COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES, INC., G.R. No. 146984 July 28, 2006

 

COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN GROUP (HK) and NATIONAL DEVELOPMENT COMPANY

G.R. No. 146984 July 28, 2006

Facts:

1.     Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in its wholly owned subsidiary the National Marine Corporation.

2.     The NDC decided to sell in one lot its NMC shares and five of its ships.

3.     The vessels were constructed for the NDC, and then initially leased to Luzon Stevedoring Company, also its wholly owned subsidiary.

4.     Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC.

5.     The NMC shares and the vessels were offered for public bidding.

6.     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."

7.     Magsaysay Lines, Inc. offered to buy the shares and the vessels for P168,000,000.00.

8.     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.

9.     The bid was approved by the Committee on Privatization, and a Notice of Award was issued to Magsaysay Lines.

10.  the implementing Contract of Sale was executed between NDC – stipulated that "value-added tax, if any, shall be for the account of the PURCHASER."

Issue:

            Whether or not the transaction is subject to VAT

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Ruling:

            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). The final purchase by the end consumer represents the final link in a production chain that itself involves several transactions and several acts of consumption. The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption, yet assuages the manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the end consumer shoulders the entire tax liability.

            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 sale of the vessels was not in the ordinary course of trade or business of NDC.

In Imperial v. Collector of Internal Revenue, G.R. No. L7924, September 30, 1955 (97 Phil. 992), the term "carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the time. "Course of business" is what is usually done in the management of trade or business.

"Course of business" or "doing business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT registered activity of NDC is leasing personal property.

Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT.

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