CTA Case No. 2372 (Decision)

COU~T C.:/ �,; . _,: AF'Pili\LS QU F:.ZON CITY ENGINEERING DEVELOPMENT COR- PORATION OF THE PHILIPPINES , Petitionerr - versus - C.T.A. CASE NO. 2372 HON. MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, Respondent. X- - - - - - - - - - - - - X DE C I S I 0 N In this suit for the refund of contractor 1 s tax alleged to pe erroneously and illegally collected, the question is whether the fees received by petitioner Engineering Development Corporation of the Philippines for rendering engineering and technical services a s consultants in the development of a government arsenal are subject to the percentage tax under the then Section 191 of the National Internal Revenue Code. The following are the pertinent facts stipulated and submitted by the parties: "COME NDW the parties in the above-entitled case, through their respective counsel, and to this Honorable Court respectfully submit the following stipulation of facts, to wit: 1. Petitioner, a corporation duly organ- ized and existi ng i n accordance with the laws of the Republic of the Philippines, is autho- rized to engage in the business of, among others, "general scientific, engineering and technolo- gical services in all the various branches thereof including but not limited to, evaluation, appraisal, market studies, project reports, management, consultation , construction super- vision, training and/or engagement in any work 9 A')..rO~

-,... .. DECISION - CTA CASE NO. 2372 - 2- � or plan as pr oject for: "(a ) XXX XXX XXX {b) {c) XXX XXX XXX {d) Civil works project including roads {e) and highways, bridges, ports and harbors, a irfields and airports, build ings , land development, sewe rage and sewerage disposal systems, buildings and str uctures of every ki nd wi th the ir mechanical, electrical and air conditioning systems and other c ivil works~ XXX XXX XXX >{XX XXX XXX (Amended Articles of Incorporation dated February 17, 1955, p. 101, BIR recs. ) ; 2 . On Apr i l 25, 1968, petitioner entered i nto an agreement with the Depar tment of Nat iona l Defense {DND for brevity), a government agency, for the purpose of rendering engineering and technical services as 'coNSULTANTS i n the develop- ment of a Government Arsenal at Lamao , Limay, Bataan . (Contract for Architectur al and Engineer- i ng Services dated April 25, 1968, pp. 15-32, BIR � rec.) ; 3. In accordance with the aforesaid agree- ment or contract, petitioner undertook to prepare and submit for approval by the Department of National Defense "pre l iminary stud ies, l ayo~t plans , and preliminary estimates of cost of all structures, utilities and facilities " as enumerated in Article B (2) of the ir contract ; 4. I n consideration of the services rendered by petitioner as CONSULTANTS, the DND paid t he total amount of FOUR HUNDRED SIXTY THOUSAND PESOS (F460,000.00 ) as fixe d fee (Article D, Contract, p. 24, BI R rec.)~ 5. As per verification of pet iti one r's claim for refund, it was ascertained that petitione r under took engineering and architectural services such as the "preparation of reports , plans, pre- liminary and final drawings, layouts, maps and 27 0

� D:':CI SION - CTA CASE NOe 2372 - 3- cost estimates of all structures, utilities and other data," x x x in connection with its contract with the DND (5th Indorsement, Nov. 19 , 1974, p. 59, BIR r ecs.); 6 . To accomplish its undertaking with the DND, petitioner employed the services of technical � men for the implementation of the . agreement (Amended Articles of Incorporation, supra); 7. The foregoing partial stipulation of facts is being submitted by the parties without prejudice to the presentation of aaditiorial evidence in suppor t of their respective contentions." The only additional evidence presented during the hearing of this case, aside from the documentary evidence which are already found in the records of the Bureau of Internal Revenue pertaining t o this proceeding, is the testimony of petitioner's witness which is mainly to the effect that its line of business is strictly confined to engineering designs and consultation; petitioner is not and has ne~er engaged in actual construction work; while in the contract with the Department of National Defense, petitioner is authorized to hire technical men for � the implementation of the said agreement, the hiring was limited to c iv il engineers, medhanical engineers, draftsmen, surveyors, geodetic .engineers and structural engineers , all licensed professionals with the exception of the draftsmen? these technical men helped in the preparation of the designs; and sorr~ laborers were hired by the surveyors to help them in the survey. (pp . 8; 10-11; 12- 15 , t . s.n., Feb. 17, 1978.} The above testimony �' 271

DEC'ISION - CTA CASE NO. 2372 - 4- was not contradicted by respondent. The law under which respondent � commissioner of Internal Revenue assessed and collected the contractor 's tax in question in January, 1970, was found in Section � 191 of the National Internal Revenue Code, the pertinent provision of which read at the time as follows: SEC. 191. Contractors, proprietors or operators of dockyards and others.- A con- tractor 's tax of 3% of the gross receipts is hereby imposeq on the following: (1) Gener al engineering, general building and specialty contractors as defined in Republic Act No. 4566; XX XX XX XX And under Section 9 of Republic Act No . 4566, the terms "contractor ", "general engineering contractor", "gene- ral building contractor" and "spe.cialt~l contractor" are defined as follows: SEC. 9 . Definition of terms.- As used in this Act: (a) "Persons" include an individual, firm, partnership, corporation, association or other organization, or any combination of any tnereof: (b) "Contractor" is deemed synonymous with the term "builder" and, hence, any person who undertakes or offers to undertake or purports to have the capacity to undertcke or submits a bid to, or does himself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, rail- road, excavation or other structure, project, development or improvement, or to do any part thereof , including the erection of scaf- -" folding or other structures or wo r ks in

' '! DECISION - CTA CASE NO. 2372 - 5- connection therewith. The term contr actor includes subcontr actor and specialty c on- tractor . (c ) A "general engineering contractor " is a person whose principal contracting business is in connection with fixed works requiring specialized engineering knowledge and skill , including the f ollowing divisions or subjects : irrigation, drainage, wa t er power, water supply, flood control, inland waterways, harbors, docks and wharves, ship- yards and ports, dams, hydroelectric projects, levees, river control and reclamation works, railroads , highvlays, streets a'nd ro ads, tunnels, airports and airways, waste reduction plants, bridges, overpasses, underpasses and other similar \Wrks, pipelines and other syste~ for the transmission of petroleum and other liquid or gaseous substances, l and leveling and earth moving projects, excavating, grading, trenching, paving and surfacing work . (d) A "general building contr actor" is a person whose principal contracting business is in connection with any str uc- ture built, being built, or to be bu il t, for the support, shelter and enclosure of per sons , animals, chattels or movable property of any kind, requir i ng i n i ts contruction the use of mo r e than two unrelated building t r ad e s or crafts, 6r to do or superintend the whole or any part thereof. Such structure includes sewer s and sewerage disposa l plants and systems , parks, playground s a nd other r ecre- ational works, refineries , chemical plants and similar industr ial pl ants requiring specialized �engineering knowledge and s kill, powerhouses, power plants and other utility plants and installations, mines and metal- lurgical plants, cement and concrete works in connection with the abov e-mentioned fixed works . A person who merely furnishes materials or supplies under section eleven without. fabricating them into, or consuming them in t he pe r formanc e of �t he wor of the gener al bu i ld ing con tracto r does not necessari l y fal l within t his definition. (e ) A "specialty contrac tor" is a person whos e operations pertain to the

DECISION - CTA CASE NO. 2372 - 6- performance of construction work requiring special skill and whose principal contrac- ting business involves the use of specialized building trades or crafts. Adverting to the terms of the statute, it is quite clear that the Government's right to collect the con- tractor's tax under the then Section 191(1) of the National �Internal Revenue Code is anchored upon the condition that the person from whom the tax is collected is a contr acto.r \'lhet.her he is a general enginee r ing, general building or specialty contractor. The accent is on the word "cont ractor " and as defined by the law, it is synonymous \'lith the "builder", the "person who undertakes or offers to undertake or purports to have the capacity to undertake or submits a bid to, or does him- self or by through others, construct, alter, repair, add � to, subtr act from, improve, move, \�lreck or demolish any building, highway, road , railroad, excavation or other structure, projec�, development or improvement, or to do any part thereof, including the erection of scaffoldin~ or other structure-s or works in connection therewith." A$ to whether the contractor is a general engineering contractor, general building contractor, or special ty contractor, refers merely to the work, project, structure, construction, undertaking or activity to which his building or contracting business is connected or in which he sp~cializeso The statute specifies, and defines, a /1 '"")- J-j1 L .

----------~------------------------------�~--~~--� =Ge~w~=~, =-~~~�~�~~� v~n~ , , '"�~-----~~~ ~~ t ' DECISION - CTA CASE NO. 2372 - 7- contractor, and only th~n is he subject to the contractor's tax. Now, to the case at bar. Here, petitioner Engineer~ng Development Corporation of the Philippines is authorized to engage in the businesG of, among others, "ge neral scientific, engineering and technological services in all the various branches thereof including but not limited to, evaluation, appraisal, market studies, project reports, management, consultation, construction supervision, training and/or engagement in any work or plan as project for civil works project, including roads and highways, bridges, ports and harbors, airfields and airports, buildings, land d~veloprnent, sewerage and sewerage dis- posal systems, buildings and structures of every kind with their mechanica~, electrical and ~ ir conditioning systems and other civil \<lorks." (Par. 1, Partial Sti- pulation of Facts.) As agreed upon by the parties, on April 25, 1968, petitioner entered into an agreement with the Dep~rtmen~ of National Defense, a government agency, for the purpose of rendering engineering and tec hn ical services as CONSULTANTS in the development of a Government Arsenal at Lamao, Limay, Bataa~ (Par. 2, Partial Stipulation of Facts.) In accordance with the aforesaid agreement or contract, petitioner undertook to prepare and submit for approval by the Department of 27 5

DECISION - CTA CASE NO. 2372 - 8- National Defense "preliminary studies, layout plans, and preliminary estimates of cost of all s tructures, titilities and facilities. (Par . 3, Partial Stipulation of Facts.) And as testified to by its witness, peti- tioner's line of business is strictly confined to ~ngineering designs and consultation~ it is not and has n~ver engaged in actual construction work . (p. 8, t.s.n., February 17, 1978.) From this state' of facts, nothing is said, or from which a conclus i on can be drawn, that pe ti tioner built or has undertaken or offered to undertake or purported to have the capacity to undertake, much less submitted a bid, by itself or through others, the construction, alt~ration, repair, improvement or addition to the Government Arsenal at Lamao, Limay, Bataan. As agreed upon by the parties, petitioner merely rendered engineer- ing and technical services as CONSULTANTS in the deve- lopment of the government arsenal by preparing and sub- mitting for approval by the Department of National Defense "preliminary studies, layout plans and prelimi- nary estimates of cost of all structu~es, utilities and facilities." Rendering engineering and technical ser- vices as CONSULTANTS cannot by any stretch of the ima- gination be considered as undertaking, offering to undertake, or purporting to undertake the construction ,

ECISION - CTA CASE NO. 2372 - 9- alteration or i~provement of . the gove rnment .ars~nal at Lamao, Limay, Bataan, for the simple reason that one involves professional engineering and architectural ~ervices whi le the other refers to t he actual building or construction of the arsenal itse lf . Thu s: 1 . In Benjamin Hilado vs. Melecio R. Domingo, CTA Case No. 712, June 16, 1961, this Court ruled that an ar c hitect whose occupat i on is t o form or devise plans and specifications for buildings or structures, and to superintend their construction is not a contractor within the purview of Section 191 of the National In ternal �Revenue Code. Unli ke in the instan t case, the taxpayer in t he Hilado case, after preparing t he plans , even super vise the construction work to the end tha t it con- formed with the s pecifica tions; yet the Cou rt held t hat his activities as such are inherent in his profession as an architec t and these alone do not automatically make him a contractor within khe i nte nt of Section 191 of the Code. 2 . In Avec i lla Bu i lding Corporation vs. Commissioner of Internal Revenue, CTA Case No. 1827, November 10, 1975 , it was held that a domestic corporation engaged in the business of general engineering and contracting of all kinds of constructions and structures; employing and contracting wi th architects , engineers , surveyors, j

DECISION - CTA CASE NO . 2372 - 10 - chemists, and other technical men, to perform engineering and architectural \'lork, including the pre-paration of surveys, plans, specifications, e~timates, etc. and to act as consulting and/or supervising engineers and architects in connection with the contracting and building business, is not subject to the contractor's percentage tax under Section 191 of the National Internal Revenue Code, if it merely provided the necessary resident superintendence and inspection on behalf of the owner of the building over t6e constr~ction undertaken by the ~ppointed contractors and the services of technical experts in the construction thereof. Since petitioner Engineering Development Corporation of the Philippines mer~ly rendered engineering and technical services as consultants in the development of a government arsenal by prep~ring and submitting for approval by tho Department of National Defense preliminary studies, layout plans and preliminary estimates of cost of all struc~ures ' � utili ties and facilities without actually building or constructing tge arsenal itself, or even providing the necessary superintendence and inspection of the construction, the professional and technical services performed by petitioner for which it was made to pay the contractor's tax cannot be considered as "construction work" contracting con- templated by the then Section 191 of the Revenue Code � . ') .-; 8 r.,; I J

--------------.....,....-- ~- - --� -�~--��----- DECISION - CTA CASE NO. 2) 72 - 11 - And t he sit1a t i on he r e p resented would not make pe t itioner an "independent contractor" as contemplated in Section 191 befor e its amendme n t by Presidential Dec re e No . 69 because the law enumera te s the kinds of contrac t o rs who are s ubject t o tax and adds to t he l ist "other independent contr act ors". It is a s ettled r ule o f s t a tu tor y c on struct i on th a t where general wor ds f ollow the designation of par ticular things or classes of person s o r subje6ts, the gener a l wo rds are to be construed as inc luding only the persons or subjects of t he same cla ss or genera l nature as thos e specifi- coll y enumerated . In lis t ing the persons subject to the contractor ' s tax under the then Section 191 of the National I nternal Revenue Code , the law begins by enumerating them and t hen adds a gener al clause pertaining to "other inde- pendent contrac t or s '' . This shows that th e "o t her independent contractors" that may come under the general clause should be of the same nature or class of persons as those that have preceded them appl ying the ru l e of construction known as ej us dem gene ris. In othe r words, i n o r de r that a pe rs on may be subject to the cont ractor's t ax under the general clause of "other independent contr ac t or s'', i t is necessary t hat he belongs t o t he same kind or c lass t her e in s pecif i- c ally enumerated . Othe r wise, he should be deemed t"I' ;9 ')- f.,

DECISION - C'l'A CASE NO. 2372 - 12 - foreign or extraneous and is not included. (Ollada vs. Court of Tax Appeals, 99 Phil. 604, citing Crawford , The Construction of Statutes, pp. 326-327; Enrile vs. Court of Appeals, L-2 75 49, Sept. 30, 1969, 29 SCRA 504.) � When Congress added "other independent contractors" at the end of the enumeration of the persons who are subject to the contractor's tax, the same should be c on strued to include only those who are engaged in business similar to 'those enumerated. (S toe!� Transfer Service, Inc. vs. Comm issioner of Internal Revenue, CTA Case No. 2003, July 22, 1971, certiorari denied i~ L-34582, January 25, 1972.) As stated earlier, the contractor's tax was im- posed and collected from petitioner for rendering engineering and technical services as consultants in the development of a government arsenal at Limay , Bataan, when it undertook to prepare and submit for approval by the Department of National Defense preliminary studies, layout plans and preliminary estimates of cost of all structures, utilities and facilities. The business of petitioner does not come or belong to the same kind or class of businessess enumerated in SPction 191 of the Revenue Code. At no point of similarity or resemblance may the rendition of engineering and tech- nical services as consultants be of the same kind or class as those specifically enumerated in Section 191 280

DECISION - CTA CASE NO. 2372 - 13 - of the Code. And ~hile there is no controversy that the contractor 1 s tax is a tax on the sale of services or labor, as respondent argues, it is to be stressed, of course, that it must be a sale of S8rvices or labor of persons who are listed under Section 191 of the Code and those �Who are engaged in business of the same nature or class as those enumerated therein. It is true that under the present provisions of . Section 191 (now Section 205) of the National Internal Revenue Code, � as amended by Presidential Decree No. 69, the term "independent contractors 11 nov1 include persons whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such con- tractors or their employees. Without i n the least attempting to express an opinion whether or not a person who renders engineering and technical services as consultan.t is a.n independent co� ntractor or o f the same kind or class of persons subject to the contractor's tax und~r Section 205 of the Revenue Code, it is to be observed that the amendment to the law pertaining to the definition of independent contractor was introdac~d only by Presidential Decree No. 69 in November, 1972, while the contract of services involved herein on whic~ the contr acto r's tax in question was co llected 2S t

DECISION - CTA CASE NO. 2372 -14 - was entered into on April 25, 1968 and the tax was withheld and paid to the Bureau of Internal Revenue on January 28, 1970. Revenue laws are prospective in operation, unless the intent that the statute operates retrospectively is distinctly expressed or necessarily implied. (Loren zo vs . Posadas, 64 Phil. 353; Corn- rnisioner of Internal Revenue vs. Filipinas Cia de Seguros, 107 Phil. 1055.) Not much need be said on respondent's point that petitioner as a corporation should be distinguished fr om the licensed professionals employe d by it, i rn- plying that a corporation cannot be considered a professional, professionalism being an individual attribute. Section 24 of Republic Act No. 544 , as amended by Republic Act No . 1582, otherwise known as " An Act To Regulate The Practice Of Civil Engineering In The Philippines" , provides: "SEC. 24 . The practice of civil engi- neering is a professional service, adrn~ssion to which must be determined upon individual, personal qualifications. Hence, no firm, partnership, corporation or associ a tion may be registered or licensed as such for the practice of civil engineering: Provided, however, That persons properly registered and licensed as civil enginee r s may, among themselves or with a person or persons pro- perly registered and licensed as architects, form, and obtain registration of, a firm, partnership or association using the term "Engineers" or "Engineers and Arch i tects" , but, nobody shall be a member o r par tner" of such f i rm , partnership or association unless "he is duly licensed civil engineer or arch i tect,

' DECIS ION CTA CASE NO. 2372 - 15 - and the members who are civ il engineers , shall only render work and services proper for a civil engineer, as defined in this Act, and the members who are architects shall also only rende r work and services proper for an architect, as defined in the law regulating the practice of architec- ture; individual members of such firms, partnersh ip or associaticin shall be respon- sible for . their own respective acts. 11 There seems to be no doubt, therefore, that under the law a corporation is allowed to practice the profession of engineering and ~rchitecture. The net result is that petitioner was not a contractor within the meaning of the then Section 191 of the National Internal Revenue Code with respect to its agreement with the Department of National Defense for the purpose of rendering engineering and technical servi~es as consultants in the developme~t of a govern- ment arsenal at Limay, Bataan, in consideration of the services of which it was pa id the total amount of ~460,000.00 and from which the sum of Pl3,800.00 was withheld and remitted to the Bureau of Internal Re venue as con tractor's tax. Not being subject to the contrac- tor's tax under Section 191, the sum of ~13 ,800 . 00 should be refunded to Engineer ing Development Corpo- ration of t he Philippines. As roadblock to petitioner's route t o refund, respondent however argues that to entitle a taxpayer to a recovery of a t ax erroneously or illegally collected , Section 306 (now Sec t i on 292) of the National Internal '".) "-' 0) ~ �~) J

-~~---~~--~-~-------~-- ------�--~-~- = ~~=v-�--�>e-=--= . ���"-=-===.:::::..;�=-- ����-��=.:;.>,.;.? I DECIS ION - CTA CASE N0. � 2372 - 16 - Revenue Code, in relation to Section 309 (now Sec t ion 295 ) of the same Code, requ ires that a written claim fo r refund wi th the Bur eau of Internal Reve nue must be filed wi thin two years after payment and that the action for recovery should be instituted in court also within t wo years after payment . Petitioner havi ng failed t o present evidence to prove that it has filed a for mal claim for. refund with the Bureau of Internal . Revenue \'lithin two years from the date of payment befor e . instituting thi s judici al suit for re fun d in this Court, responden t ma intains that petitioner is not entitled to recovery of the contractor's tax in question. Assuming arguendo that the letter of petitioner. dated July 15 , 1969 rec;ruesting "clarification" as to the basis of the action of the representative of the Auditor Ge neral in the Department of National Defense in \�l ithho lding a 3% contractor's tax f rom thelast payment of i t s professional arc hitectural and engi- nee ri ng s erv.ices as c onsultan ts in the development � of a gover nment arsenal at Limay, Bataan, is not tan- tamount to a r equest for refund or tax c redit within the cbn templation of the la~ as argued by respondent, it wil l be observed that in its letter of ganuary 24, 1972 and filed with the Appel la t e Division o f the Bureau of Internal Reveriue on January 25, 1972 (pp. 37- 38 oi the BIR Reco r ds) , peti t i oner had indicated with ') '1 I"W~ '.~J~ L..

� DECISION - CTA CASE NO. 237 2 - 17 - reasonable c larity t he fact that it is demanding the return o f the amount of Pl3 ,800.00 representing 3% contractor's tax paid under Offic ial Receipt No. QC 3931029 dated January 28, 1970, and the grounds upon which it is making its demand. The said letter is quoted in full as follows: January . 24, 1972 The Commiss i oner of Interna l Re venue M a n i 1� a Attention: Chief, Appellate Division Dear Sir : This has reference to our claim for refund subject of our letters dated July 15, 1969, August 8 , 1969, and July 29, 1971, (copies of which are hereby enclosed) � We wish to reiterate the basis of our claim as f ollows: Our firm en tered into an agreement with the Department of National Defense on April 25 , 1968 for the furni shi ng of engineering and arch i tectural services pertain- ing to the government arsenal at Limay, Bataan details of which a re shown in enclosed copy. For said services, we were paid by DND pro- fessional fees amounting to P460,000. 00 . However, fro~ the last payment to us, the DND a~di to r deducted the amo unt of Pl3,800.00 representing 3% contractor's tax and subsequently paid it to the BIR Q. C. under PVB che c k #7622 63 dated January 19, 1970 and represented by BIR OR QC 3931029 dated January 28, 1970, copi es of which have not been furnished to us as of this date.

DECISION - CTA CASE NO. 2372 - 18 - We believe we are not subject to the 3% contractor's tax for the following reasons: 1. This agreement involved only the furnishing of engineering and architectural services such as preparation of necessary reports, plans, preliminary and final drawings, layouts, maps and cost estimates of all structures, uti- lities and other data. 2. These fees were in payment for professional services di rectly connected with the exercise of the profession for which the corresponding occupation taxes were paid. 3. The nature and character of the services rendered by us to the DND are covered by the profes- sional practice of registered architects and engineers as specified in the various eng i- neering and architectural laws . In view of the foregoing, we trust our claim will now meiit your favorable consideration. Very truly yours, ENGINEER ING & DEVELOPMENT CORPORATION OF THE PHILIPPINES JOSE U. JOVELLANOS President Since the amount of Pl3,800.00 representing con- trac tor's tax erroneously and illegally collected was paid on January 28 , 1970 to the Bureau of Internal Revenue as evidenced by Official Receipt QC No. 3931029, and the formal claim for refund demanding the retur n thereof was filed with respondent 's office on '- 286

---... ----"'"F",.--,---~~--..--------.,..._--------------~~~-~~o:tll~~-- DECISION - CTA CASE .NO. 2372 - 19 - January 25, 1972 and the judicial suit for recovery of the tax was filed with this Court on January 26, 1972, all '"ithin the statutory period of two years from date ot payment, as provided by Sections 306 and 309 of the then National Internal Revenue Code, I it seems abundantly clear that petitioner has complied with all the requisites of the law to entitle it to the recovery of the contractor's tax erroneously and illegally withheld b~ the auditor of the Department of National Defense and paid to the Bureau of Internal Revenue. Accordingly, having found that its claim for refund is proper and meritorious, petitioner is entitled to the refund of the amount of ~13,800.00 representing erroneously collected contractor's tax. WHEREFORE, respondent Commissioner of Internal Revenue is hereby ordered to refund to petitioner Engineering Development Corporation of the Philippines the amount of Pl3~800.00~ Without pronouncement as to costs. SO ORDERED. Quezon City, August 31, 1979. ~~-2;_(~~/ 7 AMANTE ;~~-~- . /} Acting Presiding Judge I CONCUR: .�' �' / '' '---/:l:?-0?;; coNs'TANTE a. ROAQUIN ,As soc ia te Judge / , .., ~ ~1 r wl --~1 l