Jurisprudence: G.R. No. 125508. July 19, 2000

EN BANC

G.R. No. 125508. July 19, 2000

CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

D E C I S I O N

VITUG, J.:

The Commissioner of Internal Revenue denied the deduction from gross income of "securities becoming worthless" claimed by China Banking Corporation (CBC). The Commissioners disallowance was sustained by the Court of Tax Appeals ("CTA"). When the ruling was appealed to the Court of Appeals ("CA"), the appellate court upheld the CTA. The case is now before us on a Petition for Review on Certiorari.

Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with "deposit-taking" function. The investment amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share.

In the course of the regular examination of the financial books and investment portfolios of petitioner conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has become insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its investment in First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income.

Respondent Commissioner of internal Revenue disallowed the deduction and assessed petitioner for income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and compromise penalty. The disallowance of the deduction was made on the ground that the investment should not be classified as being "worthless" and that, although the Hongkong Banking Commissioner had revoked the license of First CBC Capital as a "deposit-taping" company, the latter could still exercise, however, its financing and investment activities. Assuming that the securities had indeed become worthless, respondent Commissioner of Internal Revenue held the view that they should then be classified as "capital loss," and not as a bad debt expense there being no indebtedness to speak of between petitioner and its subsidiary.

Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court sustained the Commissioner, holding that the securities had not indeed become worthless and ordered petitioner to pay its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest per annum until fully paid. When the decision was appealed to the Court of Appeals, the latter upheld the CTA. In its instant petition for review on certiorari, petitioner bank assails the CA decision.

The petition must fail.

The claim of petitioner that the shares of stock in question have become worthless is based on a Profit and Loss Account for the Year-End 31 December 1987, and the recommendation of Bangko Sentral that the equity investment be written-off due to the insolvency of the subsidiary. While the matter may not be indubitable (considering that certain classes of intangibles, like franchises and goodwill, are not always given corresponding values in financial statements, there may really be no need, however, to go of length into this issue since, even to assume the worthlessness of the shares, the deductibility thereof would still be nil in this particular case. At all events, the Court is not prepared to hold that both the tax court and the appellate court are utterly devoid of substantial basis for their own factual findings.

Subject to certain exceptions, such as the compensation income of individuals and passive income subject to final tax, as well as income of non-resident aliens and foreign corporations not engaged in trade or business in the Philippines, the tax on income is imposed on the net income allowing certain specified deductions from gross income to be claimed by the taxpayer. Among the deductible items allowed by the National Internal Revenue Code ("NIRC") are bad debts and losses.

An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a capital asset. A capital asset is defined negatively in Section 33(1) of the NIRC; viz:

(1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section twenty-nine; or real property used in the trade or business of the taxpayer.

Thus, shares of stock; like the other securities defined in Section 20(t) of the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. Section 20(u) of the NIRC defines a dealer in securities thus:

"(u) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom."

In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. Section 29(d)(4)(B) of the NIRC states:

"(B) Securities becoming worthless. - If securities as defined in Section 20 become worthless during the tax" year and are capital assets, the loss resulting therefrom shall, for the purposes of his Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets."

The above provision conveys that the loss sustained by the holder of the securities, which are capital assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets.  A similar kind of treatment is given, by the NIRC on the retirement of certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. In these cases, the NIRC dispenses, in effect, with the standard requirement of a sale or exchange for the application of the capital gain and loss provisions of the code.

Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer.

In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation of petitioner bank whose shares in said investee corporation are not intended for purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a capital loss, not an ordinary loss, to the investor.

Section 29(d)(4)(A), of the NIRC expresses:

"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in Section 33."

The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section 29(d)(4)(A), read:

"Section 33. Capital gains and losses. -

x x x x x x x x x.

"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation an shall not be included in determining the applicability of such limitation to other losses.

The exclusionary clause found in the foregoing text of the law does not include all forms of securities but specifically covers only bonds, debentures, notes, certificates or other evidence of indebtedness, with interest coupons or in registered form, which are the instruments of credit normally dealt with in the usual lending operations of a financial institution. Equity holdings cannot come close to being, within the purview of "evidence of indebtedness" under the second sentence of the aforequoted paragraph. Verily, it is for a like thesis that the loss of petitioner bank in its equity in vestment in the Hongkong subsidiary cannot also be deductible as a bad debt. The shares of stock in question do not constitute a loan extended by it to its subsidiary (First CBC Capital) or a debt subject to obligatory repayment by the latter, essential elements to constitute a bad debt, but a long term investment made by CBC.

One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the gain or loss upon the sale or exchange of property, as the case may be, shall be recognized. The complete text reads:

SECTION 34. Determination of amount of and recognition of gain or loss.-

"(a) Computation of gain or loss. - The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be to sum of money received plus the fair market value of the property (other than money) received. (As amended by E.O. No. 37)

"(b) Basis for determining gain or loss from sale or disposition of property. - The basis of property shall be - (1) The cost thereof in cases of property acquired on or before March 1, 1913, if such property was acquired by purchase; or

"(2) The fair market price or value as of the date of acquisition if the same was acquired by inheritance; or

"(3) If the property was acquired by gift the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value; or

"(4) If the property, other than capital asset referred to in Section 21 (e), was acquired for less than an adequate consideration in money or moneys worth, the basis of such property is (i) the amount paid by the transferee for the property or (ii) the transferor's adjusted basis at the time of the transfer whichever is greater.

"(5) The basis as defined in paragraph (c) (5) of this section if the property was acquired in a transaction where gain or loss is not recognized under paragraph (c) (2) of this section. (As amended by E.O. No. 37)

(c) Exchange of property.

"(1) General rule.- Except as herein provided, upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized.

"(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) a corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation which is, a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock in another corporation also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation.

"No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return of property."

The above law should be taken within context on the general subject of the determination, and recognition of gain or loss; it is not preclusive of, let alone renders completely inconsequential, the more specific provisions of the code. Thus, pursuant, to the same section of the law, no such recognition shall be made if the sale or exchange is made in pursuance of a plan of corporate merger or consolidation or, if as a result of an exchange of property for stocks, the exchanger, alone or together with others not exceeding four, gains control of the corporation. Then, too, how the resulting gain might be taxed, or whether or not the loss would be deductible and how, are matters properly dealt with elsewhere in various other sections of the NIRC. At all events, it may not be amiss to once again stress that the basic rule is still that any capital loss can be deducted only from capital gains under Section 33(c) of the NIRC.

In sum -

(a) The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset.

(b) Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a capital, not an ordinary, loss.

(c) The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during the same taxable year that the securities have become "worthless."

WHEREFORE, the Petition is DENIED. The decision of the Court of Appeals disallowing the claimed deduction of P16,227,851.80 is AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., Bellosillo, Melo, Puno, Kapunan, Mendoza, Panganiban, Quisumbing, Purisima, Pardo, Buena, Gonzaga-Reyes, Ynares-Santiago, and De Leon, Jr., JJ., concur.

Tax Case Digest: China Banking Corp. v. CA

China Banking Corp. v. CA
G.R. No. 125508  July 19, 2000
VITUG, J.

Lessons Applicable: Capital asset, capital loss, inventory depends on the nature of the business

Laws Applicable:

FACTS:

• Petitioner China Bank made a 53% equity investment in First CBC Capital (Asia) Ltd., a Hongkong Subsidiary of P 16,227, 851.80
• 1906: with the approval of the Bangko Sentral, it wrote of as worthless investment for being insolvent in its 1987 Income Tax Return treated as bad debts o ordinary loss deductible. 
• CIR contends it should be capital loss.  
• CTA and CA on Petition for Review on Certiorari: upheld CIR contention

ISSUE: W/N Capital loss (NOT Ordinary Loss)

HELD: Yes. Petition is DENIED

• Equity investment is a capital asset resulting in a capital gain or a capital loss. A capital asset is defined negatively in Section 33(1) of the NIRC
• (1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include: 
• stock in trade of the taxpayer; or 
• other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or 
• property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or 
• property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (f) of section twenty-nine; or
• real property used in the trade or business of the taxpayer
• Thus, shares of stock; like the other securities defined in Section 20(t)[4] of the NIRC, would be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader (for his own account) in, securities. 
• Section 20(u) of the NIRC defines a dealer in securities thus" (u) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom."  
• In the hands, however, of another who holds the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. 
• Loss sustained by the holder of the securities, which are capital assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the sale or exchange of capital assets
• Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other income of the taxpayer.

Labor Relations Case Digest: Complex Electric v. NLRC (1999) G.R. No. 121315 July 19, 1999

G.R. No. 121315 July 19, 1999

Lessons Applicable: Unfair Labor Practice

Laws Applicable:

FACTS:

·         Complex Electronics Corporation was engaged in the manufacture of electronic products. It was actually a subcontractor of electronic products where its customers gave their job orders, sent their own materials and consigned their equipment to it.

·         The rank and file workers of Complex were organized into a union known as the Complex Electronics Employees Association

·         Complex received a facsimile message from Lite-On Philippines Electronics Co., requiring it to lower its price by 10%.

o   Complex informed its Lite-On personnel that such request of lowering their selling price by 10% was not feasible as they were already incurring losses at the present prices of their products.

o   Complex regretfully informed the employees that it was left with no alternative but to close down the operations of the Lite-On Line

§  retrenchment will not take place until after 1 month

§  try to prolong the work for as many people as possible for as long as it can

§  retrenchment pay as provided for by law i.e. half a month for every year of service in accordance with Article 283 of the Labor Code of Philippines.

·         Complex filed a notice of closure of the Lite-On Line with the Department of Labor and Employment (DOLE) and the retrenchment of the ninety-seven (97) affected employees.

·         Union filed a notice of strike with the National Conciliation and Mediation Board

·         In the evening of April 6, 1992, the machinery, equipment and materials being used for production at Complex were pulled-out from the company premises and transferred to the premises of Ionics Circuit, Inc. (Ionics) at Cabuyao, Laguna.

o   Fearful that the machinery, equipment and materials would be rendered inoperative and unproductive due to the impending strike of the workers, the customers ordered their pull-out and transfer to Ionics.

o   Complex was compelled to cease operations

o   Ionics contended that it was an entity separate and distinct from Complex and had been in existence since July 5, 1984 or eight (8) years before the labor dispute arose at Complex. Like Complex, it was also engaged in the semi-conductor business where the machinery, equipment and materials were consigned to them by their customers

o   President of Complex was also the President of Ionics, the latter denied having Qua as their owner since he had no recorded subscription of P1,200,00.00 in Ionics as claimed by the Union. Ionics further argued that the hiring of some displaced workers of Complex was an exercise of management prerogatives.

·         complaint was, thereafter, filed with the Labor Arbitration Branch of the NLRC for unfair labor practice, illegal closure/illegal lockout, money claims for vacation leave, sick leave, unpaid wages, 13th month pay, damages and attorney's fees. The Union alleged that the pull-out of the machinery, equipment and materials from the company premises, which resulted to the sudden closure of the company was in violation of Section 3 and 8, Rule XIII, Book V of the Labor Code of the Philippines  and the existing CBA

·         Labor Arbiter: reinstate the 531 above-listed employees to their former position; charge of slowdown strike filed by respondent Complex against the union is hereby dismissed for lack of merit.

·         NLRC: pay 531 complainants equivalent to one month pay in lieu of notice and separation pay equivalent to one month pay for every year of service and a fraction of six months considered as one whole year.

ISSUE: W/N there was ULP

HELD:

NO.

·         A "runaway shop" is defined as an industrial plant moved by its owners from one location to another to escape union labor regulations or state laws, but the term is also used to describe a plant removed to a new location in order to discriminate against employees at the old plant because of their union activities.

o   It is one wherein the employer moves its business to another location or it temporarily closes its business for anti-union purposes

o   relocation motivated by anti-union animus rather than for business reasons

o   Ionics was not set up merely for the purpose of transferring the business of Complex. At the time the labor dispute arose at Complex, Ionics was already existing as an independent company.

o   The Union failed to show that the primary reason for the closure of the establishment was due to the union activities of the employees.

o   The mere fact that one or more corporations are owned or controlled by the same or single stockholder is not a sufficient ground for disregarding separate corporate personalities.

·         No illegal lockout/illegal dismissal

o   closure, therefore, was not motivated by the union activities of the employees, but rather by necessity since it can no longer engage in production without the much needed materials, equipment and machinery.

o   The determination to cease operation is a prerogative of management that is usually not interfered with by the State as no employer can be required to continue operating at a loss simply to maintain the workers in employment.

·         personal liability of Lawrence Qua- absence of malice or bad faith, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities.

·         We see no valid and cogent reason why petitioner should not be likewise sanctioned for its failure to serve the mandatory written notice. Under the attendant facts, we find the amount of P5,000.00, to be just and reasonable.

Jurisprudence: G.R. No. 121315 July 19, 1999

FIRST DIVISION

G.R. No. 121315 July 19, 1999

COMPLEX ELECTRONICS EMPLOYEES ASSOCIATION (CEEA) represented by its union president CECILIA TALAVERA, GEORGE ARSOLA, MARIO DIAGO AND SOCORRO BONCAYAO, petitioners,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, COMPLEX ELECTRONICS CORPORATION, IONICS CIRCUIT, INC., LAWRENCE QUA, REMEDIOS DE JESUS, MANUEL GONZAGA, ROMY DELA ROSA, TERESITA ANDINO, ARMAN CABACUNGAN, GERRY GABANA, EUSEBIA MARANAN and BERNADETH GACAD, respondents.

G.R. No. 122136 July 19, 1999

COMPLEX ELECTRONICS CORPORATION, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, COMPLEX ELECTRONICS EMPLOYEES ASSOCIATION (CEEA), represented by Union President, CECILIA TALAVERA, respondents.



KAPUNAN, J.:

These consolidated cases filed by Complex Electronics Employees Association (G.R. No. 121315) and Complex Electronics Corporation (G.R. No. 122136) assail the Decision of the NLRC dated March 10, 1995 which set aside the Decision of the Labor Arbiter dated April 30, 1993.

The antecedents of the present petitions are as follows:

Complex Electronics Corporation (Complex) was engaged in the manufacture of electronic products. It was actually a subcontractor of electronic products where its customers gave their job orders, sent their own materials and consigned their equipment to it. The customers were foreign-based companies with different product lines and specifications requiring the employment of workers with specific skills for each product line. Thus, there was the AMS Line for the Adaptive Micro System, Inc., the Heril Line for Heril Co., Ltd., the Lite-On Line for the Lite-On Philippines Electronics Co., etc.

The rank and file workers of Complex were organized into a union known as the Complex Electronics Employees Association, herein referred to as the Union.

On March 4, 1992, Complex received a facsimile message from Lite-On Philippines Electronics Co., requiring it to lower its price by 10%. The full text reads as follows:

This is to inform your office that Taiwan required you to reduce your assembly cost since it is higher by 50% and no longer competitive with that of mainland China. It is further instructed that Complex Price be patterned with that of other sources, which is 10% lower.

Please consider and give us your revised rates soon. 1

Consequently, on March 9, 1992, a meeting was held between Complex and the personnel of the Lite-On Production Line. Complex informed its Lite-On personnel that such request of lowering their selling price by 10% was not feasible as they were already incurring losses at the present prices of their products. Under such circumstances, Complex regretfully informed the employees that it was left with no alternative but to close down the operations of the Lite-On Line. The company, however, promised that:

1) Complex will follow the law by giving the people to be retrenched the necessary 1 month notice. Hence, retrenchment will not take place until after 1 month from March 09, 1992.

2) The Company will try to prolong the work for as many people as possible for as long as it can by looking for job slots for them in another line if workload so allows and if their skills are compatible with the line requirement.

3) The company will give the employees to be retrenched a retrenchment pay as provided for by law i.e. half a month for every year of service in accordance with Article 283 of the Labor Code of Philippines. 2

The Union, on the other hand, pushed for a retrenchment pay equivalent to one (1) month salary for every year of service, which Complex refused.

On March 13, 1992, Complex filed a notice of closure of the Lite-On Line with the Department of Labor and Employment (DOLE) and the retrenchment of the ninety-seven (97) affected employees. 3

On March 25, 1993, the Union filed a notice of strike with the National Conciliation and Mediation Board (NCMB).1âwphi1.nêt

Two days thereafter, or on March 27, 1993, the Union conducted a strike vote which resulted in a "yes" vote.

In the evening of April 6, 1992, the machinery, equipment and materials being used for production at Complex were pulled-out from the company premises and transferred to the premises of Ionics Circuit, Inc. (Ionics) at Cabuyao, Laguna. The following day, a total closure of company operation was effected at Complex.

A complaint was, thereafter, filed with the Labor Arbitration Branch of the NLRC for unfair labor practice, illegal closure/illegal lockout, money claims for vacation leave, sick leave, unpaid wages, 13th month pay, damages and attorney's fees. The Union alleged that the pull-out of the machinery, equipment and materials from the company premises, which resulted to the sudden closure of the company was in violation of Section 3 and 8, Rule XIII, Book V of the Labor Code of the Philippines 4 and the existing CBA. Ionics was impleaded as a party defendant because the officers and management personnel of Complex were also holding office at Ionics with Lawrence Qua as the President of both companies.

Complex, on the other hand, averred that since the time the Union filed its notice of strike, there was a significant decline in the quantity and quality of the products in all of the production lines. The delivery schedules were not met prompting the customers to lodge complaints against them. Fearful that the machinery, equipment and materials would be rendered inoperative and unproductive due to the impending strike of the workers, the customers ordered their pull-out and transfer to Ionics. Thus, Complex was compelled to cease operations.

Ionics contended that it was an entity separate and distinct from Complex and had been in existence since July 5, 1984 or eight (8) years before the labor dispute arose at Complex. Like Complex, it was also engaged in the semi-conductor business where the machinery, equipment and materials were consigned to them by their customers. While admitting that Lawrence Qua, the President of Complex was also the President of Ionics, the latter denied having Qua as their owner since he had no recorded subscription of P1,200,00.00 in Ionics as claimed by the Union. Ionics further argued that the hiring of some displaced workers of Complex was an exercise of management prerogatives. Likewise, the transfer of the machinery, equipment and materials from Complex was the decision of the owners who were common customers of Complex and Ionics.

On April 30, 1993, the Labor Arbiter rendered a decision the dispositive portion of which reads:

WHEREFORE, all the foregoing premises being considered, judgment is hereby rendered ordering the respondent Complex Electronics Corporation and/or Ionics Circuit Incorporated and/or Lawrence Qua, to reinstate the 531 above-listed employees to their former position with all the rights, privileges and benefits appertaining thereto, and to pay said complainants-employees the aggregate backwages amounting P26,949,891.80 as of April 6, 1993 and to such further backwages until their actual reinstatement. In the event reinstatement is no longer feasible for reasons not attributable to the complainants, said respondents are also liable to pay complainants-employees their separation pay to be computed at the rate of one (1) month pay for every year of service, a fraction of at least six (6) months to be considered as one whole year.

Further, the aforenamed three (3) respondents are hereby ordered to pay jointly and solidarily the complainants-employees an aggregate moral damages in the amount of P1,062,000.00 and exemplary damages in the aggregate sum of P531,000.00.

And finally, said respondents are ordered to pay attorney's fees equivalent to ten percent (10%) of whatever has been adjudicated herein in favor of the complainants.

The charge of slowdown strike filed by respondent Complex against the union is hereby dismissed for lack of merit.

SO ORDERED. 5

Separate appeals were filed by Complex, Ionics and Lawrence Qua before the respondent NLRC which rendered the questioned decision on March 10, 1995, the decretal portion of which states:

WHEREFORE, premises considered, the assailed decision is hereby ordered vacated and set aside, and a new one entered ordering respondent Complex Electronics Corporation to pay 531 complainants equivalent to one month pay in lieu of notice and separation pay equivalent to one month pay for every year of service and a fraction of six months considered as one whole year.

Respondents Ionics Circuit Incorporated and Lawrence Qua are hereby ordered excluded as parties solidarily liable with Complex Electronics Corporation.

The award of moral damages is likewise deleted for lack of merit.

Respondent Complex, however, is hereby ordered to pay attorney's fees equivalent to ten (10%) percent of the total amount of award granted the complainants.

SO ORDERED. 6

Complex, Ionics and the Union filed their motions for reconsideration of the above decision which were denied by the respondent NLRC in an Order dated July 11, 1995. 7

Hence these petitions.

In G.R. No. 121315, petitioner Complex Electronics Employees Association asseverates that the respondent NLRC erred when it:

I

SET ASIDE THE DECISION DATED APRIL 30, 1993 ISSUED BY THE HON. LABOR ARBITER JOSE DE VERA.

II

EXCLUDED PRIVATE RESPONDENTS IONICS CIRCUITS, INCORPORATED AND LAWRENCE QUA AS PARTIES SOLIDARILY LIABLE WITH COMPLEX ELECTRONICS CORPORATION.

III

FOUND THAT COMPLEX ELECTRONICS CORPORATION WAS NOT GUILTY OF ILLEGAL CLOSURE AND ILLEGAL DISMISSAL OF THE PETITIONERS.

IV

REMOVED THE AWARD FOR BACKWAGES, REINSTATEMENT AND DAMAGES IN THE DECISION DATED APRIL 30, 1993 ISSUED BY THE HON. LABOR ARBITER JOSE DE VERA. 8

On the other hand, in G.R. No. 122136, petitioner Complex Electronics Corporation raised the following issues, to wit:

I

PUBLIC RESPONDENT NLRC ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF OR IN EXCESS OF JURISDICTION IN PROMULGATING ITS DECISION AND ORDER DATED 10 MARCH 1995, AND 11 JULY 1995, RESPECTIVELY, THE SAME BEING IN CONTRAVENTION OF THE EXPRESS MANDATE OF THE LAW GOVERNING THE PAYMENT OF ONE MONTH PAY IN LIEU OF NOTICE, SEPARATION PAY AND ATTORNEY'S FEES.

II

THERE IS NO APPEAL, NOR ANY PLAIN, SPEEDY AND ADEQUATE REMEDY IN THE ORDINARY COURSE OF
LAW. 9

On December 23, 1996, the Union filed a motion for consolidation of G.R. No. 122136 with G.R. No. 121315. 10 The motion was granted by this Court in a Resolution dated June 23, 1997. 11

On November 10, 1997, the Union presented additional documentary evidence which consisted of a newspaper clipping in the Manila Bulletin, dated August 18, 1997 bearing the picture of Lawrence Qua with the following inscription:

RECERTIFICATION. The Cabuyao (Laguna) operation of Ionic Circuits, Inc. consisting of plants 2, 3, 4 and 5 was recertified to ISO 9002 as electronics contract manufacturer by the TUV, a rating firm with headquarters in Munich, Germany. Lawrence Qua, Ionics president and chief executive officer, holds the plaque of recertification presented by Gunther Theisz (3rd from left), regional manager of TUV Products Services Asia during ceremonies held at Sta. Elena Golf Club. This is the first of its kind in the country that four plants were certified at the same time. 12

The Union claimed that the said clipping showed that both corporations, Ionics and Complex are one and the same.

In answer to this allegation, Ionics explained that the photo which appeared at the Manila Bulletin issue of August 18, 1997 pertained only to respondent Ionics' recertification of ISO 9002. There was no mention about Complex Electronics Corporation. Ionics claimed that a mere photo is insufficient to conclude that Ionics and Complex are one and the same. 13

We shall first delve on the issues raised by the petitioner Union.

The Union anchors its position on the fact that Lawrence Qua is both the president of Complex and Ionics and that both companies have the same set of Board of Directors. It claims that business has not ceased at Complex but was merely transferred to Ionics, a runaway shop. To prove that Ionics was just a runaway shop, petitioner asserts that out of the 80,000 shares comprising the increased capital stock of Ionics, it was Complex that owns majority of said shares with P1,200,000.00 as its capital subscription and P448,000.00 as its paid up investment, compared to P800,000.00 subscription and P324,560.00 paid-up owing to the other stockholders, combined. Thus, according to the Union, there is a clear ground to pierce the veil of corporate fiction.

The Union further posits that there was an illegal lockout/illegal dismissal considering that as of March 11, 1992, the company had a gross sales of P61,967,559 from a capitalization of P1,500,000.00. It even ranked number thirty among the top fifty corporations in Muntinlupa. Complex, therefore, cannot claim that it was losing in its business which necessitated its closure.

With regards to Lawrence Qua, petitioner maintains that he should be made personally liable to the Union since he was the principal player in the closure of the company, not to mention the clandestine and surreptitious manner in which such closure was carried out, without regard to their right to due process.

The Union's contentions are untenable.

A "runaway shop" is defined as an industrial plant moved by its owners from one location to another to escape union labor regulations or state laws, but the term is also used to describe a plant removed to a new location in order to discriminate against employees at the old plant because of their union
activities. 14 It is one wherein the employer moves its business to another location or it temporarily closes its business for anti-union purposes. 15 A "runaway shop" in this sense, is a relocation motivated by anti-union animus rather than for business reasons. In this case, however, Ionics was not set up merely for the purpose of transferring the business of Complex. At the time the labor dispute arose at Complex, Ionics was already existing as an independent company. As earlier mentioned, it has been in existence since July 5, 1984. It cannot, therefore, be said that the temporary closure in Complex and its subsequent transfer of business to Ionics was for anti-union purposes. The Union failed to show that the primary reason for the closure of the establishment was due to the union activities of the employees.

The mere fact that one or more corporations are owned or controlled by the same or single stockholder is not a sufficient ground for disregarding separate corporate personalities. Thus, in Indophil Textile Mill Workers Union vs. Calica, 16 we ruled that:

[I]n the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the corporation is a devise to evade the application of the CBA between petitioner Union and private respondent company. While we do not discount the possibility of the similarities of the businesses of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the relief sought. The fact that the businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.

Likewise, in Del Rosario vs. National Labor Relations Commission, 17 the Court stated that substantial identity of the incorporators of two corporations does not necessarily imply that there was fraud committed to justify piercing the veil of corporate fiction.

In the recent case of Santos vs. National Labor Relations Commission, 18 we also ruled that:

The basic rule is still that which can be deduced from the Court's pronouncement in Sunio vs. National Labor Relations Commission, thus:

. . . . . Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.

Ionics may be engaged in the same business as that of Complex, but this fact alone is not enough reason to pierce the veil of corporate fiction of the corporation. Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. This fiction of corporate entity can only be disregarded in certain cases such as when it is used to defeat public convenience, justify wrong, protect fraud, or defend crime. 19 To disregard said separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. 20

As to the additional documentary evidence which consisted of a newspaper clipping filed by petitioner Union, we agree with respondent Ionics that the photo/newspaper clipping itself does not prove that Ionics and Complex are one and the same entity. The photo/newspaper clipping merely showed that some plants of Ionics were recertified to ISO 9002 and does not show that there is a relation between Complex and Ionics except for the fact that Lawrence Qua was also the president of Ionics. However, as we have stated above, the mere fact that both of the corporations have the same president is not in itself sufficient to pierce the veil of corporate fiction of the two corporations.

We, likewise, disagree with the Union that there was in this case an illegal lockout/illegal dismissal. Lockout is the temporary refusal of employer to furnish work as a result of an industrial or labor dispute. 21 It may be manifested by the employer's act of excluding employees who are union members. 22 In the present case, there was a complete cessation of the business operations at Complex not because of the labor dispute. It should be recalled that, before the labor dispute, Complex had already informed the employees that they would be closing the Lite-On Line. The employees, however, demanded for a separation pay equivalent to one (1) month salary for every year of service which Complex refused to give. When Complex filed a notice of closure of its Lite-On Line, the employees filed a notice of strike which greatly alarmed the customers of Complex and this led to the pull-out of their equipment, machinery and materials from Complex. Thus, without the much needed equipment, Complex was unable to continue its business. It was left with no other choice except to shut down the entire business. The closure, therefore, was not motivated by the union activities of the employees, but rather by necessity since it can no longer engage in production without the much needed materials, equipment and machinery. We quote with approval the findings of the respondent NLRC on this matter:

At first glance after reading the decision a quo, it would seem that the closure of respondent's operation is not justified. However, a deeper examination of the records along with the evidence, would show that the closure, although it was done abruptly as there was no compliance with the 30-day prior notice requirement, said closure was not intended to circumvent the provisions of the Labor Code on termination of employment. The closure of operation by Complex on April 7, 1992 was not without valid reasons. Customers of respondent alarmed by the pending labor dispute and the imminent strike to be foisted by the union, as shown by their strike vote, directed respondent Complex to pull-out its equipment, machinery and materials to other safe bonded warehouse. Respondent being mere consignees of the equipment, machinery and materials were without any recourse but to oblige the customers' directive. The pull-out was effected on April 6, 1992. We can see here that Complex's action, standing alone, will not result in illegal closure that would cause the illegal dismissal of the complainant workers. Hence, the Labor Arbiter's conclusion that since there were only two (2) of respondent's customers who have expressed pull-out of business from respondent Complex while most of the customer's have not and, therefore, it is not justified to close operation cannot be upheld. The determination to cease operation is a prerogative of management that is usually not interfered with by the State as no employer can be required to continue operating at a loss simply to maintain the workers in employment. That would be taking of property without due process of law which the employer has the right to resist. (Columbia Development Corp. vs. Minister of Labor and Employment, 146 SCRA 42).

As to the claim of petitioner Union that Complex was gaining profit, the financial statements for the years 1990, 1991 and 1992 issued by the auditing and accounting firm Sycip, Gorres and Velayo readily show that Complex was indeed continuously experiencing deficit and losses. 23 Nonetheless, whether or not Complex was incurring great losses, it still one of the management's prerogative to close down its business as long as it is done in good faith. Thus, in Catatista et al., vs. NLRC and Victorias Milling Co., Inc. 24 we ruled:

In any case, Article 283 of the Labor Code is clear that an employer may close or cease his business operations or undertaking even if he is not suffering from serious business losses or financial reverses, as long as he pays his employees their termination pay in the amount corresponding to their length of service. It would indeed, be stretching the intent and spirit of the law if we were to unjustly interfere in management's prerogative to close or cease its business operations just because said business operations or undertaking is not suffering from any loss.

Going now to the issue of personal liability of Lawrence Qua, it is settled that in the absence of malice or bad faith, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. 25 In the present case, while it may be true that the equipment, materials and machinery were pulled-out of Complex and transferred to Ionics during the night, their action was sufficiently explained by Lawrence Qua in his Comment to the petition filed by the Union. We quote:

The fact that the pull-out of the machinery, equipment and materials was effected during nighttime is not per se an indicia of bad faith on the part of respondent Qua since he had no other recourse, and the same was dictated by the prevailing mood of unrest as the laborers were already vandalizing the equipment, bent on picketing the company premises and threats to lock out the company officers were being made. Such acts of respondent Qua were, in fact, made pursuant to the demands of Complex's customers who were already alarmed by the pending labor dispute and imminent strike to be stage by the laborers, to have their equipment, machinery and materials pull out of Complex. As such, these acts were merely done pursuant to his official functions and were not, in any way, made with evident bad faith. 26

We perceive no intention on the part of Lawrence Qua and the other officers of Complex to defraud the employees and the Union. They were compelled to act upon the instructions of their customers who were the real owners of the equipment, materials and machinery. The prevailing labor unrest permeating within the premises of Complex left the officers with no other choice but to pull them out of Complex at night to prevent their destruction. Thus, we see no reason to declare Lawrence Qua personally liable to the Union.

Anent the award of damages, we are inclined to agree with the NLRC that there is no basis for such award. We again quote the respondent NLRC with favor:

By and large, we cannot hold respondents guilty of unfair labor practice as found by the Labor Arbiter since the closure of operation of Complex was not established by strong evidence that the purpose of said closure was to interfere with the employees' right to self-organization and collective bargaining. As very clearly established, the closure was triggered by the customers' pull-out of their equipment, machinery and materials, who were alarmed by the pending labor dispute and the imminent strike by the union, and as a protection to their interest pulled-out of business from Complex who had no recourse but to cease operation to prevent further losses. The indiscretion committed by the Union in filing the notice of strike, which to our mind is not the proper remedy to question the amount of benefits due the complainants who will be retrenched at the closure of the Lite-On Line, gave a wrong signal to customers of Complex, which consequently resulted in the loss of employment of not only a few but to all the of the workers. It may be worth saying that the right to strike should only be a remedy of last resort and must not be used as a show of force against the employer. 27

We shall now go to the issues raised by Complex in G.R. No. 122136.

Complex claims that the respondent NLRC erred in ordering them to pay the Union one (1) month pay as indemnity for failure to give notice to its employees at least thirty (30) days before such closure since it was quite clear that the employees were notified of the impending closure of the Lite-On Line as early as March 9, 1992. Moreover, the abrupt cessation of operations was brought about by the sudden pull-out of the customers which rendered it impossible for Complex to observe the required thirty (30) days notice.

Art. 283 of the Labor Code provides that:

Art. 283. Closure of establishment and reduction of personnel. — The employer may also terminate the employment of any employee due to the installation of labor saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the workers and the Ministry of Labor and Employment at least one (1) month before the intended date thereof . . . . (Emphasis ours.)

The purpose of the notice requirement is to enable the proper authorities to determine after hearing whether such closure is being done in good faith, i.e., for bona fide business reasons, or whether, to the contrary, the closure is being resorted to as a means of evading compliance with the just obligations of the employer to the employees affected. 28

While the law acknowledges the management prerogative of closing the business, it does not, however, allow the business establishment to disregard the requirements of the law. The case of Magnolia Dairy Products v. NLRC 29 is quite emphatic about this:

The law authorizes an employer, like the herein petitioners, to terminate the employment of any employee due to the installation of labor saving devices. The installation of these devices is a management prerogative, and the courts will not interfere with its exercise in the absence of abuse of discretion, arbitrariness, or maliciousness on the part of management, as in this case. Nonetheless, this did not excuse petitioner from complying with the required written notice to the employee and to the Department of Labor and Employment (DOLE) at least one month before the intended date of termination. This procedure enables an employee to contest the reality or good faith character of the asserted ground for the termination of his services before the DOLE.

The failure of petitioner to serve the written notice to private respondent and to the DOLE, however, does not ipso facto make private respondent's termination from service illegal so as to entitle her to reinstatement and payment of backwages. If at all, her termination from service is merely defective because it was not tainted with bad faith or arbitrariness and was due to a valid cause.

The well settled rule is that the employer shall be sanctioned for non-compliance with the requirements of, or for failure to observe due process in terminating from service its employee. In Wenphil Corp. v. NLRC, we sanctioned the employer for this failure by ordering it to indemnify the employee the amount of P1,000.00. Similarly, we imposed the same amount as indemnification in Rubberworld (Phils.), Inc. v. NLRC, and, Aurelio v. NLRC and Alhambra Industries, Inc. v. NLRC. Subsequently, the sum of P5,000.00 was awarded to an employee in Worldwide Papermills, Inc. v. NLRC, and P2,000.00 in Sebuguero, et al., v. NLRC, et al. Recently, the sum of P5,000.00 was again imposed as indemnify against the employer. We see no valid and cogent reason why petitioner should not be likewise sanctioned for its failure to serve the mandatory written notice. Under the attendant facts, we find the amount of P5,000.00, to be just and reasonable.

We, therefore, find no grave abuse of discretion on the part of the NLRC in ordering Complex to pay one (1) month salary by way of indemnity. It must be borne in mind that what is at stake is the means of livelihood of the workers so they are at least entitled to be formally informed of the management decisions regarding their employment. 30

Complex, likewise, maintains that it is not liable for the payment for the payment of separation pay since Article 283 of the Labor Code awards separation pay only in cases of closure not due to serious business reversals. In this case, the closure of Complex was brought about by the losses being suffered by the corporation.

We disagree.

Art. 283 further provides:

. . . . — In case of termination due to the installation of labor saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses and in case of cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year.

It is settled that in case of closures or cessation of operation of business establishments not due to serious business losses or financial reverses, 31 the employees are always given separation benefits.

In the instant case, notwithstanding the financial losses suffered by Complex, such was, however, not the main reason for its closure. Complex admitted in its petition that the main reason for the cessation of the operations was the pull-out of the materials, equipment and machinery from the premises of the corporation as dictated by its customers. It was actually still capable of continuing the business but opted to close down to prevent further losses. Under the facts and circumstances of the case, we find no grave abuse of discretion on the part of the public respondent in awarding the employees one (1) month pay for every year of service as termination pay.

WHEREFORE, premises considered, the assailed decision of the NLRC is AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., Melo, Pardo and Ynares-Santiago, JJ., concur.

Jurisprudence: G.R. Nos. 113255-56

FIRST DIVISION

G.R. Nos. 113255-56.  July 19, 2001

D E C I S I O N

PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. ROMEO GONZALES y SUN, accused-appellant.

PARDO, J.:

The case is an appeal from the decision[1] of the Regional Trial Court, Branch 57, Angeles City finding accused Romeo Gonzales y Sun guilty of possession and sale of marijuana and sentencing him to six (6) years and one (1) day imprisonment and a fine of P6,000.00[2] and life imprisonment and a fine of P20,000.00.[3]

On February 27, 1991, Asst. Provincial Prosecutor Jaime J. Bustos of Pampanga filed with the Regional Trial Court, Angeles two informations charging accused Romeo Gonzales y Sun with violation of R.A. No. 6425, Sections 8[4] and 4,[5] reading as follows:

Crim. Case No. 91-180:

“That on or about the 13th day of February 1991, in the municipality of Mabalacat, province of Pampanga, Philippines, and within the jurisdiction of this honorable Court, the above-named accused, ROMEO GONZALES y SUN, without having been lawfully authorized, permitted and/or licensed, did then and there willfully, unlawfully and feloniously have in his possession, custody and control two (2) block size of marijuana weighing 1.5 kilos more or less and ten (10) medium size plastic bags of dry marijuana weighing 300 grams more or less, which when subjected to examination yielded positive of THC, tetro hydro canabinol (sic), an active ingredient found in marijuana, a prohibited drug.

“Contrary to law.”

Crim. Case No. 91-181:

"That on or about the 13th day of February 1991, in the municipality of Mabalacat, province of Pampanga, Philippines, and within the jurisdiction of this Honorable Court, the above-named accused, ROMEO GONZALES y SUN, not having been previously licensed, authorized and/or permitted by law, did then and there willfully, unlawfully and feloniously sell more or less one (1) kilo of high-grade marijuana, for and in consideration of the amount of ONE THOUSAND TWO HUNDRED PESOS (P1,200.00), Philippine Currency, to a NARCOM poseur buyer, which said marijuana, when subjected to examination was found positive of THC, tetro hydro canabinol (sic), an active ingredient found in marijuana, a prohibited drug.

“Contrary to law.”

On March 25, 1991 and on May 13, 1991, the trial court arraigned the accused in Tagalog[6] and in English.[7] He pleaded not guilty to both charges.  The cases were tried jointly.

Early in February 1991, the police in Agusu, Brgy. San Francisco, Mabalacat, Pampanga received an information that accused Romeo Gonzales was selling large quantities of marijuana.  They conducted a surveillance for four (4) days.  On February 13, 1991, they conducted a buy-bust operation.[8]

The buy-bust team was composed of Pfc. Danilo Cruz, Pfc. Edgar Arimbuyutan, Sgt. Aurelio Ortiz, Pfc. Celestino dela Cruz, Sgt. Juanito de la Cruz and a confidential informant.  Sgt. Ortiz acted as the poseur-buyer.[9] They conducted the entrapment operation at the backyard of a house in Agusu, San Francisco, Mabalacat, Pampanga.[10] Their informant introduced Sgt. Ortiz to accused Gonzales as a buyer of marijuana.  They talked about the deal, and accused Gonzales handed him a bag containing more or less one (1) kilogram of marijuana.  After ascertaining its contents, Sgt. Ortiz delivered to accused Gonzales P1,200.00[11] as payment.  He then took out his handkerchief as a pre-arranged signal to the other members of the team, who immediately rushed to the scene.  They introduced themselves as Narcom agents and arrested the accused.  Sgt. Ortiz handed over the bag of marijuana to Pfc. Danilo Cruz.[12]

Pfc. Cruz positioned himself about 10-15 meters away from accused Gonzales and Sgt. Ortiz.  When he saw Sgt. Ortiz take out his handkerchief, he immediately rushed to the scene, introduced himself as a Narcom agent, and arrested accused Gonzales.  They recovered the bag of marijuana sold by accused Gonzales[13] and the P1,200.00 marked money.  Accused Gonzales tried to run away, but Pfc. Cruz grabbed him at once.  The team confiscated one more bag containing two (2) blocks of marijuana[14] weighing about 1.5 kilograms and ten (10) medium size plastic bags[15] each containing 300 grams of marijuana.[16]

Pfc. Cruz prepared a handwritten Confiscation Receipt[17] which accused Gonzales refused to sign.[18] Pfc. Arimbuyutan conducted a field test on the confiscated marijuana.  The tests yielded positive indications for the presence of tetrahydrocannabinol, or THC.[19] The confiscated bags of marijuana were then endorsed to the PC Crime Laboratory for examination.[20]

After the arrest, the team brought accused Gonzales to their office for interrogation.  Pfc. Cruz informed him of his constitutional rights.  Pfc. Cruz testified that accused Gonzales orally admitted that he was selling marijuana to different buyers, but claimed that somebody else owned the marijuana he sold.  When asked to identify the owner, he kept silent.  He also refused to give a written statement, so Pfc. Cruz proceeded to prepare the charges against him.[21]

Inspector Daisy P. Babor, forensic chemist at the PNP Crime Laboratory, testified that she personally examined the marijuana subject of the case.  She placed her signature on all the bags of marijuana.[22] The examination gave positive results for marijuana.[23]

On July 5, 1993, the trial court rendered a decision finding the accused guilty as charged, the dispositive portion of which reads as follows:

“WHEREFORE, considering that the prosecution has abundantly established the guilt of the accused by proof beyond reasonable doubt, judgment is hereby rendered finding accused ROMEO GONZALES y SUN guilty beyond reasonable doubt for Violation of Sections 8 and 4, Art. II., R. A. 6425, and hereby accordingly imposes upon him the penalty of imprisonment of six (6) years and one (1) day and a fine of P6,000.00 with regard Criminal Case No. 91-180 and the penalty of life imprisonment and a fine of P20,000.00 with regard Criminal Case No. 91-181.

“SO ORDERED.

“Angeles City, July 5, 1993.

“(Sgd.) MARIANO C. DEL CASTILLO

“J u d g e”[24]

Hence, this appeal.[25]

In his brief, accused-appellant claimed that he was a victim of a frame-up.  And, assuming arguendo that he was guilty in both charges, he was entitled to a modification of the sentence imposed upon him.[26]

The Solicitor General contends that the trial court’s ruling was based on facts and evidence on record, and that it correctly imposed the appropriate penalty.[27]

The doctrine is well-entrenched that factual findings of the lower courts are accorded great respect as trial judges had the opportunity to observe the demeanor of the witnesses.  Such findings are binding on this Court unless substantial facts and circumstances were overlooked which, if considered, would materially affect the result of the case.[28]

In the case at bar, accused-appellant’s contention of frame-up is incredible.  He claimed that he was inside the comfort room of a neighbor from whom he borrowed P100.00 to buy medicines for his sick mother.  He was just wearing underwear when he was brought out of the house.  As pointed out by the trial court, his version of facts defies logic.[29]

The defense of frame-up like an alibi is viewed with disfavor as it can be easily concocted.[30] Evidence therefor must be clear and convincing.  In the absence of proof of any ill-motive on the part of the apprehending officers, this defense will not prosper.[31]

A buy-bust operation, normally preceded by surveillance, is an effective mode of apprehending drug pushers and, “if carried out with due regard to constitutional and legal safeguards, [it] deserves judicial sanction.”[32] A warrant of arrest is not essential because the violator is caught in flagrante delicto.  Searches made incidental thereto are valid.[33]

Pfc. Danilo Cruz testified that accused-appellant tried to run away when the buy-bust team approached him and confiscated the bag of marijuana he sold.  When asked further on how the team confiscated the other bags of marijuana, Pfc. Cruz said that they found those bags beside accused-appellant while the latter was sitting under a tree.  The testimony of Pfc. Cruz[34] runs, thus:

Q:  And what is the contents (sic) of this plastic bag?

A:  The contents (sic) is 1 kilogram of marijuana.

Q:  How about the second and third plastic bags?

A:  They contain two blocks of marijuana of approximately 1.5 kilos, and the ten medium size plastic bags also contained marijuana.

xxx         xxx       xxx

Q:  Where did you find these two blocks of marijuana weighing approximately 1.5 kilos?

A:  I found it near the accused where he was sitting besides (sic) a tree.

Q:  Besides (sic) a tree near where the accused was sitting?

A:  Yes, sir.

Q:  How far was the tree from the accused?

A:  Very near from him because near the tree is a bamboo bench and they were waiting there.

Q:  Can you not approximate the distance between where you arrested the accused to the tree where you found the two blocks of marijuana?

A:  One meter.

Q:  How about the ten medium size plastic bags of marijuana, where did you find the same?

A:  Also in the brown paper bag.

To corroborate Pfc. Cruz’s testimony, Sgt. Ortiz testified[35] in this wise:

Q:  Did you tell us a while ago that Romeo Gonzales delivered to you one (1) kilogram marijuana did you not notice at that time where these two (2) block size and ten (10) medium plastic bag of marijuana were?

A:  It was placed together with the one (1) kilogram I purchased from Gonzales in a bag, brown paper bag, sir.

Q:  For clarification purposes, do you want us to understand that all these marijuana contained only in one (1) brown paper bag?

A:  Yes, sir.

Lastly, accused-appellant’s view on the imposable sentence is misplaced.

Accused-appellant cannot invoke the beneficial application of the Death Penalty Law[36] inasmuch as the evidence showed that he sold over one (1) kilogram of marijuana.[37] During the search conducted after the arrest, some 4.5 kilograms of marijuana were found in his possession.[38]

Under our criminal justice system, an amendatory law can not be given retroactive effect unless it is favorable to the accused.[39] In the case at bar, accused-appellant, therefore, shall suffer the penalty of life imprisonment imposed by the trial court.[40]

However, the trial court erred in imposing a straight penalty in Crim. Case No. 91-180.  The Indeterminate Sentence Law applies.[41]

The Dangerous Drugs Act,[42] Section 8, prescribes as penalty for possession of Indian hemp (marijuana), regardless of amount, an imprisonment ranging from six (6) years and one (1) day to twelve (12) years, and a fine ranging from P6,000.00 to P12,000.00.  This is the equivalent of prision mayor under the Revised Penal Code.  The question now arises as to whether the scale and graduation of penalties under the Revised Penal Code will apply for purposes of determining the imposable indeterminate sentence.[43]

Republic Act 6425[44] is a special law.  In People vs. Simon,[45] we categorically stated that it is amendatory to and in substitution of Articles 190 to 194 of the Revised Penal Code.[46] The Court said that we “must be guided by the rules prescribed by the Revised Penal Code concerning the application of penalties which distill the ‘deep legal thought and centuries of experience in the administration of criminal laws.”[47]

Applying the pro reo doctrine in criminal law,[48] we hold that the penalty prescribed in R. A. No. 6425, Section 8 while not using the nomenclature of the penalties under the Revised Penal Code is actually prision mayor.  Consequently, it is the first part of Section 1 of the Indeterminate Sentence Law, which shall apply in imposing the indeterminate sentence.  There are no modifying circumstances; hence, the maximum penalty shall be within the medium period of prision mayor, and the minimum penalty shall be any period within the penalty next lower in degree to that prescribed for the offense, or prision correccional.

WHEREFORE, the decision appealed from is AFFIRMED with MODIFICATION.  In Criminal Case No. 91-181, the accused-appellant is sentenced to life imprisonment and to pay a fine of P20,000.00.  In Criminal Case No. 91-180, the accused-appellant is sentenced to an indeterminate penalty of two (2) years and four (4) months of prision correccional, as minimum, to eight (8) years and one (1) day of prision mayor, as maximum, and to pay a fine of P6,000.00.

With costs in each case.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.