G.R. No. 222239 - Association of International Shipping Lines, Inc. vs. Secretary of Fice

Case Summary (G.R. No. 222239)

Petitioner

AISL is a non-stock, non-profit corporation whose members are international shipping carriers and/or their agents operating in the Philippines. APL is an AISL member incorporated in Singapore and licensed in the Philippines. Maersk-Filipinas, Inc. is an international shipping operator engaged in the Philippines.

Respondent

The Secretary of Finance issued Revenue Regulation No. 15-2013 (RR 15-2013). The Commissioner of Internal Revenue previously issued Revenue Memorandum Circular No. 31-2008 (RMC 31-2008), which was the subject of an earlier case decided by RTC Branch 98.

Key Dates

RA 9337 enacted: July 1, 2005 (amendments to the NIRC).
RMC 31-2008 issued by CIR: January 30, 2008.
RTC Branch 98 order (invalidating parts of RMC 31-2008): May 18, 2012; became final June 16, 2012.
RA 10378 enacted: March 7, 2013 (amending Section 28(A)(3)(a) and others).
RR 15-2013 issued to implement RA 10378: September 20, 2013.
Petition for declaratory relief challenging RR 15-2013 filed: December 4, 2013.
RTC Branch 77 orders (dismissing petition): September 15, 2015 and denial of reconsideration January 8, 2016.
Supreme Court decision affirming RTC: January 15, 2020 (decision uses the 1987 Constitution as the basis for judicial review).

Applicable Law and Regulatory Instruments

National Internal Revenue Code (NIRC) of 1997, as amended (notably Sections 28, 108, 118, 236, and Section 244 rulemaking authority).
Republic Act No. 9337 (2005) — earlier tax amendments referenced by RMC 31-2008.
Revenue Memorandum Circular No. 31-2008 (CIR issuance clarifying VAT and income tax issues for international carriers and agents).
Republic Act No. 10378 (2013) — amended NIRC Section 28(A)(3)(a) to define Gross Philippine Billings (GPB) and incorporate reciprocity/tax treaty considerations.
Revenue Regulation No. 15-2013 (RR 15-2013) — implementing rules for RA 10378.
Commonwealth Act No. 55 (CA 55) — removes from declaratory relief jurisdiction cases where taxpayer questions liability for tax collectible by BIR or Bureau of Customs.
Revised Administrative Code (provisions on interpretative regulations, filing with UP Law Center, and public participation).

Antecedents and RMC 31-2008

RMC 31-2008, issued by the CIR in January 2008 to clarify tax treatment for common carriers by sea, stated that on-line international sea carriers are subject to percentage tax vis-à-vis certain transactions, and addressed taxability of demurrage, detention fees, and commissions. Relevant portions included: (1) demurrage treated as Philippine-source income and subject to regular income tax; (2) detention and other charges treated as Philippine-source income subject to regular income tax (and VAT or 3% percentage tax depending on thresholds); and (3) certain sales to international carriers zero-rated where strictly attributable to international transport.

Prior RTC Decision (Branch 98) and Its Effect

In 2010 petitioners challenged RMC 31-2008 before RTC Branch 98. By Order dated May 18, 2012 (final and executory on June 16, 2012), the court held that international carriers were not subject to regular corporate income tax under Section 28(A)(1) and that demurrage fees were incidental to the carrier’s business and should form part of Gross Philippine Billings (GPB) subject to the preferential rate. The RTC declared invalid portions of RMC 31-2008 to the extent they subjected demurrage/detention fees and certain domestic services and commission income to regular corporate tax and 12% VAT, citing Sections 28 and 108(B)(4) of the NIRC.

Enactment of RA 10378 and Issuance of RR 15-2013

RA 10378 (March 7, 2013) amended Section 28(A)(3)(a) to define GPB for international carriers (air and shipping) as gross revenue for passenger, cargo or mail originating from the Philippines up to final destination, and allowed preferential treatment or exemptions based on reciprocity or tax treaties. The Secretary of Finance then issued RR 15-2013 to implement RA 10378; Section 4.4 of RR 15-2013 provided that items of income not forming part of GPB are subject to the pertinent provisions of the NIRC and specifically characterized demurrage and detention fees as Philippine-source income subject to regular income tax.

Proceedings Before the Trial Court Challenging RR 15-2013

Petitioners filed a petition for declaratory relief (with TRO and preliminary injunction applications) in December 2013 challenging Section 4.4 of RR 15-2013, arguing: (a) res judicata barred the new regulation because RTC Branch 98 had already determined the earlier issuance (RMC 31-2008) invalid as to such tax treatment; (b) RR 15-2013 improperly expanded RA 10378 and subjected demurrage/detention fees to regular corporate tax contrary to law; (c) demurrage/detention fees are penalties or akin to damages and thus not taxable as income, or if they are income they must be included in GPB and taxed at the preferential 2.5%; and (d) RR 15-2013 was invalidly promulgated without public hearing and without filing with the UP Law Center as required by the Revised Administrative Code.

Respondents’ Contentions

The Secretary of Finance (via OSG) and the CIR maintained: (a) the Branch 98 order in the RMC 31-2008 case does not bind the Secretary of Finance because the earlier case involved the CIR’s issuance and only the CIR was a party; (b) RR 15-2013 was promulgated pursuant to RA 10378 and Section 244 of the NIRC, and simply interprets or clarifies what constitutes GPB — it does not expand the statute; (c) demurrage and detention fees are income (compensation for extended use of property) and, if outside GPB, are taxable at the regular rate; and (d) RR 15-2013 is interpretative/internal in nature and thus did not require public hearing or filing with the UP Law Center for effectivity.

Trial Court Rulings and Orders

RTC Branch 77 granted petitioners’ request for judicial notice of RMC 31-2008, the Branch 98 order, RA 10378, and RR 15-2013, but dismissed the petition for declaratory relief for lack of jurisdiction under CA 55 (which removes from declaratory relief jurisdiction cases where taxpayers question tax liabilities). The trial court also held that res judicata did not apply and found RR 15-2013 a reasonable interpretative tax regulation not requiring public hearing or UP Law Center filing. Petitioners’ motion for reconsideration was denied.

Issues Presented on Review

The Supreme Court identified the principal issues as: (1) whether res judicata applied to bar the present challenge given the prior Branch 98 order; (2) whether a petition for declaratory relief was a proper remedy to invalidate RR 15-2013; and (3) whether RR 15-2013 is a valid revenue regulation.

Res Judicata Analysis and Ruling

The Court applied the four requisites for res judicata (finality, on the merits, rendered by court with jurisdiction, and identity of parties/subject matter/causes of action). It concluded there was no substantial identity of parties because the Branch 98 order bound only the parties in that case (petitioners and the CIR), whereas the present action impleaded the Secretary of Finance who was not a party to the earlier case; thus the Secretary of Finance is not bound by the RTC-Branch 98 judgment. The Court emphasized the different sources of authority: the CIR acted under Section 4 of the NIRC when issuing RMC 31-2008, while the Secretary of Finance acted under Section 244 of the NIRC and Section 5 of RA 10378 when issuing RR 15-2013. The Court also found no substantial identity of subject matter because the two issuances stemmed from different authorities and the earlier RTC order — being a regional trial court decision — does not constitute a binding judicial precedent that could preclude the Secretary of Finance from promulgating an issuance on the same subject.

Proper Remedy: Declaratory Relief vs. Prohibition/Certiorari

The Court recognized that CA 55 bars petitions for declaratory relief when a taxpayer questions liability for taxes collectible by the BIR or Bureau of Customs. The Court noted authority establishing that a petition for declaratory relief is inappropriate when the law has already been infringed and that certiorari/prohibition (under the judicial power in Article VIII of the 1987 Constitution) are the proper remedies to challenge acts of executive officials that may amount to grave abuse of discretion or usurpation of legislative authority. Notwithstanding these principles, the Court determined that because RR 15-2013 implicated significant public interest and longstanding controversy affecting the maritime industry, it would treat the petition as one for certiorari/prohibition to address the dispute on its merits rather than dismiss it on purely procedural grounds.

Substantive Ruling on Taxability of Demurrage and Detention Fees

Applying the statutory definition

Case Syllabus (G.R. No. 222239)

Citation and Panel

Decision reported at 868 Phil. 582, First Division, G.R. No. 222239, dated January 15, 2020.
Ponencia by Justice Lazaro-Javier; Peralta, C.J. (Chairperson), Caguioa, J., Reyes, Jr., and Lopez, JJ., concur.

Parties and Posture

Petitioners: Association of International Shipping Lines, Inc. (AISL); APL Co. Pte. Ltd. (APL); Maersk-Filipinas, Inc. (Maersk).
Respondents: Secretary of Finance; Commissioner of Internal Revenue (CIR).
Relief sought: Declaratory relief (challenging the validity of Section 4.4 of Revenue Regulation No. 15-2013) and ancillary injunctive relief; before this Court, petitioners sought review of the trial court’s dismissal/denial of their petition.

Statutory and Regulatory Background — RA 9337 and RMC 31-2008

RA 9337 (enacted July 1, 2005) amended select provisions of the 1997 National Internal Revenue Code (NIRC), including Sections 27, 28, 34, 106–116, 117, 119, 121, 148, 151, 236, 237, and 288.
CIR Lilian Hefti issued Revenue Memorandum Circular No. 31-2008 (RMC 31-2008) dated January 30, 2008, to "clarify certain provisions of the National Internal Revenue Code of 1997, as amended (Code), as it applies to shipping companies and their agents as well as their suppliers."
RMC 31-2008 (selected Q&A excerpts relied on by parties):
- Q-3 / A-3: Online international sea carriers are not subject to VAT; they are subject to 3% percentage tax under Section 118 on gross receipts from outbound fares and freight; other non-exempt transactions not under Section 119 may be liable to 12% VAT.
- Q-4 / A-4: Demurrage fees are "in the nature of rent for the use of property of the carrier in the Philippines," considered Philippine-source income and subject to income tax at the regular rate; other lines of business may be subject to VAT or percentage tax depending on threshold.
- Q-5 / A-5: Detention fees and other charges relating to outbound and inbound cargoes are Philippine-sourced income, subject to Philippine income tax under the regular rate and to VAT if annual receipts from VAT-registered activities exceed P1,500,000; otherwise, liable to 3% percentage tax.
- Q-14 / A-14: Sales to persons engaged in international shipping operations (goods, supplies, equipment, fuel, services, leases) to be used in international sea transport are zero-rated, subject to limitations (direct transport from a Philippine port to a foreign port without domestic stops); portions used otherwise are subject to 12% VAT.
- Q-34 / A-34: Commission income received by local shipping agents from foreign principals for outbound freights/fares of online international sea carriers shall be zero-rated under Section 108(B)(4); commissions for inbound freights/fares or off-line carriers are subject to 12% VAT.

Prior Litigation — Civil Case No. Q-09-64241 (RTC Branch 98) and its Ruling

On December 6, 2010, AISL, APL, and Maersk sought nullification of RMC 31-2008 in Civil Case No. Q-09-64241, Quezon City RTC Branch 98, seeking (a) preliminary injunction enjoining enforcement of challenged RMC provisions and (b) declaration that such provisions were void.
Petitioners argued RMC 31-2008 was void insofar as it imposed regular corporate tax (30%) and 12% VAT on demurrage and detention fees; on domestic portion of services to persons engaged in international shipping; and on commission income received by local agents for inbound shipments.
RTC Branch 98, in an Order dated May 18, 2012, granted summary judgment and declared invalid the pertinent portions of RMC 31-2008:
- Demurrage and detention fees were not subject to regular corporate income tax under Section 28(A)(1) nor 12% VAT.
- Demurrage fees are incidental to the trade/business of international carriers and form part of Gross Philippine Billings (GPB) subject to 2.5% tax under Section 28.
- The law did not expressly impose 12% VAT on domestic portions of services rendered by international carriers.
The RTC Order became final and executory as of June 16, 2012.

Legislative Change — RA 10378 and its Effect on Section 28

RA 10378 (enacted March 7, 2013) amended Section 28(A)(3)(a) of the NIRC regarding rates on resident foreign corporations (international carriers).
RA 10378 defines "Gross Philippine Billings" (GPB) for international air and shipping carriers:
- For international shipping: GPB means gross revenue for passenger, cargo, or mail originating from the Philippines up to final destination, regardless of place of sale or payment of passage/freight documents.
- RA 10378 preserved preferential 2.5% tax on GPB and allowed exemptions based on tax treaty or reciprocity for carriage of persons and excess baggage.
Secretary of Finance was mandated under RA 10378 to promulgate implementing rules.

Issuance of RR 15-2013 and Section 4.4 (Subject of the Present Challenge)

Secretary of Finance promulgated implementing rules under Revenue Regulation No. 15-2013 (RR 15-2013).
Petitioners challenged Section 4.4 of RR 15-2013 in Special Civil Action No. R-QZN-13-05590-CV (RTC Branch 77), which reads in material part:
- "All items of income derived by international carriers that do not form part of Gross Philippine Billings as defined under these Regulations shall be subject to tax under the pertinent provisions of the NIRC, as amended."
- RR 15-2013 specifically states: Demurrage fees "which are in the nature of rent for the use of property of the carrier in the Philippines, is considered income from Philippine source and is subject to income tax under the regular rate"; detention fees and other charges relating to outbound and inbound cargoes "are all considered Philippine-sourced income ... and are subject to the Philippine income tax under the regular rate."

Proceedings Before the Trial Court (RTC Branch 77)

Petitioners filed the petition for declaratory relief on December 4, 2013, with applications for temporary restraining order and writ of preliminary injunction.
Petitioners’ primary contentions:
- Section 4.4 of RR 15-2013 invalidly subjects demurrage and detention fees to regular corporate income tax, contrary to the prior final RTC Branch 98 Order (res judicata).
- RA 10378 did not change the treatment of demurrage/detention fees; RR 15-2013 unlawfully widens RA 10378’s scope.
- Demurrage/detention fees are penalties/damages or recoveries for losses and therefore not income; even if income, taxable only if part of GPB and thus entitled to the 2.5% rate.
- RR 15-2013 was promulgated without required public hearings and without filing with the UP Law Center, rendering it ineffective.
Respondents’ positions:
- Secretary of Finance (through OSG) contended the RTC Branch 98 Order in Civil Case No. Q-09-64241 did not bind the Secretary; the two cases involved different issuances and different issuing authorities (CIR vs. Secretary of Finance).
- RR 15-2013 was issued pursuant to authority under RA 10378 and Section 244 of the NIRC; anything outside GPB is subject to regular corporate tax.
- Demurrage and detention fees are income (compensation for use/extended use of property) and thus taxable.
- Absence of public hearings or non-filing with UP Law Center does not invalidate an interpretative regulation like RR 15-2013.
- CIR argued the RTC lacked jurisdiction under Commonwealth Act No. 55 (CA 55) because declaratory relief cannot be used to litigate tax liabilities imposed by BIR.