G.R. No. L-27813 August 15, 1975
Atlas Fertilizer Corporation, petitioner, vs. Commissioner of Internal Revenue, respondent.

FACTS

Petitioner Atlas Fertilizer Corporation (AFC), a new and necessary industry enjoying tax exemption until December 31, 1962, manufactured fertilizer using pyrite, a mineral ingredient purchased from its parent company, Atlas Consolidated Mining and Development Corporation (ACMDC). From June 20, 1962, to April 1964, AFC did not deduct the cost of this locally purchased pyrite when computing the 7% sales tax due on its fertilizer sales under Section 186 of the National Internal Revenue Code. Upon counsel’s advice in May 1964, AFC began making the deduction and subsequently filed a claim for refund or tax credit amounting to P77,310.76, representing alleged overpayments for the said period. The Commissioner of Internal Revenue denied the claim, a decision affirmed by the Court of Tax Appeals, prompting this petition for review.

ISSUE

Whether the cost of pyrite purchased by AFC from ACMDC and used in manufacturing fertilizer is deductible from the gross selling price of the fertilizer for purposes of computing the sales tax under Section 186 of the Tax Code.

RULING

Yes, the cost is deductible. The Supreme Court rejected the Commissioner’s restrictive interpretation. The Commissioner argued that Section 186-A’s term “tax-free product” referred only to raw materials from industries tax-exempt under Republic Act No. 901 and that, alternatively, Section 186’s deduction provision applied only to raw materials themselves subject to sales tax under Section 186 or 189. The Court found no legislative intent to limit Section 186-A exclusively to R.A. 901 industries. More decisively, the Court held that AFC’s claim was squarely justified under the proviso in Section 186 itself. This proviso allows deduction of the cost of materials used in manufacturing if those materials are “likewise subject to tax under this section and section one hundred and eighty-nine.” The Court interpreted this to mean materials that are of the type subject to tax under those sections, not materials upon which the tax was actually paid in the specific transaction. Pyrite, as a mineral product, is an article subject to sales tax under Section 186. Therefore, its cost is deductible from the gross selling price of the manufactured fertilizer. The Court emphasized that the sales tax is an obligation of the seller (ACMDC), not the buyer (AFC). If ACMDC failed to pay the tax on its pyrite sales, the Commissioner’s recourse is against ACMDC, not AFC. The denial of AFC’s deduction was improper. The Court of Tax Appeals decision was reversed, and the Commissioner was ordered to grant AFC a tax credit for the claimed amount.