G.R. No. L-48483. March 29, 1946.
PHILIPPINE MANUFACTURING COMPANY, plaintiff-appellant, vs. BIBIANO L. MEER, Collector of Internal Revenue, defendant-appellee.

FACTS

In 1939, the Collector of Internal Revenue levied a three and one-half percent (3.5%) sales tax on the Philippine Manufacturing Company’s sales of lard, margarine, and soap for the third quarter of 1939, pursuant to Section 186 of Commonwealth Act No. 466 (the National Internal Revenue Code). The appellant, a coconut oil mill proprietor, paid the tax of P34,561.85 under protest. It contended that the sales were subject only to a one and one-half percent (1.5%) tax under Section 189 of the same Code, amounting to P14,812.22. After the Collector denied its claim for a refund of the difference (P19,749.63), the appellant filed a recovery action in the Court of First Instance of Manila. The lower court ruled in favor of the Collector, prompting this appeal.

ISSUE

Were the lard, margarine, and soap manufactured and sold by the appellant subject to the 3.5% sales tax under Section 186 or the 1.5% tax under Section 189 of the National Internal Revenue Code?

RULING

The Supreme Court affirmed the lower court’s judgment, holding that the articles were subject to the 3.5% tax under Section 186.
The Court examined Section 189, which imposes a 1.5% tax on proprietors of coconut oil mills based on the gross value of “coconut oil manufactured or milled by them, including the derivatives, products, and by-products of the raw materials from which the said articles are produced or manufactured.” The Court interpreted the phrase “said articles” to refer to coconut oil, and the “raw materials” in this context to be copra. Therefore, the provision, as applied, reads: “including the derivatives, products, and by-products of copra from which said coconut oil is produced or manufactured.”
The Court found that lard, margarine, and soap are not derivatives, products, or by-products of copra. They are not by-products, as they are not remnants left over from manufacturing coconut oil. Neither are they direct derivatives or products of copra. Instead, the evidence showed they are manufactured from coconut oil itself through specific and distinct processes (e.g., refining, hydrogenation, mixing with other oils, churning, adding caustic soda) to create articles with specific uses (cooking, butter substitute, cleaning) for which crude coconut oil is not suitable. Thus, they are direct derivatives or products of coconut oil, not of copra.
The Court rejected the appellant’s argument based on the clause in Section 189 stating “when these derivatives, products, and by-products constitute sixty per centum or more by weight or value of the raw materials mentioned above.” The Court held that this clause refers to copra as the raw material. Lard, margarine, and soap are not constituted 60% or more of copra, nor is copra constituted 60% or more of these finished products. Furthermore, this clause is merely an additional requirement for taxability under Section 189 after an article is first determined to be a derivative, product, or by-product—a condition not met in this case.
The intent to limit Section 189’s scope was further evidenced by its subsequent amendment ( Commonwealth Act No. 503 ) deleting the words “derivatives” and “products.” A broad interpretation would create uncertainty over whether “derivative” or “product” refers to an immediate or remote antecedent material.
Finally, the Court noted it was improper for the appellant, which had charged its customers the 3.5% tax, to claim it should only pay the government 1.5%.
The appealed judgment was affirmed, with costs against the appellant.