Commissioner of Internal Revenue v. Ateneo De Manila University

[CA-G.R. SP No. 31790. April 27, 1994.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ATENEO DE MANILA UNIVERSITY and THE COURT OF TAX APPEALS , respondents . D E C I S I O N GARCIA , J p : Thru this petition for review, petitioner Commissioner of Internal Revenue seeks to nullify and set aside the decision dated July 12, 1993 of the public respondent Court of Tax Appeals cancelling the assessment for deficiency contractor's tax issued by the petitioner against private respondent, Ateneo De Manila University. The facts are as follows: 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 research 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. 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 cancelling 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, 1983, 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. 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 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. 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 if Investment under R.A. No. 5186; b. Individuals subject to occupation tax under Section 12 of the Local Tax Code (under the old Section 191, 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 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. We do not agree. It is well-settled that a "contractor" is a person who, in the pursuit of an independent business, undertakes to do a specific piece of work or job for other persons, using his own means and methods without submitting himself to control as to petty details; and that the true test of a "contractor" is that he renders the service in the course of an independent occupation, representing the will of his employer only as to the means by which it is accomplished (Luzon Stevedoring Co. vs. Trinidad, 43 Phil. 803, Commissioner of Internal Revenue vs. Court of Appeals, 143 SCRA 49; Commissioner of Internal Revenue vs. Engineering Equipment and Supply Company, 64 SCRA 590; La Carlot Sugar Central vs. Trinidad, 43 Phil. 816). It is equally settled that the term "business" is restricted to activities or affairs where profit is the purpose or livelihood is the motive; or that which occupies the time, attention and labor of men for the purpose of livelihood or profit (Commissioner of Internal Revenue vs. Club Filipino vs. Manila Lodge, 105 Phil. 983). 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 in 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 government 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 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. Lastly, settled is the rule that statutes levying taxes or duties are to be construed strongly against the Government and in favor of the subjects or citizens, because burdens are not imposed or presumed to be imposed beyond what the statute expressly and clearly declares (Commissioner of Internal Revenue vs. Court of Appeals, 204 SCRA 182). Here, Section 205 of the tax Code does not expressly and clearly declare that the research activity undertaken by the private respondent through the IPC is subject to contractor's tax. Thus, such vagueness or ambiguity should be construed strongly against petitioner and in favor of private respondent. WHEREFORE, the instant petition is hereby DISMISSED and the decision under review AFFIRMED. No costs. SO ORDERED. Ramirez and Hofilea, JJ., concur.