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Case Digest: Republic of the Philippines v. Sps. Marcelino (2019)

Republic of the Philippines v. Sps. Marcelino
G.R. No. 205473, December 10, 2019
SC First Division
Caquioa, J

Lessons Applicable:  Capital Gains Tax on Expropriation
Laws Applicable: Section 6 Rule 67

•    RTC Order dated August 23, 2012 and Order dated January 10, 2013 directed the expropriation of a 100 sqm. Lot in Valuenzuela City covered by Transfer Certificate of Title (TCT) No. V-16548 issued in the name of Sps. Marcelino and Sps. Bunsay and orderining Department of Public Works and Highways (DPWH) to pay Sps. Bunsay consequential damages equivalent to the value of the capital gains tax (CGT) and other taxes necessary to transfer the Disputed Property in its name.
•    Department of Public Works and Highways (DPWH) filed a Motion for Partial Reconsideration (MPR) praying for the deletion of the award for just compensation representing replacement cost of improvements and equivalent value of CGT and other taxes necessary to transfer
•    RTC granted the MPR in part by excluding the replacement cost of improvements
•    DPWH filed a Petition for review on certiorari filed under Rule 45 of the Rules of Court against the Order dated August 23, 2012 and Order dated January 10, 2013

ISSUE: W/N RTC award for consequential damages should include equivalent value of CGT and other taxes necessary to transfer

HELD:  NO.  While award of consequential damages equivalent value of CGT and other taxes necessary to transfer must be struck down for being erroneous, it is just and equitable to direct Republic to shoulder such taxes to preserve the compensation awarded as a consequence of the expropriation.  Compensation, to be just, must be of such value as to fully rehabilitate the affected owner; it must be sufficient to make the affected owner whole.

•    CGT, being a tax on passive income, is imposed by National Internal Revenue Code (NIRC) on the seller as a consequence of the latter’s presumed income from the sale or exchange of real property.  However, the transfer of real property by way of expropriation is not an ordinary sale contemplated under Art. 1458 of the Civil Code.  It is akin to a “forced sale” or one which arises not from consensual agreement of the vendor and vendee, but by compulsion of law.  Unlike in an ordinary sale wherein the vendor sets and agrees on the selling price, the compensation paid to the affected owner in an expropriation proceeding comes in the form of just compensation determined by the court.  Just compensation is defined as the fair and full equivalent of the loss incurred by the affected owner.
•    Section 6 Rule 67 of the Rules of Court mandates that in no case shall xxx the owner be deprived of the actual value of his property so taken.  Since just compensation requires that real, substantial, full and ample equivalent be given for the property taken, the loss incurred by the affected owner necessarily includes all incidental costs to facilitate the transfer of the expropriated property to the expropriating authority including the CGT, other taxes and fees due on the forced sale. 

Taxation Case Digest: Association of International Shipping Lines v. Sec. of Finance (2020)

Association of International Shipping Lines v. Sec. of Finance
G.R. No. 222239, January 15, 2020
SC First Division
Lazara-Javier, J.

Lessons Applicable: Res judiciata, Petition for Declaratory Relief, Income tax and VAT on demurrage and detention fees, Interpretative and internal rule

Laws Applicable: CA 55, RA 9337, RMC 31-2008

  • July 1, 2005: Republic Act No. 9337 (RA 9337) was enacted amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the 1997 National Internal Revenue Code, as amended. (NIRC)
  • January 30, 2008: Commissioner of Internal Revenue (CIR) Lilian Hefti issued Revenue Memorandum Circular No. 31-2008 (RMC 31-2008) seeking to clarify certain provisions of the NIRC with portions, to wit:  
    • Q-3: Are on-line international sea carriers subject to VAT?
    • A-3:    No. On-line international sea carriers  are  not  subject  to  VAT  they  being subject to percentage tax under Title V of the Tax Code. xxx However, if these on-line international sea carriers engage in other transactions not exempt under Section 119 of the Code, they shall be liable to the twelve percent (12%) VAT on these transactions. 
    • Q-4: Are demurrage fees collected by on-line international sea carriers due to delay by the shipper in unloading their inbound cargoes subject to tax?
    • A-4: Yes, Demurrage fees, which are in the nature of rent for the use of property of the carrier in the Philippines is considered income from Philippine source and is subject to income tax under the regular rate as the other types of income of the on-line carrier. Said other line of business may likewise be subject to VAT or percentage tax applying   the   rule   on   threshold   discussed   in   the   succeeding paragraph.
    • Q-5: Are detention fees and other charges collected by international sea carriers subject to tax?
    • A-5: Detention fees and other charges relating to outbound cargoes and inbound  cargoes  are  all  considered  Philippine-sourced  income  of the international  sea  carriers  they  being  collected  for  the  use  of property  or  rendition  of  services  in  the  Philippines, and are subject to the Philippine income tax under the regular rate, and to the Value added  tax,  if  the  total  annual  receipts  from  all  the  VAT-registered activities   exceeds   one   million   five   hundred   thousand pesos (P1,500,000.00).  However, if the total annual gross receipts do not exceed one million five hundred thousand pesos, said taxpayer is liable to pay the 3% percentage tax.

    • Q-14: Are sales of goods, supplies, equipment, fuel and services to persons engaged in international shipping operations subject to VAT? 
    • A-14: The sale of goods, supplies, equipment, fuel and services (including leases of property) to the common carrier to be used in its international sea transport operations is zero-rated.  Provided,  that  the same is limited to goods, supplies, equipment, fuel and services pertaining   to   or   attributable   to   the   transport   of   goods   and passengers from  a  port  in  the  Philippines  directly  to  a  foreign  port  without  docking  or  stopping  at  any  other  port  in  the  Philippines  to  unload  passengers  and/or  cargoes  loaded  in  and  from  another domestic  port xxx

    • Q-34: Are commission incomes received by the local shipping agents from their foreign principals subject to VAT?
    • A-34: The  commission  income  or  fees  received  by  the  local  shipping agents   for   outbound   freights/fares   received   by   their   foreign principals which are on-line international sea carriers ( touching any port in the Philippines as part of their operation) shall be zero-rated pursuant to the provisions of Section 108(B)(4) of the Code.  Said provision does not require that payments of the commission income or fees for “services rendered to persons engaged in international shipping operations, including leases of property for use thereof,” be paid in acceptable foreign currency in order that such transaction may be zero-rated. On the other hand, commission income or fees received   by   the   local   shipping   agents   pertaining   to   inbound freights/fares     received     by     their     foreign     principals/on-line international sea carriers or pertaining to freights/fares received by off-line international sea carriers shall be subject to VAT at 12%.
  • December 6, 2010: Petitioners Association of International Shipping Lines, Inc. (AISL), APL Co. Pte. Ltd. (APL) and Maersk-Filipinas, Inc. (Maersk) sought to nullify RMC No. 31-2008 via a petition for declaratory relief under Civil Case No. Q-09-64241 praying for the issuance of a writ of preliminary injunction enjoining then CIR and her agents from implementing, enforcing or acting pursuant to or on the basis of the challenged provisions of RMC 31-2008 and render judgment declaring these challenged provisions void.
    • It alleged that RMC 31-2008 was void as it imposed regular tax rate of 30% and 12% VAT on the demurrage and detention fees collected by international shipping carriers from shippers or consignees for delay in the return of containers, on the domestic portion of services to persons engaged in international shipping operations, and on commission income received by local shipping agents from international shipping carriers or in connection with inbound shipments.
  • May 18, 2012: RTC branch 98 in Civil Case No. Q-09-64241 declared as invalid the challenged provisions of RMC 31-2008 insofar as it subjects demurrage and detention fees to the regular corporate income tax under Section 28(A)(1) and 12% VAT.

  •  March 7, 2013: RA 10378 was enacted amending Section 28 (A)(3)(a) of the NIRC which reads:
    • Being incidental to the trade or business of the international carrier, demurrage fees should instead form part of the Gross Philippine Billings (GPB) subject to 2.5% tax under Section 28 (A)(1)(3b) of the NIRC and the same does not expressly impose 12% VAT on the domestic portion of the services rendered by international carriers.
  • December 4, 2013: Petitioners initiated a petition for declaratory relief challenging Section 4.4 of RR 15-2013 (implementing rules of RA 10378) and impleading both the Secretary of Finance and CIR.
    • 4.4) Taxability   of   Income   Other   Than   Income   from International Transport Services. —All items of income derived by international carriers that do not form part of Gross Philippine Billings as defined under these Regulations shall be subject to tax under the pertinent provisions of the NIRC, as amended. 
    •  Demurrage fees, which are in the nature of rent for the use of property of the carrier in the Philippines, is considered income from Philippine source and is subject to income tax under the regular rate as the other types of income of the on-line carrier.
    • Detention fees and other charges relating to outbound cargoes and inbound cargoes are all considered Philippine-sourced income of international sea carriers they being collected for the use of property or rendition of services in the Philippines, and are subject to the Philippine income tax under the regular rate.
  • September 15, 2015: RTC dismissed the petition for declaratory relief
1.    granted the motion for judicial notice of the existence of RMC 31-2008, May 18, 2012 RTC Order in Civil Case No. Q-09-64241 and the enactment of RA 10378 – all these being official acts of different branches of government
2.    Declared that it had no jurisdiction over the petition for declaratory relief pursuant to CA 55 which removed from RTC the authority to rule on cases involving one’s liability for tax, duty, or charge collectible under any law administered by the Bureau of Customs (BOC) or BIR
3.    Ruled against res judicata because:
a.    res judicata does not give rise to a cause of action for the purpose of initiating a complaint
b.    RA 10378 constituted a supervening event which negated the application of res judicata
c.    there is no similarity of parties, subject matters, and cause of action
d.    it found RR 15-2013 to be reasonable tax regulation and an interpretative issuance, the effectivity of which does not require a public hearing nor prior registration with the UP Law Center.  

  • January 8, 2016:  Petitioners’ partial motion for reconsideration was denied
  •  Petitioners, on pure questions of law, sought for Supreme Court’s discretionary appellate jurisdiction to review.  They reiterated the arguments raised in their petition for declaratory relief.  
1.    Does res judicata apply in this case?
2.    Is a petition for declaratory relief proper for the purpose of invalidating RR 15-2013?
3.    Is RR 15-2013 a valid rule?

HELD: Denied
1.    NO. Res judicata applies in the concept of “bar by prior judgment” if the following requisites concur:
a.    Former judgment or order must be final
b.    Judgment or order must be on the merits
c.    Decision must have been rendered by a court having jurisdiction over the subject matter and the parties – not met since while RMC 31-2008 which is the subject of Civil Case No. Q-09-64241 and RR 15-2013 subject of the present case both treat demurrage and detention fees to be within the prism of regular corporate income tax rate, they emanate from different authority. Moreover, the judgment in Civil Case No. Q-09-64241 which only binds the CIR cannot serve as a judicial precedent for the purpose of precluding the Secretary of Finance from promulgating a similar issuance on the same subject.  It also cannot be judicial precedent to be followed in subsequent cases by all courts in the land as it is rendered by RTC and not SC.
d.    There must be, between the 1st and 2nd action, identity of parties of subject matter and of cause of action – not met since RTC branch 98 in Civil Case No. Q-09-64241 is only binding on herein petitioners and the CIR as lone respondent.  However, in this case, although the petitioners are the same, the respondents are the CIR and the Sec. of Finance.
  • CIR issued RMC 31-2008 on January 30, 2008 under the auspices of Section 4 of the NIRC while Sec. of Finance issued RR 15-2013 on September 20, 2013 in obedience to the legislative directive under Section 5 of RA 103778 and pursuant to his rule-making power under Section 244 of the NIRC.  Both were issued pursuant to their separate powers and prerogatives granted by law.

2.    No. Since there is no actual case involved in a petition for declaratory relief, it cannot be the proper vehicle to invoke the power of judicial review to declare a state as invalid or unconstitutional. As decreed in DOTR v. PPSTA (G.R. No. 230107, July 24, 2018), the proper remedy is certiorari or prohibition. 
  • Nonetheless, the court held in Diaz et al v. Secretary of Finance, et al (G.R. No. 193007, July 19, 2011): “But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has far-reaching implications and raises questions that need to be resolved for the public good. The Court has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive officials that amount to usurpation of legislative authority. xxx Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample power to waive such technical requirements when the legal questions to be resolved are of great importance to the public. The same may be said of the requirement of locus standi which is a mere procedural requisite.”

3.    Yes. RR 15-2013 is a valid interpretative and internal issuance for the guidance of all internal revenue officers and others concerned.  It merely sums up the rules by which international carriers may avail of preferential rates or exemption from income tax on their gross revenues derived from the carriage of persons and their excess baggage based on the principle of reciprocity or an applicable tax treaty or international agreement to which the Philippines is a signatory.  As such it need not pass through a public hearing or consultation, get published nor registered with UP Law Center for its effectivity. 
  • In treating demurrage and detention fees as regular income subject to regular income tax rate, the Secretary of Finance relied on Section 23(A)(I)(3a) of NIRC, as amended by RA 10378, which is still in effect since not amended by Tax Reform for Acceleration and Inclusion (TRAIN) law.
  • Under 55 15-2013, demurrage and detention fees are not deemed within the scope of GPB.  GPB covers gross revenue derived from transportation of passengers, cargo and/or mail originating from the Philippines up to the final destination.  Any other income, therefore, is subject to the regular income tax rate.  When the law is clear, there is no other recourse but to apply it regardless of its perceived harshness.  Dura lex sed lex.
    • Exclusion of demurrage and detention fees from the preferential rate of 2.5% is proper since they are not considered income derived from transportation of persons, goods and/or mail, in accordance with the rule expressio unios est exclusion alterius.
    • Demurrage and detention fees fall within the definition of “gross income” - acquired in the normal course of trade or business 
      • Demurrage fees – rent payment for the vessel
      • Detention fees – use of container

Corporate Law and Negotiable Instruments Law Case Digest: Llorente v. Star City Pty Ltd. (2020)

First Division
Llorente v. Star City Pty Ltd.(2020)
G.R. No. 212050/G.R. No. 212216, January 15, 2020
Caguioa, J.

Lessons Applicable: Capacity to Sue, Jurisdiction of RTC, Isolation Transaction Rule, Bank Drafts, Drawer Liability, Effect of Stop Payment Order

Laws Applicable: Sec. 150 of RA 11232, Section 84 of the NIL

•    Star City Pty Limited (SCPL) operates as a casino in Sydney, New South Wales, Australia and claims that it is not doing business in the Philippines and is suing for an isolated transaction. 
•    November 25, 2002: It filed a complaint for collection of sum of money with prayer for preliminary attachment against Llorente, who was a patron of its Star City casino and Equitable PCI Bank (EPCIB).
•    July 12, 2000: Llorente negotiated two (2) Equitable PCI bank drafts with check numbers 034967 and 034968 worth 150,000 USD each or for the total amount of 300,000 USD in order to play in the Premium Programme of the casino.
•    The Premium Programme offers the patron a 1% commission rebate on his turnover at the gambling table and a .10% rebate for complimentary expense
•    Before upgrading Llorente to this programme, SCPL contracted 1st EPCIB to check the status of the subject drafts    
•    After Llorente confirmed that the same were issued on clear funds without any stop payment orders, his front money account in the casino was credited with 300,000 USD
•    July 18, 2000: SCPL deposited the drafts with Tomas Cook Ltd.
•    August 1, 2000: SCPL received the advise of Bank of New York about the “Stop Payment Order” (SPO) prompting it to make several demands upon Llorente who refused to pay
•    August 30, 2000: SCPL sought settlement from EPCIB which denied it on the ground of the SPO by LLorente and no notice of dishonor was given.
•    January 28, 2003: RTC granted the issuance of writ of preliminary attachment based on the indicative acts of Llorente of his intention to avoid his obligation and defraud SCPL (i.e. leaving hotel premise without informing SPCL his whereabouts, failing to pay for services availed of, requesting SPO despite availing of services, failure to communicate for the settlement of his obligations)
•    Llorente alleged that he caused the SPO because of SCPL’s commission of fraud and unfair gaming practices during his stay in the casino from July 12 to July 17, 2000.  He also sought the dismissal of the case on the ground of lack of legal capacity to sue since the “isolated transaction rule” only covers transaction which occurred in the Philippines when the same occurred in Australia.
•    EPCIB in its answer also alleged lack of personality to sue before the Philippine courts and denied that it unjustifiably and maliciously refused to settle the obligation since it merely complied with Llorente’s instruction.  Moreover, it stated that SCPL has no action against it since there was no privity of contract between them.  It also filed a cross-claim against Llorente since it already reimbursed the face value of the subject drafts, it is relieved of all liabilities under said drafts.
•    RTC: Found SPCL to have legal capacity to sue and held Llorente (as payee of the drafts and indorser who signed on its back) and EPCIB (as drawer of the drafts) solidarily liable for the value of the drafts.
•    CA: Denied Llorante’s appeal but partially granted EPCIB’s discharhing it from any responsibility considering that it already paid Llorente
•    CA denied both Llorente’s motion for reconsideration and SCPL’s partial motion for reconsideration
•    Llorente and SCPL filed an instant Rule 45 petitions for review on certiorari

1.    W/N SCPL has the capacity to sue
2.    W/N Philippine courts have jurisdiction over the case
3.    W/N EPCIB should be liable as drawer

1.    YES.
  • Sec. 150 of RA 11232 (Revised Corporation Code of the Philippines) (RCC) which became effective on February 23, 2019 (reproduction of Sec. 133 of BP 68) provides:
    • SEC.  150. Doing  Business  Without  a  License.–No  foreign  corporation  transacting business  in  the  Philippines  without  a  license,  or  its  successors  or  assigns,  shall  be  permitted  to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws
  • While the RCC grants to foreign corporations with Philippine license the right to sue in the Philippines, the Court, in the long line of cases under the regime of the Corporation Code has held that a foreign corporation not engaged in business in the Philippines may not be denied the right to file an action in the Philippines court for an isolated transaction. 
    • The issue on whether a foreign corporation which does not have license to engage in business the Philippines can seek redress in Philippine courts depends on whether it is doing business or it merely entered into an isolated transaction – qualifying circumstance essential part of the plaintiff’s capacity to sue (as a matter of pleading and procedure) should be affirmatively pleaded  
    • In the case at bar, SCPL alleged in its complaint that it is not doing business in the Philippines and is suing upon a singular and isolated transaction and appointed Jimeno, Jalandoni and Cope Law Offices as its attorney-in-fact.  The latter is irrelevant to its capacity to sue.
    • Moreover, Llorente in his answer pleaded an affirmative relief for damages from SCPL by way of counterclaim – contrary to his position that plaintiff has no capacity to sue and admitted the capacity of plaintiff to be subject of judicial process.  It would be unfair to allow it to be sued and not allowing it to sue on an isolated transaction here.

2.    Yes.
  • Complaint is for civil case for collection of sum of money which under BP 129 Section 19 RTCs have jurisdiction – above 400,000 in Metro Manila
    • Amount demanded: 300,000 USD plus legal interest from date of 1st demand on December 20, 2000 until full payment is 
  • Criminal case territorial jurisdiction involving checks: any of the places where the check is drawn, issued, delivered or dishonored has jurisdiction – subject drafts drawn by EPCIB, a Philippine bank

3.    Yes.
  • CA recognized SCPL as a holder in due course and it did not overturn the finding of the RTC that the subject demand/bank drafts are negotiable instruments.  In effect, 2 demand/bank drafts drawn by EPCIB with Llorante as the payee are negotiable instruments.
    • A draft is a form of a bill of exchange used mainly in transactions between persons physically remote from each other.  It is an order by 1 person, say the buyer of goods, address to a person having in possession funds of such buyer, ordering the addressee to pay the purchase price to the seller of the goods.  Where the order is made by 1 bank to another = bank drafts – negotiable instruments governed by the provisions of Negotiable Instruments Law (NIL)
  •  Both RTC and CA recognized EPCIB as the drawer of the subject demand/bank drafts. 
    • Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.
    • When the bank, as the drawer of a negotiable check, signs the instrument its engagement is then as absolute and express as if it were written on the check and a dual promise is implied from the issuance of the check:
  •  Bank upon which it is drawn will pay the amount thereof
    • If such bank should fail to make the payment, the drawer will pay the same to the holder
    • Drawing a check = drawer admits the existence of the payee and his then capacity to endorse; impliedly represents that he (payee) has funds or credits available for its payment in the bank which it is drawn; engages that if the bill is not paid by the drawee and due proceedings on dishonor are taken by the holder, he will upon demand pay the amount of the bill together with the damages and expenses accruing to the holder by reason of the dishonor of the instrument; and if the drawee refuses to accept a bill drawn upon him, becomes liable to pay the instrument according to his original undertaking
    • Liability of the drawer is secondary = after acceptance – conditional upon proper presentment and notice of dishonor, and, in case of a foreign bill of exchange, protest unless such conditions are excused or dispensed with. 
    • Section 84 of the NIL: When instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder, subject to the provision of the NIL
  • GR: Effect of countermand or stopping of payment by the drawer - Relation between the drawer and the payee = as if the instrument had been dishonored and notice thereof given to the drawer
    • drawer of a bill (including a draft or check) may by notice to the drawee prior to acceptance or payment countermand his order and command the drawee not to pay, in which case the drawee is obliged to refuse to accept or pay  Drawer’s conditional liability is changed to one free from the condition > like that of the maker of a promissory note due on demand – liable on the instrument if he has no sufficient defense
  •  EX: Draft drawn by 1 bank upon another and bought and paid for by a remitter, as the equivalent of money or as an executed sale of credit by the drawer, is not subject to rescission or countermand so as to avoid the drawer’s liability thereon.
    • Right to stop payment cannot be exercised so as to prejudice the rights of holders in due course without rendering the drawer liable on the instrument to such holders
  1. Liability of EPCIB as the drawer cannot be abrogated by the Indemnity Agreement because bank drafts are negotiable instruments nor can it argue that it has no privity of contract.  Its secondary liability under Section 61 of the NIL became primary when the payment of the subject demand/bank drafts had been stopped which had the same effect as if the instruments had been dishonored and notice thereof was given to the drawer pursuant to Section 84 of the NIL.
  2. If EPCIB is made liable on the subject demand/bank drafts, it has a recourse against the indemnity bond.  In effect, the indemnity bond required by EPCIB is in effect an admission of his liability to SCPL and Llorente’s citing exceeding his obligation to pay as reason for the SPO weakens his allegation of fraud and unfair gaming practice against SCPL.
  3. Unjust enrichment cannot apply to SPCL since party who received the benefit was Llorente.  Any payment to SCPL arising from the subject demand/bank drafts by EPCIB and/or Llorente can never be by mistake.
    • Art. 2154. If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises
    • Art. 2163. It is presumed that there was a mistake in the payment if something which had never been due or had already been paid was delivered; but he from whom the return is claimed may prove that the delivery was made out of liberality or for any other just cause.
  • Both Llorente and EPCIB are individually and primarily liable as endorser and drawer of the subject demand/bank drafts, repectively – SPCL may proceed to collect the damages awarded simultaneously or alternatively provided it is not more than the damages awarded
    • 300,000 USD with interest at the legal rate of 12% per annum from date of extrajudicial demand against EPCIB: August 30, 2002) (that was made subsequent to the extrajudicial demand against Llorente) and 6% per annum from July 1, 2013 until full payment and the payment for attorney’s fees equivalent to 5% of the amount of demand with interest of 6% per annum from finality of Decision until full payment    
  • Art. 1207. xxx There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.
    • No contract nor does NIL provide for solidary obligation under the liability of the drawer