TAGUM AGRICULTURAL DEVELOPMENT COMPANY, INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHIL I PPI NES COURT OF TAX APPEALS QUEZON CITY TAGUM AGRICULTURAL DE VELOPMENT C.T.A. CASE NO. 5543 COMPANY, INC. , Petitioner, - versus - THE COMMISSIONER OF INTERNAL. REVENUE, Respondent. X- - - - DECISION This Petition for Review seeks to annul and set aside the final decision of the Respondent denying Petitioner's protest on a 1985 def1ciency income tax assessment des1gnated as Assessme nt No. FAS-I-85- 89- 000547 in the ~m ount of P4,002.600.27. Petitioner is a domestic corporat ion enqaqed in t he business of pro ducing a nd exp orting Cavendish bananas. Pur~suan t to Pr~esidential Decr~ ee i\lo. 1789 ("Decr~ee", for~ shor~t), other~wl se known as the Omnibus Investment Code, it was duly registered as a preferred non-pioneer export of Cavendish bananas with of Inv es tme nts <"BOI", 1981 a n d was issued thereunder a Certificate of Registration bearing No. 81- 093. As such , it was e n titled to an incentive of a Reduced Income Tax under SPction 48(b) of the Decree which grants every registered export prod uce r to deduct fr~om taxable income an amount equivalent to the dir�ect labor~ cost of i t s pt~oduct and the local t~aw matel~ials of n on-t r~ad i t ion a 1 pr~od uct s utilized in the manufacture of its export products.

DECISION C.T.A. CASE NO. 5543 The present controversy Respondent disallowed Petitioner's availment of a Reduced Income Tax fOY' 1':395 by issui _ng the deficiency' income tax assessment, the details of which e:n�'e as follow~;, to ~'-lit: 1985-De-Fi~ieT'""'~Y IT'""'~ome Net income per return PitO, 730, L~'JO. 00 7,206,457.00 Add: Disallowable Reduced Income Tax F-'47' 935, 'Jit7. 00 Adjusted net income subject to income tax P16, 767,931.00 Income tax due thereon- 14, 2it5, F.72. 00 25% of P 100,000.00 p 25,000.00 ..~ 2., 52~:::, 259u (H) L, 500 .. 341. .:::7 35~ of P47,836,947.00 16, 74-2, 931. 00 p. 4,002,600.27 Less: Amount already paid Deficiency income tax Add: 20% Int. P/A from 4-16-86 to 4-7-89 TOTAL AMOUNT DUE AND COLLECTIBLE Based on the above computation, Respondent disallowed P7,206,457.00 representing the raw materials component of the Reduced Income Tax on the ground that it fell short of the requirements provided under Rule I' Section i(x) of the BOI Rules implementing the Decree, which r-�eads: (x) "Local r~aw mater~ials" for~ pur~pose of computing reduced income tax shall mean xxx indigenous raw materials and semi- finished products directly and actually used as inputs in the manufacture or processing of the registered export product which is completely finished and forming part thereof, including packaging and containers necessary to put the products in exportable form. Provided, that the semi-finished product has a loral content equal to or greater than fifty (50%) percent of manufacturing cost. <Underscoring supplied)

DECISION C.T.A. CASE NO. 5543 - 3- Respondent believed that the local content of the semi-finished product should be equal to or greater than 50~ of manufacturing cost of the exported banana product. Hence~ after~ simply noting that the SE:)mi�����finished products used by the Petitioner for 1995 had only a total value of P108~868, 137.00 which is less than 50~ of the manufacturing cost of P437,875,694.00 as reported in its income tax return <E><hibit C), Respondent made the disallowance in question. In a letter of protest filed on May 1'3, 1'389, Petitionel"~ ar�'gued that the "manufactut-�ing cost" advet~ted to in Section l(x) refers to the manufacturing cost of the semi-finished product and not to the manufacturing cost of the exported product following the doctrine of the last antecedent in statutory construction whereby the ter~m "manufactut~ing cost" in the last sentence of said section should refer to the immediately preceding phrase "semi-finished pl�'oduct." of its contention, Petitioner' cited the similar construction given by the BOI over' the matter' (Exhibit A) which accordingly invoked the well-settled rule that the interpretation or determination of the office ch;.:n~ged t>Jith the implementation and <,:>nfol'Cement of the provision of a statute such as BOI should be given controlling weight.

DECISION C.T.A. CASE NO. 5543 - 4- On June 16, 1997, Petitioner received Respondent's letter of denial of the protest. Hence, this appeal. b<:n~, both pat-�t i e s basically echoed the it~ respective positions a quo. This Cour-�t .; ~ thus. �� ::> confronted with a purely legal issue posed by the par~ties, of whether or not the "manufactur~ing cost" mentioned in the last sentence of Section 1(x) of Rule I of the Implementing Rules of the Decree pertains to semi- finished or registered export products. After a painstaking scrutiny of the arguments of the parties and the laws and rules in point, this Court has decided to deviate from the common issue presented and hereby renders a different opinion on the ground that Section l(x) of the BOI implementing rules in accord with Section 48(b) of the Decree. As worded, Section 48(b) of the Decree states: (b) Reduced Income Tax Every registered export producer shall be entitled for the first five (5) years from its registration or commercial operation, to deduct from its taxable income from domestic and export sales and from all registered operations, in addition to the normal deduction allowed by the National Internal Revenue Code, an amount equivalent to the direct labor cost of the product and the local raw materials of non-traditional export products utilized in the manufacture of its export products; Pr~ovided, hot-vever", That an additional amount equivalent to the direct labor cost shall be deductible by an export producer located in an area that the Board designate as necessary for the proper dispersal of industry or in an area which

DECISION C.T.A. CASE NO. 5543 - 5- the Board finds deficient in inft�astl���t..tctm�e, public utiliti~?s and othel�' fac:ilit:i.f:>s: PJ�'ov.idecl!, rur�t�h~?r, Th<::tt ~;uch deduction shall in no case exceed twenty- five per centum (25%) of its total export t'evenue; The above ~woviston of law specifically limits the deductton from taxable income to an amount equivalent to labot' cost of the p1��oduct and the local materials of non-traditional export products utilized in the manufacture of export products. Cln th~~ othel�' hand, Section l(x) of Rulf? I of the Rules Implementing the Decree, supra, pertinently defines local 11 as composing of indig~~nous r-'a.w and semi-�finished p1��oduct s dir�ectly ;::~ nd actually used as inputs in the manufacture or pr'ocess i ng of the registered export pr�oduct .1 pr�ovided that such semi-finished products have a local content equal to Of"' greater than SO% of manufacturing cost. This Court readily questions the inclusion of semi- finished p1��od uct s in their-� (~nt i r�et y a~"� ava.i labl e deduction for purposes of computing reduced income tax. Be it noted that the only allows local materials of non-traditional export pr-�oduct s. Th r~��r�e is no mention the amount of semi-finished products provided they have a local content equal to or' greater than 50~ of manufacturing cost, bl2 it of the registered export product or the semi-finished products.

DECISION C.T.A . CASE NO. 5543 - 6- Rightfully, only the local raw materials of the used c:\s inputs should be deduct1ble, and such products must also qualify as non- t ~~ad i t ion a 1 ex p01�~t pt��od uct s which, by the way, the section also failed to require. On this score, this Court deems the BOI implement1ng rules with respect to the inclusion of semi-finished in Section 1 (x) of Rule I as ulb~a vit~es beyond the limits of the authority conferred by the "Administ~~ative l~egulations adopted under legislative authority by a particular department must be in harmony with the provisions of the law~ and should be fo~~ the sole pu~��pose of can~yiny into effect its general provisions. By such regulations, of course, the law itself cannot be !::?><tended (U.S. v s . Tupas i Molina ). An administrative agency cannot amend an act of Congress <Santos vs. E::stenzo, 109 Phil. 419, '+22; Teoxon vs. Members of the Board of Administrators. L- 25619, June 30, 1':370, 33 SCRA ::'")85; II'Jaruel vs. Gene~~al Auditing Office, L-28952, Decembe~~ 29, 1971, 42 SCRA 660; Del.uao v�s. Casteel, L�-21905, August �:::':3, 1'369., �:::':3 SCRA 350)" [People vs. i"Y1acel�~en, 7':3 SCRA '~50 at '�:'.':18] With this Court's finding that Section l(x) of Rule I of the BOI implementing rules is not in conformity with the standard that the law prescribes, this Court has inevitable conclusion that s Petitione~~ 1 availment of the reduced income tax for its semi-finished p~-oduct s is not in accord with the Decree. Despite

DECISION C.T.A. CASE NO. 5543 - 7- Petitioner's alleged compliance with the rules, this is left with no alternative but to strike down as invalid its availment D f l�~ed UCf?d income tax for being contrary to the wordings of the Decree. A statute, being the will of the legislature, should be applied in exactly the way the legislature has expressed itself clearly in the law. The clear , unambiguous and unequivocal language of a statute precludes the Co urt from construing it and gives it no discretion but to apply the law. <Repu blic Flour Mills , Inc. vs. Comm i ssioner of Cu stoms, 39 SC RA 2 69; Commissioner of Internal Re v en u e v s. Limpan Investment Corp. , 34 SCRA 148 cited in Statutory Construction by Agpalo? 2nd ed .) Con sequent l y, the disallowed amount of P7,206,457.00 is hereby maintained on the ground that the semi-finished products which it represents have failed to qualify as pure l y corresponding to the local raw materials of non- tl�~aditional e x port products utilized in the manufacture of Petitioner's export products as stated in the Decree. Considerin~ however, that Petitioner acted in good faith and in faithful compliance to the particular BOI by itself, is debatable and ccmt 1�~o v er~s i a l between the BOI and respondent, this Court de�~ms i t pr~oper~ not to impose the 20~ interest on Petitioner's principal tax liability following the ruling in C.M. Hoskins v s. Commissioner o f Int ernal Revenue, 71 SCRA 511 and Cagayan Electric Power & Light Co., Inc. vs. Commissioner of Int e rna l Rev en ue , 138 S CRA 629.

DECISION C. T. A. CASE NO. 5543 - 8- WHEREFORE , in view of the foregoing, the instant Petition for Review is hereby DENIED . Acco-r-ding 1 y, t h f? assessment in FAS-I-85-89-0 00547 in the <::"\mount (J ~�' P4, 0 22,610.27 is hereby MODIFIED with the deletion of the 201. i n t e t' e st impos ed therein. Petitioner is hereby ORDERED to pay only the principal amount of P2,522?259.00 to the Respondent immediately. ;,-' ~J� SO ORDERED. RAMON 0. DE VEY Associate Jud e WE CONCUR: ~Q~~ ERNESTO D. ACOSTA Pt'esid1ng Judge CERTIFICATION I he r eby certify that t his decision was r eached after due consutation with t h e members of the Court of Tax Appeal s in accordance with Section 13, Article VIIl of the Constituti on. L Q -~ ERNESTO D. ACOSTA P�r-esidinq .Judge Court of Tax Appeals