G.R. No. 52018 February 23, 1990
HON. EFREN I. PLANA, in his capacity as Commissioner of Internal Revenue, petitioner, vs. COURT OF TAX APPEALS and ENGINEERING DEVELOPMENT CORPORATION OF THE PHILIPPINES, respondents.

FACTS

Private respondent Engineering Development Corporation of the Philippines (EDCORP) is a domestic corporation authorized to render general scientific, engineering, and technological services. On April 25, 1968, EDCORP entered into a contract with the Department of National Defense (DND) to act as a consultant for the development of a government arsenal in Lamao, Limay, Bataan. The contract required EDCORP to prepare and submit preliminary studies, layout plans, drawings, maps, and cost estimates for all structures and facilities. To fulfill this, EDCORP hired technical personnel such as engineers, surveyors, and draftsmen. Notably, EDCORP did not undertake any actual construction work. For these services, the DND agreed to pay EDCORP P460,000.00.
The DND auditor withheld P13,800.00, representing a 3% contractor’s tax, from the payment to EDCORP and remitted it to the Bureau of Internal Revenue. EDCORP subsequently requested a clarification from the Commissioner of Internal Revenue and later filed a formal demand for the refund of the withheld amount. EDCORP argued that the fees were for professional and technical services, not for a construction contract, and thus not subject to the contractor’s tax under Section 191 of the National Internal Revenue Code. The Commissioner denied the claim, prompting EDCORP to appeal to the Court of Tax Appeals (CTA).

ISSUE

Whether the services rendered by EDCORP under its contract with the DND constitute “contractor” activities subject to the 3% contractor’s tax under Section 191 of the National Internal Revenue Code.

RULING

The Supreme Court affirmed the decision of the Court of Tax Appeals, ruling that EDCORP’s services were not subject to the contractor’s tax. The legal logic hinges on the statutory definition of a “contractor” under Section 191 of the Tax Code, which specifically includes persons engaged in the business of “furnishing and installing machinery, equipment, millwork, and other materials, or rendering services in connection therewith.” The Court emphasized that this provision pertains to services incidental to the installation of machinery or equipment, not to purely architectural and engineering design services.
The contract between EDCORP and the DND was strictly for consultancy services involving the preparation of plans, drawings, studies, and estimates. EDCORP did not furnish or install any materials, nor did it perform any construction work. Its role was purely advisory and preparatory. Therefore, its activities fell outside the ambit of “contractor” as defined by the tax law. The fees received were compensation for professional services, not payments for a construction contract. Consequently, the withholding of the 3% tax was improper, and EDCORP was entitled to a refund. The Court’s interpretation strictly adhered to the principle that tax exemptions are construed strictly against the taxpayer, but in this case, the issue was the proper classification of the activity, and the law did not impose the tax on such purely architectural and engineering design services.