G.R. No. L-13728. November 30, 1962.
PHILIPPINE ACETYLENE CO., petitioner, vs. SILVERIO BLAQUERA, as Collector of Internal Revenue, respondent.

FACTS

Petitioner Philippine Acetylene Co., a domestic corporation manufacturing and selling oxygen and acetylene gases, was assessed a deficiency sales tax and surcharge totaling P10,879.03 for the period 1951 to the second quarter of 1955 by respondent Collector of Internal Revenue. The assessment was based on Section 186 of the National Internal Revenue Code, which imposes a 7% tax on the gross selling price of articles sold, but allows the deduction of the cost of tax-paid raw materials used in manufacture. Petitioner sought reconsideration, contending the assessment involved an incorrect and double computation of the tax. Upon denial, it appealed to the Court of Tax Appeals (CTA).
The CTA upheld the assessment, finding the petition timely filed. On the merits, it ruled that the Collector’s computation was correct. The dispute centered on the proper method to determine the “gross selling price” from which the cost of raw materials should be deducted before applying the 7% tax rate, especially where the tax amount was billed to customers.

ISSUE

Whether the respondent Collector of Internal Revenue employed the correct method in computing the deficiency percentage sales tax under Section 186 of the National Internal Revenue Code, in relation to pertinent Bureau of Internal Revenue circulars, when the cost of raw materials is deductible.

RULING

The Supreme Court affirmed the CTA decision, upholding the Collector’s computation. The legal logic rests on the proper interpretation of “gross selling price” under Section 186 and the application of BIR General Circulars Nos. 431 and 440. The law taxes the gross selling price but permits a deduction for the cost of tax-paid raw materials. The circulars clarify that for a sales tax amount to be excluded from the gross selling price, it must be billed to the purchaser as a separate item in the invoice. Crucially, the “tax” billed separately must be the correct amount of tax.
The Court found petitioner’s method flawed. Petitioner had billed its customers a 7% tax based on the total invoice price without first deducting the cost of raw materials (P334,465.74). Consequently, the amount billed as “tax” was inflated and incorrect. Following BIR Ruling 105-02, the correct procedure requires deducting the cost of raw materials from the total selling price first to arrive at the proper tax base. The 7% tax is then computed on this base. Since petitioner did not bill the correct tax separately, the entire amount paid by customers, including the overstated tax component, constituted the “gross selling price” from which the cost of materials should be deducted to find the taxable amount. The Collector’s assessment, which followed this sequence, was therefore lawful and avoided the double taxation petitioner alleged. The suggested alternative computations by petitioner and the amicus curiae were rejected for failing to comply with the law and circulars.