CTA Case No. 79 (Decision)

llEPl!JBLIC . oF nm PHILIPPINES ' COUHT, OF TAX APPEALS 04ANlU. T c.T.A. MITHI NG BAYAN COOPERATIVE CASE NO. 79 MARKETING ASSOCIATION , INC. , Petitioner, - versus - J . ANTONIO ARANETA , Collector of Internal Revenue, Respondent. X� - ~ - � � ~ - - - - ~ - X DECISION The petitioner , Mithi ng Bayan Cooperative Marketing Association, Inc. , of Sta. Cruz, Laguna, owns a rice mill. From the third quarter of 1952 to the fourth quarter of 1953, the total market value of rice milled by petitioner , including the by-products , amounted to Pl43 , 220. 92o Claiming that it is a cooperative marketing association organized under Act No. 3425, as amended, and therefore exemp\ from taxation as owner or opera- tor of a rice mill, it did not pay the fixed and percentage taxes imposed by Sections 182 and 189 .of the Revenue Code. .On the other hand, after due investigation, respondent found th~t peti- tioner was not operating in accordance with Act No. 3425. Accordingly , an assessment was made I against petitioner for the sum of ~3 , 590.53 , as fixed and percentage taxes , plus a surcharge of 25%, itemized and computed as followsJ

DECISICN - C.T.A. CASE NO. 79 .- 2 - P2,864.42 716.11 2% of Pl43,220.92, market 10.00 value of rice and its by-products removed f3.590,53 from petitioner's rice mill ------------ F25i%xedsutracxhafroger 1-9-5-3-------------- Total -----~--~-~--~-~-- In addition to the sum of 3,590,53, petition- er was also asked to pay the sum of PlOO,OO as penal- ty, in extrajudicial settlement of its violations of Sections 178, 182, 183 and 189 of the Revenue Code, penalized under Sections 208 and 209. Having failed to secure a reconsideration of the decision of respondent, petitioner instituted this appeal on February 14t 1955, Before the case . could be heard on the merits, responden~ .sought to enforce collection of the sum of P3,690.53. Peti- tioner filed a petition to enjoin collection of sa!d amount, pursuant to Section ll of Republic Act No. 1125, but this Court denied the petition in its resolution of April 23, 1956 for failure of petitioner to satisfy the requirements for the suspension of the . collection of the amount claimed by the Government. The said amount of 3,690.53 was paid under protest in two installments, the first on June 20, 1956 and the second on July 10, 1956. (Exhs. I & I-1.) Petitioner's appeal now seeks the refund of said' amount. Petitioner claims exemption from the fixed and percentage taxes imposed by Sections �182 and 189 of the Revenue Code pursuant to Section 48 of I

DECISICN - C. T. A. CASE NO. 79 3- Act No. '�3425 , as amended by Republic Act No. 702 , which providess "Sec. 48. Exemptions. - Any associa- tion organized under this Act shall not be subject to the payment of the merchant ' s sales tax , the income tax , and all other percentage taxes of whatever nature and description. "Any exemption under any and all existing laws applying to agricultural products in the possession or under the control of the individual producer, shall apply similarly and completely to agricul - tural products delivered by the farmer members to the association, or which are in the possession or under the control of the association. � In order to be entitled to exemption from the mer- � chant ' s sales tax , income tax and other percentage ' taxes of whatever nature and description , a coopera- tive marketing association must be organized under Act No, ~425. What are the requirements in order that an association may be organized under said Act? Sections l , 3 and 7 of Act No . 3425 , provide as follows: �section 1. Title and declaration of purposes. - This Act shall be known and may be cited as ' The Cooperative Mar- keting law' . Every association incorporat- ed under this law shall be operated pri - marily for the benefit of the members there- of , as producers , and should aim to pro- mote , foster , and encourage the intelli - gent and orderly marketing of agricultural products between producers and consumers as direct as can be efficiently done; and to stabilize the marketing of agricultural products. X X X �sec. 3. Who may organize . Fifteen or more persons , a majority of whom are )6

DECISION - C.T.A. CASE NO. 79 -4- residents of the Philippine Islands, en- gaged in the production of agricultural products, may form a cooperative mar- keting association, with or without cap- ital stock, under the provisions of this Act, by the adoption of and filing with the Bureau of Commerce and Industry articles of incorporation and by-laws in the same manner as is required of other corporations organized under the Corporation Law, Act Numbered One Thou- sand Four Hundred Fifty-Nine as amended, except as _herein provided. ' �sec. 7. Who may be members. - Un- der the terms and conditions prescribed in the by-laws adopted by it, an as- sociation shall admit as members, or is- sue common stock only to persons engaged in the production of the agricultural products to be handled by or through the association, including the lessees and tenants of land used for the produc- tion of such products and any lessor and landlord who received as rent all or part of the crop raised on the leased premises.� � Section 3 requires that a cooperative market- ing association must be organized by persons ~- gaged in the production of agr~cultural products, and Section 7 provides that only persons engaged in the production of agricultural products may be admitted as members. Section 1 provides that the association must be operated primarily "to promote, foster, and encourage the intelligent and orde~ly mjrketing of agricultural products between produc- ers and consumers as direct as can be efficiently done; and to stabilize the marketing of agricultural products.w In short, in order that an association may be organized under Act No. �3425, it is essential that it be organized by persons and be composed of members engaged in the production of agricultur- al products, and that it be operated primarily I

DECISICN - C.T.A . CASE NO. 79 -5- for marketing of the products of its members. Let us inquire whether petitioner has complied with these requirements. The evidence shows that while the orgimizers are �engaged in agricultural production� (Exh... C, P� 104, BIR records) , the by-laws of petitioner, which has not been amended, provides that any �person , residing in the municipality in which the association is organized, who pays a member- ship fee of Pl.OO and buys at least a share of stock in his name , may become a member of the �as- sociation� (Exh. A-1, p. 85 , BIR records). In other words, a person not engaged in agricultural production may be admitted as a member. With respect to the rice mill owned by petitioner, no evidence has been presented to show that it is operated primarily to promot~, foster, encourage and stabilize the marketing of the rice belong- ing to the members. On the contrary , it is ob-iiotas from the stipulation of facts dated December 11 , 1957 submitted by the parties that the rice milled belonging to the members (assuming that they were all members of petitioner as insisted by its coun- sel) were intended for their own consumption and not for sale by the association for the benefit of its members. Clearly, petitioner can not be considered as having been organized in accordance with Act No. 3425, and its cl-aim for exemption under Section 48 of said Act can not be sustained. I

DECISION - C.T.A. CASE NO. 79 � -6- There is anothex point which militates �against petitioner's claim for exemption. S~ction 189 ~f the Revenue Code , which imposes a tax of 2% of the gross selling price or market value of rice milled by an operator of a rice mill , provides - "In case the raw materials are manufactured or milled in pursuance of a contract where the factory , cen- tral , or mill receives a share of the finished products , the tax on the share pertaining to the planter or owner of the raw materials shall be charged to the planter or owner and withheld by the proprietor or operator of the fac- tory, central , or mill and paid by him to the Collector of I nternal Revenue. � Where the palay milled by an operator of a rice mill beloogs to another person , the law requires that the tax shall be charged to the owner of the palay and withheld by the operator of the mill to be paid by him to the Collector (now Commissioner) of In- ternal Revenue. �rn case pa!ay or corn is milled for compensation , the tax of (2%) based upon the market value of the rice or corn milled, including the by-products,. shall be charged to the owner thereof and with- held by the operator or proprietor of the rice or corn mill. The compensation received for milling rice or corn is not subject to the tax prescribed in section 189 of the National Internal Revenue Code apart from the gross value of the rice or corn milled. In other words , although the compensation received for milling is not subject to tax , tne same is .not deductible from the gross value of the rice or corn milled on which the tax is to be computed.� (Sec. 4, Rev- enue Regulations No. 7 , 39 O.G. 919.) In the case of herein petitioner , the p~lay milled by it belonged to its supposed members. There- fore , the tax on the rice milled is due and collect- I

DECISICN - C.T.A. CASE NO. 79 7- ible from the owners and not from petitioner, although it is required to withhold the tax and to pay the same to respondent. The exemption provided in Se.ction ,48 of Act No. 3425 is granted sqlely in favor of cooperative marketing associa- tions organized under said Act. The said exemption does not extend to the members of a cooperative marketing association or to other persons dealing with it. The exemption from taxation of a corpora- tion does not carry with it the exemption of its stockholders. (Manila Gas Corporation v. Collector of Int. Rev., 62 Phil. 895.) It follows that the exemption of petitioner under Section 48 of Act No. 3425, even on the assumption that it is enti- tled to such exemption , does not extend to the persons who had their palay milled in petitioner's rice mill. We now come �to the claim for refund of the sum of JlOO.OO collected by respondent and paid by petitioner as �compromise penalty" for peti- tioner's supposed violations of Sections 178, 182, 183 and 189 of the Revenue Code , penalized under Sections 208 and 209 of said Code. Respondent maintains that the collection of said amount is ' in accordance with law and therefore the claim for its refund should be denied. The arguments in sup- port of the proposit~on that respondent has power or authority to impose and collect �compromise penalties" have been fully considered and dis-

DECISION - C.T.A. CASE NO. 79 - 8- posed of in University of Sto. Tomas v. Collector of Internal Revenue, C.T . A. No. 10 , Sept. 10, 1956, and Ben L. Chuy and Lee Sin v. Collector of Internal Revenue, Civil Case No. 12823 (Pangasinan), decid- ed on July 1~, 1958. We do not deem it necessary J to restate here our opinion in said cases. How- ever, we feel that two other arguments advanced by counsel for respondent in opposing the claim for refund in the instant case deserve considera- tion. It is alleged that this Court �has no juris- diction to pass upon or refund the amount collect- ed by the Collector of Internal Revenue as compro- mise penalty in extrajudicial settlement of viola- tions of the Tax Code� , and that since �the peti- tioner voluntarily paid the aforesaid amount of PlOO. OO as compromise penalty� , the said amount can not be refunded. Certain decisions of this Court have been cited in support of the view that it has no juris- diction to pass ~pon cases involving the exercise by respondent of the power to compromise under Sec- tion 309 of the Revenue Code. This is a mistake. What was meant was simply that this Court has no power to compel a taxpayer to enter into a compro- mise agreement with respondent. In all the cases decided by us where the question was raised, we invariably assumed jurisdiction and held that the Collector of Internal Revenue has no power to im- I)

DECISION - C.I.A. CASE NO. 79 - 9- , pose and collect the so-called �compromise penalties� in the absence of a compromise agreement validly entered into between the taxpayers and the Collector. Counsel for the Government apparently admit the jurisdiction of this Court over cases involving penalties imposed and collected by respondent. We quote from their memorandum: �It is significant to note in this connection that under paragraph (l) of section 7 of Republic Act No. 1125 the Court of Tax Appeals has jurisdiction to review 'decisions of the Collector .of Internal Revenue in cases involving disputed assessments, refunds of inter- nal revenue taxes, fees or other charges, penalties imposed in relation thereto x x x �' This particular provision in effect recognizes the �uthority of the Collector of Internal Revenue to impose and collect penalties.� (Page 26 , Memorandum for Respondent.} If , as alleged, the �compromise penalty� col- lected from petitioner in this case comes under npenalties imposed in relation thereto� in Section 7 of Republic Act No. 1125, we see no reason for the claim that this Court has no jurisdiction over ca es involving the collection by respondent of the so-called "compromise penalties�. Section 7 of Republic Act No. 1125 is precisely the section that defines the jurisdiction of this Court. The other ground for opposing the refund of the sum of ~100.00 is that it was voluntarily paido Counsel for respondent have apparently overlooked the evidence and their own admissions. When this Court denied the petition for the issuance of a writ of preliminary injunction to I

DECISION C.T.A. CASE NO. 79 ~ 10- suspend collection of the fixed and percentage tax- es, surch~rge and �compromise penalty� in the sum of P3,690o53, petitioner paid the amount, under pro- ~� The two official receipts issued by respond- ent {Exhs. I and I-1) both contain the notation �paid under protest�. The amended answer filed by counsel for respondent contains the following ad- mission: �That he admits the all.egation in paragraph 6 thereof that respondent persisted and continuous- ly demanded the payment of the sum of P3,690.53 from the petitioner x x x.� Finally, from the very mem- orandum of counsel for respondent, an admission is made that the �compromise penalty� was imposed. Un- der these circumstances, to hold that there was a compromise agreement validly entered into between petitioner and respondent and that the sum of PlOO.OO was paid voluntarily as a consequence . of such com- promise agreement, would be a mockery. The dividing line between a voluntary act and an act which re- sults from imposition, compulsion or threat by another is not so dim as to be imperceptible. May the collection of the said amount be justi- fied as a penalty imposed by the Collector of Inter- nal Revenue under Sections 208 and 209 of the Rev-� enue Code? We have held that the Collector has no such power. (Ben L. Chuy and Lee Sin v. Collector of Internal ~even~e, supra, citing Murphy Vo Trini- dad, 44 Phil. 649.) Therefore, whether under Sec-

DECISIOO - C. T. A. CASE NO. 79 - -11 .- tion 309 or under Sections 208 and 209 , the collec- tion of the said �compromise penalty" in the sum , of ~100. 00 is unauthorized and illegal. Counsel for respondent have correctly stated the rule that �payment made in compromise settle - ment of criminal liability for violation of the Tax Code are not recove~able notwithstanding a sub- sequent decision holding that there is no tax due. " Here again , they have overlooked the requirement that there be a compromise settlement in order that . any payment made thereunder may not be refund- able. In this case , there is no such compromise settlement because petitioner refused t o entertain respondent' s per sistent demapgs for settlement by compromise. FOR THE FOREGO! lG CONSIDERATIONS , we are of .' t he opinion that the sum of ~3 , 590. 53 , representing the fixed and percentage taxes , plus surcharge , was validly collected from petitioner as operator of a rice mill , and its claim for refund thereof must be , as the same is hereby , denied. With respect to the sum of 100. 00 as compromise penalty , the collection thereof being unauthorized and illegal , respondent is ordered to refund the said amount , plus interest at the legal rate, No pronouncement as to costs. SO ORDERED. Manila , August 14 , 1958. WE CONCUR: �