[INTRODUCTION; PARTNERSHIP DISTINGUISHED FROM OTHER CONTRACTS] ● Pursuant to the 1982 agreement, Baguio Gold was only able
agreement, Baguio Gold was only able to execute the
21 PHILEX MINING CORP. V. CIR
April 16, 2008 | Ynares-Santiago, J. |
Petitioner/s: Philex Mining Corporation
Respondent/s: Commissioner of Internal Revenue
Doctrine: A joint venture under Philippine law is a form of partnership and should be
governed by the law of partnerships, as it is akin to a particular partnership which may
have for its object a specific undertaking.
Facts:
● On Apr. 16, 1971, Philex Mining Corp. (Philex) and Baguio Gold Mining
Company (Baguio Gold) entered into an agreement denominated “Power of
Attorney” for the management and operation of Philex of Baguio Gold’s
Mining claim known as the Sto. Nino Mine (Mine/Project) in Benguet. The
pertinent stipulations are as follows:
○ Par. 4. Baguio Gold shall avail Philex of up to P11 M, in such
amounts as may be required by the latter in managing the Mine.
This, as well as income by Baguio Gold from the Mine left with the
project shall constitute the owner’s account.
○ Par. 5. Philex may transfer their own funds or property to the Mine
should they deem it necessary and convenient for its management,
in accordance with the following:
■ 5(a). The appraised value of the properties, together with
the cash, constitutes the manager’s account.
■ 5(b). The manager’s account shall amount up to 11 M
only, unless excess is given prior approval by Baguio
Gold.
■ 5(c). Cash and property in the manager’s account cannot
be withdrawn before termination of the agency.
■ 5(d). Upon termination of the agency, Philex may (1)
receive the assets of the Mine proportionate to the
owner’s account, or (2) have have their property
originally transferred to the Project be re-transferred to
them.
○ Par. 12. Compensation of Philex shall be 50% of the net profit of
the Project before income tax.
○ Par. 16. The agency shall be irrevocable while any obligation of
Baguio Gold to Philex remains outstanding.
● During its management and operation of the Mine, Philex made advances of
cash and property in accordance with Par. 5.
● On Jan. 28, 1982, Philex withdrew from managing the mine due to losses.
The Mine completely ceased operations on Feb. 20, 1982.
● On Sept 27, 1982, the parties executed a “Compromise with Dation in
Payment” for indebtedness amounting to P179,394,000.00, where Baguio
Gold undertook to transfer several assets to Philex in three segments. This
was later amended on Dec. 31, 1982, increasing Baguio Gold’s
indebtedness to P259,137,245.00. The increase was due to the inclusion of
the payment made by Philex as guarantor on Baguio Gold’s long-term loans
from the Bank of America NT & SA and Citibank N.A., amounting to US$ 11
M.
two initial segments of the transfer of some of its assets in favor of Philex,
leaving a remaining outstanding indebtedness amounting to
P114,996,768.00.
● However, Philex subsequently wrote off in its books of account the
remaining indebtedness of Baguio Gold, later applying the same amount as
a bad debt deduction from its gross income in its annual ITR for the same
year.
● The BIR disallowed the deduction, and assessed Philex a deficiency income
tax of P62,811,161.39. Philex protested, claiming that all the requisites for a
bad debt deduction1 were satisfied.
○ BIR: denied the protest; the alleged debt was not ascertained
worthless as Baguio Gold remained existing and had not filed for
bankruptcy; deduction was not a valid and subsisting debut,
because under the 1971 contract, petitioner was to receive 50% of
the net profit (implying it was an investment).
○ CTA: affirmed the BIR; advances were not loans, but investments
in a partnership with Baguio Gold; additionally, Baguio Gold’s long-
term obligations were not yet due and demandable, so payment of
the same by Philex was pre-payment and cannot be considered
bad debt.
○ CA: affirmed the CTA; denied the subsequent MR.
Ruling:
W/N the advances made by Philex partook the nature of an investment rather
than a loan - YES. Philex and Baguio Gold were engaged in a partnership and did
not have a creditor-debtor relationship.
● It is the “Power of Attorney” that must be principally considered in
determining the relationship between Philex and Baguio Gold.
○ This established the juridical relation of the parties and defined the
parameters of their dealings with one another.
○ The compromise agreement and the subsequent amendment are
not subsequent or contemporaneous acts reflective of the parties’
true intent as they were enacted 11 years later and merely laid out
the procedure for recovery of advancements and payments under
the “Power of Attorney”.
● The “Power of Attorney” reveals the intention to establish a partnership or
joint venture.
○ Under a contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common
fund, with the intention of dividing profits among themselves.
■ General rule: Corporations, like Philex, cannot enter into a
contract of partnership.
■ Exception: Corporations can enter into a partnership if
authorized by law or its charter. In any case, they may
enter into a joint venture, akin to a particular partnership.
● In common law jurisdictions, joint venture and
partnership considered distinct even though they
1
(a) There was a valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it
was charged
 have similar elements,2 as the former
contemplates a single transaction and is
temporary in nature, while the latter contemplates
a general business and has some degree of
continuity.
● In our jurisdiction, joint venture is considered a
form of partnership, as partnerships under the
Civil Code may be universal or particular, the
latter being the case in a joint venture. However,
a corporation can enter a joint venture, but not a
partnership.
○ In this case, Philex and Baguio Gold had a common fund and had a
50-50 sharing scheme in the income of the Mine.
■ Under pars. 4 and 5, there was substantial equivalence in
the manager’s and owner’s accounts, as (1) Philex
contributed P11 M, its expertise in the management and
operation of the mine, and its compensation which cannot
be paid in cash, while (2) Baguio Gold contributed P11 M,
its actual mining claim, and any of its income left in the
project.
■ By exercising the transfer of its own property into the Mine
under par. 5, par. 5(c) was rendered effective, barring
Philex from withdrawing its advances. Consequently, the
contributions acquired an obligatory nature.
● The “Power of Attorney” does not reveal an intention to create an agency.
○ Par. 5(c) does not indicate that the contract was an agency coupled
with an interest.
■ In an agency coupled with an interest, it is the agency
itself that cannot be revoked or withdrawn by the principal.
■ In this case, the non-revocation or non-withdrawal applies
only to the advances made by the “supposed agent”.
○ Par. 16 likewise did not indicate that it was an agency coupled with
an interest. An agency of this nature does not necessarily follow
from the stipulation found therein.
○ In a contract of agency, the essence of the contract is the agent’s
representation of the principal, and the former’s ability to bring
about business relations between the latter and third persons.
Where representation is merely incidental or necessary in the
discharge of a contractual obligation, there is no agency.
■ In this case, the main object of the “Power of Attorney”
was not to grant Philex representation of Baguio Gold, but
to empower it the former to manage the latter’s mine
through mutual contribution of material resources and
industry.
○ The following circumstances likewise lead to a conclusion that a
partnership was formed, instead of an agency:
1. Under the contract, Baguio Gold was not unconditionally
obligated to return the advances made by Philex. Instead,
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(a) community of interest in the business, (b) sharing of profits/losses; and (c) mutual right of
control
Philex was merely entitled to a proportionate return of the
mine’s assets upon dissolution of their business relations.
● This is more consistent with a partnership than a
creditor-debtor relationship.
● If it were a loan, Baguio Gold should have been
bound to pay Philex an equal amount of the
same kind and quality.
● Being entitled only to a proportion of the assets,
Philex has no contractual basis to claim the
amounts stipulated in the compromise
agreements. They were merely used as basis for
claiming a bad debt deduction.
2. It is unlikely that a business corporation would extend an
unsecured loan for hundreds of millions of pesos, with no
maturity date or stipulation as to manner of payment.
3. The last and strongest indicator is the stipulation under
par. 12 that Philex would receive 50% of the net profits as
compensation.
● Under NCC 1769(4), “receipt by a person of a
share in the profits of a business is prima facie
evidence that he is a partner in the business.”
● Such cannot be mere wages as an employee, as
Philex managed the Mine, invested substantial
sums into it, and would stand not to be
remunerated in case the Mine had no income.
Moreover, Philex would not be entitled to an
equal share in the income of the Mine had it been
a mere employee.
● Conclusively, advances made by Philex in fact constitute investments in a
partnership, and were not the debts of Baguio Gold. Furthermore, the
amounts Philex paid as guarantor were not yet due and demandable, and
constituted pre-payments for Baguio Gold. Thus, Philex cannot claim these
amounts as a bad debt deduction, as exemptions are strictly construed
against the taxpayer who must prove by convincing evidence that he is
entitled to the deduction claimed.
Dispositive
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-
G.R. SP No. 49385 dated June 30, 2000, which affirmed the decision of the Court of
Tax Appeals in C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex Mining
Corporation is ORDERED to PAY the deficiency tax on its 1982 income in the amount
of P62,811,161.31, with 20% delinquency interest computed from February 10, 1995,
which is the due date given for the payment of the deficiency income tax, up to the
actual date of payment.