G.R. No. L-13203. January 28, 1961.
Yutivo Sons Hardware Company, petitioner, vs. Court of Tax Appeals and Collector of Internal Revenue, respondents.

FACTS

Petitioner Yutivo Sons Hardware Co. (Yutivo), a domestic corporation, was the appointed importer of General Motors vehicles for the Visayas and Mindanao after GM’s withdrawal from the Philippines in mid-1947. Yutivo sold these vehicles exclusively to Southern Motors, Inc. (SM), which then retailed them to the public. Yutivo paid the sales tax based on its wholesale selling price to SM. The Collector of Internal Revenue assessed Yutivo for a substantial deficiency sales tax for the period from the third quarter of 1947 to the fourth quarter of 1950, contending that the taxable event was SM’s retail sales to the public. The theory was that SM was a mere instrumentality or subsidiary of Yutivo, organized to evade taxes, and thus their separate corporate identities should be disregarded, making Yutivo liable for the tax on the final retail price.
The Court of Tax Appeals sustained the Collector’s position, finding that SM was owned and controlled by Yutivo and was organized without a legitimate business purpose, aiming primarily at tax evasion. It disregarded SM’s separate corporate existence and held Yutivo liable for the deficiency tax computed on SM’s higher retail selling prices, not on Yutivo’s wholesale prices. Yutivo appealed, arguing, among other points, that even if the corporate veil was pierced, the tax it had already paid should be credited against the new assessment.

ISSUE

The principal issue is whether the Court of Tax Appeals erred in affirming the deficiency sales tax assessment against Yutivo based on the retail prices of SM, without deducting the sales tax already paid by Yutivo on its wholesale sales to SM.

RULING

The Supreme Court modified the decision of the Court of Tax Appeals. It upheld the piercing of the corporate veil, affirming that SM was a mere instrumentality of Yutivo organized for tax evasion, thus justifying the assessment of the tax based on the ultimate retail selling price. However, the Court ruled that the tax already paid by Yutivo must be credited against the new deficiency assessment.
The legal logic is grounded in the nature of the sales tax under the Tax Code. The tax is imposed only once on the original sale. When Yutivo, as the importer, sold to SM and paid the corresponding tax, that payment was legally made. To hold Yutivo liable again for the full tax on the retail price without crediting the prior payment would constitute double taxation on the same transaction, which was not the legislative intent. The correct computation is to assess the tax due on the retail price (SM’s selling price) and then deduct the tax already paid by Yutivo on the wholesale price. The Court adopted the computation suggested by the Tax Court’s Presiding Judge, resulting in a reduced deficiency tax of P820,549.91, plus a 25% surcharge for late payment. The surcharge was reduced from 75% to 25% as the original assessment was not fraudulent but merely erroneous.