REPUBLIC OF THE PHILIPPINES, PLAINTIFF AND APPELLEE, VS. FAR EAST AMERICAN COMMERCIAL CO., INC. AND MANILA UNDERWRITERS INSURANCE CO., INC., DEFENDANTS. MANILA UNDERWRITERS INSU…

Appeal from a judgment rendered by the Court of First Instance of Manila
(civil case No. 37108) certified by the Court of Appeals (CA-G. R. No. 27104-R)
to this Court for final determination pursuant to section 17, paragraph 6, of
the Judiciary Act of 1948, as amended.

In a complaint filed on 24 July 1958 the plaintiff avers that on 1 December
1950 the Commissioner (then Collector) of Internal Revenue assessed and demanded
from the defendant Far East American Commercial Co., Inc. the payment of
P208,514.45 as deficiency sales tax, surcharges and penalty on its gross gales
for the years 1946 and 1947, as provided and imposed by sections 183-186 of the
National Internal Revenue Code; that on 23 April 1951 the defendant offered as a
compromise to pay P100,000 in full settlement of the assessment, which was
accepted by the Commissioner; that the Far East American Commercial Co., Inc.
paid P75,000, thereby leaving a balance of P25,000 which was guaranteed by MUIC
bond No. 1208 (Annex A) in the sum of P25,000 executed by the Manila
Underwriters Insurance Co., Inc. on December 1951 and approved by the
Commissioner; that out of the balance of P25,000 the defendant paid from 1951 to
1954 the sum of P15,000, thereby leaving unpaid a balance of P10.000, and that
the Far East American Commercial Co., Inc. and the Manila Underwriters Insurance
Co., Inc. failed and refused to pay the balance of P10.000, notwithstanding
repeated demands made upon them by the Commissioner. Hence, the plaintiff prays
that judgment be rendered declaring MUIC bond No. 1208 forfeited and ordering
the defendants to pay, jointly and severally, the plaintiff the sum of P10,000,
legal interest thereon from the date of the filing of the complaint to the date
of payment in full thereof and costs and for any other just and equitable
relief.

On 1 September 1958 the defendant Manila Underwriters Insurance Co., Inc.
answered the complaint denying and admitting parts thereof, and alleging that
for and in consideration of MUIC bond No. 1208 issued by it, the Far East
American Commercial Co., Inc., together with the A. Syyap & Co., Antonio
Syyap and Angel Syyap, executed an indemnity agreement (Annex 1) in favor of the
Manila Underwriters Insurance Co., Inc., “to render it harmless of any damage,
loss, costs, advances and expenses of whatever kind and nature, including
attorney’s fees, as a consequence of its having issued the aforementioned bond.”
It prays that judgment be rendered dismissing the complaint and sentencing the
defendant Far East American Commercial Co., Inc., the A. Syyap & Co.,
Antonio Syyap and Angel Syyap, jointly and severally, to pay it (the Manila
Underwriters. Insurance Co., Inc.) the sum of P1,297.20 for unpaid premium and
documentary stamps and 15% thereof as attorney’s fees, or, if the complaint be
not demanded by the plaintiff, the defendants Far East American Commercial Co.,
Inc. the A. Syyap & Co., Antonio Syyap and Angel Syyap be ordered to pay,
jointly and severally, to it the sum to be paid to the plaintiff and 15% thereof
as attorney’s fees, and costs. On 3 September, the defendant Manila Underwriters
Insurance Co., Inc. moved to bring in A. Syyap & Co., Antonio Syyap and
Angel Syyap as defendants for the granting of complete relief in the
determination of its cross-claim, pursuant to section 9, Rule 10, Rules of
Court. The motion was granted. On 28 October, the defendant Far East American
Commercial Co., Inc. moved for the dismissal of the complaint, on the ground
that the action is barred by the statute of limitations (section 332,
subparagraph 2 of paragraph c, of the National Internal Revenue Code). On 6
November, the plaintiff objected to the defendant’s motion. It contended that as
its cause of action is predicated upon a written contract (between the
Commissioner and a tax­payer) article 1144 of the Civil Code that provides for
ten-year prescriptive period and not section 332 of the Internal Revenue Code
that bars an action after five years from the date of assessment, applies to the
case. In 13 November, the defendant Manila Underwriters Insurance Co., Inc.
moved for a default order against the cross-defendants A. Syyap & Co.,
Antonio Syyap and Angel Syyap for failure to file an answer within the
reglementary period. On 14 November, the defendant Far East American Commercial
Co., Inc. filed its answer reiterating the special defense that the cause of
action already had prescribed. On 20 November, the trial court entered an order
of default against the cross defendants A. Syyap & Co., Antonio Syyap and
Angel Syyap. On 7 December, the cross-defendants moved, for reconsideration of
the order of default entered against them on 20 November 1958 and for relief
from the order of default on the ground of excusable negligence and prayed that
the reply filed, by the defendant and cross-defendant Far East American
Commercial Co., Inc. be considered their reply. On 8 December, the defendant
Manila Underwriters Insurance Co., Inc. moved for an order of default against
the defendant Far East American Commercial Co., Inc. on the cross-claim, for
failure to file an answer. On 11 December, the defendant and cross-plaintiff
Manila Underwriters Insurance Co., Inc. objected to the petition for relief. On
16 December, the court denied the petition for relief from the order of default.
On 19 December, the cross-defendants A. Syyap & Co., Antonio Syyap and Angel
Syyap again moved for relief from the order which was objected to by the
cross-plaintiff of claimant Manila Underwriters Insurance Co., Inc. On 29
December, the petition for relief filed by the cross-defendants was granted and
in a separate order of even date the court declared the cross-defendant Far East
American Commercial Co., Inc. in default on the cross-claim. On 9 January 1959
the cross-defendant Far East American Commercial Co., Inc. filed a reply to the
cross-claim reiterating that it is not liable to pay any amount as the period
within which the said claim could be instituted already had expired. On 15
January, the cross-defendant Far East American Commercial Co., Inc. filed a
motion, for reconsideration and relief from the order declaring it in default on
the cross-claim. On 27 January, the plaintiff filed a pleading informing the
court that it no longer was interested in prosecuting its claim of P10,000 in
the complaint, for the reaaon that the defendant and cross-claimant Manila
Underwriters Insurance Co., Inc had paid in full the said sum. On 31 January,
the trial court dismissed the complaint in so far as the defendants Far East
American Commercial Co., Inc. and Manila Underwriters Insurance Co., Inc. are
concerned, without pronouncement as to costs and left as parties to the case the
Manila Underwriters Insurance Co., Inc. as cross-claimant and the A. Syyap &
Co., Antonio Syyap and Angel Syyap as cross-defendants. On 10 February, the
cross-claimant moved for reconsideration of the last order (dated 31 January
1959) and prayed that the defendant and cross-defendant Far East American
Commercial Co., Inc. be reinstated as party to the case, because it has a claim
and right to be reimbursed by the cross-defendant Far East American Commercial
Co., Inc. of the P10.000 it had paid to the plaintiff. Acting on said motion, on
17 February 1959 the trial court reconsidered its order of 31 January 1959, in
the following language:

* * * that the principal, claim of the Republic of the Philippines against
the defendants is jointly dismissed, but the cross-claim of the Manila
Underwriters Insurance Co., Inc. against the cross-defendant Far East American
Commercial Co., Inc. is hereby maintained with all the legal force and effect.

The hearing of the case was set for 15 July 1959. On this date the parties
agreed to submit the cross-claim for judgment on the pleadings. On 16 November
1959 the trial court rendered judgment, the dispositive part of which reads, as
follows:

Wherefore, the Court hereby renders judgment, ordering the cross-defendants
to pay or indemnify, jointly and severally, the cross-claimant Manila
Underwriters Insurance Co., Inc., in the amount of P10,000, plus another sum of
P1,297.00 as unpaid premium and documentary stamps, and another sum of P1,500.00
(15% of the obligation) as attorney’s fees, without pronouncement as to costs.

From the above judgment, the cross-defendants Far East American Commercial
Co., Inc., A. Syyap & Co., Antonio Svyap and Angel Syyap have appealed.

The errors claimed by the appellants to have been committed by the trial
court narrow down to the question whether the action brought by the plaintiff is
a tax collection or the enforcement of a contractual liability.

This is a settled question. This Court has ruled and held that the action is
predicated upon contract and not one to collect taxes.^[1] Consequently, the prescriptive period that
would bar the action is not that provided or prescribed by the National Internal
Revenue Code but the Civil Code.

The judgment appealed from is affirmed, with costs against the appellants.

Bengzon, C. J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B. L.,
Barrera, Paredes, Dizon, Regala, and Makalintal, JJ., concur.