G.R. No. L-20660 June 13, 1968
REPUBLIC CEMENT CORPORATION, petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

FACTS

Petitioner Republic Cement Corporation is a domestic corporation engaged in mining limestone, silica, and other minerals from mineral lands held under lease and/or permit from the Government, which it uses to produce cement. For the period from May 1957 to December 1959, petitioner paid royalties and ad valorem taxes based on the “cost of production” or extraction of the raw minerals. The Commissioner of Internal Revenue demanded deficiency payment, assessing the tax based on the market value of the cement sold as a finished product. After a motion for reconsideration, the Commissioner increased the assessment to P498,653.04, covering May 1957 to August 1959, based on petitioner’s gross receipts from cement sales. The Court of Tax Appeals upheld this assessment, prompting this petition for review.

ISSUE

1. Whether the ad valorem tax should be based on the value of the finished product (cement) or the value of the raw materials upon extraction.
2. Whether the value shall be determined by the cost of extraction or by the market value of the raw materials.
3. Whether the value shall include the cost of the paper bag container for the cement.
4. Whether the assessment violates the terms of petitioner’s lease contract with the government.
5. Whether petitioner is liable for the payment of a surcharge.

RULING

1. The ad valorem tax should be based on the value of the raw materials or minerals upon extraction, not on the value of the finished product (cement). The tax is a severance tax on the privilege of extracting minerals, not a tax on the manufactured product. This follows the precedent set in CEPOC v. Commissioner of Internal Revenue.
2. The value shall be determined by the “actual market value” of the minerals or mineral products extracted, as explicitly stated in Section 243 of the Tax Code, not by the “cost of production” or extraction.
3. The cost of the paper bag container for the cement should not be included in the computation of the ad valorem tax, as the tax is based on the value of the minerals upon extraction, not on the packaged finished product.
4. The lease contract, which stipulates payment of a royalty based on the “actual market value” of the gross output of minerals payable upon removal from the mine, is in conformity with Section 243 of the Tax Code and does not support the Commissioner’s assessment based on the finished product’s value.
5. Petitioner is liable for the 25% surcharge for late payment under Section 245 of the Tax Code. The surcharge is mandatory and does not require a finding of bad faith. However, no surcharge applies to the difference between the value of cement and the value of raw materials, as the assessment based on cement value is incorrect. A surcharge is proper for the difference between the cost of extraction (which petitioner used) and the actual market value (the correct basis), as petitioner cannot claim good faith in misapplying the clear statutory language.
The Court remanded the case to the Court of Tax Appeals for reception of evidence on the actual market value of the extracted minerals to compute the correct tax liability.