G.R. No. L-27044 – THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX APPEALS, respondents.
G.R. No. L-27452 – ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, respondent.
ESGUERRA, J.
Rule Synopsis
What distinguishes a contract for a piece of work and a contract of sale is their subject matter. If the thing transferred is being produced in the ordinary course of one’s business, it is a contract of sale. If the thing transferred wouldn’t have existed but for the special order of a customer, it is one for a piece of work.
Facts
This case originated with a report made by one Juan Dela Cruz to the Commissioner of Internal Revenue (CIR) against Engineering Equipment and Supply Co. (Engineering) for, among others, tax evasion. According to Dela Cruz, Engineering misdeclared imported articles and failed to pay the correct percentage taxes due thereon. The revenue examiners assessed Engineering with a deficiency advance manufacturers sales tax of P916k (later reduced to P740k).
The CIR assessed against Engineering and demanded payment, the latter refused. On appeal, the CTA declared engineering exempt from the deficiency manufacturers sales tax but liable for P174k compensating tax, plus surcharge. Both parties appealed.
The CIR argued that Engineering is a manufacturer and seller of air conditioning units and parts. Thus, subject to the 30% advance sales tax under Section 185(m) of the Tax Code, in relation to Section 194 thereof.
On the other hand, Engineering claims that it is a contractor engaged in the design, supply and installation of the central type of air-conditioning system subject to the 3% compensating tax imposed by Section 191 of the same Code, which is essentially a tax on the sale of services or labor of a contractor rather than on the sale of articles.
Issue
Was Engineering a manufacturer of air conditioning units under Section 185(m) of the Tax Code, in relation to Sections 183(b) and 194 of the Code, or a contractor under Section 191 of the same Code?
Ruling and Discussion
Engineering was a contractor under Section 191 of the same Code.
Engineering was not engaged in the manufacture of air conditioning units but had its services contracted for the installation of a central system.
The test in determining whether the contract is one of sale, or one for work, labor and materials is whether the thing transferred is one not in existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which would have existed and has been the subject of sale to some other persons even if the order had not been given. In the first case, it is a contract for one for work, labor and materials; in the latter a contract of sale. In the latter case, the article ordered by the purchaser is exactly such as the seller makes and keeps on hand for sale to anyone, and no change or modification of it is made at purchaser’s request.
Under the Civil Code, a contract for a piece of work is defined as “[a] contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for the general market, whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order and not for the general market, it is a contract for a piece of work.” (Art. 1467, 1713)
In this case, the Court found that Engineering did not manufacture the air conditioning units for sale to the general public, but imported some items which were used in executing contracts entered into by it. These contracts were not standard but especially made for each customer and installed in his building upon special order. For each contract, Engineering would have to take into account factors such as the space to be air-conditioned, the number of persons occupying, the purpose of air conditioning the area, heat source, among others. The SC also found that Engineering advertised itself as Engineering Equipment and Supply Company, Machinery Mechanical Supplies, Engineers, Contractors, and not as manufacturers. Also, it paid the contractors tax on all the contracts it executed.
Dispositive
Decision affirmed with modification.