Commissioner of Internal Revenue vs. Euro-Philippines Airline Services, Inc.

Services performed in the Philippines by a VAT-registered person to a person engaged in international air transport operations are subject to zero percent value-added tax under Section 108(B)(4) of the National Internal Revenue Code of 1997, and failure to comply with the invoicing requirement of imprinting “zero-rated” does not by itself render the transaction subject to 12% VAT; moreover, an issue not raised at the administrative and lower tribunal level cannot be raised for the first time on appeal.

Euro-Philippines Airline Services, Inc. is the exclusive passenger sales agent in the Philippines of British Airways, PLC, described as an off-line international airline servicing the latter’s passengers in the Philippines. Section 108(B)(4) of the National Internal Revenue Code of 1997 subjects to zero percent value-added tax services performed in the Philippines by VAT-registered persons to persons engaged in international shipping or international air-transport operations. Section 113 of the same Code and Section 4.113-4 of Revenue Regulations No. 16-2005 address invoicing and accounting requirements and the consequences of issuing erroneous VAT invoices or official receipts.

Euro-Philippines Airline Services, Inc. is the exclusive passenger sales agent of British Airways, PLC, an off-line international airline, servicing the latter’s passengers in the Philippines. On September 14, 2010, Euro-Phil received a Formal Assessment Notice dated September 13, 2010 from the Commissioner of Internal Revenue in the aggregate amount of ₱4,271,228,20.00, covering deficiency taxes including value-added tax for the taxable year ending March 31, 2007, with Details of Discrepancies.

On September 29, 2010, Euro-Phil filed a final protest with the Commissioner. After the lapse of the 180-day period for resolution of the protest, Euro-Phil filed a petition for review before the Court of Tax Appeals Special First Division praying for cancellation of the assessment. According to Euro-Phil, the receipts supposedly subject to 12% value-added tax actually pertained to services rendered to persons engaged exclusively in international air transport and were therefore zero-rated.

The CTA Special First Division found that Euro-Phil was rendering services to persons engaged in international air transport operations and held such services zero-rated under Section 108 of the National Internal Revenue Code of 1997. It accordingly cancelled and withdrew the deficiency value-added tax and documentary stamp tax assessments, as well as interests and surcharges. Only at the stage of the motion for reconsideration of the CTA En Banc decision did the Commissioner press non-compliance with invoicing requirements, specifically the alleged failure to present VAT official receipts with the imprinted words “zero rated,” adopting the dissent of Presiding Justice Del Rosario.

• Invoicing Compliance as Condition for Zero-Rating: Petitioner argued that presentation of VAT official receipts with the words “zero-rated” imprinted thereon is indispensable to cancel the value-added tax assessment, and that Euro-Phil’s failure to present and offer proof of compliance with Section 113 of the National Internal Revenue Code of 1997 renders its sale of services to British Airways, PLC subject to 12% VAT.
• Review of Issue Raised on Appeal: Petitioner maintained that the issue of non-compliance with invoicing requirements must be recognized despite being raised only on appeal, taking exception to the doctrine that issues cannot be raised for the first time on appeal.

• Zero-Rated Services: Respondent argued that the receipts supposedly subject to 12% VAT pertained to services rendered to persons engaged exclusively in international air transport, hence zero-rated under Section 108 of the National Internal Revenue Code of 1997.
• New Matters on Appeal Barred: Respondent contended that petitioner raised new matters in its Petition for Review with the CTA En Banc and again in the present petition, which should not be allowed.

• New Issue on Appeal: Whether the issue of non-compliance with invoicing requirements must be recognized despite being raised only on appeal.
• Zero-Rating Despite Invoicing Defect: Whether the CTA En Banc erred in finding the transaction entitled to zero-rated VAT despite alleged failure to comply with invoicing requirements as mandated by law.

• New Issue on Appeal: No. Issues not raised at the administrative forum and before the lower tribunal cannot be raised for the first time on appeal, the reviewing court being confined to reviewing determinations already passed upon below.
• Zero-Rating Despite Invoicing Defect: No. The services were zero-rated under Section 108(B)(4), both requisites being undisputed, and neither Section 113 nor Revenue Regulations No. 16-2005 converts non-imprintment of “zero rated” into liability at 12% VAT.

• New Issue on Appeal: The prohibition was applied because the alleged failure to present VAT official receipts with imprinted “zero rated” words, adopting the dissent, was undisputedly raised only at the latter stage on motion for reconsideration of the CTA En Banc decision. To permit a different posture on appeal would require the reviewing court to determine and decide for the first time a question not raised at the administrative forum, contrary to the prior exhaustion rationale and the rule that issues not raised in the lower court cannot be raised for the first time on appeal, as explained in Aguinaldo Industries Corporation (Fishing Nets Division) vs. Commissioner of Internal Revenue and the Court of Tax Appeals.
• Zero-Rating Despite Invoicing Defect: The two requisites of Section 108(B)(4) were satisfied because Euro-Phil’s VAT-registered status was undisputed and its services to British Airways, PLC, a person engaged in international air-transport operations, were likewise undisputed, subjecting the services to zero percent VAT. The established character of the recipient as engaged in international air-transport operations was not negated by the invoicing objection, and nowhere in Section 113 on consequences of issuing erroneous VAT invoices or official receipts, nor in Section 4.113-4 of Revenue Regulations No. 16-2005, is a presumption created that non-imprintment of “zero rated” deems the transaction subject to 12% VAT.

• Issues Raised for the First Time on Appeal — A litigant may not assume a different posture on review and challenge a position accepted at the administrative level, for the reviewing court reviews administrative determinations rather than deciding for the first time questions not raised below, consistent with exhaustion of administrative remedies and the rule that issues not raised in the lower court cannot be raised for the first time on appeal. The doctrine was applied to bar the Commissioner’s invoicing-compliance objection raised only on reconsideration before the CTA En Banc.
• Zero-Rating of Services to International Air Transport Under Section 108(B)(4) — Services performed in the Philippines by VAT-registered persons to persons engaged in international shipping or international air-transport operations, including leases of property for use thereof, are subject to zero percent rate. The doctrine was applied because Euro-Phil was VAT-registered and rendered services to British Airways, PLC, engaged in international air-transport operations.
• No Statutory Conversion by Defective Invoicing — Non-compliance with the invoicing requirement of displaying “zero-rated” does not by operation of Section 113 of the National Internal Revenue Code of 1997 or Section 4.113-4 of Revenue Regulations No. 16-2005 deem a zero-rated transaction subject to 12% VAT, absent a statutory presumption to that effect. The doctrine was applied to sustain cancellation of the deficiency assessment despite the alleged invoicing defect.

• "To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at the administrative level would be to sanction a procedure whereby the court - which is supposed to review administrative determinations would not review, but determine and decide for the first time, a question not raised at the administrative forum." — States the rationale for barring new issues on appeal and for refusing the invoicing objection raised only on reconsideration.
• "Services rendered to persons engaged in international shipping or International air-transport operations, including leases of property for use thereof;" — Quotes the controlling zero-rating category under Section 108(B)(4) applied to Euro-Phil’s services to British Airways, PLC.
• "WHEREFORE, the Petition for Review is DENIED." — Records the dispositive denial sustaining the CTA En Banc’s affirmance of the cancellation of the assessments.

• Aguinaldo Industries Corporation (Fishing Nets Division) vs. Commissioner of Internal Revenue and the Court of Tax Appeals, 197 Phil. 822 (1982) — Followed as controlling authority that issues not raised at the administrative level and in the lower court cannot be raised for the first time on appeal.

• Section 108(B)(4), National Internal Revenue Code of 1997 — Subjects to zero percent rate services performed in the Philippines by VAT-registered persons to persons engaged in international shipping or international air-transport operations; applied because Euro-Phil was VAT-registered and served British Airways, PLC.
• Section 113(D), National Internal Revenue Code of 1997 — Governs consequences of issuing erroneous VAT invoice or VAT official receipt, including liability for non-VAT persons and for VAT-registered persons issuing invoices for VAT-exempt transactions without displaying “VAT-exempt sale”; cited to show no provision deeming non-imprintment of “zero rated” as subject to 12% VAT.
• Section 4.113-4, Revenue Regulations No. 16-2005 — Consolidated Value-Added Tax Regulations on consequences of erroneous issuance by non-VAT persons and on exempt transactions by VAT-registered persons failing to display “VAT-exempt sale”; cited to show absence of any rule converting the transaction to taxable at 12% for failure to imprint “zero rated.”

Senior Associate Justice Antonio T. Carpio (Chairperson), Associate Justice Diosdado M. Peralta, Associate Justice Estela M. Perlas-Bernabe, and Associate Justice Alfredo Benjamin S. Caguioa concurred. A separate concurring opinion by Associate Justice Caguioa is indicated in the case caption, but its text is not included in the source material digested.