Duty Free Philippines vs. Bureau of Internal Revenue

A decision or resolution of a division of the Court of Tax Appeals on a motion for reconsideration or new trial may not be appealed directly to the Supreme Court; the exclusive appellate remedy is a petition for review with the CTA en banc, and only the decision or ruling of the CTA en banc may be elevated to the Supreme Court via a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure.

Duty Free Philippines is a merchandising system established by the then Ministry of Tourism (now Department of Tourism) through the Philippine Tourism Authority (PTA), pursuant to Executive Order No. 46 dated September 4, 1986. The case involves the tax-exempt status of the petitioner and its liability for deficiency income tax and value-added tax. The statutory backdrop includes R.A. No. 1125, which created the Court of Tax Appeals, and R.A. No. 9282, which elevated the CTA to the level of a collegiate court co-equal with the Court of Appeals and amended the appellate procedure, requiring appeals from CTA Division decisions to be taken to the CTA en banc.

Duty Free Philippines is a merchandising system established by the then Ministry of Tourism (now Department of Tourism) through the Philippine Tourism Authority, pursuant to Executive Order No. 46 dated September 4, 1986. In a letter dated June 7, 1995, petitioner sought a clarification of its exemption from the expanded withholding tax under Revenue Regulation No. 6-94, alleging that the request was a reiteration of its letter dated October 19, 1994. It argued that as a tax-exempt establishment under E.O. No. 46, it should not be subjected to the 1.1/2% expanded withholding taxes on certain income payments withheld by credit card companies, and it inquired about the procedure for the refund of accumulated taxes withheld amounting to ₱1.8 million as of December 31, 1994.

In response, respondent issued BIR Ruling No. 136-95 on September 6, 1995, opining that E.O. No. 93 dated December 17, 1986 withdrew all the tax and duty incentives granted to government and public entities, including petitioner, and denying the request for refund. Petitioner requested reconsideration on April 10, 2001, and reiterated its request in a letter dated December 6, 2001. On November 5, 2002, respondent denied the request through BIR Ruling No. 38-2002, ruling that petitioner, as a division of PTA, was now subject to income tax, anchored on the following grounds: (1) PTA was a "government instrumentality" subject to income tax under Section 27(C) of the Tax Code of 1997; (2) PTA was not covered by the exception under Section 32(B)(7)(b) of the Tax Code, since the term "Government of the Philippines" did not include "government instrumentality"; and (3) the exemption was limited only to the VAT arising from the importation/purchases of merchandise made by petitioner and subsequently sold through authorized tax and duty-free shops, thus sales of services to petitioner were subject to VAT under Section 108 of the Tax Code.

Petitioner filed an appeal with the Department of Finance on December 23, 2002. In a Resolution dated April 11, 2003, the DOF, through then Secretary Jose Isidro Camacho, affirmed BIR Ruling No. 38-2002. Subsequent requests for reconsideration were likewise denied by the DOF through then Undersecretary Ma. Gracia M. Pulido Tan. Meanwhile, several assessment notices were sent by respondent to petitioner for deficiency income tax and VAT covering taxable years 1999 to 2002 in the total amount of ₱1,452,785,087.64. Petitioner filed protest letters, but the protest was eventually denied by respondent. Thus, on July 4, 2005, a Petition for Review was filed with the CTA questioning the assessments. The DOT, represented by then Secretary Joseph H. Durano, intervened and maintained that petitioner was exempt from income tax and VAT.

After trial, the CTA Special First Division rendered the assailed Decision on June 4, 2010. On the issue of the separate personality of petitioner from PTA, the court ruled that the DOT itself had established that petitioner was a separate and autonomous sector of the PTA. The CTA Division likewise found that petitioner was not a tax-exempt entity in the absence of an express grant of tax exemption. Even prior to E.O. No. 46, the franchise of petitioner under Presidential Decree No. 1193 required payment of 7% of its annual sales in lieu of all other taxes. The CTA Division held that P.D. Nos. 1177 and 1931 effectively withdrew PTA's exemptions under Section 1 of P.D. No. 1400. The Fiscal Incentives Review Board restored some tax incentives to petitioner, but limited these incentives only to "taxes and duties arising out of merchandise imported/purchased by Duty Free Philippines and subsequently sold by it through authorized tax and duty-free shops." As to the issue of the assessed tax deficiencies, the tax court found petitioner liable to pay the aggregate amount of ₱1,036,956,477.90 representing income tax and VAT deficiencies, plus deficiency and delinquency interests. The availment of tax amnesty by petitioner was noted by the court, but in the absence of documents showing full compliance with the requirements of R.A. No. 9480, the court refused to affirm petitioner's entitlement to the immunities under the Amnesty Law.

Petitioner and intervenor DOT filed their respective Motions for Reconsideration. In its motion, petitioner attached some documents to show compliance with the Amnesty Law. However, the CTA Division found that petitioner had still failed to present its Statement of Assets, Liabilities and Networth as of December 31, 2005, a requirement under R.A. No. 9480. The court likewise found no merit in the motions filed by petitioner and intervenor DOT. Petitioner directly appealed to the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, assailing the Decision and Resolution of the CTA Division.

• Nature of DFP: Petitioner maintained that it is a mere merchandising system established by the DOT through the PTA to generate foreign exchange and revenue for the government, and that all income derived from its merchandising operations accrue to the DOT.
• Tax-Exempt Status: Petitioner argued that, assuming it has juridical personality, its tax-exempt status derived from E.O. No. 46 and P.D. No. 564, as amended by P.D. No. 1400, has not been revoked by P.D. Nos. 1177 and 1931, as well as E.O. No. 93.
• Income Tax Exemption: Petitioner argued that, assuming it has juridical personality, it is exempt from income tax pursuant to Section 32(B)(7)(B) of the National Internal Revenue Code.
• VAT Exemption: Petitioner argued that, assuming it enjoys juridical personality, the sales of services to it are VAT-exempt considering the nature of its business.
• Equitable Grounds: Petitioner argued that, granting that it has juridical personality, it must be tax-exempt based on equitable grounds.
• Tax Amnesty: Petitioner argued that it was improper and erroneous for the CTA to rule on whether it has validly availed of the tax amnesty.

• Mode of Appeal: Respondent BIR raised the issue of the mode of appeal of petitioner, alleging that petitioner chose the wrong mode of appeal by directly availing itself of the remedies before the Supreme Court without first elevating the case to the CTA en banc as provided under Rule 16 of the Revised Rules of the CTA.

• Jurisdiction of the Supreme Court: Whether the Supreme Court has jurisdiction to review a decision or resolution of a division of the Court of Tax Appeals on a motion for reconsideration when the petitioner directly appealed under Rule 45 of the 1997 Rules of Civil Procedure without first filing a petition for review with the CTA en banc.

• Jurisdiction of the Supreme Court: No. The Supreme Court is without jurisdiction to review decisions rendered by a division of the CTA, exclusive appellate jurisdiction over which is vested in the CTA en banc under Section 18 of R.A. No. 1125, as amended by R.A. No. 9282, and Section 2, Rule 4 of the Revised Rules of the CTA. The petition was denied for procedural infirmity.

• Jurisdiction of the Supreme Court: The Court reasoned that a court's jurisdiction over the subject matter of an action is conferred only by the Constitution or by statute. The CTA came into being with the passage of R.A. No. 1125 on June 16, 1954. Section 18 of this law originally provided for appeals from the CTA directly to the Supreme Court. However, the enactment of R.A. No. 9282, which took effect on April 23, 2004, elevated the rank of the CTA to the level of a collegiate court, making it a co-equal body of the Court of Appeals. Section 11 of R.A. No. 9282 amended Section 18 of R.A. No. 1125 to provide that a party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial may file a petition for review with the CTA en banc. Section 19 was added, providing that a party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure. Furthermore, Section 2, Rule 4 of the Revised Rules of the CTA reiterates the exclusive appellate jurisdiction of the CTA en banc relative to the review of the court divisions' decisions or resolutions on motion for reconsideration or new trial in cases arising from administrative agencies such as the BIR. In this case, petitioner filed with the Supreme Court on July 29, 2011 the instant Petition from the denial of its Motion for Reconsideration by the Special First Division of the CTA. At that time, R.A. No. 9282 was already in effect, and it evidently provides that the CTA en banc shall have exclusive jurisdiction over appeals from the decision of its divisions. A party adversely affected by the resolution of the CTA division may, on motion for reconsideration, file a petition for review with the CTA en banc. Thereafter, the decision or ruling of the CTA en banc may be elevated to the Supreme Court. Simply stated, no decision of the CTA division may be elevated to the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure without passing through the CTA en banc. The Court further emphasized that an appeal is neither a natural nor a constitutional right, but is merely statutory; the party who intends to appeal must always comply with the procedures and rules governing appeals, or else the right of appeal may be lost or squandered. Neither is the right to appeal a component of due process; it is a mere statutory privilege and may be exercised only in the manner prescribed by, and in accordance with, the provisions of law. In light of these findings, the Court found no need to further discuss the other issues raised by the parties.

• Hierarchy of Appeals from the CTA — Under R.A. No. 1125, as amended by R.A. No. 9282, a party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial may file a petition for review with the CTA en banc. Only the decision or ruling of the CTA en banc may be elevated to the Supreme Court via a verified petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure. The Court applied this doctrine in dismissing the petition, holding that no decision of a CTA division may be elevated directly to the Supreme Court without passing through the CTA en banc.

• Statutory Nature of the Right to Appeal — An appeal is neither a natural nor a constitutional right, but is merely statutory. The party who intends to appeal must always comply with the procedures and rules governing appeals; otherwise, the right of appeal may be lost or squandered. Neither is the right to appeal a component of due process; it is a mere statutory privilege and may be exercised only in the manner prescribed by, and in accordance with, the provisions of law. The Court applied this doctrine to emphasize that petitioner's failure to observe the prescribed appellate procedure was fatal to its claim.

• "Clearly, this Court is without jurisdiction to review decisions rendered by a division of the CTA, exclusive appellate jurisdiction over which is vested in the CTA en banc." — This passage states the ratio decidendi of the case: the Supreme Court lacks jurisdiction over direct appeals from CTA Division decisions because the CTA en banc has exclusive appellate jurisdiction over such decisions.

• "Simply stated, no decision of the CTA division may be elevated to this Court under Rule 45 of the 1997 Rules of Civil Procedure without passing through the CTA en banc." — This passage articulates the procedural rule that governs appeals from the CTA, requiring exhaustion of the remedy before the CTA en banc before the Supreme Court may take jurisdiction.

• "It is worth emphasizing that an appeal is neither a natural nor a constitutional right, but is merely statutory. The implication of its statutory character is that the party who intends to appeal must always comply with the procedures and rules governing appeals; or else, the right of appeal may be lost or squandered." — This passage defines the statutory nature of the right to appeal and underscores the consequence of failing to comply with appellate procedures.

• Sevilleno vs. Carilo, 559 Phil 789 (2007) — Cited for the long-standing rule that a court's jurisdiction over the subject matter of an action is conferred only by the Constitution or by statute.
• Commissioner of Customs vs. Gelmart Industries Philippines, Inc., 598 Phil. 740 (2009) — Cited in support of the proposition that the Supreme Court is without jurisdiction to review decisions rendered by a division of the CTA, exclusive appellate jurisdiction over which is vested in the CTA en banc.
• Sps. Lebin vs. Mirasol, G.R. No. 164255, September 7, 2011, 657 SCRA 35 — Cited for the doctrine that an appeal is neither a natural nor a constitutional right, but is merely statutory, and that the party who intends to appeal must comply with the procedures and rules governing appeals.
• Boardwalk Business Ventures, Inc. vs. Villareal Jr., G.R. No. 181182, April 10, 2013, 695 SCRA 468 — Cited for the doctrine that the right to appeal is not a component of due process but a mere statutory privilege that may be exercised only in the manner prescribed by law.

• Section 18, R.A. No. 1125 — The original provision governing appeals from the CTA to the Supreme Court, which was amended by R.A. No. 9282 to require appeals from CTA Division resolutions on motions for reconsideration to be taken to the CTA en banc.
• Section 11, R.A. No. 9282 — Amended Section 18 of R.A. No. 1125 to provide that a party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial may file a petition for review with the CTA en banc.
• Section 19, R.A. No. 9282 — Added a new provision allowing a party adversely affected by a decision or ruling of the CTA en banc to file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure.
• Section 2, Rule 4, Revised Rules of the CTA (A.M. No. 05-11-07-CTA, November 22, 2005) — Reiterates the exclusive appellate jurisdiction of the CTA en banc relative to the review of the court divisions' decisions or resolutions on motion for reconsideration or new trial in cases arising from administrative agencies such as the BIR.
• Rule 45, 1997 Rules of Civil Procedure — The procedural rule under which petitioner filed its direct appeal to the Supreme Court; the Court held that this rule could not be used to elevate a CTA Division decision directly to the Supreme Court without passing through the CTA en banc.

• Teresita J. Leonardo-De Castro
• Lucas P. Bersamin
• Jose Portugal Perez
• Estela M. Perlas-Bernabe