THE MANILA RAILROAD COMPANY, PLAINTIFF AND APPELLANT, VS. THE INSULAR COLLECTOR OF CUSTOMS, DEFENDANT AND APPELLEE.

Manila Railroad versus Insular Collector of Customs

The Case

This is an appeal by the Manila Railroad Company against the Insular Collector of Customs, arising from the refusal of the customs authorities to admit free of duty the cost of repairs made in Hongkong to the company's steamship, the Hondagua. The railroad company contended that the repairs were exempt under the tariff provisions of the Philippine Bill and, more importantly, under the franchise statutes of the Philippine Commission. The case matters because it fixes two enduring rules: first, that the Collector's finding on whether adequate repair facilities exist in the Philippines is not conclusive but is subject to review by the courts; and second, that a vessel used as an instrumentality in railroad construction, together with the materials needed to keep it in repair, enjoys the same duty exemption as the railroad material itself.

Procedural History

The appraisers of the Bureau of Customs held that adequate facilities existed in the Philippines for the repairs and that the repairs were therefore dutiable. The railroad company protested, and the matter was appealed to the Insular Collector of Customs, who affirmed the judgment of his appraisers. The company then appealed to the Court of First Instance of Manila, which likewise affirmed. From that judgment of affirmance, the company appealed to the Supreme Court.

Facts

In 1912 the Manila Railroad Company, owner of the steamship Hondagua, caused repairs to be made on the vessel in the city of Hongkong, China. In the latter part of that year, immediately after the repairs were completed, the Hondagua came to the Philippine Islands. The railroad company then attempted to induce the Philippine Government to permit the steamship to enter Philippine waters without payment of import duties on the repairs made abroad.

The effort failed. The appraisers of the Bureau of Customs held that, at the time the repairs were made in Hongkong, adequate facilities existed in the Philippine Islands for making them, and that the repairs were therefore dutiable. The Collector of Customs affirmed, and the Court of First Instance affirmed on appeal.

It appeared that the ship had been purchased by the railroad company as an agency or instrumentality used in the construction of its southern lines, transporting railroad material and laborers from point to point. Its purchase price was included in the cost of construction for which bonds were issued with the Government guaranteeing the interest, and the receipts from its use as a common carrier were, under the direction of the Government, credited to the construction account.

Issues

• Whether or not the judgment of the Insular Collector of Customs on the existence of adequate facilities for repairs in the Philippine Islands is conclusive and beyond judicial inquiry.
• Whether or not the evidence demonstrated that adequate facilities for such repairs did not exist in the Philippine Islands at the time the repairs were made.
• Whether or not the repairs to the Hondagua must be admitted free of duty under the franchise statutes, the ship being an instrumentality in the construction of the railroad.
• Whether or not the ship's use as a common carrier for hire withdrew from it the privileges conferred by those statutes.

Applicable Provisions

Paragraph 200 of section 8 of the Tariff Act of Congress provides:

Boats, launches, lighters, and other water craft, set up or knocked down, imported into the Philippine Islands, and cost of repairs made in foreign countries to vessels, or to parts thereof, documented for the Philippine coastwise trade or plying exclusively in Philippine waters and for which repairs adequate facilities are afforded in the Philippine Islands, fifty per centum ad valorem.

This is the provision under which the Collector classified the repairs as dutiable, and its proviso refers the matter to paragraph 348 where adequate facilities are shown to be lacking.

Paragraph 348 of section 11 of the same Act provides:

Repairs to vessels documented in the Philippine Islands or regularly plying in Philippine waters, made in foreign countries, upon proof satisfactory to the collector of customs that adequate facilities for such repairs are not afforded in the Philippine Islands.

This is the free-entry provision invoked by the railroad company on the tariff ground.

Section 10 of Act Numbered 1510 provides:

All material imported into the Philippine Archipelago for the construction and equipment of the railways undertaken by the grantee pursuant to authority conferred by this concessionary contract or grant shall be admitted free of duty, under such rules and regulations as shall be prescribed by the Philippine Government.

This is the franchise exemption on which the Court ultimately rests the free entry of the repairs.

Section 1 of Act Numbered 1566 provides:

All material imported into the Philippine Archipelago for the construction and equipment of the railroads granted concessions by Acts Numbered Fourteen hundred and ninety-seven and Fifteen hundred and ten, which material shall, in fact, be so used, shall be admitted free of duty under the following rules and regulations.

This supplies the administrative machinery and confirms the exemption for material actually used in construction and equipment.

Ruling

On the first issue, the Court held that the Government was wrong: the judgment of the Insular Collector of Customs as to whether adequate facilities for repairs exist in the Philippine Islands is not conclusive but is subject to review by the courts.

On the second issue, the Court held that the appellant was wrong in claiming that it had demonstrated the absence of adequate facilities. On careful examination, the evidence on that subject was vague, uncertain, and inconclusive; indeed, it was doubtful whether any of it really went to the point.

On the third issue, the Court held that the repairs must be admitted free of duty under Acts Numbered 1510 and 1566. The ship was an agency or instrumentality used in the construction of the southern lines, in the same general class as a locomotive engine, a steam shovel, or a pneumatic drill. The Court gave weight to the long-standing administrative interpretation in Customs Administrative Circular Numbered 539, which listed among free-entry materials "all necessary material and supplies used wholly on railroads built under concessionary contracts or grants," and held that such a consistent interpretation, followed for several years, ought not now to be changed. The Court reasoned that if the ship itself could enter free of duty, the materials going into its necessary repairs should likewise be exempt, just as materials for repairing a locomotive engine used on a work train would not be dutiable.

On the fourth issue, the Court rejected the Government's argument that the ship's use as a common carrier for hire converted it into a money-making enterprise outside the exemption. Its purchase price entered the construction account, and its earnings were credited to that account, reducing the Government's contingent liability on the guaranteed bonds. Such use did not warrant withdrawal of the privileges conferred by the franchise statutes.

Doctrine

First, the factual finding of the Insular Collector of Customs on the existence of adequate facilities for ship repairs in the Philippines is subject to judicial review; it is not a conclusive determination removed from the courts.

Second, under section 10 of Act Numbered 1510 and section 1 of Act Numbered 1566, material for the construction and equipment of the railroad includes every agency, apparatus, instrument, tool, or implement necessary for the efficient and economical construction of the line; a vessel so used is such an instrumentality, and the materials required for its necessary repairs share the same exemption as the vessel itself.

Third, a settled and long-followed administrative interpretation of a tariff or franchise statute will not be disturbed by the courts merely because they might have adopted a narrower reading at first hand.

Disposition

The judgment of the Court of First Instance was reversed, and the cause remanded with instructions to set aside the Collector's refusal and to permit the entry of the repairs free of duty. The railroad company won.

Remember This

The one line to memorize: the Collector's finding on adequate repair facilities is reviewable by the courts, and repairs to a vessel used as a railroad construction instrumentality are exempt from duty as material for construction and equipment. Examiners use this case on the reviewability of customs findings and on the liberal, long-settled interpretation of franchise tax exemptions.