Primary Holding

Sales taxes paid on containers and packaging materials are creditable against miller’s tax because such materials are not “raw materials used in the milling process” under the final proviso of Section 168 of the NIRC.

Background

CENVOCO, a manufacturer of coconut oil and related products, paid sales taxes on containers and packaging materials for its edible oil in 1986. The Bureau of Internal Revenue (BIR) later assessed a deficiency miller’s tax and disallowed the sales tax credit, leading CENVOCO to challenge the assessment. The Court of Tax Appeals (CTA) and Court of Appeals (CA) ruled in favor of CENVOCO, prompting the BIR to appeal to the Supreme Court.

Facts

• 1. CENVOCO manufactured edible oil (subject to 3% miller’s tax) and soap/detergent (subject to 10% sales tax).
• 2. In 1986, CENVOCO purchased containers/packaging materials for edible oil and paid sales taxes on these purchases.
• 3. BIR assessed a deficiency miller’s tax, arguing sales taxes on containers could not offset miller’s tax liabilities under Section 168 of the NIRC.

Arguments of the Petitioners

• 1. Section 168 NIRC prohibits tax credits for sales taxes on raw materials used in milling; packaging materials, though not raw materials, should also be disallowed since no law explicitly permits such credit.
• 2. A 1988 BIR ruling reversed a 1984 favorable ruling, arguing changed circumstances negated estoppel against the government.

Arguments of the Respondents

• 1. Containers and packaging materials are not “raw materials” under Section 168, as they are not used in the milling process (e.g., grinding, crushing) nor become part of the finished product.
• 2. Revenue Regulations 2-86 and 11-86 define raw materials as items merged into the product.
• 3. A 1984 BIR ruling allowed the credit, and retroactive reversal would violate Section 278 NIRC (non-retroactivity of adverse rulings).

Issues

• 1. Containers are not raw materials but post-production packaging.
• 2. The 1984 BIR ruling allowing the credit should apply, and retroactive reversal would violate tax fairness principles.

Ruling

• 1. Rationale: The final proviso of Section 168 NIRC applies only to raw materials used in the milling process. Containers and packaging materials are not raw materials, as they are neither consumed in milling nor form part of the finished product. Revenue Regulations and jurisprudence (e.g., Caltex v. Manila Port Service) support this interpretation.
• 2. Statutory Construction: Exceptions in tax laws (like the proviso) must be strictly construed. The government cannot expand the prohibition beyond the statute’s plain language.
• 3. Estoppel: The 1984 BIR ruling in CENVOCO’s favor could not be retroactively reversed to the taxpayer’s detriment.
• 4. Deference to CTA: The Court upheld the CTA’s expertise in tax matters.

Doctrines

• 1. Strictissimi Juris: Tax statutes are construed strictly against the government.
• 2. Non-Retroactivity of Adverse Rulings: Section 278 NIRC bars retroactive application of BIR rulings unfavorable to taxpayers.
• 3. Deference to Quasi-Judicial Agencies: Courts respect CTA’s specialized expertise.

Precedents Cited

• 1. Caltex (Phils.) Inc. v. Manila Port Service (17 SCRA 1075): Defined containers as distinct from raw materials.
• 2. Samson v. Court of Appeals (145 SCRA 659): Strict construction of statutory exceptions.
• 3. Republic v. IAC (196 SCRA 335): Tax laws interpreted against the government.

Statutory and Constitutional Provisions

• 1. Section 168 NIRC: Prohibits tax credits for sales taxes on raw materials used in milling.
• 2. Revenue Regulations 2-86 and 11-86: Define raw materials as items becoming part of the finished product.
• 3. Section 278 NIRC: Bars retroactive application of adverse tax rulings.