Caltex (Philippines), Inc. v. Court of Tax Appeals

SPECIAL FORMER THIRD DIVISION [CA-G.R. SP No. 35699. June 11, 1999.] CALTEX (PHILIPPINES), INC. , petitioner , vs . COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE , respondents . A M E N D E D D E C I S I O N TUQUERO , J p : Before this Court is petitioner's Motion for Reconsideration of the Decision dated April 6, 1998, denying its petition for review of the decision of the Court of Tax Appeals (CTA) in CTA Case No. 4711. Petitioner anchors its motion on the following grounds: I. THE HONORABLE COURT A QUO ERRONEOUSLY RULED THAT PETITIONER EARNED EXTRAORDINARY GAINS FROM THE OIL PRICE INCREASE OF AUGUST 14, 1987. II. THE HONORABLE COURT'S DECISION AFFIRMING THE IMPOSITION OF A SURTAX ON EXTRAORDINARY GAINS ALLEGEDLY REALIZED BY CALTEX VIOLATES PETITIONER'S CONSTITUTIONAL RIGHT TO EQUAL PROTECTION AND THE CONSTITUTIONAL PRINCIPLE OF UNIFORMITY IN TAXATION. After a re-examination of the records, the laws involved and the jurisprudence on the matter, the Court finds merit in the subject motion. First . It is not disputed that ERB's Order of August 14, 1987, authorizing an increase of eighty centavos (P0.80) per liter was issued to augment the Oil Price Stabilization Fund (OPSF). Thus, said Order provides as follows: At this stage of the proceedings, it is clear in the mind of this Board that there are no more funds in the OPSF out of which the claims of the oil companies, outstanding since July 1987 (t.s.n., p. 189-194, July 17, 1987) may be paid. To enable the said companies to have the sufficient cash receipts for the continuous importation of crude, the OPSF has to be augmented . At present, these are the components of the average wholesale posted price (WPP) in pesos per liter: Company Ad Valorem OPSF WPP Netback Tax 3.332 1.438 (0.487) 4.283 If not for the OPSF, the WPP should actually be 4.283 pesos per liter plus 48.7 centavos, or a total of P4.77 per liter. In other words, and as a matter of example, the cost of one liter of premium gasoline today should be P7.73 per liter instead of P6.90. Now, inasmuch as the claims against the OPSF have already exceeded the cash balance thereof, the same amount of 48.7 centavos per liter should be added to the WPP instead of the oil companies trying to squeeze it from the Fund, for anyway, there is nothing more to squeeze out of it. It must, however, be stated that even after such transfer of the 48.7 centavos to the WPP, the resulting outstanding obligation of the OPSF will still be approximately P650 million by August 15, 1987, and will have to be covered by an additional contribution to the Fund estimated at 31.1 centavos per liter, average, for a period of not less than 80 days. xxx xxx xxx The netback of the oil companies should be reduced by P0.005 per liter average, on account of the shift in the basis for computing the customs duty. The reduction on the netback has however resulted in the increase by P0.007 per liter, averaged, in the Ad Valorem tax due to the different percentage rates allocated among the various petroleum products. WHEREFORE the herein applicants are hereby directed to REDUCE their netback by POINT FIVE (P0.005) CENTAVOS per liter and authorized to provisionally INCREASE the wholesale posted prices of their petroleum products by an average of FORTY EIGHT POINT SEVEN (P0.487), CENTAVOS per liter plus THIRTY ONE POINT ONE (P0.311), CENTAVOS per liter which applicants are hereby directed to pay to the OPSF to this total amount of SEVENTY NINE POINT THREE (P0.793) CENTAVOS shall be added the resultant increase of (P0.007), per liter average on the Ad Valorem tax adverted to above. Of this total increase of EIGHTY (P0.80) CENTAVOS per liter which shall be reflected in the retail prices 45.7 centavos have previously been allocated amend the various petroleum products under BOE Resolutions Nos. 87-02 and 87-03 for purposes of reimbursement from the OPSF although not reflected in the retail prices. This order, therefore allocates only THIRTY ONE POINT ONE (P0.311) CENTAVOS per liter and POINT FIVE (P0.005) CENTAVOS per liter netback deduction among all petroleum products marketed locally. . . . Indeed, the foregoing increase of P0.80 per liter finds justification in Section 8 (c) of PD 1956 as amended by EO 137, thus: xxx xxx xxx c) Any additional amount to be imposed on petroleum products to augment the resources of the Fund through an appropriate Order that may be issued by the Board of Energy requiring payment by persons or companies engaged in the business of importing, manufacturing and/or marketing petroleum products. Emphasizing the purposes of the OPSF PD 1956 as amended by EO 137, declares: 1) To reimburse the oil companies for costs increases in crude oil and imported petroleum products resulting from exchange rate adjustment and/or increase in world market prices of crude oil. 2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the reduction of domestic prices of petroleum products. The magnitude of the underrecovery if any, shall be determined by the Ministry of Finance. Elucidating on the spirit and intent of the OPSF the Supreme Court in Citizens Alliance for Consumer Protection vs . ERB, 162 SCRA 538, held as follows: The fact that the world market prices of oil, measured by the spot market in Rotterdam, vary from day to day is, of judicial notice. . . . The OPSF was established precisely to protect local consumers from the adverse consequences that such frequent oil price adjustments may have upon the economy. Thus OPSF serves as pocket, as it were, into which a portion of the purchase price of oil and petroleum products paid by consumers as well as some tax revenues are inputted and from which amounts are drawn from time to time to reimburse oil companies, when appropriate situations arise, for increases in as well as underrecovery of, costs of crude importation. The OPSF is thus a buffer mechanism through which the domestic consumer prices or oil and petroleum products are stabilized instead of fluctuating every so often oil companies are allowed to recover those portions of their costs which they would not otherwise recover given the level of domestic prices existing at any given time. A perusal of the dispositive portion of ERB Order dated August 14, 1987, shows that 48.7 centavos of the total increase of 80 centavos was intended to increase the OPSF for reimbursement purposes. This being so, such an increase is a mere source of reimbursement of increase in crude mere source of reimbursement of increase in crude and finished product import cost (Preamble of PD 1889). Second . Section 1 of PD 1889 imposes a surtax of sixty-five per cent (65%) on extraordinary gains in the following language: SECTION 1. Surtax on Extraordinary Gains : Rate of Surtax Tax . In addition to the income tax imposed under Title II of the National Internal Revenue Code there is hereby imposed a surtax of sixty five (65%) per cent on extraordinary gains realized by oil companies as a result of price increases authorized for petroleum products, which surtax shall be allowed as part of the cost of petroleum product sold on or after November 3, 1983. It is thus clear that the surtax is imposed on extraordinary gains. While it is true there was an authorized price increase of petroleum products by virtue of ERB's order of August 14, 1987, an in-depth analysis of the components of the increase reveals, however, that the authorized increase was meant to cover the cost increases on crude oil and imported petroleum products resulting from exchange rate adjustments. In this regard, the Court quotes with approval petitioner's amplification of the components of the increase, thus: The 14 August 1987 ERB Order authorized the oil companies to increase their Wholesale Posted Price (WPP) by an average of P.80 per liter. What then is the WPP? The WPP is the price charged by oil companies to their dealers on a pick-up basis at the depot or terminal of the oil companies. The WPP is the price that affects the pump prices or retail prices of petroleum products. The WPP plus the hauling charge (i.e., the amount paid to haul petroleum product from deposits of the oil companies) and the dealer's mark up equal pump or retail prices. Thus, if there is an increase in WPP, there will be a corresponding increase in the pump or retail prices of petroleum products. Conversely, if there is a decrease in the WPP, there will be a corresponding decrease in the pump or retail prices of petroleum products. If the WPP remains constant, the pump or retail prices remain constant. According to the ERB, WPP has three components to wit: Company Ad Oil Price Netback + Valorem + Stabilization Fund = WPP (OPSF) The above formula or equation is therefore (1) company netback plus (2) ad valorem plus (3) OPSF equals WPP Since the oil industry was a regulated industry during the period that the ERB issued its 14 August 1987 Order, the WPP the company netback and the OPSF are all fixed and determined by the ERB. The ad valorem on the other hand is prescribed by the Tax Code. The company netback component of the WPP goes to the oil company. The ad valorem component of the WPP goes to the government, and the OPSF component of the WPP goes to the government and the OPSF component of the WPP goes to the special fund created by PD 1956 as amended by EO 137 which special fund was administered by the Energy Ministry. In the above formula or equation the WPP, the company netback and the ad valorem are always positive. Because of the very nature of the OPSF as a buffer against price fluctuations, as will be explained in greater detail below, the OPSF component in the above formula or equation, may either be positive or negative. A positive OPSF means that, that portion of the WPP which is allocated by the ERB to the OPSF component is instead of going to the oil companies is contributed by the oil companies to the OPSF. Thus, in a positive OPSF, the WPP is allocated and goes to: 1) the oil company as company netback: 2) the government as ad valorem tax: and 3) the OPSF as a positive contribution. Simply put a positive OPSF in the above formula or equation means that the oil companies contribute to the OPSF for every liter of petroleum products sold to them. On the other hand, a negative OPSF in the above formula or equation means that the oil companies are withdrawing from the OPSF for every liter or petroleum products sold by them. This happens when the WPP set by the ERB is less than the sum total of the company netback plus the ad valorem tax. This was precisely the situation prior to the issuance of the ERB Order on August 14, 1987. The ERB Order of 14 August 1987 (pp. 21-22 Annex "K" of the CA Petition for Review stated that "at present, these are the components of the average wholesale posted price (WPP) in pesos per liter." Company Ad Valorem Oil Price Netback + + Stabilization Fund = WPP (OPSF) 3.332 1.438 (.487) 4.283 The above equation means that before the price increase order of 14 August 1987, the average WPP of petroleum products as previously set by the ERB was P4.283 per liter. In other words, the oil companies were receiving in the average, P4.283 for every liter of petroleum products they sold to their dealers at the depot. Out of this WPP of P4.283 the amount of P1.438 was paid by the oil companies to the government as ad valorem taxes. The oil companies kept the remaining amount of P2.845 [P4.283 (WPP, less P1.483 (tax)] as company netback. However, the company netback was previously fixed by the ERB of P3.332. The remaining amount of P2.845 was therefore insufficient to meet the company netback of P3.332. Thus, the oil companies were recovering the amount of P487 (the difference between P3.332 and P2.845) from the OPSF by withdrawing the said amount from the OPSF. The explains the negative P487 under OPSF in the above equation. Third . The testimony of then ERB Chairman Tantiangco that oil companies may no longer realize windfall profits in the context of PD 1889 after the establishment of the OPSF deserves credence. As explained by Chairman Tantiangco: Before the introduction of the OPSF, on October 15, 1984 by Presidential Decree No. 1956, it is possible for the oil companies to get windfall profits because increase in prices are calculated based on the lowest inventory of the oil companies and the effectivity of the increase approximate that period. The oil companies will be realizing gain because the products they are selling then was out of the crude imported in the previous period which was at low price. However, it is different after the effectivity of PD 1956 and the subsequent issuance of LOI 1441 on November 20, 1984 (T.S.N. pp. 76-77 January 9, 1955). In an answer to the questioned why oil companies may no longer realize windfall profits in the context of P.D. 1889 after the establishment of the OPSF. Mr. Tantiangco states as follows: "A. Because the adjustment in the netback now is based on their actual importation. So the Energy Regulatory Board gathered all documents from the Bureau of Customs, from the Department of Energy which approves the importation of the oil companies at the same time from the submission of the oil companies together with their documents or receipts they received from the Bureau of Customs. So the netback is adjusted based on the actual cost of the importation. . . ." It is a settled rule of evidence that the opinion of a witness on a matter requiring special knowledge, skill, experience or training which he is shown to possess, may be received in evidence (Sec. 49, Rule 130, Rules of Court). Having been mandated to enforce and administer the laws relating to the OPSF. Chairman Tantiangco undoubtedly has the requisite expertise thereon. Hence, his views on the components of OPSF are entitled to great weight, consideration and respect (Sagun vs . PHHC, 162 SCRA 411: PAFW vs . Bureau of Labor Relations, 72 SCRA 396, 402: IBAAEU vs . Inciong 132 SCRA 663. 674). Fourth . The surtax imposed by PD 1889 is upon income. Income, in the broad sense, means all wealth which flows into the taxpayers other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets (Sec. 36, Rev. Reg. No. 21, In Fisher vs . Trinidad, 43 Phil. 973, the Supreme Court defines income as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit from investment. There is no gainsaying that PD 1889 imposes tax on gain. Be it ordinary or extraordinary, the gain or income is the basis of any tax. As heretofore elucidated, the authorized increase in petroleum products under ERB's Order of August 14, 1987 did not result in a gain to petitioner. As it is, the increase partakes of the nature of mere return of capital. Fifth . Want of revenue regulation implementing the authorized increase under the August 14, 1987 ERB Order opens the floodgate for different interpretation of the provision of PD 1989. Settled is the rule that in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer. This is because, as burdens which must be endured by the taxpayers, taxes should not be presumed to go beyond what the law expressly and clearly declares (Lincoln Philippine Life Insurance Company, Inc. vs . CA, G.R. No. 118043, July 23, 1998). Sixth . The decision of the Court of Tax Appeals (CTA) in Case No. 4780 entitled "Philippine Shell Petroleum Corporation vs . Commissioner of Internal Revenue" to the effect that Pilipinas Shell Petroleum Corporation, similarly covered by the ERB's order dated August 14, 1987, did not derive any extraordinary gain as a result of said price increase forms part of our judicial system (Anyong Han vs . Court of Tax Appeals, 19 SCRA 10: Viduya vs . Berdiago, 73 SCRA 553). Petitioner Caltex and Shell being similarly situated, they should be treated alike or put on equal footing both in the privileges conferred and liabilities imposed (Juan Luna Subdivision vs . Sarmiento, 91 Phil 371). WHEREFORE, the Decision dated April 6, 1998, is RECONSIDERED and SET ASIDE. Accordingly, judgment is hereby rendered REVERSING the appealed decision and declaring as NULL and VOID the tax assessment amounting to P336,868,580.14 under Assessment Letter dated August 15, 1990. No pronouncement as to costs. SO ORDERED. Labitoria and Morales * , JJ . , concur. Footnotes * Vice J. Hormachuelos who is on leave. ** Vice J. Imperial who has retired.