CTA Case No. 4264 (Decision)

I I / AEPUBLXC OF THE PHXLXPPXNRa COURT OF TAX APPEALS Gtu.:ZDN CXTV ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, Petitioner, - versus - C. T. A. CASE NO. 4264 COMMISSIONER OF INTERNAL REVENUE, )( - - - -- - - Respondent.- )( D E C:: X S X 0 N This case stems from an assessment issued against petitioner for deficiency ad valorem ta><, J plus s t.u�"charge aggregating P1, 059,063. 47 fot" the year 1977 and for defic~ency income ta><es for 1977 and 1978 including interest in the amounts of P883,460.76 and P16,937.51 respectively. Petitioner is a domestic corporation \ organized aryd existing under and by virtue of the laws of the Republic of the Philippines and is engaged primarily in the business of mining coppet". I On April 15, 1983, respondent issued a �gainst petitioner the subject assessments which was 44~-~. �.I

DECISION - C.T.A. CASE NO. 4264. 2- seasonably contested on Apri 1 27, 1983 <BIR On Apt~i 1 14, 1988, respondent denied the by issuing and up.on the petitioner warrants of distraint and levy <Annexes A and B> which later on was 1 i fted ~p on petitioner's filing of a surety bond in the amount of P3,640,831.61 <BIR records, p. 224>. Hence, this petition for review. During the cor_wse of the proceedings, the assessment fot~ deficiency income tax became the subject of a compromise settlement which was noted . by this Court in its Resolution, dated October 10, 1990 ( p. 58, CTA records). Hence, the only t~emaining issue is the assessment for deficiency ad valorem tax. Pm~suant to a Letter of Authot~ity No . 14561 I NA, dated April 30, 1981, revenue examiners of herein respondent conducted an investigation which I yielded, amon'g others, the following results: ,I � "Subject taxpayet~ is a domestic cot~poration engaged in .mining wi't h copper, gold, silver, pyrite and molybdenum as its main minet~al products �. Gold is subject to 1 1/2~ ad valorem ta~ <royalty> while the rest at 2~ of the actual market value of the ~ross output. <Sec. 254, pat~. (b) <2> and (3), NIRC>. However, Atlas Consolidated Mining & Development Corporation enjoys certain tax incentives as a non-pioneer industry 44~. �. t

DECISION - C.T.A. CASE NO. 4264. 3- in the pt�oduction of coppet�, gold and silvet�. Vet� ification disclosed that its books of accounts and other related records are being kept and maintained in accordance with the National Internal Revenue Code and the vat�ious rules 'and regulations supplementing and implementing the same. In the course of investigation, the following assessments wet� e at�rived at: <Please see attached working papers for computation and details.> 1'377 1978 Total De f. Income P857,91'3.50 p 16,'339;.72 p 874,85'3.22 tax 1,05'3,063.47 1,05'3,063.47 De f. Ad Valorem Tax Total P857,'31'3.50 P1,076,003.1'3 P1,'316,'322.6'3 .J XXX XXX XXX XXX XXX XXX XXX XXX XXX 2. Defipiency Ad Valorem Taxes The deficiency assessment on ad valorem tax fot� 1978 which isl shown below and detailed in the attached wot�king papet' was due to the quantity deductions from the 'final assay \ for settlement'. Kind of Metals Coppet' p 695,427.05 Gold 91,103.92 Silvet� 60,719,81 Sub-total Add: 25~ Surcharge p 847,250.78 Def. Ad Valorem Tax 21 1,81 2.69 1 P1,059,063.47 ' The following facts and at�guments were presented to the taxpayer's representative to support the deficiency assessments: 44C �. I '

DECISION - C.T.A. CASE NO. 4264. 4- 1) That the copper concentrates were shipped to the smelters/buyers abt~oad, namely "MITSUBISHI METAL CORPORATION", MARCK RICH & CO. and PHILIPP BROTHERS OCEANIC, INC. ; 2> That the ad valorem taxes paid wet~e based on the pt~ovisional assay at the pt~evailing price of the metals at the London Metal Exchange Quotation; 3) That when the coppet"' concentrates reached the smelter abroad, the provisional assay is redetermined by the assayers of the seller and buyer in ot"'det"' to at~rive at a "Final Assay fot~ settlement." The final assay for settlement is the stage where the sale is perfected, meaning the seller has to part with the ownership "of the goods and the buyer is bound to pay for the price. In some instance, if the assayet"'S of both parties could not agree on the "final assay fat~ settle ment ," the difference is settled by a third pat"'ty called "the umpit"'e assayer; and 4> That in the shipments made in 1978, ~er~~n_unita_Q~ercentage were deducted ft~om the final assay for ?ettle ment 't resulting in the understatement of the actual mat"'ket Y:;lZ;;- -o_{ the metals 1 subject to ad val ot"'em tax. " <Undet~scot"'i ng sup plied> <BIR Inves~igation Report � dated Feb. 8, .1983, pp. 96-97, BIR records.) I In the BIR Assessment Demand Letter of April ,I 15, 1983, however, the Acting Commissioner at that time informed the petitioner that "no defic ,iency business tax was found due from you for the year 1977" <Exhibit A, p. 70, CTA t"'ecords) but: "the same investigation also disclosed that thet~e is due from you for the year 44i .I

DECISION - C.T.A. CASE NO. 4264. 5- 1978 the amount of P1,059,063.43 as deficiency ad valorem tax and surcharge, computed as follows: Understatement of market value of metals per investigation Ad Valorem Tax Copper P34,771,352.43 P695,427.05 91,103.92 Gold 6,073,594.35 60,719.81 Silver 3,035,990.55 P847,250.78 211,812.69 Total P1,059,063.47" Add: 25~ surcharge TOTAL AMOUNT DUE AND COLLECTIBLE (ibid.) In other words, the deficiency assessment was at~t~ived at due to petitionet~' s understatement of the market value of the me~als it shipped abroad Q.y__�;::educting cet~tain units or percentage from the quantity of the metals detet~mined in the final assay. In a lettet~, dated April 27, 1983, petitioner pt~otested the assessment on the ground that "the pt~ actice pt~evailing in the metals (like copper> is to allow the buyer a ' unit deduction' expressed \ in percentage the quantity debh~ mined in the final assay." ( p. 123, This "unit deduction" is uhpai~ The petitionet~ in the same protest letter explained, thus: "-Why? Because the sme 1 t et~/buyer needs to provide fot~ inevi table losses of metal in pt~ocessing raw copper into t~efined coppet~. 'Unit deduction' is the built-in device to correct this loss. 4-"' 4'u� �. t

DECISION - C.T.A. CASE NO. 4264. .J 6- It is this unpaid for metal content that yout~ examinet~s would now tax against ACMDC. This is an insult added to injw~y . The minet~, ACMDC not only was not paid for the unit deduction but y o m~ 0 f f i c e wo u 1d pun i s h (t wi t h a t ax on such unpaid quantity." <ibid.) Hence, the petitioner believes that it should not be subjected to assessment for deficiency ad valorem taxes. The only issue, then, is whethet~ ot~ not the assessment for deficiency ad valorem taxes in the amount of P1,059,063. _47 in~luding surcharge was valid . More specifically, whether or not the "actual mat~ket value of the gross output" under Sec. 254 of the Tax Code (1977? where the ad tax is based, includ es the "unit deduction" fat~ taxation purposes. We submit that both questions should be answered in the negative. ' I Quoted, hereunder, for easy reference, is the I applicable law fat~ the resolution of this case which reads in part: "Sec. 254. Rentals and Royalties on Mineral Lands Under Lease.- For the Q.rivil~ of exploring, developing, , mining, extt~acting, and disposing of the' minerals from the lands covered by lease, there is thereby imposed upon the lessee rentals and royalties, as follows: XXX XXX XXX 44'~ �.I .

DECISION - C.T.A. CASE NO. 4264. 7- <B> Royalties - XXX XXX XXX 2> On gold, a r"oyalty of one and one - half per centum of th e actual ma r ke t value of the annual gr� oss output thet�eof. 3) On all othet" miner"al s, e><tt�acted ft"om, ot� minet"a l pt�oducts of, minet�al lands of the fit"st, second, fot1rth and fifth groups as pt� ovided in the Mining Act, a royalty of two pet" centum of the actual market value of the g_~::_g_s s _~!:t put t h et"e of. <Und erscot" in g s upplied. > XXX XXX XXX ( 1977 National Revenue Code) Sec. 257 of the same Tax Code defines "gt"oss output" as !'the actual mat�ket val u e of minet"als Ot" mineral products, or of bullion from each mine or land s as a entity without any deduction minin g, milling, refining, tran s porting, handling, ma t�ket i ng, Ot' any othet� expen s e s ". The nattwe of ad va1ot�em tax on mining, as t"u1ed by the Supt�eme Cout�t, is a tax not on the min e t' a 1 s, but upon the pr i v i 1 e g e of seve t' in g or the same the Govet� nment' s to exact the sai d impost spt�i ng i ng from the Rega1ian of state own et�sh i p of its nat tlt"a 1 t� esources. <Cebu 45 J

DECISION - C.T.A. CASE NO. 4264. 8- Port land Ce11ent Co. vs. Co��� of Int. Rev., L- 18EA9, Feb. 27, t965, 13 SCRA 333.) Since the ad val Ot'e m tax is a sevet'ance tax, i.e., a charge upon the privilege of severing or extracting .) minet'a ls ft~om the eat~th, and is due a nd payable !-.!QOn ~em oval of the minet~al product from its bed or mine, the tax is to be computed on the basis of the ~~J:.'keL_ya_l_r_.,U?_ of the minet~al in i t s condition at the time of such t~emoval and befot~e its being substantially chang ed by chemical or manufacturing <as distinguished from physical) pt~ocessing. <Cebu Port land Ce�ent Co. vs. Co��� of Int. Rev., L- 18649, Resolution dated Dec. 29, 1957 of the Motion for Reconsidet~ation, 21 SCRA 1425. ) It should be not ed, however, th at in a lattet' case of similat~ nature, the Supreme Cout~t delimited the basis for the pomputation of the ad valot~ em tax not only on the mat'ket value but on the ~<:; tual mat�� ket val1ue of the minet.;al products extracted or produced. <Republic Ce�ent Corp. vs. Co��� of Int. Rev., 23 SCRA 967 [ 1968]. > The "actual market value" of pt~operty, fot" pUt"poses of taxation means the selling pt~ice of the at~tic� le in the course - of ordinary business. <San Miguel 5a Corp. vs. Municipal Council of Mandaue, Cebu, SCRA L~3. ) Constt~ued, thet"efot"e, the ad valot~em

DECISION - C.T.A. CASE NO. 4264. 9- tax m�Jst be based on the actual market value, i.e.~ the value after the "unit ded1.1ct ion" from the quantity of the metals determined in the final assay has been applied. The price after the unit deductio n is co nsidered the actual market value of the met a 1. This "unit deduction" is the prevailing practice in the metals world market and is co nsidered as a built -i n device for the buyer to provide for ine vit able losses of metal in . i n t o pt~ocessing t~aw coppet~ t~efined coppet~. This i s expt~essed in pet~cent age from the quantity detet' mined in the final assay. This practice is normal and ordinary i n the metals sales contracts executed by ex pot~t et'S and buy et~s. To go against this means to put an end to the petitioner's business since it cannot find buyers f ot' i t s co p per. And one cannot speak of "actual I mat'ket value" when thet'e at'e no buyet's in the course of ordinary bu ~iness. This is one of the p e c 1.11 1. at' rea i i t i e s o f t h e wo t' 1d me t a 1 s mat~ k e t � I Thtls, if it is detet'mined in the final assay that the copper concentt'ate expot'ted in a pat'ticular s h i p men t con t a i n e d 2 8 '1- me t a 1 , t h en t h e buy e t" p a i d fot' on 1 y 27'1-. The 27'1- is now the "actual market valu e " of the "gt'oss output" ft�om whet�e the ad. valorem tax shou ld be based � This, We believe, is .I

DECISION - C.T.A. CASE NO. 4264. 10 - the intent of Sec. E:5'� of the Tax Code (1977). A cont t~a t~y i nt et~pt~e t at ion will only lead to injustice and inequity. WHEREFORE, premises considered, the subject assessment for deficiency ad valot"'em tax against petitioner is hereby declared null and void. SO ORDERED. Quezon City, Metro Manila , 1993. ~ p,_~!21 RAMON 0. DE V Y Associate Jud WE CONCUR~: ~,~Q.~ ERNESTO D. ACOSTA Presiding Judge GRUBA

DECISION - C.T.A. CASE NO. 4264. 11 - C::ERTl:Fl:C::ATl:ON I hereby certify that this decision was r�eached after due consul tat ion a11ong the . members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~Q-~ ERNESTO D. ACOSTA Pt"es id i ng Judge Court of Tax Appeals I�