CTA Case No. 983 (Decision)

/ / � 11tl'UJIL1C 01" T HE PHILIPPl.NBt a>URT OF TAX APP~ ' IUNUA . ASTURIAS SUGAR CEt'!TRAL, IITC. , C. I . A. CASE !'JO . 983 � Petitioner, - versus - COMlvliSSIONER OF INTERNAL REVENUE , He spondent. X- - - - - - - - - - - � - - - X DEC I S I 0 N This is an appeal . from the decision of respond- ent Commissioner of Internal Revenue , dated October 28 , 1960, assessing against and demanding from the petitioner, Asturias Sugar Central , Inc. the amounts of ?12, 331 .96 as sugar central operator ' s deficiency percentage tax and surcharge, covering the period from 1955 to June 30, 1959 , and ?1 , 800 . 00 as lending investor ' s fixed tax for the years 1954 to 1959, or a total sum of 14,131.96. (Exhs. M, 0 & Q, pp. 63 , 78 & 85 , BIR rec .) It appears that the petitioner is engaged in the manufacture of centrifugal sugar from sugar cane produced by about three hundred {300) planters who are under milling contracts with the for~er . Pet i- tioner ' s mill is situated in Barrio Sto . Nino , Muni- cipality of Dumalag, Province of Capiz , near the Philippine RailNay Station known as San Juan. it.fter the sugar cane is processed in petitioner ' s sugar

DECISION - C. I . A. CASE NOo 983 -2- central, the centrifuga l sugar is bagged and stored in it s mill warehouse whi ch is adjacent t o the sugar cent ral. From said mi ll warehouse , the sugar is l ater loaded on cars of t he Philippine Railwa y Com- pany , at San Juan, Duoalag , Capiz , and brought to petitioner' s subsidiary warehouse in Iloilo City where the sugar is marketed or shipped to other markets . (t.s.n . pp . 5 -11) For the period under r evi ew , the petitioner pa id the total sum of P268 , 861 . 86 as sugar central operator's per ce ntage ta x under Section 189 of the Ta x Code. (Exh s. I , I-1 to I -28 ; See Working Paper , p. 51 , BIR rec .) As th ere were no buyers of the sugar at the mi ll site or at San Juan, Dumala g, Capiz , the petitioner us ed as a basis for comput ing the percentag e tax the selling prices of the sugar in Iloilo City, minus the freight charges and handling expenses in transporting the sugar from the mi ll warehouse in Dumalag , Ca pi z to its subsidiary warehous e i n Il9ilo City. I t also appears that the petitioner had been ad- vancing t o its regular employees , funds for their sub- sistence , education and emergency needs in compliance with its collective bargaining agreement with tl1em, and to its seasonal employees , loans in rice during the non - milling months ~ The petitioner also advanced mone y for the expenses of pla nting and growing the sugar cane of its pl anters and also for the freight in trans- I

DECISION - C.I.A. CASE NO. 983 - 3 .. porting the share of those planters to Iloilo City. It did not collect interest on the money advanced to its employees but charged interest at the rate of 6% to 8% per annum on the advances to its planters be- cause it also paid to the bank interest on the money so advanced . (t ..;"�.J1 .. , pp . 30- 36) The issues to be decided in this appeal are as follows : (1) Whether or not the freight charges and hand~ ling expenses incurred by the petition er in trans- porting the sugar in question from its mil'l warehouse in Dumalag , Capiz , to its subsidiary warehouse in Iloilo City should be deducted f rom the actua l Iloilo City selling prices in computing the sugar central operator 's percentage tax under Section 189 of the Tax Code ?; and , (2) Wf:l ether or not the petitioner may be classi- fied as a lending investor within the meaning of Section 182 of the Tax Code and therefore subje ct to the fixed tax prescribed by said section? The pertinent provisions of Section 189 of the ational Internal Revenue Code provide as follows : "Sec . 189 . Percentag e tax upon proprietors or operators of rope factorles , sugar ce ntrals, rice mills . coc"onut oil mills,- corn mllls , and desicc ~ ted c oconut factories . - Proprietors or operators of x x x x x sugar centrals , x x x x sha ll pay _,a tax equivalent to two per centum of -the gros s value in money of all the xxxx s1..:gar , x x x x manufactured or milled by them, including the by-products of the raw materials from which said articles are produced or manufactured, ( (~'V '

DECISION - C . T . A . CASE >JO . 983 -4- such tax tobe based on the actual sellin...9, price or oarket value of these articles at the time they leave the factory or mill warehouse : x x x x11 (Underscoring suppli ed .) Interpr eting Section 189 of the Tax Code , and as appli ed to the case at bar , the bas es expressly prescribed by law for computing the percenta ge tax upon proprietors or op erators of sugar centrals are either : (1) the actual selling price of the sugar at the time it leaves the factory or mill warehouse , i. e., if the sugar is already sold at the time it is removed therefr om ; or (2) the nar ket value of the s ugar , if it is withdrawn for some other reason . As the Supreme Court has held , the t ext of Section 189 of the Tax Code indi cates that actual sale of the product i s not essential to the accrual of the tax, s i nce the tax is 11 to be based on the actual selling 12.rice or market va!~ of these articles at the tine they !_~ the factory or mill �;varehouse " without taking into account the reason why the article i s withdrawn . {Collector of Internal Revenue vs . Centra l Azucarera de Tarlac , G. R. No . L- 11760 , July 31 , 1958 ) In the present case , the sugar in question wa s not actually sold \Nhen it left petitioner ' s sugar central or mill warehouse . Hence , the only possible legal basis for computing the miller ' s percentage tax was it ' s "market value" when it l eft the sugar central or mill warehouse of the petitioner in Dumalag , Capiz . I

DECIS I ON - C. I . A. CASE NO . 983 - 5- Inas much as there is no pro of of the actual market va l ue of the sugar when the sa~e left the sugar ce nt ral or mill warehouse , and on the contrary , the evid enc e shows that there were no buy ers of sugar in commer ci a l quantiti e s in the town of Dumal a g , Capiz , we believ e and so ho ld that the petitioner correctly deducted the f r eight charges and handling expenses incurred in t ransporti ng the sugar in ques - tion {rom its mill warehouse in Duma l ag , Capi z, to its subsidiary warehouse in Ilo i lo City from the actual Iloilo City selling prices in computing the 2% mil ler ' s tax . To hfi l d otherwise and include the fre ig ht charg es and handling expenses as part of the taxable basis for computing the miller's tax , as i ns ist ed by the respond - ent , would be tantamount to asses sing the tax on th e basis of the sugar ' s market value in Iloilo City , and not in Dumalag , Capiz , and wou l d there fore be con trary to law . To our mind , the petitioner in t he case at bar , computed its 2~ miller ' s tax liability in accord - ance with law , using as the basis the fair and equita - ble market value of the sugar at the time it ~e ft it ' s mill warehous e in Dumalag , Capiz . Coming now to the second issue , i . e ., whe ther or not the petitioner was a lend ing inv es tor during the years 1954 to 1959, Section 194 (u) of the National Internal Reve nue Code defines a "le ndi ng investor " as follows : (

0:.::CISIO! - C.I.A. CASE r~O 983 -6 11 Sec . 1 4 . �.JoTds and phra sc s defined 9 - In ap9lying the provisions of this title , ~:vord s and phrases shall be taken in the sense and extension indicatca below: ., X X X X ' 11 (u) 'Lendina invest or' incluC.:.es all persons �.vho make ~ practice of le1ding money [..;r thomselves or oth8rs at interest ." (Undcr- sc orin9 sup~lied . ) .. 'o te tnat one of the requisites before a pers on can be classified and taxed as a lending investor is that the lending of the money r.;ust be ..Ji th interest. And to our mind , the word inter::st :-:~eans . profit or gain, for just like any other ~ind of business , the business of a l ending i~vestor must be condJcted for profit o~ gain in order to be taxable . In the instan~ case , ~hen the pet itio ne r ad- vanced funds or su~plied rice to its employees , it di d so merely to comply with one Jf the terns of its collective bargain.:.rg aCjree.:�;ent and did nvt charge nor coll ect any i nterest on said loans to its em- ployees . ,Jitll regard to the a-i�1ances of money which the ~etition2r gave to its planters , the interest c _argcd was j~ st suffici e nt to pay the interest that tlie petitioner itself �aid to J.:Le ban .Lor:� the funds so advanced . In effect , the petitioner merely al- lowed the planters to avail of petitioner ' s credit with the ban � , and i ~ �.�Ja s t!: _ latter that actually collected the interest from the planters thru the petitioner. I

. DECISION - C. I . A. CASE NO 983 - 7- Moreover , from the facts as proven during the hearing of this case , the advancing of money by the petitioner to its employees and planters r:Jay be con- sidered as merely incidental to its business of operating a sugar central and therefore not taxable as an independent business in itself. 11 1Then a person or compar.y is already taxed on its main business , it may not be further taxed for doing somet: :ing or en- gaging in an activity or work which is merely a part of , incidental to and is ne- cessary to its main businessR" (Standard- Vacuum Oil Co. vs . ntigua , G.R . No . L- 6931, April 30, 1955; 51 OG 24C5, May , 1955) 11 x x x where something is done as a mere incident to , or as a necessary con- sequence of , the principal business , it is not ordinarily taxed as an independent. business in itself ; and that what is usually taken as essential is the main activity in which the taxpayer is enga �ed . All the var- ious transactions tending to better accomplish the principal end in view must be treated as mere ly incidental to the principal purpose of the business , in the absence of circums- tances evidencing a different intent. (City l :f Ma:1ila vs . Fortune Enterprises , Inc., � No. L-14096, July 26, 1960) d1lJ.:.JlEFORE , i n view of the foregoing considerations , the de cision appealed from is hereby reversed. We find and so hold that the petitioner is DQi liable for a deficiency miller 's percentage tax for the years 1955 to 1959, nor for a lending investor's fixed tax

DECISION - C. I . A. CASE ~O o 983 - 8- / / for t e years 1954 to 1959 . No costs~ SO O. 'JERED . lv~anila , Philip in es , :el)ruary 14 , l963 o �.vE co. ;c iR : __.���~-~ Presiding Ju' dge ROiviAN M. T f LI Associate Judge I