CTA Case No. 2040 (Decision)

HEf'U!IL!C OF TH E PHILIPPi~ ES COURT OF TAX APPEALS QUEZON CITY r LI SElqG GIAP TRADING � C. T�� CASE No. 2040 CORPORATION, Petitioner, - versus - C01-)}1ISS IONER OF INTERNAL REVENUE, espondent . x- - - - - - - - - - - -x DECISION Petitioner has appealed from the decision of res pond- ent Commissioner of Internal Revenue , dated August 18, 1969 , holding it liable for deficiency advance sales tax of i~ , 167 ,144. 26 on its 1963 importatior:s of Nercedes Benz diesel engines, computed as follows: 100% 7% Total landed cost Add: Nark- up Amount subject to tax Advance sales tax due ~ 21 , 335- 99 thereon Less: Advance sales tax paid 20 , 253 . 14 Total .Amount Due & ~-�-====8=~=� =8=l (Exh. 11 8 11 Dem a n7d0a,b le R rec. ) , p. BI Petitioner is a domestic corporation engaged in the impo'rtation of diesel engines from Germany. In 1963 , peti- tioner imported from said country several sets of Mercedes Benz truck diesel engines and paid 7% advance sales tax of �20 , 253 . 14 based on -the landed cost of �304,799 . 82, inclu- siVe of 25% mark-up, thereby leaving a balance of ~82. 85

DECISION - CTA CASE No . 2040 2 (it should be i:1 , 082. 85) still due the Government . nm~ing the same year, petitioner likewise imported from the same country 130 units of Mercedes Benz diesel conversion engines �type OM 636. 935 for which it also paid � 7% advance sales tax based on the landed cost thereof plus 251~ mark-up under Section 186 of the National Inter- nal Revenue Code , in relation to Section 183(b) of the same Code . Petitioner was investigated by respondent's revenue examiners in -conneGtion with its 1963 importations of die- sel engines to determine the deficiency advance sales tax, if any , due from it. On October 14, 1964, the said exam- iners recommended that a deficiency advance sales tax assessment of ill ,l67 ,ll.jlt-. 26 be issued by respondent against the said petitioner because it only paid the ad- ~ance sales tax at the rate of 7% based on the total landed cost of the imported diesel engines plus 25% mark- up, in- stead of 100% of the landed cost plus 100% mark-up. The said recommendation was approved by respondent by demand- ing from petitioner payment of the said deficiency ad- vance sales tax of ~1 , 167 , 144. 26 . Petitioner disputed and assailed respondent's assess - ment by contending that it did not import the diesel en- gines in ques t.ion as a producer or manufacturer of auto- mobiles since it is engaged in trading; the said diesel

'I 'I' . DECISION - CTA CASE No. 2040 3 engines are primarily truck conversion engines; and the said engine!:; are not ready for vertical mounting in any Mercedes Benz car Model 180-D. On the basis of the fore- going allegations, petitioner claimed that it is only sub- ject to 7% advance sales tax on the landed cost of the im- ported diesel engin~s plus the 25% mark-up prescribed under Sections 186 and 183 (b) of the Tax Cbde, in relation to ~epublic Act No. 1188 which provides that trucks and jeeps are sUbject to advance sales tax imposed by Section 186 of the s arne Code. The only question posed for resolution is whether the rate of advance sales tax imposable on the imported Mer- cedes Benz diesel engines type OH 636.935 is 100% of the gross money value thereof plus 10~~ mark-up, as prescribed in Sectiorn 184(a) and 183 (b) of the National Internal Revenue Code, or 7% of the said value plus 25% mark-up, as prescribed in Sections 186 and 183 (b) of the s arne Code� Respondent 's examiners claimed that the imported die- sel engines are ready for mounting for Mercedes Benz car l-1odel 180-D. In fact, all 180-D Mercedes Benz cars run- ning in Hanila and suburbs are touring cars mounted with 014 636 diesel engines. The revenue examiners, therefore, conclUded that the said engines may be mounted on trucks and jeeps but they remain as automobile engines because the criterion is not where the diesel engines are actually

DECISION - CTA CASE No. 2040 used or mounted but the purpose for \Y'hich they had been . manufacttired . As the J.'.1ercedes Benz car Model 180- D were sold to ct~tomers at a price of over �10,000. 00 per unit, the automobile diesel engines in question ar~ subject to 1009~ saJ.es tax based on the landed cost thereof plus 100% mark-up prescribed by Sections 184(a) and 183(b) of the National Internal Revenue Code . At the time material to the case at bar , the perti- nent parts of Sections 184 and 186 of the Tax Code provide as follovrs: SEC. :t84~ ,Percentage t~ on s�.les of jewelrY , automobiles , toilet Pie~Arations , and others . - There shall be levied, assessed, and collected once only on every originaJ. sale, barter , exchange , or similar transaction for nominal or Valuable consider �.tions intended to transfer ownership of , or title to, the ar- ticles herein below enumerated a tax equivalent to fifty per centum of the gross value in money of the articles so sold , bartered, exchanged , or transferred , such tax to be paid by the manufacturer or producer: Provideg , That where the articles enumerated hereinbelovr are manu- factured out of materials subject to tax under this section, the total cost of such materials, as duly established , shall be deductible from the gross selling price or gross value in money of such manufactl.ll'ed articles: (a) Automobile chassis and bodies, the selling price of which does not exceed seven thousand pesos: Provided , That where the sell- ing price of an automobile exceeds seven thou- sand pesos but does not exceed ten thousand pesos the same shall be taxed at the rate of seventy-five per cent um of such selling price: And provided, further, That where the selling price of an automobile exceeds ten thousand pesos the same shall be taxed at the �rate of

� r' DECI.S ION r CT CASE No . 2040 5 one h~ndred per centum of such selling price . A sale of automobile shall , for the purpose of this section, be considered to be a sale of the chassis and of the body together with parts and accessories with vlhicp the same are usually equipped: Provided , however , That parts and accessories of automobiles imported as replacements or as completely knocked down parts for the assembly of auto - mobiles shall be subject to tax under section one hundred and eighty- six : Arill., provided , further , That the total costof such materials or parts on which tax has already been paid under section one hundred and eighty- six, as duly established , shall be deductible from-� the gross selling price or gross Value in money of the assembled or manufactured ar- ticles . The term 11automobUe 11 as used here- in shall not in�1Ude motor . vehicles class i - f ied as trucks . , SEC. 186. Percentage tax on sales .of. other article� .- There shall be levied , assessed and collected once only on every origj_nci.J_ sale , barter , exchange , and similar / transaction either for nominal or valuable considerations , intended tcx _.transfer owner - ship of , or title to , the articles not enu� merated in sections one hundred and eighty- four and one hundred and eighty-five a tax equiValent to seven per cent um of the gross selling price or gross value i n money of the articles so s old , bartered , exchanged , . or transferred , such tax to be paid by the manu- facturer or producer : Provi ded , � That whepe the articles subject to tax under this sec- tion are manufactured out of materials like - wise subject to tax under this section and section one hundred and e ighty-.nine , the total �cost of such materials , as duly es- tablished , shall be deductible from the gross selling price or gross value in money of such manufactured articles . Under the foregoing provisions of Section 184(a) of the Tax Code , the imposition of the 100% sales tax on the iplported diesel engines has no legal basis what- 1 Csee NIRC, 1964 ed.)

DECISION - ... CTA CASE No. 2040 ' 6 soever. Even assuming arguendo that the diesel engines imported by petitioner are car engines , the worksheets of the investigating revenue examiners show that the total landed cost thereof , inclusive of the 1001~ mark-up�, is far below [':7 ,ooo. 00 each. In fact , Supervising Revepue Exam- iner Ben j amin :t-:adrasto testified that the landed cost per unit of the disputed diesel engine , inclusive of 100% mark- up , is around ~ , 696. 00. (T. s . n. , p. 179 , hearing of ~September 20, 1971 . ) This valuation , which is very much belovr ~7 , ooo. oo, is supported by and reflected in the sales invoices of petitioner. (See pp . 75 to 166, CTA - rec ~ ) Section 184( a) of the Tax Code then in for.ce in 1963 prescribes the rates of sales tax on automobiles as fol- loHs : SELLING PRICE RATE OF SAL~ TAX ff-7 , 000. 00 or belovT 50% 75% �7 , 001.00 to ~10 , 000 . 00 100% rlO , 00(1. ., 00 up On the bas is of the provis ions of Section 184(a) of the Tax Code as illustrated above , respondent could only assess petitioner a deficiency sales tax of ~559 , 959 . 16, instead of the staggering amount of �1,167 ,144. 26, com- puted as follows: Total landed 'Cost ����� ~ 607,102. 25 Add: Marlt-up of,. 100% � � � . 60~ , 102. 2.2 TOTAL � � � � � ~1,21 , 204.50 50% sales tax due - thereon . ~ 607 ,102. 25 5~~ : �%: f~ Less: advance sales tax paid BALANCE � � � � � ~

DECISION CTA CllSE 1 o. 204-o 7 th~ � kaA Cod@,.,� Respondent ' s assessment for . de.ficiency advance sales tax is premised on petitioner ' s brochure of the OM 636 type of Mercedes Benz conversion diesel engines (Exhibit 4), the pertinent portion of which reads as follows: 111>10RE THAN 300 , 000 OF THESE- ENGINES HAVE BEEN BUILT I NTO TRUCI\S , LIGHT BUSES , Tift!; ffi.UNOG AN;Q ABOVE JiLl:! THE l8..0::D. TOURJ;NG CA..B.. 11 (Underscoring supplied. ) Respondent ' s exruniners also relied on petitioner ' s Sales Invoice No . 2276 dated Oct. 18 , 1963 (Exh. P- 25 of petitioner , CTA rec ., p. 97) showing that petitioner sold for ~4 , 702. 50 to � D. Santos , Inc . , a taxi company , a unit of Hercedes Benz diesel engine of' the ON type 636 . 935� Supervising RevenUe Examiner Benjamin Madrasto testified that his companion , S upervisi .ng Revenue Exruniner Luis Blaza , inquired from the taxi company about the Cl.iesel en- . gine in question and he was informed tha t the same was used by the said company. (T. s . n., p. 146. ) However, no evi ence 't�rhatsoever was submitted to this Court shovring that the said diesel engine was ready for mounting or that it lttas mounted on a taxicab owned by A. D. Santos, InG � Neither was the Registration Certificate of the taxicab aJ.lUded to, or a certified true copy thereof , prese.nted in evidence to prove the type and kind of the engine used and the fuel needed for its operation.

DECISION - �' ' CTA CASE No . 204o 8 The only justification for the assessment of the defi- ciency saJ..es tax is the allegation of respondent's exam- ' iners that the Mercedes Benz diesel engines of the OM type 636. 935 were manufactured as car engines and , therefore , it is immaterial whetl;ler the same were later on mounted in trucks and jeep.neys . In fact , even Mercedes Benz truck engines of the OH type� 636 were inclUded in the revenue examiners 1 deficiency sales tax assessment on the theory stated above . (See Exh. A, p~ 31 , CTA rec . ) FAllacy of respondent's t~orv . Respondent ' s examiners took for granted that Herce- . des Benz diesel engines of the type OM 636 are exclus�ive- ly made for automobile engines . No evidence , l:J.o\vever , was introduced on this point except the -inference derived fJ;'om petitioner ' s brochure \vhich indicates that the said en- gines were also built for Nercedes Benz 180- D touring ~ars . The same brochure likewise indicates that the diesel en- gines in question are multi- purpose conversion engines suitable for trucks, light buses and the 11uminog . 11 Hr . � Rudolf Christian, -an engineer of Germany and a qualified and veteran teclmician of Daimler Benz , A. G. , manufacturer of the conversion diesel engines in question, testified as an exper~ witness that the said diesel en - gines have been used in lift trucks , agricultural and buildirtg machinery, excavators of all kinds , speed boats and motor launches, pmver supplier for cooling systems,

DECISION CTA CASE No . 20lt0 9 generating plants , -jeepney engines, delivery panels and vans. The use of said diesel engines for rugged jeepney . operations under extreme weather changes and strenuous stop-and-go traffic conditions was well publicized by the local distributor of the said diesel engines. - (Exhs. S, S - 1 , S - 2 and S - 3 , - CTA rec., p . 169 and back thereof .) Respondent 1s exc:mliners considered the said engines without t he rectangular metal framework and its body as automobile classified as a luxury_item under Section 18lt(a) of the Tax Code. On the other hand , the articles enumer - ated under Sect 16fiS-: 185 and 185(a) are classified as semi-l~~ury goods while those enumerated W1der Section 186 of the same Code are considered ordinary goods . The sale of automobile inclUdes the chassis and bod'y ' together with parts and a ccessories with vlhich the same are usually equipped. - This interpretation is clear from Sec- tion 184(a) of the Tax Code which provides , among others, ' as follows: 11x � x x . sale of automobile shall , for the purpose of this section, be considered to be a sale of the .cha.ss is and of the body together with parts and accessories with which the s arne are usually e quipped: x x. 11 The same interpretation \vas given in the opinion of the Secretary of Finance regarding importations of auto- mob ile , whether already assembled or chass1~ aug body ready for mounting �. The said opinbn is found in mm General Circular No. V-208 ,. dated Hay 2lt , 1956, tlfe pertinent por -

DECISION - CTA CJ~E No . 2040 10 tion of which re.ads -as follows: 11 GENK JJ... CIRCULAR NO. V- 208 11To all internal revenue officers and otuer~ concerned: 11 For the information and guidance of all internal revenue officers and others concerned, there is quoted hereunder an opinion of the Secretary of Finance contained in his letter to this Office dated May 24, 1956 , regarding the advance sales tax collectible on importa- tions of automobile , whether already assembled or chassis and bodSes ready for mounting under sections 184 and 1 6 of the fational Internal Revenue Code , as follows: ' tiith reference to my letter to you dated February 24, 195�6, regard- ing the advauced sales taXes which are a:QPlicablii_to imported aH;t.QIDQ.:. ~' I \vish to clarify and re - iterate my vie\>r that itlmQJ'tati9~ of asse..mbled.. automobJ..l~i~ t:or r?ss.U.e as, well as importatJ.on� of' chassis and, bodies ready for moppting , are sub- .iect to the advanced .~al?s ta;x;es � prescribed under sections 184 and 185 of the Tax Code . 1 It should be carefully noted that this refers to importations of auto- mobiles already assembled and chassis and bodies ready for mounting . x x. ' For the purpose of this letter, chassis and bodies may be defined as follmvs: - 1 (1 ) Chas s i� as a.ppl i ed to a motor car means : 11The rectangular metal frame'tifork, as distinguished from its body and seats , but inclUd- ing its accessories for propulsion, as the tanks, motor , etc. , and general running gear . 11 (ransas City Automobile S chool Co . vs . Holcker �lberg --f.:fg . Co., No . 182 s . W. 759, 761.)

DECISION - CTA CASE No. 20LrO 11 1 (2) Body as applied to a motor car means: 11 The metal shell , interior trim , seats , cowl , hood, fenders, � grille , doors, windows and \vindshield, etc . 11 ' x.x XX xx. ' Importations of automobiles, whether already assembled or chassis and bodies ready for mounting , come under sections 184 and 185. IJnporta- tiQDS of automobile parts an~ accessori~s and c~ � ~omponent parts come und~r sec - tion 1 6~ 11 The same VievT finds ample support in the conference report , quoted below , of the committee which prepared House Bill No. 5809 (nmv Republic Act No. 1612): 11 eport consolidates into one PC1ragraph all provisions covering tax on automobile ghassis and bodies , so as to avoid confusion in the manner and rate of taxing locally- assembled cars . t1ith that , Nr . President , there has been confusion in the manner of im- posing tax on assembled cars here . The spare parts were made to pay taxes , and when as - sembled cars were sold , a luxury tax is im- posed on the assembled cars , so that in ef- fect , the industry is paying two kinds of taxes. �Jith this conference report , we con- solidat ed all these provisions , so that the tax paid on spare parts are deductible when these parts are asse mbled into finished cars . Otherwise, the assembly industry here would be paying two kinds of taxes , which is contra- ry to the basic philosophy of our taxation system; and second , with that kind of double taxation, these cars "Yiould have to be sold at exhorbitant prices . x x x . 11 -� (Senate Congressional Record, July 11 , 1956 , p. 305. ) It is quite evident that it was the legislative pur - pose to tax the chassis and body of an automobile ready for mounting under Section 184(a) of the Tax Code . In this

DECLSION - CTA CASE No . 2040 12 case , hov1ever , the J-.1ercedes Benz diesel eng ines of the type OH 636 sold by petitioner to its customers is in the nature of a chassis without body as des c ribed in the Com- mercial Invoice , \vh ich reads as follovJ'S : Ten (10) units Nercedes Benz Diesel Eng ines Type ON 636 , 4o HP , complete with clutch , floor shift type gear box and c on. version parts ~ pa cked. (See Exh. B, CTA re c. , P� 34. J The legal requirement that the sale of the chassis and body cons t itutes the sale of an automobile is understand- able . The sale of the chassis \vithout the body is not a fli1is~~d product of an automobile; otherwise , each set is useless 'tvithout the other as an automobile . The chassis alone , like t he Hercedes :Benz diesel eng ine here in ques - tion , ca nnot be re g istered with the Land Transportation Comniss ion as a car without the body of an automobile . If' the same diesel engine is mounted in t he body of a jeep or truck , the same will be re g istered either as a jeep or truck but not as an automobile . This discussion and consequent dis tinction bett.reen the chassis and body o.f a motor vehicle is deemed indispensable in overthrovd:ng respondent ' s the ory t hat the 11er cedes Benz d iesel eng ines are t �a.:xab:Ie a.S' automobile engines because they have been exclusively manufactured fop Hercedes Benz touring car 1 80- D. Respondent ' s View woLUd run counter to the purpose and spirit of Re p ublic Ac t No . 1188 which provides as fol - 10\�J'S: �

\,- I DECISION - CTA . C. SE No. 20L1-0 13 1 ~ec . 1 . For purposes of the imposi- tion=��. and collection of the sales tax , the motor vehicle technically denominated ' one - fourth ton truck , four by four ' and popular- ly known as the jeep , is hereby classified as a truck , and every original sale , barter , exchange or similar transaction involving the transfer of mvnership of , or title to , said motor vehicle shall be subject to the payment of the tax provided for in section one hW1dred eighty- six of the National In- ternal Revenue Code , as amended . 11 espondent , hm..rever , pointed out in his memorandu.rn that the decision of the Supreme Court in the .case of Jose F. Zamora (Golden Taxicab) vs . The Court of 'l'ax Ap - peals , e t al ., G. � No . 23272 , is squarely applicable to the case at bar. His quotation , found on page 17 of the said memorandum, is reproduced hereunder: 11 It is argued that section 190 of the National Internal Revenue Code 1does not m$-ke a dis tinction beti.veen the importer 'vho is a manufacturer or car assembler and an importer who is not a manufacturer or assem- bler . 1 However , ' parts and access.ories of automobiles ' are subject to the 7% rate, under section 186, by Virtue only of the first proviso in subdiVision (a) of section 184, which limits the application of said section 186 to ' parts and accessories of automobiles imported as replacements or as comPletely knocked down parts for the assem- bly or automobiles x x x. 1 Indeed , this qualification is in consonance \ftTith the spirit and letter qf section 186, \vhich provides that the rate therein fixed shall be ' paid by the manufacturer or producer. 1 In other words , it is not intended for the end- user or con- sumer. xx xx 11 118 ince the petitioner is not engaged in the manufacturer or assembly of automobiles, it being a trading firm engaged in the buy- and - sell of automobile enoines , the 7jf; rate

DECLSION C'rA CAS 'E No . 201t0 is not applicable to the engines in ques - tion which it imported as 11replacement en- g ines . II (I,~emo . for Respondent , CTA rec ., p . 2ltl+. ) In t he Zamora case , our S upreme Court ruled that parts and accessories of automobiles imported by an end- user like the Golden Taxicab are subject to the 50% ad - vance sales tax without mark- up, imposed by Section 18lt(a) of the Tax Code . On the other hand, manufacturer or pro - ducer of automobiles a re sub ject to the 71& sales tax pre- scribed by Se ction 186 of the same Code on similar im- portations . , In the case at bar , however , petitioner is neither I the 11end - user or consumer'' nor "manufacturer or producer" of part s and accessories of automobiles . As a trader , therefore , pe titioner is not within the scope of the S u- preme Court ruling . Moreover , the rationale of the said ruling is not appl ic able to this case . The payment of the 7~~ advance sales tax made by petitioner herein based on the landed cost of the imported diesel engines , plus ~51s mark- Uib v.rill not ope n the door for the circ umvant ion 1 of the l aw i mposli1g a higher rate of sales tax because , if the said e ng ines were sold to a manUfacturer or pro - ducer and converted into an aut omobile , the original s ale t hereof is subject to the higher r a te of sales t ax imposed by Se ction 184(a) of the Tax Code . If the same engines were sold to an end- user or consumer, the same cannot be classified as an automobile Hithout body and chassis as s pec ified by lmv.

DECISION - CTA CASE No. 2040 15 This case differs from the Zamora case , suRr~, be- cause the imported Ford Consul Sedan involved therein are automobiles ~n completely knocked down (KD) parts while the diesel engines imported by petitioner are multi-pur- pose conversion eng ines which vrere not ready for mounting in an automobile . Noreover , no evidence vTas addllced by respondent 's examiners t hat the engines in question were parts and accessories of an automobil�8 and they were used as such therein. EVidence on the convers ~-on diesel e n~ines type 01�1 36. 935 . After discllSsing the eVidence and theory of respond - ent that the ON 636. 935 type are automobile engines , we are going to evaluate the eVidence of petitioner. Nr. Rudolf C:.~ristian , petitioner's expert \vitness , testified that the series of 110N. 636 11 d iesel engines is a mere 11nllmber or i dentification of t he prototype . 11 (T. s . n . , p . 28 , hearing of Sept. 14, 1971 . ) In fact , 01-i 636. 915 engine wa.s also used in Nercedes Benz car 170- D; OM 636 . 916 was used in 170- DA car; 636. 918 was used in 170- D3 car; 636. 931 was used in 1700 - D car ; and 01-1 636. 930 was used in 180- D car . In 1958 to 1960 , QL ' 62J, . 910 was also us ed in He rcedes Benz ca r 1 80- D. The fore going data were t al-cen by the expert witness from the Me rcedes Benz Technical Data for \'lorkshop Use in Passen - ger Car , 1957 and 1960 editions . (Exh. R- 2 , CTA rec ., pp. 171-177- a . )

DECLS ION - CTA Ct~E No . 2040 16 Petitioner ' s witness dis ti.nguished OM � 636. 930 dieseJ._eng_j,nes which \vere used with Nercedes Benz car 180- D from the OM 636. 935 diesel engines here at issue . They differ in revolution , construction, camshaft, in- jection pump , oil pan , oil pump and in mounting the engine . While OH 636. 93_Q. engine is ready for mounting in 180- D Hercedes Benz car , OM 6)6 . 93 5 engine is not ready for mounting in a car without modification , al- teration and additional expenses because type OM 636. 935 is a multi-purpose co.nvers ion engine . From the testimonial and docwnentary evidence ad - duced by petitioner , which were not refuted by respond - ent , we are constrained to hold that the Mercedes �Benz diesel engines type OM 636. 935 here in question are not automobile engines ; theY are truck or conversion engines for multiple purpose . But even assuming arguepdo that the said engines are ready for mounting as automobile engines \vi thout the necessity of� alteration and modi- fication , no evidence whatsoever was presented by re - spondent's counsel that the same were sold for their . . conversion into automobile. t'lith respect to the deficiency� sales tax of 82. 85 (it should be �1 , 082. 85), the payment of \vhich was not disputed by petitioner , we hold petitioner l i able there- f .o r .

DECISION - T 17 CTA Cl\SE No. 2040 tVHEREFORE , we hold petitioner subject to the 7% advance sales t ax imposed under Section 186 of the Tax Code based on the landed cost of the imported ercedes Benz conversion diesel engines type OH 636. 935 plus 25% mark- up imposed by Section 183 (b) of the s arne Code . Consequently , the decision of respondent Commissioner of Internal Revenue appealed from is reversed and his deficiency sales tax assessment against petitioner is hereby cancelled , except the amount of ~1 , 082. 85 still due from petitioner. Without pronouncement as to cost &. SO ORDERED. Quezon City , April. 12, 1973 . 1JlE CONCUR : ROHAN N. UNALI Presiding JUdge 12-- ~h-_ , Rl\NON L . � V.t\.1\JCEJ".>:.A Associate JUdge