Philippine Airlines, Inc. v. Court of Tax Appeals

FIFTH DIVISION [CA-G.R. SP No. 69388. November 25, 2003.] PHILIPPINE AIRLINES, INC. , petitioner , vs . HONORABLE COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N CARANDANG , J p : This is a petition for review under Rule 43 of the 1997 Rules of Civil Procedure seeking to reverse the decision of the Court of Tax Appeals (CTA) dated 05 September 2001 which denied petitioner's claim for refund of the 10% overseas communications tax (OCT) charged and collected by the Philippine Long Distance Telephone Company (PLDT) and remitted to respondent Commissioner of 'the Bureau of Internal Revenue (BIR), as well as the resolution of the Court of Tax Appeals dated 30 January 2002 which denied petitioner's motion for reconsideration of the decision. The facts of the case are as follows: On 20 November 1998, petitioner's AVP-Revenue Operations and Tax Services Atty. Edgardo P. Curbita filed with the office of the respondent Commissioner of Internal Revenue, a written request for refund of the amount of P1,089,955.68 which is the total amount of 10% overseas communications tax (OCT) collected by PLDT from the petitioner for the billing period starting January 1996 through March 1998, attaching thereto the breakdown of the tax. Said request cites section 13 of petitioner's franchise, Presidential Decree No. 1590 and BIR Ruling No. 97-94 dated 13 April 1994 as petitioner's bases for claiming the refund. On 26 March 1999, Atty. Curbita filed with the CIR a supplemental written request for refund involving the amount of P815,948.37 representing the additional 10% OCT collected by PLDT from the petitioner for the billing periods starting January 1997 through November 1998, attaching thereto the breakdown of the tax. As in the first request, the supplemental request also cites section 13 of P.D. 1590 and BIR Ruling No. 97-94 dated 13 April 1994 as petitioner's bases for claiming the refund. IcADSE To prevent its claim for refund from prescribing due to the restriction imposed by section 229 of the National Internal Revenue Code (NIRC), PAL filed a petition for review with the Court of Tax Appeals on 23 April 1999, praying that the BIR be ordered to refund to PAL the 10% OCT erroneously collected from the latter totaling P1,769,860.18. In its Answer to the petition, BIR interposed the following Special and Affirmative Defenses: "5. The `in lieu of all taxes' provision in the petitioner's franchise applies only if petitioner paid the taxes under subsections (a) and (b) of Presidential Decree No. 1590 and since petitioner is not paying any of the said taxes, then no such tax can be applied in lieu of the 10% overseas communication tax, hence, petitioner is subject thereto and therefore not entitled to the refund claimed; 6. Petitioner's claim has partially, if not totally, prescribed; 7. The petition states no cause of action as it does not alleged the date/s when the taxes sought to be refunded were actually paid; 8. In an action for the refund/credit, the burden of proof is on the taxpayer to establish its right to the refund and failure to sustain the burden is fatal to the action for tax refund; 9. Taxes paid and collected are presumed to have been made in accordance with law and regulations, hence, not refundable; and 10. Well-settled is the rule that claims for refund are construed strictly against the claimants since it partakes of the nature of an exemption for taxation (Resins, Inc. vs. Auditor General, 75 SCRA 754, 1968). " The CTA rendered its decision dated 05 September 2001 denying the petition of PAL for lack of merit. It found meritorious BIR's contention that the "in lieu of all taxes' provision in petitioner's franchise applies only if petitioner paid the taxes under subsections (a) and (b) of PD No. 1590, and that since petitioner did not pay the corporate income tax nor the 2% franchise tax, then no such tax can be applied in lieu of the 10% overseas communications tax. PAL moved for reconsideration of the CTA on 02 October 2001 arguing, among others, that under section 13 of PD 1590, PAL was granted the option to pay whichever of the following taxes: (a) basic corporate income tax, or (b) 2% franchise tax of gross revenue derived from all sources that will result in a lower tax. PAL chose to pay the basic corporate income tax for the taxable year involved in accordance with the provisions of the NIRC, depreciating its assets at twice the normal rate of depreciation, and carrying over as deduction from taxable income its net loss incurred in the last five years; which computation resulted in a zero tax liability. PAL further argued that it could not be faulted for not choosing to pay the 2% franchise tax, which is definitely higher than the zero basic corporate income tax and that notwithstanding its non-payment of the 2% franchise tax because it is a higher tax liability, PAL complied with its tax obligation under section 13 of PD 1590, such that said compliance is in lieu of all other taxes, including the 10% OCT on overseas telephone calls. DaACIH In a Resolution dated 30 January 2002, the CTA denied PAL's motion for reconsideration, reasoning that the particular issue raised in the petition has already been resolved in CTA Case No. 5824 entitled PAL vs. CIR . Associate Judge Juanito C. Castaeda disagreed with the opinion of the majority and rendered a dissenting opinion, favoring petitioner. In the present petition, PAL contends that the Court of Tax Appeals committed grave and reversible error when it dismissed its petition for lack of merit based on its erroneous interpretation of section 13 of PD 1590, i.e. , that the 'in lieu of all taxes' provision applies only if PAL paid the taxes under subsections (a) or (b) of PD 1590, regardless of whether or not it suffered a net loss during the particular taxable year involved. We find merit in the instant petition. The "in lieu of all taxes" clause under section 13 of petitioner's legislative franchise, exempts PAL from all taxes necessary in the conduct of its business covered by the franchise, except the tax on its real property for which PAL is expressly made payable. The phrase 'in lieu of' means instead of; in place of; or on substitution for ( Black v. Barnes , 46 p. 2d 625, 626, 142, Kan. 381; Rutherland vs. 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 vs. Bank of Commerce , 53 F. 735, 736, Words and Phrases, Vol. 21, p. 474)." 1 The "in lieu of all taxes" proviso in the franchises of numerous grantees has been consistently upheld by no less than the Supreme Court. In the case of Philippine National Railways vs. Nolting 2 , it was held that the `in lieu of' clause in PNR's franchise exempted it from the documentary stamp tax imposed on bills of lading issued by railway companies, PNR's franchise provided that the annual payment for which PNR is liable, when promptly and fully made "shall be in lieu of all taxes of every name and nature, municipal, provincial or central, upon its capital stock, franchise, right of way, earnings and all other property owned or operated by the grantee, under this concession or franchise. In upholding PNR's exemption from DST on bill of lading it had issued, the Supreme Court said: "The phrase `all taxes of every name and nature is a very inclusive statement, especially when it names, in connection therewith, the only government entities who have a right to collect taxes, it not only includes all payments which might be regarded as taxes, but it excludes everything which might by any possibility, be denominated taxes . . ." Likewise, in the case of Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc. 3 , the Supreme Court upheld the validity and effectivity of the "in lieu of all taxes" provision found in therein petitioner's legislative franchise and held that the franchise was not amended by PD 231 (Local Tax Code) which authorized provinces to impose franchise tax on businesses operating in the provinces. The same rationale was applied in the case of PLDT vs. CIR 4 , wherein the CTA held that 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 equipment, 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 to 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". DHEACI In CTA Case No. 45 dated February 28, 1986, the CTA ruled that a provision of law imposing a tax in lieu of all taxes of any kind, nature or description, has been generally considered a commutation tax, that is, it is a combination of two or more taxes, as an excise tax or franchise tax, payment of which would give rise to a privilege exemption from all other taxes. 5 Having said thus, what remains to be resolved is whether or not PAL is entitled to a refund of the overseas communications tax it paid to PLDT despite the fact that PAL did not pay either the corporate income tax or the 2% franchise tax. We rule in the affirmative. In deciding in favor of the Commissioner, the CTA relied upon the earlier case of Philippine Airlines, Inc. vs. Commissioner of Internal Revenue , CTA Case No. 5824, promulgated on June 13, 2001, which involved the question of whether or not PAL is entitled to refund of 20% final withholding tax on interest on its Philippine currency bank deposits. But the same principle cannot apply here because tax on interest is on bank deposit is a component of income tax, but only withheld and final. In denying PAL's claim for refund, the CTA held thus: "xxx xxx xxx Prescinding from the above, the Petitioner's franchise clearly provides that "in consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise" either the basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code, or a franchise tax of two percent (2%) of the gross revenues derived by the grantee from all sources. From the foregoing, it is quite unequivocal that Petitioner is required under its franchise to pay a franchise tax of two percent of its gross revenues without any further qualification that it is exempt from such when it is at a net loss position at the end of the taxable year. Under the franchise, it is mandatory that the Petitioner must pay its franchise tax of two percent (2%) or to pay its corporate tax so that it may avail of the incentives provided under the last paragraph that "the tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license and other fees and charges of any kinds . . .", regardless of whether or not it suffered a net loss during a particular taxable year. . . . Analyzing, therefore, the wordings of the franchise more particularly the last paragraph of Section 13 of PD 1590, it is clear that Petitioner has the option to pay either a corporate income tax or 2% franchise tax to avail of the incentive. Had petitioner paid the 2% franchise tax, then the final withholding taxes withheld may be considered as "other taxes" as it falls under income tax. However, should it choose to avail of the first alternative, then final withholding tax on income may not be considered as "other taxes". In other words, should PAL opt to avail of the first alternative, that is, to pay corporate income tax, payment of final withholding tax is deemed part of its corporate income tax liability, therefore, not refundable ." This Court is of the view that in this case, the CTA gave an erroneous interpretation to section 13 of PD 1590, which provides in part: "Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result to a lower tax : cCAaHD (a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code; or (b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or non-transport operations; provided that with respect to international air-transport service, only the gross passengers, mail, and freight revenues from its outgoing flights shall be subject to this tax. The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes , duties, royalties, registration, license, and other fees and charges of any kind, nature, or description imposed, levied, established, assessed, or collected by any municipal, city or provincial, or national authority or government agency, now or in the future . . ." In other words, this tax incentive provision in the franchise of PAL gives the latter the option to choose between the basic corporate income tax or the 2% franchise tax, whichever will yield the lesser tax liability. This is consistent with the legislative policy and intent of PD 1590, which is to grant tax privileges to PAL, as amply expressed in one of its "whereas" clauses, to wit: "WHEREAS, there is an urgent need to assist and support our National Flag Carrier in improving and expanding the domestic and international services it provides the general public and to make its operations financially sound and economically viable to effect the desired social and economic development of our country." A careful reading of the decision of the respondent Court in CTA Case No. 5824 reveals that its interpretation failed to consider the qualification provided in paragraph 1 of section 13, which is that the tax liability of PAL shall be that which will result to a lesser tax ( i.e. between the basic corporate income tax and the 2% franchise tax). It is likewise erroneous to conclude that "it is mandatory that (the petitioner) must pay its franchise tax of two percent (2%) or to pay its corporate income tax to avail of the incentives provided under the last paragraph that the `tax paid by the grantee under either of the above alternative shall be in lieu of all other taxes, duties, royalties, registration, license and other fees and charges. . .', regardless of whether or not it suffered a net loss during a particular taxable year". To repeat, the only qualification provided for in the law is the option given to PAL to choose between the tax which will yield the lesser liability. Nothing is said about exemption from other taxes if PAL, choosing the payment of corporate income tax, does not pay income tax at all if the lawmakers intended to provide for such a condition, then they would have included such a provision. More importantly, if We were to uphold this interpretation, this would effectively negate the rationale of the law, by stripping PAL of the right given to it by virtue of its franchise to avail of tax incentives, such as the 'in lieu of all other taxes' clause. The possibility that PAL will incur losses was not unforeseen by the lawmakers. In fact, the last paragraph of section 13 treats of "net loss incurred in any year" and allows PAL to "carry over the same as a deduction from taxable income . . . up to five years following the year of such loss". This is inconsistent with the interpretation of the respondent Court that PAL is obliged to pay franchise tax if it's corporate income tax yields zero tax liability for the taxable year. As correctly contended by the petitioner, if the intention of the law was to compel the petitioner to pay the 2% franchise tax in case of a net loss position, it would not have authorized petitioner to carry over the net loss as a deduction for the next five (5) taxable years. We find that the dissenting opinion of Judge Castaeda expressed the correct interpretation, to wit: "From this Court's decision promulgated on September 5, 2001, which cites the earlier decision in Philippine Airlines, Inc. vs. Commissioner of Internal Revenue , CTA Case No. 5824, promulgated on June 13, 2001, it appears that the reason for the denial of the claim for refund/tax credit is that PAL paid neither the basic corporate income tax nor the 2% franchise tax as required by the PAL franchise. I beg to differ with this conclusion. Section 13 of P.D. 1590 provides that PAL shall pay the lower or either the basic corporate income tax based on its net taxable income computed in accordance with the provisions of the National Internal Revenue Code or the 2% franchise tax of gross revenues derived from all sources in lieu of all other taxes. For purposes of computing the basic corporate income tax, PAL is allowed to accelerate depreciation at not more than twice the normal rate and to carry over as a deduction any net loss incurred in any year up to five years following the year of such loss. TaDIHc Since it allows PAL to accelerate depreciation up to twice the normal rate as well as to carry over as a deduction any net loss for up to five years, Section 13 of P.D. 1590 clearly envisions a situation where no basic corporate income tax is payable by PAL because it is in a net loss position and therefore, has no net taxable income. Consequently, in the event that no basic corporate income tax is due, which tax is obviously lower than the 2% franchise tax based on gross revenue, Pal is not liable for any other tax except for tax on its real property. This is the clear intendment of P.D. 1590, which grants a new franchise to PAL. Pursuant to Section 13 of P.D. 1590, PAL is subject to basic corporate income tax or 2% franchise tax, whichever alternative will result in a lower tax. PAL should therefore not be subject to overseas communications tax since the same falls under the category of 'all other taxes' that PAL is exempt from. I am thus registering my dissent to the conclusion embodied in the Resolution." In sum, We hold that the petitioner is entitled avail of the "in lieu of all other taxes" proviso of section 13 of PD 1590 despite the fact that it did not pay the basic corporate income tax, having chosen such as that tax which resulted in lesser liability, or no liability at all. PAL is thus entitled to the claim of refund for the overseas communications tax it paid to PLDT. WHEREFORE, premises considered, the Decision of the Court of Tax Appeals dated 05 September 2001, as well as its Resolution dated 30 January 2002 are hereby REVERSED and SET ASIDE. Respondent Commissioner of Internal Revenue is hereby ORDERED to refund to the petitioner the amount of P1,769,860.18. SO ORDERED. Labitoria and Gozo-Dadole, JJ ., concur. Footnotes 1. Philippine Long Distance Telephone Company vs. The Hon. Commissioner of Internal Revenue , C.T.A. Case No. 5106, December 18, 1995. 2. 34 Phil. 401. 3. 181 SCRA 38 (1990). 4. CTA Case No. 5106, December 18, 1995. 5. BIR Ruling UN 035-94 dated February 3, 1994.