G.R. No. L-14393. October 31, 1960
THE COLLECTOR OF INTERNAL REVENUE, PETITIONER, VS. CANTILAN LUMBER COMPANY, RESPONDENT.
BARRERA, J.:
decision of the Court of Tax Appeals (in C.T.A. Case No. 269), holding
respondent Cantilan Lumber Company, not liable for the payment of compensating
tax on certain machinery and equipment purchased from the U.S. Government by the
partnership “Cantilan Lumber Company”.
The records disclose that on June 17, 1946, the Cantilan Lumber Company, a
duly registered partnership composed of Nelson E. Kellogg and Alonso M.
Villalba, entered into a contract with the U.S. Government, through the Manila
Engineer District (MANED), for the supply by the former to the latter of a
minimum of 2,400,000 board feet of timber. To enable the partnership to perform
the terms of said contract, the U.S. Government promised to furnish to it the
necessary machinery, equipment, and supplies at prices to be agreed upon by both
parties.
Pursuant to said contract, the U.S. Government, through the MANED, furnished
the partnership, during the 4th quarter of 1946 and the 1st quarter of 1947,
various equipment such as sawmill machinery, trucks, power control unit,
tractors, arch, generator, welder arc, materials and supplies with a total value
of F262,857.78. The Collector, in his letter dated May 31, 1947, demanded from
the partnership payment of the sum of P13,142.89, as compensating tax on the
aforesaid articles.
Subsequently, the MANED made several other deliveries, thus increasing the
value of the articles delivered to P455,078.62. Later, BIR Agent Castor Jongko
reported the return by the Lumber company to MANED of certain machinery and
equipment, thereby reducing the value to P430,785.28. Based on this last amount,
the Collector, in his letter dated September 14, 1954, assessed the amount of
P21,539.36 (5% of P430,785.28), as compensating tax. This demand superseded the
original demand dated May 31, 1947.
The original contract (No. W-2557-eng-409) between MANED and the partnership
was modified by a supplemental agreement dated July 16, 1947, known as
Modification No. 1, and by supplemental agreement dated June 25, 1948, known as
Modification No. 5. Modification No. 1 described the items delivered by the
MANED to the partnership, and provided that payment for all items so delivered
would be made by the U.S. Government, withholding any amount which became due
the contractor under the contract, until the full price for said items had been
paid. It also extended the term of the contract to June 30, 1948. Modification
No. 5, on the other hand, made a change in the manner of delivery of the lumber,
and extended the term of the original contract to May, 1949.
In the meantime, the partnership (Cantilan Lumber Company) underwent several
changes. It was dissolved as of August 12, 1948, as per agreement executed on
September 30, 1948, by the partners (Kellogg and Villalba), whereby Kellog
purchased for P80,000.00, “all of the participation, share, right, title and
interest whatsoever of him (Villalba)” “in the business and good will of the
partnership hereby dissolved, and in all and singular the equipment, engines,
machinery, whether fixed or movable, tools and accessories, plant, buildings and
other improvements, supplies, effects, stocks of logs and .lumber, book accounts
and other credits, contracts including the above-mentioned contract with the
United States Government, and other assets of the partnership.” One of the
conditions of the sae was the agreement of Kellogg “to assume, pay and satisfy
all debts and other liabilities of the partnership hereby dissolved as shown by
the books of the firm as of the date of dissolution thereof, except the
income taxes accrued to the date of dissolution, which taxes shall be
apportioned equally between and paid by both of the parties.”
On October 29, 1948, respondent Cantilan Lumber Company was duly organized
and registered as a corporation[1] “for
the purpose of taking over the entire lumber business previously operated by the
aforesaid partnership (Cantilan Lumber Company), together with all the
equipment, buildings and other properties or assets appertaining thereto.” As
per deed of sale executed by the parties (dated December 7,1948) Kellogg, for
and in consideration of the sum of P160,000.00,[2] sold, assigned, transferred, and conveyed
to respondent corporation “all the lumber business heretofore carried on by the
former partnership of Kellogg and Villalba under the name and style of ‘Cantilan
Lumber Company,’ and all and singular the equipment, engines, machinery, whether
fixed or movable tools and accessories, plant, buildings and other improvements,
supplies, effects, stocks of logs and lumber, book accounts and other credits,
contracts including Contract No. W-2557-eng-409 dated June 17, 1946; with the
Government of the United States of America for the supplying of Philippine
hardwood lumber, and other assets of said partnership of every nature and
description including good-will and trade-name, the said assets being understood
as those appearing on the books of account and inventories of said (partnership)
business as of the 12th of August, 1948.” One of the conditions of the sale was
the agreement by respondent corporation “to discharge all lawful debts and
liabilities of the Vendor (Kellogg) in relation to the said lumber business as
shown by the books of the firm as of the date of said transfer (August 12,
1948).” Kellogg was one of the original directors of respondent corporation,
owning 40% of the subscribed capital stock thereof, and its general manager.
As heretofore stated, as early as May 31, 1947, petitioner demanded payment
of the compensating tax on the aforementioned machinery, equipment, and
supplies. However, collection of the said tax could not be made as the Cantilan
Lumber Company (the partnership as well as the corporation) through its general
manager Kellogg interposed the defense that the machinery and equipment were
still owned by the U. S. Government.
On September 14, 1954, after a revision of the account, petitioner, in his
letter addressed to respondent corporation, again demanded payment of the tax,
this time in the increased sum of P21,539.26, in view of additional machineries
and equipment delivered to the corporation. Respondent, in its letter addressed
to the Bureau of Internal Revenue dated October 21, 1954 and signed by its then
general manager, G.W. Bayer, replied that it has not yet obtained title to the
property, inasmuch as it was still indebted to the U. S. Government, and
requested petitioner to hold the matter in abeyance, until they hear from
Washington regarding the claim, in order that they can ascertain the final and
actual amount of the compensating tax for which the corporation may be
liable.
It appears, however, that title to the machinery and equipment in question
was transferred to respondent corporation, when it was already a corporation, on
May 11, 1954.
On November 18, 1955, the Deputy Provincial Treasurer of Surigao, acting upon
petitioner’s instruction, seized the following property of respondent
corporation:
| One (1) Unit Sawmill, complete with edger, 7-1/2 “American”…………………… |
P43.000.00
|
| One (1) Unit Caterpillar Power Plant, D-17000, 8 cyl., camp…………………….. |
16,000.00
|
|
P59,000.00
|
pursuant to the Warrant of Distraint and Levy issued by petitioner on
December 6, 1954, to satisfy the said sum of P21,539.26.
On November 28, 1955, respondent corporation requested petitioner, in
writing, that the assessment of the compensating tax against it be withdrawn or
cancelled, and that the distraint and levy upon its property be lifted, on the
grounds that (1) it is not liable for said tax; (2) the warrant of distraint and
levy is illegal and void; and (3) even assuming, arguendo, that it
could be held liable therefor, its collection by distraint and levy is barred by
the statute of limitations. On March 27, 1956, petitioner rendered his decision
denying said request.
On May 7, 1956, respondent corporation filed with the Court of Tax Appeals, a
petition for review. In due time and after trial, the Court of Tax Appeals
rendered a decision which, in part, reads:
“The rule is well-established that under this law (Sec. 190, Tax Code),
articles purchased from the U.S. Government, or from any of its agencies or
instrumentalities in the Philippines, are subject to the corresponding
compensating tax, sales tax, or specific tax, as the case may be (Go Cheng Tee
vs. Meer, 87 Phil., 18; 47 Off. Gaz. 269; Saura Import and Export Co.,
Inc. vs. Meer, 88 Phil., 199; P,M.P. Navigation Co. vs. Meer,
91 Phil., 32; A. Soriano y Cia vs. Collector, 97 Phil., 505; 51 Off.
Gaz. [9] 4548). However, it is alleged on behalf of respondent that the
compensating tax accrues and becomes payable only after the complete transfer of
title to the articles from the U.S. Government to the purchaser. In this case,
it is claimed that title to the articles in question was transferred only when
the purchase price was fully paid by petitioner. Hence, it is petitioner which
is subject to the tax.“The position taken by respondent finds no justification in the wording of
the law. The law imposes the compensating tax upon commodities, goods, ware or
merchandise, except those specifically exempted, purchased or
received from without the Philippines. There is nothing in the law
which requires that for the tax to accrue it is essential that absolute title to
the property be transferred from the person from whom it is purchased or
received to the person who purchased or received it. It is enough for a person
to be subject to the compensating tax that he purchased or received a taxable
article from without the Philippines. Who purchased or received the articles in
question from the U.S. Government? Undoubtedly, it was the Partnership and not
the petitioner. The fact that the purchase price of said articles was not fully
paid by the Partnership does not alter the fact that the articles were purchased
and subsequently received by it. Accordingly, it is the Partnership which under
the law and the facts of the case is liable for the payment of said tax.* * * * * * *
“Having found that the petitioner is not subject to the compensating tax on
the articles purchased and received by the Partnership, respondent was without
authority to enforce collection of the tax against petitioner by distraint of
its personal property. Section 318 of the Revenue Code which empowers respondent
to distrain personal property limits such power to the seizure of personal
property belonging to the ‘person owing any delinquent tax or delinquent
revenue’. It does not extend to property belonging to a person who is not a
delinquent taxpayer, as petitioner in this case. Of course, from the evidence of
record, it appears that petitioner is not an Innocent purchaser of the articles
in question, it having acquired said articles from Nelson E. Kellogg with
knowledge of the tax obligation of the Partnership, but this fact does not make
petitioner personally liable for the tax. (See Hongkong & Shanghai Banking
Corporation vs. Rafferty, 39 Phil., 145; Pio Barretto Sons, Inc.
vs. Collector of Internal Revenue, C.T.A. No. 75, Nov. 8, 1956.) Since
the articles were acquired by petitioner subject to the lien for the
compensating tax, the proper remedy is the institution of an action to enforce
the lien on whatever property subject thereto before the lien is extinguished,
if respondent wants to proceed against petitioner and not against the
Partnership or the partners Nelson E. Kellogg and Alonso N. Villalba, or any one
of them.“Petitioner not being liable for the compensating tax assessed against it, we
deem it unnecessary to. pass upon the question whether or not the right of the
Government to collect the tax has prescribed“FOR the foregoing considerations, the decision appealed from is hereby
reversed and the distraint of the personal property belonging to petitioner set
aside. No pronouncement as to costs.“SO ORDERED.”
Not satisfied with said decision, the Collector of Internal Revenue now
petitions for the review thereof.
Petitioner Collector of Internal Revenue claims that the Court of Tax Appeals
erred in holding that respondent corporation is not liable for the payment of
the compensating tax in question.
We find the contention meritorious. The records disclose that the dissolution
of the partnership Cantilan Lumber Company was not due to the closing of its
lumber business, but merely to the acquisition of Villalba’s interest therein by
Kellogg who, as sole owner, would “carry on” the business. Kellogg purchased all
of the participation, share, right, title, and interest of Villalba in the
business and goodwill of the dissolved partnership, including all the equipment,
machinery, tools and accessories, plant,, buildings, improvements, supplies,
effects, stocks of logs and lumber, book accounts and credits, contracts,
including the contracts with the United States Government, and other assets of
the partnership. Under the contract of sale, Kellog expressly agreed to assume,
pay and satisfy “all debts and other liabilities of the partnership” appearing
in the books of the firm at the time of its dissolution, “except the income
taxes” accrued, which were to be apportioned between and paid by both
parties.
Subsequently, respondent corporation was duly organized and registered as,a
corporation on October 29, 1948, for the express purpose of “taking over the
entire lumber business previously operated by the partnership” together
with all the equipment, buildings, and other properties or assets appertaining
thereto. In the deed of sale (dated December 7, 1948), Kellogg (then the sole
owner of all the assets and liabilities of said partnership by virtue of the
sale on August 12, 1948) assigned, transferred, and conveyed to respondent
corporation “all the lumber business heretofore carried, on by the former
partnership of Kellogg and Villalba under the name and style of ‘Cantilan
Lumber Company'”, including all the equipment, engines, machinery, tools and
accessories, plant, buildings, improvements, supplies, effects, stocks of logs
and lumber, book accounts and credits, contracts, including Contract No.
W-2557-eng-409 dated June 17, 1946 with the Government of the United States of
America, and other assets of said partnership of every nature and description,
including goodwill and trade name. In said contract of sale, respondent
corporation expressly agreed “to discharge all lawful debts and liabilities” of
-the vendor Kellogg, in relation to said lumber business as shown by the books
of the firm on the date of the transfer or sale to Kellogg on August 12,
1948.
Thus, it is to be noted that the transfer from the partnership to Kellogg
alone, and from him to the corporation, refers to the totality of the
entire business of the partnership, including all the assets and
liabilities of the latter and, particularly in relation with the case at bar,
the contract with the United States Government relating to the purchase of the
machineries and equipment subject to the tax in question. The compensating tax
due from the partnership is one of these liabilities, considering that proper
demand for its payment has already been made since May 31, 1947, more than a
year before the changes in its organizational set-up took place. And this
liability was not ex-cepted from the transfer as was the income tax. In other
words, it was assumed by the transferees. This is evident from the letter of the
General Manager of respondent corporation dated October 21,1954 (Exh. 24), or
shortly after its incorporation, wherein the corporation acknowledged receipt of
the Collector’s demand for the payment of the compensating tax and, instead of
disputing it and disclaiming liability therefor, requested that the matter be
held in abeyance until it could communicate with Washington regarding the status
and exact amount of its indebtedness to enable it “to determine the final and
actual amount of compensating tax for which it may be liable.”
It is significant to note that Kellogg, one of the partners of the dissolved
partnership Cantilan Lumber Company and subsequently sole owner thereof, is one
of the six original directors of the newly-organized corporation, owning 40% of
its subscribed capital stock or a majority stockholder thereof. He was also its
general manager at the inception and at the time of the transfer of the entire
lumber business to the corporation.
All these circumstances, to our mind, conclusively indicate, not only
knowledge but actual assumption by respondent corporation of the existing
liability of the dissolved partnership Cantilan Lumber Company for the
compensating tax in question. In this connection, the Court of Tax Appeals
correctly observed that respondent corporation “is not an innocent purchaser of
the articles in question, it having acquired said articles from Nelson E.
Kellogg, with knowledge of the tax obligation of the Partnership.”
Petitioner next contends that the Court of Tax Appeals erred in setting aside
the distraint on the property involved herein.
In view of what has already been said, this contention must, likewise, be
upheld. As heretofore stated, respondent corporation is liable for the payment
of the compensating tax assessed. Being delinquent in the payment thereof,
petitioner was, undoubtedly, justified in distraining its (respondent’s)
property in question on November 18, 1955, pursuant to Section 318 of the
National Internal Revenue Code, to satisfy the tax. Contrary to respondent’s
claim, said distraint is not illegal, as it was made 1 year and 4 days from
September 14,1954, the date of the last assessment or well-within the 5-year
period provided in Section 832 (c) of the same Code.
Wherefore, the decision of the Court of Tax Appeals appealed from is hereby
set aside, without pronouncement as to costs. So ordered.
Paras, C.J., Bengzon, Bautista Angelo, Labrador, Reyes, J.B.L., Gutierrez
David, and Paredes, JJ., concur.
Decision set aside.
[1] The Articles of Incorporation were
signed on September 30, the same date the partnership was dissolved and the
entire business transferred to Kellogg alone.
[2] Paid in shares of the corporation.