Republic of the Philippines

SUPREME COURT
Baguio City
THIRD DIVISION
 
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA
UNIVERSITY, respondents.

PANGANIBAN, J.:
In conducting researches and studies of social organizations and cultural values thru its
Institute of Philippine Culture, is the Ateneo de Manila University performing the work of
an independent contractor and thus taxable within the purview of then Section 205 of the
National Internal Revenue Code levying a three percent contractor's tax? This question is
answer by the Court in the negative as it resolves this petition assailing the Decision 1 of
the Respondent Court of Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27, 1994
affirming that of the Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same
being largely undisputed by the parties.
Private respondent is a non-stock, non-profit educational institution with auxiliary units and
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine
Culture (IPC), which has no legal personality separate and distinct from that of private
respondent. The IPC is a Philippine unit engaged in social science studies of Philippine
society and culture. Occasionally, it accepts sponsorships for its research activities from
international organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner Commissioner of Internal
Revenue a demand letter dated June 3, 1983, assessing private respondent the sum of
P174,043.97 for alleged deficiency contractor's tax, and an assessment dated June 27,
1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year
ended March 31, 1978. Denying said tax liabilities, private respondent sent petitioner a
letter-protest and subsequently filed with the latter a memorandum contesting the validity
of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for
deficiency income tax but modifying the assessment for deficiency contractor's tax by
increasing the amount due to P193,475.55. Unsatisfied, private respondent requested for a
reconsideration or reinvestigation of the modified assessment. At the same time, it filed in
the respondent court a petition for review of the said letter-decision of the petitioner.
While the petition was pending before the respondent court, petitioner issued a final

decision dated August 3, 1988 reducing the assessment for deficiency contractor's tax
from P193,475.55 to P46,516.41, exclusive of surcharge and interest.
On July 12, 1993, the respondent court rendered the questioned decision which
dispositively reads:
WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The
deficiency contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge
and interest for the fiscal year ended March 31, 1978 is hereby CANCELED. No
pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this Court via the present petition
for review raising the following issues:
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF
INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S
TAX UNDER SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue Code, as amended,
provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and others. — A contractor's
tax of three per centum of the gross receipts is hereby imposed on the following:
x x x           x x x          x x x
(16) Business agents and other independent contractors except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents
and contractors and except gross receipts of or from a pioneer industry registered with
the Board of Investments under Republic Act No. 5186:
x x x           x x x          x x x
The term "independent contractors" include persons (juridical or natural) not enumerated
above (but not including individuals subject to the occupation tax under Section 12 of the
Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a
fee regardless of whether or not the performance of the service calls for the exercise or
use of the physical or mental faculties of such contractors or their employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in holding that private respondent is
not an "independent contractor" within the purview of Section 205 of the Tax Code. To
petitioner, the term "independent contractor", as defined by the Code, encompasses all
kinds of services rendered for a fee and that the only exceptions are the following:
a. Persons, association and corporations under contract for embroidery and apparel for
export and gross receipts of or from pioneer industry registered with the Board of
Investment under R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section
182 [b] of the Tax Code); and
c. Regional or area headquarters established in the Philippines by multinational
corporations, including their alien executives, and which headquarters do not earn or derive

 income from the Philippines and which act as supervisory, communication and coordinating
centers for their affiliates, subsidiaries or branches in the Asia Pacific Region (Section
205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the definition of an
"independent contractor" and is not among the aforementioned exceptions, private
respondent is therefore subject to the 3% contractor's tax imposed under the same Code.
4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and
affirmed the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks
us to reverse the CA through this petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the purview of independent contractor
pursuant to Section 205 of the Tax Code.
2) Whether or not private respondent is subject to 3% contractor's tax under Section 205
of the Tax Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its
auxiliary unit or branch — the Institute of Philippine Culture — performing the work of an
independent contractor and, thus, subject to the three percent contractor's tax levied by
then Section 205 of the National Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code germane to the case
before us read:
Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A
contractor's tax of three per centum of the gross receipts is hereby imposed on the
following:
xxx xxx xxx
(16) Business agents and other independent contractors, except persons, associations and
corporations under contract for embroidery and apparel for export, as well as their agents
and contractors, and except gross receipts of or from a pioneer industry registered with
the Board of Investments under the provisions of Republic Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural) not enumerated
above (but not including individuals subject to the occupation tax under Section 12 of the
Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a
fee regardless of whether or not the performance of the service calls for the exercise or
use of the physical or mental faculties of such contractors or their employees.
The term "independent contractor" shall not include regional or area headquarters
established in the Philippines by multinational corporations, including their alien executives,

and which headquarters do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.
The term "gross receipts" means all amounts received by the prime or principal contractor
as the total contract price, undiminished by amount paid to the subcontractor, shall be
excluded from the taxable gross receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de
Manila University "falls within the definition" of an independent contractor and "is not one
of those mentioned as excepted"; hence, it is properly a subject of the three percent
contractor's tax levied by the foregoing provision of law. 6 Petitioner states that the "term
'independent contractor' is not specifically defined so as to delimit the scope thereof, so
much so that any person who . . . renders physical and mental service for a fee, is now
indubitably considered an independent contractor liable to 3% contractor's tax." 7
According to petitioner, Ateneo has the burden of proof to show its exemption from the
coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles
of tax exemption without first applying the well-settled doctrine of strict interpretation in
the imposition of taxes. It is obviously both illogical and impractical to determine who are
exempted without first determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private respondent was covered by Section
205, applying the rule of strict interpretation of laws imposing taxes and other burdens on
the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this
occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a)
statute will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously . . . (A) tax cannot be imposed without clear and express words for that
purpose. Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are
not to be extended by implication." 8 Parenthetically, in answering the question of who is
subject to tax statutes, it is basic that "in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal Revenue Code requires
that the independent contractor be engaged in the business of selling its services. Hence,
to impose the three percent contractor's tax on Ateneo's Institute of Philippine Culture, it
should be sufficiently proven that the private respondent is indeed selling its services for a
fee in pursuit of an independent business. And it is only after private respondent has been
found clearly to be subject to the provisions of Sec. 205 that the question of exemption
therefrom would arise. Only after such coverage is shown does the rule of construction —
that tax exemptions are to be strictly construed against the taxpayer — come into play,

contrary to petitioner's position. This is the main line of reasoning of the Court of Tax
Appeals in its decision, 10 which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that Ateneo's Institute of
Philippine Culture ever sold its services for a fee to anyone or was ever engaged in a
business apart from and independently of the academic purposes of the university.
Stressing that "it is not the Ateneo de Manila University per se which is being taxed,"
Petitioner Commissioner of Internal Revenue contends that "the tax is due on its activity
of conducting researches for a fee. The tax is due on the gross receipts made in favor of
IPC pursuant to the contracts the latter entered to conduct researches for the benefit
primarily of its clients. The tax is imposed on the exercise of a taxable activity. . . . [T]he
sale of services of private respondent is made under a contract and the various contracts
entered into between private respondent and its clients are almost of the same terms,
showing, among others, the compensation and terms of payment." 11 (Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be correct. However, the records do
not show that Ateneo's IPC in fact contracted to sell its research services for a fee.
Clearly then, as found by the Court of Appeals and the Court of Tax Appeals, petitioner's
theory is inapplicable to the established factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare contention
that, indeed, contracts for sale of services were ever entered into by the private
respondent. As appropriately pointed out by the latter:
An examination of the Commissioner's Written Formal Offer of Evidence in the Court of
Tax Appeals shows that only the following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner's Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.
None of the foregoing evidence even comes close to purport to be contracts between
private respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds
received by the Ateneo de Manila University are technically not a fee. They may however
fall as gifts or donations which are tax-exempt" as shown by private respondent's
compliance with the requirement of Section 123 of the National Internal Revenue Code
providing for the exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition of an "independent
contractor".
For one, the established facts show that IPC, as a unit of the private respondent, is not
engaged in business. Undisputedly, private respondent is mandated by law to undertake
research activities to maintain its university status. In fact, the research activities being

carried out by the IPC is focused not on business or profit but on social sciences studies of
Philippine society and culture. Since it can only finance a limited number of IPC's research
projects, private respondent occasionally accepts sponsorship for unfunded IPC research
projects from international organizations, private foundations and governmental agencies.
However, such sponsorships are subject to private respondent's terms and conditions,
among which are, that the research is confined to topics consistent with the private
respondent's academic agenda; that no proprietary or commercial purpose research is done;
and that private respondent retains not only the absolute right to publish but also the
ownership of the results of the research conducted by the IPC. Quite clearly, the
aforementioned terms and conditions belie the allegation that private respondent is a
contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock, non-profit
educational corporation. The fact that it accepted sponsorship for IPC's unfunded projects
is merely incidental. For, the main function of the IPC is to undertake research projects
under the academic agenda of the private respondent. Moreover the records do not show
that in accepting sponsorship of research work, IPC realized profits from such work. On
the contrary, the evidence shows that for about 30 years, IPC had continuously operated at
a loss, which means that sponsored funds are less than actual expenses for its research
projects. That IPC has been operating at a loss loudly bespeaks of the fact that education
and not profit is the motive for undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the sponsored research projects,
the fact still remains that there is no proof that part of such earnings or profits was ever
distributed as dividends to any stockholder, as in fact none was so distributed because
they accrued to the benefit of the private respondent which is a non-profit educational
institution. 14
Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture
are not given in the concept of a fee or price in exchange for the performance of a service
or delivery of an object. Rather, the amounts are in the nature of an endowment or
donation given by IPC's benefactors solely for the purpose of sponsoring or funding the
research with no strings attached. As found by the two courts below, such sponsorships are
subject to IPC's terms and conditions. No proprietary or commercial research is done, and
IPC retains the ownership of the results of the research, including the absolute right to
publish the same. The copyrights over the results of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15
The amounts given to IPC, therefore, may not be deemed, it bears stressing as fees or
gross receipts that can be subjected to the three percent contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine
Culture cannot be deemed either as a contract of sale or a contract of a piece of work. "By
the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalent." 16 By its very nature, a contract of sale requires a

transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes the obligation
to transfer ownership as an essential element of the contract of sale, following modern
codes, such as the German and the Swiss. Even in the absence of this express requirement,
however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and
Capitant, have considered such transfer of ownership as the primary purpose of sale. Perez
and Alguer follow the same view, stating that the delivery of the thing does not mean a
mere physical transfer, but is a means of transmitting ownership. Transfer of title or an
agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17
In the case of a contract for a piece of work, "the contractor binds himself to execute a
piece of work for the employer, in consideration of a certain price or compensation. . . . If
the contractor agrees to produce the work from materials furnished by him, he shall
deliver the thing produced to the employer and transfer dominion over the thing, . . ." 18
Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of
ownership is involved and a party necessarily walks away with an object. 19 In the case at
bench, it is clear from the evidence on record that there was no sale either of objects or
services because, as adverted to earlier, there was no transfer of ownership over the
research data obtained or the results of research projects undertaken by the Institute of
Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is
done in pursuance of maintaining Ateneo's university status and not in the course of an
independent business of selling such research with profit in mind. This is clear from a
reading of the regulations governing universities:
31. In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered:
xxx xxx xxx
(e) The institution must undertake research and operate with a competent qualified staff
at least three graduate departments in accordance with the rules and standards for
graduate education. One of the departments shall be science and technology. The
competence of the staff shall be judged by their effective teaching, scholarly publications
and research activities published in its school journal as well as their leadership activities
in the profession.
(f) The institution must show evidence of adequate and stable financial resources and
support, a reasonable portion of which should be devoted to institutional development and
research. (emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due notice and hearing, for failure to
maintain satisfactorily the standards and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and
not the Ateneo is patently erroneous because the former is not an independent juridical
entity that is separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of
Appeals Generally Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body
specifically created for the purpose of reviewing tax cases. Through its expertise, it is
undeniably competent to determine the issue of whether" 21 Ateneo de Manila University
may be deemed a subject of the three percent contractor's tax "through the evidence
presented before it." Consequently, "as a matter of principle, this Court will not set aside
the conclusion reached by . . . the Court of Tax Appeals which is, by the very nature of its
function, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has been an abuse or
improvident exercise of authority . . ." 22 This point becomes more evident in the case
before us where the findings and conclusions of both the Court of Tax Appeals and the
Court of Appeals appear untainted by any abuse of authority, much less grave abuse of
discretion. Thus, we find the decision of the latter affirming that of the former free from
any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted its research activities
at a huge deficit of P1,624,014.00 as shown in its statements of fund and disbursements
for the period 1972 to 1985. 23 In fact, it was Ateneo de Manila University itself that had
funded the research projects of the institute, and it was only when Ateneo could no longer
produce the needed funds that the institute sought funding from outside. The testimony of
Ateneo's Director for Accounting Services, Ms. Leonor Wijangco, provides significant
insight on the academic and nonprofit nature of the institute's research activities done in
furtherance of the university's purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute
of Philippine Culture) that as far as grants from sponsored research it is possible that the
grant sometimes is less than the actual cost. Will you please tell us in this case when the
actual cost is a lot less than the grant who shoulders the additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university, because a university has to
have its own research institute. 24
So, why is it that Ateneo continues to operate and conduct researches through its
Institute of Philippine Culture when it undisputedly loses not an insignificant amount in the
process? The plain and simple answer is that private respondent is not a contractor selling
its services for a fee but an academic institution conducting these researches pursuant to
its commitments to education and, ultimately, to public service. For the institute to have
tenaciously continued operating for so long despite its accumulation of significant losses,
we can only agree with both the Court of Tax Appeals and the Court of Appeals that
"education and not profit is [IPC's] motive for undertaking the research
projects." 25

 WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of
the Court of Appeals is hereby AFFIRMED in full.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-30232 July 29, 1988
LUZON STEVEDORING CORPORATION, petitioner-appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF INTERNAL
REVENUE, respondents-appellees.
H. San Luis & V.L. Simbulan for petitioner-appellant.

PARAS, J.:
This is a petition for review of the October 21, 1968 Decision * of the Court of Tax
Appeals in CTA Case No. 1484, "Luzon Stevedoring Corporation v. Hon. Ramon Oben,
Commissioner, Bureau of Internal Revenue", denying the various claims for tax refund; and
the February 20, 1969 Resolution of the same court denying the motion for
reconsideration.
Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its
tugboats, imported various engine parts and other equipment for which it paid, under
protest, the assessed compensating tax. Unable to secure a tax refund from the
Commissioner of Internal Revenue, on January 2, 1964, it filed a Petition for Review (Rollo,
pp. 14-18) with the Court of Tax Appeals, docketed therein as CTA Case No. 1484, praying
among others, that it be granted the refund of the amount of P33,442.13. The Court of
Tax Appeals, however, in a Decision dated October 21, 1969 (Ibid., pp. 22-27), denied the
various claims for tax refund. The decretal portion of the said decision reads:
WHEREFORE, finding petitioner's various claims for refund amounting to P33,442.13
without sufficient legal justification, the said claims have to be, as they are hereby, denied.
With costs against petitioner.
On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid., pp.
28-34), but the same was denied in a Resolution dated February 20, 1969 (Ibid., p. 35).
Hence, the instant petition.
This Court, in a Resolution dated March 13, 1969, gave due course to the petition (Ibid., p.
40). Petitioner-appellant raised three (3) assignments of error, to wit:
I
The lower court erred in holding that the petitioner-appellant is engaged in business as
stevedore, the work of unloading and loading of a vessel in port, contrary to the evidence on
record.
II

 The lower court erred in not holding that the business in which petitioner-appellant is
engaged, is part and parcel of the shipping industry.
III
The lower court erred in not allowing the refund sought by petitioner-appellant.
The instant petition is without merit.
The pivotal issue in this case is whether or not petitioner's tugboats" can be interpreted to
be included in the term "cargo vessels" for purposes of the tax exemption provided for in
Section 190 of the National Internal Revenue Code, as amended by Republic Act No. 3176.
Said law provides:
Sec. 190. Compensating tax. — ... And Provided further, That the tax imposed in this
section shall not apply to articles to be used by the importer himself in the manufacture or
preparation of articles subject to specific tax or those for consignment abroad and are to
form part thereof or to articles to be used by the importer himself as passenger and/or
cargo vessel, whether coastwise or oceangoing, including engines and spare parts of said
vessel. ....
Petitioner contends that tugboats are embraced and included in the term cargo vessel
under the tax exemption provisions of Section 190 of the Revenue Code, as amended by
Republic Act. No. 3176. He argues that in legal contemplation, the tugboat and a barge
loaded with cargoes with the former towing the latter for loading and unloading of a vessel
in part, constitute a single vessel. Accordingly, it concludes that the engines, spare parts
and equipment imported by it and used in the repair and maintenance of its tugboats are
exempt from compensating tax (Rollo, p. 23).
On the other hand, respondents-appellees counter that petitioner-appellant's "tugboats"
are not "Cargo vessel" because they are neither designed nor used for carrying and/or
transporting persons or goods by themselves but are mainly employed for towing and pulling
purposes. As such, it cannot be claimed that the tugboats in question are used in carrying
and transporting passengers or cargoes as a common carrier by water, either coastwise or
oceangoing and, therefore, not within the purview of Section 190 of the Tax Code, as
amended by Republic Act No. 3176 (Brief for Respondents-Appellees, pp. 45).
This Court has laid down the rule that "as the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and any reduction or dimunition thereof
with respect to its mode or its rate, must be strictly construed, and the same must be
coached in clear and unmistakable terms in order that it may be applied." (84 C.J.S. pp.
659-800), More specifically stated, the general rule is that any claim for exemption from
the tax statute should be strictly construed against the taxpayer (Acting Commissioner of
Customs v. Manila Electric Co. et al., 69 SCRA 469 [1977] and Commissioner of Internal
Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142 [1975]).
As correctly analyzed by the Court of Tax Appeals, in order that the importations in
question may be declared exempt from the compensating tax, it is indispensable that the
requirements of the amendatory law be complied with, namely: (1) the engines and spare
parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the

said passenger and/or cargo vessel must be used in coastwise or oceangoing navigation
(Decision, CTA Case No. 1484; Rollo, p. 24).
As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic Act No.
3176 limit tax exemption from the compensating tax to imported items to be used by the
importer himself as operator of passenger and/or cargo vessel (Ibid., p. 25).
As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows:
A tugboat is a strongly built, powerful steam or power vessel, used for towing and, now, also
used for attendance on vessel. (Webster New International Dictionary, 2nd Ed.)
A tugboat is a diesel or steam power vessel designed primarily for moving large ships to and
from piers for towing barges and lighters in harbors, rivers and canals. (Encyclopedia
International Grolier, Vol. 18, p. 256).
A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier's Law
Dictionary.) (Rollo, p. 24).
Under the foregoing definitions, petitioner's tugboats clearly do not fall under the
categories of passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory
construction that where a provision of law speaks categorically, the need for interpretation
is obviated, no plausible pretense being entertained to justify non-compliance. All that has
to be done is to apply it in every case that falls within its terms (Allied Brokerage Corp. v.
Commissioner of Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-26419, 35
SCRA 270 [1970]).
And, even if construction and interpretation of the law is insisted upon, following another
fundamental rule that statutes are to be construed in the light of purposes to be achieved
and the evils sought to be remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA
544 [1978], it will be noted that the legislature in amending Section 190 of the Tax Code
by Republic Act 3176, as appearing in the records, intended to provide incentives and
inducements to bolster the shipping industry and not the business of stevedoring, as
manifested in the sponsorship speech of Senator Gil Puyat (Rollo, p. 26).
On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found that no
evidence was adduced by petitioner-appellant that tugboats are passenger and/or cargo
vessels used in the shipping industry as an independent business. On the contrary,
petitioner-appellant's own evidence supports the view that it is engaged as a stevedore,
that is, the work of unloading and loading of a vessel in port; and towing of barges
containing cargoes is a part of petitioner's undertaking as a stevedore. In fact, even its
trade name is indicative that its sole and principal business is stevedoring and lighterage,
taxed under Section 191 of the National Internal Revenue Code as a contractor, and not an
entity which transports passengers or freight for hire which is taxed under Section 192 of
the same Code as a common carrier by water (Decision, CTA Case No. 1484; Rollo, p. 25).
Under the circumstances, there appears to be no plausible reason to disturb the findings
and conclusion of the Court of Tax Appeals.
As a matter of principle, this Court will not set aside the conclusion reached by an agency
such as the Court of Tax Appeals, which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an

 expertise on the subject unless there has been an abuse or improvident exercise of
authority (Reyes v. Commissioner of Internal Revenue, 24 SCRA 199 [1981]), which is not
present in the instant case.
PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of the
Court of Tax Appeals is AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-31092 February 27, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS, respondents.

YAP, J.:
The question involved in this petition is whether respondent John Gotamco & Sons, Inc.
should pay the 3% contractor's tax under Section 191 of the National Internal Revenue
Code on the gross receipts it realized from the construction of the World Health
Organization office building in Manila.
The World Health Organization (WHO for short) is an international organization which has
a regional office in Manila. As an international organization, it enjoys privileges and
immunities which are defined more specifically in the Host Agreement entered into
between the Republic of the Philippines and the said Organization on July 22, 1951. Section
11 of that Agreement provides, inter alia, that "the Organization, its assets, income and
other properties shall be: (a) exempt from all direct and indirect taxes. It is understood,
however, that the Organization will not claim exemption from taxes which are, in fact, no
more than charges for public utility services; . . .
When the WHO decided to construct a building to house its own offices, as well as the
other United Nations offices stationed in Manila, it entered into a further agreement with
the Govermment of the Republic of the Philippines on November 26, 1957. This agreement
contained the following provision (Article III, paragraph 2):
The Organization may import into the country materials and fixtures required for the
construction free from all duties and taxes and agrees not to utilize any portion of the
international reserves of the Government.
Article VIII of the above-mentioned agreement referred to the Host Agreement
concluded on July 22, 1951 which granted the Organization exemption from all direct and
indirect taxes.
In inviting bids for the construction of the building, the WHO informed the bidders that
the building to be constructed belonged to an international organization with diplomatic
status and thus exempt from the payment of all fees, licenses, and taxes, and that

therefore their bids "must take this into account and should not include items for such
taxes, licenses and other payments to Government agencies."
The construction contract was awarded to respondent John Gotamco & Sons, Inc. (Gotamco
for short) on February 10, 1958 for the stipulated price of P370,000.00, but when the
building was completed the price reached a total of P452,544.00.
Sometime in May 1958, the WHO received an opinion from the Commissioner of the Bureau
of Internal Revenue stating that "as the 3% contractor's tax is an indirect tax on the
assets and income of the Organization, the gross receipts derived by contractors from
their contracts with the WHO for the construction of its new building, are exempt from
tax in accordance with . . . the Host Agreement." Subsequently, however, on June 3, 1958,
the Commissioner of Internal Revenue reversed his opinion and stated that "as the 3%
contractor's tax is not a direct nor an indirect tax on the WHO, but a tax that is primarily
due from the contractor, the same is not covered by . . . the Host Agreement."
On January 2, 1960, the WHO issued a certification state 91 inter alia,:
When the request for bids for the construction of the World Health Organization office
building was called for, contractors were informed that there would be no taxes or fees
levied upon them for their work in connection with the construction of the building as this
will be considered an indirect tax to the Organization caused by the increase of the
contractor's bid in order to cover these taxes. This was upheld by the Bureau of Internal
Revenue and it can be stated that the contractors submitted their bids in good faith with
the exemption in mind.
The undersigned, therefore, certifies that the bid of John Gotamco & Sons, made under
the condition stated above, should be exempted from any taxes in connection with the
construction of the World Health Organization office building.
On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to
Gotamco demanding payment of P 16,970.40, representing the 3% contractor's tax plus
surcharges on the gross receipts it received from the WHO in the construction of the
latter's building.
Respondent Gotamco appealed the Commissioner's decision to the Court of Tax Appeals,
which after trial rendered a decision, in favor of Gotamco and reversed the Commissioner's
decision. The Court of Tax Appeal's decision is now before us for review on certiorari.
In his first assignment of error, petitioner questions the entitlement of the WHO to tax
exemption, contending that the Host Agreement is null and void, not having been ratified by
the Philippine Senate as required by the Constitution. We find no merit in this contention.
While treaties are required to be ratified by the Senate under the Constitution, less
formal types of international agreements may be entered into by the Chief Executive and
become binding without the concurrence of the legislative body. 1 The Host Agreement
comes within the latter category; it is a valid and binding international agreement even
without the concurrence of the Philippine Senate.
The privileges and immunities granted to the WHO under the Host Agreement have been
recognized by this Court as legally binding on Philippine authorities. 2

Petitioner maintains that even assuming that the Host Agreement granting tax exemption
to the WHO is valid and enforceable, the 3% contractor's tax assessed on Gotamco is not
an "indirect tax" within its purview. Petitioner's position is that the contractor's tax "is in
the nature of an excise tax which is a charge imposed upon the performance of an act, the
enjoyment of a privilege or the engaging in an occupation. . . It is a tax due primarily and
directly on the contractor, not on the owner of the building. Since this tax has no bearing
upon the WHO, it cannot be deemed an indirect taxation upon it."
We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said
the respondent court:
In context, direct taxes are those that are demanded from the very person who, it is
intended or desired, should pay them; while indirect taxes are those that are demanded in
the first instance from one person in the expectation and intention that he can shift the
burden to someone else. (Pollock vs. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law.
Ed. 759.) The contractor's tax is of course payable by the contractor but in the last
analysis it is the owner of the building that shoulders the burden of the tax because the
same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is
an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the
petitioner, the latter can shift its burden on the WHO. In the last analysis it is the WHO
that will pay the tax indirectly through the contractor and it certainly cannot be said that
'this tax has no bearing upon the World Health Organization.
Petitioner claims that under the authority of the Philippine Acetylene Company versus
Commissioner of Internal Revenue, et al., 3 the 3% contractor's tax fans directly on
Gotamco and cannot be shifted to the WHO. The Court of Tax Appeals, however, held that
the said case is not controlling in this case, since the Host Agreement specifically exempts
the WHO from "indirect taxes." We agree. The Philippine Acetylene case involved a tax on
sales of goods which under the law had to be paid by the manufacturer or producer; the
fact that the manufacturer or producer might have added the amount of the tax to the
price of the goods did not make the sales tax "a tax on the purchaser." The Court held that
the sales tax must be paid by the manufacturer or producer even if the sale is made to
tax-exempt entities like the National Power Corporation, an agency of the Philippine
Government, and to the Voice of America, an agency of the United States Government.
The Host Agreement, in specifically exempting the WHO from "indirect taxes,"
contemplates taxes which, although not imposed upon or paid by the Organization directly,
form part of the price paid or to be paid by it. This is made clear in Section 12 of the Host
Agreement which provides:
While the Organization will not, as a general rule, in the case of minor purchases, claim
exemption from excise duties, and from taxes on the sale of movable and immovable
property which form part of the price to be paid, nevertheless, when the Organization is
making important purchases for official use of property on which such duties and taxes
have been charged or are chargeable the Government of the Republic of the Philippines

shall make appropriate administrative arrangements for the remission or return of the
amount of duty or tax. (Emphasis supplied).
The above-quoted provision, although referring only to purchases made by the WHO,
elucidates the clear intention of the Agreement to exempt the WHO from "indirect"
taxation.
The certification issued by the WHO, dated January 20, 1960, sought exemption of the
contractor, Gotamco, from any taxes in connection with the construction of the WHO
office building. The 3% contractor's tax would be within this category and should be
viewed as a form of an "indirect tax" On the Organization, as the payment thereof or its
inclusion in the bid price would have meant an increase in the construction cost of the
building.
Accordingly, finding no reversible error committed by the respondent Court of Tax
Appeals, the appealed decision is hereby affirmed.
SO ORDERED.