Case Summary (G.R. No. 196094)
Parties and Main Controversy
Petitioner is a manufacturing corporation that had been granted a tax exemption certificate for the manufacture of certain machines under Republic Act No. 35 and subsequently sought reinstatement/extension under Republic Act No. 901. The central legal question presented in both petitions was whether petitioner’s manufacture and sale of finished articles (e.g., steel chairs, jeepney parts) and performance of job orders fall within the scope of the tax-exempt activities authorized by the exemption certificate and the relevant statutes.
Key Dates and Procedural Posture
- Original exemption under R.A. 35 expired May 30, 1951.
- Petitioner applied for reinstatement; R.A. 901 approved July 7, 1954 (with requested reinstatement to commence June 20, 1953).
- Two administrative assessments arose: one relating to 1953–1954 (assessment dated November 29, 1955) and another covering years 1957–1960 (assessment dated October 6, 1961).
- Two petitions for review to the Supreme Court challenge Court of Tax Appeals decisions: G.R. No. L-22805 (relating to C.T.A. Case No. 1036) and G.R. No. L-27858. The Supreme Court affirmed the CTA decisions.
Applicable Law and Legal Principles
- Statutes directly invoked: Republic Act No. 35 (tax exemption for new and necessary industries) and Republic Act No. 901 (amending and extending RA 35).
- Relevant Tax Code provisions cited by revenue examiners and in assessments: Sections 182, 183, 185 (including subsection (c)), 186, 191, and Section 106 (sales/percentage tax provisions and registration/bookkeeping obligations).
- Procedural provision referenced for appeals: Section 11 of Republic Act No. 1125 (prescribes a 30-day period to perfect appeal to the Court of Tax Appeals).
- Doctrinal principles applied by the Court: tax exemptions are to be strictly construed and disfavored; a taxpayer claiming exemption bears the burden of establishing entitlement by clear statutory grant; compromise penalties cannot be imposed or collected without the taxpayer’s agreement (cited authorities set out in the record).
Facts — 1953–1954 Investigation and Assessment
Revenue Examiner Alfonso B. Camillo’s September 30, 1955 report found that during 1953–1954 petitioner engaged in manufacturing diverse finished articles (auto spare parts, fluorescent lamp shades, rice threshers, post clips, radio screws, washers, electric irons, kerosene stoves, etc.), performed electroplating, and repaired machines. The examiner concluded petitioner failed to obtain required privilege tax receipts (Sec. 182) and did not pay sales and percentage taxes as required by the Tax Code (Sections 183, 185, 186, 191). Based on these findings, the Commissioner assessed P69,699.56 (including a 25% surcharge) on November 29, 1955, itemized as sales and percentage taxes P55,719.65; 25% surcharge P13,929.91; and fixed taxes totaling P50.00. The BIR suggested an extrajudicial compromise penalty of P3,300, which petitioner did not accept.
Facts — 1957–1960 Investigation and Assessment
A subsequent investigation beginning August 10, 1960 produced Revenue Examiner Pedro Cabigao’s December 7, 1960 report. Cabigao found petitioner manufactured and sold steel chairs without paying the 30% sales tax under Section 185(c); accepted job orders without paying the 3% gross receipts tax under Section 191; manufactured and sold other articles subject to a 7% sales tax under Section 106 that were not covered by the exemption; failed to register books of account and sales invoices as required by bookkeeping regulations; failed to record Residence Certificate numbers on invoices for purchases of P50.00 or more; and failed to produce books and records when required. The Commissioner assessed P25,080.91 (deficiency taxes plus 25% surcharge for 1957–June 30, 1960) on October 6, 1961, and suggested a total compromise penalty of P5,020 (which the petitioner did not accept).
Compromise Penalty Issue
The Court of Tax Appeals and the Supreme Court applied settled doctrine that a compromise penalty cannot be imposed or collected without the taxpayer’s agreement. Because petitioner did not agree to the suggested compromise amounts in either case, those compromise sums were not enforceable. The Supreme Court accepted CTA’s application of precedent on this point (citing cases such as Collector of Internal Revenue v. University of Santo Tomas, The Collector v. Bautista, and Philippine International Fair, Inc. v. Collector of Internal Revenue).
Statutory Definitions and Legislative Purpose
Republic Act No. 901 (as an amendment and extension of RA 35) contains definitions central to entitlement: a “new industry” is one not operating on a commercial scale prior to Jan. 1, 1945, with approval of exemptions in sequence until local demand is met; a “necessary” industry must contribute to a stable and balanced national economy, operate on a commercial scale with up-to-date practices to supply the public in adequate quantity and price, and limit imported raw materials to no more than 60% of manufacturing cost, with a preference for domestic materials. The legislative purpose expressed in these provisions is to incentivize the establishment of industries that increase domestic production of scarce goods, thereby stabilizing and balancing the national economy.
Content of the Tax Exemption Certificate
The Secretary of Finance issued a Certificate of Tax Exemption on July 7, 1954, to Wonder Mechanical Engineering Corporation expressly in respect of “the manufacture of machines for making cigarette paper, pails, lead washers, nails, rivets, candies, etc.” The certificate specified the period of exemption (until December 31, 1958, with a diminishing exemption until June 20, 1959, and a separate termination schedule for income tax). The certificate’s language confined the exemption to the manufacture of machines for producing specified products.
Administrative History Demonstrating the Intended Scope
Administrative documents preceding the certificate—specifically a March 3, 1949 memorandum from the Secretary of Finance and a May 30, 1949 letter from the Executive Secretary—indicated the grant was intended for petitioner’s manufacture of machines (examples given: a medicine tablet-wrapping machine, a loudspeaker, and a lompia-wrapping machine). These executive-branch acts and recommendations were relied upon by the Court to demonstrate the State’s intention to confer an exemption limited to the manufacture of machinery, not to the manufacture or sale of fini
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Procedural Posture
- Two petitions for review were filed to the Supreme Court from decisions of the Court of Tax Appeals in G.R. Nos. L-22805 and L-27858.
- G.R. No. L-22805 relates to C.T.A. Case No. 1036, in which the Court of Tax Appeals dismissed petitioner's appeal for lack of jurisdiction because it was filed beyond the 30-day period prescribed in Section 11 of Republic Act No. 1125, and affirmed the Commissioner of Internal Revenue's assessment totaling P69,699.56 for years 1953-54, inclusive of the 25% surcharge.
- G.R. No. L-27858 involves a decision ordering Wonder Mechanical Engineering Corporation to pay P25,080.91 as deficiency sales and percentage taxes for the period from 1957 to June 30, 1960, inclusive of the 25% surcharge, plus costs.
- The common principal issue in both cases before the Court of Tax Appeals, and presented on review, was whether the manufacture and sale of steel chairs, jeepney parts and other articles which are not machines for making other products, and job orders done by petitioner, fall within the tax exemption granted to petitioner under Republic Act Nos. 35 and 901.
Parties and Representation
- Petitioner: Wonder Mechanical Engineering Corporation, represented by Mr. Lucio Quijano, President and General Manager.
- Respondents: The Honorable Court of Tax Appeals and the Bureau of Internal Revenue, represented by the Commissioner of Internal Revenue.
- Decision authored by Justice Esguerra; Chief Justice Makalintal and Justices Castro, Makasiar, and Martin concurred.
Facts — Corporate Activity and Prior Exemption
- Petitioner is a corporation that had previously been granted tax exemption privileges under Republic Act No. 35 in respect to the "manufacture of machines for making cigarette paper, pails, lead washers, rivets, nails, candies, chairs, etc."
- The initial tax exemption under R.A. 35 expired on May 30, 1951.
- On September 14, 1953, petitioner applied to the Secretary of Finance for reinstatement of the exemption privilege under the provisions of R.A. 901, with reinstatement to commence on June 20, 1953, the date R.A. 901 took effect.
- A Certificate of Tax Exemption was issued to petitioner by the Secretary of Finance on July 7, 1954, stating entitlement to tax exemption "in respect to the manufacture of machines for making cigarette paper, pails, lead washers, nails, rivets, candies, etc." until December 31, 1958, and thereafter to a diminishing exemption until June 20, 1959, with income tax exemption terminating on June 20, 1955.
Revenue Examinations and Findings — G.R. No. L-22805 (1953–1954)
- In 1955 the Commissioner caused an investigation of petitioner’s tax liabilities.
- Revenue Examiner Alfonso B. Camillo reported on September 30, 1955, that during 1953 and 1954 petitioner engaged in manufacturing various articles and activities, specifically: auto spare parts, fluorescent lamp shades, rice threshers, post clips, radio screws, washers, electric irons, kerosene stoves, electroplating, repair of machines, and other articles.
- The examiner found petitioner did not obtain proper privilege tax receipts as required by Section 182 of the Tax Code and failed to pay sales tax on gross sales of manufactured articles and the percentage tax on gross receipts of electroplating and repair business pursuant to Sections 183, 185, 186 and 191 of the Tax Code.
- Based on these findings, on November 29, 1955, the Commissioner assessed P69,699.56 against petitioner, inclusive of the 25% surcharge, broken down as follows:
- Sales and percentage taxes for 1953 and 1954: P55,719.65
- 25% surcharge: P13,929.91
- C-14 fixed tax (1953–1954): P20.00
- C-4 (27) fixed tax (1954): P10.00
- C-4 (37) fixed tax (1953–1954): P20.00
- Total: P69,699.56
- The Bureau suggested P3,300.00 as penalties in extrajudicial compromise for violations of Sections 182, 183, 185, 186, 191 of the Tax Code and Bookkeeping Regulations, but it does not appear petitioner accepted these compromise amounts.
Revenue Examinations and Findings — G.R. No. L-27858 (1957–1960)
- On August 10, 1960, the Commissioner caused another investigation to ascertain petitioner's tax liability for later years.
- Revenue Examiner Pedro Cabigao reported on December 7, 1960, that petitioner had:
- Manufactured and sold steel chairs without paying the 30% sales tax imposed by Section 185(c) of the Tax Code.
- Accepted job orders without paying the 3% tax on gross receipts imposed by Section 191 of the Tax Code.
- Manufactured and sold other articles subject to 7% sales tax under Section 106 of the Tax Code but not covered by the tax exemption privilege.
- Failed to register books of accounts and sales invoices as required by the Bookkeeping Regulations.
- Failed to indicate in sales invoices the Residence Certificate number of customers who purchased articles worth P50.00 or over, in violation of the Bookkeeping Regulation.
- Failed to produce its books of account and business records for inspection and examination when required, also in violation of Bookkeeping Re