G.R. No. L-27044 and L-27452, June 30, 1975
THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAX APPEALS, respondents. ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, respondent.

FACTS

Engineering Equipment and Supply Company (Engineering), a domestic corporation engaged in designing and installing central air conditioning systems, was denounced for tax evasion. Following a raid, the Bureau of Internal Revenue (BIR) assessed it for deficiency advance sales tax, alleging its imported air conditioning units and parts were subject to a 30% tax under Section 185(m) of the Tax Code as manufactured articles sold at retail. The assessment, later revised to include surcharges, was contested by Engineering, which argued it was a contractor subject only to a 3% contractor’s tax under Section 191.
The Court of Tax Appeals (CTA) modified the BIR’s decision. It held Engineering was a contractor, not a manufacturer or retail dealer, and thus exempt from the 30% manufacturers sales tax. However, the CTA found Engineering liable for a 30% compensating tax under Section 190 on its importations, plus a 25% surcharge, totaling P174,141.62. Both parties appealed: the Commissioner arguing for the higher manufacturers tax, and Engineering contesting the compensating tax assessment.

ISSUE

The primary issue is whether Engineering is liable for the 30% manufacturers sales tax on its importations as a retail dealer or, alternatively, for the 30% compensating tax as determined by the CTA. Subsidiary issues involve the correctness of the 25% surcharge and the prescriptive period for assessment.

RULING

The Supreme Court affirmed the CTA decision with modification on the surcharge. The Court upheld the finding that Engineering is a contractor. Its business involves the entire process of design, fabrication, and installation of central air conditioning systems pursuant to specific contracts. The imported components lose their identity as separate articles and become integral parts of the completed system, which is a real property improvement. Therefore, Engineering is not a manufacturer or retail seller of the air conditioning units themselves, making the 30% sales tax under Section 185(m) inapplicable.
However, the Court sustained the imposition of the 30% compensating tax under Section 190. This tax applies to persons importing articles for their own use, not for resale. Since Engineering imported the components for use in its contracting business and not for sale as separate items, it correctly fell under the compensating tax regime, which is designed to equalize the tax burden between locally manufactured and imported articles. The Court rejected Engineering’s claim of prescription, finding the ten-year period for assessment applied due to a prima facie showing of fraud from its failure to properly declare the imports. Nevertheless, the Court deleted the 25% surcharge because the final compensating tax assessment was based on a recomputation made after Engineering had appealed to the CTA, constituting a new assessment issued beyond the prescriptive period. Thus, Engineering is liable only for the basic compensating tax.