G.R. No.

115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF
APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY,
respondents.

PANGANIBAN, J.:

In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture, is the Ateneo
de Manila University 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? This question is answer by the Court in the negative
as it resolves this petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No. 31790 promulgated on
April 27, 1994 affirming that of the Court of Tax Appeals. 3

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed by the parties.

Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches all over the Philippines. One
such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality separate and distinct from that of
private respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture. Occasionally, it
accepts sponsorships for its research activities from international organizations, private foundations and government agencies.

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter dated June 3,
1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's tax, and an assessment dated June
27, 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978. Denying said
tax liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the latter a memorandum contesting
the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency income tax but modifying the
assessment for deficiency contractor's tax by increasing the amount due to P193,475.55. Unsatisfied, private respondent
requested for a reconsideration or reinvestigation of the modified assessment. At the same time, it filed in the respondent court
a petition for review of the said letter-decision of the petitioner. While the petition was pending before the respondent court,
petitioner issued a final decision dated August 3, 1988 reducing the assessment for deficiency contractor's tax from P193,475.55
to P46,516.41, exclusive of surcharge and interest.

On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads:

WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency contractor's tax assessment in the
amount of P46,516.41 exclusive of surcharge and interest for the fiscal year ended March 31, 1978 is hereby CANCELED. No
pronouncement as to cost.

SO ORDERED.

Not in accord with said decision, petitioner has come to this Court via the present petition for review raising the following issues:

1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO
SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:

Sec. 205. Contractor, 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

1
(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 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.

xxx xxx xxx

Petitioner contends that the respondent court erred in holding that private respondent is not an "independent contractor" within
the purview of Section 205 of the Tax Code. To petitioner, the term "independent contractor", as defined by the Code,
encompasses all kinds of services rendered for a fee and that the only exceptions are the following:

a. Persons, association and corporations under contract for embroidery and apparel for export and gross receipts of or from
pioneer industry registered with the Board of Investment under R.A. No. 5186;

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of the Tax Code); and

c. 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,
communication and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region (Section 205 of the
Tax Code).

Petitioner thus submits that since private respondent falls under the definition of an "independent contractor" and is not among
the aforementioned exceptions, private respondent is therefore subject to the 3% contractor's tax imposed under the same Code.
4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed decision of the
Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for review.

The Issues

Petitioner submits before us the following issues:

1) Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205 of the Tax
Code.

2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax Code. 5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch — the Institute
of Philippine Culture — performing the work of an independent contractor and, thus, subject to the three percent contractor's tax
levied by then Section 205 of the National Internal Revenue Code?

The Court's Ruling

The petition is unmeritorious.

Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:

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

2
(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.

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. 6 Petitioner states that the "term 'independent contractor'
is not specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and mental
service for a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." 7 According to petitioner,
Ateneo has the burden of proof to show its exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying
the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine
who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have
determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes
and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to
reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws
and the provisions of a taxing act are not to be extended by implication." 8 Parenthetically, in answering the question of who is
subject to tax statutes, it is basic that "in case of doubt, such statutes are to be construed most strongly against the government
and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import." 9

To fall under its coverage, 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. And it is only after private respondent has been found clearly to be subject to the provisions of Sec. 205
that the question of exemption therefrom would arise. Only after such coverage is shown does the rule of construction — that tax
exemptions are to be strictly construed against the taxpayer — come into play, contrary to petitioner's position. This is the main
line of reasoning of the Court of Tax Appeals in its decision, 10 which was affirmed by the CA.

The Ateneo de Manila University Did Not Contract

for the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find 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.

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," 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. . . . [T]he 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." 11 (Emphasis supplied.)

3
In theory, the Commissioner of Internal Revenue may be correct. However, 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.

In the first place, the 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. As appropriately pointed out by the latter:

An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals shows that only the following
documentary evidence was presented:

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

3 Adjustments to Sales/Receipts

4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts between private respondent and third parties. 12

Moreover, the Court of Tax Appeals accurately and correctly declared that the " 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. 13

Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:

To our mind, private respondent hardly fits into the definition of an "independent contractor".

For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in business. Undisputedly, private
respondent is mandated by law to undertake research activities to maintain its university status. In fact, the research activities
being carried out by the IPC is focused not on business or profit but on social sciences studies of Philippine society and culture.
Since it can only finance a limited number of IPC's research projects, private respondent occasionally accepts sponsorship for
unfunded IPC research projects from international organizations, private foundations and governmental agencies. However, such
sponsorships are subject to private respondent's terms and conditions, among which are, that the research is confined to topics
consistent with the private respondent's academic agenda; that no proprietary or commercial purpose research is done; and that
private respondent retains not only the absolute right to publish but also the ownership of the results of the research conducted
by the IPC. Quite clearly, the aforementioned terms and conditions belie the allegation that private respondent is a contractor or
is engaged in business.

For another, it bears stressing that private respondent is a non-stock, non-profit educational corporation. The fact that it accepted
sponsorship for IPC's unfunded projects is merely incidental. For, the main function of the IPC is to undertake research projects
under the academic agenda of the private respondent. Moreover the records do not show that in accepting sponsorship of
research work, IPC realized profits from such work. On the contrary, the evidence shows that for about 30 years, IPC had
continuously operated at a loss, which means that sponsored funds are less than actual expenses for its research projects. That
IPC has been operating at a loss loudly bespeaks of the fact that education and not profit is the motive for undertaking the research
projects.

Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still remains that there is no
proof that part of such earnings or profits was ever distributed as dividends to any stockholder, as in fact none was so distributed
because they accrued to the benefit of the private respondent which is a non-profit educational institution. 14

Therefore, it is clear that 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. As
found by the two courts below, such 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. 15 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.

4
It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a
contract of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties obligates 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 equivalent." 16
By its very nature, a contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes the
obligation to transfer ownership as an essential element of the contract of sale, following modern codes, such as the German and
the Swiss. Even in the absence of this express requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde,
Ruggiero, Colin and Capitant, have considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow
the same view, stating that the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting
ownership. Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17 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. . . . 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, . . ." 18 Ineludably, 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. 19 In the
case at bench, it is clear from the evidence on record that there was no sale either of objects or services because, as adverted to
earlier, there was no transfer of ownership over the research data obtained or the results of research projects undertaken by the
Institute of Philippine Culture.

Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of maintaining Ateneo's
university status and not in the course of an independent business of selling such research with profit in mind. This is clear from a
reading of the regulations governing universities:

31. In addition to the legal requisites an institution must meet, among others, the following requirements before an
application for university status shall be considered:

xxx xxx xxx

(e) The institution must undertake research and operate with a competent qualified staff at least three graduate
departments in accordance with the rules and standards for graduate education. One of the departments shall be science and
technology. The competence of the staff shall be judged by their effective teaching, scholarly publications and research activities
published in its school journal as well as their leadership activities in the profession.

(f) The institution must show evidence of adequate and stable financial resources and support, a reasonable portion of
which should be devoted to institutional development and research. (emphasis supplied)

xxx xxx xxx

32. University status may be withdrawn, after due notice and hearing, for failure to maintain satisfactorily the standards and
requirements therefor. 20

Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently erroneous
because the former is not an independent juridical entity that is separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing
tax cases. Through its expertise, it is undeniably competent to determine the issue of whether" 21 Ateneo de Manila University
may be deemed a subject of the three percent contractor's tax "through the evidence presented before it." Consequently, "as a
matter of principle, this Court will not set aside the conclusion reached by . . . the Court of Tax Appeals which is, by the very nature
of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise
on the subject unless there has been an abuse or improvident exercise of authority . . ." 22 This point becomes more evident in
the case before us where the findings and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted
by any abuse of authority, much less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the former
free from any palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of P1,624,014.00 as
shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was Ateneo de Manila University
itself that had funded the research projects of the institute, and it was only when Ateneo could no longer produce the needed
funds that the institute sought funding from outside. The testimony of Ateneo's Director for Accounting Services, Ms. Leonor

5
Wijangco, provides significant insight on the academic and nonprofit nature of the institute's research activities done in
furtherance of the university's purposes, as follows:

Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of Philippine Culture) that as far as
grants from sponsored research it is possible that the grant sometimes is less than the actual cost. Will you please tell us in this
case when the actual cost is a lot less than the grant who shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has to have its own research institute.
24

So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture when it
undisputedly loses not an insignificant amount in the process? 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." 25

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is hereby AFFIRMED
in full.

SO ORDERED.

6
G.R. No. L-6584 October 16, 1911
INCHAUSTI AND CO., plaintiff-appellant, vs. ELLIS CROMWELL, Collector of
Internal Revenue, defendant-appellee.
Haussermann, Cohn & Fisher, for appellant.
Acting Attorney-General Harvey, for appellee.

MORELAND, J.:

This is an appeal by the plaintiff from a judgment of the Court of First Instance of the city of Manila, the Hon. Simplicio del Rosario
presiding, dismissing the complaint upon the merits after trial, without costs.

The facts presented to this court are agreed upon by both parties, consisting, in so far as they are material to a decision of the
case, in the following:

III. That the plaintiff firm for many years past has been and now is engaged in the business of buying and selling at wholesale
hemp, both for its own account and on commission.

IV. That 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."

V. That in all sales of hemp by the plaintiff firm, whether for its own account or on commission for others, the price is quoted to
the buyer at so much per picul, no mention being made of bailing; but with the tacit understanding, unless otherwise expressly
agreed, that the hemp will be delivered in bales and that, according to the custom prevailing among hemp merchants and dealers
in the Philippine Islands, a charge, the amount of which depends upon the then prevailing rate, is to be made against the buyer
under the denomination of "prensaje." That this charge is made in the same manner in all cases, even when the operation of
bailing was performed by the plaintiff or by its principal long before the contract of sale was made. Two specimens of the ordinary
form of account used in these operations are hereunto appended, marked Exhibits A and B, respectively, and made a part hereof.

VI. That the amount of the charge made against hemp buyers by the plaintiff firm and other sellers of hemp under the
denomination of "prensaje" during the period involved in this litigation was P1.75 per bale; that the average cost of the rattan and
matting used on each bale of hemp is fifteen (15) centavos and that the average total cost of bailing hemp is one (1) peso per bale.

VII. That insurance companies in the Philippine Islands, in estimating the insurable value of hemp always add to the quoted price
of same the charge made by the seller under the denomination of "prensaje."

VII. That the average weight of a bale of hemp is two (2) piculs (126.5 kilograms).

IX. That between the first day of January, 1905, and the 31st day of March, 1910, the plaintiff firm, in accordance with the custom
mentioned in paragraph V hereof, 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 the said hemp, sums aggregating P31,080.

X. That the plaintiff firm in estimating the amount due it as commissions on sales of hemp made by it for its principals has always
based the said amount on the total sum collected from the purchasers of the hemp, including the charge made in each case under
the denomination of "prensaje."

XI. That the plaintiff has always paid to the defendant or to his predecessor in the office of the Collector of Internal Revenue the
tax collectible under the provisions of section 139 of Act No. 1189 upon the selling price expressly agreed upon for all hemp sold
by the plaintiff firm both for its own account and on commission, but has not, until compelled to do so as hereinafter stated, paid
the said tax upon sums received from the purchaser of such hemp under the denomination of "prensaje."

XII. That of 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 in Paragraph IX hereof, and which the said

7
defendant claimed to be entitled to receive, under the provisions of the said section 139 of Act No. 1189, upon the said sums of
money so collected from purchasers of hemp under the denomination of "prensaje."

XIII. That on the 4th day of May, 1910, the plaintiff firm paid to the defendant under protest the said sum of P1,370.69, and on
the same date appealed to the defendant as Collector of Internal Revenue, against the ruling by which the plaintiff firm was
required to make said payment, but defendant overruled said protest and adversely decided said appeal, and refused and still
refuses to return to plaintiff the said sum of P1,370.68 or any part thereof.1awphil.net

XIV. Upon the facts above set forth t is contended by the plaintiff that the tax of P1,370.68 assessed by the defendant upon the
aggregate sum of said charges made against said purchasers of hemp by the plaintiff during the period in question, under the
denomination of "prensaje" as aforesaid, namely, P411,204.35, 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 service of baling the hemp, and that the plaintiff firm is
therefore entitled to recover of the defendant the said sum of P1,370.68 paid to him under protest, together with all interest
thereon at the legal rate since payment, and the costs of this action.

Upon the facts above stated it is the contention of the defendant that the said charge made under the denomination of "prensaje"
is in truth and in fact a part of the gross value of the hemp sold and of its actual selling price, and that therefore the tax imposed
by section 139 of Act No. 1189 lawfully accrued on said sums, that the collection thereof was lawfully and properly made and that
therefore the plaintiff is not entitled to recover back said sum or any part thereof; and that the defendant should have judgment
against plaintiff for his costs.

Under these facts we are of the opinion that 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 is 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 the
case, that if the plaintiff sold a quality of hemp it would be the under standing, without words, that such hemp would be delivered
in bales, and that the 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 consists of the value of
the hemp loose plus the cost and expense of putting it into marketable form. In the sales made by the plaintiff, which are the basis
of the controversy here, there were n services performed by him for his vendee. There was agreement that services should be
performed. Indeed, at the time of such sales it was not known by the vendee whether the hemp was then actually baled or not.
All that he knew and all that concerned him was that the hemp should be delivered to him baled. He did not ask the plaintiff to
perform services for him, nor did the plaintiff agree to do so. The contract was single and consisted solely in the sale and purchase
of hemp. The purchaser contracted for nothing else and the vendor agreed to deliver nothing else.

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. It is quite possible also that such vendor of the
plaintiff may have received the same hemp from his vendor in baled form, that he paid the additions cost of baling as a part of the
purchase price which he paid. 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 no 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. (Groves
vs. Buck, 3 Maule & S., 178; Towers vs. Osborne, 1 Strange, 506; Benjamin on Sales, 90.) 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. (Lamb vs. Crafts, 12 Met., 353; Smith vs.
N.Y.C. Ry. Co., 4 Keyes, 180; Benjamin on Sales, 98.) Where labor is employed on the materials of the seller he can not maintain
an action for work and labor. (Atkinson vs. Bell, 8 Barn. & C., 277; Lee vs. Griffin, 30 L.J.N. S.Q.B., 252; Prescott vs. Locke, 51 N.H.,
94.) 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. (Garbutt s. Watson, 5 Barn. & Ald., 613; Gardner vs. Joy, 9 Met., 177; Lamb
vs. Crafts, 12 Met., 353; Waterman vs. Meigs, 4 Cush., 497., Clark vs. Nichols, 107 Mass., 547; May vs. Ward, 134 Mass., 127;
Abbott vs. Gilchrist, 38 Me., 260; Crocket vs. Scribner, 64 Me., 105; Pitkin vs. Noyes, 48 N. H., 294; Prescott vs. Locke, 51 N. H., 94;
Ellison vs. Brigham, 38 Vt., 64.) 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 adoption to the
8
buyer's wishes or purposes. (Mixer vs. Howarth, 21 Pick., 205.) 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. (Goddard vs. Binney, 115 Mass., 450.)

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 whose 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. The method of bookkeeping and form of the account rendered is not controlling as to
the nature of the contract made. It is conceded in the case tat 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 tat 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 undisputable that, if the plaintiff had brought the
hemp in question already baled, and that was the hemp the sale 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. It is,
nevertheless, admitted that in spite of that fact he would still have made the double entry in his invoice of sale to such vendee.
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.

Section 139 [Act No. 1189] of the Internal Revenue Law provides that:

There shall be paid by each merchant and manufacturer a tax at the rate of one-third of one per centum on the gross value in
money of all goods, wares and merchandise sold, bartered or exchanged in the Philippine Islands, and that this tax shall be assessed
on the actual selling price at which every such merchant or manufacturer disposes of his commodities.

The operation of baling undoubtedly augments the value of the goods. We agree that there can be no question that, if the value
of the hemp were not augmented to the amount of P1.75 per bale by said operation, the purchaser would not pay that sum. If
one buys a bale of hemp at a stipulated price of P20, well knowing that there is an agreement on his part, express or implied, to
pay an additional amount of P1.75 for that bale, he considers the bale of hemp worth P21. 75. It is agreed, as we have before
stated, that hemp is sold in bales. Therefore, baling is performed before the sale. The purchaser of hemp owes to the seller nothing
whatever by reason of their contract except the value of the hemp delivered. That value, that sum which the purchaser pays to
the vendee, is the true selling price of the hemp, and every item which enters into such price is a part of such selling price. By
force of the custom prevailing among hemp dealers in the Philippine Islands, a purchaser of hemp in the market, unless he
expressly stipulates that it shall be delivered to him in loose form, obligates himself to purchase and pay for baled hemp. Wheher
or not such agreement is express or implied, whether it is actual or tacit, it has the same force. After such an agreement has once
been made by the purchaser, he has no right to insists thereafter that the seller shall furnish him with unbaled hemp. It is
undoubted that the vendees, in the sales referred to in the case at bar, would have no right, after having made their contracts, to
insists on the delivery of loose hemp with the purpose in view themselves to perform the baling and thus save 75 centavos per
bale. It is unquestioned that the seller, the plaintiff, would have stood upon his original contract of sale, that is, the obligation to
deliver baled hemp, and would have forced his vendees to accept baled hemp, he himself retaining among his own profits those
which accrued from the proceed of baling.

We are of the opinion that the judgment appealed from must be affirmed, without special finding as to costs, and it is so ordered.

9
G.R. No. L-8506 August 31, 1956
CELESTINO CO & COMPANY, petitioner, vs. COLLECTOR OF INTERNAL REVENUE,
respondent.
Office of the Solicitor General Ambrosio Padilla, Fisrt Assistant Solicitor General Guillermo E. Torres and Solicitor Federico V. Sian
for respondent.

BENGZON, J.:

Appeal from a decision of the Court of Tax Appeals.

Celestino Co & Company is a duly registered general copartnership doing business under the trade name of "Oriental Sash
Factory". From 1946 to 1951 it paid percentage taxes of 7 per cent on the gross receipts of its sash, door and window factory, in
accordance with section one hundred eighty-six of the National Revenue Code imposing taxes on sale of manufactured articles.
However in 1952 it began to claim liability only to the contractor's 3 per cent tax (instead of 7 per cent) under section 191 of the
same Code; and having failed to convince the Bureau of Internal Revenue, it brought the matter to the Court of Tax Appeals, where
it also failed. Said the Court:

To support his contention that his client is an ordinary contractor . . . counsel presented . . . duplicate copies of letters, sketches
of doors and windows and price quotations supposedly sent by the manager of the Oriental Sash Factory to four customers who
allegedly made special orders to doors and window from the said factory. The conclusion that counsel would like us to deduce
from these few exhibits is that the Oriental Sash Factory does not manufacture ready-made doors, sash and windows for the
public but only upon special order of its select customers. . . . I cannot believe that petitioner company would take, as in fact it has
taken, all the trouble and expense of registering a special trade name for its sash business and then orders company stationery
carrying the bold print "Oriental Sash Factory (Celestino Co & Company, Prop.) 926 Raon St. Quiapo, Manila, Tel. No. 33076,
Manufacturers of all kinds of doors, windows, sashes, furniture, etc. used season-dried and kiln-dried lumber, of the best quality
workmanships" solely for the purpose of supplying the needs for doors, windows and sash of its special and limited customers.
One ill note that 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. Moreover, as shown from the investigation of petitioner's book of accounts, during the period from January 1,
1952 to September 30, 1952, it sold sash, doors and windows worth P188,754.69. I find it difficult to believe that this amount
which runs to six figures was derived by petitioner entirely from its few customers who made special orders for these items.

Even if we were to believe petitioner's claim that it does not manufacture ready-made sash, doors and windows for the public and
that it makes these articles only special order of its customers, that does not make it a contractor within the purview of section
191 of the national Internal Revenue Code. there are no less than fifty occupations enumerated in the aforesaid section of the
national Internal Revenue Code subject to percentage tax and after reading carefully each and every one of them, we cannot find
under which the business of manufacturing sash, doors and windows upon special order of customers fall under the category of
"road, building, navigation, artesian well, water workers and other construction work contractors" are those who alter or repair
buildings, structures, streets, highways, sewers, street railways railroads logging roads, electric lines or power lines, and includes
any other work for the construction, altering or repairing for which machinery driven by mechanical power is used. (Payton vs.
City of Anadardo 64 P. 2d 878, 880, 179 Okl. 68).

Having thus eliminated the feasibility off taxing petitioner as a contractor under 191 of the national Internal Revenue Code, this
leaves us to decide the remaining issue whether or not petitioner could be taxed with lesser strain and more accuracy as seller of
its manufactured articles under section 186 of the same code, as the respondent Collector of Internal Revenue has in fact been
doing the Oriental Sash Factory was established in 1946.

The percentage tax imposed in section 191 of our Tax Code is generally a tax on the sales of services, in contradiction with the tax
imposed in section 186 of the same Code which is a tax on the original sales of articles by the manufacturer, producer or importer.
(Formilleza's Commentaries and Jurisprudence on the National Internal Revenue Code, Vol. II, p. 744). The fact that the articles
sold are manufactured by the seller does not exchange the contract from the purview of section 186 of the National Internal
Revenue Code as a sale of articles.

There was a strong dissent; but upon careful consideration of the whole matter are inclines to accept the above statement of the
facts and the law. The important thing to remember is that Celestino Co & Company habitually makes sash, windows and doors,
as it has represented in its stationery and advertisements to the public. That it "manufactures" the same is practically admitted
by appellant itself. The fact that windows and doors are made by it only when customers place their orders, does not alter the

10
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.

Perhaps the following paragraph represents in brief the appellant's position in this Court:

Since the petitioner, by clear proof of facts not disputed by the respondent, manufacturers sash, windows and doors only for
special customers and upon their special orders and in accordance with the desired specifications of the persons ordering the
same and not for the general market: since the doors ordered by Don Toribio Teodoro & Sons, Inc., for instance, are not in
existence and which never would have existed but for the order of the party desiring it; and since petitioner's contractual relation
with his customers is that of a contract for a piece of work or since petitioner is engaged in the sale of services, it follows that the
petitioner should be taxed under section 191 of the Tax Code and NOT under section 185 of the same Code." (Appellant's brief, p.
11-12).

But the argument rests on a false foundation. Any builder or homeowner, with sufficient money, may order windows or doors of
the kind manufactured by this appellant. Therefore it is not true that it serves special customers only or confines its services to
them alone. And anyone who sees, and likes, the doors ordered by Don Toribio Teodoro & Sons Inc. may purchase from appellant
doors of the same kind, provided he pays the price. Surely, the appellant will not refuse, for it can easily duplicate or even mass-
produce the same doors-it is mechanically equipped to do so.

That the doors and windows must meet desired specifications is neither here nor there. If these specifications do not happen to
be of the kind habitually manufactured by appellant — special forms for sash, mouldings of panels — it would not accept the order
— and no sale is made. If they do, the transaction would be no different from a purchasers of manufactured goods held is stock
for sale; they are bought because they meet the specifications desired by the purchaser.

Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications of a customer-sizes not previously
held in stock for sale to the public-it thereby becomes an employee or servant of the customer,1 not the seller of lumber. The
same consideration applies to this sash manufacturer.

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.

On the other hand, petitioner's idea of being a contractor doing construction jobs is untenable. Nobody would regard the doing
of two window panels a construction work in common parlance.2

Appellant invokes Article 1467 of the New Civil Code to bolster its contention 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".

Said article reads as follows:

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).

In our opinion 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.
The orders herein exhibited were not shown to be special. They were merely orders for work — nothing is shown to call them
special requiring extraordinary service of the factory.

The thought occurs to us that if, as alleged-all the work of appellant is only to fill orders previously made, such orders should not
be called special work, but regular work. Would a factory do business performing only special, extraordinary or peculiar
merchandise?

11
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.

12
G.R. 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.

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.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete, Solicitor Lolita O. Gal-lang, and
Special Attorney Gemaliel H. Montalino for Commissioner of Internal Revenue, etc.

Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J.R. Balonkita for Engineering and Supply Company.

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 accessories
thereof which are subject to tax under Section 185(m)1 of the Tax Code, instead of Section 186 of the same 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.

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.
13
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;

3. That the Court of Tax Appeals erred in holding Engineering 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;

5. That the Court of Tax Appeals erred in holding Engineering 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 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 xxx 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
14
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 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 setter 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 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. (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 separately.

As found by the lower court, which finding4 We adopt —

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.
15
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:

... 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.

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. ...

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. 301-305, 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. 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 ... ." 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
he 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 —

16
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 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 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 should be held
liable to pay taxes prescribed under Section 1905 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. 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"

... 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. ... (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 monthly
17
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 words air conditioning equipment should be made on any
shipping documents as well as 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 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 air conditioning 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 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. "3-F-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
presenting 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 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 conditioning.

18
It is realized that this 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 these matters will be appreciated. (Emphasis 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 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 compensation 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 the Republic Acts Nos. 253, 361, 1511 and 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:

... 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. ... 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 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.
19
G.R. No. 52267 January 24, 1996
ENGINEERING & MACHINERY CORPORATION, petitioner, vs. COURT OF APPEALS and PONCIANO L. ALMEDA, respondent.

DECISION

PANGANIBAN, J.:

Is a contract for the fabrication and installation of a central air-conditioning system in a building, one of "sale" or "for a piece of
work"? What is the prescriptive period for filing actions for breach of the terms of such contract?

These are the legal questions brought before this Court in this Petition for review on certiorari under Rule 45 of the Rules of Court,
to set aside the Decision1 of the Court of Appeals2 in CA-G.R. No. 58276-R promulgated on November 28, 1978 (affirming in toto
the decision3 dated April 15, 1974 of the then Court of First Instance of Rizal, Branch II4 , in Civil Case No. 14712, which ordered
petitioner to pay private respondent the amount needed to rectify the faults and deficiencies of the air-conditioning system
installed by petitioner in private respondent's building, plus damages, attorney's fees and costs).

By a resolution of the First Division of this Court dated November 13, 1995, this case was transferred to the Third. After deliberating
on the various submissions of the parties, including the petition, record on appeal, private respondent's comment and briefs for
the petitioner and the private respondent, the Court assigned the writing of this Decision to the undersigned, who took his oath
as a member of the Court on October 10, 1995.

The Facts

Pursuant to the contract dated September 10, 1962 between petitioner and private respondent, the former undertook to
fabricate, furnish and install the air-conditioning system in the latter's building along Buendia Avenue, Makati in consideration of
P210,000.00. Petitioner was to furnish the materials, labor, tools and all services required in order to so fabricate and install said
system. The system was completed in 1963 and accepted by private respondent, who paid in full the contract price.

On September 2, 1965, private respondent sold the building to the National Investment and Development Corporation (NIDC).
The latter took possession of the building but on account of NIDC's noncompliance with the terms and conditions of the deed of
sale, private respondent was able to secure judicial rescission thereof. The ownership of the building having been decreed back
to private respondent, he re-acquired possession sometime in 1971. It was then that he learned from some NIDC, employees of
the defects of the air-conditioning system of the building.

Acting on this information, private respondent commissioned Engineer David R. Sapico to render a technical evaluation of the
system in relation to the contract with petitioner. In his report, Sapico enumerated the defects of the system and concluded that
it was "not capable of maintaining the desired room temperature of 76ºF - 2ºF (Exhibit C)"5 .

On the basis of this report, private respondent filed on May 8, 1971 an action for damages against petitioner with the then Court
of First Instance of Rizal (Civil Case No. 14712). The complaint alleged that the air-conditioning system installed by petitioner did
not comply with the agreed plans and specifications. Hence, private respondent prayed for the amount of P210,000.00
representing the rectification cost, P100,000.00 as damages and P15,000.00 as attorney's fees.

Petitioner moved to dismiss the complaint, alleging that the prescriptive period of six months had set in pursuant to Articles 1566
and 1567, in relation to Article 1571 of the Civil Code, regarding the responsibility of a vendor for any hidden faults or defects in
the thing sold.

Private respondent countered that the contract dated September 10, 1962 was not a contract for sale but a contract for a piece
of work under Article 1713 of the Civil Code. Thus, in accordance with Article 1144 (1) of the same Code, the complaint was timely
brought within the ten-year prescriptive period.

In its reply, petitioner argued that Article 1571 of the Civil Code providing for a six-month prescriptive period is applicable to a
contract for a piece of work by virtue of Article 1714, which provides that such a contract shall be governed by the pertinent
provisions on warranty of title and against hidden defects and the payment of price in a contract of sale6 .

The trial court denied the motion to dismiss. In its answer to the complaint, petitioner reiterated its claim of prescription as an
affirmative defense. It alleged that whatever defects might have been discovered in the air-conditioning system could have been
caused by a variety of factors, including ordinary wear and tear and lack of proper and regular maintenance. It pointed out that
during the one-year period that private respondent withheld final payment, the system was subjected to "very rigid inspection
and testing and corrections or modifications effected" by petitioner. It interposed a compulsory counterclaim suggesting that the
complaint was filed "to offset the adverse effects" of the judgment in Civil Case No. 71494, Court of First Instance of Manila,
20
involving the same parties, wherein private respondent was adjudged to pay petitioner the balance of the unpaid contract price
for the air-conditioning system installed in another building of private respondent, amounting to P138,482.25.

Thereafter, private respondent filed an ex-parte motion for preliminary attachment on the strength of petitioner's own statement
to the effect that it had sold its business and was no longer doing business in Manila. The trial court granted the motion and, upon
private respondent's posting of a bond of F'50,000.00, ordered the issuance of a writ of attachment.

In due course, the trial court rendered a decision finding that petitioner failed to install certain parts and accessories called for by
the contract, and deviated from the plans of the system, thus reducing its operational effectiveness to the extent that 35 window-
type units had to be installed in the building to achieve a fairly desirable room temperature. On the question of prescription, the
trial court ruled that the complaint was filed within the ten-year court prescriptive period although the contract was one for a
piece of work, because it involved the "installation of an air-conditioning system which the defendant itself manufactured,
fabricated, designed and installed."

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. Hence, it instituted the instant petition.

The Submissions of the Parties

In the instant Petition, petitioner raised three issues. First, it contended that private respondent's acceptance of the work and his
payment of the contract price extinguished any liability with respect to the defects in the air-conditioning system. Second, it
claimed that the Court of Appeals erred when it held that the defects in the installation were not apparent at the time of delivery
and acceptance of the work considering that private respondent was not an expert who could recognize such defects. Third, it
insisted that, assuming arguendo that there were indeed hidden defects, private respondent's complaint was barred by
prescription under Article 1571 of the Civil Code, which provides for a six-month prescriptive period.

Private respondent, on the other hand, averred that the issues raised by petitioner, like the question of whether there was an
acceptance of the work by the owner and whether the hidden defects in the installation could have been discovered by simple
inspection, involve questions of fact which have been passed upon by the appellate court.

The Court's Ruling

The Supreme Court reviews only errors of law in petitions for review on certiorari under Rule 45. It is not the function of this Court
to re-examine the findings of fact of the appellate court unless said findings are not supported by the evidence on record or the
judgment is based on a misapprehension of facts7 of Appeals erred when it held that the defects in the installation were not
apparent at the time of delivery and acceptance of the work considering that private respondent was not an expert who could
recognize such defects. Third. it insisted that, assuming arguendo that there were indeed hidden defects, private respondent's
complaint was barred by prescription under Article 1571 of the Civil Code, which provides for a six-month prescriptive period.

Private respondent, on the other hand, averred that the issues raised by petitioner, like the question of whether here was an
acceptance of the work by the owner and whether the hidden defects in the installation could have been discovered by simple
inspection, involve questions of fact which have been passed upon by the appellate court.

The Court has consistently held that the factual findings of the trial court, as well as the Court of Appeals, are final and conclusive
and may not be reviewed on appeal. Among the exceptional circumstances where a reassessment of facts found by the lower
courts is allowed are when the conclusion is a finding grounded entirely on speculation, surmises or conjectures; when the
inference made is manifestly absurd, mistaken or impossible; when there is grave abuse of discretion in the appreciation of facts;
when the judgment is premised on a misapprehension of facts; when the findings went beyond the issues of the case and the
same are contrary to the admissions of both appellant and appellee. After a careful study of the case at bench, we find none of
the above grounds present to justify the re-evaluation of the findings of fact made by the courts below.8

We see no valid reason to discard the factual conclusions of the appellate court. . . . (I)t is not the function of this Court to assess
and evaluate all over again the evidence, testimonial and documentary, adduced by the parties, particularly where, such as here,
the findings of both the trial court and the appellate court on the matter coincide.9 (Emphasis supplied)

Hence, the first two issues will not be resolved as they raise questions of fact.

Thus, the only question left to be resolved is that of prescription. In their submissions, the parties argued lengthily on the nature
of the contract entered into by them, viz., whether it was one of sale or for a piece of work.

Article 1713 of the Civil Code defines a contract for a piece of work thus:

21
By the 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. The contractor may either employ only his labor or skill, or also furnish the material.

A contract for a piece of work, labor and materials may be distinguished from a contract of sale by the inquiry as to whether the
thing transferred is one not in existence and which would never have existed but for the order, of the person desiring it10 . In such
case, the contract is one for a piece of work, not a sale. On the other hand, if the thing subject of the contract would have existed
and been the subject of a sale to some other person even if the order had not been given, then the contract is one of sale11 .

Thus, Mr. Justice Vitug12 explains 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 a contract for a piece of
work (Art. 1467, Civil Code). The mere fact alone that certain articles are made upon previous orders of customers will not argue
against the imposition of the sales tax if such articles are ordinarily manufactured by the taxpayer for sale to the public (Celestino
Co. vs. Collector, 99 Phil. 841).

To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if the parties intended that
at some future date an object has to be delivered, without considering the work or labor of the party bound to deliver, the contract
is one of sale. But if one of the parties accepts the undertaking on the basis of some plan, taking into account the work he will
employ personally or through another, there is a contract for a piece of work13 .

Clearly, the contract in question is one for a piece of work. It is not petitioner's line of business to manufacture air-conditioning
systems to be sold "off-the-shelf." Its business and particular field of expertise is the fabrication and installation of such systems
as ordered by customers and in accordance with the particular plans and specifications provided by the customers. Naturally, the
price or compensation for the system manufactured and installed will depend greatly on the particular plans and specifications
agreed upon with the customers.

The obligations of a contractor for a piece of work are set forth in Articles 1714 and 1715 of the Civil Code, which provide:

Art. 1714. If the contractor agrees to produce the work from material furnished by him, he shall deliver the thing produced
to the employer and transfer dominion over the thing. This contract shall be governed by the following articles as well as by the
pertinent provisions on warranty of title and against hidden defects and the payment of price in a contract of sale.

Art. 1715. The contractor shall execute the work in such a manner that it has the qualities agreed upon and has no defects
which destroy or lessen its value or fitness for its ordinary or stipulated use. Should the work be not of such quality, the employer
may require that the contractor remove the defect or execute another work. If the contractor fails or refuses to comply with this
obligation, the employer may have the defect removed or another work executed, at the contractor's cost.

The provisions on warranty against hidden defects, referred to in Art. 1714 above-quoted, are found in Articles 1561 and 1566,
which read as follows:

Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should
they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had
the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor shall not
be answerable for patent defects or those which may be visible, or for those which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have known them.

xxx xxx xxx

Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even though he was
not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in
the thing sold.

The remedy against violations of the warranty against hidden defects is either to withdraw from the contract (redhibitory action)
or to demand a proportionate reduction of the price (accion quanti manoris), with damages in either case14 .

In Villostas vs. Court of Appeals15 , we held that, "while it is true that Article 1571 of the Civil Code provides for a prescriptive
period of six months for a redhibitory action, a cursory reading of the ten preceding articles to which it refers will reveal that said
22
rule may be applied only in case of implied warranties"; and where there is an express warranty in the contract, as in the case at
bench, the prescriptive period is the one specified in the express warranty, and in the absence of such period, "the general rule
on rescission of contract, which is four years (Article 1389, Civil Code) shall apply"16 .

Consistent with the above discussion, it would appear that this suit is barred by prescription because the complaint was filed more
than four years after the execution of the contract and the completion of the air-conditioning system.

However, a close scrutiny of the complaint filed in the trial court reveals that the original action is not really for enforcement of
the warranties against hidden defects, but one for breach of the contract itself. It alleged17 that the petitioner, "in the installation
of the air conditioning system did not comply with the specifications provided" in the written agreement between the parties,
"and an evaluation of the air-conditioning system as installed by the defendant showed the following defects and violations of the
specifications of the agreement, to wit:

GROUND FLOOR:

"A. RIGHT WING:

Equipped with Worthington Compressor, Model 2VC4 directly driven by an Hp Elin electric motor 1750 rmp, 3 phase, 60 cycles,
220 volts, complete with starter evaporative condenser, circulating water pump, air handling unit air ducts.

Defects Noted:

1. Deteriorated evaporative condenser panels, coils are full of scales and heavy corrosion is very evident.

2. Defective gauges of compressors;

3. No belt guard on motor;

4. Main switch has no cover;

5. Desired room temperature not attained;

Aside from the above defects, the following were noted not installed although provided in the specifications.

1. Face by-pass damper of G.I. sheets No. 16. This damper regulates the flow of cooled air depending on room condition.

2. No fresh air intake provision were provided which is very necessary for efficient comfort cooling..

3. No motor to regulate the face and by-pass damper.

4. Liquid level indicator for refrigerant not provided.

5. Suitable heat exchanger is not installed. This is an important component to increase refrigeration efficiency.

6. Modulating thermostat not provided.

7. Water treatment device for evaporative condenser was not provided.

8. Liquid receiver not provided by sight glass.

B. LEFT WING:

Worthington Compressor Model 2VC4 is installed complete with 15 Hp electric motor, 3 phase, 220 volts 60 cycles with starter.

Defects Noted:

Same as right wing. except No. 4, All other defects on right wing are common to the left wing.

SECOND FLOOR: (Common up to EIGHT FLOORS)

23
Compressors installed are MELCO with 7.5 Hp V-belt driven by 1800 RPM, -220 volts, 60 cycles, 3 phase, Thrige electric motor with
starters.

As stated in the specifications under, Section No. IV, the MELCO compressors do not satisfy the conditions stated therein due to
the following:

1. MELCO Compressors are not provided with automatic capacity unloader.

2. Not provided with oil pressure safety control.

3. Particular compressors do not have provision for renewal sleeves.

Out of the total 15 MELCO compressors installed to serve the 2nd floor up to 8th floors, only six (6) units are in operation and the
rest were already replaced. Of the remaining six (6) units, several of them have been replaced with bigger crankshafts.

NINTH FLOOR:

Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60 cycles, 1750 rpm, Higgs motors with starters.

Defects Noted are similar to ground floor.

GENERAL REMARKS:

Under Section III, Design conditions of specification for air conditioning work, and taking into account "A" & "B" same, the present
systems are not capable of maintaining the desired temperature of 76 = 2ºF (sic).

The present tenant have installed 35 window type air conditioning units distributed among the different floor levels. Temperature
measurements conducted on March 29. 1971, revealed that 78ºF room (sic) is only maintained due to the additional window type
units.

The trial court, after evaluating the evidence presented, held that, indeed, petitioner failed to install items and parts required in
the contract and substituted some other items which were not in accordance with the specifications18 , thus:

From all of the foregoing, the Court is persuaded to believe the plaintiff that not only had the defendant failed to install items and
parts provided for in the specifications of the air-conditioning system be installed, like face and by-pass dampers and modulating
thermostat and many others, but also that there are items, parts and accessories which were used and installed on the air-
conditioning system which were not in full accord with contract specifications. These omissions to install the equipments, parts
and accessories called for in the specifications of the contract, as well as the deviations made in putting into the air-conditioning
system equipments, parts and accessories not in full accord with the contract specification naturally resulted to adversely affect
the operational effectiveness of the air-conditioning system which necessitated the installation of thirty-five window type of air-
conditioning units distributed among the different floor levels in order to be able to obtain a fairly desirable room temperature
for the tenants and actual occupants of the building. The Court opines and so holds that the failure of the defendant to follow the
contract specifications and said omissions and deviations having resulted in the operational ineffectiveness of the system installed
makes the defendant liable to the plaintiff in the amount necessary to rectify to put the air conditioning system in its proper
operational condition to make it serve the purpose for which the plaintiff entered into the contract with the defendant.

The respondent Court affirmed the trial court's decision thereby making the latter's findings also its own.

Having concluded that the original complaint is one for damages arising from breach of a written contract - and not a suit to
enforce warranties against hidden defects - we here - with declare that the governing law is Article 1715 (supra). However,
inasmuch as this provision does not contain a specific prescriptive period, the general law on prescription, which is Article 1144 of
the Civil Code, will apply. Said provision states, inter alia, that actions "upon a written contract" prescribe in ten (10) years. Since
the governing contract was executed on September 10, 1962 and the complaint was filed on May 8, 1971, it is clear that the action
has not prescribed.

What about petitioner's contention that "acceptance of the work by the employer relieves the contractor of liability for any defect
in the work"? This was answered by respondent Court19 as follows:

As the breach of contract which gave rise to the instant case consisted in appellant's omission to install the equipments (sic), parts
and accessories not in accordance with the plan and specifications provided for in the contract and the deviations made in putting
into the air conditioning system parts and accessories not in accordance with the contract specifications, it is evident that the
24
defect in the installation was not apparent at the time of the delivery and acceptance of the work, considering further that plaintiff
is not an expert to recognize the same. From the very nature of things, it is impossible to determine by the simple inspection of
air conditioning system installed in an 8-floor building whether it has been furnished and installed as per agreed specifications.

Verily, the mere fact that the private respondent accepted the work does not, ipso facto, relieve the petitioner from liability for
deviations from and violations of the written contract, as the law gives him ten (10) years within which to file an action based on
breach thereof.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. No costs.

SO ORDERED.

25
G.R. No. 71122 March 25, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ARNOLDUS CARPENTRY SHOP, INC. and COURT OF TAX APPEALS,
respondents.

The Solicitor General for petitioner.

Generoso Jacinto for respondents.

CORTES, J.:

Assailed in this petition is the decision of the Court of Tax Appeals in CTA case No. 3357 entitled "ARNOLDUS CARPENTRY SHOP,
INC. v. COMMISSIONER OF INTERNAL REVENUE."

The facts are simple.

Arnoldus Carpentry Shop, Inc. (private respondent herein) is a domestic corporation which has been in existence since 1960. It
has for its secondary purpose the "preparing, processing, buying, selling, exporting, importing, manufacturing, trading and dealing
in cabinet shop products, wood and metal home and office furniture, cabinets, doors, windows, etc., including their component
parts and materials, of any and all nature and description" (Rollo, pp. 160-161). These furniture, cabinets and other woodwork
were sold locally and exported abroad.

For this business venture, private respondent kept samples or models of its woodwork on display from where its customers may
refer to when placing their orders.

Sometime in March 1979, the examiners of the petitioner Commissioner of Internal Revenue conducted an investigation of the
business tax liabilities of private respondent pursuant to Letter of Authority No. 08307 NA dated November 23, 1978. As per the
examination, the total gross sales of private respondent for the year 1977 from both its local and foreign dealings amounted to
P5,162,787.59 (Rollo. p. 60). From this amount, private respondent reported in its quarterly percentage tax returns P2,471,981.62
for its gross local sales. The balance of P2,690,805.97, which is 52% of the total gross sales, was considered as its gross export sales
(CTA Decision, p. 12).

Based on such an examination, BIR examiners Honesto A. Vergel de Dios and Voltaire Trinidad made a report to the Commissioner
classifying private respondent as an "other independent contractor" under Sec. 205 (16) [now Sec. 169 (q)] of the Tax Code. The
relevant portion of the report reads:

Examination of the records show that per purchase orders, which are hereby attached, of the taxpayer's customers during the
period under review, subject corporation should be considered a contractor and not a manufacturer. The corporation 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, (Luzon Stevedoring Co. v. Trinidad, 43 Phil. 803). Hence, in the computation of the
percentage tax, the 3% contractor's tax should be imposed instead of the 7% manufacturer's tax. [Rollo, p. 591 (Emphasis
supplied.)

xxx xxx xxx

As a result thereof, the examiners assessed private respondent for deficiency tax in the amount of EIGHTY EIGHT THOUSAND NINE
HUNDRED SEVENTY TWO PESOS AND TWENTY THREE CENTAVOS ( P88,972.23 ). Later, on January 31, 1981, private respondent
received a letter/notice of tax deficiency assessment inclusive of charges and interest for the year 1977 in the amount of ONE
HUNDRED EIGHT THOUSAND SEVEN HUNDRED TWENTY PESOS AND NINETY TWO CENTAVOS ( P 108,720.92 ). This tax deficiency
was a consequence of the 3% tax imposed on private respondent's gross export sales which, in turn, resulted from the examiners'
finding that categorized private respondent as a contractor (CTA decision, p.2).

Against this assessment, private respondent filed on February 19, 1981 a protest with the petitioner Commissioner of Internal
Revenue. In the protest letter, private respondent's manager maintained that the carpentry shop is a manufacturer and therefor
entitled to tax exemption on its gross export sales under Section 202 (e) of the National Internal Revenue Code. He explained that
it was the 7% tax exemption on export sales which prompted private respondent to exploit the foreign market which resulted in
the increase of its foreign sales to at least 52% of its total gross sales in 1977 (CTA decision, pp. 1213).

On June 23, 1981, private respondent received the final decision of the petitioner stating:

26
It is the stand of this Office that you are considered a contractor an not a manufacturer. Records show that you manufacture
woodworks only upon previous order from supposed manufacturers and only in accordance with the latter's own design, model
number, color, etc. [Rollo p. 64] (Emphasis supplied.)

On July 22, 1981, private respondent appealed to the Court of Tax Appeals alleging that the decision of the Commissioner was
contrary to law and the facts of the case.

On April 22, 1985, respondent Court of Tax Appeals rendered the questioned decision holding that private respondent was a
manufacturer thereby reversing the decision of the petitioner.

Hence, this petition for review wherein petitioner raises the sole issue of. Whether or not the Court of Tax Appeals erred in holding
that private respondent is a manufacturer and not a contractor and therefore not liable for the amount of P108,720.92, as
deficiency contractor's tax, inclusive of surcharge and interest, for the year 1977.

The petition is without merit.

1. Private respondent is a "manufacturer" as defined in the Tax Code and not a "contractor" under Section 205(e) of the Tax
Code as petitioner would have this Court decide.

(a) Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines "independent contractors" as:

... persons (juridical and 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. (Emphasis supplied.)

Private respondent's business does not fall under this definition.

Petitioner contends that the fact that private respondent "designs and makes samples or models that are 'displayed' or presented
or 'submitted' to prospective buyers who 'might choose' therefrom" signifies that what private respondent is selling is a kind of
service its shop is capable of rendering in terms of woodwork skills and craftsmanship (Brief for Petitioner, p. 6). He further stresses
the point that if there are no orders placed for goods as represented by the sample or model, the shop does not produce anything;
on the other hand, if there are orders placed, the shop goes into fall production to fill up the quantity ordered (Petitioner's Brief,
p. 7).

The facts of the case do not support petitioner's claim. Petitioner is ignoring the fact that private respondent sells goods which it
keeps in stock and not services. As the respondent Tax Court had found:

xxx xxx xxx

Petitioner [private respondent herein] claims, and the records bear petitioner out, that it had a ready stock of its shop products
for sale to its foreign and local buyers. As a matter of fact, the purchase orders from its foreign buyers showed that they ordered
by referring to the models designated by petitioner. Even purchases by local buyers for television cabinets (Exhs. '2 to13', pp. 1-
13, BIR records) were by orders for existing models except only for some adjustments in sizes and accessories utilized.

With regard to the television cabinets, petitioner presented three witnesses its bookkeeper, production manager and manager
who testified that samples of television cabinets were designed and made by petitioner, from which models the television
companies such as Hitachi National and others might choose, then specified whatever innovations they desired. If found to be
saleable, some television cabinets were manufactured for display and sold to the general public. These cabinets were not exported
but only sold locally. (t.s.n., pp. 2235, February 18,1982; t.s.n., pp. 7-10, March 25, 1982; t.s.n., pp. 3-6, August 10, 1983.)

xxx xxx xxx

In the case of petitioner's other woodwork products such as barometer cases, knife racks, church furniture, school furniture, knock
down chairs, etc., petitioner's above-mentioned witnesses testified that these were manufactured without previous orders.
Samples were displayed, and if in stock, were available for immediate sale to local and foreign customers. Such testimony was not
contradicted by respondent (petitioner herein). And in all the purchase orders presented as exhibits, whether from foreign or local
buyers, reference was made to the model number of the product being ordered or to the sample submitted by petitioner.

Respondent's examiners, in their memorandum to the Commissioner of Internal Revenue, stated that petitioner manufactured
only upon previous orders from customers and "only in accordance with the latter's own design, model number, color, etc." (Exh.
27
'1', p. 27, BIR records.) Their bare statement that the model numbers and designs were the customers' own, unaccompanied by
adequate evidence, is difficult to believe. It ignores commonly accepted and recognized business practices that it is not the
customer but the manufacturer who furnishes the samples or models from which the customers select when placing their orders,
The evidence adduced by petitioner to prove that the model numbers and designs were its own is more convincing [CTA decision,
pp. 6-8.] (Emphasis supplied)

xxx xxx xxx

This Court finds no reason to disagree with the Tax Court's finding of fact. It has been consistently held that while the decisions of
the Court of Tax Appeals are appealable to the Supreme Court, the former's finding of fact are entitled to the highest respect. The
factual findings can only be disturbed on the part of the tax court [Collector of Intern. al Revenue v. Henderson, L-12954, February
28, 1961, 1 SCRA 649; Aznar v. Court of Tax Appeals, L-20569, Aug. 23, 1974, 58 SCRA 519; Raymundo v. de Joya, L-27733, Dec. 3,
1980, 101 SCRA 495; Industrial Textiles Manufacturing Co. of the Phils. , Inc. v. Commissioner of Internal Revenue, L-27718 and L-
27768, May 27,1985,136 SCRA 549.]

(b) Neither can Article 1467 of the New Civil Code help petitioner's cause. Article 1467 states:

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.

Petitioner alleged that what exists prior to any order is but the sample model only, nothing more, nothing less and the ordered
quantity would never have come into existence but for the particular order as represented by the sample or model [Brief for
Petitioner, pp. 9-101.]

Petitioner wants to impress upon this Court that under Article 1467, the true test of whether or not the contract is a piece of work
(and thus classifying private respondent as a contractor) or a contract of sale (which would classify private respondent as a
manufacturer) is the mere existence of the product at the time of the perfection of the contract such that if the thing already
exists, the contract is of sale, if not, it is work.

This is not the test followed in this jurisdiction. As can be clearly seen from the wordings of Art. 1467, what determines whether
the contract is one of work or of sale is whether the thing has been manufactured specially for the customer and upon his special
order." Thus, if the thing is specially done at the order of another, this is a contract for a piece of work. If, on the other hand, the
thing is manufactured or procured for the general market in the ordinary course of one's business, it is a b contract of sale.

Jurisprudence has followed this criterion. As held in Commissioner of Internal Revenue v. Engineering Equipment and Supply Co.
(L-27044 and L-27452, June 30, 1975, 64 SCRA 590, 597), "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." (Emphasis supplied.) And in a BIR ruling, which as per Sec. 326 (now Sec. 277) of
the Tax Court the Commissioner has the power to make and which, as per settled jurisprudence is entitled to the greatest weight
as an administrative view [National Federation of Sugar Workers (NFSW) v. Ovejera, G.R. No. 59743, May 31, 1982, 114 SCRA 354,
391; Sierra Madre Trust v. Hon. Sec. of Agriculture and Natural Resources, Nos. 32370 and 32767, April 20, 1983,121 SCRA 384;
Espanol v. Chairman and Members of the Board of Administrators, Phil. Veterans Administration, L-44616, June 29, 1985, 137
SCRA 3141, "one who has ready for the sale to the general public finished furniture is a manufacturer, and the mere fact that he
did not have on hand a particular piece or pieces of furniture ordered does not make him a contractor only" (BIR Ruling No. 33-1,
series of 1960). Likewise,

xxx xxx xxx

When the vendor enters into a contract for the delivery of an article which in the ordinary course of his business he manufactures
or procures for the general market at a price certain (Art. 1458) such contract is one of sale even if at the time of contracting he
may not have such article on hand. Such articles fall within the meaning of "future goods" mentioned in Art. 1462, par. 1. [5 Padilla,
Civil Law: Civil Code Annotated 139 (1974)

xxx xxx xxx

These considerations were what precisely moved the respondent Court of Tax Appeals to rule that 'the fact that [private
respondent] kept models of its products... indicate that these products were for sale to the general public and not for special
orders,' citing Celestino Co and Co. v. Collector of Internal Revenue [99 Phil, 841 (1956)]. (CTA Decision, pp. 8-9.)
28
Petitioner alleges that the error of the respondent Tax Court was due to the 'heavy albeit misplaced and indiscriminate reliance
on the case of Celestino Co and Co. v. Collector of Internal Revenue [99 Phil. 841, 842 (1956)] which is not a case in point' 1 Brief
for Petitioner, pp. 14-15). The Commissioner of Internal Revenue made capital of the difference between the kinds of business
establishments involved a FACTORY in the Celestino Co case and a CARPENTRY SHOP in this case (Brief for Petitioner, pp. 14-18).
Petitioner seems to have missed the whole point in the former case.

True, the former case did mention the fact of the business concern being a FACTORY, Thus:

xxx xxx xxx

... I cannot believe that petitioner company would take, as in fact it has taken, all the trouble and expense of registering a special
trade name for its sash business and then orders company stationery carrying the bold print "Oriental Sash Factory (Celestino Co
and Company, Prop.) 926 Raon St., Quiapo, Manila, Tel. No. 33076, Manufacturers of all kinds of doors, windows, sashes furniture,
etc. used season dried and kiln-dried lumber, of the best quality workmanship" solely for the purpose of supplying the need for
doors, windows and sash of its special and limited customers. One will note that petitioner has chosen for its trade name 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 ready-made doors and windows of standard sizes for the average home. [Emphasis supplied.]

xxx xxx xxx

However, these findings were merely attendant facts to show what the Court was really driving at — the habituality of the
production of the goods involved for the general public.

In the instant case, it may be that what is involved is a CARPENTRY SHOP. But, in the same vein, there are also attendant facts
herein to show habituality of the production for the general public.

In this wise, it is noteworthy to again cite the findings of fact of the respondent Tax Court:

xxx xxx xxx

Petitioner [private respondent herein] claims, and the records bear petitioner out, that it had a ready stock of its shop products
for sale to its foreign and local buyers. As a matter of fact, the purchase orders from its foreign buyers showed that they ordered
by referring to the models designed by petitioner. Even purchases by local buyers for television cabinets... were by orders for
existing models. ...

With regard to the television cabinets, petitioner presented three witnesses... who testified that samples of television cabinets
were designed and made by petitioner, from which models the television companies ... might choose, then specified whatever
innovations they desired. If found to be saleable, some television cabinets were manufactured for display and sold to the general
public.

xxx xxx xxx

In the case of petitioner's other woodwork products... these were manufactured without previous orders. Samples were displayed,
and if in stock, were available for immediate sale to local and foreign customers. (CTA decision, pp. 6-8.1 [Emphasis supplied.]

(c) The private respondent not being a "contractor" as defined by the Tax Code or of the New Civil Code, is it a 'manufacturer'
as countered by the carpentry shop?

Sec. 187 (x) [now Sec. 157 (x)] of the Tax Code defines a manufacturer' as follows:

"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 product in such manner as to prepare it for a special use or uses
to which it could not have been in its original condition, or who by any such process alters the quality or any such raw 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 different kinds and in such manner that the finished product of such process or manufacture
can be put to a special use or uses to which such raw material or manufactured or partially manufactured products in their original
condition would not have been put, and who in addition alters such raw material or manufactured or partially manufactured

29
products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not
for his own use or consumption.

It is a basic rule in statutory construction that when the language of the law is clear and unequivocal, the law must be taken to
mean exactly what it says [Banawa et al. v. Mirano et al., L-24750, May 16, 1980, 97 SCRA 517, 533].

The term "manufacturer" had been considered in its ordinary and general usage. The term has been construed broadly to include
such processes as buying and converting duck eggs to salted eggs ('balut") [Ngo Shiek v. Collector of Internal Revenue, 100 Phil.
60 (1956)1; the processing of unhusked kapok into clean kapok fiber [Oriental Kapok Industries v. Commissioner of Internal
Revenue, L-17837, Jan. 31, 1963, 7 SCRA 132]; or making charcoal out of firewood Bermejo v. Collector of Internal Revenue, 87
Phil. 96 (1950)].

2. As the Court of Tax Appeals did not err in holding that private respondent is a "manufacturer," then private respondent
is entitled to the tax exemption under See. 202 (d) and (e) mow Sec. 167 (d) and (e)] of the Tax Code which states:

Sec. 202. Articles not subject to percentage tax on sales. The following shall be exempt from the percentage taxes imposed
in Sections 194, 195, 196, 197, 198, 199, and 201:

xxx xxx xxx

(d) Articles shipped or exported by the manufacturer or producer, irrespective of any shipping arrangement that may be agreed
upon which may influence or determine the transfer of ownership of the articles so exported.

(e) Articles sold by "registered export producers" to (1) other" registered export producers" (2) "registered export traders' or (3)
foreign tourists or travelers, which are considered as "export sales."

The law is clear on this point. It is conceded that as a rule, as argued by petitioner, any claim for tax exemption from tax statutes
is strictly construed against the taxpayer and it is contingent upon private respondent as taxpayer to establish a clear right to tax
exemption [Brief for Petitioners, p. 181. Tax exemptions are strictly construed against the grantee and generally in favor of the
taxing authority [City of Baguio v. Busuego, L-29772, Sept. 18, 1980, 100 SCRA 1161; they are looked upon with disfavor [Western
Minolco Corp. v. Commissioner Internal Revenue, G.R. No. 61632, Aug. 16,1983,124 1211. They are held strictly against the
taxpayer and if expressly mentioned in the law, must at least be within its purview by clear legislative intent [Commissioner of
Customs v. Phil., Acetylene Co., L-22443, May 29, 1971, 39 SCRA 70, Light and Power Co. v. Commissioner of Customs, G.R. L-
28739 and L-28902, March 29, 1972, 44 SCRA 122].

Conversely therefore, if there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative
intent, then the rule on strict construction will not apply. In the present case the respondent Tax Court did not err in classifying
private respondent as a "manufacturer". Clearly, the 'latter falls with the term 'manufacturer' mentioned in Art. 202 (d) and (e) of
the Tax Code. As the only question raised by petitioner in relation to this tax exemption claim by private respondent is the
classification of the latter as a manufacturer, this Court affirms the holding of respondent Tax Court that private respondent is
entitled to the percentage tax exemption on its export sales.

There is nothing illegal in taking advantage of tax exemptions. When the private respondent was still exporting less and producing
locally more, the petitioner did not question its classification as a manufacturer. But when in 1977 the private respondent
produced locally less and exported more, petitioner did a turnabout and imposed the contractor's tax. By classifying the private
respondent as a contractor, petitioner would likewise take away the tax exemptions granted under Sec. 202 for manufacturers.
Petitioner's action finds no support in the applicable law.

WHEREFORE, the Court hereby DENIES the Petition for lack of merit and AFFIRMS the Court of Tax Appeals decision in CTA Case
No. 3357.

SO ORDERED.

30
G.R. No. 153033 June 23, 2005
DEL MONTE PHILIPPINES, INC., petitioner, vs. NAPOLEON N. ARAGONES, respondent.

DECISION

CARPIO-MORALES, J.:

The decision in the present Petition for Review on Certiorari hinges on the nature of the contract denominated "Supply
Agreement"1 which was forged between Dynablock Enterprises, represented by its Manager herein respondent Napoleon N.
Aragones (Aragones) and Mega-Engineering Services in joint venture with WAFF Construction System Corporation (MEGA-WAFF)
— whether it was one of sale or for a piece of work.

On September 18, 1988, herein petitioner Del Monte Philippines Inc. (DMPI) entered into an "Agreement"2 with MEGA-WAFF,
represented by "Managing Principal" Edilberto Garcia (Garcia), whereby the latter undertook "the supply and installation of
modular pavement" at DMPI’s condiments warehouse at Cagayan de Oro City within 60 calendar days from signing of the
agreement.

To source its supply of concrete blocks to be installed on the pavement of the DMPI warehouse, MEGA-WAFF, as CONTRACTOR
represented by Garcia, entered into a "Supply Agreement" with Dynablock Enterprises, represented by herein respondent
Aragones, as SUPPLIER, under the following terms:

1. ITEMS TO BE SUPPLIED

The SUPPLIER at its own expense shall provide the CONTRACTOR with labor and all materials, equipment, tools and supplies
necessary and incident thereto, the required concrete blocks at the contractor’s specified casting site, all in accordance with the
terms and conditions of this agreement, as well as the requirements of the project specifications and provisions with respect to
the fabrication of concrete blocks.

2. PRICE

The CONTRACTOR will pay the supplier in consideration for the full and total performance of the above undertaking, inclusive of
all applicable taxes, the unit price of ₱7.00 per supplied and accepted piece. This price is based on the assumption that the cost
per bag of premium cement is ₱54.00 and aggregate at ₱95.00 per cu. m. Any increase of the above raw materials shall be to the
account of the contractor. All taxes shall be for the account of the contractor.

3. PLANT/EQUIPMENT

3.1 - The machines for the fabrication/casting of the concrete blocks, including all necessary equipment and accessories, shall be
provided by the SUPPLIER. The machines and equipment shall be mobilized and made operational at the specified casting
location/stockpiling yard designated and provided by the CONTRACTOR.

3.2 - The SUPPLIER shall ensure that all plant facilities/equipment must, at all times, be accessible for inspection by the
representatives of the CONTRACTOR.

3.3 - The SUPPLIER shall ensure that the plant/casting machines actual operating capacities shall not be lower than 75,000 pieces
every month. If at any time within the life of this agreement the plant/casting machines are proven to be operating below the
required minimum capacity as aforesaid, the SUPPLIER shall be obliged to take the necessary actions to upgrade the plant/casting
machines and/or make the necessary rehabilitation to increase the capacity to the required level.

4. QUALITY OF MATERIALS

4.1 – The SUPPLIER guarantees that all materials supplied to the CONTRACTOR shall meet the approved specifications (Attached
Annex "A") at 5,000 pci.

In this connection, the CONTRACTOR shall assign an inspector at the casting site to ensure that all items supplied shall conform
with the approved standards.

4.2 – The CONTRACTOR may reject any finished product or materials which do not pass the approved standards.

4.3 – There shall be a system of sampling the output of the plant and/or each casting machine for testing in accordance with the
quality standards specified. Result of such sampling tests shall be the basis for acceptance or rejection of the finished materials.
31
4.4 – Where the CONTRACTOR has provided materials to the SUPPLIER to be incorporated into the SUPPLIER’s production, as in
the case of cement and aggregates, the cost of such materials which becomes part of the rejected products due to faulty
batching/mixing/curing shall be for the account of the SUPPLIER.

5. MATERIALS AND OTHER PROVISIONS SUPPLIED BY THE CONTRACTOR

5.1 - All the materials are for the account of the SUPPLIER. The CONTRACTOR shall, however, provide all the cement and aggregates
requirement for the fabrication of the concrete blocks, in which the corresponding cost shall be deducted from the periodical
proceeds due to the SUPPLIER.

5.2- The CONTRACTOR shall provide and make available to the SUPPLIER the following provisions/facilities free of charge:

a) Casting/Fabrication Area

b) Stockpile Area

c) Warehouse for Cement

d) An all-weather working shed for workers

e) Night Watchers

5.3 – The CONTRACTOR shall arrange for the installation of electrical and water facilities for the work in which the cost of electricity
and water actually consumed shall be borne by the SUPPLIER.

5.4 – The SUPPLIER shall be responsible for all materials already turned over by the CONTRACTOR at the casting area. The
responsibility, however, of the SUPPLIER on the finished products ceases upon loading of the same to the CONTRACTOR’s truck
on way to the project site.

6. OBLIGATIONS OF SUPPLIER

6.1 – To fabricate and provide the required block machines in such number adequate to cope up with time schedule.

6.2 – To provide concrete mixers: one (1) unit of two-bagger, and two (2) units of one-bagger.

6.3 – To provide drying racks, measuring boxes, wheel borrows and other necessary hand tools.

6.4 – To supervise and provide the required manpower for the operation and production of concrete blocks.

6.5 – To undertake the following:

a) mixing and formulation of proper mix.

b) to consolidate, form and compress the blocks.

c) to unload the formed blocks into the drying racks.

d) after initial setting of blocks, to unload and arrange them to wooden pallets.

e) curing of blocks as per approved standards.

7. OTHER OBLIGATIONS OF CONTRACTOR

7.1 - To provide tarpaulin or canvas or plastic sheets to cover blocks during the seasoning stage.

7.2 - To provide forklift and wooden pallets.

8. EXCLUSIVITY OF PRODUCTION

32
8.1 - Effective upon the execution of this agreement, the SUPPLIER binds itself to devote the entire plant/casting machines and its
accessories for the CONTRACTOR’s exclusive use and full operation and production of the required concrete blocks for the
intended project.

8.2 – The SUPPLIER or his agents or representatives shall not, directly or indirectly, enter into any contract, agreement, concessions
or transactions of whatever nature or kind with the project owner or of its representative which will affect the rights, interest or
participation of the CONTRACTOR in regard to the execution and accomplishment of the project.

8.3 – In case of violation of this exclusivity clause, utmost fidelity and good faith being of the essence, the CONTRACTOR shall have
the right to demand reasonable amount of damages or terminate this agreement upon due notice.

9. CONDITIONS OF PAYMENT

9.1 – Upon mobilization of the casting machines, equipments accessories and making some operational at the casting area by the
SUPPLIER, the CONTRACTOR shall advance to the supplier a downpayment or mobilization fund of TEN THOUSAND (₱10,000.00)
PESOS per machine. Said mobilization fee shall be deducted from the proceeds of the SUPPLIER at two (2) equal installments
beginning at the first billing.

9.2 - The SUPPLIER shall present its billing every fifteen days based on the below indicated payment schedule:

a) Billing from 1st/day/month to 15th day payable after fifteen days from the date the billing is submitted.

b) Billing from the 16th day of the month to the 31st day of the month, payable after fifteen days from the date the billing is
submitted.

10. EFFECTIVITY OF CONTRACT

This agreement shall be co-terminus with the terms of the contract for the project and/or upon completion of all requirements
therefor; PROVIDED, However, that if for some reason or another the production of the concrete blocks is temporarily suspended,
this agreement shall remain in force and effective for a period of fifteen (15) days from the date of the cessation of production. In
case the said grace period expires without the production having resumed, the CONTRACTOR shall be obliged to pay reasonable
compensation for the period of suspension counted from the expiration of the said grace period.

11. PERFORMANCE BOND

The SUPPLIER shall post a SURETY/PERFORMANCE BOND in such sums which may be deemed adequate to secure its faithful
compliance of the terms and conditions of this agreement.

12. PENALTY CLAUSE

In the event the SUPPLIER fails to meet the requirements demanded in this agreement or when the SUPPLIER is in delay in the
performance of its obligation to the prejudice of the CONTRACTOR, the SUPPLIER shall answer for the corresponding damages
equivalent to one-tenth (1/10) of the rated monthly production capacity. (Emphasis and underscoring supplied).3

Aragones thereupon started assembling the machines for the fabrication/casting of the concrete blocks which MEGA-WAFF
specified to be hexagonal shaped. MEGA-WAFF, through Garcia, later directed Aragones to instead fabricate machines for S
shaped blocks.

As stated in the "Agreement" between DMPI and MEGA-WAFF, the deadline for the installation of the pavement of the warehouse
was November 18, 1988, but it was not met. As extended, the installation was finished on or about February 28, 1989, but MEGA-
WAFF was, in accordance with its agreement with DMPI, penalized for the delay, albeit at a reduced amount.

Aragones, having in the meantime gotten wind of MEGA-WAFF & DMPI’s "Agreement," more particularly the imposition of a
penalty by DMPI for the delay in the completion of the installation of the warehouse pavement, appealed to DMPI, by letter of
March 4, 1989,4 for leniency in the imposition of the penalty which "would affect [him] also although [he] was not a direct party
to the contract," he inviting attention to the "intricacy and enormity of the job involved."

Aragones later failed to collect from MEGA-WAFF the full payment of the concrete blocks. He thus sent DMPI a letter dated March
10, 1989,5 received by the latter on March 13, 1989,6 advising it of MEGA-WAFF’s unpaid obligation and requesting it to earmark
and withhold the amount of ₱188,652.65 "from [MEGA-WAFF’s] billing" to be paid directly to him "[l]est Garcia collects and fails
to pay [him]."
33
DMPI, in the meantime, verbally advised Aragones to secure a court order directing it to withhold payment of the amount due
MEGA-WAFF for, in the absence of such court order, DMPI was under its agreement with MEGA-WAFF obliged to release full
payment within 30 days from acceptance of the completed work.

It appears that Aragones reiterated his request to DMPI for direct payment to him, by letter of March 28, 1989.7 This was followed
by another letter dated April 6, 19898 which was received on April 8, 19899 by DMPI, copy of which it referred to Garcia, by letter
of April 27, 1989,10 for his comment.

By letter of May 3, 198911 addressed to DMPI, Garcia, commenting on Aragones’ April 6, 1989 letter, stated:

xxx

If there is somebody who have (sic) justifiable ground to complain, it is MEGA-WAFF against Atty. Aragones for all the miseries
and embarrassment we had suffered due to the factors attributable to Atty. Aragones Dynablock Enterprises.

For proper evaluation of things and to give both parties a fair chance, we enclosed (sic) pertinent papers for your perusal.

As contractor and businessman, it is our firm policy not to take advantage of other people and definitely not to renegade (sic)
from commitments/obligations.

We are willing to pay Atty. Aragones but based on the actual accomplishment and amount only due to him as per reconciliation
furnished to him. (attached)

We sincerely hope that the facts we had presented will suffice, and please accept our apology for whatever inconvenience it has
caused you and we pray that this matter of payments be settled soon for the general benefit of all concerned.

x x x (Underscoring supplied).

It turned out that DMPI had, on or about April 6, 1989, released to MEGA-WAFF a check dated April 4, 1989 in the amount of
₱157,863.77 representing DMPI’s balance of its obligation to MEGA-WAFF.

Aragones was thus prompted to file on May 25, 1989 a complaint12 for sum of money (₱188,652.65) with damages against Garcia
and/or MEGA-WAFF and DMPI before the Regional Trial Court (RTC) of Lanao del Norte which was raffled to Branch 5 thereof.

Aragones impleaded DMPI on the strength of Articles 1729 and 1467 of the Civil Code, he contending that it was liable to him who
put labor upon or furnished materials for a piece of work.

By his July 14, 1989 Answer,13 Garcia, without disputing the amount being collected by Aragones, justified his "refusal to satisfy
[Aragones’] demand" by claiming that Aragones defaulted in his obligation under the "Supply Agreement".

DMPI, by its Answer14 of June 25, 1989, pleaded that Aragones had no cause of action against it as it had no privity of contract
with him; that it had already paid MEGA-WAFF the full amount due it; and that it had not committed any actionable wrong against
Aragones.

Aragones later filed an Amended Complaint,15 with leave of court, "to cure certain formal defects in the original complaint as to
the designation of parties . . ."

DMPI also later filed a Motion for Leave to File an Amended Answer with Cross-Claim against Garcia and WAFF President Francisco
Castro16 which the trial court granted. In the Amended Answer with Cross Claim,17 DMPI alleged, inter alia, that "[i]n the event
[Aragones] succeeds in obtaining a judgment [against] DMPI, that said judgment should be charged to and paid by the cross-
defendants who have collected the full contract price of the Agreement wherein [Aragones] claims the rights of a subcontractor,
plus consequential damages" (underscoring in the original).

The trial court, upon the following issues:

a. Whether or not [Aragones] has still a collectible amount of ₱188,652.65 from defendants Garcia and Castro;

b. Whether or not defendant DMPI may also be held accountable for this unpaid obligation of defendant Garcia/MEGA-WAFF;

34
c. Whether or not the remaining balance of defendant DMPI account payable is ₱188,652.65 insisted by defendant Garcia/MEGA-
WAFF or only ₱157,863.77 insisted by defendant DMPI;

d. Whether or not the parties are entitled to damages pleaded;

e. Whether or not there was delay in the performance of the respective obligations of either party or both;

f. Assuming that defendant DMPI is liable to plaintiff, whether or not cross defendant Garcia/MEGA-WAFF shall be liable to DMPI
for reimbursement.18,

found for the plaintiff Aragones in light of the following considerations:

Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an action against the
owner up to the amount owing from the latter to the contractor at the time the claim is made. However, the following shall not
prejudice the laborers, employees and furnishers of materials:

(1) Payments made by the owner of the contractor before they are due;

(2) Renunciation by the contractor of any amount due him from the owner.

This article is subject to the provisions of special laws (1597a)

(Article 1729, New Civil Code, [emphasis supplied]).

In interpreting the foregoing provision, the Supreme Court made the following pertinent pronouncement:

"Article 1729 is promulgated to protect the laborers and the materialmen from being taken advantage of by unscrupulous
contractors and from possible connivance between owners and contractors." (Velasco vs. C.A. 95 Phils. (sic) (616-641).

"The legal issue that arises is whether or not GSIS is liable to the petitioners for the cost of the materials and labor furnished by
them in construction of the 63 houses now owned by the GSIS and for the construction of which no payment has been made on
the balance due to petitioners. Our considered view is and we so hold that even in equity alone, GSIS should pay the petitioners,
without prejudice to its securing indemnity from Laigo Realty Corp." (Velaso vs. C.A., 95 Phils. (sic) 616-641 [emphasis and
underscoring supplied]).

Moreover, anent this matter another decisional rule, says:

"Although there was no privity of contract between plaintiff and defendant Joven, Inc., there is sufficient evidence showing that
he had really supplied stones and sands to said defendant and also removed dirt and soil from its construction site. And it is this
main point which calls for resolution in the light of the provisions of Art. 1729 of the New Civil Code, to determine whether or not
defendant corporation is liable for materials supplied and services rendered by the plaintiff. It is quite clear that the owner of the
building, Joven Inc. is liable for materials and labor furnished to the contractor "up to the amount owing from the latter to the
contractor" and to enforce such liability, the law allows the person furnishing labor or materials to bring his right of action directly
against the owner." (Flores vs. Ruelo, CA 52 OG 850, [emphasis and underscoring supplied]).

Of course, while defendant DMPI is indeed directly liable to pay plaintiff the cost of the construction material (modular paving
blocks) sought to be collected, this defendant has also a right of recourse against cross defendant Garcia/MEGA-WAFF for
reimbursement of whatever amount it will be required here to pay plaintiff, otherwise it would result in making defendant
Garcia/MEGA-WAFF enrich itself at the expense of defendant DMPI. Additionally since the evidence on record shows that plaintiff
was compelled to litigate this matter if only to collect a just and demandable obligation, the refusal of these defendants to pay
their obligation upon demand could not be justified in law, thus both defendants should be condemned to pay exemplary damages
in the amount of ₱20,000.00 each and attorney’s fees in the amount of ₱10,000.00 each, including the cost of this suit.
(Underscoring supplied)19

The trial court accordingly rendered judgment in favor of Aragones by decision20 of September 11, 1992, the dispositive portion
of which reads:

WHEREFORE, the foregoing premises considered, the Court finds that there is ample reason in law and preponderant evidence on
record to sustain the cause of action of plaintiff asserted against both defendants, thus judgment is now rendered granting the
following relief:

35
a. That the defendants Garcia/MEGA-WAFF and DMPI shall be liable to jointly and severally pay plaintiff the unpaid cost of the
modular paving blocks construction material which he delivered to defendant DMPI priced at ₱188,652.65 and in the event that
defendant DMPI will be made to pay the full amount of this particular obligation, the defendant Garcia MEGA-WAFF must
reimburse said defendant such amount;

b. That this unpaid obligation sought to be collected must bear legal interest of 12% per annum from the time there was an
extrajudicial demand made by plaintiff last March 01, 1989; and

c. Lastly, these defendants are condemned that each pay plaintiff ₱20,000.00 for exemplary damages and ₱10,000.00 for
attorney’s fees, including the cost of this suit.

SO ORDERED. (Emphasis and underscoring supplied).21

On appeal to the Court of Appeals (CA) by only DMPI, upon the following assigned errors:

THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF DID NOT INCUR DELAY AND VIOLATE ITS SUPPLY AGREEMENT WITH
DEFENDANT MEGA-WAFF;

II

THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT MEGA-WAFF’S LIABILITY TO PLAINTIFF IS ₱188,652.65 BECAUSE AS
STIPULATED IN THE SUPPLY AGREEMENT, THE CEMENT AND AGGREGATES USED IN THE MANUFACTURE OF THE BLOCKS WERE
ADVANCED BY MEGA-WAFF, THE COST OF WHICH WILL BE DEDUCED FROM PLAINTIFF’S BILLINGS;

III.

THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT DMPI IS ALSO LIABLE TO PLAINTIFF FOR ANY LIABILITY OF MEGA-WAFF
UNDER THE SUPPLY AGREEMENT;

IV.

ASSUMING EX GRATIA ARGUMENTI THAT DMPI IS LIABLE TO PLAINTIFF'S AID LIABILITY CANNOT EXCEED THE SUM OF ₱157,863.77
BALANCE OF THE CONTRACT PRICE BETWEEN DMPI AND MEGA-WAFF, LESS AGREED PENALTY FOR LATE DELIVERY AS LIQUIDATED
DAMAGES;

V.

THE TRIAL COURT ERRED IN HOLDING DEFENDANT DMPI LIABLE TO PLAINTIFF FOR ATTORNEY’S FEES AND COSTS OF COLLECTION
CONSIDERING THAT IT HAD THE RIGHT TO RESIST PAYMENT BECAUSE IT HAS NO PRIVITY OF CONTRACT BETWEEN PLAINTIFF AND
DEFENDANT MEGA-WAFF, (Underscoring supplied),22

the CA, by decision of September 19, 200123 subject of the petition at bar, affirmed the trial court’s decision in this wise:

At this juncture it is well to note that the Supply Agreement was in the nature of a contract for a piece of work. The distinction
between a contract of sale and one for work, labor and materials is tested by 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 but 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 seller makes and keeps on hand for sale to anyone, and no change or modification of it is made at
purchaser’s request, it is a contract of sale even though it may be entirely made after, and in consequence of the purchaser’s order
for it. [Commissioner of Internal Revenue vs. Engineering Equipment and Supply Company, G.R. No. L-27044, June 30, 1975]

In the case at bench, the modular paving blocks are not exactly what the plaintiff-appellee makes and keeps on hand for sale to
anyone, but with a modification that the same be "S" in shape. Hence, the agreement falls within the ambit of Article 1467 making
Article 1729 likewise applicable in the instant case.

As regard the issue of privity of contracts, We need to add only that Article 1311 of the New Civil Code which DMPI invokes is not
applicable where the situation contemplated in Article 1729 obtains. The intention of the latter provision is to protect the laborers
and the materialmen from being taken advantage of by unscrupulous contractors and from possible connivance between owners
and contractors. Thus, a constructive vinculum or contractual privity is created by this provision, by way of exception to the
36
principle underlying Article 1311 between the owner, on the one hand, and those who furnish labor and/or materials, on the
other. [Velasco vs. Court of Appeals, G.R. No. L-47544, January 28, 1980]

As a matter of fact, insofar as the laborers are concerned, by a special law, Act no. 3959, otherwise known as "An Act making it
obligatory for any person, company, firm or corporation owning any work of any kind executed by contract to require the
contractor to furnish a bond guaranteeing the payment of the laborers." they are given added protection by requiring contractors
to file bonds guaranteeing payment to them.

It is true that defendant-appellant had already fully paid its obligation to defendant Garcia however, the former’s payment to the
latter does not extinguish its legal obligation to plaintiff-appellee because such payment was irregular. The former should have
taken care not to pay to such contractor the full amount which he is entitled to receive by virtue of the contract, until he shall
have shown that he first paid the wages of the laborer employed in said work, by means of an affidavit made and subscribed by
said contractor before a notary public or other officer authorized by law to administer oaths. There is no showing that defendant
appellant DMPI, as owner of the building, complied with this requirement paid down in Act No. 3959. Hence, under Section 2 of
said law, said defendant-appellant is responsible, jointly and severally with the general contractor, for the payment to plaintiff-
appellee as sub-contractor.

In this connection, while, indeed, Article 1729 refers to the laborers and materialmen themselves, under the peculiar
circumstances of this case, it is but fair and just that plaintiff-appellee be deemed as suing for the reimbursement of what they
have already paid the laborers and materialmen, as otherwise he would be unduly prejudiced while either defendant-appellant
DMPI or defendant Garcia would enrich themselves at plaintiff-appellee’s expense.

Be that as it may, We so hold that plaintiff-appellee has a lawful claim against defendant-appellant DMPI, owner of the constructed
warehouse since it disregarded the notice of claim of plaintiff-appellee, at a time when the amounts owing from defendant-
appellant DMPI to defendant GARCIA were more than sufficient to pay for plaintiff-appellee’s claim. The least that defendant-
appellant should have done was to withhold payment of the balance still owing to defendant Garcia as until the claim of plaintiff-
appellee was clarified. (Italics in the original; emphasis and underscoring supplied).24

Its Motion for Reconsideration having been denied by the CA, DMPI (hereinafter referred to as petitioner) lodged the present
Petition for Review on Certiorari, faulting the CA:

I.

. . . IN FINDING THAT DMPI WAS LIABLE TO RESPONDENT ARAGONES FOR THE UNPAID PRICE OF THE CONCRETE PAVING BLOCKS
OWED BY MEGA-WAFF TO THE LATTER.

A. …IN FINDING THAT THE CONTRACT FOR THE SUPPLY OF THE CONCRETE PAVING BLOCKS WAS NOT A SALE BUT ONE FOR A PIECE
OF WORK.

B. …IN HOLDING DMPI LIABLE BASED UPON THE PROVISIONS OF ARTICLE 1729 OF THE CIVIL CODE AND ACT 3959, WHICH ARE
INAPPLICABLE.

II.

. . . IN FAILING TO AWARD MORAL DAMAGES, ATTORNEY’S FEES, AND LITIGATION EXPENSES TO DMPI ON ITS COUNTERCLAIM.25

As reflected above, only petitioner appealed the trial court’s decision. MEGA-WAFF did not appeal. The decision as to it then is
final and executory.

Petitioner, in the main, contends that while the CA correctly stated the test in determining whether a transfer is a sale or one for
a piece of work, it failed to properly apply the same.

Applying the "nature of the object" test, petitioner insists that the concrete block to be produced by Aragones under the "Supply
Agreement" represented by Garcia clearly shows that the contract was one of sale, advancing the following reasons:

1.4.1 First, the concrete paving blocks were . . . capable of being mass-produced

1.4.2 Second, save for the shape, there was here no consideration of any special needs or requirements of DMPI taken into account
in the design or manufacture of the concrete paving blocks.26

Petitioner cites the following ruling in Commissioner of Internal Revenue v. Arnoldus Carpentry Shop, Inc.:27
37
x x x As can be clearly seen from the wordings of Art. 1467, what determines whether the contract is one of work or of sale is
whether the thing has been "manufactured specially for the customer and upon his special order." Thus, if the thing is specially
done on the order of another, this is a contract for a piece of work. If, on the other hand, the thing is manufactured or procured
for the general market in the ordinary course of one’s business, it is a contract of sale." (Italics and emphasis in the original;
underscoring supplied),28

and argues that "given habituality of business and the ability to mass-produce the article ordered, that customers requires (sic)
certain specifications is of no moment, the transaction remains one of sale."

Petitioner further cites, among other authorities, the following ruling in Celestino Co. v. Collector of Internal Revenue:29

x x x The important thing to remember is that Celestino & Co. habitually makes sash, windows and doors, as it has represented in
its stationery and advertisements to the public. That it "manufactures" the same is practically admitted by appellant itself. The
fact that windows and doors are made by it only when customers place their orders, does not alter the nature of the establishment
of such materials-moulding, frames, panels – as it ordinarily manufactured or was in a position habitually to manufacture.

xxx

That the doors and windows must meet desired specifications is neither here nor there. If these specifications do not happen to
be of the kind habitually manufactured by appellant – special forms of sash, mouldings, panels – it would not accept the order –
and no sale is made. If they do, the transaction would be no different from purchaser of manufactured goods held in stock for
sale; they are bought because they meet specifications desired by the purchaser.

Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications of a customer – sizes not previously
held in stock for sale to the public – it thereby becomes an employee or servant of the customer, not the seller of lumber. The
same consideration applies to this sash manufacturer.

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.

xxx

x x x 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 and/or probably had in stock the sash,
mouldings and panels it used therefor (some of them at least). (Emphasis in the original; underscoring supplied).

Petitioner concludes that as the "Supply Agreement" between Aragones and MEGA-WAFF was one of sale to which it (petitioner)
was not privy, it cannot be held liable for any obligation arising therefrom.

Dodging liability for the damages ("exemplary and . . . attorney’s fees including the cost of this suit") awarded to Aragones,
petitioner claims that it was in fact the one which was injured by Aragones’ filing in bad faith of a complaint bereft of cause of
action and "at best, [one] barred by full payment of the amount due to MEGA-WAFF," on account of which it is entitled to moral
damages in the amount of ₱50,000.00 pursuant to Article 2217 of the Civil Code, and to attorney’s fees and expenses of litigation
in the amount of at least ₱30,000.00 plus ₱2,500.00 per hearing pursuant to Article 2208 of the Civil Code.

The petition fails.

The authorities petitioner cited in fact show that the nature of the "Supply Agreement" between Aragones and MEGA-WAFF was
one for a piece of work.

Contrary to petitioner’s claim that "save for the shape, there was no consideration of any special needs or requirements of DMPI
taken into account in the design or manufacture of the concrete paving blocks," the "Supply Agreement" is replete with
specifications, terms or conditions showing that it was one for a piece of work.

As reflected in the highlighted and underscored above-quoted provisions of the "Supply Agreement," as well as other evidence on
record, the machines Aragones was obliged to fabricate were those for casting the concrete blocks specified by Garcia. Aragones
did not have those kind of machines in his usual business, hence, the special order.

38
While initially Garcia specified that the machines to be fabricated should be for hexagon shaped blocks, he later asked Aragones
to instead fabricate machines for casting S shaped blocks.

In accordance with the "Supply Agreement," Garcia furnished the cement and aggregates for the fabrication of the blocks and
Aragones fabricated three (3) machines for S shaped blocks which were delivered at the casting site on different dates. And the
"entire plant/casting machines and . . . . accessories" were, as dictated under the "Supply Agreement," devoted by Aragones "for
[MEGA-WAFF]’s exclusive use.

There can be no gainsaying that the specifications/conditions in the "Supply Agreement" and the admitted subsequent directive
of Garcia for Aragones to fabricate machines for casting S shaped, instead of hexagon shaped blocks, show that the concrete
blocks were "manufactured specifically for, and upon the special order" of Garcia.

That Garcia supplied the cement and aggregates and that the entire made-to-order casting machines and accessories used in the
manufacture of those unusual shaped blocks were agreed upon to be devoted only "for the exclusive use" of MEGA-WAFF should
belie petitioner’s contention that the concrete blocks were mass-produced and catered to the general market in the ordinary
course of Aragones’ business.

Under Art. 1467 then of the Civil Code which provides:

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. (Emphasis and underscoring supplied),

the "Supply Agreement" was decidedly a contract for a piece of work.

Following Art. 1729 of the Civil Code which provides:

ART. 1729. Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an action
against the owner up to the amount owing from the latter to the contractor at the time the claim is made. x x x

x x x (Underscoring supplied),

Aragones having specially fabricated three casting machines and furnished some materials for the production of the concrete
blocks specially ordered and specified by MEGA-WAFF which were to be and indeed they were for the exclusive use of MEGA-
WAFF, he has a cause of action upon petitioner up to the amount it owed MEGA-WAFF at the time Aragones made his claim to
petitioner.

As Velasco v. CA30 explains, the intention of Art. 1729 is

to protect the laborers and materialmen from being taken advantage of by unscrupulous contractors and from possible connivance
between owners and contractors. Thus, a constructive vinculum or contractual privity is created by this provision, by way of
exception to the principle underlying Article 1311 between the owner, on the one hand, and those who furnish labor and/or
materials, on the other.

In fine, a constructive vinculum or contractual privity was created between petitioner and Aragones.

Respecting petitioner’s disclaimer of liability for damages and its claim for moral damages, attorney’s fees and expenses of
litigation, the trial court’s disposition thereof, to wit:

. . . since the evidence on record shows that [Aragones] was compelled to litigate this matter if only to collect a just and
demandable obligation, the refusal of [DMPI and MEGA-WAFF] to pay their obligation upon demand could not be justified by law,
thus both… should be condemned to pay exemplary damages in the amount of ₱20,000.00 each and attorney’s fees in the amount
of ₱10,000.00 each including… costs of this suit" (underscoring supplied),

merits this Court’s approval.

Why should not petitioner be liable for damages. Aragones’ request, based on a provision of law, to petitioner for it to pay directly
to him his account receivable from MEGA-WAFF/Garcia out of petitioner’s account payable to MEGA-WAFF was made before
petitioner’s obligation to it was due. Yet petitioner settled such obligation to MEGA-WAFF on or about April 6, 1989 when it
released to it its check-payment. For petitioner to harp on its undertaking under its "Agreement" with MEGA-WAFF to pay its full
39
obligation thereunder within 30 days from complete installation of the pavement by MEGA-WAFF unless a court injunction could
be produced by Aragones is too shallow, under the facts and circumstances surrounding the case, to merit consideration.

Petitioner’s referral for comment of Garcia, by letter of April 27, 1989, on Aragones’ April 6, 1989 reiterative letter for the
withholding of the release of so much amount to MEGA-WAFF even after it (petitioner) had already released on or about April 6,
1989 its check-full payment to MEGA-WAFF reflects a futile attempt to cover-up the apparent "connivance" between it and
contractor MEGA-WAFF to the prejudice of Aragones, leaving him no option but to litigate.

As for the assailed citation by the appellate court of Act No. 3959 (which requires a person or firm owning any work of any kind
executed by contract to put up a bond guaranteeing the payment of the laborers) as additional justification to hold petitioner
liable to Aragones, indeed, said Act had been repealed in 1974 by P.D. No. 442 (The Labor Code of the Philippines).

WHEREFORE, in light of the foregoing discussions, the petition is hereby DENIED.

Costs against petitioner.

SO ORDERED.

40