Philex Mining Corp. v. Commissioner of Internal Revenue

SIXTH DIVISION [CA-G.R. SP. NO. 49385. June 30, 2000.] PHILEX MINING CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N ALIO-HORMACHUELOS , J p : Petition for review under Rule 43 of the 1997 Rules of Civil Procedure of the decision of the Court of Tax Appeals dated 21 August 1998 in C.T.A. Case No. 5200 entitled "Philex Mining Corporation vs. Commissioner of Internal Revenue," the dispositive portion of which states: "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, the 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 (Letter of Denial of Protest, Annex F, Petition) up to actual date of payment. IETCAS "SO ORDERED." ( Rollo , p. 63) The factual antecedents: Petitioner is a domestic corporation duly organized and existing under Philippine laws, with principal office at Philex Building, Brixton and Fairlane Streets, Pasig, Metro Manila. It is engaged in the business of mining, exporting and/or selling gold, copper concentrates and other mining products. Petitioner took over the management of the Sto. Nio Mine from Baguio Gold, pursuant to a document denominated as "Power of Attorney" ( Rollo , pp. 73-82) dated 16 April 1971 giving petitioner the authority to do all things necessary and proper to bring about the successful management of the Sto. Nio mine and the maintenance of the same as a commercially profitable venture, the Power of Attorney contains the following relevant terms: "4. Within three (3) years from date hereof, the PRINCIPAL shall make available to the MANAGERS up to ELEVEN MILLION (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. NIO 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. Nio PROJECT. Any part of any income of the PRINCIPAL from the STO. NIO MINE, which is left with the Sto. Nio 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. NIO MINE, they may transfer their own funds or property to the STO. NIO PROJECT, in accordance with the following arrangements: "(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nio PROJECT as a special fund to be known as the MANAGER's account. "(b) The total of the MANAGER's account shall not exceed P11,000,000.00 except with the 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. Nio PROJECT, the amount not so paid in cash shall be added to the MANAGER's account. "(c) The cash and property shall not thereafter be withdrawn from the Sto. Nio 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 the subsequent appreciation of property, upon a projected termination of this Agency, 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. NIO 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 MANAGERS can, on the other hand, require at their option that property originally transferred by them to the Sto. Nio PROJECT be re-transferred to them. Until such assets are transferred to the MANAGERS, this Agency shall remain subsisting. xxx xxx xxx "12. The compensation of the MANAGER shall be fifty per cent (50%) of the profit of the Sto. Nio 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. Nio PROJECT after deduction therefrom of the MANAGERS' compensation. xxx xxx xxx "16. The PRINCIPAL has current pecuniary obligations 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' 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." ( Rollo , pp. 53-55) Petitioner made various advances to Baguio Gold Mining for the management and development of the mine which petitioner claims to have been extended to Baguio Gold as loans. Baguio Gold failed to pay allegedly due to heavy losses. Petitioner withdrew as manager of the mine in January 1982. Sto. Nio Mine eventually closed down on February 20, 1982. Petitioner and Baguio Gold entered into a "Compromise with Dation in Payment" dated 27 September 1982 ( Rollo , pp. 190-199) under which Baguio Gold's liability to the petitioner was determined to be P179,394,000.00. Payment of said indebtedness was to be divided into three segments: "10.1 The first segment of P94,534,912.82 was to be paid by an assignment of certain Baguio Gold assets to Philex. "10.2 The second segment of P9,745,563.62 was to be paid by transferring to Philex the equitable title of Baguio Gold in its Philodrill assets. CADacT "10.3 The third segment of P75,113,523.56 would remain a liability and was to be paid through assets that Baguio Gold would acquire in the future." ( Rollo , pp. 11-12) On 31 December 1982, Baguio Gold modified the Compromise Agreement and executed a document entitled "Amendment to Compromise with Dation in Payment" dated 31 December 1982 ( Rollo , pp. 111-119) under which Baguio Gold's indebtedness to petitioner Philex was now determined to be P259,137,245.00 including liabilities of Baguio Gold to other creditors which Philex assumed. The parties agreed that of the said amount P259,137,245.00, Baguio Gold should pay Philex P144,140,477.00 worth of tangible and valuable assets in two segments: the first amounting to P127,838,051.00 and the second amounting to P16,302,426.00. The first segment was to be paid with Baguio Gold assets while the second was to be settled by a transfer to Philex of Baguio Gold's equitable title in its Philodrill assets, Baguio Gold's total recoverable assets at that time were determined at P144,140,477.00. In 1982, petitioner wrote off in its books for taxable year 1982 an indebtedness of Baguio Gold in the amount of P112,136,000.00 which petitioner claimed as a deduction from its gross income as a bad debt. The Commissioner of Internal Revenue disallowed the deduction and assessed petitioner Philex deficiency income tax in the amount of P62,811,161.39. Petitioner's protest was denied. The Court of Tax Appeals upheld the decision of the Commissioner of Internal Revenue primarily on the ground that the advances made by petitioner were not in the nature of a loan but an investment, ruling as follows: "First, the MANAGERS' account is not an item of obligation recognizable as 'accounts payable' for Baguio Gold paragraph 5(d) of the Power of Attorney clearly states that upon a projected termination of the agency, the 'ratio which the MANAGERS' account has to the owner's (PRINCIPAL) account will be determined, and the corresponding proportion of the entire assets of the STO. NIO MINE, excluding the claims, shall be transferred to the managers . . .' This, to our mind, is a mere distribution of assets and not in any manner requiring payment, an element essential in loan obligations. CAScIH "Second, the fact that the advances cannot thereafter be withdrawn, except upon the termination of the agency, as stated in paragraph 5(c), is a categorical demonstration of the intent of the parties in entering into a partnership agreement and not a contract of loan. The latter is extinguished by payment while partnership is terminated by the withdrawal of any of the partners. "Third, it is unlikely that a business corporation would in its right mind lend hundreds of millions of pesos without interest; proper security or collaterals, i.e., realty or bonds; and most importantly, a specific deed evidencing the terms and conditions of such loan or loans. This is what happened in this case. "The statement that the Power of Attorney, under paragraph is thereof, '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,' fails to meet the requirements of a valid and substantial security. The Power of Attorney is a mere agency. It does not bare out the assets of Baguio Gold that are constituted as security. We have to remember that Baguio Gold's biggest assets are presumably its mineral claims. Yet, in the transfer of assets to the petitioner out of its MANAGERS' account, under paragraph 5(d), such claims are not included. As it is, thus, the Power of Attorney itself is a mere scrap of paper insofar as security is concerned. "Fourth, we note that the document evidencing the advances is denominated as Power of Attorney, which is more appropriately used in the grant of authority than in contract of loans. "Fifth, there is no specific or fixed maturity date as to when the supposed various loans or debts become due and demandable. "Sixth, the sources from where Baguio Gold is to get its repayment for the alleged loans are unclear. "Lastly, both parties contributed an equal amount of P11,000,000.00 initially, with the succeeding advances given by the petitioner inclusive of the part of compensation not paid in cash, added to the MANAGERS' account without interest. Likewise, annual net profit sharing was pegged at 50% for each of them with the assets of the Sto. Nio Mine being shared, upon the termination of the agency, in accordance with the ratio of each other's contribution to the PRINCIPAL and MANAGERS' account, respectively. We believe that these factors are strong indication of an investment activity rather than a loan transaction. Both parties simply engaged in a common fund with net profits shared evenly." ( Rollo , pp. 56-58) Hence this petition which assigns the following as errors: "The Tax Court erred in construing the Power of Attorney to be a contract of partnership rather than a contract of agency. "The Tax Court erred in relying solely on the Power of Attorney executed between Baguio Gold and Philex and completely disregarding the Compromise Agreement and the Amended Compromise Agreement when it construed the nature of the advances made by Philex. "The Tax Court erred in refusing to delve upon the issue of the propriety of the bad debts write-off. Petitioner posits: (1) That paragraph 5 of the Power of Attorney which provides that upon the termination of the agency, the ratio of the manager's account to the owner's (principal) account will be determined, and the corresponding proportion of the entire assets of the Sto. Nio Mine, excluding the claims, shall be transferred to the manager is not an agreement or distribution of assets but merely provides a scheme for the return of the cash and property advances made by petitioner for the operation and management of the mine; (2) That an intent of the parties to form a partnership cannot be inferred from the mere fact that the advances cannot be withdrawn except upon the termination of the agency; (3) That the reason why it did not require any collateral for the advances it made to Baguio Gold is because it was itself acting as manager of the mine; (4) That the 50% share in the net profit of the Sto. Nio project computed before income tax was its compensation for lending its cash and property to Baguio Gold; (5) And finally, that the termination of the agency was deemed to be the maturity date of the loan. We are not convinced. Indeed, it is the document denominated as "Power of Attorney" which governed the original intent of the parties. As stipulated in the said document, petitioner as manager may even transfer funds to Baguio Gold. Considering that petitioner is not in the business of lending money, it is highly improbable that it would only be lending such a huge amount to Baguio Gold aside from guaranteeing" the other debts of the latter. Moreover, under the terms of the "Power of Attorney", petitioner had full and absolute control over the project. This, coupled with the fact the return of the funds transferred to Baguio Gold and the payment of liabilities assumed by Philex on account of Baguio Gold was to be determined upon the termination of the agreement, along with the proportion of the entire assets of the Sto. Nio Mine transferred to Philex in return of the funds and property, indicate a return of investment, rather than payment for a loan. The foregoing circumstances taken together support the ruling of the Court of tax Appeals that the advances were not in the nature of a loan but of an investment which could not be made the basis of a valid bad debt deduction. STIcEA Moreover, as correctly pointed out by the Court of Tax Appeals, the 50-50% sharing of the net profits in the Sto. Nio Mine Project is prima facie evidence that petitioner is a partner of Baguio Gold in accordance with Article 1769 of the Civil Code. WHEREFORE, there being no reversible error in the questioned decision, the same is AFFIRMED. SO ORDERED. Austria-Martinez and Asuncion, JJ . , concur.