THE EARNSHAWS DOCKS & HONOLULU IRON WORKS, PETITIONER, VS. PEDRO GIMENEZ, AS AUDITOR GENERAL, RESPONDENT.

Appeal taken by the Earnshaws “Docks a Honolulu Iron Works, hereinafter
referred to simply as Earnshaws Docks, from the decision of the Auditor General
denying its claim for refund of the amount of P198,695.61, representing the 17
per cent special excise tax levied by the levied Central Bank of the
Philippines, hereinafter referred to simply as Central Bank, on its dollar
earnings abroad utilized to purchase shares of the Hawaiian-Philippine common
stock and of the San Carlos Milling Co., Ltd., and for other purposes.

The Earnshaws Docks is a business name and style of the Honolulu Iron Works,
a corporation duly organized and existing under the laws of Hawaii, U.S.A., and
duly licensed to engage in business in the Philippines. During the effectivity
of Republic Act No. 601 (the 17 per cent foreign exchange tax law, which took
effect on March 28, 1951 and was repealed by Republic Act No. 1394 on December
31, 1955), the Earnshaws Docks received in its New York office dollar
commissions from foreign manufacturers totalling $580,048.475.

On May 26, 1954, Theo. H. Davies & Co., Far East, Ltd., for itself and on
behalf of Edward J. Nell Co. and Earnshaws Docks, requested the Central Bank for
authority to utilize their respective dollar accounts abroad to purchase and
repatriate to Philippine ownership 138,000 shares of Hawaiian-Philippine common
stock at $3.55 per share. The Monetary Board of the Central Bank granted the
request (Resolution No. 843 dated June 1, 1954) and the Earnshaws Docks utilized
$163,012.00 of its dollar funds abroad to buy 46,000 shares of
Hawaiian—Philippine common stocks. In August, 1955, San Carlos Planters and San
Carlos Corporation, for themselves and on behalf of Theo. H. Davies & Co.,
Far East, Ltd., Edward J. Nell & Co. and Earnshaws Docks also requested the
Central Bank for authority to purchase from non-residents 60,153 shares of San
Carlos Milling Co. Ltd. at $10.00 per share amounting to approximately $600,000,
of which $200,000 would be paid by the San Carlos Corporation from the dollars
it would purchase for said purpose from the Central Bank and the balance of
$400,000 to be paid by Theo. H. Davies & Co., Far East, Ltd., Edward J. Nell
& Co. and Earnshaws Docks out of their respective dollar funds abroad. This
request was likewise granted by the Central Bank. For the purchase of shares of
the San Carlos Milling Co. Ltd., the Earnshaws Docks utilized $125,000 of its
dollar commissions abroad, bringing the total foreign exchange funds used by it
for the two transactions mentioned above to $288,012.00. EarnshWs Docks used the
balance of its foreign funds during the same period for other purposes in
furtherance of its business.

On December 22, 1955, the Central Bank demanded of Earnshaws Docks the
payment of the 17 per cent foreign exchange tax on its dollar earnings abroad
utilized to purchase the Hawaiian-Philippine .and San Carlos Milling Co. shares
mentioned heretofore, as well as those utilized by it for other purposes after
the effectivity of the foreign exchange tax law (Republic Act No. 601) totalling
$580,048.475 or P1,160,797.65 converted at the rate of P2.015 to the dollar. The
demand was reiterated by the Central Bank in a letter dated February 29, 1956,
wherein Earnshaws Docks was specifically required to pay the sum of P198,695.61
as foreign exchange tax within thirty days from receipt of said letter. In a
letter of March 26, 1956, the Earnshaws Docks requested the Central Bank to
reconsider its demand on the ground that the imposition of said tax was illegal
for the reason that there was no foreign exchange purchased by the Earnshaws
Docks from the Central Bank or its agents in the consummation of the
transactions in question. After a denia1 of its request, Earnshaws Docks paid
the Central Bank the amount of the tax in two installments — June 12, 1956 and
August 31, 1956, and on June 25, 1957 filed a claim with the latter for the
return of the amount of P198,695.61. This was denied on December 10, 1957.

On March 7, 1958., Earnshaws Docks filed a claim with the General Auditing
Office for the return of said tax. Because no action was taken by the General
Auditing Office on its claim for more than two months after its filing, the
Earnshaws Docks instituted on May 26, 195$ an action in the Court of First
Instance of Manila for the recovery of the claim in question (Civil Case No.
36358) It later withdraw the action upon being notified by the General Auditing
Office that the Central Bank had commented on its claim filed with said office.
Thereafter Earnshaws Docks requested the General Auditing Office to rule on its
claim, on the merits, which said Office did on October 20, 1958, the same being
now the decision appealed from.

The questions raised by petitioner in the second,third, fourth and sixth
assignments of error—which we deem to be decisive of this appeal—are related to
each other. We shall, therefore, take them up jointly. The questions they pose
are whether or not petitioner’s dollar earnings mentioned heretofore were
subject to the 17 per cent excise tax imposed by Republic Act No. 601, and
consummate the two transactions involved in this case, petitioner may be deemed
to have surrendered or sold to the Central Bank its dollar earnings aforesaid
and then purchased from the same entity the dollars needed to pay for the shares
it purchased.

It is not disputed that between March 28, 1951 and December 31, 1955
petitioner received at its New York office as commissions the total sum of
$580,048.475 (equivalent to P168,797.68 at the conversion rate of P2.O15 to the
dollar). nor is it denied that said commissions were earned during the
effectivity of Republic Act No. 601.

Section 1 of Republic Act No. 601, insofar as pertinent, provides:

“Except as herein otherwise provided, there shall be assessed, collected aid
paid a special excise tax of seventeen per centum (17%) on the value in
Philippine peso of foreign exchange sold and/or authorized to be sold by the
Central Bank of the Philippines or any of its agents * * *.”

The pertinent provisions’of Section 5 of the same Act read as follows:

“The tax imposed under section one hereof shall be paid to the Central Bank
of the Philippines by the purchaser of the foreign exchange and the Central Bank
shall not sell any foreign exchange without the payment of the said tax. * *
*.”

The Central Bank predicates its right to assess and collect the questioned
tax upon the provisions of law quoted above and those of Section 4(a) of its
Circular No. 20, dated December 9, 1949 (47 0ff. Gaz., November, 1951), and
Section 2(h) of its Circular No. 42 (49 0ff. Gaz., May, 1950) to the following
effect:

“SEC. 4(a). All receipts of foreign exchange shall be sold daily to the
Central Bank by those authorized to deal in exchange. All receipts of
foreign exchange by person, firm, partnership, association, branch office,
agency company or other unincorporated body or corporation shall be sold to the
authorized agents of the Central Bank by the recipients within one business day
following the receipt of such foreign exchange. Any person, firm,
partnership, association, branch office, agency, company or other unincorporated
body or corporation, residing or located within the Philippines, who acquires
foreign exchange on and after the date of this Circular Foreign Exchange shall
not, unless licensed by the Central Bank, dispose of such foreign exchange in
whole or in part, nor receive less than its full value, nor delay taking
ownership thereof except as such delay is customary; provided, further, that
within one day upon taking ownership, or receiving payment, of foreign exchange
the aforementioned persons and entities shall sell such foreign exchange to
designated agents of the Central Bank (Circular No. 20; Italics ours).

“SEC. 2(h). The following are foreign exchange transactions and as
required by Central Bank Circular No. 20, are subject to prior
licensing by or on behalf of the Central Bank.

“*        *       *       *       *       *       *

“(h) all collections of residents made abroad through their overseas
branch offices, agents of representatives. Such collections shall be, brought or
ordered to be brought by such residents into the Philippines in U.S. currency
or in other currency acceptable to the Central Bank after deducting normal
business expenses incurred by such overseas branch offices, agents or
representatives.” (Central Bank Circular 42, Italics ours).

Petitioner’s position is that the 17% special excise tax accrues only when an
actual sale of foreign exchange is made by the Central Bank or its
authorized agents, such sale of foreign exchange being the operative fact or the
condition that gives rise to the excise tax; that the two transactions mentioned
above did not involve any sale or actual transfer of dollars by the Central Bank
or any of its agents to petitioner, because the latter had not, in fact,
purchased any dollar from the Central Bank to consummate said transactions; and
that it was not nor could it have been the intention of Congress to impose the
tax upon a transaction that did not involve an actual purchase of foreign
exchange.

Upon the other hand, the Central is that under the legal provisions quoted
above and its Circulars Nos. 20 and 42, petitioner was under obligation to
transfer and sell to the Central Bank , for pesos, its dollar earnings abroad;
that to purchase the shares involved in the transactions already mentioned,
petitioner should have filed an application for a foreign exchange license and,
if such license was granted, it would have then purchased foreign exchange and
paid—as petitioner admits in its brief (p. 31)—the corresponding 17 per cent
exchange tax. In this connection the Central Bank claims that if petitioner was
not required to follow this procedure literally or strictly by making an actual
surrender or sale to the Central Bank of its dollar earnings abroad prior to the
approval of the transactions herein involved, it was solely for the purpose of
avoiding red-tape or paperwork and save trouble and time.

In the light of the facts before Us and the legal provisions applicable
thereto, we are constrained to agree with the contention of the Central Bank
and, consequently, with the decision of the respondent subject of this
appeal.

Under the Central Bank circulars already referred to petitioner was under
obligation to surrender or sell to the Central Bank its dollar earnings abroad,
within one day after their acquisition or receipt. By applying for a Central
Bank license or authority before utilizing said dollar earnings abroad,
petitioner undoubtedly admitted this to be true and is now estopped to contend
otherwise.

That the Central Bank had no lawful authority to waive or agree to dispense
with this surrender or sale seems to be too obvious for argument. Much less
could it waive in favor of any party the collection of the 17 per cent excess
tax provided by law. It can be logically presumed, therefore, that the Central
Bank chose not to compel petitioner to first make such actual surrender or sale
of its dollar earnings abroad and instead gave petitioner authority to utilize
the same for the purposes already referred to, solely for the purpose of
expediting the transactions by avoiding the red-tape and paper-work involved. It
cannot be denied that this was for the benefit and convenience of petitioner as
well as of the parties from whom it purchased the shares of stock. It can not
now take advantage of the accommodation thus granted to it by claiming that,
because it retained ownership and possession all the time of its dollar earnings
abroad and it had made no actual surrender or sale thereof to the
Central Bank, it is not liable for the payment of the 17 per cent exchange tax
on the amounts utilized by it for the purchase of the shares of stock and for
other purposes already mentioned above. As already stated, before purchasing the
shares of Hawaiian—Philippine and San Carlos Milling Co., Ltd., petitioner
applied for authority from the Central Bank to utilize its dollar earnings
abroad for that purpose. Petitioner would not have asked for such authority if
it did not consider itself bound firstly, to surrender or sell such dollar
earnings to the Central Bank and secondly, to purchase, thereafter, the dollars
it needed to consummate the proposed transactions. Consequently, its request or
petition for authority to utilize its dollar earnings; the leave granted by the
Central Bank, and the subsequent use by petitioner of said dollar earnings must
be deemed equivalent to, and involving first, the surrender or sale of such
dollar earnings to the Central Bank and then the purchase by petitioner of the
dollars it needed to consummate the transactions; for otherwise we would be
sanctioning an arrangement violative of the provisions of law and of the
dispositions contained in the Central Bank Circulars mentioned heretofore.

In the first assignment of error it is contended that respondent should have
ruled that petitioner and the other parties to the two transactions involved in
this case were made to understand that no taxes would be imposed on them by the
Central Bank. We find this to be without merit. The record does not disclose
affirmatively any promise made by the Central Bank in the sense claimed by
petitioner and, as stated heretofore, any such promise made by the Central Bank
would have been void for lack of legal authority to make it. The State cannot be
precluded or barred from collecting the tax due simply by reason of the unlawful
acts of its agents.

In the view we take of the case, we deem it unnecessary to
resolve the question involved in the first assignment of error.

Wherefore, finding the decision of respondent subject of the present appeal
to be in accordance with law, the same is hereby affirmed, with
costs.

Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera,
Paredes, and De Leon, JJ., concur.