Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-47673 October 10, 1946
KOPPEL (PHILIPPINES), INC., plaintiff-appellant,
vs.
ALFREDO L. YATCO, Collector of Internal
Revenue, defendant-appellee.
Padilla, Carlos and Fernando for appellant.
Office of the Solicitor General Ozaeta, First
Assistant Solicitor General Reyes and.
Office of the Solicitor General Reyes and Solicitor
Caizanes for appellee.
HILADO, J.:
This is an appeal by Koppel (Philippines), Inc., from
the judgment of the Court of First Instance of
Manila in civil case No. 51218 of said court
dismissing said corporation's complaint for the
recovery of the sum of P64,122.51 which it had
paid under protest to the Collector of Internal
Revenue on October 30, 1936, as merchant sales
tax. The main facts of the case were stipulated in
the court below as follows:
AGREED STATEMENT OF FACTS
Now come the plaintiff by attorney Eulogio P.
Revilla and the defendant by the Solicitor General
and undersigned Assistant Attorney of the Bureau
of Justice and, with leave of this Honorable Court,
hereby respectfully stipulated and agree to the
following facts, to wit:
I. That plaintiff is a corporation duly organized and
existing under and by virtue of the laws of the
Philippines, with principal office therein at the City
of Manila, the capital stock of which is divided into
thousand (1,000) shares of P100 each. The Koppel
Industrial Car and Equipment company, a
corporation organized and existing under the laws
of the State of Pennsylvania, United States of
America, and not licensed to do business in the
Philippines, owned nine hundred and ninety-five
(995) shares out of the total capital stock of the
plaintiff from the year 1928 up to and including the
year 1936, and the remaining five (5) shares only
were and are owned one each by officers of the
plaintiff corporation.
II. That plaintiff, at all times material to this case,
was and now is duly licensed to engage in business
as a merchant and commercial broker in the
Philippines; and was and is the holder of the
corresponding merchant's and commercial broker's
privilege tax receipts.

III. That the defendant Collector of Internal revenue

is now Mr. Bibiano L. Meer in lieu of Mr. Alfredo L.
Yatco.
IV. That during the period from January 1, 1929, up
to and including December 31, 1932, plaintiff
transacted business in the Philippines in the
following manner, with the exception of the
transactions which are described in paragraphs V
and VI of this stipulation:
When a local buyer was interested in the purchase
of railway materials, machinery, and supplies, it
asked for price quotations from plaintiff. Atypical
form of such request is attached hereto and made
a part hereof as Exhibit A. (Exhibit A represents
typical transactions arising from written requests
for quotations, while Exhibits B to G, inclusive, are
typical transactions arising from verbal requests for
quotation.)
Plaintiff then cabled for the quotation desired for
Koppel Industrial Car and Equipment Company. A
sample of the pertinent cable is hereto attached
and made a part hereof as Exhibit B. Koppel
Industrial Car and Equipment Company answered
by cable quoting its cost price, usually A. C. I. F.
Manila cost price, which was later followed by a
letter of confirmation.
A sample of the said cable quotation and of the
letter of confirmation are 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 hereto attached and made a part
hereof as Exhibit D. On the basis of these
quotations, orders were placed by the local
purchasers, copies of which orders are hereto
attached as Exhibits E and E-1.
A cable was then sent to Koppel Industrial Car and
Equipment company giving instructions to ship the
merchandise to Manila forwarding the customer's
order. Sample of said cable is hereto attached as
Exhibit F.
The bills of lading were usually made to "order"
and indorsed in blank with notation to the effect
that the buyer be notified of the shipment of the
goods covered in the bills of lading; commercial
invoices were issued by Koppel Industrial Car and
Equipment Company in the names of the
purchasers and certificates of insurance were
likewise issued in their names, or in the name of
Koppel Industrial Car and Equipment Company but
indorsed in blank and attached to drafts drawn by
Koppel Industrial Car and Equipment Company on
the purchasers, which were forwarded through
foreign banks to local banks. Samples of the bills of
lading are hereto attached as Exhibits F-1, I-1, I-2

and I-3. Bills of ladings, Exhibits I-1, I-2 and I-3,

may equally have been employed, but said Exhibits
I-1, I-2 and I-3 have no connection with the
transaction covered by Exhibits B to G, inclusive.
The purchasers secured the shipping papers by
arrangement with the banks, and thereupon
received and cleared the shipments. If the
merchandise were of European origin, and if there
was not sufficient time to forward the documents
necessary for clearance, through foreign banks to
local banks, to the purchasers, the Koppel
Industrial Car and Equipment company did, in
many cases, send the documents directly from
Europe to plaintiff with instructions to turn these
documents over to the purchasers. In many cases,
where sales was effected on the basis of C. I. F.
Manila, duty paid, plaintiff advanced the sums
required for the payment of the duty, and these
sums, so advanced, were in every case reimbursed
to plaintiff by Koppel Industrial Car and Equipment
Company.
The price were payable by drafts agreed upon in
each case and drawn by Koppel Industrial Car and
Equipment Company on respective purchasers
through local banks, and payments were made to
the banks by the purchasers 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
of
compensation a percentage of the profits realized
on the above transactions as fixed in paragraph 6
of the plaintiff's contract with Koppel Industrial Car
and Equipment Company, which contract is hereto
attached as Exhibit H, and suffered its
corresponding share in the losses resulting from
some of the transactions.
That the total gross sales from January 1, 1929, up
to and including December 31, 1932, effected in
the foregoing manner and under the above
specified conditions, amount to P3, 596,438.84.
V. That when a local sugar central was interested in
the purchase of railway materials, machinery and
supplies, it secured quotations from, and placed
the corresponding orders with, the plaintiff in
substantially the same manner as outlined in
paragraph IV of this stipulation, with the only
difference that the purchase orders which were
agreed to by the central and the plaintiff are
similar to the sample hereto attached and made a
part hereof as Exhibit I. Typical samples of the bills
of lading covering the herein transaction are hereto
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.

VI. That sometime in February, 1929, Miguel J.

Ossorio, of Manila, Philippines, placed an option
with Koppel Industrial Car and Equipment
Company, through plaintiff, to purchase within
three months a pair of Atlas-Diesel Marine Engines.
Koppel Industrial Car and Equipment Company
purchased said Diesel Engines in Stockholm,
Sweden, for $16,508.32.
The suppliers drew a draft for the 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 Koppel
Industrial Car and Equipment Company could not
ship to or draw on said Mr. Miguel J. Ossorio, it in
turn drew another draft on plaintiff for the same
amount
at
six
months
sight,
with
the
understanding that Koppel Industrial Car and
Equipment Company would reimburse plaintiff
when said engines were disposed of.
Plaintiff honored the draft and debited the said sum
of $16,508.32 to merchandise account. The
engines were left stored at Stockholm, Sweden. On
April 1, 1930, a new local buyer, Mr. Cesar Barrios,
of Iloilo, Philippines, was found and the same
engines were sold to him for $21,000 (P42,000) C.
I. F. Hongkong. The engines were shipped to
Hongkong and a draft for $21,000 was drawn by
Koppel Industrial Car and Equipment Company on
Mr. Cesar Barrios. After the draft was fully paid by
Mr. Barrios, Koppel Industrial Car and Equipment
Company reimbursed plaintiff with cost price of
$16,508.32 and credited it with $1,152.95 as its
share of the profit on the transaction. Exhibits J and
J-1 are herewith attached and made integral parts
of this stipulation with particular reference to
paragraph VI hereof.
VII. That plaintiff's share in the profits realized out
of these transactions described in paragraphs IV, V
and VI hereof totaling P3,772,403.82, amounts to
P132,201.30; and that plaintiff within the time
provided by law returned the aforesaid amount
P132,201.30 for the purpose of the commercial
broker's 4 per cent tax and paid thereon the sum
P5,288.05 as such tax.
VIII. That defendant demanded of the plaintiff the
sum of P64,122.51 as the merchants' sales tax of
1% per cent on the amount of P3,772,403.82,
representing the total gross value of the sales
mentioned in paragraphs IV, V and VI hereof,
including the 25 per cent surcharge for the late
payment of the said tax, which tax and surcharge
were determined after the amount of P5,288.05
mentioned in paragraph VI hereof was deducted.

IX. That plaintiff, on October 30, 1936, paid under

protest said sum of P64,122.51 in order to avoid
further penalties, levy and distraint proceedings.
X. That defendant, on November 10, 1936,
overruled plaintiff's protest, and defendant has
failed and refused and still fails and refuses,
notwithstanding demands by plaintiff, to return to
the plaintiff said sum of P64,122.51 or any part
thereof.
xxx
xxx
xxx
That the parties hereby reserve the right to present
additional evidence in support of their respective
contentions.
Manila, Philippines, December 26, 1939
(Sgd.) ROMAN OZAETA
Solicitor General
(Sgd.) ANTONIO CAIZARES
Assistant Attorney
(Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila
Both parties adduced some oral evidence in
clarification of or addition to their agreed
statement of facts. A preponderance of evidence
has established, besides the facts thus stipulated,
the following:
(a) The shares of stock of plaintiff corporation were
and are all owned by Koppel Industries Car and
Equipment Company of Pennsylvania, U. S. A.,
exceptive which were necessary to qualify the
Board of Directors of said plaintiff corporation;
(b) In the transactions involved herein the plaintiff
corporation acted as the representative of Koppel
Industrial Car and Equipment Company only, and
not as the agent of both the latter company and
the respective local purchasers plaintiff's
principal witness, A.H. Bishop, its resident VicePresident, in his testimony invariably referred to
Koppel Industrial Car and Equipment Co. as "our
principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except
that at the bottom of page 10 to the top of page
11, the witness stated that they had "several
principal" abroad but that "our principal abroad
was, for the years in question, Koppel Industrial Car
and Equipment Company," and on page 68, he
testified that what he actually said was ". . . but
our principal abroad" and not "our principal
abroad" as to which it is very significant that
neither this witness nor any other gave the name
of even a single other principal abroad of the
plaintiff corporation;
(c) The plaintiff corporation bore alone incidental
expenses as, for instance, cable expenses-not

only those of its own cables but also those of its

"principal" (t.s.n., pp. 52, 53);
(d) the plaintiff's "share in the profits" realized from
the transactions in which it intervened was left
virtually in the hands of Koppel Industrial Car and
Equipment Company (t.s.n., p. 51);
(e) Where drafts were not paid by the purchasers,
the local banks were instructed not to protest them
but to refer them to plaintiff which was fully
empowered by Koppel Industrial Car and
Equipment company to instruct the banks with
regards to disposition of the drafts and documents
(t.s.n., p. 50; Exhibit G);
lawphil.net
(f) Where the goods were European origin, consular
invoices, bill of lading, and, in general, the
documents necessary for clearance were sent
directly to plaintiff (t.s.n., p. 14);
(g) If the plaintiff had in stock the merchandise
desired by local buyers, it immediately filled the
orders of such local buyers and made delivery in
the Philippines without the necessity of cabling its
principal 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);
(h) Whenever the deliveries made by Koppel
Industrial Car and Equipment Company were
incomplete or insufficient to fill the local buyer's
orders, plaintiff used to make good the deficiencies
by deliveries from its own local stock, but in such
cases it charged its principal only the actual cost of
the merchandise thus delivered by it from its stock
and in such transactions plaintiff did not realize any
profit (t.s.n., pp. 53-54);
(i) The contract of sale involved herein were all
perfected in the Philippines.
Those described in paragraph IV of the agreed
statement of facts went through the following
process: (1) "When a local buyer was interested in
the purchase of railway materials, machinery, and
supplies, it asked for price quotations from
plaintiff"; (2) "Plaintiff then cabled for the quotation
desired from Koppel Industrial Car and Equipment
Company"; (3) "Plaintiff, however, quoted to the
purchaser a selling price above the figures quoted
by Koppel Industrial Car and Equipment Company";
(4) "On the basis of these quotations, orders were
placed by the local purchasers . . ."
Those described in paragraph V of said agreed
statement
of
facts
were
transacted
"in
substantially the same manner as outlined in
paragraph IV."

As to the single transaction described in paragraph

VI of the same agreed statement of facts,
discarding the Ossorio option which anyway was
called off, "On April 1, 1930, a new local buyer, Mr.
Cesar Barrios, of Iloilo, Philippines, was found and
the same engines were 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 forth above, and shall
not take possession of any of the materials or
equipment applying to said orders or perform any
acts or duties outside the scope of a broker; and in
no sense shall this contract be construed as
granting to the broker the power to represent the
principal as its agent or to make commitments on
its behalf.
The Court of First Instance held for the defendant
and dismissed plaintiff's complaint with costs to it.
Upon this appeal, seven errors are assigned to said
judgment as follows:.
1. That the court a quo erred in not holding that
appellant is a domestic corporation distinct and
separate from, and not a mere branch of Koppel
Industrial Car and Equipment Co.;
2. the court a quo erred in ignoring the ruling of the
Secretary of Finance, dated January 31, 1931,
Exhibit M;
3. the court a quo erred in not holding that a
character of a broker is determined by the nature
of the transaction and not by the basis or measure
of his compensation;
4. The court a quo erred in not holding that
appellant acted as a commercial broker in the
transactions covered under paragraph VI of the
agreed statement of facts;
5. The court a quo erred in not holding that
appellant acted as a commercial broker in the
transactions covered under paragraph v of the
agreed statement of facts;
6. The court a quo erred in not holding that
appellant acted as a commercial broker in the sole
transaction covered under paragraph VI of the
agreed statement of facts;
7. the court a quo erred in dismissing appellant's
complaint.
The lower court found and held that Koppel
(Philippines), Inc. is a mere dummy or brach
("hechura") of Koppel industrial Car and Equipment
Company. The lower court did not deny legal
personality to Koppel (Philippines), Inc. for any and
all purposes, but in effect its conclusion was that,
in the transactions involved herein, the public
interest and convenience would be defeated and

what would amount to a tax evasion perpetrated,

unless resort is had to the doctrine of "disregard of
the corporate fiction."
I. In its first assignment of error appellant
submits that the trial court erred in not holding that
it is a domestic corporation distinct and separate
from and not a mere branch of Koppel Industrial
Car and Equipment Company. It contends that its
corporate existence as Philippine corporation
cannot be collaterally attacked and that the
Government is estopped from so doing.
As stated above, the lower court did not deny legal
personality to appellant for any and all purposes,
but held in effect that in the transaction involved in
this case the public interest and convenience
would be defeated and what would amount to a tax
evasion perpetrated, unless resort is had to the
doctrine of "disregard of the corporate fiction."
In other words, in looking through the corporate
form to the ultimate person or corporation behind
that form, in the particular transactions which were
involved in the case submitted to its determination
and judgment, the court did so in order to prevent
the contravention of the local internal revenue
laws, and the perpetration of what would amount
to a tax evasion, inasmuch as it considered and
in our opinion, correctly that appellant Koppel
(Philippines), Inc. was a mere branch or agency or
dummy ("hechura") of Koppel Industrial Car and
Equipment Co.
The court did not hold that the corporate
personality of Koppel (Philippines), Inc., would also
be disregarded in other cases or for other
purposes. It would have had no power to so hold.
The courts' action in this regard must be confined
to the transactions involved in the case at bar "for
the purpose of adjudging the rights and liabilities of
the parties in the case. They have no jurisdiction to
do more." (1 Flethcer, Cyclopedia of Corporation,
Permanent ed., p. 124, section 41.)
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 legal entity as a general rule, and
until sufficient reason to the contrary appears; but,
when the notion of legal entity is used to defeat
public convinience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as
an association of persons. (1 Fletcher Cyclopedia 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 was and is in fact a branch or
subsidiary of Koppel Industrial Car and Equipment
Co., a Pennsylvania corporation not licensed to do
business in the Philippines but actually doing
business here through the plaintiff; that the said
foreign corporation holds 995 of the 1,000 shares
of the plaintiff's capital stock, the remaining five
shares being held by the officers of the plaintiff
herein in order to permit the incorporation thereof
and to enable its aforesaid officers to act as
directors of the plaintiff corporation; and that
plaintiff was organized as a Philippine corporation
for the purpose of evading the payment by its
parent foreign corporation of merchants' sales tax
on the transactions involved in this case and others
of similar nature."
By most courts the entity is normally regarded but
is disregarded to prevent injustice, or the distortion
or hiding of the truth, or to let in a just defense. (1
Fletcher, Cyclopedia of Corporation, Permanent
Edition, pp. 139,140; emphasis supplied.)
Another rule is that, when the corporation is the
mere alter ego, or business 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" be natural or artificial.
A very numerous and growing class of cases
wherein the corporate entity is disregarded is that
(it is so organized and controlled, and its 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.)
While we recognize the legal principle that a
corporation does not lose its entity by the
ownership of the bulk or even the whole of its
stock, by another corporation (Monongahela Co. vs.
Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79 Am. St.
Rep., 685) yet it is equally well settled and ignore
corporate forms." (Colonial Trust Co. vs. Montello
Brick Works, 172 Fed., 310.)
Where it appears that two business enterprises are
owned, conducted and controlled by the same
parties, both law and equity will, when necessary
to protect the rights of third persons, disregard the
legal fiction that two corporations are distinct
entities, and treat them as identical. (Abney vs.
Belmont Country Club Properties, Inc., 279 Pac.,
829.)
. . . the legal fiction of distinct corporate existence
will be disregarded in a case where a corporation is
so organized and controlled and its affairs are so

conducted, as to make it merely an instrumentality

or adjunct of another corporation. (Hanter vs.
Baker Motor 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 disregarded the artificial
personality of the subsidiary coal company in order
to avoid that the parent corporation, the Lehigh
Valley R. Co., should be able, through the fiction of
that personality, to evade the prohibition of the
Hepburn Act against the transportation by railroad
companies of the articles and commodities
described therein.
Chief Justice White, speaking for the court, said:
. . . Coming to discharge this duty it follows, in
view of the express prohibitions of the commodities
clause, it must be held that while the right of a
railroad company as a stockholder to use its stock
ownership for the purpose of a bona fide separate
administration of the affairs of a corporation in
which it has a stock interest may not be denied,
the use of such stock ownership in substance for
the purpose 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 such producing, etc.,
corporation within the prohibitions of the
commodities clause.
In other words, that by operation and effect of the
commodities clause there is duty cast upon a
railroad company proposing to carry in interstate
commerce the product of a producing, etc.,
corporation in which it has a stock interest, not to
abuse such power so as virtually to do by
indirection that which the commodities clause
prohibits, a duty which plainly would be violated
by the unnecessary commingling of the affairs of
the producing company with its own, so as to
cause them to be one and inseparable.
Corroborative authorities can be cited in support of
the same proposition, which we deem unnecessary
to mention here.
From the facts hereinabove stated, as established
by a preponderance of the evidence , particularly
those narrated in paragraph (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 involved herein
are concerned, Koppel (Philippines), Inc., and
Koppel Industrial Car and Equipment company are
to all intents and purposes one and the same; or,
to use another mode of expression, that, as
regards those transactions, the former corporation
is a mere branch, subsidiary or agency of the latter.

To our mind, this is conclusively borne out by the

fact, among others, that the amount of he so-called
"share in the profits" of Koppel (Philippines), Inc.,
was ultimately left to the sole, unbridled control of
Koppel Industrial Car 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
cannot conceive how this arrangement could have
been adopted, for if there was any factor in its
business as to which it would in that case naturally
have been opposed to being thus controlled, it
must
have
been
precisely
the
amount
of profit which it could endeavor and hope to earn.
No group of businessmen could be expected to
organize a mercantile corporation the ultimate
end of which could only be profit if the amount
of that profit were to be subjected to such a
unilateral control of another corporation, unless
indeed the former has previously been designed by
the incorporators to serve as a mere subsidiary,
branch or agency of the latter.
Evidently, Koppel Industrial Car and Equipment
Company made us of its ownership of the
overwhelming majority 99.5% of the capital
stock of the local corporation to control the
operations of the latter to such an extent that it
had the final say even as to how much should be
allotted to said local entity in the so-called sharing
in the profits.
We cannot overlook the fact that in the practical
working of corporate organizations of the class to
which these two entities belong, the holder or
holders of the controlling part of the capital stock
of the corporation, particularly where the control is
determined by the virtual ownership of the totality
of the shares, dominate not only the selection of
the Board of Directors but, more often than not,
also the action of that Board.
Applying this to the instant case, we cannot
conceive how the Philippine corporation could
effectively go against the policies, decisions, and
desires of the American corporation with regards to
the scheme which was devised through the
instrumentality of the contract Exhibit H, as well as
all the other details of the system which was
adopted in order to avoid paying the 1 per cent
merchants sales tax. Neither can we conceive how
the Philippine corporation could avoid following the
directions of the American corporation held 99.5
per cent of the capital stock of the Philippine
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 the inference that the

corporation had at least a Vice-President, and
presumably also a President, who were not resident
in the Philippines but in America, where the parent
corporation is domiciled. If Koppel (Philippines),
Inc., had been intended to operate as a regular
domestic corporation in the Philippines, where it
was formed, the record and the evidence do not
disclose any reason why all its officers should not
reside and perform their functions in the
Philippines.
Other facts appearing from the evidence, and
presently to be stated, strengthen our conclusion,
because they can only be explained if the local
entity is considered as a mere subsidiary, branch
or agency of the parent organization. Plaintiff
charged the parent corporation no more than
actual cost without profit whatsoever 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 case if plaintiff had
acted in such transactions as an entirely
independent entity doing business for profit, of
course with the American concern.
There has been no attempt even to explain, if the
latter situation really obtained, why these two
corporations should have thus departed from the
ordinary course of business. Plaintiff was charged
by the American corporation with the cost even of
the latter's cable quotations from ought that
appears from the evidence, this can only be
comprehended by considering plaintiff as such a
subsidiary, branch or agency of the parent entity,
in which case it would be perfectly understandable
that for convenient accounting purposes and the
easy determination of the profits or losses of the
parent corporation's Philippines should be charged
against the Philippine office and set off against its
receipts, thus separating the accounts of said
branch from those which the central organization
might have in other countries.
The reference to plaintiff by local banks, under a
standing instruction of the parent corporation, of
unpaid drafts drawn on Philippine customers by
said parent corporation, whenever said customers
dishonored the drafts, and the fact that the
American corporation had previously advised said
banks that plaintiff in those cases was "fully
empowered to instruct (the banks) with regard to
the disposition of the drafts and documents" (t.s.n.,
p. 50), in the absence of any other satisfactory
explanation naturally give rise to the inference that
plaintiff was a subsidiary, branch or agency of the
American concern, rather than an independent
corporation acting as a broker.

For, without such positive explanation, this

delegation of power is indicative of the relations
between central and branch offices of the same
business enterprise, with the latter acting under
instructions already given by the former. Far from
disclosing a real separation between the two
entities, particularly in regard to the transactions in
question, the evidence reveals such commingling
and interlacing of their activities as to render even
incomprehensible certain accounting operations
between them, except upon the basis that the
Philippine corporation was to all intents and
purposes a mere subsidiary, branch, or agency of
the American parent entity. Only upon this basis
can it be comprehended why it seems not to
matter at all how much 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 given period.
As already stated above, under the evidence the
sales in the Philippines of the railway materials,
machinery and supplies imported here by Koppel
Industrial Car and Equipment Company could have
been as conveniently and efficiently transacted
and handled if not more so had said
corporation merely established a branch or agency
in the Philippines and obtained license to do
business locally; and if it had done so and said
sales had been effected by such branch or agency,
there seems to be no dispute that the 1 per cent
merchants' sales tax then in force would have been
collectible.
So far as we can discover, there would be only one,
but very important, difference between the two
schemes a difference in tax liability on the
ground that the sales were made through another
and distinct corporation, as alleged broker, when
we have seen that this latter corporation
is virtually owned by the former, or that they
practically one and the same, is to sanction a
circumvention of our tax laws, and permit a tax
evasion of no mean proportions and the
consequent commission of a grave injustice to the
Government. Not only this; it would allow the
taxpayer to do by indirection what the tax laws
prohibited to be done directly (non-payment of
legitimate taxes), paraphrasing the United States
Supreme Court in United States vs. Lehigh Valley R.
Co., supra.
The act of one corporation crediting or debiting the
other for certain items, expenses or even
merchandise sold or disposed of, is perfectly
compatible with the idea of the domestic entity
being or acting as a mere branch, agency or
subsidiary of the parent organization. Such
operations were called for any way by the
exigencies or convenience of the entire business.
Indeed, accounting operation such as these are
inevitable, and have to be effected in the ordinary

course of business enterprise extends its trade to

another land through a branch office, or through
another scheme amounting to the same thing.
If plaintiff were to act as broker in the Philippines
for any other corporation, entity or person, distinct
from Koppel Industrial Car and Equipment
company, an entirely different question will arise,
which, however, we are not called upon, nor in a
position, to decide.
As stated above, Exhibit H contains to 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 forth above, and shall
not take possession of any of the materials or
equipment applying to said orders or perform any
acts or duties outside the scope of a broker; and in
no sense shall this contract be construed as
granting to the broker the power to represent the
principal as its agent or to make commitments on
its behalf.
The foregoing paragraph, construed in the light of
other facts noted elsewhere in this decision,
betrays, we think a deliberate intent, through the
medium of a scheme devised with great care, to
avoid the payment of precisely the 1 per cent
merchants' sales tax in force in the Philippines
before, at the time of, and after, the making of the
said contract Exhibit H. If this were to be allowed,
the payment of a tax, which directly could not have
been avoided, could be evaded by indirection,
consideration being had of the aforementioned
peculiar relations between the said American and
local corporations.
Such evasion, involving as it would, a violation of
the former Internal Revenue Law, would even fall
within the penal sanction of section 2741 of the
Revised Administrative Code. Which only goes to
show the illegality of the whole scheme. We are not
here concerned with the impossibility of collecting
the merchants' sales tax, as a mere incidental
consequence of transactions legal in themselves
and innocent in their purpose. We are dealing with
a scheme 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 makes it illegal.
We have said above that the contracts of sale
involved herein were all perfected in the
Philippines. From the facts stipulated in paragraph
IV of the agreed statement of facts, it clearly
appears that the Philippine purchasers had to wait
for Koppel Industrial Car and Equipment Company
to communicate its cost prices to Koppel
(Philippines),
Inc.,
were
perfected
in
the
Philippines.

In those cases where no such price quotations from

the American corporation were needed, of course,
the sales effected in those cases described in
paragraph V of the agreed statement of facts were,
as expressed therein, transacted "in substantially
the same manner as outlined in paragraph VI."
Even the single transaction described in paragraph
VI of the agreed statement of facts was also
perfected in the Philippines, because the
contracting parties were here and the consent of
each was given here.
While it is true that when the contract 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 of delivery did not matter in the question of
where the agreement was perfected.
In said paragraph VI, we read the following, as
indicating where the contract was perfected,
considering beforehand that one party, Koppel
(Philippines),Inc., which in contemplation of law, as
to that transaction, was the same Koppel Industrial
Car Equipment Co., was in the Philippines:
. . . on April 1, 1930, a new local buyer Mr. Cesar
Barrios, of Iloilo, Philippines, was found and the
same engines were sold to him for $21,000
(P42,000) C.I.F. Hongkong . . . (Emphasis supplied.)
Under the revenue law in force when the sales in
question took place, the merchants' sales tax
attached upon the happening of the respective
sales of the "commodities, goods, wares, and
merchandise" involved, and we are clearly of
opinion that such "sales" took place upon the
perfection of the corresponding contracts. If such
perfection took place in the Philippines, the
merchants' sales tax then in force here attached to
the transactions.
Even if we should consider that the Philippine
buyers in the cases covered by paragraph IV and V
of the agreed statement of facts, contracted with
Koppel Industrial Car and Equipment company, we
will arrive at the same final result. It cannot be
denied in that case that said American corporation
contracted through Koppel (Philippines), Inc., which
was in the Philippines. The real transaction in each
case of sale, in final effect, began with an offer of
sale from the seller, said American corporation,
through its agent, the local corporation, of the
railway materials, machinery, and supplies at the
prices quoted, and perfected or completed by the
acceptance of that offer by the local buyers when
the latter, accepting those prices, placed their

orders. The offer could not correctly be said to

have been made by the local buyers when they
asked for price quotations, for they could not
rationally be taken to have bound themselves to
buy before knowing the prices. And even if we
should take into consideration the fact that the
american corporation contracted, at least partly,
through correspondence, according to article 54 of
the Code of Commerce, the respective contracts
were completed from the time of the acceptance
by the local buyers, which happened in the
Philippines.
Contracts executed through correspondence shall
be completed from the time an answer is
madeaccepting the proposition or the conditions by
which the latter may be modified." (Code of
Commerce, article 54; emphasis supplied.)
A contract is as a rule considered as entered into at
the place where the place it is performed. So where
delivery is regarded as made at the place of
delivery." (13 C. J., 580-81, section 581.)
(In the consensual contract of sale delivery is not
needed for its perfection.)
II. Appellant's second assignment of error can be
summarily disposed of. It is clear that the ruling of
the Secretary of Finance, Exhibit M, was not
binding upon the trial court, much less upon this
tribunal, since the duty and power of interpreting
the laws is primarily a function of the judiciary.
(Ortua vs. Singson Encarnacion, 59 Phil., 440, 444.)
Plaintiff cannot be excused from abiding by this
legal principle, nor can it properly be heard to say
that it relied on the Secretary's ruling and that,
therefore, the courts should not now apply an
interpretation at variance therewith. The rule
of stare decisis is undoubtedly entitled to more
respect in the construction of statutes than the
interpretations
given
by
officers
of
the
administrative branches of the government, even
those entrusted with the administration of
particular laws. But this court, in Philippine Trust
Company and Smith, Bell and Co. vs. Mitchell(59
Phil., 30, 36), said:
. . . The rule of stare decisis is entitled to respect.
Stability in the law, particularly in the business
field, is desirable. But idolatrous reverence for
precedent, simply as precedent, no longer rules.
More important than anything else is that court
should be right. . . .
III. In the view we take of the case, and after the
disposition made above of the first assignment of
error, it becomes unnecessary to make any specific
ruling on the third, fourth, fifth, sixth, and seventh
assignments of error, all of which are necessarily
disposed of adversely to appellant's contention.

Wherefore, he judgment appealed from is

affirmed, with costs of both instances against
appellant. So ordered.

Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones,

and Tuason, JJ., concur.