G. R. No. 17837. January 31, 1963
ORIENTAL KAPOK INDUSTRIES, PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
BARRERA, J.:
from the decision of the Court of Tax Appeals (in C.T,A. Case No. 506)
affirming the decision of respondent Commissioner of Internal Revenue
denying petitioner’s claim for refund of P3,212.69 paid as sales tax
for 1956, under Section 186 of the National Internal Revenue Code, as
amended.
It appears that petitioner, a duly organized partnership, is
engaged in the business of buying unhusked kapok and processing the
same to produce clean, light and fluffy kapok which is later sold to
manufacturers of mattresses, pillows, and cushions. The processing is
done in the following manner:
“(1) MACHINERY USED—The machinery used in the
processing of the kapok fibers by the Oriental Kapok Industries, Cebu
City, is a locally made contraption, consisting: of a horizontal
cylinder divided lengthwise into two compartments by a wire netting.
The upper compartment (marked as Chamber A in the enclosed diagram)
housed a revolving shaft running lengthwise thru the middle of the said
compartment, in which sets of blades or paddles are attached a few
apart. This revolving shaft functions by means of a series of pulleys
and belts attachment powered by a 50-horse-power diesel engine. Above
this cylinder is a wooden platform coming from the storage room of the
raw kapok. The raw kapok passes on this platform and enters Chamber A
of the cylinder thru the opening at the right upper end. Once the raw
kapok is inside Chamber A it is beaten by the blades or paddles. In
this process, the seeds and the broken cores are loosened and fall down
thru the wire netting to Chamber B, which is the lower compartment of
the cylinder. At the right end of Chamber B, a blower is installed,
which blows the loosened kapok fibers thru a piping to another room,
which is marked as Chamber X in the enclosed diagram. The kapok fiber
blown to Chamber X is the finished product which is to be packed in the
bags for the market. The machine is called by the Management as the
‘SEPARATOR’.“(2) CHEMICAL AND/OR INGREDIENTS USED—No
chemicals and/or ingredients are used before, during, and after the
cleaning process. The raw kapok with seeds and cores but without husks
or skins, is first aired in the yard of the compound inclosed by wire
nettings. After a day or two, it is then fed to the ‘separator’ machine
thru the entrance in the wooden platform.“3) PURIFYING OR
REFINING PROCESS—In the particular machine used by the Oriental Kapok
Industries, Cebu City , there is only one chamber equipped with a shaft
wherein seta of blades or paddles are attached. The raw kapok which is
fed thru an opening is being beaten by the rotating blades, loosening
the fibers, seeds and cores in so doing. The seeds and broken cores
fall to the lower chamber, where they are collected for other uses. It
should be noted that this mechanized process evolved from the primitive
form of separating the seeds from the kapok fibers for household use,
which is by placing the kapok fibers, devoid of husks or skins, in a
cylindrical bamboo basket and rotating a small bamboo stick sliced into
several places at the Lower extremity, by rolling the said stick with
the pressed palms of both hands, within the basket. The ‘separator’
machine used by Oriental Kapok Industries, is simply constructed along
the above-mentioned principle, except for the blower installed to blow
the light fibers thru the piping to the depositing chamber.“(4) CHANGES EFFECTED ON THE FINISHED PRODUCTS, AS COMPARED WITH THE
RAW MATERIAL.—The raw material is the dry, not-thoroughly-unloosened
fiber with seeds, cores, and a few sprinkling of foreign matters. The
finished product is the light, loose, and fluffy fibers cleaned of
seeds, cores, and other foreign matters. No apparent change in the
color can be detected.” (Exh. 3, pp. 60-61, BIR. Records.)
On its sales of processed kapok fiber, petitioner paid the total
sum of P7,246.89 as 7% sales tax imposed under Section 186 of the Tax
Code, corresponding to the period from the first quarter of 1955 to
November, 1956.
Contending that it is not a manufacturer of kapok fiber, petitioner
filed with respondent a claim for refund of said sum paid as sales tax.
The claim for refund was denied by respondent in his letter of October
4, 1957 . Petitioner moved for reconsideration in his letter of
November 14, but the same was denied by respondent in his letter of
January 31, 1958 .
On February 21, 1958 , petitioner filed a petition for review with
the Court of Tax Appeals. In said court, respondent asserted that
petitioner’s claim for refund of the sum of P4,034.20 as sales tax for
1955 had already prescribed. Petitioner admitted the prescription of
said claim and, therefore, limited its claim for refund to the sum of
P3,212.69 paid as sales tax for the first quarter of 1956 to November,
1956.
On November 12, 1960 , the Court of Tax Appeals affirmed the decision of respondent, partly stating:
“In Cosmos Kapok Factory vs. Araneta,
C.T.A. No. 125, March 29, 1957 , and Pacific Kapok Factory, C.T.A. No.
342, June 29, 1959, it was held that the processing of raw kapok into
clean kapok fiber by means of a machine constitutes manufacturing, and
the manufacturer is subject to the sales tax on his sales of kapok
fiber prescribed in Section 186 of the Revenue Code, We quote:‘In Cosmos Kapok Factory vs. Araneta, C.T.A. No. 125, March 29, 1957 , wherein the facts are the same as in the instant ease, it was held that—
“* * * petitioner falls squarely under the second classification
mentioned in Section. 194(x) of the Tax Code, viz: ‘any one who by any
such (physical or chemical) process alters the qualify of any such raw
materials or manufactured or partially manufactured product, so as to
reduce it to marketable shape, or prepare it for any of the uses of
Industry.’ * * *“The above described process, clearly
indicates that the kapok is sufficiently changed by means of machinery,
such that a thick and tough raw kapok is transformed into a cleaned and
light kapok, thereby altering its quality, so as to reduce it to
marketable shape, or prepare it for any of the uses of industry and
thus become a distinct class of merchandise (see Ngo Siek vs.
Collector, 52 Off. Gaz., 6873). We are, therefore, of the opinion, and
so hold, that petitioner is a manufacturer as defined in Section 194
(x) of the National Internal Revenue Cole and, as such, liable for the
7% tax on its sales of processed kapok prescribed by Section 180
thereof.”“The records do not reveal
anything which would justify reversal of our opinion in the case of
Cosmos Kapok Factory cited above. It is, however, argued that kapok
being an agricultural product, petitioner is exempt from the sales tax
on its sales of kapok, pursuant to Section 188(b) of the Revenue Code.
Section 188 (b) exempts from the sales tax, agricultural products,
when, they are sold, bartered, or exchanged in this country by the producer or owner of the land where produced.
But petitioner is neither the producer of the kapok, nor the owner of
the land where it was produced. It merely purchased the kapok winch it
processed and later sold. Therefore, Section 188 (b) does not apply to
petitioner. (Pacific Kapok Factory vs. Aranas, C.T.A. No. 342 June 29, 1959.)“In line with, our opinion in the cases cited above, the decision appealed from is affirmed. With costs against petitioner.
“So ordered.”
From this decision, petitioner appealed to us.
The sole issue for determination in this case is whether petitioner
is a “manufacturer” of kapok and, therefore, liable to pay the 7% sales
tax imposed under Section 186 of the tax Code.[1]
Section 194 (x) of the Tax Code defines the term “manufacturer” as follows:
” (x) ‘Manufacturer’ includes every person who by “physical or chemical process alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as
to prepare it for a speeded use or uses to which it would not have been
put in its, original condition, or who by any such process alters the
quality of any such raw material or manufactured or partially manufactured product so us to reduce it to marketable shape or prepare it for any of the uses of industry, or who by any
such process combines any such raw material or manufactured or
partially manufactured products with other materials or products of the
same or of different kinds and in such manner that the finished product
of such process of manufacture can be put to a special use or uses to
which such raw material or manufactured or partially manufactured
products in their original condition could not have been put, and who
in addition alters such raw material or manufactured or partially
manufactured products, or combines the same to produce such finished
products for the purpose of their sale or distribution to others and
not for his own use or consumption.” (Italics supplied.)
Petitioner, to our mind, is a manufacturer as denied in the
above-quoted provision of the Tax Code. The Court of Tax Appeals found
as a fact that petitioner buys unhusked kapok, that is, kapok with
skins or husks or kapok pods. Then the pod is broken and the skin is
removed. Thereafter the raw kapok fiber with seeds and cores is aired
in the yard of the compound. After a day or two, the kapok is fed into
a machine, called “separator” and processed in the manner described
above. It is therefore clear that the physical process employed by
petitioner from the time it buys the unhusked kapok pods until it
obtains the processed product, through the use of a machine, known as
the “separator”, not only alters the exterior texture or form
of the raw unhusked kapok pods, but also the quality of the kapok fiber
itself from its original state of “dry, not-thoroughly-unloosened fiber
with seeds, cores, and a few sprinkling of foreign matters”, into one
which is “light, loose, and fluffy, cleaned of seeds, cores, and other
foreign matters’, so as to reduce it to marketable shape or prepare it
for any of the uses of industry, such as the stuffing of mattresses,
pillows and cushions. The finished product is certainly and essentially
different from the raw unhusked kapok pods that petitioner buys, and is
a distinct class of merchandise with qualities and uses all its own.
Hence, even granting, arguendo, that the process employed
does not amount to manufacturing as ordinarily understood, still it
involves production of the finished article which makes the petitioner
a “producer” whose sales of its product are taxable under said Section
186 of the Tax Code. (Ngo Siek vs. Collector of Internal Revenue,
L-8989, October 18, 1956 , 52 Off. Gaz., 6873.)
Petitioner, however; argues that since kapok is an agricultural
product, it is exempt from the sales tax in question, pursuant to
Section 188(b) of’ the Tax Code.[2]
But, as the trial court correctly pointed out, petitioner is neither
the producer of the raw kapok, nor the owner of the land where it is
produced. It merely purchased the kapok which it processed and later
sold. Consequently, it may not invoke, or be entitled to the tax
exemption provided in said section. (See Ngo Siek vs. Collector of
Internal Revenue, supra)
With these conclusions, there is no need to discuss the other points raised by petitioner in its brief.
Wherefore, finding no error in the appealed decision of the Tax
Court, the same is hereby affirmed, with costs against the petitioner.
It is so ordered.
Bengzon, C. J., Padilla, Bautista Angelo, Concepcion , Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ., concur.
Labrador , J., I reserved my vote.
[1] Sec. 186. Percentage tax orb sales of other articles.—There
shall be levied, assessed and collected once only on every original
sale, barter, exchange, and similar transaction ether for nominal or
valuable considerations, intended to transfer ownership of, or title
to, the article’s 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 article so
sold, bartered, exchanged or transferred, such tax to be paid by the
manufacturer or producer. * * *.”
[2] SEC. 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 whether in their
original form or not when sold, bartered, or exchanged in this country
by the producer or owner of the land where produced, * * *.”