LA VERDAD, et al. vs. < CLA, et al.

DECISION -

C.'f.A.

E JO. 257 • 2 - foreign and local, which it purchases locally {pp. 169-170, t.s.n.).

On March 31, 19 !>, the Chief of the Specific Tax Division instruct d Bin Ag nts ariano P. Uy and Venancio v. Ona to investigate the business trans- action& of petit1onor for the five-year period co~­ pristng January 11 1950 to December 31• 19~4 and su it a report on their inv~st1gation (p. 31,

IR

rec.) .

Acting upon this instruction, ate m of BIR ag nts composed of essrs. Arsenio F. Santos, .1es s N.

~land s nd firso s. Viray, who ere und r th direct !dance and su ervision of Agents ariano P. Uy and V n nc!o v. Ona, inv stigated the business transactions of titioner nd submitted r port of their findings on August 11, 1955 (Exh. 2, p. 30, IR rec.).

he report states that t1tion resumably used, in th pro uction and manu£ cture of liquor for the years 1953 and 19~, the r spoctivft amounts of ~2 , 647 and 14, 709 proof liters of lcohol for which no tax ther on had been previously paid. On th basis of this finding, the BIR a ents recomm nded to respond nt Col! ctor of Internal v nu ·the as- sess ent for sp cif1e taxes for those y ars in tbe sums of 36, 852.90 an 10,~6.30 or total of ' 47, 149. 20 against p t!tioner. Accordingly on August 16, 195~ . respondent assessed ag inst nd dem nd d from p t1t1oner th@ • amount of P47,1~9.20 as previously reco ended to 168 /~ •

DECISI

• ·.r.A. CASE • 257 - 3 - cov r sp•c1f1c taxes due for the years 19~3 and 1954 on lcohol used in the compounding of 11 uors, plus th .su of 10,000.00 as penalty for the al- leged violation of s ction 133 ( a) of the .atio al Int rnal Revenue Code in r lation to s ction 174 of Code, and n dditional sum of 00.00 as penalty for t!tioner's violation of the boo oep- ing regulati ns (Exh. 3, pp. 39-40, BIR rec. ). On October ~. 1955, pet•tion r requ sted for the reconsideration of the d cision of the Collector of Int rnal evenue for the reason thnt there was , contrary to th latt r ' s fin 1ng, no increase of proof-liter 1n the tax p 1d alcohol used in the com• pounding of 11 ors, nd if there was ny lncr o, th !ncr as \aS in th volu e of liters (Exh. 4 , pp. 45-50, IR rec.).

Howev r, on rch 13, 19 6, respond nt d ni•d this r quest, h nce 1 on Apr~l ~ . 1956, petition r filed its petition for revio ~~th t his Court.

T • parties entered into a partial stipulati n of facts . w !ch re reproduce ercund r: "1. Th t upon su sequent v rificat! n ~on uct y the pet1 io er and the re$pon- d nt , it w s asc rt ed that t he peti- tioner d not ineur any income tax lia• b111ty for th year 1952;

2.

hat it w ascertained also thQt he sp cif1c tax involved in this case for th ear 1953 has been r duccd fro ~6 • ~2. v to 25, 18 .40. 1ch reduced a ount was arr d t & follows' 169 • •

I

DEC IS I

- C.T.A. CASE NO.

2~7 - 4 - Inventory of finished liquors as of Jan.

1, 19~3 ••••••••••••• Adds Liquors trans- ferr d for sales •••• Total av 1lable for sale ••••••••••••••••

Lessa Inventory of

finished liquors as of Dee.

1, 1953 •••• antity of tax-paid alcohol used 1n com- pounding and sold ••• Total sales •••••••••••

Lessa

ale of pur- chase liquors •••••• ales of own eo • pound liquors ••••• 1v1ded by averag selling price per proo liter ••••••••• ant1ty of o n com• pound liquors etually old ••••••• ant1ty o tax-p alcohol u& d in com- und ng n sold ••• Diff rene •••••••••••• peeif e t x ue ther on at .70 per proof liter ••••• 29,571 p.l.

359,CXX> p.l.

387,571 p,l.

17,194 p.l.

370, 377 p.l.

P904 , 102. 24 286, 85 .63 617,243.61 1, 519 • 9 p.l • •3. fh t the specific tax involved in this c se for t1e ye r 19~ has ben r dueed fro 10,296.

to ,521,60, whic r due d ount h n arrived at as follo s Inv ntory of finish d liquors of J n.

1, 1954 ••••••••••••• ds Liquors trans• ferred for sales •••• o al ava1la le for sale ••••••••••••••• •

L •••

nv ntory of finish d liquor s of ee, 1, 1954 •••• antity of tax•pa1d alcohol used in co - pounding and sold ••• Total sal ••••••••••• •••• ales o pur• chas d liquors •••••• 170 l7, 194.p.l.

453,106 p.l.

470,300 p.l.

27,22 p.l.

4413, 077 p.l.

913, .07 228, 888,65 /ill

DECISION «

¢.. Toe GASE es oF 7 - 5 « Sales :af own come pounded liquers tenes #665,016.42 Divided by average selling price per proof AtOP coccceces Fa 1.519 quentity of own ¢om- pounded licuers actually BOLE sesvesse 4,965 pels Quantity of tax-paid — ued . a - :

poun g anc $0 ene wn Pele DIfferen€e .ecccsescenes ° Del. Specific tax due thereon at FO. 70 per proof liter ..... 25,521.60 “4, That the parties herein hereby ree serve thelr right to present edditional evi- dence in support of their respective con- tentions."

The original specific tax deficiency assessuent for the years 1953 and 1954, as well as the asended assessment steted in the apove partial stapulietion of facts of the parties, wae W#rtved-at-oy respomiene ay ~~~ method, 72 methods were resorted to by respondent allegedly because not all the sales invoices for the said years were presented by petitioner to the inves- tigators for verification such that the total amount of daily sales based on the sales invoices available + Gid not tally with the corresponding totel emount of sales 46 recorded in petitioner's journal (xh. 2,

p. 29, BIR rec.).

By the gross profit method, the gross profit of petitioner's business for the years 1953 and 1954 was first obtained by securing the total sales and /¥0 ~~ a

D ClSI

c. r .• 11 o. 257 ubtr ctii'tg ther fro. th cost of sal s • • • e. , put• ch se plus the 1nv n tory at th be inning l ~s th$ 1nv ntory at t.h nd of the eccount1n p rio of thes~ y ars. all d1sc losed fro p tit on .r•s profit nd los& atat·m nt.

Th gro s profit .re ntag s tlen rr1v d at by dividing th osc: profit y th cost of sale&..

inc p titiono.t· sold ooth locul and forei n- ~d liquors ~hich x pr ou ly purchYsed fro th lot 1 market. th r vcn·e a cntc ~ccordingly 1 1n tod the corre pon in s lcs of uch liquor rchcS d.

Th

obt 1n 1 s o th locally purch d li or dding t cost f s 1 s th reo£ to th ro profit 1 m t.

h nv rage t od 1 u t th ~antlty of t1tion r ' in ord r o arri nuf ct r d liquors ct lly old 1n r~s of o f lit • y t 1S - th

9 A

divi t sal of tl- t1on r' c ur d in an 11 or y th ver g llin pric r oof lit r un d 11 or • 1 ur n.... th , e r.

h 9 llin pr1c r proof lit r wa sed pon •t t t 1 llin p.rlc of the various r nde of liqu r co poune d by th corp or tion uring h r 195 nd 19 s c r d fro vail bl of proof lit rs cont in d h rein.

y his co p t - tion, th r enu 9 nt d t rra1 d the ount of pro f liters all d to h v n actu lly us d nd • ld y etiti n •

o. parin t 1 fi ure lth th t ,.

1 ~ ') - ' r..J l?f

£CJSl

• C,T,A. CASE 0, 257 unt of proof liters of alcohol which was deem d re ov d and old--tax- paid, as computed from the Off1c1al gister ook , Exhibit 1--the ag nts arrived at the excess of actual sales over the quantl~y dee d re oved and sold tax p 1d (s xh. 2, p 2e- rec . ).

his xc s as considered a th ount of alcohol for which no tax had been pr viously paid and wa t en as&e~sc t the rate of . 70 per proof lit r , pursuant to section 133 ( ) of th a- tiona! Internal evenuo od ancl the su ject of the present ppeal.

ro the afor - t a~ed partial st!pul t on of facts, it appears that p tit!oner did not incur any 1ncom$ tax liabil ty for the roar 1952. one , w aecordin ly f nd that t r s no ef1ci ncy 1nco 1 t x ith r spect to l year.

h r lnin ques- t on therefor to be r solv d in thi pp al r late to the spec f c t x assesse nd de anded fro sa d petitioner in th su s of 2 , 18 . 40 and o , :>2.t..

for th 1&sues y ars 1 53 and 19 re ecti.v ly.

Th s , no foro ua may e s mr.1ar1zed as follow 1.

het r or not t ods employ d by r spondent in a sess nt of specific tax a a tition r justified;

2.

hether or not ther as really n xee&s of alco ol, use y p tit .

• in t h0 p:roluction of wines and 1 ors over the ount of t x-p id alcoho J \ 3.

hethor or not t exce& of aleoho , if any, is tax unpaid; and 4.

hether or not petitioner 1a liable for a inistrative penalty or co pro ·ise. 173 \

11Y

DECISlOO •

C. r.A. CASE O. 2!51 - a • • •111 take up these 1asues Ja seriattffi• espondent contends that the •gross-prof~t method• and •average tho4· wr• resorted to 1n pursuance of section 15 of the tax Code which autho- rizes the aasess-.nt of the tax on the basis of t •best evidence available•. On the other hand. pe- t1t1oner contends that tM Mthocls employed in/ ar- riving at tM assessment are not justified. v'It is argued that under said section 15. /these methods of assess .. nt may be used only in cases where a report required by law as a basi& for the assessment has not been su ltted to the Collector of Internal evenue or that any such report is false . tncoaplete or er- roneous. It is maintained that since there was nothing wrong. anomalous or irregular 1n the keeping by peti- tioner of the Official egiater Book, the sales jour• nal, the profit and los& statements, inventories and other pertinent records, the Collector of Internal e• venue could not assess the tax on the basis of th •gross profit -.thod• and •average .. thod• which wer aubstitut• .. thods.

~ • fin petitioner'• contention .. r1torious. j lt has sua.itted the transcripts of the Official e- gister ok which abow that the s e .. r• properly kept by it as required of distillers, rectifiers and compounders.

espondent's own witnesses, Agents LeopoldO C•ac:ho, Delfin Eaapal.llado ud Arsenio F. antos, the latt•r a certified public accountant. 1 ~} tl

DECJSIOO •

. r .A.

E NO. 257 - 9 - ho were ong the e. ers of th te . that in- vestigated this ease, ad 1tted thet they did not find the e r ecor s to be false , 1ncompl te or erroneous. The jultification of the ex rcise of the po er of th Col lector of Internal ev n to ss ss th y pro er tax on the best evidence obtain le 1 pre- dictted upon the insta c ere a {1) report r ired by law as a basis for t e ss ss ent shall not forthe ing 1th1n the time allo y 1 or egu- lat1on, or ( 2) en th r 1 son t belie th t te, or erroneous (o c.

15, even e Co e). U less it 1a sho n th t any of the two circu v n a ov exists it follo ' h t res ondent cannot 1s eg t eeords aintain nd reports 1t d y the ta nd d tu ne h1 ta l a 111ty t ro t e • oss rof t et od• and •averag thod" plo ed 1n th in t nt ca • In t ab ence of a sho ing that the r ports (tr n cr pt of th offici 1 gl t r oo ) re f lse, 1.nco plete nd erron ous, •• c ld not se any plau · le j t1 c t1on f use of substi tute et oda by r espon- ent 1n r r to pport a finding h t t e 1s ny exces 1lco 1 ov the tax-p i alco ol u d 1n th ding of petitioner' d in 11 r a.

or over, t of t he lnv ntory thod 1n thi case h ot been sho to proper cons d ring t t p t1t1 n r d al t 11 ors of v ry n in n- 175

DECISION -

C.T.A. CASE .NO, 257 - 10 « tory classificetion, each with different margins of profit, for which no distinction wes placed.

\s admitted in the case at bar by Arsenio Santos, respondent's witness, in answer to « question on cross- examination, he testified that the gross profit rate for foreign and locally purchased wines and liquors &re not the same as locally manufactured products of petitioner. Yet, the gross profit percentage rate arrived at ay respendent as regards petitioner's busi- ness during the yeers 1953 and 1954, which percentage was taken from the total sales for those years, was applied indiscriminately to the cost of sales of the locally purchased IRquors and wines, as well as that of foreign manufactured liquors. After arriving et the total sales for purchased liquors during these years, the amount obtained was subtracted from the total sales of all) liquors and wines manufactured or purchesed by petitioner without providing for any allowance for price or profit differences between the different products nor for the difference in quantities thereof. “Because different types of geeds have different cross profit, mergins, the use of one or 3 few very aposd inventory classes is likely to result in significant error." (Sec. 12, Accountants Handbook, Rufus Wixon 4th Ed., p. %6.)

The resultant total sales for manufectured pro- ducts is therefore far from being real but @ poor and inadequate approximation or calculation.

176 AI

a

DECISION «

CoT.sAe CASE NO, 257 - ll «- Going to the averege method, respondent in arriving st the selling price per proof liter of wine or liquor proceeded upon the assumption thet 211 sales were made proportionately from all acquisitions, which assumption is contrary to ordinary merchandising pro- cedure. It need not be extensively discussed that the sales for all kinds of liquors could hardly be alike in price and in volume the fact being thet the liquor may be sold at different or varieble prices in differ- ent quantities. This circumstance would greatly af- fect the volume of sales derived, for where the volume of seles is greater on thoseproof liters of wines or liquors with «# higher price per proof liter, the ap- plication of the average selling price on the total sales will tend to increase the number of proof liters sold. On the other hand, where the volume of sales is greater on those proof liters of wines or liqors with lower prices per frocf liter, the tendency is to decrease the proof liters sold. No allowance for the price or volume variance having been provided by res- pondent, the ultimate result is, therefore, unreal. This sverege pricing being unreal, the same would sub- stantially affect the amount of proof liters obtained by respondent as alleged to have been used in the com- pounding. Under the circumstances, we therefore find respondent's use of the “average method* in arriving at the selling price per proof liter to be not proper in the instant cese, We now proceed to the question raised as to whe- 177

M74

eeeeeeeeeeeeeeeeeOOOOOOOEOEEOEOEEOE—eeoeeeeeeeeeeeeeenO TT EE

DECISION -

C.T.A. CASE NO, 257 o 12 « ther or not there was an excess of alcohol used by petitioner. In the main, the testimonies and docu- mentary evidences presented tend to prove that the alcoholic contents of the compounded wines and li- quors produced by petitioner are generally lower than the alcoholic contents stated in the labels (Zxhs. A to G, inclusive, pp. 69-75, CTA rec.),. Petitioner's witnesses, Maria 3, Gatmaitan and Manuela F. Buensuceso, both analysts of the Public Health Research Laboratory, testified thet, having subjected the sample products of petitioner to che- mical analysis for any violation of the Pure Food Law, they found that the actual alcohélic strencth thereof was lower than those stated in their labels. Their respective testimony was strengthened bv the corroborating statement of Luronica M, Pesigan, Chief of the Food and Drug Section of the Public Health Ke- search Laboratory of the Department of Health an ex- officio member of the Soard of Food Inspection, who even went to the extent of saying that she has not come across a liquor which is above the strenath stated in the label. Moreover, we take note of the testimony of Ramon Aquinaldo, Supervisor of Distil- leries of the Bureau of Internal Revenue, who further corroborated the testimonies of the three previously named witnesses.

a in addition, we have Rafael Juan, wine mixer of petitioner, who testified that the addition of 178 (7.2

D CISI

c.r.A. c - ~. 2~7 - 13 - ater, clar1fy1ng ag nts an lodo d Europa to p ti• t1on r •s produ ta 1nc~eased the olu of gaug liter• of the c ound without inC~ asing the ad or str ngth. This te•timon of afa 1 Juan a be n corroborated by Lutonlea • P &iga • nee, alt ough there ay h v en n incre&s !n the vol of gau e liters p•tltion r ' s product y re son of tbe addi- tiv s, t re w s no 1ner as in t proof lit rs tn tcxable leohol to just1f r spon t's assess nt.

espondent, how ver , argu th t th r• 1s no evldenee adduced to show that the s o the co - t e witnestes of et1t1oner re s cur d nd collected from th 1 tter. e f i nd this ela 11 found d, or on t e contr r y, the re ate for nal sis of th sa ples of roduets (Exh • A to G, inclusive) r f r to sa plea of pr cts of petitioner and t he e re 1dent1f1 d b M • • tmaitan d • v.

ens c so, in their t t nits.

e find t at ~• pond nt due d no evi enee to c ntra- dict the pos1t1v• st t ente of thoa w tnesses and t e sa the~efore stand unaasa1led. h1a view, : spondent ex ~ ssed th fear that petitioner• theory t at the dd1t1on of at r to alcohol er ly lncr as s the volu of gauge liters but not its proof iters a b va11 d of by co - pounders to th prejudice of t • vernment 1n the for of • loss 1n p c1f1c tax re enu s. It ay stated, ho v r, th t t 11 could b s ua d b th kno ledge 179 /72 .t.A.

E o. 2 7 - 14 • tb t th vern t has 11 he ns and f cilities at its co nd , and 11 th pote tial eap il1t1••· to detect the pres•nce of or exist nee of used lcohol th t are ot tax-p id in t e eo ound1ng of 11 rs nd wines.

T ls concern r t • pr t t1on of govern- ant revtnu s 1 • ttt of a 1n1strat1v• • ervi- sion of the • tabl!s enta of distill rs, co oundera an the like, ut canno by 1ts lf be a ast for the sseasmen of sp ciflc tax here t t1rcu st nces oo not support the a e ..

In th lnst nt cas • w lncl that th pr au t1o of the correctness of r spo dent's ss $ nt $ en · e ch an - a re by co et nt evid nc • nd con e ently. th r en hift n the v r nt to • w, ele rl an u ml t ke 1 , tt t ther w. s in fact an 1ncreas in proof l t r of lcoho! ;ed and not n eug liters. oth p rtie ving n i.v n th 1 opportunity 'f.. to su t in t eu:

&p ct1v t1on nd 1t pp in t at the ov rn;

t wh re t 1 d to uat in its aaseas- was imp aeh d nd qu te ev1 nee, ld ot a o ing the e it of r pond n ' f r thus r jud c d.

1r d b a e- ay clear J.n find- the stat woul Altho h th · hir 1 ue 1 o rend re c de c .

el ve th t 1 e aston t er of uld in f ct further stress our finding tat v • espond nt «1nta1ns that in the anuf ctur of 1ta ro eta, p - tl ion r sed ale 1 f r z ieh no pee1fte tax ad 180 It!

DECISION «-

C.T.A. CASE NO. 257

» Se

previously been paid. Under the procedure of secur- ing alcohol, any such alcohol must have bean obtained from a distiller, and if there be any merit to the charge, the securing of such alcohol without prepey- ment of specific tax could only be done where there is connivance between the distillers and respondent's agente, We believe, however, that this allegetion is without reasonable basis. Petitioner's establishment is situated in a commercial district and as such, it would be a dangerous risk for anyone to unload near or within its compound alcohel for which no tax had been previously paid. It may be added further that peti- tioner*s establishment has a limited space and has only one door opening leading into the compound. Alcohol containers on which tax has bean paid are sealed with the corresponding revenue stamps upon payment of the tax due thereon. Fetitioner's witness, Rafael Juan, stated that the alcohol which petitioner uses in the compounding of its products is bought from licensed distilleries in which the tax has been previously paid. This fact has been corroborated by Roman Aquinaldo, Supervising Agent-et-Large of Distilleries, and Leo- poldo Camacho and Delfin Empalmado, both storekeepers, and all of whow are government officers or emplovees chargec with the duty of assessing petitioner's esta- blishment as distiller and compounder. In regard to such any alcohol obtained from other distillers, the disposition thereof is controlled whenever compounding 1Si ho 0

I I -

c. .A. • S.E o. 2 7 - 11 - is to ad • As nt tter of fact it as shown thet th co pound consisting of lcohol nd ter 1s placed in t n s, eparate tank being pro ided for e ch brnn of co poundod 11 or, nd each tank 1 cov r d by a par at account r eord. r rs check th co position and contont of th goinst the r ' s book.

Th

ntri fi of th g ug r ' :.- book are al o corr spondingly r co d 1 t

Officlal ·-

~1Gter ook (Exhibit l) hich r pond nt•s g nt it to hav b n found to b r gul ly pt 1thout ny inform tion ot r than that r t x paid.

alcohol recor d th rein fh s circumstanc s l po nt out t t th r could not h n ny alcohol us d by he pe 1t1on r in h co. o nding of ·t pr d ets f r • ch the p - cif!e not n pr viously paid th r n.

fin th t ( ) th two n tho s ( 0 • profit nd th d ) re not pr p rly lo nd y r spond nt in th king of th dis- put s $ nt 1n ccordance with the req~ nt of Sec .. ion 1 of the t~at!on In mal n e Cod • ' l:' r itr y 1n nut r ;

nd (2) the.r denc to support r spond nt• t in 1 n thnt er w s an under-d cl ration y etition r f th alcohol cont nts of it products nd th t h 15 no xc ss in lcohol used on wh ch no p clflc x h d on pr v1ou ly paid.

Having r ached h conclLtS on , so hold that petitioner is not liabl for t ate d 182 ~~

DECISION -

= -17- of $25,180.40 and #5,521.60 as specific tax for the years 1953 and 1954 respectively. With this finding, there is no necessity ior discussing the fourth issue raised regarding the amount of #1U,000.00 a6 extra- judicial penalty or compromise penalty for alleged violation of Section 133 (a), in relation to section 174, of the National internal Hevenue Code. Se that as it may, we have repeetedly held that this Court has no jurisdiction to compel the taxpayer toe pay the Suggested Compromise penalty, there veiling no showing that the taxpayer agreed thereto (see Sislig bay Lumber Co., inc. vs. Collecter of internal devenue, C.1.A. Case Wo. 155, Cotober 9, 1957).

wWhkhkFOnk, the decision of respondent Collector of Internal Aevenue should be, a6 it is hereby reversed, without pronouncement a6 to costs.

SU Oidin, idanila, April 15, 1956.

— WAR TANG onl 5

Presiding Judge

Cf