PEOPLE vs.

SANDIGANBAYAN (Fourth Division)

and BIENVENIDO A. TAN JR.

G.R. No. 152532. August 16, 2005

Tax pyramiding has since 1922 been rejected by this Court, the
legislature, and our tax authorities. The intent behind the law is clearly to
obviate a tax imposed upon another tax. Having shown the
appropriateness of deducting the ad valorem tax from the tax base upon
which it is computed, private respondent has shown prudence in exercising
his power under Section 204(2) of the NIRC of 1977 to abate an unjust,
excessively assessed, and unreasonable tax; and to accept the offer of
₱10 million if only to avoid protracted and costly litigation

FACTS:

Pursuant to Letter of Authority No. ATD-035-STO dated January 2,

1986 and Memorandum of Authority dated March 3, 1986, an investigation
was conducted by BIR examiners on the ad valorem and specific tax
liabilities of SMC covering the period from January 1, 1985 to March 31,
1986. The result of the investigation showed that SMC has a deficiency on
specific and ad valorem taxes totaling ₱342,616,217.88. (Specific Tax –
P33,817,613.21; Ad Valorem – P308, 798,604.67)
The BIR sent a letter dated July 13, 1987 to SMC demanding the
payment of its deficiency tax. Apparently, SMC protested the assessment
on the ground that: 1) the alleged specific tax deficiency was already paid
when the BIR approved SMC’s request that its excess ad valorem
payments be applied to its specific tax balance; and 2) that the computation
of the ad valorem tax deficiency was erroneous since the BIR examiners
disallowed the deduction of the price differential (cost of freight from
brewery to warehouse) and ad valorem tax.
The protest was denied by the BIR thru a letter dated October 8,
1987 signed by accused Commissioner Bienvenido Tan, Jr., but the
original assessment of ₱342,616,217.88 was reduced to ₱302,051,048.93
due to the crediting of the taxpayer’s excess ad valorem tax deposit of
₱21,805,409.10 with a reiteration of the payment of the assessed specific
and ad valorem tax as reduced.
The accused referred the matter to Assistant BIR Commissioner
Jaime M. Maza, Legal Service Division and thereafter different BIR officials
also reviewed the case of SMC and rendered varying legal opinions on the
issue
"On the part of Alicia P. Clemeno, Chief, Legislative Ruling and
Research Division, she recommended the reduction of SMC’s tax liability,
first to ₱21,856,985.29, and later to ₱22,000,000.00. Balbino E. Gatdula,
Jr., Assistant Revenue Service Chief, Legal Service, supported the demand
for ad valorem tax deficiency from SMC.
In a letter dated August 31, 1988, SMC, thru a certain Avendano
offered the amount of ₱10,000,000.00 for the settlement of the
assessment. This was concurred in by Juanito Urbi, Chief, Prosecutor
Division, BIR in a Memorandum dated December 20, 1988. Jaime Maza,
Assistant Commissioner, Legal Service, BIR, also gave his concurrence to
the recommendation that the offer of SMC for ₱10,000,000.00 in
compromise settlement be accepted. The recommendation was approved
by Bienvenido Tan; and accordingly, in a letter dated December 20, 1988,
SMC was informed that its offer to compromise was accepted.
Former BIR Commissioner Bienvenido A. Tan Jr. was charged with
"having willfully, unlawfully and criminally caused undue injury to the
government by effecting a compromise of the tax liabilities" of SMC
amounting to ₱302,051,048.93 for only ₱10,000,000, a "compromise that is
grossly disadvantageous to the government.
The Sandiganbayan acquitted herein private respondent ruling
among others that: 1) the abatement of SMC’s ad valorem taxes is proper.
The tax base for computing them should not include the ad valorem tax
itself and the price differential.
Executive Order No. 273 is not misplaced, because that law simply
affirms general principles of taxation as well as BIR’s longstanding practice
and policy not to impose a tax on a tax. Moreover, nothing precludes
private respondent from applying EO 273 on an assessment made prior to
its effectivity, because that law was merely intended to formalize such long-
standing practice and policy; and 2) after inquiring into the discretionary
prerogative of private respondent to compromise, the SB found no reason
to conclude that he had acted contrary to law or been impelled by any
motive other than honest good faith.
Thus, the compromise he had entered into regarding SMC’s tax did
not result in any injury to the government. No genuine compromise is
impeccable, since the parties to it must perforce give up something in
exchange for something else. No basis existed to hold him liable for
violation of Section 3(e) of RA 3019.
ISSUE:
Whether or not the respondent court acted with grave abuse of
discretion amounting to lack or excess of jurisdiction when, in upholding
private respondent’s act in accepting SMC’s offer of compromise of
₱10,000,000.00 for its tax liability of ₱302,051,048.93, it disregarded
Sections 124 and 228 of the NIRC.
RULING: NO
The Sandiganbayan did not gravely abuse its discretion when it
upheld private respondent’s acceptance of SMC’s compromise offer of
₱10,000,000.00
In computing its ad valorem tax liabilities for the taxable period
involved in the present case, SMC deducted from its brewer’s gross selling
price the specific tax, price differential, and ad valorem tax. The BIR
allowed the deduction of the specific tax, but not the deduction of the price
differential and ad valorem tax, thus increasing the tax base and
consequently the ad valorem tax liabilities of SMC for the said period.
Prior to and during the taxable period, several changes were made in
the NIRC of 1977, particularly its provisions pertaining to fermented liquor.
We must therefore trace the NIRC’s pertinent history to be able to rule
properly on the validity of SMC’s deduction of both the price differential and
the ad valorem tax from the brewer’s gross selling price.
Section 147(A) of the NIRC, as amended by PD 1959 in 1984,
provides for the collection of a specific tax on each liter of the volume
capacity of fermented liquor. In addition to the provision on the specific tax,
the first paragraph of its Section 147(B) provides for the levying,
assessment and collection of an ad valorem tax. The latter tax is equivalent
to a certain percentage of the brewer’s gross selling price, net of the
specific tax, of the product to be removed from the brewery or other place
of manufacture. The ad valorem tax shall be paid by the brewer at the
same time as the specific tax.
Added in 1984 were provisions of Section 186-A governing the
determination of the gross selling price of cigarettes, as well as the
administrative requirements and penalties imposable. Such provisions shall
apply to the determination of the gross selling price of fermented liquor.
Basically, this means that the amount of tax due on the fermented liquor
shall be determined by the price at which it is sold either wholesale in
the factory of SMC or directly to the public through its sales agents. If
the fermented liquor is sold or allowed to be sold wholesale by SMC in
another establishment which it owns, the wholesale price in that
establishment shall determine the tax applicable to the fermented liquor
sold there.
When the price is less than the cost of manufacture plus all expenses
incurred, until the fermented liquor is finally sold by SMC, such cost plus
expenses shall be the basis for determining the amount of tax to be
collected.
In 1986, PD 1994 amended the NIRC of 1977 by renumbering,
among others, Section 147 as Section 124.In the new Section 124, the
provisions on the specific and ad valorem taxes imposed on fermented
liquors remained substantially the same, except for the tax rates.
On July 1, 1986, Section 4 of EO 22 amended said Section 124 by
essentially providing that an ad valorem tax equivalent to a certain
percentage of the brewer’s wholesale selling price -- this time excluding the
ad valorem tax -- shall be levied, assessed and collected on fermented
liquors. It was only in 1988 that EO 273 renumbered Section 124 as
Section 140, and thereby amended it further to exclude also from such
wholesale price the value-added tax already imposed at the time upon the
same articles.
Price Differential Deduction
Section 110 of the NIRC of 1977, as amended in 1986 by PD 1994,
explicitly provides that the excise taxes on domestic products shall be paid
by the manufacturer or producer before the removal of those products from
the place of production. "It does not matter to what use the articles subject
to tax is put"; the excise taxes are still due, even though the articles are
removed merely for storage in some other place and are not actually sold
or consumed. The intent of the law is reiterated in several implementing
regulations. This means, that the price that should be used as the tax base
for computing the ad valorem tax on fermented liquor is the price at the
brewery. After all, excise taxes are taxes on property, not on the sale of the
property.
Verily, the price differential cannot be ascertained at the time the
fermented liquor is removed from the brewery, because such
ascertainment will involve amounts that cannot be determined with
certainty in advance, and that vary from one commercial outlet to another.
The price differential, according to SMC, represents the cost of discounts,
promotions, rebates, and transportation. To require the inclusion of the
price differential in, not its deduction from, the tax base for purposes of
computing the ad valorem tax would certainly lead to the impossible
situation of computing for such tax, because the price differential itself
cannot be determined unless the fermented liquor is actually sold.
Hence, no ad valorem tax can ever be paid before the removal of the
fermented liquor from the place of production. This outcome cannot be
countenanced, for it would be contrary to what the law mandates --
payment before removal. It follows that the tax base to be used should be
net of the price differential. In other words, the gross selling price should
be that which is charged at the brewery prior to the removal of the
fermented liquor.
Ad Valorem Tax Deduction
The taxable period covered in this case is January 1, 1985 to March
31, 1986. Prior to the amendment of the NIRC of 1977 by EO 22 on July 1,
1986, the ad valorem tax was not excluded from the brewer’s wholesale
price. Does this mean that such tax cannot be deducted? The answer is no.
 A tax should not be imposed upon another tax. This is tax
pyramiding, which has no basis either in fact or in law.
Private respondent has shown by mathematical analysis that the
inclusion of the ad valorem tax in the tax base would only yield a circuitous
manner of computation that will never end in just one ad valorem tax figure
properly chargeable against a taxpayer.
Equally important, tax pyramiding has since 1922 been rejected by
this Court, the legislature, and our tax authorities. The intent behind the law
is clearly to obviate a tax imposed upon another tax. Ratio legis est anima
legis. The reason for the law is its spirit.
For instance, Regulations No. 27, promulgated March 1, 1923,
already excludes the specific tax on cigars and cigarettes from the tax base
upon which such tax is computed. This is reiterated in the more recent
amendments to our tax law, among which are EOs 22 and 273, and their
implementing rules. In fact, Commissioner of Internal Revenue vs.
American Rubber Co. held that a taxpayer cannot be "compelled to pay a
tax on the tax itself."
Having shown the appropriateness of deducting the ad valorem tax
from the tax base upon which it is computed, private respondent has shown
prudence in exercising his power under Section 204(2) of the NIRC of 1977
to abate an unjust, excessively assessed, and unreasonable tax; and to
accept the offer of ₱10 million, if only to avoid protracted and costly
litigation.
Hence, the abatement of the excessive and erroneous taxes was not
only within the discretion of respondent; it was just and fair to all
concerned. After all, the purpose of tax assessment is to collect only what
is legally and justly due the government; not to overburden, much less
harass, the taxpayers.

WHEREFORE, the Petition is DENIED, and the assailed Resolution

AFFIRMED. No pronouncement as to costs. SO ORDERED.