BIR Ruling No. 305-61

June 20, 1961 BIR RULING NO. 305-61 MEMORANDUM FOR: The Revenue Operations Executive (Assessment) Attached is the entire docket (consisting of 158 pages) bearing on the franchise tax case of the TACLOBAN ELECTRIC & ICE PLANTS CO., INC. (hereinafter referred to as the Taxpayer for brevity) in the total amount of P115,778.48, representing the deficiency franchise tax for the period from June, 1950 to December, 1959, including the amount of tax erroneously refunded, exclusive of surcharges, with the following observation and comment on the legal issues involved. LexLib Issues The legal issues in this case are as follows: (1) Whether the Taxpayer in question is subject to the franchise tax at the rate of 5% in accordance with Section 259 of the Tax Code, as amended, or to the rate of 1% prescribed in the charter (Act No. 2700), covering the period above-stated, and (2) Whether or not the Government can still collect the total amount of franchise tax in question from the Taxpayer in accordance with law. I. FIRST ISSUE OBSERVATION AND COMMENT History of ownership of the legislative franchise , Act No . 2700 , approved on March 9 , 1917 . The records show that Mr. J. V. House, for a period of fifty (50) years from March 9, 1917, was granted by the Philippine Government, under Act No. 2700, a franchise to install, operate and maintain an electric light, heat and power system in the Municipality of Tacloban, Leyte. (pp. 14 to 18; 71 to 74, rec.) Mr. J.V. House and his partner, the Chapmans, used the trade name "Tacloban Electric & Ice Plants, Ltd." On January 31, 1950, Mr. J.V. House sold all his shares, interest, rights and franchise to and in favor of the Chapmans. Subsequently, the Chapmans, as the sole and absolute owners of the aforesaid company, sold all their interests, rights and franchise to Tan Tiong Bio, as evidenced by the Deed of Sale executed on April 19, 1950. (pp. 1 to 7, rec.) cdta Subsequently, the said franchise was acquired by and transferred to the Tacloban Electric & Ice Plants Co., Inc. as per decision of the Public Service Commission (P.S.C. Case No. 59811). (p. 45, rec.) Amendments to Act No . 2700 . By legislative enactment, Act No. 2700 was approved on March 9, 1917. (pp. 14 to 18, rec.) On February 23, 1918, Section 8 of the same Act was amended by Act No. 2750, the amendment of which is immaterial in the resolution of the legal issues before us. On June 19, 1959, the life of the franchise was extended for another 25 years by Republic Act No. 2339. Apparently realizing that the provisions of Section 259 of the Tax Code, as amended, affected the rate prescribed in the Taxpayer's franchise, Republic Act No. 2339 was further amended by Republic Act No. 2995 which took effect without executive approval on June 19, 1960. (pp. 148-149, rec.) Pertinent Portions of the terms and conditions stipulated in Act No . 2700 , before it was amended by R . A . No . 2995 . It appears that under the terms and conditions of the franchise, the grantee or his successors-in-interest "shall pay quarterly into the treasury of Tacloban one-half of one per centum of the gross earnings of the enterprise during the first twenty years, and one and one-half per centum during the remaining thirty years of the life of this franchise." (Sec. 8, Act No. 2700; p. 16, rec.) By virtue of the foregoing provision of the charter, the grantee or his successors-in-interest were obliged to pay the % franchise tax for the first 20 years from March 9, 1917 and subsequently the 1% tax thereafter. It must be observed, however, that the same Act stipulated further the following condition: "Sec. 11. This franchise is granted with the understanding and upon the condition that it shall be subject to amendment , alteration , or repeal by the Congress of the United States . . ., or by the Philippine Legislature , . . .." (Emphasis supplied).(pp. 15-16, rec.) Applicable rate of franchise tax on corporate franchises in accordance with internal revenue laws in force from 1917 to the present The internal revenue law in effect in 1917, as regards corporate franchises, was Section 1508 of the Administrative Code of 1917, quoted as follows: Section 1508. "There shall be collected with respect to all existing and future franchises, upon the gross earnings, or receipts from the business covered by the law granting the franchise, such taxes , charges , and percentages as are specified in the special charter of the corporations upon whom such franchises are conferred." (Emphasis supplied) When the internal revenue laws were codified, the above-quoted section of the Administrative Code of 1917 became Section 259 of Commonwealth Act No. 466 (National Internal Revenue Code), which took effect on July 1, 1939. Section 259 at that time was copied verbatim from Section 1508 of the said Administrative Code. On October 1, 1946, Republic Act No. 39 took effect, amending Section 259 of the Tax Code, thereby providing a specific and increased rate of franchise tax (5%) to be collected upon all "existing and future franchises", such as the franchise (Act No. 2700) now in question. On June 18, 1949, Section 259 of the Tax Code was further amended by Republic Act No. 418, the amendment of which is immaterial in our case. cdti The pertinent portion of Section 259 of the Tax Code, as amended by Republic Acts Nos. 39 and 418, provides as follows: " Tax on corporate franchises . There shall be collected in respect to all existing and future franchises, upon the gross earnings or receipts from the business covered by the law granting the franchise a tax of five per centum or such taxes, charges, and percentages as are specified in the special charters of the grantees upon whom such franchises are conferred, whichever is higher , unless the provisions thereof preclude the imposition of a higher tax . . . ." (Emphasis supplied) Comment on the effect of Sec . 259 , Tax Code , as amended , on the rate prescribed in Act No . 2700 . There is no question that from 1917 to September 30, 1946 the rate of the franchise tax prescribed in Act No. 2700 (before it was amended by R.A. No. 2995) was never amended, altered or repealed by any act of Congress, in view of our observation as above-explained. However, when Republic Act No. 39 took effect on October 1, 1946, the rate prescribed in the Taxpayer's franchise was necessarily affected because there was no such provision in Act No. 2700 which precluded the imposition of a higher rate of tax, the absence of which would accordingly subject the franchise to the rate of 5% imposed by Section 259 of the Tax Code, as amended. The 5% rate prescribed in Section 259 was not affected when the life of Act No. 2700 was extended for another 25 years by R.A. No. 2339 which took effect on June 19, 1959. However, it is our opinion that the Taxpayer became subject to the rate of 1% franchise tax only on June 19 , 1960 , the date when R.A. No. 2995 took effect. (PI's refer to pp. 148-149, rec.) It may be stated here that the latter Act of Congress did not, in any way, affect the assessment involved in the instant case which is for the years from June 1950 to December 1959, inclusive. cdll Comment on refunded amount of P16 , 286 . 24 . The records further show that the Taxpayer was obliged to pay the 5% franchise tax to the Government when it acquired the management and operation of the electric and ice plants in question sometime in 1950, in view of Section 259 of the Tax Code, as amended by R.A. No. 39. On December 26, 1952, however, the Taxpayer, thru counsel, filed a request for refund with this Bureau of the alleged excess amounts paid to the Government, covering the period from June 1950 to December 1952, inclusive. (pp. 19 to 23, rec.) In reply to said request for refund, the Taxpayer was informed, on January 16, 1953, that overpaid taxes during the period not barred by Section 309, Tax Code, may be acted upon, action of which was held in abeyance pending receipt of audit report of the General Auditing Office, (p. 25, rec.) This Bureau, in effect, recognized the excess payments made by the Taxpayer when the City Treasurer of Tacloban was instructed, on January 19, 1953, to collect only a franchise tax of 1% effective the last quarter of 1952. (p. 26, rec.) The Auditor General, in compliance with this Bureau's request, submitted his audit report on May 15, 1953, recommending that the amount of P16,286.24 only may be refunded. (pp. 35 to 38; 41, rec.) Based on this report, the then Acting Chief, Law Division, B.I.R., on May 26, 1953, recommended that the sum of P16,286.24 be refunded to the Taxpayer, which recommendation was approved by the Collector of Internal Revenue. (pp. 45-46; 78-79, rec.) The Secretary of Finance, likewise, approved said recommendation for refund on June 25, 1953 (pp. 47-48; 77, rec.) and was later affirmed by the defunct Board of Tax Appeals on July 10, 1953, re Tax Appeal No. 102, entitled "In Re Claim For Refund of Franchise Tax Tacloban Electric & Ice Plants Co., Inc., Petitioner". (pp. 49 to 51; 75-76, rec.) llcd The Municipal Board of Tacloban, after having been informed of the foregoing resolution and opinion of the authorities concerned (pp. 52 to 58, rec.), passed "Resolution No. 26" dated September 21, 1953, authorizing the City Treasurer of Tacloban to refund the abovementioned amount (p. 59, rec.). Apparently, the municipal resolution was made because the municipality at that time had no cash on hand for the purpose. The Taxpayer's contention and request for refund having been sustained by this Bureau, as above-explained, it resumed paying only 1% franchise tax on its gross earnings from January 1953 up to December 31, 1959. (pp. 133 to 136, rec.) Opinion, with judicial authorities . Premises considered, and in answer to the first legal issue hereof, it is our opinion, as we hereby rule, that the Taxpayer should, as it must, pay the 5% franchise tax in accordance with Section 259 of the Tax Code, as amended. The Supreme Court, in deciding a similar issue, ruled in Hoa Hin Co., Inc. cases, G.R. Nos. L-9616 & L-11783, prom. on May 25, 1959, as follows: "While the then Philippine Commission fixed the yearly tax to be paid to the Government by the original grantee, his successors and assigns at the rate of of 1% of the gross earnings derived from the operation of the slipway or marine railway, the grantor reserved its right to assess and collect other business or income tax on the grantee's business. Section 259 of the National Internal Revenue Code, as amended, provides that ' whichever is higher ' between the rate imposed by the special charter of the grantee and the National Internal Revenue Code, shall apply to and be imposed upon, and paid by, the grantee of the franchise. The rate imposed by Section 259 of the National Internal Revenue Code , as amended , being higher than that imposed in the petitioner's charter , Act No . 1256 , the petitioner has to pay the rate imposed by Section 259 of the National Internal Revenue Code , as amended . The rule in Manila Railroad Company vs. Rafferty, 40 Phil. 224; Philippine Railroad Company vs. Collector of Internal Revenue, G.R. No. L-3859, 25 March 1952; Visayan Electric Company vs. David, 49 Off. Gaz. 1385; and Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 Off. Gaz. 1068, cannot be invoked by the petitioner, because in the grantees' respective franchises there is a provisions that 'such annual payments, when promptly and fully made by the grantee, shall be in lieu of all taxes of every name and nature municipal, provincial or central upon its capital stock, franchises, right of way, earnings, and all other property owned or operated by the grantee under this concession or franchise'. The petitioner's franchise , Act No . 1256 , does not embody such exemption clause ." (Emphasis supplied) prll A similar issue was, likewise, decided by the Court of Tax Appeals in C.T.A. Case No. 613, entitled "Lealda Electric Co., Inc. vs. Commissioner of Internal Revenue" on November 2, 1959, the pertinent portions of said decision is hereby quoted as follows: ". . . However, in the case at bar, the general law referred to by the petitioner Section 259 of the National Internal Revenue Code, as amended by Republic Act No. 39 is not too general as to exclude its franchise Act No. 2475, as amended by Act No. 2620 from the operation and effects of the former. "Section 259 of the National Internal Revenue Code, as amended by Republic Act No. 39, could undoubtedly be named and denominated as the basic franchise tax law of the Philippines. As a matter of fact, said Section 259 of the Tax Code is entitled in general terms "Tax on Corporate Franchises" and it fixes the amount of the franchise tax payable by holders of all existing and future franchises . . . . "On this point, we wish to state further that the modification of Section 8 of Act No. 2475 by Section 259 of the Tax Code, as amended by Republic Act No. 39, is not by mere implication. The latter law expressly provides that there "shall be collected in respect to all existing . . . franchise (and that includes the franchise of the petitioner herein) upon the gross earnings or receipts from the business covered by the law granting the franchise a tax of five per centum per annum . . .." Hence, it can be seen that the intent to repeal is clear and manifest to warrant the holding that Section 259 of the National Internal Revenue Code, as amended by Republic Act No. 39, modified or repealed Section 8 of Act No. 2475 as to the amount of the franchise tax that the petitioner should pay after the approval of Republic Act No. 39." LibLex It has been observed that in Hoa Hin Co., Inc. and Lealda Electric Co. cases, above-cited, as well as in the instant case, there are no provisions or conditions precluding the imposition of a higher tax. In other words, the franchise (Act No. 1256) of Hoa Hin Co., franchise (Act No. 2475) of Lealda Electric Co. and the franchise (Act No. 2700) of the Taxpayer in this case, do not embody tax exemption clauses which would bar the legislative body of the Government to impose a higher rate of tax on their gross earnings or receipts. There is no doubt, therefore, that the decisions of the Supreme Court and Court of Tax Appeals, aforecited, are applicable in disposing the first issue in this case. Government is not estopped by error or mistake on the part of its officers or agents . It is admitted that this Bureau had previously ruled in 1953, affirmed by the Secretary of Finance and the defunct Board of Tax Appeals, that the Taxpayer is merely subject to the 1% franchise tax on its gross earnings or receipts in accordance with its charter (Act No. 2700). However, it is our opinion, as we hereby maintain, that said previous administrative ruling or decision was erroneously made and not binding on the Government. "It is a cardinal principle of law and well settled in jurisprudence that the government is not estopped by the neglect or omission of its officers or agents (Bachrach Motor Co. vs. Uson, 50 Phil. 981; Pineda vs. Court of First Instance of Tayabas, 52 Phil. 803)." [Cited in Central Azucarera de Tarlac vs. The Coll. of Int. Rev., et al, G.R. No. L-11092, prom. on Sept. 30, 1958] "The construction of a statute by those administering it is not binding on their successors if thereafter the latter becomes satisfied that a different construction should be given. (Association of Clerical Employees v. Brotherhood of Railway & Steamship Clerks, 85 F. (2d) 152, 109 A.L.R., 345) 'When the Commissioner determined in 1937 that the petitioner was not exempt and never had been, it was his duty to determine, assess and collect the tax due for all years not barred by the statutes of limitation. The conclusion reached and announced by his predecessor in 1924 was not binding upon him. It did not exempt the petitioner from tax. This same point was decided in this way in Stanford University Bookstore, 29 B.T.A., 1280; Affd., 83 Fed. (2d) 710' (Southern Maryland Agricultural Fair Association v. Commissioner of Internal Revenue, 40 B.T.A., 549, 554)" [Cited in Hilado vs. Collector of Internal Revenue & the C.T.A., 53 Off. Gaz. 2481] II. SECOND ISSUE OBSERVATION AND COMMENT The first issue having been disposed of as above-explained, we now come to the question as to whether or not the Government can still collect the deficiency franchise tax for the period from June 1950 to December 1959, including the amount erroneously refunded to the Taxpayer herein, plus surcharges provided by law. Period of limitation on assessment and collection of internal revenue taxes . As a general rule, internal revenue taxes shall be assessed within five (5) years after the return filed, if any, (Sec. 331, Tax Code) However, where the return filed was false or fraudulent, the tax may be assessed, or the collection of such tax may be made without assessment, at any time within ten (10) years after the discovery of the falsity or fraud. (Sec. 332(a), Tax Code) In case of failure to file a return, assessment of the tax may be made, likewise, within ten (10) years from the discovery of such omission. The collection of taxes must be made within 5 years from the time of assessment. (Sec. 332(c), Tax Code) If no return was filed, collection of taxes, by proceeding in court, may be made within ten (10) years from discovery of such omission even without assessment. (Sec. 332, (a), Tax Code) Facts per record ; Comment on prescription . The records show that, on October 3, 1955, the investigation report of BIR Agent A. Y. Brillo was submitted to the PRO of Tacloban City, reporting therein a deficiency assessment against the Taxpayer in the total amount of P56,880.98, covering the period from the 4th quarter of 1950 to 2nd quarter of 1955, inclusive. (pp. 87 to 93, rec.) The Taxpayer was earlier notified, on October 1, 1955, of said findings of the agent (p. 68, rec.), as evidenced by the Taxpayer's letter dated November 12, 1955, acknowledging receipt thereof (p. 94, rec.). On June 2, 1956, a formal letter of demand was issued by the Regional Office to the Taxpayer (pp. 103 to 105, rec.) which the latter promptly objected and requested the withdrawal of the same on June 18, 1956 (pp. 107 to 109, rec.). This request for withdrawal was granted by this Bureau on October 13, 1956 (p. 131, rec.). Our assessment for the period from June 1950 to 1955 having been set aside or cancelled by this Bureau, it is presumed that there existed no assessment at all for said period. It has been ruled by the Court of Tax Appeals that "an assessment that has been set aside or cancelled is no assessment at all" and therefore "where an assessment is made within the five-year period but such assessment is set aside and modified by another, the five-year period within which to assess as provided in Section 331 of the Revenue Code is to be counted from the date of filing of the return to the date the new assessment was made". (Carlos Moran Sison, et al. vs. Coll. of Int. Rev., C.T.A. Case No. 337, Feb. 28, 1958) On this point, however, we cannot possibly apply correctly the pertinent provision on prescription for this period in view of the absence of copies of the returns of the Taxpayer in our attached docket, except for the period covering the years 1950 and 1951 (pp. 11 to 13, rec.). It is presumed that the Taxpayer had religiously submitted its periodical reports to the General Auditing Office, as required by law, which reports were made the basis of our assessment on June 2, 1956 (pp. 103 to 105, rec.) and subsequently cancelled as already explained. LLpr The records will lead us to rule that our right to assess the deficiency tax for the period from 1950 to the first quarter of 1956 has already prescribed pursuant to Section 331 of the Tax Code, unless, of course, the Taxpayer failed to file its returns for said period, or if the returns filed, if any, were false or fraudulent. With respect to the period from the 2nd quarter of 1956 to 1959, there is no question that this Bureau has still the right to assess and collect whatever deficiency franchise tax, plus surcharge, may be due from the Taxpayer, computed at the rate of 5% as explained in Part I hereof. As to the amount of P16,286.24 allegedly refunded to the Taxpayer, there appears no evidence on record that this Bureau or the City of Tacloban (as per Resolution No. 126 dated Sept. 21, 1953, p. 59, rec.) has actually refunded the whole amount to the Taxpayer. It must be observed that the date of the actual refund is important in computing the prescriptive period within which to recover any amount duly refunded. Under the provisions of Section 308 of the Tax Code, this Bureau can institute a civil action for the recovery of taxes , including of course the taxes erroneously refunded, but there is no specific provision in the same Code as to the prescriptive period within which the Government may file or institute judicial action for recovery of tax erroneously refunded. Our recourse, therefore, is to consult the provisions of the New Civil Code of the Philippines. Under Article 2155, in relation to Article 2154, of the New Civil Code, it is substantially provided that where payment has been made by reason of a mistake in the construction or application of a doubtful or difficult question of law, the obligation on the part of the recipient to return it arises. In other words, there exists a quasi-contract relationship (between the Government and Taxpayer), as a result of the erroneous refund, known as solutio indebiti , defined by Manresa as follows: Solutio indebiti is "a tie or juridical relation which, by virtue of a payment of what is not due, made through mistake, is created between the person who paid and the one who received the payment, compelling the latter, in consequence thereof, to return what he has received". (p. 750, Vol. III, Civil Code Annotated by Padilla) LLphil The civil action, therefore, upon a quasi-contract must be commenced within six (6) years (Art. 1142, par. 2, N.C.C.) from the day the action could have been brought (Art. 1150, N.C.C.). Applying the foregoing provisions of law in the instant case, our right of action to recover the amount actually refunded by reason of a mistake in the construction or application of a doubtful question of law shall commence on the day following the actual refund made by this Bureau. It is, therefore, necessary (as already stated) that was ascertain the actual date of refund of the amount P16,286.24. Premises considered, it is desired that a recomputation of the deficiency franchise tax, plus surcharge, be made by excluding those periods already barred by prescription. Please be guided accordingly. (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue