PHILIPPINE MANUFACTURING COMPANY, PETITIONER VS. COLLECTOR OF INTERNAL REVENUE, RESPONDENT.

Philippine Manufacturing Company versus Collector of Internal Revenue

The Case

This is a petition for review filed by the Philippine Manufacturing Company against the Collector of Internal Revenue, asking the Supreme Court to reverse a judgment of the Court of Tax Appeals that ordered the company to pay specific tax on cinematographic films it had caused to be produced. The company, a corporation engaged in the manufacture of soap, lard, and similar products, claimed that the films were educational and therefore exempt from the specific tax. The case matters because it fixes the test for the exemption of educational films under the Tax Code: the exemption turns on the primary purpose of the person who imports or manufactures the films, not on whatever incidental instructional value the films may carry.

Procedural History

The Collector of Internal Revenue assessed the company for deficiency specific tax and penalty, and the company appealed the assessment to the Court of Tax Appeals. After hearing, the Court of Tax Appeals rendered judgment ordering the company to pay the Government the sum of 6,516 pesos and 75 centavos as specific tax on 43,445 lineal meters of cinematographic films at the rate of 15 centavos per lineal meter. The tax court reduced the taxable footage because 1,773 lineal meters had been returned by the company to the producer, and it declined to impose the 500 peso compromise penalty on the ground that acceptance of a compromise penalty was not within its competence to compel. The company then filed a notice of appeal and a petition for review in the Supreme Court under section 18 of Republic Act Number 1125. The case reached the Supreme Court by petition for review of the judgment of the Court of Tax Appeals.

Facts

From 19 May 1951 to 28 July 1956, the Philippine Manufacturing Company ordered the Smith Sound System Laboratories to produce cinematographic films for it. On 23 June 1955 the Collector of Internal Revenue assessed the laboratories for specific tax on films produced from 19 May 1951 to 29 December 1954, plus tax on a film entitled Sex Gang produced for export, plus a penalty for removal of films without prepayment of the tax.

The laboratories asked for reconsideration, claiming that the films were educational and exempt. Counsel for the company later wrote the Collector, admitting that part of the footage had been produced at the company's instance and that if any tax was due, the company should pay it, but insisting that the films were educational films or cinematographic films used for visual education, expressly exempted by section 146 of the National Internal Revenue Code, and that they were exhibited free of charge to the general public, especially in the rural areas. A follow-up letter covered additional footage produced from 1955 to 28 July 1956.

On 6 August 1956 the Collector replied that while the films were used to give information on proper nutrition and health hints to barrio people, it had been established that the company's primary purpose in producing them was to use them as media for the promotion or advertisement of its products. The Collector then assessed the company for specific tax on 32,693 lineal meters produced from 19 May 1951 to 29 December 1954, on 12,525 lineal meters produced from 1955 to 28 July 1956, and a 500 peso penalty, for a total of 7,282 pesos and 70 centavos. The company appealed to the Court of Tax Appeals, which found that only 43,445 lineal meters were subject to the tax and ordered payment of 6,516 pesos and 75 centavos, without the compromise penalty.

Issues

• Whether or not the cinematographic films produced for the Philippine Manufacturing Company are exempt from the specific tax as educational films or cinematographic films used for visual education.
• Whether or not the Court of Tax Appeals correctly limited the taxable footage to 43,445 lineal meters.

Applicable Provisions

Section 146 of the National Internal Revenue Code, as amended by Republic Act Number 295, provides:

There shall be collected, only on cinematographic films, except educational films, or cinematographic films used for visual education, imported into or manufactured in the Philippines, the following taxes: (a) On films of more than eight but not more than sixteen millimeters in width, fifteen centavos per lineal meters; and (b) On films of more than sixteen millimeters in width, twenty centavos per lineal meter. This tax shall not be collected on any taxpaid cinematographic films subsequently returned to the Philippines or unprinted positive film, and on any reversal film used in amateur photography of sixteen millimeters or less, and any taxes heretofore paid on cinematographic films so returned, or on any negative films or unprinted positive films, or on any reversal film, shall be refunded subject to the provisions of section three hundred and nine.

This is the provision that imposes the specific tax and carves out the exemption on which the company relied, so the whole case turns on whether the films fall within the excepted class.

Ruling

On the first issue, the Court held that the films are not exempt. To be exempt, it must be shown that the films are educational films or cinematographic films used for visual education. The Court relied on the findings of the Court of Tax Appeals, which examined samples of the films picked at random. One film, entitled How to Wash with Lava, showed a woman washing clothes with Lava soap, a product of the company. Another, entitled Cooking is Fun, showed a woman demonstrating cooking techniques before a group of women and emphasized the advantages of using Purico lard, another product of the company. Other films portrayed young people in recreational activities such as picnics and outings, subtly produced to induce the unschooled mind to associate the happy atmosphere of those gatherings with the utility of Star Margarine, another product of the company. The letters from municipal mayors and civic heads showed that free exhibitions were requested and the company was thanked for the entertainment derived from the films.

The company itself confirmed these findings in its brief, admitting that the soap wrapper bearing its name and brand was prominently displayed, that the lard used by the cook explaining proper cooking was Purico lard, and that in the film on the Margate System of harvesting rice, the only advertising value derived was the announcement that the film was shown through the courtesy of the Philippine Manufacturing Company. The Court concluded that the films are not solely educational films or cinematographic films used for visual education; their main purpose is to advertise the company's products, and whatever information or educational value they impart is merely incidental to that main purpose. The company is not a civic institution founded solely to serve the people but a corporation organized for profit, engaged in the manufacture of soap, lard, and similar products, which resorts to cinematographic films as a medium of modern advertising.

The Court warned that to accept the argument that advertising is itself a form of education, and that any film tending to educate or convey a moral lesson is exempt, would result in an absurd interpretation of the law which Congress never intended, for then no cinematographic film could be taxed in the guise of educational value, since even ordinary films shown in commercial theaters convey a moral lesson or disseminate information. What the law intends to exempt are only those used for educational purpose or those employed for visual education. In determining what films qualify, the circumstances and purposes of the person, corporation, institution, or organization importing or manufacturing them, or causing them to be imported or manufactured, should be taken into consideration. Since the educational quality of these films is incidental to the main purpose of promoting or advertising the company's products, they cannot fall within the exempt class.

On the second issue, the Court upheld the finding of the Court of Tax Appeals that only 43,445 lineal meters are subject to the tax, because 1,773 lineal meters had been returned by the company to the producer. The Court also left undisturbed the tax court's refusal to impose the compromise penalty, since acceptance of a compromise penalty is left to the pleasure of the taxpayer and cannot be compelled.

Doctrine

The exemption from specific tax under section 146 of the National Internal Revenue Code covers only educational films or cinematographic films used for visual education. The test is the primary purpose of the person, corporation, institution, or organization that imports or manufactures the films, or causes them to be imported or manufactured. Where the main purpose is to advertise the manufacturer's products, and any educational or informative value is merely incidental, the films are taxable. Advertising is not itself a form of education, and to hold otherwise would exempt every film in the guise of educational value, an absurd result Congress never intended. Exemptions are construed strictly against the claimant, and the burden rests on the party claiming the exemption to show that the films fall squarely within the excepted class.

Disposition

The Supreme Court affirmed the judgment of the Court of Tax Appeals, with costs against the Philippine Manufacturing Company, which therefore lost and remained liable for the specific tax on the films.

Remember This

The single line to memorize is that the exemption for educational films turns on the primary purpose of the manufacturer, and advertising is not education. Examiners use this case to test the strict construction of tax exemptions and the primary purpose test for cinematographic films under section 146 of the National Internal Revenue Code.