COLLECTOR OF INTERNAL REVENUE, PETITIONER, VS. LA TONDENA INC. AND THE COURT OF TAX APPEALS, RESPONDENTS.

The respondent “La Tondena, Inc.” a duly licensed rectifier, has
been engaged in the business of manufacturing wines and liquors, with a
distillery at 1068 Velasquez, Tondo, Manila. The principal products of
the respondent are “Ginebra San Miguel”, “Manila Rum”, “Oak Barrel
Rum”, “Mallorca Wine”, “Anizado”, “Creme de Mente”, “Creme de Cacao”,
etc. Since 1929, respondent has been purchasing the alcohol used in the
manufacture of its products, principally from Binalbagan Isabela Sugar
Central, Negros Occidental and Central Azucarera Don Pedro in Nasugbu,
Batangas and has been removing this alcohol from the centrals to
respondent’s distillery under joint bonds, without prepayment of
specific taxes, with the express permission and approval of the
petitioner Collector of Internal Revenue. The quantity of alcohol
purchased and received by the respondent from the centrals are recorded
and entered in the BIR Official Register Books of “La Tondena, Inc.
A-Account”, under the column “CRUDE spirit” (Exhs. A, A-l, G, G-l),
attested by the Inspector of the Bureau assigned to respondent’s
distillery. In the manufacture of “Manila Rum”, respondent uses as
basic materials low test alcohol, purchased in crude form
from the suppliers, which it re-rectifies or subjects to further
distillation, in order to suit the purpose of respondent in producing
only high quality products. In the process of further rectification or
distillation, losses thru evaporation had necessarily been
incurred, for which the petitioner in the past had given the respondent
allowance of not exceeding 7% for said losses. Respondent stated that
the process adopted by it in the manufacture of its “Manila Rum”, has
now made this product the largest selling rum in the Philippines and
the specific taxes that it had been paying the government, had steadily
increased from P3,172,515.30 in 1950 to P4,973,123.40 in 1954. On May
8, 1954, petitioner wrote a demand letter to respondent for the payment
of specific taxes, in the total amount of P154,663.10 on alcohol lost
by evaporation, thru re-rectification or redistillation, covering the
period from June 7, 1950 to February 7, 1954. A first extension of 30
days within which to reply was granted the respondent by the
petitioner. On July 26, 1954, it asked for another 30-day extension to
reply (Exh. I-3). On August 2, 1954, petitioner granted 5 days only,
from August 2,1954 (Exh. I-7), or until August 7, 1954. On August 6,
1954, respondent answered the demand letter dated May 8, 1954 (Exh. I),
protesting against the said assessment (Exhs. I-5 and I-b). In a letter
dated August 26, 1954, the petitioner made manifest its refusal to
reconsider the assessment and urged the respondent to pay within 3 days
from receipt, the amount of the assessment, which communication was
received by the respondent on August 31, 1954 (Exh. 1-7). On September
1, 1954, the respondent appealed the decision to the Conference Staff
in the same Bureau (Exh. I-8). On September 3, 1954, the Conference
Staff gave the appeal due course (Exh. I-9).

Before any hearing could be had in the Conference Staff, on January
8, 1955, the respondent received a letter from the petitioner dated
December 22, 1954, requiring it to comply with Department of Finance
Order No. 213, to deposit one-half of the amount of assessment in cash
and the balance guaranteed by a surety bond (Exh. I-11). Respondent
requested for reconsideration of this requirement (Exh. I-1a) on
January 10, 1955, which was denied on February 10, 1955 (Exh, I-13). A
second motion for reconsideration presented on February 15, 1955 (Exh.
I-14), followed by a supplementary letter (Exh. I-15) dated February
17, 1955 was denied, same having been received by respondent on March
16, 1955, and gave the respondent 5 days from receipt thereof, within
which to comply with the said Order. Not satisfied with the said
rulings, the La Tondena, Inc. presented an action with the respondent
Court of Tax Appeals on March 18, 1955. The Tax Court on December 7,
1955, rendered the following judgment.—

“IN VIEW OF THE FOREGOING CONSIDERATION, the
decision of respondent Collector of Internal Revenue, dated May 8,
1954, is hereby modified, and petitioner La Tondena, Inc., is hereby
ordered to pay the respondent Collector of Internal Revenue the sum of
f672.15, by way of specific tax. However, with respect to the balance
of the assessment amount to F153,990.95, which corresponds to the
period after January 1, 1951 and up to February 27, 1954, pursuant
to Republic Act No. 592, the petitioner is declared exempt from
liability for the specific taxes assessed therefor. “Without pronouncement as to costs.”

On appeal to this Court, the petitioner alleges that the Court of
Tax Appeals erred (1) In exempting the respondent La Tondena, Inc. from
the payment of the specific tax on rectified alcohol lost in process of further rectification, during the period from January 1, 1951 to February 27, 1954; and (2) In assuming jurisdiction over the case.

It appears that the specific taxes in question were assessed by the
petitioner “in accordance with section 133 of the Tax Code”. Up to
December 31, 1950, said section reads:

“Sec. 133. Specific tax on distilled spirits.—On distilled spirits there shall be collected, except, as hereinafter provided, specific taxes as follows:

‘(a)
If produced from sap of the nipa, coconut, cassava, camote, or buri
palm, or from the juice, syrup, or sugar of the cane, par proof liter,
forty-five centavos.

‘(b) If produced from any other material, per proof liter, one peso and seventy centavos.

‘This tax shall be proportionally increased for any strength of the spirits taxed over proof spirits.

‘Distilled spirits’, as here used, includes all substances known as
ethyl alcohol, hydrated oxide of ethyl, or spirits of wine, which are
commonly produced by the fermentation and subsequent distillation of
grain, starch, molasses, or sugar, or of some syrup or sap, including
all dilutions or mixtures; and the tax shall attach to the
substance as soon as it is in existence as much, whether it be
subsequently separated as pure or impure spirits, or be immediately or
at any subsequent time transformed into any other substance either in
process of original production or by any subsequent process.’ “

Pursuant to the above provision of law, therefore, “the tax shall
attach to this substance as soon as it is in existence as such” etc.
However, on January 1, 1951, Republic Act No. 592 tool
effect, amending section 133 and the clause underlined above had been
eliminated. The evident intention of the law maker in deleting the all
embracing underlined clause, was to subject to specific tax not all
kinds of alcoholic substances, but only distilled spirits as finished products,
actually removed from the factory or bonded warehouse. The said
amendment could not mean anything else; it is in harmony with section
129, of the same Tax Code which provides—

“Sec. 129. Removal of spirits or cigar under bond.—Spirits requiring rectification
may be removed from the place of their manufacture to some other
establishment for the purpose of rectification without the prepayment
of the specific tax, provided the distiller removing such spirits and
the rectifier receiving them shall file with the Collector of Internal
Revenue their joint bond conditioned upon the future payment by the
rectifier of the specific tax that may be due on any finished product. * * *”.

And if one would consider that the Tax Code does not prohibit
further rectification or distillation and defines in section 194
thereof, a rectifier as a person who rectifies, purifies or refines
distilled spirits, the conclusion is logical that when alcohol, even if
already distilled (as in the present case) or rectified, is again
rectified, purified or refined, the specific tax should be based on the finished product,
and not on the evaporated alcohol. The intention not to subject to
specific tax all kinds of alcoholic substances but only distilled
spirits as finished products, is reflected in former Senator Garcia’s
observations on the floor of the Senate, during the discussion of House
Bill No. 1443 (now Rep. Act No. 592), when he proposed the elimination
of the phrase “and the tax shall attach to this substance as soon as it
is in existence as such, etc.” He said—

‘That is why, Mr. President, in Section 1 of this Bill now under consideration, I have some serious objections to the provisions where all kinds of alcoholic substance which falls under the definition of proof spirits in the last paragraph of the same Section I of the proposed measure are taxable because this is one of those that I consider of deterrent effect to the industrialization of this country . . . (Senate Diario No. 6, Jan. 15, 1951, Original, 4th Special Session); Italics supplied.”

And on August 23, 1956, upon the recommendation of the Bureau of
Internal Revenue itself, Rep. Act No. 1608 was passed, amending section
133 of the Tax Code, as amended by R.A. No. 592, restoring the very
same clause which was eliminated (Sec. 7, R.A. No. 1608). The
inference, therefore, is clear that from January 1, 1951, when Rep. Act
No. 592, took effect, until August 23, 1956, when R.A. No. 1608 became
a law, the tax on alcohol did not attach as soon as it was in existence as such, but on the finished product.
And this must be so, otherwise a great injustice would be caused upon a
duly licensed rectifier, who, like the respondent herein, will be made
to pay the specific tax on the alcohol lost thru evaporation, from
which no one has been benefited, based on the provision of laws then
extant, of doubtful application. In every case of doubt, tax statutes
are construed most strongly against the government and in favor of the
citizens, because burdens are not to be imposed beyond what the
statutes expressly and clearly import (MRR Co. vs. Coll. of Customs, 52 Phil., 950; Luzon Stev. Co. vs. Trinidad, 43 Phil., 803, 809). It should be pointed out also that said section 129 was amended by adding the following—

“And provided, further, That in cases where
alcohol has already been rectified either by original and continuous
distillation or by redistillation is further rectified, so less for rectification and handling shall be allowed and the rectifier thereof shall pay the specific tax due on such loses” (Sec. 5, Rep. Act No. 1608),

which obviously reveals that the purpose of the amendment is to tax, only now,
alcohol lost, in further distillation or rectification. This law
certainly should not be given a retroactive effect, so as to cover the
period in question (January 1, 1951 to February 27, 1954). It is only
after August 23, 195§ that the government woke up from its lethargy and
hastened to fill the hiatus.

The second assignment of error is predicated upon the proposition,
that the respondent Court of Tax Appeals has no jurisdiction over the
case, because the petition for review was not filed within the 30-day
period as provided by section 11 of Rep. Act No. 1125 (Law creating the
CTA), which states—

“Sec. 11. Who may appeal; effect of appeal.—Any
person, association or corporation adversely affected by a decision or
ruling of the Collector of Internal Revenue, the Collector of Customs *
* * or any provincial or city Board of Assessment Appeals, may file an
appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or ruling. * * *”.

Conceding for the purpose of argument that the ruling appealable was
the letter-assessment dated May 8, 1954, still we believe that the
petition for review to the Tax Court was filed within the time. The
intraroffice arrangement in the Bureau of Internal Revenue allowed a
tax payer to appeal from the ruling of the Collector to a Conference
Staff of the same Bureau. The appeal made on September 1, 1954, to the
Conference Staff, from said letter-assessment dated May 8, 1954
(received by the respondent on May 28, 1954), which was reiterated in
petitioner’s letter of August 26, 1954, (received by the respondent on
August 31, 1954), had suspended the period because it was a remedy
prescribed by the petitioner himself, made available to the respondent.
(Coll. of Int. Rev. vs. Suyoc Consolidated Mining Co. 104
Phil. 819). When the Conference Staff gave due course to the appeal on
September 3, 1954, the petitioner gave the impression that his
letter-assessments of May 8 and August 26, 1954, were still subject to
review by his Conference Staff. And when the Conference Staff finally
refused to reconsider its ruling requiring respondent to deposit 1/2 of
the amount of the tax in cash, and payment of the balance guaranteed by
a surety bond, after the submission of two requests for
reconsideration, the second denial having been received by respondent
only on March 16, 1955 (Exh. I-16), it was then only, that the
petitioner may or can be said to have rejected the administrative appeal
and gave finality to his letter of August 26, 1954. We believe that
petitioner did not create the Conference Staff and permitted a tax
payer to appeal to it from his ruling, as a mere administrative
expediency, to delay the tax payer from appealing to the Tax Court, and
thus allow the period of his appeal to lapse. We should presume that
this injurious result was not intended by the Government. This being
the case, a sit is the case, when respondent lodged its petition for
review with the Tax Court on’ March 18, 1955, only three (3) days in
all, had elapsed out of the period. The period within which the review
must be sought, should be counted from the denial of the motion for
reconsideration because of the principle that all administrative
remedies must be exhausted before recourse to the courts can be had
against orders or decisions of administrative bodies (Sec. of
Agriculture, etc. et al. vs. Hora, et al. 97 Phil., 125). If,
as it should be, the final appealable ruling of the petitioner, was
that received by respondent on March 6, 1955, then only two (2) days
had been consumed by the respondent of the statutory period. In either
case, the appeal to the Tax Court was presented on time and the latter
has jurisdiction to take cognizance of the case.

Wherefore, the decision appealed from is hereby affirmed, without pronouncement as to costs.

Bengzon, C. J., Bautista Angelo, Labrador, Concepcion, Barrera, Dizon, Regala and Makalintal, JJ., concur.