Tax Exemption and Franchise Rights: Philippine Airlines' Victory on Excise Taxes

The Supreme Court has affirmed that Philippine Airlines, Inc. (PAL) remains exempt from excise taxes on its imported commissary and catering supplies, despite a later law that appeared to remove such exemptions. The ruling in Commissioner of Internal Revenue and Commissioner of Customs v. Philippine Airlines, Inc. (G.R. Nos. 212536-37, August 27, 2014) clarifies how franchise tax exemptions interact with general tax laws—a question that affects any company operating under a legislative franchise.

The Dispute: Excise Taxes on Commissary Supplies

PAL holds a legislative franchise under Presidential Decree No. 1590 (PD 1590), granted in 1978. Section 13 of that decree provides that PAL shall pay either the basic corporate income tax or a franchise tax of two percent of gross revenues—whichever is lower—and that this payment shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges.

In February and March 2007, PAL imported cigarettes and alcoholic drinks for its commissary supplies used on international flights. The Bureau of Customs assessed and collected excise taxes on these importations, totaling PhP 4,550,858.85. PAL paid under protest and later filed claims for refund.

The basis for the assessment was Section 6 of Republic Act No. 9334 (RA 9334), which amended the National Internal Revenue Code (NIRC) provision on excise taxes on imported articles. The amended provision states that the importation of cigarettes, distilled spirits, fermented liquors, and wines shall be subject to all applicable taxes, duties, and charges, including excise taxes, notwithstanding any special or general law to the contrary.

The Core Issue: Did RA 9334 Repeal PAL's Franchise Exemption?

The Commissioner of Internal Revenue and the Commissioner of Customs argued that the phrase "the provision of any special or general law to the contrary notwithstanding" in RA 9334 effectively revoked PAL's exemption under PD 1590.

The Supreme Court disagreed. It applied the established principle that a later general law does not repeal an earlier special law unless the repeal is express and specific. The Court noted that PD 1590 contains its own rule on amendment: Section 24 states that the franchise may only be modified, amended, or repealed expressly by a special law or decree that shall specifically modify, amend, or repeal the franchise or any section or provision thereof.

RA 9334, despite its "notwithstanding" clause, did not specifically identify PD 1590 or Section 13 thereof as a provision intended to be repealed. The Court also cited its earlier ruling in Commissioner of Internal Revenue v. Philippine Air Lines, Inc. (G.R. No. 180066, July 7, 2009), which recognized PAL's continued enjoyment of its franchise rights even after privatization.

The Scope of the Franchise Exemption

The Court quoted extensively from Philippine Airlines, Inc. v. Commissioner of Internal Revenue (G.R. No. 198759, July 1, 2013), which interpreted Section 13 of PD 1590. The franchise exemption covers two categories:

1. Direct taxes—taxes due from PAL as the purchaser of imported goods, including excise taxes on commissary and catering supplies.
2. Indirect taxes—taxes billed or passed on to PAL by the seller, producer, manufacturer, or importer, whether as part of the purchase price or by separate arrangement.

The exemption applies to importations for the use of the grantee in its transport and nontransport operations and other activities incidental thereto, provided the articles are not locally available in reasonable quantity, quality, or price.

The Role of RA 9337: Franchise Tax Abolished, Exemption Retained

The Court also took note of Section 22 of RA 9337, which took effect on July 1, 2005. That provision abolished the franchise tax for PAL and other domestic airlines, making them liable instead for corporate income tax and value-added tax. However, Section 22 explicitly states that the franchisee shall otherwise remain exempt from any taxes, duties, royalties, registration, license, and other fees and charges, as may be provided by their respective franchise agreement.

This provision confirmed that Congress, even while changing the tax structure for domestic airlines, intended to preserve the exemptions granted under PD 1590.

The Court's Ruling

The Supreme Court denied the petition of the tax commissioners and affirmed the Court of Tax Appeals en banc's decision ordering the refund of PhP 4,550,858.85 to PAL. The Court held that the question of whether PAL complied with the conditions for exemption—that the supplies were imported for its operations and not locally available—was a factual matter properly determined by the CTA, whose findings are binding absent a showing that they are unsupported by substantial evidence.

The Court also quoted CIR v. Fortune Tobacco Corporation (G.R. Nos. 167274-75, July 21, 2008) for the principle that if the state expects taxpayers to observe fairness and honesty in paying taxes, it must hold itself to the same standard in refunding erroneous exactions.

Practical Takeaways

• A "notwithstanding" clause is not enough. A general law that says it applies "notwithstanding any law to the contrary" does not automatically repeal a special law or franchise. The repeal must specifically identify the provision being repealed.
• Franchise exemptions survive unless expressly revoked. Legislative franchises that grant "in lieu of all taxes" treatment remain effective unless Congress passes a special law expressly amending or repealing the franchise provision.
• Tax refund claims require factual proof. Even with a clear exemption, the claimant must prove compliance with the conditions attached to the exemption, such as the imported goods being used for the franchisee's operations and not being locally available.
• The CTA's factual findings are highly persuasive. The Court of Tax Appeals, as a specialized tax court, has broad discretion in evaluating evidence; its findings will not be disturbed on appeal without a strong showing of error.
• Taxpayers should pay under protest and act promptly. PAL's successful refund claim followed the proper procedure: paying under protest, filing administrative claims, and seeking judicial relief within the prescriptive period.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.