Commissioner of Internal Revenue vs. Pilipinas Shell Petroleum Corporation

A transfer of real property from an absorbed corporation to the surviving corporation pursuant to an approved merger is not subject to documentary stamp tax under Section 196 of the NIRC, because it is not a sale or conveyance for consideration and the property vests in the surviving corporation by operation of law without a separate deed or instrument.

Pilipinas Shell Petroleum Corporation (PSPC) is a domestic corporation organized to construct, operate, and maintain petroleum refineries and related facilities; Shell Philippine Petroleum Corporation (SPPC) was its affiliate. The dispute concerns the documentary stamp tax treatment under the NIRC of 1997 of real property transfers effected through a corporate merger, and the effect of RA 9243, which later expressly exempted transfers of property pursuant to Section 40(C)(2) from DST.

Respondent Pilipinas Shell Petroleum Corporation (PSPC) and its affiliate Shell Philippine Petroleum Corporation (SPPC) executed a Plan of Merger on April 27, 1999, under which the entire assets and liabilities of SPPC would be transferred to and absorbed by PSPC as the surviving entity. The Securities and Exchange Commission approved the merger on July 1, 1999.

On August 10, 1999, PSPC paid the BIR documentary stamp taxes of ₱524,316.00 on the original issuance of its shares of stock issued in exchange for the surrendered SPPC shares pursuant to Section 175 of the NIRC. In a ruling dated October 4, 1999, the BIR confirmed the tax-free nature of the merger under Section 40(C)(2) and (6)(b) of the NIRC, stating that no gain or loss shall be recognized when, pursuant to a plan of merger or consolidation, a shareholder exchanges stock in a corporation that is a party to the merger solely for stock of another corporation that is also a party. The BIR ruling nevertheless stated that the issuance by PSPC of its own shares to SPPC shareholders in exchange for the surrendered SPPC certificates shall be subject to DST at ₱2.00 on each ₱200.00, or fractional part thereof, based on the total par value of the PSPC shares under Section 175, and that the exchange of land and improvements by SPPC to PSPC for PSPC’s shares shall be subject to DST under Section 196 based on the consideration or fair market value, whichever is higher.

On May 10, 2000, PSPC paid the BIR ₱22,101,407.64 as documentary stamp tax on the transfer of real property from SPPC to PSPC. Believing that it had erroneously paid the DST on its absorption of SPPC’s real property, PSPC filed a formal claim for refund or tax credit of ₱22,101,407.64 with the CIR on September 18, 2000. No action was taken by the CIR, so PSPC filed a petition for review with the CTA on May 8, 2002 to suspend the running of the two-year prescriptive period.

The CIR answered on June 11, 2002, praying for dismissal for lack of merit and asserting that documentary stamp tax is imposed in tax-deferred exchanges. The CIR cited BIR Ruling No. 2-2001 dated February 2, 2001, which states that a tax-deferred exchange of properties of a corporation that is a party to a merger or consolidation solely for shares of stock in another corporation that is also a party is subject to DST under Section 176 if the properties transferred are shares of stock or certificates of obligations, and under Section 196 if the properties transferred are real properties; the original issuance of shares of the surviving corporation in favor of the stockholders of the absorbed corporation is subject to DST under Section 175.

The CTA and CA found that no separate deed of assignment or transfer was executed for the real properties; the conveyance was incorporated in the merger plan, and SPPC’s real properties were deemed automatically transferred to and vested in PSPC by operation of law without further act or deed. They also found that PSPC had already paid DST of ₱524,316.00 on the issuance of its shares in the merger.

• Section 196 Coverage: Petitioner argued that Section 196 covers all transfers of real property for a valuable consideration and does not only refer to sale of realty since it speaks of real property being “granted, assigned, transferred or otherwise conveyed.”
• Operation of Law: Petitioner contended that the transfer was not entirely by operation of law because the merger agreement between respondent and SPPC involved the voluntary act of the parties.
• No Need for Separate Document: Petitioner argued that Section 196 does not require that a particular document be executed for the transfer of real property in order to be subject to DST; it is enough that a conveyance of real property has been effected since DST is imposed not on the document alone but on the transaction.
• Single Transaction but Separate Tax Incidents: Petitioner averred that the merger between SPPC and respondent, while constituting a single transaction, gave rise to several tax incidents which, for tax purposes, should be treated individually and apart from the merger as a whole.
• RA 9243 Implication: Petitioner argued that RA 9243, which specifically exempts transfers of real property in merger or consolidation from DST, only supports the conclusion that prior to RA 9243 such transfers were subject to DST; otherwise there would have been no reason to specifically exempt them.
• Timeliness: Petitioner, through the OSG, maintained that the records were forwarded to the handling lawyer only on May 26, 2010 due to inadvertence and without fault of the lawyer, and it filed the petition on July 9, 2010 within the extensions sought.

• Finality/Timeliness: Respondent submitted that the decision sought to be reviewed is already final and executory and the petition is filed out of time.
• Statutory Construction: Respondent asserted that a statute’s clauses and phrases should not be taken as detached and isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any of its parts.
• Section 196 Only Sales: Respondent claimed that petitioner’s interpretation that a mere grant, assignment, transfer or conveyance of real property is subject to DST under Section 196 is erroneous since petitioner disregarded the qualifying word “sold” which describes the kind of transfer contemplated as subject to DST; the references to “sold,” “purchaser,” and “consideration” show that only sales of real property are contemplated.
• Not a Conveyance for Consideration: Respondent emphasized that SPPC and PSPC did not enter into a deed of assignment or deed of exchange; the transaction was a merger, and the transfer of SPPC’s real properties to PSPC was merely a legal consequence of the merger, without consideration in money or money’s worth.
• Operation of Law: Respondent maintained that in a statutory merger or consolidation, real property of the absorbed corporation is transferred to and automatically vested in the surviving corporation purely and strictly by operation of law and not by voluntary act of the parties to the merger.

• Timeliness: Whether the petition for review on certiorari was filed within the period fixed by the SC.
• DST on Merger Transfer: Whether the transfer of SPPC’s real properties to respondent pursuant to their merger is subject to documentary stamp tax under Section 196 of the Tax Code.
• Refund/Tax Credit: Whether respondent is entitled to a refund or tax credit of ₱22,101,407.64 representing documentary stamp tax paid for taxable year 2000 in connection with the transfer of real properties from SPPC to respondent.

• Timeliness: Yes. The SC granted petitioner’s first and second motions for extension totaling 45 days from May 26, 2010, and the petition filed on July 9, 2010 was within the July 10, 2010 deadline.
• DST on Merger Transfer: No. Section 196 covers only conveyances of realty by way of sale to a purchaser for consideration; a merger transfer vests property in the surviving corporation by operation of law without a separate deed or instrument.
• Refund/Tax Credit: Yes. Since the transfer was not subject to DST under Section 196, the ₱22,101,407.64 paid was erroneous and respondent is entitled to refund or tax credit.

• Timeliness: The CA decision was dated September 10, 2009; the CA denied reconsideration on April 13, 2010; petitioner received notice on April 29, 2010, giving it 15 days or until May 14, 2010 to file the petition. On June 3, 2010, the OSG filed a manifestation and motion ad cautelam for extension, averring that the records were forwarded to the handling lawyer only on May 26, 2010 due to inadvertence and without fault of the handling lawyer; it filed a second motion for extension dated June 10, 2010, and the petition on July 9, 2010. The SC, in a Resolution dated July 26, 2010, granted pro hac vice the first and second motions for extension totaling 45 days from May 26, 2010, so petitioner had until July 10, 2010; the July 9, 2010 petition was timely.
• DST on Merger Transfer: Section 196 imposes DST on all conveyances, deeds, instruments, or writings whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser or purchasers. The SC applied the rule that every part of a statute must be interpreted with reference to the context and the whole enactment, not truncated parts; particular words and phrases should not be studied as detached and isolated expressions. Reading Section 196 as a whole, the phrase “granted, assigned, transferred or otherwise conveyed” is qualified by “sold”; the provision refers to “purchaser” and “consideration,” showing that only sales of real property are contemplated. Petitioner’s reliance on the phrase to cover all conveyances regardless of manner was erroneous; a statute cannot be construed on the basis of one part or by etymological dissection. In the case, the transfer was pursuant to the approved plan of merger. In a merger, one corporation survives and continues the business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the surviving corporation; there is no winding up or liquidation because the surviving corporation automatically acquires all rights, privileges, powers, and liabilities. Under Section 80 of the Corporation Code, all property of each constituent corporation is taken and deemed transferred to and vested in the surviving or consolidated corporation without further act or deed. Thus, the real properties were not deemed “sold” to the surviving corporation, and PSPC could not be considered a “purchaser” of realty; the properties were absorbed by operation of law and automatically transferred and vested without further act or deed. The transfer was neither a sale nor a conveyance for a consideration contracted to be paid under Section 196. Section 185 of Revenue Regulations No. 26 also provides that conveyances of realty not in connection with a sale, to trustees or other persons without consideration, are not taxable. DST is in the nature of an excise tax imposed on the privilege, opportunity or facility offered at exchanges for the transaction of the business; it is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, or transfer of an obligation, right or property incident thereto, and is imposed on the exercise of these privileges through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto. Here, there was no deed of assignment and transfer separately executed; the conveyance was incorporated in the merger plan, so respondent is not liable for DST. RA 9243, effective April 27, 2004, amended Section 199 of the NIRC to exempt from DST the transfer of property pursuant to Section 40(C)(2); this removed any doubt and made clear that transfer of real properties as a consequence of merger or consolidation is not subject to DST.
• Refund/Tax Credit: The CTA and CA ruled respondent entitled to refund or tax credit; the SC found no error. Since the transfer was not subject to DST under Section 196, the ₱22,101,407.64 paid was erroneous. The SC reiterated that as a matter of practice and principle it will not set aside the conclusion reached by an agency like the CTA, especially if affirmed by the CA, unless there has been an abuse or improvident exercise of authority; no such abuse was present.

• Statute read as a whole — Every part of a statute must be interpreted with reference to context and the whole enactment; particular words, clauses, and phrases should not be studied as detached and isolated expressions. The SC applied this to Section 196, reading “granted, assigned, transferred or otherwise conveyed” together with “sold,” “purchaser,” and “consideration.”
• Section 196 DST limited to sales of real property — Section 196 imposes DST on conveyances of realty sold to a purchaser for a consideration; it does not cover every transfer of real property regardless of manner. The SC held the merger transfer was not a sale.
• Merger transfers by operation of law — In a merger, the surviving corporation acquires all rights, properties, and liabilities of the absorbed corporation; under Section 80 of the Corporation Code, property is deemed transferred and vested in the surviving corporation without further act or deed. The SC held SPPC’s real properties were not sold to PSPC and PSPC was not a purchaser.
• DST as excise tax on specific instruments — DST is an excise tax on the privilege of entering into transactions and is imposed on specific documents or instruments; it is not levied on the legal status of the transaction alone. Because no separate deed of assignment or transfer was executed and the conveyance was incorporated in the merger plan, no DST under Section 196 attached.
• Conveyances without consideration — Section 185 of Revenue Regulations No. 26 provides that conveyances of realty not in connection with a sale, to trustees or other persons without consideration, are not taxable. The SC cited this in support.
• RA 9243 exemption — Section 9 of RA 9243 amended Section 199 of the NIRC to exempt from DST the transfer of property pursuant to Section 40(C)(2). The SC held this removed doubt and confirmed that real property transfers as a consequence of merger or consolidation are not subject to DST.
• CTA expertise — The SC will not set aside the conclusion of the CTA, especially when affirmed by the CA, absent abuse or improvident exercise of authority. The SC found no such abuse in the CTA’s refund ruling.

• “The phrase "granted, assigned, transferred or otherwise conveyed" is qualified by the word "sold" which means that documentary stamp tax under Section 196 is imposed on the transfer of realty by way of sale and does not apply to all conveyances of real property.” — The SC rejects the CIR’s broad reading of Section 196 and confines the DST to sales of real property.
• “A statute is passed as a whole and not in parts or sections, and is animated by one general purpose and intent. Consequently, each part or section should be construed in connection with every other part or section so as to produce a harmonious whole. It is not proper to confine its intention to the one section construed.” — The SC states the statutory-construction rule it uses to read Section 196 in context.
• “Documentary stamp tax is thus imposed on the exercise of these privileges through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto.” — The SC explains the nature of DST as an excise tax on specific instruments, supporting its holding that no DST attached absent a separate deed or instrument.

• Philippine International Trading Corporation vs. Commission on Audit, G.R. No. 183517, June 22, 2010, 621 SCRA 461, 469 — Cited for the rule that every part of a statute must be interpreted with reference to the context of the whole enactment.
• The Public Schools District Supervisors Association vs. Hon. De Jesus, 524 Phil. 366, 396 (2006) — Cited for the rule that a statute must be read as a whole, with each part construed in connection with every other part.
• Sajonas vs. Court of Appeals, 327 Phil. 689, 710 (1996) — Quoted for the rule that a statute is passed as a whole and should not be construed by etymological dissection into separate words.
• Global Business Holdings, Inc. vs. Surecomp Software, B.V., G.R. No. 173463, October 13, 2010, 633 SCRA 94, 104 — Cited for the definition and effects of a corporate merger.
• Mindanao Savings and Loan Association, Inc. vs. Willkom, G.R. No. 178618, October 20, 2010, 634 SCRA 291, 299 — Cited for the rule that in a merger there is no winding up or liquidation of the absorbed corporation’s affairs.
• Commissioner of Internal Revenue vs. Manila Bankers’ Life Insurance Corporation, G.R. No. 169103, March 16, 2011, 645 SCRA 500, 509 — Cited for the nature of documentary stamp tax as an excise tax imposed on the exercise of privileges through specific instruments.
• Compagnie Financiere Sucres Et Denrees vs. Commissioner of Internal Revenue, 531 Phil. 264, 269 (2006) — Cited for the rule that the SC will not set aside the CTA’s conclusion, especially when affirmed by the CA, absent abuse or improvident exercise of authority.

• Section 196, National Internal Revenue Code of 1997 — Imposes DST on conveyances, deeds, instruments, or writings whereby realty sold is granted, assigned, transferred, or otherwise conveyed to a purchaser for consideration; the SC read it to cover only sales and held it inapplicable to the merger transfer.
• Section 199(m), National Internal Revenue Code of 1997, as amended by Section 9 of Republic Act No. 9243 — Exempts from DST the transfer of property pursuant to Section 40(C)(2); the SC cited this as confirming that real property transfers in merger or consolidation are not subject to DST.
• Section 40(C)(2), National Internal Revenue Code of 1997 — Provides for non-recognition of gain or loss in a merger or consolidation when property or shares are exchanged solely for stock in a party corporation; the exemption in Section 199(m) is keyed to this provision.
• Section 80, Corporation Code — Provides that in a merger or consolidation, the surviving or consolidated corporation possesses the rights and franchises of the constituent corporations and all property is taken and deemed transferred to and vested in it without further act or deed; the SC used this to hold the transfer was by operation of law, not sale.
• Section 185, Revenue Regulations No. 26 — Provides that conveyances of realty not in connection with a sale, to trustees or other persons without consideration, are not taxable; the SC cited this in support of the non-taxability of the merger transfer.