G.R. No. 23985 , February 2, 1928
PAMPANGA SUGAR MILLS, plaintiff-appellant, vs. WENCESLAO TRINIDAD, Collector of Internal Revenue for the Philippine Islands, defendant-appellee.

FACTS

Pampanga Sugar Mills (appellant) operated a sugar mill. It milled sugar cane belonging to independent growers under “milling contracts,” whereby the appellant received 50% of the resulting raw centrifugal sugar as compensation for its milling services. The appellant sold its share of the sugar. The Collector of Internal Revenue (appellee) assessed and collected a 1% merchant’s percentage tax on the gross sales value of this sugar under Section 1459 of the Administrative Code of 1917. The appellant paid the tax under protest, arguing it was exempt under Section 1460 of the same Code. The Court of First Instance dismissed the complaint, relying on the precedent set in *Central Azucarera de Bais v. Trinidad*.

ISSUE

1. Whether the appellant, in milling cane belonging to others and receiving a share of the product as compensation, is a “manufacturer” considered a “merchant” subject to the percentage tax under Section 1459 of the Administrative Code of 1917.
2. Whether the appellant is entitled to the exemption provided for “agricultural products” and the “sale of their own products” by “agriculturalist cultivators” under Section 1460(b) of the same Code.

RULING

The Supreme Court AFFIRMED the decision of the lower court, holding that the appellant was subject to the tax and not entitled to the exemption.

1. On being a Manufacturer/Merchant: The Court held that the appellant was a manufacturer. The process of converting sugar cane into raw centrifugal sugar constituted manufacturing. Since the appellant sold the manufactured product (its share of the sugar), it fell within the definition of a “merchant” under the tax law, which includes those who sell manufactured products. The fact that it did not own the raw material (cane) did not alter its character as a manufacturer of the final product it sold.

2. On the Exemption under Section 1460(b): The Court ruled that the appellant was not an “agriculturalist cultivator” selling “its own agricultural products.” The exemption in Section 1460(b) applies only to the actual tiller or cultivator of the soil who sells the direct products of their cultivation. Here, the sugar cane was grown by independent planters, not by the appellant. The sugar sold by the appellant was not its “own agricultural product” but the product of its manufacturing service, for which it received a share of the output as payment. Therefore, the exemption did not apply.

The Court found the case materially identical to its prior ruling in *Central Azucarera de Bais v. Trinidad* and adhered to the doctrine established therein.

DISSENTING OPINIONS:
Justices Johnson and Villamor (with Chief Justice Avanceña concurring with Johnson) filed dissenting opinions. They argued that the appellant should be considered a co-producer with the cane growers, not a mere manufacturer for hire. They contended that the milling contract created a form of partnership or joint venture where the mill contributed its capital and labor to the production of sugar, making the final product a joint agricultural product of both the grower and the mill. Consequently, in selling its share, the mill was selling its own product as a co-agriculturalist and should be exempt under Section 1460(b). The dissent criticized the majority’s reliance on *Central Azucarera de Bais* and its narrow interpretation of the exemption.