[With Resolution, Dec. 29, 1967]

This is a petition filed by the
Cebu Portland Cement Company (CEPOC) for review of the
decision of the Court of Tax Appeals (in CTA Case No. 708) denying its claim
against the Commissioner of Internal Revenue for refund of the sum of
P476,208.50, representing alleged overpayments of ad valorem
taxes for the period of from January 1, 1957 to June 30, 1959, on the ground
that said court erred in upholding the assessment and collection thereof based
on the selling price of the cement petitioner produced and not on the value of
the limestone and shale it quarried and used in the production of the
cement.

There is no controversy as to the
fact that for the period of from April 16, 1957 to July 20, 1959, for the cement
it produced and sold, petitioner was assessed and paid ad valorem
taxes in the total sum of P502,975.28; that its demand for refund of alleged
overpayment having been denied, petitioner filed on October 15, 1959, a
corresponding petition in the Court of Tax Appeals against the respondent
Commissioner of Internal Revenue; and that after due hearing, the Court of Tax
Appeals rendered a decision on June 21, 1961, declaring the collection of the
ad valorem tax based on the selling price of cement
to have been made in accordance with Section 243 in relation to Section 246 of
the National Internal Revenue Code.

The National Internal Revenue
Code, as amended,^[1] provides:

“SEC.
243.
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 mineral or mineral products
extracted or produced from all mineral lands, not covered by lease,
an ad valorem tax payable to the Collector of Internal
Revenue, in the amount of one and one-half nor centum of the value of said
output.

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

“SEC.
245.
Time and manner of payment of royalties
or ad valorem taxes.-The royalties or
ad valorem taxes, as the case may be, shall be due and payable upon removal of the
mineral products from the locality where mined. However, the output
of the mine may be removed from such locality without the prepayment of such
royalties or ad valorem taxes if the lessee, owner or operator
shall file a bond in the form and amount and with such sureties the payment of
such royalties or ad valorem taxes, * * *

SEC.
246.
Definitions of the terms ‘gross output’,
‘minerals’ and ‘mineral products’-Disposition of royalties and ad valorem taxes.– The term ‘gross output’
shall be interpreted as the actual market value of minerals or mineral products,
or of bullion from each mine or mineral lands operated as a separate entity
without any deduction from mining, milling, refining, transporting, handling,
marketing, or any other expenses: Provided, however, * * *. The word
‘minerals’ shall mean all inorganic substances found in nature whether in solid,
liquid, gaseous, or any intermediate state. The term ‘mineral products’ shall
mean things produced by the lessee, concessionaire or owner of mineral lands, at
least eighty per cent of which things must be minerals extracted by such lessee,
concessionare, or owner of mineral lands. Ten per
centum of the royalties and
ad valorem taxes herein provided shall accrue to
the municipality and ten per centum to the province where the mines
are situated, and eighty per centum to the National
Treasury.”

Herein petitioner contends that
the collectible ad valorem tax should be based on the actual market
value of the quarried minerals that were used in the production of cement;
whereas, respondent Commissioner of Internal Revenue maintains that, as the
cement produced by petitioner consists of 80% minerals, the same is a mineral
product pursuant to the definition given in Section 246 of the Tax Code, and the
ad valorem tax should be based on its selling
price.

It is noteworthy that under
Section 242 of the same Code, with respect to leased mineral lands, the lessee
shall pay to the government, not only rentals for the use of the land, but also
royalty, on the minerals extracted therefrom. These
imposts are levied “for the privilege of exploring, developing mining,
extracting and disposing of the minerals” from said land. With respect to
mineral lands not under lease. Section 243 governs, and imposes ad valorem
tax on the actual market value of the gross output of the minerals or mineral
products extracted therefrom. Both sections 242 and
243 are under Title VI of the Tax Code which refers to Mining Taxes. As under
Section 242, the rentals and royalties collectible from the lessees and
concessionaires of the leased lands are for the privilege of mining and
extracting minerals therefrom, so it may be said that
the ad valorem tax imposed by Section 243 upon those
extracting minerals and mineral products from lands not under lease, is also for
the same purpose, i.e., the privilege of mining and extracting minerals from
said lands. In other words, 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.

There can be no question that
quarried minerals have their own market value. The dispute here arose, however,
from the construction given to the term mineral products, which was defined in
Section 246 of the Tax Code, as “things produced by the lessee, concessionaire,
or owner of mineral lands, at least eighty per cent of which things must be
minerals extracted by such lessee, concessionaire or owner of mineral lands.”
Respondent argues that since the portland cement
produced by petitioner^[2] consists of 80% minerals quarried from its
mines, such cement falls within the definition of a mineral product and the
imposable ad valorem tax should be based on its selling Price
which is its actual market value.

This line of argument suffers
from two infirmities: First, 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, calcinging, 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. It must be remembered that, as
aforestated, 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, such as washing, or cutting them into sizes,
which process does not necessarily involve the change or transformation of the
raw materials into a composite, distinct product. Secondly, respondent cannot
use the selling price of the product in this case as gauge of its actual market
value. The cement here is manufactured by petitioner itself out of materials
quarried from its mines. 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.

Anent respondent’s contention,
however, that the taxes collected and paid two years before the filing of the
action in the Court of Tax Appeals are barred by prescription, the same must be
sustained. By specific provision of Section 308 of the Internal Revenue Code,
action for recovery of tax payments erroneously or illegally collected must be
filed within 2 years from such payments. As the action in this case was
instituted only on October 16
1959,
over payments made prior to October 15,
1957 are
no longer refundable.

WHEREFORE, the decision of the Court of
Tax Appeals under review is hereby modified, by holding petitioner entitled to
the refund of the corresponding overpayments of ad valorem
taxes made after October 15,
1957. No
costs.

SO
ORDERED.

Bengzon, C. J., Bautista Angelo, Reyes,
J.B.L., Paredes, Regala,
Makalintal, Bengzon,
J.P. and Zaldivar, JJ.,
concur.

^[1] As amended by Republic Acts 909,
834, 1299, 1510.
^[2] Which is a
government-controlled corporation.

R E S O L U T I O
N

December 29,
1967

REYES, J. B. L.,
J.:

Petitioner-appellant Commissioner
of Internal Revenue has sought reconsideration of our main decision in the above
entitled case, claiming that this Court has miscontrued the issues involved in this case, and that
instead of resolving what is the market value upon which should be based the
ad valorem tax imposed by section 246 of the
Internal Revenue Code, as said section was amended by Republic Act 1299, in
force since June 16, 1955, this Court decided the case “on an issue that was not
raised by them” by ruling “that cement is not a mineral product but a
manufactured product, and as such it is not subject to the ad valorem
tax” (Motion for Reconsideration, p. 6). The appellant Commissioner therefore
prays that this Court declare:

(1) That cement is a mineral
product subject to 1-1/2 % ad valorem tax based on its
selling price; or

(2) In the alternative, that the
sales of cement by appellee Cebu Portland Cement Company are subject to sales tax of
7%.

The reconsideration must be
denied. The appellant Commissioner of Internal Revenue has plainly misconstrued
the language and import of our main decision. We there stated the issue to be as
follows:

“Herein petitioner^[1] contends that the collectible ad valorem tax should be based on the actual market value of
the quarried minerals that were used in the production of cement; whereas,
respondent Commissioner of Internal Revenue maintains that, as the cement
produced by petitioner consists of minerals, the same is a mineral product
pursuant to the definition given in Section 246 of the tax Code and the ad valorem tax should be based on its selling
price.”

And we sustained the position of
the cement company, i.e., that the ad
valorem tax in question should be based on
the actual market value of the quarried
minerals used in producing cement, reasoning that cement (as
distinguished from the original minerals used to produce it) is the result of a
process, and that the same “could not have been the state of mineral products contemplated
by the law” for the purpose of imposing the ad valorem
tax. The necessary corollary of this pronouncement is that 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. For it can not
be overlooked that 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. Both parties concede that cement is
made up of 80% or more of minerals thus extracted.

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 (Tax Code s. 245). So that the tax is to be computed on the
basis of the market value of the mineral in its condition at the time of such
removal and before its being substantially changed by chemical or manufacturing
(as distinguished from purely physical) processing. Whatever mention was made in
the decision of such process undergone by the component minerals of cement, was
made solely and exclusively to emphasize the changed in the condition of the
minerals, from the primitive state contemplated by the taxing statute. This is
clear from the text of the decision (pp. 1-5) where we.stated:

“This (respondent’s) line of
argument suffers from two infirmities. First, 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
salable 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 the ad valorem tax.” (Italic
supplied.)

WHEREFORE, all motions for reconsideration
are denied.

SO
ORDERED.

Concepcion, C. J., Bengzon, J.P., Zaldivar, Sanchez,
Ruiz Castro, Angeles and Fernando, JJ.,
concur.

^[1] Evidently referring to the
original petitioner Cebu Portland Cement Co.