CTA Case No. 4675 (Decision)

I' ,,�I� II 1~ � t I�{f \....- REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SAN ftiGUEL CORPORATION. C.T.A. CASE N0.4675 Peti. ti.oner. - versus - COftftiSSIONER OF INTERNAL REVENUEr Respondent. X- - - - - - - - - - - D E C:: I I 0N This is a petition for review to set aside and reverse the decision of respondent Commissioner of Internal Revenue dated November 12, 1991, denying petitioner's protest of an assessment of deficiency sales tax for the year 1987 �in the amount of P7,637,117.37. Petitioner is a domestic corporation engaged in the business, among others, of manufacturing and agricultural production. On April 19, 1991, petitioner received from respondent Commissioner an assessment notice demanding payment of P7,637,117.13 allegedly representing deficiency sales tax for the year 1987, computed as follows: 4 71

DECISION - C.T.A. Case No. 4675 -2- 'Sales Clagnolia Productsl per return ' 938,254,341.87 56,799,104.07 Add: Sales of Bottled lilk ' 25,982,328.25 Sales of Tetra lilk 30,816, 775.82 Total Sales ' 995,053,445.94 lOX Sales Tax Due 99,505,344.60 Less: Tax Credits 49,773,278.46 Allount Due: ' 49,773,278.46 Less: Allount already paid 44,093,368.05 Balance Add: 251 Surcharge ' 5,679,910.41 Interest 1,419,977,60 Co1pro1ise Penalty 512,229.36 25,000.00 Total A10unt Due and Collectible ' 7,637,117.37' =================== On April 24, 1991, petitioner protested the assessment, contending that its sales of bottled and tetra-packed fresh milk was not subject to any sales tax and that, alternatively, even if it was indeed liable for said deficiency sales tax, the government's right to assess the same had already prescribed since the disputed assessment was issued more than three years from the date petitioner filed its final quarterly sales tax return covering the fourth quarter of 1987. On October 10, 1991, respondent Commissioner denied petitioner's protest, ruling that its right to assess the alleged deficiency sales tax had not yet prescribed since the same was based on petitioner's fraudulent failure to include said deficiency sales tax 48

DECISION - C.T.A. Case No. 4675 -3- in its income tax return �or the year 1987. Accordingly, respondent held, the applicable prescriptive period �or the de�iciency assessment is ten years �rom the discovery o� the alleged �raud. Hence, this petition which raises two issues, namely: <1> whether or not respondent Commissioner's right to issue the disputed assessment has prescribed; and <2> in the negative, whether or not petitioner is liable �or de�iciency sales tax �or the year 1987. Anent the �irst issue, petitioner contends that the disputed assessment is barred by prescription. It points out that the �ina! quarterly sales tax return covering the �ourth quarter o� 1987 was �iled on January 20, 1988, whereas the disputed assessment was issued only on April 15, 1991 or three (3) years, two <2> months and twenty �ive <25) days later. Respondent Commissioner does not dispute the contention that the assessment in question was issued . a�ter the lapse o� more than three <3> years �rom the time petitioner �iled its �inal quarterly sales tax return �or the year 1987. Respondent contends, however, that the three-year prescriptive period under Section 203 o� the National Internal Revenue Code <NIRC> is not applicable because petitioner �raudulently omitted �rom its �inal quarterly sales tax 49

DECISION - C.T.A. Case No. 4675 -4- return �or 1987 its sales o� bottled and tetra-packed milk totalling P56,799,104.07, thereby making said return a �else return. Thus, argues respondent, the applicable provision is Section 223 o� the NIRC which provides a prescriptive period o� ten (10> years �rom the discovery o� the alleged �raudulent or �else return. The Court �inds respondent Commissioner's contention unmeritorious. There is no evidence on record that petitioner's �ailure to re�lect its sales o� bottled and tetra-packed milk in its �inal quarterly sales tax return �or 1987 was �raudulent or intentional. On the contrary, it clearly appears �rom the record that petitioner acted in an honest belie� that the sales in question was not subject to any sales tax pursuant to the last paragraph o� Section 163 o� the Tax Code <as renumbered> which provides that: nFor purposes o� sub-paragraphs <a> and (b) above, processed as applied to the �ood products mentioned therein means that such products have undergone the process o� curing, canning, bottling or other manu�acturing process. It does not include those which have merely undergone simple p~ocess o� preservation such as �reezing, re�rigeration, drying, salting or smoking.n 50

DECISION - C.T.A. Case No. 4675 -5- Further belying respondent's claim that petitioner �raudulently omitted to include its sales o� bottled and tetra-packed milk in its �inal quarterly sales tax return �or 1987 is the indorsement dated May 31, 1988 <Exhibit "B">, issued by Pablo R. Angeles; Jr., o��icer-in-charge o� the Manu�acturing Division o� the Bureau o� Internal Revenue. In said indorsement, Angeles recommended the disapproval o� the proposed de�iciency assessment, pointing out that petitioner was correct in contending that its sales o� bottled and tetra-packed milk was not subject to sales tax, at least until February 5, 1988 when the BIR issued a ruling that such sales were subject to Value Added Tax <VAT>. As aptly pointed out by petitioner, respondent Commissioner's contention that it <petitioner> was guilty o� �raud seems to be a last-ditch e��ort to avoid the e��ects o� the three-year limitation provided under Section 203 o� the Tax Code. A cursory examination o� the disputed assessment readily shows that respondent merely assessed petitioner the 25Y. surcharge due on ordinary de�iciency assessments, and not the SOY. surcharge which would have otherwise been due had petitioner's returns been indeed �raudulent. This, to the mind o� the Court is a clear indication 51

DECISION - C.T.A. Case No. 4675 -6 - that, at the outset, respondent Commissioner was not convinced that petitioner's returns were �raudulent. It was only when petitioner raised the issue o� prescription that respondent belatedly claimed the existence o� �raud. It is, o� course, axiomatic that �raud is never presumed, but must be proven as a �act. In the case at bar, respondent Commissioner has �ailed to discharge its burden o� showing that petitioner's sales tax returns �or the year 1987 were indeed �raudulent. On the contrary, respondent's �ailure to assess petitioner the SOX penalty charges �or �raudulent returns is a tacit admission that the latter's returns were not �raudulent <Central Azucarera de Tarlac ~ Collector o� Internal Revenue, 104 SCRA 653>. But even more revealing o� the paucity o� respondent's contention is its categorical admission in its memorandum that petitioner's sales tax returns were, indeed, not �raudulent <Memorandum �or Respondent, page 8>. Respondent also contends in the alternative, that petitioner's omission o� its sales o� bottled and tetra-packed milk �rom its sale~ tax returns rendered said returns "�alae" within the meaning o� Section 223 o� the Tax Code. In support o� this, reliance is placed on the ruling in the case o� Aznar vs. Court o� 52

DECISION - C.T.A. Case No. 4675 -7- Tax Appeals (58 SCRA 519>, wherein it was held that the term "false return" merely implied a deviation from the truth, irrespective of whether such omission is intentional or not. Thus, respondent argues, since petitioner's sales tax returns did not disclose the "truth" regarding its sales of bottled and tetra-packed milk to outlets other than the Armed Forces of the Philippines Commissary and Exchange Service <AFPCES> and the US Military Installations <USMI>, such omission rendered said returns "false" within the contemplation of Section 223 of the Tax Code. We find respondent's reliance on misplaced. There is nothing in the said case which establishes a hard and fast rule that every "deviation" from the truth necessarily brings a particular return under the coverage of Section 223 of the Tax Code. As pointed out by the petitioner, it is only where the falsity or "deviation" would place the government at a disadvantage so as to prevent the assessment and collection of the correct amount of taxes that the ordinary prescriptive period provided under Section 331 <now Section 203> of the Tax Code should not be applied. In the case at bar, however, the records show that from the very beginning, petitioner had opened its

DECISION - C.T.A. Case No. 4675 -8- books to the agents o� respondent Commissioner �or inspection. It also �urnished respondent copies o� all pertinent documents which would enable the latter to determine with reasonable dispatch the correct amount o� petitioner's tax liability. Despite petitioner's transparency and cooperation, however, it still took respondent Commissioner more than three years to come up with the disputed assessment. Thus, it cannot be said that the reasons �or petitioner's omission o� its sales o� bottled and tetra~packed milk were concealed �rom respondent, thereby placing the latter at a "disadvantage" in its tax collection e��orts. There is there�ore no room �or'application o� the ruling in the Aznar case. In sum, it is clear that the applicable prescriptive period is three (3) years as provided under Section 203 o� the Tax Code, and not ten <10> years as provided under Section 223 o� the same Code. Accordingly, respondent's disputed assessment is now barred by prescription. But even assuming, arguendo, that the disputed assessment is not yet barred by prescription, the �act is that the sales in question were, at the time they were made, not subject to sales tax. In this regard, respondent's contention that the said sales are subject

DECISION - C.T.A. Case No. 4675 -9 - to tax pursuant to the last paragraph of Section 163 of the Tax Code, as amended by Executive Order No. 36, is clearly untenable. On January 1, 1973, Presidential Decree No. 69 was promulgated, amending certain sections of the Tax Code. One of the affected sections was Section 186-B, which was amended to read as follows: �sEC. 186-B. Percentage tax on sales of processed meat, milk, fruits and vegetables, fish and other sea foods, wheat, flour and feeds. 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 ownership of, or title to, the articles enumerated herein below, a tax equivalent to five per centum of the gross selling price or gross value in money of the articles so sold, bartered, exchanged or transferred, such tax to be paid by the manufacturer or producer. <a> Processed meat, milk, fruits and vegetables; XXX XXX XXX For purposes of this section, processed meat, milk, fruits and vegetables, fish and other sea foods include such food products which have undergone the process of curing, canning, bottling; or similar processes, but exclude such food products which have undergone only simple preserving processes such as freezing, drying, salting or smoking."

DECISION - C.T.A. Case No. 4675 - 10 - Interpreting the a�oresaid provision, the Bureau o� Internal Revenue issued an opinion dated March 20, 1973 addressed to petitioner, to the e��ect that pasturized milk is exempt �rom the sales tax provided under Section 186-B o� the Tax Code. Thus: "Processed milk means and includes also all food products manu�actured out o� milk, as principal raw material, such as butter, cheese, ice cream, etc. Pasteurized milk is still milk, whether in its original state or not, and, there�ore, remains exempt �rom sales tax under new section 186-B, even i� canned or bottled, regardless o� whether or not the pasteurizing or canning or bottling thereo� is done by the producer, pursuant to Section 188(b) o� the Tax Code, as amended also by Presidential Decree No. 69." Subsequently, Section 186-B was amended and renumbered as Section 201 by Presidential Decree No. 1358, which was promulgated on July 1, 1978. The amendment consisted in additions to the list of goods subject to the sales tax provided under the old Section 186-B. However, the last paragraph o� the old section was retained in toto. Thus: "SEC. 201. Percentage tax on sales o� essential articles. There shall be levied, assessed and collected once only on every original sale, barter, exchange, and similar transaction either �or nominal or valuable consideration, intended to 5b

DECISION - C.T.A. Case No. 4675 - 11 - trans�er ownership o�, or title to, the articles enumerated herein below, a tax equivalent to �ive <SY.> per centum o� the gross selling price or gross value in money o� the articles so sold, bartered, exchanged or trans�erred, such tax to be paid by the manu�acturer or producer. <a> Locally processed meat, milk, �ish and other sea �oods; XXX XXX XXX For purposes o� this section, processed meat, milk, �ruits and vegetables, �ish and other sea �oods include such �ood products which have undergone the process o� curing, canning, bottling, or similar processes, but exclude such �ood products which have undergone only simple preserving processes such as �reezing, drying, salting or smoking." On August 1, 1986, Section 201 was again renumbered as Section 163 and amended by Executive Order No. 36 to read as �allows: "SEC. 163. Percentage tax on original sales o� articles. There shall be levied, assessed and collected once only on ev~ry original sale, barter, exchange, and similar transaction either �or nominal or valuable consideration, intended to trans�er ownership o�, or title to, the articles enumerated herein below, a tax based on the gross selling price or gross value in money o� the articles so sold; bartered, exchanged or trans�erred, such tax to be paid by the manu�actvrer, producer or importer. XXX XXX XXX

DECISION - C.T.A. Case No. 4575 - 12 - (2) Ten per cent <lOX>~ on the �allowing essential articles: <a> Processed meat, fruits, vegetables, fish and other sea �oods and other processed �ood products for human consumption. <b> Processed milk, creamers dairy products, butter and its substitutes like margarine. XXX XXX XXX For purposes o� subparagraphs (a) and Cb) above, processed as applied to the �ood products mentioned therein means that such products have undergone the process o� curing, canning, bottling, or similar processes. It does not include those which have merely undergone simple pr�ocess o� preservation such as freezing, refrigeration, drying, salting or smoking.n As may be seen �rom the foregoing, the last paragraph o� Section 163 of the Tax Code has remained substantially the same despite the numerous amendments to the original Section 186-B as introduced by Presidential Decree No. 69. And all throughout ita legislative history, the administrative interpretation given to the said provision has remained the same, i.e., that pasteurized milk whether bottled or in tetra packs, is exempt fro~ sales tax. It was only on February 5, 1988 that the respondent Commissioner categorically ruled that fresh milk in bottles, cans or tetra packs is subject to Value-Added Tax <VAT> 58

DECISION - C.T.A. Case No. 4675 - 13 - pursuant to Executive Order No. 273. In any event, such ruling cannot be given retroactive e��ect without violating Section 246 o� the Tax Code. In view o� the �oregoing, it is quite obvious that respondent Commissioner's contention that Section 163 o� the Tax Code is inconsistent with the interpretation given by the Bureau o� Internal Revenue to Section 186-B o� the old Tax Code is untenable. We see no inconsistency, either in language or intent, between the two provisions. The �act that section 163, is substantially similar to Section 186-B o� the old Code is a clear indication o� the legislative intent to preserve the administrative interpretation given by the Bureau o� Internal Revenue itsel� to Section 186-B. Besides, i� the opinion dated March 20, 1973 were indeed inconsistent with Section 163 o� the Tax Code, respondent Commissioner could have very easily issued an amendatory ruling or opinion in order to clari�y matters once and �or all. The �act that no such amendatory opinion or ruling was issued until February 5, 1988 clearly shows that respondent Commissioner was in �ulr agreement with the existing interpretation given to the said provision. WHEREFORE, in view o� the �oregoing, the petition is hereby GRANTED. The decision o� the

DECISION - C.T.A. Case No. 4675 - 14 - Commissioner o� Internal Revenue~ dated November 12~ 1991~ denying petitioner's protest is hereby REVERSED ;/' and SET ASIDE. SO ORDERED. ~UE GRUBA Associate Judge WE CONCUR: ~FO~-~ P esiding .Judge I //~ zzJv~ RAIIOH 0. DE VE A I Associate Ju e CERTIFICATION I hereby certify that this decision reached a�ter due consultation afflong the members of the Court of Tax Appeals in accordance with Section 13 Article VIII of the Constitution. �__A;- 6), o~....t-.. ERHESTO D. ACOSTA Presiding Judge Court o� Tax Appeals so