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

The respondent Armando L. Abad, doing business under the name
Republic Alcohol Distillery, is a manufacturer and seller of denatured
alcohol.  On August 14, 1958 he applied
for the denaturation of 33,000 gauge liters of rectified alcohol, upon the
following formula prescribed by regulation of the Bureau of Internal Revenue:

“To every one hundred (100) liters of ethyl alcohol of not
less than 180 degrees proof, there shall be added two (2) liters of methanol
and one-half (1/2) liter of pyridine.”

His application was granted. 
So on August 21 a denatur­ing committee from the BIR went to his
warehouse in Grace Park, Caloocan, Rizal to supervise the denaturation of the
alcohol.

In a surprise inspection made of the respondent’s establishment
on August 25, 1958, however, a team of BIR inspectors found that the alcohol
had not been completely denatured and that it could still be used for
compounding liquors.  The team also
discovered that 22,580 gauge liters had been removed from the respondent’s
warehouse and sold, and only 10,480 gauge liters were left.

On September 2, 1958 the petitioner Commissioner of Internal
Revenue demanded from the respondent the payment of 19, 204.20 as specific tax
on 22,580 gauge liters of alcohol plus P10,000 as compromise penalty. Three
days later the 10,480 gauge liters of alcohol was again denatured to make it
conform to the BIR formula for denatured alcohol.

Domestic alcohol, when denatured and used for industrial
purposes, is exempt from the payment of specific tax.^[1]  In the case at bar, the petitioner insisted
on the assessment of the tax on the basis of a finding that the respondent’s
alcohol had not been completely denatured so as to render it unfit for human
con­sumption, citing a laboratory examination made by the National Bureau of
Investigation which showed that the alcohol could still be used for making
Chinese wines “without immediate danger to consumer.”

The Tax Court did not find it necessary to pass on this
point.  In its view no liability for the
removal of the alcohol could be imputed to the respondent as the whole process
of denaturation was undertaken by a committee of the BIR without the
intervention of the respondent.  If the
alcohol had not in fact been completely denatured, the blame should be laid on
the denaturing committee over which “[the respondent] had no
control,” as indeed it would be unjust to make him liable for its
negligence.  Said the Tax Court:

“Samples of the denaturants were taken from [the respondent’s]
bonded denaturing warehouse by a BIR employee, Mr. Manuel Cariñgal, and brought
to the BIR Laboratory Section for analysis (p. 79, t. s. n.) and the reports of
analysis were duly accomplished (Exhibits E-1, E-2 and E-3), showing that the
denaturants passed the commercial grade and could he used for denaturing (pp.
80-82, t.s.n.). Upon receipt of the Laboratory analysis reports on the
denaturants, the Chief, Alcohol Tax Division, pursuant to Memorandum Order No.
V-799 of the Bureau of Inter­nal Revenue, dated January 29, 1958, direc­ted the
Denaturing Committee, composed of Mr. Marcelino de Leon, Chairman, and Drug
Inspector Mercedes Ylagan and Mr. Inocencio Gonzales, Jr., Chief, Laboratory
Section, Members, who are all internal revenue officers, to proceed on August
21, 1958 to the bonded denaturing warehouse of the petitioner at Grace Park,
Caloocan, Rizal and to denature the 33,000 gauge liters of rectified ethyl
alcohol of [the respon­dent].  The
Denaturing Committee denatured the rectified alcohol of the [respondent] in
accordance with the standard procedures prescribed by the internal revenue law
and regulations (please see testimony of Mr. Marcelino de Leon, pp. 27-77,
t.s.n., and testimony of Mr. Inocencio Gonzales, Jr., pp. 77-98, t.s.n.), and
after the denatura­tion the said Denaturing Committee took, through the
manholes on top of the three denaturing tanks used in the denaturation, two
samples from each of the three tanks and sealed the said samples, on which
seals were affixed the signature of the members of the Denaturing Committee and
that of the resident manager of the bonded denaturing plant.  One set of the samples was left at the de­naturing
plant and the other set was taken by the Denaturing Committee to the Laboratory
Section of the Bureau of Internal Revenue for analysis.  After the denaturation and before leaving the
premises, the Denaturing Committee duly sealed all the openings of the
denaturing tanks.  The quan­tity of the
rectified alcohol and the denaturants used in denaturation were duly entered in
the Of­ficial Register Book of the denaturing plant (Ex­hibit 1) by the BIR
storekeeper-gauger and the resident manager of the plant, and the members of
the Denaturing Committee accomplished the requisite certificates of
denaturation (Exhibits G, G-1 and C-2). 
The samples of the denatured alcohol taken by the Denaturing Committee
were brought to the BIR Laboratory Section and upon analysis, were found to be
duly denatured. (p. 91, t.s.n.).”

 The Petitioner assails
these findings.  It is not true, he
argues, that the respondent had no hand in the denaturation of his
alcohol.  “The process of denaturing
had its inception from the time the respondent filed with the bureau of
Internal Revenue his application to denature alcohol and said process is a
Continuing single act, including all its other incidents, such as the analysis
and identification of the denaturants, the accomplish­ment of the covering
report of the Denaturing Committee, and the making of the entries in the books
of the respondent.  Moreover, the
respondent owns the denaturing plant and holds the keys to the plant and its
various rooms and compartments (pp. 107, 108); his employees and laborers
provide the rectified al­cohol and the denaturants to the Denaturing Committee
and keep and make the entries in the books and other records required by the
law and regulations governing the denaturation of alcohol.  (Pp. 11, 115, 122, 123, t.s.n.)  Certainly, the respondent cannot absolutely
divorce himself from all these intricately interwoven acts and claim that he
had nothing to do with the denaturing process.”^[2]  Indeed, the claim is made that there is no
evidence to show that the denaturants used by the committee on August 21, 1958
were the same ones which the day before had been analyzed and found
satisfactory for the purpose, thereby insinuating that there had been a
substitution made.^[3]

After analyzing the entire evidence we think that, on the whole,
the Tax Court’s findings as to the steps taken in the denaturation of the
alcohol are correct.  Thus it appears
that before the actual process of denaturation was begun, a BIR agent took
samples of the denaturants for analysis and then sealed the containers by
affixing a label signed by the chief of the alcohol and prohibited drugs
division of the BIR.  Carbon copies of
these labels were presented in evidence (exhibits F, F-1 and F-2), but the
petitioner claims that it was possible that the labels which the denaturing
committee found attached to the containers were not the originals of those
presented since the chairman of the committee admitted that he did not see the
labels when they were typewritten and that blank forms of these labels were
available to anyone in the BIR.

The fact remains, however, that the denaturing commit­tee found
the containers properly sealed, with the labels intact (the labels were duly
signed), and it was not until the committee members had satisfied themselves
that the contents were really methanol and pyridine did they begin the process
of denaturation.

What is more, according to the evidence,^[4]
the denaturants were stored in a room in the warehouse as required by
revenue regulations, the key to which was held solely by the BIR storekeeper
assigned to the respondent’s establishment. 
The respon­dent had no key to this room, for while the door of the
warehouse had two padlocks, the two keys to which were each held by the
respondent and the BIR storekeeper, only the BIR storekeeper had a key to the
room inside the warehouse.  It was in
this room that the denaturants were stored after samples had been taken for
laboratory analysis.  It was also in this
room that the BIR denaturing committee found the denaturants on August 21,
1958.

Indeed the petitioner’s suspicion that there was a substitution
of the denaturants after samples thereof were taken is not borne out by the evidence,
and we think that, in the absence of proof to the contrary, the presumption of
regularity in the per­formance of official function, let alone the rule making
findings of fact of the Tax Court, when supported by substantial evidence,
conclusive, should not be overthrown on slender grounds resting solely on
innuendoes and mere say-so.

This is not to say, however, that the respondent is not liable
for the specific tax because the truth of the matter is that despite the fact
that the procedure outlined in the revenue regulations^[5]
was ostensibly followed, and despite the certification of the BIR denaturing
committee, a subsequent analysis showed that the alcohol in question had not
been completely denatured such that it could still be used to make Chinese wines
“without immediate danger to consumer.”^[6]

In an effort to discredit this finding, the respondent claims
that the samples taken were unreliable because they were taken from the faucet
at the bottom of the tank instead of from the manhole at the top.^[7]  This claim has no merit.  First, the entire mixture was supposed
to be denatured alcohol; it should therefore make no difference whether samples
were taken from the faucet or from the manhole. 
The samples taken and analyzed could not have been any less completely
denatured than the alcohol that had been drawn from the outlet pipe near the
faucet and sold to the respondent’s customers. 
Second, the respondent claims that the standard procedure is to
take samples from the manhole, but he has not cited any provision of the
revenue regulations prescribing such procedure. 
Third, if the alcohol in question had been completely denatured,
there would have been no need to denature it further.  The fact is that because of the insufficient
quantity of denaturants, 100 gauge liters of methanol and 25 gauge liters of
pyridine had to be added to the remaining 10, 480 liters of alcohol which the
BIR investigating team found.^[8]

The alcohol was certified as denatured by a BIR committee.  It was found not completely denatured in a
subsequent examination.  Why this was so
can only be conjectured.  But one thing
is certain– the BIR denaturing committee fell on its job.  This is not the first case brought to this
Court in which a denaturing committee of the BIR was found remiss in the
performance of its duty.  In Central
Azucarera de Tarlac v. Collector of Internal
Revenue,^[9]
alcohol which a BIR denaturing committee had certified as duly denatured was
subsequently found to be in fact rectified alcohol and so its owner was held
liable for the specific tax.

^“As a licensed manufacturer of rectified and
denatured alcohol, the petitioner is responsi­ble for the quality of its
products.  It cannot es­cape
responsibility by passing it over to the Denaturing Committee concerned
primarily with the prevention of frauds on the revenue.  The petitio­ner should have complied with the
law and regu­lations bearing on the denaturation of alcohol.

“[T]he fact that the alcohol in the instant case had been
passed upon and certified to by the De­naturing Committee as duly denatured,
does not exempt the petitioner from paying the specific tax.  It is a cardinal principle of law and well
settled in jurisprudence that the government is not estopped by the neglect or omission
of its officers or agents . . .”^[10]

The Tax Court distinguished Central Azucarera from
the case at bar, stating that in that case the owner was represented in the
denaturing committee whereas in this case the respondent did not have any
participation in the denaturation of the alcohol.  And the point is now pressed by the
respondent that unlike before when the owner of the alcohol was a member of the
denaturing committee, under present BIR regulations the denaturing com­mittee
is made up entirely of BIR employees.

Regardless of the composition of the committee, however, the
principle laid down in Central Azucarera holds true and it is
this:  the manufacturer is responsible
for the quality of his pro­ducts and he cannot escape this responsibility by
showing that the denaturing committee of the BIR has certified his products to
be denatured alcohol.  The respondent
cannot claim ignorance of this principle for indeed the very permit issued to
him expressly sta­ted that the manufacture of denatured alcohol should be under
his “exclusive responsibility.”^[11]  This is as it should be, otherwise it would
be easy for manufacturers to evade liability on the pre­text that some
government official has certified to the quality of their products and that
they have every right to rely on this cer­tificate.  A contrary rule would encourage
irresponsibility on the part of manufacturers, let alone collusions between
taxpayers and revenue officials to defraud the public treasury.  It is a settled rule of law that in the performance
of its governmental functions the State cannot be estopped by the neglect or
omission of its agents.  Nowhere is this
more true than in the field of taxation.

We therefore hold that the respondent Abad is liable for specific
tax in the amount of P19,204.20.  This
liability is unaf­fected by the probability that the alcohol might have been
used for industrial purposes rather than for consumption, because the law
specifically provides that specific taxes shall be paid “immediately before
removal from the place of production.”^[12]  It does not matter to what use the article
subject to tax is put; the tax attaches from the time the article is removed
from the place of production “to be put into the commerce or trade of the
country.”^[13]

Here the alcohol was sold to customers on various dates between
August 21 and August 28, 1958.  It was on
these dates that the respondent Abad’s liability for the tax arose and,
therefore, it is from these dates that interest at the legal rate should be
paid, pursuant to article 2209 of the Civil Code.  The petitio­ner’s demand, contained in his
letter of assessment of September 2, 1958, is unnecessary for the purpose of
fixing the respondent Abad’s liability because the law establishes definite
dates for the payment of various taxes. 
Thus “no room is left for the exercise of purely personal
discretion” on the part of revenue officials.^[14]
To facilitate the computation of the interest, however, and for purposes of
this case under the particular environmental circums­tances, we shall consider
the last day, August 28, 1958, as the date the entire obligation became due.

With respect to the amount of P10, 000, however, we agree with
the respondent that payment thereof cannot be demanded inasmuch as it was
offered by the petitioner only by way of compro­mise and the compromise did not
go through.  As this Court has had
occasions to explain, a compromise implies agreement.  One party cannot impose it upon the
other.  If an offer of compromise is
rejected by the taxpayer, as in this case, the Commissioner of Internal Revenue
should file a criminal action if he believes that the taxpayer is criminally
liable for violation of the tax law as the only way to enforce a penalty.^[15]  A penalty can be imposed only on a finding of
criminal liability.

ACCORDINGLY, the judgment appealed from is reversed, and
the respondent is ordered to pay the petitioner the amount of P19,204.20 as
specific tax, with interest at the rate of 6 per cent per annum from August 28,
1958, the date of the last sale.  Costs
against the respondent.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar,
Sanchez, Angeles, and Fernando, JJ., concur.

^[1]
Nat. Int. Rev. Code 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.”

^[2]
Petitioner’s brief, 27-28.

^[3] See
id., 14-17.

^[4]
T.s.n., pp. 35-36, 85, 108.

^[5] A copy
of the BIR Circular 16 on denatured alcohol is appended to the brief for the
respondent.

^[6]
Exh. 5.

^[7]
For an illustration of the tank showing the faucet, man­hole and outlet pipe,
see exh. H.

^[8] Exh.
2.

^[9] 104
Phil. 653 (1958).

^[10] Id.,
655-56.

^[11]
Exh. B.

^[12]
Nat. Int. Rev. Code sec. 124.

^[13] See
Asiatic Petroleum Co. v. Rafferty, 38 Phil. 475, 479 (1918); accord,
Asiatic Petroleum Co. v. Posadas, 52 Phil. 728 (1929).

^[14]
Acoje Mining Co. v. Commissioner of Internal Revenue, L-19378, March 27,
1968.

^[15] See,
e.g., Collector of Internal Revenue v. Pio Barretto Sons,
Inc., L-11805, May 31, 1960.