H. E. HEACOCK CO., PLAINTIFF AND APPELLANT, VS. THE INSULAR COLLECTOR OF CUSTOMS, DEFENDANT AND APPELLEE.

First. Are movements of watches, imported from Switzerland into the United
States, and there placed in cases and later imported to the Philippine Islands,
subject to the payment of duty?

Second. Must the Collector of Customs pay interest on the amount of duty
illegally collected, which has been paid under protest, when he is ordered by
the courts to return the same?

The lower court answered each of these questions in the affirmative. From
that conclusion the importer appealed.

The facts in the present case have been stipulated. (See Bill of
Exceptions, pp. 3-9.) The important facts are: That the plaintiff imported into
the Philippine Islands 48 bracelet watches from the United States; that the
movements of all of said watches had been manufactured in Switzerland and
imported into the United States; that two of the cases of said watches were like
wise made in Switzerland and imported into the United States; that all of the
rest of the cases, including the bracelets, were manufactured in the United
States; that the movements were placed in said cases in the United States; that
the watches (the cases, the movements and the bracelets) were imported into the
Philippine Islands with the movements placed in said cases and with the
bracelets attached.

The Collector of Customs assessed and collected duty upon said watches,
including the cases, the movements and the bracelets. From that decision the
plaintiff appealed to the Court of First Instance, and the case was submitted
there upon a stipulation of facts. After hearing the respective parties and
considering the facts, the Honorable James A. Ostrand, judge, rendered a
decision confirming in part and reversing in part the order of the Collector of
Customs. The lower court held that the 46 cases manufactured in the United
States, as well as the 48 bracelets which had also been manufactured in the
United States, should have been admitted free of duty. The court further held
that the two cases and the 48 movements which had been manufactured in
Switzerland and imported into the United States and then later into the
Philippine Islands were subject to the payment of duty. The Collector of Customs
collected 25 per cent duty on the value of the watches imported, including the
cases, the movements and the bracelets.

The theory of the importer and appellant is that, inasmuch as the cases,
movements and bracelets had been united in the United States, the result being a
watch, it was therefore a manufactured product of the United States and should
be admitted free of duty under the provisions of section 12 of the Act of
Congress of 1909 (Par C. of section 4 of the Act of Congress of October 3,
1913).

The theory of the Collector of Customs is that the mere placing of the
imported movements in the cases and attaching the bracelets did not constitute
the resulting article a manufacture in accordance with the legal definition of
that term as there was not sufficient transformation of the component parts, and
no new article resulted having a distinctive name, character and use.

The Collector of Customs, in his decision of May 7, 1915, based his
conclusions upon the provisions of section 12 of the Philippine Tariff Law of
1909. The fact that that law had been repealed by paragraph C of section 4 of
the Act of Congress of October 3, 1913, seems to have been overlooked. While the
important provisions of said section 12 were reenacted in said paragraph C of
section 4, the latter contains some amendments to the former law. The
amendments, however, in no way affect the result in the present case.

Section 12 of the Tariff Law of 1909 provides:

“That all articles, except rice, the growth, product, or manufacture of the
United States and its possessions to which the customs tariff in force in the
United States is applied and upon which no drawback of customs duties has been
allowed therein, going into the Philippine Islands shall hereafter be admitted
therein free of customs duty when the same are shipped directly from the country
of origin to the country of destination: Provided, That direct shipment
shall include in bond through foreign territory contiguous to the United States.
Said articles shall be as originally packed without having been opened or in any
manner changed in condition: Provided, however, That if such articles
shall become unpacked while en route by accident, wreck, or other casuality, or
so damaged as to necessitate their repacking, the same shall be admitted free of
duty upon satisfactory proof that the unpacking occurred through accident, or
necessity, and that the merchandise involved is the identical merchandise
originally shipped from the United States, or its possessions as hereinbefore
provided, and that its condition has not been changed except for such damage as
may have been sustained.”

Paragraph C of section 4 of the Tariff Law of October 3, 1913, provides:

“That there shall be levied, collected, and paid upon all articles coming
into the United States from the Philippine Islands the rates of duty which are
required to be levied, collected, and paid upon like articles imported from
foreign countries: Provided, That all articles, the growth or product
of or manufactured in the Philippine Islands from materials the growth or
product of the Philippine Islands or of the United States, or of both, or which
do not contain foreign materials to the value of more than 20 per centum of
their total value, upon which no drawback of customs duties has been allowed
therein, coming into the United States from the Philippine Islands shall
hereafter be admitted free of duty: Provided, however, That in
consideration of the exemptions aforesaid, all articles, the growth, product, or
manufacture of the United States, upon which no drawback of customs duties has
been allowed therein, shall be admitted to the Philippine Islands from the
United States free of duty: And provided further, That the free
admission, herein provided, of such articles, the growth, product, or
manufacture of the 4 United States, into the Philippine Islands or of the
growth, product, or manufacture, as hereinbefore defined, of the Philippine
Islands into the United States, shall be conditioned upon the direct shipment
thereof, under a through bill of lading, from the country of origin to the
country of destination: Provided, That direct shipment shall include
shipments in bond through foreign territory contiguous to the United States:
Provided, however, That if such articles become unpacked while en route
by accident, wreck, or other casuality, or so damaged as to necessitate their
repacking, the same shall be admitted free of duty upon satisfactory proof that
the unpacking occurred through accident or necessity and that the merchandise
involved is the identical merchandise originally shipped from the United States
or the Philippine Islands, as the case may be, and that its condition has not
been changed except for such damage as may have been sustained: * * *”

There are further provisos with regard to internal revenue taxes. The final
proviso of paragraph C is:

“* * * And provided further, That section thirteen of ‘An Act to
raise revenue for the Philippine Islands, and for other purposes,’ approved
August fifth, nineteen hundred and nine, is hereby repealed.”

Paragraph S of section 4 is in part as follows:

“That, except as hereinafter provided, sections one to forty-two both
inclusive, of an Act entitled ‘An Act to provide revenue, equalize duties, and
encourage the industries of the United States, and for other purposes,’ approved
August fifth, nineteen hundred and nine, and all Acts and parts of Acts
inconsistent with the provisions of this Act, are hereby repealed. * * *”

Although, in the main, while there is no difference between the provisions of
the Philippine Tariff Law of 1909 and that of 1913, yet we think that the latter
law must be considered as having repealed the former. In reenacting the free
trade from the United States to the Philippine Islands, Congress has placed such
relation upon a new ground. Congress has declared in the Act of 1913 that the
reason for allowing United States products to be admitted into the Philippine
Islands is “in consideration of the right to import Philippine product into the
United States free of duty.”

The importer contends that the lower court erred in not deciding that the
“bracelet watches” as a whole were of American manufacture, and hence exempt
from duty. It argues that since the watch movements had already paid a duty of
30 per cent upon their importation into the United States, they have in effect
become American products by virtue of having been placed in cases of American
manufacture and should therefore be exempt from duty. It further argues that the
product—the bracelet watches—should be considered as a whole, as “bracelet
watches” manufactured in the United States. In support of that contention it
cites the case of Uy Chaco Sons vs. Collector of Customs (24 Phil.
Rep., 548).

Before discussing the decision of this court in the case of Uy Chaco Sons, it
is important to note just what merchandise imported from the United States are
admitted free of duty into the Philippine Islands. Paragraph C above provides,
among other things, that “all articles shall be admitted into the Philippine
Islands from the United States free of duty, which are (a) of the
growth, (b) the product, and (c) the manufacture of the United
States, upon which no drawback of customs duties has been allowed therein (in
the United States).” Therefore, when it is established that the merchandise in
question is the growth, or the product or the manufacture of the United States,
it must be admitted free of duty when it is established that no drawback of
customs duties has been allowed in the United States. Certainly, the phrase
“upon which no drawback of customs duties has been allowed” cannot
apply to articles which are wholly of the product or manufacture of the
United States. Certainly said phrase was not intended to be applied to articles
“the growth or the product of the United States,” because it is difficult to
imagine a case when there could be a drawback of customs duties on such
articles. The only case in which said phrase “drawback of customs duties,” can
be applied is when the product is a manufactured product of the United States,
and then only when said manufactured product is composed of some article not of
the growth or product of the United States. For example, in order to manufacture
a particular article it becomes necessary for the manufacturer to import into
the United States some of its component parts. In such case, when the
manufacturer exports said manufactured article, he is entitled to a
drawback of customs duties on the imported article which constituted an element
of the manufactured article. We are here using the words “manufacturer” and
“manufactured” in their technical sense. In our example, of course, if the
exporter of such manufactured article recovers back the customs duties which he
has paid, then the completed manufactured product is not admitted free of duty
into the Philippine Islands. It is only when he does not ask for a repayment of
the customs duties upon such .manufactured articles that they are admitted free
of duty. Of course, if the imported component parts of the manufactured article
is admitted free of duty into the United States, then there can be no drawback
of customs duties, because none have been paid.

The phrase “when no drawback of customs duties has been allowed” only applies
to articles “of the growth, product or manufacture of the United States.” That
being so, the fact that there has been no “drawback” does not make the
particular article admissible into the Philippine Islands. It must be
an article of the growth, product or manufacture of the United States. If those
facts do not exist then the articles cannot be admitted into the Philippine
Islands free of duty, even though such articles are imported directly from the
United States. That being true, then the only question for solution is: Are said
watches, the growth, product, or manufacture of the United States? The question
is still further limited to the question whether the uniting of the cases, works
and bracelets produced a manufactured article of the United States, there being
no contention that they were the growth or product of the United States. If they
are “manufactured articles of the United States” and no “drawback” duty has been
paid, then they may be admitted free of duty. If they are not “manufactured
articles of the United States,” then they may not be admitted free of duty, even
though no “drawback” has been allowed.

In the case of Uy Chaco Sons, supra, the importer claimed that white
lead manufactured, in a bonded warehouse in the United States, from pig lead
imported from Spain without the payment of duty was entitled to free entry into
the Philippine Islands. It is admitted that the pig lead had been imported into
the United States from Spain: that there was a duty upon the pig lead which had
not been paid by the importer; that the pig lead was subjected to a process
which resulted in the “white lead,” in a bonded warehouse, and was exported from
the United States to the Philippine Islands, from said bonded warehouse, without
having paid the prescribed duty. The court held that the “white lead” was not
exempt from the payment of duty as a “manufactured article of the United
States.” The effect of bringing the goods to the Philippine Islands through a
bonded warehouse in the United States is the same as though the “white lead” had
been brought to the Philippine Islands directly from Spain—the country from
which it was originally exported to the United States. The fact that it was kept
in a bonded warehouse from the time of its importation in the United States
until the time it was exported to the Philippine Islands prevented it from
becoming in any sense the product or manufacture of the United States. It had
never become a part of the product or manufacture of the United States. Apart
from the fact that it had undergone some chemical changes while it was in the
bonded warehouse in the United States it is in exactly the same condition which
it would have been in had it been exported directly “to the Philippine Islands
from Spain. It is in no sense a manufactured article of the United States and
was therefore properly subjected to the payment of duty.

In the present case it is admitted that all of the movements of the said 48
watches and two of the cases had been imported into the United States and had
paid the prescribed duty. It is admitted that the 46 movements were placed in
the cases in the United States and later the 48 watches, as completed by the
uniting of the cases, the movements and the bracelets, were imported into the
Philippine Islands. No claim is made that any work or labor had been placed upon
said movements or the said two cases except to place the movements in the cases
after their importation into the United States. It is further admitted that no
drawback of duties had been allowed. The first question, which presents itself
in this relation is whether or not the bracelet watches, made as above
indicated, constituted a manufactured article of the United States and fall
within the provisions of the Tariff law above quoted and are therefore
admissible free of duty into the Philippine Islands. The Collector of Customs
held that the bracelet watches in question were not manufactured articles of the
United States and were therefore not admissible free of duty into the Philippine
Islands. His conclusions were modified by the lower court. The court held that
the bracelets and the cases were manufactured articles of the United States and
should have been admitted free of duty, but held that the movements were not a
manufacture of the United States and should therefore be subjected to the
payment of duty.

With reference to the question whether the watches were a manufacture of the
United States we have held in many causes that, in order to constitute “a
manufacture” under the Tariff Act, there must be in effect a transformation, in
some way or other, of the article or articles before it will be held to be “a
manufacture.” (Castle Bros., Wolf & Sons vs. McCoy, 21 Phil. Rep.,
300; Kuenzle & Streiff vs. Collector of Customs, 32 Phil. Rep.,
510; State vs. American Sugar Refining Co., 51 La. Ann., 562; State
vs. Eckendorf, 46 La. Ann., 131; Hartranft vs. Wiegmann, 121
XJ. S., 609; Tide Water Oil Co. vs. United States, 171 U. S., 210.

The application of labor to an article, either by hand or by mechanism, does
not make the article necessarily a manufactured article within the meaning of
that term as used in the tariff law, unless the application of such labor is
carried to such an extent that the article suffers a specific transformation and
is changed into a new and different article, having a distinctive name,
character or use. (United States vs. Semmer, 41 Fed. Rep., 324;
Baumgarten vs. Magone, 50 Fed. Rep., 69; Tide Water Oil Co.
vs. United States, 171 U. S., 210.)

Courts and lexicographers have differed in their definition of what
constitutes a manufacture. The courts have been obliged to formulate definitions
in order to give effect to the purpose of legislative enactments, while
lexicographers have been free to define said terms upon the pure etymology of
the words. Courts have been obliged to define the term in order to make it
applicable to particular affairs. It is the duty of the court to give the Tariff
Law a strict interpretation which will give force and effect to such law. The
primary purpose of the law is to produce revenue. (Castle Bros., Wolf & Sons
vs. McCoy, 21 Phil. Rep., 300.)

The Attorney-General, Ramon Avanceña, in his brief says:

“It is difficult indeed to conceive of the process of reasoning which would
lead one to conclude that the mere insertion of imported watch movements in
American cases would convert them into American products; it would be just as
reasonable to claim that imported unroasted, unground coffee could be put up in
American gold cans and exported as American-grown coffee. If Swiss watch works
could be imported free of duty into the Philippine Islands simply because they
are in American cases what would prevent the immediate returning of the cases to
America for the insertion of more works, and thus use the cases over and over
again as a means of bringing dutiable foreign products into the Philippine
Islands to avoid the payment of the tax? And if such a practice were to be
permitted what would prevent the free importation into the Philippine Islands by
American wholesale liquor dealers of imported beers, wines, etc., transferred
from their original containers into American-made flasks, and the repeated
return of those flasks to the United States to be refilled ? According to the
argument of the plaintiff in this case, apparently all that would be necessary
would be to make the value of the flasks exceed the value of the contents. The
very purpose of tariff laws could thus be entirely defeated.”

The lower court modified the decision of the Collector of Customs and held
that a portion of the money paid by the importer should be returned to the
importer together with 6 per cent interest per annum from the date of the
original liquidation of said duties. While the Collector of Customs did not
appeal from the decision of the lower court, he now asserts that that part of
the judgment of the lower court in which interest was allowed was erroneous and
should be modified. Inasmuch as the Collector of Customs did not appeal, we are
not called upon directly to pass upon the legality of that part of the judgment.
However, due to the importance of the question suggested by the Collector of
Customs, we deem it advisable to call attention to the jurisprudence on that
question.

It is a clearly established rule of law that a sovereign State is not liable
to pay interest unless under statute or contract. That rule is settled by
decisions of the Supreme Court of the United States, in decisions of supreme
courts of the various States and by the courts of England. (United States
vs. Bayard, 127 U. S., 251; United States vs. State of North
Carolina, 136 U. S., 211; State vs. Thompson, 36 Ohio St., 409; Carr
vs. The State, Ex rel. Coetlosquet, 127 Ind., 204; In
re Gosman, 17 Chancery Div., 771.)

While the sovereign State, in the absence of statute or contract, is not
liable to pay interest, it has been held, however, that governmental agencies,
whether individuals or boards, which have been given the power to sue and to
defend suits may be compelled to pay interest upon their indebtedness even
though the Government itself ultimately pays the indebtedness. Tax collectors
are almost universally given the power to defend suits against them for illegal
collection of taxes. It is usually provided that the person taxed may protest
and appeal to the courts to have the question of the legality of the assessment
determined. It is usually provided that when the courts determine that the
assessment was illegal, the Government itself will refund the money, relieving
the collector of personal liability. (See sec. 989, Revised Statutes of
the United States.)

In the case of Erskine vs. Van Arsdale (15 Wall. [U. S.], 68-75),
the Supreme Court of the United States held that—

“Taxes illegally assessed and paid may always be recovered back, if the
collector understands from the payer that the taxes are regarded as illegal and
that suit will be instituted to compel the refunding of them. * * * Where an
illegal tax has been collected, the citizen who has paid it, and has been
obliged to bring suit against the collector, is, we think, entitled to interest
in the event of recovery, from the time of the illegal exaction.” (See
also Schell vs. Cockren, 107 U. S., 625; National Home
vs. Parrish, 229 U. S., 496; White vs. Arthur, 10 Fed. Rep.,
80; McClain vs. Pennsylvania Company, 108 Fed. Rep., 618.)

In the case of National Home vs. Parrish (229 U. S., 496), the
Supreme Court, discussing the question before us, said:

“It is quite true that the United States cannot be subjected to the payment
of interest unless there be an authorized engagement to pay it or a statute
permitting its recovery. (U. S. Ex rel. Angarica vs. Bayard,
127 U. S., 251; U. S. vs. State of North Carolina, 136 U. S., 211.) But
this exemption has never as yet been applied to subordinate governmental
agencies. On the contrary, in suits against collectors to recover moneys
illegally exacted as taxes and paid under protest, the settled rule is that
interest is recoverable without any statute to that effect, and this although
the judgment is not to be paid by the collector, but directly from the treasury.
(Erskine vs. Van Arsdale, 15 Wall., [U. S.], 68-75; Redfield
vs. Bartels, 139 U. S., 694.)”

Section 144 of the Internal Revenue Act of 1914 authorizes the Collector of
Internal Revenue, in cases like the present, to pay out of public funds in his
hands “any judgment, damages, or costs” recovered in an action brought against
“any revenue officer” by reason of any act done in the performance of official
duties. The “damages” for the wrongful exaction or withholding of money is the
payment of interest at the legal rate. (Article 1108, Civil Code.)

In view of all of the foregoing, we see no reason for modifying the judgment
of the lower court. The same is, therefore, hereby affirmed, with costs. So
ordered.

Carson, Araullo, Street, and Malcolm, JJ., concur.

Arellano, C. J., concurs in the result.