G.R. No. 222480, November 07, 2018
Avon Products Manufacturing, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.

FACTS

Petitioner Avon Products Manufacturing, Inc. (Avon) is a manufacturer of perfumes and related products, using denatured ethyl alcohol as a raw material. It held a BIR Permit to Buy/Use Denatured Alcohol, which exempted such purchases from excise tax provided the alcohol was used solely in production. A critical condition of the permit stated that if the volume purchased differed from the volume actually received, Avon would be assessed excise tax on the difference. From January to December 2008, Avon purchased 1,309,000 liters of denatured alcohol. During transit to its warehouse, a shortage of 21,163.48 liters occurred due to evaporation.
The BIR issued a deficiency excise tax assessment on the evaporated quantity. Avon protested, arguing the alcohol was tax-exempt and the loss occurred prior to any production or rectification process. The BIR denied the protest, and the Court of Tax Appeals (CTA) divisions upheld the assessment, ruling Avon liable for the tax on the shortage. Avon elevated the case to the Supreme Court via a petition for review on certiorari.

ISSUE

Whether Avon is liable for deficiency excise tax on the denatured alcohol that evaporated during transit before any processing, rectification, or distillation.

RULING

Yes, Avon is liable. The Supreme Court affirmed the CTA’s decision. The legal logic centers on the specific tax scheme for distilled spirits under the National Internal Revenue Code (NIRC) and the conditions of Avon’s permit. While denatured alcohol used directly in manufacturing is exempt under Section 141 of the NIRC, this exemption is not absolute. Revenue Regulations No. 3-2006, which implements the tax on distilled spirits, provides that losses of distilled spirits, including denatured alcohol, incurred before removal from the distillery are subject to tax payment if they exceed allowable percentages. The Court found that the transit loss constituted a “loss” under these regulations before the alcohol was officially received and accounted for in Avon’s bonded warehouse for manufacturing.
The Court rejected Avon’s reliance on the La Tondeña case, which dealt with losses during the rectification process itself, not losses during transit of raw materials to a manufacturer. The permit’s condition, tying the tax exemption to the actual volume received, was deemed a valid implementation tool to prevent revenue leakage and ensure proper accountability for tax-exempt articles. The evaporation represented a physical shortage of the tax-exempt commodity, triggering the permit condition and the corresponding tax liability on the missing volume. The assessment, including interest, was upheld as a lawful enforcement of the tax code and the permit’s stipulations designed to safeguard government revenue.