G.R. No. L-15470 December 26, 1963
CONNEL BROS. CO. (PHIL.), petitioner-appellant, vs. COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

FACTS

Petitioner Connel Bros. Co., a domestic corporation engaged in importing general merchandise, appealed a decision of the Court of Tax Appeals denying its claim for a refund of P21,093.36, representing a deficiency sales tax plus a 25% surcharge for the period from January 18, 1948, to January 31, 1949. The deficiency assessment stemmed from a dispute over the computation of the gross selling price for sales tax purposes under Section 186 of the National Internal Revenue Code. Before January 18, 1948, the company’s sales invoices separately itemized the actual selling price and the 5% sales tax, which was then added to form the total amount paid by the customer. This method complied with the implementing rules.
From January 18, 1948, to January 31, 1949, however, the company’s invoices merely stated a single aggregate amount with the notation “5% sales tax included.” The company computed and paid the sales tax based on the actual selling price alone, excluding the tax shifted to the customer. The Collector of Internal Revenue assessed a deficiency, contending the tax should be computed on the total amount paid by the customer (which included the tax), as this constituted the “gross selling price” unless the tax was billed as a separate item.

ISSUE

Whether the mere notation “5% sales tax included” on the sales invoices constitutes compliance with the requirement under General Circulars Nos. 431 and 440 that the amount intended to cover the tax must be “billed to the purchaser as a separate item” to permit its deduction from the gross selling price for tax computation.

RULING

The Supreme Court affirmed the denial of the refund but eliminated the 25% surcharge. The Court held that the notation did not comply with the separate billing requirement. The legal logic is anchored on a strict interpretation of the circulars, which create an exception to the statutory rule. Section 186 imposes a 5% tax on the “gross selling price,” defined in Circular No. 431 as the total amount paid by the purchaser. When the tax is shifted to the customer, it becomes part of this gross price. Circulars Nos. 431 and 440 allow a deduction for the tax amount only if it is billed as a separate item in the invoice. This is a privilege, not a right, and must be strictly followed.
The phrase “billed as a separate item” is clear and specific; it requires the tax amount to be stated apart from the selling price. A mere notation that the tax is included in the aggregate sum does not satisfy this. It does not apprise the customer of the specific tax amount. The Court rejected arguments about substantial compliance, stating the requirement permits only one manner of compliance: a separate itemization. The Court also found the 25% surcharge unjustified, as the company’s interpretation was made in good faith, without intentional violation or purposeful delay in filing returns.