BIR Ruling [DA-020-01]

February 16, 2001 BIR RULING [DA-020-01] 129; 148 (b); RR 8-96; 201-99 Pilipinas Shell Petroleum Corporation Shell House 156 Valero St., Salcedo Village City of Makati Attention: Mr . P . R . Cruz General Manager-Taxation Gentlemen : This refers to your letter dated January 19, 2001 requesting for a ruling that the "refinery fuel gas" or "off-gas" produced in your refinery furnaces is not subject to the excise tax on "processed gas" under Sec. 148 (b) of the Tax Code of 1997. AEcTCD It is represented that as a consequence of your petroleum refining process in your Refinery at Tabangao, Batangas, waste furnace gas is necessarily produced; that the "refinery fuel gas" currently produced by Shell refers to the refinery's waste gases containing methane, ethane and Hydrogen Sulfide which are disposed of by means of burning or incineration in the flare or furnaces; that this is a necessary process as if it is not burned, such waste gases will pollute the environment; that there may remain some valuable gases in the "refinery fuel gas" but their further recovery for commercial purposes is no longer possible and are therefore also burned in the flare or furnaces. It is also alleged that due to the broadened definition of "processed gas" under Revenue Regulations 8-96, where it is defined as " the lightest by-product component of refined crude oil and is generated from the various process units like crude distillers, hydro desulphurizers and platformers, it is propane and butane, and is used for refinery fuel ", Shell has been forced to pay excise tax on its "refinery fuel gas"; that the broadened definition of "processed gas" in the said Regulations is invalid for it expands the letter and spirit of the law it seeks to enforce in the sense that said Regulations subjects to excise tax a product which should be outside the coverage of excise taxation; that Section 129 of the Tax Code of 1997 enumerates the goods which are subject to excise tax, thus: "SEC. 129. Goods Subject to Excise Taxes . Excise taxes apply to goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported . . ." (emphasis supplied). that the "refinery fuel gas" produced by Shell is not sold in any way; that neither is it being produced for the purpose of commercial consumption, as it is merely an unintended and necessary by-product of the refinery process of crude oil, which is burned or destroyed; that Section 130 of the Tax Code clearly provides that to be subject to excise tax, the product must be REMOVED from the place of production, mining or extraction; that by clearly contemplating a removal from the place of production, mining or extraction, the word "disposition" as used in Section 129 necessarily means a disposition to a buyer, purchaser or transferee. Thus, it is asserted that the destruction and use of the "refinery fuel gas" during the refinery process, without any REMOVAL from the place of production, nor without transfer to a third person, should not result in any excise tax liability. HDCTAc In reply, please be advised that the law which Revenue Regulations No. 8-96 seeks to implement (Republic Act No. 8184, entitled " An Act Restructuring the Excise Tax on Petroleum Products, Amending for this Purpose Pertinent Sections of the National Internal Revenue Code, As Amended ") did not make any definition of the term "processed gas". Since the said law merely amended the tax rates on petroleum products, this Office is of the opinion that the construction given to the term "processed gas" prior to the promulgation of RR 8-96 should remain controlling for purposes of the issue under consideration. As is still the case in this taxing jurisdiction, excise taxes are only made to apply to certain class of goods manufactured or produced in the Philippines provided such exciseable products are " removed from its place of production " (Section 130, Tax Code of 1997). Such removal is intended to put the manufactured products " for domestic sale or consumption or for any other disposition " (Section 129, ibid .). Thus, if not so removed from its place of production, the tax shall not apply. It should be stressed that in this jurisdiction, excise tax, whether under the specific tax or the ad valorem tax system, is basically an indirect tax imposed on consumption of certain types or class of goods, whether locally manufactured or imported. While the tax is directly levied upon the manufacturer/importer upon removal of the taxable goods from its place of production (in case of locally manufactured goods) or from the customs custody (in case of importation), the tax is, in reality, actually passed on to the end consumer as part of the transfer value or selling price of the goods sold, bartered or exchanged. This has been the premise of this tax from its inception until the present. Thus, the phrase " or for any other disposition ", may only be interpreted as a disposition of the manufactured goods in the course of the manufacturer/importer's business, for consumption of the end consumers. The Supreme Court itself has had the occasion to so hold that unless exciseable products are placed in the market for domestic consumption by the public, the tax will not apply. Thus, it was held: ". . . The theory of the law, with reference to the internal-revenue tax upon such merchandise, seems to be that the tax is not due and payable until it is about to be put into the commerce or trade of the country . The condition of the market at a particular time, or the situation in business generally, might cause the producer to withhold his merchandise and not allow it to be removed from the place of production for months, or even years; could he, under the above quoted provision of the law, be required to pay the internal-revenue taxes until he saw fit to place his product upon the market? While the law permits the producer of taxable merchandise to delay the payment of the internal-revenue tax until 'immediately before removal of the same from the place of production,' the duly authorized and promulgated regulation of the defendant himself permits the importer of taxable merchandise to deposit the same in a bonded warehouse and to delay the payment of internal-revenue tax until the same is about to be removed therefrom. . . (Asiatic Petroleum Company vs. Rafferty, 38 Phil., 475) By the very nature of the "refinery fuel gas" or "off-gas" as above described, said product appears to be a waste by-product of the refinery process. As represented, said gas is disposed of by means of destruction by burning to prevent pollution of the environment. All in all, there appears to be no introduction or removal of the product for commercial purposes and neither is there any economic benefit nor taxable gain derived by Shell out of the process of disposing said product. In view hereof, this Office is of the opinion, and so holds, that "refinery fuel gas" or "off-gas" is not subject to excise tax under Section 148(b) of the Tax Code of 1997 and that the said product is not covered by the definition of "processed gas" under Revenue Regulations No. 8-96. Finally, even if assuming arguendo , that "off-gas" is indeed embraced within the category of "processed gas", still we see no application of the tax, there being no removal of such product for domestic sale or consumption as contemplated by the law. (BIR Ruling No. 201-99 dated December 16, 1999) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be discovered that the facts are different, then this ruling shall be deemed null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group