G.R. No. L-20772 and L-20852 May 31, 1971
AMERICAN RUBBER COMPANY, petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE and THE HON. COURT OF TAX APPEALS, respondents.

FACTS

American Rubber Company sought a refund of sales taxes paid on local sales of various rubber products (Pale Crepe, Ribbed Smoked Sheets, Brown Crepe, and Flat Bark Rubber) produced and sold from its plantation from January to April 1959. The Commissioner of Internal Revenue assessed and collected the tax. The Court of Tax Appeals partially granted the refund, ordering the return of P879.50 for sales of Flat Bark Rubber and 3X Brown Crepe, which it classified as non-taxable agricultural products. However, it denied the refund of P11,879.57 for the other rubber products, ruling they were taxable manufactured articles. Both parties appealed: the company assailed the denial of the larger refund, while the Commissioner contested the grant of the smaller refund.
The production process for all products began with tapping trees to collect latex. For the disputed products (Pale Crepe, Ribbed Smoked Sheets, and 2X Brown Crepe), the latex was coagulated with acid, milled into sheets or crepes, and then washed and dried. For Flat Bark Rubber and 3X Brown Crepe, the process involved naturally coagulated latex from tree wounds or cup lumps, which was simply cleaned and flattened. The legal issue turned on whether these processes constituted manufacturing.

ISSUE

Whether the local sales of the specified rubber products by American Rubber Company are subject to sales tax under Section 186 of the National Internal Revenue Code.

RULING

The Supreme Court, en banc, ruled that none of the rubber products in question were subject to sales tax, granting the full refund. The Court applied the doctrine of stare decisis, as the identical issue involving the same parties and products had been conclusively settled in prior decisions (G.R. Nos. L-10963, L-11178, L-19667, and L-19801-19803). Those precedents established that the processes used—coagulation, milling, washing, and drying—did not transform the latex into a new commercial article with a distinct name, character, or use. The latex remained raw rubber, merely converted into a more convenient marketable form. Therefore, all products, including Pale Crepe and Ribbed Smoked Sheets, were considered “agricultural products” exempt from sales tax under Section 188(b) of the Tax Code. The Court rejected the Commissioner’s argument that the taxpayer could not claim a refund because it had passed the tax to customers. It held that a taxpayer who pays an illegal tax under protest, even if shifted to buyers, is the proper party to sue for recovery to prevent the perpetuation of unlawful exactions. Consequently, the decision in G.R. No. L-20772 was reversed, ordering a refund of P11,879.57, and the decision in G.R. No. L-20852 was affirmed, upholding the refund of P879.50.