G.R. No. 180356. February 16, 2010.

* international air carriers that do not have flights to and from the
SOUTH AFRICAN AIRWAYS, petitioner, vs. COMMISSIONER Philippines but nonetheless earn income
668from other activities in the country will be taxed at the rate of
OF INTERNAL REVENUE, respondent.
32% of such income.—Sec. 28(A)(1) of the 1997 NIRC is a general rule
Taxation; Tax Refund; Since an action for a tax refund partakes of that resident foreign corporations are liable for 32% tax on all income from
the nature of an exemption, which cannot be allowed unless granted in the sources within the Philippines. Sec. 28(A)(3) is an exception to this
most explicit and categorical language, it is strictly construed against the general rule. An exception is defined as “that which would otherwise be
claimant who must discharge such burden convincingly.—Preliminarily, included in the provision from which it is excepted. It is a clause which
we emphasize that petitioner is claiming that it is exempted from being exempts something from the operation of a statute by express words.”
taxed for its sale of passage documents in the Philippines. Petitioner, Further, “an exception need not be introduced by the words ‘except’ or
however, failed to sufficiently prove such contention. In Commissioner of ‘unless.’ An exception will be construed as such if it removes something
Internal Revenue v. Acesite (Philippines) Hotel Corporation, 516 SCRA from the operation of a provision of law.” In the instant case, the general
93 (2007) we held, “Since an action for a tax refund partakes of the nature rule is that resident foreign corporations shall be liable for a 32% income
of an exemption, which cannot be allowed unless granted in the most tax on their income from within the Philippines, except for resident foreign
explicit and categorical language, it is strictly construed against the corporations that are international carriers that derive income “from
claimant who must discharge such burden convincingly.” carriage of persons, excess baggage, cargo and mail originating from the
_______________ Philippines” which shall be taxed at 2 1/2% of their Gross Philippine
Billings. Petitioner, being an international carrier with no flights
* THIRD DIVISION. originating from the Philippines, does not fall under the exception. As
such, petitioner must fall under the general rule. This principle is embodied
666 in the Latin maxim, exception firmat regulam in casibus non
Same; Income Taxation; Air Transportation; Gross Philippine exceptis, which means, a thing not being excepted must be regarded as
Billings (GPB); As long as the uplifts of passengers and cargo occur to or coming within the purview of the general rule. To reiterate, the correct
from the Philippines, income is included in Gross Philippine Billings interpretation of the above provisions is that, if an international air carrier
(GPB).—Prior to the 1997 NIRC, GPB referred to revenues from uplifts maintains flights to and from the Philippines, it shall be taxed at the rate of
anywhere in the world, provided that the passage documents were sold in 2 1/2% of its Gross Philippine Billings, while international air carriers that
the Philippines. Legislature departed from such concept in the 1997 NIRC do not have flights to and from the Philippines but nonetheless earn
where GPB is now defined under Sec. 28(A)(3)(a): “Gross Philippine income from other activities in the country will be taxed at the rate of 32%
Billings” refers to the amount of gross revenue derived from carriage of of such income.
persons, excess baggage, cargo and mail originating from the Philippines Same; Same; Compensation; Taxes cannot be subject to
in a continuous and uninterrupted flight, irrespective of the place of sale or compensation for the simple reason that the government and the taxpayer
issue and the place of payment of the ticket or passage document. Now, it are not creditors and debtors of each other—debts are due to the
is the place of sale that is irrelevant; as long as the uplifts of passengers Government in its corporate capacity, while taxes are due to the
and cargo occur to or from the Philippines, income is included in GPB. Government in its sovereign capacity.—And we ruled in Philex Mining
Same; Same; Same; Same; Off-line air carriers having general Corporation v. Commissioner of Internal Revenue, 294 SCRA 687 (1998)
sales agents in the Philippines are engaged in or doing business in the thus: In several instances prior to the instant case, we have already made
Philippines and that their income from sales of passage documents here is the pronouncement that taxes cannot be subject to compensation for the
income from within the Philippines.—In Commissioner of Internal simple reason that the government and the taxpayer are not creditors and
Revenue v. British Overseas Airways Corporation (British Overseas debtors of each other. There is a material distinction between a tax and
Airways), 149 SCRA 395 (1987), which was decided under similar factual debt. Debts are due to the Government in its corporate capacity, while
circumstances, this Court ruled that off-line air carriers having general taxes are due to the
sales agents in the Philippines are engaged in or doing business in the 669Government in its sovereign capacity. We find no cogent reason
Philippines and that their income from sales of passage documents here is to deviate from the aforementioned distinction.
income from within the Philippines. Thus, in that case, we held the off-line Same; Same; Even though petitioner is not entitled to a refund due
air carrier liable for the 32% tax on its taxable income. to the question on the propriety of petitioner’s tax return subject of the
Same; Same; Same; Same; Sec. 28(A)(3)(a) of the 1997 National instant controversy, it would not be proper to deny such claim without
Internal Revenue Code (NIRC) does not, in any categorical term, exempt making a determination of petitioner’s liability under Sec. 28(A)(1).—
all international air carriers from the coverage of Sec. 28(A)(1) of the Petitioner’s similar tax refund claim assumes that the tax return that it filed
1997 NIRC—had legislature’s intentions been to completely exclude all was correct. Given, however, the finding of the CTA that petitioner,
international air carriers from the application of the general rule under although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable
Sec. 28(A)(1), it would have used the appropriate language to do so.—We under Sec. 28(A)(1), the correctness of the return filed by petitioner is now
point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any put in doubt. As such, we cannot grant the prayer for a refund. Be that as it
categorical term, exempt all international air carriers from the coverage of may, this Court is unable to affirm the assailed decision and resolution of
Sec. 28(A)(1) of the 1997 NIRC. Certainly, had legislature’s intentions the CTA En Banc on the outright denial of petitioner’s claim for a refund.
been to completely exclude all international air carriers from the Even though petitioner is not entitled to a refund due to the question on the
application of the general rule under Sec. 28(A)(1), it would have used the propriety of petitioner’s tax return subject of the instant controversy, it
appropriate language to do so; but the legislature did not. Thus, the logical would not be proper to deny such claim without making a determination of
interpretation of petitioner’s liability under Sec. 28(A)(1). It must be remembered that the
667such provisions is that, if Sec. 28(A)(3)(a) is applicable to a tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based
taxpayer, then the general rule under Sec. 28(A)(1) would not apply. If, on taxable income, that is, gross income less deductions and exemptions, if
however, Sec. 28(A)(3)(a) does not apply, a resident foreign corporation, any. It cannot be assumed that petitioner’s liabilities under the two
whether an international air carrier or not, would be liable for the tax under provisions would be the same. There is a need to make a determination of
Sec. 28(A)(1). petitioner’s liability under Sec. 28(A)(1) to establish whether a tax refund
Same; Same; Same; Same; Evidence; Statutory Construction; It is is forthcoming or that a tax deficiency exists. The assailed decision fails to
a well-settled doctrine in this jurisdiction that statements made by mention having computed for the tax due under Sec. 28(A)(1) and the
individual members of Congress in the consideration of a bill do not records are bereft of any evidence sufficient to establish petitioner’s
necessarily reflect the sense of that body and are, consequently, not taxable income. There is a necessity to receive evidence to establish such
controlling in the interpretation of law.—Petitioner further reiterates its amount vis-à-vis the claim for refund. It is only after such amount is
argument that the intention of Congress in amending the definition of GPB established that a tax refund or deficiency may be correctly pronounced.
is to exempt off-line air carriers from income tax by citing the
pronouncements made by Senator Juan Ponce Enrile during the PETITION for review on certiorari of the decision and resolution
deliberations on the provisions of the 1997 NIRC. Such pronouncements, of the Court of Tax Appeals En Banc.
however, are not controlling on this Court. We said in Espino v. Cleofe, 52
   The facts are stated in the opinion of the Court.
SCRA 92 (1973): A cardinal rule in the interpretation of statutes is that the
meaning and intention of the law-making body must be sought, first of all,   Baniqued & Baniqued for petitioner.
in the words of the statute itself, read and considered in their natural,   The Solicitor General for respondent.
ordinary, commonly-accepted and most obvious significations, according
to good and approved usage and without resorting to forced or subtle 670VELASCO, JR., J.:
construction. Courts, therefore, as a rule, cannot presume that the law- The Case
making body does not know the meaning of words and rules of grammar. This Petition for Review on Certiorari under Rule 45 seeks
Consequently, the grammatical reading of a statute must be presumed to the reversal of the July 19, 2007 Decision  and October 30, 2007
1

yield its correct sense. x x x It is also a well-settled doctrine in this Resolution  of the Court of Tax Appeals (CTA) En Banc in CTA
2

jurisdiction that statements made by individual members of Congress E.B. Case No. 210, entitled South African Airways v.
in the consideration of a bill do not necessarily reflect the sense of that
Commissioner of Internal Revenue. The assailed decision affirmed
body and are, consequently, not controlling in the interpretation of
law. the Decision dated May 10, 2006  and Resolution dated August 11,
3

Same; Same; Same; Same; Words and Phrases; An exception is 2006  rendered by the CTA First Division.
4

defined as that which would otherwise be included in the provision from The Facts
which it is excepted, a clause which exempts something from the operation Petitioner South African Airways is a foreign corporation
of a statute by express words; An exception need not be introduced by the organized and existing under and by virtue of the laws of the
words “except” or “unless”—an exception will be construed as such if it Republic of South Africa. Its principal office is located at Airways
removes something from the operation of a provision of law; If an Park, Jones Road, Johannesburg International Airport, South
international air carrier maintains flights to and from the Philippines, it
Africa. In the Philippines, it is an internal air carrier having no
shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while
landing rights in the country. Petitioner has a general sales agent in Whether or not the income derived by petitioner from the sale of
the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel passage documents covering petitioner’s off-line flights is Philippine-
sells passage documents for compensation or commission for source income subject to Philippine income tax.
Whether or not petitioner is entitled to a refund or a tax credit of
petitioner’s off-line flights for the carriage of passengers and cargo
erroneously paid tax on Gross Philippine Billings for the taxable year 2000
between ports or points outside the territorial jurisdiction of the in the amount of P1,727,766.38. 5

Philippines. Petitioner is not registered with the Securities and

Exchange Commission as a corporation, branch office, or
The Court’s Ruling
partnership. It is not licensed to do business in the Philippines.
For the taxable year 2000, petitioner filed separate quarterly
and annual income tax returns for its off-line flights, summarized This petition must be denied.
as follows:
_______________ Petitioner Is Subject to Income Tax
at the Rate of 32% of Its Taxable Income
1 Rollo, pp. 68-79. Penned by Associate Justice Erlinda P. Uy and concurred in
by Presiding Justice Ernesto D. Acosta and Associate Justices Lovell R. Bautista and
Olga Palanca-Enriquez.
Preliminarily, we emphasize that petitioner is claiming that it
2 Id., at pp. 126-127. is exempted from being taxed for its sale of passage
3 Id., at pp. 339-347. _______________
4 Id., at pp. 367-373.
5 Id., at p. 11. 
671

  Period Date Filed   2.5% Gross 673documents in the Philippines. Petitioner, however, failed to
sufficiently prove such contention.
Phil. In Commissioner of Internal Revenue v. Acesite (Philippines)
Billings Hotel Corporation,  we held, “Since an action for a tax refund
6

For 1st Quarter 2nd May 30, 2000 Ph 222,531.25 partakes of the nature of an exemption, which cannot be allowed
unless granted in the most explicit and categorical language, it is
Passen- Quarter August 29, P 424,046.95 strictly construed against the claimant who must discharge such
ger 3rd Quarter 2000 422,466.00 burden convincingly.”
Petitioner has failed to overcome such burden.
4th Quarter November 29, 453,182.91
In essence, petitioner calls upon this Court to determine the
2000 legal implication of the amendment to Sec. 28(A)(3)(a) of the
April 16, 2000 1997 NIRC defining GPB. It is petitioner’s contention that, with
the new definition of GPB, it is no longer liable under Sec. 28(A)
Sub-total     Ph 1,522,227.11 (3)(a). Further, petitioner argues that because the 2 1/2% tax on
P GPB is inapplicable to it, it is thereby excluded from the
imposition of any income tax.
For 1st Quarter May 30, 2000 Ph 81,531.00
Sec. 28(b)(2) of the 1939 NIRC provided:
Cargo 2nd Quarter August 29, P 50,169.65 “(2) Resident Corporations.—A corporation organized, authorized,
or existing under the laws of a foreign country, engaged in trade or
3rd Quarter 2000 36,383.74 business within the Philippines, shall be taxable as provided in subsection
4th Quarter November 29, 37,454.88 (a) of this section upon the total net income received in the preceding
taxable year from all sources within the Philippines: Provided, however,
2000 that international carriers shall pay a tax of two and one-half percent on
April 16, 2000 their gross Philippine billings.”

Sub-total     Ph 205,539.27 This provision was later amended by Sec. 24(B)(2) of the
P 1977 NIRC, which defined GPB as follows:
“Gross Philippine billings” include gross revenue realized from uplifts
TOTAL       1,727,766.38 anywhere in the world by any international carrier doing business in the
Thereafter, on February 5, 2003, petitioner filed with the Philippines of passage documents sold therein, whether for passenger,
Bureau of Internal Revenue, Revenue District Office No. 47, a excess baggage or mail, provided the cargo or mail originates from the
claim for the refund of the amount of PhP 1,727,766.38 as Philippines.”
erroneously paid tax on Gross Philippine Billings (GPB) for the _______________
taxable year 2000. Such claim was unheeded. Thus, on April 14,
2003, petitioner filed a Petition for Review with the CTA for the 6 G.R. No. 147295, February 16, 2007, 516 SCRA 93, 103.
refund of the abovementioned amount. The case was docketed as
CTA Case No. 6656. 674In the 1986 and 1993 NIRCs, the definition of GPB was
On May 10, 2006, the CTA First Division issued a Decision further changed to read:
denying the petition for lack of merit. The CTA ruled that “Gross Philippine Billings” means gross revenue realized from uplifts of
petitioner is a resident foreign corporation engaged in trade or passengers anywhere in the world and excess baggage, cargo and mail
business in the Philippines. It further ruled that petitioner was not originating from the Philippines, covered by passage documents sold in the
Philippines.
liable to pay tax on its GPB under Section 28(A)(3)(a) of the
National Internal Revenue Code (NIRC) of 1997. The CTA, Essentially, prior to the 1997 NIRC, GPB referred to revenues
however, stated that petitioner is liable to pay a tax of 32% on its from uplifts anywhere in the world, provided that the passage
income derived from the sales of passage documents in the documents were sold in the Philippines. Legislature departed from
Philippines. On this ground, the CTA denied petitioner’s claim for such concept in the 1997 NIRC where GPB is now defined under
a refund.672 Sec. 28(A)(3)(a):
Petitioner’s Motion for Reconsideration of the above decision “Gross Philippine Billings” refers to the amount of gross revenue
was denied by the CTA First Division in a Resolution dated derived from carriage of persons, excess baggage, cargo and mail
August 11, 2006. originating from the Philippines in a continuous and uninterrupted flight,
Thus, petitioner filed a Petition for Review before the irrespective of the place of sale or issue and the place of payment of the
CTA En Banc, reiterating its claim for a refund of its tax payment ticket or passage document.”
on its GPB. This was denied by the CTA in its assailed decision. A
Now, it is the place of sale that is irrelevant; as long as the
subsequent Motion for Reconsideration by petitioner was also
uplifts of passengers and cargo occur to or from the Philippines,
denied in the assailed resolution of the CTA En Banc.
income is included in GPB.
Hence, petitioner went to us.
As correctly pointed out by petitioner, inasmuch as it does not
maintain flights to or from the Philippines, it is not taxable under
The Issues Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by
the CTA. But petitioner further posits the view that due to the non-
Whether or not petitioner, as an off-line international carrier selling applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying
passage documents through an independent sales agent in the Philippines,
any other income tax for its sale of passage documents in the
is engaged in trade or business in the Philippines subject to the 32%
income tax imposed by Section 28 (A)(1) of the 1997 NIRC. Philippines.
Such position is untenable.
 In Commissioner of Internal Revenue v. British Overseas (3) International Carrier.—An international carrier doing business
Airways Corporation (British Overseas Airways),  which was 7 in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on
decided under similar factual circumstances, this Court ruled that its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier.—‘Gross Philippine Billings’
off-line air carriers having general sales agents in the
_______________
refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective
7 No. L-65773-74, April 30, 1987, 149 SCRA 395.
of the place of sale or issue and the place of payment of the ticket
or passage document: Provided, That tickets revalidated,
675Philippines are engaged in or doing business in the Philippines exchanged and/or indorsed to another international airline form
and that their income from sales of passage documents here is part of the Gross Philippine Billings if the passenger boards a
income from within the Philippines. Thus, in that case, we held the plane in a port or point in the Philippines: Provided, further, That
off-line air carrier liable for the 32% tax on its taxable income. for a flight which originates from the Philippines, but
Petitioner argues, however, that because British Overseas transshipment of passenger takes place at any port outside the
Airways was decided under the 1939 NIRC, it does not apply to Philippines on another airline, only the aliquot portion of the cost
the instant case, which must be decided under the 1997 NIRC. of the ticket corresponding to the leg flown from the Philippines
Petitioner alleges that the 1939 NIRC taxes resident foreign to the point of transshipment shall form part of Gross Philippine
Billings.”
corporations, such as itself, on all income from sources within the
Philippines. Petitioner’s interpretation of Sec. 28(A)(3)(a) of the Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident
1997 NIRC is that, since it is an international carrier that does not foreign corporations are liable for 32% tax on all income from
maintain flights to or from the Philippines, thereby having no GPB sources within the Philippines. Sec. 28(A)(3) is an exception to
as defined, it is exempt from paying any income tax at all. In other this general rule.
words, the existence of Sec. 28(A)(3)(a) according to petitioner An exception is defined as “that which would otherwise be
precludes the application of Sec. 28(A)(1) to it. included in the provision from which it is excepted. It is a clause
Its argument has no merit. which exempts something from the operation of a stat-
First, the difference cited by petitioner between the 1939 and 678ute by express words.”  Further, “an exception need not be
9

1997 NIRCs with regard to the taxation of off-line air carriers is introduced by the words ‘except’ or ‘unless.’ An exception will be
more apparent than real. construed as such if it removes something from the operation of a
We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does provision of law.” 10

not, in any categorical term, exempt all international air carriers In the instant case, the general rule is that resident foreign
from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, corporations shall be liable for a 32% income tax on their income
had legislature’s intentions been to completely exclude all from within the Philippines, except for resident foreign
international air carriers from the application of the general rule corporations that are international carriers that derive income
under Sec. 28(A)(1), it would have used the appropriate language “from carriage of persons, excess baggage, cargo and mail
to do so; but the legislature did not. Thus, the logical interpretation originating from the Philippines” which shall be taxed at 2 1/2%
of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a of their Gross Philippine Billings. Petitioner, being an
taxpayer, then the general rule under Sec. 28(A)(1) would not international carrier with no flights originating from the
apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident Philippines, does not fall under the exception. As such, petitioner
foreign corporation, whether an international air carrier or not, must fall under the general rule. This principle is embodied in the
would be liable for the tax under Sec. 28(A)(1).676 Latin maxim, exception firmat regulam in casibus non exceptis,
Clearly, no difference exists between British Overseas which means, a thing not being excepted must be regarded as
Airways and the instant case, wherein petitioner claims that the coming within the purview of the general rule. 11

former case does not apply. Thus, British Overseas To reiterate, the correct interpretation of the above provisions
Airways applies to the instant case. The findings therein that an is that, if an international air carrier maintains flights to and from
off-line air carrier is doing business in the Philippines and that the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross
income from the sale of passage documents here is Philippine- Philippine Billings, while international air carriers that do not have
source income must be upheld. flights to and from the Philippines but nonetheless earn income
Petitioner further reiterates its argument that the intention of from other activities in the country will be taxed at the rate of 32%
Congress in amending the definition of GPB is to exempt off-line of such income.
air carriers from income tax by citing the pronouncements made As to the denial of petitioner’s claim for refund, the CTA
by Senator Juan Ponce Enrile during the deliberations on the denied the claim on the basis that petitioner is liable for income
provisions of the 1997 NIRC. Such pronouncements, however, are tax under Sec. 28(A)(1) of the 1997 NIRC. Thus, petitioner raises
not controlling on this Court. We said in Espino v. Cleofe: 8
the issue of whether the existence of such liability would preclude
“A cardinal rule in the interpretation of statutes is that the meaning their claim for a refund of tax paid on the basis of Sec. 28(A)(3)
and intention of the law-making body must be sought, first of all, in the
words of the statute itself, read and considered in their natural, ordinary,
(a). In answer to petitioner’s motion for
_______________
commonly-accepted and most obvious significations, according to good
and approved usage and without resorting to forced or subtle construction.
Courts, therefore, as a rule, cannot presume that the law-making body does 9  R. Agpalo, STATUTORY CONSTRUCTION  241 (4th ed., 1998).
10 Id., at p. 242.
not know the meaning of words and rules of grammar. Consequently, the 11 Id.
grammatical reading of a statute must be presumed to yield its correct
sense. x x x It is also a well-settled doctrine in this jurisdiction that 679reconsideration,the CTA First Division ruled in its Resolution
statements made by individual members of Congress in the
dated August 11, 2006, thus:
consideration of a bill do not necessarily reflect the sense of that body
“On the fourth argument, petitioner avers that a deficiency tax
and are, consequently, not controlling in the interpretation of
assessment does not, in any way, disqualify a taxpayer from claiming a tax
law.” (Emphasis supplied.)
refund since a refund claim can proceed independently of a tax assessment
and that the assessment cannot be offset by its claim for refund.
Moreover, an examination of the subject provisions of the law
Petitioner’s argument is erroneous. Petitioner premises its argument
would show that petitioner’s interpretation of those provisions is on the existence of an assessment. In the assailed Decision, this Court did
erroneous. not, in any way, assess petitioner of any deficiency corporate income tax.
Sec. 28(A)(1) and (A)(3)(a) provides: The power to make assessments against taxpayers is lodged with the
“SEC. 28. Rates of Income Tax on Foreign Corporations.— respondent. For an assessment to be made, respondent must observe the
_______________
formalities provided in Revenue Regulations No. 12-99. This Court merely
pointed out that petitioner is liable for the regular corporate income tax by
8 No. L-33410, July 13, 1973, 52 SCRA 92, 98. virtue of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to
speak of.”12

677     (A) Tax on Resident Foreign Corporations.—

(1) In General.—Except as otherwise provided in this Code, a Precisely, petitioner questions the offsetting of its payment of
corporation organized, authorized, or existing under the laws of any
foreign country, engaged in trade or business within the Philippines, shall
the tax under Sec. 28(A)(3)(a) with their liability under Sec. 28(A)
be subject to an income tax equivalent to thirty-five percent (35%) of the (1), considering that there has not yet been any assessment of their
taxable income derived in the preceding taxable year from all sources obligation under the latter provision. Petitioner argues that such
within the Philippines: Provided, That effective January 1, 1998, the rate offsetting is in the nature of legal compensation, which cannot be
of income tax shall be thirty-four percent (34%); effective January 1, 1999, applied under the circumstances present in this case.
the rate shall be thirty-three percent (33%), and effective January 1, 2000 Article 1279 of the Civil Code contains the elements of legal
and thereafter, the rate shall be thirty-two percent (32%). compensation, to wit:
xxxx “Art. 1279. In order that compensation may be proper, it is
necessary:
 (1) That each one of the obligors be bound principally, and Thus, to avoid multiplicity of suits and unnecessary difficulties or
that he be at the same time a principal creditor of the other; expenses, it is both logically necessary and legally appropriate that the
(2)  That both debts consist in a sum of money, or if the issue of the deficiency tax assessment against Citytrust be resolved jointly
things due are consumable, they be of the same kind, and also of with its claim for tax refund, to determine once and for all in a single
the same quality if the latter has been stated; proceeding the true and correct amount of tax due or refundable.
_______________ In fact, as the Court of Tax Appeals itself has heretofore conceded, it
would be only just and fair that the taxpayer and the Government alike be
12 Rollo, p. 372. given equal opportunities to avail of remedies under the law to defeat each
other’s claim and to determine all matters of dispute between them in one
680
single case. It is important to note that in determining whether or not
(3) That the two debts be due;
petitioner is entitled to the refund of the amount paid, it would [be]
(4) That they be liquidated and demandable;
necessary to determine how much the Government is entitled to collect as
(5)  That over neither of them there be any retention or
taxes. This would necessarily include the determination of the correct
controversy, commenced by third persons and communicated in
liability of the taxpayer and, certainly, a determination of this case would
due time to the debtor.”
constitute res judicata on both parties as to all the matters subject thereof
or necessarily involved therein.” (Emphasis supplied.)
And we ruled in Philex Mining Corporation v. Commissioner
of Internal Revenue,  thus:13
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72,
“In several instances prior to the instant case, we have already made
Chapter XI of the 1997 NIRC. The above pronouncements are,
the pronouncement that taxes cannot be subject to compensation for the
simple reason that the government and the taxpayer are not creditors and therefore, still applicable today.
debtors of each other. There is a material distinction between a tax and Here, petitioner’s similar tax refund claim assumes that the tax
debt. Debts are due to the Government in its corporate capacity, while return that it filed was correct. Given, however, the finding of the
taxes are due to the Government in its sovereign capacity. We find no CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of
cogent reason to deviate from the aforementioned distinction. the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of
Prescinding from this premise, in Francia v. Intermediate Appellate the return filed by petitioner is
Court, we categorically held that taxes cannot be subject to set-off or 683now put in doubt. As such, we cannot grant the prayer for a
compensation, thus:
refund.
We have consistently ruled that there can be no off-setting of
taxes against the claims that the taxpayer may have against the Be that as it may, this Court is unable to affirm the assailed
government. A person cannot refuse to pay a tax on the ground decision and resolution of the CTA En Banc on the outright denial
that the government owes him an amount equal to or greater than of petitioner’s claim for a refund. Even though petitioner is not
the tax being collected. The collection of a tax cannot await the entitled to a refund due to the question on the propriety of
results of a lawsuit against the government. petitioner’s tax return subject of the instant controversy, it would
The ruling in Francia has been applied to the subsequent case not be proper to deny such claim without making a determination
of Caltex Philippines, Inc. v. Commission on Audit, which reiterated that: of petitioner’s liability under Sec. 28(A)(1).
. . . a taxpayer may not offset taxes due from the claims that
It must be remembered that the tax under Sec. 28(A)(3)(a) is
he may have against the government. Taxes cannot be the subject
of compensation because the government and taxpayer are not based on GPB, while Sec. 28(A)(1) is based on taxable income,
mutually creditors and debtors of each other and a claim for taxes that is, gross income less deductions and exemptions, if any. It
is not such a debt, demand, contract or judgment as is allowed to cannot be assumed that petitioner’s liabilities under the two
be set-off.” provisions would be the same. There is a need to make a
determination of petitioner’s liability under Sec. 28(A)(1) to
_______________
establish whether a tax refund is forthcoming or that a tax
deficiency exists. The assailed decision fails to mention having
13 G.R. No. 125704, August 28, 1998, 294 SCRA 687, 695-696.
computed for the tax due under Sec. 28(A)(1) and the records are
681Verily, petitioner’s argument is correct that the offsetting bereft of any evidence sufficient to establish petitioner’s taxable
of its tax refund with its alleged tax deficiency is unavailing under income. There is a necessity to receive evidence to establish such
Art. 1279 of the Civil Code. amount vis-à-vis the claim for refund. It is only after such amount
Commissioner of Internal Revenue v. Court of Tax is established that a tax refund or deficiency may be correctly
Appeals,  however, granted the offsetting of a tax refund with a
14 pronounced.
tax deficiency in this wise: WHEREFORE, the assailed July 19, 2007 Decision and
“Further, it is also worth noting that the Court of Tax Appeals erred in October 30, 2007 Resolution of the CTA En Banc in CTA E.B.
denying petitioner’s supplemental motion for reconsideration alleging Case No. 210 are SET ASIDE. The instant case is REMANDED
bringing to said court’s attention the existence of the deficiency income to the CTA En Banc for further proceedings and appropriate
and business tax assessment against Citytrust. The fact of such deficiency action, more particularly, the reception of evidence for both parties
assessment is intimately related to and inextricably intertwined with the and the corresponding disposition of CTA E.B. Case No. 210 not
right of respondent bank to claim for a tax refund for the same year. To
otherwise inconsistent with our judgment in this Decision. 684
award such refund despite the existence of that deficiency assessment is an
absurdity and a polarity in conceptual effects. Herein private respondent SO ORDERED.
cannot be entitled to refund and at the same time be liable for a tax Corona (Chairperson), Leonardo-De
deficiency assessment for the same year. Castro,  Peralta and Mendoza, JJ., concur.
**

The grant of a refund is founded on the assumption that the tax

return is valid, that is, the facts stated therein are true and correct. Judgment and resolution set aside, case remanded to Court of
The deficiency assessment, although not yet final, created a doubt as to Tax Appeals En Banc.
and constitutes a challenge against the truth and accuracy of the facts
stated in said return which, by itself and without unquestionable Notes.—The rule that tax exemptions should be construed
evidence, cannot be the basis for the grant of the refund. strictly against the taxpayer presupposes that the taxpayer is
Section 82, Chapter IX of the National Internal Revenue Code of clearly subject to the tax being levied against him—unless a
1977, which was the applicable law when the claim of Citytrust was filed, statute imposes a tax clearly, expressly and unambiguously, what
provides that “(w)hen an assessment is made in case of any list, statement,
applies is the equally well-settled rule that the imposition of a tax
or return, which in the opinion of the Commissioner of Internal Revenue
was false or fraudulent or contained any understatement or undervaluation, cannot be presumed. (Commissioner of Internal Revenue vs.
no tax collected under such assessment shall be recovered by any suits Philippine American Accident Insurance Company, Inc., 453
unless it is proved that the said list, statement, or return was not false nor SCRA 668 [2005])
fraudulent and did not contain any understatement or undervaluation; but In a claim for refund or issuance of a tax credit certificate
this provision shall not apply to statements or returns made or to be made attributable to zero-rated sales, what is to be closely scrutinized is
in good faith regarding annual depreciation of oil or gas wells and mines.” the documentary substantiation of the input VAT paid, as may be
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proven by other export documents, rather than the supporting
14 G.R. No. 106611, July 21, 1994, 234 SCRA 348, 356-358.
documents for the zero-rated export sales. (Intel Technology
Philippines, Inc. vs. Commissioner of Internal Revenue, 522
682    Moreover, to grant the refund without determination of the SCRA 657 [2007])
proper assessment and the tax due would inevitably result in multiplicity of ——o0o—— 
proceedings or suits. If the deficiency assessment should subsequently be
upheld, the Government will be forced to institute anew a proceeding for
the recovery of erroneously refunded taxes which recourse must be filed
within the prescriptive period of ten years after discovery of the falsity,
fraud or omission in the false or fraudulent return involved. This would
necessarily require and entail additional efforts and expenses on the part of
the Government, impose a burden on and a drain of government funds, and
impede or delay the collection of much-needed revenue for governmental
operations.