BIR Ruling [DA-054-01]

March 30, 2001 BIR RULING [DA-054-01] 129, 130, 148, 201-99; DA-020-2001 Caltex (Phil.), Inc . 6F 6750 Ayala Avenue Makati City Attention: Mr . Josue C Baez, General Manager, Fiscal Services Gentlemen : This refers to your letter dated December 18, 2000 requesting for a ruling that the "off gas" or synonymously, the "fuel gas" produced in your refinery and burned in your flares or furnaces is not subject to the excise tax on processed gas under Section 148(b) of the Tax Code. It is represented that Caltex (Philippines), Inc. (CPI) is a domestic corporation that is engaged in, among others, refining and manufacturing petroleum products; that it produces "off gas" or "fuel gas" during its refining process at its refinery in San Pascual, Batangas; that this "off gas" or "fuel gas" refers to the refinery's waste gases containing Methane, Ethane, and Hydrogen Sulfide; that although it is also the lightest by-product of the crude oil refining process, the "off gas" or "fuel gas" does not leave its place of production and is not sold as a product for commercial consumption; that the fuel gas is an unintended but necessary by-product of refining crude oil, and is not for sale, consumed, or disposed to the public; that being environmentally hazardous, it is disposed of by burning in CPI's furnaces and flares; that prior to Revenue Regulations No. 8-96, the "off gas" or "fuel gas" produced by CPI was not considered as "processed gas" by the BIR, and; finally, that CPI was subsequently made to pay excise tax thereon in view of the broadened definition of processed gas under the said Revenue Regulations 8-96. 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. (DA-020-2001, February 16, 2001) 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. (BIR Ruling No. 201-99, dated December 16, 1999). 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: " . . . [t]he 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. Raferty, 38 Phil 475 ) By the very nature of the "refinery fuel gas" or "off gas" or "fuel 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 Caltex (Philippines), Inc. out of the process of disposing said product. In view thereof, this Office is of the opinion, and so holds, that "refinery fuel gas" or "off-gas" or "fuel 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 "refinery fuel gas" or "off gas" or "fuel 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; DA-020-2001, February 16, 2001). 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