COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. PHILIPPINE PIPES AND MERCHANDISING CORPORATION AND THE COURT OF TAX APPEALS, RESPONDENTS.

The issue posed for
determination in this petition for review taken by the Commissioner of Internal
Revenue from the amended
decision of the Court of Tax Appeals in CTA Case No. 1858 entitled
“Philippine Pipes and Merchandising Corp. vs. Commissioner of Internal Revenue” may be
stated, thus:

For the purpose of computing the sales tax on concrete pipes and
hollow blocks, is the cost of cement used as a raw material in the manufacture thereof deductible?

Succinctly, the
antecedent facts are as follows:

Private respondent
Philippine Pipes and Merchandising Corporation is a domestic
corporation engaged in the business of manufacturing and selling
concrete pipes and hollow blocks.  In
1964, it was assessed by petitioner Commissioner of Internal Revenue for
deficiency sales taxes and surcharges for the years 1958, 1959 and 1960, in the
respective amounts of P5,507.45, P4,586.68 and P1,786.78, and compromise
penalty in the sum of P2,360.00, or for a
total amount of P14,240.91.

Private respondent
protested the assessment, but was denied by petitioner.  Two requests for reconsideration filed by
private respondent met the same fate. 
Thus, private respondent filed before the Court of Tax Appeals
(CTA) a petition for review of
the decision of petitioner, docketed as
CTA Case No. 1858.  In its petition, private respondent alleged that it was a contractor and not a manufacturer;
that granting arguendo that it was a manufacturer, as defined
by Sec. 194 (x) of the Tax Code, the petitioner Commissioner erred in
disallowing the deductions of the cost of the cement from the gross sales of
the concrete pipes and hollow blocks for purposes of computing the sales tax;
and that the assessment corresponding to the sales tax due for the year 1958
had prescribed.

In due course, the CTA
rendered a decision sustaining
petitioner Commissioner in his finding that private respondent is a manufacturer, but overturning his ruling on
the non-deductibility of the cost of
cement used as raw material in
the manufacture of concrete pipes and hollow blocks.  The CTA further ruled that the assessment for
the sales tax due for the year 1958 had prescribed.  Hence, the assessment was accordingly
modified.

Petitioner moved for a
reconsideration of the decision in so far as it allowed the deduction of the
cost of cement from the gross sales of the concrete pipes and hollow blocks.  Acting on the motion,
the CTA issued an Amended Decision,
which likewise upheld private
respondent’s theory of deductibility. 
Hence, the instant petition, petitioner assigning the following errors:

“[a]  The Court of Tax
Appeals erred in holding that the cost of cement used as raw materials in the manufacture of
concrete pipes and hollow blocks for the years 1959 and 1960 is deductible from
the gross selling price of the latter products;

“[b]  The Court of Tax
Appeals erred in holding that cement in its manufactured form is now a mineral
product;

“[c]  The Court of Tax
Appeals erred in applying Section 186 (A) of the National Internal Revenue Code
and holding that cement is a tax-free product the value of which is deductible from the gross sales of cement
pipes and hollow blocks.”^[1]

In support of its
assigned errors, petitioner alleged that:

“[a]  During the period
involved in this case (1959 and 1960) the cement utilized in the manufacture of
concrete pipes and hollow blocks was not subjected to the payment of sales tax
under Section 186 of the Tax Code;

“[b]  Under Section 186
of the Tax Code the cost of the raw materials which were used in the
manufacture of an article for sale can    
be deducted from the gross selling price of the manufactured article if it is duly established that said raw
material has been previously taxed under said Section 186 or under Section 189,
also of the Tax Code;

“[c]  During the years
involved in this case, the cement used as raw materials in the manufacture of
concrete pipes and hollow blocks which
were sold was subjected to an ad valorem tax because
the Bureau of Internal Revenue erroneously considered cement a mineral product and since it was not taxed under
Section 186 of the Tax Code, the cost thereof is not deductible from the gross
sales of cement and hollow blocks;

“[d]    That as cement undergoes several processes, it should be considered a
manufactured product;

“[e]    Even granting for
the sake of argument that cement is not subject to sales tax, the mineral
component of cement is nonetheless still subject to the ad valorem
tax and inferentially, the same is not the tax-free product contemplated under
Section 186-A of the Tax Code.”^[2]

In the original decision
of the CTA, the deductibi­lity of the cost of cement used as raw material in
the manufacture of concrete pipes and hollow blocks was anchored on the premise agreed upon by the parties that cement is a manufactured
product, as purportedly held by this Court in the cases of Cebu Portland Cement Corp. vs. Commissioner of
Internal Revenue, G.R. No. L-18649,
13 SCRA 333 and G.R. No. L-22605, 22 SCRA 56. 
From this assumption, the CTA held that since cement as a manufactured
product is subject to the 7% percentage or sales tax under Section 186 of the
Tax Code, its value is deductible when it is used as raw material of another
manufactured product as the concrete pipes and hollow blocks of private
respondent under the same Section 186 of the Tax Code which provides as
follows:

“x x x
Provided, That where the articles subject to tax under this section are
manufactured out of ma­terials likewise subject to tax under this section and
section one hundred and eighty-nine, the total cost of such materials, as duly established, shall be deductible
from the gross selling price or gross value in money of such manufactured
articles.”

On the other hand, the
basis for deductibility of the cost of cement in the Amended Decision is Section 186-A of the Tax Code, in connection
with Section 188 [c] of the same Code. 
They respectively read:

“Section 186-A. 
Whenever a tax-free product is utilized in the manufacture or production
of any article, in the determination of the value of such finished article, the
value of such tax-free product shall be deducted.  (Added by Section
5, Republic Act No. 2025)”.

“Section 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:

x x x                             x x x                             x x x

(c)     Minerals and mineral
products when sold, bartered, or exchanged by the lessee, concessionaire or
owner of the mineral land from which
removed.”

The shift in the legal basis
for deductibility was occasioned by this Court’s Resolution in Cebu Portland Cement Corp. vs. Commissioner of
Internal Revenue, G.R. No. L-18649, 21 SCRA 1425, wherein it was stated
that the “Court did not, and could not, rule that cement is a manufactured
product subject to sales tax; for the reason that such liability had never been
litigated by the parties”, as well as the subsequent ruling in Cebu Portland Cement Co. vs. Collector (now
Commissioner) of Internal Revenue, G.R. No. L-20563, 25 SCRA 789, that “before the effectivity of Republic Act No. 1299 amending Section 246
of the National Internal Revenue Code, cement was taxable as manufactured
product under Section 186, in connection with Section 194 (x) of said
Code.”^[3]

Prescinding from these rulings and the provisions of
Republic Act No. 1299, the CTA concluded that cement is a mineral product
exempt from the payment of sales tax under Section 188 (c) of the Revenue Code,
and therefore, a tax-free product within the contemplation of Section 186-A of
the same Code.

The question whether or
not cement is subject to sales tax has been laid to rest in the case of Commissioner
of Internal Revenue v. Republic Cement Corporation, 124 SCRA 26 (1983),
wherein this Court ruled that cement not being a “mineral product”
within the meaning of Section 246 of the Tax Code but a “manufactured product”, its sale is subject to sales tax imposed by Section 186, the same not being exempt under Section
188(c) of the Tax Code.  Following the
interpretation laid down in the 1965 case of Cebu
Portland Cement vs. Commissioner of Internal Revenue, G.R. No. L-18649, 13
SCRA 333 (February 27, 1965), that cement is a “manufactured
product”, the Court clarified the ruling in the 1968 case of Cebu Portland Cement vs. Commissioner of Internal
Revenue, G.R. No. L-20563, 25 SCRA 789 (October 29, 1968), to the effect
that since cement was subject to sales
tax immediately before the
enactment of Republic Act No. 1299, it should remain to be so subject thereafter, considering that the law
intended “no change of taxes whatsoever.” This ruling was affirmed in
the resolution of May 7, 1987 denying the three (3) motions for
reconsideration of the 1983 decision filed by Republic Cement Corporation, APO
Cement Corporation and Cebu Portland Cement.

Cement being subject to
sales tax, its cost there­fore as raw material in the manufacture of concrete
pipes and hollow blocks is deductible from the gross selling price of said articles.

The fact that during the
period involved in this case, 1959
and 1960, cement was not subjected to the sales tax but to the ad valorem tax due
to the erroneous classi­fication of the Bureau of Internal Revenue of cement as
a mineral product cannot alter the result of the case.  As correctly observed by the CTA in its original
decision:

“There is nothing in the language of Section 186 of the
Revenue Code that re­quires payment of the sales tax on the material as a
prerequisite of (sic) the right to deduct the value of said material when used for manufacturing.  The tax is of course presumed to be collected
by the Bureau of Internal Revenue at the proper time and from the proper
taxpayer – the cement manufacturer in this case.”^[4]

Indeed, it would be the
height of injustice and oppression to burden private respondent with a higher
tax base in order to rectify an error or mistake not of his own doing.

WHEREFORE, the instant petition for review is hereby
DENIED.  No pronouncement as to costs.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin, and Cortes, JJ., concur.

^[1]
p. 7, Rollo

^[2]
pp. 7-8, Rollo.

^[3]
At page 800.

^[4]
p. 27, Rollo.