CIR v. La Tondena, Inc.

and CTA, 5 SCRA 665, July 31, 1962 PAREDES,J p

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs. LA TONDEA INC., and THE COURT OF TAX APPEALS, respondents.

The respondent, La Tondeña, Inc., is a licensed rectifier engaged in the business of manufacturing wines and
liquors. In the manufacture of "Manila Rum", it purchased in crude form which it re-rectifies or subjects to further
distillation in order to in produce only high-quality products. In the process of further rectification or distillation,
losses thru evaporation had been incurred.

The petitioner, Collector of Internal Revenue, assessed specific taxes on the alcohol lost through evaporation and
demanded payment from La Tondeña, Inc. covering the period from June 7, 1950 to February 7, 1954.

La Tondeña, Inc. appealed the assessment to the Conference Staff, but was refused to reconsider the assessment.
Not satisfied, the La Tondeña, Inc. presented an action with the respondent Court of Tax Appeals. The Tax Court on
December 7, 1955, rendered the following judgment

“Petitioner La Tondea, Inc.,is hereby ordered to pay the respondent Collector of Internal Revenue
the sum of P672.15, by way of specific tax. However, with respect to the balance of the assessment
amounting to P153,990.95, which corresponds to the period after January 1, 1951 and up to February 27,
1954, pursuant to Republic Act No.592, the petitioner is declared exempt from liability for the specific taxes
assessed therefor.”

The Collector of Internal Revenue appealed the decision to the Supreme Court.

Whther or not Court of Tax Appeals erred In exempting the respondent La Tondea, Inc. from the payment of the
specific tax on rectified alcohol lost in process of further rectification, during the period from January 1, 1951 to
February 27, 1954

In accordance with section 133 of the Tax Code, up to December 31, 1950, said section reads:

"Sec. 133. Specific tax on distilled spirits. On distilled spirits there shall be collected, except, as
hereinafter provided, specific taxes as follows:
'(a) If produced from sap of the nipa, coconut, cassava, camote, or buri palm, or from the juice, syrup, or
sugar of the cane, par proof liter, forty-five centavos.
'(b) If produced from any other material, per proof liter, one peso and seventy centavos.
'This tax shall be proportionally increased for any strength of the spirits taxed over proof spirits.
'Distilled spirits', as here used, includes all substances known as ethyl alcohol, hydrated oxide of ethyl, or spirits of
wine, which are commonly produced by the fermentation and subsequent distillation of grain starch, molasses, or
sugar, or of some syrup or sap, including all dilutions or mixtures; and the tax shall attach to this substance as
soon as it is in existence as such, whether it be subsequently separated as pure or impure spirits, or be
immediately or at any subsequent time transformed into any other substance either in process of original
production or by any subsequent process.' "

Pursuant to the above provision of law, therefore, "the tax shall attach to this substance as soon as it is in existence
as such" etc. However, on January 1, 1951, Republic Act No. 592 took effect, amending section 133 and the clause
underlined above had been eliminated. The evident intention of the law maker in deleting the all embracing
underlined clause, was to subject to specific tax not all kinds of alcoholic substances, but only distilled spirits as
finished products, actually removed from the factory or bonded warehouse. The said amendment could not mean
anything else; it is in harmony with section 129, of the same Tax Code which provides

"SEC. 129. Removal of spirits or cigar under bond. Spirits requiring rectification may be removed from the
place of their manufacture to some other establishment for the purpose of rectification without the
prepayment of the specific tax, provided the distiller removing such spirits and the rectifier receiving them
shall file with the Collector of Internal Revenue their joint bond conditioned upon the future payment by
the rectifier of the specific tax that may be due on any finished product..."

And if one would consider that the Tax Code does not prohibit further rectification or distillation and defines in
section 194 thereof, a rectifier as a person who rectifies, purifies or refines distilled spirits, the conclusion is logical
that when alcohol, even if already distilled (as in the present case) or rectified, is again rectified, purified or refined,
the specific tax should be based on the finished product, and not on the evaporated alcohol. The intention not to
subject to specific tax all kinds of alcoholic substances but only distilled spirits as finished products, is reflected in
former Senator Garcia's observation on the floor of the Senate, during the discussion of House Bill No. 1443 (now
Rep. Act No. 592), when he proposed the elimination of the phrase "and the tax shall attach to this substance as
soon as it is in existence as such, etc." He said

"That is why, Mr. President, in Section 1 of this Bill now under consideration, I have some serious objections
to the provisions where all kinds of alcoholic substance which falls under the definition of proof spirits in
the last paragraph of the same Section I of the proposed measure are taxable because this is one of those
that I consider of deterrent effect to the industrialization of this country ...(Senate Diario No. 6, Jan. 15,
1951, Original 4th Special Session; Emphasis supplied.)"

And on August 23, 1956, upon the recommendation of the Bureau of Internal Revenue itself, Rep. Act No. 1608 was
passed, amending section 133 of the Tax Code, as amended by R.A. No. 592, restoring the very same clause which
was eliminated (Sec. 7, R.A. No. 1608). The inference, therefore, is clear that from January 1, 1951, when Rep. Act
No. 592, took effect, until August 23, 1956, when R.A. No. 1608 became a law, the tax on alcohol did not attach as
soon as it was in existence as such, but on the finished product. And this must be so, otherwise a great injustice
would be caused upon a duly licensed rectifier, who, like the respondent herein, will be made to pay the specific
tax on the alcohol lost thru evaporation, from which no one has been benefited, based on the provision of laws
then extant, of doubtful application. In every case of doubt, tax statutes are construed most strongly against the
government and in favor of the citizens, because burdens are not to be imposed beyond what the statutes
expressly and clearly import (MRR Co. vs. Coll. of Customs, 52 Phil.,950; Luzon Stev. Co. vs. Trinidad, 43 Phil.,803,
809).It should be pointed out also that said section 129 was amended by adding the following

"And provided, further, That in cases where alcohol has already been rectified either by original and
continuous distillation or by redistillation is further rectified, no loss for rectification and handling shall be
allowed and the rectifier thereof shall pay the specific tax due on such loses" (Sec. 5, Rep. Act No. 1608)

which obviously reveals that the purpose of the amendment is to tax, only now, alcohol lost, in further distillation
or rectification. This law certainly should not be given a retroactive effect, so as to cover the period in question
(January 1, 1951 to February 27, 1954). It is only after August 23, 1956 that the government woke up from its
lethargy and hastened to fill the hiatus.

 La Tondeña, Inc. is a licensed rectifier engaged in the manufacturing of wines and liquors. They purchase
alcohol from various suppliers and use it in the production of their products.
 In the process of further rectification or distillation, losses through evaporation occur.
 In 1954, the petitioner demanded payment of specific taxes on the alcohol lost through evaporation.
 La Tondeña, Inc. protested against the assessment, but the petitioner refused to reconsider.
 The petitioner argues that the specific tax should be based on the evaporated alcohol, while the
respondent argues that it should be based on the finished product.
 La Tondeña, Inc. appealed the decision to the Conference Staff of the Bureau of Internal Revenue.
 Before any hearing could be held, the petitioner required La Tondeña, Inc. to deposit half of the
assessment amount in cash and the balance guaranteed by a surety bond.
 La Tondeña, Inc. requested reconsideration of this requirement, but it was denied.
 Unsatisfied with the rulings, La Tondeña, Inc. filed an action with the Court of Tax Appeals. The Court of
Tax Appeals modified the decision of the petitioner and ordered La Tondeña, Inc. to pay a reduced
amount of specific tax.
 The court declared that La Tondeña, Inc. was exempt from liability for specific taxes assessed from
January 1, 1951, to February 27, 1954, based on Republic Act No. 592. The Court of Tax Appeals ruled in
favor of La Tondeña, Inc., stating that the specific tax should be based on the finished product.
 The petitioner appealed to the Supreme Court, arguing that the Court of Tax Appeals erred in exempting
La Tondeña, Inc. from the payment of specific tax and in assuming jurisdiction over the case.
 The Supreme Court upheld the decision of the Court of Tax Appeals.
 The court interpreted the relevant tax statutes and concluded that the specific tax should be based on
the finished product and not on the evaporated alcohol.