BIR Ruling

May 2, 1974 The Commissioner Bureau of Public Highways Manila S i r : This refers to your letter dated April 1, 1974 stating that PHILROCK has a contract with that Bureau for the construction of Cotabato-Digos Road in Mindanao; that at the commencement of the work in the said project, with PHILROCK fully mobilized and proceeding with the work, armed hostilities falling under the Special Risk Provision of Article 65 of the Proposal Book in the Contract broke up at the project site, and by reason of which that Bureau issued a suspension of work order pursuant to Clause 40(1) of the same Proposal Book; that PHILROCK then, in order not to prejudice the work thereat was directed to remobilize at another site; that obviously, damages or losses were incurred by PHILROCK in its operation; that Bureau pursuant to pertinent provisions of the contract reimbursed PHILROCK as preparation for damages sustained by them; that in paying this preparation for losses or damages to the contractor; PHILROCK; an amount equivalent to the 3% contractor's tax was deducted by that Bureau; and that the contractor immediately filed a request for reconsideration asserting that this payment does not partake the nature of gross receipts under the provisions of Section 191 of the National Internal Revenue Code. Under the foregoing facts, you would like to be clarified whether the reparation paid by the government for loss or damages under the Special Risk constitutes part of the contract price and should be subject to the 3% contractor's tax. In reply, I have the honor to inform you that the Special Risk Provision is a part of the contract entered into by and between that Bureau and PHILROCK for the construction of the Cotabato-Digos Road in Mindanao. Inasmuch as the contractor has a perfect right to name the price of its services in the contract, the amount paid to it pursuant to the terms of the contract representing damages sustained by the contractor; constitutes a part of his gross receipts. Accordingly, the same is subject to the 3% contractor's tax prescribed in Section 191 of the Tax Code. aisa dc Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue TAN-1601-593-5