Commissioner of Customs v. Philippine Phosphate Fertilizer Corp.

SPECIAL FIFTH DIVISION [CA-G.R. SP No. 38860. August 4, 2000.] COMMISSIONER OF CUSTOMS , petitioner , vs . PHILIPPINE PHOSPHATE FERTILIZER CORPORATION , respondent . D E C I S I O N AGCAOILI , J p : Before this court is a petition for review of the decision rendered by the Court of Tax Appeals (CTA) dated October 5, 1995. The decretal portion of the decision subject for review reads: "WHEREFORE, the Court finds the petition to be meritorious and in accordance with law, the same is hereby GRANTED. Respondent is ordered to issue in favor of petitioner a Tax Credit Certificate in the amount of P20,149,437.77, representing erroneously paid customs duties on purchases of fuel and petroleum products, for the periods covering the months of October to December 1991 and January to June 1992. No costs of suit. SO ORDERED." The relevant antecedents are not disputed. Philippine Phosphate Fertilizer Corporation (PHILPHOS) is a corporation engaged in the production of fertilizers for domestic and international distribution. It is registered with the Export Processing Zone Authority (EPZA) and its base of operations is the Leyte Industrial Development Estate (LIDA). HCTAEc For the periods covering October to December, 1991 and January to June, 1992, PHILPHOS purchased from Petron Corporation (PETRON) fuels and petroleum products used directly or indirectly in the manufacture of fertilizers. The customs duties on these purchased fuels and petroleum products totalling P20,149,423.77 were paid by PETRON and passed to PHILPHOS as part of the selling price. In the belief that the tax was erroneously collected, PHILPHOS filed a claim for refund or tax credit in the amount of P20,149,473.77 before petitioner, the Commissioner of Customs, for the periods covering the said purchases. PHILPHOS postulated that as an entity duly registered with the EPZA, the supplies it used whether directly or indirectly in its production of fertilizers are free from duties and taxes. Petitioner Commissioner of Customs denied PHILPHOS' claim for refund on the ground that the customs duties on the said petroleum products were already settled by PETRON and as such, the importation by the supplier had long been terminated. Pertinent portions of the letter of denial read: "Please be informed that petroleum products (fuel, etc.) locally purchased by a zone operator, and brought into the Zone for its own use, or otherwise, do not enjoy special tax treatment under Section 17 of P.D. No. 66. The petroleum products purchased by PHILPHOS from PETRON, it may be noted, were derived from crude oil imported by the latter who, upon payment of customs duties due thereon, processed and subsequently sold to the former in connection with its operations. The customs duties due on the importations of the raw material (crude oil) from which the finished products were taken and sold to PHILPHOS have been settled by the importer thereof, and the importation terminated. (Section 1202, TCC). That they may have been locally consumed by a Zone operator registered under P.D. No. 66 does not make the transaction, or any other local sale for that matter, by the oil supplier, a proper and legal case of refund. Indeed, such local sales and transportation of the finished products to the Zone are not subject to any Customs laws and regulations as prescribed in Section 17 since the importation by the supplier, as earlier state, had long been terminated when the imported articles were released from Customs custody. In view thereof, the claim for refund/tax credit is hereby denied. (Annex B)" Consequently, respondent appealed before the CTA. In due course, the CTA rendered its decision granting the refund. Hence, this petition for review. In this petition, the Commissioner of Customs contests the grant of the refund/tax credit on the following grounds: First , the customs duties on the importation of the raw materials (crude oil) from which the petroleum products were derived is the liability of the importer (PETRON) and the end-user thereof (PHILPHOS), and since the importation had already been terminated with the payment of such duties, the refund should not be granted. Second , section 17(1) of P.D. No. 66 should be read in conjunction with section 18(i) of the Decree, such that while the former section provides that "supplies . . . brought into the zone . . . to be used whether directly or indirectly in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances . . . " such provision must be qualified by section 18 which states that the tax credit shall be enjoyed on supplies only when such supplies form part of the manufactured goods. Third , the grant of a refund or tax credit must be explicit in the law. Finally , the CTA erroneously discarded the ruling of the Secretary of Finance dated July 18, 1991 in a similar case where the taxpayer's claim for refund was denied. TIaCHA For its part, PHILPHOS supports the ruling of the CTA and contends that the petroleum products were within the contemplation of "materials and supplies" as found in section 17 of P.D. No. 66. The termination of importation made by PETRON has no relevance in this case since P.D. No. 66, specifically section 17 thereof, does not distinguish the period when the duties are imposed. As an EPZA-registered enterprise, PHILPHOS is entitled to exemption from taxes and duties on the materials it uses directly or indirectly in the production of its exported products. We dismiss the petition. It is plain that the supplies and materials PHILPHOS directly or indirectly uses in its operations as an EPZA-registered corporation enjoys exemption from customs and internal revenue laws. As an incentive for registering with the EPZA, business entities are granted such privilege as specified in section 17 of P.D. No. 66, which is the controlling provision in this case "SEC. 17. Tax Treatment of Merchandise in the Zone . (1) Except as otherwise provided in this Decree, foreign and domestic merchandise, raw materials, supplies , articles, equipment, machineries, spare parts and wares of every description, except those prohibited by law, brought into the Zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise or used whether directly or indirectly in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the provisions of law to the contrary notwithstanding." (Emphasis added) From this provision, it is patent that the petroleum used directly or indirectly by PHILPHOS to facilitate its production of fertilizers is exempt from taxes and duties which entitles it to refund in case of erroneous payment thereof. But then, petitioner attempts to dilute such legislative grant by insisting that for such supplies to be exempt from duties and taxes, they should be incorporated in and form part of the goods produced by such EPZA-registered enterprise. This qualification is purportedly found in section 18 of P.D. No. 66 which states: "SEC. 18. (i) Additional Incentives . A zone registered enterprise shall also enjoy the following incentive benefits: (1) Tax Credit . Every registered zone enterprise shall enjoy a tax credit equivalent to the sales, compensating and specific taxes and duties on supplies , raw materials and semi-manufacture products used in the manufacture, processing or production of its export products and forming part thereof ; . . ." (P.D. No. 66, as amended by P.D. No. 1449: emphasis added) Petitioner's assertion cannot be sustained. Section 18 is inapplicable in this case. As petitioner himself acknowledges, this provision is meant to cover additional privileges. Thus, the phrase "a zone registered enterprise shall also enjoy the following incentives and benefits," pertains to incentives other than those provided in section 17 which refers to incentives given to enterprises by the fact of their registration with EPZA. As such, section 18 which provides for further incentives has conditions other than those provided in section 17. Since section 18 covers separate and distinct privileges from those contained in section 17, petitioner cannot validly assert that compliance with the qualifications set in section 18 is a condition precedent to exemption privileges under section 17. In other words, the supplies used directly or indirectly by the EPZA-registered enterprise in its business activities need not form part of its products to be granted the exemption. Neither can we uphold petitioner's contention that the refund cannot be granted because the taxes had already been settled by the importer of the goods. For one, the exemption from duties is clear and the fact that the duties were already paid by the seller can not negate such grant of exemption. The duties are passed on to respondent as part of the purchase price thereby unduly burdening respondent with duties and taxes in the form of higher costs. The demand for refund was precisely made to claim the exemption from such duties as specified in the law. For another, section 17 does not qualify the stage in the payment of duties when the exemption may be claimed. As such, it can be claimed so long as the conditions in section 17 are satisfied. To impose the further requirement that such claim for exemption may only be made before duties are settled by the importer is to impose a restriction when there is none. As correctly ruled by the CTA: "Contrary to the allegations of the Respondent that Section 17(1) does not provide for duty and tax exemption privilege, this Court disagrees. The phrase 'shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the provisions of law to the contrary notwithstanding' cannot be interpreted in any other manner than to mean that merchandise or supplies brought into the zone are exempt from customs duties and taxes. The incentive given under Section 17(1) is broader than a mere tax exemption. The phrase is so broad to include not only the exemption from custom duties and taxes but everything required in the enforcement of the customs and internal revenue laws save on the exceptions and conditions specified in the EPZA law itself. Considering that the customs and internal revenue laws are primarily enacted to impose duties and taxes, the phrase cannot be interpreted to exclude these impositions. More so, the phrase will also include exemption from other rules and regulations which are normally followed in the discharge of importation such as the filing of import entries, examination and other requirements attendant to the importation of goods into the country. xxx xxx xxx Regarding the allegation of Respondent that Section 18(i) shall govern the situation and therefore, the claim for refund of customs duties should be denied as the bunker oil used as fuel did not actually form part of the finished product exported. This Court believes that this section introduced by P.D. No. 1449 merely grants additional incentives to an EPZA-registered enterprise and was not meant to superseded Section 17 of P.D. 66. This is clear as the heading clearly indicates that it is an 'additional incentive.' The grantee of the incentive may or may not avail itself of it. In fact, this Court would interpret that this incentive is a surplusage. Its provision was not intended to restrict the enjoyment of the privileges under Section 17, otherwise the amending law. P.D. No. 1449, should have stated so. On the contrary it was meant only as an incentive in addition to those already being enjoyed by an EPZA registered enterprise." Contrary to petitioner's contention, the tax exemption is explicit in the law, as specified in section 17 of P.D. No. 66. There is express legislative intent to grant tax privileges to EPZA-registered enterprises in line with government's drive to attract investments to spur growth in the country. Section 1 of P.D. 66 provides: "Section 1. Declaration of Policy . It is hereby declared to be the policy of the Government to encourage and promote foreign commerce as a means of making the Philippines a center of international trade, of strengthening our export trade and foreign exchange position, of hastening industrialization, of reducing domestic unemployment, and of accelerating the development of the country, by establishing export processing zones in strategic locations in the Philippines." More recently, the intent to exempt EPZA-related industries from taxation was further expressed in Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, which palpably strengthened section 17 of P.D. No. 66, in this wise: "Art. 77. Tax exemption of Merchandise Zone . (1) Except as otherwise provided in this Code, foreign and domestic merchandise, raw materials, supplies, articles, equipment, machineries, spare parts, and wares of every description, except those prohibited by law, brought into the zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise whether directly or indirectly in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the provision of law to the contrary notwithstanding. (2) Merchandise purchased by a registered zone enterprise from the customs territory and subsequently brought into the zone, shall be considered as export sales and the exporter thereof shall be entitled to the benefits allowed by law for such transaction." Given this overriding legislative intent to grant tax exemption to EPZA-registered enterprises, we cannot but agree with the CTA in disregarding the opinion of the Secretary of Finance dated July 18, 1991, denying a similar claim for tax refund by an EPZA-registered enterprise on the ground that the materials used did not form part of the product of the said enterprise. While it is true that opinions of administrative agencies and officials tasked with the implementation of the law are accorded much weight and respect by courts, such is not the case when the opinion is contrary to law and negates the very legislative intent for which the law was enacted. WHEREFORE, the decision appealed from is AFFIRMED in toto . SO ORDERED. Sandoval-Gutierrez and Gozo-Dadole, JJ . , concur.