GR L 16809; (January, 1962) (Digest)
G.R. No. L-16809; January 31, 1962
Union Garment Co., Inc., petitioner, vs. Court of Tax Appeals and Collector of Internal Revenue, respondents.
FACTS
The petitioner, Union Garment Co., Inc., is a tailoring business. In 1953, it entered into a contract with the Armed Forces of the Philippines (AFP) following a public bidding. Under this contract, the petitioner was granted the exclusive right to sew or tailor specified apparel such as pants and shirts for the AFP. The AFP supplied all the cloth and materials, while the petitioner furnished only the labor and services necessary for the sewing and tailoring work.
The Collector of Internal Revenue assessed and collected from the petitioner the sum of P4,114.38 as a percentage tax under Section 191 of the National Internal Revenue Code, including surcharge and penalty. The petitioner paid this amount under protest and subsequently filed a claim for refund. It argued that its transactions with the AFP were exempt from tax, contending they constituted “purchases” made by the AFP, which are exempt under Paragraph 11, page 632, of Republic Act No. 816 . The Court of Tax Appeals dismissed the petition for refund, prompting this review.
ISSUE
The central issue is whether the petitioner’s contract with the AFP, where the AFP supplied the materials and the petitioner supplied only labor, constitutes a “purchase” exempt from the percentage tax under the relevant statute, or whether it is a contract for services subject to tax under Section 191 of the Tax Code.
RULING
The Supreme Court affirmed the decision of the Court of Tax Appeals, holding the petitioner liable for the percentage tax. The Court rejected the petitioner’s argument for a liberal interpretation of the tax exemption. It emphasized that tax exemptions must be construed strictly against the taxpayer claiming them.
The legal logic hinges on the nature of the transaction. The Court found that the contract was not a “purchase” of articles within the ordinary meaning of the term as used in Republic Act No. 816 . Since the AFP furnished all materials, the petitioner did not sell any goods; it sold only its tailoring services. The transaction was, in essence, a “lease of work” or a contract for a piece of work (arrendamiento de obra) as defined in Article 1713 of the Civil Code, not a contract of sale.
Consequently, the gross receipts derived from such service contracts fall squarely under the ambit of Section 191 of the National Internal Revenue Code, which imposes a three percent tax on the gross receipts of, among others, tailor shops. The exemption for “purchases” made by the AFP applies to contracts of sale where title to goods passes, not to contracts for the mere rendering of labor. Therefore, the petitioner was correctly assessed the percentage tax on its gross receipts from the AFP contract.