El"U!H,Yc Ol" ';L'L.. Bil!?I Tn I:'a Court of Tax Appe · La I, et al. vs.: - Commissioner of I Nternal Revenue

DECISION -

CTA CASE NO . 3060 - 2 - No. 34 Plaridel Str eet, Cebu City. It appears tha t on July 9 , 1973, petitioner represen ted by its General Manager , Lu i s V. Ve lez , a nd t he City o f Cebu , through its Act ing Mayor , Eulogio E . Berres , entered into a contract, t he provision s o f \'Jhich a re quoted as follows :

1.

That the PARTY OF THE FIRST PAR~

shall supply fuel (Premium or Sp0cial Ga- soline) , l ubrication, all s par ~ parts , t ires a~d batteries and s hall s ervice o r ma i n ta i n f ifteen (15) Holden Po l ice Cars of the Cebu Police Depa rtment, including the supply o f civilian d~i ve rs o n a 16~ hou r per day basis , at the f ollowing prices , to wit:

(a ) Supply of fuel and l ubricatfon, spare par t s , and supply of tires and batteries •• P40 , 000 . 00 (b ) Servicing o r tenance cif the f if t een

Holden Police Cars and

supply of d rivers m<.n n- ( 15 ) t he • • • • • 5 ,000. 00

TOTAL MONTHLY RATE

• • • • • • • £145, 9 __ 0 0. 0 0 The above-quoted p r: ices s.hall be i ndiv i sible and i nseparab l~ ; and, s hall constitute t he· monthly payments for the supply of f uel and l ubrication, spare par t s , tire s and batteries and servicing or maintenance of the fifteen (1 5) Holden Police Ca r s, i ncl uding the supp l y ci£ Drivers, shall be payable by the PARTY OF THE SECOND PART to the PARTY OF THE FIRST PART at the beginning of each month starting on July 1, 1973.

2 .

The PARTY OF THE SECOND PART shall use each of the fifteen (15) pol ice vehicles men- tioned above f or no t more t han sixteen 1 6) hours per d ay.

In c ase of unav~ilability o( 81

- .3 - any o f t he fifteen (15) police ve h i cles by reason o any unc:ont r ollable events , cir - cumstances and c a amiti es , s uc h a s l abor strikes , nava i labili t y and shortage i n t he mar e t of spare parts, f ue l and o i l; c on- flagra t ion , floods and t yphoons , shall no t be considered as grounds for the r escissi on o f this contrac t o r f o a ny cla im f o r damages .

3 .

The PARTY OF THE FIRST PART shall provi de mechanics on 24-hours duty daily t o attend t o the mechanical or e l ectr ical prob- l ems of each o f t he a bove - mentioned police ve h icles .

4.

This contract shall terminate after a period of thr ee (3) year s star t ing from July 1, 1973 .

However , the par ties have agreed that durin~ · the l i f e b f t hi~ ~gteement , the price of fuel and lubr icati on and the salar i es o f dr iver s shall be ad j usted monthly as t he prevail i ng price o f fue l and l ubr i ca- tion and mi nimum wage go up o r down based o n t he average of the r ecommended pump pr ices of all oil companies in Ce bu City : provided t hat the above-quo t e d prices ar8 based on the Peso to Doll a r exchange r a t e of SIX PESOS and

FORTY-FIVE CENTAVOS

( ~6 . 45 ) to t he U.S. Dol l ar ($1.00) , and that t herefore; f o r any f urther deval uaiion of the Peso wi t h r e s pect to t he Dol l ar , shall war r ant an immedi ate corresponding and propor tionate adj ustment o f t he above pr ices .

5.

I n case any o r al l o f t he Police c ars are used f o r mor e t han s i xteen (16) hours per day , the r e shall be a corr espo riding proportional additi ona l hour l y cha r ge based on the monthly ra t e pe r pol ice car which is t he total monthl y pr i c e div i ded by 15) t o be d ivided 30 to g i ve t he daily r a te per c ar and to be divided f ur t her by 16 to g i ve hour ly r ate pe r polic e car .

6.

The a bove- mentioned 15 ~ol lc0 c~r s , when not be ing use d by t he Cebu Polic e De- partment shall be kept at the premises o f the PARTY OF THE FIRST PART for pu r pose of r epair and maintenance .

However, the s a fe ty 8 ') {..,;

- 4 - and securi ty of s a id veh i cle s s hall be guaranteed by the Cebu Police Departmen t by assigning a guard or guards at t he premises o the PARTY OF THE FIRST PART.

7e The PARTY OF THE FIRST PART shal c ause each of the f ifteen (15) police vehicles to be covered by compr ehensive insurance policy at no extra cost of the PARTY OF THE SECOND PART .

After i nvestigation of petitioner by agents of t he Bureau of Inter nal Revenue for business tax purposes covering t he year 1974, it was ascertained that it f ail ed to pay , on the bas is of t he afore- mentioned c on t ract , t he correc t amoun t of percent- age tax on its gross r eceipts as i ndependent con- tractor as provided f or i n Sections 183 (a ) .and 191 , penalized under Section 209 , all of the t hen in forced National Internal Revenue Code .

Respondent

therefore assessed petitioner the sum of P32 , 641. 14 as defici ency percentage tax for the year 1974, i n- elusive of surcharge, interest and penalty. Petitioner reques ted a reconsideration of the assessment contending that f or purposes of corn- puting the three percent (3%) con t r ac t or's tax , the fixed sum of P40,000.00 mont hly pa i d to it by the City of Cebu , as cos t of f uel , l ubricants , tire s and other s upplies for the up-keep and main- t enance o t he fi f teen {15) Holden police cars 83

DECISION -

CTA CASE NO . 3060 ,5 - should not be i ncluded i n the total gros s rece i pts r eal ized during t he year i n questi on because they are sales t o t he City ; hence , not subject to t he con- t ractor ' s tax of t hree {3% ) _percent. Consequently , the monthly payment of P5,000.00 as compensation f or the servicing and supply of drivers to the fif teen

(15) ~olden pol i ce cars is the only amount subject to t he said tax.

In a l etter dated September 27 , 1979, respondent however denied petitio ne r ' ~ r equest for r econsi- derati on and r e iter ated t he deficiency percentage tax assessment of P32,6i41.14.

Hence , the pres.ent recourse .

I s the entire fee of P45, 000. 00 per month s t i - pulated in t he contract the gross receipt of pet i - tioner subject to the three per cent (3%) ~o ntrac ­ tor ' s tax as prov ided under the then Section 191 of the National I nterna l Revenue Code? I t i s not dispu ted that t he deficiency asse ss- ment arose f rom r espondent's i mpos i tion of t he t hree percent (3%) .contractor ' s t ax on petitioner ' s enti re monthly gross receipts of P45 , 000. 00 deri ved f r om i ts contract of ser vices and supply (Annex "D" , pp . l G-18 , CTA records) .with the c ity of Cebu dated July 19, 1973, t he perti nent provisions of 8

DECIS I ON -

- .6 - which , f or ready r eference, are a s fol lows : 1.

Tha t the PARTY OF THE FIRST PART shall s upply fu el (Premium or Special Gasoline), l ubrication , al l spare parts , tir es and batteries and shall service or maintain fifteen (15)

Holden Police Cars of the Cebu Police

Department, i ncluding t he suppl y of civilian drivers on a 16-h.our per day basis, at t he following prices , to wit:

(a ) Supply of fuel and l ubr ication, spare parts, and supply of tires and batteries o • ~40,000 . 0 0 (b) Servicing or main- .

tenance of the fif teen

(15) Holden Police Car s ·and the supply of dr i vers •• •• 5 ,000.00

TOTAL MONTHLY RATE

•• ~45,000 .00 The above-quoted prices s hall be indi- vi s ible and inseparabl e; and, shall constitute t he monthly payme:nts for t he supply of fuel and l ubr ication , spare parts, tir es and batter ies and servicing or ma i ntenance of the fifteen (15 ) Holden Police Cars , incl ud i ng t he supply of Dr ivers shall be payable b the PARTY OF THE SECOND PART t o t he PARTY OF THE FIRST PART at t he beginning of each month s tarting on July 1 , ·197 3.

As stated earlier, petitioner aver s tha t f or purposes ot the contractor's tax, only the monthly s um of ~5,000. 00 as compensation for the ser v i c ing or maintenace of c ars and supply of drivers is subject to the contractor ' s tax of t hree percent (3 %) '· the ~40 000.00 fi xed monthly contr act fee f or supplying fu el, l ubricat ion , sp.Jt(:' p.:n l:f; 1• Un·s

DECI SION

CTA CASE

O.

060 - 7 - and batter i e s being the costs of such supplies or products and should not therefore form par t of the gross r e c eipts as t hese ar e proceeds from t hei r sale s to t he City of Cebu .

On the other h a1d , to s ustain his assessment, respondent lays stre s s o n the second por.tion of paragraph 1 of the contract which provides that the quo ted prices o f ~40 ,000.00 and ~5,000 .0 0 shall be indivisible and inseparable .

Peti t i oner would no t be able t o comply with its contractual obli- gati on to service and mdintain t he cars were it not for the use of fuel, lubricants, spar e parts , tires and batteries ; hence , the s upply thereof is an i ntegra l part of the contract of service. As alleged by respondent as special and a f fi rmative de fenses i n h is answer to the peti tion fo r rev i ew : The agreeme n t between pet i tioner and the City of Cebu was to maintain a nd keep in good serviceable and running 6ondition the latter'~ police cars for a fixed fee o f P4 5 ,0 00 . 00 a month; Pet i tioner would not have been able t o comply with its obligation wer e it no t for the use of lubricants,fuel and spare parts, henc e, an integral part of the c ontract f or service which is taxable a s ' ndependent c ontract or under Section 191 (nmv

DECISION -

CTA CASE NO . 3060 8 - Sec .:. 205 ) .o f the Tax Code , as amended 1 The contract fee of ~45,000 . 00 pe r month was fix.e d , i nc l us i ve, ind i visible and inseparable for the maintenance , ser v ice and operation of the go- vernrnent c ars f o r police use a nd no specific price f o r a g i ven quant i ty of f ue l l ubr icants a nd spare parts was t agge d nor we r e said produc ts delivered and received by t he City Gover nment of Cebu; The g ross quar ter l y receipts o f petit i oner for the transaction in q uestion were subst anti ally the same as d istinguished from r ece ipts of ordinar y sales which var y daily.

In refut ing r espo ndent'~ arguments that t he c ontract of ~4 5 ,000 .00 was fixed, i nclusive , ind i- visible and inseparable, petitione r mainta ins that i t s contr ac t with t he City of Ce bu contains b,'o s ubject matters :

one for the s upply o f goods o r t hings, and the othe r for services . .That the supply o r sale of goods on one hand , and the servicing o f car s on t he other a re t oo paten t ly d i s tinct tr a nsac- tions taxable under different provisions of the Tax Code .

And that as f a r as i ts contrac t of supply i s concerned, it i s more of a seller ul iucJ , e t c , than a n independen t contrac tor. (p. 6, pet itioner 's memorandum. )

8'7

DECISION -

CTA CA~E NO. 3060 - 9 - The allegation of petitioner t hat its contract of s upply with the City of Cebu was actually a contract of sal e is not s uppcrted by the evidence and the records .

As cor rectly ooserved by respondent , t here were no s pecitic prices agreed upon by oot h par t1e s tor a given quantity ot the products sup- plied.

The re were no sale s made by petitioner to the City of Cebu , and the tires, luoricants and s upplies were used by petitioner t o put the ca~~ in t he1r prope r order in considerat i on of the monthly payment of P40,uoo. oo .

Control and possession of the goods r emained w1th pet1tioner. Ne ither do the r ecords show t hat petit i oner was enqagea in gener al merchandising as it claims.

If ev idently unde r i ts contract of supply w1th the City of Cebu petit1oner was not a seller of gooc1s, was it t he·n an i nde·penden t con tracto_r? The term "inae·pendent contractm:" as def i ne·d i n Sect i on 191 ot t he Tax Code includes per sons whose activ i t y consists essentially of the sale of any kina of service s f or a fee regardless of whether or not t he performanc·e of t he service calls for the exercise or use ot the physica l or m~ntCi l fC:l- c ult1es of sucQ.---:__ontr actors or th~;ir ernployt'e s.

As aptl y c1ted by r~~por : d~r1 t (pp . H'6 -l0 7 , C'l'f\_

Bd

• '

- 10 - r ecords) '· "the t erm 's.ervices ' involves more than mere labor and signifies much more than merely act of performing l abor, and may include, as well expenditures, materials and things furnished". (Addison Nutler, Inc . v. Commissioner of Taxation, 81 N.w. 2d, 89, 91, 92, 249, Minn. 24, cited in Wor ds and Phr ases , Vol. 38A, page 543; underscoring s uppl ied . )

"Service" i s defined as to perform ser- vices of maintenance, supply, repair, i nstal lati on , distr ibut ion , etc. for or upon, as to service a car, radio set, a ship, a territory."

(Humble Oil &

Re f inery Co. , v. State, Tax. Civ. App. 158, s.w. 2d 338, 339, cited in Words and Phrases, Vol. 38A, page 548.) . Under the afor estated de£ ini tions of services, a contract of supply could indeed be an integral part of a contract of service especially so , where, as in the ins tant case, it i s explicitly specified i n the contract that the s~ipu lated prices for both obligations shall be "indivisible and inseparable."

Other accepted def initions of a "contractor" which would apply to petitione r are as follows : "One who agree s to r1o anythil l(j hn: another; one who execute s plans under a contrac t; one who contracts or covenants, whether with a government or ot her publ i c body or with private parties, to furnish - 11 - supplies, or to construct works, or to erect buildings, or to perform any work or service, at a certain price or rate, as a paving contractor, or a labor con- tractor; one who contracts to perform work1_or supply articles on a large scal e, at a c ertain price or rate , ~ 1n bu i lding hou ses or provisioning troops or constructing a railroad. (Vol.

13, Corpus Juris, p. 211, cited in Luzon Stevedoring Co. v. Trinidad, 43 Phil. 803; Underscoring supplied. ) .

"Cont ractor" is one who, i n the pursuit of an independent business undertakes to do a specific piece of work or job for other pe _sons; one who contracts or covenants with a public body or private party to either cons- . truct works or erect buildings at a specified price or rate; one who con- . l.rc.cts with another to furnish supplies, or construct works or erect buildings or to perform any work or service at a fixed price or rate; one who, as an independent business, undertakes ~: o do specific jobs of work without suumitting himself to control as to the petty details."

(42 Okl. St., Amn. 143, Standar d Accident Ins. Co. v. Basolo, 68 P 2d 804, 806, 180 Okl. 261 cited in Words and Phrases, Vol. 9, page 340; Underscoring supplied.)

Based on the foregoing, it seems clear that petitioner was an independent contractor within t he meaning of Sec tion 191, thus the entire monthly f ees of P40,000.00 and P5,000.00 received under its Contract of Services & Supply with the City of Cebu should be considered as its gross receipts sub- j ect to the 3% contractor's tax. 90

DECISION -

CTA CASE NO. 30GO - 12 - Accordingly, the decision of responden t under review assessing petitioner de·f ic:iency percent age ' tax, inc lusive of surcharge and interest, should be sustained.

The compromise penalty of ~200.00 suggested by responde nt in his assessment should not howeve r be imposed or collected w1thout the agreement and confor mity of petitioner. A d it does not appear that petitioner accep t ed the im- position o f the compromise amount .

(Wonder Mecha-

nical Engineering Corporation vs. Court of Tax Appeals , L-228 05 & 27858, June 30, 1975, 64 SCRA 555.)

Pe titioner Cebu Maintenance Corporation is therefore or de red to pay to respondent Commis- sioner of Internal Revenue t he amo ~mt of ~32,441.14 as deficiency percentage tax for the year 1974, inclusive of interest and surcharge, plus interest at the rate of 14% per annum from March 22, 1977 to J uly 31, 1980 and at the rate of 20% per annum fr om August 1, 1980 until f ully p a id pursuant to Section 193 of the 1977 National Interna l Revenue Code as amended by Presidential Decree No. 1705.

WHEREFORE, the decision appealed from is hereby modified in the sense that the compromise pena lty should not be imposed and is affirmed in 91

DECISION -

CTA CASE NO. 30GO - 13 - al l other r espects .

With costs against petitioner.

I

Quezon City, Metro Manila, March 28, 1983. d/:V

~NTE FILLER

Presidin4 Judge

WE CONCUR: