GR 52018; (February, 1990) (Digest)
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 specifically 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 various technical personnel, including engineers and draftsmen. No actual construction work was performed by the corporation.
For these services, the DND agreed to pay EDCORP P460,000.00. However, the DND auditor withheld P13,800.00, representing a 3% contractor’s tax, and remitted this amount to the Bureau of Internal Revenue. EDCORP subsequently requested a clarification and later demanded a refund, arguing that its fees were for professional and technical services, not for construction contracting, and thus not subject to the contractor’s tax under the National Internal Revenue Code.
ISSUE
Whether the 3% contractor’s tax under Section 191 of the National Internal Revenue Code is applicable to the fees received by EDCORP for the engineering and technical consultancy services it rendered to the DND.
RULING
The Supreme Court ruled that the 3% contractor’s tax does not apply. The legal logic hinges on the statutory definition of a “contractor” subject to the tax. Section 191 of the Tax Code defined a “contractor” as a person engaged in the business of building, repairing, or otherwise engaging in construction work. The Court emphasized that the term “construction” implies the creation of a structure or the performance of labor on a building project, requiring physical assemblage and erection.
EDCORP’s services were purely consultative and preparatory. It furnished plans, drawings, and estimates but did not undertake any actual construction activities. Its role was limited to the design and advisory phase, falling within the realm of architectural and engineering professional services. The contract did not involve the physical execution of construction work. Therefore, EDCORP cannot be classified as a “contractor” under the tax law. The fees received were compensation for technical and professional services, not payments for construction contracting. Consequently, the withholding and remittance of the 3% tax were erroneous, and EDCORP is entitled to a refund of the amount illegally collected. The Court affirmed the decision of the Court of Tax Appeals ordering the refund.