Facts:

The case involves Armando L. Abad, doing business as Republic Alcohol Distillery, as the petitioner, against the Court of Tax Appeals and the Commissioner of Internal Revenue as the respondents. The events leading to this case transpired between January 1955 and August 1958. Abad operated two alcohol distilleries, alongside a bonded warehouse and a bonded denaturing warehouse. During the specified period, he utilized a total of 836,483 proof liters of rectified or ethyl alcohol without paying the required specific tax. This alcohol was converted into specially denatured alcohol using approved formulas, which he sold to various grantees. These industrial clients then employed the denatured alcohol in manufacturing non-beverage products, such as varnish and disinfectants, which inherently contained over 50% ethyl alcohol by volume, excluding water.

On December 12, 1958, the Commissioner of Internal Revenue assessed Abad for specific taxes due on the rectified or ethyl alcohol used

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Facts:

Background and Operational Details

• Armando L. Abad, doing business as Republic Alcohol Distillery, is engaged in the manufacture and sale of alcohol products.
• He operates two alcohol distilleries, a bonded warehouse, and a bonded denaturing warehouse.
• The period at issue covers January 1955 to August 1958.

Production and Use of Alcohol

• Abad utilized a total of 836,483 proof liters of rectified (or ethyl) alcohol without remitting the specific tax, using it in the production of specially denatured alcohol.
• The production process involved conversion of the rectified alcohol into specially denatured alcohol following four formulas approved by the Commissioner of Internal Revenue.
• The specially denatured alcohol was sold to various grantees who used it as the raw material in the manufacture of non-beverage industrial products (e.g., varnish, pre-mixed rice, solid alcohol fuel, detergents, emulsifiers, industrial solvents, shellac, wood dye, thinner, cleansing mixtures, embalming mixtures, barbershop disinfectants).
• It was admitted that the specially denatured alcohol contains more than 50% ethyl alcohol by volume (excluding water).

Additional Production and Sales

• During the same period, Abad also produced and sold completely denatured alcohol of not less than 180 degrees proof (ninety percent absolute alcohol).
• For the completely denatured alcohol, Abad paid a 7% sales tax on the gross sales after deducting the cost of ethyl alcohol purchased from other suppliers.
• The suppliers of the ethyl alcohol did not pay any specific tax nor declare their sales for the sales tax imposed under Section 186 of the Tax Code.

Assessment and Demand by the Commissioner of Internal Revenue

• On December 12, 1958, the Commissioner of Internal Revenue assessed and demanded:
• Specific tax on the rectified (or ethyl) alcohol used in the production of specially denatured alcohol, with detailed computations provided for each year.
• Deficiency sales tax and surcharge on the gross selling price of the completely denatured alcohol, with separate computations for each year and adjustments for tax credits.
• A compromise penalty of P300.00 for the loss of Abad’s books of accounts and records.
• The specific tax assessment was based on the premise that the 836,483 proof liters of alcohol, used in denaturing, is subject to the specific tax under the Tax Code.

Procedural History and Stipulation of Facts

• Abad contested the assessment and the case was elevated to the Appellate Division of the Bureau of Internal Revenue.
• After subsequent hearings, the Commissioner reiterated the assessment in a letter dated October 27, 1959.
• Abad then filed a petition for review with the Court of Tax Appeals, with the parties agreeing on a stipulation of facts.
• The Tax Court rendered its decision on January 4, 1963, holding:
• That the rectified or ethyl alcohol used in the specially denatured alcohol is subject to specific tax pursuant to Sections 127 and 133 of the Tax Code.
• Abad is liable for the specific tax on the alcohol he produced and sold, regardless of the subsequent use by grantees.

Periodic Computation of Specific Tax

• For January 1955 to August 22, 1956, when the specific tax did not attach immediately upon production (per Republic Act No. 592 and preceding law), a portion of the tax was deemed improperly assessed.
• The record shows 656,733 proof liters used during this period with a computed specific tax, which was later deducted from Abad’s liability.
• For the period after August 22, 1956 (under Republic Act No. 1608), the tax attaches as soon as the alcohol comes into existence.
• For August 23, 1956 to August 1958, 179,750 proof liters were produced with a computed specific tax of P111,116.00.

Claims and Legal Contentions

• Abad’s Appeal (G. R. No. L-20834):
• Argued that the mixing of denatured alcohol with other materials (to produce products like rubbing alcohol, varnish, etc.) constitutes use in the arts and industries and should exempt him from the specific tax under Section 128 of the Tax Code.
• Claimed that the removal of the alcohol — even if effected by himself as an agent of the buyers — should not attract the specific tax.
• Commissioner’s Appeal (G. R. No. L-20903):
• Contended whether the cost of ethyl alcohol purchased from other distilleries (used in the manufacture of completely denatured alcohol) is deductible from the gross selling price for computing the 7% sales tax.
• Argued that the sale of the ethyl alcohol was not subject to the sales tax provisions and that a bond under Section 164 should cover all internal revenue taxes.

Precedential Cases and Legislative Provisions Referred To

• The Court cited precedents such as Central Azucarera Don Pedro and La Tondena, Inc. regarding the tax liability on the production and removal of denatured alcohol.
• Key provisions discussed include Sections 124, 127, 128, 133, 164, 184, 185, 186, and 188 of the National Internal Revenue Code, as amended by Republic Acts Nos. 592 and 1608.

Final Assessment

• The Tax Court modified its decision:
• Abad was ordered to pay only the P111,116.00 on the 179,750 proof liters produced after August 22, 1956.
• Abad was not held liable for the deficiency sales tax, surcharge, or the P300.00 compromise penalty.
• The Commissioner’s contention regarding the deductibility of the cost of purchased ethyl alcohol was addressed in a separate appeal and ultimately affirmed.

Issue:

Whether the 836,483 proof liters of rectified (or ethyl) alcohol used in the production of specially denatured alcohol are subject to specific tax under the Tax Code.

• Whether the tax liability attaches to the producer (Abad) or to the buyers/grantees of the alcohol.
• Whether the mixing of denatured alcohol with other substances, resulting in products for industrial use, exempts the alcohol from the specific tax under Section 128.

Whether the cost of the ethyl alcohol purchased from other distilleries and used in the manufacture of completely denatured alcohol is deductible from the gross selling price for computing the 7% sales tax under Section 186.

• The applicability of the bond requirements under Section 164 in freeing the product from further internal revenue taxes.
• The interpretation of sales tax provisions vis-à-vis the treatment of raw materials already subject to specific tax.

Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Doctrine:

• (Subscriber-Only)