CL EE “Republic or Tay Philif Pi, Sourt of Fax Appeals Wan Hee Uy | 1 Cadwallader Pacific Company vs. < C.T.A. Case Ko. 587 the Commissioner of Internal Revenue

DECISION -

C.T.A. CASE NO. 587 a bill of lading and other shipping documents and drafts drawn in favor of the Branch Office were forwarded to the bank which issued the letter of credit for accept- ance and payment.

For a better appreciation of the nature of the transactions between Cadwallader and the local buyers, we reproduce hereunder the provisions of a sample con- tract (Exh. X, BIR rec. p. 13):

"CADWALLADER PACIFIC COMPANY

Importers - Indentors - Exporters

Manufacturers' Representatives

337 Perez Street, Manila Tel. 5-42-74, 5-33-90 INDENT ORDER MO. 54/788

CONTRACT

BUYER: Ventura Steel Window-Door Company ~ 340

Mayhaligue, Manila Ref.

hereby orders and agrees to purchase the merchandise specified below fron SELLER: Cadwallader Pacifie Co. - P.O. Box 565, Arcadia, Calif., USA Subject to the terms and conditions written hereon and printed on the reverse side hereof:

Description of Merchandise Ordered

ZSERMS: Irrevocable Letter of Credit in favor of Seller for above amount.

SHIPMENT: Prompt. Subj. to U. 8. Govt. export regulations.

SNSURANCE: Ordinary risks

MARKINGS: YVSWDC

Manila

5 — ~=6©330

IPE

VBLAGLUN @

C.T.A. CASE NO. 587

CONFIRMED: ACCEPTED:

CADWALLADER PACIFIC COMPAKY Ventura Steel Window Co.

Bys Bys

"CONDITIONS:

1. SELLER and/or INDENTOR shall not be responsible for any loss, damage, or delay due to fire, mutiny, war, strikes, or any ceuses be their control. Failure to ship or deliver with- in the time specified shall not be deemed a breach of this contract and all time specifica- tions, however worded, are only pont 5 pag SELLER and/or INDENTOR will not be responsible for non~ —d@elivery due to force or to any causes beyond their control. All deliveries are sub- jeet to reasonable variations from standerd in color, forn, size and quality.

2. The SELLER may ship any portion of the merchandise as soon as completed at the manufacturers’ works, and/or made ready for shipment, and payment for any portion of the goods as shipped shall become due in accordance with the terms of payment spe- ecified on the reverse side hereof.

3. Defaults, delay or defect in any one or more de- liveries and/or portions thereof shall be consi- dered as segregated default and shall not give right for the to rescind the whole order covered by this contract.

&. Title to merchandise shall pass to BUYER at time of shipment. The merchandise called for in this contract shall be shipped, travel and be insured for account and risk of the BUYER, and the res- ponsibility of the SELLER and/or INDENTOR shall cease once the shipping documents have been signed by the steamship company and delivered to the forwarding Bank.

5. The SELLER and/or INDENTOR shall not be responsi- ble in any way whatsoever for fines, charges, or any other expenses incurred because of the late or non-arrival of shipping documents cover- ing the merchandise called for in this contract.

6. Orders and all other specifications and conditions as stipulated in this contract cannot be modified or changed without written permission of the SELLER and/or of the INDENTOR.

334 ae

DECISION -

C.T.A.e CASE NO. 587

a Se

7. Should the BUYER secure release of the merchandise called for in this contract by means of trust re~- ceipt, or otherwise, from the Bank holding the draft or drafts SELLER and/or INDENTOR will in no event guarantee such trust receipt. Should the PUYER be unable to arrange for release by trust receipt, or otherwise, on arrival of the merchandise called for in this contract, SELLER and/or INDENTOR as the Seller's represen- tative, shall have the right to take delivery of said merchandise and to sell the same in the open market privately and should the price obtained -from this forced sale or sales be less than the contract price, the difference shall be for the account of the BUYER, who agrees to pay the same to SELLER and/or INDENTOR as the SELLER'S repre- sentative, on demand. All expenses incurred in making such forced sale or sales likewise shall be for BUYER'S account.

8. Should the BUYER refuse, fail or otherwise neglect to accept SELLER'S draft or drafts, or otherwise fail, or neglect to make immediate payment and/or take delivery of the merchandise, called for in this contract on arrival thereof, the BUXYER agrees and gives to the SELLER and/or INDENTOK as the SELLER'S representative, the right and authority to take delivery and possession of the said merchan- dise and to sell or offer for sale the merchandise privately without prior notice to the BUYER; and should the proceeds realized from the sale or sales thereof be insufficient to cover up the total cost or value of the merchandise as invoiced by the SELLER plus the expenses of handling and selling, such shortage or deficit shall be made good, covered and paid by the BUYER to the SELLER and/or INDENTOR immediately upon demand by the SELLER and/or INDENTOR.

9. All existing revenue and/or taxes, and/or any in- crease in such revenue and/or taxes, and/or any new taxes imposed on the merchandise involved in this contract which may become effective after the date of this contract, shall be for account of the BUYER,

10. All bank charges, such as exc e, interest, bank- ing commission, ete., shall be for the account of the BUYER unless otherwise agreed upon in writ- ing.

ll. The proper Courts empowered by the laws of the Repub- lic of the Philippines shall have jurisdiction over all suits which may arise from any violations of this contract, and the BUYER shall pay for all eourt costs plus an amount equivalent to 10% of the total invoice value of the merchandise called for in this contract to cover attorney's fees.

C.T.A. CASE NO. 987 =- 6 «=

12. In case the BUYER refuses to accept SELLER'S draft or drafts, or to pay any amount which —~—may become due or delinquent, the AUYKA agrees to pay interest on such amount becoming due, de- linquent or deficient at the rate of 12% per annum computed from date of shipment of the mer- chandise to date of complete payment in full, including such interest.

13. All orders covered by this contract are subject to eancellation by the SELLER and/or INDENTOR if the finaneial responsibility of the PUYER proves at — J time to be unsatisfactory to the SELLER and/or IXDENTOR; or if the BUYER fails to pay any note or obligation due the SELLER and/or I OR; or if the BUYER has failed to make satisfactory settlement to the SELLER and/or INDENTOR on pre- vious orders or shipments.

14, It is understood and agreed upon that insofar as the CADWALLADEN PACIFIC COMPANY is concerned, its intervention is limited to a mere broker in ef- fecting this transaction and that no responsibi- lity whatsoever attaches to it. It is also under- stood and agreed further, that in the event there is violation of the eonditions given hereof, BUYER recognizes the said CADWAL ADER PACIFIC COMPANY as the SELLER'S and/or SHIPPER'S representative authorized and aeoneee to bring suit in the name of the SEI, and/or SHIPPER, or its own name CADWALLADER PACIFIC COMPANY alone without joining the SELLER and/or SIIIPPER, in which case the pere- sonality of the CADWALLADER PACIFIC COMPARY shall not be questioned in court by the BUYER or by its agents and/or representatives.

15. Should it be stipulated that buyer shall open an irrevocable confirmed Letter of Credit or in such terms as indicated in this contract in favor of Seller or Shipper upon confirmation of this order and the same is confirmed, the buyer hereby agrees and binds himself to open said letter of credit for the full walue of this order, inclusive of such other expenses or charges indicated there- in, or remit the foregoing by telegraphic transfer. In the event that buyer fails, neglects or refuses to comply with the foregoing within ten (10) days from receipt of such confirmation, buyer will be lieble for all and whatsoever kind ef expenses and damages incurred in connection with this order."

Profits derived from the transactions were accounted for in Cadwallader's profit and loss statement as "com- mission earned.” Although one-half of the profits was 333

DECISION +

C.T.A. CASE NO. 587 =e eredited in favor of Cadwallader and one-half in favor of the Branch Office, the whole was declared as income in the former's Philippine income tax returns (Exh. 1, -BIR rece, pe 62).

For the periods from July 1, 1949 to September 21, 1950 and from September 22, 1950 to December 31, 1954, Cadwallader realized profits on said transactions in the amounts of *36,622.22 and "141,503.70, respect- ively, or a total of "175,125.92 on which respondent as- sessed broker's percentage and fixed taxes, inclusive of surcharges, in the amount of P18,010.37 (Hrh. 4, BIR rec., ppe 35-39).

During the years 1952, 1953 and 195%, Cadwallader engaged in the manufacture of venetian blinds, making therefrom gross sales in the respective sums of °245, 345.50, 215,867.24 and 226,136.32. Believing itself taxable as a contractor, it paid the corresponding contractor's percentage tax. subsequently, respondent assessed it for manufacturer's sales tax under Section 186 of the National Internal Revenue Code, which, after deducting the amounts paid as contractor's tax, amounted to 76,701.59 (Annex "A" of Petition for Review). Cadwallader admits its liability for percentage tex on the sales of the venetian blinds it manufactured, but questions the computation of the tax appearing in the assessment (see Memorandum for Petitioner, CTA rec. p. 51).

The issues to be resolved in this case are:

1) Whether or not under the transactions described above Cadwallader is a commercial broker within the pur- view of section 19%(t) of the National Internal Revenue 334 4 te Code;

———O—— EE EO ————-

H~ECISION «

C.T.A. CASE NO. 587 - § «= AS a corollary to the first issue, whether or not Cadwallader is liable for 50% surcharge for willful failure to file returns as a commercial brokers 2) Whether or not respondent's method of computing the sales tax on the manufactured venetian blinds is correct.

In its petition for review, Cadwallader raised the defense of prescription of respondent's right to assess the commercial broker's percentage tax for the year 1949 and the first quarter of 1950. ‘lowever, we believe that Cadwallader has abandoned said defense for the reason that it failed altogether to discuss and press the same in the memorandum it filed in support of its petition for review.

Cadwallader claims that the transactions it en- tered into with its local customers cqnstitute sales of merchandise. On the other hand, respondent maintains that the parties entered into indent transactions with Cadwallader acting as agent of both the local customers and sellers. In support of his contention, respondent capitalizes on paragraph 1% of the sauple contract (Exh. X), which we quote:

"14, It is understood and agreed upon that insofar as the CADWALLADEN PACIFIC COMPANY is concerned, its intervention is limited to a mere broker in effecting this transaction and that no responsibility whatscever attaches to it. It is also understood and agreed further, that in the event there is violation of the conditions given hereof, SUYER recognizes the said CADWALLADER PACIFIC COMPANY as the SELLER'S and/or SHIPPER'S representative authorized and raged to bring suit in the name of the LER and/or SHIPPER or its own name CADWAL- LADER PACIFIC COMPANY alone without joining 8859p

DECISIO -

c. . A. Ct\8" o. 5S7 - 9 - th n /or liP ER, in hich case th p rson lity or t he C D LLA C lC CO -

P

shal ot b question d 1n court y th

UY

or y it a e t an / or represent tive.s . u / The contract o its f c r nt

Q

inconsis- t c1 • 1 it 1 1 t1f s "In nt Ora o •

IJ

t u m in it app ar n t th p rt1e 1 t n- ' d d t nt r into in nt tra s ction, it, however, r f rs to t loc 1 cl to r as buy r nd th Branch Office as sell r (in th conditio s, s ler or seller /or 1 d ntor), h r by in 1 equ l y p t t that t tr n ction intended 1 o ~.e of pu ell nd 1 • While para ra hs 7, 13 provid or r1gh n favor of C d-walla er in h co c pt of ler, conse- quent1y, n tln perso 'lit of ~dentor or brok r , p ragr ph 14, owev , 11 .. 1t th~? interv nt1on o d- wa 1 d r 1n th trn s ction to h t o . b ke • view of t h s pp r nt 1 con 1 t nt cont actual provi· ion , we sha 1 1v in o the act 4al conduct of th partie to dete ne t nat r ~ of the ransactio s nt r din o {Jrtic, et al., 6 P 11. 88;

37 , Civil Code; C vo vs. 0 1ves, t c, Gu ..

P

ific co. vs .

In ular Gov rn ent., 10 Phil. 1 6; Quiro n v • iar ons t r d r Co . , 38 bil. 50 , 50 ) • A aror stat d, Cadw 11 der s cure orders fro oc 1 custo er tor the pt:..rcha o o The ord r , to ther with irrevoc bl 1 tters o credit dawn by th loc 1 customers , wer . trans itt d tot ch or 1c which bo ht the erch ndi e. The er- chandis wa shipp d by th rane Office on its invoice 336 C.T.A. CASE NO. 587 = 16 «= directly to the local customers. The usual bills of lading and other shipping documents and drafts draw against the local buyers in favor of the Branch Office were forwarded to the bank or banks which issued the ins of eredit fer acceptance and payment.

fe our mind, the transactions between Cadwallader on the one hand end the local customers on the other were in reality purchase and sale. Cadwallader secured the orders for merchandise and solc the same in its own behalf through the Branch Office. The local customers bought the merchendise not from foreign manufecturers, wut from the Branch Office. Payment was made to the Branch Office, not to any other person or entity.

Cadwallader realized income from the transactions not in the form of broker's commission, but profit arising from overprice of the serchandise, “It would have been different if the whole amount paid by the local customer for the merchandise went to the supplier or manufacturer and in turn the latter paid Cadwallader and/or the Branch Office a commission; or if the local | eustomer paid to Cadwallader and/or the Branch Office whieh turned over to the supplier or manufacturer the amount paid, minus the commission. For then, the amount paid by the local tuyer for the merchandise never be- lenged to Cadwallader. “But, in the transactions in question, Cadwallader was the owner of the price paid for the merchandise, being the seller (see Ker & Co., Ltd. vs. Comm. of Int. lev., 70 Phil. 36, 42). There is no showing that it was accountable to the supplier or 337 oat ~~ ws « jj -« manufacturer for the amount represented in the letter of credit opened in favor of the Branch Office. Nor is there proof that it was accountable as an agent or broker of the local eustomer.

A commercial broker, as defined in Section 19%(t) ef the Revenue Code, includes all persons, other than importers, manufacturers, producers, or bons 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 car- ried by vessels or other means of transportation. The term includes commission merchants. fit does not in- clude a person or persons whe, like Cadwallader, for profit, purchase and/or sell merchandise on their owm behalf. For a broker acts for another (Behn, Neyer & Coe, Ltd. vs. Nolting and Garcia, 35 Phil.*27%, 280) and not for himself. ‘le is strictly a middleman (lien- derson vs. The State, 50 Ind., 23%).

The fact that paragraph 1% of the contract in question provides that, in effecting the transaction, Codwallader's intervention shall be limited to a mere broker does not irrevocably make Cadwallader a broker for tax purposes, for this contractual provision cannot be read as conclusive of the nature of the transaction recited in the contract. At is a settled principle that a clause cannot be segregated and given a meaning 338 gBe C.T.A- CASE NO. 587 > 12 -_ which runs counter to that conveyed by the entire do- cument. The whole contract must be interpreted or read together in order to arrive at its meaning (Ignacio va. Martinez and Martines, 33 Phil. 576). The operative provisions ef the contract (5. 8. Melsen Co. vs. Comm. of Int. Rev. 26 BTA 223), whieh inveriably indicate the plain intent of the parties, should prevail.

fhe use of the word “eommission™ in Cadwallader's statement ef profit and less in reference to profits derived from the transactions in question is not con- trolling in determining whether or not Cadwallader acted as a broker (see Quiroga vs. Parsons ‘lardware Co., 38 Phil. 5013 Mathews Conveyer Co. vs. Palmer-Bee Goo, 135 F 2d 73).

In the previous case of Cadwallader Pacific Co. vs. Commissioner of Internal Revemie, CTA Case Ne. 536, December 23, 1960, involving the very parties at bar and identical transactions under a contract whieh, with the exception of a clause found in paragraph 14 ef the present contract limiting the intervention of Cadwallader to a mere broker, is similar to the contract in ques- tion, we held that the petitiener-company was not a commercial broker. The transactions in question being identical with those in the previous case, the limiting contractual clause alone cannot make these two cases distinguishable from each other. Consequently, we hold the previous case of Cadwallader Pacifie Co. vs. Conm- missioner, gupra, as authoritative in the case at ber.

In the alternative, respondent contends that if 359 gape

VECLELUN =

C.T.A. CASE NG. 587 -13- Cadwallader cannot be considered a broker, it should be considered a commission merchant. In our Resolu- tion of the motion for reconsideration of our Decision in CTA Case Bo. $36, we held that a person who buys for the purpose of resale is not a commission merchant, In other words, petitionertherein is not a commission merchant. In the light of present, but identical trans- actions, we find no plausible reason for holding Cad- wallader otherwise.

Inasmuch as Cadwallader is not a broker or com- mission merchant, it should be absolved from the pay- ment of broker's fixed and percentage taxes. Hence, the imposition of the surcharges of 25% and 50% is devoid of legal basis.

Cadwallader also assails the deficiency assessment for manufacturer's sales tax. It is urged that the 25% mark-up and expenses, consisting of bank charges, marine insurance and brokerage fees, should be added to the cost of raw materials used during the year involved.

But respondent argues that these items have already been ineluded in the inventory or cost of raw materials.

The contention of respondent that the inventory cost already ineludes the 25% mark-up, bank charges, marine insurance, and brokerage fees is incorrect because their cost, as appearing in the records, rep- resents only the cost, C & F, and license fees and taxes paid.

Having sustained the propesition that the mark-up and expenses are not yet included in the inventory 84 goat _—— — — - ————— — —

DECISION -

C.T.A. CASE NO. 587 ~ lh « eosts of raw materials and the same should, therefore, “pe added thereto, it follows that respondent's method of computing Cedwallader‘s liability for sales tax on the manufactured venetian blinds is erroneous. Conse- quently, we find Cadwallader's method, as illustrated in the memorandum submitted in support of its answer to the petition for review, proper and correct.

However, we find that Cadwallader, in its eomputa- tion of its liability fer sales tax on the sanufactured venetian blinds, represented the total asount of pur- chases of raw materials imported in 1952 as P46,321.65, From Exhibit I, we gather that the total amount of pur- chases should be P46,421.65 (the sum of the dollar value, C 4 F Manila, and license fee and sales tax), whieh we hold to be correct. In view of this inadver~ tent error, we find Cadwallader liable for the payment of deficiency manufacturer's sales tax amounting to P204.51 plus a surcharge of 25% for late paynent. ‘low- ever, for the years 1953 and 195%, it is not liable fer deficiency sales tax.

Similarly, we find that mechanical errors have been committed in Cadwallader'’s proffered computation of the sales tax on venetian blinds manufactured in 1953 and 195%. Thus, instead of "7,710.7% as the total amount of tax already paid for 1953, the correct amount is *7,110.7% (see Exh. Y-1, BIR ree., p» 73). And ine stead of the sums of 7581.53 and f' 1,932.11 spent for marine insuranee and brokerage fees in 195%, the correct figures are £572.18 and °1,882.05, respectively (see MELLIBDAUE @.

GeoToAe CASE HO. 587 -15~ Exhibits 8S, No. 5, Petitioner's Folders). ‘These errors do not alter the fact that Cadwallader does not ove deficiency sales tax on venetian blinds manufactured in 1953 and 195%. On the contrary, there is an over- payment, the refund or eredit of whieh is not sought in this proceeding.

We find Cadwalleder's objection to the exployment of the ratio nethod in determining the cost of deduct- ible raw uaterials used in 195% meritorious, Cadwallader has presented in evidence invoices, vouchers and import- er's declarations upon which the cost of raw materials may be ascertained.

Cadwallader did not contest its liability for the payment of advance sales tax in the amount of 840.00 fer the period from February 16, 1951 to December 31, 1953.

With respect to the compromise penalty of 1,000.00, we have consistently ruled in previous cases that the Comnissioner of Internal Revere has no euthority te impose the same on the taxpayer.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the decision of the Commissioner of Internal Hevenue dated September 9, 1958 is hereby modified. Petitioner, Cadwalleder Pacific Company, is hereby ordered to pay the Commissioner of Internal lieverme and/or his author- ized representative the amount of 255.6% and °840.00 as sales tax for 1952, inclusive of 25% surcharge and advanee sales tax, respectively, or a total of 71,095.64.

DECISION ~

C.TeAs CASE NO. 587 = 16 « 80 ONDERED, —*

—_ MARIANO

Presiding Judge

WE CONCUR:

sociate Judge ROMAN M. UMALI

Associate Judge

342