CTA Case No. 4957 (Decision)

REPUBLIC OF JHE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PHILIPPINE PHOSPHATE FERTILIZER CORPORATION6 Petitioner. - versus - C.T.A. CASE NO. 4957 �;_;; THE HONORABLE COMMISSIONER Promulgated: f"" OF CUSTOMS6 OCT 05 1995 Respondent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION Tl~is is an appeal from the decision of respondent denying petitioner's claim for refund of customs duties paid on petroleum � products purchased from Petron Corporation pursuant to the provisions of Section 17 of Presidential Decree No. 66, otherwise kti�)Wti as the EPZA Law. Petitjoner.. Philippine Phosphate Fertilizer Corporation (PHI LPHOS for short) is a domestic corporation duly organized and existing under the la'Vo!S of the Philippines. It is engaged in the manufacture and production of fertilizers for domestic and international distribution. It is registered 'YVith the Export Processing Z()ne Authority (EPZA). 1289

DECISION- t_T _A_ CASE BO_ 4957 -2- For the periods covering t11e months of October to December 1991 and January to June 1992, Philphos purchased from Petron fuels and ot11er petroleum products used directly or indirectly in t11e manufacture of fertilizers. The customs duties., on these purchased fuels and petroleum products were passed on by Petron to Philphos as part of the selling price and paid tlle amount of P20,149~473.77 corresponding to said tax. Philphos deemed the payment erroneously and illegally collected by the respondent. Philphos relies on the prollision of Section 17( 1) of Presidential Decree No. 66, quoted as follows: �sEC_ 17_ Tax Treatme.Dt Df .Merclta.Ddise i.o the Zone.. - ( 1) Except as otllerwise provided in this Decree, foreign and domestic merchandise, raw materials, supplies, articles, equipment machineries, spare parts and 'Y\Iares of every description, except those prohibited by law, brought into the Zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated, manufactured, . mixed V~Titll foreign or domestic merchandise or used whether directly or indirectly in such activity, shall not be subject to Customs and internal revenue laws and regulations nor to local tax ordinances, the provisions of law to the contrary notwit11standing." Philphos heretofore entitled to the privilege accorded under tlle aforequoted provision of Presidential Decree No. 66, being a registered zone er.."Port enterprise, filed through its counsel a letter claim for refund with the respondent 't)n Sepwmber 22, 1992, covering the periods October to December 1290

DECISIOB- C.T.A. CASE R'O. 4957 -3- 1991 and January to June 1992 in the amount of P20, 149,473.77 (Exh. A). On January 19, 1993, counsel for petitioner received a copy of the clecision of respondent dated January 4, 1993, denying the� claim for refund/t3.X credit pertinent portion of said decision reads as follovvs: "Please be informed that petroleum products (fuel, etc.) locall..\7 purchased by a zone operator, and brought into tl1e Zone for its own use, or otherWise, do not enjoy special tax treatment under Section 17 of P.D. No. 66. The petroleum products purchased by PHI LPHOS from PETRON, it maybe noted, were deri\Ted from crude oil imported by the latter �\Tho, upon payment of customs duties due then~on, processed and subsequently sold to the former in connection ~Alith its operations. The customs duties due on the importations of the raw material (crude oil) from "+~1lich the finished products were taken and sold to PHI LPHOS have been settled by the importer thereof, and the importation terminated, (Section 1202, TCC). That they may hm1e been locally consumed by a Zone operator registered under P.D. No. 66 does not make the transaction, or any other local sale for that matter_. by the oil supplier, a proper and legal case of refund. Indeed, such local sales and transportation of the finished products to the Zone are not subject to any Customs lav;s and regulations as prescribed in Section 17 since the importation by the supplier, as earlier statRd, had long been terminated ~en the imported articles were released from Customs custody. In view thereof, the claim for refund/tax credit is hereby denied." (Exh. B) Hence, this petition for review filed on February H3, 1993. 1291

DECISI011- C.t .A. CASE BO. 4957 -4- In his ansv\rer to Philpllos's petition for review, respondent alleges by way of affirmative and special defenses that: (a) The Court has no jurisdiction over the case absent the decision of respondent Commissioner of Customs on the protest denied by the Collector of Customs; (b) Assuming arguendo that the Court has jurisdiction, still the claim for refund has no basis since the fuels and petroleum products purchased from Petron were not imported therefore no customs duties were paid and collected thereon; (c) The customs duties paid on the imported crude oil liave been settled by the importer (Petron) and therefore payment of the customs duties terminate the importation pursuant to Section 12 02 of the Tariff and Customs Code_ The subsequent sale of the finished product, petroleum and fuels does not give rise to the refund of customs duties under Section 17 of Presidential Decree No. 66; (d) Section 17( 1) should be read in relation 'With Section 1&(i) of the same Decree, as amended by PD. 1449, June 11, 1973, that the supplies used in the manufactur~ or production of export products must form part of the finished product, i.e_ fertilizer; (e) Tax exemptions must be expressed; (f) Article 79 of E.O. 226, otherwise known as the Omnibus Investments Code, wllich provides: "All doubts concerning the benefits and incentives granted enterprises and investors by this Cocle shall be resolved in favor of investors and registered enterprises" cannot be applied since there is not doubt for the la\v is clear; and (g) .Tlie Secretary of Finance in a Ruling dated 13 July 1991, superseded a previous ruling dated December 11, 1292

DECISIOB- C.I.A. CASE HO. 49)7 -5- 1984, \oli'hich ei~empts EPZA enterprises from customs_. internal revenue and local ta.1{es. The jurisdiction of this Court has been settled in our Resolution dared December 13, 1993. Section 2402 of the Tariff and Customs-Code provides for the remedy of appeal to the Court of Tax Appeals from the ruling of the Commissioner of Customs in any matter brought. before him upon protest. or by his action or ruling in any case of seizure. Petitioner filed a claim for refund -vvith the respondent stating its desire to recover erroneously paid customs duties. Petitioner after receiving the adverse decision of respondent filed within thirtyT (30) days its petition for review by ltv-ray of appeal to this Court pursuant to Section 7(2) of Republic Act No. 1125. Having pursued all legal remedies allowed by law in the administrative level, petitioner's next recourse was to file a petition for review with this Court within the prescriptive period. All having been accomplished, the Court therefore acquires jurisdiction over t11e case. The only question left to be resolved is whether or not petitioner is exempt from paying customs duties added as cost to its purchases of fuel and petroleum products and \ollhere passed on to it by oil companies. Our view is not new. We have alread}'T resolved this issue inllolving the same parties in the case of Philippine Phosphate Fertilizer Corporation v _ The Hon. Commissioner of Customs. C.T.A. Case No. 4661. May 31. 1993. �where the Court.lleld: 1293

DECISIOB- C.I.A. CASE BO. 4957 -6 - "Contrary to the allegation of the Respondent that Section 17( 1) does not provide for duty and tax exemption privilege, this Court disagrees. The phrase 'shall n<>t. tJe subje(;t. to customs and internal revenue laws and regulations nor to local tax ordinano?s, the pro~Jisions of law to the contrary �notwithstanding� cannot be interpreted in any other manner than to mean that merchandise or supplies brought into the zone are exempt from customs duties and taxes. The incentive given under Section 17( 1) is broader than a mere tax exemption. The phrase is so broad to include not only tlle exemption from custorns duties and taxes but everything required in the enforcement of the customs and internal revenue laws save on the exceptions and conditions specified in tlle EPZA law itself. Considering that the customs and internal revenue lav{S are primarily enacted to impose duties and taxes, the phrase cannot be interpreted to exclude t11ese impositions. More so, the phrase will also indu.de exemption from ot11er rules and regulations which are normally followed in tlle discharge of importation such as t11e filing of import entries, e1C1mination and other requirements attendant to the importation of goods into the country. XXX XXX XXX. Section 17( 1) covers domestic merchandise, raw materials, supplies, articles and wares of every description, except those prohibited by law, brought into the zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectly in such activity shall not be subject to customs and internal revenue lavv.s and regulations. Oil products produced by local oil companies may be classified as domestic merchandise, raw materials or supplies as legally 1294

DECISIO.If- C.T.A. CASE 110. 49~7 -1 - defined in the Supreme Court case of Commissioner of Customs vs. Caltex (Philippines). Inc. (G.R. No. L- 13067, Dec. 29, 1959, 106 Phil. 82 9) -which states that supplies or materials shall include gasoline and other petroleum products for purposes of exemption from customs duties under Article 103 of Republic Act No. 387. For what purpose, among others, these products may be brought into t11e zone for processing, manipulation, manufacture, mixed with foreign and domestic merchandise or used directly or indirectly in sucll activity. In our particular case, the petroleum products deliverd to Petitioner is used in the processing of fertilizer for export. While Respondent may be correct that these products did not form part of the fertilizer exported nevert11eless, the law does not provide for such requirement but only requires the use of such materials directly or indirectly in such activity. The use of petroleum products lil~e bunker oil as fuel will easily fall under the phrase �used directly or indirectly in such activity'. Clearly these petroleum products can easily qualify for tax and duty free privileges under Section 17(1) of P.D. 66. Regarding the allegation of Respondent that Section lMi) shall go.�.tern the situation and therefore t11e claim for refund of customs duties should be denied as the bunker oil used as fuel did not actually form part of the finished product exported. This C<)urt believes that this section introduced by P.D. 1449 merely grants additional incentive to an EPZA registered enterprise and \'v'as not meant to supersede Section 17 of P.D. 66. This is clear as the heading clearly indicates that it is an 'additional incentive�. The grantee of the incentive may or may not a~lail itself of it. In fact, this Court would interpret t11at. t.his incentive as a surplusage. Its provision V.fas not intended to restrict the enjoyment of the privileges under Section 17, othervvise the 1295

DECISI01f- C.I.A. CASE :RO. 4957 -3- amending laV�l, P.D. 1449, should have stated so. On the contrary it V�laS meant only as an incentive in addition to those already being enjoyed by an EPZA registered enterprise. . This interpretation is strengthened by the enactment of E.O. 226 (The Omnibus Investments Code). The tax treatment of merchandise inside the zone ~vas re-enacted under Article 77 of Book IV of the Code but not Section 18(i). Said Section 18(i) was deleted from Book VI governing incentives of EPZA registered enterprise and \AlaS incorporated as one of the ino~ntives of a BOI registered enoorprise under Book I which an EPZA regisoored enoorprise may also enjoy as an additional incentive under Art. 7&. X}tX XXX. Finally under paragraph (2) of E.O. 226 aiorequoood, the purchase of merchandise by a registered zone enterprise vva.s likewise considered as export sale and the exporoor shall be entitled to the benefits allowed by law for such transaction. This will entitle the e1.:oporwr to duty drawback under Section 106 of the Tariff and Customs Code and tax credit under Section 127(d) of the National Inoornal Revenue Code. Considering that pursuant to the afore-quoted provision of the LOI and E.O. 226, the mere act of selling and delivering products to the export processing zone enwrprise can be considered already as export sale wiU10ut a-waiting for actual exportation, the allegation of the Respondent that the article sold to an EPZA registered enterprise should form part of the finished product actually exported will hold no water at all. All tl1e above incentives spring from the concept that an export processing zone is carved out of the Philippine territory for purposes of enforcement of customs and tax laws. So that the 1296

DECISIOB- C.T .A. CASE HO. 4957 -9- area or areas fixed or delimited by presidential proclamation or by board resolution of the Export Processing Zone Aut11ority as export processing zone shall be referred to as the �zone� and the national . territorv outside of tlie zone shall be called �customs I territorv� (Section 2(.e) & (f) of the Amended Rules and Regulations to Implement PD. 66). The basic policy in establishing a zone is to attract enterprises espe(:ially foreign investors v.,1lo will be manufacturing products primarily for export and be able to d'' so without their supplies and raw materials entering, and the export products leaving t.l1e Philippine territory within the �context of customs and revenue regulations. Export is the backbone of our economy and is being encouraged by pro'YTiding enterprises v-vith all tl1e incentives including those which we have discussed above. For Vv1lich reason the law further states that 'All doubts concerning tlle benefits and incentives granted enterprises and inYestors by the Code shall be reS(>lved in favor of investors and registered � enwrprises�. {Article 79 E.O. 226.)" Respondent's contention that the previous Ruling dated December 11, 1934, issued by the Ministry of Finance which confirmed that petroleum products sold by Petroleum Corporati9n to EPZA Enterprises are not subject to customs laws. internal revenue laws nor local tax ordinances, had been supers~ded by a subsequent Ruling dated July 13, 1991, issued by tll~n Secretary of Finance, Jesus P. Estanislao, is untenable. We quote in full the Ruling invoked by respondent dated July 18, 1991. to wit: 1297

--- DECISIOB- C.T.A. CASE BO. 4957 - 10 - "Rept!.blic of the Philippines DEPARMENT OF FINANCE Manila 18 July 1991 Hon. Peter D. Garrucho, Jr. Secretary Department of Trade and Industry Makati, Metro Manila Dear Secretary Garrucho, We were in receipt of your letter referring to t11e request of the �Philippine Associated Smelting and Refining Corporation (PASAR) for confirmation of its tax and duty drawbacks due from its purchases of petroleum products. The claim of PASAR had been previously brought to our attention and we had referred the same to tlle Commissioner of Internal Revenue for evaluation. Based on the review, the claim for refund of excise taxes paid on purchases of petroleum products by PASAR cannot be allowed on the following considerations: a. Section 18(i) of PD 66 allom refunds through tax credit of duties and taxes paid on supplies only if tlle supplies used in tlle manufacture, processing or production of export products form part of the finished products. b. The tax exemption must be justified by the clearest grant of organic or statute law and t11at this should be explicit and categorical. 1298

--- DECISIO.H- C.I.A. CASE BO. 4957 - 11 - W~ llave also 'Stimated that the claim Of ta~{ refunds will result to P 103 million in revenue loss for government. Sincerely yours, (Sgd.) JESUS P. ESTANISLAO Secretary" The authority of the Minister of Finance (now the Secretary of Finance), in conjunction \vitll th~ Commissioner of Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal revenue laws cannot be controverted. Neitl1er can it be disputed that such rules and �regulations, as ~.-\Tell as administrative opinions and rulings, ordinarily should deser~.7e weight and respect by the courts. Much more fundamental than either of the above, however, is that all stKh issuances must not override, but must remain consistent and in harmony v..Titll, the law they seek to apply and imple-ment. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the la~.o\1. (Commissioner of Internal Revenue v _ The Hon. court of Appeals, R.O.H. Auto Products Philippines, Inc. and The Hon. Court of Tax Appeals. G.R. No. 103358. january 20, 1995.) In case of conflict between a law and an administrative regulation} the law prevails. (Wise & Co., Inc., et. al... v _ Bibiano L Meer, Collector of Internal Revenue.. G.R. No. L-46231.. june 30.. 1947, 73 Phil. 655) 1299

--- DECISIOB- C.I.A. CASE 110.4957 - 12 - In the case at bar, Section 17(1) of P.D. 66 is the controlling statute. Any ruling issued by the Secretary of Finance "Which runs in conflict v.,itll Section 17( 1) cannot b~ given the force of la\�\1. For onl;T regulations or ruling issued in consonance -v~ith the law it implements shall be valid. The requisites for validity of regulations are: ( 1) They must be useful, practical and necessary for the enforcement of the law; (2) They must be reasonable in their provisions; and (3) They must not be contrary to law (Inter-provincial Auto Bus Co_ v_ Collector., 52 O_G_ No. 22., P- 79 L) and they must be published in the Official Gazette (Sees_ 79-B and 551.. Adm. Code; Lim Hoa Ting v _Central Bank., 104 PhiL 573; Angela S. Lazatin v _ Commissioner of Customs., CTA Case No_ 732., January 19., 1962; see also Nolledo., Bar Reviewer in Taxation., 1990 ed.., P- 36)_ Thus, respondent's submission that the Ruling of the Secretary of Finance dated 13 July 1991, which superseded a previous ruling dated December 13, 1984, denying PASAR's claim for refund of excise taxes paid on purchases of petroleum products, is positively -v~itl1out merit and could not have revoked t11e grant of exemption from customs duties to petitioner under Section 17( 1) of P.D. 66, as amended. Last, but n()t least, ~ith regard to the claim for tax credit, there appears to be no dispute vvith respect to ~e amount claimed. Petitioner had satisfied the Court ~ith the evidence presented t11at it is entitled to be credited the amount of P20,149,473.77 (see Exhs. CtoE, inclusive of their submarkings). 1300

---- DECISION- C.T.A. CASE HO. 49)7 - 13 - WHEREFORE.. the C.::mrt finds the petition to be meritorious and in a..xorclance \plitll law, the same is hereby GRANTED. Respondent. is ordered t(i issue in favor of petitioner a Tax Credit Certificate in tlle amount of P20, 149,473.77, representing - erroneously paid <:ustxns duties on purchases of fuel and petroleutrr products for t11e periods covering the months of October J:l.) Decemher 199 1 and January to June 1992. No costs of suit. SO ORDERED. Q~-i< .. C~ ERNHSTO D. ACOSTA Presiding Judge WE CONCUR: z._� ~~I RAMON 0. DE vn;'A / Associate Judge I 1301

DECISIOB- C.T.A. CASE HO. 4957 - 14 - CERTIFICATION I hereby certify that tllis decision was reaclled after due consultation among the members of the Court of Tax Appeals in accordance \.Vl.th Section 13, Article VI II of the Constitution. ~62.. G'~ ERlfESTO D. ACOSTA Presiding Judge Court of Tax Appeals r 1302