American Rubber Company v. Revenue)

ESGUERRA, J.:

In Case No. 164, the Court of Tax Appeals in its decision dated July 31, 1965, held the petitioner, American Rubber Company (now American Rubber Corporation), liable for the payment of the sum of P47,374.38, representing deficiency sales tax and surcharge on its sales of lumber during the years 1950, 1951, 1952 and 1953. Hence this appeal. Petitioner, a domestic corporation organized under the laws of the Philippines, is engaged in the business of producing logs and lumber for sale.

It acquired its logs from its forest concession in Basilan City duly licensed by the Bureau of Forestry. (Exhibits "E-3", "E-4", t.s.n. pp. 15, 16, 95-96 Vol.

1 CTA rec.) It likewise cut timber in the forest covered by the UP Land Grant which was operated by the Santa Clara Lumber Co., Inc., hereinafter referred to as SCLCO, under Timber License Agreement No. 1 executed between the UP and SCLCO wherein the latter had an "exclusive license to cut, collect and remove timber of all groups from the Grant, subject to certain conditions, including payment by SCLCO to the UP of the corresponding forest charges on all timber cut and removed from the area in accordance with Commonwealth Act No. 466 (National Internal Revenue Code) and such other charges as may be required by other laws." (p. 7 Petitioner's Brief) Apart from his, petitioner hereinafter referred to as ARCO was allowed to cut timber and operated a portion of the southwestern corner of SCLCO's concession in Basilan covered by Timber License No. 1425-V, which portion was applied for by ARCO and finally included in its Ordinary Timber License No. 2175, renewed May 31, 1947, and extended on July 6, 1948, to cover period ending June 30, 1952.

(p. 10 Petitioner's Brief) The operation of the aforesaid areas was embodied in a "Letter Agreement" executed between ARCO and SCLCO on January 13, 1948, which agreement is quoted hereunder: American Rubber Company Isabela de Basilan, Zamboanga Dear Sirs: In connection with your request which was approved by the Board of Directors of the Company in its last meeting, you are allowed to cut timber in the Southwestern corner of our Concession at Isabela de Basilan with an area of not over 400 hectares under the following terms and conditions: 1.

In the event that you will stop the operation of your mill or sell and or transfer the ownership of your present lumber business, the above portion of our Concession will be reverted to us; 2. The Sta. Clara Lumber Co., will be allowed the free use of your private roads; 3.

The Sta. Clara Lumber Co., shall continue to take charge of the disposal of your production that may be sent to Manila in accordance with present arrangements. The Sta.

Clara Lumber Co., will take up this matter with the proper authorities for the proper execution of whatever requirements that may be needed pursuant to its agreement. If the above terms and conditions are agreeable to you, please sign and indicate your conformity on the space provided for below. Very truly yours, Sta.

Clara Lumber Co., Inc. By T. M. Diaz General Manager Agreed: American Rubber Company By J.W. Strong From May, 1949, through February, 1952, Mr. Denoga, Administrator of the UP Land Grant, prepared monthly scale reports of timber cut by petitioner from the UP Land Grant, pursuant to which the UP billed forest charges against the SCLCO which paid the bills, later reimbursed by ARCO. (p. 561 t.s.n.

Vol. II CTA rec.) As testified to by Mr. Roque de Leon, "No. 2 man" of American Rubber Co. (ARCO) (t.s.n.

400-411 Vol.

II CTA rec.), all the logs of petitioner in the lumber business were disposed of in the following manner: Timber were cut down from the UP Land Grant and/or the forest concession of petitioner, then the same were hauled in petitioner's trucks to its sawmills where they are sawn into lumber. The lumber were then loaded in petitioner's truck and hauled to petitioner's dock at Isabela, Basilan, where Jose Rubia, petitioner's checker, checked the same and prepared a summary or recapitulation from the tally sheets. Petitioner retained a copy of the recapitulation and forwarded four copies to SCLCO's office at Isabela, Basilan.

The tally sheets and the corresponding recapitulations were marked Exhibits "Y", "Y-11", to "Y-152a". The lumber pieces belonging to petitioner which were deposited at petitioner's dock at Isabela, Basilan, were sold thru contracts executed by SCLCO with different buyers in Manila and the contracts recited among others that said lumber was "the timber of American Rubber Company". (Exhs.

"F-187", "G-137", "10-H24-b") SCLCO issued in behalf of petitioner sales invoices to said buyers. Petitioner reimbursed SCLCO for transportation, handling and other expenses advanced by the latter. After SCLCO had shipped to Manila buyers the lumber marked "ARCO", bills of lading were issued in favor of SCLCO as shipper and consignee.

In some bills of lading, petitioner appears as shipper and SCLCO as consignee. (t.s.n. pp. 265-283) SCLCO insured the lumber against marine risks of loss or damage occurring while in transit from petitioner's dock at Basilan to Manila.

The premiums were allegedly paid by it although it is the contention of respondent that these premium payments were reimbursed by ARCO. After delivery of the lumber sold by SCLCO in behalf of petitioner, SCLCO sent to petitioner's Manila office liquidation statements of said lumber shipped to Manila (t.s.n. pp. 450-451) which papers consisted of statements of lumber costs, bank deposit slips, bills of lading and lumber sales contracts.

(t.s.n. 452458) SCLCO in making the sales, charged and collected a 5% commission which was deducted from the gross sales. Likewise it deducted freight, unloading and trucking charges from the proceeds of sale and the balance was deposited by SCLCO with petitioner's bank account - at the National City Bank of New York.

SCLCO provided itself with the privilege tax receipt and paid percentage taxes as commercial brokers during the period in question. (p. 331 CTA rec.) On or about August 27, 1953, General Enterprises, Inc., a local business firm with offices at Basilan City, entered into a contract with petitioner wherein it appears that the General Enterprises Inc. agreed to ship to Japan, SS "Tamon Maru"

under B/L No. 1 voyage No. 6, 400,000 bd. ft. of round apitong logs for which General Enterprises paid the sum of P32,000.00 to petitioner.

The latter did not declare this sale nor did it pay the sales tax therefor. (p. 37 Petitioner's Brief) Jose Cabrera, agent of the Bureau of Internal Revenue, conducted the investigation on petitioner company's business transactions for the years 1949 to 1953, and as a result of this investigation an assessment was recommended.

On February 11, 1955, petitioner was assessed for alleged deficiency sales tax and surcharge in the sum of P66,022.77, itemized as follows: Gross sales for 1949 - P941,218.32 5% tax due P47,060.92 Less: Taxes paid 36,509.54