CTA Case No. 357 (Decision)

-- ..- ... IUt.PUBLIC OP THE PHILIPPINBii COURT OF TAX APPEAl..' UANIU CONI-JELL BRCE . CO. (Phil . ) , C. I . A. CASE I Oo 357 Petitioner , - versus - COLLECTOR OF INTERNAL REVENUE , Respondent . X- " - � - � � - - � - - - X DECISION This is an appeal interposed by the petitioner Connell Bros . Co. (Phil. ) , from the decision of the respondent Collector (now Commissioner) of Internal Revenue , denying its claim for refund of the amount of 21 , 716. 54 which it claims to have been illegally collected by the respondent as deficiency sales tax for the period comprised between January 1, 1948 to January 31 , 1949 , inclusive . The petitioner herein is a domestic corporation duly organized and existing under the laws of the Phil- ippines with principal place of business in Manila. It is engaged principally in business as an importer of general merchandise. In a letter (p. 17, BIR rec . ) dated September 3 , 1949, the respondent assessed against and demanded from the petitioner the payment of the sum of �29 , 365 . 50 repres~nting alleged deficiency sales tax corresponding to the third quarter of 1946 and the period from the first quarter of 1948 to the first quarter of 1949 o

� DEC1SICN - C. T. A. CASE NOo 357 - 2 .. However, upon further reinvestigation . the assessment was subsequently modified and reduced by the respon- dent from ~29 , 365 . 50 to ~21 , 716 . 54 exc lusive of the sum of ~50. 00 as penalty covering the year 1948 and the month of Januar y, 1949 as appearing in re s pon- dent's letter (p . 73, BIR rec.) to the petitioner dated March 24 , 1950o Notwithstanding its non-conformity to the entire assessment though it was reduced substantially, the pe- titioner on September 8,1950, sent National City Bank of New York Check No . 5281 to the respondent by way of deposit covering the amount demanded (p . 77 , BIH. rec o)o Upon petitioner ' s request, the respondent , on August 30 , 1956, converted the deposit of ~21 , 716 . 54 into pay- ment and issued Business Occupation Tax Receipt No . 1294117 (p. 104, BL~ rec.} . A formal request for re - fund of said amount was made by the petitioner to the respondent in its letter of September 8 , 1956 (p. 103, BIR reco} which however was denied by the respondent on January 30 , 1957 (pp. 122-123 BIR rec.). Hence, t he pe- titioner on Marc h 6 1 1957 filed its 11 Petition for Review11 with this Court , questioning on purely legal ground the ~ assessment , its collection and refusal on the part of the respondent to entertain favorably its cla~n for re - fund of the amount of ~21,716 . 54 . On March 14 , 1958 , the petitioner and the respon- dent agreed in open court (1) that during the peltiod from January 1, 1948 to January 17, 1948, the peti- tioner fully complied with General Circulars Nos . 431 and 440; (2) that the petitioner is therefore entitled

DECISION - C.I.A. CASE NO. 357 - 3- to a refund of P623 .18 which amount represents the illegally collected de ficiency sales tax for the same period; and (3) that during the period from January 18, 1948 to January 31, 1949, all the invoices issued by the petitioner 1 including the customer's copy, con- tained the words ��5% Sales Tax Included" but without any itemization or breakdown of the amount of sales tax actually paid by each customer (pp. 81-87, t.s . n.) . As heretofore stated, the present appeal involves purely a question of law: Whether or not the annotation of the phrase 11 5% Sales Tax Included�� in the sales in- voices issued by the petitioner to its numerous cus- tomers was a sufficient compliance of General Circulars Nos. 431 and 440 in relation to Section 186 of the Tax Code , so as to entitle it to deduct the amount of the sales tax from the gross selling price in computing its sales tax liability? The pertinent provision of Section 186 of the National Internal Revenue Code in force during the taxable period under review. states: usee. 186. Percentage tax on sales of other articles.- There is levied, assessed, and collected once only on every original sale , barter , exchange and similar trans- action intended to transfer ownership of, or title to , the articles not enumerated in sections one hundred eighty-four and one hundred eighty-five a tax equivalent to five per centum of the gross selling price or gross value in money of the articles so sold, bartered, exchanged1 or transferred, such tax to be paid by the manufacturer, producer, or importer: x x x11

DEC.lSION - C,T.A. CASE NO, 357 - 4- and those of General Circulars Nos, 431 and 440 res- pectively provide: nx x x 'Gross selling price' or 'gross value~in mon~y' of the articles ~old , _ bar tered , exchang~d , or transferred as the term is used in the aforecited sections of the National Internal Revenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendor to receive or get the goods, However, if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him, has included an amount of money intended to cover the sales tax in the gross selling price of the articles , the sales tax shall be based on the gross selling price less the amount intended to cover the tax , if the same is billed to the purchaser as a separate item. x x x11 (General Circular No , 431 , July 29, l939; ~ Unde~scoring supplied , ) 11 x x x Unless billed to the purchaser as seaarate items in the invoice, the amounts inten ed to cover the sales tax shall be con- sidered as part of the aross selling price of the articles sold, andeductions thereof will not be allowed a 11 (General Circular No , 440, Q~..:to_be.:r. ).~.....J..9.3_'t_.,. Underscoring supplied . ) The � petitioner contends that it has substantially complied with the provisions of General Circulars Nos , 431 and 440 in relation to Section 186 of the Tax Code when it noted on its sales invoices the phrase '' �5% Sales Tax Included" and argues that to require merchants to itemize and bill the sales tax as a separate item on its invoices issued to customers as required by General Circulars Nos . 431 and 440 is much too unreasonable and would just involve unnecessary loss of time , The peti- tioner claims that the only purpose of the requirement is to advise the customers that the invoice price in- cludes the sales tax which the seller is shifting to him.

DEClSICN - C. I . A. CASE NO. 357 - 5- and that this purpose is equally served by the anno- tation on its invoices of the words u5% Sales Tax Included. " If a customer, the petitioner concludes , would really want to know the actual amount of sales tax which he paid , the same could easily be determined by a simple arithmetical computation. The respondent on the other hand 1 contends that if a seller of merchandise as the petitioner herein wishes to pass on or shift the sales tax liability to his customer or buyer , which is a mere privilege or concession accorded the seller by law, the requirements imposed by standing rules and regulations as a condi- tion precedent to the granting of such privilege or concession should be complied with strictlyo The res - pondent cites as authority in support of his stand our decision in Philippine Acetylene Co . vs . Blaquera , c. T.A. . I Case Noo 324 , promulgated on January 10, 1958 1 wherein we cited with approval and applied the decision of the Supreme Court of the United States in the analo- gous case of Lash's Products Co . vs . u.s . 278 u.so 175. In Philippine Acetylene Co . vs. Silverio Blaquera, C. T. A. Case No. 324 1 promulgated on January 101 1958, wherein we interpreted and applied the same General Cir- culars Nos . 431 and 440 noW at issue in the instant case, we held that: "In order that the sales tax may not be considered as part of the taxable gross sell- ing price of an article . it is essential that the tax be billed as a separate item in the invoice issued to the customer o ' The tax' , as used in General Circular No. 431 mean�s ~ the correct amount of tax. 1 ~�n+ t~ +h� ~;

DECJS I<l'J ... CoT�.� CASE NO. 357 - 6- billed to the customers does not repre- sent the correct amount of the tax, the requirement of the circular is not com- plied with because what has been billed is not the tax within the meaning of said circular and Section 186 of the Re - venue Code (in case of an article taxable under that section), but a different amounto In the instant case, the total amount that should have been billed to its customers by petitioner, as autho- rized by General Circular No . 431, is Pl03.673.83. Instead, it billed to its customers the total amount of �125 ,561.31. � The amount of the tax (~103,673.83) n�1 having been billed as separate items in the invoices issued to its customers, the B total taxable gross selling price of the articles sold petitioner on which the sales tax must e imposed is the total sum paid by the customers for the goods, which is ~1 ,584.728.54 including the tax but exclusive of the value of the deduc- tible raw materials, as the 'amount added because of the tax iS paid to ~et the goods and for nothing else.' - lLash's Products Company vs o u.s., ~78 u.s. _ 17~) 11 And we concluded that: � 11 The requirement that the tax be billeg as a separate item in the invoices being merely a privilege granted to the taxpayers, the same must be strictly com- plied with. Failure to do so results in the denial of the privilege. 11 (Underscor- �ing supplied.) ... We are for the respondent. We find no valid and convincing reason to deviate from our previous ruling in the above-quoted case which is supported on all fours by a decision of the Supreme Court of the United States in Lash's Products Company vs. United States 278 u.s. 175-177. The contrary ruling in the case of Cliquot Club Co. vs. U.S. 13 F. 2d 655, 5 AFTR 6097 (decided by the District Court of Massachusets on June 3, 1926} cited b petitioner in its favor, cannot revail over

.I DECISION - C. I . A. CASE NOo 357 - 7- the ruling of the Supreme Court of the United States in the Lash' s Products case (decided January 2,. 1929) considering ' that the former case was decided previous to the latter by a Court of i nfer ior jurisdic tion . The c ase of Standard Oil Co . vs . State Tax Com- missioner , 71 ND 146, 299 N'W 447 , 135 ALR 1481 , c ited by petitioner in support of its stand , is not appli- c able to c ase at bar . It was held in that c ase that the two kinds of taxes (federal excise tax and state tax on the sale of gasoline) attached at the same time . Consequently, the Court ruled that the federal exc ise tax could not be said to be a part of the gross re - ceipts of the gasoline dealer for purposes of deter- mining the state gasoline tax. In the instant case , there is only one tax involved o It is however contended by the petitioner that the decision of this Court in the case of Philippine Acetylene Co o vs . Blaquera , supra , is not applicable to the case at bar on the ground that said "case in- volved a situation where the taxpayer deceived its customers as to the amount of sales taxes being shifted to them" by charging and billing as separate items in the invoices , sales taxes much larger in amounts than what were actually due to the Govern- ment . (Memorandum for the Petitioner , p. 47 CIA rec . ) In answer to this contention , it shall suffice to state that the taxpayer herein is not in a better position since it did ug1 only UQ1 bill the correct

DECISIO>J - C. I.A. CASE NO. 357 - 8- it did not bill any amount of ta x whats oever as a separate item in its sales invoices issued to its customers . . The petitioner does not impugn the right of the Collector (now Commissioner) of Internal Revenue to promulgate General Circulars Nos . 431 and 440 in order to implement and give force and effect to the provisions of Sections 184- 186 of the National In- ternal Revenue Code . The dispute ~enters on the rea- sonableness and practicability of said circulars with respect to the requirement of separate itemized bill- ing of the sales t ax on the invoices issued to pur- chasers . The petitioner maintains that it has substan- tially complied with said requirement when it wrote down the phrase n5% Sales Tax Included" on the 25,757 invoices issued by it to its customers~covering the period from January 18, 1948 to January 31, 1949 . In order to justify its failure to comply strictly with the requirement in question, the petitioner counters with the proposition that "if the customer were really interested in determining the actual amount of the sales tax shifted to him , a simple arithmetical com- putation would have given him the answer" (Memorandum for the Petitioner, Po 46 C.I.A. reco) . - Indeed, if it is just that easy as depicted by counsel , irres- pective of the intelligence and educational background of the different customers of his client, it ought to

DECJSION - C . T. A. CASE NOo 357 - 9- its invoices the impost in order to entitle it to shift the burden to its purchasers . As a matter of fact , it is admitted by both parties (p . 81 t . s . n. ) that during the first seventeen (17) days of the taxable years now in controversy, the petitioner com- plied with the requirement o It is relieving enough for the petitioner to pass on to its customers said tax burden without having to impose upon them the addi- tional burden of having to compute themselves the exact amount of sales tax that was added to the selling price of the commodity purchased and how much they ac tually had contributed to the coffers of the Government . What the said circulars require is not that the purchaser be merely informed that he is paying the tax as a part of the selling price. What iS required is that he be in- formed of the actual amount of the tax, which should be billed as a separate item in the invoice . Nothing short of this will satisfy the require mento The privilege granted to every manufacturer� pro- ducer or importer of deducting the amount of the tax for purposes of the sales tax payable by them under Sec - tions 184, 185 and 186 of the National Internal Revenue Code is limited to those who actually comply with the requirement that the tax be billed as a separate item in the invoice issued by them . Those who are unwilling or are otherwise unable to comply with the requirement for one reason or another should not be entitled to the privilege . One cannot have his cake and eat it too. ' e would be rendering worthless and ineffective the r e qu i r e- ment imposed by the General Circulars Nos . 431 and 440, the wisdom and practicability of which is beyond ques -

DECISION ... C. I.A. CASE NO. 357 - 10 ... pletely or comply with it in the manner it pleases and at the same time accord it with all the corres- ponding privileges. It iS a well- settled rule that "Exemptions from taxation are highly disfavored in law; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. " (Asiatic Petroleum Co. vs . Llanes lector of Internal Revenue vso Manila Jockey Club , Inc ., G. Ro Noo L-8755 , March 23, 1956. ) The petitioner complains that the requirement of separate itemized billing of sales tax on invoices or receipts issued by merchants to their customers as pro- vided by General Circulars Nos . 431 and 440 , is burden- some and entails unnecessary loss of timeo This may be so o However , the burden iS more than compensated with the privilege given to merc hants of shifting the payment of the sales tax on the purchaseto their customers after complying strictly with the requirement . Moreover, equity demands that a particular law, rule or regula- tion be interpreted in such a manner as to do justice to all parties concerned and not just to suit the c on- venience or stubborn resistance of one of the parties. In this particular case , the interest of the Government as well as the customers of petitioner should also be considered. The questioned requirement is not new. In the United States . after which our tax laws are patterned, it has been adopted and enforced for several vears in

DECISION - C. T. A. CASE NO . 3 57 - 11- the past with beneficial and practical results �. The validity and wisdom of the requirement was sustained by the Supreme Court of the United States in Lash ' s Products Company vs . U. S . 278 U. S. 175- 177 . Our Department of Finance has on more than one occasion in the past sustained the validity of General Circu- lars Nos . 431 and 440 (see Opinions of Secretary of Finance Pia Pedrosa and Undersecretary of Finance Sixto B. Ortiz , dated September 10 , 1951 and December 26, 1951 , respectively) . The main purposes for the requirement are: (1) to compel merchants to issue in- voices; (2) to apprize the buying public of the exact amount of sales tax being shifted to them by merchants for its moral satisfaction thereby arousing tax con- sciousness; (3) to give the buyers an exact estimate of the basic cost of the merchandise purchased in order to know what kind of bargain, good or bad, they are getting; and (4) to mitigage the sharp increase in the rates of sales tax which under the old Tax Code was only 1-1/2% but subsequently increased in 1939 from a minimum of 3-1/2% to a maximum of 10% . WHEREFORE, in view of the foregoing considerations , the decision of the respondent dated January 30 , 1957, denying petitioner ' s claim for refund with respect to the amount of P21 , 093 . 36 (original claim for refund was P21,716 . 54) i s hereby affirmed . However, the respon- dent is ordered to refund to the petitioner the balance of the amount claimed in the sum of ~23 . 18 representing

.. / DECJSIO'l - C. T. A. CASE NO. 357 - 12 - deficiency sal es tax collected for the period from January l, 1948 to January 17, 1948, inclusive , the respondent having admitted in open court (ppo 81, 82, t . s. n o) that during said period the petitioner complied strictly w~th the requirements imposed by General Cir - culars Nos . 431 and 440 and,therefore , entitled to the refund of the amount of P623 . 18 with interest thereon at the legal rate from August 30, 1956. With costs against petitionero SO ORDERED . Manila , April 29, 1959 . I. CCNCUR: _/ c<.;?-M"~'4 AA ~NA~ . Presiding Judge RQvlAN M. UMALI Associate Judge Did not t ake part