University of Mindanao - College of Legal Education

SALES
Case Name CIR vs. CA

Docket G.R. No. 115349 April 18, 1997

Number | Date

Ponente PANGANIBAN, J

Petitioners COMMISSIONER OF INTERNAL REVENUE

 Claimed that in conducting researches and studies of social
organizations and cultural values thru its Institute of Philippine Culture,
Ateneo de Manila University is performing the work of an independent
contractor and thus taxable within the purview of then Section 205 of
the National Internal Revenue Code levying a three percent
contractor's tax.

Respondents THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO
DE MANILA UNIVERSITY

Case summary
 The Institute of Philippine Culture (IPC), is an auxiliary unit of
private respondent Ateneo de Manila University and accepts
sponsorships for its research activities from international
organizations, private foundations and government agencies.
 Private respondent received from petitioner Commissioner of
Internal Revenue (CIR) demand letters for alleged deficiency
contractor’s tax and alleged deficiency income tax. Denying said tax
liabilities, private respondent sent petitioner a letter-protest and
subsequently filed with the letter memorandum contesting the
validity of the assessments.
 Petitioner rendered a letter-decision cancelling the assessment for
deficiency income tax but modifying the assessment for deficiency
of contractor’s tax by increasing the amount due. Unsatisfied,
private respondent requested for a reconsideration or
reinvestigation of the modified assessment. Petitioner also filed a
petition for review with the CA.
 While petition for review was pending before the respondent court,
petitioner issued a final decision reducing the assessment for
deficiency contractor’s tax from P193,475.55 to P46,516.41,
exclusive of surcharge and interest.
 The Court of Appeals disagreed with the petitioner Commissioner of
Internal Revenue and affirmed the assailed decision of the Court of
Tax Appeals. Hence this petition for review.

Doctrine Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A

contractor's tax of three per centum of the gross receipts is hereby imposed on
the following:
 xxx xxx xxx

(16) Business agents and other independent contractors, except persons,

associations and corporations under contract for embroidery and apparel for
export, as well as their agents and contractors, and except gross receipts of or
from a pioneer industry registered with the Board of Investments under the
provisions of Republic Act No. 5186;

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not

enumerated above (but not including individuals subject to the occupation tax
under Section 12 of the Local Tax Code) whose activity consists essentially of
the sale of all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.

The term "independent contractor" shall not include regional or area

headquarters established in the Philippines by multinational corporations,
including their alien executives, and which headquarters do not earn or derive
income from the Philippines and which act as supervisory, communications
and coordinating centers for their affiliates, subsidiaries or branches in the
Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal
contractor as the total contract price, undiminished by amount paid to the
subcontractor, shall be excluded from the taxable gross receipts of the
subcontractor.

Trigger Contractor’s Tax (3%)

words/Phrase

Relevant Facts

 Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de

Manila University "falls within the definition" of an independent contractor and "is not one of
those mentioned as excepted"; hence, it is properly a subject of the three percent
contractor's tax levied by the foregoing provision of law. 

 Petitioner Commissioner of Internal Revenue contends that "the tax is due on its activity of
conducting researches for a fee. The tax is due on the gross receipts made in favor of IPC
pursuant to the contracts the latter entered to conduct researches for the benefit primarily of
its clients. The tax is imposed on the exercise of a taxable activity x x x The sale of services
of private respondent is made under a contract and the various contracts entered into
between private respondent and its clients are almost of the same terms, showing, among
others, the compensation and terms of payment.
  Petitioner has presented no evidence to prove its bare contention that, indeed, contracts for
sale of services were ever entered into by the private respondent. 

 Section 205 of the National Internal Revenue Code requires that the independent contractor
be engaged in the business of selling its services. Hence, to impose the three percent
contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven
that the private respondent is indeed selling its services for a fee in pursuit of an independent
business. 

 The sponsorships are subject to IPC's terms and conditions. No proprietary or commercial
research is done, and IPC retains the ownership of the results of the research, including the
absolute right to publish the same. The copyrights over the results of the research are owned
by Ateneo and, consequently, no portion thereof may be reproduced without its permission. 

 Hence, this petition.  

Ratio Decidendi

[LAW] 
Whether or not private National Internal Revenue Code Sec. 205. 
respondent falls under the
purview of independent The term "independent contractors" include persons
contractor pursuant to (juridical or natural) not enumerated above (but not including
Section 205 of the Tax Code. individuals subject to the occupation tax under Section 12 of the
Local Tax Code) whose activity consists essentially of the sale of
Ans: NO.  all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the
physical or mental faculties of such contractors or their
employees.

[APPLICATION]
National Internal Revenue Code requires that the
independent contractor be engaged in the business of selling its
services. Hence, to impose the three percent contractor's tax on
Ateneo's Institute of Philippine Culture, it should be sufficiently
proven that the private respondent is indeed selling its services for
a fee in pursuit of an independent business.

[CONCLUSION]
There is no evidence that Ateneo's Institute of Philippine
Culture ever sold its services for a fee to anyone or was ever
engaged in a business apart from and independently of the
academic purposes of the university. The records do not show
that Ateneo's IPC in fact contracted to sell its research services for
a fee. Clearly then, as found by the Court of Appeals and the
Court of Tax Appeals, petitioner's theory is inapplicable to the
established factual milieu obtaining in the instant case.
 Whether or not private [LAW]
respondent is subject to 3% Article 1458 of the Civil Code
contractor's tax under "By the contract of sale, one of the contracting parties obligates
Section 205 of the Tax Code. himself to transfer the ownership of and to deliver a determinate
thing, and the other to pay therefor a price certain in money or its
Ans: NO. equivalent."  By its very nature, a contract of sale requires a
transfer of ownership.

In the case of a contract for a piece of work, "the contractor

binds himself to execute a piece of work for the employer, in
consideration of a certain price or compensation x x x. If the
contractor agrees to produce the work from materials furnished by
him, he shall deliver the thing produced to the employer and
transfer dominion over the thing, . . ."  Ineludibly, whether the
contract be one of sale or one for a piece of work, a transfer of
ownership is involved and a party necessarily walks away with an
object.

[APPLICATION]
Funds received by the Ateneo de Manila University are
technically not a fee. They may however fall as gifts or donations
which are tax-exempt" as shown by private respondent's
compliance with the requirement of Section 123 of the National
Internal Revenue Code providing for the exemption of such gifts to
an educational institution.

  The funds received by Ateneo's Institute of Philippine Culture

are not given in the concept of a fee or price in exchange for the
performance of a service or delivery of an object. Rather, the
amounts are in the nature of an endowment or donation given by
IPC's benefactors solely for the purpose of sponsoring or funding
the research with no strings attached. The amounts given to IPC,
therefore, may not be deemed, it bears stressing as fees or gross
receipts that can be subjected to the three percent contractor's
tax.

Ruling

The plain and simple answer is that private respondent is not a contractor selling its services
for a fee but an academic institution conducting these researches pursuant to its commitments to
education and, ultimately, to public service. For the institute to have tenaciously continued operating
for so long despite its accumulation of significant losses, we can only agree with both the Court of
Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for undertaking
the research projects."