CTA Case No. 3004 (Decision)

I'P.PUWLIC ()F TilE P'RlLTPPlNEI � (;;OURT 01<' 'A' A .~ PPE.t.LI �. UKZObl Cll'Y ,� �: '- / ORO ENTERPRISES , I NC ., P e~itioner , - .versus - C.T .A . CASE O. 3004 COMMISSIONER OF INTERNAL REVENUE, Respondent . X C8 . . . .- .a � - - .. - .x. 0 ECI S I 0N The question u rged upo n o ur consid~ration .� relative to the i nstant claim for r efund of alleged erroneously and illegally i mposed and collected percentage and advance sales taxes is whe�ther the product bear ins t he trade name "Citrobelle Skin Lot~on " is a medicinal pre- pa~ation wi thin the contemplation of tl}e Tax Code. Petitioner corporation on t he sale of i ts "Citrobelle Skin Lotion sometime during J anuary , 1977 through ~ecember , 197~, paid t he a mount of P440,616.70 as perce ~ tage sales taxes at the rate prescfibed for cosmelic prepara tion as so categorized by t he r espondent Conmissioner of Intern al Revenue under Section 194(b ) ?f the Tax Code of 1977 , quoted i nsofar as pe~ t inen thus: "Sec . 194. Percentuge t~x on sale s of non ~ ssentia l . articles.- Th e r e s hall be l ev i ed 0 asse.F;sed an d c:olle ct c: d once 93

DECISION CTA CASE NO . JQQ( - 2- only o every original sale , barter , exchange or similar t ransaction f or n om i n~l o r va lu able c onside ration i ntended to t-=ansfe ownership of, o~ title to , the a~ti c l es here i nbe l ow enumerated a tax equivalent to f i f ty per centum of the gross value in money � of the articl es so sol d, bar t ered , e xc:hanged or transferred , such tax to be pa id by t he manuf a cturer o r pro- .. duce � XXX XXX ~X (b) Perfumes , essences , e xtracts, t oile t wate~s , cosmetics , hair d ressings , hair dyes, hair restoratives , aromatic c achou s , t oile t powders , except tooth and mouth washes , dentrifies , tooth paste , t a l cum and medicated t o ile t powders , hair ~~l s a nd pomades. x x x " Unde rscoring supplied ) . Also paid by pet itione r is t he s um of P~l , OlO . OO a s the 50~ advance s ale s t ax on i ts i mported essen- tial oils to be used as r aw materials i n the manu fac tu re of the said produc based on t he l anded cost p lu s 100~ mark- up pursuan t to Sect i on 193(b) in relation t o Section 194(b)~ supra , both of ~he Tax Code. Section 193{b} i nsof a r as pe rtinent provides : "Sec . 193 5 Payme nt of percentage t axes .,- x x :' (b) Sales tax on imported arti c le s e- When t he �art:Cle!~ a re i mpor ted , the percent- age taxes established in Se ction s 194, 195 , in 196 , 197 , 198 , 199 ano 201 of this Code shall be paid advanc e by the importer , ' n accordance w~th the regulat ions promul- gated by the Se~retary o f Financ u and pri or

DEC I SI ON - CTA CASE NO ~ 300 4 - 3- to t he r elease o f s uc h ar ti c l e s f rom c ustoms' ~ ustody , b ased o n the home c onsufupt ion v a l ue or pr ice {exclud i ng i nterna l e xcise t a~es ) t he r e o f , pl us (10% ) pe cent of such �home c onsump ti on value �o r price , i nclu d i ng pos tage , commiss i on , customs duty and all s im i la r c harges , e xc ep t f rei gh t and � nsurance , plus one hundr ed per ce ntum of such total va l ue i n t he c ase of . a rticles e nume rate d in Se ction 1 94 a nd 195 , f ifty per cent um i n t he case o f article s unde r Section s 196 and 197 and twenty-f_i ve per c en t um in t he c a s e of a r ticles nder Sec tions 198 , 199 a nd 201 . The tax i mpo sed in t hi s Section shal l not apply t o articles t o be used by t he i mporter h imsel f i n t he manufacture o r p repa r a t i on o f a rti c l es subj ec t t o s pecif i c t ax: x x x ~ Taking excepti on , peti t ioner cla i ms , by and l arge , t ha t i ts manuf ac tu red "Ci t robelle Skin Lo tion " by formulat i on and purpose is prima ri l � an antisept ic f o r pimp le and acn e medi ca t i on pr oper ly cl assi f ied a s med ici na l p repara ti on o And hav i ng di stilled sp irits a s chie f i ng r edien t i t must be s ub jec t to t he s ame t a x a s such c h i e f i ngred ie n t a s p resc r ibed i n Sec tion 138 i n r e l at i on to Se c t ion 145 , both of the Tax Code . The pe rt ine n t pr ov i sion s r ead a s -al l ows : "Se c 4 l 38 o Tax o n preparation s c on t aining ~ i s tt lled s pir i t s a s chi e f i ngredient. - . H�!dicina l p re para t ions , f lavor i ng e xtra c t~ , and al l ot her pre - p ar ati ons ~ exce p t t o i l e t p r e pa r at i on s , o f which , e xc lud i ng wa t er , d i sti l l ed s p i rit s f or m t hp chief i ngr ~ d i e nt , s ha l l be s ubje c t-. t o t he sa11112 ta}; <AS s-uch i ngr. e d ie n t , x x ."

DECISION - CTA CASE N0 8 300 4 - 4- Sec . 1 45 . Specif j~ t ax o n dis tilled sp i rits. On distilled ppirits there shall be col l ec:ted , s.ubject to t he provisions of Section one hundred t h irt y - ;~ine of this Code:, e xce pt as hexeinafter provided , s pecif ic taxes as fol l ows : XXX XXX ' Spirits or d isti lled spi r i t s � is t he substance known as ethyl alc9hol , ethanol or spir i ts or wine , i ncluding al l dilutions and mixt ur es t he reof , from whatever source by whatever process. produced , and shal l i nclude wh i s l<y , brandy , r um , gin and vod ka, and other similar products o r mi xtures excep compounded l iquors t axe�d unde r Secti on 1 4G of t hi s Code . x x.� BIR Ge:ne:r al Circu lar No . 4&8 da te9 September 18 , 1940 provides t hat t he "ter m chief i ngredient is construed to mean more tha n 5 0% of t he preparation , excluding water/ is a l cohol " and as cer tified by the Food a nd Drug Administrat i on (Ex h . "A" ~ i nfra , Citrobelle Skin Lotion c on tai ns 90 % more o r l ess of ethyl alcohol by volume, excludi ng water . On the foregoin g note, pet i t i one r fi led with t he responden t Comm i ssioner o f I nter na l Revenue a wri tten claim f or r e f und of t he a ggregate amoun t o f ~501,626 e 70 r epr e s e nt i ng the perce n tage an d advance sale s t axe s raid, and ins t l t: ,JI: l~d t.i1j s i nstant petition f or review on April 20, 1979. The record r e l e~antl y s umma r 1zed di s clo s e s tha t t he contr o<tJerte J "s kin l ot ion " i s u r egi stered i 96

DECISION - CTA CASE NO. l004 .5 - or 9 with the Food and Drug Admi n istrat ion (FDA) '� which 0 f o r: "the� purpos.e of the i nstan t c ase i ssued the certif ication , quoted as f ollows: �s February 1979 CE RT F I CAT I 0 N TO WHOM T 1-'lAY CONCERN : This is to certify t ha t on the basis of t hei r formulation , CITROBELLE SKIN LOTION and CITRO SKIN LOTION are MEDICINAL PRE - PARATIONS containing as active i ngred ien t s al i cylic acid , a keratolytic agen t, and ethyl alcohol , as chief i ngredien t c omprising 90% more or less of t he f inished p roduc t e~cluding wa t er . This is to certify al s o that on t he bas is of their active ingredient and chief i ngredient , CITROBELLE SKI N LOTION a c t as an antibacterial and an tiprur i t ic preparations and have a normalizing effect on dermal osmotic pressures. This is to certify furthe r that LIME , LEHON a nd LAVENDER essentia l oils a re vita l ing- r edien t s i n the f ormu lation of the finished produc t .. This is t o certify f inally t hat Bor ic Aci d powde r USP grade a nd Borax powder / gr anule USP grade are i n(.ii spensa ble components cf CITRQBELLE SKI N LOTION a nd CITRO SK IN LOTION. These chemical raw mate r ials ac t as antibacterial agents . Th i s c e rtificat ion � s being iss ued upon r equest of ORO LABORATORIES , a division of ORO ENTE RP R IS~ S , INC . for Bur eau o I nterna l Revenue (BIR) _purposes only~ (S gd. ) ARSENIO N, REGALA, Ph . D. ADMINIS.TRATOR '8 ..

DECISIO CTA CASE NO. 300 4 - .6 - The t estimonies o f r ecord , i nter alia , show t ha t Citro~elle Sk in Lotion was register ed a s a drug because i ts active components are f ound t9 cure , medicate and alleviate sk in disorders l ike acne and pimples etc ., and that the chief i ngre d ien t has ge rm icid a l a nd a nt ise p ti c action (Ms. Eli~ a Caballero of the Drug and Registration Unit, FDA) ~ t hat the pr esence of ingredients wi th differ- en t medicinal purpo~es and t he r apeu ti c values makes Citrobelle Sk i n Lotion a medicinal v is a vi s cosmetic , preparation (Professor Nat i vidad De Castro , College of Pharmacy , U. P. ~ t hat i n the f ormul at i on of the f ormul a s f or Cit robelle Skin Lotion tne mentioned ingredi~nt s were specifically chosen because they are tradi tionally tried and tested drugs used i n t he tr eatment of common ski n disorder s which includes pi mples , acne , ri ngwonn o r ' anan ', athlete~ _ f oo t, e czematoiditis, i tch i nes s from insect bites , etc . (Ms. Teresita Guanzon Velasco , Vice -Pres iden t, Or o Laborator i es , Chem i s t and Pharmaci st ) �. What have bee n j ust stated and quote d c ould have the controvertecS pr�oduct fi t into an appropriate l ega c ubbyhole f or Jt .edic inal preparations aptly c harac t er i zed i n an analo~1ous c .J:..>e, " /\ '.:> u::>t.ed i n t he I 98

DECISION - CTA CASE NO. 3004 - 7- Tariff c t 9 of March 3, 1~8 3 c . 121 , Schedu l e 2 , 22 Sta . 494 ) _thes e medicina l pr eparations mean . such articles , as are of use or be lieved by tne prescribe or use r f a i rl� and honestly to be of use , i n curing or allevi ating or palliating or preventi ng some disease or affection 9f the human body." (La Tondefia, I nc . v . Collector of I nterna l Revenue and CTA , 0 SCRA 713 � Thi s wel l compor t s . with t he class.if ica tion pe ti tione ha s given its O\'ln product. In t he c�ase at bar we are not to confu se about a rare addendum t o pharmacopoe ia in which f act and fabr i cation become indistinguisable but abou t t he usual attributes animating the meaning of medicinal preparations as legal ly contemplated f or t ax purpose . I t may not therefore be an over - simplication to state that the finding of the Food and Drug Admin i strat i on f ur nishes the best mean s of its own exposi tion in te rms o f t ractab le d a t a openly l aid and f ully disclosed and as such de serves the credence that should normally be accorded . Res- pendent points to no i r r egul ar ity nor error of the r elevance and c oupe t ence r equi r ed t o bash that patina of le�gi timacy over the cer ti r lc ~t tlun. 'l'lte 99

DECIS lON � CTA CASE NO. 3 004 - .B ... apparen quibble on t he descriptive t erm, " ot i on� as c reating t h e i mpr e ssion and evo ki ng the c onno ta - tion tha t the preparation i s cosmetic , does not change the basic fact that the controverted product by nature , formulation and purpose , as f ound and c er tified , i s medic inal e "What 's i a nam~?, t hat wh i ch we c all a rose , by any other name wo uld smel l as sweet1" We do not think the c er tifi cation i s a mer e c osmetic effor t to disgu i s e the true nature �� and c haracter of the questioned product;; . We t here - f ore feel c ompelled to affirm i t s import and force l est i t be suffered t o petrify i n f util i ty e On aspects similar in many o r so with the case at bar , t he ruling in the La Tonden a c ase , supra , appear s i n point , " specially denatured alcohol being deemed dis tilled sp i r its and fo rming as it does the chief i ngredient of r ubbing alcohol , the l atte r i s considered as med i c inal preparation subject to specif ic t ax under Sect ions 127 now Sec. ~ 138 ) .and 13 3 (now See . 145) '� both of the Tax Code . " Li kew ise , on the s ame foc using question it was aga i n ruled that, "Astringosol" with distil l ed s pirits as its c hi ef i ngred i en t , although denatured , has bee class ified as medicinal pr e p ~r a t ion by the I nst itute of Science and Te c hnol ogy. ! ccordingly, 100

DECISION CT CAS E NO . 3004 - .9 the e t hyl alcohol to be used i n i t s manufac t ur e II i s subject to the specific t ax presc r i ped in Sect i on 133 (now Sec. 1 45 ) _i n r ela t i on t o Section 1 27 (now Se e s 1 38) ~ both of t he Tax C o ~e, prior to i ts removal f rom the d ist i ller y prem ises~ (BI R Ruling of Ma rch 2 , 1955.) I n indignation petitione r righ tful l y poses, " if r ubbing alcohol which i s sole l an anti sept i c i s considered a medici nal prepara t i on , what more of Ci t r obelle Skin Lotion , whic h is a pimp l e a nd acne med ic at i on , more t han just an antis.eptic, what also o f 11 As t ri ngoso l" a t ooth and mouth wash o r anti sep tic, used f o to i let purpose , which has bee n exc l ud~d from t he toile t i tems s ub j ect to 5�0% percentage t ax unde r Sec ti o 1 94 of t h e Tax Code a s be i ng medic ina l prepa r at ion by v irtue o f BIR Rul i ng of March 2, 1955 ." The reason i ng inter posed by t he pe t itione r s eems a li ttle mo re t han a sta temen t of t he o bv i ous. We uphold. Of equal signif ip ance is a r ece nt rul ing of th e respondent Cornmissione t of I n t euu.L l{ev.cnue on the " Johnson ' ~ � B aby Cologn e" preparat ion, whi ch c ircumstances obta i ni ng a re of no differen t mo ld with t he instan t c ase , i nsofar as pertinen t r e ads , "Accordingly , a nd as t he chief ing r cd1ent of t he 10 1

DEC ISIO � CTA C SE NOa 30 04 .1 0 pr epar at i on i s alcohol, a d i s t il e s pir it, the a f ores aid p�r oduct is subjec to speci fi c tax a s such d istilled s pi rits p rsuan t to Secti on 138 of the Tax; Code . However , since spe,cific t ax on the alcohol use d as ch ief i ngre d i e n t in t he man ufacture of J ohnson' s Baby Co l ogne has a lready been paid , no fur t he r spec if ic t ax i s due and payabl e on t e s a id p r od uct . Fur thermore , no f urther perc entage tax is due and payable on t he same produc t ." (Respondent 8 s l e t t e t o Law Of fi c e of A.M . S i s on , Jr. date d March 30, 1981, Annex "A".) Far be i t f rom a the oret i c a l gobbledygoo k the ru ~ i ng l e nds settli ng eloque nc e to the p re cise is ~u e r aised in the case a t bar. Suffice it to state, the above-cited rul ings ar e pa t en t e xe mpla rs demon st r a t i ve of re spondent 's unde r stand i ng of t he c a se s similar ly concei ved and claimed as prep a rat ions wh ich chi e f in gr edient s ar e d is ti lled spir i ts , t hereupon consi sten tly t ac ke d t he spec if ic t~x i mpos ed on s uc h chi e f i ngredient pre s cr ibed in Se ction 1 38 in relation t o Section 14 5 o f the Tax Code , sup ra . ~\l'e s e e no r ea s on a nd none i s ofier ed as to t he ran dom 4uir � o a arianc e i th e ~ ax treatme n t ot Cit obel l e Skin Lot ion "wh i c h i s wore t han just a1: <-~n tis\..� p t tc: 1 0:2

DECISION - CTA CASE NO . 3004 - 11 - being compounded f o r purposes of medi o ~ting a d � p reve nting skin d i so ~ der s , such as pimp les, acne, an other skin irrita t i ons." (Exh. "D".) Res- pend e nt'~ classi fi ca tion of th e Skin Lotion a s a c osme t ic subject to t he 50% s ales tax under Sec tion 194 (b) .of t he Tax Code, su pra, (Exh. "C") '� would seem a convolute d rend 'tion of a n e xpedie17 t denouerne n which is not entirely justi fi ed . Such a quick s h t t le of a contr a d ictory fi a t co~ld not be r e su l t o f po licy but suffers from l ack of policy. We t hus re ac h t he conclusion th a t the c on- tr over t ed Citrobelle Sk i n Loti on bein CJ a medic in al prepar a tion a nd conta ini ng distil led spirits as c hi e f ingr e d i e nt i s s ubject to the same tax a s such c hief ingredient pres cribed under Section 138 in r e l a tion to Section 145, both o f the Tax Code, s upra . Consequ ently , the importat i on of essential oils to be used a s r aw ma terials in t he manuf actur e of the medicin a l preparation is exempt f r om th e payme nt of pe r c e ntage t ax a nd c ompen s ating t ax as e >,;pr ess ly provi ded in Section l 93(b) a nd Sec t ion 204(a) .both of the Tax Code of ' 97 7 .. 103

- DECISION - . CTA CASE NO. 3004 - 12 WHEREFORE, petitione r is entitled to the � refund of t he a grega te amoun t of PS01,626.70 representing erroneously paid percentage taxes and advance sales tax for the period involved which respondent is irected to pay without pronouncement as to costs. SO ORDERED. Quezon City, Me tro Manila, April 15, 1983. WE CONCUR: � ROAQUIN e Judg.e 104