COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF TAX APPEALS and AVECILLA BUILDING CORPORATION, respondents.

Facts: This is a petition to review on certiorari the decision of the Court of Tax Appeals which ruled that respondent Avecilla Building Corporation was not, during the period in question, an independent contractor within the meaning of Section 191 of the National Internal Revenue Code as amended, with respect to its business of furnishing technical services in the construction of buildings. Private respondent is a domestic corporation engaged in the business of "general engineering and contracting of all kinds of constructions and structures; employing and contracting with architects, engineers, surveyors, chemists and other technical men, to perform engineering and architectural work. For the period from September, 1964 to September, 1966, inclusive, the respondent corporation was retained for a fixed monthly fee by the Philippine National Bank, the Development Bank of the Philippines and the Social Security System to render services as "work engineers. On February 2, 1967, the respondent corporation filed with the Court of Tax Appeals a petition for review claiming refund in the amount of P9,572.69 plus interests thereon, for allegedly overpaid contractor's tax for the period from September 1964 to September 1966. It claimed that it is not an "independent contractor" subject to the 3% contractor's tax under Section 191 of the National Internal Revenue Code, as amended.

Issue : Whether or not the respondent corporation is subject to the contractor's tax under Section 191 of the National Internal Revenue Code as amended because of the technical services it rendered for the Philippine National Bank, Development Bank of the Philippines and the Social Security System. In deciding whether or not a person, natural or juridical is subject to a percentage tax provided for in Section 191 of the National Internal Revenue Code, as amended, the Court of Tax Appeals ruled that (1) to be considered as a "contractor" the work performed should be any of the businesses specifically enumerated therein and (2) to be considered as "independent contractor" the work performed should be similar to any of the businesses enumerated therein. Following this interpretation, the respondent court opined that the respondent corporation was neither a "contractor" nor an "independent contractor" within the purview of said Section 191 because the work performed by the latter in furnishing technical services in the construction projects does not fit in either classification. Premised on these circumstances, we find the respondent corporation a building contractor subject to the 3% percentage tax under Section 191 of the National Internal Revenue Code, as amended. A "contractor" within the context of Section 191, National Internal Revenue Code, as amended has been defined as follows: The word 'contractor' has come to be used with special reference to a person who, in the pursuit of the independent business, undertakes to do a specific job or piece of work for other persons, using his own means and methods without submitting himself to control as to the petty details. (Aranas Annotations and Jurisprudence on the National Internal Revenue Code, p. 318, par. 191 (2), 1970 Ed.) The true test of a contractor as was held in the cases of Luzon Stevedoring Co., v. Trinidad, 43 Phil. 803, 807-808, and La Carlota Sugar Central v. Trinidad, 43 Phil. 816, 819, would seem to be that he renders service in the course of an independent occupation, representing the will of his employer only as to the result of his work, and not as to the means by which it is accomplished. (Commissioner of Internal Revenue v. Engineering Equipment and Supply Company, 64 SCRA 597- 598).

The respondent corporation, which has a distinct and separate personality from its "work engineers", rendered technical services to the Philippine National Bank, the Development Bank of the Philippines and the Social Security System in connection with the construction of their buildings. The law imposes a 3% percentage tax on among others, "building ... and other construction work contractors." (emphasis supplied). The respondent corporation's claim for refund of overpaid contractor's tax is DENIED.

CHARTERED BANK OF INDIA, AUSTRALIA AND CHINA, plaintiff-appellee, vs. DIONISIO CONSTANTINO AND 111 OTHERS, defendants-appellants. Facts: Pananbutan Lumber & Plantation Company sold and delivered to the Chartered Bank of India, Australia & China a considerable quantity of lumber. However, when the bank attempted to export the purchased lumber from Pananbutan Lumber & Plantation Company, the bank was prevented from doing so by the employees of the lumber company. Hence, the bank filed a case to obtain an injunction. The employees of the Pananbutan Lumber & Plantation Company instituted an action against their employer, the Pananbutan Lumber & Plantation Company, to recover from it their unpaid salaries and wages aggregating thirty off thousand pesos. The deplorable situation of these employees will thus be understood, for they hold a judgment against their employer undoubtedly of no monetary value, while the lumber formerly owned by their employer has been transferred to the Chartered Bank of India, Australia & China. Counsel for the defendants submits two propositions, based respectively on articles 1600 and 1922, paragraph 1, of the Civil Code. The first cited codal article provides that: "Any person who has done work on personal property is entitled to retain the same as a pledge until he is paid." Here it is conceded that the employees of the Pananbutan Lumber & Plantation Company have done work on lumber, and that they have not been paid for their work. Issue: WON defendants can successfully invoke the provisions of article 1600 and 1922 of the Civil Code.

Held: Defendants were salaried employees and not artisans paid for specific work done on personal property. The defendants were paid for actual service rendered independent of the quality or quantity of the finished product of their labor. Accordingly, article 1600 of the Civil Code is not applicable, for the reason that salaried employees do not come within its purview. Manresa: The difference between the lease of work by contract or for a fixed price and the lease of services of hired servants or laborers is sufficiently clear. In the latter, the direct object of the contract is the lessor's labor; the acts in which such labor consists, performed for the benefit of the lessee, are taken into account immediately. In work done by contract or for a fixed price, the lessor's labor is indeed an important, a most important factor; but it is not the direct object of the contract, nor is it immediately taken into account. The object which the parties consider, which they bear in mind in order to determine the cause of the contract, and upon which they really give their consent, is not the labor but its result, the complete and finished work, the aggregate of the lessor's acts embodied in something material, which is the useful object of the contract.

It is, therefore, plain that the defendants cannot successfully invoke the provisions of article 1600 of the Civil Code. Neither do we think that article 1922, paragraph 1, can prove of any avail to them. It has been conclusively demonstrated that the bank had a right to obtain an injunction. The judgment appealed from will be affirmed, without special pronouncement as to costs in this instance.

THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX APPEALS, respondents. G.R. No. L-27452 June 30, 1975 ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, respondent. Facts: Engineering Equipment and Supply Co. (Engineering) is engaged, among others, in the design and installation of central type air conditioning system, pumping plants and steel fabrications. On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of Internal Revenue denouncing Engineering for tax evasion by misdeclaring its imported articles and failing to pay the correct percentage taxes On September 30, 1957, revenue examiners Quesada and Catudan reported and recommended to the then Collector, now Commissioner, of Internal Revenue (hereinafter referred to as Commissioner) that Engineering be assessed for P480,912.01 as deficiency advance sales tax on the theory that it misdeclared its importation of air conditioning units and parts and accessories thereof which are subject to tax under Section 185(m) 1 of the Tax Code, instead of Section 186 of the same Code. On March 3, 1959. the Commissioner assessed against, and demanded upon, Engineering payment of the increased amount and suggested that P10,000 be paid as compromise in extrajudicial settlement of Engineering's penal liability for violation of the Tax Code On July 30, 1959, Engineering appealed the case to the Court of Tax On November 29, 1966, the Court of Tax Appeals rendered its decision, and declared petitioner, as a contractor, hence exempt from the deficiency manufacturers sales tax.

Issue: WON Engineering is a manufacturer of air conditioning units under Section 185(m), supra, in relation to Sections 183(b) and 194 of the Code, or a contractor under Section 191 of the same Code. Held: The arguments of both the Engineering and the Commissioner call for a clarification of the term contractor as well as the distinction between a contract of sale and contract for furnishing services, labor and materials. The distinction between a contract of sale and one

for work, labor and materials is tested by the inquiry 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. 2 If the article ordered by the purchaser is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change or modification of it is made at defendant's request, it is a contract of sale, even though it may be entirely made after, and in consequence of, the defendants order for it. 3 Our New Civil Code, likewise distinguishes a contract of sale from a contract for a piece of work thus: Art. 1467. 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. The word "contractor" has come to be used with special reference to a person who, in the pursuit of the independent business, undertakes to do a specific job or piece of work for other persons, using his own means and methods without submitting himself to control as to the petty details. We find that Engineering did not manufacture air conditioning units for sale to the general public, but imported some items, which were used in executing contracts entered into by it. Engineering, therefore, undertook negotiations and execution of individual contracts for the design, supply and installation of air conditioning units. The facts and circumstances aforequoted support the theory that Engineering is a contractor rather than a manufacturer, subject to the contractors tax prescribed by Section 191 of the Code and not to the advance sales tax imposed by Section 185(m) in relation to Section 194 of the same Code. Since it has been proved to Our satisfaction that Engineering imported air conditioning units, parts or accessories thereof for use in its construction business and these items were never sold, resold, bartered or exchanged.

INCHAUSTI & CO. VS. CROMWELL 20 Phil 345

FACTS: 1. Plaintiff firm for many years past has been and is now engaged in business of buying and selling at wholesale hemp. 2. It was customary for it to sell hemp in bales and that in all sales of hemp by the plaintiff firm no mention is made of baling; but with the tacit understanding, unless otherwise expressly agreed, that the hemp will be delivered in bales. 3. A charge is then made against the buyers for said baling. 4. Elias Cromwell, the Collector of the Internal Revenue then made a tax assessment upon the sums received from the sale of baled hemp. 5. Plaintiff paid under protest contending that the tax assessed by the defendant upon the aggregate of charges made against said purchasers of hemp by the plaintiff is illegal upon the ground that the said charge does not constitute a part of the selling price of the hemp, but is a charge made for the services of baling the hemp. ISSUE: Is there a contract of sale? HELD: The judgment of the court below was right. It is one of the stipulations in the Statement of Facts that it is customary to sell hemp in bales, and that the price quoted in the market for hemp per picul is the price for the hemp baled. The fact it that among large dealers like the plaintiff in this case it is practically impossible to handle hemp without its being baled, and it is admitted by the Statement of Facts, as well as demonstrated by the documentary proof introduced in this case, that if the plaintiff sold a quantity of hemp it would be the understanding, without words, that purchase price would include the cost and expense of baling. In other words, it is the fact as stipulated, as well as it would be the fact of necessity, that in all dealings in hemp in the general market the selling price consist of the value of the hemp loose plus the cost and expense of petting it into marketable form. * Under such conditions the cost and expenses of baling the hemp is a part of the purchase price and subject to a tax imposed by law on the gross amount of sales of the dealers, and is not a sum paid for work, labor, and materials performed and furnished by the vendor for the vendee. The word price signifies the sum stipulated or the equivalent of the thing sold and also every incident taken into consideration for the fixing of the price, put to the debit of the vendee and agreed to by him. The distinction between a contract of sale and one for work, labor, and materials is tested by the inquiry 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 been the subject of sale to some other person, even if the order has not been given. It is clear that in the case at bar the hemp was in existence in baled form before the agreements of sale were made, or, at least, would have been in existence even if none of the individual sales herein question had been consummated. It would have been baled nevertheless, for sale to someone else, since, according to the agreed Statement of Facts, it is customary to sell hemp in bales.

When a person stipulates for the future sale of articles which he is habitually making, and which at the time are not made or finished, it is essentially a contract of sale and not a contract for labor. It is otherwise when the article is made pursuant to agreement. Where labor is employed on the materials of the seller he cannot maintain an action for work and labor. If the article ordered by the purchaser is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change or modification of it is made at the defendants request, it is a contract of sal e, even though it may be entirely made after, and in consequence of, the defendants order for it. In the case at bar the baling was performed for the general market and was not something done by the plaintiff which was a result of any peculiar wording of the particular contract between him and his vendee. It is undoubted that the plaintiff prepared his hemp for the general market. This would be necessary. One who exposes goods for sale in the market must have them in marketable form.

Nielson & Co. Inc. vs. Lepanto Consolidated Mining Co. Case Digest
Nielson & Co. Inc. vs. Lepanto Consolidated Mining Co. [GR L-21601, 28 December 1968] Facts: [GR L-21601, 17 December 1966; Zaldivar (J): 6 concur, 2 took no part] An operating agreement was executed before World War II (on 30 January 1937) between Nielson & Co. Inc. and the Lepanto Consolidated Mining Co. whereby the former operated and managed the mining properties owned by the latter for a management fee of P2,500.00 a month and a 10% participation in the net profits resulting from the operation of the mining properties, for a period of 5 years. In 1940, a dispute arose regarding the computation of the 10% share of Nielson in the profits. The Board of Directors of Lepanto, realizing that the mechanics of the contract was unfair to Nielson, authorized its President to enter into an agreement with Nielson modifying the pertinent provision of the contract effective 1 January 1940 in such a way that Nielson shall receive (1) 10% of the dividends declared and paid, when and as paid, during the period of the contract and at the end of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of any amount expended during the year out of surplus earnings for capital account. In the latter part of 1941, the parties agreed to renew the contract for another period of 5 years, but in the meantime, the Pacific War broke out in December 1941. In January 1942 operation of the mining properties was disrupted on account of the war. In February 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand and mines, were destroyed upon orders of the United States Army, to prevent their utilization by the invading Japanese Army. The Japanese forces thereafter occupied the mining properties, operated the mines during the continuance of the war, and who were ousted from the mining properties only in August 1945. After the mining properties were liberated from the Japanese forces, LEPANTO took possession thereof and embarked in rebuilding and reconstructing the mines and mill; setting up new organization; clearing the mill site; repairing the mines; erecting staff quarters and bodegas and repairing existing structures; installing new machinery and equipment; repairing roads and maintaining the same; salvaging equipment and storing the same within the bodegas; doing police work necessary to take care of the materials and equipment recovered; repairing and renewing the water system; and retimbering. The rehabilitation and reconstruction of the mine and mill was not completed until 1948. On 26 June 1948 the mines resumed operation under the exclusive management of LEPANTO. Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose between NIELSON and LEPANTO over the status of the operating contract which as renewed expired in 1947. Under the terms thereof, the management contract shall remain in suspense in case fortuitous event or force majeure, such as war or civil commotion, adversely affects the work of mining and milling. On 6 February 1958, NIELSON brought an action against LEPANTO before the Court of First Instance of Manila to recover certain sums of money representing damages allegedly suffered by the former in view of the refusal of the latter to comply with the terms of a management contract entered into between them on 30 January 1937, including attorney's fees and costs. LEPANTO in its answer denied the material allegations of the complaint and set up certain special defenses, among them, prescription and laches, as bars against the institution of the action. After trial, the court a quo rendered a decision dismissing the complaint with costs. The court stated that it did not find sufficient evidence to establish LEPANTO's counterclaim and so it likewise dismissed the same. NIELSON appealed. The Supreme Court reversed the decision of the trial court and enter in lieu thereof another, ordering Lepanto to pay Nielson (1) 10% share of cash dividends of December, 1941 in the amount of P17,500.00, with legal interest thereon from the date of the filing of the complaint; (2) management fee for January, 1942 in the amount of P2,500.00, with legal interest thereon from the date of the filing of the complaint; (3) management fees for the sixty-month period of extension of the management contract, amounting to P150,000.00, with legal interest from the date of the filing of the complaint; (4) 10% share in the cash dividends during the period of extension of the management contract, amounting to P1,400,000.00, with legal interest thereon from the date of the filing of the complaint; (5) 10% of the depletion reserve set up during the period of extension, amounting to P53,928.88, with legal interest thereon from the date of the filing of the complaint; (6) 10% of the expenses for capital account during the period of extension, amounting to P694,364.76, with legal interest thereon from the date of the filing of the complaint; (7) to issue and deliver to Nielson and Co. Inc. shares of stock of Lepanto Consolidated Mining Co. at par value equivalent to the total of Nielson's 10% share in the stock dividends declared on November 28, 1949 and August 22, 1950, together with all cash and stock dividends, if any, as may have been declared and issued subsequent to November 28, 1949 and August 22, 1950, as fruits that accrued to said shares; provided that if sufficient shares of stock of Lepanto's are not available to satisfy this judgment, Lepanto shall pay Nielson an amount in cash equivalent to the market value of said shares at the time of default, that is, all shares of stock that should have been delivered to Nielson before the filing of the complaint must be paid at their market value as of the date of the filing of the complaint; and all shares, if any, that should have been delivered after the filing of the complaint at the market value of the shares at the time Lepanto disposed of all its available shares, for it is only then that Lepanto placed itself in condition of not being able to perform its obligation; (8) the sum of P50,000.00 as attorney's fees; and (9) the costs. Lepanto seeks the reconsideration of the decision rendered on 17 December 1966.

Issue: Whether the management contract is a contract of agency or a contract of lease of services. Held: Article 1709 of the Old Civil Code, defining contract of agency, provides that "By the contract of agency, one person binds himself to render some service or do something for the account or at the request of another." Article 1544, defining contract of lease of service, provides that "In a lease of work or services, one of the parties binds himself to make or construct something or to render a service to the other for a price certain." In both agency and lease of services one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment. The lessor of services does not represent his employer, while the agent represents his principal. Further, agency is a preparatory contract, as agency "does not stop with the agency because the purpose is to enter into other contracts." The most characteristic feature of an agency relationship is the agent's power to bring about business relations between his principal and third persons. "The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease of services contemplate only material (non-juridical) acts." Herein, the principal and paramount undertaking of Nielson under the management contract was the operation and development of the mine and the operation of the mill. All the other undertakings mentioned in the contract are necessary or incidental to the principal undertaking these other undertakings being dependent upon the work on the development of the mine and the operation of the mill. In the performance of this principal undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation. It is true that the management contract provides that Nielson would also act as purchasing agent of supplies and enter into contracts regarding the sale of mineral, but the contract also provides that Nielson could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is clear, therefore, that even in these cases Nielson could not execute juridical acts which would bind Lepanto without first securing the approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an agent. Further, from the statements in the annual report for 1936, and from the provision of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and manage its mines was principally in consideration of the know-how and technical services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and accepted by Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere in the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management contract because it had lost its trust and confidence in Nielson.

QUIROGA vs. PARSONS HARDWARE CO. 38 Phil 501, G.R. No. L-11491, August 23, 1918 FACTS: On January 24, 1911, herein plaintiff-appellant AndressQuiroga and J. Parsons, both merchants, enteredinto a contract, for the exclusive sale of "Quiroga" Beds in the Visayan Islands. It was agreed, amongothers, that Andres Quiroga grants the exclusive right to sell his beds in the Visayan Islands to J.Parsons, subject to some conditions provided in the contract. Likewise, it was agreed that. Incompensation for the expenses of advertisement which, for the benefit of both contracting parties, Mr.Parsons may find himself obliged to make, Mr.Quiroga assumes the obligation to offer and give thepreference to Mr. Parsons in case anyone should apply for the exclusive agency for any island notcomprised with the Visayan group; and that, Mr. Parsons may sell, or establish branches of his agency forthe sale of "Quiroga" beds in all the towns of the Archipelago where there are no exclusive agents, andshall immediately report such action to Mr. Quiroga for his approval.Plaintiff filed a complaint, alleging that the defendant violated the following obligations: not to sell thebeds at higher prices than those of the invoices; to have an open establishment in Iloilo; itself to conductthe agency; to keep the beds on public exhibition, and to pay for the advertisement expenses for thesame; and to order the beds by the dozen and in no other manner. He alleged that the defendant washis agent for the sale of his beds in Iloilo, and that said obligations are implied in a contract of commercial agency. ISSUE: Whether or not the defendant, by reason of the contract hereinbefore transcribed, was an agent of theplaintiff for the sale of his beds.

HELD: No. In order to classify a contract, due regard must be given to its essential clauses. In the contract inquestion, there was the obligation on the part of the plaintiff to supply the beds, and, on the part of thedefendant, to pay their price. These features exclude the legal conception of an agency or order to sellwhereby the mandatory or agent received the thing to sell it, and does not pay its price, but delivers tothe principal the price he obtains from the sale of the thing to a third person, and if he does not succeedin selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter, onreceiving the beds, was necessarily obliged to pay their price within the term fixed, without any otherconsideration and regardless as to whether he had or had not sold the beds.In respect to the defendant's obligation to order by the dozen, the only one expressly imposed by thecontract, the effect of its breach would only entitle the plaintiff to disregard the orders which thedefendant might place under other conditions; but if the plaintiff consents to fill them, he waives his rightand cannot complain for having acted thus at his own free will.