Commissioner of Internal Revenue v. Central Vegetable Oil Manufacturing Co., Inc.

TENTH DIVISION [CA-G.R. SP No. 25581. September 10, 1992.] (C.T.A. Case No. 4366) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . CENTRAL VEGETABLE OIL MANUFACTURING CO., INC., and the COURT OF TAX APPEALS , respondents . D E C I S I O N LAPEA , JR ., J p : Petitioner Commissioner of Internal Revenue elevated to this Court the decision of the Court of Tax Appeals in CTA Case No. 4366 finding respondent Central Vegetable Oil Manufacturing Company (CENVOCO, for short) not liable for deficiency millers tax for the year 1986 in the amount of P1,515,514.70. Private respondent CENVOCO filed a petition with the Court of Tax Appeals assailing the validity of the tax assessment made by petitioner for deficiency 3% miller's tax in the amount of P1,575,514.70 for the year 1986 contained in the letter of Deputy Commissioner Eufracio D. Santos dated November 17, 1988. The assessment arose from the disallowance of CENVOCO's request for tax credit of the sales tax it paid on containers and packaging materials against the 3% miller's tax due on its gross sales of edible oil and allied products. The facts are summarized in the decision of the Court of Tax Appeals as follows: "Petitioner (CENVOCO) is a manufacturer of edible and coconut/coprameal cake and such other coconut related oil subject to the miller's tax of 3%. Petitioner also manufactures lard, detergent and laundry soap subject to the sales tax of 10%. In 1986, petitioner purchased a specified number of containers and packaging materials for its edible oil from its suppliers and paid the sales tax due thereon. After an investigation conducted by respondent's Revenue Examiner, Assessment Notice No. FAS-B-86-88-001661-001664 dated April 22, 1988 was issued against petitioner for deficiency miller's tax in the total amount of P1,575,514.70, details of which are as follows: 1986 First Quarter Deficiency 3% Miller's Tax Net taxable sales P11,414,675.57 3% Miller's tax due thereon 335,425.90 Less: Sales tax paid 88,762.71 Deficiency miller's tax 246,663.19 Add: 25% Surcharge 61,665.80 20% Int. fr. 4-21-86 to 123,331.60 4-21-88 TOTAL AMOUNT DUE AND COLLECTIBLE P431,660.59 =========== 1986 Second Quarter Deficiency 3% Miller's Tax Net taxable sales P8,563,672.67 3% Miller's tax due thereon 249,427.37 Less: Sales tax paid 42,447.33 Deficiency miller's tax P206,950.04 Add: 25% Surcharge 51,737.51 20% Int. fr. 7-21-86 to 90.540.64 4-21-88 TOTAL AMOUNT DUE AND COLLECTIBLE P349,228.19 =========== 1986 Third Quarter Deficiency 3% Miller's Tax Net taxable sales P10,732,930.54 3% Miller's tax due thereon 312,609.63 Less: Sales tax paid 53,494.82 Deficiency miller's tax 259,114.81 Add: 25% Surcharge 64,778.70 20% Int. fr. 10-21-86 to 97,168.05 4-21-88 TOTAL AMOUNT DUE AND COLLECTIBLE P421,061.56 =========== 1986 Fourth Quarter Deficiency 3% Miller's Tax Net taxable sales P8,672,015.59 3% Miller's tax due thereon 252,852.98 Less: Sales tax paid 13,501.79 Deficiency miller's tax 239,081.19 Add: 25% Surcharge 59,770.30 20% Int. fr. 10-21-86 to 74,712.87 4-21-88 TOTAL AMOUNT DUE AND COLLECTIBLE P373,564.36 =========== On June 29, 1988, petitioner filed with respondent a letter dated June 27, 1988 requesting for reconsideration of assessments, contending that the final provision of Section 165 of the TaxCode does not apply to sales tax paid on containers and packaging materials, hence, the amount paid therefor should have been credited against the miller's the tax assessed against it. Again, thru letter dated September 28, 1988, petitioner reiterated its request for reconsideration. On November 17, 1988, respondent finally came up with his decision denying petitioner's request for reconsideration, full text of which reads as follows: November 17, 1988 Central Vegetable Oil Manufacturing Co., Inc. P.O. box 2816 M a n i l a Attention: Mr. James Chua President Gentlemen : We have received your letter of September 28, 1988, relative to our assessment against your company in the amount of P1,575,514.75, as deficiency miller's tax for the year 1986. Section 168 of the TaxCode provides that sales, miller's or excise taxes paid on raw materials or supplies used in the milling process shall be allowed against the miller's tax due. You contend that since packaging materials are not used in the milling process then, the sales taxes paid thereon should be allowed as a credit against the miller's tax due because they do not fall within the scope of the prohibition. It is our position, however, that since the law specifically does not allow taxes paid on the raw materials or supplies used in the milling process as a credit against the miller's tax due, with more reason should the sales taxes paid on materials not used in the milling process be allowed as a credit against the miller's tax due. There is no provision of law which allows such a credit-to-be made. In view of the above, we are reiterating the assessment referred to above. We request that you make payment immediately so that this case may be considered closed and terminated. Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner" As stated earlier, respondent Court ruled that CENVOCO is not liable for deficiency miller's tax for the year 1986. Hence, this petition. The main issue in this case is whether or not respondent CENVOCO is liable for deficiency miller's tax for the year 1986 in the amount of P1,575,514.70. This in turn hinges on whether or not containers and packaging materials are raw materials used in the milling process within the contemplation of the final proviso of Section 168 of the National Internal Revenue Code, which reads: "Provided finally, that credit for any sales, miller's or excise taxes paid on raw materials or supplies used in the milling process shall not be allowed against the miller's tax due, . . ." According to petitioner, the aforesaid provision clearly and specifically does not allow taxes paid on raw materials or supplies used in the milling process as a credit against the miller's tax due. And there being no specific provision allowing such tax credit, the sales tax paid or materials not used in the milling process cannot be allowed as a credit against the miller's tax due. The argument lacks merit. We agree with respondent Court that containers and packages cannot be considered "raw materials" utilized in the milling process. In arriving at this conclusion, respondent Court quoted with approval the reasons cited by CENVOCO, as follows: "FIRST: The raw materials used by Cenvoco in manufacturing edible oil are copra and/or coconut oil. In other words, the term "used" in the final proviso of Section 168 of the NIRC refers or is strictly confined to "raw materials" or supplies fed, supplied or put into the apparatus, equipment, machinery or its adjuncts that cause or execute the milling process. On the other hand, the containers, such as tin cans, and/or packages are not used or fed into the milling machinery nor were ever intended for conversion to form part of the finished product, i.e., refined coconut/edible oil. Consequently, it would be absurd to say that said containers and packages are "used in the milling process", for the process involves "grinding, crushing, stamping, cutting, shaping or polishing" (See THE DICTIONARY, by TIME, COPYRIGHT 1974, p. 444). It is one of the primary canons of construction that all statutes should receive a reasonable interpretation, if the meaning of the statute is at all doubtful. It has been a well-entrenched doctrine in our jurisdiction that" . . . in the interpretation of statutes levying taxes or duties, that in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens, because burdens are not to be imposed, nor presumed to be imposed beyond what statutes expressly and clearly import ( Commissioner of Internal Revenue vs. Fireman's Insurance Co., 168 SCRA 315; Manila Railroad Co. vs. Collector of Customs, 52 Phil. 950; Collector vs. La Tondea, Inc., 5 SCRA 665; Luzon Stev. Co. vs. Trinidad, 43 Phil. 803). Furthermore, since the interpretation given by petitioner would result to absurdity, such construction must be temporarily avoided (Ledesma vs. Pictain, 79 Phil. 95; Diokno vs. Rehabilitation Finance Corp., 91 Phil. 108, People vs. Villanueva, 1 SCRA 1248; Lagdameo vs. Lao, 12 SCRA 626; Guevara vs. Inocentes, 16 SCRA 370). SECOND: Petitioner's interpretation of the term raw materials is contrary to law and jurisprudence. Thus, raw materials as used in the definition of "manufacture", denotes materials from which final product is made (Black's Law Dictionary, 4th ed., citing State vs. Hannessy Co., 71 Mont. 301, 230, p. 64, 65). And consistent with said definition, Revenue Regulations Nos.2-86 and11-86 [effective January 1, 1986 and August 1, 1986, respectively] which govern the filing of quarterly percentage tax return and payment thereof under the provisions, inter alia, of Section 168 of the NIRC, define raw materials or material, to wit: "any article which when used in the MANUFACTURE of another article becomes a homogenous part thereof, such that it can no longer be identified in its original state nor may be removed therefrom without destroying or rendering useless the finished article to which it has been merged, mixed or dissolved." Tested in the light of the foregoing statutory definition, it is evident that containers and packages used by Cenvoco are not "raw materials" and do not fall within the purview of the final proviso of Section 168 of the NIRC. Understandably, containers and packages are finished products while raw materials are as yet to be manufactured, processed or milled into finished goods. As such, containers and packages are separate and distinct from the finished goods, in that the former are utilized as receptacles, not as ingredients or components, of the latter. As a coup de grace, it is pertinent to note the case of Caltex (Phils.) Inc., vs. Manila Port Service (17 SCRA 1075) where the Supreme Court aptly defined containers and/or packages ". . . a package or a bundle made up for transportation; a packet; a bale; a parcel; or that in which anything is packed; box, case, barrel, crate, etc. in which goods are packed; a container". (Emphasis supplied) The definition is an emphatic rejection of petitioner's construction that Cenvoco's containers and packages are raw materials used in the milling process." Petitioner cites Revenue Regulations 2-86 and 11-86 and BIR ruling No. 66-027 dated January 29, 1966, to the effect that "containers are raw materials of manufactured articles". In disposing of said argument as devoid of merit, respondent Court observed that said revenue regulations defined the term "raw materials but not "containers" or "packaging materials". Hence, it is not correct to say that containers and packages are raw materials. Moreover, Section 168 of the Revenue Code expressly limits the articles subject to percentage tax (miller's tax) to: "rope, sugar, coconut oil, palm oil, cassava flour or starch, desiccated coconuts, manufactures, processed or milled by them, including the by-product of the raw materials, from which said articles are produced, processed or manufactured." CENVOCO further relied on the ruling of the then Commissioner Ruben Ancheta on October 1984, which reads in part: "xxx xxx xxx This refers to your letter dated September 5, 1984 requesting that the 10% sales tax paid on container cans purchased by you, be credited against the 2% (now 3%) miller's tax due on the refined coconut edible oil. It is represented that you process copra and/or coconut oil and sell the refined edible oil in cans; that said cans are purchased from can manufacturers who in turn bill to you the price of the cans and the 10% tax paid thereon which are separately shown on the invoice; and that the cost of the cans, including the 2% miller's tax is computed. In reply, I have the honor to inform you that your request is hereby granted. . . . (Pacific Oxygen & Acetylene Co. vs. Commissioner, GR No. L-17708, April 30, 1965)." Petitioner, however, contends that the aforesaid ruling of Commissioner Ancheta was revoked or reversed by the latest opinion of Deputy Commissioner Eufracio D. Santos, which is the basis of instant petition. In ruling that this cannot be done, respondent Court ratiocinated as follows, and which We quote with approval: The above ruling of the Commissioner Ruben Ancheta dated October 18, 1984 was effective and in force when petitioner availed itself of the tax credit in 1986 of a specified number of containers and packaging materials. Such being the case, the said ruling cannot be revoked by the November 17, 1988 opinion of the Deputy Commissioner Eufracio D. Santos (Exh. F) as in that way, to apply it retroactively, would clearly be prejudicial to petitioner. Section 278 of the National InternalRevenueCode states as follows: ' Non-retroactivity of rulings. Any revocation, modification, or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayer . . .." (Emphasis supplied) The reason for incorporating the aforequoted provision in the National Internal Revenue Code was aptly declared by Supreme Court in ABS-CBNBroadcastingCorporation vs.CTA (No. G.R. L-52306, Oct. 12, 1981; 108 SCRA 143, thus 'This Court is not unaware of the well-entrenched principle that the Government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. In fact, utmost caution should be taken in this regard. But, like other principles of law, this also admits of exceptions in the interest of justice and fair play. The insertion of Section 338-A (now Section 327) into the National InternalRevenueCode, as held in the case of Tuazon,Jr.vs.Lingad (58 SCRA, p. 170), is indicative of legislative intention to support the principle of good faith. In fact, in the United States, from where Section 24(b) was patterned, it has been held that the Commissioner or Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer.' (Emphasis supplied) The underlying principle of Section 338-A, now Section 278 of the TaxCode, is to provide for the non retroactivity of rulings of the Commissioner of Internal Revenue (Tan Chong v. Sec. of Labor, 72 Phil. 307). The principle of said provision is good faith in that "the Commissioner or Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer" (ABS-CBN Broadcasting Corporation vs. CTA, ibid, citing Tiagon, Inc. vs. Lingad, 158 SCRA 130). In the case at bar, the imposition of the deficiency miller's tax for the year 1986 will surely result to the prejudice and injustice to petitioner in that the sales tax paid by petitioner on the containers will not be credited against the alleged deficiency miller's tax; petitioner will then be subject to tax twice considering that said miller's tax is based on the gross selling price of the refined coconut edible oil on said containers (pp. 115-116, CTA rec.). Consequently, the 1984 ruling of Commissioner Ruben Ancheta, allowing petitioner to credit the sales tax it paid on the containers against the deficiency miller's tax on 1986 cannot be revoked or repealed by the 1988 ruling/opinion (Exh. F) of Deputy Commissioner Santos. (pp. 116, CTA rec.)" Finally, petitioner invokes the presumption of correctness of his assessment. The contention is off-tangent in the instant case, as the presumption applies only where there is a question as to the correctness of the computation assessed against the taxpayer. In the instant case, CENVOCO is not questioning the accuracy of the computation of the alleged deficiency miller's tax, but the legal basis therefor. As shown above, the assessment does not have any legal or factual basis. Premises considered, We hereby affirm the decision of respondent Court under review. No pronouncement as to costs. SO ORDERED. Signed by undersigned who certify further that this Decision was reached after due consultation among the members of the Division in accordance with the Constitution. Puno and Abad Santos , Jr ., JJ ., concur.