CTA Case No. 387

DECISION

This {s 2n appeel from the decision of the Col- lector of Internal Revenue assessing egainst, and demanding from, the petitfoner Central Azucarersa Lon Pedro, specific tax on denatured alcohol in the amount of #33,696.60, and compromise penalty of #10,000,00 for alleged violation of sections 124 and 133 in relae tion to section 127, all of the National Internal iie- venue Code.

The petitfoner here{n, Central Asucarera Don Pedro, is a domestic corporation duly established and organized under the laws of the Philippines, with a principal place of business at Nasugbu, Batangas, Among other things, it is authorized to operate a duly registered distillery plant. Between the perfod from March 23, 1953, to August 13, 1954, the petitioner manufactured in {ts distillery, 284,423 proof liters of denatured alcohol under a spectal formula admitted Dasdnsths guntten te, Cate etesiines on:-te-tb Gatien ;

DECISION «

C,T.A, CASE NO, 387 oor liters of rece akties Ale of not less than i A de- fal gro ye fe » there shall be opropyl," } This denatured alcohol was solid by the petitioner to the Pacific Products, Inc. and the Pacific Industrial Manufacturing, who {fn turn used it in the manufacture of rubbing alcohol compound and other products cone taining specially denatured alcohol as ingredient, The rubbing alcohol compound produced py the two last mentioned buyers contains 7% alcohel and, as appear= ing on the labels pasted to the containers, Exhibits 1 and 2, is intended for use as “disinfectant, sterie lization, sanitation, bathing, massage, rubbing or other external uses,” The preparation, sale, and withdrawal of this denatured alcohol sold to the two buyers was admittedly | with the permission and authority of the respondent | through his Lenaturing Gomaittee and at the time of the sale and withdrawal the said comaittee riever mede any demand from the petitioner for the payment of the spee cific tax in question, However, petitioner paid the corresponding sales tax on the denatured alcohol sold to the two buyers, As heretofore stated, the denaturization was done in accordance with a formula approved by the res= pondent, The process of denaturization, as evidenced by Exhibits A to A@25, was witnessed by a Denaturing Committee consisting of three members, all represen« tatives of the respondent. After the process of denae “2 ge ee ee ee Le a sweets Se ee EL eT

DECISION

CeTeA. CASE NG, 387 je tuxization, but during thet same day, the said com- mittee sccomplished denaturizetion certificates, Exhibits A to A=-25, attesting to the chief ingre- Gients used, the denaturing agent mixed and the amount of proof lifters produced as well as the percentage of their aleoholic contents. The resulting denatured alcohol wes correspondingly recorded in an Offic{al Register Book, Exhibits 2 to 8-9 under BIA Form No. 2.41, by the owner or manager of the corporation and attested to by an Internal Revenue agent. The dena-~- turtzation certificates, Exhibits A to 4-25, show therein that the denatured alcohol was exenpted from | payment of specific tax by the Denaturing Comaittee, On the basis of a report, Exhibit 3 (pp. 3-4 BIR rec.), dated May 26, 1985, of Kevenue Agents Harlano P, Uy and Venencic V, Ona, the respondent wrote a letter, Exhibit 4 (pp. ll-12 SIR rec.) dated Mag 30, 1955 assessing and demanding from the pett- tioner the sums of #199,906,10 as spectftc tax on the said 264,423 preef liters ef denatured aleohol and # 10,000.00 as couprowise renalty.

Aftor @ reinvestigation and finding thet ext of the total of 284,423 proof liters of denatured alechol removed frou petitioner's distillery, only 48,138 proof liters were actually used by the Pacific Industrial Manufacturing and the Pacific Products, Inc. in the production ané manufacture of rubbing zleohel compound, the respondent, on Mey 24, 1957, wrote a letter, Ex- hibit & (p. 44 6K rec.) notifying the petitfoner through

DECISION -

CeT.A. CASE WO, 387 7 a counsel that the ortginal assessment and demand for spectfitc tax against ‘t was reduced from ?199,906,10 to #33,696.60 exclus‘ve of the comprom!se pensity of #10,000,00. It appears by agreement of the parties 7 a that the rest of the denatured aicohol amounting to 236,285 proof lifters after deducting the amount used fn the manufacture of rubb‘nyg alcohol, was ut‘l'tzed by the two buyer-corporations ‘n the manufacture of shellac, varnish, lacquer thinner, wood dye, glass cleanser and cleaning flu‘ds, . 7 The main *ssue ra‘sed by the part‘es, in th*s ape peal *s whether or not the 48,138 proof l‘ters of de- oe natured alcohol sold by the pet*tfoner to the Pactfic Products Inc. and the Pactf'c Industrtal Manufacturtng and used by the latter as raw matertals ‘n the manuface- ture and product'on of rubb'ng alcohel compound should be siabjected te the payment of spec’ftc tax puxsuant to Section £24 tn relatton te Sectfons 127 and 133 of the Natfonal internal Aevenue Code, The pertinent sect‘ons of the Nattonal Internal Revenue Code upon which respondent's assessment and demand {$ based are reproduced hereunder;

_ “Sec, 124, Paynent gape: tiic Tex on 5 om opectifc taxes on comese- ¢ products shail be patd by the manufac- turer, producer, owner, or person having possessfon of the Samezyand, except as other- w'se @pecfally sllowed, such taxes shall oe pafd tomed‘ately before remeval from the place of product‘on,"* PS ar eer

DEGISION «

GeTeAe GASE NO, 387 -5- ~- Siavgring exizeste, snd oll eines 8 story sist {ited spirfts form the chtef tngredtent subject to the seme tax as such pb ary tgs grec tant.”

_ ~ ~~ ~ 153, ae oie ea eaanes | sein or ee this pete except as Senetaattae provided spec'fitc taxes as follows;

edeniadltt Zf produced from sap of n < o;, ange = or burt pa tte or from the ot ce, Syrup, or sugar of the cane, per proof litter, seventy centavos;

mo P 4 x x - ~ - “*Dtetflled spirfts’, as here used pn gage Sh all stances known @s ethyl al- oxtde of ethyl, or i yg wines, age 1th are ae Sommensy by fermentation and subsequent dfstilla-~ tfon of gratn, starch, molesses, or sugar, of sme — = or 3aD6 including all dt- tons or Pet{tfoner contends that the denatured alcohol which was removed from ‘ts d{st‘llery by the two buyers and used by the latter ‘n the product{fon and manufacture of rubeing alcehol compound are not “medfctnal preparations" subject to specific tax under sectfon 127 of the Tax Code, fn relation to sect‘on 133 of the same Code, Petittoner argues that “Even ‘f ‘t were hypothet‘cally assumed — that rubbfng elcohol, x x xq ‘s a medtcfnal preparation, it ts not subject to specffte tax under section 127" because th*s sectfon subjects to spec'f'c tax only those art'cles mentfoned therefn the chief ‘ngredtent of whfch *s capable of oral ‘ntake or {nternal consumption, _ We cannot sustafn the contention of the pet‘tioner.

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c. r. • 3.17 - i - t wa& roven by the te t ony of Dr. Benjam1n en- auceso, r •~dent ph s •e• n of the h11 pp'n ~neral ~ Hospital . t~at don~tur d alcohol is edie~nal pre- ~ p~at !_on • .; .Oes"d ~ . we have .naC! occaa-fon to old •n « case nv .v ~ ng th~$ same quest on t t enatured al• cohol. wh4ch was de the ch~e£ ·n reotent of rub tog alcohol compound, •s La Tondetla • 1'nc. vs. Collector of nt~rnal Revenu•·· C. T.A. Cast No. 182. December 1 • 1 ~7.} The foet that the m d c nal prep r t-'4n& .r ot c pablo of oral •ntake ~ nte nal eonsu ~tfon ' of no •rnpor- thereon.

Th law n ·1 end sp ak of • ed1ctnal and t~•let pre par t ort$" lld "all t.>ther pro par t ~ons~ of whtch dfsttlled p fr "tJ fs the ch' f 'n red~ent.

It does not a • ny d"st nctfon hethe those pro- ducts are pota le or not ~ (La ond na, !nc. vs. C ollector. ~. )

The pet t oner further contends that tl d n - tured alcohol produced nnd sold to the two corpora- t•ons are exe pt fro~ spec~ e tax under s ~tton 12P o£ the Internal evenue ode.

~h~ch prov~oe ' .J 11

J

DEC ~I

• <;.f. • cASE O. 387 - 7 - Alt oug t waa proven by petit1oner th t the t o corporat ons to hfch 1 t sold t he den tured al- cohol ~ re engaged fn an fnoustry • the manufactur of ch ~~cal products - £nd ut~l•z~ng a se zable 42-44, t .s.n.) yet, emount of lei or and cap1 tal ( pp. as ,. ~ prev•ously i ld !n th ~uera , ~n order that the denatur d

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Tondefia _caso • lcohol tn qu s- tfon could be exempted under the prov·s~on of the fax Code jus quote· a ov • t ust be so used for the _ ./ op rat•on of such ~ndustr•es and no rely aa an 'n- gred•ent •n _the anufac t ur e of anoth r product.J rant~nq th t the ru •ng lcohol compound •n controv rsy fs subject to spec •£ c tax, th pet•t•oner a'nt ~ ns th t t t •a not l ' ablc for tho pay ont of the sa • t4ttonor argues that und r ct on 1?4 of th at•onal tnt rnal • venue od • p c f•c tax s on omest~c products shall produc r* wn r or p rson ha ng possess on of the same x x x ef rc removal rom the pl c of pro uct'on.N !nas JC'h as t he _r b ng lcohol eo Qound •s not pro• P c{ftc P oduets, nc. • and aciffc •ndu tr• 1 t nufactur~ng , the t"'t-toner concludes that t e sat t o corporat ons should be made to pi y the spectf •c t x on th rubb .tng alcohol. •• ftn th'& la t alterne~v contentron of the pet4t~oner to be er~tor•ous. v(.t s true th t the de• natured ale tol wh.,c ior ' th ch#e fngr d ent of t _e ruub#ng alcohol co~poun , wa m nufactured v the pet'• t oner .

H~ ver, the denature alcohol as never re-

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DECTS ICN -

CeleA, CASE NO, 387 moved by the petit‘oner from ‘te d‘st‘llery with the fntent’on of evading the paywent of the spe- cfffc taxes thereon, On the contrary, the sane wes Sold by the pet‘!ttoner to Pacff‘e Products, Inc., @ad Pactfite tndustr@l Manufacturing, and when tne_ | said two corporations assumed control end possession of the denetured alcohol, they acqufred the owner shtp | | over the same, (Arts. 1477 and 1497, Cfvil Code of a the Ph‘lfpp‘nes}). Subsequentiy, with the permissfon and the author’ty of the respondent, they reaoved the denatured alcohol from pet’ttoner's dést*tllery, and with ft as the princ'pal raw mater’al, they sanufac- tured the cusb'ng alcohol compound on wh'ch the res- pondent assessec and now seeks to collect the d‘sputed spec’ffc tax. To oux sing, 't *s clear thet Pac‘tife a Products, Inc., and Paciffc Industral sanutfacturiag, are the manufscturers, producers, and/or owners of the rubbtng aleohel compound, and consider‘’ag that the law (Sec. 124, weatfonal Internal Revenue Code) does not require the spectfic tax to be patd ‘umed‘tately before the sale (¥en‘to Garcta vs. The Coliector of Internal Revenue, 66 Phil. 441), we are of the optnion and so hold that the satd corpuret‘ons who purchased the de=- natured alcohol from the pet‘tfoner, are liable for the paynent of the spec’ifc tax fn questton, and not the pettfoner neretn. | ae

WHEREFORE, the dec’sfon cf respondent appealed from, should be, as *t *s hereby reversed. Fet!tioner

DECISION -

C.oT.A. CASE NO, 387 -9- Central Azucarera Don Pedro ts hereby declared not lftable for the payment of the sum of #33,696.60 ree present*ng spectf*c tax assessed by the respondent, without prejudfce to whatever actfon the respondent may dec*de to take agatnst the proper party or partfes lfable therefor, Without pronouncement as to costs., SO CRDERED,

WE CONCUR:

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MARIANO BA

Presiding Judge

T eoneur ‘in result wefeeen at | on of Internal Revenue, C.T.A.~ No. 182, Dec. 16, 1957.

Chee

Asseciate Judge

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