COMMISSIONER vs.

BOAC
149 SCRA 395
GR No. L-65773-74 April 30, 1987

"The source of an income is the property, activity or service that produced

the income. For such source to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity within the
Philippines."
FACTS:
Petitioner CIR seeks a review of the CTA's decision setting aside petitioner's
assessment of deficiency income taxes against respondent British Overseas
Airways Corporation (BOAC) for the fiscal years 1959 to 1971. BOAC is a
100% British Government-owned corporation organized and existing under
the laws of the United Kingdom, and is engaged in the international airline
business. During the periods covered by the disputed assessments, it is
admitted that BOAC had no landing rights for traffic purposes in the
Philippines. Consequently, it did not carry passengers and/or cargo to or
from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines —
Wamer Barnes and Company, Ltd., and later Qantas Airways — which was
responsible for selling BOAC tickets covering passengers and cargoes. The
CTA sided with BOAC citing that the proceeds of sales of BOAC tickets do not
constitute BOAC income from Philippine sources since no service of carriage
of passengers or freight was performed by BOAC within the Philippines and,
therefore, said income is not subject to Philippine income tax. The CTA
position was that income from transportation is income from services so that
the place where services are rendered determines the source.

ISSUE:
Are the revenues derived by BOAC from sales of ticket for air transportation,
while having no landing rights here, constitute income of BOAC from
Philippine sources, and accordingly, taxable?

HELD:
Yes. The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as coming
from the Philippines, it is sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale of tickets in the Philippines is
the activity that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency. The site of
the source of payments is the Philippines. The flow of wealth proceeded
from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such protection,
the flow of wealth should share the burden of supporting the government.

CIR vs Arnoldus Carpentry Shop

GR No. 71122

Subject: Sales
Doctrine: Contract of Sale vs Contract for a Piece of Work
FACTS:
Arnoldus Carpentry Shop, Inc. is a domestic corporation which has been in
existence since 1960 which has for its 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 and description”. The company kept samples or models of its
woodwork on display from where its customers may refer to when placing
their orders.
On March 1979, the examiners from BIR who conducted an investigation on
the company’s tax liabilities reported that subject corporation should be
considered a contractor and not a manufacturer since the corporation
renders service in the course of an independent occupation representing the
will of his employer only as to the result of his work, and not as to the
means by which it is accomplished. Hence, in the computation of the
percentage tax, the 3% contractor’s tax should be imposed instead of the
7% manufacturer’s tax. However, responded company holds that the
carpentry shop is a manufacturer and therefore entitled to tax exemption on
its gross export sales under Section 202 (e) of the National Internal Revenue
Code. CIR rendered its decision classifying the respondent as contractor
which was in turn reversed by the CTA. Hence, this appeal.
ISSUE:
Whether or not the Court of Tax Appeals erred in holding that private
respondent is a manufacturer and not a contractor.
HELD:
The Supreme Court holds that the private respondent is a “manufacturer” as
defined in the Tax Code and not a “contractor” under Section 205(e) of the
Tax Code.
Petitioner CIR wants to impress upon this Court that under Article 1467, the
true test of whether or not the contract is a piece of work (and thus
classifying private respondent as a contractor) or a contract of sale (which
would classify private respondent as a manufacturer) is the mere existence
of the product at the time of the perfection of the contract such that if the
thing already exists, the contract is of sale, if not, it is work. This is not the
test followed in this jurisdiction. Based on Art. 1467, what determines
whether the contract is one of work or of sale is whether the thing has been
manufactured specially for the customer and “upon his special order.” Thus,
if the thing is specially done at the order of another, this is a contract for a
piece of work. If, on the other hand, the thing is manufactured or procured
for the general market in the ordinary course of one’s business, it is a
contract of sale. The distinction between a contract of sale and one for work,
labor and materials is tested by the inquiry whether the thing transferred is
one not in existence and which never would have existed but for the order of
the party desiring to acquire it, or a thing which would have existed and has
been the subject of sale to some other persons even if the order had not
been given. The one who has ready for the sale to the general public
finished furniture is a manufacturer, and the mere fact that he did not have
on hand a particular piece or pieces of furniture ordered does not make him
a contractor only.
A contract for the delivery at a certain price of an article which the vendor in
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 a
contract of sale, but if the goods are to be manufactured specially for the
customer and upon his special order, and not for the general market, it is a
contract for a piece of work. The facts show that the company had a ready
stock of its shop products for sale to its foreign and local buyers. As a matter
of fact, the purchase orders from its foreign buyers showed that they
ordered by referring to the models designated by petitioner. Even purchases
by local buyers for television cabinets were by orders for existing models
except only for some adjustments in sizes and accessories utilized.
The Court finds itself in agreement with CTA and as the CTA did not err in
holding that private respondent is a “manufacturer,” then private respondent
is entitled to the tax exemption under See. 202 (d) and (e) now Sec. 167 (d)
and (e)] of the Tax Code.