PHILIPPINE ACETYLENE CO. INC vs.

CIR GR No L-19707, August 17,

1967 / 20 SCRA 1056
Castro, J.
Digest 1:
FACTS: Philippine Acetylene Co. Inc. is engaged in the manufacture and sale of
oxygen and acetylene gases. It sold its products to the National Power Corporation
(Napocor), an agency of the Philippine Government, and the Voice of America (VOA),
an agency of the United States Government. When the commissioner assessed
deficiency sales tax and surcharges against the company, the company denied
liability for the payment of tax on the ground that both Napocor and VOA are exempt
from taxes.
ISSUE: WON Philippine Acetylene Co. is liable for tax.
HELD: YES. Sales tax are paid by the manufacturer or producer who must make a
true and complete return of the amount of his, her or its gross monthly sales,
receipts or earnings or gross value of output actually removed from the factory or
mill, warehouse and to pay the tax due thereon. The tax imposed by Section 186 of
the Tax Code is a tax on the manufacturer or producer and not a tax on the
purchaser except probably in a very remote and inconsequential sense. Accordingly,
its levy on the sales made to tax- exempt entities like the Napocor is permissible.
On the other hand, there is nothing in the language of the Military Bases Agreement
to warrant the general exemption granted by General Circular V-41 (1947). Thus, the
expansive construction of the tax exemption is void; and the sales to the VOA are
subject to the payment of percentage taxes under Section 186 of the Tax Code.
Therefore, tax exemption is strictly construed and exemption will not be held to
conferred unless the terms under which it is granted clearly and distinctly show that
such was the intention.

Digest 2:
FACTS: The NPC enjoys tax exemption by virtue of RA 987. It is contended
that the immunity thus given to the NPC would be impaired by the
imposition of a tax on sales made to it because while the tax is paid by the
manufacturer or producer, the tax is ultimately shifted by the latter to the
former. The petitioner invokes in support of its position a 1954 opinion of
the Secretary of Justice which ruled that the NPC is exempt from the
payment of all taxes "whether direct or indirect."
HELD: In the early case of Panhandle Oil Co. v. Mississippi the doctrine of
intergovernmental tax immunity was held as prohibiting the imposition of a
tax on sales of gasoline made to the Federal Government. Said the
Supreme court of the United States.
Justice Holmes did not agree. In a powerful dissent joined by Justices
Brandeis and Stone, he said:
"If the plaintiff in error had paid the tax and added it to the price the
government would have nothing to say. It could take the gasoline or leave
it but it could not require the seller to abate his charge even if it had been
arbitrarily increased in the hope of getting more from the government than
could be got from the public at large. It does not appear that the
government would have refused to pay a price that included the tax if

demanded, but if the government had refused it would not have

exonerated the seller."
In 1941, Alabama v. King & Boozer held that the constitutional immunity of
the United States from state taxation was not infringed by the imposition of
a state sales tax with which the seller was chargeable but which he was
required to collect from the buyer, in respect of materials purchased by a
contractor with the United States on a cost-plus basis for use in carrying
out its contract, despite the fact that the economic burden of the tax was
borne by the United States.
The asserted right of the one to be free of taxation by the other does not
spell immunity from paying the added costs, attributable to the taxation of
those who furnish supplies to the Government and who have been granted
no tax immunity.
Further inroads into the doctrine of Panhandle were made in 1943 when
the U.S. Supreme Court held that immunity from state regulation in the
performance of governmental functions by Federal officers and agencies
did not extend to those who merely contracted to furnish supplies or
render services to the government even though as a result of an increase
in the price of such supplies or services attributable to the state regulation,
its ultimate effect may be to impose an additional economic burden on the
Government.
But if a complete turnabout from the rule announced in Panhandle was yet
to be made, it was so made in 1952 in Esso Standard Oil v. Evans which
held that a contractor is not exempt from the payment of a state privilege
tax on the business of storing gasoline simply because the Federal
Government with which it has a contract for the storage of gasoline is
immune from state taxation.
We have determined the current status of the doctrine of
intergovernmental tax immunity in the United States, by showing the drift
of the decisions following announcement of the original rule, to point up
the that fact that even in those cases where exemption from tax was
sought on the ground of state immunity, the attempt has not met with
success. If a claim of exemption from sales tax based on state immunity
cannot command assent, much less can a claim resting on statutory grant.
We therefore hold that the tax imposed by section 186 of the National
Internal Revenue Code is a tax on the manufacturer or producer and not a
tax on the purchaser except probably in a very remote and inconsequential
sense. Accordingly its levy on the sales made to tax-exempt entities like
the NPC is permissible.
RULING: We hold, therefore, that sales to the VOA are subject to the
payment of percentage taxes under section 186 of the Code. The petitioner
is thus liable for P12,910.60, computed as follows:
Sales to NPC

P145,866.70

Sales to VOA
P 1,683.00
Total sales subject to tax
P147,549.70
7% sales tax due thereon
P 10,328.48
Add: 25% surcharge
P 2,582.12
Total amount due and collectible

P 12,910.60
Accordingly, the decision a quo is modified by ordering the petitioner to
pay to the respondent Commission the amount of P12,910.60 as sales tax
and surcharge, with costs against the petitioner.