G.R. No. L-19804 October 23, 1967
Leon Balbas, Donato Abitong, and Nemesio Valdez, petitioners, vs. Melecio R. Domingo, Commissioner of Internal Revenue, Manila, respondent.

FACTS

Petitioners individually executed “Harvest Contracts” with the Canlubang Sugar Estate on August 10, 1956. Under these contracts, they were obliged to recruit men, preferably from the Ilocos provinces, to harvest cane according to a schedule provided by Canlubang. The contracts designated petitioners as “contractors.” They paid their own recruiting expenses, transportation costs for recruits, and subsistence allowances. They were paid at a fixed rate per ton, from which sum they remunerated the men they hired. They prepared payrolls for Canlubang’s verification. Canlubang furnished tools and equipment, for which petitioners were responsible, with damages due to lack of care to be repaired or replaced at their expense. Petitioners were also obliged to furnish loading boards at their expense and execute security for their performance. The contracts contained rules and instructions for harvesting, with penalties for violations. Respondent Commissioner assessed and demanded from petitioners fixed and percentage taxes, surcharges, and compromise penalties, classifying them as independent contractors under the Tax Code. Petitioners questioned the assessments before the Court of Tax Appeals, which sustained the Commissioner, ordering payment of taxes and surcharges but not compromise penalties.

ISSUE

Whether petitioners, under their Harvest Contracts with Canlubang Sugar Estate, are independent contractors subject to tax under Sections 182 and 191 of the National Internal Revenue Code, or merely employees not liable for such taxes.

RULING

The Supreme Court affirmed the decision of the Court of Tax Appeals, holding that petitioners are independent contractors subject to tax. The Court is bound by the factual findings of the Court of Tax Appeals, which found that the contracts revealed the extent of petitioners’ independence. Key indicia of independent contractor status included: the power to recruit and hire men; payment of recruiting and transportation expenses from their own account; payment based on a fixed rate per ton from which they paid their workers; preparation of payrolls; responsibility for furnished tools and equipment; obligation to furnish loading boards at their expense; and execution of security for performance. Provisions for rules, instructions, and penalties for violations were not deemed to impair their independent character. The Court applied the principle that the actual performance of obligations, not merely the contract title, determines the nature of the relationship, and here, the contractual terms and performance affirmed independent contractor status.