Air Canada vs.

Commissioner of Internal Revenue

G.R. No. 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 offline 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 Canadas 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). Its 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.

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.

ISSUES & HELD:

1) Whether Air Canada is subject to the 2% tax on Gross Philippine Billings
pursuant to
Section 28(A)(3).

NO. Air Canada is not is not liable to tax on Gross Philippine Billings under Section 28(A)
(3). The tax attaches only when the carriage of persons, excess baggage, cargo, and mail
originated from the Philippines in a continuous and uninterrupted flight, regardless of
where the passage documents were sold. Not having flights to and from the Philippines,
petitioner is clearly not liable for the Gross Philippine Billings tax.

2) If not, whether Air Canada is a resident foreign corporation engaged in

trade or business and thus, can be subject to the regular corporate income tax
of 32% pursuant to Section 28(A)(1);

YES. Petitioner falls within the definition of resident foreign corporation under Section
28(A)(1)2, thus, it may be subject to 32% tax on its taxable income. The Court in
Commissioner of Internal Revenue v. British Overseas Airways Corporation declared
British Overseas Airways Corporation, an international air carrier with no landing rights in
the Philippines, as a resident foreign corporation engaged in business in the Philippines
through its local sales agent that sold and issued tickets for the airline company.

According to said case, there is no specific criterion as to what constitutes doing or

engaging in or transacting business. Each case must be judged in the light of its
peculiar environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose and object of the business
organization.

An offline carrier is any foreign air carrier not certificated by the Civil Aeronautics Board,
but who maintains office or who has designated or appointed agents or employees in the
Philippines, who sells or offers for sale any air transportation in behalf of said foreign air
carrier and/or others, or negotiate for, or holds itself out by solicitation, advertisement,
or otherwise sells, provides, furnishes, contracts, or arranges for such transportation.

Petitioner is undoubtedly doing business or engaged in trade or business in the

Philippines. In the case at hand, Aerotel performs acts or works or exercises functions
that are incidental and beneficial to the purpose of petitioners business. The activities of
Aerotel bring direct receipts or profits to petitioner. Further, petitioner was issued by the
Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines for
a period of five years. Petitioner is, therefore, a resident foreign corporation that is
taxable on its income derived from sources within the Philippines.

3) Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

YES. While petitioner is taxable as a resident foreign corporation under Section 28(A)(1)
on its taxable income from sale of airline tickets in the Philippines, it could only be taxed
at a maximum of 1% of gross revenues, pursuant to Article VIII of the Republic of the
Philippines-Canada Tax Treaty that applies to petitioner as a foreign corporation
organized and existing under the laws of Canada.

The second paragraph of Article VIII states that profits from sources within a Contracting
State derived by an enterprise of the other Contracting State from the operation of ships
or aircraft in international traffic may be taxed in the first-mentioned State but the tax so
charged shall not exceed the lesser of a) one and one-half per cent of the gross revenues
derived from sources in that State; and b) the lowest rate of Philippine tax imposed on
such profits derived by an enterprise of a third State.

By reason of our bilateral negotiations with Canada, we have agreed to have our right to
tax limited to a certain extent. Thus, we are bound to extend to a Canadian air carrier
doing business in the Philippines through a local sales agent the benefit of a lower tax
equivalent to 1% on business profits derived from sale of international air
transportation.

Our Constitution provides for adherence to the general principles of international law as
part of the law of the land. The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty obligations on the part of the
states that enter into the agreement.
Every treaty in force is binding upon the parties, and obligations under the treaty must
be performed by them in good faith. More importantly, treaties have the force and effect
of law in this jurisdiction. (Deutsche Bank AG Manila Branch v.
Commissioner of Internal Revenue).

4) Whether the appointment of a local general sales agent in the Philippines

falls under the definition of permanent establishment under Article V(2)(i) of
the Republic of the Philippines-Canada Tax Treaty;

Article V of the Republic of the Philippines-Canada Tax Treaty defines permanent

establishment as a fixed place of business in which the business of the enterprise is
wholly or partly carried on. Specifically, Article V(4) of the Republic of the Philippines-
Canada Tax Treaty states that a person acting in a Contracting State on behalf of an
enterprise of the other Contracting State shall be deemed to be a permanent
establishment in the first mentioned State if . . . he has and habitually exercises in that
State an authority to conclude contracts on behalf of the enterprise, unless his activities
are limited to the purchase of goods or merchandise for that enterprise.

Section 3 of The Civil Aeronautics Act of the Philippines, defines a general sales agent as
a person, not a bonafide employee of an air carrier, who pursuant to an authority from
an airline, by itself or through an agent, sells or offers for sale any air transportation, or
negotiates for, or holds himself out by solicitation, advertisement or otherwise as one
who sells, provides, furnishes, contracts or arranges for, such air transportation.

Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have
created a permanent establishment in the Philippines as defined under the Republic of
the
Philippines-Canada Tax Treaty. Aerotel is a dependent agent of petitioner pursuant to the
terms of the Passenger General Sales Agency Agreement executed between the parties.
It has the authority or power to conclude contracts or bind petitioner to contracts
entered into in the Philippines. A third-party liability on contracts of Aerotel is to
petitioner as the principal, and not to Aerotel, and liability to such third party is
enforceable against petitioner. While Aerotel maintains a certain independence and its
activities may not be devoted wholly to petitioner, nonetheless, when representing
petitioner pursuant to the Agreement, it must carry out its functions solely for the benefit
of petitioner and according to the latters Manual and written instructions. Aerotel is
required to submit its annual sales plan for petitioners approval.

In essence, Aerotel extends to the Philippines the transportation business of petitioner. It

is a conduit or outlet through which petitioners airline tickets are sold.

Under Article VII of the Republic of the Philippines-Canada Tax Treaty, the business
profits of an enterprise of a Contracting State is taxable only in that State, unless the
enterprise carries on business in the other Contracting State through a permanent
establishment. Thus, income attributable to Aerotel or from business activities effected
by petitioner through Aerotel may be taxed in the Philippines.

5) 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.

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was
computed at the rate of 1 % 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 % of gross
revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty.
Hence, no refund is forthcoming.

Commissioner of Internal Revenue vs. Mirant Pagbilao Corp.

G.R. No. 180434, January 20, 2016

FACTS: MPC is a duly-registered Philippine corporation located at Pagbilao Grande Island in Pagbilao, Quezon, and
primarily engaged in the generation and distribution of electricity to the NAPOCOR under a Build, Operate,Transfer
Scheme. As such, it is registered with the BIR as a VAT taxpayer.

BIR approved MPCs application for Effective Zero-Rating for the construction and operation of its power plant.

For taxable year 2000, the quarterly VAT returns filed by MPC on April 25, 2000, July 25, 2000, October 24, 2000, and
August 27, 2001 showed an excess input VAT paid on domestic purchases of goods, services and importation of goods in
the amount of 127,140,331.85.

MPC filed before the BIR an administrative claim for refund of its input VAT covering the taxable year of 2000. Fearing
that the period for filing a judicial claim for refund was about to expire, MPC proceeded to file a petition for review
before the CTA without waiting for the CIRs action on the administrative claim.

The CTA Second Division partially granted MPCs claim for refund, and ordering the CIR to grant a refund or a tax credit
certificate, but only in the reduced amount of 118,749,001.55, representing MPCs unutilized input VAT incurred for the
second, third and fourth quarters of taxable year 2000.

The CTA Second Division held that by virtue of NAPOCORs exemption from direct and indirect taxes. MPCs sale of
services to NAPOCOR is subject to VAT at 0% rate. The Secretary of Finance even issued a Memorandum dated January
28, 1998, addressed to the CIR, espousing the Courts ruling that purchases by NAPOCOR of electricity from independent
power producers are subject to VAT at 0% rate.

The input taxes sought to be refunded were not applied by MPC against its output VAT liability as of April 25, 2002 and
can no longer be used as credit against its future output VAT liability.

MPC filed a motion for partial reconsideration and new trial in view of the additional amount it sought to be approved.

In an Amended Decision, the CTA Second Division found that MPC is entitled to a modified amount of 118,756,640.97
input VAT, upon allowing the amount of 7,639.42 in addition to the VAT input tax. However, MPCs motion for new trial
was denied. Dissatisfied, MPC elevated the matter to the CTA en banc.
The CIR filed a motion for reconsideration of the amended decision. However, the CTA Second Division denied the
motion. Thereafter, the CIR filed a petition for review before the CTA en banc. In a Decision, the CTA en banc affirmed
in toto the assailed amended decision The CTA en banc ruled that:

(a) MPCs claim for the refund of 810,047.31 is disallowed for lack of supporting documents.

(b) MPCs claim for the refund of 836,768.00 as input taxes is denied due to lack of proof of payment.

(c) The denial of MPCs motion for new trial was correct since it was pointless to require MPC to submit additional
documents in support of the unutilized input tax of 3,310,109.20, in view of MPCs admission that the VAT official
receipts and invoices were not even pre-marked and proffered before the court.

Disagreeing with the CTA en bancs decision, both parties filed their respective motions for reconsideration, which were
denied in the CTA en banc.

Aggrieved by the adverse ruling, the CIR now seeks recourse to the Court via a petition for review on certiorari.

ISSUE: Whether or not the CTA had jurisdiction to entertain MPCs judicial claim

HELD: It is settled that a jurisdictional issue may be invoked by either party or even the Court motu proprio, and may be
raised at any stage of the proceedings, even on appeal.

In the present dispute, compliance with the requirements on administrative claims with the CIR, which are to precede
judicial actions with the CTA, indubitably impinge on the tax courts jurisdiction. In CIR v. Aichi Forging Company of
Asia, Inc.,27 the Court ruled that the premature filing of a claim for refund or credit of input VAT before the CTA warrants
a dismissal, inasmuch as no jurisdiction is acquired by the tax court.

Sec. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-Rated or Effectively Zero-Rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively
zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales x x x.
xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall
grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days
from the date of submission of complete documents in support of the application filed in accordance with Subsections
(A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to
act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the
receipt of the decision denying the claim or after the expiration of the one hundred twenty-day period, appeal the
decision or the unacted claim with the [CTA].

MPC filed its petition for review with the CTA on March 26, 2002, or a mere 15 days after it filed an administrative claim
for refund with the CIR on March 11, 2002. It then did not wait for the lapse of the 120-day period expressly provided for
by law within which the CIR shall grant or deny the application for refund. The Courts pronouncement in CIR v. San
Roque Power Corporation29 is instructive on the effect of such failure to comply with the 120-day waiting period.

It is indisputable that compliance with the 120-day waiting period is mandatory and jurisdictional. Failure to comply
with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine of exhaustion of
administrative remedies and renders the petition premature and thus without a cause of action, with the effect that the
CTA does not acquire jurisdiction over the taxpayers petition.
MPC's failure to observe the mandatory 120-day period under the law was fatal to its immediate filing of a judicial claim
before the CTA. It rendered the filing of the CT A petition premature, and barred the tax court from acquiring jurisdiction
over the same. Thus, the dismissal of the petition is in order. "[T]ax refunds or tax credits - just I ike tax exemptions - are
strictly construed against taxpayers, the latter having the burden to prove strict compliance with the conditions for the
grant of the tax refund or credit."

Philippine Amusement and Gaming Corp. vs. Bureau of Internal Revenue

G.R. No. 208731, January 27, 2016

FACTS: PAGCOR claims that it is a duly organized government-owned and controlled corporation existing under and by
virtue of Presidential Decree No. 1869. It was created to regulate, establish and operate clubs and casinos for amusement
and recreation, including sports gaming pools, and such other forms of amusement and recreation.

Respondent, to resolve protests on assessments issued by her office or her authorized representatives.

[PAGCOR] provides a car plan program to its qualified officers under which sixty percent ( 60%) of the car plan
availment is shouldered by PAGCOR and the remaining forty percent (40%) for the account of the officer, payable in five
(5) years.

[PAGCOR] received a Post Reporting Notice from BIR Regional Director Alfredo Misajon for an informal conference to
discuss the result of its investigation on [PAGCOR's] internal revenue taxes in 2004. The Post Reporting Notice shows
that [PAGCOR] has deficiencies on Value Added Tax (VAT), Withholding Tax on VAT (WTV), Expanded Withholding
Tax (EWT), and Fringe Benefits Tax (FBI).

Subsequently, the BIR abandoned the claim for deficiency assessments on VAT, WTV and EWT in the Letter to
[PAGCOR] 2007 in view of the principles laid down in Commissioner of Internal Revenue vs. Acesite Hotel Corporation
exempting [PAGCOR] and its contractors from VAT. However, the assessment on deficiency FBT subsists and remains
due to date.

[PAGCOR] received a Final Assessment Notice, with demand for payment of deficiency FBT for taxable year 2004. On
January 24, 2008, PAGCOR filed a protest to the FAN.

[PAGCOR] elevated its protest to respondent CIR in a Letter, there being no action taken thereon as of that date.

In a Letter, [PAGCOR] was informed that the Legal Division of Revenue sustained Revenue Officer Ma. Elena Llantada
on the imposition of FBT against it based on the provisions of Revenue Regulations (RR) No. 3-98 and that its protest was
forwarded to the Assessment Division for further action.
[PAGCOR] received a letter, stating that its letter protest was referred to Revenue District Office No. 33 for appropriate
action.

On March 11, 2009, [PAGCOR] filed the instant Petition for Review alleging respondents' inaction in its protest on the
disputed deficiency FBT.

The CTA 1st Division issued the assailed decision and ruled in favor of respondents. The CTA 1st Division ruled that RD
Misajon's issuance of the FAN was a valid delegation of authority, and PAGCOR's administrative protest was validly and
seasonably filed on 24 January 2008. The petition for review filed with the CTA 1st Division, however, was filed out of
time.

[PAGCOR] timely filed its administrative protest on January 24, 2008. In accordance with Section 228 of the Tax Code,
respondent CIR or her duly authorized representative had 180 days or until July 22, 2008 to act on the protest. After the
expiration of the 180-day period without action on the protest, as in the instant case, the taxpayer, specifically [PAGCOR],
had 30 days or until August 21, 2008 to assail the non-determination of its protest. Clearly, the conclusion that the instant
Petition for Review was filed beyond the reglementary period for appeal on March 11, 2009, effectively depriving the
Court of jurisdiction over the petition, is inescapable.

The failure of [PAGCOR] to appeal from an assessment on time rendered the same final, executory and demandable.
Consequently, [PAGCOR] is already precluded from disputing the correctness of the assessment. The failure to comply
with the 30-day statutory period would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain
and determine the correctness of the assessment. Even assuming in gratia argumenti that the [CTA] has jurisdiction over
the case as claimed by [PAGCOR], the petition must still fail on the ground that [PAGCOR] is not exempt from payment
of the assessed FBT under its charter.

Since the car plan provided by [PAGCOR] partakes of the nature of a personal expense attributable to its employees, it
shall be treated as taxable fringe benefit of its employees, whether or not the same is duly receipted in the name of the
employer. Therefore, [PAGCOR's] obligation as an agent of the government to withhold and remit the final tax on the
fringe benefit received by its employees is personal and direct. The government's cause of action against [PAGCOR] is
not for the collection of income tax, for which [PAGCOR] is exempted, but for the enforcement of the withholding
provision of the 1997 NIRC, compliance of which is imposed on [PAGCOR] as, the withholding agent, and not upon its
employees. Consequently, [PAGCOR's] non-compliance with said obligation to withhold makes it personally liable for the
tax arising from the breach of its legal duty.

PAGCOR filed a motion for reconsideration. In the meantime, the CIR sent PAGCOR a letter dated 18 July 2011.9 The
letter stated that PAGCOR should be subjected to the issuance of a Warrant of Distraint and/or Levy and a Warrant of
Garnishment because of its failure to pay its outstanding delinquent account in the amount of P46,589,507.65, which
included surcharge and interest. Subsequently, PAGCOR filed a reply dated 28 September 2011 to ask that an order be
issued directing respondents to hold in abeyance the execution of the Warrant of Distraint and/or Levy and the Warrant of
Garnishment, as well as to suspend the collection of tax insofar as the 2004 assessment is concerned. PAGCOR also asked
for exemption from filing a bond or depositing the amount claimed by respondents. 10 PAGCOR filed a petition for
review with urgent motion to suspend tax collection11 with the CTA En Banc on 23 November 2011.

The CTA En Banc dismissed PAGCOR's petition for review and affirmed the CTA 1st Division's Decision and Resolution.
The CTA En Banc ruled that the protest filed before the RD is a valid protest; hence, it was superfluous for PAGCOR to
raise the protest before the CIR.

Moreover, Section 223 of the NIRC merely suspends the period within which the BIR can make assessments on a certain
taxpayer. A taxpayer's request for reinvestigation only happens upon the BIR's issuance of an assessment within the three-
year prescriptive period. The reinvestigation of the assessment suspends the prescriptive period for either a revised
assessment or a retained assessment.

PAGCOR filed its Motion for Reconsideration, while respondents filed their Comment/Opposition. The CTA En Banc
denied PAGCOR's motion.
PAGCOR filed the present petition for review. Respondents filed their comment through the Office of the Solicitor
General on 20 March 2014. On 23 April 2014, the Court required PAGCOR to file a reply to the comment within 10 days
from notice. This period expired on 26 June 2014. On 15 September 2014, this Court issued another resolution denying
PAGCOR's petition for failure to comply with its lawful order without any valid cause. On 31 October 2014, PAGCOR
filed a motion for reconsideration of the Court's 15 September 2014 Resolution. PAGCOR's motion was granted.

Issue: Whether or not the CTA En Banc gravely erred in affirming the CTA 1st Division's Decision dismissing the Petition
for Review for having been filed out of time.

Held: The petition has no merit. The CTA En Banc and 1st Division were correct in dismissing PAGCOR's petition.
However, as we shall explain below, the dismissal should be on the ground of premature, rather than late, filing.

Section 3.1.5 gives a protesting taxpayer like PAGCOR only three options:

1. If the protest is wholly or partially denied by the CIR or his authorized representative, then the taxpayer may appeal to
the CTA within 30 days from receipt of the whole or partial denial of the protest.

2. If the protest is wholly or partially denied by the CIR's authorized representative, then the taxpayer may appeal to the
CIR within 30 days from receipt of the whole or partial denial of the protest.

3. If the CIR or his authorized representative failed to act upon the protest within 180 days from submission of the
required supporting documents, then the taxpayer may appeal to the CTA within 30 days from the lapse of the 180-day
period.

To further clarify the three options: A whole or partial denial by the CIR's authorized representative may be appealed to
the CIR or the CTA. A whole or partial denial by the CIR may be appealed to the CTA. The CIR or the CIR's authorized
representative's failure to act may be appealed to the CTA. There is no mention of an appeal to the CIR from the failure to
act by the CIR's authorized representative. PAGCOR did not wait for the RD or the CIR's decision on its protest.
PAGCOR made separate and successive filings before the RD and the CIR before it filed its petition with the
CTA.

If we consider, for the sake of argument, PAGCOR's submission before the CIR as a separate
protest and not as an appeal, then such protest should be denied for having been filed out of time.
PAGCOR only had 30 days from 17 January 2008 within which to file its protest. This period
ended on 16 February 2008. PAGCOR filed its submission before the CIR on 13 August 2008.

When PAGCOR filed its petition before the CTA, it is clear that PAGCOR failed to make use of
any of the three options described above. A petition before the CTA may only be made after a
whole or partial denial of the protest by the CIR or the CIR's authorized representative.
When PAGCOR filed its petition before the CTA on 11 March 2009, there was still no denial of
PAGCOR's protest by either the RD or the CIR. Therefore, under the first option, PAGCOR's
petition before the CTA had no cause of action because it was prematurely filed.

PAGCOR has clearly failed to comply with the requisites in disputing an assessment as provided by
Section 228 and Section 3.1.5. Indeed, PAGCOR's lapses in procedure have made the BIR's
assessment final, executory and demandable, thus obviating the need to further discuss the issue of
the propriety of imposition of fringe benefits tax.