Celestino Co & Company vs. Collector of Internal Revenue

A manufacturer that habitually produces articles and sells them to customers — even when cutting or combining materials to meet buyer specifications — is taxed as a manufacturer under Section 186 of the National Internal Revenue Code, not as a contractor under Section 191, provided the orders do not require extraordinary equipment or services beyond the manufacturer's ordinary operations.

Celestino Co & Company is a duly registered general copartnership doing business under the trade name "Oriental Sash Factory," with offices at 926 Raon Street, Quiapo, Manila. The partnership manufactures doors, windows, sashes, and furniture, advertising itself on company stationery as a "Factory" and "Manufacturers of all kinds of doors, windows, sashes, furniture, etc." using season-dried and kiln-dried lumber. From its establishment in 1946, the Bureau of Internal Revenue assessed percentage taxes on its gross receipts at the rate of 7% under Section 186 of the National Revenue Code, which imposes a tax on the original sale of manufactured articles. In 1952, the partnership sought reclassification as a contractor subject to the lower 3% tax under Section 191 of the same Code.

Celestino Co & Company, a duly registered general copartnership, operated the "Oriental Sash Factory" at 926 Raon Street, Quiapo, Manila. Its stationery bore the bold print "Manufacturers of all kinds of doors, windows, sashes, furniture, etc. used season-dried and kiln-dried lumber, of the best quality workmanships," and it had registered a special trade name for the business. From 1946 to 1951, the partnership paid percentage taxes of 7% on its gross receipts under Section 186 of the National Revenue Code, which imposes a tax on the sale of manufactured articles.

In 1952, the partnership began claiming that it was liable only for the 3% contractor's tax under Section 191 of the same Code. It argued that it did not manufacture ready-made doors, sash, and windows for the general public but only upon special order of select customers, according to their desired specifications. To support this contention, it presented duplicate copies of letters, sketches of doors and windows, and price quotations supposedly sent to four customers who had allegedly placed special orders, including Don Toribio Teodoro & Sons, Inc. The Bureau of Internal Revenue rejected the claim, and the partnership elevated the matter to the Court of Tax Appeals.

The Court of Tax Appeals found the evidence unconvincing. It noted that petitioner had registered a trade name containing the word "Factory" and advertised itself as a manufacturer, indicating business on a large scale. An investigation of petitioner's books showed that from January 1, 1952 to September 30, 1952, it sold sash, doors, and windows worth ₱188,754.69 — a six-figure amount difficult to attribute entirely to a few special-order customers. The Court of Tax Appeals further held that even if petitioner's claim were believed, the business of manufacturing sash, doors, and windows upon special order did not fall under any of the fifty occupations enumerated in Section 191 as contractor's work, which covered road, building, navigation, artesian well, water works, and other construction work contractors. It concluded that petitioner was more properly taxed as a seller of manufactured articles under Section 186.

On appeal, the Supreme Court adopted the Court of Tax Appeals' statement of facts and law. The Court emphasized that the Oriental Sash Factory habitually made sash, windows, and doors, as it had represented to the public, and that the fact these articles were produced only when customers placed orders did not alter the nature of the establishment. The factory accepted only such orders as called for the use of materials — moulding, frames, panels — that it ordinarily manufactured or was in a position habitually to manufacture. Any builder or homeowner with sufficient funds could order doors or windows of the kind manufactured by the factory, and the factory was mechanically equipped to duplicate or mass-produce the same. The Court found that the orders exhibited were not shown to be special orders requiring extraordinary equipment or services beyond the factory's ordinary operations.

• Contractor Classification: Petitioner argued that it manufactured sash, windows, and doors only for special customers and upon their special orders, in accordance with desired specifications, and not for the general market. Because it was engaged in the sale of services, it should be taxed under Section 191 of the Tax Code as a contractor at the 3% rate, not under Section 186 as a manufacturer at the 7% rate.
• Contract for a Piece of Work: Petitioner invoked Article 1467 of the New Civil Code, contending that since the goods were manufactured specially for the customer and upon his special order, and not for the general market, the transactions were contracts for a piece of work, not contracts of sale.

• Tax Classification: Whether a sash factory that manufactures doors, windows, and sash upon special order of customers, according to their specifications, is a manufacturer subject to the 7% tax under Section 186 of the National Revenue Code or a contractor subject to the 3% tax under Section 191.
• Nature of the Transaction: Whether the filling of customer-specified orders for doors and windows constitutes a contract of sale or a contract for a piece of work under Article 1467 of the New Civil Code.

• Tax Classification: No. Petitioner is not a contractor under Section 191 but a manufacturer under Section 186. The business of manufacturing sash, doors, and windows upon special order does not fall under any of the occupations enumerated in Section 191, which covers construction work contractors.
• Nature of the Transaction: The transactions are contracts of sale, not contracts for a piece of work. Under Article 1467, a contract for the delivery of an article which the vendor in the ordinary course of his business manufactures for the general market is a contract of sale, even if the goods are not on hand at the time.

• Tax Classification: Section 186 of the National Revenue Code imposes a tax on the original sales of articles by the manufacturer, producer, or importer, while Section 191 imposes a tax on the sales of services by contractors. The fifty occupations enumerated in Section 191 pertain to road, building, navigation, artesian well, water works, and other construction work contractors — those who alter or repair buildings, structures, streets, highways, sewers, electric lines, and similar works. The business of manufacturing sash, doors, and windows upon special order does not fall under any of these enumerated occupations. Petitioner habitually manufactured sash, panels, mouldings, and frames, and merely cut them to such sizes and combined them in such forms as customers desired. The fact that articles were made only when orders were placed did not alter the establishment's character as a manufacturer, since it accepted only orders calling for materials it ordinarily manufactured or was in a position habitually to manufacture. Nobody would regard the making of two window panels as construction work in common parlance. Accordingly, petitioner was properly taxed as a manufacturer under Section 186.

• Nature of the Transaction: Article 1467 of the New Civil Code distinguishes a contract of sale from a contract for a piece of work: if the vendor in the ordinary course of his business manufactures or procures the article for the general market, the contract is one of sale; if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work. Petitioner did not merely sell its services to customers; it also sold the materials — sash, panels, mouldings — that it ordinarily manufactured, although in such form or combination as suited the purchaser. The new form did not divest the factory of its character as manufacturer, nor did it take the transaction out of the category of sales, because the factory could stock or probably had in stock the sash, mouldings, and panels it used. The Court held that when a factory accepts a job requiring extraordinary or additional equipment, or involving services not generally performed by it, it thereby contracts for a piece of work; but the orders in this case were not shown to be special orders requiring extraordinary service. Any builder or homeowner could order doors or windows of the kind manufactured by petitioner, and the factory was mechanically equipped to duplicate or mass-produce them. Even assuming arguendo that the transactions were not sales, they were neither lease of services nor contract jobs by a contractor; since the articles had been admittedly manufactured by the factory, the transactions could and should be taxed as transfers thereof under Section 186.

• Distinction between contract of sale and contract for a piece of work (Article 1467, Civil Code) — A contract for the delivery at a certain price 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 of sale. If the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work. The Court applied this provision by holding that the Oriental Sash Factory's transactions were sales because it habitually manufactured the materials used (sash, panels, mouldings) and merely combined them to meet customer specifications; the orders were not shown to require extraordinary equipment or services beyond the factory's ordinary operations.
• Manufacturer vs. contractor for tax purposes (Sections 186 and 191, NIRC) — Section 186 imposes a percentage tax on the original sale of manufactured articles by the manufacturer, while Section 191 imposes a percentage tax on the sale of services by contractors enumerated therein. The Court held that a manufacturer that habitually produces articles and sells them — even when tailoring them to customer specifications — remains a manufacturer under Section 186, not a contractor under Section 191, unless the work requires extraordinary equipment or services not generally performed by the establishment.

• "The important thing to remember is that Celestino Co & Company habitually makes sash, windows and doors, as it has represented in its stationery and advertisements to the public. That it 'manufactures' the same is practically admitted by appellant itself. The fact that windows and doors are made by it only when customers place their orders, does not alter the nature of the establishment, for it is obvious that it only accepted such orders as called for the employment of such material-moulding, frames, panels-as it ordinarily manufactured or was in a position habitually to manufacture." — This passage articulates the ratio decidendi: habitual manufacture, not the incidental fact that goods are produced upon order, determines tax classification as a manufacturer.

• "In our opinion when this Factory accepts a job that requires the use of extraordinary or additional equipment, or involves services not generally performed by it-it thereby contracts for a piece of work — filing special orders within the meaning of Article 1467. The orders herein exhibited were not shown to be special. They were merely orders for work — nothing is shown to call them special requiring extraordinary service of the factory." — This defines the boundary between a contract of sale and a contract for a piece of work as applied to manufacturers filling customer specifications.

• "Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications of a customer-sizes not previously held in stock for sale to the public-it thereby becomes an employee or servant of the customer, not the seller of lumber. The same consideration applies to this sash manufacturer." — This analogy clarifies that cutting or adapting manufactured goods to customer specifications does not transform a seller into a contractor or servant.

• Payton vs. City of Anadardo, 64 P. 2d 878, 880, 179 Okl. 68 — Cited by the Court of Tax Appeals for the definition of "road, building, navigation, artesian well, water works and other construction work contractors" under Section 191 of the NIRC, to show that manufacturing sash, doors, and windows does not fall within the contractor category.

• Section 186, National Internal Revenue Code — Imposes a percentage tax of 7% on the original sale of manufactured articles by the manufacturer, producer, or importer. Applied to hold that the Oriental Sash Factory, as a manufacturer of sash, doors, and windows, was subject to this tax.
• Section 191, National Internal Revenue Code — Imposes a percentage tax of 3% on contractors, enumerating over fifty occupations including road, building, navigation, artesian well, water works, and other construction work contractors. Applied to hold that the business of manufacturing sash, doors, and windows upon special order does not fall under any enumerated contractor occupation.
• Article 1467, New Civil Code — Distinguishes a contract of sale from a contract for a piece of work based on whether the vendor manufactures the article for the general market or specially for the customer upon special order. Applied to hold that the factory's transactions were contracts of sale because it habitually manufactured the materials used and the orders were not shown to require extraordinary service.

Paras, C.J., Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J.B.L., and Felix, JJ., concurred.

The decision mentions that "[t]here was a strong dissent" at the Court of Tax Appeals level, but no dissenting opinion from any Supreme Court Justice is identified in the text.