Koppel Inc. vs. Yatco

8/10/2019 Koppel Inc. vs. Yatco

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EN BANC

G.R. No. L-47673 October 10, 1946

KOPPEL (PHILIPPINES), INC.,Plaintiff-Appellant, vs. ALFREDOL. YATCO, Collector of Internal Revenue,Defendant-Appellee.

Padilla, Carlos and Fernando for appellant.Office of the Solicitor General Ozaeta, First Assistant SolicitorGeneral Reyes and.Office of the Solicitor General Reyes and Solicitor Caizanes forappellee

HILADO,J.:chanroblesvirtuallaw library

This is an appeal by Koppel (Philippines), Inc., from the judgment ofthe Court of First Instance of Manila in civil case No. 51218 of saidcourt dismissing said corporation's complaint for the recovery of thesum of P64,122.51 which it had paid under protest to the Collectorof Internal Revenue on October 30, 1936, as merchant sales tax.The main facts of the case were stipulated in the court below asfollows:

AGREED STATEMENT OF FACTSchanroblesvirtuallaw library

Now come the plaintiff by attorney Eulogio P. Revilla and thedefendant by the Solicitor General and undersigned AssistantAttorney of the Bureau of Justice and, with leave of this HonorableCourt, hereby respectfully stipulated and agree to the followingfacts, to wit:chanroblesvirtuallaw library

I. That plaintiff is a corporation duly organized and existing underand by virtue of the laws of the Philippines, with principal officetherein at the City of Manila, the capital stock of which is dividedinto thousand (1,000) shares of P100 each. The Koppel IndustrialCar and Equipment company, a corporation organized and existingunder the laws of the State of Pennsylvania, United States ofAmerica, and not licensed to do business in the Philippines, ownednine hundred and ninety-five (995) shares out of the total capitalstock of the plaintiff from the year 1928 up to and including the


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year 1936, and the remaining five (5) shares only were and areowned one each by officers of the plaintiff corporation. chanroblesvirtualawlibrarychanroblesvirtuallaw library

II. That plaintiff, at all times material to this case, was and now isduly licensed to engage in business as a merchant and commercialbroker in the Philippines; and was and is the holder of thecorresponding merchant's and commercial broker's privilege taxreceipts.chanroblesvirtualawlibrarychanroblesvirtuallaw library

III. That the defendant Collector of Internal revenue is now Mr.Bibiano L. Meer in lieu of Mr. Alfredo L. Yatco. chanroblesvirtualawlibrarychanroblesvirtuallaw library

IV. That during the period from January 1, 1929, up to andincluding December 31, 1932, plaintiff transacted business in the

Philippines in the following manner, with the exception of thetransactions which are described in paragraphs V and VI of thisstipulation:chanroblesvirtuallaw library

When a local buyer was interested in the purchase of railwaymaterials, machinery, and supplies, it asked for price quotationsfrom plaintiff. Atypical form of such request is attached hereto andmade a part hereof as Exhibit A. (Exhibit A represents typicaltransactions arising from written requests for quotations, whileExhibits B to G, inclusive, are typical transactions arising fromverbal requests for quotation.) Plaintiff then cabled for the quotationdesired for Koppel Industrial Car and Equipment Company. Asample of the pertinent cable is hereto attached and made a parthereof as Exhibit B. Koppel Industrial Car and Equipment Companyanswered by cable quoting its cost price, usually A. C. I. F. Manilacost price, which was later followed by a letter of confirmation. Asample of the said cable quotation and of the letter of confirmationare hereto attached and made a part hereof as Exhibits C and C-1.Plaintiff, however, quoted by Koppel Industrial Car and Equipment

Company. Copy of the plaintiff's letter to purchaser is heretoattached and made a part hereof as Exhibit D. On the basis of thesequotations, orders were placed by the local purchasers, copies ofwhich orders are hereto attached as Exhibits E and E-1.chanroblesvirtualawlibrarychanroblesvirtuallaw library

A cable was then sent to Koppel Industrial Car and Equipmentcompany giving instructions to ship the merchandise to Manila


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forwarding the customer's order. Sample of said cable is heretoattached as Exhibit F. The bills of lading were usually made to"order" and indorsed in blank with notation to the effect that thebuyer be notified of the shipment of the goods covered in the bills of

lading; commercial invoices were issued by Koppel Industrial Carand Equipment Company in the names of the purchasers andcertificates of insurance were likewise issued in their names, or inthe name of Koppel Industrial Car and Equipment Company butindorsed in blank and attached to drafts drawn by Koppel IndustrialCar and Equipment Company on the purchasers, which wereforwarded through foreign banks to local banks. Samples of the billsof lading are hereto attached as Exhibits F-1, I-1, I-2 and I-3. Billsof ladings, Exhibits I-1, I-2 and I-3, may equally have beenemployed, but said Exhibits I-1, I-2 and I-3 have no connection

with the transaction covered by Exhibits B to G, inclusive. Thepurchasers secured the shipping papers by arrangement with thebanks, and thereupon received and cleared the shipments. If themerchandise were of European origin, and if there was not sufficienttime to forward the documents necessary for clearance, throughforeign banks to local banks, to the purchasers, the KoppelIndustrial Car and Equipment company did, in many cases, send thedocuments directly from Europe to plaintiff with instructions to turnthese documents over to the purchasers. In many cases, where

sales was effected on the basis of C. I. F. Manila, duty paid, plaintiffadvanced the sums required for the payment of the duty, and thesesums, so advanced, were in every case reimbursed to plaintiff byKoppel Industrial Car and Equipment Company. The price werepayable by drafts agreed upon in each case and drawn by KoppelIndustrial Car and Equipment Company on respective purchasersthrough local banks, and payments were made to the banks by thepurchasers on presentation and delivery to them of the above-mentioned shipping documents or copies thereof. A sample of said

drafts is hereto attached as Exhibit G. Plaintiff received by way ofcompensation a percentage of the profits realized on the abovetransactions as fixed in paragraph 6 of the plaintiff's contract withKoppel Industrial Car and Equipment Company, which contract ishereto attached as Exhibit H, and suffered its corresponding sharein the losses resulting from some of the transactions. chanroblesvirtualawlibrarychanroblesvirtuallaw library


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That the total gross sales from January 1, 1929, up to and includingDecember 31, 1932, effected in the foregoing manner and underthe above specified conditions, amount to P3, 596,438.84.chanroblesvirtualawlibrarychanroblesvirtuallaw library

V. That when a local sugar central was interested in the purchase ofrailway materials, machinery and supplies, it secured quotationsfrom, and placed the corresponding orders with, the plaintiff insubstantially the same manner as outlined in paragraph IV of thisstipulation, with the only difference that the purchase orders whichwere agreed to by the central and the plaintiff are similar to thesample hereto attached and made a part hereof as Exhibit I. Typicalsamples of the bills of lading covering the herein transaction arehereto attached and made a part hereto as Exhibits I-1, I-2 and I-3.The value of the sales carried out in the manner mentioned in this

paragraph is P133,964.98.chanroblesvirtualawlibrarychanroblesvirtuallaw library

VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila,Philippines, placed an option with Koppel Industrial Car andEquipment Company, through plaintiff, to purchase within threemonths a pair of Atlas-Diesel Marine Engines. Koppel Industrial Carand Equipment Company purchased said Diesel Engines inStockholm, Sweden, for $16,508.32. The suppliers drew a draft forthe amount of $16,508.32 on the Koppel Industrial Car and

Equipment Company, which paid the amount covered by the draft.Later, Miguel J. Ossorio definitely called the deal off, and as KoppelIndustrial Car and Equipment Company could not ship to or draw onsaid Mr. Miguel J. Ossorio, it in turn drew another draft on plaintifffor the same amount at six months sight, with the understandingthat Koppel Industrial Car and Equipment Company wouldreimburse plaintiff when said engines were disposed of. Plaintiffhonored the draft and debited the said sum of $16,508.32 tomerchandise account. The engines were left stored at Stockholm,Sweden. On April 1, 1930, a new local buyer, Mr. Cesar Barrios, ofIloilo, Philippines, was found and the same engines were sold to himfor $21,000 (P42,000) C. I. F. Hongkong. The engines were shippedto Hongkong and a draft for $21,000 was drawn by KoppelIndustrial Car and Equipment Company on Mr. Cesar Barrios. Afterthe draft was fully paid by Mr. Barrios, Koppel Industrial Car andEquipment Company reimbursed plaintiff with cost price of


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$16,508.32 and credited it with $1,152.95 as its share of the profiton the transaction. Exhibits J and J-1 are herewith attached andmade integral parts of this stipulation with particular reference toparagraph VI hereof.chanroblesvirtualawlibrarychanroblesvirtuallaw library

VII. That plaintiff's share in the profits realized out of thesetransactions described in paragraphs IV, V and VI hereof totalingP3,772,403.82, amounts to P132,201.30; and that plaintiff withinthe time provided by law returned the aforesaid amountP132,201.30 for the purpose of the commercial broker's 4 per centtax and paid thereon the sum P5,288.05 as such tax.chanroblesvirtualawlibrarychanroblesvirtuallaw library

VIII. That defendant demanded of the plaintiff the sum ofP64,122.51 as the merchants' sales tax of 1% per cent on the

amount of P3,772,403.82, representing the total gross value of thesales mentioned in paragraphs IV, V and VI hereof, including the 25per cent surcharge for the late payment of the said tax, which taxand surcharge were determined after the amount of P5,288.05mentioned in paragraph VI hereof was deducted. chanroblesvirtualawlibrarychanroblesvirtuallaw library

IX. That plaintiff, on October 30, 1936, paid under protest said sumof P64,122.51 in order to avoid further penalties, levy and distraintproceedings.chanroblesvirtualawlibrarychanroblesvirtuallaw library

X. That defendant, on November 10, 1936, overruled plaintiff'sprotest, and defendant has failed and refused and still fails andrefuses, notwithstanding demands by plaintiff, to return to theplaintiff said sum of P64,122.51 or any part thereof.

x x x x x x x x x

That the parties hereby reserve the right to present additionalevidence in support of their respective contentions.chanroblesvirtualawlibrarychanroblesvirtuallaw library

Manila, Philippines, December 26, 1939

(Sgd.) ROMAN OZAETASolicitor General


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(Sgd.) ANTONIO CAIZARESAssistant Attorney

(Sgd.) E. P. REVILLAAttorney for the Plaintiff

3rd Floor, Perez Samanillo Bldg., Manila

Both parties adduced some oral evidence in clarification of oraddition to their agreed statement of facts. A preponderance ofevidence has established, besides the facts thus stipulated, thefollowing:

(a) The shares of stock of plaintiff corporation were and are allowned by Koppel Industries Car and Equipment Company of

Pennsylvania, U. S. A., exceptive which were necessary to qualifythe Board of Directors of said plaintiff corporation;chanroblesvirtuallaw library

(b) In the transactions involved herein the plaintiff corporationacted as the representative of Koppel Industrial Car and EquipmentCompany only, and not as the agent of both the latter company andthe respective local purchasers - plaintiff's principal witness, A.H.Bishop, its resident Vice-President, in his testimony invariablyreferred to Koppel Industrial Car and Equipment Co. as "ourprincipal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at thebottom of page 10 to the top of page 11, the witness stated thatthey had "several principal" abroad but that "our principal abroadwas, for the years in question, Koppel Industrial Car and EquipmentCompany," and on page 68, he testified that what he actually saidwas ". . . but ourprincipal abroad" and not "our principal abroad" -as to which it is very significant that neither this witness nor anyother gave the name of even a single other principal abroad of theplaintiff corporation;chanroblesvirtuallaw library

(c) The plaintiff corporation bore alone incidental expenses - as, forinstance, cable expenses-not only those of its own cables but alsothose of its "principal" (t.s.n., pp. 52, 53);chanroblesvirtuallaw library

(d) the plaintiff's "share in the profits" realized from thetransactions in which it intervened was left virtually in the hands ofKoppel Industrial Car and Equipment Company (t.s.n., p. 51); chanroblesvirtuallaw library


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(e) Where drafts were not paid by the purchasers, the local bankswere instructed not to protest them but to refer them to plaintiffwhich was fully empowered by Koppel Industrial Car and Equipmentcompany to instruct the banks with regards to disposition of the

drafts and documents (t.s.n., p. 50; Exhibit G);chanroblesvirtuallaw library

(f) Where the goods were European origin, consular invoices, bill oflading, and, in general, the documents necessary for clearance weresent directly to plaintiff (t.s.n., p. 14);chanroblesvirtuallaw library

(g) If the plaintiff had in stock the merchandise desired by localbuyers, it immediately filled the orders of such local buyers andmade delivery in the Philippines without the necessity of cabling itsprincipal in America either for price quotations or confirmation or

rejection of that agreed upon between it and the buyer (t.s.n., pp.39-43);chanroblesvirtuallaw library

(h) Whenever the deliveries made by Koppel Industrial Car andEquipment Company were incomplete or insufficient to fill the localbuyer's orders, plaintiff used to make good the deficiencies bydeliveries from its own local stock, but in such cases it charged itsprincipal only the actual cost of the merchandise thus delivered by itfrom its stock and in such transactions plaintiff did not realize anyprofit (t.s.n., pp. 53-54);chanroblesvirtuallaw library

(i) The contract of sale involved herein were all perfected in thePhilippines.

Those described in paragraph IV of the agreed statement of factswent through the following process: (1) "When a local buyer wasinterested in the purchase of railway materials, machinery, andsupplies, it asked for price quotations from plaintiff"; (2) "Plaintiffthen cabled for the quotation desired from Koppel Industrial Car and

Equipment Company"; (3) "Plaintiff, however, quoted to thepurchaser a selling price above the figures quoted by KoppelIndustrial Car and Equipment Company"; (4) "On the basis of thesequotations, orders were placed by the local purchasers . . ."chanroblesvirtuallaw library


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Those described in paragraph V of said agreed statement of factswere transacted "in substantially the same manner as outlined inparagraph IV."chanroblesvirtuallaw library

As to the single transaction described in paragraph VI of the sameagreed statement of facts, discarding the Ossorio option whichanyway was called off, "On April 1, 1930, a new local buyer, Mr.Cesar Barrios, of Iloilo, Philippines, was found and the same engineswere sold to him for $21,000(P42,000) C.I.F. Hongkong."(Emphasis supplied.).

(j) Exhibit H contains the following paragraph:

It is clearly understood that the intent of this contract is that the

broker shall perform only the functions of a broker as set forthabove, and shall not take possession of any of the materials orequipment applying to said orders or perform any acts or dutiesoutside the scope of a broker; and in no sense shall this contract beconstrued as granting to the broker the power to represent theprincipal as its agent or to make commitments on its behalf.

The Court of First Instance held for the defendant and dismissedplaintiff's complaint with costs to it. chanroblesvirtualawlibrarychanroblesvirtuallaw library

Upon this appeal, seven errors are assigned to said judgment asfollows:.

1. That the court a quo erred in not holding that appellant is adomestic corporation distinct and separate from, and not a merebranch of Koppel Industrial Car and Equipment Co.; chanroblesvirtuallaw library

2. the court a quo erred in ignoring the ruling of the Secretary ofFinance, dated January 31, 1931, Exhibit M;chanroblesvirtuallaw library

3. the court a quo erred in not holding that a character of a brokeris determined by the nature of the transaction and not by the basisor measure of his compensation; chanroblesvirtuallaw library


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4. The court a quo erred in not holding that appellant acted as acommercial broker in the transactions covered under paragraph VIof the agreed statement of facts;chanroblesvirtuallaw library

5. The court a quo erred in not holding that appellant acted as acommercial broker in the transactions covered under paragraph v ofthe agreed statement of facts; chanroblesvirtuallaw library

6. The court a quo erred in not holding that appellant acted as acommercial broker in the sole transaction covered under paragraphVI of the agreed statement of facts;chanroblesvirtuallaw library

7. the court a quo erred in dismissing appellant's complaint.

The lower court found and held that Koppel (Philippines), Inc. is amere dummy or brach ("hechura") of Koppel industrial Car andEquipment Company. The lower court did not deny legal personalityto Koppel (Philippines), Inc. for any and all purposes, but in effectits conclusion was that, in the transactions involved herein, thepublic interest and convenience would be defeated and what wouldamount to a tax evasion perpetrated, unless resort is had to thedoctrine of "disregard of the corporate fiction." chanroblesvirtuallaw library

I. In its first assignment of error appellant submits that the trial

court erred in not holding that it is a domestic corporation distinctand separate from and not a mere branch of Koppel Industrial Carand Equipment Company. It contends that its corporate existenceas Philippine corporation can not be collaterally attacked and thatthe Government is estopped from so doing. As stated above, thelower court did not deny legal personality to appellant for any andall purposes, but held in effect that in the transaction involved inthis case the public interest and convenience would be defeated andwhat would amount to a tax evasion perpetrated, unless resort is

had to the doctrine of "disregard of the corporate fiction." In otherwords, in looking through the corporate form to the ultimate personor corporation behind that form, in the particular transactions whichwere involved in the case submitted to its determination andjudgment, the court did so in order to prevent the contravention ofthe local internal revenue laws, and the perpetration of what wouldamount to a tax evasion, inasmuch as it considered - and in our


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opinion, correctly - that appellant Koppel (Philippines), Inc. was amere branch or agency or dummy ("hechura") of Koppel IndustrialCar and Equipment Co. The court did not hold that the corporatepersonality of Koppel (Philippines), Inc., would also be disregarded

in other cases or for other purposes. It would have had no power toso hold. The courts' action in this regard must be confined to thetransactions involved in the case at bar "for the purpose ofadjudging the rights and liabilities of the parties in the case. Theyhave no jurisdiction to do more." (1 Flethcer, Cyclopedia ofCorporation, Permanent ed., p. 124, section 41.)chanroblesvirtuallaw library

A leading and much cited case puts it as follows:

If any general rule can be laid down, in the present state of

authority, it is that a corporation will be looked upon as a legalentity as a general rule, and until sufficient reason to the contraryappears; but, when the notion of legal entity is used to defeat publicconvinience, justify wrong, protect fraud, or defend crime, the lawwill regard the corporation as an association of persons. (1 FletcherCyclopedia of Corporation [Permanent Edition], pp. 135, 136;United States vs. Milwaukee Refrigeration Transit Co., 142 Fed.,247, 255, per Sanborn, J.)

In his second special defense appellee alleges "that the plaintiff wasand is in fact a branch or subsidiary of Koppel Industrial Car andEquipment Co., a Pennsylvania corporation not licensed to dobusiness in the Philippines but actually doing business here throughthe plaintiff; that the said foreign corporation holds 995 of the1,000 shares of the plaintiff's capital stock, the remaining fiveshares being held by the officers of the plaintiff herein in order topermit the incorporation thereof and to enable its aforesaid officersto act as directors of the plaintiff corporation; and that plaintiff wasorganized as a Philippine corporation for the purpose of evading the

payment by its parent foreign corporation of merchants' sales taxon the transactions involved in this case and others of similarnature."

By most courts the entity is normally regarded but is disregarded toprevent injustice, or the distortion or hiding of the truth, or to let in


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a just defense. (1 Fletcher, Cyclopedia of Corporation, PermanentEdition, pp. 139,140; emphasis supplied.)chanroblesvirtuallaw library

Another rule is that, when the corporation is the mere alter ego, orbusiness conduit of a person, it may de disregarded." (1 Fletcher,Cyclopedia of Corporation, Permanent Edition, p. 136.)

Manifestly, the principle is the same whether the "person" benatural or artificial.

A very numerous and growing class of cases wherein the corporateentity is disregarded is that (it is so organized and controlled, andits affairs are so conducted, as to make it merely an instrumentality,agency, conduit or adjunct of another corporation)." (1 Fletcher,

Cyclopedia of Corporation, Permanent ed., pp. 154, 155.)chanroblesvirtuallaw library

While we recognize the legal principle that a corporation does notlose its entity by the ownership of the bulk or even the whole of itsstock, by another corporation (Monongahela Co. vs. Pittsburg Co.,196 Pa., 25; 46 Atl., 99; 79 Am. St. Rep., 685) yet it is equally wellsettled and ignore corporate forms." (Colonial Trust Co. vs. MontelloBrick Works, 172 Fed., 310.)chanroblesvirtuallaw library

Where it appears that two business enterprises are owned,

conducted and controlled by the same parties, both law and equitywill, when necessary to protect the rights of third persons, disregardthe legal fiction that two corporations are distinct entities, and treatthem as identical. (Abney vs. Belmont Country Club Properties, Inc.,279 Pac., 829.)chanroblesvirtuallaw library

. . . the legal fiction of distinct corporate existence will bedisregarded in a case where a corporation is so organized andcontrolled and its affairs are so conducted, as to make it merely an

instrumentality or adjunct of another corporation. (Hanter vs. BakerMotor Vehicle Co., 190 Fed., 665.)

In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law.ed., 458, 464), the Supreme Court of the United States disregardedthe artificial personality of the subsidiary coal company in order toavoid that the parent corporation, the Lehigh Valley R. Co., should


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be able, through the fiction of that personality, to evade theprohibition of the Hepburn Act against the transportation by railroadcompanies of the articles and commodities described therein.chanroblesvirtualawlibrarychanroblesvirtuallaw library

Chief Justice White, speaking for the court, said:

. . . Coming to discharge this duty it follows, in view of the expressprohibitions of the commodities clause, it must be held that whilethe right of a railroad company as a stockholder to use its stockownership for the purpose of abona fide separate administration ofthe affairs of a corporation in which it has a stock interest may notbe denied, the use of such stock ownership in substance for thepurpose of destroying the entity of a producing, etc., corporation,and commingling its affairs in administration with the affairs of the

railroad company, so as to make the two corporations virtually one,brings the railroad company so voluntarily acting as to suchproducing, etc., corporation within the prohibitions of thecommodities clause. In other words, that by operation and effect ofthe commodities clause there is duty cast upon a railroad companyproposing to carry in interstate commerce the product of aproducing, etc., corporation in which it has a stock interest, not toabuse such power so as virtually to do by indirection that which thecommodities clause prohibits, - a duty which plainly would be

violated by the unnecessary commingling of the affairs of theproducing company with its own, so as to cause them to be one andinseparable.

Corrobarative authorities can be cited in support of the sameproposition, which we deem unnecessary to mention here. chanroblesvirtualawlibrarychanroblesvirtuallaw library

From the facts hereinabove stated, as established by apreponderance of the evidence , particularly those narrated inparagraph (a), (b), (c), (d), (e),(f), (h), (i), and (j) after the agreed

statement of facts, we find that, in so far as the sales involvedherein are concerned, Koppel (Philippines), Inc., and KoppelIndustrial Car and Equipment company are to all intents andpurposes one and the same; or, to use another mode of expression,that, as regards those transactions, the former corporation is amere branch, subsidiary or agency of the latter. To our mind, this isconclusively borne out by the fact, among others, that the amount


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of he so-called "share in the profits" of Koppel (Philippines), Inc.,was ultimately left to the sole, unbridled control of Koppel IndustrialCar and Equipment Company. If, in their relations with each other,Koppel (Philippines), Inc., was considered and intended to function

as a bona fide separate corporation, we can not conceive how thisarrangement could have been adopted, for if there was any factor inits business as to which it would in that case naturally have beenopposed to being thus controlled, it must have been precisely theamount ofprofit which it could endeavor and hope to earn. Nogroup of businessmen could be expected to organize a mercantilecorporation - the ultimate end of which could only be profit - if theamount of that profit were to be subjected to such a unilateralcontrol of another corporation, unless indeed the former haspreviously been designed by the incorporators to serve as a mere

subsidiary, branch or agency of the latter. Evidently, KoppelIndustrial Car and Equipment Company made us of its ownership ofthe overwhelming majority - 99.5% - of the capital stock of thelocal corporation to control the operations of the latter to such anextent that it had the final say even as to how much should beallotted to said local entity in the so-called sharing in the profits. Wecan not overlook the fact that in the practical working of corporateorganizations of the class to which these two entities belong, theholder or holders of the controlling part of the capital stock of the

corporation, particularly where the control is determined by thevirtual ownership of the totality of the shares, dominate not only theselection of the Board of Directors but, more often than not, alsothe action of that Board. Applying this to the instant case, we cannot conceive how the Philippine corporation could effectively goagainst the policies, decisions, and desires of the Americancorporation with regards to the scheme which was devised throughthe instrumentality of the contract Exhibit H, as well as all the otherdetails of the system which was adopted in order to avoid paying

the 1 per cent merchants sales tax. Neither can we conceive howthe Philippine corporation could avoid following the directions of theAmerican corporation held 99.5 per cent of the capital stock of thePhilippine corporation. In the present instance, we note that Koppel(Philippines), Inc., was represented in the Philippines by its"resident Vice-President." This fact necessarily leads to theinference that the corporation had at least a Vice-President, and


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presumably also a President, who were not resident in thePhilippines but in America, where the parent corporation isdomiciled. If Koppel (Philippines), Inc., had been intended tooperate as a regular domestic corporation in the Philippines, where

it was formed, the record and the evidence do not disclose anyreason why all its officers should not reside and perform theirfunctions in the Philippines. chanroblesvirtualawlibrarychanroblesvirtuallaw library

Other facts appearing from the evidence, and presently to bestated, strengthen our conclusion, because they can only beexplained if the local entity is considered as a mere subsidiary,branch or agency of the parent organization. Plaintiff charged theparent corporation no more than actual cost - without profitwhatsoever - for merchandise allegedly of its own to complete

deficiencies of shipments made by said parent corporation (t.s.n.,pp. 53, 54) - a fact which could not conceivably have been the caseif plaintiff had acted in such transactions as an entirely independententity doing business - for profit, of course - with the Americanconcern. There has been no attempt even to explain, if the lattersituation really obtained, why these two corporations should havethus departed from the ordinary course of business. Plaintiff wascharged by the American corporation with the cost even of thelatter's cable quotations - from ought that appears from the

evidence, this can only be comprehended by considering plaintiff assuch a subsidiary, branch or agency of the parent entity, in whichcase it would be perfectly understandable that for convenientaccounting purposes and the easy determination of the profits orlosses of the parent corporation's Philippines should be chargedagainst the Philippine office and set off against its receipts, thusseparating the accounts of said branch from those which the centralorganization might have in other countries. The reference to plaintiffby local banks, under a standing instruction of the parentcorporation, of unpaid drafts drawn on Philippine customers by saidparent corporation, whenever said customers dishonored the drafts,and the fact that the American corporation had previously advisedsaid banks that plaintiff in those cases was "fully empowered toinstruct (the banks) with regard to the disposition of the drafts anddocuments" (t.s.n., p. 50), in the absence of any other satisfactoryexplanation naturally give rise to the inference that plaintiff was a


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subsidiary, branch or agency of the American concern, rather thanan independent corporation acting as a broker. For, without suchpositive explanation, this delegation of power is indicative of therelations between central and branch offices of the same business

enterprise, with the latter acting under instructions already given bythe former. Far from disclosing a real separation between the twoentities, particularly in regard to the transactions in question, theevidence reveals such commongling and interlacing of theiractivities as to render even incomprehensible certain accountingoperations between them, except upon the basis that the Philippinecorporation was to all intents and purposes a mere subsidiary,branch, or agency of the American parent entity. Only upon thisbasis can it be comprehended why it seems not to matter at all howmuch profit would be allocated to plaintiff, or even that no profit at

all be so allocated to it, at any given time or after any givenperiod.chanroblesvirtualawlibrarychanroblesvirtuallaw library

As already stated above, under the evidence the sales in thePhilippines of the railway materials, machinery and suppliesimported here by Koppel Industrial Car and Equipment Companycould have been as conviniently and efficiently transacted andhandled - if not more so - had said corporation merely established abranch or agency in the Philippines and obtained license to do

business locally; and if it had done so and said sales had beeneffected by such branch or agency, there seems to be no disputethat the 1 per cent merchants' sales tax then in force would havebeen collectible. So far as we can discover, there would be only one,but very important, difference between the two schemes - adifference in tax liability on the ground that the sales were madethrough another and distinct corporation, as alleged broker, whenwe have seen that this latter corporation is virtually owned by theformer, or that they practically one and the same, is to sanction acircumvention of our tax laws, and permit a tax evasion of no meanproportions and the consequent commission of a grave injustice tothe Government. Not only this; it would allow the taxpayer to do byindirection what the tax laws prohibited to be done directly (non-payment of legitimate taxes), paraphrasing the United StatesSupreme Court in United States vs. Lehigh Valley R. Co., supra.chanroblesvirtualawlibrarychanroblesvirtuallaw library


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The act of one corporation crediting or debiting the other for certainitems, expenses or even merchandise sold or disposed of, isperfectly compatible with the idea of the domestic entity being oracting as a mere branch, agency or subsidiary of the parent

organization. Such operations were called for any way by theexigencies or convenience of the entire business. Indeed,accounting operation such as these are invitable, and have to beeffected in the ordinary course of business enterprise extends itstrade to another land through a branch office, or through anotherscheme amounting to the same thing. chanroblesvirtualawlibrarychanroblesvirtuallaw library

If plaintiff were to act as broker in the Philippines for any othercorporation, entity or person, distinct from Koppel Industrial Carand Equipment company, an entirely different question will arise,

which, however, we are not called upon, nor in a position, todecide.chanroblesvirtualawlibrarychanroblesvirtuallaw library

As stated above, Exhibit H contains to the following paragraph:

It is clearly understood that the intent of this contract is that thebroker shall perform only the functions of a broker as set forthabove, and shall not take possession of any of the materials orequipment applying to said orders or perform any acts or dutiesoutside the scope of a broker; and in no sense shall this contract beconstrued as granting to the broker the power to represent theprincipal as its agent or to make commitments on its behalf.

The foregoing paragraph, construed in the light of other facts notedelsewhere in this decision, betrays, we think a deliberate intent,through the medium of a scheme devised with great care, toavoidthe payment of precisely the 1 per cent merchants' sales taxin force in the Philippines before, at the time of, and after, themaking of the said contract Exhibit H. If this were to be allowed, the

payment of a tax, which directly could not have been avoided, couldbe evaded by indirection, consideration being had of theaforementioned peculiar relations between the said American andlocal corporations. Such evasion, involving as it would, a violation ofthe former Internal Revenue Law, would even fall within the penalsanction of section 2741 of the Revised Administrative Code. Whichonly goes to show the illegality of the whole scheme. We are not


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here concerned with the impossibility of collecting the merchants'sales tax, as a mere incidental consequence of transactions legal inthemselves and innocent in their purpose. We are dealing with ascheme the primary, not to say the sole, object of which the evasion

of the payment of such tax. It is this aim of the scheme that makesit illegal.chanroblesvirtualawlibrarychanroblesvirtuallaw library

We have said above that the contracts of sale involved herein wereall perfected in the Philippines. From the facts stipulated inparagraph IV of the agreed statement of facts, it clearly appearsthat the Philippine purchasers had to wait for Koppel Industrial Carand Equipment Company to communicate its cost prices to Koppel(Philippines), Inc., were perfected in the Philippines. In those caseswhere no such price quotations from the American corporation were

needed, of course, the sales effected in those cases described inparagraph V of the agreed statement of facts were, as expressedtherein, transacted "in substantially the same manner as outlined inparagraph VI." Even the single transaction described in paragraphVI of the agreed statement of facts was also perfected in thePhilippines, because the contracting parties were here and theconsent of each was given here. While it is true that when thecontract was thus perfected in the Philippines the pair of Atlas-Diesel Marine Engines were in Sweden and the agreement was to

deliver them C.I.F. Hongkong, the contract of sale being consensual- perfected by mere consent - (Civil Code, article 1445; 10 Manresa,4th ed., p. 11), the location of the property and the place ofdelivery did not matter in the question of where the agreement wasperfected.chanroblesvirtualawlibrarychanroblesvirtuallaw library

In said paragraph VI, we read the following, as indicating where thecontract was perfected, considering beforehand that one party,Koppel (Philippines),Inc., which in contemplation of law, as to thattransaction, was the same Koppel Industrial Car Equipment Co.,was in the Philippines:

. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, ofIloilo,Philippines, was found and the same engines were sold to him for$21,000 (P42,000) C.I.F. Hongkong . . . (Emphasis supplied.)


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Under the revenue law in force when the sales in question tookplace, the merchants' sales tax attached upon the happening of therespective sales of the "commodities, goods, wares, andmerchandise" involved, and we are clearly of opinion that such

"sales" took place upon the perfection of the correspondingcontracts. If such perfection took place in the Philippines, themerchants' sales tax then in force here attached to thetransactions.chanroblesvirtualawlibrarychanroblesvirtuallaw library

Even if we should consider that the Philippine buyers in the casescovered by paragraph IV and V of the agreed statement of facts,contracted with Koppel Industrial Car and Equipment company, wewill arrive at the same final result. It can not be denied in that casethat said American corporation contracted through Koppel

(Philippines), Inc., which was in the Philippines. The real transactionin each case of sale, in final effect, began with an offer of sale fromthe seller, said American corporation, through its agent, the localcorporation, of the railway materials, machinery, and supplies at theprices quoted, and perfected or completed by the acceptance of thatoffer by the local buyers when the latter, accepting those prices,placed their orders. The offer could not correctly be said to havebeen made by the local buyers when they asked for pricequotations, for they could not rationally be taken to have bound

themselves to buybefore knowing the prices. And even if we shouldtake into consideration the fact that the american corporationcontracted, at least partly, through correspondence, according toarticle 54 of the Code of Commerce, the respective contracts werecompleted from the time of the acceptance by the local buyers,which happened in the Philippines.

Contracts executed through correspondence shall be completedfrom the time an answer is made accepting the proposition or theconditions by which the latter may be modified." (Code ofCommerce, article 54; emphasis supplied.)chanroblesvirtuallaw library

A contract is as a rule considered as entered into at the place wherethe place it is performed. So where delivery is regarded as made atthe place of delivery." (13 C. J., 580-81, section 581.)chanroblesvirtuallaw library


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(In the consensual contract of sale delivery is not needed for itsperfection.)

II. Appellant's second assignment of error can be summarilydisposed of. It is clear that the ruling of the Secretary of Finance,Exhibit M, was not binding upon the trial court, much less upon thistribunal, since the duty and power of interpreting the laws isprimarily a function of the judiciary. (Ortua vs. SingsonEncarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused fromabiding by this legal principle, nor can it properly be heard to saythat it relied on the Secretary's ruling and that, therefore, the courtsshould not now apply an interpretation at variance therewith. Therule of stare decisis is undoubtedly entitled to more respect in theconstruction of statutes than the interpretations given by officers of

the administrative branches of the government, even thoseentrusted with the administration of particular laws. But this court,in Philippine Trust Company and Smith, Bell and Co. vs. Mitchell(59Phil., 30, 36), said:

. . . The rule of stare decisis is entitled to respect. Stability in thelaw, particularly in the business field, is desirable. But idolatrousreverence for precedent, simply as precedent, no longer rules. Moreimportant than anything else is that court should be right. . . .

III. In the view we take of the case, and after the disposition madeabove of the first assignment of error, it becomes unnecessary tomake any specific ruling on the third, fourth, fifth, sixth, andseventh assignments of error, all of which are necessarily disposedof adversely to appellant's contention. chanroblesvirtualawlibrarychanroblesvirtuallaw library

Wherefore, he judgment appealed from is affirmed, with costs ofboth instances against appellant. So ordered.

Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones, and Tuason, JJ.,concur

Separate Opinions

PERFECTO,J., concurring:chanroblesvirtuallaw library


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We fully agree with the well-written decision penned by Mr. JusticeHilado in this case. We only wish to add that the ingenious device ofevading the payment of taxes, is not a new one. It is only one ofthe manifold manifestations of the shrewdness of the masterminds

behind some powerful corporations who, without ay compunction,do not stop at adopting any scheme by which the controllingcapitalists may get even richer and richer, sometimes atgovernment expense, sometimes by squeezing credulous orignorant small shareholders, sometimes with the exploitation of thehelpless public at large, and sometimes at great sacrifice of all thethree entities.chanroblesvirtualawlibrarychanroblesvirtuallaw library

The system of corporation combines, of holding and subsidiarycorporations, of spreading and interlocking companies, has no well

developed and has grown so powerful that even the wisestgovernment had been unable to defend itself and protect the peoplefrom the crushing tentacles of the moneyed octopuses. It is truethat in the United States of America anti trusts laws were enactedbut, notwithstanding their ability and wisdom, the Americans wereunable to stave off the effects of the bankruptcy of the pyramid ofholding and interlocking companies built around the tragic figure ofSamuel Insull.chanroblesvirtualawlibrarychanroblesvirtuallaw library

That Philippine Government, that Filipino consumers, that Filipinopublic at large, had already been victims of the evil effects of such asystem has been conclusively proved in the scandalous illegalitiesand irregularities disclosed in the investigation made by the firstNational Assembly, through its Committee on Rate Reducing ofPublic Utilities. In said investigation, it was revealed that, by asystem of holding and interlocking companies, by their manipulationof books of accounts, our government was defrauded of enormousamounts in taxes and millions of pesos were unjustly squeezed fromthe public.chanroblesvirtualawlibrarychanroblesvirtuallaw library

It is high time that alarm be sounded so that our government andour public may avoid being further victimized and this countryturned into a puppet at the mercy of moneyed tycoons who are notstopped by any scruple to attain their unquenchable thristiness formore money and for power and domination. All liberal-minded


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people must fight not only against political imperialism, but alsoagainst economic or financial imperialism, in fact, against any kindof imperialism. The call for eternal vigilance must be heeded by all,including tribunals, if the survival of our people must not be

jeopardized by artful corporations and unscrupulous financiers.

Koppel Inc. vs. Yatco

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