling membership with MED ICARD, its
members will be able to avail of the pre-arranged medical services from its accredited healthcare providers without the necessary
protocol of posting cash bonds or deposits prior to being attended to or admitted to hospitals or clinics, especially during
emergencies, at any given time. Apart from this, MEDICARD may also directly provide medical, hospital and laboratory services,
which depends upon its member's choice.

Thus, in the course of its business as such, MED ICARD members can either avail of medical services from MEDICARD's
accredited healthcare providers or directly from MEDICARD. In the former, MEDICARD members obviously knew that beyond
the agreement to pre-arrange the healthcare needs of its ·members, MEDICARD would not actually be providing the actual
healthcare service. Thus, based on industry practice, MEDICARD informs its would-be member beforehand that 80% of the
amount would be earmarked for medical utilization and only the remaining 20% comprises its service fee. In the latter case,
MEDICARD's sale of its services is exempt from VAT under Section 109(G).

The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC that would extend the
definition of gross receipts even to amounts that do not only pertain to the services to be performed: by another person, other than
the taxpayer, but even to amounts that were indisputably utilized not by MED ICARD itself but by the medical service providers.

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered
surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is
preferred over that which makes some words idle and nugatory. This principle is expressed in the maxim Utmagisvaleat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute – it’s every word.

In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, 38the Court adopted the principal object and
purpose object in determining whether the MEDICARD therein is engaged in the business of insurance and therefore liable for
documentary stamp tax. The Court held therein that an HMO engaged in preventive, diagnostic and curative medical services is
not engaged in the business of an insurance, thus:

To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician
and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in
cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features,
the indemnification for cost after .the services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the
rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is
rendered.39 (Emphasis ours)

In sum, the Court said that the main difference between an HMO arid an insurance company is that HMOs undertake to provide or
arrange for the provision of medical services through participating physicians while insurance companies simply undertake to
indemnify the insured for medical expenses incurred up to a pre-agreed limit. In the present case, the VAT is a tax on the value
added by the performance of the service by the taxpayer. It is, thus, this service and the value charged thereof by the taxpayer that
is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT. 40 But the Court's task however is
not to weigh these policy considerations but to determine if these considerations in favor of taxation can even be implied from the
statute where the CIR purports to derive her authority. This Court rules that they cannot because the language of the NIRC is
pretty straightforward and clear. As this Court previously ruled:

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar
doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a
tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that
purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by implication . In answering the question of
who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond
what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning
of the tax laws. 41 (Citation omitted and emphasis and underlining ours)

For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the authority should have been
reasonably founded from the language of the statute. That language is wanting in this case. In the scheme of judicial tax
administration, the need for certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill in the
details that Congress may not have the opportunity or competence to provide. The regulations these authorities issue are relied
upon by taxpayers, who are certain that these will be followed by the courts. Courts, however, will not uphold these authorities'
interpretations when dearly absurd, erroneous or improper. 42 The CIR's interpretation of gross receipts in the present case is
patently erroneous for lack of both textual and non-textual support.

As to the CIR's argument that the act of earmarking or allocation is by itself an act of ownership and management over the funds,
the Court does not agree.1âwphi1 On the contrary, it is MEDICARD's act of earmarking or allocating 80% of the amount it
received as membership fee at the time of payment that weakens the ownership imputed to it. By earmarking or allocating 80% of
the amount, MEDICARD unequivocally recognizes that its possession of the funds is not in the concept of owner but as a mere
administrator of the same. For this reason, at most, MEDICARD's right in relation to these amounts is a mere inchoate owner
which would ripen into actual ownership if, and only if, there is underutilization of the membership fees at the end of the fiscal
year. Prior to that, MEDI CARD is bound to pay from the amounts it had allocated as an administrator once its members avail of
the medical services of MEDICARD's healthcare providers.

Before the Court, the parties were one in submitting the legal issue of whether the amounts MEDICARD earmarked,
corresponding to 80% of its enrollment fees, and paid to the medical service providers should form part of its gross receipt for
VAT purposes, after having paid the VAT on the amount comprising the 20%. It is significant to note in this regard that
MEDICARD established that upon receipt of payment of membership fee it actually issued two official receipts, one pertaining to
the VAT able portion, representing compensation for its services, and the other represents the non-vatable portion pertaining to the
amount earmarked for medical utilization.: Therefore, the absence of an actual and physical segregation of the amounts pertaining
to two different kinds · of fees cannot arbitrarily disqualify MEDICARD from rebutting the presumption under the law and from
proving that indeed services were rendered by its healthcare providers for which it paid the amount it sought to be excluded from
its gross receipts.

With the foregoing discussions on the nullity of the assessment on due process grounds and violation of the NIRC, on one hand,
and the utter lack of legal basis of the CIR's position on the computation of MEDICARD's gross receipts, the Court finds it
unnecessary, nay useless, to discuss the rest of the parties' arguments and counter-arguments.

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of the CTA en banc grounded as it
is on due process violation. The Court likewise rules that for purposes of determining the VAT liability of an HMO, the amounts
earmarked and actually spent for medical utilization of its members should not be included in the computation of its gross
receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby GRANTED. The Decision dated
September 2, 2015 and Resolution dated January 29, 2016 issued by the Court of Tax Appeals en bane in CTA EB No. 1224
are REVERSED and SET ASIDE. The definition of gross receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in
relation to Section 108(A) of the National Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of
determining its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty percent (80%) of the amount of the
contract price earmarked as fiduciary funds for the medical utilization of its members. Further, the Value-Added Tax deficiency
assessment issued against Medicard Philippines, Inc. is hereby declared unauthorized for having been issued without a Letter of
Authority by the Commissioner of Internal Revenue or his duly authorized representatives.

SO ORDERED.