G.R. No. L-27718 and G.R. No. L-27768, May 27, 1985
Industrial Textiles Manufacturing Company of the Philippines, Inc. (ITEMCOP) vs. Commissioner of Internal Revenue and The Court of Tax Appeals; and Commissioner of Internal Revenue vs. Industrial Textiles Manufacturing Company of the Philippines, Inc. (ITEMCOP) and The Court of Tax Appeals

FACTS

Industrial Textiles Manufacturing Company of the Philippines, Inc. (ITEMCOP), a new and necessary industry, enjoyed full tax exemption in 1957 and 1958. In 1959, its exemption was reduced to 90%, making it partially subject to the 7% sales tax on its jute bag sales. For its 1959 sales tax returns, ITEMCOP reported gross sales of P10,395,208.25 and deducted P4,764,391.44 for raw material costs. This deduction comprised two items: (1) P939,687.31 for raw materials imported tax-free in 1958, and (2) P3,824,704.13 for raw materials acquired in 1959. The Bureau of Internal Revenue (BIR) disallowed the first deduction, contending that Section 186-A of the Tax Code only permitted deductions for tax-free raw materials purchased locally from a new and necessary industry. For the second item, the BIR contested the cost, asserting it should be P3,524,240.18.
The Court of Tax Appeals (CTA) upheld the BIR’s disallowance of the first deduction but sustained ITEMCOP’s claimed cost for the second item. Both parties sought review, resulting in these consolidated petitions.

ISSUE

The primary issues are: (1) Whether the cost of raw materials imported tax-free in a prior year (1958) and used in manufacturing goods sold in a taxable year (1959) is deductible from gross sales for sales tax computation under Section 186-A of the Tax Code; and (2) Whether the CTA’s factual finding on the actual cost of raw materials purchased and used in 1959 is binding.

RULING

The Supreme Court ruled in favor of ITEMCOP on the first issue. Applying its precedent in Republic Flour Mills, Inc. vs. Commissioner of Internal Revenue, the Court held that Section 186-A of the Tax Code unequivocally allows the deduction of the value of any tax-free product used in manufacturing, regardless of whether it is imported or locally sourced. The provision contains no qualification limiting the deduction to locally purchased materials from tax-exempt industries. Therefore, ITEMCOP was entitled to deduct the P939,687.31 representing the cost of tax-free raw materials imported in 1958 and utilized in 1959 production.
Regarding the second issue, the Court affirmed the CTA’s factual determination. The question of the actual cost of raw materials acquired in 1959 is factual in nature. The CTA’s finding that the cost was P3,824,704.13, as claimed by ITEMCOP, was supported by substantial evidence and thus must be respected. Consequently, in G.R. No. L-27718, the CTA decision was modified to allow the disputed deduction. In G.R. No. L-27768, the Commissioner’s petition challenging the cost finding was dismissed for lack of merit.