HYDRO RESOURCES CONTRACTORS CORPORATION, PETITIONER, VS. THE COURT OF TAX APPEALS AND THE HON. DEPUTY MINISTER OF FINANCE, ALFREDO PIO DE RODA, RESPONDENTS.

This is a special civil action of certiorari instituted by
petitioner Hydro Resources Contractors Corporation against respondents Court of
Tax Appeals and Deputy Minister of Finance which seeks to set aside the
decisions of both public respondents holding petitioner liable for a 3% ad valorem
duty in the amount of P281,591.00.

It appears that the National Irrigation Administration (referred
to hereinafter as NIA for brevity) a government owned and controlled
corporation, entered into an agreement, sometime in August 1978, with
petitioner Hydro Resources Contractors Corporation (Hydro for short), for the
construction of the Magat River Multipurpose Project
in Isabela.

Under the aforesaid contract, designated as
Contract No. MPI-C-1, petitioner was allowed to procure new construction
equipment, spare parts and tools from abroad, the payment for which was
advanced by NIA under a financing plan embodied in the contract, as follows:

a) Procurement – Petitioner is required to submit to NIA for
approval a list of new construction equipment, spare parts and tools which it
intends to acquire from abroad. 
Petitioner shall procure these items as an agent of NIA as all invoices
shall be in the name of said government agency. 
NIA undertakes to pay all import taxes,
duties and all fees, impost and other charges that may be due on said
importations.

b) Ownership and delivery – The equipment and spare parts imported
from abroad shall be owned by NIA and delivered to its construction site in Isabela.

c) Repayment – Petitioner shall repay NIA
the costs of the above procurement and the manner of repayment shall be through
deductions from each monthly or periodic progress payment due to petitioner.

d) Transfer of Ownership – Ownership shall be transferred to
petitioner only upon complete payment of the costs abovementioned.

The equipment imported by NIA in 1978 and 1979 for Hydro’s use are –

By the terms of the contract (quoted earlier) NIA undertakes
payment of all the import duties and taxes incident to the importations
deductible from the proceeds of the contract price.  HYDRO shall repay NIA in full the value of the
construction equipment out of the same
proceeds before eventual transfer or taking ownership of subject construction
equipment upon termination of the contract.

NIA reneged and failed in the compliance of its tax obligations.  In the meantime, HYDRO had fully repaid the
value of the construction equipment in the amount of P14,537,783.63
(US$1,991,477.21) so much so that on December 6, 1982 and March 24, 1983, NIA
executed deeds of sale covering the same and transferring the ownership thereof in favor of petitioner.

Upon the transfer of the ownership of the said equipment HYDRO
was assessed by the Bureau of Customs the corresponding customs duty and
compensating tax, respectively, as follows:

This amount was paid by HYDRO to the
Bureau of Customs.

In addition, HYDRO
was assessed additional 3% ad valorem
duty in the amount of P281,591.00 prescribed in Executive Order 860.  HYDRO also paid this amount but this time under
protest.

The Collector of Customs acted favorably on petitioner’s protest
and ordered the refund of the amount paid for the ad valorem
duty in the form of tax credit,
ruling that –

“The foregoing scheme entered into between NIA and HYDRO had
generated a contract and it will
be unfair to involve new proposal as in the imposition of 3% additional duty ad valorem which was not obtaining
at the time of the agreement nor at the time of
arrival and release of the shipment from the
piers.  For one thing, the scheme
may be viewed in the same light as sales
of commodities to be delivered at some future date, whose price or
prices at the time of delivery may be way above or below the sale price or
prices.  For another thing, HYDRO may not
be deprived of rights vested before the promulgation of Executive Order 860
prescribing 3% additional duty ad valorem.” (p. 22, Rollo)

The Acting Commissioner of Customs affirmed the ruling of the
Collector of Customs.  In his 2nd Indorsement dated June
25, 1984, (p. 25, Rollo) Acting Commissioner Ramon Farolan
stated –

“This Office shares the view of the Collector of Customs to
the effect that the various equipment and parts in question which the National
Irrigation Administration imported in 1978 and 1979 and subsequently sold to
Hydro Resources Construction Corporation by virtue of a previous agreement, are
subject to duties and taxes but not the additional 3% ad valorem duty under Executive
Order No. 860 which took effect only on December 21, 1982.  Moreover, the Deputy Minister of Finance, in
his 1st Indorsement to the Central Bank dated March
26, 1983, which was then
reproduced by the Central Bank Governor in a circular letter to all authorized
agent banks, clarified that –

‘Letters of Credit opened prior to the effectivity
of P.D. 1853 and E.O. 860 are not subject to the provisions thereof even if
they are amended after the effectivity
thereof.”’

(p. 15, Rollo)

These findings of the Collector of Customs as well as the Acting Customs Commissioner were reversed
by the Deputy Minister of Finance.

Petitioner appealed to the Court of Tax Appeals but in its
Decision dated May 22, 1987,
the said court (with a dissenting
opinion) affirmed the ruling of the
Deputy Minister of Finance denying petitioner’s claim for refund.

Hence, the present recourse, after petitioner’s motion for
reconsideration was denied.

In this petition, Hydro presents the following issues –

I

THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF ITS
JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN REFUSING TO CONSIDER THE FACT
THAT THE SALE OF THE NIA-FINANCED
EQUIPMENT TOOK PLACE IN 1978.

II

THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF ITS
JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN APPLYING EXECUTIVE ORDER NO. 860 RETROACTIVELY.

III

THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF ITS
JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION IN FAILING TO CONSIDEER THAT THE
IMPOSITION OF THE 3% AD VALOREM TAX ON IMPORTATIONS MADE PRIOR TO ITS ISSUANCE
IS VIOLATIVE OF THE CONSTITUTION.

IV

THE PUBLIC RESPONDENT CTA HAS ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION
OR WITH GRAVE ABUSE OF DISCRETION IN IMPOSING THE AD VALOREM TAX SANS
STATUTORY AND LEGAL BASIS.

The petition is meritorious.

Executive Order No. 860 which was the basis for the imposition of
the 3% ad valorem duty upon the said
importations, took effect on December
21, 1982.  The importations
were effected in 1978 and 1979 by NIA. 
Nonetheless, respondent Court of Tax Appeals denied petitioner’s claim
for refund because –

“When NIA transferred the equipment in question supposedly ‘after
its (HYDRO‘s) use
for a number
of years’, it cannot he doubted that these equipment were sold
and transferred presumably ‘several years’ after the equipments’ importation in
1978 and 1979.  It is obvious therefore that
the sale or transfer of the ownership of the equipment to petitioner HYDRO were
unquestionably made after the effectivity of PD 882
on January 20, 1976, undisputably said sale or
transfer thereof was (sic) governed by Section 4 of PD 882 and was correctly
applied by respondent.  We take particular note of the fact
that we cannot pinpoint with definiteness or exactitude from the evidence, when
or what years after the years 1978 and 1979 importations were the equipment
sold or transferred by NIA to petitioner HYDRO so that we can determine
outright whether the sale or transfers are covered by the mandatory provision
of Executive Order 860 effective on December 21, 1982 imposing 3% additional ad
valorem duty on such importations.  Such that if the sale or transfer of the
ownership of the equipment were effected to petitioner
HYDRO after December 21, 1982,
the effective date of Executive Order No. 860, the 3% ad valorem duty is imposable as said Executive Order
860 was applied prospectively and rightly. 
If the sale or transfer of the ownership of the equipment to HYDRO were
(sic) prior to the effectivity of Executive Order No. 860, then said Executive
Order 860 is inapplicable, and
petitioner is not liable to pay the 3% ad valorem
duty of P281,591.00 and is entitled to the refund
thereof.

As a rule and principle, it was incumbent upon petitioner-taxpayer
HYDRO to have shown that the sale or transfer of said equipment to it were made
before December 21, 1982, when the Executive Order No. 860 was effective
in order that it shall not be subject to the imposition of 3% additional ad
valorem duty. 
Fairing thus, its claim for refund in the amount of P281,591.00 unquestionably fails.” (pp. 37-38, Rollo)

The foregoing
conclusion is erroneous.  The subsequent
executions of the Deeds of Sale of the equipment in question on December 6, 1982 and March 24, 1983 are not relevant and
material in the consideration of
the application of Executive Order No. 860 because said Deeds of Sale were mere
formalities in the implementation of Contract No. MFI-C-1 executed on August
1978, which should be reckoned and construed as the actual date of sale.  This must be so because the contract of
purchase and sale of the NIA-financed/owned equipment to Hydro took place in
1978 when Contract No. MP1-C-1 was
signed by NIA and HYDRO wherein the contracting parties provided for their
financing, procurement, delivery, repayment, transfer of possession and
ownership.  The said scheme contemplated
a Contract of Sale within the purview of Art. 1458 of the Civil Code which
provides –

“Art. 1458.  By the contract of sale, one of the
contracting parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and
the other to pay thereafter a price certain in money or its equivalent.

“A contract of sale may be absolute or conditional.” (p.
11, Rollo)

This view is shared by the Collector of Customs in his decision
when he declared that there being a meeting of the minds between NIA and HYDRO
upon the object of the contract of sale and upon the price, the contract of
sale of the equipment between them was perfected in 1978.  It is a perfected contract of sale subject to
a suspensive condition, the full payment by HYDRO of
the consideration for the subject of the contract is the operative act to
compel NIA to effect the transfer of absolute
ownership thereof to HYDRO.  And under Art. 1187 of the Civil Code, the effectivity of said contract reverts back to the
constitution of the contract, in this case – August 1978.

“ART. 1187. 
The effects of a conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of the constitution of
the obligation.” (p. 12, Rollo)

It is a cardinal
rule that laws shall have no retroactive effect, unless the contrary is provided.  Art. 4, Civil Code) Except for a statement
providing for its immediate execution, Executive Order No. 860 does not provide
for its retroactivity.  Moreover, the
Deputy Minister of Finance in his 1st Indorsement
to the Central Bank dated March 26, 1983
which was reproduced by the Central Bank Governor in a circular letter to all
authorized agent banks, clarified that letters of
credit opened prior to the effectivity of E.O. 860
are not subject to the provisions thereof. 
Consequently, the importations in question which arrived in 1977 and
1978 are not subject to the the 3% additional ad
valorem duty, the same being imposed only on
those whose letter of credit were opened after the promulgation of Executive
Order 860.  In this regard Judge Alex
Reyes in his dissenting opinion correctly observed –

“Let it suffice that the procurement of the equipment, as
earlier stated, was not on a tax exempt basis as the import liabilities thereon
have been secured to be paid under
the terms of the financial scheme in the contract.  The formality of vesting of title over the
equipment was not an unwarranted expectation but a matter of an implementation
of a pre-existing agreement, hence, the imported articles can only be subject to
the rates of import duties/taxes prevailing at the time of entry or withdrawal
from customs custody (Sec. 205, TCC) in 1978 and 1979, thus foreclosing any
retroactive application of the 1982 Executive Order.

“Taken in the above light, it would be unfair and incongruous
to hold petitioner to an additional levy sans any statutory basis.  The majority could have fumbled into a
precipitate action in taking an adverse position on petitioner’s right to a
refund.” (pp. 44-45, Rollo)

IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is
GRANTED; the assailed Decisions of respondents Court of Tax Appeals and Deputy
Minister of Finance are SET ASIDE and another one rendered ordering the refund of the amount of P281,591.00 representing 3% additional ad valorem duty to petitioner Hydro Resources Contractors
Corporation in the form of tax credit.

SO ORDERED.

Melencio-Herrera, (Chairman),
Padilla, Sarmiento, and
Regalado, JJ., concur.