CTA Case No. 448 (Decision)

f � .�� . ~l.T(:; OP' ITH E f>HII.IPPJ:VES t �u c Cf ()i" TAX APPEALS. QUEWN .:'V .r C.T.A. CASE NO . 448 PHILIPPINE MANUFACTURING COMP NY, INC., Petitioner, versus THE COLLECTOR OF INTERNAL REVENUE , Respondent. X- ~ - - - - - - - - - X DE C I S I 0 N This is a petition for review of a decision of respondent Collector (now Commissioner) of Internal Revenue dated October 31, 1957, assessing petitioner the total amount of ~146 ,666.46, as deficiency sales tax and surcharg.e for the period from the first quarter of 1951 to the first quarter of 1956, plus the sum of ~1 , 000 . 00 as compromise penalty . Petitioner is a domestic corporation engaged in the business of manufacturing and selling cooking oil, soap, lard and margarine . In June . 1956, agents of the Bureau of Internal Revenue submitted a report to respondent recommending that, for the period from the first quarter of 1951 to the first quarter of 1956, petitioner be assessed for deficiency sales tax and surcharge on account of the following alleged discrepancies: (1) That petitioner paid on its sales of refined oil only the 2% miller's tax instead of the 7~ sales tax imposed on a manufacturer; (2) That petitioner deducted from the gross sales of its manufactured articles

DECISION - CTA CASE NO. 448 2 (such as cooking oil, l ard , margarine etc . ) the amounts paid to contractors . from whom it ordered containers, cra tes , cartons , l abels , etc �which were used in the manufacture and sale of its fin- ished products; (3) That petitioner deducted from �the gross sales of its manufaetured articles the . value of r aw-materials purchased from tax- exempt industries; and (4) That petitioner pa id the 2% miller ' s tax on the coconut oil processed and used . by it in the manufacture of its cooking oil , soap and l ard but deducted the value thereof from the gross sales of � its manufactured products . On July 18 , 1956, based on the aforesaid report of the revenue agents , petitioner was assessed by res - pondent for deficiency sales tax and surcharge in the total amount of !"4, 523 , 560 . 89 , computed as follmvs: Market value of the re- � fined oil sold from the 1st qtr . of 1951 to the 1st qtr . of 1956 . � � � f2l.t, 850 , ')90 . 89 7% tax due on P24 , 85o ~ - 590. 89 . . . . . . . . � ~. 1' 739 , 541. 25 Less: Taxes paid���� 495, 011 . 23 Deficiency sales tax. � Total amount paid to contractors and de- ducted from your tax- able sales � � � � � � � P1, 319 9 164. 58 7% tax due on P1 , 319 ,- . 164. 58 �� � � � � � � � Total amount of non- deduct- 92,341 . 52 ible raw materials de - 68 , 156 . 17 ducted from your sales . ::..f>_ _ 9.._'7-3"""4,'""6'""'5""9'~..-�...l.~2 7% tax due on ?973 , 659 ,- 57 . . . . . . . . . . . Market value of the coco- nut oil purposely pro- cessed for use in the manufacture of edible oil, lard and soap � � � ?'76 , 23 1, 626 . 4-2 7% tax due on P76,231 , - 626 . 42 . � � � � � � � � 5,336,213 . 84

DECI 'IOI CTA CASE l O� .4-4-8 3 Less: Taxes (2%) paid �� F 1, 524, 4-7Q.11 3 , 81 1, 74-3 . 7~ Deficiency sales tax. � Total � � � � � � � � � P5, 216, 770 . 9 Less: ~dvance sales tax 1' 597 , 922 . 23 paid. � � � � � � � � Total deficiency sales 3, 618 , 848 . 71 . tax. . . . . . . . . . 9Q4, 712 .1 8 25% surcharge thereon�� TOTAL AMOUNT STILL DUE & COLLECTIBLE . � � � � . 4-, 523 , 560l 89 In its letters dated August 9, 1956 , February 9, 1957 and Nay 26 , 1957, petitioner protested and requested reconsideration and/or reinvestigation of the assessment. On October 31 , 1957 , after a reinvestigation, res - pondent issued a revised assessment demanding from pe - titioner , apart from a compromise penalty of 1, 000 . 00 , t he aggregate sum of P146 , 666 . 4-6 , as deficiency sales tax for the first quarter of 1951 to the first quarter of 1956 , itemized as follows: Total amount paid to contractors which was deducted from taxable sales ��� ; � � � � P1, 319 ,1 64-. 58 7% tax due thereon � � ?92 ' 34-1 �52 Total cost of raw ma- terials purchased from �tax- exempt ir:dustrie~ �p - .357:, 023 . 57 7% tax due thereon. � �- ?24, 991 . 65 P117 , 333 .1 7 Plus 25% surcharge . � � 29 , ~33 - 29 Deficiency sales tax & surcharge due ����� ~1 4-6 , 666 . 29 The revised assessment , in other words, eliminated two pr i ncipal � items of the original assessment andre- tained only the items corresponding to the 7% sales tax on the alleged cost of containers , labels , crates , car- tons , etc . ; the 7% sales t ax on the cost of raw materials

DECISION - CTA CASE NO . 4-4-8 4- purcha sed from tax- exempt industries; and the 25% sur - char ge thereon. On November 4, 1957 , the revised assessment was received by the petitioner and was appealed to this Court on December 2, 1957. During the pendency of this case , res pondent ' s counsel filed a "Manifestation" agreeing with the pe- titioner that the "Commissioner of Internal Revenue cannot impose the compromise penalty v.rhere the petitioner has not agreed thereto 11 , thus in effect waiving his claim to the compromise penalty . The principal issues to be resolved in this ca se are the following: (1) Whether or not the disallowance of the total amount of ?1, 319,1 64-. 58 which was deducted by the petitioner from the gross selling price of its manufactured products as cost of co ntainers , ca rtons, crates, labels , etc . is legal; (2) Whether or not in connection vri th the first issue , the assessment has partially prescribed ; (3 ) Whether or not the disallowance of 357 , 023 . 57 representing the cost of raw materials purchased from tax- exempt indus- tries a nd deducted by petitioner from the gross sales of its manufactured articles is correct . (4) Whether or not the i mposition of the 25% surcharge is valid . With respect to the first issue it appears that the sum of 1'-'1, 319 , 164-. 58 which \�ras deducted by petitioner from the gross selling price of its manufactured oils , soap , lard a nd mar garine, represents the total amount I

DECISION - CTA CASE NO . lt.l1-8 5 paid by it , during the period in question, to various entities for freight and hauling charges , as \�Tell as for materials such as can, buckets , cartons , labels, tags , liners , vmoden erates , decora ted tin plate s etc . used in the production and sale of its finished products . The breakdown of said amount is as follows: Philippine Tin Lithography (cans & buckets) � � � � � � � � � � 588 , 740 . 74 General Offset Press (cartons) � � � � 522 , 620 . 63 South Sea Printing (Labels, liners , tags & cartons with \veight figures) . 68 , 581 . 39 M. J . Gonzales & Ass . (decorated tinplates) � � � � � � � � 10 , 156 . 99 Sarangaya Const . etc . 9, 888 . 75 (wooden crates) ����������� Advertising Associates (decorated tinplates ) �������� Tan Chong Pin HRR (freight & hauling) ��������� 7,029 . 44 General Advertising Agency 17. 00 (article unascertainable) ������ Pacific Offset Press (decorated tinplates) � � � � � � � � 17 , 762 . 45 Hanalang Gen. Advertising 9, 790 . 69 (decorated tinplates) ������� � Lhrayvray Publications (labels & stickers) . � � � � � � � � 2,950 . 03 Standard Bookbinding (wrappers) . � � 1, 350 . 00 Allied Printers (decorated tinplates) . 253 . 96 Philippine Business Forms (cartons) . � 19, 795 . 26 Ca~ho Hermanos & J . s)�::P~1,~3~3:~:2:!:_::6::l0::Q8::~~:-:9:2:6:a TO! AL � � � � � � Anastacio (label � ����� � ��� The pertinent provision of the Revenue Code in this issue is Section 186 thereof which runs as follows: SEC . 186 . Percenta~e tax on saJes of other articles . - There shall be levied, assessed and collected once only on every original sales , barter , exchange , and simi- lar transaction either for nominal or valuable considerations to transfer ownership or title to, the articles not enumerated in Section one hundred a~~ eighty- four and one hundred and eighty- five a tax equivalent to seven per centum of the gross selling price or gross value in money of the articles }

DECISION - CT1i CASE NO . 488 6 so sold , barter ed , excha nged, or t r ansferred , such tax to be paid by the manufacturer or producer : Provided , irhat where the articles are manufactured out of materials subject to tax under t his Section, t he total cost of such materials , as duly established shall be deductible from the gross selling price or gross value in money of the manufactured articles: x x x. Tan Chon~ Pin l"JRB.,.J.E.r_ei~b.t and HauJin~) ~f? , 029 . ~ <li'rom a perusal of Section 186 of the Revenue Code it is at once patent that cost of freight and hauling is not deductible from the gross selling price of petitioner ' s manufactured products . Only materials are deductible and verily frei ght and hauling are not materials (Insular Lumber Co . v . Coll . of Int. Rev ., G. R. No. 1- 7190, April 28 , 1956) . From the language of Section 186 of the Re venue / Code it would seem that what is deductible from the gross selling price of manufacturers like petitioner is the price of materials obta ined by them from manufacturers or producers thereof which a re also subject \ to the sales t ax upon sale , barter or exchange of said ma terials . The theory is that since the ma terials have already been subjected to the sales tax, they should not be again subjected to the same sales tax ~orhen used by the subsequent manufacturers . The material covered by the la-vr include ma terials

DECISION - CTA CASE NO . 488 r 7 used for the marketing of the finished products . Thus , it has been held that the cost of paper bags in the sale of ice cream are deductible (Arcega et al . v . Com..rn . of Int . Rev ., C. 'r . A. Case No . 574, Oct . / 30, 1964, citing La Tondefia Inc . v . Comm . of Int . I Rev., C. T. A. Case No . 1017, Nov. 9, 1962). The cost 1 of bottles, tin cans, cartons and v.rooden boxes used \ \ I as containers of finished products have been declared \ by the Bureau of Internal Revenue to be deductible \ from the gross selling price of manufactured articles I \ \ sold. Containers are , as a rule, considered raw materials for purposes of sales tax. Therefore , the total cost of containers, if purchased from manufacturers primarily engaged in the manufacture thereof, is de- ductible from the gross selling price of the manufactured articles sold . (B. I . R. Ruling , Oct . 10, 1955) The cost of bottles , tin cans and carton and wooden boxes which are used by the local manufacturer as containers of the articles it manufactures is deductible from the gross selling pri ce or gross value in money of the articles manufactured if the local com- pany or manufacturer purchased the contain- ers directly from local manufacturers there- of . (B.I.R. Ruling, Feb . 17, 1955) Containers are , as a rule, considered, for sales tax purposes, raw materials . Accordingly, the cost of tin containers purchased by a pop corn manufacturer from the manufacturers thereof and used by the pop corn manufacturer thereof as containers for his products vrhich are sold together with said containers is deductible from the gross selling price of said products, it being understood that th epamidanthufeac7t%ursear leosf said tin containers had tax on his sales thereof, pursuant to section 186 of the Tax Code,_ as amended by Republic Act No . 1612 . (B. I . rt . Ruling , Jan. 11, 1957) 1 ,1

DECISION ? CTA CASE NO . 488 8 The labels and stickers involved in this item were made by Liv.rayway Publicatio ns to the specifica- tion of and exclusively for petitioner . The stickers and labels bear the printed 1vord 11 Venus 11 and are used for the containers of petitioner ' s finished products and becomes a part thereof. For making these stickers and labels , Li'I.�Tayway Publica tions is classified by Section 191 (17) of the Revenue Code as a contractor subject to the contractor ' s tax of 3% and not to the sales tax . Thus provides said law: SEC . 191 . Contractors, proprietors or operators of dockyards and others . - A con- tractor ' s tax of three per cent of gross receipts is hereby i mp osed on the ~allowing: XXX XXX XXX XXX (17) Printers , bookbinders, lithographers and publishers except those engaged in the publication or printing a nd publication of any newspaper , ma gazine , review or bulletin v1hich appears at regular intervals , vii th fixed prices for subscription and sale and v.rhich is not devoted principally to the publication of advertisements ; XXX XXX XXX XXX As a matter of fact a letter of Liwayway ' s acting General Manager to res pondent, dated July 3, 1958 reads thus: As per your letter of June 27th, we ..;-rould like to i nform you that our records concerning our printing contracts with the Phili ppine Hanufa cturing Company in 1951 had been destroyed, and that since 1952 , we have been dealing vli th the Philippine Advertising Associates . However, please be informed that the Liway;,vay Publica tions, Inc . ha s paid the 3%tax re quired on all recei pts of payments for our printing jobs .

DECISION - C�fA C.ASE NO . 4-4-8 9 In fine the rna terials supplied by LiwaYvJaY Pub- lications to petitioner are _not materials made by manufacturers subject to sales tax on the first sale , barter or exchange and are not deductible from the gross selling price of petitioner 's finished products . outh Sea Printing (Labels, Liners , Tags Cartons 1Hth Weight Figures - ?68 , 581 . 39 For the labels and tags involved herein, labo~ and materials we re supplied by South Sea Printing; for the liners, petitioner furnished the grease proof paper and South Sea Printing merely affixed the de- sign, die-cuts and delivered the finished liners to petitioner; and as for the cartons, petitioner furnished the cartons and South Sea Printing merely blotted out the �Height figures and printed ne'l:v 1..reight figures thereon. The labels were made in accordance with the specifications of petitioner and the same bear the printed \vords 11 Philippine Hanufacturing Company11 and the brand of petitioner ' s products such as 11 Venus 11 , 11 Sunshine11 and 11 Victor 11 � As in the case of Liwayway Publications, South Sea Printing is taxable as a contractor under Section 191 ( 17) of the Tax Code and not for sales tax . In fact, a certification from its manager states that South Sea Printing is a printing contractor and all its receipts from the Philippine l:Ianufactur ing Company from 1951 to 1956 have been declared for the contractor ' s

DECISION - CTA CASE NO . 448 10 percentage tax. Accordingly , the sum of P68 ,581.39 paid by petitioner to South Sea Printing is not deduct- ible . Cacho Hermanos & J . Anastacio CLaRels - & Stickers ) - f3,6o8 . 96 This item involves labels and stickers supplied � to petitione r by Cacho Hermanos and J . Anastacio , made in accordance with the specification of petttioner. The making of such labels and stickers as in the Li- wayw,ay_ case is essentially a printer ' s job and the I transactions between petitioner ,and Cacho Hermanos and J . Anas tacio are subject to the 370 contractor 1 s tax under Section 191 (17) of the "{evenue Code and not ) to the sales tax. This. item is not deductibie . Philippine Ti n Litho~ravhy (Cans & Buckets ) - ?588 , 7~ . 7~ A sample of the contracts between petitioner and Philippine Tin Lithography provides that: 11 PNC will furnish the tin plates . This order is subject to the terms and conditions on our contract for assembly and deli very of cans and bu.ckets . u Elaborating on this transaction petitioner ' s witness said: A. \ve have certain suppliers - like Philip- pine Tin Lithography . Before the tin pla tes a re sent to be formed into tin cans , these sheets are sent to M. J-. Gonzales where they put certain signs or decorations . Q. In other words, the tin plates are purchased as ra-vr ma terials bY- the petitioner? A. Yes , sir .

DECISION - CTA CASE NO . 4L~8 11 Q. From the time of your purchase , '\tTha t is the next step done by the petitioner to make them into packaging materials'? A. 'rhey are sent to the lithography v1here the ~'J.me of the product is printed . Q. And after the printing , therr these tin plates are converted by a certain con- tractor for the purpose of making them into containers'? ,\.t~.. . y es , sJ..r . Q. And once these are converted into con- tainers , they are delivered to the petitioner for use in the sale of its manufactured products'? A. Yes . The contracts bet1.veen petitioner and Philippine Tin Lithography \1rere obviously for service or piece '\oTork , that is , assembling the tin sheets of petitioner into cans and buckets (Article 1715 , Civil Code of the Philippines) , not of sale , barter or exchange . Philip- .. pine Tin Lithography is therefore subject to the 3% contractor ' s tax under Section 191( 18) of the Revenue Code , not to the sales tax . This item is not deductible . H., J t GonzaJe,s and...)\ssociates (Decor:ated Tin Pl ates ) - l?1 Q , :1 ~6 . 2st As may be seen from ,..,hat has been' said in the Philippine Tin Lithography item, all that N. J . Gon- zales did was to design decorations in tin plates and his contract l.oli th petitioner was obviously one for service or piece 1.vork and not one of sale , barter or exchange by a manufacturer subject to sales tax .

DECISION - CTA CASE NO . l-t48 12 This item is not deductible . Ivlanalan' General Aov:er:tisin~ (Decotated TinpJates) - P9 ,790.69 Advettisin~ Assocjatea (Decotated Tin,pJates ) - P56 , 618 . 29 Pacific Offset Ptess ~ecorated TinpJates) - P17,762,45 Allied Printers (Decotated T1r~lates ) - ?253 . 96 In these four items, all that Manalang General Advertising, Advertising Associates , Pacific Offset Press and Allied Printers did vTas to decorate the tin- plates supplied to them by petitioner and charge the latter for the work as in the case of M. J . Gonzales and for the same reason stated therein these items are not deductible. Standard Bookb 1 ndin~ (Wrappe ts) - P 1,350, 00 It is admitted that petitioner furnished the materials (pulp board in large sheets) and Standard Bookbinding merely cut these into sizes for pulpboard innerwrappers for toilet soap. This obviously involves a contract for service or piece 1..rork and not sale of materials to petitioner . Consequently , the sum of ~1 ,350. 00 paid to Standard Bookbinding is not deduct- ible from the gross selli.ng price of petitioner 's products . Petitioner admits that the kind of articles \

DECL3ION - C':rA CASE NO . lt48 13 involved in this item is not ascertainable and it has not shown the nature of the transaction between petitioner and General Advertising Agency . In other words petitioner has not justified the deduction. Since an assessment is presumed to be correct and it is the taxpayer ' s duty to justify a deduction this � item cannot be deducted for failure of the petitioner to prove its claim. (Inter - Provincial Bus Co . , Inc . v . Coll . of Int . Rev ., G. R. No . L- 6741, Jan. 31 , 1956; Perez v . Court of Tax Appeals, et al ., G.R . No . 1- 10507 , Nay 30 , 1958; Coll . of Int . Rev . v . Bohol Land Transportation Co ., G. R. No . 1-13099 , April 29, 1960 . ) San }B ~nel Corporation (Tooth;pa s te 'rubes) - ?702 . 38 This item which is touched in petitioner ' s Supple- mentary Memorandum is not covered by the assessment - in question and has no bearing to the issues of this case . Sarangaya Construction and Woodcraft supplied petitioner wooden crates used by the latter for packing its products in bulk. Said supplier appears to be a manufacture~ in the business of supplying other manu- facturers with wooden crates . There can be no question of the deductibility of this item for it is not con- troverted that Sarangaya Construction and Woodcraft paid 75~ sales tax for the crates it sold to petitioner .

DECISIO CT C S� NO . 448 This item is deductible . General Offset Pr ess ( a r to ns) - 522 , 620 . 63 These i terns refer to cartons printed 11 Purico" with perforation and ready to be folded into boxes to be used as containers for petitioner ' s products for mar ket- ing . These were supplied to petitioner by General Offset Press and Philippine Business Forms which are in the business of supplying cartons to manufacturers . A printer is classified as contractor under Section 191 of the evenue Code but to our mind a printer is a contractor only vrhen it undertakes an essentially printi job. vhen it also engages in the making of pre- formed boxes to be used as containers , it does a manufacturing j ob , and as such is subject to the sales tax . The making of boxes is not a printing activity . A box to be used as a container is not a printed matter but a manufactured article (33 vords and Phrases , p. 64o , citing raut v . United States , 134 F. 701 , 142 F 1037) . These'items are deductible . espondent Commissioner urges that since it has not been shown that General Offset and Philippine Busi- ness Forms paid sales tax for their transactions with petitioner the latter is not entitled to deduction of the price of the materials it purchased from said suppliers .

DECISION - CTA CASE NO . 448 15 Whether or not General Offset Press : and �Philip- pine Business Forms paid sales tax for the materials sold to petitiomer and used by the latter for its own manufacturing purpcses , the price of materials so purchased by petitioner is deductible . There is nothing in the language of Section 186 of the Revenue Code that requires actual payment of the sales tax on the material as a prerequisite of the right to deduct the value of said material when used for manufacturing . The tax is presumed to be collected by the Bureau of Internal Revenue at the proper time and from the proper . taxpayer - the Philippine Business Forms and General ~ ) Offset Press in this case ; (Cebu Portland Cement Co . L ~) v . Collector (now Commissioner ) of Internal Revenue , ~ G . R . No . L- 20563 , Oct . 29 , 1968 . ) . And there is also good authority to the effect that the fact that the suppliers of petitioner did not actually pay sales tax for such materials is no reason for burdening pe - titioner with said sales tax (Abad v . Court of Tax Appeals and the Commissioner of Internal Revenue , G. R. Nos . L- 20834&20903 , October 19 , 1966) . / ? S('fl.--+ilt 3 7d- We find no merit in petitioner ' s alternative assertion that at least the cost of raw materials used by the contractors, whether supplied by petitioner or the contractors themselves , _should be deducted from the gross selling price of petitioner ' s products . Assuming arguendo that the contention of petitioner

DECISION - CTA C.b.SE HO . 448 has a basis in l aw there i s no evidence a s to the costs of said rm., materials . There is no means by which \ve can determine the deductible amount and the QDYA of proving said amount is on the taxpayer and his failure to comply with this burden is fatal (Limpan Investment Corp . v . The ColJ. � of Int . Rev ., CTA Case No . 1397 , Dec . 11 , 1967) . In fine only the total amount of P?66 , 859 . 94 is properly subject to 7% sales tax , itemized as follows: Philippine Tin Lithography (cans & buckets) � � � � � � � � � � ?588 , 740 . 74 South Sea Print i ng (labels , liners , tags & cartons with weight figuresl 68 , 58 1. 39 M. J . Gonzales & Associates (decorated tinplates ) � � � � � � � 1o, 156 . 99 Adver t ising Associates (decorated t inplates ) � � � � � � � � � � � � � 56 , 618 . 29 Tan Chong Pin MRR (freight and hauling ) ������������ General Adver tising Agency (article unas certainable). � � �� � � � � � � 17 . 00 Pacific Offset Press (decorated tinplates ) � � � � � � � � � � � � � 17,762 . 45 Manalang Gen. Advertising (decorated tinplates) . � � � � � � � 9 , 790 . 69 Li"t.ray1,1ay Publications (labels & stickers) � � � � � � � � � � � � � 2 , 950 . 03 Standard Bookbinding (wrappers) ���� 1' 350 . 00 Allied Printers (decorated tinplates) � � � � � � � � � � � - � �� 253 . 96 Cacho Hermanos & J . Anastacio (stickers & labels) � � � � � � � � � ~ , 6Q8 . 9Q T01AL � � � � � � � � � � � � � � � P76 , 859 . 94 With respect to the second issue , which is prescrip- tion, petitioner ' s position is that the portion of the assessment covering the first quarter of 1951 to the thir d quarter of 1952 has prescribed because the quarter - ly returns therefor e -r,.rere filed on April 19 , 1951, July 19 , 1951 , October 18 , 1951, January 18 , 1952 , April 19 , ~- �__

DECISION - CTA CASE NO . 448 17 1952 , July 21, 1952 and October 20 , 1952 , respectively, and the revised assessment was received only November 4, 1957 . In other words , petitioner postulates that the five- year limitation should be counted from the filing of the returns to the date the revised assess- ment was received . Alternatively, petitioner maintains that even assuming arguengQ that the period of prescrip- tion should be counted from the original assessment , the portion thereof covering the first and second quarter of 1951 has prescribed . On the other hand , respondent claims that no part of the assessment has prescribed because: (1) the deficiencies in question were just reiterated in the revised assessment of October 31, 1957 and , therefore, they should be deemed originally assessed on July 18, 1956; (2) the quarterly returns filed were false or fraudulent and , therefore, the period to assess the tax is ten ( 10) years� from the discovery of the falsity or fraud pursuant to Section 332(a) of the Tax Code; and (3) petitioner should be estopped from claiming the defense of prescription because it had occasioned the same or contributed to it . The law requires that the tax shall be assessed within five (5) years after the return was filed (Sec . 331, Tax Code) . HO\!/ever , in the case of a false or fraud- lent return with intent to evade tax or of a failure to file a return, the tax may be assessed at any time within ten (10) years after the discovery of the falsity,

DECISION - C'rA CASE NO . l.t-48 18 fraud or emission (Sec . 332 Ca) , Id) . Interpreting Section 332 (a) aforesaid the Supreme Court said in Jose B. Aznar v . Court of Tax Appeals and Collector of Internal Revenue , G. R. No . L- 20569 , August 28 , 1974: Petitioner argues that Sec . 332 of the NIRC does not apply because the taxpayer did not file false and fraudulent returns with intent to evade tax , vThile respondent Commissioner of Internal Revenue insists contrarhrise , with respondent Court of Tax Appeals concluding that the very 11 substantial underdeclarations of income for six conse- cutive years eloquently demonstrate the falsity or fraudulence of the i ncome tax returns with an intent to evade the payment of tax. " To our minds YTe can dispense vii th these controversial arguments on facts , although v1e do not deny that the findings of facts by the Court of Tax Appeals , supported as they are by very substantial evidence , carry great \veight , by resorting to a proper in- terpretation of Section 332 of the NIRC . ~ve believe that the proper and reasonable interpretation of said provision should be that in the three different cases of ( 1) false return, (2) fraudulent r eturn with intent to evade tax , (3 ) failure to file a return, the tax may be assessed , or a proceed- ing in court for the collection of such tax may be begun without assessment , at any time within ten years after the discovery of the (1 ) falsity , (2) fraud , (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent re- turn viith intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision vThich segregates the situations into three differ- ent classes, namely - nfalsity" , 11 fr a ud 11 and "omission" . That there is a difference between "false return" and "fraudulent re- turn" cannot be denied . While the first merely implies deviation from the truth, v1hether inte nti on:'ll or not , the second im- plies intentional or deceitful entry with intent to evade the taxes due .

DECISION - CTA CASE NO . 448 19 The ordinary period of prescription of 5 years within which to assess tax liabili- ties under Sec . 331 of the NIRC should be applicable to normal circumstances , but whenever the government is placed at a dis- advantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns , fraudulent return intended to evade payment of tax or failure to file returns , the period of ten years provided for in Sec . 332 (a) NIRC, from the time of the discovery of the falsity , fraud or omission even seems to be inadequate and should be the one enforced. There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court of Tax Appeals that Sec . 332 (a) of the NIRC should apply and that the period of ten years within which to assess petitioner 's tax liability had not expired at the time said assessment was made . Under the foregoing doctrine the five-year period for prescription does not apply to cases where there is deviation from the truth in the return thus making it a false return. There is a deviation from the truth in petitioner ' s returns and they are thus false returns . It appears therein that petitioner deducted from the gross selling price of its products the sums paid to its suppliers of materials on the false assump- tion that the transactions betvJ'een petitioner and suppliers were subject to the sales tax when in fact they were not . Because of t his falsity or deviation from the truth assessment may be made within ten years from the discovery of the falsity . Assuming that the falsity of the returns vias discovered in 1951 1.vhen the returns were made, the ten-year period provided

DECISION - CTA CASE NO . 448 20 in Section 332 (a) of the Revenue Code in case of a false return had not yet lapsed in 1956 when the ori- ginal assessment vras made nor in 1957 when the revised assessment vias received by petitioner . And now we come to the third issue . It is admitted that in the manufacture and sale of its products during the period in question, petition- er used raw materials (corrugated cartons and papers ) purchased from tax-exempt industries under Republic Acts Nos . 35 and 901, the total cost of which amounted to 193 57, 023 . 57 . Prior to the effectivity of Section 186-A of the Internal Revenue Code on June 22, 1957, which exempts the costs of raw materials purchased from tax-exempt materials used in the manufacture of finished articles , the settled doctrine is that the cost of materials purchased from tax-exempt industries are not deductible from the gross selling price of the manufactured article in v1hich they were used . (Tan Chiu v. The Coll . of Int . Rev ., G. R. No . L-15008, Jan. 28, 1961; Pacific Orffgen & Acetylene Co . v . Comm. of Int . Rev . , G. R. No . L- 17708, April 30, 1965; 13 SCRA 622-625. ) Considering that this case involves the period from 1951 to 1956, that is, prior to the effectivity of said law, said ruling of the Supreme Court in the aforesaid cases is control- ling . Tax lavrs are of prospective effect and there is nothing in Section 186 of the Revenue Code that

DECISION * CTA CASE NO . l~48 21 provides for its retroactive effect . 'rhis i tern is not deductible . Finally , we come to the last issue , the 25% sur - charge for late payment prescribed in Section 183(a) of the Tax Code . The imposition of this penalty is mandatory , and neither the Commissioner nor the courts may waive the same . It is enough that the tax was not paid on time in order that the surcharge becomes imposable , it being immaterial whether the non- payment or delay in the payment of the correct tax was due to fortuitous events or circumstances not attributable to the tax- payer . (Lim Co Chui v. Posadas , 41 Phi1 . 4-60; Republic v . Luzon Industrial Corp . 102 Phil . 189 , cited in Ar cega et al . v . Comm., GTA ,Case No . 574, Oct . 30 , 1964 ; Koppel v . Call ., 87 Phil . 348; See ~also Liddel & Co ., Inc. v . Coll �., 2 SCRA 632 ; and Yutivo Sons Hardwar e Co . v . Court of Tax Appeals , et al ., 1 SCRA 160 .) Appar ently , the only exception to this is vJhen the no n- payment or delay in the payment of the tax is due to acts or rulings 'of the Government itself v1hich was� relied upon by the taxpayer . (See National Po-vmr Corp . v . Arafias , G. R. No . L- 21402 , Sept . 23 , 1968 ; Continental Nfg . Gorp . v. Comm�. of Int . Rev., CTA Cases Nos . 1027 , 1324 & 1351, Dec . 27 , 1968 ; Connel Bros . v . Call . of Int . Rev., G. R. No . L-1 5470 , Dec . 26 , 1963 ; 9 SCHA 738 - 741. ) In this case \ve find no

DECISION - CTA CASE NO . 448 22 such positive act or ruling which prompted the delay in the payment of the correct sales tax. Consequently, the imposition of the 25% surcharge is in order . To summarize , petitioner is liable to pay deficiency sales tax and surcharge for the period in question in the total amount of ~5 , 250 . 98 computed as follows: Total amount paid to contractors and de- ducted from taxable '?66 , 859 . 94 7%sasleasle�s ���� � � � � � � � � � � � tax on ?766 , 859 . 95� � � � � � � � � � � � � 53 , 680 . 20 Total amount of raw materials pur- chased from tax- e.xempt industries � � � �357,023 . 57 Tfo sales tax on . . � � � � � 24, 991. 6;1 P3 57 ' 023 . 57 . � � � Total deficiency sales tax . � � � � � � � � � � � � � P 78 , 671 . 85 25% surcharge thereon � � � � � � � � j9,6.6.2...9.6. Total amount due & collectible . � � � � � � � � � � � ~ 98 , 339 . 81 \1/HERIJ:FORE: , the decision appealed from is hereby modified . Petitioner is ordered to pay to the res - pondent Commissioner of Internal Revenue or his author- ized representative the total sum of ?98,339.81 as deficiency sal�es tax and surcharge for the period under review. Without pronouncement as to costs . SO ORDERED . Quezon City, September 3, 1974. IL~-1- ~ RiHON L. AVANCEf{A Associate Ju::lge /E CONCUR: ../