Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue

Section 135 of the NIRC confers an impersonal tax exemption on the petroleum products themselves — not on the enumerated persons — such that upon sale to international carriers or other exempt entities, excise taxes previously paid by the manufacturer/importer as statutory taxpayer become erroneously or illegally collected and are proper subjects of a refund under Sections 204 and 229 of the Tax Code; however, a subsequent purchaser who merely bore the passed-on tax burden cannot claim the refund, as it is not the statutory taxpayer.

Pilipinas Shell Petroleum Corporation (PSPC) is a corporation engaged in the manufacture, processing, treatment, refinement, and sale of petroleum products, including Jet A-1 fuel. Between February and March 2006, PSPC imported 28,578,673 liters of Jet A-1 fuel through its refinery in Tabangao, Batangas, and paid excise taxes at the rate of P3.67 per liter totaling P104,883,730.27 to the Bureau of Customs. Within the same period, PSPC purchased locally 3,192,012 liters of Jet A-1 fuel from Chevron Philippines, Inc., with the latter passing on the cost of excise taxes it had previously paid upon importation as part of the total bill. From February 27 to April 9, 2006, PSPC sold a total of 24,974,294 liters of Jet A-1 fuel to various international carriers for their consumption outside the Philippines. The excise tax regime under the National Internal Revenue Code of 1997 imposes excise taxes on goods manufactured or produced in the Philippines and on imported articles, with liability attaching upon manufacture or importation. Section 135 of the same Code exempts petroleum products sold to international carriers and certain exempt entities from excise tax, a provision rooted in the Philippines' commitments under the 1944 Chicago Convention on International Civil Aviation and various bilateral air transport agreements.

Pilipinas Shell Petroleum Corporation (PSPC) is a corporation engaged in the manufacture, processing, treatment, refinement, and sale of petroleum products, including Jet A-1 fuel. Between February and March 2006, PSPC imported 28,578,673 liters of Jet A-1 fuel through its refinery in Tabangao, Batangas, and accordingly paid the Bureau of Customs in Batangas excise taxes at the rate of P3.67 per liter, totaling P104,883,730.27. Within the same period, PSPC purchased locally 3,192,012 liters of Jet A-1 fuel from Chevron Philippines, Inc. Chevron had previously paid excise taxes upon importation of that fuel and passed on the cost of those taxes to PSPC as part of the total bill.

From February 27 to April 9, 2006, PSPC sold a total of 24,974,294 liters of Jet A-1 fuel to various international carriers for their use and consumption outside the Philippines. PSPC took the position that the excise taxes it had paid on the Jet A-1 fuel sold to international carriers were in the nature of erroneously or illegally collected taxes, entitling it to a refund. On February 15, 2007, PSPC filed a claim for refund or tax credit with the Bureau of Internal Revenue Large Taxpayers Audit and Investigation Division II in the total amount of P91,655,658.98. The BIR did not act on the claim, prompting PSPC to file a Petition for Review with the Court of Tax Appeals on February 15, 2008, docketed as CTA Case No. 7731.

The CTA Third Division denied PSPC's claim on September 7, 2012, relying on the Supreme Court's 2012 Pilipinas Shell Decision, which declared that Section 135(a) of the NIRC did not confer an excise tax exemption to local manufacturers of petroleum products but merely prohibited the shifting of the tax burden to international carriers. PSPC's motion for reconsideration was denied on November 12, 2012. PSPC elevated the case to the CTA En Banc, which likewise denied the petition on September 9, 2013, holding that the 2012 Pilipinas Shell Decision was squarely applicable. PSPC's motion for reconsideration before the CTA En Banc was denied on February 3, 2014. Meanwhile, the 2012 Pilipinas Shell Decision was reconsidered by the Supreme Court through a Resolution dated February 19, 2014 (the 2014 Pilipinas Shell Resolution), which reversed the earlier ruling and granted the manufacturer's claim for refund. PSPC thereafter filed the present petition before the Supreme Court on April 3, 2014, invoking the 2014 Pilipinas Shell Resolution and the doctrine of stare decisis.

• Interpretation of Section 135(a): PSPC argued that Section 135(a) of the Tax Code should be interpreted as granting the exemption to the petroleum product itself, since excise taxes are applicable to certain specific goods or articles. While manufacturers or producers of petroleum are liable to pay excise taxes, this liability is reversed when the same is sold to international carriers due to the exemption of the product under Section 135(a). Thus, the excise taxes PSPC had previously paid became erroneously paid taxes recoverable pursuant to Sections 204 and 229 of the Tax Code.
• Stare Decisis: PSPC asserted that the 2014 Pilipinas Shell Resolution should govern the instant case given the identity of parties, factual settings, and issues raised. It also noted that the doctrine in the 2014 Resolution was affirmed by the Court En Banc in the 2015 Chevron decision and by the Third Division in the 2016 Pilipinas Shell decision, which involved a similar claim for refund. PSPC prayed that the Court resolve the present petition in the same manner pursuant to the doctrine of stare decisis.
• Finality of 2014 Resolution: PSPC manifested that the Court had denied with finality all motions for reconsideration filed by the OSG in the 2014 Pilipinas Shell Resolution, further supporting the application of stare decisis.

• Inapplicability of 2014 Resolution: The OSG, representing respondent CIR, countered that the 2014 Pilipinas Shell Resolution was inapplicable to the present case since that Resolution specifically involved the application of bilateral Air Transport Agreements with other countries.
• Tax Liability as Importer: The OSG claimed that PSPC was liable to pay taxes due on the imported Jet A-1 fuel pursuant to Sections 131(a) to 148 of the Tax Code, pointing out that PSPC was not a manufacturer or producer of the petroleum products but merely an importer thereof.

• Entitlement to Refund: Whether PSPC is entitled to its claim for refund for the excise taxes it paid on the Jet A-1 fuel sold to international carriers from February 27 to April 9, 2006.
• Nature of Section 135 Exemption: Whether Section 135 of the NIRC confers a personal tax exemption on the enumerated entities (international carriers) or an impersonal tax exemption on the petroleum products themselves.
• Proper Party to Claim Refund: Whether the manufacturer/importer as statutory taxpayer, or the purchaser/international carrier, is the proper party to claim a refund of excise taxes paid on petroleum products sold to international carriers.
• Refund for Locally Purchased Fuel: Whether PSPC may claim a refund for excise taxes passed on to it by Chevron as part of the purchase price of locally purchased Jet A-1 fuel.

• Entitlement to Refund: Yes, in part. PSPC is entitled to a refund of excise taxes it paid on Jet A-1 fuel it imported and subsequently sold to international carriers, but not for excise taxes passed on by Chevron for locally purchased fuel.
• Nature of Section 135 Exemption: Section 135 confers an impersonal tax exemption on the petroleum products themselves, not a personal exemption on the enumerated entities. The object of the provision is the "petroleum products sold," with the enumerated persons merely descriptive of the conditions for the exemption to operate.
• Proper Party to Claim Refund: The manufacturer/importer, as the statutory taxpayer who bears the legal incidence of the excise tax, is the proper party to claim the refund — not the purchaser or international carrier, who merely bears the economic burden through passed-on costs.
• Refund for Locally Purchased Fuel: No. PSPC cannot claim a refund for excise taxes passed on by Chevron, because PSPC was merely a purchaser bearing the tax burden, not the statutory taxpayer. The tax incidence remained with Chevron, and PSPC's eventual sale to an international carrier could not negate the accrual of excise tax liability that had already attached when Chevron sold the fuel to PSPC.

• Entitlement to Refund: The Court applied the doctrine of stare decisis, finding no compelling reason to deviate from the 2014 Pilipinas Shell Resolution and the 2015 Chevron decision, which involved exactly identical parties, facts, issues, and applicable laws. Under those precedents, upon PSPC's sale of its imported petroleum products to international carriers, the tax exemption under Section 135(a) came into effect, rendering previously paid excise taxes erroneously or illegally collected and proper subjects of a refund under Sections 204 and 229 of the Tax Code. However, the Court could not declare PSPC entitled to the entirety of its claim because the records did not clearly show the composition of the 24,974,294 liters sold — specifically, how much came from PSPC's own importation versus its local purchase from Chevron. The case was remanded to the CTA for this factual determination.
• Nature of Section 135 Exemption: The Court elucidated that excise taxes under the NIRC are taxes on goods or articles, not taxes on persons. As such, the exemption under Section 135 must be understood as an impersonal tax exemption — one granted directly in favor of a certain class of property. The wording of Section 135 itself supports this: the provision states that "[p]etroleum products sold to the following are exempt from excise tax," making the petroleum products the object of the exemption, with the enumerated persons merely descriptive of the conditions under which the exemption operates. This characterization was explicitly adopted in the 2015 Chevron decision, which held that the exemption is "in favor of the petroleum products on which the excise tax was levied in the first place." The 2014 Pilipinas Shell Resolution had characterized the exemption as conferred on international carriers, but this was effectively abandoned by the 2015 Chevron. The impersonal nature of the exemption is consistent with the nature of excise taxes as property taxes rather than taxes on persons.
• Proper Party to Claim Refund: Because excise taxes are indirect taxes, the statutory taxpayer remains the manufacturer or importer of the articles, even when the tax burden is shifted to the buyer through "passing on." The passing on of the tax burden is a contractual affair between the parties and does not determine the tax incidence imposed by law. The purchaser who assumes the passed-on costs does not become a statutory taxpayer. Since the tax exemption under Section 135 operates to alleviate the tax incidence — not merely the economic burden — it must benefit the statutory taxpayer, i.e., the manufacturer/importer, and not the purchaser. International carriers do not manufacture or import petroleum products and hence are not statutory taxpayers to whom the exemption could pertain. A tax immunity would lose its meaning if available only to a person who has no obligation to pay the tax in the first place.
• Refund for Locally Purchased Fuel: When PSPC purchased Jet A-1 fuel from Chevron and paid the corresponding excise taxes as part of the purchase price, this did not transform PSPC into the statutory taxpayer. What PSPC paid was merely the tax burden, not the tax incidence. The tax incidence remained with Chevron. At the time Chevron sold the fuel to PSPC — who is not an international carrier or any of the enumerated persons in Section 135 — the excise taxes already became due and demandable. PSPC's eventual sale to an international carrier could not negate the accrual of the excise tax liability that had already attached. Therefore, PSPC could not invoke the exemption under Section 135(a) for the fuel purchased from Chevron. The Court adopted the observations of Justices Lazaro-Javier and Zalameda on this point, notwithstanding their overall dissent, as the ponencia agreed that the refund should be limited to excise taxes on PSPC's own importation.

• Stare Decisis et Non Quieta Movere — The doctrine of adhering to precedents and not unsettling things which are established. Once a question of law has been examined and decided, it should be deemed settled and closed to further argument. The purpose is to secure certainty and stability of judicial decisions. Although not an absolute rule, absent strong and compelling reasons, cases based on substantially similar facts and questions of law ought to follow precedent. The Court applied this doctrine to uphold PSPC's claim, finding no compelling reason to deviate from the 2014 Pilipinas Shell Resolution and the 2015 Chevron decision, given the identity of parties, facts, issues, and applicable laws.
• Impersonal Tax Exemption — A tax exemption granted directly in favor of a certain class of property, as opposed to a personal exemption granted in favor of specific persons. If the tax exemption is impersonal in nature, it applies regardless of who transacts with the property. The Court held that Section 135 confers an impersonal exemption on petroleum products themselves, consistent with the nature of excise taxes as taxes on goods rather than taxes on persons.
• Tax Incidence vs. Tax Burden — Tax incidence refers to the actual legal liability to pay the tax, while tax burden refers to the economic burden of the tax. In the case of indirect taxes such as excise taxes, the statutory taxpayer (manufacturer/importer) bears the tax incidence, while the purchaser bears the tax burden when costs are passed on. The passing on of the tax burden is a contractual affair and does not transfer the legal incidence of the tax to the purchaser. Only the statutory taxpayer may benefit from a tax exemption and claim a refund, because the exemption operates on the tax incidence, not the economic burden.
• Excise Tax as a Property Tax — Under the NIRC of 1997, excise taxes are taxes levied on specific goods or articles manufactured or produced in the Philippines or imported, not taxes on the exercise of a privilege or on persons. The tax attaches to the article as soon as it comes into existence when manufactured or immediately upon importation. The status of the goods as taxable or tax-exempt is conditional and subject to confirmation upon sale to the entities enumerated under Section 135. This principle was established in Petron Corporation vs. Tiangco and confirmed in the 2015 Chevron decision.
• Strict Construction of Tax Exemptions (Strictissimi Juris) — Tax exemptions are construed strictly against the taxpayer and liberally in favor of the State. However, the Court held that this general rule does not apply in this case because the conferral of the exemption in favor of the petroleum products' manufacturers/importers is made clear by the provision's reasonable interpretation, bearing in mind the nature of excise taxes. The dissenting justices vigorously argued for strict application of this doctrine.

• "Petroleum products sold to the following are exempt from excise tax" — This is the operative text of Section 135 of the NIRC, which the Court held confers an impersonal tax exemption on the petroleum products themselves, with the enumerated entities merely describing the conditions under which the exemption becomes operative.
• "the exemption from the excise tax expressly granted under Section 135 of the NIRC must be construed in favor of the petroleum products on which the excise tax was levied in the first place" — This formulation from the 2015 Chevron decision, quoted and adopted by the Court, articulates the canonical characterization of Section 135 as an impersonal tax exemption on the goods rather than a personal exemption on the buyers.
• "Even if the consumers or purchasers ultimately pay for the tax, they are not considered the taxpayers" — This passage, quoted from the Silkair line of cases, establishes the critical distinction between the statutory taxpayer (manufacturer/importer) and the purchaser who merely bears the economic burden through passed-on costs, underpinning the Court's conclusion that only the manufacturer/importer may claim the refund.
• "this shifting process, otherwise known as 'passing on,' is largely a contractual affair between the parties" — This principle, drawn from Philippine Airlines, Inc. vs. Commissioner of Internal Revenue, supports the Court's holding that the passing on of the tax burden does not transfer the legal incidence of taxation and therefore does not transform the purchaser into a statutory taxpayer entitled to claim exemption or refund.

• Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation, 686 Phil. 944 (2012) (2012 Pilipinas Shell Decision) — Initially denied PSPC's claim for refund, holding that Section 135(a) did not confer excise tax exemption to local manufacturers but merely prohibited shifting of the tax burden to international carriers. This decision was subsequently reconsidered and reversed by the 2014 Pilipinas Shell Resolution.
• Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation, 727 Phil. 506 (2014) (2014 Pilipinas Shell Resolution) — Reversed the 2012 decision and granted the manufacturer's claim for refund, holding that the statutory taxpayer (manufacturer/importer) is entitled to refund of excise taxes paid on petroleum products sold to international carriers, in fulfillment of the country's commitment under the Chicago Convention. The present decision applied this resolution via stare decisis.
• Chevron Philippines, Inc. vs. Commissioner of Internal Revenue, 768 Phil. 37 (2015) (2015 Chevron) — Clarified that Section 135 confers an impersonal tax exemption on the petroleum products themselves, not on the enumerated entities. This decision corrected the 2014 Resolution's characterization of the exemption as personal to international carriers. The present decision relied on this as the authoritative formulation of the nature of the Section 135 exemption.
• Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation, 780 Phil. 623 (2016) (2016 Pilipinas Shell) — Applied stare decisis based on the 2014 Resolution, granting PSPC's claim for refund. The present decision cited this as additional support for applying stare decisis.
• Silkair (Singapore) Pte. Ltd. vs. Commissioner of Internal Revenue, 591 Phil. 754 (2008) — Established that the proper party to seek a refund of an indirect tax is the statutory taxpayer — the person on whom the tax is imposed by law and who paid the same — even if the burden is shifted to another. The present decision relied on this line of cases to support the conclusion that the manufacturer/importer, not the purchaser, is the proper party to claim refund.
• Petron Corporation vs. Tiangco, 574 Phil. 620 (2008) — Explained that excise taxes under the NIRC are taxes on specific goods or articles, not taxes on the exercise of a privilege. The present decision relied on this to support the characterization of excise taxes as property taxes.
• Philippine Airlines, Inc. vs. Commissioner of Internal Revenue, 713 Phil. 134 (2013) — Held that the shifting of the tax burden ("passing on") is a contractual affair between the parties. The present decision cited this to support the distinction between tax incidence and tax burden.
• Commissioner of Internal Revenue vs. Philippine Long Distance Telephone Company, 514 Phil. 255 (2005) — Defined direct taxes and indirect taxes, providing the conceptual framework for understanding excise taxes as indirect taxes where the liability falls on one person but the burden may be shifted to another.

• Section 135, National Internal Revenue Code of 1997 (Tax Code) — Exempts petroleum products sold to international carriers, exempt entities covered by tax treaties, and entities exempt from direct and indirect taxes from excise tax. The Court held that this provision confers an impersonal tax exemption on the petroleum products themselves, with the enumerated entities merely describing the conditions for the exemption to operate. Upon sale to international carriers, excise taxes previously paid become erroneously collected and refundable.
• Section 129, NIRC — Defines excise taxes as taxes applicable to goods manufactured or produced in the Philippines for domestic sale or consumption and to things imported. The Court relied on this to characterize excise taxes as taxes on goods rather than on persons.
• Section 131, NIRC — Provides that excise taxes on imported articles shall be paid by the owner or importer before release from the customs house. The Court cited this provision, particularly its second paragraph, to illustrate the principle of conditional taxability — that tax-free articles may subsequently become taxable depending on the subsequent buyer — which mirrors the principle of subsequent confirmation applied in the 2015 Chevron decision.
• Sections 204 and 229, NIRC — Authorize the Commissioner of Internal Revenue to credit or refund taxes erroneously or illegally collected, upon written claim filed within two years from payment. The Court held that upon sale of petroleum products to international carriers, excise taxes previously paid become erroneously or illegally collected and are proper subjects of a refund under these provisions.
• Section 148, NIRC — Subjects petroleum products to excise tax, which attaches to the goods as soon as they are in existence. This provision was cited in the dissent to argue that excise taxes are properly collected upon manufacture or importation regardless of the eventual purchaser.
• Article 24(a), Chicago Convention on International Civil Aviation (1944) — Provides that fuel, lubricating oils, spare parts, and aircraft stores on board an aircraft of a contracting State, on arrival in the territory of another contracting State and retained on board on leaving, shall be exempt from customs duty, inspection fees, or similar national or local duties and charges. The Court cited this as the international legal basis for the excise tax exemption under Section 135(a), reflecting the Philippines' commitment to promote and expand international travel through avoidance of multiple taxation.

• Gesmundo, C.J. — Concurred.
• Hernando, J. — Concurred.
• Carandang, J. — Concurred.
• M. Lopez, J. — Concurred. In his concurring opinion, Justice Lopez observed that it is erroneous to construe Section 135 as a prohibition on manufacturers, producers, and importers from passing on the tax burden, because sellers may nonetheless increase the selling price in the guise of additional margin to cover the excise tax, as they ultimately determine the price at which they sell their products.
• Gaerlan, J. — Concurred.
• Rosario, J. — Concurred.
• Caguioa, J. — Filed a concurring opinion elaborating on the plain meaning of Section 135, arguing that the provision exempts the petroleum product itself and not the enumerated entities. Justice Caguioa discussed the nature of excise taxes as property taxes under Title VI of the NIRC, the legislative history of Section 135 tracing back to the Chicago Convention, and the Silkair line of cases establishing the manufacturer/importer as the proper party to claim refund. He also noted that the grant of refund is not automatic and requires proof of compliance with statutory and regulatory requirements, supporting the remand to the CTA.
• Inting, J. — Filed a separate concurring opinion discussing the requisites for claiming a refund under Section 135(a). Justice Inting enumerated six requirements: (1) the claimant produced/imported fuel; (2) the fuel was stored in an internal-revenue bonded storage tank; (3) the corresponding excise tax was paid; (4) the fuel was sold to international carriers for use or consumption outside the Philippines; (5) the fuel was labeled or packaged in accordance with regulatory requirements; and (6) separate claims must be filed for manufactured and imported fuel. He also discussed Revenue Regulations No. 3-2008 as expressly recognizing the manufacturer/importer's entitlement to refund.

• Leonen, J. — Justice Leonen argued that the doctrine of strictissimi juris governs tax exemptions and claims for refund based thereon, requiring categorical and exact statutory language. Section 135, as worded, exempts the buyers (international carriers) and not the manufacturers, sellers, or importers. The provision merely prohibits the passing on of the excise tax burden to tax-exempt buyers. The 2014 Pilipinas Shell Resolution and subsequent cases erroneously expanded the wording of the law by granting refunds to manufacturers/importers, which constitutes judicial legislation. The Chicago Convention's Article 24(a) only exempts fuel on board aircraft retained on leaving the territory, not fuel sold by domestic manufacturers. Stare decisis cannot bind the Court when prior rulings are based on an erroneous interpretation of the law. Justice Leonen voted to deny PSPC's claim and sustain the CTA rulings.
• Lazaro-Javier, J. — Justice Lazaro-Javier agreed with Justice Leonen, arguing that excise taxes are not property taxes but taxes on the production, sale, or consumption of specific commodities. Section 135's exemption is triggered by the sale to a tax-exempt entity, not by the mere existence of the petroleum product. The exemption was intended as a shield for international carriers, not a benefit for importers, manufacturers, or sellers. She also argued that PSPC has no factual basis to claim refund for excise taxes passed on by Chevron, as PSPC was not the statutory taxpayer for that portion. Policy arguments about consequences of denying refunds are matters for Congress, not the Court, to determine. She voted to deny the petition and abandon all rulings contrary to Justice Leonen's position.
• Zalameda, J. — Justice Zalameda maintained that Section 135 does not confer excise tax exemption upon manufacturers, sellers, or importers. The provision is clear and unambiguous and must be applied according to its express terms. Excise tax is an indirect tax due upon removal of petroleum products from the place of production, regardless of who will buy it. The excise taxes paid were correct and proper at the time of collection and therefore not erroneously or illegally collected within the meaning of Section 229. The tax exemption enjoyed by the buyer cannot be the basis of a claim for exemption by the seller. Justice Zalameda voted to deny the petition.
• Delos Santos, J. — Joined the dissent of Justice Leonen.
• J. Lopez, J. — Joined the dissent of Justice Zalameda.