4 - CIR vs INTERNATIONAL PHARMACEUTICALS INC.
FACTS
Respondent International Pharmaceuticals, Inc. (IPI) is the manufacturer of Casino Rubbing Alcohol, and
uses denatured ethyl alcohol as chief domestic ingredient. It is denatured to render it unfit for human
consumption under the authority and supervision of the excise tax division based on formula previously
approved by CIR. Sec 134 of the NIRC exempts denatured alcohol from excise tax provided that such
domestic alcohol is not less than one hundred eighty (180) degrees proof suitably denatured and rendered
unfit for oral intake.
The BIR informed IPI through a notice of discrepancy of deficiency income excise tax due on its denatured
alcohol which is classified as medicinal preparation. This was opposed by respondent, but the BIR later
issued a Preliminary Assessment Notice for taxable years 2000 to 2002. The BIR ultimately issued a
Formal Letter of Demand, and IPI filed its Protest/Motion for Reconsideration seeking for the FLD to be
set aside. Deputy Commissioner Henares denied the motion and issued a Final Decision on Disputed
Assessment (FDDA) on 16 August 2005 which was received by IPI on September 7, 2005. IPI filed its
motion for reconsideration against the FDDA on September 15, 2005 with Commissioner Bunag.
Pending the resolution of the motion with Bunag, a Warrant of Distraint and/Or Levy in the amount of
P176.8M was received by IPI on March 4, 2008. IPI filed a Petition for Review with Motion to Suspend
Collection of Disputed Tax Liability with the First Division of the CTA on March 11, 2008. After trial, the
First Division granted IPI's Petition for Review and cancelled the P176.M tax assessment.
ISSUE/S
Whether IPI timely filed its petition for review
Whether the denatured alcohol is exempt from excise tax
RULING
Yes. The petition was denied.
1st Issue
The CTA rejected the CIR’s contention and ruled that IPI timely filed its petition for review as provided
under Sec 228 of the NIRC. IPI received on 07 September 2005 Henares’ FDDA from Henares. On 15
September 2005, IPI filed a Motion for Reconsideration against this FDDA addressed to Commissioner
Bunag with a motion to elevate the assessment to the BIR's Appellate Division.
Sec 228 of the NIRC:
Section 228 of the 1997 Tax Code provides that an assessment may be protested
administratively by filing a request for reconsideration or reinvestigation within thirty
(30) days from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60) days from filing of the
protest, all relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty
(180) days from submission of documents, the taxpayer adversely affected by the decision
or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt
of the said decision, or from the lapse of the one hundred eighty (180)-day period;
otherwise, the decision shall become final, executory and demandable. (Underscoring
supplied)
The CTA ruled that the Motion for Reconsideration filed by IPI on 15 September 2005 did in fact toll the
period for the filing of a judicial appeal because of Section 3.1.5 of Revenue Regulation (RR) 12-99.
3.1.5 Disputed Assessment. The taxpayer or his duly authorized representative
may protest administratively against the aforesaid formal letter of demand and
assessment notice within thirty (30) days from date of receipt thereof. xxx
In general, if the protest is denied, in whole or in part, by the Commissioner or his
duly authorized representative, the taxpayer may appeal to the Court of Tax Appeals
within thirty (30) days from date of receipt of the said decision, otherwise, the
assessment shall become final, executory and demandable:
Provided, however, that if the taxpayer elevates his protest to the Commissioner within
thirty (30) days from date of receipt of the final decision of the Commissioner's duly
authorized representative, the latter's decision shall not be considered final, executory
and demandable, in which case, the protest shall be decided by the Commissioner.
Clearly, if the FDDA was issued by the Commissioner's duly authorized representative, a taxpayer
may still elevate the protest to the CIR within thirty days (30) from receipt, and the said FDDA shall not
attain finality. In such a case, the protest shall be decided by the Commissioner.
In this case, IPI elevated Henares’ denial of the protest to then Commissioner Bunag within the thirtyday
period. This prevented the FDDA by Henares from attaining finality. The Warrant for Distraint or Levy was
issued pending Commissioner Bunag’s resolution of the motion for reconsideration against Henares’s
denial of the protest. Had Commissioner Bunag resolved the motion, and the same was issued before the
Warrant of Distraint and/or Levy, such resolution of Bunag should have been the proper decision that was
to be elevated to the CTA via a Petition for Review.
Section 228 provides the taxpayer alternative remedies with respect to the appeal to the CTA of an
assessment protest, either a Petition for Review may be filed before a division of the CTA within thirty (30)
days from receipt of an adverse decision of the CIR or from the lapse of one hundred eighty (180) days
from the submission of the supporting documents for the protest.
IPI opted to wait for the decision of the CIR as it filed its Petition for Review with First Division on 11
March 2008, or eight days after it received a Warrant of Distraint and/or Levy on 04 March 2008. The
warrant was properly treated as the adverse decision appealable to the CTA under Section 228.
From the time it received the warrant on March 4, 2008, IPI had until 03 April 2008 to file its petition with
the CTA but filed its Petition for Review filed on 11 March 2008. Hence, the said petition was timely filed.
2nd Issue
Section 134 of the NIRC of 1997 provides that domestic alcohol when suitably denatured and rendered
unfit for human consumption is exempt from the excise tax imposed on Distilled Spirits by Section 141
SEC. 134. - Exemption in favor of domestic denatured alcohol- Domestic
alcohol of not less than one hundred eighty degrees proof (ninety per
centum absolute) shall when suitably denatured and rendered unfit for human
intake, be exempt from the specific tax prescribed in Section 141; provided,
however, that such denatured alcohol shall be subject to the tax under Section
106 (A) of this Code;
Provided, further, That if such alcohol is to be used for motive power, it shall
be taxed under section 148 (D) of this Code; Provided, finally, that any alcohol
previously rendered unfit for oral intake or after denaturing but subsequently
rendered fit for oral intake after undergoing fermentation, dilution, purification,
mixture or any other similar process shall be taxed under Section 141 of this
Code and shall be paid by the person in the possession of such reprocessed
spirits.
The CTA said that the law is clear that domestic alcohol, one hundred eighty (180) proof or more, when
suitably denatured and rendered unfit for human intake shall be exempt from excise tax.
The exceptions to this exemption are:
1. When such denatured alcohol is to be used for motive power, it shall be taxed under section 148
(D) of the NIRC of 1997; and
2. When any alcohol previously rendered unfit for oral intake or after denaturing but subsequently
rendered fit for oral intake after undergoing fermentation, dilution, purification, mixture or any
other similar process shall be taxed under Section 141 of the NIRC of 1997.
The CTA said that IPI’s denatured alcohol is covered by Sec 134, and is thus exempt from excise tax as
found by the First Division which said that the denaturing of alcohol was done under written authority and
supervision of the officially designated personnel of the Excise Tax Division of the BIR. The parties
admitted the existence of petitioner's evidence authorizing denaturing and certification of said denaturing
of alcohol at petitioner's premises. Under Section 134, alcohol, when suitably denatured and rendered
unfit for oral intake, is exempt from the excise tax prescribed in Section 141 of the NIRC provided, that
when the same, which was previously rendered unfit for oral intake, but later on rendered fit for oral intake
after fermentation, dilution, purification, or any other similar process, shall be taxed under Section 141 of
the NIRC, and the tax shall be paid by the person in possession of such re-processed spirits.
In other words, denatured alcohol can become subject to excise tax when the same is re-processed
to make it potable or drinkable
Regarding petitioner’s contention that IPI failed to present any proof that its denatured alcohol fully
complied with the provision of Section 134 with respect to the 180 proof alcohol requirement, the CTA said
that respondent did not need to present such evidence since the same can be derived from the issued
PAN and the FDDA. Based on the BIR’s formula, IPI's denatured alcohol passed the requirement as a
domestic alcohol of more than one hundred eighty (180) proof with a one hundred eighty-nine (189)
proof using simple algebra.
Medicinal Preparation Liable to Tax
As to petitioner’s contention that IPI's Casino Rubbing Alcohol as medicinal preparation is subject to excise
tax, under Section 141, the CTA ruled that what is being taxed in medicinal preparations is the chief
ingredient of the said preparation and not the end product as specifed by the phrase shall be subject
to the same tax as the chief ingredient, as well as indicated in the assessment notices. The PAN and
FDDA used as tax base the proof liters of the denatured alcohol as the chief ingredient, and not Casino
Rubbing Alcohol, the medicinal preparation.
SEC. 141. Distilled Spirits. - On distilled spirits, there shall be collected, subject to the
provisions of Section 133 of this Code, excise taxes as follows:
(c) Medicinal preparations, flavouring extracts, and all other preparations, except toilet
preparations, of which, excluding water, distilled spirits form the chief ingredient, shall be
subject to the same tax as such chief ingredient.
In determining the tax, the taxing authority should first examine the taxability of the chief ingredient before
deciding that a medicinal preparation is liable to the excise tax. If the chief ingredient is tax
exempt, then the preparation is likewise exempt.