Commissioner of Internal Revenue v. Philippine Long Distance Telephone Co.

SIXTEENTH DIVISION [CA-G.R. SP No. 40811. February 16, 1998.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PHILIPPINE LONG DISTANCE TELEPHONE COMPANY , respondent . D E C I S I O N MONTENEGRO , J p : This is a petition for review of: a) the December 18, 1995 decision of the Court of Tax Appeals in C.T.A. Case No. 5106, entitled "Philippine Long Distance Telephone Company vs. The Honorable Commissioner of Internal Revenue" ordering the Commissioner of Internal Revenue to issue in favor of PLDT a Tax Credit Certificate in the amount of P428,760,320.00 representing erroneously and illegally paid VAT on importation of equipment machineries and spare parts for the period May 3, 1992 to February 23, 1994, and b) the May 9, 1996 resolution denying the motion for reconsideration. The antecedent facts are recited by the Court of Tax Appeals in its decision and quoted by the petitioner Commissioner of Internal Revenue in its petition. "As borne out by the pleadings, petitioner, Philippine Long Distance Telephone Company, is a domestic corporation duly organized and existing under the laws of the Philippines. It is duly licensed to operate a telecommunications system in the Philippines by virtue of a legislative franchise issued in its name on November 28, 1928 under Act No. 3436, as amended by Commonwealth Act No. 407. The fifty (50) year term of said Franchise was extended for another twenty five (25) years from the date of its expiration on November 28, 1978 or up to November 28, 2008 and the franchise tax of one per cent (1%) was increased to five per cent (5%) pursuant to Republic Act No. 6146. Then on June 11, 1978 the franchise tax of five per cent (5%) was reduced to two per cent (2%) up to the end of its twenty five (25) year extended period. The term of petitioner's franchise was extended anew for another twenty five (25) years from its expiration on November 28, 2008 or up to November 28, 2028 under Republic Act No. 7082 and consolidated the terms and conditions of its franchise. The scope of its franchise is provided for under Section 1 of R.A. 7082, to wit: "SEC. 1. Subject to the provisions of the Constitution, the Philippine Long Distance Telephone Company (PLDT), its successors or assigns, and hereunder referred to as the grantee, is hereby granted the right privileges and authority to carry on the business of providing basic and enhanced telecommunications services in and between provinces, cities and municipalities in the Philippines and between the Philippines and other countries and territories and for this purpose to establish, operate, manage, lease, maintain and purchase telecommunications systems, including mobile, cellular and wired or wireless telecommunications systems, fiber optics, multichannel transmission distribution systems, satellite transmit and receive systems, and other telecommunications systems and their value-added services such as but not limited to transmission of voice, data, facsimile, control signals, audio and video, information service bureau and all other telecommunications systems technologies as are at present available or be made available through technical advances or innovations in the future, or construct, acquire, lease and operate or manage transmitting and receiving stations and switching stations, both for local and international services, lines, cable or systems, as is, or are, convenient or essential to efficiently carry out the purposes of this franchise, . . .' (Admitted in the Answer.) "On various dates, starting March 4, 1992 to February 29, 1994, petitioner purchased imported equipments, machineries and spare parts for its use in operating its franchise. It paid, the Value Added Tax (VAT) on said importations in the sum of P698,039,124.00. On April 19, 1994, the Bureau of Internal Revenue (BIR) issued BIR Ruling No. UN-140-94 addressed to petitioner confirming its opinion regarding its VAT exemption privileges with respect to its importation of equipments, machineries and spare parts. By virtue of this ruling and in reliance to Section 12 of R.A. No. 7082, petitioner filed with the BIR on May 3, 1994, a claim for refund by way of a tax credit the alleged erroneously and illegally paid VAT amounting to P698,059,124.00. On the same date, petitioner filed with this Court its petition seeking for the issuance of a tax credit in its favor." (Rollo, pp. 18-20). On December 18, 1995, the Court of Tax Appeals rendered the assailed decision, the dispositive portion reading: "WHEREFORE, finding the petition meritorious and in accordance with law, the same is hereby GRANTED with modification as to the amount of tax credit to which petitioner is entitled. Respondent is hereby ordered to issue in favor of petitioner a Tax Credit Certificate in the amount of P428,730,320.00, representing erroneously and illegally paid VAT on its importation of equipments, machineries and spare parts for the period covering May 3, 1992 to February 29, 1994. "No pronouncement as to cost. "SO ORDERED." (Rollo, p. 29) The lower amount adjudged as tax credit, instead of P698,059,124.00 as claimed, is because PLDT in its memorandum filed with the CTA claimed a lower amount of tax credit of P428,730,320.00 representing erroneously paid VAT for the period May 3, 1992 to February 29, 1994 (Decision of CTA, p. 4; Rollo, p. 21). On January 5, 1996, petitioner filed a motion for reconsideration (Rollo, p. 8) which was denied by the Court of Tax Appeals in its resolution dated May 9, 1996 (Rollo, pp. 62-72). Hence, this petition for review. The sole issue as stated by petitioner Commissioner of Internal Revenue is whether or not PLDT, whose franchise (under R.A. 7082) expressly provides that the payment of the franchise tax of three per cent (3%) of the gross receipts shall be in lieu of all taxes is exempt from paying the VAT on its importation of equipment, machineries and spare parts for the use of its telecommunication system (Petition, p. 5; Rollo, p. 11). The issue revolves around the proper interpretation of the phrase "in lieu of all taxes" in Section 12 of R.A. 7082, which reads: "SEC. 12. The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof : Provided, That the grantee its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. xxx xxx xxx in relation to Section 117 of the NIRC, as amended by Executive Order No. 72: "Sec. 117. Tax on franchises . Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon the gross receipts from the business covered by the law granting the franchise, a tax in accordance with the schedule prescribed hereunder. cdpr (a) . . . (b) On telephone and/or telegraph systems, and radio/or broadcasting stations ... Three (3%) per cent (c) . . . "The grantee shall file the return with and pay the tax due thereon to, the Commissioner of Internal Revenue or his duly authorized representative in accordance with the provisions of Section 125 of this Code, and the return shall be subject to audit by the Bureau of Internal Revenue, any provision of any existing law to the contrary notwithstanding." Petitioner contends that the value added tax (VAT) on importations under Section 101 of the Tax Code, as amended, is neither a tax on franchise nor on gross receipts or earnings but is a privilege tax for importing goods whether intended for sale or for personal use or consumption, and is, therefore, not covered by the exempting privilege in Section 12 of R.A. 7082. The contention is patently without merit. The contention is belied by the plain and clear words of the statute. "Section 1 of R.A. No. 7082 expressly authorizes PLDT to purchase all types of telecommunication systems, equipment, machineries and spare parts necessary for it to exercise the right privilege and authority to carry on the business of providing basic and enhanced telecommunication services within the bounds of its franchise area. Correctly explained by the Court of Tax Appeals in its resolution denying the motion for reconsideration: "The equipment, machineries and spare parts imported were used by petitioner in its business operations pursuant to its legislative franchise under Section 1 of R.A. 7082, to wit: "SEC. 1. Subject to the provisions of the Constitution, the Philippine Long Distance Telephone Company (PLDT) its successors or assigns, and hereunder referred to as the grantee, is hereby granted the right privilege and authority to carry on the business of providing basic and enhanced telecommunications services in and between provinces, cities and municipalities in the Philippines and between the Philippines and other countries and territories and, for this purpose to establish, operate, manage, lease, maintain and purchase telecommunications systems, including mobile, cellular and wired or wireless telecommunications systems, fiber optics, multichannel transmission distribution systems, satellite transmit and receive systems, and other telecommunications systems and their value-added services such as but not limited to transmission of voice, data, facsimile, control signals, audio and video, information service bureau and all other telecommunications systems technologies as are at present available or be made available through technical advances or innovations in the future, or construct, acquire, lease and operate or manage transmitting and receiving stations and switching stations, both for local and international services, lines, cable or systems, as is, or are, convenient or essential to efficiently carry out the purposes of this franchise, . . .. (Admitted in the Answer.)' [Emphasis supplied.] "Section 1, as above-mentioned, specifically authorizes petitioner to import equipment, machineries and spare parts needed for operating its franchise. On the basis of this franchise, petitioner pursuant to Section 12 thereof pays a 3% franchise tax based on gross receipts from its telephone and/or other telecommunications business which tax shall be in lieu of all taxes on this franchise or earnings thereof. This to our opinion carries with it the VAT on importation of capital goods because the importation of capital goods have been granted to it by virtue of its franchise under Sec. 1 of R.A. 7082. As such, the act of importation is well within the scope of the petitioner's franchise. Therefore, the 3% franchise tax includes the VAT on the importation of capital goods under Section 101 of the Tax Code. "As a matter of fact, respondent even conceded by stating that the 3% franchise tax shall be collected as substitute for any internal revenue taxes , other than those which the grantee is made expressly liable imposed on its franchise or gross receipts/earning thereof.' There is no doubt that respondent has admitted in her Answer the existence of Section 1 of R.A. 7082 which is the scope of petitioner's authority and grant by virtue of said franchise. Respondent by her own admission cannot change course by stating otherwise. The importation of capital goods subject matter of this case is clearly included, as conceded by respondent, in the authority granted in favor of petitioner pursuant to its franchise under Section 1 of R.A. 7082." (Rollo. pp. 66-69) It is a basic rule of statutory construction that a meaning that does not appear nor is intended or reflected in the very language of the statute cannot be placed therein (Masikad vs. Tanodbayan, 127 SCRA 724; Chang Yung Fa, et al. vs. Gianzon, etc., 97 Phil. 913). It is worth noting that the exempting clause or the "in lieu" provision in Sec. 12 of R.A. 7082, which reads "shall be in lieu of all taxes on this franchise or earnings thereof" is couched in a general term and all encompassing that it is safe to say that respondent PLDT is likewise exempted from paying the Value Added Tax (VAT) on its importation of equipment, machineries and spare parts for the use of its telecommunication system. If the intention of the law were to delimit the extent of the exemption, the legislative authority could have enumerated the kinds of taxes and assessments which shall not be collected and restrict the exemption by specific words. It is a principle of statutory construction that general terms may be restricted by specific words, with the result that the general language will be delimited by the specific language which indicates the statutes object and purpose (Manila Electric Company vs. Vera, 67 SCRA 352; 360; Statutory Construction by Crawford, 1940 ed., p. 324-325). Aside from the 3% franchise tax, respondent PLDT is expressly made liable by Sec. 12 of R.A. 7082 only for the following: a) "to pay the same taxes on their real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay": and b) "(t)hat the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 . . .". We quote with approval the decision of the Court of Tax Appeals: "The phrase 'in lieu of' means instead of in place of: or in substitution for (Black v. Barnes, 46 P.2d 625, 626, 142 Kau. 381. Rutherland v. Oroville-Wyandotte Irr. Dist. 22 P.2d 505, 218 Cal. 242; Words and Phrases, Vol. 21, p. 472). It does not mean 'in addition to' (Glassman Const. Co. v. Baltimore Brick Co., 246 Md. 478, 228 A.2d 472, 474, Black's Law Dictionary, 6th ed., 1990, p. 787). The 'in lieu of' implies the existence of something for which a substitution is being made. Thus, the 'in lieu of all other taxes' means that none other than the tax specified however described can be demanded. It limits the liability to the specific tax (State of Tennessee v. Bank of Commerce, 53 F. 735, 736, Words and Phrases, Vol. 21, p. 474). Thus, the phrase 'in lieu of all taxes' has the effect of exempting from taxation the VAT (which is covered under the general term 'taxes' under Section 12 of R.A. 7082) on the purchases of imported equipments, machineries and spare parts made by petitioner by virtue of its paying of the 3% Franchise Tax pursuant to Section 117 of the NIRC and Section 12 of R.A. 7082. The rationale or purpose for the exemption from all other taxes except the income tax and the real property tax granted on petitioner upon the payment of the 3% Franchise Tax is 'that such exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the grantee' (Province of Misamis Oriental v. Cagayan Electric Power and Light Company, Inc., G.R. No. 45355, January 12, 1990, 181 SCRA 38). "Furthermore, there is nothing in the provisions of Section 12 of R.A. 7082 which can be construed as expressly excepting petitioner from the exemption to the VAT similar to the proviso on income tax and real property taxes. The only tax imposable on petitioner is the 3% Franchise Tax, the income tax and the real property tax. Otherwise, the law could very well have provided that petitioner should and is still liable to the VAT. It is an elementary rule in statutory construction that the exceptions in the law will not be enlarged beyond the actual signification of the words used or extended beyond the limits which the words themselves actually set (De Jesus v. City of Manila, 29 Phil. 73)." (Decision, CTA, pp. 8-9; Rollo, pp. 25-26). It also bears stressing that the Bureau of Internal Revenue and the Department of Finance are in accord in interpreting the phrase "in lieu of all taxes" and one in saying that petitioner is exempt from the 10% value added tax under Section 101 of the Tax Code. In BIR Ruling UN-140-94, the Bureau of Internal Revenue, through Assistant Commissioner Jaime M. Maza, ruled that "(t)he 'in lieu of all taxes' provision under Section 12 of RA 7082 clearly exempts PLDT from all taxes including the 10% value-added tax (VAT) prescribed by Section 101(a) of the same Code on its importations of equipment, machineries and spare parts necessary in the conduct of its business covered by the franchise, except the aforementioned enumerated taxes for which PLDT is expressly made liable." (Rollo, p. 98). In reply to a letter of PLDT dated 29 July 1994, and supplemental memorandum dated November 23, 1994 requesting a ruling by the Department of Finance on the matter of the payment of taxes and duties on PLDT's importation of equipment, machineries and spare parts to be used in the operation of its business pursuant to its franchise Acting Secretary Romeo L. Bernardo wrote, "(t)hus when Congress provided in Section 12 of R.A. 7082 for the taxes for which PLDT shall be liable and that payment of the franchise tax shall be in lieu of other taxes the lawmakers must have intended to include the import duties and taxes, which is not included in the enumeration of taxes PLDT shall pay, in the term taxes of the 'in lieu of' clause to which PLDT shall not be subject. To hold otherwise would make the obvious preferential tax treatment of the franchise holder nugatory." (Rollo, p. 109)" cdlex The Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. As a matter of principle, Courts will not set aside conclusions reached by the Court of Tax Appeals which is, by the very nature of its function dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority (Commissioner of Internal Revenue vs. The Court of Appeals. The Court of Tax Appeals and Ateneo de Manila University. G.R. No. 115349, promulgated April 16, 1997, citing Commissioner of Internal Revenue vs. Wander Philippines, Inc., et al., 160 SCRA 573). WHEREFORE, premises considered, the petition is DENIED DUE COURSE and DISMISSED. SO ORDERED. Valdez , Jr . and Cosico , JJ ., concur.