Lo v. KJS Eco-Formwork System Phil., G.R. No.

149420, October 8, 2003

FACTS:

 Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of steel
scaffoldings, while petitioner Sonny Lo is a building contractor.
 On 22 February 22 1990, petitioner ordered scaffolding equipments from respondent worth P540,425.80.
He paid P150,000.00 as downpayment, the balance of which was made payable in ten monthly
installments.
 Petitioner was only able to pay the first two monthly installments and was unable to settle his obligation
due to financial difficulties.
 On 11 October 11 1990, petitioner and respondent executed a Deed of Assignment, the former assigning
to the latter his receivables in the amount of P335,462.14 from Jomero Realty Corporation.
 However, when respondent tried to collect the said credit from Jomero, the latter refused to honor the
Deed of Assignment because it claimed that petitioner was also indebted to it. On 26 November 26 1990,
respondent sent a letter to petitioner demanding payment of his obligation.
 However, petitioner refused to pay claiming that his obligation had been extinguished when they
executed the Deed of Assignment.

ISSUE: WON the deed of assignment extinguished the petitioner’s obligation

HELD:

No. The petitioner’s obligation was not extinguished with the execution of the deed of assignment.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal
cause, such as sale, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same
extent as the assignor could enforce it against the debtor.

In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who accepts it as
equivalent of payment of an outstanding debt. In order that there be a valid dation in payment, the following are
the requisites: (1) There must be the performance of the prestation in lieu of payment (animo solvendi) which may
consist in the delivery of a corporeal thing or a real right or a credit against the third person; (2) There must be
some difference between the prestation due and that which is given in substitution (aliud pro alio); (3) There must
be an agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the
performance of a prestation different from that due. The undertaking really partakes in one sense of the nature of
sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged
against the debtor’s debt. As such, the vendor in good faith shall be responsible, for the existence and legality of
the credit at the time of the sale but not for the solvency of the debtor, in specified circumstances.

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property, produced
the effects of a dation in payment which may extinguish the obligation. However, as in any other contract of sale,
the vendor or assignor is bound by certain warranties. More specifically, the first paragraph of Article 1628 of the
Civil Code provides:
 The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale,
unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so expressly
stipulated or unless the insolvency was prior to the sale and of common knowledge.

From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and legality of the
credit at the time of the sale or assignment. When Jomero claimed that it was no longer indebted to petitioner
since the latter also had an unpaid obligation to it, it essentially meant that its obligation to petitioner has been
extinguished by compensation. In other words, respondent alleged the non-existence of the credit and asserted its
claim to petitioner’s warranty under the assignment. Therefore, it necessary for the petitioner to make good its
warranty and pay the obligation.

Furthermore, the petitioner breached his obligation under the Deed of Assignment, to execute and do all such
further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever
collectibles said ASSIGNOR has in accordance with the true intent and meaning of these presents.

Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the performance
thereof in case the same is later found to be inexistent. He should be held liable to pay to respondent the amount
of his indebtedness.

Celestino Co. v. Collector of Internal Revenue, G.R. No. L-8506, August 31, 1956

Facts:
 Celestino Co doing business under the name of “Oriental Sash Factory”. From 1956-1951 it paid percentage
tax of 7% (National Revenue Code sec. 186) on the gross receipts of its sash, door, and window factory.
However on 1952 it began to claim liability only to contractor’s 3% tax (Instead of 7%) under sec. 191.

 Celestino claims that they do not manufacture ready made doors, sah, and windows for the public. He claims
that they only do Special Orders for customers, thus, contending they are not manufacturers. This did not
convince the BIR and the Court of Tax Appeals.

 CTA said that their tradename gives an impression they do engage in manufacturing and their records suggest
that their huge earnings (P188, 754.69) cannot be from special orders from ther few customers, but because it
was from ready made products. They also offered themselves as a “factory” to the public.

Issue:

Whether or not that in filing orders for windows and doors according to specifications, it did not sell, but merely
contracted for particular pieces of work or "merely sold its services".

Held:

No.

Article 1467 provides that :

“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 contract for a piece of work.”
It is at once apparent that the Oriental Sash Factory did not merely sell its services to Don Toribio Teodoro & Co.
(To take one instance) because it also sold the materials. The truth of the matter is that it sold materials ordinarily
manufactured by it — sash, panels, mouldings — to Teodoro & Co., although in such form or combination as suited
the fancy of the purchaser. Such new form does not divest the Oriental Sash Factory of its character as
manufacturer. Neither does it take the transaction out of the category of sales under Article 1467 above quoted,
because although the Factory does not, in the ordinary course of its business, manufacture and keep on stock
doors of the kind sold to Teodoro, it could stock and/or probably had in stock the sash, mouldings and panels it
used therefor (some of them at least).

When this Factory accepts a job that requires the use of extraordinary or additional equipment, or involves
services not generally performed by it-it thereby contracts for a piece of work — filing special orders within the
meaning of Article 1467.

Anyway, supposing for the moment that the transactions were not sales, they were neither lease of services nor
contract jobs by a contractor. But as the doors and windows had been admittedly "manufactured" by the Oriental
Sash Factory, such transactions could be, and should be taxed as "transfers" thereof under section 186 of the
National Revenue Code.

The appealed decision is consequently affirmed. So ordered.

Commissioner of Internal Revenue v. Engineering Equipment and Supply Co., G.R. No. L-27044 June

 Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation, is an engineering and
machinery firm. As operator of an integrated engineering shop, it 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 due thereon in connivance with its foreign suppliers. Engineering was likewise denounced
to the Central Bank (CB) for alleged fraud in obtaining its dollar allocations. Acting on these denunciations, a
raid and search was conducted by a joint team of Central Bank, (CB), National Bureau of Investigation (NBI)
and Bureau of Internal Revenue (BIR) agents on September 27, 1956, on which occasion voluminous records
of the firm were seized and confiscated
 On September 30, 1957, revenue examiners Quesada and Catudan reported and recommended to the then
Collector, now Commissioner, of Internal Revenue 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) of the Tax 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. The firm, however, contested the tax assessment
and requested that it be furnished with the details and particulars of the Commissioner's assessment

Issue: W/ON 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:

Engineering is a contractor rather than a manufacturer.

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.
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. The true test of a contractor, 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.

Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of its various customers the
central type air conditioning system; prepares the plans and specifications therefor which are distinct and different
from each other; the air conditioning units and spare parts or accessories thereof used by petitioner are not the
window type of air conditioner which are manufactured, assembled and produced locally for sale to the general
market; and the imported air conditioning units and spare parts or accessories thereof are supplied and installed
by petitioner upon previous orders of its customers conformably with their needs and requirements.

The facts and circumstances aforequoted support the theory that Engineering is a contractor rather than a
manufacturer.