G.R. No. 226680 - Aces Philippines Cellular Satellite Corp. vs. Commissioner of Internal Revenue

Case Summary (G.R. No. 226680)

Factual Background and Contractual Framework

PLDT entered into a Gateway Agreement (1995) with Aces Indonesia to obtain equipment, software and documentation for constructing and operating gateways in the Philippines. PLDT and Aces Indonesia later executed a Founder NSP Air Time Purchase Agreement (1997) whereby Aces Indonesia sold satellite communications time (ACeS Services) to PLDT, which would be the exclusive supplier in the Philippines. The ACeS System comprised satellites (outer space), terminals, and gateways; billing was on “Billable Units” (each six-second interval) and expressly excluded set-up, unanswered, or incomplete calls. In 1998, contractual rights were transferred so that Aces Bermuda became the foreign service provider and Aces Philippines became PLDT’s assignee and local operator/distributor of ACeS Services.

Audit, FDDA and Administrative Finding

A Bureau of Internal Revenue (BIR) audit for taxable year 2006 found Aces Philippines paid Aces Bermuda P199,312,169.00 in satellite airtime fees but failed to withhold appropriate tax. The CIR issued a Final Decision on Disputed Assessment (FDDA) asserting Aces Philippines’ liability for deficiency final withholding tax (FWT) assessed at 35% of gross (P69,759,259.15) plus 25% surcharge, interest, and compromise penalty, producing a total assessment of P170,935,184.92.

CTA Second Division Ruling

The Court of Tax Appeals (CTA) Second Division affirmed the CIR’s assessment with modifications. It held that the satellite airtime fees were Philippine-sourced income because the contractual payment obligation arose only upon successful delivery and utilization of satellite airtime by Aces Philippines and its Philippine subscribers — i.e., when the gateways in the Philippines received the routed call. The Division ordered payment of the basic FWT, 25% surcharge, and applicable interest.

CTA En Banc Ruling

The CTA En Banc affirmed the Division. It emphasized the continuous interconnection among the satellite, control center, and Philippine gateways and held that performance is completed only when signals reach the gateways in the Philippines. The En Banc also sustained the imposition of both deficiency interest and delinquency interest under Section 249 of the 1997 Tax Code and denied the petitioner’s motion for reconsideration.

Petitioner’s Principal Arguments

Aces Philippines argued the airtime payments were foreign-sourced because (a) the act of transmission (receipt and beaming of signals) and the Network Control operations occurred outside the Philippines (outer space/Indonesia); (b) Aces Bermuda had no equipment, employees, or fixed place of business in the Philippines; (c) foreign jurisprudence, U.S. tax law (IRC §863(e)), OECD commentaries, and certain foreign rulings treat similar satellite or international communications income as foreign-sourced; (d) a prior BIR ruling (ITAD-214-02) held space segment services to be foreign-sourced; and (e) the law did not intend the simultaneous imposition of deficiency and delinquency interest.

Issues Presented

Whether satellite airtime fee payments to Aces Bermuda for services rendered using the ACeS System constituted income from sources within the Philippines, and therefore subject to 35% FWT on payments to a nonresident foreign corporation (NRFC).
If so, whether Aces Philippines (as withholding agent) is liable for delinquency interest and whether deficiency and delinquency interest should be imposed simultaneously given statutory amendments.

Legal Framework Applied by the Court

The Court applied principles of sovereign taxing power under the 1987 Constitution and the 1997 Tax Code: NRFCs are taxable only on income from sources within the Philippines (Section 28(8)(1)). Withholding agents must withhold and remit applicable final taxes (Sections 57 and 58). The Court invoked the two-step analysis for cross-border income: (A) identify the property, activity, or service that produced the income (the source), and (B) determine the situs of that income-producing activity.

Court’s Identification of the Income Source

The Court concluded the income source is the gateway’s receipt of the routed call (i.e., delivery and utilization of satellite airtime in the Philippines), not merely transmission in outer space. Two principal reasons were given: (1) performance/completion — under the parties’ contract, Aces Bermuda’s undertaking is to provide satellite communication time to Aces Philippines, and such service is only completed when the routed signal is received by Philippine gateways enabling connection of the subscriber; and (2) accrual of fees — the contract’s billing rules (Billable Units) and the explicit exclusion of charges for call setup, unanswered or incomplete calls indicate airtime fees accrue only upon successful delivery and utilization by Philippine subscribers.

Court’s Determination of Situs

The Court found the situs of the income-producing activity to be within the Philippines because (1) the income-generating activity is directly associated with gateways and related facilities located in the Philippines, and (2) the provision of satellite communications services in the Philippines is a government-regulated industry requiring local franchise or authorization and thus implicates state protection and regulation. Although Aces Philippines legally owned the gateways, the Court viewed Aces Bermuda as having sufficient economic/beneficial interest given the dependence of Aces Bermuda’s operations on the local gateways and national regulatory framework.

Rejection of Foreign Authorities and BIR Ruling as Controlling

The Court observed that foreign case law, U.S. tax provisions, OECD commentaries, and other jurisdictions’ decisions are not binding and are only persuasive. The BIR ruling cited by the petitioner (ITAD-214-02) was held to bind only the inquiring taxpayer and not generally persuasive here. The Court emphasized that Congress, not the judiciary, determines the scope and situs rules of domestic taxation; absent legislative special source rules for international communications income, the Court applied existing domestic law. The taxpayer bears the burden of proving income is foreign-sourced; Aces Philippines failed to present sufficient evidence to overcome the assessment.

Interest, Surcharge and Amendments under TRAIN

On interest, the Court rejected the petitioner’s argument against simultaneous imposition of deficiency and delinquency interest under the 1997 Tax Code as originally worded, but it modified computations in light of Republic Act No. 10963 (TRAIN Law) and Revenue Regulations No. 21-2018: (a) deficiency interest at 20% per annum on basic deficiency tax (P69,759,259.15) computed from January 10, 2007 until December 31, 2017; (b) delinquency interest at 20% per annum on the total amount (basic tax plus 25% surcharge and accrued deficiency interest) from October 3, 2012 until December 31, 2017; and (c) from January 1, 2018 until full payment, delinquency interest at the TRAIN-prescribed prevailing legal rate (implemented at 12% by regulation) applies, and the simultaneous imposition of both types of interest was curtailed prospectively by TRAIN. The Court upheld the 25% surcharge imposed under Section 248(3) because petitioner did not contest that assessment before the CTA and did not raise a defense in the present petition.

Final Disposition

The Supreme Court dismissed the petition and affirmed the CTA En Banc’s decision with modification as to interest computation in accordance with the TRAIN amendment and its implementing regulation. Petitioner was ordered to pay the basic FWT, surcharge, and interests as modified.

Separate Opinion — Senior Associate Justice Leonen (Concurring in Part; Dissenting in Part)

Justice Leonen concurred with the majority that Aces Bermuda’s airtime fees are Phili

Case Syllabus (G.R. No. 226680)

Background and Antecedents

In 1995 PLDT entered into a Gateway Agreement with PT Asia Cellular Satellite (Aces Indonesia) for supply of equipment, software, data and documentation to enable PLDT to construct, own and operate gateways in the Philippines.
In 1995 Aces Philippines was incorporated as PLDT’s subsidiary to operate telecommunication gateways and equipment involving processing, storage, monitoring and retrieval of data, image, voice, audio and tone.
On March 12, 1997 PLDT entered into the Founder NSP Air Time Purchase Agreement with Aces Indonesia, under which Aces Indonesia agreed to sell satellite communications time (the ACeS Services) to PLDT as exclusive supplier in the Philippine Territory.
The Air Time Purchase Agreement granted PLDT the exclusive right to provide ACeS Services to persons resident in the Territory during the Term, subject to retained rights of Aces Indonesia for areas outside the Territory, and contained provisions on allocation of Billable Units and usage-based pricing.
The ACeS System, as defined in the Air Time Purchase Agreement, consists of the satellite(s), terminals and gateways; the satellite receives, switches, amplifies and transmits radio signals to and from terminals and gateways which interlink with terrestrial fixed-line and cellular systems within its coverage.
Billable Units were defined as each six‑second interval of satellite utilization time for a voice or data call, with exclusions for set-up, unanswered and incomplete calls, and the price per Billable Unit was US$0.025 under Section 3.2.
In 1998 the parties to the Air Time Purchase Agreement transferred their rights: Aces Indonesia transferred to Aces International Limited (Aces Bermuda) and PLDT transferred to its subsidiary Aces Philippines; post-transfer Aces Philippines operated gateways and had exclusive authority to provide ACeS Services to Philippine subscribers.

Technical and Contractual Features of the ACeS System and Agreement

The Air Time Purchase Agreement recitals describe the Garuda (ACeS) satellite in geostationary orbit with capacity to receive, switch, amplify and transmit radio signals between terminals and gateways; the system is designed for Aces Indonesia (and successors) to sell satellite communication time to Service Providers for resale to subscribers.
Paragraph 2.2 granted PLDT (and later Aces Philippines) exclusivity to provide ACeS Services in the Philippines during the Term and precluded Aces Indonesia/ACeS from contracting others for ACeS Services in the Territory without PLDT’s prior written consent, subject to roaming guidelines and retained rights for areas outside the Territory.
Section 3.2 specified that Aces Indonesia/Aces Bermuda would invoice PLDT/Aces Philippines for all satellite communications time measured in Billable Units used during each Billing Month; allocation principles deemed PLDT to have “used” all Billable Units arising from calls to or from PLDT’s subscribers utilizing the ACeS System, regardless of subscriber location or the gateway handling the call.
Annex Z defined Billable Unit and excluded set-up, unanswered and incomplete calls, thereby making fees contingent on successful delivery and utilization of satellite air time.

Transfer of Rights and Operational Consequence

By the end of 1998, Aces Philippines had the authority to operate telecommunications gateways and related equipment within the ACeS System and possessed exclusive authority to provide ACeS Services to Philippine subscribers, effectively taking over PLDT’s position under the Air Time Purchase Agreement.
The agreements (Gateway Agreement and Air Time Purchase Agreement) were complementary: the Gateway Agreement facilitated construction and operation of Philippine gateways and the Air Time Purchase Agreement provided the satellite airtime sold to PLDT/Aces Philippines for resale to Philippine subscribers.

BIR Audit, FDDA and Computation of Assessment

In 2007 the Bureau of Internal Revenue audited Aces Philippines’ books for taxable year 2006 and found payments of P199,312,169.00 in satellite airtime fees to Aces Bermuda for which Aces Philippines did not withhold tax; the BIR treated these payments as income to an NRFC subject to 35% final withholding tax (FWT).
The Commissioner of Internal Revenue issued a Final Decision on Disputed Assessment (FDDA) dated August 23, 2012 assessing deficiency FWT of P69,759,259.15 plus 25% surcharge, interest and compromise penalty, arriving at a total payable of P170,935,184.92 (interest computed from July 30, 2006 to August 31, 2012).
The FDDA’s arithmetic: Satellite airtime fees P199,312,169.00 × 35% FWT = Basic tax P69,759,259.15; plus 25% surcharge P17,439,814.79; plus interest and compromise penalty producing the total P170,935,184.92.

Administrative and Judicial Proceedings: CTA Second Division

Aces Philippines filed a judicial protest before the Court of Tax Appeals (CTA).
The CTA Second Division affirmed the CIR’s assessment with modifications, ordering payment by Aces Philippines of P87,199,073.94 representing deficiency FWT inclusive of 25% surcharge (basic tax P69,759,259.15 + 25% surcharge P17,439,814.79).
The CTA Division also ordered payment of: (a) deficiency interest at 20% per annum on the basic deficiency tax from January 10, 2007 until full payment pursuant to Sec. 249(B); and (b) delinquency interest at 20% per annum on the total amount and on the 20% deficiency interest from October 3, 2012 until full payment pursuant to Sec. 249(C).
The CTA Division’s essential factual-conclusion: satellite airtime fees are Philippine‑sourced income because Aces Philippines pays only when satellite air time is delivered to and utilized in the Philippines; the activity producing income is the providing of satellite communication time delivered and utilized by Aces Philippines and its Philippine subscribers, thus occurring in the Philippines.
Aces Philippines’ motion for reconsideration before the CTA Division alleging all services were rendered outside the Philippines and challenging simultaneous 20% deficiency and delinquency interest was denied.

CTA En Banc Decision and Rationale

Aces Philippines elevated the case to CTA En Banc; the CTA En Banc affirmed the CTA Division.
The CTA En Banc emphasized that satellite air time services require that satellite communication time be available and actually delivered in the Philippines through petitioner’s gateway facilities; thus there is a continuous and real connection among the Philippines, Garuda satellite (outer space), and Network Control Center (Indonesia).
The CTA En Banc reasoned that the consideration is the undertaking by Aces Bermuda to provide successful transmission of satellite signals to petitioner in the Philippines and that performance is consummated only when the satellite signals are received by petitioner’s gateway facilities in the Philippines.
The CTA En Banc rejected the contention that transmission occurs entirely outside the Philippines, stressing that absence of successful transmission to Philippine gateways prevents accrual of payment; it concluded services are delivered within the Philippines and the income is Philippine‑sourced.
The court below also upheld imposition of deficiency interest, reasoning that liability for payment of FWT rests on the withholding agent and deficiency FWT gives rise to deficiency interest.

Issues Presented to the Supreme Court

Primary issue: whether satellite airtime fee payments to Aces Bermuda for services rendered using the ACeS System are income from sources within the Philippines and therefore subject to Philippine FWT.
Secondary issue: if those payments are Philippine‑sourced, whether Aces Philippines is liable for delinquency interest and whether interest and surcharges were properly imposed and computed.

Petitioner's Main Arguments (as advanced and preserved in the record)

Satellite airtime fees are from sources outside the Philippines and thus not subject to Philippine income tax or FWT because the act of transmission (receipt and beaming of satellite signals) occurs outside the Philippines (outer space and control center in Indonesia).
Aces Bermuda rendered services entirely outside the Philippines and had no machinery, equipment or employees in the Philippines; mere satellite footprint over the Philippines does not create situs.
Satellite airtime fees are not rentals or royalties but fees for international communications services and various foreign jurisdictions and US tax rules treat such income as foreign‑sourced.
Cite BIR Ruling No. ITAD‑214‑02 and foreign cases (e.g., Piedras Negras Broadcasting) and US IRC Section 863(e) and OECD Commentaries to support the foreign source characterization of international communications income.
Alternatively, petitioner argued that if subject to FWT, the law did not intend simultaneous imposition of 20% deficiency interest and 20% delinquency interest.

Supreme Court’s Holding (Majority / Ponencia)

Petiti