CIR v.

PILIPINAS SHELL PETROLEUM

Facts:
The SC in one case did not grant PSP a tax refund for the latters failure to establish that is
tax exempt.
Resp PSP:
That a plain reading of Section 135 of the NIRC reveals that it is the petroleum
products sold to international carriers which are exempt from excise tax for which reason no
excise taxes are deemed to have been due in the first place. It points out that excise tax
being an indirect tax, Section 135 in relation to Section 148 should be interpreted as
referring to a tax exemption from the point of production and removal from the place of
production considering that it is only at that point that an excise tax is imposed. The
situation is unlike the valueadded tax (VAT) which is imposed at every point of turnover
from production to wholesale, to retail and to endconsumer. Respondent thus concludes
that exemption could only refer to the imposition of the tax on the statutory seller, in this
case the respondent. This is because when a tax paid by the statutory seller is passed on to
the buyer it is no longer in the nature of a tax but an added cost to the purchase price of the
product sold.
That our ruling that Section 135 only prohibits local petroleum manufacturers like
respondent from shifting the burden of excise tax to international carriers has adverse
economic impact as it severely curtails the domestic oil industry. Requiring local petroleum
manufacturers to absorb the tax burden in the sale of its products to international carriers is
contrary to the States policy of protecting gasoline dealers and distributors from unfair and
onerous trade conditions, and places them at a competitive disadvantage since foreign oil
producers, particularly those whose governments with which we have entered into bilateral
service agreements, are not subject to excise tax for the same transaction.
that the imposition by the Philippine Government of excise tax on petroleum products
sold to international carriers is in violation Chicago Convention on International Aviation.
Sol Gen:
That the excise tax, when passed on to the purchaser, becomes part of the purchase
price. This refutes respondents theory that the exemption attaches to the petroleum
product itself and not to the purchaser for it would have been erroneous for the seller to pay
the excise tax and inequitable to pass it on to the purchaser if the excise tax exemption
attaches to the product.
That petroleum manufacturers selling petroleum products to international carriers are
exempt from paying excise taxes. Section 135 does not intend to exempt manufacturers or
producers of petroleum products from the payment of excise tax.

Issues:
Whether or not the excise tax on petroleum products sold to international carriers for use or
consumption outside the Philippines attaches to the article when sold to say international

carriers, as it is the article which is exempt from the tax, not the international carrier. Simply,
whether or not respondent PSP is exempt from excise tax.
Ruling:
Yes.
Under Section 129 of the NIRC, excise taxes are those applied to goods manufactured or
produced in the Philippines for domestic sale or consumption or for any other disposition and
to things imported. Excise taxes as used in our Tax Code fall under two types (1) specific
tax which is based on weight or volume capacity and other physical unit of measurement,
and (2) ad valorem tax which is based on selling price or other specified value of the goods.
Aviation fuel is subject to specific tax under Section 148 (g) which attaches to said product
as soon as they are in existence as such.
That excise tax as presently understood is a tax on property has no bearing at all on the
issue of respondents entitlement to refund. Nor does the nature of excise tax as an indirect
tax supports respondents postulation that the tax exemption provided in Sec. 135 attaches
to the petroleum products themselves and consequently the domestic petroleum
manufacturer is not liable for the payment of excise tax at the point of production. As
already discussed in our Decision, to which Justice Bersamin concurs, the accrual and
payment of the excise tax on the goods enumerated under Title VI of the NIRC prior to their
removal at the place of production are absolute and admit of no exception. This also
underscores the fact that the exemption from payment of excise tax is conferred on
international carriers who purchased the petroleum products of respondent.
On the basis of Philippine Acetylene, we held that a tax exemption being enjoyed by the
buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the
goods for any tax due to it as the manufacturer or seller. The excise tax imposed on
petroleum products under Section 148 is the direct liability of the manufacturer who cannot
thus invoke the excise tax exemption granted to its buyers who are international carriers.
And following our pronouncement in Maceda v. Macarig, Jr. we further ruled that Section
135(a) should be construed as prohibiting the shifting of the burden of the excise tax to the
international carriers who buy petroleum products from the local manufacturers. Said
international carriers are thus allowed to purchase the petroleum products without the
excise tax component which otherwise would have been added to the cost or price fixed by
the local manufacturers or distributors/sellers.
The exemption from excise tax of aviation fuel purchased by international carriers for
consumption outside the Philippines fulfills a treaty obligation pursuant to which our
Government supports the promotion and expansion of international travel through
avoidance of multiple taxation and ensuring the viability and safety of international air
travel. In recent years, developing economies such as ours focused more serious attention to
significant gains for business and tourism sectors as well. Even without such recent
incidental benefit, States had long accepted the need for international cooperation in
maintaining a capital intensive, labor intensive and fuel intensive airline industry, and
recognized the major role of international air transport in the development of international
trade and travel.
Under the basic international law principle of pacta sunt servanda, we have the duty to fulfill
our treaty obligations in good faith. This entails harmonization of national legislation with

treaty provisions. In this case, Sec. 135(a) of the NIRC embodies our compliance with our
undertakings under the Chicago Convention and various bilateral air service agreements not
to impose excise tax on aviation fuel purchased by international carriers from domestic
manufacturers or suppliers. In our Decision in this case, we interpreted Section 135 (a) as
prohibiting domestic manufacturer or producer to pass on to international carriers the excise
tax it had paid on petroleum products upon their removal from the place of production,
pursuant to Article 148 and pertinent BIR regulations. Ruling on respondents claim for tax
refund of such paid excise taxes on petroleum products sold to taxexempt international
carriers, we found no basis in the Tax Code and jurisprudence to grant the refund of an
erroneously or illegally paid tax.
Section 135(a) of the NIRC and earlier amendments to the Tax Code represent our
Governments compliance with the Chicago Convention, its subsequent resolutions/annexes,
and the air transport agreements entered into by the Philippine Government with various
countries. The rationale for exemption of fuel from national and local taxes was expressed
by
ICAO
as
follows:chanRoblesvirtualLawlibrary
...The Council in 1951 adopted a Resolution and Recommendation on the taxation of
fuel, a Resolution on the taxation of income and of aircraft, and a Resolution on taxes
related to the sale or use of international air transport (cf. Doc 7145) which were
further amended and amplified by the policy statements in Doc 8632 published in
1966. The Resolutions and Recommendation concerned were designed to recognize
the uniqueness of civil aviation and the need to accord tax exempt status
to certain aspects of the operations of international air transport and were
adopted because multiple taxation on the aircraft, fuel, technical supplies
and the income of international air transport, as well as taxes on its sale
and use, were considered as major obstacles to the further development of
international air transport. Nonobservance of the principle of reciprocal
exemption envisaged in these policies was also seen as risking retaliatory action with
adverse repercussions on international air transport which plays a major role in the
development and expansion of international trade and travel.
In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF) held on March 1822,
2013 at Montreal, among matters agreed upon was that the proliferation of various taxes
and duties on air transport could have negative impact on the sustainable development of
air transport and on consumers. Confirming that ICAOs policies on taxation remain valid,
the Conference recommended that ICAO promote more vigorously its policies and with
industry stakeholders to develop analysis and guidance to States on the impact of taxes and
other levies on air transport.13 Even as said conference was being held, on March 7, 2013,
President Benigno Aquino III has signed into law Republic Act (R.A.) No.
1037814 granting tax incentives to foreign carriers which include exemption from
the 12% valueadded tax (VAT) and 2.5% gross Philippine billings tax (GPBT). GPBT
is a form of income tax applied to international airlines or shipping companies. The law,
based on reciprocal grant of similar tax exemptions to Philippine carriers, is expected to
increase foreign tourist arrivals in the country.
Indeed, the avowed purpose of a tax exemption is always some public benefit or interest,
which the lawmaking body considers sufficient to offset the monetary loss entailed in the
grant of the exemption. The exemption from excise tax of aviation fuel purchased by
international carriers for consumption outside the Philippines fulfills a treaty obligation
pursuant to which our Government supports the promotion and expansion of international
travel through avoidance of multiple taxation and ensuring the viability and safety of
international air travel.

We maintain that Section 135 (a), in fulfillment of international agreement and practice to
exempt aviation fuel from excise tax and other impositions, prohibits the passing of the
excise tax to international carriers who buys petroleum products from local
manufacturers/sellers such as respondent. However, we agree that there is a need to
reexamine the effect of denying the domestic manufacturers/sellers claim for
refund of the excise taxes they already paid on petroleum products sold to
international carriers, and its serious implications on our Governments
commitment to the goals and objectives of the Chicago Convention.
Article 24 (a) of the Convention simply provides that fuel and lubricating oils on board an
aircraft of a Contracting State, on arrival in the territory of another Contracting State and
retained on board on leaving the territory of that State, shall be exempt from customs duty,
inspection fees or similar national or local duties and charges. Subsequently, the exemption
of airlines from national taxes and customs duties on spare parts and fuel has become a
standard element of bilateral air service agreements (ASAs) between individual countries.
With the prospect of declining sales of aviation jet fuel sales to international carriers on
account of major domestic oil companies unwillingness to shoulder the burden of excise tax,
or of petroleum products being sold to said carriers by local manufacturers or sellers at still
high prices , the practice of tankering would not be discouraged. This scenario does not
augur well for the Philippines growing economy and the booming tourism industry. Worse,
our Government would be risking retaliatory action under several bilateral agreements with
various countries. Evidently, construction of the tax exemption provision in question should
give primary consideration to its broad implications on our commitment under international
agreements.
In view of the foregoing reasons, we find merit in respondents motion for
reconsideration. We therefore hold that respondent, as the statutory taxpayer
who is directly liable to pay the excise tax on its petroleum products, is entitled to
a refund or credit of the excise taxes it paid for petroleum products sold to
international carriers, the latter having been granted exemption from the
payment of said excise tax under Sec. 135 (a) of the NIRC.

H. TAMBUNTING PAWNSHOP v. CIR

Facts:
Petitioner is a domestic corp duly licensed and authorized to engage in the pawnshop
business. It appeals the decision of the CTA ordering it to pay deficiency income taxes in the
amount of P.5M for taxable year 1997, plus 20% delinquency interest.
The BIR issued assessment notices and demand letters assessing petitioner Tambunting for
deficiency percentage tax, income tax and compromise penalties for year 1997.
Petitioner instituted an admin protest against the assessment notices and demand letter
with the CIR.

CTA ordered petitioner to pay CIR the deficiency income tax for the year 1997, plus 20%
delinquency interest.
CTA En Banc denied petitioners petitioner for review.

Issue:
Whether or not petitioner Tambunting should have been allowed to its supposed deductions.

Ruling:
No.
At the outset, the Court agrees with the CTA En Banc that because this case involved
assessments relating to transactions incurred by Tambunting prior to the effectivity of
Republic Act No. 8424 (National Internal Revenue Code of 1997, or NIRC of 1997), the
provisions governing the propriety of the deductions was Presidential Decree 1158 (NIRC of
1977). In that regard, the pertinent provisions of Section 29 (d) (2) & (3)of the NIRC of 1977
state:
xxxx
(2) By corporation. In the case of a corporation, all losses actually sustained and
charged off within the taxable year and not compensated for by insurance or
otherwise.
(3) Proof of loss. In the case of a non-resident alien individual or foreign
corporation, the losses deductible are those actually sustained during the year
incurred in business or trade conducted within the Philippines, and losses actually
sustained during the year in transactions
entered into for profit in the Philippines although not connected with their business or trade,
when such losses are not compensated for by insurance or otherwise. The Secretary of
Finance, upon recommendation of the Commissioner of Internal Revenue, is hereby
authorized to promulgate rules and regulations prescribing, among other things, the time
and manner by which the taxpayer shall submit a declaration of loss sustained from casualty
or from robbery, theft, or embezzlement during the taxable year: Provided, That the time to
be so prescribed in the regulations shall not be less than 30 days nor more than 90 days
from the date of the occurrence of the casualty or robbery, theft, or embezzlement giving
rise to the loss.
To prove the loss on auction sale, petitioner submitted in evidence its "Rematado" and
"Subasta" books and the "Schedule of Losses on Auction Sale". The "Rematado" book
contained a record of items foreclosed by the pawnshop while the "Subasta" book contained
a record of the auction sale of pawned items foreclosed.
However, as elucidated by the petitioner, the gain or loss on auction sale represents the
difference between the capital (the amount loaned to the pawnee, the unpaid interest and
other expenses incurred in connection with such loan) and the price for which the pawned

articles were sold, as reflected in the "Subasta" Book. Furthermore, it explained that the
amounts appearing in the "Rematado" book do not reflect the total capital of petitioner as it
merely reflected the amounts loaned to the pawnee. Likewise, the amounts appearing in the
"Subasta" book, are not representative of the amount of sale made during the "subastas"
since not all articles are eventually sold and disposed of by petitioner.
Petitioner submits that based on the evidence presented, it was able to show beyond doubt
that it incurred the amount of losses on auction sale claimed as deduction from its gross
income for the taxable year 1997. And that the documents/records submitted in evidence as
well as the facts contained therein were neither contested nor controverted by the
respondent, hence, admitted.
In this case, petitioner's reliance on the entries made in the "Subasta" book were not
sufficient to substantiate the claimed deduction of loss on auction sale. As admitted by the
petitioner, the contents in the "Rematado" and "Subasta" books do not reflect the true
amounts of the total capital and the auction sale, respectively. Be that as it may, petitioner
still failed to adduce evidence to substantiate the other expenses alleged to have been
incurred in connection with the sale of pawned items.
The rule that tax deductions, being in the nature of tax exemptions, are to be
construed in strictissimi juris against the taxpayer is well settled. 20 Corollary to
this rule is the principle that when a taxpayer claims a deduction, he must point
to some specific provision of the statute in which that deduction is authorized and
must be able to prove that he is entitled to the deduction which the law
allows.21 An item of expenditure, therefore, must fall squarely within the language
of the law in order to be deductible. 22 A mere averment that the taxpayer has
incurred a loss does not automatically warrant a deduction from its gross income.
As the CTA En Banc held, Tambunting did not properly prove that it had incurred losses. The
subasta books it presented were not the proper evidence of such losses from the auctions
because they did not reflect the true amounts of the proceeds of the auctions due to certain
items having been left unsold after the auctions. The rematado books did not also prove the
amounts of capital because the figures reflected therein were only the amounts given to the
pawnees. It is interesting to note, too, that the amounts received by the pawnees were not
the actual values of the pawned articles but were only fractions of the real values.
The requisites for the deductibility of ordinary and necessary trade or business
expenses, like those paid for security and janitorial services, management and professional
fees, and rental expenses, are that: (a) the expenses must be ordinary and necessary; (b)
they must have been paid or incurred during the taxable year; (c) they must have been paid
or incurred in carrying on the trade or business of the taxpayer; and (d) they must be
supported by receipts, records or other pertinent papers.23
In denying Tambuntings claim for deduction of its security and janitorial expenses,
management and professional fees, and its rental expenses, the CTA En Banc explained:
Contrary to petitioners contention, the security/janitorial expenses paid to Pathfinder
Investigation were not duly substantiated. The certification issued by Mr. Balisado was not
the proper document required by law to substantiate its expenses. Petitioner should have

presented the official receipts or invoices to prove its claim as provided for under Section
238 of the National Internal Revenue Code of 1977
From the foregoing provision of law, a person who is subject to an internal revenue tax shall
issue receipts, sales or commercial invoices, prepared at least in duplicate. The provision
likewise imposed a responsibility upon the purchaser to keep and preserve the original copy
of the invoice or receipt for a period of three years from the close of the taxable year in
which the invoice or receipt was issued. The rationale behind the latter requirement is the
duty of the taxpayer to keep adequate records of each and every transaction entered into in
the conduct of its business. So that when their books of accounts are subjected to a tax
audit examination, all entries therein could be shown as adequately supported and proven
as legitimate business transactions. Hence, petitioners claim that the NIRC of 1977 did not
require substantiation requirements is erroneous."

CONSOLIDATES MINES, INC v. CTA and CIR

Facts:
Petitioner Company, a domestic corporation engaged in mining, had filed its income tax
returns for 1951, 1952, 1953 and 1956. In 1957 examiners of the BIR investigated the
income tax returns filed by the Company because its auditor, Felipe Ollada, claimed the
refund of the sum of P107,472.00 representing alleged overpayments of income taxes for
the year 1951. After the investigation the examiners reported that (A) for the years 1951 to
1954 (1) the Company had not accrued as an expense the share in the company profits of
Benguet Consolidated Mines as operator of the Company's mines, although for income tax
purposes the Company had reported income and expenses on the accrual basis; (2)
depletion and depreciation expenses had been overcharged; and (3) the claims for audit and
legal fees and miscellaneous expenses for 1953 and 1954 had not been properly
substantiated; and that (B) for the year 1956 (1) the Company had overstated its claim for
depletion; and (2) certain claims for miscellaneous expenses were not duly supported by
evidence.
In view of said reports the Commissioner of Internal Revenue sent the Company a letter of
demand requiring it to pay certain deficiency income taxes for the years 1951 to 1954,
inclusive, and for the year 1956. Deficiency income tax assessment notices for said years
were also sent to the Company. The Company requested a reconsideration of the
assessment, but the Commissioner refused to reconsider, hence the Company appealed to
the Court of Tax Appeals.
On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the amounts
of P107,846.56, P134,033.01 and P71,392.82 as deficiency income taxes for the years 1953,
1954 and 1956, respectively.
However, on August 7, 1961, upon motion of the Company, the Tax Court reconsidered its
decision and further reduced the deficiency income tax liabilities of the Company to
P79,812.93, P51,528.24 and P71,382.82 for the years 1953, 1954 and 1956, respectively.

Both the Company and the Commissioner appealed to this Court. The Company questions
the rate of mine depletion adopted by the Court of Tax Appeals and the disallowance of
depreciation charges and certain miscellaneous.

Issue:
Whether or not the Court of Tax Appeals erred with respect to the rate of mine depletion.

Ruling:
No.
The Tax Code provides that in computing net income there shall be allowed as deduction, in
the case of mines, a reasonable allowance for depletion thereof not to exceed the market
value in the mine of the product thereof which has been mined and sold during the year for
which the return is made [Sec. 30(g) (1) (B)].
The formula for computing the rate of depletion is:
Cost of Mine Property
---------------------- = Rate of Depletion Per Unit Estimated ore Deposit of Product Mined and
sold.
The Commissioner and the Company do not agree as to the figures corresponding to either
factor that affects the rate of depletion per unit. The figures according to the Commissioner
are:
P2,646,878.44 (mine cost) P0.59189 (rate of
------------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)
while the Company insists they are:
P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
4,156,888 tons (estimated
ore deposit)
They agree, however, that the "cost of the mine property" consists of (1) mine cost; and (2)
expenses of development before production.
As an income tax concept, depletion is wholly a creation of the statute "solely a
matter of legislative grace." Hence, the taxpayer has the burden of justifying the
allowance of any deduction claimed. As in connection with all other tax
controversies, the burden of proof to show that a disallowance of depletion by the
Commissioner is incorrect or that an allowance made is inadequate is upon the
taxpayer, and this is true with respect to the value of the property constituting
the basis of the deduction. This burden-of-proof rule has been frequently applied
and a value claimed has been disallowed for lack of evidence.

The Company's balance sheet for December 31, 1947 lists the "mine cost" of P2,500,000 as
"development cost" and the amount of P1,738,974.37 as "suspense account (mining
properties subject to war losses)." The Company claims that its accountant, Mr. Calpo, made
these errors, because he was then new at the job. Granting that was what had happened, it
does not affect the fact that the, evidence on hand is insufficient to prove the cost of
development alleged by the Company. Nor can we rely on the statements of Eligio S. Garcia,
who was the Company's treasurer and assistant secretary at the time he testified on August
14, 1959. He admitted that he did not know how the figure P4,238,974.57 was arrived at,
explaining: "I only know that it is the figure appearing on the balance sheet as of December
31, 1946 as certified by the Company's auditors; and this we made as the basis of the
valuation of the depletable value of the mines."
We, therefore, have to rely on the Commissioner's assertion that the "development cost"
was P131,878.44, broken down as follows: assessment, P34,092.12; development,
P61,484.63; exploration, P13,966.62; and diamond drilling, P22,335.07.
The question as to which figure should properly correspond to "mine cost" is one of fact. The
findings of fact of the Tax Court, where reasonably supported by evidence, are conclusive
upon the Supreme Court.

PHILIPPINE REFINING CO v. CA
Facts:
Petitioner PRC was assessed by CIR to pay deficiency tax for 1985 which was timely
protested by petitioner that it was based on erroneous disallowances of bad debts and
interest expense although the same are both allowable and legal deductions.
But Respondent Commissioner still issued a warrant of garnishment against the deposits of
petitioner so petitioner filed a petition with the CTA alleging that bad debts and interest
expense are legal and allowable deductions.
CTA modified the findings of the commissioner by reducing the deficiency income tax
assessment with surcharge and interest incident to delinquency. The Tax court reversed and
set aside the commissioners disallowance of the interest expense but maintained the
disallowance of the bad debts. CA affirmed the CTAs decision.

Issue:
Whether or not petitioner PRC is entitled to the allowable deduction of bad debt

Ruling:
This pronouncement of respondent Court of Appeals relied on the ruling of this Court in
Collector vs. Goodrich International Rubber Co., which established the rule in determining
the "worthlessness of a debt." In said case, we held that for debts to be considered as
"worthless," and thereby qualify as "bad debts" making them deductible, the taxpayer

should show that (1) there is a valid and subsisting debt; (2) the debt must be actually
ascertained to be worthless and uncollectible during the taxable year; (3) the debt must
be charged off during the taxable year; and (4) the debt must arise from the business or
trade of the taxpayer. Additionally, before a debt can be considered worthless, the
taxpayer must also show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he
exerted diligent efforts to collect the debts, viz: (1) sending of statement of accounts; (2)
sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing
a collection case in court.
On the foregoing considerations, respondent Court of Appeals held that petitioner did not
satisfy the requirements of "worthlessness of a debt" as to the thirteen (13) accounts
disallowed as deductions.
It appears that the only evidentiary support given by PRC for its aforesaid claimed
deductions was the explanation or justification posited by its financial adviser or
accountant, Guia D. Masagana. Her allegations were not supported by any documentary
evidence, hence, both the Court of Appeals and the CTA ruled that said contentions per se
cannot prove that the debts were indeed uncollectible and can be considered as bad
debts as to make them deductible. That both lower courts are correct is shown by
petitioner's own submission and the discussion thereof which we have taken time and
patience to cull from the antecedent proceedings in this case, albeit bordering on factual
settings.
The contentions of PRC that nobody is in a better position to determine when an obligation
becomes a bad debt than the creditor itself, and that its judgment should not be
substituted by that of respondent court as it is PRC which has the facilities in ascertaining
the collectibility or uncollectibility of these debts, are presumptuous and uncalled for. The
Court of Tax Appeals is a highly specialized body specifically created for the purpose of
reviewing tax cases. Through its expertise, it is undeniably competent to determine the
issue of whether or not the debt is deductible through the evidence presented before it.
The Court vehemently rejects the absurd thesis of petitioner that despite the supervening
delay in the tax payment, nothing is lost on the part of the Government because in the
event that these debts are collected, the same will be returned as taxes to it in the year of
the recovery. This is an irresponsible statement which deliberately ignores the fact that
while the Government may eventually recover revenues under that hypothesis, the delay
caused by the non-payment of taxes under such a contingency will obviously have a
disastrous effect on the revenue collections necessary for governmental operations during
the period concerned.