G.R. No. 27771 - Philippine Button Corp. vs. Posadas, Jr.

Case Summary (G.R. No. 27771)

Factual Background

The parties entered into a stipulation of facts. Philippine Button Corporation engaged in the local production of buttons by purchasing raw trochas shells in the Philippine Islands, manufacturing them into buttons in its Manila factory, and then shipping the finished buttons through its resident manager to its head office in New York, where the buttons were sold or otherwise disposed of. The corporation employed several hundred Filipino workmen and workwomen and maintained machinery and facilities in Manila, with investments running to several hundred thousand pesos and a substantial monthly payroll.

For the period from 1922 up to the first quarter of 1923, the Collector demanded and collected from the corporation a tax of one per centum (1%) on the gross value of the buttons directly shipped and sent from Manila to New York. The demand was made “under the pretended authority of section 1459 of the Administrative Code, 1917.” The corporation paid under protest to avoid penalties for non-payment, on the ground, among others, that it did not fall within section 1459 and therefore was not subject to the tax levied thereunder. Payment under protest was made on specified dates and for specified quarterly amounts beginning with the payment on February 15, 1923 and running through subsequent quarterly payments.

For the period beginning with the second quarter of 1923 and up to the first quarter of 1925, the Collector demanded and collected a higher tax of one and one-half per centum (1 1/2%) on the gross value of the buttons shipped from Manila to New York. This was collected “under the pretended authority of section 1459 of the Administrative Code, 1917 and Act No. 3065, in connection with Act No. 3183.” Again, the corporation paid under protest, asserting among other grounds that it was not subject to the tax under Act No. 3063 as amended by Act No. 3183. The stipulation also reflected an exception as to the amount of P1,816.40 paid on October 18, 1924, which the Collector did not admit was paid under protest.

The stipulation further stated that the complaint was filed on September 22, 1925, and the parties reserved the right to introduce additional evidence.

Pursuant to that reservation, the corporation presented additional proof showing that its business in the Islands started in August 1922. It was established that most of the buttons manufactured in Manila were sent to the New York office, while approximately four per cent was sold locally to embroidery establishments in Manila upon orders, because those buttons could not be found elsewhere in the local market. The corporation also showed that P1,816.40 was paid on October 18, 1924 under protest, with payment made by check attached to a letter submitted to the treasurer’s office in Manila; the letter was delivered around four o’clock in the afternoon of October 20, 1924 by a stenographer of the corporation’s resident manager.

Trial Court Issue on Procedural Amendment

The appellant assigned as error the trial court’s admission of the defendant’s second amended answer dated May 4, 1926. The asserted ground was that the amendment added new defenses after the parties had already entered into a stipulation of facts, but before the stipulation had been submitted for the court’s approval and before trial.

The Supreme Court examined the applicable procedural principle governing amendments adding new defenses. It emphasized that whether an amendment should be allowed depended largely on the time when it was offered, whether its grant would work an injustice to the plaintiff, and the trial court’s discretion, which would not be disturbed absent a clear abuse. The Court noted that amendments adding new defenses are generally allowed when sought before trial or at its commencement, particularly where the matter is regulated by code or statute.

The Court found that in the present case the amendment was made before the trial and before the stipulation of facts was submitted to the court for approval. It also reasoned that filing the stipulation did not amount to a submission of the case for final decision because the parties had expressly reserved the right to present additional evidence. The appellant had an opportunity to disprove the newly alleged facts through competent evidence. On that basis, the Court held that the admission of the second amended answer did not constitute an abuse of discretion and did not prejudice any right of the appellant.

The Tax Dispute: Whether the Corporation Was a “Merchant” for Consignment Abroad

Having rejected the procedural challenge, the Court proceeded to the substantive question: whether the corporation was subject to the internal revenue tax on consignments abroad under section 1459 of the Administrative Code of 1917 and under Act No. 3065 as connected with Act No. 3183.

The Court quoted section 1459 on the percentage tax on merchants’ sales. The provision required that “all merchants” not specifically exempted pay one per centum on the gross value in money of specified goods, wares, and merchandise consigned abroad, based on the actual selling price or value at the time the commodities were disposed of or consigned. The section then defined “merchant” as “a person engaged in the sale, barter, or exchange of personal property of whatever character.” It included, by definition, manufacturers who sell articles of their own production, and commission merchants having establishments for keeping and disposing of goods, but it excluded merchandise brokers.

The Court also quoted section 1 of Act No. 3065, which became effective February 26, 1923. That statute imposed an additional tax of one-half of one per centum on the gross value in money of commodities, goods, wares, and merchandise sold, bartered, exchanged, or consigned abroad by merchants, manufacturers, and commission merchants not otherwise specifically exempted. It expressly referred to manufacturers as among the persons bound by the additional tax.

It then described Act No. 3183, effective November 27, 1924, which amended section four of Act No. 3065 to limit the tax’s enforcement from the approval date of that act until December 31, 1925.

The corporation contended that it was not a “merchant” but only a manufacturer of buttons. The Collector countered that the corporation was a merchant within section 1459 and therefore liable for the tax on consignments abroad under section 1459, and for the additional tax under Act No. 3065 as governed by Act No. 3183.

Application of the Definition of “Merchant” to the Corporation’s Business Model

The Supreme Court treated the factual matrix as decisive. It recorded that approximately four per cent of the buttons manufactured by the corporation in the Philippines were sold locally to embroidery establishments through orders, while the rest were shipped to the New York office for sale and distribution. For the local sales, the corporation held a merchant’s license and paid the appropriate local tax on buttons sold.

Given those facts and the statutory definition of merchant, the Court held that the corporation was a merchant. It explained that if the corporation did business in the Islands and held itself out under a merchant license, the fact that it shipped buttons of its own manufacture as consignments to its own New York office did not negate its status as a merchant for purposes of the percentage tax on consignments abroad. The Court reasoned that a manufacturer engaged in the business, whether with its own goods or those of others, is a merchant under the statutory scheme. It further held that the corporation could not “strip” itself of its merchant character when it sold locally and then treat itself as merely a manufacturer when it shipped abroad, because the statute’s tax character attached when goods were consigned abroad by a person who is within the term “merchant.”

The Court relied on prior jurisprudence. It cited Murphy vs. Trinidad (44 Phil., 649), which held that a person who sends material to the Philippines to be embroidered under the supervision of its local agent, with the finished product returned to the owner, was engaged in manufacturing in the Islands and was a “manufacturing merchant” within the Internal Revenue Law. It also cited Vegetable Oil Corporation vs. Trinidad (45 Phil., 822), involving a corporation licensed to do business in the Philippines that bought copra locally and shipped it to the United States for conversion and sale there; the Court held it to be a merchant subject to the consignment or shipment tax under section 1459.

The Court further treated Act No. 3065 as providing greater clarity by expressly mentioning manufacturers subject to the additional tax on consignments abroad. It stated that for a manufacturer to be bound to pay the internal revenue tax on consignments, it had to be a merchant at the same time, and a merchant was one who sold goods of its own manufacture.

Harmonization of Alleged Conflicting Jurisprudence

The corporation argued that earlier cases established conflicting doctrines. The Supreme Court examined the cited decisions and found no conflict. It discussed several cases, each addressing different statutory phrases or different industrial or commercial arrangements, including whether a particular dealing constituted being a merchant, the meaning of “disposed of,” the proper tax base for manufacturers selling in stores outside their factory, whether certai

Case Syllabus (G.R. No. 27771)

Philippine Button Corporation (plaintiff and appellant) appealed from a Court of First Instance of Manila judgment that absolved Juan Posadas, jr., Collector of Internal Revenue (defendant and appellee) from a complaint seeking reimbursement of taxes paid under protest.
The complaint sought reimbursement of P14,400.10, which the corporation paid as internal revenue tax on several button shipments made by its local manager from the Philippines to the corporation’s office in New York, United States of America.
The corporation challenged the assessments on the grounds that it was not a “merchant” under the applicable tax law and that the shipments were not “consignments.”
The appellate review raised two assigned errors: the admission of a second amended answer and the subsequent dismissal of the complaint.

Parties and Procedural Posture

Philippine Button Corporation sued for reimbursement after it paid taxes under protest, and it appealed after losing in the Court of First Instance of Manila.
Juan Posadas, jr., as Collector of Internal Revenue of the Philippine Islands, defended the assessments as lawful under section 1459 of the Administrative Code of 1917 and Act No. 3065, in relation to Act No. 3183.
The parties submitted an agreement stipulating the relevant facts, while expressly reserving the right to present additional evidence during trial.
The corporation later presented additional evidence to clarify the nature of its business operations and the circumstances of the October 18, 1924 payment.
The Supreme Court addressed first the procedural issue on amendment and then the substantive issue on whether the corporation was subject to the tax on consignments.

Stipulated Facts and Operations

Philippine Button Corporation was a foreign corporation organized under the laws of the State of New York, duly licensed to do business in the Philippine Islands.
The corporation maintained in Manila a branch and factory under the resident manager John L. Headington.
The corporation held a merchants’ privilege tax-receipt.
In the Philippines, the corporation purchased raw trochas shells, manufactured them into buttons in its Manila factory, and then shipped the finished buttons through its resident manager to its head office in New York, where the buttons were sold or otherwise disposed of.
The corporation employed several hundred Filipino workmen and Filipino workwomen, and it maintained machinery and equipment for conversion of raw shells into buttons, with a substantial investment and monthly payroll.
The business model included local sales for approximately four percent (about 4 per cent) of production, which were sold to embroidery establishments in Manila upon orders.
Most of the produced buttons were sent to New York for sale and distribution, with the remainder sold locally because that class of buttons could not be found elsewhere in the local market.

Tax Assessments Under Challenge

The collector, under the purported authority of section 1459 of the Administrative Code of 1917, demanded and collected a one percent (1%) tax on the gross value of buttons directly shipped and sent from Manila to New York for the period from the year 1922 up to and until the first quarter of 1923.
The corporation paid these assessments involuntarily to avoid penalties for non-payment, and it paid under protest on the ground, among others, that it did not come within section 1459 and therefore was not subject to the tax.
For the later period from the second quarter of 1923 up to and until the first quarter of 1925, the collector demanded and collected a one and one-half percent (1 1/2%) tax under Act No. 3065, in connection with Act No. 3183.
The corporation again paid under protest on the ground, among others, that it did not come within the provisions applicable to the additional rate and therefore was not subject to the tax.
The parties’ agreement reflected specific amounts paid per quarter, including P788.24, P895.44, and amounts totaling P4,317.65, plus additional payments for the succeeding period.
The agreement noted an exception concerning the payment of P1,816.40 on October 18, 1924, because the collector did not admit that this particular payment was made under protest.
The corporation presented additional evidence showing that the P1,816.40 payment on October 18, 1924 was made under protest, supported by the mechanics of payment through a check attached to a letter delivered to the city treasurer.

Issue One: Amendment of Answer

The corporation asserted that the trial court erred in admitting the second amended answer dated May 4, 1926 because it allegedly added new defenses after stipulation of facts and before submission of the stipulation for court approval and before trial.
The Supreme Court discussed the governing rule on whether an amendment adding new defenses should be allowed, emphasizing timing, discretion, and prejudice to the plaintiff.
The Court treated the controlling considerations as whether the amen