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 Date of
point of
of of filing of
Year Quarter counting
prescriptiveadministrative judicial
the 2-year
period claim claim
period
September September September 26, September
2000 3rd
30, 2000 30, 2002 2002 30, 2002
December December 31, September 26, September
4th
31, 2000 2002 2002 30, 2002
March 31, March 31, September 26, September
2001 1st
2001 2003 2002 30, 2002
June 30, June 30, September 26, September
2nd
2001 2003 2002 30, 2002
3rd September September September 26, September
 30, 2001 30, 2003 2002 30, 2002
December December 31, September 26, September
4th
31, 2001 2003 2002 30, 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. -

(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: 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 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 zero-
rated 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.
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
(B)
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
(3) effect must be issued by 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
(4)
for the supplier to avail of the benefits of zero-rating for its sales to
said BOI-registered buyers; and
(5) The VAT-registered supplier shall issue for each sale to BOI-registered
 manufacturer/exporters a duly registered VAT invoice with the words
'zero-rated' 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 Taxable Output
Exhibit Covere Input VAT
Sales/Receipts Sales VAT
d
P P
1st Qtr- P P
"C" 3,044,160,148.1      16,803,760.8 
2005 1,397,107.80 139,710.78
6 2
2nd Qtr- 3,038,281,557.5 32,097,482.2
"D"   1,241,576.30  124,157.63   
2005 7 9
3rd Qtr- 3,125,371,667.0
"E"   452,411.64  45,241.16 16,937,644.73 
2005 8
"G"        
(amende October
  910,949.50  91,094.95 14,297,363.76 
d) 2005
P P P P
Total 9,207,813,372.  4,002,045.  400,204.  80,136,251. 
81 24 52 60
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
Date Filed/Paid Amount of Tax
Quarter[/]Year
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
ON
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 - December

38,974.75
"C") 2002

JP Morgan Chase Bank (Exhibit September 2002 -

1,237,646.43
"D") December 2002

Phil. Bank of January 2002 - March

7,698.63
Communication[s] (Exhibit "E") 2002

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

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

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

38,974.75
"C") 2002

JP Morgan Chase Bank (Exhibit September 2002 -

1,237,646.43
"D") December 2002

Phil. Bank of January 2002 - March

7,698.63
Communication[s] (Exhibit "E") 2002

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

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

Phil. Bank of
October 2002 - December
Communication[s] (Exhibit[s] 8,037.28
2002
"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:

WITHHOLDING DATE
PRINCIPAL PERIOD INTEREST
MATURITY VALUE TAX REMITTED
AMOUNT COVERED INCOME (NET)
DEDUCTED TO BIR

USD17,098,253.14 01/01/02 USD17,315,721.5 USD111,150.52 USD9,012.20 02/11/02,

to 5 03/11/02,
04/02/02 04/10/02,
05/10/02

USD17,315,721.55 04/02/02 USD17,617,709.5 USD301,987.99 USD24,485.51 05/10/02,

to 4 06/10/02,
09/30/02 07/10/02,
08/10/02,
09/10/02,
10/10/02

USD17,617,709.54 9/30/02 to USD17,669,993.7 USD52,284.22 USD4,239.26 10/10/02,

12/16/02 6 11/11/02,
12/10/02,
01/10/03

USD10,669,993.76 12/16/02 USD10,807,210.6 USD11,309.08 USD916.95 01/10/03

to 2
12/31/02

USD7,000,000.00 12/23/02 USD7,086,558.17 USD3,956.95 USD320.83 01/10/03

to
12/31/02
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:

  MAY JUNE JULY AUGUST SEPTEMBER

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 1,259,246.3
325,500.00 216,258.42 527,321.80 222,789.29
Paid 2

Withhold
65,100.00 43,251.67 251,849.25 105,464.35 44,557.86
ing 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

Withhold
7,698.63 1,698.99 3,009.28 8,037.28  
ing 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].

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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.