BIR Ruling [UN-140-95]

April 5, 1995 BIR RULING [UN-140-95] MEMORANDUM TO: The Assistant Commissioner Performance Monitoring Service This refers to the Memorandum of Revenue Officer Cesar Espaol, Chief, Performance Audit and Monitoring Section, Regulatory Operations Monitoring Division recommending denial of the request of Berbacs Chemicals, Inc. (Berbacs), San Pedro, Laguna, dated August 1, 1994 to denature its "heads and tails", or wastes produced in the process of rectifying lower-grade alcohol to higher-grade alcohol. casia The records show that on August 26, 1964, Berbacs was granted a permit to operate an alcohol distillery plant; that in 1979 it temporarily stopped operations as a distillery because its additional outlay for wastes disposal rendered its production of rectified alcohol uneconomical; that in October 19, 1979, it obtained a permit to undertake alcohol rectification in order to convert lower grade alcohol purchased (under bond) from other distillers to a higher or premium grade alcohol suitable to the production of premium-grade liquor; that on September 3, 1980 it resumed its distillery operations; that on December 12, 1980 it was granted an A-1 permit to operate as a rectifier but shortly after, it stopped its distillery operations because of recurring pollution problems; that on August 12, 1982 it was granted a permit to produce denatured alcohol for motive power. Its denaturing operations however, is limited to denaturing and converting its "heads and tails" into motive fuel for its own use. In a nutshell, the sole issue to be resolved in this case is whether a rectifier may legally denature its own "heads and tails" (wastes) and convert it to motive fuel for its own use. If not, whether its permit as denaturer can be cancelled now and retroact the effectivity of the cancellation to the date of the grant thereof thereby subjecting Berbacs to a deficiency specific tax assessment in the amount of P640,756.00. It is contended that Revenue Regulations No. 6-80 dated September 1, 1980 limits the privileges to denature alcohol for motive power to distillers, or those who produce alcohol from raw materials, more particularly molasses which is a by-product in the manufacture of sugar from cane sugar. It does not grant Berbacs the privilege to denature its "heads and tails" for its own use. The concept of denaturing distilled spirits or alcohol for blending with gasoline or other fuel for motive power is relatively new. It was envisioned under P.D. No. 1089 to meet the challenge of low oil supply in the seventies created by the Israeli-Egyptian War. On August 1, 1980, Letter of Instruction No. 1051 was issued which was implemented by Revenue Regulations No. 6-80 dated September 1, 1980. Said Regulations governed the denaturing, taxation and removal of distilled spirits or alcohol for blending with gasoline or other motor fuels for motive power. Pursuant to Sections 2 and 3 of Revenue Regulations No. 6-80, stating "SEC. 2. Taxability of distilled spirits or alcohol .The imposition of the specific tax on distilled spirits or alcohol, whether rectified or absolute, to be used for blending with gasoline or other motor fuels for motive power as contemplated under Presidential Decree No. 1089 is hereby suspended. "In effect, the specific tax at the same rate as the tax imposed on premium gasoline shall, until further instructions, not apply to distilled spirits or alcohol to be used for blending with gasoline or other motor fuels for motive power. "However, alcohol to be used for the production of "Alcogas" shall be subject to specific tax at P0.01 per liter in accordance with Section 153(d) of the National Internal Revenue of 1977, as amended. "SEC. 3. Prior denaturing required before any distilled spirits or alcohol may be removed from the distillery premises or place of production for blending with gasoline or other motor fuels for motive power . In order to prevent the unlawful diversion of distilled spirits or alcohol intended for "Alcogas" production to the illicit manufacture of compounded liquors or any other intoxicating beverage whatever or medicinal preparations, flavoring extracts, and all other preparations containing distilled spirits as chief ingredient subject to specific taxes, no distilled spirits or alcohol intended for blending purposes in the production of "Alcogas" shall be allowed to be removed from the distillery premises or place of production without first having been suitably denatured and rendered unfit for oral intake in accordance with Section 175 of the National Internal Revenue Code of 1977, as amended. "The denaturing process shall, therefore, be governed by the following statutory requirements under Section 175, supra: "1. The process of denaturing alcohol shall be effected only within the distillery premises where the alcohol to be denatured is produced; "2. The denaturing formula must first be approved by the Bureau of Internal Revenue; and "3. The denaturing process shall be done only in the presence of duly designated BIR representatives." the imposition of the specific tax on distilled spirits or alcohol, whether rectified (upgraded) or absolute (the product produced directly in the fermentation and distillation of molasses), to be used for blending with gasoline or other motor fuel for motive power shall be suspended. However, the blended alcohol or "Alcogas" shall be subject to specific tax at the rate of P0.01 (now P0.05) per liter, pursuant to Section 145(4) of the Tax Code, as amended. It should be noted that rectified alcohol which are required to be denatured prior to its removal for blending with motor fuel (to produce "Alcogas") is no longer subject to specific tax under Section 138 of the Tax Code, as amended. But the blended product, or "Alcogas" is subject to the specific tax rate imposed on motor fuel. Even if Berbacs ceased to operate as a distillery plant and limited its operations to mere rectification or production of rectified alcohol, from lower-grade alcohol purchased from other distillers, it is very logical to state that Berbacs, as the producer of rectified alcohol is similarly authorized to denature it for blending with motor fuel to produce "Alcogas", more so, if it merely denature its "wastes" for blending and conversion to motive fuel for its own use. The fact is on August 12, 1982, Berbacs has obtained prior permit to denature its "wastes" and that permit has not been cancelled up to the present. Clearly, for denaturing its "heads and tails" or wastes produced in the process of rectifying low-grade alcohol to higher-grade alcohol, Berbacs relied on the said permit; hence, in the interest of justice and fair play, it should not be subjected to any deficiency specific tax assessment. (see ABS-CBN Broadcasting Corporation vs. Court of Tax Appeals, et al., L-52306, October 12, 1981, 108 SCRA 143; CIR vs. Burroughs Limited & CTA, L-66653, June 19, 1986). Unless clearly illegal and erroneous, previous permits granted to Berbacs by past Commissioners of Internal Revenue should be reconfirmed as valid. Accordingly, future requests of Berbacs to denature their "heads and tails" into motive fuel; for its own use, should be granted subject to its compliance of the terms and conditions indicated in its permit; Provided, that the excise tax on blended motive fuel (Alcogas) at the rate of P0.05 per liter is paid pursuant to Section 145(4) of the Tax Code, as amended. Precedents or acts of past Commissioners should be respected for the sake of stability. It should not be disturbed, except in the cases specifically provided under Section 246 of the Tax Code, as amended, e.g., misstatements, omissions of material facts, facts subsequently gathered are different, or bad faith on the part of the taxpayer. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue