Commissioner of Internal Revenue v. Ault and Wiborg Co. (Far East)-Philippine Branch

NINTH DIVISION [CA-G.R. SP No. 53132. September 15, 2003.] COMMISSIONER OF INTERNAL REVENUE, petitioner , vs . AULT AND WIBORG COMPANY (FAR EAST) PHILIPPINE BRANCH, respondent . D E C I S I O N MENDOZA ,, J p : Before us is an Amended Petition for Review 1 filed by the Commissioner of Internal Revenue (CIR), herein petitioner, challenging the Decision 2 of the Court of Tax Appeals (CTA), dated April 20, 1999, the dispositive portion of which reads: "WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby GRANTED. ACCORDINGLY, the assessment in question, under Demand No. 111720-87-B-90-B-2, dated September 10, 1990, in the amount of P19,772,659.08 covering percentage and excise taxes issued against the Petitioner (Ault & Wiborg Company) is hereby WITHDRAWN and CANCELLED and declared to be of no force and effect. SO ORDERED." 3 The facts: Records bear out that in a memorandum, dated August 15, 1990, Revenue Officer II Eduardo V. Ty (Ty) found Ault and Wiborg Company (Far East) Philippine Branch (Ault & Wiborg), respondent in this amended petition, liable for deficiency percentage tax for the year 1987 for failure to comply with the substantiation requirements to avail of sales tax credits and uniform method of sales tax credit accounting as required in Revenue Regulation (RR) No. 19-84, dated October 12, 1984. 4 Also, respondent Ault & Wiborg cannot be allowed tax credits for import duties paid to the Bureau of Customs. 5 The findings of Revenue Officer Ty further disclosed that on the same year, respondent was liable for deficiency excise tax for its failure to remit the amount of P659,357.04 representing the balance of its excise tax liability for the second, third and fourth quarters of 1987 in the amount of P2,884,191.91 computed in accordance with Section 128 of the Tax Code of 1987 which provided for a 25% tax rate of gross selling price. 6 On the basis of the above findings, Regional Director Honorio A. Todio (Todio) of Revenue Region No. 4B-2 in Demand No. 111720-87-B-90-B-2 assessed respondent Ault & Wiborg of its total tax liabilities amounting to P19,772,659.08. 7 Dissatisfied with the said assessment, respondent Ault & Wiborg filed a letter/protest on September 27, 1990 8 followed by another letter/protest on May 31, 1991 9 with Regional Director Todio. On November 10, 1993, respondent Ault & Wiborg filed a memorandum 10 to further support its protest against the merit of the subject assessment with the Appellate Division of the Bureau of Internal Revenue (BIR). To refute the alleged deficiency percentage tax, respondent Ault & Wiborg averred that it fully complied with the requirements of RR No. 19-84. Its sales book reflected the name of the customers, invoice number, the total accounts receivables, sales tax, and total sales for each month. Likewise, the purchase book contained the accounts payable to the suppliers, the net amount of the purchases made for each month and the sales tax for each particular purchase of raw materials, packaging and imported materials in compliance with the substantiation requirements of RR No. 19-84. Respondent Ault & Wiborg further claimed that the accounts which were required to be maintained by the taxpayer in its books of accounts under the subject revenue regulation were not exclusive and mandatory in nature considering that the taxpayer had the option to adopt "similarly equivalent accounts." Also, respondent Ault & Wiborg contended that the journal entries it adopted during the taxable period in question were in compliance with the requirements set forth in RR No. 19-84. The same, likewise, satisfied the basic objective of RR No. 19-84 which was to record separately the amount of tax credit passed on to the taxpayer by the supplier-dealer or supplier-manufacturer. With respect to the tax credits for import duties paid to the Bureau of Customs, respondent Ault & Wiborg alleged that it claimed as tax credit on importation only the portion representing payment of advance sales tax or compensating tax and it did not include the corresponding customs duties. Otherwise stated, respondent Ault & Wiborg emphasized that only the portion representing advance sales tax or compensating tax was claimed by it. On the alleged deficiency excise tax, Revenue Officer Ty found that there was a deficiency in the remittance made by the respondent. He stated that the official and registered sales book of Cebu disclosed that during the second, third and fourth quarters of 1987, the total amount recorded as excise tax of respondent Ault & Wiborg billed to its customers amounted to P2,884,191.91 and only the amount of P2,224,834.87 had been remitted to the BIR thereby leaving a balance of P659,357.04, exclusive of penalties. The assessment was made on the premise that respondent Ault & Wiborg, as a manufacturer, was subject to the 25% tax rate under Section 128 of the Tax Code. Respondent Ault & Wiborg, on the other hand, citing BIR Ruling No. 194-87, dated July 7, 1987, contended that it started paying the then 20% tax on original sales of imported thinner or reducer and retarder which were likewise sold "as is" beginning July 7, 1987. Consequently, the corresponding sales invoices were prepared on the basis thereof. Respondent Ault & Wiborg, thus, stressed that while the booking of the amount billed was with the use of the erroneous 25% rate, the amount actually billed, collected and remitted to the BIR was on the correct 1 % rate. In sum, respondent Ault & Wiborg prayed for the cancellation of the assessment made against it. The Appellate Division of the BIR ruled in favor of respondent Ault & Wiborg. 11 However, despite the appellate division's favorable recommendation, petitioner CIR through then Commissioner Liwayway Vinzons-Chato, remained unconvinced. Thus, in a letter, dated May 4, 1995, 12 she denied with finality respondent Ault & Wiborg's protest. Specifically, she stated: "I. Deficiency Percentage Tax A. There is no argument to the contention that the requirements under the aforesaid regulations are not exclusive and mandatory in nature. In fact, the Bureau subscribes to the view that the regulations allow taxpayers a certain latitude of discretion or flexibility on what 'account' to use provided that they are akin to that prescribed considering that rules and regulations are promulgated for the effective enforcement of the Tax Code (Section 245). It must be stressed however that the real issue at hand is whether the requirements therein stated were substantially complied with by the taxpayer. The findings of the investigating examiner contradict in all force the claim that your client substantially complied with the regulations. Informations gathered from the entries reflected from your client's books of accounts clearly indicate that there was flagrant non-compliance of RR No. 19-84. This led our examiner to make the following observations: 1. Section 4(a) of RR No. 19-84 a subsidiary ledger shall be kept and maintained wherein the Deferred Sales Tax Credit (DSTC) accounts are classified and separately recorded according to supplier (manufacturer or dealer) and according to rates of sales tax. The taxpayer failed to record their purchases in the abovestated manner, and also failed to maintain a subsidiary ledger wherein the DSTC accounts are classified and separately recorded according to supplier and according to rates of sales tax. While they maintained an account for a separately recorded manufacturer and dealer, the rates of sales tax for each is not separately recorded.' These and all are clear indications of failure to comply even substantially with RR No. 19-84. In short, the journal entries adopted by your client are unacceptable and fail to satisfy the basic objective enunciated by RR No. 19-84 of recording separately the amount of tax credit passed on to the taxpayer by the supplier-dealer or supplier-manufacturer. While it is true that regulations are intended merely to promote safety and efficiency, an authoritative rule or principle dealing with matters of procedure, it is equally important to take notice of the case of Arches vs. Bellosillo , 20 SCRA 32 wherein it was declared that 'a revenue regulation, the issuance of which is authorized by statute, has the force and effect of law.' B. The tax credit on importations claimed by your client are not in payment of compensating or advance sales taxes but are, in truth and in fact, payment for import duties. This was ascertained upon examination of the Bureau of Customs' official receipts which reflected the payment of import duties alone. There is also the allegation that for every Bureau of Customs official receipt, there is a corresponding import entry that would show that the import duty actually includes compensating or advance sales tax. Hence, there is a discrepancy between the official receipt and the import duty? Which will now prevail? This Office believes in the veracity of the official receipt rather than that of the import entry. While the receipt is prepared by the designated official of the Bureau of Customs, the import entry is filled up by the taxpayer through its broker thus making the latter self-serving, and under the Rules on Evidence, self-serving evidence has very little or no weight at all. II. Specific Tax This Office subscribes to the finding of our examiner that your client is actually engaged in the manufacture of thinner or reducer and retarder and thus, subject to 25% tax rate under then Section 128 of the Tax Code. Revenue Ruling 194-87 dated July 7, 1987 issued to your client that it is not subject to excise tax under Section 128 relative to their product is therefore inapplicable in as much as the facts subsequently gathered upon investigation are materially different from the facts as represented in the ruling. . . . xxx xxx xxx In view thereof, your protest has to be as it is hereby denied. Accordingly, it is requested that you advise your client, AULT & WIBORG CO. (FAR EAST) to pay the total amount of P19,772,659.08 as deficiency percentage and specific taxes to the Revenue District Office nearest to your client's place of business plus interest that may accrue thereon, . . . . This constitutes the final decision of this Office on the matter. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenues" 13 Aggrieved by the adverse decision of the then Commissioner of Internal Revenue, respondent Ault & Wiborg filed a Petition for Review 14 with the CTA on August 18, 1995. Herein petitioner CIR, then respondent, on the other hand, filed its Answer 15 on October 23, 1995. Trial on the merits ensued. Thereafter, CTA rendered its assailed decision granting the Petition for Review filed by herein respondent Ault & Wiborg, in effect, ordering the withdrawal and cancellation of the assessment under Demand No. 111720-87-B-90-B-2, dated September 10, 1990, covering the amount of P19,772,659.08 representing deficiency percentage and excise tax for the year 1987. Not convinced with the unfavorable ruling of the CTA, petitioner CIR instituted the instant Petition for Review, as amended, raising the following issues "WHETHER OR NOT RESPONDENT COMPLIED WITH THE REQUIREMENTS PRESCRIBED IN REVENUE REGULATIONS NO. 19-84 WHETHER OR NOT RESPONDENT IS A MANUFACTURER WHICH MUST BE SUBJECTED TO THE 25% TAX RATE UNDER SECTION 128 OF THE TAX CODE AND NOT TO THE 1 & 1/2% TAX RATE ON SUBSEQUENT SALES." 16 We find the instant petition bereft of merit. Primarily, as regards the first issue , petitioner CIR quoted Sections 4 and 5 of RR No. 19-84. 17 To refute further respondent's claim for tax credits as manufacturer, hereby strengthening its assessment for deficiency percentage tax against respondent, petitioner cited Section 2 of the same revenue regulation. 18 It averred that respondent Ault & Wiborg's Sales Books, Purchase Books and Charts of Accounts clearly showed its failure to substantially comply with the substantiation requirements to avail of the sales tax credits and uniform method of sales tax credit accounting prescribed in RR No. 19-84. Petitioner thus quotes: "Accounts Required under RR No. 19-84 Counterpart Accounts Used by Respondent 1. Purchases With TC Supplier 1. Purchases Raw Materials (Code Manufacturer Account No. 341010 2. Purchases With TC Supplier Dealer -do- Account 3. Purchases Without TC Account -do- 4. Packaging Materials With TC Supplier 2. Purchases Containers (Code No. Manufacturer Account 342010 5. Packaging Materials With TC Supplier -do- Dealer Account 6. Packaging Materials Without TC Account -do- 7. Deferred Sales Tax Credit(DSTC) 3. Sales Tax Creditable(Code No. Supplier Manufacturer Account. 232500) 8. Deferred Sales Tax Credit (DSTC) -do- Supplier Dealer Account 9. Deferred Sales Tax Credit (DSTC) -do- Advance Sales Tax (AST) Account 10. Deferred Sales Tax Credit (DSTC) Pioneer -do- Enterprise Account 11. Sales Tax Payable Account 4. Sales Tax Payable (Code No. 232501) 12. Sales Finished Article Account -do- 13. Sales: Unused R/M Account -do- 14. Advance Sales Tax Account -do-" 19 The abovequoted comparison considered, petitioner CIR advanced the view that respondent Ault & Wiborg did not comply with the requirements set forth in the subject revenue as only four (4) accounts out of the fourteen (14) accounts required were adopted by the latter. We are not persuaded. As clearly observed by the CTA, apparently, there is basis for disallowing respondent Ault & Wiborg's claim for sales tax credit as the accounts it maintained failed to meet the requirements of RR No. 19-84. A cursory reading of the accounting made by respondent, however, even on the basis of the above comparison, reveals that respondent merely put together in one (1) account all purchases it has made inclusive of the corresponding creditable sales taxes, regardless of whether the same came from a manufacturer or dealer with or without tax credit. This method of accounting has also been used by respondent insofar as the accounts for packaging materials, deferred sales tax credits and sales are concerned. Parenthetically, respondent's method of accounting is still in keeping with the provisions of RR No. 19-84. It bears stressing that it is beyond dispute that the subject regulation is not exclusive and mandatory as it speaks of " similarly equivalent accounts ." Insofar as Sections 2(b) and 2(i) of the subject regulation are concerned, CTA argues: "Unbeknown to herein parties, however, This Court believes that Petitioner is entitled to a relief in the interest of substantive justice. Whereas under Section 2(b) 2(i) of RR No. 19-84 it is required that the supplier of raw materials, parts, accessory or other articles should only be a dealer and not a manufacturer, a reading of Executive Order No. 990 (1984) which is the basis for the promulgation of RR No. 19-84 would show that suppliers who are manufacturers are not to be excluded from the availment of sales tax credit. Said Order states: xxx xxx xxx Section 1. Credits against sales tax due . Any specific or percentage tax paid under Titles IV and V of the National Internal Revenue Code on domestically manufactured, processed or produced , or improved raw material, part, accessory or other article locally purchased or imported by the manufacturer for conversion into or intended to form part of the finished products shall be credited against the sales tax due on the finished product enumerated in Section 194, 195, 196, 197, 199(a) and 201 of the same Code: . . . xxx xxx xxx Section 3. Uniformity of methods of recording sales tax credits and tax liability . The Minister of Finance, upon recommendation of the Commissioner of Internal Revenue, shall promulgate rules and regulations, prescribing uniform system of accounting and method of recording sales tax liability of manufacturers and SALES TAX CREDITS REPRESENTING specific and sales tax shifted and separately billed in sales invoices by dealers, importers, MANUFACTURERS or producers. xxx xxx xxx (Italics and emphasis supplied) It is crystal clear from the above that sales tax of supplier-manufacturers constitutes sales tax credit against the sales tax liability of purchaser-manufacturers. This fact stirs up a monumental change in understanding Petitioner's compliance with the prescribed method of recording purchases, packaging materials, sales and deferred sales tax credits under RR No. 19-84. It has, in effect, rendered unnecessary and a surplusage the creation of separate accounts for dealers and manufacturers as required in said regulations. In case of discrepancy or conflict between the basic law and the regulations issued to implement it, the former prevails over the latter. (Article 7, Civil Code; Villa vs. Llanes, 120 SCRA 81, as cited in Statutory Construction by Agpalo) Likewise, this Court believes that there is no need for a separate account for purchases and packaging materials without tax credit as required in RR No. 19-84 because what is really intended by Executive Order No. 990 to be recorded as available tax credit are actual specific and sales taxes which have been separately billed in sales invoices. Absent any specific and sales taxes in an invoice, there should really be nothing to record at all." 20 Verily, respondent Ault & Wiborg's book of accounts taken in its entirety is in accordance with EO No. 990 and in substantial compliance with the term "similarly equivalent accounts" set forth in RR No. 19-84. As regards the alleged failure of respondent Ault & Wiborg to maintain a subsidiary ledger as another ground to disallow its claim, we also affirm the pronouncement made by the CTA that a subsidiary ledger is merely optional. Anent the second issue , petitioner CIR argues that the actual activity of respondent Ault & Wiborg shows that it is actually engaged in the manufacture of thinners and solvents, thus, subject, to 25% tax rate pursuant to Section 128 of the Tax Code and not to the 1% tax rate on subsequent sales. 21 To support this, firstly , it alleges that the mixing and blending of acetone, Pegasol 1425, isopropyl alcohol, toluene, xylene, Usar Ester EEP, and Butyl Cellosove results in a mixture different from the use of the individual components. Secondly , it avers that respondent Ault & Wiborg placed in its thinner products its name indicated as manufacturer. Petitioner CIR's argument is misplaced. We agree with the CTA on the validity of BIR Ruling No. 194-87 22 which subjected respondent Ault & Wiborg to 1% tax on its sales of thinner or reducer and retarder. As no action was undertaken by petitioner CIR to revoke, modify or reverse said BIR ruling, it continues to have force and effect. Consequently, it has to be applied in this particular case. The Court respects the conclusions reached by quasi-judicial agencies, such as the CTA which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority. 23 None of these exceptions exists in this case. WHEREFORE, the instant petition for review, as amended, is DISMISSED and the Decision of the Court of Tax Appeals is AFFIRMED in toto . SO ORDERED. Adefuin-Dela Cruz and de los Santos, JJ. , concur. Footnotes 1. Rollo , 6791. 2. Ibid , 3559. 3. ibid. , 58, words in parenthesis ours 4. Annex "J" 5. Ibid. 6. Ibid. 7. Annex "D" 8. Annex "E" 9. Annex "F" 10. Annex "G" 11. Rollo , 122126 12. Annex "I" 13. Emphasis supplied 14. Annex "B" 15. Annex "C" 16. Rollo , 76 17. Section 4. Accounts to be used and entries to be made for recording purchases and recording sales tax credits . (a) Manufacturer. Every manufacturer shall maintain the following or similarly equivalent accounts in his books of accounts wherein all purchases of raw material, part, accessory, or other article (herein referred to as "purchases"), including packaging materials, which are intended by the purchaser-manufacturer for conversion into and to form part of a finished article, and sales tax credits representing sales, millers, or specific taxes billed to him and/or indicated as a separate item in a supplier's sales invoice (herein referred to as "separately billed tax") recorded: (1) "Purchases w/ TC: Supplier-manufacturer" Account. This account shall be debited with amounts for purchases made by the manufacturer in cases where the supplier is also a manufacturer indicates a separately billed tax in sales invoice. (2) "Purchases w/ TC: Supplier-Dealer" Account. This account shall be debited with amounts for purchases made by the manufacturer in cases where the supplier who is not a manufacturer indicates a separately billed tax in the sales invoice. (3) "Purchases w/o TC" Account. This account shall be debited with amounts for purchases made by the manufacturer in cases where the supplier does not indicate a separately billed tax in the sales invoice. (4) "Packaging materials w/ TC: Supplier-Manufacturer" Account. This account shall be debited with amounts for packaging materials purchased by the manufacturer in cases where the supplier who is also a manufacturer indicates a separately billed tax in the sales invoice. (5) "Packaging materials w/ TC: Supplier-Dealer" Account. This account shall be debited with amounts for packaging materials purchased by the manufacturer in cases where the supplier who is not a manufacturer indicates a separately billed tax in the sales invoice. (6) "Packaging material w/o TC" Account. This account shall be debited with amounts for packaging materials purchased by the manufacturer in cases where the supplier does not indicate a separately billed tax in the sales invoice. (7) "Deferred Sales Tax Credit (or DSTC); Supplier-Manufacturer" Account. This account shall be debited with the amount of sales, millers or specific tax separately billed in the invoice anytime purchases are made from a supplier who is a manufacturer and intended by the purchaser-manufacturer for conversion into and to form part of a finished article. (8) "Deferred Sales Tax Credit (or DSTC); Supplier-Dealer" Account. This account shall be debited with the amount of sales, millers, or specific tax separately billed in the supplier's invoice where such purchases are made from a supplier who is not a manufacturer and intended by the purchaser-manufacturer for conversion into and to form part of a finished product; (9) "Deferred sales Tax Credit (or DSTC): AST" Account. This account shall be debited with the amount of advance sales tax paid by the manufacturer upon importation of raw material, part, accessory, or other material intended by the said importer-manufacturer for conversion into and to form part of a finished article. (10) "Deferred Sales Tax Credit (or DSTC): Pioneer Enterprise" Account. This account shall be debited with the amount of deemed paid tax separately billed the invoice everytime purchases are made from a pioneer enterprise registered with the Board of Investments intended by the purchaser-manufacturer for conversion into and to form part of a finished article. A subsidiary ledger shall be kept and maintained wherein a DSTC accounts are classified and separately recorded according to supplier (manufacturer or dealer) and according to rates of sales tax. xxx xxx xxx Section 5. Accounts to be used and entries to be made for recording sales and sales tax liability . (a) Manufacturer. Every manufacturer shall enter the following or similarly equivalent accounts in his books of accounts wherein all sales and the corresponding sales tax liability and sales tax credit shall be recorded: (1) "Sales: Finished Article" Account. This account shall be credited with the total amount of sales of finished articles, excluding the sales tax and the sales tax credit (2) "Sales Tax Payable" Account. This account shall be credited with the amount of sales tax based on the amount of sales credited to "Sales" account. (3) "Sales' Unused R/M" Account. This account shall be credited with the amount of sales of raw material, part, accessory, or other articles which are subsequently transferred, disposed of, or for any other reason, can no longer be used in the manufacture of the finished product. (4) "DSTC " or "Advance Sales Tax" Account. Any of these accounts shall be matched and credited with the amount of sales tax on the article sold, transferred, disposed of, or for any other reason, can no longer be used in the manufacture of the finished product. xxx xxx xxx 18. Section 2. Requirements for allowing claims for sales tax credit (a) Statutory requirement . To be creditable against a manufacturer's sales tax, the amount of sales tax on the raw material, part, accessory, or other article intended for conversion into, and to form part of a finished article shall be indicated as a separate item in the supplier's invoice. (b) Substantiation requirements . The burden of establishing the correctness of the amount of tax credit shall be borne by the manufacturer. Claims for tax credits by the manufacturer shall be allowed only upon compliance with the following substantiation requirements: (1) The manufacturer has adopted and employed the sales tax credit accounting method as prescribed in these regulations; (2) The supplier issuing the invoice (i) is duly registered and accredited by the Commissioner of Internal Revenue as a registered supplier of raw material and the said supplier is not a manufacturer; (ii) complied with the requirement to use the sales tax credit accounting prescribed in these regulations; (3) The supplier's invoice indicates the amount of sales tax as a separate item in the invoice, and the supplier's accreditation number. (c) Effect of manufacturer's failure to meet substantiation requirements . Except as provided for in paragraph (d) of this section, claims for tax credits which do not meet the requirements of substantiation prescribed in this Section shall not be allowed. xxx xxx xxx 19. Rollo , 8081 20. Rollo , 4951 21. Ibid ., 2829 22. Ibid ., 5557 23. Commissioner of Internal Revenue v. Court of Appeals, 204 SCRA 182 (1991); Commissioner of Internal Revenue v. Court of Appeals, 242 SCRA 289 (1995)