Title
Pampanga Sugar Mills vs. Trinidad
Case
G.R. No. 23985
Decision Date
Feb 2, 1928
Pampanga Sugar Mills contested a 1% merchant's tax on sugar sales, claiming exemption as a producer. Court ruled it a manufacturer, not exempt, as it processed cane grown by others.
sales tax
exemption
manufacturer

Case Summary (A.C. No. 6281)

Factual Background

The agreed statement of facts showed that Pampanga Sugar Mills owned and operated a sugar mill in Del Carmen, Pampanga, engaged in the production of raw centrifugal sugar and its by-products. In operating the mill, it processed sugar cane grown by sugar cane growers on lands other than those belonging to the mill operator. The cane was delivered under so-called milling contracts, under which each party received half of the resulting centrifugal sugar: the mill received fifty per cent, and the growers received the remaining fifty per cent.

For the relevant periods in the sugar crop years stated in the stipulation, the plaintiff received its share of raw centrifugal sugar, and the agreed amounts represented the sales values of the plaintiff’s portion upon sale. The plaintiff’s share had sales values of P2,059,897.00 (third quarter 1920), P91,608.00 (fourth quarter 1920), P540,066.00 (first quarter 1921), P1,388,011.00 (second quarter 1921), P450,698.00 (third quarter 1921), P112,761.00 (fourth quarter 1921), P616,507.00 (first quarter 1922), and P831,594.00 (second quarter 1922).

Tax Assessments and Protests

The Collector claimed authority under section 1459 and levied a one per cent (1%) percentage tax on the plaintiff’s sales values. To avoid penalties for nonpayment, the plaintiff paid the assessed amounts involuntarily and under protest, totaling P60,911.42. The plaintiff then filed protests against the payment of all the assessed taxes, asserting that the taxes were illegal and that it was exempt under section 1460, paragraph (b) of the Administrative Code of 1917. The Collector overruled the protests and refused to refund the payments.

Commencement of Action and Defense

The plaintiff filed a complaint on September 14, 1922 in the Court of First Instance. The Collector filed his answer on October 11, 1922, admitting the complaint’s material allegations while raising as special defense that the plaintiff was not the owner of the land where the cane was grown, and that in grinding the cane the plaintiff acted as a manufacturer, thus being subject to tax under section 1469 of the Administrative Code of 1917. Because the parties agreed to submit the controversy on the stipulated facts, the trial court proceeded to decision.

Trial Court’s Disposition and Reliance on Prior Case

The Court of First Instance held that the facts stipulated were practically identical to those agreed upon in Central Azucarera de Bais vs. Trinidad (46 Phil., 492). Applying the Supreme Court’s ruling in that case, the trial court dismissed the plaintiff’s complaint and entered judgment for the defendant. The plaintiff appealed to the Supreme Court.

The Parties’ Contentions on Appeal

On appeal, counsel for the plaintiff assigned two errors. First, the plaintiff argued that the lower court erred in holding that the plaintiff was a manufacturer in the sense that made it a merchant within section 1459 of the Administrative Code. Second, the plaintiff argued that the lower court erred in holding that it was not entitled to the exemption in section 1460(b).

In addressing the governing provisions, the Court recited that section 1459 imposed a one per cent tax on the gross value in money of commodities and merchandise sold by “merchants,” and that the term “merchant,” as used in that section, included manufacturers who sell articles of their own production, but excluded merchandise brokers. Section 1460(b), in computing the tax, excluded “agricultural products when sold by the producer or owner of the land where grown, or by any other person other than a merchant or commission merchant.”

Legal Issues Framed by the Stipulation

The Supreme Court treated as the central question whether a sugar central, operating under milling contracts on a share-to-share basis and processing cane grown on lands not owned by the central, should be regarded as a merchant subject to the percentage tax, and whether the plaintiff’s share of centrifugal sugar should be excluded as an “agricultural product” under section 1460(b).

Majority Reasoning: Production vs. Manufacture and the Application of Section 1459

The Court began by noting that the question whether a sugar central under milling contracts should be regarded as a merchant had been subject to “much discussion” and that different theories had been advanced. It referenced La Carlota Sugar Central vs. Trinidad (43 Phil., 816) as correctly rejecting an earlier thought that the sugar central should be viewed as a contractor under section 1462.

The Court then explained that later contentions had been influenced by expressions in Central Azucarera de Bais vs. Trinidad, which led some to argue that the relationship between sugar centrals and planters was effectively partnership in production, that sugar was an agricultural product, and that the planters and the sugar centrals were exempt under section 1460(b). The Court rejected that approach as failing to give weight to the essential distinction between the production of raw material (sugar cane) and the manufacture of the finished product (centrifugal sugar). To underscore this point, it relied on the principle articulated in Allen vs. Smith (173 U. S., 389) that raising cane does not make one the producer of sugar, because converting cane into sugar involves a process of manufacturing and creates a different finished product.

Applying these distinctions to the stipulated facts, the Court observed that section 1459 taxed sales by manufacturers of articles of their own production, while section 1460(b) excluded agricultural products when sold under conditions tied to the producer or owner of the land where the product was grown or to a seller who is not a merchant or commission merchant. The Court emphasized admissions in the stipulation: the plaintiff sold large quantities of sugar for its own account and admitted it was engaged in producing centrifugal sugar, while the sugar in question was manufactured or milled from cane that was not grown on plaintiff’s own land. The stipulation also showed that the plaintiff manufactured sugar under a milling contract entitling it to one-half of the resulting centrifugal sugar, while the planters retained the other half.

The Court reasoned that, under these facts, the Collector treated the sugar received by the planters under the milling contract as exempt, while requiring the plaintiff to pay the tax on the sugar corresponding to its share. The plaintiff sought refund only of the tax paid on its own share. The Court found the partnership theory weak because it did not consider the manufacturing distinction, and it explained that the planters did not claim any role in manufacturing centrifugal sugar, nor did the stipulation suggest planters had control over the manufacturing processes after delivery of the cane.

The plaintiff later advanced, for the first time on appeal, an argument that because planters were admitted owners of the cane, the plaintiff received cane merely as a bailment and therefore did not acquire title to any part of the sugar until milling was completed, such that the sugar could not be regarded as the plaintiff’s own production. The Court treated this as a misconception arising from confusing ownership of cane with the production or manufacture of sugar. It clarified that the dispute did not hinge on legal title to the cane in relation to the planters, because the statutory incidence depended on whether the plaintiff sold for its own account a manufactured product that it produced from cane delivered to it, and the plaintiff admitted it manufactured its share and sold it for its own account. The Court added that nothing in the complaint or stipulation alleged that the plaintiff produced sugar merely as an agent; even assuming a bailment, it was coupled with a contractual right to mill and appropriate one-half of the finished sugar, which meant the plaintiff had a direct, individual interest in producing and selling the finished product.

The Court further addressed and rejected a “latest theory” that extraction of juice and conversion into centrifugal sugar was not manufacturing. It held that this conflicted with Allen vs. Smith and with the uncontested facts that the plaintiff, functioning as a manufacturer, produced its share of sugar for its own benefit and from cane grown on lands other than its own, had the legal right to mill upon delivery, and sold its share for its own account. The Court concluded that these facts were sufficient to make the sales taxable under section 1459 and that the judgment of the trial court accorded with both the law and the facts. It therefore affirmed the dismissal of the complaint, with costs against the appellant.

Separate Opinions: Concurrence Pro Hac Vice

Johnson, J. concurred pro hac vice. He noted that the action began in the Court of First Instance on September 14, 1922, and that it had been pending decision in the Supreme Court since 1925, with repeated arguments and the existence of an empate among the members. He stated that the length of time and the equal division led him to concur pro hac vice so that the defeated party might obtain a decision from the Supreme Court of the United States.

Johnson, J. expressed disagreement with the majority’s characterization of sugar production. He opined that sugar was not manufactured but extracted from sugar cane pulp, and that the process was akin to making rice from palay, digging and hulling peanuts, or obtaining coprax by machinery from coconut shells. He viewed the plaintiff as employed by growers for extracting sugar at a fixed price, and he considered the fact that the plaintiff received a portion of the sugar in lieu of cash did not convert it into a manufacturer or merchant. While he cited multiple authorities, his concurrence remained limited “simply pro hac vice” and he did not consent to what he perceived as an adverse characterization imposed on the principal industry.

Separate Opinions: Disse

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