G. R. No. L-8886. May 22, 1957

On  December  20, 1950,  A. Soriano  y   Cia.,  and the Philippine  Iron Mines,  Inc., both duly organized  corporations existing under  the  laws  of  the  Philippines,  with principal  offices  in  Manila, entered  into   an agreement (Exhibit 1), the pertinent terms of which  are as follows:

1. Iron  Mines  hereby  employs Soriano as its  Technical  Consultant in  connection with management and operation of other mining properties of  which it has, under contracts, supervision  or  control, and  Soriano hereby  accepts  such  employment,  under  the terms, covenants and  provisions  and  conditions hereinafter stated.
2. As Technical  Consultant,  SORIANO undertakes  and agrees to render  complete engineering direction  on all phases of operation of the properties, opinion and  reports necessary to fulfill the generally accepted duty of consultants relative to the  prospecting, exploration, development, extraction, metallurgy, geology and handling of mineral properties of Iron Mines and other mineral properties under contract with it, and to lay  out  plans normally connected with the operation of the  said properties, except  such  extraordinary plans as may  require full  and undivided attention of Soriano and not in the normal course of  the exploitation of the said properties.
3. In addition  to the,  above services, SORIANO further undertakes and agree* to negotiate and consummate the sale of all the products obtained front the said, mining properties, and for said purpose its representative or  representatives may be required to  travel abroad. Soriano further  agrees  to check  analysis  and conditions of the ore from time to time at  point of destination.  In all  such eases, tho travel and other  expenses of Soriano’s representatives shall be for the account of Iron  Mines.
4. •  •  *.
5. For its services hereunder, Soriano wilt receive two and  onehalf per cent (2 1/2%)  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, SORIANO shall also be entitled to  a monthly compensation of One  Thousand Two Hundreo Pesos  (P1,200) for consulting services  in Manila,, to be payable  at the end of each  month.”  (Exhibit 1).

On July 18, 1952, after A. Soriano y Cia. had voluntarily paid the 6 per cent broker’s percentage tax on the amount it had received  from  the mining company, the former sent a letter to the Collector of Internal Revenue requesting for the refund of payments thus made corresponding to  the period beginning from  the 2nd quarter  of 1950 to the 1st quarter of 1952, inclusive, amounting to P19,621.06, on the ground that the sum received  by said company from the Philippine Iron Mines, Inc., upon which the aforementioned taxes were levied,  partook of the nature of compensation for technical services rendered; that the work performed by the  Company  for  the Iron Mines which may be considered  as that of  a broker, were the negotiation  and consummation of the  sale of the mineral products  in  Japan, which were rendered  outside the jurisdiction of the Philippines;  and that  as  the ruling of  the  Internal  Revenue Office—Ruling,  BIR  105.02, March 28,  1950,  was  to  the effect that compensation of a  local broker  for work rendered outside the  country is not  subject to the percentage tax. therefore,  those particular services performed by the Company for the Iron Mines were exempt from the broker’s percentage tax.  It appears that despite a follow-up letter dated January 22,  1953, the matter was not acted upon by the Collector of Internal  Revenue.

On July 20, 1954, the Company sent another communication this time demanding for the refund of the amount of P50,058.01 which was allegedly paid erroneously as broker’s percentage tax for the period beginning from the 2nd quarter of 1952 to the 2nd quarter of 1954, citing the same Ruling  (BIR 105.02)  as basis for its demand, and without waiting for the action of the Collector of  Internal Revenue, said Company filed  on July 21, 1954, a petition with the Court of Tax Appeals, alleging that despite the letters sent to the Collector of Internal Revenue  requesting the refund  of  the sums  of P19,621.06 and  P50,058.01 which were erroneously paid as broker’s percentage taxes for the 2nd quarter of 1950 to the 2nd  quarter of 1954,  inclusive, said Official failed and refused to refund said amounts, and, therefore, prayed that same be returned to the  Company and for such other relief and remedy as may be deemed just and equitable in the  premises.  On  July 29, 1954, A. Soriano y Cia. filed an amended petition,  this time alleging that notwithstanding the  length of time that had elapsed, the Collector of Internal Revenue failed to answer the request of  petitioner or  refund the amount of P19,621.06 which at that time can no longer be recovered because the two-year period fixed by section 306 of the National Internal Revenue Code  for  the filing  of a  suit had already elapsed; that during the period of from the 2nd quarter of 1952  to the 2nd quarter  of 1954, inclusive, petitioner received from  the Philippine Iron Mines, Inc., the sum of P834,305.27 itemized as follows,  to  wit: P25,656.75 for the last 3 quarters of 1952; P356,821.83 for  the 4 quarters of 1953; and P226,826.69 for the  2 quarters of 1954, representing 2 1/2 per cent of the gross receipts.of all the min- erals  or ore of commercial value shipped  and sold abroad, and based on the said aggregate amount of P834,305.27, A. Soriano y Cia., voluntarily paid  a total sum of P50,058.01 as the 6  per cent broker’s percentage tax in  accordance with the provisions of Section 195 of the National Internal Revenue Code, as amended by Republic Act No. 588, in relation to section 194 (t) of the same Code; that respondent failed and refused to refund the said amount of P50,058,01  as he had  failed  and  refused to  refund  the  amount  of P19,621.06, and prayed that judgment be rendered ordering respondent to return  to petitioner the sum of P50,058.01 and for  such other relief that may be deemed  just and equitable in the premises.
 
 A motion to dismiss was filed  by respondent on August 6, 1954, for lack of cause of  action, for  it was contended that with the exception of the amount of P5,832.98  allegedly paid by petitioner  as  broker’s percentage tax on July 21, 1952,  the filing of  the petition was premature because the Collector of Internal Revenue had not yet passed upon the claim  for refund, that assuming that petitioner made the alleged payment on October 20,  1952, the Collector may yet act on the same  before October 21, 1954.   In this motion to dismiss, the respondent incorporated his answer to the 11 petition denying some of the averments therein and admitting the  others.  As special defenses, it was averred that under paragraph  3 of the so-called  Contract  of  Services, petitioner was a commercial broker pursuant to Section 194  (t) of the  Tax Code; that under paragraph 5 of the said agreement, petitioner  was paid  a definite  amount as brokerage  fee for negotiating the sale of mineral products and that under said paragraph, petitioner had a distinct characteristic—that of a broker; that the amount of P5,832.98 (corresponding to the 2nd  quarter of 1952) paid as broker’s percentage tax was in accordance with section 195 of the Tax Code, and therefore prayed that the amended petition be dismissed, with costs  against petitioner.
 
Inasmuch as later the  Solicitor  General received information from the  Collector of Internal Revenue to the effect that the claim for refund made by petitioner was denied, the former moved for the admission of the amended answer, which  motion was granted by resolution of the Court of September 1,  1954,  admitting the amended  answer  and considering the motion to dismiss filed by the same counsel as withdrawn.

After due hearing and after the parties had filed  their respective memoranda, the Court of Tax Appeals rendered decision on  February  5,  1955, finding  that although the Philippine Iron Mines, Inc. had already a General Manager in the person of the  Atlantic, Gulf & Pacific Co. of Manila which as engineers for more than half a century had established  an  enviable record of service,  it  had  (no need) to employ the  petitioner  as consulting engineers, and  in so doing the reason was obvious, i.e., that such set-up was only to avail of the services of said company in order to effect negotiations for the  sale of ore to Japan as in fact it was through the representation of Col. Soriano that the Philippine Iron Mines was able to sell over 4,500,000 tons of ore which  put said mining company back on its feet.  It was, therefore, held that the main and principal  purpose for which  petitioner was  employed by  the Philippine  Iron Mines, Inc., was to negotiate and consummate the sale  of all the products obtained from its mining properties; that although said petitioner undertook and agreed to render engineering direction  services,  this was   only necessary to maintain a favorable volume of sales to the Japanese and to be able to show that the company could fulfill its  commitments, declaring  that said employment as a consultant was only  a means to its principal occupation  as a broker. It was observed by  the trial court that the compensation for petitioner was not on a fixed monthly basis but based on the gross receipts of all minerals of commercial  value shipped and  sold; that the compensation  received by petitioner was entered in its books as  full commission, and made  the  pronouncement that the  exaction  of  the tax would  not be violative of the due process clause of the  Constitution because what was  taxed was not the business of the brokerage transactions  of the broker  but only his right to  receive compensation in the exercise of an occupation recognized by our  laws, and,  therefore,  affirmed the decision  of the Collector  of  Internal  Revenue  denying the Company’s claim for refund.

A.  Soriano y Cia.  appealed from the  decision  to Us maintaining that the  Court  of Tax  Appeals erred:

1. In holding that the petitioner is  employed under the contract as a  broker;
2. In holding that  the  services  performed by  petitioner  under paragraphs 2 and 3 of the  contract  constituted an occupation of a broker, that the  total compensation  derived therefrom  are  subject to the broker’s percentage taxes  prescribed in section  195  of the National Internal  Revenue Code,  as  amended;
3. In finding without reasonable support of sufficient evidence that the employment of the petitioner  as  consulting  engineers is  merely an incident  of its commitment  to  negotiate and  consummate the sales of all the products of the Philippine  Iron Mines;
4. In holding that the broker’s percentage tax prescribed in  section 195 of the  National Internal Revenue Code is a tax on the privilege of: receiving  compensation from the  exorcise of an occupation  and not a tax on brokerage transactions;
5. In holding  that  the  commission from  brokerage  transactions made and consummated in Japan  is  subject to the broker’s percentage  tax in the Philippines;
6. In holding that the fact that the full  amount of compensation received by  the petitioner from  the Philippine Iron  Mines, Inc. under  paragraphs 2 and 3 of the contract  was  entered  as commissions is convincing evidence that  the said amount constitutes brokerage commission;
7. In holding  that the collection from the petitioner  of a broker’s percentage  tax on  commission  from’ brokerage transactions  made and  consummated in Japan does  not deprive the petitioner  of its  property without due process of law; and
8. In denying the refund of the  sum  of P50,058.01  as broker’s percentage  taxes erroneously paid by petitioner on the  total  gross compensation received by it from the  Philippine Iron Mines, Inc. for services under paragraphs 2 and 3  of the contract.

There  is no  dispute  as to the  facts already  narrated, and consolidating the  questions raised by  petitioner  and reducing them to bare essentials, the main issues are: (1) whether the amount of  P834,305.27 was received by petitioner A. Soriano y Cia, from the Philippine Iron Mines, Inc., as commission or as compensation for technical services;  and  (2) whether  or not  the  Collector of  Internal Revenue has  authority  to  collect the  6 per cent of  said commission as broker’s percentage tax, for the right  of receiving compensation  for the  exercise of an occupation recognized by our  laws.

I. A perusal of  paragraphs  2  and 3 of the  contract (Exhibit  A)  will reveal that the Philippine Iron Mines, Inc.,  contracted  the services of petitioner  not  only for technical  consultation but  also  to negotiate and  consummate  the  sale of all the mineral products obtainable from the mining properties of the former, and that in consideration of these services,  the  latter was  to receive 2 1/2  percent of the gross receipts  of the ore  or mineral of commercial value shipped,  payable  monthly as soon as such gross receipts shall have been determined (paragraph  5,. Exhibit A).  There  is  also no  dispute that for consultation services  in  Manila, petitioner was going  to  receive the fixed  amount of P1,200 every month.

A.  Soriano y Cia. tried1 to  establish  the fact that it had rendered  technical  services  to  the mining company  by presenting evidence that it  assigned to work for the latter 6 mining engineers  in  1952; 13 in 1953;  and 11  in the first 7 months of 1954,  which costs the petitioner a total sum of P242,147.   However, the facts brought about during the regular  meeting of the Board of  Directors  of the Philippine Iron Mines  held  on  May  18,  1954, will shed some  light as to the purpose behind  such efforts of petitioner.  The Minutes of said meeting contain the following:

“In  this  connection,  Mr.  Belden (President), desiring to clarify the  position  and the  work performed by  the General  Managers and tile  Consulting Engineers,  explained to  Mr. Tuason (Director) that after liberation,  prior to  the Company’s resuming operations in 1948, it was feared that it would not be  able  to sell a  single ton of  ore  until Col  Soriano  contacted  SCAP Headqiiarters  in Tokyo, and  the Company  was able to sell 200,000 tons. At that time, A. Soriano y Cia., as Consulting Engineers, arranged for the contracts and for the acquisition of the ore and thereafter secured more  and  more contracts for additional deliveries to Japan,  which in effect,,put the company back on its feet.  Col. Soriano then added that it was  the function of the SCAP to help rehabilitate the economy of Japan and one of  the ways of doing1 this was by assuring a supply  of ore  for’  its mills, which ore was 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  operations at Larap.  That is the reason, he said, why the company needs General Managers and Consulting Engineers.

“Continuing the. discussion on this point, Mr. Belden said that in order to  maintain a favorable volume of sales  to tho Japanese Steel Mills 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 present, he said, the Company had  been, able to sell Over 4,500,000 tons of iron ore, which has  never  been done before,  thanks to the  efforts of the Consulting   Engineers”, (pp. 87-88,  Original-Record.)

From  the aforequoted  portion  of the Minutes of said meeting, We cannot help but notice that the mining company was  on the  verge of disaster, fearing  that it  would not be able to sell a  single ton of ore, but for the contracts made by Col. Soriano  with the  SCAP Headquarters  in Tokyo, Japan, and from then on, more and more contracts for the delivery of ore to said country were  made possible through  the intervention of  A. Soriano y Cia., supposedly Consulting Engineers.

Section  194  of the  National  Internal  Revenue  Code contains the following definition:

“Sec. 194. Words and Phrases Defined,—(t) Commercial  broker includes all persons, other than importers, manufacturers, producers, or bona fids 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 other business for owners of vessels,  or  other means of transportation, or for  shippers, or .consignors or consignees  of freight carried by vessels or other means of transportation.  The term includes commission merchants”

 And it is also said that:

A broker is one who is engaged for others on a commission, to negotiate contracts relative to property with the custody of  which he has  no concern (12 C. J. S.  53).

 The record bears out the fact that it was solely  through the  efforts of Col. Soriano that the mining company  was able to  make sales of  ore  to Japan  and  that  more  and more  contracts  were  effected through  the  mediation of A.  Soriano y Cia.  For compensation,  A.  Soriano y  Cia. received the amount corresp6nding to 21/2  per cent of the gross receipts of the sales made by the mining company, and it was not shown that the former ever acquired custody of the properties of the latter.  It, therefore,  dawns upon Us that the nature of the work of petitioner, A.  Soriano y Cia. is that  of a broker.   Even granting  that it  had also  rendered consultation  services,  the same were  only needed in order to assure the Japanese Steel Mills  of a steady supply of ore,  which ultimately redounded to its benefit because petitioner was always to get 2 1/2 Per cent of the  receipts from these sales.   It is really quite  hard to comprehend why the mining  company  would secure  and employ the services of petitioner, A.  Soriano y  Cia., as Technical Consultant and for  complete  engineering direction when the Philippine Iron Mines, Inc., already counted with the services, as  General Manager, of the  Atlantic, Gulf &  Pacific Co. of  Manila, a “corporation duly registered and licensed to do business in the Philippines, which, as  stated in the decision  appealed  from “as  engineers for  more than half a century has established an  enviable record  of  service”.  And the  Minutes  (Exhibit  E)  of the  Board meeting  previously quoted  supplied, the   link and revealed the real  intent  in availing,  of the  services 1 of  petitioner. For this reason, We  are  inclined to believe that the 2%  per cent of the  gross receipts from the  sales  made  by the mining company,  amounting to P834,305.27, received by petitioner was in consideration of its duty as a  broker  and not  as   Technical  Consultant although the monthly compensation  of P1,200 for  consulting services in Manila  (paragraph 5 of Exhibit 1) might have been paid on this account.
 
 Having arrived at the conclusion that the compensation received by petitioner partook of the nature of brokerage commission,  We will next determine whether the Collector of Internal Revenue had the  right to  collect  said 6  per cent  brokerage percentage  tax  taking  into account  the fact that  the brokerage transactions were  allegedly. consummated outside  of  the  Philippine  jurisdiction.
 
 Petitioner, in its.brief,  assailed the ruling of the lower court holding that the broker’s percentage tax prescribed in section 195  of the  National Internal Revenue Code  is  a tax on the privilege of receiving compensation from  the exercise of  an occupation  and  not  a  tax  on  brokerage transactions,  maintaining  that  this  theory would have been  correct if the tax involved herein were  inheritance or death taxes.  And in substantiating  its stand that the tax in question is a business tax, cited Section  193 (q) of the Tax Code, which  prescribes  the following:

“Sec. 193. Amount’ of Tax on Business.—Fixed taxes on business shall be collected as follows, the amount stated being’ for the’whole year, when not otherwise specified:
 

*     *     *
 (q)  Stockbrokers, dealers in securities,  real estate  brokers,  real estate dealers, commercial brokers, customs brokers, and immigration brokers, one hundred fifty pesos.
 
*     *     *

 and asserted that the object of the broker’s tax referred to in Sections 193 and 195 of the Tax Code is the negotiation  or  the bringing  together of  proposed buyers and sellers.   It  concluded then that since the negotiations in the case at bar were effected  in Japan, the compensation received in virtue  thereof are not taxable in the Philippines.

There is  no question  that  Section  193- (q)  aforequoted imposes,a fixed rate of P150.00 a year as tax on the business of brokerage, but Section 4,95 of the same code, also referred to  by petitioner, treats of  a different  nature. Said section contains  the following:

“Sec. 195. Percentage TAX  ON  STOCK, REAL ESTATE, COMMERCIAL, CUSTOMS, AND IMMIGRATION BROKERS—Stock, real  estate,  commercial,  customs, and immigration  brokers  shall pay a percentage tax equivalent  to 6 percent  of the gross compensation received by them * *.”

It is clear, therefore, that brokerage is subject to 2 different taxes—-one for the business itself, which is a specific amount fixed by Section  193 of  the Tax Code, and another  is imposed by Section  195 of. the same code, which is 6 per cent of the gross compensation to be received on account of the brokerage.  The latter form of tax is not an exaction on the business, nor on the business transactions, but on the compensation resulting from said transactions  and by reason of said business which appellant  company  received in Manila.

In the light of the distinction drawn above. We  declare that the amount of P50,058.01  paid by petitioner in  accordance with section 195 of the  Tax Code  is a levy, not on . the brokerage transactions effected outside of the Philippines, but on the compensation received by petitioner as a broker from another domestic corporation, in virtue of a contract executed in the  Philippines.   The parties, in executing the same, subjected themselves to the taxing jurisdiction  of this country.

Wherefore, and on  the  strength of the foregoing considerations,  the decision appealed from is hereby affirmed, with costs  against petitioner-appellant.  It  is so ordered.

Bengzon,   Padilla,   Montemayor,  Reyes,   A.,  Baututa Angelo, Labrador,  Conception, Reyes, J. B.  L., and Endencia, JJ., concur.