Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation

A local petroleum manufacturer who is the statutory taxpayer directly liable for excise taxes under Section 148 of the National Internal Revenue Code is entitled to a refund or tax credit for excise taxes paid on petroleum products sold to international carriers, where the latter are exempt from such taxes under Section 135(a) of the NIRC, in order to fulfill the State's treaty obligations under the Chicago Convention and bilateral air service agreements and to avoid the economic inefficiency and retaliatory risks associated with "tankering."

Pilipinas Shell Petroleum Corporation, a domestic manufacturer of petroleum products, sold aviation fuel and other petroleum products to international carriers for use or consumption outside the Philippines. Shell paid excise taxes on these products upon their removal from the place of production pursuant to Section 148 of the NIRC, then subsequently filed claims for tax refund or credit citing the exemption provided under Section 135(a) of the NIRC for petroleum products sold to international carriers. The dispute centered on whether this exemption attaches to the product itself (thereby exempting the manufacturer from the tax at the point of production) or merely to the international carrier (prohibiting only the shifting of the tax burden to the buyer), and consequently, whether the manufacturer could claim a refund of taxes already paid.

• Pilipinas Shell Petroleum Corporation is a domestic manufacturer and producer of petroleum products, including aviation fuel subject to specific excise tax under Section 148(g) of the National Internal Revenue Code of 1997.
• Shell paid excise taxes on its petroleum products upon their removal from the place of production, as required by Sections 129 and 148 of the NIRC, which impose a direct statutory liability on the manufacturer.
• Shell sold these petroleum products to international air carriers for use or consumption outside the Philippines during the period October 2001 to June 2002.
• Section 135(a) of the NIRC provides that petroleum products sold to international carriers for use or consumption outside the Philippines are exempt from excise tax, in compliance with the Chicago Convention on International Aviation and bilateral air service agreements.
• Shell filed claims for tax refund or credit with the Court of Tax Appeals, asserting that it was entitled to recover the excise taxes paid on the products sold to exempt international carriers, either because the exemption attached to the products themselves at the point of production or because it could not shift the tax burden to the exempt buyers.
• The excise tax paid by Shell totaled P195,014,283.00 for the specified period.
• The Court of Tax Appeals En Banc originally granted the refund, but the Supreme Court initially reversed this on appeal, interpreting Section 135(a) as merely prohibiting the shifting of the tax burden to international carriers without exempting the manufacturer from its direct statutory liability to pay the tax.

• The Solicitor General, representing the Commissioner of Internal Revenue, argued that Section 135(a) of the NIRC does not exempt the manufacturer from excise tax liability but merely prohibits the shifting of the tax burden to international carriers who are the beneficiaries of the exemption.
• Citing Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue, petitioner contended that once excise tax is passed on to the purchaser, it becomes part of the purchase price, refuting the theory that the exemption attaches to the product itself.
• Petitioner relied on Philippine Acetylene Co, Inc. v. Commissioner of Internal Revenue to argue that a tax exemption enjoyed by the buyer cannot be the basis of a claim for exemption or refund by the manufacturer or seller.
• Petitioner cited Maceda v. Macaraig, Jr. to support the interpretation that Section 135(a) does not intend to exempt manufacturers or producers from the payment of excise tax, but only to prevent them from passing the tax cost to international carriers.
• Petitioner asserted that the exemption is strictly construed against the taxpayer, and since the statutory liability for excise tax is direct and absolute upon the manufacturer at the point of removal, Shell was not entitled to a refund.

• Pilipinas Shell argued that a plain reading of Section 135(a) reveals that the petroleum products themselves are exempt from excise tax, meaning no excise taxes are deemed due in the first place at the point of production and removal.
• Shell contended that excise tax is an indirect tax, and if the tax paid by the statutory seller is passed on to the buyer, it ceases to be a tax and becomes merely an added cost to the purchase price; therefore, the exemption must refer to the imposition of the tax on the statutory seller.
• Shell asserted that requiring local manufacturers to absorb the tax burden while foreign oil producers (under bilateral agreements) are not subject to excise tax places domestic manufacturers at a competitive disadvantage, contrary to the State's policy of protecting gasoline dealers from unfair trade conditions.
• Shell argued that the imposition of excise tax on petroleum products sold to international carriers violates the Chicago Convention on International Aviation and various bilateral air service agreements to which the Philippines is a signatory.
• Shell warned that denying the refund could lead to cessation of supply to international carriers, retrenchment of employees, or shutdown of production due to unprofitability, and would encourage "tankering" (carriers fueling in low-tax jurisdictions), effectively diminishing Filipino participation in the domestic oil industry.

• Procedural Issues: Whether the Supreme Court should grant the Motion for Reconsideration and Supplemental Motion for Reconsideration filed by Pilipinas Shell Petroleum Corporation.
• Substantive Issues: Whether Section 135(a) of the NIRC exempts the manufacturer from excise tax liability or merely prohibits the shifting of the tax burden to international carriers; whether the domestic manufacturer is entitled to a refund or credit of excise taxes paid on petroleum products sold to exempt international carriers; and whether the denial of such refund violates the Philippines' obligations under the Chicago Convention on International Aviation and bilateral air service agreements.

• Procedural: The Supreme Court granted the Motion for Reconsideration dated May 22, 2012, and the Supplemental Motion for Reconsideration dated December 12, 2012, filed by Pilipinas Shell Petroleum Corporation; set aside the Decision dated April 25, 2012; and affirmed the Decision dated March 25, 2009, and Resolution dated June 24, 2009, of the Court of Tax Appeals En Banc in CTA EB No. 415.
• Substantive: The Court maintained that Section 135(a) of the NIRC, in fulfillment of international agreements, prohibits the passing of excise tax to international carriers who purchase petroleum products from local manufacturers. However, the Court held that the statutory taxpayer (manufacturer) is entitled to a refund or credit of the excise taxes paid on products sold to international carriers because: (1) the accrual and payment of excise tax are absolute and direct on the manufacturer prior to removal from production; (2) denying the refund would effectively nullify the exemption granted to international carriers and violate the principle of pacta sunt servanda regarding treaty obligations; (3) the economic reality of "tankering" and the risk of retaliatory action under bilateral agreements necessitate the refund to ensure the viability of international air transport and the domestic oil industry; and (4) the rationale for tax exemption is the promotion of international trade and travel through avoidance of multiple taxation, which would be undermined if the domestic manufacturer were forced to absorb the tax cost. The Court directed the Commissioner to refund P195,014,283.00 or issue a tax credit certificate.

• Shifting of Tax Burden in Indirect Taxation — While excise tax is an indirect tax where the statutory taxpayer (manufacturer) may shift the economic burden to the purchaser, Section 135(a) of the NIRC specifically prohibits such shifting to international carriers to comply with international aviation agreements; however, to prevent the exemption from becoming illusory and to avoid economic inefficiency, the manufacturer who cannot shift the tax may recover it through a refund or credit.
• Pacta Sunt Servanda — Under international law, treaties must be performed in good faith; the Philippines has a duty to harmonize its domestic legislation, specifically Section 135(a) of the NIRC, with its treaty obligations under the Chicago Convention on International Aviation and bilateral air service agreements to exempt aviation fuel from excise tax.
• Nature of Excise Tax under the NIRC — Excise tax is a tax levied on specific goods or articles manufactured or produced in the Philippines, distinct from the traditional American Jurisprudence definition of a privilege tax; under Sections 129 and 148 of the NIRC, the liability for specific tax on petroleum products is direct and absolute on the manufacturer at the point of removal from the place of production.
• Strict Construction of Tax Exemptions — Tax exemptions are strictly construed against the taxpayer and in favor of the government; however, the construction must consider the purpose of the exemption, which is to achieve a public benefit or interest sufficient to offset the monetary loss, including the promotion of international air transport and compliance with treaty obligations.

• "The shifting of the tax burden by manufacturers-sellers is a business prerogative resulting from the collective impact of market forces" — Associate Justice Lucas P. Bersamin, Separate Opinion.
• "The accrual and payment of the excise tax on the goods enumerated under Title VI of the NIRC prior to their removal at the place of production are absolute and admit of no exception."
• "The exemption from excise tax of aviation fuel purchased by international carriers for consumption outside the Philippines fulfills a treaty obligation pursuant to which our Government supports the promotion and expansion of international travel through avoidance of multiple taxation and ensuring the viability and safety of international air travel."
• "Under the basic international law principle of pacta sunt servanda, we have the duty to fulfill our treaty obligations in good faith."
• "With the prospect of declining sales of aviation jet fuel sales to international carriers on account of major domestic oil companies' unwillingness to shoulder the burden of excise tax... the practice of 'tankering' would not be discouraged."
• "We hold that respondent, as the statutory taxpayer who is directly liable to pay the excise tax on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum products sold to international carriers, the latter having been granted exemption from the payment of said excise tax under Sec. 135 (a) of the NIRC."

• Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, No. L-19707, August 17, 1967, 20 SCRA 1056 — Cited for the general rule that a tax exemption enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller; the Court reconsidered its application in light of international treaty obligations.
• Maceda v. Macaraig, Jr., G.R. No. 88291, June 8, 1993, 223 SCRA 217 — Cited for the interpretation that Section 135 does not intend to exempt manufacturers from the payment of excise tax; the Court reconciled this with the necessity of granting refunds to comply with international agreements.
• Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue, G.R. No. 180909, January 19, 2011, 640 SCRA 203 — Cited for the ruling that excise tax, when passed on to the purchaser, becomes part of the purchase price; used to counter Shell's argument that the exemption attaches to the product.
• Petron Corporation v. Tiangco, G.R. No. 158881, April 16, 2008, 551 SCRA 484 — Cited for explaining the transformation of the definition of "excise tax" from the traditional American Jurisprudence concept (privilege tax) to the current NIRC definition (tax on specified goods or articles).
• Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue, G.R. No. 166482, January 25, 2012, 664 SCRA 33 — Cited by Shell but distinguished by the Solicitor General as containing no pronouncement that petroleum manufacturers are exempt from excise taxes.
• Commissioner of Internal Revenue, et al. v. Botelho Shipping Corp., et al., 126 Phil. 846 — Cited for the principle that the avowed purpose of a tax exemption is always some public benefit or interest sufficient to offset the monetary loss entailed in the grant.

• Section 135(a), National Internal Revenue Code of 1997 — Provides for the exemption from excise tax of petroleum products sold to international carriers for use or consumption outside the Philippines; interpreted as prohibiting the shifting of tax burden to such carriers while entitling the manufacturer to a refund.
• Section 148, National Internal Revenue Code of 1997 — Imposes specific excise taxes on petroleum products, attaching to the product as soon as they are in existence and removable from the place of production.
• Section 129, National Internal Revenue Code of 1997 — Defines excise taxes as those applied to goods manufactured or produced in the Philippines for domestic sale or consumption and to things imported.
• Article 24, Chicago Convention on International Aviation — Provides for the exemption of fuel and lubricating oils on board aircraft from customs duty and similar national or local duties and charges; cited as the basis for the policy of exempting aviation fuel from excise tax.
• Republic Act No. 10378 — An act recognizing reciprocity as a basis for income tax exemptions to international carriers; cited as recent legislative recognition of the policy of granting tax incentives to international carriers to promote tourism and international trade.

• Associate Justice Lucas P. Bersamin — Wrote a separate concurring opinion arguing that it is erroneous to construe Section 135(a) only as a prohibition against the shifting of the tax burden by manufacturers to international carriers, because the shifting of tax burden is a business prerogative resulting from market forces, and such a construction would deprive manufacturers of their right to determine selling prices; he concurred in the result granting the refund but based on the premise that the manufacturer's inability to shift the tax necessitates the refund to preserve their business prerogative.