AMERICAN MACHINERY & PARTS MANUFACTURING, INC., INTERNATIONAL CHEMICAL INDUSTRIES, INC., AND YUPANGCO COTTON MILLS, INC., PETITIONERS, VS. ISMAEL MATHAY, SR., AS AUDITOR GENERAL…

American Machinery and Parts Manufacturing versus Mathay

The Case

This is a petition for review, certiorari, and mandamus brought by three domestic corporations — American Machinery and Parts Manufacturing, International Chemical Industries, and Yupangco Cotton Mills — against the Auditor General, the Executive Secretary, and the Auditor of the Central Bank. The petitioners ask the Supreme Court to annul the rulings that denied their claims for refund of foreign exchange margin fees, and to compel the respondents to approve those claims. The case matters because it fixes the precise moment when the margin fee becomes legally due — the sale of foreign exchange — and because it defines the breadth of the Auditor General's constitutional power to disallow claims against the government.

Procedural History

Each petitioner filed a claim for refund of margin fees with the Central Bank. The Central Bank Auditor recommended approval of the Amparts claim, following the ruling of the Office of the President in the Bautista Brothers Lumber Company case. The Auditor General, instead of affirming that recommendation, sought the guidance of the Office of the President. The Office of the President, through the Assistant Executive Secretary, initially ruled that the Bautista ruling applied to the Amparts claim. On reconsideration, however, the Executive Secretary reversed that ruling, and the Auditor General denied the claim. The Auditor of the Central Bank then issued a memorandum directing that similar claims be disallowed in audit. From these rulings, the petitioners went directly to the Supreme Court on petitions for review, certiorari, and mandamus. The three petitions were consolidated and decided jointly because they raised identical issues.

Facts

In 1960 and 1961, the petitioners opened letters of credit with their respective banks for the importation of machinery, spare parts, and equipment. Against these letters of credit, beneficiaries drew and negotiated drafts abroad, and the petitioners purchased foreign exchange from the Central Bank to cover the drafts. On those purchases, the Central Bank assessed and collected margin fees: 5,304 pesos and 81 centavos for Amparts, 128,260 pesos and 28 centavos for Inchem, and 220,847 pesos and 66 centavos for Yupangco.

The Basic Industries Law, Republic Act Number 3127, took effect on 17 June 1961. Thereafter, each petitioner applied for tax exemption and was issued a certificate of tax exemption by the Board of Industries. Relying on these certificates, the petitioners sought refund of the margin fees they had paid.

The Central Bank refunded portions of the claims but disallowed the margin fees corresponding to foreign exchange purchased before the effectivity of the Basic Industries Law. The petitioners invoked the Bautista ruling of the Office of the President, which had exempted margin fees on foreign exchange purchased before the law took effect, for machinery landed and withdrawn from customs custody after its effectivity. The Executive Secretary, however, distinguished Bautista on the ground that in the Amparts case the importations had landed before the law took effect, and denied the claims.

Issues

• Whether or not the sale of foreign exchange made before the effectivity of Republic Act Number 3127, for importations landed before but released after such effectivity, is exempt from the payment of foreign exchange margin fees; stated differently, when did the margin fees become legally due?
• Whether or not the Auditor General gravely abused his discretion in reviewing and disallowing the petitioners' claims for refund instead of following the recommendation of the Central Bank Auditor.

Applicable Provisions

Section 6 of Republic Act Number 3127, the Basic Industries Law, provides:

Any person partnership, company or corporation who or which is now engaged or shall engage in a basic industry shall be exempted from payment of special import tax, compensating tax, foreign exchange margin fee and tariff duties in respect of the importation of machinery, spare parts and equipment as follows: (a) One hundred per centum of the taxes due during the period from the date of approval of this Act to December thirty-first, nineteen hundred sixty-six; (b) Seventy-five per centum of the taxes due during the period from January first to December thirty-first, nineteen hundred sixty-seven; (c) Fifty per centum of the taxes due during the period from January first to December thirty-first nineteen hundred sixty-eight, after which such person, partnership, company or corporation shall be liable in full to all taxes: Provided, That packaging and assembly plants shall not be entitled to the benefits granted in this Act: Provided, further, That exemptions from taxes for spare parts as mentioned in this section shall only apply to spare parts imported at the time of the original importation of the machinery and equipment.

This is the exemption provision the petitioners invoke, and the Court holds it cannot reach margin fees that had already accrued before the law took effect.

Section 7 of the same law provides:

For the purpose of determining the commencement of exemption, provided for in Section six of this Act, the benefits of exemption of basic industries from the payment of taxes under this Act shall, upon approval of the application for exemption by the Board, retroact as of the date of the filing of the application for exemption.

This fixes the retroactivity of the exemption at the date of filing the application, which in every case came after the foreign exchange had already been purchased.

Section 1 of Republic Act Number 2609, the Margin Fee Law, provides:

The provisions of any law to the contrary notwithstanding, when and as long as the Central Bank of the Philippines subjects all transactions in gold and foreign exchange to licensing, the Central Bank, in respect of all sales of foreign exchange by the Central Bank and its authorized agent banks, shall have the authority to establish a uniform margin of not more than forty per cent over the Banks' selling rates stipulated by the Monetary Board, which margin shall not be changed oftener than once a year except upon the recommendation of the National Economic Council and the approval of the President. The Monetary Board shall fix the margin at such rate as it may deem necessary to effectively curtail any excessive demand upon the international reserve.

This is the decisive language: the fee attaches to the sale of foreign exchange, not to the later landing or release of the imported goods.

Section 2 of Article Eleven of the 1935 Constitution provides:

The Auditor General shall examine, audit and settle all accounts pertaining to the revenues and receipts from whatever source, including trust funds derived from bond issues; and audit in accordance with law and administrative regulations, all expenditures of funds and property pertaining to or held in trust by the government or the provinces or municipalities thereof. He shall keep the general accounts of the government and preserve the vouchers pertaining thereto. It shall be the duty of the Auditor General to bring to the attention of the proper administrative officials expenditures of funds or property which, in his opinion, are irregular, unnecessary, excessive or extravagant. He shall also perform such other functions as may be prescribed by law.

This is the source of the Auditor General's power to scrutinize and disallow claims against the government.

Ruling

On the first issue, the Court ruled that the margin fees became legally due upon the sale and purchase of foreign exchange, regardless of when that exchange was later utilized. The Court held that both rulings of the Office of the President, Bautista and Amparts, lost sight of the essential act at the base of the controversy: the purchase of foreign exchange which, by provision of law, gave rise to the obligation to pay the margin fee. The Margin Fee Law speaks of a margin in respect of all sales of foreign exchange by the Central Bank and its authorized agent banks. The Court quoted its earlier holding that a margin levy is a form of exchange control designed to discourage imports and curtail excessive demand upon the international reserve. Since the petitioners purchased their foreign exchange before the Basic Industries Law took effect, no exemption yet existed to cover those purchases. The Court applied the rule that laws are prospective in operation unless there is a clear provision to the contrary, and that exemption provisions are strictly construed against the one who claims exemption.

On the second issue, the Court ruled that the Auditor General did not gravely abuse his discretion. Under the Constitution and the Revised Administrative Code, the Auditor General may scrutinize expenditures that may be irregular or unnecessary and rule on claims due from or against the government. The Court described him as not merely an examiner but also a critic of the wisdom and propriety of expenditures of public funds. The refund of a fee that properly belongs to the government is a matter he may disallow in his discretion.

Doctrine

The foreign exchange margin fee is imposed on the sale of foreign exchange by the Central Bank or its agent banks. It accrues at the moment of that sale, not at the landing or release of the imported goods from customs custody. A tax exemption granted by a later law cannot reach a fee that had already accrued before the exempting law took effect, because laws are prospective in operation and exemptions are strictly construed against the claimant. The Auditor General's power to examine, audit, and settle claims includes the discretion to disallow a refund of a fee properly belonging to the government.

Disposition

The petitions were dismissed, and the denials of the claims for refund were sustained, without costs.

Remember This

Memorize the line: it is the act of selling and the correlative purchasing of foreign exchange that gives rise to the margin fee, regardless of when the exchange is used. Examiners use this case to test the accrual point of the margin fee against a later tax exemption, and the scope of the Auditor General's disallowance power.