CTA Case No. 3357 (Decision)

REPUBLIC OP THI. PHILIPPlNEI COURT OF TAX APPEALS QUEZON CITY ARNOLDUS CARPENTRY SHOP, INC ., Petitioner , - .ver su s - C T.A . CASE NO. 3357 COMMISSIONER OF INTERNAL REVENUE , Respondent . X- - - - - - .x DE C I S I 0 N Questioned in this petition for review i s the d ec ision of responde nt Commi ssioner o f Internal Revenue holding petitioner Arnoldus Carpentry Shop , I nc ., lia ble for t he amount of Pl08 ,7 20 . 92 as defi- ciency contract or ' s tax, i nclusive of surcharge and interest , for the year 1977, pursuant to Sections 183 (a .and 191 Lnow Sections 193 (a) .and 205, respec- tiveli7 of the Nat i onal I nternal Revenue Code . The per tinent facts as alleged in the petition f o r revi ew a nd admitted in the a nswer a re: ' Petitioner is a domestic corporation organized and exis ting under and by virtue of the l aws of the Philippines , with princ ipal address at the Christ the King Compound , 101 E. Rodriguez Sr . Blvd ., Quezon City . # Some time in March , 1979 , th e exam iners of t he Bureau of Internal Revenue conducted an investigation

DECISION - CTA CASE NO. 3357 - 2- of the bu s i ness t ax liabili ti es of petitioner a t the above addre ss pu rsuan t to Le ter o f Autho rity No. 08307 A d ated November 23 , 19 78 . On March 29 , 1979 , the said e xami ner s , Mes srs . Honesto A. Verge! de Dio s and Vo lta ir e v. Tr i nidad , made a report of thei r inves ig at i on to the Comm i s- sioner of I nternal Revenue, c lassifying here in peti- tioner as a contr actor , citing Luzon Stevedo ring Co . v. Tr inidad , 43 Phil . 809 , alleging as r eason for said classification that peti tioner renders services in the course o f an independent occupation representing the will of hi s employer on l y as to the result of hi s 1110 r k and not as t o th e means by whi c h it is accompli s hed. The said exam iners assessed pe titioner f or defic iency t ax in the tot a l amoun o f EIGHTY EI GH T THOUSAND NINE HUNDRED SEVENTY TWO PESOS & '�WENTY THREE CENTAVOS (PSS, 972. 23 ) �. On Janua ry 31, 1981 , petit i oner received a l et ter / not i ce of tax deficiency assessment inclus ive of sur- charge and inter est for the year 197 7 in the amount o f ONE HUNDRED EIGHT THOUSAND SEVEN HUNDRED TWENTY PESOS & NINETY TWO CENTAVOS (P108 , 720. 92) �. Said tax def i- � ciency was due to the f act that the examiners of the Inte rnal Revenue class ified petitioner as a con t ractor inste a d of a man uf acture r ba s ed on the Pur c hase Or ders rece i ved from petitioner's customers .

DECI SI ON - CTA CASE 0 3357 - .3 - On Fe bruary 19 , 1981, pet it ioner fil ed its protest and informed the public respondent that it was because of the 7% percent tax exemption on foreign sales granted under Sect ion 202(e) .of the National Internal Revenue Code to encourage exports , exploited f oreign markets resulting to 52% increase in the total sales for 1 977 through the sale of knockdown chairs , church benches, kni fe r acks and barometer cases . ~ on Ju ne 23, 1981 , petitione r r eceived the final decision of the Commissioner of Internal Revenue , Rube n B. Ancheta, dated May 29, 1981 wh ich sta ted 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. Acc ordingl y, 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 (3 0 ) yea rs from date of you r r eceipt hereof; otherwise , this Office wi ll take the necessar y action to enforce the collection of the aforesaid assessment . " Averring that the aforesaid de cision 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 , 198 1 .

DECISION - CTA CASE NO. 3357 - 4- As spec ial and affirmative de f ense s, re s pondent a lleged in his an swer t hat: ~ Petit ioner is a contractor under Sec ti on 205 of the 1977 Tax Code as amended , being engaged in the business of making woodworks li ke TV cabinets, upon previo us orders fr om c ustomers and i n acco r d ance with the latter 's specifications. The assessment fo r deficiency percentage t ax for the yea r 1977 in the amount of ~108, 720 . 92 was made in accordance wi th 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 petit ioner a manuf actu rer or a contr ac t o r for percentage tax purpose? ? ~It is contended by respondent that since pe ti- 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 a ccompli shed, pe tition e r should be considered a c ontractor 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 7L

DECISION - CTA CASE NO. 3357 5- firms for various years starting from 19 64 to 1979, all purporting to show that in placing such orders , petitioner us cus t omers specified in deta il the kind of cabinets they wantede (Exhs . " 2" to "1 3" , 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 fo r a piece of wo rk and not contracts cf sa le. (Re sponden t's Memorandum, p. 177 , CTA records. ) ~. ~ Article 1 46 7 of the New Ci vi l Code distingui shes 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 ro t, is a contract o f sale, bu t 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 , whe re the art icl es made upon prev i ous order s are those which the manufacturer makes for sale to the public , the fact that a sale o f such article is made ~ � I' I

DEC I SI ON CTA CASE NO. 3 357 - 6- upon previ ous order , because t here was none in stock at the time, will not af f ect th e t axab il ity of the tran s a ction as sale . (Gen . Ci r . No . 509 , Nov. 6 , 1941; Inchausti vs . Cromwell , 20 Phi l . 345; Celest ino Co vs . Collecto r of Internal Revenue , 99 Phi l. 841 ; Commis- sioner of I n t er nal Revenue vs . Engineer i ng Equipment, L- 27044 , J un e 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 bea r petitioner out, that it had 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 h e purchase orders fr om its foreign b uyer 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 - reco r ds ) .were by orders fo r e xist i 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 pu rchase ord ers f rom foreign buyers for the year s 197 7, 1978 a nd 1982 were offered by pe ti t i oner to substant i ate its cla i m. (Exhs � U 11 11 11 U-1 11 , to 11 U-7 " , pp . 104-108 , BIR recor ds ; Exhs . P 11 11 11 Q", 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 , Augus t .l O, 1 983. ) Upon examination , pet itioner ' s man ager test i 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. Woul d you know why the purchaser alway s make mention as per their drawing~? A. We send them our model . Once they selected on the model , they wi ll 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 e sti fied that these were manufactured without previous orders . Sampl es were 7J

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 presen t ed as exhibits , whethe r 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 te d 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 numbe r , col or , etc ." (Exh . " 1", p . 27 , BIR records.) The ir 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 manu f acturer who furnishes the samples or models from which the customers select when placing their orders. The evidence adduced by petitioner to prove tha t 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 o f its products, inclu- ding television cabinets, which were availed of by i ts r.u

DECISION - CTA CASE NO. 3357 - 9- local and foreign customers , indicate that these pro- ducts we re for sale to t he general public and not for s pec i a l orders . However , would cer ta in specifications ordered by some customers on the television cabinet models as to material , finish, ha rdwar e, etc . , be suff i- cient to divest petitioner of its character as manufact- urer? ~1 The case o f Celestino Co & Co. vs. Collector of Internal Revenu e , 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 wh ich habitually ma kes sash, wi ndows and doo rs , and sells the goods to the public is a manufac turer . The fact that the windows and doors are made by it only when c us tomers place thei r orders a nd 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 Cel est ino 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 c ustomers place their orders , does not alter t he na ture 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. XXX XXX XXX

DECISION - CTA CASE NO. 3357 - 10 - That the doors and windows mu st mee t desired spec i fi cations 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 accep t t he order - .and no sale is made . If they do, the transaction would be no different from a purchase of man ufactur e d 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 sawmi ll cuts lumber i n accor dance wi th the pec uliar 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 Sas h Factory does nothi ng more t han s ell the goods that it mass- produces or habitually makes; sash , panels , mouldings, frames , cutting them to such s izes and comb ining them in suc h forms a s its customers may desir e. XXX XXX XXX 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 ma ter ials ordinarily manufactured by it - .sash, panels, mould- . i ngs- to Teodoro & Co ., although i n such form or combination as s ui ted 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 unde r Ar t icle 1467 above quoted, because although the Factory does not , in the ordinary cou rse 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

DEC I SION - CTA CASE NO . 3357 - .11 - and p anel s it used t her e f o r (s ome of them a t leas t ) �. In o ur op1n1on when thi s Fac to r y accepts a j ob that r equi res t he use of extraord i nary or additiona l equ ipment , or i nvolves ser v i c es not generally pe r- f ormed by it - .it t hereby contracts fo r a p i ece o f wor k - .f i l ling s pec ia l orders wi th in the meaning of Ar t i c le 1467 . The o rde rs here in exhib ited we re no t shown to be spec i a l o They were mer ely order s for wor k - n::th ing is shown t o c a l l them special r equir ing extraor dinary s er vice of th e f ac tory g" " In l ine wi t h the r uli ng l a id down i n the a f o r e- quoted decis i on o f th e 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 peti ti one r ' s t a x liab il ity , respondent i mpos e d th e 3% contrac t or ' s t ax on petit i one r's t o tal gross s ales f or 1977 , l ocal and export , on t he ground tha t being a contractor and not a manuf ac tu rer , pet i- tioner canno t a vail of t he percen tage t ax exemption on expor t sal e s . Pe titi one r ma inta i ns t hat as a manufacture r , it i s ent i tled to sa i d tax exemption on its export sales under Sec ti on 188 (e ) Lnow Section 202( dl7. of the Nat i onal I nte r nal Revenue Code , \\ the appl icabl e pr ovis i ons of which are as f ollows : "SEC . 188 . Tran saction s and per sons no t su b j e c t t o percen t ag e tax.- . In c omputing the tax imposed i n secti ons one hundred e i ghty- f our, one hundred eigh ty-four-A, one hundred

DECIS I ON - CTA CASE NO . 3357 - 12 - ei gh ty- fi ve , on e 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 fo l lowing c ommod i ti es sha l l be ex- cluded : XXX XXX XXX (e) Articl es sh ipped or expor ted abroad by the . manufactur er or producer , i rrespective o f any s h i pp ing arrangement t hat may be ag r eed upon which may in- . fluence or deter mine the transfer or ownersh ip of t he art i cles s o exported : Provided , however , Tha t s ales to tourist s , 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 ac tu ally r emove d by t hem f rom the Phili p- pines upon t heir departur e ." As per respondent ' s exam i nat ion , the total gr oss sa l es o f pet itioner fo r 197 7 , l oc a l and e xport, amoun t ed to ~5,162 ,7 8 7.59. (Exhs. "1" an d " 14", pp . 24, 26 , BIR records .. ) . Pe t itioner ' s gr o ss l ocal s a l es as r epor t e d i n i ts quarter ly percentage tax returns f or 1977 t otalled ~2 , 471 , 981.62. (pp . 1 6 - ~9 , BIR reco rd s .) The d i fference of ~ 2, 690,805 . 97 between pe tftioner ' s total gross sales of ~5 , 162 , 787 . 59 and its gro ss l oca l sales o f ~ 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 petit i one 's manager to res pondent Commis sioner of In- ternal Revenue protesting the def ic iency assessment, wher ein he expl ained t ha t it was on ac c ou nt of t he 7% percentage t ax exemption on export s al es that peti tioner 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 197 7. (Exh . " 16", p . 33 , BIR records.) ~ n class i fying petitioner as a contractor, r es- .. pendent relied solely on the findings of hi s examiners f rom the purchase o r de r s tha t television cab i nets were ordered from petitioner in accordance wi th the c ustomers ' specifications . There were no Euch f indings however i nsof ar as t he other products of petitioner were con- cerned , includ ing those exported , wh i ch comprised 52% of the total gross sales . Thus , the s eeming inconsi stency , as pe ti 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 pet i tioner ' s export sa l 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 no t 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 , the re 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 Nat i onal Internal Revenue

DEC ISION - CTA CASE NO . 3357 - 14 - Code e According ly, r espondent erred in assessing petitioner f or deficiency contractor 's tax i n t he a mo un t of ~108 , 720.92, incl us i ve of surcharge and interest, f or the year 1977. WHE RE FORE , t he d e cision a ppealed fr om is hereby reversed. SO ORDERED .. Quezon City, Me t r o Man i la , Ap ri l 22, 1985. Presidin WE CONCUR: ,