COMMISSIONER vs. ENGR.

EQUIPMENT

FACTS:

Present case is a petition for certiorari of the decision of the Court of Tax Appeals (CTA)
assessing a compensating tax of P174,441.62 on the respondent Engineering Equipment
and Supply Company (Engineering).
Engineering, 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 fabrication.
One Juan de la Cruz, wrote the Commissioner of Internal Revenue (CIR) 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. It was also
denounced to the Central Bank (CB) for alleged fraud in obtaining its dollar allocations.
Revenue examiners reported and recommended to the Commissioner that Engineering be
assessed for P480,912. As deficiency advance sales tax on the theory that it misdeclared
its importation of air conditioning units and parts and accessories which are subject to
tax.
This assessment was revised and raised and Commissioner demanded another increase of
P10,000 as compromise in extrajudicial settlement of Engineerings liability for violating
the tax Code.
The firm, however, contested this demand and requested that it be furnished wit the
details and particulars of the Commissioners assessment to which the Commissioner
answered that the increase was done pursuant and in compliance with what is provided
for under the law.
Respondents appealed to the CTA and during the pendency of the appeal, the
investigating revenue examiners reduced the deficiency tax liabilities.
Thereafter, CTA rendered a decision declaring respondent as a contractor thus exempt
from the deficiency manfactures sales tax, however they are ordered to pay compensating
tax and 25% surcharge.
Commissioner appealed the decision to the SC. On the other hand, Engineering filed with
the CTA a motion for reconsideration (MR) of the above decision which was
subsequently denied prompting respondent to also file an appeal with the SC.
Both appeals/cases were consolidated in the present case.
Commissioner contends that respondent is a manufacturer and seller of air conditioning
units and parts or accessories, therefore, it is subject to the 30% advance sales tax.
On the other hand, respondent claims that it is not a manufacturer and setter of air
conditioning units and spare parts or accessories but a contractor engaged in design,
supply, and installation of the central type air conditioning system subject to 3% tax
under the Tax Code.
ISSUE: WON Engineering is a manufacturer of air condition units under the Tax Code or a
contractor under the same code.

HELD:

We find Engineering did not manufacture air conditioning units for sale to the general
public, but imported some items which were used in executing contracts entered into by
it. respondent, therefore, undertook negotiations and execution of individual contracts for
the design, supply, and installation of air conditioning units of the central type.
The distinction between a contract of sale and one for work, labor, and materials is tested
by the inquiry whether the thing transferred is one not in existence and which never
would have existed but for the order of the party desiring to acquire it, or a thing which
would have existed and has been the subject of sale to some other persons even if the
order had not been given.
The true test of contractor would seem to be that he renders service in the course of an
independent occupation, representing the will of his employer only as to the result of his
work, and not as to the means by which it is accomplished.
The facts and circumstances support the theory that Engineering is a contractor rather
than a manufacturer. However, as the facts of the case also show that Engineering
misdeclared its importations as alleged by the petitioners, it is thus ordered to pay 50%
fraud surcharge plus 30% compensating tax for the imported spare parts.
Decision appealed from is affirmed with modifications.