Central Azucarera Don Pedro vs. Central Bank of the Philippines

Under section 3 of Republic Act No. 601, imported Hessian cloth converted into bags to contain centrifugal sugar actually exported to the United States qualifies for refund of the 17% special excise tax on the foreign exchange used for the importation, because the bags were used in the preparation of the exported local product and formed part thereof even without physical or chemical merger.

Central Azucarera Don Pedro was a sugar central producing centrifugal sugar for export to the United States for its own account and that of its planters. It obtained foreign exchange through the Chartered Bank of India, Australia & China, the agent of the Central Bank of the Philippines. Republic Act No. 601, the statute in force at the time, governed refunds of the 17% special excise tax on foreign exchange used to import articles or containers used in the manufacture or preparation of local products for export.

On 30 May 1951, Central Azucarera Don Pedro imported from Calcutta, India, 325 bales of Hessian (Fiji) cloth measuring 325,000 yards, made into 304,525 bags, for which it purchased from the Chartered Bank of India, Australia & China, the agent of the Central Bank, and remitted to Calcutta, India, foreign exchange in the sum of $196,625, United States currency. All the bags containing centrifugal sugar produced or manufactured by the Sugar Central were exported to the United States for its account and for the account of its planters.

In July 1951, the Sugar Central imported from the same country 200 bales of the same kind of cloth measuring 199,199 yards, made into 187,400 bags, for which it purchased from the same agent bank of the Central Bank and remitted to Calcutta, India, foreign exchange in the sum of $119,099.42, United States currency. Of the 187,400 bags, 155,852 bags containing centrifugal sugar produced or manufactured by the Sugar Central were exported to the United States for its account and for that of its planters.

The Central Bank assessed and the Sugar Central paid a 17% special excise tax on the foreign exchange it purchased, amounting to P61,353.89 on the first importation and P40,797.50 on the second. On 23 April 1952, the Sugar Central asked the Central Bank to refund the sum of P67,353.89. This was denied as well as a petition for reconsideration of the denial.

In view thereof, the Sugar Central did not file a formal petition for the refund of the sum of P33,929.42, the excise tax on the 155,852 bags containing the centrifugal sugar that were exported to the United States. Instead, it brought suit in the Court of First Instance of Manila to recover from or to compel the Central Bank to refund the sums it paid as excise tax on the two importations of Hessian (Fiji) cloth. The parties submitted the foregoing facts by stipulation.

• Purpose of Republic Act No. 601: Central Bank, the defendant-appellant, contended that Republic Act No. 601 was enacted to raise revenue.

• Refund under Section 3 of Republic Act No. 601: Whether Hessian (Fiji) cloth imported and converted into bags to contain centrifugal sugar exported to the United States falls within the refund provision for articles or containers used in the manufacture or preparation of local products for export.
• Purpose of Republic Act No. 601: Whether the purpose of Republic Act No. 601—whether to raise revenue or conserve/protect the dollar reserve—determines whether the Hessian cloth falls within the refund exception.
• Exhaustion of Administrative Remedies: Whether failure to file a formal petition for refund of the special excise tax on the second importation bars recovery where a prior refund request had been denied.
• Proper Party Defendant: Whether the Central Bank of the Philippines is the proper party defendant in an action to refund the special excise tax under Republic Act No. 601.

• Refund under Section 3 of Republic Act No. 601: Yes. The Hessian cloth converted into bags was used in the preparation of centrifugal sugar for export and formed part thereof; "forming part" does not require physical merger, and the bags were needed to accomplish the export.
• Purpose of Republic Act No. 601: No. The purpose of the law is not determinative where the law itself makes an exception to the general rule imposing the special excise tax.
• Exhaustion of Administrative Remedies: No. A demand on the administrative officer and appeal to the Monetary Board would have been an idle ceremony after the refund of the first excise tax had been denied.
• Proper Party Defendant: Yes. The Central Bank is a corporation that may sue and be sued, and section 5 of Republic Act No. 601 provides that refunds under sections 2 and 3 shall be made by the Central Bank.

• Refund under Section 3 of Republic Act No. 601: The SC quoted section 3, Republic Act No. 601, which requires refund upon satisfactory proof that imported articles or containers were actually used in the manufacture or preparation of local products, formed part thereof, and that the local products were actually exported. The SC set out six requisites: (1) the articles or containers were imported by the importer-manufacturer; (2) they were used by the importer in the manufacture or preparation of local products; (3) the local products were actually consigned or exported abroad; (4) the imported articles or containers actually used formed part of the manufactured products; (5) the foreign exchange purchased, upon which the tax was assessed and paid, was to defray the cost, transportation and/or other charges incident to importation of the articles or containers; and (6) the importer-manufacturer actually paid the 17% special excise tax. The SC reasoned that if the Hessian cloth was not a container because cutting and sewing were needed to convert it into bags, it could still be deemed an article used in the manufacture or preparation of the centrifugal sugar as long as it formed part of the sugar actually exported. Even if not used in the manufacture of the sugar, it was used in the preparation of the sugar for consignment or export. The term "forming part" does not require mechanical, physical, or chemical merger; it means the imported article is needed to accomplish the export abroad of the locally manufactured product. Until ships are built or space is provided to carry sugar in bulk, the bags form part of the centrifugal sugar to be shipped abroad. The SC therefore affirmed the refunds.
• Purpose of Republic Act No. 601: The SC held that whether Republic Act No. 601 was enacted to raise revenue, as the appellant contended, or to conserve or protect the dollar reserve, or both, as the trial court held, the intent of Congress or the purpose of the law is not determinative if the law itself makes an exception to the general rule imposing the special excise tax. The question is whether under section 3 the Hessian cloth, upon which the tax was assessed and imposed, comes under the exception when converted into bags to contain centrifugal sugar exported to the United States. The SC answered that it does.
• Exhaustion of Administrative Remedies: The SC agreed with the trial court that the Sugar Central's failure to exhaust administrative remedies for the second importation did not bar recovery. It would have been an idle ceremony to make a demand on the administrative officer and, after denial, to appeal to the Monetary Board of the Central Bank after the refund of the first excise tax had already been denied. The SC therefore allowed the refund on the second cause of action.
• Proper Party Defendant: The SC agreed with the trial court that the Central Bank is the proper party defendant. It is a corporation that may sue and be sued, and section 5 of Republic Act No. 601 provides that the refund of taxes pursuant to sections 2 and 3 shall be made by the Central Bank of the Philippines. The SC cited Santos vs. Santos in support of the Central Bank's capacity to sue and be sued.

• Refund of special excise tax on foreign exchange under Section 3, Republic Act No. 601 — A manufacturer seeking refund of the 17% special excise tax on foreign exchange used to pay the cost, transportation, and/or other charges incident to importation of articles or containers used in the manufacture or preparation of local products for export must show:
  • (1) the articles or containers were imported into the Philippines by the importer-manufacturer;
  • (2) the articles or containers were used by the importer in the manufacture or preparation of local products;
  • (3) the local products manufactured or prepared were actually consigned or exported abroad;
  • (4) the imported articles or containers actually used by the importer-manufacturer form part of the manufactured products;
  • (5) the foreign exchange purchased, upon which the special excise tax was assessed and paid, was to defray the cost, transportation, and/or other charges incident to importation into the Philippines of the articles or containers used; and
  • (6) the importer-manufacturer had actually paid the 17% special excise tax assessed or imposed. The SC applied this to Hessian cloth converted into bags used to contain centrifugal sugar exported to the United States.
• "Forming part" of the exported local product — The term does not require the imported article to be merged into the local product by mechanical process, physically or materially mixed, or chemically combined so as to lose its identity. It means the imported article is needed to accomplish the export abroad of the locally manufactured product. The SC held the bags formed part of the centrifugal sugar until ships could carry the sugar in bulk.
• Purpose of tax law not determinative where exception exists — The SC held that whether Republic Act No. 601 was enacted to raise revenue or to conserve/protect the dollar reserve is not determinative if the law itself makes an exception to the general rule imposing the special excise tax. The question is whether the imported article falls within the exception.
• Idle ceremony exception to exhaustion of administrative remedies — Failure to exhaust administrative remedies is excused where a demand on the administrative officer and appeal to the Monetary Board would be an idle ceremony. The SC applied this after the first refund request was denied.
• Central Bank as proper party defendant for refunds — Under section 5 of Republic Act No. 601, refunds under sections 2 and 3 shall be made by the Central Bank. The SC held the Central Bank, as a corporation that may sue and be sued, is the proper party defendant.

• "The term "forming thereof" does not mean that the imported article should be merged into the local product by mechanical process, or physically or materially mixed, or chemically combined, so as to lose its identity. It means that the reported article is needed to accomplish the export abroad the product locally manufactured." — Defines the term "forming part" under section 3, Republic Act No. 601, and rejects the need for physical or chemical merger.
• "Until bottoms are built or space or room is provided in ocean-going ships to carry in bulk the sugar to be exported, the bags of whatever fiber used to contain the centrifugal sugar forms part the centrifugal sugar locally manufactured to be consigned or shipped abroad." — Explains why the bags form part of the centrifugal sugar until bulk shipment is possible.
• "On the failure of the appellee to exhaust administrative remedies to secure the refund of the special excise tax on the second importation sought to be recovered, we are of the same opinion as the trial court that it would have been an idle ceremony to make a demand on the administrative officer and after denial thereof to appeal to the Monetary Board of the Central Bank after the refund of the first excise tax had been denied." — Excuses exhaustion of administrative remedies as an idle ceremony after the first refund denial.
• "Whether the provisions of Republic Act No. 601, the law in force at the time of the importations made by the Sugar Central, was enacted to raise revenue, as contended by the appellant, or to conserve or protect our dollar reserve, or both, as held by the trial court, the intent of the Congress or the purpose of the law is not determinative of the issue involved in the case, if the law itself makes an exception to the general rule imposing the special excise tax." — Holds that the purpose of Republic Act No. 601 is not determinative where the statute itself creates an exception.

• Santos vs. Santos, 48 Off. Gaz. 4815, 4817; 92 Phil. 281 — Cited in support of the Central Bank's capacity to sue and be sued.

• Section 3, Republic Act No. 601 — Provided the refund of the special excise tax on foreign exchange used for the payment of the cost, transportation and/or other charges incident to importation of articles or containers used by the importer in the manufacture or preparation of local products for consignment or export abroad, upon satisfactory proof that the imported articles or containers were actually used and formed part of the local products and that the local products were actually exported. The SC applied it to the Hessian cloth converted into bags for exported centrifugal sugar.
• Section 5, Republic Act No. 601 — Provided that refunds of taxes pursuant to sections 2 and 3 shall be made by the Central Bank of the Philippines. The SC applied it to hold the Central Bank the proper party defendant.
• Sections 1 and 4, Republic Act No. 265 — Cited in the footnotes for the Central Bank being a corporation that may sue and be sued. The SC relied on this capacity in holding it the proper party defendant.