CTA Case No. 3060 (Decision)

,El"U!H,YC Ol" ';l'l . . BIL!?i� tN I:'A � COURT OF TAX APPE � La . li.t;;J�.~f/.' . . QUJ<.:ZOti Cll''li l'~- � t CEB U }ffiiNTENANCE CORPORATION, Petitioner , - ,versus: - C . T.A. CAS E NO. 3 0 60 COMMI SSIONE R OF I NTERNAL REVENUE , Respondent . X - - - - - - -- - - - - - - x. DEC I S I 0 N This is a p e ti t ion to review t he decision of re�spondent Comm iss:ioner of Internal Revenue dated September 27 , 1979 requiring petition er Cebu Ma in- tenanc e~ Co rporation to p a y the sum of ~32,6i 41 . 1 4: representing deficiency percentage tax, s ur charge , interest a nd penalty for 1974, o n i t s g r oss . rece ipts as independen t contracto r a s pr ovided f or under Se�ctions 183 (a) .a nd 19 1 of the then in forced Na- tional Internal Revenue Code. Ther e is no dis:pu te as to the facts, the case h av ing been s ubmitted by the parties on the basis o f the pleadings a nd the rec ords of the Bureau o f Internal Re venue on this proceeding. Petitioner Cebu Mai nte�nance Co rpo ra tion is a cor pora tio n dul y organized and existin g under the L::<li::.> or the Philipp ines , with principal o ffice and address at 80

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 Ge n era l Manager , Lu i s V. Ve le z , a nd t he City o f Cebu , through its Act ing Mayor , Eulogio E . Berr es , entered into a contract, t he provi sion s o f \'Jhich a re quoted as follows : 1. That the PARTY OF THE F IRST PAR~ sh a ll suppl y fuel (Pr emium or Sp0cial Ga- soli ne) , l ub rication, all s par ~ parts , t ires a~d batte ries and s hal l s ervice o r ma i n ta i n f ifteen (1 5 ) Holden Po l ice Ca rs of the Cebu Police Depa rtment, including the su pply 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 p ar t s , and supply of ti res and batteries �� P40 , 000 . 00 ( b ) Servicing o r m<.n n - tenance cif the f if t een (1 5 ) Holden Police Cars and t he supply of d rivers ����� 5 ,000. 00 TOTAL MONTHLY RATE � � � � � � � �145, 9__0 0. 0 0 The above-quoted p r: ices s.hall be i n div i sible and i nseparab l~ ; and, s h all con st itute t he� monthly payme nts for the supply of f uel and l ubrication, spare par t s , tire s and batteries and ser vicing or maintenance of the fifteen (1 5) Holden Po lice Ca r s, i ncl uding the supp l y ci� Drivers, shall be payable by the PARTY OF THE SECON D 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 sh a ll use each of the fifteen (15) pol ice vehicles men- tioned above f or no t more t han sixteen 1 6) h ours p er d a y. In c ase of unav~ilability o( 81

DECISION - CTA CASE NO. 3060 - .3 - any o f t he fifteen (1 5 ) police v e h i cles by reason o any u nc:on t r oll ab le events , ci r - cumstance s and c a am iti es , s u c h a s l abor strikes , nava i labili t y and shortage i n t he mar e t of spare p arts, f ue l and o i l; c on- flagra t ion , floods and t yphoons , sha ll 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 FIRS T PART shall provi de mechanics on 24-hours d uty dai ly t o attend t o the mechanical or e l ectr ical prob- l ems of each o f t he a bov e - men ti oned police veh icles . 4. This contract shall terminate after a period of thr ee (3) year s star t ing from Jul y 1, 1 973 . However , the pa r tie s h a v e 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 p rice o f fue l and l ubr i ca- tion a nd mi nimum wage go up o r down based o n t he a verage of the r ecommende d pump pr ice s of all oil companies in Ce bu City : provided t hat the above-quo t ed prices ar8 based on the Peso to Dol l 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 d eval uaiion of the Pe so wi t h r e s pect to t he Dol l ar , sha ll war r a nt an immed i ate corresponding and pr opor tionate adj u stment o f t he abo ve pr ices . 5. I n case any o r all o f t he Po lice c ars are used f o r mor e t han s i xteen (16) hours per day , th e r e shal l be a corr esp o riding proportional additi onal 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 a nd 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, th e s a fe ty 8 '){..,;

DEC ISION - CTA CASE NO. 3060 - 4- and securi ty of s a id veh i cle s s hall be guaranteed by the Cebu Po lice Dep a rtmen t by ass igning a guard or guards at t he p remises o the PARTY OF THE FIRST PART. 7e The PARTY OF THE FIRST PART sha l c ause each of the f if teen (15) police v eh icles to be c overed by comp r ehensive insurance policy at no extra cost of the PARTY OF THE SECOND PART . After i nvestiga tion 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- ment ione d c on t ract , t he correc t amo un 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 therefor e asses sed petitione r the sum of P32 , 641. 1 4 as defici ency percentage tax for the year 1974, i n- elusive of surcharge, interest and penalty. Petitioner reques ted a reconsideration of the assessmen t contending tha t f or purposes of c orn- put ing the three percent ( 3%) con t r ac t o r's ta x , the fixed sum o f P40,000.00 mon t h ly 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 ) Holde n po li ce cars 83

DECISION - CTA CASE NO . 30 60 ,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 sub ject to t he c on- t ractor ' s tax o f t hree {3% ) _percent. Consequently , the monthly payment o f P5,000.00 as compe nsation f or the servicing and supply of drivers to the fif teen (15 ) ~olden pol i ce cars is the only amou n t s ubject to t he said tax. In a l etter d ated September 27 , 197 9, respondent howeve r de nied petitio ne r ' ~ r equest for r econs i- derati on and r e iter ated t he deficiency percentage tax asse ssment of P3 2,6i41 .14. Hence , the pres.e nt recourse . I s the e ntire fee o f P45, 000. 00 pe r month s t i - pulated in t he contract the gross receipt of pet i - tioner sub ject to the three pe r ce n t (3 %) ~o ntrac tor ' s tax as prov ided under the then Section 191 of the Nati on a l I nterna l Revenue Code? I t i s no t dispu ted tha t t he deficiency a sse ss- ment arose f rom r esponden t's i mpos i tion of t he t hree percen t ( 3%) .contrac tor ' s t ax on petitioner ' s e nt i re monthly g ros s receipts of P45 , 000 . 00 deri ved f r om i ts contract of ser vi ce s and suppl y (Anne x "D" , pp . l G-18 , CTA records) .with the c ity of Cebu dated July 19, 1973, t he perti nent prov isions of 8

DECIS I ON - CTA CASE NO. 3060 - .6 - which , f or ready r eference, are a s fo l lows : 1. Tha t the PARTY OF THE FIRST PART shall s upply fu e l (Premium or Spec ia l Gaso line ), l ubricat ion , al l spare parts , tir es and batteries and shall se rvice or maintain fifteen (15) Holden Police Cars of the Cebu Police Departmen t, i nclu ding t he supp l y of civi lian drivers on a 16-h.ou r per day basis, at t he following prices , to wi t : (a ) Supply of fuel and l ubr ication, spare parts, and supply of tire s and batte ries o � ~40,000 . 0 0 (b ) Servicing or ma in - . tenance of the fif teen (15) Holden Police Car s �and the supply of dr i vers �� �� 5 ,000.00 TOTAL MON THLY RATE � � ~45,000 .00 The above-quoted prices s hall be ind i- vi s ible and inseparabl e; and, s hall constitute t he monthly payme:nts for t he supply o f fuel and l ubr ication , spare parts, tir es and ba tter ies and serv ici ng or ma i ntenance o f the fifteen (15 ) Holden Poli c e Cars , incl ud i ng t he supply of Dr ivers shall be pa yable b the PARTY OF THE SECOND PART t o t he PARTY OF THE FI RS T PART at t he begin ning of eac h mon th s tarti ng on July 1 , �197 3 . As stated earlier, petitioner aver s th a t f or purposes ot the contractor's tax, only the monthly s um of ~5,000. 00 as compen sation 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 co ntr act fee f o r supplying fu e l, l ubricat io n , sp.Jt(:' p.:n l:f; 1� Un�s

DEC I 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 ec eipts as t hese ar e proceeds from t heir sale s to t he Ci ty of Cebu . On the other h a 1 d , to s ustain his assessme nt, respondent lays stre s s o n the second por.tion of paragraph 1 of the contract which provides that the qu o te d prices o f ~40 ,000.00 and ~5,000 .0 0 shal l be indivisible and inseparable . Pe ti 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 d e fenses i n h is answer to the peti tion fo r rev i ew : The agree me n t between pet i ti on er and the City of Cebu was to maintain a nd keep in good servicea ble and running 6onditi o n the latter'~ po lice cars for a fixed fee o f P4 5 ,0 00 . 00 a month; Pet i tioner wou ld n ot have be en able t o comply with its obligation were it no t for the use of lubricants,fuel and spare parts, henc e, an integral part of the c ontr act f or service which is taxable a s ' ndependent c ontrac t or under Section 191 (nmv

DECI SION - CTA CASE NO . 3060 8- Se c .: . 2 05 ) .o f the Tax Code , as amended 1 The con tract fee of ~45,000 . 00 pe r month wa s fix.e d , i nc l us i ve, ind i visible and in separable for the maintenance , ser v ice and operation of the go- vernrnent c ars f o r p o lic e use a n d no speci fic price f o r a g i ven quanti ty of f ue l l ubr icants a nd spare parts was t ag g e d nor we r e said produ c ts delivered and received by t he City Gover nment of Cebu; The g ross quar ter l y receipts o f pe tit i oner for the transaction in q uestion were subst anti a lly the same as d istinguished from r ece ipts of o rdinar y sales which var y daily. In ref ut ing r espo ndent'~ arguments that t he c on tract of ~4 5 ,000 .00 wa s fixed, i ncl u sive , ind i- visible and inseparable, petitioner mainta ins that i t s contr ac t with t he City of Ce bu contains b,'o s ub ject matters : one for the s upply o f goods o r t hing s, 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 p rovisions of the Tax Code . And th at as f a r as i ts contrac t of su pply 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 al legation of petitioner t hat its contract o f s upp ly with the City of Ce bu was ac tually a contract of sal e is not s uppcrted by the evidence a nd the record s . As cor re ctly ooserved by respondent , t here were no s pecitic prices agre ed upon by oo t h par t1e s tor a given quantity ot the products sup- plied. The re wer e no s ale s made by petitioner to the City o f Cebu , and the tires, lu oricants and s upplies wer e us ed by petitioner t o p ut the ca~~ in t he1r p rope r o rder in conside ra t i on of the monthly payment of P40,uoo . oo . Control and possession of the goods r emai ned w1th pet1tioner. Ne ither do the r ecords show t ha t petit i oner was enqagea in gener al mer chand isi ng a s it claims. If ev iden tly unde r i ts contract of supply w1th the City o f Cebu petit1 oner was no t a seller of gooc1s, was it t he�n an i nde�penden t con tracto_r? The ter m "i nae�pendent contractm:" as def i ne�d i n Sect i on 191 o t t he Tax Code inc ludes per s ons whose activ i t y consi sts essentially of the sale of any kina of service s f or a fee re gardless of whether or not t he performanc�e o f t he service calls for the exerci s e or us e ot the ph ysic a l or m~ntCi l fC:l - c ult1es of sucQ.---:__ont r actors or th~;ir ernplo yt'e s. As aptl y c1ted by r~~por: d~r1 t (pp . H'6 -l0 7 , C'l'f\_ Bd

� ' DECISION - CTA CASE NO . 3060 - 10 - r ecords) '� "the t e rm 's.ervices ' involves more than me re labor and signifies much more than merely act of performing l abor, and may include, as wel l 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 a ses , Vol. 38A, page 543; underscoring s uppl ied . ) "Service " i s defined as to perform ser - vices of maintenance, supply, repair, i nstal lat i on , distr ibut ion , etc. for or upon, as to service a car, radio set, a sh ip, 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 fo r bo th obligations shall be "indivisible and inseparable." Other accepted def initions of a "contractor" which would apply to petitione r are as foll ows : "One who agre e s to r1o anyt hil l(j hn: another; one who execute s plans under a contrac t; one who contracts or covenants, whether with a government or o t her publ i c body or with private parties, to furnish

DECISION - CTA CASE NO. 3060 - 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 sca l e, at a c e rtain price or rate , ~ 1n bu i lding hou s es 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 wo rk 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 per form any work or service at a fixed price or rate; one who, as an indepe nde nt busine ss, unde rta kes ~: 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 Ce bu s hould be considered as its gross receipts sub- j e ct 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 compromis e 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 . (Wond er 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- sion er 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 interes t 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 ul ly 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 shou ld not be imposed and is affirmed in 91

DECISION - CTA CASE NO. 30GO - 13 - all other r espe cts . With costs against petitioner. SO ORDERED. I Quezon City, Metro Manila, March 28, 1983. d / : V ~NTE FILLER Presidin4 Judge WE CONCUR: