Procter and Gamble Philippine Manufacturing Corporation v. Commissioner of Internal Revenue
NEW DOCTRINEFacts
The Antecedents: Petitioner Procter and Gamble Philippine Manufacturing Corporation (P&G) manufactured lard, soap, and margarine, using coconut oil, which it also manufactured. P&G paid the 7% sales tax on its manufactured products under Section 186 of the National Internal Revenue Code (NIRC) and the 2% miller's tax on its coconut oil under Section 189 of the NIRC. In computing the sales tax on its manufactured products, P&G deducted from the gross selling price not only the market value of the coconut oil used but also the 2% miller's tax it had paid on said oil. Procedural History: The Commissioner of Internal Revenue (CIR) assessed P&G for deficiency sales tax, surcharge, and interest, contending that the 2% miller's tax paid on the coconut oil was not deductible from the gross selling price of the manufactured products. The Court of Tax Appeals (CTA) affirmed the CIR's resolution, holding that only the market value of the coconut oil, not its total cost including the miller's tax, was deductible. The CTA reasoned that the cost to a manufacturer differs from the cost to a purchaser, and allowing the deduction of the miller's tax would result in a double advantage. The Petition: P&G filed a petition for review, arguing that the 'total cost' of raw materials under Sections 186 and 189 of the NIRC includes all amounts paid to acquire and use them, such as the miller's tax. P&G also contended that disallowing the deduction discriminates against integrated industries and that it did not claim the miller's tax as a deduction from its gross income for income tax purposes.
Issue(s)
Whether the 2% miller's tax paid on coconut oil is deductible from the gross selling price of lard, soap, and margarine manufactured by petitioner, as part of the 'total cost' of the raw material under Sections 186 and 189 of the National Internal Revenue Code. Whether the Court of Tax Appeals erred in distinguishing between the 'total cost' to a manufacturer and the 'market value' of raw materials for purposes of sales tax deduction.
Ruling
The petition for review is meritorious. The decision of the Court of Tax Appeals and the resolution of the Commissioner of Internal Revenue assessing deficiency sales tax and surcharges against the petitioner are reversed and set aside.
Ratio Decidendi
On the deductibility of the 2% miller's tax as part of 'total cost': The Supreme Court held that the 'total cost' of coconut oil deductible from the gross selling price of manufactured articles under Sections 186 and 189 of the National Internal Revenue Code includes the 2% miller's tax paid thereon. The Court reasoned that the miller's tax is imposed on the coconut oil at the time it leaves the factory or mill warehouse, making its payment a necessary prerequisite for the withdrawal and use of the oil as a raw material in the manufacture of other products like lard, soap, and margarine. Therefore, this tax is an integral part of the 'total cost' incurred by the manufacturer to be able to use the raw material. The Court cited Collector vs. Central Azucarera de Tarlac (G.R. No. L-11760, July 31, 1958) to support the principle that taxes paid are part of the cost of goods. To deny this deduction would penalize integrated industries and run counter to the national policy of encouraging self-sufficiency. On the distinction between 'total cost' and 'market value': The Court found the distinction made by the Court of Tax Appeals between the 'total cost' to a manufacturer and the 'market value' of raw materials to be unwarranted and unreasonable in this context. The Court clarified that while 'market value' is generally the selling price, 'total cost' encompasses all expenses and charges incurred to make the raw material available for use. The Court emphasized that the law explicitly uses the term 'total cost,' which is broader than 'market value,' and logically includes the mandatory miller's tax that must be paid before the raw material can be withdrawn and utilized. The Court rejected the CTA's reasoning that allowing the deduction would grant a 'double advantage,' stating that such an advantage, if any, would be a reward for industrial integration.
Main Doctrine
The 'total cost' of raw materials deductible from the gross selling price of manufactured articles under Section 186 and Section 189 of the National Internal Revenue Code includes the miller's tax paid on such raw materials, as the payment of this tax is a necessary prerequisite for the withdrawal and use of the raw materials in further manufacturing.