CTA Case No. 3887 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY 3 M PHILIPPINES, INC ., Petitioner-, versus - C.T.A. CASE NO. 3883 COMMISSIONER OF INTERNAL 3{~/tl' F~EVENUE, Respondent. !�~--�-�- ------:�{ DE C I S I 0 N This is a petition to ~eview the decision of respondent dated - ~eptember 2 8, 1984� denying petitioner's request to cancel and withdraw the deficiency sa l es t ax assessment issued amounting to Philippine~;, In c: . , is a clomc~stic cor poration wholly owned by Minnesota Manufa cturi ng Co., a non--�resi d en t foreign corporation located at St. Paul, Minnesota, U .S.A., office s at 3M House , Guadalupe, t�1 c:~ t. n:) t1 a n .i. 1 a . It is engaged in the manufactur-~ of adhesive tapes and other artic l es ~:; uch as scour .in~J and 272

DECISION CTA CASE NO. 3883 the br-and of its par-ent company~ fr- o m whi c h the r-aw mat er-ia l s used in the pr-oduction irnpor�ted. These : impor-ted ma ter-ials ar-e g .i.g.:1 n tic .i.n s.i zes con ta.ined in big r-olls~ " F II~ IIG II~ and "H" ~ pp. 40-- 41 ~ CTA r-ec or-ds). The .impor-t.�:.>d "jumbo" me�~ t.er- ia 1s ar-e c:u t. i.n to sma 11 sizes an d p ac ked for� r- es ~J.le to consumer-s (E:-:hib.it "F- 1" ~ "G - J." ~ and "H -�- J." ~ pp . .40 - 41, CTA r�-�ecor�ds) . On Augu st 30, 1976, r-espondent assessed p e tition er- the s um of P342~357.97~ r-�"pn~sen ting cit=? f ic .i i':~nc y s,:;_.1. es tax for- the per-iod fr-om September 1, 1.'7'73 to October 31, 1974~ including s ur-charge and in ten:.>�:-:; t. ~ compu t.E?d as follow s: (p. 149~ BIR Amount s ubject to d eficiency p ::::; ' 193' 723. 40 sa les ta x per- investigation p 223 ~ ~i60. 64� 7% sa l es tax due ther-eon p 342 ~ 357.97 25% sur-c har-ge for- late payment 14% interest per- annum fr-om January 2 1~ 1975 to September- 30~ 1976 TOTAL At10UNT DUE Pf.::>ti tioner� �r-ecr;! i ved the assf.::>ssm�::>n t. 1et ter on De: to bet- 11, .1976 and pr-otested the sa me in its . ..

DECISION CTA CASE NO. 3883 3 letter dated October 28, 1976 which respondent received on November 3, 1976. On December- 17, 1984, petitioner received the decision of respondent dated September 28, 1984� denying its request. to cancel and withdr-a w the de �f .i.e: iency s<::~. 1 es tax assessment notice issued to Hence, the present petition for review. The issue herein raised is whether or not there was an overstatement in the cost of "jumbo" in the amount of P2,652,875.59 that to double deduction deductible from the gross se lling price. F\e s ponciE�n t in his spf~c.i.al and affirmative d p "f r,~ n S('?S contend that the cost of these impor-ted "jumbo" mat�-?t- i.als l'~r;_.r-e alr�eady deducted for sa le s in accordance with section 186 in relation to Se~tion 194(x) both of the 1974 Ta:�: Code~. Tht~ BIF\ its investigation that t he raw materials deducted from t ht~ g r�oss selling pr-ic::E? overst <:". \ted by P2,b~j2,875.59 . Const?quen t 1y, sa l es ta:-: se para tely billed to its customers, amounti ng to

DECISION CTA CASE NO. 3883 - 4- p540.847.81, was erroneously computed, the s ame should not hav e been deducted from the gross s elling price by virtue of BIR General Ci n::u 1 <:1.r- No. Thus , the total amount of P 3 ,193,723 . 40 sho~ld not have been deducted from the gross s elling price. For a more picturesque vi e w, the BIR prese-n.t.ed its proposed assess ment for the fis c: a.l year ended October 31, 1974, as �fo lJ. Olt~ S : (p . 41, BIR records) Ra w Ma t e rial s (RIM) and P6,81.4,524.58 Pac kaging Supplies (PIS) deduc ted per sales tax l'"l'? "l" .ut-� n Allow a bl e deductible RIM f:, PI E3 per�� invr:!stigat.ion ... _1..!1..16l..,.64�8.99 t a Ov e r- ~:; tr~d deduc t.i b J. f.-? fVt1 f:, PIS P2,652,875.59 Add: E3.:.:d E? s ta :�~ pa .i d (Separately billed .in s ales invoice) Per BIR 540 ,847 .81 Gen. Cir . No. 431, the tax billed must be correctly computed, in order to be deductible from the gros s selling price . . ... . ..�...... P Total amount subject to F'3,193,723.40 deficiency sales tax lL_.. 7% p 22::::.' 560. 64 2 M -� ld

DECISION CTA CASE NO. 3883 - 5- De fi cie ncy sa le s tax 25% s urcharge for late p .::~ ymen t ..�.... n � � � � � � � � � � � - - -�� 5~~-90 � .!.~. Defici e ncy sales tax plus F-' - -2-7C-:.,'�-'--4--5--0-.-8�-0�- F'etj . tioner~ on the other hand~ maintains that~ as a manufacturer~ i t i s r~ n titled to clec:luc: t the co~:; t of l.ike\..,ise subject to from the gross selling price or gross value in mon ey of the manuf~ctured good s pursuant to Section .186 and 1.89 in relation to Section 194(x) of the 1974 T a.:-: CodE?. SE:>c t.icm .1.94(:-:) d ef in es a manufacturer as to .inc 1 udc-'? t~Vi:-~ r �y per s on who by ph ysica l CH.. chem.ic~-11 [.H-� o c ess C:\ 1 t. E� r��s the quality of any raw material or manu f <.1C bJ.r-ed Of'.. p a rtially manufactured pn::>duct s o to mark~tabl e s hape or prepare i t for a n y of the uses of industry. In its arduousness to refute the assessment, petitioner c laim s that pur- ~; uant to a directive of it ~~:; p <-:~ r-�ent company, thE~ "jumbo" mat.er-�ials received then:?f n :J rn, paym�?n t. of the corresponding custo ms duties and taxes and upon release from c u s toms custody, in its books of accounts as purchases of fini s hed good s inventory - 27G

DECISION CTA CASE NO . 3883 - 6- . They do not form "jumbo" mater�i als. that they are c ut into s mall sizes and by the use of other manufacturing process which changes their forms, whose domestic sa l es are also subjected to 71. ' manufac tur. e t-� ' s sa les ta:-: ( E:d�li bit "E" p . 39, CTA records, underscoring ours). It. is no t.P~'IIo r. t. h y to point out that in computing t he sales tax on local l y converted goods, petitioner deducts thE� cost of thE~ "jumb os", other.. t. D :-: paid raw materials, and packaging mater i a l s (p . 50, CTA records). After a carefu ~ review of t h e record, We have f ound no reas on at al l to di s turb the findings of the BIR examin e rs. is not one of deductibility but rather one of overstatement in t ~lf::? c: n:; t u �f ,,.. .::\W m .:~ t: e t-� i C:\ 1 s d ed uc t.r~cl in thE' gross i t s rnarlufactUJ'" ing oper- ,'::\ tions. We find peti t.icmer.. ' s a llegations uruneJ"'i torious. In fact., the cost accountant of petitioner r-(:?Vr.-~a 1 t-?c1 dur-ing t r i a l . th~:\t. thr= sa lf.? ~; t.c.'\:-: l i a b i l i t y 27 ;

I DECISION CTA CASE NO. 3883 - 7- for the year ended October 31, 1974 was computed on th e-, ba s is of the gross sales less the sales .1. ~~.<:;-~~-:lJ. Y........<:;..f?D.:r.:~~.r:::..:t.�.~L _..:i...!.:~.m.?.. (underscoring supplied ) . Th~? ba 1 ancF.J is taxable net sale s out of which the 71. sales ta:�: is 17, t.s.n., ,July 16, .19B~:i). that the cost of locally convE~ t"� ted goods have already been considered as a d e duction in computing the sales tax liability of P E~t.i. tionE~,.�- . Ther�efore, to uphold petitioner's claim i:.:h c:\t the same should be deducted from the gross s elling price of its manufacturing operations 1"ot.t 1d en tai 1 double deduction . It would be absurd if s uch would be allowed. Pe titioner, in support of hi s claim, s ubmitted the �fo 1 1owing revised Statement of Cost of Goods Sold for Trading only and a Statement of Cost of Goods Manufac tured for the year ended October 31, 1-.!ith the original statements s ubm~tted~ to wit: 2 't-j - ()

DECISION CTA CASE NO. 388 3 - 8- Statement of Cost of Goods Sold (Tr��ad.ing Only) Original Revised (E:-:h.ibit "B", (p . 26, BIR c .r: ___ fl..!_ ~:...4,_!1 T A___r-e ~_;_J_____ e �..9 r .f!.tl Fin.ishE~d good s -- F' E3, 86:::::, :::.3 5. 00 F'u r �c h a !'> es (B eg � ) - .3.f!i l! .0- 0- -9�'�-4�-:-3--4�-.�-0�-0"- Add: Pt..wc: ha se~; Cost of Good~:; P22,106,057.00 Avai lablf:'! _____.!..!I.Q_2 4 ,_z~3 ._QO Less : Finished goods- F'u r�c: ha SE'!!S E:.:!~.:J.. 1 ~2.Q,.,._f3_4 0 � 0 Q_ ( End) Other� d .i s po sa ls Cost of salr.-~s E~_1..'J..?1J... 3..92C;' -~~2. F'24' 741 '929. 00 (Tr�a d.inq o nly) L.e_~;;s_;__ Cost of sale::i (locally con- ve r-ted i terns f:~ so ld the sa n ''"!! year� ) Add: Operating Expenses F' 167,996.90 Inventory Control 478,954.90 f:~ F'r-oduc: tion Plr.:mnirHJ -~J-~_7 17 -~Z RE~c:e.i v .ing, WHSG E___!_,_J 59, 669 � 07 1!.~ SHF'G F'T!., 4 :56 , 897. 6 :,5 Equipment Service :.::::::==========:::::::::::::= Cost of Sc:\les Trading Only ..

�.:. DECISION CTA CASE NO. 3883 - 9- Statement of Cost of Goods Manufactured For the year ended October 31~197 4 Or igi nal Revised ( E :d1 � II () II ~ p p � ( E :�: h � D II II , p � ::n �-}3, CTA r�ec.) 3 6, CTA rec .J... Cost of Ra~r-1 F'5~244,862.00 F' 5,244~862.00 t1ater� ial~5 (RIM) a nd Packaging Matf.:? r-ials (F'/1'1) Us ed Add: l....oca 11 y con -- V�~ r� ted .i terns ( .i rn n or-t.f?d f .i.n � "i h ~d goods Total R/1'1 i!~ F'/M Usedf_:_~2 44,862.00 Add: Con VfH-s ion Cost Direct Labor Pl~541~310.00 F' 765,132.40 t1 a nu f ac tur- .ing Over�head __.:'?, 3Q.J:...!I.:3 44..!'-Q!2. P3,842,654.00 Total Manufacturing f_:l.Q_,_)8 2 , 548 � 1 7 Co~:; t. In the Revised Statement of Cost of Goods Sold (Tradin~J Only)~ petitioner deducted the cost of salf.:!S of locally converted items amounting to F'2,464~700.44, computed as follows~ r'- e c or�ds) �.:. ._ 80

DECISION CTA CASE NO. 3883 - 10 - Manufacturing Statement - Jumbo Fiscal Year Ended October 31~ 1974 Invt~ nt.ot- y tx~q. -- Nov. '1 ~ 1973 F' 390~685.90 F't.lr--(: 1��\ast:~-::J � " � � � � � � � � � � � � � � � � � 5 1..:"2.�L 989! oo Jumbo Available for Use ��.�� P5~752~674.90 Less~ Inventory end, Octcher 31, 1974 .... Jumbo Usc~d it to the Statement of Cost of Goods Manufactured by adding it. to the cost of raw packaging materials used an the gnJuncl that the same should be deducted a s such considt:-?r- irHJ that. these "jumbo" rna tE?r-i.:1 l. s h <:~.ve under�� gone a manufacturing process and were not actually s old a r_..-, i s .. However�� , the findings of the BIR examiners~ to which We adhere, showc~d that the cost of imported finished good~:; ("jumbo" a 1 n~ <:". \dy inc 1 uded in the original statement of Cost of Goods Manufactured~ this finds support upon .i.rnpor�ted ra\.'J -~ \ !?:-:arn.i.nation of the purchases of mat."!r��ials and packaging materials in relation to the advance sales tax paid as shown below: ( p. 78 ~ B I R recor�d:;) 281 :..

DECISION CTA CASE NO. 3883 -- 11 - ,T. mpor- ted ,..-,'.\~ ~ rn a.t~.;~r- i a 1 s pur-e hase s ~ F'7~121~594.00 pe r orig. s tatement ....�....��.�.� Imported pac kagin g materia ls purcha s es~ per orig. s tatement . . . � Tot. -~1 .� �� . . . . . . . . . � . . . . � . . . . . . .. .� � Cos t of importation of raw a nd p ackagi ng ma teri a l s per advanced sa les tax p ~3id - LandE�?d Co s t -�- B...'!...tl~.T~ � 087~:1 -- f::..':!:J..�__,_3Q~. � N375 --� F'I.J� ~ 780 ~ 62�3. ~~7 F' 1 ~ 983 ~ 464. 43 Add: A � S � T � ._..____-.!�JJL. ].Q_~'i_.-:.22. E xc ess~ represe nting impnr. tf.;.>d �f inishE?d goods . . . . . .. . . . Add~ Tota. l l a nd e d cost of imported �f ini~; hr:0 d goods .. � . . � . . � . � . . � . � . � � .. ThE? co n te:-:?n tic:in of petitioner- that the d i "f �fert::>nce l"�e presen ting imported finished good s v~E? I""C? ac b ..! a 1 1 y in - transit raw material s is not convi ncing s ince nothing is shown in the records to pr. ove that such wer e actually in �-- tr-a n si t mHte r.. ial s . No evidence wa s adduced by peti tiorH?r.. to rebut the findings of respondent. Ba se d on thE"~ �for�ego .fng, W�~, ther..efore ~ see no va lid to set a s ide decision of r es pondent dated September 28, 1984. 282

DECISION CTA CASE NO. 3883 - 12 - , \!JHEREFDF~E th E? decision appealed from is and petitioner 3M Philippines, In c . i s ordered ~o pay respon~ent, Commissioner of Revenu-~ sum o �f P342, :357.97 ,~ epr"E'SE~n tirHJ def ic i~n_t:y sa J. es t,::..:.: for the period f r�om Se p tern be:~ r- 1 , 1973 to October 31, 1974� ' including s urcharge and interest, at petitioner's cos ts . SO ORDERED. Quezon City, Metro Manila, Marc 1988. -....... C. ROAQUIN WE CONCUR: Presidin Judge ~~ Associate Judge 283

---~----- - DECISION - CTA CASE NO. 3 883� - 13 - CERT I F I CAT I 0 N I ller�� f.�~by certi fy that this decision was reac hed a fter due consultation amo ng the members of t he Cout��t o f Ta :�: Appeals in accordance with qf?ctio n 13, Artic l e VIII of the Constitution. AMANTE F'n:~si d ir g Judge Court of Ta x Appeals 284