COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. CENTRAL AZUCARERA DON PEDRO, RESPONDENT.

From the decision of the Court of Tax Appeals (in C.T.A. Case No. 387),
absolving respondent Central Azucarera Don Pedro from liability for the
payment of P33,696.60 as specific tax assessed by him, petitioner
Commissioner of Internal Revenue interposed this petition for review.

Respondent is a domestic corporation, duly established and organized
under the laws of the Philippines, with principal place of business at
Nasugbu, Batangas. Among other things, it is authorized to operate a
duly registered distillery plant. Between the period from March 23,
1953 to August 13, 1954, respondent manufactured in its distillery,
284,423 proof liters of denatured alcohol, under a special formula, as
follows: “To every 100 gauge liters of rectified Alcohol of not less
than 100 degrees proof there shall be added 10 liters of Isoprophyl.”
This denatured alcohol was sold by respondent to the Pacific Products,
Inc. and the Pacific Industrial Manufacturing which used the same in
the manufacture of rubbing alcohol compound and other products
containing specially denatured alcohol as ingredient. The rubbing
alcohol compound produced by said buyers contains 70% alcohol and, as
appearing on the labels pasted to the containers (Exhs. 1 and 2), is
intended for use as “disinfectant, sterilization, sanitation, bathing,
massage, rubbing or other external uses.”

The preparation,
sale, and withdrawal of said denatured alcohol sold to said buyers was,
admittedly, with the permission and authority of petitioner through his
Denaturing Committee and, at the time of its sale to, and withdrawal by
said buyers, said committee never made any demand from respondent for
the payment of the specific tax in question. Respondent, on the other
hand, paid the corresponding sales tax on said denatured alcohol sold.

As already stated, the denaturization of said alcohol was done in
accordance with the aforementioned formula approved by petitioner. The
process of denaturization, as shown by Exhibits A to A-25, was
witnessed by a Denaturing Committee consisting of 3 members, all
representatives of petitioner. After the process of denaturization, but
during the same day, said committee accomplished denaturization
certificates (Exhs. A to A-25) attesting to the chief ingredients used,
the denaturing agent mixed, the amount of proof liters produced, and
the percentage of their alcoholic contents. The resulting denatured
alcohol was correspondingly recorded in an official Register Book
(Exhs. B. to B-9) under BIR Form No. 2.41, by the owner or manager of
respondent, and attested to by an Internal Revenue agent. The
denaturization certificates (Exhs. A to A-25), show that the denatured
alcohol was exempted from payment of specific tax by said Denaturing
Committee.

Later, however, on the basis of a report (Exh. 3)
dated May 26, 1955, of Internal Revenue Agents Mariano P. Uy and
Venancio V. Ona, petitioner wrote a letter dated May 30, 1955 (Exh. 4)
assessing and demanding from respondent the sums of P199,906.10 as
specific tax on said 284,423 proof liters of denatured alcohol and
P10,000.00 as compromise penalty.

Subsequently, after a
reinvestigation, and finding that out of the total of said 284,423
proof liters of denatured alcohol removed from respondent’s distillery,
only 48,138 proof liters were actually used by the Pacific Products,
Inc. and the Pacific Industrial Manufacturing in the production and
manufacture of rubbing alcohol compound, petitioner, on May 24, 1957,
wrote a letter (Exh. E), notifying respondent that the original
assessment and demand for specific tax against it was reduced from
P199,906.10 to P33,696.60, exclusive of the compromise penalty of
P10,000.00. It appears that the rest of the denatured alcohol amounting
to 236,285 proof liters, was utilized by said corporations in the
manufacture of shellac, varnish, lacquer, thinner, wood dye, glass
cleanser, and cleaning fluids.

On June 24, 1957, respondent
filed with the Court of Tax Appeals, a petition for review (Annex A),
praying that said assessment of specific tax made by petitioner against
it be declared illegal and void, and that it be absolved from any
liability therefor. To this petition, petitioner filed an answer (Annex
B) on July 12, 1957.

After the issues were joined, the case
was heard and, after hearing, the court, on February 28, 1958, rendered
a decision (Annex D) which, in pertinent part, reads:

* * * * * * *

“Granting
that the rubbing alcohol compound in controversy is subject to specific
tax, the petitioner maintains that it is not liable for the payment of
the same. Petitioner argues that under Section 124 of the National
Internal Revenue Code ‘specific taxes on domestic products shall be
paid by the manufacturer, producer, owner or person having possession
of the same * * * before removal from the place of production.’
Inasmuch as the rubbing alcohol compound is not a product of petitioner
but of Pacific Products, Inc. and Pacific Industrial Manufacturing, the
petitioner concludes that the said two corporations should be made to
pay the specific tax on the rubbing alcohol.

“We find this last alternative contention of the petitioner to be meritorious. It
is true that the denatured alcohol which forms the chief ingredient of
the rubbing alcohol compound, was manufactured, by the petitioner.
However, the denatured alcohol was never removed by the petitioner from
its distillery with the intention of evading the payment of specific
taxes thereon. On the contrary, the same was sold by the petitioner to
Pacific Products, Inc. and Pacific Industrial Manufacturing, and when
the said two corporations assumed control and possession of the
denatured alcohol, they acquired the ownership over the same. (Arts.
1477 and 1479, Civil Code of the Philippines.) Subsequently, with
the permission and authority of the respondent, they removed the
denatured alcohol from petitioner’s distillery, and with it as the
principal raw material, they manufactured the rubbing alcohol compound
on which the respondent assessed and now seeks to collect the disputed
specific tax. To our mind, it is clear that Pacific Products, Inc.
and Pacific Industrial Manufacturing, are the manufacturers, producers,
and or owners of the rubbing alcohol compound, and considering that the
taw (Sec. 124, National Internal Revenue Code) does not require the
specific tax to be paid immediately before the sale (Benito Garcia vs.
The Collector of Internal Revenue, 66 Phil. 4A1), we are of the opinion
and so hold that the said corporations who purchased the denatured
alcohol from the petitioner, are liable for the payment of the specific
tax in question, and not the petitioner herein.

Wherefore, the decision of respondent appealed from, should be, as it
is hereby reversed. Petitioner Central Azucarera Don Pedro is hereby
declared not liable for the payment of the sum of P33,696.60
representing specific tax assessed by the respondent, without prejudice
to whatever action the respondent may decide to take against the proper
party or parties liable therefor. Without pronouncement as to costs.”
(Emphasis supplied.)

On April 22, 1958
petitioner filed a motion for reconsideration of said decision, which
was denied by the court June 30, 1958. Hence this petition for review.

The only issue to be resolved in this case is whether respondent is
liable for the payment of specific tax on the denatured alcohol in
question sold by it to the aformentioned corporations and used by the
latter as chief ingredient in the manufacture and production of rubbing
alcohol.

While the legal question involved as set forth in
the preceding paragraph is clear enough, the factual basis seems a
little befuddled as to induce the charge made in respondent’s brief
(pages 56 to 57) that the petitioner has, in this appeal, introduced “a
belated twist * * * an entirely new and distinct issue of which Central
(herein respondent) was not timely advised at the time it entered into
trial before the Court of Tax Appeals.”

It would appear that
the first assessment made by petitioner on respondent was upon the
entire amount of denatured alcohol sold to the Pacific Products, Inc.
and Pacific Industrial Manufacturing in the total of 284,423 proof
liters for which specific tax amounting to P199,906.10 was demanded.
Later, after re-investigation, the assessment was reduced to P33,696.60
only and was based on the 48,138 proof liters which were actually used
in the manufacture of rubbing alcohol. Hence, it would seem clear that
the specific tax is being levied not as a result of the manufacture or
production, or sale of the denatured alcohol, but as a consequence of
its conversion or manufacture, by the purchasers, into rubbing alcohol.
Otherwise, if the specific tax was due upon the manufacture or
production of the denatured alcohol, what could be the purpose of
detailing a Denaturing Committee consisting of 3 representatives of
petitioner to watch and witness the whole process of denaturization in
accordance with a special formula approved by petitioner and of the
issuance by this committee of certificates of denaturization (Exhs. A
to A-25) to the effect that the denatured alcohol was exempted from
payment of specific tax? Or if the tax became due upon the sale of the
denatured alcohol, why was the payment of the tax not enforced, as
required by Section 124 of the National Internal Revenue Code
“immediately before removal (thereof) from the place of production,
since such removal was, as found by the trial court, with the
permission and authority of the respondent? And again, why was the
original assessment of P199,906.10 based on the total denatured alcohol
sold and removed, later reduced to P33,696.60 specifically limiting the
levy only to the amount of denatured alcohol converted into rubbing
alcohol?

There can be only one conclusion that could be
drawn from the actuations of petitioner, and that is, that the tax is
being imposed on the rubbing alcohol in accordance with Section 124, in
relation to Sections 127 and 133 of the National Internal Revenue Code,
reading in pertinent parts as follows:

“Sec. 124. Payment of specific tax on domestic products.—Specific
taxes on domestic products shall be paid by the manufacturer, producer,
owner, or person having possession of the same; and, except as
otherwise especially allowed, such taxes shall be paid immediately
before removal from the place of production.

“Sec. 127. Tax on preparations containing distilled spirits as chief ingredient.—Medicinal
preparations, flavoring extracts, and all other preparations, of which,
excluding water, distilled spirits form the chief ingredient, shall be
subject to the same tax as such chief ingredient. * * *.

“Sec. 133. Specific tax on distilled spirits.—*
* *. ‘Distilled spirits,’ as here used, include all substances known as
ethyl alcohol, hydrated oxide of ethyl, or spirits of wines, 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,” (As amended by Rep. Act No. 592, effective
January 1, 1951.)

There is no question that
the rubbing alcohol is a domestic product (Section 124) and a medicinal
and toilet preparation (see uses stated, in labels, Exhibits 1 and 2. supra;
section 127) of which, excluding water, distilled spirits (section 133)
form the chief ingredient. Admittedly, the Pacific Products, Inc. and
the Pacific Industrial Manufacturing, and not respondent, are the
manufacturers, producers, and owners of the rubbing alcohol. It follows
that they, and not the respondent, are the parties liable to the
payment of the corresponding specific tax (section 124).

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

Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, and Gutierrez David, JJ., concur.

Reyes, J.B.L., and Endencia, JJ., on leave, took no part.