Republic Flour Mills v. Revenue

J.B.L., J.:

Appeal by the Republic Flour Mills from the decision of the Court of Tax Appeals (in CTA Case No. 1151) on the sole question of whether or not in computing the manufacturer's sales tax due on the flour it manufactured and sold in 1959, wherein wheat grains imported tax-free in 1958 were utilized, the cost of said wheat grains is deductible. As stipulated by the parties and found by the court below, the facts of this case are briefly as follows: In 1957, the Republic Flour Mills, Inc., a domestic corporation engaged in the business of manufacturing flour, was granted tax-exemption privileges as a new and necessary industry pursuant to Republic Act 901,1 commencing on 28 January 1957 to continue as a diminishing exemption until 31 December 1962.2 In 1958, the corporation imported a quantity of wheat grains, part of which it was not able to mill and use in the business that year, so that by 1 January 1959 the corporation carried a surplus of P1,486,616.41 worth of wheat grains from the previous year's importation.

These surplus grains were finally utilized and manufactured into flour and sold in 1959. For the year 1959, the corporation paid manufacturer's sales tax on its produce in the sum of P37,275.55, in the computation of which the cost of the wheat left over from the 1968 importation was treated as a deductible item from the gross sales in 1959. On 28 March 1961, the Commissioner of Internal Revenue assessed the corporation of deficiency tax for 1959 in the total sum of P23,170.17.

The corporation requested a reinvestigation of the assessment, and when it was denied filed a petition for review in the Court of Tax Appeals (CTA Case No. 1151) to contest the assessment of advance sales tax on the wheat grains imported tax-free in 1958 and the disallowance of the deduction of the cost of said wheat grains from its gross sales of flour in 1959. Respondent Commissioner of Internal Revenue defended and maintained the assessment, on the ground that by 1959 the raw materials used by petitioner in its tax-exempt industry were already subject to payment of 10% tax thereon. During the hearing, the parties entered into a Partial Stipulation of Facts, the pertinent provisions of which are the following: 12.

That the legal issue is whether or not the cost of raw materials imported tax-free in the year 1958 which raw materials were utilized in the year 1959 for the manufacture of flour sold in 1959, is deductible from the gross sales in the year 1959; 13. If the legal question before this Honorable Court should be resolved in the affirmative, Petitioner's tax liability shall be P3,288.16 computed as follows: Net sales P21,011,818.17 Deduct: Cost of raw materials used for flour (including tax-free raw materials) 15,310,806.74