Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corp.

EIGHTH DIVISION [CA-G.R. SP NO. 77117. September 10, 2009.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PILIPINAS SHELL PETROLEUM CORPORATION , respondent . DECISION BALTAZAR-PADILLA , J p : Pending resolution of this case, Republic Act 9282 1 was enacted on March 22, 2004 making the decisions of the Court of Tax Appeals (CTA) no longer appealable to this Court but directly to the Supreme Court. However, considering that the present case took place at the time when Republic Act No. 1125, otherwise known as An Act Creating the Court of Tax Appeals, was still in effect, this Court was vested with jurisdiction over the present appeal. This is an appeal from the decision dated April 30, 2003 of the Court of Tax Appeals in CTA Case No. 6477 entitled "Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue", 2 the dispositive part of which reads: " WHEREFORE , in view of the foregoing, the instant Petition for Review is hereby GRANTED . Accordingly, respondent is hereby ORDERED to REFUND or in the alternative ISSUE a TAX CREDIT CERTIFICATE in favor of the petitioner in the amount of P22,101,407.64 representing the latter's erroneously paid documentary stamp tax for the taxable year 2000. SO ORDERED ." FACTS The facts of the case as culled from the joint stipulations of facts and issues 3 of the parties are as follows: 1. Petitioner is a corporation organized and existing under the laws of the Philippines with office address at Shell House, 156 Valero Street, Salcedo Village, 1227 Makati City. SCEHaD 2. Respondent is the duly appointed Commissioner of Internal Revenue who holds office at the BIR National Office located at Agham Road, Diliman, Quezon City. 3. Petitioner is a corporation organized and existing under the laws of the Philippines and was incorporated "to construct, operate and maintain petroleum refineries, works, plant machinery, equipment dock and harbor facilities and auxiliary works and other facilities of all kinds and use in or in connection with the manufacture of products of all kinds which are wholly or partly derived from crude oil". 4. On April 27, 1999, petitioner entered into a Plan of Merger with its affiliate, Shell Philippine Petroleum Corporation ("SPPC"), a corporation organized and existing under the laws of the Philippines, whereby the entire assets and liabilities of SPPC will be transferred to, and absorbed by, petitioner as the surviving entity. 5. The Securities and Exchange Commission approved the merger on July 1, 1999. 6. Petitioner paid to the BIR on August 10, 1999 documentary stamp tax (DST) amounting to P524,316,00 * on the original issuance of shares of stock of petitioner in exchange for the surrendered SPPC shares pursuant to Section 175 of the National Internal Revenue Code of 1997 ("1997 NIRC"). 7. Confirming the tax-free nature of the merger between petitioner and SPPC, the Bureau of Internal Revenue (BIR), in a ruling dated October 4, 1999, ruled pursuant to Section 40 (C) (2) and (6) (b) of the 1997 NIRC, no gain or loss shall be recognized, if, in pursuance of a plan of merger or consolidation, a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation also a party to the merger or consolidation. 8. Accordingly, the BIR ruled, among others, that "no gain or loss shall be recognized by the stockholders of SPPC on the exchange of their shares of stock of SPPC solely for shares of stock (of petitioner) pursuant to the Plan of Merger". 9. The BIR, however, stated in the Ruling that "3. the issuance by PSPC of its own shares of stock to the shareholders of SPPC in exchange for the surrendered certificates of stock of SPPC shall be subject to the documentary stamp tax (DST) at the rate of Two Pesos (P2.00) on each Two Hundred Pesos (P200.00), or fractional part thereof, based on the total par value of the PSPC shares of stock issued pursuant to Section 175 of the Tax Code of 1997. xxx xxx xxx 6. The exchange of land and improvement by SPPC to PSPC for the latter's shares of stock shall be subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997, based on the consideration contracted to be paid for such realty or its fair market value determined in accordance with Section 6(E) of the said Code, whichever is higher." 10. Petitioner paid to the BIR on May 10, 2000 the amount of P22,101,407.64 representing DST on the transfer of real property from SPPC to petitioner. 11. Believing that it erroneously paid DST on its absorption of real property owned by SPPC, petitioner filed with respondent on September 18, 2000 a formal claim for refund or tax credit of the DST in the amount of P22,101,47,64. * 12. Up to this date, however, petitioner's claim for refund or tax credit remains unacted upon by respondent. AaIDHS Hence, on May 8, 2002, Pilipinas Shell Petroleum Corporation (PSPC, hereafter) filed a petition for review 4 with the CTA in order to suspend the running of the two-year prescriptive period. On May 30, 2003, the CTA granted PSPC's prayer for tax refund or credit. Hence, this appeal. ISSUE The Commissioner of Internal Revenue (CIR, hereafter) submitted a sole issue for Our consideration, to wit: WHETHER RESPONDENT IS ENTITLED TO THE REFUND/TAX CREDIT OF THE AMOUNT OF P22,101,407.64 ALLEGEDLY REPRESENTING ERRONEOUSLY PAID DOCUMENTARY STAMP TAX (DST) FOR THE TAXABLE YEAR 2000 IN CONNECTION WITH THE TRANSFER OF REAL PROPERTIES FROM SHELL PHILIPPINES PETROLEUM CORPORATION (SPPC) TO RESPONDENT. RULING The appeal is bereft of merit. The Bureau of Internal Revenue (BIR) imposed documentary stamp tax (DST) on the transfer of the real properties of Shell Philippines Petroleum Corporation (SPPC, hereafter) to PSPC by virtue of Section 196 of the NIRC, which states: "Section 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. On all conveyances, deeds, instruments or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration." The BIR wants to impress upon this Court that Section 196 not only refers to sale of real property but also to all transfers of real property since it speaks of real property being "granted, assigned, transferred or otherwise conveyed". In order to further its claim, it argues that Regulations No. 26, otherwise known as the "Documentary Stamp Regulations", covers transactions involving transfer of real property that are not in the nature of sale, specifically Section 173 and 177, which state: "Section 173. Deeds of exchange of properties. In the case of an exchange of two properties, the deeds transferring the title to each are subject to tax, which should in each case be computed on the basis of the actual value of the interest or property conveyed, the amount of any preexisting lien or encumbrance which is not removed by the sale being deductible." Section 177. Stock in a corporation a valuable consideration. Stock in a corporation is a valuable consideration for the transfer of real property." The resolution of the issue raised calls for the interpretation of Section 196 of the NIRC. It is a fundamental rule in statutory construction that the clauses, phrases, sections and provisions of a law are read as a whole; never as disjointed or truncated parts, for a law is enacted as a single entity and not by installment of paragraphs here and subsections there. 5 Section 196 should be read as a whole and not phrase by phrase. The phrase granted, assigned, transferred or otherwise conveyed clearly refers to the phrase whereby any land, tenement or other realty is sold. This clearly shows that the legislature intended Section 196 to refer to a transfer of realty by virtue of sale. This is further bolstered by the fact that the property is granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers . In addition, the basis of the stamp tax is the consideration agreed upon by the parties or the property's fair market value. Taking all of these into consideration, it is beyond doubt that the Section 196 pertains to a transfer of realty by way of sale. ADaSET Even Sections 173 and 177 of Regulations No. 26 being invoked by BIR cannot support its argument since both refer to a transfer of property in exchange of another property. In this case, the transfer of the properties of SPPC to PSPC was not in exchange for the latter's shares of stock but is a legal consequence of the merger. Merger is a union whereby one corporation absorbs one or more existing corporations, and the absorbing corporation survives and continues the combined business. 6 Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. 7 The effects of merger are provided for in Section 80 of the Corporation Code, to wit: "Sec. 80. Effects or merger or consolidation. The merger or consolidation shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation." (Emphasis supplied) After the approval by the Commission of the articles of merger or consolidation, as the case may be, there is no need to execute a deed of conveyance of the assets from the constituent corporations to the surviving or consolidated corporation because the law already has transferred them to the latter without the need of any further act or deed. 8 It is clear that transfer of property is one of the legal consequences of merger and it occurs by operation of law. Operation of law is defined as "a term describing the fact that rights may be acquired or lost by the effect of a legal rule without any act of the person affected". 9 In this case, the actual transfer to PSPC of the real properties owned by SPPC was not effected by or dependent upon any voluntary deed, conveyance, assignment, or other such deal by the parties. Rather the transfer occurred solely and automatically by virtue of Section 80 of the Corporation Code. Furthermore, a documentary stamp tax is in the nature of an excise tax. It is not imposed upon the business transacted but is an excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction of the business separate and apart from the business itself. 10 WE adopt the ruling of the CTA when it stated, viz. : "Indeed, the aforequoted jurisprudence points to the conclusion that the obligation to pay DST is based on the voluntary action of the person performing the act or engaging in the activity which is subject to DST. Therefore, the DST imposed on the transfer of real property should not apply to a statutory merger where real property of the absorbed corporation is automatically vested in the surviving corporation by operation of law, without any further act or deed, rather than by some voluntary act or deed on the part of the taxpayer concerned." Considering that the basis of the BIR in imposing the DST is not applicable to a transfer of real property by operation of law, PSPC erroneously paid the DST and is, therefore, entitled to a tax refund or tax credit. Moreover, it is a hornbook rule that where the findings of the administrative body are amply supported by substantial evidence, such findings are accorded not only respect but also finality, and are binding on this Court. Courts of justice will not generally interfere with purely administrative matters which are addressed to the sound discretion of government agencies unless there is a clear showing that the latter acted arbitrarily or with grave abuse of discretion or when they have acted in a capricious and whimsical manner such that their action may amount to an excess of jurisdiction. 11 In this case, the CTA, by reason of its special knowledge and expertise over matters falling under its jurisdiction, is in a better position to pass judgment on the case. WE have carefully scrutinized the records of the petition and found no compelling reason to deviate from the findings of the CTA. CcTHaD On a final note. It is worth to mention that pending the determination of this case, the issue herein involved has been put to rest by the enactment of Republic Act No. 9243 12 last March 20, 2004. It specifically exempts the transfer of real property of a corporation, which is a party to the merger or consolidation, to another corporation, which is also a party to the merger or consolidation, from the payment of documentary stamp tax. It provides: "SECTION 9. Section 199 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows: SEC. 199. Documents and Papers Not Subject to Stamp Tax. The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the DST: xxx xxx xxx (m) Transfer of property pursuant to Section 40 (C) (2) 13 of the National Internal Revenue Code of 1997, as amended." WHEREFORE , in the light of all the foregoing, the instant appeal is hereby DISMISSED and the impugned Decision, AFFIRMED . SO ORDERED . Guevara-Salonga and Librea-Leagogo, JJ., concur. Footnotes 1. An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as Amended, Otherwise Known as the Law Creating the Court of Tax Appeals, and for Other Purposes. 2. Rollo, p. 30. 3. Id., pp. 44-48. 4. Id., p. 49. 5. Samar II Electric Cooperative, Inc. vs. Quijano, G.R. No. 144474, April 27, 2007. 6. McLeod vs. NLRC, G.R. No. 146667, January 23, 2007. 7. Associated Bank vs. Court of Appeals, G.R. No. 123793, June 29, 1998. 8. Agpalo, Comments on Corporation Code of the Philippines, 2001. 9. Sibal, Philippine Legal Dictionary, 1991. 10. Antam Pawnshop Corporation vs. Commissioner of Internal Revenue, G.R. No. 167962, September 19, 2008. 11. Remolona vs. CSC, G.R. No. 137473, August 2, 2001. 12. An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997. 13. Section 40. Determination of Amount and Recognition of Gain or Loss. xxx xxx xxx (C) Exchange of Property. xxx xxx xxx (2) Exception. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to a merger or consolidation, solely for the stock of another corporation, also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to a merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation. No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.