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CIR vs. Pilipinas Shell [Taxrev] - [Construction of Tax Statutes]

Pilipinas Shell Petroleum Corporation (PSPC) entered into a Plan of Merger with its affiliate, Shell
Philippine Petroleum Corporation (SPPC). In the Plan of Merger, it was provided that the entire assets
and liabilities of SPPC will be transferred to, and absorbed by, respondent as the surviving entity.
Respondent paid to the BIR documentary stamp taxes on the original issuance of shares of stock of
respondent issued in exchange for the surrendered SPPC shares pursuant to Section 175 of the Tax
Code. The BIR, however, said that “the issuance by PSPC of its own shares of stock to the
shareholders of SPPC in exchange for the surrendered certificates of stock of SPPC shall be subject
to the documentary stamp tax (DST) pursuant to Section 175 of the Tax Code of 1997” and “the
exchange of land and improvements by SPPC to PSPC for the latter’s shares of stock shall be subject
to documentary stamp tax imposed under Section 196.”1

Respondent paid. Later on, believing that it erroneously paid documentary stamp tax on its absorption
of real property owned by SPPC, respondent filed with CIR a formal claim for refund or tax credit of
the documentary stamp tax. The CIR did not act on it, so they filed a petition for review with the CTA,
who granted respondent’s prayer for tax refund or credit. The CA ruled that the actual transfer of
SPPC’s real properties to respondent was not effected by or dependent upon any voluntary deed,
conveyance or assignment but occurred by operation of law. The MR was denied.

I: Whether the transfer of SPPC’s real properties to respondent is subject to documentary stamp tax
under Section 196 of the Tax Code? NO

- According to Section 196, documentary stamp tax is imposed on all conveyances, deeds,
instruments or writings whereby land or realty sold shall be conveyed to the purchaser or purchasers.

- It is a rule in statutory construction that every part of the statute must be interpreted with
reference to the context, i.e., that every part of the statute must be considered together with the other
parts, and kept subservient to the general intent of the whole enactment.

- Here, we do not find merit in petitioner’s contention that Section 196 covers all transfers and
conveyances of real property for a valuable consideration. A perusal of the subject provision would
clearly show it pertains only to sale transactions where real property is conveyed to a purchaser
for a consideration. 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 fact that Section
196 refers to words "sold", "purchaser" and "consideration" undoubtedly leads to the conclusion that
only sales of real property are contemplated therein.

- The CIR erred when it relied on the phrase "granted, assigned, transferred or otherwise conveyed" in

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SEC. 196. Stamp Tax on Deeds of Sale and Conveyance of Real Property. – On all conveyances, deeds,
instruments, or writings, other than grants, patents, or original certificates of adjudication issued by the
Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise
conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or
purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed based on the
consideration contracted to be paid for such realty or on its fair market value determined in accordance with
Section 6(E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the
Government, the tax herein imposed shall be based on the actual consideration.

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claiming that all conveyances of real property regardless of the manner of transfer are subject to
documentary stamp tax under Section 196. It is not proper to construe the meaning of a statute on the
basis of one part.

- A statute is passed as a whole and not in parts or sections

- Section 196 should be read as a whole and not phrase by phrase. The phrase granted, assigned,
transferred or otherwise conveyed clearly refers to the phrase whereby any land, tenement or other
realty is sold. This clearly shows that the legislature intended Section 196 to refer to a transfer of realty
by virtue of sale.

- It should be emphasized that in the instant case, the transfer of SPPC’s real property to respondent
was pursuant to their approved plan of merger. In a merger of two existing corporations, one of the
corporations survives and continues the business, while the other is dissolved, and all its rights,
properties, and liabilities are acquired by the surviving corporation.

- Notably, RA 9243, entitled "An Act Rationalizing the Provisions of the Documentary Stamp Tax of the
National Internal Revenue Code of 1997" exempts the transfer of real property of a corporation, which
is a party to the merger or consolidation, to another corporation, which is also a party to the merger or
consolidation, from the payment of documentary stamp tax.
Facts
1. Respondent Pilipinas Shell Petroleum Corporation (PSPC) is a corporation organized and
existing under the laws of the Philippines and was incorporated to construct, operate and maintain
petroleum refineries, works, plant machinery, equipment dock and harbor facilities and auxiliary
works and other facilities of all kinds and used in or in connection with the manufacture of products
of all kinds which are wholly or partly derived from crude oil.
2. Respondent entered into a Plan of Merger with its affiliate, Shell Philippine Petroleum
Corporation (SPPC), a corporation organized and existing under the laws of the Philippines. In
the Plan of Merger, it was provided that the entire assets and liabilities of SPPC will be transferred
to, and absorbed by, respondent as the surviving entity. The Securities and Exchange
Commission approved the merger on July 1, 1999.
3. Respondent paid to the BIR documentary stamp taxes amounting to ₱524,316.00 on the original
issuance of shares of stock of respondent issued in exchange for the surrendered SPPC shares
pursuant to Section 175 of the Tax Code.
4. Confirming the tax-free nature of the merger between respondent and SPPC, the BIR ruled
that pursuant to Section 40 (C)(2) and (6)(b) of the NIRC, no gain or loss shall be
recognized, if, in pursuance to a plan of merger or consolidation, a shareholder exchanges
stock in a corporation which is a party to the merger or consolidation solely for the stock
of another corporation which is also a party to the merger or consolidation. The BIR ruled,
among others, that no gain or loss shall be recognized by the stockholders of SPPC on the
exchange of their shares of stock of SPPC solely for shares of stock of respondent pursuant to the
Plan of Merger.
5. The BIR, however, stated in said Ruling that “The issuance by PSPC of its own shares of stock to
the shareholders of SPPC in exchange for the surrendered certificates of stock of SPPC shall be
subject to the documentary stamp tax (DST) at the rate of Two Pesos (₱2.00) on each Two
Hundred Pesos (₱200.00), or fractional part thereof, based on the total par value of the PSPC
shares of stock issued pursuant to Section 175 of the Tax Code of 1997.” And “The exchange of
land and improvements by SPPC to PSPC for the latter’s shares of stock shall be subject to
documentary stamp tax imposed under Section 196 of the Tax Code of 1997, based on the
consideration contracted to be paid for such realty or its fair market value determined in
accordance withSection 6(E) of the said Code, whichever is higher.”
6. Respondent paid to the BIR the amount of ₱22,101,407.64 representing documentary stamp tax
on the transfer of real property from SPPC to respondent.
Procedural History
1. Believing that it erroneously paid documentary stamp tax on its absorption of real property

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 owned by SPPC, respondent filed with CIR a formal claim for refund or tax credit of the
documentary stamp tax in the amount of ₱22,101,407.64.
2. There being no action by petitioner, respondent filed a petition for review with the Court of Tax
Appeals (CTA) in order to suspend the running of the two-year prescriptive period.
3. Petitioner filed an Answer on June 11, 2002 praying that the petition for review be dismissed
for lack of merit. Petitioner asserted that in tax deferred exchanges, documentary stamp tax is
imposed. Petitioner cited BIR Ruling No. 2-2001.
4. In its Decision promulgated the CTA granted respondent’s prayer for tax refund or credit.
5. Petitioner filed a petition for review with the CA.
6. The appellate court held that the transfer of the properties of SPPC to respondent was not in
exchange for the latter’s shares of stock but is a legal consequence of the merger. The CA
ruled that the actual transfer of SPPC’s real properties to respondent was not effected by or
dependent upon any voluntary deed, conveyance or assignment but occurred by operation of
law. The CA held that since the basis of the BIR in imposing the documentary stamp tax is not
applicable to a transfer of real property by operation of law, PSPC erroneously paid the
documentary stamp tax and is therefore, entitled to a tax refund or tax credit.
7. Petitioner filed a motion for reconsideration which was denied by the CA.
8. petitioner filed the present petition on the sole ground that
“The court of appeals erred in holding that the transfer of real properties of SPPC to
respondent in exchange for the latter’s shares of stock is not subject to the DST imposed under
Section 196 of the tax code.
Points of Contention
Petitioner:
- merger between SPPC and respondent resulted in the following: (1) the issuance by respondent of its
own shares of stock to the shareholders of SPPC in exchange for the surrendered certificates of stock
of SPPC and was imposed a documentary stamp tax under Section 175 of the Tax Code in the amount
of ₱524,316.00; and (2) the transfer of SPPC’s real properties to respondent in exchange for the latter’s
shares of stock which was imposed a documentary stamp tax under Section 196 of the Tax Code in
the amount of ₱22,101,407.64.

Respondent:
-the documentary stamp tax imposed on the second transaction had been erroneously paid and
seeks to claim a refund or tax credit in the amount of ₱22,101,407.64. Both the CTA and the CA held
that respondent is entitled to refund or tax credit.
Issue/s Ruling
1. Whether the transfer of SPPC’s real properties to respondent is subject to 1. No
documentary stamp tax under Section 196 of the Tax Code
2. Whether respondent is entitled to the refund/tax credit representing 2. Yes
documentary stamp tax paid for the taxable year 2000 in connection with the
transfer of real properties from SPPC to respondent.
Rationale
1. The transfer of SPPC’s real properties to respondent is subject to documentary stamp tax
under Section 196 of the Tax Code

SEC. 196. Stamp Tax on Deeds of Sale and Conveyance of Real Property. – On all conveyances,
deeds, instruments, or writings, other than grants, patents, or original certificates of adjudication issued
by the Government, whereby any land, tenement or other realty sold shall be granted, assigned,
transferred orotherwise conveyed to the purchaser, or purchasers, or to any other person or persons
designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the
rates herein below prescribed based on the consideration contracted to be paid for such realty or on its
fair market value determined in accordance with Section 6(E) of this Code, whichever is higher:
Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be
based on the actual consideration. (Emphasis and underscoring ours.)

As can be gleaned from the aforequoted provision, documentary stamp tax is imposed on all
conveyances, deeds, instruments or writings whereby land or realty sold shall be conveyed to the

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purchaser or purchasers.

It is a rule in statutory construction that every part of the statute must be interpreted with reference
to the context, i.e., that every part of the statute must be considered together with the other parts, and
kept subservient to the general intent of the whole enactment. The law must not be read in truncated
parts, its provisions must beread in relation to the whole law. The particular words, clauses and
phrases should not be studied as detached and isolated expression, but the whole and every part of
the statute must be considered in fixing the meaning of any of its parts and in order to produce a
harmonious whole.

Here, we do not find merit in petitioner’s contention that Section 196 covers all transfers and
conveyances of real property for a valuable consideration. A perusal of the subject provision would
clearly show it pertains only to sale transactions where real property is conveyed to a purchaser
for a consideration. 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. Indeed, as correctly
noted by the respondent, the fact that Section 196 refers to words "sold", "purchaser" and
"consideration" undoubtedly leads to the conclusion that only sales of real property are contemplated
therein.

Thus, petitioner obviously erred when it relied on the phrase "granted, assigned, transferred or
otherwise conveyed" in claiming that all conveyances of real property regardless of the manner of
transfer are subject to documentary stamp tax under Section 196. It is not proper to construe the
meaning of a statute on the basis of one part.

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. It is always an unsafe way of construing a statute or contract to divide it by a
process of etymological dissection, into separate words, and then apply to each, thus separated from
the context, some particular meaning to be attached to any word or phrase usually to be ascertained
from the context.

We quote with approval the following statements of the appellate court in the assailed decision, Section
196 should be read as a whole and not phrase by phrase. The phrase granted, assigned,
transferred or otherwise conveyed clearly refers to the phrase whereby any land, tenement or other
realty is sold. This clearly shows that the legislature intended Section 196 to refer to a transfer of realty
by virtue of sale. This is further bolstered by the fact that the property is granted, assigned, transferred
or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated
by such purchaser or purchasers. In addition, the basis of the stamp tax is the consideration agreed
upon by the parties or the property’s fair market value. Taking all of these into consideration, it is
beyond doubt that … Section 196 pertains to a transfer of realty by way of sale.

It should be emphasized that in the instant case, the transfer of SPPC’s real property to respondent
was pursuant to their approved plan of merger. In a merger of two existing corporations, one of the
corporations survives and continues the business, while the other is dissolved, and all its rights,
properties, and liabilities are acquired by the surviving corporation. Although there is a dissolution of the
absorbed or merged corporations, there is no winding up of their affairs or liquidation of their assets
because the surviving corporation automatically acquires all their rights,privileges, and powers, as well
as their liabilities. Here, SPPC ceased to have any legal personality and respondent PSPC stepped into
everything that was SPPC’s, pursuant to the law and the terms of their Plan of Merger.

-Documentary stamp tax is in the nature of an excise tax because it is imposed upon the privilege,
opportunity or facility offered at exchanges for the transaction of the business. 

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- Notably, RA 9243, entitled "An Act Rationalizing the Provisions of the Documentary Stamp Tax of the
National Internal Revenue Code of 1997" was enacted and took effect on April 27, 2004 which exempts
the transfer of real property of a corporation, which is a party to the merger or consolidation, to another
corporation, which is also a party to the merger or consolidation, from the payment of documentary
stamp tax.

2. Respondent is entitled to the refund/tax credit representing documentary stamp tax paid
for the taxable year 2000 in connection with the transfer of real properties from SPPC to
respondent

There is no error on the part of the CA in affirming the Decision of the CTA which ruled that respondent
is entitled to a refund or issuance of a tax credit certificate in the amount of ₱22,101,407.64
representing respondent’s erroneously paid documentary stamp tax on the transfer of real property
from SPPC to respondent.

The Court reiterated the well-established doctrine 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. By the
very nature of its function, it has dedicated itself to the study and consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an abuse or improvident
exercise of authority on its part which is not present here
Disposition
Petition denied. Pilipinas Shell entitled to a tax refund

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