Nichimen Corporation vs. Court of Appeals

A branch office of a resident foreign corporation that solicits purchase orders from local buyers and relays them to its head office, receiving compensation computed as a percentage of invoice amounts of import-export transactions, is a commercial broker subject to the percentage tax under Section 174 of the National Internal Revenue Code, notwithstanding that the compensation comes from its own head office, because the branch acts for third persons—the buyers and sellers—in bringing about sales.

Petitioner Nichimen Corporation is a resident foreign corporation organized under the laws of Japan and authorized to do business in the Philippines, maintaining a Manila branch to deal with its Philippine customers. The Commissioner of Internal Revenue assessed petitioner for deficiency percentage tax based on Revenue Audit Memorandum Order No. 1-86, which classified branch operations that solicit purchase orders from local buyers and relay them to the home office as commercial brokerage activities subject to gross receipts tax. Section 174 of the National Internal Revenue Code imposes a seven percent percentage tax on commercial brokers' gross compensation, and Section 157(t) defines a commercial broker to include persons who, for compensation or profit, sell or bring about sales or purchases of merchandise for other persons.

Petitioner Nichimen Corporation is a resident foreign corporation organized under the laws of Japan and authorized to do business in the Philippines, maintaining a Manila branch to deal with its Philippine customers. On 19 January 1990, petitioner received from the Commissioner of Internal Revenue a demand letter with an accompanying notice assessing it for deficiency income tax, fixed tax, expanded withholding tax, and percentage tax in the aggregate amount of P1,092,459.94, inclusive of increments, for the fiscal year ended 31 March 1987. The deficiency percentage tax assessment amounted to P767,531.10, computed based on basic tax due per quarter less payments per return, plus 25% surcharge, 20% interest per annum up to 30 January 1990, and a compromise penalty of P10,000.00.

Petitioner, through its external auditors Sycip, Gorres Velayo & Co. (SGV & Co.), protested the assessment in a letter dated 06 February 1990. The Commissioner withdrew the assessment for fixed tax on 07 October 1991 but sustained the other assessments. On 07 November 1991, petitioner agreed to pay in full its deficiency income tax, expanded withholding tax, and withholding tax on compensation, as shown per Central Bank Confirmation Receipt No. B24068532 in the total amount of P313,953.84. Petitioner, however, continued to oppose the assessment for deficiency percentage tax amounting to P767,531.10.

On 06 November 1991, petitioner filed with the Court of Tax Appeals a petition for review, alleging that the subject assessment was devoid of legal basis. Petitioner argued that its act of looking for local buyers was merely liaising for its head office, and that the amount allocated to the branch was considered income attributable to the branch, reported to the Central Bank, and converted into Philippine pesos as the branch's income in its income tax return. Petitioner contended that it could not be considered receiving income subject to broker's tax from its own head office, in the same manner that a person cannot be considered receiving taxable income from itself, since the head office and the Manila branch were but one single entity. Petitioner maintained that a broker is necessarily distinct from the party for which he renders service, and that in a transaction involving a broker there are three separate and distinct entities—the principal, the broker, and the buyer—whereas in the instant case only two parties were involved.

Respondent Commissioner maintained that the assessment was based on findings of the Bureau of Internal Revenue that there were receipts showing that certain sales entered into between Philippine customers and foreign manufacturers resulted from the liaising services rendered by petitioner, and contended that the branch office should be considered a commercial broker in accordance with Revenue Audit Memorandum Order No. 1-86, par. 3, subpar. 3.2. The Court of Tax Appeals sustained the Commissioner, concluding that petitioner had earned commissions from companies other than Nichimen Corporation in Japan and that the compensation it received from the head office represented its share in the commissions received by the head office due to their brokerage activities here and abroad. The tax court noted that item 2 of petitioner's Notes to Financial Statements disclosed that compensations received from the home office represented income computed at certain percentages of invoice amounts of import and export transactions in the Philippines of the home office and others, and that commissions represented income computed at certain percentages of invoice amounts of import and export transactions in the Philippines of certain affiliates of Nichimen Corporation and of other parties.

Ms. Myrna Lou Tabije, one of the examiners who investigated the tax case, explained that the broker's tax assessment was based on the compensation representing the share of commission of the branch from the head office or transactions wherein the branch solicited orders from local customers and notified the head office, which in turn looked for the commodities that the Philippine branch needed, and another instance wherein the head office ordered the branch to look for local products and the branch merely monitored the shipping to the importer of these local products. The Court of Tax Appeals gave weight to respondent's testimonial and documentary evidence. On appeal, the Court of Appeals sustained the findings of the Court of Tax Appeals, holding petitioner to be a commercial broker, noting that petitioner's own Notes to Financial Statements demonstrated that it had been receiving compensations and commissions from its home office over and above its fixed periodical subsidy, and citing a letter from Mr. C. C. Gison of SGV & Co. stating that petitioner was not liable for the deficiency fixed tax "as it is only engaging in business as a broker."

• Single Entity Theory: Petitioner argued that the Manila branch and the head office were one single entity, and therefore the branch could not be considered receiving income subject to broker's tax from its own head office, in the same manner that a person cannot be considered receiving taxable income from itself.
• Absence of Broker Relationship: Petitioner argued that a broker is necessarily distinct from the party for which he renders service, and that in a transaction involving a broker there are three separate and distinct entities—the principal, the broker, and the buyer—whereas in the instant case only two parties were involved: Nichimen (Head Office) and the Philippine customers, with the Manila branch being an integral part of the head office.
• Liaising Not Brokerage: Petitioner argued that its act of looking for local buyers was merely liaising for its head office, and that the amounts allocated to the branch to cover operating requirements for liaising activities were not commissions or brokerage fees subject to broker's tax.

• Commercial Broker Classification: Respondent Commissioner maintained that the assessment for deficiency percentage tax was based on findings of the Bureau of Internal Revenue that there were receipts showing that certain sales entered into between Philippine customers and foreign manufacturers resulted from the liaising services rendered by petitioner, and contended that the branch office should be considered a commercial broker in accordance with Revenue Audit Memorandum Order No. 1-86, par. 3, subpar. 3.2.
• Evidence of Brokerage Activities: Respondent relied on petitioner's own Notes to Financial Statements showing that compensations received from the home office represented income computed at certain percentages of invoice amounts of import-export transactions, and on the testimony of tax examiner Myrna Lou Tabije explaining the basis of the assessment.

• Commercial Broker Status: Whether petitioner, a branch office of a resident foreign corporation receiving compensation from its head office for liaising services, is a commercial broker subject to the percentage tax under Section 174 of the National Internal Revenue Code.
• Binding Effect of Factual Findings: Whether the findings of fact of the Court of Tax Appeals, as affirmed by the Court of Appeals, are binding on the Supreme Court.

• Commercial Broker Status: Yes. Petitioner was properly classified as a commercial broker. Section 157(t) of the National Internal Revenue Code defines a commercial broker to include persons who, for compensation or profit, sell or bring about sales or purchases of merchandise for other persons, and the evidence showed that petitioner's liaising activities brought about sales between Philippine customers and foreign manufacturers other than petitioner itself.
• Binding Effect of Factual Findings: Yes. The findings of fact of the Court of Tax Appeals, exercising particular expertise on the subject, bind the Supreme Court, particularly when such findings are affirmed by the Court of Appeals.

• Commercial Broker Status: The Court defined a broker as a middleman who acts for others on a commission, negotiating contracts relative to property with the custody of which he has no concern, and whose task is to bring the parties together and to get them to come to an agreement. A basic characteristic of a broker is that he acts not for himself but for a third person, regardless of whether the fee paid to him is a fixed amount, regular or not, or whether the act performed by him can be performed by the principal or not. The Court distinguished a broker from a commission merchant, who may buy and sell in his own name without having to disclose his principal, and from a dealer, who buys and sells for his own account. The Court of Tax Appeals and the Court of Appeals both found that the receipts upon which the assessed deficiency broker's tax had been based were derived from sales consummated between customers in the Philippines and manufacturers abroad, other than petitioner itself, and that the sales resulted from the liaising services rendered by its Philippine branch. Given these findings, the Court could not sustain petitioner's position that it was not a commercial broker.

• Binding Effect of Factual Findings: The Court held that the findings of fact of the Court of Tax Appeals, exercising particular expertise on the subject, bind the Court, particularly when such findings are affirmed by the Court of Appeals. The Court cited the doctrine that factual findings of administrative bodies with special expertise, when affirmed by the Court of Appeals, are generally conclusive and binding on the Supreme Court.

• Definition of a Commercial Broker — A commercial broker is defined under Section 157(t) of the National Internal Revenue Code as "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 merchant. The Court applied this definition to hold that petitioner's liaising activities, which brought about sales between Philippine customers and foreign manufacturers, constituted commercial brokerage.

• Characteristics of a Broker — A broker is a middleman who acts for others on a commission, negotiating contracts relative to property with the custody of which he has no concern; he is, in more ways than one, an agent of both parties. A basic characteristic of a broker is that he acts not for himself but for a third person, regardless of whether the fee paid to him is a fixed amount, regular or not, or whether the act performed by him can be performed by the principal or not. The Court applied this doctrine to reject petitioner's argument that it could not be a broker because it was one entity with its head office, since the evidence showed that petitioner acted for third persons—the Philippine customers and foreign manufacturers.

• Binding Effect of CTA Factual Findings — The findings of fact of the Court of Tax Appeals, exercising particular expertise on the subject, bind the Supreme Court, particularly when such findings are affirmed by the Court of Appeals. The Court applied this doctrine to defer to the factual findings of both lower courts that petitioner had earned commissions from companies other than Nichimen Corporation in Japan.

• "A broker, in general, is a middleman who acts for others, on a commission, negotiating contracts relative to property with the custody of which he has no concern; he is, in more ways than one, an agent of both parties." — This passage defines the general concept of a broker and establishes the doctrinal foundation for the Court's classification of petitioner as a commercial broker.

• "A basic characteristic of a broker is that he acts not for himself, but for a third person, regardless of whether the fee paid to him is a fixed amount, regular or not, or whether the act performed by him can be performed by the principal or not." — This passage articulates the essential characteristic of a broker that the Court applied to reject petitioner's single-entity theory.

• "The findings of fact of the Court of Tax Appeals exercising particular expertise on the subject bind this Court, particularly when such findings are affirmed by the Court of Appeals." — This passage states the doctrine of binding effect of CTA factual findings that the Court applied in deferring to the lower courts' determinations.

• Behn, Meyer, and Co. Ltd. vs. Nolting and Garcia, 35 Phil 274 — Cited for the general definition of a broker as a middleman who acts for others on a commission.
• CIR vs. Cadwallader Pacific Co., 18 SCRA 827 — Cited for the proposition that a broker's task is to bring parties together and to get them to come to an agreement, and for the distinction between a broker and a commission merchant.
• Kuenzle & Streiff, Inc. vs. Comm. of Internal Revenue, 120 Phil 1092 — Cited for the basic characteristic of a broker that he acts not for himself but for a third person.
• Pacific Commercial Company vs. Alfredo Yatco, 68 Phil 398 — Cited for the distinction between a broker and a dealer, where a dealer buys and sells for his own account.
• Yobido vs. Court of Appeals, 281 SCRA 1 — Cited for the doctrine that findings of fact of the Court of Tax Appeals bind the Supreme Court, particularly when affirmed by the Court of Appeals.

• Section 174, National Internal Revenue Code — Imposes on commercial brokers a percentage tax equivalent to seven percent of the gross compensation received by them. The Court applied this provision to hold petitioner liable for the deficiency percentage tax on the compensation it received from its head office.
• Section 157(t), National Internal Revenue Code — Defines a commercial broker to include 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. The Court applied this definition to classify petitioner as a commercial broker.
• Section 283(c), National Internal Revenue Code — Cited in the Court of Tax Appeals decision as the basis for imposing 20% interest per annum from February 1, 1990 until fully paid.
• Revenue Audit Memorandum Order No. 1-86, par. 3, subpar. 3.2 — Provides that a branch that solicits purchase orders from local buyers and relays the information to its home office, which in turn solicits prospective sellers abroad and eventually receives compensation for services rendered, shall be considered a commercial broker or indentor, and its share from compensation as allocated by its home office shall be subject to commercial broker gross receipts tax. The Commissioner relied on this issuance in assessing petitioner.

Melo, Panganiban, Sandoval-Gutierrez, and Carpio, JJ., concurred.