G.R. No. L-19667 and L-19801-03, November 29, 1966.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AMERICAN RUBBER COMPANY and COURT OF TAX APPEALS, respondents. (G.R. No. L-19667)

AMERICAN RUBBER COMPANY, petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents. (G.R. Nos. L-19801-03)

FACTS

American Rubber Company, a domestic corporation, owned and operated a rubber tree plantation. From 1955 to 1958, it produced various rubber products: Preserved Latex, Pale Crepe Nos. 1 and 2, Ribbed Smoked Sheets Nos. 1 and 2, Flat Bark Rubber, 2X Brown Crepe, and 3X Brown Crepe. The process began with tapping trees to collect latex. For Preserved Latex, ammonia was added to preserve it in liquid form. For Pale Crepe and Ribbed Smoked Sheets, acetic acid was added to coagulate the latex, which was then rolled and either air-dried or smoke-cured. Flat Bark Rubber, 3X Brown Crepe, and 2X Brown Crepe were produced from naturally coagulated and dried latex (ground rubber, bark rubber, cup rubber, and trimmings) by milling without added chemicals. The company paid sales taxes under protest on local sales of these products, claiming exemption under Section 188(b) of the National Internal Revenue Code as agricultural products. The Commissioner of Internal Revenue denied the claim, arguing the products were manufactured. The Court of Tax Appeals held Preserved Latex, Flat Bark Rubber, and 3X Brown Crepe were agricultural and exempt, but Pale Crepe Nos. 1 and 2, Ribbed Smoked Sheets Nos. 1 and 2, and 2X Brown Crepe were manufactured and taxable. It also ruled the company could not recover taxes it had passed on to buyers. Both parties appealed.

ISSUE

1. Whether the rubber products are agricultural or manufactured for sales tax purposes.
2. Whether American Rubber Company is entitled to recover the sales tax paid but passed on to buyers.
3. Whether the company is entitled to interest on the tax refund.

RULING

1. All the rubber products in question are agricultural products exempt from sales tax under Section 188(b) of the National Internal Revenue Code. Applying the principle from Philippine Packing Corporation vs. Collector of Internal Revenue, the exemption is not lost merely because the agricultural product undergoes processing to make it more convenient, valuable, and marketable. Fresh latex spoils in two hours; adding ammonia preserves it for a month, a process akin to preservation, not manufacturing. The coagulation, rolling, and drying/smoking processes for Pale Crepe and Ribbed Smoked Sheets are minimal treatments necessary to prevent spoilage and prepare the raw rubber for market, not transforming it into a new product. Products from naturally coagulated latex (Flat Bark, 3X Brown Crepe, 2X Brown Crepe) involve even less processing. Therefore, none of the products are considered manufactured goods subject to sales tax.
2. American Rubber Company is entitled to recover the sales taxes it paid under protest, even though it separately itemized and passed the tax to its buyers, except for the period when Republic Act No. 1612 was in force. The rule in Medina vs. City of Baguio, that a taxpayer who shifts the tax burden cannot recover it, should not be applied indiscriminately to sales taxes. The separate billing was done following Internal Revenue circulars to avoid paying tax on the tax itself. Allowing recovery prevents the perpetuation of illegal taxation, as individual buyers are unlikely to sue for small amounts. The defense of passing on the tax is overruled.
3. The company is not entitled to interest on the refund. Interest is allowed only in cases of patent arbitrariness by revenue authorities, which was not present here.
The Court of Tax Appeals decision is affirmed in G.R. No. L-19667 and modified in G.R. Nos. L-19801-03. The sales taxes are declared improperly levied and must be refunded, except for taxes paid under Republic Act No. 1612 from August 24, 1956, to June 22, 1957, amounting to P37,075.47, which were properly collected.