CIR v.
PILIPINAS SHELL PETROLEUM Whether or not the excise tax on petroleum products sold to
Facts:
The SC in one case did not grant PSP a tax refund for the
latter’s failure to establish that is tax exempt.
Resp PSP:
That a plain reading of Section 135 of the NIRC
reveals that it is the petroleum products sold to international
carriers which are exempt from excise tax for which reason
no excise taxes are deemed to have been due in the first place.
It points out that excise tax being an indirect tax, Section 135
in relation to Section 148 should be interpreted as referring
to a tax exemption from the point of production and removal
from the place of production considering that it is only at that
point that an excise tax is imposed. The situation is unlike the
value–added tax (VAT) which is imposed at every point of
turnover – from production to wholesale, to retail and to end–
consumer. Respondent thus concludes that exemption could
only refer to the imposition of the tax on the statutory seller,
in this case the respondent. This is because when a tax paid
by the statutory seller is passed on to the buyer it is no longer
in the nature of a tax but an added cost to the purchase price
of the product sold.
That our ruling that Section 135 only prohibits
local petroleum manufacturers like respondent from shifting
the burden of excise tax to international carriers has adverse
economic impact as it severely curtails the domestic oil
industry. Requiring local petroleum manufacturers to absorb
the tax burden in the sale of its products to international
carriers is contrary to the State’s policy of “protecting
gasoline dealers and distributors from unfair and onerous
trade conditions,” and places them at a competitive
disadvantage since foreign oil producers, particularly those
whose governments with which we have entered into
bilateral service agreements, are not subject to excise tax for
the same transaction.
that the imposition by the Philippine Government
of excise tax on petroleum products sold to international
carriers is in violation Chicago Convention on International
Aviation.
Sol Gen:
That the excise tax, when passed on to the
purchaser, becomes part of the purchase price. This refutes
respondent’s theory that the exemption attaches to the
petroleum product itself and not to the purchaser for it would
have been erroneous for the seller to pay the excise tax and
inequitable to pass it on to the purchaser if the excise tax
exemption attaches to the product.
That petroleum manufacturers selling petroleum
products to international carriers are exempt from paying
excise taxes. Section 135 does not intend to exempt
manufacturers or producers of petroleum products from the
payment of excise tax.
Issues:
international carriers for use or consumption outside the
Philippines attaches to the article when sold to say
international carriers, as it is the article which is exempt from
the tax, not the international carrier. Simply, whether or not
respondent PSP is exempt from excise tax.
Ruling:
Yes.
Under Section 129 of the NIRC, excise taxes are those applied
to goods manufactured or produced in the Philippines for
domestic sale or consumption or for any other disposition
and to things imported. Excise taxes as used in our Tax
Code fall under two types – (1) specific tax which is based on
weight or volume capacity and other physical unit of
measurement, and (2) ad valorem tax which is based on
selling price or other specified value of the goods. Aviation
fuel is subject to specific tax under Section 148 (g) which
attaches to said product “as soon as they are in existence as
such.”
That excise tax as presently understood is a tax on property
has no bearing at all on the issue of respondent’s entitlement
to refund. Nor does the nature of excise tax as an indirect tax
supports respondent’s postulation that the tax
exemption provided in Sec. 135 attaches to the petroleum
products themselves and consequently the domestic
petroleum manufacturer is not liable for the payment of
excise tax at the point of production. As already discussed in
our Decision, to which Justice Bersamin concurs, “the accrual
and payment of the excise tax on the goods enumerated under
Title VI of the NIRC prior to their removal at the place of
production are absolute and admit of no exception.” This also
underscores the fact that the exemption from payment of
excise tax is conferred on international carriers who
purchased the petroleum products of respondent.
On the basis of Philippine Acetylene, we held that a tax
exemption being enjoyed by the buyer cannot be the basis of
a claim for tax exemption by the manufacturer or seller of the
goods for any tax due to it as the manufacturer or seller. The
excise tax imposed on petroleum products under Section 148
is the direct liability of the manufacturer who cannot thus
invoke the excise tax exemption granted to its buyers who are
international carriers. And following our pronouncement
in Maceda v. Macarig, Jr. we further ruled that Section 135(a)
should be construed as prohibiting the shifting of the burden
of the excise tax to the international carriers who buy
petroleum products from the local manufacturers. Said
international carriers are thus allowed to purchase the
petroleum products without the excise tax component which
otherwise would have been added to the cost or price fixed
by the local manufacturers or distributors/sellers.
The exemption from excise tax of aviation fuel purchased by
international carriers for consumption outside the
Philippines fulfills a treaty obligation pursuant to which our
Government supports the promotion and expansion of
international travel through avoidance of multiple taxation
and ensuring the viability and safety of international air
travel. In recent years, developing economies such as ours
focused more serious attention to significant gains for
business and tourism sectors as well. Even without such
recent incidental benefit, States had long accepted the need
for international cooperation in maintaining a capital
intensive, labor intensive and fuel intensive airline industry,
and recognized the major role of international air transport
in the development of international trade and travel.
Under the basic international law principle of pacta sunt
servanda, we have the duty to fulfill our treaty obligations in
good faith. This entails harmonization of national legislation
with treaty provisions. In this case, Sec. 135(a) of the NIRC
embodies our compliance with our undertakings under the
Chicago Convention and various bilateral air service
agreements not to impose excise tax on aviation fuel
purchased by international carriers from domestic
manufacturers or suppliers. In our Decision in this case, we
interpreted Section 135 (a) as prohibiting domestic
manufacturer or producer to pass on to international carriers
the excise tax it had paid on petroleum products upon their
removal from the place of production, pursuant to Article 148
and pertinent BIR regulations. Ruling on respondent’s claim
for tax refund of such paid excise taxes on petroleum
products sold to tax–exempt international carriers, we found
no basis in the Tax Code and jurisprudence to grant the
refund of an “erroneously or illegally paid” tax.
Section 135(a) of the NIRC and earlier amendments to
the Tax Code represent our Governments’ compliance with
the Chicago Convention, its subsequent resolutions/annexes,
and the air transport agreements entered into by the
Philippine Government with various countries. The rationale
for exemption of fuel from national and local taxes was
expressed by ICAO as follows:chanRoblesvirtualLawlibrary
...The Council in 1951 adopted a Resolution and
Recommendation on the taxation of fuel, a
Resolution on the taxation of income and of
aircraft, and a Resolution on taxes related to the
sale or use of international air transport (cf. Doc
7145) which were further amended and amplified
by the policy statements in Doc 8632 published in
1966. The Resolutions and Recommendation
concerned were designed to recognize the
uniqueness of civil aviation and the need to
accord tax exempt status to certain aspects of
the operations of international air transport
and were adopted because multiple taxation on
the aircraft, fuel, technical supplies and the
income of international air transport, as well as
taxes on its sale and use, were considered as
major obstacles to the further development of
international air transport. Non–observance of
the principle of reciprocal exemption envisaged in
these policies was also seen as risking retaliatory
action with adverse repercussions on international
air transport which plays a major role in the
development and expansion of international trade
and travel.
In the 6th Meeting of the Worldwide Air Transport Conference
(ATCONF) held on March 18–22, 2013 at Montreal, among
matters agreed upon was that “the proliferation of various
taxes and duties on air transport could have negative impact
on the sustainable development of air transport and on
consumers.” Confirming that ICAO’s policies on taxation
remain valid, the Conference recommended that “ICAO
promote more vigorously its policies and with industry
stakeholders to develop analysis and guidance to States on
the impact of taxes and other levies on air transport.”13 Even
as said conference was being held, on March 7, 2013,
President Benigno Aquino III has signed into law
Republic Act (R.A.) No. 1037814 granting tax incentives to
foreign carriers which include exemption from the 12%
value–added tax (VAT) and 2.5% gross Philippine
billings tax (GPBT). GPBT is a form of income tax applied to
international airlines or shipping companies. The law, based
on reciprocal grant of similar tax exemptions to Philippine
carriers, is expected to increase foreign tourist arrivals in the
country.
Indeed, the avowed purpose of a tax exemption is always
“some public benefit or interest, which the law–making body
considers sufficient to offset the monetary loss entailed in the
grant of the exemption.” The exemption from excise tax of
aviation fuel purchased by international carriers for
consumption outside the Philippines fulfills a treaty
obligation pursuant to which our Government supports the
promotion and expansion of international travel through
avoidance of multiple taxation and ensuring the viability and
safety of international air travel.
We maintain that Section 135 (a), in fulfillment of
international agreement and practice to exempt aviation fuel
from excise tax and other impositions, prohibits the passing
of the excise tax to international carriers who buys petroleum
products from local manufacturers/sellers such as
respondent. However, we agree that there is a need to
reexamine the effect of denying the domestic
manufacturers/sellers’ claim for refund of the excise
taxes they already paid on petroleum products sold to
international carriers, and its serious implications on
our Government’s commitment to the goals and
objectives of the Chicago Convention.
Article 24 (a) of the Convention simply provides that fuel and
lubricating oils 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. Subsequently, the
exemption of airlines from national taxes and customs duties
on spare parts and fuel has become a standard element of
bilateral air service agreements (ASAs) between individual
countries.
With the prospect of declining sales of aviation jet fuel sales
to international carriers on account of major domestic oil
companies’ unwillingness to shoulder the burden of excise
tax, or of petroleum products being sold to said carriers by
local manufacturers or sellers at still high prices , the practice
of “tankering” would not be discouraged. This scenario does
not augur well for the Philippines’ growing economy and the
booming tourism industry. Worse, our Government would be
risking retaliatory action under several bilateral agreements
with various countries. Evidently, construction of the tax
exemption provision in question should give primary
consideration to its broad implications on our commitment
under international agreements.
In view of the foregoing reasons, we find merit in
respondent’s motion for reconsideration. We therefore
hold that respondent, as the statutory taxpayer who is
directly liable to pay the excise tax on its petroleum
products, is entitled to a refund or credit of the excise
taxes it paid for petroleum products sold to international
carriers, the latter having been granted exemption from
the payment of said excise tax under Sec. 135 (a) of the
NIRC.
H. TAMBUNTING PAWNSHOP v. CIR
Facts:
Petitioner is a domestic corp duly licensed and authorized to
engage in the pawnshop business. It appeals the decision of
the CTA ordering it to pay deficiency income taxes in the
amount of P.5M for taxable year 1997, plus 20% delinquency
interest.
The BIR issued assessment notices and demand letters
assessing petitioner Tambunting for deficiency percentage
tax, income tax and compromise penalties for year 1997.
Petitioner instituted an admin protest against the assessment
notices and demand letter with the CIR.
CTA ordered petitioner to pay CIR the deficiency income tax
for the year 1997, plus 20% delinquency interest.
CTA En Banc denied petitioner’s petitioner for review.
Issue:
Whether or not petitioner Tambunting should have been
allowed to its supposed deductions.
Ruling:
No.
At the outset, the Court agrees with the CTA En Banc that
because this case involved assessments relating to
transactions incurred by Tambunting prior to the effectivity
of Republic Act No. 8424 (National Internal Revenue Code of
1997, or NIRC of 1997), the provisions governing the
propriety of the deductions was Presidential Decree 1158
(NIRC of 1977). In that regard, the pertinent provisions of
Section 29 (d) (2) & (3)of the NIRC of 1977 state:
xxxx
(2) By corporation. — In the case of a corporation,
all losses actually sustained and charged off within
the taxable year and not compensated for by
insurance or otherwise.
(3) Proof of loss. — In the case of a non-resident
alien individual or foreign corporation, the losses
deductible are those actually sustained during the
year incurred in business or trade conducted
within the Philippines, and losses actually
sustained during the year in transactions
entered into for profit in the Philippines although not
connected with their business or trade, when such losses are
not compensated for by insurance or otherwise. The
Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, is hereby authorized to
promulgate rules and regulations prescribing, among other
things, the time and manner by which the taxpayer shall
submit a declaration of loss sustained from casualty or from
robbery, theft, or embezzlement during the taxable year:
Provided, That the time to be so prescribed in the regulations
shall not be less than 30 days nor more than 90 days from the
date of the occurrence of the casualty or robbery, theft, or
embezzlement giving rise to the loss.
To prove the loss on auction sale, petitioner submitted in
evidence its "Rematado" and "Subasta" books and the
"Schedule of Losses on Auction Sale". The "Rematado" book
contained a record of items foreclosed by the pawnshop while
the "Subasta" book contained a record of the auction sale of
pawned items foreclosed.
However, as elucidated by the petitioner, the gain or loss on
auction sale represents the difference between the capital
(the amount loaned to the pawnee, the unpaid interest and
other expenses incurred in connection with such loan) and
the price for which the pawned articles were sold, as reflected
in the "Subasta" Book. Furthermore, it explained that the
amounts appearing in the "Rematado" book do not reflect the
total capital of petitioner as it merely reflected the amounts
loaned to the pawnee. Likewise, the amounts appearing in the
"Subasta" book, are not representative of the amount of sale
made during the "subastas" since not all articles are
eventually sold and disposed of by petitioner.
Petitioner submits that based on the evidence presented, it
was able to show beyond doubt that it incurred the amount of
losses on auction sale claimed as deduction from its gross
income for the taxable year 1997. And that the
documents/records submitted in evidence as well as the facts
contained therein were neither contested nor controverted
by the respondent, hence, admitted.
In this case, petitioner's reliance on the entries made in the
"Subasta" book were not sufficient to substantiate the
claimed deduction of loss on auction sale. As admitted by the
petitioner, the contents in the "Rematado" and "Subasta"
books do not reflect the true amounts of the total capital and
the auction sale, respectively. Be that as it may, petitioner still
failed to adduce evidence to substantiate the other expenses
alleged to have been incurred in connection with the sale of
pawned items.
The rule that tax deductions, being in the nature of tax
exemptions, are to be construed in strictissimi juris
against the taxpayer is well settled.20 Corollary to this
rule is the principle that when a taxpayer claims a
deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be
able to prove that he is entitled to the deduction which
the law allows.21 An item of expenditure, therefore, must
fall squarely within the language of the law in order to be
deductible.22 A mere averment that the taxpayer has
incurred a loss does not automatically warrant a
deduction from its gross income.
As the CTA En Banc held, Tambunting did not properly prove
that it had incurred losses. The subasta books it presented
were not the proper evidence of such losses from the auctions
because they did not reflect the true amounts of the proceeds
of the auctions due to certain items having been left unsold
after the auctions. The rematado books did not also prove the
amounts of capital because the figures reflected therein were
only the amounts given to the pawnees. It is interesting to
note, too, that the amounts received by the pawnees were not
the actual values of the pawned articles but were only
fractions of the real values.
The requisites for the deductibility of ordinary and
necessary trade or business expenses, like those paid for
security and janitorial services, management and
professional fees, and rental expenses, are that: (a) the
expenses must be ordinary and necessary; (b) they must have
been paid or incurred during the taxable year; (c) they must
have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) they must be supported by
receipts, records or other pertinent papers.23
In denying Tambunting’s claim for deduction of its security
and janitorial expenses, management and professional fees,
and its rental expenses, the CTA En Banc explained:
Contrary to petitioner’s contention, the security/janitorial
expenses paid to Pathfinder Investigation were not duly
substantiated. The certification issued by Mr. Balisado was
not the proper document required by law to substantiate its
expenses. Petitioner should have presented the official
receipts or invoices to prove its claim as provided for under
Section 238 of the National Internal Revenue Code of 1977
From the foregoing provision of law, a person who is subject
to an internal revenue tax shall issue receipts, sales or
commercial invoices, prepared at least in duplicate. The
provision likewise imposed a responsibility upon the
purchaser to keep and preserve the original copy of the
invoice or receipt for a period of three years from the close of
the taxable year in which the invoice or receipt was issued.
The rationale behind the latter requirement is the duty of the
taxpayer to keep adequate records of each and every
transaction entered into in the conduct of its business. So that
when their books of accounts are subjected to a tax audit
examination, all entries therein could be shown as adequately
supported and proven as legitimate business transactions.
Hence, petitioner’s claim that the NIRC of 1977 did not
require substantiation requirements is erroneous."
CONSOLIDATES MINES, INC v. CTA and CIR
Facts:
Petitioner Company, a domestic corporation engaged in
mining, had filed its income tax returns for 1951, 1952, 1953
and 1956. In 1957 examiners of the BIR investigated the
income tax returns filed by the Company because its auditor,
Felipe Ollada, claimed the refund of the sum of P107,472.00
representing alleged overpayments of income taxes for the
year 1951. After the investigation the examiners reported
that (A) for the years 1951 to 1954 (1) the Company had not
accrued as an expense the share in the company profits of
Benguet Consolidated Mines as operator of the Company's
mines, although for income tax purposes the Company had
reported income and expenses on the accrual basis; (2)
depletion and depreciation expenses had been overcharged;
and (3) the claims for audit and legal fees and miscellaneous
expenses for 1953 and 1954 had not been properly
substantiated; and that (B) for the year 1956 (1) the Company
had overstated its claim for depletion; and (2) certain claims
for miscellaneous expenses were not duly supported by
evidence.
In view of said reports the Commissioner of Internal Revenue
sent the Company a letter of demand requiring it to pay
certain deficiency income taxes for the years 1951 to 1954,
inclusive, and for the year 1956. Deficiency income tax
assessment notices for said years were also sent to the
Company. The Company requested a reconsideration of the
assessment, but the Commissioner refused to reconsider,
hence the Company appealed to the Court of Tax Appeals.
On May 6, 1961 the Tax Court rendered judgment ordering
the Company to pay the amounts of P107,846.56,
P134,033.01 and P71,392.82 as deficiency income taxes for
the years 1953, 1954 and 1956, respectively.
However, on August 7, 1961, upon motion of the Company,
the Tax Court reconsidered its decision and further reduced
the deficiency income tax liabilities of the Company to
P79,812.93, P51,528.24 and P71,382.82 for the years 1953,
1954 and 1956, respectively.
Both the Company and the Commissioner appealed to this
Court. The Company questions the rate of mine depletion
adopted by the Court of Tax Appeals and the disallowance of
depreciation charges and certain miscellaneous.
Issue:
Whether or not the Court of Tax Appeals erred with respect
to the rate of mine depletion.
Ruling:
No.
The Tax Code provides that in computing net income there
shall be allowed as deduction, in the case of mines, a
reasonable allowance for depletion thereof not to exceed the
market value in the mine of the product thereof which has
been mined and sold during the year for which the return is
made [Sec. 30(g) (1) (B)].
The formula for computing the rate of depletion is:
Cost of Mine Property
---------------------- = Rate of Depletion Per Unit Estimated ore
Deposit of Product Mined and sold.
The Commissioner and the Company do not agree as to the
figures corresponding to either factor that affects the rate of
depletion per unit. The figures according to the
Commissioner are:
P2,646,878.44 (mine cost) P0.59189 (rate of
------------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)
while the Company insists they are:
P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
4,156,888 tons (estimated
ore deposit)
They agree, however, that the "cost of the mine property"
consists of (1) mine cost; and (2) expenses of development
before production.
As an income tax concept, depletion is wholly a creation
of the statute— "solely a matter of legislative grace."
Hence, the taxpayer has the burden of justifying the
allowance of any deduction claimed. As in connection
with all other tax controversies, the burden of proof to
show that a disallowance of depletion by the
Commissioner is incorrect or that an allowance made is
inadequate is upon the taxpayer, and this is true with
respect to the value of the property constituting the basis
of the deduction. This burden-of-proof rule has been
frequently applied and a value claimed has been
disallowed for lack of evidence.
The Company's balance sheet for December 31, 1947 lists the
"mine cost" of P2,500,000 as "development cost" and the
amount of P1,738,974.37 as "suspense account (mining
properties subject to war losses)." The Company claims that
its accountant, Mr. Calpo, made these errors, because he was
then new at the job. Granting that was what had happened, it
does not affect the fact that the, evidence on hand is
insufficient to prove the cost of development alleged by the
Company. Nor can we rely on the statements of Eligio S.
Garcia, who was the Company's treasurer and assistant
secretary at the time he testified on August 14, 1959. He
admitted that he did not know how the figure P4,238,974.57
was arrived at, explaining: "I only know that it is the figure
appearing on the balance sheet as of December 31, 1946 as
certified by the Company's auditors; and this we made as the
basis of the valuation of the depletable value of the mines."
We, therefore, have to rely on the Commissioner's assertion
that the "development cost" was P131,878.44, broken down
as follows: assessment, P34,092.12; development,
P61,484.63; exploration, P13,966.62; and diamond drilling,
P22,335.07.
The question as to which figure should properly correspond
to "mine cost" is one of fact. The findings of fact of the Tax
Court, where reasonably supported by evidence, are
conclusive upon the Supreme Court.
PHILIPPINE REFINING CO v. CA
Facts:
Petitioner PRC was assessed by CIR to pay deficiency tax for
1985 which was timely protested by petitioner that it was
based on erroneous disallowances of “bad debts” and
“interest expense” although the same are both allowable and
legal deductions.
But Respondent Commissioner still issued a warrant of
garnishment against the deposits of petitioner so petitioner
filed a petition with the CTA alleging that “bad debts” and
“interest expense” are legal and allowable deductions.
CTA modified the findings of the commissioner by reducing
the deficiency income tax assessment with surcharge and
interest incident to delinquency. The Tax court reversed and
set aside the commissioner’s disallowance of the interest
expense but maintained the disallowance of the bad debts. CA
affirmed the CTA’s decision.
Issue:
Whether or not petitioner PRC is entitled to the allowable
deduction of bad debt
Ruling:
This pronouncement of respondent Court of Appeals
relied on the ruling of this Court in Collector vs. Goodrich
International Rubber Co., which established the rule in
determining the "worthlessness of a debt." In said case, we
held that for debts to be considered as "worthless," and
thereby qualify as "bad debts" making them deductible,
the taxpayer should show that (1) there is a valid and
subsisting debt; (2) the debt must be actually ascertained
to be worthless and uncollectible during the taxable year;
(3) the debt must be charged off during the taxable year;
and (4) the debt must arise from the business or trade of
the taxpayer. Additionally, before a debt can be
considered worthless, the taxpayer must also show that it
is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken
by the taxpayer to prove that he exerted diligent efforts to
collect the debts, viz: (1) sending of statement of accounts;
(2) sending of collection letters; (3) giving the account to
a lawyer for collection; and (4) filing a collection case in
court.
On the foregoing considerations, respondent Court of
Appeals held that petitioner did not satisfy the
requirements of "worthlessness of a debt" as to the
thirteen (13) accounts disallowed as deductions.
It appears that the only evidentiary support given by PRC
for its aforesaid claimed deductions was the explanation
or justification posited by its financial adviser or
accountant, Guia D. Masagana. Her allegations were not
supported by any documentary evidence, hence, both the
Court of Appeals and the CTA ruled that said contentions
per se cannot prove that the debts were indeed
uncollectible and can be considered as bad debts as to
make them deductible. That both lower courts are correct
is shown by petitioner's own submission and the
discussion thereof which we have taken time and patience
to cull from the antecedent proceedings in this case, albeit
bordering on factual settings.
The contentions of PRC that nobody is in a better position
to determine when an obligation becomes a bad debt than
the creditor itself, and that its judgment should not be
substituted by that of respondent court as it is PRC which
has the facilities in ascertaining the collectibility or
uncollectibility of these debts, are presumptuous and
uncalled for. The Court of Tax Appeals is a highly
specialized body specifically created for the purpose of
reviewing tax cases. Through its expertise, it is undeniably
competent to determine the issue of whether or not the
debt is deductible through the evidence presented before
it.
The Court vehemently rejects the absurd thesis of
petitioner that despite the supervening delay in the tax
payment, nothing is lost on the part of the Government
because in the event that these debts are collected, the
same will be returned as taxes to it in the year of the
recovery. This is an irresponsible statement which
deliberately ignores the fact that while the Government
may eventually recover revenues under that hypothesis,
the delay caused by the non-payment of taxes under such
a contingency will obviously have a disastrous effect on
the revenue collections necessary for governmental
operations during the period concerned.