G.R. No. 140230. December 15, 2005.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondent.

FACTS

Respondent PLDT, a franchise holder under Republic Act No. 7082, imported various equipment and spare parts from 1992 to 1994. It paid substantial taxes on these importations, including value-added tax (VAT), compensating tax, and advance sales tax, totaling hundreds of millions of pesos. PLDT sought a confirmatory ruling from the BIR regarding its tax exemption under Section 12 of its franchise, which states it shall pay a 3% franchise tax on gross receipts “in lieu of all taxes on this franchise or earnings thereof.” The BIR, in Ruling No. UN-140-94, confirmed that this “in lieu of all taxes” provision exempted PLDT from all taxes, including VAT on importations, except those expressly enumerated.
Armed with this ruling, PLDT filed a claim for refund or tax credit for the taxes it had paid on its importations. After the BIR failed to act, PLDT filed a petition with the Court of Tax Appeals. The CTA granted the petition in part, ordering a refund of P223,265,276.00, after disallowing claims that had prescribed. The CTA majority held that the franchise exemption covered the indirect taxes in question. The Commissioner appealed to the Court of Appeals, which affirmed the CTA decision.

ISSUE

Whether the “in lieu of all taxes” provision in PLDT’s franchise exempts it from indirect taxes, specifically VAT, compensating tax, and advance sales tax, on its importation of equipment and spare parts.

RULING

Yes. The Supreme Court affirmed the decisions of the lower courts, holding that PLDT is exempt from the subject taxes. The legal logic rests on a strict interpretation of the franchise law. Section 12 of R.A. No. 7082 is clear: the 3% franchise tax is “in lieu of all taxes on this franchise or earnings thereof.” The phrase “all taxes” is comprehensive and unambiguous; it admits of no distinction between direct and indirect taxes. The law does not qualify the exemption.
The Court rejected the Commissioner’s argument that the exemption should be limited to direct taxes. Tax exemptions are construed strictly against the grantee, but this principle applies only when the statute is ambiguous. Here, the language of the franchise is clear and leaves no room for interpretation. To impose the indirect taxes in question would effectively impose another tax on PLDT’s franchise, which is precisely what the “in lieu” provision seeks to prevent. The BIR’s own confirmatory ruling correctly interpreted this exemption. Therefore, the taxes paid by PLDT on its importations were erroneously collected and are refundable, subject to the prescriptive period for filing claims.