Commissioner of Internal Revenue v. Court of Tax Appeals

[CA-G.R. SP No. 31025. January 12, 1994.] (C.T.A. Case No. 3925) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . THE COURT OF TAX APPEALS and WARNER-LAMBERT PHILIPPINES, INC. , respondents . D E C I S I O N MARTIN , JR ., J p : Before Us is a petition for review of the decision dated April 21, 1992 of the Court of Tax Appeals in C.T.A. Case No. 3925 entitled "Warner-Lambert Philippines, petitioner, versus, Commissioner of Internal Revenue, respondent", as action involving a claim for tax refund or tax credit, the decretal portion of which reads as follows: "WHEREFORE, judgment is rendered in favor of petitioner. Respondent is hereby ordered to refund or credit to petitioner the amount of P449,657.24 erroneously paid as manufacturer's sales tax for the year 1983 and the first three quarters of 1984. Without pronouncement as to costs. SO ORDERED." (p. 10, CTA Decision; p. 44, Rollo) The uncontroverted facts which gave rise to the instant petition are as follows: Warner-Lambert Philippines, Incorporated (WLPI for brevity) is a duly registered domestic corporation engaged in the manufacture and sale of certain pharmaceutical, health-care and confectionery products classified and covered under different trademarks and in buying finished products and selling them under their own trademarks (p. 3, Petition; pp. 2-3, Comment of the Private Respondent; pp. 70-71, Rollo). In its continuing operations, WLPI was regularly selling one of its products, a pharmaceutical soap under the Neko brand, which was manufactured for its sale by the Manufacturing Services and Trade Corporation (MSTC for short) in compliance with the processing and packaging contract entered into by the said MSTC with Park Davies and Company Incorporated (PDCI for brevity) whose business operations were earlier consolidated with WLPI (p. 3, Petition; p. 3, Comment of the Private Respondent; p. 71, Rollo). WLPI filed its quarterly in one tax returns covering the calendar year 1983, as well as the first three quarters of 1984. Accordingly, it paid on different dates the five (5) per cent manufacturer's sales tax on Neko soap in the aggregate amount of P449,657.24 which was included in the total percentage tax payments of P13,563,177.00 for the period starting from January 1, 1983 up to August 30, 1984 (p. 3, Petition; pp. 7-9, Comment of the Private Respondent; pp. 75-77, Rollo). On June 28, 1984, the MSTC sent a letter of request to the Bureau of Internal Revenue praying for a ruling on whether it should be classified as a manufacturer or a contractor. In its BIR Ruling No. 135-84 issued on July 31, 1984, the Commissioner of Internal Revenue declared that the former was really a manufacturer as defined under the then Section 187 (x) of the National Internal Revenue Code considering that for the purpose of making the house brand Neko soap for WLPI, MSTC supplied the soap base comprising 97.6% of the soap and only the remaining 2.4% soap additives was provided by WLPI, thus the former was subject to the ten (10) per cent sales tax on the NEKO soap pursuant to the then Sections 192(1) and 199(a) respectively of the National Internal Revenue Code (p. 6, Comment of Private Respondent; p. 74, Rollo). Reacting to the foregoing ruling, WLPI, in its letter dated April 18, 1985, requested the Commissioner of Internal Revenue for a tax refund or tax credit in the sum of P449,651.00 corresponding to percentage taxes it paid erroneously on sales of Neko soap, further alleging that BIR Ruling No. 135-84 operated to its benefit and should be given retroactive affect (p. 3, CYA Decision p. 37, Rollo). While the above claim for tax refund/credit was pending with the Bureau of Internal Revenue and before the expiration of the prescriptive period of two (2) years pursuant to the then Section 292 of the National Internal Revenue Code, WLPI filed a petition for review with the court a quo contending substantially that the pharmaceutical soap with NEKO brand was manufactured for it by MSTC; that in manufacturing the same, MSTC maintained its own complete line of equivalent, manpower and facilities; that in order to clear any doubt as to what taxpayer it is and the taxes it should pay, MSTC sent a letter of request to the Bureau of Internal Revenue which, in its BIR Ruling No. 135-84 issued on July 31, 1984, classified MSTC as a manufacturer subject to the payment of ten (10) per cent sales tax on the NEKO soap as prescribed in Sections 192(1) and 199(a) of the National Internal Revenue Code; and that because the said ruling was beneficial to it. WLPI prayed that the same should be given retroactive affect so that it may recover the manufacturer's sales taxes it erroneously paid (Petition for Review in the CTA; pp. 21-30, Rollo). In his answer, the Commissioner of Internal Revenue (CIR for short) denied the material allegations of the aforesaid petition and by way of special and affirmative defenses averred, among others, that WLPI was admittedly a manufacturer subject to the prescribed manufacturer's sales taxes; that revenue rulings of the Bureau of Internal Revenue are not given retroactive effect unless expressly so provided; that it was incumbent upon WLPI to prove that the taxes paid or remitted were erroneously collected and failure to prove the same would be fatal to the action for tax refund or tax credit; and that claims for refund are construed strictly against taxpayers as the same were in the nature of an exemption (Annex S, Petition; pp. 1-3, Answer; pp. 31-33, Rollo). After trial on the merits, the court a quo handed down its declaration as earlier adverted to. Dissatisfied, the CIR moved to reconsider the aforesaid decision (Annex D, Petition; p. 45, Rollo) but the court a quo , in its resolution dated April 29, 1983, denied the same for lack of merit (pp. 53-54, Rollo). Hence, the instant petition interposed by the CIR ascribing to the court a quo the lone error of granting WLPI a tax refund or credit in the amount of P449,657.24 supposedly erroneously paid as manufacturer's sales tax for the calendar year 1983 and the first three quarters of 1984. We find the instant petition not impressed with merit. Petitioner CIR insists that respondent WLPI should not be entitled to a tax refund and/or tax credit because under the processing and packaging contract executed between WLPI and MSTC, the former was not a mere distributor of Neko soap but in effect the manufacturer thereof and an independent contractor of WLPI in regard to said soap product. We do not subscribe to this line of reasoning. The then applicable provisions of the National Internal Revenue Code on the matter are reproduced in full as follows: "SECTION 167. Words and Phrases, Phrases Defined (X) "Manufacturer" includes every person who by physical or chemical process alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not have been put in its original condition, or who by any such process alters the quality of any such raw material or manufactured or partially manufactured products so as to reduce it to marketable shape or prepare it for any of the uses of industry, or who by any such process combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished product of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured products in their original condition could not have been out, and who in addition alters such raw material or manufactured or partially manufactured products, or combinse the same to produce such finished products for the purpose of their sale or distribution to others and act for his own use or consumption (Emphasis Supplied). xxx xxx xxx "SECTION 192. Fixed Taxes (1) Persons subject to percentage tax Unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay a fixed annual tax of one hundred pesos (P100.00). xxx xxx xxx "SECTION 199(a) * Percentage tax on sales of other articles There shall be levied, assessed and collected case only on every original sale, barter, exchange, and similar transaction either for nominal, or valuable consideration, intended to transfer ownership of, or tite to, the articles not covered in Sections 194, 195, 196, 197, 198 and 201, a tax equivalent to ten per centum (10%) 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 any percentage or specific tax paid under this Title or Title IV respectively, on domestically manufactured, processed or produced, or imported new materials, part, accessory or other article forming part of the finished product: Provided, however, That in race the total tax paid on the raw material, part, accessory or other article exceeds the amount of the sales tax due on the finished product, the excess shall be credited against the sales tax liabilities of the manufacturer for the succeeding taxable quarters; And provided further, That the amount of the tax on the raw material, part, accessory or other article shall be indicated as separate item in the sales invoice . Any part or accessory of the above-mentioned articles shall be taxed under this subsection (Emphasis supplied)." * (Gonzales and Gonzales, National Internal Revenue Code, 1984 Revised Edition, p. 409, p. 415, p. 507) Applying the afore-quoted provisions, We find that MSTC, not respondent WLPI, was the manufacturer of NEKO soap intended for sale by respondent WLPI upon the final production of the aforesaid product pursuant to the processing and packaging contract which MSTC entered into with PDCI. At the trial in the court below, Accounting Supervisor Marina Cumagon testified that MSTC was engaged in manufacturing toilet soap, one of which was NEKO soap. In the manufacture of this particular brand of soap, MSTC supplied 97% of the raw materials, 100% of labor and 100% overhead. Furthermore, MSTC billed WLPI for the product through sales invoices wherein the selling price and manufacturer's sales tax are separately indicated. Appellant Commissioner of Internal Revenue contends there is no provision in the processing and packaging contract (Exhibit "1") executed by and between WLPI (Warner-Lambert) and Manufacturing Services and Trade Corporation (MSTC) which shifts to the latter the payment of the manufacturer's sales tax especially since MSTC is only an independent contractor whose function depends upon whatever instructions were given by WLPI. The contention is devoid of merit. While there may be no specific provision in the processing and packaging contract (Exh. "I") which passes on to MSTC the obligation to pay the manufacturer's sales tax on the manufacture of Neko soap, the undisputed fact remains that two (2) sales taxes were paid to the B.I.R. on the same soap product, one by WLPI and the either by MSTC. Under the provisions of Section 179 of the National Internal Revenue Code, the manufacturer's sales tax is levied, assessed and collected only once, on every original sale, barter or exchange, and the provision has been interpreted to mean the first sale, barter or exchange of the article by the manufacturer or producer (p. 7, CTA Decision). While the overriding purpose of tax laws is the collection of taxes (Commissioner of Internal Revenue vs. Fireman's Funds Inc. Co., Inc., 148 SCRA 315), the observance of the same principle does not preclude exceptions in the interest of justice and fair play. The payment by WLPI of the manufacturer's sales tax on Neko soap clearly constitutes double payment and a denial of the former's claim for the corresponding refund or tax credit would result in injustice to taxpayer WLPI. Appellant Commissioner of Internal Revenue's insistence that the collection of manufacturer's sales tax on Neko soap against WLPI is thus without merit. The appellant next argues that WLPI's reliance on BIR Ruling No. 135-85 as a basis for its claim for refund or tax credit is misplaced because the aforesaid ruling was made on July 31, 1984 and should not be given retroactive application as to cover tax payments for 1983 and the first three (3) quarters of 1984. It is also posited that the factual basis of said BIR ruling is materially different. It is finally argued that appellant Commissioner of Internal Revenue has the authority to revoke, repeal or abrogate the rulings of his predecessors in office and may rectify any error committed in the implementation of tax laws and regulations. We find ourselves unable to accept appellant's position under the factual milieu of the case at bar. It must be remembered that at the instance of MSTC to determine categorically whether it should be classified as a manufacturer or contractor, the then Commissioner of Internal Revenue issued BIR Ruling No. 135-85 dated July 31, 1984, which is quoted, to wit: "Gentlemen: In reply to your letter dated June 28, 1984 requesting a ruling as to whether you should be classified as a manufacturer or contractor, please be informed that for operating and/or maintaining a complete line of equipment, manpower and facilities for toilet scrap production for the purpose of manufacturing your own house brand of soap, namely NOVA, SUCCESS and PERSONA and other brand of soap, e.g., NEKO soap for your client Warner Lambert Philippines, Inc ., wherein you provide, the soap base comprising 97.6% of the soap and your client the soap additives comprising 2.4% thereof, you come within the purview of manufacturer as defined under Section 137 (x) of the Tax Code. Accordingly, you are subject to the 10% sales tax on the NEKO soap as prescribed in Section 192 (1) and 199 (a) respectively of the Tax Code." (Exhibit "N", pp. 3-4, Petition for Review, emphasis ours.) It is crystal-clear from the foregoing ruling that MSTC was classified as the manufacturer of Neko soap for its client, Warner Lambert Philippines, Inc. (WLPI) and should pay the 10% sales tax on said Neko soap. It is not disputed that MSTC paid the corresponding manufacturer's sales taxes as indicated in the sale invoices. The conclusion therefore is that WLPI is not the manufacturer of the same item and the manufacturer's sales taxes it erroneously paid on said Neko soap constituted a double payment. The allegation of appellant Commissioner of Internal Revenue that the aforesaid BIR Ruling No. 135-84 is based on facts materially different is debunked. Moreover, appellee WLPI adduced evidence during the trial which established the factual basis, while appellant opted not to present any evidence at all. Neither can the assertion of appellant CIR that BIR Ruling No. 135-84 should not be given retroactive effect, be sustained. Section 246 (previously Section 327) of the National Internal Revenue Code provides that: "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 taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith." It is clear from the foregoing that circulars or rulings promulgated by the Commissioner of Internal Revenue have no retroactive application where to so apply them would be prejudicial to taxpayers. Conversely, if the ruling or circular is beneficial to taxpayers, the same must be given retroactive application to lighten the taxpayer's tax burden. The power of taxation should be exercised with caution to minimize injury to the rights of a taxpayer (Roxas vs. Court of Tax Appeals, 23 SCRA 276). As the Court below aptly ruled, which we quote with approval: "As to the argument of respondent that BIR Ruling 135-85 should not be given retroactive affect pursuant to Section 327 of the Tax Code, suffice it to state that rulings or circulars promulgated by the BIR have no retroactive application only in cases where the revocation, modification or reversal thereof will be prejudicial to the taxpayer (ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, L-52306, 108 SCRA 148 (1981). Consequently, if the ruling or circular proves beneficial to the taxpayer, the same must be given retroactive effect. Hence, this Court is inclined to grant petitioner's claim for refund or tax credit." (p. 9, CTA Decision; p. 43 Rollo) Appellant likewise invokes the settled rule that in an action for refund of taxes, the burden of proof is upon the taxpayer to show that taxes paid or remitted were erroneously collected. The record shows that appellee adduced evidence in support of its case. On the other hand, appellant Commissioner of Internal Revenue through counsel submitted his case on the basis of the records and pleadings, without offering evidence to rebut taxpayer WLPI's evidence, testimonial and documentary. Thus, respondent court made the findings of fact the unquestionably two (2) manufacturer's sales taxes were paid, one by MSTC and the other by WLPI, on the same item, Neko soap. From all the preceding disquisitions, We find no cogent reason to deviate from the well-entrenched principle that the findings of facts and conclusions of the tax court are entitled to respect in the absence of showing of gross error or an abuse or improvement exercise of its authority (Commissioner vs. Ayala Securities Corporation and C.T.A., 70 SCRA 204; Nasiad and Lozada vs. Court of Tax Appeals, 61 SCRA 238, 244) and can only be disturbed on appeal if not supported by substantial evidence (Parag. No. 8, Supreme Court Circular 1-91, CIR vs. Cadwallader Pacific Company, 73 SCRA 89, 73). WHEREFORE, finding no error of fact or law committed by the respondent court that will warrant a reversal or modification of the decision sought to be reviewed, the petition for review is DENIED DUE COURSE and is DISMISSED for lack of merit. No pronouncement as to costs. SO ORDERED. Chua and Guerrero, JJ ., concur. Footnotes * This section and other provisions on sales tax were replaced by value-added tax law pursuant to Section 100 of Executive Order No. 273 enacted as July 25, 1987 and which took effect last January 1, 1988 (83 O.G. No. 31-S, August 3, 1987, p. 3528-108).