CTA Case No. 3824 (Decision)

U:fttJBLIC OP �~ He: ...tJfUPPil'"'� ~URT OF TAX APPEAU Q\JKO.IC Cl fY I' 3M PHI LIPPINES , INC., Petitioner, - versu s - C.T .A . CASE NO. 3824 COMM ISSI ON ER OF INT ERNAL f' REVENUE, : ) Respo nde nt. I X- - - - �- - - - - X I DECIS I ON This is an appeal from the decision of respondent Commissioner of Int erna l Revenue holdin g petitioner liable for the amounts of 8216, 790.37 and B9, 355.41 , or a tota l sum of B226 , 145.78, as deficiency sa l es and contractor's taxes, respect ive ly, for the period from Nov ember 1? 1974 to Octobe r 31 , 1975. Pe titioner 3M Philippines, In c . is a dom estic corporation engaged in t he busin ass as an importer, wholesaler and exc lusive manuf acturer of 3M brand product s such as ab ~ asive, adhe sives , re f ectorized traffic signs, medical and electrical s upp lies , and ca s sette tape s . I t is also en gaged i n th e leasing and ser vicing o f duplicating ma c hines. While peti- t ~o ner is the sole dealer of 3M brand photoc op ying machine s, it has also other uni ts of photocopying \ 500

DECISJO, ' - CTA CASE NO. 3824 - 2- machines for lease, with exclusive con tracts for tbe servicing and maintenance of the said units . (pp. L~S- l.t6J BIR rec.) '� In the investigation conducted by the BIR exam - iners, it was disclosed that, fo r the period from Nov ember l, 1974 to October Jl, 19 75, petitioner is liable for deficiency contractor's tax due from rental and service inc ome of photocopying machines. Like~~is e , i t v1as also tile finding of the examjners that, under Section 185-B(g ) of the Old National Inter- nal Revenue Code, the manufac tur e and sale of cassette tapes is t axed at 40% and since the imported ra w materials used in th e manuf ac tur e t hereof ~s fi ni shed art icl es Are also subject to 40% advance sales tax 1 the allocuhle portion of all owable raw materi8ls used in the manufacture of the aforesaid article nre considered as deduction in arriving at the net taxable sales . (p. 45, BIR rec.) On t he br:H>is of the BIH f'ind:i.ngs, the cor respondin g deficiency assessme nt, computed he rein belo w ( p. 49 , BIR rec . ), was issued against petitioner. Def . sales tax per investigation ~ ~ E?HJ1 , 2L:8.29 e21 6 , 7 9 o�3 7 25% surcharqe � � � � � � � � � ___2_'.)_t_ 31_ 2 ._ 07_ 1 4% int. fr. l/21/76 - 7/3 1/80 E!l L.G , 560.3 6 20 % int. fr. 8/1/80 - 1 2/22 /8 0 80 ,2 67.01 _______2..1_:~_0 3 -~o_g_ N \ J

DECI SION - - 3- CT A CASE NO. 3824 J' Def. percentag e t ax per investigation � e !+,369 . 30 1 , 092 . 32 25% surcharge � �� ���� e 5 ,461.6 2 3,463 . 86 14% in t . fr. 1/21/76 - 7/31/80 e 9',355.41 429 . 93 - 20 % int. fr. 8/ 1/ 80 - 12 /22/80 ~-~-f-�-l.-1-~-2.-!-.-Z-~ Total Amount Due and Collectible In a l e tter dated February 28 , 1981, pe t itio ner protested the assessment contending,am ong o thers, that Section 185-B (g ) of the Old Tax Code does not i nclude cassette tapes with i n its pu rview as said se cti on refe rs to machines, ins truments, and devices which are ca pable of r e cording or reproducing sound or mu si c and casse tt e tape is ne ither a machine, instrument and device, hence, not subject to 40% sales tax, but to 7% sales tax as an ordinary article, und er Sec tion 186 of the said Old Tax Cod e . It wa s further contend ed that th e deficienc y contractor's t ax assessme nt arose beca use t he BIR exa m- iners includ ed the sal es for the pas t pe riod, th e app l i- cable tax on which had a l ready bee n pa id . (pp. 53-55, BIR rec.) The protest of petition er was finally denied b y respondent in his letter-deci s ion dated April 18, 1983 . Hence, thi s appeal . Th e is s ues so u g h t to be resolve d by th e parties ma1y be stat ed as follow s : \ 50 '7

I DECISION �- CTA CASE NO. 3824 .. . 1. . \ 1he th er the blank caso;ctt.e tapes manura ct ur e d an d snld by r e ti- tioner fr o m Nove mber 1 , l974 to October 31 , 1975 are sub j ect to 40% s.:1 l es tax .:1s s o und :r e pro duc in q or recordi ng a.rti. cle s und e r Sectio n' 185 or 185-B(g) of th e Old Tax Code, or 7 ~~ sa 1 e s � bn: a ~~ o r d i n a r y a r t i c 1 e s und er Se c t ion 186 of th e sAme lax Co de; nnd 2. Whether or not t h e jmpo si tion o f th e defici ~ n cy J% contractor ' s tax u nder Secti on 191 of th e Old Ta x Code aga i nst petit i oner f o r th e same pe rio d is proper . Th e pertinent provis ion of law cove rin g the d e fi- ciency sales a nd co ntr Actor ' s percentage tax es f or th e fiscal ye Dr from No vemhnr 1~ 1974 t o October 3 1, 197 5 are Se c t ions 18 5 , l85(cl), .1.8 )�- ('� 9 ) ' 18 5- B ~g) and 186 of the Old Tax Co d e, � as amended by F:epubl ic /\cL No. 61 10 and P.,D . No. 69 , a nd !)e cLiort HU( a ) of the same Code~ which a re quoted herein beln ~ , res p ectively, as follows : " Sec � l 8 5 � f..E..E.~..r:!.!-~1e --~h-2..!:'.. g~t!;.t~.�_. �.f..~.�.9..E..!-.~..~fl._Sl�9_d 8...t......9.!!...cL_~-~ h~-:..E...~� There shall b e levied , assessed , and c ollec te d once onl y on ev e ry orig in al sa le s, bar ter, exc hange , or similar transact.io n i ntend ed to transfer o~tner�-� ship of, or titl e to, the ar ti cles hereinbelow cnume ate d, a tax eq ui- v a 1 e n t Lo f o r t y E.!?..E.......��~t ~~!_ o f �~ he q r o s s value in mo ne y of the articles so soldr bartered, exchanged or transferred , suc h tax to be pai d tly the manufacturer or p ~oducer: Pr ov i ded~ Tha t where t h e ar ti cles enume r a ted here in below are manu f actured o u t o f materials sub je ct vt� 0 ."' J

DECISION - - 5- CTA CASE NO. 3824 ,. to tax under this s ection, the tota cost of such materials, as duly estab- lished, shall be deductible from the gross selling price or gross va lue in money of such manufactured articles. XXX XXX XXX (d) Articles of which celluloid is the component material of chief value; XXX XXX XXX (g) Pianos; phonog r aph records (except thos e locally manufactured and those us ed for educational purpose s) ; juke boxes; Sec. 185-B. Percentage tax on sale s of phonographs, combination r~dio and phonograph sets of all types, television sets, combination radio and televi~ion sets, combination radio- phonogr aph-televisio n sets, gramophones, and similar articles. - There shall be levied, assessed and collec te d once only on every original sale , barter, exchange, or similar transaction in- tended to transfer ownership of, or title to, the articles hereinbelow en umera ted a tax equ iv alent to forty per centum of the gross selling price or gross value in money of the articles so sold, bartered, exchanged or trans- ferred, such tax to be paid by the ma nufacturer or producer: Provided, ' hti~ever, That wher~ the artic le s h e rein- below enu merated are locally manuf a ctured articles as hereinafter defined, the tax shall be seven per centum: Prov i dBd furthe r , That where the articles enume- rated hereinbelow are manufactured from mater i al s subject to ta x under this Section the total cost of such materials \ 50 '

DECISION - CTA CASE NO. 3824 - 6- shall be deducted from the gross selling price or gros s value in money of such manufactured articl s s: (a) Phonogr a phs; (b) Combina t ion radio and phono- graph s e ts of all types; (c) Television sets; (d ) Combination radio a~d tele- vision s e ts; (e) Combination radio-phonogr aph- television sets; (f) Gramophon e s; and (g) Similar articles for reproducing and/or r ec ording music and sound, ike tape recorders , etc. The words "locally manufactured articles" mean articles manufactured in a manufacturing enterprise which process physically and/or chemical!~ raw materials such as copper clad boards, silicon, steel laminations, other metal sheets, wires, plastic powder and/or pall e ts, fiber boards, wood, metallic and non- metallic tub~s, rods, special p ap er, etc., into the various i ntermed i ate components and parts into such completed and finish e d articles: Provided , however, That if the following parts are intermediate components of a f in ished article, except as used in the tuner assembly , they must be locally manufactured within the man ufacturing enterprise or any other local manufacturing enterprise: 1. Printed circuit boards; 2. Transformers; 3 . Coils, except yoke a nd flyback, and sheet metalware attached hereto except the ma s k; 4. Cabinets; and 5. Chassis. (As amended by Rep. Act No. 6110) \ 510

DECISION - CTA CASE NO . 3824 - 7- Sec . 186. Percentage tax on sales of other articles.- There sha ll be levi ed, assessed and collected once only .. on every original sale, barter, exchange and similar transaction either (or nominal or valuable considerations, intended to transfer ownership of, or title to~ the articles'not enumerated in sections one hundred and eighty-four, one hundred and eighty-five, one hundred a nd eighty- five-A, and one hundred and eighty-five-8 a tax equ ivalent to seven per centum of the gross selling price or gross value in money of the articles so sold, bartered, exchanged, or transfer r ed, suc h tax to be paid by the manufacturer, or producer: Provided, That where the articles subject to tax under this section are manufactured out of materi als likewise subject to tax under this section and section one hundred and eighty-nine, the total of such materials, as duly established, shall be deductible from thegross selling price or gross value in money of such manufactured articles. (As amended by Rep. Act No. 6110) Sec. 183. ~ment of percentage taxes.- (a) In general.- Unless otherwise specifi- cally provided, it shal l be the duty of every person conduc ting a business on which a percentage tax is imposed under this Title, to make a true and complete return of the amount of his, her or its gross quarterly sales, receipts, or earnings or gross va lue of output actually removed from the fact ory or mill warehouse and within twenty days after the end of each qua rter pay the tax due thereon: Provided, That any person retiring from a business subject to the percentage tax shall notify the nearest internal revenue officer thereof, file hi s return or declaration, and pay the tax due thereon within twenty days after closing his business. \ 51

DE CISION - CTA CASE NO. 3824 For purposes of thi s section, sales on consignment shall be conside re d actual- ly sold on the day of sale or sixty days .. after the dat e consigned, whichev er is earlier. If ~he percentage tax in a ny busi- ness is not paid within the time specified above 1 the amount of the tax shall be incr eased by twenty-fiv e �_~r-~entun~ the increment to be a part of the tax a nd the entire unpaid a moun t sha ll be s ub ject to interest at the rate of fourteen per cent per annum . In case of willful neglect to file the return within the period prescribed herein, or in case a f a l se or fraudulent return is willfully made, th ere s hall be add e d to the t3x or to the defici e ncy tax i n ca se any pay rn e n t ha s b e en� made on the basis of such return before th e di s covery of th e falsity or fraud, a surcharge of fifty per centum of its amount and the en tire unpaid amount sha ll be subject to intere s t at the rat e of four tee n per cent um per annum. The amount s o added to an y tax sha ll be collected at the same tim e a nd in the sam e manne r and a s part of the tax unle ss the ta x has been paid before the discovery of the falsity or fraud, jn which case , th e amount s o added sholl be collected in t he same manner as t he tax." Anent the fir st issue, petitioner con tends that the blank cassette t a pes ar e su b jec t to only 7% as ordinary articles a nd not to Section s 185 ( d), 185- B(g) at 40% becaus e the se blank cassette tapes a re not articles which reproduces or records music and sound. On the ot h er hand~ r espon dent conte nd s otherwise \ !:)1 2

DECI '::dON - - 9- C1A CASE NO. 3824 ,f' asserting tha t casf,ette tapes are 1 ike ~~~~~.9_rap.!2_ records" �..-~hich are s u bject to tax at 40 ?o of the gross selling price thereof . We agree wit h t h e contention of petitioner that the b l ank cassette t apes it manu f actur ed a nd sold are subject on l y to 7~ tax as ord i n ar y a r ticle and no t to 40% tax under Sections l85(d), l85(g) ond 185-0(g) of the Old Tax Code . As cnn be ga t hered from the evol u- tionary development of Section 185 of the Tax Code, beg in ni ng fro m June 1, 1939 thru 1971, it shows that genera 1 1 y wh a t was s lJ b j e c t to r-; a 1 e B t a :�. e r e t. hose articles, among which j ustly was musical instrume n t. which records and reproduces music , s pec ific all y in- l9L>8, RA 596 , June 1 8, l9l1 9 ; RA 588, ~:~o pt. 22, 1950, RA 1612 , Aug . 24~ 1 956.) In tho last cited law, RA 1612, it prov ided that what are taxe d are tho se enume- ducing_!!:'usic" . Section 185-B(g) of the Tax Code, confirms the evolution of t he provision of Section 185, which taxed "(g) similar articles for reproducing end/or re c or ding music and sound, l i ke ta pe recorders, I etc.'' a nd that this confirms the statutory construction \ 513

1 DECISION ... - l0 - CTA CASE NO. 3824 J' rule of ejusdem generis to the effect what are taxed are those articles that ~rds and/or reproduces .. music, specifically like in the case qf phonograph records, tape ~ecorders, etc. Se c tions l85(d), (b) and 185-B(g) of the Old Tax Code, upon which respon- dent based his decision dated April 18, 1983 and on the basis of which imposed the 40 % sales tax on the petitioner's cassette tapes manufactured e nd sold do n ot apply on blank magnetic cassette tapes to which we fully agree with petitioner. And to borrow the words o f counsel for petitioner, which we finrl to be credi- ta bly presented , as it is based on the true facts and the law o f the c ase , he said and we quote: "xxx Secco 185(d) covered 'articles o f wh ich cellu l oid is the component ma ter ial o f chief valuer and the un- disp uted evidence is that the cassette t a pe is made of pl astic case and cover and polyester tape and does not �ontain any celluloid. Sec. 185(g) also did not apply because it covered only 'pianos; pho nograph records (except thoselocally ma nu factured and those u sed for educa- t i onal pur poses) ; jukeboxes . 1 Respondent s tat es that ncassette tapes are like p ho n o graph recor d s ' taxed at 40% but his statement is correct as r egards imported phonograph records; l oca l ly manufactured pho nograp h records were not included in Sec . 1 85(g) and not taxed at 40% . So even assum i ng th e cassette tapes and phonogr a ph rec ords are the same in the sense that they are articles i n wh ich sound or music can be recorded or stored, petitioner 1 s \ 51

DECISION - CTA CASE NO. 3824 - .ll - cassett e tapes shou ld not be taxed at 40% beca u se they were lo call y manuf- ac tur ed . Finally, Sec. 185-B(g) also did not apply because t he cassette tape s '� were not 'sim ilar articles for reproducing ond/or reco rdin g music and s ound ' a s dis- cussed anrl explained in the preceding disc ussi on on the legis l ative hi s tory of Sec . 185. By the proces s of elimination, therefore, cassette ta pes f all unde r Sec . 186 because they were not enumeratej in See s . 184, 185, 185-A and 185-B so th at the applicable sal e s tax rate i s 7 %. (pp . 84-85, CTA ~ec.) We would like to add to pet itione r 's aforesaid observation a nd conclu s io n that the blank magnetic cassette tapes of petitioner, which are imported i n master rolls from the Un ite d StatBs, is not made of c elluloi d but of t e ns i lized polyester a s confirmed by the National Institute of Sci e nce and Te chnology. And these bl a nk mag netic cassette tapes are unlike ph o no- g r a ph r e c o r d s be c a u s e t he 1 a t t e r i s s o111 e t h i ~~he r e .9..�0!-JVB carfling recorded sound or ehor o_g_E_�phic r~.E_l-2_�~� duction (Webster 1 s New Collegiate Di c tinary, 1977 Ed., p. 86 21; underlinin_g__s~li~�), v~ h.ile in the CRse of the b lank ma gnetic cassette tapes cf petitioner in question, there are stil l no sound recorded therein or phonographic re pr oducti on that can come therefrom. Clearly, without sound or music recorded on the bl a nk \

DECISION - - 12 - CTA CASE NO. 3824 I' cassette tapes of petitioner, these cannot be like phonograph records and taxed under Sections 185(d), (b) , or 185-B(g), since it is not one of those article~� e nu merated under 185-B(a) to (f), or are similar ar- ticles thereto, all of which records or reproduce s sound or music. Consequently, we are of the opinion tha t the blank cassette tapes manufactured and s old by pet i tioner in this case is only subject to or liable for 7% sales tax as ordinary ar ticl es under Sec tion 186 of the Old Tax Code . The imposition of 40% sales ta x by respondent in his assessment against petitioner upon its blank cassette tapes in the sum of e 2 16 , 790.37 i s hereby de c lared illegal and vo id, and js, therefore, set aside. Co ming now to the sec ond issue, petitioner contends that it is not liable to the deficiency contractor's t ax i n th e amount of e9,355 . 40. It argues that it had paid its fixe d contractor's tax on the annual basis in 19 75. On the other hand, res pondent maintain the oppo- site view. We a r e in conformity with the position taken by pet i tion e r. Petitioner had paid a total of el4,499 . 86 as ' contractor ' s tax for 197 5 , computed as follows: \ 5lo

.. DECISION - CTA CASE NO. )82 4 - 13 - Total Amount Paid - 1975 (BIR Schedule I) 810,976.71 Le ss : Total Amount Paid ! No v. & Dec. 1975 ) 421.50 Sub Total elo , 555.21 Add: Tota l Aniount Paid (Nov . - Dec.� 1974) 3,9t.f4.65 Adjusted Total Am o unt Paid F Y 10-31-75 ~ !~t.~22!.�~ (p. 86, CTA rec.) Up on a total 1975 gros s receipts o f 8365,889 . 33, itemized as follows: Gro ss r ec eipt s for July - De c. 11, 1975 � � � ��. � e2s5,597.33 1975 percentage t ax ret urn s ~~.QQ. (Exhs . D to C) . . . . Tot a l Gross receigts fo r rY ended Oct . 31 , 197~ � � � � . � . ~~�2~�~2!.~~ petitioner had undisputed ly poid a total contra ctor's tax of 814,499.8~ aforesaid. lhe pa yment of al l busi- ness taxes of petitioner for fiscaJ yea r ended October 31, 1975 had be en confirmed by the respondent ' s examiners (Antonio C. Atien za and Eleuterio S . Rabe) , who r eportLd that, with r esp ect to petitioner's alle~ed tax obli- gations, 11 X x x Further , verif ication als o disclosed that all return ab le i ncome, or those which could ot her- wis e be subj e ct to bu si ness/ pe rcent a ge taxes, were found to have been correctly returned in the books o f accounts and reflected in the c orre spond ing tax ret u rn s 11 � \

DECISION - 14 - CTA CA SE NO. 3824 I' Consequently, and in sum , we are of the opini o n and so hold that petitioner is not liable for the ,, deficiency sales and contractor's t~x .assessed Against it by respondent for the cale11t.iur yeor 1975. WHERE FORE, the decision of respondent Commissioner of Internal Revenue assessing against petitioner th total sum of E226,145.78 as deficiency sales and con- tra ctor's taxes for the period November 1, 1974 to October 31, 1975 should be, as it is hereby, reversed. No pronouncement as to cost~. SO ORDERED. Quezon City , Metro Manila, Augu/8, 1987. WE CONCUR: ; '~ ! AMANTE FILLER Presiding Judge I' \ 513