G.R. No. 107135 - Commissioner of Internal Revenue vs. Court of Appeals

Case Summary (G.R. No. 107135)

Factual Background

CENVOCO manufactured edible coconut oil and copra meal subject to the miller’s tax and produced other goods subject to sales tax. In 1986 CENVOCO purchased containers and packaging materials for its edible oil and paid the ten percent sales tax shown separately on suppliers’ invoices. Following a revenue examination, the Bureau of Internal Revenue issued an assessment charging CENVOCO with a deficiency miller’s tax for 1986 in the total amount of P1,575,514.70. CENVOCO sought administrative reconsideration, contending that the sales taxes it paid on containers and packaging materials were not taxes “paid on raw materials or supplies used in the milling process” under Section 168 and therefore should be credited against the miller’s tax.

Proceedings Below: Court of Tax Appeals

CENVOCO filed a petition for review with the Court of Tax Appeals challenging the deficiency assessment. The Court of Tax Appeals ruled in favor of CENVOCO and held that CENVOCO was not liable for the asserted deficiency miller’s tax for 1986 in the amount assessed. The C.T.A. concluded that containers and packaging materials were not “raw materials” used in the milling process within the meaning of the final proviso of Section 168, and therefore the sales tax paid on those items could be credited against the miller’s tax.

Proceedings Below: Court of Appeals

The Commissioner appealed to the Court of Appeals. The Court of Appeals affirmed the Court of Tax Appeals in toto, adopting the C.T.A.’s reasoning that the final proviso of Section 168 referred only to taxes on raw materials or supplies actually used in the milling process and that containers and packages—such as tin cans and tetrapaks—were not transformed or incorporated into the finished edible oil product and thus were not raw materials. The Court of Appeals relied on statutory definitions in Revenue Regulations Nos. 2-86 and 11-86 and on prior jurisprudence, including Caltex (Phils.) Inc. v. Manila Port Service, to define “containers” and to reject the Commissioner’s broader construction.

Issue Presented

The dispositive issue posed by the petitioner was whether the sales tax paid by CENVOCO when it purchased containers and packaging materials for its milled products could be credited against the deficiency miller’s tax assessed under Section 168 of the old Tax Code, given the final proviso that the credit for taxes paid on raw materials or supplies used in the milling process shall not be allowed against the miller’s tax due.

Parties’ Contentions

The Commissioner maintained that the BIR properly refused to allow the credit and that there was no statutory provision permitting such a credit for taxes paid on containers and packaging materials. The Commissioner further argued that prior favorable administrative rulings should not be reversed where to do so would violate the rule on nonretroactivity of prejudicial rulings under Section 278 of the old Tax Code and that permitting the credit would, in effect, create an unwarranted exemption. CENVOCO countered that the final proviso of Section 168 expressly limited its exclusion to taxes on raw materials or supplies used in the milling process and that containers and packages were not raw materials by common, statutory and judicial definitions, and therefore the sales tax paid thereon should be credited against the miller’s tax.

Legal Basis and Reasoning

The Court applied rules of statutory construction, emphasizing that exceptions to a general rule are to be strictly construed and that words must be given their plain and ordinary meaning absent clear legislative intent to the contrary. The Court reviewed the text of Section 168, particularly the final proviso, and the regulatory definition in Revenue Regulations Nos. 2-86 and 11-86 that a raw material is an article which becomes a homogenous part of the manufactured article and cannot be identified in its original state. Applying that definition and ordinary meaning, the Court concluded that containers and packages were not raw materials used in the milling process because they were not fed into milling machinery nor intended to be converted into or to form part of the finished edible oil. The Court cited jurisprudence, including Caltex (Phils.) Inc. v. Manila Port Service, for the ordinary meaning of “package” and invoked established principles that tax statutes are construed strictissimi juris against the government. The Court further noted the specialized comp

Case Syllabus (G.R. No. 107135)

Parties and Procedural Posture

COMMISSIONER OF INTERNAL REVENUE filed a Petition for Review on Certiorari to the Supreme Court from the judgment of the Court of Appeals.
CENTRAL VEGETABLE OIL MANUFACTURING CO., INC. (CENVOCO) was the taxpayer respondent before the Court of Tax Appeals and the Court of Appeals.
THE COURT OF TAX APPEALS rendered the initial judgment in favor of CENVOCO by a decision dated December 3, 1990, which the Court of Appeals affirmed in toto.
The Supreme Court dismissed the petition and affirmed the decision of the Court of Appeals with no pronouncement as to costs.
The Supreme Court opinion recorded the concurrence of Romero (Chairman), Panganiban, and Gonzaga-Reyes, JJ., and the absence of Vitug, J., who was on official leave.

Key Factual Allegations

CENVOCO manufactured edible coconut oil and related products that were subject to the miller’s tax and also manufactured other goods subject to sales tax.
In 1986 CENVOCO purchased containers and packaging materials for its edible oil and paid the applicable sales tax thereon.
Respondent's Revenue Examiner issued Assessment Notice No. FAS-B-86-88-001661-001664 dated April 22, 1988 assessing a deficiency miller’s tax of PHP 1,575,514.70 against CENVOCO.
CENVOCO sought reconsideration by letters dated June 27, 1988 and September 28, 1988 asserting that sales tax paid on containers and packaging materials should be credited against the miller’s tax.
A November 17, 1988 letter from Deputy Commissioner Eufracio D. Santos denied the requested credit and reiterated the assessment.

Statutory Provision

The dispute turned on the last proviso of Section 168 of the then applicable National Internal Revenue Code which provided that credit for any sales, miller’s or excise taxes paid on raw materials or supplies used in the milling process shall not be allowed against the miller’s tax due.
The Court referenced Section 278 of the old Tax Code in relation to non-retroactivity of rulings of tax officials as discussed by the parties.
The Court considered Revenue Regulations Nos. 2-86 and 11-86 as they define "raw materials" for purposes of the Tax Code provisions at issue.

Issue Presented

The principal issue was whether the sales tax paid by CENVOCO on containers and packaging materials for its milled products could be credited against the assessed deficiency miller’s tax for the year 1986.

Contentions of the Parties

COMMISSIONER OF INTERNAL REVENUE contended that the proviso in Section 168 barred any credit for sales taxes paid on materials related to milling and that no statutory provision authorized the credit sought by CENVOCO.
CENVOCO contended that containers and packaging materials are not "raw materials used in the