CTA Case No. 2369 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ETERNIT CORPORATION, C. T.A. CASE NO. 2369 Petitioner , - versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - -X DECI S I 0 N Before the court , peti tione.r p1�ays for judgment ordering respondent to refund to it tl1e sum of P195 , 379.28, repJ"esen ting ~<!lleged illeg~'ll /1erl"oneous overpayment b.v i t of the 7.t' ma1wfactu.re1� ' s sales tax fc:u� the years 1968 to 1970, inc lusive. Fe t i tioner is ~q dtJly .registe1�ed domestic co1�po1"ation engaged in the manufacture of ~'lsbestos cement pJ"oducts (such as Flat and Corrug~'lted Sheets, Noulded Goods, and Pipes) which manufactured from asbestos fibeJ", cement, cartons and copper sulphate. These p.roduc ts were subJect Sec tion 186 of tj1e old Tax Code. I t appeal"s fTom the .recoJ"ds of the c~'lse tlla t petitioneT , in the years 1968, 1969 and 1970, paid 52

DECISION CTA CASE NO. 2369 -2- in th e f o l'ln o f 7.%' tax 011 tbe sale of its asbestos cement p1�oduc ts , a total of P1,377, 350 . 74, broke11 d o r�m .::1s foll o ws : )�' e a r Sales Ta .l-\� Paid 1 9e:s p 405 .~ 188.83 1 '.? e:�.? 48(�. .~ 96 :~. 5 4 19 70 48 5 .~ 19 2 .37 Total Pt ~' 37 7 .~ 35r} . 7 4 ' ---- ---------- The tax was conJputed without deducting the cost of c ement used in ma1wfactu.ring tlu~ asbestos cement pro du c ts s o ld , in acco n:f.:mce r.ri th .respondent ' s c on s istent nJlings p.rio1� to 1970 that the pbr~qse "tax- exempt produe t " as used in Section 186-A of the o ld Tax Co de refers only to ".rar.r mate1�ials pu1�ehas ed from tax-exempt industries " , to r.rhich c atego1�y c ement d o es not belong. On Febn1ary 18, 1970 , the Sup1�eme Colu�t pl'omulga ted its decision in the ease of Republic Flour Hills v. The Commissioner of Internal Revenue and The Court of Tax Appeals, G. R . No . L - 25602 (31 SCRA 5 2 0) , rulings and h o lding that the phrase " tax- f1�ee pJ"oduct" in Sec tion 186- A is "all encompassing " and refel's ordinarily .:wd commonly to all materials and arti c les exempted f1�om payment of tax . On tTuly 2 0 ; ' ' 53

DECISION CTA CASE NO. 2369 - 3- 1970, this court , in the cBse of Philippine Pipes and IJerchandlslng Corporation v. Co.mJDlssioner of Internal Revenue, C. T.A. C..qse No. 1858 , held thBt "whethe.t� cement qua cement is subject to sBles tBx or not, its value is appa.r�ently deductible f.r�om g.r�oss sales of nu'mufactuTed p.r�oducts usi11g sBme Bs .r�aw materi .". 'll ... On !1ay 1..9, 1971, on the stre11gtb of the above - cited cases, petitioner filed with n~spcmdent a claim fo.r� .r�efund of its allegedly ove.t'PBid 7.%' manufactuTe.t� 's sales tax covering the pe.r�i od from tl.!'I1Wa.t'JT 1968 to December 1970, i11clusive, 1.11 the total amount of P195,379.28. This WJdi.sputed amount is bToken down b.v yeBr, thus: Year Tax Allegedly Overpaid 1968 p 58~471.30 1 '.~69 82 .*116.~~7 54 .~791.01 1970 p 195?379.28 Total ------------ The alleged overpayment w.q. s computed on the basls of cost of cement per square mete.r� applied 011 tl1e per unit sold for the yelU' ln questio11 (as stated in the ml uwfa ctu.ring statement). In otheT wo.r�ds , peti tione.r, i n oTd e .r� to a.tTive at the alleged overpald tax foT ..<=~ny given yelu�, fl1�st multlplled 54

DECISION CTA CASE NO. 2369 - 4- the "Net S,'iles (for that �give11 yea~�) in Squ.'.i.re 11ete:rs Subject to 7.%' Sales Tax" r<1ith the "Cost of Cement Pe.r Mete!" (pe1� 11anufac tul"ing Statement for the same yea1�); and then multiplied the resulting product the.reof by 7.%'. Petitione!" � s compu ta t i ons, r<1hi ch a1�e embodied in its Exhibits "G" to "G-8", inclusive, a1�e he.reinbelow summa1�ized as foll o r<1s: ) �' AR 1969 1970 :::::::== Net Sales in p 1'.'::J5,37'.~ .28 Square Neters ::-:ubject to 77. ------------ Sales Ta.l>;� Cost of Cement Used in the Nanufac ture of A:.:;:bes tos Cement Produc t s t-or the year THEREOF-77. Total t-or the three years On .lmwal".V 11, 1972, as 1�espondent l1ad yet to act 011 petitioner's claim, the instant Cllse was filed wi tl1 this cou1�t i11 on1e.t� to toll the l'W111iJJg of the prescriptive period. The issue now p.t�esen ted before this court for determination is: In computing the 7% 55

DECISION CTA CASE NO. 2369 - 5- manufl1cture:r � s sa les tax 011 8Sbestos cement products, is the cost of cement used in .manufaeturing such products deductible f1�on1 thei1� ,gross selling price? Before the court proceeds to discuss the .merits of thi s C8se. it must first settle the preJudici8l controversy reg8J'ding whether o1� not the right of petitioner to recover an.v t ..~. xes allegedly overpaid by it prior to .l<'mtuu�.v 11 , 1970 has already prescribed. Respondent con tends th8 t, in 8ccord8nce with Section 306 (nor<~ Section 230) of the old T.'. lx Code, the refund of t8xes allegedly p,":lid b.v petitioner before J8JHlary 11 , 1970 is 8lread.v baJTed by prescription. The said Tax Code p1�ovision re .~. ds .~. s follor<~s: n S e ': , .3 CJ e.: . Rg_~:;;..(~--~-~.f!..r... Y....____Q_t.:. . . . .t.~..~~---��-��f:..r.. t_Q_~.. 'f!.gJ>,f,!_~_!._y__<,>.r.. _.l.!...!...f:?.9..ii1:..!.!...Y... _r;:J~~-L!...rLt;.t. f:?9.� - No suit or proceeding shall be maintained in any cour t "for the re co very o"f any national internal revenue ta x hereafter alleged to have b ee n erroneously or illegally assessed or c ollected, or o"f any penalty c laimed to have been collected without authorit y, or o"f any sum alleged to have been e xcess ive or in any manner wrongfully collected, until a claim "for refund o"f cred it has been duly "filed with the Commissioner o"f Internal Revenue; but s u c h suit or proceeding may be maintained, whether or not such ta x , penalty, or sum has been paid under 56

DECISION CTA CASE NO. 2369 - 6- p r o t e s t o r d u r e s s � !.'f.l........~J)_Y....._ �:;_~ 2.J?.._..___ .ug ...2.Y..<.:;!J ;.".Y..it. ____<.!.!......... Pr...r,,;_ ~J?..9...i...ng _. .b._~_LL_. k_fl....... P...fl_Y._T}__ __i:i_f.t..~r.. .t ./J.f?...... f?..:".<..P...i...!..�.i!i..ti.~:,.TL.....<J. .f . _t~':!.P... _Y._f?...~ r _(f.__ f.r...qm___th.~. -1..gt.~- Qt........P~. Y.."!!!..l?.T!..t. .... ...(!L........t.h..~........_. t~..:.><.._____gr.___ ......P~.Tl.~..LtY.. � II (Unders c oring supplied) Petitioner, on the othe1� hand , contends that it r-n'ls only on February 18, 19 70, when the Sup1�eme Court 1�endered its decision in the case of Republic Flour JIJills, Inc. v. The Commissioner of Internal Revenue and The Court of Tax Appeals, G.R . No . 25602 (31 SCRA 520) �' that its payment of the 7.%' manufac turer ' s sales tax corresponding to the cost of the cement it used as l'c.'iW material , became er1�oneous or illegal. In other words, petitioner claims that the tr.;o-.vear prescriptive pe1�iod set fo1�th in Section 306 (nor.; Sectio11 230) of the old Tax Code, should be reckoned in the instant c .'. ise, not f1�om the respective dates the questioned sal~s taxes were paid, but from Febnuu�y 18, 1970 . Consequently, peti tione.t� contends that its "Petitioner for Revier.," was seasonably filed with this court. Peti tloner .'.inchc.u�s 1 ts coJJtention on the Supreme Court dec ision in the case of CoJtWissioner of Internal Revenue v. National Power Corporation, G.R. No. 18874 , .llllwary 30 , 1970 (31 SCRA 112), wherein the Court stated that: 57

DECISION CTA CASE NO. 2369 - 7- " (UJhen a tax was originall y co I I e c ted 1..~.9-~ .L!.Y.. .~ the r u n n i n 9 of the pre s criptive period of two year s provided t"o r in S e c tion 3f}e. of the National Internal Revenue Code s hould c ommen c e not from the date the tax was paid but from the happening of the supervening cau s e which entitled the ta x payer to a refund; and the c laim for refund with the Commi ss ioner of Internal Revenue and the s ub s equent a c tion before the Court of Ta x Appeal s re g arding the refund should be done within the s aid period of two y ears." (Co��issioner of Internal Revenue v. National Power Corporation, 31 SCRA 11 2 .~ 117 - 8) (Underscoring supplied) The cou.rt agrees witl1 petitioner that it filed its "Petition f or Revier�" rdthin the tr-1o-year prescriptive p eriod , and that its claim fo1� refund for the .veL'il'S 1968 to 19 70, inclusive , is 11ot .vet ba.t-red by prescription . It is the court 's view tlMt the collection of the total sum of P1,377 , 350. 74 paid by petitioner as 7.%' manufacturer ' s s .'. iles tax dut�ing tl1e pe.l'iod from January 1968 to Decembe.t� 1970, inclusive, was made co.t-rectly and legally l">ecause the l1mount collected r�l..'iS computed in a ma1111er consistent with respondent �s rulings on al�e "tax- f.t�ee products" under Section 186-A of the old Tax Code - - that is, tlu~t sin c e cement is not .'.i product of a tax- exempt indus try, its cost is not deduetible f.t�om th e gn.Jss se lling price of finished p1�oducts in whi c h it is used liS a 1�aw ma teriL'il , for purposes 58

--- DECISION CTA CASJ.f NO. 2369 - 8- of computing manufacturer ' s sales tax . It was only upon the promulgation by the Sup1�eme Court of the Republic Flour llllls declslon thltt the collection of peti tione1� ' s 1968 to 1970 nuuwfactlu�e1� ' s sales tax col-responding to the cost of cement used, became ern:meous and illegal. In other words, it was the Supreme Cou1�t ' s declaration made 011 Fe bruary 18, 1970 that "tax- free p1�oducts" include all articles exempted f1�om payment of taxes, (takeJJ togetber r.fith tbe fact tlult unde1� Republic Act No. 1299, passed on <Tune 16, 1955 , ceme11 t is classified as a mineral pr oduct which is not subject to percentage tax under Section 188 of the old Tax Code) which is the superveni11g cause that gave rise to petiticme1� 's right to claim for 1�eflmd of its allegedly overpaid sales tax. At tbis point, the court would like to note that Se c tion 306 of the old T.'.ix Code, as above quoted, was amended by Presidential Dec1�ee No. 69 , dated Novembe1� 2 4, 1972 to 1�ead as follows: " Sec � 306 � = !i.!?..<;.Q..!~.!J..!..Y.. .�.P.f..�....t:..~ .,"f.........~g_r...r_g n.~g_f,~Y.2-L'L_<.:>.r.. ..... f..J.Jg.Qf!L!..Y.....�.f.!l l e c t.g.r.t. � - No s u i t or proceeding shall be maintained in any c ourt -for the re c overy o-f any r1ational inte r nal revenue tax herea-fter alleged to h av e been erroneously or illegally a ss e ss ed o r c ollected, or of any penalty c laimed to have been c ollected Nithout authority, or af any sum alleged to have been e xc e s sive or in any manner 59

DECISION CTA CASE NO. 2369 -9- Nrongfully c ollected .~ until a claim for refund or c redit has been duly filed with the CommissionerJ but such suit or pro c eeding may be maintained~ Nhether or not s u e h t a .">;� .~ pen a 1 ty .~ or sum has been paid under prote s t or dure :..::s. In any c a s e~ no s u c h s uit or proceeding shall be begun after the expiration of tNo years from the date ot� payment of the tax or pen a I t y [_f?_g~r.Q)_J!. ~. L ___Qf... .. E...TJY____~UP.. .~J!J?...r.d.B_.Q_ t;. ~_Y�. . ..... th. ~.t..... 'TIJ...~Y...........iii.Ll.~...fJ__ ~.f.t.Ji.r..... .. . ..P.iii...'L.lTI.!!..TLt : Provided .~ however .~ That the Commissioner may even without a written claim therefor~ refund or credit any ta x , ~>-~here on the face of the return upon which payment Na s made~ such payment appears c l e arly to ha~'e been erroneously paid," (Underscoring supplied) Since the instant case r,;as lnsti tuted in this couJ"t in Janua~�y , 19 72, months befoTe Presidential Dec.ree No. 69 added the plu�ase of any supervening cause that may a~�ise after payment", tben the supervening cause doctz�ine as enunciated in the National Po~er Corporation case discussed ea:rlie:r, is applicable to the case ltt baz�. Having settled tbe pz�escz�iption contz�ove1�s.v, the cou.rt now comes to crux of the case a11d decides the question of deductibility of the cost of ceme11t used by petitioner. Peti tloner assez�ts that the pz�opez� basis of the 7.%' m.". iJwfacturer ' s sales tax on 1 ts asbestos cement products is 1 ts gz�oss se11ing pz�i ce , 1ess the cost of cement used i11 making tl1em , in accordance with the doctrine laid down i11 the 60

- DECISION CTA CASE NO. 2369 - 10 - earlier- cited Phlllpplne Plpes and llerchandlslng case , C. T . A. Case No. 1858, July 20, 1970. Respondent, 011 the con tr,<:try , insists that the cost of cement is 110 t properly deductible from the gross selling price of asbestos cement Pl"Oducts ma11uf,_qctured using it , and that cement is not a "tax-fl"ee product" w1de1" Section 186-A of the old Tax Code, which reads: "14 hen ever a t~_,l:\:::::.f.r... ~UL.._.__pr_P.r::f..Y.<.=._t is utilized in the manufacture or production of any article.~ in the determination of the value of such f i n i s hed article .~ the v a 1 u e of such t_i:i_;5 -::_f.r.. .~.I?......_P.r..QrJ...Y.<; .t s h a 11 be deducted. ~~ (Under s coring supplied) With respect to respondent ,s a!"gumen t that the court sustains the same. Pertine11t is the following doctrine laid dor.r11 by the Sup1�eme Coul"t in the case of Commlssloner of Internal Revenue v. Phlllpplne P.ipes and Jferchandls.ing Corporatlon and The Court of Tax Appeals, G.R. No. L-32898, August 21, 1987 ( 153 SCRA 113) : 11 The question Nhether or not cement is subject to sales tax has been laid to re s t in the c ase of Co��issioner of Internal Revenue v. Republic Ce�ent Corporation~ 124 SCR .A 26 (1983)_� Nherein thi s Court ruled that cement not being a ' mineral product �� Nithin the meaning of Se c tion 2 46 of the Tax Code but a 'manut-a c tured product .� �� its sale i s s ubje c t to s ale :.:: tax imposed by Section 61

DECISION CTA CASE NO . 2369 - 11 - 18~~ the same not being exempt under Section 1SS(c) of the Tax Code. FolloNing the interpretation laid doNn in the 1965 case of Cebu Portland Ceaent v. Coaaissioner of Internal Revenue~ G.R. No. L-18f...49 .� 1.3 SCRA 3.3.3 (February 27, 1965)~ that ce ment is a 'manufactured product, ' the Court clarified the ruling the 1968 case of Cebu Portland Ceaent v. Coaaissioner of Internal Revenue~ G.R. No. L-2056.3, 25 SCRA 789 (October 29, 1968) .� to the effect that since cement Nas subject to sales tax immediately before the enactment of Republic Act No. 129'.':l, it shou ld remain to be so sub.iect thereafter~ considering that the la/A! intended no change of taxes IA!hatsoever. ' This ruling Nas affirmed in the resolution of Hay 7, 1987 denying the thr-ee ( .J) motions for reconsideration of the 198.3 decision filed by Republic Cement Corporation, APO Cement Corporation and Cebu Portland Cement.n fCoaai ss i oner of Internal Revenue v. Phi 1 i ppine Pi pes and Herchandising Corporation and The Court of Tax Appeals, 15.3 SCRA 11.3, 118) Regarding the question of the deductibility of the cost C..1f cement used .in mtuwfactu.ri11g pe ti tl one.r 's asbestos cement pr�oducts, the court finds petitioner's position to be meritorious. Wllile, as stated e .~. rlier, .it .is true that cement .is 11ot a "tax-fr�ee product" tmdel' Section 186-A of the old Tax Code, and consequently, tbe deductibility of its cost cannot be based on the said old Tax Code provision; it does not follow that sucll cost is not so deductible. A l'eading of Section 186 of tlle old Tax Code bear�s this co11clusioJ1. The s8ld provision reads as follows: 62

�� DECISION CTA CASE NO. 2369 - 12 - "s ec # 1 8 6 . f_f!I...-~.~.n._t. ~. Q.f!...~-���t. -~--~~�-....J~~}"J....._...~-~..1. ~. ~- Q.L. ._J~J.IJ.g.r...............~.r.. t..i.. �.!...~-~, There s h a 1 1 be levied .. assessed and collected once only on every original sa le~ barter~ e x change~ and similar tran sac tion either for nominal or valuable considerations~ intended to transfer oNnership of, or title to .. the arti c les not enumerated in sec tions one hundred and eighty-four, one hundred and eighty - five, one hundred and eighty-five-A~ and one hundred eig hty- five-B a ta x equ iv alent to se ven per centum of the gross se lling price or gross value in money of the articles so s old, bartered, e xc hanged .. or trans - ferred, suc h tax to be paid by the man 1.1 fa c t u r e r .. or p r o d u c e r ; f...r..QX..i_1.E..'1. ..r... Th. ~ t . . ~<!.h..t'!..r.fL ...... t. b..!L_.~.r.. ..t...i. .t;_Lg_ ~..........~.I::!.P..L~g.i;,.'t.. _..!;,. f:_' .........t.~ .,lf.. Y. n...9..g_r.. _.. J..h .i...~.........~.g..t;..t .f:.(.1�.f.I...._....'J.r...L . .J!I..i!1".LU f !ls;._t_y_r_I?A.. _..Q.tJ..t P.f..._......!!!.rJ.t~Li.J~. l.?._.... ..!.. f.l:s..g_f.:!.L~.g_ ___,,�.t,!..PL#?.i;..l_ _,,_. .tr.:'.. . . . -. t..~.:.".<.. Y..n.fl~.r...___.. tb...i...2........._ $_f?.!;._.t..i...f..l.r!.... -.....~n_t:t._._:.?,e t;,.'t...f:...qn_ ._q.n.#1. h..Y.U!1.T.f?..9..... ......~.r.!. 4. .....#1..f..q!J.t'L-:.1} .i....T!..#i .r........-t/J.~- tq.t~J. ._fJL~ .t (,'..f...... .....~ .lJ..f ..b.........JJ!..~. t .g_.r._f..~..!..�. .f ........'J.$._,__1..4...!..Y_. _ . ~~-t~ P..l.i..2}J..f1.1. J' . :f:..h.rJ.!....!. ........._. k.~.- . -rJ..~.'.;!.Ys....tLb..J.#i..............f r_Qm_ _.. t..f.>_~....-.._...QLP..2...~. :=,:,g]J....f...r..t..g,,_,_. P..L.i,,t;,g,_, ......PL......__gr...p S�______y_~_Ll!~......._... ... LT.!... !!!..<::!TJ._f!_Y......___<.~.t--...~.lJ..f ..b..._ ....J!!..~..n.Yf_a...r;,_t._t,t_.r._ll__q_ _~.r....t. .t..r;Lf?..2.. , " (Underscoring su pplied) [lnde.r this p..rovision of lar<~ , � in o1�de..r fo1� a mate1�ial ' s cost to be deductible from the ma11ufactu.red l-u�ticle ' s g1�oss selling prlce, two conditions must be met, namely: fl.rst, tl1at the manufa c tu:red a..rticle falls r<~i thin the ambit of Section 186; and seco11d, that the material is also subject to the tax imposed in Section 186. Section 186 . of the old Tax Code , construed together r<~lth Sections 184, 184-A, 185, 185 - A tmd 185- B, all of tbe same code, sbor,;s tllat petitioner 's asbestos cement products are among 63

.. DECISION CTA CASE NO. 2369 - 13 - those r.rhicl1 a:re subject to the tax imposed b.v Section 186 of the old 1'ax Code. Thus, condition o11e, stated above, exists in the i11stant case. 1'he cc:'Jut�t .rei tet�ates the l'Uling of the Supt�eme Court ea.rliet� adverted to, that cement is ..q "manufactut�ed P1'oduct" which sale is subject to the sales tax imposed by Sec."'!tion 186, as it is 110t exempt f1'om pe1�centage ta..Y. es W'ldet� Sectio11 188(c) of the old Tax Code. Tl1is shows that condition two, stated above, is also p1�eseJ1t i11 the case of cement used in manufactu1�ing asbestos ceme11t products; and, that the proviso of Section 186 applies . In otbez� wo.t�ds, as stated by the SupnJme Cou1�t i11 tl1e Ph111pp1ne Pipes and Merchandising Corporation case: "Cement being su b}ect to sales tax .� its c ost therefore as raN mat erial in the manufacture of concrete pi pes and hollow blocl;�s is dliductib le from the gross selling pri ce of sai d arti c le :.::::." (Co��i ssionflfr o., Int ,..na l Revenue v. Phi 1 i ppine Pip s and l'lerchandi!ling Corporation and Th Court o"f T x Appeals .� 153 SCRA 113, 11S-9J HHEREFORE. ln v1 ~ o:f the foregoing considerations, re!Jpond nt Co lssioner of Internal Revenue is hereby ordered to refund to petitioner the amount of P196,3i9 .28 as overpaid 7% 64

�. DECISION CTA CASE NO. 2369 - 14 - manufacturer ' s sales tax for the years 1968 to 1970, 1nclus1ve. No costs. SO ORDERED. Quezo11 City, /1etJ"o Manila, Feln�uaJ"y 12, 1992 . ~~tQ.~ ERNESTO D. ACOSTA Associate Judge I CONCUR: ~ ?/f11J~ /c. CONS 'ANTE ROAQUIN ActiJ'!I P.residi11g Judge CERTLFLCATZON I he.reby cez�tify tlu:tt this decisio11 was reached aftez� due ccmsul tatio11 l'etr.reen the membe:rs of tl1e Court of Tax Appeals in accoz�dance wi tl1 Section 13 , Az�ticle VII I of tbe Co11sti tution . .'lf/ I )/ ' - - CONS 'ANTE/ c. ROAQUIN Acti g Pz�esidl11g .Judge Couz�t of Tax Appeals 65