07. Philex Mining vs. CIR, G.R. No.

148187, April 16, 2008

Facts:

Philex Mining, (as MANAGER), and Baguio Gold, (as PRINCIPAL), entered
into a "Power of Attorney," whereby Philex Mining was to develop the mining
resources known as STO. NINO MINE of Baguio Gold and to make advances.
When the venture did not prosper, the two mining companies did a settlement of
accounts between them leaving a large amount of advances by Philex Mining, which
was partly settled by Baguio Gold. Eventually Philex Mining wrote-off as bad debts
the remaining balance of the advances when it was shown that Baguio Gold had
become insolvent. The BIR refused to accept the writing-off as being deductible
from the income tax due from Philex Mining on the ground that the arrangement
between the two mining companies was a partnership or joint-venture arrangements,
and the advances were not really receivables but equity placements into the venture.
Philex Mining asserts that the advances it made were in the nature of a loan and not
as an investment.

Issue:

Whether the “Power of Attorney” entered into by Philex Mining and Baguio
Gold is one of AGENCY and not PARTNERSHIP.

Ruling:

The agreement entered is a PARTNERSHIP and not AGENCY.

As quoted by the Supreme Court in Partnership, Agency and Trusts, 1996 Ed.,
De Leon and De Leon, Jr., p. 330, “The essence of an agency, even one that is
coupled with interest, is the agent’s ability to represent his principal and bring about
business relations between the latter and third persons.”

In Nielson & Company, Inc. v. Lepanto Consolidated Mining Company, 135

Phil. 532, 542 (1968), it was held that, “Where representation for and in behalf of
the principal is merely incidental or necessary for the proper discharge of one’s
paramount undertaking under a contract, the latter may not necessarily be a contract
of agency, but some other agreement depending on the ultimate undertaking of the
parties.”

In this case, the main object of the "Power of Attorney" was not to confer a
power in favor of Philex Mining to contract with third persons on behalf of Baguio
Gold but to create a business relationship between Philex Mining and Baguio Gold,
in which the former was to manage and operate the latter’s mine through the parties’
mutual contribution of material resources and industry. The totality of the
circumstances and the stipulations in the parties’ agreement indubitably lead to the
conclusion that a PARTNERSHIP was formed between petitioner and Baguio Gold.