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Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-22358 January 29, 1975

PIO BARRETTO SONS, INC., petitioner,vs.COMPAIA MARITIMA, respondent.

Vicente del Rosario, E. V. Navarro and E. I. Perez for petitioner.

Rafael Dinglasan for respondent.

ESGUERRA, J.:

Petition for review on certiorari of the decision of the Court ofAppeals in its CA-G.R. No. 23367-R which reverses the judgment

of the Court of First Instance of Manila, including its resolutiondenying the petitioner's motion for reconsideration of thedecision.

The factual background of the case is as follows:

Petitioner as plaintiff filed a complaint for collection of a sum ofmoney against herein respondent, alleging that during themonths of October and November, 1941, the defendant (now

respondent) purchased on credit and received from the plaintiff(now petitioner), lumber worth P5,300.55; and on December 4,1941, the defendant-respondent again purchased on credit andreceived from the plaintiff-petitioner, lumber worth P453.81,thereby incurring a total indebtedness of P6,054.36 withstipulated interest of 12% per annum, plus attorney's fees.

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and that the alleged cause of action, if any at all, isalready barred by the statute of limitation of actions.

IV. The Lower Court erred in ordering defendant to pay

to plaintiff the sum of P6,054.36 plus legal interestthereon from the filing of the complaint until fully paid,plus attorney's fees in the amount of P500.00 togetherwith the costs. (pp. 1-2, Brief for the Defendant-Appellant)

The Court of Appeals reversed the judgment of the trial court andordered the dismissal of the case on the ground that delivery ofthe lumber by plaintiff-petitioner to defendant-respondent wasnot duly proved.

Petitioner's motion for reconsideration of the decision of the Courtof Appeals was denied again on the ground of lack of sufficientshowing of a valid delivery of the lumber in question by theBarretto Sons, Inc. to the Compaia Maritima.

Hence this petition for review on certiorari.

Petitioner maintains that:

I. The Court of Appeals erred in creating andraising, motu propio, for the first time a new issue, thatof the question of delivery, upon which the Court ofAppeals based its decision reversing the judgment ofthe trial Court.

II. The Court of Appeals erred in its conclusion drawnfrom proven facts, and has decided the case in a way

not in accordance with law or with the applicabledecisions of this Court, and

III. The Court of Appeals erred in that it has so fardeparted from the accepted and usual course of judicialproceedings. (pp. 1-2, Brief for Petitioner).

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Petitioner further asserts that the case having been tried anddecided by the trial court on the issue of whether or not therewas payment made by respondent Compaia Maritima of thelumber covered by Exhs. "A-1" to "A-6" (invoices of petitioner)

and Exh. "B", "B-1 " to "B-4 (the counter-receipts issued by therespondent), it is alone on this issue that the Court of Appealsshould have decided the case and not on the issue of whether ornot there was delivery of the lumber in question.

The principal issue, therefore, before Us is whether or not theCourt of Appeals decided the case on a new issue not raised inthe pleadings before the lower courts.

We rule that the issue of delivery on which the Court of Appealsbased its decision reversing that of the trial court is no new issueat all. For delivery and payment in a contract of sale, or for thatmatter in quasi-contracts, are so interrelated and intertwined witheach other that without delivery of the goods there is nocorresponding obligation to pay. The two complement each other.Thus, "by the contract of sale one of the contracting partiesobligates himself to transfer the ownership of and to deliver adeterminate thing, and the other to pay therefor a price certain inmoney or its equivalent." (Art. 1458, 1st par., new Civil Code).The source of this provision of law is Article 1445 of the old Code,which provides:

By the contract of purchase and sale one of thecontracting parties obligates himself to deliver adeterminate thing and the other to pay a certain pricetherefor in money or in something representing thesame.

It is clear that the two elements cannot be dissociated, for "thecontract of purchase and sale is, essentially, a bilateral contract,as it gives rise to reciprocal obligations; to wit, on the part of theseller, "to deliver a determinate thing, and on the part of thebuyer, "to pay a certain price therefor in money or in something

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"A. Whenever the Compaia Maritimaorders lumber from our company, theCompaia Maritima issues a purchase orderto the Pio Barretto Sons, Inc. When this

purchase order is received by the PioBarretto Sons, Inc., the Pio Barretto Sons,Inc. delivers the lumber, as specified in thepurchase order. Upon delivery of this lumber,the lumber is covered by invoice of the PioBarretto, together with the purchase order ofthe Compaia Maritima. Now, when thelumber is received by the CompaiaMaritima, the Compaia Maritima stamps our

invoice for the lumber delivered, and thereceiving clerk signs the said invoice for theCompaia Maritima. Now, after the lumberhas been delivered, our delivery man bringsback to our office and gives the invoice tome, together with the purchase order. Now,at the end of each week, I prepare theStatement of Accounts to be sent theCompaia Maritima, through our collector,

and, in turn, the Accounting Department ofthe Compaia Maritima issues as the kinds ofreceipts for the invoices, purchase orders,and statements of accounts surrendered tothem." tsn. 76-77, Vol. I;

stated otherwise, first, there was a purchase order byMaritima; 2ndly, there was an invoice by Barretto;3rdly, there was a delivery unto Maritima; 4thly, there

was a delivery of the purchase order and deliveryreceipt unto Maritima for checking or revision; andsince Maritima would because of that retain thepurchase orders and delivery receipts, it would issue inexchange its own counter receipt of said documents;and 5thly, after due verification had been made,Maritima would then pay; this procedure should now be

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correlated to the evidence herein presented; nowplaintiff has here presented two sets of documents, Ato A-6 and B to B-4; the first set consists of a purchaseorder, together with the invoices or delivery receipts, At

to A-6; and the second set consists of counter-receiptsevidencing the fact that Maritima had received, with theexception of that in B-4, certain documents, i.e.,purchase orders and delivery receipts from Barretto,"para su revision"; if then the documents would becorrelated with the testimonies and the procedureoutlined by witness Perez, it will result that as to A toA-6, plaintiff, according to it, had already complied withthe purchase order, the sale, and delivery, but that it

had not submitted all these to Maritima "para surevision" while as to B to B-4, it had according to it,complied with purchase order (except as to B-4), sale,delivery, and submission "para su revision", but thesame had not been as yet checked and verified byMaritima; the question is, has this proof demonstratedplaintiff's cause of action, pursuant to the veryprocedure by it outlined in its evidence to have beenfollowed between the parties in the course of their

commercial transactions but how could that be whenprecisely because of that practice, it gave untoMaritima the right to first verify; and there is noshowing that had been verified; but let it not be heresaid that just because Maritima had not yet verified,plaintiff should not be permitted to recover, for thatpractice must give way to the truth, as plaintiffcontends, that if it had after all proved delivery,defendant must pay; but has plaintiff proved delivery

under the evidence? According to what has been paid,plaintiff had, according to it, submitted its documentsin B to B-4 for revision; this means to say that it had inits possession and given unto Maritima purchaseorders, and delivery receipts, but does this mean that ithad proved delivery? Can delivery be proved by thefact that one had in his possession what one had

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believed to be a delivery receipt and submitted that forverification, without any actual proof of delivery of thearticle? If that were the case, a litigant would beexcused from proving the element most vital to show

his cause of action; and a Court of Justice must have torely on the presumption that just because one had inhis possession a "delivery receipt", one had alreadydelivered; but the vice of this argument is that italtogether parts from the basis that the "deliveryreceipt" thus possessed and surrendered was a genuinedelivery receipt, evidencing the fact that buyer hadindeed received; but here, there absolutely is no proofof that; what this Court has only seen in the evidence

nearest to the required proof is the stamp of Maritimaon A-1 to A-6; for as this Court has said, the supposedadmission by defendant witness Narvaez that thelumber therein annotated had been "delivered" wasclearly and unfortunately, one that could not, to befair to the witness, have been correctly meant tohave by him been made, for he was "purchasing agent"only and could not be qualified at all to declare if whathe had authorized to be purchased had been thereafter

delivered, and the witness had in fact insisted againstsuch alleged delivery to "Posadas", and witness had allthe time insisted that only one "J. Leoncio", couldreceive, and this clarification is indisputably fortified bythe very evidence of plaintiff, consisting in the purchaseorder Exh. A, wherein is annotated:

"Not valid unless invoices are receiptedand signed by: J. LEONCIO";

which name, "J. Leoncio" had been written precisely bysaid witness and this must mean that the signature of"Posadas" in A-1 to A-6 by the evidence of plaintiffitself, has been shown to have been unauthorized; andgoing to the stamp of Maritima on A-1 to A-6, this had

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to be correlated to the fact that Narvaez has testifiedthat:

This is our own stamp, but we did not

authorize Mr. Posadas to sign for any lumberreceived. tsn. 134, Vol. II;

nor has in fact, in any part of the evidence been shownany proof as even to show the authenticity of saidsignature "Posadas"; or that said "Posadas" hadactually received said lumber; to prove at least that thelumber had been deposited in the compound ofMaritima by that "Posadas", for if there had been suchproof in the record, if plaintiff had shown evidence ofthat actual delivery of the lumber into the possession ofMaritima, then it would have been the obligation of thisCourt under the law of quasi-contracts, to grantBarretto its prayer for the value of that; but no, whatBarrette has here presented as witnesses were firstRoman Legarda So, manager of Barretto, who admittedin cross that:

Q. With respect to Exhibits A-1 to A-5, you

did not have any personal intervention orparticipation in the preparation of thesedocuments?

A. No, sir, I did not have any participationor intervention.

Q. You did not have any personalintervention in the alleged deliveries of these

number to the Compaia Maritima? A. - No,sir, I did not have.

A. As a matter of fact, you do not knowwho put these rubber stamps here andsigned at the bottom of these Exhibits A, A-1to A- 5?

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Q. No, sir, I do not know. tsn. 57-58, Vol.I;

and then Juanita G. Perez, assistant cashier of Barretto

who admitted in cross that:Q. So, you do not know of your ownpersonal knowledge the circumstances or themanner in which these Exhibits A-1 to A-5were stamped. You do not know of your ownpersonal knowledge?

A. Well, when it comes to stamping, I donot have any knowledge," tsn. 35, Vol. I;

under such a status of plaintiffs own proofs, how couldit be said that plaintiff had proved its case? And howwould it be correctly insisted against this Court that ithad disregarded Lower Court's findings contrary to theexisting jurisprudence when there was no issue ofcredibility presented to this Court on which it indeedwould have been bound to rely as a rule upon LowerCourt's determination; but what had been before this

Court was a simple issue of preponderance and it hadto make its conclusions based on the documentsthemselves presented by plaintiff it is because of thesethat this Court is impelled to reiterate that it shouldrule as it had ruled previously, for litigations can not bedetermined by possibly correct suppositions, deductionsor even presumptions, with no basis in the evidence,for the truth must have to be determined by the hardrules of proof. (pp. 1-7, CA Resolution dated January 8,

1964).

"An examination of said receipts would reveal that they werecounter-receipts issued by Cia. Maritima unto Pio Barrettocertifying to the fact of having received from Pio Barretto, certainstatements, "para su revision", which can only mean not an

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admission of having received the lumber but only an admission ofhaving received certain statements on claims for lumber allegedlydelivered; ... that plaintiff has the duty to prove its affirmativeallegations here of delivery to and failure of defendant to pay, ...

otherwise, the meaning would be that the sending of a statementof account would be an evidence of the admission thereof which itsurely is not. (p. 6, CA Decision dated November 18, 1963; p. 27,ROA).

We concur in the foregoing observations and find that theconclusion of the Court of Appeals that plaintiff did notsatisfactorily prove delivery of the lumber in question is inaccordance with the facts and the law.

WHEREFORE, the judgment appealed from is hereby affirmedwithout pronouncement as to costs.

SO ORDERED.

Castro (Chairman), Teehankee, Makasiar and Muoz Palma, JJ.,concur.

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QUIROGA vs. PARSONS HARDWARE Co., 38 Phil. 501, No.11491, August 23, 1918

ANDRES QUIROGA, plaintiff-appellant,

vs.PARSONS HARDWARE CO., defendant-appellee.

Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza forappellant.Crossfield & O'Brien for appellee.

AVANCEA, J.:

On January 24, 1911, in this city of manila, a contract in thefollowing tenor was entered into by and between the plaintiff, asparty of the first part, and J. Parsons (to whose rights andobligations the present defendant later subrogated itself), asparty of the second part:

CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA ANDJ. PARSONS, BOTH MERCHANTS ESTABLISHED IN MANILA, FORTHE EXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN

ISLANDS.

ARTICLE 1. Don Andres Quiroga grants the exclusive right to sellhis beds in the Visayan Islands to J. Parsons under the followingconditions:

(A) Mr. Quiroga shall furnish beds of his manufacture to Mr.Parsons for the latter's establishment in Iloilo, and shall invoicethem at the same price he has fixed for sales, in Manila, and, in

the invoices, shall make and allowance of a discount of 25 percent of the invoiced prices, as commission on the sale; and Mr.Parsons shall order the beds by the dozen, whether of the sameor of different styles.

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(B) Mr. Parsons binds himself to pay Mr. Quiroga for the bedsreceived, within a period of sixty days from the date of theirshipment.

(C) The expenses for transportation and shipment shall be borneby M. Quiroga, and the freight, insurance, and cost of unloadingfrom the vessel at the point where the beds are received, shall bepaid by Mr. Parsons.

(D) If, before an invoice falls due, Mr. Quiroga should request itspayment, said payment when made shall be considered as aprompt payment, and as such a deduction of 2 per cent shall bemade from the amount of the invoice.

The same discount shall be made on the amount of any invoicewhich Mr. Parsons may deem convenient to pay in cash.

(E) Mr. Quiroga binds himself to give notice at least fifteen daysbefore hand of any alteration in price which he may plan to makein respect to his beds, and agrees that if on the date when suchalteration takes effect he should have any order pending to beserved to Mr. Parsons, such order shall enjoy the advantage of

the alteration if the price thereby be lowered, but shall not beaffected by said alteration if the price thereby be increased, for,in this latter case, Mr. Quiroga assumed the obligation to invoicethe beds at the price at which the order was given.

(F) Mr. Parsons binds himself not to sell any other kind except the"Quiroga" beds.

ART. 2. In compensation for the expenses of advertisement

which, for the benefit of both contracting parties, Mr. Parsonsmay find himself obliged to make, Mr. Quiroga assumes theobligation to offer and give the preference to Mr. Parsons in caseanyone should apply for the exclusive agency for any island notcomprised with the Visayan group.

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ART. 3. Mr. Parsons may sell, or establish branches of his agencyfor the sale of "Quiroga" beds in all the towns of the Archipelagowhere there are no exclusive agents, and shall immediatelyreport such action to Mr. Quiroga for his approval.

ART. 4. This contract is made for an unlimited period, and may beterminated by either of the contracting parties on a previousnotice of ninety days to the other party.

Of the three causes of action alleged by the plaintiff in hiscomplaint, only two of them constitute the subject matter of thisappeal and both substantially amount to the averment that thedefendant violated the following obligations: not to sell the beds

at higher prices than those of the invoices; to have an openestablishment in Iloilo; itself to conduct the agency; to keep thebeds on public exhibition, and to pay for the advertisementexpenses for the same; and to order the beds by the dozen andin no other manner. As may be seen, with the exception of theobligation on the part of the defendant to order the beds by thedozen and in no other manner, none of the obligations imputed tothe defendant in the two causes of action are expressly set forthin the contract. But the plaintiff alleged that the defendant was

his agent for the sale of his beds in Iloilo, and that saidobligations are implied in a contract of commercial agency. Thewhole question, therefore, reduced itself to a determination as towhether the defendant, by reason of the contract hereinbeforetranscribed, was a purchaser or an agent of the plaintiff for thesale of his beds.

In order to classify a contract, due regard must be given to itsessential clauses. In the contract in question, what was essential,

as constituting its cause and subject matter, is that the plaintiffwas to furnish the defendant with the beds which the latter mightorder, at the price stipulated, and that the defendant was to paythe price in the manner stipulated. The price agreed upon was theone determined by the plaintiff for the sale of these beds inManila, with a discount of from 20 to 25 per cent, according totheir class. Payment was to be made at the end of sixty days, or

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before, at the plaintiff's request, or in cash, if the defendant sopreferred, and in these last two cases an additional discount wasto be allowed for prompt payment. These are precisely theessential features of a contract of purchase and sale. There was

the obligation on the part of the plaintiff to supply the beds, and,on the part of the defendant, to pay their price. These featuresexclude the legal conception of an agency or order to sellwhereby the mandatory or agent received the thing to sell it, anddoes not pay its price, but delivers to the principal the price heobtains from the sale of the thing to a third person, and if hedoes not succeed in selling it, he returns it. By virtue of thecontract between the plaintiff and the defendant, the latter, onreceiving the beds, was necessarily obliged to pay their price

within the term fixed, without any other consideration andregardless as to whether he had or had not sold the beds.

It would be enough to hold, as we do, that the contract by andbetween the defendant and the plaintiff is one of purchase andsale, in order to show that it was not one made on the basis of acommission on sales, as the plaintiff claims it was, for thesecontracts are incompatible with each other. But, besides,examining the clauses of this contract, none of them is found that

substantially supports the plaintiff's contention. Not a single oneof these clauses necessarily conveys the idea of an agency. Thewords commission on sales used in clause (A) of article 1 meannothing else, as stated in the contract itself, than a mere discounton the invoice price. The word agency, also used in articles 2 and3, only expresses that the defendant was the only one that couldsell the plaintiff's beds in the Visayan Islands. With regard to theremaining clauses, the least that can be said is that they are notincompatible with the contract of purchase and sale.

The plaintiff calls attention to the testimony of Ernesto Vidal, aformer vice-president of the defendant corporation and whoestablished and managed the latter's business in Iloilo. It appearsthat this witness, prior to the time of his testimony, had serioustrouble with the defendant, had maintained a civil suit against it,and had even accused one of its partners, Guillermo Parsons, of

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falsification. He testified that it was he who drafted the contractExhibit A, and, when questioned as to what was his purpose incontracting with the plaintiff, replied that it was to be an agentfor his beds and to collect a commission on sales. However,

according to the defendant's evidence, it was Mariano LopezSantos, a director of the corporation, who prepared Exhibit A.But, even supposing that Ernesto Vidal has stated the truth, hisstatement as to what was his idea in contracting with the plaintiffis of no importance, inasmuch as the agreements contained inExhibit A which he claims to have drafted, constitute, as we havesaid, a contract of purchase and sale, and not one of commercialagency. This only means that Ernesto Vidal was mistaken in hisclassification of the contract. But it must be

understood that a contract is what the law defines it to be, andnot what it is called by the contracting parties.

The plaintiff also endeavored to prove that the defendant hadreturned beds that it could not sell; that, without previous notice,it forwarded to the defendant the beds that it wanted; and thatthe defendant received its commission for the beds sold by theplaintiff directly to persons in Iloilo. But all this, at the most onlyshows that, on the part of both of them, there was mutual

tolerance in the performance of the contract in disregard of itsterms; and it gives no right to have the contract considered, notas the parties stipulated it, but as they performed it. Only theacts of the contracting parties, subsequent to, and in connectionwith, the execution of the contract, must be considered for thepurpose of interpreting the contract, when such interpretation isnecessary, but not when, as in the instant case, its essentialagreements are clearly set forth and plainly show that thecontract belongs to a certain kind and not to another.

Furthermore, the return made was of certain brass beds, and wasnot effected in exchange for the price paid for them, but was forother beds of another kind; and for the letter Exhibit L-1,requested the plaintiff's prior consent with respect to said beds,which shows that it was not considered that the defendant had aright, by virtue of the contract, to make this return. As regardsthe shipment of beds without previous notice, it is insinuated in

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the record that these brass beds were precisely the ones soshipped, and that, for this very reason, the plaintiff agreed totheir return. And with respect to the so-called commissions, wehave said that they merely constituted a discount on the invoice

price, and the reason for applying this benefit to the beds solddirectly by the plaintiff to persons in Iloilo was because, as thedefendant obligated itself in the contract to incur the expenses ofadvertisement of the plaintiff's beds, such sales were to beconsidered as a result of that advertisement.

In respect to the defendant's obligation to order by the dozen,the only one expressly imposed by the contract, the effect of itsbreach would only entitle the plaintiff to disregard the orders

which the defendant might place under other conditions; but ifthe plaintiff consents to fill them, he waives his right and cannotcomplain for having acted thus at his own free will.

For the foregoing reasons, we are of opinion that the contract byand between the plaintiff and the defendant was one of purchaseand sale, and that the obligations the breach of which is allegedas a cause of action are not imposed upon the defendant, eitherby agreement or by law.

The judgment appealed from is affirmed, with costs against theappellant. So ordered.

Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ., concur.

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Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 71122 March 25, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.ARNOLDUS CARPENTRY SHOP, INC. and COURT OF TAX

APPEALS, respondents.

The Solicitor General for petitioner.

Generoso Jacinto for respondents.

CORTES,J.:

Assailed in this petition is the decision of the Court of Tax Appeals in CTAcase No. 3357 entitled "ARNOLDUS CARPENTRY SHOP, INC. v.COMMISSIONER OF INTERNAL REVENUE."

The facts are simple.

Arnoldus Carpentry Shop, Inc. (private respondent herein) is a domesticcorporation which has been in existence since 1960. It has for itssecondary purpose the "preparing, processing, buying, selling, exporting,importing, manufacturing, trading and dealing in cabinet shop products,wood and metal home and office furniture, cabinets, doors, windows, etc.,including their component parts and materials, of any and all nature anddescription" (Rollo, pp. 160-161). These furniture, cabinets and other

woodwork were sold locally and exported abroad.

For this business venture, private respondent kept samples or models of itswoodwork on display from where its customers may refer to when placingtheir orders.

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Sometime in March 1979, the examiners of the petitioner Commissioner ofInternal Revenue conducted an investigation of the business tax liabilitiesof private respondent pursuant to Letter of Authority No. 08307 NA datedNovember 23, 1978. As per the examination, the total gross sales of privaterespondent for the year 1977 from both its local and foreign dealingsamounted to P5,162,787.59 (Rollo. p. 60). From this amount, privaterespondent reported in its quarterly percentage tax returns P2,471,981.62for its gross local sales. The balance of P2,690,805.97, which is 52% of thetotal gross sales, was considered as its gross export sales (CTA Decision,p. 12).

Based on such an examination, BIR examiners Honesto A. Vergel de Diosand Voltaire Trinidad made a report to the Commissioner classifying privaterespondent as an "other independent contractor" under Sec. 205 (16) [now

Sec. 169 (q)] of the Tax Code. The relevant portion of the report reads:

Examination of the records show that per purchase orders,which are hereby attached, of the taxpayer's customers duringthe period under review, subject corporation should beconsidered a contractor and not a manufacturer.Thecorporation renders service in the course of an independentoccupation representing the will of his employer only as to theresult of his work, and not as to the means by which it isaccomplished, (Luzon Stevedoring Co. v. Trinidad, 43 Phil.

803). Hence, in the computation of the percentage tax, the 3%contractor's tax should be imposed instead of the 7%manufacturer's tax. [Rollo, p. 591 (Emphasis supplied.)

xxx xxx xxx

As a result thereof, the examiners assessed private respondent fordeficiency tax in the amount of EIGHTY EIGHT THOUSAND NINEHUNDRED SEVENTY TWO PESOS AND TWENTY THREE CENTAVOS (P88,972.23 ). Later, on January 31, 1981, private respondent received aletter/notice of tax deficiency assessment inclusive of charges and interestfor the year 1977 in the amount of ONE HUNDRED EIGHT THOUSANDSEVEN HUNDRED TWENTY PESOS AND NINETY TWO CENTAVOS ( P108,720.92 ). This tax deficiency was a consequence of the 3% taximposed on private respondent's gross export sales which, in turn, resulted

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from the examiners' finding that categorized private respondent as acontractor (CTA decision, p.2).

Against this assessment, private respondent filed on February 19, 1981 aprotest with the petitioner Commissioner of Internal Revenue. In the protestletter, private respondent's manager maintained that the carpentry shop isa manufacturer and therefor entitled to tax exemption on its gross exportsales under Section 202 (e) of the National Internal Revenue Code. Heexplained that it was the 7% tax exemption on export sales which promptedprivate respondent to exploit the foreign market which resulted in theincrease of its foreign sales to at least 52% of its total gross sales in 1977(CTA decision, pp. 1213).

On June 23, 1981, private respondent received the final decision of the

petitioner stating:

It is the stand of this Office that you are considered a contractoran not a manufacturer.Records show that you manufacturewoodworks only upon previous order from supposedmanufacturers and only in accordance with the latter's owndesign, model number, color, etc. [Rollo p. 64] (Emphasissupplied.)

On July 22, 1981, private respondent appealed to the Court of Tax Appeals

alleging that the decision of the Commissioner was contrary to law and thefacts of the case.

On April 22, 1985, respondent Court of Tax Appeals rendered thequestioned decision holding that private respondent was a manufacturerthereby reversing the decision of the petitioner.

Hence, this petition for review wherein petitioner raises the sole issueof. Whether or not the Court of Tax Appeals erred in holding that privaterespondent is a manufacturer and not a contractor and therefore not liable

for the amount of P108,720.92, as deficiency contractor's tax, inclusive ofsurcharge and interest, for the year 1977.

The petition is without merit.

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1. Private respondent is a "manufacturer" as defined in the Tax Code andnot a "contractor" under Section 205(e) of the Tax Code as petitioner wouldhave this Court decide.

(a) Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines"independent contractors" as:

... persons (juridical and natural) not enumerated above (but notincluding individuals subject to the occupation tax underSection 12 of the Local Tax Code) whose activity consistsessentially of the sale of all kinds of services for a feeregardless of whether or not the performance of the servicecalls for the exercise or use of the physical or mental facultiesof such contractors or their employees. (Emphasis supplied.)

Private respondent's business does not fall under this definition.

Petitioner contends that the fact that private respondent "designs andmakes samples or models that are 'displayed' or presented or 'submitted' toprospective buyers who 'might choose' therefrom" signifies that whatprivate respondent is selling is a kind of service its shop is capable ofrendering in terms of woodwork skills and craftsmanship (Brief forPetitioner, p. 6). He further stresses the point that if there are no ordersplaced for goods as represented by the sample or model, the shop does

not produce anything; on the other hand, if there are orders placed, theshop goes into fall production to fill up the quantity ordered (Petitioner'sBrief, p. 7).

The facts of the case do not support petitioner's claim. Petitioner is ignoringthe fact that private respondent sells goods which it keeps in stock and notservices. As the respondent Tax Court had found:

xxx xxx xxx

Petitioner [private respondent herein] claims, and the recordsbear petitioner out, that it had a ready stock of its shop productsfor saleto its foreign and local buyers. As a matter of fact, thepurchase orders from its foreign buyers showed that theyordered by referring to the models designated by petitioner.Even purchases by local buyers for television cabinets (Exhs. '2to13', pp. 1-13, BIR records) were by orders for existing

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modelsexcept only for some adjustments in sizes andaccessories utilized.

With regard to the television cabinets, petitioner presentedthree witnesses its bookkeeper, production manager andmanager who testified that samples of television cabinets weredesigned and made by petitioner, from which models thetelevision companies such as Hitachi National and others mightchoose, then specified whatever innovations they desired. Iffound to be saleable, some television cabinets weremanufactured for display and sold to the general public. Thesecabinets were not exported but only sold locally. (t.s.n., pp.2235, February 18,1982; t.s.n., pp. 7-10, March 25, 1982; t.s.n.,pp. 3-6, August 10, 1983.)

xxx xxx xxx

In the case of petitioner's other woodwork products such asbarometer cases, knife racks, church furniture, school furniture,knock down chairs, etc., petitioner's above-mentionedwitnesses testified that these were manufactured withoutprevious orders. Samples were displayed, and if in stock, wereavailable for immediate sale to local and foreign customers.Such testimony was not contradicted by respondent (petitioner

herein). And in all the purchase orders presented as exhibits,whether from foreign or local buyers, reference was made tothe model number of the product being ordered or to thesample submitted by petitioner.

Respondent's examiners, in their memorandum to theCommissioner of Internal Revenue, stated that petitionermanufactured only upon previous orders from customers and"only in accordance with the latter's own design, model number,color, etc." (Exh. '1', p. 27, BIR records.) Their bare statementthat the model numbers and designs were the customers' own,unaccompanied by adequate evidence, is difficult to believe. Itignores commonly accepted and recognized business practicesthat it is not the customer but the manufacturer who furnishesthe samples or models from which the customers select when

placing their orders, The evidence adduced by petitioner to

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prove that the model numbers and designs were its own ismore convincing [CTA decision, pp. 6-8.] (Emphasis supplied)

xxx xxx xxx

This Court finds no reason to disagree with the Tax Court's finding of fact. Ithas been consistently held that while the decisions of the Court of Tax

Appeals are appealable to the Supreme Court, the former's finding of factare entitled to the highest respect. The factual findings can only bedisturbed on the part of the tax court [Collector of Intern. al Revenue v.Henderson, L-12954, February 28, 1961, 1 SCRA 649; Aznar v. Court ofTax Appeals, L-20569, Aug. 23, 1974, 58 SCRA 519; Raymundo v. deJoya, L-27733, Dec. 3, 1980, 101 SCRA 495; Industrial TextilesManufacturing Co. of the Phils. , Inc. v. Commissioner of Internal Revenue,

L-27718 and L-27768, May 27,1985,136 SCRA 549.]

(b) Neither can Article 1467 of the New Civil Code help petitioner's cause.Article 1467 states:

A contract for the delivery at a certain price of an article Which the vendorin the ordinary course of his business manufactures or procures for the -general market, whether the same is on hand at the time or not, is acontract of sale, but if the goods are to be manufactured specially for thecustomer and upon his special order, and not for the general market, it is a

contract for a piece of work.

Petitioner alleged that what exists prior to any order is but the samplemodel only, nothing more, nothing less and the ordered quantity wouldnever have come into existence but for the particular order as representedby the sample or model [Brief for Petitioner, pp. 9-101.]

Petitioner wants to impress upon this Court that under Article 1467, the truetest of whether or not the contract is a piece of work (and thus classifyingprivate respondent as a contractor) or a contract of sale (which would

classify private respondent as a manufacturer) is the mere existence of theproduct at the time of the perfection of the contract such that if the thingalready exists, the contractis of sale, if not, it is work.

This is not the test followed in this jurisdiction. As can be clearly seen fromthe wordings of Art. 1467, what determines whether the contract is one ofwork or of sale is whether the thing has been manufactured specially for

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the customer and upon his special order." Thus, if the thing is speciallydone at the order of another, this is a contract for a piece of work. If, on theother hand, the thing is manufactured or procured for the general market inthe ordinary course of one's business, it is a b contract of sale.

Jurisprudence has followed this criterion. As held in Commissioner ofInternal Revenue v. Engineering Equipment and Supply Co. (L-27044 andL-27452, June 30, 1975, 64 SCRA 590, 597), "the distinction between acontract of sale and one for work, labor and materials is tested by theinquiry whether the thing transferred is one not in existence and whichnever would have existed but for the order of the party desiring to acquireit, or a thing which would have existed and has been the subject of sale tosome other persons even if the order had not been given." (Emphasissupplied.) And in a BIR ruling, which as per Sec. 326 (now Sec. 277) of the

Tax Court the Commissioner has the power to make and which, as persettled jurisprudence is entitled to the greatest weight as an administrativeview [National Federation of Sugar Workers (NFSW) v. Ovejera, G.R. No.59743, May 31, 1982, 114 SCRA 354, 391; Sierra Madre Trust v. Hon.Sec. of Agriculture and Natural Resources, Nos. 32370 and 32767, April20, 1983,121 SCRA 384; Espanol v. Chairman and Members of the Boardof Administrators, Phil. Veterans Administration, L-44616, June 29, 1985,137 SCRA 3141, "one who has ready for the sale to the general publicfinished furniture is a manufacturer, and the mere fact that he did not haveon hand a particular piece or pieces of furniture ordered does not make hima contractor only" (BIR Ruling No. 33-1, series of 1960). Likewise,

xxx xxx xxx

When the vendor enters into a contract for the delivery of anarticle which in the ordinary course of his business hemanufactures or procures for the general market at a pricecertain (Art. 1458) such contract is one of sale even if at thetime of contracting he may not have such article on hand. Such

articles fall within the meaning of "future goods" mentioned inArt. 1462, par. 1. [5 Padilla, Civil Law: Civil Code Annotated139 (1974)

xxx xxx xxx

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These considerations were what precisely moved the respondent Court ofTax Appeals to rule that 'the fact that [private respondent] kept models ofits products... indicate that these products were for sale to the generalpublic and not for special orders,' citing Celestino Co and Co. v. Collectorof Internal Revenue[99 Phil, 841 (1956)]. (CTA Decision, pp. 8-9.)

Petitioner alleges that the error of the respondent Tax Court was due to the'heavy albeit misplaced and indiscriminate reliance on the caseof Celestino Co and Co. v. Collector of Internal Revenue[99 Phil. 841, 842(1956)] which is not a case in point' 1 Brief for Petitioner, pp. 14-15). TheCommissioner of Internal Revenue made capital of the difference betweenthe kinds of business establishments involved a FACTORY in the CelestinoCo case and a CARPENTRY SHOP in this case (Brief for Petitioner, pp.14-18). Petitioner seems to have missed the whole point in the former

case.

True, the former case did mention the fact of the business concern being aFACTORY, Thus:

xxx xxx xxx

... I cannot believe that petitioner company would take, as infact it has taken, all the trouble and expense of registering aspecial trade name for its sash business and then orders

company stationery carrying the bold print "Oriental SashFactory (Celestino Co and Company, Prop.) 926 Raon St.,Quiapo, Manila, Tel. No. 33076, Manufacturers of all kinds ofdoors, windows, sashes furniture, etc. used season dried andkiln-dried lumber, of the best quality workmanship" solely for thepurpose of supplying the need for doors, windows and sash ofits special and limited customers. One will note that petitionerhas chosen for its trade name and has offered itself to thepublic as a FACTORY, which means it is out to do business inits chosen lines on a big scale. As a general rule, sash factoriesreceive orders for doors and windows of special design only inparticular cases but the bulk of their sales is derived fromready-made doors and windows of standard sizes for theaverage home. [Emphasis supplied.]

xxx xxx xxx

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However, these findings were merely attendant facts to show what theCourt was really driving at the habitualityof the production of the goodsinvolved for the general public.

In the instant case, it may be that what is involved is a CARPENTRYSHOP. But, in the same vein, there are also attendant facts herein to showhabituality of the production for the general public.

In this wise, it is noteworthy to again cite the findings of fact of therespondent Tax Court:

xxx xxx xxx

Petitioner [private respondent herein] claims, and the recordsbear petitioner out, that it had a ready stock of its shop productsfor saleto its foreign and local buyers. As a matter of fact, thepurchase orders from its foreign buyers showed that theyordered by referring to the models designed by petitioner. Evenpurchases by local buyers for television cabinets... wereby orders for existing models. ...

With regard to the television cabinets, petitioner presentedthree witnesses... who testified that samples of televisioncabinets were designed and made by petitioner, from which

models the television companies ... might choose, thenspecified whatever innovations they desired. If found to besaleable, some television cabinets were manufactured fordisplay and sold to the general public.

xxx xxx xxx

In the case of petitioner's other woodwork products... thesewere manufactured without previous orders. Samples weredisplayed, and if in stock, were available for immediate sale to

local and foreign customers.(CTA decision, pp. 6-8.1[Emphasis supplied.]

(c) The private respondent not being a "contractor" as defined by the TaxCode or of the New Civil Code, is it a 'manufacturer' as countered by thecarpentry shop?

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Sec. 187 (x) [now Sec. 157 (x)] of the Tax Code defines a manufacturer' asfollows:

"Manufacturer" includes every person who by physical orchemical process alters the exterior texture or form or innersubstance of any raw material or manufactured or partiallymanufactured product in such manner as to prepare it for aspecial use or uses to which it could not have been in itsoriginal condition, or who by any such process alters the qualityor any such raw material or manufactured or partiallymanufactured product so as to reduce it to marketable shape orprepare it for any of the uses of industry, or who by any suchprocess combines any such raw material or manufactured orpartially manufactured products with other materials or products

of the same or different kinds and in such manner that thefinished product of such process or manufacture can be put to aspecial use or uses to which such raw material or manufacturedor partially manufactured products in their original conditionwould not have been put, and who in addition alters such rawmaterial or manufactured or partially manufactured products, orcombines the same to produce such finished products for thepurpose of their sale or distribution to others and not for his ownuse or consumption.

It is a basic rule in statutory construction that when the language of the lawis clear and unequivocal, the law must be taken to mean exactly what itsays [Banawa et al. v. Mirano et al., L-24750, May 16, 1980, 97 SCRA 517,533].

The term "manufacturer" had been considered in its ordinary and generalusage. The term has been construed broadly to include such processes asbuying and converting duck eggs to salted eggs ('balut") [Ngo Shiek v.Collector of Internal Revenue, 100 Phil. 60 (1956)1; the processing of

unhusked kapok into clean kapok fiber [Oriental Kapok Industries v.Commissioner of Internal Revenue, L-17837, Jan. 31, 1963, 7 SCRA 132];or making charcoal out of firewood Bermejo v. Collector of InternalRevenue, 87 Phil. 96 (1950)].

2. As the Court of Tax Appeals did not err in holding that privaterespondent is a "manufacturer," then private respondent is entitled to the

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tax exemption under See. 202 (d) and (e) mow Sec. 167 (d) and (e)] of theTax Code which states:

Sec. 202. Articles not subject to percentage tax on sales. Thefollowing shall be exempt from the percentage taxes imposed inSections 194, 195, 196, 197, 198, 199, and 201:

xxx xxx xxx

(d) Articles shipped or exported by the manufacturer orproducer, irrespective of any shipping arrangement that may beagreed upon which may influence or determine the transfer ofownership of the articles so exported.

(e) Articles sold by "registered export producers" to (1) other"registered export producers" (2) "registered export traders' or(3) foreign tourists or travelers, which are considered as "exportsales."

The law is clear on this point. It is conceded that as a rule, as argued bypetitioner, any claim for tax exemption from tax statutes is strictly construedagainst the taxpayer and it is contingent upon private respondent astaxpayer to establish a clear right to tax exemption [Brief for Petitioners, p.181. Tax exemptions are strictly construed against the grantee and

generally in favor of the taxing authority [City of Baguio v. Busuego, L-29772, Sept. 18, 1980, 100 SCRA 1161; they are looked upon with disfavor[Western Minolco Corp. v. Commissioner Internal Revenue, G.R. No.61632, Aug. 16,1983,124 1211. They are held strictly against the taxpayerand if expressly mentioned in the law, must at least be within its purview byclear legislative intent [Commissioner of Customs v. Phil., Acetylene Co., L-22443, May 29, 1971, 39 SCRA 70, Light and Power Co. v. Commissionerof Customs, G.R. L-28739 and L-28902, March 29, 1972, 44 SCRA 122].

Conversely therefore, if there is an express mention or if the taxpayer falls

within the purview of the exemption by clear legislative intent, then the ruleon strict construction will not apply. In the present case the respondent TaxCourt did not err in classifying private respondent as a "manufacturer".Clearly, the 'latter falls with the term 'manufacturer' mentioned in Art. 202(d) and (e) of the Tax Code. As the only question raised by petitioner inrelation to this tax exemption claim by private respondent is theclassification of the latter as a manufacturer, this Court affirms the holding

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of respondent Tax Court that private respondent is entitled to thepercentage tax exemption on its export sales.

There is nothing illegal in taking advantage of tax exemptions. When theprivate respondent was still exporting less and producing locally more, thepetitioner did not question its classification as a manufacturer. But when in1977 the private respondent produced locally less and exported more,petitioner did a turnabout and imposed the contractor's tax. By classifyingthe private respondent as a contractor, petitioner would likewise take awaythe tax exemptions granted under Sec. 202 for manufacturers. Petitioner'saction finds no support in the applicable law.

WHEREFORE, the Court hereby DENIES the Petition for lack of merit andAFFIRMS the Court of Tax Appeals decision in CTA Case No. 3357.

SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., Feliciano and Bidin, concur.

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Dignos vs. Court of Appeals, and Jabil

158 SCRA 378

February 1988

FACTS:

In July 1965, herein petitioners Silvestre T. Dignos and IsabelaLumungsod de Dignos (spouses Dignos) sold their parcel of landin Opon, LapuLapu to herein private respondent Antonio Jabil forthe sum of P28,000 payable for two installments, with anassumption of indebtedness with the First Insular Bank of Cebu inthe sum of P12,000 and the next installment of P4,000 to be paid

in September 1965. In November 1965, the spouses Dignos soldthe same parcel of land for P35,000 to defendants LucianoCabigas and Jovita L. de Cabigas (spouses Cabigas) who werethen US citizens, and executed in their favor an Absolute Deed ofSale duly registered in the Office of the Register of Deeds.

Upon discovery of the 2nd sale of the subject land, Jabil filed thecase at bar in the CFI of Cebu which rendered its Decision inAugust 1975 declaring the 2nd sale to the spouses Cabigas null

and void ab initio and the 1st sale to Jabil not rescinded. The CFIof Cebu also ordered Jabil to pay the remaining P16,000 to thespouses Dignos and to reimburse the spouses Cabigas areasonable amount corresponding the expenses in theconstruction of hollow block fences in the said parcel of land. Thespouses Dignos were also ordered to return the P35,000 to thespouses Cabigas.

Both Jabil and the spouses Dignos appealed to the Court of

Appeals, which affirmed in July 1981 the CFI of Cebus Decisionexcept for the part of Jabil paying the expenses of the spousesCabigas for building a fence. The spouses Dignos contested thatthe contract between them and Jabil was merely a contract to selland not a deed of sale.

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ISSUE:

Is the contract between the parties a contract of sale or acontract to sell?

COURT RULING:

The Supreme Court affirmed the Decision of the Court of Appealssaying stated that all the elements of a valid contract of sale arepresent in the document and that the spouses Dignos had noright to sell the land in question because an actual delivery of itspossession has already been made in favor of Jabil as early asMarch 1965. It was also found that the spouses Dignos nevernotified Jabil by notarial act that they were rescinding the

contract, and neither did they file a suit in court to rescind thesale. There is no showing that Jabil properly authorized a certainCipriano Amistad to tell petitioners that he was already waivinghis rights to the land in question.

-------------------------------------------------------------------------------------------------------------------------------------------------

FACTS:

The spouses Silvestre and Isabel Dignos were. owners of a parcelof land in Opon, Lapu-Lapu City. OnJune 7, 1965, appellants,herein petitioners Dignos spouses sold the said parcel of land torespondentAtilano J. Jabil for the sum of P28,000.00, payable intwo installments, with an assumption of indebtedness with theFirst Insular Bank of Cebu in the sum of PI 2,000.00, which waspaid andacknowledged by the vendors in the deed of saleexecuted in favor of plaintiff-appellant, and the nextinstallment in

the sum of P4,000.00 to be paid on or before September 15,1965.On November 25, 1965, the Dignos spouses sold the sameland in favor of defendants spouses, LucianoCabigas and Jovita L.De Cabigas, who were then U.S. citizens, for the price ofP35,000.00. A deed of absolute sale was executed by the Dignosspouses in favor of the Cabigas spouses, and which wasregisteredin the Office of the Register of Deeds pursuant to the provisions

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of Act No. 3344.As the Dignos spouses refused to accept fromplaintiff-appellant the balance of the purchase price of theland,and as plaintiff- appellant discovered the second sale made bydefendants-appellants to the Cabigasspouses, plaintiff-appellant

brought the present suit.

ISSUE:

Whether or not there was an absolute contract of sale.2. Whetheror not the contract of sale was already rescinded when the Digrosspouses sold the land toCabigas

HELD:

Yes. That a deed of sale is absolute in nature althoughdenominated as a "Deed of Conditional Sale"where nowhere inthe contract in question is a proviso or stipulation to the effectthat title to theproperty sold is reserved in the vendor until fullpayment of the purchase price, nor is there astipulation giving

the vendor the right to unilaterally rescind the contract themoment the vendeefails to pay within a fixed period.A carefulexamination of the contract shows that there is no suchstipulation reserving the title of the property on the vendors nordoes it give them the right to unilaterally rescind the contractuponnon-payment of the balance thereof within a fixed period.Onthe contrary, all the elements of a valid contract of sale underArticle 1458 of the Civil Code, arepresent, such as: (1) consent ormeeting of the minds; (2) determinate subject matter; and

(3)price certain in money or its equivalent. In addition, Article1477 of the same Code provides that"The ownership of the thingsold shall be transferred to the vendee upon actual orconstructive delivery thereof." While it may be conceded thatthere was no constructive delivery of the land soldin the case atbar, as subject Deed of Sale is a private instrument, it is beyondquestion that therewas actual delivery thereof. As found by the

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trial court, the Dignos spouses delivered the possessionof theland in question to Jabil as early as March 27,1965 so that thelatter constructed thereonSally's Beach Resort also known asJabil's Beach Resort in March, 1965; Mactan White Beach

Resorton January 15, J 966 and Bevirlyn's Beach Resort onSeptember 1, 1965. Such facts were admittedby petitionerspouses.2. No. The contract of sale being absolute in nature isgoverned by Article 1592 of the Civil Code. It isundisputed thatpetitioners never notified private respondents Jabil by notarial actthat they wererescinding the contract, and neither did they file asuit in court to rescind the sale. There is noshowing that Amistadwas properly authorized by Jabil to make such extra-judicialrescission for thelatter who, on the contrary, vigorously denied

having sent Amistad to tell petitioners that he wasalready waivinghis rights to the land in question. Under Article 1358 of the CivilCode, it is requiredthat acts and contracts which have for theirobject extinguishment of real rights over immovablepropertymust appear in a public document.Petitioners laid considerableemphasis on the fact that private respondent Jabil had no moneyonthe stipulated date of payment on September 15,1965 and wasable to raise the necessary amountonly by mid-October 1965. Ithas been ruled, however, that where time is not of the essence of

theagreement, a slight delay on the part of one party in theperformance of his obligation is not asufficient ground for therescission of the agreement. Considering that private respondenthas only abalance of P4,OOO.00 and was delayed in paymentonly for one month, equity and justice mandateas in theaforecited case that Jabil be given an additional period withinwhich to complete paymentof the purchase price.