G.R. No. L-25602. February 18, 1970
REPUBLIC FLOUR MILLS, INC., PETITIONER, VS. THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, RESPONDENTS.
REYES, J.B.L., J.:
Appeal by the Republic Flour Mills from the decision of the Court
of Tax Appeals (in CTA Case No. 1151) on the sole question of whether or not in
computing the manufacturer’s sales tax due on the flour it manufactured and
sold in 1959, wherein wheat grains imported tax-free in 1958 were utilized,
the cost of said wheat grains is deductible.
As stipulated by the parties and found by the court below, the
facts of this case are briefly as follows:
In 1957, the Republic Flour Mills, Inc., a domestic corporation
engaged in the business of manufacturing flour, was granted tax – exemption
privileges as a new and necessary industry pursuant to Republic Act 901,[1] commencing on 28 January
1957 to continue as
a diminishing exemption until 31 December 1962.[2]
In 1958, the corporation imported a quantity of wheat grains,
part of which it was not able to mill and use in the business that year, so
that by 1 January 1959 the corporation carried a surplus of P1,486,616.41 worth
of wheat grains from the previous year’s importation. These surplus grains were finally utilized
and manufactured into flour and sold in 1959.
For the year 1959, the corporation paid manufacturer’s sales tax on its
produce in the sum of P37,275.55, in the computation of which the cost of the
wheat left over from the 1958 importation was treated as a deductible item from
the gross sales in 1959.
On 28 March 1961,
the Commissioner of Internal Revenue assessed
the corporation of deficiency tax for 1959 in the total sum of P23,170.17. The corporation requested a reinvestigation
of the assessment, and when it
was denied filed a petition for review in
the Court of Tax Appeals (CTA Case No. 1151) to contest the assessment
of advance sales tax on the
wheat grains imported tax-free in 1958 and the disallowance of the deduction of
the cost of said wheat grains from its
gross sales of flour in 1959.
Respondent Commissioner
of Internal Revenue defended and
maintained the assessment, on the ground that by 1959 the raw materials
used by petitioner in its tax-exempt industry were already subject to payment of 10% tax
thereon. During the hearing, the parties entered into a Partial Stipulation
of facts, the pertinent provisions of
which are the following:
“12. That the legal issue is whether or not the cost
of raw materials imported tax-free in
the year 1958 which raw
materials were utilized in the year 1959 for the manufacture of flour
sold in 1959, is deductible from
the gross sales in the year 1959;
“13. If the legal question before this
Honorable Court should be resolved in
the affirmative, Petitioner’s tax liability shall be P3,288.16 computed
as follows:
Net sales——————————— P21,011,818.17
Deduct: Cost of raw materials used for
flour (including tax-free raw materials) 15,310,806.74
Taxable gross sales——————- 5,701,011.43
7% tax thereon————————– 399,070.80
10% of said tax ————————- P 39,907.08
Less: Amount of Tax paid ———– 37,276.55
Deficiency sales tax —————— 2,630.53
Plus 25% surcharge —————— 657.63
TOTAL AMOUNT PAYABLE ——– P 3,288.16
“14. On the
other hand, if the question is resolved
in the negative, petitioner’s tax
liability shall be P24,587.98 computed as
follows:
Net sales………………………………….. P21,011,818.17
Deduct: Cost of raw materials used
for flour…………………………………….. P15,310.806.74
Less: Cost of tax-free
raw
materials…………………………….. 2,434,264.24
12,876,542.50
Taxable gross sales…………………… P8,135,275.67
7% tax thereon …………………………. 569,469.30
10% of said tax …………………………. 56,946.93
Less amount paid ……………………… P 37,276.55
Deficiency sales tax due ……………. 19,670.38
Plus 25% surcharge ………………….. 4,917.60
TOTAL AMOUNT DUE & COLLECTIBLE P
24,587.98
On 12 December 1965, the
Court of Tax Appeals sustained the correctness of the disputed assessment, and
petitioner corporation was ordered to pay the sum of P24,587.98
as deficiency sales tax and surcharge.
Hence the filing by petitioner of the present appeal, on the same legal
issue litigated by the parties in the court below.
It may be observed from the stipulated facts quoted above that
the issue in this case has nothing to do with the enforcement or exercise of
the tax-exemption privileges granted to the petitioner. The point in controversy is only whether or
not the cost of the tax-free wheat grains used in the manufacture of flour,
which is also tax-exempt, is a deductible item for purposes of computing the
percentage tax (10%) admittedly due on the said manufactured product in 1959.
Disputing the assessment of deficiency tax by the respondent
Commissioner of Internal Revenue, herein petitioner insists that the cost of
imported tax-free wheat grains is a deductible item from its gross sales of
the flour, pursuant to Section 186-A of the Internal revenue Code, which reads:
“SEC. 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.
“
Respondent Commissioner refutes this
contention, saying that, as defined by the Internal Revenue Office, the term
“tax-free product” mentioned in
the above-quoted Section 185-A refers to raw materials purchased from
tax-exempt industries,[3]
whereas the wheat grains involved in the case, although used by a tax-exempt
industry, were not acquired from one enjoying tax-exemption privilege under our
laws.
In the resolution of the long issue in this case, it is
worthwhile to mention that prior to 22
June 1957 the prevailing rule on the matter was to allow the cost
of raw materials used in the manufacture of another article to be deducted from
gross sales, whenever such raw materials had been subjected to sales tax. The reason therefor,
as expressed by this Court, was to preclude a second assessment of the
percentage tax on the raw materials.[4]
This ruling finds basis in Section 186 of the Tax Code which reads:
“Sec. 186.
Percentage tax on
sales of other articles. — There shall be levied, assessed and
collected once only on every original sale, barter, exchange, and similar
transaction either for nominal or valuable considerations, intended to transfer
ownership of, or title to, the articles not enumerated in sections one hundred
and eighty-four and one hundred and eighty-five a tax equivalent to seven par
centum of the gross selling price or gross value in money of the articles so
sold, bartered, exchanged or transferred, such tax to be paid by the manufacturer or producer: 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.
x x x x x x
x x x
x x
x x x
x.”
(Emphasis supplied)
With the establishment of tax-exempt industries in the mid-50s,
enforcement of the foregoing provision must have created a peculiar problem, so
much so that on 22 June 1957 the legislature enacted Republic Act 2025, which
inserted Section 186-A in the Tax Code, expressly constituting the value of
tax-free products to be a deductible item from the gross sales of the finished
goods manufactured out of the same.
Cast against this background, We agree with the petitioner that there is
actually no cause here calling for an administrative
definition or interpretation of Section 186-A.
For no reason exists to
read into the provision a qualification
that is not there, nor to give
to the phrase “tax-free product” a meaning other than what it
ordinarily and commonly conveys — a material or article exempted from payment
of tax.
The respondent Commissioner himself could supply no plausible
reason for excluding tax-free imported raw materials from the coverage of the
term “tax -free” product other than the lame argument that wheat
grains are not a “product” because they are not made out of another article
(V. B.I.R. Circular No. V-252, 15 July
1957).
The Commissioner’s stand, upheld by the Tax Court, runs contrary
to the legal definition of the term “product” which covers
“anything that is produced, whether as the result of generation, growth,
labor or thought” (Molina vs. Rafferty, 38 Phil. 171; 50 C. J. S., pages
631-632). If, as held in the case cited, fish were agricultural product,
no reason is seen why wheat grains should not equally be products of agriculture. Indeed, if the Commissioner’s definition were
correct, it would be logical to expect that Section 186-A of the Tax Code (ante),
instead of referring to “a tax free product” utilized in the
manufacture of other articles, would have proclaimed the deductibility of the
value of “products of a tax exempt
industry . . . utilized in the
manufacture or production of any article “.
Further, it must not be overlooked that the exemption granted to
the petitioner covered not only the sales tax of the manufactured product but
also the sales tax “on raw materials and supplies to be used exclusively
in the manufacture of such, (exempt) products” (Brief for Appellee, page 1).
To bar the deductibility of the value of such raw materials is to tear
away the tax exemption from sales tax on said materials Indeed, if, as is
conceded, these wheat grains were allowed to enter in 1958 as exempt from
paying advance sales tax, no reason exists why the value of this same material
should be subjected to tax just because they were milled in 1959 and not in the
year of importation.
That petitioner’s manufactured flour would be subject in 1959 to
only a part of the normal sales tax, pursuant to Republic Act 901, would not
alter the principles herein established.
It is true that in the construction of tax statutes tax exemptions
(and deductions are of this nature) are not favored in the law, and are
construed strictissimi juris against the taxpayer.[5]
However, it is equally a recognized
principle that where the provision of the law is clear and unambiguous,
so that there is no occasion for
the court’s seeking the legislative intent, the law must be taken as it is, devoid of judicial
addition or subtraction.[6] In this case, we find the provision
of Section 186-A — “whenever a tax free product is utilized,
etc.” — all encompassing to comprehend tax-free raw materials, even if
imported. Where the law provided no
qualification for the granting of the privilege, the court is not at liberty to
supply any.
WHEREFORE, and for the foregoing considerations, the decision
appealed from is reversed and set
aside, and, in accordance with the
stipulation of the parties, petitioner is hereby ordered to pay to respondent Commissioner the sum of P3,288.16 as deficiency
tax, with legal interest thereon from the date the tax became due.[7] No
costs.
Concepcion, C.J., Dizon,
Makalintal, Zaldivar,
Sanchez, Ruiz Castro, Fernando, Teehankee, Barredo, and Villamor, JJ., concur.
[1]
The exemption therein granted covers
the fixed and privileged tax on
business, percentage tax on sales of the manufactured products, and advance
sales tax on raw materials and supplies to be used exclusively in the production of flour (pages 14-15, Rollo).
[2]
For 1958, the tax exemption is 100%;
90% for 1959; 75% for 1960; 50% for
1961; and 10% for 1962 (Sec. 1, Rep. Act 901).
[3]
Gen. Circular No. V-252, 15 July 1957.
[4]
Tan Chiu vs. Collector, L-15008, 28 January 1961, 1 SCRA 301.
[5]
E. Rodriguez, Inc. vs. Collector, L-23041, 31 July 1969; Commissioner vs. Guerrero, L-20942, 22
Sept. 1967, 21 SCRA 180; Philippine
Guaranty Co. vs. Commissioner, L-22074, 6 Sept. 1965; La Carlota Sugar Central vs. Jimenez, L-12436, 31 May 1961, 1 SCRA 295.
[6]
1 Mertens, Law of Fed. Income Taxation, page 59, and
cases therein cited.
[7]
Central Azucarera
de San Pedro vs. Court of Tax
Appeals, et al., L-23236 & L-23254, 31 May 1967, 20 SCRA 334, reiterated in Heald
Lumber Co. vs. Tabios, et al., L-23123, 30 Sept. 1969.