Association of International Shipping Lines, Inc. vs. Secretary of Finance

Demurrage and detention fees collected by international shipping carriers are not part of "Gross Philippine Billings" under Section 28(A)(3)(a) of the National Internal Revenue Code; being compensation for the use of vessels and containers rather than revenue derived from the carriage of passengers, cargo, or mail originating from the Philippines, they are subject to the regular corporate income tax rate and not the preferential 2.5% rate.

Republic Act No. 9337 amended the National Internal Revenue Code of 1997, prompting the Commissioner of Internal Revenue to issue Revenue Memorandum Circular No. 31-2008 clarifying tax treatment for shipping companies. Petitioners successfully challenged provisions of RMC 31-2008 imposing regular income tax and value-added tax on demurrage and detention fees before the Regional Trial Court of Quezon City, Branch 98, which declared those provisions invalid in a final judgment dated May 18, 2012. Subsequently, Republic Act No. 10378 amended Section 28(A)(3)(a) of the NIRC to recognize reciprocity in tax exemptions for international carriers. Pursuant thereto, the Secretary of Finance issued Revenue Regulation No. 15-2013, whose Section 4.4 similarly subjected demurrage and detention fees to regular income tax.

• The First Challenge: In 2010, petitioners Association of International Shipping Lines, Inc., APL Co. Pte Ltd., and Maersk-Filipinas, Inc. filed a petition for declaratory relief before the Regional Trial Court, Branch 98, Quezon City (Civil Case No. Q-09-64241) seeking to nullify Revenue Memorandum Circular No. 31-2008 insofar as it imposed 30% regular corporate income tax and 12% VAT on demurrage and detention fees, and 12% VAT on commission income of local shipping agents. By Order dated May 18, 2012, the trial court granted summary judgment, declaring the challenged provisions invalid on the ground that demurrage and detention fees formed part of Gross Philippine Billings subject only to the 2.5% preferential tax rate. The order became final and executory on June 16, 2012.
• Legislative and Regulatory Developments: On March 7, 2013, Republic Act No. 10378 was enacted, amending Section 28(A)(3)(a) of the NIRC to define "Gross Philippine Billings" for international shipping as gross revenue for passenger, cargo, or mail originating from the Philippines up to final destination, and authorizing the Secretary of Finance to promulgate implementing rules. On September 20, 2013, the Secretary of Finance issued Revenue Regulation No. 15-2013. Section 4.4 thereof provided that demurrage and detention fees "are all considered Philippine-sourced income" and "subject to the Philippine income tax under the regular rate," not being part of Gross Philippine Billings.
• The Present Action: On December 4, 2013, petitioners filed a second petition for declaratory relief before the Regional Trial Court, Branch 77, Quezon City (Special Civil Action No. R-QZN-13-05590-CV), impleading both the Secretary of Finance and the Commissioner of Internal Revenue, and seeking to invalidate Section 4.4 of RR 15-2013. They argued that res judicata barred the enforcement of the new regulation, that the fees were not income but penalties, and that the regulation was procedurally defective for lack of public hearing and filing with the UP Law Center. The trial court dismissed the petition for lack of jurisdiction under Commonwealth Act No. 55, denied the application of res judicata, and upheld the validity of RR 15-2013.

• Res Judicata: Petitioners maintained that the final and executory Order dated May 18, 2012 in Civil Case No. Q-09-64241 barred the enforcement of Section 4.4 of RR 15-2013, as both involved the identical subject matter of taxing demurrage and detention fees at regular rates, and the Secretary of Finance was in privity with the CIR.
• Nature of Fees and Statutory Construction: Petitioners argued that demurrage and detention fees are penalties or damages, not income, or alternatively, that they constitute part of Gross Philippine Billings under Section 28(A)(3)(a) of the NIRC as amended by RA 10378, and should be taxed at the preferential 2.5% rate. They contended that RR 15-2013 unduly expanded the law by imposing taxes not authorized by Congress.
• Procedural Defects in Rule-Making: Petitioners asserted that RR 15-2013 was invalid because it was promulgated without public hearing and was not filed with the University of the Philippines Law Center as required by the Revised Administrative Code.

• Lack of Identity of Parties and Subject Matter: Respondents countered that res judicata could not apply because the Secretary of Finance was not impleaded in Civil Case No. Q-09-64241, and the Secretary's authority to issue RR 15-2013 under Section 244 of the NIRC and Section 5 of RA 10378 is distinct from the CIR's authority under Section 4 of the NIRC. The prior judgment bound only the CIR.
• Jurisdictional Bar: Respondents argued that the petition for declaratory relief was improper under Commonwealth Act No. 55, which removes from regional trial courts jurisdiction over cases questioning tax liability under laws administered by the Bureau of Internal Revenue.
• Validity as Interpretative Regulation: Respondents contended that RR 15-2013 was a valid interpretative regulation merely clarifying the definition of Gross Philippine Billings under Section 28(A)(3)(a). They argued that demurrage and detention fees constitute income from the use of property in the Philippines, not from the carriage of passengers or cargo, and thus fall outside the scope of GPB. As an interpretative rule, it required no public hearing or filing with the UP Law Center to be effective.

• Res Judicata: Whether the principle of res judicata bars the challenge against Section 4.4 of RR 15-2013 in light of the final judgment in Civil Case No. Q-09-64241.
• Proper Remedy: Whether a petition for declaratory relief is the proper vehicle to invalidate RR 15-2013.
• Validity of RR 15-2013: Whether Section 4.4 of RR 15-2013 is a valid revenue regulation correctly interpreting Section 28(A)(3)(a) of the NIRC.

• Res Judicata: Res judicata does not apply. There is no substantial identity of parties because the Secretary of Finance, who issued RR 15-2013, was not a party to the prior action against the CIR; the binding effect of a declaratory judgment is limited to parties impleaded under Rule 63, Section 2 of the Rules of Court. Furthermore, there is no identity of subject matter because the prior case involved the CIR's interpretative authority under Section 4 of the NIRC, whereas the present case involves the Secretary's distinct rule-making power under Section 244 of the NIRC and Section 5 of RA 10378. The prior RTC decision is not a judicial precedent binding on the Secretary.
• Proper Remedy: A petition for declaratory relief is not the proper remedy to challenge a revenue regulation where the taxpayer questions tax liability, as Commonwealth Act No. 55 bars regional trial courts from exercising jurisdiction over such actions. However, given the far-reaching implications for the maritime industry and the need to resolve the controversy, the Court treated the petition as one for prohibition under its expanded certiorari jurisdiction to correct grave abuse of discretion.
• Validity of RR 15-2013: Section 4.4 of RR 15-2013 is a valid interpretative regulation. It correctly interprets Section 28(A)(3)(a) of the NIRC, which defines Gross Philippine Billings as gross revenue derived from the carriage of passengers, cargo, or mail originating from the Philippines. Demurrage fees, being compensation for the detention of vessels, and detention fees, being compensation for the extended use of containers, constitute income from the use of property and not from transportation services. Under the principle expressio unius est exclusio alterius, income not derived from the carriage of passengers, cargo, or mail falls outside the definition of GPB and is subject to the regular corporate income tax rate of thirty percent. As an interpretative regulation governing internal revenue officers, RR 15-2013 required no public hearing or filing with the UP Law Center to be effective.

• Res Judicata in Declaratory Relief — Res judicata requires identity of parties, subject matter, and cause of action. A judgment in an action for declaratory relief binds only parties properly impleaded under Rule 63, Section 2 of the Rules of Court; it does not prejudice the rights of persons not made parties to the action.
• Jurisdiction over Tax Declaratory Relief — Commonwealth Act No. 55 removes from courts jurisdiction over petitions for declaratory relief involving the validity of tax assessments or the liability for taxes, duties, or charges collectible under laws administered by the Bureau of Internal Revenue or Bureau of Customs.
• Interpretative vs. Legislative Regulations — Interpretative regulations merely construe or clarify existing statutory provisions without adding new substantive requirements; they need only bare issuance to be effective and are not required to undergo public hearing or be filed with the University of the Philippines Law Center. Legislative regulations, which create new substantive rights or duties, must comply with the procedural requirements of the Revised Administrative Code.
• Gross Philippine Billings (GPB) Definition — Under Section 28(A)(3)(a) of the NIRC, as amended by RA 10378, GPB for international shipping carriers is limited to gross revenue derived from the carriage of passengers, cargo, or mail originating from the Philippines up to final destination. Income from sources other than transportation services, such as demurrage and detention fees (compensation for use of property), is excluded from GPB and subject to regular income tax rates under the principle expressio unius est exclusio alterius.

• "Res judicata applies in the concept of 'bar by prior judgment' if the following requisites concur: (1) the former judgment or order must be final; (2) the judgment or order must be on the merits; (3) the decision must have been rendered by a court having jurisdiction over the subject matter and the parties; and (4) there must be, between the first and the second action, identity of parties, of subject matter, and of causes of action."
• "An action for declaratory relief should be filed by a person interested under a deed, will, contract or other written instrument, and whose rights are affected by a statute, executive order, regulation or ordinance before breach or violation thereof... Where the law or contract has already been contravened prior to the filing of an action for declaratory relief, the court can no longer assume jurisdiction over the action."
• "Demurrage and detention fees definitely form part of an international sea carrier's gross income... The exclusion of demurrage and detention fees from the preferential rate of 2.5% is proper since they are not considered income derived from transportation of persons, goods and/or mail, in accordance with the rule expressio unios est exclusio alterius."
• "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."

• Tambunting, Jr. v. Sumabat, 507 Phil. 94 (2005) — Cited for the principle that declaratory relief must be sought before breach or violation of the instrument or statute, and that the judgment binds only parties impleaded.
• Heirs of Marcelino Doronio v. Heirs of Fortunato Doronio, 565 Phil. 766 (2007) — Applied to emphasize that judgments in declaratory relief actions are conclusive only between the parties and do not bind non-parties.
• CJH Development Corp. v. BIR, 595 Phil. 1051 (2008) — Cited to establish that Commonwealth Act No. 55 remains good law, barring courts from exercising jurisdiction over declaratory relief involving tax liability.
• CIR v. Standard Insurance, Co., Inc., G.R. No. 219340 (2018) — Reinforced the rule that regional trial courts lack jurisdiction over petitions for declaratory relief against tax assessments.
• Diaz et al. v. Secretary of Finance, 669 Phil. 371 (2011) — Authority for treating a petition for declaratory relief as one for prohibition when the case involves far-reaching implications and questions of usurpation of legislative authority.
• ASTEC v. ERC, 695 Phil. 243 (2012) — Cited for the distinction that interpretative regulations and internal rules need not be filed with the UP Law Center to be effective.

• Section 28(A)(3)(a), National Internal Revenue Code of 1997 (as amended by Republic Act No. 10378) — Defines "Gross Philippine Billings" for international shipping carriers and prescribes the 2.5% preferential tax rate.
• Section 4, National Internal Revenue Code of 1997 — Grants the Commissioner of Internal Revenue the power to interpret tax laws.
• Section 244, National Internal Revenue Code of 1997 — Authorizes the Secretary of Finance to promulgate rules and regulations for the effective enforcement of the Code.
• Section 5, Republic Act No. 10378 — Directs the Secretary of Finance to promulgate implementing rules and regulations within thirty days of the law's effectivity.
• Commonwealth Act No. 55 — Removes jurisdiction from courts over declaratory relief actions involving tax liability under laws administered by the Bureau of Customs or Bureau of Internal Revenue.
• Rule 63, Section 2, Rules of Court — Requires that all persons who have or claim any interest affected by a declaratory judgment be made parties, and provides that the declaration shall not prejudice the rights of persons not parties to the action.
• Revised Administrative Code, Book VII, Sections 3 and 9 — Prescribe filing and publication requirements for administrative rules, excepting interpretative and internal regulations.

Peralta, C.J. (Chairperson), Caguioa, J. Reyes, Jr., and Lopez, JJ.