COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. CIRILO D. CONSTANTINO AND COURT OF TAX APPEALS, RESPONDENTS.

Appeal from the decision of the Court of Tax Appeals, in its CTA
Case No. 1016, holding that the respondent, Cirilo D.
Constantino, is not a commercial broker, as defined
by Section 194(t) of the National Internal Revenue Code, providing as follows:

“‘Commercial broker’ includes all persons, other than
importers, manufacturers, producers, or bona fide 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 the shippers, or
consignors or consignees of freight carried by vessels or other means of
transportation.  The term includes
commission merchants.”

and declaring
him not liable to pay the commercial broker’s percentage tax.

Petitioner Commissioner of Internal Revenue assessed against and
demanded from respondent Constantino the commercial
broker’s percentage tax of 6% on his gross compensation for 1956, as dealer or
distributor of the products of International Harvester, Macleod, Inc., (IHM for short).  The tax was computed as follows:

Total discount for
1956 ————————-  P38,390.40

6% broker’s percentage tax

due thereon
———————————-      
2,303.40

25% surcharge ———————————-           575.85

Compromise penalty —————————           100.00

Total
amount due and

collectible
———————————–      P 2,979.25

________________________________________

Constantino
protested the assessment on the ground that he is not a commercial broker.  On his protest being overruled, he filed a
peti­tion for review with the court of Tax Appeals, which, after trial, found
for him.  Upon his reversal by the tax
court, the revenue Commissioner interposed the present appeal.

The issue here is whether the relationship between and the
respondent is one of principal and agent, as maintained by the Commis­sioner,
or one of vendor and vendee, as maintained by the respondent taxpayer.

Respondent Cirilo D. Constantino is a businessman with a business establishment
in San Pablo City known as “C. C. Motor Service”, where he stores,
displays and sells trucks, machineries, equipment, spare parts and accessories
shipped to him by International Harvester, Macleod, Inc., (formerly
International Harvester Company of the Philippines) in accordance with their
“Dealer Sales and Service Agreement”, Exhibit “A”,
designating the said respondent as exclusive dealer of the products of the
company within a prescribed territory. 
According to respondent’s counsel, who is also the legal counsel and
secretary of the company, the company sells its products through its dealers
for purposes of economy and that since it may not be allowed to retail under
the retail trade law, it sells by wholesale to its dealers (T.s.n.,
pages 49, 52-53).

In classifying himself as an independent merchant instead of a
commercial broker, respondent Constantino cites the
following facts:  that under the
“Dealer Sales and Service Agreement” that he signed with he may buy,
on cash basis or credit terms, IHM products, such as trucks, tractors, other
types of machinery and equipment and spare
parts and accessories for resale to his customers within his designated
territory; that under a “Schedule of Discounts and Terms”, Exhibit
“B”, he is granted trade discounts of 16% for trucks, tractors and
other heavy equipment and 30% for service parts; that he is also given a cash
discount of 5% under certain conditions; that the terms and conditions on his
credit purchases are governed by a “Retail
Financing Agreement”, Exhibit “C”; that he may purchase
service parts on open credit account or on a 30-day term; and that he sold service
parts to his customers on cash basis (T.s.n., pages
9-10).  He states that his purchases of
heavy equipment are commenced by his filing with the company a “Dealer
Order for Goods”, Exhibit “G” (BIR Record, page 153, after
Exhibit “B”, as the numbering of pages is inverted); if on credit, he
executes a chattel mortgage in favor of IHM, Exhibit “L”; and, if he
sells to his customer on credit, he requires said customer to execute also a
chattel mortgage in his favor and he (respondent Constantino)
then executes an “Indenture of Assignment”, Exhibit “M-I”,
in favor of IHM.

Constantino also cites the fact that
his purchases are covered by IHM’s sales invoices,
and when he re-sells he issues his own sales invoice; that delivery of his
purchases from IHM are accepted by him “ex-bodega” in Manila, after which he
services the heavy equipment at his establishment in San Pablo before delivery
to his customer (T.s.n., page 26); that his credit
purchases of trucks and other heavy equipment are insured by IHM and, in case
of loss, the insurance proceeds belong to both in proportion to their interests,
but the premiums are for his own account; that he insures himself the goods
that he purchases on cash basis; and that at the end of each calendar year he
includes in the inventory that he submits to the Bureau of Internal Revenue
unsold stocks that he had purchased from IHM.

Without considering the forms and documents that petitioner Com­missioner
of Internal Revenue alluded to in his brief (forms and documents that were only
annexed to his memorandum submitted to the tax court and not formally offered in
evidence) but considering the entirety of res­pondent Constantino’s
own evidence, this Court is of the opinion that, for taxation purposes, he is
not an independent merchant but an agent of IHM, or a commercial broker, as
defined by the tax code, selling or bringing about sales and purchases of IHM’s merchandise.  A
casual examination of respondent’s evidence may give the impression that this
relationship with the company is that of vendor and vendee, but a closer look
into the actual legal effect of the terms and conditions embodied, rather than
the names of the contracts used or the terminologies employed, in the chain of
documents^[1]
shows that the relation between the com­pany and the respondent is one of
principal and agent.

From his own evidence and statement of facts, if Constantino wishes to “buy” from IHM, either on
“cash basis” or on credit, he files a “Dealer Order for Goods”, Exhibit
“G”.  He failed to state or
notice, however, the condition in the said order, which is in small print,
that:

“the title
of the goods delivered under this order shall remain in International
Harvester Company of Philippines
until the full purchase price shall have been paid in cash
or acceptable security.  Upon receipt of the subject equipment, the
undersigned agrees to execute a chattel mortgage or other security instrument
covering the goods or­dered herein to secure the payment therefor,
and prior to full payment of the purchase price, the undersigned shall
have no right to sell or dispose of any goods delivered under this order except
in the ordinary course of retail trade for their reason­able value, and
upon the express condition that before delivery to a Purchaser, the undersigned
shall secure from the Purchaser full settlement, and the proceeds of such
resale, whether in cash, property or an obligation of the Purchaser, shall be
considered the property of International Harves­ter Company of the
Philippines, and shall be held in trust for the Company and subject to its order.” (Emphasis supplied)

In plain language, the effect of the afore-quoted condition is
that the title to goods sold by the Dealer to his “customer” passes
directly to the latter from IHM, and that the price of such goods, even if previously shipped to the dealer upon his order,
belongs to IHM, not to the dealer, who merely collects and holds the
proceeds in trust.  Hence, in the
“Dealer Order for Goods”, the dealer does not make purchase orders;
he merely orders for shipment to himself the goods
specified therein.  And while in the
“Dealer Sales and Service Agreement” the contractual provisions on
orders for goods refer or use terms like “purchase”,
“obligation to sell” and “obligation to buy”, the said
Dealer Sales and Service Agreement expressly binds the dealer, when ordering
goods, to place his orders “upon forms furnished by the Com­pany”
(Exhibit “A”, page 4), and the form furnished is the “Dealer
Order for Goods”, with the clause previously quoted.

Where the transaction between Constantino
and his customer is on credit, Constantino requires his customer to execute a chattel
mortgage in his favor but then he must assign in favor of IHM, by an
“Indenture of Assignment”, all his rights, interest and participation
in the goods theretofore mortgaged to himself for the same amount.  When the goods are delivered by IHM to the
dealer, the dealer does not acquire ownership of the goods upon such delivery;
and when the dealer “sells” the goods to his customer, the customer
does not acquire ownership thereof upon such “sale”, because the
“Dealer Order for Goods” expressly stipulates that “title of the
goods delivered under this order shall remain until the purchase price shall
have been paid – – – – – -.” And the fact that the customer is made to
execute a chattel mortgage does not make him the owner, because when the goods
were “sold” to him by the dealer the latter did not own the
goods.  That the dealer should issue his
own sales invoice to the customer is neither a means of acquiring ownership nor
is it proof of ownership.

In the “Retail Financing Agreement” that the dealer
enters into with the company, when he “buys” goods on credit for
“resale” to customers, the dealer does not “buy” with his
own funds, as the agreement expressly prohibits him from advancing the down payment and any installment to his
customer; and when he
“sells” to his customer, the “retail contract” as well as
the customer’s credit is subject to approval by the company (Exhibit
“C”, page 3, paragraph 4).  The
effect of such an arrangement is that it is the very customer who buys on credit
because the purchase money comes from him, not the dealer, and the credit that
is financed is the credit of the customer, not that of the dealer.

If the transaction is on “cash basis”, a procedure
similar to transactions on credit is followed;  the dealer orders specific goods for
shipment to himself by filing the “Dealer Order for Goods”; if his
order is accepted by the company, the company ships the goods and issues a
delivery receipt (Exhibit “D”), not a cash invoice, as the respondent
contends in his brief.  Under such a
delivery receipt, the goods are termed “Sold to Mr. Cirilo
D. Constantino” for “Cash”; but the
same receipt also indicates that it is for the supposed vendee’s
“order”, obviously referring to the “Dealer Order for
Goods”, and that the shipment is “Due and payable first day of month
following shipment”.  It is,
therefore, clear that even when the company ships the goods to the dealer on a
supposed “cash basis” it is payable in cash but it does not prove that
cash or money was paid – – – payment is not yet due cash or money was paid – –
– payment is not yet due – – – and that the company shipped the goods but
retained ownership of the same in accordance with the “order”.

Since the company retained ownership of the goods, even as it
delivered possession unto the dealer for resale to customers, the price and
terms of which were subject to the company’s control, the relationship between
the company and the dealer is one of agency, tested under the following
criterion:

“The difficulty in distinguishing between contracts of sale
and the creation of an agency to sell has led to the establishment of rules by
the application of which this difficulty may be solved.  The decisions say the transfer of title or
agreement to transfer it for a price paid or promised is the essence of
sale.  If such trans­fer puts the
transferee in the attitude or position of an owner and makes him liable to the transferror as a debtor for the agreed price, and not
merely as an agent who must account for the proceeds of a resale, the transaction is a sale; while the essence of an agency to
sell is the delivery to an agent, not as his property, but as the property of
the principal, who remains the owner and has the right to control sales, fix
the price and terms, demand and receive
the proceeds less the agent’s
commission upon sales made.  1 Mechem on Sales, Sec. 43; 1 Mechem on Agency, Sec. 48; Williston on Sales, 1; Tiedeman on Sales, 1.” (Salisbury v. Brooks, 94 SE 117, 118-119)

It
is contended that the respondent is not an agent of IHM because their
“Dealer Sales and Service Agreement” expressly provide that he “is
not the Company’s agent in any respect – – – – -“, but the control by the
company of the resale made (or agreed upon to be made) by the dealer is so
pervasive as to exclude the idea of the latter being an in­dependent
merchant.  The extent of his dependence
upon and control by the company is shown in the provisions of the “Dealer
Sales and Service Agreement”:

An order for goods by the dealer “shall not be considered as
accepted until written acceptance – – – – – is given to the Dealer, or delivery
has been made to the Dealer – – – – -.” “Prices, discounts
and terms – – – – – shall be those established by the Company – – – – -”
which are “subject to change
at any time without notice.” Places of delivery “shall be
those established by the Company – – – – -” and the dealer “will
accept delivery at points of delivery selected by the Company and pay all
transportation charges thereon – – – – -.” “Prior to full payment of the
purchase price to the Company,
the Dealer shall have no right to sell or dispose of any goods – – – – –
without first securing the written approval of the Company.” At any
reasonable time, the company may enter the dealer’s premises, “to examine his books and records – – – –
-.” The dealer is bound “to provide and maintain adequate physical
facilities acceptable to the Company – – – – -.” He “agrees to
maintain accounting records”, “to furnish monthly operating
statements” and “a complete detailed financial statement.” He
“shall properly store and care for all goods purchased – – – – – and
protect the same from injury or damage from any cause.” The quantity of
goods alloted to the dealer “shall be determined
solely by the Company.” “The dealer agrees, in reselling goods – – –
– – to enter into a Sales Contract with each customer on one of the current
printed blank forms furnished by the Company for that purpose and to give no
different or additional allowances, warranties or guaranties on behalf of the
Company beyond those included in the Sales Contract.” The agreement
“may be terminated at any time by either party without cause – – – “ and since “this is a personal agreement, it shall
automatically terminate upon the death of the Dealer.” The agreement
involves “mutual confidence and trust,
and it may not be assigned by either party.” Now, to insure “the faithful performance on the Dealer’s part
of the con­ditions of this agreement,” the dealer is required to put up a bond, which is in the amount of P30,000.00.

As respondent is not an independent merchant, but an agent, the
discount of 16% that he receives is not a “trade discount” but a
compensation or profit for selling or bringing about sales or purchases of
merchandise for the company.

The assessment made by petitioner Commissioner of Internal Revenue
against respondent Constantino does not include the
30% discount that the respondent is entitled to or benefited from his sales of service parts; even so, the sales of
or transactions on service parts is covered
by stipulations between the company and the respondent different
from those on heavy machineries or big items; for these reasons, it is unnecessary to pass upon the
taxability of said 30% discount.

FOR THE FOREGOING REASONS, the appealed decision is hereby
reversed, and another one entered affirming the assessment and ordering the
respondent to pay the same, with costs against the res­pondent.

Concepcion, C.J., Dizon,
Makalintal, Zaldivar,
Ruiz Castro, Fernando, Teehankee, Barredo,
and Villamor, JJ., concur.

^[1]
These are all in the nature of adhesion contracts, being on printed forms
prepared and supplied by IHM, that binds the dealer
and the company as well as that which binds him with his customer.