COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION, respondent.
Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year ending March 1985. In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with the construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial Development Estate.
On March 1, 1986, petitioner’s revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractor’s and commercial broker’s taxes. Respondent questioned this assessment in a letter dated June 5, 1986.
Petitioner found that the NDC and Philphos contracts were made on a “turn-key” basis and that the gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes.
Issue: Whether or not respondent is liable to pay the income, branch profit remittance, and contractor’s taxes assessed by petitioner.
Held:
A contractor’s tax is imposed in the National Internal Revenue Code (NIRC) as follows:
“Sec. 205. Contractors, proprietors or operators of dockyards, and others.—A contractor’s tax of four percent of the gross receipts is hereby imposed on proprietors or operators of the following business establishments and/or persons engaged in the business of selling or rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566;
(q) Other independent contractors. The term “independent contractors” includes persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under 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. It does 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.
Under the afore-quoted provision, an independent contractor is a person 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 word “contractor” refers to a person who, in the pursuit of independent business, undertakes to do a specific job or piece of work for other persons, using his own means and methods without submitting himself to control as to the petty details.
A contractor’s tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.
In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the two subject contracts.
Clearly, the service of “design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination…”of the two projects involved two taxing jurisdictions. These acts occurred in two countries – Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor’s tax.
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