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[COMMISSIONER OF CUSTOMS v. CALTEX INC.](https://lawyerly.ph/juris/view/c34b8?user=fbGU2WFpmaitMVEVGZ2lBVW5xZ2RVdz09)
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[ GR No. L-13067, Dec 29, 1959 ]

COMMISSIONER OF CUSTOMS v. CALTEX INC. +

DECISION

106 Phil. 829

[ G. R. No. L-13067, December 29, 1959 ]

THE COMMISSIONER OF CUSTOMS, PETITIONER, VS. CALTEX (PHILIPPINES) INC., ET AL., RESPONDENTS.

D E C I S I O N

BAUTISTA ANGELO, J.:

On June 20, 1953, Caltex (Philippines)  Inc. was  granted by the  Secretary of Agriculture and Natural Resources a petroleum refining concession with the  right to establish and operate a petroleum refinery in the municipalities of Bauan and  Batangas,  province  of Batangas.  The  con- cession contains the  following proviso:  "the Government hereby also grants all the rights of a Petroleum Refining Concession and the Concessionaire  hereby accepts all the obligations of said Petroleum Refining  Concession in accordance  with the provisions of  Republic Act No.  387 as approved 18 June 1949, the provisions of which are  made a part  of this Deed  of Concession."   The  corporation  constructed a petroleum refinery in the municipality of Bauan, Batangas, which was  completed and commenced operation sometime in October,  1954,  using as  basic material crude oil  imported from abroad.

On May 11, July  28, and September  11, 1954,  the corporation filed with the Collector  of Customs a claim for refund  of the  amounts  of P9,924.31j  P3,679.78  and P1,300.24, representing customs  duties paid on imported petroleum products consumed in  connection with its re finery  project at Bauan, Batangas, during the period from June 20,  1953 to March 15, 1954; from April 1, 1954 to June 30, 1954, and from March 1, 1954 to March 31, 1954, respectively, on  the ground that the same  were  exempt from  customs duties  under Article 103 of  Republic Act No. 387.  On April 25, 1955, the Collector  of Customs denied  said claim for refund  and,  on appeal, the Com missioner of  Customs  affirmed the ruling on  August 21, 1955.   On September 30, 1955, the corporation filed a petition for review with  the Court of Tax Appeals which, after  hearing, rendered decision  the  dispositive part of which  reads:

"Wherefore, the decision of the respondent Commissioner of Customs of August 21, 1955, appealed from, should be, as it is hereby modified.

"Respondent is hereby ordered to refund to the petitioner, Caltex (Philippines)  Inc. the  amount of P10.444.82, representing" customs duty on the petroleum products imported by it during the period from June 24,  1953  to  May 29,  1954, for its own use in the construction of  its Batangas refinery,  the collection and refusal to refund  the same being in  contravention of Article 103 of  Republic Act No. 387,  without special pronouncement as to costs."

The  Commissioner of Customs interposed the present petition for review.

Respondent company claims exemption from  payment of customs duties  on its  importation of  petroleum products consumed by  it during  the  construction  of its  refinery under Article  103 of Republic Act No. 387, which provides:

"ART. 103. Customs duties. During the first five years following the granting of any concession, the concessionaire may import free of customs duty, all  equipment, machinery, material, instruments, supplies and accessories.

"No exemption shall be allowed on  goods imported by the concessionaire for his personal use  or that of any others; nor for sale or for re-export and if any  goods  on which  exemption has been allowed be thus used or disposed of, the concessionaire is obliged to make a report  to the Secretary  of Agriculture and Natural Resources  to that effect and to pay such import duty as is due."

It  would  appear that under  the above  provision any concessionaire may (import free of customs duty "all equipment, machinery, material, instruments, supplies and accessories" during the first five years following the granting of the concession.  Here  it cannot  be disputed that  the petroleum products imported by respondent  for  its  use during the construction of the  refinery such  as  gasoline and oil furnished its drivers during the  construction  job come within the import of the words material or supplies, for it has been held that gasoline and oil used by  drivers in a construction job fall  under  the category of  supplies (West vs. Detroit Fidelity and Surety Co., 225 N. W. 673, 678, 118  Neb. 544  cited on page 790 Vol. 40, Words and Phrases).  To the  same effect is the  opinion rendered by the Secretary of Justice on June  28, 1954 upon the request of respondent who held  that  its  importation of crude oil for the use of its  refinery can be  considered as  "materials" within the purview of the  exemption statute.  It is, therefore, clear that by express provision of the law the petroleum  products imported  by respondent for the use of its cars during the  construction of  its refinery are exempt from  the customs duties  imposed by petitioner.

It is, however,  contended that, regardless  of the above interpretation, the exemption  clause contained in the law cannot apply  to the herein  corporation for the reason that the refinery of the latter  is being operated on imported crude petroleum and not on crude petroleum produced in tire Philippines, contrary,  it is  claimed, to  the very objective of Republic Act No. 387 which  is to promote and encourage  the exploration, development,  production and utilization  of the petroleum resources  of  the Philippines, as much as possible, by private enterprises looking toward the establishment of a wholly integrated domestic industry with an equitable division of benefits between such private enterprise and the Government, giving  likewise a share of such benefits to the private land owners."  And to strengthen his argument, petitioner adds the following comment:
"It cannot be denied that refining concessionaires cannot help in the utilization  of our petroleum resources unless they  refine  locally  produced  crude petroleum  products. To exempt respondent Caltex  (Philippines) Inc. from payment of  customs duties on its importation of equipment, machinery, material, instruments, supplies, and accessories will not only result in the loss of revenues to the government, but will also defeat the purpose of the law to  develop, exploit and utilize the petroleum resources of the Philippines."  In other words, the  claim  of  petitioner is that since  respondent does  not use in  its refinery locally produced  crude  petroleum but it operates on imported crude petroleum  products, it  cannot claim the benefit of exemption  granted by Republic Act 387.

Many reasons may be advanced to show that such is not the real intent of the law in granting exemption to petroleum  concessionaires  in the Philippines.   To begin  with, we may cite the  provision of Article 79 of said Act which requires any established refinery "to refine crude petroleum produced in the Philippines in preference over any imported crude petroleum", which means that imported crude petroleum  may  be allowed as long as  no crude  petroleum is produced in the  Philippines, and here  it is admitted that there is no commercial production of crude petroleum in the Philippines such  that respondent might be compelled for sometime to operate on imported  petroleum.  In the second place, in the  concession  granted to  respondent, there is  a proviso to the  effect  that  the concessionaire shall not be required against its will to refine crude petroleum from foreign  sources, which can only  mean that it may also make use of petroleum from foreign  sources if it so desires.   In the third place, when the Petroleum Act was passed and the concession granted to respondent under its provision, it was well known that there  was then no Philippine  crude petroleum available for the use of any refinery in the Philippines which makes it  obvious  that Congress could not  have intended that before the exemption may be extended to a concessionaire the latter should only refine crude  petroleum produced in the Philippines, for that would defeat the very objective of the Act. From the practical and legal  point of view, therefore,  the interpretation that petitioner desires to  give now to the law. in an effort to justify  its denial of  the claim for exemption by respondent  is unfair  and cannot be sustained.

But petitioner insists that to allow the operation of oil refineries in the Philippines on imported crude oil products would be contrary to the real objective of the Act which is to promote and  encourage the exploration,  development, production  and utilization of the petroleum  resources of the  Philippines, and so that should  not be countenanced. Again,  this contention  is  untenable, for it overlooks the fact that with the establishment here of oil refineries those interested in  oil exploration  and venture  would receive greater impetus and encouragement because of the thought that  if they strike  oil  of  commercial value they would have an already established refinery that would be ready to absorb all the crude petroleum they may produce out of their exploratory efforts.  They would know  then  that in that eventuality they would not need to  establish their own refinery, which requires a  huge  capital, to  process their own produced raw  material.   In this respect, we cannot but take notice  of the following interesting observation of the Court  of Tax Appeals,  which  we quote with approval:

"We  could  concede that as a petroleum refining concessionaire, the petitioner herein is not contributing directly to the exploration and exploitation  of our  petroleum resources.  We cannot admit, however, that as  such  concessionaire, the petitioner is undermining the development  of our  petroleum resources.  Indirectly,  the petitioner is contributing immeasurably to  the exploration of our hidden and undeveloped  oil resources.  For one  thing, the establishment of a petroleum refinery in  the  Philippines, like the  one operated by petitioner, has given the necessary incentive to  those already engaged or  who intend to engage  in  drilling  oil wells in  the Philippines as the  Philippine Oil Development Co. and many  others.  Filipino capitalists  who are  by nature  conservative  and timid, would be encouraged  to invest and  keep  on investing their capital in the venture with  the assurance that  should, they finally strike oil of commercial  value, they would  have ready at  their disposal a  well- established,  locally  operated  refinery  costing  over P50,000,000.00 manned by experts.  For their convenience, there will be no need for them  to refine their crude oils abroad nor provide for themselves a refinery that would mean a drainage of capital and  several years to construct.  By way  of analogy, the  Philippine Charity Sweep stakes Office is definitely not engaged in  breeding horses.  However, it cannot be denied that its creation has  given much encouragement to local horse  fanciers,  race  horse owners  and  horse traders to breed  good  stock, what with  the  tempting prizes  that are  being offered  to winners in Sweepstakes races and the  exorbitant  price that a potential  Sweepstakes winner could  command  in  the  horse market.   Moreover, it would be  most unreasonable as  respondent's counsel  seems to  expect, for petitioner  to  refine locally produced crude  oil before granting it the  benefit of exemption from customs duty when,  as everybody  knows,  we have not yet discovered crude oils  of commercial value in this  country.

"The  Director  of  Mines  who  is  authorized under Republic  Act No.  387, to  administer  and enforce said  law,  in his letter of  May 9, 1953, Exhibit  B,  to  the Secretary of Agriculture  and Natural Resources recommending the approval of  petitioner's  application for a  Petroleum Refining Concession, made the following observations:

"The establishment of a petroleum refinery in the Philippines will undoubtedly  contribute much to the economic welfare of the nation as it will  be an  additional source of  taxes for the  Government afford  more  opportunities for  employment of our people,  and  may reduce the cost of petroleum  products  which  are  basic needs  and therefore essential  in the  progressive industrialization of our economy.  The operation  of  such a refinery may also induce the intensification  of  the search  for  oil in  the Philippines, where oil  is recognized to exist,  as then there will be a  refinery available to turn into manufactured  products the crude petroleums that may be found  and produced locally.  It may also be mentioned that the investment here of P60,000,000  for  such a refinery will constitute another evidence of the confidence of foreign investors in the soundness of the Philippine peso and the existence locally of a favorable climate for foreign investments.'"

Note this observation of the Director of Mines: "The operation of such a refinery may also  induce the intensification  of  the  search for  oil  in the  Philippines, where oil  is recognized to  exist, as then there will be  a refinery available to turn into manufactured  products  the  crude petroleums  that may be found and produced locally."  No greater  encouragement can be found to bolster up  the exploration and development of the petroleum resources of the Philippines than this comment of our technical authority on the  matter.

It is finally contended that Republic  Act No. 901 which grants general  tax exemption to new  and necessary industries  has the effect of impliedly repealing Section  103 of the Petroleum Act insofar as new industries are concerned and  since the refinery established by  respondent may be  considered a new industry, it may not now claim the exemption in question.  To meet this point, suffice it to state that Section 1 of Republic Act No. 901 expressly provides that  "the tax exemption provided  for in this Act shall not include any company or person engaged in the processing of oil, gasoline, lubricants and other similar fuels and by-products", which shows that respondent's refinery cannot be considered a new industry under said Act.  In fact,  respondent never requested any  exemption from taxation under Republic  Act No. 901, nor has  it claimed  to  be a  new and  necessary  industry within its scope.

We find, therefore,  untenable the  errors attributed by petitioner to the  Court of  Tax Appeals.

Wherefore, the decision appealed from is affirmed, without pronouncement as to  costs.

Paras, C. J., Padilla, Montemayor, Labrador,  Concepcion, Endencia,  Barrera, and  Gutierrez David, JJ.,  concur.

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