Commissioner of Internal Revenue v. Procter and Gamble Philippine Manufacturing Corp.

FIFTEENTH DIVISION [CA-G.R. SP No. 20422. August 9, 1991.] (C.T.A. Case No. 2740) THE COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS , respondents . D E C I S I O N YNARES-SANTIAGO , J p : This is a petition for review on certiorari of the Decision of the Court of Tax Appeals dated September 30, 1995 in C.T.A. Case No. 2740, entitled "Procter & Gamble Philippine Manufacturing Corporation vs. The Commissioner of Internal Revenue" which reversed petitioners' assessment against Procter & Gamble Philippine Manufacturing Corporation (PMC), in the amount of P1,032,257.38, representing he 1967 deficiency sales tax on the sales of lard, margarine, soap, etc., under Sec. 186 of the National Internal Revenue Code. The facts as summarized by the Court of Tax Appeals, are as follows: "Sometime on February 26, 1968, Revenue Examiner Ruperto Estrada examined the books of account and other accounting records of petitioner [Procter & Gamble (PMC) therein] for business tax purposes for the year 1967. After investigation, petitioner received on September 17, 1971 a letter of assessment dated August 19, 1971 demanding against petitioner for 1967 the payment of deficiency 7% sales tax on lard, margarine, etc., in the amount of P1,032,257.38, and deficiency sales tax (difference between 7% and 2%) on cooking oil in the amount of P263,570.91, or a total of P1,295,828.30, inclusive of 25% surcharge for late payment (pp. 68-69, BIR Rec.) computed as follows: 7% Sales Tax on Lard, Margarine, Soap, etc. Amount subject to sales P48,084,009.21 tax per investigation 7% sales tax due thereon 3,365,880.64 Less: Tax already paid 2,540,074.73 Deficiency sales tax due 825,805.91 Add: 25% surcharge 206,451.47 for late payment P1,032,257.38 =========== 7% Sales Tax on Cooking Oil Amount subject to sales P4,184,316.71 tax per investigation 7% sales tax due thereon 292,902.16 Less: Tax already paid 82,045.43 Deficiency sales tax due 210,856.73 Add: 25% surcharge 263,570.91 for late payment TOTAL AMOUNT DUE AND P1,295,828.29 COLLECTIBLE =========== The assessment for deficiency 7% tax on "lard, margarine, soap, etc.", aforesaid arose mainly from the disallowance of the deductions for containers and packaging materials for not allegedly being under then Section 186 of the Tax Code (par. 5, Petition for Review, Admitted, par. 4, Answer). In other words, the raw materials were not made subject to the 7% sales tax but allegedly to the 3% contractor's tax, but said materials having been produced allegedly by suppliers per specifications of petitioner, while the assessment for deficiency sales tax on cooking oil is due to the contention of respondent that the same was taxable under then Section 186 of the Tax Code at 7% and not under Section 189 at 2% (par. 7, Petition for Review, Admitted, par. 1, Answer). On September 28, 1971, petitioner wrote a letter dated September 27, 1971 addressed to the Bureau of Internal Revenue' Business Tax Division and requested for details as to how the assessment was arrived at (Exh. "BB-3", pp. 122, CTA Rec., pp. 8-10, TSN, February 20, 1979). Then on November 25, 1971, petitioner filed its letter of protest. (Exh. "M", pp. 86-100, BIR Rec.) On August 12, 1975, respondent rendered a decision, which was received by petitioner on September 13, 1975 (Exh. "AA", pp. 169-174, BIR Rec., Annex "A", Petition for Review) denying the protest. Hence, petitioner filed its petition for review on September 17, 1975. Respondent filed its answer to the petition for review on March 16, 1976." On September 30, 1985, the Court of Tax Appeals, reversed the findings of the Commissioner, holding PMC not liable for deficiency percentage tax in the amount of P1,032,257.38. A petition for review was filed with the Supreme Court by the petitioner. In a Resolution dated March 26, 1990, the Supreme Court referred the herein petition to the Court of Appeals, who has concurrent jurisdiction over the case. The petitioner raised two issues in this petition, to wit: 1. Whether respondent court of Tax Appeals had jurisdiction over this case, and 2. Whether the deficiency sales tax assessment is valid. Republic Act No. 1125 which created the Court of Tax Appeals provides in Sections 7 and 11 thereof: "Sec. 7. Jurisdiction . The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided (1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue code or other law or part of law administered by the Bureau of Internal Revenue; xxx xxx xxx "Sec. 11. Who may appeal ; effect of appeal . Any person, association or corporation adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after of such decision or ruling." Republic Act No. 1125 vests in the Court of Tax Appeals (CTA) exclusive appellate jurisdiction to review by appeal decisions of the Collector of Internal Revenue in cases involving (1) disputed assessments, (2) refunds of internal revenue taxes, (3) penalties imposed in relation thereto, and (4) other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue. The instant case involves a disputed assessment and thus falls within the jurisdiction of the Court of Tax Appeals. The assessment however must be appealed by those adversely affected by a decision or ruling of the Commissioner of Internal Revenue to the Court of Tax Appeals, within thirty days after the receipt of the decision or ruling, otherwise the assessment shall become final and unappealable. In other words, this thirty-day requirement is jurisdictional. However, while an assessment by the BIR can become final and executory, it is not however, the Commissioner's decision contemplated by Sec. 7 of R.A. 1125 from which a petition for review may forthwith be filed with the Court of Tax Appeals (Commissioner v. Villa, 22 SCRA 4 [1968] citing St. Stephen's Association and St. Stephen's Chinese Girls' School v. Collector of Internal Revenue, 104 Phil. 314 and other cases). Rather, it is the action taken by the Commissioner in response to the taxpayer's request for reconsideration of the assessment or to his written claim for refund that would constitute the decision, the receipt of which shall start the thirty-day period within which the taxpayer may appeal to the Court of Tax Appeals. As the Supreme Court in the Villa case noted, Sec. 11 R.A. 1125 uses the word "decisions", not "assessment", thus further to judicial review the decision of the Commissioner on the protest of the assessment, but not on the assessment itself. The Court of Tax Appeals correctly held thus: "The assessment dated August 19, 1971 was properly protested or disputed on November 25, 1971. This protest was decided by respondent [Commissioner of Internal Revenue] on August 12, 1975. This decision dated August 12, 1975, received by petitioner on September 13, 11975, became the decision on the disputed assessment which should be appealed to this court within the thirty days from receipt pursuant to Section 7 and 11 of Republic Act No. 1125, the charter of this Court. The decision of the Commissioner of Internal Revenue having been brought to this Court on Appeal on September 17, 1975, or three days from receipt of said decision on the disputed assessment, it was appealed within the period provided by law (St. Stephen's Association and St. Stephen's Chinese Girl's School v. the Coll. (Comm.) of Internal Revenue, 104 Phil. 314, Comm. v. Villa, 22 SCRA 3, Comm. Gonzales, 18 SCRA 757, Ker and Co., Ltd., CTA 4 SCRA 160, Roman Catholic Archbishop of Cebu v. Coll. 4 SCRA 279)." Petitioner, however, claims that the letter dated September 28, 1971, sent by herein private respondent requesting the BIR for details of the assessment and likewise for an extension of thirty (30) days to submit a memorandum protesting the assessment, is not the protest contemplated under the rules and regulations, particularly Department Order No. 213. This order mandates that any request for reinvestigation or re-examination of a tax assessment should be under oath, should state the grounds relied upon, accompanied by supporting documents. Petitioner's claim has no merit. The latter of private respondent dated September 27, 1971 which was actually filed on November 25, 1971 is equivalent to a protest. The letter reads as follows: "September 27, 1991 "The Commissioner of Internal Revenue Manila Dear Sir : Our client, Procter & Gamble Philippine Manufacturing Corporation, has referred to us for reply your letter dated August 19, 1971, received by it only on September 17, 1971, assessing it deficiency sales tax for the year 1967 in the amount of P1,295,828.29, inclusive of surcharge. Inasmuch as we are not aware of the basis of your deficiency assessment, particularly on how you arrived at the amount subject to sales tax, We are requesting for the details thereof in order that we can properly determine and ascertain the correctness of your assessment. Likewise, we are requesting for an extension of at least thirty (30) days from receipt of the information requested within which to take up the matter with you and submit our memorandum in protests of the assessment, should the facts warrant. We trust our request will be granted. Very truly yours, (SGD) M. GUTIERREZ Tax Division" The request of petitioner was granted by implication when the Commissioner of Internal Revenue stated in its final decision dated August 12, 1975, the following: "This constitutes the final decision of this Office on the matter. If you are not agreeable, you may appeal to the Court of Tax Appeals within thirty days from your receipt of this letter. Very truly yours, (SGD) MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5" The Supreme Court in the Villa Case and other related Cases, emphasized the rule that the person adversely affected by a decision or ruling of the Collector or Commissioner may file an appeal with the Court of Tax Appeals within thirty days after the receipt of such decision or ruling. The thirty days period commences to run after the receipt of the decision, not after the filing of the protest. Anent the second issue, petitioner claims that the deficiency sales tax assessment is valid because in computing the 7% sales tax under Section 186 of the Tax Code, private respondent erroneously deducted from gross sales the cost of raw materials which were earlier made subject to the 3% contractor's tax which is not allowed by law. Only components raw materials, which were made subject to sales tax, not to contractor's tax, are deductible from the sales tax due on the finished article. This claim prosper. As correctly found by the Court of Tax Appeals: "The final decision of respondent on the disputed assessment states that the reason for the disallowance of the costs of the containers and packaging materials purchased by petitioner against the gross sales of lard, margarine, soap, etc., was that said containers and packaging materials were purchased upon specifications made by petitioner and that only 3% tax was paid thereon (p. 174, BIR Rec.). Obviously, the decision of respondent was based on the examiner's report, with the exception that Examiner Ruperto Estrada never said that only 3% tax was paid thereon (Emphasis ours). What he said in his report is that ". . . deducted the raw materials which are believed to be subject the 3% contractor's tax." Please see memoranda dated March 18, 1970 & Jan. 6, 1971, pp. 39-40 & pp. 65-66, BIR Rec. respectively). It is contrarily noted that the list of suppliers from whom the raw materials were secured and the amounts purchased from them by petitioner shows that actually 7% tax was paid thereon by the suppliers (p. 8, BIR Rec.) and not 3% tax." Petitioners' claim that private respondent computed the 7% sales tax on the gross selling price in the issuance of invoices to its customers without firsts deducting therefrom the cost of raw materials used, is not well taken. As correctly pointed out by the respondent Court: "As to the fourth issue, respondent [Commissioner] alleges that petitioner [PMC], in the issuance of invoices to its customers, computed the 7% sales tax on the gross selling price without first deducting therefrom the cost of raw materials used in contravention of the decision in the case of Philippine Acetylene Company vs. Silverio Blaquera, G.R. No. 1-13728, Prom. November 30, 1962 (pp. 282-286, CTA Records). Petitioner, on the other hand, argues that there is no legal justification for including the amounts billed to its customers as part of the gross selling price, in computing the 7% sales tax under Section 186 of the Tax Code, since the sales invoices issued clearly show or indicate that the amount of sales tax was included in the total amount or price payable by the customer (pp. 229-235, CTA Records). In the other words, petitioner maintains that the percentage and computed after first deducting the cost of raw materials used by it in the manufacture of its finished products such as lard, margarine, soap, etc." "The records will show that in recommending the assessment, respondent's Examiner Ruperto Estrada relied on the Philippine Acetylene case, supra , alleging that the taxpayer did not deduct the cost of raw materials before computing the 7% tax and that the assessment of respondent was issued based on the allegation that the sales taxes paid were not separately billed to petitioner's customers. (Connell Bros. Company Philippines vs. Collector of Internal Revenue, G.R. No. L-15470, December 26, 1963, 9 SCRA 735). There seems to be a disagreement between the respondent and his examiner as to the actual basis for including the percentage taxes as part of the tax base. However, both as part of the tax base. However, both grounds to our mind are erroneous. Petitioner maintains otherwise asserting that it computed the 7% tax after it had deducted the cost of raw materials. "We will now discuss separately the grounds advanced by respondent and his examiner. With respect to the ground advanced by respondent's letter of denial subject of this appeal, witness Araceli Garcia testified to the effect that since 1962, petitioner corporation had been billing the tax separately to its customers (pp. 4-7, t.s.n., April 5, 1977) and that since that time on there was no other examiner who had raised this question. At the hearing of October 6, 1978 (p. 46 CTA Records), witness presented sample sales invoices for the year in question and official receipts evidencing payments made by customers. A perusal of Exhibits "Q", "R" and "S" (pp. 117-119, CTA Records, said invoices will indicate that there are three columns therein, namely, 'Unit Price Sales Tax Included', 'Amount Sales Tax Included', and 'Sales Tax'. Under the second money column of Exhibit "Q" appears the product of quantity multiplied by unit price for each item, e.g., Tide 60', etc. For each item, the sales tax is recorded under the third money column. Thus, for the second item, 'Tide 288' shows a unit price of 'P24.95', the amount sales tax included of 'P823.35', and sales ta of 'P22.44' under the column 'Sales Tax'. The customer is appraised of the unit price and total amount of each item, and tax on such amount but at the end of the invoice the following information appears; Unit Price Amount Sales Tax Sales Tax Sales Included Included Tax End of Invoice P2,559.50 P53.58 Gross 2% Discount 51.29 Net P2,508.31 ======== "From the information gathered from the invoices, the customer is appraised of the details by item and by totals. The Customer is appraised too of the sales tax being shifted to them. This manner of separate billing the sales tax is in accord with the Connell Bros. case, supra . "As to the ground asserted by Examiner Estrada, we could see that he relied on bare allegation without any factual support, as he has not submitted any sample invoice showing that petitioner billed to its customers the 7% tax before deducting the raw materials. Neither did he reiterate at the hearing his grounds which appears only in his second memorandum; he merely relied on the Philippine Acetylene case and alleges that the tax was computed before deductions for raw materials, moreover, his ground was repudiated by respondent who asserted another ground in his letter-decision denying petitioner's protest. Nonetheless, petitioner had strong oral and documentary evidence which were never impreached, countered or rebutted by respondent. Both grounds relied upon and asserted by the respondent is based on erroneous presumptions had without any factual basis to lean on." The above findings of facts made by respondent Court of Tax Appeals must be accorded deference. In the absence of respondent Court's abuse or improvident exercise of authority, the facts as determined is entitled to respect. [Nasiad vs. CTA, 61 SCRA 238 (1974)]. Only errors of law and not rulings on the weight of evidence are reviewable [Balbas vs. Domingo, 21 SCRA 444 (1967); Chu Hoi Horn vs. Court of Tax Appeals, 25 SCRA 809 (1968); Dy Peh vs. Collector of Internal Revenue, 28 SCRA 216 (1969)]. Although as a general rule, assessments made by the Commissioner of Internal Revenue are presumed to be correct nd valid, this presumption, however, is not final or conclusive. The assessment must be based on actual facts, and not on mere presumptions, no matter how reasonable such presumptions appear to be (Benipayo v. Collector, 4 SCRA 182, Collector v. Bohol Land Transportation Co., 107 Phil. 965). As the Court of Tax Appeals correctly found: "While it is true and well-settled is the rule that an assessment is presumed to be correct, and that the petitioner has the burden of proof to show that the same is invalid, we find the assessment in this case totally wanting in relevant facts and substance to stand on. Examiner Estrada only presumed petitioner had deducted raw materials which were subject to 3% tax, instead of 7% sales tax; he also presumed that petitioner issued invoices to customers and computing the 7% tax on the gross selling price without first deducting the cost of raw materials used in the manufacture of the finished article. Consequently, we feel that the burden of proof to overturn the assessment never shifted to petitioner. It has been clearly judicially states that assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be (Collector of Internal Revenue vs. Benipayo, 4 SCRA 182) and the burden of proof rule is not to be applied, as in this case, which will have the effect of defeating justice. Mertens, The Law of Federal Income Taxation, par. 50.65, Vol. 9, p. 187)" WHEREFORE, finding no merit in the petition, same is hereby DISMISSED, without pronouncement as to costs. SO ORDERED. Pronove, Jr . and Lapea, Jr ., JJ ., concur.