CTA Case No. 2103 (Decision)

W.J!I'tJBtlC OF Htf: t>tt t L tl�y,;; ~� ~OURT OF TAX APP~ Qli.~O.N CJ f"1 CEPOC INDUSTRIES , INC., C . T. A. CASE NO . 2103 Petitioner , - versus - COMMISSIONER OF INTERNAL REVENUE , Respondent . X- - - - - - - - - - - X 0 EC I S I 0 N This is a companion case of CTA Case No . 2075 , Cepoc Industries , Inc ., (formerly Cebu Portland Cement Company) vs . Commissioner of Internal Revenue , involving the same parties and the same iss ues , wherein this Court in it s decision dated October 7 , 1987 ordered petitioner Cepoc Industries , Inc ., to pay the 7% sales tax on cement, s u bject - matter t herein , the same to be computed on the basis of the gross selli ng price , less appropriate ded uctions corresponding to the costs of raw materials used in the manufacture of cement , conformably with Section 186 of the app l icable National Internal Reve nue Code , I and without the imposition of 25% surcharge . The factua l setting of t his case is also simi l ar to that of CTA Case No . 2075 . 555

DECISION - CTA CASE NO . 2103 - 2- Petitioner i s a government owned a nd controlled corporation , duly organized and existing und er and by virtue of the laws of the Philippines, formerly engaged in the production of Apo Portland cement and other products , with principal office at the Apo Cement Building , corner Da s mari~as and Barraca Sts ., Manila . Respondent is a public officer e ntru sted with the proper collection of internal revenue taxes . During the period from January 1 to June 30 , 1963 , petitioner produced Apo Portland cement , more than 80% of which consist of limestone and clay quarried by petitioner from its own mineral land located in the Philippines . During the period in question , petitioner filed with respondent quart erly retur ns of the gross sales of the cement produced, on the basis of which res- pondent assessed and colle c ted only ~ valorem tax as respondent was then or the opinion that peti- tioner ' s cement was not liable to the payment of sales tax by virtue of the provisions of Republic Act No . 1299 which took effect on June 17 , 1955;

DECISION - CTA CASE NO. 2103 - 4- the said protest filed by petitioner against the assessment in question. On April 17 , 1970, petitioner was served by respondent a warrant of distraint and levy of the personal and real properties of petitioner , No . N- 138-69, to enforce the collection of the foregoing assessment . On May 8 , 1970 , petitioner filed the instant petition for review with this Court . The issues are : (a) whether petitioner ' s sales of cement are subject to sales tax , and (b) whether respondent's assessment had already prescribed . On the question of prescription , respondent alleges as affirmative defense that since petitioner has not filed sales tax return on its gross sales of cement from January 1 to June 30, 1963 as required under Section 183 of the applicable National Internal Revenue Code , respondent has a period of ten (10) years from the discovery of s aid omission within which to assess the deficiency sales tax in accord - ance with Section 332(a) of the then in force Tax Code. Since the deficiency sales tax disputed in this case was assessed on May 8 , 1968 or within ~58

DECISION - CTA CASE NO . 2103 - 3- that s~id ad v~lorem tax is the subject of an action for refund docketed as C.T . A. Case No . 1617 . Respondent , after the promulgation on February 27 , 1965, of the decision of the Supreme Court in G. R. No . L-18649 entitled "Cebu Portland Cement Com- pany vs . Commissioner of Internal Revenue , " wherein the Supreme Court sustained the contention of peti- tioner that the basis for the computation of the ad valorem tax is the costs of the raw materials quarried from its mines, s ubjected petitioner , as producer of cement , to the payment of sales tax. On June 14 , 1968 , petitioner received a letter from respondent dated May 8, 1968, assessing peti- tioner the amount of e202,226 . 97 as alleged defi- ciency sales tax and surcharge on its sale of cement produced by petitioner from January 1 to June 30, 1963 . On June 14, 1968 , petitioner filed with res- pendent a letter protesting the said assessment on the ground that cement is not subject to the sales tax and that the assessment had already prescribed . On April 17 , 1970, petitioner received from respondent a letter dated March 10, 1970, denying vr.; 5'(

-- �- DECISION - CTA CASE NO. 2103 - 5- ten (10) years from Apri l 8 , 1968, t he date of dis- covery of peti t i oner ' s omissio n to fi l e a al e s tax return, t he deficiency sales tax herei n was assessed on time by respondent. Upon request of the parties, action on this case was held in abeyance to await the decision of the Supreme Court in similar cases involving the same issues which were then pending therein under G.R . Nos. L-35668 , 35670, 35671, 35672, 35683 and 35677 entitled 11 Republic Cement Corporation, Fili- pinas Cement Corporation, Apo Cement Corporation, Bacnotan Consolidated Industries, Inc. , Philippine Portland Cement Co . , Inc . , and Cepoc Industries , Inc . vs. Commissioner of Internal Revenue . 11 On August 10, 1983 the Supreme Court promul- gated it s de cision in Commissioner of Internal Revenue vs. Republic Cement Corporation, Filipinas Cement Corporation , Apo Cement Corporation , Bacnotan Consolidated Industries, Inc . , Rizal Cement Company , ' Inc � , Phi 1 i p pine Port 1 and Cement Co � , . Inc ., and the Court of Tax Appeals, G. R. Nos. L-35668-72 & L-35683; and Commissioner of Internal Revenue vs . Cepoc Industries, Inc . and the Court o f Tax Appeals, 55 8

DECISION - CTA CASE NO. 2103 - 6- L-35677, 124 SCRA 46, wherein the High Tribunal unequivocally ruled that cement is a "manufactured product" and its sale is not exempt from the sales tax imposed by Sections 186 & l88(c) of the then in force National Internal Revenue Code. As a conse- quence of this ruling, the Supreme Court ordered the private respondents therein to pay the sales tax. Buttressed by the law, precedent and reason, we find unnecessary to re-echo the rationale of the ruling of the Supreme Court that cement is subject to the sales tax. For purposes of computing the correct tax liab- ility of petitioner, howev e r, some qualifications as pointed out in the decision are in order. To quote: (1) The disputed assessments carry a 25% surcharge pursuant to Section 1 8 3 ( a ) o f t he Ta x co de /now se c � 19 3 (a) (3)7 which prescribe~ the said sur- charge-for late tax payment. In Connell Bros. Co. (Phil.) vs. Collector of Internal Revenue (10 SCRA 469 at 470-471), the then Justice Makalintal, speaking for the Court, rejected therein the imposition of 25% surcharge for late payment: XXX XXX XXX XXX XXX XXX 5()0

DECISION - CTA CASE NO. 2103 - 7- In the case at bar, the assessments are not undisputed or indisputable. The dispute as to the tax liability of private respondents for sales tax on the sale of cement arose not simply because of ordi- nary divergence of views in good faith vis-a-vis the interpretation of the law; the position of private respondent was founded upon the original stand of the Bureau of Internal Revenue itself that cement is a mineral product rather than a manufactured product and is therefore subject to ad valorem tax, not sales tax. As pointed ;ut above, this stand was apparently given implied support in CEPOC vs. Collector , G.R. No. L-20563 (1968), 25 SCRA 789, penned by Justice Angeles. That the posture of private respondents is plausible - despite the subsequent BIR position that cement is a manufactured product subject to sales tax - is supported by the fact that the Court of Tax Appeals, the specialized body handling tax cases, sustained the private respondents in the decisions under review. Under the circumstances, the 25% surcharge imposed in the disputed assess- ment must be deleted. (a) The assessments in question seem to have computed the ~ales tax liability of private respondents on the basis of the tdtal selling price of cement sold . If this was so , a re- computation is in order so as to deduct from the tax base the costs of raw mat- erials used in the production of cement, such as gypsum, conformably with the provisions of Section 186 /now Sec . 199(al7 uu &:: ('

DECISION - CTA CASE NO. 2103 - 8- of the Tax Code as it stood during the tax period here involved: XXX XXX XXX Before closing, it may be noted in passing that in order to obviate any further controversy , cement ~ cement has been expressly made subject to sales tax at the reduced rate of 5% on the implicit assumption that it is a manufactured product and there- fore outside the purview of "mineral product" under Section 246 of the Tax Code . (See Presidential Decree No . 1358 . ) And on the issue of prescription of the govern- ment's right to make the subject assessment, which was upheld by the Supreme Court, we quote the pertinent portions of the resolution of the Supreme Court dated May 7 , 1987 denying the motion for reconsideration of the decision . 3. Finally , the Motion for Reconsideration filed by private res- pondent CEPOC raises anew the issue of prescription of the government's right to make the subject assessment in the light of Sec . 331 of the Tax Code . Unlike the non-retroactivity issue , prescription has been venti- lated by the movant even during the pendency of the case in the Court of Tax Appeals , and in its pleadings filed with this Court . Both the Court of Tax Appeals decision and the decision sought to be reconsidered are , however , silent on that point . We clarify . 582

DECISION - CTA CASE NO. 2103 - 9- Considering that the decision on the tax liability of private respon- dents, as in fact, the dispositive portion thereof ordered them to pay the 7% sales tax, the prescription issue with regard to the movant CEPOC merits clarification. Left unresolved, it will only serve to nurture the lingering doubt which CEPOC continues to harbor insofar as its tax liability is concerned . Besides, the issue was squarely raised at the proper time and in the proper forum . We elect to dis- cuss the issue , but as already said, only as a clarification of the decision which needs no reconsideration on its merits . In order to avail itself of the benefits of the five-yenr prescription period under Sec . 331 of the Tax Code , the taxpayer should have filed the re- quired return for the tax involved , that is , a sales tax return . (Butuan Sawmill Inc . v . CTA et al . , G. R . No . L-21516, April 29, 1966 , 16 SCRA 277). Thus CEPOC should have filed sales tax returns of its gross sales for the sub- ject periods . Both parties admit that returns were made for the ad valorem mining tax . CEPOC argues that said returns contain the information neces - sary for the assessment of the sales .. tax . The Commissioner does not consider sue~ returns as compliance with the re- quirement for the filing of tax returns so as to start the running of the five- year prescriptive period . We agree with the Commissioner . It has been held in Butuan Sawmill Inc . v . CTA , supra , that the filing of an income tax return cannot be considered as sub - stantial compliance with the requirement 563

DECISION - CTA CASE NO. 2103 - 10 - of filing sales tax returns , in the same way that an income tax return cannot be considered as a return for compensatjng tax for the purpose of computing the period of prescription under Sec . 331 . (Citing Bisaya Land Transportation Co ., Inc . v . Collector, G.R . Nos. L-12100 and L-11812, May 29, 1959). There being no sales tax returns filed by CEPOC , the statute of limitations in Sec . � 331 did not begin to run against the government . The assessment made by the Commissioner in 1968 on CEPOC's cement sales during the period from July 1 , 1959 to December 31 , 1960 is not barred by the five - year prescriptive period . Absent a return , or when the return is false or fraudulent, the applicable period is ten (10) years from the discovery of the fraud , falsity or omission . The question in this case is: When was CEPOC ' s �Omission to file �. the return deemed discovered by the government , so as to start the running of said period? It may be recalled that prior to the interpretation made by the Court in the first CEPOr case in 1965 on the nature and taxability of cement , the Commissioner of Internal Revenue was of the opinion that sales tax was not due on cement . Consequently, said private respondent did not file the required sales tax returns on its gross sales of cement for the period from July 1, 1959 to December 31 , 1960 . How - ever, it was only in 1968, and by reason of said interpretation, that the Commis- sioner changed his opinion and assessed sales tax against the private respondents, including the movant CEPOC . The Commissioner contends that his duty to assess the sales tax in question 0r::64

DECISION - CTA CASE NO. 2103 - 11 - arose only after the Court ruled in the first CEPOC case (G.R. No. L-18649, February 27, 1965) that cement was sub- ject to the tax. Thus, according to him, the statute of limitations began to run only in 1967, when the Motion to Reconsider said decision was denied. The net effect of this argument is that the prescription period for the assessment of the sales tax was suspended during the time that the Commissioner held the opinion that cement was not liable to tax. For its part, CEPOC maintains that the statute of limitations cannot be suspended because of the Commissioner's erroneous interpre- tat~on of the Tax Code which is not among the grounds for suspension under Section 333. Following this line of argument, the omission of CEPOC would be deemed "discovered" by the government as early as 1960, after the filing of CEPOC's ad valor:eiii returns. - Whether We consider the discovery of CEPOC's omission to file a sales tax return to have taken place in 1960, immediately after the filing of its returns fof ad valorem tax, or in 1967, when the Commis- sioner changed his erroneous ruling, We will arrive at the same result. Since the subject assessment was made in 1968, the same still falls within the ten-year prescriptive period either from 1960 or from 1967. WHEREFORE, the decision appealed from is affirmed; and it is hereby ordered that petitioner Cepoc Indus- tries, Inc., pay to respondent Commissioner of Internal Revenue the 7% sales tax on cement, subject bf this case, the same to be computed on the basis of the gross 585

DECISION - CTA CASE NO . 2103 - 12 - selling price , less appropriate deductions corres- ponding to the costs of raw materials used in the ma n ufacture of cement, conformably with Section 186 of the applicable National Internal Revenue Code , and without the imposition of 25% surcharge . No costs . SO ORDERED . Quezon City , Metro Manila , October 21 , 1987 . AMANTE Presidi WE CONCUR: , c'.---ROAQU IN e Judge