Industrial Textiles Manufacturing v. Commissioner of Internal Revenue
REITERATIONFacts
The Antecedents: Industrial Textiles Manufacturing Company of the Philippines, Inc. (ITEMCOP), a new and necessary industry, enjoyed full tax exemption in 1957 and 1958. In 1959, its tax exemption was reduced to 90%, making it partially subject to sales tax on its manufactured jute bags. For 1959, ITEMCOP reported gross sales of P10,395,208.25 and deducted P4,764,391.44 for raw materials used. This deduction included P939,687.31 for raw materials imported tax-free in 1958 and P3,824,704.13 for raw materials imported or bought locally in 1959. Procedural History: The Bureau of Internal Revenue (BIR) disallowed the deduction of the P939,687.31 (item 1) on the ground that Section 186-A of the Tax Code only allowed deduction of tax-free raw materials locally bought from a new and necessary industry. The BIR also adjusted the cost of item (2) to P3,524,240.18. The Court of Tax Appeals (CTA) sustained the BIR on item (1) but upheld ITEMCOP on item (2). The Petition: Both ITEMCOP and the Commissioner of Internal Revenue appealed the CTA's decision.
Issue(s)
Whether the cost of raw materials imported tax-free in 1958 and used in the manufacture of jute bags sold in 1959 is deductible from ITEMCOP's 1959 gross sales for sales tax purposes. Whether the CTA's finding on the actual cost of raw materials imported in 1959 and used in the manufacture of jute bags sold in the same year is supported by substantial evidence.
Ruling
In G.R. No. L-27718, the appealed decision is modified by allowing the deduction from petitioner's 1959 gross sales of the cost of raw materials imported by it tax-free in 1958 and used in the manufacture of jute bags which were sold in 1959. In G.R. No. L-27768, the petition is dismissed.
Ratio Decidendi
On the deductibility of tax-free imported raw materials: The Court held that the cost of raw materials imported tax-free in 1958 by ITEMCOP and used by it in the manufacture of jute bags sold in 1959 is deductible from its 1959 gross sales for sales tax purposes. This ruling followed the precedent set in Republic Flour Mills, Inc. vs. Commissioner of Internal Revenue, 31 SCRA 520. The Court clarified that Section 186-A of the Tax Code, as amended by Republic Act No. 2025, does not require that the tax-free raw materials be locally bought from a tax-exempt industry; it only requires that a tax-free product be utilized in the manufacture or production of any article, and its value shall be deducted in determining the value of the finished article. Therefore, the origin of the tax-free raw material (imported vs. locally bought) is immaterial under the cited provision. On the factual finding regarding the cost of 1959 raw materials: The Court affirmed that the issue of the actual cost of raw materials imported in 1959 by ITEMCOP and used in the manufacture of jute bags sold in the same year is a question of fact. Since the finding of the Court of Tax Appeals on this matter was not shown to be unsupported by substantial evidence, it must be left undisturbed. Consequently, the Commissioner's petition challenging this factual finding was dismissed.
Main Doctrine
The cost of tax-free raw materials imported in a prior year and used in the manufacture of goods sold in a subsequent year is deductible from the gross sales of that subsequent year for sales tax purposes, provided Section 186-A of the Tax Code is applicable. Factual findings of the Court of Tax Appeals, when supported by substantial evidence, are binding on the Supreme Court.