ROLANDO M. MENDIOLA, PETITIONER, VS. COMMERZ TRADING INT’L., INC., RESPONDENT.

Mendiola versus Commerz Trading International

The Case

This is a petition for review brought by Rolando M. Mendiola, a physician, against Commerz Trading International, Incorporated, the entity he engaged to help market and sell Genicon laparoscopic instruments in the Philippines. Mendiola filed a collection suit to recover seventy thousand pesos that Commerz withheld from the proceeds of a sale, and Commerz answered that the amount represented a portion of the value added tax due on that sale. The case matters because it shows how the Supreme Court separates the economic burden of a tax from the legal liability to pay it, and how it treats a withholding made under a contract that is silent on the point.

Procedural History

Mendiola filed a collection suit with the Metropolitan Trial Court of Las Piñas City, Branch 79. The trial court ruled in his favor, ordering Commerz to pay seventy thousand pesos as actual damages with twelve percent interest per annum from June 2007, plus twenty thousand pesos in attorney's fees and costs. Commerz appealed to the Regional Trial Court of Las Piñas City, Branch 255, which affirmed the trial court in full and held that the Memorandum of Agreement is the law between the parties. Commerz then went up to the Court of Appeals, which reversed the Regional Trial Court and ruled for Commerz, ordering Mendiola to reimburse the amount of one hundred ninety-seven thousand eight hundred fifty-seven pesos and fourteen centavos, and directing that the reimbursement be reflected in the value added tax return. Mendiola then filed this petition for review with the Supreme Court.

Facts

Genicon, a foreign corporation based in Florida, designs and distributes patented surgical instruments for laparoscopic surgery. Mendiola contracted with Genicon to be its exclusive distributor in the Philippines under a Distribution Agreement. To facilitate the marketing and sale of the instruments, Mendiola in turn entered into a Memorandum of Agreement with Commerz, under which Commerz would be compensated one hundred thousand pesos for the use of its name, office, secretary, invoices, official receipts and facilities for every sale of a complete set of Genicon instruments.

Commerz sent a price quotation to Pampanga Medical Specialist Hospital, which agreed to purchase a Genicon instrument for two million six hundred thousand pesos. Mendiola ordered the instrument from Genicon, which shipped it to the Philippines. Commerz undertook the release of the instrument from the Bureau of Customs and delivered it to the hospital. The hospital paid Commerz five hundred twenty thousand pesos by one check voucher and two million eighty thousand pesos by another, and Commerz issued an official receipt for the first payment.

From the total of two million six hundred thousand pesos, Commerz's president deducted one hundred thousand pesos as compensation under the Memorandum of Agreement, and Commerz remitted only two million four hundred thirty thousand pesos to Mendiola instead of two million five hundred thousand pesos. Despite repeated demands, Commerz did not remit the remaining seventy thousand pesos. Commerz claimed that this amount represented a portion of the value added tax that it had erroneously credited or remitted to Mendiola's account.

Issues

• Whether or not Commerz has the right to retain the balance of the proceeds of the sale in the amount of seventy thousand pesos.
• Whether or not Mendiola is entitled to the award of interest and attorney's fees.

Applicable Provisions

Paragraph V of the Memorandum of Agreement provides:

All taxes/expenses and expenses related to Genicon transactions shall be the responsibility of the petitioner.

This stipulation is the contractual basis on which the Court allocates the economic burden of the tax to Mendiola.

Article 1306 of the Civil Code, invoked through the principle that a contract is the law between the parties, provides:

The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

This is the rule the Court applies in holding the parties to their stipulations, subject to the limits of law and public policy.

Article 19 of the Civil Code provides:

Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.

The Court uses this provision to condemn any arrangement that would defraud the government of the correct taxes due on the sale.

Ruling

On the first issue, the Court denied the petition. It held that there is no dispute that the seventy thousand pesos formed part of the proceeds of the sale. Commerz claimed the amount represented a portion of the value added tax due, and paragraph V of the Memorandum of Agreement obligates Mendiola to pay the taxes due from the sale. Mendiola himself admitted that he is responsible for the value added tax and that Commerz merely acted as marketer. As between the two of them, therefore, Mendiola bears the burden of the tax.

The Court then asked whether Commerz was authorized under the agreement to withhold a specific amount as tax. The agreement is silent on this matter and does not expressly allow Commerz to collect or withhold any amount for taxation purposes. However, the agreement allows Commerz to issue official receipts on which the tax should have been computed and included in the purchase price, and obligates Mendiola to pay any tax due on the sale. Since Commerz is a registered entity that issued the official receipt and received the two million six hundred thousand pesos from the hospital, its records show that it is the seller of the instrument, and the tax would be computed on the receipt it issued. To hold otherwise would defraud the government of the correct taxes and would contravene the duty to act with justice and good faith. While by agreement Mendiola bears the economic burden of the tax, the legal liability to pay it to the Bureau of Internal Revenue falls on Commerz. The Court therefore allowed Commerz to retain the seventy thousand pesos only for the purpose of paying it forthwith to the Bureau of Internal Revenue as the estimated tax due, and directed that the Bureau be informed of the decision because a dispute remained on the correct computation of the tax.

On the second issue, the Court found it unnecessary to resolve the matter of interest and attorney's fees.

Doctrine

A contract is the law between the parties, and its stipulations are binding on them unless contrary to law, morals, good customs, public order or public policy. Where the contract obligates one party to bear the taxes on a transaction, that party bears the economic burden of the tax. The economic burden, however, is distinct from the legal liability to pay the tax to the government, which rests on the seller on record who issued the official receipt. A party may retain a portion of the proceeds as estimated tax only for the purpose of paying it promptly to the tax authority, and any arrangement that would deprive the government of the correct taxes contravenes the duty to act with justice and good faith under Article 19 of the Civil Code.

Disposition

The Supreme Court denied the petition, sustained the ruling of the Court of Appeals allowing Commerz to retain the seventy thousand pesos solely to pay it to the Bureau of Internal Revenue, and ordered that a copy of the decision be forwarded to the Bureau for its appropriate action.

Remember This

Remember the distinction: the economic burden of a tax may be shifted by contract, but the legal liability to pay it to the government stays with the seller on record. Examiners use this case to test that distinction, and to test whether a withholding under a silent contract can be justified as a payment of tax rather than a retention of another's money.