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CIR vs CA/ADMU The pertinent portions of Section 205 of the National Internal Revenue Code, as amended,

provide:
Facts: 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 Sec. 205. Contractor, proprietors or operators of dockyards, and others.
Philippine Culture (IPC), which has no legal personality separate and distinct from that of — A contractor's tax of three per centum of the gross receipts is hereby
private respondent. The IPC is a Philippine unit engaged in social science studies of imposed on the following:
Philippine society and culture.
xxx xxx xxx
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 (16) Business agents and other independent contractors
alleged deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of except persons, associations and corporations under
P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, contract for embroidery and apparel for export, as well as
1978. Denying said tax liabilities, private respondent sent petitioner a letter-protest and their agents and contractors and except gross receipts of
or from a pioneer industry registered with the Board of
subsequently filed with the latter a memorandum contesting the validity of the Investments under Republic Act No. 5186:
assessments.
xxx xxx xxx
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
The term "independent contractors" include persons
due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or
(juridical or natural) not enumerated above (but not
reinvestigation of the modified assessment. At the same time, it filed in the respondent including individuals subject to the occupation tax under
court a petition for review of the said letter-decision of the petitioner. While the petition Section 12 of the Local Tax Code) whose activity consists
was pending before the respondent court, petitioner issued a final decision dated August essentially of the sale of all kinds of services for a fee
3, 1988 reducing the assessment for deficiency contractor's tax from P193,475.55 to regardless of whether or not the performance of the
P46,516.41, exclusive of surcharge and interest. service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.
respondent court rendered the questioned decision which dispositively reads:
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
WHEREFORE, in view of the foregoing, respondent's decision is SET petitioner, the term "independent contractor", as defined by the Code, encompasses all
ASIDE. The deficiency contractor's tax assessment in the amount of kinds of services rendered for a fee and that the only exceptions are the following:
P46,516.41 exclusive of surcharge and interest for the fiscal year ended
March 31, 1978 is hereby CANCELED.
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
Issue: petitioner has come to this Court via the present petition for review raising the Investment under R.A. No. 5186;
following issues:
b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS Section 182 [b] of the Tax Code); and
UNDER THE PURVIEW OF INDEPENDENT
CONTRACTOR PURSUANT TO SECTION 205 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
2) WHETHER OR NOT PRIVATE RESPONDENT IS
SUBJECT TO 3% CONTRACTOR'S TAX UNDER SECTION
205 OF THE TAX CODE.
Petitioner thus submits that since private respondent falls under the supervisory, communications and coordinating centers for their affiliates,
definition of an "independent contractor" and is not among the subsidiaries or branches in the Asia-Pacific Region.
aforementioned exceptions, private respondent is therefore subject to the
3% contractor's tax imposed under the same Code. 4 The term "gross receipts" means all amounts received by the prime or
principal contractor as the total contract price, undiminished by amount
The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and paid to the subcontractor, shall be excluded from the taxable gross
affirmed the assailed decision of the Court of Tax Appeals receipts of the subcontractor.

Summarized issue: Is Ateneo de Manila University, through its auxiliary unit or branch Petitioner Commissioner of Internal Revenue erred in applying the principles of tax
— the Institute of Philippine Culture — performing the work of an independent contractor exemption without first applying the well-settled doctrine of strict interpretation in the
and, thus, subject to the three percent contractor's tax levied by then Section 205 of the imposition of taxes. It is obviously both illogical and impractical to determine who are
National Internal Revenue Code? exempted without first determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private respondent was covered by Section
Ruling: Petition is unmeritorious. 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
The parts of then Section 205 of the National Internal Revenue Code germane to the case occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a)
before us read: 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
Sec. 205. Contractors, proprietors or operators of dockyards, and others. — purpose. Accordingly, the general rule of requiring adherence to the letter in construing
A contractor's tax of three per centum of the gross receipts is hereby statutes applies with peculiar strictness to tax laws and the provisions of a taxing act
imposed on the following:
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
xxx xxx xxx
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
(16) Business agents and other independent contractors, except persons, statutes expressly and clearly import.
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 Section 205 of the National Internal Revenue Code requires that the independent
Investments under the provisions of Republic Act No. 5186; 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
xxx xxx xxx
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
The term "independent contractors" include persons (juridical or natural) therefrom would arise. Only after such coverage is shown does the rule of construction —
not enumerated above (but not including individuals subject to the that tax exemptions are to be strictly construed against the taxpayer — come into play,
occupation tax under Section 12 of the Local Tax Code) whose activity contrary to petitioner's position. This is the main line of reasoning of the Court of Tax
consists essentially of the sale of all kinds of services for a fee regardless Appeals in its decision, 10 which was affirmed by the CA.
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 Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine Culture

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


After reviewing the records of this case, we find no evidence that Ateneo's Institute of
headquarters established in the Philippines by multinational
Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a
corporations, including their alien executives, and which headquarters do
business apart from and independently of the academic purposes of the university.
not earn or derive income from the Philippines and which act as
However, the records do not show that Ateneo's IPC in fact contracted to sell its research Transfer of title or an agreement to transfer it for a price paid or promised to be paid is
services for a fee. Clearly then, as found by the Court of Appeals and the Court of Tax the essence of sale." 17 In the case of a contract for a piece of work, "the contractor binds
Appeals, petitioner's theory is inapplicable to the established factual milieu obtaining in himself to execute a piece of work for the employer, in consideration of a certain price or
the instant case. 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
In the first place, the petitioner has presented no evidence to prove its bare contention the thing, . . ." 18 Ineludably, whether the contract be one of sale or one for a piece of
that, indeed, contracts for sale of services were ever entered into by the private work, a transfer of ownership is involved and a party necessarily walks away with an
respondent. As appropriately pointed out by the latter 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
Court of Tax Appeals accurately and correctly declared that the " funds received by the by the Institute of Philippine Culture.
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 Furthermore, it is clear that the research activity of the Institute of Philippine Culture is
requirement of Section 123 of the National Internal Revenue Code providing for the done in pursuance of maintaining Ateneo's university status and not in the course of an
exemption of such gifts to an educational institution. independent business of selling such research with profit in 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 Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and
engaged in business. Undisputedly, private respondent is mandated by law to undertake not the Ateneo is patently erroneous because the former is not an independent juridical
research activities to maintain its university status entity that is separate and distinct form the latter.

For another, it bears stressing that private respondent is a non-stock, non-profit Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the
educational corporation. The fact that it accepted sponsorship for IPC's unfunded projects Court of Appeals Generally Conclusive
is merely incidental.
In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body
Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are specifically created for the purpose of reviewing tax cases. Through its expertise, it is
not given in the concept of a fee or price in exchange for the performance of a service or undeniably competent to determine the issue of whether" 21 Ateneo de Manila University
delivery of an object. Rather, the amounts are in the nature of an endowment or donation 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
given by IPC's benefactors solely for the purpose of sponsoring or funding the
the conclusion reached by . . . the Court of Tax Appeals which is, by the very nature of its
research with no strings attached. As found by the two courts below, such sponsorships function, dedicated exclusively to the study and consideration of tax problems and has
are subject to IPC's terms and conditions. No proprietary or commercial research is done, necessarily developed an expertise on the subject unless there has been an abuse or
and IPC retains the ownership of the results of the research, including the absolute right improvident exercise of authority
to publish the same.
The records show that the Institute of Philippine Culture conducted its research activities
It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine at a huge deficit of P1,624,014.00 as shown in its statements of fund and disbursements
Culture cannot be deemed either as a contract of sale or a contract of a piece of work. "By for the period 1972 to 1985. 23 In fact, it was Ateneo de Manila University itself that had
the contract of sale, one of the contracting parties obligates himself to transfer the funded the research projects of the institute, and it was only when Ateneo could no longer
ownership of and to deliver a determinate thing, and the other to pay therefor a price produce the needed funds that the institute sought funding from outside.
certain in money or its equivalent." 16 By its very nature, a contract of sale requires a
transfer of ownership. 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 the plaintiff has always paid to the defendant or to his predecessor in the office of the
pursuant to its commitments to education and, ultimately, to public service. 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
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of firm both for its own account and on commission, but has not, until compelled to do so as
the Court of Appeals is hereby AFFIRMED in full. hereinafter stated, paid the said tax upon sums received from the purchaser of such
hemp under the denomination of "prensaje.

defendant, acting in his official capacity as Collector of Internal Revenue of the Philippine
Inchausti vs Ellis 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
Facts: plaintiff firm for many years past has been and now is engaged in the business of
of money mentioned in Paragraph IX hereof, and which the said defendant claimed to be
buying and selling at wholesale hemp, both for its own account and on commission.
entitled to receive, under the provisions of the said section 139 of Act No. 1189, upon the
in all sales of hemp by the plaintiff firm, whether for its own account or on commission for said sums of money so collected from purchasers of hemp under the denomination of
others, the price is quoted to the buyer at so much per picul, no mention being made of "prensaje."
bailing; but with the tacit understanding, unless otherwise expressly agreed, that the
plaintiff firm paid to the defendant under protest the said sum of P1,370.69, and on the
hemp will be delivered in bales and that, according to the custom prevailing among hemp
same date appealed to the defendant as Collector of Internal Revenue, against the ruling
merchants and dealers in the Philippine Islands, a charge, the amount of which depends
by which the plaintiff firm was required to make said payment, but defendant overruled
upon the then prevailing rate, is to be made against the buyer under the denomination of
said protest and adversely decided said appeal, and refused and still refuses to return to
"prensaje." That this charge is made in the same manner in all cases, even when the
plaintiff the said sum of P1,370.68
operation of bailing was performed by the plaintiff or by its principal long before the
contract of sale was made. 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
That the amount of the charge made against hemp buyers by the plaintiff firm and other
during the period in question, under the denomination of "prensaje" as aforesaid, namely,
sellers of hemp under the denomination of "prensaje" during the period involved in this
P411,204.35, is illegal upon the ground that the said charge does not constitute a part of
litigation was P1.75 per bale; that the average cost of the rattan and matting used on each
the selling price of the hemp, but is a charge made for the service of baling the hemp, and
bale of hemp is fifteen (15) centavos and that the average total cost of bailing hemp is one
that the plaintiff firm is therefore entitled to recover of the defendant the said sum of
(1) peso per bale.
P1,370.68 paid to him under protest, together with all interest thereon at the legal rate
between the first day of January, 1905, and the 31st day of March, 1910, the plaintiff since payment, and the costs of this action.
firm, in accordance with the custom mentioned in paragraph V hereof, collected and
it is the contention of the defendant that the said charge made under the denomination of
received, under the denomination of "prensaje," from purchasers of hemp sold by the said
"prensaje" is in truth and in fact a part of the gross value of the hemp sold and of its
firm for its own account, in addition to the price expressly agreed upon for the said hemp,
actual selling price, and that therefore the tax imposed by section 139 of Act No. 1189
sums aggregating P380,124.35; and between the 1st day of October, 1908, and the 1st
lawfully accrued on said sums, that the collection thereof was lawfully and properly made
day of March, 1910, collected for the account of the owners of hemp sold by the plaintiff
and that therefore the plaintiff is not entitled to recover back said sum
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.

the plaintiff firm in estimating the amount due it as commissions on sales of hemp made SC ruling: we are of the opinion that the judgment of the court below was right. It is one
by it for its principals has always based the said amount on the total sum collected from of the stipulations in the statement of facts that it is customary to sell hemp in bales, and
the purchasers of the hemp, including the charge made in each case under the that the price quoted in the market for hemp per picul is the price for the hemp baled.
denomination of "prensaje." 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 request, it is a contract of sale, even though it may be entirely made after, and in
facts, as well as demonstrated by the documentary proof introduced in the case, that if consequence of, the defendant's order for it.
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 It has been held in Massachusetts that a contract to make is a contract of sale if the
cost and expense of baling. In other words, it is the fact as stipulated, as well as it would article ordered is already substantially in existence at the time of the order and merely
be the fact of necessity, that in all dealings in hemp in the general market the selling price requires some alteration, modification, or adoption to the buyer's wishes or purposes.
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 It is also held in that state that a contract for the sale of an article which the vendor in the
here, there were n services performed by him for his vendee. There was agreement that ordinary course of his business manufactures or procures for the general market, whether
services should be performed. Indeed, at the time of such sales it was not known by the the same is on hand at the time or not, is a contract for the sale of goods to which the
vendee whether the hemp was then actually baled or not. All that he knew and all that statute of frauds applies. But if the goods are to be manufactured especially for the
concerned him was that the hemp should be delivered to him baled. He did not ask the purchaser and upon his special order, and not for the general market, the case is not
plaintiff to perform services for him, nor did the plaintiff agree to do so. The contract was within the statute.
single and consisted solely in the sale and purchase of hemp.
It is clear to our minds that in the case at bar the baling was performed for the general
word "price" signifies the sum stipulated as the equivalent of the thing sold and also every market and was not something done by plaintiff which was a result of any peculiar
incident taken into consideration for the fixing of the price, put to the debit of the vendee wording of the particular contract between him and his vendee. It is undoubted that the
and agreed to by him. It is quite possible that the plaintiff, in this case in connection with plaintiff prepared his hemp for the general market. This would be necessary. One whose
the hemp which he sold, had himself already paid the additional expense of baling as a exposes goods for sale in the market must have them in marketable form. The hemp in
part of the purchase price which he paid and that he himself had received the hemp baled question would not have been in that condition if it had not been baled. the baling,
from his vendor. It is quite possible also that such vendor of the plaintiff may have therefore, was nothing peculiar to the contract between the plaintiff and his vendee. It
received the same hemp from his vendor in baled form, that he paid the additions cost of was precisely the same contract that was made by every other seller of hemp, engaged as
baling as a part of the purchase price which he paid. In such case the plaintiff performed was the plaintiff, and resulted simply in the transfer of title to goods already prepared for
no service whatever for his vendee, nor did the plaintiff's vendor perform any service for the general market. The method of bookkeeping and form of the account rendered is not
him. 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
distinction between a contract of sale and one for work, labor, and materials is tested by the one who baled the hemp but, instead, had received it already baled from his vendor.
the inquiry whether the thing transferred is one no in existence and which never would This indicates of necessity tat the mere fact of entering a separate item for the baling of
have existed but for the order of the party desiring to acquire it, or a thing which would the hemp is formal rather than essential and in no sense indicates in this case the real
have existed and been the subject of sale to some other person, even if the order had not transaction between the parties. It is undisputable that, if the plaintiff had brought the
been given 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
It is clear that in the case at bar the hemp was in existence in baled form before the could not, therefore, lawfully charge for the rendition of such service.
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, It is agreed, as we have before stated, that hemp is sold in bales. Therefore, baling is
nevertheless, for sale to someone else, since, according to the agreed statement of facts, it performed before the sale. The purchaser of hemp owes to the seller nothing whatever by
is customary to sell hemp in bales. When a person stipulates for the future sale of articles reason of their contract except the value of the hemp delivered. That value, that sum
which he is habitually making, and which at the time are not made or finished, it is which the purchaser pays to the vendee, is the true selling price of the hemp, and every
essentially a contract of sale and not a contract for labor. 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,
If the article ordered by the purchaser is exactly such as the plaintiff makes and keeps on
obligates himself to purchase and pay for baled hemp. Wheher or not such agreement is
hand for sale to anyone, and no change or modification of it is made at the defendant's 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 Facts: Engineering for short), a domestic corporation, is an engineering and machinery
that the seller shall furnish him with unbaled hemp. It is undoubted that the vendees, in firm. As operator of an integrated engineering shop, it is engaged, among others, in the
the sales referred to in the case at bar, would have no right, after having made their design and installation of central type air conditioning system, pumping plants and steel
contracts, to insists on the delivery of loose hemp with the purpose in view themselves to fabrications
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 one Juan de la Cruz, wrote the then Collector, now Commissioner, of Internal Revenue
deliver baled hemp, and would have forced his vendees to accept baled hemp, he himself denouncing Engineering for tax evasion by misdeclaring its imported articles and failing
retaining among his own profits those which accrued from the proceed of baling. to pay the correct percentage taxes due thereon in connivance with its foreign suppliers

We are of the opinion that the judgment appealed from must be affirmed 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)
Inchausti and Co vs. Ellis CromwellGR L-6584Oct 161911 and Bureau of Internal Revenue (BIR) agents on September 27, 1956, on which occasion
voluminous records of the firm were seized and confiscated.
Facts:
revenue examiners Quesada and Catudan reported and recommended to the then
1)Inchausti is a seller of hemps. It is a custom to sell hemps in bales. In fact, Collector, now Commissioner, of Internal Revenue (hereinafter referred to as
whwneverhemps are sold, it is understood to be in bales. 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
2)Bale had an additional cost of 1.75. 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.
3)Inchausti in its dealings from 1908 to 1910 received an additional amount of
31,080(price of bale) aside from the actual price of hemps.
This assessment was revised on January 23, 1959, in line with the observation of the
4)The Collector of Internal revenue included this amount in its computation for taxes. Chief, BIR Law Division, and was raised to P916,362.56 representing deficiency advance
Hedemanded that Inchausti pay 1,370.68 sales tax and manufacturers sales tax.

5)Inchausti forwarded the case to the court, claiming that the said charge was the Commissioner assessed against, and demanded upon, Engineering payment of the
notincluded in the selling price of the hemp but a service charge for bailing the hemp. 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,
Issue: Was the charge for the bailing a part of the contract of sale or a separate contract contested the tax assessment and requested that it be furnished with the details and
for labor? particulars of the Commissioner's assessment

Held: Engineering appealed the case to the Court of Tax Appeals and during the pendency of
The charge for bailing is part of the contract of sale. The bailing is inherent part of the case the investigating revenue examiners reduced Engineering's deficiency tax
the productwhen it is sold, it is understood to be baled, there is no need for further liabilities from P916,362.65 to P740,587.86
stipulations for it. Thetest is by the inquiry whether the thing transferred is one not in
existence and which neverwould have existed but for the order of the party desiring to
acquire it. 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
CIR vs Engineering 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
Commissioner, not satisfied with the decision of the Court of Tax Appeals, appealed to Engineering claims that it is not a manufacturer and setter of air-conditioning units and
this Court on January 18, 1967, (G.R. No. L-27044). On the other hand, Engineering, on spare parts or accessories thereof subject to tax under Section 185(m) of the Tax Code,
January 4, 1967, filed with the Court of Tax Appeals a motion for reconsideration of the but a contractor engaged in the design, supply and installation of the central type of air-
decision abovementioned. This was denied on April 6, 1967, prompting Engineering to file
conditioning system subject to the 3% tax imposed by Section 191 of the same Code
also with this Court its appeal
The distinction between a contract of sale and one for work, labor and materials is tested
Engineering in its Petition claims that the Court of Tax Appeals committed the following by the inquiry whether the thing transferred is one not in existence and which never
errors:
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
1. That the Court of Tax Appeals erred in holding Engineering Equipment
order had not been given.2 If the article ordered by the purchaser is exactly such as the
& Supply Company liable to the 30% compensating tax on its
importations of equipment 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
2. That the Court of Tax Appeals erred in holding Engineering Equipment made after, and in consequence of, the defendants order for it
& Supply Company guilty of fraud in effecting the said importations on the basis of
incomplete quotations Civil Code, likewise distinguishes a contract of sale from a contract for a piece of work
thus:
Commissioner on the other hand claims that the Court of Tax Appeals
erred: 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
1. In holding that the respondent company is a contractor and not a procures for the general market, whether the same is on hand at the time
manufacturer. 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.
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 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
Issue: whether or not Engineering is a manufacturer of air conditioning units under
as to the petty details
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.
Ruling: 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,
Commissioner contends that Engineering is a manufacturer and seller of air conditioning
heat exchangers or coils, t.s.n. p. 39) which were used in executing contracts entered into
units and parts or accessories thereof and, therefore, it is subject to the 30% advance
by it. Engineering, therefore, undertook negotiations and execution of individual contracts
sales tax prescribed by Section 185(m) of the Tax Code, in relation to Section 194
for the design, supply and installation of air conditioning units of the central type taking
Manufacturer" includes every person who by physical or chemical process alters the into consideration in the process such factors as the area of the space to be air
exterior texture or form or inner substance of any raw material or manufactured or conditioned; the number of persons occupying or would be occupying the premises; the
partially manufactured products in such manner as to prepare it for a special use or uses purpose for which the various air conditioning areas are to be used; and the sources of
to which it could not have been put in its original condition, or who by any such process heat gain or cooling load on the plant such as sun load, lighting, and other electrical
alters the quality of any such material or manufactured or partially manufactured appliances which are or may be in the plan.
product so as to reduce it to marketable shape.
As found by the lower court, which finding4 We adopt —
Engineering, in a nutshell, fabricates, assembles, supplies and installs in conditioning units were not intended for sale to the general public. Therefore, We have but
the buildings of its various customers the central type air conditioning to affirm the conclusion of the Court of Tax Appeals that Engineering is a contractor
system; prepares the plans and specifications therefor which are distinct rather than a manufacturer, subject to the contractors tax prescribed by Section 191 of
and different from each other; the air conditioning units and spare parts
the Code and not to the advance sales tax imposed by Section 185(m) in relation to
or accessories thereof used by petitioner are not the window type of air
conditioner which are manufactured, assembled and produced locally for Section 194 of the same Code.
sale to the general market; and the imported air conditioning units and
spare parts or accessories thereof are supplied and installed by petitioner We take up next the issue of fraud. The Commissioner charged Engineering with
upon previous orders of its customers conformably with their needs and misdeclaration of the imported air conditioning units and parts or accessories thereof so
requirements. 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%)
The facts and circumstances aforequoted support the theory that Engineering is a
contractor rather than a manufacturer. 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
Commissioner in his Brief argues that "it is more in accord with reason and sound as follows:
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 imposition of the 50% surcharge prescribed by Section 183(a) of the
the same from the company. 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
This is untenable in the light of the fact that air conditioning units, packaged, or what we willfully made, it can readily be seen, that petitioner cannot legally be
know as self-contained air conditioning units, are distinct from the central system which held subject to the 50% surcharge imposed by Section 183(a) of the Tax
Code
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,
As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co. (Exh.
but a significant fact which We just cannot ignore.
"3-K" pp. 152-155, BIR rec.) viz:
There is also the testimony of one Carlos Navarro, a licensed Mechanical and Electrical
Your invoices should be made in the name of Madrigal & Co., Inc.,
Engineer, who was once the Chairman of the Board of Examiners for Mechanical
Manila, Philippines, c/o Engineering Equipment & Supply Co., Manila,
Engineers and who was allegedly responsible for the preparation of the refrigeration and Philippines — forwarding all correspondence and shipping papers
air conditioning code of the City of Manila, who said that "the central type air conditioning concerning this order to us only and not to the customer.
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 On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York, U.S.A.
small and of various sizes. (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
The point, therefore, is this — Engineering definitely did not and was not engaged in the
fitting insulation instead.
manufacture of air conditioning units but had its services contracted for the installation
of a central system. The aforequoted communications are strongly indicative of the fraudulent intent of
Engineering to misdeclare its importation of air conditioning units and spare parts or
Applying the facts of the aforementioned case to the present case, We see that the supply
accessories thereof to evade payment of the 30% tax. And since the commission of fraud
of air conditioning units to Engineer's various customers, whether the said machineries
is altogether too glaring, We cannot agree with the Court of Tax Appeals in absolving
were in hand or not, was especially made for each customer and installed in his building
Engineering from the 50% fraud surcharge, otherwise We will be giving premium to a
upon his special order. The air conditioning units installed in a central type of air
plainly intolerable act of tax evasion. As aptly stated by then Solicitor General, now
conditioning system would not have existed but for the order of the party desiring to
Justice, Antonio P. Barredo: 'this circumstance will not free it from the 50% surcharge
acquire it and if it existed without the special order of Engineering's customer, the said air
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 WHEREFORE, the decision appealed from is affirmed with the modification that
declarations before the importations maybe released from customs custody. Engineering is hereby also made liable to pay the 50% fraud surcharge

Anent the 25% delinquency surcharge, We fully agree to the ruling made by the Court of CASE DIGEST: Commissioner on Internal Revenue vs Engineering Equipment G.R. No. L-
Tax Appeals and hold Engineering liable for the same. As held by the lower court: 27044 June 30, 1975
Facts:
Engineering Equipment and Supply Co. (Engineering for short), a domestic corporation,
At first blush it would seem that the contention of petitioner that it is not is an engineering and machinery firm. As operator of an integrated engineering shop, it is
subject to the delinquency, surcharge of 25% is sound, valid and tenable. engaged, among others, in the design and installation of central type air conditioning
However, a serious study and critical analysis of the historical provisions system, pumping plants and steel fabrications.
of Section 190 of the Tax Code dealing on compensating tax in relation to On July 27, 1956, one Juan de la Cruz, wrote the then Collector, now Commissioner, of
Section 183(a) of the same Code, will show that the contention of Internal Revenue denouncing Engineering for tax evasion by misdeclaring its imported
petitioner is without merit. articles and failing to pay the correct percentage taxes due thereon in connivance with its
foreign suppliers. Engineering was likewise denounced to the Central Bank (CB) for
Since the imported air conditioning units-and spare parts or accessories thereof are alleged fraud in obtaining its dollar allocations. Acting on these denunciations, a raid and
subject to the compensating tax of 30% as the same were used in the construction search was conducted by a joint team of Central Bank, (CB), National Bureau of
business of Engineering, it is incumbent upon the latter to comply with the aforequoted Investigation (NBI) and Bureau of Internal Revenue (BIR) agents on September 27, 1956,
requirement of Section 190 of the Code, by posting in its books of accounts or notifying on which occasion voluminous records of the firm were seized and confiscated
On September 30, 1957, revenue examiners Quesada and Catudan reported and
the Collector of Internal Revenue that the imported articles were used for other purposes
recommended to the then Collector, now Commissioner, of Internal Revenue that
within 30 days. 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
Lastly the question of prescription of the tax assessment has been put in issue. thereof which are subject to tax under Section 185(m) of the Tax Code,
Engineering contends that it was not guilty of tax fraud in effecting the importations and, On March 3, 1959. the Commissioner assessed against, and demanded upon,
therefore, Section 332(a) prescribing ten years is inapplicable, claiming that the pertinent Engineering payment of the increased amount and suggested that P10,000 be paid as
prescriptive period is five years from the date the questioned importations were made. A compromise in extrajudicial settlement of Engineering's penal liability for violation of the
review of the record however reveals that Engineering did file a tax return or declaration Tax Code. The firm, however, contested the tax assessment and requested that it be
with the Bureau of Customs before it paid the advance sales tax of 7%. And the furnished with the details and particulars of the Commissioner's assessment
declaration filed reveals that it did in fact misdeclare its importations. Section 332 of the Engineering appealed to the Court of Tax Appeals. CTA rendered a decision in favor of
Tax Code which provides: Engineering, 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
Section 332. — Exceptions as to period of limitation of assessment and
compensating tax and 25% surcharge for the period from 1953 to September 1956. With
collection of taxes. —
costs against petitioner.
Not satisfied, both appealed before the SC. Since the two cases are similar, both will be
(a) In the case of a false or fraudulent return with intent to evade tax or of tried together.
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 Issue: W/ON Engineering is a manufacturer of air conditioning units under Section
any time within ten years after the discovery of the falsity, fraud or 185(m), supra, in relation to Sections 183(b) and 194 of the Code, or a contractor under
omission. Section 191 of the same Code.

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 Held: Contractor. The distinction between a contract of sale and one for work, labor and
within the period prescribed by law and prescription had not set in against the materials is tested by the inquiry whether the thing transferred is one not in existence
Government. 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 word "contractor" has come to be used with special reference to a person who, in the RTC- WHEREFORE, judgment is hereby rendered in favor of the plaintiffs Vicente and
pursuit of the independent business, undertakes to do a specific job or piece of work for Inocencia Dino and against defendant Toy Master Manufacturing, Inc. ordering the latter
other persons, using his own means and methods without submitting himself to control to pay the former:
as to the petty details. The true test of a contractor, would seem to be that he renders
service in the course of an independent occupation, representing the will of his employer 1. The amount of Two Hundred Eight Thousand Four Hundred Four (P208,404.00)
only as to the result of his work, and not as to the means by which it is accomplished.

Engineering, in a nutshell, fabricates, assembles, supplies and installs in the buildings of CA- Respondent Sio sought recourse in the Court of Appeals. In its April 30, 1993
its various customers the central type air conditioning system; prepares the plans and decision, the appellate court affirmed the trial court decision. Respondent then filed a
specifications therefor which are distinct and different from each other; the air Motion for Reconsideration and a Supplemental Motion for Reconsideration alleging
conditioning units and spare parts or accessories thereof used by petitioner are not the therein that the petitioners' action for collection of sum of money based on a breach of
window type of air conditioner which are manufactured, assembled and produced locally warranty had already prescribed. On January 24, 1994, the respondent court reversed its
for sale to the general market; and the imported air conditioning units and spare parts or decision
accessories thereof are supplied and installed by petitioner upon previous orders of its
customers conformably with their needs and requirements.
Issue: w/n Court of Appeals seriously erred in dismissing the complaint of the
Petitioners on the ground that the action had prescribed.
DINO/ "CANDY CLAIRE FASHION GARMENTS" vs
Ruling: Petitioners claim that the Complaint they filed in the trial court on July 24, 1989
CA , Sio/ "UNIVERSAL TOY MASTER MANUFACTURING" was one for the collection of a sum of money. Respondent contends that it was an action
for breach of warranty as the sum of money petitioners sought to collect was actually a
Facts: spouses Dino, doing business under the trade name "Candy Claire Fashion refund of the purchase price they paid for the alleged defective goods they bought from
Garment" are engaged in the business of manufacturing and selling shirts. 1 Respondent the respondent.
Sio is part owner and general manager of a manufacturing corporation doing business
under the trade name "Universal Toy Master Manufacturing We uphold the respondent's contention.

Petitioners and respondent Sio entered into a contract whereby the latter would The following provisions of the New Civil Code are apropos:
manufacture for the petitioners 20,000 pieces of vinyl frogs and 20,000 pieces of vinyl
mooseheads at P7.00 per piece in accordance with the sample approved by the "Art. 1467. A contract for the delivery at a certain price of an article which the
petitioners. These frogs and mooseheads were to be attached to the shirts petitioners vendor in the ordinary course of his business manufactures or procures for the
would manufacture and sell 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
Sio delivered in several installments the 40,000 pieces of frogs and mooseheads. The last his special order, and not for the general market, it is a contract for a piece of
work."
delivery was made on September 28, 1988. Petitioner fully paid the agreed
price.4 Subsequently, petitioners returned to respondent 29,772 pieces of frogs and
"Art. 1713. By the contract for a piece of work the contractor binds himself to
mooseheads for failing to comply with the approved sample.5 The return was made on
execute a piece of work for the employer, in consideration of a certain price or
different dates: the initial one on December 12, 1988 consisting of 1,720 pieces, 6 the compensation. The contractor may either employ only his labor or skill, or also
second on January 11, 1989,7 and the last on January 17, 1989 furnish the material."

Petitioners then demanded from the respondent a refund of the purchase price of the
"a contract for a piece of work, labor and materials may be distinguished from a contract
returned goods in the amount of P208,404.00. As respondent Sio refused to of sale by the inquiry as to whether the thing transferred is one not in existence and
pay,9 petitioners filed on July 24, 1989 an action for collection of a sum of money in the which would never have existed but for the order of the person desiring it. In such case,
Regional Trial Court of Manila 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 sale."13 The contract "Art. 1571. Actions arising from the provisions of the preceding ten articles shall
between the petitioners and respondent stipulated that respondent would manufacture be barred after six months from the delivery of the thing sold." (Emphasis
upon order of the petitioners 20,000 pieces of vinyl frogs and 20,000 pieces of vinyl supplied)
mooseheads according to the samples specified and approved by the petitioners.
Respondent Sio did not ordinarily manufacture these products, but only upon order of the There is no dispute that respondent made the last delivery of the vinyl products to
petitioners and at the price agreed upon.14Clearly, the contract executed by and between petitioners on September 28, 1988. It is also settled that the action to recover the
the petitioners and the respondent was a contract for a piece of work. At any rate, purchase price of the goods petitioners returned to the respondent was filed on July 24,
whether the agreement between the parties was one of a contract of sale or a piece of 1989,16 more than nine months from the date of last delivery. Petitioners having filed the
work, the provisions on warranty of title against hidden defects in a contract of sale apply action three months after the six-month period for filing actions for breach of warranty
to the case at bar, viz: against hidden defects stated in Art. 1571,17 the appellate court dismissed the action.

"Art. 1714. If the contractor agrees to produce the work from material furnished It is apparent in the records that respondent made the last delivery of vinyl products to
by him, he shall deliver the thing produced to the employer and transfer dominion the petitioners on September 28, 1988. Petitioners admit this in their Memorandum
over the thing. This contract shall be governed by the following articles as well as submitted to the trial court and reiterate it in their Petition for Review. 21 It is also
by the pertinent provisions on warranty of title and against hidden defects and apparent in the Complaint that petitioners instituted their action on July 24, 1989. The
the payment of price in a contract of sale." issue for resolution is whether or not the respondent Court of Appeals could dismiss the
petitioners' action if the defense of prescription was raised for the first time on appeal but
"Art. 1561. The vendor shall be responsible for warranty against the hidden is apparent in the records.
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 Following the Gicano doctrine that allows dismissal of an action on the ground of
extent that, had the vendee been aware thereof, he would not have acquired it or prescription even after judgment on the merits, or even if the defense was not raised at all
would have given a lower price for it; but said vendor shall not be answerable for so long as the relevant dates are clear on the record, we rule that the action filed by the
patent defects or those which may be visible, or for those which are not visible if petitioners has prescribed. The dates of delivery and institution of the action are
the vendee is an expert who, by reason of his trade or profession, should have undisputed. There are no new issues of fact arising in connection with the question of
known them." prescription, thus carving out the case at bar as an exception from the general rule that
prescription if not impleaded in the answer is deemed waived.
Petitioners aver that they discovered the defects in respondent's products when customers
in their (petitioners') shirt business came back to them complaining that the frog and Even if the defense of prescription was raised for the first time on appeal in respondent's
moosehead figures attached to the shirts they bought were torn. Petitioners allege that
Supplemental Motion for Reconsideration of the appellate court's decision, this does not
they did not readily see these hidden defects upon their acceptance. A hidden defect is
one which is unknown or could not have been known to the vendee militate against the due process right of the petitioners. On appeal, there was no new
issue of fact that arose in connection with the question of prescription, thus it cannot be
Article 1567 provides for the remedies available to the vendee in case of hidden said that petitioners were not given the opportunity to present evidence in the trial court
defects, viz: to meet a factual issue.

WHEREFORE, the petition is DENIED and the impugned decision of the Court of Appeals
"Art. 1567. In the cases of Articles 1561, 1562, 1564, 1565 and 1566, the vendee
may elect between withdrawing from the contract and demanding a proportionate dated January 24, 1994 is AFFIRMED
reduction of the price, with damages in either case."
Schmid and Oberly, Inc. vs RJL Martinez
By returning the 29,772 pieces of vinyl products to respondent and asking for a return of
Facts:
their purchase price, petitioners were in effect "withdrawing from the contract" as
provided in Art. 1567. The prescriptive period for this kind of action is provided in Art.
1571 of the New Civil Code, viz: RJL MARTINEZ is engaged in the business of deep-sea fishing. As RJL MARTINEZ needed
electric generators for some of its boats and SCHMIID sold electric generators of different
brands, negotiations between them for the acquisition thereof took place. The parties had All fifteen (15) generators subject of the two transactions burned out after continuous use.
two separate transactions over "Nagata"-brand generators. RJL MARTINEZ informed SCHMID about this development. In turn, SCHMID brought the
matter to the attention of NAGATA CO. In July 1976, NAGATA CO. sent two technical
The first transaction was the sale of three (3) generators. In this transaction, it is not representatives who made an ocular inspection and conducted tests on some of the
disputed that SCHMID was the vendor of the generators. The company supplied the burned out generators, which by then had been delivered to the premises of SCHMID.
generators from its stockroom; it was also SCHMID which invoiced the sale.
The tests revealed that the generators were overrated. As indicated both in the quotation
The second transaction, which gave rise to the present controversy, involves twelve (12) and in the invoice, the capacity of a generator was supposed to be 5 KVA (kilovolt
"Nagata"-brand generators. 'These are the facts surrounding this particular transaction: amperes). However, it turned out that the actual capacity was only 4 KVA.

As RJL MARTINEZ was canvassing for generators, SC gave RJL MARTINEZ its Quotation SCHMID replaced the three (3) generators subject of the first sale with generators of a
dated August 19, 1975 [Exhibit 'A"] for twelve (12) "Nagata'-brand generators with the different brand.
following specifications:
As for the twelve (12) generators subject of the second transaction, the Japanese
"NAGATA" Single phase AC Alternators, 110/220 V, 60 cycles, 1800 rpm, technicians advised RJL MARTINEZ to ship three (3) generators to Japan, which the
unity power factor, rectifier type and radio suppressor,, 5KVA (5KW) company did. These three (3) generators were repaired by NAGATA CO. itself and
$546.75 @ thereafter returned to RJL MARTINEZ; the remaining nine (9) were neither repaired nor
replaced. NAGATA CO., however, wrote SCHMID suggesting that the latter check the
generators, request for spare parts for replacement free of charge, and send to NAGATA
It was stipulated that payment would be made by confirming an irrevocable letter of credit CO. SCHMID's warranty claim including the labor cost for repairs [Exhibit "I".] In its reply
in favor of NAGATA CO. Furthermore, among the General Conditions of Sale appearing on letter, SCHMID indicated that it was not agreeable to these terms
the dorsal side of the Quotation is the following:
RJL MARTINEZ formally demanded that it be refunded the cost of the generators and paid
Buyer will, upon request, promptly open irrevocable Letter of Credit in favor damages. SCHMID in its reply maintained that it was not the seller of the twelve (12)
of seller, in the amount stated on the face of this memorandum, generators and thus refused to refund the purchase price therefor. Hence, on February
specifying shipment from any Foreign port to Manila or any safe 14, 1977, RJL MARTINEZ brought suit against SCHMID on the theory that the latter was
Philippine port, permitting partial shipments and providing that in the the vendor of the twelve (12) generators and, as such vendor, was liable under its
event the shippers are unable to ship within the specified period due to warranty against hidden defects.
strikes, lack of shipping space or other circumstances beyond their
reasonable control, Buyer agrees to extend the said Letter of Credit for
later shipment. The Letter of Credit shall otherwise be subject to the Both the trial court and the Court of Appeals upheld the contention of RJL MARTINEZ
conditions stated in this memorandum of contract. [Emphasis supplied.] that SCHMID was the vendor in the second transaction and was liable under its warranty.

Agreeing with the terms of the Quotation, RJL MARTINEZ opened a letter of credit in favor
of NAGATA CO. Accordingly, on November 20,1975, SCHMID transmitted to NAGATA CO.
an order [Exhibit "4"] for the twelve (12) generators to be shipped directly to RJL Court of Appeals affirmed the decision of the trial court ordering petitioner to refund to
MARTINEZ. NAGATA CO. thereafter sent RJL MARTINEZ the bill of lading and its own private respondent the purchase price for the twelve (12) generators and to accept delivery
invoice (Exhibit "B") and, in accordance with the order, shipped the generators directly to of the same and to pay s and attorney's fees, with a slight modification as to the amount
RJL MARTINEZ. The invoice states that "one (1) case of 'NAGATA' AC Generators" to be refunded.
consisting of twelve sets was—bought by order and for account risk of Messrs. RJL
Martinez Fishing Corporation. However, when, as in this case, it is the petitioner's position that the appealed judgment
is premised on a misapprehension of
For its efforts, SCHMID received from NAGATA CO. a commission of $1,752.00 for the facts, * the Court is compelled to review the Court of Appeal's factual findings
sale of the twelve generators to RJL MARTINEZ
Schmid was merely the indentor in the sale [of the twelve (12) generators] between Nagata A commission merchant is one engaged in the purchase or sale for another of personal
Co., the exporter and RJL Martinez, the importer; property which, for this purpose, is placed in his possession and at his disposal. He
maintains a relation not only with his principal and the purchasers or vendors, but also
(ii) as mere indentor, Schmid is not liable for the seller's implied warranty against hidden with the property which is subject matter of the transaction.
defects, Schmid not having personally assumed any such warranty.
Thus, the chief feature of a commercial broker and a commercial merchant is that in
(iii) in any event, conformably with Article 1563 of the Civil Code, there was no implied effecting a sale, they are merely intermediaries or middle-men, and act in a certain sense
warranty against hidden defects in the sale of these twelve (12) generators because these as the agent of both parties to the transaction.
were sold under their trade name "Nagata"; and
Webster defines an indent as "a purchase order for goods especially when sent from a
(iv) Schmid, accordingly, is not liable for the reimbursement claimed by RJL Martinez foreign country."

It would appear that there are three parties to an indent transaction, namely, the buyer,
the indentor, and the supplier who is usually a non-resident manufacturer residing in the
Issue: w/n the second transaction between the parties was a sale or an indent
country where the goods are to be bought
transaction. SCHMID maintains that it was the latter; RJL MARTINEZ claims that it was a
sale.
An indentor may therefore be best described as one who, for compensation, acts as a
middleman in bringing about a purchase and sale of goods between a foreign supplier and
Ruling: Indent only.
a local purchaser.
It has been said that the essence of the contract of sale is transfer of title or agreement to
transfer it for a price paid or promised Coming now to the case at bar, the admissions of the parties and the facts appearing on
record more than suffice to warrant the conclusion that SCHMID was not a vendor, but
was merely an indentor, in the second transaction.
On the other hand, there is no statutory definition of "indent" in this jurisdiction.
However, the Rules and Regulations to Implement Presidential Decree No. 1789 (the
RJL MARTINEZ admitted that the generators were purchased "through indent order"
Omnibus Investments Code) lumps "indentors" together with "commercial brokers" and
"commission merchants" in this manner:
In the same vein, it admitted in its demand letter previously sent to SCHMID that twelve
(12) of en (15) Nagata-brand generators "were purchased through your company
... A foreign firm which does business through the middlemen acting in
(SCHMID), by indent order and three (3) by direct purchase." [Exhibit "D".] The evidence
their own names, such as indentors, commercial brokers or commission
merchants, shall not be deemed doing business in the Philippines. But also show that RJL MARTINEZ paid directly NAGATA CO, for the generators, and that the
such indentors, commercial brokers or commission merchants shall be latter company itself invoiced the sale [Exhibit "B"], and shipped the generators directly to
the ones deemed to be doing business in the Philippines [Part I, Rule I, the former.
Section 1, par. g (1).]
The above transaction is significantly different from the first transaction wherein SCHMID
Therefore, an indentor is a middlemen in the same class as commercial brokers and delivered the goods from its own stock (which it had itself imported from NAGATA CO.),
commission merchants. To get an Idea of what an indentor is, a look at the definition of issued its own invoice, and collected payment directly from the purchaser.
those in his class may prove helpful.
These facts notwithstanding, RJL MARTINEZ insists that SCHMID was the vendor of the
A broker is generally defined as one who is engaged, for others, on a twelve generators on the following grounds:
commission, negotiating contracts relative to property with the custody of
which he has no concern; the negotiator between other parties, never
acting in his own name but in the name of those who employed him; he is
strictly a middleman and for some purpose the agent of both parties.
First, it is contended that the Quotation and the General Conditions of Sale on the dorsal In view of the above considerations, this Court rules that SCHMID was merely acting as
side thereof do not necessarily lead to the conclusion that NAGATA CO., and not an indentor in the purchase and sale of the twelve (12) generators subject of the second
SCHMID, was the real seller in the case of the twelve (12) generators transaction. Not being the vendor, SCHMID cannot be held liable for the implied warranty
for hidden defects under the Civil Code.
Second, it is asserted that the acts of SCHMID after it was informed of the defect in the
generators were indicative of its awareness that it was the vendor and acknowledgment of 2. However, even as SCHMID was merely an indentor, there was nothing to prevent it
its liability as such vendor, from voluntarily warranting that twelve (12) generators subject of the second transaction
are free from any hidden defects. In other words, SCHMID may be held answerable for
third, it is argued that the contents of the letter from NAGATA CO. to SCHMID regarding some other contractual obligation, if indeed it had so bound itself. As stated above, an
indentor is to some extent an agent of both the vendor and the vendee. As such agent,
the repair of the generators indicated that the latter was "within the purview of a seller.
therefore, he may expressly obligate himself to undertake the obligations of his principal
Fourth, it is argued that if SCHMID is considered as a mere agent of NAGATA CO., a
The Court's inquiry, therefore, shifts to a determination of whether or not SCHMID
foreign corporation not licensed to do business in the Philippines, then the officers and
expressly bound itself to warrant that the twelve (12) generators are free of any hidden
employees of the former may be penalized for violation of the old Corporation Law. defects.

The facts do not bear out these contentions. Again, we consider the facts.

The first contention disregards the circumstances surrounding the second transaction as The Quotation (Exhibit A is in writing. It is the repository of the contract between RJL
distinguished from those surrounding the first transaction, as noted above. MARTINEZ and SCHMID. Notably, nowhere is it stated therein that SCHMID did bind
itself to answer for the defects of the things sold. There being no allegation nor any proof
Neither does the solicitous manner by which SCHMID responded to RJL MARTINEZ's that the Quotation does not express the true intent and agreement of the contracting
complaint prove that the former was the seller of the generators. As aptly stated by parties, extrinsic parol evidence of warranty will be to no avail
counsel, no indentor will just fold its hands when a client complains about the goods it
has bought upon the indentor's mediation Moreover, a closer examination of the statements allegedly made by the representative of
SCHMID reveals that they merely constituted an expression of opinion which cannot by
Note that in contrast to its act of replacing the three (3) generators subject of the first any means be construed as a warranty.
transaction, SCHMID did not replace any of the twelve (12) generators, but merely
rendered assistance. At any rate, when asked where SCHMID's warranty was contained, Balagtas testified
initially that it was in the receipts covering the sale. (At this point, it may be stated that
the invoice [Exhibit "B-l"] was issued by NAGATA CO. and nowhere is it stated therein
he proposal of NAGATA CO. rejected by SCHMID that the latter undertake the repair of
that SCHMID warranted the generators against defects.) When confronted with a copy of
the nine (9) other defective generators, with the former supplying the replacement parts
the invoice issued by NAGATA CO., he changed his assertion and claimed that what he
free of charge and subsequently reimbursing the latter for labor costs [Exhibit "I"], cannot
meant was that the date of the commencement of the period of SCHMID's warranty would
support the conclusion that SCHMID is vendor of the generators of the second transaction
be based on the date of the invoice. On further examination, he again changed his mind
or was acting "within the purview of a seller."
and asserted that the warranty was given verbally.

Finally, the afore-quoted penal provision in the Corporation Law finds no application to
On the other hand, Hernan Adad SCHMID's General Manager, was categorical that the
SCHMID and its officers and employees relative to the transactions in the instant case.
company does not warrant goods bought on indent and that the company warrants only
What the law seeks to prevent, through said provision, is the circumvention by foreign
the goods bought directly from it, like the three generators earlier bought by RJL
corporations of licensing requirements through the device of employing local
MARTINEZ itself.
representatives. An indentor, acting in his own name, is not, however, covered by the
above-quoted provision.
In the face of these conflicting testimonies, this Court is of the view that RJL has failed to
prove that SCHMID had given a warranty on the twelve (12) generators subject of the
second transaction. Even assuming that a warranty was given, there is no way to
determine whether there has been a breach thereof, considering that its nature or terms the date when such alteration takes effect he should have any order pending to be served
and conditions have not been shown. to Mr. Parsons, such order shall enjoy the advantage of the alteration if the price thereby
be lowered, but shall not be affected by said alteration if the price thereby be increased
3. In view of the foregoing, it becomes unnecessary to pass upon the other issues.
(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga" beds.
WHEREFORE, finding the Court of Appeals to have committed a reversible error, the
petition is GRANTED and the appealed Decision and Resolution of the Court of Appeals ART. 2. In compensation for the expenses of advertisement which, for the benefit
are REVERSED. of both contracting parties, Mr. Parsons may find himself obliged to make, Mr.
Quiroga assumes the obligation to offer and give the preference to Mr. Parsons in
case anyone should apply for the exclusive agency for any island not comprised
with the Visayan group.
Quiroga vs Parsons
ART. 3. Mr. Parsons may sell, or establish branches of his agency for the sale of
"Quiroga" beds in all the towns of the Archipelago where there are no exclusive
Facts: a contract in the following tenor was entered into by and between the plaintiff, as agents, and shall immediately report such action to Mr. Quiroga for his approval.
party of the first part, and J. Parsons (to whose rights and obligations the present
defendant later subrogated itself), as party of the second part:
ART. 4. This contract is made for an unlimited period, and may be terminated by
either of the contracting parties on a previous notice of ninety days to the other
CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J. party.
PARSONS, BOTH MERCHANTS ESTABLISHED IN MANILA, FOR THE
EXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN ISLANDS.
Of the three causes of action alleged by the plaintiff in his complaint, only two of them
constitute the subject matter of this appeal and both substantially amount to the
ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds in the averment that the defendant violated the following obligations: not to sell the beds at
Visayan Islands to J. Parsons under the following conditions: higher prices than those of the invoices; to have an open establishment in Iloilo; itself to
conduct the agency; to keep the beds on public exhibition, and to pay for the
(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for the advertisement expenses for the same; and to order the beds by the dozen and in no other
latter's establishment in Iloilo, and shall invoice them at the same price he has manner. As may be seen, with the exception of the obligation on the part of the defendant
fixed for sales, in Manila, and, in the invoices, shall make and allowance of a to order the beds by the dozen and in no other manner, none of the obligations imputed to
discount of 25 per cent of the invoiced prices, as commission on the sale; and Mr. the defendant in the two causes of action are expressly set forth in the contract. But the
Parsons shall order the beds by the dozen, whether of the same or of different plaintiff alleged that the defendant was his agent for the sale of his beds in Iloilo, and that
styles. said obligations are implied in a contract of commercial agency.

(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received, within a Issue: w/n the defendant, by reason of the contract hereinbefore transcribed, was a
period of sixty days from the date of their shipment. purchaser or an agent of the plaintiff for the sale of his beds.

(D) If, before an invoice falls due, Mr. Quiroga should request its payment, said payment Ruling: In the contract in question, what was essential, as constituting its cause and
when made shall be considered as a prompt payment, and as such a deduction of 2 per subject matter, is that the plaintiff was to furnish the defendant with the beds which the
cent shall be made from the amount of the invoice. latter might order, at the price stipulated, and that the defendant was to pay the price in
the manner stipulated. The price agreed upon was the one determined by the plaintiff for
The same discount shall be made on the amount of any invoice which Mr. Parsons may the sale of these beds in Manila, with a discount of from 20 to 25 per cent, according to
deem convenient to pay in cash. their class. Payment was to be made at the end of sixty days, or before, at the plaintiff's
request, or in cash, if the defendant so preferred, and in these last two cases an
additional discount was to be allowed for prompt payment. These are precisely the
(E) Mr. Quiroga binds himself to give notice at least fifteen days before hand of any essential features of a contract of purchase and sale. There was the obligation on the part
alteration in price which he may plan to make in respect to his beds, and agrees that if on of the plaintiff to supply the beds, and, on the part of the defendant, to pay their price.
These features exclude the legal conception of an agency or order to sell whereby the In respect to the defendant's obligation to order by the dozen, the only one expressly
mandatory or agent received the thing to sell it, and does not pay its price, but delivers to imposed by the contract, the effect of its breach would only entitle the plaintiff to
the principal the price he obtains from the sale of the thing to a third person, and if he disregard the orders which the defendant might place under other conditions; but if the
does not succeed in selling it, he returns it. By virtue of the contract between the plaintiff plaintiff consents to fill them, he waives his right and cannot complain for having acted
and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their thus at his own free will.
price within the term fixed, without any other consideration and regardless as to whether
he had or had not sold the beds. For the foregoing reasons, we are of opinion that the contract by and between the plaintiff
and the defendant was one of purchase and sale, and that the obligations the breach of
It would be enough to hold, as we do, that the contract by and between the defendant and which is alleged as a cause of action are not imposed upon the defendant, either by
the plaintiff is one of purchase and sale, in order to show that it was not one made on the agreement or by law.
basis of a commission on sales, as the plaintiff claims it was, for these contracts are
incompatible with each other. But, besides, examining the clauses of this contract, none The judgment appealed from is affirmed
of them is found that substantially supports the plaintiff's contention. Not a single one of
these clauses necessarily conveys the idea of an agency. The words commission on
sales used in clause (A) of article 1 mean nothing else, as stated in the contract itself,
than a mere discount on the invoice price. The word agency, also used in articles 2 and 3,
only expresses that the defendant was the only one that could sell the plaintiff's beds in
the Visayan Islands. With regard to the remaining clauses, the least that can be said is
that they are not incompatible with the contract of purchase and sale.

The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of
the defendant corporation and who established and managed the latter's business in
Iloilo. It appears that this witness, prior to the time of his testimony, had serious trouble
with the defendant, had maintained a civil suit against it, and had even accused one of its
partners, Guillermo Parsons, of falsification. He testified that it was he who drafted the
contract Exhibit A, and, when questioned as to what was his purpose in contracting with
the plaintiff, replied that it was to be an agent for his beds and to collect a commission on
sales. However, according to the defendant's evidence, it was Mariano Lopez Santos, a
director of the corporation, who prepared Exhibit A. But, even supposing that Ernesto
Vidal has stated the truth, his statement as to what was his idea in contracting with the
plaintiff is of no importance, inasmuch as the agreements contained in Exhibit A which he
claims to have drafted, constitute, as we have said, a contract of purchase and sale, and
not one of commercial agency. This only means that Ernesto Vidal was mistaken in his
classification of the contract.

The plaintiff also endeavored to prove that the defendant had returned beds that it could
not sell; that, without previous notice, it forwarded to the defendant the beds that it
wanted; and that the defendant received its commission for the beds sold by the plaintiff
directly to persons in Iloilo. But all this, at the most only shows that, on the part of both
of them, there was mutual tolerance in the performance of the contract in disregard of its
terms; and it gives no right to have the contract considered, not as the parties stipulated
it, but as they performed it. Only the acts of the contracting parties, subsequent to, and
in connection with, the execution of the contract, must be considered for the purpose of
interpreting the contract, when such interpretation is necessary, but not when, as in the
instant case, its essential agreements are clearly set forth and plainly show that the
contract belongs to a certain kind and not to another.