CIR v. Arnoldus Carpentry Shop G.R. No. 71122 March 25, 1988 Tax Exemption


Private respondent Arnoldus Carpentry Shop, Inc., a domestic corporation which has been in existence since 1960, has for its secondary purpose the “preparing, processing, buying, selling, exporting, importing, manufacturing, trading and dealing in furniture, cabinets and other woodwork locally and abroad.

Private respondent kept samples or models of its woodwork on display from where its customers may refer to when placing their orders.

Sometime in March 1979, the examiners of the petitioner Commissioner of Internal Revenue conducted an investigation of the business tax liabilities of private respondent. 

As per the examination, the total gross sales of private respondent for the year 1977 from both its local and foreign dealings amounted to P5,162,787.59. From this amount, private respondent reported in its quarterly percentage tax returns P2,471,981.62 for its gross local sales. The balance of P2,690,805.97, which is 52% of the total gross sales, was considered as its gross export sales.

The BIR examiners made a report to the Commissioner classifying private respondent as an “other independent contractor” and not a manufacturer. 

Hence, in the computation of the percentage tax, the 3% contractor’s tax should be imposed instead of the 7% manufacturer’s tax. 

As a result thereof, the examiners assessed private respondent for deficiency tax in the amount of EIGHTY EIGHT THOUSAND NINE HUNDRED SEVENTY TWO PESOS AND TWENTY THREE CENTAVOS ( P88,972.23 ). 

Later, on January 31, 1981, private respondent received a letter/notice of tax deficiency assessment inclusive of charges and interest for the year 1977 in the amount of ONE HUNDRED EIGHT THOUSAND SEVEN HUNDRED TWENTY PESOS AND NINETY TWO CENTAVOS ( P 108,720.92, as a consequence of the 3% tax imposed on private respondent’s gross export sales which, in turn, resulted from the examiners’ finding that categorized private respondent as a contractor.

Private respondent filed a protest with the petitioner maintaining that the carpentry shop is a manufacturer and therefor entitled to tax exemption on its gross export sales under Section 202 (e) of the NIRC. 

The CIR rendered a final decision finding the petitioner a contractor and not a manufacturer.

On July 22, 1981, private respondent appealed to the Court of Tax Appeals alleging that the decision of the Commissioner was contrary to law and the facts of the case.

The CTA rendered the questioned decision holding that private respondent was a manufacturer thereby reversing the decision of the petitioner.


Whether the private respondent is a manufacturer and not a contractor and therefore not liable for deficiency contractor’s tax, inclusive of surcharge and interest, for the year 1977.


The petition is without merit.

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) xxx 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. 

Private respondent’s business does not fall under this definition.

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.

This Court finds no reason to disagree with the Tax Court’s finding of fact. It has been consistently held that while the decisions of the Court of Tax Appeals are appealable to the Supreme Court, the former’s finding of fact are entitled to the highest respect. The factual findings can only be disturbed on the part of the tax court.

As the Court of Tax Appeals did not err in holding that private respondent is a “manufacturer,” then private respondent is entitled to the tax exemption under See. 202 (d) and (e) now Sec. 167 (d) and (e)] of the Tax Code which states:

Sec. 202. Articles not subject to percentage tax on sales. The following shall be exempt from the percentage taxes imposed in Sections 194, 195, 196, 197, 198, 199, and 201:

xxx xxx xxx

(d) Articles shipped or exported by the manufacturer or producer, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the articles so exported.

(e) Articles sold by “registered export producers” to (1) other” registered export producers” (2) “registered export traders’ or (3) foreign tourists or travelers, which are considered as “export sales.”

The law is clear on this point. It is conceded that as a rule, as argued by petitioner, any claim for tax exemption from tax statutes is strictly construed against the taxpayer and it is contingent upon private respondent as taxpayer to establish a clear right to tax exemption. 

Tax exemptions are strictly construed against the grantee and generally in favor of the taxing authority; they are looked upon with disfavor. They are held strictly against the taxpayer and if expressly mentioned in the law, must at least be within its purview by clear legislative intent.

Conversely therefore, if there is an express mention or if the taxpayer falls within the purview of the exemption by clear legislative intent, then the rule on strict construction will not apply. 

Clearly, the ‘latter falls with the term ‘manufacturer’ mentioned in Art. 202 (d) and (e) of the Tax Code. As the only question raised by petitioner in relation to this tax exemption claim by private respondent is the classification of the latter as a manufacturer, this Court affirms the holding of respondent Tax Court that private respondent is entitled to the percentage tax exemption on its export sales.

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