Republic of the Philippines Court of Tax Appeals Quezon City Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue

DECISION

This is an appeal from the denial of the Commissioner of Internal Revenue of the protest f i I ed by the petitioner disputing the assessment demanding the payment of deficiency surtax on a I I eged extraordinary gains arising from the oi I price Increase authorized by the Energy Regulatory Board (ERB> on August 15, 1989 in the total amount of P50,080,140.96 inclusive of interest and surcharge.

On August 26, 1992, petitioner received an assessment notice demanding the payment of deficiency surtax on extraordinary gains obtained by the petitioner as a result of the oi I price increase authorized by the ERB on August 15, 1989.

The deta i Is of the assessment are specified hereunder as follows:

DECISION - C.T.A.

CASE NO.

5132 - 2 - Company Recovery Contribution to the OPSF Total Multiply by rate Basic Tax Amount Paid Add:

25% Surcharge Total Add:

I nterest from Sept.

16, 1989 to Aug. 15, 1992 TOTAL DEFICIENCY, SURCHARGE & INTEREST p 3,425,950.08 35,502,742.49 P38,928,692.57 65% P25,303,650.17 P25,303,650.17 6,325,912.54 P31,629,562.71 18,450,578.25 P50,080,140.96 The revenue examiners based their computation 0n the product inventory listed in the Official Registry Book of Pi I i pi nas She I I Petro I eum for the month ending August 31, 1992, deta i I ed as fa I I ows: PRODUCT Premium Mogas Regu I at' Mogas Kerosene Gas 0 i I Fue I 0 i I Refinery Fue I 0 i I LPG Av tur Lams SBP Component Products OPENING BALANCES 7,623,741 2,420,032 1,805,988 24' 651 '770 37,504,218 1,074,849 3,398,437 5,761,335 126,383 136,989 29,497,592 Based on this inventory I ist, the revenue examiners then computed petitioner by the inventory gain realized by multiplying said inventory by individual components mentioned In the ERB order, August 15, 1989, detailed as follows:

the the dated

DECISION -

C.T.A. CASE NO. 5132 - 3 -

OIL COMPANY OIL PRICE

PRODUCT NETBACK STABILIZATION FUND

Premium gasoline PO.03 (PO.0577) Regular gasoline 0.03 ( 0.0577) Av turbo 0.03 ( 0.9423) Kerosene 0.03 ( 0.0394) Diesel Oil 0.03 ( 0.0395) Fuel Oil/Feedstock 0.03 0.47 LPS 0.03 ( 0.0394) Asphalt 0.03 0.4605 Thinner 0.03 0.4606 The final assessed amount of P50,080,140.96 is summarized as follows:

PRODUCT NE TBACK OPSF TOTAL

Premium Gas 228,712.23 (439, 889. 86) (211,177.63) Regular Gas 72,600.98 (139,635.85) (67,034.87) Kerosene 54,179.64 (71,155.92) (16,976. 28) Gas Oi| 745,553.10 (981,644.92) (236,091.82) Fuel Oji| 1,125,126.54 17,626, 982.46 18, 752,109.00 Refinary Fuel Oi| 32,155.47 505,179.03 537,334.50 LPG 101,953.11 (133,898.42) (31,945.31) Av Turbo 172,840.09 5,428 ,905.97 5,601, 746.06 LAWS 3,791.49 58,212.00 62,003.49 SBP 4,109.67 63,097.13 67 , 206.80 Components Products 884,927.76 13,586, 590.87 14, 471,518.63 TOTAL 3,425 , 950.08 35,502, 742.49 38 , 928,692.57 Total Inventory Gain 38 , 928 ,692. 57 Surtax Due - 65% 25,303,650. 17 Add: Surcharge 6,325,912.54 Interest 20% Fr. 9-16-89 to 8-15-92 18, 450,578.25 Total Amount Due 50 ,O80, 140.96 Petitioner filed a letter protest on September 22, 1992, disputing the assessment and declaring therein that the deficiency surtax imposed by the respondent lacks 24 legal and factual bases. This protest letter contained a DECISION - C.T.A.

CASE NO.

5132 - 4 - denial that petitioner rea I i zed extraordinary gains or windfall profits from the 1989 oi I price increase because said increase was mere I y intended to grant o i I companies reI i ef from increases in cost of transshipment, chemicals and additives and to cover the deficiency in the Oi I Price Stabilization Fund <OPSF).

Respondent denied the aforementioned protest in a letter, dated March petitioner on June 22, 9, 1994, 1994.

and received by the Shortly thereafter, an appeal was made in this Court by means of a petition for review filed on July 22, 1994, reiterating its opposition to the assessment issued for deficiency surtax and affirming its stand that it did not realize any gain much less extraordinary gain as a result of said price increase.

In answer to the petition, respondent asserts the following special and affirmative defenses: 9.

As a result of the increase in of petroleum products authorized by the Regulatory Board (ERB) on August 15, petitioner realized extraordinary gains are subject to the sixty five percent surtax imposed under Presidential Decree No.

1889.

prices Energy 1989, which (65%) ( p. 0. )

10.

In the computation of extraordinary gains rea I i zed from the increase in prices of petroleum products, petitioner's contributions to the Oil Price Stabilization Funds are included since the contributions form part of the price increase (cf.

Section 2, P.O.

No.

1889).

' I I l1"' •• 1 r i (1 i' I i, l DECISION - C.T.A. CASE NO.

5132 1 1 • taxation It is that - 5 - an estab I i shed the assessment doctrine of in the Commissioner of Internal Revenue is prima facie correct and the burden of proof that it is otherwise is on the taxpayer to prove all the facts necessary to establish the I I legality of the assessment (Commissioner of Internal Revenue vs.

Construction Resources of Asia, Inc.,

145 SCRA

671;

I nterprov inc I a I Auto Bus Co., Inc.

vs. Commissioner of Internal Revenue, 98 Phil.

290).

12.

Finally, in view of this Honorable Court's Decision in Caltex (Philippines), Inc, vs.

Commissioner of Internal Revenue (C.T.A.

Case No.

4711, July 5, 1994), petitioner is, therefore, I iable to pay government the amount of P50,080,140.96 as deficiency surtax, inclusive of Interest and surcharge, on extraordinary gains arising from the oi I price increase authorized by ERB last August 15, 1989.

This Court is ca I I ed upon to reso I ve the issue of whether or not petitioner rea I i zed extraordinary gaIns from the oi I price increase authorized by the ERB in an order, dated August 15, 1989, and if findings show that extraordinary gains were indeed realized, whether or not a 65% surtax shal I be imposed on this extraordinary gain pursuant to the provisions of Presidential Decree No.

1889.

Petitioner maintains that the revenue examiners erred in applying the provisions of Presidential Decree No.

1889 to the 1989 oil price increase because said decree which imposed a 65% surtax on extraordinary gains ,, f is applicable only to oil price increases authorized I 'l !

i .i DECISION - C.T.A. CASE NO.

5132 - 6 - prior to the promulgation of said decree which was in 1983 as clearly seen from the wordings of this particular law.

Petitioner further avers that the o i I ' ' price increase of August 15, 1989 was specifically authoriz;ed to reimburse the oi I companies for unrecovered costs and to replenish the OPSF, a situation which is wholly different from that preva i I i ng when P.O.

1889 was promulgated in 1983.

Petitioner explains that in 1983 the OPSF was not yet in existence and that the o i I price increase contemplated by P.O.

1889 which resulted to a windfall profit for the oi I companies was due primarily from the fact that these companies sold petroleum products at a higher price as compared to the price they l " .. ! !

had paid in acquiring and purchasing these products prior t • to the price ad j ustment.

To prove this point, petitioner < ••• quoted a portion of the preamble of

p. 0. 1889 which .>l••l provides, thus:

about "WHEREAS, the immediate price increases on the whole range of refined or blended petroleum products have brought about extraordinary gains for oi I companies on account of the sale at higher prices of finished products, processed from crude oi I and other base stocks, purchased or acquired by them before the price ad j ustment. "

I ' ., Petitioner insists that the situation which h brought P q,r.

the o i I price increase on August 1 5, 1989 is ' " entirely different from that contemplated by DECISION - C.T.A. CASE NO.

5132 - 7 - aforequoted preamble because no gain was possible from the then preva iIi ng pricing system in 1989.

To put petitioner's allegations in simple terms, the 1989 price increase, subject of the present assessment, pertained to the recovery of increased inland transshipment and freight charges and costs of chemicals incurred by the o i I companies and to the replenishment of the OPSF, precluding the possibility of any gain, thus it should not be held I iable for any deficiency surtax.

Petitioner further stresses that the absence of any implementing regu I at ions to serve as guide I i nes in the determination of extraordinary gains pertaining to the August 15, 1989 ' 'r.

o i I price increase serves to iII ustrate the point that no · Jj \ extraordinary gain could be realized by the oi I companies I I' t from this particular increase unlike in the previous o·l price hikes prior to the promulgation of several implementing regulations particularly Revenue Regulations 13-84, 'I"' P.O.

1889, where ,,,q were issu ed, I l1 12-84 and 22-84.

';)

On the other hand, respondent remains firm in theory that 'the 65% surtax imposed by P.O.

1889 applies 'l · I to the August 15, 1989 oi I price increase.

To illustrate ; ' ' J her point, respondent focuses on Section 2 of said Law ' ' I which defines what constitutes extraordinary gains and   .  that under Section 8 of P.O.

1956, a law that created the 0 i I Price Stabilization Fund (OPSF), the extraordinC\ry .

.

' ' f f DECISION - C.T.A. CASE NO. 5132 - 8 - I.

' ' ' gains realized by the o i I companies is not one of the sources of the OPSF, hence petitioner cannot ' ' claim that a substantial portion of the gain realized by the oil price increase of 1989 was remitted to the OPSF.

Furthermore, respondent, in her memorandum, stated that the Chairman of the Energy Regulatory Board has no legal authority to transfer that portion of the increase in the wholesale posted price to the OPSF because under the provisions of P.O.

1956 there are only three sources of funds that can be put into the OPSF and increase in the who I esa I e posted price is not one of them.

Lastly, respondent be I itt I ed petitioner's claim regu I at ions is proof that the absence that P.O.

1889 is not of revenue .  .

applicable to R the 1989 o i I price increase. Respondent declared that an ( 1-:

implementing regulation is necessary only if the law is ambiguous and therefore susceptible of different 'l ';

interpretations and this is not true in the instant ca>e because

p. D. 1889 clearly defines what constitutes 1 I ,
"extraordinary gain." The issues that press Us for determination could be justly resolved through a thorough analysis of the order ,.

!

issued by the ERB on August price increase and its 15, 1989 authorizing an oil ·"': j relevance, if any, to the It·;

provisions of P.O.

1889 which Imposes a 65% surtax extraordinary gain or windfal I profit.

DECISION - C.T.A. CASE NO.

5132 The ERB order, part as follows:

- 9 - dated August 15, 1989 provides :in

WHEREFORE, considering the foregoing, and pursuant to Section 8 of Executive Order No.

172, this Board hereby grants 'app I i cants' prayer· for provisional relief and, accordingly, authorizes said applicants, pending hearing and final decision of the above entitled cases, a weighted average provision a I increase of TWENTY-FIVE

POINT FOUR

CENTAVOS (P0.254) per I iter, broken down as follows:

In Centavos Per Liter Crude TransshIppIng, TEL, Chemicals and Additives TOTAL 22.4 3.0 25.4 The increases authorized herein shal be reflected as an upward adjustment In the respective posted prices of the said four products ex-terminal/depot In other parts of the country and in the price build-up of all products as fo I I ows: PRODUCT NETBACK OPSF Premium gasol ine P0.03 (P0.0577l Regular gasol ine 0.03 ( 0.0577) Avturbo 0.03 0.9423 Kerosene 0.03 0.0394) ;,, D,i esS I oi 0.03 0.0395) Fuel o i 1/ Feedstock 0.03 0.47 Regular gasoline LPG Asphalt Thinner From the ensuing oi the aforequoted order, 0.03 0.0577) 0.03 0.0394) 0.03 0.4605 0.03 0.4606 price Increase brought about by the Bureau of Internal Revenue .I DECISION - C.T.A.

CASE NO.

5132 - 10 - issued the disputed assessment against ..

the petitioner anchored on the provisions of P.O.

1889, particularly Sections 1 and 2, quoted hereinbelow, thus:

SECTION 1.

Surtax on Extraordinary Gains;

Rate of Surtax.

In addition to the income tax imposed under Title

I I

of the National Internal Revenue Code, there is hereby imposed a surtax of sixty-five (65%) per cent on extra­ ordinary gains realized by oil companies as a result of price increases authorized for petro I eum products, which surtax sha I I be allowed as part of the cost of petroleum product sold on or after November 3, 1983.

SECTION 2.

Computation of Extraordinary Gains.

The extraordinary gains shal I be measured by the difference between the approved wholesale posted prices of refined petroleum products immediately before the authorized price increases and the new posted prices multiplied by the number of units of petroleum products existing as of the day of effectivity of the price Increases.

Extraordinary gains shal I also refer to the aggregate increases in the value of crude oi I and base stocks.

t r·,!

' " It is clear from the abovecited provisions that P.O.

1889 imposes a 65% surtax on extraordinary gains rea I i zed as a result of an o i I price increase and since the dispute centers around the concept of extraordinary gain, j • f ' it is appropriate at this point to strike a working definition of what constitutes extraordinary gain.

The testimonies of witnesses for both parties seem to point to a common definition of extraordinary gains as evidenced by statements made during the hearings held on DECISION - C.T.A.

CASE NO.

5132 this case.

- 1 1 - The wit ness for respondent, Gu i I I erma Guz i, Division Chief of the Special Investigation Division, Revenue District Office No.

7, Quezon City, during the hearing held on December 6, 1995, defined it in this manner:

A.

Q.

JUDGE In that case, if the crude o i I was purchased at P6.00 and sel I i ng that for P8.00 and suddenly the following day, Your Honors, it was sold for P10.00, then, there was additional P2 increase that wi I I go to the offers ( s i c } of the o i I company assuming that there is no intervening factors that w iII affect the P2.00.

We assumed that . ... GRUBA What do you mean to say?

Do you mean to say that the crude oi I cost is P6.00 and sell it at P8.00, there is already a profit on it and then, the next day they increased it to P10, that Is the windfall profit?

A.

Yes, Your Honors.

#f '  Similarly, the witness for the petitioner, then ERB A,.

Chairman Rex Tantiongco, in his testimony made on May 23, · 1995, also defined extraordinary gain, thus:

Q.

And how w i I I the realize a gain with reference inventories?

oil companies under P.O.

1889 to the crude oi I j DECISION - C.T.A.

CASE NO.

5132 A.

Q.

- 12 - You mean to say, sir, slapped by the ...

No, how wi II they extraordinary gain?

how they are realize an A.

They rea I i ze an extraordInary gain as Q.

So I said because the price increase is made ahead of schedule or even before the exhaustion or depletion of the old stocks.

What I mean by old stocks, is inventory acquired at a lower price.

The oil companies were allowed already to increase their price ahead. there was a gain that increase In purchased at a that correct?

with regard to prices although lower price, is A.

That's correct, Sir.

So, if to be brutally, if we are going to use a brut a I term about it, it was a legalized hoarding.

Q.

see.

And that gain refers only to increases In crude o i I cost?

A.

Increase in crude oil cost, sir, yes.

Q.

If we refer to 3 centavo increase, wou I d that refer to increases in the crude oi I cost?

A.

No, as said it was an increase in transshipment and additives. 0.

A.

And could P.O.

1889 to the August build up?

No.

Definitely, no.

app l y with regard 16, 1989 price From the aforequoted testimonies, extraordinary gain occurs when the oi companies se I I their petroleum DECISION - C.T.A.

CASE NO.

5132 - 13 - products at a much higher price by reason of an oi I price hike, compared to the amount actually spent by them in acquiring its raw materials prior to the said oi I price increase.

Respondent insists that petitioner realized extraordinary gains as a result of the oi I price increase authorized by the ERB on August 15, 1989.

For its part, petitioner presented the then ERB Chairman, Rex Tantiongco, to shed I ight on the mechanics of an oil price hike, particularly the one authorized on August 15, 1989.

The gist of the testimony of Chairman Tantionqco centered on the components of the wholesale posted price ' J or WPP of petroleum products because it is this WPP tKLt increased its rate by 25.4 centavos/ I iter in the order dated August 15, 1989.

By the use of a transparency j.

f which was later presented by the petitioner as Exhibit ' I "A", Chairman Tantiongco defined WPP as the amount paid PY the dea:lers • ·l' .... ;l, .

' ' ; ., the depot'pr .

· .

. t h .

. ' l >
7" ),.

composition of the WPP during the hearing held on May 2?1 1995, thus:

A.

Your Honors, the wholesale 12osted 12rice is the amount 12aid bM the I' dealers when they withdraw petroleum products from the DECISION - C.T.A.

CASE NO.

5132 Q.

Mr.

A.

The - 14 - depot or the terminal.

In case of Metro Man i I a, the amount paid ex-Pandacan term Ina I.

And the composition of the wholesale posted price are the company netback or the company take, the amount realized or retained by the oil companies plus the tax, specific tax and the OPSF, the Oil Price Stabilization Fund.

It may be a negative or a positive.

So the total of these three components are the wholesale posted price. Chairman, netback.

are the net back?

net back you mentioned about a Cou I d you te I I us what compositions of this are the cost of manufacturing such as materials which is crude ol I, the conversion costs which are the labor and the overhead, then also the tax or the ad valorem tax which Is already part of the raw materials and the profit of the oil companies.

(Underscoring supplied} As seen from the aforequoted testimony, the wholesale posted price or WPP has three components namely:

specific tax on petroleum products (ad valorem tax), the company's netback and the OPSF (see Exhibit "A", p.

1 1 4 1 CTA rec.).

Therefore, an increase authorized by the ERB on the WPP on petroleum products is distributed among these three components.

Chairman Tantiongco explained that out of the 25.4 centavos/ I iter increase authorized by the ERB on August 15, 1989, . 81 DECISION - C.T.A.

CASE NO.

5132 - 15 - centavos went to the ad va I orem tax, 21.57 centavos went to the OPSF and the remaining three centavos went to the oi I companies as reimbursement for increase in operating costs such as transshipment costs and increase in the price of additives and chemicals used in refining these products (see TSN of May 23, 1995 and Exhibit "C", p.

123, CTA records).

The question that was then presented focused on the 3 centavos that supposedly went back to the oil companies, because if this 3 centavo increase given to the company's netback portion of the WPP, did not these companies earn profit as a result?

answer given by Chairman Tantiongco was stl I I in negative as shown by his answer narrated in the hearing held on May 23, 1995, thus:

Q.

So you're saying that centavos Increase cost recovery only?

even this 3 constitutes A.

Cost recovery of their operating Q.

A.

Now, expenses particularly the increase in the transshipment cost and additives or chemicals a 
ed to enha`pe tna ·bYclity or t o' ' i m p r o v e ·' t h e 1: ; . q u a I 1 t y of petroleum products.

:> · how much of this August 16, 1989 WPP increase, how much went to the improvement of the prof itabi I ity of the o i I companies?

Actually, it did profitabi I ity not of improve the the o i I wadl· ;

thet:J The the san,1.e , l :\ c· 1:

; ..

- I I ,, ., ,,:q fl ·' DECISION - C.T.A.

CASE NO.

5132 - 16 - companies but mere I y a I I owed them to recover costs increase particular period.

the additional in that Q.

So inspite of the fact that there was A.

a 3 centavos increase in the netback or direct company recovery, it's (sic) sti I I did not improve the prof i tab iIi ty of the oi I companies?

Compared with the previous years did not improve it the o i I of the prof itabi I ity companies, as mere recovery of cost incurred by particular period.

said it was a the incrementa I them in that This Court in arriving at a sound conclusion gives much weight to the position held by then Chairman Rex Tantiongco primarily because it is his office, the Energy Regulatory Board, that is involved in the study of the market prices of crude oil and it is this agency which is tasked in administering the OPSF.

Furthermore, We are guided by the decision promulgated by this Court in the case entitled "Pi I ipinas She I I Petroleum v.

Commissioner of Internal Revenue, CTA Case No.

4780, August 9, 1996" involving exactly a similar issue regarding extraordinary gains.

Our decision in this aforecited (CTA Case No.

4780) gave special Pilipinas Shell case emphasis on the explanation made by Chairman Tantiongco as to the reason why oi I companies may no longer realize windfall profits DECISION - C.T.A. CASE NO. 5132 - 17 - or extraordinary gains after the issuance of Presidential Decree No.

1956 on October 10, 1984, which created the Oi I Price Stabi I ization Fund or OPSF and We quote, thus:

To explain further his point, Mr.

Tantiongco testified that before the introduction of the OPSF on October 15, 1984 by Presidential Decree No.

1956, it is possible for the oil companies to get windfall profit because increase in prices are calculated based on the I owest inventory of the o i I companies and the effectivity of the increase approximate that period.

The oil companies will be rea I i zing gain because the products they are se I I i ng then was out of the crude imported In previous period which was at low price.

However, it is different after the effectivity of PO 1956 and the subsequent issuance of LOI 1441 on November 20, 1984 (T.S.N.

pp.

76-77, January 9, 1995).

In an answer to the question why o i I companies may no I onger rea I i ze windfall profits in the context of P.O.

1889 after the establishment of the OPSF, Mr.

Tantiongco states as follows: "A.

Because the adjustment in the netback now is based on their actual importation.

So the Energy Regulatory Board gathered all the documents from the Bureau of Customs, from the Department of Energy which approves the importation of the o i I companies and at the same time from the submission of the oi I companies together with their documents or receipts they received from the Bureau of Customs.

So the net back is adjusted based on the actual cost of the importation.

And whatever adjustment in the pump price is reflected only on the OPSF and not in the netback of the oi I companies.

Although that adjustment is reflected in the wholesale posted price, the composition of the wholesale posted price whether upward or downward after the OPSF is created is direct I y DECISION - ,C.T.A. CASE NO. 5132 - 18 - absorbed by the Oi I Stabilization Fund.

<T.S.N.

9, 1995, pp. 78 to 79. )"

Price January In the instant case, the rationale of ERB's approval of an oi I price hike effective August 16, 1989 stemmed from the increase in the peso I anded cost of crude o i I coupled with a corresponding deficit of the OPSF in the amount of P818 mi I I ion as of the end of May 1989.

This is i I lustrated by a portion of the ERB order which declared, thus:

The Board has noted that the actual FOB cost of crude imported by the applicants during the period March-Apri I 1989 stood at an average of $16.6941 per barrel which, when compared with the reference FOB of' $11.2859 per barrel existing as of November 8, 1988 when the Board ordered a reduction in the wholesale posted prices of petroleum products <WPP) by an average amount of PO. 757 per I iter, shows an increase in the peso landed cost of crude by an average amount of P129.0371 per barrel, or P0.8543 per I iter of product.

As a result of such significant increase in crude cost, the 0 i I Price Stab iIi zat ion Fund

( OPSF)

component of the WPP has become a negative figure of minus P0.8785 per liter effective May 1, 1989 under ERB Resolution No.

89-15 dated June 6, 1989.

The OPSF which was estab I i shed to absorb fluctuations in product costs arising from changes in world market prices of crude oi I and in the peso-dollar exchange rate and thereby minimize frequent changes in the prices of petroleum products sold locally, has been subsidizing the local selling prices.

In the process, and as appearing in the report dated July 27, 1989 submitted to this Board by the Office of Energy Affairs, which is responsible for the administration of the OPSF, the latter ..

,...

- DECISION - C.T.A. CASE NO.

5132 - 19 - has accumulated an accrued deficit of P818 Mi I I ion as of the end of May 1989, and that the present shortfa I I of the Fund is increasing at an estimated average monthly drawdown rate of P1 B i I I ion.

The 25.4 centavos/ I iter increase primarily seeks to reimburse the oi I companies for the increase in the costs of transshipment, chemicals and additives that were already shouldered by the oi I companies prior to the increase and to replenish the OPSF which at that time was already depleted.

We find merit in the testimony of petitioner 's witness, Atty.

Armando P.

Batara, the in- house counsel of Pi I ipinas Shell, when he concluded that the 65% surtax imposed by P.O.

1889 is applicable only when the oi I companies purchase raw materials at the old price then subsequently sel I the finished products based on the higher price brought about by an oil price hike, giving rise to an extraordinary gain which should be taxed at 65%.

A portion of his testimony made during the hearing held on February 22, 1995, is quoted hereunder as f o I I ows:

A.

That is P. D.

1889, Your Honors.

quote, Your Honors:

"Whereas, the i rnmed i ate price increases on the whole grains of refined or blended petroleum products have brought about extraordinary gains for oi I companies on account of the sale at higher prices of finished DECISION - C.T.A. CASE NO.

5132 - 20 - products processed from crude oi I and other base tax purchased or acquired by them before the price ad j ustment. " From this particular Whereas Clause, Your Honors, it is apparent that this provision would only come into play when an oi I company purchases raw materials at the old price and sells finished products at a higher price based on the increased price, Your Honors.

The situation contemplated by P.O.

1889 Is not entirely analogous to the instant case as can be clearly seen from the facts earlier discussed.

A review of the history surrounding the issuance of P.O. 1889 on July 23, 1983, would reveal that its purpose was to impose a surtax on the profits obtained by the oi I companies by reason of an oil price increase which enabled them to dispose of their old stocks purchased at the old rate, by selling them at the increased price due to the oi I price hike resulting in extraordinary gain or windfal profit.

The prevai I ing circumstances were different at the time of the price increase authorized on August 15, 1989.

During this time, Presidential Decree No.

1956 (issued on October 10, 1984) was already in existence.

p. 0. 1956 created the Oil Price Stabilization Fund or the OPSF, the purpose of which was clearly enunciated and We quote:

in said decree DECISION - C.T.A.

CASF NC .

5132 - 21 - "The zund cre3ted herein shal I be used to rc i mburse :he o i I companies for cost increases o n c r u d e 'J i I a n c· i m p o r t e d pet r o I e u m p r o d u c t s resulting 1rom exchange rate ad j ustment and/or increase in war I d market prices of crude o i I." The current situation that was then prevai I ing at the time of the issuance of ERB order dated August 1989 was descrir,ed in said order and We quote, thus:

The OPSF, which was estab I i shed to absorb fluctuations in product costs arising from changes in war I d market prices of crude o I I and in the peso-q ::>I I ar exchange rate and thereby minimize fre<.Jent changes in the prices of p e t r o I e u m p r c1 d u c t s s o I d I o c a I I y , h a s be e n subsidizing tt)l!

local selling prices.

In the process, and us appearing in the report dated July 27, 198E submitted to this Board by the Office of Ene• 'gy Affairs, which is responsible for the administration of the OPSF, the latter has accumulated an accrued deficit of P818 Mi II ion as of the' end of May 1989, and that the p-r e s e n t s h o r t f a I I of t h e F u n d i s i n c r e a s i n g at an estimated average monthly drawdown rate of P1 Bi II ion.

Moreover, the peso-do I I ar reference rate of P21.25 per US$1.00 used by the Board as basis for the November 8, 1988 price reduction had not i ceab I [ yJ risen.

The Bankers Association of the Philippines <BAP) has reported  reference rate of P21.88 as of August 11, 1989.

Reckoned together with other related costs of importation, the aforementioned increase in FOB cost of crude, increased peso-do I I ar reference rate and depletion of the OPSF would necessitate an increase in WPP by what this Board has so far tentatively determined from its continuing studies and the submissions of the applicants as an average amount of approximately P1.25 per iter of product.

The Board, however, is a I so mandated by Letter of Instructions No.

1460 to consider at its periodic review of the domestic petroleum product prices, "the need to maintain stable 15, DECISION - C.T.A.

CASE NO.

5132 - 22 - prices in the domestic petroleum product market through such feasible alternatives and measures as shal I be necessary and appropriate" . In line with the above mandate, and in order to meet and cover the aforementioned deficiency in the OPSF and at the same time forestal I any serious j eopardy to the financial viabi I ity of the applicants to supply the fuel requirements of the country, this Board is of the opinion, notwithstanding the aforementioned substantial average figure which may j ustifiably be granted as an increase, that the applicants may in the meantime be authorized to increase the wholesale posted prices of certain petroleum products by a general weighted average of PO. 254 per I iter on I y.

In regard to the a I I eged increase inland transshipment and freight charges cost of chemicals and additives, this Board determined that indeed said applicants been incurring such add it i ana I costs. in and has have It is obvious from the aforequoted situation, that the controversial price increase of 25.4 centavos was partly distributed to replenish the OPSF and to reimburse  he oi I companies for the increased cost of chemicals and additives as we II as increases in inland transshipment and freight charges already spent by them.

The situation in the present case does not however preclude any kind of remembered that one of profit whatsoever.

It must be the components of the wholesale posted price is the ad valorem tax which in this case increased to .81 centavos.

Respondent failed to consider the ad valorem Nevertheless, tax this component particular A r: · _;

in her assessment.

component is of DECISION - C.T.A.

CASE NO.

5132 - 23 - significance because ad valorem taxes are paid fifteen (15) days from date of removal of petroleum products from the place of production in accordance with Section 127(a) of the Tax Code.

It follows then that the ad valorem taxes paid by the oi I companies when they acquired these petroleum products were sti I I at the old rate prior to the increase, therefore when they subsequently sold these products at the increased price, profits were realized with respect to this particular component.

In the aforecited case of Pi I lplnas She I I Petroleum v.

Commissioner of Internal Revenue, CTA Case No.

4780, August 9, 1996, this Court upheld respondent's assessment of petitioner 's tax I iabi I ities for extraordinary gain due to the increase in the ad valorem tax component of the WPP.

entitled Internal We quote a portion of the decision of said case Pi I i pi nas She I I Petroleum vs.

Commissioner of Revenue, CTA Case No.

4780, dated August 9, 1996, thus:

"x x x.

The respondent is correct in assessing petitioner for 65% surtax on extraordinary gain covering tax paid petroleum products because the taxes on those products have already been paid at the old rate as required by law and when sold at the higher pump price petitioner certainly benefitted by the increase in ad va I orem tax.

The increase in ad valorem tax goes to the petitioner as the law requires payment of the tax within fifteen 115) days from the date of removal of petroleum products from the place of production (Section DECISION - C.T.A.

CASE NO. 5132 - 24 - 127[a] National Internal Revenue Code). These stocks are stored in unbonded i nsta I I at ions or depots ready for marketing and are not subjected again to the payment of the higher tax rate.

To the extent of this unbonded or tax paid stocks, this Court believes petitioner is I iable to 65% surtax for extraordinary gain pursuant to PO 1889.

In fact, petitioner failed to dispute this finding of the respondent."

In applying the above principle to the present case, the assessment issued against petitioner for surtax on windfall profit is modified to include the extraordinary gains realized by the petitioner as a result of the Increase in ad valorem tax by .81 centavos brought about by the ERB order dated August 15, 1989.

Accordingly, the assessment of 65% surtax on the alleged extraordinary gains that went to the OPSF and to the o i I incurred, companies as is cancelled a mere reimbursement but the assessment of costs is hereby modified to impose a 65% surtax on extraordinary gains which resu I ted in the increase in ad va I orem tax covering unbonded stocks and is computed as follows:

ITEM INVENTORY Premium Mogas Regular Mogas Kerosene Gas o i I Fue I o i I Refined fuel oi LPG AV turbo Total Multiply by average rate of increase 30,961,079 14,244,797 7,726,850 82,417,406 132,556,134 3,956,890 1,131,672 723,322 273,718,150 DECISION - C.T.A. CASE NO.

5132 ' - 25 - in ad valorem tax Multiply by rate of surtax Add:

25% surcharge X • 0081 2, 217, 117.07

X 65%

1,441,126.06 360,281.51 1,801,407.57* *plus 20% interest from date prescribed for payment which is within thirty (30) days after August 15, 1989, the effectivity date of the price increase unti I the amount is fully paid pursuant to Section 249 of the NIRC.

WHEREFORE, in view of the foregoing, the assessment issued by the respondent for deficiency surtax on the oi I price increase dated August 15, 1989, is hereby MODIFIED.

Petitioner is ORDERED to PAY respondent the total amount of P1, 801, 07. 57 representing deficiency surtax on extraordinary gains, inclusive of the 25% surcharge plus 20% interest from August 16, 1989, SO ORDERED.

WE CONCUR:

(On Leave) ERNESTO D.

ACOSTA Presiding Judge _L _ __ _;_ s:-:'   - Ju
V' I I I I f u I I y paid.

J;

RAMON 0.

DE VEYt}.. / A s s o c i a t e J u d g eV DECISION - C.T.A.

CASE NO.

5132 - 26 - CERTIFICATION hereby certify that this decision was reached after due consultation with the members of the Court of Tax Appeals in accordance with Sec ion 13, Article VIII of the Constitution.

/RAM."' Associate Judg Court of Tax Ap