CEBU PORTLAND CEMENT COMPANY, PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cebu Portland Cement versus Commissioner of Internal Revenue

The Case

Cebu Portland Cement Company, a government owned and controlled corporation that manufactures APO portland cement, paid under protest an ad valorem tax that the Commissioner of Internal Revenue had assessed on its gross sales of cement, and then sued to recover part of it. The case matters because it fixes the correct tax base for the mineral ad valorem tax when the product sold is cement: the Court holds that cement itself is not a mineral product under the Tax Code, so the tax must be measured by the value of the quarried raw materials that go into it, not by the selling price of the finished cement.

Procedural History

The Commissioner levied and collected the ad valorem tax from the company. The company paid under protest and filed a claim for refund with the Commissioner. Without awaiting the resolution of that claim, it brought the matter to the Court of Tax Appeals, which denied the refund. The company then elevated the case to the Supreme Court, which decided it on appeal from the Tax Court's denial.

Facts

Cebu Portland Cement Company quarries its own mineral lands for limestone, silica and shale, the raw materials of which cement is at least eighty percent composed. For the period from the first of July 1959 to the thirty-first of December 1960, the company realized gross sales of 13,924,415 pesos and 80 centavos.

The Commissioner of Internal Revenue levied and collected 190,115 pesos and 24 centavos as ad valorem tax under Section 243 of the Tax Code, using as the tax base the gross sales minus the cost of cement bags, which was 1,188,248 pesos and 56 centavos.

The company paid under protest and sought a refund of 174,032 pesos and 85 centavos, arguing that the tax should be based on the cost of the raw materials, which was 1,072,159 pesos and 28 centavos. The Court of Tax Appeals denied the refund, and the company appealed. Before the Supreme Court, however, the company abandoned its original theory and asked, in the alternative, that the tax be based on the bin cost of cement, meaning the cost of production minus the cost of cement bags, under which it would be entitled to a refund of 42,810 pesos and 11 centavos.

Issues

• Whether or not cement is a mineral product within the purview of Section 243 of the Tax Code, so that the ad valorem tax may be imposed directly upon it.
• Whether or not the correct basis of the one and one-half percent ad valorem tax is the market value of the quarried raw materials rather than the gross selling price of cement.
• Whether or not the company is entitled to a refund, at least on the basis of the bin cost of cement, as prayed for in its alternative prayer.

Applicable Provisions

Section 243 of the Tax Code, as described in the decision, levies the tax in these terms:

On the actual market value of the annual gross output of the minerals 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 per centum of the value of said output.

This is the provision under which the Commissioner assessed the company, and its scope determines whether cement may be taxed directly.

Section 246 of the Tax Code defines the term mineral product:

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.

This definition controls whether finished cement falls within the taxable class of mineral products.

Ruling

On the first issue, the Court held that cement is not a mineral product within the meaning of the Tax Code. Speaking through Justice Bengzon, the Court recalled its earlier ruling in the first Cebu Portland Cement case, decided in February 1965, that cement qua cement, meaning cement as cement, is no longer a mineral product in the condition envisaged by the tax law, and noted that it had very recently reaffirmed that stand when it denied a plea to reconsider. It follows that Section 243 cannot be applied directly to cement; what is taxable thereunder are the minerals constituting cement, namely limestone, silica and shale. Gypsum, though also a constituent of cement, cannot be included because it is imported from abroad.

On the second issue, the Court held that the correct basis of the one and one-half percent ad valorem tax is the market value of the quarried raw materials. This was in fact the company's stand before the Tax Court, but the Solicitor General pointed out, and the records bore him out, that the company abandoned that stand before the Supreme Court.

On the third issue, the Court weighed the equities, which it found to weigh more heavily on the company's side than on the State's. Since the company's alternative prayer asked that the tax be based on the bin cost of cement, the Court held that its claim for refund, based at least on that bin cost, should be granted.

Doctrine

Three rules are worth carrying into the examination room. First, cement qua cement is not a mineral product under the Tax Code; the taxable objects under Section 243 are the minerals that constitute it, such as limestone, silica and shale. Second, because Section 243 cannot be applied directly to cement, the ad valorem tax is measured by the market value of the quarried raw materials, not by the gross selling price of the finished product. Third, where the taxpayer's alternative prayer is supported by the equities and by the record, the Court may grant a refund on that alternative basis even though the original theory was abandoned on appeal.

Disposition

The Court reversed and set aside the decision of the Court of Tax Appeals and ordered the Commissioner of Internal Revenue to refund 42,810 pesos and 11 centavos to Cebu Portland Cement Company, without costs.

Remember This

Memorize the line that cement qua cement is no longer a mineral product in the condition envisaged by the tax law, so the ad valorem tax falls on the raw minerals and not on the finished cement. Examiners use this case to test the tax base under the mineral ad valorem tax and the treatment of a taxpayer who shifts to an alternative prayer on appeal.