Inchausti & Co. vs.

Cromwell 20 Phil 345

Facts:

 Petitioner is engaged in the business of buying and selling wholesale hemp either on
commission or for its own account.
 It is customary to sell hemp in bales which are made by compressing the loose fiber by
means of presses, covering two sides of the bale with matting, and fastening it by means of
strips of rattan; that the operation of bailing hemp is designated among merchants by the
word “prensaje.”
 In all sales of hemp by Inchausti, the price is quoted to the buyer at so much per picul, no
mention being made of bailing. It is with the tacit understanding that the hemp will be
delivered in bales. The amount depends under the denomination of “prensaje” or the baled
hemp.
 Between the first day of January, 1905, and the 31st day of March, 1910, the plaintiff firm
collected and received, under the denomination of 'prensaje,' from purchasers of hemp sold
by the said firm for its own account, in addition to the price expressly agreed upon for the
said hemp, sums aggregating P380,124.35; and between the 1st day of October, 1908, and
the 1st day of March, 1910, collected for the account of the owners of hemp sold by the
plaintiff firm in Manila on commission, and under the said denomination of 'prensaje,' in
addition to the price expressly agreed upon for said hemp, sums aggregating P31,080.
 On the 29th day of April, 1910, the defendant, acting in his official capacity as Collector of
Internal Revenue of the Philippine Islands, made demand in writing upon the plaintiff firm for
the payment within the period of five (5) days of the sum of P1,370.68 as a tax of one-third
of one per cent on the sums of money mentioned .
 Petitioner paid the amount under protest but, however, contends that the collected amount
is erroneous on the ground that the said charge does not constitute a part of the selling price
of hemp, but is rather a charge made for service or labor for baling the said hemp. Thus,
distinct and different from the contract of sale of hemp and should not be charged by the
defendant.
Issue: WoN the charge in bailing of hemp is deemed constituted in the contract of sale of the
same.
Ruling: YES

 The word "price" signifies the sum stipulated as 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. It is quite possible that the plaintiff, in this case in connection
with the hemp which he sold, had himself already paid the additional expense of baling as a
part of the purchase price which he paid and that he himself had received the hemp baled
from his vendor In such case the plaintiff performed no service whatever for his vendee, nor
did, the plaintiff's vendor perform any service for 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 had 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 here in 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
defendant's request, it is a contract of sale, even though it may be entirely made after, and
in consequence of, the defendant's order for it.
 It has been held in Massachusetts that a contract to make is a contract of sale if the
article ordered is already substantially in existence at the time of the order and merely
requires some alteration, modification, or adaptation to the buyer's wishes or
purposes. It is also held in that state that a contract for the sale 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 for the
sale of goods to which the statute of frauds applies. But if the goods are to be
manufactured especially for the purchaser and upon his special order, and not for the
general market, the case is not within the statute.
 It is clear to our minds that in the case at bar the baling was performed for the general
market and was not something done by 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. The hemp in
question would not have been in that condition if it had not been baled. The baling,
therefore, was nothing peculiar to the contract between the plaintiff and his vendee. It
was precisely the same contract that was made by every other seller of hemp,
engaged as was the plaintiff, and resulted simply in the transfer of title to goods
already prepared for the general market.
 It is conceded in the case that a separate entry and charge would have been made for the
baling even if the plaintiff had not been the one who baled the hemp but, instead, had
received it already baled from his vendor. This indicates of necessity that the mere fact of
entering a separate item for the baling of the hemp is formal rather than essential and in no
sense indicates in this case the real transaction between the parties. It is indisputable that, if
the plaintiff had bought the hemp in question already baled, and that that was the hemp the
sale of which formed the subject of this controversy, then the plaintiff would have performed
no service for his vendee and could not, therefore, lawfully charge for the rendition of such
service. This demonstrates the nature of the transaction and discloses, as we have
already said, that the entry of a separate charge for baling does not accurately
describe the transaction between the parties.
Celestino Co. vs. Collector of Internal Revenue
Facts:

 Celestino Co & Company is a duly registered general co-partnership doing business under
the trade name of “Oriental Sash Factory”.
 From 1946 to 1951 it paid percentage taxes of 7% on the gross receipts of its sash, door
and window factory, in accordance with sec. 186 of the National Internal Revenue Code
which is a tax on the original sales of articles by manufacturer, producer or importer.
 However, in 1952 it began to claim only 3% tax under Sec. 191, which is a tax on sales of
services. Petitioner claims that it does not manufacture ready-made doors, sash and
windows for the public, but only upon special orders from the customers, hence, it is not
engaged in manufacturing under sec 186, but only in sales of services covered by sec 191.
 Having failed to convince BIR, petitioner went to the Court of Tax Appeal where it also
failed. CTA, in its decision, holds that the “petitioner has chosen for its tradename and has
offered itself to the public as a “Factory”, which means it is out to do business, in its chosen
lines on a big scale. As a general rule, sash factories receive orders for doors and windows
of special design only in particular cases but the bulk of their sales is derived from a ready-
made doors and windows of standard sizes for the average home.
Issue: WoN the petitioner is engaged in manufacturing or provides special services.
Ruling:

 The Oriental Sash Factory is engaged in manufacturing. The company habitually makes
sash, windows and doors as it has been represented to the public.The fact that windows
and doors are made by it only when customers place their orders, does not alter the nature
of the establishment, for it is obvious that it only accepted such orders as called for the
employment of such material-moulding, frames, panels-as it ordinarily manufactured or was
in a position habitually to manufacture. The Oriental Sash Factory does nothing more than
sell the goods that it mass-produces or habitually makes; sash, panels, mouldings, frames,
cutting them to such sizes and combining them in such forms as its customers may desire.
*Ruling that is relevant to the syllabus topic:

 SC differentiated contract of sale from a contract for a piece of work saying 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."
CIR vs. Engineering Equipment and Supply

Facts:

 Engineering Equipment and Supply Co (EESC) is an engineering and machinery firm and is
engaged, among others, in the design and installation of central type air conditioning
system, pumping plants and steel fabrications.
 One Juan dela Cruz wrote the Collector, now Commissioner of CIR, denouncing EESC for
tax evasion and failing to pay the correct percentage taxes due in connivance with foreign
suppliers.
 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) 1 of the Tax Code, instead of Section 186 of
the same Code.
 This assessment was revised on January 23, 1959, in line with the observation of the Chief,
BIR Law Division, and was raised to P916,362.56 representing deficiency advance sales tax
and manufacturers sales tax, inclusive of the 25% and 50% surcharges.
 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 Appeal, Court of Tax Appeals (CTA) modified the Commissioner’s decision ruled that
EESC, as a contractor, is declared exempt from the deficiency manufacturers sales tax.
Both parties filed their appeal on this Court.

Issue: WoN petitioner is engaged in manufacturing and therefore subject to sec 185 (M) of Tax
Code.
Ruling: NO.

 Engineering was not engaged in the manufacture of air conditioning units but had its
services contracted for the installation of a central system.
 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.
 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.
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.