COMMISSIONER OF INTERNAL REVENUE (CIR) vs.

ARNOLDUS CARPENTRY
SHOP, INC. and COURT OF TAX APPEALS (CTA)
GR 71122 March 25, 1988
FACTS:
Respondent Arnoldus Carpentry Shop, Inc. is a domestic corporation existing since
1960. It has for its 2nd 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, Arnoldus Carpentry kept samples or models of its woodwork
on display where customers may refer to when ordering.
In 1979, the examiners of petitioner CIR conducted an investigation of the business
tax liabilities of Arnoldus Carpentry. Based on such examination, BIR examiners
reported to the Commissioner classifying Arnoldus Carpentry as an "other
independent contractor", and not a manufacturer under Sec. 205 (16) [now Sec.
169 (q)] of the Tax Code.
According to the CIR, Arnoldus Carpentry 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. They are considered
a contractor, and not a manufacturer because records show that Arnoldus Carpentry
manufacture woodworks only upon previous order from supposed manufacturers and
only in accordance with the latters own design, model number, color, etc.
Hence, in the computation of the percentage tax, the 3% contractor's tax should be
imposed instead of the 7% manufacturer's tax. Subsequently, a tax deficiency of
P108,720.92 became the consequence of the 3% tax imposed on Arnoldus
Carpentrys gross export sales as a contractor, as categorized by the BIR examiners.
CTA ruled in favor of Arnoldus Carpentry hence the current petition for review.
ISSUE: W/N the contracts entered into by Arnoldus Carpentry Shop is a contract for
a piece of work or a contract of sale?
RULING:
Arnoldus Carpentry Shop entered into contracts of sale, as a manufacturer.
CIR is ignoring the fact that Arnoldus Carpentry sells goods which it keeps in stock
and not services. CIR alleged that what exists prior to any order is but the sample
model only, nothing more, nothing less and the ordered quantity would never have
come into existence but for the particular order as represented by the sample or
model
Art 1467 of the NCC states that a contract for the delivery at a certain price of an
article which the vendor in the ordinary course of his business manufactures or
procures for the general market, whether the same is on hand at the time or not, is a
contract of sale, but if the goods are to be manufactured specially for the customer
and upon his special order, and not for the general market, it is a contract for a
piece of work.

The test that determines whether the contract is one of work or ofsale is whether the
thing has been manufactured specially for the customer and upon his special
order. Thus, if the thing is specially done at the order of another, this is a contract for
a piece of work. If, on the other hand, the thing is manufactured or procured for
the general market in the ordinary course of one's business, it is a contract of sale.
One who has ready for the sale to the general public finished furniture is a
manufacturer, and the mere fact that he did not have on hand a particular piece or
pieces of furniture ordered does not make him a contractor only.
Under Art 1458, when the vendor enters into a contract for the delivery of an article
which in the ordinary course of his business he manufactures or procures for the
general market at a price certain, such contract is one of sale even if at the time of
contracting he may not have such article on hand. Such articles fall within the
meaning of "future goods" mentioned in Art 1462 par1.
The CTA ruled on the fact that Arnoldus Carpentry kept models of its products to
indicate that these products were for sale to the general public and not for special
orders, showing the habituality of the production of the goods involved for the
general public.
In the case at bar, there are attendant facts herein to show Arnoldus Carpentrys
habituality of the production for the general public. Claims and records show that
Arnoldus Carpentry had a ready stock of its shop products for sale to its foreign and
local buyers. As a matter of fact, the purchase orders from its foreign buyers showed
that they ordered by referring to the models designed by Arnoldus Carpentry. Even
purchases by local buyers for television cabinets were byorders for existing models.
For its woodwork products, these were manufactured without previous orders.
Samples were displayed, and if in stock, were available for immediate sale to local
and foreign customers.
The Tax Court did not err in classifying Arnoldus Carpentry as a "manufacturer".
Clearly, the latter falls with the term manufacturer mentioned in Art. 202 Sec. 187
[now Sec. 157] of the Tax Code. The SC affirms the holding of Tax Court that
Arnoldus Carpentry is entitled to the percentage tax exemption on its export sales.
SC DENIED petition.
ANDRES QUIROGA vs PARSONS HARDWARE CO.,
G.R. L-11491 August 23, 1918
FACTS: On January 24, 1911, a contract was entered into by and between Andres
Quiroga and J. Parsons, to whose rights and obligations the present defendant later
subrogated itself. The contract stipulated that Don Andres Quiroga grants the
exclusive right to sell his beds in the Visayan Islands to J. Parsons.
Quiroga files a case against Parsons for allegedly violating the following stipulations:
not to sell the beds at higher prices than those of the invoices; to have an open
establishment in Iloilo; itself to conduct the agency; to keep the beds on public
exhibition, and to pay for the advertisement expenses for the same; and to order the
beds by the dozen and in no other manner. With the exception of the obligation on
the part of the defendant to order the beds by the dozen and in no other manner,
none of the obligations imputed to the defendant in the two causes of action are
expressly set forth in the contract. But the plaintiff alleged that the defendant was his

agent for the sale of his beds in Iloilo, and that said obligations are implied in a
contract of commercial agency. The whole question, therefore, reduced itself to a
determination as to whether the defendant, byreason of the contract hereinbefore
transcribed, was a purchaser or an agent of the plaintiff for the sale of his beds.
ISSUE: Whether the contract is a contract of agency or of sale.
RULING:
In order to classify a contract, due regard must be given to its essential clauses. In
the contract in question, what was essential, as constituting its cause and subject
matter, is that the plaintiff was to furnish the defendant with the beds which the latter
might order, at the price stipulated, and that the defendant was to pay the price in the
manner stipulated. The price agreed upon was the one determined by the plaintiff for
the sale of these beds in Manila, with a discount of from 20 to 25 per cent, according
to their class. Payment was to be made at the end of sixty days, or before, at the
plaintiff's request, or in cash, if the defendant so preferred, and in these last two
cases an additional discount was to be allowed for prompt payment. These are
precisely the essential features of a contract of purchase and sale. There was the
obligation on the part of the plaintiff to supply the beds, and, on the part of the
defendant, to pay their price. These features exclude the legal conception of an
agency or order to sell whereby the mandatory or agent received the thing to
sell it, and does not pay its price, but delivers to the principal the price he
obtains from the sale of the thing to a third person, and if he does not succeed
in selling it, he returns it. By virtue of the contract between the plaintiff and the
defendant, the latter, on receiving the beds, was necessarily obliged to pay their price
within the term fixed, without any other consideration and regardless as to whether
he had or had not sold the beds.
It would be enough to hold, as we do, that the contract by and between the defendant
and the plaintiff is one of purchase and sale, in order to show that it was not one
made on the basis of a commission on sales, as the plaintiff claims it was, for these
contracts are incompatible with each other. But, besides, examining the clauses of
this contract, none of them is found that substantially supports the plaintiff's
contention. Not a single one of these clauses necessarily conveys the idea of an
agency. The words commission on sales used in clause (A) of article 1 mean nothing
else, as stated in the contract itself, than a mere discount on the invoice price. The
word agency, also used in articles 2 and 3, only expresses that the defendant was
the only one that could sell the plaintiff's beds in the Visayan Islands. With regard to
the remaining clauses, the least that can be said is that they are not incompatible
with the contract of purchase and sale.