CTA Case No. 4280 (Decision)

REPUBLIC OF TilE Pll I L PP I NES COURT OF TAX APPEALS QUEZON CITY ATENEO DE MANILA UNIVERSITY, Petitioner, - versu s - C.T.A. CASE NO. 4280 THE COMMISSIONER OF INTERNAL 11 1~1'1~ REVENUE, - )( - - - Respondent. - - - - - - >< 0 EC I s I DN Be 'fore this Court is a question of" whether or not a non -stock, non - prof' it educational institution, engaged in undertaking research sponsored by various government agencies, pri v t e international .) non -profit organizations, and other entities, is an independent contractor subject to contractor's tax pursuant t o the provision of" Sec. 205 o'f th Natio n 1 Intern 1 Revenue Code of 1977., as amended by Presidential Decree No. 69. Briefly, th undisputed fa cts as gathered f'rom the r cords and the evidence adduced by the parti es are as f'ollows : 673

DECISION - C.T. A. CASE NO. 4280 - 2- The petition er, Ateneo de Ma nila University, is a non -s tock, non-profit educational institution with au)( �l iary units and branches all over the nation. One such au)(iliary unit is the Institute of Philippine Culture <IPC for brevity> which has 'no legal personality separate and distinct fr om that of the petition r. Th IPC i a research unit engag d n soc �a l sc ienc studies of Philipp ine society and culture. For this purpo se, the IPC conducts research which it hope wi 11 contribut to t he adv ncement of knowledge, s p e i l � y of Phi 1 i pp in e society and cult ur that will ev n tually lead to an improvement i n th qu lity of life of the Fil pin os .. With uch noble obj et i ves, the asp t � ons of IPC r shar d by other int rnation 1 ni zations, private foundations, and governm en t agencie s which are willing to sponsor research in si milar undertakings <Memorandum 'for the Pet it ioner, C. T. A. Records, p. 190) � rec ived On July a, 1983, petitioner from the respondent Commissioner of Internal Revenue a demand 1 et t er, dat ed ..June 3, 1983, assessing pet it � oner th s um of P174, 043. 97 67

DECISION - C.T.A. CASE NO. 4280 - 3- for deficien c y contractor's t a><' and an asses s ment, dated June 27, 1983, i n the su m of P1, 141,837.76 for deficiency incom e ta><, both for the fiscal year e n ded March 31, 1978. On August 1, 1983, pet it ioner 'prote sted th e above assessments through a letter, dated July 28, 1983. An e eve n-page memorandum, dated October 3, 1983, was thereafter fi led with the respo n d nt on Octo ber 4, 1983 c on testing the validity of= the assessments, t ogethe with the requ�red waiver of the def ense of prescription. Respondent, in letter-decision of March 1 7' 1988 which was received by the pet itioner on May 16, 1988, cance l led the assessment for d fici ncy income ta>< and modifi d t h e ass ssment f or defici enc y contractor's ta>< by incr asing the amount due On June 14, 1 sa, p tition e r req uested ror a reconsider tion or re i nv estigation of the modified as seg m nt. On the same date, pet itioner filed this petition f o r review. Wh ile the case was pending bef ore this Court, responde n t, in reply to pet iti oner's 67fi .J

DECI SI ON - C.T.A. CASE NO. 4280 - 4- request, issued a fi n al decision dated August 3, 1988 modify i ng the assessment for defi cienc y contractor's tax from P193,475.55 to P46,516.41 exclusive of surcharge and i nterest computed as follows: IPC revenue on spo n sored research for the fiscal year ended March 31, 1978 P1,550,547.00 Contractor's tax rate " --~ Deficiency contractor's ta>< p 46~_16. 41 Respondent, in support of his assessment, stat ed in his letter-decisi on addressed to the petition er's counsel that: "For rendering research work to various government agencies and international non -profit organizati on s as part of its educational thrust, the Uni versi ty is considered an independent contractor pursuant to the provision of then Section 205 of the Tax Code; hence, its gross receipts in the amount of P1,550,547.00 is subject to the 3" contractor's ta><. The fact that no profit is realized by your client from its activities of rendering spo n sored re search does not relieve it from paying the 3" contractor's t ax because the co ntractor's t H be"ng n xcise tax imposed on the e><ercise of a privilege, is collectible from the person exercising the priv ilege. Hence, your client should pay the 3" contractor's ta>< on the basis of the total gross rece�pts derived from the sponsored research which amounted t o Pl, 550, 547.00 during the fiscal ye ar und er review." Section 205 of' the 1977 Tax Code, as amended, reads: 67

DECISION - C.T.A. CASE NO. 4280 - 5- "Sec. 205. Contractors, proprietors or operators or dockyards, and others. - A contract o r ' s tax of three per centum of the gross receipts is hereby imposed on the following: )()()( )()()( XXX (15) Business agents and other independent contractors except per' suonndse,r associations c o r p o r a t 1. o n s and contract for embroidery a nd apparel for export, as well as their agents and contractors and except gross receipt s of or from a pioneer industry registered with the Board of Investments under the provisions of Republic Act No. 5185; XXX XXX XXX The term "independent contract or s" include persons (jurid ical O Y' natural> not enumerated above <but not including individuals subject to the occ upation t a x under Section 12 of the local Tax C ode> whose activity consists ~5se ntially of the -~-~-l~____.Q_f.___~_!j__!U_n c!L_Q.f---2.~.! v i~ e s for a f e e regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. <Underscor ing supplied) XXX XXX )()()(." In the case of Luzon Stevedoring Co. vs. Trinidad 1 <43 Phi 1 803) the Supreme Court defined the word "contractor" as "xxx a person who, in the pursu it of ~..i.rrde~_ ndent bu ~i ne__~_�_ , undertakes to do a specific piece or job of work for other persons, using his own means and me thods without submitting himselF to con trol as to the petty details. The true test of a - - - -�- - - - - - � - 1See also COIIissioner of Internal Revenue v. Court of Tax Appeals, 143 SCRA 49; Co11issioner of Internal Revenue v. Engineering Equip1ent and Supply Co1pany, 64 SCRA 590; La Carlota Sugar Central v. Trinidad, 43 Phil. 816. 67 '7

DECISION - C.T.A. CASE NO. 4280 - 6- 'cqntractor' would seem to be that he r ~!!_Qg r ~---tb.~-~ e r_yj_�.!L_tD---.!b..~-~-~~--Q..f__a n .L'l9 e_.Q_I?_Ds;!_g_n ~--Q c c (!p~.t_i o 'l, r e pre s en t i n g t h e will ' of his employer on ly as to the result of his work, and not as to the means by which it is accomplished." <Underscorin g supplied) Is petitioner an independent contractor within the purview of the provisioh of the Tax Code and the jurisprudence above-cited? Respondent tried to impress th is Court that the term "independent contractor" encompasses all kinds of servi ces rend ered for a fee and that the only exc.eptions are the following: .J a. Persons, associat ions and corporations under contract for embroidery and apparel for export; b. Gross rece ipts of or from pioneer industry registered with the Board of Inves tment under R.A. No. 5186 ; c. Individuals subj ect to occupation tax under Sec. 12 of the Local Tax Code; and d. Regional or area h eadquarters established in the Phili ppines by multination a l co rporat ions, including the ir alien executives, and which headquarters do not earn or derive inc ome from the Philippines and wh ich act as supervi s ory, co mmun ic ation an d coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region . 678

DECISION - C.T.A. CASE NO. 4280 - 7- Respondent concluded that since petitioner falls under the definiti on of an independent contractor and is not a mong the exceptions, it is theref o re subject t o the 3" contractor's tax <Memorandum for Respondent, C. T. A. Records, pp. 213�2 14 >. This Court rules otherwise. It is true that exceptions, ded u c tions and amnesty are matters o f legislat ive grace and should be construed in strictissimi juris against the taxpayer and l iberally i n f avor of the taxing authority <P hilippine P et roleum Corporation v. Municipality of P i l illa, Rizal, 198 SCRA 82>, but statutes levying taxes or duties are to b e construed s trongly against the Government a nd in favor of the subjects or citizens, because burdens a re not imposed or presumed to be imposed bey o nd what statutes expressly and clearly d eclare. <Commissioner of Internal Revenue v . Court of Appeals, 204 SCRA 182>. In the case at bar, this Court, with the latter presumption in mind, should first determine if petitioner is covered by the term "independent contractor" as def i ned in Sec. 205 of the Tax Code. If it is, t hen the 6? 9

DECISION - C.T. A. CASE NO. 4280 - 8- respondent is correct in relying on the first presumption; otherwise, there is no room for such interpretation. In plain words, the general provision of= a tax law is l iberal ly construed in f=av(Jr of= the taxpayer whereas its exception is strictly construed again st him. The tax provision in question states that "persons xxx whose activity consists essentially of= the sale of all kinds of service for a fee xxx" are liable for contractor's tax. It is clear there fore that f=or one to be made liable, he must be engaged in business . Contractor's tax is a business tax under Titlq V of the Tax Code . Business is restri cted to ct i viti es or af=f=airs whe r pro�it i s th purpose or liv eli hood is the motive. <Commiss i oner of Internal Revenue v. Club Filipino , Inc., 5 SCRA 321; Collector o� Internal Revenue v. Manila Lodge, 105 Phi 1 983 ) Business is that which occupies th e tim , ttention and labor of= men f=or the purpo se of livelihood or prof=it <Bouvier's Law Dictionary , Third Revision, 1975 Ed. ) � 680

DECISION - C.T.A. CASE NO. 4280 - 9- Petitioner maybe considered a "contractor" or an "independent contractor in a generic sense of the word<s> but is definitely not a "contractor" or an "independent contractor" as contemplated in Sec. 205 of the Ta~ Code. The latte~ has but a limited and restricted me ning; that is , one whose activity consists essentially of the sale of 11 kinds of service s for a fee, or one who pur ues n inde pendent business, or one who renders service in the course of an independent occup tion. As corr ctly rgued by the petitioner, it is not liable for contractor's ta~ since: 1. Resea ch is a mandat ed activity for petitioner to ret a i n its un iversity status; and 2. Petitione r is not engaged in business as it has no profit motive, it retains ownership of results of the research and the right to publish such results , and it does not undertake propr'etary nor co mme rcia l research <Memorandum for Petitioner, C. T. A. Records, pp. 194- 206 ). In the case of U.S. T. Press vs. National Labor Union <G SCRA 317>, the Supreme Court , while maint ining that Press is neither a natur _l or judici al person and ha s 68

DECISION - C.T.A. CASE NO. 4280 - 10 - no personality to be a party in a case in its own right ruled: "It may be true that the U.S. T. Press used to accept outside pri nt ing jobs, but th' s work is merely inci dental, for its main fun c tion is to do j obs coming from the University of Santo Tomas and i ts departments or from the Dominican Fathers. Moreover, the record is not clear th'at in so accepting outside printing jobs the press realized profits. And even assuming that it made profits from such work, the f act stil l r emain s that th ere is no proof that part of s uch earni ngs or profits was ever d � stributed as divi d nds to any st ockho ldel", a i n fact non e was so distr'but d b cause they accrue<;~ to the benefit of the Univel"sity of Santo Tomas which is a non-profi t educational institution. �� Petit'oner was abl e to show that IPC had incurred lo sses ~rom 1972 to 1985. Respondent howev er alleged that si nce -' contractor's tax is an e xc ise tax imposed on the exercise o~ a privil eg e, having lo ss es or no realized pro~it do es not relieve petitioner from paying the ta)(. This Court consid ers the accumulated losses as proof that education and not prof'i t is the motiv e f'o r undertaking the research projects. The respond ent's allegation is therefore totally misplac d. The Sup..- me Co u..- t in the c: ses of Club Filipino, Inc. and Manil Lodge <supra> held: 68 2

DECISION - C.T.A. CASE NO. 4280 - 11 - "Hav ing found as a fact that the Club was organized to develop and cultivate sports of a l l class and denomi nation, for the h ealthful recreation and entertainment of its stockholders and members; that upon its diss ol ution, its remaining assets, after paying debts, shall be d onated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from m mbership fees and ,dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overal l overhead expenses and to improve its golf-course (cost-plus-expenses- basis>, it stands to reason that the Club is not engaged in the business of an ) operator of bar and restaurant xxx." " xxx. The privilege taxes prescribed in section 93 of the Tax Code in relation to section 178 of the same, are to be i mposed on 1 y on persons or en t it i e s who engage in t h e activities mentioned or class�fied therein for 'business' purposes. This evident intention of the l aw becomes more palp ble when we take into consideration the fact that the drafters of our Tax Cod had grouped the forequoted provisions of law under one gen r 1 divis on of the Tax Code headed as 'Titl V, PriYil ge Taxes on Busjness and occupation.' It is not therefore entirely correct to m intain as respondent does, th t all persons selling articles subject to specific taxes, like liquor and tobacco, should likewise be subject to the fixed taxes imposed by section 193 of the Tax Code. We believe, that in order that these persons should be subjected to the privilege taxes imposed by the aforementioned sect ion of th e Tax Code, it is necessary that they be engaged in the 'business' of selling liquor and tobacco, otherwise the privilege taxes as a dealer of liquor and tobacco can n ot attach." 68~

DECISION - C.T.A. CASE NO. 4280 - 12 - The runds received by the petitioner ~re technically not a ree. They may however rall as girts or donations which are tax-exempt. I PC, ror the riscal ye r ended March 31, 1978, had the rollowing revenues, costs and \ expenses: <Exhibit "F", CTA Records, ' p. 125> Sponsored Publication Total Research Revenues P1,550,547.00 P63,854.00 P1, 614, 401. 00 53,775.00 1,383,536.00 Direct Costs 1 329 761.00 P10,079.00 p 230,865.00 G~oss Profit P 220,786.00 p 110,995.00 p 341,860.00 Other Income ---=3:...=9:..7.:_,_049. 00 Gross Income p 55,189.00 Indirect Expens s Net Loss In compl ianee with Sec. 123 of the Tax Codet~~t, less than thirty per cent:um <P220,7BG~OO/P1,S50,547 .. 00 = 14.24") of the �sec. 123. eNelption of certain gift s. - The following gift s or donations shall be exeapt fro� the taM provided for in this Chapter: al In the case of gifts tade by a resident: KKK )(JIM UK J) Gifts in favor of an educational and or ctlaritable, religious, cultural or social wei fare corporation, institut ion, foundation, trust or philanthropic org nization or resurctl in titution or organization: ProvidPd, httttrvtr, That nat tore than thirty per centu� of said gifts shall be uud by suctl dontt for adainistration purposes. For the purpoSI! of this ne~ption, a non-profit educ,ltional and/or charitablt corporation, institution, foundation, trust or philanthropic organization and/or research institution or organization is a schoo l, college or university and/or charitable corporation, foundation, trust or philanthropic org nizat ion and/or research institution, or organization, incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no cotpensation, devoting all its inco1e1 Mhether student's fees, or gifts, donations, subsidil!s or othtr forn or philanthropy, to the acco1plishtent and prototion of the purposes enu1erated in its articles of incorporation. !IIIli MIIJI II XII,

DECISION - C.T.A. CASE NO. 4280 - 13 - gross revenue was made available for administration purposes. WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency contractor's tax assessmeht in the amount of P4G, 516~ 41 e><clusive of surcharge and inter st for th fiscal year enDed March 3 1' 1978 is he reby CANCELLED. No pronouneem nt s to cos t. SO ORDERED .. Qu zon City, Metro Manila, 'uly 12, 1993. WE CONCUR: A2~ 1>~J.~ Q~- Q.Q~ I RAMON 0. DE VEV Associate Jud ERNESTO D. ACOSTA Presiding Judge I I I ) GRUBA Judge 685

-- DECISION - C.T.A. CASE NO. 4280 - 14 - C:ERTIFIC:RTIDN I hereby certiFy that this deci sion was reached aFter due consultatio n among the members oF the Court oF Tax Appeals in accordance with Section 13, Article VIII oF the Constitution. ~~~~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 688