CTA Case No. 4712 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY CARLSBERG PHILIPPINES, INC. , Petitioner, - versus - C.T.A. CASE NO. 4712 CO""ISSIONER OF INTERNAL REVENUE, Re spondent . X- - - - - -- - -X DEC I I 0 N Having admitted the material allegations o� the petitioner and there being no objection on the part o� the respondent, this Court hereby resolves to grant petitioner's motion �or judgment on the pleadings. Petitioner is a trader engaged in the business o� buying locally manu�ac tur ed beer �or the purpose o� reselling the m in thei r original state. Being among those that were subjected to the Value-Added Tax <VAT it availed o� the ax presumptive input tax under Sec. 25 o� Executive Order 273 (E. 0. 273).

DECISION - C.T.A. CASE NO. 4712. - 2- The petitioner applied the 8Y. presumptive input tax on its inventories including on those goods for resale as of December 31, 1987 consisting of beer with a total value of P7,640,969.64. However, the respondent, claiming that the petitioner is not covered by Sec. 25 of EO 273, made an assessment for VAT deficiency in the total amount of P1,429,647.17 inclusive of the disallowance of the presumptive input on its inventory of supplies and penalties. The only issue to be res~lved in this case is whether or not the petitioner can avail of the 8Y. presumptive input tax under Sec. 25(3) of EO 273 on its inventory of beer valued at P7,640,969.64. We rule in favor of the petitioner. Section 25 of Executive Order No. 273 provides: "SEC. 25 Transitory provisions.- <a> All VAT - registered person shall be allowed transit Lnnal input taxes which can be ~~e ~ited against output tax in the same manner , as p rovided in Section 104 of the National Internal Revenue Code as f o l l o w s -: 1.) XX X XXX XXX 2. ) XXX XXX XXX 3. 1 A p re sumptive input tax equivalent to BY. of the value of the inventory as of December 31, 1987 of goods for sale, the tax on which was not taken up or claimed as deferred sales tax credit." 6 ") 1 0 ..L.

DECISION - C.T.A. CASE NO. 4712. -3- The respondent interpreted "goods �or sale" under Sec. 25<3> as limited to those re�erred to in Sec. 166 o� the �ormer Tax Code, which provides: "SEC. 166. Tax Credit. (a> Creditable Taxes. - Any excise, sales or miller's tax pai d under this Title and Tile V o� this Code on domestically manu�actured, processed, produced or imported ~<:l."t.....n.:t<:~_t .4::!'r .~..<:l. l!::J.~---� .P?X.t..t..______~_pg�'~.~_q_J.::.Y 9X::.�...�..9.t..h.E:?..r.:._.._.?_.r.:.t.. ~9J.._e_______.J,.()_9..~. :l...l.Y.___ P..~.!:.P..h.~..!!:JgQ___Q.!:. ! .!'IP9r:.t.�'g_________l?.y_______t.J."!.!L.______l!l_~.!!.!l..!~-g_t~:r._�'K...._________~Q!:. 9. QQ.Y �.':r:EI.i.9..D._____;i. D.!.9........c:J.L ...J .I1.t.�'.n_c;f_�'_Q___t _Q___! _Q_:f.!!I_._..P ~!'...t. Q~ ----~!.l.Y ...t.~_D._i~.l:t.E:?..c:! ... P.!-::..Q.Q.~_g_t____:{Q_!'___f?._!=l..!.~ sh a 11 be credited against the sales tax on the original sale o� the �inished product, except agricultural products: Provided, however, That the amount o� sales tax on domestically purchased raw material, part or accessory, is separately indicated in the sales invoice. The respondent maintains that to be able to avail o� the 8Y. presumptive input tax under Sec. 25(3) o� EO 273, the inventory o� goods re�erred to therein must consist o� raw materials or articles that would be converted into or would �orm part o� a �inished product. Thus, the respondent rejected the petitioner's claim �or a presumptive input tax on its inventory o� beer "because beer is not used as a raw material o� a �inished product subject to sales tax." <Annex "L" o� Petition> It is a �undamental and basic precept o� statutory construct ion that in interpreting the meaning and scope of a term as used in a law, a 632

.. DECISION - C.T.A. CASE NO. 4712. - 4- careful review of the whole law involved must be made, looking likewise into the intendment of the law <Chan Rung Fa va. Gianzon, 97 Phil 913>. One need not go beyond Sec. 25 above-quoted to be able to conclude that the phrase "the tax on which was not taken up or claimed as deferred sales tax credit" is not intended to restrictly qualify the subject inventory to those articles mentioned under Sec. 166 of the former Tax Code. Sec. 25 ( 2 > which is similarly qualified by the said phrase provides: "xxx XXX XXX 2. ) A presumptive input tax equivalent to 8/. of the value of the inventory as of December 31, 1987 of l!la t..~rJa 1 s .<:l f1d ..13.~ p pl_i~. t::l...... ~ .h;i,_gJ:L....~L~.-�....r.:t..Q:t___.;tg.r. f? a.l. e ~.-...... t h_e ._ t .a)( .. 9. n __ .which .......~..a..s . ..D..<=' t . . . . j;,.~.~.~.n..._..~.P pr __cJ_aimed__ ._. a .E.:J _._d~fE?rre~�--�~�~JE?!?.._.t.~~.-.QL~_q_;i,. t ~ (Underscoring supplied) XXX XXX xxx." The inventory of "materials and supplies" abovementioned could not possibly contemplate the " raw materials of a finished product" inasmuch as they are not intended for further processing and are being used in business in their present condition. Machiner y parts and equipment not falling under the def i nition of "capital goods " may come within the purvi e w of the term "supplies". The respondent ev e n adm~ts in his VAT ruling <Annex 63J

DECISION - C.T.A. CASE NO. 4712. -5- "D" of the petition> that an inventory of supplies consisting of PQ.~J:.J�>~. may be subject � of the BY. presumptive input tax under Sec. 25 <2 > and which article, like beer, is definitely not "a raw mat erial of a finished product subject to sales tax". Thus, no less than the respondent had made the admission that the last phrase appearing in both 2 and 3 of Sec. 25 does not restrict the subject inventories to the articles mentioned in Sec. 166 of the former Tax Code. It merely excludes from its application those goods and supplies whose taxes were already claimed as deferred sales tax credit. Sec. 105 of the National Internal Revenue Code as added by EO 273 provides: "Sec. 105. Transitional Input Tax. - A person who becomes liable to value- added tax or any person who elects to be a VAT -registered person shall subject to the filing of an inventory as prescribed by regulati ons, be allowed input tax on his beginning ,i. D.Y E;?_f.I.~..QT.Y.�_._____Q! ..._____g.Q_Q.Q_~t- !!1.9..~.~_:rj.~_J,._~ ..__a.mL... sup p .lj,_~ f::l___~_q.!J..!.Y.~l.~_n ~.-_t_Q._fJ.Z.. Q.f ..- ......t..h.~--��� Y.a_~e ��--�-Q-~ .. ....~!-lq_l}__.__!nY~D-t...9..r.Y___Qr__t.h~. �l_g.t.!!!'!.J._.__y�l J.\! E?. .....�...a~q.e.Q____t._C!~--P.~J_Q___Q!L__I::l_\!.9h 9 .Q.QQ_f!'!..r.......!fl.~.:t: .~.r.J..~l..f:l.r_..__<:iD..q___f!'!_\!.P.P.!.:t~.~-�-:!f..h .:i,_gh~.Y.~.!:. ;i.J? ...._ .l:lJ.g.t1 ~x::-. ......'!1: tli. q h...._..f:!haJJ,___..Q~--�-qr..~_g_~ t~_P-J.. e �lJH!.~.ns t._..t P_�'___Q.~..t.P.!:l.~----:t.~-~...!- " Note that under this provision, the BY. presumpt ive input tax is made to apply generally to the goods, materials and supplies of persons who

.. DECISION - C.T.A. CASE NO. 4712. -6- become liable to VAT or who elects to become VAT -registered without the exception appearing under Sec. 25 <2> and <3>. Consequently, those who similarly engage in the business o� the petitioner <trader o:f beer> whose annual gross sales does not exceed P200, 000.00 but who elects to regi ster under VAT and those whose annual gross sales shall exceed P200,000.00 are entitled to the 8Y. presumptive input <or actual VAT paid) under Sec. 105 in conjunction with Sec. 17 o:f the implementing rules and regulations <Revenue Regulation 5-87) regardless o:f whether the tax on such goods had been claimed as de:ferred sales tax credit under Sec. 166 o:f the :former Tax Code. The VAT embodied in EO 273 which took e:f:fect on January 1, 1988 imposes a uniform rate covering all persons engaged in the business o:f selling goods and services which not only applies to manufacturers, producers, and importers, but subsequent sellers as well, including wholesale distributors, traders, and retailers. Under this present system not only original sellers but also subsequent sellers are entitled to claim tax credit. G35

DECISION - C.T.A. CASE HO. 4712. -7- The .framers o.f EO 273 must have been .fully aware o.f the initially pe rsistent criticisms and misapprehensions over the proposed tax re.form as typi.fied in those issued raised in the case o.f KHU va. Executive Secretary <163 SCRA 371), particular 1 y, the .fear o.f price increase. They must have also known that due to its enlarged scope, di.f.ferent sellers then subject to di.f.ferent tax rates would suddenly be charged with a constant tax rate o.f lOX, �unless zero-rated. Consequently, a trader who, at the time o.f the law's conception, is paying the lower 1.5X turnover tax, would eventually be subjected to an abrupt 8.5X increase in its tax liability .for its inventory o.f goods existing by the end of December 1987 subsequently sold. Being an indirect tax:, it may very well be expected that the additional t-ax burden will ultimately be passed on to the buying public or consumers in the .form o.f unpopular price increase. Such a s c enario is .further enhanced by the unavo idable situation on the initial implementation o.f the VAT the lack of a valid or actual VAT input on the sellers' stock of goods bought be.fore January 1, 1988 inasmuch as they were never subjected to lOX VAT. C36

DECISION - C.T.A. CASE NO. 4712. -8- While manufacturers, producers and importers covered by the old sales tax law may legally avail of a last tax credit under Sec. 166 of the former Tax Code, subsequent sellers not covered by said provision may not, although under EO 273, they are supposed to be placed on equal footing with the original sellers by similarly being entitled to claim a tax credit on purchases o:f raw materials, supplies, capital equipment and services made in the course of their trade or business. This situation, impugns the characteristically uniform and equitable nature of the VAT. It is in this light that the transitory provision of EO 273 should be interpreted. The 8% presumptive input seeks to remedy or at least alleviate the iniquitous situations which would necessarily arise during the transition from the old to the new tax law. It also seeks to put in check any possibility of price destabilization, and ensure a uniform and equitable application of the law. In other words, the provision was incorporated under EO 273 to pave the way for a smooth transition into the new tax law. The foregoing discussion elucidates petitioner's argument that Sec. 25 should generally apply to every VAT -reg istra nt. It is, in fact, in 63 7

DECISION - C.T.A. CASE NO. 4712. -9- harmony with the very provision itself when it stated: Sec. 25. Transitory provisions. <a> A.!J .....YAT.::.J::"t:e>9J �I:tE?:r~q___ . .P.E::'X::I?.9.:DI::J shall be allowed transitional input taxes which can be credited against output tax in the same manner as provided in Sec. 104 of the National Internal Revenue Code as follows: XXX XXX xxx." <Underscoring supplied> The phrase "the tax on which was not taken up or claimed as deferred sales tax credit does not qualify the phrase "All-VAT-registrants" which include petitioner herein but "goods for sale". However, it simply means that any VAT-registrant may avail of the 8X presumptive tax on its inventory as of December 31, 1987 over goods on which it has not availed of, or cannot avail of the tax credit under Sec. 166. This construction eradicates the inequity of denying other VAT taxpayer from being able to avail of a tax credit in its first payment of VAT. The respondent, in its answer laid stress "that the transi tory provision in the aforestated EO 273 simply prov ide s for the mechanics of adjustment from one tax system to another. Thus, if tax crediting by a t rader of a finished product 83

DECISION - C.T.A. CASE NO. 4 712. - 10 - (subject to turnover tax> is not allowed, it cannot, similarly, he claimed as presumptive input tax credit under the VAT system <EO 273)". This constricted view on the function of a transi tory provision had likewise led to the 1imi ted interpretation of Sec . 25 of EO 273. It suffices to state that transitory or temporary provisions are frequently necessary to provide for special situations in the transition period and the establishment of the new law <Sutherland Statutory Construction, 4th Ed. Vol. lA 20.21). WHEREFORE, judgment is hereby rendered allowing the 8% preSUIIIptive input On petitioner,.S inventory of goods valued at P7,640,969,64 and accordingly, hereby orders the cancellation of the deficiency VAT assessment in the of P1,429,647.17 covere d by Assessment Notice and Letter of De mand No. FAS - 4 - 88 - 91001057 dated "arch 30, 1991. SO ORDERED . Quezon Cit y Metro Man i la, July 5, 1993. ~~Q .. ~ ERNESTO D. ACOSTA Presiding Judge

DECISION - C.T.A. CASE NO. 4712. - 11 - WE CONCUR: ~EL Ass ciate Judge / !~ !/,~_/ RAKON 0. DE ~~~A Associate Judge CERTIFICATION I hereby certi�y that this decision was reached a�ter due consultation among the members o� the Court o� Tax Appeals in accordance with Section 13, Article VIII o� the Constitution. ~Q,~ ERNESTO D. ACOSTA Presiding Judge Court o� Tax Appeals 64