PHILEX MINING G.R. No. 148187
CORPORATION,
Petitioner, Present:
Ynares-Santiago, J. (Chairperson),
- versus - Carpio Morales, *
Chico-Nazario,
Nachura, and,
Reyes, JJ.
COMMISSIONER OF
INTERNAL REVENUE, Promulgated:
Respondent.
x
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x
YNARES-SANTIAGO, J.:
This is a petition for review on
certiorari of the June 30, 2000 Decision[1] of
the Court of Appeals in CA-G.R. SP No. 49385, which affirmed the Decision[2] of
the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the
The facts of the case are as follows:
On
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from time to time may be required by the MANAGERS within the said 3-year period, for use in the MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for internal audit purposes, as the owner’s account in the Sto. Nino PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino PROJECT, shall be added to such owner’s account.
5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the Sto. Nino PROJECT, in accordance with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nino PROJECT as a special fund to be known as the MANAGERS’ account.
(b) The
total of the MANAGERS’ account shall not exceed P11,000,000.00, except with
prior approval of the PRINCIPAL; provided, however, that if the compensation of
the MANAGERS as herein provided cannot be paid in cash from the Sto. Nino PRO
(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until termination of this Agency.
(d) The
MANAGERS’ account shall not accrue interest. Since it is the desire of the
PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation of
property, upon a projected termination of this Agency, the ratio which the
MANAGERS’ account has to the owner’s account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding
the claims, shall be transferred to the MANAGERS, except that such transferred
assets shall not include mine development, roads, buildings, and similar
property which will be valueless, or of slight value, to the MANAGERS. The
x x x x
12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto. Nino PROJECT before income tax. It is understood that the MANAGERS shall pay income tax on their compensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto. Nino PROJECT after deduction therefrom of the MANAGERS’ compensation.
x x x x
16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the future, may incur other obligations in favor of the MANAGERS. This Power of Attorney has been executed as security for the payment and satisfaction of all such obligations of the PRINCIPAL in favor of the MANAGERS and as a means to fulfill the same. Therefore, this Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS’ account. After all obligations of the PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full, this Agency shall be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.
17. Notwithstanding any agreement or understanding between the PRINCIPAL and the MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in any manner be held liable to the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof shall be operative in case of the MANAGERS’ withdrawal.
x x x x[5]
In the course of managing and
operating the project, Philex Mining made advances of cash and property in
accordance with paragraph 5 of the agreement. However, the mine suffered continuing losses over
the years which resulted to petitioner’s withdrawal as manager of the mine on
Thereafter, on September 27, 1982, the
parties executed a “Compromise with Dation in Payment”[7] wherein
Baguio Gold admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by first assigning
Baguio Gold’s tangible assets to petitioner, transferring to the latter Baguio
Gold’s equitable title in its Philodrill assets and finally settling the remaining
liability through properties that Baguio Gold may acquire in the future.
On
Subsequently, petitioner wrote off in
its 1982 books of account the remaining outstanding indebtedness of Baguio Gold
by charging P112,136,000.00 to allowances and reserves that were set up in 1981
and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return,
petitioner deducted from its gross income the amount of P112,136,000.00 as
“loss on settlement of receivables from Baguio Gold against reserves and
allowances.”[9] However, the Bureau of Internal Revenue (BIR)
disallowed the amount as deduction for bad debt and assessed petitioner a
deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the
deduction must be allowed since all requisites for a bad debt deduction were
satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was
ascertained to be worthless; and (c) it was charged off within the taxable year
when it was determined to be worthless.
Petitioner emphasized that the debt
arose out of a valid management contract it entered into with Baguio Gold. The bad debt deduction represented advances
made by petitioner which, pursuant to the management contract, formed part of Baguio
Gold’s “pecuniary obligations” to petitioner. It also included payments made by
petitioner as guarantor of Baguio Gold’s long-term loans which legally entitled
petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Gold’s irreversible losses,
it became evident that it would not be able to recover the advances and
payments it had made in behalf of Baguio Gold. For a debt to be considered worthless, petitioner
claimed that it was neither required to institute a judicial action for
collection against the debtor nor to sell or dispose of collateral assets in
satisfaction of the debt. It is enough
that a taxpayer exerted diligent efforts to enforce collection and exhausted all
reasonable means to collect.
On
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered
judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition for
Review is hereby DENIED for lack of merit. The assessment in question, viz:
FAS-1-82-88-003067 for deficiency income tax in the amount of P62,811,161.39 is
hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby
ORDERED to PAY respondent Commissioner of Internal Revenue the amount of
P62,811,161.39, plus, 20% delinquency interest due computed from February 10,
1995, which is the date after the 20-day grace period given by the respondent
within which petitioner has to pay the deficiency amount x x x up to actual
date of payment.
SO ORDERED.[11]
The CTA rejected petitioner’s assertion that the advances it made for the
Sto. Nino mine were in the nature of a loan. It instead characterized the advances as
petitioner’s investment in a partnership with Baguio Gold for the development
and exploitation of the Sto. Nino mine. The
CTA held that the “Power of Attorney” executed by petitioner and Baguio Gold
was actually a partnership agreement. Since
the advanced amount partook of the nature of an investment, it could not be
deducted as a bad debt from petitioner’s gross income.
The CTA likewise held that the amount paid by petitioner for the long-term
loan obligations of Baguio Gold could not be allowed as a bad debt deduction. At the time the payments were made, Baguio
Gold was not in default since its loans were not yet due and demandable. What petitioner did was to pre-pay the loans
as evidenced by the notice sent by Bank of America showing that it was merely
demanding payment of the installment and interests due. Moreover, Citibank imposed and collected a
“pre-termination penalty” for the pre-payment.
The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon denial of its motion for
reconsideration,[13] petitioner took this recourse
under Rule 45 of the Rules of Court, alleging that:
I.
The
Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of
the nature of an investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino Mine indicates that Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine notwithstanding the clear absence of any intent on the part of Philex and Baguio Gold to form a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding the Compromise Agreement and the Amended Compromise Agreement when it construed the nature of the advances made by Philex.
IV.
The
Court of Appeals erred in refusing to delve upon the issue of the propriety of
the bad debts write-off.[14]
Petitioner insists that in determining the nature of its business
relationship with Baguio Gold, we should not only rely on the “Power of Attorney”,
but also on the subsequent “Compromise with Dation in Payment” and “Amended
Compromise with Dation in Payment” that the parties executed in 1982. These documents, allegedly evinced the
parties’ intent to treat the advances and payments as a loan and establish a
creditor-debtor relationship between them.
The petition lacks merit.
The lower courts correctly held that the “Power of Attorney” is the
instrument that is material in determining the true nature of the business
relationship between petitioner and Baguio Gold. Before resort may be had to the two compromise
agreements, the parties’ contractual intent must first be discovered from the
expressed language of the primary contract under which the parties’ business
relations were founded. It should be
noted that the compromise agreements were mere collateral documents executed by
the parties pursuant to the termination of their business relationship created
under the “Power of Attorney”. On the
other hand, it is the latter which established the juridical relation of the
parties and defined the parameters of their dealings with one another.
The execution of the two compromise agreements can hardly be considered
as a subsequent or contemporaneous act that is reflective of the parties’ true
intent. The compromise agreements were
executed eleven years after the “Power of Attorney” and merely laid out a plan
or procedure by which petitioner could recover the advances and payments it
made under the “Power of Attorney”. The
parties entered into the compromise agreements as a consequence of the dissolution
of their business relationship. It did
not define that relationship or indicate its real character.
An examination of the “Power of Attorney” reveals that a partnership or
joint venture was indeed intended by the parties. Under a contract of partnership, two or more
persons bind themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves.[15] While a corporation, like petitioner, cannot
generally enter into a contract of partnership unless authorized by law or its
charter, it has been held that it may enter into a joint venture which is akin
to a particular partnership:
The legal concept of a joint venture is of common law origin.
It has no precise legal definition, but
it has been generally understood to mean an organization formed for some
temporary purpose. x x x It is in fact hardly distinguishable from the
partnership, since their elements are similar – community of interest in the
business, sharing of profits and losses, and a mutual right of control. x x x
The main distinction cited by most opinions in common law jurisdictions is that
the partnership contemplates a general business with some degree of continuity,
while the joint venture is formed for the execution of a single transaction,
and is thus of a temporary nature. x x x This observation is not entirely
accurate in this jurisdiction, since under the Civil Code, a partnership may be
particular or universal, and a particular partnership may have for its object a
specific undertaking. x x x It would seem therefore that under Philippine law,
a joint venture is a form of partnership and should be governed by the law of
partnerships. The Supreme Court has however recognized a distinction between
these two business forms, and has held that although a corporation cannot enter
into a partnership contract, it may however engage in a joint venture with
others. x x x (Citations omitted) [16]
Perusal of the agreement denominated as the “Power of Attorney” indicates
that the parties had intended to create a partnership and establish a common
fund for the purpose. They also had a
joint interest in the profits of the business as shown by a 50-50 sharing in
the income of the mine.
Under the “Power of Attorney”, petitioner and Baguio Gold undertook to
contribute money, property and industry to the common fund known as the Sto.
Niño mine.[17] In this regard, we note that there is a
substantive equivalence in the respective contributions of the parties to the
development and operation of the mine. Pursuant
to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold were to
contribute equally to the joint venture assets under their respective accounts.
Baguio Gold would contribute P11M under its owner’s account plus any
of its income that is left in the
project, in addition to its actual
mining claim. Meanwhile,
petitioner’s contribution would consist of its expertise in the management and operation of mines, as well as the
manager’s account which is comprised of P11M
in funds and property and petitioner’s “compensation”
as manager that cannot be paid in cash.
However, petitioner asserts that it could not have entered into a
partnership agreement with Baguio Gold because it did not “bind” itself to
contribute money or property to the project; that under paragraph 5 of the
agreement, it was only optional for petitioner to transfer funds or property to
the Sto. Niño project “(w)henever the MANAGERS shall deem it necessary and
convenient in connection with the MANAGEMENT of the STO. NIÑO MINE.”[18]
The wording of the parties’ agreement as to petitioner’s contribution to
the common fund does not detract from the fact that petitioner transferred its
funds and property to the project as specified in paragraph 5, thus rendering
effective the other stipulations of the contract, particularly paragraph 5(c)
which prohibits petitioner from withdrawing the advances until termination of
the parties’ business relations. As can
be seen, petitioner became bound by its contributions once the transfers were
made. The contributions acquired an obligatory nature as soon as petitioner had
chosen to exercise its option under paragraph 5.
There is no merit to petitioner’s claim that the prohibition in paragraph
5(c) against withdrawal of advances should not be taken as an indication that
it had entered into a partnership with Baguio Gold; that the stipulation only
showed that what the parties entered into was actually a contract of agency
coupled with an interest which is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot
be revoked or withdrawn by the principal due to an interest of a third
party that depends upon it, or the mutual interest of both principal and agent.[19] In this case, the non-revocation or
non-withdrawal under paragraph 5(c) applies to the advances made by
petitioner who is supposedly the agent and not the principal under the
contract. Thus, it cannot be inferred
from the stipulation that the parties’ relation under the agreement is one of
agency coupled with an interest and not a partnership.
Neither can paragraph 16 of the agreement be
taken as an indication that the relationship of the parties was one of agency
and not a partnership. Although the said provision states that “this Agency
shall be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS’ account,” it does not necessarily
follow that the parties entered into an agency contract coupled with an
interest that cannot be withdrawn by Baguio Gold.
It should be stressed that the main object of the “Power of Attorney” was
not to confer a power in favor of petitioner to contract with third persons on behalf of Baguio Gold but to
create a business relationship between petitioner and Baguio Gold, in which the
former was to manage and operate the latter’s mine through the parties’ mutual
contribution of material resources and industry. The essence of an agency, even one that is coupled
with interest, is the agent’s ability to represent his principal and bring about business relations between the
latter and third persons.[20] Where representation for and in behalf of the
principal is merely incidental or necessary for the proper discharge of one’s
paramount undertaking under a contract, the latter may not necessarily be a
contract of agency, but some other agreement depending on the ultimate undertaking
of the parties.[21]
In this case, the totality of the circumstances and the stipulations in the
parties’ agreement indubitably lead to the conclusion that a partnership was
formed between petitioner and Baguio Gold.
First, it does not appear that Baguio Gold was unconditionally obligated
to return the advances made by petitioner under the agreement. Paragraph 5 (d) thereof
provides that upon termination of the parties’ business relations, “the ratio
which the MANAGER’S account has to the owner’s account will be determined, and
the corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims” shall be transferred to petitioner.[22] As pointed out by the Court of Tax Appeals, petitioner
was merely entitled to a proportionate return of the mine’s assets upon
dissolution of the parties’ business relations. There was nothing in the agreement that would
require Baguio Gold to make payments of the advances to petitioner as would be
recognized as an item of obligation or “accounts payable” for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a
distribution of assets of the Sto. Niño mine upon termination, a provision that
is more consistent with a partnership than a creditor-debtor relationship. It should be pointed out that in a contract of
loan, a person who receives a loan or money or any fungible thing acquires
ownership thereof and is bound to pay the creditor an equal amount of
the same kind and quality.[23] In this case, however, there was no stipulation
for Baguio Gold to actually repay petitioner the cash and property that it had advanced,
but only the return of an amount pegged at a ratio which the manager’s account
had to the owner’s account.
In this connection, we find no contractual basis for the execution of the
two compromise agreements in which Baguio Gold recognized a debt in favor of
petitioner, which supposedly arose from the termination of their business
relations over the Sto. Nino mine. The
“Power of Attorney” clearly provides that petitioner would only be entitled to
the return of a proportionate share of the mine assets to be computed at a
ratio that the manager’s account had to the owner’s account. Except to provide a basis for claiming the
advances as a bad debt deduction, there is no reason for Baguio Gold to hold
itself liable to petitioner under the compromise agreements, for any amount
over and above the proportion agreed upon in the “Power of Attorney”.
Next, the tax court correctly observed that it was unlikely for a
business corporation to lend hundreds of millions of pesos to another
corporation with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans. The parties also did not provide a specific
maturity date for the advances to become due and demandable, and the manner of
payment was unclear. All these point to
the inevitable conclusion that the advances were not loans but capital
contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Niño
mine is the fact that it would receive 50% of the net profits as “compensation”
under paragraph 12 of the agreement. The
entirety of the parties’ contractual stipulations simply leads to no other
conclusion than that petitioner’s “compensation” is actually its share in the
income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the “receipt
by a person of a share in the profits of a business is prima facie
evidence that he is a partner in the business.” Petitioner asserts, however, that no such
inference can be drawn against it since its share in the profits of the Sto
Niño project was in the nature of compensation or “wages of an employee”, under
the exception provided in Article 1769 (4) (b).[24]
On this score, the tax court correctly noted that petitioner was not an
employee of Baguio Gold who will be paid “wages” pursuant to an
employer-employee relationship. To begin
with, petitioner was the manager of the project and had put substantial sums into
the venture in order to ensure its viability and profitability. By pegging its compensation to profits,
petitioner also stood not to be remunerated in case the mine had no income. It
is hard to believe that petitioner would take the risk of not being paid at all
for its services, if it were truly just an ordinary employee.
Consequently, we find that petitioner’s “compensation” under paragraph 12
of the agreement actually constitutes its share in the net profits of the
partnership. Indeed, petitioner would
not be entitled to an equal share in the income of the mine if it were just an
employee of Baguio Gold.[25] It is not surprising that petitioner was to
receive a 50% share in the net profits, considering that the “Power of
Attorney” also provided for an almost equal contribution of the parties to the
St. Nino mine. The “compensation” agreed
upon only serves to reinforce the notion that the parties’ relations were
indeed of partners and not employer-employee.
All told, the lower courts did not err in treating petitioner’s advances
as investments in a partnership known as the Sto. Nino mine. The advances were not “debts” of Baguio Gold
to petitioner inasmuch as the latter was under no unconditional obligation to
return the same to the former under the “Power of Attorney”. As for the amounts that petitioner paid as
guarantor to Baguio Gold’s creditors, we find no reason to depart from the tax
court’s factual finding that Baguio Gold’s debts were not yet due and
demandable at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s
outstanding loans to its bank creditors and this conclusion is supported by the
evidence on record.[26]
In sum, petitioner cannot claim the advances as a bad debt deduction from
its gross income. Deductions for income
tax purposes partake of the nature of tax exemptions and are strictly construed
against the taxpayer, who must prove by convincing evidence that he is entitled
to the deduction claimed.[27] In this case, petitioner failed to
substantiate its assertion that the advances were subsisting debts of Baguio
Gold that could be deducted from its gross income. Consequently, it could not claim the advances
as a valid bad debt deduction.
WHEREFORE, the petition is DENIED.
The decision of the Court of Appeals in CA-G.R. SP No. 49385 dated
SO
OR
CONSUELO
YNARES-SANTIAGO
Associate Justice
WE CONCUR:
CONCHITA CARPIO MORALES
Associate Justice
MINITA V. CHICO-NAZARIO ANTONIO
EDUARDO B. NACHURA
Associate
Justice Associate Justice
RUBEN T. REYES
Associate Justice
ATTESTATION
I attest that the conclusions in the above decision were
reached in consultation before the case was assigned to the writer of the
opinion of the Court’s Division.
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution
and the Division Chairperson’s Attestation, it is hereby certified that the
conclusions in the above Decision were reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.
REYNATO
S. PUNO
Chief Justice
* In lieu of Associate Justice Ma. Alicia Austria-Martinez.
[1] Rollo, pp. 46-57; penned by Associate
Justice Portia Aliño-Hormachuelos and concurred in by Associate Justices Ma. Alicia
Austria-Martinez (now an Associate Justice of the Supreme Court) and Elvi John
[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15]
CIVIL CODE, Art. 1767.
[16] Aurbach v. Sanitary Wares Manufacturing
Corporation, G.R. No. 75875,
[17]
Power of Attorney, paragraph 2(a), rollo,
p. 61.
[18] Rollo, p. 62.
[19]
CIVIL CODE, Art. 1927. An agency cannot be revoked if a bilateral contract
depends upon it, or if it is the means of fulfilling an obligation already
contracted, or if a partner is appointed manager of a partnership in the
contract of partnership and his removal from the management is
unjustifiable.
[20] Partnership, Agency and Trusts, 1996
Ed., De
[21]
See Nielson & Company, Inc. v.
Lepanto Consolidated Mining Company, 135 Phil. 532, 542 (1968).
[22] Rollo, p. 63.
[23]
CIVIL CODE, Art. 1953.
[24]
Article 1769 (4) (b) of the Civil Code states:
Art. 1769. In determining whether a partnership exists,
these rules shall apply:
x x x x
(4) The receipt
by a person of a share of the profits of a business is prima facie evidence
that he is a partner in the business, but no such inference shall be drawn if
such profits were received in payment:
x x x x
(b) As wages of an employee or rent to a
landlord;
x x x x
[25]
See Tocao v. Court of Appeals, 396
Phil. 166, 180-182 (2000).
[26] Rollo, pp. 81-88.
[27]
See Law of Basic Taxation in the