Commissioner of Internal Revenue vs. Philippine Associated Smelting and Refining Corporation

A PEZA-registered enterprise exempt from "internal revenue laws and regulations" under Section 17 of Presidential Decree No. 66 is entitled to claim a refund of excise taxes passed on to it by the statutory taxpayer, as the exemption covers both direct and indirect taxes, thereby granting legal personality to the party bearing the economic burden of the tax.

The case involves the interpretation of tax exemption privileges granted to export processing zone enterprises under Presidential Decree No. 66. Specifically, it addresses whether such exemptions extend to excise taxes on petroleum products used in manufacturing processes and who may properly claim a refund when such taxes are passed on by suppliers to the exempt entity.

• PASAR is a domestic corporation engaged in processing, smelting, refining, and exporting refined copper cathodes, registered as a Zone Export Enterprise with the Export Processing Zone Authority (EPZA) pursuant to Presidential Decree No. 66.
• During the period of January 2005 to October 2005, PASAR purchased petroleum products from Petron Corporation for use in its manufacturing and other processes in its Leyte Industrial Development Estate (LIDE) operations.
• Petron Corporation, as the statutory taxpayer, paid the corresponding excise taxes on these imported petroleum products to the government and subsequently passed on the amount of eleven million six hundred eighty-seven thousand four hundred sixty-seven pesos and 62/100 (P11,687,467.62) to PASAR as part of the purchase price.
• PASAR filed a claim for refund and/or tax credit with the Office of the Regional Director of the Bureau of Internal Revenue (BIR) Region XIV in December 2006, claiming exemption from excise taxes under Section 17 of P.D. No. 66.
• The BIR Regional Director denied PASAR's claim in a letter dated January 3, 2007.
• The parties before the CTA stipulated to the following issues: (1) whether petroleum products purchased from Petron are exempt from excise taxes under Section 17 of P.D. No. 66; (2) whether PASAR is the proper party to claim the refund; (3) whether the claim is properly substantiated; and (4) whether the claim is timely filed.
• The CTA Second Division initially dismissed the petition on the ground that PASAR was not the proper party to seek the refund, as it was not the statutory taxpayer.
• The CTA En Banc reversed, ruling that PASAR, as a PEZA-registered entity enjoying tax exemption under P.D. No. 66 and R.A. No. 7916, is exempt from excise taxes and is the proper party to seek refund, citing precedent involving similar factual circumstances.

• The Commissioner of Internal Revenue contended that the Court of Tax Appeals lacks jurisdiction over decisions of the BIR Regional Director, arguing that the CTA's appellate jurisdiction under Section 7 of R.A. No. 1125 (as amended by R.A. No. 9282) is limited to decisions of the Commissioner of Internal Revenue.
• The petitioner argued that the CTA En Banc misplaced its reliance on Commissioner of Customs v. Philippine Phosphate Fertilizer Corp. and Philippine Phosphate Fertilizer Corporation v. Commissioner of Internal Revenue, asserting that the former involved customs duties rather than excise taxes, and the latter did not squarely resolve whether an EPZA-registered enterprise is exempt from excise taxes on petroleum products indirectly used.
• The CIR maintained that the proper party to seek a tax refund or credit is the statutory taxpayer—the person on whom the tax was imposed and who paid the same—which in this case was Petron Corporation, not PASAR, despite the economic burden having been shifted.
• The petitioner asserted that Section 17 of P.D. No. 66 does not clearly provide that petroleum products delivered to EPZA-registered enterprises are exempt from taxes, and that such products do not form part of the export products manufactured by PASAR.

• PASAR claimed that the petitioner is estopped from questioning the jurisdiction of the Court of Tax Appeals.
• The respondent maintained that the rulings in Commissioner of Customs v. Philippine Phosphate Fertilizer Corp. and Philippine Phosphate Fertilizer Corporation v. Commissioner of Internal Revenue are applicable to the present case, establishing that EPZA-registered enterprises are exempt from excise taxes on petroleum products.
• PASAR argued that it is the proper party to apply for the tax refund or credit, being the entity that ultimately bore the economic burden of the excise taxes passed on by Petron.
• The respondent asserted that it is entitled to exemption from payment of excise taxes by virtue of its status as a PEZA-registered enterprise under Section 17 of P.D. No. 66.

• Procedural Issues: Whether the Court of Tax Appeals has jurisdiction over the denial by the BIR Regional Director of PASAR's claim for refund.
• Substantive Issues: Whether PASAR is the proper party to claim a refund or tax credit of excise taxes passed on to it by Petron Corporation; Whether petroleum products purchased by a PEZA-registered enterprise are exempt from excise taxes under Section 17 of P.D. No. 66.

• Procedural: The Supreme Court declined to rule on the jurisdictional issue and other grounds raised (including factual substantiation and timeliness of the claim), noting that these were not proper for resolution at this stage of the proceedings since the CTA En Banc's review was limited to the preliminary issue of whether PASAR is the proper party to claim the refund.
• Substantive: The Court held that PASAR is the proper party to file the claim for refund or tax credit of excise taxes. The Court ruled that Section 17 of P.D. No. 66 grants a comprehensive exemption from both customs duties and internal revenue taxes (including excise taxes) on supplies used directly or indirectly in the zone. Following the doctrine established in Philippine Airlines, Inc. v. Commissioner of Internal Revenue, when a tax exemption covers both direct and indirect taxes, the claimant who bears the economic burden of the tax is entitled to seek a refund, even if not the statutory taxpayer. The Court affirmed the CTA En Banc's ruling that PASAR, as a PEZA-registered enterprise, falls under this exemption category and therefore has legal personality to claim the refund of excise taxes passed on by Petron.

• Nature of Tax Exemptions — Tax exemptions are generally construed strictly against the taxpayer, but when the statutory language granting the exemption is clear and unambiguous, it must be applied according to its plain meaning. In this case, the Court applied the clear language of Section 17 of P.D. No. 66, which states that merchandise and supplies used directly or indirectly in zone activities "shall not be subject to customs and internal revenue laws and regulations," interpreting this to include exemption from excise taxes on petroleum products.
• Proper Party to Claim Tax Refund (Direct vs. Indirect Tax Exemption) — The general rule that only the statutory taxpayer may claim a refund of taxes does not apply when the claimant enjoys an exemption from both direct and indirect taxes. Citing Philippine Airlines, Inc., the Court distinguished between exemptions: if the law confers exemption from both direct and indirect taxes, a claimant bearing the economic burden may seek refund even if not the statutory taxpayer; conversely, if the exemption applies only to direct taxes, only the statutory taxpayer may file the claim. Here, PASAR's exemption under P.D. No. 66 covers internal revenue laws generally, thereby encompassing indirect taxes like excise taxes, making PASAR the proper party.
• Pass-Through Theory of Indirect Taxes — In cases of indirect taxes (such as excise taxes and VAT), the statutory taxpayer may shift the economic burden to the purchaser, but if the purchaser is exempt from the tax by law, the exempt entity may recover the tax passed on to it, as the exemption attaches to the transaction or the entity regardless of who initially paid the tax to the government.

• "Section 17 of the EPZA Law particularizes the tax benefits accorded to duly registered enterprises. It states: SEC. 17. Tax Treatment of Merchandize in the Zone. - (1) Except as otherwise provided in this Decree, foreign and domestic merchandise, raw materials, supplies, articles, equipment, machineries, spare parts and wares of every description, except those prohibited by law, brought into the Zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise or used whether directly or indirectly in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the following provisions of law to the contrary notwithstanding." — The Court cited this provision to establish the statutory basis for the exemption covering both customs duties and internal revenue taxes.
• "The supplies are not subject to customs and internal revenue laws and regulations, nor to local tax ordinances. It is clear that Section 17(1) considers such supplies exempt even if they are used indirectly, as they had been in this case." — Quoting from Commissioner of Customs v. Philippine Phosphate Fertilizer Corp., the Court emphasized that the exemption applies to indirect use of supplies in zone activities.
• "If the law confers an exemption from both direct or indirect taxes, a claimant is entitled to a tax refund even if it only bears the economic burden of the applicable tax. On the other hand, if the exemption conferred only applies to direct taxes, then the statutory taxpayer is regarded as the proper party to file the refund claim." — The Court quoted this distinction from Philippine Airlines, Inc. to justify why PASAR, though not the statutory taxpayer, could claim the refund.

• Commissioner of Customs v. Philippine Phosphate Fertilizer Corp., 481 Phil. 31 (2004) — Cited as controlling precedent interpreting Section 17 of P.D. No. 66 as granting exemption from both customs duties and internal revenue taxes on supplies (including petroleum products) used directly or indirectly by EPZA-registered enterprises. The Court followed this interpretation despite the CIR's objection that it involved customs duties rather than excise taxes.
• Philippine Phosphate Fertilizer Corporation v. Commissioner of Internal Revenue, 500 Phil. 149 (2005) — Cited to support the ruling that a PEZA-registered enterprise is entitled to exemption from excise taxes on petroleum products and may claim a refund thereof. The Court noted that in this case, the entitlement to exemption was undisputed.
• Philippine Airlines, Inc. v. Commissioner of Internal Revenue, G.R. No. 198759, July 1, 2013, 700 SCRA 322 — Cited for the principle distinguishing between exemptions from direct taxes only (where only the statutory taxpayer may claim refund) and exemptions from both direct and indirect taxes (where the party bearing the economic burden may claim). The Court applied this to determine that PASAR, as an exempt entity bearing the economic burden, is the proper party.
• Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue, G.R. No. 166482, January 25, 2012, 664 SCRA 33 — Cited by the CIR and acknowledged by the Court as establishing the general rule that the statutory taxpayer is the proper party to file a refund claim, but distinguished on the basis that the exemption in this case covers both direct and indirect taxes.

• Section 17 of Presidential Decree No. 66 — The central statutory provision granting tax exemptions to EPZA-registered enterprises, providing that merchandise, raw materials, supplies, and other articles used directly or indirectly in zone activities shall not be subject to customs and internal revenue laws and regulations.
• Section 7 of Republic Act No. 1125 (as amended by Section 7 of Republic Act No. 9282) — Cited regarding the jurisdiction of the Court of Tax Appeals, specifically whether its appellate jurisdiction extends to decisions of BIR Regional Directors or is limited to the Commissioner of Internal Revenue.
• Republic Act No. 7916 — Mentioned as the subsequent legislation governing the Philippine Economic Zone Authority (PEZA), which superseded certain aspects of P.D. No. 66 but maintained the tax exemption privileges.
• Presidential Decree No. 66 — The EPZA Law creating the Export Processing Zone Authority and establishing the tax exemption regime for registered enterprises.