COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. AMERICAN RUBBER COMPANY AND COURT OF TAX APPEALS, RESPONDENTS.[G.R. Nos. L-19801-03] AMERICAN RUBBER COMPANY, PETITIONER, VS. T…

These cases are brought on appeal from the Court of Tax Appeals by the State
(G. R. No. L-19667) as well as by the American Rubber Company (G. R. Nos.
L-19801, 19802 , 19803).

The factual background is the same in all four cases, and is not in
controversy, having been stipulated between the parties.

Petitioner, American Rubber Company, a domestic corporation, from January 1,
1955 to December 31, 1958, was engaged in producing rubber from its
approximately 900-hectare rubber tree plantation, which it owned and operated in
Latuan, Isabela, City of Basilan. Its products, known in the market as Preserved
Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked Sheets Nos. 1 and 2,
Flat Bark Rubber, 2X Brown Crepe and 3X Brown Crepe, are turned out in the
following manner:

The initial step common to the production of all the foregoing rubber
products is tapping, i.e., the collection of latex (rubber juice) from rubber
trees. This is done by the daily cutting, early in the morning, of a spiral
incision in the bark of rubber trees and placing a cup below the lower end of
the incision to receive the flow of latex. The collecting cup is filled after
two hours. The tapper then collects the latex into buckets and carries them to
the collecting shed. The tapper subsequently pours the latex collected into big
milk cans. The filled milk cans are then taken in motor vehicles to a
coagulating shed, also within the premises of petitioner’s plantation, where the
latex is strained into coagulating tanks to remove foreign matter such as leaves
and dirt. After these initial steps, the processes vary in the production of the
various rubber products mentioned above. Said processes are described here
under.

Preserved Rubber Latex

Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per gallon of latex.
The mixture is thoroughly stirred and then poured into metal drums. The addition
of ammonia preserves the latex in liquid form and prevents its deterioration or
its acquisition of a repulsive smell, and at the same time preserves its uniform
color. Latex which has been thus artificially preserved in its liquid form
generally lasts for about a month without spoiling. On the other hand, fresh
latex in its original state lasts for only about two hours, after which it
becomes spoiled.

Petitioner sells preserved latex only upon previous orders of customers who
supply empty metal drum containers.

Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2

To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 ,
the petitioner adds to the latex in the coagulating tank about’ 15 or 16 ounces
of glacial acetic acid per gallon of latex. The mixture is stirred thoroughly.
Thereafter aluminum partitions are placed crosswise inside the tank so that the
latex will coagulate into uniform slabs. Acetic add is added to the latex to
hasten coagulation which otherwise takes place naturally, and to preserve its
fresh state and color. The similarity in the production of Pale Crepe Nos. 1 and
2 and Ribbed Smoked Sheets Nos. 1 and 2 ends at the point of removing the
coagulum (coagulated rubber sheets) from the coagulating tanks.

To produce Pale Crepe No. 1, the coagulum is passed through a series of
rollers until the desired thickness is attained, whereupon it is moved to the
air-drying house situated inside petitioner1 s plantation and hung for a period
of about twelve or thirteen days to dry. There are no mechanical driers used;
the air-drying is done naturally. As soon as the Pale Crepe is dried, the sheets
are sorted; those which are of uniform pale color are classified as Pale Crepe
No. 2, whereupon they are baled and stored, ready for the market.

Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically in the same
manner as Pale Crepe, except that the coagulum is passed only once through a
roller provided with ribs after which the flattened and ribbed coagulum is
removed to petitioner’s smoke-house where it is hung and cured by exposure to
heat and smoke from wood fires for about six or seven days. The resulting smoked
sheets are sorted and classified dependent upon color and opaqueness into ribbed
smoked sheets (RSS) No. 1 and No. 2, baled, and stored ready for the market. No
mechanical equipment is used in generating the smoke in the smoke-house.

The petitioner’s rollers are powered by engines although they could be turned
by hand as it is done in small rubber plantations. If Pale Crepe Nos. 1 and 2
and Ribbed Smoked Sheets Nos. 1 and 2 are not air-dried and smoked, they
deteriorate, get spoiled, and the color varies.

Flat Bark Rubber

Each morning before a tapper makes a fresh incision in the bark of a rubber
tree, he gathers the latex drippings from the ground around the tree, called
“ground rubber”, as well as the dried latex from the incisions made the previous
day, called ” bark rubber “. Ground and bark rubber are not intentionally
produced. No chemicals are added to the latex transformed into ground and bark
rubber. This kind of dried latex is spoiled and has a bad odor.

Ground and bark rubber when gathered in sufficient quantities are passed
numerous times through the rollers or mills until they form a uniform mass or
sheet which, finally is called Flat Bark Rubber. No chemical is used to
coagulate the dried ground and bark rubber because they are already coagulated.
They are formed into sheets by means only of pressure of the mills or rollers
through which they are passed. Flat Bark Rubber commands the lowest prices in
the rubber market.

3X Brown Crepe

Every morning, before a fresh incision is made in the bark of the rubber
trees, the tapper collects not only ground and bark rubber but removes and
collects the latex in the cups, known as “cup rubber”. The cup rubber coagulates
and dries through natural processes and, when gathered in sufficient quantities,
is milled and rolled through a series of rollers until by force of pressure it
is formed into a mass of the desired thickness called “3X Brown Crepe” . Like
ground and bark rubber, no chemicals are added to cup rubber to produce 3X Brown
Crepe. Cup rubber in its original form, like ground and bark rubber, is spoiled
and has a bad odor.

2X Brown Crepe

2X Brown Crepe is obtained by milling or rolling the excess places of
coagulated rubber latex which had been cut or trimmed from the ribbed smoked
sheets No. 2 into a uniform mass. 2X Brown Crepe is produced in the same manner
as the other sheets of crepe rubber, i.e., without the addition of any
chemicals.

Petitioner during the said period sold its foregoing rubber products locally
and as prescribed by the respondent’s regulations declared same for tax purposes
which respondent accordingly assessed. Petitioner paid, under protest, the
corresponding sales taxes thereon claiming exemption therefrom under Section 188
(b) of the National Internal Revenue Code.

The following sales taxes on the aforementioned rubber products were paid
under protest —

From Jan. 1, 1955 to Dec. 31, 1956	. . . . . . . . . . .	P83,193.48
From Jan. 1, 1957 to June 30, 1957	. . . . . . . . . . .	P20,504.99
From July 1, 1957 to Dec. 31, 1958	. . . . . . . . . . .	P52,378.90

It is further stipulated that the sales tax collected from petitioner
American Rubber Company on the local sales of its rubber products, following
Internal Revenue General Circulars Nos. 431 and 440, had been separately
itemized and billed by petitioner Company in the invoices issued to the
customers, that paid both the value of the rubber articles and the separately
itemized sales tax, from January 1, 1955 to August 2, 1957.

After paying under protest, the petitioner claimed refund of the sales taxes
paid by it on the ground that, under section 188, paragraph b, of the Internal
Revenue Code, as amended,^[1] its rubber
products were agricultural products exempt from sales tax, and upon refusal of
the Commissioner of Internal Revenue, brought the case on appeal to the Court of
Tax Appeals (C.T.A. Nos. 356, 440, 632). The respondent Commissioner Interposed
defenses, denying that petitioners products were agricultural ones within the
exemption; claiming that there had been no exhaustion of administrative
remedies; and argued that the sales tax having been passed to the buyers during
the period that elapsed from January 1, 1955 to August 2 , 1957, the petitioner
did not have personality to demand, sue for and recover the aforesaid sales
taxes, plus interest.

In its decision, now under appeal, the Tax Court held Preserved Latex, Flat
Bark Rubber, and 3X Brown Crepe to be agricultural products, “because the labor
employed in the processing thereof is agricultural labor”, and, hence, the sales
of such products were exempt from sales tax, but declared Pale Crepe No. 1,
Ribbed Smoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which is obtained
from rolling excess pieces of Smoked Sheets) to be manufactured products, sales
of which were subject to the tax. It overruled the defense of non-exhaustion of
administrative remedies and upheld the Revenue Commissioner’s stand that
petitioner Company was not entitled to recover the sales tax that had been
separately billed to its customers, and paid by the latter. Hence, it dismissed
the appeal in C.T.A. Nos. 356 and 440, and ordered respondent Commissioner to
refund only ?3,916.49 without interest, or costs.

Both parties then duly appealed to this Court. The issues posed on these
appeals are:

(1) Whether the plaintiff’s rubber products above described should be
considered agricultural or manufactured, for purposes of their subjection to the
sales tax;

(2) Whether plaintiff is or is not entitled to recover the sales tax paid by
it, but passed on to and paid by the buyers of its products; and

(3) Whether plaintiff is or is not entitled to interest on the sales tax paid
by it under protest, in case recovery thereof is allowed.

The first issue, in our opinion, is governed by the principles laid down by
this Court in Philippine Packing Corporation vs. Collector of Internal Revenue,
100 Phil. 545 et seq. We there ruled that the exemption from sales tax
established in section 188 (b) of the Internal Revenue Tax Code in favor of
sales of agricultural products, whether in their original form or not, made by
the producer or owner of the land where produced is not taken away merely
because the produce undergoes processing at the hand of said producer or owner
for the purpose of working his product into a more convenient and valuable form
suited to meet the demand of an expanded market; that the exemption was not
designed in favor of the small agricultural producer, already exempted by the
subsequent paragraphs of the same section 188, but that said exemption is not
incompatible with large scale agricultural production that incidentally required
resort to preservative processes designed to increase or prolong marketability
of the product.

In the case before us, the parties have stipulated that fresh latex directly
obtained from the rubber tree, which is clearly an agricultural product, becomes
spoiled alter only two hours. It has, therefore, a severely limited
marketability. The addition of ammonia prevents its deterioration for about a
month, and we see no reason why this preservative process should wrest away from
the preserved latex the protective mantle of the tax exemption.

Taking also into account the great distance that separates the plaintiff’s
plantation from the main rubber processing centres in Japan, the United States
and Europe, and the difficulty in handling products in liquid form, it can be
discerned without difficulty that preserved latex, with its 30-day spoilage
limit, is still severely handicapped for export and dollar earning purposes.

To overcome these shortcomings, and extend its useful life almost
indefinitely, it becomes necessary to separate and solidify the rubber granules
diffused in the latex, and hence, according to the stipulation of facts and the
evidence, acetic acid is added to hasten coagulation. There is nothing on record
to show that the acetic acid in any way produces anything that was not
originally in the source, the liquid latex. The coagulum is then rolled and
compacted and afterwards air dried to make Pale Crepe (1 and 2), or else cured
and smoked to produce rubber sheets. Once again we see nothing in this
processing to alter the agricultural nature of the result; what takes place is
merely an accelerated coagulation and dessication that would naturally occur
anyway, only within a longer period of time, coupled with greater spoilage of
the product.

Thus the operations carried out by plaintiff appear to be purely preservative
in nature, made necessary by its production of fresh rubber latex in a large
scale. They are purely incidental to the latter, just as the canning of skinned
and cored pineapples in syrup was held to be incidental to the large-scale
cultivation of the fruit in the Philippine Packing Corporation case
(ante). Being necessary to suit the product to the demands of the market,
the the operations in both cases should lead to same result, non-taxability of
the sales of the respective agricultural products. In not so holding, the Tax
Court was in error.

Even less justifiable is the position taken by the Revenue Commissioner in
his appeal against the finding of the Tax Court that Flat Bark and 3X Brown
Crepe rubber are agricultural products. According to the record, these sheets
result from the drippings and waste rubber that have dried naturally, that are
rolled and compacted into the desired thickness, without any other
processing.

As to 2X Brown Crepe which is compacted out of the trimmings and waste left
over fern the production of ribbed smoked sheets, no reason is seen why it
should be treated differently from the ribbed smoked sheets themselves.

In his appeal the Revenue Commissioner contends that all of plaintiff s
products should be deemed manufactured articles, on the strength of section 194
(N) of the Revenue Code defining a “manufacturer” as

“every person who by physical or chemical process alters the exterior texture
or form or inner substance of any raw material, or manufactured or partially
manufactured product in such manner as to prepare it for a special use or uses
to which it could not have been put to in its original condition, or who x x x
alters the quality of any such raw material x x x as to reduce it to marketable
shape x x x.”

But, as pointed out in the Philippine Packing Corporation case, this
definition is not applicable to the exemption of agricultural products, “whether
in their original form or not”. The use of this last phrase in the statute
clearly indicates that the agricultural product may be altered in texture or
form without being divested of the exemption (cas. cit. 101 Phil., p. 548). The
exception would be sales of agricultural products while Republic Act No. 1612
was in effect because under this Act the freedom from sales tax became
restricted to agricultural products”in their original form ” only. So that
plaintiff’s sales from August 24, 1 956 (approval of Republic Act 1612) to June
22, 1957 (when Republic Act 1856 became effective and restored the exemption to
agricultural products “whether in their original form or not”) became properly
taxable. Under paragraphs A(2) and B(4) of the additional stipulation of facts
(CTA rec. P. 261-262, G. R. L-19801), the sales tax properly collected during
this period on plaintiff’s transactions amounted to Wl8 ,187.19 from August 24
to December 31, 1956; and P18,888.28 from January 1 to June 21, 1957, or a total
of P37,075.47. This last amount is, therefore, non-recoverable.^[2]

The second issue in this appeal concerns the holding of the Court of Tax
Appeals that the plaintiff Company is not entitled to recover the sales tax paid
by it from January, 1955 to August 2, 1957, because during that period the
plaintiff had separately invoiced and billed the corresponding sales tax to the
buyers of its products. In so holding, the Tax Court relied on our decisions in
Medina vs. City of Baguio, 91 Phil. 854; Mendoza, Santos & Co. vs.
Municipality of Meycawayan, L-6069-6070, April 30, 1954 (94 Phil. 1047); and
Zosimo Rojas & Bros vs. City of Cavite, L-10730, May 27, 1958.

The basic ruling is that of Medina vs. City of Baguio, supra, where
this Court affirmed the ruling of the Court of First Instance to the effect
that—

‘”The amount collected from the theater goers as additional price of
admission tickets is not the property of plaintiffs or any of them. It is paid
by the public. If anybody has the right to claim it, it is those who paid it.
Only owners of property has the right to claim said property. The cine owners
acted as mere agents of the city in collecting additional price charged
in the sale of admission tickets.'” (Medina vs. City of Baguio, 91 Phil. 854)
(Italics supplied)

We agree with the plaintiff-appellant that the Medina ruling is not
applicable to the present case, since the municipal taxes therein imposed were
taxes on the admission tickets sold, so that, in effect, they were levies upon
the theater goers who bought them; so much so that (as the decision expressly
ruled) the tax was collected by the theater owners as agents of the respective
municipal treasurers. This does not obtain in the case at bar. The Medina ruling
was merely followed in Rojas & Bros. vs. Cavite, supra, and in
Mendoza, Santos & Co. vs. Municipality of Meycawayan, 94 Phil. 1047.

By contrast with the municipal taxes involved in the preceding cases, the
sales tax is by law imposed directly, not on the thing sold, but on the act
(sale) of the manufacturer, producer or importer (Op. of the Secretary of
Justice, June 15, 1946; 47 C.J.S., p. 1141), who is exclusively made liable for
its timely payment. There is no proof that the tax paid by plaintiff is the very
money paid by its customers. Where the tax money paid by the plaintiff came from
is really no concern of the Government, but solely a matter between the
plaintiff and its customers. Anyway, once recovered, the plaintiff must hold the
refunded taxes in trust for the individual purchasers who advanced payment
thereof, and whose names must appear in plaintiff’s records.

Moreover, the separate billing of the sales tax in appellant’s invoices was a
direct result of the respondent Commissioner’s General Circular No. 440,
providing that —

“if a manufacturer, producer, or importer, in fixing the gross selling price
of an article sold by him, has included an amount intended to cover the sales
tax in the gross selling price of the article, the sales tax shall be based on
the gross selling price less the amount intended to cover the tax, if
the same is billed to the purchaser as a separate item in the invoice. xxx ”
(Italics supplied)

In other words, the separate itemization of the sales tax in the invoices was
permitted to avoid the taxpayer being compelled to pay a sales tax on the tax
itself. It does not seem either just or proper that a step suggested by the
Internal Revenue authorities themselves to protect the taxpayer from paying a
double tax should now be used to block his action to recover taxes collected
without legal sanction.

Finally, a more important reason that militates against extensive and
indiscriminate application of the Medina vs. City of Baguio ruling is that it
would tend to perpetuate illegal taxation; for the individual customers to whom
the tax is ultimately shifted will ordinarily not care to sue for its recovery,
in view of the small amount paid by each and the high cost of litigation for the
reclaiming of an illegal tax. In so far, therefore , as it favors the
imposition, collection and retention of illegal taxes, and encourages a
multiplicity of suits, the Tax Court’s ruling under appeal violates morals and
public policy.

The plaintiff Company also urges that the refund of the taxes should include
interest thereon. While this Court has allowed recovery of interest in some
cases, it has done so only in cases of patent arbitrariness on the part of the
Revenue authorities; and in this instance we agree with the Tax Court that no
such patent arbitrariness has been shown.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is
affirmed in Case G. R. No. L-19667 and modified in cases G. R. Nos. L-19801,
19802 and 19803, by declaring the sales taxes therein involved to have been
improperly levied and collected and ordering respondent Commissioner of Internal
Revenue to refund the same, except the taxes corresponding to the period from
August 24, 1956 to June 22, 1957, during which Republic Act No. 1612 was in
force. The amount of P37,075.47 paid by the taxpayer for this period is hereby
declared properly collected and not refundable. Without special pronouncement as
to costs.

Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon,
J.P., Zaldivar, and Sanchez JJ., concur.

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^[1] “SEC. 188. Transactions and
persons not subject to percentage tax.—In computing the tax imposed in
sections one hundred eighty-four, one hundred eighty-five, and one hundred
eighty-six, transactions in the following commodities shall be
excluded:

(a) Articles subject to tax under Title IV of this
Code.

(b) Agricultural products and the ordinary salt whether in their
original form or not when sold, bartered, or exchanged in this country by the
producer or owner of the land where produced, as well as all kinds of fish and
its byproducts when sold, bartered, or exchanged by the fisherman or fishing
operator whether in their original state or not.

^[2] Collector of Internal Revenue vs. American
Rubber Co., L-10963, April 30, 1963; Tan Kim Tee vs. Court of Tax Appeals,
L-18080, Apr. 22, 1963.