According to the decision of the Court of Tax Appeals, the appellant  subjects the fresh fruit to the following process :

"Pineapple fruits are harvested from the plants.  After they are washed,  peeled  and sorted,  then sliced, cubed, or crushed, the raw materials are placed in cans.  The residual air  is  removed and heavy syrup, made up  from a mixture of juice  and sugar,  is added.  The cans are closed.  Heat  is applied to sterilize the contents, after which the cans are cooled  rapidly.  With respect to the  canned pineapple juice, no sugar is added.  Unless preserved  in  tin cans, fresh pineapple fruits are very perishable  and will not keep longer than two days." (Annex "A" p. 13)

On October 15, 1948,  appellant sent the then Collector of Internal Revenue Bibiano Meer a letter quoted as follows :

"We wish to  refer to your letter dated July 20, 1948 in which you have requested  that we file a bond to  cover any possible sales of our pineapple products in the Philippines.

We have  recently taken some orders for canned pineapple here in Manila and we will be shipping the goods from Bugo early next. week.

According to  your letter we have to pay 5% tax prior to shipping these goods, however, we are of the opinion it is  not necessary for us to pay this  tax  under Section  188 (b)  of the Internal Revenue Code, since our operation is  entirely agricultural.

We will appreciate receiving your decision on the above at your earliest convenience and we  would like  to  take this opportunity to thank you for  your kind attention to  our matters  in the past.** (Exhibit "A")

to which Collector Meer replied:

"In reply  to your letter dated October 15, 1948, I have the honor to inform you that  sales in this country of the pineapple  products which you produce  herein are  exempt from the sales tax imposed in section 186  of the National Internal Revenue  Code, in accordance with section 188 (b) of the same  code."   (Exhibit "B")

Six years later, on January 13, 1954, appellant received a letter from the appellee  Collector  of Internal Revenue through Deputy  Collector   Silverio  Blaquera,  demanding payment  of  P196,060.69 as  fixed  and  percentage  taxes and surcharges on its domestic sales of pineapple products since October, 1948 to September, 1953, plus the additional sum of P1,000 as penalty for  alleged violation of  the Internal  Revenue Law.   From the decision of the Collector, appellant appealed to the defunct  Board of Tax Appeals, which  was succeeded  by the Court of Tax Appeals under Republic Act No. 1125.  On January 31, 1955,  the Court of  Tax Appeals affirmed the decision of the Collector of Internal Revenue and on April  11, 1955 denied appellant's motion for reconsideration.  Wherefore, appellant filed before this Court a petition for review.

The main issue is whether the domestic sales of pineapples and pineapple products grown and canned by appellants are exempted from tax under Section 188  (b) of the Internal Revenue Code, providing:

"SEC.  188. Transactions and persons not subject to  percentage tax, In computing the tax imposed in sections one  hundred eighty- four, one  hundred eighty-five, and  one hundred  eighty-six,  transactions in  the following  commodities shall be excluded:

*        *       *      *      *       *       *

"(b)  Agricultural products and  the ordinary salt when sold, bartered, or exchanged in this country by the producer  or owner of the land where produced, as well as fish and its by-products when sold, bartered or exchanged by the fisherman or fishing operator, whether in their original state or not" (Italics supplied)

We find ourselves unable to agree with the Court of Tax Appeals that because the manipulations to which appellant subjects the fresh pineapple fruit grown by it amount to a  manufacturing  process,  that the  sale of the  canned products becomes a taxable sale of manufactured goods, and not an exempt sale of agricultural products.   The very text of  the law,  in  exempting "agricultural products whether in their original state or not," makes it  clear  that the exemption is not divested merely because the products themselves have undergone processing of some kind.  At what particular stage the extent of the manufacturing process extinguishes or  supersedes the agricultural  character of the product can not be predetermined in advance. But such  uncertainties are no obstacle to the application or  refusal of the exemption in specific cases.  We believe the case before  us can  be determined  following  the test set by this Court in Central Azucarera de Bais vs. Trinidad, 46 Phil. 492, 499:

"A planter who devotes himself to the production of sugar cane arid  as an  incident to such production works his  product into a more convenient and valuable form is primarily a planter; his manufacturing is merely an incident to the management of his plantation.  His  case is manifestly different from that  of the plaintiff corporation which, in, effect,  buys its raw materials and  devotes itself exclusively to converting it into finished merchandise.  It may, perhaps, not always be easy to draw the line of demarcation between one business and the other,  but  difficulties of  that sort are frequently encountered in the interpretation of the law."

The facts on record in the case  before us clearly indicate that the canning of appellant's products is a mere incident and consequence of its  large scale production of pineapples.  Appellant perforce  had to  resort to a  preserving process, for the volume of its products  (170,000 tons) made it impossible to dispose of the same in  the local market.   The  pineapples could  not  be sold  in the open market unless properly ripened; on  the  other hand, once ripened, the fruit would  quickly deteriorate, and become unsalable, unless the  deterioration was arrested by some preservative process, which thus becomes an essential part of  the production and  disposition of the fruit.  We believe  that the legislature, in providing  a tax exemption for agricultural products, "whether in their  original state or not", had precisely in  mind that  fruit crops could not be raised and sold on a large scale without resort to some process to prevent their deterioration.

The state has not  shown  that the canned products of appellant corporation have acquired, as a consequence of the processing  to  which  they are subjected, any use to which the  original fruit was  not  suited,  or could  not be devoted.   It is practically admitted (and the Court may well take judicial cognizance thereof)  that the  nature, qualities and texture of the product are in no way altered, and it distinctly  remains an agricultural product.  Certainly the canned pineapples as  compared to the  original fruit  have undergone much less change  than that  found in the case of  centrifugal sugar  obtained from the sugar cane or of abaca-fiber when compared with the raw plant stalks.  And yet  the  state  admits,  that  the sugar from the cane is exempt from the tax under sec.  188(6)  of the Internal Revenue Code.

That the purpose of the tax exemption now in  question was to  foster agriculture and the  utilization of idle lands was recognized in Molina vs. Rafferty, 38 Phil. 167.   Passing upon this very exemption, the Court said (p. 169-170):

"The first inquiry, therefore,  must relate to the purpose  of the Legislative had in mind in  establishing  the exemption contained  in the clause now under consideration.  It  seems reasonable to assume that it was due  to the belief on the  part of the law making body that by exempting agricultural products from this  tax the farming industry would be favored  and  the  development of the  resources of the country encourage.  It is  a fact, of  which  we take judicial cognizance,  that  there  are  immense tracts  of  public land  in this country,  at present wholly unproductive,  which  might  be  made fruitful by  cultivation, and that large  sums of money go abroad every  year  for the  purchase of food substances  which  might be grown here.  Every  dollar's worth  of food  which  the farmer produces and sells in these Islands adds directly to the wealth  of the country.   On the other  hand, in the  process of  distribution of commodities to the ultimate consumer, no  direct increase in value results solely  from  their transfer from one person  to another in the course of commercial transactions.  It  is fairly  to be inferred from  the statute that  the  object and purpose of the Legislature was, in  general  terms,  to  levy  the  tax in question, significantly termed the  'merchant's tax,' upon all persons  engaged in  making a  profit  upon goods produced by others, but to exempt  from the tax all persons directly producing goods from  the land.  In order the accomplish this purpose the Legislature, instead of attempting an enumeration  of  exempted products, has grouped  them all  under the general  designation of 'agricultural products.'"

The position of appellant corporation comes squarely under this ruling.  It  directly  produces its  goods  from the cultivation  of land, merely engaging in the suitable preservative processes for the purpose of making the product available at all times, without regard to seasons,  and  in markets  that would not be  accessible to the  fresh fruit. Appellants does not make its profit  upon goods produced by others, and there is no reason why it should not be given the protection that the law affords.

"Public policy has  long  favored  the  exemption of agricultural producers from the taxation  of the methods employed by  them to put their products  upon the market, for the preparation, transportation, and direct sale by the farmer of  produce raised  by  himself is not engagement in a trade, but incident to his business of production.  Thus,  the exemption or especially favorable classification of farmers, their produce, or their vehicles hauling agricultural products  to markets in statutes imposing business occupational, and sales taxes,  in statutory trade license provisions,  and in highway transportation tax  or  registration laws, has in a  number of cases been held to be based upon  a  reasonable classification."  (2  Am. Jur. pp. 399-400).

The interpretation  adopted by the Court of Tax Appeals would limit the benefits of the tax exemption under  section 188  (b)  of the Tax Code to small scale farmers  and producers,  who can dispose of their products within a short time after the ripening of the fruit.  Where this the legislative intent,  the exemption  for  agricultural  products would have been unnecessary, since the same section already exempts, directly  and expressly,

"(a) Persons whose gross quarterly sales or receipts do  not exceed four hundred fifty pesos.

(b)  All persons engaged  in public market places exclusively in the  sale  at  retail  of  domestic meat,  fruits,  vegetables, game, poultry, fish and other domestic food products.

(c)  Peddlers and sellers at fixed stands and other similar selling places engaged exclusively in the  sale at retail of domestic meat, fruits,  vegetables, game, poultry,  fish,  and similar  domestic  food products, whose total stock in trade in any one day does not reach a retail value of fifty pesos.

(d)  Producers of commodities of all classes working in their own homes, consisting  of parents and children living as one family, when the value of each day's production by  each person capable of working is not in excess of five pesos."

With  the small producers and merchants already  guarded and  fostered  by the provisions  above quoted, we see no  reason  why   the  further  exemption, of  agricultural products "whether  in their original state or not"  should not apply  to large scale  agricultural  production and its incidental processes.

The decision in Bermejo vs. Collector of Internal Revenue, 47 Off. Gaz. (No. 12 Suppl.) p. 292, (upon which the state relies as overruling Central Azucarera  de  Bais vs. Trinidad, 46  Phil. 492,  and Pampanga Sugar Mills vs. Trinidad, 53 Phil. 750), did not consider or discuss the tax exemption under section  188 (b) of the Internal Revenue Code,  and therefore  is  not  controlling here. Similarly, the American authorities cited for the State refer to manufacturers that are not the growers of the products processed by them;  which  is precisely the reason  why the sugar  mills or centrals exclusively devoted to processing the planter's sugar cane, are not exempted from the tax, being, as they are, primarily manufacturers and not producers of agricultural crops.  The appellant's situation is just the  contrary.

Wherefore, the decision of the Court of Tax Appeals is reversed, and the domestic sale of pineapple products  of appellant,  Philippine  Packing Corporation,  held exempt from sales tax.  Without costs.  So ordered.

Paras, C.  J., Bengzon, Padilla,  Labrador, Concepcion, Endencia and Felix, JJ., concur.

---

RESOLUTION




REYES, J. B. L., J.:

In a motion to reconsider our decision of December 26, 1956, the respondent Collector of Internal Revenue argues that  Republic Act No. 1612  (passed-August 24,  1956), the most recent amendment to section 188  (b) of the Tax Code,  furnishes an indubitable index to  the true  sense of Congress in enacting section 188 (b), in that the term "agricultural  products" does not comprehend  those which have undergone the  process of manufacturing.

The argument is untenable.  Comparing the provisions of section 188 (b)  before and after its amendment  by Rep. Act 1612, we have the following:

SEC. 188 (b) before passage of R. A. 1612		SEC. 188  (b) after  passage of  R. A. 1612
"(b) Agricultural products  and the ordinary salt when sold, bartered,  or  exchanged  in   this country by the producer or owner of the land where produced, as well as fish and its by-products when  sold,  bartered,  or  exchanged  by  the fisherman  or fishing  operator,  whether   in their original state  or not.		"(b)  Agricultural  products and the ordinary  salt in their original  form, when sold, bartered, or exchanged by the producer  or owner  of  the land where produced.  The term 'agricultural 'products' as used herein shall not include cultured fish and other products raised or produced in fishponds, and those which have undergone the process of manufacturing at defined in section one  hundred ninety-four  (x) of this Code.

Note that  while the old  provision  exempts "agricultural products * * * whether in their original state or not", the new amendment omitted  the words "or not", limiting the  exemption to  "agricultural products * * * in their original form", and further  clarified  the meaning of the phrase "in their original form" as follows:

"the  term agricultural products shall not  include those which have undergone the process of manufacturing as defined in section one hundred ninety-four (x)  of this  Code."

By the very nature of the changes made in the original statute,  it  is clear that  the  amendment is intended, not to clarify the  doubtful meaning  of the former law, as contended by respondent, but to withdraw from the scope of the former exemption the agricultural  products that are no longer in their original form because  they have undergone the process of manufacture;  and this view is also supported by the explanatory note to House Bill No. 5809, the source of Republic Act 1612, wherein it is stated that "all the proposed amendments to Title V of the National Internal Revenue Code" were aimed "at greater revenue by imposing slight increase in tax rates and greater coverage of subject of  taxation".

Of course, under  the new amendment to sec 188.  (b)  of the Tax Code, the products of petitioner Philippine Packing Corporation are now subject to percentage tax;  but as Republic Act No.1612 does not have any retroactive effect, there  being no provision for its  retroactive operation, it can only affect petitioner after, and not before, its passage and effectivity.

Wherefore the motion to  reconsider is denied for lack of merit.   So  ordered.

Paras,  C. J.,  Bengzon, Padilla,  Montemayor,  Reyes, A., Bautista  Angelo, Labrador,  Concepcion,  Endencia,  and Felix,  JJ., concur.