G.R. No. L-17744, April 30, 1965
RATTAN ART & DECORATIONS, INC., petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

FACTS

Petitioner Rattan Art & Decorations, Inc., engaged in manufacturing and selling rattan articles, including rattan round pieces, sold these goods to foreign buyers on F.O.B. Manila terms. On April 19, 1954, the Collector of Internal Revenue demanded payment of P1,313.75 as deficiency sales tax, surcharge, and penalty for the period from September 4, 1951, to January 24, 1952. Petitioner sought cancellation, claiming the sales were export transactions exempt from sales tax, with title passing only upon arrival and inspection in the United States. A reinvestigation led to a higher assessment of P96,706.30 for the years 1949 to 1954. After a modified assessment of P77,087.28 and denial of reconsideration, a Warrant of Distraint and Levy was issued. Petitioner filed a Petition for Review with the Court of Tax Appeals (CTA), contesting the assessment as erroneous and arguing prescription of the tax liability for 1949 and early 1950. The CTA modified the assessment, holding petitioner liable for deficiency sales tax from the second quarter of 1950 to 1952, plus surcharges and fixed taxes, totaling P68,582.23, but ruled that the tax for 1949 and the first quarter of 1950 had prescribed. Petitioner’s motion for reconsideration, invoking retroactive application of Republic Act No. 894 (which exempted such shipments from sales tax effective June 20, 1953), was denied, prompting this appeal.

ISSUE

1. Whether the sales to foreign buyers under F.O.B. Manila terms are domestic sales subject to sales tax.
2. Whether the right of the government to assess deficiency sales tax for 1949 and the first quarter of 1950 had prescribed.
3. Whether Republic Act No. 894 should be given retroactive effect to exempt petitioner from sales tax for periods prior to its effectivity.

RULING

1. Yes, the sales are domestic sales subject to sales tax. Under Section 196 of the National Internal Revenue Code, sales tax applies to sales consummated in the Philippines, determined by where title passes. The sales were on F.O.B. Manila terms, with packing expenses charged to buyers, freight paid by buyers at destination, shipments insured by buyers, and payment via drafts or letters of credit on local banks. Title passed when goods were placed on board the carrying vessels in Manila, consummating the sales within the Philippines. Payment in dollars or compliance with Central Bank regulations does not convert them into foreign sales exempt from tax.
2. Yes, the right to assess deficiency sales tax for 1949 and the first quarter of 1950 had prescribed. The assessment was made on June 22, 1955. For the first quarter of 1950, the return was filed on or before April 20, 1950, exceeding the five-year prescriptive period. For the second quarter of 1950, the return was due on July 20, 1950, so the assessment was within the five-year period.
3. No, Republic Act No. 894 cannot be applied retroactively. Tax exemptions must be clearly granted by law. The government’s right to the taxes had already vested before the law’s effectivity on June 20, 1953. Retroactive application would impair this vested right. The Court cited precedent (Misamis Lumber Co., Inc. v. Collector) that transactions before the law’s effectivity are not covered.
The Supreme Court affirmed the CTA decision, ordering petitioner to pay P68,582.23.