Facts:

In 1995, the Philippine Long Distance Telephone Company (PLDT) entered into a Gateway Agreement with PT Asia Cellular Satellite (Aces Indonesia), an Indonesian company, allowing PLDT to construct, own, and operate telecommunications gateways in the Philippines. That year, Aces Philippines Cellular Satellite Corporation (Aces Philippines), a PLDT subsidiary, was incorporated to operate these gateways and equipment involving the processing of telecommunication signals. In 1997, PLDT contracted with Aces Indonesia under the Founder NSP Air Time Purchase Agreement (Air Time Purchase Agreement), granting PLDT the exclusive right to provide satellite communication services (ACeS Services) in the Philippines using Aces Indonesia's satellite system (the ACeS System). The system involved satellites in outer space, terminals, and Philippine-based gateways which enabled transmission of telecommunications signals.

In 1998, the parties assigned their respective rights under the Air Time

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Facts:

Corporate and Contractual Background

• In 1995, the Philippine Long Distance Telephone Company (PLDT) entered into a Gateway Agreement with PT Asia Cellular Satellite (Aces Indonesia) for the supply of equipment, software, data, and documentation necessary for constructing, owning, and operating telecommunications gateways in the Philippines.
• In the same year, Aces Philippines was incorporated as PLDT’s subsidiary to operate telecommunication gateways and related equipment, thereby playing a key role in the domestic provision of satellite communications services.
• On March 12, 1997, PLDT and Aces Indonesia executed the Founder NSP Air Time Purchase Agreement (Air Time Purchase Agreement).
• The agreement granted PLDT, and its designated service provider (later Aces Philippines), the exclusive right to provide satellite communication services (the “Aces Services”) in the Philippines.
• It contained detailed recitals explaining that Aces Indonesia contracted with third parties for the manufacture and launch of a satellite (later known as part of the “Aces System”) designed to transmit, switch, amplify, and receive radio signals.
• The contract set out that Aces Indonesia (and later its assignee) would bill PLDT for satellite communication time measured in “Billable Units” (each defined as every six-second interval, rounded up when fractional), exclusively for completed, successful calls (excluding set-up, unanswered, and incomplete calls).

Transfer of Rights and Operational Structure

• In 1998, the parties to the Air Time Purchase Agreement transferred their rights and obligations:
• Aces Indonesia’s contractual rights and obligations were transferred to Aces International Limited (commonly referred to as Aces Bermuda), a company incorporated in Bermuda.
• PLDT’s rights and obligations were transferred to its subsidiary, Aces Philippines, conferring upon it the authority to operate the necessary gateways and to serve as the exclusive provider of Aces Services to Philippine subscribers.
• The “Aces System” was structured to include space-based components (the satellite), transnational control elements (such as the Network Control Center located in Indonesia), and terrestrial facilities (gateways located in the Philippines).

Tax Audit and Deficiency Assessment

• In 2007, the Bureau of Internal Revenue (BIR) audited Aces Philippines’ accounting records for the taxable year 2006.
• The BIR found that Aces Philippines had remitted satellite air time fees amounting to approximately P199,312,169.00 to Aces Bermuda but failed to withhold the proper final withholding tax (FWT) at the applicable rate of 35% on payments to a nonresident foreign corporation (NRFC).
• The Commissioner of Internal Revenue (CIR) subsequently issued a Final Decision on Disputed Assessment (FDDA), assessing a deficiency FWT for 2006 that included base tax, a 25% surcharge, interest, and a compromise penalty, totaling P170,935,184.92.

Judicial Proceedings and the Court of Tax Appeals (CTA) Decisions

• Aces Philippines filed a judicial protest before the CTA against the CIR’s FDDA assessment.
• The CTA Division issued a ruling affirming the CIR’s assessment with modifications, ordering Aces Philippines to pay a deficiency final withholding tax of P87,199,073.94—comprising the basic tax and a 25% surcharge—and additional interest charges computed at 20% per annum on the unpaid amounts.
• The CTA Division’s reasoning emphasized that satellite air time fees were incurred only upon the successful delivery of satellite signals to the Philippine gateways. Although the satellite transmitted signals from outer space and the control center was based in Indonesia, the economic benefit materialized when calls were actually connected through facilities located in the Philippines.

Arguments Presented by the Parties

• Aces Philippines contended that:
• The relevant services provided by Aces Bermuda were rendered entirely outside the Philippines (i.e. through transmission from outer space and operations in Indonesia), and therefore the income should be considered as sourced outside the Philippines and not subject to domestic income tax.
• The imposition of both deficiency and delinquency interest simultaneously was not intended by law, citing various U.S. tax laws, foreign jurisprudence, and OECD guidelines, as well as earlier rulings (e.g., BIR Ruling No. ITAD-214-02 and cases such as Commissioner of Internal Revenue v. Piedras Negras Broadcasting Co.).
• In its submissions, petitioner emphasized technical aspects of the Aces System, including diagrams and affidavits explaining that the income-producing “act of transmission” occurred in outer space and that Aces Bermuda lacked physical presence or operational facilities in the Philippines.

Further Developments and Concurring/Dissenting Opinions

• The CTA En Banc, in reviewing the case, upheld the CTA Division’s decision and reaffirmed that the income-producing activity occurs upon receipt of the routed calls by Philippine gateways, thereby substantiating the Philippine-sourced nature of the income.
• The en banc decision also addressed the issue of interest imposition, clarifying that deficiency interest and delinquency interest would be imposed simultaneously in accordance with the pre-TRAIN Law provisions until December 31, 2017, with post-TRAIN adjustments applying thereafter.
• In separate opinions, some justices concurred with the majority on the source of income and taxability, while other dissenting opinions (e.g., by Presiding Justice Leonen and Associate Justice Dimaampao) expressed reservations regarding the simultaneous imposition of the two types of interest.

Issue:

Determination of the Income Source

• Whether the satellite air time fee payments made to Aces Bermuda—a nonresident foreign corporation—are income from sources within the Philippines.
• Whether the income is generated through the complete and successful delivery of the service (i.e. from the reception of the satellite signals at the Philippine gateways) rather than merely from the act of transmission occurring in outer space.

Assessment of Interest and Penalties

• Whether Aces Philippines, as the withholding agent, is liable for both deficiency interest and delinquency interest on the tax deficiency.
• Whether the simultaneous imposition of both types of interest is valid in light of statutory provisions and subsequent amendments (such as those introduced by the TRAIN Law).

Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Doctrine:

• (Subscriber-Only)