CTA Case No. 2882 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PHILIPPINE PETROLEUM CORPORATION, Petitioner, - - ver~ . us C.T.A. CASE NO. 2882 THE COMMISSIONER OF CUSTOMS, Respondent. X- - - - - - - - - X DEC I I0N An action to recover ~awback duties on exported bas e stock for lubricating oil on the basis of a 2 .2:1 ratio during the period November, 1975 to December, 1975, and a 1.85 ratio during the period February, 1976 to October, 1976. It appears ~h~t petitioner is a domestic corporation duly registered with the Board of Investments as a pioneer industry engaged in the manufactLtre and production of base stock for 5[6

DECISION CTA CASE NO. 2882 2- ' lubricating oi 1, a part of which is sold locally and another part is specifically produced for e:�:port. It uses crude oil residium from imported crude oil as a raw material for the manufacture and production of base stock for lubricating oil, and on which importations, customs duties are paid. It alleges that for every barrel of base stock for lubricating oil it exported abroad for the period November to December, 1975, approximately 6. 75 barrels imported crude oi 1 were required. Of the appro:�:imately 5.7 other barrels, 1.20 barrels were utilized in the process of manufacturing and production, and 4.55 other remaining barrels, which are residues, were sold as fuel oil. For the period February up to October, 1976, approximately 5.24 barrels of imported crude oil was required to e:�:tract a barrel of base stock. Of the appro>:imately 4.24 other barrels, 0.85 barrel was utilized in the process of manufacturing and production, and the 3. 39 other remaining barrel's, which are residues, were sold as fuel oil. Petitioner applied .for a duty drawback with the respondent on 2.2:1 basis for certain export ['" I ~ t_. (

DECISION - CTA CASE NO. 2882 - 3- shipments during the November to December, 1975 period, and on 1.85:1 basis for certain export shipments for the Fe-bruary to October, 1976 period, to cover the actual base stock for lubricating oil exported, plus the actual crude oil utilized in the process of manufacturing and production of the exported bases stock but excluding the residue sold as fuel oil. Said ratio representing the formula of manufacture applicable during the aforesaid periods were duly approved by the National Institute of Science and Technology (NIST), pursuant to Section IV of Customs Administrative Order No. 14-72 "Prescribing rules and regulations governing-drawback under Section 106(b) of the Tariff and Customs Code of the Philippines". On June 28, 1977 respondent issued to petitioner Tax Credit No. 0004916-A dated April 14, 1977, in th1;� total amount of P3,183,136.00 (out of the claimed P6,234,526.56) representing the allowed duty drawback on the basis of only 1:1 ratio instead of a 2.2:1 ratio applicable for the period

DECISION CTA CASE NO. 2882 -4 November 1975 up to December, 1975, and a 1.85:1 ratio for the period February, i976 to October, 1976. A request for reconsideration was denied by the respondent in a letter dated May 23, 1977 for lack of legal basis. � Hence, this petition for review. The is~ ue presented is whether the allowable duty drawback is 1:1 ratio as decided by the respondent Commissioner or the 2.2:1 and 1.85 ratios as applied for by the petitioner. � Petitioner presents the propositions as reasons for the appeal that under Section 106 of the Tariff and Customs Code, a duty drawback is allowed upon the e:�:portation of article manufactured or produced in the Philippines, for the duties paid on the imported materials actually used in the production or manufacture of said articles. Taking the cue from the U.S. Tariff Act where the provision was copied almost verbatim and without any substantial change, it invokes the -. rulings that under the said Act, a duty drawback is

DECISION - CTA CASE NO. 2882 - 5- allowed even on articles used for the manufacture or production of the e:�:ported articles even if at the time of the e>:portation the articles on which the duty drawback is being applied for is no longer perceptible to the sen~~s, like for example imported salt for curing exported fish or meat. What is essential is only a proof that the imported salt was used in the curing of the exported meat. Likewise, where 1inseed is imported and used to manu fac tt .. �e oi 1 and oi 1 cake and the oi 1 cake is exported, the drawback should be computed in proportion to the value, not weight, which the e>:ported oil cake bears to the imported linseed (National Lead Co. v. u.s. 252 us 140, 64 L.ed. 496; 40 SCRA 2 3 7, 56 OTC 1514; u.s. v. Dean Linseed-Oi 1 Co. ( CCA 2) 87 Fed. 453). In the instant case, the base stock is the sole product sought to be manufactured or produced. This also distinguishes the situation of petitioner from other oil refineries in the Philippines. The drawback therefor.e should be in proportion to the total raw materials imported minus the residue sold as fuel oil.

�' DECISION - CTA CASE NO. 2882 - 6- Further object of the drawback provisions is not only to build up an export trade, but to encourage export- oriented and dollar producing manufactur8rs in the country, by granting a rebate of duties on the raw or other materials, imported for use in the manufacture and production of exports, thus enabling the manufacturers to compete in foreign market with the same articles manufactured in other countries (Tide Water Oil Co. v. United States, 171 U.S. 210, 43 L. ed. 139). The NIST has certified that petitioner consumed 1.85 barrels for each barrel of -. lubricating oil base stocks produced. Likewise the Board of Investments has accepted the 1.85:1 formula for the manufacture of e>:port lubricating oil base stock by petitioner. Respondent does not dispute the quantity of crude oil needed to produce one barrel of lubricating oi 1 but posits an unvarying assertion that the question lie~ on the amount of duty drawback allowable. The 1:1 ratio, the accepted and prevailing formula to all oil r

DECISION CTA CASE NO. 2882 - 7- refineries, ~~ premised on the fact that to produce one barrel of finished product, at least one barrel of crude oi 1 will .have to be> L!sed in . the process, no less, crude oil being an inorganic substance and therefore does not have the capacity to grow or multiply. Moreover, petitioner did not process imported crude oil, but a semi-finished product purchased from Cal te>: (Phils.) Inc. as �the processing done by petitioner did not involve the use of imported oi 1 d j,rec t 1y, thus it cannot be treated independently from the processing done by Calte>: in so far as the crude oil is concerned. The' certification of the Board of Investments allegedly recognizing a .J..B5:l. basis is not in accordance with the drawback provision of the tariff and Customs Code, as amended by P.D. No. 34. It presumed that the processing done by petitioner involved the use of imported crude oil directly, 1 ike that t , f Cal te>:. In order, however, to insure uniformity in the application of the 1:1 ratio in terms of pesos and centavos, the following formula has been adopted in computing the amount of creditable duty drawback:

DECISION CTA CASE NO. 2 882 - 8- DP >: E >: .99 --------- ---- = �R BI BI represents the number of barrels/ units of raw crude imported DP total pesos of- duty paid on said importations E number of barrels/units of finished products exported � 99 the 99/. con ternpl a ted as portion of dutLes ref~ndable R actual amount of duty creditable Undf.~r.. the a for�emen t.ioned formu 1a the amoun1 of duty drawback, therefore~ is based . 'n the quantity of e:�:ported product, with the duty paid per unit. of imported product~ linking the duty drawback on the percentage yield from crude oil of the e:�: port product. In this case, a refinery can pr�ocess any one barrel of Kuwait crude oil to produce the following: E'.BQPJJ.GI. !.':LQ..~.....:.PE. f.:J;:R.G .~t-.!I.Af.J..F;:_ ~B.B.B. ~~�. LPG fuel .04 4.0 Gasoline .195 19.5 Avtur .065 Diesel .14 6.5 Residue � 50 14.0 Refinery 50.0 __ .!_Q.Q_ s~ loss 1.000 BBL - ��--���6��--�.�-�0-�-��-- 100.00 I. If a dGty of F'1.00 is paid one barrel of processed crude oi 1, say, � 50 BBL, of Residue is exported, the drawback would be 2.~2..::'~--~~.....:. ~~:.....~.~-'=- ~-.....:.:~.!... or P . 4 9 5 1 ink in g duty drawback on the percentage yield from �crude oil of the export product. CJ

DECISION - CTA CASE Nt. 2882 - 9- Any ratio other than the "one to one" (1:1) ratio is not in consonance with the drawback provision of the Tariff and Customs Code as amended by P.O. 34. Hence, the duty drawbaek claim approved by the respondent in the amount of P3,183 ,136.00 out of the P6,234,526.56 claim of petitioner is in accordance with law. Again, as previously stated, the petitioner did not process imported crude oil, but semi- finished product purchased from Caltex (Phil.) Inc., as the processing done by petitioner did not �, involve the use of imported crude oi 1 directly. Thus, it cannot be- treated independent 1y from the processing done by Cal te>: insofar as crude oil is concerned. Illustrated: C~_b_T.S/.5_._~_Q__PI::!J L,_U:.F� I Nf..:_ .E.~.TRQL~IJ.tLQ.QMPA~.Y. EB.OCE!2_!2J NG CALTEX 1 BBL Crude LPG .04 Bbl � Oil � 14 Diesel .065 Processed Avtur .195 Gasoline Refinery loss .06 Residuet .50 c

DECISION - CTA CASE NO. 2882 - 10 - ~_g_!::.t..!.Y..~-L~.o ..t.....D..!::.tt.Y.. p ~_i.:..Q_ Pl.OO LPG P.04 Diesel .14 Avtur loss .065 Gasoline .195 Residue .50 Refinery .06 Purchased Residue Lobe Oil P.32 .18 8.~.?...!.~.1.!..~. Note: a. Calte:-: imported crude oil processed the same which yielded different products in various properties b. Philippine Petroleum Company pLtrchased Residue~ a semi- f ini~hed produ c:t of Cal te>: and further processed it by ::::~: trac ting Lobe oil (Lubricating) which it subsequently e:-:ported. The remaining r�esidue was sold to Meralco. Therefore, in the process only one half or 50% of Caltex crude oil importation was used by petitioner in � processing its lubricating oil for export. Therefore, if, for instance, out of two barrels of crude oil imported by Caltex, only one barre~ is av~ilable for petitioner to be used in the process of extracting Lobe oil, excluding CALTEX's light products, the 1:1 ratio as basis

DECISION CTA CASE NO. 2882 - 11 - becomes evident. Hence, for every one barrel of ~obe oil exported~ petitioner wi 11 have a refund of the amount of one barrel crude oil Residium purchased from Calte>:. All told the ~material facts are relatively simple so is the issue under resolve but the parties seem trying to get the better of each other over by a quibble as to what ratio applies in determining the creditable duty drawback on the subject exportations. The provision of Section 106 (b) of the Tariff and Customs Code as amended by P.D. ~o. 34, insofar as pertinent, provides: On Articles Made fiom Imported Ma teria 1s. - Upon e~:porta tion of artie 1es manufactured or produced in the Phi 1 i ppines, inc 1 ud ing pa c king~ covering, putting up~ marking -or labelling thereof ei t.her- in whole or in part. of imported materials for which duties have been paid refund or tax credit shall be allowed for duties paid on the 9imported material so used including the packing, covering, put t.ing LIP, marking or 1a belling thereof, subject to the following conditions: 1 The ac tua 1 use of the imported materi ~ ls in the production or manufacture of the article exported with their quantity, value and amount of duties paid thereon, having been established; 5 f()

DECISION CTA CASE NO. 2882 - 12 - 2. The duties refunded or credited shall not. exceed ninety-nine (99) per cent of the duties paid on the impor�ted materials used; >~X X XXX XXX Understood to mean what is plainly e:�:pressed insofar as the scope and limit of the said provision bear upon the circumstances obtaining respondent has struck the right chord in his proffered formula which furnishes the best means of its own exposition. Such illustration solely drawn for the 1 ight that may be shed in determining the allowable duty drawback, respondent points to the direction in which the intended imperative of Section 106, supra, should be applied. And far be it from a theor�etica 1 gobbledygook it firmly establishes the appropriate legal moorings and lends settling eloquence to the precise issue raised in the case at bar. And, as to the subsidiary argument of the "economics" of the undertaking We need not and do not deem it necessary to discuss the kind of "sweetener" further e:�:cept to say that it is too much of a stretch to hold respondent's action as "( '

DECISION -- CTA CASE NO. 2 882 would forec lose the development of petitioner's export bus iness and frustrate its competitive s tan c e i n the foreign market. It t a kes more than a generou s r e bate to attain a me aningful progress in the s aid indu~t~y. It is enough that the decision is in accordance with law. Upon the y-e.cords both the circumstances obtaining and r e levant legal standards compel the conclusion that the petitioner failed to prove entitlement to a favorable determination of the desired r�eJ..i.ef. WHEREFORE, petition is dismissed at petitioner's costs. SO ORDERED. Qu ez on City, Metro Manila, Assoc;iate Judge WE CONCUR: �~ ----- I' �v' co~.z� ,-ANTE . ROAGUIN /ssociate Judge [j f

DECISION - CTA CASE NO . 2882 - 1.4 - CERT I F I CAT I 0 N I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 1.3, Article VIII of the Constitution. Presiding Judge Court of Tax Appeals 5 f~