CTA Case No. 4960 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY RODOLFO A. GAMBOA, Petitioner, - versus - C.T.A. CASE NO. 4960 HONORABLE JOSE U. ONG, COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - DECISION The issue presented in this case, which involves a claim for refund of the sum of P789.39 representing value-added tax (VAT), is whether or not the saTe of mo1ssses is exempt from VAT under sect ion 103 (b) of the Interns 1 Revenue Code ss I' ',! amended, the pertinent provisions of which state ss fo 11ows: sec. 103. Exemet Transactions. The fo11owing sha11 be exempt from the Value-added tax: XXX XXX XXX (b) saTe or importation in their original state of agricultural and marine food products; 1ivestock and poultry or a kind genera11y used , as, or yielding or producing food for human consumption; and breeding stock and genetic materials therefor. Products classified under this paragraph and parsgraph (a) sha11 be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, 458

DECISION - CTA CASE NO. 4980 - 2- salting, smoking or stripping. Polished snd/or husked rice, corn grits and raw cane sugar shall . be considered in their original state for purposes of this paragraph. There is no dispute on the facts leading to this controversy. The amount of P789.39 representing VAT, surcharge and interest, on his sale of molasses was paid by the petitioner, a bona fide sugar producer, on December 5, 1991 under Payment Order No. 010618635 (Exh. "A") snd Confirmation Receipt No. 8 23755593 (Exh. "B"). On February 28, 1992, he ' filed a written request or claim for refund of said tax with the respondent contending that molasses. like raw cane sugar, is an agricultural product in its original state snd therefore exempt from VAT under said Sect ion 102 (b) of the Tax Code (Exh. "C"). In a letter, dated December 29, 1992 (Exh. "0"), respondent Commissiqner of Internal Revenue denied petitioner's claim for refund on the ground that molasses, unlike raw cane sugar, is not included in the exemption under Section 103 (b) of the Tax Code and its implementing Revenue Regulations No. 5-87, as well as in BIR VAT Ruling No. 058-90. More extensively, the position of respondent as contained in his letter of December 29, 1992, states as follows: 459

DECISION - CTA CASE NO. 4960 - 3- Please be informed that the issue on the taxability of the sale of molasses has been squarely resolved in VAT Ruling No. 058-90 dated February 28, 1990 wherein it was held that - "Genera 11y, mi 11ing which employs technology and machinery, is not considered as a simple process for the purpose of qualifying agricultural prodUcts as remaining in their original state. Thus, a11 mi 1led products with the exception of rice, corn grits and .raw cane,__�Y.Jl.Sr:, are no longer in their original state; hence not exempt from the VAT (Section 103 (b) of the Tax Code as implemented by Section 9 (b)(2) of Rev. Reg. 5-87). MOlasses, although a by-product of sugar mi 71 ing, is not however considered as raw cane sugar; hence its sale is subject to 10% VAT pursuant to Section 100 of the same Code.�� Likewise, the VAT Review Committee, in the same ruling, held that there is no inconsistency between the provisions of the VAT law and those of the implementing regulations. It stated that "Section 100 of the same Code imposes a 10% VAT on the sale of goods except those specifics 11y enumerated under Section 103 of the same Code. It is very clear under the Taw that molasses is not included among those qualified for exemption under subsection (b). In fact, Section 9 (b)(2) of the revenue regulations implementing the VAT Taw (Rev. Reg. 5-87), expressly provides that "raw cane sugar" to which VAT exemption is limited does not include molasses, among others." In fine, Rev. Reg. 5-87 merely reiterated the provisions of Sec. 103 of the Tax Code (the act of the 1egis1ature/Congress) pertaining to the items exempt from the VAT although they undergo the mi11ing process, raw cane sugar being one of them, and clarified that "raw cane sugar" 460

DECISION - CTA CASE NO. 4960 - 4- does not include molasses. It did not add to nor exceed the 7imitations set forth by the provisions of the VAT Taw contrary to your claim. (See pp. 10 & 11, CTA rec.) Consistent with the view and argument raised in its written claim for refund fi Ted with the Bureau of Internal Revenue, petitioner, after receipt of respondent's Tetter of denial on January 26, 1993, filed his petition for review with this court on February 23, 1993 seeking the refund of the amount of P789.39 paid as VAT on his saTe of molasses. Petitioner contends that molasses is an agricultural product in its original state and so, Tike raw sugar, it is exempt from VAT. He avers that molasses is an intermediary product of a simple operation of mi77ing sugar cane into raw sugar or that it is a by-product of sugar cane in processing the same into sugar. Hence, there is no rhyme or reason why the exemption of raw sugar from VAT should not be extended to molasses as we77. In assailing the validity of Revenue Regulations No. 5-87, Sec. 9 (b), which excluded molasses from the exemption, pet it ioner a 11eges that the same extended the Tetter and spirit of the Taw, thus amounting to an amendment of the same. 461

DECISION - CTA CASE NO. 4980 - 5- Pet it ioner cited the testimonies of his witnesses, Messrs. Vicente G. Castro and Roge1io Covar, who ~ere qualified as experts, that molasses is a by-product in the manufacture of sugar and pointing to the milling operations or manufacturing process of said products. L~!!!-ti'!P.!!Y.....!?.! --.- _ _ - �V--i�c-e-.n.... te G.........c... a_s.... tr....o... : Q. You said that as general manager of the Bico1andia Sugar Development Corporation, one of your responsibi 1ities was in managing the sugar mi11s operations. Wi11 you please describe to the honorable Court what precisely does the term "mi11ing operations" refer to? A. Hi 11 ing operation refers to the grinding of the sugar cane brought to the sugar mi 11, process the juice into sugar. And the sugar that was manufactured from sugar cane is put in bag and this is sold by the particular owners. Jha_t_.is_. in bri~L..r.!!f.t}L..~ .!5?_.1h.~__!J..Y.9.~!.....!!l!!l.Y.!ac.!.Y.ri IJS. Q. Wi 11 you please inform the court what other product is produced by the same process of mi11ing operations? A. When the sugar cane is grinded and crushed, the juice is clarified. After the juice is clarified, this is boiled. After it has undergone boi1 ing, this wi 11 go to the crystallizer whereby the pure sugar is made into crystals. And that component that could not be crystallized goes to the mo 1asses. a, .$.0 i e ffe�l.J___!!!Ql~��.~~_i�.._..!L!!X...-:: e.roqy_ct.....P.L. .-~Y..9.M:.......�ane_.__f!)_e,roci!_!JS i ~9- th~ .!J..Y..9.!f.... _. _l?..~--..t.rJ.~o __Ji!!.~r. <under1; ni ng supplied.) (pp. 9 & 10, TSN, July 12, 1993.) 462

DECISION - CTA CASE NO. 4960 - 6- Lf!�.! i 11!!1!!�_9..[ .~1io_�9~G Q. Wi 11 you please describe to the honorable Court what you meant by sugar mi 11 operations? A. We11, sugar mi11 operations involve essentia71y cane processing. At the onset, I wish to inform Your Honors that sugar or raw sugar or sucrose the chemical substance which is knc:win rea71y as raw sugar - is produced in the sugar cane plant by a process ca11ed photosynthesis. And this is stored in the sugar cane ce11s. This is the sucrose which we seek to crysta71ize and se71 to the public as raw sugar. Now, this is included and contained in the sugar cane stalk which is delivered to the factory for processing. As soon as these cane stalks are delivered to the factory, these are weighed and brought to a conveyor where it is passed through cane knives. And these are cut into sma71 pieces probably one foot length. Once this is cut into these sma71 pieces, this is passed through a crusher. And canes are crushed so that the ce71s wi11 be destroyed. Now, after crushing, this is passed through a shredder where the fibers are shred so that the juice can be further extracted. From the shredders, this is passed through a series of mi 77 train which we ca71 a mi71 tandem which consist of four. or five sets of ro11ers. Now, in these ro71ers, the cane ce71s are pressed under pressure so that the juice comes out and the fiber content is � separated when it passes through the last mi 77. The fiber content which is separated with the trash is what we ca11 bagasse. Now, this is the first by-product in sugar cane manufacture. The juice which is separated fnom the bagasse by the extraction is now passed through a clarifier. �rn the clarifier, Time is added 463

DECISION CTA CASE NO. 4960 - 7- together with phosphoric acid so that the dirtier portions of the juice wiTT be separated from the pure juice. 01ce this is dbne, then the juice is passed through a series of fiTters. We ca71 it a rotary drum fiTter. Now, the clarified juice, after passing through the fiTter, is sent to the boi Ter. The thick substance that separates from or the precipitate separating from the filtering is what we ca71 a second by- product which is known as the fiTter press or mud press. The clear juice once H goes to the boi Ter is boi Ted through muTtipTe effect evaporators wherein the water is separated from the pure sucrose. Now, after it has passed through boiT ing, this goes to a vacuum pan where the thick syrup is further evaporated under pressure so that the sucrose wiTT not carame 7i ze. Now, from there, it is dropped through a crystallizer where the syrup which is now ca11ed a massecuite contains molasses and the crystalline sucrose. This is now dropped to a centrifuge wherein the crysta 1 is separated from the viscous liquid known as molasses. Now, these crystallized substance is what we ca11 raw sugar, and the thick viscous liquid which is separated from the massecuite is what we ca11 molasses. And since we have recovered now the pure raw sucrose in crysta 71 ine form, the viscous and dirty substance which comes out is known as the molasses and it's a by-product of a sugar manufacture. Now, these crysta 11 ine sugar now is dried and placed in bags and soTd as raw sugar. a. So that in your op1mon, Hr. covar, can you te71 the court whether molasses can be considered as an agricultural product in its original state? 464

DECISION - CTA CASE NO. 4960 - 8- A. Molasses is considered an agricultural product because, as I have said, there is no change involved, there is no chemical change involved in the process except a physical separation between the crystalline raw sugar which is the major product and molasses which is a by-product. (pp. 18 to 23, TSN, July 12, 1993.) The Court finds petitioner's view not we11 taken. "Molasses is the thick, brown or dark-colored, viscid sirup which drains from sugar in the process of manufacture." (webster's Intennational Dictionary, 2nd Ed., p. 1579.) From the concept of mi 11 ing operations or manufacturing process that produce sugar and molasses described by petitioner's expert witnesses, molasses cannot qualify as an agricultural product in its original state because the process of product ion or manufacture thereof does not merely involve a simple process of preparation or preservation for the market, such as freezing, drying, salting, smoking or stripping as contemplated by Taw (Section 103 (b) of the Tax Code as amended) but �~ )' one that covers an intricate process and severs 1 stages of activities. Truly, the expert witnesses even admit in their testimonies that molasses results from a manufacturing process. Let us 465

., DECISION - CTA CASE NO. 4960 - 9- consider these series of activities that go into the manufacture of sugar and molasses as condensed from the testimony of petitioner's witness Mr. Rogelio Covar: Delivery of sugar cane stalks to the factory CUtting of sugar cane into sma11 pieces Crushing or grinding the same through a crusher Shredding through a shredder Passing through a series of "mi 11 train" or "mi 11 tandem" or "sets of ro 11ers" Clarifying of crushed sugar cane juice into a clarifier in which lime and phosphoric acid are added to separate pure juice from the dirtier portions of the juice Passing of the sugar cane juice through a series of filters ca11ed "rotary drum filter" Boiling of clarified juice through a boiler and "multiple effect evaporators", wherein water is separated from the pure sucrose. Passing of juice to a vacuum pan to further evaporate the thick syrup Crysta11izing of pure sucrose through a crysta 11 i zer. Separating the crysts11ized sucrose ca11ed "raw sugar" from the viscous liquid ca11ed "molasses", through a "centrifuge" Drying of crysta11ine sugar and placing same in bags for saTe. In fact, in one of the stages of the manufacturing process, that is the stage of clarifying crushed sugar cane juice into a clarifier, lime (a mineral) and phosphoric acid (a chemical) are added or used. 466

DECISION - CTA CASE NO�.4960 - 10 - Such manufacturing process, which molasses undergoes, negates the concept of its being "in its origins 1 state" that wou 1d qua 1i fy it as an agricultural product exempt from VAT under said Section 103 (b) of the Tax Code which provides that agricultural food products should be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, smoking or stripping. Indeed, prior to the value- added tax provisions in the Internal Revenue Code, the previous percentage tax provisions of said Code, (Sec. 198 (a) and (b), 1977 Tax Code) defines even the phrase ')!!l!.t h..!!.L...i!L.ti:Je i r ._2f..._fgj_na 1_�_tate or not" as "the transformation of said products by the application -of simple processes to preserve or otherwise prepare said products for the market such as freezing, drying, salting, smoking or stripping." Be that as it may, the focal point rea17y in petitioner's position is that since the law (Section 103 (b). of the Tax Code, supra) considers raw cane sugar as an agricultural product in its original state and thus exempt from VAT, why should molasses, which undergoes the same milling or 467 ---------" ---- - ------"

DECISION - CTA CASE NO. 4960 - 11 - manufacturing process, be not similarly considered and likewise exempted from VAT? We 11, the point is that while molasses has undergone almost the same milling or manufacturing process as raw cane sugar, it is only a by-product. It is not sugar or even similar to it in physical structure and use. And the law considers raw cane sugar, the principal product, together with polished or husked rice and corn grits, as an agricultural product in its original state and does not inc 1ude mo 1asses as such. On t h is point, we find the position of respondent in his letter of December 29, 1992 heretofore cited as tenable: Please be informed that the issue on the taxability of the saTe of molasses has been squarely resolved in VAT Ruling No. 058-90 dated February 28, 1990 wherein it was held that - "Genera 11y, mi 11 ing which employs technology and machinery, is not considered as a simple process for the purpose of qualifying agricultural products as remaining in their original state. Thus, a17 mi 11ed products with the exception of rice, corn grits and f'J!.W...�1�1~ S.Y..9..ar, are no Tanger in their original state; hence not exempt from the VAT (Section 103 (b) of the Tax Code as implemented by Section 9 (b)(2) of Rev. Reg. 5-81). Hblasses, although a by-product of sugar mi11ing, is nat however considered as raw cane sugar; hence its sale is subject to 10% VAT pursuant to Section 100 of the same COde." 468

DECISION - CTA CASE NO. 4960 - 12 - The ru1e of exclusio unius est exclusio alterius, contrary to petitioner's postu1ation, may be app1ied in this case, there being no positive or strong 1egis1ative fiat that wou1d justify the inc1usion of mo1asses in the exemption. Furthermore, exemption from taxation is not favored and shou1d be construed strictissimi juris against the taxpayer and 1ibera71y in favor of the tax{ng authority. (Philippine Petnoleum corporation vs. fbli ci pa1i ty of Pi 1i 11a, Rba1f 198 SCRA 82; caltex Philippines. Inc. vs. COIIInission on Audit, et al., 208 SCRA 726; COIIInissioner of Internal Revenue vs. Qlerrero, 21 SCRA 180; Manila Electric 00. vs. Vera, 67 SCRA 351.) VeriTy, Section 9 (b) of Revenue Regu1ations No. 5-87 which imp1ements the VAT provisions in question, is va1id and correct. Said regu1ations, in stating that mo1asses is not inc1uded in the exemption, mere1y upho1ds Sec. 105 (b) of the NIRC which itse1f does not inc1ude or consider mo1asses as an agricu7tura1 product in its origina1 state and thus, un1ike raw cane sugar, is exempt from VAT. In other words, Section 9 (b) of Revenue Regu1ations No. 5-87 is in accordance with 1aw and does not extend nor amend the provisions of Section 103 (b) of the Tax Code. Again, we agree with respondent's stand on this matter: �, 469

DECISION - CTA CASE NO. 4960 - 13 - In fine, Rev. Reg. 5-87 merely reiterated the provisions of Sec. 103 of the Tax Code (the act of the legislature/Congress) pertaining to the items exempt from the VAT although they undergo the milling process, raw cane sugar being one of them, and clarified that "raw cane sugar" does not include molasses. It did not add to nor exceed the limitations set forth by the provisions of the VAT law contrary to your claim. (See pp. 10 & 11, CTA rec.) Petitioner has invoked some jurisprudence on the term agricultural products whether or not in their original state as exempt from percentage tax or sales tax under the old percentage tax provisions of the Tax Code. But what he failed to notice is that those doctrines relate to other agricultural food and non-food products whether in their original state or not under the old provfsions of the Tax Code which have undergone revisions. And that, under the 1ater editions of the National Internal Revenue Code (NIRC of 1977 & NIRC as revised in 1987) the phrase "whether in their original state or not" qua 1i tying agricultural products, refers to those which have simply undergone the simple process of preparation or preservation. Never in the history of the pertinent Tax Code provisions nor by jurisprudence has molasses been considered as an agricultural food product in its original state and therefore 470

DECISION - CTA CASE NO. 4960 - 14 - exempt even from percentage tax or sales tax then enforced. WHEREFORE, petitioner,s petition for review is not sustained and his claim for refund therein sought for, is DENIED. SO ORDERED. ~ jl4~~ ~ RA N 0. DE VEY. Assocjste Judg WE CONCUR: I ~~~~ ERNESTO D. ACOSTA Presiding Judge CERTrFrCATrON 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. 471 � ...-4;1G~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals