Commissioner of Customs vs. Caltex (Philippine) Inc., et al.

A petroleum refining concessionaire is exempt from customs duties under Article 103 of Republic Act No. 387 on gasoline and oil imported for its own use in constructing its refinery, as these fall within "material" or "supplies"; the exemption is not lost by the refinery's use of imported crude petroleum where no local crude is commercially produced and the concession permits foreign crude, and Republic Act No. 901 does not impliedly repeal Article 103 because it expressly excludes oil-processing companies.

Caltex (Philippines) Inc. held a petroleum refining concession granted by the Secretary of Agriculture and Natural Resources under Republic Act No. 387, the Petroleum Act, authorizing it to establish and operate a refinery in Bauan and Batangas, Batangas. The concession incorporated the provisions of Republic Act No. 387, including Article 103's customs-duty exemption for concessionaires during the first five years. The dispute required construction of Article 103 and Article 79 of the Petroleum Act, as well as the effect of Republic Act No. 901, which granted general tax exemption to new and necessary industries but expressly excluded companies processing oil, gasoline, lubricant, and similar fuels and by-products.

On June 20, 1953, Caltex (Philippines) Inc. was granted by the Secretary of Agriculture and Natural Resources a petroleum refining concession with the right to establish and operate a petroleum refinery in the municipalities of Bauan and Batangas, province of Batangas. The concession contained a proviso granting all the rights of a Petroleum Refining Concession and accepting all obligations under Republic Act No. 387, approved June 18, 1949, whose provisions were made part of the deed of concession. Caltex constructed a petroleum refinery in Bauan, Batangas, which was completed and commenced operation sometime in October 1954, using as basic material crude oil imported from abroad.

On May 11, July 28, and September 11, 1954, Caltex filed with the Collector of Customs claims for refund of P9,924.31, P3,679.78, and P1,300.24, respectively, representing customs duties paid on imported petroleum products consumed in connection with its refinery project at Bauan, Batangas, during the periods June 20, 1953 to March 15, 1954; April 1, 1954 to June 30, 1954; and March 1, 1954 to March 31, 1954. Caltex claimed the amounts were exempt from customs duties under Article 103 of Republic Act No. 387. The imported petroleum products included gasoline and oil furnished to its drivers during the construction job.

On April 25, 1955, the Collector of Customs denied the claim for refund. On appeal, the Commissioner of Customs affirmed the ruling on August 21, 1955. On September 30, 1955, Caltex filed a petition for review with the Court of Tax Appeals. After hearing, the Court of Tax Appeals rendered a decision ordering the Commissioner to refund P10,444.82, representing customs duty on the petroleum products imported by Caltex during the period from June 24, 1953 to May 29, 1954 for its own use in the construction of its Batangas refinery; the collection and refusal to refund were held to contravene Article 103 of Republic Act No. 387, without special pronouncement as to costs. The Commissioner interposed the present petition for review.

The Commissioner contended that the exemption could not apply because Caltex's refinery operated on imported crude petroleum rather than crude petroleum produced in the Philippines, contrary to the objective of Republic Act No. 387 to promote and encourage exploration, development, production, and utilization of Philippine petroleum resources. The Commissioner also argued that exempting Caltex would result in loss of revenue and defeat the law's purpose, and that Republic Act No. 901 impliedly repealed Section 103 of the Petroleum Act as to new industries. Caltex, for its part, claimed exemption under Article 103 and relied on the Secretary of Justice opinion of June 28, 1954 that its importation of crude oil for refinery use could be considered "materials" within the exemption statute. The Court of Tax Appeals found that the petroleum products were imported for Caltex's own use in constructing its Batangas refinery and that no commercial production of crude petroleum existed in the Philippines.

• Imported Crude Petroleum: Petitioner argued that the exemption cannot apply because Caltex's refinery operates on imported crude petroleum, not crude petroleum produced in the Philippines, contrary to the objective of Republic Act No. 387 to promote and encourage the exploration, development, production, and utilization of Philippine petroleum resources.
• Loss of Revenue and Defeat of Purpose: Petitioner maintained that exempting Caltex from customs duties on its importation would result in loss of revenue to the government and defeat the law's purpose to develop, exploit, and utilize Philippine petroleum resources.
• Implied Repeal by Republic Act No. 901: Petitioner contended that Republic Act No. 901, which grants general tax exemption to new and necessary industries, impliedly repealed Section 103 of the Petroleum Act insofar as new industries are concerned, and that Caltex's refinery may be considered a new industry, so it may no longer claim the exemption.

• Article 103 Exemption: Respondent claimed exemption from customs duties on its importation of petroleum products consumed during the construction of its refinery under Article 103 of Republic Act No. 387.
• Gasoline and Oil as Materials or Supplies: Respondent maintained that gasoline and oil used in the construction job fall within "material" or "supplies" under Article 103.
• Secretary of Justice Opinion: Respondent relied on the Secretary of Justice opinion of June 28, 1954 that its importation of crude oil for refinery use could be considered "materials" within the exemption statute.

• Exemption under Article 103: Whether gasoline and oil imported by Caltex for its own use during the construction of its refinery fall within the customs-duty exemption for "material" or "supplies" under Article 103 of Republic Act No. 387.
• Imported Crude Petroleum: Whether Caltex's operation of its refinery on imported crude petroleum disqualifies it from the exemption under Republic Act No. 387.
• Implied Repeal by Republic Act No. 901: Whether Republic Act No. 901 impliedly repealed Section 103 of the Petroleum Act as to new industries, thereby barring Caltex's exemption.

• Exemption under Article 103: Yes. Gasoline and oil used in the construction job are "material" or "supplies" within Article 103, and the Secretary of Justice opinion considered crude oil imported for refinery use as "materials."
• Imported Crude Petroleum: No. Article 79 requires preference for local crude but permits imported crude while no local commercial production exists; the concession also allowed foreign crude.
• Implied Repeal by Republic Act No. 901: No. Republic Act No. 901 expressly excludes companies engaged in processing oil, gasoline, lubricant, and similar fuels and by-products, so Caltex's refinery cannot be a new industry under that law.

• Exemption under Article 103: Article 103 permits a concessionaire, during the first five years following the granting of any concession, to import free of customs duty "all equipment, machinery, material, instruments, supplies and accessories." The only exclusions are goods imported for personal use, for sale, or for re-export. The petroleum products Caltex imported for its own use during construction—gasoline and oil furnished to its drivers—come within "material" or "supplies." The Court cited West vs. Detroit Fidelity and Surety Co., where gasoline and oil used by drivers in a construction job were held to fall under "supplies." It also noted the Secretary of Justice opinion of June 28, 1954 that importation of crude oil for refinery use could be considered "materials" under the exemption. Thus the Court of Tax Appeals correctly ordered refund.

• Imported Crude Petroleum: Petitioner's argument that the exemption cannot apply because Caltex operates on imported crude petroleum and not locally produced crude was untenable. Article 79 requires an established refinery to refine crude petroleum produced in the Philippines in preference over imported crude petroleum; this means imported crude may be allowed as long as no crude petroleum is produced in the Philippines, and it was admitted that there was no commercial production of crude petroleum in the country. The concession also provided that the concessionaire shall not be required against its will to refine crude petroleum from foreign sources, meaning it may use foreign sources if it desires. When the Petroleum Act was passed and the concession granted, no Philippine crude petroleum was available, so Congress could not have intended that the exemption be conditioned on refining only locally produced crude; such a condition would defeat the Act's objective. Allowing refineries to operate on imported crude did not defeat the objective; the establishment of refineries would encourage exploration because those who strike oil of commercial value would have a ready local refinery to absorb their crude. The Court quoted with approval the Court of Tax Appeals' observation that Caltex indirectly contributed to exploration by providing incentive to those engaged in drilling, and the Director of Mines' letter that a refinery would contribute to economic welfare, taxes, employment, reduced costs, and induce intensified search for oil.

• Implied Repeal by Republic Act No. 901: Petitioner's contention that Republic Act No. 901 impliedly repealed Section 103 of the Petroleum Act as to new industries failed. Section 1 of Republic Act No. 901 expressly provides that the tax exemption shall not include any company or person engaged in the processing of oil, gasoline, lubricant, and other similar fuels and by-products. Caltex's refinery therefore cannot be considered a new industry under Republic Act No. 901. Caltex never requested any exemption under Republic Act No. 901, nor claimed to be a new and necessary industry within its scope. Thus no implied repeal affected its Article 103 exemption.

• Article 103, Republic Act No. 387 — Customs duty exemption for petroleum concessionaires — During the first five years following the granting of a concession, a concessionaire may import free of customs duty all equipment, machinery, material, instruments, supplies, and accessories. The exemption does not cover goods imported for personal use, sale, or re-export. The Court applied this to gasoline and oil imported by Caltex for its own use in constructing its refinery, holding that they fall within "material" or "supplies."
• Imported crude petroleum and Article 79, Republic Act No. 387 — Article 79's requirement that a refinery refine locally produced crude petroleum in preference to imported crude does not prohibit the use of imported crude where no commercial local production exists. A concession may also provide that the concessionaire shall not be required against its will to refine foreign crude. The exemption under Article 103 is not conditioned on the refinery using locally produced crude.
• No implied repeal of Article 103 by Republic Act No. 901 — Republic Act No. 901, which granted general tax exemption to new and necessary industries, expressly excluded companies or persons engaged in processing oil, gasoline, lubricant, and similar fuels and by-products. Because Caltex's refinery fell within that exclusion, it could not be considered a new industry under Republic Act No. 901, and Article 103 was not impliedly repealed as to it.
• Purposive construction of the Petroleum Act — The objective of Republic Act No. 387 to promote exploration, development, production, and utilization of Philippine petroleum resources is not defeated by allowing refineries to operate on imported crude petroleum. The establishment of a local refinery encourages exploration because it provides a ready market for any locally produced crude oil, and the Court relied on the Court of Tax Appeals' observation and the Director of Mines' letter to that effect.

• "Here it cannot be disputed that the petroleum products imported by respondent for its use during the construction of the refinery such as gasoline and oil furnished its drivers during the construction job come within the import of the words material or supplies, for it has been held that gasoline and oil used by drivers in a construction job fall under the category of supplies..." — States the core holding that gasoline and oil used in construction are exempt as "material" or "supplies" under Article 103.
• "In the second place, in the concession granted to respondent, there is a proviso to the effect that the concessionaire shall not be required against its will to refine crude petroleum from foreign sources, which can only mean that it may also make use of petroleum from foreign sources if it so desires." — Rejects the contention that operation on imported crude petroleum disqualifies Caltex from the exemption.
• "To meet this point, suffice it to state that Section 1 of Republic Act No. 901 expressly provides that 'the tax exemption provided for in this Act shall no include any company or person engaged in the processing of oil, gasoline, lubricant and other similar fuels and by-products', which shows that respondent's refinery cannot be considered a new industry under said Act." — Disposes of the asserted implied repeal by Republic Act No. 901.
• "Wherefore, the decision appealed from is affirmed, without pronouncement as to costs." — The dispositive portion affirming the Court of Tax Appeals' refund order.

• West vs. Detroit Fidelity and Surety Co., 225 N.W. 673, 678, 118 Neb. 544 — Cited by the Court to support the classification of gasoline and oil used by drivers in a construction job as "supplies" within the meaning of Article 103's exemption.

• Article 103, Republic Act No. 387 — Exempts a concessionaire, during the first five years following the granting of any concession, from customs duties on all equipment, machinery, material, instruments, supplies, and accessories; it excludes goods imported for personal use, sale, or re-export. The Court applied it to gasoline and oil imported by Caltex for its own use in constructing its refinery.
• Article 79, Republic Act No. 387 — Requires an established refinery to refine crude petroleum produced in the Philippines in preference over imported crude petroleum. The Court interpreted it to allow imported crude while no local crude petroleum is produced in the Philippines.
• Section 1, Republic Act No. 901 — Grants general tax exemption to new and necessary industries but expressly excludes any company or person engaged in the processing of oil, gasoline, lubricant, and other similar fuels and by-products. The Court used this exclusion to reject the claim of implied repeal of Article 103.

Paras, C.J., Padilla, Montemayor, Labrador, Conception, Endencia, Barrera, and Gutierrez David, JJ., concurred.