CTA Case No. 4531 (Decision)

) REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ICANEMATSU-GOSHO~ LTD.- MANILA BRANCH~ Petitioner~ - versus - . C.T .A. CASE NO. 4 531 THE COMMISSIONER OF _Promulgat.ed: ~. INTERNAL REVENUE~ MAR 27 f9!1i I I Resp~ndent. X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION . This case involves an assessment of alleged deficiency . ' gross receipts tax (broker's tax) in the amount of P423,327.50, inclusive of increments for the first, second and third quarters of fiscal year ending March 31, 1988. ; ! Petitioner is a resident. foreign corporation organized and J existing under the laws of Japan and doing business in the Philippines through l Branch with office located at the 4th Floor, 1 I �~ .Don Chua Lamk.o Bldg., Alfaro corner Dela Costa Streets, Salcedo 1 Village, Mak.ati, Metro Manila. It is engaged in general indenting \ ~�~. ~ctJvitles in the Philippines and acts as a liaison office for and in . .:; ,j i ) I -~

DECISION- \ C.TA. CASE NO. 4531. l - Pag:2- .' i behalf of its Head Office, Kanematsu-Gosho, Japan, and its local customers in the Philippines. l On January 10, 1990, respondent issued a Pre-Assessment 1 Notice against petitioner by virtue of the report of investigation conducted on its books under Letter of Authority No. 00 15814 I NA regarding its income and business tax liability for t11e fiscal year ending March 31, 1988. On January 26, 1990, petitioner 'i t11rough its auditors protested t11e pre-assessment notice and 1 requested for its cancellation and withdrawal. 1 Finally, on February 14, 1990 ~espondent issued a Deficiency Gross Receipts Tax Assessment against petitioner for f � the first three quarters of fiscal year ending March 31, 1988, in t11e sum of P42 3,32 7.50, computed as follo\lt/S: l Deficiency Gross Receipts Tax j FY Ending March 31. 1988 ( 1st Quarter-Apri11/87 to June 30/87 Gross Receipts p 910.372.04 7'1. Gross Receipts Tax Due Thereon p 6'3,726.04 25'lo Surcharge 15,931.51 Total p 79,657.55 Add: 56'1. interest from 7/21/87 to 2/16/87 44,608.23 Compromise penalty (per RMO 26-86) 6,000.00 Total Amount Due p 130,265.78 2nd Quarter-july 1.87 to Sept. '30/87 Gross Receipts P1.580.451.37 7"1. Gross Receipts Tax Due Thereon P 110,631.59 2Yi'o Surcharge 27.657.90 Total P 138,289.49 Add: 46'/o interest from 10/21/87 to 2/16/90 63.613.17 Compromise penalty (per RMO 26-86} 8.000.00 Total Amount Due P 209,902.66 561

DBJSIO~ 1 L C.TA. CASE NO. 4531 -Pagel- 3rd Quarter-October 1/87 to December 31/87 Gross Receipts p 625..402.79 77. Gross Receipts Tax Due Thereon p 43.778.19 10,944.55 25v. Surcharge Total p 54,722.74 Add: 41 7o interest from 1/21/88 to 2/16/90 22,436.32 Compromise penalty (per RMO 26-86) 6.000.00 Total Amount Due p 83,159.06 Total Amount Still Due & Collectible p 423.327.50 On March 2, 1990, a protest was filed by petitioner reiterating the same basis for the cancellation of the assessment By and large, petitioner alleged that it cannot be held liable for the broker's tax on the service fees received by it from its Head Office in Japan for the reason that the fees correspond merely to its liasing for and in behalf of its Head Office where it acted as an agent thereof in looking for customers in the Philippines. The customer-buyer in the Philippines transacts business with the Head Office-Seller in Japan. Petitioner as agent acts for and in behalf of its principal (Head Office-Japan) and as such it acted as . one entity when it transacts with its Philippine customers. Thus, the Seller is the Head Office and the Buyers are its customers in the Philippines. What petitioner did was merely to liason for its Head Office. The income received by petitioner as a Branch is I reported by it as income in its Income Tax Return. On December 5, 1990, petitioner received the decision of respondent, dated July 11, 1990, denying the request for cancellation of the assessment and instead reiterated the collection of the alleged deficiency gross receipts tax of P423,327.50. Respondent's decision relied basically on the 562 j

-, DHCISION ) C.TA. CASE NO. 4531 - Paw4- findings of its examiner that the gross receipts were derived from sales consummated between Philippine customers and sellers and manufacturers abroad other than Kanematsu-Gosho (Japan), contrary to the allegations of petitioner that the sales were directly made by Kanematsu-Gosho (Japan) to its Philippine customers by virtue of the liasing made by Kanematsu Gosho, Ltd. Manila Branch. On January 3. 199 1, petitioner filed a petition for review with this Court contesting the decision of respondent, dated July 11, 1990. On February 26, 1991, respondent served a copy of the Warrants of Garnishment on Citibank and Philippine Commercial International Bank (PCIB), petitioner's depository banks. Subsequently, on March 1, 199 1, petitioner received a copy of the Warrant of Distraint and/or Levy issued by respondent to enforce by summary remedy the collection of said tax. A surety bond was filed by petitioner to lift the warrants issued as well as to guarantee payment of tlle tax assessed. The Court granted petitioner's urgent motion for preliminary injunction by virtue of the surety bond filed and there being no objections on the part of respondent. The issue that confronts us is not legal but factual. Whether or not the sales transactions were entered into by petitioner's Head Office in Japan as direct seller of the goods or merchandise. If so, then petitioner acting as an agent of the principal is not liable for the commercial broker's tax under Section 174 of the National Internal Revenue Code. 563

D�CJSION- C.TA. CASE NO. 4531 - Page5- It is the contention of petitioner that the sales entered into was made directly by the Head Office and not by anotl1er seller or manufacturer. Petitioner presented various commercial sales invoices issued by Kanemats~-Gosho Ltd. - Tokyo, Japan (Head Office), to prove that indeed it is the owner and seller of tlle goods sold to various customers in tlle Philippines. (See E:xhs. D, E, F, G, H, I, J, K, L, M, N, 0, P, Q, R, S, T, U, V, W, X, Y, Z, and its respective submarkings). To show that its Head Office is a resident foreign corporation autllorized to engage in business in the Philippines as a general exporter and importer, petitioner presented tl1e license issued by tlle Securities and Exchange Commission {E:xh. A). Like'Wise, tlle Articles of Association (E:xh. B) of its Head Office basically showed the nature of business it is engaged in, that is, among otl1ers, to export/import, sales/purchases of commodities and technical services (E:xh. B-1); and manufacturing, processing, wholesaling, brokering, acting as agent and leasing of the commodities (E:xh. B-2). Section 157(t) of tlle 1987 National Internal Revenue Code defines a commercial broker as follows: "(t). �commercial broker� includes all persons, other than importers, manufacturers, producers or bt?Dlt lid~ employees, who, for compensation .or profit, sell or bring about sales or purchases of merchandise for other persons, or bring proposed buyers and sellers together, or negotiate freights or otller business for owners of vessels, or other means of transportation, or for the shippers, or consignors or consignee of freight carried by vessels or other means of transportation. The term includes commission merchants." � 564

DliCISI(;... - C.T.A. CASH NO. 4531. - Pa~f6- A broker is generally defined as one who is engaged. for others. on a commission, negotiating contracts relative to property with the custody of which he has no concern; the negotiator between other parties, never acting in his own name. but in the name of those who employed him; he is strictly a middleman and for some purposes, tl1e agent of both parties (Behn Meyer & Co., Ltd. vs. Nolting and Garcia, 35 PhiL 274). The broker. unlike the commission merchant. bas no relation with the thing he sells or buys. He is merely an intermediary between the purchaser and the vendor. He acquires neither the possession nor the custody of the things sold. His only office is to bring together the parties to the transaction (Pacific Commercial Co. vs. Yatco. 68 PhiL 398). The chief feature which distinguishes a broker from�other classess of agents is that it is the intermediary or middleman and, in effecting a sale, or exchange of property, acts in a certain sense as the agent of both parties to the transaction. Another distinction is that the idea of exclusiveness enters into an employment agency. while in respect of a broker there is a holding out of oneself generally for employment in matter of trade, commerce and navigation and on this principle. a broker is distinguished from a clerk ( 12 C.J.S. pp. 8-9, citing cases. italics supplied)" [Kuenzle & su�eiff. Inc. vs. Commissioner of Internal Revenue, 12 SCRA 300; Collector of Internal Revenue vs. Tan Eng Hong. 18 SCRA 4311. From the above-definition of a broker. it can be gleaned t11at there are three parties involved in a transaction - the buyer. seller, and broker. who brings the two together and in turn earns 565

DHCJS.Jm C.TA. CASH NO. 4531 - Palf'7- a commission when the sale is consummated. In this case, there are only two parties involved, the buyer (Philippine customers) and the seller (Kanematsu-Gosho. Ltd., Japan). Petitioner as a branch merely acted as an agent of the Head Office in promoting its sales, delivering the samples and the quotation to the possible buyers. The Head Office is the actual seller (shipper) of the goods as indicated itl tlle commercial invoices presented in evidence by I' petitioner. The �Head Office as a trading office buys the goods ,. >' ~: ', from manufacturers in Japan and .then sells the same to local buyet�s in the Philippines. No third party is involved in the transactions entered into by the Head Office - setter and the buyers in the Philippines. Petitioner merely facilitates the sale of . the goods in behalf of the Head Office in Japan. For the Hasing services performed by petitioner, its Head Office remitted to petitioner-btanch setvice chatges Which are reported in the books of �petitioner as ittcome attd wete ptoperly teflected in its In~ome Tax Return. The Financial Statements of petitioner for the years ended March 31, 1988 and 1987 (Exh. AA) showed that these service chatges are reflected in the lncome Statements (Exlls. AA-1, AA-2 and AA-3) as Note No. 6, which teads as fo11ows: "6. SERVICE CHARGE AGREEMENT The income of the Manila Branch is derived mainly from services it renders in connection with the purchases and sales of goods in behalf of its� Head Office. Various service charge rates agreed upon are applied on the invoice value of the goods sold or purchased. Service charges are 566

DEClSION C.T.A. CASE NO. 4531 -PageS- recognized as income by tlle Manila Branch when the services are rendered and copies of the related invoices are received from the Head Office. Receivables ansmg from this service charge agreement and other miscellaneous charges against Head Office are shown as "Inter- office current accounts" in the accompanying statements of assets and liabilities." These service charges cover the operational expenses of the branch. Petitioner's "Witness testified that no other service charges were received by petitioner from other manufacturing entities in Japan except that coming from the Head Office. Respondent failed to present any evidence to support the findings of its examiners that the receipts were derived from sales transactions abroad between Philippine customers and seller or manufacturers other than Kanematsu-Gosho, Ltd. - Japan. Respondent merely submitted this case for decision based .on the pleadings and the records thereof. From all tlle undisputed facts, no other conclusion can be reached except tllat petitioner merely acted as an agent of tlle Head Office. Hence, tlle service charges received by petitioner cannot be construed to mean brokerage fees or commissions subject to tlle 7% commercial broker's tax. Petitioner had overcome tlle burden of proof on tl1e presumption of tlle correctness of tlle assessment issued by respondent, tllerefore, tlle assessments stands on shallow grounds and cannot hold water. 567

DECJSION- C.TA. CASE NO. 4531 - Page9- WHEREFORE. in view of the foregoing, the petition for review is found to be meritorious and the same is hereby GRANTED. Respondent's decision dated July 11, 1990 is reversed and set aside. Accordingly, the Deficiency Gross Receipts Tax Assessment issued against petitioner for the period April 1, 1987 to December 31. 1987, in the total amount of P423.327.50, is hereby cancelled and withdrawn for lack of legal and factual basis. Respondent is permanently enjoined from collecting said assessment. No costs of suits. SO OR.DER.ED_ ~�~ y~W R.AMON 0_ DE Associate Judge WE CONCUR.: (~\Q. ~ ER.NESTO D_ ACOSTA Presiding Judge ~~~ L IL GRUBA Associate Judge 568

IJS.:ISJB. ,{ C.T.A. CASE NO. 4531 -Paw: to- CERTIFICATION I hereby certify that this decision was reached after due consultation between the members of the Court of Tax Appeals in accordance with Section 13. Article VI II of the Constitution. ~Q,~ ERNESTO D. ACOSTA Court of Tax Appeals Presiding Judge 569