Republic v. Macondray & Co., Inc.

[Manila Civil Case No. 18013. September 28, 1956.] REPUBLIC OF THE PHILIPPINES , plaintiff, vs . MACONDRAY & CO., INC., and FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS , defendants . D E C I S I O N Republic Act No. 1125 requires that all cases involving disputed assessment of internal revenue taxes pending determination before the Court of First Instance at the time of the creation of the Court of Tax Appeals be certified and remanded to this Court for final disposition. This is one of those cases. cdll This action was instituted by the Republic of the Philippines upon the instance of the Collector of Internal Revenue to collect from defendant Macondray & Company, Inc. (hereinafter referred to as MACONDRAY) the sum of P587.60 as alleged unpaid percentage tax due from it pertaining to 1933 and the sum of P2,844.46 as 25 percent surcharge for late payment of the percentage taxes for the second quarter of 1948. The Fidelity & Surety Company of the Philippine Islands (hereinafter referred to as FIDELITY) was joined as co-defendant for the purpose of obtaining the forfeiture of surety Bond Nos. 223-49 and 225-49 (Annexes "A" and "B" of Complaint) issued by it in favor of the Republic of the Philippines. Under said bonds FIDELITY as surety bound itself solidarily with MACONDRAY, as principal to the performance of the obligation of the latter to pay the percentage tax and surcharge first mentioned above in the event the final decision is against said principal. The FIDELITY filed its answer to the complaint with a cross-complaint against co-defendant MACONDRAY. The latter has in effect admitted liability to the cross-complaint in the event plaintiff's principal action will prosper. At the time this case was remanded to this Court pursuant to Republic Act No. 1125, all parties had filed their respective pleadings and the issues therefore already joined. There is no dispute as to most of the facts of the case as the parties had entered into the following stipulation of facts: "Without prejudice to presenting such evidence as the parties may deem necessary, they hereby submit the following stipulation of facts: "1. The plaintiff is a political entity with juridical capacity to sue and with principal office in the City of Manila; "2. Defendants Macondray & Co., Inc. & Fidelity & Surety Company of the Philippine Islands are both corporations duly organized and existing under and by virtue of the laws of the Philippines with their principal offices in the City of Manila; "3. On or about January 31, 1949, defendants subscribed to a bond in favor of the Collector of Internal Revenue, marked Annex 'A' of the complaint to guarantee the payment of the sum of five hundred eighty seven and 60/00 pesos (P587.60), for alleged taxes due if payment thereof is finally decided against Macondray & Co., Inc.; "4. The only record of the plaintiff of the supposed tax assessment against Macondray & Co., Inc. is an index card, in words and figures as follows: 'BIR FORM NO. 27.05 MACONDRAY & CO., INC. Municipality Cebu Province Cebu Schedule C Date of Letter 2/25/1933 Paragraph 6 Tax- 1-% P470.08 Surcharge 25% 117.52 P587.60' "5. On January 31, 1949, the defendants executed another bond marked Annex 'B' of the complaint in favor of the Collector of Internal Revenue to answer for the sum of two thousand eight hundred forty four and 46/100 pesos (P2,844.46), representing twenty five per cent (25%) alleged surcharge for late payment of percentage tax for the second quarter of 1948 if payment thereof is finally decided against Macondray & Co., Inc.; "6. The percentage tax due the plaintiff from defendant Macondray & Co., Inc. for the second quarter of 1948, amounted to one hundred seventy seven thousand fifty eight and 26/100 pesos (P177,058.26), this amount being payable during the first twenty (20) days of July, 1948; "7. That during the first twenty (20) days of July, 1948, defendant Macondray & Co., Inc. has paid to the Bureau of Customs the sum of eleven thousand two hundred ninety seven and 85/100 pesos (P11,297.85) as advance sales tax on importations during the said first twenty (20) days of July 1948, which is within the third quarter of 1948; "8. That the defendant Macondray & Co., Inc. applied the sum of eleven thousand two hundred ninety seven and 85/100 pesos (P11,297.85) to the portion of the taxes due during the first twenty (20) days of July 1948, thereby leaving a balance of one hundred sixty five thousand seven hundred sixty and 41/100 pesos (P165,760.41), which was paid on July 20, 1948, by the company, as follows: Official Receipt No. 107501 P148,780.00 Official Receipt No. 107500 6/10/1929 Official Receipt No. 107499 6,225.90 P165,760.41" In connection with its liability for surcharge MACONDRAY presented its accountant, Manuel Miranda, who testified that before paying the percentage taxes for the second quarter of 1948, he inquired from the Office of the Bureau of Internal Revenue whether the advance sales tax paid by it during the first twenty (20) days of July 1948 may be applied to the amount of tax due for the second quarter of 1948. Miranda testified further that he received an affirmative reply, so in making payment of taxes for the second quarter of 1948, a statement of the same was submitted to the City Treasurer (Exhibit "1") purporting to show the tax liability of MACONDRAY for the second quarter of 1948 after deducting advance sales tax in the amount of P11,297.85 paid by it during the first twenty days of July 1948. He also testified that in paying the taxes for MACONDRAY corresponding to the third quarter of 1948, the said P11,297.85 previously taken up as above was not discounted in the computation of the tax liability for that quarter (see Exhibit "2"). The Collector of Internal Revenue thus treated the payment for taxes on the second quarter of 1948 as paid only after the due date of July 20, 1948. From the foregoing we are called upon to consider the following issues: 1. Whether defendant MACONDRAY may be held liable for the alleged unpaid percentage tax of P587.60 on the basis of an index card (Exhibit A); and 2. Whether the amount of P11,297.85 paid as advance sales tax during the third quarter of 1948 may be applied for the payment of the taxes due for the second quarter of 1948. The first issue centers upon an index card (Exhibit A) which were among the pre-war records of the Bureau of Internal Revenue salvaged by it upon liberation. The card purports to be a memorandum record of a letter sent to MACONDRAY on February 25, 1933 demanding payment of percentage tax and surcharge in the amount of P587.60 and does not contain any entry that the same had been paid. On this alone, the plaintiff herein contends that the index card is sufficient to support the claim against MACONDRAY for such alleged unpaid tax obligation on the ground that the said card is a public record with entries therein being made in the regular course of business, and therefore entitled to full faith and credit. MACONDRAY, on the other hand, denies this obligation of P587.60 and argues that the index card is inadequate to support the government's claim. By way of special defense, MACONDRAY maintained further, that the plaintiff is guilty of laches in enforcing the collection of the tax liability. We find defendant's contention meritorious. In the case of Warner, Barnes & Co., Ltd. vs. Collector of Internal Revenue, B.T.A. Case No. 51, decided by the defunct Board of Tax Appeals on July 1, 1952, involving the question of the use of index cards as the basis of a tax liability, the Board said: "The issue here is this: Can a taxpayer be required to pay taxes, dating as far back as fifteen years on the basis of a notation in an index card, a secondary record, a 'record of a record?' Can he be made to pay a percentage tax on nobody knows what price? We are inclined to answer these questions negatively. It seems to us highly improbable that during the long lapse of time between the making of the index card and the demand for the payment of the taxes alleged to be due these cards should not have been noticed by any official of the Internal Revenue and no action should have been taken in an attempt to collect the not insignificant amount of nearly seventeen thousand pesos. We would rather believe that the present record cover taxes already paid by the petitioner and which payment had been entered in the main record but not in the index card." In the case of Republic of the Philippines vs. Philippine Manufacturing Co., (Manila Civil Case No. 19602, March 19, 1955) involving substantially the same question, this Court concurred in the above view and thus held: "It is true that taxpayers should not be allowed to take undue advantage of the loss or destruction of important records of the Government by disclaiming responsibility for tax obligations merely because of the failure of tax officials to produce the main records of a case, but side by side with the supreme and inherent power of the State to collect taxes is the right of a citizen not to be deprived of his property without due process of law. (Sec. 1 par. 1, Art. III Constitution of the Philippines). A demand for alleged deficiency tax which is uncertain, vague and indefinite deprives the taxpayer of the right to question the legality and validity of the assessment and in effect would deprive him of his property without due process of law. In the instant case the Collector of Internal Revenue would require the Philippine Manufacturing Company to pay a tax without informing the latter why and for what it is being taxed. And the company has no means of knowing whether the tax demanded is valid or invalid, paid or unpaid. In the last analysis, the defendant Philippine Manufacturing Company is deprived of the means by which it can question the legality of the demand of the Collector of Internal Revenue. . . In justice and fairness to the defendant, Philippine Manufacturing Company, we believe that it is entitled to know the tax for which it is being required to pay, its source and the manner the obligation was arrived at, so that it could have a basis in determining not only its legality but also the correctness of the amount." We see no reason to depart from our previous ruling and therefore find that the defendant MACONDRAY cannot be held liable for the alleged unpaid percentage tax for 1933 in the amount of P587.60 on the sole basis of the index card (Exhibit A). Moreover, even assuming that there was in fact such an unpaid liability for percentage tax due in 1933, we nevertheless find that the revenue officials have failed to collect the tax within the statute of limitations applicable in the premises. Since the tax had already been assessed at the time the National Internal Revenue Code took effect on July 1, 1939, MACONDRAY was thereby entitled to the benefits of the prescriptive period given in section 332 therein. The fact that the government failed to exercise the right to collect the tax herein involved within the prescribed period of five years thereby bars the collection thereof and constrains this Court to hold that these is no longer a deficiency in respect of such tax (Sec. 14, Republic Act No. 1125). We now proceed to the other issue. Plaintiff claims that the advance sales tax paid by MACONDRAY during the third quarter of 1948 cannot be applied to the taxes due for the second quarter of the same year. MACONDRAY on the other hand argues that this may be done under Section 183-B of the National Internal Revenue Code as amended by Republic Act No. 253. This codal provision reads: "(B) Advance payment of the sales tax on imported and locally produced and manufactured articles. In the case of imported articles, the percentage taxes established in sections one hundred eighty four, one hundred eighty five, and one hundred eighty six of this Code shall be paid in advance by the importer, in accordance with regulations promulgated by the Secretary of Finance and prior to the release of such articles from customs' custody based on the total value thereof at the time they are received by the importer, including freight, insurance, commission, customs' duty, and all similar charges. In the case of locally produced or manufactured articles, the percentage taxes established in the said sections shall likewise be paid in advance on the total value thereof prior to removal from the producer's or manufacturer's warehouse. The amount so paid in advance in accordance with this sub-section, shall be credited against the percentage taxes due on the sales by the taxpayer for each calendar quarter. (As amended by Section 1, Republic Act No. 253.)" Section 5 of Revenue Regulations No. V-3 promulgated in pursuance of the above law, provides thus: "Section 5. Quarterly return and payment of sales tax . It shall be the duty of every importer, manufacturer or producer, within twenty days after the end of every calendar quarter, to make a true and complete return of the amount of the gross sales during the preceding calendar quarter and pay the tax due thereon (Sec. 183-A). National Internal Revenue Code, as amended by Republic Act No. 253). The amount paid in advance by importers, manufacturers and producers shall be credited against the percentage taxes due on their sales for each calendar quarter. (Sec. 183, id.)" (Published 44 O.G. No. 5, p. 1459). From the aforecited statutory rule and the implementing regulation, it is clear that the advance sales tax paid by importers, manufacturers and producers may be credited against the percentage taxes due on the sales by them for each calendar quarter. Contrary to the claim of MACONDRAY said advance sales taxes can be applied only to percentage taxes corresponding to the quarter in which they were paid. In the instant case, MACONDRAY paid as advance sales taxes the sum of P11,297.85 during the third quarter of 1948 and applied it to percentage taxes due for the second quarter contrary to the aforecited provision of law and regulation. There is no question that the sum of P11,297.85 paid as advance sales tax is deductible but the crux of the matter is the particular quarter in which it is to be applied. In this case, the credit should not have been made against the percentage taxes due for the second quarter. Thus, MACONDRAY cannot be considered as having fully paid on the due date of July 20, 1948 the taxes corresponding to the second quarter of 1948 and should therefore be liable for the 25% surcharge for late payment thereof. llcd Defendant MACONDRAY further contends that the 25% surcharge should not be imposed because it partakes of the nature of a penalty based on the nonfulfillment of a principal obligation, and argues that upon the satisfaction of such obligation, it follows that the subsidiary liability attached thereto is also extinguished. We believe this contention of defendant to be without merit. Paragraph (A) of Section 183 of the Tax Code provides: "The percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted during each quarter; . . ." "If the percentage tax on any business is not paid within the time prescribed above, the amount of the tax shall be increased by twenty-five per centum, the increment to be a part of the tax." It is apparent from the above rule that when MACONDRAY made payments on its tax liability, the percentage taxes for the second quarter should have been paid in full. Having failed to do so, it became liable not only for the tax deficiency but also for the penalty which is to be paid as part of the tax. The imposition of this surcharge for late payment as an increment of the tax is mandatory or operates automatically and the Collector of Internal Revenue or even this Court has no discretion in the matter (Lim Co Chiu v. Posadas, 47 Phil. 460; Koppel v. Collector, 48 O.G. No. 1, p. 98). We therefore find and so hold MACONDRAY liable for the 25% surcharge for late payment of percentage tax corresponding to the second quarter of 1948 in the amount of P2,844.46. By virtue of the surety bond provided by defendant FIDELITY (see Annex "B" of Complaint) it bound itself to be jointly and severally liable, with defendant MACONDRAY for the payment of the tax liability of P2,844.46 in the event the final decision is against the latter as principal. However, under an indemnity agreement (Annex "2", Answer with Cross-claim) FIDELITY is entitled to indemnification from MACONDRAY for whatever is paid by the former under the bond which obligation the latter admits (par. 3, Answer to Cross-claim). Finding that MACONDRAY is liable for the sum of P2,844.46, we are of the opinion and so hold that FIDELITY is likewise liable jointly and severally for the said amount of P2,844.46 by virtue of the bond it executed in favor of plaintiff. However, in the event FIDELITY shall pay the said tax liability of P2,844.46 unto the herein plaintiff by virtue hereof we further hold that the former should be entitled to reimbursement from MACONDRAY under the cross-claim. Suffice it to say that jurisdiction over the subject matter and the parties once acquired by the Court of First Instance the same may not be lost, we have therefore determined accordingly the right of plaintiff against FIDELITY as well as the cross-claim of FIDELITY against MACONDRAY. IN VIEW OF THE FOREGOING, Macondray & Company, Inc. together with the Fidelity & Surety Company of the Philippine Islands are hereby ordered to pay jointly and severally the sum of P2,844.46 to the plaintiff Republic of the Philippines thru the Collector of Internal Revenue. The defendants are hereby absolved of the plaintiff's claim of P587.60 and the bond executed by defendants for said sum is hereby declared of no effect. In the event the defendant Fidelity & Surety Company of the Philippine Islands should pay the herein sum of P2,844.46 unto the plaintiff, the defendant Macondray & Company, Inc. is hereby ordered to reimburse the said Fidelity & Surety Company the same amount. With costs against defendants. SO ORDERED. MARIANO NABLE Presiding Judge I CONCUR: AUGUSTO M. LUCIANO Associate Judge Separate Opinions UMALI , J . , dissenting : I reiterate the view expressed in my dissenting opinion in the cases of Republic of the Philippines vs. Limaco & De Guzman Co., Inc., et al., Manila Civil Case No. 18859, decided by this Court on January 16, 1956, and Republic of the Philippines vs. Sarile, et al., Manila Civil Case No. 9839, decided by this Court on January 18, 1956. For this reason, I vote to have the records of this case returned to the court of origin for proper disposition thereof. cdpr