G.R. No. 71122, 25 March 1988, 159 SCRA 199


Arnoldus Carpentry Shop, Inc. is a domestic corporation which has been in existence since 1960. It has for its secondary purpose the “preparing, processing, buying, selling, exporting, importing, manufacturing, trading and dealing in cabinet shop products, wood and metal home and office furniture, cabinets, doors, windows, etc., including their component parts and materials, of any and all nature and description”. These furniture, cabinets and other woodwork were sold locally and exported abroad. For this business venture, private respondent kept samples or models of its woodwork on display from where its customers may refer to when placing their orders.

The examiners from BIR who conducted an investigation on the company’s tax liabilities reported that subject corporation should be considered a contractor and not a manufacturer since the corporation renders service in the course of an independent occupation representing the will of his employer only as to the result of his work, and not as to the means by which it is accomplished. Hence, in the computation of the percentage tax, the 3% contractor’s tax should be imposed instead of the 7% manufacturer’s tax. However, responded company holds that the carpentry shop is a manufacturer and therefore entitled to tax exemption on its gross export sales under Section 202 (e) of the National Internal Revenue Code. CIR rendered its decision classifying the respondent as contractor which was in turn reversed by the CTA. Hence, this appeal.


Whether private respondent is manufacturer.


Yes. Private respondent is a “manufacturer” as defined in the Tax Code and not a “contractor” under Section 205(e) of the Tax Code as petitioner would have this Court decide.

(a) Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines “independent contractors” as:… persons (juridical and 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. (Emphasis supplied.) Private respondent’s business does not fall under this definition.

Petitioner contends that the fact that private respondent “designs and makes samples or models that are ‘displayed’ or presented or ‘submitted’ to prospective buyers who ‘might choose’ therefrom” signifies that what private respondent is selling is a kind of service its shop is capable of rendering in terms of woodwork skills and craftsmanship. He further stresses the point that if there are no orders placed for goods as represented by the sample or model, the shop does not produce anything; on the other hand, if there are orders placed, the shop goes into fall production to fill up the quantity ordered.

The facts of the case do not support petitioner’s claim. Petitioner is ignoring the fact that private respondent sells goods which it keeps in stock and not services

*Case digest by Paul Jason G. Acasio, JD-IV, Andres Bonifacio Law School, SY 2019-2020