G.R. Nos. L-22805 & L-27858. June 30, 1975.
Wonder Mechanical Engineering Corporation, represented by Lucio Quijano, President & General Manager, petitioner, vs. The Hon. Court of Tax Appeals and The Bureau of Internal Revenue, represented by the Commissioner of Internal Revenue, respondents.

FACTS

In G.R. No. L-22805, the Commissioner of Internal Revenue (CIR) assessed petitioner Wonder Mechanical Engineering Corporation deficiency fixed and sales taxes totaling P69,699.56 for 1953-1954. The assessment was based on findings that petitioner manufactured various articles (e.g., auto spare parts, rice threshers) and engaged in electroplating and repair services without paying the corresponding taxes. Petitioner claimed tax exemption under Republic Acts Nos. 35 and 901, which granted exemptions for “new and necessary” industries. Its original 1949 exemption under R.A. 35 specifically covered the “manufacture of machines for making” listed items like cigarette paper and chairs. After this exemption expired, petitioner sought reinstatement under R.A. 901.
In G.R. No. L-27858, the CIR issued another assessment for P25,080.91 as deficiency taxes for 1957-1960. This was based on petitioner’s manufacture and sale of steel chairs and jeepney parts, and its acceptance of job orders, without paying the required sales and percentage taxes. Petitioner again invoked its tax exemption privilege. The Court of Tax Appeals (CTA) dismissed the first petition for late filing and ruled against the petitioner on the merits in the second, leading to these consolidated petitions for review.

ISSUE

Whether the manufacture and sale of steel chairs, jeepney parts, and other similar articles, and the acceptance of job orders for repair and electroplating, are covered by the tax exemption privilege granted to petitioner under Republic Acts Nos. 35 and 901.

RULING

No. The Supreme Court affirmed the CTA decisions, holding that petitioner’s activities were not tax-exempt. The legal logic rests on the strict construction of tax exemption statutes. Exemptions from taxation are highly disfavored and must be granted by the clearest and most unequivocal language; they cannot be established by mere implication. The original 1949 grant of exemption was explicitly limited to the “manufacture of machines for making” specific products. The supporting memorandum from the Secretary of Finance clarified that the approval was based on petitioner’s production of machines like a tablet-wrapping machine or a lumpia-wrapping machine.
The manufacture of the end-products themselves (steel chairs, jeep parts) or the performance of job orders (electroplating, repairs) is fundamentally different from the manufacture of the machines that make those products. The former activities do not constitute the “new and necessary” industry of machine-making that the law intended to promote. Since the tax assessments for these non-exempt activities were undisputed as to computation, and petitioner failed to justify its claim under the clear language of the exemption grant, the assessments were upheld. The Court also noted that suggested compromise penalties could not be imposed without the taxpayer’s consent.