Commissioner of Internal Revenue v. Court of Tax Appeals

SPECIAL EIGHTH DIVISION [CA-G.R. SP No. 24474. August 30, 1991.] (C.T.A. Case No. 2352) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HON. COURT OF TAX APPEALS and UNION GLASS & CONTAINER CORPORATION , respondents . D E C I S I O N RASUL , J p : This is an appeal from the decision of the Court of Tax Appeals, under of January 18, 1979, in CTA Case No. 2352 entitled Union Glass and Container Corporation vs. The Commissioner of Internal Revenue, the decretal portion of which reads, to wit: "WHEREFORE, in view of all the foregoing, respondent Commissioner of Internal Revenue is hereby ordered to refund to petitioner the sum of P29,252.27, representing overpaid manufacturer's sales tax in accordance with Section 186-A and 188 (c) of the National Internal Revenue Code Without pronouncement as to costs. SO ORDERED." So far as relevant, the facts as revealed by the records are as follows: "1. Union Glass is a domestic corporation organized and existing under Philippines laws and is engaged in the business of manufacturing and selling glass products. As such manufacture, it paid, during the period from February 18, 1968 to December 31, 1970, the 7% manufacturer's sales tax based on the gross selling priced of its products imposed under Section 186 of the Old Tax Code. 2. In the manufacture of glass products for which it paid manufacturer's sales tax, Union Glass used various raw materials such as silica sand, feldspar, limestone, gypsum and dolomite, among others, which it purchased from different mining companies. 3. Union Glass did not deduct the cost of these raw materials from the gross selling price of the finished glass products in computing the 7% manufacturer's sales tax because the rule then was that if a raw material was not tax-paid under the same section as the finished products, and the same was not purchased from a tax exempt industry under R.A. No. 901, the cost thereof was not deductible for sales tax purposes. (BIR Circular No. V-252 dated July 15, 1957). 4. On July 20, 1970, the Court of Tax Appeals, in Philippines Pipes and Merchandising Corporation vs. Commissioner (CTA Case No. 1858; hereinafter referred to as "Philippines Pipes"), ruled that the cost of cement which is also a mineral product subject to add valorem tax, is deductible for sales tax purposes, pursuant to Section 186-A of the Old Tax Code. 5. Union Glass, on February 4, 1971, filed a claim for the refund or tax credit with the Commissioner of Internal Revenue (The "Commissioner") for overpaid manufacturer's sales tax amounting to P95,184.03 for the period from February 18, 1968 to December 31, 1970. 6. Due to the Commissioner's apparent inaction over Union Glass' Claim for refund or tax credit. Union Glass filed with the court of Tax Appeals (CTA) a petition for review on November 24, 1971 in order to preserve its judicial right to claim a refund or tax credit. 7. After trial, the CTA rendered a decision dated January 18, 1979. ordering the Commissioner of Internal Revenue to refund to Union "Glass "the sum of P29,252.27, representing overpaid manufacturer's sales tax in accordance with Section 186-A and 188 (c) of the National Internal Revenue Code . . ." 8. On September 28, 1979, the Commissioner of Internal Revenue filed a petitioner for review on certiorari of the above decision of the CTA with the Supreme Court. 9. On March 13, 1991, the Supreme Court issued a resolution which referred and transferred the case to this Honorable Court." The crucial issue in this appeal is whether or not the cost or value of the raw materials composed of silica sand, feldspar, limestone, gypsum and dolomite used in the manufacture of glass is deductible from the gross sales of the finished glass products for purposes of computing the 7% manufacturer's sales tax in accordance with the then Section 186 of the National Internal Revenue Code. Petitioner argues, to begin with, that respondent Union and Container Corporation cannot deduct from the gross selling price the total cost of raw materials used in computing the 7% manufacturer's sales tax because the provision of Section 186 of the National Internal Revenue Code limits the deduction to the total cost of raw materials used which were previously subjected to tax it being subjected to Ad Valorem tax under Section 243 thereof. Private Respondent Union Glass contends that petitioner's argument is off-tangent because the deduction of the cost or raw material from the gross selling price of Union Glass products is based on Section 186-A of the Old tax Code which provides that whenever a tax-free product is utilized in the manufacture or production of any article, in determining the value of the finished article, the value of such tax-free product shall be deducted (added by Section 5, Republic Act No. 2025). In fine, although the mineral product used as raw materials is not subjected to sales tax under Section 186 and 189, its value is still deductible from the gross sales of the manufactured product by virtue of Section 186-A. The instant appeal deserves no merit and consideration. The Court of Tax Appeals correctly ruled that the mere fact that cement is now a mineral product under Republic Act No. 1299 under date of June 16, 1955, amending Section 246 of the Revenue Code, and hence not subject to tax does not necessarily mean that its valued is not deductible from the gross sales of manufactured products For there is nothing in the language of Section 186 of the Revenue Code that required payment of sales tax on the materials as a prerequisite of the right to deduct the value of said material when used for manufacturing or production. This is in accordance with the settled ruling in the case of Philippine Pipe and Merchandising Corporation vs. Commissioner (CTA Case No. 1885) The decision in Philippines Pipes and Merchandising Corporation is only a reiteration of the ruling of the Supreme Court in Republic Flour Mills, Inc. (RFM) vs. Commissioner ( 31 SCRA 520 ). In RFM, the Supreme Court dismissed the contention of the Commissioner in said case-the same contention of the Commissioner in the present case-that the term tax-free product mentioned in Section 186-A only refers to raw material purchased from tax-exempt industries. As held by the Supreme Court in RFM case: "In the resolution of the lone issued in this case, it is worthwhile to mention that prior to 22 June 1957 the prevailing rule on the matter was to allow the cost of raw materials used in the manufacture of another article to be deducted from gross sales, whenever such raw materials had been subjected to sales tax. The reason therefore, as expressed by this court, was to preclude a second assessment of the percentage tax on raw materials. This ruling finds basis in Section 186 of the Tax Code . . . With the establishment of tax-exempt industries in the mid-50s, enforcement of the foregoing prevision must have created a peculiar problem, so much so that on 22 June 1957 the legislature enacted Republic Act 2025, which inserted 186-A in the Tax Code, expressly constituting the valued of tax-freed products to be a deductible items the gross sales of the finished goods manufactured out of the same. Cast against this background, We agree with the petitioner that there is actually no cause here calling for and administrative definition or interpretation of Section 186-A. For no reason exists to read into the provision a qualification that is not there, nor to give the phrase "tax-free product" a meaning other than what it ordinarily and commonly conveys a material or article exempted from payment of tax." In fine, in the light of the foregoing jurisprudence, there is no doubt that the raw materials used by Union Glass and Container Corporation are tax-free products under Section 186-A which does not refer only to products of tax-exempt industries under R.A. 901. As declared in RFM Case itself (31 SCRA 520), the phrase tax-free product simply means an article exempt from tax and not, as argued by the petitioner in this case, a product of tax exempt industry. If through erroneous administrative interpretation, there is illegal collection, Section 306 of the old tax code recognizes the tax-payer's right to recover it, or to a refund. After a deliberate scrutiny of the entire records, and considering the applicable law and jurisprudence, We find Ourselves unable to perceive any justification to depart from the decision of the Court a quo. ACCORDINGLY, in the light of the foregoing disquisitions, the decision of the Court of Tax Appeals is hereby AFFIRMED in toto , without pronouncement as to cost. SO ORDERED Marigomen and Mendoza JJ., concur.