Calfurn Mfg. Philippines, Inc. v. Quinsaat

SPECIAL THIRD DIVISION [C.T.A. AC NO. 253. January 25, 2024.] CALFURN MFG. PHILIPPINES, INCORPORATED, ASIA RAN MFG. COMPANY, AWECA EXIM TRADING CORPORATION, AIM-EX ASIA INT'L. TRADING CORPORATION, AWECA CARGO SERVICES, INC., and AWECA AGRO-FOREST INDUSTRIES CORPORATION , petitioners , vs. JULIETA QUINSAAT, in her capacity as City Treasurer of Angeles City, Pampanga , respondent . DECISION MODESTO-SAN PEDRO , J p : The Case This Petition for Review ("Petition"), 1 filed by petitioners, CALFURN MFG. PHILIPPINES, INCORPORATED, ASIA RAN MFG. COMPANY, AWECA EXIM TRADING CORPORATION, AIM-EX ASIA INT'L. TRADING CORPORATION, AWECA CARGO SERVICES, INC., and AWECA AGRO-FOREST INDUSTRIES CORPORATION , on 24 May 2021, through registered mail, against respondent, JULIETA QUINSAAT, in her capacity as City Treasurer of Angeles City, Pampanga , pursuant to Section 7 (a) (3) of Republic Act No. 1125, as amended by Section (7) of Republic Act No. 9282 ("RA 1125") , seeks the appeal of the Resolutions, dated 27 January 2021 2 and 11 March 2021, 3 both issued by Regional Trial Court-Branch 42, City of San Fernando, Pampanga, in relation to Commercial Case No. 060, and prays that judgment be rendered finding petitioners exempt from local taxes ( i.e. , local business taxes ("LBT") and real property taxes ("RPT")) while the corporate rehabilitation of petitioners are ongoing. 4 AIDSTE The Parties 5 Petitioners are duly constituted corporations existing under the laws of the Republic of the Philippines with principal office at Manga Road, Pulungbulo, Angeles City, Pampanga. Their main operation consists in the manufacture and export of furniture made of native materials. Respondent is of legal age, Filipino, and with postal office address at the Office of the City Treasurer, Angeles City Hall, Angeles City, Pampanga. She is impleaded in her capacity as City Treasurer of Angeles City. The Facts 6 Petitioners filed a Petition for Corporate Rehabilitation on 6 December 2008. 7 The Rehab Court then issued a Commencement Order on 17 December 2008. With such Order, a Stay Order was likewise issued on all claims against petitioners. 8 SDAaTC About a year later, the Rehabilitation Plan was approved through an Order, dated 16 December 2009. 9 The Rehabilitation Plan initially had a duration period of until 31 December 2018 but this was subsequently extended to 31 December 2023 pursuant to an Order, dated 23 May 2019, of the Rehab Court. 10 Then, on 23 December 2019, petitioners sent Letters to respondent and the Office of the Assessor of Angeles City requesting for a waiver of RPT and LBT in light of the provisions of the Financial Rehabilitation and Insolvency Act ("FRIA") Law of 2010 . 11 In January 2020, petitioners received a Letter from respondent, dated 3 January 2020, to which a Legal Opinion of Atty. Ralph Vincent S. Macalino, City Legal Officer of Angeles City, was attached. In said Legal Opinion, the City Legal Officer opined that there is no explicit pronouncement on the waiver of LBT and RPT with respect to the Local Government Unit ("LGU") of Angeles City, Pampanga. Accordingly, respondent requested that a more specific pronouncement be provided by petitioners in order that the LGU of Angeles City can grant a waiver of LBT and RPT. 12 On 16 January 2020, the Court-appointed Rehabilitation Receiver, Atty. Leopoldo E. San Buenaventura, wrote to respondent explaining that Section 19 of the FRIA Law mandates the exemption of petitioners from local taxes and fees. 13 The Receiver likewise discussed the matter with the LGU of the City of Angeles through informal explanations and negotiations concerning the applicable provisions of the FRIA Law but to no avail. Respondent maintained that an Order from the Rehabilitation Court ("Rehab Court") must be secured particularly exempting petitioners from the imposition of local taxes within the City of Angeles and that this would serve as legal basis for the request for exemption by petitioners from the aforementioned local taxes. On 22 September 2020, petitioners received a copy of the Motion for Exemption (for Local Taxes and Fees) from the Receiver which was filed with the Rehab Court ( i.e. , Regional Trial Court-Branch 42, City of San Fernando, Pampanga, in relation to Commercial Case No. 060). 14 In response, the City Legal Officer of Angeles City filed his formal entry of appearance and filed a Comment/Opposition (to Petitioner's Motion for Exemption), which was later on amended when the City Legal Officer filed an Amended Comment/Opposition (to Petitioner's Motion for Exemption). 15 On 28 January 2021, petitioners received a Manifestation, dated 25 January 2021, filed by the Receiver. In said Manifestation, the Receiver pointed out that two (2) Orders of Payment addressed to petitioners, both dated 17 January 2021, were received by the latter, requiring them to pay the amounts of Php1,794,472.46 and Php272,162.80. Petitioners did not indicate what type of local taxes were sought to be collected in such Orders of Payment nor did they indicate the taxable years on which such local taxes pertained to. However, in petitioners' Memorandum, they claimed that they paid local taxes under protest for the taxable year 2009 to 2019 in the total amount of Php7,490,252.83 and for the taxable year 2020 to 2022 in the total amount of Php6,625,574.21. 16 This Court, therefore, has no option but to presume that the local taxes demanded in the two (2) Orders of Payment are contained in the payments made by petitioners under protest for the taxable years 2009 to 2022. Accordingly, this Court shall deem such local taxes as pertaining to taxable years 2009 to 2022. AaCTcI On 29 January 2021, petitioner received through electronic mail the assailed Resolution, dated 29 January 2021, which denied their Motion for Exemption (for Local Taxes and Fees) on the ground that the waiver of local taxes and fees requested by petitioners is valid only until a Rehabilitation Plan has been approved or the Petition has been dismissed, whichever comes first; and since a Rehabilitation Plan has already been approved by the Court, petitioners are no longer entitled to a waiver of local taxes and fees. Petitioners then filed a Motion for Reconsideration in response thereto, 17 while respondent filed a Comment/Opposition (to Petitioner's Motion for Reconsideration. 18 On the other hand, the Receiver filed a Reply to said filing of respondent. 19 The Rehab Court then denied the Motion for Reconsideration through the assailed Resolution, dated 11 March 2021, a copy of which was received by petitioners through electronic mail on 23 March 2021. Thus, the present Petition was filed before this Court on 24 May 2021 through registered mail, after the filing of a Motion for Extension of Time to File Petition for Review on 22 April 2021. 20 Respondent filed a Comment/Opposition (to Petitioner's Petition for Review) with Manifestation on 16 August 2022. 21 As such, the Court gave due course to the Petition in a Resolution, dated 14 September 2022. 22 On 18 November 2022, petitioner filed their Memorandum. 23 On the other hand, respondent filed her Memorandum on 24 November 2022 through registered mail. 24 Thus, in a Resolution, dated 13 January 2023, the instant case was submitted for Decision. 25 Hence, this Decision. The Issue 26 Based on the Memoranda filed by both parties, the issue to be resolved by this Court is WHETHER OR NOT THE REHAB COURT ERRED IN DENYING PETITIONERS' REQUEST FOR WAIVER OF ITS LOCAL TAXES AND FEES. Arguments of the Parties Petitioner's Arguments 27 Petitioner avers the following in its Memorandum: acEHCD a) Section 19 of the FRIA expressly provides for the waiver by the national government and by the LGUs having jurisdiction over the corporation undergoing rehabilitation from imposing and collecting taxes "until the approval of the Rehabilitation Plan or dismissal of the Petition, whichever is earlier." b) Upon approval of the Rehabilitation Plan or dismissal of the Petition, whichever comes earlier, the national government and the LGUs are still precluded from collecting taxes. The reason for this prohibition is the issuance of the Stay Order. Said Stay Order as per applicable law will be effective until lifted by reason of the termination of the rehabilitation proceedings and covers all claims against the corporation under distress, including the claims of the government. c) Section 21 of the FRIA provides that "[u]nless lifted by the court, the Commencement Order shall be effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully rehabilitated." d) In the case of Bureau of Internal Revenue, et al. v. Lepanto Ceramics, Inc. 28 the Supreme Court ruled that the Bureau of Internal Revenue cannot pursue its claims for deficiency taxes in light of the issuance of a Commencement Order. All claims of the government, whether national or local, including taxes, tariffs and customs duties, are covered by the Stay Order. This is to allow the corporation under distress to rehabilitate. The affected creditors, however, are not without remedy. They may file their claims before the Rehab Court. e) Petitioners have been exerting their best efforts to attain the desired objectives of the Rehabilitation Plan. The process, though slowed down by the pandemic, surely are being attained with the valuable cooperation of petitioners' suppliers. f) The reason for the Stay Order is to enable the Management Committee or the Rehabilitation Receiver to effectively exercise its/his power free from any judicial or extra-judicial interference that might unduly hinder or prevent the "rescue" of the debtor company. To allow such other action to continue would only add to the burden of the Management Committee or Rehabilitation receiver, whose time, effort and resources would be washed in defending claims against the corporation instead of being directed towards its restructuring and rehabilitation. g) While taxes are the lifeblood of the government, the collection of the same should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. EcTCAD h) Section 19 of the FRIA must not be literally applied. Upon approval of the Rehabilitation Plan, it might take six or seven months or a year before compliance with the Rehabilitation Plan starts. As such, there is no tax or fee, both national and local, which may be subject to waiver or exemption. It follows that no benefit was actually accorded by such provision. Respondent's Counter-Arguments 29 Respondent counter-argues that petitioners are liable to pay local taxes to the LGU of Angeles City. Section 19 of the FRIA clearly provides that the waiver of local taxes are only until the approval of the Rehabilitation Plan or dismissal of the Petition, whichever is earlier. The issuance of a Commencement Order was merely to signify the start of such waiver of local taxes and fees. It is not made to mean that such waiver shall remain in full force and effect while the Commencement Order ( i.e. , Stay Order) is in effect. The waiver of taxes immediately ends upon the approval of the Rehabilitation Plan or dismissal of the Petition, whichever comes earlier. Section 21 of the FRIA does not apply to taxes and fees. It only applies to ordinary creditors of the distressed corporation. The wisdom and understanding of petitioners in seeking for the waiver of taxes are contrary to law. Upon approval of the Rehabilitation Plan, a distressed corporation shall commence the operation of its business in order to make profits and pay its debtors. Consequently, since the distressed corporation is already making profits, it shall pay taxes. Thus, the Assailed Resolutions were properly issued by the Rehab Court. The Ruling of the Court The Court has jurisdiction over the present Petition. Jurisdiction by this Court over the instant case is conferred by Section 7 (a) (3) of RA 1125 , to wit: " SEC. 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided xxx xxx xxx (3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction "; (Emphasis and underscoring, Ours.) SDHTEC As clearly provided, above, this Court has exclusive appellate jurisdiction over decisions by the Regional Trial Courts exercised in their original or appellate jurisdiction involving local tax cases. In the present case, petitioner is appealing two (2) Assailed Resolutions by Regional Trial Court-Branch 42, City of San Fernando, Pampanga, in relation to Commercial Case No. 060, where said Regional Trial Court denied petitioners' request for waiver from local taxes and fees. As such, these Assailed Resolutions are decisions by a Regional Trial Court exercised in their original jurisdiction involving local tax cases. This Court has undoubted jurisdiction over the instant case. Now, the question that should be determined is whether petitioners timely filed their judicial appeal. Under Section 3, Rule 8 of the Revised Rules of the Court of Tax Appeals , "[a] party adversely affected by a decision . . . of the Commissioner of Internal Revenue . . . may appeal to the Court by petition for review filed within thirty days after receipt of a copy of such decision." In the case at bar, petitioner unquestionably received the Assailed Resolution, dated 11 March 2021, on 23 March 2021 through electronic mail. 30 Following this, petitioner had thirty (30) days from receipt, or until 22 April 2021, within which to file a judicial appeal before this Court. On 22 April 2021, petitioner timely filed a Motion for Extension of Time to File Petition for Review extending the filing of the Petition for thirty (30) days, or up until 22 May 2021. 31 The request for extension was granted by this Court in a Resolution, dated 17 June 2021. 32 Pursuant to Administrative Circular No. 22-2021, the time for filing and service of pleadings and motions in the areas placed under Modified Enhanced Community Quarantine ("MECQ") was suspended and shall resume seven (7) calendar days counted from the first day of physical opening of the relevant court. This Court was physically opened on 17 May 2021. 33 Hence, the deadline to file the instant Petition was moved to 24 May 2021. As petitioner filed the instant Petition on 24 May 2021, through registered mail, this Court properly assumed jurisdiction over the present case. The FRIA clearly provides that the waiver of taxes granted to a distressed corporation is only until the approval of a Rehabilitation Plan or dismissal of the Petition, whichever comes first. The present Petition for Corporate Rehabilitation was filed on 6 December 2008. 34 At first glance, it would appear that the FRIA is inapplicable to the instant case since the effectivity date of said law was on 18 July 2010. However, Section 146 of the FRIA clearly provides that "[t]his Act shall govern all petitions filed after it has taken effect. All further proceedings in insolvency, suspension of payments and rehabilitation cases then pending , except to the extent that in opinion of the court their application would not be feasible or would work injustice, in which event the procedures set forth in prior laws and regulations shall apply." Thus, the FRIA's provisions apply to the present case. HSAcaE There are two provisions of the FRIA which are applicable to the case before us. The first is Section 19 , which provides as follows: "SEC. 19. Waiver of Taxes and Fees Due to the National Government and to Local Government Units (LGUs) . Upon issuance of the Commencement Order by the court, and until the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier, the imposition of all taxes and fees, including penalties, interests and charges thereof, due to the national government or to LGUs shall be considered waived, in furtherance of the objectives of rehabilitation." This provision lays down the rule that all taxes, fees, penalties, interests and charges due to the national government or to LGUs shall be considered waived, upon issuance of the Commencement Order and until approval of the Rehabilitation Plan or dismissal of the petition for rehabilitation. Accordingly, from point A, which is the issuance of the Commencement Order on 17 December 2008, to point B, which is the approval of the Rehabilitation Plan on 16 December 2009, the imposition of all taxes is considered waived. The rationale for this generous waiver appears in the provision itself as "in furtherance of the objectives of rehabilitation." Jurisprudence, in turn, has shown that the objectives of rehabilitation involve equitable and rehabilitative purposes. "Thus: On the one hand, 'they attempt to provide for the efficient and equitable distribution of an insolvent debtor's remaining assets to its creditors; and on the other, to provide debtors with a fresh start by relieving them of the weight of their outstanding debts and permitting them to reorganize their affairs.'" 35 Furthermore, a rehabilitation plan aims to restore the financial well-being and viability of an insolvent debtor using various means including, but not limited to, debt forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en pago , debt-equity conversion, and sale of the business (or parts of it) as a going concern, or setting-up of new business entity, or other similar arrangements as may be approved by the court or creditors. 36 Thus, such waiver of taxes, a form of debt forgiveness, during the period specified is justified. However, before the Commencement Order was issued on 17 December 2008 and for the period following 16 December 2009, taxes could be assessed against petitioner, these not covered by the period of waiver. AScHCD The next question is thus: when can such taxes be collected? This brings us to the second provision of FRIA, Section 21 , which provides as follows: "SEC. 21. Effectivity and Duration of Commencement Order . Unless lifted by the court, the Commencement Order shall be effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully rehabilitated." Following the dictates of Section 21 , collection of any such taxes due can only be made after the duration of the rehabilitation proceedings or per the express terms of the schedule of payment of claims in the Rehabilitation Plan. Here, petitioner alleges that the rehabilitation period terms has been extended until 31 December 2023, citing the rehabilitation court's 23 May 2019 Order. 37 There is no indication that the LGU's claim has been included in the schedule of payments in the Rehabilitation Plan. As it stands, any such payment can now be collected if, indeed, the rehabilitation proceedings have ended. For clarity, there are three periods relevant to the collection of taxes here. The first would be prior to the issuance of the Commencement Order. All taxes, national or local, that pertain to taxable periods prior to the date of issuance of the Commencement Order may be assessed but not immediately collected, considering that these are considered claims against the distressed corporation. These would involve taxes covering the period before 17 December 2008 and would be in the nature of claims against the petitioner in light of the rehabilitation proceedings. Applying Sections 19 and 21 of FRIA , these claims are subject to the Stay Order and must have been presented before the rehabilitation court for inclusion in the schedule of payment necessarily part of the Rehabilitation Plan. To stress, the assessment of such taxes must be ventilated before the Rehabilitation Receiver and not directly with the distressed corporation. Otherwise, the collecting party may be cited for indirect contempt. 38 If not presented during the rehabilitation proceedings and not made part of the schedule of payment therein, these claims could not be made directly to petitioner during the duration of rehabilitation proceedings. These claims, however, can already be collected directly against the petitioner after 31 December 2023, when the rehabilitation proceedings appear to have been terminated, subject to the rules on prescription. The second would be that period between the issuance of the Commencement Order on 17 December 2008 and the approval of the Rehabilitation Plan on 16 December 2009. All taxes pertaining to this period are deemed waived by express provision of Section 19 of the FRIA . Again, this is provided for by law in furtherance of the objectives of rehabilitation proceedings. Finally, there is the period following the approval of the Rehabilitation Plan on 16 December 2009. All taxes from this point onward are neither claims nor subject to waiver. They can and could be assessed and collected against petitioner. Of course, during the duration of rehabilitation proceedings, any such collection effort must be coursed through the Rehabilitation Receiver. Following the rehabilitation proceedings, however, they can be collected directly against the petitioner. HESIcT Following the above guidelines, this Court shall now determine whether the LGU can collect the assessed taxes against petitioners. The Court notes that neither party indicated the taxable periods of the taxes which are sought by petitioner to be waived. It was only indicated that two (2) Orders of Payment addressed to petitioners, both dated 17 January 2021, were received by the latter, requiring them to pay the amounts of Php1,794,472.46 and Php272,162.80. Petitioners did not indicate what type of local taxes were sought to be collected in such Orders of Payment nor did they indicate the taxable years to which such local taxes pertained. It is only in petitioners' Memorandum that they claimed that they paid local taxes under protest for the taxable year 2009 to 2019 in the total amount of Php7,490,252.83 and for the taxable year 2020 to 2022 in the total amount of Php6,625,574.21. 39 This Court, therefore, has no recourse but to presume that the local taxes demanded in the two (2) Orders of Payment are contained in the payments made by petitioners under protest for the taxable years 2009 to 2022. Thus, this Court shall deem that the subject local taxes which petitioners request to be waived pertain to taxable years 2009 to 2022. Given this, local taxes that accrued during the taxable year 2009 against petitioners are deemed partially waived in accordance with Section 19 of the FRIA . This is because these taxes fell due between the dates the Commencement Order was issued on 17 December 2008 and the date the Rehabilitation Plan was approved on 16 December 2009. However, the waiver shall be made pro-rata since taxable year 2009 ends on 31 December 2009 which means that there is a remaining fifteen (15) days in 2009 that taxes are no longer deemed waived. On the other hand, local taxes for taxable years 2010 to 2022 can be assessed and collected directly from petitioners. These taxes cannot be deemed waived since Section 19 of the FRIA expressly limits the waiver of taxes until the approval of a Rehabilitation Plan or dismissal of the Petition, whichever comes first. Further, the assessment of these taxes can be directly made against petitioners. It is no longer necessary to ventilate the assessment of these taxes before the Rehabilitation Receiver considering that rehabilitation proceedings have already been terminated as of 31 December 2023. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. 40 Their collection is of primordial importance. The waiver of national and local taxes provided for under Section 19 of the FRIA is akin to a tax exemption. Well-settled is the rule that a tax exemption is strictly construed against the taxpayer because an exemption restricts the collection of taxes necessary for the existence of the government. 41 Thus, the waiver of taxes in Section 19 of the FRIA can only be claimed within the specific parameters provided therein, specifically only from the date of issuance of the Commencement Order until the approval of the Rehabilitation Plan or dismissal of the Petition, whichever comes first. AcICHD WHEREFORE , in light of the foregoing considerations, the instant Petition is PARTIALLY GRANTED only insofar as taxes for the period of 17 December 2008 to 16 December 2009 are concerned, which taxes are deemed waived by express provision of Section 19 of Republic Act No. 10142 . n The Assailed Resolutions, dated 27 January 2021 and 11 March 2021, are accordingly hereby so MODIFIED . SO ORDERED. (SGD.) MARIA ROWENA MODESTO-SAN PEDRO Associate Justice Ma. Belen M. Ringpis-Liban and Corazon G. Ferrer-Flores, JJ. , concur. Footnotes 1. Records, pp. 14-107. 2. Annex "A", Petition, id. , pp. 31-36. 3. Annex "B", Petition, id. , pp. 37-41. 4. See Prayer, Petition, id. , pp. 24-25. 5. See The Parties, Petition, id. , p. 15. 6. See Statement of Relevant Facts, Petition, id. , pp. 16-18. 7. Petitioners have also claimed that they filed their Petition for Corporate Rehabilitation on 8 December 2008; see Memorandum, id. , p. 268. However, whether the Petition was filed on 6 or 8 December 2008 is a non-issue for Our current purposes, so this Court will comment no further on it. 8. See Annex "A" of Annex "E", Petition, id. , p. 53; See Annex "B" of Annex "F", Petition, id. , p. 67. 9. See Annex "A", Petition, id. , p. 32. 10. See Annex "B" of Annex "F", Petition, id. , p. 67. 11. Annex "C", Petition, id. , pp. 42-46; Petitioners did not indicate in their submissions what triggered them to send requests to respondent to waive their RPT and LBT. Thus, this Court will no longer inquire why petitioners opted such course of action. 12. Annex "D", Petition, id. , pp. 47-48. 13. Annex "E", Petition, id. , pp. 49-54. 14. Annex "F", Petition, id. , pp. 55-69. 15. Annex "G", Petition, id. , pp. 70-78. 16. Id. , pp. 282-283. 17. Annex "H", Petition, id. , pp. 79-90. 18. Annex "I", Petition, id. , pp. 91-95. 19. Annex "J", Petition, id. , pp. 96-107. 20. Id. , pp. 8-13. 21. Id. , pp. 236-244. 22. Id. , pp. 245-247. 23. Id. , pp. 263-308. 24. Id. , pp. 310-322. 25. Id. , p. 324. 26. See Issue/s, Respondent's Memorandum, id. , p. 312; See Lone Issue, Memorandum, id. , p. 275. 27. Id. , pp. 275-289. 28. G.R. No. 224764, 24 April 2017. 29. See Respondents' Memorandum, id. , pp. 312-315. 30. Annex "B", Petition, id. , pp. 37-41. 31. Id. , pp. 8-13. 32. Id. , pp. 108-110. 33. Administrative Circular No. 33-2021. 34. Petitioners have also claimed that they filed their Petition for Corporate Rehabilitation on 8 December 2008; see Memorandum, Records, p. 268. However, whether the Petition was filed on 6 or 8 December 2008 is a non-issue for Our current purposes, so this Court will comment no further on it. 35. China Banking Corp. v. St. Francis Square Realty Corp. , G.R. Nos. 232600-04, 27 July 2022. 36. Id. 37. Annex "B" of Annex "F", p. 67. 38. Bureau of Internal Revenue, et al. v. Lepanto Ceramics, Inc. , G.R. No. 224764, 24 April 2017. 39. Id. , pp. 282-283. 40. Commissioner of Internal Revenue v. Yumex Philippines Corporation , G.R. No. 222476, 5 May 2021. 41. Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc. , G.R. Nos. 195909 and 195960, 26 September 2012. n Note from the Publisher: Written as "Republic Act No. 10472" in the original document.