G.R. No. 180066. July 7, 2009.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

philippine airlines, inc., respondent.

Taxation; The Court already settled that the “basic corporate income
tax,” under Section 13(a) of Presidential Decree No. 1590, relates to the
general rate of 35% (reduced to 32% by the year 2000) as stipulated in
Section 27(a) of the National Internal Revenue Code (NIRC) of 1997.—
Section 13(a) of Presidential Decree No. 1590 refers to “basic corporate
income tax.” In Commissioner of Internal Revenue v. Philippine Airlines,
Inc. (504 SCRA 90 [2006]), the Court already settled that the “basic
corporate income tax,” under Section 13(a) of Presidential Decree No. 1590,
relates to the general rate of 35% (reduced to 32% by the year 2000) as
stipulated in Section 27(A) of the NIRC of 1997.
Same; Income Taxation; Taxable income is defined under Section 31 of
the National Internal Revenue Code (NIRC)  of 1997 as the pertinent items
of gross income specified in the said Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such types of
income by the same Code or other special laws.—Taxable income is defined
under Section 31 of the NIRC of 1997 as the pertinent items of gross
income specified in the said Code, less the deductions and/or personal
and additional exemptions, if any, authorized for such types of income
by the same Code or other special laws. The gross income, referred to in
Section 31, is described in Section 32 of the NIRC of 1997 as income from
whatever source, including compensation for services; the conduct of trade
or business or the exercise of profession; dealings in property; interests;
rents; royalties; dividends; annuities; prizes and winnings; pensions; and a
partner’s distributive share in the net income of a general professional
partnership.
Same; Same; Gross income of a domestic corporation engaged in the
sale of service means gross receipts, less sales returns, allowances,
discounts and cost of services.—According to the last paragraph of Section
27(E)(4) of the NIRC of 1997, gross income of a

_______________

* THIRD DIVISION.
 238

238 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

domestic corporation engaged in the sale of service means gross receipts,

less sales returns, allowances, discounts and cost of services. “Cost of
services” refers to all direct costs and expenses necessarily incurred to
provide the services required by the customers and clients including (a)
salaries and employee benefits of personnel, consultants, and specialists
directly rendering the service; and (b) cost of facilities directly utilized in
providing the service, such as depreciation or rental of equipment used and
cost of supplies. Noticeably, inclusions in and exclusions/deductions from
gross income for MCIT purposes are limited to those directly arising from
the conduct of the taxpayer’s business. It is, thus, more limited than the
gross income used in the computation of basic corporate income tax.
Same; Same; It held that income tax on the passive income of a
domestic corporation, under Section 27(D) of the National Internal Revenue
Code (NIRC) of 1997, is different from the basic corporate income tax on
the taxable income of a domestic corporation, imposed by Section 27(A),
also of the NIRC of 1997.—The Court again cites Commissioner of Internal
Revenue v. Philippine Airlines, Inc. (504 SCRA 90 [2006]), wherein it held
that income tax on the passive income of a domestic corporation, under
Section 27(D) of the NIRC of 1997, is different from the basic corporate
income tax on the taxable income of a domestic corporation, imposed by
Section 27(A), also of the NIRC of 1997. Section 13 of Presidential Decree
No. 1590 gives PAL the option to pay basic corporate income tax or
franchise tax, whichever is lower; and the tax so paid shall be in lieu of all
other taxes, except real property tax. The income tax on the passive income
of PAL falls within the category of “all other taxes” from which PAL is
exempted, and which, if already collected, should be refunded to PAL.
Same; Same; Not being covered by Section 13(a) of Presidential
Decree No. 1590, which makes Philippine Airlines, Inc. (PAL) liable only
for basic corporate income tax, then Minimum Corporate Income Tax
(MCIT) is included in “all other taxes” from which PAL is exempted.—The
Court herein treats MCIT in much the same way. Although both are income
taxes, the MCIT is different from the basic corporate income tax, not just in
the rates, but also in the bases for their computation. Not being covered by
Section 13(a) of Presidential Decree No. 1590, which makes PAL liable
only for basic corporate

239

VOL. 5923, JULY 7, 2009 239

 Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

income tax, then MCIT is included in “all other taxes” from which PAL is
exempted.
Same; Public Utilities; A public utility is granted special tax treatment
(including tax exceptions/exemptions) under its franchise, as an inducement
for the acceptance of the franchise and the rendition of public service by the
said public utility.—Section 13 of Presidential Decree No. 1520 is not
unusual. A public utility is granted special tax treatment (including tax
exceptions/exemptions) under its franchise, as an inducement for the
acceptance of the franchise and the rendition of public service by the said
public utility. In this case, in addition to being a public utility providing air-
transport service, PAL is also the official flag carrier of the country.
Same; Republic Act No. 9337, which took effect on 1 July 2005, cannot
be applied retroactively and any amendment introduced by said statute
affecting the taxation of Philippine Airlines, Inc. (PAL), is immaterial in the
present case.—The CIR seems to lose sight of the fact that the Petition at
bar involves the liability of PAL for MCIT for the fiscal year ending 31
March 2001. Republic Act No. 9337, which took effect on 1 July 2005,
cannot be applied retroactively and any amendment introduced by said
statute affecting the taxation of PAL is immaterial in the present case.
Same; Even though Republic Act No. 8424 amended the National
Internal Revenue Code (NIRC) by introducing the Minimum Corporate
Income Tax (MCIT), in what is now Section 27(E) of the said Code, this
amendment is actually irrelevant and should not affect the taxation of
Philippine Airlines, Inc. (PAL), since the MCIT is clearly distinct from the
basic corporate income tax referred to in Section 13(a) of Presidential
Decree No. 1590, and from which Philippine Airlines, Inc. (PAL) is
consequently exempt under the “in lieu of all other taxes” clause of its
charter.—The alternative argument of the CIR—that the imposition of the
MCIT is pursuant to the amendment of the NIRC, and not of Presidential
Decree No. 1590—is just as specious. As has already been settled by this
Court, the basic corporate income tax under Section 13(a) of Presidential
Decree No. 1590 relates to the general tax rate under Section 27(A) of the
NIRC of 1997, which is 32% by the year 2000, imposed on taxable income.
Thus, only provisions of the NIRC of 1997 necessary for the computation of
the basic corporate income tax apply to PAL. And

240

240 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

even though Republic Act No. 8424 amended the NIRC by introducing the
MCIT, in what is now Section 27(E) of the said Code, this amendment is
actually irrelevant and should not affect the taxation of PAL, since the
MCIT is clearly distinct from the basic corporate income tax referred to in
Section 13(a) of Presidential Decree No. 1590, and from which PAL is
consequently exempt under the “in lieu of all other taxes” clause of its
charter.
Administrative Law; It should be understandable that when an
administrative rule is merely interpretative in nature, its applicability needs
nothing further than its bare issuance for it gives no real consequence more
than what the law itself has already prescribed.—Despite the claims of the
CIR that RMC No. 66-2003 is just a clarificatory and internal issuance, the
Court observes that RMC No. 66-2003 does more than just clarify a
previous regulation and goes beyond mere internal administration. It
effectively increases the tax burden of PAL and other taxpayers who are
similarly situated, making them liable for a tax for which they were not
liable before. Therefore, RMC No. 66-2003 cannot be given effect without
previous notice or publication to those who will be affected thereby. In
Commissioner of Internal Revenue v. Court of Appeals (261 SCRA 236, 247
[1996]), the Court ratiocinated that: It should be understandable that when
an administrative rule is merely interpretative in nature, its applicability
needs nothing further than its bare issuance for it gives no real consequence
more than what the law itself has already prescribed. When, upon the other
hand, the administrative rule goes beyond merely providing for the
means that can facilitate or render least cumbersome the
implementation of the law but substantially adds to or increases the
burden of those governed, it behooves the agency to accord at least to
those directly affected a chance to be heard, and thereafter to be duly
informed, before that new issuance is given the force and effect of law.
Taxation; Tax Exemptions; Petitioner Commissioner of Internal
Revenue erred in applying the principles of tax exemption without first
applying the well-settled doctrine of strict interpretation in the imposition of
taxes.—As to the assertions of the CIR that exemption from tax is not
presumed, and the one claiming it must be able to show that it indubitably
exists, the Court recalls its pronouncements in Commissioner of Internal
Revenue v. Court of Appeals (271 SCRA

241

VOL. 5923, JULY 7, 2009 241

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

605, 613-614 [1997]): We disagree. Petitioner Commissioner of Internal

Revenue erred in applying the principles of tax exemption without first
applying the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and impractical to
determine who are exempted without first determining who are covered
by the aforesaid provision. The Commissioner should have determined
first if private respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens on the
populace, before asking Ateneo to prove its exemption therefrom. The Court
takes this occasion to reiterate the hornbook doctrine in the interpretation of
tax laws that “(a) statute will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously. x  x  x (A) tax cannot be
imposed without clear and express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter in construing statutes
applies with peculiar strictness to tax laws and the provisions of a
taxing act are not to be extended by implication.” Parenthetically, in
answering the question of who is subject to tax statutes, it is basic that
“in case of doubt, such statutes are to be construed most strongly
against the government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed beyond
what statutes expressly and clearly import.”
Same; Same; The exemption of Philippine Airlines, Inc. (PAL), from
“all other taxes” was not just a presumption, but a previously established,
accepted, and respected fact, even for the Bureau of Internal Revenue (BIR).
—For two decades following the grant of its franchise by Presidential
Decree No. 1590 in 1978, PAL was only being held liable for the basic
corporate income tax or franchise tax, whichever was lower; and its
payment of either tax was in lieu of all other taxes, except real property tax,
in accordance with the plain language of Section 13 of the charter of PAL.
Therefore, the exemption of PAL from “all other taxes” was not just a
presumption, but a previously established, accepted, and respected fact,
even for the BIR.

PETITION for review on certiorari of the decision and resolution of

the Court of Tax Appeals.

242

242 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

   The facts are stated in the opinion of the Court.

  The Solicitor General for petitioner.
  Eduardo R. Ceniza and Oscar C. Ventanilla, Jr. for respondent.

CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari, under
Rule 45 of the Revised Rules of Court, seeking the reversal and
setting aside of the Decision1 dated 9 August 2007 and Resolution2
dated 11 October 2007 of the Court of Tax Appeals (CTA) en banc
in CTA E.B. No. 246. The CTA en banc affirmed the Decision3
dated 31 July 2006 of the CTA Second Division in C.T.A. Case No.
7010, ordering the cancellation and withdrawal of Preliminary
Assessment Notice (PAN) No. INC FY-3-31-01-000094 dated 3
September 2003 and Formal Letter of Demand dated 12 January
2004, issued by the Bureau of Internal Revenue (BIR) against
respondent Philippine Airlines, Inc. (PAL), for the payment of
Minimum Corporate Income Tax (MCIT) in the amount of
P272,421,886.58.
There is no dispute as to the antecedent facts of this case.
PAL is a domestic corporation organized under the corporate
laws of the Republic of the Philippines; declared the national flag
carrier of the country; and the grantee under

_______________

1 Penned by Associate Justice Erlinda P. Uy with Presiding Justice Ernesto D.

Acosta and Associate Justices Juanito C. Castañeda, Jr., Lovell R. Bautista, Caesar A.
Casanova, and Olga Palanca-Enriquez, concurring; Rollo, pp. 43-56.
2 Id., at pp. 67-68.
3  Penned by Associate Justice Juanito C. Castañeda with Associate Justices
Erlinda P. Uy and Olga Palanca-Enriquez, concurring, id., at pp. 70-90.

243

VOL. 5923, JULY 7, 2009 243

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

Presidential Decree No. 15904 of a franchise to establish, operate,

and maintain transport services for the carriage of passengers, mail,
and property by air, in and between any and all points and places
throughout the Philippines, and between the Philippines and other
countries.5
For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL
allegedly incurred zero taxable income,6 which left it with unapplied
creditable withholding tax7 in the amount of P2,334,377.95. PAL did
not pay any MCIT for the period.
In a letter dated 12 July 2002, addressed to petitioner
Commissioner of Internal Revenue (CIR), PAL requested for the
refund of its unapplied creditable withholding tax for FY 2000-2001.
PAL attached to its letter the following: (1) Schedule of Creditable
Tax Withheld at Source for FY 2000-2001; (2) Certificates of
Creditable Taxes Withheld; and (3) Audited Financial Statements.
Acting on the aforementioned letter of PAL, the Large Taxpayers
Audit and Investigation Division 1 (LTAID 1) of the BIR Large
Taxpayers Service (LTS), issued on 16 August 2002, Tax
Verification Notice No. 00201448, authorizing Revenue Officer
Jacinto Cueto, Jr. (Cueto) to verify the supporting documents and
pertinent records relative to the claim of PAL for refund of its
unapplied creditable withholding tax for FY 2000-20001. In a letter
dated 19 August 2003, LTAID 1 Chief Armit S. Linsangan invited
PAL to an informal confer-
_______________

4 AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO ESTABLISH,

OPERATE, AND MAINTAIN AIR-TRANSPORT SERVICES IN THE PHILIPPINES AND OTHER
COUNTRIES.
5 Section 1 of PRESIDENTIAL DECREE NO. 1590.
6 According to the Annual Income Tax Return of PAL for the fiscal year in
question, its allowable deductions exactly equalled its total gross income of
P39,470,862,232.00, thus, leaving zero taxable income.
7  Withheld at source, meaning, it was previously deducted and withheld by
various withholding agents from the income payments made to PAL.

244

244 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

ence at the BIR National Office in Diliman, Quezon City, on 27

August 2003, at 10:00 a.m., to discuss the results of the investigation
conducted by Revenue Officer Cueto, supervised by Revenue
Officer Madelyn T. Sacluti.
BIR officers and PAL representatives attended the scheduled
informal conference, during which the former relayed to the latter
that the BIR was denying the claim for refund of PAL and, instead,
was assessing PAL for deficiency MCIT for FY 2000-2001. The
PAL representatives argued that PAL was not liable for MCIT under
its franchise. The BIR officers then informed the PAL
representatives that the matter would be referred to the BIR Legal
Service for opinion.
The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-
31-01-000094, which was received by PAL on 23 October 2003.
LTAID 1 assessed PAL for P262,474,732.54, representing deficiency
MCIT for FY 2000-2001, plus interest and compromise penalty,
computed as follows:

Sales/Revenues from Operation P 38,798,721,685.00

Less: Cost of Services 30,316,679,013.00
Gross Income from Operation 8,482,042,672.00
Add: Non-operating income 465,111,368.00
Total Gross Income for MCIT purposes 9,947,154,040.008
Rate of Tax 2%
Tax Due 178,943,080.80
Add: 20% interest (8-16-00 to 10-31-03) 83,506,651.74
Compromise Penalty 25,000.00
Total Amount Due P 262,474,732.549

_______________

8 Should be P8,947,154,040.00.
9 Rollo, p. 105.
 245

VOL. 5923, JULY 7, 2009 245

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

PAL protested PAN No. INC FY-3-31-01-000094 through a letter

dated 4 November 2003 to the BIR LTS.
On 12 January 2004, the LTAID 1 sent PAL a Formal Letter of
Demand for deficiency MCIT for FY 2000-2001 in the amount of
P271,421,886.58, based on the following calculation:

Sales/Revenues from   P
Operation 38,798,721,685.00
Less: Cost of Services    
Direct Costs - P  
30,749,761,017.00
Less: Non-deductible    
interest expense               433,082,004.00        30,316,679,013.00
Gross Income from Operation P
8,482,042,672.00
Add: Non-operating Income        
465,111,368.00
Total Gross Income for MCIT purposes P
9,947,154,040.00
MCIT tax due       P
178,943,080.80
Interest – 20% per annum –             
7/16/01 to 02/15/04 92,453,805.78
Compromise Penalty                    
25,000.00
Total MCIT due and demandable P
271,421,886.5810

PAL received the foregoing Formal Letter of Demand on 12

February 2004, prompting it to file with the BIR LTS a formal
written protest dated 13 February 2004.
The BIR LTS rendered on 7 May 2004 its Final Decision on
Disputed Assessment, which was received by PAL on 26 May 2004.
Invoking Revenue Memorandum Circular (RMC) No. 66-2003, the
BIR LTS denied with finality the protest of PAL and reiterated the
request that PAL immediately pay its deficiency MCIT for FY 2000-
2001, inclusive of penalties incident to delinquency.

_______________

10 Id., at p. 114.

246

246 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.
 PAL filed a Petition for Review with the CTA, which was
docketed as C.T.A. Case No. 7010 and raffled to the CTA Second
Division. The CTA Second Division promulgated its Decision on 31
July 2006, ruling in favor of PAL. The dispositive portion of the
judgment of the CTA Second Division reads:

“WHEREFORE, premises considered, the instant Petition for Review is

hereby GRANTED. Accordingly, Assessment Notice No. INC FY-3-31-01-
000094 and Formal Letter of Demand for the payment of deficiency
Minimum Corporate Income Tax in the amount of P272,421,886.58 are
hereby CANCELLED and WITHDRAWN.”11

In a Resolution dated 2 January 2007, the CTA Second Division

denied the Motion for Reconsideration of the CIR.
It was then the turn of the CIR to file a Petition for Review with
the CTA en banc, docketed as C.T.A. E.B. No. 246. The CTA en
banc found that “the cited legal provisions and jurisprudence are
teeming with life with respect to the grant of tax exemption too vivid
to pass unnoticed,” and that “the Court in Division correctly ruled in
favor of the respondent [PAL] granting its petition for the
cancellation of Assessment Notice No. INC FY-3-31-01-000094 and
Formal Letter of Demand for the deficiency MCIT in the amount of
P272,421,886.58.”12 Consequently, the CTA en banc denied the
Petition of the CIR for lack of merit. The CTA en banc likewise
denied the Motion for Reconsideration of the CIR in a Resolution
dated 11 October 2007.
Hence, the CIR comes before this Court via the instant Petition
for Review on Certiorari, based on the grounds stated hereunder:

THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN

ITS ASSAILED DECISION BECAUSE:

_______________

11 Id., at p. 89.
12 Id., at p. 55.

247

VOL. 5923, JULY 7, 2009 247

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

(1) [PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME

TAX PROVISION OF THE NATIONAL INTERNAL REVENUE CODE
OF 1997 (NIRC OF 1997). (sic) AS AMENDED; HENCE, IT IS
COVERED BY THE MCIT PROVISION OF THE SAME CODE.
(2) THE MCIT DOES NOT BELONG TO THE CATEGORY OF
“OTHER TAXES” WHICH WOULD ENABLE RESPONDENT TO
AVAIL ITSELF OF THE “IN LIEU” (sic) OF ALL OTHER TAXES”
CLAUSE UNDER SECTION 13 OF P.D. NO. 1590 (“CHARTER”).
(3) THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN
AMENDMENT OF [PAL’S] CHARTER.
(4) PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE
BETWEEN WHAT WILL GIVE IT THE BENEFIT OF A LOWER TAX,
BUT ALSO THE RESPONSIBILITY OF PAYING ITS SHARE OF THE
TAX BURDEN, AS IS EVIDENT IN SECTION 22 OF RA NO. 9337.
(5) A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER
PRESUMED; [PAL] IS LIABLE FOR THE DEFICIENCY MCIT.13

There is only one vital issue that the Court must resolve in the
Petition at bar, i.e., whether PAL is liable for deficiency MCIT for
FY 2000-2001.
The Court answers in the negative.
Presidential Decree No. 1590, the franchise of PAL, contains
provisions specifically governing the taxation of said corporation, to
wit:

“Section 13. In consideration of the franchise and rights hereby

granted, the grantee shall pay to the Philippine Government during the life
of this franchise whichever of subsections (a) and (b) hereunder will
result in a lower tax:
(a) The basic corporate income tax based on the grantee’s annual
net taxable income computed in accordance with the provisions of the
National Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues derived
by the grantee from all sources, without distinction as

_______________

13 Id., at pp. 17-18.

248

248 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

to transport or nontransport operations; provided, that with respect to

international air-transport service, only the gross passenger, mail, and
freight revenues from its outgoing flights shall be subject to this tax.
The tax paid by the grantee under either of the above alternatives shall be
in lieu of all other taxes, duties, royalties, registration, license, and other
fees and charges of any kind, nature, or description, imposed, levied,
established, assessed, or collected by any municipal, city, provincial, or
national authority or government agency, now or in the future, including but
not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local purchases
by the grantee of aviation gas, fuel, and oil, whether refined or in crude
form, and whether such taxes, duties, charges, royalties, or fees are directly
due from or imposable upon the purchaser or the seller, producer,
manufacturer, or importer of said petroleum products but are billed or
passed on to the grantee either as part of the price or cost thereof or by
mutual agreement or other arrangement; provided, that all such purchases
by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall be for
exclusive use in its transport and nontransport operations and other activities
incidental thereto;
2. All taxes, including compensating taxes, duties, charges, royalties,
or fees due on all importations by the grantee of aircraft, engines,
equipment, machinery, spare parts, accessories, commissary and catering
supplies, aviation gas, fuel, and oil, whether refined or in crude form and
other articles, supplies, or materials; provided, that such articles or supplies
or materials are imported for the use of the grantee in its transport and
nontransport operations and other activities incidental thereto and are not
locally available in reasonable quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges payable
to lessors, whether foreign or domestic, of aircraft, engines, equipment,
machinery, spare parts, and other property rented, leased, or chartered by the
grantee where the payment of such taxes is assumed by the grantee;
4. All taxes on interest, fees, and other charges on foreign loans
obtained and other obligations incurred by the grantee where the payment of
such taxes is assumed by the grantee;

249

VOL. 5923, JULY 7, 2009 249

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

5. All taxes, fees, and other charges on the registration, licensing,

acquisition, and transfer of aircraft, equipment, motor vehicles, and all other
personal and real property of the grantee; and
6. The corporate development tax under Presidential Decree No. 1158-
A.
The grantee, shall, however, pay the tax on its real property in
conformity with existing law.
For purposes of computing the basic corporate income tax as provided
herein, the grantee is authorized:
(a) To depreciate its assets to the extent of not more than twice as fast
the normal rate of depreciation; and
(b) To carry over as a deduction from taxable income any net loss
incurred in any year up to five years following the year of such loss.
Section 14. The grantee shall pay either the franchise tax or the basic
corporate income tax on quarterly basis to the Commissioner of Internal
Revenue. Within sixty (60) days after the end of each of the first three
quarters of the taxable calendar or fiscal year, the quarterly franchise or
income-tax return shall be filed and payment of either the franchise or
income tax shall be made by the grantee.
 A final or an adjustment return covering the operation of the grantee for
the preceding calendar or fiscal year shall be filed on or before the fifteenth
day of the fourth month following the close of the calendar or fiscal year.
The amount of the final franchise or income tax to be paid by the grantee
shall be the balance of the total franchise or income tax shown in the final or
adjustment return after deducting therefrom the total quarterly franchise or
income taxes already paid during the preceding first three quarters of the
same taxable year.
Any excess of the total quarterly payments over the actual annual
franchise of income tax due as shown in the final or adjustment franchise or
income-tax return shall either be refunded to the grantee or credited against
the grantee’s quarterly franchise or income-tax liability for the succeeding
taxable year or years at the option of the grantee.
The term “gross revenues” is herein defined as the total gross income
earned by the grantee from; (a) transport, nontransport, and other services;
(b) earnings realized from investments in

250

250 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

money-market placements, bank deposits, investments in shares of stock

and other securities, and other investments; (c) total gains net of total losses
realized from the disposition of assets and foreign-exchange transactions;
and (d) gross income from other sources.” (Emphases ours.)

According to the aforequoted provisions, the taxation of PAL,

during the lifetime of its franchise, shall be governed by two
fundamental rules, particularly: (1) PAL shall pay the Government
either basic corporate income tax or franchise tax, whichever is
lower; and (2) the tax paid by PAL, under either of these
alternatives, shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges, except only real
property tax.
The basic corporate income tax of PAL shall be based on its
annual net taxable income, computed in accordance with the
National Internal Revenue Code (NIRC). Presidential Decree No.
1590 also explicitly authorizes PAL, in the computation of its basic
corporate income tax, to (1) depreciate its assets twice as fast the
normal rate of depreciation;14 and (2) carry over as a deduction from
taxable income any net loss incurred in any year up to five years
following the year of such loss.15
Franchise tax, on the other hand, shall be two per cent (2%) of
the gross revenues derived by PAL from all sources, whether
transport or nontransport operations. However, with respect to
international air-transport service, the franchise tax shall only be
imposed on the gross passenger, mail, and freight revenues of PAL
from its outgoing flights.
_______________

14  As a general rule, there shall be allowed as a depreciation deduction a

reasonable allowance for the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in the trade or business. (Section 34[F]
[1] of the NIRC of 1997)
15 In general, losses shall be deducted from gross income in the same taxable year
said losses were incurred. The recognized exception under Section 39(D) of the NIRC
of 1997, allowing net capital loss carryover, may only be availed of by a taxpayer
“other than a corporation.”

251

VOL. 5923, JULY 7, 2009 251

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

In its income tax return for FY 2000-2001, filed with the BIR,
PAL reported no net taxable income for the period, resulting in zero
basic corporate income tax, which would necessarily be lower than
any franchise tax due from PAL for the same period.
The CIR, though, assessed PAL for MCIT for FY 2000-2001. It
is the position of the CIR that the MCIT is income tax for which
PAL is liable. The CIR reasons that Section 13(a) of Presidential
Decree No. 1590 provides that the corporate income tax of PAL
shall be computed in accordance with the NIRC. And, since the
NIRC of 1997 imposes MCIT, and PAL has not applied for relief
from the said tax, then PAL is subject to the same.
The Court is not persuaded. The arguments of the CIR are
contrary to the plain meaning and obvious intent of Presidential
Decree No. 1590, the franchise of PAL.
Income tax on domestic corporations is covered by Section 27 of
the NIRC of 1997,16 pertinent provisions of which are reproduced
below for easy reference:

“SEC. 27. Rates of Income Tax on Domestic Corporations.—

(A) In General—Except as otherwise provided in this Code, an income
tax of thirty-five percent (35%) is hereby imposed upon the taxable
income derived during each taxable year from all sources within and
without the Philippines by every corporation, as defined in Section 22(B) of
this Code and taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided, That effective January
1, 1998, the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
x x x x
(E) Minimum Corporate Income Tax on Domestic Corporations.—

_______________
 16 Prior to its amendment by Republic Act No. 9337, which was signed into law on 24 May
2005 and took effect on 1 July 2005.

252

252 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

       (1) Imposition of Tax.—A minimum corporate income tax of two

percent (2%) of the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the
minimum income tax is greater than the tax computed under Subsection (A)
of this Section for the taxable year.”

Hence, a domestic corporation must pay whichever is higher of:

(1) the income tax under Section 27(A) of the NIRC of 1997,
computed by applying the tax rate therein to the taxable income of
the corporation; or (2) the MCIT under Section 27(E), also of the
NIRC of 1997, equivalent to 2% of the gross income of the
corporation. Although this may be the general rule in determining
the income tax due from a domestic corporation under the NIRC of
1997, it can only be applied to PAL to the extent allowed by the
provisions in the franchise of PAL specifically governing its
taxation.
After a conscientious study of Section 13 of Presidential Decree
No. 1590, in relation to Sections 27(A) and 27(E) of the NIRC of
1997, the Court, like the CTA en banc and Second Division,
concludes that PAL cannot be subjected to MCIT for FY 2000-2001.
First, Section 13(a) of Presidential Decree No. 1590 refers to
“basic corporate income tax.” In Commissioner of Internal
Revenue v. Philippine Airlines, Inc.,17 the Court already settled that
the “basic corporate income tax,” under Section 13(a) of Presidential
Decree No. 1590, relates to the general rate of 35% (reduced to 32%
by the year 2000) as stipulated in Section 27(A) of the NIRC of
1997.
Section 13(a) of Presidential Decree No. 1590 requires that the
basic corporate income tax be computed in accordance with the
NIRC. This means that PAL shall compute its basic corporate
income tax using the rate and basis prescribed by the NIRC of 1997
for the said tax. There is nothing in Section

_______________

17 G.R. No. 160528, 9 October 2006, 504 SCRA 90, 100.

253
 VOL. 5923, JULY 7, 2009 253
Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

13(a) of Presidential Decree No. 1590 to support the contention of

the CIR that PAL is subject to the entire Title II of the NIRC of
1997, entitled “Tax on Income.”
Second, Section 13(a) of Presidential Decree No. 1590 further
provides that the basic corporate income tax of PAL shall be based
on its annual net taxable income. This is consistent with Section
27(A) of the NIRC of 1997, which provides that the rate of basic
corporate income tax, which is 32% beginning 1 January 2000, shall
be imposed on the taxable income of the domestic corporation.
Taxable income is defined under Section 31 of the NIRC of 1997
as the pertinent items of gross income specified in the said Code,
less the deductions and/or personal and additional exemptions, if
any, authorized for such types of income by the same Code or
other special laws. The gross income, referred to in Section 31, is
described in Section 32 of the NIRC of 1997 as income from
whatever source, including compensation for services; the conduct
of trade or business or the exercise of profession; dealings in
property; interests; rents; royalties; dividends; annuities; prizes and
winnings; pensions; and a partner’s distributive share in the net
income of a general professional partnership.
Pursuant to the NIRC of 1997, the taxable income of a domestic
corporation may be arrived at by subtracting from gross income
deductions authorized, not just by the NIRC of 1997,18 but also by
special laws. Presidential Decree No. 1590 may be considered as
one of such special laws authorizing PAL, in computing its annual
net taxable income, on which its basic corporate income tax shall be
based, to deduct from its gross income the following: (1)
depreciation of assets at twice the normal rate; and (2) net loss carry-
over up to five years following the year of such loss.

_______________

18  Section 34 of the NIRC of 1997 enumerates the allowable deductions, while
Section 35 identifies the personal and additional exemptions.

254

254 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

In comparison, the 2% MCIT under Section 27(E) of the NIRC

of 1997 shall be based on the gross income of the domestic
corporation. The Court notes that gross income, as the basis for
MCIT, is given a special definition under Section 27(E)(4) of the
NIRC of 1997, different from the general one under Section 34 of
the same Code.
According to the last paragraph of Section 27(E)(4) of the NIRC
of 1997, gross income of a domestic corporation engaged in the sale
of service means gross receipts, less sales returns, allowances,
discounts and cost of services. “Cost of services” refers to all
direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (a) salaries
and employee benefits of personnel, consultants, and specialists
directly rendering the service; and (b) cost of facilities directly
utilized in providing the service, such as depreciation or rental of
equipment used and cost of supplies.19 Noticeably, inclusions in and
exclusions/deductions from gross income for MCIT purposes are
limited to those directly arising from the conduct of the taxpayer’s
business. It is, thus, more limited than the gross income used in the
computation of basic corporate income tax.
In light of the foregoing, there is an apparent distinction under
the NIRC of 1997 between taxable income, which is the basis for
basic corporate income tax under Section 27(A); and gross income,
which is the basis for the MCIT under Section 27(E). The two terms
have their respective technical meanings, and cannot be used
interchangeably. The same reasons prevent this Court from declaring
that the basic corporate income tax, for which PAL is liable under
Section 13(a) of Presidential Decree No. 1590, also covers MCIT
under Section 27(E) of the NIRC of 1997, since the basis for the first
is the annual net taxable income, while the basis for the second is
gross income.

_______________

19 Section 27(E)(4) of the NIRC of 1997.

255

VOL. 5923, JULY 7, 2009 255

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

Third, even if the basic corporate income tax and the MCIT are
both income taxes under Section 27 of the NIRC of 1997, and one is
paid in place of the other, the two are distinct and separate taxes.
The Court again cites Commissioner of Internal Revenue v.
Philippine Airlines, Inc.,20 wherein it held that income tax on the
passive income21 of a domestic corporation, under Section 27(D) of
the NIRC of 1997, is different from the basic corporate income tax
on the taxable income of a domestic corporation, imposed by
Section 27(A), also of the NIRC of 1997. Section 13 of Presidential
Decree No. 1590 gives PAL the option to pay basic corporate
income tax or franchise tax, whichever is lower; and the tax so paid
shall be in lieu of all other taxes, except real property tax. The
income tax on the passive income of PAL falls within the category
of “all other taxes” from which PAL is exempted, and which, if
already collected, should be refunded to PAL.
The Court herein treats MCIT in much the same way. Although
both are income taxes, the MCIT is different from the basic
corporate income tax, not just in the rates, but also in the bases for
their computation. Not being covered by Section 13(a) of
Presidential Decree No. 1590, which makes PAL liable only for
basic corporate income tax, then MCIT is included in “all other
taxes” from which PAL is exempted.
That, under general circumstances, the MCIT is paid in place of
the basic corporate income tax, when the former is

_______________

20 Supra note 17at pp. 98, 100.

21 Passive income includes interest from deposits and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements and
royalties [Section 27(D)(1) of the Tax Code of 1997]; capital gains from the sale of
shares of stock not traded in the stock exchange [Section 27(D)(2)]; income derived
under the Expanded Foreign Currency Deposit System [Section 27(D)(3)];
intercorporate dividends [Section 27(D)(4)]; and capital gains realized from sale,
exchange or disposition of lands and/or buildings [Section 27(D)(5)].

256

256 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

higher than the latter, does not mean that these two income taxes are
one and the same. The said taxes are merely paid in the alternative,
giving the Government the opportunity to collect the higher amount
between the two. The situation is not much different from Section 13
of Presidential Decree No. 1590, which reversely allows PAL to pay,
whichever is lower of the basic corporate income tax or the
franchise tax. It does not make the basic corporate income tax
indistinguishable from the franchise tax.
Given the fundamental differences between the basic corporate
income tax and the MCIT, presented in the preceding discussion, it
is not baseless for this Court to rule that, pursuant to the franchise of
PAL, said corporation is subject to the first tax, yet exempted from
the second.
Fourth, the evident intent of Section 13 of Presidential Decree
No. 1520 is to extend to PAL tax concessions not ordinarily
available to other domestic corporations. Section 13 of Presidential
Decree No. 1520 permits PAL to pay whichever is lower of the
basic corporate income tax or the franchise tax; and the tax so paid
shall be in lieu of all other taxes, except only real property tax.
Hence, under its franchise, PAL is to pay the least amount of tax
possible.
Section 13 of Presidential Decree No. 1520 is not unusual. A
public utility is granted special tax treatment (including tax
exceptions/exemptions) under its franchise, as an inducement for the
acceptance of the franchise and the rendition of public service by the
said public utility.22 In this case, in addition to being a public utility
providing air-transport service, PAL is also the official flag carrier of
the country.
The imposition of MCIT on PAL, as the CIR insists, would result
in a situation that contravenes the objective of Section 13 of
Presidential Decree No. 1590. In effect, PAL would not just have
two, but three tax alternatives, namely, the basic

_______________

22 See Carcar Electric and Ice Plant Co., Inc. v. Collector of Internal Revenue,
100 Phil. 50, 54 (1956).

257

VOL. 5923, JULY 7, 2009 257

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

corporate income tax, MCIT, or franchise tax. More troublesome is

the fact that, as between the basic corporate income tax and the
MCIT, PAL shall be made to pay whichever is higher, irrefragably,
in violation of the avowed intention of Section 13 of Presidential
Decree No. 1590 to make PAL pay for the lower amount of tax.
Fifth, the CIR posits that PAL may not invoke in the instant case
the “in lieu of all other taxes” clause in Section 13 of Presidential
Decree No. 1520, if it did not pay anything at all as basic corporate
income tax or franchise tax. As a result, PAL should be made liable
for “other taxes” such as MCIT. This line of reasoning has been
dubbed as the Substitution Theory, and this is not the first time the
CIR raised the same. The Court already rejected the Substitution
Theory in Commissioner of Internal Revenue v. Philippine Airlines,
Inc.,23 to wit:

“Substitution Theory”
of the CIR Untenable
A careful reading of Section 13 rebuts the argument of the CIR that
the “in lieu of all other taxes” proviso is a mere incentive that applies
only when PAL actually pays something. It is clear that PD 1590 intended
to give respondent the option to avail itself of Subsection (a) or (b) as
consideration for its franchise. Either option excludes the payment of other
taxes and dues imposed or collected by the national or the local government.
PAL has the option to choose the alternative that results in lower taxes. It is
not the fact of tax payment that exempts it, but the exercise of its
option.
Under Subsection (a), the basis for the tax rate is respondent’s annual net
taxable income, which (as earlier discussed) is computed by subtracting
allowable deductions and exemptions from gross income. By basing the tax
rate on the annual net taxable income, PD 1590 necessarily recognized the
situation in which taxable income may result in a negative amount and thus
translate into a zero tax liability.

_______________

23 Supra note 17 at pp. 100-101.

258

258 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

Notably, PAL was owned and operated by the government at the time the
franchise was last amended. It can reasonably be contemplated that PD 1590
sought to assist the finances of the government corporation in the form of
lower taxes. When respondent operates at a loss (as in the instant case), no
taxes are due; in this instances, it has a lower tax liability than that provided
by Subsection (b).
The fallacy of the CIR’s argument is evident from the fact that the
payment of a measly sum of one peso would suffice to exempt PAL from
other taxes, whereas a zero liability arising from its losses would not.
There is no substantial distinction between a zero tax and a one-peso
tax liability.” (Emphasis ours.)

Based on the same ratiocination, the Court finds the Substitution

Theory unacceptable in the present Petition.
The CIR alludes as well to Republic Act No. 9337, for reasons
similar to those behind the Substitution Theory. Section 22 of
Republic Act No. 9337, more popularly known as the Expanded
Value Added Tax (E-VAT) Law, abolished the franchise tax imposed
by the charters of particularly identified public utilities, including
Presidential Decree No. 1590 of PAL. PAL may no longer exercise
its options or alternatives under Section 13 of Presidential Decree
No. 1590, and is now liable for both corporate income tax and the
12% VAT on its sale of services. The CIR alleges that Republic Act
No. 9337 reveals the intention of the Legislature to make PAL share
the tax burden of other domestic corporations.
The CIR seems to lose sight of the fact that the Petition at bar
involves the liability of PAL for MCIT for the fiscal year ending 31
March 2001. Republic Act No. 9337, which took effect on 1 July
2005, cannot be applied retroactively24 and any amendment
introduced by said statute affecting the taxation of PAL is immaterial
in the present case.

_______________

24 Article 4 of the Civil Code provides that “Laws shall have no retroactive effect,
unless the contrary is provided.”

259

VOL. 5923, JULY 7, 2009 259

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

And sixth, Presidential Decree No. 1590 explicitly allows PAL, in

computing its basic corporate income tax, to carry over as deduction
any net loss incurred in any year, up to five years following the year
of such loss. Therefore, Presidential Decree No. 1590 does not only
consider the possibility that, at the end of a taxable period, PAL shall
end up with zero annual net taxable income (when its deductions
exactly equal its gross income), as what happened in the case at bar,
but also the likelihood that PAL shall incur net loss (when its
deductions exceed its gross income). If PAL is subjected to MCIT,
the provision in Presidential Decree No. 1590 on net loss carry-over
will be rendered nugatory. Net loss carry-over is material only in
computing the annual net taxable income to be used as basis for the
basic corporate income tax of PAL; but PAL will never be able to
avail itself of the basic corporate income tax option when it is in a
net loss position, because it will always then be compelled to pay the
necessarily higher MCIT.
Consequently, the insistence of the CIR to subject PAL to MCIT
cannot be done without contravening Presidential Decree No. 1520.
Between Presidential Decree No. 1520, on one hand, which is a
special law specifically governing the franchise of PAL, issued on 11
June 1978; and the NIRC of 1997, on the other, which is a general
law on national internal revenue taxes, that took effect on 1 January
1998, the former prevails. The rule is that on a specific matter, the
special law shall prevail over the general law, which shall be
resorted to only to supply deficiencies in the former. In addition,
where there are two statutes, the earlier special and the later general
—the terms of the general broad enough to include the matter
provided for in the special—the fact that one is special and the other
is general creates a presumption that the special is to be considered
as remaining an exception to the general, one as a general law of the
land, the other as the law of a particular case. It is a canon of
statutory construction that a later statute,

260
260 SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

general in its terms and not expressly repealing a prior special

statute, will ordinarily not affect the special provisions of such
earlier statute.25
Neither can it be said that the NIRC of 1997 repealed or amended
Presidential Decree No. 1590.
While Section 16 of Presidential Decree No. 1590 provides that
the franchise is granted to PAL with the understanding that it shall
be subject to amendment, alteration, or repeal by competent
authority when the public interest so requires, Section 24 of the
same Decree also states that the franchise or any portion thereof may
only be modified, amended, or repealed expressly by a special law
or decree that shall specifically modify, amend, or repeal said
franchise or any portion thereof. No such special law or decree
exists herein.
The CIR cannot rely on Section 7(B) of Republic Act No. 8424,
which amended the NIRC in 1997 and reads as follows:

“Section 7. Repealing Clauses.—

x x x x
(B) The provisions of the National Internal Revenue Code, as
amended, and all other laws, including charters of government-owned or
controlled corporations, decrees, orders, or regulations or parts thereof,
that are inconsistent with this Act are hereby repealed or amended
accordingly.”

The CIR reasons that PAL was a government-owned and

controlled corporation when Presidential Decree No. 1590, its
franchise or charter, was issued in 1978. Since PAL was still
operating under the very same charter when Republic Act No. 8424
took effect in 1998, then the latter can repeal or amend the former by
virtue of Section 7(B).
The Court disagrees.

_______________

25 Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R.

No. 159647, 15 April 2005, 456 SCRA 414, 449.

261

VOL. 5923, JULY 7, 2009 261

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

A brief recount of the history of PAL is in order. PAL was

established as a private corporation under the general law of the
Republic of the Philippines in February 1941. In November 1977,
the government, through the Government Service Insurance System
(GSIS), acquired the majority shares in PAL. PAL was privatized in
January 1992 when the local consortium PR Holdings acquired a
67% stake therein.26
It is true that when Presidential Decree No. 1590 was issued on
11 June 1978, PAL was then a government-owned and controlled
corporation; but when Republic Act No. 8424, amending the NIRC,
took effect on 1 January 1998, PAL was already a private
corporation for six years. The repealing clause under Section 7(B) of
Republic Act No. 8424 simply refers to charters of government-
owned and controlled corporations, which would simply and plainly
mean corporations under the ownership and control of the
government at the time of effectivity of said statute. It is already a
stretch for the Court to read into said provision charters, issued to
what were then government-owned and controlled corporations that
are now private, but still operating under the same charters.
That the Legislature chose not to amend or repeal Presidential
Decree No. 1590, even after PAL was privatized, reveals the intent
of the Legislature to let PAL continue enjoying, as a private
corporation, the very same rights and privileges under the terms and
conditions stated in said charter. From the moment PAL was
privatized, it had to be treated as a private corporation, and its
charter became that of a private corporation. It would be completely
illogical to say that PAL is a private corporation still operating under
a charter of a government-owned and controlled corporation.
The alternative argument of the CIR—that the imposition of the
MCIT is pursuant to the amendment of the NIRC, and

_______________

26 http://www.philippineairlines.com/about_pal/milestones/milestones.jsp

262

262 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

not of Presidential Decree No. 1590—is just as specious. As has

already been settled by this Court, the basic corporate income tax
under Section 13(a) of Presidential Decree No. 1590 relates to the
general tax rate under Section 27(A) of the NIRC of 1997, which is
32% by the year 2000, imposed on taxable income. Thus, only
provisions of the NIRC of 1997 necessary for the computation of the
basic corporate income tax apply to PAL. And even though Republic
Act No. 8424 amended the NIRC by introducing the MCIT, in what
is now Section 27(E) of the said Code, this amendment is actually
irrelevant and should not affect the taxation of PAL, since the MCIT
is clearly distinct from the basic corporate income tax referred to in
Section 13(a) of Presidential Decree No. 1590, and from which PAL
is consequently exempt under the “in lieu of all other taxes” clause
of its charter.
The CIR calls the attention of the Court to RMC No. 66-2003, on
“Clarifying the Taxability of Philippine Airlines (PAL) for Income
Tax Purposes As Well As Other Franchise Grantees Similarly
Situated.” According to RMC No. 66-2003:

“Section 27(E) of the Code, as implemented by Revenue Regulations

No. 9-98, provides that MCIT of two percent (2%) of the gross income as of
the end of the taxable year (whether calendar or fiscal year, depending on
the accounting period employed) is imposed upon any domestic corporation
beginning the 4th taxable year immediately following the taxable year in
which such corporation commenced its business operations. The MCIT shall
be imposed whenever such corporation has zero or negative taxable income
or whenever the amount of MCIT is greater than the normal income tax due
from such corporation.
With the advent of such provision beginning January 1, 1998, it is certain
that domestic corporations subject to normal income tax as well as those
choose to be subject thereto, such as PAL, are bound to pay income tax
regardless of whether they are operating at a profit or loss.
Thus, in case of operating loss, PAL may either opt to subject itself to
minimum corporate income tax or to the 2% franchise tax,

263

VOL. 5923, JULY 7, 2009 263

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

whichever is lower. On the other hand, if PAL is operating at a profit, the

income tax liability shall be the lower amount between:
(1) normal income tax or MCIT whichever is higher; and
(2) 2% franchise tax.”

The CIR attempts to sway this Court to adopt RMC No. 66-2003
since the “[c]onstruction by an executive branch of government of a
particular law although not binding upon the courts must be given
weight as the construction comes from the branch of the government
called upon to implement the law.”27
But the Court is unconvinced.
It is significant to note that RMC No. 66-2003 was issued only on
14 October 2003, more than two years after FY 2000-2001 of PAL
ended on 31 March 2001. This violates the well-entrenched principle
that statutes, including administrative rules and regulations, operate
prospectively only, unless the legislative intent to the contrary is
manifest by express terms or by necessary implication.28
Moreover, despite the claims of the CIR that RMC No. 66-2003
is just a clarificatory and internal issuance, the Court observes that
RMC No. 66-2003 does more than just clarify a previous regulation
and goes beyond mere internal administration. It effectively
increases the tax burden of PAL and other taxpayers who are
similarly situated, making them liable for a tax for which they were
not liable before. Therefore, RMC No. 66-2003 cannot be given
effect without previous notice or publication to those who will be
affected thereby. In Commissioner of Internal Revenue v. Court of
Appeals,29 the Court ratiocinated that:

_______________

27 Memorandum of the CIR, Rollo, p. 264.

28 BPI Leasing Corporation v. Court of Appeals, 461 Phil. 451, 460; 416 SCRA 4,
13 (2003).
29 329 Phil. 987, 1007-1009; 261 SCRA 236, 247 (1996).

264

264 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

“It should be understandable that when an administrative rule is merely

interpretative in nature, its applicability needs nothing further than its bare
issuance for it gives no real consequence more than what the law itself has
already prescribed. When, upon the other hand, the administrative rule
goes beyond merely providing for the means that can facilitate or
render least cumbersome the implementation of the law but
substantially adds to or increases the burden of those governed, it
behooves the agency to accord at least to those directly affected a
chance to be heard, and thereafter to be duly informed, before that new
issuance is given the force and effect of law.
A reading of RMC 37-93, particularly considering the circumstances
under which it has been issued, convinces us that the circular cannot be
viewed simply as a corrective measure (revoking in the process the previous
holdings of past Commissioners) or merely as construing Section 142(c)(1)
of the NIRC, as amended, but has, in fact and most importantly, been made
in order to place “Hope Luxury,” “Premium More” and “Champion” within
the classification of locally manufactured cigarettes bearing foreign brands
and to thereby have them covered by RA 7654. Specifically, the new law
would have its amendatory provisions applied to locally manufactured
cigarettes which at the time of its effectivity were not so classified as
bearing foreign brands. Prior to the issuance of the questioned circular,
“Hope Luxury,” “Premium More,” and “Champion” cigarettes were in the
category of locally manufactured cigarettes not bearing foreign brand
subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment
of RA 7654, would have had no new tax rate consequence on private
respondent’s products. Evidently, in order to place “Hope Luxury,”
“Premium More,” and “Champion” cigarettes within the scope of the
amendatory law and subject them to an increased tax rate, the now disputed
RMC 37-93 had to be issued. In so doing, the BIR not simply interpreted
the law; verily, it legislated under its quasi-legislative authority. The
due observance of the requirements of notice, of hearing, and of
publication should not have been then ignored.
Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

265

VOL. 5923, JULY 7, 2009 265

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

“RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations “It has
been observed that one of the problem areas bearing on compliance
with Internal Revenue Tax rules and regulations is lack or
insufficiency of due notice to the tax paying public. Unless there is
due notice, due compliance therewith may not be reasonably
expected. And most importantly, their strict enforcement could
possibly suffer from legal infirmity in the light of the constitutional
provision on ‘due process of law’ and the essence of the Civil Code
provision concerning effectivity of laws, whereby due notice is a
basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil
Code).
“In order that there shall be a just enforcement of rules and
regulations, in conformity with the basic element of due process,
the following procedures are hereby prescribed for the drafting,
issuance and implementation of the said Revenue Tax Issuances:
“(1). This Circular shall apply only to (a) Revenue Regulations;
(b) Revenue Audit Memorandum Orders; and (c) Revenue
Memorandum Circulars and Revenue Memorandum Orders
bearing on internal revenue tax rules and regulations.
“(2). Except when the law otherwise expressly provides, the
aforesaid internal revenue tax issuances shall not begin to be
operative until after due notice thereof may be fairly presumed.
“Due notice of the said issuances may be fairly presumed only
after the following procedures have been taken:
“x x x x x x x x x “(5). Strict compliance with the foregoing
procedures is enjoined.13
Nothing on record could tell us that it was either impossible or
impracticable for the BIR to observe and comply with the above
requirements before giving effect to its questioned circular.” (Emphases
ours.)

The Court, however, stops short of ruling on the validity of RMC

No. 66-2003, for it is not among the issues raised in the instant
Petition. It only wishes to stress the requirement of

266
266 SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

prior notice to PAL before RMC No. 66-2003 could have become
effective. Only after RMC No. 66-2003 was issued on 14 October
2003 could PAL have been given notice of said circular, and only
following such notice to PAL would RMC No. 66-2003 have taken
effect. Given this sequence, it is not possible to say that RMC No.
66-2003 was already in effect and should have been strictly
complied with by PAL for its fiscal year which ended on 31 March
2001.
Even conceding that the construction of a statute by the CIR is to
be given great weight, the courts, which include the CTA, are not
bound thereby if such construction is erroneous or is clearly shown
to be in conflict with the governing statute or the Constitution or
other laws. “It is the role of the Judiciary to refine and, when
necessary, correct constitutional (and/or statutory) interpretation, in
the context of the interactions of the three branches of the
government.”30 It is furthermore the rule of long standing that this
Court will not set aside lightly the conclusions reached by the CTA
which, by the very nature of its functions, is dedicated exclusively to
the resolution of tax problems and has, accordingly, developed an
expertise on the subject, unless there has been an abuse or
improvident exercise of authority.31 In the Petition at bar, the CTA
en banc and in division both adjudged that PAL is not liable for
MCIT under Presidential Decree No. 1590, and this Court has no
sufficient basis to reverse them.
As to the assertions of the CIR that exemption from tax is not
presumed, and the one claiming it must be able to show that it
indubitably exists, the Court recalls its pronounce-

_______________

30 Philippine Scout Veterans Security and Investigation Agency, Inc. v. National

Labor Relations Commission, 330 Phil. 665, 676; 262 SCRA 112, 121 (1996).
31 Commissioner of Internal Revenue v. Philippine National Bank, G.R. No.
161997, 25 October 2005, 474 SCRA 303, 320; Commissioner of Internal Revenue v.
Manila Mining Corporation, G.R. No. 153204, 31 August 2005, 468 SCRA 571, 593-
594.

267

VOL. 5923, JULY 7, 2009 267

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

ments in Commissioner of Internal Revenue v. Court of Appeals:32

 “We disagree. Petitioner Commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying the well-
settled doctrine of strict interpretation in the imposition of taxes. It is
obviously both illogical and impractical to determine who are exempted
without first determining who are covered by the aforesaid provision.
The Commissioner should have determined first if private respondent was
covered by Section 205, applying the rule of strict interpretation of laws
imposing taxes and other burdens on the populace, before asking Ateneo to
prove its exemption therefrom. The Court takes this occasion to reiterate the
hornbook doctrine in the interpretation of tax laws that “(a) statute will not
be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. x x x (A) tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be
extended by implication.” Parenthetically, in answering the question of
who is subject to tax statutes, it is basic that “in case of doubt, such
statutes are to be construed most strongly against the government and
in favor of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes expressly
and clearly import.” (Emphases ours.)

For two decades following the grant of its franchise by

Presidential Decree No. 1590 in 1978, PAL was only being held
liable for the basic corporate income tax or franchise tax, whichever
was lower; and its payment of either tax was in lieu of all other
taxes, except real property tax, in accordance with the plain
language of Section 13 of the charter of PAL. Therefore, the
exemption of PAL from “all other taxes” was not just a presumption,
but a previously established, accepted, and respected fact, even for
the BIR.

_______________

32 338 Phil. 322, 330-331; 271 SCRA 605, 613-614 (1997).

268

268 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Philippine Airlines, Inc.

The MCIT was a new tax introduced by Republic Act No. 8424.
Under the doctrine of strict interpretation, the burden is upon the
CIR to primarily prove that the new MCIT provisions of the NIRC
of 1997, clearly, expressly, and unambiguously extend and apply to
PAL, despite the latter’s existing tax exemption. To do this, the CIR
must convince the Court that the MCIT is a basic corporate income
tax,33 and is not covered by the “in lieu of all other taxes” clause of
 Presidential Decree No. 1590. Since the CIR failed in this regard,
the Court is left with no choice but to consider the MCIT as one of
“all other taxes,” from which PAL is exempt under the explicit
provisions of its charter.
Not being liable for MCIT in FY 2000-2001, it necessarily
follows that PAL need not apply for relief from said tax as the CIR
maintains.
WHEREFORE, premises considered, the instant Petition for
Review is hereby DENIED, and the Decision dated 9 August 2007
and Resolution dated 11 October 2007 of the Court of Tax Appeals
en banc in CTA E.B. No. 246 is hereby AFFIRMED. No costs.
SO ORDERED.

Ynares-Santiago (Chairperson), Velasco, Jr., Nachura and

Peralta, JJ., concur.

Petition denied, judgment and resolution affirmed.

Note.—Rulings, circulars, rules and regulations promulgated by

the Commissioner of Internal Revenue have no retroactive
application if to apply them would prejudice the taxpayer.
(Commissioner of Internal Revenue vs. Philippine Health Care
Providers, Inc., 522 SCRA 131 [2007])
——o0o——

_______________

33  Since it is readily apparent that the MCIT does not constitute the alternative
franchise tax.

© Copyright 2020 Central Book Supply, Inc. All rights reserved.