BIR Ruling

1996 Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Gentlemen : This refers to your protest-letters dated April 25, 1990 and May 2, 1990, respectively, which you filed for and in behalf of SAN PABLO MANUFACTURING CORPORATION (San Pablo for brevity against its 1992 deficiency business tax assessments which are as follows: cdt Assessment No. Kind of Tax Total 1. FAS-4-87-90-000-511 Miller's Tax P4,596,093.58 2. FAS-4-87-90-000-518 Sales Tax 3,586,039.27 3. FAS-4-87-90-000-510 Miller's Tax 215,476.18 4. FAS-4-87-90-000-513 Percentage Tax 42,221.92 5. FAS-4-87-90-000-514 Percentage Tax 35,300.29 6. FAS-4-87-90-000-515 Increments on Late Payment 2,298.78 7. FAS-4-87-90-000-516 Fixed Tax 495.78 8. FAS-4-87-90-000-517 Fixed Tax 495.00 9. FAS-4-87-90-000-518 Fixed Tax 1,090.44 TOTAL AMOUNT DUE AND COLLECTIBLE P8,479,561.02 In one of you protest-letters dated April 25, 1990, you stated that except for the deficiency taxes covered by item numbers 1 and 2 hereinabove mentioned, your client has conceded liability for all others, from items 3 to 9, and is willing and able to pay the total amount due and collectible thereof. That being the case, we hesitate to disturb the wisdom of such offer and now therefore proceed to focus our attention on or limit the resolution of, the issues appertaining to the first two (2) deficiency assessments on miller's and sales taxes. I. FIRST ISSUE : TAXABILITY VS. NON-TAXABILITY OF CNO SALES TO UNICHEM It is your representation that San Pablo's sales of CNO to its mother company, UNICHEM, cannot and should not be categorized as "local sales"; rather, it should be treated entirely as "indirect export sales" that is exempt from the 3% miller's tax in conformity with the exemption clause enunciated by Section 203 of the old Tax Code, thus; "Sec. 203. Percentage tax upon proprietors or operators of rope factories, sugar centrals and mills, coconut oil mills, cassava mills, and desiccated coconut factories shall pay a tax equivalent to two (2%) per centum of the gross value of all the rope, sugar, coconut oil, cassava flour or starch, desiccated coconut, manufactured, processed or milled by them, including the by-product of the raw materials from which said articles are produced, processed, or manufactured such tax to be based on the actual selling price or market value of these articles at the time they leave the factory or mill warehouse. Provided, however, that this tax shall not apply to rope, coconut oil, and the by-product of copra from which it is produced or manufactured, and desiccated coconuts, if such rope, coconut oil, copra by products and desiccated coconuts shall be removed for exportation and are actually exported without returning to the Philippines, whether so exported in their original state, or as an ingredient or part of any manufactured article or product ." [Emphasis supplied]. Explaining the applicability of the underscored exemption clause as regards sales to UNICHEM, it is your contention that if the milled products are exported in their "original state", logically, the exporter is the proprietor or operator of the factory or miller himself. But if the products are exported "as an ingredient or part of any manufactured article or product" and not in their "original state", it follows as per your reasoning, that the exporter is a person or entity other than the miller or proprietor/operator of the factory. Stated in another way; the exemption from the miller's tax under Section 203, of the old Tax Code is not confined to exportations made by proprietor or operator of the factory or miller himself but applies with equal force in exportations effected by a person or entity other than the proprietor, operator or miller. What is basically essential then for purposes of the exemption from the miller's tax following your argument, is the fact that the milled products are eventually "exported" either in their original state, or as ingredient or part of any manufactured article. To buttress such argument, you cited the tax case of Procter & Gamble-PMC where this Bureau upheld the exemption from miller's tax of crude coconut oil sold to PRC which the latter removed from Procter & Gamble's factory or mill warehouse and directly loaded the same on an ocean-going vessel for export shipment to the United States. You assert that the facts and circumstances obtaining therein congruously apply to the conditions now under consideration. After careful review of your protests taking into account the law, rules and regulations applicable hereto as well as prevailing jurisprudence on the matter, we come to conclude that your justifications and/or contentions lack legal firmity that would warrant a departure from the examiner's findings. FIRSTLY, it must be pointed out in retrospect that when Section 203 (now Section 168) of the old Tax Code was amended by pertinent enactments, the following innovations were introduced and actually incorporated therein: 1. The addition of "palm oil" in the list or series of products manufactured, processed or milled by the owner, operator or miller; 2. The inclusion of the "miller himself" as one of those persons or entities not subject to miller's tax; if the products are removed for exportation and are actually exported without returning to the Philippines; 3. Classifying the planter or owner of raw materials an "exporter" who is thus entitled to certain tax privileges under relevant laws, rules and regulations. Evidently, the initial wording of Section 168, it specifically enumerated the persons liable to the 3% miller's tax, namely, the "proprietor or operator" of the factory, sugar central or mill; then it proceeds to lay down the conditions for the applicability of the exemption clause therein provided, thus; "Section 168. . . . Provided, however, That this tax shall not apply to rope, coconut oil, palm oil and the by-product of copra from which it is produced or manufactured, and desiccated coconuts if such rope, coconut oil, palm oil, copra by-products shall be removed for exportation by the proprietor or operator of the factory or miller himself, and are actually exported without returning to the Philippines . . ." Verily, the aforestated exemption clause exclusively pertains to "the proprietor or operator of the factory or miller himself" and effectively operates in cases where the conditions are simultaneously complied with by the latter. Where the law enumerates the subjects and/or conditions on which it is to operate, it is to be construed as excluding from its effects all those not expressly mentioned. Had it been the intention of our lawmakers to include or cover in the exemption clause subjects who export finished products with milled products as ingredients, it would have plainly said so in order to avoid doubt on a subject of such far-reaching importance. A simple phrase in said Section would have sufficed for this purpose. Far from it, the intendment of our lawmakers in Section 168 was actually to delimit the persons or subjects entitled to exemption from the miller's tax; and it is very clear from the provisions that their intention was to confer such right to those expressly mentioned therein and to no other, following the well-known rule of law " inclusio unius est exclusio alterious ". This brings us closer to the applicability of another important principle or rule in taxation that tax exemption is held strictly against the taxpayer. If not expressly mentioned in the law, at least, the exemption must fall within the purview by clear legislative intent. It would be repugnant to the rule were we to relax the coverage thereof by extending the same breath of exemption to persons other than the proprietor or operator of the factory or miller himself. In the tax case of Procter and Gamble-PMC, this Office had the occasion to rule that the crude coconut oil purchased and subsequently exported by the Philippine Refining Company (PRC) to the United States is exempt from 2% miller's tax. Justifying such exemption, we ruled: ". . . that the transaction described above was one uninterrupted, continuous whole, as there was no break in point of time from the removal of the crude coconut oil from the PG-PMC factory or mill warehouse to the loading thereof on the vessel "Stolt Lion" for exportation; that Philippine Refinery Company never had actual or physical possession of the crude oil from the time of purchase and removal thereof from PG-PMC factory or mill warehouse up to the loading of said crude coconut oil on the vessel for export to the United States. . ." The case just cited is circumstantially dissimilar to the sales transaction effected by your client San Pablo to UNICHEM, which you argued to be, tax-exempt following the exportation of the CNO abroad by the latter. Where in the PG-PMC case there was no break in point of time from the removal of the crude coconut oil from the factory to the loading thereof for exportation, this is absent in the San Pablo case for the simple reason that the CNO was first delivered to UNICHEM, stayed there for sometime to undergo a manufacturing or conversion process until it was eventually exported abroad. Evidently, that latter is not a clear case of a transaction that could be aptly characterized as "uninterrupted, continuous whole." II. SECOND ISSUE :IS SAN PABLO MANUFACTURING CORPORATION A MANUFACTURER OF BLEND OIL? In paragraph 3 of your protest letter dated May 21, 1990, you contended that your client San Pablo is not a "manufacturer"; consequently, it was not subject to the 10% "manufacturer's sales tax" on the sale of blend oil. To fall within the contemplation of the term "manufacturer", averred that the alteration and combination of any raw material, manufactured or partially manufactured product shall be effected through "physical or chemical" process, without which, there is no manufacturing activity within the definition of the Tax Code. Stated in another way, it is this process which spells the difference or demarcates the classification between a "manufacturer" or a "non-manufacturer." Based on facts, it is certain that your client San Pablo is a "manufacturer" from the legal standpoint. We give credence to the finding made by the examiner that in order to produce "blend oil," the raw materials thereof consisting of edible oil and crude corn oil have to undergo separate refining processes to remove substance impurities, fetidness and yellowish color. The refining processes serve as vital embellishers for the product to gain wide acceptability among its users. It is therefore beyond comprehension how a refined product, such as blend oil, could be produced by the simple act of pouring 10% crude oil and 90% edible oil into one container. Such allegation is palpably implausible and far from the actual reality of producing blend oil as desired. Thus, when refined edible oil is mixed with refined corn oil in order to produce blend oil, both material components lose their respective identities. It is no longer possible to identify which is edible oil and which is corn oil. As a result, therefore, we can conclude that a new product is produced subject to the rate of 20% sales tax. In view thereof, it is requested that you advise your client, SAN PABLO MANUFACTURING CORPORATION, to pay the following deficiency taxes which are covered by the following assessments, exclusive of interests and surcharges: Type of Tax/Year Assessment No. Amount 1987 Def. Miller's tax FAS-4-87-90-000-510 P215,476.18 Def. Miller's tax FAS-4-87-90-000-511 4,596,093.58 Def. sales tax FAS-4-87-90-000-512 3,586,089.27 Def. percentage tax FAS-4-87-90-000-513 42,221.92 Def. percentage tax FAS-4-87-90-000-514 35,300.29 Increments on late FAS-4-87-90-000-515 2,298,78 payment of miller's tax Def. fixed tax FAS-4-87-90-000-516 495.78 Def. fixed tax FAS-4-87-90-000-517 495.00 Def. fixed tax FAS-4-87-90-000-518 1,090.44 TOTAL P8,479,561.02 to the Revenue District Office nearest to your clients place of business within fifteen (15) days from your receipt hereof in order that this case be closed and terminated. LexLib Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue