Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc.

Operators of Class C sawmills are not required to accomplish and submit auxiliary invoices under Regulations No. 85 of the Department of Finance; consequently, the 25% surcharge under Section 267 of the National Internal Revenue Code is not imposable where the forest products removed were covered by the commercial or official invoices prescribed for such sawmills. The term "invoice" in Section 267 is not limited to auxiliary invoices, and a compromise penalty may not be imposed without the taxpayer's conformity.

Lianga Bay Logging Co., Inc. is a domestic corporation that has been a forest concessionaire since 1956, holding an ordinary timber license issued by the Bureau of Forestry until March 12, 1958, when the license was converted into Timber License Agreement No. 49. Within its forest concession it also operated a sawmill, and in connection therewith posted a P25,000 bond with the Collector of Internal Revenue to guarantee payment of such forest charges as might be due from it. The dispute turns on the Revised Internal Revenue Forest Products Regulations No. 85 of the Department of Finance, which classify sawmills into Classes A, B, C, and D and prescribe different invoicing and record-keeping requirements for each class, and on Section 267 of the National Internal Revenue Code, which imposes a 25% increase in forest charges where forest products are removed without invoice.

Lianga Bay Logging Co., Inc., a domestic corporation, has been a forest concessionaire since 1956, holding an ordinary timber license issued by the Bureau of Forestry until March 12, 1958, when its license was converted into Timber License Agreement No. 49. Within its forest concession it also operated a sawmill, and in connection therewith posted a bond in the amount of P25,000.00 with the Collector of Internal Revenue to guarantee payment of such forest charges as might be due from it.

Forest officers were assigned to Lianga's concession. They prepared monthly reports setting forth, among other things, the quantity of logs cut and removed within a certain period and the computation of the forest charges due thereon. It was on the basis of these reports that forest charges were paid by Lianga to the Bureau of Internal Revenue through the deputy provincial treasurer. For the period from April 1956 to December 1961, inclusive, Lianga paid a total of P336,462.40 in regular forest charges.

Some two years later, the Commissioner of Internal Revenue wrote to Lianga demanding payment of P84,115.60, representing a 25% surcharge on the sum of P336,462.40, on the theory that Lianga had removed forest products from its cutting area without the auxiliary invoices required by Section 267 of the National Internal Revenue Code, being covered only by "commercial tables" prepared by the forest officers assigned to Lianga. The Commissioner also required payment of P300.00 as compromise if Lianga wished to settle extrajudicially the violation in question. Lianga asked the Commissioner to reconsider his assessment and demand, claiming that as operator of a Class C sawmill it was not required to prepare and submit auxiliary invoices pursuant to Section 23 of Regulations No. 85 of the Department of Finance. When the Commissioner refused to change his stand, Lianga appealed to the Court of Tax Appeals.

The Court of Tax Appeals found, on the basis of the evidence, that Lianga is a Class C sawmill, and the record established its character as such: in accordance with Regulations No. 85, forest officers had been permanently assigned to its concession for the purpose of scaling all logs felled, and it had posted a bond to guarantee payment of the forest charges that might be due from it. What is required of a Class C sawmill in lieu of auxiliary invoices are the monthly scale reports (B.I.R. Form No. 14.15, drawn up by the forest officers assigned to the concession and subsequently presented to the deputy provincial treasurer for payment of the corresponding forest charges), as well as the Daily Trimmer Tally (B.I.R. Form No. 14.11), the sawmill or commercial invoice (B.I.R. Form No. 14.13), and the monthly Abstract of Sawmill Invoice (B.I.R. Form No. 14.14). The Commissioner did not claim and made no effort whatever to prove that these forms were not accomplished, so that, as the Tax Court declared, Lianga is presumed to have complied with the requirements regarding the keeping and use of the records and documents required of Class C sawmills. The forest officers' reports and computations were in fact the basis for the payment of forest charges by Lianga and the basis, as well, of the Commissioner's computation of the alleged 25% surcharge.

• Section 267 of the National Internal Revenue Code: The Commissioner invoked Section 267, which provides that if forest products shall be removed without invoice, the forest charges shall be increased by twenty-five per centum.
• Section 11 of Regulations No. 85: The Commissioner relied on Section 11, which requires that before transporting forest products cut or gathered under an ordinary license issued by the Director of Forestry, the licensee shall list such forest products on blank forms of auxiliary invoices (B.I.R. Forms No. 1404 for timber or No. 1405 for firewood or other minor forest products), which may be secured from the deputy provincial treasurer of the municipality where the products were cut or gathered.
• Section 13 of Regulations No. 85: The Commissioner invoked Section 13, which requires the possessor of forest products cut or gathered without license, or on which charges are payable, to present auxiliary invoices, and provides that surcharges shall be collected for cutting without license, cutting in violation of the terms of the license, transporting without invoice, or discharging without permit.

• Class C Sawmill Classification: Lianga claimed that as operator of a Class C sawmill, it was not required to prepare and submit auxiliary invoices pursuant to Section 23 of Regulations No. 85 of the Department of Finance.
• Compliance with Substitute Records: Lianga maintained that it complied with the record-keeping and invoicing requirements prescribed for Class C sawmills in lieu of auxiliary invoices, its forest charges having been paid on the basis of the monthly reports and computations prepared by the forest officers permanently assigned to its concession.

• Auxiliary Invoices for Class C Sawmills: Whether Lianga Bay Logging Co., Inc., as operator of a Class C sawmill, was required to accomplish and submit auxiliary invoices under Regulations No. 85 of the Department of Finance.
• Imposability of the 25% Surcharge: Whether the 25% surcharge under Section 267 of the National Internal Revenue Code was imposable on Lianga for the forest products it removed during the period from April 1956 to December 1961.
• Validity of the Compromise Penalty: Whether the P300.00 compromise penalty demanded by the Commissioner of Internal Revenue had any legal basis.

• Auxiliary Invoices for Class C Sawmills: No. Operators of Class C sawmills are not required to accomplish auxiliary invoices; under Regulations No. 85, auxiliary invoices are required only of Class A sawmills, that is, holders of ordinary timber licenses, while Class C sawmills keep and use other prescribed records in lieu thereof.
• Imposability of the 25% Surcharge: No. Section 267 of the National Internal Revenue Code does not specify the nature of the invoice contemplated, and the term is not limited to auxiliary invoices but extends to the official or commercial invoices prepared by Class C sawmills, which Lianga in fact prepared.
• Validity of the Compromise Penalty: No. The imposition of the compromise penalty without the conformity of the taxpayer is illegal and unauthorized.

• Auxiliary Invoices for Class C Sawmills: Section 11 of Regulations No. 85 applies to a forest concessionaire who is the holder of an ordinary license, but there are separate provisions on invoicing and payment of forest charges in the case of owners or operators of sawmills who are forest concessionaires like Lianga. For purposes of the Regulations, sawmills are classified into Classes A, B, C, and D. Class A sawmills are those operated by holders of forestry licenses for the purpose of sawing timber cut under their license, irrespective of whether the sawmills are located within the licensee's cutting area; their operators are required to accomplish auxiliary invoices and to secure official invoices as provided in Section 11, in the same manner as ordinary licensees. Class C sawmills are those operated by holders of forestry licenses at which forest officers are permanently stationed for the purpose of scaling all logs felled, and for the operation of which a bond is filed with the Commissioner of Internal Revenue to guarantee payment of forest charges due from the concessionaires; as in the case of Class B sawmills, their operators are not required to accomplish auxiliary invoices, but in lieu thereof use the copy of the monthly scale report furnished them by the deputy provincial treasurer for the purpose of paying the forest charges due. The Tax Court's finding, based on the evidence, that Lianga is a Class C sawmill is supported by the record: forest officers had been permanently assigned to its concession for the purpose of scaling all logs felled, and it had posted a bond to guarantee payment of forest charges. Lianga was therefore not required by Regulation No. 85 to accomplish and submit auxiliary invoices, which are required only of Class A sawmills. What is required in lieu thereof are the monthly scale reports (B.I.R. Form No. 14.15) drawn up by the forest officers assigned to the concession and subsequently presented to the deputy provincial treasurer for payment of the corresponding forest charges, as well as the Daily Trimmer Tally (B.I.R. Form No. 14.11), the sawmill or commercial invoice (B.I.R. Form No. 14.13), and the monthly Abstract of Sawmill Invoice (B.I.R. Form No. 14.14). The Commissioner did not claim and made no effort whatever to prove that these forms were not accomplished; thus, as the Tax Court declared, Lianga is presumed to have complied with the requirements regarding the keeping and use of the records and documents required of Class C sawmills, among which are the Daily Trimmer Tally and the commercial invoice. The official position of the Director of Forestry, expressed in a memorandum to Forestry Regional Directors, District Foresters and Officers in Charge dated September 6, 1966, confirms that operators of Class C sawmills are not required to accomplish auxiliary invoices, and that where logs are scaled by the Bureau of Forestry in the cutting area of a Class C sawmill and the corresponding monthly scale reports are submitted for collection at the end of the month, the logs may be transported without any corresponding auxiliary invoice. The forest officers' reports and computations were in fact the basis for the payment of forest charges by Lianga and the basis, as well, of the Commissioner's computation of the alleged 25% surcharge.

• Imposability of the 25% Surcharge: Section 267 of the Tax Code, imposing a surcharge of 25% of the regular forest charges if forest products are removed from the forest concession without invoice, does not specify the nature of the invoice contemplated. The term is not limited to auxiliary invoices; it may refer as well to official or commercial invoices such as those prepared by Class C sawmills. This is the interpretation placed on the term by Regulations No. 85 themselves, which declare that the 25% surcharge is imposable on forest products transported without official invoice, or commercial invoice, as the case requires. Since, as far as the record goes, sawmill or commercial invoices were in fact prepared by Lianga, no violation of the rule may be imputed to it at all.

• Validity of the Compromise Penalty: There is no basis for the P300.00 compromise penalty also sought to be imposed. As the Court of Tax Appeals declared, the imposition of the same without the conformity of the taxpayer is illegal and unauthorized.

• Classification of Sawmills under Regulations No. 85 — The Revised Internal Revenue Forest Products Regulations No. 85 of the Department of Finance classify sawmills into four classes with distinct invoicing and record-keeping obligations. Class A sawmills are those operated by holders of forestry licenses for the purpose of sawing timber cut under their license, irrespective of whether the sawmills are located within the licensee's cutting area; their operators are required to accomplish auxiliary invoices and to secure official invoices as provided in Section 11, in the same manner as ordinary licensees. Class B sawmills are those operated by holders of forestry licenses, in or near the forest, without a forest officer being stationed therein, and for the operation of which a bond is filed with the Collector (now Commissioner) of Internal Revenue to guarantee payment of all forest charges due from the concessionaires; their operators keep and accomplish, in lieu of auxiliary invoices, the Log Scale Record (B.I.R. Form No. 14.15), Daily Trimmer Tally (B.I.R. Form No. 14.11), Sawmill Invoice (B.I.R. Form No. 14.13), and monthly Abstract of Sawmill Invoice (B.I.R. Form No. 14.14), and pay forest charges at the end of each month. Class C sawmills are those operated by holders of forestry licenses at which forest officers are permanently stationed for the purpose of scaling all logs felled, and for the operation of which a bond is filed with the Commissioner of Internal Revenue to guarantee payment of forest charges due from the concessionaires; their operators are not required to accomplish auxiliary invoices, but use in lieu thereof the copy of the monthly scale report furnished them by the deputy provincial treasurer for the purpose of paying the forest charges due. Class D sawmills are those operated by holders of forestry licenses who are permitted to measure their timber after being sawn; for this privilege they pay P10.00 for each 1,000 board feet of first and second group timber and P5.00 for other groups, and they accomplish a monthly summary of lumber sawn (B.I.R. Form No. 14-12) while keeping and using the records and forms prescribed for Class B and C sawmills according as to whether or not a forest officer is stationed at the mill. In this case, the Court relied on the classification to hold that Lianga, being a Class C sawmill, was not required to accomplish auxiliary invoices.

• Meaning of "Invoice" under Section 267 of the National Internal Revenue Code — The term "invoice" in Section 267, which imposes a 25% increase in forest charges where forest products are removed without invoice, is not limited to auxiliary invoices; it may refer as well to official or commercial invoices such as those prepared by Class C sawmills. The Court adopted the interpretation placed on the term by Regulations No. 85, which declare the 25% surcharge imposable on forest products transported without official invoice, or commercial invoice, as the case requires. Because Lianga had in fact prepared sawmill or commercial invoices, no violation of the rule could be imputed to it.

• Illegality of a Compromise Penalty Imposed Without the Taxpayer's Conformity — The imposition of a compromise penalty without the conformity of the taxpayer is illegal and unauthorized. The Court applied this doctrine in rejecting the Commissioner's demand for P300.00 as a compromise for the alleged violation.

• Presumption of Compliance with Prescribed Records — Where the Commissioner neither claims nor makes any effort to prove that the records and documents required of a taxpayer were not accomplished, the taxpayer is presumed to have complied with the requirements regarding the keeping and use of such records. The Court relied on this in holding that Lianga is presumed to have complied with the requirements for Class C sawmills, among which are the Daily Trimmer Tally and the commercial invoice.

• "If forest products shall be removed without invoice . . . the forest charges shall be increased by twenty-five per centum . . ." — This is the text of Section 267 of the National Internal Revenue Code, the provision on which the Commissioner's assessment of the P84,115.60 surcharge rested; the Court construed its reference to "invoice" as embracing official and commercial invoices, not auxiliary invoices alone.

• "Class C sawmills are those operated by holders of forestry licenses, at which forest officers are permanently stationed for the purpose of scaling all logs felled, and for the operation of which a bond is filed with the Commissioner of Internal Revenue to guarantee payment of forest charges due from the concessionaires. As in the case of operators of Class B sawmills, operators of Class C sawmills are not required to accomplish auxiliary invoices, but in lieu thereof, the copy of the monthly scale report furnished operators of Class C sawmills by deputy provincial treasurer for the purpose of paying the forest charges due from them." — This passage, quoted by the Court from the Court of Tax Appeals, supplies the canonical definition of a Class C sawmill and the basis for exempting its operator from the auxiliary invoice requirement.

• "Furthermore, Section 267 of the Tax Code, imposing a surcharge of 25% of the regular forest charges if forest products are removed from the forest concession 'without invoice,' does not specify the nature of the invoice contemplated. Obviously, as the Tax Court says, the term is not limited to auxiliary invoices. It may refer as well to 'official' or 'commercial' invoices such as those prepared by Class C sawmills, supra. This is the interpretation placed on the term by said Regulations No. 85 themselves, which declare that the 25% surcharge is imposable on 'Forest products transported without official invoice, or commercial invoice, as the case requires.'" — This is the ratio decidendi on the surcharge, holding that the statutory term "invoice" is not restricted to auxiliary invoices and that the Commissioner's theory of liability therefore failed.

• "As to the 'compromise penalty' of P300.00 also sought to be imposed, there is no basis therefor, and, as the Court of Tax Appeals finally declares, 'the imposition of the same without the conformity of the taxpayer is illegal and unauthorized (Coll. v. U.S.T., 104 Phil. 1062; Phil. Int. Fair v. Coll., G.R. Nos. L-12928 & L-12932, March 31, 1962).'" — This passage states the Court's disposition of the compromise penalty and cites the two precedents establishing that such a penalty cannot be imposed absent the taxpayer's consent.

• Collector of Internal Revenue vs. University of Santo Tomas, 104 Phil. 1062 — Cited as authority for the rule that the imposition of a compromise penalty without the conformity of the taxpayer is illegal and unauthorized; relied upon in striking down the P300.00 compromise penalty.
• Philippine International Fair, Inc. vs. Collector of Internal Revenue, G.R. Nos. L-12928 & L-12932, March 31, 1962 — Cited alongside the U.S.T. case for the same rule on the invalidity of a compromise penalty imposed without the taxpayer's conformity.

• Section 267, National Internal Revenue Code — Provides that if forest products shall be removed without invoice, the forest charges shall be increased by twenty-five per centum. The Court held that the provision does not specify the nature of the invoice contemplated and that the term is not limited to auxiliary invoices but includes official or commercial invoices such as those prepared by Class C sawmills; since Lianga prepared sawmill or commercial invoices, the 25% surcharge was not imposable.
• Section 11, Revised Internal Revenue Forest Products Regulations No. 85 — Requires that before transporting from the public forests or forest reserves within the cutting area forest products cut or gathered under an ordinary license issued by the Director of Forestry, the licensee shall list such forest products on blank forms of auxiliary invoices (B.I.R. Form No. 1404 for timber or B.I.R. Form No. 1405 for firewood or other minor forest products), which may be secured from the deputy provincial treasurer of the municipality where the products were cut or gathered. The Court held that this section applies to a forest concessionaire who is the holder of an ordinary license, and not to operators of Class C sawmills such as Lianga.
• Section 13, Revised Internal Revenue Forest Products Regulations No. 85 — Requires the possessor of forest products cut or gathered without license, or on which charges are payable, to present auxiliary invoices, and provides that surcharges shall be collected for cutting without license, cutting in violation of the terms of the license, transporting without invoice, or discharging without permit. The Court rejected the Commissioner's reliance on this provision because Lianga, as a Class C sawmill operator, was not subject to the auxiliary invoice requirement.
• Section 23, Revised Internal Revenue Forest Products Regulations No. 85 — Invoked by Lianga in its request for reconsideration as the basis for its claim that, as operator of a Class C sawmill, it was not required to prepare and submit auxiliary invoices.
• Sections 26, 27, 28, and 29, Revised Internal Revenue Forest Products Regulations No. 85 — The provisions, cited by the Court of Tax Appeals, governing the invoicing and payment of forest charges for Classes A, B, C, and D sawmills respectively; Section 28 governs Class C sawmills, under which the copy of the monthly scale report furnished by the deputy provincial treasurer serves in lieu of auxiliary invoices.

Cruz, Gancayco, Griño-Aquino, and Medialdea, JJ.