Missioner v. Engineering Equipment 65 SCRA 590 (1975)

8/12/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 064
590 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Engineering
Equipment and Supply Company
*
No. L-27044. June 30, 1975.
THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND
THE COURT OF TAX APPEALS, respondents.
*
No. L-27452. June 30, 1975.
ENGINEERING EQUIPMENT AND SUPPLY COMPANY,

petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE
AND THE COURT OF TAX APPEALS, respondents.
Taxation; Contractor’s tax; Company engaged in the design and

installation of central type air conditioning system subject to contractor’s
tax; Reasons.—The company 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. It undertook negotiations and
execution of individual contracts for the design, supply and installation of
air conditioning units of the central type, taking into consideration in the
process such factors as the area of the space to be air conditioned; the
number of persons occupying or would be occupying the premises; the
purpose for which the various air conditioning areas are to be used; and the
sources of heat gain or cooling loan on the plant such as sum load, lighting,
and other electrical appliances which are or may be in the plan. The
company did not and was not engaged in the manufacture of air
conditioning
_______________
6 Motion to Dismiss dated April 28, 1975.
* FIRST DIVISION.
591
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VOL. 64, JUNE 30, 1975 591
units but had its services contracted for the installation of a central system.
The supply of air conditioning units to the company’s various customers,
whether the said machineries were on hand or not, was specially made for
each customer and installed in his building upon his special order. The
company 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.
Same; Same; Distinction between a contract of sale and a 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.
Same; Same; Test to determine whether a person a contractor or not.—
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.
Same; Compensating tax; Compensating tax imposed on the user of
imported goods not subject to sales tax; Case at bar.—Since the company
imported air conditioning units, parts or accessories thereof for use in its
construction business and these items were never sold, resold, bartered or
exchanged, it should be held liable to pay taxes prescribed under Section
190 of the Code. This compensating tax is not a tax on the importation of
goods but a tax on the use of imported goods not subject to sales tax.
Same; Surcharge; Payment of surcharge in ca.se a false or fraudulent
return is filed or in case of willful neglect to file a return; Reasons; Case at
bar.—The company deliberately and purposely misdeclared its importations
to evade the payment of the 30% tax.
592
Since the commission of fraud is altogether too glaring, the company should
not be absolved from the 50% fraud surcharge, otherwise it would be giving
premium to a plainly intolerable act of tax evasion. Whether the company is
subject to advance sales tax or compensating tax, it is required by law to
truly declare its importation in the import entries and internal revenue
declarations before the importations maybe released from customs custody.
The said entries are the very documents where the nature, quantity and value
of the imported goods are declared and where the customs duties, internal
revenue taxes and other fees or charges incident to the importation are
computed. These entries, therefore, serve the same purpose as the returns
required by Section 183(a) of the Code.
Same: Surcharge for delinquency in the payment of compensating tax.
—Section 190 of the Tax Code, as amended, provides that if any article
withdrawn from the customhouse or the post office without payment of the
compensating tax is subsequently used by the importer for other purposes,
corresponding entry should be made in the books of accounts if any are kept
or a written notice thereof sent to the Collector of Internal Revenue and
payment of the corresponding compensating tax made within 30 days from
the date of such entry or notice and if tax is not paid within such period the
amount of the tax shall be increased by 25% the increment to be a part of
the tax.
Same: Prescription; Assessment and collection of taxes in case a false
or fraudulent return is filed or in case of failure to file a return within 10
years after the discovery of the falsity, fraud or omission.—In the case of a
false or fraudulent return with intent to evade tax or of a failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of
such tax may be begun without assessment at any time within ten years after
the discovery of the falsity, fraud or omission.
PETITION for review on certiorari of a decision of the Court of Tax

Appeals.
The facts are stated in the opinion of the Court.

Solicitor General Antonio P. Barredo, Assistant Solicitor
General Felicisimo R. Rosete, Solicitor Lolita O. Gal-lang and
Special Attorney Gemaliel H. Mantolino for Commissioner of
Internal Revenue, etc.
Melquiades C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr.,
Luis Ma. Guerrero and J.R. Balonkita for Engineering Equipment
and Supply Company.
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VOL. 64, JUNE 30, 1975 593

ESGUERRA, J.:
Petition for review on certiorari of the decision of the Court of Tax

Appeals in CTA Case No. 681, dated November 29, 1966, assessing
a compensating tax of P174,441.62 on the Engineering Equipment
and Supply Company.
As found by the Court of Tax Appeals, and as established by the
evidence on record, the facts of this case are as follows:
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. (Vol. I pp. 12-16
T.S.N. August 23, 1960)
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 (Exh. “2” p. 1 BIR record Vol. I). 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. (pp.
173-177 T.S.N.)
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 1 accessories
thereof which are subject to tax under Section 185(m) of the Tax
Code, instead of Section 186 of the same
__________________
1 “Section 185. Percentage tax on sales of x x x, refrigerators and others.—There

shall be levied, assessed, and collected once only on every original sale, barter,
exchange, or similar transaction intended to transfer ownership of, or title to, the other
articles herein below enumerated, a tax equivalent to thirty percentum of the gross
selling price or gross value in money of the articles sold, bartered,
594

Code. (Exh. “3” pp. 59-63 BIR rec. Vol. I) 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, (pp. 72-80 BIR rec.
Vol. I)
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. (Exh. “B” and “15”, pp. 86-88 BIR rec.
Vol. I) The Commissioner replied that the assessment was in
accordance with law and the facts of the case.
On July 30, 1959, Engineering appealed the case to the Court of
Tax Appeals and during the pendency of the case the investigating
revenue examiners reduced Engineering’s deficiency tax liabilities
from P916,362.65 to P740,587.86 (Exhs. “R” and “9” pp. 162-170,
BIR rec.), based on findings after conferences had with
Engineering’s Accountant and Auditor.
On November 29, 1966, the Court of Tax Appeals rendered its
decision, the dispositive portion of which reads as follows:
“For ALL THE FOREGOING CONSIDERATIONS, the decision of

respondent appealed from is hereby modified, and petitioner, as a contractor,
is declared exempt from the deficiency manufacturers sales tax covering the
period from June 1, 1948, to September 2, 1956. However, petitioner is
ordered to pay respondent, or his duly authorized collection agent, the sum
of P174,141.62 as compensating tax and 25% surcharge for the period from
1953 to September 1956. With costs against petitioner.”
_______________
exchanged or transferred, such tax to be paid by the manufacturer or producers.

Provided: That where the articles enumerated herein below are manufactured out of
materials subject to tax under this section, the total cost of such materials, as duly
established, shall be deductible from the gross selling price or gross value in money
of such manufactured articles.
xxx
(m) Air conditioning units and parts or accessories thereof (As amended by R.A.
No. 588, effective from September 22, 1950 until it was amended by R.A. No. 1612
made effective August 14, 1956 )
595
VOL. 64, JUNE 30, 1975 595

Commisioner of Internal Revenue vs. Engineering
The Commissioner, not satisfied with the decision of the Court of

Tax Appeals, appealed to this Court on January 18, 1967, (G.R. No.
L-27044). On the other hand, Engineering, on January 4, 1967, filed
with the Court of Tax Appeals a motion for reconsideration of the
decision abovementioned. This was denied on April 6, 1967,
prompting Engineering to file also with this Court its appeal,
docketed as G.R. No. L-27452. Since the two cases, G.R. No. L-
27044 and G.R. No. L-27452, involve the same parties and issues,
We have decided to consolidate and jointly decide them.
Engineering in its petition claims that the Court of Tax Appeals
committed the following errors:
1. That the Court of Tax Appeals erred in holding Engineering

Equipment & Supply Company liable to the 30%
compensating tax on its importations of equipment and
ordinary articles used in the central type air conditioning
systems it designed, fabricated, constructed and installed in
the buildings and premises of its customers, rather than to
the compensating tax of only 7%;
2. That the Court of Tax Appeals erred in holding
Engineering Equipment & Supply Company guilty of fraud
in effecting the said importations on the basis of incomplete
quotations from the contents of alleged photostat copies of
documents seized illegally from Engineering Equipment
and Supply Company which should not have been admitted
in evidence;
Equipment & Supply Company liable to the 25% surcharge
prescribed in Section 190 of the Tax Code;
4. That the Court of Tax Appeals erred in holding the
assessment as not having prescribed;
Equipment & Supply Company liable for the sum of
P174,141.62 as 30% compensating tax and 25% surcharge
instead of completely absolving it from the deficiency
assessment of the Commissioner.
The Commissioner on the other hand claims that the Court of Tax
Appeals erred:
1. In holding that the respondent company is a contractor and

not a manufacturer;
2 In holding respondent company liable to the 3%
contractor’s tax imposed by Section 191 of the Tax Code
instead of the 30% sales tax prescribed in Section 185(m) in
relation to Section 194(x) both of the same Code;
3 In holding that the respondent company is subject only to
the 30% compensating tax under Section 190 of the Tax
Code and not to
596

the 30% advance sales tax imposed by section 183 (b), in

relation to section 185(m) both of the same Code, on its
importations of parts and accessories of air conditioning
units;
4. In not holding the company liable to the 50% fraud
surcharge under Section 183 of the Tax Code on its
importations of parts and accessories of air conditioning
units, notwithstanding the finding of said court that the
respondent company fraudulently misdeclared the said
importations;
5. In holding the respondent company liable for P174,141.62
as compensating tax and 25% surcharge instead of
P740,587.86 as deficiency advance sales tax, deficiency
manufacturers tax and 25% and 50% surcharge for the
period from June 1, 1948 to December 31 1956.
The main issue revolves on the question of whether or not

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.
The Commissioner contends that Engineering is a manufacturer
and seller of air conditioning units and parts or accessories thereof
and, therefore, it is subject to the 30% advance sales tax prescribed
by Section 185(m) of the Tax Code, in relation to Section 194 of the
same, which defines a manufacturer as follows:
“Section 194.—Words and Phrases Defined.—In applying the provisions of

this Title, words and phrases shall be taken in the sense and extension
indicated below:
xxx
(x) “Manufacturer” includes every person who by physical or chemical

process alters the exterior texture or form or inner substance of any raw
material or manufactured or partially manufactured products in such manner
as to prepare it for a special use or uses to which it could not have been put
in its original condition, or who by any such process alters the quality of any
such material or manufactured or partially manufactured product so as to
reduce it to marketable shape, or prepare it for any of the uses of industry, or
who by any such process combines any such raw material or manufactured
or partially manufactured products with other materials or products of the
same or of different kinds and in such manner that the finished product of
such process of manufacture can be put to special use or uses to which such
raw material or manufactured or partially manufactured products in their
original condition could not have been put, and who in addition alters such
raw material or manufactured or partially manufactured products, or
combines the same to produce such finished products for the purpose
597
VOL. 64, JUNE 30, 1975 597

of their sale or distribution to others and not for his own use or
consumption.
In answer to the above contention, Engineering claims that it is not a

manufacturer and seller of air-conditioning units and spare parts or
accessories thereof subject to tax under Section 185(m) of the Tax
Code, but a contractor engaged in the design, supply and installation
of the central type of air-conditioning system subject to the 3% 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 subject to the tax referred to in Sections 184, 185 and 186
of the Code.
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 subject2 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
3
made after, and in consequence
of, the defendants order for it.
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
________________
2 Groves vs. Buck, 3, Maule & s. 178; Towers v. Osborne, 1 Strange 506,
Benjamin on Sales 90; as cited in Arañas, Annotations and Jurisprudence on the
NIRC, as amended, 1970 ed. p. 323, 324.
3 Ibid p. 324, par. 191 (13).
598

other persons, using his own means and methods without submitting
himself to control as to the petty details. (Arañas, 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., vs. Trinidad 43, Phil. 803, 807-808,
and La Carlota Sugar Central vs. 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.
With the foregoing criteria as guideposts, We shall now examine
whether Engineering really did “manufacture” and sell, as alleged by
the Commissioner to hold it liable to the advance sales tax under
Section 185(m), or it only had its services “contracted” for
installation purposes to hold it liable under section 198 of the Tax
Code.
After going over the three volumes of stenographic notes and the
voluminous record of the BIR and the CTA as well as the exhibits
submitted by both parties, We find that Engineering did not

manufacture air conditioning units for sale to the general public, but
imported some items (as refrigeration compressors in complete set,
heat exchangers or coils, t.s.n. p. 39) 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 of the central type
(t.s.n. pp. 20-36; Exhs. “F”, “G”, “H”, “I”, “J”, “K”, “L”, and “M”),
taking into consideration in the process such factors as the area of
the space to be air conditioned; the number of persons occupying or
would be occupying the premises; the purpose for which the various
air conditioning areas are to be used; and the sources of heat gain or
cooling load on the plant such as sun load, lighting, and other
electrical appliances which are or may be in the plan, (t.s.n. p. 34,
Vol. I) Engineering also testified during the hearing in the Court of
Tax Appeals that relative to the installation of air conditioning
system, Engineering designed and engineered complete each
particular plant and that no two plants were identical but each had to
be engineered
4
separately. As found by the lower court, which
finding We adopt—
________________
4 Decision, Court of Tax Appeals, CTA Rec. p. 212.
599
VOL. 64, JUNE 30, 1975 599

“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.
The Commissioner in his Brief argues that “it is more in accord
with reason and sound business management to say that anyone who
desires to have air conditioning units installed in his premises and
who is in a position and willing to pay the price can order the same
from the company (Engineering) and, therefore, Engineering could

have mass produced and stockpiled air conditioning units for sale to
the public or to any customer with enough money to buy the same.”
This is untenable in the light of the fact that air conditioning units,
packaged, or what we know as self-contained air conditioning units,
are distinct from the central system which Engineering dealt in. To
Our mind, the distinction as explained by Engineering, in its Brief,
quoting from books, is not an idle play of words as claimed by the
Commissioner, but a significant fact which We just cannot ignore.
As quoted by Engineering Equipment & Supply Co., from an
Engineering handbook by L.C. Morrow, and which We reproduce
hereunder for easy reference:
“x x x there is a great variety of equipment in use to do this job (of air

conditioning). Some devices are designed to serve a specific type of space;
others to perform a specific function; and still others as components to be
assembled into a tailor-made system to fit a particular building. Generally,
however, they may be grouped into two classifications—unitary and central
system.
“The unitary equipment classification includes those designs such as
room air conditioner, where all of the functional components are included in
one or two packages, and installation involves only making service
connection such as electricity, water and drains. Central-station systems,
often referred to as applied or built-up systems, require the installation of
components at different points in a building and their interconnection.
600

“The room air conditioner is a unitary equipment designed specifically for a

room or similar small space. It is unique among air conditioning equipment
in two respects: It is in the electrical appliance classification, and it is made
by a great number of manufacturers.”
There is also the testimony of one Carlos Navarro, a licensed

Mechanical and Electrical Engineer, who was once the Chairman of
the Board of Examiners for Mechanical Engineers and who was
allegedly responsible for the preparation of the refrigeration and air
conditioning code of the City of Manila, who said that “the central
type air conditioning system is an engineering job that requires
planning and meticulous layout due to the fact that usually architects
assign definite space and usually the spaces they assign are very
small and of various sizes. Continuing further, he testified:
“I don’t think I have seen central type of air conditioning machinery room
that are exactly alike because all our buildings here are designed by
architects dissimilar to existing buildings, and usually they don’t coordinate
and get the advice of air conditioning and refrigerating engineers so much
so that when we come to design, we have to make use of the available space
that they are assigning to us so that we have to design the different
component parts of the air conditioning system in such a way that will be
accommodated in the space assigned and afterwards the system may be
considered as a definite portion of the building. x x x”
Definitely there is quite a big difference in the operation because the
window type air conditioner is a sort of compromise. In fact, it cannot
control humidity to the desired level; rather the manufacturers, by hit and
miss, were able to satisfy themselves that the desired comfort within a room
could be made by a definite setting of the machine as it comes from the
factory; whereas the central type system definitely requires an intelligent
operator.” (t.s.n. pp. 301-335, Vol. II)
The point, therefore, is this—Engineering definitely did not and was

not engaged in the manufacture of air conditioning units but had its
services contracted for the installation of a central system. The cases
cited by the Commissioner (Advertising Associates, Inc. vs.
Collector of Customs, 97, Phil. 636; Celestino Co & Co. vs.
Collector of Internal Revenue, 99 Phil. 841 and Manila Trading &
Supply Co. vs. City of Manila, 56 O.G. 3629), are not in point.
Neither are they applicable because the facts in all the cases cited are
entirely different.
601
VOL. 64, JUNE 30, 1975 601

Take for instance the case of Celestino Co where this Court held the
taxpayer to be a manufacturer rather than a contractor of sash, doors
and windows manufactured in its factory. Indeed, from the very
start, Celestino Co intended itself to be a manufacturer of doors,
windows, sashes etc. as it did register a special trade name for its
sash business and ordered company stationery carrying the bold
print “ORIENTAL SASH FACTORY (CELESTINO CO AND
COMPANY, PROP.) 926 Raon St., Quiapo, Manila, Tel. No. etc.,
Manufacturers of All Kinds of Doors, Windows x x x.” Likewise,
Celestino Co never put up a contractor’s bond as required by Article
1729 of the Civil Code. Also, 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 ready-
made doors and windows of standard sizes for the average home,
which “sales” were reflected in their books of accounts totalling
P118,754.69 for the period from January, 1952 to September 30,

1952, or for a period of only nine (9) months. This Court found said
sum difficult to have been derived from its few customers who
placed special orders for these items. Applying the abovestated facts
to the case at bar, We found them to be inapposite. Engineering
advertised itself as Engineering Equipment and Supply Company,
Machinery Mechanical Supplies, Engineers, Contractors, 174
Marques de Comillas, Manila (Exh. “B” and “15” BIR rec. p. 186),
and not as manufacturers. It likewise paid the contractors tax on all
the contracts for the design and construction of central system as
testified to by Mr. Rey Parker, its President and General Manager,
(t.s.n. p. 102, 103) Similarly, Engineering did not have ready-made
air conditioning units for sale but as per testimony of Mr. Parker
upon inquiry of Judge Luciano of the CTA—
Q—“Aside from the general components, which go into air
conditioning plant or system of the central type which your company
undertakes, and the procedure followed by you in obtaining and
executing contracts which you have already testified to in previous
hearing, would you say that the covering contracts for these different
projects listed . . . referred to in the list, Exh. “F” are identical in
every respect? I mean every plan or system covered by these
different contracts are identical in standard in every respect, so that
you can reproduce them?
A—“No, sir. They are not all standard. On the contrary, none of
them
602

are the same. Each one must be designed and constructed to meet
the particular requirements, whether the application is to be
operated. (t.s.n. pp. 101-102)
What We consider as on all fours with the case at bar is the case
of S.M. Lawrence Co. vs. McFarland, Commissioner of Internal
Revenue of the State of Tennessee and McCanless, 355 SW 2d, 100,
101, “where the cause presents the question of whether one engaged
in the business of contracting for the establishment of air
conditioning system in buildings, which work requires, in addition
to the furnishing of a cooling unit, the connection of such unit with
electrical and plumbing facilities and the installation of ducts within
and through walls, ceilings and floors to convey cool air to various
parts of the building, is liable for sale or use tax as a contractor
rather than a retailer of tangible personal property. Appellee took the
position that appellant was not engaged in the business of selling air
conditioning equipment as such but in the furnishing to its customers

of completed air conditioning systems pursuant to contract, was a
contractor engaged in the construction or improvement of real
property, and as such was liable for sales or use tax as the consumer
of materials and equipment used in the consummation of contracts,
irrespective of the tax status of its contractors. To transmit the warm
or cool air over the buildings, the appellant installed system of ducts
running from the basic units through walls, ceilings and floors to
registers. The contract called for completed air conditioning systems
which became permanent part of the buildings and improvements to
the realty.” The Court held the appellant a contractor which used the
materials and the equipment upon the value of which the tax herein
imposed was levied in the performance of its contracts with its
customers, and that the customers did not purchase the equipment
and have the same installed.
Applying the facts of the aforementioned case to the present case,
We see that the supply of air conditioning units to Engineer’s
various customers, whether the said machineries were in hand or
not, was especially made for each customer and installed in his
building upon his special order. The air conditioning units installed
in a central type of air conditioning system would not have existed
but for the order of the party desiring to acquire it and if it existed
without the special order of Engineering’s customer, the said air
conditioning units were
603
VOL. 64, JUNE 30, 1975 603

not intended for sale to the general public. Therefore, We have but to
affirm the conclusion of the Court of Tax Appeals 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, Engineering 5
should be
held liable to pay taxes prescribed under Section 190 of the Code.
This compensating tax is not a tax on the importation of goods but a
______________
5 “Section 190. Compensating tax.—All persons residing or doing business in the

Philippines, who purchase or receive from without the Philippines any commodities,
goods, wares or merchandise, excepting those subject to specific taxes under Title IV
of this Code, shall pay on the total value thereof at the time they are received by such
persons, including freight, postage, insurance, commission and all similar charges, a
compensating tax equivalent to the percentage taxes imposed under this Title on
original transactions effected by merchants, importers or manufacturers, such tax to
be paid before the withdrawal or removal of said commodities, goods, wares or
merchandise from the custom house or the post office. Provided, However, That
merchants, importers, and manufacturers, who are subject to the tax under Sections
184, 185, 186 or 189 of this Title, shall not be required to pay the herein tax imposed
where such commodities, goods wares or merchandise purchased or received by them
from without the Philippines are to be sold, resold, bartered or exchanged or are to he
used in the manufacture or preparation of articles for sale, barter or exchange and are
to form part thereof. And Provided, Further, that the tax imposed in this section shall
not apply to articles to he used by the importer himself in the manufacture or
preparation of articles subject to specific tax, or those for consignment abroad and are
to form part thereof. If any article withdrawn from the customhouse or the post office
without payment of the compensating tax is subsequently used by the importer for
other purposes, corresponding entry should be made in the books of accounts, if any
are kept or written notice thereof sent to the Collector of Internal Revenue and
payment of the corresponding compensating tax made within 10 days from the date of
such entry or notice. If the tax is not paid within such period the amount of the tax
shall be increased by 25%, the increment to be a part of the tax”. (As amended by
R.A. 253, effective July 1948)
604

tax on the use of imported goods riot subject to sales tax.

Engineering, therefore, should be held liable to the payment of 30%
compensating tax in accordance with Section 190 of the Tax Code in
relation to Section 185(m) of the same, but without the 50% mark up
provided in Section 183(b).
II
We take up next the issue of fraud. The Commissioner charged

Engineering with misdeclaration of the imported air conditioning
units and parts or accessories thereof so as to make them subject to a
lower rate of percentage tax (7%) under Section 186 of the Tax
Code, when they are allegedly subject to a higher rate of tax (30%)
under its Section 185(m). This charge of fraud was denied by
Engineering but the Court of Tax Appeals in its decision found
adversely and said:
“x x x We are amply convinced from the evidence presented by respondent

that petitioner deliberately and purposely misdeclared its importations. This
evidence consists of letters written by petitioner to its foreign suppliers,
instructing them on how to invoice and describe the air conditioning units
ordered by petitioner. x x x” (p. 218 CTA rec.)
Despite the above findings, however, the Court of Tax Appeals

absolved Engineering from paying the 50% surcharge prescribe by
Section 183(a) of the Tax Code by reasoning out as follows:
“The imposition of the 50% surcharge prescribed by Section 183(a) of the

Tax Code is based on willful neglect to file the monthly return within 20
days after the end of each month or in case a false or fraudulent return is
willfully made, it can readily be seen that petitioner cannot legally be held
subject to the 50% surcharge imposed by Section 183(a) of the Tax Code.
Neither can petitioner be held subject to the 50% surcharge under Section
190 of the Tax Code dealing on compensating tax because the provisions
thereof do not include the 50% surcharge. Where a particular provision of
the Tax Code does not impose the 50% surcharge as fraud penalty we
cannot enforce a non-existing provision of law notwithstanding the
assessment of respondent to the contrary. Instances of the exclusion in the
Tax Code of the 50% surcharge are those dealing on tax on banks, taxes on
receipts of insurance companies, and franchise tax. However, if the Tax
Code imposes the 50% surcharge as fraud penalty, it expressly so provides
as in the cases of income tax, estate and inheritance taxes, gift taxes, mining
tax, amusement tax and the
605
VOL. 64, JUNE 30, 1975 605

monthly percentage taxes. Accordingly, we hold that petitioner is not

subject to the 50% surcharge despite the existence of fraud in the absence of
legal basis to support the importation thereof.” (p. 228 CTA rec.)
We have gone over the exhibits submitted by the Commissioner

evidencing fraud committed by Engineering and We reproduce some
of them hereunder for clarity.
As early as March 18, 1953, Engineering in a letter of even date
wrote to Trane Co. (Exh. “3-K” pp. 152-155, BIR rec.) viz:
“Your invoices should be made in the name of Madrigal & Co., Inc.,
Manila, Philippines, c/o Engineering Equipment & Supply Co., Manila,
Philippines—forwarding all correspondence and shipping papers concerning
this order to us only and not to the customer.
“When invoicing, your invoices should be exactly as detailed in the
customer’s Letter Order dated March 14th, 1953 attached. This is in
accordance with the Philippine import licenses granted to Madrigal & Co.,
Inc. and such details must only be shown on all papers and shipping
documents for this shipment. No mention of the words air conditioning
equipment should be made on any shipping documents as well an on the
cases. Please give this matter your careful attention, otherwise great
difficulties will be encountered with the Philippine Bureau of Customs
when clearing the shipment on its arrival in Manila. All invoices and cases
should be marked ‘THIS EQUIPMENT FOR RIZAL CEMENT CO.’ “
The same instruction was made to Acme Industries, Inc., San

Francisco, California in a letter dated March 19, 1953 (Exh. “3-J-1”
pp. 150-151, BIR rec.)
On April 6, 1953, Engineering wrote to Owens-Corning
Fiberglass Corp., New York, U.S.A. (Exh. “3-1” pp. 147-149, BIR
rec.) also enjoining the latter from mentioning or referring’ to the
term ‘air conditioning’ and to describe the goods on order as
Fiberglass pipe and pipe fitting insulation instead. Likewise on April
30, 1953, Engineering threatened to discontinue the forwarding
service of Universal Transcontinental Corporation when it wrote
Trane Co. (Exh. “3-H” p. 146, BIR rec.):
“It will be noted that the Universal Transcontinental Corporation is not

following through on the instructions which have been covered by the above
correspondence, and which indicates the necessity of discontinuing the use
of the term “Air conditioning Machinery or Air Coolers”. Our instructions
concerning this general situation have been sent to you in ample time to
have avoided this error in terminology, and we will ask that on receipt of
this letter that you again write to
606

Universal Transcontinental Corp. and inform them that, if in the future, they
are unable to cooperate with us on this requirement, we will thereafter be
unable to utilize their forwarding service. Please inform them that we will
not tolerate another failure to follow our requirements.”
And on July 17, 1953 (Exh. “3-g”, p. 145, BIR rec.) Engineering
wrote Trane Co. another letter, viz:
“In the past, we have always paid the airconditioning tax on climate
changers and that mark is recognized in the Philippines as air conditioning
equipment. This matter of avoiding any tie-in on air conditioning is very
important to us, and we are again asking that from hereon that whoever
takes care of the processing of our orders be carefully instructed so as to
avoid again using the term ‘climate changers’ or in any way referring to the
equipment as ‘air conditioning.’
And in response to the aforequoted letter, Trane Co. wrote on July

30, 1953, suggesting a solution, viz:
“We feel that we can probably solve all the problems by following the
procedure outlined in your letter of March 25, 1953, wherein you stated that
in all future jobs you would enclose photostatic copies of your import
license so that we might make up two sets of invoices: one set describing
equipment ordered simply according to the way that they are listed on the
import license and another according to our ordinary regular methods of
order write-up. We would then include the set made up according to the
import license in the shipping boxes themselves and use those items as our
actual shipping documents and invoices, and we will send the other regular
invoice to you, by separate correspondence. (Exh. No. “3F-1”, p. 144 BIR
rec.)
Another interesting letter of Engineering is one dated August 27,

1955 (Exh. “3-C” p. 141 BIR rec.)
“In the process of clearing the shipment from the piers, one of the Customs
inspectors requested to see the packing list. Upon locating the packing list, it
was discovered that the same was prepared on a copy of your letterhead
which indicated that the Trane Co. manufactured air conditioning, heating
and heat transfer equipment. Accordingly, the inspectors insisted that this
equipment was being imported for air conditioning purposes. To date, we
have not been able to clear the shipment and it is possible that we will be
required to pay heavy taxes on the equipment.
“The purpose of this letter is to request that in the future, no documents
of any kind should be sent with the order that indicate in any way that the
equipment could possibly be used for air
607
VOL. 64, JUNE 30, 1975 607

conditioning.
“It is realized that this is a broad request and fairly difficult to
accomplish and administer, but we believe with proper caution it can be
executed. Your cooperation and close supervision concerning those matters
will be appreciated.” (Italics supplied)
The aforequoted communications are strongly indicative of the

fraudulent intent of Engineering to misdeclare its importation of air
conditioning units and spare parts or accessories thereof to evade
payment of the 30% tax. And since the commission of fraud is
altogether too glaring, We cannot agree with the Court of Tax

Appeals in absolving Engineering from the 50% fraud surcharge,
otherwise We will be giving premium to a plainly intolerable act of
tax evasion. As aptly stated by then Solicitor General, now Justice,
Antonio P. Barredo: ‘this circumstance will not free it from the 50%
surcharge because in any case whether it is subject to advance sales
tax or compensating tax, it is required by law to truly declare its
importation in the import entries and internal revenue declarations
before the importations maybe released from customs custody. The
said entries are the very documents where the nature, quantity and
value of the imported goods are declared and where the customs
duties, internal revenue taxes and other fees or charges incident to
the importation are computed. These entries, therefore, serve the
same purpose as the returns required by Section 183(a) of the Code.’
Anent the 25% delinquency surcharge, We fully agree to the
ruling made by the Court of Tax Appeals and hold Engineering
liable for the same. As held by the lower court:
“At first blush it would seem that the contention of petitioner that it is not
subject to the delinquency surcharge of 25% is sound, valid and tenable.
However, a serious study and critical analysis of the historical provisions of
Section 190 of the Tax Code dealing on compensating tax in relation to
Section 183 (a) of the same Code, will show that the contention of petitioner
is without merit. The original text of Section 190 of Commonwealth Act
466, otherwise known as the National Internal Revenue Code, as amended
by Commonwealth Act No. 503, effective on October 1, 1939, does not
provide for the filing of’ a compensating tax return and payment of the 25%
surcharge for late payment thereof. Under the original text of Section 190 of
the Tax Code, as amended by Commonwealth Act No. 503, the contention
of the petitioner that it is not subject to the 25% surcharge appears to be
legally tenable. However, Section 190 of the Tax Code was subsequently
amended by Republic Acts Nos. 48, 253, 361, 1511 and
608

1612 effective October 1, 1946, July 1, 1948, June 9, 1949, June 16, 1956
and August 24, 1956 respectively, which invariably provides among others,
the following:
“x x x If any article withdrawn from the customhouse or the post office without
payment of the compensating tax is subsequently used by the importer for other
purposes, corresponding entry should be made in the books of accounts if any are
kept or a written notice thereof sent to the Collector of Internal Revenue and
payment of the corresponding compensating tax made within 30 days from the date
of such entry or notice and if tax is not paid within such period the amount of the tax
shall be increased by 25% the increment to be a part of the tax.”
“Since the imported air conditioning units and spare parts or accessories
thereof are subject to the compensating tax of 30% as the same were used in
the construction business of Engineering, it is incumbent upon the latter to
comply with the aforequoted requirement of Section 190 of the Code, by
posting in its books of accounts or notifying the Collector of Internal
Revenue that the imported articles were used for other purposes within 30
days. x x x Consequently, as the 30% compensating tax was not paid by
petitioner within the time prescribed by Section 190 of the Tax Code as
amended, it is therefore subject to the 25% surcharge for delinquency in the
payment of the said tax.” (pp. 224-226 CTA rec.)
III
Lastly the question of prescription of the tax assessment has been

put in issue. Engineering contends that it was not guilty of tax fraud
in effecting the importations and, therefore, Section 332(a)
prescribing ten years is inapplicable, claiming that the pertinent
prescriptive period is five years from the date the questioned
importations were made. A review of the record however reveals
that Engineering did file a tax return or declaration with the Bureau
of Customs before it paid the advance sales tax of 7%. And the
declaration filed reveals that it did in fact misdeclare its
importations. Section 332 of the Tax Code which provides:
“Section 332.—Exceptions as to period of limitation of assessment and

collection of taxes.—
(a) In the case of a false or fraudulent return with intent to evade tax or
of a failure to file a return, the tax may be assessed, or a proceeding in court
for the collection of such tax may be begun
609
VOL. 64, JUNE 30, 1975 609

without assessment at any time within ten years after the discovery of the
falsity, fraud or omission.
is applicable, considering the preponderance of evidence of fraud

with the intent to evade the higher rate of percentage tax due from
Engineering. The tax assessment was made within the period
prescribed by law and prescription had not set in against the
Government.
WHEREFORE, the decision appealed from is affirmed with the

modification that Engineering is hereby also made liable to pay the
50% fraud surcharge.
SO ORDERED.
Makalintal, C.J., Castro, Makasiar and Martin, JJ., concur.
Decision affirmed with modification.
Notes.—a) Contractor defined.—Although, in a general sense,

every person who enters into a contract may be called a contractor,
yet the word, for want of a better one, has come to be used with
special reference to a person who, in the pursuit of an independent
business, undertakes to do a specific piece or job 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 the 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. (Luzon Stevedoring Co. vs. Trinidad, L-
18316, September 23, 1922).
b) When return considered sufficient.—A return need not be
complete in all particulars. It is sufficient if it complies substantially
with the law. There is substantial compliance (1) when the return is
made in good faith and is not false or fraudulent; (2) when it covers
the entire period involved; and (3) when it contains information as to
the various items of income, deductions and credits with such
definiteness as to permit the computation and assessment of the tax.
(Commissioner of Internal Revenue vs. Lilia Yusay Gonzales, L-
19495, Nov. 24, 1966).
-----o0o-----
610
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8/12/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 064

590 SUPREME COURT REPORTS ANNOTATED

THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

ENGINEERING EQUIPMENT AND SUPPLY COMPANY,

Taxation; Contractor’s tax; Company engaged in the design and

6 Motion to Dismiss dated April 28, 1975.

VOL. 64, JUNE 30, 1975 591

Commissioner of Internal Revenue vs. Engineering

Equipment and Supply Company

592 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Engineering

Equipment and Supply Company

PETITION for review on certiorari of a decision of the Court of Tax

The facts are stated in the opinion of the Court.

VOL. 64, JUNE 30, 1975 593

Petition for review on certiorari of the decision of the Court of Tax

1 “Section 185. Percentage tax on sales of x x x, refrigerators and others.—There

594 SUPREME COURT REPORTS ANNOTATED

“For ALL THE FOREGOING CONSIDERATIONS, the decision of

exchanged or transferred, such tax to be paid by the manufacturer or producers.

VOL. 64, JUNE 30, 1975 595

The Commissioner, not satisfied with the decision of the Court of

1. That the Court of Tax Appeals erred in holding Engineering

1. In holding that the respondent company is a contractor and

596 SUPREME COURT REPORTS ANNOTATED

the 30% advance sales tax imposed by section 183 (b), in

The main issue revolves on the question of whether or not

“Section 194.—Words and Phrases Defined.—In applying the provisions of

(x) “Manufacturer” includes every person who by physical or chemical

VOL. 64, JUNE 30, 1975 597

In answer to the above contention, Engineering claims that it is not a

Our New Civil Code, likewise distinguishes a contract of sale

The word “contractor” has come to be used with special reference to

598 SUPREME COURT REPORTS ANNOTATED

submitted by both parties, We find that Engineering did not

4 Decision, Court of Tax Appeals, CTA Rec. p. 212.

VOL. 64, JUNE 30, 1975 599

“Engineering, in a nutshell, fabricates, assembles, supplies and installs in

The facts and circumstances aforequoted support the theory that

from the company (Engineering) and, therefore, Engineering could

“x x x there is a great variety of equipment in use to do this job (of air

600 SUPREME COURT REPORTS ANNOTATED

“The room air conditioner is a unitary equipment designed specifically for a

There is also the testimony of one Carlos Navarro, a licensed

The point, therefore, is this—Engineering definitely did not and was

VOL. 64, JUNE 30, 1975 601

P118,754.69 for the period from January, 1952 to September 30,

602 SUPREME COURT REPORTS ANNOTATED

conditioning equipment as such but in the furnishing to its customers

VOL. 64, JUNE 30, 1975 603

5 “Section 190. Compensating tax.—All persons residing or doing business in the

604 SUPREME COURT REPORTS ANNOTATED

tax on the use of imported goods riot subject to sales tax.

We take up next the issue of fraud. The Commissioner charged

“x x x We are amply convinced from the evidence presented by respondent

Despite the above findings, however, the Court of Tax Appeals

“The imposition of the 50% surcharge prescribed by Section 183(a) of the

VOL. 64, JUNE 30, 1975 605

monthly percentage taxes. Accordingly, we hold that petitioner is not