G.R. No. 20101. July 12, 1923

The plaintiff is a corporation organized and existing under the laws of the
State of California, with its principal office and place of business in the City
of San Francisco, and there engaged solely in the manufacture and sale of
cocoanut oil, and is duly licensed to transact business in the Philippine
Islands, where it has a resident agent engaged solely in the purchase of
copra.

The defendant is the duly appointed, qualified, and acting Collector of
Internal Revenue of the Philippine Islands.

The complaint alleges that during the year 1921, the plaintiff purchased
copra from various merchants residing in the Philippine Islands of the value of
P1,022,209.93, under the terms and conditions of which purchase the resident
merchants sold and consigned the copra to plaintiff f. o. b. ship in Manila Bay,
on all of which a merchant’s tax of 1 per cent, under section 1459 of the
Administrative Code of 1917, was paid by the respective sellers and consignors;
that the defendant, acting under the pretended authority of section 1459, on
April 4, 1922, levied and assessed against the plaintiff a merchant’s tax of
P10,222.08 which, with the surcharge of 25 per cent for delinquency, made a
total tax, with the penalty, of P12,777.64, claiming that amount was due on the
copra so purchased, which it demanded from plaintiff’s resident purchasing agent
in the Philippine Islands under the threat of a more severe penalty; that the
tax was paid under protest and is unjust and illegal, for the reasons, first, it
was not due; second, it is invalid; and third, that the merchandise upon which
it was demanded was not exported or consigned abroad by the plaintiff.
Plaintiff’s written protest was overruled, and the defendant still refuses the
return of the money, wherefore, plaintiff prays for judgment for the amount with
interest.

For answer, the defendant admits all of the allegations of paragraph one of
the complaint and makes a specific denial of all other matters alleged, and, as
a special defense, pleads (a) that during the year 1921, plaintiff,
through its purchasing agent, consigned abroad the merchandise in question;
(b) that the defendant in his official capacity demanded from plaintiff
an internal revenue tax of 1 per cent on the amount, plus 25 per cent for delay
in the payment; (c) that in compliance therewith plaintiff paid the money
under protest; and (d) that the collection of the tax is authorized by
law.

The case was tried and submitted on “an agreed statement of facts,” as
follows:

“I. That the plaintiff is a foreign corporation organized and existing under
and by virtue of the laws of the State of California, United States of America,
wherein it is engaged solely in the manufacture and sale of cocoanut and other
oils, with its principal place of business in the City of San Francisco,
California, and having only a resident purchasing agent in the Philippine
Islands, at the City of Manila, although duly licensed to transact business in
said Islands; that the defendant is the duly appointed and acting Collector of
Internal Revenue for the Philippine Islands.

“II. That during the year 1921, the said El Dorado Oil Works of San
Francisco, California, United States of America, through its resident purchasing
agent in the Philippine Islands, purchased from various merchants resident m the
Philippine Islands copra of the value of one million twenty-two thousand two
hundred and nine pesos and ninety-three centavos (P1,022,209.93) under the terms
and conditions of which purchases said merchants, resident in the Philippine
Islands, sold the same to plaintiff, El Dorado Oil Works, of San Francisco,
California, United States of America, f. o. b. (free on board) ship Manila Bay;
that said merchants, upon delivering said copra as aforesaid, obtained, signed
and executed all bills of lading pertaining to said shipments of copra; that
said bills of lading directed shipment of said copra to plaintiff, at San
Francisco, California; that upon presenting said bills of lading thus made out
and signed, as aforesaid, said merchants were paid for said copra by plaintiff’s
resident purchasing agent.

“III. That on all of said copra so purchased the percentage tax of one per
cent (1%), payable under section 1459 of the Administrative Code of 1917, was
paid by the respective sellers prior to the date of the demand made upon
plaintiff’s resident purchasing agent by defendant.

“IV. That the defendant, in his capacity, as Collector of Internal Revenue,
and acting under the alleged authority of section 1459 of the Administrative
Code of 1917, on the fourth day of April, 1922, levied and assessed against
plaintiff as tax due on the consignments of the copra set forth in the last
preceding paragraph the sum of ten thousand two hundred twenty-two pesos and
eight centavos (P10,222.08), together with a surcharge of twenty-five per cent
(25%) thereof for delinquency in the further sum of two thousand five hundred
fifty-five pesos and fifty-five centavos (P2,555.55), making a total tax and
penalties of twelve thousand seven hundred seventy-seven pesos and sixty-three
centavos (P12,777.63), and demanded same from the plaintiff’s resident
purchasing agent in the Philippine Islands; that plaintiff is not and never has
been engaged in the sale, barter or exchange of personal property of any
character whatsoever in the Philippine Islands, it being engaged solely through
its said purchasing agent in the purchase of copra in the Philippine Islands
which is shipped to the head office of plaintiff in the United States cf America
as aforesaid.

“V. That plaintiff’s said resident purchasing agent in the Philippine Islands
for and on behalf of plaintiff, involuntarily and to prevent the exaction of
further penalties, on the 11th day of April, 1922, paid under protest to
defendant the sum of twelve thousand seven hundred seventy-seven pesos and
sixty-three centavos (P12,777.63).

“VI. That plaintiff’s protest was overruled and denied by defendant, who
refused and still refuses to refund the sum above mentioned.”

Exhibits B and C, in the form of letters, are attached to and made a part of
the stipulation.

The lower court rendered judgment for the plaintiff as prayed for in the
complaint, from which the defendant appeals, claiming (1) that the court erred
in holding that the plaintiff was not subject to the tax under section 1459; (2)
in allowing interest in favor of the plaintiff; and (3) in rendering the
judgment.

Under the “agreed statement of facts,” the question involved is the
construction of section 1459 of the Administrative Code of 1917. It will be
noted that the plaintiff is a foreign corporation organized under the laws of
the State of California, with its principal office and place of business in the
City of San Francisco, where it is engaged in the manufacture and sale of
cocoanut oil and its by-products. Although it is duly licensed to transact
business in the Philippine Islands, it has a resident purchasing agent only
here. That under the terms and conditions by which the agent made all of the
purchases in question, the copra was sold to the plaintiff, a foreign
corporation, f. o. b. ship, Manila Bay. That the merchants from whom it was
purchased signed and executed all bills of lading for its shipment, and directed
the shipment of the copra to the plaintiff at San Francisco, and that upon
presenting the bills of lading thus prepared and signed, the merchants were
then, and not before, paid for the copra by the resident purchasing agent. On
all such copra the percentage tax of 1 per cent, payable under section 1459, was
paid by the respective owners and sellers prior to the date of the demand which
was made by the defendant upon the resident purchasing agent for the tax in
question. Notwithstanding the payment of the tax by the merchants who sold the
copra, the defendant contends that the plaintiff should pay another sales tax
upon the same copra because it was purchased here by its agent.

The following are the material provisions of section 1459:

“Percentage tax on merchants’ sales.—All merchants not herein
specifically exempted shall pay a tax of one per centum on the gross value in
money of the commodities, goods, wares, and merchandise sold, bartered,
exchanged, or consigned abroad by them, such tax to be based on the actual
selling price or value of the things in question at the time they are disposed
of or consigned, whether consisting of raw material or of manufactured or
partially manufactured products, and whether of domestic or foreign origin. The
tax upon things consigned abroad shall be refunded upon satisfactory proof of
the return thereof to the Philippine Islands unsold. * * *

” ‘Merchant,’ as here used, means a person engaged in the sale, barter, or
exchange of personal property of whatever character. Except as specially
provided, the term includes manufacturers who sell articles of their own
production and commission merchants having establishments of their own for the
keeping and disposal of goods of which sales or exchanges are effected, but does
not include merchandise brokers.”

At or about the time the instant case was submitted, this Court rendered a
decision in Murphy vs. Trinidad (44 Phil., 649), in which the writer,
though standing alone, vigorously dissented.

In paragraph one of the syllabus in that case, it is said:

“1. INTERNAL REVENUE; MERCHANTS’ TAX; EMBROIDERY MATERIAL SENT FROM
ABROAD.—The merchants’ tax imposed by section 1459 of the Administrative Code
must be paid by a person who sends material to the Philippine Islands to be
embroidered under the supervision of its local agent by whom the finished
product is returned to the owner. The person so sending material to be
embroidered and returned is engaged in the business of manufacture in these
Islands and is a manufacturing merchant within the meaning of the Internal
Revenue Law.”

The opinion says:

“The term ‘merchant’ is there defined as a person engaged in the sale,
barter, or exchange of personal property of whatever character, and it is
declared that tiie term includes manufacturers who sell articles of their own
production. The American Import Company fulfills every requirement of this
definition because it is engaged in the manufacture of Philippine embroideries
and exports the finished product for sale in the United States.

“* * * and there is no reason why a foreign company, buying its material in a
foreign market, should not be required to carry the weight of the investment,
when such material is sent to this country to be converted into a finished
product, the same as a local manufacturer who buys his material here, or in any
market.”

The decision in that case is now the law of this Court, but upon the facts
there is a very important distinction between the two cases. In the instant
case, there is no claim or pretense that the plaintiff ever shipped any raw
material to the Philippine Islands to be manufactured into a finished product,
or that it ever manufactured anything in the Philippine Islands, or that it ever
sold any of its manufactured products in the Philippine Islands. The very most
that can be said is that, through its agent, it purchased raw material here in
the form of copra to be shipped to its plant in San Francisco, there to be
manufactured into oil and its by-products, and the stipulation expressly recites
that the shipper paid the sales tax prior to the shipment of the copra as a
condition precedent and as one of the considerations of the payment of the
purchase price.

In other words, under the contract of purchase, the copra was to be delivered
to the plaintiff f. o. b. ship, Manila Bay, with the sales tax paid thereon by
the seller who made the delivery.

The appellant’s brief says:

“The lower court held that the plaintiff was not subject to the tax on
consignments abroad, because it was not a merchant according to the definition
of same given in section 1459 of the Revised Administrative Code. It is true
that the plaintiff is not and never has been engaged in the sale, barter, or
exchange of personal property of any character in the Philippine Islands
(paragraph IV of Agreed Statement of Facts). It should be taken into
consideration, however, that the plaintiff is a manufacturing corporation,
licensed to transact business in this country and is engaged in the manufacture
and sale of cocoanut and other oils in the United States (paragraph I of Agreed
Statement of Facts). Inasmuch as plaintiff manufactures and sells oil, it comes
within the definition of a merchant given in section 1459 above mentioned, which
includes manufacturers who sell articles of their own
production.”

The last statement is not tenable. The record shows that the plaintiff never
did manufacture or sell oil in the Philippine Islands. That it only manufactures
and sells oil in the United States. It is further contended that the plaintiff
is the consignor of the copra and, as such, is liable for the payment of the
tax. That contention is in direct conflict with clause two of the “Agreed
Statement of Facts,” above quoted.

We agree with the Attorney-General that it is the policy of the law to uphold
rather than defeat revenue laws. But upon the stipulated facts, to require the
plaintiff to pay a sales tax would violate every rule of statutory construction
and would require a foreign purchaser of goods to pay as sales tax for the
privilege of making the purchase, and, in legal effect, would be a tax on
exports. Upon that question, a case square in point is A. G. Spalding &
Bros. vs. Edwards, Advance Opinions of the Supreme Court of the United
States, No. 14, May 15, 1923, page 539; 67 L. ed., 865. It is there held:

“A sale by a manufacturer to a broker to fill an order from a foreign
merchant is a step in the export, where the title passes when the property is
delivered to the carrier, so that, under the terms of the Federal Constitution,
it is not subject to tax, where the broker sends the manufacturer what is termed
an export order, with directions to deliver the goods on board ship, marked for
the foreign merchant, although the invoice is sent to the broker to enable him
to secure a license and clearance at the customhouse, and the manufacturer
secures a receipt from the carrier, which is sent to the broker, and by him
exchanged for an export bill of lading in his own name.”

In the instant case, the record is conclusive that the plaintiff never “sold,
bartered, exchanged or consigned abroad” any copra within the meaning of section
1459 of the Administrative Code.

The judgment of the lower court includes both costs and interest in favor of
the plaintiff. This was error. The judgment of the lower court is modified so as
to eliminate both costs and interest, and in all other respects is affirmed,
without costs in this court. So ordered.

Araullo, C.J., Johnson, Street,
Malcolm, Avanceña, Villamor, and Romualdez, JJ., concur.