G.R. No. L-17708 April 30, 1965
PACIFIC OXYGEN & ACETYLENE CO., petitioner-appellant, vs. COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

FACTS

The petitioner-appellant, Pacific Oxygen & Acetylene Co., is a domestic corporation engaged in the manufacture and sale of acetylene and oxygen. In its manufacturing process, it used calcium carbide purchased from the Maria Cristina Chemical Industries of the Philippines, an industry tax-exempt under Republic Act No. 901. For the years 1954, 1955, and 1956, the appellant, in computing the percentage taxes on its acetylene sales, deducted the cost of the calcium carbide from the gross selling price. The Commissioner of Internal Revenue disallowed this deduction, resulting in a deficiency tax assessment of P5,855.07. The appellant protested and sought review in the Court of Tax Appeals, which sustained the Commissioner and also granted the Commissioner’s counterclaim for an amount erroneously credited to the appellant. The case is now on appeal.

ISSUE

The primary issue is whether the appellant is entitled to deduct the cost of the tax-exempt calcium carbide from the gross selling price of its manufactured acetylene for purposes of computing the percentage tax under Section 186 of the Internal Revenue Code.

RULING

The Supreme Court affirmed the decision of the Court of Tax Appeals. The appellant is not entitled to the deduction. The proviso in Section 186 allowing deduction of the cost of materials applies only where those materials have themselves been subject to tax under the same section or Section 189. Since the calcium carbide was purchased from a tax-exempt industry, it had not been previously taxed, and therefore its cost is not deductible. The Court rejected the appellant’s argument that it purchased the carbide from National Carbon Philippines, Inc., which might have paid the tax, as the stipulation of facts established that the carbide was purchased from the tax-exempt Maria Cristina Chemical Industries through National Carbon, which acted merely as an agent. There was no evidence that the percentage tax was included in the purchase price. The Court also held that Section 186-A of the Tax Code, which allows deduction of the value of tax-free products used in manufacture, was enacted by Republic Act No. 2025, which took effect on June 22, 1957, and has no retroactive application to the tax years in question. Regarding the counterclaim, the Court upheld the grant of the Commissioner’s claim for P364.02 erroneously credited by an investigating agent, as no written claim for refund or credit was filed by the appellant as required by Section 309 of the Tax Code, and the Government is not estopped from correcting such an error.