Commissioner of Internal Revenue vs. Cebu Portland Cement Company

Cement is a manufactured product subject to sales tax under Section 186 of the Tax Code, and a tax refund may be offset against an existing tax deficiency of the same taxpayer; the prescriptive period for assessment does not begin to run unless the specific return required for the tax involved has been filed.

The Commissioner of Internal Revenue (CIR) and Cebu Portland Cement Company (CEPOC) were locked in a long-running dispute over the proper tax classification of cement — whether it was a "manufactured product" subject to sales tax under Section 186 of the National Internal Revenue Code, or a "mineral product" subject only to ad valorem tax under Section 246 and exempt from sales tax after the effectivity of Republic Act No. 1299 on June 16, 1955. CEPOC had previously secured a judgment from the Court of Tax Appeals, as modified by the Supreme Court, ordering a refund of P359,408.98 representing overpayments of ad valorem taxes on cement produced and sold after October 1957. Separately, the CIR had assessed CEPOC for deficiency sales taxes amounting to P4,789,279.85 plus surcharge, which assessment CEPOC contested on the ground that cement was a mineral product exempt from sales tax.

By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on appeal by the Supreme Court on February 27, 1965, the Commissioner of Internal Revenue was ordered to refund to Cebu Portland Cement Company the amount of P359,408.98, representing overpayments of ad valorem taxes on cement produced and sold by it after October 1957. After the denial of motions for reconsideration filed by both the petitioner and the private respondent, CEPOC moved on March 28, 1968 for a writ of execution to enforce the judgment.

The CIR opposed the motion, asserting that CEPOC had an outstanding sales tax liability to which the judgment debt had already been credited, and that a balance of P4,789,279.85 plus 28% surcharge remained owing on the sales taxes. On April 22, 1968, the Court of Tax Appeals granted CEPOC's motion, holding that the alleged sales tax liability was still being questioned and therefore could not be set off against the refund. The CIR then filed the present petition for review.

The CIR maintained that the refund should be charged against CEPOC's tax deficiency on the sales of cement under Section 186 of the Tax Code, arguing that cement is a manufactured and not a mineral product and therefore not exempt from sales taxes. He further asserted that enforcement of the tax deficiency was properly effected through his power of distraint under Sections 316 and 318 of the Code, and that collection of any national internal revenue tax may not be enjoined under Section 305, subject only to the exception in Republic Act No. 1125, which was not applicable. The CIR also denied that the sales tax assessments had prescribed, contending that the prescriptive period should be counted from the filing of sales tax returns, which CEPOC had not yet filed.

CEPOC, for its part, disclaimed liability for the sales taxes on the ground that cement is not a manufactured product but a mineral product, exempted from sales taxes under Section 188 of the Tax Code after the effectivity of Republic Act No. 1299 on June 16, 1955, in accordance with Cebu Portland Cement Co. vs. Collector of Internal Revenue, decided in 1968. CEPOC further argued that the alleged sales tax deficiency could not yet be enforced because the assessment was not yet final, still being under protest and yet to be resolved on the merits, and that the assessment had already prescribed, not having been made within the five-year period from the filing of tax returns.

• Classification of Cement: Petitioner argued that cement is a manufactured product and not a mineral product, and therefore subject to sales taxes under Section 186 of the Tax Code.
• Set-off of Refund: Petitioner maintained that the refund owed to CEPOC should be charged against its outstanding sales tax deficiency, which still had a balance of P4,789,279.85 plus 28% surcharge.
• Power of Distraint: Petitioner asserted that enforcement of the tax deficiency was properly effected through his power of distraint of personal property under Sections 316 and 318 of the Tax Code.
• No Injunction Available: Petitioner argued that collection of any national internal revenue tax may not be enjoined under Section 305 of the Tax Code, subject only to the exception prescribed in Republic Act No. 1125, which was not applicable to the case.
• Prescription: Petitioner denied that the sales tax assessments had prescribed, contending that the prescriptive period should be counted from the filing of sales tax returns, which CEPOC had not yet filed.

• Cement as Mineral Product: Respondent argued that cement is not a manufactured product but a mineral product, exempted from sales taxes under Section 188 of the Tax Code after the effectivity of Republic Act No. 1299 on June 16, 1955, in accordance with Cebu Portland Cement Co. vs. Collector of Internal Revenue.
• Assessment Not Yet Final: Respondent contended that the alleged sales tax deficiency could not yet be enforced because the assessment was still under protest and had not been definitely resolved on the merits.
• Prescription of Assessment: Respondent claimed that the five-year reglementary period for assessment started from the filing of its gross sales returns on June 30, 1962, rendering the assessments made on January 16, 1968 and March 4, 1968 already out of time.

• Classification of Cement: Whether cement is a manufactured product subject to sales tax or a mineral product exempt therefrom under the Tax Code.
• Prescription of Assessment: Whether the sales tax assessments against CEPOC had prescribed under Section 331 of the Tax Code.
• Enforceability of Assessment: Whether the sales tax assessment could be enforced despite being contested at the administrative level.
• Set-off of Refund: Whether the Court of Tax Appeals erred in ordering execution of the refund without offsetting it against CEPOC's outstanding sales tax deficiency.

• Classification of Cement: Yes. Cement has always been considered a manufactured product and not a mineral product, and is therefore subject to sales tax under Section 186 of the Tax Code.
• Prescription of Assessment: No. The prescriptive period under Section 331 did not begin to run because CEPOC filed only ad valorem tax returns, not the sales tax returns required under Section 183(n) of the Tax Code.
• Enforceability of Assessment: Yes. The collection of national internal revenue taxes cannot be enjoined merely by questioning the validity of the assessment, especially when the challenge is still at the administrative level.
• Set-off of Refund: Yes. The Court of Tax Appeals erred in ordering the refund without offsetting it against the tax deficiency, as requiring the CIR to refund only to later distrain for the same taxpayer's outstanding liability would be an idle ritual.

• Classification of Cement: The Court extensively discussed and categorically resolved this question in Commissioner of Internal Revenue vs. Republic Cement Corporation, decided August 10, 1983, where it was declared for a unanimous Court that cement was never considered a mineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at least 80% of its components are minerals, because cement is the product of a manufacturing process and is no longer the mineral product contemplated in the Tax Code. The Court found that reliance on Cebu Portland Cement Co. vs. Collector of Internal Revenue (L-20563, October 29, 1968) was misplaced, as that decision did not rule that Republic Act No. 1299 reclassified cement as a mineral product exempt from sales tax; it was enough for the Court there to hold that even assuming such reclassification, it could not be given retrospective application. The Court expressly overruled the CEPOC decision insofar as its pronouncements conflicted with the Republic Cement ruling. The nature of cement as a manufactured product was reiterated in the resolution denying reconsideration of the Republic Cement decision.

• Prescription of Assessment: The Court rejected CEPOC's contention that the five-year prescriptive period started from the filing of its gross sales returns on June 30, 1962. What CEPOC filed were not the sales returns required under Section 183(n) but the ad valorem tax returns required under Section 245 of the Tax Code. Citing Butuan Sawmill, Inc. vs. CTA, the Court held that to avail of the five-year prescription period under Section 331, the taxpayer must have filed the required return for the tax involved — a sales tax return. The filing of an income tax return cannot be considered substantial compliance with the requirement of filing sales tax returns, just as an income tax return cannot serve as a return for compensating tax for prescription purposes. Because no sales tax returns were filed by CEPOC, the statute of limitations in Section 331 did not begin to run against the government, and the assessments made in 1968 on CEPOC's cement sales from July 1, 1959 to December 31, 1960 were not barred.

• Enforceability of Assessment: The Court held that CEPOC's argument that the assessment could not yet be enforced because it was still being contested lost sight of the urgency of collecting taxes as the "lifeblood of the government." If payment of taxes could be postponed by simply questioning their validity, the machinery of the state would grind to a halt. Under Section 291 of the Tax Code, no court has authority to grant an injunction to restrain the collection of any national internal revenue tax. This prohibition applies not only when the assessment is being questioned in court but more so when, as in this case, the challenge is still only at the administrative level. The exception under Republic Act No. 1125 was not applicable.

• Set-off of Refund: The Court held that the respondent Court of Tax Appeals erred in ordering the refund to be paid to CEPOC, which the CIR would later have the right to distrain for payment of its sales tax liability. Given that even after crediting the refund against the tax deficiency, a balance of more than P4 million remained due from CEPOC, ordering the actual refund would be an idle ritual. The Court found no justification for the charade and set aside the CTA resolution.

• Cement as Manufactured Product — Cement is a manufactured product subject to sales tax under Section 186 of the Tax Code, not a mineral product exempt therefrom, notwithstanding that at least 80% of its components are minerals. Cement is the product of a manufacturing process and is no longer the mineral product contemplated in the Tax Code (i.e., minerals subjected to simple treatments) for purposes of imposing the ad valorem tax. This was definitively settled in Commissioner of Internal Revenue vs. Republic Cement Corporation (142 SCRA 46, August 10, 1983), which expressly overruled Cebu Portland Cement Co. vs. Collector of Internal Revenue (L-20563, October 29, 1968) insofar as the latter conflicted with this ruling.

• Prescription of Tax Assessment — Requirement of Specific Return — To avail of the five-year prescriptive period under Section 331 of the Tax Code, the taxpayer must have filed the specific return required for the tax involved. The filing of a return for one type of tax (e.g., ad valorem tax returns or income tax returns) cannot be considered substantial compliance with the requirement of filing returns for another type of tax (e.g., sales tax returns) for purposes of computing the prescriptive period. Where no sales tax return is filed, the statute of limitations does not begin to run against the government.

• Non-Injoctability of Tax Collection — Under Section 291 (formerly Section 305) of the Tax Code, no court has authority to grant an injunction to restrain the collection of any national internal revenue tax. This prohibition applies not only when the assessment is being questioned in a court of justice but more so when the challenge is at the administrative level. The sole exception is under Republic Act No. 1125, which allows the Court of Tax Appeals to suspend collection if it may jeopardize the interest of the Government or the taxpayer.

• Taxes as Lifeblood of the Government — The collection of taxes cannot be postponed by simply questioning their validity, as taxes are the lifeblood of the government; if payment could be so postponed, the machinery of the state would grind to a halt and all government functions would be paralyzed.

• "From all the foregoing cases, it is clear that cement qua cement was never considered as a mineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at least 80% of its components are minerals, for the simple reason that cement is the product of a manufacturing process and is no longer the mineral product contemplated in the Tax Code (i.e.; minerals subjected to simple treatments) for the purpose of imposing the ad valorem tax." — This passage, quoted from Commissioner of Internal Revenue vs. Republic Cement Corporation, articulates the definitive ratio decidendi on the classification of cement as a manufactured product subject to sales tax.

• "In order to avail itself of the benefits of the five-year prescription period under Section 331 of the Tax Code, the taxpayer should have filed the required return for the tax involved, that is, a sales tax return." — This statement, drawn from Justice Irene R. Cortes's resolution in the Republic Cement case, establishes the rule that prescription of tax assessment requires the filing of the specific return for the tax sought to be assessed.

• "If the payment of taxes could be postponed by simply questioning their validity, the machinery of the state would grind to a halt and all government functions would be paralyzed." — This passage articulates the doctrinal basis for the prohibition against enjoining tax collection, grounded in the lifeblood doctrine of taxation.

• "To require the petitioner to actually refund to the private respondent the amount of the judgment debt, which he will later have the right to distrain for payment of its sales tax liability is in our view an Idle ritual." — This statement captures the Court's rationale for allowing set-off of the refund against the tax deficiency, characterizing the CTA's order as an unnecessary and futile exercise.

• Commissioner of Internal Revenue vs. Republic Cement Corporation, 142 SCRA 46 (August 10, 1983) — Controlling precedent. The Court relied on this decision as the definitive authority holding that cement is a manufactured product subject to sales tax, not a mineral product. The Court quoted extensively from both the decision and its resolution denying reconsideration, and expressly overruled the earlier CEPOC case insofar as it conflicted.

• Cebu Portland Cement Co. vs. Collector of Internal Revenue, L-20563, October 29, 1968 (28 SCRA 789) — Distinguished and partially overruled. The Court found reliance on this decision misplaced, as it did not actually rule that Republic Act No. 1299 reclassified cement as a mineral product exempt from sales tax. The Court expressly overruled it insofar as its pronouncements or implications conflicted with the Republic Cement ruling.

• Butuan Sawmill, Inc. vs. CTA, G.R. No. L-21516, April 29, 1966 (16 SCRA 277) — Followed. Cited for the rule that the filing of an income tax return cannot be considered substantial compliance with the requirement of filing sales tax returns for purposes of computing the prescriptive period under Section 331.

• Bisaya Land Transportation Co., Inc. vs. Collector of Internal Revenue, G.R. Nos. L-12100 and L-11812, May 29, 1959 — Followed. Cited through Butuan Sawmill for the proposition that an income tax return cannot serve as a return for compensating tax for prescription purposes.

• Section 186, National Internal Revenue Code — Imposes sales tax on manufactured products. Applied as the basis for subjecting cement to sales tax, the Court having determined that cement is a manufactured product.

• Section 246, National Internal Revenue Code — Defines "mineral" and "mineral products" as amended by Republic Act No. 1299. The Court held that cement does not fall within this definition because it is the product of a manufacturing process, not a mineral product subjected to simple treatments.

• Section 183(n), National Internal Revenue Code — Requires the filing of sales tax returns. The Court held that CEPOC's failure to file sales tax returns under this provision meant the prescriptive period under Section 331 did not begin to run.

• Section 245, National Internal Revenue Code — Requires the filing of ad valorem tax returns. CEPOC filed returns under this provision but not sales tax returns under Section 183(n), which the Court held was insufficient to start the prescriptive period for sales tax assessment.

• Section 331, National Internal Revenue Code — Provides the five-year prescriptive period for assessment of internal revenue taxes, counted from the filing of the required return. The Court held this period did not run because no sales tax return was filed.

• Section 291 (formerly Section 305), National Internal Revenue Code — Prohibits courts from granting injunctions to restrain the collection of any national internal revenue tax. The Court applied this to hold that CEPOC could not prevent enforcement of the assessment by merely questioning its validity at the administrative level.

• Sections 316 and 318 (now Sections 302 and 304), National Internal Revenue Code — Grant the Commissioner the power of distraint of personal property for collection of taxes. The CIR invoked these provisions as the proper mechanism for enforcing the tax deficiency.

• Section 11, Republic Act No. 1125 — Provides the exception to the non-injoctability rule, allowing the Court of Tax Appeals to suspend collection if it may jeopardize the interest of the Government or the taxpayer. The Court found this exception inapplicable to the case.

Teehankee, C.J., Narvasa, Paras, and Gancayco, JJ., concurred.