[ G.R. No. 19869. March 21, 1923 ] 44 Phil. 649
[ G.R. No. 19869. March 21, 1923 ]
ROBERT E. MURPHY, PLAINTIFF AND APPELLANT, VS. WENCESLAO TRINIDAD, AS COLLECTOR OF INTERNAL REVENUE, DEFENDANT AND APPELLEE. D E C I S I O N
STREET, J.:
This is an appeal from a decision of the Court of First Instance of the City of Manila in an action wherein the plaintiff, R. E. Murphy, seeks to recover of the defendant, Wenceslao Trinidad, as Collector of Internal Revenue, a sum of money which had been exacted from the plaintiff, and paid under protest by him, as internal-revenue taxes, upon the value of certain embroideries exported by the plaintiff from the Philippines between July 1, 1916, and July 1, 1921. To the amount involved in the tax proper the statutory penalty, equal to twenty-five per centum of the tax, and a fine of P200 had been added by the Collector; and the total amount protested and sought to be recovered herein is P15,895.93. At the trial in the Court of First Instance his Honor, Judge Geo. R. Harvey, held that the tax in question" was legally due and had been properly collected. He therefore absolved the defendant from the complaint, and the plaintiff appealed.
It appears from the pleadings and admitted facts that the American Import Company, of San Francisco, California, is extensively engaged in the exportation of embroideries from the Philippine Islands for sale in the United States; and the plaintiff, R. E. Murphy, during the period covered by the transactions now in question, was employed by said company as its supervising agent in these Islands, upon a commission of three per centum of the value of the labor expended in the embroidery work. It further appears that the company has adopted the plan of causing all its product from the Philippine Islands to be embroidered here by native workers under the supervision of the company’s agent, and upon material supplied by the company from the United States. For the purpose of securing a uniform quality of work, even the thread used in the embroidery is supplied by said company to the embroiderers, but for this a charge is made at cost price. In his capacity as agent, the plaintiff receives from San Francisco the goods to be embroidered, supervises the manufacture of the embroidered product, and returns the same from time to time in a finished state to the company in San Francisco.
In respect to the transactions thus conducted by the plaintiff for the American Import Company of San Francisco during the period of five years from July 1, 1916, to July 1, 1921, the said plaintiff made returns to the Collector of Internal Revenue, for the purposes of taxation under section 1459 of the Administrative Code, showing taxable transactions to the value of P339,544.59, consisting, first, of P36,691.94, the value of thread and damaged materials sold by the plaintiff in the Islands; and, secondly, of P302,852.65, the value of the labor expended upon the embroidery work prior to September of the year 1919. Upon these returns he was taxed accordingly and paid the tax without protest.
From the foregoing it will be seen that in the returns upon which the plaintiff was thus taxed, no account was taken of the value of the goods used in the making of the embroideries, and after September, 1919, no account was taken even of the value of the embroidery work.
It appears, however, that during the aforesaid period of five years the plaintiff caused to be embroidered cloth, belonging to the American Import Company of a total value of P597,248.31, upon which there was expended labor of a total value of P931,823.30, all of which was returned to the American Import Company from time to time during the said period at its office in San Francisco, California. The freight and cartage on said shipments amounted to P670.42; and the plaintiff earned as his commission during the same time the sum of P28,785.04.
In view of the facts stated in the preceding paragraph, the Collector of Internal Revenue, evidently assuming that the plaintiff had previously been underassessed, demanded payment of the tax of one per centum on the difference between the gross amount of P1,595,219.01 and the amount upon which the plaintiff had already been taxed (P339,544.59), that is to say, upon the amount of P1,255,674.41, thus claiming additional tax to the amount of P12,556.74, together with the statutory penalty of twenty-five per centum for delinquency, as prescribed in section 1458 of the Administrative Code, and a fine of P200, making in all the sum of P15,895.93. This amount the plaintiff paid under protest, and now sues to recover the same, under the authority granted in section 1579 of the Administrative Code.
The principal points of controversy are two, namely, first, whether the plaintiff Murphy (or his principal, the American Import Company of San Francisco) is liable in any event for the tax, commonly called the merchants’ tax, imposed by section 1459 of the Administrative Code; and, secondly, whether, assuming such liability to exist, the value of the goods upon which the embroidery work is done can be properly included in the taxable value of the manufactured product.
At the inception of the discussion we should note the fact that in the section referred to a tax of one per centum is imposed upon the gross value of goods sold, bartered, exchanged, or consigned abroad. The expression “consigned abroad,” as here used, means approximately the same as “exported;” and under the organic law here in force the Philippine Legislature’ has no power, without the express approval of Congress, to make a law imposing a tax on exports. But the provision now in question has been three times ratified by different Acts of the Congress of the United States, that is to say, first, as it originally stood in Act No. 2541, as amended by Act No. 2622 of the Philippine Legislature; secondly, as it now stands in section 1459 of the Administrative Code of 1917; and, thirdly and lastly, as it stood in section 1614 in the Administrative Code of 1916 (Acts of Congress of July 1, 1916; of June 4, 1918; and of June 5, 1920). There can therefore be no question as to the validity of said provision as it has stood at all times upon our statute books since its first enactment; and we may say that the Congressional Act of ratification of June 5, 1920, was passed by Congress after this court had decided the case of Smith, Bell & Co. vs. Rafferty (40 Phil., 691), and said decision was reversed by the Supreme Court of the United States, in so far as relates to the efficacy of section 1614 of the Administartive Code of 1916, solely because of said ratification by Congress pending the appeal.
And now, upon the point of liability for the tax that has been collected, we note the contention in the appellant’s brief that the plaintiff Murphy himself is not a “merchant.” This contention is undoubtedly correct if the plaintiff is considered without relation to the master that stands behind him. Individually the plaintiff is no merchant. But he is the agent and representative in the Philippine Islands of the American Import Company of San Francisco; and that the latter is a merchant in the sense intended in section 1459 of the Administrative Code is obvious.
The term “merchant” is there defined as a person engaged in the sale, barter, or exchange of personal property of whatever character, and it is declared that the term includes manufacturers who sell articles of their own production. The American Import Company fulfills every requirement of this definition because it is engaged in the manufacture of Philippine embroideries and exports the finished product for sale in the United States. The fact that the production and export of these embroideries is effected through the agency of the plaintiff Murphy and that the operations of the company in these Islands are conducted in his name in no wise alters the case. Nor is the further circumstance here material that the consignor or shipper of the goods from these Islands is Murphy and the consignee in the United States is the American Import Company. Where a consignment of goods is otherwise taxable, the tax should be assessed and collected regardless of the personality of the consignor or consignee. A shipment of goods abroad is no less taxable under this section, though consigned to the order of the shipper himself.
Upon the question whether the value of the material used as a base for the embroidery work should be taken into account in estimating the value of the finished product for the purposes of taxation under section 1459, we are clearly of the opinion that the proper answer is in the affirmative, and the Collector of Internal Revenue made no mistake in including said item in his estimate. The merchants’ tax, when paid by a manufacturer, should be computed upon all the elements of value in the finished product; and it would be singular indeed if a person residing in a foreign country could send his raw materials to his agent in this country to be here manufactured and then export the finished product free of tax on the basic material in competition with local manufacturers who are required to pay tax on the entire value. The possibility of so unjust a discrimination against local capital was foreseen by the lawmaker and defeated by the use of carefully chosen words in section 1459, for it is there declared that the tax shall be paid on the gross value of the goods, “whether consisting of raw material or of manufactured or partially manufactured products, and whether of domestic or foreign origin.” (Italics ours.)
It is hardly necessary to observe that in every case of manufacture the value of the basic or raw material represents an investment of capital which must be carried by someone, usually the manufacturer himself, during the process of manufacture; and there is no reason why a foreign company, buying its material in a foreign market, should not be required to carry the weight of the investment, when such material is sent to this country to be converted into a finished product, the same as a local manufacturer who buys his material here, or in any market.
Besides, as already pointed out, the case of the American Import Company, of California, falls squarely within; the letter of the statute; and in this connection we desire to quote a passage from an opinion of Lord Cairns, speaking in the House of Lords in Partington vs. Attorney-General (Law Reports, 4 H. L., 100, 122), in which the principle by which the courts should be guided in interpreting revenue laws is stated with notable force and perspicacity. Said his Lordship: * * * “As I understand the principle of all fiscal legislation, it is this: If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute.”
From any point of view the tax which was collected in this case was due to the Philippine Government from the American Import Company of San Francisco; and the circumstance that it has been collected nominally from the plaintiff Murphy should mislead no one. He has acted throughout as agent, and it is to be assumed, in the absence of proof to the contrary, that the money which went into the public coffers belonged to his principal. Besides, as consignor of the exported product, the plaintiff was apparently the person directly responsible to the Collector for the taxes due on the several consignments.
We note that in his estimate of the value of the exported embroideries, the Collector adopted the gross cost of production, including the value of material, work done, commissions of plaintiff, freight, and cartage. The last three of these items are of course merely incidental expenses and are not per se contributory to value. The value assessed by the Collector, however, cannot be said to be excessive, since all the elements entering into the cost of production are merely items of proof upon which the Collector based his estimate, and the true value of the exported articles cannot be supposed to be less than the sum of all the elements of cost going1 into production and exportation.
Upon one point alone do we consider that error has been committed. This relates to the fine of P200 imposed on the plaintiff by the Collector and included in the amount which was paid by the plaintiff under protest. The question of liability for this fine seems not to have been called to the attention of the trial judge, and for that reason was evidently overlooked by him.
The imposition of this fine by the Collector serves as a reminder of a practice sanctioned by the Internal Revenue Law of 1904 (Act No. 1189), and the Collector no doubt supposed the same practice to be permissible under the Internal Revenue Law now in force. The history of the legislation on the subject is this: Under various provisions of the Internal Revenue Law of 1904 (Act No. 1189), the Collector had authority to impose administrative fines of varying proportions for sundry delinquencies on the part of persons liable for internal-revenue taxes; and although the person subjected to such a fine had a right of appeal to the Court of of First Instance (Act No. 1189, sec. 54), the Code Committee, when engaged in the revisal of that Act for incorporation in the Administrative Code did not look with favor on this feature of the law. Accordingly the Code Committee proposed to the Collector of Internal Revenue to eliminate the administrative fine altogether and in lieu thereof to insert a general provision, such as is contained in section 2741 of the Administrative Code of 1917, imposing a penalty, to be enforced by the courts, for the violation of any provision of the Internal Revenue Law or of any lawful regulation of the Bureau of Internal Revenue for which no specific penalty was provided by law. This proposal met the approval of the Collector; and the administrative fine disappeared from our fiscal system with the adoption of the Internal Revenue Law of 1914, an Act prepared by the Code Committee and embodying the feature we have mentioned. The individuals responsible for this change in the law were of the opinion that the practice of allowing the Collector to impose fines in his discretion, even though within moderate limits, was objectionable. It certainly was not in harmony with legislation in the United States and is said to have been originally here adopted from the fiscal practices of the Government of Mexico. However that may be, the administrative fine has clearly ceased to be, imposable in this country, and the judgment appealed from must be corrected to the extent of allowing a recovery for the amount paid as such fine.
For the reasons stated, the judgment appealed from will be affirmed with respect to the tax and penalty thereon paid under protest, and reversed to the extent of the fine; and judgment will be entered for the plaintiff to recover of the defendant the sum of P200, but without interest, pursuant to section 1579 of the Administrative Code, and without costs. So ordered.
Araullo, C.J., Malcolm, Avanceña, Ostrand, and Romualdez, JJ., concur.