CTA Case No. 4780 (Decision)

Republic o� the Philippines COURT OF TAX APPEALS Quezon City PILIPIHAS SHELL PETROLEUK C.T.A. CASE NO. 4780 Petitioner, Promulgated: - versus - AUG 09 1996 COKKISSIONER OF INTERNAL REVENUE, Respondent. x- - - - - -- - - - - - - - - - -x DECISION This is a Petition �or Review of the denial by the respondent Commissioner of Internal Revenue of petitioner's protest of an assessment issued against petitioner for deficiency surtax on alleged extraordinary gains arising from the oil price increase of August 15, 1987 in the amount of P225,592,198. 83 inclusive of surcharge and interest. It appears from evidence presented that on August 14, 1987, the Energy Regulatory Board <ERB> issued an order authorizing the three oil companies, Caltex <Philippines> Inc., Petrophil Corporation and Pilipinas Shell Petroleum Corporation, to increase their price of various petroleum products, effective 12:01 A.M. of August 15, 1987. 888

DECISION CTA CASE NO. 4780 -2- On account of said price increase on November 10, 1989, petitioner received a letter from BIR Industry Audit Division, inviting petitioner to an informal conference regarding the proposed assessment of a surtax on alleged extraordinary gains realized by petitioner from the August 15, 1987 oil price increase. Pre-assessment Notice, dated April 2, 1990, and eventually an Assessment Letter and Assessment Notice No. FAS-1-87-90-001762. \ letter, dated May 25, 1990, assessing petitioner for deficiency surtax on alleged extraordinary gains realized by petitioner as a result of the August 15, 1987 oil price increase, were issued as follows: 1~87 Surtax on Extraordinary Gains Total Inventory Gains P178p 156p 951. 14 Surtax Due 65X 115p802p018. 24 Add: 25X surcharge 28p950p504.:5:5 20X interest 80,819,676.04 �rom 8-16-89 to 5-30-90 Total Amount Due and P225,572,198.aa Collectible Petitioner was given thirty <30) days from receipt of said assessment to pay. On June 01, 1990, petitioner filed its protest letter, dated May 3, 1990, disputing the factual and legal bases of the assessment. However, on March 24, 1992, petitioner received respondents's letter, dated January 30, 1992, 888

DECISION CTA CASE NO. 4780 - 3- denying petitioner's protest with a repeat request to pay the assessment within �i�teen (15) days �rom receipt o� the letter, otherwise, the collection shall be en�orced by means o� distraint and levy. The respondent Commissioner considered the said denial as his �inal decision on the matter. Hence, on April 07, 1992, petitioner �iled the instant petition �or review. Respondent, in denying the protest invoked Presidential Decree No, 1889 and its implementing Revenue Regulations Nos. 13-84 and 22-84, and imputed the OPSF component o� the August 1987 price increase as well as the increase in ad valorem tax as part o� the extraordinary gains subject to surtax. Petitioner, on the other hand, alleged that the price increase representing petitioner's contribution to the Oil Price Stabilization Fund <OPSF> is simply a mechanism �or reimbursing cost increases previously incurred by it. Presidential Decree No. 1889 and its implementing revenue regulation are all inapplicable, and even i� applicable, its application will not result in extraordinary gain. Furthermore, it alleged that with the operation o� Presidential Decree No. 1956 890

DECISION CTA CASE NO. 4780 - 4- and LOI 1441, "extraordinary gain" under PD 1889 ceased to be possible. Accordingly, the issue this court is called upon to resolve in this case is: �whether or not the component o� the price increase especially the provisional increase in wholesale posted prices o� petroleu� products by an average o� �arty- eight point seven <P.487) centavos per liter plus the resultant average increase o� P.0007 per liter in the ad valorem tax, constitute extraordinary gain subject to sixty �ive (65%> percent surtax pursuant to P.D. 1889.� The resolution to this issue depends on the interpretation by this Court o� the Order o� the Energy Regulatory Board o� August 14, 1987, in relation to Presidential Decree Nos. 1889 & 1956 and Letter o� Instruction No. 1441. In a similar case involving Caltex <Phils. >, Inc. vs. Commissioner o� Internal Revenue, CTA Case No. 4711, this Court ruled on the application o� Presidential Decree No. 1889, as �ollows: �Finally, on Nove�ber 3, 1983, Presidential Decree No. 1889 vas issued in the same manner as P.D. 1867, the surtax on extraordinary gain vas <increased to> also 65% but unlike the tvo previous decrees the said �surtax shall be allowed as part o� the cost o� the petroleum product sold on a�ter November 3, 1983. The computation o� extraordinary gain is likewise based on the di��erence between the wholesale posted prices be�ore and a�ter the price increased multiplied by the number o� units o� petroleu� products 891

DECISION CTA CASE NO. 4780 -5- existing as oi the day oi the eiiectivity oi the price increases. The same is likewise payable within 30 days Iollowing the promulgation OI this decree. The law shall take eiiect immediately. In implementation oi this decree, the BIR issued three Revenue Regulations namely: Revenue Regulation No. 12-84 to implement the June 7, 1984 price increase; Revenue Regulation No. 13-84 to implement price increase on May 18, 1984 and Revenue Regulation No. 22-84 to implement the October 20, 1984 price increase. The computation oi extraordinary gain arising Irom the increase in the industry net back shall be determined on the average by multipying the inventory oi petroleum products as oi the date oi the increase by the authorized price increase per liter while gains due to increase in ad valorem tax shall be determined by multiplying the inventory oi unhanded <tax paid) stocks as oi the date oi the authorized price increase by the increase in ad valorem and/or speciiic tax increases. The surtax was made payable within thirty <30> days aiter the date oi the eiiectivity oi the price increase. x x x. "However, this is not so in the case oi P.D. 1889. When the same was promulgated on November 3, 1983 there were no price increases prior to its promulgation nor was there a recent price increase. The law states that it shall take eiiect immediately or prospectively. Accordingly, it was made to apply to subsequent price increases the Iollowing year 1984 and as mentioned above three revenue ~egulations were issued in implementation ;oi these price increases that year. The application oi said decree to the 1984 price increases is correct by the rules on statutory construction that laws unless otherwise provided shall have prospective eiiect". Unlike in the Caltex case, petitioner in this case did not o��er a very strong objection on the application o� PD 1889 but dwelt more to explain 892

DECISION �~. CTA CASE NO. 4780 -6- that in view of the existence of two other related laws, namely PD 1955 and LOI 1441, there can be no "extraordinary gain" although increases in the price of petroleum products was authorized by the Energy and Regulatory Board. On October 15, 1984, Presidential Decree No. 1955 took effect. Under Section 8 thereof, a special account in the General Fund was created and designated as Oil Price Stabilization Fund for the purpose of minimizing frequent price changes brought about by foreign exchange rate adjustments and/or an increase in world market of crude oil and imported petroleum products. The funds are sourced primarily from increase in tax collections on petroleum products. The fund shall be used to reimburse the oil companies for cost increases in the importation of crude oil and petroleum products resulting from exchange rate adjustment and/or increase in world market prices of crude oil. To implement P.D. 1955, Letter of Instruction No. 1441 was issued by the President on November 20, 1984, the primary purpose of which is to provide a system of periodic review of the price of petroleum products so that the adjustment, if ever made, would require smaller changes so it would be less 89~

DECISION CTA CASE NO. 4780 -7- disruptive to the economy. The LOI mandated the Board of Energy, as follows: �(!) To review and reset prices of domestic petroleum products up or down as necessary every two months or the second Monday of the month starting January 14, 1985 to refect the prevailing prices of crude oil and petroleum products; <2> Our price adjustment shall be made by adjusting the OPSF impost, increasing or decreasing this price component as necessary to maintain a balance between revenues and claims on the OPSF. (3) The price adjustment shall be made by the Board of Energy on the basis of certified import documents to be submitted by the oil companies and OPSF projection of revenues and claims to be submitted by the Ministry of Energy for this purpose. (4) This price adjustment shall cover only increases in crude oil and finished product, import cost and shall /� not include any adjustment for operating and other oil company cost. <5> This shall not preclude adjustments/restructuring of domestic petroleum product prices by the Board of Energy at any time when necessary in accordance with existing procedures.� Bearing in mind the aforementioned applicable laws involved in this case, we are now ready to examine and analyze the ERB order of August 14, 1987, which states as follows: �wHEREFORE, the herein applicants are hereby directed to REDUCE their netback by POINT FIVE <P.005> CENTAVOS average per liter, and authorized to provisionally 894

DECISION CTA CASE NO. 4780 -8- INCREASE the wholesale posted prices o� their petroleum products by an average o� FORTY-EIGHT POINT SEVEN <P0.487> centavos per liter plus thirty-one point one <P0.311> CENTAVOS per liter which applicants are hereby directed to pay to the OPSF. To this total amount o� SEVENTY-NINE POINT THREE <P0.793) CENTAVOS shall be added the resultant increase o� P.007 per liter average on the Ad Valorem tax adverted to above. 0� this total increase o� EIGHTY (P0.80) CENTAVOS per liter which shall be re:flec�ted in the retail prices, 48. 7 centavos have previously been allocated among the various petroleum products under BOI Resolutions Nos. 87-02 and 87-03 �or purposes o� reimbursement �rom the OPSF although not re:flected in the retail prices. This Order, there�ore, allocates only 31.1 centavos per liter and the point :five <P.005) centavos per liter netback reduction among all petroleum products marketed locally in the :following manner: OIL PRICE NETBACK STABILIZATION FUND Premium Gasoline � 02 . 4373 Regular Gasoline � 01 . 8366 Avturbo (. 078) Kerosene (. 13) � 5343 Diesel Oil � 08 � 5499 Fuel Oil (. 067) Feedstock (. 067) LPG � 06 � 6018 Asphalts (. 07) � 5296 Thinners/Solvents (. 12) � 5182 "The amount o� P.007 representing the ad valorem tax e��ect "allocates itsel�" 895

DECISION CTA CASE NO. 4780 -9- among the petroleum products upon the application o� the ad valorem tax rates. xxx" By literal interpretations of the order, without sufficient background and explanation as to the mechanics of an oil price hike, the component of the above price increase are as follows: Company net back <P.005) centavos average per liter Wholesale posted Price 0.487 centavos per liter Oil Price Stabilization Fund- P0.311 centavos per liter Ad Valorem Tax P.007 centavos per liter average Applying Presidential Decree No. 1889 and the implementing revenue regulation, we have come up with a computation of extraordinary gains by the difference between the old wholesale posted price and new wholesale posted price plus gain arising from the increases in specific or ad valorem tax, multiplied by the inventory of petroleum products and unhanded stocks, respectively as of the date of the new authorization for price increase. Hence, the pump increase of P.487 centavos and increase in ad valorem of P.007 centavos were multiplied with the existing inventory to arrive at extraordinary gain. This is how we interpreted the said order in the Cal tex case. 896

.... DECISION CTA CASE NO. 4780 - 10 - However, unlike in the Caltex case, where the contending parties merely submitted their own sel�- serving interpretation o� the laws, petitioner in the present case submitted su��icient documentary and testimonial evidence during the hearings to �urther explain the mechanics o� the oil price increase and the so-called extraordinary gain resulting there�rom. Foremost o� which were the testimonies o� the Chairman o� the Energy Regulatory Board, <ERB>, Rex Tantiongco, and the Director o� Finance Management Services o� the Department o� Energy, Cesar Ramirez. When con�ronted with a question whether or not, Mr. Tantiongco is �amiliar with Presidential Decree No. 1889, he answered that he is �amiliar with the decree because as an o��icer o� the ERB, he parti- cipated in the computation o� the wind�all pro�it tax slapped by the BIR on the oil companies. He continued with his testimony as �allows: �A. P~D. 1889 vas issued precisely to slap the oil companies with the vind�all tax they realized or they gained in the adjust�ent o� petroleum products during that time. But this time. the increase or decrease or any adjustment in the pump price o� petroleum products or on the wholesale posted price o� petroleum products does not go to the oil companies but re�1ected in the balance o� the OPSF or the OPSF contributions. x x x The netback or the company pay in the 89'7

DECISION CTA CASE NO. 4780 - 11 - producers price is affected only by the bi-monthly review and the bi-monthly is precisely only to reflect the adjustment in the cost of importation of crude oil. : <T.S.N. pp. 91-92, January 9, 1995 hearing> To explain further his point, Mr. Tantiongco testified that before the introduction of the OPSF on October 15, 1984 by Presidential Decree No. 1956, it is possible for the oil companies to get windfall profit because increase in prices are calculated based on the lowest inventory of the oil companies and the effectivity of the increase approximate that period. The oil companies will be realizing gain because the products they are selling then was out of the crude imported in previous period which was at low price. However, it is different after the effectivity of PD 1956 and the subsequent issuance of LOI 1441 on November 20, 1984 CT.S.N. pp. 76-77 January 9, 1995). In an answer to the question why oil companies may no longer realize windfall profits in the context of P.D. 1889 after the establishment of the OPSF, Mr. Tantiongco states as follows: �A. Because the adjustment in the netback nov is based on their actual importation. So the Energy Regulatory Board gathered all the documents from the Bureau of Customs, from the Department of the Energy which approves the importation of the oil companies and at the same time from the submission of the oil companies together with their documents or receipts they received from the Bureau of Customs. 898

DECISION CTA CASE NO. 4780 - 12 - So the netback is adjusted based on the actual cost o� the i�portation. And whatever adjustment in the pump price is re�lected only on the OPSF and not in the netback o� the oil co�panies. Although that adjustment is re�lected in the wholesale posted price, the composition o� the wholesale posted price is OPSF, tax and netback. So the adjustment on the whole posted price whether upward or downward a�ter the OPSF is created is directly absorbed by the Oil Price Stabilization Fund. <T.S.N. January 9, 1995, pp. 78 to 79.>� Chairman Tantiongco, �urther testi�ied that on July 14, 1987, the OPSF contribution was a negative 778.8 million. So the Board increased the price o� petroleum product by P.80 centavos per liter. 0� this P.80 centavos, P.798 centavos went to OPSF, ?.007 centavos went to tax and the netback o� the oil companies went down by P.005 centavos/per liter. This statement was �urther supported by the testimony o� Mr. Cesar Ramirez o� the Department o� Energy, the agency tasked with administering the OPSF. When asked about the components o� the 80 centavos increase, he state thus: �A. Actually there are three components. First is the 79.08 centavos which vas allocated and directed to be contributed to the OPSF. This is allocated �or purposes o� wiping out the de�icit in the OPSF averaging 48.7 centavos because at that time the OPSF vas already with a negative bala~ce. So there vas increases, cost increases that vas not re�lected in the WPP. So the 48.7 centavos vas the average amount which has to be reimbursed to the oil companies and 898

DECISION CTA CASE NO. 4780 - 13 - also there is, the other 31.1 centavos which will be used also to reimburse the oil companies to the accumulating outstanding claims up to August 1987 and also aiter the deiicit shall have been wipe out, the 31.1 will be able to augment or built up the Iund Ior the Iuture, whatever Iuture increases that may occur later. And also the second vas the reduction in netback by .005 centavos and the third one is the increase in the ad valorem tax by .007 centavos. So that is the component of the 80 centavos increase in the wholesale posted price.� <T.S.H. pp. 14-15 March 19, 1993). Mr. Ramirez likewise corroborated the testimony of Chairman Tantiongco, when asked the question whether the withdrawal by the oil companies constitutes a gain, that the withdrawals from OFSF is a mere recovery of the landed cost o� crude oil due to increases in the price o� crude oil and fluctuation o� the exchange rate. <T.S.N. March 13, 1993, p. 11 and Exhibit "M" pp. 18 to 19>. From the above testimonies o� the very o��icials who are involved in the authorization o� the oil price increase and in the implementation o� the mechanics o� the OPSF, it is clear that the WPP amounting to P.487 centavos per liter was part o� the OPSF and was ordered to be paid directly to the oil companies to satisfy their claim �or reimbursement as the fund was already in deficit and there was nothing more to draw or squeeze out o� the fund. We concur with the petitioner that the change 900

DECISION CTA CASE NO. 4780 - 14 - in procedure for claiming reimbursement does not change the nature of the funds and should not in any way prejudice the petitioner. The above testimonies explain the procedure taken by the Board in authorizing the August 15, 1987 price increase as recited in the body of the order. First of all, the Board limited the scope of the proceedings to the alleged increase in the price of crude oil and the peso-dollar exchange rate. The proceeding took into consideration the increase cost of crude importation incurred by the applicants during the period from March to June 1987, as compared to the cost of crude importations prevailing during the period January to February 1987. Taking into consideration our weighted average increase of P1.122 per barrel, or P0.007 per liter of product during the said period, the increase of P0.007 per liter should have been considered in the upward adjustments but the Board of Energy deemed it best not to disturbed the pump price and just let the oil company absorb the said P0.007 per liter cost differential. After a change in the manner of computing customs duty and some offsetting, underrecovery was reduced by P0.005 per liter and finally P0.002 per liter but nothing was 901

DECISION CTA CASE NO. 4780 - 15 - done to adjust the pump price. Under the circumstances, the remedy would be to allow the oil companies to withdraw from the OPSF, if and only to the extent that there is sufficient and available amount in the OPSF. As of July 14, 1987, the per liter recovery of the oil companies was reduced from 72.1 to 48.7 centavos per liter after the President issued Executive Order No. 195 reducing the taxes on petroleum products. This explains the components of this average wholesale posted price prior to the price increase, in peso per liter: Ad v a l o r e m . OPSF = WPP Company Netback 3.332 1.438 (.487)= 4.283 So, inasmuch as there are no more funds in the OPSF out of which the claim of the oil companies could be satisfied, the said 48.7 /liter should be added in the WPP and the oil companies should be allowed to directly recover from it. This accounted for the change in procedure and explains the allowance of direct recovery by the oil companies in the amount of P48.7 centavos per liter. However, the 48.7 centavos was not enough, the resulting outstanding obligation of the OPSF will still be approximately P650 million by August 15, 902

-~- DECISION CTA CASE NO. 4780 - 16 - 1987 and will have to be recovered by an additional contribution to the �und estimated at 31.1 centavos per liter, averaged. <Order o� August 14, 1987, pp. 21-22). This in turn explains the order o� the ERB allowing P.487 centavos per liter increase plus P.311 centavos per liter to the OPSF. All the �oregoing, especially including the testimonies o� the o��icials o� the agencies o� the government incharge o� implementing the very order and subject matter o� this case, hold �irmly to the �act that no extraordinary gain was derived by the petitioner by virtue o� the price order o� the ERB on August 14, 1987 inso�ar as the OPSF portion is concerned: �It is a principle too well established to require extensive documentation that the construction given to a statute by an administrative agency charged with the interpretation and application o� that statute is entitled to great respect and should be accorded great weight by the courts. unless such construction is clearly shown to be sharp con�lict with the governing statute or the constitution and other lava. x x x. The rationale �or this rule relates not only to the emergence o� the multi�arious needs o� a modern or modernizing society and the establishment o� diverse administrative agencies �or addressing and satis�ying those needs; it also relates to accumulation o� experience and growth o� specialized capabilities by the administrative agency charged with implementing a particular statute. In closing. it is use�ul to remind litigation 903

DECISION CTA CASE NO. 4780 - 17 - prone individuals that the interpretation by o��icera o� lava which are entrusted to their administration is entitled to great respect. The construction o� the o��ice charged with implementing the provisions o� a statute should be given controlling weight.� <Nestle Philippines, Inc. va. Court o� Appeals and Securities & Exchange Commission, 203 SCRA 504 <November 13, 1991. >; Siera Madre Trust versus Secretary o� Agriculture & Natural Resources, 121 SCRA 384 <April 20, 1983>; Asturias Sugar Control, Inc. versus Commissioner o� Customs, 29 SCRA 617 <September 30, 1989. > XXX XXX XXX However, the same conclusion may not be true with regard to the increase in the ad valorem tax by an average of ?.007 centavos per liter of petroleum products. The respondent is correct in assessing petitioner for 65/. surtax on extraordinary gain covering tax- paid petroleum products because the taxes on those products have already been paid at the old rate as required by law and when sold at the higher pump price petitioner certainly benefited by the increase in ad valorem tax. The increase in ad valorem tax goes to the petitioner as the law requires payment of the tax within fifteen <15> days from the date of removal of petroleum products from the place of production (Section 127 (a) National Internal Revenue Code). These stocks are stored in unbonded installations or depots ready for marketing and are not subjected again to the payment of the 904

DECISION CTA CASE HO. 4780 - 18 - higher tax rate. To the extent o� this unbonded or tax paid stocks, this Court believes petitioner is liable to 65Y. surtax �or extraordinary gain pursuant to PD 1889. In �act, petitioner �ailed to dispute this �inding o� the respondent. Accordingly, the assessment against petitioner �or surtax on wind�all pro�it or extraordinary gain is recomputed as �allows: 1. Due to the increase in the Oil Price Stabilization Fund, deleted. 2. Due to tax paid inventory o� petroleum products. ITEJf IHVEHTORY Premium Gas P18,452,288. 0 0 Regular Gas 11,810,756.oo Kerosene 9, 968, 741. 00 Diesolie 46,046,147. 00 Fuel Oil 35, 164, 191. 00 Avturbo 2,896,826. 00 Solvents 441,039. 00 LPG 6, 144, 471. 00 Total 130, 924, 464. t::><::> Multiply by average rate o� increase in Ad Valorem Tax x P0.007 916, 471.15::.5 Multiply by rate o� .x 65X Surtax P595,706.3:1. Add 25Y. surcharge 148,926.57 P744,632.aa *plus 20Y. interest �rom date prescribed �or payment which is within thirty (30) days a�ter August 15, 1989, the e��ectivity date o� the price increase, until the amount is �ully paid pursuant to Section 249 o� the NIRC. 905

- . -- DECISION CTA CASE NO. 4780 - 19 - Where.�ore, in view o� all the �oregoing, the assessment is hereby modi�ied. Petitioner is ordered to pay respondent the total amount o� P744,G32. 88 representing surtax on extraordinary gain, inclusive o� the 25X surcharge plus 20X interest �rom August paid. SO ORDERED. ~~~ RAMON 0. DE A Associate J ge I CONCUR: ~lQ.Q~ ERNESTO D. ACOSTA CERTIFICATION I hereby certi�y that this decision was reached a�ter due consultation with the members o� the Court o� Tax Appeals in accordance with Section 13, Article VIII o� the Constitution. ~\Q--~ ERNESTO D. ACOSTA Presiding Judge Court o� Tax Appeals 906