FAUSTINO LICHAUCO, plaintiff-appellee,

vs.
GREGORIO OLEGARIO and DALMACIO OLEGARIO, defendants-appellants.

In actions instituted in the Court of First Instance of Manila, cases Nos. 8883, 9213, and 9217, entitled Faustino Lichauco vs. Jose
de Guzman et al., judgment was rendered in favor of the plaintiff and against the defendant Gregorio Olegario for the sum of
P72,766.37.

This judgment having become final, a writ of execution was issued by virtue of which were attached and advertised fro sale at
public auction on the 3d of March, 1919, certain real properties of Gregorio Olegario described in the complaint herein and
registered, with certificates of titles Nos. 227, 313, 587, and 7781 issued by the registrar of deeds of the city of Manila.

At this auction the plaintiff bid, offering ten thousand pesos (P10,000) for these realties, and succeeded in having them sold to
him as the highest bidder on the aforesaid date of March 3, 1919.

On that same day the defendant Gregorio Olegario sold to his cousin and brother-in-law Dalmacio Olegario, the other defendant
in this case, his right of redemption over the aforesaid properties, executing the proper deed of sale, which was registered in the
registry on the date of the conveyance. The plaintiff alleges that this sale is fictitious, the result of a fraudulent conspiracy
between the herein defendants.

Some days having elapsed, and the plaintiffs judgment hereinbefore alluded to not having been fully satisfied, the sheriff
proceeded with the sale at public auction of the aforesaid right of redemption, whereat the plaintiff himself bid, and said right
of redemption was sold to him for the sum of P1,000. They did not, however, succeed in having this sale recorded in the registry
owing to the fact that the sale executed by the execution debtor Gregorio Olegario in favor of Dalmacio Olegario was already
recorded in the registry.

In view thereof, in order to remove this cloud on his title to the aforesaid estates, the plaintiff brought this action to have the
court declare fraudulent and void the transfer made by Gregorio Olegario of said right of redemption, and order the cancellation
of its registration, offering in that event to accept said right of redemption in full and complete satisfaction of the balance that
by virtue of the final judgment in his favor remains outstanding against the execution debtor, Gregorio Olegario. This offer is
renewed in this instance by the appellee in his brief (page 4).

The defendants answered with a general denial, and each sets up a special defense, that of Gregorio Olegario consisting in the
allegation that he did in reality receive the sum of P500 as the price of the right of redemption abovementioned, and that he
was compelled to sell it for the purpose of paying his obligations and not for the purpose of defrauding the plaintiff. Dalmacio
Olegarios special defense is that the said transfer of the right of redemption in his favor was real and true, executed in good
faith and for value and sufficient consideration; and that the facts alleged in the complaint do not constitute a cause of action.

After trial, the court rendered judgment declaring the transfer in question rescinded, it being of the opinion that such a transfer
in comes within one of the cases enumerated in article 1297 of the Civil Code, the same having been executed by Gregorio
Olegario against whom a judgment had been rendered, and that the presumption of fraud established in said article has not
been overthrown by the evidence.

From this judgment the defendants have appealed to this court, setting out several points in support of their appeal.
For the purposes of this decision it is sufficient, in our opinion, to decide the following three questions: First, whether or not
Gregorio Olegario, as an execution debtor, was authorized to sell said right of redemption; second, whether or not Faustino
Lichauco, as an execution creditor and purchaser at the auction in question was entitled, after his judgment had thus been
executed but not wholly satisfied, to have it executed again by levying upon the right of redemption over said properties; and
third, whether or not under the circumstances of this case, Faustino Lichauco has the right to question the transfer made by
Gregorio Olegario of said right of redemption in favor of Dalmacio Olegario.

As to whether or not Gregorio Olegario, as an execution debtor, was legally authorized to sell his right of redemption, is a
question already decided by this court in the affirmative in numerous decisions based on the precepts of section 463 and 464,
and other sections related thereto, of the Code of Civil Procedure.

In regard to the second question, an execution creditor and purchases of the property at an auction held by virtue of his
judgment is not entitled to have another execution issued upon the same judgment and levied upon the right of redemption,
which has been reserved by the law to the execution debtor. To recognize such a right in the execution creditor and purchaser is
in the last analysis tantamount to placing at his absolute disposal the property purchased by him. It would render practically
nugatory this peculiar means secured by the law to the execution debtor of avoiding the sale of his property made at an auction
under execution. We cannot make up our mind that the law permits a private individual to annul, at will, a right established for
reasons of public policy.

It must be understood, however, that we do not decide here (for we deem it unnecessary to do so in order to dispose of t his
case) whether this legal redemption is, or is not, subject to a new execution issued upon another judgment different from that
by virtue of which the property was sold, giving rise to said right of redemption. What we wish to declare is that a judgment by
virtue of which a property is sold at public auction can have no further effect on such property.

This is the reason why, in case an execution levied upon real property is returned partially satisfied, the law does not authorize
the issuance of another execution against the same realty already levied upon, but only permits, as a proceeding supplementary
to execution, the examination of the execution debtor to find out whether he has some other property left (secs. 474-486, Code
of Civil Procedure). The law would not speak of examination in such proceedings if it had in mind the right of redemption over
the property sold under execution, for the existence and scope of said right is perfectly known in all cases, and requires no
further examination. In these supplementary proceedings the law has undoubtedly in mind some other property of the
execution debtor difference from that already sold under execution by virtue of the said judgment.

We are aware that this rule is not expressly provided in our laws now in force; but, as seen, there is nothing therein to the
contrary, and its implied recognition is apparent from the fact that our laws provide for the legal redemption in a general sense
(art. 1521, and other articles related thereto, of the Civil Code), and this redemption is reserved to the judgment debtor in a
special manner (secs. 463 and 464, supra, of the Code of Civil Procedure).

We adhere on this point to the doctrine laid down by the Supreme Court of Indiana in the case ofHorn vs. Indianapolis National
Bank (21 Am. St. Rep. 231, 241), wherein said high tribunal expresses itself as follows:
If the sale from which the appellee seeks to redeem was made to satisfy its judgment, it has no statutory right to redeem, so
that the pivotal question is, whether the sale was made on its own judgment. It will aid us in our investigation to ascertain the
reason for the rule prohibiting a judgment creditor from redeeming from a sale made to satisfy a judgment in his own favor. The
policy of the law is to make the property bring its full value, and to discourage persons from bidding less than the fair value of
the property. It is also the intention of the law to do justice to interested parties, by securing the fair value of the property at one
sale, and thus prevent the annoyance and expense of numerous sales; and numerous sales may follow where there are many
successive redemptions. The law was not intended to enable a creditor to offer only part of the fair value of the property, and
take the chance of a redemption; neither was it intended that the creditor should permit others to bid much less than the value
of the property, and subsequently redeem from the sale. Nor was it intended that bidders should be discouraged by the
uncertainty of acquiring title, and the probability that the owner of the judgment which the property was sold to satisfy might
come in and redeem. These are strong reasons supporting the conclusion that a judgment creditor should not be permitted to
redeem from a sale made to satisfy his own judgment, and the conclusion is supported by authority.

We, therefore, find that the plaintiff, as a judgment creditor, was not, and is not, entitled, after an execution has been levied
upon the real properties in question by virtue of the judgment in his favor, to have another execution levied upon the same
properties by virtue of the same judgment to reach the right of redemption which the execution debtor and his privies retained
over them.

We come now to the third point, to wit, whether or not the plaintiff herein has any right to question the transfer of said
right of redemption, executed by Gregorio Olegario in favor of Dalmacio Olegario. If, under the circumstances of the case, the
plaintiff was not, and is not, legally entitled to have an execution levied upon the said right of redemption by virtue of the
aforesaid judgment, it follows that the alienation of the said right of redemption made by Gregorio Olegario could not, and
cannot, legally affect the plaintiff, nor, therefore, cause him any damage.

If such a transfer has not caused him any damage, it matters not to him whether the same was, or was not, fraudulently
executed. This conclusion renders it unnecessary to determine whether the sale of this right of redemption made by Gregorio
Olegario in favor of his codefendant is tainted or not with fraud or bad faith. Having decided the pertinent questions that have
been raised in this appeal, we find: (a) That the defendant Gregorio Olegario had a perfect right to sell his right of redemption in
question; (b) that the plaintiff was not, and is not, legally entitled, after an execution had been levied upon the real properties
hereinbefore mentioned by virtue of the judgment in his favor, to have another execution levied again on the same properties to
reach the right of redemption which the execution debtor retained over them; and (c) that the plaintiff has no right of action in
this case.
The period for the exercise of the right of redemption in question having, as it has, been interrupted on account on these
proceedings, it is but just that it should be completed to the limit fixed by the law. And said interruption having taken place on
the 29th of September, 1919, the date of the filing of the complaint, we hereby order that said right of redemption continue in
force for one year from the date of the notification of this decision to the parties, deducting from said time a time equal to that
intervening between the 3d of March, 1919, when the plaintiff bought the real properties at the auction above mentioned, and
the aforesaid 29th of September of said year, on which this action was commenced.

The judgment appealed from is reversed, without special finding as to costs. So ordered.

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,

vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.
Briefly, the facts of the case are summarized as follows:

In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real
estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of
Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land
registry.

On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same
property and providing that during the existence or after the term of this lease the lessor should he decide
to sell the property leased shall first offer the same to the lessee and the letter has the priority to buy under
similar conditions (Exhibits A to A-5)

On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations
under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent
of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)

The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per
stipulation of the parties (Exhs. A to D-3 inclusive)

On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and
defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased property (TCT
No.T-4240) together with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila
(TCT No. 4273) for 2,500 shares of stock of defendant corporation with a total value of P1,500,000.00 (Exhs.
C to C-5, inclusive) (pp. 44-45, Rollo)

On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement,
respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin
Pacheco.

After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision reads:

ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs preferential
right to acquire the subject property (right of first refusal) and ordering the defendants and all persons
deriving rights therefrom to convey the said property to plaintiff who may offer to acquire the same at the
rate of P14.00 per square meter, more or less, for Lot 1095 whose area is 27,169 square meters only.
Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief,
pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.

The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.

We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave
it due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a parcel
of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the Valenzuela,
Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366, although the prevailing
value thereof is approximately P300/sq. meter or P8.1 Million;
 2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of
actual ownership interests by petitioners to third parties; and

3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will
acquire the land not under "similar conditions" by which it was transferred to petitioner Delpher Trades
Corporation, as provided in the same contractual provision invoked by private respondent. (pp. 251-252,
Rollo)

The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the
one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the
private respondent's right of first refusal over the leased property included in the "deed of exchange."

Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation
is a family corporation; that the corporation was organized by the children of the two spouses (spouses Pelagia Pacheco and
Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro
Pipes Philippines in order to perpetuate their control over the property through the corporation and to avoid taxes; that in order
to accomplish this end, two pieces of real estate, including Lot No. 1095 which had been leased to Hydro Pipes Philippines, were
transferred to the corporation; that the leased property was transferred to the corporation by virtue of a deed of exchange of
property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which
are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares; and that at the time of
incorporation, he knew all about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for
reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo)

Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject parcel of
land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that the beneficial
ownership and control of petitioner corporation remained in the hands of the original co-owners, there was no transfer of
actual ownership interests over the land when the same was transferred to petitioner corporation in exchange for the latter's
shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner corporation
is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the
same, there being in substance and in effect an Identity of interest." (p. 254, Rollo)

The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged
the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit of the
contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while
there is a barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255,
Rollo)

On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct
from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or
conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate and distinct corporate
entity, is not a party who may allege that this separate corporate existence should be disregarded. It maintains that there was
actual transfer of ownership interests over the leased property when the same was transferred to Delpher Trades Corporation in
exchange for the latter's shares of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the
corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa.,
609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of
stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription
"The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or
to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines,
Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par value shares in exchange for their properties.

A no-par value share does not purport to represent any stated proportionate interest in the capital stock
measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation.
 The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets
of the corporation. But this character of proportionate interest is not hidden beneath a false appearance of
a given sum in money, as in the case of par value shares. The capital stock of a corporation issuing only no-
par value shares is not set forth by a stated amount of money, but instead is expressed to be divided into a
stated number of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an
aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of
100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the
financial condition of a corporation is focused upon the value of assets and the amount of its debts.
(Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980
Edition, p. 107).

Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square
meter was turned over to the family's corporation for only P14.00 a square meter.

It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation.
Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their
properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades
Corporation to take control of their properties and at the same time save on inheritance taxes.

As explained by Eduardo Neria:

xxx xxx xxx

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with their execution of a deed of exchange on the
properties for no par value shares of the defendant corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation in entering in the deed of
exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits to the spouses of
this deed of exchange?

A Continuous control of the property, tax exemption benefits, and other inherent
benefits in a corporation.

Q What are these advantages to the said spouses from the point of view of taxation in
entering in the deed of exchange?

A Having fulfilled the conditions in the income tax law, providing for tax free exchange of
property, they were able to execute the deed of exchange free from income tax and
acquire a corporation.
 Q What provision in the income tax law are you referring to?

A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2)
Exceptions regarding the provision which I quote: "No gain or loss shall also be
recognized if a person exchanges his property for stock in a corporation of which as a
result of such exchange said person alone or together with others not exceeding four
persons gains control of said corporation."

Q Did you explain to the spouses this benefit at the time you executed the deed of
exchange?

A Yes, sir

Q You also, testified during the last hearing that the decision to have no par value share
in the defendant corporation was for the purpose of flexibility. Can you explain flexibility
in connection with the ownership of the property in question?

A There is flexibility in using no par value shares as the value is determined by the board
of directors in increasing capitalization. The board can fix the value of the shares
equivalent to the capital requirements of the corporation.

Q Now also from the point of taxation, is there any flexibility in the holding by the
corporation of the property in question?

A Yes, since a corporation does not die it can continue to hold on to the property
indefinitely for a period of at least 50 years. On the other hand, if the property is held by
the spouse the property will be tied up in succession proceedings and the consequential
payments of estate and inheritance taxes when an owner dies.

Q Now what advantage is this continuity in relation to ownership by a particular person

of certain properties in respect to taxation?

A The property is not subjected to taxes on succession as the corporation does not die.

Q So the benefit you are talking about are inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos.
"The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v.
Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of
sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed
their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no
basis for its claim of a light of first refusal under the lease contract.

KER & CO., LTD., petitioner,

vs.
JOSE B. LINGAD, as Acting Commissioner of Internal Revenue, respondent.
Petitioner Ker & Co., Ltd. would have us reverse a decision of the Court of Tax Appeals, holding it liable as a commercial broker
under Section 194 (t) of the National Internal Revenue Code. Its plea, notwithstanding the vigorous effort of its counsel, is not
sufficiently persuasive. An obstacle, well-nigh insuperable stands in the way. The decision under review conforms to and is in
accordance with the controlling doctrine announced in the recent case of Commissioner of Internal Revenue v.
Constantino. 1 The decisive test, as therein set forth, is the retention of the ownership of the goods delivered to the possession
of the dealer, like herein petitioner, for resale to customers, the price and terms remaining subject to the control of the firm
consigning such goods. The facts, as found by respondent Court, to which we defer, unmistakably indicate that such a situation
does exist. The juridical consequences must inevitably follow. We affirm.

It was shown that petitioner was assessed by the then Commissioner of Internal Revenue Melecio R. Domingo the sum of
P20,272.33 as the commercial broker's percentage tax, surcharge, and compromise penalty for the period from July 1, 1949 to
December 31, 1953. There was a request on the part of petitioner for the cancellation of such assessment, which request was
turned down. As a result, it filed a petition for review with the Court of Tax Appeals. In its answer, the then Commissioner
Domingo maintained his stand that petitioner should be taxed in such amount as a commercial broker. In the decision now
under review, promulgated on October 19, 1962, the Court of Tax Appeals held petitioner taxable except as to the compromise
penalty of P500.00, the amount due from it being fixed at P19,772.33.

Such liability arose from a contract of petitioner with the United States Rubber International, the former being referred to as the
Distributor and the latter specifically designated as the Company. The contract was to apply to transactions between the former
and petitioner, as Distributor, from July 1, 1948 to continue in force until terminated by either party giving to the other sixty
days' notice. 2 The shipments would cover products "for consumption in Cebu, Bohol, Leyte, Samar, Jolo, Negros Oriental, and
Mindanao except [the] province of Davao", petitioner, as Distributor, being precluded from disposing such products elsewhere
than in the above places unless written consent would first be obtained from the Company. 3 Petitioner, as Distributor, is
required to exert every effort to have the shipment of the products in the maximum quantity and to promote in every way the
sale thereof. 4 The prices, discounts, terms of payment, terms of delivery and other conditions of sale were subject to change in
the discretion of the Company. 5

Then came this crucial stipulation: "The Company shall from time to time consign to the Distributor and the Distributor will
receive, accept and/or hold upon consignment the products specified under the terms of this agreement in such quantities as in
the judgment of the Company may be necessary for the successful solicitation and maintenance of business in the territory, and
the Distributor agrees that responsibility for the final sole of all goods delivered shall rest with him. All goods on consignment
shall remain the property of the Company until sold by the Distributor to the purchaser or purchasers, but all sales made by the
Distributor shall be in his name, in which the sale price of all goods sold less the discount given to the Distributor by the
Company in accordance with the provision of paragraph 13 of this agreement, whether or not such sale price shall have been
collected by the Distributor from the purchaser or purchasers, shall immediately be paid and remitted by the Distributor to the
Company. It is further agreed that this agreement does not constitute Distributor the agent or legal representative 4 of the
Company for any purpose whatsoever. Distributor is not granted any right or authority to assume or to create any obligation or
responsibility, express or implied, in behalf of or in the name of the Company, or to bind the Company in any manner or thing
whatsoever." 6

All specifications for the goods ordered were subject to acceptance by the Company with petitioner, as Distributor, required to
accept such goods shipped as well as to clear the same through customs and to arrange for delivery in its warehouse in Cebu
City. Moreover, orders are to be filled in whole or in part from the stocks carried by the Company's neighboring branches,
subsidiaries or other sources of Company's brands. 7 Shipments were to be invoiced at prices to be agreed upon, with the
customs duties being paid by petitioner, as Distributor, for account of the Company. 8 Moreover, all resale prices, lists, discounts
and general terms and conditions of local resale were to be subject to the approval of the Company and to change from time to
time in its discretion. 9 The dealer, as Distributor, is allowed a discount of ten percent on the net amount of sales of merchandise
made under such agreement. 10 On a date to be determined by the Company, the petitioner, as Distributor, was required to
report to it data showing in detail all sales during the month immediately preceding, specifying therein the quantities, sizes and
types together with such information as may be required for accounting purposes, with the Company rendering an invoice on
sales as described to be dated as of the date of inventory and sales report. As Distributor, petitioner had to make payment on
such invoice or invoices on due date with the Company being privileged at its option to terminate and cancel the agreement
forthwith upon the failure to comply with this obligation. 11 The Company, at its own expense, was to keep the consigned stock
fully insured against loss or damage by fire or as a result of fire, the policy of such insurance to be payable to it in the event of
loss. Petitioner, as Distributor, assumed full responsibility with reference to the stock and its safety at all times; and upon
request of the Company at any time, it was to render inventory of the existing stock which could be subject to change. 12 There
was furthermore this equally tell-tale covenant: "Upon the termination or any cancellation of this agreement all goods held on
consignment shall be held by the Distributor for the account of the Company, without expense to the Company, until such time
as provision can be made by the Company for disposition." 13

The issue with the Court of Tax Appeals, as with us now, is whether the relationship thus created is one of vendor and vendee or
of broker and principal. Not that there would have been the slightest doubt were it not for the categorical denial in the contract
that petitioner was not constituted as "the agent or legal representative of the Company for any purpose whatsoever." It would
be, however, to impart to such an express disclaimer a meaning it should not possess to ignore what is manifestly the role
assigned to petitioner considering the instrument as a whole. That would be to lose sight altogether of what has been agreed
upon. The Court of Tax Appeals was not misled in the language of the decision now on appeal: "That the petitioner Ker & Co.,
Ltd. is, by contractual stipulation, an agent of U.S. Rubber International is borne out by the facts that petitioner can dispose of
the products of the Company only to certain persons or entities and within stipulated limits, unless excepted by the contract or
by the Rubber Company (Par. 2); that it merely receives, accepts and/or holds upon consignment the products, which remain
properties of the latter company (Par. 8); that every effort shall be made by petitioner to promote in every way the sale of the
products (Par. 3); that sales made by petitioner are subject to approval by the company (Par. 12); that on dates determined by
the rubber company, petitioner shall render a detailed report showing sales during the month (Par. 14); that the rubber
company shall invoice the sales as of the dates of inventory and sales report (Par. 14); that the rubber company agrees to keep
the consigned goods fully insured under insurance policies payable to it in case of loss (Par. 15); that upon request of the rubber
company at any time, petitioner shall render an inventory of the existing stock which may be checked by an authorized
representative of the former (Par. 15); and that upon termination or cancellation of the Agreement, all goods held on
consignment shall be held by petitioner for the account of the rubber company until their disposition is provided for by the
latter (Par. 19). All these circumstances are irreconcilably antagonistic to the idea of an independent merchant." 14 Hence its
conclusion: "However, upon analysis of the contract, as a whole, together with the actual conduct of the parties in respect
thereto, we have arrived at the conclusion that the relationship between them is one of brokerage or agency." 15 We find
ourselves in agreement, notwithstanding the able brief filed on behalf of petitioner by its counsel. As noted at the outset, we
cannot heed petitioner's plea for reversal.

1. According to the National Internal Revenue Code, a commercial broker "includes all persons, other than importers,
manufacturers, producers, or bona fide employees, who, for compensation or profit, sell or bring about sales or purchases of
merchandise for other persons or bring proposed buyers and sellers together, or negotiate freights or other business for owners
of vessels or other means of transportation, or for the shippers, or consignors or consignees of freight carried by vessels or
other means of transportation. The term includes commission merchants." 16 The controlling decision as to the test to be
followed as to who falls within the above definition of a commercial broker is that of Commissioner of Internal Revenue v.
Constantino. 17 In the language of Justice J. B. L. Reyes, who penned the opinion: "Since the company retained ownership of the
goods, even as it delivered possession unto the dealer for resale to customers, the price and terms of which were subject to the
company's control, the relationship between the company and the dealer is one of agency, ... ." 18 An excerpt from Salisbury v.
Brooks 19 cited in support of such a view follows: " 'The difficulty in distinguishing between contracts of sale and the creation of
an agency to sell has led to the establishment of rules by the application of which this difficulty may be solved. The decisions say
the transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the
transferee in the attitude or position of an owner and makes him liable to the transferor as a debtor for the agreed price, and
not merely as an agent who must account for the proceeds of a resale, the transaction is a sale; while the essence of an agency
to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the owner and has the
right to control sales, fix the price, and terms, demand and receive the proceeds less the agent's commission upon sales made.'
"20 The opinion relied on the work of Mechem on Sales as well as Mechem on Agency. Williston and Tiedman both of whom
wrote treatises on Sales, were likewise referred to.

Equally relevant is this portion of the Salisbury opinion: "It is difficult to understand or appreciate the necessity or presence of
these mutual requirements and obligations on any theory other than that of a contract of agency. Salisbury was to furnish the
mill and put the timber owned by him into a marketable condition in the form of lumber; Brooks was to furnish the funds
necessary for that purpose, sell the manufactured product, and account therefor to Salisbury upon the specific terms of the
agreement, less the compensation fixed by the parties in lieu of interest on the money advanced and for services as agent.
These requirements and stipulations are in tent with any other conception of the contract. If it constitutes an agreement to sell,
they are meaningless. But they cannot be ignored. They were placed there for some purpose, doubtless as the result of definite
antecedent negotiations therefore, consummated by the final written expression of the agreement." 21 Hence the Constantino
opinion could categorically affirm that the mere disclaimer in a contract that an entity like petitioner is not "the agent or legal
representative for any purpose whatsoever" does not suffice to yield the conclusion that it is an independent merchant if the
control over the goods for resale of the goods consigned is pervasive in character. The Court of Tax Appeals decision now under
review pays fealty to such an applicable doctrine.
2. No merit therefore attaches to the first error imputed by petitioner to the Court of Tax Appeals. Neither did such Court fail to
appreciate in its true significance the act and conduct pursued in the implementation of the contract by both the United States
Rubber International and petitioner, as was contended in the second assignment of error. Petitioner ought to have been aware
that there was no need for such an inquiry. The terms of the contract, as noted, speak quite clearly. There is lacking that degree
of ambiguity sufficient to give rise to serious doubt as to what was contemplated by the parties. A reading thereof discloses that
the relationship arising therefrom was not one of seller and purchaser. If it were thus intended, then it would not have included
covenants which in their totality would negate the concept of a firm acquiring as vendee goods from another. Instead, the
stipulations were so worded as to lead to no other conclusion than that the control by the United States Rubber International
over the goods in question is, in the language of the Constantino opinion, "pervasive". The insistence on a relationship opposed
to that apparent from the language employed might even yield the impression that such a mode of construction was resorted to
in order that the applicability of a taxing statute might be rendered nugatory. Certainly, such a result is to be avoided.

Nor is it to be lost sight of that on a matter left to the discretion of the Court of Tax Appeals which has developed an expertise in
view of its function being limited solely to the interpretation of revenue laws, this Court is not prepared to substitute its own
judgment unless a grave abuse of discretion is manifest. It would be to frustrate the objective for which administrative tribunals
are created if the judiciary, absent such a showing, is to ignore their appraisal on a matter that forms the staple of their
specialized competence. While it is to be admitted that counsel for petitioner did scrutinize with care the decision under review
with a view to exposing what was considered its flaws, it cannot be said that there was such a failure to apply what the law
commands as to call for its reversal. Instead, what cannot be denied is that the Court of Tax Appeals reached a result to which
the Court in the recent Constantino decision gave the imprimatur of its approval.

INCHAUSTI AND CO., plaintiff-appellant,

vs.
ELLIS CROMWELL, Collector of Internal Revenue, defendant-appellee.

The facts presented to this court are agreed upon by both parties, consisting, in so far as they are material to a decision of
the case, in the following:

III. That the plaintiff firm for many years past has been and now is engaged in the business of buying and selling at
wholesale hemp, both for its own account and on commission.

IV. That it is customary to sell hemp in bales which are made by compressing the loose fiber by means of presses,
covering two sides of the bale with matting, and fastening it by means of strips of rattan; that the operation of bailing
hemp is designated among merchants by the word "prensaje."

V. That in all sales of hemp by the plaintiff firm, whether for its own account or on commission for others, the price is
quoted to the buyer at so much per picul, no mention being made of bailing; but with the tacit understanding, unless
otherwise expressly agreed, that the hemp will be delivered in bales and that, according to the custom prevailing
among hemp merchants and dealers in the Philippine Islands, a charge, the amount of which depends upon the then
prevailing rate, is to be made against the buyer under the denomination of "prensaje." That this charge is made in the
same manner in all cases, even when the operation of bailing was performed by the plaintiff or by its principal long
before the contract of sale was made. Two specimens of the ordinary form of account used in these operations are
hereunto appended, marked Exhibits A and B, respectively, and made a part hereof.

VI. That the amount of the charge made against hemp buyers by the plaintiff firm and other sellers of hemp under the
denomination of "prensaje" during the period involved in this litigation was P1.75 per bale; that the average cost of
the rattan and matting used on each bale of hemp is fifteen (15) centavos and that the average total cost of bailing
hemp is one (1) peso per bale.

VII. That insurance companies in the Philippine Islands, in estimating the insurable value of hemp always add to the
quoted price of same the charge made by the seller under the denomination of "prensaje."

VII. That the average weight of a bale of hemp is two (2) piculs (126.5 kilograms).
 IX. That between the first day of January, 1905, and the 31st day of March, 1910, the plaintiff firm, in accordance with
the custom mentioned in paragraph V hereof, collected and received, under the denomination of "prensaje," from
purchasers of hemp sold by the said firm for its own account, in addition to the price expressly agreed upon for the
said hemp, sums aggregating P380,124.35; and between the 1st day of October, 1908, and the 1st day of March, 1910,
collected for the account of the owners of hemp sold by the plaintiff firm in Manila on commission, and under the said
denomination of "prensaje," in addition to the price expressly agreed upon the said hemp, sums aggregating P31,080.

X. That the plaintiff firm in estimating the amount due it as commissions on sales of hemp made by it for its principals
has always based the said amount on the total sum collected from the purchasers of the hemp, including the charge
made in each case under the denomination of "prensaje."

XI. That the plaintiff has always paid to the defendant or to his predecessor in the office of the Collector of Internal
Revenue the tax collectible under the provisions of section 139 of Act No. 1189 upon the selling price expressly agreed
upon for all hemp sold by the plaintiff firm both for its own account and on commission, but has not, until compelled
to do so as hereinafter stated, paid the said tax upon sums received from the purchaser of such hemp under the
denomination of "prensaje."

XII. That of the 29th day of April, 1910, the defendant, acting in his official capacity as Collector of Internal Revenue of
the Philippine Islands, made demand in writing upon the plaintiff firm for the payment within the period of five (5)
days of the sum of P1,370.68 as a tax of one third of one per cent on the sums of money mentioned in Paragraph IX
hereof, and which the said defendant claimed to be entitled to receive, under the provisions of the said section 139 of
Act No. 1189, upon the said sums of money so collected from purchasers of hemp under the denomination of
"prensaje."

XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the defendant under protest the said sum of
P1,370.69, and on the same date appealed to the defendant as Collector of Internal Revenue, against the ruling by
which the plaintiff firm was required to make said payment, but defendant overruled said protest and adversely
decided said appeal, and refused and still refuses to return to plaintiff the said sum of P1,370.68 or any part
thereof.1awphil.net

XIV. Upon the facts above set forth t is contended by the plaintiff that the tax of P1,370.68 assessed by the defendant
upon the aggregate sum of said charges made against said purchasers of hemp by the plaintiff during the period in
question, under the denomination of "prensaje" as aforesaid, namely, P411,204.35, is illegal upon the ground that the
said charge does not constitute a part of the selling price of the hemp, but is a charge made for the service of baling
the hemp, and that the plaintiff firm is therefore entitled to recover of the defendant the said sum of P1,370.68 paid
to him under protest, together with all interest thereon at the legal rate since payment, and the costs of this action.

Upon the facts above stated it is the contention of the defendant that the said charge made under the
denomination of "prensaje" is in truth and in fact a part of the gross value of the hemp sold and of its actual selling
price, and that therefore the tax imposed by section 139 of Act No. 1189 lawfully accrued on said sums, that the
collection thereof was lawfully and properly made and that therefore the plaintiff is not entitled to recover back said
sum or any part thereof; and that the defendant should have judgment against plaintiff for his costs.

Under these facts we are of the opinion that the judgment of the court below was right. It is one of the stipulations in the
statement of facts that it is customary to sell hemp in bales, and that the price quoted in the market for hemp per picul is the
price for the hemp baled. The fact is that among large dealers like the plaintiff in this case it is practically impossible to handle
hemp without its being baled, and it is admitted by the statement of facts, as well as demonstrated by the documentary proof
introduced in the case, that if the plaintiff sold a quality of hemp it would be the under standing, without words, that such hemp
would be delivered in bales, and that the purchase price would include the cost and expense of baling. In other words, it is the
fact as stipulated, as well as it would be the fact of necessity, that in all dealings in hemp in the general market the selling price
consists of the value of the hemp loose plus the cost and expense of putting it into marketable form. In the sales made by the
plaintiff, which are the basis of the controversy here, there were n services performed by him for his vendee. There was
agreement that services should be performed. Indeed, at the time of such sales it was not known by the vendee whether the
hemp was then actually baled or not. All that he knew and all that concerned him was that the hemp should be delivered to him
baled. He did not ask the plaintiff to perform services for him, nor did the plaintiff agree to do so. The contract was single and
consisted solely in the sale and purchase of hemp. The purchaser contracted for nothing else and the vendor agreed to deliver
nothing else.
 The word "price" signifies the sum stipulated as the equivalent of the thing sold and also every incident taken into
consideration for the fixing of the price, put to the debit of the vendee and agreed to by him. It is quite possible that the
plaintiff, in this case in connection with the hemp which he sold, had himself already paid the additional expense of baling as a
part of the purchase price which he paid and that he himself had received the hemp baled from his vendor. It is quite possible
also that such vendor of the plaintiff may have received the same hemp from his vendor in baled form, that he paid the
additions cost of baling as a part of the purchase price which he paid. In such case the plaintiff performed no service whatever
for his vendee, nor did the plaintiff's vendor perform any service for him.

The distinction between a contract of sale and one for work, labor, and materials is tested by the inquiry whether the thing
transferred is one no in existence and which never would have existed but for the order of the party desiring to acquire it, or a
thing which would have existed and been the subject of sale to some other person, even if the order had not been given.
(Groves vs. Buck, 3 Maule & S., 178; Towers vs. Osborne, 1 Strange, 506; Benjamin on Sales, 90.) It is clear that in the case at bar
the hemp was in existence in baled form before the agreements of sale were made, or, at least, would have been in existence
even if none of the individual sales here in question had been consummated. It would have been baled, nevertheless, for sale to
someone else, since, according to the agreed statement of facts, it is customary to sell hemp in bales. When a person stipulates
for the future sale of articles which he is habitually making, and which at the time are not made or finished, it is essentially a
contract of sale and not a contract for labor. It is otherwise when the article is made pursuant to agreement. (Lamb vs. Crafts, 12
Met., 353; Smith vs. N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where labor is employed on the materials of the seller
he can not maintain an action for work and labor. (Atkinson vs. Bell, 8 Barn. & C., 277; Lee vs. Griffin, 30 L.J.N. S.Q.B., 252;
Prescott vs. Locke, 51 N.H., 94.) If the article ordered by the purchaser is exactly such as the plaintiff makes and keeps on hand
for sale to anyone, and no change or modification of it is made at the defendant's request, it is a contract of sale, even though it
may be entirely made after, and in consequence of, the defendant's order for it. (Garbutt s. Watson, 5 Barn. & Ald., 613;
Gardner vs.Joy, 9 Met., 177; Lamb vs. Crafts, 12 Met., 353; Waterman vs. Meigs, 4 Cush., 497., Clark vs. Nichols, 107 Mass., 547;
May vs. Ward, 134 Mass., 127; Abbott vs. Gilchrist, 38 Me., 260; Crocket vs. Scribner, 64 Me., 105; Pitkin vs.Noyes, 48 N. H., 294;
Prescott vs. Locke, 51 N. H., 94; Ellison vs. Brigham, 38 Vt., 64.) It has been held in Massachusetts that a contract to make is a
contract of sale if the article ordered is already substantially in existence at the time of the order and merely requires some
alteration, modification, or adoption to the buyer's wishes or purposes. (Mixer vs. Howarth, 21 Pick., 205.) It is also held in that
state that a contract for the sale of an article which the vendor in the ordinary course of his business manufactures or procures
for the general market, whether the same is on hand at the time or not, is a contract for the sale of goods to which the statute
of frauds applies. But if the goods are to be manufactured especially for the purchaser and upon his special order, and not for
the general market, the case is not within the statute. (Goddard vs. Binney, 115 Mass., 450.)

It is clear to our minds that in the case at bar the baling was performed for the general market and was not something
done by plaintiff which was a result of any peculiar wording of the particular contract between him and his vendee. It is
undoubted that the plaintiff prepared his hemp for the general market. This would be necessary. One whose exposes goods for
sale in the market must have them in marketable form. The hemp in question would not have been in that condition if it had not
been baled. the baling, therefore, was nothing peculiar to the contract between the plaintiff and his vendee. It was precisely the
same contract that was made by every other seller of hemp, engaged as was the plaintiff, and resulted simply in the transfer of
title to goods already prepared for the general market. The method of bookkeeping and form of the account rendered is not
controlling as to the nature of the contract made. It is conceded in the case tat a separate entry and charge would have been
made for the baling even if the plaintiff had not been the one who baled the hemp but, instead, had received it already baled
from his vendor. This indicates of necessity tat the mere fact of entering a separate item for the baling of the hemp is formal
rather than essential and in no sense indicates in this case the real transaction between the parties. It is undisputable that, if the
plaintiff had brought the hemp in question already baled, and that was the hemp the sale which formed the subject of this
controversy, then the plaintiff would have performed no service for his vendee and could not, therefore, lawfully charge for the
rendition of such service. It is, nevertheless, admitted that in spite of that fact he would still have made the double entry in his
invoice of sale to such vendee. This demonstrates the nature of the transaction and discloses, as we have already said, that the
entry of a separate charge for baling does not accurately describe the transaction between the parties.

Section 139 [Act No. 1189] of the Internal Revenue Law provides that:

There shall be paid by each merchant and manufacturer a tax at the rate of one-third of one per centum on the
gross value in money of all goods, wares and merchandise sold, bartered or exchanged in the Philippine Islands, and
that this tax shall be assessed on the actual selling price at which every such merchant or manufacturer disposes of his
commodities.
 The operation of baling undoubtedly augments the value of the goods. We agree that there can be no question that, if the
value of the hemp were not augmented to the amount of P1.75 per bale by said operation, the purchaser would not pay that
sum. If one buys a bale of hemp at a stipulated price of P20, well knowing that there is an agreement on his part, express or
implied, to pay an additional amount of P1.75 for that bale, he considers the bale of hemp worth P21. 75. It is agreed, as we
have before stated, that hemp is sold in bales. Therefore, baling is performed before the sale. The purchaser of hemp owes to
the seller nothing whatever by reason of their contract except the value of the hemp delivered. That value, that sum which the
purchaser pays to the vendee, is the true selling price of the hemp, and every item which enters into such price is a part of such
selling price. By force of the custom prevailing among hemp dealers in the Philippine Islands, a purchaser of hemp in the market,
unless he expressly stipulates that it shall be delivered to him in loose form, obligates himself to purchase and pay for baled
hemp. Wheher or not such agreement is express or implied, whether it is actual or tacit, it has the same force. After such an
agreement has once been made by the purchaser, he has no right to insists thereafter that the seller shall furnish him with
unbaled hemp. It is undoubted that the vendees, in the sales referred to in the case at bar, would have no right, after having
made their contracts, to insists on the delivery of loose hemp with the purpose in view themselves to perform the baling and
thus save 75 centavos per bale. It is unquestioned that the seller, the plaintiff, would have stood upon his original contract of
sale, that is, the obligation to deliver baled hemp, and would have forced his vendees to accept baled hemp, he himself
retaining among his own profits those which accrued from the proceed of baling.