G.R. No.

222743

MEDICARD PHILIPPINES, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

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

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 ordered to pay [CIR] the amount of
₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)(3) of
the NIRC of 1997, as amended, computed as follows:

Basic Deficiency VAT ₱76,187,687.58

Add: 25% Surcharge 44,046,921.90

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.23 Hence, 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 x x x (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 perjury27 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

xxxx

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. "

xxxx

V. PROCEDURES

xxxx

B. At the Regional Office/Large Taxpayers Service

xxxx

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

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

xxxx

Decision 11 G.R. No. 222743

xxxx

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 x x and for service to the concerned
taxpayers.

xxxx

C. At the RDO x x x

xxxx

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
x x.

xxxx

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 MED ICARD 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 4.108-3. xxx

xxxx

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 x x. "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 Ut magisvaleat 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.

BIENVENID L. REYES,
Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR
Associate Justice
Chairperson

LUCAS P. BERSAMIN
Associate JusticeALFREDO BENJAMIN S. CAGUIOA
Associate Justice
 NOEL G. TIJAM
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court’s Division.

PRESBITERO J. VELASCO, JR
Associate Justice
Chairperson,

CERTIFICATION

Pursuant to the Section 13, Article VIII of the Constitution and the Division
Chairperson’s Attestation, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer of the opinion of the
Court’s Division.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes

* Additional Member per Raffle dated April 3, 2017 vice Associate Justice Francis H.

Jardeleza.

1 Rollo, pp. 187-231.

2 Penned by Associate Justice Juanito C. Castaneda; id. at 13-45.

3 Id. at 46-59; Presiding Justice Roman G. Del Rosario with Concurring and Dissenting
Opinion, joined by Associate Justice Erlinda P. Uy.

4 Penned by Associate Justice Ma. Belen M. Ringpis-Liban, with Associate Justices

Lovell R. Bautista and Esperanza R. Pabon-Victorino concurring; id. at 124-174.

5 Id.atl75-178.

6 SEC. 249. Interest. -

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EN BANC

[ GR No. 193625, Aug 30, 2017 ]

AICHI FORGING COMPANY OF ASIA v. CTA - EN BANC +

DECISION

MARTIRES, J.:
The Commissioner of Internal Revenue (CIR) is given 120 days to decide[1] an
administrative claim for refund/credit of unutilized or unapplied input Value Added Tax
(VAT) attributable to zero-rated sales. In case of a decision rendered or inaction after
the 120-day period, the taxpayer may institute a judicial claim by filing an appeal before
the Court of Tax Appeals (CTA) within 30 days from the decision or inaction. [2] Both
120- and 30-day periods are mandatory and jurisdictional. [3] An appeal taken prior to
the expiration of the 120-day period without a decision or action of the Commissioner is
premature and, thus, without a cause of action. Accordingly, the appeal must be
dismissed for lack of jurisdiction.

The Case

Before the Court is a special civil action for certiorari under Rule 65 of the Rules of
Court filed by petitioner Aichi Forging Company of Asia, Inc. (AICHI) seeking the
reversal and setting aside of the 18 February 2010 Decision[4] and 20 July 2010
Resolution[5] of the CTA En Banc in CTA-EB Case No. 519, which affirmed the 20 March
2009 Decision and 29 July 2009 Resolution of the CTA Second Division (CTA Division)
in CTA Case No. 6540 that partially granted the claim of AICHI for tax refund/credit of
unutilized or unapplied input VAT attributable to zero-rated sales.

The Antecedents

AICHI is a domestic corporation duly organized and existing under the laws of the
Philippines, and is principally engaged in the manufacture, production, and processing
of all kinds of steel and steel byproducts, such as closed impression die steel forgings
and all automotive steel parts. It is duly registered with the Bureau of Internal Revenue
(BIR) as a VAT taxpayer and with the Board of Investments (BOI) as an expanding
producer of closed impression die steel forgings.

On 26 September 2002, AICHI filed with the BIR District Office in San Pedro, Laguna, a
written claim for refund and/or tax credit of its unutilized input VAT credits for the
third and fourth quarters of 2000 and the four taxable quarters of 2001. AICHI sought
the tax refund/credit of input VAT for the said taxable quarters in the total sum of
P18,030,547.77[6] representing VAT payments on importation of capital goods and
domestic purchases of goods and services.[7]

As respondent CIR failed to act on the refund claim, and in order to toll the running of
the prescriptive period provided under Sections 229 and 112 (D) of the National Internal
Revenue Code (Tax Code), AICHI filed, on 30 September 2002, a Petition for Review
before the CTA Division.[8]

The Issues

The issue for resolution before the court was whether AICHI was entitled to a refund or
issuance of a tax credit certificate of unutilized input VAT attributable to zero-rated
sales and unutilized input tax on importation of capital goods for the period 1 July 2000
to 31 December 2001 (or six consecutive taxable quarters). Corollary thereto was the
issue on whether the administrative claim (refund claim with the BIR) and judicial claim
(Petition for Review with the CTA) were filed within the statutory periods for filing the
claims.
 The Proceedings before the CTA Division

After finding that both the administrative and judicial claims were filed within the
statutory two-year prescriptive period,[9] the CTA Division partially granted the refund
claim of AICHI.

The CTA Division denied AICID's refund claim with respect to its purchase of capital
goods for the period 1 July 2000 to 31 December 2001 because of the latter's failure to
show that the goods purchased formed part of its Property, Plant and Equipment
Account and that they were subjected to depreciation allowance. As to the claim for
refund of input VAT attributable to zero-rated sales, the CTA only partially granted the
claim due to lack of evidence to substantiate the zero-rating of AICID's sales. In
particular, the CTA denied VAT zero-rating on the sales to BOI-registered enterprises on
account of non-submission of the required BOI Certification.[10] The dispositive portion
of the decision[11] partially granting the refund claim reads as follows:

WHEREFORE, premises considered, the Petition for Review is hereby PARTIALLY

GRANTED. Accordingly, Respondent Commissioner of Internal Revenue is
hereby ORDERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in
favor of petitioner the reduced amount of SIX MILLION NINE HUNDRED
NINETY ONE THOUSAND THREE HUNDRED TWENTY and 40/100 PESOS
(P6,991,320.40), representing unutilized input VAT attributable to zero-rated sales
for the period covering July 1, 2000 to December 31, 2001.[12]
Only the CIR moved for reconsideration[13] of the said decision. The CTA Division denied
the motion,[14] hence, the appeal by the CIR to the CTA En Banc.

The Proceedings before the CTA En Banc

The CIR questioned the partial grant of the refund claim in favor of AICHI. It claimed
that the court did not acquire jurisdiction over the refund claim in view of AICHI's
failure to observe the 30-day period to claim refund/tax credit as specified in Sec. 112 of
the Tax Code, i.e., appeal to the CTA may be filed within 30 days from receipt of the
decision denying the claim or after expiration of 120 days (denial by inaction). With the
filing of the administrative claim on 26 September 2002, the CIR had until 20 January
2003 to act on the matter; and if it failed to do so, AICHI had the right to elevate the
case before the CTA within 30 days from 20 January 2003, or on or before 20 February
2003. However, AICHI filed its Petition for Review on 30 September 2002, or before the
30-day period of appeal had commenced. According to the CIR, this period is
jurisdictional, thus, AICHI's failure to observe it resulted in the CTA not acquiring
jurisdiction over its appeal.[15]

The CTA En Banc was not persuaded. The court ruled that the law does not prohibit the
simultaneous filing of the administrative and judicial claims for refund.[16] It further
declared that what is controlling is that both claims for refund are filed within the two-
year prescriptive period.[17] In sum, the CTA En Banc affirmed the assailed decision and
resolution of the CTA Division, disposing as follows:

WHEREFORE, the instant Petition for Review is hereby DISMISSED for lack of

merit. Accordingly, the March 20, 2009 Decision and July 29, 2009 Resolution of
the CTA Former Second Division in CTA Case No. 6540 entitled, "Aichi Forging
Company of Asia, Inc. vs. Commissioner of Internal Revenue" are
hereby AFFIRMED in toto.[18]
This time, both the CIR and AICHI separately filed motions for reconsideration of the
CTA En Banc decision. In the assailed resolution of the CTA En Banc, the court ruled:

WHEREFORE, premises considered, there having no new matters or issues advanced

by the petitioner-CIR in its Motion which may compel this Court to reverse, modify or
amend the March 20, 2009 Decision of the CTA En Banc, petitioner's "Motion for
Reconsideration" is hereby DENIED for lack of merit. On the other hand, respondent-
AICHI's (sic) Motion for Reconsideration is hereby DENIED for being filed out of time.
[19]

On 24 September 2010, or sixty days from receipt of the said resolution, AICHI, through
a new counsel, filed the instant petition alleging grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of the CTA En Banc when it issued the assailed
decision and resolution.

The Present Petition for Certiorari

To support its petition, AICHI raised the following grounds:

A. PETITIONER'S MOTION FOR RECONSIDERATION (of the Decision

promulgated on 18 February 2010) WAS FILED ON TIME;

B. ASSUMING FOR THE SAKE OF ARGUMENT THAT THE SAID MOTION

WAS FILED OUT OF TIME, IN THE INTEREST OF SUBSTANTIAL JUSTICE,
AND DUE TO GROSS NEGLIGENCE OF PETITIONER'S FORMER
COUNSEL, THE HONORABLE COURT OF TAX APPEALS EN BANC
SHOULD HAVE CONSIDERED PETITIONER'S MOTION FOR
RECONSIDERATION;

C. PETITIONER IS ENTITLED TO THE CLAIMED REFUND AS EVIDENCED

BY THE CERTIFICATION ISSUED BY THE BOARD OF INVESTMENTS.[20]
Citing Section 1, Rule 15 of A.M. No. 05-11-07-CTA or the Revised Rules of the Court of
Tax Appeals (Revised CTA Rules),[21] AICHI claims that it has fifteen (15) days from
receipt of the questioned decision of the CTA En Banc within which to file a motion for
reconsideration. Considering that it received the 18 February 2010 Decision of the
CTA En Banc on 25 February 2010, and that it filed the Motion for Reconsideration on
12 March 2010, AICHI asserts that the filing of the said motion was made within the
prescriptive period provided in the law. [22]

AICHI also ascribes gross negligence on the part of its former counsel when it repeatedly
failed to avail of the remedies under the law after obtaining unfavorable decisions
and/or resolutions of the CTA, to wit: (1) failure to file a motion for reconsideration or
new trial from the decision of the CTA Division partially denying AICHI's claim for
refund; and (2) failure to appeal to the Supreme Court after receiving the resolution of
the CTA En Banc denying AICHI's motion for reconsideration of the decision of the CTA
En Banc. Such gross negligence of the former counsel, AICHI claims, does not bind the
latter and, thus, its motion for reconsideration of the decision of the CTA En Banc ought
to have been considered by the latter. [23]

Finally, AICHI argues that it is entitled to the refund of unutilized input VAT because its
sales to Asian Transmission Corporation and Honda Philippines are qualified for zero-
rating, the latter being a HOI-registered enterprise, as evidenced by a Certification
issued by the BOI. Said certification was attached by AICHI in its motion for
reconsideration from the CTA En Banc decision.[24]
Without giving it due course, we required the respondents to submit their comment to
the said petition.[25]

The Arguments of the CIR

In its Comment,[26] the CIR anchored its opposition to the petition on the following
arguments:

I. PETITIONER FAILED TO AVAIL OF THE PROPER REMEDY.

II. THE CTA EN BANC DID NOT ERR WHEN IT DENIED PETITIONER'S MOTION
FOR RECONSIDERATION.

III. PETITIONER IS NOT ENTITLED TO ITS CLAIM FOR REFUND.[27]

The CIR maintains that under Republic Act No. 9282 (R.A. No. 9282)[28] and the
Revised CTA Rules,[29] an aggrieved party may appeal a decision or ruling of the CTA En
Banc by filing a verified petition for review under Rule 45 of the Rules of Court.
Conformably thereto, the petitioner should have filed a petition for review on certiorari
under Rule 45 instead of a special civil action for certiorari under Rule 65. Being
procedurally flawed, the instant petition must be dismissed outright. [30]

As to the timeliness of the motion for reconsideration, the CIR contends that the
petitioner had mistakenly reckoned the counting of the 15-day period to file the motion
for reconsideration from the receipt of the decision of the CTA En Banc. The CIR
maintains that the reckoning point should be the petitioner's receipt of the decision of
the CTA Division. Considering that no such motion for reconsideration within the 15-
day period was filed by the petitioner before the CTA Division, the CIR concludes that
the petitioner's right to question the decision of the CTA Division had already lapsed
and, accordingly, the petitioner may no longer move for a reconsideration of a decision
which it never questioned.[31]

Anent petitioner AICHI's entitlement to the claim for refund, the CIR contends that the
BOI Certification, which was attached to the petitioner's Motion for Reconsideration,
dated 12 March 2010, should not be considered at all as it was presented only during
appeal (before the CTA En Banc). In any event, the certification does not prove AICHI's
claim for refund. In said certification, it is required by the terms and conditions that
AICHI must comply with the production schedule of 3,900 metric tons or the peso
equivalent of P257,400,000.00. However, this data is not verifiable from the petitioner's
Quarterly VAT Returns or from the testimonies of its witness. The CIR, thus, submits
that the noncompliance with the BOI terms and conditions further warrants the denial
of AICHI's claim for refund.[32]

The Issues

Based on the opposing contentions of the parties, the issues for resolution are the
following: (1) whether AICHI availed of the correct remedy; (2) whether AICHI can still
question the CTA Division ruling; and (3) whether AICHI sufficiently proved its
entitlement to the refund or tax credit.

The Court's Ruling

We deny the petition.

I.

The CTA had no jurisdiction over the judicial claim.

AICHI's judicial claim was filed prematurely and, thus, without cause of action.

First, we invoke the age-old rule that when a case is on appeal, the Court has the
authority to review matters not specifically raised or assigned as error if their
consideration is necessary in reaching a just conclusion of the case. [33] Guided by this
principle, we shall discuss the timeliness of AICHI's judicial claim, although not raised
by the parties in the present petition, in order to determine whether the CTA validly
acquired jurisdiction over it. The matter of jurisdiction cannot be waived because it is
conferred by law and is not dependent on the consent or objection or the acts or
omissions of the parties or any one of them.[34] In addition, courts have the power
to motu proprio dismiss an action over which it has no jurisdiction. The grounds
for motu proprio dismissal by the court are provided in Rule 9, Section 1 of the Revised
Rules of Court, to wit:

SECTION 1. Defenses and objections not pleaded - Defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived. However, when it
appears from the pleadings or the evidence on record that the court has no
jurisdiction over the subject matter, that there is another action pending between
the same parties for the same cause, or that the action is barred by a prior judgment or
by statute of limitations, the court shall dismiss the claim. (emphasis supplied)
On the judicial claim for refund or tax credit of AICHI, the CTA did not validly acquire
jurisdiction over such judicial claim because the appeal before the court was made
prematurely. When the CTA acts without jurisdiction, its decision is void. Consequently,
the answer to the second issue, i.e., whether AICHI can still question the CTA ruling,
becomes irrelevant.

The present case stemmed from a claim for refund or tax credit of alleged unutilized
input VAT attributable to zero-rated sales and unutilized input VAT on the purchase of
capital goods for the third and fourth quarters of 2000 and the four taxable quarters of
2001. The refund or tax credit of input taxes corresponding to the six taxable quarters
were combined into one administrative claim filed before the BIR on 26
September 2002. On the other hand, the judicial claim was filed before the CTA,
through a petition for review, on 30 September 2002, or a mere four days after the
administrative claim was filed. It is not disputed that the administrative claim was not
acted upon by the BIR.

Convinced that the judicial claim of AICHI was properly made, the CTA Division took
cognizance of the case and proceeded with trial on the merits. Among the issues
presented by the parties was the timeliness of both the administrative and judicial
claims of AICHI. In its decision, the CTA Division categorically found that both the dates
of filing the administrative claim and judicial claim were within the two-year
prescriptive period reckoned from the close of each of the taxable quarters from the
third quarter of 2000 up to the last quarter of 2001, to wit:
 Reckoning
Expiry date Date of filing
point of Date of filing
of of
Year Quarter counting of judicial
prescriptive administrativ
the 2-year claim
period e claim
period
September September September 26, September 30,
2000 3rd
30, 2000 30, 2002 2002 2002
December 31, December 31, September 26, September 30,
4th
2000 2002 2002 2002
March 31, March 31, September 26, September 30,
2001 1st
2001 2003 2002 2002
June 30, June 30, September 26, September 30,
2nd
2001 2003 2002 2002
September September September 26, September 30,
3rd
30, 2001 30, 2003 2002 2002
December 31, December 31, September 26, September 30,
4th
2001 2003 2002 2002
The relevant provisions of the 1997 Tax Code[35] at the time AICHI filed its claim for
refund or credit of unutilized input tax reads:

SEC. 112. Refunds or Tax Credits of Input Tax. -

(A) Zero-rated or Effectively Zero-rated Sales.- Any VAT-registered person, whose sales
are zero-rated or effectively zero-rated may, within two (2) years after the close
of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been applied
against output tax: x x x

(B) Capital Goods. A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased,
to the extent that such input taxes have not been applied against output taxes.

The application may be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was made.

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application filed in
accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure
on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from
the receipt of the decision denying the claim or after the expiration of the
one hundred twenty-day period, appeal the decision or the unacted claim
with the Court of Tax Appeals. (emphasis supplied)
The law contemplates two kinds of refundable amounts: (1) unutilized input tax paid on
capital goods purchased, and (2) unutilized input tax attributable to zero-rated sales.
The claim for tax refund or credit is initially filed before the CIR who is vested with the
power and primary with jurisdiction to decide on refunds of taxes, fees or other charges,
and penalties imposed in relation thereto.[36] In every case, the filing of the
administrative claim should be done within two years. However, the reckoning point
of counting such two-year period varies according to the kind of input tax subject matter
of the claim. For the input tax paid on capital goods, the counting of the two-year period
starts from the close of the taxable quarter when the purchase was made; whereas, for
input tax attributable to zero-rated sale, from the close of the taxable quarter when such
zero-rated sale was made (not when the purchase was made).

From the submission of the complete documents to support the claim, the CIR has a
period of one hundred twenty (120) days to decide on the claim. If the CIR decides
within the 120-day period, the taxpayer may initiate a judicial claim by filing within 30
days an appeal before the CTA. If there is no decision within the 120-day period, the
CIR's inaction shall be deemed a denial of the application. [37] In the latter case, the
taxpayer may institute the judicial claim, also by an appeal, within 30 days before the
CTA.

Generally, the 120-day waiting period is both mandatory and

jurisdictional.

In a long line of cases,[38] the Court had interpreted the 120-day period as both
mandatory and jurisdictional such that the taxpayer is forced to await the expiration of
the period before initiating an appeal before the CTA. This must be so because prior to
the expiration of the period, the CIR still has the statutory authority to render a
decision. If there is no decision and the period has not yet expired, there is no reason to
complain of in the meantime. Otherwise stated, there is no cause of action yet as would
justify a resort to the court.

A premature invocation of the court's jurisdiction is fatally defective and is susceptible

to dismissal for want of jurisdiction. Such is the very essence of the doctrine of
exhaustion of administrative remedies under which the court cannot take cognizance of
a case unless all available remedies in the administrative level are first utilized.
Whenever granted by law a specific period of time to act, an administrative officer must
be given the full benefit of such period. Administrative remedies are exhausted upon the
full expiration of the period without any action.

The first test case regarding the mandatory and jurisdictional nature of the 120+30-day
waiting periods[39] provided in Section 112 (D)[40] of the 1997 Tax Code is CIR v. Aichi
Forging Company of Asia, Inc. (Aichi), G.R. No. 184823, 6 October 2010.[41] In that
landmark case, the Court rejected as without legal basis the assertion of the respondent
taxpayer that the non observance of the 120-day period is not fatal to the filing of a
judicial claim as long as both the administrative and the judicial claims are filed within
the two-year prescriptive period. The Court explained that Section 112 (D) contemplated
two scenarios: (1) a decision is made before the expiration of the 120-day period; and (2)
no decision after such 120-day period. In either instance, the appeal with the CTA can
only be made within 30 days after the decision or inaction.
Emphatically, Aichi announced that the 120-day period is crucial in filing an appeal with
the CTA.

The exception: Judicial claims filed from 10 December 2003 up to 6

October 2010

Nonetheless, in the subsequent landmark decision of CIR v. San Roque Power

Corporation, Taganito Mining Corporation v. CIR, and Philex Mining Corporation v.
CIR (San Roque),[42] the Court recognized an instance when a prematurely filed appeal
may be validly taken cognizance of by the CTA. San Roque relaxed the strict compliance
with the 120-day mandatory and jurisdictional period, specifically for Taganito Mining
Corporation, in view of BIR Ruling No. DA-489-03, dated 10 December 2003,
which expressly declared that the "taxpayer-claimant need not wait for the lapse of the
120-day period before it could seek judicial relief with the CTA by way of petition for
review." Pertinently, the prematurely filed appeal of San Roque Power Corporation
before the CTA was dismissed because it came before the issuance of BIR Ruling No.
DA-489-03. On the other hand, Taganito Mining Corporation's appeal was allowed
because it was taken after the issuance of said BIR Ruling.[43]

Subsequently, in Taganito Mining Corporation v. CIR,[44] the Court reconciled the

doctrines in San Roque and the 2010 Aichi case by enunciating that during the window
period from 10 December 2003 (issuance of BIR Ruling No. DA-489-03) to 6 October
2010 (date of promulgation of Aichi), taxpayer-claimants need not observe the stringent
120-day period. We said -

Reconciling the pronouncements in the Aichi and San Roque cases, the rule must
therefore be that during the period December 10, 2003 (when BIR Ruling No. DA-489-
03 was issued) to October 6, 2010 (when the Aichi case was promulgated), taxpayers-
claimants need not observe the 120-day period before it could file a judicial claim for
refund of excess input VAT before the CTA. Before and after the aforementioned
period (i.e., December 10, 2003 to October 6, 2010), the observance of the 120- day
period is mandatory and jurisdictional to the filing of such claim. (emphasis
supplied)
Here, it is not disputed that AICHI had timely filed its administrative claim for refund
or tax credit before the BIR. The records show that the claim for refund/tax credit of
input taxes covering the six separate taxable periods from the 3rd Quarter of 2000 up to
the 4th Quarter of 2001 was made on 26 September 2002. Both the CTA Division and
CTA En Banc correctly ruled that it fell within the two-year statute of limitations.
However, its judicial claim was filed a mere four days later on 30 September 2002,
or before the window period when the taxpayers need not observe the 120-day
mandatory and jurisdictional period. Consequently, the general rule applies.

AICHI is similarly situated as San Roque Power Corporation in San Roque - both filed
their appeals to the CTA without waiting for the 120-day period to lapse and before the
aforesaid window period. As in San Roque, AICHI failed to comply with the mandatory
120-day waiting period, thus, the CTA ought to have dismissed the appeal for lack of
jurisdiction.

The judicial claim need not fall within the 2-year period.

Both the CTA Division and CTA En Banc were convinced that a simultaneous filing of
the administrative and judicial claims is permissible so long as the two claims fall within
the two-year prescriptive period.

We do not agree.

Aichi already settled the matter concerning the proper interpretation of the phrase
"within two (2) years x x x apply for the issuance of a tax credit certificate or refund"
found in Section 112 (D) of the 1997 Tax Code. Aichi clarified that the phrase refers to
applications for refund/credit filed with the CIR and not to appeals made to the CTA. All
that is required under the law is that the appeal to the CTA is brought within 30 days
from either decision or inaction.

Under the foregoing interpretation, there may be two possible scenarios when an appeal
to the CTA is considered fatally defective even when initiated within the two-year
prescriptive period: first, when there is no decision and the appeal is taken prior to the
lapse of the 120-day mandatory period,[45] except only the appeal within the window
period from 10 December 2003 to 6 October 2010;[46] second, the appeal is
taken beyond 30 days from either decision or inaction "deemed a denial." [47] In
contrast, an appeal outside the 2-year period is not legally infirm for as long as it is
taken within 30 days from the decision or inaction on the administrative claim that
must have been initiated within the 2-year prescriptive period. In other words, the
appeal to the CTA is always initiated within 30 days from decision or
inaction regardless whether the date of its filing is within or outside the 2-year period
of limitation.

To repeat, except only to the extent allowed by the window period, there is no legal basis
for the insistence that the simultaneous filing of both administrative and judicial claims
(pursuant to Section 112 of the Tax Code) is pennissible for as long as both fall within
the 2-year prescriptive period.

Existing jurisprudence involving petitioner Aichi

There are two other cases involving AICHI wherein we resolved the same issue on the
timeliness of the judicial claims before the CTA - the first is the landmark case
of Aichi (hereinafter 2010 Aichi); and the second is Commissioner v. Aichi Forging
Company of Asia, Inc. (2014 Aichi),[48] promulgated in 2014.

Worth mentioning is the predominantly striking similarities between the two cases: (1)
both involved applications for refund/tax credit of unutilized input VAT under Section
112 of the Tax Code; (2) the administrative claims were timely filed before the CIR; (3)
the judicial claims before the CTA were premature;[49] and (4) the judicial claims
were filed after 10 December 2003, or the date of the issuance ofBIR Ruling No.
DA-489-03.[50] Yet, the Court arrived at divergent conclusions on the application of the
120-day period - in 2010 Aichi, the Court applied the strict compliance with the
mandatory 120-day waiting period; whereas, in 2014 Aichi, the premature filing was
allowed following the exception laid down in San Roque (2013). Thus, the Court denied
the judicial claim in 2010 Aichi due to the CTA's lack of jurisdiction over it, but
sustained such jurisdiction in 2014 Aichi.

We clarify.

In 2010 Aichi, the Court passed upon the timeliness of the judicial claim with the
CTA without considering BIR Ruling No. DA-489-03. The reason is simple: none of the
parties, especially Aichi, had raised the matter on the effect of the said BIR Ruling. It is
reasonable to think that Aichi saw no need to present the issue since the CTA already
gave due course to its petition and the Commissioner questioned, on motion for
reconsideration, the simultaneous filing of both the administrative and judicial claims
only after the CTA First Division partially ruled in favor of Aichi. The CTA First Division
denied the motion holding that the law does not prohibit the simultaneous filing of the
administrative and judicial claims for refund. The CTA En Banc subsequently sustained
the CTA First Division, although we dismissed such reasoning in view of the clear
wordings of Section 112.

It was only in the 2013 case of San Roque that BIR Ruling No. DA-489-03 was raised for
the first time and, thus, the Court was presented a clear opportunity to discuss its legal
effect. The doctrine on the exception to the strict application of the 120-day period laid
down in San Roque became the controlling law that was followed in numerous
subsequent cases, one of which is 2014 Aichi. Thus, even though the appeal with the
CTA in 2010 Aichi fell within the window period, the exception could not be applied as
this was first recognized only in 2013 when San Roque was promulgated. On the other
hand, it is different in 2014 Aichi as it must yield to San Roque.

The present case, just like 2014 Aichi, is very much similar to 2010 Aichi, with the only
notable distinction being the date of filing of the appeal with the CTA. As stated
previously, the appeal in this case came before the window period. However, such
distinction is not significant as our conclusions here and in 2010 Aichi are the same,
that is, the CTA did not acquire jurisdiction in view of the mandatory and jurisdictional
nature of the 120-day waiting period.

Considering our holding that the CTA did not acquire jurisdiction over the appeal of
AICHI, the decision partially granting the refund claim must therefore be set aside as a
void judgment.

The rule is that where there is want of jurisdiction over a subject matter, the judgment is
rendered null and void.[51] A void judgment is in legal effect no judgment, by which no
rights are divested, from which no right can be obtained, which neither binds nor bars
anyone, and under which all acts performed and all claims flowing out are void. [52] We
quote our pronouncement in Canero v. University of the Philippines:[53]

A void judgment is not entitled to the respect accorded to a valid judgment, but may be
entirely disregarded or declared inoperative by any tribunal in which effect is sought to
be given to it. It has no legal or binding effect or efficacy for any purpose or at any place.
It cannot affect, impair or create rights. It is not entitled to enforcement and is,
ordinarily, no protection to those who seek to enforce. In other words, a void judgment
is regarded as a nullity, and the situation is the same as it would be if there was no
judgment.
Since the judgment of the CTA Division is void, it becomes futile for any of the parties to
question it. It, therefore, does not matter whether AICHI had timely filed a motion for
reconsideration to question either the decision of the CTA En Banc or the CTA Division.

II.

The petitioner adopted the wrong remedy in assailing the decision of the
CTA En Banc.

We agree with the CIR that the filing of the present Petition for Certiorari under Rule 65
of the 1997 Rules of Court is procedurally flawed. What the petitioner should have done
to question the decision of the CTA En Banc was to file before this Court a petition for
review under Rule 45 of the same Rules of Court. This is in conformity with Section 11 of
R.A. No. 9282, the pertinent text reproduced here:

SECTION 11. Section 18 of the same Act is hereby amended as follows:

SEC. 18. Appeal to the Court ofTax Appeals En Banc. - No civil proceeding involving
matter arising under the National Internal Revenue Code, the Tariff and Customs Code
or the Local Government Code shall be maintained, except as herein provided, until and
unless an appeal has been previously filed with the CTA and disposed of in accordance
with the provisions of this Act.

A party adversely affected by a resolution of a Division of the CTA on a motion for

reconsideration or new trial, may file a petition for review with the CTA en banc.

SEC. 19. Review by Certiorari. - A party adversely affected by a decision or ruling of the

CTA en banc may file with the Supreme Court a verified petition for review on certiorari
pursuant to Rule 45 of the 1997 Rules of Civil Procedure.
Likewise, Section 1, Rule 16 the Revised CTA Rules provides:

RULE16

APPEAL
SECTION 1. Appeal to Supreme Court by petition for review on certiorari.- A party
adversely affected by a decision or ruling of the Court en banc may appeal therefrom by
filing with the Supreme Court a verified petition for review on certiorari within fifteen
days from receipt of a copy of the decision or resolution, as provided in Rule 45 of the
Rules of Court. If such party has filed a motion for reconsideration or for new trial, the
period herein fixed shall run from the party's receipt of a copy of the resolution denying
tl1e motion for reconsideration or for new trial.
A petition for certiorari under Rule 65 of the Rules of Court is a special civil action that
may be resorted to only in the absence of appeal or any plain, speedy and adequate
remedy in the ordinary course of law.[54]

In this case, there is a plain, speedy and adequate remedy that is available appeal by
certiorari under Rule 45. Appeal is available because the 20 July 2010 Resolution of the
CTA En Banc was a final disposition as it denied AICHI's full claim for refund or tax
credit of creditable input taxes. The proper remedy to obtain a reversal of judgment on
the merits, final order or resolution is appeal. AICHI's resort to certiorari proceedings
under Rule 65 is, therefore, erroneous and it deserves nothing less than an outright
dismissal.

In several cases, the Court had allowed the liberal application of the Rules of Court.
Thus, we treated as appeal by certiorari under Rule 45 what otherwise was denominated
or styled as a petition for certiorari under Rule 65, provided the petition must have been
filed within the reglementary period of 15 days from receipt of the assailed decision or
resolution. Outside of this circumstance, there should be a strong and justifiable reason
for a departure from the established rule of procedure. As the Court had held, it is only
for the most persuasive of reasons can such rules be relaxed to relieve a litigant of an
injustice not commensurate with the degree of his thoughtlessness in not complying
with the procedure prescribed.[55]

Here, the petition was filed on the 60th day following the receipt of the assailed
resolution of the CTA En Banc, or outside of the 15-day period of appeal by certiorari
under Rule 45 but within the 60-day period for filing a petition for certiorari under Rule
65. Unfortunately, petitioner AICHI had not demonstrated any justifiable reason for us
to relax the rules and disregard the procedural infirmity of its adopted remedy. What the
petitioner merely did was invoke substantial justice by ascribing gross negligence on the
part of its previous counsel. It cites its previous counsel's failure to file a motion for
reconsideration of the CTA Division's ruling partially denying its claim for refund, and
to promptly file an appeal before this Court from the denial of its motion for
reconsideration assailing the decision of the CTA En Banc.

We are not persuaded.

The well-settled rule is that negligence and mistakes of counsel bind the client. The
exception is when the negligence of counsel is so gross as to constitute a violation of the
due process rights of the client[56] Even so, it must be convincingly shown that the client
was so maliciously deprived of information that he or she could not have acted to
protect his or her interests.[57] In Bejarasco, Jr. v. People,[58] this court reiterated:

For the exception to apply . . . the gross negligence should not be accompanied by the
client's own negligence or malice, considering that the client has the duty to be vigilant
in respect of his interests by keeping himself up-to-date on the status of the case. Failing
in this duty, the client should suffer whatever adverse judgment is rendered against him.
If indeed the petitioner was earnest in recovering the full amount of its refund claim, it
could have avoided the negative consequences of the failure to move for dismissal from
the CTA Division's partial denial of its claim by simply making a follow-up from its
lawyer regarding the status of its case. Worse, it committed the same mistake again by
staying passive even after denial of its motion for reconsideration from the decision of
the CTA En Banc. Party-litigants share in the responsibility of prosecuting their
complaints with assiduousness and should not be expected to simply sit back, relax, and
await a favorable outcome.[59] Absent any other compelling reasons, we cannot apply the
exception to the rule that the negligence of counsel binds the client so as to excuse the
wrongful resort to a petition for certiorari instead of an appeal. Besides, AICHI's citation
of the negligence of counsel was meant for the CTA to grant its motion for
reconsideration, not for this Court to give due course to the present petition. Thus, there
is no cogent justification for granting to the petitioner the preferential treatment of a
liberal application of the rules.

It must be emphasized, however, that the outright dismissal of the petition for being the
wrong remedy does not mean that the CTA decision and resolution stand. As discussed,
the decision of the CTA Division is null and void; therefore, no right can be obtained
from it or that all claims flowing out of it is void.

Epilogue

Petitioner AICHI came to this court expecting a reversal of the partial denial of its claim
for refund/credit so that it could recover more in addition to what it had been allowed
by the CTA. Regrettably, AICHI comes out empty-handed in our judgment. We could
not rule on the jurisdiction of the CTA any other way. The law and jurisprudence speak
loud and clear. Our solemn duty is to obey it.

All told, the CTA has no jurisdiction over AICHI's judicial claim considering that its
Petition for Review was filed prematurely, or without cause of action for failure to
exhaust the administrative remedies provided under Section 112 (D) of the Tax Code, as
amended. In addition, AICHI availed of the wrong remedy. Likewise, we find no need to
pass upon the issue on whether petitioner AICHI had substantiated its claim for refund
or tax credit. Indisputably, we must deny AICHI's claim for refund.

WHEREFORE, for lack of jurisdiction, the 20 March 2009 Decision and 29 July 2009
Resolution of the Court of Tax Appeals Second Division in CTA Case No. 6540, and the
18 February 2010 Decision and 20 July 2010 Resolution of the Court of Tax Appeals En
Banc in CTA-EB Case No. 519 are hereby VACATED and SET ASIDE.

Consequently, the petition before this Court is DENIED. No costs.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersamin, Leonen, and Gesmundo, JJ., concur.

October 2, 2017

NOTICE OF JUDGMENT

Sirs / Mesdames:
Please take notice that on August 30, 2017 a Decision, copy attached hereto, was
rendered by the Supreme Court in the above-entitled case, the original of which was
received by this Office on October 2, 2017 at 3:05 p.m.

Very truly yours,

(SGD)
WILFREDO V.
LAPITAN
Division Clerk of
 
Court

[1]
 Section 112 (D) [now renumbered as 112(C)], 1997 Tax Code.

[2]
 Id.

[3]
 See Visayas Geothermal Power Company v. Commissioner, G.R. No. 205279, 26
April 2017.

[4]
 Rollo, pp. 32-49.

[5]
 Id. at 50-55.

[6]
 Later increased to P18,203,933.60, per AICHI's Amended Petition for Review with
the CTA.

[7]
 Rollo, pp. 33-36; Joint Stipulation of Facts and Issues, as adapted in the 18 February
2010 Decision of the CTA En Banc.

[8]
 Id. at 38-39.

[9]
 The finding was based on Section 112 of the NIRC, which provides:

SEC. 112. Refunds or Tax Credits of Input Tax. -

Zero-rated or Effectively Zero-rated Sales. - any VAT-registered person, whose

sales are zero-rated or effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made, apply for the issuance of a
tax credit certificate or refund of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: Provided, however, That in the case of zero-rated
sales under Section 106(A)(2)(a)(I), (2) and (B) and Section 108 (B)(I) and (2), the
(A) acceptable foreign currency exchange proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zerorated sale and also in taxable or exempt sale of goods or properties
or services, and the amount of creditable input tax due or paid cannot be directly
and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.
(B) Capital Goods. - A VAT-registered person may apply for the issuance of a tax credit
 certificate or refund of input taxes paid on capital goods imported or locally
purchased, to the extent that such input taxes have not been applied against output
taxes. The application may be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was made.

[10]
 Section 3 of RMO 9-2000 provides:

SEC. 3. Sales of goods, properties or services made by a VAT-registered supplier to a

BOI registered exporter shall be accorded automatic zero-rating, i.e., without necessity
of applying for and securing approval of the application for zero-rating as provided in
Revenue Regulations No. 7-95, subject to the following conditions:

(1) The supplier must be VAT-registered;

(2) The BOI-registered buyer must likewise be VAT-registered;
The buyer must be a BOI-registered manufacturer/producer whose products are
100% exported. For this purpose, a Certification to this effect must be issued by
(3)
the Board of Investments (BOI) and which certification shall be good for one year
unless subsequently re-issued by the BOI;
The BOIl-registered buyer shall furnish each of its suppliers with a copy of the
aforementioned BOI Certification which shall serve as authority for the supplier to
(4)
avail of the benefits of zero-rating for its sales to said BOI-registered
buyers; and
The VAT-registered supplier shall issue for each sale to BOI-registered
manufacturer/exporters a duly registered VAT invoice with the words 'zero-rated'
(5) stamped thereon in compliance with Sec. 4.108-1 of Revenue Regulations No. 7-95.
The supplier must likewise indicate in the VAT-invoice the name and BOI-registry
number of the buyer. (Emphasis supplied.)

[11]
 Rollo, pp. 341-372.

[12]
 Id. at 371.

[13]
 Id. at 379-386.

[14]
 Id. at 400-402.

[15]
 Id. at 409-412.

[16]
 Id. at 39.

[17]
 Id. at 40.

[18]
 Id.

[19]
 Id. at 52-53.

[20]
 Id. at 18.

[21]
 The provision reads:

Section 1. Who may and when to file motion. - Any aggrieved party may seek a
reconsideration or new trial of any decision, resolution or order of the Court. He shall
file a motion for reconsideration or new trial within fifteen days from the date he
received the notice of the decision, resolution or order of the Court in question.

[22]
 Rollo, pp. 19-20.

[23]
 Id. at 21-24.

[24]
 Id. at 24-26.

[25]
 Id. at 488.

[26]
 Id. at 530 to 551.

[27]
 Id. at 534.

[28]
 Id. at 536.The relevant provision reads:

SEC. 19. Review by Certiorari.- A party adversely affected by a decision or ruling of the
CTA en banc may file with the Supreme Court a verified petition for review on certiorari
pursuant to Rule 45 of the 1997 Rules of Civil Procedure.

[29]
 Id. The pertinent provision reads:

Rule 16

APPEAL

SECTION 1. Appeal to Supreme Court by petition for review on certiorari. - A party

adversely affected by a decision or ruling of the Court en banc may appeal therefrom by
filing with the Supreme Court a verified petition for review on certiorari within fifteen
days from receipt of a copy of the decision or resolution, as provided in Rule 45 of the
Rules of Court. If such party has filed a motion for reconsideration or for new trial, the
period herein fixed shall run from the party's receipt of a copy of the resolution denying
the motion for reconsideration or for new trial.

[30]
 Rollo, p. 537.

[31]
 Id. at 540-542.

[32]
 Id. at 545-546.

[33]
 See Silicon Philippines, Inc. (formerly Intel Philippines Manufacturing. Inc.) v. CIR,
757 Phil. 54, 69 (2015), citing Silicon Philippines, Inc. (formerly Intel Philippines
Manufacturing, Inc.) v. CIR, 727 Phil. 487, 499 (2014).

[34]
 Id., citing Nippon Express (Philippines) Corporation v. CIR, 706 Phil. 442, 450-451
(2013).

[35]
 Before the amendments introduced by R.A. No. 9337 and R.A. No. 9361. R.A. No.
9337 took force on 1 November 2005; R.A. No. 9361 on 28 November 2006.

[36]
 See Section 4, Tax Code.

[37]
 Section 11, R.A. No. 1125, as amended; See also CIR v. San Roque Power
Corporation, 703 Phil. 310, 355 (2013).
[38]
 Some of these cases are: Sitel Philippines Corporation (Formerly Clientlogic Phils.,
Inc.) v. CIR, G.R. No. 201326, 8 February 2017; Deutsche v. CIR, G.R. No. 197980, 1
December 2016; Coral Bay Nickel Corporation v. CIR, G.R. No. 190506, 13 June
2016; Procter and Gamble Asia PTE Ltd. V. CIR, G.R. No. 204277, 30 May 2016, 791
SCRA 392, 407; Silicon Philippines, Inc. v. CIR, 757 Phil. 54, 68 (2015); Pilipinas Total
Gas, Inc. v. CIR, G.R. No. 207112, 8 December 2015, 776 SCRA 395, 428; Mindanao II
Geothermal Partnership v. CIR, 749 Phil. 485, 491 (2014); CIR v. San Roque Power
Corporation, 703 Phil. 310 (2013); Nippon Express (Philippines) Corporation v. CIR,
706 Phil. 442, 450 (2013); CIR v. Aichi Forging Company of Asia, Inc., 646 Phil. 710
(2010).

[39]
 The precursor of the 120-day period under Section 112 (D) of the 1997 Tax Code is
Section 106 (d) of the old 1977 Tax Code which provided for a 60-day period for the
Commissioner to decide on the claim. Such 60-day (now 120-day) period has been
interpreted, most recently in CIR v. San Roque Power Corporation, 703 Phil. 310, 354
(2013), as both mandatory andjurisdictiona1 in character.

[40]
 Now renumbered Section 112 (C), Tax Code, pursuant to R.A. No. 9337.

[41]
 646 Phil. 710 (2010).

[42]
 Supra note 37.

[43]
 Unlike the cases of San Roque and Taganito, the case of Philex was not
a prematurely filed appeal but a belatedly filed appeal, that is, the appeal was filed long
after the 120+30 day period. The appeal of Philex was dismissed for lack of jurisdiction,
the 30-day period of appeal being jurisdictional in nature. Taganito Mining
Corporation v. CIR, 703 Phil. 310 (2013).

[44]
 736 Phil. 591, 600 (2014).

[45]
 Illustrated by Nippon Express (Philippines) Corporation v. CIR, 706 PhiL 442
(2013).

[46]
 Illustrated by Taganito Mining Corporation v. CIR, 703 Phil. 310 (2013).

[47]
 Illustrated by Philex Mining Corporation v. CIR, 703 Phil. 310 (2013).

[48]
 746 Phil. 85 (2014).

[49]
 In 2010 Aichi, both the administrative and judicial claims were filed on the same day.
In 2014 Aichi, the judicial claim was filed a mere two days after the filing of the
administrative claim.

[50]
 In 2010 Aichi, the appeal with the CTA was filed on 30 September 2004; whereas the
appeal in 2014 Aichi was filed on 31 March 2005.

[51]
 Paulino v. Court of Appeals, 735 Phil. 448, 459 (2014).

[52]
 Id. See also Imperial v. Hon. Armes, G.R. No. 178842, 30 January 2017.

[53]
 481 Phil. 249, 267 (2004).

[54]
 Malayang Manggagawa ng Stayfast Phils., Inc. v. NLRC, 716 Phil. 500, 512 (2013).

[55]
 Galang v. Court of Appeals, 276 Phil. 748, 755 (1991).
 [56]
 Ong Lay Hin v. Court of Appeals, 752 Phil. 15, 23-25 (2015).

[57]
 Ibid.

[58]
 656 Phil. 337, 340 (2011), cited in Ong Lay Hin v. CA, supra Note 56 at 25.

[59]
 Spouses Zarate v. Maybank Philippines, Inc., 498 Phil. 825-837 (2005).

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DIVISION

[ GR No. 197760, Jan 13, 2014 ]

TEAM ENERGY CORPORATION v. CIR +

DECISION
G.R. No. 197760

PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
which seeks to reverse and set aside the May 2, 2011 [1] and the July 15,
2011[2] Resolutions of the Court of Tax Appeals (CTA) En Banc in CTA EB Case No. 706.
The assailed resolutions affirmed the November 26, 2010 Amended Decision [3] of the
CTA Special First Division in CTA Case No. 7617, which dismissed petitioner's claim for
tax refund or issuance of a tax credit certificate for failure to comply with the 120-day
period provided under Section 112 (C) of the National Internal Revenue Code (NIRC).
The facts, as found by the CTA, follow:
Petitioner is principally engaged in the business of power generation and subsequent
sale thereof to the National Power Corporation (NPC) under a Build, Operate, Transfer
(BOT) scheme. As such, it is registered with the BIR as a VAT taxpayer in accordance
with Section 107 of the National Internal Revenue Code (NIRC) of 1977 (now Section
236 of the NIRC of 1997), with Tax Identification No. 001-726-870-000, as shown on its
BIR Certificate of Registration No. OCN8RC0000017854.
On December 17, 2004, petitioner filed with the BIR Audit Information, Tax Exemption
and Incentives Division an Application for VAT Zero-Rate for the supply of electricity to
the NPC from January 1, 2005 to December 31, 2005, which was subsequently
approved.
Petitioner filed with the BIR its Quarterly VAT Returns for the first three quarters of
2005 on April 25, 2005, July 26, 2005, and October 25, 2005, respectively. Likewise,
petitioner filed its Monthly VAT Declaration for the month of October 2005 on
November 21, 2005, which was subsequently amended on May 24, 2006. These VAT
Returns reflected, among others, the following entries:
Period
Zero-Rated
Exhibit Covere Taxable Sales Output VAT Input VAT
Sales/Receipts
d
1st Qtr- P
"C" P 3,044,160,148.16  P 1,397,107.80  P 139,710.78   
2005 16,803,760.82
2nd Qtr-
"D" 3,038,281,557.57  1,241,576.30  124,157.63  32,097,482.29 
2005
3rd Qtr-
"E" 3,125,371,667.08  452,411.64  45,241.16  16,937,644.73 
2005
"G"        
(amended October
  910,949.50  91,094.95  14,297,363.76 
) 2005
P P
P P
Total 9,207,813,372.8  4,002,045.2     
400,204.52 80,136,251.60
1 4
On December 20, 2006, petitioner filed an administrative claim for cash refund or
issuance of tax credit certificate corresponding to the input VAT reported in its
Quarterly VAT Returns for the first three quarters of 2005 and Monthly VAT
Declaration for October 2005 in the amount of P80,136,251.60, citing as legal bases
Section 112 (A), in relation to Section 108 (B)(3) of the NIRC of 1997, Section 4.106-2(c)
of Revenue Regulations No. 7-95, Revenue Memorandum Circular No. 61-2005, and the
case of Maceda v. Macaraig.
Due to respondent's inaction on its claim, petitioner filed the instant Petition for Review
before this Court on April 18, 2007.
In his Answer filed on May 27, 2007, respondent interposed the following Special and
Affirmative Defenses:

5. He reiterates and pleads the preceding paragraphs of this answer as part of his
Special and Affirmative Defenses.
 6. Petitioner's alleged claim for refund is subject to administrative
investigation/examination by respondent.
7. Taxes remitted to the BIR are presumed to have been made in the regular course
of business and in accordance with the provision of law.
8. To support its claim for refund, it is imperative for petitioner to prove the
following, viz.:
a. The registration requirements of a value-added taxpayer in compliance
with the pertinent provision of the Tax Code, of 1997, as amended, and its
implementing revenue regulations;
b. The invoicing and accounting requirements for VAT-registered persons, as
well as the filing and payment of VAT in compliance with the provisions of
Sections 113 and 114 of the Tax Code of 1997, as amended;
c. Proof of compliance with the submission of complete documents in
support of the administrative claim for refund pursuant to Section 112 (D)
of the Tax Code of 1997, as amended, otherwise there would be no
sufficient compliance with the filing of administrative claim for refund
which is a condition sine qua non prior to the filing of judicial claim in
accordance with the provision of Section 229 of the Tax Code, as amended;
d. That the input taxes of P80,136,261.60 allegedly representing unutilized
input VAT from its domestic purchases of capital goods, domestic
purchases of goods other than capital goods, domestic purchases of
services, services rendered by nonresidents, importation of capital goods
and importation of goods other than capital goods were:

d.i paid by petitioner;

d.ii attributable to its zero-rated sales;
d.iii used in the course of its trade or business; and
d.iv such have not been applied against any output tax;

e. That petitioner's claim for tax credit or refund of the unutilized input tax
(VAT) was filed within two (2) years after the close of the taxable quarter
when the sales were made in accordance with Section 112 (A) of the Tax
Code of 1997, as amended;
f. That petitioner has complied with the governing rules and regulations with
reference to recovery of tax erroneously or illegally collected as explicitly
found in Sections 112 (A) and 229 of the Tax Code, as amended.
g. Petitioner failed to prove compliance with the aforementioned
requirements.
9. Furthermore, in action for refund the burden of proof is on the taxpayer to
establish its right to refund and failure to sustain the burden is fatal to the claim
for refund/credit. This is so because exemptions from taxation are highly
disfavored in law and he who claims exemption must be able to justify his claim
by the clearest grant of organic or statutory law. An exemption from common
burden cannot be permitted to exist upon vague implications. (Asiatic Petroleum
Co. [P.I.] v. Llanes, 49 Phil 446, cited in Collector of Internal Revenue v. Manila
Jockey Club, 98 Phil. 670);
10. Claims for refund are construed strictly against the claimant for the same partake
the nature of exemption from taxation.

During trial, petitioner presented documentary and testimonial evidence. Respondent,

on the other hand, waived his right to present evidence.
This case was submitted for decision on July 13, 2009, after the parties filed their
respective Memorandum.[4]
In a Decision[5] dated July 13, 2010, the CTA Special First Division partially granted
petitioner's claim for refund or issuance of tax credit certificate. It held as follows:
WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND or in the alternative, ISSUE
A TAX CREDIT CERTIFICATE in the amount of SEVENTY-NINE MILLION ONE
HUNDRED EIGHTY-FIVE THOUSAND SIX HUNDRED SEVENTEEN AND 33/100
PESOS (P79,185,617.33) in favor of petitioner, representing unutilized input VAT,
attributable to its effectively zero-rated sales of power generation services to NPC for the
period covering January 1, 2005 to October 31, 2005.
SO ORDERED.
Disgruntled, respondent filed a Motion for Reconsideration against said decision.
On November 26, 2010, the CTA Special First Division rendered an Amended Decision
granting respondent's Motion for Reconsideration. In light of this Court's ruling
in Commissioner of Internal Revenue v. Aichi Forging Company, Inc. [6] (Aichi), it
reversed and set aside the earlier decision of the CTA Special First Division. Thus:
In the case at bench, petitioner's administrative claim was filed on December 20, 2006
which is well within the two-year [prescriptive] period prescribed under Section 112 (A)
of the NIRC. Observing the 120-day period for the Commissioner to render a decision on
the administrative claim, as required under Section 112 (D) of the NIRC, petitioner's
judicial claim should have been filed not earlier than April 19, 2007. Petitioner,
however, filed its judicial claim on April 18, 2007 or only 199 days from December 20,
2006, thus, prematurely filed.
Accordingly, petitioner's claim for refund/credit of excess input VAT, covering the
period January 1 to October 31, 2005, warrants a dismissal for having been prematurely
filed.
WHEREFORE, the Motion for Reconsideration (Re: Decision promulgated 13 July
2010) of the respondents is hereby GRANTED. The assailed July 13, 2010 Decision is
hereby REVERSED and SET ASIDE and CTA Case No. 7617 is hereby
considered DISMISSED for having been prematurely filed.
SO ORDERED.[7]
Petitioner then filed a Petition for Review with the CTA En Banc arguing that the
requirement to exhaust the 120-day period for respondent to act on its administrative
claim for input VAT refund/credit under Section 112 (C) of the NIRC is merely a species
of the doctrine of exhaustion of administrative remedies and is, therefore, not
jurisdictional.
In a Resolution dated May 2, 2011, the CTA En Banc denied the petition for lack of
merit. Its fallo reads:
WHEREFORE, premises considered, the Petition for Review is hereby DENIED DUE
COURSE for lack of merit.
Attys. Rachel P. Follosco and Froilyn P. Doyaoen-Pagayatan are
hereby ADMONISHED to be more careful in the discharge of their duty to the court as
a lawyer under the Code of Professional Responsibility.
SO ORDERED.[8]
Unfazed, petitioner filed a Motion for Reconsideration. However, the same was denied
in a Resolution dated July 15, 2011.
Hence, the present petition.
Petitioner invokes the following grounds to support its petition:
I.
THE CTA ACQUIRED JURISDICTION OVER THE PETITION FOR REVIEW FILED
WITH AND TRIED BY THE SPECIAL FIRST DIVISION OF THE CTA DUE TO
FAILURE OF THE RESPONDENT CIR TO INVOKE THE RULE OF NON-
EXHAUSTION OF ADMINISTRATIVE REMEDIES.
II.
THE CTA EN BANC'S APPLICATION OF THE RECENT JUDICIAL INTERPRETATION
OF THE SUPREME COURT IN THE AICHI CASE TO THE INSTANT PETITION FOR
REVIEW IS ERRONEOUS BECAUSE:
A) IT VIOLATES ESTABLISHED RULES PROHIBITING RETROACTIVE
APPLICATION OF JUDICIAL DECISIONS;
B) IT WILL BE UNJUST AND INEQUITABLE TO THE PETITIONER WHO RELIED IN
GOOD FAITH ON PREVAILING JURISPRUDENCE AT THE TIME OF INSTITUTING
THE ADMINISTRATIVE AND JUDICIAL CLAIMS; AND,
C) IT WILL UNJUSTLY ENRICH THE GOVERNMENT AT THE EXPENSE OF THE
PETITIONER.[9]
In essence, the issue is whether or not the CTA has jurisdiction to take cognizance of the
instant case.
Prefatorily, to address the issue of lack of jurisdiction, there is a need to discuss Section
112 (A) and (C) which states:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-Rated or Effectively Zero-Rated Sales. Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been applied
against output tax: x x x.
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes shall be
Made. In proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the date
of submission of complete documents in support of the application filed in accordance
with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed
above, the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal
the decision or the unacted claim with the Court of Tax Appeals.
From the foregoing, it is clear that a VAT-registered taxpayer claiming for refund or tax
credit of their excess and unutilized input VAT must file their administrative claim
within two years from the close of the taxable quarter when the sales were made. After
that, the taxpayer must await the decision or ruling of denial of its claim, whether full or
partial, or the expiration of the 120-day period from the submission of complete
documents in support of such claim. Once the taxpayer receives the decision or ruling of
denial or expiration of the 120-day period, it may file its petition for review with the CTA
within thirty (30) days.
In the Aichi case, this Court ruled that the 120-30-day period in Section 112 (C) of the
NIRC is mandatory and its non-observance is fatal to the filing of a judicial claim with
the CTA. In this case, the Court explained that if after the 120-day mandatory period,
the Commissioner of Internal Revenue (CIR) fails to act on the application for tax
refund or credit, the remedy of the taxpayer is to appeal the inaction of the CIR to the
CTA within thirty (30) days. The judicial claim, therefore, need not be filed within the
two-year prescriptive period but has to be filed within the required 30-day period after
the expiration of the 120 days. Thus:
Section 112 (D) of the NIRC clearly provides that the CIR has "120 days, from the date of
the submission of the complete documents in support of the application [for tax
refund/credit]," within which to grant or deny the claim. In case of full or partial denial
by the CIR, the taxpayer's recourse is to file an appeal before the CTA within 30 days
from receipt of the decision of the CIR. However, if after the 120-day period the CIR fails
to act on the application for tax refund/credit, the remedy of the taxpayer is to appeal
the inaction of the CIR to [the] CTA within 30 days.
xxxx
There is nothing in Section 112 of the NIRC to support respondent's view. Subsection (A)
of the said provision states that "any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within two years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales." The phrase
"within two years x x x apply for the issuance of a tax credit certificate or refund" refers
to applications for refund/credit filed with the CIR and not to appeals made to the CTA.
This is apparent in the first paragraph of subsection (D) of the same provision, which
states that the CIR has "120 days from the submission of complete documents in
support of the application filed in accordance with Subsections (A) and (B)" within
which to decide on the claim.
In fact, applying the two-year period to judicial claims would render
nugatory Section 112 (D) of the NIRC, which already provides for a specific
period within which a taxpayer should appeal the decision or inaction of the
CIR. The second paragraph of Section 112 (D) of the NIRC envisions two scenarios: (1)
when a decision is issued by the CIR before the lapse of the 120-day period; and (2)
when no decision is made after the 120-day period. In both instances, the taxpayer
has 30 days within which to file an appeal with the CTA. As we see it then,
the 120-day period is crucial in filing an appeal with the CTA.[10] (Emphasis
supplied)
Recently, however, in the case of Commissioner of Internal Revenue v. San Roque
Power Corporation[11] (San Roque), the Court clarified that the mandatory and
jurisdictional nature of the 120-30-day rule does not apply on claims for refund that
were prematurely filed during the interim period from the issuance of Bureau of
Internal Revenue (BIR) Ruling No. DA-489-03 on December 10, 2003 to October 6,
2010 when the Aichi doctrine was adopted. The exemption was premised on the fact
that prior to the promulgation of the Aichi decision, there was an existing interpretation
laid down in BIR Ruling No. DA-489-03 where the BIR expressly ruled that the taxpayer
need not wait for the expiration of the 120-day period before it could seek judicial relief
with the CTA. It expounded on the matter in this wise:
BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under
Section 246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states that
the "taxpayer-claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of Petition for
Review." Prior to this ruling, the BIR held, as shown by its position in the Court of
Appeals, that the expiration of the 120-day period is mandatory and jurisdictional
before a judicial claim can be filed.
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the
CTA does not acquire jurisdiction over a judicial claim that is filed before the expiration
of the 120-day period. There are, however, two exceptions to this rule. The first
exception is if the Commissioner, through a specific ruling, misleads a particular
taxpayer to prematurely file a judicial claim with the CTA. Such specific ruling is
applicable only to such particular taxpayer. The second exception is where the
Commissioner, through a general interpretative rule issued under Section 4 of the Tax
Code, misleads all taxpayers into filing prematurely judicial claims with the CTA. In
these cases, the Commissioner cannot be allowed to later on question the CTA's
assumption of jurisdiction over such claim since equitable estoppel has set in as
expressly authorized under Section 246 of the Tax Code.
xxxx
Since the Commissioner has exclusive and original jurisdiction to interpret tax
laws, taxpayers acting in good faith should not be made to suffer for adhering to general
interpretative rules of the Commissioner interpreting tax laws, should such
interpretation later turn out to be erroneous and be reversed by the Commissioner or
this Court. Indeed, Section 246 of the Tax Code expressly provides that a reversal of a
BIR regulation or ruling cannot adversely prejudice a taxpayer who, in good faith, relied
on the BIR regulation or ruling prior to its reversal. Section 246 provides as follows:
Section 246. Non-retroactivity of Rulings. Any modification or reversal of any of
the rules and regulations promulgated in accordance with the preceding Sections or
any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal will be
prejudicial to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or
any document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Thus, a general interpretative rule issued by the Commissioner may be relied upon by
the taxpayers from the time the rule is issued up to its reversal by the Commissioner or
this Court. Section 246 is not limited to a reversal only by the Commissioner because
this Section expressly states, "Any revocation, modification or reversal" without
specifying who made the revocation, modification or reversal. Hence, a reversal by this
Court is covered by Section 246.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative
rule applicable to all taxpayers or a specific ruling applicable only to a particular
taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it is a response to a
query made, not by a particular taxpayer, but by a government agency tasked with
processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax
Credit and Drawback Center of the Department of Finance. This government
agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03.
Thus, while this government agency mentions in its query to the Commissioner the
administrative claim of Lazi Bay Resources Development, Inc., the agency was, in fact,
asking the Commissioner what to do in cases like the tax claim of Lazi Bay Resources
Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers
can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December
2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held
that the 120-130 day periods are mandatory and jurisdictional. [12]
In the present case, petitioner filed its judicial claim on April 18, 2007 or after the
issuance of BIR Ruling No. DA-489-03 on December 10, 2003 but before October 6,
2010, the date when the Aichi case was promulgated. Thus, even though petitioner's
judicial claim was prematurely filed without waiting for the expiration of the 120-day
mandatory period, the CTA may still take cognizance of the instant case as it was filed
within the period exempted from the 120-30-day mandatory period.
WHEREFORE, the foregoing considered, the instant Petition for Review
on Certiorari is hereby GRANTED. The May 2, 2011 and the July 15, 2011 Resolutions
of the Court of Tax Appeals En Banc in CTA EB Case No. 706 are REVERSED and SET
ASIDE. Let this case be remanded to the Court of Tax Appeals for the proper
determination of the refundable amount.
SO ORDERED.
Velasco, Jr., (Chairperson), Abad, and Mendoza, JJ., concur.
Leonen, J., I dissent consistent with my position in CIR v. San Roque (2013)

February 10, 2014

N O T I C E OF J U D G M E N T
Sirs/Mesdames:
Please take notice that on January 13, 2014 a Decision, copy attached herewith, was
rendered by the Supreme Court in the above-entitled case, the original of which was
received by this Office on February 10, 2014 at 2:20 p.m.
Very truly yours,
(SGD)
 LUCITA ABJELINA SORIANO
Division Clerk of Court

[1]
 Penned by Associate Justice Cielito N. Mindaro-Grulla, with Associate Justices
Juanito C. Castañeda, Jr., Erlinda P. Uy, Olga Palanca-Enriquez, Esperanza R. Fabon-
Victorino and Amelia R. Cotangco-Manalastas, concurring; Associate Justice Lovell R.
Bautista, dissenting; Presiding Justice Ernesto D. Acosta and Associate Justice Caesar A.
Casanova, on wellness leave, rollo, pp. 48-61.

[2]
 Rollo, pp. 66-70.
[3]
 Penned by Associate Justice Caesar A. Casanova, with Presiding Justice Ernesto D.
Acosta, concurring and Associate Justice Lovell R. Bautista, dissenting; id. at 35-39.
[4]
 Id. at 15-18. (Citations omitted; emphasis in the original)
[5]
 Id. at 14-33.
[6]
 G.R. No. 184823, October 6, 2010, 632 SCRA 422.
[7]
 Rollo, pp. 38-39. (Emphasis in the original)
[8]
 Id. at 60. (Emphasis in the original)
[9]
 Id. at 84.
[10]
 Commissioner of Internal Revenue v. Aichi Forging Company, Inc., supra note 6, at
443-444. (Emphasis in the original)
[11]
 G.R. Nos. 187485, 196113, 197156, February 12, 2013, 690 SCRA 336.
[12]
 Commissioner of Internal Revenue v. San Roque Power Corporation, supra, at 401-
404. (Citations omitted, emphasis in the original)
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DIVISION

[ GR No. 169507, Jan 11, 2016 ]

AIR CANADA v. CIR +

DECISION

LEONEN, J.:

An offline international air carrier selling passage tickets in the Philippines, through a
general sales agent, is a resident foreign corporation doing business in the Philippines.
As such, it is taxable under Section 28(A)(1), and not Section 28(A)(3) of the 1997
National Internal Revenue Code, subject to any applicable tax treaty to which the
Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-
Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 1/2% of its
gross revenues earned from the sale of its tickets in the Philippines.

This is a Petition for Review[1] appealing the August 26, 2005 Decision[2] of the Court of
Tax Appeals En Banc, which in turn affirmed the December 22, 2004 Decision [3] and
April 8, 2005 Resolution[4] of the Court of Tax Appeals First Division denying Air
Canada's claim for refund.

Air Canada is a "foreign corporation organized and existing under the laws of
Canada[.]"[5] On April 24, 2000, it was granted an authority to operate as an offline
carrier by the Civil Aeronautics Board, subject to certain conditions, which authority
would expire on April 24, 2005.[6] "As an off-line carrier, [Air Canada] does not have
flights originating from or coming to the Philippines [and does not] operate any airplane
[in] the Philippines[.]"[7]

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its
general sales agent in the Philippines.[8] Aerotel "sells [Air Canada's] passage documents
in the Philippines."[9]

For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air
Canada, through Aerotel, filed quarterly and annual income tax returns and paid the
income tax on Gross Philippine Billings in the total amount of P5,185,676.77, [10] detailed
as follows:

Applicable Quarter[/]Year Date Filed/Paid Amount of Tax

3rd Qtr 2000 November 29,2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
3rd Qtr 2001 November 29, 2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30,2002 594,850.13
2nd Qtr 2002 August 29,2002 1,164,664.11
TOTAL   P 5,185,676.77[11]

On November 28, 2002, Air Canada filed a written claim for refund of alleged
erroneously paid income taxes amounting to P5,185,676.77 before the Bureau of
Internal Revenue,[12] Revenue District Office No. 47-East Makati.[13] It found basis from
the revised definition[14] of Gross Philippine Billings under Section 28(A)(3)(a) of the
1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....
(3) International Carrier. - An international carrier doing business in the Philippines
shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as
defined hereunder:

(a) International Air Carrier. - '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: Provided, That tickets revalidated, exchanged
and/or indorsed to another international airline form part of the Gross Philippine
Billings if the passenger boards a plane in a port or point in the Philippines: Provided,
further, That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only-the
aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine Billings.
(Emphasis supplied)

To prevent the running of the prescriptive period, Air Canada filed a Petition for Review
before the Court of Tax Appeals on November 29, 2002.[15] The case was docketed as
C.T.A. Case No. 6572.[16]

On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision
denying the Petition for Review and, hence, the claim for refund. [17] It found that Air
Canada was engaged in business in the Philippines through a local agent that sells
airline tickets on its behalf. As such, it should be taxed as a resident foreign corporation
at the regular rate of 32%.[18] Further, according to the Court of Tax Appeals First
Division, Air Canada was deemed to have established a "permanent establishment" [19] in
the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax
Treaty[20] by the appointment of the local sales agent, "in which [the] petitioner uses its
premises as an outlet where sales of [airline] tickets are made[.]" [21]

Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in
the Court of Tax Appeals First Division's Resolution dated April 8, 2005 for lack of
merit.[22] The First Division held that while Air Canada was not liable for tax on its Gross
Philippine Billings under Section 28(A)(3), it was nevertheless liable to pay the 32%
corporate income tax on income derived from the sale of airline tickets within the
Philippines pursuant to Section 28(A)(1).[23]

On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Bane. [24] The
appeal was docketed as CTAEB No. 86.[25]

In the Decision dated August 26, 2005, the Court of Tax Appeals En Bane affirmed the
findings of the First Division.[26] The En Banc ruled that Air Canada is subject to tax as a
resident foreign corporation doing business in the Philippines since it sold airline tickets
in the Philippines.[27] The Court of Tax Appeals En Bane disposed thus:

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE

COURSE, and accordingly, DISMISSED for lack of merit.[28]

Hence, this Petition for Review[29] was filed. The issues for our consideration are:

First, whether petitioner Air Canada, as an offline international carrier selling passage
documents through a general sales agent in the Philippines, is-a resident foreign
corporation within the meaning of Section 28(A)(1) of the 1997 National Internal
Revenue Code;

Second, whether petitioner Air Canada is subject to the 21/2% tax on Gross Philippine
Billings pursuant to Section 28(A)(3). If not, whether an offline international carrier
selling passage documents through a general sales agent can be subject to the regular
corporate income tax of 32%[30] on taxable income pursuant to Section 28(A)(1);

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:

a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

b. Whether the appointment of a local general sales agent in the Philippines falls
under the definition of "permanent establishment" under Article V(2)(i) of the
Republic of the Philippines-Canada Tax Treaty; and

Lastly, whether petitioner Air Canada is entitled to the refund of P5,185,676.77

pertaining allegedly to erroneously paid tax on Gross Philippine Billings from the third
quarter of 2000 to the second quarter of 2002.

Petitioner claims that the general provision imposing the regular corporate income tax
on resident foreign corporations provided under Section 28(A)(1) of the 1997 National
Internal Revenue Code does not apply to "international carriers," [31] which are especially
classified and taxed under Section 28(A)(3).[32] It adds that the fact that it is no longer
subject to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals
Decision "does not render it ipso facto subject to 32% income tax on taxable income as a
resident foreign corporation."[33] Petitioner argues that to impose the 32% regular
corporate income tax on its income would violate the Philippine government's covenant
under Article VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a
tax higher than 1 Vi% of the carrier's gross revenue derived from sources within the
Philippines.[34] It would also allegedly result in "inequitable tax treatment of on-line and
off-line international air carriers[.]"[35]

Also, petitioner states that the income it derived from the sale of airline tickets in the
Philippines was income from services and not income from sales of personal property.
[36]
 Petitioner cites the deliberations of the Bicameral Conference Committee on House
Bill No. 9077 (which eventually became the 1997 National Internal Revenue Code),
particularly Senator Juan Ponce Enrile's statement, [37] to reveal the "legislative intent to
treat the revenue derived from air carriage as income from services, and that the
carriage of passenger or cargo as the activity that generates the income." [38] Accordingly,
applying the principle on the situs of taxation in taxation of services, petitioner claims
that its income derived "from services rendered outside the Philippines [was] not
subject to Philippine income taxation."[39]

Petitioner further contends that by the appointment of Aerotel as its general sales agent,
petitioner cannot be considered to have a "permanent establishment" [40] in the
Philippines pursuant to Article V(6) of the Republic of the Philippines-Canada Tax
Treaty.[41] It points out that Aerotel is an "independent general sales agent that acts as
such for ... other international airline companies in the ordinary course of its
business."[42] Aerotel sells passage tickets on behalf of petitioner and receives a
commission for its services.[43] Petitioner states that even the Bureau of Internal
Revenue— through VAT Ruling No. 003-04 dated February 14, 2004—has conceded
that an offline international air carrier, having no flight operations to and from the
Philippines, is not deemed engaged in business in the Philippines by merely appointing
a general sales agent.[44] Finally, petitioner maintains that its "claim for refund of
erroneously paid Gross Philippine Billings cannot be denied on the ground that [it] is
subject to income tax under Section 28 (A) (I)"[45] since it has not been assessed at all by
the Bureau of Internal Revenue for any income tax liability. [46]

On the other hand, respondent maintains that petitioner is subject to the 32% corporate
income tax as a resident foreign corporation doing business in the Philippines.
Petitioner's total payment of P5,185,676.77 allegedly shows that petitioner was earning a
sizable income from the sale of its plane tickets within the Philippines during the
relevant period.[47] Respondent further points out that this court in Commissioner of
Internal Revenue v. American Airlines, Inc.,[48] which in turn cited the cases involving
the British Overseas Airways Corporation and Air India, had already settled that
"foreign airline companies which sold tickets in the Philippines through their local
agents . . . [are] considered resident foreign corporations engaged in trade or business in
the country."[49] It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which
defined the phrase "doing business in the Philippines" as including "regular sale of
tickets in the Philippines by offline international airlines either by themselves or
through their agents."[50]

Respondent further contends that petitioner is not entitled to its claim for refund
because the amount of P5,185,676.77 it paid as tax from the third quarter of 2000 to the
second quarter of 2001 was still short of the 32% income tax due for the period.
[51]
 Petitioner cannot allegedly claim good faith in its failure to pay the right amount of
tax since the National Internal Revenue Code became operative on January 1, 1998 and
by 2000, petitioner should have already been aware of the implications of Section 28(A)
(3) and the decided cases of this court's ruling on the taxability of offline international
carriers selling passage tickets in the Philippines.[52]

At the outset, we affirm the Court of Tax Appeals' ruling that petitioner, as an offline
international carrier with no landing rights in the Philippines, is not liable to tax on
Gross Philippine Billings under Section 28(A)(3) of the 1997 National Internal Revenue
Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines
shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as
defined hereunder:

(a) International Air Carrier. - '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: Provided,
That tickets revalidated, exchanged and/or indorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards a plane in a port or
point in the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside the
Philippines on another airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings. (Emphasis supplied)

Under the foregoing provision, the tax attaches only when the carriage of persons,
excess baggage, cargo, and mail originated from the Philippines in a continuous and
uninterrupted flight, regardless of where the passage documents were sold.

Not having flights to and from the Philippines, petitioner is clearly not liable for the
Gross Philippine Billings tax.

II

Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes.
Petitioner falls within the definition of resident foreign corporation under Section 28(A)
(1) of the 1997 National Internal Revenue Code, thus, it may be subject to 32% [53] tax on
its taxable income:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation

organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be subject to an
income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within the
Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty- three
percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%[54]). (Emphasis supplied)

The definition of "resident foreign corporation" has not substantially changed

throughout the amendments of the National Internal Revenue Code. All versions refer
to "a foreign corporation engaged in trade or business within the Philippines."

Commonwealth Act No. 466, known as the National Internal Revenue Code and
approved on June 15, 1939, defined "resident foreign corporation" as applying to "a
foreign corporation engaged in trade or business within the Philippines or having an
office or place of business therein."[55]
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act
No. 6110, approved on August 4, 1969, reads:

Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .

(2) Resident corporations. — A corporation organized, authorized, or existing under the

laws of any foreign country, except a foreign life insurance company, engaged in trade
or business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from all sources
within the Philippines.[56] (Emphasis supplied)

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of
the 1939 National Internal Revenue Code. Section 24(b)(2) on foreign resident
corporations was amended, but it still provides that "[a] corporation organized,
authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from all sources
within the Philippines[.]"[57]

As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas

Airways Corporation[58] declared British Overseas Airways Corporation, an
international air carrier with no landing rights in the Philippines, as a resident foreign
corporation engaged in business in the Philippines through its local sales agent that sold
and issued tickets for the airline company.[59] This court discussed that:

There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, 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 for the purpose
and object of the business organization. "In order that a foreign corporation may
be regarded as doing business within a State, there must be continuity of conduct and
intention to establish a continuous business, such as the appointment of a local agent,
and not one of a temporary character. ["]

BOAC, during the periods covered by the subject-assessments, maintained a general

sales agent in the Philippines. That general sales agent, from 1959 to 1971, "was engaged
in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips —
each trip in the series corresponding to a different airline company; (3) receiving the
fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode
of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." Those activities were in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its main activity, is the
very lifeWood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines.
[60]
 (Emphasis supplied, citations omitted)
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[.][61] (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 year
stay in the country for a period or periods totaling one hundred eighty (180) days or
more[.]"[62]

An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics]
Board, but who maintains office or who has designated or appointed agents or
employees in the Philippines, who sells or offers for sale any air transportation in behalf
of said foreign air carrier and/or others, or negotiate for, or holds itself out by
solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges
for such transportation."[63]

"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the
[Civil Aeronautics] Board for such authority."[64] Each offline carrier must file with the
Civil Aeronautics Board a monthly report containing information on the tickets sold,
such as the origin and destination of the passengers, carriers involved, and commissions
received.[65]

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the

Philippines.

Aerotel performs acts or works or exercises functions that are incidental and beneficial
to the purpose of petitioner's business. The activities of Aerotel bring direct receipts or
profits to petitioner.[66] There is nothing on record to show that Aerotel solicited orders
alone and for its own account and without interference from, let alone direction of,
petitioner. On the contrary, Aerotel cannot "enter into any contract on behalf of
[petitioner Air Canada] without the express written consent of [the latter,]" [67] and it
must perform its functions according to the standards required by petitioner.
[68]
 Through Aerotel, petitioner is able to engage in an economic activity in the
Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as
an offline carrier in the Philippines for a period of five years, or from April 24, 2000
until April 24, 2005.[69]

Petitioner is, therefore, a resident foreign corporation that is taxable on its income
derived from sources within the Philippines. Petitioner's income from sale of airline
tickets, through Aerotel, is income realized from the pursuit of its business activities in
the Philippines.

III

However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider the existence of an effective tax treaty
between the Philippines and the home country of the foreign air carrier.

In the earlier case of South African Airways v. Commissioner of Internal Revenue,

[70]
 this court held that Section 28(A)(3)(a) does not categorically exempt all
international air carriers from the coverage of Section 28(A)(1). Thus, if Section 28(A)
(3)(a) is applicable to a taxpayer, then the general rule under Section 28(A)(1) does not
apply. If, however, Section 28(A)(3)(a) does not apply, an international air carrier would
be liable for the tax under Section 28(A)(1).[71]

This court in South African Airways declared that the correct interpretation of these
provisions is that: "international air carrier[s] maintaining] flights to and from the
Philippines . . . shall be taxed at the rate of 21/2% 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 [like sale of airline tickets]
will be taxed at the rate of 32% of such [taxable] income."[72]

In this case, there is a tax treaty that must be taken into consideration to determine the
proper tax rate.

A tax treaty is an agreement entered into between sovereign states "for purposes of
eliminating double taxation on income and capital, preventing fiscal evasion, promoting
mutual trade and investment, and according fair and equitable tax treatment to foreign
residents or nationals."[73] Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc.[74] explained the purpose of a tax treaty:

The purpose of these international agreements is to reconcile the national fiscal

legislations of the contracting parties in order to help the taxpayer avoid simultaneous
taxation in two different jurisdictions. More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods.

The apparent rationale for doing away with double taxation is to encourage the free flow
of goods and services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate.[75] (Emphasis in the original, citations omitted)

Observance of any treaty obligation binding upon the government of the Philippines is
anchored on the constitutional provision that the Philippines "adopts the generally
accepted principles of international law as part of the law of the land[.]" [76] Pacta sunt
servanda is a fundamental international law principle that requires agreeing parties to
comply with their treaty obligations in good faith.[77]

Hence, the application of the provisions of the National Internal Revenue Code must be
subject to the provisions of tax treaties entered into by the Philippines with foreign
countries.

In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, [78] this

court stressed the binding effects of tax treaties. It dealt with the issue of "whether the
failure to strictly comply with [Revenue Memorandum Order] RMO No. 1-2000 [79] will
deprive persons or corporations of the benefit of a tax treaty." [80] Upholding the tax
treaty over the administrative issuance, this court reasoned thus:

Our Constitution provides for adherence to the general principles of international law
as part of the law of the land. The time-honored international principle of pacta
sunt servanda demands the performance in good faith of treaty obligations on the part
of the states that enter into the agreement. Every treaty in force is binding upon the
parties, and obligations under the treaty must be performed by them in good faith.
More importantly, treaties have the force and effect of law in this
jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two
different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax
conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate." Simply put, tax treaties are entered into to minimize, if not eliminate the
harshness of international juridical double taxation, which is why they are also known as
double tax treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the
obligations undertaken. " Thus, laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the parties entitled thereto. The BIR must
not impose additional requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the RP-Germany Tax
Treaty does not provide for any pre-requisite for the availment of the benefits under said
agreement.
....

Bearing in mind the rationale of tax treaties, the period of application for the availment
of tax treaty relief as required by RMO No. 1 -2000 should not operate to divest
entitlement to the relief as it would constitute a violation of the duty required by good
faith in complying with a tax treaty. The denial of the availment of tax relief for the
failure of a taxpayer to apply within the prescribed period under the administrative
issuance would impair the value of the tax treaty. At most, the application for a tax
treaty relief from the BIR should merely operate to confirm the entitlement of the
taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of
RMO No. 1-2000. Logically, noncompliance with tax treaties has negative implications
on international relations, and unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No. 1-2000 involve an administrative
procedure, these may be remedied through other system management processes, e.g.,
the imposition of a fine or penalty. But we cannot totally deprive those who are entitled
to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.[81] (Emphasis supplied, citations omitted)

On March 11, 1976, the representatives[82] for the government of the Republic of the
Philippines and for the government of Canada signed the Convention between the
Philippines and Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income (Republic of the Philippines-Canada
Tax Treaty). This treaty entered into force on December 21, 1977.

Article V[83] of the Republic of the Philippines-Canada Tax Treaty defines "permanent
establishment" as a "fixed place of business in which the business of the enterprise is
wholly or partly carried on."[84]

Even though there is no fixed place of business, an enterprise of a Contracting State is

deemed to have a permanent establishment in the other Contracting State if under
certain conditions there is a person acting for it.

Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states
that "[a] person acting in a Contracting State on behalf of an enterprise of the other
Contracting State (other than an agent of independent status to whom paragraph 6
applies) shall be deemed to be a permanent establishment in the first-mentioned State if
. . . he has and habitually exercises in that State an authority to conclude contracts on
behalf of the enterprise, unless his activities are limited to the purchase of goods or
merchandise for that enterprise[.]" The provision seems to refer to one who would be
considered an agent under Article 1868[85] of the Civil Code of the Philippines.

On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State
shall not be deemed to have a permanent establishment in the other Contracting State
merely because it carries on business in that other State through a broker, general
commission agent or any other agent of an independent status, where such
persons are acting in the ordinary course of their business."

Considering Article XV[86] of the same Treaty, which covers dependent personal services,
the term "dependent" would imply a relationship between the principal and the agent
that is akin to an employer-employee relationship.

Thus, an agent may be considered to be dependent on the principal where the latter
exercises comprehensive control and detailed instructions over the means and results of
the activities of the agent.[87]

Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act
of the Philippines, defines a general sales agent as "a person, not a bonafide employee of
an air carrier, who pursuant to an authority from an airline, by itself or through an
agent, sells or offers for sale any air transportation, or negotiates for, or holds himself
out by solicitation, advertisement or otherwise as one who sells, provides, furnishes,
contracts or arranges for, such air transportation." [88] General sales agents and their
property, property rights, equipment, facilities, and franchise are subject to the
regulation and control of the Civil Aeronautics Board.[89] A permit or authorization
issued by the Civil Aeronautics Board is required before a general sales agent may
engage in such an activity.[90]

Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have
created a "permanent"establishment" in the Philippines as defined under the Republic
of the Philippines-Canada Tax Treaty.

Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of
transportation on petitioner and handle reservations, appointment, and supervision of
International Air Transport Association-approved and petitioner-approved sales agents,
including the following services:

ARTICLE 7
GSA SERVICES

The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following
services:

a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC
in every matter relating to this Agreement;
....

c) Promotion of passenger transportation on AC;

....

e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory
of the GSA [Philippines], of traffic documents issued by AC outside the said territory of
the GSA [Philippines], as required by the passenger(s);
....

h) Distribution among passenger sales agents and display of timetables, fare sheets,
tariffs and publicity material provided by AC in accordance with the reasonable
requirements of AC;
....

j) Distribution of official press releases provided by AC to media and reference of any

press or public relations inquiries to AC;
....

o) Submission for AC's approval, of an annual written sales plan on or before a date to
be determined by AC and in a form acceptable to AC;
....

q) Submission of proposals for AC's approval of passenger sales agent incentive plans at
a reasonable time in advance of proposed implementation.
....

r) Provision of assistance on request, in its relations with Governmental and other

authorities, offices and agencies in the Territory [Philippines].
....

u) Follow AC guidelines for the handling of baggage claims and customer complaints
and, unless otherwise stated in the guidelines, refer all such claims and complaints to
AC.[91]

Under the terms of the Passenger General Sales Agency Agreement, Aerotel will
"provide at its own expense and acceptable to [petitioner Air Canada], adequate and
suitable premises, qualified staff, equipment, documentation, facilities and supervision
and in consideration of the remuneration and expenses payable[,] [will] defray all costs
and expenses of and incidental to the Agency." [92] "[I]t is the sole employer of its
employees and . . . is responsible for [their] actions ... or those of any
subcontractor."[93] In remuneration for its services, Aerotel would be paid by petitioner a
commission on sales of transportation plus override commission on flown revenues.
[94]
 Aerotel would also be reimbursed "for all authorized expenses supported by original
supplier invoices."[95]

Aerotel is required to keep "separate books and records of account, including supporting
documents, regarding all transactions at, through or in any way connected with
[petitioner Air Canada] business."[96]

"If representing more than one carrier, [Aerotel must] represent all carriers in an
unbiased way."[97] Aerotel cannot "accept additional appointments as General Sales
Agent of any other carrier without the prior written consent of [petitioner Air
Canada]."[98]

The Passenger General Sales Agency Agreement "may be terminated by either party
without cause upon [no] less than 60 days' prior notice in writing[.]" [99] In case of breach
of any provisions of the Agreement, petitioner may require Aerotel "to cure the breach in
30 days failing which [petitioner Air Canada] may terminate [the] Agreement[.]" [100]

The following terms are indicative of Aerotel's dependent status:

First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires
or takes control of another entity or merges with or is acquired or controlled by another
person or entity[,]"[101] Except with the written consent of petitioner, Aerotel must not
acquire a substantial interest in the ownership, management, or profits of a passenger
sales agent affiliated with the International Air Transport Association or a non-affiliated
passenger sales agent nor shall an affiliated passenger sales agent acquire a substantial
interest in Aerotel as to influence its commercial policy and/or management decisions.
[102]
 Aerotel must also provide petitioner "with a report on any interests held by [it], its
owners, directors, officers, employees and their immediate families in companies and
other entities in the aviation industry or ... industries related to it[.]"[103] Petitioner may
require that any interest be divested within a set period of time.[104]

Second, in carrying out the services, Aerotei cannot enter into any contract on behalf of
petitioner without the express written consent of the latter; [105] it must act according to
the standards required by petitioner;[106] "follow the terms and provisions of the
[petitioner Air Canada] GS A Manual [and all] written instructions of [petitioner Air
Canada;]"[107] and "[i]n the absence of an applicable provision in the Manual or
instructions, [Aerotei must] carry out its functions in accordance with [its own]
standard practices and procedures[.]"[108]

Third, Aerotei must only "issue traffic documents approved by [petitioner Air Canada]
for all transportation over [its] services[.]"[109] All use of petitioner's name, logo, and
marks must be with the written consent of petitioner and according to petitioner's
corporate standards and guidelines set out in the Manual. [110]

Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the
transportation sold by Aerotei are for the account of petitioner, except in the case of
negligence of Aerotei.[111]

Aerotei is a dependent agent of petitioner pursuant to the terms of the Passenger

General Sales Agency Agreement executed between the parties. It has the authority or
power to conclude contracts or bind petitioner to contracts entered into in the
Philippines. A third-party liability on contracts of Aerotei is to petitioner as the
principal, and not to Aerotei, and liability to such third party is enforceable against
petitioner. While Aerotei maintains a certain independence and its activities may not be
devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the
Agreement, it must carry out its functions solely for the benefit of petitioner and
according to the latter's Manual and written instructions. Aerotei is required to submit
its annual sales plan for petitioner's approval.

In essence, Aerotei extends to the Philippines the transportation business of petitioner.

It is a conduit or outlet through which petitioner's airline tickets are sold. [112]

Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax
Treaty, the "business profits" of an enterprise of a Contracting State is "taxable only in
that State[,] unless the enterprise carries on business in the other Contracting State
through a permanent establishment);.]"[113] Thus, income attributable to Aerotel or from
business activities effected by petitioner through Aerotel may be taxed in the
Philippines. However, pursuant to the last paragraph [114] of Article VII in relation to
Article VIII[115] (Shipping and Air Transport) of the same Treaty, the tax imposed on
income derived from the operation of ships or aircraft in international traffic should not
exceed 1 1/2% of gross revenues derived from Philippine sources.

IV

While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of

the 1997 National Internal Revenue Code on its taxable income[116] from sale of airline
tickets in the Philippines, it could only be taxed at a maximum of 1 1/2% of gross
revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty
that applies to petitioner as a "foreign corporation organized and existing under the laws
of Canada[.]"[117]

Tax treaties form part of the law of the land,[118] and jurisprudence has applied the
statutory construction principle that specific laws prevail over general ones.[119]

The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977
and became valid and effective on that date. On the other hand, the applicable
provisions[120] relating to the taxability of resident foreign corporations and the rate of
such tax found in the National Internal Revenue Code became effective on January 1,
1998.[121] Ordinarily, the later provision governs over the earlier one.[122] In this case,
however, the provisions of the Republic of the Philippines-Canada Tax Treaty are more
specific than the provisions found in the National Internal Revenue Code.

These rules of interpretation apply even though one of the sources is a treaty and not
simply a statute.

Article VII, Section 21 of the Constitution provides:

SECTION 21. No treaty or international agreement shall be valid and effective unless
concurred in by at least two-thirds of all the Members of the Senate.

This provision states the second of two ways through which international obligations
become binding. Article II, Section 2 of the Constitution deals with international
obligations that are incorporated, while Article VII, Section 21 deals with international
obligations that become binding through ratification.

"Valid and effective" means that treaty provisions that define rights and duties as well as
definite prestations have effects equivalent to a statute. Thus, these specific treaty
provisions may amend statutory provisions. Statutory provisions may also amend these
types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international
obligations erga omnes. We are also not required to rule in this case on the effect of
international customary norms especially those with jus cogens character.

The second paragraph of Article VIII states that "profits from sources within a
Contracting State derived by an enterprise of the other Contracting State from the
operation of ships or aircraft in international traffic may be taxed in the first-mentioned
State but the tax so charged shall not exceed the lesser of a) one and one-half per cent of
the gross revenues derived from sources in that State; and b) the lowest rate of
Philippine tax imposed on such profits derived by an enterprise of a third State."

The Agreement between the government of the Republic of the Philippines and the
government of Canada on Air Transport, entered into on January 14, 1997, reiterates the
effectivity of Article VIII of the Republic of the Philippines-Canada Tax Treaty:

ARTICLE XVI
(Taxation)

The Contracting Parties shall act in accordance with the provisions of Article VIII of the
Convention between the Philippines and Canada for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Manila
on March 31, 1976 and entered into force on December 21, 1977, and any amendments
thereto, in respect of the operation of aircraft in international traffic. [123]

Petitioner's income from sale of ticket for international carriage of passenger is income
derived from international operation of aircraft. The sale of tickets is closely related to
the international operation of aircraft that it is considered incidental thereto.

"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our
right to tax limited to a certain extent[.]"[124] Thus, we are bound to extend to a Canadian
air carrier doing business in the Philippines through a local sales agent the benefit of a
lower tax equivalent to 1 1/2% on business profits derived from sale of international air
transportation.

Finally, we reject petitioner's contention that the Court of Tax Appeals erred in denying
its claim for refund of erroneously paid Gross Philippine Billings tax on the ground that
it is subject to income tax under Section 28(A)(1) of the National Internal Revenue Code
because (a) it has not been assessed at all by the Bureau of Internal Revenue for any
income tax liability;[125] and (b) internal revenue taxes cannot be the subject of set-off or
compensation,[126] citing Republic v. Mambulao Lumber Co., et al.[127] and Francia v.
Intermediate Appellate Court.[128]

In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue, [129] we

have ruled that "[i]n an action for the refund of taxes allegedly erroneously paid, the
Court of Tax Appeals may determine whether there are taxes that should have been paid
in lieu of the taxes paid."[130] The determination of the proper category of tax that should
have been paid is incidental and necessary to resolve the issue of whether a refund
should be granted.[131] Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6%
capital gains tax or other taxes at the first instance. The Court of Tax Appeals has no
power to make an assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In stating
that petitioner's transactions are subject to capital gains tax, however, the Court of Tax
Appeals was not making an assessment. It was merely determining the proper category
of tax that petitioner should have paid, in view of its claim that it erroneously imposed
upon itself and paid the 5% final tax imposed upon PEZA-registered enterprises.

The determination of the proper category of tax that petitioner should have paid is an
incidental matter necessary for the resolution of the principal issue, which is whether
petitioner was entitled to a refund.

The issue of petitioner's claim for tax refund is intertwined with the issue of the proper
taxes that are due from petitioner. A claim for tax refund carries the assumption that the
tax returns filed were correct. If the tax return filed was not proper, the correctness of
the amount paid and, therefore, the claim for refund become questionable. In that case,
the court must determine if a taxpayer claiming refund of erroneously paid taxes is more
properly liable for taxes other than that paid.

In South African Airways v. Commissioner of Internal Revenue, South African Airways

claimed for refund of its erroneously paid 2 1/2% taxes on its gross Philippine billings.
This court did not immediately grant South African's claim for refund. This is because
although this court found that South African Airways was not subject to the 2 1/2% tax
on its gross Philippine billings, this court also found that it was subject to 32% tax on its
taxable income.

In this case, petitioner's claim that it erroneously paid the 5% final tax is an admission
that the quarterly tax return it filed in 2000 was improper. Hence, to determine if
petitioner was entitled to the refund being claimed, the Court of Tax Appeals has the
duty to determine if petitioner was indeed not liable for the 5% final tax and, instead,
liable for taxes other than the 5% final tax. As in South African Airways, petitioner's
request for refund can neither be granted nor denied outright without such
determination.

If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the
amount of the taxpayer's liability should be computed and deducted from the refundable
amount.

Any liability in excess of the refundable amount, however, may not be collected in a case
involving solely the issue of the taxpayer's entitlement to refund. The question of tax
deficiency is distinct and unrelated to the question of petitioner's entitlement to refund.
Tax deficiencies should be subject to assessment procedures and the rules of
prescription. The court cannot be expected to perform the BIR's duties whenever it fails
to do so either through neglect or oversight. Neither can court processes be used as a
tool to circumvent laws protecting the rights of taxpayers.[132]

Hence, the Court of Tax Appeals properly denied petitioner's claim for refund of
allegedly erroneously paid tax on its Gross Philippine Billings, on the ground that it was
liable instead for the regular 32% tax on its taxable income received from sources within
the Philippines. Its determination of petitioner's liability for the 32% regular income tax
was made merely for the purpose of ascertaining petitioner's entitlement to a tax refund
and not for imposing any deficiency tax.

In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases
cited are based on different circumstances. In both cited cases, [133] the taxpayer claimed
that his (its) tax liability was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al, Mambulao Lumber contended
that the amounts it paid to the government as reforestation charges from 1947 to 1956,
not having been used in the reforestation of the area covered by its license, may be set
off or applied to the payment of forest charges still due and owing from it. [134] Rejecting
Mambulao's claim of legal compensation, this court ruled:

[A]ppellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial court
correctly observed:

Under Article 1278, NCC, compensation should take place when two persons in their
own right are creditors and debtors of each other. With respect to the forest charges
which the defendant Mambulao Lumber Company has paid to the government, they
are in the coffers of the government as taxes collected, and the government does not
owe anything to defendant Mambulao Lumber Company. So, it is crystal clear that the
Republic of the Philippines and the Mambulao Lumber Company are not creditors and
debtors of each other, because compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest
charges in question, can not be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed uniformly, in the light of public
policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction
sued on. * * *. (80 C.J.S. 73-74.)

The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental purposes.
The reason on which the general rule is based, is that taxes are not in the nature of
contracts between the party and party but grow out of a duty to, and are the positive acts
of the government, to the making and enforcing of which, the personal consent of
individual taxpayers is not required. * * * If the taxpayer can properly refuse to pay his
tax when called upon by the Collector, because he has a claim against the governmental
body which is not included in the tax levy, it is plain that some legitimate and necessary
expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the
tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of
the government will be thrown into great confusion. (47 Am. Jur. 766-767.)
[135]
 (Emphasis supplied)

In Francia, this court did not allow legal compensation since not all requisites of legal
compensation provided under Article 1279 were present.[136] In that case, a portion of
Francia's property in Pasay was expropriated by the national government, [137] which did
not immediately pay Francia. In the meantime, he failed to pay the real property tax due
on his remaining property to the local government of Pasay, which later on would
auction the property on account of such delinquency. He then moved to set aside the
auction sale and argued, among others, that his real property tax delinquency was
extinguished by legal compensation on account of his unpaid claim against the national
government.[139] This court ruled against Francia:

There is no legal basis for the contention. By legal compensation, obligations of persons,
who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other;

xxx     xxx     xxx

(3) that the two debts be due.

xxx     xxx     xxx

This principal contention of the petitioner has no merit. We have consistently ruled that
there can be no off-setting of taxes against the claims that the taxpayer may have against
the government. A person cannot refuse to pay a tax on the ground that the government
owes him an amount equal to or greater than the tax being collected. The collection of a
tax cannot await the results of a lawsuit against the government.
....

There are other factors which compel us to rule against the petitioner. The tax was due
to the city government while the expropriation was effected by the national
government. Moreover, the amount of P4,116.00 paid by the national government for
the 125 square meter portion of his lot was deposited with the Philippine National Bank
long before the sale at public auction of his remaining property. Notice of the deposit
dated September 28, 1977 was received by the petitioner on September 30, 1977. The
petitioner admitted in his testimony that he knew about the P4,116.00 deposited with
the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale
at public auction.[140]

The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v.
Commission on Audit[141] and Philex Mining Corporation v. Commissioner of Internal
Revenue.[142] In Caltex, this court reiterated:

[A] taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract or judgment as is allowed to beset-off. [143] (Citations
omitted)

Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity."[144] Rejecting Philex Mining's assertion that the
imposition of surcharge and interest was unjustified because it had no obligation to pay
the excise tax liabilities within the prescribed period since, after all, it still had pending
claims for VAT input credit/refund with the Bureau of Internal Revenue, this court
explained:

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government which
has not yet been granted. It must be noted that a distinguishing feature of a tax is that it
is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the
consent of the taxpayer. If any tax payer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would adversely affect
the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall
due simply because he has a claim against the government or that the collection of the
tax is contingent on the result of the lawsuit it filed against the government. Moreover,
Philex's theory that would automatically apply its VAT input credit/refund against its
tax liabilities can easily give rise to confusion and abuse, depriving the government of
authority over the manner by which taxpayers credit and offset their tax liabilities.
[145]
 (Citations omitted)

In sum, the rulings in those cases were to the effect that the taxpayer cannot simply
refuse to pay tax on the ground that the tax liabilities were off-set against any alleged
claim the taxpayer may have against the government. Such would merely be in keeping
with the basic policy on prompt collection of taxes as the lifeblood of the government.

Here, what is involved is a denial of a taxpayer's refund claim on account of the Court of
Tax Appeals' finding of its liability for another tax in lieu of the Gross Philippine Billings
tax that was allegedly erroneously paid.

Squarely applicable is South African Airways where this court rejected similar

arguments on the denial of claim for tax refund:

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the

offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying
petitioner's supplemental motion for reconsideration alleging bringing to said court's
attention the existence of the deficiency income and business tax assessment against
Citytrust. The fact of such deficiency assessment is intimately related to and inextricably
intertwined with the right of respondent bank to claim for a tax refund for the same
year. To award such refund despite the existence of that deficiency assessment is an
absurdity and a polarity in conceptual effects. Herein private respondent cannot be
entitled to refund and at the same time be liable for a tax deficiency assessment for the
same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. 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.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse must
be filed within the prescriptive period of ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return involved. This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden
on and a drain of government funds, and impede or delay the collection of much-needed
revenue for governmental operations.

Thus, 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.

In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just
and fair that the taxpayer and the Government alike be given equal opportunities to
avail of remedies under the law to defeat each other's claim and to determine all matters
of dispute between them in one single case. It is important to note that in determining
whether or not petitioner 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. 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.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC.
The above pronouncements are, therefore, still applicable today.

Here, petitioner's similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable under
Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the
return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.[146] (Emphasis supplied, citation omitted)

In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue,

[147]
 this court upheld the denial of the claim for refund based on the Court of Tax
Appeals' finding that the taxpayer had, through erroneous deductions on its gross
income, underpaid its Gross Philippine Billing tax on cargo revenues for 1999, and the
amount of underpayment was even greater than the refund sought for erroneously paid
Gross Philippine Billings tax on passenger revenues for the same taxable period. [148]

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was
computed at the rate of 1 1/2% of its gross revenues amounting to
P345,711,806.08[149] from the third quarter of 2000 to the second quarter of 2002. It is
quite apparent that the tax imposable under Section 28(A)(1) of the 1997 National
Internal Revenue Code [32% of taxable income, that is, gross income less deductions]
will exceed the maximum ceiling of 1 1/2% of gross revenues as decreed in Article VIII of
the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.

WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and
Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.

SO ORDERED.

Carpio, (Chairperson), Brion, Del Castillo, and Mendoza, JJ., concur.

[1]
 Rollo, pp. 9-40. The Petition was filed pursuant to Rule 45 of the Rules of Court.

[2]
 Id. at 57-72. The Decision was penned by Associate Justice Olga Palanca-Enriquez
and concurred in by Presiding Justice Ernesto D. Acosta and Associate Justices Lovell R.
Bautista, Erlinda P. Uy, and Caesar A. Casanova. Associate Justice Juanito C. Castaneda,
Jr. voluntarily inhibited himself.

[3]
 Id. at 41-5 1. The Decision was penned by Associate Justice Lovell R. Bautista and
concurred in by Presiding Justice Ernesto D. Acosta and Associate Justice Caesar A.
Casanova.

[4]
 Id. at 52-56. The Resolution was signed by Presiding Justice Ernesto D. Acosta and
Associate Justices Lovell R. Bautista and Caesar A. Casanova.

[5]
 Id. at 59, Court of Tax Appeals En Bane Decision.

[6]
 Id. at 78, Civil Aeronautics Board Executive Director's Letter.

[7]
 Id. at 300, Air Canada's Memorandum.

[8]
 Id. at 118-140, Passenger General Sales Agency Agreement Between Air Canada and
Aerotel Ltd., Corp.

[9]
 Id. at 300, Air Canada's Memorandum.

[10]
 Id. at 59-60, Court of Tax Appeals En Banc Decision.

[11]
 Id.

[12]
 Id. at 60.

[13]
 Id. at 13, Petition.

[14]
 Pres. Decree No. 1355 (1978), sec. 1 defines Gross Philippine Billings as: "Gross
Philippine billings" includes gross revenue realized from uplifts anywhere in the world
by any international carrier doing business in the Philippines of passage documents
sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail
originates from the Philippines. The gross revenue realized from the said cargo or mail
shall include the gross freight charge up to final destination. Gross revenues from
chartered flights originating from the Philippines shall likewise form part of "gross
Philippine billings" regardless of the place of sale or payment of the passage documents.
For purposes of determining the taxability of revenues from chartered flights, the term
"originating from the Philippines" shall include flight of passengers who stay in the
Philippines for more than forty-eight (48) hours prior to embarkation." (Emphasis
supplied)

[15]
 Rollo, p. 60, Court of Tax Appeals En Banc Decision.

[16]
 Id. at 41, Court of Tax Appeals First Division Decision.

[17]
 Id. at 51.

[18]
 Id. at 47-48.

[19]
 Id. at 51.

[20]
 Id. at 50.
[21]
 Id. at 51.

[22]
 Id. at 53 and 56, Court of Tax Appeals First Division Resolution.

[23]
 Id. at 54.

[24]
 Id. at 16, Petition.

[25]
 Id.

[26]
 Id. at 71, Court of Tax Appeals En Banc Decision.

[27]
 Id. at 67-68.

[28]
 Id. at 71.

[29]
 The Petition was received by the court on October 20, 2005. Respondent filed its
Comment (Id. at 252-261) on August 6, 2007. Subsequently, pursuant to the court's
Resolution (Id. at 282-283) dated November 28, 2007, petitioner filed its Memorandum
(Id. at 284-328) on February 21, 2008 and respondent filed its Manifestation (Id. at
349-350) on January 5, 2009, stating that it is adopting its Comment as its
Memorandum.

[30]
 Pursuant to Rep. Act No. 9337 (2005), the rate is reduced to 30% beginning January
1, 2009.

[31]
 Rollo, pp. 22, Petition, and 307, Air Canada's Memorandum.

[32]
 Id.

[33]
 Id. at 28, Petition.

[34]
 Id. at 23-24, Petition, and 315, Air Canada's Memorandum.

[35]
 Id. at 319, Air Canada's Memorandum.

[36]
 Id. at 28-29, Petition.

[37]
 Id. at 29. According to Senator Juan Ponce Enrile, "the gross Philippine billings of
international air carriers must refer to flown revenue because this is an income from
services and this will make the determination of the tax base a lot easier by following the
same rule in determining the liability of the carrier for common carrier's tax." (Minutes
of the Bicameral Conference Committee on House Bill No. 9077 [Comprehensive Tax
Reform Program], 10 October 1997, pp. 19-20).

[38]
 Id.

[39]
 Id. at 313, Air Canada's Memorandum.

[40]
 Id. at 35, Petition.

[41]
 Id. at 35, Petition, and 322, Air Canada's Memorandum.

[42]
 Id. at 321, Air Canada's Memorandum.

[43]
 Id. at 35, Petition.

[44]
 Id. at 35-36, Petition, and 322-323, Air Canada's Memorandum.
[45]
 Id. at 37, Petition, and 325, Air Canada's Memorandum.

[46]
 Id. at 37, Petition, and 325-326, Air Canada's Memorandum.

[47]
 Id. at 256, Commissioner of Internal Revenue's Comment.

[48]
 259 Phil. 757 (1989) [Per J. Regalado, Second Division].

[49]
 Rollo, p. 258, Commissioner of Internal Revenue's Comment.

[50]
 Id. at 257.

[51]
 Id. at 260.

[52]
 Id. at 260-261.

[53]
 Pursuant to Rep. Act No. 9337 (2005), the rate is reduced to 30% beginning January
1, 2009.

[54]
 Pursuant to Rep. Act No. 9337 (2005), the rate is reduced to 30% beginning January
1, 2009.

[55]
 Com. Act No. 466 (1939), sec. 84(g).

[56]
 Commissioner of Internal Revenue v. British Overseas Airways Corporation, 233
Phil. 406, 421 (1987) [Per J. Melencio-Herrera, En Banc], citing Tax Code, sec. 24(b)(2),
as amended by Rep. Act No. 6110 (1969).

[57]
 Pres. Decree No. 1158-A (1977), sec. 1.

[58]
 233 Phil. 406 (1987) [Per J. Melencio-Herrera, En Banc], cited in Commissioner of
Internal Revenue v. Air India, 241 Phil. 689, 694-696 (1988) [Per J. Gancayco, First
Division].

[59]
 Id. at 420-421.

[60]
 Id.

[61]
 Rep. Act No. 7042(1991), sec 3(d).

[62]
 Implementing Rules and Regulations of Rep. Act No. 7042 (1991), sec 1(f).

[63]
 Civil Aeronautics Board Economic Regulation No. 4, chap. I, sec. 2(b).

[64]
 Civil Aeronautics Board Economic Regulation No. 4, chap. Ill, sec. 26.

[65]
 Civil Aeronautics Board Economic Regulation No. 4, chap. Ill, sec. 30.

[66]
 Cf. Cargill, Inc. v. Intra Strata Assurance Corporation, 629 Phil. 320, 332 (2010)
[Per J. Carpio, Second Division], citing National Sugar Trading Corporation v. Court
of Appeals, 316 Phil. 562, 568-569 (1995) [Per J. Quiason, First Division].

[67]
 Rollo, p. 122, Passenger General Sales Agency Agreement Between Air Canada and
Aerotel Ltd., Corp.

[68]
 Id. at 126.
[69]
 Id. at 78, Civil Aeronautics Board Executive Director Guia Martinez's letter to Aerotel
Limited Corporation.

[70]
 626 Phil. 566 (2010) [Per J. Velasco, Jr., Third Division]. The case was also cited
in United Airlines, Inc. v. Commissioner of Internal Revenue, 646 Phil. 184, 193 (2010)
[Per J. Villarama, Jr., Third Division].

[71]
 South African Airways v. Commissioner of Internal Revenue, 626 Phil. 566, 574-575
(2010) [Per J. Velasco, Jr., Third Division].

[72]
 Id. at 575.

[73]
 J. Paras, Dissenting Opinion in Commissioner of Internal Revenue v. Procter &
Gamble Philippine Manufacturing Corporation, G.R. No. 66838, December 2, 1991,
204 SCRA 377, 411 [Per J. Feliciano, En Banc].

[74]
 368 Phil. 388 (1999) [Per J. Gonzaga-Reyes, Third Division].

[75]
 Id. at 404-405.

[76]
 CONST., art. II, sec. 2.

[77]
 Tanada v. Angara, 338 Phil. 546, 591-592 (1997) [Per J. Panganiban, En Banc]:
"[W]hile sovereignty has traditionally been deemed absolute and all-encompassing on
the domestic level, it is however subject to restrictions and limitations voluntarily
agreed to by the Philippines, expressly or impliedly, as a member of the family of
nations. Unquestionably, the Constitution did not envision a hermit-type isolation of the
country from the rest of the world. In its Declaration of Principles and State Policies, the
Constitution "adopts the generally accepted principles of international law as part of the
law of the land, and adheres to the policy of peace, equality, justice, freedom,
cooperation and amity, with all nations." By the doctrine of incorporation, the country is
bound by generally accepted principles of international law, which are considered to be
automatically part of our own laws. One of the oldest and most fundamental rules in
international law is pacta sunt servanda — international agreements must be
performed in good faith. "A treaty engagement is not a mere moral obligation but
creates a legally binding obligation on the parties. . . . A state which has contracted valid
international obligations is bound to make in its legislations such modifications as may
be necessary to ensure the fulfillment of the obligations undertaken." (Citations
omitted)

[78]
 G.R. No. 188550, August 28, 2013, 704 SCRA 216 [Per C.J. Sereno, First Division].
Also cited in CBK Power Company Limited v. Commissioner of Internal Revenue, G.R.
Nos. 193383-84, January 14, 2015 7-8 [Per J. Perlas-Bernabe, First Division].

[79]
 Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, G.R. No.
188550, August 28, 2013, 704 SCRA 216, 223 [Per C.J. Sereno, First Division]. The
Bureau of Internal Revenue "issued RMO No. 1-2000, which requires that any
availment of the tax treaty relief must be preceded by an application with ITAD at least
15 days before the transaction. The Order was issued to streamline the processing of the
application of tax treaty relief in order to improve efficiency and service to the taxpayers.
Further, it also aims to prevent the consequences of an erroneous interpretation and/or
application of the treaty provisions (i.e., filing a claim for a tax refund/credit for the
overpayment of taxes or for deficiency tax liabilities for underpayment)." (Citation
omitted)

[80]
 Id.

[81]
 Id. at 227-228.
[82]
 Convention with Canada for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income, March 11,  1976 (1977) (visited July
21, 2015). Cesar Virata signed for the government of the Republic of the Philippines,
while Donald Jamieson signed for the government of Canada.

[83]
 Convention with Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, art. V provides:

Article V
Permanent Establishment

1. For the purposes of this Convention, the term "permanent establishment" means
a fixed place of business in which the business of the enterprise is wholly or partly
carried on.
2. The term "permanent establishment" shall include especially:

a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, quarry or other place of extraction of natural resources;
g) a building or construction site or supervisory activities in connection
therewith, where such activities continue for a period more than six months;
h) an assembly or installation project which exists for more than three months;
i) premises used as a sales outlet;
j) a warehouse, in relation to a person providing storage facilities for others.

3. The term "permanent establishment" shall not be deemed to include:

a) the use of facilities solely for the purpose of storage, display or delivery of
goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
c) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise, or for collecting information for the
enterprise;
e) the maintenance of a fixed place of business solely for the purpose of
advertising, for the supply of information, for scientific research, or for similar
activities which have a preparatory or auxiliary character, for the enterprise.

4. A person acting in a Contracting State on behalf of an enterprise of the other

Contracting State (other than an agent of independent status to whom
paragraph 6 applies) shall be deemed to be a permanent establishment in the
first-mentioned State if:

a) he has and habitually exercises in that State an authority to conclude

contracts on behalf of the enterprise, unless his activities are limited to the
purchase of goods or merchandise for that enterprise; or
b) he has no such authority, but habitually maintains in the first-mentioned State
a stock of goods or merchandise from which he regularly delivers goods or
merchandise on behalf of the enterprise.

5. An insurance enterprise of a Contracting State shall, except in regard to re-

insurance, be deemed to have a permanent establishment in the other State if it
collects premiums in the territory of that State or insures risks situated therein
through an employee or through a representative who is not an agent of
 independent status within the meaning of paragraph 6.

6. An enterprise of a Contracting State shall not be deemed to have a permanent

establishment in the other Contracting State merely because it carries on
business in that other State through a broker, general commission agent or any
other agent of an independent status, where such persons are acting in the
ordinary course of their business.

7. The fact that a company which is a resident of a Contracting State controls or is

controlled by a company which is a resident of the other Contracting State, or
which carries on business in that other State (whether through a permanent
establishment or otherwise), shall not of itself constitute for either company a
permanent establishment of the other. (Emphasis supplied)

[84]
 Convention with Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, art. V(1).

[85]
 CIVIL CODE, art. 1868 provides:

Article 1868. By the contract of agency a person binds himself to render some service or
to do something in representation or on behalf of another, with the consent or authority
of the latter.

[86]
 Convention with Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, art. XV provides:

Article XV
Dependent Personal Services

1. Subject to the provisions of Articles XVI, XVIII and XIX, salaries, wages and
other similar remuneration derived by a resident of a Contracting State in respect
of an employment shall be taxable only in that State unless the employment is
exercised in the other Contracting State. If the employment is so exercised, such
remuneration as is derived therefrom may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a

resident of a Contracting State in respect of an employment exercised in the other
Contracting State shall be taxable only in the first-mentioned State if the
recipient is present in the other Contracting State for a period or periods not
exceeding in the aggregate 183 days in the calendar year concerned, and either

a) the remuneration earned in the other Contracting State in the calendar year
concerned does not exceed two thousand five hundred Canadian dollars ($2,500)
or its equivalent in Philippine pesos or such other amount as may be specified
and agreed in letters exchanged between the competent authorities of the
Contracting States; or

b) the remuneration is paid by, or on behalf of, an employer who is not a resident
of the other State, and such remuneration is not borne by a permanent
establishment or a fixed base which the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration in respect

of employment as a member of the regular crew or complement of a ship or
aircraft operated in international traffic by an enterprise of a Contracting State,
shall be taxable only in that State.

[87]
 Among the four elements of an employer-employee relationship (i.e., (i) the selection
and engagement of the employee; (ii) the payment of wages; (iii) the power of dismissal;
and (iv) the power of control of the employees conduct), the control test is regarded as
the most important. Under this test, an employer-employee relationship exists if the
employer has reserved the right to control the employee not only as to the result of the
work done but also as to the means and methods by which the same is to be
accomplished. See Fuji Television Network, Inc. v. Espiritu, G.R. Nos. 204944^1-5,
December 3, 2014 19-20 [Per J. Leonen, Second Division]; Royale Homes Marketing
Corporation v. Alcantara, G.R. No. 195190, July 28, 2014, 731 SCRA 147, 162 [Per J.
Del Castillo, Second Division]; Tongko v. The Manufacturers Life Insurance Co.
(Phils.), Inc., 655 Phil. 384, 400-401 (2011) [Per J. Brion, En Banc]; Sonza v. ABS-CBN
Broadcasting Corporation, G.R. No. 138051, June 10, 2004, 431 SCRA 583, 594-595
[Per J. Carpio, First Division]; Dr. Sara v. Agarrado, 248 Phil. 847, 851 (1988) [Per C.J.
Fernan, Third Division], and Investment Planning Corporation of the Philippines v.
Social Security System, 129 Phil. 143, 147 (1967) [Per J. Makalintal, En Banc], cited
in Insular Life Assurance Co., Ltd. v. National Labor Relations Commission, 259 Phil.
65, 72 (1989) [Per J. Narvasa, First Division].

[88]
 Rep. Act No. 776(1952), sec.1(jj), as amended by Pres. Decree No. 1462 (1978), sec. 1.

[89]
 Rep. Act No. 776 (1952), sec. 10(A), as amended by Pres. Decree No. 1462 (1978), sec.
6.

[90]
 Rep. Act No. 776 (1952), sec. 11, as amended by Pres. Decree No. 1462 (1978), sec. 7.

[91]
 Rollo, pp. 124-125, Passenger General Sales Agency Agreement Between Air Canada
and Aerotel Ltd., Corp.

[92]
 Id. at 126.

[93]
 Id. at 122.

[94]
 Id. at 127.

[95]
 Id. at 128.

[96]
 Id. at 130.

[97]
 Id. at 122.

[98]
 Id.

[99]
 Id. at 137.

[100]
 Id.

[101]
 Id. at 122.

[102]
 Id. at 123.

[103]
 Id.

[104]
 Id.

[105]
 Id. at 122.

[106]
 Id. at 126.

[107]
 Id.
[108]
 Id.

[109]
 Id. at 129.

[110]
 Id. at 131.

[111]
 Id. at 132.

[112]
 Cf. Steelcase, Inc. v. Design International Selections, Inc., G.R. No. 171995, April 18,
2012, 670 SCRA 64 [Per J. Mendoza, Third Division]. This couit held that "the
appointment of a distributor in the Philippines is not sufficient to constitute 'doing
business' unless it is under the full control of the foreign corporation. On the other hand,
if the distributor is an independent entity which buys and distributes products, other
than those of the foreign corporation, for its own name and its own account, A the latter
cannot be considered to be doing business in the Philippines. It should be kept in mind
that the determination of whether a foreign corporation is doing business in the
Philippines must be judged in light of the attendant circumstances." (Id. at 74, citations
omitted) This court found that Design International Selections, Inc. "was an
independent contractor, distributing various products of Steelcase and of other
companies, acting in its own name and for its own account." (Id. at 75) "As a result,
Steelcase cannot be considered to be doing business in the Philippines by its act of
appointing a distributor as it falls under one of the exceptions under R.A. No. 7042." (Id.
at 77).

[113]
 Convention with Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, art. VII provides:

Article VII
Business Profits

1. The profits of an enterprise of a Contracting State shall be taxable only in that

State unless the enterprise carries on business in the other Contracting State
through a permanent establishment situated therein. If the enterprise carries on
or has carried on business as aforesaid, the profits of the enterprise may be taxed
in the other State but only so much of them as is attributable to:

a) that permanent establishment; or

b) sales of goods or merchandise of the same or similar kind as those sold, or

from other business activities of the same or similar kind as those affected,
through that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting

State carries on business in the other Contracting State through a permanent
establishment situated therein, there shall be attributed to that permanent
establishment profits which it might be expected to make if it were a distinct and
separate enterprise engaged in the same or similar activities under the same or
similar conditions and dealing wholly independently with the enterprise of which
it is a permanent establishment.

3. In the determination of the profits of a permanent establishment, there shall be

allowed those ' deductible expenses which are incurred for the purposes of the
permanent establishment including executive and general administrative
expenses, whether incurred in the State in which the permanent establishment is
situated or elsewhere.
 4. No profits shall be attributed to a permanent establishment by reason of the mere
purchase by that permanent establishment of goods or merchandise for the
enterprise.
5. For the purposes of the preceding paragraphs, the profits to be attributed to the
permanent establishment shall be determined by the same method year by year
unless there is good and sufficient reason to the contrary.
6. Where profits include items of income which are dealt with separately in other
Articles of this Convention, then, the provisions of those Articles shall not be
affected by the provisions of this Article.

[114]
 Convention with Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, art. VII, par. 6 provides:

6. Where profits include items of income which are dealt with separately in other
Articles of this Convention, then, the provisions of those Articles shall not be
affected by the provisions of this Article.

[115]
 Convention with Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, art. VIII provides:

Article VIII
Shipping and Air Transport

1. Profits derived by an enterprise of a Contracting State from the operation of ships

or aircraft shall be taxable only in that State.

2. Notwithstanding the provisions of paragraph 1, profits from sources within a

Contracting State derived by an enterprise of the other Contracting State from the
operation of ships or aircraft in international traffic may be taxed in the first-
mentioned State but the tax so charged shall not exceed the lesser of

a) one and one-half per cent of the gross revenues derived from sources in that
State; and
b) the lowest rate of Philippine tax imposed on such profits derived by an
enterprise of a third State.
[116]
 TAX CODE, sec. 31 provides:

SEC. 31. Taxable Income Defined. - The term 'taxable income' means the pertinent items
of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or other
special laws.

[117]
 Rollo, p. 59, Court of Tax Appeals En Bance Decision.

[118]
 Const., an. II, sec. 2.

[119]
 Lex specialis derogat generali; See BAYAN (Bagong Alyansang Makabayan) v.
Exec. Sec. Zamora, 396 Phil. 623, 652 (2000) [Per J. Buena, En Banc], citing Manila
Railroad Co. v Collector of Customs, 52 Phil. 950, 952 (1929) [Per J. Malcolm, En Banc]
and Leveriza v. Intermediate Appellate Court, 241 Phil. 285, 299 (1988) [Per J. Bidin,
Third Division], cited in Republic v. Sandiganbayan, First Division, 255 Phil. 71, 83-84
(1989) [Per J. Gutierrez, Jr., En Banc].
[120]
 TAX CODE, sec. 28(A)(1), as amended by Rep. Act No. 9337 (2005), sec. 2.

[121]
 See Bureau of Internal Revenue website (visited July 21, 2015).

[122]
 See Herman v. Radio Corporation of the Philippines, 50 Phil. 490, 498 (1927) [Per
J. Street, En Banc] in that the later legislative expression prevails when two statutes
apply.

[123]
 Agreement Between the Government of Canada and the Government of the
Republic of the Philippines on Air Transport, Global Affairs Canada (visited July 21,
2015).

[124]
 Marubeni Corporation v. Commissioner of Internal Revenue, 258 Phil. 295, 306
(1989) [Per CJ. Fernan, Third Division].

[125]
 Rollo, pp. 325-326, Air Canada's Memorandum.

[126]
 Id. at 323-325.

[127]
 114 Phil. 549, 554-555 (1962) [Per J. Barrera, En Banc].

[128]
 245 Phil. 717, 722-723 (1988) [Per J. Gutierrez, Jr., Third Division].

[129]
 G.R. No. 175410, November 12, 2014 [Per J. Leonen, Second Division],

[130]
 Id. at 1.

[131]
 Id.

[132]
 Id. at 9-10.

[133]
 Republic v. Mambulao Lumber Co., et al., 114 Phil. 549, 552 (1962) [Per J. Barrera,
En Banc] and Francia v. Intermediate Appellate Court, 245 Phil. 717, 722 (1988) [Per J.
Gutierrez, Jr., Third Division].

[134]
 Republic v. Mambulao Lumber Co., et al, 114 Phil. 549, 552 (1962) [Per J. Barrera,
En Banc].

[135]
 Id. at 554-555.

[136]
 Francia v. Intermediate Appellate Court, 245 Phil. 717, 722 (1988) [Per J. Gutierrez,
Jr., Third Division].

[137]
 Id. at 719.

[138]
 Id. at 720.

[139]
 Id. at 722.

[140]
 Id. at 722-723.

[141]
 G.R. No. 92585, May 8, 1992, 208 SCRA 726 [Per J. Davide, Jr., En Banc].

[142]
 356 Phil. 189 (1998) [Per J. Romero, Third Division].

[143]
 Caltex Philippines, Inc. v. Commission on Audit, G.R. No. 92585, May 8, 1992, 208
SCRA 726, 756 [Per J. Davide, Jr., En Banc].
 [144]
 Philex Mining Corporation v. Commissioner of Internal Revenue, 356 Phil. 189, 198
(1998) [Per J. Romero, Third Division], citing Commissioner of Internal Revenue v.
Palanca, Jr., 124 Phil. 1102, 1107 (1966) [Per J. Regala, En Banc].

[145]
 Id. at 200.

[146]
 South African Airways v. Commissioner of Internal Revenue, 626 Phil. 566, 577
(2010) [Per J. Velasco, Jr., Third Division].

[147]
 646 Phil. 184 (2010) [Per J. Villarama. Jr., Third Division].

[148]
 Id. at 198-199.

[149]
 Rollo, pp. 79-105, Air Canada's Quarterly and Annual Income Tax Returns.
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 G.R. Nos. 206079-80 - PHILIPPINE AIRLINES, INC. (PAL), PETITIONER, V.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. [G.R. No. 206309,
January 17, 2018] COMMISSIONER OF INTERNAL REVENUE, PETITIONER, V.
PHILIPPINE AIRLINES, INC. (PAL), RESPONDENT. D E C I S I O N

THIRD DIVISION

[ G.R. Nos. 206079-80, January 17, 2018 ]

PHILIPPINE AIRLINES, INC. (PAL), PETITIONER, V. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT.

[G.R. No. 206309, January 17, 2018]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, V. PHILIPPINE AIRLINES,

INC. (PAL), RESPONDENT.

DECISION

LEONEN, J.:

Before this Court are two (2) consolidated Petitions for Review on Certiorari under Rule
45 of the Rules of Court assailing the August 14, 2012 Decision[1] and February 25,
2013 Resolution[2] of the Court of Tax Appeals En Banc in CTA EB Nos. 749 and 757
(CTA Case No. 6877).

These consolidated cases stem from a refund claim by Philippine Airlines, Inc. (PAL) for
final taxes withheld on its interest income from its peso and dollar deposits with China
Banking Corporation (Chinabank), JP Morgan Chase Bank (JPMorgan), Philippine Bank
of Communications (PBCom), and Standard Chartered Bank (Standard Chartered)
(collectively, Agent Banks).[3]

G.R. Nos. 206079-80 involves the Petition filed by PAL questioning the denial of its
claim for refund of P510,233.16 and US$65,877.07, representing the final income tax
withheld by Chinabank, PBCom, and Standard Chartered.[4]

Meanwhile, G.R. No. 206309 involves the Petition filed by the Commissioner of Internal
Revenue (Commissioner) assailing the grant to PAL of the tax refund of P1,237,646.43,
representing the final income tax withheld and remitted by JPMorgan.[5]

PAL asserts that it is entitled to a refund of the withheld taxes because it is exempted
from paying the tax on interest income under its franchise, Presidential Decree No.
1590.[6] However, the Commissioner refused to grant the claim, arguing that PAL failed
to prove the remittance of the withheld taxes to the Bureau of Internal Revenue.[7]

Thus, the issue involves whether or not PAL is required to prove the remittance to the
Bureau of Internal Revenue of the final withholding tax on its interest from currency
bank deposits to be entitled to tax refund.

The Court of Tax Appeals Special First Division ordered the refund to PAL of
P1,237,646.43 representing the final income tax withheld and remitted by JPMorgan on
PAL's interest income. However, it denied the refund of P510,223.16 and
US$65,877.07, representing the final income tax withheld by Chinabank, PBCom, and
Standard Chartered.[8] The Court of Tax Appeals En Banc affirmed the Decision of the
Court of Tax Appeals Special First Division.[9]

The facts are as follows:

Sometime in 2002, PAL made US dollar and Philippine peso deposits and placements
in the following Philippine banks: Chinabank, JPMorgan, PBCom, and Standard
Chartered.[10]
PAL earned interest income from these deposits and the Agent Banks deducted final
withholding taxes.[11]

From Chinabank, PAL claimed that it earned interest income net of withholding tax in
the amount of US$480,688.76 in its US dollar time deposit for the year 2002.
[12]
 Substantiating this claim was Chinabank's Certification dated October 24, 2003,
[13]
 which stated that withholding taxes were deducted from PAL's interest income in the
amount of US$38,974.75. These taxes were remitted to the Bureau of Internal Revenue
on different dates from February 11, 2002 to January 10, 2003.[14]

From JPMorgan, PAL alleged that it earned interest income in its peso deposit in the
amount of P6,188,232.17, from September 2002 to December 2002. JPMorgan
deducted withholding tax totalling P1,237,646.43.[15]

From PBCom, PAL maintained that it earned interest income from its various dollar
placements for the year 2002, with the following corresponding final taxes withheld:[16]

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD

1st Quarter US$ 102,648.40 US$ 7,698.63

2nd Quarter US$ 22,653.20 US$ 1,698.00

3rd Quarter US$ 40,123.73 US$ 3,009.28

4thQuarter US$ 107,163.73 US$ 8,037.28

TOTAL US$ 272,589.06 US$ 20,443.19

PAL's peso deposit account with PBCom also allegedly earned interest income for the
year 2002, with the following corresponding final taxes withheld:[17]

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD

2nd Quarter P 541,758.42 P 108,351.67

3rd Quarter P 2,009,357.41 P 401,871.46

TOTAL P 2,551,115.83 P 510,223.13

A letter dated April 10, 2003 from PBCom's Branch Manager, Carmencita L. Tan, stated
that the taxes withheld from PAL's interest income had been remitted by PBCom to the
Bureau of Internal Revenue.[18]

From Standard Chartered, PAL stated that it earned interest income in its dollar time
deposit account from May 2002 to December 2002, amounting to US$86,107.55. The
amount of US$6,458.14 was deducted and allegedly remitted to the Bureau of Internal
Revenue as final withholding tax.[19]

Claiming that it was exempt from final withholding taxes under its franchise, Presidential
Decree No. 1590, PAL filed with the Commissioner on November 3, 2003 a written
request for a tax refund[20] of the withheld amounts of P1,747,869.59 and US$65,877.07.
[21]

The Commissioner failed to act on the request. Thus, on February 24, 2004, PAL
elevated the case to the Court of Tax Appeals in Division.[22]

In her Answer, the Commissioner contended that PAL's claim was subject to
administrative routinary investigation or examination by the Bureau of Internal Revenue.
She also alleged that PAL's claim was not properly documented, and that it must show
that it complied with the prescriptive period for filing refunds under Sections 204(C) and
229 of the National Internal Revenue Code. It likewise asserted that claims for refund
are of the same nature as a tax exemption, and thus, are strictly construed against the
claimant.[23]

PAL presented evidence to support its claim. The Commissioner then submitted the
case for decision based on the pleadings.[24]

In its November 9, 2010 Decision,[25] the Court of Tax Appeals Special First Division
partially granted PAL's Petition and ordered the Commissioner to refund PAL
P1,237,646.43, representing the final income tax withheld and remitted by JPMorgan. It
denied the remaining claim for refund of P510,223.16 and US$65,877.07 representing
the final income tax withheld by Chinabank, PBCom, and Standard Chartered.[26]

The Court of Tax Appeals Special First Division found that PAL was exempted from final
withholding tax on interest on bank deposits.[27] However, it ruled that PAL failed to
adequately substantiate its claim because it did not prove that the Agent Banks, with the
exception of JPMorgan, remitted the withheld amounts to the Bureau of Internal
Revenue.[28] PAL only presented documents[29] which showed the total amount of final
taxes withheld for all branches of the banks.[30] As such, the amount of tax withheld from
and to be refunded to PAL could not be ascertained with particularity.[31] It ruled that the
Certificates of Final Tax Withheld at Source are not sufficient to prove remittance.
[32]
 Thus:

WHEREFORE, premises considered, the instant Petition for Review is hereby

PARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED TO REFUND in
favor of petitioner the reduced amount of P1,237,646.43, representing the 20% final
income tax withheld and remitted by JP Morgan Chase bank on petitioner's interest
income; while the remaining claim of P510,223.16 and US$65,877.07, representing the
final income tax withheld by China Banking Corporation, Philippine Bank of
Communication[s], and Standard Chartered Bank are hereby DENIED due to
insufficiency of evidence.

SO ORDERED.[33]

The Court of Tax Appeals Special First Division denied the separate motions for
reconsideration filed by the parties. Thus, both parties filed separate appeals before the
Court of Tax Appeals En Banc, which consolidated the cases.[34]

In its August 14, 2012 Decision, the Court of Tax Appeals En Banc denied the petitions
and affirmed the decision of the Court of Tax Appeals Special First Division.[35] The
Court of Tax Appeals En Banc sustained that PAL needed to prove the remittance of
the withheld taxes because although remittance is the responsibility of the banks as
withholding agents, remittance was put in issue in this case. Thus, the Court of Tax
Appeals Special First Division correctly made a ruling on it.[36]

It found that PAL was able to establish the remittance of the taxes withheld by
JPMorgan because the monthly remittance returns were identified by PAL's witness and
were formally offered in the Court of Tax Appeals Special First Division without
objections to their admissibility. It ruled that the monthly remittance returns may be
considered even if they were only presented in the Court of Tax Appeals Special First
Division as it is a court of record and is required to conduct a formal trial.[37]

It sustained that PAL failed to prove the remittance by Chinabank, PBCom, and
Standard Chartered because it did not show that the amounts remitted by these Agent
Banks pertained to the taxes withheld from PAL's interest income.[38]

Thus:

WHEREFORE, all the foregoing considered, the Commissioner's Petition for Review in
CTA EB No. 749 and PAL's Petition for Review in CTA EB No. 757 are
hereby DENIED for lack of merit. The assailed Decision dated November 9, 2010 and
Resolution dated March 17, 2011 are hereby AFFIRMED.

SO ORDERED.[39] (Emphasis in the original)

The Court of Tax Appeals En Banc denied the motions for reconsideration.[40]

Hence, the present Petitions via Rule 45 have been filed.[41]

In G.R. Nos. 206079-80, PAL questions the denial of its refund claim for the taxes
withheld by Chinabank, PBCom, and Standard Chartered. PAL argues that it
adequately established the withholding and remittance of final taxes through the
Certificates of Final Taxes Withheld issued to it by these Agent Banks.[42] It contends
that these Certificates are prima facie evidence of actual remittance, and if they are
uncontroverted, as in this case, they are sufficient proof of remittance.[43] It holds that the
rule pertaining to Creditable Taxes Withheld in CIR v. Asian Transmission
Corporation[44] and other Court of Tax Appeals En Banc cases[45] should apply to Final
Taxes Withheld, as these are of the same nature.[46]

PAL also insists that it is unequivocally exempt from final withholding taxes,[47] and
consequently, for as long as it duly establishes that taxes were withheld from its income,
it must be refunded.[48] It maintains that proof of actual remittance is not necessary.[49]

PAL further claims that it need not establish the remittance of income taxes to the
Bureau of Internal Revenue because this function is vested with the Agent Banks as the
payors and withholding agents of the Commissioner.[50]

In G.R. No. 206309, the Commissioner questions the grant of refund to PAL for the final
income taxes withheld by JPMorgan. She argues that PAL is not entitled to the refund
as it failed to present its documentary evidence before the Bureau of Internal Revenue
when it filed its administrative claim.[51]

In its June 10, 2013 Resolution, the two (2) cases were consolidated.[52]

The parties thereafter filed their respective Comments,[53] Replies,[54] and Memoranda.[55]

PAL argues that it is entitled to its claim for tax refund or tax credit and insists that it has
adequately established that the final taxes on interest income withheld by the banks
were remitted to the Bureau of Internal Revenue.[56] It contends that the Certificates of
Final Taxes Withheld issued by the Agent Banks are prima facie evidence of actual
remittance.[57] As prima facie evidence, they are sufficient proof of the fact that PAL is
establishing, if they are unexplained or uncontradicted.[58]

As such, PAL avers that the Commissioner had the burden to prove that the Agent
Banks failed to remit the withheld taxes.[59] Nonetheless, the Commissioner simply
submitted the case for decision based on the pleadings. It did not contradict or dispute
the Certificates of Final Taxes Withheld.[60]

PAL further posits that the failure of the Agent Banks to remit the withheld taxes should
not prejudice PAL, because they are the withholding agents accountable for proving
remittance. PAL has no control or responsibility over the remittance of the taxes
withheld.[61]

Moreover, PAL holds that there is no need for proof of actual remittance to be entitled to
claim for refund,[62] and that this Court's rulings on creditable taxes withheld should also
apply to final taxes withheld at source, as they are of the same nature.[63] Since PAL has
shown that it is unequivocally exempt from paying final withholding taxes, its taxes were
erroneously paid and must be refunded.[64]

PAL further asserts that the Court of Tax Appeals is a court of record, required to
conduct a trial de novo. Thus, it should not be barred from considering new evidence
not submitted in the administrative claim for refund.[65]
Assuming PAL is limited by the documents it submitted in the administrative level, the
Commissioner had the burden to prove that PAL did not submit complete supporting
documents. However, it neither showed what documents PAL presented nor
established that PAL submitted incomplete supporting documents.[66]

PAL further submits that assuming it failed to present the remittance returns on final
income tax withheld, the Commissioner could have retrieved these files from the
records, as these are monthly returns filed with the Bureau of Internal Revenue.[67] As
the Chief of the Bureau of Internal Revenue, the Commissioner has access to all tax
returns including those of final income tax withheld at source, and thus, is in bad faith in
not checking the records to determine whether or not the withheld taxes were remitted.
[68]
 PAL maintains that the Commissioner's denial of the withholding of the taxes is not a
specific denial, and thus, should be deemed as an admission of this fact.[69]

Finally, PAL holds that the denial of its refund because of its failure to submit monthly
remittance returns is contrary to substantial justice, equity, and fair play.[70]

On the other hand, the Commissioner argues in her Memorandum[71] that PAL needed
to prove, but did not prove, that the withheld taxes were remitted to the Bureau of
Internal Revenue.[72]

She points out that PAL only showed the withheld amounts remitted by branches of
Chinabank, PBCom, and Standard Chartered, but there is no indication that the remitted
amounts are the taxes withheld from PAL's interest income. She argues that PAL must
first prove that the money remitted to the Bureau of Internal Revenue is attributable to it
because tax refunds are strictly construed against the taxpayer.[73]

She further insists that PAL's claim must fail for insufficiency of evidence because it
failed to present several of its documentary evidence before the Bureau of Internal
Revenue during the administrative level.[74] She argues that even if the evidence was
presented in the Court of Tax Appeals, it should not be considered because trial de
novo in the Court of Tax Appeals must be limited to the evidence shown in the
administrative claim for refund.[75] The Court of Tax Appeals' judicial review is allegedly
limited to whether the Commissioner rightfully ruled on the claim on the basis of the
evidence presented in the administrative claim, and the ruling may only be set aside
where there is gross abuse of discretion, fraud, or error of law.[76] Thus, she claims that
the Court of Tax Appeals erred in considering the new evidence presented to it.[77] In
allowing the presentation of new evidence, the Court of Tax Appeals did not conduct a
judicial review. Rather, it adopted an entirely new proceeding.[78]

This Court resolves the following issues:

First, whether or not evidence not presented in the administrative claim for refund in the
Bureau of Internal Revenue can be presented in the Court of Tax Appeals;

Second, whether or not Philippine Airlines, Inc. was able to prove remittance of its final
taxes withheld to the Bureau of Internal Revenue; and

Finally, whether or not proof of remittance is necessary for Philippine Airlines, Inc. to
claim a refund under its charter, Presidential Decree No. 1590.

This Court sustains the factual findings of the Court of Tax Appeals that Philippine
Airlines, Inc. failed to prove remittance of the withheld taxes.

Nonetheless, this Court grants the Petition of Philippine Airlines, Inc.

The Commissioner contends that PAL failed to present several of its documentary
evidence before the Bureau of Internal Revenue during the administrative level.[79] Thus,
she claims that the new evidence that petitioner presented in the Court of Tax Appeals
should not have been considered because trial de novo in the Court of Tax Appeals
must be limited to the evidence shown in the administrative claim.[80]

This Court rules that the Court of Tax Appeals is not limited by the evidence presented
in the administrative claim in the Bureau of Internal Revenue. The claimant may present
new and additional evidence to the Court of Tax Appeals to support its case for tax
refund.

Section 4 of the National Internal Revenue Code[81] states that the Commissioner has
the power to decide on tax refunds, but his or her decision is subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals:

Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.
— The power to interpret the provisions of this Code and other tax laws shall be under
the exclusive and original jurisdiction of the Commissioner, subject to review by the
Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the Bureau of Internal Revenue
is vested in the commissioner, subject to the exclusive appellate jurisdiction of the Court
of Tax Appeals.

Republic Act No. 9282,[82] amending Republic Act No. 1125,[83] is the governing law on
the jurisdiction of the Court of Tax Appeals. Section 7 provides that the Court of Tax
Appeals has exclusive appellate jurisdiction over tax refund claims in case the
Commissioner fails to act on them:

Section 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or other
laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue, where the National Internal
Revenue Code provides a specific period of action, in which case the inaction shall be
deemed a denial;

(3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the exercise of their original or appellate
jurisdiction[.] (Emphasis supplied)

This means that while the Commissioner has the right to hear a refund claim first, if he
or she fails to act on it, it will be treated as a denial of the refund, and the Court of Tax
Appeals is the only entity that may review this ruling.

The power of the Court of Tax Appeals to exercise its appellate jurisdiction does not
preclude it from considering evidence that was not presented in the administrative claim
in the Bureau of Internal Revenue. Republic Act No. 1125 states that the Court of Tax
Appeals is a court of record:

Section 8. Court of record; seal; proceedings. — The Court of Tax Appeals shall be a
court of record and shall have a seal which shall be judicially noticed. It shall prescribe
the form of its writs and other processes. It shall have the power to promulgate rules
and regulations for the conduct of the business of the Court, and as may be needful for
the uniformity of decisions within its jurisdiction as conferred by law, but such
proceedings shall not be governed strictly by technical rules of evidence.[84]

As such, parties are expected to litigate and prove every aspect of their case anew and
formally offer all their evidence.[85] No value is given to documentary evidence submitted
in the Bureau of Internal Revenue unless it is formally offered in the Court of Tax
Appeals.[86] Thus, the review of the Court of Tax Appeals is not limited to whether or not
the Commissioner committed gross abuse of discretion, fraud, or error of law, as
contended by the Commissioner.[87] As evidence is considered and evaluated again, the
scope of the Court of Tax Appeals' review covers factual findings.

In Commissioner of Internal Revenue v. Philippine National Bank:[88]

Finally, petitioner's allegation that the submission of the certificates of withholding taxes
before the Court of Tax Appeals was late is untenable. The samples of the withholding
tax certificates attached to respondent's comment bore the receiving stamp of the
Bureau of Internal Revenue's Large Taxpayers Document Processing and Quality
Assurance Division. As observed by the Court of Tax Appeals En Banc, "[t]he
Commissioner is in no position to assail the authenticity of the CWT certificates due to
PNB's alleged failure to submit the same before the administrative level since he could
have easily directed the claimant to furnish copies of these documents, if the refund
applied for casts him any doubt." Indeed, petitioner's inaction prompted respondent to
elevate its claim for refund to the tax court.

More importantly, the Court of Tax Appeals is not precluded from accepting

respondent's evidence assuming these were not presented at the administrative level.
Cases filed in the Court of Tax Appeals are litigated de novo. Thus, respondent "should
prove every minute aspect of its case by presenting, formally offering and
submitting . . . to the Court of Tax Appeals [all evidence] . . . required for the successful
prosecution of [its] administrative claim."[89] (Emphasis supplied, citations omitted)

In the case at bar, the Commissioner failed to act on PAL's administrative claim.[90] If
she had acted on the refund claim, she could have directed PAL to submit the
necessary documents to prove its case.

Furthermore, considering that the refund claim will be litigated anew in the Court of Tax
Appeals, the latter may consider all pieces of evidence formally offered by PAL, whether
or not they were submitted in the administrative level.

Thus, the Commissioner's contention must fail.

II

Both PAL and the Commissioner are contesting whether or not PAL has proven the
Agent Banks' remittance of the withheld taxes on its interest income.[91]

The Court of Tax Appeals Special First Division and En Banc ruled that PAL was able to
prove JPMorgan's remittance of the withheld taxes but that it failed to prove those of
Chinabank, PBCom, and Standard Chartered.[92]

This Court maintains the factual findings of the Court of Tax Appeals Special First
Division and En Banc.

Firstly, in bringing forth the issue of remittance, the parties are raising a question of fact
which is not within the scope of review on certiorari under a Rule 45 Petition.[93] An
appeal under Rule 45 must raise only questions of law.[94]

The Rules of Court states that a review of appeals filed before this Court is "not a matter
of right, but of sound judicial discretion." The Rules of Court further requires that only
questions of law should be raised in petitions filed under Rule 45 since factual questions
are not the proper subject of an appeal by certiorari. It is not this Court's function to
once again analyze or weigh evidence that has already been considered in the lower
courts.[95] (Citations omitted)

There is a question of law when it seeks to determine whether or not the legal
conclusions of the lower courts from a given set of facts are correct, i.e. what is the law,
given a particular set of circumstances? On the other hand, there is a question of fact
when the issue involves the truth or falsity of the parties' allegations. The test in
determining if an issue is a question of law or fact is whether or not there is a need to
evaluate evidence to resolve the issue. If there is a need to review the evidence or
witnesses, it is a question of fact. If there is no need, it is a question of law.[96]

As stated, this Court will no longer entertain questions of fact in appeals under Rule 45.
The factual findings of the lower courts are accorded respect and are beyond this
Court's review.[97] However, the rule admits of exceptions, especially if it is shown that
the factual findings are not supported by evidence, or the judgment is based on a
misapprehension of facts:

[T]he general rule for petitions filed under Rule 45 admits exceptions. Medina v. Mayor
Asistio, Jr. lists down the recognized exceptions:

(1) When the conclusion is a finding grounded entirely on speculation, surmises or

conjectures; (2) When the inference made is manifestly mistaken, absurd or impossible;
(3) Where there is a grave abuse of discretion; (4) When the judgment is based on a
misapprehension of facts; (5) When the findings of fact are conflicting; (6) When the
Court of Appeals, in making its findings, went beyond the issues of the case and the
same is contrary to the admissions of both appellant and appellee; (7) The findings of
the Court of Appeals are contrary to those of the trial court; (8) When the findings of fact
are conclusions without citation of specific evidence on which they are based; (9) When
the facts set forth in the petition as well as in the petitioner's main and reply briefs are
not disputed by the respondents; and (10) The finding of fact of the Court of Appeals is
premised on the supposed absence of evidence and is contradicted by the evidence on
record.

These exceptions similarly apply in petitions for review filed before this Court involving
civil, labor, tax, or criminal cases.[98] (Citations omitted)

A party filing the petition, however, has the burden of showing convincing evidence that
the appeal falls under one of the exceptions. A mere assertion is not sufficient.[99]

Moreover, this Court has consistently held that the findings of fact of the Court of Tax
Appeals, as a highly specialized court, are accorded respect and are deemed final and
conclusive.[100]

In Philippine Refining Company v. Court of Appeals:[101]

The Court of Tax Appeals is a highly specialized body specifically created for the
purpose of reviewing tax cases ...

Because of this recognized expertise, the findings of the CTA will not ordinarily be
reviewed absent a showing of gross error or abuse on its part. The findings of fact of the
CTA are binding on this Court and in the absence of strong reasons for this Court to
delve into facts, only questions of law are open for determination . . .[102] (Citation
omitted)

In Commissioner of Internal Revenue v. Tours Specialists, Inc., and the Court of Tax
Appeals:[103]

The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are
binding on this Court and absent strong reasons for this Court to delve into facts, only
questions of law are open for determination . . . In the recent case of Sy Po v. Court of
Appeals . . . we ruled that the factual findings of the Court of Tax Appeals are binding
upon this court and can only be disturbed on appeal if not supported by substantial
evidence.[104]

In the case at bar, both the Court of Tax Appeals Special First Division and En Banc
ruled that PAL failed to sufficiently prove that Chinabank, PBCom, and Standard
Chartered had remitted the withheld taxes.[105] It found that the presented
documents[106] only showed the total amount of final taxes withheld for all branches of
these Agent Banks.[107] It did not show that the amounts remitted by these Agent Banks
pertained to the taxes withheld from PAL’s interest income.[108]

However, it found that PAL was able to prove the remittance of the taxes withheld by
JPMorgan because the monthly remittance returns were identified by PAL's witness and
were formally offered in the Court of Tax Appeals Special First Division without
objections to their admissibility.[109]

The Court of Tax Appeals Special First Division stated:

To prove that petitioner earned interest income on its bank deposits and that they were
remitted to the BIR, petitioner offered in evidence the following certifications and
Certificates of Final Tax Withheld at Source (BIR Form No. 2306) from various banks:

AMOUNT OF TAX WITHHELD

BANK PERIOD COVERED
PESO US DOLLAR

China Banking Corp. (Exhibit January 2002 -

38,974.75
"C") December 2002

JP Morgan Chase Bank September 2002 -

1,237,646.43
(Exhibit "D") December 2002

Phil. Bank of
January 2002 - March
Communication[s] (Exhibit 7,698.63
2002
"E")

Phil. Bank of
Communication[s] (Exhibit April 2002 - June 2002 108,351.68 1,698.99
"F")

Phil. Bank of
July 2002 - September
Communication[s] (Exhibit 401,871.48 3,009.28
2002
"G")

Phil. Bank of
October 2002 -
Communication[s] 8,037.28
December 2002
(Exhibit[s] "H" and "I")

Standard Chartered [Bank] May 2002 - December

6,458.14
(Exhibit "J") 2002

TOTAL P1,747,869.59 $65,877.07

A careful scrutiny of the evidence presented reveals that only documents pertaining to
the amount of taxes withheld and actually remitted to the BIR by depositary bank JP
Morgan Chase, in the amount of P1,237,646.43, represents petitioner's valid claim . . .

....

This Court cannot give credence to the other certifications and Certificates of Final Tax
Withheld at Source issued by the various depositary banks because proof on the fact of
remittance was not aptly complied with; thus, the amount of taxes to be refunded cannot
be ascertained.
The amount of final withholding taxes as reflected on the Summary of Monthly Final
Income Taxes Withheld on Philippine Savings Deposit and Foreign Currency Deposit
and the Monthly Remittance Return of Final Income Taxes (BIR Form No. 1602)
provided by withholding agents China Banking Corporation, Philippine Bank of
Communication, and Standard Chartered Bank were based on the total amount of final
withholding taxes per branch of each depositary banks; while the total amount
appearing on the documents of Monthly Remittance Return of Final Income Taxes (BIR
Form No. 1602) was based on the total amount of final withholding taxes for all
branches of the depositary banks.

Therefore, the amount of final income tax withheld from petitioner cannot be ascertained
with particularity from the total amount of final withholding taxes that were remitted to
the BIR by China Banking Corporation, Philippine Bank of Communication[s), and
Standard Chartered Bank.[110]

These findings were affirmed by the Court of Tax Appeals En Banc:

Without doubt, there were amounts of withheld taxes which have been remitted by
[Chinabank] to the BIR. However, from the supposed Stage 1 up to the last Stage of the
paper trail, We fail to see, in the evidence pointed out by PAL, the inclusion of the final
income taxes withheld from its interest income in the total amounts remitted by
[Chinabank] to the BIR. In other words, there is no indication that the specific withheld
amounts which have been remitted to the BIR by [Chinabank] referred to the taxes
withheld on PAL's interest income. In fact, PAL's documentary evidence are merely to
the effect that certain amounts have been remitted to the BIR by [Chinabank], and such
amounts may be broken down as to which [Chinabank] branch offices the same are
attributable.

The same holds true as regards the taxes withheld by [PBCom] and [Standard
Chartered]. The documentary evidence of PAL relating to the supposed remittances of
the said depositary banks are also wanting of any sign that portion of the remitted taxes
pertain to the withheld taxes from PAL's interest income. Simply put, We cannot
perceive, from such evidence, that pertinent items of the withheld taxes are attributable
to PAL.[111]

In questioning these findings of the Court of Tax Appeals regarding the remittance of
the taxes, the parties are raising questions of fact. To determine whether or not the
taxes have been remitted to the Bureau of Internal Revenue requires an evaluation of
the documents and other evidence presented by the parties. Thus, it is incumbent upon
them to prove that the above-stated exceptions are present in this case.

However, the parties failed to show that this case falls into any of the exceptions
mentioned.[112]

The Court of Tax Appeals Special First Division and En Banc based their findings after
an examination of all pieces of evidence presented by PAL. Both parties failed to show
that the Court of Tax Appeals committed any gross error or abuse in making this factual
determination. There is likewise no showing that the findings are conflicting or based on
speculation, conjecture, or misapprehension or mistake of facts. There is no sign of any
grave abuse of discretion.

Thus, this Court finds no reason to disturb the Court of Tax Appeals' factual findings.

III

Nonetheless, this Court rules that PAL is entitled to its claim for refund for taxes
withheld by Chinabank, PBCom, and Standard Chartered.

Remittance need not be proven. PAL needs only to prove that taxes were withheld
from its interest income.

III.A
First, PAL is uncontestedly exempt from paying the income tax on interest earned.

Under its franchise, Presidential Decree No. 1590,[113] petitioner may either pay a
franchise tax or the basic corporate income tax, and is exempt from paying any other
tax, including taxes on interest earned from deposits:

Section 13. In consideration of the franchise and rights hereby granted, the grantee
shall pay to the Philippine Government during the life of this franchise whichever of
subsections (a) and (b) hereunder will result in a lower tax:

(a) The basic corporate income tax based on the grantee's annual net taxable income
computed in accordance with the provisions of the National Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee
from all sources, without distinction as to transport or nontransport operations; provided,
that with respect to international air-transport service, only the gross passenger, mail,
and freight revenues from its outgoing flights shall be subject to this tax.

The tax paid by the grantee under either of the above alternatives shall be in lieu of all
other taxes, duties, royalties, registration, license, and other fees and charges of any
kind, nature, or description, imposed, levied, established, assessed, or collected by any
municipal, city, provincial, or national authority or government agency, now or in the
future, including but not limited to the following:

....

The grantee, shall, however, pay the tax on its real property in conformity with existing
law. (Emphasis supplied)

In Commissioner of Internal Revenue v. Philippine Airlines, Inc.,[114] this Court ruled that

Section 13 of Presidential Decree No. 1590 is clear and unequivocal in exempting PAL
from all taxes other than the basic corporate income tax or the 2% franchise tax:

While the Court recognizes the general rule that the grant of tax exemptions is strictly
construed against the taxpayer and in favor of the taxing power, Section 13 of the
franchise of respondent leaves no room for interpretation. Its franchise exempts it from
paying any tax other than the option it chooses: either the "basic corporate income tax"
or the two percent gross revenue tax. [115] (Citation omitted)

More recently, PAL's tax privileges were outlined and confirmed in Commissioner of
Internal Revenue v. Philippine Airlines, Inc.[116] when Republic Act No. 9334 took effect,
amending Section 131 of the National Internal Revenue Code.[117] Republic Act No.
9334 increased the rates of excise tax imposed on alcohol and tobacco products,
and removed the exemption from taxes, duties and charges, including excise taxes, on
importations of cigars, cigarettes, distilled spirits, wines and fermented liquor into the
Philippines.[118] This Court ruled that PAL's tax exemptions remain:

In the fairly recent case of Commissioner of Internal Revenue and Commissioner of

Customs v. Philippine Airlines, Inc., the core issue raised was whether or not PAL's
importations of alcohol and tobacco products for its commissary supplies are subject to
excise tax. This Court, ruling in favor of PAL, held that:

....

That the Legislature chose not to amend or repeal [PD] 1590 even after PAL was
privatized reveals the intent of the Legislature to let PAL continue to enjoy, as a private
corporation, the very same rights and privileges under the terms and conditions stated
in said charter. . . .

To be sure, the manner to effectively repeal or at least modify any specific provision of
PAL's franchise under PD 1590, as decreed in the aforequoted Sec. 24, has not been
demonstrated. . . .
....

Any lingering doubt, however, as to the continued entitlement of PAL under Sec. 13 of
its franchise to excise tax exemption on otherwise taxable items contemplated therein,
e.g., aviation gas, wine, liquor or cigarettes, should once and for all be put to rest by the
fairly recent pronouncement in Philippine Airlines, Inc. v. Commissioner of Internal
Revenue. In that case, the Court, on the premise that the "propriety of a tax refund is
hinged on the kind of exemption which forms its basis," declared in no uncertain terms
that PAL has "sufficiently prove[d]" its entitlement to a tax refund of the excise taxes and
that PAL's payment of either the franchise tax or basic corporate income tax in the
amount fixed thereat shall be in lieu of all other taxes or duties, and inclusive of all taxes
on all importations of commissary and catering supplies, subject to the condition of their
availability and eventual use....

In the more recent consolidated cases of Republic of the Philippines v. Philippine

Airlines, Inc. (PAL) and Commissioner of Internal Revenue v. Philippine Airlines, Inc.
(PAL), this Court, echoing the ruling in the abovecited case of CIR v. PAL, held that:

In other words, the franchise of PAL remains the governing law on its exemption from
taxes. Its payment of either basic corporate income tax or franchise tax — whichever is
lower — shall be in lieu of all other taxes, duties, royalties, registrations, licenses, and
other fees and charges, except only real property tax. The phrase "in lieu of all other
taxes" includes but is not limited to taxes, duties, charges, royalties, or fees due on all
importations by the grantee of the commissary and catering supplies, provided that such
articles or supplies or materials are imported for the use of the grantee in its transport
and nontransport operations and other activities incidental thereto and are not locally
available in reasonable quantity, quality, or price.[119] (Citations omitted)

PAL's tax liability was also modified on July 1, 2005, when Republic Act No.
9337[120] further amended the National Internal Revenue Code. Section 22 of Republic
Act No. 9337 abolished the franchise tax and subjected PAL to corporate income tax
and to value-added tax. Nonetheless, it maintained PAL's exemption from "any taxes,
duties, royalties, registration, license, and other fees and charges, as may be provided
by their respective franchise agreement."[121]

Section 22. Franchises of Domestic Airlines. — The provisions of P.D. No. 1590 on the
franchise tax of Philippine Airlines, Inc., R.A. No. 7151 on the franchise tax of Cebu Air,
Inc., R.A. No. 7583 on the franchise tax of Aboitiz Air Transport Corporation, R.A. No.
7909 on the franchise tax of Pacific Airways Corporation, R.A. No. 8339 on the
franchise tax of Air Philippines, or any other franchise agreement or law pertaining to a
domestic airline to the contrary notwithstanding:

(A) The franchise tax is abolished;

(B) The franchisee shall be liable to the corporate income tax;

(C) The franchisee shall register for value-added tax under Section 236, and to account
under Title IV of the National Internal Revenue Code of 1997, as amended, for value-
added tax on its sale of goods, property or services and its lease of property; and

(D) The franchisee shall otherwise remain exempt from any taxes, duties, royalties,
registration, license, and other fees and charges, as may be provided by their
respective franchise agreement.

Again, in Commissioner of Internal Revenue v. Philippine Airlines, Inc.,[122] this Court

maintained that despite these amendments to the National Internal Revenue Code, PAL
remains exempt from all other taxes, duties, royalties, registrations, licenses, and other
fees and charges, provided it pays the corporate income tax as granted in its franchise
agreement. It further emphasized that no explicit repeals were made on Presidential
Decree No. 1590.[123]
Thus, Presidential Decree No. 1590 and PAL's tax exemptions subsist. Necessarily,
PAL remains exempt from tax on interest income earned from bank deposits.

Moreover, Presidential Decree No. 1590 provides that any excess payment over taxes
due from PAL's shall either be refunded or credited against its tax liability for the
succeeding taxable year, thus:

Section 14. The grantee shall pay either the franchise tax or the basic corporate income
tax on quarterly basis to the Commissioner of Internal Revenue. . . .

....

Any excess of the total quarterly payments over the actual annual franchise of income
tax due as shown in the final or adjustment franchise or income-tax return shall either
be refunded to the grantee or credited against the grantee's quarterly franchise or
income-tax liability for the succeeding taxable year or years at the option of the grantee.

The term "gross revenues" is herein defined as the total gross income earned by the
grantee from; (a) transport, nontransport, and other services; (b) earnings realized from
investments in money-market placements, bank deposits, investments in shares of
stock and other securities, and other investments; (c) total gains net of total losses
realized from the disposition of assets and foreign-exchange transactions; and (d) gross
income from other sources.[124] (Emphasis supplied)

Thus, PAL is entitled to a tax refund or tax credit if excess payments are made on top of
the taxes due from it.

Considering that PAL is not liable to pay the tax on interest income from bank deposits,
any payments made for that purpose are in excess of what is due from it. Thus, if PAL
erroneously paid for this tax, it is entitled to a refund.

III.B

PAL is likewise entitled to a refund because it is not responsible for the remittance of tax
to the Bureau of Internal Revenue. The taxes on interest income from bank deposits are
in the nature of a withholding tax. Thus, the party liable for remitting the amounts
withheld is the withholding agent of the Bureau of Internal Revenue.

Interest income from bank deposits is taxed under the National Internal Revenue Code:

Section 27. Rates of Income Tax on Domestic Corporations.

....

(D) Rates of Tax on Certain Passive Incomes. —

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. — A final
tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest
on currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines: Provided,
however, That interest income derived by a domestic corporation from a depository
bank under the expanded foreign currency deposit system shall be subject to a final
income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.
[125]
 (Emphasis supplied)

The tax due on this income is a final withholding tax:

Section 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations the
Secretary of Finance may promulgate, upon the recommendation of the Commissioner,
requiring the filing of income tax return by certain income payees, the tax imposed or
prescribed by Sections ... 27(D)(1), ... of this Code on specified items of income shall be
withheld by payor-corporation and/or person and paid in the same manner and subject
to the same conditions as provided in Section 58 of this Code.[126]

Final withholding taxes imposed on interest income are likewise provided for under
Revenue Regulations No. 02-98, Section 2.57.1(G):[127]

(G) Income Payment to a Domestic Corporation. — The following items of income shall

be subject to a final withholding tax in the hands of a domestic corporation, based on
the gross amount thereof and at the rate of tax prescribed therefor:

(1) Interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements derived from sources
within the Philippines — Twenty Percent (20%).

....

(3) Interest income derived from a depository bank under the Expanded Foreign
Currency Deposit System, otherwise known as a Foreign Currency Deposit Unit (FCDU)
— Seven and one-half percent (7.5%).

When a particular income is subject to a final withholding tax, it means that a

withholding agent will withhold the tax due from the income earned to remit it to the
Bureau of Internal Revenue. Thus, the liability for remitting the tax is on the withholding
agent:[128]

Under Revenue Regulations No. 02-98, Section 2.57:

Section 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. — Under the final withholding tax system the amount of
income tax withheld by the withholding agent is constituted as a full and final payment of
the income tax due from the payee on the said income. The liability for payment of the
tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to
withhold the tax or in case of under withholding, the deficiency tax shall be collected
from the payor/withholding agent. The payee is not required to file an income tax return
for the particular income. (Emphasis supplied)

Clearly, the withholding agent is the payor liable for the tax, and any deficiency in its
amount shall be collected from it.[129] Should the Bureau of Internal Revenue find that the
taxes were not properly remitted, its action is against the withholding agent, and not
against the taxpayer.

The responsibility of the withholding agent is further underscored by Republic Act No.
8424, Section 58:

Section 58. Returns and Payment of Taxes Withheld at Source. —

(B) Statement of Income Payments Made and Taxes Withheld. — Every withholding

agent required to deduct and withhold taxes under Section 57 shall furnish each
recipient, in respect to his or its receipts during the calendar quarter or year, a written
statement showing the income or other payments made by the withholding agent during
such quarter or year, and the amount of the tax deducted and withheld therefrom,
simultaneously upon payment at the request of the payee, but not later than the
twentieth (20th) day following the close of the quarter in the case of corporate payee, or
not later than March 1 of the following year in the case of individual payee for creditable
withholding taxes. For final withholding taxes, the statement should be given to the
payee on or before January 31 of the succeeding year.
(C) Annual Information Return. — Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the Commissioner an annual
information return containing the list of payees and income payments, amount of taxes
withheld from each payee and such other pertinent information as may be required by
the Commissioner . . .[130] (Emphasis supplied)

Revenue Regulations 09-28 further provides:

Section 2.57.4. Time of Withholding. — The obligation of the payor to deduct and

withhold the tax under Section 2.57 of these regulations arises at the time an income is
paid or payable, whichever comes first, the term "payable" refers to the date the
obligation become due, demandable or legally enforceable.[131]

....

Section 2.58. Returns and Payment of Taxes Withheld at Source. —

....

(B) Withholding tax statement for taxes withheld — Every payor required to deduct and
withhold taxes under these regulations shall furnish each payee, whether individual or
corporate, with a withholding tax statement, using the prescribed form (BIR Form 2307)
showing the income payments made and the amount of taxes withheld therefrom, for
every month of the quarter within twenty (20) days following the close of the taxable
quarter employed by the payee in filing his/its quarterly income tax return. Upon request
of the payee, however, the payor must furnish such statement to the payee
simultaneously with the income payment. For final withholding taxes, the statement
should be given to the payee on or before January 31 of the succeeding year.

(C) Annual information return for income tax withheld at source. — The payor is
required to file with the Commissioner, Revenue Regional Director, Revenue District
Officer, Collection Agent in the city or municipality where the payor has his legal
residence or principal place of business, where the government office is located in the
case of a government agency, on or before January 31 of the following year in which
payments were made, an Annual Information Return of Income Tax Withheld at Source
(Form No. 1604), showing among others the following information:

(1) Name, address and taxpayer's identification number (TIN); and

(2) Nature of income payments, gross amount and amount of tax withheld from each
payee and such other information as may be required by the Commissioner.
[132]
 (Emphasis supplied)

These provisions state that the withholding agent must file the annual information return
and furnish the payee written statements of the payments it made and of the amounts it
deducted and withheld. They confirm that the remittance of the tax is not the
responsibility of the payee, but that of the payor, the withholding agent.

Moreover, in Commissioner of Internal Revenue v. Philippine National Bank:[133]

Petitioner's posture that respondent is required to establish actual remittance to the

Bureau of Internal Revenue deserves scant consideration. Proof of actual remittance is
not a condition to claim for a refund of unutilized tax credits. Under Sections 57 and 58
of the 1997 National Internal Revenue Code, as amended, it is the payor-withholding
agent, and not the payee-refund claimant such as respondent, who is vested with the
responsibility of withholding and remitting income taxes.

This court's ruling in Commissioner of Internal Revenue v. Asian Transmission

Corporation, citing the Court of Tax Appeals' explanation, is instructive:

. . . proof of actual remittance by the respondent is not needed in order to prove

withholding and remittance of taxes to petitioner. Section 2.58.3 (B) of Revenue
Regulation No. 2-98 clearly provides that proof of remittance is the responsibility of the
withholding agent and not of the taxpayer-refund claimant. It should be borne in mind by
the petitioner that payors of withholding taxes are by themselves constituted as
withholding agents of the BIR. The taxes they withhold are held in trust for the
government. In the event that the withholding agents commit fraud against the
government by not remitting the taxes so withheld, such act should not prejudice herein
respondent who has been duly withheld taxes by the withholding agents acting under
government authority. Moreover, pursuant to Sections 57 and 58 of the NIRC of 1997,
as amended, the withholding of income tax and the remittance thereof to the BIR is
the responsibility of the payor and not the payee. Therefore, respondent . . . has no
control over the remittance of the taxes withheld from its income by the withholding
agent or payor who is the agent of the petitioner. The Certificates of Creditable Tax
Withheld at Source issued by the withholding agents of the government are prima
facie proof of actual payment by herein respondent-payee to the government itself
through said agents.[134] (Emphasis supplied, citations omitted)

In the case at bar, PAL is the income earner and the payee of the final withholding tax,
and the Agent Banks are the withholding agents who are the payors responsible for the
deduction and remittance of the tax.

Given the above provisions, the failure of the Agent Banks to remit the amounts does
not affect and should not prejudice PAL. In case of failure of remittance of taxes, the
Bureau of Internal Revenue's cause of action is against the Agent Banks.

Thus, PAL is not obliged to remit, let alone prove the remittance of, the taxes withheld.

III.C

To claim a refund, this Court rules that PAL needs only to prove that taxes were
withheld.

Taxes withheld by the withholding agent are deemed to be the full and final payment of
the income tax due from the income earner or payee.[135]

Section 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. — Under the final withholding tax system the amount of
income tax withheld by the withholding agent is constituted as a full and final
payment of the income tax due from the payee on the said income. The liability
for payment of the tax rests primarily on the payor as a withholding agent. Thus,
in case of his failure to withhold the tax or in case of under withholding, the deficiency
tax shall be collected from the payor/withholding agent. The payee is not required to file
an income tax return for the particular income.

The finality of the withholding tax is limited only to the payee's income tax liability on the
particular income. It does not extend to the payee's other tax liability on said income,
such as when the said income is further subject to a percentage tax. For example, if a
bank receives income subject to final withholding tax, the same shall be subject to a
percentage tax.[136] (Emphasis supplied)

Certificates of Final Taxes Withheld issued by the Agent Banks are sufficient evidence
to establish the withholding of the taxes.[137]

In Commissioner of internal Revenue v. Philippine National Bank: [138]

The certificate of creditable tax withheld at source is the competent proof to establish
the fact that taxes are withheld. It is not necessary for the person who executed and
prepared the certificate of creditable tax withheld at source to be presented and to
testify personally to prove the authenticity of the certificates.
In Banco Filipino Savings and Mortgage Bank v. Court of Appeals, this court declared
that a certificate is complete in the relevant details that would aid the courts in the
evaluation of any claim for refund of excess creditable withholding taxes:

In fine, the document which may be accepted as evidence of the third condition, that is,
the fact of withholding, must emanate from the payor itself, and not merely from the
payee, and must indicate the name of the payor, the income payment basis of the tax
withheld, the amount of the tax withheld and the nature of the tax paid.

At the time material to this case, the requisite information regarding withholding taxes
from the sale of acquired assets can be found in BIR Form No. 1743.1. As described in
Section 6 of Revenue Regulations No. 6-85, BIR Form No. 1743.1 is a written statement
issued by the payor as withholding agent showing the income or other payments made
by the said withholding agent during a quarter or year and the amount of the tax
deducted and withheld therefrom. It readily identifies the payor, the income payment
and the tax withheld. It is complete in the relevant details which would aid the courts in
the evaluation of any claim for refund of creditable withholding taxes.[139] (Emphasis
supplied, citations omitted)

In the case at bar, the Court of Tax Appeals Special First Division noted that PAL
offered in evidence the following Certificates of Final Tax Withheld at Source from the
Agent Banks to prove the earned interest income on its bank deposits and the taxes
withheld:[140]

AMOUNT OF TAX WITHHELD

BANK PERIOD COVERED
PESO US DOLLAR

China Banking Corp. (Exhibit January 2002 -

38,974.75
"C") December 2002

JP Morgan Chase Bank September 2002 -

1,237,646.43
(Exhibit "D") December 2002

Phil. Bank of
January 2002 - March
Communication[s] (Exhibit 7,698.63
2002
"E")

Phil. Bank of
Communication[s] (Exhibit April 2002 - June 2002 108,351.68 1,698.99
"F")

Phil. Bank of
July 2002 - September
Communication[s] (Exhibit 401,871.48 3,009.28
2002
"G")

Phil. Bank of
October 2002 -
Communication[s] 8,037.28
December 2002
(Exhibit[s] "H" and "I")

Standard Chartered [Bank] May 2002 - December

6,458.14
(Exhibit "J") 2002

TOTAL P1,747,869.59 $65,877.07

PAL also presented bank-issued Certificates of Final Tax Withheld at Source showing
that the amounts it is seeking to refund were withheld.

For JPMorgan, PAL presented a Certificate of Income Tax Withheld for the Year 2002,
which stated that its interest earned was P6,188,232.17 and that JPMorgan's withheld
taxes were P1,237,646.43. This Certificate was signed by JPMorgan's Vice President
and Operations Manager, Mamerto R. Natividad.[141]
For Chinabank, PAL presented a Bank Certification dated October 24, 2003, signed by
Wilfredo A. Quijencio, Chinabank's International Banking Group Senior Manager.[142] It
showed that Chinabank withheld final taxes amounting to US$38,974.75 from PAL's
interest income from its dollar time deposit with Chinabank for the year 2002:

This is to certify the amount[s] of tax withheld from US DOLLAR Time Deposit account
of PHILIPPINE AIRLINES the year 2002 are as follows:

DATE
PERIOD WITHHOLDIN
PRINCIPAL INTEREST REMITTE
COVERE MATURITY VALUE G TAX
AMOUNT INCOME (NET) D
D DEDUCTED
TO BIR

USD17,098,253.1 01/01/0 USD17,315,721.5 USD111,150.5 USD9,012.20 02/11/02,

4 2 to 5 2 03/11/02,
04/02/0 04/10/02,
2 05/10/02

USD17,315,721.5 04/02/0 USD17,617,709.5 USD301,987.9 USD24,485.51 05/10/02,

5 2 to 4 9 06/10/02,
09/30/0 07/10/02,
2 08/10/02,
09/10/02,
10/10/02

USD17,617,709.5 9/30/02 USD17,669,993.7 USD52,284.22 USD4,239.26 10/10/02,

4 to 6 11/11/02,
12/16/0 12/10/02,
2 01/10/03

USD10,669,993.7 12/16/0 USD10,807,210.6 USD11,309.08 USD916.95 01/10/03

6 2 to 2
12/31/0
2

USD7,000,000.00 12/23/0 USD7,086,558.17 USD3,956.95 USD320.83 01/10/03

2 to
12/31/0
2

This is to certify further that the said withholding tax deducted was duly remitted in
accordance with existing rules and regulations of the Bureau of Internal Revenue.

This certification is being issued upon the request of the above client for whatever
purpose/s it may serve.[143]

For PBCom, PAL presented Certificates of Income Tax Withheld for the four (4)
quarters of Year 2002, all of which were signed by PBCom's Assistant Vice President,
Carmencita L. Tan. [144]

These Certificates stated the amounts of interest income PAL earned and the taxes
withheld from its US dollar time deposits:[145]

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD

1st Quarter[146] US$102,648.40 US$7,698.63

2nd Quarter[147] US$22,653.20 US$1,698.00

 3rd Quarter[148] US$40,123.73 US$3,009.28

4th Quarter[149] US$107,163.73 US$8,037.28

TOTAL[150] US$ 272,589.06 US$ 20,443.19

These Certificates also showed the amounts of interest income PAL earned and the
taxes withheld from its peso deposit accounts:[151]

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD

2nd Quarter[152] P 541,758.42 P 108,351.67

3rd Quarter[153] P 2,009,357.41 P 401,871.46

TOTAL P 2,551,115.83 P 510,223.13

Moreover, PBCom's letter[154] dated April 10, 2003 stated:

Dear Sir,

This is to certify that Philippine Airlines had various dollar & [peso savings accounts]
placement[s] with our branch for the year 2002. The taxes withheld of which had been
remitted to the BIR [are] as follows:

SEPTEMBE
  MAY JUNE JULY AUGUST
R

PSA

Principal 186,000,00 192,490,55 244,661,60 104,420,16 104,842,01

Amount 0.03 7.00 0.04 0.01 7.46

Interest 1,259,246.
325,500.00 216,258.42 527,321.80 222,789.29
Paid 32

Withhol
65,100.00 43,251.67 251,849.25 105,464.35 44,557.86
ding Tax

  1ST QRTR. 2ND QRTR. 3RD QRTR. 4TH QRTR.

Dollar
Time          
Deposit

Interest
102,648.40 22,653.20 40,123.73 107,163.73  
Paid

Withhol
7,698.63 1,698.99 3,009.28 8,037.28  
ding Tax

This certification is hereby issued for whatever legal purpose it may serve.

Very truly yours,

(SGD) Ms. Carmencita L. Tan, AVP
Branch Manager[155]

For Standard Chartered, PAL presented a letter dated September 19, 2003, signed by
Standard Chartered's Treasury Operations Officer, Bienvenido Nieto, listing PAL's
interest income and withholding tax for its US dollar time deposit account from May
2002 to December 2002.[156]

This letter stated:

We confirm the above interest income and the 7.5% withholding tax for your Time
Deposit Account and remitted to the Bureau of Internal Revenue.[157]

These bank-issued Certificates of Income Tax Withheld and BIR Forms were neither
disputed nor alleged to be false or fraudulent. There was not even any denial from the
Commissioner or the Agent Banks that the amounts were not withheld as final taxes
from PAL's interest income from its money deposits.

Moreover, these Certificates of Final Tax Withheld, complete in relevant details, were
declared under the penalty of perjury. As such, they may be taken at face value.[158]

Section 267 of the National Internal Revenue Code, as amended, provides:

Section 267. Declaration under Penalties of Perjury. — Any declaration, return and

other statements required under this Code, shall, in lieu of an oath, contain a written
statement that they are made under the penalties of perjury. Any person who willfully
files a declaration, return or statement containing information which is not true and
correct as to every material matter shall, upon conviction, be subject to the penalties
prescribed for perjury under the Revised Penal Code.[159]

Considering that these Certificates were presented, the burden of proof shifts to the
Commissioner, who needs to establish that they were incomplete, false, or issued
irregularly.[160]

However, the Commissioner did no such thing.

Thus, these Certificates are sufficient evidence to establish the withholding of the taxes.

The taxes withheld from PAL are considered its full and final payment of taxes.
Necessarily, when taxes were withheld and deducted from its income, PAL is deemed
to have paid them.

Considering that PAL is exempted from paying the withholding tax, it is rightfully entitled
to a refund.

III.D

This Court notes that the case of Commissioner of Internal Revenue v. Philippine
National Bank[161] involves a refund of creditable withholding tax and not of final
withholding tax. However, its ruling that proof of remittance is not necessary to claim a
tax refund applies to final withholding taxes. The same principles used to rationalize the
ruling apply to final withholding taxes: (i) the payor-withholding agent is responsible for
the withholding and remitting of the income taxes; (ii) the payee-refund claimant has no
control over the remittance of the taxes withheld from its income; (iii) the Certificates of
Final Tax Withheld at Source issued by the withholding agents of the government
are prima facie proof of actual payment by payee-refund claimant to the government
itself and are declared under perjury.[162]

Thus, this Court sees no reason why it should not rule the same way.

III.E

Lastly, while tax exemptions are strictly construed against the taxpayer, the government
should not misuse technicalities to keep money it is not entitled to.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money
not belonging to it, thereby enriching itself at the expense of its law-abiding citizens.
Under the principle of solutio indebiti provided in Art. 2154, Civil Code, the BIR received
something "when there [was] no right to demand it," and thus, it has the obligation to
return it. Heavily militating against respondent Commissioner is the ancient principle
that no one, not even the state, shall enrich oneself at the expense of another. Indeed,
simple justice requires the speedy refund of the wrongly held taxes.[163] (Citations
omitted)

Considering that PAL presented sufficient proof that: (i) it is exempted from paying
withholding taxes; (ii) amounts were withheld and deducted from its accounts; (iii) and
the Commissioner did not contest the withholding of these amounts and only raises that
they were not proven to be remitted, this Court finds that PAL sufficiently proved that it
is entitled to its claim for refund.

Finally, both the Commissioner and the Court of Tax Appeals should have appreciated
the unreasonable difficulty that it would have put the taxpayer—in this case PAL—to
claim a statutory exemption granted to it. In requiring that it prove actual remittance, the
court a quo and the Commissioner effectively put the burden on the payee to prove that
both government and the banks complied with their legal obligation. It would have been
near impossible for the taxpayer to demand to see the records of the payor bank or the
ledgers of the government. The legislative policy was to provide incentives to the
taxpayer by unburdening it of taxes. By administrative and judicial interpretation, such
policy would have been unreasonably reversed. This is not this Court's view of equity.
Clearly, the taxpayer in this case is entitled to relief.

WHEREFORE, premises considered, the Petition of Philippine Airlines, Inc. in G.R.

Nos. 206079-80 is GRANTED. The Petition of the Commissioner of Internal Revenue
in G.R. No. 206309 is DENIED. The August 14, 2012 Decision and February 25, 2013
Resolution of the Court of Tax Appeals En Banc in CTA CASE No. 6877
are PARTIALLY REVERSED. Philippine Airlines, Inc. is entitled to its claim for refund of
P510,223.16 and US$65,877.07, representing the final income taxes withheld by China
Banking Corporation, Philippine Bank of Communications, and Standard Chartered
Bank.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersamin, Martires, and Gesmundo, JJ., concur.

March 12, 2018

NOTICE OF JUDGMENT

Sirs/Mesdames:

Please take notice that on January 17, 2018 a Decision, copy attached hereto, was
rendered by the Supreme Court in the above-entitled case, the original of which was
received by this Office on March 12, 2018 at 10:20 a.m.

Very truly yours,

(SGD.) WILFREDO V. LAPITAN

Division Clerk of Court

[1]
 Rollo (G.R. No. 206309), pp. 30-45, Decision of the Court of Tax Appeals En Banc.
The Decision was penned by Associate Justice Erlinda P. Uy and concurred in by
Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C. Castañeda, Jr.,
Lovell R. Bautista, Caesar A. Casanova, Olga Palanca-Enriquez, Esperanza R. Pabon-
Victorino, Cielito N. Mindaro-Grulla, and Amelia R. Cotangco-Manalastas of the Court of
Tax Appeals, Quezon City.

[2]
 Id. at 48-54, Resolution of the Court of Tax Appeals En Banc. The Resolution was
penned by Associate Justice Erlinda P. Uy and concurred in by Acting Presiding Justice
Juanito C. Castañeda, Jr. and Associate Justices Lovell R. Bautista, Caesar A.
Casanova, Esperanza R. Pabon-Victorino, Cielito N. Mindaro-Grulla, and Amelia R.
Cotangco-Manalastas of the Court of Tax Appeals, Quezon City.
[3]
 Id. at 103, Decision of the Court of Tax Appeals Special First Division.
[4]
 Rollo (G.R. Nos. 206079-80), pp. 35-52, Petition for Review on Certiorari.
[5]
 Rollo (G.R. No. 206309), pp. 7-27.
[6]
 Id. at 34.
[7]
 Id. at 14.
[8]
 Id. at 116.
[9]
 Id. at 44.
[10]
 Id. at 32.
[11]
 Id.
[12]
 Id.
[13]
 Signed by China Banking Corporation's Senior Manager, International Banking
Group, Wilfredo A. Quijencio.
[14]
 Rollo (G.R. No. 206309), p. 32.
[15]
 Id. at 32-33.
[16]
 Id. at 33.
[17]
 Id.
[18]
 Id.
[19]
 Id.
[20]
 Through PAL's Assistant Vice President for Financial Planning and Analysis, Ma.
Stella L. Diaz.
[21]
 Rollo (G.R. No. 206309), p. 34.
[22]
 Id.
[23]
 Id.
[24]
 Id. at 34-35.
[25]
 Id. at 103-117. The Decision was penned by Associate Justice Lovell R. Bautista and
concurred in by Presiding Justice Ernesto D. Acosta and Associate Justice Caesar A.
Casanova of the Special First Division, Court of Tax Appeals, Quezon City.
[26]
 Rollo (G.R. No. 206309), p. 35; rollo (G.R. Nos. 206079-80), pp. 360-379.
[27]
 Rollo (G.R. No. 206309), p. 108.
[28]
 Id. at 112.
[29]
 Certificates of Final Tax Withheld at Source (BIR Forms No. 2036), Summary of
Monthly Final Income Taxes Withheld, and Monthly Remittance Return of Final Income
Taxes (BIR Form No. 1602).
[30]
 Rollo (G.R. No. 206309), pp. 112-113.
[31]
 Id. at 113.
[32]
 Id. at 113-114.
[33]
 Rollo (GR. Nos. 206079-80), p. 378.
[34]
 Rollo (G.R. No. 206309), p. 36.
[35]
 Id. at 44.
[36]
 Id. at 41.
[37]
 Id. at 39-40.
[38]
 Id. at 41-43.
[39]
 Id. at 44.
[40]
 Id. at 53.
[41]
 Rollo (G.R. Nos. 206079-80), pp. 35-52; Rollo (G.R. No. 206309), pp. 7-27.
[42]
 Rollo (G.R. Nos. 206079-80), p. 42.
[43]
 Id. at 43 and 46.
[44]
 CIR v. Asian Transmission Corporation, 655 Phil. 186 (2011) [Per J. Mendoza,
Second Division].
[45]
 Rollo (G.R. Nos. 206079-80), pp. 44-45 citing Winebrenner & Inigo Insurance
Brokers v. CIR, CTA EB Case No. 285, October 1, 2007; PAL v. CIR, CTA EB Case No.
665, January 5, 2012; Sonoma v. CIR, CTA Case No. 7911, August 16, 2012.
[46]
 Rollo (G.R. Nos. 206079-80), pp. 44-45.
[47]
 Id. at 47, citing Commissioner of Internal Revenue v. Philippine Airlines, 535 Phil. 95
(2006) [Per C.J. Panganiban, First Division].
[48]
 Rollo (G.R. Nos. 206079-80), p. 47.
[49]
 Id.
[50]
 Id, citing CIR v. PNB, CTA EB Case No. 285, October 1, 2007.
[51]
 Rollo (G.R. No. 206309), pp. 16-19.
[52]
 Rollo (G.R. Nos. 206079-80), p. 574.
[53]
 Rollo (G.R. Nos. 206079-80), pp. 575-585, PAL's Comment with
Opposition; rollo (G.R. No. 206309), pp. 250-264, CIR's Comment.
[54]
 Rollo (G.R. Nos. 206079-80), pp. 595-302, PAL's Reply; Rollo (G.R. No. 206309),
pp. 291-300, CIR's Reply.
[55]
 Rollo (G.R. Nos. 206079-80), pp. 275-347, PAL's Memorandum; Rollo (G.R. No.
206309), pp. 309-331, CIR's Memorandum.
[56]
 Rollo (G.R. No. 206309), p. 314.
[57]
 Id. at 316.
[58]
 Id. at 318.
[59]
 Id. at 315.
[60]
 Id. at 319.
[61]
 Id. at 316.
[62]
 Id. at 316 and 319.
[63]
 Id. at 317.
[64]
 Id. at 320.
[65]
 Id. at 321.
[66]
 Id. at 324-325.
[67]
 Id. at 326.
[68]
 ld. at 326 and 319.
[69]
 Id. at 327.
[70]
 Id.
[71]
 Id. at 342-355.
[72]
 Id. at 347.
[73]
 Id. at 348-349.
[74]
 Id. at 349.
[75]
 Id. at 351.
[76]
 Id. at 350.
[77]
 Id.
[78]
 Id. at 351-352.
[79]
 Id. at 349.
[80]
 Id. at 348 and 351.
[81]
 TAX CODE, Title I, sec. 4, as amended by Rep. Act No. 8424 (1997), Tax Reform
Act of 1997.
[82]
 Rep. Act No. 9282 (2004).
[83]
 Rep. Act No. 1125 (1954).
[84]
 Rep. Act No. 1125 (1954), sec. 8.
[85]
 Commissioner of Internal Revenue v. Manila Mining Corp., 505 Phil. 650, 664 (2005)
[Per J. Carpio-Morales, Third Division].
[86]
 Id.
[87]
 Rollo (G.R. No. 206309), p. 350.
[88]
 744 Phil. 299 (2014) [Per J. Leonen, Second Division].
[89]
 Id. at 311-312.
[90]
 Rollo (G.R. No. 206309), p. 34.
[91]
 Id. at 314 and 347.
[92]
 Id. at 39 and 113.
[93]
 City Government of Valenzuela v. Agustines, G.R. No. 209369 (Notice), January 28,
2015 < http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/resolutions/2015/01/209369.pdf > 3 [Per J. Leonen, Second
Division].
[94]
 See Fangonil-Herrera v. Fangonil, 558 Phil. 235, 254 (2007) [Per J. Chico-Nazario,
Third Division].
[95]
 Spouses Miano. v. Manila Electric Co., G.R. No. 205035, November 16, 2016 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2016/november2016/205035.pdf > 4 [Per J. Leonen, Second
Division].
[96]
 Id.
[97]
 See Fangonil-Herrera v. Fangonil, 558 Phil. 235, 254 (2007) [Per J. Chico-Nazario,
Third Division].
[98]
 Spouses Miano. v. Manila Electric Co., G.R. No. 205035, November 16, 2016 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2016/november2016/205035.pdf > 4-5 [Per J. Leonen, Second
Division].
[99]
 Id.
[100]
 Philippine Refining Company v. Court of Appeals, 326 Phil. 680, 689 (1996) [Per J.
Regalado, Second Division].
[101]
 326 Phil. 680 (1996) [Per J. Regalado, Second Division].
[102]
 Id. at 689.
[103]
 262 Phil. 437 (1990) [Per, J. Gutierrez, Jr., En Banc]
[104]
 Id. at 442, citing Nilsen v. Commissioner of Customs, 178 Phil. 26-32 (1979) [Per J.
Fernando, Second Division]; Balbas v. Domingo, 128 Phil. 467-473 (1967) [Per J.
Fernando, En Banc]; Raymundo v. De Joya, 189 Phil. 378-382 (1980) [Per C.J.
Fernando, Second Division].
[105]
 Rollo (G.R. No. 206309), pp. 42 and 112.
[106]
 Certificates of Final Tax Withheld (BIR Form No. 2036), Summary of Monthly Final
Income Taxes Withheld, Monthly Remittance Return of Final Income Taxes (BIR Form
No. 1602).
[107]
 Rollo (G.R. No. 206309), p. 113.
[108]
 Id. at 41-43.
[109]
 Id. at 39-40.
[110]
 Id. at 111-113.
[111]
 Id. at 43.
[112]
 See Fangonil-Herrera v. Fangonil, 558 Phil. 235, 254 (2007) [Per J. Chico-Nazario,
Third Division].
[113]
 Pres. Decree No. 1590 (1978), Grant of New Franchise to Philippine Airlines, Inc. To
Operate, etc. Air Transport Services.
[114]
 535 Phil. 95 (2006) [Per C. J. Panganiban, First Division].
[115]
 Id. at 109.
[116]
 G.R. Nos. 215705-07, February 22, 2017 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2017/february2017/215705-07.pdf > [Per J. Peralta, Second
Division].
[117]
 Rep. Act No. 9334 (2004), amending Rep. Act No. 8424 (1997), Title II, ch. 4, sec.
131 reads in part: Section 131. Payment of Excise Taxes on Imported Articles. —

(A) Persons Liable. — Excise taxes on imported articles shall be paid by the owner or
importer to the Customs Officers, conformably with the regulations of the Department of
Finance and before the release of such articles from the customs house, or by the
person who is found in possession of articles which are exempt from excise taxes other
than those legally entitled to exemption. In the case of tax-free articles brought or
imported into the Philippines by persons, entities, or agencies exempt from tax which
are subsequently sold, transferred or exchanged in the Philippines to non-exempt
persons or entities, the purchasers or recipients shall be considered the importers
thereof, and shall be liable for the duty and internal revenue tax due on such
importation.

The provision of any special or genera/law to the contrary notwithstanding, the

importation of cigars and cigarettes, distilled spirits, fermented liquors and wines into
the Philippines, even if destined for tax and duty-free shops, shall be subject to all
applicable taxes, duties, charges, including excise taxes due thereon. This shall apply
to cigars and cigarettes, distilled spirits, fermented liquors and wines brought directly
into the duly chartered or legislated freeports of the Subic Special Economic and
Freeport Zone, created under Republic Act No. 7227; the Cagayan Special Economic
Zone and Freeport, created under Republic Act No. 7922; and the Zamboanga City
Special Economic Zone, created under Republic Act No. 7903, and such other freeports
as may hereafter be established or created by law: Provided, further, That importations
of cigars and cigarettes, distilled spirits, fermented liquors and wines made directly by a
government-owned and operated duty-free shop, like the Duty-Free Philippines (DFP),
shall be exempted from all applicable duties only: Provided, still further, That such
articles directly imported by a government-owned and operated duty-free shop, like the
Duty-Free Philippines, shall be labeled 'duty-free' and 'not for resale': Provided, finally,
That the removal and transfer of tax and duty-free goods, products, machinery,
equipment and other similar articles other than cigars and cigarettes, distilled spirits,
fermented liquors and wines, from one freeport to another freeport, shall not be deemed
an introduction into the Philippine customs territory. (Emphasis supplied)
[118]
 Commissioner of Internal Revenue v. Philippine Airlines, Inc., G.R. Nos. 215705-07,
February 22, 2017 < http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2017/february2017/215705-07.pdf > [Per J. Peralta, Second
Division].
[119]
 Id. at 8-10.
[120]
 Rep. Act No. 9337 (2005), VAT Reform Act.
[121]
 Rep. Act No. 9337, sec. 22.
[122]
 G.R. Nos. 215705-07, February 22, 2017 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?
file=/jurisprudence/2017/february2017/215705-07.pdf > [Per J. Peralta, Second
Division].
[123]
 Id.
[124]
 Pres. Decree No. 1590 (1978), sec. 14.
[125]
 TAX CODE, Title II, ch.4, sec. 27, as amended by Rep. Act No. 8424 (1997).
[126]
 TAX CODE, sec. 57.
[127]
 BIR Revenue Reg. No. 02-98 (1998), Implementing Republic Act No. 8424, "An Act
Amending The National Internal Revenue Code, as Amended" Relative to the
Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding
Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-
Added Tax and Other Percentage Taxes.
[128]
 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57.
[129]
 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57(A).
[130]
 TAX CODE, Title II, ch. 4, sec. 58, as amended by Rep. Act No. 8424 (1997).
[131]
 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57.4.
[132]
 BIR Revenue Reg. No. 02-98 (1998), sec. 2.58.
[133]
 744 Phil. 299 (2014) [Per J. Leonen, Second Division].
[134]
 Id. at 310-311.
[135]
 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57.
[136]
 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57(A).
[137]
 Commissioner of Internal Revenue v. Philippine National Bank, 744 Phil. 299, 309
(2014) [Per J. Leonen, Second Division].
[138]
 744 Phil. 299 (2014) [Per J. Leonen, Second Division].
[139]
 Id. at 309-310.
[140]
 Rollo (G.R. No. 206309), pp. 111-113.
[141]
 Id. at 63-64.
[142]
 Id. at 62.
[143]
 Id.
[144]
 Id. at 65-72.
[145]
 Id.
[146]
 Id. at 65-66.
[147]
 Id. at 67-68.
[148]
 Id. at 69-70.
[149]
 Id. at 71-72.
[150]
 Id. at 73.
[151]
 Id. at 67-70.
[152]
 Rollo (G.R. Nos. 206079-80), p. 14.
[153]
 Id.
[154]
 Rollo (G.R. No. 206309), p. 73.
[155]
 Id.
[156]
 Id. at 74-76.
[157]
 Id. at 76.
[158]
 Commissioner of Internal Revenue. v. Philippine National Bank, 744 Phil. 299, 310
(2014) [Per J. Leonen, Second Division].
[159]
 TAX CODE, Title X, ch. 1, sec. 267, as amended by Rep. Act No. 8424 (1997).
[160]
 Commissioner of Internal Revenue. v. Philippine National Bank, 744 Phil. 299, 310
(2014) [Per J. Leonen, Second Division].
[161]
 744 Phil. 299 (2014) [Per J. Leonen, Second Division].
[162]
 Id. at 310-311.
[163]
 State Land Investment Corp. v. Commissioner of Internal Revenue, 566 Phil. 113,
122 (2008) [Per J. Sandoval-Gutierez, First Division].

© Supreme Court E-Library 2019

This website was designed and developed, and is maintained, by the E-Library
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G.R. No. 182582

FIRST DIVISION

April 17, 2017

G.R. No. 182582 *

METROPOLITAN BANK & TRUST COMPANY, Petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari 1 is the Decision 2 dated April 21, 2008
of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 340, which affirmed the
Decision3 dated August 13, 2007 and the Resolution4 dated November 14, 2007 of the
CTA First Division (CTA Division) in CTA Case No. 6765, and consequently, dismissed
petitioner Metropolitan Bank & Trust Company's (Metrobank) claim for refund on the
ground of prescription.

The Facts

On June 5, 1997, Solidbank Corporation (Solidbank) entered into an agreement with

Luzon Hydro Corporation (LHC), whereby the former extended to the latter a foreign
currency denominated loan in the principal amount of US$123,780,000.00 (Agreement).
Pursuant to the Agreement, LHC is bound to shoulder all the corresponding internal
revenue taxes required by law to be deducted or withheld on the said loan, as well as
the filing of tax returns and remittance of the taxes withheld to the Bureau of Internal
Revenue (BIR). On September 1, 2000, Metrobank acquired Solidbank, and
consequently, assumed the latter's rights and obligations under the aforesaid
Agreement. 5

On March 2, 2001 and October 31, 2001, LHC paid Metro bank the total amounts of
US$1,538,122.17

6 and US$1,333,268.31, 7 respectively. Pursuant to the Agreement, LHC withheld, and

eventually paid to the BIR, the ten percent (10%) final tax on the interest portions of the
aforesaid payments, on the same months that the respective payments were made to
petitioner. In sum, LHC remitted a total ofUS$106,178.69,8 or its Philippine Peso
equivalent of ₱5,296,773.05,9 as evidenced by LHC's Schedules of Final Tax and
Monthly Remittance Returns for the said months. 10

According to Metrobank, it mistakenly remitted the aforesaid amounts to the BIR as well
when they were inadvertently included in its own Monthly Remittance Returns of Final
Income Taxes Withheld for the months of March 2001 and October 2001. Thus,
on December 27, 2002, it filed a letter to the BIR requesting for the refund thereof.
Thereafter and in view of respondent the Commissioner of Internal Revenue's (CIR)
inaction, Metrobank filed its judicial claim for refund via a petition for review filed before
the CTA on September 10, 2003, docketed as CTA Case No. 6765. 11

In defense, the CIR averred that: (a) the claim for refund is subject to administrative
investigation; (b) Metro bank must prove that there was double payment of the tax
sought to be refunded; (c) such claim must be filed within the prescriptive period laid
down by law; (d) the burden of proof to establish the right to a refund is on the taxpayer;
and (e) claims for tax refunds are in the nature of tax exemptions, and as such, should
be construed strictissimi Juris against the taxpayer. 12

The CTA Division Ruling

In a Decision 13 dated August 13, 2007, the CTA Division denied Metrobank's claims
for refund for lack of merit. 14 It ruled that Metrobank's claim relative to the March 2001
final tax was filed beyond the two (2)-year prescriptive period. It pointed out that since
Metrobank remitted such payment on April 25, 2001, the latter only had until April 25,
2003 to file its administrative and judicial claim for refunds. In this regard, while Metro
bank filed its administrative claim well within the afore said period, or
on December 27, 2002, the judicial claim was filed only on September 10,
2003. Hence, the right to claim for such refund has prescribed. 15 On the other hand,
the CTA Division also denied Metrobank's claim for refund relative to the October 2001
tax payment for insufficiency of evidence. 16

Metrobank moved for reconsideration, 17 which was partially granted in a

Resolution18 dated November 14, 2007, and thus, was allowed to present further
evidence regarding its claim for refund for the October 2001 final tax. However, the CTA
Division affirmed the denial of the claim relative to its March 2001 final tax on the
ground of prescription. 19 Aggrieved, Metrobank filed a petition for partial
review20 before the CTA En Banc, docketed as C.T.A. EB No. 340.

The CTA En Banc Ruling

In a Decision21 dated April 21, 2008, the CTA En Banc affirmed the CTA Division's
ruling. It held that since Metrobank's March 2001 final tax is in the nature of a final
withholding tax, the two (2)-year prescriptive period was correctly reckoned by the CTA
Division from the time the same was paid on April 25, 2001. As such, Metro bank's
claim for refund had already prescribed as it only filed its judicial claim on September
10, 2003. 22

Hence, this petition.

The Issue Before the Court

The issue for the Court's resolution is whether or not the CTA En Banc correctly held
that Metrobank's claim for refund relative to its March 2001 final tax had already
prescribed.

The Court's Ruling

The petition is without merit.

Section 204 of the National Internal Revenue Code, as amended, 23 provides the CIR
with, inter alia, the authority to grant tax refunds. Pertinent portions of which read:

Section 204. Authority of the Commissioner to Compromise, Abate and Refund or

Credit Taxes. -The Commissioner may-

xxxx

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps
that have been rendered unfit for use and refund their value upon proof of
destruction.1âwphi1 No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for credit or
refund within two (2) years after the payment of the tax or penalty: Provided,
however, That a return filed showing an overpayment shall be considered as a written
claim for credit or refund. (Emphasis and underscoring supplied)

In this relation, Section 229 of the same Code provides for the proper procedure in
order to claim for such refunds, to wit:

Section 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or

proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such
tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax,
where on the face of the return upon which payment was made, such payment appears
clearly to have been erroneously paid. (Emphases and underscoring supplied)

As may be gleaned from the foregoing provisions, a claimant for refund must first file an
administrative claim for refund before the CIR, prior to filing a judicial claim before the
CTA. Notably, both the administrative and judicial claims for refund should be filed
within the two (2)-year prescriptive period indicated therein, and that the claimant is
allowed to file the latter even without waiting for the resolution of the former in order to
prevent the forfeiture of its claim through prescription. In this regard, case law states
that "the primary purpose of filing an administrative claim [is] to serve as a notice of
warning to the CIR that court action would follow unless the tax or penalty alleged to
have been collected erroneously or illegally is refunded. To clarify, Section 229 of the
Tax Code - then Section 306 of the old Tax Code - however does not mean that the
taxpayer must await the final resolution of its administrative claim for refund, since doing
so would be tantamount to the taxpayer's forfeiture of its right to seek judicial recourse
should the two (2)-year prescriptive period expire without the appropriate judicial claim
being filed."24

In this case, Metrobank insists that the filing of its administrative and judicial claims on
December 27, 2002 and September 10, 2003, respectively, were well-within the two (2)-
year prescriptive period. Citing ACCRA Investments Corporation v. Court of
Appeals,25 CIR v. TMX Sales, Inc.,26 CIR v. Philippine American Life Insurance,
Co., 27 and CIR v. CDCP Mining Corporation, 28 Metrobank contends that the
aforesaid prescriptive period should be reckoned not from April 25, 2001 when it
remitted the tax to the BIR, but rather, from the time it filed its Final Adjustment Return
or Annual Income Tax Return for the taxable year of 2001, or in April 2002, as it was
only at that time when its right to a refund was ascertained. 29

Metrobank's contention cannot be sustained.

As correctly pointed out by the CIR, the cases cited by Metrobank involved corporate
income taxes, in which the corporate taxpayer is required to file and pay income tax on
a quarterly basis, with such payments being subject to an adjustment at the end of the
taxable year. As aptly put in CIR v.TMX Sales, Inc., "payment of quarterly income tax
should only be considered [as] mere installments of the annual tax due. These quarterly
tax payments which are computed based on the cumulative figures of gross receipts
and deductions in order to arrive at a net taxable income, should be treated as
advances or portions of the annual income tax due, to be adjusted at the end of the
calendar or fiscal year. x x x Consequently, the two-year prescriptive period x x x should
be computed from the time of filing of the Adjustment Return or Annual Income Tax
Return and final payment of income tax."30 Verily, since quarterly income tax payments
are treated as mere "advance payments" of the annual corporate income tax, there may
arise certain situations where such "advance payments" would cover more than said
corporate taxpayer's entire income tax liability for a specific taxable year. Thus, it is only
logical to reckon the two (2)-year prescriptive period from the time the Final Adjustment
Return or the Annual Income Tax Return was filed, since it is only at that time that it
would be possible to determine whether the corporate taxpayer had paid an amount
exceeding its annual income tax liability.

On the other hand, the tax involved in this case is a ten percent (10%) final withholding
tax on Metrobank's interest income on its foreign currency denominated loan extended
to LHC. In this regard, Section 2.57 (A) of Revenue Regulations No. 02-9831 explains
the characterization of taxes of this nature, to wit:

Section 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. - Under the final withholding tax system[,] the amount of
income tax withheld by the withholding agent is constituted as a full and final
payment of the income tax due from the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of
his failure to withhold the tax or in case of under withholding, the deficiency tax shall be
collected from the payor/withholding agent. The payee is not required to file an income
tax return for the particular income.

The finality of the withholding tax is limited only to the payee's income tax liability on the
particular income. It does not extend to the payee's other tax liability on said income,
such as when the said income is further subject to a percentage tax. For example, if a
bank receives income subject to final withholding tax, the same shall be subject to a
percentage tax. (Emphasis and underscoring supplied)

From the foregoing, it may be gleaned that final withholding taxes are considered as full
and final payment of the income tax due, and thus, are not subject to any adjustments.
Thus, the two (2)-year prescriptive period commences to run from the time the refund is
ascertained, i.e.,  the date such tax was paid, and not upon the discovery by the
taxpayer of the erroneous or excessive payment of taxes. 32

In the case at bar, it is undisputed that Metrobank's final withholding tax liability in March
2001 was remitted to the BIR on April 25, 2001. As such, it only had until April 25,
2003 to file its administrative and judicial claims for refund. However, while Metrobank's
administrative claim was filed on December 27, 2002, its corresponding judicial claim
was only filed on September 10, 2003. Therefore, Metrobank's claim for refund had
clearly prescribed.

Finally, the Court finds untenable Metrobank's resort to the principle of solutio indebiti in
support of its position. 33 In CIR v. Manila Electric Company, 34 the Court rejected the
application of said principle to tax refund cases, viz.:

In this regard, petitioner is misguided when it relied upon the six (6)-year prescriptive
period for initiating an action on the ground of quasi contract or solutio indebiti under
Article 1145 of the New Civil Code. There is solutio indebiti where: (1) payment is made
when there exists no binding relation between the payor, who has no duty to pay, and
the person who received the payment; and (2) the payment is made through mistake,
and not through liberality or some other cause. Here, there is· a binding relation
between petitioner as the taxing authority in this jurisdiction and respondent
MERALCO which is bound under the law to act as a withholding agent of
NORD/LB Singapore Branch, the taxpayer. Hence, the first element of  solutio
indebiti  is lacking. Moreover, such legal precept is inapplicable to the present
case since the Tax Code, a special law, explicitly provides for a mandatory period
for claiming a refund for taxes erroneously paid.

Tax refunds are based on the general premise that taxes have either been erroneously
or excessively paid. Though the Tax Code recognizes the right of taxpayers to request
the return of such excess/erroneous payments from the government, they must do so
within a prescribed period. Further, "a taxpayer must prove not only his entitlement to a
refund, but also his compliance with the procedural due process as nonobservance of
the prescriptive periods within which to file the administrative and the judicial claims
would result in the denial of his claim."35 (Emphasis and underscoring supplied)

In sum, the CT A Division and CT A En Banc correctly ruled that Metrobank's claim for
refund in connection with its final withholding tax incurred in March 2001 should be
denied on the ground of prescription.

WHEREFORE, the petition is DENIED. The Decision dated April 21, 2008 of the Court
of Tax Appeals En Banc in C.T.A. EB No. 340 is hereby AFFIRMED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE,
Associate Justice
WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice

TERESITA J. LEONARDO-DE CASTRO

Associate JusticeMARIANO C. DEL CASTILLO
Associate Justice

ALFREDO BENJAMIN S. CAGUIOA

Associate Justice

CERTIFICATION

Pursuant to the Section 13, Article VIII of the Constitution and the Division
Chairperson’s Attestation, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer of the opinion of the
Court’s Division.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes

* Part of the Supreme Court's Case Decongestion Program 2017.

1 Rollo, pp. 7-18.

2 Id. at 19-34. Penned by Associate Justice Olga Palanca-Enriquez with Presiding

Justice Ernesto D. Acosta and Associate Justices Juanito C. Castaneda, Jr., Lovell R.
Bautista, and Caesar A. Casanova concurring. Associate Justice Erlinda P. Uy was on
official business.

3 Id. at 35-48. Penned by Associate Justice Caesar A. Casanova with Presiding Justice
Ernesto D. Acosta and Associate Justice Lovell R. Bautista concurring.

4 Id. at 57-61.

5 Id. at 20-21.

6 Id. at 21. Comprised of US$902,545.47 as principal and US$635,576.70 as interest.

7 Id. Comprised ofUS$902,545.45 as principal and US$430,722.86 as interest.

8 See id. at 21-22. US$63, 106.40 in March 2001 and US$43,072.29 in October 2001.

9 See id. P3,060,029.24 in March 2001 and P2,236,743.81 in October 2001.

10 See id.

11 See id. at 22.

12 See id. at 23.

13 Id. at 35-47.

14 Id. at 47.

15 Id. at 41-42.

16 See id. at 42-47.

17 See motion for reconsideration dated September 5, 2007; id. at 49-55.

18 Id.at57-61.

19 See id. at 59.

20 Dated December 6, 2007. Id. at 62-72.

21 Id. at 19-34.

22 Id. at 26-33.

23 Presidential Decree No. 1158, as amended up to Republic Act No. 9504, An Act
Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, As Amended,
Otherwise known as the National Internal Revenue Code of 1997, approved on June
17, 2008.

24 See CIR v. Goodyear Philippines, Inc., G.R. No. 216130, August 3, 2016.

25 281 Phil. 1060 (1991).

26 282 Phil. 199 (1992).

27 314Phil.349(1995).

28 362 Phil. 7 5 (1999).

29 Seerollo,pp.12-15, 114-117,and 143-147.

30 Supra note 26, at 207-208.

31 SUBJECT: Implementing Republic Act No. 8424, "An Act Amending the National
Internal Revenue Code, as Amended" Relative to the Withholding on Income Subject to
the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax
on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage
Taxes, dated April 17, 1998.

32 See CIR v. Manila Electric Company, G.R. No. 181459, June 9, 2014, 725 SCRA
384, 398.

33 See rollo, pp. 16 and 147.

34 Supra note 32.

35 Id. at 399-400.

G.R. No. 203514

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
ST. LUKE’S MEDICAL CENTER, INC., Respondent

DECISION

DEL CASTILLO, J.:

The doctrine of stare decisis dictates that "absent any powerful countervailing

considerations, like cases ought to be decided alike."1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the
May 9, 2012 Decision3 and the September 17, 2012 Resolution4 of the Court of Tax
Appeals (CTA) in CTA EB Case No. 716.
Factual Antecedents

On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received
from the Large Taxpayers Service-Documents Processing and Quality Assurance
Division of the Bureau of Internal Revenue (BIR) Audit Results/Assessment Notice Nos.
QA-07-0000965 and QA-07-000097,6 assessing respondent SLMC deficiency income
tax under Section 27(B)7 of the 1997 National Internal Revenue Code (NIRC), as
amended, for taxable year 2005 in the amount of ₱78,617,434.54 and for taxable year
2006 in the amount of ₱57,119,867.33.

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue
(CIR) an administrative protest8 assailing the assessments. SLMC claimed that as a
non-stock, non-profit charitable and social welfare organization under Section 30(E) and
(G)9 of the 1997 NIRC, as amended, it is exempt from paying income tax.

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed
Assessment10 dated April 9, 2008 increasing the deficiency income for the taxable year
2005 tax to ₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94, computed
as follows:

For Taxable Year 2005:

ASSESSMENT NO. QA-07-000096

PARTICULARS AMOUNT
Sales/Revenues/Receipts/Fees ?3,623,511,616.00
Less: Cost of Sales/Services 2,643,049, 769.00
Gross Income From Operation 980,461,847.00
Add: Non-Operating & Other Income -
Total Gross Income 980,461,847.00
Less: Deductions 481,266,883 .00
Net Income Subject to Tax 499, 194,964.00
XTaxRate 10%
Tax Due 49,919,496.40
Less: Tax Credits -
Deficiency Income Tax 49,919,496.40
Add: Increments  
25% Surcharge 12,479,874.10
20% Interest Per Annum (4115/06-4/15/08) 19,995,151.71
Compromise Penalty for Late Payment 25,000.00
Total increments 32,500,025.81
Total Amount Due ?82,419,522.21

For Taxable Year 2006:

ASSESSMENT NO. QA-07-000097

PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees ?3,8 l 5,922,240.00
Less: Cost of Sales/Services 2,760,518,437.00
 Gross Income From Operation 1,055,403,803.00
Add: Non-Operating & Other Income -
Total Gross Income 1,055,403,803.00
Less: Deductions 640,147,719.00
Net Income Subject to Tax 415,256,084.00
XTaxRate 10%
Tax.Due 41,525,608.40
Less: Tax Credits -
Deficiency Income Tax 41,525,608.40
Add: Increments -
25% Surcharge 10,381,402.10
20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44
Compromise Penalty for Late Payment 25,000.00
Total increments 18,734,277.54
Total Amount Due ?60,259,885.9411

Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,12 docketed
as CTA Case No. 7789.

Ruling of the Court of Tax Appeals Division

On August 26, 2010, the CTA Division rendered a Decision13 finding SLMC not liable
for deficiency income tax under Section 27(B) of the 1997 NIRC, as amended, since it is
exempt from paying income tax under Section 30(E) and (G) of the same Code. Thus:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.

Accordingly, Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097,
assessing petitioner for alleged deficiency income taxes for the taxable years 2005 and
2006, respectively, are hereby CANCELLED and SET ASIDE.

SO ORDERED.14

CIR moved for reconsideration but the CTA Division denied the same in its December
28, 2010 Resolution.15

This prompted CIR to file a Petition for Review16 before the CTA En Banc.

Ruling of the Court of Tax Appeals En Banc

On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the
Audit Results/Assessment Notices issued against SLMC. It sustained the findings of the
CTA Division that SLMC complies with all the requisites under Section 30(E) and (G) of
the 1997 NIRC and thus, entitled to the tax exemption provided therein.17

On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.

Issue

Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that
the CTA erred in exempting SLMC from the payment of income tax.
Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos.
195909 and 195960, entitled Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.,18 finding SLMC not entitled to the tax exemption under Section 30(E) and
(G) of the NIRC of 1997 as it does not operate exclusively for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. Thus, the
Court disposed of the case in this manner:

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.

195909is PARTLY GRANTED. The Decision of the Court of Tax Appeals En
Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case
No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the
deficiency income tax in 1998 based on the 10% preferential income tax rate under
Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of
the National Internal Revenue Code. All other parts of the Decision and Resolution of
the Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section I, Rule 45 of the Rules of Court.

SO ORDERED.19

Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing the
Court that on April 30, 2013, it paid the BIR the amount of basic taxes due for taxable
years 1998, 2000-2002, and 2004-2007, as evidenced by the payment
confirmation21 from the BIR, and that it did not pay any surcharge, interest, and
compromise penalty in accordance with the above-mentioned Decision of the Court. In
view of the payment it made, SLMC moved for the dismissal of the instant case on the
ground of mootness.

CIR opposed the motion claiming that the payment confirmation submitted by SLMC is
not a competent proof of payment as it is a mere photocopy and does not even indicate
the quarter/sand/or year/s said payment covers.22

In reply,23 SLMC submitted a copy of the Certification24 issued by the Large Taxpayers

Service of the BIR dated May 27, 2013, certifying that, "[a]s far as the basic deficiency
income tax for taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are concen1ed,
this Office considers the cases closed due to the payment made on April 30, 2013."
SLMC likewise submitted a letter25 from the BIR dated November 26, 2013 with
attached Certification of Payment26 and application for abatement,27 which it earlier
submitted to the Court in a related case, G.R. No. 200688, entitled Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc.28

Thereafter, the parties submitted their respective memorandum.

CIR 's Arguments

CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax
under Section 27(B) of the 1997 NIRC.29 It likewise asserts that SLMC is liable to pay
compromise penalty pursuant to Section 248(A)30 of the 1997 NIRC for failing to file its
quarterly income tax returns.31

As to the alleged payment of the basic tax, CIR contends that this does not render the
instant case moot as the payment confirmation submitted by SLMC is not a competent
proof of payment of its tax liabilities.32

SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R.
Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.)33 positing that earning a profit by a charitable, benevolent hospital or
educational institution does not result in the withdrawal of its tax exempt
privilege.34 SLMC further claims that the income it derives from operating a hospital is
not income from "activities conducted for profit."35 Also, it maintains that in accordance
with the ruling of the Court in G.R. Nos. 195909 and 195960 (Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.),36 it is not liable for compromise
penalties.37

In any case, SLMC insists that the instant case should be dismissed in view of its
payment of the basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to
the BIR on April 30, 2013.38

Our Ruling

SLMC is liable for income tax under

Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned

The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997
NIRC insofar as its revenues from paying patients are concerned has been settled in
G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.),39 where the Court ruled that:

x x x We hold that Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B)
on one hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the introduction of Section
27(B) is to subject the taxable income of two specific institutions, namely, proprietary
non-profit educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(l).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be proprietary and non-profit.
'Proprietary' means private, following the definition of a 'proprietary educational
institution' as 'any private school maintained and administered by private individuals or
groups' with a government permit. 'Non-profit' means no net income or asset accrues to
or benefits any member or specific person, with all the net income or asset devoted to
the institution's purposes and all its activities conducted not for profit.

'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v.

Club Filipino, Inc. de Cebu, this Court considered as non-profit a sports club organized
for recreation and entertainment of its stockholders and members. The club was
primarily funded by membership fees and dues. If it had profits, they were used for
overhead expenses and improving its golf course. The club was non-profit because of
its purpose and there was no evidence that it was engaged in a profit-making
enterprise.

The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not
charitable. Tue Court defined 'charity' in Lung Center of the Philippines v. Quezon
City as 'a gift, to be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or
[by] otherwise lessening the burden of government.' A nonprofit club for the benefit of its
members fails this test. An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members. However, despite its being
a tax exempt institution, any income such institution earns from activities conducted for
profit is taxable, as expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test

of charity in Lung Center. The issue in Lung Center concerns exemption from real
property tax and not income tax. However, it provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens
the burden of government. In other words, charitable institutions provide for free goods
and services to the public which would otherwise fall on the shoulders of government.
Thus, as a matter of efficiency, the government forgoes taxes which should have been
spent to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions. The loss
of taxes by the government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The

requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that '[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members of
Congress.' The requirements for a tax exemption are strictly construed against the
taxpayer because an exemption restricts the collection of taxes necessary for the
existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This ruling
uses the same premise as Hospital de San Juan and Jesus Sacred Heart
College which says that receiving income from paying patients does not destroy the
charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
outpatient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which
it is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution.

For real property taxes, the incidental generation of income is permissible because the
test of exemption is the use of the property. The Constitution provides that '[c]haritable
institutions, churches and personages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.' The test of exemption is not strictly a requirement on the intrinsic nature or
character of the institution. The test requires that the institution use property in a certain
way, i.e., for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article VI
of the Constitution does not define a charitable institution, but requires that the
institution 'actually, directly and exclusively' use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted
'exclusively' for charitable purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as 'one where no
part of its income is distributable as dividends to its members, trustees, or officers' and
that any profit 'obtain[ed] as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized.' However, under Lung Center, any profit by a charitable institution must
not only be plowed back 'whenever necessary or proper,' but must be 'devoted or used
altogether to the charitable object which it is intended to achieve.'

The operations of the charitable institution generally refer to its regular activities.
Section 30(E) of the NIRC requires that these operations be exclusive to charity. There
is also a specific requirement that 'no part of [the] net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any specific person.' The use of
lands, buildings and improvements of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes.
This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of
charity, a charitable institution is not ipso facto tax exempt. To be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires that a charitable
institution use the property 'actually, directly and exclusively' for charitable purposes. To
be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be 'organized and operated exclusively' for charitable purposes.
Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the
institution be 'operated exclusively' for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized
and operated exclusively' by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever

kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts 'any' activity for profit, such activity is not tax exempt even as its not-
for-profit activities remain tax exempt. This paragraph qualifies the requirements in
Section 30(E) that the '[n]on-stock corporation or association [must be] organized and
operated exclusively for . . . charitable . . . purposes . . . . ' It likewise qualifies the
requirement in Section 30(G) that the civic organization must be 'operated exclusively'
for the promotion of social welfare.

Thus, even if the charitable institution must be 'organized and operated exclusively' for
charitable purposes, it is nevertheless allowed to engage in 'activities conducted for
profit' without losing its tax exempt status for its not-for-profit activities. The only
consequence is that the 'income of whatever kind and character' of a charitable
institution 'from any of its activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax.' Prior to the introduction of Section 27(B),
the tax rate on such income from for-profit activities was the ordinary corporate rate
under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately ₱l.73 billion
from paying patients is not an institution 'operated exclusively' for charitable purposes.
Clearly, revenues from paying patients are income received from 'activities conducted
for profit.' Indeed, St. Luke's admits that it derived profits from its paying patients. St.
Luke's declared ₱l,730,367,965 as 'Revenues from Services to Patients' in contrast to
its 'Free Services' expenditure of ₱218,187,498. In its Comment in G.R. No. 195909, St.
Luke's showed the following 'calculation' to support its claim that 65.20% of its 'income
after expenses was allocated to free or charitable services' in 1998.

x x xx

In Lung Center, this Court declared:

'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred

from participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as
enjoying a privilege exclusively.' . . . The words 'dominant use' or 'principal use' cannot
be substituted for the words 'used exclusively' without doing violence to the Constitution
and thelaw. Solely is synonymous with exclusively.

The Court cannot expand the meaning of the words 'operated exclusively' without
violating the NIRC. Services to paying patients are activities conducted for profit. They
cannot be considered any other way. There is a 'purpose to make profit over and above
the cost' of services. The ₱l.73 billion total revenues from paying patients is not even
incidental to St. Luke's charity expenditure of ₱2l8,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating
income in 1998. However, if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services to paying and non-
paying patients, then it cannot be said that the income is 'devoted or used altogether to
the charitable object which it is intended to achieve.' The income is plowed back to the
corporation not entirely for charitable purposes, but for profit as well. In any case, the
last paragraph of Section 30 of the NIRC expressly qualifies that income from activities
for profit is taxable 'regardless of the disposition made of such income.'

Jesus Sacred Heart College declared that there is no official legislative record

explaining the phrase 'any activity conducted for profit.' However, it quoted a deposition
of Senator Mariano Jesus Cuenco, who was a member of the Committee of Conference
for the Senate, which introduced the phrase 'or from any activity conducted for profit.'

P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree

V d que es una actividad esencial dicho hospital para el funcionamiento def colegio de
medicina

de dicha universidad?

x x x x x x xxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa;

pero considerando que el hospital tiene cuartos de pago, y a los mismos generalmente
van enfermos de buena posicion social economica, lo que se paga por estos enfermos
debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para
insertar las palabras o frase 'or from any activity conducted for profit.'

The question was whether having a hospital is essential to an educational institution like
the College of Medicine of the University of Santo Tomas.1awp++i1 Senator Cuenco
answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was one of
the reasons Congress inserted the phrase 'or any activity conducted for profit.'

The question in Jesus Sacred Heart College involves an educational institution.

However, it is applicable to charitable institutions because Senator Cuenco's response
shows an intent to focus on the activities of charitable institutions. Activities for profit
should not escape the reach of taxation. Being a non-stock and non-profit corporation
does not, by this reason alone, completely exempt an institution from tax. An institution
cannot use its corporate form to prevent its profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting
tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section
30(E) and (G) of the NIRC requires that an institution be 'operated exclusively' for
charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary
corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should therefore be lin1ited to
institutions beneficial to the public and those which improve social welfare. A profit-
making entity should not be allowed to exploit this subsidy to the detriment of the
government and other taxpayers.

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its
profits to its members and such profits are reinvested pursuant to its corporate
purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990
by the BIR, which opined that St. Luke's is 'a corporation for purely charitable and social
welfare purposes' and thus exempt from income tax. In Michael J Lhuillier, Inc. v.
Commissioner of Internal Revenue, the Court said that 'good faith and honest belief that
one is not subject to tax on the basis of previous interpretation of government agencies
tasked to implement the tax law, are sufficient justification to delete the imposition of
surcharges and interest.'40

A careful review of the pleadings reveals that there is no countervailing consideration for
the Court to revisit its aforequoted ruling in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.). Thus,
under the doctrine of stare decisis, which states that "[o]nce a case has been decided in
one way, any other case involving exactly the same point at issue x x x should be
decided in the same manner,"41 the Court finds that SLMC is subject to 10% income
tax insofar as its revenues from paying patients are concerned.

To be clear, for an institution to be completely exempt from income tax, Section 30(E)
and (G) of the 1997 NIRC requires said institution to operate exclusively for charitable
or social welfare purpose. But in case an exempt institution under Section 30(E) or (G)
of the said Code earns income from its for-profit activities, it will not lose its tax
exemption. However, its income from for-profit activities will be subject to income tax at
the preferential 10% rate pursuant to Section 27(B) thereof.

SLMC is not liable for Compromise

Penalty.

As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997
NIRC for its alleged failure to file its quarterly income tax returns, this has also been
resolved in G.R Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.),42 where the imposition of surcharges and interest under
Sections 24843 and 24944 of the 1997 NIRC were deleted on the basis of good faith
and honest belief on the part of SLMC that it is not subject to tax. Thus, following the
ruling of the Court in the said case, SLMC is not liable to pay compromise penalty under
Section 248(A) of the 1997 NIRC.

The Petition is rendered moot by the

payment made by SLMC on April 30,
2013.
However, in view of the payment of the basic taxes made by SLMC on April 30, 2013,
the instant Petition has become moot.1avvphi1

While the Court agrees with the CIR that the payment confirmation from the BIR
presented by SLMC is not a competent proof of payment as it does not indicate the
specific taxable period the said payment covers, the Court finds that the Certification
issued by the Large Taxpayers Service of the BIR dated May 27, 2013, and the letter
from the BIR dated November 26, 2013 with attached Certification of Payment and
application for abatement are sufficient to prove payment especially since CIR never
questioned the authenticity of these documents. In fact, in a related case, G.R. No.
200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center,
lnc.,45 the Court dismissed the petition based on a letter issued by CIR confirming
SLMC's payment of taxes, which is the same letter submitted by SLMC in the instant
case.

In fine, the Court resolves to dismiss the instant Petition as the same has been
rendered moot by the payment made by SLMC of the basic taxes for the taxable years
2005 and 2006, in the amounts of ₱49,919,496.40 and ₱4 l,525,608.40, respectively.46

WHEREFORE, the Petition is hereby DISMISSED.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice
Chairperson

TERESITA J. LEONARDO-DE CASTRO

Associate JusticeESTELA M. PERLAS-BERNABE
Associate Justice

ALFREDO BENJAMIN S. CAGUIOA

Associate Justice

CERTIFICATION

Pursuant to the Section 13, Article VIII of the Constitution, I certify that the conclusions
in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes

1 Ty v. Banco Filipino Savings & Mortgage Bunk, 51 l Phil. 510, 520 (2005).

2 Rollo, pp. 13-34.

3 Id. at 39-51; penned by Associate Justice Lovell R. Bautista and concurred in by

Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C. Castañeda, Jr.,
Caesar A. Casanova, Olga Palanca-Enriquez, Esperanza R. Fabon-Victorino, Cielito N.
Mindaro-Grulla, and Amelia R. Cotangco-Manalastas; Associate Justice Erlinda P. Uy
on leave.

4 Id. at 52-55; penned by Associate Justice Lovell R. Bautista and concurred in by

Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C. Castañeda, Jr.,
Caesar A, Casanova, Olga Palanca-Enriquez, Esperanza R. Fabon-Victorino, Cielito N.
Mindaro-Grulla, and Amelia R. Cotangco-Manalastas: Associate Justice Erlinda P. Uy
took no part.

5 CTA rollo (Division), pp. 32-33.

6 Id. at 34-35.

7 SEC. 27. Rates of Income Tax on Domestic Corporations. -

x x xx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational

institutions and hospitals which are non-profit shall pay a tax of ten percent (10%)
on their taxable income except those covered by Subsection (D)
hereof: Provided, Thatt if the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection
(A) hereof shall be imposed on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other activity means any trade,
business or other activity,' the conduct of which is not substantially related to the
exercise or performance by such educational institution or hospital of its primary
purpose or function. A 'proprietary educational institution' is any private school
maintained and administered by private individuals or groups with an issued permit to
operate from the Department of Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED). or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in accordance with existing laws
and regulations. (Emphasis supplied)

8 CTA rollo (Division), pp. 36-46.

9 SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall

not be taxed under this Title in respect to income received by them as such:

x x xx

(E) Nonstock corporation or association organized and operated exclusively for

religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or inure to the benefit
of an)' member, organizer, officer or any specific person;

x x xx

(G) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;

x x xx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever

kind and character of the foregoing organizations from any of their properties, real
or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied)

10 CTA rollo (Division), pp. 47-50.

11 Id. at 47-48.

12 Id. at 1-3 l.

13 Id. at 1059-1079; penned by Associate Justice Cielito N. Mindaro-Grulla and

concurred in by Associate Justices Juanito C. Castañeda, Jr. and Caesar A. Casanova.
14 Id. at 1079.

15 Id. at 1117-1125 (last page missing).

16 CTA rollo (En Banc), pp. 1-8.

17 Rollo, pp. 47-49.

18 695 Phil. 867 (2012).

19 Id. at 895.

20 Rollo, pp. 80-82.

21 Id. at 83.

22 Id. at 99-106.

23 Id. at 112-116.

24 Id. at 118.

25 Id. at 119.

26 Id. at 121.

27 Id. at 123-129.

28 G.R. No. 200688 (Notice), April 15, 2015.

29 Rollo, pp. 186-193.

30 Section 248. Civil Penalties. -

(A) There shall be imposed, in addition to the tax required to be paid, a penalty
equivalent to twenty-five percent (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 officer other than those with 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 pmt 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.

xxxx

31 Rollo, p. 193.

32 Id. at 193-194.

33 Supra note 19.

34 Rollo, pp. 150-155.

35 Id. at 155-156.
36 Supra note 19.

37 Rollo, pp. 158-160.

38 Id. at 160-162.

39 Supra note 19.

40 Id. at 885-895.

41 Chinese Young Men's Christian Association of the Philippine Islands v. Remington

Steel Corporation, 573 Phil. 320, 337 (2008).

42 Supra note 19.

43 Section 248. Civil Penalties. -

(A) There shall be imposed, in addition to the tax required to be paid, a penalty
equivalent to twenty-five percent (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 officer other than those with 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 rules and regulations, or in case a false or fraudulent return is willfully made, the
penalty to be imposed shall be fifty percent (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 a substantial underdeclaration of taxable sales,
receipts or income, or a 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 a false or fraudulent return:
Provided, further, That failure to report sales, receipts or income in an amount
exceeding thirty percent (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 herein.

44 Section 249. Interest. -

(A) In General. -There shall be assessed and collected on any unpaid amount of tax,
interest at the rate of twenty percent (20%) per annum, or such higher rate as may be
prescribed by rules and regulations, from the date prescribed for payment until the
amount is fully paid.

(B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this
Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest
shall be assessed and collected from the date prescribed for its payment until the full
payment thereof.

(C) Delinquency Interest. - In case of failure to pay:

(l) The amount of the tax due on any return to be filed, or

(2) The amount of the tax due for which no return is required, or

(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in
the notice and demand of the Commissioner, there shall be assessed and collected on
the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the
amount is fully paid, which interest shall form part of the tax.

(D) Interest on Extended Payment. -If any person required to pay the tax is qualified and
elects to pay the tax on installment under the provisions of this Code, but fails to pay the
tax or any installment hereof, or any part of such amount or installment on or before the
date prescribed for its payment, or where the Commissioner has authorized an
extension of time within which to pay a tax or a deficiency tax or any part thereof, there
shall be assessed and collected interest at the rate hereinabove prescribed on the tax
or deficiency tax or any part thereof unpaid from the date of notice and demand until it is
paid.

45 Supra note 28.

46 Rollo, p. 120.