SOUTH AFRICAN AIRWAYS v.

CIR
G.R. No. 180356 | February 16, 2010
Petitioner: SOUTH AFRICAN AIRWAYS
Respondent: COMMISSIONER OF INTERNAL REVENUE
VELASCO, JR., J.:

Doctrine: If an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 ½%of its Gross Philippine Billings, while international air carriers that do not
have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the regular rate of 32% (now 30%) of such income.

SUMMARY:
South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the Republic of South Africa. In the Philippines, it is an internal air carrier having no
landing rights in the country. South African Airways, however, has a general sales agent in the Philippines, Aerotel. Aerotel sells passage documents for compensation or commission for
South African Airways’ off-line flights for the carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines. South African Airways filed income
tax returns and paid tax on its Gross Philippine Billings (GPB). South African Airways, however, subsequently claim for refund contending that it was not liable to pay tax on its GPB. CTA denied
the claim on the ground that South African Airways is liable to pay the 32% (now 30%) regular corporate income tax.

W/N South African Airways engaged in trade or business in the Philippines subject to the regular corporate income tax? YES. The general rule is that resident foreign corporations shall be
liable for a 32% income tax on their income from within the Philippines, except for resident foreign corporations that are international carriers that derive income “from carriage of persons,
excess baggage, cargo and mail originating from the Philippines” which shall be taxed at 2 ½% of their Gross Philippine Billings. South African Airways being an international carrier with no
flights originating from the Philippines, does not fall under the exception. As such, it must fall under the general rule  Hence, it is liable for regular corporate income tax.

FACTS:
 Petition for Review on Certiorari seeking the reversal of CTA EB decision (affirming decision of CTA division) DENYING its claim for tax refund.
 South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the Republic of South Africa. Its principal office is located at Johannesburg
International Airport, South Africa.
 In PH, it is an internal air carrier having no landing rights in the country. South African Airways, however, has a general sales agent in the Philippines, Aerotel Limited Corporation
(Aerotel).
 Aerotel sells passage documents for compensation or commission for South African Airways’ off-line flights for the carriage of passengers and cargo between ports or points outside
the territorial jurisdiction of the Philippines.
 South African Airways is not registered with the SEC as a corporation, branch office, or partnership. It is not licensed to do business in PH.
 For the taxable year 2000, South African Airways filed separate quarterly and annual income tax returns for its off-line flights
 February 5, 2003: South African Airways filed with the BIR a claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for the
taxable year 2000.
 Claim was unheeded  South African Airways filed a Petition for Review with the CTA for the refund of the said amount.

CTA First Division: DENIED petition for lack of merit

 Ruled that South African Airways is a resident foreign corporation engaged in trade or business in the Philippines.
 South African Airways was not liable to pay tax on its GPB under Section 28(A)(3)(a) of NIRC. BUT South African Airways is liable to pay a tax of 32% on its income derived from the
sales of passage documents in the Philippines.
CTA En Banc: AFFIRMED CTA Division’s Decision. MR Denied.
Hence, this petition.

ISSUES:
1. W/N South African Airways, as an off-line international carrier selling passage documents through an independent sales agent in the Philippines, is engaged in trade or business in the
Philippines subject to the 32% (now 30%) income tax? YES
2. W/N the income derived by South African Airways from the sale of passage documents covering petitioner’s off-line flights is Philippine-source income subject to Philippine income tax? YES
3. W/N South African Airways is entitled to a refund or a tax credit of erroneously paid tax on Gross Philippine Billings for the taxable year 2000 in the amount of P1,727,766.38?

HELD: CTA Decision SET ASIDE. The instant case is REMANDED to the CTA En Banc for further proceedings and appropriate action, more particularly, the reception of evidence for both parties
and the corresponding disposition the case consistent with the SC’s decision

RATIO:
SOUTH AFRICAN AIRWAYS IS SUBJECT TO INCOME TAX AT THE RATE OF 32% (NOW 30%) OF ITS TAXABLE INCOME
 South African Airways failed to sufficiently prove that it is exempted from being taxed for its sale of passage documents in the Philippines.
o CIR v. Acesite (Philippines) Hotel Corporation: Tax refund partakes of the nature of an exemption  it is strictly construed against the claimant who must discharge such burden
convincingly.

South African Airways’ contentions:

 With the new definition of GPB (the provision was amended), it is no longer liable under Sec. 28(A)(3)(a).
 Since 2 1/2% tax on GPB is inapplicable to it, South African Airways is also excluded from the imposition of any income tax.

There were several amendments to the provision involving GPB, but the present Tax Code (1997) provides:
"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document.
 Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided that the passage documents were sold in the Philippines.
 Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the Philippines, income is included in GPB.

SC: South African Airways is correct in saying that since it does not maintain flights to or from the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC (GPB provision).
 BUT it is wrong when it said that in view of non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying any other income tax for its sale of passage documents in the Philippines.
 CIR v. British Overseas Airways Corporation (BOAC): SC ruled that off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines and
that their income from sales of passage documents here is income from within the Philippines.  The off-line air carrier liable for the 32% tax on its taxable income. (Note: this case was
decided under similar factual circumstances as South African Airways)

 Sec. 28(A)(3)(a) of the 1997 NIRC does NOT, in any categorical term, exempt all international air carriers from the coverage of Sec. 28(A)(1) – General Rule 32% (now 30%) income tax.
 Had legislature’s intentions been to completely exclude all international air carriers from the application of the general rule it would have used the appropriate language to do so – BUT
IT DID NOT!
 Thus, the logical interpretation of such provisions is that, if the GPB provision (2 ½% Gross PH Billings) were applicable to a taxpayer, then the general rule (32% now 30% income tax)
would not apply.
  If, however, GPB Provision does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under Sec. 28(A)(1).

To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its
Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at
the rate of 32% of such income.

Other Matters:
a. Statutory Construction: Basically, SC said that the pronouncements made during the deliberations are not controlling. It is a cardinal rule in the interpretation of statutes is that the meaning
and intention of the law-making body must be sought, first of all, in the words of the statute itself.
b. Exception firmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as coming within the purview of the general rule. Sec. 28(A)(1) of the 1997
NIRC is a general rule that resident foreign corporations are liable for 32% tax on all income from sources within the Philippines. Sec. 28(A)(3) is an exception to this general rule.
 South African Airways, being an international carrier with no flights originating from the Philippines, does not fall under the exception. As such, petitioner must fall under the general
rule.

c. On the Denial of claim for refund: The CTA denied the claim on the basis that South African Airways is liable for income tax. Thus, South African Airways raises the issue of whether the
existence of such liability would preclude their claim for a refund of tax paid on the basis of Gross Philippine Billings.

 South African Airways avers that a deficiency tax assessment does not disqualify a taxpayer from claiming a tax refund since a refund claim can proceed independently of a tax
assessment and that the assessment cannot be offset by its claim for refund.  Argument is erroneous.
o South African Airways premises its argument on the existence of an assessment.
o In the assailed Decision, CTA did not, in any way, assess South African Airways of any deficiency corporate income tax.
o CTA merely pointed out that it is liable for the regular corporate income tax.  There is no assessment to speak of.

 GR: Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other.
 Exception: CIR v. CA, CityTrust (234 SCRA 348) SC, however, granted the offsetting of a tax refund with a tax deficiency on the ground that such deficiency assessment is intimately
related to and inextricably intertwined with the right of CityTrust to claim for a tax refund for the same year.
o To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. CityTrust cannot be entitled to refund and at the
same time be liable for a tax deficiency assessment for the same year.
o The grant of a refund is founded on the assumption that the tax return is valid - the facts stated therein are true and correct.
o The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by
itself and without unquestionable evidence, cannot be the basis for the grant of the refund.
o To avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the deficiency tax assessment
against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable.

 Note: In determining W/N South African Airways is entitled to the refund of the amount paid, it would be necessary to determine how much the Government is entitled to collect as taxes.
o This would necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties
as to all the matters subject thereof or necessarily involved therein.
o Given the finding of the CTA that South African Airways, although not liable for GPB, is liable for income tax  the correctness of the return filed by South African Airways is now
put in doubt.
 o Hence, SC cannot grant the prayer for a refund.

SC Court is unable to affirm CTA En Banc’s decision on the outright denial of petitioner’s claim for a refund.
 Even though petitioner is not entitled to a refund due to the question on the propriety of petitioner’s tax return subject of the instant controversy, it would not be proper to deny such
claim without making a determination of South African Airways’ liability under Sec. 28(A)(1).
o Note: Tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on taxable income, that is, gross income less deductions and exemptions, if any.
o It cannot be assumed that South African Airways’ liabilities under the two provisions would be the same.
o There is a need to make a determination of South African Airways’ liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax deficiency exists.

Taxation; Air Transportation; Petitioner, as an offline flights to and from the Philippines, petitioner is clearly not liable
international carrier with no landing rights in the Philippines, is for the Gross Philippine Billings tax.
not liable to tax on Gross Philippine Billings under Section 28(A)
(3) of the 1997 National Internal Revenue Code (NIRC).—At the Same; Resident Foreign Corporation; Petitioner falls within
outset, we affirm the Court of Tax Appeals’ ruling that petitioner, the definition of resident foreign corporation under Section 28(A)
as an offline international carrier with no landing rights in the (1) of the 1997 National Internal Revenue Code (NIRC), thus, it
Philippines, is not liable to tax on Gross Philippine Billings under may be subject to thirty-two percent (32%) tax on its taxable
Section 28(A)(3) of the 1997 National Internal Revenue Code: income.—Petitioner, an offline carrier, is a resident foreign
SEC. 28. Rates of Income Tax on Foreign Corporations.—(A) corporation for income tax purposes. Petitioner falls within the
Tax on Resident Foreign Corporations.—. . . . (3) International definition of resident foreign corporation under Section 28(A)(1) of
Carrier.—An international carrier doing business in the the 1997 National Internal Revenue Code, thus, it may be subject
Philippines shall pay a tax of two and one-half percent (2 1/2%) on to 32% tax on its taxable income. x x x The definition of “resident
its ‘Gross Philippine Billings’ as defined hereunder: (a) foreign corporation” has not substantially changed throughout the
International Air Carrier.—‘Gross Philippine Billings’ refers to the amendments of the National Internal Revenue Code. All versions
amount of gross revenue derived from carriage of persons, excess refer to “a foreign corporation engaged in trade or business within
baggage, cargo and mail originating from the Philippines in a the Philippines.” Commonwealth Act No. 466, known as the
continuous and uninterrupted flight, irrespective of the place of National Internal Revenue Code and approved on June 15, 1939,
sale or issue and the place of payment of the ticket or passage defined “resident foreign corporation” as applying to “a foreign
document: Provided, That tickets revalidated, exchanged and/or corporation engaged in trade or business within the Philippines or
indorsed to another international airline form part of the Gross having an office or place of business therein.” Section 24(b)(2) of
Philippine Billings if the passenger boards a plane in a port or the National Internal Revenue Code, as amended by Republic Act
point in the Philippines: Provided, further, That for a flight which No. 6110, approved on August 4, 1969, reads: Sec. 24. Rates of tax
originates from the Philippines, but transshipment of passenger on corporations.—. . . (b) Tax on foreign corporations.—. . . (2)
takes place at any port outside the Philippines on another airline, Resident corporations.—A corporation organized, authorized, or
only the aliquot portion of the cost of the ticket corresponding to existing under the laws of any foreign country, except a foreign
the leg flown from the Philippines to the point of transshipment life insurance company, engaged in trade or business within the
shall form part of Gross Philippine Billings. (Emphasis supplied) Philippines, shall be taxable as provided in subsection (a) of this
Under the foregoing provision, the tax attaches only when the section upon the total net income received in the preceding
carriage of persons, excess baggage, cargo, and mail originated taxable year from all sources within the Philippines.
from the Philippines in a continuous and uninterrupted flight,
regardless of where the passage documents were sold. Not having
Same; Same; Doing Business; Words and Phrases; The year stay in the country for a period or periods totaling one
Implementing Rules and Regulations (IRR) of Republic Act (RA) hundred eighty (180) days or more[.]
No. 7042 clarifies that “doing business” includes “appointing
representatives or distributors, operating under full control of the
foreign corporation, domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling
one hundred eighty (180) days or more.”—Republic Act No. 7042
or the Foreign Investments Act of 1991 also provides guidance
with its definition of “doing business” with regard to foreign
corporations. Section 3(d) of the law enumerates the activities
that constitute doing business: d. the phrase “doing business” shall include soliciting orders,
service contracts, opening offices,
whether called “liaison” offices or branches; appointing
representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or
periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business,
firm, entity or corporation in the Philippines; and any other act
or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and
object of the business organization: Provided, however, That
the phrase “doing business” shall not be deemed to include mere
investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of
rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a
representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account[.]
(Emphasis supplied) While Section 3(d) above states that
“appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its
own account” is not considered as “doing business,” the
Implementing Rules and Regulations of Republic Act No. 7042
clarifies that “doing business” includes “appointing representatives
or distributors, operating under full control of the foreign
corporation, domiciled in the Philippines or who in any calendar