G.R. No. L-8989 - Ngo Shiek vs. Collector of Internal Revenue

NGO SHIEK, the petitioner and appellant, sought a review of the decision rendered by the Court of Tax Appeals (CTA No. 14) which held him liable for a manufacturer’s 7% sales tax under section 186 of the National Internal Revenue Code.
The disputed sales involved salted eggs produced during the years 1951 and 1952.

Immersion in a solution containing salt, mud, lime, ash, and water.
Placement in large baskets and covering with hay for a period of time.
Post-immersion cleaning of the eggs to remove mud.
Boiling of the eggs followed by immersion in water containing basic red coloring.
Drying of the eggs, which then rendered them fit for the market.

The eggshells became toughened.
The egg contents solidified.
The taste was altered.
A phosphorous lecithin compound was decomposed, liberating an oily lecithin previously not present in the fresh eggs.

The transformation was so substantial that trade customs even involved tinting the shells red to differentiate salted eggs from fresh eggs.

The appellant was assessed and paid an amount of P3,499.08 as fixed and sales taxes and surcharges under sections 182 and 186 of the Code, based on his sales of salted eggs.
His petition for a refund of the paid taxes was denied, leading him to bring the case to the Court of Tax Appeals.
The CTA’s decision, which found his arguments unmeritorious, was later brought for review.

The first issue raised by the appellant was that the conversion of fresh eggs into salted eggs did not amount to manufacturing; hence, such sales should not be taxable.
The second issue was his contention that he was entitled to a discount (or deduction) from the value of his taxable sales by deducting the cost of the fresh eggs used in the production process, particularly those purchased locally.

Whether the process of converting raw or fresh eggs into salted eggs, despite not being manufacturing in the ordinary sense, involves sufficient alteration to categorize the product as manufactured and thereby subject to tax under section 186.
Whether the appellant should be allowed a deduction from the taxable sales value corresponding to the cost of the fresh eggs used in the process, considering the provisions of section 186 regarding the deductibility of the costs of taxable materials.