CTA Case No. 4311 (Decision)

REPUBLIC OF THE PHI L IPPINES COURT OF TAX APPEALS QUEZON CITY MARCELO STEEL CORPORATION, Petitioner~ - versus - C.T.A. CASE NO. 4 3 11 THE COMMISSIONER OF INTERNAL REVENUE, )�( ................... Respondent. -�-- -- .- x D E C Xs X0 N .. The ~w:stioh which remai n s to be resol \ �.. ~ ' s c entered on t he sole issue o f legality of respondent's 1982 deficiency sales ta:-: assess ment ti\ disallo wing petition er's claim for tax credit deductions on its pure hases of scr�ap meta 1s from its sales ta:-: liability for t he sa me year . The material fac:ts of this c a se are simple . Petitioner is a domestic corporation engaged in the manufacture and sale of various stee l prodLlcts. By virtue of a Letter of Authority No. 000 2 8 2 7 NA da t.ed Ma y .to~ .t 98 4 sent to petitio n er ~ r�espondent � s exa miner� was ab l e to exa mjne petitioner's 1982 books o f ac:coLmts and 'other c:'\ccoun t ing records for. in terna l revenue ta:�: purposes ( p. 16 4~ BIR r e c .). 4 ~4

DECISION CTA CASE NO. 4311 -2 On the basis of the examiner's report of investigation~ petitioner was assessed on July 15~ 1987 deficiency income and business taxes for 1982 .totalling to P3~002~263.51~ summarized as follows (pp. 218-219~ BIR rec.): Deficiency income ta>: p 51,089.60 Deficiency expanded withholding taH 7 ,6~).29 Deficiency sales ta>: 2~ 714~6::::6.(>4 Deficiency cc:ntractor's tax 7~442.47 Deficiency commc:n carrier's ta>: 10~571.31 Deficiency documentary stamp tax 210~873.00 T o t a 1 ����������������� �F'3,<:x:l2,263. 51 Petitioner filed a formal protest dated August 24~ 1987 with the Bureau of Internal. On November 4~ 1988, petitioner received respondent's final decision dated October 5, 1988 upholding the deficiency income and business tax assessments e>:cept for the deficiency documentary stamp tax assessment which was modified and reduced to P153,005.95 (Annex "A", pp. 6 - 7, CTA rec.). Hence this petition for review. On the basis of the pleadings filed and the BIR records, the parties agree to submit this case

DECISION 'CTA CASE NO. 4311 -3 for decision on the sole issue of whether or not petitioner caul d deduct the sa 1es ta:-: L . . ~ ts pure hases of scrap irons (raw materia 1s) used in the manufacture of steel products~ from its sales ta>: liability. By and large the center of discussion is now limited to the 1982 deficiency sales tax amounting to P2~714~626.04~ computed as follows: Sales E.~JL9J4_,,ffi.~. ~ 10/. sales tax due tt-ereon .��.�.�������������� p 5,691,448.39 Less: GUarterl y payments �������� P2, 937 ~ 340. :::!'8 __,4,_J...5.......3_.4_..J 823.26 ,_.._ ..........._..,_, p 1,156,625.13 Ta:-: credit applications 855,437.00 ___,__,;?.$'~:.... ~-"::~ ~-~ p 1,445-,781.41 Allowable tax credit.. . _____24~,i:-'1-P. !~ . . . . ..1,.6�..�_,_~.~.~.~"2 [)eficier1cy ................................... . ?'ldd: 25 I. s urcharge p 2, 714,6."!.6.1)4 Tota1 �..����.�.���.�.�����..���..� � � � � � � � � � � ?'ldd: 20/. int. fr. 3-21--B3 to 7-15-87 ������� TOTPL. PMJJ'.fT DLE Af\[) CCLLECT I R..E ������������ The rest of the deficiency income and business ta :-: assessments for 1982 were already admit ted by petitioner to be correct (Manifestation dated Nov. 6 ~ 1989, p. 40, CTA rec. ) � Petitioner assails the decision of respondent disallowing the tax credit claimed on the purchases of scrap iron used as raw materials in the manufacture of steel products. First, it contends that the BIR has previously allowed the appliL _ . _ ,n ' :~. ;,

DECISION CTA CASE NO. 4311 - 4- of tax credits on purchases of scrap iron for 1981 and prior years. Second~ scrap irons gathered by petitioner's supp 1 iers from construe tion projects and ind i v idua 1 home bui 1ders sti 11 has a residua 1 value and retains its taN paid element. Petitioner's suppliers have indicated the burden in their invoices. Third 1y ~ petitioner as buyer of scrap iron is not subject to sales ta:<. Respondent's recourse is on the gatherers of scrap irons. They should be considered producers subject to sa 1 es ta:�:. Respondent in his usual line of defense raises that all presumptions are in favor of the c:on-ectness of the tax assessments and the burden of proof r�ests upon petitioner to show otherwise. The assailed decision is valid being in accordance with law and evidence on record. The issue boils down to whether o: � ;:at petitioner can claim a tax credit on its purchases of scrap irons used as raw materials for the manufacture of steel products for the purpose of computing the sales tax. Without presenting any evidence and Sci:\nS any memorandum both parties agr�ee to submit this case for deci sion based on the pleadings and the BIR r�ecords. 4~7

DEC ISION CTA CASE NO. 4 3 11 5 The governing provision of the National Internal Revenue Code~ insofar as pertinent~ provides: "SEC. 199 . Percentage tax on sales of other articles. There shall be levied~ assessed and collected once only on every original sale~ barter~ exchange and similar transaction either for nominal or valuable~ consideration intended to transfer owners h i p of ~ or title to~ t he articles not covered in Sec tions 194~ 195~ 196~ 197~ 198 and 201, a ta x equiva l ent to ten (lOX) per centum of the gross selling price or gross value in money of the artie 1es so so 1d ~ bartered, e x changed~ or transferred, such ta:�: to be paid by the manufacturer or pr�oducer : Provided, that 9.D.Y Q.~r-~..�.!:l.t.~g_�.~ s pec i f i c or min in g .t~.Y.!. Q9_.i,.Q. !::.I.D.Q..�.C .t..b.! .2. .t.J..t..l�. .s.. Tit l e IV or Tit l e VII~ res pe c t i ve 1y , QD.. Q.g.rog�j;_.t_c:;:. ~..Ll_y !!l.~D..!::-.\..1 ac;j;_l.::\.L?..9 ..s.. g_r.o.�:;..�.~.?..�9. Q.!:. P.F.9.Q.!:.\.!;.~.9..s . Q..!:. t.? .! .m.PR..r t� d r.E.~. m.~. r .!..~l. ..s.. P.~x::_t._s.. ~.c;<;:_�?..:�.? Q.r.Y Q.r.::. p t .b..e c. ? r:..t.i.�:;.J_g :tQ.r.:: m! .D.9. P..E..C.t.. g _f_ .t _l]g f_!nJ,_~IJ..~.9. P..r:.9.9.P<;:_t . ?..b.~.Ll !?..~. �:;...t::.~.9.!..t..f!?_9. ~.9~.J.o.~.t.. .t..b.�. ?_~.1�~. .t.�l.l1. 9.!::-.1.� g_rJ. .t.b.�. f..!. o..!.~.b�.Q_ p r .Q.9..l:t.c;.t _;.. Provided, however, That in case the tota l ta:�: pai d on the raw m aterial~ part, accessory or �other article exceeds the amoLm t of t he sa 1es ta:�: due on the finished product~ the e xc ess s h a l l be credited against t he sales t a .. 1iabi 1i ties of t he manufacturer for the suc ceeding taxab l e quarter : And Provided, furthet- , That .tJ.::H:?. ~mQ~\.O..t g_f_ .t.h�. :t.E..li 9.0. .t..bg r.::.~ w m.a t.�.r:..t~.l..s.. P.~x::.t..s . ~.�:;_c:;:. l!?..?..?.P..a....s.. PC. R..t..tu~.r:. ~.r.::.t.J..c;J_g ~..b.~. U - .Q.?.. !JJ.Q!..~..s..tg.Q_ ~.�. a ?..�.P._~_r--~_t..�. .!...t.�.ffi. AD_ t.b.�. ?..~J e.�. !.D.~9..!.~ f?_� HX>t ( As amended by P .D. No. 1 358)"

DECISION CTA CASE NO. 4311 -- 6 - It seems apparent that respondent in his ruling of July~ 1961 ha s this to say: II 9..~.1_�.~. I~.l:t - ~.Q.?_t g_f . r:.~.W. r:D.9..t~J.::_;!._~.l?...!L 9. ~9q<.:._.t..!J?.. :i:..L!,. .t.Y. g_f_. The cost of locally purchased scrap iron used in the manufacture of steel bars and billets is deductible from the gros s s elling price of the latter~ s crap iron and steel bars and billets being subject to the same r� ate of sales ta }: (7/.) ." (BIR Ruling No. 226, s. 1961. See al s o BIR Ruling No. 233 ~ s. 1961.) [p. 4~ Vol. VI IRB No. 7 (1961)] Likewise~ petitioner invokes another unnumbered BIR Ruling dated August 30~ 1968~ heretoforth quoted as follows: "August 3 0~ 1968 Mr. Lincoln T. Yabut Su i te 309-3rd Floor Manhattan Building 41 3 Nueva St., Manila Sir� : This refers to your letter dated August 23, 1968 stating that your client is a manufacturer of steel products; that in the manufacture of steel washers the s ubject ta :-: payer use steel plates, G. I. s heets and sc r�ap iron as raw rna ter ia 1 s which it procures from certain suppliers, 1 ike the Rheem of the Phi 1 ippines, Inc. and other factories having similar busines s of steel manufacturing. Under the foregoing facts, yoLI now me ant to be in formed whether or not the c ost of the raw materials which have been pr�ev ious 1y subject to the sales ta l-: is deductible by your client for purposes of determining his sales ta:-:.

DECISION CTA CASE NO. 4 311 - 7- In r-ep 1 y thereto~ I have the honor to inform you that under Section 186 of the Tax Code~ where the articles subject to the tax under said section are manufactured out of materials likewise subject to ta>: under same section~ the total cost of such materials~ as duly established~ is deductible from the gross selling pr-ice of the manufactured ar-ticles. Accordingly~ the cost of steel plates~ G. I. sheets and scrap iron used in the manufacture of steel washers is deductible �from the gross selling price for sa 1 e s t a:�: pur poses P..r..Qy_.t_<;\_~.9- .t.b_a t .tb.~ !;.9..�..t .!.�. 2.!:-J.Q.P.OC.t!E.~. Qy_ :l;_h~ !;_Q.r.::.r~�.P.Q.O_Qj._IJ.Q. l...O..Y..9.A!;.!E..�. emt .t.b-~..t :l;h_~- .!IL"-.9_!..!;_~�. 1-.D.Q.J ..~~..t..�. :t_bg r::_~_t�?.. Q.f. te.r..!. .t.9.. w.b_;i,_c;JJ. .t.b.~- r::.E.!d_ t.. ffi.�l.j;_gr::_:j,_~.l?_ b.E.Y..�. !:1.~�?..0_ 2.!::\_Qj_ ec_t.eQ. P.\...1 r::.2.!d.e.O... :t_9.. 8_�?..Y_�?..[LI:.L~ Bg_Q.!d..lc.t.tJ.PJJ. ~.9...~- ~=~ ~.-!.. ( Emphasis Ours. ) Very truly yours~ (SGD.) MISAEL P. VERA Commissioner of Internal Revenue" Gr-owing out and on the basis of the foregoing BIR rulings~ petitioner- seeks to enforce its claim that it can deduct from its sales tax liability tax cr-edit on its pure hase of scrap irons used as raw materials in the production of steel bars. It was fw- ther alleged that respondent had pt-eviously allowed this practice of petitioner. The controverted assessment had for its basis the revenue examiner's report of investigation t- elev.:mtly summarized as follows: (1) for purposes son

/ DECISION CTA CASE NO. 4311 - 8- of computing the sales tax, the net sales appearing in the books of petitioner was deemed to be the correct figure compared to the net sales appearing in the sales ta:-: t- eturn; and (2) the ta:�: creG ~ L. ',n local purchases was reduced and adjusted as a result of the random sampling conducted on the purchas e invoices which disclosed that most of the purchases consist of sct-ap metals at- steel from which sales taxes were imputed. ( p. 203 , BIR r�ec � ) . There is no question that petitioner can claim as a deduction from its sales ta:�: liability sales ta>:es paid on t-aw materials forming part of the finished prodL1ct. Subject only to the. limitation provided under Section 199 and the above-c ited rulings that the s ales tax paid on the raw mat~~i~l purchases must be indicated as a separate i tern in the sales invoice. The burden lies on the petitioner to show proof that sales ta:�: es paid on its purchases of s crap irons were separately indicated in the invoices. Petitioner failed to present any ~ vidence to support its claim. It is an elementary rule in procedural law that "each party must prove 5 0 .1

DECISION CTA CASE NO. 4311 -- 9 - his own affit- mative allegations". (Wigmore on Evidence, 3rd Ed., sec. 2485, p. 271.) Equally~ in !J.9.It QJ.l.A. m~.Q.~..t.. - the bur-den of pr-oof is on him who aver-s~ not on him who denies. (U.S. v. De la Torre, 42 Phil. 65.) The best that petitioner could have done was to pr-esent as evidence the invoices of its pur-chases of scr-ap ir-ons and other- r-aw mater-ials with sales ta:-:es paid ther-eon. At this junctur-e~ it may also be stated that petitioner-'s claim for- tax cr-edit of P1~929~151.76 should have been substantiated by pr-oof. As computed by r-espondent only the amount of P742~045.88 was allowed as ~ ax cr-edit deduction. The least that petitioner- could have done was to pr-ove the r-emaining ta:-: cr-edit of P1~187~105.88 disallowed by r-espondent r-epresenting the tax credit on pur-chases of scr-ap ir-ons used. Petitioner- has not pr-oven by any affir-mative evidence the i r-r-egu 1ar- i ty or- un 1awful conduct of the e>:aminer-. Having waived its r-ight to pr-esent evidence~ petitioner- failed to dischar-ge its burden jud.i..cially. Thus~ the pr-esumption of r-egular-ity in the performance of official duties is in favor- of the e>:aminer- . (Rule 131, Sec. 3(m), Revised Rules

DECISION CTA CASE NO. 4311 - 10 - of Court, U.S. v. Escalante, 36 Phil. 743.) All presumptions are in favor of the correctness w ; '" '1e assessment made by the Commissioner of Internal Revenue, the taxpayer must prove the contrary. (Commissioner of Internal Revenue v. Antonio Tuason, Inc., 173 SCRA 397; Commissioner of Internal Revenue v. Construction Resources of Asia, Inc. ) � The burden of justifying a deduction 1 ies in the t a:�: payer. ( ESSO Standard Eastern, Inc. v. Commissioner of Internal Revenue, 175 SCRA 149; Commissioner of Internal Revenue v. Algue, Inc., 158 SCRA 9.) In the case at bar, petitioner- purchas er has the burden of proof to show that all ..~ 1� . pres c t- ibed t- equisites for ta:< sale wet- e complied with. (see Francia v. Intermediate Appellate Court, 162 SCRA 753.) Again it may be necessary to repeat what the Supreme Court has s aid in the case of Bonifacia Sy Po v. Court of Tax Appeals and Commissioner of Internal Revenue, G.R. No. L-81446, August 18, 1988, that - Whet- e the ta:-:payer is appealing to the ta x court on the ground that the Collectot- ' s assessment is erroneous~ i t is incumbent upon him to prove there what is the correct a nd just liability by a full and fair disclosure of all pertinen �:_

DECISION CTA CASE NO. 4 3 11 - 11 - data in his possession. Otherwise, if, the ta:-: payer confines himse 1 f to proving that the assessment is wrong, the tax c:ourt proceedings would settle nothing, and the way would be left open for subsequent assessments and appeals in interminable succession. A scrutiny of the records of respondent shows that indeed the pt-oper amount of net sales should be P56,914,483.90 as appearing in the books of petitioner instead of P57, 219,291.37 its 1982 sales tax LikC?wise, respondent properly deducted from petitioner's 10% sales ta:-: liability of P5,691,448.39 payments for the second, third and fourth quarters of 1982 totalling to P2,937,340.38 which were supported by c::onfir�mat.ion t-eceipts (pp . 190, 180, 178, 174 BIR r�ec . ) . Petitionet-' s ta:-: ct-edit applications fot- the first and second quarter of 1982 totalling F'855,437.00 also properly allowed as a deduction from its sales tax liability as shown in the BIR records (see pp. 190, 182, 172 BIR rec.). The Court is unable to find that petitioner has borne its burden of proof, and therefor!::' t ~~ .ds respondent� s decision to be well founded and the same is hereby affirmed. WHEREFORE, the petition for review is hereby

DECISION CTA CASE NO. 4 3 11 - 12 - dismissed with costs against petitioner. Petitioner MARCELO STEEL CORPORATION is ordered to pay respondent Commissioner of Inter nal Revenue the amount of P2,714,636 . 04, representing its 1982 deficiency sales tax inc lL1sive of deficiency surcharge and interest, plus 25% surc h arge for late pctyment and 20% annual interest from October 5, 1988 until ful l y paid, pursuant to Sections 282 and 283 of the National I n ternal Revenue Code as amended by Preside n tial Decree No . 1994 which took effect on January 1, 1986. SO ORDERED. Qu ezon City, Metro Manila, October 29, 1991. ~ Presid ing Jud WE CONCU , : ,_____. ICONSTANTE ; . ROAQUIN Assoc:iak.e Judge f;.v�7V \Q~ (;:~ ERNESTO D. ACOSTA Associate Judge

DECISION CTA CASE NO . 4 3 11 - 13 - CERTIFICATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13~ Article VIII of the Constitution. ~~ Presiding Judge Court of Tax Appeals