Implementing Guidelines of Section 31 of the Republic Act No. 11223 on the Processing and Submission of Health and Health-related Data

[C.T.A. CASE NO. 269. August 12, 1958.] CANTILAN LUMBER COMPANY , petitioner , vs. THE COLLECTOR OF INTERNAL REVENUE , respondent . D E C I S I O N The Collector (now Commissioner) of Internal Revenue assessed against the petitioner the sum of P21,539.26 as compensating tax on machinery, equipment and supplies allegedly acquired by the latter from the United States Government through the Manila Engineer District. cdta The facts, as related by counsel for respondent, are as follows: "On June 17, 1946, the Cantilan Lumber Company entered into a contract with the United States of America, thru the Manila Engineer District, for the supply by the former to the latter of a minimum of 2,400,000 board feet of timber. To enable the Cantilan Lumber Co. to perform the terms of the contract, the United States Government promised to furnish the lumber company the machinery, equipment and supplies at prices to be agreed upon by both parties. "Pursuant to this contract, the U.S. Government thru the Manila Engineer District, furnished the Cantilan Lumber Co. during the 4th quarter of 1946 and 1st quarter of 1947 various equipment, such as sawmill machinery, trucks, power control unit, tractors, arch, generator, welder arc, materials and supplies with a total value of P262,857.78. The respondent Collector of Internal Revenue in his letter dated May 31, 1947 (Exhibit D for Pet.) demanded from the Cantilan Lumber Company payment of the sum of P13,142.89 as compensating tax on the aforesaid articles. "Subsequently, the Manila Engineer District made several deliveries, thus increasing the value of the article delivered to P455,078.62. Agent Castor Jonko reported a reduction in the value of the machinery and equipment due to the return of some equipment, thereby reducing the value to P430,785.28. (Exh. 6 Respondent). Based on this amount, respondent in his letter dated September 14, 1954 (Exh. K for Pet.), assessed the amount of P21,539.26 (5% of P430,785.28) as compensating tax. This demand superseded the original demand dated May 31, 1947. "The original contract No. W-2557-eng-409 was modified by a supplemental agreement dated July 16, 1947 otherwise known as modification No. 1 and supplemental agreement dated June 25, 1948 known as Modification No. 5. Modification No. 1 described the items delivered by the MANED to the Cantilan Lumber Company and provided that payment for all items so delivered would be made by the U.S. government withholding any amount which became due the contractor under the contract until the full price for said items had been paid. It also extended the term of the contract to June 30, 1948. Modification No. 5 made a change in the manner of delivery of the lumber and extended the term of the original contract to May, 1949. "In the meantime, the Cantilan Lumber Company has undergone several changes. The Cantilan Lumber Company, a partnership composed of Nelson E. Kellog and Alfonso N. Villalba was dissolved as of August 12, 1948 as per agreement executed on September 30, 1948 by the partners, whereby Mr. Kellog bought all the interest of Mr. Villalba for P80,000.00 (Exh. 15 for Respondent, Exh. 1 for Petitioner). One of the conditions of the sale was that Mr. Kellog agreed to assume and pay all the debts and liabilities of the partnership. On October 29, 1948, the Cantilan Lumber Company was organized as a corporation for the purpose of taking over the entire lumber business previously operated by the aforesaid partnership, together with all the equipment, buildings and other properties or assets appertaining thereto. (Exh. 9 for resp., Exh. A2 for Pet.) As per Deed of Sale executed by the parties, Mr. Nelson E. Kellog in consideration of P160,000.00 sold, assigned, transferred and conveyed to the Cantilan Lumber Company (the corporation) as of November 1, 1948 all the lumber business heretofore carried on by the former partnership of Kellog and Villalba under the name and style of Cantilan Lumber Company and of which Mr. Kellog subsequently became the sole owner, all the equipment, engines, machinery, whether fixed or movable, tools and accessories, plant, buildings and lumber, books of accounts and other credits, contracts, including contract No. W-2557 and 2409, dated June 17, 1946, with the Government of the United States of America for the supply of Philippine hardwood, and other assets appearing on the books of account and inventories of said business as of August 12, 1948. (Exh. 16 for Resp., Exh. J for Pet.) "In consideration of the foregoing sale, assignment, transfer and conveyance, the Vendee, petitioner herein, agreed: (a) To issue fully paid and non-assessable shares of its capital stock with an aggregate value of P160,000.00 or 1,600 shares of the par value of P100.00 each; and (b) To discharge all lawful debts and liabilities of the Vendor in relation to said lumber business as shown by the books of the firm as of the date of said transfer. "As early as May 31, 1947, respondent demanded payment of the compensating tax on the abovementioned machinery, equipment and supplies. However, collection of the aforesaid sum of P21,539.26 as compensating tax could not be made as the Cantilan Lumber Company (the partnership as well as the corporation), thru its general manager Mr. Kellog, interposed the defense that the machinery and equipment are still owned by the United States Government (Exhs. 13 and 24 for resp). This fact is corroborated by the following documents: " Exh . 14 for respondent This is the letter of H. C. Medlock of the Office of the District Engineer, Manila District, APO 900 address to the Bureau of Internal Revenue informing the respondent that title to the machinery and equipment will not be transferred to the Cantilan Lumber Company until complete payment is made which is expected to take several more months. cdti " Exh . 21 for respondent 4th Indorsement dated June 16, 1952 of Agent Ildefonso G. Infante, found on p. 55 of the BIR records, informing the Office that no absolute transfer of the equipment from the MANED to the Cantilan Lumber Company has been made due to protracted negotiation being undertaken by the Cantilan Lumber Company (the corporation) in order to reduce the price of the equipment. " Exh . 22 for respondent 2nd Indorsement of Examiner Teofilo Alcordo dated November 29, 1952 found on p. 67 of the B.I.R. records, informing the Office that no formal transfer of title to the machinery has been effected. "On September 14, 1954, respondent Collector of Internal Revenue, in his letter addressed to the Cantilan Lumber Co. again demanded payment of the sum of P21,539.26 as compensating tax on the machinery and equipment in question. The petitioner, Cantilan Lumber Company (the corporation), in its letter addressed to the Bureau of Internal Revenue dated October 21, 1954 , and signed by G. W. Bayer as General Manager, replied that the corporation has not obtained title to the property inasmuch as it was still indebted to the U.S. and requested respondent to hold this matter in abeyance until they hear from Washington regarding their claim in order that they can ascertain the final and actual amount of the compensating tax for which it may be liable. "The evidence on record show that title to the machinery and equipment was transferred to the Cantilan Lumber Company when it was already a corporation, on May 11, 1954, as evidenced by the letter of the Acting Comptroller General of the United States addressed to Messrs. Wolf, Block Schorr and SolisCohen, attorney for the Cantilan Lumber Corporation dated May 11, 1954. (Exh. U. for Petitioner). "On November 18, 1955, the Deputy Provincial Treasurer of Surigao, acting upon instruction of the respondent, seized the following property: One (1) Unit Sawmill, complete with edger 7- "American" P43,000.00 One (1) Unit Caterpillar Power Plant D-17000 8 cyl. camp P16,000.00 P59,000.00 ========= pursuant to the Warrant of Distraint and Levy issued on December 6, 1954 by the respondent to satisfy the sum of P21,539.26 due from petitioner as compensating tax. (Par. 4, Petition for Review). "On November 28, 1955, petitioner thru its counsel, requested that the assessment in the amount of P21,539.26 against it be withdrawn or cancelled and that the warrant of distraint and levy upon its property be lifted. On March 27, 1956, respondent rendered his decision denying petitioner's request. Hence, this appeal." It is admitted that the Cantilan Lumber Company, a partnership organized by Nelson E. Kellog and Alonso M. Villalba sometime in 1946, hereinafter referred to as the "Partnership,", is distinct and different from the Cantilan Lumber Company, a corporation organized on September 30, 1948 by Alex Frieder, Robert Frieder, Jose Macias, Arturo R. Reyes and J. R. Balongkita, hereinafter referred to as the "Corporation." It is also admitted that the machinery, equipment and supplies in question were purchased and received by the Partnership, although final payment for the same was made by the Corporation, petitioner herein, by virtue of an agreement between Nelson E. Kellog and the Corporation whereby Kellog transferred the assets of the Partnership, previously acquired by him, to the Corporation, and the latter assumed the obligation of paying the balance of the purchase price to the U.S. Government. In this appeal, petitioner contends that it is not the one liable for the payment of the compensation tax but the Partnership and, assuming that it is so liable, the right of the Government to collect the tax has prescribed. On the other hand, respondent claims that it is petitioner which is liable for the payment of the tax and that the right to collect the same has not prescribed. As formulated by counsel for respondent, two issues are presented for resolution by this Court, to wit: I. Is the petitioner, Cantilan Lumber Company (the Corporation), liable for the payment of the compensating tax amounting to P21,539.26 on the machinery, equipment and supplies in question? II. Has the right of the Government to collect the aforesaid tax prescribed? (Pp. 6-7, Memorandum for Respondent.) The compensating tax is imposed by Section 190 of the Revenue Code, which provides: "SECTION 190. Compensating tax . All persons residing or doing business in the Philippines, who purchase or receive from without the Philippines any commodities, goods, wares, or merchandise, excepting those subject to specific taxes under Title IV of this Code, shall pay on the total value thereof at the time they are received by such persons, including freight, postage, insurance, commission, and all similar charges, a compensating tax equivalent to the percentage tax imposed under this Title on original transactions effected by merchants, importers, or manufacturers, such tax to be paid upon the withdrawal or removal of said commodities, goods, wares, or merchandise from the customhouse or the post office . . . ." The rule is well established that under this law, articles purchased from the U.S. Government, or from any of its agencies or instrumentalities in the Philippines, are subject to the corresponding compensating tax, sales tax, or specific tax, as the case may be. (Go Cheng Tee v. Meer, G. R. No. L-2825, July 17, 1950; Saura Import and Export Co., Inc. v. Meer, G. R. No. L-2927, January 26, 1951; P. M. P. Navigation Co. v. Meer, G. R. No. L-4621, March 24, 1953; A. Soriano y Cia. v. Collector, G. R. No. L-5896, August 31, 1955, 51 O.G. 4548.) However, it is alleged on behalf of respondent that the compensating tax accrues and becomes payable only after the complete transfer of title to the articles from the U.S. Government to the purchaser. In this case, it is claimed that title to the articles in question was transferred only when the purchase price was fully paid by petitioner. Hence, it is petitioner which is subject to the tax. The position taken by respondent finds no justification in the wording of the law. The law imposes the compensating tax upon commodities, goods, wares or merchandise, except those specifically exempted, purchased or received from without the Philippines. There is nothing in the law which requires that for the tax to accrue it is essential that absolute title to the property be transferred from the person from whom it is purchased or received to the person who purchased or received it. It is enough for a person to be subject to the compensating tax that he purchased or received a taxable article from without the Philippines. Who purchased or received the articles in question from the U.S. Government? Undoubtedly, it was the Partnership and not the petitioner. The fact that the purchase price of said articles was not fully paid by the Partnership does not alter the fact that the articles were purchased and subsequently received by it. Accordingly, it is the Partnership which under the law and the facts of the case is liable for the payment of said tax. cdt We find no merit in the allegation that "Since the compensating tax due on the said articles has not been paid, the importation thereof is not deemed completed in accordance with the above-mentioned provisions of Section 1248 of the Revised Administrative Code. Accordingly, the corporation which is in actual possession of the machinery and equipment and to whom title thereto was transferred by the U.S. Government, is liable for the payment of the compensating tax. Since the corporation, petitioner herein, failed to pay the aforesaid tax, respondent has the right to forfeit the said property to satisfy the liability due the Government." (Page 11, Memorandum for Respondent.) Evidently, it is the theory or respondent that until the compensating tax has been paid an article is not deemed imported or "received from without the Philippines", pursuant to Section 1248 of the Administrative Code. 1 If this theory is correct, then the compensating tax on the articles in question has not accrued until now, because the tax has not as yet been paid; and if petitioner should sell said articles to another, without paying the tax, the tax may again be assessed against the transferee. We do not think any one can admit the soundness of this proposition. At any rate, the Supreme Court has recently held that Section 1248 of the Administrative Code does not apply to cases involving the compensating tax, the said law having been enacted for the purpose of determining the accrual of the import "duties due upon the merchandise". (Collector of Int. Rev. v. Viduya, G. R. No. L-10808, February 28, 1958.) Having found that petitioner is not subject to the compensating tax on the articles purchased and received by the Partnership, respondent was without authority to enforce collection of the tax against petitioner by distraint of its personal property. Section 318 of the Revenue Code which empowers respondent to distraint personal property limits such power to the seizure of personal property belonging to the "person owing any delinquent tax or delinquent revenue". It does not extend to property belonging to a person who is not the delinquent taxpayer, as petitioner in this case. Of course, from the evidence of record, it appears, that petitioner is not an innocent purchaser of the articles in question, it having acquired said articles from Nelson E. Kellog with knowledge of the tax obligation of the Partnership, but this fact does not make petitioner personally liable for the tax. (See Hongkong & Shanghai Banking Corporation v. Rafferty, 39 Phil. 145; Pio Barreto Sons, Inc. v. Collector of Internal Revenue, C.T.A. No. 75, Nov. 1956.) Since the articles were acquired by petitioner subject to the lien for the compensating tax, the proper remedy is the institution of an action to enforce the lien on whatever property subject thereto before the lien is extinguished, if respondent wants to proceed against petitioner and not against the Partnership or the partners Nelson E. Kellog and Alonso M. Villalba, or any one of them. Petitioner not being liable for the compensating tax assessed against it, we deem it unnecessary to pass upon the question whether or not the right of the Government to collect the tax has prescribed. FOR THE FOREGOING CONSIDERATIONS, the decision appealed from is hereby reversed and the distraint of the personal property belonging to petitioner set aside. No pronouncement as to costs. SO ORDERED. ROMAN M. UMALI Associate Judge WE CONCUR: MARIANO NABLE Presiding Judge AUGUSTO M. LUCIANO Associate Judge Footnotes 1. Section 1248 of the Administrative Code provides: "Importation by sea begins when the importing vessel enters the jurisdictional waters of the Philippines with intention to unlade therein, and is not completed until the duties due upon the merchandise have been paid or secured to be paid at a port of entry and the legal permit for withdrawal shall have been granted, or, in case said merchandise is free of duty, until it has legally left the jurisdiction of the customs."