CTA Case No. 2020 (Decision)

l\EPUBLIC OJ' THE P ILIPPINFJ COURT OF . TAX APPE.ALI QUE~ON CITY REPUBLIC CEiv1ENT CORPORATION, C.T.A. CASE NO. 2020 Petitioner, T vereu.s C0~1ISSIOt1ER OF INTERNAL REVENUE, Respondent. X- - - - ~ - - - - - - - - - X FILIPINAS CEMENT CORPORATION, Pe ti ti oner , versus C.T.A. CASE NO. 2021 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - X APO CElv1ENT CORPORATION, Petitioner, versus C.T.A. CASE NO. 2 022 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - X BACNOTAN CEMENT INDUSTRIES, INC., Petitioner, versus C.T.A. CASE NO. 2023 Cm-1MISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - X RIZAL CEMENT COMPANY, INC. , Petitioner, versus C.T.A. CASE NO. 2024 COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - - - - X PHILIPPINE PORTLAND CEl,1ENT CO., INC., Petitioner, versus C.T.A. CASE NO. 2027 COI-OOSSIOtlER OF INTERNAL REVENUE, Respondent. X- - - - - - - - - - - - -X DE C I S I 0 N The facts involved in the above entitled cases

DECISION - CTA CASES NOS. 2020, 2021, 2022, 2023, 2024 & 2027 ,. 2 are not disputed and may be briefly stated as follows: Petitioners are domestic corporations engaged in the production of cement. They are lessees, concessionaires or owners of mineral lands from where raw materials are extracted and used in the production or manufacture of cement. On different dates, respondent Commissioner of Internal Revenue issued assessments against petitioners for deficiency sales tax and surcharge due as manufacturers of cement, to wit: Petitioner Date IssY.�g Years Covered .Amount Assessed Republic Cement 1963-1967 P10,969,166.45 Corporation 11-20-68 Filipinas Ce- 5-15-69 1964-1967 6,275,134.95 ment Corp. APO Cement 2-20-68 10-30-63 to 1,341,814.?8 Corporation 6-30-65 ?,066,651.56 1963-196? Bacnotan Cement Industries,Inc. 4-23-69 Rizal Cement 3-12-68 1964-196? 1'156, 518.49 Co., Inc. Phil. Portland 1963-1967 893,341.92 Cement Co.,Inc. 2-1 0-69 The assessments were protested by petitioners in separate letters. In a Memorandum dated September 5, 1968, a Supplemental Memorandum dated September 11,

DECISION - CTA CASES NOS. 2020, 2021, 2022, 2023, 202~ & 2027 3 1968, and the Second Supplemental Memorandum dated February 27, 1969, petitioners reiterated their pro- tests to the assessments. The said protests were denied by respondent in a letter dated July 9, 1969. From this denial, petitioners filed their respective petitions for review with this Court. Subsequently, amended petitions were filed by petitioners. Since these cases raise the same issues, the parties moved for a joint hearing of all of them. There being no dispute as to the facts thereof, peti- tioners moved for a summary judgment to which the Court acceded in a resolution of March 12, 1971. However, before rendering judgment, the Court deemed it necessary to hear the arguments of the parties and so required them to submit their respective memoranda. In the main, the issues involved in these cases are: 1. Whether or not cement is a mineral product under Section 246 of the National Internal Revenue Code as amended and is exempt from the sales tax; � that 2. Whether ' ocremnoetn1t assuming petitioners sales are subject to the 7~ tax, the cost of gypsum and paper bag containers used are deductible from the tax base; 3. Whether or not, in the event the disputed assessments are held il- legal1 respondent may be held liable therer�or.

DECISION - CTA CASES NOS. 2020, 2021, 2022, 2023, 2024 & 2027 ) The first issue involves interpretation of Section 246 of the National Internal Revenue Code as amended by Republic Act No. 1299 that took effect on June 16, 1955, and Section 188(c) of the same Code. The original text of Section 246 runs as follows: SEC. 246. Definition of the term "gross output". -The term "gross output" shall be interpreted as the actual market value of mine- rals or mineral products, or of bul- lion from each mine or mineral lands operated as a separate entity with- out any deduction from mining, mill- ing, refining, transporting, handling, marketing, or any ether expenses: Provided, . QQwever, that if the mine- rals or mineral products are sold or consigned abroad by the lessee or owner of the miner under C.I.F. terms, the actual ,cost of ocean freight and insurance shall be deducted. The output of any group of contiguous mining claims shall net be subdi- vided. All the royalties or .�.9. valorem taxes herein provided shall accrue to the National Treasury. s amended by Republic Act No. 1299, Section 246 new reads as follows: SEC. 246. Definitiops of the terms "gross Qgtput," "minerals" and "mineral products" - Disposition Qf royalties apd ad valor;m taxes. - The term ngross output�sha.ll be in- terpreted as the actual market value of minerals or mineral products, or of bullion from each mine or mineral lands operated as a separate entity without any deduction from mining, milling, refining, transporting,

DECISION - CTA CASES NOS. 2020, 2021, 2022, 2023, 2024 & 2027 5 handling, marketing, or any other ex- penses: Proyid~d htmever,..That if the minerals or mineral products a.re sold or consigned abroad by the les- see or owner of the mine under C.I.F. terms, the actual cost of ocean freight and insurance shall be deducted. The output of any group of contiguous mining claims shall not be subdivided. The word rtmineralstt shall mean all inorganic substances found in nature whether in solid, liquid, gaseous, or any intermediate state. The term ttmineral products'' shall mean things produced by the lessee, concessionaire eoirghotwynepr eor f minera.l lands at least ~ cent of which !hings must be minerals extracted by such lessee, concessionaire or owner of mineral lands. Five Jl�.t. qentum of the royal- ties and ~ valorem. taxes herein provided shall accrue to the munici- pality where the mines are situated, and ninety-five ~ centum_to the National Treasury. _- Needless to say, while the original text does not define the word "mineralstt ' and the term "mineral productstt the amendment defines them. Section 188(c), before same was amended by Republic Act No. 4888 which took effect on June 17, 196?, reads as follows: SEC. 188. Transactions and � persons not stibjegt to percentage ~. - X X X X X X X X (c) Minerals and mineral products when sold, bartered or exchanged by the lessee, concession- aire, or owner of the mineral land from which removed.

DECISION - CTA CASES NOS. 2020, 2021, 20221 2023' 2024 & 202"/ 6 The amendment made by Republic Act No. 4888 consisted in the insertion to the original provision of Section 188(c) of the phrase ''whether in their original state or not 11 after the word 11 products. u Petitioners contend that since cement is ad- mittedly composed of 80% minerals extracted by petitioners as lessees or concessionaires or owners of mineral lands, it is therefore a mineral product in accordance with the provisions of Section 246 of the National Internal Revenue Code and is thus exempt from the sales tax under the provisions of Section 188(c) of the same Code. In support of their position, petitioners cite Cebu Portland Cement Co. v. Commissioner of Internal Revenue, G.R. No. L- 20563, October 29, 1968 (25 SCRA 789), and Philip- pine Pipes and Merchandizing Corporation v. Com- missioner of Internal Revenue, C~ Case No. 1858, July 28, 1970. Respondent for his part, citing Cebu Portland Cement Co. v. Commissioner of Internal Revenue, G.R. No. L-186~9, February 27, 1965 (13 SCRA 333), and Cebu Portland Cement Co. v. Commissioner of Internal Revenue, G.R. No. L-220605, January 17, 1968 (22 SCRA 56), urges that cement is not a mineral product in the contemplation of Section 246 aforesaid but

iI DECISION - CTA CASES NOS. 2020, 2021, 2022, 2023, 2024 & 2027 7 is a distinct product, having substantially under- gone a chemical transformation through a manufacturing process, hence is not exempt from the sales tax under the provision of Section 188(c) of the Revenue Code. In support of his contention, respondent/ quotes the following excerpts from G.R. No. L-18649 and G.R. No. L-22605: � � � The dispute here arose, however, from the construction given to the term mineral products, which was defined in Section 246 of the Tax Code as, 11 things produced by the lesseel concessionaire, or owner of minera lands, at least eighty ~ ~ of which things must be minerals extracted by suCh lessee, concession- aire or owner of mineral lands �11 Re- spondent argues that since the port- land cement produced by petitioner consists of 80,% minerals quarried from its mines, such cement falls within the definition of a mineral product and the imposable ad valorem tax should be based on its selling price which is its actual market value. This line of argument suffers from two infirmities: 80F%irmsti,newrahlisle, cement is composed of it is not merely an admixture or blend- ing of raw materials? as lime, silica, shale and others. I~ is the result of a definite process - the crushing of minerals, grinding, mixing, cal- cining, cooling, adding of retarder or raw gypsum. In short, before cement reaches its saleable form, the minerals had already undergone a chemical change through mant~acturing process. This could not have been

( ' DECISION - CTA CASES NOS. 2020, 2021, 2022, 2023, 2024 & 2027 8 the state of ''mineral products" that the law contemplates for purposes of imposing the a� valorem tax. � � (G.R. No. L-1~649.) The parties here have assumed that cement is a mineral product /with- in the purview of See. 243 of the Tax Code. Our view is otherwise. As we expressed it .in Cebu Portland � Cement Co. vs. Commissioner, L-18649, February 27, 1965, cement qua cement is no longer a mineral product in the condition envisaged by the Tax law. Very recently We reiterated and re- affirmed this stand thru Justice J.B.L. Reyes when We denied a plea to recon- sider the original decision rendered therein. It results that See. 2~a of the Tax Code cannot be applied directly to cement. What is taxable there- under are the minerals constituting cement, i.e., limestone, silica and shale. Hence, the correct basis of the lt1& M yalorem tax is the market value of the quarried raw materials. (G.R. No. L-22605.) It is easier to grasp the legal implications of the foregoing excerpts if they are read in the con- text of the resolution of the Supreme Court in (} .R. No . L-18649, December 29, 1967, the pertinent por- tion of which reads as follO\'IS: ���And we sustained the position of the cement company, i.e. that the ~ valorem tax in question should be based on the actual market value of the Quarried minerals used in pro- ducing cement, reasoning that cement (as distinguished from the original minerals used to produce it) is the result of a process, and that the same 11could not have been the state

" DECISION - CTA CASES NOS. 2020, 2021, 20221 2023' 2024 & 202�/ 9 of mineral products contemplated by the law" for the purpose of imposing the ~. valorem tax. The necessary corollary of this pronouncement is that the law intended to impose the ~ valorem tax upon the market value of the component mineral products in ~ their original state" before processing into cement . For it can not be �over- looked that the law does not impose a tax on cement ~ cement, but on mineral products, at least 80,% of which must be minerals extracted by the lessee, concessionaire or owner of mineral lands. Both puaprtoiefs80c%on- cede that cement i s made or more of minerals thus extracted . The Court did not, and could aot, rule that cement is a manufactured product subject to sales tax, for the reason that such liability had never been litigated by the parties . What it did declare is that, while cement is a mineral product, it is no longer in the state or condition contemplated by the law; hence the market value of the cement could not be the basis for computing the ~ valorem tax, since the Ad valorem tax is a sever- ance tax, i . e . , a charge upon the privilege of severing or extracting minerals from the earth, (Dec. p. ~) and is due and payable J.m.S2I1 remgval of the mineral product from its bed or mine (Tax Code s . 245). So that the tax is to be computed on the basis of the market value of the mineral in its condition at the time of such removal and before its being substan- tially changed by chemical or manu- facturing (as distinguished from purely physical) processing. What- ever mention was made in the decision of such process undergone by the component minerals of cement, was made solely and exclusively to emphasize the change in .the condition of the minerals, from the 1primitive state contemplated by the taxing statute. This is clear from the text of the decision (pp. 4-5) where we stated:

�'' DECISION - CTA CASES NOS . 2020, 2021, 2022, 2023, 202lt & 2027 10 11This (respondent's) line � of argument suffers from two infirm ities. Firs to, fw~h-aie cement is composed minerals1 it is not merely an admixture or blending of raw materials, as lime, sil- ica, shale and others. It is the result of a definite pro- cess -- the crushing of mine- rals, grinding, mixing, cal- cining, cooling, adding of retarder or raw gypsum . In short, before cement reaches its salable form, the minerals had already undergone a chem- ical change through manufac- turing process. This_rould not have been the state of mineral prQducts that tbe law cgntemplates _for purposes of the ad valorem t f.u (Em- phasis supplied. It can be readily gathered from the foregoing excerpt that cement is a mineral product under Sec- tion 2lt6 of the Revenue Code . Therein, the .Cobrt says 11while cement is a mineral product � � � II .i Also, it says: ��� For it can not be over- maloiotnakexerdaolnthpcareotmdtuehncettsml,awatdceolemeasesnntto, 8tb0%uimtopoofnse which must be minerals extracted by the lessee, concessionaire or owner of mineral lands . Both parties ~- .... � con c.~e.a<e that cement is made up of' 80% or more of minerals thus extracted. ~ It should be noted that in the foregoing excerpt the resolution applies to cement the definition of mineral products found under Section 21t6 of the Revenue Code which reads as follows:

DECISION - CTA CASES NOS. 2020, 2021, 2022, 2023, 2024 & 2027 11 SEC. 246. Definitlons of th~ terms ugross output", 11mineralsn and 11minera.l produc;ts 11 . -D1sposition of royalties and ad valorem taxes.- x x x The term nmineral products" shall mean things produced by the lesseei concessionaire or owner of minera lands, at least eighty per cent of which things must be minerals extracted by such lessee , conces- sionaire, or owner of mineral lands. XXX Whatever mention was made in the decisions in G.R. No. L-18649 and G.R. No. L-22605, of the manufac- turing process undergone by the component minerals of cement was solely and exclusively to emphasize the change in the condition of the minerals from _- their primitive state, contemplated by the statute as the basis for computing the ad valorem tax which is a severance tax payable upon removal and, as such, should be based on the state of the minerals _upon removal from the earth. The mention of the manufac- turing process was not meant to have any other legal implication. More directly in point, however, is G. R. No. L-20563 decided after G. R. Ncs. L-18649 and L-22605�. G.R. No. L-20563 involved refund of sales taxes paid from November 1, 195'+ to March, 1955 and ~ valorem taxes paid from April, 1955 to September 30, 1956. It was there urged that since the purpose of the amendment was merely to clarify the meaning of

DECISION - CTA CASES NOS. 2020, 2021, 2022, 2023, 2024 & 2027 12 mineral products, Section 246 in question should be I construed as if it had been originally passed in its amended form so that cement should be considered as ttmineral product" even before the enactment of Republic Act 1299 and, therefore, exempt from the sales or percentage tax pursuant to the provisions of Section 188(c) of the National Internal Revenue Code. Respecting this contention, the Supreme Court said: Indeed, like other statutes, tax laws operate prospectively, whe- ther they enact, amend or repeal, unless, as aforesaid, the p~pose of the Legislature to give retro- spective effect is expressly declared or may clearly be implied from the language used. It thus results that before the enactment of the amend- ment to section 246 of the Tax Code, when cement was not yet placed under the category of either 11minerals 11 or ''mineral products 11 it was not exempt from the percentage tax imposed by section 186 of said Code, and was, therefore, taxable as a manufactured product. Needless to say, the clear implication of the foregoing language is that cement is now a mineral product under section 246 of the Internal Revenue Code by 'virtue of Republic Act No. 1299 which took effect on June 16, 1955, amending said section/2~6. Being now a mineral product it is exempt from sales taxes under section 188(c) of the Revenue Code. '�. ;

DECISION - CTA CASES NOS. 2020, 2021, 20221 2023, 2024 & 202"{ 13 This Court has previously passed upon this same question in Philippine Pipes and Merchandizing Cor- poration v. Commissioner of Internal Revenue, supra. On the strength of G.R. Nos. L-18649, ~22605 and L-20563, we there held in our amended decision of July 28, 1970, that cement is now mineral product under Section 246 of the Revenue Code and is thus exempt from sales taxes under Section 188(c) of the same Code. We see no valid reason for reversing said ruling on this point. Respondent makes capital of the amendment to Section 188(c) effective June 17, 1967 consisting of the insertion of the phrase "whether in its original state or not" after the word ttproducts 11 � Respondent urges that the insertion of said c~ause indicates. that before the amendment the exemption was not meant to cover mineral products that were no longer in their original state. We do not sub- scribe to this line of thought. Sections 188(c) and 246 are complementary provi- sions and if by legislative fiat a product is de- clared a mineral product in the latter section, then it is also so in the first. It may not be amiss to say in this connection that G.R. No. L- 20563, which ruled that Republic Act No . 1299 placed cement in the category of mineral product, involved cement produced before the passage of Republic Act

-' I DECISION - CTA CASES NOS . 2020, 2021, 2022, 2023, 2024 & 2027 14 No . 4888 inserting the clause "whether in its original form or not" after the word "products". The cases of American Rubber Company v. The Commissioner of Internal Revenue, G.R. Nos . L-20772 and 20852, May 31, 1971, 39 SCRA 163, and Philippine Packing Corporation v. Collector of Internal Revenue, G.R . No . L-904o, December 26, 1956, 100 Phil. 545, cited by respondent are not in point. Said cases involve the tax exemption for agricultural products provided in Section 188(b) of the Revenue Code which has no complementary provision like Section 188(c) and so, the exemption should be determined only from the language of the provision itself. Respondent has not shown to us any provision in the Tax Code defining agricultural products to establish an analogy with Section 188(c). Since we have reached the conclusion that peti- tioners' cement are not subject to the sales tax, we deem it unnecessary to pass upon the second issue raised in these cases. With respect to the third issue, there is nothing to show that respondent acted with arbitrari- ness in making the assessments subject of these ap- peals. Liability on the part of respondent must be premised on arbitrary action (Gibbs v. Coll ., .,

DECISION - CTA CASES NOS. 2020, 2021, 2022, 2023, 2024 & 2027 15 G.R. Nos. L-14166 & L-14320, April 28, 1962; Comm. v. � Asturias Sugar Central, Inc., G.R. No. L-15013, December 28, 1961). WHEREFORE, the appealed decisions in C.T.A. Cases Nos. 2020, 2021, 2022, 2023, 2024 & 2027 are hereby reversed, without pronouncement as to costs. SO ORDERED. Quezon City, June 28, 1972. ;(Av-...-- -1 ~� RAMON II. Y. NCENA Associate Judge WE CONCUR: ROMAN M. Presiding Judge -~~,fk-o ?(?;;,y�d<.' ESTANISIAO R. ALVAREZ Associate Judge