CTA Case No. 3883 (Resolution)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY 3M PHILIPPINES, INC., C.T.A. CASE NO. 3883 Petitioner, vers us - COMMISSIONER OF INTERNAL REVENUE , Respondent. X- - - - - - - - - - - X DEC I S I 0 N This is a petition to review the decision of respondent dated September 28, 1984 denying petitioner's request to cancel and withdraw the deficiency sales tax assessmen t issued amounting to P342,357.97. Petitioner~ 3M Philippines, Inc., is a domestic corporation whol l y owned by Minnesota Mining and Manufacturing Co., a non-resident foreign corporation located at St. Paul, Minnesota, U.S.A., with offices at 3M House, Guadalupe, Makati, Metro Manila. It is engaged in the manufactur0 of adhesive tapes and other articles such as abrasives, scouring materials and

DECISION CTA CASE NO. 3883 2 r.. e�f 1�-~ctot~�::; using the brand of i t s parent company, from which the raw materials used in the production .i.mpot.. tr::?d. imported materials are �:;~.i..c.:Jan t i c :i. n irl big het-�ein<.:\"ft.E~t- de::;c:t..�ibE�d a.�-s ''jumbo '' matet-�ials (E:-::hibit "1�-1", pp. �1-0--41., e-rn 1'-ec:or-d�:s). impor-t.t::.�d '' j u.mbo '' materia 1 s at-�r::? cut in to s ma 11 si zr::?s a.nd packed fot'.. r���esale to con~:;ume.>r-s (E:-:hib.it '' F--1'', "G�--1"~ anc! " H--�1", pp. 't0--4.1., CTf:~ t����ec:onjs). On Augu.st 3<), respondent assessed petitioner the sum of P342,357.97, tax for the period from September 1, 1973 to October 31, 1974, .i n clud i ng surcharge comput.t:?d a.:; fo 11 m-�JS: (p. 14-9, BIR Amount subject to deficiency p :::;;, 19::::;, 723 � 4 0 sales tax per investiga t ion F' 2::;;'3 !' 560 . 6LI� 7% sales tax due thereon s: ________!:;2.!t.G.90 .J. 25% surcharge for late p 279, <-1- ~50. 80 p.:,;_ '/mer�, t _ _......::;6:..:::.:::.�'..!1..2'~=-)7_.~_1..?_ 14% interest per annum from January 21, 1975 to P September 30, 1976 TOTAL AMOUNT DUE Petitioner received t h e assess ment. letter on De t.obet- .1 1, .1.976 "-'rid protested the same in .l.tS

DECISION CTA CASE NO . 3883 3 letter dated October 28, 1976 which respondent received on November 3, 1976. On December 17, 1984, petitioner received the dec:i�::5.i.on of respondent dated September 28, denying its request to cancel and withdraw the dr:::.�f .i.e ienC)/ "'a ll"?S tax assessment notice issued t.o Hence, the present petition for review. The issue herein raised is whether or not there was an overstatement in thE' cost of "jumbo" in the amount of P2,652,875.59 that to double deduction i. f consich:~n-?d deductible from the gross selling price. .in hi~:. ~:; Pf:?C :i. 0:\ l anc:l a f �f i r-�ma t i ve dE?"ff-:=nsc:':5 contend that the cost of these iHlpor-ted i::. 2\ ~-~ p u r- p c.1 :::;12�:==; in accordance with section 1.86 in relation to Section 194(x) both of the 1974 Ta.:-; Cc:>d f:?. Tht:::' B IF\ examiners disclosed its investigation that the raw materials deducted from ~st.0ll ing p r�� .i. c:: E�~ b'l Con�50?C!UE?n t 1 y, thE.' separately billed to its customers, amounting to

DECISION CTA CASE NO. 3883 -- 4 - P540.847.81, was erroneously computed, the same should not have been deducted from the gross selling price by virtue of BIR General Ci n::u l.:u�- No. Thus, the total amount of P3,193,723.40 should not have been deducted from the gross selling price. For a more picturesque view, the BIR presented its proposed assessment for the f.i.�:::.;ca.l year ended October 31, 197;l,, a.s (p. 41, BIR records) Raw Materials (R/M) and Packaging Supplies (P/8) deducted per sales tax Allowable deductible R/M t P! f:3 pE� ,.... in VE'S t. i q C":\ t. i. on . . . _:l.!\..16:\:..!\ 64f?_. 9tf. Overstated deductible P2,652,875.59 8,). 1 e-:::. ta :-; p<::\ i d (Separately billed in sales invoice) Per BIR Gen. Cir. No. 431, the tax billed must be correctly computed, in order to be deductible from the gross sellinq pi--ice p---�-~�3-4-0-�834..7-.-8�-1- Total amount subject to defic i ency sales tax p 22:~;' 560" 64 �

DECISION CTA CASE NO. 3883 - 5- Deficiency sales tax 25% surcharge for late p a y mE:~n t . . .. . . . . . .. . . . . . . . . " " --�-��� ~. -~~..L..G.2.9-!..lt?.. Deficiency sales tax plus e___ ~:; u t""C l"l <:";\!"""" !J e � " � " � � . � " " " � " � � � � 2 7 ?'_!\_1.:~1.i~.-~J2 0 Petitioner, on the other hand, maintains that, as a manufacturer, it to clecluc:t the CCJ":5 t of t e a r��a~<.J m..::~. , J'. i k f.0~<.J i s;e sut:Jj ect to ta.:-: t'" i 1�:; ; pr�� i c e or� gn:)�;:.:;~; VC:\ l U~ i n �f I"" CHi! thr:.~> i n g 1 l ~~ t""US~~ ~:;;e money of the manufactured goods pursuant to Section .186 Hid .1.89 in relation to Section .194(x) of the 197�4 Ta.;.; r.:;odE~. to :i.nc luc:l!::: f:.~VE"~r��y by phy�::;ic:a l or�� c: hemic a J. thr: qu~~1lity of any raw material ur partially manufactured p r�od uc: t so to marketable shape or prepare it for any of the uses of industry. In :i. t~::. refute the assessment, petitioner claims t ha. t pu. r�suan t to a directive of c:omp.:~n'"/, thf:! "jumbo" me:1. ter� i<::\ J. s r�ecei ved p~::o. ymE~n t of thf:? c:orn::spond ing cu3tom�::; dutir:::~�:; upon ,~ t��om in its books of accounts as purchases of finished goods inventory -

DECISION CTA CASE NO. 3 883 - 6- �::;pee if i. E?.d <c~ s "jumbo" mater� ia 1s. that tht~Y are cut into small sizes and by the use o�f othe:?.t-� manufacturing process which cha n ges their domestic salE?�- are also subjected to 7 ., m.::1.n u �f ac tu t"'C?. t�� ' s ~5<:\ 1 es ta :�~ ( E :< h :L bit "E " , !. p. 39, CTA records, underscoring ours). It is not.E?.I'IIor�thy t. (.') point out tha t in computing the sales tax on locally converted goods, petitioner deducts thE?. c:o~:;t of t h E~ "jumbos"~ other packaging materials (p. 50, CTA records). careful review of t h e record, We have found no Y"i2a.s5on at all t o disturb the findi n gs of the?. BIF\: Thco- i :3sue is not one of deductibility but in materials deducted in the gt��oss manu f ac tU I'" inrJ alle<;~ations In fact~ th0 co~;t c:~c:c:ou.nta n t. of pE?.ti t: ioner� !--O:!VE0a l E~d dut..�ing trial that the sales tax lia b ility

DECISION CTA CASE NO . 3883 - 7- fo~ the yea~ ended Octobe~ 31, 1974 was computed on the g~oss sales ~etu~ns, a~riving (underscoring supplied). ThE~ be:\ 1 anc::E~ is taxable net sales out of which the �-,. , S<3.l E~S t."-i.)< .i.. s bast";?d ( p. 1 -, t . n . l( -:; ~ ,J uly 1.6, i !. -~ I , . .19D::"�) LIJ�~ -:-:; t r- E�~ !'~ -s-:i. t h a t thE� GC:lS t of J. oc<:t l ly have already been consi d e~ed as a deduc ticm in computing the sales tax liability of to u.p h old cla.im th,:�,,t the same should be deducted from the g~oss selling p~ice of i t s manufacturing ope~at i ons double deduction. It would be absurd if such would be allowed. Petitioner, in support of his claim, submitted thE:.> follo\AJing revised Statement of Cost of Goods Sold fo~ T~ading only and a Statement of Cost of Goods Manufactured for the yea~ ended Octob e ~ 31, 1974, as compared with t.hf2 ot-�iginal �:; ta tt:~ m en ts subm~tted, t o wit~

DECISION CTA CASE NO . 3883 - 8- Statement of Cost of Goods Sold (Tr�ad.ing Only) Original Revised (E:d�lib.it: "B", (p. 26, BIR D_'!-.. :::::_'Ls.____~I�L..r~s:~...o:-1_________r.:._l:lf:.:..9..r.:.9_s t Finished goods - F' t3, ~:36:~~;, ~3::.:; ~) ar ()() Purchases (Beg.) _:;:.~!...!!. 09 9 .!'._:~t;;:_4.~!..Q. Co�:::; t oi= Gclod<:;; P��--4-�_L-_!L~�-q~.-7:!;:?:..!1.~7...�.'.9:.~..':...n;:_,n.::_ Available P22~106,057.00 Less: Finished goods- Pur-e has~s ............ L..!I..9_Zj-_~2l3..:l_'!..QO (End) f~~?~~.!I..J..~g_,J.E!:9_.~_9.9. D the r- d .t s; po-:5-:::t 1s Cost of s,:;d0~s (Tr-�c-:tding only) Lf.~_:"o5f.?_!!... Cost of -::;ales ( J.ocall y con��� ver-ted i. tems f:~ SCJ J. d thf2 s.;:l.fnf:'i: yE~a r-� ) Operating Expenses 167,996.90 478,954.90 Inventory Control f:~ F'l'-oduc: tion z ----� 5J:,~,-,;;__,__ 1 ?-"-~~z Plannin(J :::: :::: :-.::: ::: ::::: ::: :::: ::::. :::: ::::: :::: :::!: ::::: :::: R0:c:f.?.i v ing ,, ~<JHSG r:~ S!-�IF'G Equipment Service Co3t o�f Sales Tr.,?":\d ing On 1 y

DECISION CTA CASE NO. 3883 - 9- Statement of Cost of Goods Manufactured For the year ended October 31,1974 Original Revised (E:�(h, "A"~ pp. (E:-:h. "D", p. ~::.1 -:};L._l;2l�L r�ec .~ }~:T A.. ...J.:"E:)G_=..j_ Cost of F\av-J F'~.':l, 24-4, 862.00 F' 5 , 2�+4, 862. 00 r1,.:.~tet-�.i.al~~ (F~/r�n <::�.nd Packaging 1'1<:\ tr::::r�� i a 1 ~:; ( F' /1'"1) Us E�d Add: Loca 11 y� con-- VE'?! t�� tF!!c:l .i tem~5 ( .irnpor� t.t:~d �f :i.nishE�)d goods ,::'.)del; 76~l, 132.40 Direct Labor Pl,54l,310.00 11an u f ac tu r� .i. n C.J Over� head Total Manufacturing Cost In the F\ev.i.sed Statement of Cost of Goods Sold (Tr�ad.i.nq Only), petitioner deducted the c:ost of locally converted .i.t.E~ms i:\mountinq to F'2,464,700.44, computed as follows: (p. 1:~~A, BIF\

DECISION CTA CASE NO . 3883 - 10 - Manufacturing Statement - Jumbo Fiscal Year Ended October 31, 1974 Inventory beg. -Nov. 1, 1973 F' ~380 , 6f:l5 � 90 Jumbo Available for Use ���.� ~3 !l~~.~I....'!..:liJ 9 !..9S2. Less~ Inventory end, P5, 7~32, 674�. <:.to October 3 1 , 1974 .�.. Jumbo Usc~d it to the Statement of Cost of Goods Manufactured by adding it to the cost of raw packaging materials used on the the same should be deducted as such c~ons.ider- ing that the~:;e 11 jumbo 11 m.:.<. ter- ia 1 s have under gone a manufacturing process and were not actually the findings of the BIR exami n ers, to which We adhere, ShOI,>Jt::~d that the cost of impor-tE.' Ci �fin ishe?d goods ( 11 jumbo 11 mater��:i.als) already included in the original statement of Cost of Goods Manufactured, this finds support upon ('2~-:amin<::\t..ion o f \ r�a~.J the purchases of and matt.":>r��j_.:;~.J.~:; packaging materials in relation to the advance sales tax paid as shown below: ( p. 7�-3'

DECISION CTA CASE NO . 3883 -- 11 - Imported raw materials purchases, per orig. statement .�..�......���. Imported packaging materials purchases, per orig. statement ��.� -ro -~.~. �3. 1 n 11 r. f; a n 10 t1 t; r. 11 11 It 10 11 n ::l H ~ a II Z$ n �� <I .!1 a n 1:1 Cost of importation of raw and packaging materials per advanced sales tax p.;.d.d - L. an d f:~ cl cos t -�- fLo:...U..'!. T_!_ � <)8~75 �- E:!!J..Et,._ :~::. <~.~~1. .OB75 -��� F'l.l., 780, 62E3. :':17 -��5�-:.:1..c.1L8:!:�9--!313.-.--:-T�-7- F' l , 983, 4�64�. 43 Add~ r-1 � S � T � ._....___1_,1:._E]_,.._;_8_=!_;'.!..9.9. Excess, representing imported finished goods ��.�..�.�� Add~ ~?~.:ji~ (Tl.i::\r-k--t,Jp r. II II C n ::Z ::Z ::Z II II II It II n 01: 1:1 ft Tot<:Il landed cost of imported f ini.shed goods .��..�.�....�...... Tht.~ con tem tion of peti t.ioner.. that the difference representing finished goods in�--tr-ansi t is not. convincing since nothing is shown in the records to pr"OVE? th~~. t such were actually in-transit raw matt=.�r.. ials. No evi d ence was adduced by petitioner� to rebut the findings of respondent. the foregoing, We, t herefore, see no \/alid r�eason to set the-? decision of respondent dated September 2E3, 19E34.

DECISION CTA CASE NO . 3883 - 12 - ~IJHEREFOF\E, decision appealed from is and petitioner 3M Philippines, Inc. is ordered to pay respon~ent, Commissioner of Inten1a1 Revenue the sum of P3L~2, ::::.57.97 representing deficiency sales tax for t he period 1 , 197 3 to October 31, 197Ll�, including surcharge and i n terest, at petitioner's SO ORDERED. 1988. Quezon City, Metro Manila, Marc -..____ C. ROAQUIN WE CONCUR: Presidin Judge ~~ Ass ociate Judge

DECISION CT A CA S E NO . 3883 - 13 - C E R T I F I C AT I 0 N I he~eby c~~tify that this decision was reached afte~ due consultation among the membe~s of the Cou~t of Tax Appeals in acco~dance with Section 13, Article VIII of the Constitution. AMANTE P~~sidirg Judge Cou~t of Tax Appeals