Commissioner of Internal Revenue v. La Carlota Mill District Multi-Purpose Cooperative

TWELFTH DIVISION [CA-G.R. SP No. 38634. September 19, 1996.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .LA CARLOTA MILL DISTRICT MULTI-PURPOSE COOPERATIVE , respondent . D E C I S I O N AGCAOILI , J p : This petition for review assails the decision of the Court of Tax Appeals in favor of respondent La Carlota Mill District Multi-Purpose Cooperative (Cooperative),which granted the refund of value-added tax (VAT),alleged to have been erroneously assessed and paid for the year 1992. The antecedent facts are as follows: Respondent Cooperative is composed of sugar cane planters and growers at the La Carlota Mill District. It is also a licensed sugar trader. In 1992, the members of the Cooperative executed a deed of assignment in favor of the latter, covering the sugar harvested for that year. By that agreement, the planters transferred or conveyed their raw cane sugar to the Cooperative, with the undertaking that it shall have the raw cane sugar milled. After milling the Cooperative shall pay the planters the price of the sugar manufactured on the basis of the current price obtainable in the market, minus the cash advances made by the Cooperative, the interest on such cash advances, and costs incident to storing and handling of the sugar produced. The agreement further provided that the quedans to be issued by the sugar central, covering the manufactured sugar, shall be in the name of the Cooperative but with a notation that it is for the account of a particular cooperative member, in order to identify the planter to be paid. In addition to the deed of assignment the Cooperative and its members also entered into a marketing agreement and special power of attorney, by virtue of which the Cooperative shall sell the sugar, molasses and other derivatives produced. Thereafter, the Cooperative shall turn over to the members the net proceeds on the sale of the said products. The Cooperative delivered the raw cane sugar to the Central Azucarera de la Carlota (Central) for milling. However, before allowing the withdrawal of the finished products, the Central charged the Cooperative and the individual members withdrawing their share with payment of the VAT. The Cooperative paid the VAT under protest and subsequently filed a claim for refund of erroneously paid or collected tax with the Commissioner of Internal Revenue (CIR). Without any decision being rendered by the CIR, the Cooperative elevated its case to the Court of Tax Appeals (CTA), in order to toll the running of the prescriptive period for claiming a tax refund, as provided in Section 230 of the National Internal Revenue Code, which states: "SEC. 230. Recovery of tax erroneously or illegally collected xxx xxx xxx In any case, no such suit or proceeding shall begun after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: ..." (Emphasis added) The CTA decided the case in favor of the Cooperative, allowing the claim for refund amounting to P1,533,317.66 of VAT previously collected. The ruling was based on the tax exemption privilege set out in section 61 of R.A. No. 6938, or the Cooperative Code of the Philippines, which states: "ART. 61. Tax Treatment of Cooperatives Duly registered cooperatives under this Code which do not transact any business with non-members or the general public shall not be subject to any government taxes or fees imposed under the internal revenue laws and other tax laws. ..." Hence, this petition interposed by the Government stating the following reasons warranting review: "1. THE CERTIFICATE OF EXEMPTION OF RESPONDENT COOPERATIVE DOES NOT COVER OR INCLUDE THE 10% VALUE-ADDED TAX WHICH MIGHT BE PASSED ON OR BILLED TO IT BY THE SELLER/VENDOR. 2. IT IS EXPRESSLY PROVIDED IN THE CERTIFICATE OF EXEMPTION ISSUED TO RESPONDENT-COOPERATIVE THAT THE EXEMPTION FROM TAXES AND FEES IMPOSED BY THE INTERNAL REVENUE LAWS AND OTHER TAX LAWS DOES NOT EXTEND TO ITS INDIVIDUAL MEMBERS. 3. RESPONDENT-COOPERATIVE IS NOT ENGAGED IN THE BUYING AND SELLING OF SUGAR EITHER FROM THE MEMBERS OR NON-MEMBERS BUT MERELY MARKETS/DISPOSES OF THE SUGAR OF THE PLANTERS/MEMBERS WHO ARE ACTUAL OWNERS THEREOF. 4. PURSUANT TO THE MARKETING AGREEMENT AND THE SPECIAL POWER OF ATTORNEY EXECUTED BY AND BETWEEN THE COOPERATIVE AND ITS INDIVIDUAL MEMBERS. THE SUGARCANE OF THE LATTER ARE KILLED BY THE SUGAR CENTRAL AND THE RESULTING SUGAR ARE QUEDANNED IN THE NAME OF THE COOPERATIVE FOR THE ACCOUNTS OF THE PLANTERS-MEMBERS." (Rollo, 14) Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. (Province of Tarlac v. Alcantara, 216 SCRA 790 [1992] ) On the other hand, exemption is an immunity or privilege; it is freedom from a charge or burden to which others are subjected. (Greenfield v. Meer, 77 Phil. 394 (1946) It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and, in this sense is prejudicial thereto. (Commissioner of Internal Revenue v. Botelho Shipping Corporation, 20 SCRA 487 [1967] ) Its avowed purpose is some public benefit or interest, which the law-making body considers sufficient to offset the monetary loss entailed in the grant of exemption. (Ibid) Hence, in the construction of tax statutes, tax exemptions are not favored, and are construed strictissimi juris against the taxpayer. (Republic Flour Mills, Inc. v. Commissioner of Internal Revenue, 31 SCRA 520 [1970]) He who would seek to be thus privileged must justify it by words too plain to be mistaken and too categorical to the misinterpreted. (Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd.,65 SCRA 142 [1975] ) In the case at bar, the core issue is whether or not the grant of exemption to cooperatives in general, based on section 61 of the Cooperative Code ( supra ),and to herein respondent Cooperative, in particular, based on its certificate of exemption, includes exemption from both direct and indirect taxes, like the value-added tax (VAT).Owing to the nature of tax exemptions, a general grant thereof does not normally include taxes indirectly imposed. However, the rule on strict interpretation of tax exemption statutes admits of exceptions, namely: a) when the law itself expressly provides for liberal, construction, that is, in case of doubt, it shall be resolved in favor of exemption; b) when the exemption is in favor of the government or of religious charitable and educational institution, because the general rule is that they are exempt from tax. (De Leon. The Fundamentals of Taxation, 1988, 66) In Maceda v. Macaraig , 197 SCRA 771 (1991) and 223 SCRA 217 (1993), a third exception was in effect constituted, i.e. by basing tax exemption on the history of statutes granting tax exemptions privileges . Tracing then the history of laws on cooperatives and their tax exemptions, we find that they have been consistently treated with favor. Exemptions were usually granted to them as a privilege. The first legislative enactment on cooperatives was Act No. 2508 (1915). Section 42, paragraph (b) thereof provides: "(b) They shall not be subject to the payment of the taxes established by the Internal Revenue Law of Nineteen hundred and fourteen." The second significant statute on cooperatives is R.A. No. 2023 (1957), section 66 of which states: "SEC. 66. Exemptions . Cooperatives registered under this Act shall notwithstanding the provisions of existing law to the contrary, enjoy the following exemptions: (1) Cooperatives with net assets of not more than five hundred thousand pesos shall be exempt from all taxes and government fees of whatever name and nature except those provided for under this Act; Provided, however, That cooperatives having net assets in excess of five hundred thousand pesos shall pay taxes as provided hereunder: (a) Income Tax they shall pay tax at the full rate as provided under existing laws on the amount allocated for interest on capital; (b) Sales Tax they shall pay fixed and percentage taxes at the full rate as provided under existing laws on gross sales to non-members." (Emphasis added) P.D. No. 175 (1972) was the next cooperative law. Section 5 of that law provides: "Section 5. Privileges of Cooperatives Cooperatives shall enjoy the following privileges: (a) Exemption from income taxes and sales taxes provided that a substantial portion of the net income of the cooperative is returned to members in the form of interest and/or patronage refunds: Provided, further, that for income tax purposes, non-agricultural cooperatives shall be exempt for a period of five (5) years and agricultural cooperatives for a period of ten (10) years reckoned from the date of registration with the Department of Local Government and Community Development; Provided, finally, that the taxable income shall mean that portion of the cooperative's income after deducting the interest paid to members and patronage refunds." P.D. No. 2008 (1986), aimed at further strengthening the cooperative movement, states in section 2 thereof: "SEC. 5. Privileges of Cooperatives . Cooperatives which are in good standing as certified by the BCOD/MAF shall enjoy the following privileges: (a) Exemption from income and sales taxes until December 31, 1991; Provided, That a substantial portion of the net income of the cooperative is returned to members in the form of interests and/or patronage refunds: Provided, further, That those cooperatives whose tax exemption privileges under this Decree have already expired shall continue to enjoy such privileges but in no case shall extension go beyond December 31, 1991: Provided, Finally, That the cooperative's taxable income shall mean that portion of the cooperative's income after deducting the interest and patronage funds paid to its members; ..." Under the Cooperative Code of the Philippines or R.A. No. 6938 (1991), the exemption privileges of cooperatives, is found in section 61 ( supra ),and section 62 hereinafter quoted: "ART. 62. Tax and Other Exemptions . Cooperatives transacting business with both members and non-members shall not be subject to tax on their transactions to members. Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing with non-members shall enjoy the following tax exemptions: (1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten million pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until after five (5) years, otherwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or duties thereon. (2) Cooperative with accumulated reserves and undivided net savings of more than Ten million pesos (P10,000,000.00) shall pay the following taxes at full rate: (a) Income Tax On the amount allocated for interest on capitals: Provided ,that the same tax is not consequently imposed on interest received by members; (b) Sales Tax On sales to members: Provided, however .That all cooperatives, regardless of income and sales taxes for a period of ten (10) years." On the other hand, the present VAT law traces its roots from sales tax which was introduced in the country in 1939. It was a single-stage value-added tax , meaning, it was applicable only to the original seller. On July 1, 1978, P.D. 1358 issued to amend the sales tax law, but only with respect to the manner of computation. On July, 25, 1987, the old VAT law E.O. No. 273, was issued. It took effect on January 1, 1988. The major change introduced by this law is that it covered not just original sellers, but subsequent sellers as well, meaning, it was a multi-stage tax imposed on every turnover of the goods sold and purchased. This value-added tax was an indirect tax. The burden of the tax may be shifted by the original payer on whom the tax was assessed or imposed to another or someone else. (De Leon, The Fundamentals of Taxation, 1991, 48-49). However, the shifting of the VAT to the latter does not make him directly liable for the payment of the VAT, hence, he cannot normally invoke any exemption privilege, to avoid the passed-on VAT. The VAT shifted forms part of the cost of goods and services purchased. (De Leon, The National Internal Revenue Code Annotated, 1994, 348) The expanded VAT Law, R.A. No. 7716, enacted on May 5, 1994, introduced several changes, including the withdrawal of exemption from some persons or entities previously exempt. Looking at these tax statutes vis-a-vis the laws governing cooperatives, we see that, historically, cooperatives have been accorded the privilege of exemption. They are lauded as vehicles for self-reliance, economic development and social justice. Hence, public policy dictates that they should be given incentives for growth and preferential treatment. In 1939, when the sales was initially imposed, the law governing cooperatives was Act No. 2508 which provided for exemption from payment of taxes under the Internal Revenue Code. When the sales tax law was amended by P.D. No. 1358 in 1978, the applicable statute to cooperatives was P.D. No. 175. Under this law cooperatives of the same nature and character as herein respondent Cooperative were exempted from the sales tax . The old VAT law was introduced in 1987 and it recognized certain exempt transactions, thus: "SEC. 103. Exempt Transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (u) Transactions which are exempt under special laws or international agreements which the Philippines is a signatory;" The Cooperative Code of the Philippines (1991), a special law of later enactment, falls under this provision. As previously cited, section 61 thereof provides that cooperatives shall be exempt from payment of any government tax or fee imposed under the internal revenue laws and other tax laws. This case arose from an assessment and payment of value-added tax in 1992 by the Cooperative. From all that has been historically distilled from cooperative statutes, it is clear that the tax was erroneously assessed and paid. Even without considering government policy to exempt cooperatives from the payment of taxes whether direct or indirect, with the VAT falling under the latter category it plainly appears that cooperatives enjoy the privilege of exemption under the old VAT law. The expanded VAT law of 1994 removed this privilege, but that is another story. Petitioner contends that by the terms of the marketing agreement and special power of attorney executed by and between the Cooperative and its members, the members would avail of an exemption not granted or extended to them by law. This argument is not well-taken. It goes against the principal by which cooperatives are organized in the first place. It is petitioner's theory that members of the Cooperative, by means of assigning their cane produce to the latter which, in turn, enters into a milling contract with the millers and subsequently markets the end product as sugar, are indirectly availing of a tax exemption granted only to cooperatives at the milling stage. That, precisely, is the point in forming a cooperative. People voluntarily organize and pool their resources together in order to undertake an economic enterprise for the purpose of meeting their common needs. (Aquino, Primer on the Cooperative Code of the Philippines, 1991, 2) In one of the whereas clauses of P.D. No. 175 ( supra ),the state recognizes cooperatives as vehicles by which less fortunate segments of our society could enjoy the privilege of self-development, social growth and economic independence. In keeping with this, the same law defines a cooperative thus: "Section 2. Cooperative Defined Cooperative shall means only organizations composed primarily of small producers and of consumers who voluntarily join together to form business enterprises which they themselves own, control and patronize. A small producer shall mean a self-employed individual who, by himself or with his family provides the primary labor requirements of his business enterprise or one who earns at least fifty percent of his gross income from the payment proceeds or income of the labor he provides." Although these provisions no longer appear in the present law (R.A. No. 6938), they still capture the essence and spirit of the cooperative movement itself. These remain as the very principles by which any cooperative law is enacted. It is a recognition that the ordinary, lowly citizen, by himself, would not accomplish much, but organized with his peers in a cooperative, they would become a more vital and dynamic force that could contribute much in the pursuit of the country's economic goals. This is the reason why the state encourages and provides incentives to the formation of cooperatives. To further uphold these principles, we hereby sustain the Cooperative members' act in assigning their sugar cane to the Cooperative, so the latter could then avail of its tax exemption privileges under the old VAT law, the law applicable here. A sad epilogue to this case is that under the expanded VAT law, cooperatives, except electric cooperatives, no longer enjoy the exemption. In Tolentino v. Secretary of Finance , 235 SCRA 630. (1994), the Supreme Court said: "On the other hand, the CUP's contention that Congress' withdrawal of exemption of producers cooperatives, marketing cooperatives, and service cooperatives, while maintaining that granted to electric cooperatives, not only goes against the constitutional policy to promote cooperatives as instrument of social justice (Art. XII, sec. 15) but also denies such cooperatives the equal protection of the law is actually a policy argument. The legislature is not required to adhere to a policy of 'all or none' in choosing the subject of taxation." This ruling upholds legislative prerogative to choose those who shall be the subject of taxation, those who shall be exempt therefrom, and those from whom a prior exemption shall be withheld. Parenthetically, one cannot withdraw a privilege which was not previously granted. By implication, all cooperatives were once exempt from payment under the old VAT law, but under the expanded VAT law, only electric cooperatives enjoy the privilege. However, since this case concerns itself with an assessment and payment of VAT under the old law we are still at liberty to uphold the cooperatives exemption provided therein. And uphold it, we shall. WHEREFORE, the decision of the Court of Tax Appeals is AFFIRMED in toto ,and the Commissioner of Internal Revenue is hereby ORDERED to refund to the La Carlota Mill District Multi-Purpose Cooperative the amount of P1,533,317.66, representing taxes erroneously assessed and paid for the year 1992. No costs. SO ORDERED. Elbinias and Verzola, JJ .,concur.