In the course of trade or business defined vs. isolated transaction (not subject to VAT) THIRD DIVISIO ! ".R. O.

#$%&'$( )ul* +'( +,,% -

.O//ISSIO 0R O1 I T0R A2 R0V0 30 40TITIO 0R( VS. /A"SA5SA5 2I 0S( I ..( 6A2I7A" AVI"ATIO ( I ..( 1I/ 2I/IT0D O1 TH0 /ARD0 "RO34 (H8) A D ATIO A2 D0V02O4/0 T .O/4A 5( R0S4O D0 TS. D0.ISIO TI "A( ).9 The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private respondents is subject to valueadded tax ( !T) under the National "nternal #evenue Code of $%&' (Tax Code) then prevailin( at the time of the sale) The Court of Tax !ppeals (CT!) and the Court of !ppeals commonly ruled that the sale is not subject to !T) *e affirm+ thou(h on a more une,uivocal rationale than that utili-ed by the rulin(s under review) The fact that the sale was not in the course of the trade or business of NDC is sufficient in itself to declare the sale as outside the covera(e of !T) The facts are culled primarily from the rulin( of the CT!)

.ursuant to a (overnment pro(ram of privati-ation+ NDC decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National /arine Corporation (N/C)) The NDC decided to sell in one lot its N/C shares and five (5) of its ships+ which are 0+122 D*T Tween-Dec3er+ 45loec3ner4 type vessels) 6$7 The vessels were constructed for the NDC between $%&$ and $%&8+ then initially leased to 9u-on :tevedorin( Company+ also its wholly-owned subsidiary) :ubse,uently+ the vessels were transferred and leased+ on a bareboat basis+ to the N/C) 6;7 The N/C shares and the vessels were offered for public biddin() !mon( the stipulated terms and conditions for the public auction was that the winnin( bidder was to pay 4a value added tax of $2< on the value of the vessels)4607 =n 0 >une $%&&+ private respondent /a(saysay 9ines+ "nc) (/a(saysay 9ines) offered to buy the shares and the vessels for .$'&+222+222)22) The bid was made by /a(saysay 9ines+ purportedly for a new company still to be formed composed of itself+ ?aliwa( Navi(ation+ "nc)+ and @"/ 9imited of the /arden Aroup based in Bon(3on( (collectively+ private respondents)) 687 The bid was approved by the Committee on .rivati-ation+ and a Notice of !ward dated $ >uly $%&& was issued to /a(saysay 9ines) =n ;& :eptember $%&&+ the implementin( Contract of :ale was executed between NDC+ on one hand+ and /a(saysay 9ines+ ?aliwa( Navi(ation+ and @"/ 9imited+ on the other) .ara(raph $$)2; of the contract stipulated that 46v7alue-added tax+ if any+ shall be for the account of the .C#CB!:D#)4657 .er arran(ement+ an irrevocable confirmed 9etter of Credit previously filed as bidders bond was accepted by NDC as security for the payment of !T+ if any) ?y this time+ a formal re,uest for a rulin( on whether or not the sale of the vessels was subject to !T had already been filed with the ?ureau of "nternal #evenue (?"#) by the law firm of :ycip :ala-ar Bernande- E Aatmaitan+ presumably in behalf of private respondents) Thus+ the parties a(reed that should no favorable rulin( be received from the ?"#+ NDC was authori-ed to draw on the 9etter of Credit upon written demand the amount needed for the payment of the !T on the stipulated due date+ ;2 December $%&&)6'7

"n >anuary of $%&%+ private respondents throu(h counsel received !T #ulin( No) 5'&&& dated $8 December $%&& from the ?"#+ holdin( that the sale of the vessels was subject to the $2< !T) The rulin( cited the fact that NDC was a !T-re(istered enterprise+ and thus its 4transactions incident to its normal !T re(istered activity of leasin( out personal property includin( sale of its own assets that are movable+ tan(ible objects which are appropriable or transferable are subject to the $2< 6 !T7)4617 .rivate respondents moved for the reconsideration of !T #ulin( No) 5'&-&&+ as well as !T #ulin( No) 0%5-&& (dated $& !u(ust $%&&)+ which made a similar rulin( on the sale of the same vessels in response to an in,uiry from the Chairman of the :enate ?lue #ibbon Committee) Their motion was denied when the ?"# issued !T #ulin( Nos) 221-&% dated ;8 @ebruary $%&%+ reiteratin( the earlier !T rulin(s) !t this point+ NDC drew on the 9etter of Credit to pay for the !T+ and the amount of .$5+$;2+222)22 in taxes was paid on $' /arch $%&%) =n $2 !pril $%&%+ private respondents filed an !ppeal and .etition for #efund with the CT!+ followed by a :upplemental .etition for #eview on $8 >uly $%&%) They prayed for the reversal of !T #ulin(s No) 0%5-&&+ 5'&-&& and 221-&%+ as well as the refund of the !T payment made amountin( to .$5+$;2+222)22) 6&7 The Commissioner of "nternal #evenue (C"#) opposed the petition+ first ar(uin( that private respondents were not the real parties in interest as they were not the transferors or sellers as contemplated in :ections %% and $22 of the then Tax Code) The C"# also s,uarely defended the !T rulin(s holdin( the sale of the vessels liable for !T+ especially citin( :ection 0 of #evenue #e(ulation No) 5-&1 (#)#) No) 5-&1)+ which provided that 46 !T7 is imposed on any sale or transactions 4deemed sale4 of taxable (oods (includin( capital (oods+ irrespective of the date of ac,uisition))4 The C"# ar(ued that the sale of the vessels were amon( those transactions 4deemed sale+4 as enumerated in :ection 8 of #)#) No) 5-&1) "t seems that the C"# particularly emphasi-ed :ection 8(D)(i) of the #e(ulation+ which classified 4chan(e of ownership of business4 as a circumstance that (ave rise to a transaction 4deemed sale)4 "n a Decision dated ;1 !pril $%%;+ the CT! rejected the C"#Fs ar(uments and (ranted the petition)6%7 The CT! ruled that the sale of a vessel was an 4isolated transaction+4 not done in the ordinary course of NDCFs business+ and was thus not subject to !T+ which under :ection %% of the Tax Code+ was applied only to sales in the course of trade or business) The CT! further held that the sale of the vessels could not be 4deemed sale+4 and thus subject to !T+ as the transaction did not fall under the enumeration of transactions deemed sale as listed either in :ection $22(b) of the Tax Code+ or :ection 8 of #)#) No) 5-&1) @inally+ the CT! ruled that any case of doubt should be resolved in favor of private respondents since :ection %% of the Tax Code which implemented !T is not an exemption provision+ but a classification provision which warranted the resolution of doubts in favor of the taxpayer) The C"# appealed the CT! Decision to the Court of !ppeals+6$27 which on $$ /arch $%%1+ rendered a Decision reversin( the CT!)6$$7 *hile the appellate court a(reed that the sale was an isolated transaction+ not made in the course of NDCFs re(ular trade or business+ it nonetheless found that the transaction fell within the classification of those 4deemed sale4 under #)#) No) 5-&1+ since the sale of the vessels to(ether with the N/C shares brou(ht about a chan(e of ownership in N/C) The Court of !ppeals also applied the principle (overnin( tax exemptions that such should be strictly construed a(ainst the taxpayer+ and liberally in favor of the (overnment) 6$;7 Bowever+ the Court of !ppeals reversed itself upon reconsiderin( the case+ throu(h a #esolution dated 5 @ebruary ;22$)6$07 This time+ the appellate court ruled that the 4chan(e of ownership of business4 as contemplated in #)#) No) 5-&1 must be a conse,uence of the 4retirement from or cessation of business4 by the owner of the

(oods+ as provided for in :ection $22 of the Tax Code) The Court of !ppeals also a(reed with the CT! that the classification of transactions 4deemed sale4 was a classification statute+ and not an exemption statute+ thus warrantin( the resolution of any doubt in favor of the taxpayer) 6$87 To the mind of the Court+ the ar(uments raised in the present petition have already been ade,uately discussed and refuted in the rulin(s assailed before us) Dvidently+ the petition should be denied) Get the Court finds that :ection %% of the Tax Code is sufficient reason for upholdin( the refund of !T payments+ and the subse,uent dis,uisitions by the lower courts on the applicability of :ection $22 of the Tax Code and :ection 8 of #)#) No) 5-&1 are ultimately irrelevant) ! brief reiteration of the basic principles (overnin( !T is in order) !T is ultimately a tax on consumption+ even thou(h it is assessed on many levels of transactions on the basis of a fixed percenta(e) 6$57 "t is the end user of consumer (oods or services which ultimately shoulders the tax+ as the liability therefrom is passed on to the end users by the providers of these (oods or services 6$'7 who in turn may credit their own !T liability (or input !T) from the !T payments they receive from the final consumer (or output !T))6$17 The final purchase by the end consumer represents the final lin3 in a production chain that itself involves several transactions and several acts of consumption) The !T system assures fiscal ade,uacy throu(h the collection of taxes on every level of consumption+ 6$&7 yet assua(es the manufacturers or providers of (oods and services by enablin( them to pass on their respective !T liabilities to the next lin3 of the chain until finally the end consumer shoulders the entire tax liability) Get !T is not a sin(ular-minded tax on every transactional level) "ts assessment bears direct relevance to the taxpayerFs role or lin3 in the production chain) Bence+ as affirmed by :ection %% of the Tax Code and its subse,uent incarnations+ 6$%7 the tax is levied only on the sale+ barter or exchan(e of (oods or services by persons who en(a(e 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) !s the sales of (oods or services do not occur within the course of trade or business+ the providers of such (oods or services would hardly+ if at all+ have the opportunity to appropriately credit any !T liability as a(ainst their own accumulated !T collections since the accumulation of output !T arises in the first place only throu(h the ordinary course of trade or business) That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both the CT! and the Court of !ppeals+ the latter doin( so even in its first decision which it eventually reconsidered) 6;27 *e cite with approval the CT!Fs explanation on this pointH "n I:;erial v. .ollector of Internal Revenue( A)#) No) 9-1%;8+ :eptember 02+ $%55 (%1 .hil) %%;)+ the term 4 carr*in< on business4 does not mean the performance of a sin(le disconnected act+ but means conductin(+ prosecutin( and continuin( business by performin( pro(ressively all the acts normally incident thereofI while 4 doin< business4 conveys the idea of business bein( done+ not from time to time+ but all the time) 6>) !ranas+ C.D!TDD N!T"=N!9 "NTD#N!9 #D DNCD C=DD (*"TB !NN=T!T"=N:)+ p) '2&-% ($%&&)7) 4Course of business4 is what is usually done in the mana(ement of trade or business) 6Id:i v. 7ee=s > Russel( %% :o) 1'$+ 1'8+ $05 /iss) '5+ cited in *ords E .hrases+ ol) $2+ ($%&8)7) *hat is clear therefore+ based on the aforecited jurisprudence+ is that 4course of business4 or 4doin( business4 connotes re<ularit* of activit*) "n the instant case+ the sale was an isolated transaction) The sale which was involuntary and made pursuant to the declared policy of Aovernment for ;rivati?ation could no lon<er be re;eated or carried on @ith re<ularit*. "t should be emphasi-ed that the normal !T-re(istered activity of NDC is leasin< personal property)6;$7

This findin( is confirmed by the #evised Charter 6;;7 of the NDC which bears no indication that the NDC was created for the primary purpose of sellin( real property) 6;07 The conclusion that the sale was not in the course of trade or business+ which the C"# does not dispute before this Court+ 6;87 should have definitively settled the matter) !ny sale+ barter or exchan(e of (oods or services not in the course of trade or business is not subject to !T) :ection $22 of the Tax Code+ which is implemented by :ection 8(D)(i) of #)#) No) 5-&1 now relied upon by the C"#+ is captioned 4 alue-added tax on sale of (oods+4 and it expressly states that 46t7here shall be levied+ assessed and collected on every sale+ barter or exchan(e of (oods+ a value added tax x x x)4 :ection $22 should be read in li(ht of :ection %%+ which lays down the (eneral rule on which persons are liable for !T in the first place and on what transaction if at all) "t may even be noted that :ection %% is the very first provision in Title " of the Tax Code+ the Title that covers !T in the law) ?efore any portion of :ection $22+ or the rest of the law for that matter+ may be applied in order to subject a transaction to !T+ it must first be satisfied that the taxpayer and transaction involved is liable for !T in the first place under :ection %%) "t would have been a different matter if :ection $22 purported to define the phrase 4in the course of trade or business4 as expressed in :ection %%) "f that were so+ reference to :ection $22 would have been necessary as a means of ascertainin( whether the sale of the vessels was 4in the course of trade or business+4 and thus subject to !T) ?ut that is not the case) *hat :ection $22 and :ection 8(D)(i) of #)#) No) 5-&1 elaborate on is not the meanin( of 4in the course of trade or business+4 but instead the identification of the transactions which may be deemed as sale) "t would become necessary to ascertain whether under those two provisions the transaction may be deemed a sale+ only if it is settled that the transaction occurred in the course of trade or business in the first place) "f the transaction transpired outside the course of trade or business+ it would be irrelevant for the purpose of determinin( !T liability whether the transaction may be deemed sale+ since it anyway is not subject to !T) !ccordin(ly+ the Court rules that (iven the undisputed findin( that the transaction in ,uestion was not made in the course of trade or business of the seller+ NDC that is+ the sale is not subject to !T pursuant to :ection %% of the Tax Code+ no matter how the said sale may hew to those transactions deemed sale as defined under :ection $22) "n any event+ even if :ection $22 or :ection 8 of #)#) No) 5-&1 were to find application in this case+ the Court finds the discussions offered on this point by the CT! and the Court of !ppeals (in its subse,uent #esolution) essentially correct) :ection 8 (D)(i) of #)#) No) 5-&1 does classify as amon( the transactions deemed sale those involvin( 4chan(e of ownership of business)4 Bowever+ :ection 8(D) of #)#) No) 5-&1+ reflectin( :ection $22 of the Tax Code+ clarifies that such 4chan(e of ownership4 is only an attendin( circumstance to 4retirement from or cessation of business6+ 7 with respect to all (oods on hand 6as7 of the date of such retirement or cessation)4 6;57 "ndeed+ :ection 8(D) of #)#) No) 5-&1 expressly characteri-es the 4chan(e of ownership of business4 as only a 4circumstance4 that attends those transactions 4deemed sale+4 which are otherwise stated in the same section)6;'7 *BD#D@=#D+ := the petition is DDN"DD) No costs) =#DD#DD)

Juisumbing, (Chairperson), Carpio, Carpio-Morales, and Velasco, Jr. JJ., concur

6$7

Rollo+

p)

5&) "d) "d)

6;7

607

687

"d) "d) "d)

at at at

5%) '2) '$) "d)

657

6'7

617

6&7

at
6%7

.rivate respondents also filed their claim for refund with the ?"# on $0 >uly $%&%) "d) '0)

Decision penned by !ssociate >ud(e Constante C) #oa,uin+ concurred in by .residin( >ud(e Drnesto D) !costa and !ctin( !ssociate >ud(e :tella Dadivas@arrales)
6$27

The Court of !ppeals initially dismissed the C"#Fs .etition for #eview as it had been filed beyond the re(lementary period of appeal+ but such dismissal was subse,uently reconsidered) The allowance of the appeal was the subject of a special civil action for certiorari eventually denied by the Court in Magsaysay Lines, et al. v. Court of ppeals, 0;% .hil) 0$2 ($%%')+ a decision limited solely to the propriety of the allowance of the C"#Fs appeal+ without delvin( on any of the issues now subject for resolution in the present petition)
6$$7

Decision penned by then !ssociate >ustice (now :upreme Court !ssociate >ustice) #omeo >) Callejo+ :r)+ and concurred in by !ssociate >ustices Aloria C) .aras and #uben T) #eyes)
6$;7

:ee

Rollo+

pp)

50-58)

6$07

:ee id) at 0$) #esolution also penned by then !ssociate >ustice (now :upreme Court !ssociate >ustice) #omeo >) Callejo+ :r)+ and concurred in by !ssociate >ustices #amon /abutas+ >r) and #uben T) #eyes)
6$87

"d)

at

00-05)

6$57

:ee Commissioner of !nternal Revenue v. "enguet Corporation, A)#) Nos)$085&1 E $085&&+ & >uly ;225+ 8'0 :C#! ;&+ 8;)
6$'7

46T7he amount of tax paid may be shifted or passed on by the seller to the buyer) *hat is transferred in such instances is not the liability for the tax+ but the tax burden) "n addin( or includin( the !T due to the sellin( price+ the seller remains the person primarily and le(ally liable for the payment of the tax) *hat is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax)4 Conte# Corporation v. Commissioner of !nternal Revneue, A)#) No) $5$$05+ ; >uly ;228+ 800 :C#! 01'+ 0&5+ citin( Deoferio+ >r) and /amalateo+ The alue !dded Tax "n The .hilippines 05-0' ($st ed) ;222))
6$17

4There is another 3ey characteristic of the !T4 that no matter the number of taxable transactions that precede the final purchase or sale+ it is the end user+ or the consumer+ that ultimately shoulders the tax) Despite its name+ !T is (enerally not intended to be a tax on value added+ but rather as a tax on consumption) Bence+ there is a mechanism

in the !T system that enables firms to offset the tax they have paid on their own purchases of (oods and services a(ainst the tax they char(e on their sales of (oods and services)4 ba$a%a &uro 'arty List v. (rmita, A)#) Nos) $'&25'+ $'&;21+ $'&8'$+ $'&8'0+ $'&102+ $ :eptember ;225+ 8'% :C#! $+ ;&;+ >) Tin(a+ Dissentin( and Concurrin( =pinion)
6$&7

4The !T system assures that the (overnment shall reap income for every transaction that is had+ and not just on the final sale or transfer)4 "bid)
6$%7

:ee+ e.g., :ection $25+ #epublic !ct No) &8;8 (National "nternal #evenue Code of $%&1)) The said provision remained intact despite the passa(e of #epublic !ct No) %001+ which expanded the covera(e of the !T+ in ;225)
6;27

:ee

rollo,

p)

5$)

6;$7

"d) at '%-12+ emphasis omitted) :ee also Commissioner of !nternal Revenue v. Court of ppeals, 0&5 .hil) &15 (;222)) 4 !T is a tax on transactions+ imposed at every sta(e of the distribution process on the sale+ barter+ exchan(e of (oods or property+ and on the performance of services+ even in the absence of profit attributable thereto) The term 4in the course of trade or business4 re,uires the re(ular conduct or pursuit of a commercial or an economic activity+ re(ardless of whether or not the entity is profitoriented)4 "d) at &&8)
6;;7

.res) Decree No) $'8&+ entitled #eor(ani-in( the National Development Company and Dstablishin( a #evised Charter Therefor+ dated ;5 =ctober $%1%)
6;07

:ee

.res)

Decree

No)

$'8&+

:ecs)

and

8)

6;87

Notably+ the C"# even expressly submits that the earlier decision of the Court of !ppeals+ which did rule the sale as an isolated transaction+ 4is correct)4 :ee rollo+ p) ;1)
6;57

:ee :ection $22(b)(0)(8)+ $%&' Tax Code+ which readsH 4#etirement from or cessation of business+ with respect to inventories of taxable (oods existin( as of such retirement or cessation)4
6;'7

:ection

of

#)#)

No)

5-&1

statesH

:DC) 8) )ransactions *%eeme% sale.* - The followin( transactions are 4deemed sale4 pursuant to :ection $22 (b)H (a) Transfer+ use or consumption+ not in the course of business) Transfer of (oods not in the course of business can ta3e place when the !T-re(istered person withdraws (oods from his business for his personal useI (b) Distribution or transfer to shareholders or investors as share in the profits of the businessI (c) Transfer to creditors in payment of debt or obli(ationI

(d) Consi(nment of (oods if actual sale is not made within '2 days followin( the date such (oods were consi(ned) Consi(ned (oods returned by the consi(nee within the '2 day period is not deemed soldI and (e) #etirement from or cessation of business or death of an individual with respect to all (oods on hand+ whether capital (oods+ stoc3-in-trade+ supplies or materials as of the date of such retirement or cessation+ whether or not the business is continued by the

new owner or successor+ estate or heir) The followin( circumstances shall+ amon( others+ (ive rise to transactions 4deemed sale4 for the purposes of this :ectionH i) Chan(e of ownership of business or incorporation of the business in the case of a sin(le proprietorshipI ii) Dissolution of a partnership and creation of a new partnership which ta3es over the businessI and Kiii) Death of an individual who is a !T-re(istered person+ even if the estate or heirs of the decedent shall continue to operate the business)