GR L 71122; (March, 1988) (Digest)
G.R. No. L-71122, March 25, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ARNOLDUS CARPENTRY SHOP, INC. and COURT OF TAX APPEALS, respondents.
FACTS
Arnoldus Carpentry Shop, Inc., a domestic corporation, is engaged in the business of manufacturing and selling wood products such as furniture and cabinets, both locally and for export. For the year 1977, its total gross sales amounted to P5,162,787.59, with export sales constituting 52% thereof. The Bureau of Internal Revenue (BIR) examiners, after an investigation, reclassified the company from a manufacturer to an “other independent contractor” under the Tax Code. This reclassification was based on their finding that the corporation produced items only upon specific customer orders and according to the customers’ designs. Consequently, the BIR assessed a deficiency contractor’s tax of P108,720.92, inclusive of surcharge and interest, for 1977, arguing that the 3% contractor’s tax applied instead of the 7% manufacturer’s tax, and that export sales were not tax-exempt for a contractor. Arnoldus protested, maintaining it was a manufacturer entitled to tax exemption on its export sales under Section 202(e) of the National Internal Revenue Code. The Court of Tax Appeals reversed the BIR, holding that Arnoldus was a manufacturer.
ISSUE
Whether the Court of Tax Appeals erred in holding that Arnoldus Carpentry Shop, Inc. is a manufacturer and not a contractor, and thus not liable for the assessed deficiency contractor’s tax on its export sales for 1977.
RULING
The Supreme Court affirmed the decision of the Court of Tax Appeals, ruling that Arnoldus is a manufacturer, not a contractor. The legal logic hinges on the statutory definitions and the nature of the business. An “independent contractor” under the Tax Code essentially sells services for a fee. In contrast, a manufacturer is one who engages in the production of articles for sale from raw materials. The Court found that Arnoldus sells finished goods, not services. It maintains a ready stock of its products, and the fact that it accepts orders based on samples does not transform its sale of goods into a sale of services. The production process, utilizing raw materials to create new products, is characteristic of manufacturing.
Consequently, as a manufacturer, Arnoldus’s export sales are expressly exempt from percentage tax under Section 202(d) and (e) of the Tax Code. While tax exemptions are generally construed strictly against the taxpayer, the exemption here is clear from the law’s text, which explicitly mentions “manufacturer.” Since Arnoldus falls within this category by clear legislative intent, the rule of strict construction does not apply to deny the exemption. The BIR’s attempt to reclassify the company based on its increased export volume was unsupported by law. The petition was denied for lack of merit.