Commissioner of Internal Revenue v. Apex Mining Co., Inc.

SIXTH DIVISION [CA-G.R. SP No. 37054. August 18, 1995.] (C.T.A. Case No. 4450) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs. APEX MINING CO. INC., AND THE COURT OF TAX APPEALS , respondent . D E C I S I O N MARTINEZ , J p : The sole issue for resolution in this petition for review is whether or not respondent Apex Mining Co. Inc., is liable for the 5% ad valorem tax due on mineral products it purchased from small scale miners. The facts: During the period from January to June 1988, respondent Apex Mining Co. Inc. (or Apex for brevity) was engaged in the business of mining, milling, concentrating, converting, smelting, manufacturing, buying, selling and otherwise producing and dealing in all kinds of ores, metals and minerals, as well as the products and by-products thereof. During the same period, Apex either produced its own minerals/mineral products or made purchases from small scale miners. For this reason, the Bureau of Internal Revenue assessed Apex ad valorem tax due on the minerals/mineral products it produced at the rate of 5% and on minerals it purchased from small scale miners pursuant to Section 151 in relation to Section 127 of the Tax Code in a Pre-assessment notice issued on 7 November 1989. On 17 November 1989, respondent protested the assessment. On 11 December 1989, petitioner in a letter advised respondent to pay the amount of P3,748,961.21 representing the uncontested portion of the latter's deficiency ad valorem tax assessment due on its own mineral products. Likewise, respondent protested on 25 January 1990 the ad valorem tax imposed on the minerals it purchased from small scale miners in the amount of P8,212,983.50. At the same time, Apex informed petitioner that it is not contesting the ad valorem tax assessment corresponding to its production of mineral products in the amount of P2,570,863.17, exclusive of increments incident to delinquency. On 23 February 1990, respondent reiterated its protest against the assessment issued on the mineral products it purchased from small scale miners. This was denied by petitioner in a letter dated 12 March 1990 and simultaneously demanding payment of the amounts of P10,225,637.87 and P4,659,368.13, representing respondent's deficiency ad valorem tax assessments due on the mineral products it purchased from small scale miners and its own production, respectively. On 27 April 1990, respondent filed with the Court of Tax Appeals a petition for review questioning the validity of said assessment. The CTA rendered its decision ordering respondent Apex to pay the ad valorem tax due on the mineral products it produced in the amount of P2,570,863.17 plus 25% surcharge and 20% interest thereon per annum from date of removal from its place of production until the same is fully paid, pursuant to Sections 248 (a) (3) and 249 (c) (3) of the Tax Code. However, the assessment for deficiency excise tax due on the mineral products purchased from the small scale miners was declared cancelled for lack of legal basis. Petitioner filed a motion for reconsideration which was denied by the Court of Tax Appeals in a Resolution dated 15 March 1995. Hence, this appeal. The petitioner argues that the Court of Tax Appeals erred in ruling that respondent Apex is not liable for the ad valorem tax on minerals it purchased from small scale miners. This is because Section 127 of the Tax Code, in relation to Section 151 of the same Code, states that: SEC. 127. Payment of excise taxes on domestic products . (a) Persons liable; time for payment . Unless otherwise especially allowed, excise taxes on domestic products shall be paid by the manufacturer or producer before removal from the place of production: . . . . Should domestic products like mineral products be removed from the place of production without the payment of the tax, the owner or person having possession thereof shall be liable for the tax due thereon . It is the contention of the petitioner that in accordance with the above provision, the persons liable are the manufacturer or producer before removal thereof from the place of production. If the mineral products are removed from the place of production without the corresponding excise tax (ad valorem) being paid thereon, then the owner or person having possession thereof (mineral/mineral products) shall be liable for the tax due which in this case is private respondent Apex. The Court of Tax Appeals relieved Apex Mining from payment of the deficiency excise tax on the mineral products purchased by it from small scale miners because respondent was neither the manufacturer or producer, and in the case of non pre-payment of the tax, Apex is neither the owner or person having possession thereof, the minerals having been sold by it to the Central Bank. On the other hand, private respondent Apex maintains that the deficiency 5% ad valorem tax on the minerals it purchased from small scale miners is without factual and legal basis. In the first place, according to respondent, petitioner has the burden of showing that the tax on the minerals the former purchased from small scale miners was not paid by the latter. This, plus the fact that respondent is neither the owner of said minerals nor the present possessor thereof because the same was already sold to the Central Bank which has possession thereof. We rule in favor of petitioner. We find the arguments of Apex untenable. Section 127(a) of the Tax Code should be read in conjunction with other provisions of the Tax Code relative to excise taxes on mineral products. Pursuant to Section 151(a) (3), the rate of the ad valorem tax on metallic minerals is based on the actual market value of the gross output thereof at the time of removal, in the case of those locally extracted or produced. The minerals and mineral products being taxed refer to naturally occurring inorganic substances (found in nature) whether in solid, liquid, gaseous or any intermediate state while mineral products refer to things produced and prepared in a marketable state by simple treatment processes such as washing or drying, but without undergoing any chemical change or process or manufacturing by the lessee, concessionaire or owner of mineral lands (Section 151 (b) (3). The tax shall be due and payable upon removal of the minerals or mineral products or quarry resources from the locality where mined (Section 151,(c)). Thus it is clear from the above provisions that the nature of the excise tax on mineral products is based on the market value which such extracted product can command in the market by a seller who is not obliged to buy. Further, it is to be emphasized that what the law aims to tax is not the minerals itself but the privilege of severing or extracting minerals or mineral products from the earth, the Government's right to exact said impost springing from the Regalian theory of state ownership of its natural resources (Commissioner of Internal Revenue v. CA 204 SCRA 182). However, said tax is due and payable only upon removal of the same from the locality where mined and imposed on the actual market value of mineral products extracted or produced. In other words, the assessment shall be based, not upon the cost of production or extraction of said minerals or mineral products, but on the price which the same before undergoing a process of manufacture would command in the ordinary course of business (Republic Cement Corporation v. CIR 23 SCRA 971). The excise tax on the extracted minerals while in the hands of the small scale miners cannot as yet be determined, not until the same is given value thereof by selling it to a buyer. Such buyer although not in itself the person or entity who extracted the minerals nevertheless becomes responsible for the tax due by reason of the fact that it is from the time of its purchase from the small scale miners that the value of the minerals is ascertained. Apex argues that it cannot be liable for the tax since it is neither the present owner nor possessor of the taxable property, such having been sold and already in the possession of the Central Bank. This is true if we base the liability of Apex solely on Section 127 of the Tax Code. But this provision alone is not sufficient to determine where the tax liability lies especially in this case where several transfers have been consummated and definitely, the Central Bank, to whom the minerals have been sold, is not liable for payment of the tax. There is no question that the minerals extracted by the small scale miners and sold to Apex are those defined under the Tax Code. The fact however that the excise tax due is in the nature of a tax on the privilege to extract minerals does not in itself make the small scale miners liable. It should be noted that there is no indication at all as to who these small scale miners are. Nor can we utilize the second instance cited in Section 127 of the Tax Code which makes the owner or person having possession thereof liable because the present owner and possessor now is the Central Bank, a government entity. This does not mean that no excise tax at all is due on the mineral product extracted. Naturally, Apex cannot be liable as manufacturer under Section 127 of the Tax Code because the minerals it purchased from the small scale miners were sold to Central Bank in their original state. Besides, the ad valorem tax on minerals is not intended to comprehend cases where the minerals had already undergone a chemical change through manufacturing process (Republic Cement Corp. v. Comm. 23 SCRA 967). Neither can Apex be held liable as owner or present possessor. But the fact remains that the minerals purchased by Apex from the small scale miners, was sold with intention to profit from it, to the Central Bank. For this reason, attention should be focused on Section 151 (c) of the Tax Code which states; SEC. 151. Mineral Products (a) . . . (b) . . . (c) Time, manner and place of payment of excise tax on mineral and mineral products . Unless otherwise provided, the excise tax on minerals and mineral products shall be due and payable upon removal of the minerals and mineral products or quarry resources from the locality where mined or upon removal from customs custody in the case of importations. Any person liable to pay the excise tax on locally produced or extracted minerals, mineral products or quarry resources shall before removal of such products file in duplicate, a return setting forth the quantity and the actual market value of the minerals or mineral products to be removed and pay the taxes due thereon to the Collection agent, of the Treasurer of the city or municipality of the place where the mine is located except as herein below provided. However, the output of the mine may be removed form such locality without the prepayment of such excise taxes if the lessee, owner or operator of the mining claim shall file a bond in the form and amount and with such sureties as the Commissioner may require, conditioned upon the payment of such excise taxes. It shall be the duty of every lessee, owner or operator to make a true and complete return in duplicate setting forth the quantity and the actual market value of the minerals and mineral products or quarry resources removed during such calendar quarter, of the balance if any in cases where payments are made upon removal, and pay the excise taxes thereon within 20 days after the end of such quarter to the collection agent, or the Treasurer of the city or municipality of the place where the mine is located. (emphasis ours) Thus, the tax on minerals extracted was due upon removal thereof from the locality where mined. Yet, there was no showing that a return was filed by the person liable, for which reason Apex is now assessed such tax because it caused the removal of the minerals extracted from the locality where mined. Assessments, are prima facie presumed correct and made in good faith, thus We find no reason to disturb the same. It is an elementary rule that in the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. All presumptions are in favor of tax assessments (Sy Po v. CTA et al. 164 SCRA 524). Consequently, failure to present proof of error in the assessment will justify judicial affirmance of said assessment (Commissioner of Internal Revenue v. CA, Atlas Consolidated Mining and Development Corporation and Court of Tax Appeals (March 10, 1995 citing Delta Motors Co. v. Commissioner of Internal Revenue, C.T.A. Case No. 3782, May 21 1986). Further, the basis of the tax in accordance with Section 151 (a) is: SEC. 151. . . . (1) . . . (2) . . . (3) . . . on the actual market value of the annual gross output thereof at the time of removal, in the case of those locally extracted or produced; . . . The assessment therefore of the ad valorem tax shall be based, not upon the cost of production or extraction of said minerals or mineral products but on the price which the same before or without undergoing a process of manufacture would command in the ordinary course of business. (Republic Cement Corp. v. Comm., 23 SCRA 967) The act of Apex in causing the minerals to be removed from the place where extracted and a value thereof determined by purchase, after which with evident intention to profit sold it to the Central Bank Leads to the conclusion that the excise tax became due while the minerals were in the possession and ownership of Apex. To rule otherwise, will permit Apex to evade the payment of the tax. WHEREFORE, premises considered, the appealed decision of the Court of Tax Appeals dated 6 October 1994 is MODIFIED only with respect to the assessment of ad valorem tax on minerals purchased from small scale miners against respondent Apex. The assessment for deficiency excise tax on minerals purchased from small scale miners and subsequently sold to the Central Bank is upheld. The decision of the Court of Tax Appeals is affirmed in all other respects. SO ORDERED. Ynarez-Santiago and Reyes, JJ ., concur.