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

FIFTEENTH DIVISION [CA-G.R. SP No. 22800. September 13, 1999.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORP. AND COURT OF TAX APPEALS , respondents . D E C I S I O N SABIO , J.L. , Jr ., J p : This treats of a petition to review on appeal the Decision of the Court of Tax Appeals dated July 31, 1990 in CTA Case No. 2723 which absolved herein private respondent from liability for the payment of the amount of P18,401,232.09 as deficiency sales tax as manufacturer for the years 1962 to 1966, inclusive of surcharges and interests, the dispositive portion of which reads as follows: "WHEREFORE, the decision appealed from is hereby reversed and set aside. No pronouncement as to costs. SO ORDERED." The antecedents of this case: Private respondent Procter & Gamble Philippine Manufacturing Corp. is a domestic corporation engaged in among others, in the manufacture of vegetable lard, margarine, edible cooking oil, soap, toothpaste, etc. On the basis of the report and recommendation and suppletory memorandum of the revenue examiners, and having determined that petitioner wilfully failed to pay the correct sales taxes as manufacturer for the years 1962 to 1963 and the failure to pay the correct sales taxes on taxable sales for 1964, 1965 an 1966 in violation of Sections 183 and 186, penalized under Section 209, respectively, all of the Old Tax Code, petitioner issued a letter dated August 21, 1970, assessing and demanding from petitioner the aggregate amount of P18,401,232.09 inclusive of surcharges for the said year. In a letter dated December 8, 1970, petitioner protested the assessment on grounds showing lack of factual and legal basis. In a letter dated August 7, 1975, respondent rendered his final decision on the disputed assessment denying the protest and reiterating the demand for the amount of P18,401, 232.09. Private respondent appealed the decision to the Court of Tax Appeals and on July 31, 1990, the latter rendered the assailed decision reversing the decision of petitioner Commissioner of Internal Revenue. Hence, the present appeal. Petitioner raised two (2) assignment of errors, to wit: "I. THE TAX COURT ERRED IN RULING THAT PRIVATE RESPONDENT WAS NOT LIABLE FOR DEFICIENCY SALES TAXES FOR THE YEARS 1962 TO 1966, INCLUSIVE IN THE AGGREGATE AMOUNT OF P18,401,232.09; II THE TAX COURT ERRED IN RULING THAT THE RIGHT OF PETITIONER TO ASSESS THE DEFICIENCY SALES TAX IN QUESTION HAS ALREADY PRESCRIBED." THE APPEAL LACKS MERIT. The petitioner reiterated and raised almost the same arguments with private respondent Court which were duly resolved and substantiated by the latter in its assailed decision, but for purposes of due process, this Court will go over the same. Anent the first assignment of error, petitioner's first contention is that cooking oil is manufactured product subject to 7% sales tax, private respondent being an operator of coconut oil mills. Its product is coconut oil or crude oil with copra cake as a by-product. Coconut or crude oil in its original state, before it becomes an edible or cooking oil, has undergone chemical or physical processes such as refining, bleaching, washing, deodorizing and canning, thus, rendering private respondent herein a "manufacturer" as defined in Section 194(x) of the Old Tax Code. Consequently, cooking oil being a manufactured product subject to 7% sales tax under Section 186 of the same code. Likewise, petitioner contends that the term "coconut oil" mentioned in Section 189 refers to crude oil and does not include cooking oil. Petitioner and private respondent cited Section 186 and 189 of the Old Tax Code which provide as follows: "Section 186. Percentage tax on sales of other articles . There shall be levied, assessed and collected once only on every original sale, barter, exchange, and similar transaction either for nominal or valuable considerations, intended to transfer ownership of, or title to, the articles not enumerated in Sections one hundred and eighty-four, one hundred and eighty-five , a tax equivalent to seven per centum of the gross selling price or gross value in money of the articles so sold, bartered, exchanged, or transferred, such tax to be paid by the manufacturer, or producer: Provided, That were the articles subject to tax under this section are manufactured out of materials likewise subject to tax under this section and section one hundred and eighty-nine, the total cost of such materials, as duly established shall be deductible from the gross selling price or gross value in money of such manufactured articles." LibLex "Section 189. Percentage tax upon proprietors or operators of rope factories , sugar centrals , COCONUT OIL MILLS , cassava mills and desiccated coconut factories . Proprietors or operators of rope factories, sugar centrals, COCONUT OIL MILLS, cassava mills and desiccated coconut factories shall pay a tax equivalent to two per centum of gross value in money of all the rope, sugar, coconut oil , cassava flour or starch, and desiccated coconut manufactured, processed or milled by them, including the by-products of the raw materials from which said articles are produced or manufactured, such tax to be based on the actual selling price or market value of these articles at the time they leave the factory or mill warehouse: Provided, however, that this tax should not apply to ropes, coconut oil and the by-products of copra from which it is produced or manufactured and desiccated coconuts if such oil, copra, by-products and desiccated coconuts shall be removed from exportation without returning to the Philippines, whether so exported in their original state, or as an ingredient or part of any manufactured article or product." (Emphasis supplied). The law clearly imposes the 2% miller's tax on ALL COCONUT OIL manufactured or processed or milled by proprietors or operators of oil mills WITHOUT DISTINCTION. Where the law does not distinguish, we should not distinguish. The public respondent in resolving the issue said and herein quoted: "The issue is not new. The question has already been resolved in the case of Procter and Gamble Philippine Manufacturing Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 2740, September 30, 1985, where respondent withdrew the assessment for deficiency sales tax on cooking oil in view of BIR Ruling No. 203-000-00-098-83 dated June 8, 1983, holding the proprietors or operators of coconut oil mills are subject to the miller's tax of 2% and not to the 7% sales tax assessed against petitioner (herein private respondent). In a more recent case, this Court conformed to the said ruling as the law clearly imposes the 2% miller's tax on all coconut oil manufactured or processed by proprietors or operators of oil mills without distinction, it is enough that what is produced is coconut oil, and considering the above ruling is a contemporaneous and practical interpretation of Section 189 of the Tax Code relative to coconut oil, it should be respected and not to be disturbed except for cogent reasons unless contrary to the statute or exceeding departmental authority and they are binding upon the Commissioner and taxpayer alike. (Please see Philippine Refining Company, Inc. vs. Commissioner of Internal Revenue, C.T.A. Cases Nos. 3148 & 3499.)" (pp. 4-5, Rollo) LexLib We agree with the findings of the public respondent. "Factual findings of the Court of Tax Appeals can only be disturbed on appeal if not supported by substantial evidence." (Sy Po vs. Court of Tax Appeals, 164 SCRA 524). As can be gleaned from the records of the case, public respondent rendered the assailed decision based on evidence presented by the parties in said court. Likewise, the argument raised by private respondent in its Comment is logical and persuasive: "As far back as 1956, it was ruled that a manufacturer of coconut oil was subject to the 2% miller's tax imposed under then Section 189 of the Tax Code, based and computed on the actual selling price or market value of the manufactured oil including the by-product thereof, at the time said articles left the factory or mill warehouse (BIR Ruling dated May 16, 1956, cited in Aranas, Jose, Annotations and Jurisprudence on the National Internal Revenue Code, as Amended, Vol. II, 1958 Edition, p. 344). This was the ruling in force in 1962, 1963, 1964, 1965 and 1966, when private respondent was assessed by petitioner. xxx xxx xxx So also, in another Court of Tax Appeals' case, respondent Commissioner therein, petitioner herein manifested in his memorandum that he was "withdrawing the assessment for deficiency sales tax on cooking oil in view of BIR Ruling No. 203-000-00-098-83 dated June 8, 1983, providing that proprietors or operators of coconut oil in mills are subject to the miller's tax of 2% and not 7% sales tax assessed against petitioner. (Procter and Gamble Philippine Manufacturing Corporation vs. The Commissioner of Internal Revenue, Respondent, CTA Case No. 2740, promulgated September 30, 1985). This is as it should be. For there is no legal or logical basis in petitioner's claim that the term coconut oil as used in then Section 189 should be construed as crude coconut oil, on the basis of the following presentation: First . On one hand, cooking oil or refined coconut oil is pure coconut oil , a product derived through a refining process by removing the so called odor bodies and color bodies consisting of copra bits, dust, and other impurities from the crude oil pressed from copra. On the other hand, the crude coconut oil which is murky and rancid smelling, is essentially coconut oil plus impurities, color bodies, odor bodies, etc. Clearly then, if anything deserves to be called coconut oil , it is the pure coconut oil more than the crude coconut oil . It is therefore error to say that pure coconut oil , which has no additives and was made pure by deodorization and removal of solids and impurities, should not come within the meaning of coconut oil mentioned under Section 189 of the Tax Code simply because, on account of its purification, it has become fit for human consumption and thus called edible oil or cooking oil . Second . Then Section 189 of the Tax Code imposed the 2% miller's tax on coconut oil , among other products, without distinction. The term coconut oil then cannot be limited to crude coconut oil , it is in fact also called pure coconut oil or edible oil , or cooking oil . Private respondent's witness, Engr. Reynaldo Pantangco, categorically testified that coconut oil is the same as refined coconut, or edible oil, or cooking oil (pp. 4-5, t.s.n. July 26, 1983). If the law had meant crude oil from the term coconut oil, it would have said so. Thus, in Robles vs . Zambales Chromite Mining Co ., 104 Phil. 688, 690 (1958), it was held that: xxx xxx xxx It is a well-known maxim in statutory construction that where law does not distinguish, we should not distinguish." . . . xxx xxx xxx Third . Limiting the application of the term coconut oil as used in the then Section 189 of the Tax code to unrefined or crude oil would result in absurdity. The taxing proviso and exempting proviso of said Section 189 are respectively quoted below, to wit: 1. ". . . shall pay a tax equivalent to two per centum of the gross value in money of all the rope, sugar, coconut oil . . . manufactured, processed, or milled by them . . . " (Emphasis supplied) 2. "Provided, further, That this tax shall not apply to ropes, coconut oil , and the by-products of copra from which it is produced or manufactured, and desiccated coconuts, if such ropes, oil , copra by-products and desiccated coconuts shall be removed for exportation and are actually exported without returning to the Philippines , whether so exported in their original state , or as an ingredient or part of any manufactured article or product . (Emphasis supplied) xxx xxx xxx To argue then that the term coconut oil as used in the taxing proviso of Section 189 mentioned in number 1 above means crude coconut oil , while coconut oil as used in the exempting proviso of said Section 189 mentioned in number 2 above refers to refined or pure coconut oil, would create an irreconcilable incongruity (Comments filed by private respondent, pp. 76-78, Rollo) Petitioner likewise contends that the market value of crude oil deducted by private respondent in computing the 7% sales tax due on its manufacturing soap, lard, etc. is properly disallowed since under Section 189 (supra), the costs of raw materials, as have been duly established which were taxed under said Section and Section 189 (supra) shall be deducted in computing the 7% sales on the manufactured product. In the instant case, the cost of crude oil used as raw material in the manufacture of lard, toothpaste was disallowed because the market value of said crude oil has not been duly established, it appearing that the same is not covered by purchase invoice or invoice Moreover, private respondent is an operator or coconut oil mill and the milled crude oil belonged to said respondent. Public respondent disposed of this issue in the following manner: "We found the arguments of respondent unfounded. The fact that petitioner (private respondent herein) is the miller and owner, and because the manufacture of finished products is a continuing process, do not signify that there is no removal of the crude oil for the accrual of the tax under Section 189 of the Tax Code is not dependent on the actual sale of the products. As ruled by the Supreme Court in an analogous case: ". . . The text of Section 189 of the Revenue Code indicates that actual sale of the product is not essential to the accrual of the tax since the tax is based on the actual selling price or market value of these articles at the time they leave the factory or mill warehouse without taking into account the reason why the article is withdrawn. The fact that the distillery and the sugar mill are in the same compound, does not prove that they are not independent units. It is not contended that all the sugar produced by the mill is converted into alcohol; and the manufacture of alcohol from sugar is clearly distinct from the processing of sugar cane into sugar. Since the manufacture of alcohol does not have to be the manufacture of sugar, taxwise, the routing of sugar and molasses to the distillery is as much as a withdrawal of sugar from the central as a removal thereof for the purpose of selling it. (Collector of Internal Revenue vs. Central Azucarera de Tarlac, G.R. No. L-11760, July 31, 1958) Moreover, the Supreme Court in the latest decision involving the same issue under consideration, held: "The attempt of the respondent Court to distinguish between a manufacturer and purchaser of coconut oil and to discriminate against the former is unwarranted and unreasonable. To deny to the petitioner the right to deduct the 2% miller's tax enjoyed by the other soap, lard and margarine manufacturers who, unlike petitioner buy , instead of produce their raw materials would discourage the establishment of integrated or self-sufficient industries. The State would be regressing from, instead of progressing toward, the national goal of self-sufficiency. dctai Its is no argument for disallowing, for purposes of the sales tax, the deduction of the 2% miller's tax as part of the "total cost" of the coconut oil used in the manufacture of lard, soap, and margarine, that the manufacturer (herein petitioner) would enjoy a "double advantage" because it may also deduct the 2% miller's tax from its gross income for purposes of income tax. Although the petitioner denies that it deducted said miller's tax from its gross income for income tax purposes, the point is, even if it did deduct the 2% tax, the "double advantage" reaped by it would be its just reward for having integrated its industry. (Procter & Gamble Philippine Manufacturing Corporation vs. The Commissioner of Internal Revenue and the Court of Tax Appeals, G.R. No. L-33425, January 20, 1989.)" (pp. 44-46, Rollo) We see no cogent reason to disturb the above findings of respondent court. Petitioner's third contention is that the costs of imported raw materials is not deductible for lack of official receipts evidencing payment of advanced sales tax and that private respondent claimed as deductions the costs of imported raw materials listed in the worksheets prepared by the investigating examiners. In resolving this question, the respondent court admitted the presentation of private respondent's witness in the person of Cecilia Garcia who testified otherwise, which testimony was unrefuted and uncontroverted by petitioner. As a matter of fact, private respondent submitted evidence which showed that the latter had already paid in advance the sales tax on the raw materials imported. Another contention of petitioner is that the costs of raw materials not forming parts of the finished product was properly disallowed by petitioner pursuant to Section 186 which allegedly provides that only costs of raw materials subject to tax under said Section 186 and 189 are deductible from the gross selling price of the finished products. Herein private respondent claimed as deduction raw materials which have been previously taxed at 3% contractor's tax. A list of the supplier of private respondent which previously paid contractor's 3% thereon were contained in the worksheets of the examiners. cdll Section 186 of the then Tax Code, provides: ". . . That where the articles subject to tax under this section are manufactured out of materials likewise subject to tax under this section and section one hundred and eighty-nine, the total cost of such materials as duly established , shall be deductible from the gross selling price or gross value in money of such manufactured articles ." As correctly pointed out by private respondent, there is nothing in the aforestated provision which requires that raw materials must form part of the manufactured product to be deductible. To disallow the cost of imported raw materials from being deducted from the gross sales on the ground that the same did not physically form part of the manufactured product is to defeat the purpose and intent of the provisions of Section 186 of the Tax Code. It is then safe to say that the cost of raw materials which went into the production of the manufactured articles can be deducted from the gross selling price thereof, without such materials necessarily forming part of the finished products, for as long as such materials had been previously tax-paid under the same section as the manufactured articles. In Tan Chiu vs. Collector of Internal Revenue (G.R. No. L-15008, January 28, 1961; 1 SCRA 301), the Highest Tribunal held that ". . . the purpose of Section 186 of the Internal Revenue Code authorizing the deduction costs of materials manufactured from the gross selling price is to avoid or prevent double taxation; . . .". The fifth contention of petitioner is that the private respondent did not bill separately the 7% sales tax charged to customers because the invoices issued by private respondent to its customers contained only a column "amount sales tax included" which is allegedly in violation of the rule on separate billing and hence petitioner include said amounts in the gross sales when it computed the 7% sales tax under Section 186. LLphil The respondent Court ruled in this manner: "Again, we disagreed with the assertion of respondent. This Court has already passed upon this question on separate billings in the case of Procter & Gamble Philippine Manufacturing Corporation, C.T.A. No. 2740, supra , which held in part pertinent, thus: . . . 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 rec.) witness presented sample of sales invoices for the year in question and official receipts evidencing payments made by customers. A perusal of Exhs. "Q", "R", and "S" (pp. 117-119, CTA rec.), said invoices will indicate that there are three columns therein, namely: "Unit price sales tax incl.", "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 or P823.35. and sales tax 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 appears: xxx xxx xxx 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 Connel Bros. case, supra . (pp. 54-55) We find no cogent reason to disturb the findings of the respondent court considering the fact that indeed the customer is appraised of the shifting of the sales tax to them. The sixth contention of petitioner is that the 2% miller's tax paid is not deductible from the total costs of the finished products because the total costs of lard, soap, etc. manufactured is the market value thereof as agreed by both parties without including its 2% tax on coconut oil. In the case of Procter & Gamble Philippine Manufacturing Corporation vs. the Commissioner of Internal Revenue, G.R. No. 33425, January 20, 1989, 169 SCRA 237), the Supreme Court ruled: ". . . To deny to the petitioner the right to deduct the 2% miller's tax enjoyed by other soap, lard, and margarine manufacturers who, unlike the petitioner, buy, instead of produce, their raw materials would discourage the establishment of integrated or self- sufficient industries. The State would be regressing from, instead of progressing toward, the national goal of self-sufficiency. It is no argument for disallowing, for purposes of the sales tax, the deduction of the 2% miller's tax as part of the "total cost" of the coconut oil used in the manufacture of lard, soap and margarine, that the manufacturer (herein petitioner) would enjoy a "double advantage" because it may also deduct the 2% miller's tax from its gross income for purposes of the income tax. . . ., the point is, even if it did deduct 2% tax , the " double advantage " reaped by it would be its just reward for having integrated its industry ." (Emphasis supplied) As to the understatement of sales of cooking oil, petitioner contends that for taxable years 1963 and 1964, private respondent substantially underdeclared its sales of cooking oil in the amount of P992,834.03 and P992,834.04, respectfully, or a total of P1,985,668.04, ascertained through inventory methods of investigation. To arrive at the quantity of tinplates used in the manufacture of finished products, the examiners consulted court's record of the Tax court, can plant inventories, and inventories of finished goods. A list was prepared by the examiners containing the names of vessels and quantity of tinplates shipments. Respondent court, in resolving the issue ruled: "And more, petitioner pointed out to some inherent defects in the method used, like: lack of beginning and ending inventories of copra, crude oil and other materials used in the manufacture of cooking oil; failure to consider purchases of copra and crude oil from other miller; failure to take into account short deliveries of tin plates which were used in some products other than cooking oil. After careful study of the respective position of the parties and on the basis of the uncontroverted testimony of petitioner's witness, precedent and reasons, we feel compelled to subscribe to petitioner's position as to the non-existence of fraud. Hence, we find no underdeclaration of sales of cooking oil." (pp. 56-57, Rollo) (emphasis supplied) This Court is of the opinion that respondent court committed no reversible error in ruling that there was no underdeclaration of sales of cooking oil. As already stated above, for as long as supported by substantial evidence, "factual findings of the Court of Tax Appeals are binding." (Industrial Textiles Manufacturing Company of the Phil., Inc. (ITEMCOP) vs. Commissioner of Internal Revenue and Court of Tax Appeals, 136 SCRA 549). As to the second issue of prescription, petitioner contends that the deficiency assessment for the years 1962 to 1964 and January to August 1965 were not barred by prescription, the controlling provision involved being Section 319 (now Section 269) of the Tax Code, granting petitioner ten (10) years within which to assess internal revenue taxes from the time of the discovery of the fraud. Since fraud in this case was discovered on August 13, 1968 (the date of examiner's report), the government has until August 13, 1978 to make an assessment. Accordingly, the letter of demand dated August 21, 1970 was issued within the period. The contention of petitioner is untenable. The respondent Court has disposed of this issue when it ruled: "The argument of respondent does not appear plausible under the circumstances obtaining in this case as found earlier and it is hardly necessary to reiterate our findings in the preceding issue discussed above, wherein we subscribed to the position of petitioner (private respondent herein). On the allegation that petitioner made improper deductions, suffice it to say that we have also disposed of earlier the issue adverse to respondent in the light of our decision in C.T.A. Case No. 2740, supra. In fine, there being no sufficient evidence to establish deliberate intent on the part of the petitioner (private respondent herein) to defraud the Government of sales tax for the period in question and respondent's (herein petitioner) failure to prove his allegations that would place his case within the exception of Section 331 of the Tax Code, his position on this issue becomes less tenable. Ergo, we find and so holds that respondent's right to assess is already time barred." (p. 58, Rollo) LLpr The Highest Tribunal in the case of Commissioner of Internal Revenue vs. Ayala Securities Corporation (70 SCRA 204) held: "Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the court below (Court of Tax Appeals). The findings of the trial court as to the existence and non-existence is final and cannot be reviewed here unless clearly shown to be erroneous. Fraud is never lightly to be presumed because it is a serious charge. xxx xxx xxx Assessment made beyond five-year prescription period is no longer binding on the tax payer" The burden of proof of the existence of fraud lies with the petitioner. Since the letter failed to prove the existence of fraud, the assessment made by the petitioner was way beyond the five-year period required under Section 331 of the Tax Code and therefore has already prescribed. WHEREFORE, in view of the foregoing, the appeal is hereby DENIED. The decision of the Court of Tax Appeals is AFFIRMED IN TOTO Without pronouncement as to costs. SO ORDERED. Hofilena and Amin , JJ ., concur.