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CIR v. PHILIPPINE LONG DISTANCE TELEP COMPANY

FACTS:

The case involves a petition for review on certiorari filed by the Commissioner of Internal Revenue (CIR) against Philippine Long Distance Company (PLDT), a grantee of a franchise to operate a telecommunications system in the Philippines. PLDT sought a ruling from the BIR on its tax exemption privilege under its franchise, and based on the ruling, claimed for tax credit/refund. The Court of Tax Appeals (CTA) granted PLDT's petition, ordering the refund. The CTA's decision was subsequently affirmed by the Court of Appeals (CA).

The dispute between the BIR and PLDT revolves around the interpretation of the phrase "in lieu of all taxes" found in PLDT's franchise. The BIR Commissioner argues that the phrase only refers to direct taxes and does not cover indirect taxes such as VAT. The CA dismissed the BIR Commissioner's petition, affirming the CTA's decision. The CA relied on a previous ruling in a similar case involving the same parties and issue, which became final and executory. The SC emphasized that the doctrine of stare decisis does not bind them and acknowledged the lost opportunity in the earlier case to interpret the relevant provision authoritatively. The main issue is the interpretation of the phrase "in lieu of all taxes."

In a separate case, Mariano Norberto filed a petition seeking to reverse the CA's decision affirming the assessment and collection of his deficiency tax liabilities. Norberto argued that his professional fees should be exempt from income tax under the NIRC, as lawyers are "tax exempt as to their professional fees rendered in cases handled by them before courts of justice." The CIR maintained that the exemption only covers direct taxes and income tax should apply to Norberto's professional fees and other income. The CA held that the exemption for lawyers under the aforementioned clause was limited to direct taxes and affirmed the inclusion of Norberto's professional fees and other income in his gross income for tax purposes. Dissatisfied, Norberto filed a petition before the SC.

ISSUES:

  1. Whether or not PLDT is exempt from paying VAT, compensating taxes, advance sales taxes, and internal revenue taxes on its importations.

  2. Whether or not the "in lieu of all taxes" clause in PLDT's franchise covers direct and indirect taxes.

  3. Whether the "in lieu of all taxes" clause encompasses indirect taxes

  4. Whether the limiting clause "on this franchise or earnings thereof" excludes indirect taxes

RULING:

  1. PLDT is not exempt from paying VAT, compensating taxes, advance sales taxes, and internal revenue taxes on its importations. The taxes in question are indirect taxes, and the liabilities for their payment lie with the seller of the goods or services, not the buyer. Thus, PLDT cannot invoke its exemption privilege to avoid the shifting or passing on of these taxes to them.

  2. The "in lieu of all taxes" clause in PLDT's franchise covers only direct taxes. For indirect taxes to be included in the exemption, the intention to include must be specific and unmistakable. In this case, the Court of Appeals erred in declaring PLDT exempt from payment of VAT and other indirect taxes on its importations.

  3. The "in lieu of all taxes" clause does not encompass indirect taxes.

  4. The limiting clause "on this franchise or earnings thereof" excludes indirect taxes.

PRINCIPLES:

  • The distinction between direct and indirect taxes: Direct taxes are exacted from the person who is intended or desired to pay them, while indirect taxes are demanded from one person in the expectation and intention that they can shift the burden to someone else.

  • Burden and liability of indirect taxes: The liability for the payment of indirect taxes lies with the seller of the goods or services, but the burden of the tax can be shifted or passed on to another person, usually the final purchaser or end-user.

  • Specific inclusion for exemption of indirect taxes: The intention to include indirect taxes in an exemption must be specific and unmistakable. A general "in lieu of all taxes" clause may not automatically cover indirect taxes.

  • Tax exemptions must be construed strictly against the taxpayer and liberally in favor of the taxing authority.

  • Each word or phrase in a law must be given its proper connection in order to give it proper force and effect.

  • A compensating tax is an excise tax imposed on the use of imported articles, and not on the articles themselves.

  • An exemption from "all taxes" excludes indirect taxes, unless the exempting statute specifically includes indirect taxes.

  • Unless it appears clearly and manifestly that an exemption is intended, the provision is to be construed strictly against the party claiming exemption.

  • Tax exemption represents a loss of revenue to the government and must be strictly construed against the taxpayer who must prove that he falls under the exception.

  • If an exemption is found to exist, it must not be enlarged by construction, as the reasonable presumption is that the state has granted in express terms all it intended to grant.

  • In construing a statute, it is the duty of courts to seek the real intent of the legislature, even if it limits the literal meaning of the broad language.

  • Taxpayers must not rely on vague inferences or interpretations in claiming tax exemptions.