PHILIPPINE PACKING CORPORATION, PETITIONER AND APPELLANT, VS. THE COLLECTOR OF INTERNAL REVENUE, RESPONDENT AND APPELLEE.

Philippine Packing Corporation versus Collector of Internal Revenue

The Case

This is a tax case. The Philippine Packing Corporation, a domestic corporation that grows and cans pineapples in Mindanao, sued the Collector of Internal Revenue over a demand for percentage taxes on its domestic sales of pineapple products. The corporation claims those sales are exempt under Section 188 (b) of the Internal Revenue Code as sales of agricultural products by the producer, while the Collector says the canning is manufacturing and the sales are therefore taxable. The case matters because it fixes the test for when an agricultural producer who processes his own crop loses the exemption, and because it shows how a later amendment withdrawing an exemption is construed as prospective only.

Procedural History

The Collector of Internal Revenue demanded payment of fixed and percentage taxes and surcharges on the corporation's domestic sales from October 1948 to September 1953, plus a penalty. The corporation appealed the Collector's decision to the defunct Board of Tax Appeals, which was succeeded by the Court of Tax Appeals under Republic Act Number 1125. The Court of Tax Appeals affirmed the Collector's decision, and later denied the corporation's motion for reconsideration. The corporation then filed a petition for review before the Supreme Court, which reversed the Court of Tax Appeals. The Collector moved for reconsideration, and the Supreme Court denied that motion in a resolution issued the following month.

Facts

The Philippine Packing Corporation grows and cans pineapples in Mindanao for sale locally and abroad. Each year it produces about 120,000 tons of pineapple. Of this, some 50,000 tons are not suitable for canning and are sold or given away fresh, untaxed. The rest are canned as sliced pineapple, chunks, crushed pineapple, and juice. The fresh fruit is washed, peeled, sorted, sliced, cubed, or crushed, then placed in cans; residual air is removed, heavy syrup is added, the cans are closed, heat sterilizes the contents, and the cans are cooled rapidly. No sugar is added to the canned juice. Fresh pineapple is very perishable and will not keep longer than two days unless preserved in tin cans.

In October 1948 the corporation wrote the then Collector, Bibiano Meer, saying it believed it need not pay the five percent tax under Section 188 (b) of the Internal Revenue Code because its operation is entirely agricultural. Collector Meer replied that sales in this country of the pineapple products produced here are exempt from the sales tax under Section 188 (b).

Six years later, in January 1954, the corporation received a letter from the Collector through a deputy, demanding 196,060 pesos and 69 centavos as fixed and percentage taxes and surcharges on its domestic sales since October 1948 to September 1953, plus 1,000 pesos as penalty for alleged violation of the Internal Revenue Law. That demand led to the appeal and to this case.

Issues

• Whether or not the domestic sales of pineapples and pineapple products grown and canned by the corporation are exempt from the percentage tax under Section 188 (b) of the Internal Revenue Code, notwithstanding that the canning amounts to a manufacturing process.
• Whether or not Republic Act Number 1612, which amended Section 188 (b) to exclude products that have undergone manufacturing, applies retroactively so as to make the earlier sales taxable.

Applicable Provisions

Section 188 (b) of the Internal Revenue Code, as it stood before its amendment, provides:

Section 188. Transactions and persons not subject to percentage tax. In computing the tax imposed in sections one hundred eighty four, one hundred eighty five, and one hundred eighty six, transactions in the following commodities shall be excluded: (b) Agricultural products and the ordinary salt when sold, bartered, or exchanged in this country by the producer or owner of the land where produced, as well as fish and its by-products when sold, bartered or exchanged by the fisherman or fishing operator, whether in their original state or not.

The phrase "whether in their original state or not" is the very language the Court construes, and it is the basis for holding that processing does not by itself destroy the exemption.

Section 188 (b) as amended by Republic Act Number 1612 provides:

(b) Agricultural products and the ordinary salt in their original form, when sold, bartered, or exchanged by the producer or owner of the land where produced. The term agricultural products as used herein shall not include cultured fish and other products raised or produced in fishponds, and those which have undergone the process of manufacturing as defined in section one hundred ninety four (x) of this Code.

The amendment drops the words "or not" and expressly excludes manufactured products, which raises the question of retroactivity.

Ruling

On the first issue, the Court ruled for the corporation. The Court refused to agree that because the manipulations amount to manufacturing, the sale of canned products becomes a taxable sale of manufactured goods. The very text of the law, exempting agricultural products "whether in their original state or not," makes clear that the exemption is not lost merely because the products have undergone processing. At what stage manufacturing extinguishes the agricultural character cannot be predetermined in advance. The Court applied the test from Central Azucarera de Bais versus Trinidad: a planter who devotes himself to producing a crop and, as an incident, works his product into a more convenient and valuable form is primarily a planter, unlike a corporation that buys raw materials and devotes itself exclusively to converting them into finished merchandise.

Here, the canning was a mere incident and consequence of large scale production. The volume made it impossible to dispose of the fruit locally, and the fruit would deteriorate unless preserved. The legislature, in exempting agricultural products "whether in their original state or not," had precisely in mind that fruit crops could not be raised and sold on a large scale without some process to prevent deterioration. The State did not show that the canned products acquired any use to which the original fruit was not suited; the nature, qualities, and texture remain unchanged, and the product distinctly remains agricultural. Canned pineapple has undergone much less change than centrifugal sugar from cane, which the State admits is exempt. The Court also invoked Molina versus Rafferty, which recognized that the exemption was meant to foster agriculture and the utilization of idle lands, and to tax the merchant who profits on goods produced by others while exempting those who directly produce goods from the land. The corporation does not make its profit on goods produced by others. The Court added that the interpretation of the Court of Tax Appeals would limit the exemption to small farmers, which would make it unnecessary, since the same section already exempts small sellers and producers.

On the second issue, the Court denied reconsideration. The amendment omitted the words "or not," limiting the exemption to products in their original form, and excluded those that have undergone manufacturing. By the nature of the changes, the amendment was intended not to clarify the old law but to withdraw from the exemption products no longer in original form. Still, Republic Act Number 1612 has no retroactive effect, there being no provision for retroactive operation, so it affects the corporation only after its passage and effectivity.

Doctrine

First, under the old Section 188 (b), the exemption of agricultural products "whether in their original state or not" is not lost merely because the producer processes his own crop. The governing test is whether the processing is a mere incident of the producer's agricultural operation, as opposed to a business that buys raw materials from others and devotes itself exclusively to manufacturing. Second, the exemption is construed in light of its purpose of fostering agriculture and exempting those who directly produce goods from the land, as against the merchant who profits on goods produced by others. Third, a later amendment that withdraws an exemption is presumed prospective unless it expressly provides for retroactive operation.

Disposition

The Supreme Court reversed the decision of the Court of Tax Appeals and held the domestic sales of the corporation's pineapple products exempt from the sales tax, without costs; the Collector's motion for reconsideration was denied.

Remember This

Memorize the line that the exemption of agricultural products "whether in their original state or not" is not lost merely because the producer processes his own crop, for processing that is a mere incident of production keeps the exemption. Examiners use this case to test the planter versus manufacturer distinction and the rule that a withdrawing amendment operates prospectively only.