COMMISSIONER OF INTERNAL REVENUE

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY
G.R. No. 115349. April 18, 1997
Facts:

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 contractors
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.

The parts of then Section 205 of the National Internal Revenue Code germane to the case:

SEC. 205. Contractors, proprietors or operators of dockyards, and others. -- A contractors tax of
three per centum of the gross receipts is hereby imposed on the following:

(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;

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.

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 contractors 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 contractors 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 cancelling the contractors tax
assessment in the amount of P46,516.41 exclusive of surcharge and interest for the fiscal year ended March 31,
1978. Said decision was affirmed by the CA.

Hence, this petition for review.

Issue;
 1) Whether private respondent falls under the purview of independent contractor and therefore subject to 3%
contractors tax under Section 205 of the Tax Code?

Ruling:

1. NO. The SC held that 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 contractors tax on Ateneos 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 there from 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 petitioners position. This is the main line of reasoning of the
Court of Tax Appeals in its decision, which was affirmed by the CA.

After reviewing the records of this case, we find no evidence that Ateneos 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. x x x [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.

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show
that Ateneos 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, petitioners 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:

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 respondents compliance with the requirement of Section
123 of the National Internal Revenue Code providing for the exemption of such gifts to an
educational institution.

Therefore, it is clear that the funds received by Ateneos 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 IPCs
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 IPCs 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.[ 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 contractors
tax

It is also well to stress that the questioned transactions of Ateneos Institute of Philippine Culture cannot
be deemed either as a contract of sale or a contract for 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. 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. 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. x x x 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. x x x. 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. 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 Ateneos 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: