Republic Op Thi. Philipplnei Court of Tax Appeals Quezon City Arnoldus Carpentry Shop, Inc. vs. Commissioner of Internal Revenue

DECISION -

- 2 - of the bus i ness t ax liabilities of petitioner a t the above address pursuant to Le ter of Authority No. 08307 A dated November 23 , 1978 .

On March 29 , 1979 , the said examiner s , Messrs . Honesto A. Verge! de Dios and Volta ire v. Tr i nidad , made a report of their inves igati on to the Commi s- sioner of I nternal Revenue, c lassifying herein peti- tioner as a contractor , citing Luzon Stevedoring Co .

v. Tr inidad , 43 Phil . 809 , alleging as r eason for said classification that petitioner renders services in the course of an independent occupation representing the will of his employer onl y as to the result of hi s 1110 r k and not as t o the means by which it is accomplished. The said examiners assessed petitioner f or defic iency t ax in the total amoun

of EIGHTY EIGHT THOUSAND NINE

HUNDRED SEVENTY TWO PESOS & '£WENTY THREE CENTAVOS

(PSS, 972. 23) •.

On January 31, 1981, petiti oner received a l etter/ not i ce of tax deficiency assessment inclus ive of sur- charge and interest for the year 1977 in the amount of

ONE HUNDRED EIGHT THOUSAND SEVEN HUNDRED TWENTY PESOS

& NINETY TWO CENTAVOS (P108 , 720. 92) •. Said tax defi- · ciency was due to the f act that the examiners of the Internal Revenue classified petitioner as a cont ractor instead of a manuf acturer bas ed on the Purchase Or ders rece i ved from petitioner's customers .

DECISION -

CTA CASE

0 3357 - .3 - On February 19 , 1981, petitioner filed its protest and informed the public respondent that it was because of the 7% percent tax exemption on foreign sales granted under Section 202(e) .of the National Internal Revenue Code to encourage exports , exploited f oreign markets resulting to 52% increase in the total sales for 1977 through the sale of knockdown chairs , church benches, kni fe r acks and barometer cases .

~ on June 23, 1981 , petitioner r eceived the final decision of the Commissioner of Internal Revenue , Ruben B. Ancheta, dated May 29, 1981 which stated thus "It i s the sta~d of this Office that , you are considered a contracto and not a manufacturer .

Records show that you manuf- acture woodworks only upon previous order from supposed manufacturers and only in accordance with the l atter's own des i gn , model number, color , etc .

Accordingly, it is hereby r equested that you settle the aforesaid assessment without f urther delay .

This i s our final decision and should you disagree, you may appeal to the Court of Tax Appeal within thirty (30 ) years from date of your r eceipt hereof; otherwise , this Office wi ll take the necessary action to enforce the collection of the aforesaid assessment . "

Averring that the aforesaid decision of the Com~ missioner of Internal Revenue is contrary to law and the facts of the case , petitioner filed i ts appeal to this Cour t on July 22 , 1981 .

- 4 - As special and affirmative def enses, respondent alleged in his answer t hat:

~ Petit ioner is a contractor under Section 205 of the 1977 Tax Code as amended , being engaged in the business of making woodworks like TV cabinets, upon previous orders fr om customers and i n accor dance with the latter 's specifications.

The assessment for deficiency percentage t ax for the year 1977 in the amount of ~108, 720 . 92 was made in accordance with law and regulations . Being a contrac tor and not a manufacturer, peti- tioner is not entitled t6 the percentage tax exemption under Section 202 (formerly Sec tion 188 ) of the Tax Code of 1977 , as amended .

Is petitioner a manufacturer or a contract or for percentage tax purpose? ?

~It is contended by respondent that since peti- tione r rendered service i n the course of an indepen- dent occupation representing the will of its employer only as to the r esult of i ts work and not as to the means by wh ich it is accomplished, pe titioner should be considered a contractor and not a manufacturer . In support thereof, r espondent presented letter- quotat i ons f rom petitioner to its customers and purchase orders f or television cabinets from local

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5 - firms for various years starting from 1964 to 1979, all purporting to show that in placing such orders , petitioner us cust omers specified in detail the kind of cabinets they wantede (Exhs . " 2" to "13" , pp. 1- 13, BIR records .)

Since these cabinets were manuf- actured exclusively for special customers , that is , the television -~ak i ng firms which ordered them and not for the general public, respondent asserts that their manufacture were contracts for a piece of work and not contracts cf sale.

(Respondent's Memorandum, p. 177 ,

CTA

records. ) ~.

~ Article 1467 of the New Civi l Code distinguishes a contract of sale from a contract f or a p iece of work as follows:

"A contract f or the delivery at a certain price of an article which t he vendor in t he ordinary course of his busi - ness manufac tures or procures for the general market, whether the same i s on hand a t the time or rot, is a contract of sale, but if t he goods are to be manuf- actured specially f or the customer and upon his special order , and not for the general market, it is a contract for a piece of worke n " Sales of articles made upon previous orders of customers are generally not considered t axable sales. However , where the articles made upon previ ous order s are those which the manufacturer makes for sale to the public , the fact that a sale of such article is made ~ ·

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- 6 - upon previ ous order , because t here was none in stock at the time, will not af f ect the t axability of the trans action as sale .

(Gen . Cir . No . 509 , Nov. 6 , 1941; Inchausti vs . Cromwell , 20 Phi l . 345; Celest ino Co vs .

Collector of Internal Revenue , 99 Phi l. 841 ; Commis- sioner of I n t er nal Revenue vs . Engineer i ng Equipment, L-27044 , J une 30, 1975, 64 SCRA 590 .) Thus , for peti- t ioner ' s transact ions to fall under the category of sal es , i t must be shown that peti tioner manu f actured i ts woodwork p roducts for the general market. Pet i t i oner cla i ms , a nd the records bear petitioner out , that it ha d a ready· s t ock of i t s s hop products fo r sal e to its f ore ign and l ocal buyers . As a matter o f fact , t he purchase orders fr om its foreign buyer s show tha t they ordered by r eferring t o the model s des i gnated by peti tioner .

Even purchases by local buyers for tel ev i sion cabinets (Exhs . "2" t o "13" , pp . 1- 13 , BIR - recor ds ) .were by orders fo r existi ng models , except only f o r some adjustments in s i zes and accessor i es utili zed.

Illustrat ions of some of these r eady pro- ducts , such as ba rometer cas e s , knife racks , chuf h fur- n i ture , chairs and s everal purchase orders f rom foreign buyers for the years 1977, 1978 a nd 1982 were offered by peti t i oner to substanti ate its cla i m. ( E xh s •

11 U

11 ,

11 U -1

11 to 11 U-7" , pp . 104-108 , BIR recor ds ; Exhs .

11 P

11 , 11Q",

11 Q-1 11

to 11 Q- 3" , pp . 36- 44 , CTA records .)

DECISION -

CTA CASE NO . 3357 - 7 - ~ With regard to the telev ision cab i~s , petitioner presented three witnesses- i t s bookkeeper, production manager and manager who tes t ified that samples of tele- v i sion cabinet s were designed and made by petitioner , f rom which models the television c ompanies such as Hi tachi , National and others might cho%e, then specified whatever innovations they desired .

If found to be sale- able, some telev ision cabi nets were manufactured for display and s old to the general public . These cabinets were not exported but only sold local ly . 0 (t . s . n. , pp . 22- 35, February 18 , 1982; t.s.n., pp . 7-10 , March 25, 1982; t . s . n ., pp . 3-6 , August .l O, 1983. ) Upon examination , petitioner ' s manager testi fied on the purchase orders f or television cabinets as follows:

"Q.

In the purchase order , i t states here • d As per our drawing and approved sample. Would you know why the purchaser always make mention as per their drawing~?

A.

We send them our model .

Once they selected on the model , they will make a drawing f rom our sample and see how they can f i t in the models i mported . " (t. s.n . , p . 5 , August 10, 1983.) . ~. I n the case of peti tioner ' s other woodwork products such as barometer cases , knife racks, chur ch furni t ure , school furniture, knock down chairs, etc., petitioner 1 s above-mentioned witnesses t esti fied that these were manufactured without previous orders . Sampl es were

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DECISION -

CTA CASE NO . 3357 - 8 - displayed, and if in stock,were available for immediate ·sale to local and foreign customers* Such testimony was not contradicted by respondent.

And i n all the purchase orders present ed as exhibits , whether fr om f oreign or local buyers , reference was made to the model numbe of the product being ordered or to the sample submi t ted by petitionerc " Respondent ' s examiners , in the i r memorandum to the Commissioner of Internal Revenue, stated that petitioner manufactured only upon previous orders from customers and "only in accordance with the latter 's own design , model number , col or , etc."

(Exh . "1", p . 27 , BIR records.)

Their bare statement that the model numbers and designs were the customers ' own , unaccompan ied by adequate evi- dence , is di f ficult to believe.

I t i gnores commonly accept ed and recogn ized business practices that it is not the customer but the manuf acturer who furnishes the samples or models from which the customers select when placing their orders.

The evidence adduced by petitioner to prove that the model numbers and designs were its own is more convincing.

It i s clear from the foregoing that petitioner · manufactured its products for the general market . The fact that petitioner kept models of its products, inclu- ding television cabinets, which were availed of by i ts r.u

- 9 - local and foreign customers , indicate that these pro- ducts were for sale to t he general public and not for speci al orders .

However , would certain specifications ordered by some customers on the television cabinet models as to material , finish, hardware, etc . , be suffi- cient to divest petitioner of its character as manufact- urer? ~1 The case of Celestino Co & Co. vs. Collector of Internal Revenue , No . L-8506, 31 August 1956, 99 Phil. 841 , cited by petitione r , is in point. In this case, the Supreme Court held that:

"A f actory which habitually makes sash, windows and doors , and sells the goods to the public is a manufacturer .

The fact that the windows and doors are made by it only when c us tomers place their orders and according to such form or combination as sui t the fancy of the purchasers does not alter the nature of the establ i shment."

Pertinent portions of the decision read as follows : "The important thing to remember is that Celestino Co & Company habitually makes sash , windows and doors , as it has represented i n its stationery and advertisements to the pub- lic.

That it amanufactures ' the same is prac- tically admitted by appellant itself. The fact that windows and doors are made by it only when customers place their orders , does not alter t he nature of the establishment, for it is obvious that it only accepted such orders as called for t he employment of such materials-~oulding, frames, panels-as it ordinarily manufactured or was in a position habitually to manufacture.

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- 10 - That the doors and windows must meet desired spec i fications is neither here nor there If these specifications do not happen to be of the kind habitually manuf- actured by appellant - special forms of sash, mouldings or panels - it would not accept t he order - .and no sale is made. If they do, the transaction would be no different from a purchase of manufactur ed goods held in . stock for sale; they are bought because they meet t he specifications desired by the purchaser .

Nobody will say that when a sawmill cuts lumber i n accor dance with the peculiar specifications of a cus tomer - 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.

The Or i ental Sash Factory does nothing more t han sell the goods that it mass- produces or habitually makes; sash , panels , mouldings, frames , cutting them to such s izes and combining them in such forms a s its customers may desire.

XXX

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It i s at once apparent that the Oriental Sash Factory did not merely sell its services to Don Toribio Teodoro and Co.

(To t ake one i nstance) because it also sold the mater ials .

The trut h of the matter i s that i t sold mater ials ordinarily manufactured by it - .sash, panels, mould- . i ngs- to Teodoro & Co., although i n such form or combination as s uited the fancy of the purchaser.

Such new form does not divest the Oriental Sash Factory of its character as manufacturer .

Neither does it take the transaction out of the cat e- gory of sales under Ar t icle 1467 above quoted, because although the Factory does not, in the ordinary course of its business , manufacture and keep on stock doors of the kind sold to Teodoro, it could-stock and/or probably had in stock the sash , mouldings

DECI SION -

CTA CASE NO . 3357 - .11 - and panels it used t here f or (some of them a t least ) •.

In our op1n1on when thi s Factor y accepts a j ob that r equi res t he use of extraord i nary or additional equ ipment , or i nvolves ser v i ces not generally per- f ormed by it - .it t hereby contracts for a p i ece of work - .fi l ling special orders wi thin the meaning of Ar t i cle 1467. The orders herein exhibited were not shown to be speci al o They were merely order s for wor k - n::thing is shown t o ca l l them special r equir ing extraor dinary s er vice of the f ac tory g" " In l ine wi t h the r uling l a id down i n the af or e- quoted decisi on of the Supreme Cour t , there seems t o be no doubt t hat petitioner i s a manufactur er for percent - . age t ax purposes.

In computing petitioner ' s t ax liability , respondent i mpos ed the 3% contrac t or ' s t ax on petiti oner's t otal gross sales f or 1977 , l ocal and export , on t he ground tha t being a contractor and not a manufac turer , peti- tioner cannot avail of t he percentage t ax exemption on expor t sal e s .

Petitioner ma intai ns t hat as a manufacturer , it i s ent i tled to sai d tax exemption on its export sales under Section 188 (e ) Lnow Section 202(dl7. of the Nati onal I nter nal Revenue Code ,\\ the appl icabl e provisi ons of which are as follows :

"SEC . 188 .

Transactions and persons not subj ec t t o percent age tax.- . In computing the tax imposed i n secti ons one hundred e i ghty- f our, one hundred eighty-four-A, one hundred

DECISI ON -

CTA CASE NO . 3357 - 12 - eighty-five , one hundred e i g hty-f ive -~ and one hundr ed e ighty-six, and one hundred eight y-six-B, tr ansac tions i n t he fol lowing commodi ties shal l be ex- cluded:

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(e) Articl es sh ipped or expor ted abroad by the . manufactur er or producer , i rrespective of any shi pping arrangement t hat may be agr eed upon which may in- . fluence or deter mine the transfer or ownership of t he arti cles so exported : Provided , however , That sales to tourists , which ar e paid for in the fore ign cur- . r ency and on which sales tax had been previousl y paid, shall be considered ex- . port sales , i f t he articles purchased are actually r emoved by t hem f rom the Philip- pines upon t heir departur e ."

As per respondent ' s exami nation , the total gross sal es of petitioner for 1977 , l oca l and export, amount ed to ~5,162 ,7 8 7.59.

(Exhs. "1" and "14", pp . 24, 26 , BIR records .. ) . Pet itioner ' s gross l ocal sa l es as r epor t ed i n i ts quarter ly percentage tax returns f or 1977 t otalled ~2 , 471 , 981.62.

(pp .

1 6 - ~9 , BIR records .)

The d i fference of ~ 2, 690,805 . 97 between pe tftioner ' s total gross sales of ~5 , 162 , 787 . 59 and its gross l ocal sales of ~ 2, 4 71 , 981 . 6 2 must be its gross export sal es which is 52% of t he total gross sales.

This can be gathered from the letter of petiti one 's manager to respondent Commissioner of In- ternal Revenue protesting the def iciency assessment, wher ein he expl ained t hat it was on account of t he 7% percentage t ax exemption on export s al es that petitioner exploited the f oreign markets which resulted i n the

DECISION -

CTA CASE NO . 3357 - 13 - increase of i ts foreign sal es to at least 52% of i ts total gross sales in 1977.

(Exh . "16", p . 33, BIR records.)

~ n classi fying petitioner as a contractor, r es- .. pendent relied solely on the findings of his examiners f rom the purchase or der s that television cabi nets were ordered from petitioner in accordance wi th the customers ' specifications.

There were no Euch f indings however i nsof ar as t he other products of petitioner were con- cerned , including those exported , wh i ch comprised 52% of the total gross sales.

Thus , the s eeming inconsi stency , as peti tioner puts i t , o~ the basis of respondent' s a s sessment for deficiency contractor ' s t ax. Respondent gave no other r eason for i mposing the 3% tax on peti tioner ' s export sal es aside f r om the f act that peti tioner is allegedly an independent contr actor taxable under Section 191 (now Section 205) ? f the Tax Code and not a manufacturer t axable under Sections 184, 184-A, 185, 185-~, 186 or 186-B of the Tax Code.

(Res-

pendent ' s memor andum, p . 180 , CTA recor ds .) . Cons i dering that we have found petitioner to be a manufacturer and not a contract or f or percentage mx purposes , there is no question that petitioner i s enti t led to the percent- age tax exemption on i t s export sales under Section 188(e) Lnow 202(dl7 of the Nati onal Internal Revenue

DECISION -

CTA CASE NO . 3357 - 14 - Code e Accordingly, r espondent erred in assessing petitioner f or deficiency contractor 's tax i n t he amoun t of ~108 , 720.92, inclus i ve of surcharge and interest, f or the year 1977.

WHEREFORE , t he decision appealed fr om is hereby reversed.

Presidin

WE CONCUR:

,