SECOND DIVISION

[G.R. No. 180909 : January 19, 2011]

EXXONMOBIL PETROLEUM AND CHEMICAL HOLDINGS, INC. - PHILIPPINE

BRANCH, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 filed by petitioner Exxonmobil
Petroleum and Chemical Holdings, Inc. - Philippine Branch (Exxon) to set aside the
September 7, 2007 Decision [1]  of the Court  of Tax Appeals En Banc (CTA-En Banc) in
CTA E.B. No. 204,  and its November 27, 2007 Resolution [2] denying petitioner's motion
for reconsideration.
cralawlibrary

THE FACTS

Petitioner Exxon is a foreign corporation duly organized and existing under the laws of
the State of Delaware, United States of America. [3] It is authorized to do business in
the Philippines through its Philippine Branch, with principal office address at the 17/F
The Orient Square, Emerald Avenue, Ortigas Center, Pasig City. [4]

Exxon is engaged in the business of selling petroleum products to domestic and

international carriers. [5] In pursuit of its business, Exxon purchased from Caltex
Philippines, Inc. (Caltex) and Petron Corporation (Petron) Jet A-1 fuel and other
petroleum products, the excise taxes on which were paid for and remitted by both
Caltex and Petron. [6]  Said taxes, however, were passed on to Exxon which ultimately
shouldered the excise taxes on the fuel and petroleum products. [7]

From November 2001 to June 2002, Exxon sold a total of 28,635,841 liters of Jet A-1
fuel to international carriers, free of excise taxes amounting to
Php105,093,536.47. [8] On various dates, it filed administrative claims for refund with
the Bureau of Internal Revenue (BIR) amounting to Php105,093,536.47. [9]

On October 30, 2003, Exxon filed a petition for review with the CTA [10] claiming a
refund or tax credit in the amount of Php105,093,536.47, representing the amount of
excise taxes paid on Jet A-1 fuel and other petroleum products it sold to international
carriers from November 2001 to June 2002. [11]

Exxon and the Commissioner of Internal Revenue (CIR) filed their Joint Stipulation of
Facts and Issues on June 24, 2004, presenting a total of fourteen (14) issues for
resolution. [12]

During Exxon's preparation of evidence, the CIR filed a motion dated January 28, 2005
to first resolve the issue of whether or not Exxon was the proper party to ask for a
refund. [13] Exxon filed its opposition to the motion on March 15, 2005. cralawlibrary

On July 27, 2005, the CTA First Division issued a resolution [14] sustaining the CIR's
position and dismissing Exxon's claim for refund. Exxon filed a motion for
reconsideration, but this was denied on July 27, 2006. [15]

Exxon filed a petition for review [16] with the CTA En Banc assailing the July 27, 2005
Resolution of the CTA First Division which dismissed the petition for review, and the
July 27, 2006 Resolution [17] which affirmed the said ruling.cralawlibrary

RULING OF THE COURT OF TAX APPEALS EN BANC

In its Decision dated September 7, 2007, the CTA En Banc dismissed the petition for
review and affirmed the two resolutions of the First Division dated July 27, 2005 and
July 27, 2006. Exxon filed a motion for reconsideration, but it was denied on November
27, 2007. cralawlibrary

Citing Sections 130 (A)(2) [18] and 204 (C) in relation to Section 135 (a) [19] of the
National Internal Revenue Code of 1997 (NIRC), the CTA  ruled that in consonance with
its ruling in several cases, [20] only the taxpayer or the manufacturer of the petroleum
products sold has the legal personality to claim the refund of excise taxes paid on
petroleum products sold to international carriers. [21]

The CTA stated that Section 130(A)(2) makes the manufacturer or producer of the
petroleum products directly liable for the payment of excise taxes. [22] Therefore, it
follows that the manufacturer or producer is the taxpayer. [23]

This determination of the identity of the taxpayer designated by law is pivotal as the
NIRC provides that it is only the taxpayer who "has the legal personality to ask for a
refund in case of erroneous payment of taxes." [24]

Further, the excise tax imposed on manufacturers upon the removal of petroleum
products by oil companies is an indirect tax, or a tax which is primarily paid by persons
who can shift the burden upon someone else. [25] The CTA cited the cases of Philippine
Acetylene Co., Inc. v. Commissioner of Internal Revenue, [26] Contex Corporation v.
Commissioner of Internal Revenue, [27] and Commissioner of Internal Revenue v.
Philippine Long Distance Telephone Company, [28] and explained that with indirect taxes,
"although the burden of an indirect tax can be shifted or passed on to the purchaser of
the goods, the liability for the indirect tax remains with the
manufacturer." [29] Moreover, "the manufacturer has the option whether or not to shift
the burden of the tax to the purchaser. When shifted, the amount added by the
manufacturer becomes a part of the price, therefore, the purchaser does not really pay
the tax per se but only the price of the commodity." [30]

Going by such logic, the CTA concluded that a refund of erroneously paid or illegally
received tax can only be made in favor of the taxpayer, pursuant to Section 204(C) of
the NIRC. [31] As categorically ruled in the Cebu Portland
Cement[32] and Contex[33] cases, in the case of indirect taxes, it is the manufacturer of
the goods who is entitled to claim any refund thereof. [34] Therefore, it follows that the
indirect taxes paid by the manufacturers or producers of the goods cannot be refunded
to the purchasers of the goods because the purchasers are not the taxpayers. [35]

The CTA also emphasized that tax refunds are in the nature of tax exemptions and are,
thus, regarded as in derogation of sovereign authority and construed strictissimi
juris against the person or entity claiming the exemption. [36]

Finally, the CTA disregarded Exxon's argument that "in effectively holding that only
petroleum products purchased directly from the manufacturers or producers are exempt
from excise taxes, the First Division of [the CTA] sanctioned a universal amendment of
existing bilateral agreements which the Philippines have with other countries, in
violation of the basic principle of `pacta sunt servanda.'" [37] The CTA explained that the
findings of fact of the First Division (that when Exxon sold the Jet A-1 fuel to
international carriers, it did so free of tax) negated any violation of the exemption from
excise tax of the petroleum products sold to international carriers. Second, the right of
international carriers to invoke the exemption granted under Section 135(a) of the
NIRC was neither affected nor restricted in any way by the ruling of the First Division.
At the point of sale, the international carriers were free to invoke the exemption from
excise taxes of the petroleum products sold to them. Lastly, the lawmaking body was
presumed to have enacted a later law with the knowledge of all other laws involving the
same subject matter. [38]

THE ISSUES

Petitioner now raises the following issues in its petition for review: chanroblesvirtuallawlibrary

I.

WHETHER THE ASSAILED DECISION AND RESOLUTION ERRONEOUSLY

PROHIBITED PETITIONER, AS THE DISTRIBUTOR AND VENDOR OF
PETROLEUM PRODUCTS TO INTERNATIONAL CARRIERS REGISTERED IN
FOREIGN COUNTRIES WHICH HAVE EXISTING BILATERAL AGREEMENTS WITH
THE PHILIPPINES, FROM CLAIMING A REFUND OF THE EXCISE TAXES PAID
THEREON; AND

II.

WHETHER THE ASSAILED DECISIONS ERRED IN AFFIRMING THE DISMISSAL

OF PETITIONER'S CLAIM FOR REFUND BASED ON RESPONDENT'S "MOTION TO
RESOLVE FIRST THE ISSUE OF WHETHER OR NOT THE PETITIONER IS THE
PROPER PARTY THAT MAY ASK FOR A REFUND," SINCE SAID MOTION IS
ESSENTIALLY A MOTION TO DISMISS, WHICH SHOULD HAVE BEEN DENIED
OUTRIGHT BY THE COURT OF TAX APPEALS FOR HAVING BEEN FILED OUT OF
TIME.

RULING OF THE COURT

I.  On respondent's "motion to resolve first

the issue of whether or not the petitioner is
the proper party that may ask for a refund."

For a logical resolution of the issues, the court will tackle first the issue of whether or
not the CTA erred in granting respondent's Motion to Resolve First the Issue of Whether
or Not the Petitioner is the Proper Party that may Ask for a Refund. [39]  In said motion,
the CIR prayed that the CTA First Division resolve ahead of the other stipulated issues
the sole issue of whether petitioner was the proper party to ask for a refund. [40]

Exxon opines that the CIR's motion is essentially a motion to dismiss filed out of
time, [41] as it was filed after petitioner began presenting evidence [42] more than a year
after the filing of the Answer. [43] By praying that Exxon be declared as not the proper
party to ask for a refund, the CIR asked for the dismissal of the petition, as the grant of
the Motion to Resolve would bring trial to a close. [44]

Moreover, Exxon states that the motion should have also complied with the three-day
notice and ten-day hearing rules provided in Rule 15 of the Rules of Court. [45] Since the
CIR failed to set its motion for any hearing before the filing of the Answer, the motion
should have been considered a mere scrap of paper. [46]

Finally, citing Maruhom v. Commission on Elections and Dimaporo, [47] Exxon argues

that a defendant who desires a preliminary hearing on special and affirmative defenses
must file a motion to that effect at the time of filing of his answer. [48]

The CIR, on the other hand, counters that it did not file a motion to
dismiss. [49] Instead, the grounds for dismissal of the case were pleaded as special and
affirmative defenses in its Answer filed on December 15, 2003. [50] Therefore, the issue
of "whether or not petitioner is the proper party to claim for a tax refund of the excise
taxes allegedly passed on by Caltex and Petron" was included as one of the issues in
the Joint Stipulation of Facts and Issues dated June 24, 2004 signed by petitioner and
respondent. [51]

The CIR now argues that nothing in the Rules requires the preliminary hearing to be
held before the filing of an Answer. [52] However, a preliminary hearing cannot be held
before the filing of the Answer precisely because any ground raised as an affirmative
defense is pleaded in the Answer itself. [53]

Further, the CIR contends that the case cited by petitioner, Maruhom v.

Comelec, [54] does not apply here.  In the said case, a motion to dismiss was filed after
the filing of the answer. [55] And, the said motion to dismiss was                             
found to be a frivolous motion designed to prevent the early termination of the
proceedings in the election case therein. [56] Here, the Motion to Resolve was filed not to
delay the disposition of the case, but rather, to expedite proceedings. [57]

Rule 16, Section 6 of the 1997 Rules of Civil Procedure provides: chanroblesvirtuallawlibrary

SEC. 6. Pleading grounds as affirmative defenses. - If no motion to dismiss has

been filed, any of the grounds for dismissal provided for in this Rule may be pleaded as
an affirmative defense in the answer, and in the discretion of the court, a preliminary
hearing may be had thereon as if a motion to dismiss had been filed.
The dismissal of the complaint under this section shall be without prejudice to the
prosecution in the same or separate action of a counterclaim pleaded in the answer.
(Underscoring supplied.)

This case is a clear cut application of the above provision. The CIR did not file a motion
to dismiss. Thus, he pleaded the grounds for dismissal as affirmative defenses in its
Answer and thereafter prayed for the conduct of a preliminary hearing to determine
whether petitioner was the proper party to apply for the refund of excise taxes paid. cralawlibrary

The determination of this question was the keystone on which the entire case was
leaning. If Exxon was not the proper party to apply for the refund of excise taxes paid,
then it would be useless to proceed with the case.  It would not make any sense to
proceed to try a case when petitioner had no standing to pursue it. cralawlibrary

In the case of California and Hawaiian Sugar Company v. Pioneer Insurance and Surety
Corporation, [58] the Court held that:
chanroblesvirtuallawlibrary

Considering that there was only one question, which may even be deemed to be the
very touchstone of the whole case, the trial court had no cogent reason to deny the
Motion for Preliminary Hearing.  Indeed, it committed grave abuse of discretion when it
denied a preliminary hearing on a simple issue of fact that could have possibly settled
the entire case. Verily, where a preliminary hearing appears to suffice, there is no
reason to go on to trial.  One reason why dockets of trial courts are clogged is the
unreasonable refusal to use a process or procedure, like a motion to dismiss, which is
designed to abbreviate the resolution of a case. [59] (Underscoring supplied.)

II. On whether petitioner, as the distributor

and vendor of petroleum products to international
carriers registered in foreign countries which have
existing bilateral agreements with the Philippines,
can claim a refund of the excise taxes paid thereon

This brings us now to the substantive issue of whether Exxon, as the distributor and
vendor of petroleum products to international carriers registered in foreign countries
which have existing bilateral agreements with the Philippines, is the proper party to
claim a tax refund for the excise taxes paid by the manufacturers, Caltex and Petron,
and passed on to it as part of the purchase price. cralawlibrary

Exxon argues that having paid the excise taxes on the petroleum products sold to
international carriers, it is a real party in interest consistent with the rules and
jurisprudence. [60]

It reasons out that the subject of the exemption is neither the seller nor the buyer of
the petroleum products, but the products themselves, so long as they are sold to
international carriers for use in international flight operations, or to exempt entities
covered by tax treaties, conventions and other international agreements for their use or
consumption, among other conditions. [61]

Thus, as the exemption granted under Section 135 attaches to the petroleum products
and not to the seller, the exemption will apply regardless of whether the same were
sold by its manufacturer or its distributor for two reasons. [62] First, Section 135 does
not require that to be exempt from excise tax, the products should be sold by the
manufacturer or producer. [63] Second, the legislative intent was precisely to make
Section 135 independent from Sections 129 and 130 of the NIRC, [64] stemming from
the fact that unlike other products subject to excise tax, petroleum products of this
nature have become subject to preferential tax treatment by virtue of either specific
international agreements or simply of international reciprocity. [65]

Respondent CIR, on the other hand, posits that Exxon is not the proper party to seek a
refund of excise taxes paid on the petroleum products. [66] In so arguing, the CIR states
that excise taxes are indirect taxes, the liability for payment of which falls on one
person, but the burden of payment may be shifted to another. [67] Here, the sellers of
the petroleum products or Jet A-1 fuel subject to excise tax are Petron and Caltex,
while Exxon was the buyer to whom the burden of paying excise tax was
shifted. [68] While the impact or burden of taxation falls on Exxon, as the tax is shifted
to it as part of the purchase price, the persons statutorily liable to pay the tax are
Petron and Caltex. [69] As Exxon is not the taxpayer primarily liable to pay, and not
exempted from paying, excise tax, it is not the proper party to claim for the refund of
excise taxes paid. [70]

The excise tax, when passed on to the

purchaser, becomes part of the
purchase price.

Excise taxes are imposed under Title VI of the NIRC. They apply to specific goods
manufactured or produced in the Philippines for domestic sale or consumption or for
any other disposition, and to those that are imported. [71] In effect, these taxes are
imposed when two conditions concur: first, that the articles subject to tax belong to any
of the categories of goods enumerated in Title VI of the NIRC; and second, that said
articles are for domestic sale or consumption, excluding those that are actually
exported. [72]

There are, however, certain exemptions to the coverage of excise taxes, such as
petroleum products sold to international carriers and exempt entities or agencies.
Section 135 of the NIRC provides: chanroblesvirtuallawlibrary

SEC. 135. Petroleum Products Sold to International Carriers and Exempt

Entities or Agencies. - Petroleum products sold to the following are exempt from
excise tax:chanroblesvirtuallawlibrary

(a) International carriers of Philippine or foreign registry on their use or consumption

outside the Philippines: Provided, That the petroleum products sold to these
international carriers shall be stored in a bonded storage tank and may be disposed of
only in accordance with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner;

(b) Exempt entities or agencies covered by tax treaties, conventions and other
international agreements for their use of consumption: Provided, however, That the
country of said foreign international carrier or exempt entities or agencies exempts
from similar taxes petroleum products sold to Philippine carriers, entities or agencies;
and

(c) Entities which are by law exempt from direct and indirect taxes. (Underscoring
supplied.)

Thus, under Section 135, petroleum products sold to international carriers of foreign
registry on their use or consumption outside the Philippines are exempt from excise
tax, provided that the petroleum products sold to such international carriers shall be
stored in a bonded storage tank and may be disposed of only in accordance with the
rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. [73]

The confusion here stems from the fact that excise taxes are of the nature of indirect
taxes, the liability for payment of which may fall on a person other than he who actually
bears the burden of the tax. cralawlibrary

In Commissioner of Internal Revenue v. Philippine Long Distance Telephone

Company, [74] the Court discussed the nature of indirect taxes as follows: chanroblesvirtuallawlibrary

[I]ndirect taxes are those that are demanded, in the first instance, from, or are paid by,
one person to someone else. Stated elsewise, indirect taxes are taxes wherein the
liability for the payment of the tax falls on one person but the burden thereof can be
shifted or passed on to another person, such as when the tax is imposed upon goods
before reaching the consumer who ultimately pays for it. When the seller passes on the
tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the
purchaser, as part of the goods sold or services rendered.

Accordingly, the party liable for the tax can shift the burden to another, as part of the
purchase price of the goods or services. Although the manufacturer/seller is the one
who is statutorily liable for the tax, it is the buyer who actually shoulders or bears the
burden of the tax, albeit not in the nature of a tax, but part of the purchase price or the
cost of the goods or services sold. cralawlibrary

As petitioner is not the statutory

taxpayer, it is not entitled to claim
a refund of excise taxes paid.

The question we are faced with now is, if the party statutorily liable for the tax is
different from the party who bears the burden of such tax, who is entitled to claim a
refund of the tax paid?

Sections 129 and 130 of the NIRC provide: chanroblesvirtuallawlibrary

SEC. 129. Goods subject to Excise Taxes. - Excise taxes apply to goods
manufactured or produced in the Philippines for domestic sales or consumption or for
any other disposition and to things imported. The excise tax imposed herein shall be in
addition to the value-added tax imposed under Title IV. cralawlibrary

For purposes of this Title, excise taxes herein imposed and based on weight or volume
capacity or any other physical unit of measurement shall be referred to as 'specific tax'
and an excise tax herein imposed and based on selling price or other specified value of
the good shall be referred to as 'ad valorem tax.'

SEC. 130. Filing of Return and Payment of Excise Tax on Domestic Products. -

(A) Persons Liable to File a Return, Filing of Return on Removal and Payment
of Tax. -

(1) Persons Liable to File a Return. - Every person liable to pay excise tax imposed
under this Title shall file a separate return for each place of production setting forth,
among others the description and quantity or volume of products to be removed, the
applicable tax base and the amount of tax due thereon: Provided, however, That in the
case of indigenous petroleum, natural gas or liquefied natural gas, the excise tax shall
be paid by the first buyer, purchaser or transferee for local sale, barter or transfer,
while the excise tax on exported products shall be paid by the owner, lessee,
concessionaire or operator of the mining claim. cralawlibrary

Should domestic products be removed from the place of production without the
payment of the tax, the owner or person having possession thereof shall be liable for
the tax due thereon. cralawlibrary

(2) Time for Filing of Return and Payment of the Tax. - Unless otherwise
specifically allowed, the return shall be filed and the excise tax paid by the
manufacturer or producer before removal of domestic products from place of
production: Provided, That the tax excise on locally manufactured petroleum products
and indigenous petroleum/levied under Sections 148 and 151(A)(4), respectively, of
this Title shall be paid within ten (10) days from the date of removal of such products
for the period from January 1, 1998 to June 30, 1998; within five (5) days from the
date of removal of such products for the period from July 1, 1998 to December 31,
1998; and, before removal from the place of production of such products from January
1, 1999 and thereafter: Provided, further, That the excise tax on nonmetallic mineral or
mineral products, or quarry resources shall be due and payable upon removal of such
products from the locality where mined or extracted, but with respect to the excise tax
on locally produced or extracted metallic mineral or mineral products, the person liable
shall file a return and pay the tax within fifteen (15) days after the end of the calendar
quarter when such products were removed subject to such conditions as may be
prescribed by rules and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner. For this purpose, the taxpayer shall file a
bond in an amount which approximates the amount of excise tax due on the removals
for the said quarter. The foregoing rules notwithstanding, for imported mineral or
mineral products, whether metallic or nonmetallic, the excise tax due thereon shall be
paid before their removal from customs custody. cralawlibrary

xxx

(Italics and underscoring supplied.)

As early as the 1960's, this Court has ruled that the proper party to question, or to seek
a refund of, an indirect tax, is the statutory taxpayer, or the person on whom the tax is
imposed by law and who paid the same, even if he shifts the burden thereof to
another. [75]

In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, [76] the Court

held that the sales tax is imposed on the manufacturer or producer and not on the
purchaser, "except probably in a very remote and inconsequential
sense." [77] Discussing the "passing on" of the sales tax to the purchaser, the Court
therein cited Justice Oliver Wendell Holmes' opinion in Lash's Products v. United
States [78]wherein he said:chanroblesvirtuallawlibrary

"The phrase `passed the tax on' is inaccurate, as obviously the tax is laid and remains
on the manufacturer and on him alone. The purchaser does not really pay the tax. He
pays or may pay the seller more for the goods because of the seller's obligation, but
that is all. x  x x  The price is the sum total paid for the goods. The amount added
because of the tax is paid to get the goods and for nothing else. Therefore it is part of
the price x  x  x." [79]

Proceeding from this discussion, the Court went on to state: chanroblesvirtuallawlibrary

It may indeed be that the economic burden of the tax finally falls on the purchaser;
when it does the tax becomes a part of the price which the purchaser must pay. It does
not matter that an additional amount is billed as tax to the purchaser. x  x  x  The
effect is still the same, namely, that the purchaser does not pay the tax. He pays or
may pay the seller more for the goods because of the seller's obligation, but that is all
and the amount added because of the tax is paid to get the goods and for nothing
else.cralawlibrary

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb
the burden of the tax is largely a matter of economics. Then it can no longer be
contended that a sales tax is a tax on the purchaser. [80]

The above case was cited in the later case of Cebu Portland Cement Company v.
Collector (now Commissioner) of Internal Revenue, [81] where the Court ruled that as
the sales tax is imposed upon the manufacturer or producer and not on the purchaser,
"it is petitioner and not its customers, who may ask for a refund of whatever amount it
is entitled for the percentage or sales taxes it paid before the amendment of section
246 of the Tax Code." [82]

The Philippine Acetylene case was also cited in the first Silkair (Singapore) Pte, Ltd. v.
Commissioner of Internal Revenue [83] case, where the Court held that the proper party
to question, or to seek a refund of, an indirect tax is the statutory taxpayer, the person
on whom the tax is imposed by law and who paid the same even if he shifts the burden
thereof to another. [84]

In the Silkair cases, [85] petitioner Silkair (Singapore) Pte, Ltd. (Silkair), filed with the

BIR a written application for the refund of excise taxes it claimed to have paid on its
purchase of jet fuel from Petron. As the BIR did not act on the application, Silkair filed a
Petition for Review before the CTA. cralawlibrary

In both cases, the CIR argued that the excise tax on petroleum products is the direct
liability of the manufacturer/producer, and when added to the cost of the goods sold to
the buyer, it is no longer a tax but part of the price which the buyer has to pay to
obtain the article. cralawlibrary

In the first Silkair case, the Court ruled: chanroblesvirtuallawlibrary

The proper party to question, or seek a refund of, an indirect tax is the
statutory taxpayer, the person on whom the tax is imposed by law and who
paid the same even if he shifts the burden thereof to another. Section 130 (A)
(2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall
be filed and the excise tax paid by the manufacturer or producer before removal of
domestic products from place of production." Thus, Petron Corporation, not Silkair, is
the statutory taxpayer which is entitled to claim a refund based on Section 135 of the
NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and
Singapore. cralawlibrary

Even if Petron Corporation passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is not a tax but part of the price
which Silkair had to pay as a purchaser. [86] (Emphasis and underscoring supplied.)

Citing the above case, the second Silkair case was promulgated a few months after the
first, and stated: chanroblesvirtuallawlibrary

The issue presented is not novel. In a similar case involving the same parties, this
Court has categorically ruled that "the proper party to question, or seek a refund of an
indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law
and who paid the same even if he shifts the burden thereof to another." The Court
added that "even if Petron Corporation passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is not a tax but part of the price which
Silkair had to pay as a purchaser." [87]

The CTA En Banc, thus, held that: chanroblesvirtuallawlibrary

The determination of who is the taxpayer plays a pivotal role in claims for refund
because the same law provides that it is only the taxpayer who has the legal
personality to ask for a refund in case of erroneous payment of taxes. Section 204 (C)
of the 1997 NIRC, [provides] in part, as follows: chanroblesvirtuallawlibrary

SEC. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit
Taxes. - The Commissioner may -

xxx      xxx   xxx

(C) Credit or refund taxes erroneously or illegally received or penalties imposed

without authority, refund the value of internal revenue stamps when they are returned
in good condition by the purchaser, and, in his discretion, redeem or change unused
stamps that have been rendered unfit for use and refund their value upon proof of
destruction. No credit or refund of taxes or penalties shall be allowed unless the
taxpayer files in writing with the Commissioner a claim for credit or
refund within two (2) years after the payment of the tax or penalty: Provided,
however, That a return showing an overpayment shall be considered as a written claim
for credit or refund. cralawlibrary
 xxx      xxx   xxx

(Emphasis shown supplied by the CTA.) [88]

Therefore, as Exxon is not the party statutorily liable for payment of excise taxes under
Section 130, in relation to Section 129 of the NIRC, it is not the proper party to claim a
refund of any taxes erroneously paid. cralawlibrary

There is no unilateral amendment of

existing bilateral agreements of the
Philippines with other countries.

Exxon also argues that in effectively holding that only petroleum products purchased
directly from the manufacturers or producers are exempt from excise taxes, the CTA En
Banc sanctioned a unilateral amendment of existing bilateral agreements which the
Philippines has with other countries, in violation of the basic international law principle
of pacta sunt servanda. [89]  The Court does not agree. cralawlibrary

As correctly held by the CTA En Banc: chanroblesvirtuallawlibrary

One final point, petitioner's argument "that in effectively holding that only petroleum
products purchased directly from the manufacturers or producers are exempt from
excise taxes, the First Division of this Court sanctioned a unilateral amendment of
existing bilateral agreements which the Philippines have (sic) with other countries, in
violation of the basic international principle of "pacta sunt servanda" is misplaced. First,
the findings of fact of the First Division of this Court that "when petitioner sold the Jet
A-1 fuel to international carriers, it did so free of tax" negates any violation of the
exemption from excise tax of the petroleum products sold to international carriers
insofar as this case is concerned. Secondly, the right of international carriers to invoke
the exemption granted under Section 135 (a) of the 1997 NIRC has neither been
affected nor restricted in any way by the ruling of the First Division of this Court. At the
point of sale, the international carriers are free to invoke the exemption from excise
taxes of the petroleum products sold to them. Lastly, the law-making body is presumed
to have enacted a later law with the knowledge of all other laws involving the same
subject matter." [90] (Underscoring supplied.)

WHEREFORE, the petition is DENIED. cralawlibrary

G.R. No. 188497               February 19, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.

RESOLUTION

VILLARAMA, JR., J.:

For resolution are the Motion for Reconsideration dated May 22, 2012 and Supplemental Motion for
Reconsideration dated December 12, 2012 filed by Pilipinas Shell Petroleum Corporation
(respondent). As directed, the Solicitor General on behalf of petitioner Commissioner of Internal
Revenue filed their Comment, to which respondent filed its Reply.

In our Decision promulgated on April 25, 2012, we ruled that the Court of Tax Appeals (CTA) erred
in granting respondent's claim for tax refund because the latter failed to establish a tax exemption in
its favor under Section 135(a) of the National Internal Revenue Code of 1997 (NIRC).

WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25,
2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415
are hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by respondent
Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.

No pronouncement as to costs.

SO ORDERED. 1

Respondent argues 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.

Respondent also contends 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. Respondent fears this could lead to cessation of
supply of petroleum products to international carriers, retrenchment of employees of domestic
manufacturers/producers to prevent further losses, or worse, shutting down of their production of jet
A-1 fuel and aviation gas due to unprofitability of sustaining operations. Under this scenario,
participation of Filipino capital, management and labor in the domestic oil industry is effectively
diminished.
Lastly, respondent asserts that the imposition by the Philippine Government of excise tax on
petroleum products sold to international carriers is in violation of the Chicago Convention on
International Aviation ("Chicago Convention") to which it is a signatory, as well as other international
agreements (the Republic of the Philippines’ air transport agreements with the United States of
America, Netherlands, Belgium and Japan).

In his Comment, the Solicitor General underscores the statutory basis of this Court’s ruling that the
exemption under Section 135 does not attach to the products. Citing Exxonmobil Petroleum &
Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue,  which held that the
2

excise tax, when passed on to the purchaser, becomes part of the purchase price, the Solicitor
General claims 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.

As to respondent’s reliance in the cases of Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal
Revenue  and Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner
3

of Internal Revenue,  the Solicitor General points out that there was no pronouncement in these
4

cases that petroleum manufacturers selling petroleum products to international carriers are exempt
from paying excise taxes. In fact, Exxonmobil even cited the case of Philippine Acetylene Co, Inc. v.
Commissioner of Internal Revenue.  Further, the ruling in Maceda v. Macaraig, Jr.  which confirms
5 6

that Section 135 does not intend to exempt manufacturers or producers of petroleum products from
the payment of excise tax.

The Court will now address the principal arguments proffered by respondent: (1) Section 135
intended the tax exemption to apply to petroleum products at the point of production; (2) Philippine
Acetylene Co., Inc. v. Commissioner of Internal Revenue and Maceda v. Macaraig, Jr. are
inapplicable in the light of previous rulings of the Bureau of Internal Revenue (BIR) and the CTA that
the excise tax on petroleum products sold to international carriers for use or consumption outside the
Philippines attaches to the article when sold to said international carriers, as it is the article which is
exempt from the tax, not the international carrier; and (3) the Decision of this Court will not only have
adverse impact on the domestic oil industry but is also in violation of international agreements on
aviation.

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."

On this point, the clarification made by our esteemed colleague, Associate Justice Lucas P.
Bersamin regarding the traditional meaning of excise tax adopted in our Decision, is well-taken.

The transformation undergone by the term "excise tax" from its traditional concept up to its current
definition in our Tax Code was explained in the case of Petron Corporation v. Tiangco,  as follows:
7

Admittedly, the proffered definition of an excise tax as "a tax upon the performance, carrying on, or
exercise of some right, privilege, activity, calling or occupation" derives from the compendium
American Jurisprudence, popularly referred to as Am Jur and has been cited in previous decisions of
this Court, including those cited by Petron itself. Such a definition would not have been inconsistent
with previous incarnations of our Tax Code, such as the NIRC of 1939, as amended, or the NIRC of
1977 because in those laws the term "excise tax" was not used at all. In contrast, the nomenclature
used in those prior laws in referring to taxes imposed on specific articles was "specific tax." Yet
beginning with the National Internal Revenue Code of 1986, as amended, the term "excise taxes"
was used and defined as applicable "to goods manufactured or produced in the Philippines… and to
things imported." This definition was carried over into the present NIRC of 1997. Further, these two
latest codes categorize two different kinds of excise taxes: "specific tax" which is imposed and based
on weight or volume capacity or any other physical unit of measurement; and "ad valorem tax" which
is imposed and based on the selling price or other specified value of the goods. In other words, the
meaning of "excise tax" has undergone a transformation, morphing from the Am Jur definition to its
current signification which is a tax on certain specified goods or articles.

The change in perspective brought forth by the use of the term "excise tax" in a different connotation
was not lost on the departed author Jose Nolledo as he accorded divergent treatments in his 1973
and 1994 commentaries on our tax laws. Writing in 1973, and essentially alluding to the Am Jur
definition of "excise tax," Nolledo observed:

Are specific taxes, taxes on property or excise taxes –

In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are property
taxes, a ruling which seems to be erroneous. Specific taxes are truly excise taxes for the fact that
the value of the property taxed is taken into account will not change the nature of the tax. It is correct
to say that specific taxes are taxes on the privilege to import, manufacture and remove from storage
certain articles specified by law.

In contrast, after the tax code was amended to classify specific taxes as a subset of excise taxes,
Nolledo, in his 1994 commentaries, wrote:

1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain specified
goods or articles manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition and to things imported into the Philippines. They are
either specific or ad valorem.

2. Nature of excise taxes. – They are imposed directly on certain specified goods. (infra)
They are, therefore, taxes on property. (see Medina vs. City of Baguio, 91 Phil. 854.)

A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as an
incident to, or in connection with, the business to be taxed.

In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax, and
observe that the term is "synonymous with ‘privilege tax’ and [both terms] are often used
interchangeably." At the same time, they offer a caveat that "[e]xcise tax, as [defined by Am Jur], is
not to be confused with excise tax imposed [by the NIRC] on certain specified articles manufactured
or produced in, or imported into, the Philippines, ‘for domestic sale or consumption or for any other
disposition.’"

It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a
specific article, rather than one "upon the performance, carrying on, or the exercise of an activity."

This current definition was already in place when the Code was enacted in 1991, and we can only
presume that it was what the Congress had intended as it specified that local government units
could not impose "excise taxes on articles enumerated under the [NIRC]." This prohibition must
pertain to the same kind of excise taxes as imposed by the NIRC, and not those previously defined
"excise taxes" which were not integrated or denominated as such in our present tax law.  (Emphasis
8

supplied.)

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.

Excise tax on aviation fuel used for international flights is practically nil as most countries are
signatories to the 1944 Chicago Convention on International Aviation (Chicago Convention). Article
24  of the Convention has been interpreted to prohibit taxation of aircraft fuel consumed for
9

international transport. Taxation of international air travel is presently at such low level that there has
been an intensified debate on whether these should be increased to "finance development rather
than simply to augment national tax revenue" considering the "cross-border environmental damage"
caused by aircraft emissions that contribute to global warming, not to mention noise pollution and
congestion at airports).  Mutual exemptions given under bilateral air service agreements are seen as
10

main legal obstacles to the imposition of indirect taxes on aviation fuel. In response to present
realities, the International Civil Aviation Organization (ICAO) has adopted policies on charges and
emission-related taxes and charges. 11

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:

...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.
12

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."  Even as said
13

conference was being held, on March 7, 2013, President Benigno Aquino III has signed into law
Republic Act (R.A.) No. 10378  granting tax incentives to foreign carriers which include exemption
14

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
15

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.

Justice Bersamin argues that "(T)he shifting of the tax burden by manufacturers-sellers is a business
prerogative resulting from the collective impact of market forces," and that it is "erroneous to
construe Section 135(a) only as a prohibition against the shifting by the manufacturers-sellers of
petroleum products of the tax burden to international carriers, for such construction will deprive the
manufacturers-sellers of their business prerogative to determine the prices at which they can sell
their products."

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.

The Chicago Convention, which established the legal framework for international civil aviation, did
not deal comprehensively with tax matters. 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.

The importance of exemption from aviation fuel tax was underscored in the following observation
made by a British author  in a paper assessing the debate on using tax to control aviation emissions
16

and the obstacles to introducing excise duty on aviation fuel, thus:

Without any international agreement on taxing fuel, it is highly likely that moves to impose duty on
international flights, either at a domestic or European level, would encourage 'tankering': carriers
filling their aircraft as full as possible whenever they landed outside the EU to avoid paying
tax.  Clearly this would be entirely counterproductive. Aircraft would be travelling further than
1âwphi1

necessary to fill up in low-tax jurisdictions; in addition they would be burning up more fuel when
carrying the extra weight of a full fuel tank.

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.

WHEREFORE, the Court hereby resolves to:

(1) GRANT the original and supplemental motions for reconsideration filed by respondent
Pilipinas Shell Petroleum Corporation; and

(2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the
Court of Tax Appeals En Banc in CT A EB No. 415; and DIRECT petitioner Commissioner of
Internal Revenue to refund or to issue a tax credit certificate to Pilipinas Shell Petroleum
Corporation in the amount of J195,014,283.00 representing the excise taxes it paid on
petroleum products sold to international carriers from October 2001 to June 2002.