Case Summary (G.R. No. 178788)
Key Dates
- 1998: Passenger services ceased.
- April 12, 2002: Claim for refund filed.
- May 18, 2006: CTA First Division decision denying refund.
- July 5, 2007: CTA En Banc decision affirming denial.
- September 29, 2010: Supreme Court decision.
Applicable Law
- 1987 Philippine Constitution.
- National Internal Revenue Code of 1997:
• Section 28(A)(3)(a) – 2½% tax on Gross Philippine Billings (GPB) of international air carriers.
• Section 72 – suit to recover tax based on false or fraudulent returns; prevents refund if return contains understatement or undervaluation.
• Section 228 – requirements for deficiency assessment.
• Sections 203 & 222 – prescriptive periods for assessment or collection. - RP–US Tax Treaty:
• Article 4(7) – income sourced to the Philippines from international carriers only if originating traffic.
• Article 9 – domestic taxing rights on air transport profits. - Civil Code, Article 1279 – elements of legal compensation.
Facts of the Case
- United paid GPB tax on passenger and cargo revenues for taxable years 1999–2001.
- Passenger revenue for 1999: ticket sales in the Philippines, uplifts abroad; United claimed these revenues were non-Philippine-sourced post-cessation.
- Claim for refund: P15,916,680.69, including P5,028,813.23 for 1999 passenger GPB tax.
- No formal action on refund claim by BIR; two-year prescription on refund request prompted filing of CTA petition on April 15, 2002.
Procedural History
• CTA First Division (May 18, 2006): Denied refund.
– Acknowledged overpayment on passenger GPB but found understatement of cargo GPB: United deducted agent commissions (P141.79 million) and incentives (P1.98 billion) from gross cargo revenues, understating GPB by P2.84 billion.
– Computed correct GPB tax on cargo: P42.54 million vs. reported P11.1 million, yielding P31.43 million deficiency—exceeding the P5.03 million refund claim.
• CTA En Banc (July 5, 2007): Affirmed.
Issues
- Is United entitled to refund of P5,028,813.23 GPB tax on passenger revenues for 1999?
- May the CTA offset the passenger-GPB refund claim against the cargo-GPB deficiency?
- Did CTA violate due process by effectively assessing a deficiency without formal notice?
- Is any deficiency assessment barred by prescription?
Supreme Court’s Analysis
Entitlement to Passenger-GPB Refund
- Accepted that post-1998 passenger GPB tax was erroneously paid under Section 28(A)(3)(a) and RP–US Treaty Article 9.
CTA’s Authority to Examine Returns
- Under Section 72, the CTA may refuse refunds when returns contain undervaluations.
- CTA did not “assess” in lieu of BIR but examined the correctness of returns to determine refund entitlement, including gross cargo revenues.
Offset and Compensation
- Although taxes are sovereign obligations not subject to legal compensation under Civil Code Article 1279 and jurisprudence (Philex, Francia, Caltex), Section 72 authorizes denial of refunds where returns are false or undervalued.
- This “offset” is not a private compensation but part of a single proceeding to determine net tax due or refundable, avoiding multiplicity of suits (Commissioner v. CTA, South African Airways).
Due Process and Jurisdiction
- CTA’s review of refund claims inherently involves validating returns and computing correct
Case Syllabus (G.R. No. 178788)
Facts of the Case
- United Airlines, Inc. is a foreign corporation organized under Delaware law, engaged in international air transport.
- It ceased passenger flight operations to and from the Philippines on February 21, 1998, and appointed Aerotel Ltd. Corp. as its local general sales agent.
- It continued to operate cargo flights originating in the Philippines until January 31, 2001.
- On April 12, 2002, United Airlines filed with the Commissioner of Internal Revenue a claim for income tax refund of ₱15,916,680.69 under Section 28(A)(3)(a) of the 1997 NIRC and Article 4(7) of the RP-US Tax Treaty.
- The refund claim included ₱5,028,813.23 allegedly paid in 1999 on passenger revenues from tickets sold in the Philippines but uplifted on flights originating outside the Philippines.
- With no resolution on the refund claim and facing a two-year prescriptive period, United Airlines filed a petition with the Court of Tax Appeals (CTA) on April 15, 2002.
Procedural History
- CTA First Division (May 18, 2006) denied the refund:
- Acknowledged that passenger revenues from off-line flights were not taxable.
- Found that United Airlines had erroneously deducted commission (₱141.79 million) and other incentives (₱1.98 billion) from gross cargo revenues, understating its 1999 gross Philippine billings (GPB).
- Calculated correct GPB tax on cargo revenues at ₱42.54 million, exceeding the ₱11.10 million actually paid, resulting in a ₱31.43 million underpayment greater than the refund sought.
- Denied motion for reconsideration, holding that no offsetting of liabilities occurred and that the CTA’s task was merely to determine refund entitlement on undisputed facts.
- CTA En Banc (July 5, 2007) affirmed the First Division decision.
- United Airlines elevated the case to the Supreme Court via Rule 45.
Issues Presented
- Whether United Airlines is entitled to a refund of ₱5,028,813.23 paid on 1999 off-line passenger revenues.
- Whether the CTA En Banc erred by effectively offsetting the refund claim against an alleged ₱31.43 million cargo tax deficiency.
- Whether the CTA En Banc violated due process by denying the refund without a formal deficiency assessment.
- Whether th