G.R. No. L-32898 August 21, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE PIPES AND MERCHANDISING CORPORATION and THE COURT OF TAX APPEALS, respondents.

FACTS

The Commissioner of Internal Revenue assessed Philippine Pipes and Merchandising Corporation for deficiency sales taxes and surcharges for the years 1958, 1959, and 1960. The corporation, engaged in manufacturing concrete pipes and hollow blocks, protested the assessment. It argued that it was a contractor, not a manufacturer, and that even if considered a manufacturer, the cost of cement used as raw material should be deductible from gross sales for tax computation. The Commissioner disallowed the deduction.
The Court of Tax Appeals (CTA) ruled that the corporation was indeed a manufacturer. However, it held that the cost of cement was deductible, modifying the assessment. The CTA initially based deductibility on the premise that cement was a manufactured product subject to sales tax under Section 186 of the Tax Code. Upon reconsideration, it issued an Amended Decision, shifting the legal basis to Section 186-A, concluding cement was a tax-free mineral product under Section 188(c). The Commissioner appealed, arguing cement was not a tax-free product during the relevant years.

ISSUE

Whether the cost of cement used as raw material in manufacturing concrete pipes and hollow blocks is deductible from the gross selling price for sales tax computation for the years 1959 and 1960.

RULING

Yes, the cost is deductible. The Supreme Court clarified that cement is a “manufactured product,” not a “mineral product” exempt from sales tax under Section 188(c). Following the precedent in Commissioner of Internal Revenue v. Republic Cement Corporation, cement is subject to the sales tax imposed by Section 186 of the Tax Code. Consequently, as a material subject to tax under Section 186, its cost is deductible under the proviso in that same section when used in manufacturing another taxable article.
The Court rejected the Commissioner’s argument that deductibility required the tax to have been actually paid on the cement during the specific years. The Bureau of Internal Revenue’s erroneous classification and collection of an ad valorem tax instead of the sales tax on cement during 1959-1960 does not negate the right to deduct. The law does not require actual payment as a prerequisite; it presumes the tax will be collected from the proper taxpayer, the cement manufacturer. It would be unjust to deny the deduction and impose a higher tax burden on the manufacturer due to the government’s own error. The petition was denied.