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12 CIR v.

Magsaysay Lines (Justin) assuages the manufacturers or providers of goods and services by enabling them
July 28, 2006 | Tinga, J. | VAT to pass on their respective VAT liabilities to the next link of the chain until
PETITIONER: CIR finally the end consumer shoulders the entire tax liability.
RESPONDENTS: MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, Yet VAT is not a singular-minded tax on every transactional level.
INC., FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL Its assessment bears direct relevance to the taxpayer’s role or link in the
DEVELOPMENT COMPANY, production chain. Hence, as affirmed by Section 99 of the Tax Code and its
SUMMARY: Pursuant to a government program of privatization, NDC decided subsequent incarnations, the tax is levied only on the sale, barter or exchange of
to sell to private enterprise all of its shares in its wholly-owned subsidiary the goods or services by persons who engage in such activities, in the course of trade
National Marine Corporation (NMC). The NDC decided to sell in one lot its or business. These transactions outside the course of trade or business may
NMC shares and five (5) of its ships. invariably contribute to the production chain, but they do so only as a matter of
The NMC shares and the vessels were offered for public bidding. Among the accident or incident. As the sales of goods or services do not occur within the
stipulated terms and conditions for the public auction was that the winning course of trade or business, the providers of such goods or services would
bidder was to pay "a value added tax of 10% on the value of the vessels." hardly, if at all, have the opportunity to appropriately credit any VAT liability as
On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay Lines) against their own accumulated VAT collections since the accumulation of output
offered to buy the shares and the vessels for P168,000,000.00. The bid was made VAT arises in the first place only through the ordinary course of trade or
by Magsaysay Lines, purportedly for a new company still to be formed business.”
composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden DOCTRINE: Any sale, barter or exchange of goods or services not in the
Group based in Hongkong (collectively, private respondents). The bid was course of trade or business is not subject to VAT.
approved by the Committee on Privatization, and a Notice of Award dated 1 July FACTS:
1988 was issued to Magsaysay Lines. 1. Pursuant to a government program of privatization, National Development
On 28 September 1988, the implementing Contract of Sale was executed Company (NDC) decided to sell to private enterprise all of its shares in its
between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and wholly-owned subsidiary the National Marine Corporation (NMC). The
FIM Limited, on the other. Paragraph 11.02 of the contract stipulated that NDC decided to sell in one lot its NMC shares and five (5) of its ships.
"[v]alue-added tax, if any, shall be for the account of the PURCHASER." 2. The NMC shares and the vessels were offered for public bidding. Among
ISSUE: W/N such sale was within the coverage of VAT. No. The sale of the the stipulated terms and conditions for the public auction was that the
vessels was not in the ordinary course of trade or business of NDC. winning bidder was to pay "a value added tax of 10% on the value of the
[from Gnotes] The Supreme Court found that the sale of the vessels was not in vessels."
the ordinary course of trade or business. As such, the transaction was outside the 3. On 3 June 1988, private respondent Magsaysay Lines, Inc. (Magsaysay
coverage of VAT. Lines) offered to buy the shares and the vessels for P168,000,000.00. The
The decision contained an explanation of VAT, to wit: “A brief reiteration of the bid was made by Magsaysay Lines, purportedly for a new company still to
basic principles governing VAT is in order. VAT is ultimately a tax on be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited
consumption, even though it is assessed on many levels of transactions on the of the Marden Group based in Hongkong (collectively, private
basis of a fixed percentage. It is the end user of consumer goods or services respondents). The bid was approved by the Committee on Privatization, and
which ultimately shoulders the tax, as the liability therefrom is passed on to the a Notice of Award dated 1 July 1988 was issued to Magsaysay Lines.
end users by the providers of these goods or services who in turn may credit their 4. On 28 September 1988, the implementing Contract of Sale was executed
own VAT liability (or input VAT) from the VAT payments they receive from between NDC, on one hand, and Magsaysay Lines, Baliwag Navigation,
the final consumer (or output VAT). The final purchase by the end consumer and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated
represents the final link in a production chain that itself involves several that "[v]alue-added tax, if any, shall be for the account of the
transactions and several acts of consumption. The VAT system assures fiscal PURCHASER." Per arrangement, a letter of credit was accepted by NDC
adequacy through the collection of taxes on every level of consumption, yet as security for the payment of VAT, if any.
5. By this time, a formal request for a ruling on whether or not the sale of the RULING: WHEREFORE, the petition is DENIED. No costs.
cessels was subject to VAT had already been filed with the BIR. RATIO:
a. BIR issued VAT Ruling No. 568-88 holding that the sale of the First Issue
vessels was subject to VAT because NDC is a VAT registered 1. The petition should be denied.
enterprise, this its “transactions incident to its normal VAT 2. Sec 99 of the Tax Code is sufficient reason for upholding the refund of the
registered activity of leasing out personal property including sale Tax payments, and the subsequent disquisitions by the lower courts on the
of its own assets that are movable, tangible objects which are applicability of Sec 100 of the Tax Code and Section 4 of RR no 5-87 are
appropriable or transferable are subject to VAT. ultimately irrelevant.
b. Private respondents moved for reconsideration but it was denied 3. VAT is ultimately a tax on consumption, even though it is assessed on
when BIR issued VAT ruling No. 007-89 reiterating the earlier many levels of transactions on the basis of a fixed percentage. It is the end
VAT rulings. So, NDC drew on the letter of credit to pay the VAT. user of consumer goods or services which ultimately shoulders the tax, as
6. On April 10, 1989, private respondents filed an Appeal and Petition for
the liability therefrom is passed on to the end users by the providers of these
Refund with the CTA, followed by a Supplemental Petition for Review.
a. Prayed for the reversal of the VAT rulings and the refund of VAT goods or services who in turn may credit their own VAT liability (or input
payment. VAT) from the VAT payments they receive from the final consumer (or
b. CIR opposed the petition by citing Sec 3 of Revenue Regulation output VAT). The final purchase by the end consumer represents the final
No. 5-87 which provided that “VAT is imposed on any sale or link in a production chain that itself involves several transactions and
transactions ‘deemed sae’ of taxable good. The CIR argued that the several acts of consumption. The VAT system assures fiscal adequacy
sale of the vessels was among those transactions “deemed sale,” as through the collection of taxes on every level of consumption, yet assuages
enumerated in Sec 4 of RR No. 5-87. It seems that the CIR
the manufacturers or providers of goods and services by enabling them to
particularly emphasized Sec 4(E)(i) of the Regulation, which
classified “change of ownership of business” as a circumstance pass on their respective VAT liabilities to the next link of the chain until
that gave rise to a transaction “deemed sale.” finally the end consumer shoulders the entire tax liability.
7. CTA rejected the CIR’s arguments and granted the petition. 4. Yet VAT is not a singular-minded tax on every transactional level. Its
a. The sale of a vessel was an “isolated transaction,” not done in the assessment bears direct relevance to the taxpayer's role or link in the
ordinary course of NDC’s business, and was thus not subject to production chain. Hence, as affirmed by Section 99 of the Tax Code and its
VAT, which under Sec 99 of the Tax Code, applied only to sale in subsequent incarnations, the tax is levied only on the sale, barter or
the course of trade or business.
exchange of goods or services by persons who engage in such activities, in
b. The sale of vessels cannot be “deemed sale” as the transaction did
not fall under the transactions enumerated in either Sec 100(b) of the course of trade or business. These transactions outside the course of
the Tax Code or Sec 4 of RR No. 5-87. trade or business may invariably contribute to the production chain, but they
c. Doubts should be resolved in favor of private respondents since do so only as a matter of accident or incident. As the sales of goods or
Sec 99 of the Tax Code is not an exemption provision but a services do not occur within the course of trade or business, the providers of
classification provision. such goods or services would hardly, if at all, have the opportunity to
8. CA reversed the CTA ruling. appropriately credit any VAT liability as against their own accumulated
a. It was an isolated transaction not in the course of trade or business
VAT collections since the accumulation of output VAT arises in the first
but it still falls within the classification of those “deemed sale”
under RR No. 5-87, since the sale of the vessels together with the place only through the ordinary course of trade or business.
NMC share brought about the change of ownership in NMC. 5. The sale of the vessels was not in the ordinary course of trade or business of
9. CA reversed itself upon reconsideration. NDC.
a. “Change of ownership of business” as contemplated in RR 5-87 a. Imperial v. CIR
must be a consequence of the “retirement from or cessation of i. “Carrying on business” means conducting, prosecuting,
business” by the owner of goods, as provided for in Section 100 of and continuing business by performing progressively all
the Tax Code.
the acts normally incident thereof
ISSUE:
1. WoN the sale by NDC of 5 of its vessels is subject to VAT? - NO ii. “Doing business” converys the idea of business being
done, not from time to time but all the time.
iii. “Course of business” is what is usually done it the
management of trade or business.
b. What is clear is that “course of business” or doing business”
connotes regularity of activity. In this case, the sale was an isolated
transaction and it was onvoluntary as it was made pursuant to the
policy of the Government for privatization. It should be noted that
the normal VAT registered activity of NDC is the leasing of
personal property.
i. Even the charter of NDC bears no indication that the
NDC was created for the primary purpose of selling real
property.
c. The conclusion that the sale was not in the course of trade or
business, which the CIR does not dispute before this Court, should
have definitively settled the matter. Any sale, barter or exchange of
goods or services not in the course of trade or business is not
subject to VAT.
d. Section 100 of the Tax Code, which is implemented by Sec 4(E)(i)
of RR 5-87 should be read I light of Sec 99 of the Tax Code, which
lays down the general rule on which persons are liable for VAT in
the first place and on what transaction if at all. Before any portion
of Section 100, or the rest of the law for that matter, may be
applied in order to subject a transaction to VAT, it must first be
satisfied that the taxpayer and transaction involved is liable for
VAT in the first place under Section 99.
e. What Sec 100 and Sec 4(E)(i) of RR 5-87 elaborate on is not the
meaning of “in the course of trade or business,” but instead the
identification of the transactions which may be deemed as sale.
f. Sec 4(E) of RR 5-87 carifies that such “change of ownership” is
only an attending circumstance to “retirement from cessation of
business, with respect to all goods on hand as of the date of such
retirement or cessation.”