G.R. No. L-25965 - American Rubber Co. vs. Collector of Internal Revenue

American Rubber Company (now American Rubber Corporation), a domestic corporation engaged in the business of producing logs and lumber for sale.

The Collector of Internal Revenue (now the Commissioner of Internal Revenue) and the Court of Tax Appeals as respondents.

Petitioner’s operations involved acquiring logs both from its own forest concession in Basilan City (duly licensed by the Bureau of Forestry) and through cutting timber on the UP Land Grant managed by Sta. Clara Lumber Co., Inc. (SCLCO) under a Timber License Agreement.

A “Letter Agreement” executed on January 13, 1948 between American Rubber Company (ARCO) and SCLCO outlined the terms under which ARCO was allowed to cut timber from a designated area of SCLCO’s concession.

The agreement established conditions such as reversion of the cut area if ARCO ceased operations or transferred its business, free use of ARCO’s private roads by SCLCO, and SCLCO’s continued responsibility for the disposal of ARCO’s production.

From May 1949 to February 1952, monthly scale reports were prepared by the UP Land Grant administrator to record the timber cut by petitioner, based on which forest charges were billed and later reimbursed by ARCO through SCLCO.

The disposal of logs was conducted by hauling them to ARCO’s sawmills, where they were converted into lumber, and then transported to a dock in Isabela, Basilan for processing.

Tallies, recapitulations, and sales invoices were generated to record the sale transactions, with bills of lading indicating either ARCO or SCLCO as shipper or consignee.

SCLCO collected a 5% commission on sales and rendered related documents (such as privilege tax receipts) evidencing its role in the processing and sale of petitioner’s lumber.

On February 11, 1955, following an investigation by Jose Cabrera of the Bureau of Internal Revenue, petitioner was assessed for a deficiency sales tax and surcharge amounting to P66,022.77 on its sales of lumber for various years (including detailed computations for 1949 through 1953).

Petitioner subsequently filed a petition for review of the assessment on July 25, 1955 before the Court of Tax Appeals (CTA), which then engaged in a preliminary hearing on the issue of jurisdiction.

The CTA eventually established its jurisdiction (August 25, 1956), and, after trial on the merits, on July 31, 1965, modified the original assessment ordering petitioner to pay P47,374.38 for sales in the years 1950 to 1953.

Petitioner filed motions for reconsideration and, later, a petition for review, alleging multiple errors concerning the agency relationship, computation of gross selling price (including discounts and deductions), and the treatment of an alleged export sale transaction.

The dispute centered on whether SCLCO acted merely as an agent for petitioner or as an independent buyer in a contract of sale – a determination affecting the assessment of sales tax.

Contentions were raised regarding the proper computation of gross sales price, particularly whether discounts for short deliveries or broken pieces should reduce the taxable base, and whether freight, trucking, handling, and other incidental expenses should be included in that base.

An additional issue involved a transaction dated August 27, 1953, where logs were reportedly shipped to Japan. Petitioner argued that this should qualify as an export sale, which would render it exempt from the percentage tax; however, documentary evidence pointed to a local sale arrangement facilitated by General Enterprises, Inc.

Whether the Court of Tax Appeals correctly affirmed the Commissioner’s assessment of deficiency sales tax and surcharge imposed on petitioner’s lumber sales for the years 1950 through 1953.
Whether SCLCO acted as an agent of the petitioner or merely as a buyer under a contract of sale, particularly in light of the "Letter Agreement" and subsequent conduct in handling transactions.
Whether the gross selling price of the lumber was correctly computed by including incidental expenses such as freight, trucking, handling, and unloading, and whether any discounts should have adjusted the tax base.
Whether petitioner's contention to deduct its cost in acquiring title to logs from the UP Land Grant and SCLCO’s forest concession could be justified under Section 186 of the Tax Code.
Whether the shipment of logs purportedly destined for Japan qualified as an export sale exempt from percentage tax, or whether the transaction was properly characterized as a local sale subject to tax.