CTA Case No. 257 (Decision)

1\1:.1 l I 1ULlPPINBS GOLHl Ul \X Al>PEALS MANILA .Pe ' tloner, - ersu - c . c ~ . � 2tl7 lA~ �XC)('"~' TE L \ espondent. X� � ~ � � � � ~ � � � h t is n ppe 1 ro the ci on of r pon- nt oll etor of Internal 1n in fr , Inc. , ~ 1 n ' frt y h tot l u 7, 1 � � lu n �- r 1v p 1 y for vlol t1on of th ok- pin r ul -r n c J.c J.ency ~ _inc ~_..:;..;;;,: n th unt of l , al � � p~u urch � f y 1952. tit on r 1 corporation duly r z ci 1 n the la s of t 11 pp n � (p � � place of t t � ria nh tltion for vi � tt ). t t as of co oun ing dist 11 nufactur of win nd oth r 11 or ro leol ol purchased fro a ly 1 c sed di t 11 r (p r. 2, - t1t1on for � d; pp. 65, 71 , t.s . n. ). It 1& lso in th 1 0 in s ,d 11 or , 16 7

DECISION - C.'f.A. E JO. 257 � 2- foreign and local, which it purchases locally {pp. 169-170, t.s.n.). On March 31 , 19 !> , the Chief of the Specific Tax Division instruct d Bin Ag nts ariano P. Uy and Venancio v. Ona to investigate the business trans- action& of petit1onor for the five-year period co~ pristng January 11 1950 to December 31� 19~4 and su it a report on their inv~st1gation (p. 31, IR rec.) . Acting upon this instruction, ate m of BIR ag nts composed of essrs. Arsenio F. Santos , .1es s N. ~land s nd firso s. Viray , who ere und r th direct !dance and su ervision of Agents ariano P. Uy and V n nc!o v. Ona , inv stigated the business transactions of titioner nd submitted r port of their findings on August 11, 1955 (Exh. 2, p. 30, IR rec.). he report states that t1tion resumably used, in th pro uction and manu� cture of liquor for the years 1953 and 19~, the r spoctivft amounts of ~2 , 647 and 14, 709 proof liters of lcohol for which no tax ther on had been previously paid. On th basis of this finding , the BIR a ents recomm nded to respond nt Col! ctor of Internal v nu �the as - � sess ent for sp cif1e taxes for those y ars in tbe sums of 36, 852.90 an 10,~6.30 or total of ' 47, 149. 20 against p t!tioner. Accordingly on August 16, 195~ . respondent assessed ag inst nd dem nd d from p t1t1oner th@ � amount of P47,1~9.20 as previously reco ended to 168 /~

D�.ErC.IAS.I � � 257 CASE - 3- cov r sp�c1f1c taxes due for the years 19~3 and 1954 on lcohol used in the compounding of 11 uors , plus th .su of 10,000.00 as penalty for the al- leged violation of s ction 133 ( a) of the .atio al Int rnal Revenue Code in r lation to s ction 174 of Code, and n dditional sum of 00. 00 as penalty for t!tioner's violation of the boo oep- ing regulati ns (Exh. 3, pp. 39-40, BIR rec . ) . On October ~. 1955, pet�tion r requ sted for the reconsideration of the d cision of the Collector of Int rnal evenue for the reason thnt there was , contrary to th latt r ' s fin 1ng, no increase of proof- liter 1n the tax p 1d alcohol used in the com� pounding of 11 ors, nd if there was ny lncr o , th !ncr as \aS in th volu e of liters (Exh. 4 , pp. 45-50, IR rec.). Howev r, on rch 13, 19 6, respond nt d ni�d this r quest , h nce 1 on Apr~l ~ . 1956, petition r fi led its petition for revio ~~th t his Court. T � parties entered into a partial stipulati n of facts . w !ch re reproduce ercund r: "1. Th t upon su sequent v rificat! n ~on uct y the pet1 io er and the re$pon- d nt , it w s asc rt ed that t he peti- tioner d not ineur any income tax lia� � b111ty for th year 1952; 2. hat it w ascertained also thQt he sp cif1c tax involved in this case for th ear 1953 has been r duccd fro ~6 � ~2. v to 25 , 18 .40. 1ch reduced a ount was arr d t & follows' � 169 I

DEC IS I - C.T.A. CASE NO. 2~7 - 4- Inventory of finished 29,571 p.l. liquors as of Jan. 359,CXX> p.l. 1, 19~3 ������������� 387,571 p,l. Adds Liquors trans- 17,194 p.l. ferr d for sales ���� 370, 377 p.l. Total av 1lable for sale ���������������� Lessa Inventory of finished liquors as of Dee. 1, 1953 ���� antity of tax-paid alcohol used 1n com- pounding and sold ��� Total sales ����������� P904, 102.24 Lessa ale of pur- 286, 85 .63 617,243.61 chase liquors ������ ales of own eo � 1, 519 pound liquors ����� � 9 p.l� 1v1ded by averag selling price per proo liter ��������� ant1ty of o n com� pound liquors etually old ������� ant1ty o tax-p alcohol u& d in com- und ng n sold ��� Diff rene ������������ peeif e t x ue ther on at .70 per proof liter ����� �3. fh t the specific tax involved in this c se for t1e ye r 19~ has ben r dueed fro 10,296. to ,521,60, whic r due d ount h n arrived at as follo s Inv ntory of finish d l7, 194.p.l. liquors of J n. 453,106 p.l. 470,300 p.l. 1, 1954 ������������� ds Liquors trans� 27,22 p.l. ferred for sales ���� o al ava1la le for 4413, 077 p.l. sale ��������������� � L ��� nv ntory of finish d liquor s of ee, 1, 1954 ���� antity of tax�pa1d alcohol used in co - pounding and sold ��� Total sal ����������� 913, .07 ���� ales o pur� chas d liquors ������ 228, 888,65 170 /ill

E � 257 2 -- 1. - �� ������� - r- 1 � vc - � nt 1 ner to t tlon uc at t f 0 1 inv s tel �� ln tit � J t' 1 ( � c.) � � t �� 0 0t � 1~ n r' 0 1 � c .. 1. 7 1

D ClSI 11 o. 257 c. r.� ubtr ctii'tg ther fro. th cost of sal s � � �e. , put� c h se plus the 1nv n tory at th be inning l ~s th$ 1nv ntory at t.h nd of the eccount1n p rio of thes~ y ars . all d1sc losed fro p tit on .r �s profit nd los& atat�m nt. Th gro s profit .re ntag s tlen rr1v d at by dividing th osc: profit y th c ost of sale&.. inc p titiono.t� sold ooth locul and forei n- ~d liquors ~hich x pr ou ly purchYsed fro th lot 1 market . th r vcn�e a cntc ~ccordingly 1 1n tod the corre pon in s lcs of uch liquor rchcS d. Th 1 s o th locally purch d li or obt 1n dding t cost f s 1 s th reo� to th ro profit 1 m t. h nv rage t od 1 u in ord r o arri t th ~antlty of t1tion r ' nuf ct r d liquors - ct lly old 1n r~s of o f lit � y t 1S th 9 A divi t sal of tl- t1on r' c ur d in an 11 or y th ver g llin pric r oof lit r un d 11 or � 1 ur n.... th , e r. h 9 llin pr1c r proof lit r wa sed pon �t t t 1 llin p.rlc of t he various r nde of liqu r co poune d by th corpor tion uring h r 195 nd 19 s c r d fro vail bl of proof lit rs cont in d h rein. y his co p t - tion, th r enu 9 nt d t rra1 d the ount of pro f liters all d to h v n actu lly us d nd � ld y etiti n � o. parin t 1 fi ure lth th t ,. 1 ~ ') l?f - ' r..J

�CJSl � C,T, A. CASE 0 , 257 unt of proof liters of alcohol which was deem d re ov d and old--tax- paid, as computed from the Off1c1al gister ook , Exhibit 1--the ag nts arrived at the excess of actual sales over the quantl~y dee d re oved and sold tax p 1d (s xh. 2, p 2e- rec . ) . his xc s as considered a th ount of alcohol for which no tax had been pr viously paid and wa t en as&e~sc t the rate of . 70 per proof lit r , pursuant to section 133 ( ) of th a- tiona! Internal evenuo od ancl the su ject of the present ppeal. ro the afor - t a~ed partial st!pul t on of facts, it appears that p tit!oner did not incur any 1ncom$ tax liabil ty for the roar 1952. one , w aecordin ly f nd that t r s no ef1ci ncy 1nco 1 t x ith r spect to l year. h r lnin ques- t on therefor to be r solv d in thi pp al r late to the spec f c t x assesse nd de anded fro sa d petitioner in th su s of 2 , 18 . 40 and o , :>2.t.. for th y ars 1 53 and 19 r e ecti.v ly. Th s , 1&sues no . foro ua may e s mr.1ar1zed as follow � \ 1. het r or not t ods employ d by r spondent in a sess nt of specific tax a a tition r justified; 2. hether or not ther as really n xee&s of alco ol, use y p tit in t h0 p:roluction of wines and 1 ors over t he ount of t x-p id alcoho J \ 3. hethor or not t exce& of aleoho , if any, is tax unpaid; and 4 . hether or not petitioner 1a liable for a inistrative penalty or co pro �ise. 173 11Y

DECISlOO � C. r.A. CASE O. 2!51 - a� � �111 take up these 1asues Ja seriattffi� espondent contends that the �gross-prof~t method� and �average tho4� wr� resorted to 1n pursuance of section 15 of the tax Code which autho- rizes the aasess-.nt of the tax on the basis of t �best evidence available� . On the other hand. pe- t1t1oner contends that tM Mthocls employed in/ ar- riving at tM assessment are not justified. v'It is argued that under said section 15. /these methods of assess..nt may be used only in cases where a report required by law as a basi& for the assessment has not been su ltted to the Collector of Internal evenue or that any such report is false . tncoaplete or er- roneous. It is maintained that since there was nothing wrong. anomalous or irregular 1n the keeping by peti- tioner of the Official egiater Book, the sales jour� nal, the profit and los& statements, inventories and other pertinent records, the Collector of Internal e� venue could not assess the tax on the basis of th �gross profit -.thod� and �average ..thod� which wer aubstitut� ..thods. � fin petitioner'� contention ..r1torious. j~ lt has sua.itted the transcripts of the Official e- gister ok which abow that the s e ..r� properly kept by it as required of distillers, rectifiers and compounders. espondent's own witnesses, Agents LeopoldO C�ac:ho, Delfin Eaapal.llado ud Arsenio F. antos, the latt�r a certified public accountant. 1 ~} tl

DECJSIOO � . r .A. E NO. 257 - 9- ho were ong the e. ers of th te . that in- vestigated this ease , ad 1tted thet they did not find the e r ecor s to be false , 1ncompl te or erroneous. The jultification of the ex rcise of the po er of th Col lector of Internal ev n to ss ss th y pro er tax on the best evidence obtain le 1 pre- dictted upon the insta c ere a {1) report r ired by law as a basis for t e ss ss ent shall not forthe ing 1th1n the time allo y 1 or egu- lat1on , or ( 2) en th r 1 son t belie th t te, or erroneous (o c. 15, even e Co e). U less it 1a sho n th t any of the two circu v n a ov exists it follo ' h t res ondent cannot 1s eg t eeords aintain nd reports 1t d y the ta nd d tu ne h1 ta l a 111ty t ro t e � oss rof t et od� and �averag thod" plo ed 1n th in t nt ca � In t ab ence of a sho ing that the r ports (tr n cr pt of th offici 1 gl t r oo ) re f lse, 1.nco plete nd erron ous, �� c ld not se any plau � le j t1 c t1on f use of substi tute et oda by r espon- ent 1n r r to pport a finding h t t e 1s ny exces 1lco 1 ov the tax-p i alco ol u d 1n th ding of petitioner' d in 11 r a. or over, t of t he lnv ntory thod 1n thi case h ot been sho to proper cons d ring t t p t1t1 n r d al t 11 ors of v ry n in n- 175

DE 'I -l - to y cl if e tton , � ch lth diff r nt ar 1n of profit, for ~ch no distinction as place � s a tt d 1n the e e at y r n o �antoa. ~ sp nd nt � witne s. 1n n ~ to e a 1n tlon , h t stifl th t th �- ues io o. c t rof1t xa � for for� n and loo lly purch e win !.1 l'l �r� 1 locally anuf ctur ct f petition � y t , th oss profit p reent � r t e arrlv pond t as s p 1o r ' ness durin th 1953 nd 1 54 , tch p e n s t k n fro t e total $ales for thoae y r , a ppli d in 1sc:r1 t ly u the eo t of sale of t . 1 c ly purch"' or n � 11 a t t f for gn d 11 or � rlv n t th tot 1 1 s f r purch 11 r � th t d fro tot 1 1 of 11 1quors or p rch d y p tit on r wit out provl in for y llo nc for pric r rofit differ ne � t dlff r nt roduct or fo:r tl n nt1t1 s er of. � ecaust ~ff!�tn:t ~ml! ~' (S c. l , ccou ants H nd ok , ufu � 5 �) The re ult nt to al al s or anuf ctur o- duet 1 th r for f fro b ing 1 t oor n 1nad quat pproximat on or c lcul tlon. 1.76

7 - 11 - 1n to t ver 9 thod, p n nt in 1v... g t th sellln pr1ce per pro f liter f " � or 11 uor c d d upon th s ti n th t 11 al es r� de p oport1on t ly fro 11 ac 1 1t1 ns , .1ch contr ry o or n ry re n sing p - It � not xt ns1v ly diseuss d ele for all k1nds o hardly pre �n vol t: ct t 1 or my old f r t r r1 - nt cr..t nt1t1 � fh � c t nc olu f ct vol of 1 ad r , f r r of 1 s 15 ter on tl lit r of ine ~ r pric 0 f 11t r , t p- p11c t vr pric n t~t l al n ro f 1 us ol � r f le f llt r of 11 rs pr oof lit r, h � n cy 0 h 'r N or t pric or lt t ult 1 � t �- pon , h 1 .. rtc!.ng etn nr 1, u t ntt. lly f ct t ount of p.r of ind p nd t 1 d to in - poun 1rcu t re ond nt1 0t ar u at 1c p ~ proof lit r to n t prop r in th 1n t nt c � � n proca t o t � quest on r�i � as to w � - 17 7

� ~7 - 12 - tber or not th re w � exc � of leo 1 u y pet1t1one~. In the ain, the te�t �� an cloc - enta ev1de ces pre ent�d t nd o ale olle conten � o h n s d 11- ora d c d th ~ th alcoholic c n n a stat d ls ( xha. A toG, 1nclua1ve. � 6 - 7 � CTA ec.). et1t1oner' � witnesses. a� a1tan and anuela f. ena ceao, a alvst f t olic ����reb Healt La rato~y. teat1f ed tha , av!n �ubjected t � s pl� p oduets of et1 loner to e - leal anal ail for an v1o ation of the � Fo w, tne o n th t t e ac u 1 a eo nh her of was lo r th n t ose at t 1 th � �� heir re was st n t� corro o at1n st t fL f t � Fo an D ug ct1on of t e lth �- search La r r of � rt nt of alth an ex� o f .lclo r of the 1oo~rro od Ins ct , w o even nt t he x nt f t t she h s no c e cross a 11 or wh1c� 1s a � sr nt atat !n t a 1. , � a � note of teat on u AI , u rv ao f Distil� l ies of t ro 1 v u , who f t r corro orated t te 1 of th thr � o s .y witne � / In add tion , .. h_aye afael Juan , wine 1xer 1 of petitioner, who testified that the add1t1o of ,, 178

- cD.Cr.IAS.I c ~. 2~7 - 13 - ater, clar1fy1ng ag nts an lodo d Europa to p ti� t1on r � s produ ta 1nc~eased the olu of gaug liter� of the c ound without inC~ asing the ad or str ngth. This te�timon of afa 1 Juan a be n corroborated by Lutonlea � P &iga � nee, alt ough there ay h v en n incre&s !n the vol of gau e liters p�tltion r ' s product y re son of tbe addi- tiv s , t re w s no 1ner as in t proof lit rs tn tcxable leohol to just1f r spon t's assess nt. espondent, how ver , argu th t th r� 1s no evldenee adduced to show that the s o the co - t e witnestes of et1t1oner re s cur d nd collected from th 1 tter. e f i nd this ela 11 found d, or on t e contr r y, the re ate for nal sis of th sa ples of roduets (Exh � A to G, inclusive) r f r to sa plea of pr cts of petitioner and t he e re 1dent1f1 d b M �� tmaitan d � v. ens c so, in their t t nits. e find t at ~� pond nt due d no evi enee to c ntra- dict the pos1t1v� st t ente of thoa w tnesses and t e sa the~efore stand unaasa1led. h1a view, : spondent ex ~ ssed th fear that petitioner� theory t at the dd1t1on of at r to alcohol er ly lncr as s the volu of gauge liters but not its proof iters a b va11 d of by co - pounders to th prejudice of t � vernment 1n the for of � loss 1n p c1f1c tax re enu s. It ay stated, ho v r, th t t 11 could b s ua d b th kno ledge 1 79 /72

.t. A. E o. 2 7 - 14 � tb t th vern t has 11 he ns and f cilities at its co nd , and 11 th pote tial eap il1t1��� to detect the pres�nce of or exist nee of used lcohol th t are ot tax-p id in t e eo ound1ng of 11 rs nd wines. T ls concern r t � pr t t1on of govern- ant revtnu s 1 � ttt of a 1n1strat1v� � ervi- sion of the � tabl!s enta of distill rs, co oundera an the like, ut canno by 1ts lf be a ast for the sseasmen of sp ciflc tax here t t1rcu st nces oo not support the a e .. In th lnst nt cas � w lncl that th pr au t1o of the correctness - of r spo dent's ss $ nt $ en � e ch an a re by co et nt evid nc � nd con e ently. th r en hift n the v r nt to � w, ele rl an u ml t ke 1 , tt t ther w. s in fact an 1ncreas in proof l t r of lcoho! ;ed and not n eug liters. oth p rtie ving n i.v n th 1 opportunity 'f.. to su t in t eu: &p ct1v t1on nd 1t pp in t at the ov rn; 1 d to uat in its aaseas- t wh re t was imp aeh d nd 1r d b a e- qu te ev1 nee, ld ot a o ay clear J.n find- ing the e it of r pond n ' f r the stat woul thus r jud c d. Altho h th � hir 1 ue 1 o rend re c de c . el ve th t 1 e aston t er of uld in f ct further stress our finding tat v � espond nt �1nta1ns that in the anuf ctur of 1ta ro eta, p - tl ion r sed ale 1 f r z i eh no pee1fte tax ad 1 80 It!

~1 o. 257 C.T. A. -1 - previously n p id. Vnd r th oc dura of secur- ln �lcohol, any uch alcohol . st h v n o tained fro distill r , and if th ~ ny rit to the ch~ , t e curing of ch leo ol out pr p - is conniv nee b t en th distill r n' ag nt beli v , ho v r, that t 1 a le ti n 1 1thout r a n bl s1 � tit oner' t 11 is s1tuat d n co er 1 dist ict nd a& uch , ou l d n r u ri fo n one to nl n or 1thin its co :pound alcohol or 1ch no t X ad b n r viously pald. t y be d f rth r t t t1- c � t1 n r � s � t blisl nt onl co nd. leo ol 0 o r n g lea 1n into th con n s on hi.Ch t X $ n 1 11 t pon 1 g ev nue s a $ p pa nt of t t r on. tition r � 1tnes , , fa 1 Ju n, Gt tt lcohol 11 ch p t 1t1 n t co o n 1 g of roduct 1a ou t fr 1 c ns d tll l ries 1n which th ax h e n pr viousl � his f ct n corro orat d y p rv1 n nt- t-Lar of 01 till r , poldo C nd 0 1 o, both � � d l l of ho r ov r of 1c rs o ch ut 1 in pet t1o � bli&l nt a distill r In r g d � c any lc holo f 0 oth dist 11 � di po itlon th r of 1 controlle ' n 1. 8 1

- 0 I I o. 2 7 c. .A. � S.E - 11 - is to ad � As nt tter of fact it as shown thet th co pound consisting of lcohol nd ter 1s placed in t n s, eparate tank being pro ided for e ch brnn of co poundod 11 or, nd each tank 1 cov r d by a parat account r eord. r rs check th co position and contont of th goinst the r ' s book. Th ntri fi of th g ug r ' :.- book �- Officlal are al o corr spondingly r co d1 t ~1Gter ook (Exhibit l) hich r pond nt � s g nt it to hav b n found to b r gul ly pt 1thout ny inform tion ot r than that alcohol recor d th rein r t x paid. fh s circumstanc s l po nt out t t th r could not h n ny alcohol us d by he pe 1t1on r in h co. o nding of �t pr d ets f r � ch the p - cif!e not n pr viously paid th r n. fin th t ( ) th two n tho s ( 0 � profit nd th d ) re not pr p rly lo d nd y r spond nt in th king of th dis- put s $ nt 1n ccordance with the req~ nt of Sec ..ion 1 of the t~at!on In mal ' n e Cod � l:' r itr y 1n nut r ; nd (2) the.r ate denc to support r spond nt � t in 1 n thnt er w s an under-d cl ration y etition r f th alcohol cont nts of it products nd th t h 15 no xc ss in lcohol used on wh ch no p clflc x h d on pr v1ou ly pa id. Having r ached h conclLtS on , so hold that petitioner is not liabl for t 182 ~~

a � 257 - 17 - 0 2 ,1 a � , !> � a c e t or ho y ars eapec v ly. fl..i n ' rh � the 0 S1ty or 1 eus a- re t� judi r� v1olati n o 10 174, 0 al nte l u.rt �� ay, �t y haa OJur 1 s $ 0 that eto y �� 0 nal nu � 1er c. � � o, � 1 ..,1). t f of n � ev r � pr n u t � 1� p �1 � 183