G.R. Nos. L-13033 and L-13701; May 31, 1960
Case Parties/Title:

1. LU DO AND LU YM CORPORATION, doing business under the trade name of Philippine Corn Products Company, plaintiff-appellant, vs. CENTRAL BANK OF THE PHILIPPINES, defendant-appellee.
2. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE CORN PRODUCTS, INC. (Lu Do and Lu Ym CORPORATION), respondent.

FACTS

Lu Do and Lu Ym Corporation, operating as Philippine Corn Products, Inc., is a domestic corporation engaged in manufacturing, packing, storing, distributing, and selling corn starch, gluten feed, and corn. Its business was certified by the Secretary of Finance as a new and necessary industry under Republic Act No. 35 , effective October 1, 1952. Between January 1954 and March 1955, the corporation imported 212 bales (211,187 pieces) of empty cotton bags from the United States for use in packing, storing, distributing, and selling its manufactured corn starch. On these importations, the Central Bank of the Philippines imposed and collected a 17% excise tax on foreign exchange amounting to P24,498.43, and the Bureau of Customs, on behalf of the Collector of Internal Revenue, demanded and collected a 7% sales or compensating tax amounting to P13,654.92. On September 5 and 6, 1955, the corporation filed separate demands for refund of these amounts with the Commissioner of Internal Revenue and the Central Bank, respectively. Both demands were denied on the ground, among others, that the imported empty cotton bags were not covered by the tax exemption certificate issued by the Department of Finance. Consequently, on December 6, 1956, the corporation filed a petition in the Court of Tax Appeals (CTA Case No. 340) seeking refund of the P13,654.92 compensating tax. The Court of Tax Appeals, in its decision of December 20, 1957, ordered the refund, holding that the imported bags were used in the manufacture of finished products and thus exempt, and that the Secretary of Finance had no power to limit the articles that could be imported tax-free. The Commissioner of Internal Revenue appealed this decision (G.R. No. L-13701). Separately, on July 24, 1957, the corporation filed an action in the Court of First Instance of Manila to recover the P24,498.43 excise tax from the Central Bank. The Central Bank moved to dismiss the complaint for lack of cause of action and non-joinder of indispensable parties, arguing the bags were not among the articles allowed for tax-free importation by the Secretary of Finance. The lower court sustained the Central Bank and dismissed the complaint. The corporation appealed this dismissal (G.R. No. L-13033). The two cases were consolidated as they involve the same transaction and interpretation of the same law.

ISSUE

Whether Lu Do and Lu Ym Corporation (Philippine Corn Products, Inc.) is liable for payment of the 7% compensating or sales tax and the 17% excise tax on foreign exchange for its importations of empty cotton bags, or whether these importations are tax-exempt under Republic Act No. 35 , as amended by Republic Act No. 901 .

RULING

The Supreme Court ruled that the corporation is liable for both taxes. The tax exemption granted to the corporation by the Secretary of Finance was specific and limited. The exemption letter expressly stated that the approval was “in respect to the manufacture of corn starch, corn gluten feed, and corn oil” and that “the only raw material to be imported is sulphur.” The Court held that under Republic Act No. 901 , the Secretary of Finance is expressly empowered by Section 11 to “determine the scope and extent of the privileges granted hereunder.” This authority includes the power to limit the articles that may be imported tax-free. Since the Secretary’s approval specifically restricted tax-free importation to sulphur, the importation of empty cotton bags was not covered by the exemption. The Court rejected the corporation’s argument (and the Court of Tax Appeals’ ruling) that the Secretary had no such limiting power, distinguishing the cited case of Industrial Textiles Company which was decided under the provisions of the original Republic Act No. 35 . Furthermore, the Court found that empty cotton bags are not “raw materials” for the manufacture of corn starch but are “supplies” used for packing the finished product. Under the tax exemption law, the tax privilege for supplies is limited to those “to be used exclusively in the manufacture of such products.” The Court interpreted “manufacture” to mean the transformation of raw materials into a finished product for use, which ends when the product is in a condition to be placed in the market. The act of packing the finished corn starch into bags occurs after manufacture is complete; therefore, the bags are not used “in the manufacture” and do not qualify for the exemption. Consequently, the importation was subject to the 7% compensating tax. By the same logic, since the imported article itself was not tax-exempt, the foreign exchange used for its importation was also not exempt from the 17% excise tax. The Court affirmed the order of the Court of First Instance dismissing the complaint for refund of the excise tax (G.R. No. L-13033). It affirmed the Court of Tax Appeals decision regarding its jurisdiction and the issue of prescription (finding the claim was filed within the two-year period), but reversed its order for the refund of the compensating tax (G.R. No. L-13701). Costs were awarded against Lu Do and Lu Ym Corporation.