CTA Case No. 4467 (Decision)

REPURLJ G OF THE PHII~IPPINES COURT OF TAX APPEALS QUEZON GJTY ANSCOR CONTAINER COHPORATlON, 1' e L i L i u i1 e t� , - versus - C.T.A. CASE NO. 4467 COMMISSIONER OF INTERNAL REVENUE, PcumulgaleU ' ~ l<e~IJouueul. APR 241995 X- - - - - - - - - - - - - - - - - - - - - - - - - - - X DECISION On appeal before Ll1is Cuurl is a peliliuu fur review uf respuuueuL 's uec is iuu assessing peL i Liuner fot� 1984 deficiency sales Lax anu uelicieucy iiual tax Ull divideuds in the respective amounts of Pl,541,073.95 and , P39,72:!..30. Allegeuly, petitioner is a service contractor processing raw materials provided by its customers into steel drums and other containers based on specifications !Jl'U\1 ided !Jy SUCh CUSLUillel'S, Since 1Y55, its directors have ueen receiving as tileit� compensation an amuuuL ui eyual to Lwo aucJ une-hali per cent (:!.~%) ui the uel pruliLs ol the company for the 683

DECISION - C.T.A. Case No. 4467 - 2- preceding fiscal year, to be equally apportioned among them. On May 30, 1988, it filed a protest with respondent to question the aforesaid assessments. On June 1, 1990, petitioner received a letter from respondent deuyiug its IJruLesL. Heuce, this appeal filed with this Court on June 29, 1990. Issues raised in the case are the following: 1. Whether or uot su~ject assessments are barred by prescription; 2. Whether or not petitioner acted as a contractor in the subject transactions with Pilipinas Shell Petroleum Corporation (PiliiJinas Shell) and Marinduque Mining Industrial CoqJot�atiou (MMIC); 3. Whether o1� not the directors' fees given by petitioner constitute dividends subject to 15% final tax. On hand for IJrimary consideration is the issue ou prescription. Petitioner contends that Lhe assessment for deficiency sales tax was issued on May 23, 1988. Its subject matter are sale transactions that occurred before December 31, 1984. This ~eing so, the percentage tax r e t u 1� n 1 o 1� the said transactions should ~e filed on the 20th day of the month ai ter the end oi the last 4ua1�te1� in 1984 or not later t.hau April 20, 1985, tu ~e exact. Three years from April 20, 1985 is April 20, 1988. 6'84

DECISION - G.T.A. Gase No. 4467 - 3- Petitioner asserts that respondent's right Lo assess should be exercised on or before April 20, 1988. As the assessment in question was issued only on May 23, 1988, petitioner concludes that respondent's right to assess has already prescriGed. The same argument has been applied by petitioner to respondent's assessment for deficiency final Lax ou dividends. It professes that respondent has only up to April 15, 1988 wilhiu which Lo issue valid income tax assessment. Obviously, since subject assessment was similarly issued on the same date of May 23, 1988, the same right of respondent to assess has already prescribed. We beg to disagree. Respondent's right to assess has uot pt�escr ibed. A waiver of Lhe defense of prescription (Exhibit "411 of Respondent, p. 341, BIR records) was duly executed by Mr. Raul v . Locsin on February 24, 1988, in his capacity as president of petitioner in consideration of its request for reinvestigation of its internal revenue tax liabilities for 1984. The existence of this waiver was mentioned by respondent in his answer under paragraph 6 of his special and aflirmalive defenses. The validity ol Lhis waiver 685

DECISION - C.T.A. Case No. 4467 - 4- finds support in Section 223 uf the Tax Cude, pertinent provisions of which are quoted as follows: "Section 223. Exceptions as to period of limitation of assessment and collection of taxes - (a) X X X (b) If before the expirition of the time prescribed in the preceding section for the assessment uf the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The pet�iod so agt�eed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) X X X (d) X X X (e) X X X " (Underscoring supplied) Applying the foregoing, it is beyond question that the waiver was legally and/or validly executed. It was put into writing on February 24, 1988 which is prior to April 20, 1988, respondent's deadline to assess. And it was signed by both the Deputy Commissioner of Internal Revenue, Eufracio D. Santos and the President of petitioner, Raul V. Locsin. Petitioner argues that respondent could not invoke that waiver as it specifically pertains to assessments for income tax fur "prior year's expenses" and the pet�centage tax assessment. The 1� e 1 u r e , eve u i i the waiver 686

DECISION - C.T.A. Case No. 4467 - 5- is assumed to be valid such could not be deemed to apply with respect to the assessment for the deficiency withholding tax on dividends. Again, we beg to disagree. A reading of the said waiver stating that: "I, Raul V. Locsin x x x do hereby waive the defense of vrescri.vtion under the statute of limitations prescribed in Sections 268 and 269 and other related vrovisious oi the National Internal Revenue Code, and consent to the assessment and/or collection of the tax or taxes for said year which may be found due after investigation/reinvestigation at any time belore or alter the �lavse of the veriod of limitations fixed by said sectious of the National Internal Revenue Code. X X X." (Underscoring suvplied) shows clearly that petitioner, through its president, agrees in writing that the wai~er's avvlication is not limited to income and percentage tax assessments of its contract sales but extends to all other taxes which may be found due after the investigation or reinvestigation. The Court now comes to the second issue. Petitioner contends that its sul>jecl transactions with Pilipinas Shell arid MMIC were mere contracting services on the ground that the raw materials it used in vrocessing the drums and other steel containers were suvvlied by said customers. Moreover, these drums or containers were made 687

DECISION - C.T.A. Case No. 4467 - 6- in accurJauce with the Jesigus or specifications provided by Pi 1 ip iuas She 11 auJ mac. On the coutt�ary, respouueut 's examiner, Hs. Olivia Lao, maintains that petitioner's t r� ans act ions are not only limited with Pilipinas Shell and HMIC. There are othet� customers similarly situated and yet were charged with manufacturer's tax. Pertinent portion of Ms. Lao's testimony taken during the hearing of January 17, 1995 is reproduced hereunder: "ATTY. URBANO Q. Now, in your report, Miss Witness, yout� t�eason o1� one of your reasons in recomrnenJing an assessment for Jeficiency sales tax in the amount of Pl,463,605.43 is that petitioner is really a manufacturer, is that correct? A. Yes, because their SEC registration papers would show that. And on top ol that, they also serve customers who are similarly situated anJ yet they charge them for sales tax and nul contractor's Lax. Because, actually, the sales there are sales arising from sale to Shell, I think, and the other one is Marinduque Mining, wherein il was subjected to contractor's tax because according to them the raw materials were proviJed by the customers. Rut in other instances wherein they also serve clients who are similarly situated, meaning, they also serve clients in the chemical iuJuslry and also in the mining industry, they charge the sales tax and not the contractor's tax. (T.S.N., hearing of January 17, 1994, pp. 21-22; Underscoring supplied) 688

DECISION - C.T.A. Case No. 4467 - 7- Based on the ahove findings, the Court holds the view that it is erroneous fot� petitioner's counsel to limit its Lliscussion of the secouJ issue only to transactions of petitioner with Pilipinas Shell and MMIC. As it will be shown later, petitioner has .no less than a hundred of customers to transact with. Be that as it may, the Cout�t still liuds lor the respondent. Petitioner's transactions with Pilip inas Shell and MMlC are manufacturing in nature. The fact that the drums or steel containers were made in accordance with SIJecilicatious or designs pr�ov ided by c us Lome t�s is ol uo moment. Petitioner's witness, ALLy. Rodollo Paclilla, has aJmiLLeJ in ojJen court that the mainline ot petitioner's business is manulactur:iug ol Jrums. Thus, in the hearing ot January '27, 1993, T.S.N. pp. 36-37, he testified as follows: ".JUDGE GRUBA I will just ask some questions? How many customers do Auscor Container Cot�jJoration have�? A. We have at least a huudt�ed. JUDGE GHUBA l'he mainliue ul your business is manulaclur�iug ul Llrums! A� Yes , You r Hu 11 o l' � " 689

DECISION - C.T.A. Case No. 4467 - 8- ln oue case, it has been held that: " x x x The imp o r tan t t h i u g L o 1: em em lJ e 1� i s that Celesliuo Co and Company hauilually makes sash, windows and doors, as it has represented in its stationery and advertisements to the puulic. That it "manufactures" the same is practically admitted by appellant itself. The tact that windows and doors are made by it only when customers place L he i r� o r de r s , does not a l t e r the uatu1�e ol t he e s t a lJ 1 i s lun e n t , 1 o r i t is obvious that it only accepted sucll orders as called for the employment of such mater�ials- moulding, lr�ames, pauels as it or�dinarily manufactured or was in a position habitually to manufacture." (Celestino Co au~ Go. vs. Golleetor ot Internal Revenue, 99 Phil. 843- 844) ln the same way, petitioner iu the onlinarily course of its bu::-;iuess h a lJ i t tta 1 1 y mau ul a c t u r e u u r� 11111 s au u o L he 1� couta iuet�s, although iu the case ol sale to .She 11 and MariuduqnP Hining, the same were mauutactured upon their spec it ic onJers. ln auothet� t.lecision it has beeu r�uleu that: Petitionet� \vants Lo impress upon this Court that under Article 1467, the true test of \vhether or not the contract is a piece nf work (and thus classifying private respondent as a c u u t r a c t u r ) o r a co u L 1� a c l. o 1 s a 1 e ( wh i c h wo u 1d classify private respondeut as a mauulaclurer) is lhe me1�e existence ot the product at the Lime ot the perlection ut the contract such that il the thing already exists, the contract is of sale, if not, it is wot�k. This is not the test followed iu this jurist.liction. As can ue clearly seen trom the wording of Art. t467, what determines whether l.he couLt�act is uue ol work ur ol Hale is w11 e L11 e r i 11 e L11 i 11 g l1t:1. s Ll e e 11 "m a llll t a c Lur e d specially lol' U1e cw?iomer tHld upou llis special 690

DECISION - C.T.A. Case No. 4467 - 9- order." Thu1:;, il the thing is S)Jecially done at the order of another, this is a contract for a piece ol work. 11:, un the other hand, the thing is manufactured or procured for the general market itt the ordinary course of one's business, it is a contract ul sale. Juri1:;prudeuce has lulluwed this cJ.iteriun. As held in Commissioner ol Internal Revenue vs. Br1gineering Bquipment and Supple Co. (L-27044 and L-27452, Juue 30, 1Y75, 64 S<..:HA 590, 597), "the distinction between a contract of sale and one tor work, labor and materials is tested by the in4uiry whethet� the thing lrausierred is one not in existence and wllicll never would lla.ve existed /Jut Lor Llle order oL tlle paz�ty desiring to acquire it, or a thing which would have existed and has been the subject ot sale to some othet� )Jersuul:; even il the unlet� had nul been given." (italics SV)Jplied.) And in a HlH ruling, which as )Jer Sec. 236 (now Sec. 277) of the Tax <..:ode the Commissioner ha1:; the power tu make and which, as per settled jurisprudeuce is entitled to the greatest weight as an administrative view [National Federation of Sugar Workers (NFSW) vs. Ovejera, G.R. No. 5Y743, Hay 31, 1Y82, 114 S<..:HA 354, :..191; Sierra Madre Trust v1:;. Jlou. Sec. o.L Agricult.ut�e and Natural Resources, Nus. L-32370 and L-:..12767, April 20, 1Y83, 121 SCHA 3H4; Es)Janol vs. Chairman and Members ol the Hoard ol Admidislrators, Phil. Veterans Adminislratiod, L-44616, June 29, 1985, 137 SCRA 3t4], "one who h a s _ _read_x___to r ___!:_!!_e s a 1 e to t he gene r a 1 )J u b 1 i c iiuished iurniture is a manuJ:aclurer, a11d the Ill e r e 1 a c L L11 a t: ll e did not lla.ve on lla.ud a particular piece or pieces ol' l'urniLure ordered does 110 L make llim a contractor o11ly" (HlH Ruling No. 537, series of iY60). L\kewise, XXX XXX XXX When the vendor enters into a contract for Lhe delive1�y ui au at�ticle which iu the ot�diuary cuu1�se ul his business he mauulactures or procut�es tot� the general market at a price certain (Art. 1458) such contract is one of sale even il' at the time ot contracting he may nut i1a.ve sucil a.z�Licle o11 ila.11d. Such articles 691

UECISlON - C.T.A. Case No. 4467 - 10 - tall within the meaning ot "future goods" meutiuJteu in Art. 1462, par. 1. L5 Padilla, C i v i 1 L a\v : C i v i 1 C u cJ.e Anu o t a l e tl 1 :J Y ( 1 Y 7 4 ) j . XXX XXX XXX (Commissioner ot Internal Revenue vs. Arnoidus Carpent:ry Shops Inc. pp. 206-207; lJ u de 1' s c o 1� i u g s u p p 1 i e tl ) From the abuve-4uoted decision, il is tuo cleat� that even it petitioner diu nut have uu hand a particular drum which is being utdered, such situation will not alter its classification as a ma11u!:acturer. As enunciated by the alor�e4uuteu jut� ispruueuce, the contract will remain that of sa l'es because the manul.acl.ure ol drum is in the ordinary course ut its business which it does or procures lor the general market at a price certain. To put it in another way, thus; the articles ordered by the purchaser ar�e exactly whaL the mauulacturer makes and keeps on hand lor sale to anyone. The trausactiun would r�emain that oi sale although in the case oi Shell and .Htll'indu4ue Hining, the same were manufactured upon their specilic on..lers. Furthermore, Lhe representation or declaration to the public that it is a manufacturer was made in th.e purposp clause ol its Articles ot Incorporation (p. 11, BlR records), in its Residence Certiticate for 1984 (p. '::d, 1biu.J, as well as in its Hanagement Contract with A. Sorianu l p � 2 L, supra). Petitioner cannot have its own cake and eat it too. Why did it declare in said records 692

DECISION - C.T.A. Case No. 4467 ll - Ol' documents Lhal it i. s a manulaclut:er and then fur Laxation il claims that it a mere conlraclol� l lly nul divulging Lhe Lt�ue inleuliou/s or purpose/s oi its incorporation, petitioner clearly puts the gove t�tuuen L a l i Ls met�cy. ll vetiLiuuer wants to be kuowu o1 Laxeu as a mauulacturer, then so be it, for it is expt�Pssly provided ill il.s Articles ul lliC01'{H>rrtt.ion. However, i t p P t: i t i o n e r \vant:s to be charged a lower rate ol Lax, then it will al~o claim it is a mere contractor. ll will :;,imvly p1�esenl a t.:ontt�act 01 Agreement it eutereu iuto wilh ils cUl:;Lomel� Lo the ellecl Lhal peLiLjuuer will mauulactut�e melal coulaiHet�l:; pursuant to saiu customer's order aud specificatious. This Court [eels that this situation jl:j uul conducive Lu a stable tax adminisl.rat.io11. Although it may be admitted that Oll some occasions petitiouer does some contracting services, the tact remains, as horne by its accounting and p11blic recorus, that it. is priHcipally a manulacluriug ~..;unceru. This u; uackeu up by L h t>. l i g u ,. e s I i 1 L e d l t' u 111 i L s j o u r n a 1 eulri.es LhaL gave rise Lu Lhe Lolal amuuul ul P65,7::17,<J5<J.:12 that was su!Jj ect.ed to sales Lax. Breakdown o t said amonnt:, as appearing oil page l.7B, BlR recut�ds is as lollu1vs: 693

DECISION - C.T.A. Case No. 4467 - 12 - "Manuiact11ring Salf~s P6L,75l,fill.l9 Contract Sales 3,977,466.79 Total per 1'/S - P65,729,077.96 Exh. "U-J" ol 8,881.]6 petitiouet� (p. 97, l.llH t�eco rds) P 6 s , 7 :n , 9 59 . 3 2 " Add: Special Price Discount Taxable Sale Evident-ly from the above, the principal line of business ol petitioner is mauul:acturiug as its manu t a c t u 1� i u g sales ill the amount ol P61,75l,bll.l9 comprises 94% ol its total taxable sales. Con L t�ac L sa 1es in the minimal amount of P3,Y77,466.17 is only 6% ol its total taxable sales. From all the lur<~guing, petitionet� there lut�e is a manulaclurer and not a mere contractor ol services. it is truly a manutactut�er and hence, subject to 10% sales tax. With regard to the thin! issue, respondent asserts thal Lhe uitectot's lees wete actually dividends issued to directors who have suusLantial holdings in A. Suriano Corporation (par. 9, Ans\ver, p. 31, C'l'A records). HesiJondent's assertion is without merit. His examiner miserably tailed to prove in court that the director's tees were dividends in reality. The list of director's Hhareholdiugs and tees from 1983 to 1985 which was marked as Exhibit "5" lor reHpondent (p. JJ4, HIH 694

DECISION - C.T.A. Case No. 4467 - 1) - records) auu the gent-�ral iHiormalion sheet oi A. Soriano Co~poration rtid not prove anything favorable to the t.'espoudeu t. On the coutrary, said Exhibit "5" all the mo1�e strengthened petitione1�'s stance that the director's lees vaiu were not in any way related Lo the numoer of shares held uy the directo1�s. The director's tees, if they were indeed dividends, were overproportioned to the nominal shares held by the directors. Moreover, even the di1�ectors ol suuject petitioner own substantial shareholdings in A. Soriano Corporation, respondent has no legal nor factual basis to presume that management tees issued by vetitioner to cJ i 1� e c to 1� s ul A. Sol� iallo a1�e iH Lite guise oi divi.deucJs. Well-settled the rule that "the vresumvti.on oi v correctness o l a ::; s e s s 111 e n t be i 11 g a me 1� e 1� e s HllllJ L i on c a uno t be made to rest on another vresumpti.on." (Gommissioner ol internal Revenue vs. llenipayo, G.R. No. L-13656, Jan. :.H, 1962.) WHJo:RIU'OIU:, in v ie\v ol a J 1 the Joregoing, respondent's assessment for deficiency final tax on dividends in the amount of P39,772.30 is hereby cancelled tor lack ol merit. However, vetitioner is he1�eby ordered to pay the resvoudeuL Lhe amount oi P1,541,07J.Y5 as deficiency 695

DECISION - C.T.A. Case No. 4467 - 14 - sales t:ax tor 198ft, plus 25% surcharge. and 20% interest thereon from May 23, 1988 until fully paid pursuant to Sections 248 aud 249 of the Tax Code as re-numbered and re-arranged by Executive Order No. 273, which took effect on Jauua1y 1, 1YB8. SO ORDERED. ~c.~~ ERNESTO U. ACOSTA P 1� e o i Ll i u g J u d g e WE CONCUR: ~I Pt.~ RAMON 0. DE V. RA Associate Jt ge CE.R':L" IF ICAT ION 1 hereby cerl ity tiJAt the decisio11 was reAched after due consultation among the memuet�s ol the Gourt oi Tax AplJeals in accordauce wiLI1 Section JJ, Article Vlll oi the Constitution. ~-o~~ EHNESTO D. ACOSTA Presiding .Judge Court ot Tax Appeals 696