PHIL. ACETYLENE v.

CIR
November 15, 1967| Castro, J. | Tax Exemptions
Digester: Alexis Bea
SUMMARY: Philippine Acetylene Co. Inc. is engaged in the
manufacture and sale of oxygen and acetylene gases. It sold its
products to the National Power Corporation (Napocor), an agency
of the Philippine Government, and the Voice of America (VOA), an
agency of the United States Government. When the commissioner
assessed deficiency sales tax and surcharges against the company,
the company denied liability for the payment of tax on the ground
that both Napocor and VOA are exempt from taxes. The SC held
that petitioner is liable for the tax.
DOCTRINE: T he expansive construction of the tax exemption is
void; and the sales to the VOA are subject to the payment of
percentage taxes under Section 186 of the Tax Code. Therefore,
tax exemption is strictly construed and exemption will not be held
to conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention
FACTS:
Philippine Acetylene Co Inc is a corporation engaged in the
manufacture and sale of oxygen and acetylene gases.
During the period from June 2, 1953 to June 30, 1958, it made
various sales of its products to the National Power Corporation,
an agency of the Philippine Government, and to the Voice of
America an agency of the United States Government.
The sales to the NPC amounted to P145,866.70, while those to
the VOA amounted to P1,683, on account of which the
Commission of Internal Revenue assessed against, and
demanded from Philippine Acetylene Co Inc the payment of
P12,910.60 as deficiency sales tax and surcharge, pursuant to
Sec. 186 and Sec 183 of the NIRC which involves the payment
of percentage taxes.
o Sec. 186. Percentage tax on sales of other articles.
There shall be levied, assessed and collected once
only on every original sale, , intended to transfer
ownership of, or title to, a tax equivalent to seven
per centum of the gross selling price or gross value
in money of the articles so sold, bartered exchanged,
or transferred, such tax to be paid by the
manufacturer or producer: . . . .
Philippine Acetylene: It has no liability for the payment of the
tax on the ground that both NPC and VOA are exempt from
taxation. NPC enjoys a tax exemption by virtue of an act of

Congress and the immunity would be impaired by the

imposition of a tax on sales made to it because while the tax is
paid by the manufacturer or producer, the tax is ultimately
shifted by the latter to the former.
o It invokes in support of its position a 1954 opinion of
the Sec of Justice which ruled that NPC is exempt
from payment of all taxes "whether direct or
indirect."
CIR: Denied Philippine Acetylenes reconsideration of the
assessment. Philippine Acetylene is liable for the tax on sales
to both NPC and VOA, pursuant to the NIRC.
CTA: Denied. The tax on the sale of articles or goods in
section 186 of the Code is a tax on the manufacturer and
not on the buyer with the result that Philippine Acetylene,
the manufacturer or producer of oxygen and acetylene
gases sold to NPC, cannot claim exemption from the
payment of sales tax simply because its buyer the NPC
is exempt from the payment of all taxes. With respect to the
sales made to the VOA, the goods purchased by the
American Government or its agencies from manufacturers
or producers are exempt from the payment of the sales tax
under the agreement between the Government of the
Philippines and that of the United States, provided the
purchases are supported by certificates of exemption, and
since purchases amounting to only P558, out of a total of
P1,683, were not covered by certificates of exemption, only
the sales in the sum of P558 were subject to the payment of
tax. Accordingly, the assessment was revised and the
liability was reduced from P12,910.60, as assessed by the
commission, to P12,812.16. (See Notes)

RULING: CTA Decision modified. Ordered petitioner to pay CIR in

the amount of P12,910.60 as sales tax and surcharge
Whether or not petitioner is exempt from paying tax on
sales it made to NPC and VOA because both are exempt
from taxationNO
The tax imposed by section 186 of the National Internal
Revenue Code is a tax on the manufacturer or producer and
not a tax on the purchaser except probably in a very remote
and inconsequential sense.
Accordingly its levy on the sales made to tax-exempt
entities like the NPC is permissible. The sales to the VOA
are subject to the payment of percentage taxes under
section 186 of the Code.

Only sales made "for exclusive use in the construction,

maintenance, operation or defense of the bases," in a word,
only sales to the quartermaster, are exempt under article V
from taxation. Sales of goods to any other party even if it be
an agency of the United States, such as the VOA, or even to
the quartermaster but for a different purpose, are not free
from the payment of the tax. Philippine Acetylene is thus
liable for P12,910.60
The pertinent provisions of the Agreement read:
o ARTICLE V. Exemption from Customs and Other
Duties. No import, excise, consumption or other tax,
duty or impost shall be charged on material,
equipment, supplies or goods, including food stores
and clothing, for exclusive use in the construction,
maintenance, operation or defense of the bases,
consigned to, or destined for, the United States
authorities and certified by them to be for such
purposes.
o ARTICLE XVIII.Sales and Services Within the
Bases. It is mutually agreed that the United States
Shall have the right to establish on bases, free of all
licenses; fees; sales, excise or other taxes, or
imposts; Government agencies, including
concessions, such as sales commissaries and post
exchanges, messes and social clubs, for the
exclusive use of the United States military forces
and authorized civilian personnel and their families.
The merchandise or services sold or dispensed by
such agencies shall be free of all taxes, duties and
inspection by the Philippine authorities.
Thus only sales made "for exclusive use in the construction,
maintenance, operation or defense of the bases," in a word,

only sales to the quartermaster, are exempt under article V

from taxation. Sales of goods to any other party even if it be
an agency of the United States, such as the VOA, or even to
the quartermaster but for a different purpose, are not free
from the payment of the tax.
On the other hand, article XVIII exempts from the payment
of the tax sales made within the base by (not sales to)
commissaries and the like in recognition of the principle
that a sales tax is a tax on the seller and not on the
purchaser.
It is a familiar learning in the American law of taxation that
tax exemption must be strictly construed and that the
exemption will not be held to be conferred unless the terms
under which it is granted clearly and distinctly show that
such was the intention of the parties.17 Hence, in so far as
the circular of the Bureau of Internal Revenue would give
the tax exemptions in the Agreement an expansive
construction it is void.
We hold, therefore, that sales to the VOA are subject to the
payment of percentage taxes under section 186 of the
Code. The petitioner is thus liable for P12,910.60

NOTES:
Sales to NPC
P145,866.70
Sales to VOA
P 558.00
Total sales subject to tax
P146,424.70
7% sales tax due thereon
P 10,249.73
Add 25% surcharge
P 2,562.41
Total amount due and collectible P 12,812.16