Revenue v. Philippine Airlines

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari, under Rule 45 of the Revised Rules of Court, seeking the reversal and setting aside of the Decision1 dated 9 August 2007 and Resolution2 dated 11 October 2007 of the Court of Tax Appeals (CTA) en banc in CTA E.B. No. 246. The CTA en banc affirmed the Decision3 dated 31 July 2006 of the CTA Second Division in C.T.A. Case No. 7010, ordering the cancellation and withdrawal of Preliminary Assessment Notice (PAN) No. INC FY-3-31-01-000094 dated 3 September 2003 and Formal Letter of Demand dated 12 January 2004, issued by the Bureau of Internal Revenue (BIR) against respondent Philippine Airlines, Inc. (PAL), for the payment of Minimum Corporate Income Tax (MCIT) in the amount of ₱272,421,886.58. There is no dispute as to the antecedent facts of this case.

PAL is a domestic corporation organized under the corporate laws of the Republic of the Philippines; declared the national flag carrier of the country; and the grantee under Presidential Decree No. 15904 of a franchise to establish, operate, and maintain transport services for the carriage of passengers, mail, and property by air, in and between any and all points and places throughout the Philippines, and between the Philippines and other countries.5 For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly incurred zero taxable income,6 which left it with unapplied creditable withholding tax7 in the amount of ₱2,334,377.95. PAL did not pay any MCIT for the period. In a letter dated 12 July 2002, addressed to petitioner Commissioner of Internal Revenue (CIR), PAL requested for the refund of its unapplied creditable withholding tax for FY 2000-2001.

PAL attached to its letter the following: (1) Schedule of Creditable Tax Withheld at Source for FY 2000-2001; (2) Certificates of Creditable Taxes Withheld; and (3) Audited Financial Statements.1avvphi1 Acting on the aforementioned letter of PAL, the Large Taxpayers Audit and Investigation Division 1 (LTAID 1) of the BIR Large Taxpayers Service (LTS), issued on 16 August 2002, Tax Verification Notice No. 00201448, authorizing Revenue Officer Jacinto Cueto, Jr. (Cueto) to verify the supporting documents and pertinent records relative to the claim of PAL for refund of its unapplied creditable withholding tax for FY 2000-20001. In a letter dated 19 August 2003, LTAID 1 Chief Armit S. Linsangan invited PAL to an informal conference at the BIR National Office in Diliman, Quezon City, on 27 August 2003, at 10:00 a.m., to discuss the results of the investigation conducted by Revenue Officer Cueto, supervised by Revenue Officer Madelyn T. Sacluti.

BIR officers and PAL representatives attended the scheduled informal conference, during which the former relayed to the latter that the BIR was denying the claim for refund of PAL and, instead, was assessing PAL for deficiency MCIT for FY 2000-2001. The PAL representatives argued that PAL was not liable for MCIT under its franchise. The BIR officers then informed the PAL representatives that the matter would be referred to the BIR Legal Service for opinion.

The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-31-01-000094, which was received by PAL on 23 October 2003. LTAID 1 assessed PAL for ₱262,474,732.54, representing deficiency MCIT for FY 2000-2001, plus interest and compromise penalty, computed as follows: Sales/Revenues from Operation ₱ 38,798,721,685.00 Less: Cost of Services 30,316,679,013.00 Gross Income from Operation 8,482,042,672.00 Add: Non-operating income 465,111,368.00 Total Gross Income for MCIT purposes 9,947,154,040.008 Rate of Tax 2% Tax Due 178,943,080.80 Add: 20% interest (8-16-00 to 10-31-03) 83,506,651.74 Compromise Penalty 25,000.00