CTA Case No. 1 (Decision)

REPUBLIC OF TilE PHILIPPINES ~OURT OF TAX APPEALS MANILA � SOB.IA1~0 y CI � , C . T . ~ . C�Cf.S NO . 1 Petitioner, - versus - COLL:.:CTOR OF IN""TJI:f,:NAL FEv'"ENUE , Easpondent . x- - - - - - - - - - - - - - - -x DECISION This is an appeal originally filed with this Court, brought by the petitioner , roriano y Cia . , from a decision of the res- pendent, Collector of Internal Revenue , denying the reauest of the former for refund of the sum of �=50 , 058 . 01 , allegedly repre - senting 6% broker ' s percentage taxes for the period from dpril 1, 1952 to June 30 , 1954, inclusive . It appears that on December 20 , 1950, the Philippine Iron I,iines , Inc . , and the petitioner A. Soriano y Cia ., two corpora- tions duly organized and existin.c; under and by virtue of the laws of the Philippines , having their principal offices and places of business in the City of L:anila , entered into a contract , .::;y.hibit 11 Att , the pertinent provisions of �Jhich are as follows : 1. IROJ LTiif<..:S hereby employs SOhiiUJO as its Tech- nical Consultant in connection 'IIlith management and ope - ration of its affa irs and mining properties and the management and operation of other mining properties of vJhich it has , under contracts , supervision or con- trol , and SORI&iO hereby accepts such employment , under the terms , covenants and provisions and conditions hereinafter stated . 2 . o~. s Techni cal Consultant , SOB.IliHO undertakes and agrees to render complete engineerin5 direction on all phases of ope r ation of the properties , opinion and re- ports ne~ssary to fulfill the generally accepted duty of consultants relative to the prospecting, exploration, development , ext raction , metallurgy , geolo@:y and hand- ling of mine r al properties of TIWN IvdriES and other mineral properties under contract v1ith it , and to lay out plans normally connected vJith the operation of the said proper-

DECISION - C�T.. . � Ciiuc:EI i'IO � 1. - 2- ties , except such extraordinary plans as may require full and undivided attention of SOHI ~TO and not in the normal course of the exploitation of the said properties . 3 . In addition to the above services , SORI' ~0 further undertakes and agrees to negotiate and con- summate the sale of all the products obtained from the said mining properties , and for said purpose its representative or representatives may be required to travel abroad . SORIANO further asrees to check ana- lyses and conditions of the ore from time to time at point of destination. In all such cases, the travel and other expenses of SOlGlil!O 1S r epresentatives shall be for the account of IliON IGCES . 4 . It is e)~ ressly and distinctly understood and agreed that all work , acts and things to be done and performed by SOhi ���m under this agreement, in so far as they may conflict vJith the terms and .:)rovisions of the b.G & P ( tlantic , Gulf & acific Company of Manila) banagement Agr eement of .DecembEsr _ , 1950 , shall be done and performed by SOF.I ''TO in conjunction or coop- eration vdth S.G & P . 5 . For its services hereunder , SOEI "ro vJill re- ~ ceive tvvo and one-half per cent (2-l/2%) of the gross receipts of all minerals or ore of commercial value shipped , payable monthly as soon as such gross receipts shall have been determined . In addition thereto , SOf.I NO shall also be entitled to a monthly compensa- tion of ONE THOUE' L.,ND 1'\IO illi'IDP~D PT::S.OS ( l , 200 . 00) for consulting services in I.:anila , to be payable at the end of eaci1 month . For services rendered, the petitioner received from the hil- ippine Iron hines , Inc .,. for the period from April 1 , 1952 to June 30 , 1954, inclusive , the total sum of �834 , 305' . 27 , represent- ing the tvJo and one-half per cent (2-l/2%) of the gross r e ceip ts of all minerals or ore of commercial value shipped and sold abroad by both of them , as provided for in the first part of paragraph 5 of their agreement as quoted above . Based on the said amount of -� 34, 305 . 27 , the petitioner voluntarily paid the respondent the sum of ?50 , 058 .01 as 6% broker ' s percentage tax in accordance with the provisions of Section 195 of the ~:ational Internal Revenue Code , as amer:rled by ilepublic Act l~o . 588 , in relation to .:-ection 194 (t)

DECISION - C. T. k . C~SE NO . l . - 3- of the same Code . After paying the aforesaid amount voluntarily, tho petitioner sought the refund of the same on the ground that the amount received by it from the �hilippine Iron L:ines , Inc ., partakes of the nature of compensation for services rendered as technical consultants, and therefore not subject to the broker ' s percentage tax as p r escDibed in said Section 195 . The claim for refund of the ~: aid sum of ''"50 , 05EL01 11as denied by the respondent . The first question to decide , therefore, is >"lhether or not the services rendered by the petitioner pursuant to paragraphs 2 and 3 of the contract reproduced above could be considered as a trade or occupation of a broker and the amount paid to it b;l the Philippine Iron Mines, Inc ., a brokex�age , and hence liable to the percentage tax equivalent to 6% of the gross compensation received by it . It vJill be abserved from the contract, by virtue of VJhich the Philippine .Iron r,dnes , Inc ., has at;reed to employ b. Soriano y Cia . as its Technical Consultant in connection >1i"th the management and operation of its affairs and mining properties , that the latter undertook: 111. '1'o render complete engineering direction on all phases of operation of the properties , opinion and reports necessary to fulfill the generally accepted duty of con- sultants relative to the prospecting, exploration, deve- lopment , extraction , metallurgy, geology and handling of mineral properties of the PIIVi and other mineral p roperties under contract with it, and to lay out plans normally con- nected v'Ji th the operation of the said properties , except such extraordinary plans as may require full and undivided attention of the petitioner and not in the normal course of exploitation of the said properties; "2. To negotiate and consummate the sale of all the products obtained from the said mining properties , and for said purpose its representative or representatives may be required to travel abroad; and to check analyses and conditions of the ore from time to time at point of destination;

- n~c:.:~ro_I C�'i' � A� C <:;E: rm � 1. - 4- 11 3 . 'l'o r<nder consulting services inianila . 11 Under thL first tvJO above - quot-7;d duties and oblieations , the peti- tioner received from the Philippine I r on i.:ines , Inc ., the swns of t"-250 , 656 . 75 f or the last three quarters of 1952; :r-J56,821.83 for the four quarters of 1953 , ani "�226 , 826 . 69 for the first tvw quar- ters of 1954, or a total of ~"'834 , 305 . 27 , repr(;senting the 2- l/2J.> of the gross rf ceipts . ~ih~clE" the petitioner admits that under its /s'Scond duty and obligation of ne3otiating and consummating the sale of all the products obtained from the mining )roperties of the - hilippine Iron Lines , Inc ., such services are in the nature of a brokera~:e occupation , it contends that under its first above - quoted duties and obligations , such employment can in no wise be consi- dered as a trade or occt~ation of a broker . Anent the third duty of rendering cotiJ.sulting services in ~-~anila, there seems to be no controversy regarding the nature of the compen~ation of the peti- tioncr in thE amount of ~1 , 200 . 00 per month . t the outset , we obsel'Ve from the ple.:1dings that the l'hil-� ippine .=ron Lin�' s , Inc ., is the mmer of and has the exclusive right to the oc cupancy , possession and benefic~al use of certain mining claims located within the jurisdictional limits of Paracale (Jose anganiban), Camarines Norte . By virtue of a contrnct vJith the b[Usan Gold I.:ines , inc ., said corporation has also thP right to e:>..'})lore , develop and operate certain mining claims belonging to the said li.gusan Gold i. ines , Inc ., also located in aracale , Carna-ri- :aes Horte , and to market such ore as may be found therein : In ac- cordance vJith au agreement made and entered into on Decembe!:' 20 , ' 19'5) , by and bet�~een the Philippine Iron L;ines , Inc ., and the ktlantic, Gulf and Pacific Company of Lanila , a .;est Vircinia corporation duly r egistered and licensed to transact businSS in

DECISIOE - C.�i' . A. Cb.rE NO . 1. - 5- the fhilippines , rJith principal office and place of' business in r.._anila , the former employed the latter as General Operating Lanage r of its business aqd mining properties , as vJell as the mining p r,o- parties of the ligusan Gold L.ine s, Inc ., and such other mining com- panies with "Whom the :PhHippine Iron 1..ines , Inc., had entered into or might enter into agreements for the exploration, development and operation thereof , and of thE! marketing of the :)roducts ob- tained therefrom . J::n addition to the employmEnt of the Atlantic, Gulf &: .Pacific Company of Lanila , the Philippine Iron L,ines , Inc ., also employed ~:> . Soriano y Cia ., as its Technical Consultant , with the po"Wers , authority , duties and obligations specified in the con- tract quoted above . It appears that in the regular meeting of the Board of Jirec- tors of the Philippine Iron Lines , Inc ., on !\Jay 18 , 1954, at the Soriano Buildint.; , Lanila , Lr . S.:.vero Tuason , one of the dirr;;ctors, invited the Directors 1 attention to the ) rincipal question alvJays brought by the stoclmolders of the said corporation, namely , that if the company has a @eneral Lanage r and a Technical Consultant , what vJas the need of h~ving a representative in J-apan? To this , Col . Soriano , who is the head of the petitioner and also the Vice- President of the Philippine Iron i:iinGs , Inc ., replied 11 that a re- presentative is absolutely necessary to protect the interests of the company at that end . This he v1ent on to say , was a job entirely different from the vwrk performed by the General Lanagers and the Consulting Engineers .u t.~xhibit 1'Ett). 1'o ~uote some more : � 11 In this c onnect ion, I.':r . Belden , desiring to clarify the position and the ,nork performed by the General ;, ana- gars and the Consulting ..~ngineers , e:>,.'plained to Lr . Tua- son that after liberation , prior to the Company ' s resum- ing operations in 1948 , it v1as feared that it would not be able to sell a single ton of ore until Col . Soriano

r DECISION - C. T�� CASE NO . l. - 6- contacted SCl-U> Headquarters in Tokyo, and the Company v1as able to sell 200 , 000 tons . At that time , . A. Soriano y Cia ., as Consulting bne;ineers, arranged for the con- tract and for the acquisition of the ore and thereafter secured more and more contracts for additional deli- veries to Japan vvhich , in effect, put the company back on its feet . Col. Soriano then added that it VJas the function of the SCAP to help rehabilitate the. economy of Japan and one of the ways of doing this was by as- suring a supply of ore for its mills, vJhich ore vtas available from the Philippines . Col . Soriano pointed out that the economy of Japan and of the Philippines are complimentary to each other, and that the sale of ore to Japan had succeeded in the resumption of opera- tions at Larap . That is the reason, he said, why the company needs General l!lanager s and Consulting Zneineers . "Continuing the discussion on this point, Ivir . Bel- den said that in order to maintain a favorable volume of sales to the Japanese Steel Hills and to assure them of a supply of ore, the company has established this particular set-up and has been able to show at all times that it can fulfill all its commitments . Up to the pre- sent he said , the Company had been able to sell over 4 , 500 , 000 tons of iron ore , v1hich has never been done before , thanks to the efforts of the Consulting :En- gineers . " (Exhibit trg n), ( It vJill thus be seen that although the Philippine Iron !.'lines , Inc ., has already a general manager in the person of the Atlantic, Gulf &. Pacific Company of Lanila , 'vhich as engineers for more than half a century has established an enviable record of service , it had to employ the petitioner as consulting engineers . The rationale is obvious : as explained above , prior to the company's resumption of operations in 1948 , it v1as f eared that it �would not be able to sell a sincle ton of ore until Col . Soriano (head of the petitioner A. Soriano y Cia . ) contacted SGiJ> Headquarte rs in Tokyo . b.s a matter of fact, it was through the petitioner ' s efforts in arranging con- tracts for the acq~i sition of ores and for additional deliveries to Japan v~hich put the Philippine Ir on i.lines back on its feet . In order to maintain a favorable volume of sales to the Japanese Steel l.1ills and to assure them of a steady supply of ore , said company had to employ the petitioner to nEgotiate and consummate the sales of all

DECISTJN - C. 'l' . b . C"S� 1~0 . 1. - 7- its products obtained from its mining properties to show at all times that it can fulfill all its commitments . And because of the efforts of the petitioner as a broker, the hilippJ_ne Iron Eines VJas able to sell over 4, 500 , 000 tons of j_ron ore , V'Jhich has never been done before . Unquestionably , the main and prin- cipal purpose for which the petitioner was employed by the Phil- i9pine Iron r...�.nes vJas , as stated in paragraph 3 of the contract , to negotiate and consummate the sale of all the products obtained from its mining properties , which as counsel for the petitioner admits , is precisely the occupation of a commercial broker . :> it is true that under the contract , the petitioner vJas em- ployed as a Te chnical Consultant , and as such , it undertook and agf eed to render complete engineering direction on all phases of operation of the properties , opinion and reports necessary to ful- fill the generally accepted duty of consultants relative to the prospecting, exploration, development , extraction, metallurgy , geology and handling of mineral properties of the Philippine Iron Iiiincs , but as stated by the company ' s President, it was necessary to estab~i sh this set-up in order to maintain a favorable volume of sales to the Japanese and to assure them of a supply of ore and to be able to show at all times that said company can fulfill all its commitments . \.e do not believe that it \~ould be ne cessary to state that a person who is employed to negotiate and consummate the sales of all the products obtained from a prospective seller and , as an incident thereto , acts as a consultant in order to assure himself that the seller can at all times fulfill all its commit- ments , is primarily a broker; the employment as consultant being only a means to his principal occ~Dation as broker .

r DECISIOi.'J - l- C..T .. li . C&S~ NO . l . � - 8- 'rhis conclusion is rendered clearer v1hen VJe take into con- sideration the fact that under paragraph 5 of the contract , for services rendered , the petitioner receives two and one-half per cent of the gross receipts of all minerals or ore of QQmmercial ~~ipped , thus indubitably implying that its services as a consultant is merely an incident to its commitment to negotiate and consummate the sales of all the products of th~ Philippine ' Iron I,;ines . For if the petitioner were employed really as:� tech- nical consultant , its fees as such should have been agreed upon just as its consulting services in L:anila v~ere set forth in the contract on a fixed monthly basis . I.: ore over , considering that a broker is never entitled to commission for unsuccessful efforts, it is hard to believe that compensation paid to the petitioner partakes more of the nature of salaries as consultine engineers . Furthermore , the payment in question of P$34, 305 . 27 is en- tered in full as commission by the petitioner itself in its books of accounts and we see no justifiable reason to disturb the book entries . 'l'h...: records kept by brokers may be used as evidence to determine the amount of thE' percentage tax due from them , and the Collector of Int~rnal ::-.avenue may assess and collect the tax due on the compensation or gross receipts earned in accordance with said r~cords . (par . 2, Section 195, National Internal Revenue Code). l.hile the petitioner claims that the best evidence is the contract itself , it has already been shown that in accordance with the said contract , the petitioner is employed as a broker . Counsel for the petitioner , hovJever , contend::1 that the ex- action of the tax under consideration would deprive his client of property without dl.ue process of law because the tax is imposed upon things beyond the jurisdiction of the Philippines . u.ccording to him,

DZCISION - C. 'l' �� Ci..SL NO . 1. - 9- inasmuch as the brokerae:e transactions v~ere done outside the coun- 1 try, the brokerage commissions received by the petitioner are not subject to the broker 1s percenta~e tax prescribed un:ier Section 19 5 of the National Internal Revenue Code because the Philippine Government consistent vJith <Rue process cannot impose a tax on pro- perty, persons or business beyond its jurisdiction . The question thus reduces itself to the inquir~� v~hether the Philippine Govern- ment will transcress its taxinc power because it impoces a broker 's pc.rcentage tax on commission received by a domestic corporation for negotiating and consummating the sales , in Japan , of all the products obtained from the minin� properties of another domestic corporation which mining properties are located in the Philippines . It is true that generally a state raay not tax real or tangible personal property lying outside her borders , nor may she lay an excise or privilece tax upon ths ezercise or enjoyment of a right or priviler,e in another state derived from the Jaws of that state and therein exercised or enjoyed . But a perusal of the provisions of Section 195 of the 'i'a:x Code �will readily show that the tax prEs - cribed therein is a tax on the privilege of receiving compensation from the exErcise of an occupation rccocnized by our . laws rather than a tax on brokerage transactions . blthough it is directly con- nected v;ith the business carried on by brokers, nevertheless its essence rest upon the principle that the brokerage is the soLrrce from v1hich the taxing power of the hi1ippine Government derives its being, and it is the privilece of receiving such brokerage that the tax is more immediately founded . For a broker , being only an intermidiary betvJeen the purchaser and vendor , neither acts in his o~n name nor neGotiates commercial transactions , but merely repre- � sents the part y Ylho may emplo;Jr his services . It follm'Js that any

DECISION 6 �'f . � c JI 1~0 � 1. - 10 - commercial transactions entered and agreed into by the venQor and purchaser are not the business or brokera�;e transactions of the broker but strictly those of the parties . Under these circwnstances, we cannot see our way clear hovJ the colleqtion of the tax in ques- tion rJould deprive the petitioner of its property without due pro- cess of lavJ since what is being tax is only his right of receiving the compenFation derived from the enjoyment of a privilege granted by the laws of the hilippines and herein exercised . nd even if it be assumed that the success of the petitioner in consummating the sales bctvJeen the hilippine :l.ron J,;ines , Inc ., and the Japanese buyers depended upon its negotiations in Japan, we believe that this will not ultimately make the tax under consi- deration an exaction on businAss transactions done outside of the country because the nexus betvJc-;en such a tax and the compensation is still in the Philippines . fter all, ths contract of services dated December 20 , 1950 , entered into b~� and between the Philip - pine Iron (,ines , Inc ., and a. Soriano y Cia ., VJherein the latter v1as employed by the former to neeotiate and consummate the sales of its products , was executed vJithin the Philippines and in ao- cordance with our laws . It can never be said , therefore , that tht: substantial elements of the agreement are not situated in this country since the parties by executing the same v1i thin� the rhil- ippinss have subjected themselves to the taxing jurisdiction of our country . Because of . the prote ction afforded by the Philippine Government, the hilippine Iron i..ines, Inc ., was able to mine its ores and the petitioner �was :flree to pursue its occupation of nego- tist ing the Aales thereof, and if by the reasonable operation of the tax the Philippines has exerted its power in relation to the I opportunities it has given and the b~nefits it has conferred , we

� � I DI: CIS I01~ - c s . t~ . cas-:: rm � 1. - ll - are at a loss to see how property is taken rJithout due process of lavJ . In principle , our Government is only asking a little in return for what it has biven . Furthermore , it would certainly be a discrimination at_ainst a local broker to hold him liable for this tax in case he negotiates sales in the Philippines and to exempt another local broker simply because he v1as able to find buyers in a foreign country when both of them enjoy the same pro- tection from our Government . ��n:r:E':ii'Of.': , the appealed decision is hereby affirmed , ro'ithout special pronouncem~"nt as to costs . SO OF!JEr~ � i:..anila , hilippines, February 5, 1955. I concur :