African Airways v.

CIR
G.R. No. 180356 February 16, 2010 
VELASCO, JR., J.

Lessons Applicable: Taxes can be offset if intimately related, unless exempted assumed
within the purview of general rule, liabilities and tax credit must first be determined
before offset can take place

Laws Applicable:

Facts:

 South African Airways, a foreign corporation with no license to do business in the

Philippines, sells passage documents for off-line flights through Aerotel Limited,
general sales agent in the Philippines 
 Feb 5, 2003: Petitioner filed a claim for refund erroneously paid tax on Gross
Philippine Billing (GPB) for the year 2010.  
 CTA: denied - petitioner is a resident foreign corp. engaged in trade or business
in the Philippines and therefore is NOT liable to pay tax on GPB under the Sec. 28 (A)
(3) (a) of the 1997 NIRC but cannot be allowed refund because liable for the 32%
income tax from its sales of passage documents.  
 This is upheld by the CTA and CTA En Banc
Issue:
1. W/N  petitioner is engaged in trade or business in the Philippines is subject to 32%
income tax.
2. W/N petitioner is entitled to refund

HELD: The petition must be denied

CTA En Banc decision is set side 

1. Yes.  Since it does not maintain flights to or from the Philippines, it is not taxable
under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by the CTA. But
petitioner further posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to
it, it is precluded from paying any other income tax for its sale of passage documents in
the Philippines.  But, Sec. 28 (A)(1) of the 1997 NIRC does not exempt all international air
carriers from the coverage of Sec. 28 (A) (1) of the 1997 NIRC being a general rule. 
Petitioner, being an international carrier with no flights originating from the Philippines,
does not fall under the exception. As such, petitioner must fall under the general rule.
This principle is embodied in the Latin maxim, exception firmat regulam in casibus non
exceptis, which means, a thing not being excepted must be regarded as coming within
the purview of the general rule.

2. Underterminable.  Although offsetting of tax refund with tax deficiency is unavailing

under Art. 1279 of the Civil Code, in CIR v. CTA it granted when deficiency assessment is
intimately related and inextricably intertwined with the right to claim for a tax refund. 
Sec. 72 Chapter XI of 1997 NIRC is not applicable where petitioner's tax refund claim
assumes that the tax return that it filed were correct because petitioner is liable under
Sec. 28 (A)(1), the correctness is now put in doubt and refund cannot be granted.  It
cannot be assumed that the liabilities for two different provisions would be the same. 
There is a necessity for the CTA to receive evidence and establish the correct amount
before a refund can be granted.

Sec. 28(b)(2) of the 1939 NIRC provided:

(2) Resident Corporations. – A corporation organized, authorized, or existing under the laws of a
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: Provided, however, that international carriers shall pay a tax of two
and one-half percent on their gross Philippine billings.

This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:

"Gross Philippine billings" include 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.

In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:

"Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in the
world and excess baggage, cargo and mail originating from the Philippines, covered by passage
documents sold in the Philippines.

Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world,
provided that the passage documents were sold in the Philippines. Legislature departed from such
concept in the 1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):

"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.
Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to
or from the Philippines, income is included in GPB

As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the
Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by
the CTA. But petitioner further posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to
it, it is precluded from paying any other income tax for its sale of passage documents in the
Philippines.Such position is untenable

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all
international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had
legislature’s intentions been to completely exclude all international air carriers from the application of
the general rule under Sec. 28(A)(1), it would have used the appropriate language to do so; but the
legislature did not. Thus, the logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is
applicable to a taxpayer, then the general rule under Sec. 28(A)(1) would not apply. If, however,
Sec. 28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier or
not, would be liable for the tax under Sec. 28(A)(1)

the general rule is that resident foreign corporations shall be liable for a 32% income tax on their
income from within the Philippines, except for resident foreign corporations that are international
carriers that derive income "from carriage of persons, excess baggage, cargo and mail originating
from the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner,
being an international carrier with no flights originating from the Philippines, does not fall under the
exception. As such, petitioner must fall under the general rule. This principle is embodied in the Latin
maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted
must be regarded as coming within the purview of the general rule
GATCHALIAN v. COMMISSIONER OF INTERNAL REVENUE

G.R. No. 45425; April 29, 1939

Ponente: J. Imperial

FACTS:

          On December 15, 1934, the plaintiffs, all 15 of them, each contributed in order to buy a
sweepstakes ticket worth Php 2.00.

           That immediately thereafter but prior to December 16, 1934, plaintiffs purchased, in the
ordinary course of business, from one of the duly authorized agents of the National Charity
Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that the
said ticket was registered in the name of Jose Gatchalian and Company.

          

          The above-mentioned ticket bearing No. 178637 won one of the third prizes in the
amount of P50,000 and that the corresponding check covering the above-mentioned prize of
P50,000 was drawn by the National Charity Sweepstakes Office in favor of Jose Gatchalian &
Company against the Philippine National Bank, which check was cashed during the latter part of
December, 1934 by Jose Gatchalian & Company

          
          Thereafter, Jose Gatchalian was required by income tax examiner Alfredo David to file the
corresponding income tax return covering the prize won by Jose Gatchalian & Company and
that on December 29, 1934

          

            The defendant made an assessment against Jose Gatchalian & Company requesting the
payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan. Tthe
plaintiffs requested exemption from the payment of the income tax but it was rejected. The
plaintiffs paid in protest the tax assessment given to them.

ISSUE:

Whether the plaintiffs formed a partnership, thus not exempted from paying income tax

HELD:

          Yes, the plaintiffs formed a partnership

   

       The Supreme Court held that according to the stipulated facts the plaintiffs organized a
partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for
the sole purpose of dividing equally the prize which they may win, as they did in fact in the
amount of P50,000.

         The partnership was not only formed, but upon the organization thereof and the winning
of the prize, Jose Gatchalian personally appeared in the office of the Philippine Charity
Sweepstakes, in his capacity as co-partner, as such collected the prize, the office issued the
check for P50,000 in favor of Jose Gatchalian and company, and the said partner. in the same
capacity, collected the said check.

          Having organized and constituted a partnership of a civil nature, the said entity is the one
bound to pay the income tax which the defendant collected under the aforesaid section 10 (a) of
Act No. 2833, as amended by section 2 of Act No. 3761.
and had an agent
therein.
Losses, if any, on policies were to
be paid to the Tobacco Company
by the London Company in
London
and by the Paris Company in Paris.
The tax assessed and levied by the
Collector of Internal Revenue,
under the same law now involved,
was challenged as unconstitutional.
The Supreme Court of the United
States sustained the tax with
respect to premiums paid to the
London Company and held it
erroneous with
respect to premiums paid to the
Paris Company.
Issue: Whether the sending of an
adjuster to the Philippines to fix
the amount of losses is a ground
for
holding that the insurance
companies subjected themselves to
the taxing jurisdiction of the
Philippines.
whether or not the disputed tax is
one imposed by the
Commonwealth of the Philippines
upon a contract
beyond its jurisdiction.
YES
Where the insured is within the
Philippines, 'the risk insured
against also within the Philippines,
and
certain incidents of the contract are
to be attended to in the Philippines,
such as, payment of dividends
when received in cash, sending of
an adjuster into the Philippines in
case of dispute, or making of proof
of loss, the Commonwealth of
the Philippines has the power
to impose the tax upon the
insured,
regardless of whether the contract
is executed in a foreign country
and with a foreign corporation.
Under such circumstances,
substantial elements of the
contract may be said to be so
situated in the
Philippines as to give its
government the power to tax. And,
even if it be assumed that the tax
imposed
upon the insured will ultimately be
passed on to the insurer, thus
constituting an indirect tax upon
the
foreign corporation, it would still
be valid, because the foreign
corporation, by the stipulations of
its
contract, has subjected itself to the
taxing jurisdiction of the
Philippines. After all, the
Commonwealth of
the Philippines, by protecting
the properties insured, benefits
the foreign corporation, and it
is but
reasonable that the latter should
pay a just contribution therefor. It
would certainly be a discrimination
against domestic corporations to
hold the tax valid when the policy
is given by them and invalid when
issued by foreign corporations.
Judgment is affirmed, with costs
against appellant.
Ruling: NO.
TAXATION; INSURANCE;
VALIDITY OF TAX OF
ONE PER CENTUM UPON
INSURANCE
PREMIUMS PAID BY
DOMESTIC CORPORATION TO
FOREIGN CORPORATIONS.—
Where the
insured is within the Philippines,
the risk insured against also within
the Philippines, and certain
incidents
of the contract are to be attended to
in the Philippines, such as,
payment of dividends when
received in

and had an agent

therein.
Losses, if any, on policies were to
be paid to the Tobacco Company
by the London Company in
London
and by the Paris Company in Paris.
The tax assessed and levied by the
Collector of Internal Revenue,
under the same law now involved,
was challenged as unconstitutional.
The Supreme Court of the United
States sustained the tax with
respect to premiums paid to the
London Company and held it
erroneous with
respect to premiums paid to the
Paris Company.
Issue: Whether the sending of an
adjuster to the Philippines to fix
the amount of losses is a ground
for
holding that the insurance
companies subjected themselves to
the taxing jurisdiction of the
Philippines.
whether or not the disputed tax is
one imposed by the
Commonwealth of the Philippines
upon a contract
beyond its jurisdiction.
YES
Where the insured is within the
Philippines, 'the risk insured
against also within the Philippines,
and
certain incidents of the contract are
to be attended to in the Philippines,
such as, payment of dividends
when received in cash, sending of
an adjuster into the Philippines in
case of dispute, or making of proof
of loss, the Commonwealth of
the Philippines has the power
to impose the tax upon the
insured,
regardless of whether the contract
is executed in a foreign country
and with a foreign corporation.
Under such circumstances,
substantial elements of the
contract may be said to be so
situated in the
Philippines as to give its
government the power to tax. And,
even if it be assumed that the tax
imposed
upon the insured will ultimately be
passed on to the insurer, thus
constituting an indirect tax upon
the
foreign corporation, it would still
be valid, because the foreign
corporation, by the stipulations of
its
contract, has subjected itself to the
taxing jurisdiction of the
Philippines. After all, the
Commonwealth of
the Philippines, by protecting
the properties insured, benefits
the foreign corporation, and it
is but
reasonable that the latter should
pay a just contribution therefor. It
would certainly be a discrimination
against domestic corporations to
hold the tax valid when the policy
is given by them and invalid when
issued by foreign corporations.
Judgment is affirmed, with costs
against appellant.
Ruling: NO.
TAXATION; INSURANCE;
VALIDITY OF TAX OF
ONE PER CENTUM UPON
INSURANCE
PREMIUMS PAID BY
DOMESTIC CORPORATION TO
FOREIGN CORPORATIONS.—
Where the
insured is within the Philippines,
the risk insured against also within
the Philippines, and certain
incidents
of the contract are to be attended to
in the Philippines, such as,
payment of dividends when
received in

and had an agent

therein.
Losses, if any, on policies were to
be paid to the Tobacco Company
by the London Company in
London
and by the Paris Company in Paris.
The tax assessed and levied by the
Collector of Internal Revenue,
under the same law now involved,
was challenged as unconstitutional.
The Supreme Court of the United
States sustained the tax with
respect to premiums paid to the
London Company and held it
erroneous with
respect to premiums paid to the
Paris Company.
Issue: Whether the sending of an
adjuster to the Philippines to fix
the amount of losses is a ground
for
holding that the insurance
companies subjected themselves to
the taxing jurisdiction of the
Philippines.
whether or not the disputed tax is
one imposed by the
Commonwealth of the Philippines
upon a contract
beyond its jurisdiction.
YES
Where the insured is within the
Philippines, 'the risk insured
against also within the Philippines,
and
certain incidents of the contract are
to be attended to in the Philippines,
such as, payment of dividends
when received in cash, sending of
an adjuster into the Philippines in
case of dispute, or making of proof
of loss, the Commonwealth of
the Philippines has the power
to impose the tax upon the
insured,
regardless of whether the contract
is executed in a foreign country
and with a foreign corporation.
Under such circumstances,
substantial elements of the
contract may be said to be so
situated in the
Philippines as to give its
government the power to tax. And,
even if it be assumed that the tax
imposed
upon the insured will ultimately be
passed on to the insurer, thus
constituting an indirect tax upon
the
foreign corporation, it would still
be valid, because the foreign
corporation, by the stipulations of
its
contract, has subjected itself to the
taxing jurisdiction of the
Philippines. After all, the
Commonwealth of
the Philippines, by protecting
the properties insured, benefits
the foreign corporation, and it
is but
reasonable that the latter should
pay a just contribution therefor. It
would certainly be a discrimination
against domestic corporations to
hold the tax valid when the policy
is given by them and invalid when
issued by foreign corporations.
Judgment is affirmed, with costs
against appellant.
Ruling: NO.
TAXATION; INSURANCE;
VALIDITY OF TAX OF
ONE PER CENTUM UPON
INSURANCE
PREMIUMS PAID BY
DOMESTIC CORPORATION TO
FOREIGN CORPORATIONS.—
Where the
insured is within the Philippines,
the risk insured against also within
the Philippines, and certain
incidents
of the contract are to be attended to
in the Philippines, such as,
payment of dividends when
received in
In 1935, plaintiff Manila Electric
Company, a corporation organized
and existing under the laws
of the Philippines, insured with the
City of New York Insurance
Company and the United States
Guaranty
Company, certain real and
personal properties situated in the
Philippines.
The insurance was entered into in
behalf of said plaintiff by its
broker in New York City .
The insurance companies are
foreign corporations not licensed
to do business in the Philippines
and
having no agents therein. The
policies contained provisions for
the settlement and payment of
losses upon
the occurrence of any risk insured
against, a sample of which is
policy No. 20 of the New York
Insurance
Company attached to and made an
integral part of the agreed
statement of facts.
Plaintiff through its broker paid, in
New York, to said insurance
company premiums in the sum
of P91,696. The Collector of
Internal Revenue, under the
authority of section 192 of Act No.
2427, as
amended, assessed and levied a tax
of one per centum on said
premiums, which plaintiff paid
under
protest.
The protest having been overruled,
plaintiff instituted the present
action to recover the tax.
The trial court dismissed the
complaint, and from the judgment
thus rendered, plaintiff took the
instant appeal