G.R. No. L-18354 December 29, 1962
CHENG BAN YEK CO., INC., petitioner, vs. AUDITOR GENERAL, respondent.

FACTS

Cheng Ban Yek Co., Inc., a domestic corporation operating the International Oil Factory, imported hydrogenated cottonseed and fish oils from 1953 to 1955 for use in manufacturing vegetable lard from local coconut oil. Initially, the Central Bank, relying on an opinion from its legal counsel, granted an exemption from the 17% special excise tax under Republic Act No. 601 , as amended, and even refunded taxes paid under protest, amounting to P113,219.25. The legal counsel’s opinion was that hydrogenated cottonseed oil qualified as a “stabilizer” under the Act, which would exempt the foreign exchange used for its importation from the tax.
Subsequently, the Central Bank auditor, disagreeing with this interpretation, demanded payment of P185,884.09 in total taxes, including the refunded amount. The matter was referred to the Auditor General for a definitive ruling on whether the imported oil constituted a “stabilizer” under the law. The Secretary of Finance opined that the importation was a component, not a stabilizer, and thus taxable, emphasizing the rule of strict construction of tax exemptions. The Auditor General sought scientific opinions, which evolved from initial divergence to a final, consolidated technical view from the National Institute of Science and Technology, endorsed by the Chairman of the National Science Development Board.

ISSUE

Whether hydrogenated cottonseed oil, when added to coconut oil in the manufacture of vegetable lard, serves as a “stabilizer” exempt from the special excise tax under Republic Act No. 601 , or as a taxable component or ingredient.

RULING

The Supreme Court dismissed the petition and affirmed the decision of the Auditor General, holding that the imported oil was a taxable component, not an exempt stabilizer. The Court’s ruling was anchored on the technical definition of “stabilizer” as used in the tax law. It deferred to the definitive scientific opinion obtained by the Auditor General from the highest scientific authority, the National Science Development Board, which cited the analysis of the National Institute of Science and Technology.
The scientific opinion established that a stabilizer, in a technical sense, is a substance added in very small amounts (usually less than 2%) to retard chemical changes and preserve equilibrium, such as an antioxidant preventing rancidity. In contrast, hydrogenated cottonseed oil was added in quantities of 10-15% to alter the physical plasticity of the mixture, forming an integral component of the final product without affecting its chemical stability. Since the law employed the term in its technical sense, and the oil’s primary function was as a substantial ingredient altering physical structure rather than a minor additive preserving chemical stability, it did not fall within the statutory exemption. The Court, applying the principle that tax exemptions must be construed strictly against the taxpayer, found no legal basis to overturn the Auditor General’s factually supported conclusion that the oil was a taxable component.