TAN CHIU, PETITIONER, VS. THE COLLECTOR OF INTERNAL REVENUE, RESPONDENT.

Petitioner seeks the review of a decision of the Court of Tax Appeals
denying his claim for refund of the sum of P3,648.32 collected from him
under the provisions of Section 186 of the Internal Revenue Code on
sales of undershirts manufactured by him.

It appears that
petitioner purchased knitting materials amounting to P45,179.64 and
P6,939.18 for the first quarter up to the last quarter of 1956 and from
January to May, 1957. He was required to pay as percentage tax on the
sales of the undershirts manufactured from the knitting materials
purchased, the amount of P3,648.32. The Court of Tax Appeals sustained
the assessment of the tax, declaring that the purpose of Section 186 of
the Internal Revenue Code authorizing the deduction of the costs of
materials manufactured from the gross selling price, is to avoid or
prevent double taxation; that the purpose of the law is to prevent a
second assessment of the percentage tax on the material that went into
the production of the manufactured articles, but that as the sales tax
on the materials purchased in the case at bar, which were manufactured
into undershirts, were not required to be paid, by virtue of the
provision of Republic Act No. 901 because of the exemption granted to
new and necessary industries, said knitting materials not having been
previously subjected to the payment of the sales tax, their value
should not be deducted from the selling price of the products
manufactured.

Petitioner’s counsel argues that the subject
of the tax or payor should be distinguished from the product of the
subject thereof; that Republic Act No. 901 exempts the payor or
manufacturers, not the materials used in the manufacture. The
distinction is merely in words. When the payor or the person engaged in
a new and necessary industry is exempt from the tax, that means that he
does not pay tax or the sales tax on the products that he manufactures
in the new and necessary industry. In this case the products that are
manufactured are the cotton knitting materials previously manufactured
by the tax exempt industry; so the cotton knitting materials produced
are not subject to the sales tax. As no sales tax have been paid
thereon (on the knitting materials), the deduction of the cost thereof
from the value of the gross sales of petitioner, can not be claimed.

The decision of the Court of Tax Appeals is hereby affirmed, with costs against petitioner.

Bengzon, Padilla, Bautista Angelo, Concepcion, Reyes, J. B. L., Barrera, Gutierrez David, Paredes, and Dizon, JJ., concur.