PHILIPPINE ACETYLENE CO., PETITIONER, VS. SILVERIO BLAQUERA, AS COLLECTOR OF INTERNAL REVENUE, RESPONDENT.

This is an appeal from the decision of the Court of Tax Appeals in C.T.A.
Case No. 324, dated January 10, 1958 upholding the legality of the assessment
and demand issued by the respondent requiring the petitioner to pay the amount
of P10,879.03 as deficiency sales tax and surcharge on the latter’s sales of its
manufactured oxygen and acetylene gases during the period from 1951 to the
second quarter of 1955, and from its resolution dated March 24, 1958 denying
petitioner’s motion for reconsideration thereof.

Because of the importance of the question of law involved, Antonio T.
Carrascoso, Jr. of the law firm of Ross, Selph & Carrascoso entered his
appearance as attorney amicus curiae.

The facts of this case deemed pertinent to this appeal may be succinctly
stated as follows:

Petitioner is a domestic corporation engaged in the manufacture and sale of
oxygen and acetylene gases. In a letter dated June 8, 1956, and received by
petitioner on July 5, 1956, respondent assessed the former a deficiency sales
tax and surcharge amounting to P10,879.03 covering the period from 1951 to the
second quarter of 1955. Petitioner was also asked to pay the sum of P500.00 in
addition to the sum of P10,879.03 if it desired to settle extra judicially its
violation of Sections 183 and 186 of the National Internal Revenue Code,
penalized under section 209 of the same Code.

Petitioner sought a reconsideration of the assessment, and, upon denial
thereof, he appealed to the Court of Tax Appeals and raised the following
issues: (1) whether or not the appeal to the Tax Court was filed within the
statutory period of 30 days prescribed infection 11 of Republic Act No. 1125,
and (2) whether or not the deficiency assessment is in accordance with law.

The Court of Tax Appeals found that the petition for review was filed within
the statutory period.

As to the second issue, the Tax Court was of the opinion that the assessment
made by respondent, except with respect to the sum of P500.00 was in order.
Costs were correspondingly pronounced against the petitioner.

In its appeal before this Court, petitioner contends that respondent’s
procedure of computation in the questioned assessment is manifestly contrary to
the provision of section 186 of the National Internal Revenue Code, as amended,
as well as the procedure established by General Circular Nos. 431 and 440 of the
Bureau of Internal Revenue. In effect, according to the petitioner, resnondent’s
procedure amounts to double computation of the percentage tax; and that
furthermore, the decision of the Court of Tax Appeals does not, in effect, give
the petitioner the benefits of the provisions of General Circular No. 431 in
that after the tax is billed as a separate item in the sales invoices, it is
again added to the selling price from which total, the cost of raw materials is
deducted.

The law, the application of which is involved, reads as follows:

“SECTION 186. Percentage Tax on Sales of Other Articles.—There shall
be levied, assessed, and collected once only on every original sale, barter,
exchange, and similar transaction either for nominal or valuable considerations,
intended to transfer ownership of, or title to, the articles not enumerated in
sections one hundred and eighty-four and one hundred and eighty-five a tax
equivalent to seven per centum of the gross selling price or gross value in
money of the articles so sold, bartered, exchanged, or transferred, such tax to
be paid by the manufacturer or producer, Provided, That where the
articles subject to tax under this section are manufactured out of materials
likewise subject to tax under this section and section one hundred and
eighty-nine, the total cost of such materials as duly established, shall be
deductible from the gross selling price or gross value in money of such
manufactured articles; * * *.” (Sec. 186, National Internal Revenue
Code)

The folowing B.I.R. Ruling and Illustration on how the seven (7) percentage
tax provided In section 186 of the Revenue Code above quoted is assessed when
the raw materials used in the manufacture of the product is deductible, is
indeed enlightening:

“Cost of raw materials should first be deducted before computing sales
tax.—Where the amount intended to cover the sales tax is billed to the
customer as a separate item, or the invoice covering the sale bears the notation
“tax included”, in order to arrive at the correct amount subject to the tax, the
cost of raw materials (in cases where the cost of raw materials is deductible
for purposes of the sales tax) should first be deducted from the gross selling
price of the article sold before the latter is divided by, assuming that the
article is taxable at 7%, 107%, (Ruling, BIR 105.02, Oct. 30, 1956; Int. Rev.
Bull., VoL I, No. 11).

	Illustration of deductibility of materials used in the manufacture of article
	Total landed cost of imported materials used	P1,000
	Add: 25% mark-up (assuming that they are classified as ordinary articles under section 186 of the Tax Code)	P250
	Total deductible cost of materials	P1,250
	Gross selling price of the article manufactured out of above materials	P2,000
	Less: Cost of materials are computed above assuming they were all used during the period	P1,250
	Balance subject to the sales tax	P750
	7% of P750 is P52.50 payable by the manufacturer. (ARAÑAS, Annotations and Jurisprudence on Business and Occupation Taxes, pp. 290-291.)

As correctly observed by the Tax Court, petitioner and respondent agree on
the following figures, appearing on Exhibit “A” for petitioner, and Exhibit “1”
for respondent:

	Total selling price of oxygen and acetylene gases from 1951 to the second quarter of 1955, as indicated in the invoices, without the tax but including the value of tax-paid imported raw materials	P1,793,732.97
	Tax billed to customers on the basis of the gross selling price of P1,793,732.97	P125,561.31
	Gross amount billed to customers	P1,919,294.28
	Cost of imported raw materials used	P334,465.74
	7% tax actually paid by petitioner	P102,227.78
	This is how the lower court reached the amount of P10,879.03:
	Deficiency sales tax	P8,703.22
	25% surcharge	P2,175.81
		P10,879.03

It is not disputed that petitioner is subject to the percentage tax of 7% on
its sale of oxygen and acetylene gases based on the “gross selling price or
gross value in money of the articles so sold.”

The only controversy hinges on the method of computation that should be
adopted on the basis of the so-called “gross selling price.” In fact, petitioner
says in its memorandum in lieu of oral argument that “the only question here at
issue is whether or not the petitioner’s procedure is in accordance with the law
and the provisions of General Circular No. 431 of the Collector of Internal
Revenue.”

It will be noted that the only difference between the two formulas or methods
submitted by the parties is the inclusion of the tax billed by the petitioner to
its customers.

A perusal of the above figures reveals that petitioner received more by way
of tax from its customers than what it has actually paid to the Government,
because in the issuance of invoices to its customers, petitioner computed the 7%
tax on the basis of the gross selling price of P1,793,732.97 without first
deducting therefrom the cost of the raw materials used, while in its income tax
returns, the 7% was computed on the amount of P1,793,732.97 minus the value o£
the raw materials. This method of computation employed by petitioner is
certainly not fair, and not in accordance with law and General Circular Nos. 431
and 440 of the Bureau of Internal Revenue. Petitioner should not be allowed to
enrich itself at the expenses of its customers who were misled as to the amount
of tax that they had to pay. On this point, the Tax Court aptly said:

“It does not sit well on the lips of petitioner to contest the legality of
the assessment which is actually less than what it had collected from its
customers, by way of sales tax. Certainly, it has never been the intention of
the law and General Circulars Nos. 431 and 440 to permit taxpayers to collect
more from their customers by way of tax and at the same time to pay to the
government an amount which is even less than what the law provides.

“It occured to Us that petitioner might be justly required to pay not the sum
of P10,879.03, as assessed by respondent, but the sum of P23,333.53, which is
the difference between the amount petitioner collected from its customers as tax
and the amount already paid to the Government, on the ground that petitioner
should not be allowed to enrich itself at the expense of its customers who were
misled as to the amount of the tax that they had to pay. Upon a careful
consideration of the matter, we can not find any legal justification for
requiring a taxpayer to pay more than what the law requires. * *
*”.

To ascertain the correct procedure, this Court looks into the provisions of
General Circular No. 431 of the Bureau of Internal Revenue reading as
follows:

” ‘Gross selling price’ or ‘gross value in money’ of the articles sold,
bartered, exchanged, or transferred, as the term is used in the aforecited
sections of the National Internal Revenue Code, is the total amount of money or
its equivalent which the purchaser pays to the vendor to receive or get the
goods. However, if a manufacturer, producer, or importer, in fixing the gross
selling price of an article sold by him, has included an amount intended to
cover the sales tax in the gross selling price of articles, the sales tax shall
be based on the gross selling price less the amount intended to cover the tax if
the same is billed to the purchaser as a separate item. To illustrate: In case
an automobile dealer fixes the price of an automobile at P2,400.00 and charges
an additional of P120 to cover the sales tax which he bills as a separate item
on the sales invoice, the tax of 5% prescribed in section 185 of the Code (the
rate of tax then in force) shall be imposed on P2,400.”

Pursuant to the above-quoted provisions of General Circular No. 431, to be
excluded as part of the taxable gross selling price of the article, the sales
lax should be billed as a separate item in the invoice issued to the customers.
And of course, the “tax” mentioned in the General Circular No. 431 should be the
correct amount of tax as rightly observed by the Tax Court. So, where the amount
billed to the customers is not the correct amount of tax, the requirement of the
circular is not fulfilled as in this case where the value of the raw materials
used was not deducted from the total gross selling price of the oxygen and
acetylene gases sold before billing the tax to the customers. In figures, the
amount of P334,465.74 representing the cost of the raw materials should have,
been subtracted first from P1,793,732.97 before the 7% tax was imposed and
charged to the customers. (BIR Ruling 105.02, Oct. 30, 1956; Int. Rev. Bull.,
Vol. I, No. 11).

General Circular No. 440 of the Bureau of Internal Revenue provides that
“unless billed to the purchaser as separate items in the invoice, the amount
intended to cover the sale tax shall be considered as part of the gross selling
price of the articles sold, and deduction thereof will not be allowed.”

Conformably to the provisions of the Internal Revenue Code and General
Circular Nos. 431 and 440 already heretofore reproduced, the computation
employed by respondent is the correct one.

The computation suggested by the amicus curiae, like the one used by
petitioner, is not in accordance with law and General Circulars Nos. 431 and 440
for the simple reason that it treated the tax charged to the customers as having
been validly billed separately and hence, he did not consider it for purposes of
deducting the cost of the raw materials.

In view of all the foregoing, the decision appealed from is hereby affirmed,
with costs against petitioner.

Padilla, Labrador, Concepcion, Reyes, J. B. L., Barrera, Paredes,
Dizon, and Makalintal, JJ., concur.