CIR V CA G.R. No. 115349. April 18, 1997

FACTS The Institute of Philippine Culture (IPC), is auxiliary unit of private respondent ATENEO DE MANILA UNIVERSITY and accepts sponsorships for its research activities from international organizations, private foundations and government agencies. Private respondent received from petitioner Commissioner of Internal Revenue (CIR) demand letters for alleged deficiency contractors tax and alleged deficiency income tax, 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. 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. 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 reducing the assessment for deficiency contractors tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest. The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for review. ISSUE Is Ateneo de Manila University, through its auxiliary unit or branch -the Institute of Philippine Culture- performing the work of an independent contractor and, thus, subject to the three percent contractors tax levied by then Section 205 of the National Internal Revenue Code? RULING The petition is unmeritorious. Section 205 of the National Internal Revenue Code provides that 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. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. 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 therefrom 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 petitioner’s position. After reviewing the records of this case, court found 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. 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. 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. 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.