CIR v. Magsaysay Lines

 Doctrines: 

• VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage 
• The tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities in the course of trade or business. 
• Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT. 

Facts: Pursuant to a government program of privatization, National Development Company decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships. The vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC. 

The NMC shares and vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay “a value added tax of 10% on the value of the vessels.” Magsaysay Lines offered to buy the shares and the vessels. The bid was made by Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong. The bid was approved and a Notice of Award was issued to Magsaysay Lines.

In the contract of sale, the contract stipulated that “[v]alue-added tax, if any, shall be for the account of the PURCHASER.” Per arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as security for the payment of VAT, if any. 

A formal request for a ruling on whether or not the sale of the vessels was subject to VAT had already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the parties agreed that should no favorable ruling be received from the BIR, NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for the payment of the VAT. BIR ruled that the sale of the vessels was subject to 10% VAT since NDC was a VAT-registered enterprise, and thus its “transactions incident to its normal VAT registered activity of leasing out personal property including sale of its own assets that are movable, tangible objects which are appropriable or transferable are subject to the 10% [VAT]. Respondents moved for reconsideration but it was denied. NDC drew on the Letter of Credit to pay for the VAT.

Respondents filed an appeal and Petition for Refund with the CTA, followed by a Supplemental Petition for Review, which the court granted the petition. The CTA ruled that the sale of a vessel was an “isolated transaction,” not done in the ordinary course of NDC’s business, and was thus not subject to VAT.

CA reversed the CTA decision but it revered itself upon reconsidering the case. The “change of ownership of business” as contemplated in R.R. No. 5-87 must be a consequence of the “retirement from or cessation of business” by the owner of the goods, as provided for in Section 100 of the Tax Code. The classification of transactions “deemed sale” was a classification statute, and not an exemption statute, thus warranting the resolution of any doubt in favor of the taxpayer.

Issue: whether the sale by the NDC of 5 of its vessels to the private respondents is subject to VAT under the National Internal Revenue Code of 1986

Held: No. A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the basis of a fixed percentage. It is the end user of consumer goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT). 

VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. 

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.