sales cases first batch

8/21/2019 Sales Cases First Batch

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Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-11491 August 23, 1918

ANDRES QUIROGA, plaintiff-appellant,vs.PARSONS HARDWARE CO., defendant-appellee.

Alfredo Chicote, Jose Arnaiz and Pascual B. Azanza for appellant.Crossfield & O'Brien for appellee.

AVANCEA,J.:

On January 24, 1911, in this city of manila, a contract in the following tenor wasentered into by and between the plaintiff, as party of the first part, and J. Parsons(to whose rights and obligations the present defendant later subrogated itself), asparty of the second part:

CONTRACT EXECUTED BY AND BETWEEN ANDRES QUIROGA AND J.PARSONS, BOTH MERCHANTS ESTABLISHED IN MANILA, FOR THEEXCLUSIVE SALE OF "QUIROGA" BEDS IN THE VISAYAN ISLANDS.

ARTICLE 1. Don Andres Quiroga grants the exclusive right to sell his beds inthe Visayan Islands to J. Parsons under the following conditions:

(A) Mr. Quiroga shall furnish beds of his manufacture to Mr. Parsons for thelatter's establishment in Iloilo, and shall invoice them at the same price hehas fixed for sales, in Manila, and, in the invoices, shall make and allowanceof a discount of 25 per cent of the invoiced prices, as commission on thesale; and Mr. Parsons shall order the beds by the dozen, whether of thesame or of different styles.

(B) Mr. Parsons binds himself to pay Mr. Quiroga for the beds received,within a period of sixty days from the date of their shipment.

(C) The expenses for transportation and shipment shall be borne by M.Quiroga, and the freight, insurance, and cost of unloading from the vessel atthe point where the beds are received, shall be paid by Mr. Parsons.

(D) If, before an invoice falls due, Mr. Quiroga should request its payment,said payment when made shall be considered as a prompt payment, and assuch a deduction of 2 per cent shall be made from the amount of the invoice.


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The same discount shall be made on the amount of any invoice which Mr.Parsons may deem convenient to pay in cash.

(E) Mr. Quiroga binds himself to give notice at least fifteen days before handof any alteration in price which he may plan to make in respect to his beds,and agrees that if on the date when such alteration takes effect he shouldhave any order pending to be served to Mr. Parsons, such order shall enjoythe advantage of the alteration if the price thereby be lowered, but shall notbe affected by said alteration if the price thereby be increased, for, in thislatter case, Mr. Quiroga assumed the obligation to invoice the beds at theprice at which the order was given.

(F) Mr. Parsons binds himself not to sell any other kind except the "Quiroga"beds.

ART. 2. In compensation for the expenses of advertisement which, for thebenefit of both contracting parties, Mr. Parsons may find himself obliged to

make, Mr. Quiroga assumes the obligation to offer and give the preference toMr. Parsons in case anyone should apply for the exclusive agency for anyisland not comprised with the Visayan group.

ART. 3. Mr. Parsons may sell, or establish branches of his agency for the saleof "Quiroga" beds in all the towns of the Archipelago where there are noexclusive agents, and shall immediately report such action to Mr. Quiroga forhis approval.

ART. 4. This contract is made for an unlimited period, and may be terminatedby either of the contracting parties on a previous notice of ninety days to the

other party.

Of the three causes of action alleged by the plaintiff in his complaint, only two ofthem constitute the subject matter of this appeal and both substantially amount tothe averment that the defendant violated the following obligations: not to sell thebeds at higher prices than those of the invoices; to have an open establishment inIloilo; itself to conduct the agency; to keep the beds on public exhibition, and topay for the advertisement expenses for the same; and to order the beds by thedozen and in no other manner. As may be seen, with the exception of the obligationon the part of the defendant to order the beds by the dozen and in no othermanner, none of the obligations imputed to the defendant in the two causes ofaction are expressly set forth in the contract. But the plaintiff alleged that thedefendant was his agent for the sale of his beds in Iloilo, and that said obligationsare implied in a contract of commercial agency. The whole question, therefore,reduced itself to a determination as to whether the defendant, by reason of thecontract hereinbefore transcribed, was a purchaser or an agent of the plaintiff forthe sale of his beds.

In order to classify a contract, due regard must be given to its essential clauses. Inthe contract in question, what was essential, as constituting its cause and subject


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matter, is that the plaintiff was to furnish the defendant with the beds which thelatter might order, at the price stipulated, and that the defendant was to pay theprice in the manner stipulated. The price agreed upon was the one determined bythe plaintiff for the sale of these beds in Manila, with a discount of from 20 to 25per cent, according to their class. Payment was to be made at the end of sixtydays, 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 promptpayment. These are precisely the essential features of a contract of purchase andsale. 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 legalconception of an agency or order to sell whereby the mandatory or agent receivedthe thing to sell it, and does not pay its price, but delivers to the principal the pricehe obtains from the sale of the thing to a third person, and if he does not succeedin selling it, he returns it. By virtue of the contract between the plaintiff and thedefendant, the latter, on receiving the beds, was necessarily obliged to pay theirprice within the term fixed, without any other consideration and regardless as towhether he had or had not sold the beds.

It would be enough to hold, as we do, that the contract by and between thedefendant and the plaintiff is one of purchase and sale, in order to show that it wasnot 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 theclauses of this contract, none of them is found that substantially supports theplaintiff's contention. Not a single one of these clauses necessarily conveys the ideaof an agency. The words commission on sales used in clause (A) of article 1 meannothing else, as stated in the contract itself, than a mere discount on the invoiceprice. The word agency, also used in articles 2 and 3, only expresses that thedefendant 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 thatthey are not incompatible with the contract of purchase and sale.

The plaintiff calls attention to the testimony of Ernesto Vidal, a former vice-president of the defendant corporation and who established and managed thelatter's business in Iloilo. It appears that this witness, prior to the time of histestimony, had serious trouble with the defendant, had maintained a civil suitagainst it, and had even accused one of its partners, Guillermo Parsons, offalsification. He testified that it was he who drafted the contract Exhibit A, and,when questioned as to what was his purpose in contracting with the plaintiff,replied that it was to be an agent for his beds and to collect a commission on sales.However, according to the defendant's evidence, it was Mariano Lopez Santos, a

director of the corporation, who prepared Exhibit A. But, even supposing thatErnesto Vidal has stated the truth, his statement as to what was his idea incontracting with the plaintiff is of no importance, inasmuch as the agreementscontained in Exhibit A which he claims to have drafted, constitute, as we have said,a contract of purchase and sale, and not one of commercial agency. This onlymeans that Ernesto Vidal was mistaken in his classification of the contract. But itmust be understood that a contract is what the law defines it to be, and not what itis called by the contracting parties.


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The plaintiff also endeavored to prove that the defendant had returned beds that itcould not sell; that, without previous notice, it forwarded to the defendant the bedsthat it wanted; and that the defendant received its commission for the beds sold bythe plaintiff directly to persons in Iloilo. But all this, at the most only shows that, onthe part of both of them, there was mutual tolerance in the performance of thecontract in disregard of its terms; and it gives no right to have the contractconsidered, not as the parties stipulated it, but as they performed it. Only the actsof the contracting parties, subsequent to, and in connection with, the execution ofthe contract, must be considered for the purpose of interpreting the contract, whensuch interpretation is necessary, but not when, as in the instant case, its essentialagreements are clearly set forth and plainly show that the contract belongs to acertain kind and not to another. Furthermore, the return made was of certain brassbeds, and was not effected in exchange for the price paid for them, but was forother beds of another kind; and for the letter Exhibit L-1, requested the plaintiff'sprior consent with respect to said beds, which shows that it was not considered thatthe defendant had a right, by virtue of the contract, to make this return. As regardsthe shipment of beds without previous notice, it is insinuated in the record that

these brass beds were precisely the ones so shipped, and that, for this very reason,the plaintiff agreed to their return. And with respect to the so-called commissions,we have said that they merely constituted a discount on the invoice price, and thereason for applying this benefit to the beds sold directly by the plaintiff to personsin Iloilo was because, as the defendant obligated itself in the contract to incur theexpenses of advertisement of the plaintiff's beds, such sales were to be consideredas a result of that advertisement.

In respect to the defendant's obligation to order by the dozen, the only oneexpressly imposed by the contract, the effect of its breach would only entitle theplaintiff to disregard the orders which the defendant might place under other

conditions; but if the plaintiff consents to fill them, he waives his right and cannotcomplain for having acted thus at his own free will.

For the foregoing reasons, we are of opinion that the contract by and between theplaintiff and the defendant was one of purchase and sale, and that the obligationsthe breach of which is alleged as a cause of action are not imposed upon thedefendant, either by agreement or by law.

The judgment appealed from is affirmed, with costs against the appellant. Soordered.

Arellano, C.J., Torres, Johnson, Street and Malcolm, JJ.,concur


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Manila

FIRST DIVISION

G.R. No. L-27044 June 30, 1975

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.ENGINEERING EQUIPMENT AND SUPPLY COMPANY AND THE COURT OF TAXAPPEALS, respondents.

G.R. No. L-27452 June 30, 1975

ENGINEERING EQUIPMENT AND SUPPLY COMPANY, petitioner,vs.THE COMMISSIONER OF INTERNAL REVENUE AND THE COURT OF TAXAPPEALS, respondent.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor GeneralFelicisimo R. Rosete, Solicitor Lolita O. Gal-lang, and Special Attorney Gemaliel H.Montalino for Commissioner of Internal Revenue, etc.

Melquides C. Gutierrez, Jose U. Ong, Juan G. Collas, Jr., Luis Ma. Guerrero and J.R.Balonkita for Engineering and Supply Company.

ESGUERRA,J.:

Petition for review on certiorari of the decision of the Court of Tax Appeals in CTACase No. 681, dated November 29, 1966, assessing a compensating tax ofP174,441.62 on the Engineering Equipment and Supply Company.

As found by the Court of Tax Appeals, and as established by the evidence onrecord, the facts of this case are as follows:

Engineering Equipment and Supply Co. (Engineering for short), a domesticcorporation, is an engineering and machinery firm. As operator of an integratedengineering shop, it is engaged, among others, in the design and installation ofcentral type air conditioning system, pumping plants and steel fabrications. (Vol. Ipp. 12-16 T.S.N. August 23, 1960)


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On July 27, 1956, one Juan de la Cruz, wrote the then Collector, nowCommissioner, of Internal Revenue denouncing Engineering for tax evasion bymisdeclaring its imported articles and failing to pay the correct percentage taxesdue thereon in connivance with its foreign suppliers (Exh. "2" p. 1 BIR record Vol.I). Engineering was likewise denounced to the Central Bank (CB) for alleged fraudin obtaining its dollar allocations. Acting on these denunciations, a raid and searchwas conducted by a joint team of Central Bank, (CB), National Bureau ofInvestigation (NBI) and Bureau of Internal Revenue (BIR) agents on September 27,1956, on which occasion voluminous records of the firm were seized andconfiscated. (pp. 173-177 T.S.N.)

On September 30, 1957, revenue examiners Quesada and Catudan reported andrecommended to the then Collector, now Commissioner, of Internal Revenue(hereinafter referred to as Commissioner) that Engineering be assessed forP480,912.01 as deficiency advance sales tax on the theory that it misdeclared itsimportation of air conditioning units and parts and accessories thereof which aresubject to tax under Section 185(m)1of the Tax Code, instead of Section 186 of

the same Code. (Exh. "3" pp. 59-63 BIR rec. Vol. I) This assessment was revisedon January 23, 1959, in line with the observation of the Chief, BIR Law Division,and was raised to P916,362.56 representing deficiency advance sales tax andmanufacturers sales tax, inclusive of the 25% and 50% surcharges. (pp. 72-80 BIRrec. Vol. I)

On March 3, 1959. the Commissioner assessed against, and demanded upon,Engineering payment of the increased amount and suggested that P10,000 be paidas compromise in extrajudicial settlement of Engineering's penal liability forviolation of the Tax Code. The firm, however, contested the tax assessment andrequested that it be furnished with the details and particulars of the Commissioner's

assessment. (Exh. "B" and "15", pp. 86-88 BIR rec. Vol. I) The Commissionerreplied that the assessment was in accordance with law and the facts of the case.

On July 30, 1959, Engineering appealed the case to the Court of Tax Appeals andduring the pendency of the case the investigating revenue examiners reducedEngineering's deficiency tax liabilities from P916,362.65 to P740,587.86 (Exhs. "R"and "9" pp. 162-170, BIR rec.), based on findings after conferences had withEngineering's Accountant and Auditor.

On November 29, 1966, the Court of Tax Appeals rendered its decision, thedispositive portion of which reads as follows:

For ALL THE FOREGOING CONSIDERATIONS, the decision ofrespondent appealed from is hereby modified, and petitioner, as acontractor, is declared exempt from the deficiency manufacturers salestax covering the period from June 1, 1948. to September 2, 1956.However, petitioner is ordered to pay respondent, or his dulyauthorized collection agent, the sum of P174,141.62 as compensatingtax and 25% surcharge for the period from 1953 to September 1956.With costs against petitioner.


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The Commissioner, not satisfied with the decision of the Court of Tax Appeals,appealed to this Court on January 18, 1967, (G.R. No. L-27044). On the otherhand, Engineering, on January 4, 1967, filed with the Court of Tax Appeals amotion for reconsideration of the decision abovementioned. This was denied onApril 6, 1967, prompting Engineering to file also with this Court its appeal, docketedas G.R. No. L-27452.

Since the two cases, G.R. No. L-27044 and G.R. No. L-27452, involve the sameparties and issues, We have decided to consolidate and jointly decide them.

Engineering in its Petition claims that the Court of Tax Appeals committed thefollowing errors:

1. That the Court of Tax Appeals erred in holding EngineeringEquipment & Supply Company liable to the 30% compensating tax onits importations of equipment and ordinary articles used in the centraltype air conditioning systems it designed, fabricated, constructed and

installed in the buildings and premises of its customers, rather than tothe compensating tax of only 7%;

2. That the Court of Tax Appeals erred in holding EngineeringEquipment & Supply Company guilty of fraud in effecting the saidimportations on the basis of incomplete quotations from the contentsof alleged photostat copies of documents seized illegally fromEngineering Equipment and Supply Company which should not havebeen admitted in evidence;

3. That the Court of Tax Appeals erred in holding Engineering

Equipment & Supply Company liable to the 25% surcharge prescribedin Section 190 of the Tax Code;

4. That the Court of Tax Appeals erred in holding the assessment asnot having prescribed;

5. That the Court of Tax Appeals erred in holding EngineeringEquipment & Supply Company liable for the sum of P174,141.62 as30% compensating tax and 25% surcharge instead of completelyabsolving it from the deficiency assessment of the Commissioner.

The Commissioner on the other hand claims that the Court of Tax Appeals erred:1. In holding that the respondent company is a contractor and not amanufacturer.

2. In holding respondent company liable to the 3% contractor's taximposed by Section 191 of the Tax Code instead of the 30% sales tax


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prescribed in Section 185(m) in relation to Section 194(x) both of thesame Code;

3. In holding that the respondent company is subject only to the 30%compensating tax under Section 190 of the Tax Code and not to the30% advance sales tax imposed by section 183 (b), in relation tosection 185(m) both of the same Code, on its importations of partsand accessories of air conditioning units;

4. In not holding the company liable to the 50% fraud surcharge underSection 183 of the Tax Code on its importations of parts andaccessories of air conditioning units, notwithstanding the finding ofsaid court that the respondent company fraudulently misdeclared thesaid importations;

5. In holding the respondent company liable for P174,141.62 ascompensating tax and 25% surcharge instead of P740,587.86 as

deficiency advance sales tax, deficiency manufacturers tax and 25%and 50% surcharge for the period from June 1, 1948 to December 31,1956.

The main issue revolves on the question of whether or not Engineering is amanufacturer of air conditioning units under Section 185(m), supra, in relation toSections 183(b) and 194 of the Code, or a contractor under Section 191 of thesame Code.

The Commissioner contends that Engineering is a manufacturer and seller of airconditioning units and parts or accessories thereof and, therefore, it is subject to

the 30% advance sales tax prescribed by Section 185(m) of the Tax Code, inrelation to Section 194 of the same, which defines a manufacturer as follows:

Section 194. Words and Phrases Defined. In applying theprovisions of this Title, words and phrases shall be taken in the senseand extension indicated below:

xxx xxx xxx

(x) "Manufacturer" includes every person who by physical or chemicalprocess alters the exterior texture or form or inner substance of any

raw material or manufactured or partially manufactured products insuch manner as to prepare it for a special use or uses to which it couldnot have been put in its original condition, or who by any such processalters the quality of any such material or manufactured or partiallymanufactured product so as to reduce it to marketable shape, orprepare it for any of the uses of industry, or who by any such processcombines any such raw material or manufactured or partiallymanufactured products with other materials or products of the same orof different kinds and in such manner that the finished product of such


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process of manufacture can be put to special use or uses to which suchraw material or manufactured or partially manufactured products intheir original condition could not have been put, and who in additionalters such raw material or manufactured or partially manufacturedproducts, or combines the same to produce such finished products forthe purpose of their sale or distribution to others and not for his ownuse or consumption.

In answer to the above contention, Engineering claims that it is not a manufacturerand setter of air-conditioning units and spare parts or accessories thereof subject totax under Section 185(m) of the Tax Code, but a contractor engaged in the design,supply and installation of the central type of air-conditioning system subject to the3% tax imposed by Section 191 of the same Code, which is essentially a tax on thesale of services or labor of a contractor rather than on the sale of articles subject tothe tax referred to in Sections 184, 185 and 186 of the Code.

The arguments of both the Engineering and the Commissioner call for a clarification

of the term contractor as well as the distinction between a contract of sale andcontract for furnishing services, labor and materials. The distinction between acontract of sale and one for work, labor and materials is tested by the inquirywhether the thing transferred is one not in existence and which never would haveexisted but for the order of the party desiring to acquire it, or a thing which wouldhave existed and has been the subject of sale to some other persons even if theorder had not been given.2If the article ordered by the purchaser is exactly suchas the plaintiff makes and keeps on hand for sale to anyone, and no change ormodification of it is made at defendant's request, it is a contract of sale, eventhough it may be entirely made after, and in consequence of, the defendants orderfor it.3

Our New Civil Code, likewise distinguishes a contract of sale from a contract for apiece of work thus:

Art. 1467. A contract for the delivery at a certain price of an articlewhich the vendor in the ordinary course of his business manufacturesor procures for the general market, whether the same is on hand atthe time or not, is a contract of sale, but if the goods are to bemanufactured specially for the customer and upon his special orderand not for the general market, it is a contract for a piece of work.

The word "contractor" has come to be used with special reference to a person who,in the pursuit of the independent business, undertakes to do a specific job or pieceof work for other persons, using his own means and methods without submittinghimself to control as to the petty details. (Araas, Annotations and Jurisprudenceon the National Internal Revenue Code, p. 318, par. 191 (2), 1970 Ed.) The truetest of a contractor as was held in the cases of Luzon Stevedoring Co., vs.Trinidad, 43, Phil. 803, 807-808, and La Carlota Sugar Central vs. Trinidad, 43,Phil. 816, 819, would seem to be that he renders service in the course of an


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independent occupation, representing the will of his employer only as to the resultof his work, and not as to the means by which it is accomplished.

With the foregoing criteria as guideposts, We shall now examine whetherEngineering really did "manufacture" and sell, as alleged by the Commissioner tohold it liable to the advance sales tax under Section 185(m), or it only had itsservices "contracted" for installation purposes to hold it liable under section 198 ofthe Tax Code.

I

After going over the three volumes of stenographic notes and the voluminousrecord of the BIR and the CTA as well as the exhibits submitted by both parties, Wefind that Engineering did not manufacture air conditioning units for sale to thegeneral public, but imported some items (as refrigeration compressors in completeset, heat exchangers or coils, t.s.n. p. 39) which were used in executing contractsentered into by it. Engineering, therefore, undertook negotiations and execution of

individual contracts for the design, supply and installation of air conditioning unitsof the central type (t.s.n. pp. 20-36; Exhs. "F", "G", "H", "I", "J", "K", "L", and "M"),taking into consideration in the process such factors as the area of the space to beair conditioned; the number of persons occupying or would be occupying thepremises; the purpose for which the various air conditioning areas are to be used;and the sources of heat gain or cooling load on the plant such as sun load, lighting,and other electrical appliances which are or may be in the plan. (t.s.n. p. 34, Vol. I)Engineering also testified during the hearing in the Court of Tax Appeals thatrelative to the installation of air conditioning system, Engineering designed andengineered complete each particular plant and that no two plants were identical buteach had to be engineered separately.

As found by the lower court, which finding4We adopt

Engineering, in a nutshell, fabricates, assembles, supplies and installsin the buildings of its various customers the central type airconditioning system; prepares the plans and specifications thereforwhich are distinct and different from each other; the air conditioningunits and spare parts or accessories thereof used by petitioner are notthe window type of air conditioner which are manufactured, assembledand produced locally for sale to the general market; and the importedair conditioning units and spare parts or accessories thereof aresupplied and installed by petitioner upon previous orders of itscustomers conformably with their needs and requirements.

The facts and circumstances aforequoted support the theory that Engineering is acontractor rather than a manufacturer.

The Commissioner in his Brief argues that "it is more in accord with reason andsound business management to say that anyone who desires to have airconditioning units installed in his premises and who is in a position and willing to


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pay the price can order the same from the company (Engineering) and, therefore,Engineering could have mass produced and stockpiled air conditioning units for saleto the public or to any customer with enough money to buy the same." This isuntenable in the light of the fact that air conditioning units, packaged, or what weknow as self-contained air conditioning units, are distinct from the central systemwhich Engineering dealt in. To Our mind, the distinction as explained byEngineering, in its Brief, quoting from books, is not an idle play of words as claimedby the Commissioner, but a significant fact which We just cannot ignore. As quotedby Engineering Equipment & Supply Co., from an Engineering handbook by L.C.Morrow, and which We reproduce hereunder for easy reference:

... there is a great variety of equipment in use to do this job (of airconditioning). Some devices are designed to serve a specific type ofspace; others to perform a specific function; and still others ascomponents to be assembled into a tailor-made system to fit aparticular building. Generally, however, they may be grouped into twoclassifications unitary and central system.

The unitary equipment classification includes those designs such asroom air conditioner, where all of the functional components areincluded in one or two packages, and installation involves only makingservice connection such as electricity, water and drains. Central-station systems, often referred to as applied or built-up systems,require the installation of components at different points in a buildingand their interconnection.

The room air conditioner is a unitary equipment designed specificallyfor a room or similar small space. It is unique among air conditioning

equipment in two respects: It is in the electrical applianceclassification, and it is made by a great number of manufacturers.

There is also the testimony of one Carlos Navarro, a licensed Mechanical andElectrical Engineer, who was once the Chairman of the Board of Examiners forMechanical Engineers and who was allegedly responsible for the preparation of therefrigeration and air conditioning code of the City of Manila, who said that "thecentral type air conditioning system is an engineering job that requires planningand meticulous layout due to the fact that usually architects assign definite spaceand usually the spaces they assign are very small and of various sizes. Continuingfurther, he testified:

I don't think I have seen central type of air conditioning machineryroom that are exactly alike because all our buildings here are designedby architects dissimilar to existing buildings, and usually they don'tcoordinate and get the advice of air conditioning and refrigeratingengineers so much so that when we come to design, we have to makeuse of the available space that they are assigning to us so that wehave to design the different component parts of the air conditioningsystem in such a way that will be accommodated in the space assigned


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and afterwards the system may be considered as a definite portion ofthe building. ...

Definitely there is quite a big difference in the operation because thewindow type air conditioner is a sort of compromise. In fact it cannotcontrol humidity to the desired level; rather the manufacturers, by hitand miss, were able to satisfy themselves that the desired comfortwithin a room could be made by a definite setting of the machine as itcomes from the factory; whereas the central type system definitelyrequires an intelligent operator. (t.s.n. pp. 301-305, Vol. II)

The point, therefore, is this Engineering definitely did not and was not engagedin the manufacture of air conditioning units but had its services contracted for theinstallation of a central system. The cases cited by the Commissioner (AdvertisingAssociates, Inc. vs. Collector of Customs, 97, Phil. 636; Celestino Co & Co. vs.Collector of Internal Revenue, 99 Phil. 841 and Manila Trading & Supply Co. vs. Cityof Manila, 56 O.G. 3629), are not in point. Neither are they applicable because the

facts in all the cases cited are entirely different. Take for instance the case ofCelestino Co where this Court held the taxpayer to be a manufacturer rather than acontractor of sash, doors and windows manufactured in its factory. Indeed, fromthe very start, Celestino Co intended itself to be a manufacturer of doors, windows,sashes etc. as it did register a special trade name for its sash business and orderedcompany stationery carrying the bold print "ORIENTAL SASH FACTORY (CELESTINOCO AND COMPANY, PROP.) 926 Raon St., Quiapo, Manila, Tel. No. etc.,Manufacturers of All Kinds of Doors, Windows ... ." Likewise, Celestino Co never putup a contractor's bond as required by Article 1729 of the Civil Code. Also, as ageneral rule, sash factories receive orders for doors and windows of special designonly in particular cases, but the bulk of their sales is derived from ready-made

doors and windows of standard sizes for the average home, which "sales" werereflected in their books of accounts totalling P118,754.69 for the period fromJanuary, 1952 to September 30, 1952, or for a period of only nine (9) months. ThisCourt found said sum difficult to have been derived from its few customers whoplaced special orders for these items. Applying the abovestated facts to the case atbar, We found them to he inapposite. Engineering advertised itself as EngineeringEquipment and Supply Company, Machinery Mechanical Supplies, Engineers,Contractors, 174 Marques de Comillas, Manila (Exh. "B" and "15" BIR rec. p. 186),and not as manufacturers. It likewise paid the contractors tax on all the contractsfor the design and construction of central system as testified to by Mr. Rey Parker,its President and General Manager. (t.s.n. p. 102, 103) Similarly, Engineering didnot have ready-made air conditioning units for sale but as per testimony of Mr.

Parker upon inquiry of Judge Luciano of the CTA

Q Aside from the general components, which go intoair conditioning plant or system of the central type whichyour company undertakes, and the procedure followed byyou in obtaining and executing contracts which you havealready testified to in previous hearing, would you saythat the covering contracts for these different projects


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listed ... referred to in the list, Exh. "F" are identical inevery respect? I mean every plan or system covered bythese different contracts are identical in standard in everyrespect, so that you can reproduce them?

A No, sir. They are not all standard. On the contrary,none of them are the same. Each one must be designedand constructed to meet the particular requirements,whether the application is to be operated. (t.s.n. pp. 101-102)

What We consider as on all fours with the case at bar is the case of S.M. LawrenceCo. vs. McFarland,Commissioner of Internal Revenue of the State of Tennessee andMcCanless, 355 SW 2d, 100, 101, "where the cause presents the question ofwhether one engaged in the business of contracting for the establishment of airconditioning system in buildings, which work requires, in addition to the furnishingof a cooling unit, the connection of such unit with electrical and plumbing facilities

and the installation of ducts within and through walls, ceilings and floors to conveycool air to various parts of the building, is liable for sale or use tax as a contractorrather than a retailer of tangible personal property. Appellee took the Position thatappellant was not engaged in the business of selling air conditioning equipment assuch but in the furnishing to its customers of completed air conditioning systemspursuant to contract, was a contractor engaged in the construction or improvementof real property, and as such was liable for sales or use tax as the consumer ofmaterials and equipment used in the consummation of contracts, irrespective of thetax status of its contractors. To transmit the warm or cool air over the buildings,the appellant installed system of ducts running from the basic units through walls,ceilings and floors to registers. The contract called for completed air conditioning

systems which became permanent part of the buildings and improvements to therealty." The Court held the appellant a contractor which used the materials and theequipment upon the value of which the tax herein imposed was levied in theperformance of its contracts with its customers, and that the customers did notpurchase the equipment and have the same installed.

Applying the facts of the aforementioned case to the present case, We see that thesupply of air conditioning units to Engineer's various customers, whether the saidmachineries were in hand or not, was especially made for each customer andinstalled in his building upon his special order. The air conditioning units installed ina central type of air conditioning system would not have existed but for the order ofthe party desiring to acquire it and if it existed without the special order ofEngineering's customer, the said air conditioning units were not intended for sale tothe general public. Therefore, We have but to affirm the conclusion of the Court ofTax Appeals that Engineering is a contractor rather than a manufacturer, subject tothe contractors tax prescribed by Section 191 of the Code and not to the advancesales tax imposed by Section 185(m) in relation to Section 194 of the same Code.Since it has been proved to Our satisfaction that Engineering imported airconditioning units, parts or accessories thereof for use in its construction businessand these items were never sold, resold, bartered or exchanged, Engineering


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should be held liable to pay taxes prescribed under Section 1905of the Code. Thiscompensating tax is not a tax on the importation of goods but a tax on the use ofimported goods not subject to sales tax. Engineering, therefore, should be heldliable to the payment of 30% compensating tax in accordance with Section 190 ofthe Tax Code in relation to Section 185(m) of the same, but without the 50% markup provided in Section 183(b).

II

We take up next the issue of fraud. The Commissioner charged Engineering withmisdeclaration of the imported air conditioning units and parts or accessoriesthereof so as to make them subject to a lower rate of percentage tax (7%) underSection 186 of the Tax Code, when they are allegedly subject to a higher rate of tax(30%) under its Section 185(m). This charge of fraud was denied by Engineeringbut the Court of Tax Appeals in its decision found adversely and said"

... We are amply convinced from the evidence presented by

respondent that petitioner deliberately and purposely misdeclared itsimportations. This evidence consists of letters written by petitioner toits foreign suppliers, instructing them on how to invoice and describethe air conditioning units ordered by petitioner. ... (p. 218 CTA rec.)

Despite the above findings, however, the Court of Tax Appeals absolvedEngineering from paying the 50% surcharge prescribe by Section 183(a) of the TaxCode by reasoning out as follows:

The imposition of the 50% surcharge prescribed by Section 183(a) ofthe Tax Code is based on willful neglect to file the monthly return

within 20 days after the end of each month or in case a false orfraudulent return is willfully made, it can readily be seen, thatpetitioner cannot legally be held subject to the 50% surchargeimposed by Section 183(a) of the Tax Code. Neither can petitioner beheld subject to the 50% surcharge under Section 190 of the Tax Codedealing on compensating tax because the provisions thereof do notinclude the 50% surcharge. Where a particular provision of the TaxCode does not impose the 50% surcharge as fraud penalty we cannotenforce a non-existing provision of law notwithstanding theassessment of respondent to the contrary. Instances of the exclusionin the Tax Code of the 50% surcharge are those dealing on tax onbanks, taxes on receipts of insurance companies, and franchise tax.However, if the Tax Code imposes the 50% surcharge as fraudpenalty, it expressly so provides as in the cases of income tax, estateand inheritance taxes, gift taxes, mining tax, amusement tax and themonthly percentage taxes. Accordingly, we hold that petitioner is notsubject to the 50% surcharge despite the existence of fraud in theabsence of legal basis to support the importation thereof. (p. 228 CTArec.)


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We have gone over the exhibits submitted by the Commissioner evidencing fraudcommitted by Engineering and We reproduce some of them hereunder for clarity.

As early as March 18, 1953, Engineering in a letter of even date wrote to Trane Co.(Exh. "3-K" pp. 152-155, BIR rec.) viz:

Your invoices should be made in the name of Madrigal & Co., Inc.,Manila, Philippines, c/o Engineering Equipment & Supply Co., Manila,Philippines forwarding all correspondence and shipping papersconcerning this order to us only and not to the customer.

When invoicing, your invoices should be exactly as detailed in thecustomer's Letter Order dated March 14th, 1953 attached. This is inaccordance with the Philippine import licenses granted to Madrigal &Co., Inc. and such details must only be shown on all papers andshipping documents for this shipment. No mention of words airconditioning equipment should be made on any shipping documents as

well as on the cases. Please give this matter your careful attention,otherwise great difficulties will be encountered with the PhilippineBureau of Customs when clearing the shipment on its arrival in Manila.All invoices and cases should be marked "THIS EQUIPMENT FOR RIZALCEMENT CO."

The same instruction was made to Acme Industries, Inc., San Francisco, Californiain a letter dated March 19, 1953 (Exh. "3-J-1" pp. 150-151, BIR rec.)

On April 6, 1953, Engineering wrote to Owens-Corning Fiberglass Corp., New York,U.S.A. (Exh. "3-1" pp. 147-149, BIR rec.) also enjoining the latter from mentioning

or referring to the term 'air conditioning' and to describe the goods on order asFiberglass pipe and pipe fitting insulation instead. Likewise on April 30, 1953,Engineering threatened to discontinue the forwarding service of UniversalTranscontinental Corporation when it wrote Trane Co. (Exh. "3-H" p. 146, BIR rec.):

It will be noted that the Universal Transcontinental Corporation is notfollowing through on the instructions which have been covered by theabove correspondence, and which indicates the necessity ofdiscontinuing the use of the term "Air conditioning Machinery or AirCoolers". Our instructions concerning this general situation have beensent to you in ample time to have avoided this error in terminology,and we will ask that on receipt of this letter that you again write toUniversal Transcontinental Corp. and inform them that, if in the future,they are unable to cooperate with us on this requirement, we willthereafter be unable to utilize their forwarding service. Please informthem that we will not tolerate another failure to follow ourrequirements.

And on July 17, 1953 (Exh- "3-g" p. 145, BIR rec.) Engineering wrote Trane Co.another letter, viz:


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In the past, we have always paid the air conditioning tax on climatechangers and that mark is recognized in the Philippines, as airconditioning equipment. This matter of avoiding any tie-in on airconditioning is very important to us, and we are asking that fromhereon that whoever takes care of the processing of our orders becarefully instructed so as to avoid again using the term "Climatechangers" or in any way referring to the equipment as "airconditioning."

And in response to the aforequoted letter, Trane Co. wrote on July 30, 1953,suggesting a solution, viz:

We feel that we can probably solve all the problems by following theprocedure outlined in your letter of March 25, 1953 wherein you statedthat in all future jobs you would enclose photostatic copies of yourimport license so that we might make up two sets of invoices: one setdescribing equipment ordered simply according to the way that they

are listed on the import license and another according to our ordinaryregular methods of order write-up. We would then include the setmade up according to the import license in the shipping boxesthemselves and use those items as our actual shipping documents andinvoices, and we will send the other regular invoice to you, byseparate correspondence. (Exh- No. "3-F-1", p. 144 BIR rec.)

Another interesting letter of Engineering is one dated August 27, 1955 (Exh. "3-C"p. 141 BIR rec.)

In the process of clearing the shipment from the piers, one of the

Customs inspectors requested to see the packing list. Upon presentingthe packing list, it was discovered that the same was prepared on acopy of your letterhead which indicated that the Trane Co.manufactured air conditioning, heating and heat transfer equipment.Accordingly, the inspectors insisted that this equipment was beingimported for air conditioning purposes.To date, we have not been ableto clear the shipment and it is possible that we will be required to payheavy taxes on equipment.

The purpose of this letter is to request that in the future, nodocuments of any kind should be sent with the order that indicate inany way that the equipment could possibly be used for airconditioning.

It is realized that this a broad request and fairly difficult to accomplishand administer, but we believe with proper caution it can be executed.Your cooperation and close supervision concerning these matters willbe appreciated. (Emphasis supplied)


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The aforequoted communications are strongly indicative of the fraudulent intent ofEngineering to misdeclare its importation of air conditioning units and spare partsor accessories thereof to evade payment of the 30% tax. And since the commissionof fraud is altogether too glaring, We cannot agree with the Court of Tax Appeals inabsolving Engineering from the 50% fraud surcharge, otherwise We will be givingpremium to a plainly intolerable act of tax evasion. As aptly stated by then SolicitorGeneral, now Justice, Antonio P. Barredo: 'this circumstance will not free it from the50% surcharge because in any case whether it is subject to advance sales tax orcompensating tax, it is required by law to truly declare its importation in the importentries and internal revenue declarations before the importations maybe releasedfrom customs custody. The said entries are the very documents where the nature,quantity and value of the imported goods declared and where the customs duties,internal revenue taxes, and other fees or charges incident to the importation arecomputed. These entries, therefore, serve the same purpose as the returnsrequired by Section 183(a) of the Code.'

Anent the 25% delinquency surcharge, We fully agree to the ruling made by the

Court of Tax Appeals and hold Engineering liable for the same. As held by the lowercourt:

At first blush it would seem that the contention of petitioner that it isnot subject to the delinquency, surcharge of 25% is sound, valid andtenable. However, a serious study and critical analysis of the historicalprovisions of Section 190 of the Tax Code dealing on compensating taxin relation to Section 183(a) of the same Code, will show that thecontention of petitioner is without merit. The original text of Section190 of Commonwealth Act 466, otherwise known as the NationalInternal Revenue Code, as amended by Commonwealth Act No. 503,

effective on October 1, 1939, does not provide for the filing of acompensation tax return and payment of the 25 % surcharge for latepayment thereof. Under the original text of Section 190 of the TaxCode as amended by Commonwealth Act No. 503, the contention ofthe petitioner that it is not subject to the 25% surcharge appears to belegally tenable. However, Section 190 of the Tax Code wassubsequently amended by the Republic Acts Nos. 253, 361, 1511 and1612 effective October 1, 1946, July 1, 1948, June 9, 1949, June 16,1956 and August 24, 1956 respectively, which invariably providesamong others, the following:

... If any article withdrawn from the customhouse or thepost office without payment of the compensating tax issubsequently used by the importer for other purposes,corresponding entry should be made in the books ofaccounts if any are kept or a written notice thereof sentto the Collector of Internal Revenue and payment of thecorresponding compensating tax made within 30 daysfrom the date of such entry or notice and if tax is not paid


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within such period the amount of the tax shall beincreased by 25% the increment to be a part of the tax.

Since the imported air conditioning units-and spare parts or accessories thereof aresubject to the compensating tax of 30% as the same were used in the constructionbusiness of Engineering, it is incumbent upon the latter to comply with theaforequoted requirement of Section 190 of the Code, by posting in its books ofaccounts or notifying the Collector of Internal Revenue that the imported articleswere used for other purposes within 30 days. ... Consequently; as the 30%compensating tax was not paid by petitioner within the time prescribed by Section190 of the Tax Code as amended, it is therefore subject to the 25% surcharge fordelinquency in the payment of the said tax. (pp. 224-226 CTA rec.)

III

Lastly the question of prescription of the tax assessment has been put in issue.Engineering contends that it was not guilty of tax fraud in effecting the importations

and, therefore, Section 332(a) prescribing ten years is inapplicable, claiming thatthe pertinent prescriptive period is five years from the date the questionedimportations were made. A review of the record however reveals that Engineeringdid file a tax return or declaration with the Bureau of Customs before it paid theadvance sales tax of 7%. And the declaration filed reveals that it did in factmisdeclare its importations. Section 332 of the Tax Code which provides:

Section 332. Exceptions as to period of limitation of assessment andcollection of taxes.

(a) In the case of a false or fraudulent return with intent to evade tax

or of a failure to file a return, the tax may be assessed, or aproceeding in court for the collection of such tax may be begunwithout assessment at any time within ten years after the discovery ofthe falsity, fraud or omission.

is applicable, considering the preponderance of evidence of fraud with the intent toevade the higher rate of percentage tax due from Engineering. The, tax assessmentwas made within the period prescribed by law and prescription had not set inagainst the Government.

WHEREFORE, the decision appealed from is affirmed with the modification thatEngineering is hereby also made liable to pay the 50% fraud surcharge.

SO ORDERED.


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THIRD DIVISION

ENRICO S. EULOGIO,Petitioner,

- versus -

SPOUSES CLEMENTEAPELES[1]and LUZ APELES,

Respondents.

G.R. No. 167884

Present:

YNARES-SANTIAGO,J.,Chairperson,

AUSTRIA-MARTINEZ,AZCUNA,*CHICO-NAZARIO, andNACHURA,JJ.

Promulgated:

January 20, 2009

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N

CHICO-NAZARIO,J.:

Petitioner Enrico S. Eulogio (Enrico) filed this instant Petition for Review

on Certiorariunder Rule 45 of the Revised Rules of Court assailing the

Decision[2]dated 20 December 2004 of the Court of Appeals in CA-G.R. CV No.

76933 which reversed the Decision[3]dated 8 October 2002 of the Regional Trial

Court (RTC) of Quezon City, Branch 215, in Civil Case No. Q-99-36834. The RTC

directed respondents, spouses Clemente and Luz Apeles (spouses Apeles) to

execute a Deed of Sale over a piece of real property in favor of Enrico after the

latters payment of full consideration therefor.

The factual and procedural antecedents of the present case are as follows:
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The real property in question consists of a house and lot situated at No. 87

Timog Avenue,Quezon City (subject property). The lot has an area of 360.60

square meters, covered by Transfer Certificate of Title No. 253990 issued by the

Registry of Deeds of Quezon City in the names of the spouses Apeles.[4]

In 1979, the spouses Apeles leased the subject property to Arturo Eulogio

(Arturo), Enricos father. Upon Arturos death, his son Enrico succeeded as lessor

of the subject property. Enrico used the subject property as his residence and

place of business. Enrico was engaged in the business of buying and selling

imported cars.[5]

On 6 January 1987, the spouses Apeles and Enrico allegedly entered into a

Contract of Lease[6]with Option to Purchase involving the subject

property. According to the said lease contract, Luz Apeles was authorized to enter

into the same as the attorney-in-fact of her husband, Clemente, pursuant to a

Special Power of Attorney executed by the latter in favor of the former on 24

January 1979. The contract purportedly afforded Enrico, before the expiration of

the three-year lease period, the option to purchase the subject property for a price

not exceeding P1.5 Million. The pertinent provisions of the Contract of Lease are

reproduced below:

3. That this Contract shall be effective commencingfrom January 26, 1987 and shall remain valid and binding for THREE(3) YEARS from the said date. The LESSOR hereby gives the LESSEEunder this Contract of Lease the right and option to buy the subjecthouse and lot within the said 3-year lease period.

4. That the purchase price or total consideration of thehouse and lot subject of this Contract of Lease shall, should the
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LESSEE exercise his option to buy it on or before the expiration of the3-year lease period, be fixed or agreed upon by the LESSOR and theLESSEE, Provided, that the said purchase price, as it is hereby agreed,shall not be more than ONE MILLION FIVE HUNDRED THOUSANDPESOS (P1,500,000.00) and, provided further, that the monthlyrentals paid by the LESSEE to the LESSOR during the 3-year leaseperiod shall form part of or be deducted from the purchase price ortotal consideration as may hereafter be mutually fixed or agreed uponby the LESSOR and the LESSEE.

5. That if the LESSEE shall give oral or written notice tothe LESSOR on or before the expiry date of the 3-year lease periodstipulated herein of his desire to exercise his option to buy or purchasethe house and lot herein leased, the LESSOR upon receipt of thepurchase price/total consideration as fixed or agreed upon less thetotal amount of monthly rentals paid the LESSEE during the 3-yearlease period shall execute the appropriate Deed to SELL, TRANSFER

and CONVEY the house and lot subject of this Contract in favor of theLESSEE, his heirs, successors and assigns, together with all thefixtures and accessories therein, free from all liens and encumbrances.

Before the expiration of the three-year lease period provided in the lease

contract, Enrico exercised his option to purchase the subject property by

communicating verbally and in writing to Luz his willingness to pay the agreed

purchase price, but the spouses Apeles supposedly ignored Enricos manifestation.

This prompted Enrico to seek recourse from the barangay for the enforcement of

his right to purchase the subject property, but despite several notices, the spouses

Apeles failed to appear before the barangay for settlement proceedings. Hence,

the barangayissued to Enrico a Certificate to File Action.[7]

In a letter dated 26 January 1997 to Enrico, the spouses Apeles demanded

that he pay his rental arrears from January 1991 to December 1996 and he vacate

the subject property since it would be needed by the spouses Apeles themselves.
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Without heeding the demand of the spouses Apeles, Enrico instituted on 23

February 1999 a Complaint for Specific Performance with Damages against the

spouses Apeles before the RTC, docketed as Civil Case No. Q-99-

36834. Enricos causeof action is founded on paragraph 5 of the Contract of Lease

with Option to Purchase vesting him with the right to acquire ownership of the

subject property after paying the agreed amount of consideration.

Following the pre-trial conference, trial on the merits ensued before the RTC.

Enrico himself testified as the sole witness for his side. He narrated that he

and Luz entered into the Contract of Lease with Option to Purchase on 26 January

1987, with Luz signing the said Contract at Enricos office inTimog Avenue, Quezon

City. The Contract was notarized on the same day as evidenced by the Certification

on the Notary Publics Report issued by the Clerk of Court of the RTC of Manila.[8]

On the other hand, the spouses Apeles denied that Luz signed the Contract

of Lease with Option to Purchase, and posited that Luzs signature thereon was a

forgery. To buttress their contention, the spouses Apeles offered as evidence Luzs

Philippine Passport which showed that on26 January 1987, the date when Luz

allegedly signed the said Contract, she was in the United States of America. The

spouses Apeles likewise presented several official documents bearing her genuine

signatures to reveal their remarkable discrepancy from the signature appearing in

the disputed lease contract. The spouses Apeles maintained that they did not

intend to sell the subject property.[9]
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After the spouses Apeles established by documentary evidence that Luz was

not in the country at the time the Contract of Lease with Option to Purchase was

executed, Enrico, in rebuttal, retracted his prior declaration that the said Contract

was signed by Luz on 26 January 1996. Instead, Enrico averred that Luz signed the

Contract after she arrived in the Philippines on 30 May 1987. Enrico further related

that after Luz signed the lease contract, she took it with her for notarization, and by

the time the document was returned to him, it was already notarized.[10]

On 8 October 2002, the RTC rendered a Decision in Civil Case No. Q-99-

36834 in favor of Enrico. Since none of the parties presented a handwriting expert,

the RTC relied on its own examination of the specimen signatures submitted to

resolve the issue of forgery. The RTC found striking similarity between Luzs

genuine signatures in the documents presented by the spouses Apeles themselves

and her purportedly forged signature in the Contract of Lease with Option to

Purchase. Absent any finding of forgery, the RTC bound the parties to the clear and

unequivocal stipulations they made in the lease contract. Accordingly, the RTC

ordered the spouses Apeles to execute a Deed of Sale in favor of Enrico upon the

latters payment of the agreed amount of consideration. The falloof the RTC

Decision reads:

WHEREFORE, this Court finds [Enricos] complaint to besubstantiated by preponderance of evidence and accordingly orders

(1) [The spouses Apeles] to comply with the provisions ofthe Contract of Lease with Option to Purchase; and upon payment oftotal consideration as stipulated in the said CONTRACT for [thespouses Apeles] to execute a Deed of Absolute Sale in favor of[Enrico], over the parcel of land and the improvements existingthereon located at No. 87 Timog Avenue, Quezon City.


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(2) [The spouses Apeles] to pay [Enrico] moral andexemplary damages in the respective amounts ofP100,000.00and P50,000.00.

(3) [The spouses Apeles] to pay attorneys feesof P50,000.00 and costs of the suit.[11]

The spouses Apeles challenged the adverse RTC Decision before the Court of

Appeals and urged the appellate court to nullify the assailed Contract of Lease with

Option to Purchase since Luzs signature thereon was clearly a forgery. The

spouses Apeles argued that it was physically impossible for Luz to sign the said

Contract on 26 January 1987 since she was not in the Philippines on that date andreturned five months thereafter. The spouses Apeles called attention to Enricos

inconsistent declarations as to material details involving the execution of the lease

contract, thereby casting doubt on Enricos credibility, as well as on the presumed

regularity of the contract as a notarized document.

On 20 December 2004, the Court of Appeals rendered a Decision in CA-G.R.

CV No. 76933 granting the appeal of the spouses Apeles and overturning the

judgment of the RTC. In arriving at its assailed decision, the appellate court noted

that the Notary Public did not observe utmost care in certifying the due execution of

the Contract of Lease with Option to Purchase. The Court of Appeals chose not to

accord the disputed Contract full faith and credence. The Court of Appeals held,

thus:

WHEREFORE, the foregoing premises considered, the appealeddecision dated October 8, 2002 of the Regional Trial Court of QuezonCity, Branch 215 in Civil Case No. Q-99-36834 for specific performancewith damages is hereby REVERSED and a new is one entereddismissing [Enricos] complaint.[12]


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Enricos Motion for Reconsideration was denied by the Court of Appeals in a

Resolution[13]dated 25 April 2005.

Enrico is presently before this Court seeking the reversal of the unfavorable

judgment of the Court of Appeals, assigning the following errors thereto:

I.

THE COURT OF APPEALS COMMITTED (sic) REVERSIBLE ERROR WHENIT BRUSHED ASIDE THE RULING OF THE COURT A QUO UPHOLDINGTHE VALIDITY OF THE CONTRACT OF LEASE WITH OPTION TOPURCHASE AND IN LIEU THEREOF RULED THAT THE SAID CONTRACTOF LEASE WAS A FORGERY AND THUS, NULL AND VOID.

II.

THE COURT OF APPEALS COMMITTED (sic) REVERSIBLE ERROR WHENCONTRARY TO THE FINDINGS OF THE COURT A QUO IT RULED THATTHE DEFENSE OF FORGERY WAS SUBSTANTIALLY ANDCONVINCINGLY PROVEN BY COMPETENT EVIDENCE.

Simply, Enrico faults the Court of Appeals for disturbing the factual findings

of the RTC in disregard of the legal aphorism that the factual findings of the trial

court should be accorded great weight and respect on appeal.

We do not agree.

Enricos insistence on the infallibility of the findings of the RTC seriously

impairs the discretion of the appellate tribunal to make independent determination

of the merits of the case appealed before it. Certainly, the Court of Appeals cannot

swallow hook, line, and sinker the factual conclusions of the trial court without
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crippling the very office of review. Although we have indeed held that the factual

findings of the trial courts are to be accorded great weight and respect, they are

not absolutely conclusive upon the appellate court.[14]

The reliance of appellate tribunals on the factual findings of the trial court is

based on the postulate that the latter had firsthand opportunity to hear the

witnesses and to observe their conduct and demeanor during the proceedings.

However, when such findings are not anchored on their credibility and their

testimonies, but on the assessment of documents that are available to appellate

magistrates and subject to their scrutiny, reliance on the trial court finds no

application.[15]

Moreover, appeal by writ of error to the Court of Appeals under Rule 41 of

the Revised Rules of Court, the parties may raise both questions of fact and/or of

law. In fact, it is imperative for the Court of Appeals to review the findings of fact

made by the trial court. The Court of Appeals even has the power to try cases and

conduct hearings, receive evidence and perform any and all acts necessary to

resolve factual issues raised in cases falling within its original and appellate

jurisdiction.[16]

Enrico assiduously prays before this Court to sustain the validity of the

Contract of Lease with Option to Purchase. Enrico asserts that the said Contract

was voluntarily entered into and signed by Luz who had it notarized herself. The

spouses Apeles should be obliged to respect the terms of the agreement, and not
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be allowed to renege on their commitment thereunder and frustrate the sanctity of

contracts.

Again, we are not persuaded. We agree with the Court of Appeals that in

ruling out forgery, the RTC heavily relied on the testimony proffered by Enrico

during the trial, ignoring blatant contradictions that destroy his credibility and the

veracity of his claims. On direct examination, Enrico testified that Luz signed the

Contract of Lease with Option to Purchase on 26 January 1987 in his

presence,[17]but he recanted his testimony on the matter after the spouses Apeles

established by clear and convincing evidence that Luz was not in the Philippines on

that date.[18] In rebuttal, Enrico made a complete turnabout and claimed that Luz

signed the Contract in question on 30 May 1987 after her arrival in the

country.[19] The inconsistencies in Enricos version of events have seriously

impaired the probative value of his testimony and cast serious doubt on his

credibility. His contradictory statements on important details simply eroded the

integrity of his testimony.

While it is true that a notarized document carries the evidentiary weight

conferred upon it with respect to its due execution, and has in its favor the

presumption of regularity, this presumption, however, is not absolute. It may be

rebutted by clear and convincing evidence to the contrary.[20]Enrico himself

admitted that Luz took the document and had it notarized without his

presence. Such fact alone overcomes the presumption of regularity since a notary

public is enjoined not to notarize a document unless the persons who signed the
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same are the very same persons who executed and personally appeared before the

said notary public to attest to the contents and truth of what are stated therein.

Although there is no direct evidence to prove forgery, preponderance of

evidence inarguably favors the spouses Apeles. In civil cases, the party having the

burden of proof must establish his case by a preponderance of

evidence. Preponderance of evidence is the weight, credit, and value of the

aggregate evidence on either side and is usually considered to be synonymous with

the term greater weight of the evidence or greater weight of the credible

evidence. Preponderance of evidence is a phrase which, in the last analysis,

means probability of the truth. It is evidence which is more convincing to the court

as worthier of belief than that which is offered in opposition thereto.[21] In the case

at bar, the spouses Apeles were able to overcome the burden of proof and prove by

preponderant evidence in disputing the authenticity and due execution of the

Contract of Lease with Option to Purchase. In contrast, Enrico seemed to rely only

on his own self-serving declarations, without asserting any proof of corroborating

testimony or circumstantial evidence to buttress his claim.

Even assuming for the sake of argument that we agree with Enrico that Luz

voluntarily entered into the Contract of Lease with Option to Purchase and

personally affixed her signature to the said document, the provision on the option

to purchase the subject property incorporated in said Contract still remains

unenforceable.


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There is no dispute that what Enrico sought to enforce in Civil Case No. Q-

99-36834 was his purported right to acquire ownership of the subject property in

the exercise of his option to purchase the same under the Contract of Lease with

Option to Purchase. He ultimately wants to compel the spouses Apeles to already

execute the Deed of Sale over the subject property in his favor.

An option is a contract by which the owner of the property agrees with

another person that the latter shall have the right to buy the formers property at a

fixed price within a certain time. It is a condition offered or contract by which the

owner stipulates with another that the latter shall have the right to buy the

property at a fixed price within a certain time, or under, or in compliance with

certain terms and conditions; or which gives to the owner of the property the right

to sell or demand a sale.[22] An option is not of itself a purchase, but merely

secures the privilege to buy. It is not a sale of property but a sale of the right to

purchase. It is simply a contract by which the owner of the property agrees with

another person that he shall have the right to buy his property at a fixed price

within a certain time. He does not sell his land; he does not then agree to sell it;

but he does sell something, i.e.,the right or privilege to buy at the election or

option of the other party. Its distinguishing characteristic is that it imposes no

binding obligation on the person holding the option, aside from the consideration

for the offer.[23]

It is also sometimes called an unaccepted offer and is sanctioned by Article

1479 of the Civil Code:


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Art. 1479. A promise to buy and sell a determinate thing for aprice certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinatething for a price certain is binding upon the promissor if the promise issupported by a consideration distinct from the price.

The second paragraph of Article 1479 provides for the definition and

consequent rights and obligations under an option contract. For an option contract

to be valid and enforceable against the promissor, there must be a separate and

distinct consideration that supports it.[24]

In the landmark case of Southwestern Sugar and Molasses Company v.

Atlantic Gulf and Pacific Co.,[25]we declared that for an option contract to bind the

promissor, it must be supported by consideration:

There is no question that under Article 1479 of the new CivilCode an option to sell, or a promise to buy or to sell, as used insaid article, to be valid must be supported by a consideration distinct

from the price. This is clearly inferred from the context of said articlethat a unilateral promise to buy or to sell, even if accepted, is onlybinding if supported by a consideration. In other words, anaccepted unilateral promise can only have a binding effect ifsupported by a consideration, which means that the option canstill be withdrawn, even if accepted, if the same is notsupported by any consideration. Here it is not disputed that theoption is without consideration. It can therefore be withdrawnnotwithstanding the acceptance made of it byappellee. (Emphasis supplied.)

The doctrine requiring the payment of consideration in an option contract

enunciated inSouthwestern Sugar is resonated in subsequent cases and remains

controlling to this day. Without consideration that is separate and distinct from the


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purchase price, an option contract cannot be enforced; that holds true even if the

unilateral promise is already accepted by the optionee.

The consideration is the why of the contracts, the essential reason which

moves the contracting parties to enter into the contract. This definition illustrates

that the consideration contemplated to support an option contract need not be

monetary. Actual cash need not be exchanged for the option. However, by the very

nature of an option contract, as defined in Article 1479, the same is an onerous

contract for which the consideration must be something of value, although its kind

may vary.[26]

We have painstakingly examined the Contract of Lease with Option to

Purchase, as well as the pleadings submitted by the parties, and their testimonies

in open court, for any direct evidence or evidence aliundeto prove the existence of

consideration for the option contract, but we have found none. The only

consideration agreed upon by the parties in the said Contract is the supposed

purchase price for the subject property in the amount not exceeding P1.5 Million,

which could not be deemed to be the same consideration for the option contract

since the law and jurisprudence explicitly dictate that for the option contract to be

valid, it must be supported by a consideration separate and distinct from

the price.

In Bible Baptist Church v. Court of Appeals,[27]we stressed that an option

contract needs to be supported by a separate consideration. The consideration

need not be monetary but could consist of other things or undertakings. However,


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if the consideration is not monetary, these must be things or undertakings of value,

in view of the onerous nature of the option contract. Furthermore, when a

consideration for an option contract is not monetary, said consideration must be

clearly specified as such in the option contract or clause.

In the present case, it is indubitable that no consideration was given by

Enrico to the spouses Apeles for the option contract. The absence of monetary or

any material consideration keeps this Court from enforcing the rights of the parties

under said option contract.

WHEREFORE, in view of the foregoing, the instant Petition

is DENIED. The Decision dated20 December 2004 and Resolution dated 25 April

2005 of the Court of Appeals in CA-G.R. CV No. 76933 are hereby AFFIRMED. No

costs.

SO ORDERED.


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Manila

EN BANC

G.R. No. 109125 December 2, 1994

ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,vs.THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENTCORPORATION, respondents.

Antonio M. Albano for petitioners.

Umali, Soriano & Associates for private respondent.

VITUG,J.:

Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04December 1991, in CA-G.R. SP No. 26345 setting aside and declaring without forceand effect the orders of execution of the trial court, dated 30 August 1991 and 27September 1991, in Civil Case No. 87-41058.

The antecedents are recited in good detail by the appellate court thusly:

On July 29, 1987 a Second Amended Complaint for SpecificPerformance was filed by Ang Yu Asuncion and Keh Tiong, et al.,against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before theRegional Trial Court, Branch 31, Manila in Civil Case No. 87-41058,alleging, among others, that plaintiffs are tenants or lessees ofresidential and commercial spaces owned by defendants described asNos. 630-638 Ongpin Street, Binondo, Manila; that they have occupiedsaid spaces since 1935 and have been religiously paying the rental andcomplying with all the conditions of the lease contract; that on several

occasions before October 9, 1986, defendants informed plaintiffs thatthey are offering to sell the premises and are giving them priority toacquire the same; that during the negotiations, Bobby Cu Unjiengoffered a price of P6-million while plaintiffs made a counter offer of P5-million; that plaintiffs thereafter asked the defendants to put theiroffer in writing to which request defendants acceded; that in reply todefendant's letter, plaintiffs wrote them on October 24, 1986 askingthat they specify the terms and conditions of the offer to sell; that


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when plaintiffs did not receive any reply, they sent another letterdated January 28, 1987 with the same request; that since defendantsfailed to specify the terms and conditions of the offer to sell andbecause of information received that defendants were about to sell theproperty, plaintiffs were compelled to file the complaint to compeldefendants to sell the property to them.

Defendants filed their answer denying the material allegations of thecomplaint and interposing a special defense of lack of cause of action.

After the issues were joined, defendants filed a motion for summaryjudgment which was granted by the lower court. The trial court foundthat defendants' offer to sell was never accepted by the plaintiffs forthe reason that the parties did not agree upon the terms andconditions of the proposed sale, hence, there was no contract of saleat all. Nonetheless, the lower court ruled that should the defendantssubsequently offer their property for sale at a price of P11-million or

below, plaintiffs will have the right of first refusal. Thus the dispositiveportion of the decision states:

WHEREFORE, judgment is hereby rendered in favor of thedefendants and against the plaintiffs summarilydismissing the complaint subject to the aforementionedcondition that if the defendants subsequently decide tooffer their property for sale for a purchase price of ElevenMillion Pesos or lower, then the plaintiffs has the option topurchase the property or of first refusal, otherwise,defendants need not offer the property to the plaintiffs if

the purchase price is higher than Eleven Million Pesos.

SO ORDERED.

Aggrieved by the decision, plaintiffs appealed to this Court inCA-G.R. CV No. 21123. In a decision promulgated on September 21,1990 (penned by Justice Segundino G. Chua and concurred in byJustices Vicente V. Mendoza and Fernando A. Santiago), this Courtaffirmed with modification the lower court's judgment, holding:

In resume, there was no meeting of the minds betweenthe parties concerning the sale of the property. Absentsuch requirement, the claim for specific performance willnot lie. Appellants' demand for actual, moral andexemplary damages will likewise fail as there exists no

justifiable ground for its award. Summary judgment fordefendants was properly granted. Courts may rendersummary judgment when there is no genuine issue as toany material fact and the moving party is entitled to a

judgment as a matter of law (Garcia vs. Court of Appeals,


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176 SCRA 815). All requisites obtaining, the decision ofthe court a quo is legally justifiable.

WHEREFORE, finding the appeal unmeritorious, thejudgment appealed from is hereby AFFIRMED, but subjectto the following modification: The courta quoin theaforestated decision gave the plaintiffs-appellants theright of first refusal only if the property is sold for apurchase price of Eleven Million pesos or lower; however,considering the mercurial and uncertain forces in ourmarket economy today. We find no reason not to grantthe same right of first refusal to herein appellants in theevent that the subject property is sold for a price inexcess of Eleven Million pesos. No pronouncement as tocosts.

SO ORDERED.

The decision of this Court was brought to the Supreme Court bypetition for review on certiorari. The Supreme Court denied the appealon May 6, 1991 "for insufficiency in form and substances" (Annex H,Petition).

On November 15, 1990, while CA-G.R. CV No. 21123 was pendingconsideration by this Court, the Cu Unjieng spouses executed a Deedof Sale (Annex D, Petition) transferring the property in question toherein petitioner Buen Realty and Development Corporation, subject tothe following terms and conditions:

1. That for and in consideration of the sum of FIFTEENMILLION PESOS (P15,000,000.00), receipt of which in fullis hereby acknowledged, the VENDORS hereby sells,transfers and conveys for and in favor of the VENDEE, hisheirs, executors, administrators or assigns, the above-described property with all the improvements foundtherein including all the rights and interest in the saidproperty free from all liens and encumbrances ofwhatever nature, except the pending ejectmentproceeding;

2. That the VENDEE shall pay the Documentary StampTax, registration fees for the transfer of title in his favorand other expenses incidental to the sale of above-described property including capital gains tax and accruedreal estate taxes.


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As a consequence of the sale, TCT No. 105254/T-881 in the name ofthe Cu Unjieng spouses was cancelled and, in lieu thereof, TCT No.195816 was issued in the name of petitioner on December 3, 1990.

On July 1, 1991, petitioner as the new owner of the subject propertywrote a letter to the lessees demanding that the latter vacate thepremises.

On July 16, 1991, the lessees wrote a reply to petitioner stating thatpetitioner brought the property subject to the notice oflis

pendensregarding Civil Case No. 87-41058 annotated on TCT No.105254/T-881 in the name of the Cu Unjiengs.

The lessees filed a Motion for Execution dated August 27, 1991 of theDecision in Civil Case No. 87-41058 as modified by the Court ofAppeals in CA-G.R. CV No. 21123.

On August 30, 1991,

sales cases first batch

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