ARMANDO L. ABAD, DOING BUSINESS AS REPUBLIC ALCOHOL DISTILLERY, PETITIONER, VS. COURT OF TAX APPEALS AND COMMISSIONER OF INTERNAL REVENUE, RESPONDENTS.

Separate appeals by both parties from a decision of the Court of Tax Appeals,
in its CTA Case No. 717, entitled “Armando L. Abad,
doing business under the trade name of Republic Alcohol Distillery, petitioner,
vs. Commissioner of Internal Revenue, respondent”.

Briefly, the facts, as gathered from the records of this case and as
stipulated by the parties, are:

Armando L. Abad is engaged in business as a
distiller and operates two (2) alcohol distilleries, a bonded warehouse and
bonded denaturing warehouse. During the period from January, 1955 to August,
1958, inclusive, he used the total sum of 836,483 proof liters of rectified or
ethyl alcohol^[1],
without paying the specific tax thereon, in the conversion into, and for the
production of, specially denatured alcohol. He produced said specially denatured
alcohol, in and from his bonded denaturing warehouse, in accordance with four
formulas, acquired by different grantees and duly approved by the Commissioner
of Internal Revenue, and sold the same to said grantees, who, in turn, used said
specially denatured alcohol as raw material in the manufacture of various
non-beverage industrial products, such as varnish, pre-mixed rice, solid alcohol
fuel, detergents, emulsifiers, industrial solvents, shellac, wood dye, thinner,
cleansing mixtures, embalming mixtures, barbershop disinfectants like Tonix and bayrum. These products
contain more than 50% ethyl alcohol by volume, excluding water.

During the same period of January, 1955 to August, 1958, Abad also produced and sold completely denatured alcohol of
not less than 180 degrees proof (ninety per cent absolute alcohol) for which he
paid the 7% sales tax on the gross sales; but in the computation of the sales
tax, he deducted the cost of ethyl alcohol purchased from suppliers and used in
the manufacture of said completely denatured alcohol, although the distillers
and sellers of said ethyl alcohol did not pay any specific tax nor did they
declare their sales for purposes of the sales tax imposed by Section 186 of the
Tax Code.

On December 12, 1958,
the Commissioner of Internal Revenue wrote a letter to Abad, assessing and demanding the following: (a) As specific tax on the rectified or ethyl alcohol used in the
production of specially denatured alcohol, computed as follows:

Year	Proof Liter	Rate	Specific Tax
1955………………………………………………………..	400,592	P0.70	P280,414.40
1956……………………………………………………….	330,051	“	231,035.70
1957……………………………………………………….	47,004	“	32,902.80
Jan. to Aug. 1958……………………………………..	58,836	0.45	26,476.20
TOTAL……………………………………………………..	836,438		P570,829.10

 

(b) As deficiency sales tax and surcharge on the gross selling price of
completely denatured alcohol, computed as follows:

Year	Gross Sales	Deductions	Taxable Sales
1955………………………………………………………	P193,303.75	P32,071.57	P161,237.18
1956……………………………………………………..	499,623.50	90,938.28	408,685.22
1957…………………………………………………….	1,565,714.83	151,082.31	1,414,632.32
Jan. to Aug. 1958…………………………………….	1,664,725.21	131,462.58	1,533,262.63
TOTAL……………………………………………………	P3,923,372.29	P405,554.74	P3,515,817.35
7% sales tax due on P3,517,817.35 ………..			P 246,247 .21
LESS: Sales tax already paid……………………			79,934.97
Deficiency Sales Tax………………………………..			P 166,312.24
25% surcharge………………………………………			41,578.06
TOTAL			P207,890.30

 

(c) P300.00 as compromise penalty for the loss of his books of accounts and
records.

In due time, after receipt of the above stated assessment and demand letter,
Abad contested it; and the case was elevated to the
Appellate Division of the Bureau of Internal Revenue. After due hearing therein,
the Commissioner of Internal Revenue, in a letter dated October 27, 1959,
reiterated his previous assessment; hence, Abad filed
his petition for review in the Court of Tax Appeals, disputing the validity of
the assessment.

After the filing of the usual answer by the Commissioner of Internal Revenue,
the parties submitted the case for decision on a stipulation of facts.

On the basis of this stipulation, the Tax Court rendered its decision, dated
January 4, 1963, ruling that it having been admitted that the 836,483 proof
liters of specially denatured alcohol^[2]
consist of 50% ethyl alcohol by volume, excluding water, distilled spirits
compose its chief ingredient; hence, it is subject to specific tax pursuant to
Section 127, in relation to Section 133, both of the Tax Code; that it also
having been admitted that said specially denatured alcohol was used as raw
materials in the manufacture of other products by the different grantees thereof
and not used in the operation of industries, it is not exempt from specific tax
under Section 128 of the same Code; and that it having been admitted further
that Abad himself sold and removed said alcohol, he
should be held liable for said specific tax, and not the grantees or buyers
thereof. The same decision, however, held petitioner Abad not liable for deficiency sales tax and surcharge,
ruling that when ethyl alcohol is sold for use in the production of completely
denatured alcohol it ceases to be liable for the specific tax imposed by Section
133 of the Tax Code, and, not being included among the articles taxable under
sections 184 and 185 of the same Code, the sales of said ethyl alcohol become
subject to sales tax under section 186; hence, for purposes of computing the
sales tax due on the sales of completely denatured alcohol pursuant to same
section 186, the total cost of said ethyl alcohol is deductible from the gross
selling price thereof, regardless of whether the specific or sales taxes thereon
had previously been paid or not. Said decision also held Abad not liable for the P300.00 compromise penalty for the
loss of his books of accounts and records, it having been admitted by respondent
Commissioner that the same can not be imposed without the consent of the
taxpayer, and Abad did not give his consent
thereto.

Petitioner Armando L. Abad, not satisfied with that
portion of the decision of the Tax Court holding him liable for specific tax on
the specially denatured alcohol, interposed his appeal to this Court, which was
docketed as G. R. No. L-20834; while respondent Commissioner of Internal Revenue
filed his separate appeal (which was docketed as G. R. No. L-20903) against that part of the decision holding Abad not liable for deficiency tax and surcharge.

We will first consider Abad’s appeal (G. R. No.
L-20834). In this connection, it is unnecessary to
decide whether or not specially denatured alcohol is
subject to specific tax, an issue which is immaterial and irrelevant to the
controversy.

The reason is that the specific tax was assessed on the 836,483 proof liters
of rectified or ethyl alcohol used in the production or manufacture of specially
denatured alcohol and not on the specially denatured alcohol itself. This is
evident from respondent Commissioner’s letter dated December 22, 1958, and subsequent letter dated
October 27, 1959, as
pointed out in the appealed decision (C.T.A. record, p. 173). The pertinent
portion of each letter is quoted below, for ready reference:

“It was also found that you failed to pay the specific tax due on the
rectified alcohol used in denaturing before removal from your distillery
premises, in violation of section 124, in relation to sections 127 and 128, all
of the National Internal Revenue Code.” (C.T.A. record, p. 6; BIR record, pp.
1-2, Annex A, Abad’s petition for review) (Emphasis
supplied)

“It may be stated by way of explanation that the specific tax was assessed on
the distilled spirits which were used in the production of denatured alcohol in
the Republic Alcohol Distillery denaturing plant at 270 F. Roxas, Grace Park, Caloocan, Rizal, x x x x x.”
(Annex “C”, Abad’s petition for review; CTA record, p.
58; BIR record, p. 108; underlining supplied for emphasis)

Hence, the real issue involved herein is whether or not the 836,483 proof
liters of rectified or ethyl alcohol used in the production or manufacture of
specially denatured alcohol is subject to specific tax, and to what extent
petitioner Abad is liable for the payment of such
tax.

During the period of time covered by the assessment of specific tax on the
rectified or ethyl alcohol in question, i.e., from January, 1955 to August,
1958, the provisions of the Tax Code governing specific taxes on rectified or
ethyl alcohol are Sections 124, 127 and 133 of said Tax Code, as amended, to
wit:

“SEC. 124. Payment of specific
tax on domestic products. –Sepcific tax on
domestic products shall be paid by the manufacturer, producer, owner, or person
having possession of the same; and, except as otherwise specially allowed, such
taxes shall be paid immediately before removal from the place of production.”
(National Internal Revenue Code)

“SEC. 127. Tax on preparations
containing distilled spirits as chief ingredient. – Medicinal
preparations, flavoring extracts, and all other preparations, except toilet
preparations, of which excluding water, distilled spirits form the chief
ingredient, shall be subject to the same tax as such chief ingredient.” x x x x
x x x x x
x x x x x
x x x x x
x

“SEC. 133. Specific tax on
distilled spirits. – On distilled spirits there shall be collected
subject to the provision of section one hundred and twenty-eight of this Act,
except as hereinafter provided, specific taxes as follows:

(a) If produced from sap of the nipa, coconut,
cassava, camote, or buri
palm, or from juice, syrup, sugar of the cane, per proof liter, seventy
centavos; x x x x x x
x x x x x
x x x x x
x x x x

‘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 and
mixtures; and the tax shall attach to this substance as soon as it is in
existence as such, whether it be subsequently separated as pure or impure
spirits, or be immediately or at any subsequent time transformed into any other
substances either in process of original production or by any subs0equent
process.” ^[3] (Emphasis
supplied)

x x x x x . (National Internal Revenue Code, as amended).

From Section 133 of the Tax Code, it cannot be disputed that rectified or
ethyl alcohol falls within the definition or enumeration of the term “distilled
spirits”, and is taxable as such. But during the period that transpired between
the enactment of Republic Act No. 592 (effective January 1, 1951) and the
enactment of Republic Act No. 1608 (in force from August 23, 1956 onward) the
specific tax did not attach to the alcohol upon its coming into existence;
hence, this Court has ruled that a producer of ethyl alcohol specially denatured
and sold to permittees of the Collector of Internal
Revenue is not liable for the tax, but that said tax is to be paid by the
producer of the taxable finished product (Commissioner of Internal Revenue vs.
Central Azucarera Don Pedro, L-14015, May 31, 1960; La
Tondeña, Inc. vs. Collector of Internal Revenue, G. R.
L-14336, April 30, 1964). In the La Tondeña case, this
Court expressly ruled that:

“Judgment. – This appellant is liable; but
we agree that its liability attached not upon its manufactured ethyl alcohol but
upon its medicinal product – the rubbing alcohol.

“Accordingly, in the instant case, above petitioner (La Tondeña) shall pay only the specific tax corresponding to
the quantity of rubbing alcohol it marketed or only on 35,298 proof liters. Needless to add, the appellant is not responsible for
taxes on the alcohol it sold to permittees of the
Internal Revenue Office.” (Emphasis supplied)

The Tax Court sought to differentiate the case of Central Azucarera Don Pedro from that of herein petitioner Abad by pointing out that, in the former, the specially
denatured alcohol “was removed by the buyers, while in the present case, the
removal was made by the petitioner himself” . We find this alleged difference to
be unsubstantial, because the parties expressly stipulated that Abad’s alcohol was manufactured and denatured “for the uses
applied for by the grantees thereof, and duly approved by the respondent
commissioner” (Stip. p. 4). Since the alcohol was
produced and denatured for the particular use of the grantees or permittees to whom it was sold, and conformably to their
requirements, the removal of the alcohol was done by Abad only as an agent of the buyers for whom the alcohol was
destined from the start. Removal by Abad, therefore,
was in law removal by the buyers, and the Central Don Pedro and the La Tondeña rulings by this Court are fully applicable.

During the period from January, 1955 to August 22, 1956, when Republic Act
1608 became effective, the record discloses that Abad
used for denaturation and sale the following
quantities of rectified or ethyl alcohol, computed as follows:

Year	Proof Liter	Rate	Specific Tax Assessed
1955…………………………………………………………………..	400,592	P0.70	P280,414.40
Jan. to Aug. 22, 1956……………………………………………	256,141	0.70	179,298.70
TOTAL………………………………………………………………..	656,733		P459,713.10

 

Following our rulings aforesaid, this last amount should be deducted from
appellant Abad’s tax liability, having been improperly
assessed against him.

Upon the other hand, when Republic Act No. 1608 reincorporated to Section 133
of the Tax Code the underlined proviso (ante, p. 7), it is evident that
distilled spirits, such as rectified or ethyl alcohol, produced or manufactured
after August 23, 1956 became subject to specific tax as soon as it came into
existence as such; and that the manufacturer, producer, owner, or person having
possession of the same at the time is liable for said specific tax (Sec. 124,
National Internal Revenue Code).

It appears that after August 22,
1956, petitioner Armando L. Abad was the
owner or producer of quantities of rectified or ethyl alcohol, computed as
follows:

Year	Proof Liter	Rate	Specific Tax Due
Aug. 23 to Dec. 31, 1956……………………………………………………	73,910	P0.70	P51,737.00
1957………………………………………………………………………………	47,004	0.70	32,902.80
Jan. to Aug. 1958 ……………………………………………………………	58,836	0.45	26,476.20
TOTAL……………………………………………………………………………	179,750		P111,116.00

 

And it being undisputed that said rectified or ethyl alcohol is distilled
spirits if within the meaning of Section 133 of the Tax Code ^[4]
,and that by Republic Act No. 1608 the specific tax
attaches to this substance as soon as it is in existence as such; then
petitioner Armando L. Abad should be required to pay
the above computed tax of P111,116.00 assessed on the 179,750 proof liters of
rectified or ethyl alcohol produced by him from August 23, 1956 to August of
1958.

However, appellant Abad claims exemption from
specific tax on the theory that the mixing of denatured alcohol with other
materials, resulting into rubbing alcohol, varnish, bayrum, lacquer, etc., constitutes use in arts in
industries, that is, frees the alcohol from Tax under Section 128 of the Tax
Code:

“SEC. 128 – Exemption in favor of domestic denatured alcohol. –
Domestic alcohol of not less than one hundred eighty degrees proof (ninety percentum absolute alcohol) may, when denatured, be
withdrawn from a registered distillery or bonded warehouse without the
prepayment of the specific tax prescribed in section 133, for the purpose of
being used for fuel, or light, or for use generally in the arts, industries,
hospitals sanitaria, and clinics or for research or experimental purposes, or
for the official use of the Government of the Republic of the Philippines or its
instrumentalities or political subdivisions. (As amended by Republic Act No.
1608, approved August 23, 1956)”

We agree with the Tax Court that this claim of appellant is untenable. Under
the facts, as stipulated, what is used or is marketed for use in arts and
industries is not the denatured alcohol (as required by Section 128), since it
loses its identity upon mixture or combination with other materials; what comes
into use is the resultant product, which is different from the denatured alcohol
itself.

The argument that a narrow interpretation of the exemption has favored
imported isopropyl alcohol is a consideration that should be addressed to the
Legislature and not to the courts that are not authorized to view laws from the
standpoint of their results. It is well settled that tax exemptions, as
exceptions to the general rule, are not favored, and can not be presumed nor
created by implication (Collector vs. Manila Jockey Club, 98 Phil. 670, 676;
Song Kiat Chocolate Factory vs. Central Bank, 54 Off.
Gaz.
615).

Lastly, the claim that the tax on distilled spirits is collectible only on
spirits fit for consumption has been also rejected by our decision in La Tondeña vs. Collector of Internal Revenue, G.R. No. L-14336,
April 30, 1964.

Coming now to the appeal of the Commissioner of Internal Revenue (G. R.
L-20903): the only issue therein posed is whether or not the cost of ethyl
alcohol purchased from other distilleries and used in the manufacture of
completely denatured alcohol by petitioner Abad is
deductible from the gross selling price of said completely denatured alcohol in
computing the 7% sales tax imposed by Section 186 of the National Internal
Revenue Code. In deciding this point, the lower court opined that it was so
deductible.

Respondent Commissioner assails the conclusion of the lower court, contending
that under Section 164 of the Tax Code the purpose of the requirement of posting
a bond before ethyl alcohol is withdrawn or removed for denaturing for use as
fuel, light, and other purposes enumerated in Section 128 of the same Code is to
free the distiller or producer thereof from paying any internal revenue tax,
whether specific tax or percentage sales tax; that the sale of said ethyl
alcohol is not subject to sales tax under Section 186 nor under Section 189 of
the same Code, it not being one of the articles taxable under the latter
section; and this coupled with the admitted fact that the distiller or producer
of said ethyl alcohol did not declare their sales, nor paid the sales tax
thereon (citing the Tan Chiu case), petitioner Abad is
precluded from deducting the cost of said ethyl alcohol from the gross selling
price of the completely denatured alcohol, for purposes of computing the 7%
sales tax imposed by Section 186 of the Tax Code.

If the completely denatured alcohol is free from specific tax, yet the ethyl
alcohol from which it is made, though not listed as subject to sales tax under
Sections 184, 185 and 185-A of the Tax Code, becomes subject to sales tax under
the first part of Section 186, and its cost is deductible in the computation of
the sales tax under the last part or proviso of the same section. It will be
noted that the terms of Section 186 (first portion) are sufficiently broad to
cover sales of such ethyl alcohol:

“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 per 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 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.” (first paragraph, National
Internal Revenue Code, as amended)

The Tax Court, therefore, correctly held that the sales of said ethyl alcohol
to Abad are subject to sales tax under the first part
of Section 186, already quoted; wherefore, the cost thereof is deductible from
Abad’s gross selling price of the completely denatured
alcohol made from it, for purposes of computing the 7% sales tax due on the
latter.

The same result obtains when it is considered that, under Section 188(a) of
the Tax Code, transactions in commodities subject to taxes under Title IV of the
Code (specific taxes) are to be excluded in computing the sales tax under
Sections 184 to 186. Since the alcohol was purchased by Abad before it was denatured, it was then subject to
specific tax, and its cost should be deducted from the computation of the sales
tax due on the sale of the denatured alcohol.

The fact that Abad’s suppliers of ethyl alcohol did
not pay sales tax thereon is no reason for burdening Abad with said tax.

The Commissioner’s contention that the bond required under Section 164 is
answerable for all kinds of internal revenue taxes is too far-fetched and not
tenable because the evident purpose of said bond is to make it answerable only
for specific taxes in the event that the producer of the denatured alcohol will
not use the distilled spirits for the purpose or the uses described in Section
128 (light, fuel, etc.), when it is allowed to be withdrawn under bond.

“SEC. 128. Exemption in favor of domestic
denatured alcohol – Domestic alcohol of not less than one hundred eighty
degrees proof (ninety per centum absolute alcohol) may, when denatured, be
withdrawn from a registered distillery or bonded warehouse without the
prepayment of the specific tax prescribed in section 133, for the purpose of
being used for fuel, or light, or for use generally in the arts, industries,
hospitals, sanitaria, and clinics, or for research or experimental purposes, or
for the official use of the Government of the Republic of the Philippines or its
instrumentalities or political subdivisions.(As amended by Republic Act No.
1608, approved Aug. 23, 1956).”

“SEC. 164. Requirements
incident to process of denaturing alcohol. – Where alcohol is
withdrawn for denaturing for purposes enumerated in section 128* of this Tax
Code, or a motor fuel, the process of denaturing shall be effected either on the
distillery premises or in a bonded warehouse designated by the Commissioner of
Internal Revenue for denaturing purposes only. To such warehouses, alcohol may
be transferred under bond under conditions prescribed in the regulations of the
Department of Finance. (As amended by Republic Act No. 1608, approved Aug. 23,
1956)”

The Tan Chiu case, G. R. No. L-15008, January 28,
1961, relied upon by the Commissioner of Internal Revenue is not applicable to
the case at bar, the ruling in that case being that the cost of the raw
materials was not allowed to be deducted from the gross selling price of the
finished product, not because there was non-payment of the sales tax, but
because the raw materials there were expressly exempted from taxes as used by
new and necessary industries (Rep. Act No. 901), and no sales tax was naturally
expected to be paid thereon.

WHEREFORE, the decision of the Court of Tax Appeals is
modified, as follows:

In G. R. No. L-20834, petitioner-appellant Armando
L. Abad, doing business under the trade name of
Republic Alcohol Distillery, is ordered to pay only the amount of P111,116.00 as
specific tax on 179,750 proof liters of rectified or ethyl alcohol.

In G. R. No. L-10903, that part of the same decision
of the Tax Court appealed by respondent-appellant Commissioner of Internal
Revenue should be, as it is hereby, affirmed. Without costs in
either appeal.

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

Barrera, J., on leave.

^[1] As appearing in the records, the
Commissioner of Internal Revenue or his subordinates interchanged loosely in
using the terms “rectified” or “ethyl” alcohol.

^[2] Should have been rectified or ethyl
alcohol, as will be shown hereafter.

^[3] The underlined phrase was deleted by
Republic Act No. 592, effective January 1, 1951, but was reinserted by Republic
Act No. 1608, effective August 23, 1956; See Collector of Internal Revenue vs.
La Tondeña, Inc., G. R. No. L-10431, July 31, 1962.

^[4] Collector vs. La Tondeña, G.R. No. L-10431,
July 31,
1962; La Tondeña
vs. Collector, G.R. No. L-14336, April 30, 1964.