G.R. No. 222480 - Avon Products Manufacturing, Inc. vs. Commissioner of Internal Revenue

Case Summary (G.R. No. 222480)

Factual Background

Avon Products Manufacturing, Inc. purchased denatured ethyl alcohol from suppliers totaling 1,309,000 liters in 2008 for use as a raw material in its products. The Bureau of Internal Revenue issued Avon a Permit to Buy/Use Denatured Alcohol dated January 7, 2008, which exempted denatured alcohol from excise tax so long as it was used solely in manufacture of Avon’s products but contained Condition No. 3 providing that discrepancies between purchased and received volumes would be subject to excise tax on the difference. During transit, marginal quantities evaporated. The BIR alleged shortages amounting to 21,163.48 liters and assessed deficiency excise tax on evaporated denatured alcohol in the amount of Php1,135,500.85. Avon protested the assessment and limited its petition before the CTA to contesting a claimed deficiency of Php738,580.13.

Procedural History

Avon’s protest was denied by the BIR in a Final Decision on Disputed Assessment dated September 1, 2010. The CTA Second Division denied Avon’s petition in a Decision dated May 16, 2013, upholding the deficiency assessment but in a modified amount and ordering the payment of surcharge and interest. Avon’s motion for reconsideration before the CTA Second Division was denied. The CTA En Banc likewise denied relief in its Decision dated March 16, 2015 and denied reconsideration in its January 15, 2016 Resolution. Avon filed a Petition for Review on Certiorari under Rule 45 of the Rules of Court before the Supreme Court, which rendered judgment on November 7, 2018.

Issue Presented

Whether Avon Products Manufacturing, Inc. is liable for deficiency excise tax on the 21,163.48 liters of denatured alcohol that evaporated during transit before any rectification, distillation, reprocessing, or conversion into a finished distilled spirit.

The Parties’ Contentions

Avon Products Manufacturing, Inc. argued that Revenue Regulations No. 3-2006 and its Section 22 apply only to distilled spirits and distillers, not to denatured alcohol held by a manufacturer that is not engaged in producing distilled spirits. Avon invoked La Tondena Inc., v. Collector of Internal Revenue to contend that unintentional, casual, unavoidable or natural losses prior to conversion into a finished product are not subject to specific tax and that the shortages here occurred before any rectification or conversion. Avon also asserted that Condition No. 3 of its BIR permit is contrary to Section 134 of the NIRC and that the BIR cannot impose excise tax on a tax-exempt article absent statutory authority. Avon further argued that the simultaneous imposition of deficiency and delinquency interest was excessive. The Office of the Solicitor General, representing the Commissioner of Internal Revenue, countered that Avon failed to prove that the subject alcohol was at least ninety percent absolute alcohol as required by Section 134 and thus failed to establish the claimed exemption. The OSG maintained that Section 22 of Revenue Regulations No. 3-2006 on losses of distilled spirits was applicable and that Avon had not shown entitlement to relief.

Ruling of the Supreme Court

The Supreme Court granted the petition. The Court reversed and set aside the CTA En Banc Decision dated March 16, 2015 and its Resolution dated January 15, 2016, and declared Final Decision on Disputed Assessment No. 2009-1-A-159 dated September 1, 2010 void and without legal effect. The Court held that the 21,163.48 liters of denatured alcohol that evaporated during transit were exempt from excise tax.

Legal Basis and Reasoning

The Court began from the statute and controlling precedent that excise taxes under the NIRC apply to specified goods and attach upon the existence of the taxable article. Citing Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation and other authorities, the Court explained that the modern conception of excise tax in the Code is a tax on certain specified goods and that Section 141 provides that excise tax on distilled spirits attaches to the substance as soon as it exists as such. The Court observed that Section 134 expressly exempts denatured alcohol of not less than 180 proof (ninety percent absolute alcohol) when suitably denatured and rendered unfit for oral intake from the excise tax prescribed in Section 141, except where the denatured alcohol is less than 180 proof or has been reprocessed and rendered fit for oral intake. The Court determined that to impose excise tax on the evaporated quantities, two questions must be resolved: whether the denatured alcohol fell below 180 proof, and whether it was reprocessed or rectified into a distilled spirit.

On the first question, the Court relied on the BIR’s Formal Letter of Demand and the FDDA, which indicated that the denatured alcohol in question was 189 proof, or 94.5% absolute alcohol. That datum established that the material met the 180 proof threshold and, when suitably denatured, was rendered unfit for oral intake and thus prima facie exempt under Section 134. On the second question, the Court found no record evidence that the evaporated denatured alcohol underwent rectification, distillation, fermentation, dilution, purification, or other reprocessing to render it fit for oral intake. The Court emphasized that Section 22 of Revenue Regulations No. 3-2006 explicitly addresses losses on distilled spirits and is directed to distillers and rectifiers. The CTA erred in applying that provision to denatured alcohol held by a manufacturer who is not a distiller. The Court noted that if the BIR believed the denaturant was unsuitable or that the alcohol did not meet the statutory proof, it could have assessed the entire purchased volume; instead the BIR as

Case Syllabus (G.R. No. 222480)

Parties and Posture

Avon Products Manufacturing, Inc. filed a Petition for Review on Certiorari under Rule 45 assailing a deficiency excise tax assessment for shortages of denatured ethyl alcohol that evaporated during transit.
Commissioner of Internal Revenue issued the assessment through a Formal Letter of Demand and defended the assessment before the Court of Tax Appeals and this Court.
The Court of Tax Appeals Second Division sustained the assessment in part and imposed surcharge and interest, and the CTA En Banc affirmed in Decision dated March 16, 2015 and Resolution dated January 15, 2016.
The Supreme Court First Division, with TIJAM, J. as ponente, reviewed the CTA En Banc rulings and the underlying Final Decision on Disputed Assessment dated September 1, 2010.

Factual Background

Avon is a manufacturer of perfumes and similar products that purchased denatured alcohol as a raw material during January to December 2008 totaling 1,309,000 liters.
The Bureau of Internal Revenue issued to Avon a Permit to Buy/Use Denatured Alcohol dated January 7, 2008 subject to conditions including Condition No. 3 that permits assessment of excise tax on differences between purchased and received volumes.
During transit from suppliers to Avon's Calamba warehouse marginal quantities evaporated, resulting in a total shortage of 21,163.48 liters.
The BIR issued a Formal Letter of Demand assessing excise tax for the evaporated quantity in the amount of Php1,135,500.85, and the FDDA denied Avon's protest on September 1, 2010.
Avon limited its CTA petition to contest the excise tax over the 21,163.48 liters amounting to Php738,580.13 before the CTA.

Issues Presented

Whether the 21,163.48 liters of denatured alcohol that evaporated during transit are subject to excise tax under Section 141 of the NIRC.
Whether Section 22 of RR No. 3-2006 governing losses on distilled spirits may be applied to losses of denatured alcohol.
Whether the CTA erred in refusing to apply La Tondena Inc. v. Collector of Internal Revenue and in upholding the BIR permit condition that the petitioner alleged is contrary to the NIRC.
Whether the simultaneous imposition of deficiency and delinquency interest was excessive and unconscionable.

Contentions of Petitioner

Avon argued that RR No. 3-2006 and its Section 22 apply only to distilled spirits and distillers and therefore cannot be extended to tax-exempt denatured alcohol used in manufacturing.
Avon invoked La Tondena Inc. v. Collector of Internal Revenue to contend that unintentional losses prior to conversion into a finished product are not subject to specific tax.
Avon maintained that Condition No. 3 in its BIR permit unlawfully imposes excise tax contrary to the exemption under Section 134 of the NIRC.
Avon argued that the CTA erred in imposing both deficiency and delinquency interest as excessive.

Contentions of Respondent

The Office of the Solicitor General, representing the CIR, contended that Avon failed to prove that the evaporated denatured alcohol met the 180 proof or 90% a