BIR Ruling No. 201-99

December 16, 1999 BIR RULING NO. 201-99 201-99 Belo Gozon Parel Asuncion & Lucila Attorneys-At-Law 15th Floor, Sagittarius Condominium H.V. dela Costa Street, Salcedo Village Makati City Attention: Atty . Felipe L . Gozon Gentlemen : This refers to your letter dated November 25, 1999 requesting for a ruling that the "off-gas" produced by your client, Petron Corporation, in its refinery furnaces is not subject to the excise tax on "processed gas" under Sec. 148(b) of the Tax Code of 1997. The facts of the case are summarized as follows: 1. Petron produces "off-gas" during its refining process at its Refinery at Bataan. 2. Prior to 1984, Petron had been producing "processed gas" which it sold to Planters Products, Inc., as their raw material for producing Ammonia, because of the high hydrogen yield. "Processed gas" is composed primarily of propane and butane, and a little of ethane and methane and other valuable gases. Petron had been paying excise tax on such "processed gas". With the closure of Planters Products, Inc. in 1984, the Refinery ceased to produce the "processed gas" and its components are diverted to their respective streams - methane and ethane to "off gas" for incineration in the flare or furnaces while propane and butane to LPG or Propane and Butane streams, respectively. 3. On the other hand, the "off-gases" currently produced by Petron refers to the refinery's waste gases containing Hydrogen Sulfide and other sulfur compounds, which if not burned will pollute the environment. It also contains less valuable gases the further recovery of which is not possible. The propane, butane and other valuable gases which remain in the "off-gas" are no longer recoverable and are therefore also burned in the flare or furnaces. Being environmentally hazardous, such "off-gas" is burned and destroyed at Petron's refinery furnaces. 4. Prior to Revenue Regulations No. 8-96, the "off-gas" produced by Petron was not considered as "processed gas" by the BIR. However, said regulations broadened the definition of processed gas, thus: "m) Processed gas it is 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 composed of pressurized gases like hydrogen, methane, ethane, propane and butane, and is used for refinery fuel." (Sec. 2 (m), REV. REGS. NO. 8-96, implementing R.A. 8184) 5. Due to the broadened definition of "processed gas" under the said Revenue Regulations, Petron has been forced to pay excise tax on its "off-gas" since 1996. LexLib 6. Petron asserts 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 regulation subjects to excise tax a product which should be outside the coverage of excise taxation. 7. 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). 8. The "off-gas" produced by Petron is not sold in any way. Neither is it being produced for the purpose of consumption as it is merely an unintended and necessary by-product of the refinery process of crude oil which is burned or destroyed. Neither should the word "disposition" as used in the said Section be taken to refer to the act of burning or destruction of the said "off-gas" product. 9. In defining the persons liable for the payment of excise tax on domestic products, 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. 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. 10. Thus, Petron asserts that the destruction and use of the "off-gas" it produces during its refinery process, without any REMOVAL from the place of production nor transfer to a third person, should not result in any excise tax liability. The basic issue therefore is whether or not "off-gas", as described in the foregoing representations, is embraced within the definition of "processed-gas" and/or whether or not it is classified as among the domestic products subject to excise tax. In reply, please be advised that 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", the law which Revenue Regulations No. 8-96 seeks to implement, did not make any definition of the term "processed gas". This law merely amended the tax rates on petroleum products, thus 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 is 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 excise taxes, 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 ", as correctly asseverated by Petron, 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 . . .' (Decision written by Mr. Justice Johnson in the case of Asiatic Petroleum Company vs. Rafferty, 38 Phil., 475) By the very nature of the "off gas" as above described, said product appears to be a waste by-product of the refinery process. It 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 Petron out of the process of disposing its "off gas". As such, this Office sees no iota of logic, much less sound basis in law, for subjecting such product to excise tax. Notwithstanding the innocuous description of "processed gas" as this term is defined in the regulations, we take cognizance of the fact that taxes are not supposed to be administered in an oppressive or confiscatory manner. In view thereof, this Office is of the opinion, and so holds, that "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. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be discovered that the facts are different, then this ruling shall be deemed null and void. LibLex Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue