G.R. No. L-25926 February 27, 1970
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CIRILO D. CONSTANTINO AND COURT OF TAX APPEALS, respondents.

FACTS

The Commissioner of Internal Revenue assessed and demanded from respondent Cirilo D. Constantino the commercial broker’s percentage tax of 6% on his gross compensation for 1956, as a dealer/distributor of International Harvester, Macleod, Inc. (IHM). Constantino protested, claiming he was not a commercial broker but an independent merchant. After his protest was overruled, he filed a petition for review with the Court of Tax Appeals, which ruled in his favor. The Commissioner appealed.
Constantino operated “C. C. Motor Service” in San Pablo City under a “Dealer Sales and Service Agreement” as IHM’s exclusive dealer. He cited facts supporting his independent merchant status: he could buy IHM products on cash or credit for resale; received trade discounts (16% for heavy equipment, 30% for parts) and a cash discount; his credit purchases were governed by a “Retail Financing Agreement”; he issued his own sales invoices to customers; he insured cash-purchased goods and included unsold IHM stocks in his annual inventory.

ISSUE

Whether the relationship between IHM and Constantino is one of principal and agent (making Constantino a commercial broker liable for percentage tax) or one of vendor and vendee (making Constantino an independent merchant not liable for said tax).

RULING

The Supreme Court reversed the Court of Tax Appeals and held that Constantino was a commercial broker, not an independent merchant, and was liable for the percentage tax. The Court looked beyond the forms and terminologies of the contracts to their actual legal effect. A key document, the “Dealer Order for Goods,” stipulated that title to the goods remained with IHM until full payment, and proceeds from resale were the property of IHM and held in trust by the dealer. This meant ownership passed directly from IHM to the ultimate customer, not through Constantino. Even in “cash basis” transactions, payment was not immediate, and IHM retained ownership upon shipment. The “Retail Financing Agreement” showed that the dealer did not use his own funds, and customer credit was subject to IHM’s approval, indicating the financed credit was the customer’s, not the dealer’s. Other contractual provisions (e.g., IHM’s control over resale terms, right to examine records, termination clauses, required bond) established a relationship of mutual confidence and trust characteristic of agency. Consequently, the 16% discount received was not a trade discount but compensation for selling IHM’s merchandise, making Constantino a commercial broker as defined in the Tax Code. The assessment, which did not include the 30% discount on parts, was affirmed.