CIR v. John Gotamco P: Yap, J. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. JOHN GOTAMCO & SONS, INC.

and THE COURT OF TAX APPEALS, respondents.

Facts: The World Health Organization (WHO), an international organization exempt from all direct and indirect taxes under its Host Agreement with the Philippine Government concluded on July 22, 1951, decided to have a building constructed to house its offices in the Philippines. Pursuant to this, it entered into an additional agreement with the Philippines government, and part of the agreement granted the WHO permission to import into the country materials and fixtures required for the construction free from all duties and taxes and stipulated that the WHO was not to utilize any portion of the international reserves of the Government. The construction contract was awarded to respondent John Gotamco & Sons, Inc. (Gotamco for short) on February 10, 1958 for the stipulated price of P370,000.00, but when the building was completed the price reached a total of P452,544.00. In May 1958, the BIR released an opinion that the receipts of Gotamco derived from the construction of the WHO office building was exempt under the 1951 Host Agreement. In June of that year, however, the BIR reversed its opinion and claimed that the 3% contractor's tax was in the nature of an excise tax, which is a charge imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. The BIR claimed that the contractors tax is not a direct nor an indirect tax on the WHO, but a tax that is primarily due from the contractor, and was thus not exempted. On January 2, 1960, the WHO issued a certification reiterating the prior opinion of the BIR in exempting the construction from any tax, and asserted that their construction contract with Gotamco should be exempted. Nevertheless, the BIR sent Gotamco a demand letter on January 17, 1961 for P 16,970.40, representing the 3% contractor's tax plus surcharges. On appeal, the Court of Tax Appeals rendered a decision reversing the CIR decision and ruled in favor of Gotamco.

Issues (relevant to tax): Is the contractors tax an excise tax payable by the contractor alone, and not a direct/indirect tax on the WHO?

Held/Ratio: No, the contractors tax is not an excise tax. Although the contractors tax is paid by the contractor, it is a burden that can be shifted to WHO as a matter of business practice. An indirect tax is defined as a tax demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. This is exactly how the contractors tax operates. Being thus exempt from direct and indirect taxes under the Host Agreement, the construction contract should thus be exempt from taxes. The petitioners reliance on Philippine Acetylene Company versus Commissioner of Internal Revenue, et al. is misplaced. In that case, the tax in question was a sales tax, which by law must be paid specifically by the manufacturer or the producer. Even if the manufacturer or producer adds the value of the tax to the sale price, such addition does not convert the sales tax into a tax on the purchaser. It is therefore not analogous to a contractors tax.

Disposition: Petition is DISMISSED, decision appealed from is AFFIRMED