Petron Corporation vs. Commissioner of Internal Revenue

A claim for tax refund based on the absence of a law imposing the tax requires the application of the doctrine of strict interpretation in the imposition of taxes, not the rule on strict interpretation of tax exemptions; alkylate, produced by alkylation and not distillation, is not subject to excise tax under Sec. 148(e) of the NIRC.

The BIR issued a letter stating that alkylate is subject to excise tax under Sec. 148(e) of the NIRC as a product of distillation similar to naphtha. The BOC implemented this via Customs Memorandum Circular No. 164-2012, leading to the collection of excise taxes on Petron's alkylate importations from July to November 2012.

• Original Filing: Two separate Petitions for Review before the CTA (CTA Case No. 8914 and CTA Case No. 8981), which were consolidated.
• Lower Court Decision: CTA Special Second Division denied the claim for refund on December 18, 2018. Motion for Reconsideration denied on April 30, 2019.
• Appeal: Petition for Review to the CTA En Banc (CTA EB No. 2072).
• CTA En Banc Decision: Denied the petition on July 22, 2020. Motion for Reconsideration failed to get the required affirmative votes to reverse, so it was denied on February 18, 2021.
• SC Action: Petition for Review on Certiorari under Rule 45 filed before the SC.

• The Importation and Tax Assessment: Petron imported alkylate on five occasions from July 22 to November 6, 2012. Pursuant to BIR's letter and BOC's CMC No. 164-2012, the BOC assessed and collected excise taxes totaling P219,153,851.00.
• Administrative Claims: Petron filed two administrative claims for refund with the BIR (October 10, 2014 for P148,546,113.00 and January 23, 2015 for P70,607,738.00), claiming the taxes were erroneously and illegally collected. The BIR did not act on either.
• Judicial Claims: Petron filed two petitions with the CTA, which were consolidated.
• Nature of Alkylate: Alkylate is produced by alkylation (a chemical process converting light olefins and isobutane into isoparaffin isomers), not distillation. It is an intermediate or raw gasoline component used as blend stock. It cannot be used as a motor fuel by itself due to low volatility and high boiling point, violating Philippine National Standards (PNS) and the Clean Air Act.
• BIR's Basis: The BIR classified alkylate as subject to excise tax based on the testimony of its OIC-Chief of the BIR Laboratory Section, who relied on textbook/internet definitions rather than actual testing, and who conceded alkylation is the primary process for alkylate.

• The CTA incorrectly applied the rule on strict construction of tax exemptions; Petron's claim is based on the absence of a law imposing the tax, not on an exemption.
• Alkylate is a product of alkylation, not distillation, so it does not fall under Sec. 148(e) of the NIRC.
• Alkylate is a mere blending component, not a finished product for domestic sale or consumption; taxing both alkylate and the finished gasoline constitutes double taxation.

• Sec. 148(e) of the NIRC does not qualify whether the items subject to excise tax are primary or secondary products of distillation.
• CMC No. 164-2012 was issued in the exercise of the BOC's quasi-legislative function and carries the force of law until declared void.
• (Adopted by CTA) Tax refunds are in the nature of tax exemptions and must be construed strictly against the taxpayer.
• (Adopted by CTA) Double taxation does not apply because the tax on imported alkylate and locally produced gasoline have different subject matters.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the rule on strict interpretation of tax exemptions or the rule on strict interpretation in the imposition of taxes applies to a claim for refund based on erroneous payment.
  • Whether alkylate falls under "other similar products of distillation" subject to excise tax under Sec. 148(e) of the NIRC.

• Procedural: N/A
• Substantive:
  • Applicable Rule on Interpretation: The SC ruled that the doctrine of strict interpretation in the imposition of taxes applies, not the strict interpretation of tax exemptions. A tax refund partakes of the nature of a tax exemption only when the claim is based on a tax exemption or tax refund statute. Here, Petron anchors its claim on the absence of a law imposing the tax (erroneous payment), not on an exemption. Therefore, non-taxability is the rule, taxability is the exception. Doubts must be resolved in favor of the taxpayer.
  • Taxability of Alkylate: Alkylate is not subject to excise tax. Sec. 148(e) taxes "naphtha, regular gasoline and other similar products of distillation." Alkylate is produced by alkylation, not distillation. The law taxes the product itself, not its raw materials. Even if raw materials undergo distillation, only one of alkylate's raw materials (isobutane) is a product of distillation; the other (light olefins) comes from fluid catalytic cracking. Applying the principle of ejusdem generis, "other similar products" must be akin to naphtha and regular gasoline. Alkylate differs in boiling range, volatility, and recovery process, and cannot be used as motor fuel by itself. The CIR's administrative interpretation classifying alkylate as similar to naphtha was based on mere definitions, not actual testing, and cannot override the clear language of the statute.

• Strict Interpretation in the Imposition of Taxes — Taxes cannot be presumed; if there is doubt, tax laws must be construed strictly against the government and in favor of the taxpayer. Applied because Sec. 148(e) did not clearly, expressly, and unambiguously impose tax on alkylate.
• Strict Interpretation of Tax Exemptions — Tax exemptions are construed strictly against the taxpayer. Distinguished: This applies only when a refund claim is based on a tax exemption/refund statute. If the claim is based on erroneous payment (absence of law), the strict interpretation in the imposition of taxes applies instead.
• Ejusdem Generis — Where a general word or phrase follows an enumeration of particular and specific words of the same class, the general word or phrase is construed to include only things akin to, resembling, or of the same kind as those specifically mentioned. Applied to "other similar products of distillation" in Sec. 148(e), restricting it to products akin to naphtha and regular gasoline. Alkylate is not of the same class.
• Administrative Interpretations — Interpretations placed upon a statute by executive officers are not conclusive and will be ignored if judicially found to be erroneous. Administrative issuances cannot override the law they seek to apply and implement. Applied to invalidate the CIR's classification of alkylate, which lacked textual and scientific support.

• Section 148(e), NIRC of 1997 (as amended by RA 9337) — Imposes excise tax on "Naphtha, regular gasoline and other similar products of distillation." Applied: The SC held alkylate is not a product of distillation and not similar to naphtha/regular gasoline, thus falling outside this provision's ambit.
• Section 229, NIRC of 1997 — Governs the recovery of tax erroneously or illegally collected. Applied: Serves as the statutory basis for Petron's claim for refund of erroneously paid excise taxes.