REPUBLIC CEMENT CORPORATION, PETITIONER, VS. THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, RESPONDENTS.

Appeal from a decision of the Court of Tax Appeals.

Petitioner Republic Cement Corporation is a domestic corporation
engaged, inter alia, in the mining,
from mineral lands held by it under lease and/or “mines temporary permit”
from the Government, of limestone, silica and other minerals used in the
production of cement.

For the period from May 1957 to December 1959, petitioner had
paid royalties and/or ad valorem taxes
based upon the value of the raw materials or minerals it had extracted and
later used in the manufacture of cement, as determined by the “cost of
production” or extraction of said materials or minerals.

Upon the theory that said royalties and/or ad valorem taxes are assessed on the market value of
the cement produced and sold by petitioner as finished product, the
Commissioner of Internal Revenue – hereinafter referred to as respondent –
demanded from petitioner the payment of P79,876.72, as
deficiency ad valorem tax and
surcharge, based upon the amount it had realized from the sale of cement from
September to December 1959.

Petitioner moved for a reconsideration, but, instead of granting
the same, respondent increased the assessment of P498,653.04,
covering the period from May 1957 to August 1959, on the basis of petitioner’s
gross receipts from the sale of cement.^[1]
On appeal taken by petitioner, this in­creased assessment was upheld by the
Court of Tax Appeals.  Hence, this
petition for review of herein petitioner.

The questions for determination are:

(1)  
Whether the ad valorem tax in question should be based on the value
of the finished product, as held by res­pondent and the Court of Tax Appeals,
or upon the value of the raw materials or minerals used in the manufacture of
said finished product, upon extraction of said raw materials or minerals, as
contended by the petitioner;

(2)  
Whether said value shall be
determined by the cost of extraction of the raw materials or minerals from the
land or mines, or by the market value of said raw materials or minerals;

(3)  
Whether the aforementioned value
shall include that of the paper bag container in which the cement, as a
finished product, is placed for distribution and/or sale;

(4)  
Whether the disputed assessment
violates the terms of petitioner’s lease contract with the government, pur­suant
to which the 1-1/2% royalty therein stipulated shall be paid for the privilege
of exploring, mining, extracting and disposing of said raw materials or
minerals, based on the “actual market value” of the gross output of
limestone, which royalty shall be due and payable upon the removal of a mineral
products from the locality where mined; and

(5)  
Whether petitioner is liable for
the payment of surcharge.

The first question is far from being one of first im­pression.  It has already been settled adversely to res­pondent
herein.  In CEPOC v. Commissioner of Int.
Revenue,^[2]
this Court, speaking through Mr. Justice Barrera, held:

“Ad valorem tax is a tax not on the
minerals, but upon the privilege of severing or extracting the same from the
earth, the government’s right to exact the said impost springing from the Regalian theory of State ownership of its natural
resources.” xxx

“xxx While cement is composed of 80%
minerals, it is not merely an admixture or blending of raw materials, as lime,
silica, shale and others.  It is the
result of a definite process – the crushing of minerals, grinding, mixing, calcining, cooling, adding of retarder or raw gypsum. 
In short, before cement reaches its saleable form, the minerals had
already undergone a chemical change through manufacturing process.  This could not have been the state of
“mineral products” that the law contemplates for purposes of imposing
the ad valorem tax. 
xxx this tax is imposed on the privilege of
extracting or severing the minerals from the mines.  To our minds, therefore, the inclusion of the
term mineral products is intended to comprehend cases where the mined or
quarried elements may not be usable in its original state without application
of simple treatments xxx which process does not necessarily involve the change
or transformation of the raw materials into a composite distinct product.  xxx While the
selling price of cement may reflect the actual market value of cement, said
selling price cannot be taken as the market value also of the minerals
composing the cement.  And it was not the
cement that was mined, only the minerals composing the finished product.”

We ratified this view in denying the
motion for reconsideration of our decision in the same case.  In the language of Mr. Justice Reyes
(J.B.L.):

“xxx the ad valorem
tax in question should be based on the actual market value of the quar­ried
minerals used in producing cement, x x x the law intended to impose the ad valorem
tax upon the market value of the component mineral products in their original
state before processing into cement.  xxx
The law does not Impose a tax on cement qua cement, but on mineral
products, at least 80% of which must be minerals extracted by the lessee,
concessionaire or owner of mineral lands.

“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.  What it did declare is that, while cement is
a mineral product, it is no longer in the state or condition contemplated by
the law; hence the market value of the cement could not be the basis for
computing the ad valorem tax, since the ad valorem tax is a severance tax, i.e., a charge upon the
privilege of severing or extracting minerals from the earth, (Dec. p. 4) and is
due and payable upon removal of the mineral product from its bed or mine.

Soon later, we had occasion to reiterate that view.^[3]

On the second question, petitioner’s practice of computing the ad
valorem tax on the basis of the “cost of
pro­duction” of the raw materials or minerals extracted from its mines,
contravenes Section 243 of the Tax Code, read­ing:

“Ad valorem
taxes on output of mineral lands not covered by lease.  There shall be assessed and collected on the actual
market value of the annual gross output of the minerals or mineral products
extracted or produced from all mineral lands, not covered by lease an ad
valorem tax, payable to the Commissioner of
Internal Revenue, in the amount of one and one-half per centum of the value of
said output.

“Before the minerals or mineral products are removed from the
mines, the Commissioner of Internal Revenue or his representatives shall first
be notified of such removal on a form prescribed for the purpose.”

Pursuant to this provision, the ad valorem
tax is com­puted on the “actual market value of the minerals or
mineral products extracted or produced from all mineral lands”.  In other words, the assessment shall be
based, not upon the cost of production or extraction of said minerals or
mineral products, but on the price which the same – before or with­out
undergoing a process of manufacture – would command in the ordinary course of
business, that is to say, when of­fered for sale by one willing to sell, but
not under compulsion to sell, and purchased by another who is willing to buy,
but under no obligation to purchase.

As a consequence, the third question must be settled in favor of
petitioner herein.  In other words, the
cost of the paper bag container, in which the finished product or cement is
placed, for sale to the public, should not be in­cluded in the computation of
the ad valorem tax and/or royalty
collectible by the Government.

We need not discuss the alleged impairment of the obli­gations
under petitioner’s lease contract with the Government^[4] –
involved in the fourth question – inasmuch as said contract is in conformity with
our interpretation of section 243 of the Tax Code, although not in accord with
that of respondent herein.  It should be
understood, however, that the assessment shall be based on the actual market
value of the mineral products upon extraction thereof from the mines, not
on the cost of such extraction.

As regards the surcharge of 25% included in the dis­puted
assessment, petitioner maintains that it is not liable therefor,
because it had acted in good faith.  More
speci­fically, petitioner would have us believe that it merely did what it had
done “in the early part of 1957,” namely, pay­ing the ad valorem tax “on the value of the minerals
extracted from its mines”, to which – petitioner intimates – respond­ent
had seemingly acquiesced.  Predicated
upon this premise, petitioner claims to have acted in good faith, because of
which – it concludes – it should not be required to pay the statutory surcharge
of 25%, or, the same should, at least, be reduced.

Insofar as the difference between the value of cement, as
finished product, and that of the minerals or raw materials extracted from its
mines is concerned, there can be no surcharge, for, as above stated, the
assessment of the 1-1/2% ad valorem tax
must be based on the value of said raw materials, upon extraction
thereof from the land, not on the value of the said finished product.

As regards, however, the difference between the cost of
extraction of said raw materials, upon which petitioner’s returns were
based, and the actual market value of said raw materials, on which the
tax is due, petitioner can not claim good faith.  Indeed, the language of said section 243 of
the Tax Code is plain, clear and simple. 
It explicitly declares that the tax shall be assessed and collected on
the “actual market value x x x of the minerals and mineral products ex­tracted or
produced from all mineral lands.” Petitioner has not even tried to show it
earnestly believed that “actual market value” and “cost of
production” or “cost of extraction” have identical connotations.  Moreover, there is every reason to believe
that it knew the difference between the one and the other.  Its own brief reveals that it had a correct
notion of the aforementioned provision of its lease contract with the Government,
which is substantially identical to the import of said section 243 of Tax Code.

At any rate, pursuant to the second paragraph of section 245 of
the same Code:

 “In case the royalties
or ad valorem taxes are not paid within
the period prescribed above, there shall be added thereto a surcharge of
twenty-five per centum.  Where a false or
frau­dulent return is made, there shall be added to the royalties or ad valorem taxes a surcharge of fifty per centum of
their amount.  The surcharge so added
shall be collected in the same manner and as part of the royalties or ad
valorem taxes, as the case may be.”

The 25% surcharge thus prescribed for the late payment of the
royalties and the ad valorem tax, when
contrasted with the 50% surcharge impose “where a false or fraudulent
return is made,” strongly suggests that bad faith is not essential
for the imposition of the 25% surcharge.

This becomes more apparent when we consider that the surcharge is
increased to 50%, where the return is “false,” a condition which may
exist without bad faith.  In fact, if it
existed, the return would be, not merely “false,” but, also
fraudulent.

Then again, said section 245 does not merely vest in respondent
the authority or discretion to impose the 25% surcharge.  The same is imposed by law itself.  In this res­pect, it is analogous to the 25%
surcharge prescribed for failure to pay the “percentage tax on any
business” within the time fixed by law,^[5]
the collection of which has been held to be mandatory and on which respondent
has no discretion.^[6]

In conclusion, petitioner is bound to pay the 1-1-1/2% ad valorem tax on the actual market value of the
minerals or mineral products extracted from its mines, with a 25% surcharge for
failure to make said payment within the prescribed time.  No evidence having been introduced, however,
on said actual market value, the records are hereby re­manded to the Court of
Tax Appeals, for the reception of evidence and further proceedings not
inconsistent with this decision.  The
cost of this instance shall be borne by the petitioner, Republic Cement
Corporation.

IT IS SO ORDERED.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,
Castro, and Angeles, JJ.,
concur.

Fernando, J., took no part.

^[1]
In the aggregate sum of P23,389,478.03.

^[2]
L-18649, Feb. 27, 1965.

^[3]
CEPOC v. Comm. of Int. Rev., L-22605, Jan. 17, 1968.

^[4]
“The LESSEE shall pay for the privilege of exploring, developing, mining,
extracting and disposing of the limestone (or silica or shale, as the case may
be) and other minerals belonging to the same group in the lands covered by this
lease, to the provincial, city or deputy provincial treasurer of the province
or city where the mining claims are situated x x x and to the Government of the Philippines, thru the
Collector of Internal Revenue or his duly authorized representative, a royalty
of one and one-half per centum (1-1/2%) of the actual market value of the gross
output of limestone (or silica or shale, as the case may be) and of all other
minerals extracted from, or mineral products of, mine­ral lands of the fifth
group as provided for in the Mining Act, as amended, and covered by this
lease.  Before the minerals or mineral
products are removed from the mines, the Collector of Internal Revenue or his
representative shall first be notified of such removal by the Lessee or his duly
authorized representative on the form prescribed for the pur­pose.  The royalties shall be due and payable upon
the re­moval of the mineral products from the locality where mined.”

^[5]
If the percentage tax on any business is not paid within the time specified
above, the amount of the tax shall be increased by twenty-five per centum, the
increment to be a part of the tax.” (Second paragraph of
Section 183 of the Tax Code).

^[6]
Lim Co Chu v. Posadas,
47 Phil. 460; Kopel (Phil.) Inc. v. Collector
of Int. Rev., 87 Phil. 348; Republic v. Luzon Industrial Corp., 102
Phil. 189,193.