Philippine Button Corp. v. Posadas
REITERATIONFacts
The Antecedents: The Philippine Button Corporation, a foreign corporation licensed to do business in the Philippines, manufactured buttons in its Manila factory using local labor and machinery. It purchased raw materials, manufactured buttons, and then shipped the finished products to its head office in New York, USA, where they were sold. A small percentage (4%) of the manufactured buttons were sold locally in Manila to embroidery establishments upon order. The corporation held a merchant's privilege tax receipt. Procedural History: The Collector of Internal Revenue demanded and collected internal revenue taxes from the Philippine Button Corporation based on Section 1459 of the Administrative Code and subsequently Act No. 3065, as amended by Act No. 3183, on the gross value of buttons shipped abroad. The corporation paid these taxes under protest, asserting it was not a "merchant" within the meaning of the law and that the shipments were not consignments. The corporation filed a complaint praying for the reimbursement of P14,400.10. The Court of First Instance of Manila absolved the defendant Collector of Internal Revenue. The Petition: The plaintiff-appellant appealed the decision, assigning as errors the admission of the defendant's second amended answer and the dismissal of its complaint.
Issue(s)
Whether the trial court committed a reversible error by admitting the second amended answer of the defendant after the parties had entered into a stipulation of facts but before the trial. Whether a manufacturing corporation that sells a small portion of its products locally and ships the rest to its foreign head office is a 'merchant' subject to the percentage tax on consignments abroad under Section 1459 of the Administrative Code of 1917 and Act No. 3065.
Ruling
The Supreme Court affirmed the judgment of the lower court, holding that the Philippine Button Corporation is subject to the internal revenue tax on its shipments of buttons abroad. The Court found no error in the admission of the amended answer and ruled that the corporation, by engaging in both manufacturing and selling, possesses the dual character of a merchant and a manufacturer, making it liable for the taxes imposed.
Ratio Decidendi
On Issue 1: The Court ruled that there was no abuse of discretion in admitting the second amended answer because the amendment was made before the trial and before the stipulation of facts was formally submitted for court approval. Citing the general rules of procedure, the Court noted that amendments adding new defenses are generally allowed before trial in the furtherance of justice. Furthermore, the stipulation of facts specifically reserved the right for parties to present additional evidence, which they did. The appellant had ample opportunity to disprove the new facts alleged in the amended answer by presenting competent evidence during the trial. Consequently, the admission of the amendment did not prejudice the rights of the appellant, as the case was not yet submitted for final decision when the amendment occurred. On Issue 2: The Court determined that the Philippine Button Corporation falls squarely within the legal definition of a 'merchant' under Section 1459 of the Administrative Code of 1917. The law defines a merchant as one engaged in the sale, barter, or exchange of personal property, specifically including 'manufacturers who sell articles of their own production.' Since the appellant admittedly sold 4% of its buttons locally and held a merchant's license for those sales, it cannot strip itself of its character as a merchant when shipping the remainder of its goods abroad. Relying on the precedents of Murphy v. Trinidad and Vegetable Oil Corporation v. Trinidad, the Court emphasized that a manufacturer doing business in the Islands is a merchant. The act of shipping goods to its own main office in New York constitutes a 'consignment abroad' based on the gross value of the products. Therefore, the corporation possesses a double character as both merchant and manufacturer and is subject to the percentage tax not only on local sales but also on all shipments consigned abroad.
Main Doctrine
A foreign corporation manufacturing buttons in the Philippines, holding a merchant's license, selling a portion locally and consigning the rest abroad to its main office, possesses the dual character of a merchant and a manufacturer, and is subject to internal revenue tax on both local sales and foreign consignments under Section 1459 of the Administrative Code and Act No. 3065.