CTA Case No. 620 (Decision)

Re~ublic of the Philippines COURT OF TAX AP PE:'.\LS ~�\cnila i\BJ,lAJ\DO L. ABNJ , doing C. I . A. business under the trade CAS?.. NO., 620 name of Republic Alco - hol Distillery , Petitioner , - versus - THE COMMISSIOh!ER OF INTERl'!AL REV.::.NUE , Respondento X- - - - - - - - - - X DECI SI 0 N The respondent assessed against the petitioner the sum of tl9,204.20 as specific tax on 42 , 676 proof liters of distilled spiri ts whi ch were allegedly ille- gally removed from petitione r ' s bonded w9r ehouse with- out payment of s ai d t ax. I n addi tion , pet i tion er was a l so asked to pay the sum of - ~10 , 000.00 as penalty (compromise) for violation of Section 174 of the Na - tional Internal Revenue Code. l ~aving failed to secure reconsideration of the assessment , petitioner has ap- pea lad. It appears that petitioner is the owner of the Republic Alcohol Distillery located at 273 F. Roxas , Grace Park , Caloocan , Rizal , which is engaged in the mc:nufacture of denaturedUalcohol for industrial uses . Denatured alcohol for use in industry is exempt from the specific tax prescribed in Section 133 of the Natibnol Internal Revenue Code , pursuant to Section 128 , but sales of which by the manufacturer are subje ct to the sales tax provided in Section 186. The manufacture of dena-

DECISIOf\T - C. I . A. CASE NO . 620 - 2- turod alcohol is subject to the supervision and con- trol of the Bureau of Internal Revenue. (Sees. 149 , 164 , Revenue Code; General Circul a r No. 420, June 23 , 1939. ) On August 14 , 1958 , petitioner applied for the de- naturation of 33,000 gauge liters of rectified alcohol. The denaturation was effected on August 21 , 1958 by the Denaturing Committee of the Bureau cf Internal Revenue composed exclusively of three officers of said Bureau without the intervention of petitioner or any of his agents . The circumstances surrounding the denatura - tion are as follows: "In his letter dated August 14 , 1958 (Exhi>it E) , petitioner applied for the denaturation of 33 ,000 gauge liters of rectified alcohol of not less than 180 degress proof under Formula No . 1 pres - cribed in section 40 of Chapter V, Cir - cular No . 16 , to wit : To every 100 parts by volume of ethyl alcohol of not less than 180 degrees proof , there shall be added 2 parts by volume of approved me - thyl alcohol (or methanol) and one - half of 1 part by volume of approved pyridine . ~pon re ceipt of petitioner ' s appli cation , the Chief of respondent ' s Alcohol Tax Di v- ision prepared the corresponding author- ity addressed to the Chief , Laboratory Se cti on to analyze the denaturants needed 1~5a~m6pl, ets.s for denaturation (pp. � . n.; de - Exhibits E-1 and E-2 of the naturants were taken from oetitioner ' s bonded denaturing wareh nus~ by a BIR em - ployee , Hr. Manuel Carifigal , and brought to the BIR Laboratory Se cti on for analysis {p. 79 , Ls.n. ) , and the reports of analysis were duly accomplished {Exhibits E- 1 , E- 2 and E- 2) , showing that the dena - turants passed the commercial grade and could be used for denaturing (pp. 80 - 82 ; t . s . n. ). Upon receipt of the laboratory analysiS reports on the denaturants , the Chief , Alcohol Tax Division , pursuant to Memorandum Order _1o. V- 799 cf the Bur- eau of Internal Hevenue , dated January

- D~CI~ION C. I . A. CSE l'TO. 620 - 3- 29 , 1958 , directed the Denaturing Com- mittee , compose d of Mr. Marcelino de Leon , Chairman , and Drug Inspector Mercedes Ylagan and Mr. Inocencio Gonzales , Jr., Chief, Labor2tory Section , Members , who are all internal revenue officers , to proceed , on ,ugust 21 , 1958 , to the bond- ed denaturing warehouse of the petition- er at Gra ce Park , Caloocan, Rizal , and to denature the 33 ,000 gauge liters of rectified ethyl alcohol of petitioner. /fhe Denaturing Committee denatured the ' rectified alcohol of the petitioner in accordance with the standard procedures pres cribed by the internal revenue law and regulations {please see testimony of Mr. Marcelino de Leon , pp . 27 ~77 , t . s . n. , and testimony of Mr. Inocencio Gonzales , Jr . , PP� 77-98 , t. s . n. ) 1 and after the denaturation , the said Denaturing Commit - tee took , through the manho les on top of the three denaturing tanks used in the denaturation , two samples from each of the three tanks and sealed the said sam- ples , on whi ch seals were affixed the signature of the members of the Denatur- ing Committee and that of the resident manager of the bonded denaturing plant, One set of the samples was left at the denaturing plant and the other set was taken by the Denaturin g CQmmittee to the Laboratory Section of the Bureau of Internal Revenue for analysisv After the denaturation and before leaving the prem - ises, the Denaturing Committee duly seal- ed all the openings of the denaturing tanks . The quantity of the rectified al - cohol and the denaturants used in dena - turation were duly entered in the Off i - cial Register Book of the denaturing plant (Exhibit I) by the BIR storekeeper- gauger and the resident manager of the plant , and the members of the Denituring Committee accomplished the requis.1te cer- tific2tes of denaturation (Exhibit~ G, G- 1 and G- 2) . / The samples of the dena - tured alcohol taken by the Denaturing Committee were brought to the BIR Labor- atory Section and upon analysis , were found to be duly denatured {p. 91 , t . s.n .~ " (Pages 2 -5, Memorandum for Petitioner , Jan . 18 , 1961 ~ ) The facts narrated above are not disp~ted by respond - ent .

DECISION - C. T. A. CASE NO . 620 -4 - However , upon surprise inspection on August 25 , 1958 , it v.1as found thCJt the remaining elcohol (10 , 420 gauge liters crr 19 ~ 694 proof liters) in the tanks where . the denatured alcohol was stored was not completely de- natured and that ~the same can be used in the manufac- ture of Siu Hoc Tong , Rum , Chinese wines and other high - ly flavored alcoholic beverages.~ Accordingly , steps wer~ taken to completely denature said alcohol . With respect to the 22 ,580 gauge liters or 42 , 676 proof li - ters already removed or sold prior to the surprise in - spection , respondent required petitioner to pay the specific tax of ~19 , 204 . 20 , plus the ''penalty� of ~10 , 000 , 00 . It is contended on behalf of pet itioner that , as- suming that the alcohol in question was not completely denatured as alleged 1. he cannot be held liable for the specific tax because the denaturation was made by the Denaturing Committee of the Bureau of Internal Revenue without his intervention or of any of his agents. On the other hand , respondent contends that the denaturation of the alcohol was the sole responsibility o,f petition- er , and since it turned out that the alcohol was not completely denatured , he must pay the corresponding specific tax. We agree with petitioner that he cannot be held legally liable for the specific tax. There is no question that the denaturation was made by the Denaturing 'committee of the Bureau of Inter- nal Revenue without the intervention of petitioner or of any of his agents.. The Committee certified that the / .. ~ I I:S 3

/ DECISION - C. I . A. CASE NO ~ 620 -5- alcohol in question was completely denatured in� ac- cordance with existing regulations . Petitioner was en- titled to rely on such certification and to dispose of the alcohol in accordance with his license . The case .of Central Azucarera de Tarlac v. Collector of In - ternal Revenue , G. R. No . L-11092, September 30 , 1958 , is not in point. In that case , it appears that the denaturation was made by a committee , a member of wh~ch was an agent or representative of the taxpayer. In this case , the Bureau of Internal Revenue required that the denaturation be made , as it was actually made , by a committee composed exclusively of officers of said Bureau without the participation or interven - tion of petitioner or his agents . Surely , it would be unjust to make petitioner liable for the negligence of said committee. over whil:ch he had no control. Res pondent relies on the principle that the Gov - ernment cannot he pre judiced by the negligence of its agents. Said principle appears �to us inapplicable to the instant case. Petitioner applied for the dena - turation of 33 ,000 gauge liters of alcohol to be sold for industrial purposes on which no specific tax is due. While it m8y be true that the alcohol was not complete- ly denatured , the fact that the same was sold for in - dustrial purposes on which the sales tax was undoubted- ly paid did not prejudice the Government. even admit- ting the correctness of the allegation that incomplete- ly denatured alcohol could have been used in the manu - facture of Chinese wines , etc .. , the fact remains that

DECISIOiT - C . _. � CA E .JO . 620 - 6- the alcohol was not so used . The evidence sho~s that it was dis9osed of as industrial alcohol . The Govern - ment was not , t~erefore , defrauded of lawful revenues . To require petitioner to p2y the tax as assessed would esta l i sh a dangerous precedent . It would make tax - payers the helpless vict i ms of s cheming government agents . If in this c ase the Government was pre j udi ced , the remedy is against its own agents , not against t he taxnayer who has not been shown to have anything to do with t he acts of said agents . Fi nding no legal basis for the assessment , the decision appealed from is here y reversed . No costs . SO OPDcRED . danila , February 26 , 1962. 'VE. CO.JCUR: