Republic v. Tamaraw Studios, Inc.

[CA No. 27328-R. November 6, 1962.] REPUBLIC OF THE PHILIPPINES , plaintiff and appellee , vs . TAMARAW STUDIOS, INC., and THE CAPITAL INSURANCE & SURETY COMPANY, INC. , defendants and appellants . Lobrin & Associates for defendant and appellant Tamaraw Studios, Inc. Achacoso, Nera & Ocampo for defendant and appellant. The Capital Insurance & Surety Company, Inc. Assistant Solicitor General Jose P . Alejandro and Special Attorneys Priscilla R . Gonzales and Santiago M . Capultos for plaintiff and appellee. SYLLABUS 1. SPECIFIC TAXES; COLLECTION; LIABILITY OF POSSESSOR OF TAXABLE ARTICLES; SECTION 124, TAX CODE, CONSTRUED. A taxpayer in possession of taxable articles is unquestionably liable thereon under Section 124 of the Tax Code which provides that "specific taxes on domestic products shall be paid by the manufacturer, producer, owner, or person having possession of the same". 2. ID.; ID.; PRESCRIPTION; RULE; EXCEPTION. The 5-year period prescribed by Section 332 (c) of the Tax Code within which to collect the specific taxes due on taxable products or articles by judicial action commences from the date of assessment, and not from the discovery of the taxable articles by the proper authorities. But where the payment of taxes is guaranteed by a surety bond, the action to enforce collection prescribes in 10 years, pursuant to Article 1144 of the Civil Code, because the giving of a bond to stay the collection of the taxes effected a substitution of a contractual obligation for the tax liability, giving a cause of action separate and distinct from the action for the collection of the taxes. (Merten's, The Law on Federal Income Taxation, Vol. 10, pp. 151-152.) D E C I S I O N NARVASA , J p : The above-named plaintiff instituted this action on September 10, 1958, to recover from defendant, Tamaraw Studios, Inc., P7,179.23, on the first cause of action, being the balance of the total specific taxes due from said defendant on the cinematographic films therein mentioned after deducting the partial payments made thereon; and P3,891.73, on the second cause of action, being the balance also of the total specific taxes due from said defendant on the cinematographic films therein mentioned after deducting the partial payments made thereon, the payment of which specific taxes being secured by surety bonds executed by said defendant. Tamaraw Studios, Inc., as principal, and by the other defendant, Capital Insurance and Surety Co., Inc., as surety. LibLex In its answer, defendant Tamaraw Studios, Inc., disclaims liability not only for the payment of the amount claimed in plaintiffs first cause of action on the ground that the motion pictures therein referred to were not produced but merely distributed by it, and that the specific tax on the "Dahong Palay" produced by it was already paid; but also for the amount claimed in plaintiff's second cause of action, on the ground that the action to collect the taxes on "Ang Aking Kahapon" and "Awa Ng Birhen Sa Baclaran" produced by it has already prescribed, and that it is not liable for the taxes on the other film as it acted only as the broker and/or distributor and was not the producer thereof. Defendant Surety adopts in its behalf the special defenses alleged by its co-defendant in its answer and alleges that if it has failed to meet its obligation under the surety bonds it was due to the assurances of its co-defendant that the obligation was already settled. It set up cross-claim against its co-defendant for indemnity for whatever amount it may be ordered to pay under the bonds referred to. After trial, the Court of First Instance of Manila, the Honorable Judge Ramon O. Nolasco, presiding, rendered decision on February 3, 1960, containing the following judgment: "WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant ordering defendant Tamaraw Studios, Inc. to pay the plaintiff the sum of P4,383.32 plus legal interests from the date of the filing of the complaint until fully paid with respect to plaintiff's first cause of action and with respect to plaintiff's second cause of action, defendants are jointly and severally ordered to pay to plaintiff the sum of P3,891.73, with legal interests from the date of the filing of the complaint until fully paid and in default thereof, the bonds (Annexes A, B and C) executed by the herein defendants are hereby ordered confiscated and forfeited in favor of the plaintiff. With regards to the cross-claim of defendant Capital Insurance & Surety Co., Inc., judgment is, likewise, hereby rendered ordering Tamaraw Studios, Inc. to reimburse the cross-claimant, the Capital Insurance & Surety Co., Inc., all amounts that the latter may pay to the plaintiff by virtue of this judgment, together with a sum equivalent to fifteen percent (15%) of the total amount thus paid as stipulated attorney's fees. "With costs against the defendants." Defendant Tamaraw Studios, Inc., appealed because, according to it, the trial court committed the following errors: (1) in holding that the assessments for specific tax made by the B.I.R. have already become final due to the failure of the taxpayer to contest the same within thirty (30) days from receipt of the assessments to the Court of Tax Appeals; (2) in holding that the defendant, being found in possession of the cinematographic films in issue, is liable for the payment of specific tax thereon; (3) in not holding that the right of the B.I.R. to institute a judicial action for collection of specific tax from defendant has prescribed; and (4) in holding that the posting of a bond to stay the collection of the tax liability has converted such tax liability into a contractual obligation. Defendant surety also appealed because, according to it, it was error of the trial court to render judgment against the bonds issued by it in favor of the plaintiff. The Tamaraw Studios, Inc., is a Filipino corporation engaged in the business of producing and/or distributing motion pictures in the Philippines. It produced the motion pictures, "Dahong Palay", "Ang Aking Kahapon", and "Ang Awa ng Birhen sa Baclaran". It acted as the sole and exclusive distributor of the following motion pictures: (1) "Tatlong Baguio", (2) "Tubig na Hinugasan", (3) "Kundiman ng Luha", and (4) "Dalawang Bandila". Based upon reports of its examiners that some copies of the above-mentioned seven motion pictures were removed from the place of production without payment of the specific tax thereon, the Bureau of Internal Revenue forthwith issued to said Tamaraw Studios, Inc., the corresponding assessment and demand letters, Exhibits A, A-1; F, F-1; I and H. Said corporation was not able to pay in full the specific taxes assessed against it, so it put up surety bonds (Exhs. 10, 11, 12) executed by it, as principal, and by defendant Capital Insurance & Surety Co., Inc., as surety, to guarantee the payment of the specific taxes due on the following motion pictures: Motion Picture CISCO Involved Bond Date Amount No. Dalawang Bandila IR-2438 May 30, 1951 P1,500.00 Awa ng Birhen Sa Baclaran IR-4914 Sept. 30, 1952 2,000.00 Ang Aking Kahapon IR-4915 Sept. 30, 1952 2,100.00 On March 26, 1957, the Bureau of Internal Revenue demanded of said Tamaraw Studios, Inc., payment of the unpaid balance of the specific taxes assessed against it (Exh. K). Said entity did not pay; hence, this action, as already stated above. During the trial of the case, it was discovered that specific taxes due on the "Kundiman Ng Luha" (P1,295.96) and on the "Dahong Palay" (P1,500.00) had been fully paid, thereby reducing plaintiff's claim on the first cause of action to P4,383.32. The facts being as above narrated, this appeal cannot be successfully maintained. As already seen, the Bureau of Internal Revenue made the corresponding tax assessment against defendant Tamaraw Studios, Inc., and demanded payment of the taxes assessed. Said defendant made partial payments and put up bonds to guarantee the payment of the balance. Section 7 of Republic Act No. 1125 confers upon the Court of Tax Appeals exclusive appellate jurisdiction to review by appeal decisions or rulings of the Collector of Internal Revenue in cases involving disputed assessments; while Section 11 of the Act requires a taxpayer aggrieved by decision or ruling of said Collector to appeal to the Court of Tax Appeals within thirty days from receipt of such decision or ruling to impugn or contest the legality thereof. In the present case, the defendant taxpayer, Tamaraw Studios, Inc., not only did not appeal from the assessments made by the Bureau of Internal Revenue but made partial payment of the taxes assessed, thereby rendering the said assessments final, executory and demandable. It appearing from the evidence that the said Tamaraw Studios, Inc., was in possession of the films in question, its liability for the specific taxes thereon is unquestionable under Section 124 of the Tax Code which provides that "specific taxes on domestic products shall be paid by the manufacturer, producer, owner, or person having possession of the same." It may be true, as stated by appellant taxpayer, that it came into the possession of the films, as distributor, upon prior assurance by the producers to pay the tax due on the films. This can only mean that said taxpayer may hold the producers liable under their agreement, but such agreement has absolutely no effect upon the herein plaintiff which was not privy thereto. The discovery made by the revenue examiners regarding the films, "Tatlong Bagwis" and "Tubig na Hinugasan", took place sometime in August, 1955, and the taxes thereon were assessed on April 12, 1956 when letter of demand, Exhibit E, was made. Consequently, it is from this last mentioned date that the 5-year period prescribed by Section 332 (c) of the Tax Code should be counted within which to collect the specific taxes on said two films by judicial action. Insofar as the taxes on the films, "Dalawang Bandila", "Awa ng Birhen sa Baclaran" and "Ang Aking Kahapon", are concerned, the payment of which is guaranteed by surety bonds executed on May 30, 1961 (Exh. 10) and on September 30, 1962 (Exhs. 11 and 12), the action to enforce collection prescribes in 10 years, pursuant to Article 1144 of the Civil Code, notwithstanding the lapse of the 5-year period prescribed in the aforesaid Section 332 (c) of the Tax Code, because the giving of a bond to stay the collection of the taxes effected a substitution of a contractual obligation for the tax liability, giving a cause of action separate and distinct from the action for the collection of the taxes (See Merten's The Law on Federal Income Taxation, Vol. 10, pp. 151-152.) WHEREFORE, we hereby affirm the decision appealed from, the same being in accordance with the evidence and the law, with costs against the appellants. LibLex SO ORDERED. Piccio and Enriquez, JJ ., concur.