Commissioner of Internal Revenue vs. Abad

A manufacturer of denatured alcohol is liable for the specific tax on alcohol that was not completely denatured, even if a BIR denaturing committee certified the alcohol as duly denatured, because the manufacturer is responsible for the quality of its products and cannot escape this responsibility by showing that the denaturing committee certified the products as denatured alcohol. The government is not estopped by the neglect or omission of its officers or agents, and this principle applies with particular force in the field of taxation.

The respondent Armando L. Abad, doing business under the name Republic Alcohol Distillery, was a licensed manufacturer and seller of denatured alcohol. Under the National Internal Revenue Code, domestic alcohol of not less than 180 degrees proof may, when denatured, be withdrawn from a registered distillery or bonded warehouse without prepayment of the specific tax, for use in fuel, light, arts, industries, hospitals, and similar purposes. The denaturation process was governed by BIR regulations and supervised by a denaturing committee composed entirely of BIR employees, and the permit issued to the respondent expressly stated that the manufacture of denatured alcohol should be under his "exclusive responsibility."

Armando L. Abad, doing business under the name Republic Alcohol Distillery, was a manufacturer and seller of denatured alcohol. On August 14, 1958, he applied for the denaturation of 33,000 gauge liters of rectified alcohol, using the formula prescribed by BIR regulation: to every one hundred liters of ethyl alcohol of not less than 180 degrees proof, there shall be added two liters of methanol and one-half liter of pyridine. His application was granted, and on August 21, 1958, a denaturing committee from the BIR went to his warehouse in Grace Park, Caloocan, Rizal to supervise the denaturation.

In a surprise inspection on August 25, 1958, a team of BIR inspectors found that the alcohol had not been completely denatured and could still be used for compounding liquors. The team also discovered that 22,580 gauge liters had been removed from the warehouse and sold, with only 10,480 gauge liters remaining. On September 2, 1958, the Commissioner of Internal Revenue demanded payment of P19,204.20 as specific tax on the 22,580 gauge liters plus P10,000 as compromise penalty. Three days later, the remaining 10,480 gauge liters was again denatured to conform to the BIR formula, with 100 gauge liters of methanol and 25 gauge liters of pyridine added.

The petitioner insisted on the assessment based on a laboratory examination by the National Bureau of Investigation showing that the alcohol could still be used for making Chinese wines "without immediate danger to consumer." The Tax Court did not pass on this point, instead holding that no liability could be imputed to the respondent because the denaturation was undertaken entirely by a BIR committee. The petitioner argued that the respondent had a hand in the process, pointing to his ownership of the plant, his employees' participation in providing the alcohol and denaturants and keeping the books, and the continuing nature of the denaturing process from application to completion. The petitioner also suggested that the denaturants used on August 21 may not have been the same ones analyzed the day before, insinuating substitution.

The evidence showed that before denaturation, a BIR agent took samples of the denaturants for analysis and sealed the containers with labels signed by the chief of the alcohol and prohibited drugs division. The denaturing committee found the containers properly sealed with labels intact and satisfied themselves that the contents were really methanol and pyridine before beginning. The denaturants were stored in a room in the warehouse, the key to which was held solely by the BIR storekeeper; the respondent had no key to this room. The respondent claimed the samples taken in the subsequent investigation were unreliable because they were taken from the faucet at the bottom of the tank instead of from the manholes at the top, but the Court found this claim without merit since the entire mixture was supposed to be denatured alcohol, and the fact that additional denaturants had to be added to the remaining alcohol confirmed that the original denaturation was insufficient.

• Manufacturer's Participation: The petitioner argued that the respondent had a hand in the denaturation process, which had its inception from the time he filed his application to denature alcohol, and that the process was a continuing single act including all its incidents such as the analysis and identification of denaturants, the accomplishment of reports, and the making of entries in the respondent's books.
• Substitution of Denaturants: The petitioner claimed there was no evidence to show that the denaturants used by the committee on August 21, 1958 were the same ones analyzed the day before and found satisfactory, insinuating that a substitution had been made.
• Manufacturer's Responsibility: The petitioner maintained that the respondent, as a licensed manufacturer, could not absolutely divorce himself from the intricately interwoven acts of the denaturing process and claim he had nothing to do with it.

• Lack of Control: The respondent argued that no liability for the removal of the alcohol could be imputed to him because the whole process of denaturation was undertaken by a committee of the BIR without his intervention, and it would be unjust to make him liable for the committee's negligence.
• Unreliable Samples: The respondent claimed that the samples taken in the subsequent investigation were unreliable because they were taken from the faucet at the bottom of the tank instead of from the manholes at the top, contrary to standard procedure.
• Distinction from Central Azucarera: The respondent pressed the point that unlike in Central Azucarera de Tarlac vs. Collector of Internal Revenue, where the owner was represented in the denaturing committee, in this case the respondent did not have any participation in the denaturation, as the committee was made up entirely of BIR employees under present regulations.

• Manufacturer's Liability: Whether the respondent is liable for the specific tax on alcohol that was certified as duly denatured by a BIR denaturing committee but was subsequently found not completely denatured.
• Compromise Penalty: Whether the respondent can be compelled to pay the P10,000 compromise penalty demanded by the petitioner.

• Manufacturer's Liability: Yes. The respondent is liable for specific tax in the amount of P19,204.20. The manufacturer is responsible for the quality of its products and cannot escape this responsibility by showing that the BIR denaturing committee certified the products as denatured alcohol, since the government is not estopped by the neglect or omission of its officers or agents.
• Compromise Penalty: No. The P10,000 compromise penalty cannot be demanded because it was offered only by way of compromise and the compromise did not go through; a compromise implies agreement, and one party cannot impose it upon the other.

• Manufacturer's Liability: The Court found the Tax Court's findings as to the steps taken in the denaturation to be correct, including that the denaturing committee found the containers properly sealed with labels intact and satisfied themselves as to the contents before beginning. The petitioner's suspicion of substitution was not borne out by the evidence, and the presumption of regularity in the performance of official function, together with the rule making findings of fact of the Tax Court conclusive when supported by substantial evidence, should not be overthrown on slender grounds resting solely on innuendoes and mere say-so. However, the Court held that the respondent was nonetheless liable because despite the procedure being ostensibly followed and the committee's certification, a subsequent analysis showed the alcohol had not been completely denatured. The respondent's claim that the samples were unreliable had no merit: first, the entire mixture was supposed to be denatured alcohol, so it should make no difference whether samples were taken from the faucet or the manhole; second, the respondent cited no provision of the revenue regulations prescribing manhole sampling as standard procedure; and third, if the alcohol had been completely denatured, there would have been no need to denature it further, as evidenced by the additional 100 gauge liters of methanol and 25 gauge liters of pyridine added to the remaining 10,480 liters. The Court applied the principle from Central Azucarera de Tarlac vs. Collector of Internal Revenue: the manufacturer is responsible for the quality of his products and cannot escape this responsibility by showing that the BIR denaturing committee certified his products to be denatured alcohol. The respondent's permit expressly stated that the manufacture of denatured alcohol should be under his "exclusive responsibility." A contrary rule would encourage irresponsibility on the part of manufacturers and collusion between taxpayers and revenue officials to defraud the public treasury. The liability is unaffected by the probability that the alcohol might have been used for industrial purposes, because the law specifically provides that specific taxes shall be paid "immediately before removal from the place of production," and the tax attaches from the time the article is removed from the place of production "to be put into the commerce or trade of the country." The alcohol was sold between August 21 and August 28, 1958, and interest at the legal rate should be paid from these dates pursuant to article 2209 of the Civil Code. The petitioner's demand letter was unnecessary for fixing liability because the law establishes definite dates for payment of taxes. For purposes of computation, the Court considered August 28, 1958, the date of the last sale, as the date the entire obligation became due.
• Compromise Penalty: The Court agreed with the respondent that the P10,000 compromise penalty could not be demanded because it was offered only by way of compromise and the compromise did not go through. A compromise implies agreement; one party cannot impose it upon the other. If an offer of compromise is rejected by the taxpayer, the Commissioner of Internal Revenue should file a criminal action if he believes the taxpayer is criminally liable, as a penalty can be imposed only on a finding of criminal liability.

• Manufacturer's Responsibility for Product Quality — A licensed manufacturer is responsible for the quality of its products and cannot escape this responsibility by showing that a government denaturing committee certified the products as conforming to regulations. The Court applied this principle to hold the respondent liable for specific tax despite the BIR committee's certification, reasoning that a contrary rule would encourage irresponsibility and collusion between taxpayers and revenue officials.
• Non-Estoppel of the Government — The State cannot be estopped by the neglect or omission of its officers or agents in the performance of its governmental functions. The Court held this principle applies with particular force in the field of taxation, so the fact that the BIR denaturing committee certified the alcohol as duly denatured did not exempt the respondent from paying the specific tax.
• Compromise Requires Agreement — A compromise implies agreement between the parties, and one party cannot impose it upon the other. The Court held that when an offer of compromise is rejected by the taxpayer, the Commissioner of Internal Revenue should file a criminal action if criminal liability is believed to exist, as a penalty can be imposed only on a finding of criminal liability.

• "As a licensed manufacturer of rectified and denatured alcohol, the petitioner is responsible for the quality of its products. It cannot escape responsibility by passing it over to the Denaturing Committee concerned primarily with the prevention of frauds on the revenue." — This passage states the core ratio decidendi: the manufacturer's responsibility for product quality cannot be delegated to or absorbed by the BIR denaturing committee.
• "It is a cardinal principle of law and well settled in jurisprudence that the government is not estopped by the neglect or omission of its officers or agents." — This excerpt articulates the controlling doctrine of non-estoppel of the government, which the Court applied to reject the respondent's reliance on the committee's certification.
• "Regardless of the composition of the committee, however, the principle laid down in Central Azucarera holds true and it is this: the manufacturer is responsible for the quality of his products and he cannot escape this responsibility by showing that the denaturing committee of the BIR has certified his products to be denatured alcohol." — This passage affirms the continuing validity of the Central Azucarera principle and rejects the respondent's attempt to distinguish that case based on the committee's composition.
• "A compromise implies agreement. One party cannot impose it upon the other." — This excerpt states the principle governing compromise penalties: the Commissioner cannot unilaterally impose a compromise penalty on a taxpayer who rejects the offer.

• Central Azucarera de Tarlac vs. Collector of Internal Revenue, 104 Phil. 653 (1958) — Controlling precedent followed. The Court applied its principle that a manufacturer is responsible for the quality of its products and cannot escape liability by showing that a BIR denaturing committee certified the products as denatured alcohol, rejecting the Tax Court's attempt to distinguish the case on the ground of committee composition.
• Asiatic Petroleum Co. vs. Rafferty, 38 Phil. 475 (1918) — Cited to support the proposition that the tax attaches from the time the article is removed from the place of production "to be put into the commerce or trade of the country," regardless of the use to which the article is put.
• Asiatic Petroleum Co. vs. Posadas, 52 Phil. 728 (1929) — Cited in accord with Asiatic Petroleum Co. vs. Rafferty on the point that the tax attaches upon removal from the place of production.
• Acoje Mining Co. vs. Commissioner of Internal Revenue, L-19378, March 27, 1968 — Cited for the proposition that no room is left for the exercise of purely personal discretion on the part of revenue officials in fixing the dates for payment of taxes.
• Collector of Internal Revenue vs. Pio Barretto Sons, Inc., L-11805, May 31, 1960 — Cited for the proposition that if an offer of compromise is rejected by the taxpayer, the Commissioner should file a criminal action if criminal liability is believed to exist.

• Section 128, National Internal Revenue Code — Exemption in favor of domestic denatured alcohol: domestic alcohol of not less than 180 degrees proof may, when denatured, be withdrawn from a registered distillery or bonded warehouse without prepayment of the specific tax for specified purposes. The Court noted this exemption but held it inapplicable because the alcohol was not completely denatured.
• Section 124, National Internal Revenue Code — Provides that specific taxes shall be paid "immediately before removal from the place of production." The Court applied this provision to hold that the respondent's liability arose on the dates the alcohol was sold to customers between August 21 and August 28, 1958.
• Article 2209, Civil Code — Provides for interest at the legal rate on obligations. The Court applied this provision to award interest at 6% per annum from August 28, 1958, the date of the last sale.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Angeles and Fernando, JJ., concurred.