G.R. No.
L-8506 August 31, 1956
CELESTINO CO & COMPANY, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor
General Guillermo E. Torres and Solicitor Federico V. Sian for respondent.
BENGZON, J.:
Appeal from a decision of the Court of Tax Appeals.
Celestino Co & Company is a duly registered general copartnership doing
business under the trade name of "Oriental Sash Factory". From 1946 to
1951 it paid percentage taxes of 7 per cent on the gross receipts of its
sash, door and window factory, in accordance with section one hundred
eighty-six of the National Revenue Code imposing taxes on sale of
manufactured articles. However in 1952 it began to claim liability only to
the contractor's 3 per cent tax (instead of 7 per cent) under section 191 of
the same Code; and having failed to convince the Bureau of Internal
Revenue, it brought the matter to the Court of Tax Appeals, where it also
failed. Said the Court:
To support his contention that his client is an ordinary
contractor . . . counsel presented . . . duplicate copies of letters,
sketches of doors and windows and price quotations
supposedly sent by the manager of the Oriental Sash Factory
to four customers who allegedly made special orders to doors
and window from the said factory. The conclusion that counsel
would like us to deduce from these few exhibits is that the
Oriental Sash Factory does not manufacture ready-made
doors, sash and windows for the public but only upon special
order of its select customers. . . . I cannot believe that petitioner
company would take, as in fact it has taken, all the trouble and
expense of registering a special trade name for its sash
business and then orders company stationery carrying the bold
print "Oriental Sash Factory (Celestino Co & Company, Prop.)
926 Raon St. Quiapo, Manila, Tel. No. 33076, Manufacturers of
all kinds of doors, windows, sashes, furniture, etc. used
season-dried and kiln-dried lumber, of the best quality
workmanships" solely for the purpose of supplying the needs
for doors, windows and sash of its special and limited
customers. One ill note that petitioner has chosen for its
tradename and has offered itself to the public as a "Factory",
which means it is out to do business, in its chosen lines on a
big scale. As a general rule, sash factories receive orders for
doors and windows of special design only in particular cases
but the bulk of their sales is derived from a ready-made doors
and windows of standard sizes for the average home.
Moreover, as shown from the investigation of petitioner's book
of accounts, during the period from January 1, 1952 to
September 30, 1952, it sold sash, doors and windows worth
P188,754.69. I find it difficult to believe that this amount which
runs to six figures was derived by petitioner entirely from its few
customers who made special orders for these items.
Even if we were to believe petitioner's claim that it does not
manufacture ready-made sash, doors and windows for the
public and that it makes these articles only special order of its
customers, that does not make it a contractor within the
purview of section 191 of the national Internal Revenue Code.
there are no less than fifty occupations enumerated in the
aforesaid section of the national Internal Revenue Code subject
to percentage tax and after reading carefully each and every
one of them, we cannot find under which the business of
manufacturing sash, doors and windows upon special order of
customers fall under the category of "road, building, navigation,
artesian well, water workers and other construction work
contractors" are those who alter or repair buildings, structures,
streets, highways, sewers, street railways railroads logging
roads, electric lines or power lines, and includes any other work
for the construction, altering or repairing for which machinery
driven by mechanical power is used. (Payton vs. City of
Anadardo 64 P. 2d 878, 880, 179 Okl. 68).
Having thus eliminated the feasibility off taxing petitioner as a
contractor under 191 of the national Internal Revenue Code,
this leaves us to decide the remaining issue whether or not
petitioner could be taxed with lesser strain and more accuracy
as seller of its manufactured articles under section 186 of the
same code, as the respondent Collector of Internal Revenue
has in fact been doing the Oriental Sash Factory was
established in 1946.
The percentage tax imposed in section 191 of our Tax Code is
generally a tax on the sales of services, in contradiction with
the tax imposed in section 186 of the same Code which is a tax
on the original sales of articles by the manufacturer, producer
or importer. (Formilleza's Commentaries and Jurisprudence on
the National Internal Revenue Code, Vol. II, p. 744). The fact
that the articles sold are manufactured by the seller does not
exchange the contract from the purview of section 186 of the
National Internal Revenue Code as a sale of articles.
There was a strong dissent; but upon careful consideration of the whole
matter are inclines to accept the above statement of the facts and the law.
The important thing to remember is that Celestino Co &
Company habitually makes sash, windows and doors, as it has
represented in its stationery and advertisements to the public. That it
"manufactures" the same is practically admitted by appellant itself. The
fact that windows and doors are made by it only when customers place
their orders, does not alter the nature of the establishment, for it is obvious
that it only accepted such orders as called for the employment of such
material-moulding, frames, panels-as it ordinarily manufactured or was in
a position habitually to manufacture.
Perhaps the following paragraph represents in brief the appellant's
position in this Court:
Since the petitioner, by clear proof of facts not disputed by the
respondent, manufacturers sash, windows and doors only for
special customers and upon their special orders and in
accordance with the desired specifications of the persons
ordering the same and not for the general market: since the
doors ordered by Don Toribio Teodoro & Sons, Inc., for
instance, are not in existence and which never would have
existed but for the order of the party desiring it; and since
petitioner's contractual relation with his customers is that of a
contract for a piece of work or since petitioner is engaged in the
sale of services, it follows that the petitioner should be taxed
under section 191 of the Tax Code and NOT under section 185
of the same Code." (Appellant's brief, p. 11-12).
But the argument rests on a false foundation. Any builder or homeowner,
with sufficient money, may order windows or doors of the kind
manufactured by this appellant. Therefore it is not true that it serves
special customers only or confines its services to them alone. And anyone
who sees, and likes, the doors ordered by Don Toribio Teodoro & Sons
Inc. may purchase from appellant doors of the same kind, provided he
pays the price. Surely, the appellant will not refuse, for it can easily
duplicate or even mass-produce the same doors-it is mechanically
equipped to do so.
That the doors and windows must meet desired specifications is neither
here nor there. If these specifications do not happen to be of the kind
habitually manufactured by appellant — special forms for sash, mouldings
of panels — it would not accept the order — and no sale is made. If they
do, the transaction would be no different from a purchasers of
manufactured goods held is stock for sale; they are bought because they
meet the specifications desired by the purchaser.
Nobody will say that when a sawmill cuts lumber in accordance with the
peculiar specifications of a customer-sizes not previously held in stock for
sale to the public-it thereby becomes an employee or servant of the
customer,1 not the seller of lumber. The same consideration applies to this
sash manufacturer.
The Oriental Sash Factory does nothing more than sell the goods that it
mass-produces or habitually makes; sash, panels, mouldings, frames,
cutting them to such sizes and combining them in such forms as its
customers may desire.
On the other hand, petitioner's idea of being a contractor doing
construction jobs is untenable. Nobody would regard the doing of two
window panels a construction work in common parlance.2
Appellant invokes Article 1467 of the New Civil Code to bolster its
contention that in filing orders for windows and doors according to
specifications, it did not sell, but merely contracted for particular pieces of
work or "merely sold its services".
Said article reads as follows:
A contract for the delivery at a certain price of an article which
the vendor in the ordinary course of his business manufactures
or procures for the general market, whether the same is on
hand at the time or not, is a contract of sale, but if the goods
are to be manufactured specially for the customer and upon his
special order, and not for the general market, it is contract for a
piece of work.
It is at once apparent that the Oriental Sash Factory did not merely sell its
services to Don Toribio Teodoro & Co. (To take one instance) because it
also sold the materials. The truth of the matter is that it sold materials
ordinarily manufactured by it — sash, panels, mouldings — to Teodoro &
Co., although in such form or combination as suited the fancy of the
purchaser. Such new form does not divest the Oriental Sash Factory of its
character as manufacturer. Neither does it take the transaction out of the
category of sales under Article 1467 above quoted, because although the
Factory does not, in the ordinary course of its business, manufacture and
keep on stock doors of the kind sold to Teodoro, it could stock and/or
probably had in stock the sash, mouldings and panels it used therefor
(some of them at least).
In our opinion when this Factory accepts a job that requires the use of
extraordinary or additional equipment, or involves services not generally
performed by it-it thereby contracts for a piece of work — filing special
orders within the meaning of Article 1467. The orders herein exhibited
were not shown to be special. They were merely orders for work —
nothing is shown to call them special requiring extraordinary service of the
factory.
The thought occurs to us that if, as alleged-all the work of appellant is only
to fill orders previously made, such orders should not be
called special work, but regular work. Would a factory do business
performing only special, extraordinary or peculiar merchandise?
Anyway, supposing for the moment that the transactions were not sales,
they were neither lease of services nor contract jobs by a contractor. But
as the doors and windows had been admittedly "manufactured" by the
Oriental Sash Factory, such transactions could be, and should be taxed as
"transfers" thereof under section 186 of the National Revenue Code.
The appealed decision is consequently affirmed. So ordered.
Paras, C. J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J.
B. L., and Felix, JJ., concur.
G.R. No. L-46658 May 13, 1991
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of
the Court of First Instance of Rizal, Branch XXI and TAYABAS
CEMENT COMPANY, INC., respondents.
The Chief Legal Counsel for petitioner.
Ortille Law Office for private respondent.
FERNAN, C.J.:
In this petition for certiorari, petitioner Philippine National Bank (PNB)
seeks to annul and set aside the orders dated March 4, 1977 and May 31,
1977 rendered in Civil Case No. 244221 of the Court of First Instance of
Rizal, Branch XXI, respectively granting private respondent Tayabas
Cement Company, Inc.'s application for a writ of preliminary injunction to
enjoin the foreclosure sale of certain properties in Quezon City and
Negros Occidental and denying petitioner's motion for reconsideration
thereof.
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo
Spouses), obtained a loan of P580,000.00 from petitioner bank to
purchase 60% of the subscribed capital stock, and thereby acquire the
controlling interest of private respondent Tayabas Cement Company, Inc.
(TCC).2 As security for said loan, the spouses Arroyo executed a real
estate mortgage over a parcel of land covered by Transfer Certificate of
Title No. 55323 of the Register of Deeds of Quezon City known as the La
Vista property.
Thereafter, TCC filed with petitioner bank an application and agreement
for the establishment of an eight (8) year deferred letter of credit (L/C) for
$7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to
cover the importation of a cement plant machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in favor
of Toyo Menka Kaisha, Ltd. for the account of TCC, the Arroyo spouses
executed the following documents to secure this loan accommodation:
Surety Agreement dated August 5, 19643 and Covenant dated August 6,
1964.4
The imported cement plant machinery and equipment arrived from Japan
and were released to TCC under a trust receipt agreement. Subsequently,
Toyo Menka Kaisha, Ltd. made the corresponding drawings against the
L/C as scheduled. TCC, however, failed to remit and/or pay the
corresponding amount covered by the drawings. Thus, on May 19, 1968,
pursuant to the trust receipt agreement, PNB notified TCC of its intention
to repossess, as it later did, the imported machinery and equipment for
failure of TCC to settle its obligations under the L/C.5
In the meantime, the personal accounts of the spouses Arroyo, which
included another loan of P160,000.00 secured by a real estate mortgage
over parcels of agricultural land known as Hacienda Bacon located in
Isabela, Negros Occidental, had likewise become due. The spouses
Arroyo having failed to satisfy their obligations with PNB, the latter decided
to foreclose the real estate mortgages executed by the spouses Arroyo in
its favor.
On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition
for extra-judicial foreclosure under Act 3138, as amended by Act 4118 and
under Presidential Decree No. 385 of the real estate mortgage over the
properties known as the La Vista property covered by TCT No.
55323.6 PNB likewise filed a similar petition with the City Sheriff of
Bacolod, Negros Occidental with respect to the mortgaged properties
located at Isabela, Negros Occidental and covered by OCT No. RT 1615.
The foreclosure sale of the La Vista property was scheduled on August 11,
1975. At the auction sale, PNB was the highest bidder with a bid price of
P1,000,001.00. However, when said property was about to be awarded to
PNB, the representative of the mortgagor-spouses objected and
demanded from the PNB the difference between the bid price of
P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo
spouses on their personal account. It was the contention of the spouses
Arroyo's representative that the foreclosure proceedings referred only to
the personal account of the mortgagor spouses without reference to the
account of TCC.
To remedy the situation, PNB filed a supplemental petition on August 13,
1975 requesting the Sheriff's Office to proceed with the sale of the subject
real properties to satisfy not only the amount of P499,060.25 owed by the
spouses Arroyos on their personal account but also the amount of
P35,019,901.49 exclusive of interest, commission charges and other
expenses owed by said spouses as sureties of TCC.7 Said petition was
opposed by the spouses Arroyo and the other bidder, Jose L. Araneta.
On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff
Diana L. Dungca issued a resolution finding that the questions raised by
the parties required the reception and evaluation of evidence, hence,
proper for adjudication by the courts of law. Since said questions were
prejudicial to the holding of the foreclosure sale, she ruled that her "Office,
therefore, cannot properly proceed with the foreclosure sale unless and
until there be a court ruling on the aforementioned issues."8
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon
City, Branch V a petition for mandamus9against said Diana Dungca in her
capacity as City Sheriff of Quezon City to compel her to proceed with the
foreclosure sale of the mortgaged properties covered by TCT No. 55323 in
order to satisfy both the personal obligation of the spouses Arroyo as well
as their liabilities as sureties of TCC.10
On September 6, 1976, the petition was granted and Dungca was directed
to proceed with the foreclosure sale of the mortgaged properties covered
by TCT No. 55323 pursuant to Act No. 3135 and to issue the
corresponding Sheriff's Certificate of Sale.11
Before the decision could attain finality, TCC filed on September 14, 1976
before the Court of First Instance of Rizal, Pasig, Branch XXI a
complaint12 against PNB, Dungca, and the Provincial Sheriff of Negros
Occidental and Ex-Officio Sheriff of Bacolod City seeking, inter alia, the
issuance of a writ of preliminary injunction to restrain the foreclosure of the
mortgages over the La Vista property and Hacienda Bacon as well as a
declaration that its obligation with PNB had been fully paid by reason of
the latter's repossession of the imported machinery and equipment.13
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda,
issued a restraining order14 and on March 4, 1977, granted a writ of
preliminary injunction.15 PNB's motion for reconsideration was denied,
hence this petition.
Petitioner PNB advances four grounds for the setting aside of the writ of
preliminary injunction, namely: a) that it contravenes P.D. No. 385 which
prohibits the issuance of a restraining order against a government financial
institution in any action taken by such institution in compliance with the
mandatory foreclosure provided in Section 1 thereof; b) that the writ
countermands a final decision of a co-equal and coordinate court; c) that
the writ seeks to prohibit the performance of acts beyond the court's
territorial jurisdiction; and, d) private respondent TCC has not shown any
clear legal right or necessity to the relief of preliminary injunction.
Private respondent TCC counters with the argument that P.D. No. 385
does not apply to the case at bar, firstly because no foreclosure
proceedings have been instituted against it by PNB and secondly,
because its account under the L/C has been fully satisfied with the
repossession of the imported machinery and equipment by PNB.
The resolution of the instant controversy lies primarily on the question of
whether or not TCC's liability has been extinguished by the repossession
of PNB of the imported cement plant machinery and equipment.
We rule for the petitioner PNB. It must be remembered that PNB took
possession of the imported cement plant machinery and equipment
pursuant to the trust receipt agreement executed by and between PNB
and TCC giving the former the unqualified right to the possession and
disposal of all property shipped under the Letter of Credit until such time
as all the liabilities and obligations under said letter had been
discharged.16 In the case of Vintola vs. Insular Bank of Asia and
America17 wherein the same argument was advanced by the Vintolas as
entrustees of imported seashells under a trust receipt transaction, we said:
Further, the VINTOLAS take the position that their obligation to
IBAA has been extinguished inasmuch as, through no fault of
their own, they were unable to dispose of the seashells, and
that they have relinquished possession thereof to the IBAA, as
owner of the goods, by depositing them with the Court.
The foregoing submission overlooks the nature and mercantile
usage of the transaction involved. A letter of credit-trust receipt
arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan
covered by the Letter of Credit, with the trust receipt as a
security for the loan. In other words, the transaction involves a
loan feature represented by the letter of credit, and a security
feature which is in the covering trust receipt.
xxx xxx xxx
A trust receipt, therefore, is a security agreement, pursuant to
which a bank acquires a "security interest" in the
goods.1âwphi1 It secures an indebtedness and there can be no
such thing as security interest that secures no obligation. As
defined in our laws:
(h) "Security interest" means a property interest in
goods, documents or instruments to secure
performance of some obligations of the entrustee or
of some third persons to the entruster and includes
title, whether or not expressed to be absolute,
whenever such title is in substance taken or retained
for security only.
xxx xxx xxx
Contrary to the allegation of the VINTOLAS, IBAA did not
become the real owner of the goods. It was merely the holder
of a security title for the advances it had made to the
VINTOLAS. The goods the VINTOLAS had purchased through
IBAA financing remain their own property and they hold it at
their own risk. The trust receipt arrangement did not convert the
IBAA into an investor; the latter remained a lender and creditor.
xxx xxx xxx
Since the IBAA is not the factual owner of the goods, the
VINTOLAS cannot justifiably claim that because they have
surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely relieved of
their obligation to pay their loan because of their inability to
dispose of the goods. The fact that they were unable to sell the
seashells in question does not affect IBAA's right to recover the
advances it had made under the Letter of Credit.
PNB's possession of the subject machinery and equipment being precisely
as a form of security for the advances given to TCC under the Letter of
Credit, said possession by itself cannot be considered payment of the loan
secured thereby. Payment would legally result only after PNB had
foreclosed on said securities, sold the same and applied the proceeds
thereof to TCC's loan obligation. Mere possession does not amount to
foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and
includes the sale itself.18

Neither can said repossession amount to dacion en pago. Dation in

payment takes place when property is alienated to the creditor in
satisfaction of a debt in money and the same is governed by
sales.19 Dation in payment is the delivery and transmission of ownership of
a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation.20 As aforesaid, the repossession of the
machinery and equipment in question was merely to secure the payment
of TCC's loan obligation and not for the purpose of transferring ownership
thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was
ever accomplished.

Proceeding from this finding, PNB has the right to foreclose the mortgages
executed by the spouses Arroyo as sureties of TCC. A surety is
considered in law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable.21 As sureties, the Arroyo
spouses are primarily liable as original promissors and are bound
immediately to pay the creditor the amount outstanding.22

Under Presidential Decree No. 385 which took effect on January 31, 1974,
government financial institutions like herein petitioner PNB are required to
foreclose on the collaterals and/or securities for any loan, credit or
accommodation whenever the arrearages on such account amount to at
least twenty percent (20%) of the total outstanding obligations, including
interests and charges, as appearing in the books of account of the
financial institution concerned.23 It is further provided therein that "no
restraining order, temporary or permanent injunction shall be issued by the
court against any government financial institution in any action taken by
such institution in compliance with the mandatory foreclosure provided in
Section 1 hereof, whether such restraining order, temporary or permanent
injunction is sought by the borrower(s) or any third party or parties . . ."24

It is not disputed that the foreclosure proceedings instituted by PNB

against the Arroyo spouses were in compliance with the mandate of P.D.
385. This being the case, the respondent judge acted in excess of his
jurisdiction in issuing the injunction specifically proscribed under said
decree.

Another reason for striking down the writ of preliminary injunction

complained of is that it interfered with the order of a co-equal and
coordinate court. Since Branch V of the CFI of Rizal had already acquired
jurisdiction over the question of foreclosure of mortgage over the La Vista
property and rendered judgment in relation thereto, then it retained
jurisdiction to the exclusion of all other coordinate courts over its judgment,
including all incidents relative to the control and conduct of its ministerial
officers, namely the sheriff thereof.25 The foreclosure sale having been
ordered by Branch V of the CFI of Rizal, TCC should not have filed
injunction proceedings with Branch XXI of the same CFI, but instead
should have first sought relief by proper motion and application from the
former court which had exclusive jurisdiction over the foreclosure
proceeding.26

This doctrine of non-interference is premised on the principle that a

judgment of a court of competent jurisdiction may not be opened, modified
or vacated by any court of concurrent jurisdiction.27

Furthermore, we find the issuance of the preliminary injunction directed

against the Provincial Sheriff of Negros Occidental and ex-officio Sheriff of
Bacolod City a jurisdictional faux pas as the Courts of First Instance, now
Regional Trial Courts, can only enforce their writs of injunction within their
respective designated territories.28

WHEREFORE, the instant petition is hereby granted. The assailed orders

are hereby set aside. Costs against private respondent.

Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.