LU DO & LU YM CORPORATION, DOING BUSINESS UNDER THE TRADE NAME OF PHILIPPINE CORN PRODUCTS COMPANY, PLAINTIFF AND APPELLANT, VS. CENTRAL BANK OF THE PHILIPPINES, DEFENDANT AND A…

These two cases, one (G. R. No. L-13033) coming from the Court of First
Instance of Manila, and the other (G. R. No. L-13701), from the Court
of Tax Appeals, have, by agreement and request of the parties, been
jointly submitted for deliberation and decision of this Court as they
involve the same transaction (importation of empty cotton bags) and
require the interpretation of the same law (Republic Act 35, as amended
by Republic Act 901). The pertinent facts in both cases are not
disputed.

Lu Do & Lu Ym Corporation, doing business
under the trade name of Philippine Corn Products, Inc., is a domestic
corporation engaged in the manufacture, packing, storage, distribution,
and sale of corn starch, gluten feed and corn. Upon prior application
for tax exemption under Republic Act 35, its business was certified by
the Secretary of Finance as a new and necessary industry, effective
October 1, 1952.

Between January, 1954 and March, 1955, the
corporation imported from the United States 212 bales or 211,187 pieces
of empty cotton bags for use in the packing, storage, distribution, and
sale of its manufactured corn starch, upon which importations the
Central Bank of the Philippines imposed and the said corporation paid
the 17% excise tax on foreign exchange amounting to P24,498.43, and the
sum of P13,654.92 demanded by the Bureau of Customs, in behalf of the
Collector of Internal Revenue, as 7% sales or compensating tax on the
articles.

On September 5 and 6, 1955, the Philippine Corn
Products, Inc. filed with the Commissioner of Internal Revenue and the
Central Bank of the Philippines, respectively, separate demands for the
refund of the aforementioned amounts, both of which were denied on the
ground, among others, that the imported articles were not covered by
the tax exemption certificate issued by the Department of Finance.
Hence, on December 6, 1956, the company filed a petition in the Court
of Tax Appeals (CTA Case No. 340), praying for the refund of the sum of
P13,654.92 representing the 7% compensating tax collected by the
Collector of Internal Revenue allegedly in violation of Republic Act
35, as amended by Republic Act 901, it being contended that the
imported cotton bags were necessary, convenient and indispensable in
the manufacture, packing, storage, and distribution of its manufactured
products.

In resisting this claim, respondent Commissioner
of Internal Revenue maintained that empty cotton bags were not among
the raw materials allowed by the Secretary of Finance to be imported
tax-free, and, consequently, were subject to the 7% sales or
compensating tax.

Deciding for the petitioner, the Court of
Tax Appeals, in its decision of December 20, 1957, ordered the refund
of the sum of P13,654.92 collected by the revenue authorities from the
Philippine Corn Products, Inc., on the ground that the imported
articles were actually used in the manufacture of its finished products
and thus exempted from taxes, and that the Secretary of Finance had no
power to limit the articles which could be imported free of tax. With
respect to the question of prescription, the court, considering the
payments made by petitioner, upon clearance of the goods to the
customhouse, as mere deposits, held that under customs law, the same
did not become payments until after the publication of the final
liquidation of the port entries in relation thereto. As respondent
Commissioner of Internal Revenue failed to introduce evidence when the
publication was made, the filing of the action on January 5, 1957, was
presumed to have been made within the 2-year period prescribed by law.
From this decision, this present petition for review was filed by the
Commissioner of Internal Revenue (G. R. No. L-13701).

At
about the same time, or on July 24, 1957, the Philippine Corn Products,
Inc. instituted in the Court of First Instance of Manila an action for
recovery of the sum of P24,498.43, against the Central Bank of the
Philippines, claiming that defendant’s collection of the said amount as
17% excise tax on the foreign exchange used for the importation of the
same empty cotton bags, was made in violation of Republic Act 35, as
amended by Republic Act 901.

The Central Bank of the
Philippines moved to dismiss the complaint for lack of cause of action
and non-joinder of indispensable parties, for the reason that the empty
cotton bags imported by plaintiff were not among those allowed by the
Secretary of Finance to be procured abroad and, consequently, not
included in the exemption, and that the suit should have been
instituted against the Auditor General or the Treasurer of the
Philippines, because, with the expiration of the Exchange Tax Law on
December 31, 1955, the monies collected by the Central Bank of the
Philippines pursuant to Republic Act 601 were turned over to the
Insular Treasurer. Sustaining defendant’s contention, the lower court
dismissed the complaint. Now, plaintiff corporation appeals to us (G.
R. No. L-13033).

The questions raised by both parties in
these cases may be answered with the resolution of a single issue,
which is controlling on the others, i.e., whether the Company may be
held liable for payment of the 7% compensating or sales tax and the 17%
excise tax on foreign exchange, in connection with its importations of
empty cotton bags.

The letter of the Secretary of Finance,
granting the Company’s application for tax exemption of its business,
in full, reads:

“Gentlemen :

“Referring
to your application of September 30, 1952 for tax exemption under the
provisions of Republic Act No. 35, I have the honor to advise that in
view of the favorable recommendations of the Secretary of Commerce and
Industry and the Administrator of Economic Coordination, the same
is hereby approved in respect to the manufacture of corn starch, corn
gluten feed, and corn oil. It is understood that the only raw material
to be imported is sulphur (60 kilos of sulphur for every 30 metric
tons of processed corn) and that this raw material will be procured
locally as soon as similar article of domestic origin or manufacture
shall have become available.

“The exemption herein granted refers to the following internal revenue taxes:

“1. The fixed and privilege tax on business;

“2. The
percentage tax on the sales of manufactured products in respect to
which exemption is granted and on raw materials and supplies to be used
exclusively in the manufacture of such products;

“3. The compensating tax on machinery and equipment to be exclusively used in the new and necessary industry;

“4. The documentary stamp tax; and

“5. The income tax in respect to the net income derived from the exempted industry.

“The
exemption shall cover a period of four (4) years from this date.
Attention, in this connection is invited to paragraphs 2(2), 7 and 8 of
Executive Order No. 433, series of 1951, which indicates the requisites
for the continued enjoyment of the privileges herein granted.”
(Emphasis supplied.)

The Company does not
controvert the fact that the Secretary of Finance, in approving its
application, allowed only the importation of sulphur, and this, on a
limited scale. In claiming for tax exemption for its importations of
empty cotton bags, however, it maintains—and is sustained by the Court
of Tax Appeals^[1]—that the
Secretary of Finance has no power under Republic Act 901 to limit the
articles that may be imported as long as they are used by the Company
in its new and necessary industry and the taxes that may be payable
thereon are directly payable in respect to said industry. In support of
this contention, the case of Industrial Textiles Company of the
Philippines et al. vs. Collector of Internal Revenue (106
Phil., 1046) is cited. But respondent Company overlooks the fact that
the rulings therein made were predicated on the provisions of Republic
Act 35 which did not grant any authority to the Secretary of Finance
except to recommend to the President for his determination, what
qualifications an industry should possess to be entitled to the
benefits of the Act. Contrarily, by express authority of Republic Act
901, the Secretary of Finance is empowered, among others, (1) himself
(not the President) to determine, after availing of the facilities of
the Department of Commerce and Industry, the Central Bank and the
Office of Economic Coordination, whether an industry or business is new
or necessary (Sec. 5) ; (2) to suspend the privileges granted
thereunder if the grantee fails to comply with any of the new
obligations imposed by the Act (Sec. 8); and (3) to promulgate rule3
and regulations necessary for the proper enforcement and to carry out
the intents and purposes of the Act, and to determine the scope and extent of the privileges granted thereunder
(Sec. 11). In empowering the Secretary of Finance, to pass upon
applications and determine the qualifications of applicants to enjoy
the privileges granted thereunder, Republic Act 901 did not limit his
(the Secretary’s) action relative to the granting or denial of the said
applications. The mandate of the law is express and specific; “The
Secretary of Finance shall * * * determine the scope and extent of the
privileges granted thereunder.”^[2]
Thus, he may either totally approve or disapprove an application, or
may limit the privileges to be enjoyed within the scope, and extent
determined by him unless, of course, such limitation is prohibited by
law. In the instant case, the restriction on the importation of raw
materials other than sulphur, imposed by the Secretary of Finance,
cannot be considered violative of Republic Act 901. On the contrary,
such restriction must have been made in compliance with the intendment
of said law, that is, to boost local production by giving emphasis on
the exploitation and utilization of local raw materials and the
consequential conservation of foreign exchange^[3].
The importations of empty cotton bags, not being covered by the grant
are, therefore, subject to the taxes imposed thereon. The Company, in
accepting the grant, is bound by the terms thereof and its remedy is to
ask for its modification by the Secretary of Finance.

Respondent Company additionally claims that if the empty cotton bags do
not come within the exempted raw materials, they, however, fall under
the category of equipment covered by Exemption No. 3 of the letter of
the Secretary of Finance. We do not think so.

Equipment has
been defined as “materials or articles used in equipping as for an
expedition; the articles comprised in an outfit, as furnishings, or
apparatus; equippage; as laboratory equipment. * * * In industry,
physical facilities available for production, including buildings,
machineries, tools, etc.”^[4] “whatever is needed in equipping; the articles comprised in an outfit; equippage”;^[5] “synonymous with furnishings”.^[6] Taken together with “machinery”, as used in Exemption No. 3, the equipment
referred to therein must relate to furnishings or equippage necessary
for the operation of the industry. Empty cotton bags actually used in
the packing or preparation for the market of the finished products can
hardly be considered as falling within the group.

The
question raised by the Solicitor-General, in behalf of the Commissioner
of Internal Revenue, that the proceeding here is in effect a review of
the action of the Secretary of Finance in respect of the granting of
the certificate of exemption and, therefore, beyond the jurisdiction of
the Court of Tax Appeals, is of no substance, the primordial and
immediate question involved being the refund of taxes allegedly
collected illegally. In at least two cases,^[7] this Court has already upheld inferentially the jurisdiction of the Court of Tax Appeals in this respect.

That the two-year period within which suit for recovery of tax
erroneously or illegally collected should be filed is a prescriptive
period and not a jurisdictional fact, has likewise been passed upon by
this Tribunal in the cases of College of Oral and Dental Surgery vs. Court of Tax Appeals et al., (102 Phil., 912; 54 Off. Gaz. [29] 7055) and Panay Electric Co. vs. Collector of Internal Revenue, et al., (103 Phil., 819; 55 Off. Gaz. [24] 4430).

On the foregoing two procedural points, the decision of the Court of Tax Appeals presently before us is correct.

Coming now to the case appealed from the Court of First Instance of
Manila (G. R. No. L-13033), dismissing the complaint which seeks the
refund of the 17% excise tax on the foreign exchange used in the
importation of the empty cotton bags, we agree with the lower court
that the refund is not proper in view of our conclusion that such
importation is not within the exemption granted to the Company. If the
imported article itself is not exempt from taxation, the foreign
exchange used in the importation of said article cannot logically be
exempt from the exchange tax, for otherwise, the result would be to tax
the principal but not the incidental.

Wherefore, the
appealed order of the Court of First Instance (in G. R. No. L-13033) is
affirmed, while the questioned decision of the Court of Tax Appeals (in
G. R. No. L-13701) is hereby affirmed, in respect of the questions of
jurisdiction and prescription, and reversed, insofar as it orders the
refund of the compensating tax paid by the Philippine Corn Products,
Inc. (Lu Do & Lu Ym Corporation), with costs against the latter in
both instances. So ordered.

Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion and Gutierrez David, JJ., concur.

Reyes, J.B.L., and Endencia, JJ., on leave, took no part.

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^[1] By a split vote of 2 against 1.

^[2]
Sec. 11. The Secretary of Finance shall promulgate the necessary rules
and regulations for the proper enforcement and to carry out the intents
and purposes of this Act, and shall determine the scope and extent of the privileges granted hereunder. (Republic Act No. 901; emphasis supplied.)

^[3] Section 3-(3), Rep. Act 901.

^[4] Webster’s New International Dictionary, Second Edition.

^[5] Department of Treasury, Gross Income Tax Div. vs. Rangercook, Inc., 49 NE 2d 548.

^[6] State ex rel. Davis vs. Barber, 139 Fla 706, 19 So 809.

^[7] Marble Corporation of the Philippines vs. Collector of Internal Revenue, et al., G. R. No. L-8677, Dec. 28, 1957; Industrial Textiles Co., et al. vs. Collector of Internal Revenue, 103 Phil., 1046.