PHILIPPINE ACETYLENE CO. INC.

vs COMMISSIONER OF INTERNAL REVENUE

FACTS: The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. During the
period from June 2, 1953 to June 30, 1958, it made various sales of its products to the National Power Corporation, an
agency of the Philippine Government, and to the Voice of America an agency of the United States Government. The sales
to the NPC amounted to P145,866.70, while those to the VOA amounted to P1,683, on account of which the respondent
Commission of Internal Revenue assessed against, and demanded from, the petitioner the payment of P12,910.60 as
deficiency sales tax and surcharge.

The petitioner denied liability for the payment of the tax on the ground that both the NPC and the VOA are exempt from
taxation. It asked for a reconsideration of the assessment and, failing to secure one, appealed to the Court of Tax
Appeals.

The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the manufacturer and
not on the buyer with the result that the "petitioner Philippine Acetylene Company, the manufacturer or producer of oxygen
and acetylene gases sold to the National Power Corporation, cannot claim exemption from the payment of sales tax
simply because its buyer — the National Power Corporation — is exempt from the payment of all taxes." With respect to
the sales made to the VOA, the court held that goods purchased by the American Government or its agencies from
manufacturers or producers are exempt from the payment of the sales tax under the agreement between the Government
of the Philippines and that of the United States, provided the purchases are supported by certificates of exemption, and
since purchases amounting to only P558, out of a total of P1,683, were not covered by certificates of exemption, only the
sales in the sum of P558 were subject to the payment of tax. Accordingly, the assessment was revised and the petitioner's
liability was reduced from P12,910.60, as assessed by the respondent commission, to P12,812.16.

ISSUE: WON petitioner is liable for the payment of tax on the sales it made to the NPC and the VOA because both
entities are exempt from taxation.

RULING: Petitioner is liable.

First, The NPC enjoys tax exemption by virtue of an act of Congress which provides as follows:

Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be exempt from all
taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities and municipalities.

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
Code states that the sales tax "shall be 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 within twenty days after the end of each month, pay the tax due thereon."

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the purchaser is an entity like
the NPC which is exempt from the payment of "all taxes, except real property tax," the tax cannot be collected from sales.

The incidence of the tax ultimately settles on the purchaser, but it is not for that reason alone that one may validly argue
that it is a tax on the purchaser. The exemption granted to the NPC may be likened to the immunity of the Federal
Government from state taxation and vice versa in the federal system of government of the United States. In the early case
of Panhandle Oil Co. v. Mississippi the doctrine of intergovernment mental tax immunity was held as prohibiting the
imposition of a tax on sales of gasoline made to the Federal Government.

Soon it became obvious that to test the constitutionality of a statute by determining the party on which the legal incidence
of the tax fell was an unsatisfactory way of doing things.

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.
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. Evans11 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.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax becomes a part of
the price which the purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. The
method of listing the price and the tax separately and defining taxable gross receipts as the amount received less the
amount of the tax added, merely avoids payment by the seller of a tax on the amount of the tax.

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax is largely a
matter of economics.15 Then it can no longer be contended that a sales tax is a tax on the purchaser.

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.

Second, only sales made "for exclusive use in the construction, maintenance, operation or defense of the bases," in a
word, only sales to the quartermaster, are exempt under article V from taxation. Sales of goods to any other party even if
it be an agency of the United States, such as the VOA, or even to the quartermaster but for a different purpose, are not
free from the payment of the tax. On the other hand, article XVIII exempts from the payment of the tax sales made within
the base by (not sales to) commissaries and the like in recognition of the principle that a sales tax is a tax on the seller
and not on the purchaser.

It is a familiar learning in the American law of taxation that tax exemption must be strictly construed and that the
exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such
was the intention of the parties.17 Hence, in so far as the circular of the Bureau of Internal Revenue would give the tax
exemptions in the Agreement an expansive construction it is void.

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. 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.