G.R. No. L-25602 February 18, 1970
REPUBLIC FLOUR MILLS, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

FACTS

Petitioner Republic Flour Mills, Inc., a domestic corporation engaged in manufacturing flour, was granted tax-exemption privileges as a new and necessary industry under Republic Act 901, effective from January 28, 1957, as a diminishing exemption until December 31, 1962. In 1958, the corporation imported wheat grains tax-free. Part of this importation was not milled in 1958, resulting in a surplus worth P1,486,616.41 carried over to January 1, 1959. This surplus was utilized and manufactured into flour sold in 1959. For 1959, the corporation paid a manufacturer’s sales tax of P37,275.55, deducting the cost of the wheat from the 1958 importation from its gross sales. The Commissioner of Internal Revenue assessed a deficiency tax for 1959 totaling P23,170.17, disallowing the deduction of the cost of the tax-free wheat grains. The corporation contested this assessment before the Court of Tax Appeals. The parties stipulated that the sole legal issue was whether the cost of raw materials imported tax-free in 1958 and utilized in 1959 is deductible from gross sales in 1959. The Court of Tax Appeals sustained the Commissioner’s assessment, ordering payment of P24,587.98 as deficiency tax and surcharge.

ISSUE

Whether, in computing the manufacturer’s sales tax due on flour manufactured and sold in 1959, wherein wheat grains imported tax-free in 1958 were utilized, the cost of said wheat grains is deductible from gross sales pursuant to Section 186-A of the Internal Revenue Code.

RULING

Yes. The Supreme Court reversed the decision of the Court of Tax Appeals. The Court held that Section 186-A of the Internal Revenue Code, which states, “Whenever a tax free product is utilized in the manufacture or production of any article, in the determination of the value of such finished article, the value of such tax free product shall be deducted,” is clear and unambiguous. The term “tax-free product” encompasses tax-free raw materials, including those imported, and is not limited to products purchased from tax-exempt industries. Wheat grains are agricultural products. To disallow the deduction would effectively subject the tax-exempt raw materials to tax. The principle of strict interpretation of tax exemptions does not apply where the law is clear. Therefore, the cost of the tax-free wheat is deductible. Petitioner was ordered to pay the deficiency tax of P3,288.16 as stipulated for an affirmative resolution of the issue.