I.
CLASSIFICATION OF TAXES The issue raised here was whether the
A. DIFFERENT CLASSIFICATION
COMMISSIONER OF INTERNAL
REVENUE, Petitioner,
vs.
PILIPINAS SHELL PETROLEUM
CORPORATION, Respondent.
SEPARATE OPINION
BERSAMIN, J.:
In essence, the Resolution written for the Court
by my esteemed colleague, Justice Martin S.
Villarama, Jr., maintains that the exemption from
payment of the excise tax under Section 135(a)
of the National Internal Revenue Code (NIRC) is
conferred on the international carriers; and that,
accordingly, and in fulfillment of international
agreement and practice to exempt aviation fuel
from the excise tax and other impositions,
Section 135(a) of the NIRC prohibits the passing
of the excise tax to international carriers
purchasing petroleum products from local
manufacturers/sellers. Hence, he finds merit in
the Motion for Reconsideration filed by Pilipinas
Shell Petroleum Corporation (Pilipinas Shell),
and rules that Pilipinas Shell, as the statutory
taxpayer directly liable to pay the excise tax on
its petroleum products, is entitled to the refund
or credit of the excise taxes it paid on the
petroleum products sold to international carriers,
the latter having been granted exemption from
the payment of such taxes under Section 135(a)
of the NIRC.
I CONCUR in the result.
I write this separate opinion only to explain that I
hold a different view on the proper interpretation
of the excise tax exemption under Section
135(a) of the NIRC. I hold that the excise tax
exemption under Section 135(a) of the NIRC is
conferred on the petroleum products on which
the excise tax is levied in the first place in view
of its nature as a tax on property, the liability for
the payment of which is statutorily imposed on
the domestic petroleum manufacturer.
I submit the following disquisition in support of
this separate opinion.
manufacturer was entitled to claim the refund of
the excise taxes paid on the petroleum products
sold to international carriers exempt under
Section 135(a) of the NIRC.
We ruled in the negative, and held that the
exemption from the excise tax under Section
135(a) of the NIRC was conferred on the
international carriers to whom the petroleum
products were sold. In the decision promulgated
onn April 25, 2012,1 the Court granted the
petition for review on certiorari filed by the
Commissioner of Internal Revenue (CIR), and
disposed thusly:
WHEREFORE, the petition for review on
certiorari is GRANTED. The Decision dated
March 25, 2009 and Resolution dated June 24,
2009 of the Court of Tax Appeals En Banc in
CTA EB No. 415 are hereby REVERSED and
SET ASIDE. The claims for tax refund or credit
filed by respondent Pilipinas Shell Petroleum
Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.2
We thereby agreed with the position of the
Solicitor General that Section 135(a) of the
NIRC must be construed only as a prohibition for
the manufacturer-seller of the petroleum
products from shifting the tax burden to the
international carriers by incorporating the
previously-paid excise tax in the selling price. As
a consequence, the manufacturer-seller could
not invoke the exemption from the excise tax
granted to international carriers. Concluding, we
said: –
Respondent’s locally manufactured petroleum
products are clearly subject to excise tax under
Sec. 148. Hence, its claim for tax refund may not
be predicated on Sec. 229 of the NIRC allowing
a refund of erroneous or excess payment of tax.
Respondent’s claim is premised on what it
determined as a tax exemption "attaching to the
goods themselves," which must be based on a
statute granting tax exemption, or "the result of
legislative grace." Such a claim is to be
construed strictissimi juris against the taxpayer,
meaning that the claim cannot be made to rest
on vague inference. Where the rule of strict
interpretation against the taxpayer is applicable
as the claim for refund partakes of the nature of
an exemption, the claimant must show that he
clearly falls under the exempting statute.
The exemption from excise tax payment on
petroleum products under Sec. 135 (a) is
conferred on international carriers who
purchased the same for their use or
consumption outside the Philippines. The only
condition set by law is for these petroleum
products to be stored in a bonded storage tank
and may be disposed of only in accordance with
the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of
the Commissioner.3
xxxx
Because an excise tax is a tax on the
manufacturer and not on the purchaser, and
there being no express grant under the NIRC of
exemption from payment of excise tax to local
manufacturers of petroleum products sold to
international carriers, and absent any provision
in the Code authorizing the refund or crediting of
such excise taxes paid, the Court holds that
Sec. 135 (a) should be construed as prohibiting
the shifting of the burden of the excise tax to the
international carriers who buys petroleum
products from the local manufacturers. Said
provision thus merely allows the international
carriers to purchase petroleum products without
the excise tax component as an added cost in
the price fixed by the manufacturers or
distributors/sellers. Consequently, the oil
companies which sold such petroleum products
to international carriers are not entitled to a
refund of excise taxes previously paid on the
goods.4
In its Motion for Reconsideration filed on May
23, 2012, Pilipinas Shell principally contends
that the Court has erred in its interpretation of
Section 135(a) of the 1997 NIRC; that Section
135(a) of the NIRC categorically exempts from
the excise tax the petroleum products sold to
international carriers of Philippine or foreign
registry for their use or consumption outside the
Philippines;5 that no excise tax should be
imposed on the petroleum products, whether in
the hands of the qualified international carriers
or in the hands of the manufacturer-seller;6 that
although it is the manufacturer, producer or
importer who is generally liable for the excise tax
when the goods or articles are subject to the
excise tax, no tax should accordingly be
collected from the manufacturer, producer or
importer in instances when the goods or articles
themselves are not subject to the excise
tax;7 and that as a consequence any excise tax
paid in advance on products that are exempt
under the law should be considered erroneously
paid and subject of refund.8
Pilipinas Shell further contends that the Court’s
decision, which effectively prohibits petroleum
manufacturers from passing on the burden of
the excise tax, defeats the rationale behind the
grant of the exemption;9 and that without the
benefit of a refund or the ability to pass on the
burden of the excise tax to the international
carriers, the excise tax will constitute an
additional production cost that ultimately
increases the selling price of the petroleum
products.10
The CIR counters that the decision has clearly
set forth that the excise tax exemption under
Section 135(a) of the NIRC does not attach to
the products; that Pilipinas Shell’s reliance on
the Silkair rulings is misplaced considering that
the Court made no pronouncement therein that
the manufacturers selling petroleum products to
international carriers were exempt from paying
the taxes; that the rulings that are more
appropriate are those in Philippine Acetylene
Co., Inc. v. Commissioner of Internal
Revenue11 and Maceda v. Macaraig,
Jr.,12 whereby the Court confirmed the obvious
intent of Section 135 of the NIRC to grant the
excise tax exemption to the international carriers
or agencies as the buyers of petroleum
products; and that this intention is further
supported by the requirement that the petroleum
manufacturer must pay the excise tax in
advance without regard to whether or not the
petroleum purchaser is qualified for exemption
under Section 135 of the NIRC.
In its Supplemental Motion for Reconsideration,
Pilipinas Shell reiterates that what is being
exempted under Section 135 of the NIRC is the
petroleum product that is sold to international
carriers; that the exemption is not given to the
producer or the buyer but to the product itself
considering that the excise taxes, according to
the NIRC, are taxes applicable to certain specific
goods or articles for domestic sale or
consumption or for any other disposition,
whether manufactured in or imported into the
Philippines; that the excise tax that is passed on
to the buyer is no longer in the nature of a tax
but of an added cost to the purchase price of the
product sold; that what is contemplated under
Section 135 of the NIRC is an exemption from
the excise tax, not an exemption from the
burden to shoulder the tax; and that inasmuch
as the exemption can refer only to the imposition
of the tax on the statutory seller, like Pilipinas
Shell, a contrary interpretation renders Section
135 of the NIRC nugatory because the NIRC
does not impose the excise tax on subsequent
holders of the product like the international
carriers.
As I earlier said, I agree to GRANT Pilipinas
Shell’s motions for reconsideration.
Excise tax is essentially a tax
on goods, products or articles
Taxes are classified, according to subject matter
or object, into three groups, to wit: (1) personal,
capitation or poll taxes; (2) property taxes; and
(3) excise or license taxes. Personal, capitation
or poll taxes are fixed amounts imposed upon
residents or persons of a certain class without
regard to their property or business, an example
of which is the basic community tax.13 Property
taxes are assessed on property or things of a
certain class, whether real or personal, in
proportion to their value or other reasonable
method of apportionment, such as the real
estate tax.14 Excise or license taxes are imposed
upon the performance of an act, the enjoyment
of a privilege, or the engaging in an occupation,
profession or business.15 Income tax, value-
added tax, estate and donor’s tax fall under the
third group.
Excise tax, as a classification of tax according to
object, must not be confused with the excise tax
under Title VI of the NIRC. The term "excise tax"
under Title VI of the 1997 NIRC derives its
definition from the 1986 NIRC,16 and relates to
taxes applied to goods manufactured or
produced in the Philippines for domestic sale or
consumption or for any other disposition and to
things imported.17 In contrast, an excise tax that
is imposed directly on certain specified goods –
goods manufactured or produced in the
Philippines, or things imported – is undoubtedly
a tax on property.18
The payment of excise taxes is the direct
liability of the manufacturer or producer
The production, manufacture or importation of
the goods belonging to any of the categories
enumerated in Title VI of the NIRC (i.e., alcohol
products, tobacco products, petroleum products,
automobiles and non-essential goods, mineral
products) are not the sole determinants for the
proper levy of the excise tax. It is further
required that the goods be manufactured,
produced or imported for domestic sale,
consumption or any other disposition.19 The
accrual of the tax liability is, therefore,
contingent on the production, manufacture or
importation of the taxable goods and the
intention of the manufacturer, producer or
importer to have the goods locally sold or
consumed or disposed in any other manner.
This is the reason why the accrual and liability
for the payment of the excise tax are imposed
directly on the manufacturer or producer of the
taxable goods,20 and arise before the removal of
the goods from the place of their production.21
The manufacturer’s or producer’s direct liability
to pay the excise taxes similarly operates
although the goods produced or manufactured
within the country are intended for export and
are "actually exported without returning to the
Philippines, whether so exported in their original
state or as ingredients or parts of any
manufactured goods or products." This is
implied from the grant of a tax credit or refund to
the manufacturer or producer by Section
130(4)(D) of the NIRC, thereby presupposing
that the excise tax corresponding to the goods
exported were previously paid. Section
130(4)(D) reads:
xxxx
(D) Credit for Excise Tax on Goods Actually
Exported. - When goods locally produced or
manufactured are removed and actually
exported without returning to the Philippines,
whether so exported in their original state or as
ingredients or parts of any manufactured goods
or products, any excise tax paid thereon shall be
credited or refunded upon submission of the
proof of actual exportation and upon receipt of
the corresponding foreign exchange payment:
Provided, That the excise tax on mineral
products, except coal and coke, imposed under
Section 151 shall not be creditable or refundable
even if the mineral products are actually
exported. (Emphasis supplied.)
Simply stated, the accrual and payment of the
excise tax under Title VI of the NIRC materially
rest on the fact of actual production,
manufacture or importation of the taxable goods
in the Philippines and on their presumed or
intended domestic sale, consumption or
disposition. Considering that the excise tax
attaches to the goods upon the accrual of the
manufacturer’s direct liability for its payment, the
subsequent sale, consumption or other
disposition of the goods becomes relevant only
to determine whether any exemption or tax relief
may be granted thereafter.
The actual sale, consumption or disposition
of the taxable goods confirms the proper tax
treatment of goods previously subjected
to the excise tax
Conformably with the foregoing discussion, the
accrual and payment of the excise tax on the
goods enumerated under Title VI of the NIRC
prior to their removal from the place of
production are absolute and admit of no
exception. As earlier mentioned, even locally
manufactured goods intended for export cannot
escape the imposition and payment of the
excise tax, subject to a future claim for tax credit
or refund once proof of actual exportation has
been submitted to the Commissioner of Internal
Revenue (CIR).22 Verily, it is the actual sale,
consumption or disposition of the taxable goods
that confirms the proper tax treatment of goods
previously subjected to the excise tax. If any of
the goods enumerated under Title VI of the
NIRC are manufactured or produced in the
Philippines and eventually sold, consumed, or
disposed of in any other manner domestically,
therefore, there can be no claim for any tax relief
inasmuch as the excise tax was properly levied
and collected from the manufacturer-seller.
Here, the point of interest is the proper tax
treatment of the petroleum products sold by
Pilipinas Shell to various international carriers.
An international carrier is engaged in
international transportation or contract of
carriage between places in different territorial
jurisdictions.23
Pertinent is Section 135(a) of the NIRC, which
provides:
SEC. 135. Petroleum Products Sold to
International Carriers and Exempt Entities or
Agencies. - Petroleum products sold to the
following are exempt from excise tax:
(a) International carriers of Philippine or foreign
registry on their use or consumption outside the
Philippines: Provided, That the petroleum
products sold to these international carriers shall
be stored in a bonded storage tank and may be
disposed of only in accordance with the rules
and regulations to be prescribed by the
Secretary of Finance, upon recommendation of
the Commissioner; x x x
xxxx
As the taxpayer statutorily and directly liable for
the accrual and payment of the excise tax on the
petroleum products it manufactured and it
intended for future domestic sale or
consumption, Pilipinas Shell paid the
corresponding excise taxes prior to the removal
of the goods from the place of production.
However, upon the sale of the petroleum
products to the international carriers, the goods
became exempt from the excise tax by the
express provision of Section 135(a) of the NIRC.
In the latter instance, the fact of sale to the
international carriers of the petroleum products
previously subjected to the excise tax confirms
the proper tax treatment of the goods as exempt
from the excise tax.
It is worthy to note that Section 135(a) of the
NIRC is a product of the 1944 Convention of
International Civil Aviation, otherwise known as
the Chicago Convention, of which the
Philippines is a Member State. Article 24(a) of
the Chicago Convention provides –
Article 24
Customs duty
(a) Aircraft on a flight to, from, or across the
territory of another contracting State shall be
admitted temporarily free of duty, subject to the
customs regulations of the State. Fuel,
lubricating oils, spare parts, regular equipment
and aircraft stores on board an aircraft of a
contracting State, on arrival in the territory of
another contracting State and retained on board
on leaving the territory of that State shall be
exempt from customs duty, inspection fees or
similar national or local duties and charges. This
exemption shall not apply to any quantities or
articles unloaded, except in accordance with the
customs regulations of the State, which may
require that they shall be kept under customs
supervision. x x x (Bold emphasis supplied.)
This provision was extended by the ICAO
Council in its 1999 Resolution, which stated that
"fuel … taken on board for consumption" by an
aircraft from a contracting state in the territory of
another contracting State departing for the
territory of any other State must be exempt from
all customs or other duties. The Resolution
broadly interpreted the scope of the Article 24
prohibition to include "import, export, excise,
sales, consumption and internal duties and
taxes of all kinds levied upon . . . fuel."24
Given the nature of the excise tax on petroleum
products as a tax on property, the tax exemption
espoused by Article 24(a) of the Chicago
Convention, as now embodied in Section 135(a)
of the NIRC, is clearly conferred on the aviation
fuel or petroleum product on-board international
carriers. Consequently, the manufacturer’s or
producer’s sale of the petroleum products to
international carriers for their use or
consumption outside the Philippines operates to
bring the tax exemption of the petroleum
products into full force and effect.
Pilipinas Shell, the statutory taxpayer, is
the proper party to claim the refund of
the excise taxes paid on petroleum
products sold to international carriers
The excise taxes are of the nature of indirect
taxes, the liability for the payment of which may
fall on a person other than whoever actually
bears the burden of the tax.25
In Commissioner of Internal Revenue v.
Philippine Long Distance Telephone
Company,26 the Court has discussed the nature
of indirect taxes in the following manner:
[I]ndirect taxes are those that are demanded, in
the first instance, from, or are paid by, one
person in the expectation and intention that he
can shift the burden to someone else. Stated
elsewise, indirect taxes are taxes wherein the
liability for the payment of the tax falls on one
person but the burden thereof can be shifted or
passed on to another person, such as when the
tax is imposed upon goods before reaching the
consumer who ultimately pays for it. When the
seller passes on the tax to his buyer, he, in
effect, shifts the tax burden, not the liability to
pay it, to the purchaser, as part of the price of
goods sold or services rendered.27
In another ruling, the Court has observed:
Accordingly, the party liable for the tax can shift
the burden to another, as part of the purchase
price of the goods or services. Although the
manufacturer/seller is the one who is statutorily
liable for the tax, it is the buyer who actually
shoulders or bears the burden of the tax, albeit
not in the nature of a tax, but part of the
purchase price or the cost of the goods or
services sold.28
Accordingly, the option of shifting the burden to
pay the excise tax rests on the statutory
taxpayer, which is the manufacturer or producer
in the case of the excise taxes imposed on the
petroleum products. Regardless of who
shoulders the burden of tax payment, however,
the Court has ruled as early as in the 1960s that
the proper party to question or to seek a refund
of an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and
who paid the same, even if he shifts the burden
thereof to another.29 The Court has explained:
In Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue, the Court
held that the sales tax is imposed on the
manufacturer or producer and not on the
purchaser, "except probably in a very remote
and inconsequential sense." Discussing the
"passing on" of the sales tax to the purchaser,
the Court therein cited Justice Oliver Wendell
Holmes’ opinion in Lash’s Products v. United
States wherein he said:
"The phrase ‘passed the tax on’ is inaccurate, as
obviously the tax is laid and remains on the
manufacturer and on him alone. The purchaser
does not really pay the tax. He pays or may pay
the seller more for the goods because of the
seller’s obligation, but that is all. x x x The price
is the sum total paid for the goods. The amount
added because of the tax is paid to get the
goods and for nothing else. Therefore it is part of
the price x x x."
Proceeding from this discussion, the Court went
on to state:
It may indeed be that the economic burden of
the tax finally falls on the purchaser; when it
does the tax becomes a part of the price which
the purchaser must pay. It does not matter that
an additional amount is billed as tax to the
purchaser. x x x The effect is still the same,
namely, that the purchaser does not pay the tax.
He pays or may pay the seller more for the
goods because of the seller’s obligation, but that
is all and the amount added because of the tax
is paid to get the goods and for nothing else.
But the tax burden may not even be shifted to
the purchaser at all. A decision to absorb the
burden of the tax is largely a matter of
economics. Then it can no longer be contended
that a sales tax is a tax on the purchaser.30
The Silkair rulings involving the excise taxes on
the petroleum products sold to international
carriers firmly hold that the proper party to claim
the refund of excise taxes paid is the
manufacturer-seller.
In the February 2008 Silkair ruling, 31 the Court
declared:
The proper party to question, or seek a refund
of, an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and
who paid the same even if he shifts the burden
thereof to another. Section 130 (A) (2) of the
NIRC provides that "[u]nless otherwise
specifically allowed, the return shall be filed and
the excise tax paid by the manufacturer or
producer before removal of domestic products
from place of production." Thus, Petron
Corporation, not Silkair, is the statutory taxpayer
which is entitled to claim a refund based on
Section 135 of the NIRC of 1997 and Article 4(2)
of the Air Transport Agreement between RP and
Singapore.
Even if Petron Corporation passed on to Silkair
the burden of the tax, the additional amount
billed to Silkair for jet fuel is not a tax but part of
the price which Silkair had to pay as a purchaser
In the November 2008 Silkair ruling,32 the Court
reiterated:
Section 129 of the NIRC provides that excise
taxes refer to taxes imposed on specified goods
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported. The excise
taxes are collected from manufacturers or
producers before removal of the domestic
products from the place of production. Although
excise taxes can be considered as taxes on
production, they are really taxes on property as
they are imposed on certain specified goods.
Section 148(g) of the NIRC provides that there
shall be collected on aviation jet fuel an excise
tax of ₱3.67 per liter of volume capacity. Since
the tax imposed is based on volume capacity,
the tax is referred to as "specific tax." However,
excise tax, whether classified as specific or ad
valorem tax, is basically an indirect tax imposed
on the consumption of a specified list of goods
or products. The tax is directly levied on the
manufacturer upon removal of the taxable goods
from the place of production but in reality, the
tax is passed on to the end consumer as part of
the selling price of the goods sold
xxxx
When Petron removes its petroleum products
from its refinery in Limay, Bataan, it pays the
excise tax due on the petroleum products thus
removed. Petron, as manufacturer or producer,
is the person liable for the payment of the excise
tax as shown in the Excise Tax Returns filed
with the BIR. Stated otherwise, Petron is the
taxpayer that is primarily, directly and legally
liable for the payment of the excise taxes.
However, since an excise tax is an indirect tax,
Petron can transfer to its customers the amount
of the excise tax paid by treating it as part of the
cost of the goods and tacking it on to the selling
price.
As correctly observed by the CTA, this Court
held in Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue:
It may indeed be that the economic burden of
the tax finally falls on the purchaser; when it
does the tax becomes part of the price which the
purchaser must pay.
Even if the consumers or purchasers ultimately
pay for the tax, they are not considered the
taxpayers. The fact that Petron, on whom the
excise tax is imposed, can shift the tax burden to
its purchasers does not make the latter the
taxpayers and the former the withholding agent.
Petitioner, as the purchaser and end-consumer,
ultimately bears the tax burden, but this does not
transform petitioner's status into a statutory
taxpayer.
In the refund of indirect taxes, the statutory
taxpayer is the proper party who can claim the
refund.
Section 204(c) of the NIRC provides:
Sec. 204. Authority of the Commissioner to
Compromise, Abate, and Refund or Credit
Taxes. The Commissioner may –
xxxx
(b) 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. 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)
The person entitled to claim a tax refund is the
statutory taxpayer. Section 22(N) of the NIRC
defines a taxpayer as "any person subject to
tax." In Commissioner of Internal Revenue v.
Procter and Gamble Phil. Mfg. Corp., the Court
ruled that:
A "person liable for tax" has been held to be a
"person subject to tax" and properly considered
a "taxpayer." The terms "liable for tax" and
"subject to tax" both connote a legal obligation
or duty to pay a tax.
The excise tax is due from the manufacturers of
the petroleum products and is paid upon
removal of the products from their refineries.
Even before the aviation jet fuel is purchased
from Petron, the excise tax is already paid by
Petron. Petron, being the manufacturer, is the
"person subject to tax." In this case, Petron,
which paid the excise tax upon removal of the
products from its Bataan refinery, is the "person
liable for tax." Petitioner is neither a "person
liable for tax" nor "a person subject to tax."
There is also no legal duty on the part of
petitioner to pay the excise tax; hence, petitioner
cannot be considered the taxpayer.
Even if the tax is shifted by Petron to its
customers and even if the tax is billed as a
separate item in the aviation delivery receipts
and invoices issued to its customers, Petron
remains the taxpayer because the excise tax is
imposed directly on Petron as the manufacturer.
Hence, Petron, as the statutory taxpayer, is the
proper party that can claim the refund of the
excise taxes paid to the BIR.33
It is noteworthy that the foregoing
pronouncements were applied in two more
Silkair cases34 involving the same parties and
the same cause of action but pertaining to
different periods of taxation.
The shifting of the tax burden by manufacturers-
sellers is a business prerogative resulting from
the collective impact of market forces. Such
forces include government impositions like the
excise tax. Hence, the additional amount billed
to the purchaser as part of the price the
purchaser pays for the goods acquired cannot
be solely attributed to the effect of the tax liability
imposed on the manufacture-seller. It is
erroneous to construe Section 135(a) only as a
prohibition against the shifting by the
manufacturers-sellers of petroleum products of
the tax burden to international carriers, for such
construction will deprive the manufacturers-
sellers of their business prerogative to determine
the prices at which they can sell their products.
Section 135(a) of the NIRC cannot be further
construed as granting the excise tax exemption
to the international carrier to whom the
petroleum products are sold considering that the
international carrier has not been subjected to
excise tax at the outset. To reiterate, the excise
tax is levied on the petroleum products because
it is a tax on property. Levy is the act of
imposition by the Legislature such as by its
enactment of a law.35 The law enacted here is
the NIRC whereby the excise tax is imposed on
the petroleum products, the liability for the
payment of which is further statutorily imposed
on the domestic petroleum manufacturer.
Accordingly, the exemption must be allowed to
the petroleum products because it is on them
that the tax is imposed. The tax status of an
international carrier to whom the petroleum
products are sold is not based on exemption;
rather, it is based on the absence of a law
imposing the excise tax on it. This further
supports the position that the burden passed on
by the domestic petroleum manufacturer is not
anymore in the nature of a tax – although
resulting from the previously-paid excise tax –
but as an additional cost component in the
selling price. Consequently, the purchaser of the
petroleum products to whom the burden of the
excise tax has been shifted, not being the
statutory taxpayer, cannot claim a refund of the
excise tax paid by the manufacturer or producer.
Applying the foregoing, the Court concludes
that: (1) the exemption under Section 135(a) of
the NIRC is conferred on the petroleum products
on which the excise tax was levied in the first
place; (2) Pilipinas Shell, being the manufacturer
or producer of petroleum products, was the
statutory taxpayer of the excise tax imposed on
the petroleum products; (3) as the statutory
taxpayer, Pilipinas Shell’s liability to pay the
excise tax accrued as soon as the petroleum
products came into existence, and Pilipinas
Shell accordingly paid its excise tax liability prior
to its sale or disposition of the taxable goods to
third parties, a fact not disputed by the CIR; and
(3) Pilipinas Shell’s sale of the petroleum
products to international carriers for their use or
consumption outside the Philippines confirmed
the proper tax treatment of the subject goods as
exempt from the excise tax.1âwphi1
Under the circumstances, therefore, Pilipinas
Shell erroneously paid the excise taxes on its
petroleum products sold to international carriers,
and was entitled to claim the refund of the
excise taxes paid in accordance with prevailing
jurisprudence and Section 204(C) of the NIRC,
viz:
Section 204. Authority of the Commissioner to
Compromise, Abate and Refund or Credit
Taxes. – The Commissioner may – x x x
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. 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
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.
IN VIEW OF THE FOREGOING, I VOTE TO
GRANT the Motion for Reconsideration and
Supplemental Motion for Reconsideration of
Pilipinas Shell Petroleum Corporation and,
accordingly:
(a) TO AFFIRM the decision dated
March 25, 2009 and resolution dated
June 24, 2009 of the Court of Tax
Appeals En Banc in CTA EB No. 415;
and
(b) TO DIRECT petitioner Commissioner
of Internal Revenue to refund or to issue
a tax credit certificate to Pilipinas Shell
Petroleum Corporation in the amount of
₱95,014,283.00 representing the excise
taxes it paid on the petroleum products
sold to international carriers in the
period from October 2001 to June 2002.
LUCAS P. BERSAMIN
Associate Justice

II. FEES VS CHARGES VS TAXES
ANGELES UNIVERSITY
FOUNDATION, Petitioner,
vs.
CITY OF ANGELES, JULIET G. QUINSAAT, in
her capacity as Treasurer of Angeles City
and ENGR. DONATO N. DIZON, in his
capacity as Acting Angeles City Building
Official, Respondents.
Facts:
Petitioner Angeles University Foundation (AUF)
is an educational institution established on May
25, 1962 and was converted into a non-stock,
non-profit education foundation under the
provisions of Republic Act (RA) No. 6055 on
December 4, 1975.
On August 2005, petitioner filed with the Office
of the City Building Official in the City of Angeles
Pampanga an application for a building permit
for the construction of an 11-storey building in its
main Campus. A Building Permit Fee
Assessment and an order of payment for
Locational Clearance Fees was issued by the
said office.
Petitioner claimed, through a letter addressed to
respondents City Treasurer and Acting City
Building Official, that it is exempted from the
payment of the building permit and locational
clearance fees and cited legal opinions rendered
by the Department of Justice (DOJ).
Respondents referred the matter to the Bureau
of Local Government Finance (BLGF) of the
Department of Finance, which in turn endorsed
the query to the DOJ. DOJ replied and affirmed
the claim of the petitioner.
Despite the petitioner’s plea, however,
respondents refused to issue the building permit.
Petitioner then appealed the matter to the City
Mayor but received no written response.
Consequently, petitioner paid under protest a
total of P826,662.99 and the Building Permit and
other documents were issued afterwards.
Petitioner formally requested the respondents to
refund the fees it paid under protest through
letters dated June 15, 2006 and August 7, 2006.
But the respondents denied the claim for refund.
On August 31, 2006, petitioner filed a Complaint
before the trial court seeking for the refund
of P826,662.99 plus interest at a rate of 12% per
annum, and for attorneys fee in the amount
of P300,000.00 and litigation expenses.
On September 21, 2007, the trial court rendered
judgment in favor of the petitioner. Respondents
appeal to the CA which reversed the trial court’s
decision. Petitioner filed a motion for
reconsideration but was denied.
So the petitioner filed a petition for review on
certiorari before the Supreme Court.
Issue:
Whether or not the building permit fee is a tax
from which petitioner is exempt.
Discussion:
The building permit fee is neither a tax nor a
charge on property. Based on Sections 102, 103
and 104, the building permit fee is a regulatory
imposition on certain activities the owner may
conduct either to build such structures or to
repair, alter, renovate or demolish the same.
Since building permit fees are not charges on
property, they are not impositions from which
petitioner is exempt.
As to petitioner’s argument that the building
permit fees collected by respondents are in
reality taxes because the primary purpose is to
raise revenues for the local government unit, the
same does not hold water.
A charge of a fixed sum which bears no relation
at all to the cost of inspection and regulation
may be held to be a tax rather than an exercise The petition was denied and the decision of the
of the police power. In this case, the Secretary Court of Appeals was affirmed.
of Public Works and Highways who is mandated
to prescribe and fix the amount of fees and other
charges that the Building Official shall collect in
connection with the performance of regulatory
functions, has promulgated and issued the
Implementing Rules and Regulations which
provide for the bases of assessment of such
fees.

The court cited the case of CHEVRON

PHILIPPINES, INC. VS. BASES CONVERSION
DEVELOPMENT AUTHORITY and explained
the difference between tax and regulation:

IN DISTINGUISHING TAX AND REGULATION

AS A FORM OF POLICE POWER, THE
DETERMINING FACTOR IS THE PURPOSE
OF THE IMPLEMENTED MEASURE. IF THE
PURPOSE IS PRIMARILY TO RAISE
REVENUE, THEN IT WILL BE DEEMED A TAX
EVEN THOUGH THE MEASURE RESULTS IN
SOME FORM OF REGULATION. ON THE
OTHER HAND, IF THE PURPOSE IS
PRIMARILY TO REGULATE, THEN IT IS
DEEMED A REGULATION AND AN EXERCISE
OF THE POLICE POWER OF THE STATE,
EVEN THOUGH INCIDENTALLY, REVENUE IS
GENERATED.

In GEROCHI V. DEPARTMENT OF ENERGY,

the Court stated:

THE CONSERVATIVE AND PIVOTAL

DISTINCTION BETWEEN THESE TWO (2)
POWERS RESTS IN THE PURPOSE FOR
WHICH THE CHARGE IS MADE. IF
GENERATION OF REVENUE IS THE
PRIMARY PURPOSE AND REGULATION IS
MERELY INCIDENTAL, THE IMPOSITION IS A
TAX; BUT IF REGULATION IS THE PRIMARY
PURPOSE, THE FACT THAT REVENUE IS
INCIDENTALLY RAISED DOES NOT MAKE
THE IMPOSITION A TAX.

Held:
 III.ARE TAXES SUBJECT TO SET-OFF?
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO
FERNANDEZ, respondents.
The petitioner invokes legal and
equitable grounds to reverse the questioned
decision of the Intermediate Appellate Court, to
set aside the auction sale of his property which
took place on December 5, 1977, and to allow
him to recover a 203 square meter lot which
was, sold at public auction to Ho Fernandez and
ordered titled in the latter's name.
FACTS:
Engracio Francia is the registered owner
of a 328 square meters residential lot described
and covered by Transfer Certificate of Title No.
4739 (37795) of the Registry of Deeds of Pasay
City and a two-story house built upon it situated
at Barrio San Isidro (now District of Sta. Clara,
Pasay City, Metro Manila).
On October 15, 1977, a 125 square
meter portion of Francia's property was
expropriated by the RP for the sum of P4,116.00
representing the estimated amount equivalent to
the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive,
Francia failed to pay his real estate taxes. Thus,
on December 5, 1977, his property was sold at
public auction by the City Treasurer of Pasay
City pursuant to Section 73 of Presidential
Decree No. 464 known as the Real Property Tax
Code in order to satisfy a tax delinquency of
P2,400.00. Ho Fernandez was the highest
bidder for the property (Francia was not present
during the auction sale since he was in Iligan
City at that time helping his uncle ship bananas).
On March 3, 1979, Francia received a
notice of hearing of LRC Case No. 1593-P "In
re: Petition for Entry of New Certificate of Title"
filed by Ho Fernandez, seeking the cancellation
of TCT No. 4739 (37795) and the issuance in his
name of a new certificate of title. Upon
verification through his lawyer, Francia
discovered that a Final Bill of Sale had been
issued in favor of Ho Fernandez by the City
Treasurer on December 11, 1978. The auction
sale and the final bill of sale were both
annotated at the back of TCT No. 4739 (37795)
by the Register of Deeds.
On March 20, 1979, Francia filed a
complaint to annul the auction sale. He later
amended his complaint on January 24, 1980.
On April 23, 1981, the lower court
dismissed the amended complaint and ordered
The Register of Deeds of Pasay City to issue a
new TCT in favor of the defendant Ho
Fernandez over the parcel of land including the
improvements thereon, subject to whatever
encumbrances appearing at the back of TCT
No. 4739 (37795) and ordering the same TCT
The Intermediate Appellate Court
affirmed the decision of the lower court in toto.
Hence, this petition for review.
ISSUE: WHETHER OR NOT THE
EXPROPRIATION MAY COMPENSATE FOR
THE REAL ESTATE TAXES DUE.
HELD: NO. There can be no off-setting of taxes
against the claims that the taxpayer may have
against the government.
Francia’s argument is that the
government owed him P4, 116.00 when a
portion of his land was expropriated on October
15, 1977. Hence, his tax obligation had been
set-off by operation of law as of October 15,
1977.
Following Article 1278 of the Civil Code,
there is legal compensation when obligations of
persons, who in their own right are reciprocally
debtors and creditors of each other, are
extinguished. The circumstances in the instant
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;
(3) that the two debts be due.
A taxpayer cannot refuse to pay his
tax when called upon by the collector
because he has a claim against the
governmental body not included in the tax
levy.
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.
As stated in the case of Republic v.
Mambulao Lumber Co. (4 SCRA 622), internal
revenue taxes cannot be the subject of set-off or
compensation, thus: "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
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 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. ..."
As reiterated in the case of Corders v.
Gonda internal revenue taxes cannot be the
subject of compensation: Reason: government
and taxpayer are not mutually creditors and
debtors of each other' under Article 1278 of the
Civil Code and a "claim for taxes is not such a
debt, demand, contract or judgment as is
allowed to be set-off."
The Supreme Court emphasized: 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.
On the issue that the selling price of P2,
400.00 was grossly inadequate, the same is not
tenable. The Supreme Court said: “alleged gross
inadequacy of price is not material when the law
gives the owner the right to redeem as when a
sale is made at public auction, upon the theory
that the lesser the price, the easier it is for the
owner to effect redemption.” If mere inadequacy
of price is held to be a valid objection to a sale
for taxes, the collection of taxes in this manner
would be greatly embarrassed, if not rendered
altogether impracticable. “Where land is sold for
taxes, the inadequacy of the price given is not a
valid objection to the sale.” This rule arises from
necessity, for, if a fair price for the land were
essential to the sale, it would be useless to offer
the property. Indeed, it is notorious that the
prices habitually paid by purchasers at tax sales
are grossly out of proportion to the value of the
land.
WHEREFORE, IN VIEW OF THE
FOREGOING, the petition for review is
DISMISSED. The decision of the respondent
court is affirmed.
PHILEX MINING CORPORATION vs.
COMMISSIONER OF INTERNAL REVENUE,
FACTS:
On August 5, 1992, the BIR sent a letter to
Philex asking it to settle its excise tax liabilities
amounting to P123,821,982.52. Philex protested
the demand for payment of the tax liabilities
stating that it has pending claims for VAT input
credit/refund for the taxes it paid for the years
1989 to 1991 in the amount of P119,977,037.02
plus interest. Therefore, these claims for tax
credit/refund should be applied against the tax
liabilities.
In reply, the BIR held that since these pending
claims have not yet been established or
determined with certainty, it follows that no legal
compensation can take place. Hence, the BIR
reiterated its demand that Philex settle the
amount plus interest within 30 days from the
receipt of the letter.
Philex raised the issue to the Court of Tax
Appeals and in the course of the proceedings,
the BIR issued a Tax Credit Certificate SN
001795 in the amount of P13,144,313.88 which,
applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latter’s
tax obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the
CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest,
elucidating its reason that “taxes cannot be
subject to set-off on compensation since claim
for taxes is not a debt or contract.
Philex appealed the case before the Court of
Appeals. Nonetheless, the Court of Appeals
affirmed the Court of Tax Appeals observation.
Philex filed a motion for reconsideration which
was again denied. However, a few days after the
denial of its motion for reconsideration, Philex
was able to obtain its VAT input credit/refund not
only for the taxable year 1989 to 1991 but also
for 1992 and 1994, computed amounting to
205,595,289.20.
In view of the grant of its VAT input
credit/refund, Philex now contends that the
same should, ipso jure, off-set its excise tax
liabilities since both had already become “due
and demandable, as well as fully liquidated;”
hence, legal compensation can properly take
place.
ISSUE: Whether or not the petitioner is correct
in its contention that tax liability and VAT input
credit/refund can be subjected to legal
compensation.
HELD:
The Supreme Court has already made the
pronouncement that taxes cannot be subject to
compensation for the simple reason that the
government and the taxpayer are not creditors
and debtors of each other. There 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.
Philex’s claim is an outright disregard of the
basic principle in tax law that taxes are the
lifeblood of the government and so should be
collected without unnecessary hindrance.
Evidently, to countenance Philex’s whimsical
reason would render ineffective our tax
collection system.
Philex is not allowed 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 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.
"The power of taxation is sometimes called also
the power to destroy. Therefore it should be
exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the
tax collector kill the 'hen that lays the golden
egg.' And, in the order to maintain the general
public's trust and confidence in the Government
this power must be used justly and not
treacherously."
The petition is hereby dismissed.
 DOMINGO VS. GARLITOS
CASE DOCTRINE:
COMPENSATION BETWEEN TAXES AND
CLAIMS OF INTESTATE RECOGNIZED AND
APPROPRIATED FOR BY LAW. — The fact
that the court having jurisdiction of the estate
had found that the claim of the estate against
the Government has been appropriated for the
purpose by a corresponding law (Rep Act No.
2700) shows that both the claim of the
Government for inheritance taxes and the claim
of the intestate for services rendered have
already become overdue and demandable as
well as fully liquidated. Compensation, therefore,
takes place by operation of law, in accordance
with the Provisions of Articles 1279 and 1290 of
the Civil Code, and both debts are extinguished
to the concurrent amount.
FACTS: The Supreme Court declared as final
and executory the order of the Court of First
Instance of Leyte for the payment of estate and
inheritance taxes, charges and penalties
amounting to P40,058.55 by the Estate of the
late Walter Scott Price. The petition for
execution filed by the fiscal, however, was
denied by the lower court. The Court held that
the execution is unjustified as the Government
itself is indebted to the Estate for 262,200; and
ordered the amount of inheritance taxes be
deducted from the Government’s indebtedness
to the Estate.
ISSUE: Whether a tax and a debt may be
compensated.
HELD: The court having jurisdiction of the Estate
had found that the claim of the Estate against
the Government has been recognized and an
amount of P262,200 has already been
appropriated by a corresponding law (RA 2700).
Under the circumstances, both the claim of the
Government for inheritance taxes and the claim
of the intestate for services rendered have
already become overdue and demandable as
well as fully liquidated. Compensation, therefore,
takes place by operation of law, in accordance
with Article 1279 and 1290 of the Civil Code,
and both debts are extinguished to the
concurrent amount.
AIR CANADA v. CIR
G.R. 169507 January 11, 2016
FACTS:
Air Canada is a foreign corporation organized
and existing under the laws of Canada. 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. 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.
On July 1, 1999, Air Canada engaged the
services of Aerotel Ltd., Corp. (Aerotel) as its
general sales agent in the Philippines. Aerotel
sells Air Canada’s passage documents in the
Philippines.
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
₱5,185,676.77.
On November 28, 2002, Air Canada filed a
written claim for refund of alleged erroneously
paid income taxes amounting to ₱5,185,676.77
before the Bureau of Internal Revenue (BIR). It’s
basis was found in the revised definition of
Gross Philippine Billings under Section
28(A)(3)(a) of the 1997 National Internal
Revenue Code (NIRC)1.
1 SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
To prevent the running of the prescriptive period,
Air Canada filed a Petition for Review before the
Court of Tax Appeals (CTA).
The CTA denied the petition. 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 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). On appeal, the
CTA En Banc affirmed the ruling of the CTA
First Division.
In this case, the P5,185,676.77 Gross Philippine
Billings tax paid by petitioner was computed at
the rate of 1 ½% of its gross revenues
amounting to P345,711,806.08149 from the third
quarter of 2000 to the second quarter of 2002. It
is quite apparent that the tax imposable under
Section 28(A)(l) of the 1997 NIRC 32% of
taxable income, that is, gross income less
deductions will exceed the maximum ceiling of 1
½% of gross revenues as decreed in Article VIII
of the Republic of the Philippines-Canada Tax
Treaty. Hence, no refund is forthcoming

1) Whether petitioner Air Canada is entitled

to the refund.

NO. As discussed in South African Airways, 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.

(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)
 IV.DOUBLE TAXATION The Case

A. Kinds of double taxation Before us is a Petition for Review under1

B. Modes of eliminating double Rule 45 of the Rules of Court, seeking to

taxation annul the July 18, 2000 Decision and the
2

May 8, 2001 Resolution of the Court of

3

COMMISSIONER OF INTERNAL Appeals (CA) in CA-GR SP No. 54599. The

4

REVENUE, petitioner, decretal portion of the assailed Decision

vs. reads as follows:
SOLIDBANK CORPORATION, respondent.
"WHEREFORE, we AFFIRM in toto the assailed
PANGANIBAN, J.: decision and resolution of the Court of Tax
Appeals." 5

Under the Tax Code, the earnings of banks from

"passive" income are subject to a twenty percent The challenged Resolution denied petitioner’s
final withholding tax (20% FWT). This tax is Motion for Reconsideration.
withheld at source and is thus not actually and
physically received by the banks, because it is The Facts
paid directly to the government by the entities
from which the banks derived the income. Apart Quoting petitioner, the CA summarized the
6

from the 20% FWT, banks are also subject to a
five percent gross receipts tax (5% GRT) which
is imposed by the Tax Code on their gross
receipts, including the "passive" income.
Since the 20% FWT is constructively received
by the banks and forms part of their gross
receipts or earnings, it follows that it is subject to
the 5% GRT. After all, the amount withheld is
paid to the government on their behalf, in
satisfaction of their withholding taxes. That they
do not actually receive the amount does not alter
the fact that it is remitted for their benefit in
satisfaction of their tax obligations.
facts of this case as follows:
"For the calendar year 1995, [respondent]
seasonably filed its Quarterly Percentage Tax
Returns reflecting gross receipts (pertaining to
5% [Gross Receipts Tax] rate) in the total
amount of ₱1,474,691,693.44 with
corresponding gross receipts tax payments in
the sum of ₱73,734,584.60, broken down as
follows:
"[Respondent] alleges that the total gross
Period Covered Gross Receipts
Gross Receipts
Tax

January to March 1994 ₱ 188,406,061.95 ₱ 9,420,303.10

Stated otherwise, the fact is that if there were no
withholding tax system in place in this country, April to June 1994 370,913,832.70 18,545,691.63
this 20 percent portion of the "passive" income July to September 1994 481,501,838.98 24,075,091.95
of banks would actually be paid to the banks and
October to December
then remitted by them to the government in 1994
433,869,959.81 21,693,497.98

payment of their income tax. The institution of

₱
the withholding tax system does not alter the Total ₱ 73,734,584.60
1,474,691,693.44
fact that the 20 percent portion of their "passive" receipts in the amount of ₱1,474,691,693.44
income constitutes part of their actual earnings, included the sum of ₱350,807,875.15
except that it is paid directly to the government representing gross receipts from passive income
on their behalf in satisfaction of the 20 percent which was already subjected to 20% final
final income tax due on their "passive" incomes. withholding tax.
"On January 30, 1996, [the Court of Tax
Appeals] rendered a decision in CTA Case No.
4720 entitled Asian Bank Corporation vs.
Commissioner of Internal Revenue[,] wherein it
was held that the 20% final withholding tax on
[a] bank’s interest income should not form part
of its taxable gross receipts for purposes of
computing the gross receipts tax.
"On June 19, 1997, on the strength of the
aforementioned decision, [respondent] filed with
the Bureau of Internal Revenue [BIR] a letter-
request for the refund or issuance of [a] tax
credit certificate in the aggregate amount of
₱3,508,078.75, representing allegedly overpaid
gross receipts tax for the year 1995, computed
as follows:
Gross Receipts Subjected to the
Final Tax
Derived from Passive [Income]
350,807,875.15
Multiply by Final Tax rate
20% Final Tax Withheld at Source ₱ 70,161,575.03
Multiply by [Gross Receipts Tax] rate
Overpaid [Gross Receipts Tax] ₱ 3,508,078.75
"Without waiting for an action from the
[petitioner], [respondent] on the same day filed
[a] petition for review [with the Court of Tax
Appeals] in order to toll the running of the two-
year prescriptive period to judicially claim for the
refund of [any] overpaid internal revenue tax[,]
pursuant to Section 230 [now 229] of the Tax
Code [also ‘National Internal Revenue Code’] x x
x.
xxx xxx xxx
"After trial on the merits, the [Court of Tax
Appeals], on August 6, 1999, rendered its
decision ordering x x x petitioner to refund in
favor of x x x respondent the reduced amount of
₱1,555,749.65 as overpaid [gross receipts tax]
for the year 1995. The legal issue x x x was
resolved by the [Court of Tax Appeals], with
Hon. Amancio Q. Saga dissenting, on the
strength of its earlier pronouncement in x x x
Asian Bank Corporation vs. Commissioner of
Internal Revenue x x x, wherein it was held that
the 20% [final withholding tax] on [a] bank’s
interest income should not form part of its
taxable gross receipts for purposes of computing
the [gross receipts tax]."7
Ruling of the CA
The CA held that the 20% FWT on a bank’s
interest income did not form part of the taxable
gross receipts in computing the 5% GRT,
because the FWT was not actually received by
the bank but was directly remitted to the
government. The appellate court curtly said that
while the Tax Code "does not specifically state
any exemption, x x x the statute must receive a
sensible construction such as will give effect to
the legislative intention, and so as to avoid an
₱ unjust or absurd conclusion." 8
20% Hence, this appeal. 9
Issue
5%
Petitioner raises this lone issue for our
consideration:
"Whether or not the 20% final withholding tax on
[a] bank’s interest income forms part of the
taxable gross receipts in computing the 5%
gross receipts tax." 10
The Court’s Ruling
The Petition is meritorious.
Sole Issue:
Whether the 20% FWT Forms Part
of the Taxable Gross Receipts
Petitioner claims that although the 20% FWT on
respondent’s interest income was not actually
received by respondent because it was remitted
directly to the government, the fact that the
amount redounded to the bank’s benefit makes
it part of the taxable gross receipts in computing
the 5% GRT. Respondent, on the other hand,
maintains that the CA correctly ruled otherwise.
We agree with petitioner. In fact, the same issue
has been raised recently in China Banking
Corporation v. CA, where this Court held that
11
the amount of interest income withheld in
payment of the 20% FWT forms part of gross
receipts in computing for the GRT on banks.
The FWT and the GRT:
Two Different Taxes
The 5% GRT is imposed by Section 119 of 12
the Tax Code, which provides:
13
"SEC. 119. Tax on banks and non-bank financial
intermediaries. – There shall be collected a tax
on gross receipts derived from sources within
the Philippines by all banks and non-bank
financial intermediaries in accordance with the
following schedule:
"(a) On interest, commissions and discounts
from lending activities as well as income from
financial leasing, on the basis of remaining
maturities of instruments from which such
receipts are derived.
Short-term maturity not in excess of two (2)
years……………………5%
Medium-term maturity – over two (2) years
but not exceeding four (4)
years………………………………….…...3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7)
years……………………………………………1%
(ii) Over seven (7)
years………………………………….….0%
"(b) On
dividends……………………………….……..0%
"(c) On royalties, rentals of property, real or
personal, profits from exchange and all other
items treated as gross income under Section
28 of this
14
Code………..........................................................
..........5%
Provided, however, That in case the maturity
period referred to in paragraph (a) is shortened
thru pretermination, then the maturity period
shall be reckoned to end as of the date of
pretermination for purposes of classifying the
transaction as short, medium or long term and
the correct rate of tax shall be applied
accordingly.
"Nothing in this Code shall preclude the
Commissioner from imposing the same tax
herein provided on persons performing similar
banking activities."
The 5% GRT is included under "Title V.
15
Other Percentage Taxes" of the Tax Code
and is not subject to withholding. The banks
and non-bank financial intermediaries liable
therefor shall, under Section 125(a)(1), file 16
quarterly returns on the amount of gross receipts
and pay the taxes due thereon within twenty
(20) days after the end of each taxable quarter.
17
The 20% FWT, on the other hand, falls under
18
Section 24(e)(1) of "Title II. Tax on Income." It is
19
a tax on passive income, deducted and withheld
at source by the payor-corporation and/or
person as withholding agent pursuant to Section
50, and paid in the same manner and subject to
20
the same conditions as provided for in Section
51. 21
A perusal of these provisions clearly shows that
two types of taxes are involved in the present
controversy: (1) the GRT, which is a percentage
tax; and (2) the FWT, which is an income tax. As
a bank, petitioner is covered by both taxes.
A percentage tax is a national tax measured by
a certain percentage of the gross selling price or
gross value in money of goods sold, bartered or
imported; or of the gross receipts or earnings
derived by any person engaged in the sale of
services. It is not subject to withholding.
22
An income tax, on the other hand, is a national
tax imposed on the net or the gross income
realized in a taxable year. It is subject to
23
withholding.
In a withholding tax system, the payee is the
taxpayer, the person on whom the tax is
imposed; the payor, a separate entity, acts as no
more than an agent of the government for the
collection of the tax in order to ensure its
payment. Obviously, this amount that is used to
settle the tax liability is deemed sourced from
the proceeds constitutive of the tax base. These
24
proceeds are either actual or constructive. Both
parties herein agree that there is no actual
receipt by the bank of the amount withheld.
What needs to be determined is if there is
constructive receipt thereof. Since the payee --
not the payor -- is the real taxpayer, the rule on
constructive receipt can be easily rationalized, if
not made clearly manifest. 25
No Double Taxation
We have repeatedly said that the two taxes,
subject of this litigation, are different from each
other. The basis of their imposition may be the
same, but their natures are different, thus
leading us to a final point. Is there double
taxation?
The Court finds none.
Double taxation means taxing the same property
twice when it should be taxed only once; that is,
"x x x taxing the same person twice by the same
jurisdiction for the same thing." It is obnoxious
117
when the taxpayer is taxed twice, when it should
be but once. Otherwise described as "direct
118
duplicate taxation," the two taxes must be
119
imposed on the same subject matter, for the
same purpose, by the same taxing authority,
within the same jurisdiction, during the same
taxing period; and they must be of the same kind
or character.
120
First, the taxes herein are imposed on two
different subject matters. The subject matter of
the FWT is the passive income generated in the
form of interest on deposits and yield on deposit
substitutes, while the subject matter of the GRT
is the privilege of engaging in the business of
banking.
A tax based on receipts is a tax on business
rather than on the property; hence, it is an
excise rather than a property tax. It is not an
121 122
income tax, unlike the FWT. In fact, we have
already held that one can be taxed for engaging
in business and further taxed differently for the
income derived therefrom. Akin to our ruling in
123
Velilla v. Posadas, these two taxes are entirely
124
distinct and are assessed under different
provisions.
Second, although both taxes are national in
scope because they are imposed by the same
taxing authority -- the national government under
the Tax Code -- and operate within the same
Philippine jurisdiction for the same purpose of
raising revenues, the taxing periods they affect
are different. The FWT is deducted and withheld
as soon as the income is earned, and is paid
after every calendar quarter in which it is
earned. On the other hand, the GRT is neither
deducted nor withheld, but is paid only after
every taxable quarter in which it is earned.
Third, these two taxes are of different kinds or
characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax
not subject to withholding.
In short, there is no double taxation, because
there is no taxing twice, by the same taxing
authority, within the same jurisdiction, for the
same purpose, in different taxing periods, some
of the property in the territory. Subjecting
125
interest income to a 20% FWT and including it in
the computation of the 5% GRT is clearly not
double taxation.
WHEREFORE, the Petition is GRANTED. The
assailed Decision and Resolution of the Court of
Appeals are hereby REVERSED and SET the excise, value-added or percentage taxes
ASIDE. No costs. under the National Internal Revenue Code,
hereinafter referred to as NIRC, as amended, a
NURSERY CARE CORPORATION; tax of FIFTY PERCENT (50%) OF ONE
SHOEMART, INC.; STAR APPLIANCE PERCENT (1%) per annum on the gross sales
CENTER, INC.; H&B, INC.; SUPPLIES or receipts of the preceding calendar year is
STATION, INC.; and HARDWARE hereby imposed:
WORKSHOP, INC., Petitioners,
vs. A) On person who sells goods and services in
ANTHONY ACEVEDO, in his capacity as THE the course of trade or businesses; x x x
TREASURER OF MANILA; and THE CITY OF PROVIDED, that all registered businesses in the
MANILA,Respondents. City of Manila already paying the
aforementioned tax shall be exempted from
DECISION payment thereof.

BERSAMIN, J.: To comply with the City of Manila’s

assessmentof taxes under Section 21, supra,
The issue here concerns double taxation. There the petitioners paid under protest the following
is double taxation when the same taxpayer is amounts corresponding to the first quarter of
1999, to wit:
5
taxed twice when he should be taxed only once
for the same purpose by the same taxing
authority within the same jurisdiction during the (a) Nursery Care Corporation
same taxing period, and the taxes are of the ₱595,190.25
same kind or character. Double taxation is
obnoxious. (b) Shoemart Incorporated
₱3,283,520.14
The Case
(c) Star Appliance Center ₱236,084.03
Under review are the resolution promulgated in
CA-G.R. SP No. 72191 on June 18, (d) H & B, Inc. ₱1,271,118.74
2007, whereby the Court of Appeals (CA)
1

denied petitioners' appeal for lack of jurisdiction; (e) Supplies Station, Inc. ₱239,501.25
and the resolution promulgated on November
14, 2007, whereby the CA denied their motion
2
(f) Hardware Work Shop, Inc.
for reconsideration for its lack of merit.
₱609,953.24

Antecedents By letter dated March 1, 1999, the petitioners

formally requested the Office of the City
The City of Manila assessed and collected taxes Treasurer for the tax credit or refund of the local
from the individual petitioners pursuant to business taxes paid under protest. However,
6

Section 15 (Tax on Wholesalers, Distributors, or then City Treasurer Anthony Acevedo (Acevedo)
Dealers) and Section 17 (Tax on Retailers) of denied the request through his letter of March
the Revenue Code of Manila. At the same time,
3
10, 1999. 7

the City of Manila imposed additional taxes upon

the petitioners pursuant to Section 21 ofthe
Revenue Code of Manila, as amended, as a
4
condition for the renewal of their respective
business licenses for the year 1999. Section 21
On April 8, 1999, the petitioners, through their
representative, Cecilia R. Patricio, sought the
reconsideration of the denial of their
request. Still, the City Treasurer did not
8

of the Revenue Code of Manila stated:

reconsider. In the meanwhile, Liberty Toledo
9

succeeded Acevedo as the City Treasurer of

Section 21. Tax on Business Subject to the Manila. 10

Excise, Value-Added or Percentage Taxes

under the NIRC - On any of the following
businesses and articles of commerce subject to
On April 29, 1999, the petitioners filed their
respective petitions for certiorariin the Regional
Trial Court (RTC) in Manila. The petitions,
docketed as Civil Cases Nos. 99-93668 to 99-
93673, were initially raffled to different
11
branches, but were soon consolidated in Branch
34. After the presiding judge of Branch 34
12
voluntarily inhibited himself, the consolidated
cases were transferred to Branch 23, but were 13
again re-raffled to Branch 19 upon the
designation of Branch 23 as a special drugs
court. 14
The parties agreed on and jointly submitted the
following issues for the consideration and
resolution of the RTC, namely:
(a) Whether or not the collection of
taxes under Section 21 of Ordinance
No. 7794, as amended, constitutes
double taxation.
(b) Whether or not the failure of the
petitioners to avail of the statutorily
provided remedy for their tax protest on
the ground of unconstitutionality,
illegality and oppressiveness under
Section 187 of the Local Government
Code renders the present action
dismissible for non-exhaustion of
administrative remedy.15
Decision of the RTC
On April 26, 2002, the RTC rendered its
decision, holding thusly:
The Court perceives of no instance of the
constitutionally proscribed double taxation, in the
strict, narrow or obnoxious sense, imposed upon
the petitioners under Section 15 and 17, on the
one hand, and under Section 21, on the other, of
the questioned Ordinance. The tax imposed
under Section 15 and 17, as against that
imposed under Section 21, are levied against
different tax objects or subject matter. The tax
under Section 15 is imposed upon wholesalers,
distributors or dealers, while that under Section
17 is imposedupon retailers. In short, taxes
imposed under Section 15 and 17 is a tax on the
business of wholesalers, distributors, dealers
and retailers. On the other hand, the tax
imposed upon herein petitioners under Section
21 is not a tax against the business of the
petitioners (as wholesalers, distributors, dealers
or retailers)but is rather a tax against consumers
or end-users of the articles sold by petitioners.
This is plain from a reading of the modifying
paragraph of Section 21 which says:
"The tax shall be payable by the person paying
for the services rendered and shall be paid to
the person rendering the services who is
required to collect and pay the tax within twenty
(20) days after the end of each quarter."
(Underscoring supplied)
In effect, the petitioners only act as the collection
or withholding agent of the City while the ones
actually paying the tax are the consumers or
end-users of the articles being sold by
petitioners. The taxes imposed under Sec. 21
represent additional amounts added by the
business establishment to the basic prices of its
goods and services which are paid by the end-
users to the businesses. It is actually not taxes
on the business of petitioners but on the
consumers. Hence, there is no double taxation
in the narrow, strict or obnoxious sense,involved
in the imposition of taxes by the City of Manila
under Sections 15, 17 and 21 of the questioned
Ordinance. This in effect resolves infavor of the
constitutionality of the assailed sections of
Ordinance No. 7807 of the City of Manila.
Petitioners, likewise, pray the Court to direct
respondents to cease and desist from
implementing Section 21 of the questioned
Ordinance. That the Court cannot do, without
doing away with the mandatory provisions of
Section 187 of the Local Government Code
which distinctly commands that an appeal
questioning the constitutionality or legality of a
tax ordinance shall not have the effectof
suspending the effectivity of the ordinance and
the accrual and payment of the tax, fee or
charge levied therein. This is so because an
ordinance carries with it the presumption of
validity.
xxx
With the foregoing findings, petitioners’ prayer
for the refund of the amounts paid by them
under protest must, likewise, fail.
Wherefore, the petitions are dismissed. Without
pronouncement as to costs.
SO ORDERED. 16
The petitioners appealed to the CA. 17
Ruling of the CA
On June 18, 2007, the CA deniedthe petitioners’
appeal, ruling as follows:
The six (6) cases were consolidated on a
common question of fact and law, that is,
whether the act ofthe City Treasurer of Manila of
assessing and collecting business taxes under
Section 21of Ordinance 7807, on top of other
business taxes alsoassessed and collected
under the previous sections of the same
ordinance is a violation of the provisions of
Section 143 of the Local Government Code.
Clearly, the disposition of the present appeal in
these consolidated cases does not necessitate
the calibration of the whole evidence as there is
no question or doubt as to the truth or the
falsehood of the facts obtaining herein, as both
parties agree thereon. The present case
involves a question of law that would not lend
itself to an examination or evaluation by this
Court of the probative value of the evidence
presented.
Thus the Court is constrained todismiss the
instant petition for lack of jurisdiction under
Section 2,Rule 50 of the 1997 Rules on Civil
Procedure which states:
"Sec. 2. Dismissal of improper appeal to the
Court of Appeals. – An appeal under Rule 41
taken from the Regional Trial Court to the Court
of Appeals raising only questions of law shall be
dismissed, issues purely of law not being
reviewable by said court. similarly, an appeal by
notice of appeal instead of by petition for review
from the appellate judgment of a Regional Trial
Court shall be dismissed.
An appeal erroneously taken tothe Court of
Appeals shall not be transferred to the
appropriate court but shall be dismissed outright.
WHEREFORE, the foregoing considered, the
appeal is DISMISSED.
SO ORDERED. 18
The petitioners moved for reconsideration, but
the CA denied their motion through the
resolution promulgated on November 14,
2007.19
ISSUE:
Whether or not the collection of taxes under
Section 21 of Ordinance No. 7794, as amended,
constitutes double taxation. YES
RULING:
There is DOUBLE TAXATION when the same
taxpayer is taxed twice when he should be taxed
only once for the same purpose by the same
taxing authority within the same jurisdiction
during the same taxing period, and the taxes are
of the same kind or character. DOUBLE
TAXATION is obnoxious.
DOUBLE TAXATION means taxing the same
property twice when it should be taxed only
once; that is, "taxing the same person twice by
the same jurisdiction for the same thing." It is
obnoxious when the taxpayer is taxed twice,
when it should be but once. Otherwise described
as "DIRECT DUPLICATE TAXATION," the two
taxes must be imposed on the same subject
matter, for the same purpose, by the same
taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes
must be of the same kind or character.
Using the aforementioned test, the COURT finds
that there is INDEED DOUBLE TAXATION IF
RESPONDENT IS SUBJECTED TO THE
TAXES UNDER BOTH SECTIONS 14 AND 21
OF TAX ORDINANCE NO. 7794, since these
are being imposed: (1) on the same subject
matter – the privilege of doing business in the
City of Manila; (2) for the same purpose – to
make persons conducting business within the
City of Manila contribute to city revenues; (3) by
the same taxing authority – petitioner City of
Manila; (4) within the same taxing jurisdiction –
within the territorial jurisdiction of the City of
Manila; (5) for the same taxing periods – per
calendar year; and (6) of the same kind or
character – a local business tax imposed on
gross sales or receipts of the business.
Based on the foregoing reasons, PETITIONER
should not have been subjected to taxes under
Section 21 of the Manila Revenue Code for the
fourth quarter of 2001, considering that it had
already been paying local business tax under
Section 14 of the same ordinance.
Accordingly, respondent’s assessment under
both Sections 14 and 21 had no basis.
PETITIONER is indeed liable to pay business
taxes to the City of Manila; nevertheless,
considering that the FORMER has already paid
these taxes under Section 14 of the Manila
Revenue Code, it is exempt from the same
payments under Section 21 of the same code.
Hence, payments made under Section 21 must
be refunded in favor of petitioner. It is
undisputed that PETITIONER paid business
taxes based on Sections 14 and 21 for the fourth
quarter of 2001 in the total amount of
₱470,932.21. Therefore, it is ENTITLED TO A
REFUND OF ₱164,552.04 corresponding to the
payment under Section 21 of the Manila
Revenue Code.
In fine, the IMPOSITION OF THE TAX UNDER
SECTION 21 OF THE REVENUE CODE OF
MANILA constituted double taxation, and the
taxes collected pursuant thereto must be
refunded.
IMPORTANT PRINCIPLE: WHEN IS THERE
DOUBLE TAXATION; REQUISITES OF
DOUBLE TAXATION
WHEN IS THERE DOUBLE TAXATION?
There is DOUBLE TAXATION when the same
taxpayer is taxed twice when he should be taxed
only once for the same purpose by the same
taxing authority within the same jurisdiction
during the same taxing period, and the taxes are
of the same kind or character. DOUBLE
TAXATION is obnoxious.
DOUBLE TAXATION means taxing the same
property twice when it should be taxed only
once; that is, "taxing the same person twice by
the same jurisdiction for the same thing." It is
obnoxious when the taxpayer is taxed twice,
when it should be but once. Otherwise described
as "DIRECT DUPLICATE TAXATION," the two
taxes must be imposed on the same subject
matter, for the same purpose, by the same
taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes
must be of the same kind or character.
REQUISITES OF DOUBLE TAXATION:
Using the aforementioned test, the COURT finds
that there is INDEED DOUBLE TAXATION IF
RESPONDENT IS SUBJECTED TO THE
TAXES UNDER BOTH SECTIONS 14 AND 21
OF TAX ORDINANCE NO. 7794, since these
are being imposed:
(1) On the same subject matter – the privilege of
doing business in the City of Manila;
(2) For the same purpose – to make persons
conducting business within the City of Manila
contribute to city revenues;
(3) By the same taxing authority – petitioner City
of Manila;
(4) Within the same taxing jurisdiction – within
the territorial jurisdiction of the City of Manila;
(5) For the same taxing periods – per calendar
year; and
(6) Of the same kind or character – a local
business tax imposed on gross sales or receipts
of the business.

Deutsche Bank AG Manila Branch v.
Commissioner of Internal Revenue
GR Number 188550
Petition: Petition for Review
Petitioner: Deutsche Bank AG Manila Branch
Respondent: Commissioner of Internal
Revenue
Ponente: Sereno, C. J.
Date: August 28, 2013
Facts:
Pursuant to the National Internal Revenue Code
of 1997, on October 21, 2003, the petitioner
remitted to the respondent the amount of Php
67,688,553.51, representing fifteen (15) percent
of the branch profit remittance tax (BPRT) on its
regular banking unit (RBU) net income remitted
to the Deutsche Bank of Germany (DB
Germany) for 2002 and prior taxable years.
Believing that they made an overpayment of the
BPRT, on October 4, 2005, the petitioner filed
with the BIR Large Taxpayers Assessment and
Investigation Division an administrative claim for
refund or a tax credit certificate representing the
alleged excess BPRT paid (amount of Php
22,562,851.17). The petitioners also requested
from the International Tax Affairs Division (ITAD)
for a confirmation of its entitlement to a
preferential tax rate of 10% under the RP-
Germany Tax Treaty.
Because of the alleged inaction of the BIR on
the administrative claim, on October 18, 2005,
the petitioner filed a petition for review with the
Court of Tax Appeals (CTA), reiterating its claim
for refund or tax credit certificate representing
the alleged excess BPRT paid. The claim was
denied on the ground that application for tax
treaty relief was not filed with ITAD prior to the
payment of BPRT, thereby violating the fifteen-
day period mandated under Section III,
paragraph 2 of the Revenue Memorandum
Order No. 1-2000. Also, the CTA Second
Division relied on an en banc decision of the
CTA that before the benefits of a tax treaty may
be extended to a foreign corporation, the latter
should first invoke the provisions of the tax
treaty and prove that they indeed apply to the
corporation (Mirant Operations Corporation v
Commissioner of Internal Revenue).
Hence this petition.
Issue:
Whether or not the failure to strictly comply with
the provisions of RMO No. 1-2000 will deprive
persons or corporations the benefit of a tax
treaty.
Ruling:
No. The constitution provides for the adherence
to the general principles of international law as
part of the law of the land (Article II, Section 2).
Every treaty is binding upon the parties, and
obligations must be performed (Article 26,
Vienna Convention on the Law on Treaties).
There is nothing in RMO 1-2000 indicating a
deprivation of entitlement to a tax treaty for
failure to comply with the fifteen-day period. The
denial of availment of tax relief for the failure to
apply within the prescribed period (under the
administrative issuance) would impair the value
of the tax treaty. Also, the obligation to comply
with the tax treaty must take precedence over
the objective of RMO 1-2000 because the non-
compliance with tax treaties would have
negative implications on international affairs and
would discourage foreign investments.
Dispositive:
The petition was granted, the CTA en
decision was set aside and reversed.
respondent was ordered to refund or issue
credit certificate (the amount of
22,562,851.17) in favor of the petitioner.
COMMISSIONER OF INTERNAL
the Fuji Bank, Limited (Fuji Bank), with the
mergedentity being named as Mizuho Corporate
banc Bank (Mizuho Bank). One of the merged banks,
The Fuji Bank, had a branch in the Philippines, which
a tax became a branch of Mizuho Bank as a result of
the merger. The Industrial Bank of Japan and
Php
Mizuho Bank are residents of Japan for
purposes of income taxation, and recognized as
such under the relevant provisions of the income
tax treaties between the Philippines and Japan. 9

REVENUE, Petitioner,
vs. Certain portions of the loan were subsequently
CBK POWER COMPANY assigned by the original lenders to various other
LIMITED, Respondent. banks, including Fortis Bank (Nederland) N.V.
(Fortis-Netherlands) and Raiffesen Zentral Bank
DECISION Osterreich AG (Raiffesen Bank). Fortis-
Netherlands, in turn, assigned its portion of the
PERLAS-BERNABE, J.: loan to Fortis Bank S.A./N.V. (Fortis-Belgium), a
resident of Belgium. Fortis Netherlands and
Assailed in these consolidated petitions for Raiffesen Bank, on the other hand, are residents
review on certiorari are the Decision dated
1 2
of Netherlands and Austria, respectively.10

March 29, 2010 and the Resolution dated 3

August 16, 2010 of the Court ofTax Appeals In February 2001, CBK Power borrowed money
(CTA) En Bancin C.T.A. E.B. Nos. 469 and 494, from Industrial Bank of Japan, Fortis-
which affirmed the Decision dated August 28,
4 Netherlands, Raiffesen Bank, Fortis-Belgium,
2008, the Amended Decision dated February
5 and Mizuho Bank for which it remitted interest
12, 2009, and the Resolution dated May 7, 2009
6 payments from May 2001 to May 2003. It 11

of the CTA First Division in CTA Case Nos.
6699, 6884,and 7166 granting CBK Power
Company Limited (CBK Power) a refund of its
excess final withholding tax for the taxable years
2001 to 2003.
The Facts
allegedly withheld final taxes from said
payments based on the following rates, and paid
the same to the Revenue District Office No. 55
of the Bureau of Internal Revenue (BIR): (a)
fifteen percent (15%) for Fortis-Belgium, Fortis-
Netherlands, and Raiffesen Bank; and (b) twenty
percent (20%) for Industrial Bank of Japan and
Mizuho Bank. 12

CBK Power is a limited partnership duly

organized and existing under the laws of the
Philippines, and primarily engaged in the
development and operation of the Caliraya,
Botocan, and Kalayaan hydro electric power
generating plants in Laguna (CBK Project). It is
registered with the Board of Investments (BOI)
However, according to CBK Power, under the
relevant tax treaties between the Philippines and
the respective countries in which each of the
banks is a resident, the interest income derived
by the aforementioned banks are subject only to
a preferential tax rate of 10%, viz.:
13

as engaged in a preferred pioneer area of 1âw phi1

investment under the Omnibus Investment Code COUNTRY OF PREFERENTIAL

of 1987.7 BANK
RESIDENCE UNDER THE RELEVANT TAX TREATY

To finance the CBK Project, CBK

Fortis BankPower
S.A./N.V. Belgium 10% (Article 11[1], RP
obtained in August 2000 a syndicated loan from Tax Treaty)
several foreign banks, i.e., BNP Paribas, Dai-
8

IndustrialBank Bank
ichi Kangyo Bank, Limited, Industrial of of Japan 10% (Article 11[3], RP-Japan Tax Treaty
Japan (original
Japan, Limited, and Societe General
lenders), acting through an Inter-Creditor Agent,
Raiffesen Zentral
Dai-ichi Kangyo Bank, a Japanesebank that Bank Austria 10% (Article 11[3], RP-Austria Tax Treat
Osterreich
subsequently merged with the Industrial AG of
Bank
Japan, Limited (Industrial Bank of Japan) and

Corporate Bank Japan 10% (Article 11[3], RP-Japan Tax Treaty)
Accordingly, on April 14, 2003, CBK Power filed
a claim for refund of its excess final withholding
taxes allegedly erroneously withheld and
collected for the years 2001 and 2002 with the
BIR Revenue Region No. 9. The claim for refund
of excess final withholding taxes in 2003 was
subsequently filed on March 4, 2005. 14
The Commissioner of Internal Revenue’s
(Commissioner) inaction on said claims
prompted CBK Power to file petitions for review
before the CTA, viz.: 15
(1) CTA Case No. 6699 was filed by
CBK Power on June 6, 2003 seeking
the refund of excess final withholding
tax in the total amount of ₱6,393,267.20
covering the year 2001 with respect to
interest income derived by [Fortis-
Belgium], Industrial Bank of Japan, and
[Raiffesen Bank]. An Answer was filed
by the Commissioner on July 25, 2003.
(2) CTA Case No. 6884was filed by
CBK Power on March 5, 2004 seeking
for the refund of the amount of
8,136,174.31 covering [the] year 2002
with respect to interest income derived
by [Fortis- Belgium], Industrial Bank of
Japan, [Mizuho Bank], and [Raiffesen
Bank]. The Commissioner filed his
Answer on May 7, 2004.
xxxx
(3) CTA Case No. 7166was filed by
CBK [Power] on March 9, 2005 seeking
for the refund of [the amount of]
₱1,143,517.21covering [the] year 2003
with respect to interest income derived
by [Fortis Belgium], and [Raiffesen
Bank]. The Commissioner filed his
Answer on May 9, 2005. (Emphases
supplied)
CTA Case Nos. 6699 and 6884 were
consolidated first on June 18, 2004.
Subsequently, however, all three cases – CTA
Case Nos. 6699, 6884, and 7166 – were
consolidated in a Resolution dated August 3,
2005.16
The CTA First Division Rulings
In a Decision dated August 28, 2008, the CTA
17
First Division granted the petitions and ordered
the refund of the amount of 15,672,958.42 upon
a finding that the relevant tax treaties were
applicable to the case. It cited DA-ITAD Ruling
18
No. 099-03 dated July 16, 2003, issued by the
19
BIR, confirming CBK Power’s claim that the
interest payments it made to Industrial Bank of
Japan and Raiffesen Bank were subject to a
final withholding tax rate of only 10%of the gross
amount of interest, pursuant to Article 11 of the
Republic of the Philippines (RP)-Austria and RP-
Japan tax treaties. However, in DA-ITAD Ruling
No. 126-03 dated August 18, 2003, also issued
20
by the BIR, interest payments to Fortis-Belgium
were likewise subjected to the same rate
pursuant to the Protocol Amending the RP-
Belgium Tax Treaty, the provisions of which
apply on income derived or which accrued
beginning January 1, 2000. With respect to
interest payments made to Fortis-Netherlands
before it assigned its portion of the loan to
Fortis-Belgium, the CTA First Division likewise
granted the preferential rate. 21
The CTA First Division categorically declared in
the August 28, 2008 Decision that the required
International Tax Affairs Division (ITAD) ruling
was not a condition sine qua non for the
entitlement of the tax relief sought by CBK
Power, however,
22
upon motion for
reconsideration filed by the Commissioner, the
23
CTA First Division amendedits earlier decision
by reducing the amount of the refund from
₱15,672,958.42 to ₱14,835,720.39 on the
ground that CBK Power failed to obtain an ITAD
ruling with respect to its transactions with Fortis-
Netherlands. In its Amended Decision dated
24 25
February 12, 2009, the CTA First Division
adopted the ruling in the case of Mirant
26
(Philippines) Operations Corporation (formerly:
Southern Energy Asia-Pacific Operations
[Phils.], Inc.) v. Commissioner of Internal
Revenue (Mirant), cited by the Commissioner in
27
his motion for reconsideration, where the Court
categorically pronounced in its Resolution dated
February 18, 2008 that an ITAD ruling must be
obtained prior to availing a preferential tax rate.
CBK Power moved for the reconsideration of 28
the Amended Decision dated February 12, 2009,
arguing in the main that the Mirantcase, which
was resolved in a minute resolution, did not
establish a legal precedent. The motion was
denied, however, in a Resolution dated May 7,
29
2009 for lack of merit.
Undaunted, CBK Power elevated the matter to
the CTA En Bancon petition for
review,30 docketed as C.T.A E.B. No. 494. The
Commissioner likewise filed his own petition for
review,31 which was docketed as C.T.A. E.B. No.
469. Said petitions were subsequently
consolidated.32
CBK Power raised the lone issue of whether or
not an ITAD ruling is required before it can avail
of the preferential tax rate. On the other hand,
the Commissioner claimed that CBK Power
failed to exhaust administrative remedies when it
filed its petitions before the CTA First Division,
and that said petitions were not filed within the
two-year prescriptive period for initiating judicial
claims for refund.33
The CTA En Banc Ruling
In a Decision34 dated March 29, 2010, the CTA
En Banc affirmed the ruling of the CTA First
Division that a prior application with the ITAD is
indeed required by Revenue Memorandum
Order (RMO) 1-2000,35 which administrative
issuance has the force and effect of law and is
just as binding as a tax treaty. The CTA En Banc
declared the Mirant case as without any binding
effect on CBK Power, having been resolved by
this Court merely through minute resolutions,
and relied instead on the mandatory wording of
RMO 1-2000, as follows:36
III. Policies:
xxxx
2. Any availment of the tax treaty relief shall be
preceded by an application by filing BIR Form
No. 0901 (Application for Relief from Double
Taxation) with ITAD at least 15 days before the
transaction i.e. payment of dividends, royalties,
etc., accompanied by supporting documents
justifying the relief. x x x.
The CTA En Banc further held that CBK Power’s
petitions for review were filed within the two-year
prescriptive period provided under Section
22937 of the National Internal Revenue Code of
199738 (NIRC), and that it was proper for CBK
Power to have filed said petitions without
awaiting the final resolution of its administrative
claims for refund before the BIR; otherwise, it
would have completely lost its right to seek
judicial recourse if the two-year prescriptive
period lapsed with no judicial claim filed.
CBK Power’s motion for partial reconsideration
and the Commissioner’s motion for
reconsideration of the foregoing Decision were
both deniedin a Resolution39 dated August 16,
2010 for lack of merit; hence, the present
consolidated petitions.
The Court rules for CBK Power.
Sections 204 and 229 of the NIRC pertain to the
refund of erroneously or illegally collected taxes.
Section 204 applies to administrative claims for
refund, while Section 229 to judicial claims for
refund. In both instances, the taxpayer’s claim
must be filed within two (2) years from the date
of payment of the tax or penalty. However,
Section 229 of the NIRC further states the
condition that a judicial claim for refund may not
be maintained until a claim for refund or credit
has been duly filed with the Commissioner.
These provisions respectively read:
SEC. 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. 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.
xxxx
 SEC. 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, of any
sum alleged to have been excessively or in any
manner wrongfully collected without authority, or
of any sum alleged to have been excessively
orin 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: x x x. (Emphases and underscoring
supplied)
Indubitably, CBK Power’s administrative and
judicial claims for refund of its excess final
withholding taxes covering taxable year 2003
were filed within the two-year prescriptive
period, as shown by the table below: 58
WHEN FINAL WHEN LAST DAY OF WHEN
INCOME REMITTANCE THE 2-YEAR ADMINISTRATIVE
TAXES WERE RETURN PRESCRIPTIVE CLAIM WAS FILED
WITHHELD FILED PERIOD
February 2003 03/10/03 03/10/05 March 4, 2005 any national
May 2003 06/10/03 06/10/05 March 4, 2005 assessed 03/09/05
With respect to the remittance filed on March 10,
2003, the Court agrees with the ratiocination of
the CTA En Banc in debunking the alleged
failure to exhaust administrative remedies. Had
CBK Power awaited the action of the
Commissioner on its claim for refund prior to
taking court action knowing fully well that the
prescriptive period was about to end, it would
have lost not only its right to seek judicial
recourse but its right to recover the final
withholding taxes it erroneously paid to the
government thereby suffering irreparable
damage. 59
Also, while it may be argued that, for the
remittance filed on June 10, 2003 that was to
prescribe on June 10,2005, CBK Power could
have waited for, at the most, three (3) months
from the filing of the administrative claim on
March 4, 2005 until the last day of the two-year
prescriptive period ending June 10, 2005, that is,
if only togive the BIR at the administrative level
an opportunity to act on said claim, the Court
cannot, on that basis alone, deny a legitimate
claim that was, for all intents and purposes,
timely filed in accordance with Section 229 of
the NIRC. There was no violation of Section 229
since the law, as worded, only requires that an
administrative claim be priorly filed.
In the foregoing instances, attention must be
drawn to the Court’s ruling in P.J. Kiener Co.,
Ltd. v. David60 (Kiener), wherein it was held that
in no wise does the law, i.e., Section 306 of the
old Tax Code (now, Section 229 of the NIRC),
imply that the Collector of Internal Revenue first
act upon the taxpayer’s claim, and that the
taxpayer shall not go to court before he is
notified of the Collector’s action. In Kiener, the
Court went on to say that the claim with the
Collector of Internal Revenue was intended
primarily as a notice of warning that unless the
tax or penalty alleged to have been collected
erroneously or illegally is refunded, court action
will follow, viz.: The controversy centers on the
construction of the aforementioned section of
the Tax Code which reads:
WHEN PETITION
FOR REVIEW
SEC. 306. Recovery of tax erroneously or
WAS FILED
illegally collected. — No suit or proceeding shall
be maintained in any court for the recovery of
03/09/05internal revenue tax hereafter
alleged to have been erroneously or illegally
or collected, or of any penalty claimed
to have been collected without authority, or of
any sum alleged to have been excessive or in
any manner wrongfully collected, until a claim for
refund or credit has been duly filed with the
Collector of Internal Revenue; 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 begun after the expiration of
two years from the date of payment of the tax or
penalty. The preceding provisions seem at first
blush conflicting. It will be noticed that, whereas
the first sentence requires a claim to be filed
with the Collector of Internal Revenue before
any suit is commenced, the last makes
imperative the bringing of such suit within two
years from the date of collection. But the conflict
is only apparent and the two provisions easily
yield to reconciliation, which it is the office of
statutory construction to effectuate, where
possible, to give effect to the entire enactment.

To this end, and bearing in mind that the

Legislature is presumed to have understood the
language it used and to have acted with full idea
of what it wanted to accomplish, it is fair and
reasonable to say without doing violence to the
context or either of the two provisions, that by
the first is meant simply that the Collector of
Internal Revenue shall be given an opportunity
to consider his mistake, if mistake has been
committed, before he is sued, but not, as the
appellant contends that pending consideration of
the claim, the period of two years provided in the
last clause shall be deemed interrupted.
Nowhere and in no wise does the law imply that
the Collector of Internal Revenue must act upon
the claim, or that the taxpayer shall not go to
court before he is notified of the Collector’s
action. x x x. We understand the filing of the
claim with the Collector of Internal Revenue to
be intended primarily as a notice of warning that
unless the tax or penalty alleged to have been
collected erroneously or illegally is refunded,
court action will follow. x x x.61 (Emphases
supplied)

That being said, the foregoing refund claims of

CBK Power should all be granted, and, the
petition of the Commissioner in G.R. Nos.
193407-08 be denied for lack of merit.

WHEREFORE, the petition in G.R. Nos.

193383-84 is GRANTED. The Decision dated
March 29, 2010 and the Resolution dated
August 16, 2010 of the Court of Tax Appeals
(CTA) En Banc in C.T.A. E.B. Nos. 469 and
494 are hereby REVERSED and SET ASIDE
and a new one entered REINSTATING the
Decision of the CTA First Division dated
August 28, 2008 ordering the refund in favor
of CBK Power Company Limited the amount
of PlS,672,958.42 representing its excess final
withholding taxes for the taxable years 2001
to 2003. On the other hand, the petition in
G.R. Nos. 193407-08 is DENIED for lack of
merit.

SO ORDERED.