Eternit Corporation vs. Commissioner of Internal Revenue

DECISION

- 2 - in the f ol'ln of 7.%' tax 011 tbe sale of its asbestos cement p1·oduc ts , a total of P1,377, 350 . 74, broke11 d o r·m .::1s foll o ws :

)·'ear 1 9e:s 1 '.? e:·.?

1970 Total Sales Ta .l-\· Paid p 405 .~ 188.83 48(£ ..

~ 96 :~. 5 4 48 5 .~ 19 2 .37 Pt ~' 37 7 .~ 35r} . 7 4 ------------- ------------- The tax was conJputed without deducting the cost of c ement used in ma1wfactu.ring tlu~ asbestos cement produc ts s old , in accon:f.:mce r.ri th .respondent ' s c ons istent nJlings p.rio1· to 1970 that the pbr~qse "tax- exempt produe t " as used in Section 186-A of the old Tax Code refers only to ".rar.r mate1·ials pu1·ehas ed from tax-exempt industries " , to r.rhich c atego1·y c ement does not belong. On Febn1ary 18, 1970, the Sup1·eme Colu·t pl'omulga ted its decision in the ease of Republic Flour Hills v. The Commissioner of Internal Revenue and The Court of Tax Appeals, G. R .

No .

L - 25602

(31 SCRA 52 0) , rulings and h olding that the phrase " tax- f1·ee pJ"oduct" in Sec tion 186- A is "all encompassing " and refel's ordinarily .:wd commonly to all materials and arti c les exempted f1·om payment of tax . On tTuly 2 0 ;

53 ' '

- 3 - 1970, this court , in the cBse of Philippine Pipes and IJerchandlslng Corporation v. Co.mJDlssioner of Internal Revenue, C. T.A.

C .. qse No.

1858, held thBt "whethe.t· cement qua cement is subject to sBles tBx or not, its value is appa.r·ently deductible f.r·om g.r·oss sales of nu'mufactuTed p.r·oducts usi11g sBme Bs .r·aw materi .. "'ll ... On !1ay 1..9, 1971, on the stre11gtb of the above- cited cases, petitioner filed with n~spcmdent a claim fo.r· .r·efund of its allegedly ove.t'PBid 7.%' manufactuTe.t· 's sales tax covering the pe.r·i od from tl.!'I1Wa.t'JT 1968 to December 1970, i11clusive, 1.11 the total amount of P195,379.28.

This WJdi.sputed amount is bToken down b.v yeBr, thus: Year 1968 1 '.~69 1970 Total Tax Allegedly Overpaid p 58~471.30 82 .*116.~~7 54 .~791.01 p 195?379.28 ------------ ------------ The alleged overpayment w .. qs computed on the basls of cost of cement per square mete.r· applied 011 tl1e per unit sold for the yelU' ln questio11 (as stated in the mluwfactu.ring statement). In otheT wo.r·ds , peti tione.r, i n oTd e.r· to a.tTive at the alleged overpald tax foT .. <=~ny given yelu·, fl1·st multlplled 54

- 4 - the "Net S,'iles (for that ·give11 yea~·) in Squ .. 'i.re 11ete:rs Subject to 7.%' Sales Tax" r<1ith the "Cost of Cement Pe.r Mete!"

(pe1· 11anufac tul"ing Statement for the same yea1·); and then multiplied the resulting product the.reof by 7.%'. Petitione!" · s compu ta ti ons, r<1hi ch a1·e embodied in its Exhibits "G" to "G-8", inclusive, a1·e he.reinbelow summa1·ized as foll o r<1s:

Net Sales in Square Neters ::-:ubject to 77.

Sales Ta.l>;· Cost of Cement Used in the Nanufacture of A:.:;:bes tos Cement Produc t s t-or the year THEREOF-77.

Total t-or the three years )·' 1969 A R 1970 :::::::== p 1'.'::J5,37'.~ .28 ------------ ------------ On .lmwal".V 11, 1972, as 1·espondent l1ad yet to act 011 petitioner's claim, the instant Cllse was filed wi tl1 this cou1·t i11 on1e.t· to toll the l'W111iJJg of the prescriptive period. The issue now p.t·esen ted before this court for determination is:

In computing the 7% 55

- 5 - manufl1cture:r · s sales tax 011 8Sbestos cement products, is the cost of cement used in .manufaeturing such products deductible f1·on1 thei1· ,gross selling price? Before the court proceeds to discuss the .merits of thi s C8se.

it must first settle the preJudici8l controversy reg8J'ding whether o1· not the right of petitioner to recover an.v t ... ~xes allegedly overpaid by it prior to .l<'mtuu·.v 11 , 1970 has already prescribed. Respondent con tends th8 t, in 8ccord8nce with Section 306 (nor<~ Section 230) of the old T ... 'lx Code, the refund of t8xes allegedly p,":lid b.v petitioner before J8JHlary 11 , 1970 is 8lread.v baJTed by prescription.

The said Tax Code p1·ovision re ... ~ds ... ~s follor<~s:

n S e ': , .3 CJ e.: .

Rg _~:;; .. (~ - -~-~ .f! .. r.. .. Y. ... ____ Q_t.: ......... t .~ .. ~~---··-· ·f: .. r. .. t_Q_~ ..

'f!.gJ>,f,!_~_!._y __ <,>.r.. _.l.!...!...f:?.9..ii1:..!.!...Y. .. _r;:J~~-L!...rLt;.t. f:?9.· - No suit or proceeding shall be maintained in any cour t "for the re co very o"f any national internal revenue ta x hereafter alleged to have b ee n erroneously or illegally assessed or c ollected, or o"f any penalty c laimed to have been collected without authorit y, or o"f any sum alleged to have been e xcess ive or in any manner wrongfully collected, until a claim "for refund o"f credit has been duly "filed with the Commissioner o"f Internal Revenue; but s u c h suit or proceeding may be maintained, whether or not such ta x , penalty, or sum has been paid under 56 = 2 protest or duress, In. ie no such Surt. OF Br oceeding shall be begun after of two. _years from _the date 2, of. the tax or penalty.” (Underscoring supplied) Petitioner, on the other hand, contends that 1t was only on February 18, 1970, when the Supreme Court rendered its decision in the case of Republic Flour Mills, Ine. v. The Commissioner of Internal Revenue and The Court of Tax Appeals, G.R. No. 25602 (31 SCRA 520), that its Payment of the 7% manufacturers sales tax corresponding to the cost of the cement it used as raw materlal, became erroneous or lJilegal. In other words, petitioner claims that the two-year prescriptive period set forth in Section 306 (now Section 230) of the old Tax Code, should be reckoned in the instant case, not from the respective dates the questioned sales taxes were paid, but from February 18, 1970. Consequently, petitioner eontends that ltée "Petitioner for Review" was seasonably filed with this court.

Petitioner anchors ite contention on the Supreme Court decision in the case of Commissioner of Internal Revenue v. National Power Corporation, G.R. No. 18874, January 30, 1970 (31 SCRA 112), wherein the Court stated that:

57

- 7 - " (UJhen a tax was originall y co I I e c ted 1..~.9- ~ .L!.Y.. .~ the r u n n i n 9 of the pre s criptive period of two year s provided t"o r in S e c tion 3f}e.

of the National Internal Revenue Code s hould c ommen c e not from the date the tax was paid but from the happening of the supervening cau s e which entitled the ta x payer to a refund; and the c laim for refund with the Commi ss ioner of Internal Revenue and the s ub s equent a c tion before the Court of Ta x Appeal s re g arding the refund should be done within the s aid period of two y ears." (Co••issioner of Internal Revenue

v. National Power Corporation, 31 SCRA 11 2 .~ 117- 8) (Underscoring supplied) The cou.rt agrees witl1 petitioner that it filed its "Petition f or Revier¥" rdthin the tr-1o-year prescriptive p eriod , and that its claim fo1· refund for the .veL'il'S 1968 to 1970, inclusive , is 11ot .vet ba.t-red by prescription . It is the court ' s view tlMt the collection of the total sum of P1,377, 350. 74 paid by petitioner as 7.%' manufacturer ' s s .. 'iles tax dut•ing tl1e pe.l'iod from January 1968 to Decembe.t· 1970, inclusive, was made co.t-rectly and legally l">ecause the l1mount collected r·l..'iS computed in a ma1111er consistent with respondent · s rulings on al·e "tax- f.t·ee products" under Section 186-A of the old Tax Code - - that is, tlu~t sinc e cement is not .. 'i product of a tax- exempt indus try, its cost is not deduetible f.t·om th e gn.Jss selling price of finished p1·oducts in whi ch it is used liS a 1·aw ma teriL'il , for purposes 58 --- DECISION CTA CASJ.f NO. 2369 - 8 - of computing manufacturer ' s sales tax . It was only upon the promulgation by the Sup1·eme Court of the Republic Flour llllls declslon thltt the collection of peti tione1· ' s 1968 to 1970 nuuwfactlu·e1· ' s sales tax col-responding to the cost of cement used, became ern:meous and illegal. In other words, it was the Supreme Cou1·t ' s declaration made 011 Fe bruary 18, 1970 that "tax- free p1·oducts" include all articles exempted f1·om payment of taxes, (takeJJ togetber r.fith tbe fact tlult unde1· Republic Act No. 1299, passed on <Tune 16, 1955 , ceme11 t is classified as a mineral p r oduct which is not subject to percentage tax under Section 188 of the old Tax Code) which is the superveni11g cause that gave rise to petiticme1· ' s right to claim for 1·eflmd of its allegedly overpaid sales tax. At tbis point, the court would like to note that Sec tion 306 of the old T ... 'ix Code, as above quoted, was amended by Presidential Dec1·ee No. 69 , dated Novembe1· 2 4, 1972 to 1·ead as follows: " S e c • 3 0 6 • !i.!?. .<;.Q..!~.!J..!..Y .. .•. P.f. .•.... t:. .~ .,"f.. ....... ~g_r...r_g = n .~g_f,~Y.2-L'L_<.:>.r.. ..... f..J.Jg.Qf!L!..Y. .... £.f.!ll e c t.g.r.t. • - No s u i t or proceeding shall be maintained in any c ourt -for the re c overy o-f any r1ational inte r nal revenue tax herea-fter alleged to h av e been erroneously or illegally a ss e ss ed o r c ollected, or of any penalty c laimed to have been c ollected Nithout authority, or af any sum alleged to have been e xc e s sive or in any manner 59 - 9 - Nrongfully c ollected .~ until a claim for refund or c redit has been duly filed with the CommissionerJ but such suit or pro c eeding may be maintained~ Nhether or not s u e h t a .">;· .~ pen a 1 ty .~ or sum has been paid under prote s t or dure :..::s.

In any c a s e~ no s u c h s uit or proceeding shall be begun after the expiration of tNo years from the date ot· payment of the tax or pen a I t y [_f?_g~r.Q)_J!. ~. L ___ Qf. .. .. E...TJY ____ ~UP.. .~J!J? ... r.d.B_.Q_ t;. ~_Y§. € ....... th. ~.t..... 'TIJ ... ~Y ........... iii.Ll .~ ... fJ __ ~.f.t.Ji.r. ....... .... P.iii...'L.lTI.!!..TLt : Provided .~ however .~ That the Commissioner may even without a written claim therefor~ refund or credit any ta x , ~>-~here on the face of the return upon which payment Na s made~ such payment appears c l e arly to ha~'e been erroneously paid," (Underscoring supplied) Since the instant case r,;as lnsti tuted in this couJ"t in Janua~·y , 1972, months befoTe Presidential Dec.ree No.

69 added the plu·ase of any supervening cause that may a~·ise after payment", tben the supervening cause doctz·ine as enunciated in the National Po~er Corporation case discussed ea:rlie:r, is applicable to the case ltt baz·. Having settled tbe pz·escz·iption contz·ove1·s.v, the cou.rt now comes to crux of the case a11d decides the question of deductibility of the cost of ceme11t used by petitioner.

Peti tloner assez·ts that the pz·opez· basis of the 7.%' m .. "iJwfacturer ' s sales tax on 1 ts asbestos cement products is 1 ts gz·oss se 11 ing pz·i ce , 1 ess the cost of cement used i11 making tl1em , in accordance with the doctrine laid down i11 the 60 - - 10 - earlier- cited Phlllpplne Plpes and llerchandlslng case , C . T . A.

Case No.

1858, July 20, 1970.

Respondent, 011 the con tr,<:try , insists that the cost of cement is 110 t properly deductible from the gross selling price of asbestos cement Pl"Oducts ma11uf,_qctured using it , and that cement is not a "tax-fl"ee product" w1de1" Section 186-A of the old Tax Code, which reads: "14 hen ever a t~_,l:\:::::.f.r.. .. ~UL .. _. _ _pr_P.r::f..Y.<.=._t is utilized in the manufacture or production of any article.~ in the determination of the value of such fini s hed article .~ the v a 1 u e of such t_i:i_;5 -::_f.r.. .~.I?. ..... _P.r .. QrJ...Y.<;.t s h a 11 be deducted.

~~ (Under s coring supplied) With respect to respondent , s a!"gumen t that the court sustains the same.

Pertine11t is the following doctrine laid dor.r11 by the Sup1·eme Coul"t in the case of Commlssloner of Internal Revenue v. Phlllpplne P.ipes and Jferchandls.ing Corporatlon and The Court of Tax Appeals, G.R.

No. L-32898, August 21, 1987

( 153 SCRA 113) :

11 The question is subject to sales re s t in the c ase Internal Revenue Nhether or not cement tax has been laid to of Co••issioner of v.

Republic Ce•ent Corporation~ 124 SCR .A 26 (1983)_¥ Nherein thi s Court ruled that cement not being a ' mineral product ·· Nithin the meaning of Se c tion 2 46 of the Tax Code but a 'manut-a c tured product .¥ ·· its sale i s s ubje c t to s ale :.::

tax imposed by Section 61

- 11 - 18~~ the same not being exempt under Section 1SS(c) of the Tax Code.

FolloNing the interpretation laid doNn in the 1965 case of Cebu Portland Ceaent v. Coaaissioner of Internal Revenue~ G.R.

No.

L-18f...49 .• 1.3 SCRA 3.3.3 (February 27, 1965)~ that ce ment is a 'manufactured product, ' the Court clarified the ruling the 1968 case of Cebu Portland Ceaent v. Coaaissioner of Internal Revenue~ G.R.

No.

L-2056.3, 25 SCRA 789 (October 29, 1968) .• to the effect that since cement Nas subject to sales tax immediately before the enactment of Republic Act No. 129'.':l, it shou ld remain to be so sub.iect thereafter~ considering that the la/A!

intended no change of taxes IA!hatsoever. ' This ruling Nas affirmed in the resolution of Hay 7, 1987 denying the thr-ee ( .J) motions for reconsideration of the 198.3 decision filed by Republic Cement Corporation, APO Cement Corporation and Cebu Portland Cement.n fCoaai ss i oner of Internal Revenue v.

Phi 1 i ppine Pi pes and Herchandising Corporation and The Court of Tax Appeals, 15.3 SCRA 11.3, 118) Regarding the question of the deductibility of the cost C..1f cement used .in mtuwfactu.ri11g pe ti tl one.r 's asbestos cement pr·oducts, the court finds petitioner's position to be meritorious. Wllile, as stated e ... ~rlier, .it .is true that cement .is 11ot a "tax-fr·ee product" tmdel' Section 186-A of the old Tax Code, and consequently, tbe deductibility of its cost cannot be based on the said old Tax Code provision; it does not follow that sucll cost is not so deductible.

A l'eading of Section 186 of tlle old Tax Code bear·s this co11clusioJ1. The s8ld provision reads as follows:

62

~ 2? - “Sec. 186. Percentage tax on sales of. other articles. - There shall be levied, assessed and collected once only on every original sale, barter, exchange, and similar transaction either for nominal or valuable considerations, intended to transfer ownership of, or title to, the articles not enumerated In sections one hundred and eighty-four, one hundred and eighty-five, one hundred and eighty-five-A, and one hundred eighty-five-B a tax equivalent ta seven per centum of the grass selling price or grass value in money af the articles s0 sold, bartered, exchanged, ar trans— ferred, such tax to be pard by the manufacturer, or producers Provided, That. where the articles subject to ta Ss _are manufactured aut of mate = 1 se subject to tax under this secti¢ and Section on hundred and erghi @, the total cost __.be nufactured articles.”

(Underscoring supplied) Under thig provision of law, in order for a material’s cost to be deductible from the manufactured article’s gross selling price, two eohditiont must be met, namely: first, that the manufactured article falls within the ambit of Section 186; and second, that the material is also subject to the tax imposed in Section 186.

Section 186 .of the old Tax Code, construed together with Sections 184, 184-A, 185, 185-A and 185-B, all of the esame- code, shows that petitioner’s ashestos cement products are among 63 ..

- 13 - those r.rhicl1 a:re subject to the tax imposed b.v Section 186 of the old 1'ax Code. Thus, condition o11e, stated above, exists in the i11stant case. 1'he cc:'Jut·t .rei tet·ates the l'Uling of the Supt·eme Court ea.rliet· adverted to, that cement is .. q "manufactut·ed P1'oduct" which sale is subject to the sales tax imposed by Sec."'!tion 186, as it is 110t exempt f1'om pe1·centage ta ... Yes W'ldet· Sectio11 188(c) of the old Tax Code.

Tl1is shows that condition two, stated above, is also p1·eseJ1t i11 the case of cement used in manufactu1·ing asbestos ceme11t products;

and, that the proviso of Section 186 applies . In otbez· wo.t·ds, as stated by the SupnJme Cou1·t i11 tl1e Ph111pp1ne Pipes and Merchandising Corporation case: "Cement being sub}ect to sales tax .• its c ost therefore as raN material in the manufacture of concrete p i pes and hollow blocl;·s is dliductib le from selling pri ce of sai d the gross arti c le :.::::."

Revenue v.

l'lerchandi!ling o"f T x Appeals .• (Co••i ssionflfr o., Int ,..nal Phi 1 i ppine Pip s and Corporation and Th Court 153 SCRA 113, 11S-9J HHEREFORE.

ln v1 ~ o:f the foregoing considerations, re!Jpond nt Co lssioner of Internal Revenue is hereby ordered to refund to petitioner the amount of P196,3i9.28 as overpaid 7% 64 ·.

- 14 - manufacturer ' s sales tax for the years 1968 to 1970, 1nclus1ve.

No costs.