G.R. No. L-14336. April 30, 1964.
LA TONDEÑA, INC., petitioner, vs. COLLECTOR OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

FACTS

The petitioner, La Tondeña, Inc., is a domestic corporation engaged in manufacturing wines, liquors, and denatured alcohol. For over 23 years, the Bureau of Internal Revenue consistently held that the especially denatured alcohol manufactured by the petitioner for use in producing rubbing alcohol (sold as “Jai-Alai”) or for sale to authorized permittees was tax-exempt. However, in 1955, the Bureau reversed its position and assessed specific tax on 391,396 proof-liters of this denatured alcohol used from July 1951 to May 1954, demanding payment of P68,153.73, plus a P10,000 penalty for alleged illegal removal without prepayment of tax.
La Tondeña appealed to the Court of Tax Appeals, which upheld the Bureau’s assessment. The Tax Court ruled that the rubbing alcohol was a “medicinal preparation” under the Tax Code and that the denatured alcohol used as its chief ingredient constituted “distilled spirits,” making the final product subject to specific tax. It rejected the petitioner’s arguments for exemption and its plea against the retroactive application of the new interpretation. La Tondeña’s motion for reconsideration was denied, prompting this appeal.

ISSUE

Whether the especially denatured alcohol used in manufacturing “Jai-Alai” rubbing alcohol is subject to specific tax under Sections 127 and 133 of the National Internal Revenue Code.

RULING

The Supreme Court modified the decision of the Court of Tax Appeals, holding La Tondeña liable for specific tax but only on the rubbing alcohol finally marketed, not on the intermediate denatured alcohol.
The Court rejected La Tondeña’s primary contention that “medicinal preparations” under Section 127 are limited to those for oral intake. The law makes no such distinction, and rubbing alcohol, used as an antiseptic and disinfectant, plainly qualifies as a medicinal preparation. Advertising it as “alcohol 70%” for medical purposes reinforced this conclusion. The Court also dismissed the argument that denatured alcohol is not “distilled spirits.” Section 133 explicitly defines distilled spirits to include ethyl alcohol and “all dilutions or mixtures.” Denatured alcohol, created by adding denaturants to ethyl alcohol, falls within this statutory definition as a mixture.
However, the Court agreed with La Tondeña that the tax liability should attach to the finished medicinal product (the rubbing alcohol), not to the denatured alcohol itself during its intermediate production stage. Consequently, liability was limited to the specific tax on the 35,298 proof-liters of rubbing alcohol actually marketed, amounting to P24,708.60. The Court also clarified that alcohol sold to other permittees was not subject to this tax. The penalty was implicitly set aside as the modified liability reflected a different taxable event.