CONNELL BROS. CO., (PHIL.), PETITIONER AND APPELLANT, VS. COLLECTOR OF INTERNAL REVENUE, RESPONDENT AND APPELLEE.

This is an appeal from the decision
of the Court of Tax Appeals in CTA case No. 357 denying petitioner-appellant’s
claim for refund of the sum of P21,093.36 representing alleged deficiency (plus
25% surcharge thereon) in the sales tax paid by it for the period beginning
January 18, 1948 thru January 31, 1949.

Appellant, a domestic corporation,
is engaged in the importation of general merchandise. The original assessment
for such tax was made on September 3, 1949, in the amount of P29,365.50, corresponding to the third quarter of 1946 and the
period from the first quarter of, 1948 to the first quarter of 1949. It was
later reduced to P21,716.54. Appellant contested the
validity of the assessment, but deposited with appellee
a cheek for the amount on September 8, 1950. On August 30, 1956 the deposit
was converted into payment, which was followed by a formal request for refund
on September 8, 1956. The request was denied on January
20, 1957
and so appellant filed a petition for review in the Court of Tax Appeals. On March
6, 1957,
after some adjustment whereby appellee recognized
appellant’s right to a refund of P623.18, the amount involved in the petition
was finally reduced to P21,093.36.

The controversy involves the
application of Section 186 of the National Internal Revenue Code and of General
Circulars No. 431 and 440 promulgated by the Bureau of Internal Revenue to
implement the said provision of the tax statute.

The pertinent portion of section
186 is as follows:

“There is levied, assessed,
and collected once only on every original sale, barter, exchange and similar
transaction intended to transfer ownership of, or title to, the articles not
enumerated in sections one hundred eighty four and one hundred eighty-five a
tax equivalent to five per centum, of the gross selling price or gross
value in money of the articles so sold, bartered, exchanged or transferred. * *
*.”

General Circular No. 431 states:

“*** ‘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 of money
intended to cover the sales tax in the gross selling price of the articles, the
sales tax shall be based on the gross selling price less the amount intended to
cover the tax, if the same be billed to the purchaser as separate item. * *
*.”

General Circular No. 440,
supplementing General CircularNo. 431, provides:

“*** Unless billed to the purchaser
as separate items in the invoice, the amounts intended to cover the sales tax
shall be considered as part of the gross selling price of the articles sold,
and deductions thereof will not be allowed.”

Up to January 17, 1948, every
sales invoice issued by appellant, among those originally questioned by appellee, contained an itemization of the actual selling
price and of the 5% sales tax thereon, which was then added to the selling
price and shifted to the customer, who paid the total amount. This procedure,
by stipulation of the parties in the court below, constituted full compliance
with General Circulars 431 and 440. From January 18, 1948 to January
31, 1949,
however, the sales invoices merely showed one single amount in each instance,
namely, the total of the actual selling price and of the corresponding sales
tax, with the notation of the phrase “5% sales tax included.” The
customer paid appellant for the goods purchased the amount thus indicated, and
appellant in turn paid the sales tax to appellee as
computed on the basis of the actual selling price alone, that is, without
including the tax which had been shifted to the customer.

The alleged deficiency assessed
against appellant and now subject of the instant case for refund is the
difference between the amount resulting from the two
methods of computation. Thus, for instance in a sale of goods priced at P100
without the tax, appellant computed the 5% tax to be P5.00, billing the
customer for the amount of P105.00; while appellee’s
computation was P5.25, based on the sum actually paid by the customer,
resulting in a difference of P0.25 for every such sale.

The sole issue in this case is
whether or not the mere notation of the words “5% sales tax included”
on the questioned invoices of appellant complies with the circulars aforequoted, which expressly require a separate billing to
the customer of the amount intended to cover the tax in order that it may be
deducted from the gross selling price for purposes of tax computation. What is
gross selling price is defined in General Circular No. 431 as “the total
amount of money or its equivalent which the purchaser pays to the vendor to
receive or get the goods.” The correctness of this definition is not
disputed. The 5% sales tax under Section 186 of the Revenue Code is imposed on
such gross selling price, including the tax itself when it is shifted to the
customer, for that is the total amount that he pays to receive the goods
purchased by him. The deduction that is allowed by the two circulars
constitutes in effect an exception to the rule established by the statute, and
may be availed of only if the amount intended to cover the tax is billed to the
purchaser as a separate item. As correctly stated by the Court of Tax Appeals,
the exception is merely a privilege granted to the taxpayer which, if he is to
claim its benefits, must be complied with by him.

The idea of separate billing is
too clear and specific to admit of different interpretations. It means that the
amount of the tax must be stated as an item apart. The requirement is
emphasized in General Circular No. 440, which states that “unless
billed to the purchaser as separate items in the invoices, the amounts
intended to cover the sales tax shall be considered as part of the gross
selling price of the articles sold and deductions thereof will not be
allowed.” (Italic supplied.) Certainly a simple indication on the
invoice that the 5% tax is already included in the aggregate sum charged to the
customer cannot be a separate hilling of the amount of such tax. It is
purposeless to distinguish between substantial or strict compliance with the
requirement, as the parties have essayed to do: the amount of the tax must
appear as a separate item, and this is the only manner of complying that is
possible. The intention, evidently, is to apprise the customer of the exact
amount of the tax that is passed on to him for payment. It is suggested that he
can determine the amount by simple mathematical computation. How many customers
would have the ability or the patience to go through the process? And since
after all the benefits of separately billing the amount of the tax accrue to
the taxpayer, it is fair and logical that the task of computing and indicating
it on the invoice should devolve upon him.

The resolution of the defunct Board
of Tax Appeals in the case of Fred Wilson & Company, Inc. (T.A. No. 63),
dated December 11, 1952, is relied upon by appellant here. In that case, to be
sure, the Board ruled that the notation of the words “tax included”
on the sales invoices issued by a taxpayer constituted substantial compliance
with General Circular No. 431, as amended. The ruling, however, binds neither
the Court of Tax Appeals nor this Court. Nor could it have been a guide for
appellant in connection with the sales covered by the instant case, for those
sales took place in 1948 and 1949, before the Wilson case was decided. Appellant,
therefore, is in no position to invoke said ruling as a contemporary
administrative interpretation of the circulars in question. If appellee here, as the administrative authority concerned,
subsequently adopted a different, and as we see it, correct, interpretation,
appellant can claim no vested right in the error, not having been led to act on
strength thereof.

The last question refers to the 25%
surcharge imposed upon appellant, amounting to P4,343.31.
Appellant seeks relief therefrom and cites the
following applicable principles, from which the Solicitor General expresses no
dissent:

“The question of whether the
specific penalty in addition to the 25% surcharge will be enforced, in cases of
delinquency in paying the percentage taxes is one of discretion with the
Collector of Internal Revenue. In all cases where the delinquent has delayed
the administration of the law or has intentionally violated the provisions of
the law,, or has purposely delayed filing the return, the Collector of Internal
Revenue will insist on enforcing the specific penalty for failure to make
return within the time prescribed by law. Failure to make this return and pay
the tax during the months in which the said taxes are payable will be
considered as purposely delaying filing the return. The necessity of notifying
the taxpayer of his delinquency or the discovery of such a delinquency by a
revenue officer will be treated as delaying: the administration of the
law.” (Sec. 15 (c), Reg. No. 11, Formilleza,
Commentaries on the National Internal Revenue Code, Vol. II, pp. 712-713, I950
ed.)

We are convinced that appellant, in
preparing its sales invoices as it did, was not guilty of an intentional
violation of the law. It did not delay filing- the returns for the sales taxes
corresponding to the period in question, let alone did so purposely. The delay
was in the payment of the deficiency, which arose from a mistaken understanding
of the regulations laid down by appellee. The ensuing
controversy was, in our opinion, generated in good faith and should furnish no
justification for the imposition of a penalty.

Wherefore, modified by eliminating the
surcharge of 25% imposed upon appellant, the judgment appealed from is
affirmed, without costs.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Paredes, Dizon and Regala, JJ., concur.

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