Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corp.

ELEVENTH DIVISION [CA-G.R. SP No. 44308. March 2, 1999.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PILIPINAS SHELL PETROLEUM CORPORATION , respondent . [CA-G.R. SP No. 44418. March 2, 1999.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs. PILIPINAS SHELL PETROLEUM CORPORATION , respondent . D E C I S I O N IBAY-SOMERA, C . , J p : This is a petition for review filed by the Commissioner of Internal Revenue through the Office of the Solicitor General assailing the decision rendered by the Court of Tax Appeals in CTA Case No. 5132, which modified petitioner's assessment of taxes due against private respondent, the dispositive portion of which reads: "WHEREFORE, in view of the foregoing, the assessment issued by the respondent for deficiency surtax on the oil price increase dated August 15, 1989, is hereby MODIFIED. Petitioner is ORDERED to PAY respondent the total amount of P1,801,407.57 representing deficiency surtax on extraordinary gains, inclusive of the 25% surcharge plus 20% interest from August 16, 1989, until fully paid. SO ORDERED." (p. 92, Rollo) As stated by the petitioner, the antecedent facts as summarized in the decision rendered by the Court of Tax Appeals (CTA for brevity) are not disputed thus, the same are hereunder adopted and reproduced, to wit: "On August 26, 1992, petitioner received an assessment notice demanding the payment of deficiency surtax on extraordinary gains obtained by the petitioner as a result of the oil price increase authorized by the ERB on August 15, 1989. The details of the assessment are specified hereunder as follows: Company Recovery P3,425,950.08 Contribution to the OPSF 35,502,742.49 Total P38,928,692.57 Multiply by rate 65% Basic Tax P25,303,650.17 Amount Paid --- 25,303,650.17 Add: 25% Surcharge 6,325,912.54 Total 31,629,562.71 Add: Interest from Sept. 16 1989 to Aug. 15, 1992 18,450,578.25 TOTAL DEFICIENCY, SURCHARGE & INTEREST 50,080,140.96 =========== The revenue examiners based their computation on the product inventory listed in the Official Registry Book of Pilipinas Shell Petroleum for the month ending August 31, 1992, detailed as follows: PRODUCT OPENING BALANCES Premium Mogas 7,623,741 Regular Mogas 2,420,032 Kerosene 1,805,988 Gas Oil 24,851,770 Fuel Oil 37,504,218 Refinery Fuel Oil 1,074,849 LPG 3,398,437 Av tur 5,761,335 Lams 126,383 SBP 136,989 Component Products 29,497,592 Based on this inventory list, the revenue examiners then computed the inventory gain realized by the petitioner by multiplying said inventory by the individual components mentioned in the ERB order, dated August 15, 1989, detailed as follows: PRODUCT OIL COMPANY NETBACK OIL PRICE STABILIZATION FUND Premium Gasoline P0.03 (P 0.0577) Regular Gasoline P0.03 (0.0577) Av turbo P0.03 (0.9423) Kerosene P0.03 (0.0394) Diesel oil P0.03 (0.0395) Fuel Oil/Feedstock P0.03 0.47 LPS P0.03 (0.0394) Asphalt P0.03 0.4605 Thinner P0.03 0.4606 The final assessed amount of P50,080,140.96 is summarized as follows: PRODUCT NETBACK OPSF TOTAL Premium Gas 228,712.23 (439,889.86) (211,177.63) Regular Gas 72,600.98 (139,635.85) (67,034.87) Kerosene 54,179.64 (71,155.92) (16,976.28) Gas Oil 745,553.10 (981,644.92) (236,091.82) Fuel Oil 1,125,126.54 17,626,982.46 18,752,109.00 Refinery Fuel Oil 32,155.47 505,179.03 537,334.50 LPG 101,953.11 (133,898.42) (31,945.31) Av Turbo 172,840.09 5,428,905.97 5,601,746.06 LAWS 3,791.49 58,212.00 62,003.49 SBP 4,109.67 63,097.13 67,206.80 Component Products 884,927.76 13,586,590.87 14,471,518.63 TOTAL 3,425,950.08 35,502,742.49 38,928,692.57 ========= =========== =========== Total Inventory Gain 38,928,692.57 Surtax Due - 65% 25,303,650.17 Add: Surcharge 6,325,912.54 Interest 20% Fr. 9-16-89 to 8-15-92 18,450,578.25 Total Amount Due 50,080,140.96 =========== Petitioner field a letter protest on September 22, 1992, disputing the assessment and declaring therein that the deficiency surtax imposed by the respondent lacks legal and factual bases. This protest letter contained a denial that petitioner realized extraordinary gains or windfall profits from the 1989 oil price increase because said increase was merely intended to grant oil companies relief from increases in cost of transshipment , chemicals and additives and to cover the deficiency in the Oil Price Stabilization Fund (OPSF) . prcd Respondent denied the aforementioned protest in a letter, dated March 9, 1994, and received by the petitioner on June 22, 1994. Shortly thereafter, an appeal was made in its Court by means of a petition for review filed on July 22, 1994, reiterating its opposition to the assessment issued for deficiency surtax ad affirming its stand that it did not realize any gain much less extraordinary gain as a result of said price increase. In answer to the petition, respondent asserts the following special and affirmative defenses: '9. As a result of the increase in prices of petroleum products authorized by the Energy Regulatory Board (ERB) on August 15, 1989, petitioner realized extraordinary gains which are subject to the sixty five percent (65%) surtax imposed under Presidential Decree (P.D. No. 1889). 10. In the computation of extraordinary gains realized from the increase in prices of petroleum products, petitioner's contributions to the Oil Price Stabilization Funds are included since the contributions form part of the price increase (of Section 2, P.D. No. 1889). 11. It is an established doctrine in taxation that the assessment of the Commissioner of Internal Revenue is prima facie correct and the burden of proof that it is otherwise is on the taxpayer to prove all the facts necessary to establish the illegality of the assessment (Commissioner of Internal Revenue vs. Construction Resources of Asia, Inc., 145 SCRA 671; Interprovincial Auto Bus Co., Inc. vs. Commissioner of Internal Revenue, 98 Phil. 290). 12. Finally, in view of this Honorable Court's Decision in Caltex (Philippines) , Inc . vs . Commissioner of Internal Revenue (C.T.A. Case No. 4711, July 5, 1994), petitioner is, therefore, liable to pay government the amount of P50,080,140.96 as deficiency surtax, inclusive of interest and surcharge, on extraordinary gains arising from the oil price increase authorized by ERB last August 15, 1989." (pp. 68 to 72, Rollo) The assailed decision likewise ruled that "the assessment of 65% surtax on the alleged extraordinary gains that went to the OPSF and to the oil companies as a mere reimbursement of costs incurred, is cancelled but the assessment is hereby modified to impose a 65% surtax on extraordinary gains which resulted in the increase in ad valorem tax covering unbounded stocks." (p. 24, decision) Petitioner Commissioner of Internal Revenue, in support of his petition, raised the sole issue thus "WHETHER OR NOT THE COURT OF TAX APPEALS ERRED IN CANCELLING THE ASSESSMENT OF 65% SURTAX ON THE ALLEGED EXTRAORDINARY GAINS THAT WENT TO THE OPSF AND TO THE OIL COMPANIES AS A MERE REIMBURSEMENT OF COSTS INCURRED." (p. 23, Rollo) Petitioner alleged that PD 1889 the law which created the Oil Price Stabilization Fund, provides for the manner for which extraordinary gains should be measured and the rate of surtax that should be imposed, and quoted pertinent provisions of said law, as follows: "SECTION 1. Surtax on Extraordinary Gains ; Rate of Surtax . 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 against 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 . "SECTION 2. Computation of Extraordinary Gains . The extraordinary gains shall be measured by the difference between the approved wholesale prices of refined petroleum products immediately before the authorized price increases and the new posted prices multiplied by the number of units of petroleum products existing as of the day of effectivity of the price increases. Extraordinary gains shall also refer to the aggregate increases in the value of crude oil and base stocks." (pp. 24-25, Rollo) It is further alleged by the petitioner that the above-quoted provisions are clear, hence must be literally construed. What are extraordinary gains? As quoted in the decision sought to be reviewed, the testimonies of the witnesses of petitioner Commissioner of Internal Revenue, Messrs. Guillermo Guzi and Rex Tantiongco, Division Chief of the Special Investigation Division of Dist. 7 and ERB Chairman, respectively, provide for the clear explanation of what extraordinary gains are, to wit: "A. In that case, if the crude oil was purchased at P6.00 and selling that for P8.00 and suddenly the following day, Your Honors, it was sold for P10.00, then, there was additional P2 increase that will go to the offers (sic) of the oil company assuming that there is no intervening factors that will affect the P2.00. Q. We assumed that . . . JUDGE GRUBA What do you mean to say? Do you mean to say that the crude oil cost is P6.00 and sell it at P8.00, there is already a profit on it and then, the next day they increased it to P10, that is the windfall profit? A. Yes, Your Honor." Q. And how will the oil companies realize a gain under P.D. 1889 with reference to the crude oil inventories? LibLex A. You mean to say, sir, how they are slapped by the . . . Q. No, how will they realized a extraordinary gain? A. They realized an extraordinary gain as I said because the price increase is made ahead of schedule or even before the exhaustion or depletion of the old stocks . What I mean by old stocks, is inventory acquired at a lower price . The oil companies were allowed already to increase their price ahead . Q. So there was a gain with regard to that increase in prices although purchased at a lower price, is that correct? A. That's correct, Sir. So, if to be brutally, if we are going to use a brutal term about it, it was a legalized hoarding. Q. I see. And that gain refers only to increases in crude oil cost? A. Increase in crude oil cost, sir, yes. Q. If we refer to 3 centavo increase, would that refer to increases in the crude oil cost? A. No, as I said it was an increase in transshipment and additives. Q. And could P.D. 1889 apply with regard to the August 16, 1989 price build up? A. No. Definitely, no. From the aforequoted testimonies, extraordinary gain occurs when the oil companies sell their petroleum products at a much higher price by reason of an oil price hike, compared to the amount actually spent by them in acquiring its raw materials prior to the said oil price increase." (78-80, Rollo) The above testimonies led to the conclusion that out of the 25.4 centavos per liter increase, 21.57 went to the Oil Price Stabilization Fund (OPSF), hence, no gain was realized by the respondent. The 3-centavo difference which went to the respondent was in a form of reimbursement of cost. The respondent convincingly prove that it did not realize any extraordinary gain from the price increase. This Court fully concurs with the findings of the CTA when it said: "The situation contemplated by PD 1889 is not entirely analogous to the instant case as can be clearly seen from the facts earlier discussed. A review of the history surrounding the issuance of P.D. 1889 on July 23, 1983, would reveal that its purpose was to impose a surtax on the profits obtained by the oil companies by reason of an oil price increase which enabled them to dispose of their old stocks purchased at the old rate, by selling them at the increased price due to the oil price hike resulting in extraordinary gain or windfall profit. The prevailing circumstances were different at the time of the price increase authorized on August 15, 1989. During this time, Presidential Decree No. 1956 (issued on October 10, 1984) was already in existence. P.D. 1956 created the Oil Price Stabilization Fund or the OPSF, the purpose of which was clearly enunciated in said decree and We quote: 'The Fund created herein shall be used to reimburse the oil companies for cost increases on crude oil and imported petroleum products resulting from exchange rate adjustment and/or increase in world market prices of crude oil.' The current situation that was then prevailing at the time of the issuance of ERB order dated August 15, 1989 was described in said order and We quote, thus: 'The OPSF, which was established to absorb fluctuations in product costs arising from changes in world market prices of crude oil and in the peso-dollar exchange rate and thereby minimize frequent changes in the prices of petroleum products sold locally, has been subsidizing the local selling prices. In the process, and as appearing in the report dated July 27, 1989 submitted to this Board by the Office of Energy Affairs, which is responsible for the administration of the OPSF, the latter has accumulated an accrued deficit of P818 Million as of the end of May 1989, and that the present shortfall of the Fund is increasing at an estimated average monthly drawdown rate of P1 Billion. Moreover, the peso-dollar reference rate of P21.25 per US$1.00 used by the Board as basis for the November 8, 1988 price reduction had noticeably risen. The Bankers Association of the Philippines (BAP) has reported a reference rate of P21.88 as of August 11, 1989. Reckoned together with other related costs of importation, the aforementioned increase in FOB cost of crude. Increased peso-dollar reference rate and depletion of the OPSF would necessitate and increase in WPP by what this Board has so far tentatively determined from its continuing studies and the submissions of the applicants as an average amount of approximately P1.25 per liter of product. llcd The Board, however, is also mandated by Letter of Instructions No. 1460 to consider at its periodic review of the domestic petroleum product prices, "the need to maintain stable prices in the domestic petroleum product market through such feasible alternatives and measures as shall be necessary and appropriate." In line with the above mandate, and in order to meet and cover the aforementioned deficiency in the OPSF and at the same time forestall any serious jeopardy to the financial viability of the applicants to supply the fuel requirements of the country, this Board is of the opinion, notwithstanding the aforementioned substantial average figure which may justifiably be granted as an increase, that the applicants may in the meantime be authorized to increase the wholesale posted prices of certain petroleum products by a general weighted average of P0.254 per liter only. In regard to the alleged increase in inland transshipment and freight charges and cost of chemicals and additives, this Board has determined that indeed said applicants have been incurring such additional costs'." (pp. 87-89, Rollo) "The situation in the present case does not however preclude any kind of profit whatsoever, it must be remembered that one of the components of the wholesale posted price is the ad valorem tax which in this case increased to .81 centavos. Respondent failed to consider the ad valorem tax component in her assessment. Nevertheless, this particular component is of significance because ad valorem taxes are paid fifteen (15) days from date of removal of petroleum products from the place of production in accordance with Section 127(a) of the Tax Code. It follows then that the ad valorem taxes paid by the oil companies when they acquired these petroleum products were still at the old rate prior to the increase, therefore when they subsequently sold these products at the increased price, profits were realized with respect to this particular component. In the aforecited case of Pilipinas Shell Petroleum v. Commissioner of Internal Revenue, CTA Case No. 4780, August 9, 1996, this Court upheld respondent's assessment of petitioner's tax liabilities for extraordinary gain due to the increase in the ad valorem tax component of the WPP. We quote a portion of the decision of said case entitled Pilipinas Shell Petroleum vs. Commissioner of Internal Revenue, CTA Case No. 4780, dated August 9, 1996, thus: '. . . The respondent is correct in assessing petitioner for 65% surtax on extraordinary gain covering tax paid petroleum products because the taxes on those products have already been paid at the old rate as required by law and when sold at the higher pump price petitioner certainly benefitted by the increase in ad valorem tax. The increase in ad valorem tax goes to the petitioner as the law requires payment of the tax within fifteen (15) days from the date of removal of petroleum products from the place of production (Section 127[a] National Internal Revenue Code). These stocks are stored in unbonded installations or depots ready for marketing and are not subjected again to the payment of the higher tax rate. To the extent of this unbonded or tax paid stocks, this Court believes petitioner is liable to 65% surtax for extraordinary gain pursuant to PD 1889. In fact, petitioner failed to dispute this finding of the respondent.' (pp. 89-91, Rollo) In view of the above, this Court finds no cogent reason to disturb the findings and ruling of the CTA. WHEREFORE, the petition is DENIED and the decision rendered by the CTA on May 6, 1977, sought to be reviewed in the instant petition is AFFIRMED in toto. SO ORDERED. Agcaoili and Bello, Jr . , JJ . , concur.