Philippine Match Co., Ltd. vs. City of Cebu

A chartered city may validly impose a sales tax on transactions booked and paid for within its territorial jurisdiction even if the goods are delivered to customers outside the city, where delivery to the carrier within the city is deemed delivery to the buyer under Article 1523 of the Civil Code, thereby consummating the sale within the city's taxing power.

Philippine Match Co., Ltd. is a Manila-based manufacturer of matches with its factory at Punta, Sta. Ana, Manila. It maintains a branch office in Cebu City for storage, sale, and distribution of matches throughout the Visayas-Mindanao region, of which Cebu City is merely one of eleven districts under that branch. Cebu City Ordinance No. 279, approved by the mayor on March 10, 1960 and also approved by the provincial board, imposes a quarterly one percent sales tax on gross sales of merchants, dealers, importers, and manufacturers doing business in the city. Section 9 of the ordinance provides that all deliveries of goods or commodities stored in the city shall be considered sales in the city and taxable. The city's taxing power derives from Section 17(a) of Commonwealth Act No. 58 and Section 31(l) of Republic Act No. 3857 (Revised Charter of Cebu City), as augmented by the Local Autonomy Act, Republic Act No. 2264, which authorizes chartered cities to impose municipal license taxes and fees upon persons engaged in business within their jurisdiction.

Philippine Match Co., Ltd., whose principal office is in Manila, manufactures matches at its factory in Punta, Sta. Ana, Manila. It ships cases and cartons of matches from Manila to its branch office in Cebu City for storage, sale, and distribution throughout the Visayas-Mindanao region. Cebu City itself is just one of the eleven districts under the company's Cebu City branch office. The company does not question the tax on matches sold and delivered within Cebu City. It assails the legality of the tax collected by the city treasurer on three classes of out-of-town deliveries: (1) sales of matches booked and paid for in Cebu City but shipped directly to customers outside the city; (2) transfers of matches to salesmen assigned to different agencies outside the city; and (3) shipments of matches to provincial customers pursuant to salesmen's instructions.

The company paid under protest the sum of P12,844.61 as one percent sales tax on those three classes of out-of-town deliveries for the period from the second quarter of 1961 to the second quarter of 1963. In paying the tax, the company accomplished verified forms furnished by the city treasurer's office, submitting a statement indicating the four kinds of transactions, the total sales, a summary of deliveries to the different agencies, invoice numbers, names of customers, the value of sales, transfers of matches to salesmen outside Cebu City, and the computation of taxes.

The first category — sales booked and paid for in Cebu City but shipped directly to customers outside the city — refers to orders made in the city by customers through personal or phone calls, for which sales invoices are issued. The matches are then shipped from the company's bodega in the city, where they had been stored, to the customers' places of business or residences outside the city, duly covered by bills of lading. The matches are used and consumed outside the city. The second category — transfers to salesmen — involves shipments from the branch office to salesmen provided with panel cars assigned within the province of Cebu and in the different districts in the Visayas and Mindanao. No sales invoices are issued for these transfers; the matches received by the salesmen constitute their direct cash accountability. The salesmen sell the matches within their respective territories, issue cash sales invoices, and remit proceeds to the Cebu branch office. The third category — shipments pursuant to salesmen's instructions — involves orders sent by letter or telegram to the branch office by salesmen assigned outside the city. The matches are shipped from the bodega in the city to customers residing outside the city, the salesmen issue the sales invoices, and the proceeds are remitted to the branch office. In all three categories, the matches are consumed and used outside the city.

By letter dated April 15, 1961, the company sought refund of the sales tax paid on out-of-town deliveries, invoking Shell Company of the Philippines, Ltd. vs. Municipality of Sipocot, Camarines Sur, where sales of oil effected outside the territorial limits of Sipocot were held not subject to the municipal tax. The city treasurer denied the request, maintaining that under Section 9 of the ordinance all out-of-town deliveries of matches stored in the city are subject to the sales tax. On August 12, 1963, the company filed the complaint, praying that the ordinance be declared void insofar as it taxed out-of-town deliveries, that the city be ordered to refund P12,844.61 as excess sales tax, and that the city treasurer be ordered to pay damages.

After hearing, the trial court sustained the tax on the first category — sales booked and paid for in Cebu City but shipped directly to customers outside the city — holding that those sales were consummated in Cebu City because delivery to the carrier in the city is deemed delivery to the buyer. The trial court invalidated the tax on the second and third categories, characterizing it as a "storage tax" rather than a sales tax, and ordered the defendants to refund P8,923.55 with legal interest. The city did not appeal. The company appealed from the portion of the decision upholding the tax on the first category and from the dismissal of its claim for damages against the city treasurer.

• Taxing Jurisdiction: Petitioner argued that sales of matches delivered to customers outside Cebu City are beyond the city's taxing power because the matches were consumed outside the city, invoking Shell Company of the Philippines, Ltd. vs. Municipality of Sipocot, Camarines Sur, where sales effected outside the taxing municipality were held not subject to the municipal tax.
• Damages: Petitioner contended that the city treasurer refused and neglected without just cause to perform his duty and to act with justice and good faith, citing Articles 19, 20, 21, 27, and 2229 of the Civil Code. Petitioner faulted the treasurer for not following the city fiscal's opinion that all out-of-town deliveries are not subject to the sales tax, and sought exemplary damages of P20,000 and attorney's fees.

• Performance of Official Duty: Respondent argued that the city treasurer was simply complying with his duty as collector of taxes under Section 50 of the Revised Charter of Cebu City, and that under Section 357 of the Revised Manual of Instructions to Treasurers, a tax ordinance must be enforced in accordance with its provisions until declared void by a competent court or revoked by the council from which it originated.
• Advisory Nature of Fiscal's Opinion: Respondent maintained that the Secretary of Finance had reminded the city treasurer that a tax ordinance approved by the provincial board is operative and must be enforced, and that the fiscal's opinion on the legality of an ordinance is merely advisory and has no binding effect.

• Taxing Power: Whether the City of Cebu can validly tax sales of matches which were perfected and paid for in Cebu City but delivered to customers outside the city.
• Damages: Whether the city treasurer is liable for exemplary damages and attorney's fees for collecting the sales tax on out-of-town deliveries.

• Taxing Power: Yes. The city can validly tax sales of matches booked and paid for at the company's branch office in the city, because delivery to the carrier in Cebu City is deemed delivery to the buyer under Article 1523 of the Civil Code, consummating the sale within the city.
• Damages: No. The city treasurer acted within the scope of his authority and in bona fide interpretation of the ordinance; an erroneous interpretation does not constitute bad faith warranting damages.

• Taxing Power: The Court applied Article 1523 of the Civil Code, under which delivery of goods to the carrier constitutes delivery to the buyer. Because the matches were stored in Cebu City and delivered to the carrier in the city, the sales were consummated in the city and thus within its taxing power. The Court distinguished this case from Shell Company vs. Municipality of Sipocot, where the price of the oil was paid outside the taxing municipality — here, the sales were booked and paid for in Cebu City. The Court also distinguished Municipality of Jose Panganiban vs. Shell Company, where the enabling law (R.A. No. 1435) specifically limited the tax to oils "distributed within the limits" of the municipality, a feature absent from the Cebu City ordinance. The Court noted that the sales formed part of the merchandising business being conducted by the company in the city and were in essence the same as sales fully consummated in the city. A contrary interpretation would defeat the ordinance or encourage tax evasion through the expedient of arranging delivery outside the city while the purchase was effected and paid for within it. The taxing power of chartered cities under the Local Autonomy Act (R.A. No. 2264) authorizes imposition of taxes on businesses conducted within the city, and the prohibition against percentage taxes on sales applies only to municipalities and municipal districts, not to chartered cities.
• Damages: The Court found that Article 27 of the Civil Code presupposes that the refusal or omission of a public official is attributable to malice or inexcusable negligence. The record revealed that the city treasurer honestly believed he was justified under Section 9 of the ordinance, considering that the company's branch office was located in Cebu City and that all out-of-town purchase orders were filled by the branch office and the sales duly reported to it. The treasurer acted within the scope of his authority and in consonance with his bona fide interpretation. The fact that his action was not completely sustained by the courts would not render him liable, especially since the Court upheld his act of taxing sales booked and paid for in the city. An erroneous interpretation of an ordinance does not constitute bad faith. The fiscal's opinion was merely advisory and had no binding effect. The Court also found it would not be just and equitable to award attorney's fees against the city under Article 2208 of the Civil Code.

• Delivery to the Carrier as Delivery to the Buyer — Under Article 1523 of the Civil Code, delivery of goods to the carrier constitutes delivery to the buyer. The Court applied this doctrine to fix the taxable situs of a sale: because the matches were delivered to the carrier in Cebu City, the sale was consummated in the city and within its taxing power, notwithstanding that the matches were ultimately used and consumed outside the city.

• Immunity of Public Officers from Liability for Erroneous Interpretation — A public officer, whether judicial, quasi-judicial, or executive, is not liable for damages to persons injured by an act performed within the scope of official authority and in the line of official duty, provided the acts are done without malice or corruption. An erroneous interpretation of an ordinance does not constitute or amount to bad faith that would entitle an aggrieved party to damages. The Court applied this to shield the city treasurer, who had acted in good faith and within his authority in enforcing the ordinance.

• Taxing Power of Chartered Cities vs. Municipalities — Under the Local Autonomy Act (R.A. No. 2264), chartered cities have authority to impose municipal license taxes or fees upon persons engaged in business within their jurisdiction. The prohibition against imposing percentage taxes on sales applies only to municipalities and municipal districts, not to chartered cities. The Court relied on this distinction to sustain Cebu City's sales tax ordinance.

• "We hold that the appeal is devoid of merit because the city can validly tax the sales of matches to customers outside the city as long as the orders were booked and paid for in the company's branch office in the city. Those matches can be regarded as sold in the city, as contemplated in the ordinance, because the matches were delivered to the carrier in Cebu City." — This passage states the ratio decidendi, linking the civil law rule on delivery to the carrier with the city's taxing power.

• "A different interpretation would defeat the tax ordinance in question or encourage tax evasion through the simple expedient of arranging for the delivery of the matches at the outskirts of the city through the purchase were effected and paid for in the company's branch office in the city." — This articulates the policy rationale against allowing the place of physical delivery to defeat the tax where the sale was perfected within the taxing jurisdiction.

• "Article 27 presupposes that the refusal or omission of a public official is attributable to malice or inexcusable negligence." — This defines the threshold for liability under Article 27 of the Civil Code, a formulation frequently relevant to claims for damages against public officers.

• Shell Company of the Philippines, Ltd. vs. Municipality of Sipocot, Camarines Sur, 105 Phil. 1263 — Distinguished. In that case, the price of the oil sold was paid outside the taxing municipality, unlike here where sales were booked and paid for in Cebu City.

• Municipality of Jose Panganiban, Province of Camarines Norte vs. Shell Company of the Philippines, Ltd., L-18349, July 30, 1966, 17 SCRA 778 — Distinguished. The enabling law (R.A. No. 1435) specifically limited the tax to oils "distributed within the limits" of the municipality, a restriction absent from the Cebu City ordinance.

• Pepsi-Cola Bottling Co. of the Philippines, Inc. vs. Municipality of Tanauan, Leyte, L-31156, February 27, 1976, 69 SCRA 460 — Cited as authority for the taxing power delegated to cities and municipalities under the Local Autonomy Act.

• Behn, Meyer & Co. vs. Yangco, 38 Phil. 602 — Cited as authority for the rule that delivery to the carrier is delivery to the buyer.

• C. N. Hodges vs. Municipal Board of the City of Iloilo, 117 Phil. 164 — Cited for the jurisdictional test of local taxing power under the Local Autonomy Act.

• Article 1523, Civil Code — Provides that delivery to the carrier is deemed delivery to the buyer. Applied to determine that sales of matches were consummated in Cebu City, placing them within the city's taxing power.

• Section 2, Republic Act No. 2264 (Local Autonomy Act) — Authorizes chartered cities, municipalities, and municipal districts to impose municipal license taxes or fees upon persons engaged in business within their jurisdiction. The proviso prohibiting percentage taxes on sales applies only to municipalities and municipal districts, not to chartered cities.

• Section 17(a), Commonwealth Act No. 58; Section 31(l), Republic Act No. 3857 (Revised Charter of Cebu City) — Empowers the municipal board of Cebu City to provide for the levy and collection of taxes for general purposes.

• Article 27, Civil Code — Provides that any person suffering material or moral loss because a public servant refuses or neglects, without just cause, to perform official duty may file an action for damages. The Court held that this provision presupposes malice or inexcusable negligence, which was absent here.

• Articles 2229 and 2208, Civil Code — Govern exemplary damages and attorney's fees, respectively. The Court found no basis for awarding either against the city or its treasurer.

Fernando (Chairman), Antonio, and Concepcion, Jr., JJ., concurred. Santos, J., was on leave. Barredo, J., wrote a separate concurring opinion noting that, as to the appellant's claim for damages, the trial court could have held the city fully liable, which in his view could have been possible.