CTA Case No. 182 (Decision)

__, I'I~I'UIJLIC O'P' THg PHILIPPlN , COURT OF TAX APPEALS WANll.A . LA TOOD � I! P' etitioner, - versus .. C.T.A. CASE NO. 182 ,~~ COLLECT(){ L \~ , REVENUE. e pondent. ~y � x� � - ~ - - - - - - � - - �x N D EC I~ 1 This is an appeal from t he decis on of the res- pondent Collector of Int ernal Revenue assessing nd demanding from the petitioner, La Tondena, Inc., the payment of the sum of ' 68,153. 73 as s~ec f_j_c t_ax on 391,396 proof liters of denatured alcohol produced by it during the period fr) July, 19~1 to ~ay, 19~4, inclusive, plus penalty in the amount of 10,000.00 for alleged !legal removal of alcohol from the place of product on w thout prepayment of the spec fie tax due thereon in violation of Sect on 124 in relation to actions 127 and 133, and penalized under Section 174 all of t e at!onal Internal avenue ode. The p tit!oner , La Ton na, Inc. is a corpora- tion duly organ zed and existing under the laws of the Philippines. As de fro the manufacture of wines and liquors , the petitioner 1& also a duly licensed rec- tifier of alcohol wh�ch is re ove from the place of original distillation without pr epayment of the spe- cific tax but under bond approved by the respondent conditioned upon petitioner' pay ent of the specific 651

� \[(). 182 tax that y be due on the finis ed roduct, as pro- vided for n ect on 129 of the T xCodo. tis also engaged in denatur ng ethyl alcohol f r the anuf c- ture of ru bing alcohol either for its own use or for sale to the public under the rand �Jai Ala!� ru bing alcohol or for the use of the d!ff rent r ntees of special for la � approved by th re u of nt rnal Revenue , for the anufacture of fuel , shellac. r bbing alcohol and other ro ucts s c!fled n the grantee ' s permit. In denaturing alcohol, the petitioner uses three formul as , n ly: (1) nder the en r 1 for 1 us ng thyl alcohol an pyri ine ases as ingre tents which composition is used for fuel or light) (2) under the special for 1~ using castor o 1, or than 1 an ur n1n solution, or e oth r ingredients Wh1c co osition used for the nu etur o shellac , woo dye, or fo some other n us ria rpo e ; ~nd (~) under t e spe� elal formulas en rat 1n t report (pp. l � l , rae.) of gents arian � Uy enane1o h ch are authorize y t � ure u of Intern 1 avenue. fore denaturing the alcohol for each general or special for 1 , t pe itloner if for its o us � or the different ran s if or t ir o use, secur s first the approv 1 of the ollector of Int r al evenue. thereafter , a date i ixed or the enaturlng o he alcohol , and at the place and on the date and hour fixed , a denaturing co lttee composed of embers appointed by 652

�� r-.o. 182 - 3- the oll ctor, from thre (3} to ftve (5) in nu. er, witness the pour ng of t �ngr d ents p c1fied in the approv d for ul to the coho! , and th result- !ny co pound s th n c containers or dru s htch ar p nted n 1 ttercd \1 th t e 1nfor , tion aa ap cifie y th r u of nt r n 1 venue, d �f- ferent �n color fro the ru s us d for tax p3!d 1� cobol. r su ject tt r oft pre ent ~ss ss ent nd de and re th d n tured lcohol used by th p titionor in the nuf cture oi ts �J Al u ing l eo ol and the lcohol sp call denatured by the pet t�o r nd sol l ffeaent purch s rs. 11 thy! ale hol n t in 189� proof, and 11 th l� cohol d n ere �nter d t �t on r nd t - teated y nt tiv th nt rn 1 evenue n Off c al gt t r oo s Ace unt ich is o w er n onlv d n t red alcohol re reco.rde � J un 24, 19 ' nternal v nu g nt ar ano c 0 v. P. Uy n r ported, ft r du nv st � ation, th t ro July, 1951 to v, 1954, t p t!tion r did ot pay the p c f c tax on 391 , 29 proof liters of ethyl cohol hich r enatured n e d �n th pre- para lo of ru bing alcohol and oth r odic� 1 pr par - tiona, t , 1 p id th 7~ sal s on th al of the &aid pr parations. ih sp cif"c ta x ue t r au co pute o 273,977.20, but n- 653

� E � 182 a y p d th sum of 5 1823.47 as sales tax, -che r~sp dent, on July 26, 1954, ssu d an ass ss nt and demand or the pay ent of the su of 268 , 153.73 ssp cific t x on saia alcohol, pl us the nt of . 00 as p n lty, which assess nt an d nder r vi � the only quest�on to b cia d n th s pp a 1& wheth r or not th pe �t on r s ubj ct to the specific t x prescr� n ~1 in r lat on to - ~�ction 1 , oth of the t n 1 Internal v nu Cod , on its �3a! Al 1 r ng alcohol nd th sp c lly denatur d lcohol �h �ch t roduced nd arutfact red .n acco d nc 'J th sp c � 1 for 1 s for ts � f f r~nt custo ers. The p rt nent pr vi ions f of the Tax C d rov!d s follo s : "(a) If pro uced ro n pa, cocon t~ cass v , ca ot , fro the juice, yrup, or , or per pr of liter� s venty c can , �( ) If produced fro ny oth r L1Dt - rials , per prco 1 ter, n p sos. �thla tax shall b propor ion lly in- creased for any strength of the pir ts taxed over oroof f~ft _ M 654 �

��� � 182 anuf ctured n pro c d by the petitioner herein, so of ic were us d y it in the anuf actu.re of it "Ja1 lai" rubDing alc ohol an tho re t sold to t diffe:cent ante 1 iven per its y the Bureau of L&teroal ven,~e, are mgdic irial orgRarationt, th chief ln edient f which s distilled spir t s , nd ence u ject o e ecif c t x on di ti l ed spir ts. h f t in lry t erefor turns upon th an- in of the t r d c al pr parat ons~ and Atoilet ... reparation "� fh f llow 9 deftnition ar In oint' dicin 1 preparation'- the term has aning n tra nd eo rce as c on & Ch and 1 e criptive of and re- fers t o au stance used in die ne and re� pared or he use of t a othecary or phy� ci n to b d n tered as r edy n d - $0." La 1ct1onary with ronounc1at1on, allant1n , h 1 pplne Edltion. M " he expre sion ' ed cin 1 prepar~t on ' u �n a iff ct arch , 1883, � 121 , chedul A, 22 Stat . 494, n uch t cles as are of use or believed y tl pr scr er or user fairly nd honestly to e of use, cur�ng or allav ating or palliating or pr - nt so s se f ffect on of th hu an ra � ( ord Phrases, Vol. 2 � p . 617.) � � ed!~ nal' ns c r t ve or 11 v a- tlve; uae f r the cur or llev atlon of bo y disorders.� ( or s Phr s s , Vol. 2 , p. 616.) 655

llt,;IS I ~.T . A . C 'E 'v� 182 �ro 'let a er� usually y Flori a ater, used n or a a r hn r of th In ernational ict par 0 ro �� � t ctorino � acist of th e ~ stif ed to t effQct Phar ac ut cal La a ory, at d n tur d leo ol could CO lS. r d dici 1 p.t'epara lo"l ccuc; t c n n ant s pt c nh b ts the ro~h of acter ( p. 1~ �121, 135-1 �t . s. n.}. hi v e h r d y s. � et Ch f In t�tut (Jp. 215- 219 t.s.n.), y er n a t"llo, v"dent P s cian o th Phil pp n al osp�t 1 (pp. 397- 6 t.s . n. ); y Dr � =-s � l a- Z lc t:. T co, ar ac t of th 1 Hosplt l .n. � 151- 153 t. ; an y g 1 Ar lo, har c &t rd nstructor o t oll 90 acy, Univ rs ty of t h �1 � JP n ~ . ( tsn p.l78-180.) 1 aht of th l i cr 1 an :in 0 te .. die n 1 pr par t!on, " nd th op n on of xp rt5 as st t d abo n c ns r ng that the rug an Co otic ulat ons s cl . lcohol c n (s 43 o.c. o. 2, f � 1947, pp. 06- 41 ) , we hold ther f rff that th .,p c lly n ur d alcohol nuf ctured and rod ced by the pc't ti n r s a di- to deter n h th r or not distilled sp its s the chief ingred nt of th n - 656

� - c.'!.... LSI'"' � 102 . A. 1\SE - 7- tur d. t ,yl leo ol in que s tion . Di iC ...l l ~ ir:lt ~ as def .oci i 1 ...~ction 1 33 o t Tax ncludet Thus , und r t h �s d~f n tion , athyl lcohol 1~ e sidered distill d ir ts . .ons c;der1n th � S't t - t ory clefinitio. nd Con r 1 C o� .46 of t u e u of Int nal ,evenu � dot d ept r 1~ , l 4 , h ch a n p rt t at ' alcohol shal. con � der d tt e li f "ngr do n~ of c al prep rat#ons if a r exclu in at r, alcohol constitut s . re th n . of pr&p ti n by volu D o ar of th opinion n 1�0 h 1 th t h ec� lly d natured lcoh and r oduc d y th p t�t � on r h r in, so .e of� :11 ch were s d y t !.n t h anu ctur oi ts �Jai la" x�u _ng ytd the r t ')1 to "t o cu~ rs ..o U S(j t ru in lc d or sur !cal purpos ' ...u j ct t - th sp~c if c t,; X re cr ed by vCCt �on 127 ' n r 1 lt cti n l ~ ox h �� X Co A cureory por~sal 0 c d.ffer nt foru.ula U6e by the t tton r , a t ng the p ctally d n - ture aieohol upports th s conclusion. lthes f r - las shaw that t yl lcohol hich y #xpr~ s� provl- ion of !a is 1 ss r � ~ ief ingredient of :f.d pr par tions. o ev r, the petit paration the chief ingr di t of ich 1 !stilled 657

c.r.A. � 182 - 8- spirits to ,be subject to spec fie tax, the same must be potable or~ pable of being taken internally. , It argues t at since the denaturants us d render d the al~ohol unfit for internal ~ons pt!on, it follo s that the specially d natured alcohol cannot be con� sidered as distilled spirit& taxable un er ~ect on 127 in relation to ection 133 of the Tax Code. e are of the opin on that uch an interpret � tion 1s er roneous an farfet~h� � The law 1 eneral and apea s of �. .di~ !nal and toilet preparations� and �all other preparations� of wh ch dlst lled spirits is the chief ingredient. t oes not a any dt t net on but subjects su~h preparation alike to the pectfic dittloauere de- reov r, in the l o& t!on of the sp c fie tax on alcohol as a di~inal prep I tion, th c cu st nc of whether it is c pa 1 of oral lnt or n ernal con� sumption is not taken into account. It is uffic!ent that al~ohol has b n anuf ct red and produced , and the specifi~ tax thereon lately tt ch e. (Sec . 124, lso aint t th t th � I. .c. ) � lcohol 1n The pat tio r que&tion was used for in ustries n s th refore x pt from specific tax un er act on 128 of the T x Cod which reads as foll a tic not 658

E � 182 -- roof (ninoty p~r centum a solute alco� Pol) ,, 1!.un d natcre , be \'iit dJ..�a fro a registered distillery or bonded ~r otts of t o t ller or of the ov rn nt thout the p ymcnt o h ~ pec � f c tax P~'scr b d . n s oct on 133, fo t purpose of be!n u ad or f � 1, or 1� ht , or r u~ ( e r ly � 1 t c arts nd ndustr ea. e f nd petttion r ' s ~ cont tion unten ble and 1 hout e:it, and on tho contrnry, e e !eve that th exe t on under ct on 128 of th f x ~od r fer to do estic neturcd lcohol u d !n th operation of industries nd not to denatur d alco ol to e used rely as n !n r d nt in th � anufact re of anot r product. 0 old oth x ~0 �ld nd r u .. tory d ithout ct on 12'7 of th Tax Cod f r �t nden� bl t anuf ctur of d c�n 1, t o let nd oth r t ons e du tr � s. �n enact ng s ct ons 127 ncl 28c ld not nv in .end to pon t X n ct on, only to X pt th fo1lo ng ct on. t 8 c d al ul f �nt r e� t tion that prov onr. of 1 ~ hould �ntcrpretcd such n r s to a on ze t ' th other pr � vi ons. oreover , x ptions f ro t xat on r h ly d sf vor a and ust b s r etly c nstrued. I ho cl st abl to u t fy h~s c 1 y th cleare t r nt of organ c or tut 1 � ( ol� lector vs. an la Jockoy ub, nc ., 3 o�� 37 2; n y 1 ctr c �o. v � Col ctor, G. � o. L� 753, July 30, 1955.} Th t�t oner furth r ues th~t th n !nter� pretat on ven by the r apond nt to ect!on 127 nd 659

nil - C . T. A. C !..':JE � 182 -1 - 128 of t e Tax Code should not be given retroactiv ef f ct . It cl ims that for the 1 t t enty (20) y ers it h d en relying on t he previous ru11n s and pormits of t e � eau of Int rna1 ev nu 1 and c onse u tJy, it di d not t ke nto cons derat on the a n~ of s e- ~ 1� i c tax 1n its s le of tf e c nlly donatur ( ~1c ohol to the dif fe ent r nt es of r mits nnd n �:s s le o its �Jai b n 1c hol to the con~u ng publ, c � ... t r r not m1 a n!strat ve This est �on of officer is oiJnd y the previous ruliilgs of h � s pr d - cessor �n off ce ha lr y n squ rely d c ed the upre e ourt in of H 1 do vs. ollector of Int rn 1 ev nue and b ourt of x App als (53 0 �� 2 1 ) . nc , t shall suff c to ~1ot from s d de - cision h applicabl rul "ng of th Co rt � 1 order to i p of h present cont n on of th p ti- t!on r:~ � .-nen th v. in 19 7 th t e pt and 5 to r t x. du e or tutes of re ched in 1 24 d"d not ex 660

DEC lSI � 182 .T.A. - 11 - � point w s decided in this wav tanford n!vers1ty o store, 729lo� .�.T� .A., 12801 affd. , 8 ed. 2 ) (Southern &ryland gricul� tural_ 1r ssoct�t1on v. Co ts- sioner of Internal evenue. .I�� , ~9, ~. ) And as to the retroactive ef ect that ay e g!v n to a new nter retat!on o eo struet on ot a tax law, th Supre Court in th �� case �a! a lth r to the c ntent� n that n- e.ral r .cular ~o. � 139 c nnot g1v n retro� active effect because that woul affect and o literate the vast d r g t acquired y p t � tioner under the prevlous ctrcular, suffice !t to say that neral Circular o. V- 123, having n ,issued on a ong construction of the la , c nno give r i se o a vested right t at can invoked by a t x yer . r e re on is v ousa a ve ted 1 t cannot spr g fro a wro g in� terpr t tlon. h s too cl to requir elaoorat1on. oreover, the prevlo s interpretation of ec 1 ns 127 and 128 of t e ax ode having en de ermined to erroneou& eco s a nullity. n as tween t e taxpayer nd the ver t , the taxpayer cannot plea the void act of official to shield htm ro nd of t vernaent that h pay t e lawful apeci ic tax t at is nda le and clue fr h � The nt can neither estopped nor prejudiced by the ille al acts of its servants. (Govern nt v. larosa, 36 h 1. , 7.) , in v e of the foregoing considerations, the decision of the respon nt ollector of Internal �� venue assessing � atnat and de anding fr the petitioner La To de a, . , the pa nt of the su of 268, 153.73 as spec fie tax on the denatu alcohol t produced 661

�2 - 12 - during the per od fro July, 1951 to ay, 1954, incl u� sive, is here y affir , n the ti !on r is hereby ordered t o pay the &a! ount to th re&pondent . Ho ve � th r spect to th position of t penalty in t he u of 10 , , the sa e e1n pur ly penal 1n natura, th1 Court h no juri diet on ov r t e �� � ( llada -vs. urt of Tax App al&, et al., 2 o. � 4667. ) 1th co&t a g !nat t h petitioner. anil � Phil ppines , ec r 16, 19~7 . IC .& . ~LI ocl te Judge i s t s in a & par t op �n i on. 662

fU Pl BLJC OF THE PHJLJPPINRS H H.T Of 1 X APPJ!.AL~;. MA"l11...4 � , - r �- c.r . . �2 -- � -. - - - ~ -~ ~ ~ - 1 663

l" net 1. ~ �d t fie 1 i no ale �� � I � � 1 t � tl �� Y' 1 664

-~- ( l. 1 1 � la no f � �� tex � I 0 rt � f � � n 27. � $ tl- ax l t / 665

cl h 1 � lc t i ... � � tel il as the chief ingredient and articles manufactured out 666

-- � {or - , .. .. � 667

fc 1 - 1 t X - � r. -- - � .. 66

. .. � � r 1. 1 1 � � 669